US embassy cable - 04KUWAIT2909

UNCLAS SECTION 01 OF 02 KUWAIT 002909 
 
SIPDIS 
 
STATE FOR NEA/ARP 
STATE FOR EB/IFD/OIA ABRYAN 
USDOC FOR 4520/ITA/MAC/OME/CLOUSTAUNAU/COBERG 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EINV, ETRD, PGOV, PREL, IZ, FR, KW 
SUBJECT: KUWAIT BANKING AND FINANCE UPDATE, SEPTEMBER 2004 
 
(U) This cable is sensitive but unclassified; please protect 
accordingly. 
 
1.  (SBU) Summary:  In this edition of the Kuwait Banking & 
Finance Update: the Central Bank raises interest rates; a 
Kuwaiti bank limits its business in Iraq due to security 
concerns; the banking sector opens to foreign banks; a new 
Islamic bank is formed; and a new draft tax law is approved 
by the Council of Ministers and referred to the National 
Assembly.  End Summary. 
 
 
Interest Rate Hike: Cooling down an overheated economy 
--------------------------------------------- --------- 
 
2.  (U) In what some news reports called a "surprise move," 
the Central Bank of Kuwait (CBK) raised the discount interest 
rate on 3 August from 3.5% to 4%.  After initial grumbling in 
the press and among some National Assembly (NA) members about 
the timing and surprise nature of the announcement, most 
financial analysts and members of the banking community 
agreed that the rate hike was called for.  In an August 19 
meeting with EconOff, National Bank of Kuwait (NBK) General 
Manager for Asset Management and Treasury George Nasra said 
that the recent rate hike was "necessary and understandable," 
and was "needed to cool down the real estate sector and stock 
market."  Nasra did not foresee the CBK moving away from 
keeping interest rate fluctuations in line with US Federal 
Reserve interest rate changes.  In an August 29 courtesy call 
by CDA, Central Bank Governor Sheikh Salem Abdul Aziz 
Al-Sabah echoed Nasra's opinion, saying that the Kuwait 
economy has become "over-enthusiastic."  He added that there 
had been "too much expectation of an Iraq reconstruction 
boom," and that the interest rate was raised to cool down 
some of the excess borrowing. 
 
NBK in Iraq: Eager for business, wary of security 
--------------------------------------------- ---- 
 
3.  (SBU) In an August 19 meeting, NBK GM Nasra told EconOff 
that NBK has acquired about 15 branches of a local Iraqi 
bank, with plans to focus on Baghdad and Basra.  It will 
operate the banks using mostly local employees, with some 
management personnel sent from Kuwait.  While the original 
plan was to begin operations in January 2005, per the January 
2004 agreement between the Central Bank of Iraq (CBI) and 
NBK, the current security situation was casting that 
timeframe into doubt.  Nasra said that everything depended on 
the security situation, adding that the opening of its 
banking operations "depends on what happens today in Najaf." 
(Commment: By this, Nasra meant that everything depended on 
the security situation in all of Iraq, and not just in the 
cities or neighborhoods where NBK planned to operate 
branches. End Comment.) 
 
4.  (SBU) In an August 24 courtesy call by CDA, NBK CEO 
Ibrahim Dabdoub expanded further on NBK's business in Iraq. 
He explained that NBK has actually purchased an 85% share of 
a bank chain owned by the Kubba family in Iraq, but that NBK 
would keep the family name on the bank for the next year or 
two.  NBK currently has 15 people from the bank in Kuwait for 
training.  While noting that "the business potential in Iraq 
is huge," Dabdoub said that NBK will likely ask the CBI for 
an extension on the deadline to be operational, in order to 
"let the security situation settle down." 
 
5.  (U) NBK is also facilitating wire transfers with two or 
three banks in Iraq, according to NBK GM Nasra, but the 
demand is very low.  He is seeing some demand for global 
payments made from Baghdad, but not much the other way, into 
Iraq.  Nasra said that the Iraq Trade Bank, operated as a 
consortium, was working out well so far, and he had no 
specific difficulties to report. 
 
 
First Foreign Bank Licensed in Kuwait 
------------------------------------- 
 
6.  (U) Following on the January 2004 approval by the 
National Assembly to allow foreign banks to enter the Kuwaiti 
market, the CBK granted BNP Paribas the first license for a 
foreign bank in the country in August 2004.  The license must 
go for approval by the Cabinet of Ministers before it becomes 
law.  Citigroup, Standard Chartered Bank and HSBC are also 
reported to have applied for licenses. 
 
 
7.  (SBU) NBK GM Nasra said that BNP Paribas would start 
operating once it has been given GOK approval, and that other 
foreign banks were on the way.  He saw these new market 
entrants as possibly affecting smaller, weaker banks, but not 
NBK.  He did expect that the foreign banks would eat into 
some of NBK,s market share in the areas of wealth 
management, credit card services, and other advisory 
services, but did not expect NBK to be challenged in retail 
banking.  Nasra said that a Citibank colleague based in 
Bahrain told him that the holdup of Citibank,s entrance into 
the Kuwait market was the fault of Citibank, and not the GOK. 
 CBK Governor Sheikh Salem, in the August 29 courtesy call, 
said that Citibank needed to submit more paperwork to meet 
certain requirements but that Citibank was definitely 
interested in doing business in Kuwait.  Sheikh Salem echoed 
Nasra's opinion, saying that the presence of foreign banks 
would increase competition in the areas of corporate banking, 
portfolio management and wealth management. 
 
 
Islamic Banking: A New Bank and a Growing Market 
--------------------------------------------- --- 
 
8.  (U) The Bubiyan Islamic Bank, a new Islamic bank 
established by the Kuwait Investment Authority (KIA), is 
still in the process of being formed after its May 2004 
initial public offering.  On August 21, the CBK announced a 
proposed list of 15 board members, but there has been some 
dispute over the position of the bank chairman.  Local 
newspapers reported on August 22 that an Islamic party is 
supporting a candidate for chairmanship of Bubiyan Bank who 
is not on CBK's proposed list of board members. 
 
9.  (U) NBK GM Nasra said that NBK currently offers some 
Islamic financial services, including leasing, and money 
market and real estate funds, but was not yet offering retail 
Islamic banking services.  In Kuwait, he noted, Islamic 
banking and conventional banking are separated by law, so it 
is easier for an institution to operate solely one way or the 
other.  He expected some competition from Bubiyan Islamic 
Bank and from other local banks.  Nasra said that he sees a 
growing demand for such services, both in Kuwait and in the 
region. 
 
 
Draft Tax Law Referred to National Assembly 
------------------------------------------- 
 
10.  (U) A draft tax law has been approved by the Council of 
Ministers on August 25, and will be sent to the National 
Assembly in the fall 2004 session.  The draft law calls for a 
progressive tax on net income and excludes salaries and 
certain low-income wage earners.  The draft law exempts the 
Amir and Crown Prince from paying the taxes, which will be 
collected on January 1 of each year.  The proposed law calls 
for the following taxes on "net income from commercial, 
industrial, private, capital or real estate activities:" 
 
KD 1 to KD 10,000               2.5% 
KD 10,000 to KD 50,000          5.0% 
KD 50,000 to KD 250,000        10.0% 
KD 250,000 to KD 1 million     15.0% 
KD 1 million to KD 5 million   20.0% 
KD 5 million and higher        25.0% 
 
11.  (U) Post will provide additional financial news in 
regular update cables. 
TUELLER