Kuwait Finance House (KFH), the country’s biggest Islamic lender, sees attractive opportunities in financing the budget deficits of Kuwait and other oil exporting countries in the region, its group chief executive said.
Mazin al-Nahedh’s comments underline how a growing proportion of banks’ money in wealthy Gulf countries is flowing into government debt rather than to the private sector, as governments increase borrowing to cover fiscal deficits caused by low oil prices.
Al-Nahedh said KFH officials have met with governments and companies in Gulf Arab countries every month to discuss how state budget deficits could be financed.
The bank holds about 57% of Islamic deposits in Kuwait, which are equivalent to 21% of total bank deposits, making it an important source of funds for the Kuwaiti government and potentially significant for the regional debt market.
Between April and KFH’s last disclosure on July 26, it accounted for 51% of Islamic banks’ financing of Kuwait’s budget deficit through securities operations, which totalled 725mn dinars ($2.4bn).
Although yields on Kuwait government debt instruments are low in absolute terms, they are high in relative terms because of the instruments’ low level of risk and good liquidity, al-Nahedh said.
“This combination gives you comfort that you are investing in high-quality, liquid assets... They are the best assets in Kuwait Finance House,” he said.
KFH has restructured its business over the last couple of years to focus on banking and core investment activities. In July it agreed to sell its stake of over 50% in Aref Investment Group. Al-Nahedh, however, said that the diversity of KFH’s investments was a challenge in the restructuring process, and it was finding it hard to exit assets in some countries. In Kuwait, the market for assets lacks depth, he said.
“When you have a company that wants to sell...the lack of parties who want to buy does not facilitate competition on the price.”
KFH’s non-performing loans in Kuwait have dropped to 1.8% of total loans from 2% a year ago, while in the group as a whole, they fell to 2.95% from 3.03%, al-Nahedh said.
The bank will also restructure its Malaysian unit, which has a share of about 3% of the local market, he said. “The operating environment is difficult because of the intensity of competition among banks there.”
The restructuring will focus on upgrading the unit’s technology, and attracting certain types of individual clients while reducing corporate financing activity, al-Nahedh said.