Banks begin restructuring loans for retirees after pension cuts

With the Public Institution for Social Security beginning to implement the Cabinet’s decision to reduce exceptional pensions and suspend exceptional bonuses, effective May 1, Kuwaiti banks are now grappling with how to handle borrowers whose incomes have suddenly dropped—some by nearly 50 percent.

In line with Central Bank of Kuwait regulations, retirees’ loan installments must not exceed 30 percent of their net salary, while employees are capped at 40 percent. With this in mind, banks have been instructed to restructure personal financing terms—both consumer and housing loans—for retirees receiving reduced exceptional pensions.

Informed sources told Al-Rai, this means retirees will now pay smaller monthly installments over longer repayment periods to reflect their lower income.

However, sources explained that existing Central Bank regulations already allow the extension of loan terms:

• Consumer loans: May be extended by 2 additional years, for a maximum of 7 years.
• Housing loans: May be extended by 5 additional years, for a maximum of 20 years.

These extensions aim to ease the financial burden on retirees, offering flexibility to cope with their reduced monthly incomes while maintaining a balanced and sustainable credit relationship.

But if the new 30% income rule still leads to a repayment schedule that exceeds the maximum loan term, the sources clarified that:

• Loan terms cannot exceed the 7-year (consumer) and 20-year (housing) ceilings set by the Central Bank.
• If the 30% rule would require more time than allowed, retirees must repay the excess amount upfront from their own funds.
• Failure to do so may result in the borrower being classified as in default, until the issue is resolved with the lending bank.

While banks can restructure loan agreements, interest will continue to apply:

• In conventional banks, interest is variable every five years, and additional periods are priced based on prevailing market rates—whether higher or lower.
• In Islamic banks, financing is typically fixed based on initial agreement terms.

Thus, retirees opting for extended repayment periods should expect interest charges to reflect the lengthened financing terms, particularly in non-Islamic financial institutions.

Separately, the Public Institution for Social Security will also be restructuring loans granted as part of replacement schemes or seven-month advances, with monthly installments now capped at 25 percent of the adjusted pension.