Arab banking’s evolution

In a tumultuous economic climate, constancy can be hard to find. Chairman of Kuwait International Bank Sheikh Mohammed Jarrah Al-Sabah spoke to World Finance about the evolution of the Arab banking industry

 
Arab banking's evolution
Chairman of Kuwait International Bank Sheikh Mohammed Jarrah Al-Sabah 

Consistent, sustained growth is a deceptively simple-sounding goal for the finance industry, and one that appears to be increasingly elusive. According to the IMF’s , published in October 2016, many banks require substantial reforms and a rethink of management in order to escape the current climate of low profitability. While only the tip of the iceberg when it comes to the challenges facing global markets, low interest rates and outdated thinking have eroded the profitability of many established players.

It is this challenging environment that makes strong results particularly noteworthy, as only the most successful banking institutions are able to navigate such uncertain times. To achieve positive figures requires an institution to be disciplined, dedicated and focused, not only in terms of the bottom line, but also in terms of an underlying positive ethos that drives the decision-making process.

One region experiencing rapid development within its banking industry is the Middle East, with a range of finance providers now jockeying for leading positions as the industry modernises at a rapid rate. Of particular note is (KIB), which posted notable results for 2016, during what was certainly a challenging year.

Chairman of KIB Sheikh Mohammed Jarrah Al-Sabah told World Finance: “I am proud to say that 2016 was a particularly successful year for KIB, as we have managed to achieve impressive results across several key areas, including the enhancement of our financial position, the restructuring of our business activities and the streamlining of our internal operations.”

Originally founded as Kuwait Real Estate Bank in 1972, KIB has operated as a full-featured Sharia-compliant bank since 2007. Currently, the bank has 28 branches across Kuwait.

A year to remember
In 2016, KIB made substantial strides on the retail side of the bank’s business. Al-Jarrah said: “In an effort to make our customer experience simpler and more convenient, we have made substantial investments to upgrade our IT infrastructure and streamline our systems and processes. Also, we continue to enhance our products and services, introducing more innovative and state of the art Sharia-compliant banking solutions, which are crafted to meet the ever-changing needs of both customers and the market.”

Overall, the bank’s 2016 figures demonstrated both substantial strength and improvement over a number of key performance indicators. In total, the bank achieved a net profit of KWD 18.2m ($59.7m) for 2016, a growth of 14 percent compared with the previous year (see Fig 1).

“In specific areas, we witnessed substantial growth in financing revenues, which increased by 12 percent to reach KWD 71m [$232m], compared with KWD 63.2m [$206.6m] recorded for 2015”, Al-Jarrah explained. “Total assets reached KWD 1.85bn [$6.05bn], primarily due to a growth in the overall financing portfolio by KWD 95m [$310m] to touch KWD 1.27bn [$4.15bn], compared to KWD 1.17bn [$3.82bn] at the end of 2015. This marked an eight percent growth.”

KIB also recorded a 17 percent increase in the bank’s investment portfolio over the previous year, while customer deposits reached KWD 1.12bn ($3.66bn), a 10 percent increase on the previous year. Return on equity reached 7.2 percent, in comparison with 6.5 percent for the previous year. The bank’s non-performing loan ratio was maintained at 1.4 percent, while the total provision coverage ratio has increased to 231 percent, compared with 199 percent the previous year.

Al-Jarrah noted: “KIB continues to maintain a comfortable buffer in maintaining capital adequacy ratios in compliance with the Central Bank of Kuwait’s regulations concerning Basel III. Capital adequacy ratio was 20.5 percent at the end of 2016. The financial leverage ratio as of 31 December 2016 was 10.7 percent.”

These successful figures are beginning to add up for KIB, with 2016 culminating in a ratings upgrade. “In an important testament to our stability and financial strength, KIB’s credit ratings were raised in October 2016 by Fitch Ratings. Fitch upgraded our viability rating and affirmed our long-term issuer default rating at ‘A+’, with a ‘stable’ outlook.”

Planning for success
KIB’s successful 2016 was thanks to far more than just the strong fundamentals of its core business. Al-Jarrah explained: “Much of our continued success can be credited to the successful implementation of our forward-thinking strategy, which has been extremely successful in enhancing our position within the Islamic banking sector, setting us well on our way to achieve our vision of becoming the Islamic bank of choice in Kuwait.”

