Throughout 2019 Kuwait's banking sector has been characterised by a number of trends that have resulted in the sector's continued stability and soundness. The most notable of these are the improved asset quality held by banks, strong gains in net bank income to 18% from 9% in 2017, a significant number of business consolidations in the banking and finance sector and progressive legislative reform, including fintech regulation.
In 2018, there were a number of significant business combinations in the banking and finance sector. The acquisition of a 70% stake in Global Investment House by KAMCO Investment House (KAMCO) was a landmark transaction as it involved two historic and leading investment houses. The merger between KFH and Ahli United Bank BSC is also expected to complete in 2019. We anticipate that this trend in the finance and investment sectors will continue.
The privatisation of the Boursa Kuwait (formerly the Kuwait Stock Exchange) was also a notable development. This privatisation is a precedent-setting transaction in Kuwait given the nature and consequence of the deal and the involvement of major international operators. It attracted some of the world's leading stock market operators working together with local Kuwaiti financial institutions. The privatisation culminated in the sale by the Capital Markets Authority (CMA) of 44% of its shares held in the capital of Boursa Kuwait to an international consortium comprised of the Athens Stock Exchange, National Investments Company, Al Oula Investment and Arzan Financial Group.
Progressive legislative reform
A December 2018 amendment to the regulatory regime governing acquisitions by foreign nationals of shares in Kuwaiti joint stock companies resulted in the removal of a crucial requirement in Ministerial Resolution No. 205 of 2000. The requirement meant that non-Kuwaiti investors had to secure approval from the Council of Ministers when seeking to own over 49% of a local bank. Ministerial Resolution No. 694 of 2018, issued on December 11 2018, now only requires any shareholding above 5% to be approved by the Central Bank of Kuwait (CBK). This amendment should positively impact business consolidations in the Kuwaiti banking sector between foreign and local banks.
On the capital markets side, legislation has been amended to exempt non-Kuwaiti incorporated companies that are dual-listed on the Boursa Kuwait from the takeover regime. Additionally, partial voluntary takeovers are now possible in certain circumstances. Also notable is the amendment to the regulatory regime with respect to transactions involving the purchase of no less than 5% of the shares of a listed company and which lead to a holding of 30%-50% of the share capital of a listed target company.
The consolidation of the regime for off-market negotiated trades by Boursa Kuwait, in the 2018 version of the Boursa Kuwait Rulebook, is a development that cannot be ignored. The Rulebook now allows for the execution of a negotiated off-market trades where the value of the trade is KD150,000 (approximately $495,000) or more, provided that Boursa Kuwait's approval has been obtained. The off-market trade regime is particularly important in light of anticipated continued business consolidations in the banking and finance sector as it eliminates the possibility of hostile or competitive bids in the acquisition of publicly traded companies.
The off-market trade regime is particularly important in light of anticipated continued business consolidations
On November 11 2018, the CBK also issued new instructions to banks regarding consumer finance, instalment loans and the issuance of credit cards. The instructions became effective on November 14 2018. Among the amendments made to the previous rules, the CBK raised the maximum limit on consumer-directed loans and Islamic financing facilities to 25 times the net monthly salary of the customer, up to a maximum of KD25,000. The CBK held the maximum upper limit for financing directed to housing purposes at KD70,000. The rules stipulated, among other things, that monthly instalments must not exceed 40% of a borrower's net salary and 30% of a retiree's pension.
The instructions stipulate that banks should take into consideration the net monthly salary plus the national labour allowance, rather than the ongoing monthly income. In addition, the instructions removed certain documentation requirements and obliged banks and Islamic finance institutions to waive interest charges applicable to the remaining term of an agreement, if the agreement is amended due to the early repayment of the financing. The instructions also included certain provisions regarding the monitoring of fraud and the enhancing of security on card information.
In 2001, a system for collecting information and data related to consumer loans and credit facilities in connection with sales on credit (the Ci-Net credit bureau) was established by virtue of Law No. 2 of 2001 (Ci-Net Law). According to the Ci-Net Law, all banks and financial institutions that were providing consumer finance were required to participate in Ci-Net and to make certain information and data about their customers available on the Ci-Net account. This information and data related to consumer and instalment loans and other credit facilities that derived from selling products and services on credit. Only banks and finance companies were permitted to have access to the Ci-Net.
Recently, the legal framework set through the Ci-Net Law was amended by Law No. 9 of 2019 regarding the exchange of credit information. The new law enables the establishment of public joint stock companies whose purpose is to collect and provide credit information and credit ratings related to consumer and instalment loans and other credit facilities arising from the sale of products and services on credit. Such companies will be licenced by the CBK. The new law applies to banks, investment and finance companies, including entities regulated by the Ministry of Commerce and Industry, which provides financing through the sale of products and services on credit. Companies incorporated under the new law will be subject to the CBK supervision. No information on customers may be obtained or shared with regard without prior written approval from the customer.
The new law defines the general framework for the incorporation of the credit information and rating companies; the operating environment, structure and capital requirements for these companies; the CBK's role and powers with regards to the supervision of these companies; the collection and exchange of information and confidentiality obligations; and the various sanctions for breaching or failing to comply with the provisions and requirements set out in new law and its executive regulations.
