Kuwait’s banking sector thrives as the backbone of economic stability

• The stability of the banking system in Kuwait bolsters the resilience of the national economy, as evidenced by twenty key indicators that highlight the strength and durability of banks.

The banking sector in Kuwait has demonstrated its resilience and adaptability amid local and global challenges, solidifying its role as a cornerstone of the national economy and a key driver of economic growth.

Banks are crucial for supporting the national economy by providing essential financing to companies and individuals, thereby stimulating economic activity. They offer loans and credit facilities to businesses of all sizes, facilitating the development of new projects and the expansion of existing ones, which in turn creates job opportunities and boosts economic growth. Additionally, banks support trade by financing imports and exports, improving cash flow and enhancing the trade balance.

Moreover, banks facilitate money circulation between individuals and companies by offering innovative banking solutions such as electronic payments, liquidity management, and money transfers.

Local Kuwaiti banks play a vital role in developing the financial infrastructure through competitive practices aimed at delivering high-quality services to their customers. They invest in advanced financial technologies that streamline financial operations and enhance efficiency.

The banking sector in Kuwait has shown remarkable flexibility and solvency, as evidenced by strong financial indicators, particularly in terms of capital adequacy. This performance underscores the sustainability of the local banking sector and its capacity to adapt to economic challenges. Moving forward, the sector is expected to maintain its stability and continue improving its financial performance.

In this context, we present an overview of the twenty key indicators that highlight the strengths reinforcing the banking sector’s position as a crucial element in supporting the national economy.