The plan dates back to 2015, when KIB formulated a strategy to develop and enhance all aspects of its operations. This included performance, market growth, asset quality, organisational structure and, perhaps most importantly, product and service offerings. Ultimately, the goal of the plan is to make KIB the Islamic bank of choice in Kuwait for both customers and employees.

According to Al-Jarrah, the strategy has so far shown positive results, while also positively impacting many different levels of the organisation: “Since its launch, we have successfully completed a number of pivotal changes within our organisation, restructuring our core departments, establishing new business units and divisions, as well as adding several talented, experienced and dynamic professionals to our executive management team. We have also focused a lot of our efforts on reinvigorating and streamlining all internal operations in order to maximise effectiveness and efficiency.”

As government expenditure shrinks and investment in projects decreases, banks witness an increase in their financing costs

Despite the successes so far, KIB has made no indication that it plans to slow down anytime soon. “The next stage of the plan, which is scheduled to roll out throughout this year, focuses on enhancing KIB’s competitive edge within the banking sector”, Al-Jarrah said. “I believe the success we have seen so far in the implementation of the first two phases has set a solid foundation for us to achieve that goal.”

Al-Jarrah also said another key factor behind KIB’s success is the wealth of experience among the bank’s management team. “Our employees have been major contributors to our recent success; KIB is proud to house a team of highly motivated banking professionals.”

As the continued development of the bank’s employees is key to its future, fostering local talent is essential. Al-Jarrah said: “Our goal is to continuously attract aspiring young Kuwaiti professionals of both genders, thereby providing a wealth of career opportunities and professional training programmes for newly graduated Kuwaiti nationals. We are also committed to investing in our employees and promoting their professional growth and development, which is why we continue to provide professional training and development opportunities across all divisions and levels.”

For example, the bank maintains a comprehensive programme of training initiatives year-round, which are designed to enhance the skillsets and abilities of all employees. It is also currently implementing a new performance management process that is designed to balance performance assessments with career aspirations and professional development.

Al-Jarrah said: “I am quite proud to say, in a testament to our outstanding employment strategies and ongoing efforts to support local human capital, we were honoured at the 15th ceremony for recognising excellence in workforce nationalisation policies in the private sector in the GCC. The ceremony took place under the auspices of the Council of Ministers of Labour and the Council of Ministers of Social Affairs of GCC States.”

Corporate social responsibility
Though now a staple in the banking sector, corporate social responsibility (CSR) programmes vary wildly in their scope and effectiveness. However, for KIB, such a programme is core to the bank’s ongoing success. “One of our biggest focus areas as an organisation has been social responsibility, and I am proud to say that KIB continues to have one of the most comprehensive CSR programmes in the region”, Al-Jarrah explained. “We believe social responsibility to be a core component defining an organisation’s success, as any successful organisation is expected to play an active role within its local community and actively contribute to social development.”

Al-Jarrah said KIB has a responsibility to not just provide the best financial solutions to customers, but also to operate the best social initiatives and programmes that truly serve all segments of KIB’s community: “CSR has been the cornerstone of our vision since inception, was solidified further after the firm’s transformation into a Sharia-compliant bank. We have always sought to be true corporate citizens and have worked diligently to fulfil our duty towards Kuwait, its people and its society, beyond our economic role.”

The importance of a CSR charter or programme comes down to a number of factors, both from a consumer and a business perspective. “One of the trends that has driven the prevalence of social responsibility within organisations is that customers have become increasingly interested in socially conscious companies; the ethical conduct of companies now influences the purchasing decisions of customers. Additionally, investors around the world are changing the way they assess companies’ performance, and are making decisions based on criteria that include ethical concerns. Even employees are looking beyond paycheques and looking into a company whose philosophies and operating practices match their own principles.”

In this sense, adopting a long-term CSR programme, as is the case at KIB, is also a long-term investment in the bank’s employees, community and future. For 2017, the bank is focusing on supporting initiatives that cover a number of key areas, including religion, humanitarianism, social causes, philanthropy, sports, environment, healthcare, nationalism, culture and education.

