Ideas for Enhancing Retail Banking in Kuwait - KIBS · Retail Banking Institute of Banking Studies – Kuwait 6 SECTION 1: DEPOSITS 2.1 Current and salary accounts product offering

Institute of Banking Studies Research »

Ideas for Enhancing Retail

Banking in Kuwait

Consultancy and Research Department

January 2016

Retail Banking Institute of Banking Studies – Kuwait

Table of Contents

Section Page Executive Summary .................................................................................................................. 3

Introduction ............................................................................................................................. 5

Section 1: Deposits ................................................................................................................... 6

1.1 Current and salary accounts product offering .......................................................... 6

1.2 Savings accounts product offering ............................................................................ 8

1.3 State of competition ................................................................................................ 11

Section 2: Loans and finance .................................................................................................. 13

2.1 Product offering ...................................................................................................... 13

2.2 State of competition ................................................................................................ 16

Section 3: Other products and services ................................................................................. 19

3.1 Private banking ........................................................................................................ 19

3.2 Credit cards.............................................................................................................. 19

3.3 Insurance and takaful .............................................................................................. 20

3.4 Delivery through technology and the future of retail banking ............................... 21

Conclusion .............................................................................................................................. 27

Endnotes ................................................................................................................................ 28

About the IBS Consulting and Research Team ....................................................................... 29


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EXECUTIVE SUMMARY

This study has examined ways in which Kuwaiti banks’ retail offerings can be enhanced. We have

addressed the issue in two ways: firstly by suggesting specific deposit and loan products that are

currently not available to customers in Kuwait; and secondly, by focusing on the state of

competition between the banks, reflecting in part, the regulatory structure.

1. Product enhancement

There are a number of ways in which Kuwaiti banks can enhance their retail banking business by

offering additional products and by developing and utilizing new technology:

Deposit-taking. Kuwaiti banks currently provide a good variety of salary, current, saving and

investment deposit accounts relative to GCC peers. Competition in product offerings,

interest rates and distributions to depositors reflects relatively light regulation. The largest

gap in the product line-up relates to long-term savings plans, especially for retirement. This

likely reflects both a lack of demand given the government’s generous pension plans; and

there being an undeveloped KD-denominated bond market in Kuwait, essential for effective

asset-liability management.

Loans and finance. While there is some notable product innovation, most Kuwaiti banks are

not providing customers with a wide variety of lending and financing options, relative to

GCC peers. More could be done, for instance, to better service distinctive segments of the

market, rather than just offering ‘catch-all’ products, such as the personal loan.

Other products and services, and delivery through technology. Banks should always be

looking to enhance noninterest income by cross-selling new products to existing customers.

One obvious example relates to insurance and takaful. Within the GCC, only banks in Kuwait

and Bahrain do not currently offer a full range of insurance products to customers. The

Central Bank of Kuwait could consider alternative ways to protect consumers, for instance

by allowing bancassurance, while maintaining a ban on agency-only sales.

Digitalization is an opportunity to those players willing to disrupt the market, but an

existential threat to those satisfied with the status quo. Kuwaiti banks need to address the

basics. While there has been some notable success with regards mobile banking

applications, none of the banks are matching GCC and international peers in terms of

website development.


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2. Roadmap to the Liberalization of Lending

While there are good examples of significant innovations in lending in Kuwait, especially among

the smaller banks, competition remains limited. Notwithstanding loan offerings within private

banking, regulations set by the Central Bank of Kuwait with regards consumer lending (whether

personal or installment loans) leave relatively little room for manoeuver. As a result, the market

share of the largest banks remains entrenched and there is little incentive for the biggest banks

to enhance customer services.

More freedom to allow banks to set the terms of loans i.e. use of funds, size, duration and

interest rate, would enable the banks to better meet borrowing needs, and would ultimately be

beneficial to the Kuwaiti economy. At present, for instance, with interest rate ceilings set by the

Central Bank of Kuwait, banks are unable to properly price varying degrees of risk.

However, such a process would have to be undertaken carefully and slowly; with the Central

Bank of Kuwait and the banks agreeing to a ‘liberalization roadmap’. Such a roadmap would set

out the necessary steps prior to liberalization. Steps would include the construction of a national

system of credit scoring; demonstration on the part of the banks that there are effective

procedures in place to ensure that borrowed funds are used for the correct purposes; and that

underwriting standards are always maintained at the highest level. Financial education for the

population at large is also a prerequisite. Through enhancements to websites, banks can play an

important role in preparing the population for greater financial freedom.


