The Global Financial Crisis and the Kuwaiti Banking Sector

Fourth International Conference of the College of Administrative Sciences

December 14, 2010



Dear Attendees,

The lessons learned from the global financial and economic crisis, which worsened during the last quarter of 2008, reveal a confluence of many factors that led to the emergence of this crisis, including causes arising from imbalances in the banking business, namely weak credit discipline, lax credit conditions, excessive issuance of innovative and structured products with high risks, increased leverage rates, weak supervisory role of regulatory and supervisory agencies, weak risk management and governance standards in financial institutions, in addition to other causes arising from imbalances in financial market mechanisms, such as the financial markets.

The global financial and economic crisis has had repercussions on the banking sectors in most countries of the world, including the banking sector in the State of Kuwait, which is not isolated from the impact of the spread of the global crisis, especially in light of the strong interdependence in international economic relations with the spread of the phenomenon of globalization, and the repercussions of this crisis included both developed countries, whose governments intervened with unprecedented financial rescue plans to save their banking and financial systems, and developing countries that were directly and indirectly affected by the decline in global financial aid or the decline in funding rates from foreign markets as a result of the effects of the crisis Despite the economic stimulus programs in all countries of the world, this crisis is still having repercussions on many developed and emerging economies, especially with regard to public budget deficits and the increasing ratio of public debt to GDP, with fears and cautions about the transmission of sovereign risks to the banking systems of some countries and the repercussions that this may have on the economy.

The sovereign debt crisis in Europe is worsening, the risks of inflation in China are increasing, and the continued weakness of the U.S. economy is a global concern. Six months ago, Europe allocated $1 trillion as a bailout program for sovereign debt in the Eurozone, but it soon discovered that this amount was insufficient to reduce the deficit and stimulate economic growth in highly indebted countries such as Greece, Ireland and Portugal, prompting German Chancellor Merkel to recently call for rescheduling and restructuring sovereign debt and shifting part of the burden to commercial banks. The 1987 Brady Plan to address the Latin American debt crisis may have been the source of this German inspiration. The big jump in inflation this year in China has dampened optimism for a Soft Landing scenario for its runaway economy and increased pessimism among the G20 community about preventing exchange rate wars between the group's major currencies. But the main concern for the global economy's recovery is the continued weak growth in the US economy, and despite QE1 and QE2, the outlook for the US economy's growth is not good. The worsening deficit-to-GDP ratio and the injection of $600 trillion into the economic cycle have contributed to a general atmosphere of uncertainty about the effectiveness of these tools in preventing deflation in the US.

In light of the magnitude of the links of Islamic banks and financial institutions to the markets experiencing these crises and the impact on the activities of these Islamic banks and their performance rates, these crises have left negative effects on Islamic banks, the repercussions of which are represented in the decline in the prices of financial and real estate assets, a slowdown in the demand for Islamic financing instruments, and a slowdown in the growth in the issuance of Islamic Sukuk.

The global financial crisis has had significant repercussions on both conventional and Islamic banks, which has led to calls to consider the development of banking methods, models and practices, especially in the area of developing and improving the performance of risk management to avoid the effects of any future financial crises so that these banks can play a leading role in the performance of the economies of their countries.

With regard to Islamic banks, they need to reassess their business models, especially in terms of strengthening their capital bases, improving liquidity management, evaluating their products to remove the risks inherent in their balance sheets and stabilizing their funding positions, in addition to diversifying and developing their products. We believe that the response of Islamic banks to these issues and challenges will also enable them to easily meet the requirements of the Basel III reform package, especially with regard to the capital adequacy, liquidity and leverage standards, in addition to the set of requirements related to strengthening risk management and governance standards in these banks.

Of course, the regulatory authorities are also required to review and modernize the financial legislation for Islamic banking in order to help these banks provide products and tools appropriate to the nature of their business and the stability of their financial resources, and to enhance the supervisory and regulatory role on the work of these Islamic banks.

In Kuwait, the global financial crisis left negative impacts on the national economy, represented in the sharp decline in asset values as a result of the wave of distrust in the markets and the decline in the volume of economic activity accompanied by the scarcity of funding sources and the interruption of some of them, and the weak ability of some companies to achieve returns and increase the size of their debts, in addition to the effects of the crisis on conventional and Islamic banks, represented in the decline in the value of their lending portfolios, financing portfolios and their financial and real estate investment portfolios.

The State of Kuwait, supported by its high sovereign ratings by major international rating agencies, has directed its economic policy in both monetary and fiscal aspects to counter the effects of the global financial and economic crisis on the banking sector and the economic situation in the country in general.

