US embassy cable - 05KUWAIT638

C O N F I D E N T I A L SECTION 01 OF 06 KUWAIT 000638 
 
SIPDIS 
 
STATE FOR NEA/ARPI 
EB/IFD/OIA ABRYAN 
EB/ESC/TFS BSTEPHENSON 
S/CT TKUSHNER 
OFAC DIRECTOR RWERNER 
USDOC:4520/ITA/MAC/OME/CLOUSTAUNAU/COBERG 
USDOC:3131/USFCS/OIO/ANESA/TGILMAN 
 
E.O. 12958: DECL: 02/15/2015 
TAGS: ECON, EFIN, PTER, KU, IZ, Banking 
SUBJECT: KUWAIT'S COMMERCIAL BANKS: SURVEY OF RESULTS, IRAQ 
INTEREST, ISLAMIC BANKING AND C/T TOOLS 
 
REF: A. KUWAIT 0076 
     B. 2004 KUWAIT 4191 
     C. BAGHDAD 0503 
     D. 2004 BAGHDAD 1175 
 
Classified By: Ambassador Richard LeBaron for reason 1.4 (d) 
 
1.  (SBU) Summary and Comment: Following up on his December 
2004 meeting with the Central Bank Governor (Ref B) 
Ambassador met during January and February with the top 
executives of the leading Kuwait banks.  The bank executives 
were generally positive about the Kuwaiti economy and the 
strength of the banking sector, were not concerned much about 
foreign competition, but were concerned about terror finance. 
 All of them thought that Kuwaiti banks were being vigilant 
on terror finance, but some recognized the need for tougher 
legislation.  Some of the banks were actively seeking 
business opportunities in Iraq while others were waiting out 
the current instability, but all of the bankers saw Iraq as a 
potentially lucrative market.  Although only some of the 
bankers were interested in offering Islamic banking services, 
all of them saw it as a growth area.  Some of them also 
expressed resentment at Kuwait Finance House's rise in wealth 
and influence, seeing it as the product of less regulation 
and explicit GOK support.  The most lucrative sector, 
according to all the bankers, is real estate, but all of them 
seemed to understand the risks in real estate speculation and 
the potential bubble in the real estate market.  The bankers 
were all focused on training and staffing challenges and 
recognized that they were in stiff competition with each 
other for the small number of well-qualified Kuwaiti 
employees.  They also all recognized the value of U.S. 
training and educational opportunities.  Overall, the bankers 
were positive in their outlook for 2005, with most expecting 
their double digit profit growth of 2004 to be matched this 
year. 
 
2.  (C) Comment: Clearly the banks in Kuwait are doing very 
well and will continue to do so in 2005.   The senior 
managers of these banks are impressive, as is the attention 
most seem to be giving to issues of key concern to us, such 
as money-laundering.   Still scarred by the massive amount of 
non-performing loans resulting from the stock market crash of 
1982, the GOK, through the Central Bank, is limiting the 
exposure of the banks and exercising strong supervision. 
Given the size and relatively good management of the Kuwaiti 
commercial banks, the prospect of entry by a few of the big 
multinationals, including Citibank, is being met without any 
percetible anxiety.  Two or three of the Kuwaiti banks will 
likely become significant players in Iraq once the security 
situation stabilizes. End Summary and Comment. 
 
Banking Sector Overview: NBK on Top, KFH and Others Also 
Strong 
--------------------------------------------- ----------- 
 
3.  (U) Following are the top banks in Kuwait, in descending 
order by assets. 
 
--  National Bank of Kuwait (NBK): Largest bank in Kuwait by 
assets, 47 branches, 2004 profits of $515 million.  The third 
largest bank in the Arab world, with the highest credit 
rating in the Middle East.  Has branches, offices, or 
partnerships in Qatar, Jordan, Lebanon, London, New York, 
Paris, Geneva, Bahrain, Singapore, Vietnam and Thailand. 
 
--  Gulf Bank: Second largest bank in Kuwait, 31 branches, 
2003 profits of $165 million. 
 