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INTRODUCTION

The purpose of this study is to investigate ways in which Kuwaiti banks can enhance and develop

their retail product offerings. The research has been undertaken at the request of the Institute

of Banking Studies’ Research and Studies Committee. The committee comprises representatives

from each of the commercial banks, conventional and Islamic, the Central Bank of Kuwait and

the IBS.

Our methodology has been to take a comparative approach: benchmarking Kuwaiti banks’

product offering against GCC peers. The guiding research question has been to ask what other

banks offer that Kuwaiti banks do not. Where we have discovered a systematic lack of products,

we have looked to uncover factors that may be impeding product diversification and

competition within Kuwait.

In undertaking our research and preparing this report we have focused on deposits (Section 1),

loans and finance (Section 2), and other products and services (Section 3). In the final section we

have also looked at various ways by which Kuwaiti banks could enhance the delivery of products

and services through technology.

We have surveyed the product offerings of the six largest banks (by assets) servicing retail

customers within each GCC member state, including Kuwait. Total assets in the table below

reflect the most recent annual report.

GCC banks surveyed, assets in U.S. $ billions

Bank Country Assets Bank Country Assets Qatar National Bank Qatar 133.6 Qatar Islamic Bank Qatar 26.4 National Commercial Bank Saudi Arabia 116.0 Bank Muscat Oman 25.3 National Bank of Abu Dhabi UAE 102.4 Al Baraka Bank Group Bahrain 23.5 Emirates NBD UAE 98.8 Al Rayan Qatar 22.0 Al Rajhi Bank Saudi Arabia 82.1 Doha Bank Qatar 20.7 National Bank of Kuwait Kuwait 74.3 Gulf Bank Kuwait 18.2 Kuwait Finance House Kuwait 58.6 Al-Khaliji Commercial Bank Qatar 14.4 Samba Financial Group Saudi Arabia 58.0 Commercial Bank of Kuwait Kuwait 14.4 First Gulf Bank UAE 57.8 Al Ahli Bank Kuwait Kuwait 11.9 Abu Dhabi Commercial Bank UAE 55.5 Bank of Bahrain and Kuwait Bahrain 9.3 Banque Saudi Fransi Saudi Arabia 50.3 Bank Dhofar Oman 8.3 Saudi British Bank Saudi Arabia 50.0 Ithmar Bank Bahrain 7.9 Arab National Bank Saudi Arabia 43.9 National Bank of Bahrain Bahrain 7.3 Dubai Islamic Bank UAE 33.7 HSBC Bank Oman Oman 5.8 Ahli United Bank Bahrain 33.4 Bank Sohar Oman 5.4 Commercial Bank of Qatar Qatar 31.8 Al Salam Bank Bahrain 5.2 Abu Dhabi Islamic Bank UAE 30.5 Oman Arab Bank Oman 4.7 Burgan Bank Kuwait 26.4 Ahli Bank - Oman Oman 3.5 Sources: IBS GCC Banks Financial Report, gulfbusiness.com


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SECTION 1: DEPOSITS

2.1 Current and salary accounts product offering

Chart 1 shows the number of current and salary account products that each GCC countries’ six

largest banks offer their retail customers. An explanation of the charts is provided below.

Chart 1: Kuwaiti banks offer a wide variety of current and salary deposit accounts

Sources: Banks’ websites, IBS calculations

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Kuwait Bahrain Oman Qatar Saudi Arabia UAE

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0 20 40 60 80 100 120 140

Total assets $'billion, most recent annual report

Kuwaiti banks Non-Kuwaiti GCC banks

Number of current and salary accounts

Number of current and salary accounts


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The top diagram displays a ‘box’ for each country, showing the number of current and salary

account products offered by the banks lying between the 20th to 80th percentiles. For instance, in

a country where there are six banks, and each bank offers 1, 2, 3, 4, 5 and 6 products

respectively, the ‘middle 60’ percentiles is taken up by banks offering 2, 3, 4 and 5 products. In

Kuwait, of the six banks surveyed, the ‘middle 60’ is populated by banks offering either 3 or 4

current and salary accounts.

The top chart shows that Kuwait offers a good degree of current and salary account choice

relative to other GCC countries. In Bahrain and Qatar, for instance, the ‘middle 60’ percentiles

are constituted by banks offering either 1 or 2 products; in Oman, the equivalent is 2 to 3

products (still lower than Kuwait). Perhaps unsurprisingly, given the relative size of the economy

and population, Saudi Arabia and the UAE perform better. Yet in Saudi, the top of the box only

extends to 4 product offerings. Only in UAE does the ‘middle 60’ extend to a bank offering 5

products; yet three out of the six banks surveyed in the UAE only offer 1 product. Thus in

Kuwait, in terms of current and salary accounts, there is a depth to the market lacking

elsewhere in the region.