In terms of monetary and regulatory policy, the Central Bank of Kuwait adopted a policy of easing the application of these tools, which was also applied by central banks and supervisory authorities in most countries of the world. In this context, during the last quarter of 2008, the Central Bank took a package of measures at the level of monetary and regulatory policy, which consisted of injecting liquidity into the banking system for different maturity periods and amending some regulatory ratios to ease lending controls to allow banks to expand their lending space and facilitate the flow of bank credit within the sectors of the national economy to prevent a contraction in bank credit. Among the measures taken by the Central Bank in this regard are raising the maximum loan-to-deposit ratio from 80% to 85%, allowing banks to consider real estate as acceptable collateral to mitigate credit risk for the purpose of calculating the capital adequacy ratio (Basel II), and easing the liquidity requirement ratio from 20% to 18%. Also, in terms of monetary policy measures in the field of interest rates, the Central Bank of Kuwait has made six reductions in the discount rate since the beginning of October 2008, the last of which was on 7/2/2010, bringing the discount rate to 2.5% from 5.75%, as well as within the framework of the set of policies and precautionary measures in the face of the global financial crisis, Law No. 30 was also issued) for the year 2008 on 3/11/2008 on the guarantee of deposits in local banks in the State of Kuwait, and the issuance of this law aims to enhance the competitiveness of banks and strengthen the atmosphere of confidence in our national economy and the banking sector.

This set of measures had a direct role in the continuation of bank credit to positive growth rates in 2009 and 2010 and the absence of credit contraction, albeit at slow growth rates compared to previous years, which is considered normal in times of crisis, as fiscal policy plays the most important role in these times by increasing growth rates in spending, especially on capital projects, including infrastructure projects.

Therefore, within the framework of the role of fiscal policy in facing the effects of the global financial crisis, the development plan for the years (2010/2011 - 2013/2014) was issued by Law No. 9 of 2010, which was implemented as of February 1, 2010, in light of a vision to achieve a set of strategic objectives, mainly to stimulate the efforts and capabilities of the state to prepare for the challenges facing the development process by adopting multiple policies aimed at expanding and supporting the role of the private sector in development, through reviving the central role of the private sector in leading development, through the government's establishment of public joint stock companies with private sector participation, including the policies adopted by the private sector, including the policies adopted by the

In line with the strategic objectives of the development plan in terms of addressing the main structural imbalances in the economy and expanding and supporting the role of the private sector in development, the process of financing the companies that will be established to implement the development plan projects must be consistent with the strategic objectives of the plan, which requires assigning the main role in financing these companies to the banking sector in the State of Kuwait, which is a wide sector that includes many traditional and Islamic national banks in addition to branches of foreign banks, taking into account the well-known role of this sector in financing the economic renaissance in the country since the early 1960s Thus, enhancing the performance of the banking sector, which comes as a companion to the oil sector and constitutes the main pillar for transforming Kuwait into a financial and commercial center, is an economic and national requirement and is in line with the state's economic policy strategy and the objectives of the development plan in addressing the repercussions of the global financial crisis on the Kuwaiti economy. The experiences of other countries that rushed to support their banks by applying unprecedented financial rescue plans, while our national banks, thankfully, did not need such financial rescue plans. Thus, it can be clearly stated that the normal situation for financing development plan projects is to assign the main role to local banks, which is in line with international practices where financing operations are carried out through banking and financial markets. These banks are also subject to the supervision of the supervisory authority, which is mandated by law to monitor the banking system and guide the credit policy to help economic and social progress and increase national income. The strength of the credit ratings of national banks confirms the ability of these banks to finance development projects due to their technical and financing capabilities represented in their financial resources, liquidity surpluses and strong capital bases that allow them to expand credit, in addition to accumulated experience in the field of finance and financial studies, and proven experience in financing major projects. The branches of foreign banks operating in the State of Kuwait are also able to participate effectively in financing plan projects, especially since these branches are international banks with strong financial centers and known for their technical and financial ability in arranging loans.

I believe that the banking sector, both conventional and Islamic, is capable of financing feasible companies by granting them their financing needs at market rates, whether in the form of loans or financing by individual banks or in the form of loans and co-financing by a group of conventional and Islamic banks or with the participation of branches of foreign banks or a joint financing process with foreign banks. In addition to obtaining financing through the issuance of bonds and sukuk by companies through the financial market in proportion to the financing needs of the project.

Finally, noting that the development plan is the first to be issued by the consensus of the legislative and executive authorities and represents a new direction in government and parliamentary work, we look forward with great optimism that it and its various projects will move in a direction that serves the goals for which it was developed to achieve the directives of His Highness the Amir to make Kuwait a regional center for financial and commercial services, and that our focus in the development plan should not only be on construction projects but also accelerate the development of key related laws such as the Companies Law and the Competition Law and develop the appropriate legislative environment to keep pace with developments We must also develop and modernize the institutions and outputs of the education sector, as this is an essential pillar of this development project.

Thank you, and may God's peace, mercy and blessings be upon you

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