US embassy cable - 05KUWAIT76

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 000076 
 
SIPDIS 
 
STATE FOR NEA/ARPI 
EB/IFD/OIA ABRYAN 
EB/ESC/TFS BSTEPHENSON 
S/CT TKUSHNER 
OFAC DIRECTOR RWERNER 
 
E.O. 12958: DECL: 01/05/2015 
TAGS: ECON, EFIN, ETTC, KU, Banking 
SUBJECT: KUWAIT FINANCE HOUSE: A GROWING ISLAMIC INVESTMENT 
BANK 
 
Classified By: Ambassador Richard LeBaron for reason 1.4 (d) 
 
1.  (U) Summary:  Ambassador met January 4 with Kuwait 
Finance House (KFH) Chairman Bader Al-Mukhaizeem and other 
senior management to discuss the history and structure of the 
institution, Islamic bonds, terror finance controls, and 
Kuwaiti investment patterns.  Al-Mukhaizeem emphasized that 
KFH is an investment bank, described some of its investments 
in regional real estate projects, and noted a growing 
interest in Islamic bonds (sukuk) in Kuwait and elsewhere. 
His staff also described some of the measures taken to 
control financial flows and how the bank complies with OFAC 
regulations.  End Summary. 
 
KFH: $10 Billion Strong, and Growing 
------------------------------------ 
 
2.  (U) On January 4, Ambassador met with Kuwait Finance 
House (KFH) Chairman Bader Al-Mukhaizeem, General Manager 
Jassar Al-Jassar, and Investment Sector Assistant General 
Manager Mohammad Al-Omar.  KFH is Kuwait's leading Islamic 
banking institution, with 2003 reported assets of $10.3 
billion, depositor accounts totaling $7.8 billion, and a 
reported net profit of $197 million.  KFH has subsidiary 
operations in Bahrain and Oman, offers some services in 
Malaysia and Turkey, and hopes to expand further.  The bank 
was established in 1977 with 49% GOK ownership, since 
expanded to 56% ownership. 
 
3.  (U) Al-Mukhaizeem explained that the main difference 
between Islamic banks and regular banks is that no interest 
can be paid to depositors by an Islamic bank.  Instead, the 
deposits are invested in a portfolio, from which a dividend 
is paid.  Instead of interest-based loans, the bank makes 
investments.  It is heavily invested in the region, but also 
has real estate investments throughout the world, including 
in the U.S. in Texas, California, and Georgia. KFH waits 
until the end of each year and then pays out dividends based 
on its investment profits.  According to the KFH officers, it 
has done consistently well over time, regularly beating out 
interest rate returns from other Kuwaiti banks.  The KFH 
officers said that Kuwaitis are attracted to the bank both 
for its Islamic character and for its profitability.  "If 
it's Islamic but doesn't make any money," Al-Mukhaizeem 
admitted, "no one would put their money with us."  The 
Chairman said that the most difficult part of running an 
Islamic bank was finding staff who understood principles of 
banking and of Islamic law (sharia).  He said the bank 
provides internal training to address this problem. 
 
Sukuk: Islamic Bonds Used for Project Finance 
--------------------------------------------- 
 
4.  (U) The KFH officers described the growing trend of using 
Islamic bonds, or "sukuk," to finance large projects.  The 
bonds are generally being used for projects with long-term, 
medium-to-high rates of returns.  The individual bond-holders 
have an ownership in the asset and the bonds can be traded as 
a receivable.  KFH's Bahrain-based subsidiary just 
participated in a sukuk issue for the "Durrat Al-Bahrain" 
island resort project, and hopes to use this financing method 
for other projects in the region.  Al-Mukhaizeem said the 
Bahraini government has used sukuk bonds for government 
project and that KFH has worked with the governments of 
Bahrain, Qatar and Malaysia on sukuk financing.  KFH has also 
spoken with the Central Bank of Kuwait about sukuk financing, 
according to Al-Mukhaizeem, and the GOK appeared interested. 
The KFH officers said that the project financing 
opportunities in Kuwait were limited due to the amount of 
bureaucracy involved in any project. 
 
KFH Talks the Talk on Terror Finance 
------------------------------------ 
 
5. (C) Ambassador raised USG concerns about terror financing 
and the KFH officers said that KFH takes its responsibilities 
very seriously and coordinates with the Central Bank, OFAC 
and U.S. financial institutions such as Citibank to make sure 
it is in compliance with all terror finance and anti-money 
laundering legislation.  Al-Omar said that all transfers in 
and out of Kuwait were closely regulated.  With no personal 
taxes in Kuwait, Al-Omar explained, there is not much of an 
underground economy and thus no reason to hide assets or move 
cash across borders.  With Know Your Customer (KYC) 
regulations, Al-Mukhaizeem said, the bank was demanding more 
information from customers than they traditionally wanted to 
give, but he said that KFH was complying with the 
regulations, and customers are getting used to it. 
******************************************** 
Visit Embassy Kuwait's Classified Website: 
http://www.state.sgov.gov/p/nea/kuwait/ 
******************************************** 
LEBARON