--  Commercial Bank of Kuwait (CBK): Third largest bank in 
Kuwait, 39 branches, 2004 profit of $214 million. 
 
--  Al-Ahli Bank of Kuwait: Fourth largest bank in Kuwait, 15 
branches, 2003 profits of $75 million. 
 
--  Burgan Bank: Fifth largest bank, 2003 profits of $69 
million. 
 
--  Bank of Kuwait and the Middle East (BKME): Sixth largest 
bank, 18 branches, 2003 profits of $68 million.  48% owned by 
Ahli United Bank of Bahrain.  Was owned by GOK until 2002. 
 
--  Kuwait Finance House (KFH): Market leader in Islamic 
banking, second largest financial institution in Kuwait (Ref 
A), with profits of $200 million in 2003.  As of 2005, 
officially came under the same regulatory and oversight 
structure as other Kuwaiti banks.  Previously did not have to 
comply with similar banking regulations and enjoyed "unfair 
advantages," according to some commercial bankers.  (Note: 
KFH is usually not ranked with the commercial banks, but is 
only second to NBK in the size of its assets.) 
 
The Bankers: A Close-Knit, Well-Connected Group 
--------------------------------------------- -- 
 
4.  (C) While the banks are all in competition with one 
another for customers, deposits and skilled employees, the 
top Kuwaiti bankers are a close-knit group, bonded both by 
family connections and investment opportunities.  Many of the 
top bankers are closely connected to either the top Kuwaiti 
merchant families or the ruling family.  During January and 
February 2005, Ambassador and EconOff met with the following 
Kuwaiti bankers: 
 
National Bank of Kuwait (NBK) Chairman Mohammed Al-Bahar, 
NBK CEO Ibrahim Dabdoub, 
Burgan Bank Chairman Shaykh Mohammed Al-Jarrah Al-Sabah, 
Gulf Bank CEO and GM Dr. Yousef Al-Awadi, 
BKME Chairman Hamad Al-Marzouq, 
Commercial Bank Chairman Abdulmajeed Al-Shatti, 
Commercial Bank CEO & General Manager Jamal Al-Mutawa, 
Al-Ahli Bank Deputy Chairman Ali Al-Mutairi, 
Al-Ahli Bank General Manager Ibrahim Ibrahim, 
Al-Ahli Bank Asst. General Manager Trevor Bush, 
Kuwait Finance House Chairman Bader Al-Mukhaizeem, 
Kuwait Finance House General Manager Jasser Al-Jasser, and 
Kuwait Finance House Asst. General Manager Mohammad Al-Omar. 
 
Banking in Kuwait: Solid Oversight, Ready for Foreign 
Competition 
--------------------------------------------- -------- 
 
5.  (C) Kuwait's banks are generally held in high regard 
throughout the region and usually receive high ratings from 
the major credit ratings agencies.  All of Kuwait's major 
banks enjoyed double-digit growth in 2004; some reached a 
20-25% growth in profits.  While some of the banks, such as 
Burgan, are known for having a large amount of non-performing 
loans, others are proud of their record and their credit 
rating.  Al-Ahli Bank GM Ibrahim boasted, for example, that 
Al-Ahli is the "cleanest bank in non-performing loans," 
meaning that his bank had the lowest loan default rate, and 
that the bank received four upgrades from the major ratings 
agencies over the past year.  Commenting on general oversight 
of Kuwaiti banks, Al-Mutawa of the Commercial Bank said that 
the Central Bank has to approve the senior management of all 
banks operating in Kuwait.  He thought that this would be the 
case for any new foreign banks entering the Kuwaiti market. 
Al-Mutairi of Al-Ahli Bank said that Kuwait has a "very 
strong Central Bank Governor" who was reasonable but also 
wanted to ensure that no Kuwaiti bank collapsed.  Reflecting 
on his experience throughout the region, NBK CEO Dabdoub said 
"the Central Bank of Kuwait is the best by far."  Many of the 
bankers reflected back on the Kuwaiti stock market crash of 
1983, seeing it as the impetus for the Central Bank's strict 
control today.  Gulf Bank CEO Al-Awadi described the Central 
Bank as "very responsible," and said that Kuwaiti banks are 
very strong as a result. 
 