The specifics of KIB’s CSR strategies are varied and far-reaching. The bank promotes Islamic values, particularly through the holy month of Ramadan. Moreover, prior to this celebration, KIB distributes a collection of Koran and Du’a recitations, which feature some of the most prominent reciters in the Islamic world. The bank also supports a countless number of youth-focused events and initiatives, which are designed to encourage young people to build the future of the country, including encouraging aspiring professionals to pursue a career in banking. The bank is also an active participant in many job fairs for students.

Another focus for KIB is the health and wellbeing of various communities in Kuwait, ranging from efforts to fund cancer and diabetes support organisations, to being a regular host of a mobile blood bank at its head office. The bank has also sponsored the late Abdullah Mishari Al-Roudan’s indoor football tournament for five years running, and sponsored both the late Jassim Al-Sharhan’s Ramadan football tournament and the Flair Fitness Competition.

KIB has also made efforts to sponsor talented individuals, including honouring inventor and engineer Mubarak Taher, who received an international patent for his system, the Dynamic Network for Oil and Gas Production.

Kuwait City, Kuwait

Supporting local communities
On a national level, the bank has sought to support events that stimulate sustainable national and social development. KIB sponsored the Hala Ramadan Exhibition in 2016, an event created to support successful local youth initiatives. The bank also offered its backing to Light Expo, an event that featured leading businesswomen and young female entrepreneurs, as well as focusing on encouraging innovative small projects in Kuwait. KIB was also a sponsor of the Fifth Tmkeen Youth Empowerment Symposium. “These are examples of where KIB has been able to make a substantial difference to communities in Kuwait”, Al-Jarrah told World Finance.

According to Al-Jarrah, as a leading financial institution, KIB recognises the key economic role the bank plays in the national landscape, and is fully conscious this gives it the opportunity to be a major force for good in Kuwait. As such, KIB plays a significant role in helping to make a positive impact in society, which is a reflection of its deep-rooted commitment to serving its community with integrity in every way possible. These positive efforts reflect both the bank’s overall performance and its ability to meet the expectations of customers and shareholders.

“We believe that we have a responsibility to not only provide the best financial solutions, but to also provide the best social initiatives and community programmes that truly serve all segments of our community”, Al-Jarrah explained. “As an Islamic financial institution, we consider social responsibility to be our duty towards our community, which comes as a benefit, rather than a cost.”

Al-Jarrah also said social responsibility is particularly important in Kuwait, as CSR values are fundamentally woven into Arab culture: “Yet, even beyond that, social responsibility remains important in the Arab world, mainly because of the need for sustainable economic development. Governments, civil society organisations and academic institutions should all be involved in this effort.”

Al-Jarrah added that companies have a particularly important role to play: “They must be involved and contribute to the betterment of the societies in which they operate. They can do this through CSR initiatives that align with national development objectives in a diverse number of areas.”

It is often within local communities that companies’ CSR programmes are able to make the biggest difference to individuals. While broad directives might prompt general and gradual change in the world, working on a local level can make an immediate difference in the lives of individuals. Consequently, KIB constantly strives to actively participate in community activities, which are aimed at bettering both the local community and the national economy.

As the GCC grows from an economy that is heavily focused on oil exports to a more diversified institution, it will have to develop its finance sector to match

“Companies must work to the best of their abilities and available resources to enhance various aspects of society and support the different segments within it”, Al-Jarrah said. “Moreover, they must focus on social issues with the highest impact and steer their social responsibility efforts to create sustainable and long-term improvements.”

That said, CSR programmes are also capable of making a significant impact at a corporate level as well. Combining both the macro and micro benefits of CSR is something KIB is working hard to achieve: “We have always believed in integrating social responsibility into the very fabric of our organisation, and we therefore seek to embed corporate citizenship into our business practices and corporate values across our entire organisation – encouraging our employees to be more socially aware and active in their communities. Our all-encompassing social responsibility philosophy has enabled us to never lose sight of one of our most important core values: fulfilling our duty towards the society in which we belong. In doing so, we recognise that our credibility with stakeholders is further enhanced, as well as our corporate reputation.”