1. Capital strength: The capital adequacy ratio for the sector reached 18.1% by the end of the first half of 2024, which is higher than both local and international regulatory requirements. This confirms the ability of banks to absorb sudden financial shocks. This rate reflects the stability of the financial situation and the capacity of banks to fulfill their obligations without the need for external intervention.
2. Asset quality: Banks maintained high asset quality, as the ratio of non-performing loans to total loans reached 1.7% by the end of the second quarter of this year, while the coverage ratio of non-performing loans reached 245.7%, one of the highest rates in the region. These ratios confirm the efficiency of risk management policies and the low default rates of borrowers, which enhances the sustainability of profits and the ability to confront any potential defaults in loan repayments without affecting financial stability or profitability.
3. Strong liquidity: Kuwaiti banks’ deposits rose to KD 73.5 billion, an increase of 4.4% compared to the previous year. This growth reflects the increasing confidence of depositors, both from the private and public sectors, in the Kuwaiti banking sector, in addition to the banks’ efficiency in managing liquidity.
4. Loan growth: The ability of Kuwaiti banks to finance major projects is a vital factor in driving economic development in the country. Kuwaiti banks play a key role in supporting mega projects, whether infrastructure, industrial, or real estate projects, thanks to their financial strength, local and international networks, and high levels of liquidity. By the end of 2023, the loan portfolio had increased to reach KD 69.2 billion, indicating the banks’ capability to finance various economic sectors, including major projects and infrastructure, while maintaining stable interest rates.
5. Growth of the Islamic banking sector: Despite the fact that Islamic banks offer interest-free financial instruments, they still engage in various investments and face market risks, including maturity risks that can significantly affect their financial position. Islamic banks achieved faster growth compared to conventional banks, recording a 4% increase in assets, compared to 2.3% for conventional banks. This reflects the increasing demand for Islamic financial products and the continued expansion of this sector in the local market.
6. Stable profits: Banks recorded strong profits in 2023, with profits attributable to shareholders increasing by 26% to reach KD 1.5 billion. This growth is due to improved asset quality and higher operating revenues from banking activities. Additionally, the nine banks achieved a 4% increase in net profits for the first half of 2024, recording profits of KD 845.791 million. In more detail, both conventional and Islamic banks achieved growth in net profits, including profits attributable to minority interests, during 2023. However, the growth in net profits of Islamic banks significantly exceeded that of their conventional counterparts during the past year, largely due to the acquisition of a foreign bank group by a local bank in the last quarter of 2022. The increase in net profits for Islamic banks amounted to about KD 242 million, reaching approximately KD 793 million by the end of the year, compared to an increase of about KD 90 million for conventional banks, which brought their profits to approximately KD 788 million. This resulted in a reversal of the gap in favor of Islamic banks’ profits by five million dinars.
7. Improvement in return on assets: The remarkable growth in banks’ profits during 2023 and the first half of 2024 was clearly reflected in the performance and efficiency of the banking sector, as both the return on average assets and the return on average equity increased. The return on assets rose to 1.5%, reflecting the banks’ efficiency in utilizing their resources and investments to achieve sustainable returns. This rate aligns with expectations and enhances confidence in the continuity of profit growth.
8. Profitability indicators: Overall, while 2023 was positive in terms of profitability indicators for the Kuwaiti banking sector, the continuation of a tight monetary policy, characterized by maintained interest rates during the past year, has led to several pressures, such as a decline in loan growth and an impact on credit quality. Additionally, global markets remain subject to various pressures due to uncertainty related to rising geopolitical tensions and disruptions in trade corridors. However, the local banking sector has sufficient buffers to confront any unexpected developments or losses from a position of strength.
9. Return on equity and investment portfolio: The return on equity rose to 11.1% by the end of the year, reflecting improved financial performance and stable returns for shareholders. This high percentage indicates the efficiency of banks in managing capital and achieving good returns on investments. The banks’ investment portfolio also grew by 13.6% during 2023, with investments directed more towards fixed-income assets (by 15.1%) and equity investments (by 3.8%). This reflects effective management of investment portfolios and diversification of income sources.
10. Increase in government deposits: Local banks continue to rely more on private sector deposits as a primary source of funds than on government deposits, with private sector deposits constituting the largest share of the deposit portfolio at about 56.5% of the total. Government deposits amounted to approximately KD 5.1 billion by the end of July 2024, reflecting the state’s continued support for the banking system and the stability of liquidity flows. This government support enhances banks’ ability to provide the necessary financing to various economic sectors.
11. Diversification of the sectoral loan portfolio: Despite the high interest rate environment, the loan portfolio witnessed a growth of 2.6%, reaching KD 69.2 billion, primarily due to increased financing granted to large companies. In terms of sectoraldistribution, most sectors experienced growth, particularly the services, construction, and trade sectors, which increased by a total of KD 870 million. The sectoral distribution of the loan portfolio remains consistent with previous years, as it continues to focus on the household, real estate, and services sectors.
12. Growth in real estate financing: Housing facilities (financing) experienced sustainable growth during 2023 and 2024, reaching KWD 16.2 billion by the end of July. Housing loans are long-term personal loans not exceeding fifteen years, provided to customers for the purpose of purchasing, building, or renovating a private residence. The expansion of banks in granting these loans reflects growing confidence in the real estate market and the ability of banks to finance private housing.
13. Progress in digital transformation: Kuwaiti banks have recorded remarkable growth in digital transformation, becoming heavily reliant on technology to provide services more easily and efficiently. Through banking applications, websites, and smart ATMs, customers can easily conduct transactions such as transfers, bill payments, and balance inquiries without the need to visit branches. This enhances the operational efficiency of banks and reduces reliance on paper transactions.
14. Banking sector’s flexibility in the face of crises: Despite global turmoil, the Kuwaiti banking sector has demonstrated its ability to withstand and adapt to economic changes, thanks to the prudent policies of the Central Bank of Kuwait. These policies have contributed to enhancing the stability of the sector and protecting it from international banking crises.
15. Growth in investment profits: The value of investment portfolios in banks increased by about 13.6%, driven by a remarkable rise in fixed-income investments, particularly government and corporate bonds, which grew by KD 2.4 billion during 2023. Although this growth was mainly concentrated in two banks, most banks have generally moved to increase their investments in fixed-income instruments. This trend is due to high global interest rates, which have limited the ability and willingness of some borrowers to borrow and made investing in fixed-income instruments more attractive.
16. Stability of the banking system: Stress tests conducted by the Central Bank showed the ability of banks to withstand economic and financial shocks. The results of these tests revealed the strength of the banking system and its readiness to face future challenges.
17. Commitment to governance standards: Kuwaiti banks adopt the highest standards of governance and transparency, enhancing confidence among shareholders and investors and contributing to the sustainability of financial performance.
18. Expansion of Islamic financial services: With the increasing demand for Islamic financial products, Islamic banks have continued to expand the scope of their services, enabling them to attract more customers and investors.
19. Support for small and medium enterprises: Banks play a vital role in supporting small and medium enterprises by providing dedicated financing programs, which contribute to enhancing economic diversification and creating new job opportunities.
20. Confronting financial fraud: Banks have a long record of pioneering efforts to combat the risks of digital financial fraud. As a result, they have been able to keep fraud operations in Kuwait at very low levels compared to many developed countries. The value of online card fraud operations, as a percentage of total online transactions, amounted to only 0.07% across all customers in the Kuwaiti banking sector. In contrast, this percentage ranges between 0.1% and 0.2% in countries such as France, the United Kingdom, Canada, and Australia, according to data from the Bank for International Settlements.

The number of fraud operations, as a percentage of the total, constitutes only 0.01% across all units of the banking sector in Kuwait. Notably, 79% of these operations are cross-border transactions.