6.  (C) The National Assembly passed a law in 2001 allowing 
entry of foreign banks into the Kuwaiti market, and the first 
foreign bank, BNP Paribas, was granted a license in 2004. 
Other banks are expected to follow soon, including Citibank, 
HSBC, Standard Charter and National Bank of Abu Dhabi.  Gulf 
Bank CEO Al-Awadi said that he thought Citibank was close to 
getting approval, and had recently been in town "looking for 
premises."  While none of the bankers expressed much concern 
over losing market share to foreign banks entering the Kuwait 
market, some of them were curious as to whether they would 
have to abide by all of Kuwait's laws.  Specifically, Burgan 
Bank Chairman Al-Sabah questioned how much taxes foreign 
banks would pay, and whether or not they would be required to 
pay the labor charge (2.5% of net profits) and the training 
charge (1% of net profits).  NBK's CEO Dabdoub and Chairman 
Al-Bahar both agreed that Kuwaiti banks would not be affected 
much by the entry of foreign banks in the Kuwaiti market, 
explaining that the foreign banks would be competing in 
wealth management and private banking, not retail banking. 
 
7.  (C) Al-Marzouq of BKME, reflecting on his extensive 
experience with the banking sector in Bahrain, said that the 
market in Bahrain was much more open, and that reciprocity 
with other international banks was easier handled when the 
bank is based in Bahrain rather than Kuwait. 
 
Bank Expansion: More Branches, More E-Banking 
--------------------------------------------- 
 
8.  (U) Most of the bankers said that they were expanding 
their branch networks in Kuwait, and none saw the Kuwaiti 
market as "overbanked" yet.  Because the Central Bank 
controls fees, Commercial Bank CEO Al-Mutawa explained, the 
competition is in product range, service, and the branch 
network.  Kuwaitis like to go into their branches and talk 
with someone, or get someone on the phone, the bankers 
explained, so the cost of opening up new branches usually 
pays off.  Commercial Bank Chairman Al-Shatti said that his 
bank was planning on opening 15 new branches in 2005. 
Al-Ahli Bank also plans to open new branches, with Deputy 
Chairman Al-Mutairi explaining that the "social culture calls 
for more bank branches." 
 
9.  (U) Burgan Bank Chairman Al-Sabah said that all of 
Kuwait's banks were trying to open new branches, but that 
interest was also growing in electronic and phone banking. 
To encourage greater use of electronic banking, Al-Sabah 
added, Burgan Bank was putting a 1 KD transaction fee on some 
paper transactions at the teller.  Al-Sabah described a few 
of the phone banking options now available in Kuwait, 
including the customer's ability to receive text messages on 
their cellphones confirming bank transaction, and paying 
bills by phone.  He also said that a "SmartCard" could be 
introduced in the Kuwaiti banking sector in 2005-2006.  Gulf 
Bank CEO Al-Awadi said that many Kuwaiti consumers are doing 
electronic banking, through the use of ATMs and online 
banking. 
 
Banking in Iraq: Most Interested in this "Lucrative Market" 
--------------------------------------------- -------------- 
 
10.  (C) NBK is the most forward-looking of the Kuwaiti banks 
on Iraq, having received a license to operate from the 
Central Bank of Iraq in January 2004 (Refs C and D).  The 
license terms called for NBK to have the bank operational by 
January 2005, but the security situation has slowed things 
down.  NBK purchased 85% of the bank owned by the Al-Kubba 
family and plans to put the NBK name on it after a year or 
two.  NBK CEO Dabdoub explained that Iraq's banks were "like 
piggy banks," meaning they were just being used to store 
money.  "The problem now is the circulation of money," he 
added.  He illustrated this point by explaining that the 
Central Bank of Iraq is currently holding more dollars than 
the Central Bank of Kuwait, and that the branch operations of 
NBK's bank in Iraq hold more dollars than NBK does in Kuwait. 
 They are waiting for the security situation to stabilize to 
begin real banking operations, Dabdoub concluded. 
 