When trying to attract the best staff in addition to a loyal customer base, a sturdy CSR programme is a necessity in the modern business environment. Stakeholders have become more knowledgeable, and increasingly they tend to make decisions based on the reputational status of organisations. Accordingly, organisations must set themselves apart through more intangible means.

“CSR has a strong, positive effect on corporate image, which in turn positively affects stakeholder perception of the organisation; even employees may be attracted to work for, or be even more committed to, corporations perceived as being socially responsible.

“Our CSR programme has worked to improve our credibility within different segments of the Kuwaiti community. As credibility with our stakeholders translates into the satisfaction of our customers, we consider social responsibility to be a necessary determinant of building our reputation; which in turn affects how our clients, the community, our current employees and even potential employees view us.”

Arab banking development
The Arab banking industry has been full of swift evolutions and changes, making it one of the most exciting areas of finance at the moment. Al-Jarrah said many of these changes have been focused on the careful running of banks: “As a direct response to the 2008 financial crisis, new regulations such as Basel III have been established, introducing more stringent financial controls and restrictions over banking activity. These new regulatory frameworks have gone a long way in strengthening banks’ resilience and their ability to absorb losses in financial crises. In many ways, they have completely changed the way in which banks operate, and their approach to risk management.”

However, there have also been substantial developments in the retail banking sector. Al-Jarrah said the retail sector has been experiencing a higher growth rate than corporate banking, and is presenting a new wave of challenges and opportunities: “Also, it is important to note that our customers’ demands have evolved, as they have become more technologically savvy, more connected, better informed and less loyal to a single bank. This has forced the Arab banking sector to adapt and meet their changing needs.”

While the global banking industry is facing its fair share of challenges, Al-Jarrah explained the GCC is facing a particularly tricky climate with the prolonged instability of oil prices. “The ongoing instability in oil prices continues to pose a threat, which comes as no surprise as oil is the driving force of many of the Arab economies.

$1.85bn

Kuwait International Bank’s total assets

17%

The increase in the bank’s investment portfolio over the past year

231%

The bank’s total provision coverage ratio

“At a macroeconomic level, oil prices have taken a toll on national GDP, and therefore growth. We have witnessed its effects trickle down to the banking sector. As government expenditure shrinks, investment in projects decreases and costs for businesses rise, investment and commercial banks witness an increase in their financing costs.”

Although this presents problems, the current climate can also be seen as an opportunity for growth. “Banks must carefully monitor the dynamic business environment to effectively and constantly adapt to changes when needed”, Al-Jarrah explained. “Also, they must proactively work on keeping up with the requirements to modernise systems and maintain international compliance with legal, audit and accounting standards in order to achieve required operational efficiency amid competition, and to counteract any possible volatility in the future. Although this is a challenge, it is also a source of motivation, driving us all to provide the best services and banking solutions to individual and corporate customers alike.”

Al-Jarrah said, if the situation of unstable oil prices persists, the market is likely to witness major changes in government spending, foreign investment in the region and implementation of development plans: “Kuwait is a prime example of that, as these developments have motivated the Kuwaiti Government to forge ahead with many development projects, in a bid to diversify income and boost market performance. Not only does this reflect the government’s commitment to move ahead with its development plans, it also signals that capital spending will not be affected by the drop in oil revenues, at least in the medium run. Additionally, I believe the shifts taking place in the global economic landscape have created an opportunity for the Islamic banking industry in the GCC, opening the door for banks in the region to augment their position as key international players.”

A new beginning
As the sector develops, the Arab banking is increasingly finding a united voice to meet these challenges, with both KIB and Al-Jarrah at the forefront of these efforts. Speaking in Beirut at the Annual Arab Banking Conference in November, Al-Jarrah’s opening remarks as Chairman of the Union of Arab Banks called for the establishment of an Arab lobby: “Through this conference today, the Union of Arab Banks is looking to explore the possibility of establishing an international Arab banking lobby, stemming from the union’s commitment to promoting financial stability and economic cohesiveness, despite the political and security challenges the world is currently facing.”