The top chart also includes ‘whiskers’. The top whisker shows the highest recorded value for the

number of currency and salary accounts by any one bank; the bottom whisker shows the lowest

recorded number. Three countries, Kuwait, Oman and the UAE, have one ‘outlier’ bank that is

offering significantly more products than their competitors; Gulf Bank, Bank Muscat and

National Bank of Abu Dhabi. In this respect, Gulf Bank stands out, as both Bank Muscat and

NABD are the largest banks in their respective countries.

The lower chart is presented on the basis that one would expect larger banks to offer more

products. In fact, the relationship between size and the number current and salary accounts is

not as strong as one might expect (the correlation in our population of 36 banks is only 0.34). All

the same, the chart does show that, on the whole, Kuwaiti banks are performing well on this

metric, given their size; only one bank is on the line, the rest are above the line. In essence,

Kuwaiti banks can be said to be ‘punching above their weight’.

Even so, as Table 1 below shows, there are additional product ideas that could be explored in

Kuwait, based on what is available to customers elsewhere in the GCC. While these product

ideas reflect, in most cases, marketing rather than banking innovation, many would appear to

be suitable for the Kuwaiti market.

As will be seen in Table 1, throughout this report, in order to provide more ideas and enhance

the usefulness of our research, in addition to the GCC banks we have also surveyed large banks

in the U.S. and U.K. In the case of salary and current accounts, we were able to find additional

products in the U.K. (Lloyds Bank), but no additional products in the U.S. (Wells Fargo and Bank

of America).


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Table 1: GCC current and salary account products not offered in Kuwait

Product Example bank Description

Favorite football club accounts

NBAD Included either in a basic current account or Elite account are exclusive offers, merchandise and prizes related to Real Madrid. (Note: some of these accounts may not comply with Sharia banking principles).

Free services NBAD Certain accounts come from with free services; e.g. the first international remittance is free each month; or the first 4 cash withdrawals are free in-country; or the first 6 teller transactions are free every month.

Interest paying current accounts

Lloyds Variable tiered interest rates of 1%, 2% and 4% up to balances of £5,000; no interest over balances of £5,000.

Accounts with added benefits

Lloyds For a monthly fee of £10, accounts offer free annual travel insurance, motor vehicle breakdown cover, and mobile phone insurance.

Special overdraft facilities

Lloyds For pre-planned overdrafts, the interest rate applied is tiered. For instance, in the Platinum account, no interest is charged on the first £300, the next £900 comes with a 17.28% APR.

Source: Bank websites

1.2 Savings accounts product offering

In this category of accounts we include conventional savings accounts, call accounts (unless

otherwise specified as a call current account), fixed term deposits, flexible term deposits and

Islamic investment deposit accounts.

In counting the various products on offer, we have: 1) counted all youth and child accounts as

one type of product; 2) not counted foreign currency savings accounts as an additional product

so long as they offer a similar duration and conditions as the equivalent KD-denominated

savings account and; 3) counted the account as separate in the case of either the initial balance

or minimum deposit being different from other products or if the interest rate is different from

other products.

Chart 2 shows the number of savings account products that each GCC countries’ six largest

banks offer their retail customers.


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Chart 2: Kuwaiti banks offer wide variety of savings deposit accounts relative to GCC


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Number of savings accounts

Number of savings accounts Kuwaiti Banks


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As with currency and salary accounts, relative to GCC peers, Kuwaiti banks are offering their

customers a wide variety of ways to save. Indeed, one can quickly see from viewing the upper

graphic in Chart 2 that, in terms of the number of savings products, Kuwait is second in the

region, only to the UAE. Specifically, in Kuwait, four of the six banks offer between 4 and 7

products, with one bank (KFH) offering 8 products, the other (NBK) offering 3.

The lower graphic shows that there is little correlation (0.11) between the size of the bank and

the number of savings products on offer. Indeed, in Kuwait, the bank with the lowest number of

savings products, NBK, is also the largest bank, around three times the size of the two

institutions, Burgan Bank and Gulf Bank, which each offer the most savings products. It may be

that these smaller banks need to offer a greater variety of savings products to compete with

NBK, the dominant player in conventional banking.

All in all, Kuwaiti banks are providing their retail customers with a strong offering of deposit

accounts, relative to the region. There is a high level of competition which, as we discuss in

Section 1.3 below, reflects a reasonably light touch deposit-taking regulatory regime.

Even so, as with our analysis of current and salary accounts, Table 2 below shows that there are

ideas from the region and beyond which Kuwaiti banks could potentially use to expand their

product offerings, with varying degrees of banking and marketing innovation.