11.  (C) Al-Marzouq of BKME said that his bank had just 
obtained a license to operate in Iraq, but that the challenge 
now was to "try and get people who are quite adventurous" to 
actually go work there.  He had traveled to Baghdad in 2004 
and looked at buying a local bank there along with other 
bankers, as a consortium, but they later decided against it. 
Overall, Al-Marzouq saw "huge investment flows" to Iraq in 
the future, once the situation stabilizes.  He saw Iraq as 
rich both in resources and tourism potential. 
 
12.  (C) The Commercial Bank is interested in doing business 
in Iraq, according to Chairman Al-Shatti, but will take a 
"calculated risk" through an alliance or partnership.  Burgan 
Bank Chairman Al-Sabah did not have any specific plans for 
business in Iraq, saying that the situation was too unstable 
now.  Al-Ahli bank also sounded a cautious tone on doing 
business in Iraq, with Deputy Chairman Al-Mutairi saying that 
the bank was supporting Iraq by helping Kuwaiti customers, 
including DoD contractors, do business there.  He added that, 
while his bank does not see Iraqi banks as reliable yet, it 
may consider a partnership or buyout at a later date.  Gulf 
Bank CEO Al-Awadi said that his bank does not want to take a 
direct risk in the Iraqi banking sector just yet, but, like 
others, it is financing Kuwaiti corporations doing business 
there. 
 
Islamic Banking: Seen as Profitable, but Resentment at Unfair 
Advantage of KFH 
--------------------------------------------- -------------- 
 
13.  (U) Most of Kuwait's commercial bankers expressed 
interest in Islamic banking and a few of the commercial banks 
offer a limited number of Islamic banking products and 
services.  Commercial Bank Chairman Al-Shatti explained that 
the Central Bank allows each commercial bank to have one 
branch that operates under Islamic banking principles, but 
most of Kuwait's commercial banks have not taken up this 
option.  Al-Marzouq of BKME said that his bank is interested 
in offering Islamic banking service but just has to figure 
out its right niche.  BKME is now financing some Islamic 
investment funds, he explained.  He described the difference 
between commercial banking and Islamic banking as a "matter 
of documentation," and added that, if everything is equal, 
Kuwaiti customers would like to do Islamic banking to meet 
their religious requirements.  Gulf Bank CEO Al-Awadi said 
that "people were attracted to Islamic banks because of 
Shari'a," but agreed with Al-Marzouq that the basic 
difference is "documentation, just gimmicks." 
 
14.  (C) Some of the bankers also expressed resentment at 
Kuwait Finance House's rise in wealth and influence, seeing 
it as the product of lax oversight and explicit GOK support. 
The GOK owns 56% of KFH and it was not until January 2005 
that KFH came under the full control and oversight of the 
Central Bank.  (Note: See Ref A for further background on 
KFH.)  Al-Shatti characterized KFH as "unfair competition," 
and expressed satisfaction that KFH had finally been put 
under Central Bank authority, but not before "building an 
empire" for 15 years.  While joining in the criticism of KFH, 
Commercial Bank CEO Al-Mutawa was also quick to point out 
that his cousin is a member of the Shari'a Compliance Board 
there and that they all know each other.  Al-Marzouq pointed 
out that KFH was being re-organized and would have to divest 
itself of its car-selling division.  Gulf Bank CEO Al-Awadi 
called KFH a "merchant of huge liquidity" and also expressed 
satisfaction that the company was now fully under the control 
and supervision of the Central Bank.  He pointed out that 
other Islamic banks, such as the newly established Boubyan 
Bank and the re-organizaed Kuwait Real Estate Bank, were also 
now under complete Central Bank supervision.  None of the 
banking executives contended that Islamic banking (or the 
KFH) held terror-financing risks. 
 