He also warned of the impact of unstable oil prices, and the potential consequences should the migration of domestic capital continue at its current rates. “To put things into perspective, the combined assets of Arab banking institutions exceed the total value of the Arab economy”, Al-Jarrah told World Finance. “Through the establishment of a consortium, we aim to enhance the competitive edge of the Arab banking sector by redirecting investments made abroad to the local banking sector. The consortium intends to decrease international dependency from foreign debt. This will positively affect investments in the region by boosting new projects, creating job opportunities and driving economic development across the entire Arab region.”

The agreement could make for an important moment in the Arab banking world, creating a united voice that would be far more capable of addressing the challenges the region presents.

Al-Jarrah added: “Driven by the belief that cooperation will help mobilise human capital, conserve and maximise resources, and build capacities, the consortium will allow for a collaborative effort to strengthen the Arab economy. This cooperation is a prerequisite to building a solid foundation that is rooted in peace and stability, in addition to being a key component towards achieving balanced, sustainable and comprehensive development.”

However, such unity is not necessarily easy to create. Despite facing the same challenges, uniting so many organisations in a coordinated effort is difficult in any field, let alone banking. Al-Jarrah said building greater trust and confidence in what are relatively young institutions is the first challenge.

“So far, there has been great development in enhancing their reputation around the world and among ourselves, and in doing so there is now a better understanding of the strength and integrity of these institutions. There have also been great efforts made in encouraging the Arab banking sector to help drive social and economic development within the Arab region, as opposed to elsewhere.”

Al-Jarrah said there are other fields in which the organisation is working to improve. “Further efforts are to be made by the Arab banking sector by taking an active role in helping boost the economy by capitalising on its financial and human resources, as well as committing to promoting financial stability and cohesiveness, despite the political and economic turmoil plaguing the region.”

In holding chairman positions at both KIB and the Union of Arab Banks, one may think that Al-Jarrah may have an impossible amount of work in front of him. However, the goals of both organisations are one and the same: “Many of my key responsibilities involve a wide scope, such as building the reputation, enhancing the framework and creating awareness for Islamic banking, both in the region and globally. Furthermore, an important item on my agenda is strengthening Arab banks across the region by building reputation and harnessing capabilities to achieve the higher goal of developing the Arab financial sector.”

Future-centric
As the GCC grows from an economy that has been heavily focused on the export of oil and other goods and services for the past two decades (see Fig 2) to a more diversified and resilient institution, it will have to develop its finance sector to match.

Al-Jarrah believes a well developed financial sector is intrinsically linked to economic development: “With the improvement of the financial sector comes the reduction of inefficiency, the proper identification of profitable business opportunities, the mobilisation of savings, and the enhancement of goods exchange and productivity. As we work to develop these financial mechanisms, we will witness a more efficient allocation of resources, a more rapid accumulation of physical and human capital, and faster technological progress, all of which feed economic growth.”

He also said that, conversely, these advancements go hand-in-hand at a macroeconomic level. “Developments in the financial sector must work simultaneously with policy changes by government decision makers, which encourage robust regulations for financial activities and consequently, facilitate financial development.”

Overall, the future for banking in Kuwait looks promising, despite the challenges that exist in the region. Islamic finance has developed rapidly, and as the GCC continues to find new industries to foster, banking and finance has found a bigger sector to fill.

“Amid the ongoing instability in the energy sector and the changing global economic landscape, the banking sector in Kuwait and the GCC continues to perform strongly”, Al-Jarrah said. “As I’ve already mentioned, the challenging economic climate seems to have encouraged governments across the GCC to undertake fiscal reforms and actively pursue income diversification. Consequently, many governments in the GCC are forging ahead with widescale national development schemes.” One such example is the recently announced plan to transform Kuwait into a business and cultural hub for the region by 2035, which will also inevitably create countless opportunities for the sector.

“I would also say that the shifting global economic paradigms are opening the door for Arab banks, particularly Islamic banks, to assume a greater role on a global level, particularly as the world continues to recognise the importance of socially responsible investments.”

In an industry as vibrant as Islamic finance, even more innovations and achievements are expected to emerge in the coming years. While the region faces its challenges, a promising future awaits both KIB and the people driving the incredible creativity behind this bank. Indeed, the next decade may see financial institutions have as big an impact as oil.

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