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More and more financial institutions are emerging that offer the full range of Islamic banking products. But while many of these firms have been set up for this purpose alone, some well-established banks are changing the way they do business in order to be fully sharia-compliant.
The growth of Islamic finance institutions is not just confined to Islamic countries, but stretches across the globe; some of the countries that pioneered this method of banking are continuing to innovate. Kuwait, for example, has led the way in sharia-compliant financial products in recent years, and one of its leading banks, Kuwait International Bank (KIB), has been transforming the way it does business to cater for this market.
Founded in 1973, KIB became sharia-compliant six years ago. The bank’s Chairman, Sheikh Mohammed al Sabah, spoke to World Finance about how the company has transformed itself over the last six years, what challenges face the Kuwaiti banking industry, and how it is becoming a thriving hub for financial products.
Embracing change
KIB decided to comply with sharia law in July 2007, and this shift has transformed what was once known as the Kuwait Real Estate Bank into one that offers a wide range of Islamic finance products. The move has proved highly successful, and recent financial results have been strong.
“KIB posted exceptional financial results last year, where operating profits exceeded KWD 21m and shareholders received seven percent in cash,” says al Sabah. “The bank continued this steady growth in the first half of 2013 by attaining operating profits of more than KWD 16.6m and the second half looks promising and encouraging too.”
There have been plenty of challenges in changing the way the bank operates, especially as the company has such a deep-seated history in the industry.
“This journey of transformation, from a conventional bank to an Islamic one, has been one of our biggest challenges and accomplishments,” says al Sabah. “When you have a 34-year-old legacy and are a leader in the sector, it is not easy to transform, while maintaining your client base and managing their expectations.
There are vast opportunities and potential growth in the Kuwaiti banking sector, especially because of the government’s development plans
“I would say that during this journey of transformation, meeting our client’s expectations, understanding their needs and catering to them was very critical. We are always open minded and willing to listen to our clients. This has helped us grow our base in terms of corporate clients as well as individual clients.”
KIB has also been widely recognised for the way it has remained successful during the last few turbulent years. Despite the financial crisis, credit ratings agency Fitch gave it an ‘A+’ level recognition due to its strong capitalisation, liquidity profile and strong capital ratios.
KIB also received the Golden Medal Award of Merit 2013 from the Tatweej Academy for Excellence and Quality in the Arab Region. The bank is also the only Kuwaiti firm to publish its corporate governance manual in both Arabic and English, emphasising its commitment to transparency.
The opportunities in Kuwait’s banking industry are considerable, and al Sabah says that the government is keen to develop it even further.
“There are vast opportunities and potential growth in the Kuwaiti banking sector, especially because of the government’s development plans. The Kuwaiti banking sector is strong and stable in comparison with other economic sectors. This is in spite of structural imbalances suffered by our national economy, deterioration of investment spending, lacklustre implementation of the development plan for which KWD 34m was allocated, and a slowdown in infrastructure projects due to privatisation issues. All of these negatively affected the performance of the private sector and consequently lead to a weakening of financing channels in local banks.
KWD 21mn
KIB operating profit (2012)
“Irrespective of these foggy conditions, the Kuwaiti banking sector was able to retain its prominent status, ranking third among GCC counties after Saudi Arabic and Qatar, as per Moody’s ratings. Kuwaiti banks are aware of the pressing need to offer innovative and creative products, and to develop and update their information and communication technology in order to stay ahead of competition.”
With assets of around $4.6bn, the company now offers a full range of Islamic finance products.
“Today, KIB’s business covers all banking services including acceptance of deposits, financing transactions, direct investment, Murabaha (auto, real estate and commodities), Ijara Muntahia Bittamleek (lease-to-own), Istisna’a, Tawarruq, credit cards, Wakala and other products. We also provide corporate projects and finance, treasury services, letters of credit, letters of guarantee, real estate dealings and management of properties,” says al Sabah.
He adds that the adoption of Islamic finance products has also helped KIB to innovate.
“Being one of the early adopters of Islamic banking presents both an advantage and a challenge for KIB. Today, almost all local banks have adopted Islamic banking. This works as a trigger for KIB to keep on innovating and enhancing our products and services, so that we are way ahead of the competition and always part of the local leading banks.”
New technology
The bank is actively developing a range of technological services for clients, from mobile banking to online services.
“Technology has been driving business excellence and pushing the standards of service levels across organisations. The banking sector is no different. At KIB we use technology as an enabler and service differentiator. KIB also has its own expansion plan in terms of both products and presence. We are committed to offering modern, sharia-compliant products and to reach out to our clients across the state of Kuwait by increasing our presence through various banking channels, including a wide network of branches, ATMs, mobile banking, and internet banking, to facilitate customer interface.
The mantra today is innovation and alignment. The one-size-fits-all logic does not work in today’s world
“Our excellence is based on two significant elements: strong leadership and keeping up-to-date with technology. We place great emphasis on attracting and retaining able and experienced leadership from inside and outside Kuwait. We also ensure that all our staff are trained regularly with a view to upgrading their capabilities in all fields. We have also put in a significant effort to offer the latest electronic and online services to our customers.”
Maintaining customer satisfaction is also a vital part of KIB’s strategy, and the firm has developed a range of services to enhance the banking experience, whether clients are at home in Kuwait or overseas.
“We also believe in rewarding our loyal clients with a host of special services and privileges wherever in the world they may be,” says al Sabah. “One such privilege that is offered to our Visa Platinum and Gold cardholders is access to VIP lounges in airports around the world. Operational excellence, customer service satisfaction, innovative product offerings and outstanding service are essentially the cornerstones of any business. We believe that all of this must exist in the culture of KIB for us to stand out.
“The mantra today is innovation and alignment. The one-size-fits-all logic does not work in today’s world.”
Regulatory landscape
The changing regulatory landscape for the global banking industry has meant that firms across the world are having to make adjustments to the way they do business.
“KIB has developed a five-year plan that focuses on maximising shareholder rights, mitigating risks, improving capabilities and the potential of KIB staff, and applying a flexible business model that will help realise sustainable, acceptable and secured development,” says al Sabah.
“The bank is committed to full compliance with all international rules and regulations and is well placed to meet the demands of Basel III. KIB holds sufficient high-quality liquid assets and is committed to be in-line with Basel III requirements as prescribed by the Central Bank of Kuwait. We also have an independent Anti-Money Laundering Unit in order to prevent and detect money laundering, terrorism financing and other illegal activities.”
KIB aims to develop its international banking service in the coming years, as well as its domestic retail-banking arm.
“Our current strategy is to concentrate on the international and retail banking sectors with innovative and up-to-date services. One of our key objectives is customer satisfaction, as that is the path to achieve profitable distributions and remain a leader in the Islamic banking industry.”
Al Sabah adds that the banking sector can play an integral role in developing the country’s economy in the coming years, and he is keen for the firm to play its role.
“Banking is one of the promising sectors in the country, and plays a vital role in its economic development. Despite challenges in the global financial market, the banking system in Kuwait has been progressing rapidly over the last few years. Favourable demographics, a focus on asset management, increased investment in technology and drive on regulatory reforms have contributed to this burgeoning growth.”