Charities and Terror Financing: GOK Needs to do More 
--------------------------------------------- ------- 
 
15.  (C) Commercial Bank Chairman Al-Shatti said that 
anti-money laundering regulations in Kuwait are strong and 
that the money laundering unit in his bank reports directly 
to him.  He said that Kuwaiti law "necessitates looking at 
every penny coming in and out," and that he regularly 
discusses large transactions with the other top bankers in 
Kuwait.  While most of the other bankers agreed with this 
assessment, some recognized the need for stricter laws and 
better enforcement.  NBK CEO Dabdoub said that it was "very 
embarrassing for (NBK's) branches in New York and London to 
have weak laws (in Kuwait)," and that he and other NBK 
executives would "help lobby on this."  Gulf Bank CEO 
Al-Awadi agreed that Post should be concerned that there are 
no criminal sanctions for terror financing, and said "you 
guys should push very hard on this."  He said that his bank 
tracks all transactions and asks for the source of funding 
for any deposits over 3000 KD ($10,274) per the Kuwaiti law, 
and that the Central Bank was "doing a good job" on keeping 
the pressure on the banks to follow the law. 
 
16.  (C) Most of the bankers expressed concern over the 
number of unlicensed charity collection boxes found 
throughout Kuwait, with BKME Chairman Al-Marzouq saying that 
he and others had been "voicing this concern for many years." 
 He explained that "conflict within the ruling family had 
allowed the rise of religious parties and their influence," 
and that the GOK "didn't have the necessary will to clamp 
down" on the unlicensed charity collection.  Referring to the 
recent shootouts between extremists and police, Al-Marzouq 
said that there was "no better time than the present" for the 
GOK to crack down on these practices, and that there would be 
a "tidal wave" of support for such a crackdown.  He said that 
there were no reliable estimates of how much these unlicensed 
charities had raised, giving the example of a small, 
relatively unknown charity that was found to have collected 
over $50 million in donations.  Despite the absence of a law 
explicitly making terror financing a crime, Al-Marzouq said 
that he thought the anti-money laundering laws covered terror 
financing by making it illegal for the banks to accept 
deposits for "unclear objectives."  He said that it would be 
better for the GOK to focus on regulating charities than to 
spend time and energy on adding new provisions to the law. 
Al-Ahli Bank Deputy Chairman Al-Mutairi also expressed 
concern over the "many unlicensed charity collection boxes," 
especially in mosques.  Gulf Bank CEO Al-Awadi agreed, but 
added that "charity worldwide is a problem." 
 
Real Estate: Lots of Money, and Lots of Speculation 
--------------------------------------------- ------ 
 
17.  (U) Most of the bankers that the Ambassador spoke with 
saw the real estate sector as the most lucrative market at 
present, but the sector was also seen as quite speculative 
and the profits not sustainable.  To illustrate, Al-Ahli Bank 
Deputy Chairman Al-Mutairi referred to a recently-issued S&P 
report on real estate in the Gulf that compared the amount of 
the banking sectors' total equity that was invested in real 
estate.  In the frenzied real estate market of Dubai, S&P 
found that 67% of bank equity was going to real estate.  In 
Kuwait, however, where the pace of overall growth is slower 
than Dubai, 73% of total bank equity was being invested in 
real estate.  Al-Mutairi said that this was partly due to 
more private capital being available in Dubai and more 
properties being bought and paid for before they are even 
built.  Most of the bankers saw the interest rate increases 
and other recent actions by the Central Bank as helping to 
cool down the real estate market in Kuwait. 
 
Training & Staffing: Need Better Trained Kuwaitis, U.S. 
Education Valued Highly 
--------------------------------------------- ---------- 
 
18.  (U) BKME Chairman Al-Marzouq said that his bank spends a 
lot of money on training, and that "hiring Kuwaitis brings 
long-term stability."  Having just joined the Board of the 
Banking Institute, Al-Marzouq explained, he planned to push 
for more Institute-sponsored training and for the banking 
sector to be able to absorb more Kuwaiti graduates.  Agreeing 
with the Ambassador on the importance of U.S. educational 
opportunities for Kuwaitis, Al-Marzouq explained that, as a 
student at the Claremont Graduate University, he studied 
under Peter Drucker and other management experts. While most 
of the bankers saw student visas and stricter visa procedures 
as a hurdle to sending more Kuwaitis for training and 
education in the U.S., many of them saw U.S. educational 
opportunities as worth it.  "Student visas are a challenge," 
said Al-Mutairi of Al-Ahli Bank, "but American education is 
the best." 
 