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Table 2: GCC savings account products not offered in Kuwait

Product Example bank Description

Retirement savings plan Bank Muscat The saver chooses the monthly deposit amount, the savings term and the terms of the pension (how much and when the pension should begin and end). Additional bonuses and enticements are offered. (Only KFH offers such long-term savings plans in Kuwait).

Retirement and education savings plans with guaranteed returns

Emirates NBD Long-term planning with monthly premiums starting at $150 per month and guaranteed returns

Favorite football club savings account

Emirates NBD Access to Manchester United merchandise, possibilities of winning a trip to see the team play.

Technology assisted saving Emirates NBD The ‘shake n’ save’ account enables the account holder to save small amounts of money instantly, whenever and wherever, just with a shake of his or her mobile phone.

Enhanced interest rates for regular saving/ recurrent deposit accounts

Lloyds Bank While the normal savings account pays 0.75% interest; the ‘monthly saver’ account pays 4% for the first 12 months if the customer saves between £25 and £400 every month via standing order. After 1 year, the account converts to a basic saving account.

Health savings account Wells Fargo Benefiting from tax advantages in the U.S., customers save long-term for future health costs.


1.3 State of Competition

Notwithstanding the potential to expand the product range (as demonstrated in Tables 1 and 2),

Kuwaiti banks offer a broad range of deposit products, whether salary accounts, current

accounts, saving accounts, fixed term deposits or investment deposits (Islamic banking).

There is, in short, a healthy degree of competition in the market place that has led to product

diversification and attention to customer needs. Indeed, in contrast to lending which is strictly

regulated, deposit-taking is one area the banks are generally free to compete in. The Central

Bank of Kuwait neither prescribes the types of deposit accounts that a bank can offer or the

interest rates/distributions to depositors that a bank can make. Since 1995, the Central Bank of

Kuwait has ordained that interest rates on deposits should reflect conditions of supply and

demand.

As a result, banks compete with each other not just on product offerings but on interest rates as

well. For instance, as of writing, Gulf Bank is offering customers 0.875 percent on a 200-day


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deposit of KD 50,000; whereas Commercial Bank of Kuwait is offering 1.125 percent on the same

size and duration.

While there is no formal regulation requiring new products to be cleared by the Central Bank of

Kuwait prior to launch; in practice, the banks do seek approval. In some limited cases, a long

lead time can undermine attempts by individual banks to respond quickly to new customer

needs and can dilute advantages that would accrue from being a leader in innovation.

Moreover, with limited ability to charge fees to customers on deposit accounts (Commerce Law

Article III requires that there is a ‘justifiable’ service provided against all fees), some new

products, such as a football account, can remain uneconomic. In the UAE, where retail banking

is much more important to the banks, greater regulatory freedom and the ability to levy fees has

led to an enhanced product offering.

Perhaps the most obvious gap in product line-up relates to the lack of retirement and other

long-term saving plans. Notwithstanding KFH, which does offer a range of long-term savings

plans, including retirement and education, Kuwaitis are not serviced well in this area. This may

reflect the general view that government pensions and other savings are sufficient for

retirement, thus there is little demand for such products. Yet it may be that many banks are

unwilling to supply such products to customers because asset-liability matching would be too

challenging, given the lack of a developed KD-denominated sovereign and corporate bond

market with a range of short to long term duration bonds.


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SECTION 2: LOANS AND FINANCE

2.1 Product offering

While Kuwaiti banks rank well from a regional perspective in terms of the number of deposit

account products available to customers, they are less well positioned with respect to lending

and finance. To some extent, as we discuss below, this outcome is a reflection of regulation; but

it also, perhaps, demonstrates a lack of innovative thinking and desire to compete.

Chart 3 below provides both ‘box-and-whisker’ and ‘scatter-plot’ charts of GCC lending

products. The upper-graphic shows that Kuwaiti banks are offering a similar range of products

when compared to Oman; while outperforming Saudi and Bahraini banks in terms of variety and

number. The graphic also shows that Kuwait is lagging Qatar and the UAE. That UAE banks make

up the vanguard is perhaps to be expected, as the country acts as the financial hub for the

region; less expected, perhaps, is the extent to which their banks distinguish themselves in

terms of product variety, leaving other banks in the GCC trailing by a significant margin.

The lower graphic is more concerning. There is a reasonably pronounced correlation between

lending products and total asset size (0.47) -- higher than the correlations between deposit

products and asset size-- which means that it is a more important metric with which to measure

Kuwaiti banks’ performance. And, as the graphic shows, when scaled by size, Kuwaiti banks do

not appear to be performing strongly. Out of the six banks surveyed, four are below the line,

one is on the line (KFH) and only one is above the line (Gulf Bank). In other words, from a GCC

perspective, given the size of these banks, one would expect to see more lending products on

offer to retail customers.

