NBK says credit at a four-year high

In its latest economic brief on monetary developments, the National Bank of Kuwait reports that September saw the largest increase in credit facilities to residents in four years with lending to the private sector rising by KD 193 million or 3.5%.

Most of this was offset by a KD 153 million drop in credit to non-residents which suggests possible reclassification of loans and a much smaller effective growth in lending activity. Year to date, domestic credit increased by KD 504 million, or 9.6%, while credit to non-residents was essentially flat. Though growth in domestic credit so far in 2001 was higher than in 1999 and 2000, it remains well below its pace in 1997.

Lending to the real estate sector and non-bank financial institutions accounted for most of the growth in domestic credit during September. Loans to these two sectors rose by KD 116 million and KD 118 million, respectively. Facilities to the trade and construction sectors were also up significantly by 5% and 6%, respectively. Offsetting these increases was a KD 160 million drop in other sectors. The unusually large monthly changes further support our view that reclassification may have been behind the notable changes in September.

Notwithstanding the above, evidence for the growing demand for credit can be found in the value of new credit agreements concluded with residents. The value of such agreements during September was KD 440 million, the second highest increase on record after June's KD 485 million. Indeed, credit agreements drawn over the last six months were the highest on record amounting to KD 2,336 million or 43% of the outstanding balance of utilized facilities in March 2001. The growth in credit coincides with a pick up in trading turnover at the Kuwait Stock Exchange and the resumption of KIA share sales to the pubic.

Another notable increase was in new consumer loan agreements that hit a record KD 86 million in September compared to a monthly value ranging between KD 11-21 million over the last two years. The pace of consumer loans started to pick up in April helped by falling interest rates. It is worth noting that consumer loan figures reflect only part of salary related loans to individuals. The latter also include installment loans typically used for housing related purposes and classified with other personal facilities. Their balances are estimated to be more than twice as big as consumer loans.

The outstanding balance of consumer loans reached KD 613 million in September, up 8.3% from a year ago. Though official statistics are not available, we estimate installment loans extended by local banks to have grown by more than 20% over the same period as the ceiling imposed by the central bank was lifted. Banks can now lend to individuals (salary related consumer and installment loans) up to 12% of their customer deposits plus an additional 30% of issued bonds. The old ceiling, in effect until April 2000, was 10% of deposits only.

The large jump in credit was the main factor pushing private deposits higher in September. Deposits increased by KD 78 million (1%). This in turn provided the first significant rise in the money supply since March, when UNCC payments provided a significant injection. M2 increased by KD 90 million or 1.1%. On a year-to-date basis, private deposits and M2 rose by 6.2% and 5.3%, respectively.

Growth in private deposit growth was in KD deposits, which rose KD 113 million or 1.5%. Meanwhile, foreign currency deposits continued to fall, dropping by 4% in September. Time deposits accounted for most of the growth, though savings showed good growth in percent terms. Demand deposits, which had fallen during the previous two months, were almost unchanged. To-date in 2001 KD deposits were up KD 563 million or 8.2%, the largest such increase in years.

Rising credit and deposits helped banks increase total assets by KD 247 million for the third consecutive month. Liquid and semi-liquid assets at local banks increased by KD 105 million (2.5%) with the liquid assets to total assets ratio reaching 22.8%, up from 19.6% a year ago. Kuwaiti banks also increased their interbank borrowing substantially during September, with foreign interbank deposits jumping 25%. This may have been a precautionary move following the attacks in the US to secure adequate liquidity in the face of heightened uncertainty.

The Central Bank of Kuwait (CBK) cut the discount rate by 50 basis points on September 18, following the attacks in the US and similar moves by the US Fed and other monetary authorities. The average interest rate paid on deposits dropped by 12 basis points during the month following a slight increase in August. KD time deposit rates fell between 19 and 24 basis points, while dollar rates lost between 44 and 56 basis points. Rates on KD deposits fell to a lesser extent than rates on dollar deposits due to competitive pressures. Three-month treasury bills were priced 82 basis points lower in September.

On October 30, the CBK moved to cut another 50 basis points off the discount rate, which now stands at 4.25%. The cut came four weeks after the second US rate cut since September 11. More recently, the US Fed cut rates a third time by another 0.5% on November 6. This is expected to cause a further drop in domestic deposit and loan rates.