19.  (C) Commercial Bank Chairman Al-Shatti described some of 
the difficulties in finding well-trained Kuwaitis, explaining 
that "the big problem is Kuwaitization."  He added that many 
good expat teachers were removed and poorly trained Kuwaiti 
teachers are being promoted.  Al-Mutawa said that the 
Palestinian teachers, generally regarded as among the best, 
were kicked out after the Gulf War and replaced by Egyptian 
teachers who are not as good.  Kuwaitis make up 40% of the 
banking sector, Al-Shatti explained, but the people are not 
as good as in Kuwait's most important sector, the oil 
industry.  He pegged the cost of recruitment in the banking 
sector at about 500KD ($1721) per employee. 
 
20.  (C) Al-Ahli Bank sends staff to London and New York for 
training, and conducts its own internal training.  Deputy 
Chairman Al-Mutairi echoed the other bankers' complaints 
about the Kuwaiti educational system, saying that "local 
grads are not as good as those from the U.S. and India." 
Burgan Bank Chairman Al-Sabah said that it was "hard to find 
the right kind of good people," and that most graduates 
preferred government work, with its guaranteed benefits and 
lack of performance standards.  Banking salaries are higher 
than government salaries, Al-Sabah said, but the banks 
require more work.  He estimated the average actual workday 
for a Kuwaiti government employee at about 30 minutes. 
 
21.  (U) Gulf Bank spends a lot of money training young 
Kuwaitis, according to CEO Al-Awadi, and also sends HR staff 
to job fairs in search of qualified Kuwaiti students.  He 
added that there was "no shortage of good talent" and that 
his bank preferred to find people with good skills, then 
train them in the banking profession.  He explained that 
providing training and creating qualified Kuwaitis was part 
of "being a good corporate citizen," (a term rarely heard in 
Kuwait). 
 
Banking Outlook for 2005: More Money, More Profits 
--------------------------------------------- ----- 
 
22.  (U) Besides the economic boom in Kuwait associated with 
Saddam Hussein's downfall and Iraq's liberation, BKME 
Chairman Al-Marzouq also saw a sustained economic boom in 
Kuwait from the steady influx of cash through United Nations 
Compensation Committee (UNCC) payments.  A combination of 
$6-$7 billion in UNCC money and low-interest loans from banks 
had provided a tremendous amount of liquidity in Kuwait, he 
explained.  While interest rates have risen, he added, GOK 
expenditures have also risen, so the liquidity remains. 
(Note: The common assumption that the economic boom in Kuwait 
was due primarily to an influx of money being re-invested in 
Kuwait after the downfall of Saddam was not borne out in our 
discussions with the banking executives, but we will explore 
this issue in further detail with interlocutors in the 
investment community.) 
 
23.  (U) Al-Ahli Bank Deputy Chairman Al-Mutairi expected 
20-25% growth in profits in 2005, estimating that most of the 
profit growth would come from its retail operations.  Gulf 
Bank CEO Al-Awadi also saw positive prospects for 2005, 
describing it as a "normal extension of 2004."  Burgan Bank 
Chairman Al-Sabah said that 2005 should be good for business 
in general, and for the real estate and stock market in 
particular.  He cited a number of specific real estate 
projects, such as a new hotel planned for the Marina area and 
an "old Kuwait" planned for downtown.  The other bankers all 
agreed that the banking sector would continue to see 
double-digit profit growth in 2005. 
 
******************************************** 
Visit Embassy Kuwait's Classified Website: 
http://www.state.sgov.gov/p/nea/kuwait/ 
******************************************** 
LEBARON