The details of the law will be laid out in its executive regulations. It should be noted that the new law is expected to come into force once the executive regulations are issued, and that this will happen six months following the publication of the new law in the official gazette: in August 2019.
Fintech regulation and supervisory streamlining
Kuwait has recognised that fintech is playing a pivotal role in innovation in both traditional payments systems and modern payment settlement systems that involve blockchain technologies. In a bid to regulate this fast-growing area, the CBK has extended its regulatory oversight to the sector through recently issued regulations governing electronic payments and settlement systems. Under the regulations, the CBK now has increased oversight over electronic infrastructure providers such as banks and telecommunication companies; electronic payment agents, such as third-party e-payment applications; data protection and confidentiality for information related to e-payments; and risk management by e-payment infrastructure providers and agents.
Kuwait has recognised that fintech is playing a pivotal role in innovation in both traditional payments systems and modern payment settlement systems
All e-payment infrastructure providers and agents are required to obtain CBK approval prior to operating any e-payment platforms and all providers must observe anti-money laundering and counter terrorism financing regulations.
In 2018, the CBK and the CMA signed an MOU defining their respective roles in monitoring and supervising certain activities by entities regulated by the CBK, as well as in supervisory responsibilities where an entity is regulated by both the CBK and the CMA, among other things. In this regard, the MOU provided for coordination between the CBK and the CMA with regard to investment companies established before the issuance of the CMA law, the licensing of banks' securities activities, and M&A transactions.
On the other hand, in light of the amendments made to the Companies Law (No. 1 of 2016) and its executive regulations and the implementation of certain laws affecting entities supervised by the CBK (Law No. 106 of 2013 concerning Anti Money Laundering and Combating Terrorism Financing, Law No. 20 of 2014 regarding E-Transactions and Law No. 9 of 2019 concerning the Exchange of Credit Information), the CBK signed an MOU with the Ministry of Commerce and Industry (MOCI) on July 2 2019. The MOU defines the CBK's and the MOCI's supervisory roles and authority over certain activities carried out by CBK-regulated entities, so as to avoid any duplication.
A positive outlook
The CBK has predicted a continued positive outlook in the sector. This is backed by the rating agency Standard & Poor's, which recently affirmed its respective AA/A-1+ and Aa2 rating for Kuwait. Generally, Kuwait maintained a favourable outlook as growth was kept at a positive rate, ranging between 2.9% and 3.5%, and inflation was contained at the rate of 3.5%.
We expect an increase in business consolidation in the banking and financial sector given the recent progressive legislative reforms impacting the ownership of banking entities and the regulatory regime governing mergers and acquisitions. The new e-payment regulations governing the increasingly popular non-traditional settlement systems are a positive development from a consumer protection perspective. It remains to be seen how these regulations will be tested locally.
It is worth noting that on July 31 2019, the CBK announced that it had decided to maintain the discount rate at its current level of 3.0%, in order to 'maintain a healthy margin in favour of the KD, boost returns on KD deposits, and allow for a conductive environment for economic growth'.
|About the author|
Ibrahim Sattout is a partner at ASAR – Al Ruwayeh & Partners. He has over 26 years of experience, 19 years of which have been spent in Kuwait.
Ibrahim's practice covers banking and finance, public-private partnerships (PPPs), government projects, commercial and corporate, M&A transactions, capital markets and arbitration.
Ibrahim regularly provides advice to banks and financial institutions with regard to Kuwait's banking regulatory framework. He has represented local and international banks on major financing transactions in Kuwait, including the multi-billion financing of the Kuwait National Petroleum Company clean fuel project.
Ibrahim has extensive experience in project finance and PPP projects and led the ASAR team that advised on Az Zour North IWPP Phase 1; Az Zour North IWPP Phase 2; Al Khairan IWPP Phase 1; Kabd Municipal Solid Waste Treatment Facility; and Al Abdaliya ISCC Project. Ibrahim is currently advising the selected bidders in respect of Umm Al Hayman WWTP.Ibrahim is fluent in English, Arabic and French.
|About the author|
Brenda is an associate with ASAR – Al Ruwayeh & Partners and has over 10 years' experience in banking, finance, commercial, corporate acquisition transactions and restructuring and insolvency. Brenda has been involved in and has assisted on several financial, corporate and banking projects and M&A transactions ranging from typical transactions to highly complex ones.
Brenda's recent non-exhaustive experience includes advising various foreign banking institutions as lenders to Kuwaiti counterparties including in transactions involving various forms of security; representing both local and international clients in the processes involved with corporate acquisitions, private equity investments and corporate restructuring; advising several foreign clients (including multinational corporations, private equity funds, leveraged funds and investment banks) on structuring corporate vehicles for carrying out business and undertaking acquisitions in Kuwait; and advising local and international clients (including multinational corporations, listed companies, private equity funds, leveraged funds and investment banks) with regard to joint-venture agreements and shareholder agreements, including the drafting and negotiating of terms.