Additional ideas for loan and finance products are presented in Table 3 below.


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Chart 3: Kuwaiti banks far behind GCC leaders in terms of loan products


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Number of loan products Kuwaiti Banks Non-Kuwaiti GCC banks


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Table 3: GCC loan products not offered in Kuwait

Product Example bank(s) Description

Mortgages Commercial Bank of Qatar Products include loans for the cost of purchasing real estate for investment or residential purposes, construction finance, mortgages for foreign nationals looking to purchase freehold real estate in Qatar, and equity releases loans against pre-existing property.

Overdrafts Doha Bank, Emirates NBD Short-term cash flow needs can be met with pre-arranged overdrafts. (While overdrafts are not allowed for normal customers, it should be noted that credit cards perform a similar function in Kuwait).

Flexible installments

National Bank of Bahrain The flexi-loan program allows the borrower the flexibility to pay back the loan with installments that increase in size with the loan tenor. The installments start low and increase every year, helping the borrower better manage their cash flow (given the assumption of increasing salaries over time).

Early-term and other incentives

HSBC Bank Oman The first three months of a home loan is refunded to the borrower. Instalment deferral on personal loans is allowed twice a year during Eid.

Loans for specific events

Doha Bank, Emirates NBD Doha offers a marriage loan with no arrangement fee and two months grace period. Emirates NBD offers customers loans if they are new to the country or starting a new job.

Loans for specific individuals

Emirates NBD, Al Rajhi Banking Corporation

Emirates NBD offers loans to non-resident Indians of up to 90% of fixed deposit amounts in AED and up to 80% of INR fixed deposits. Al Rahji offers special loans for doctors and bankers.

Auto loans additional features

Emirates NBD Numerous variations include staggered installment plans; the balloon 50:50 buy bank program which allows borrowers to reduce monthly payments with a unique balloon payment on Toyota and Nissan vehicles; and the fixed deposit auto loan, which offers customers a guaranteed return by placing the deposit for the car purchase on deposit.

Offset loans or multi-purpose accounts

Barclays Bank Balances in deposit accounts are automatically deducted from the loan to reduce the outstanding balance on which interest is charged. Because the monthly repayment remains the same, a customer with deposits automatically overpays.



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2.2 State of Competition

Many of the product ideas listed in Table 3 above are driven by marketing rather than product

innovation. For instance, a personal loan in Kuwait can be taken for a variety of purposes,

including, for instance, marriage. Rather than ‘carving out’ a marriage loan as a specific product

as Doha bank does, Kuwaiti banks, in the main, choose to offer only one generic consumer loan

product. Likewise, while many banks in the GCC offer separate financing for the purchase,

construction materials and construction of a property, most Kuwaiti banks (the exceptions being

KFH and Boubyan), include all these possibilities in one loan product – the installment loan.

Marketing the same loan under various headings may be seen by some as window dressing; but

addressing specific niches (say construction rather than materials) could affect a borrower’s

decision to opt for one bank over another. Moreover, distinguishing loans between different

uses also increases the scope for specific enticements. In general, thinking about a particular

segment of borrowers can lead to innovating new solutions to meet borrowers’ needs.

Boubyan Bank (not one of Kuwait’s biggest six banks by asset size), for instance, has created

specific health and education financing products that come with zero finance cost and do not

require the borrower to transfer his or her salary to Boubyan. The financing is profitable for

Boubyan because while the bank is repaid the full cost of treatment by its customer, Boubyan

receives a discount on the services it is paying to the participating clinic on behalf of the client.

Presumably each clinic or hospital is willing to accept the discount in order to win more patients.

To some, however, a proliferation of products does not necessarily represent the most effective

strategy going forward. Some within the banking community believe that streamlining offerings

may help customers better navigate the complexities of finance. ABK, for instance, are hoping to

gain market share through a deliberate strategy of making banking “Simpler”: less products,

simpler website etc., etc.

The current regulatory structure makes adopting either strategy (product proliferation or

streamlining) challenging. Simplifying the number of products requires that each type of product

is more flexible in nature. Likewise, increasing the number of products is difficult when the

terms and conditions of loans are limited to installment loans with 15 year terms and consumer

loans with 5 year terms.

While the example of Boubyan above proves that innovation is possible within the current

framework, generally speaking, the regulatory environment limits competition and thereby

innovation. As a result, banks compete on qualitative issues, such as speed of service1,

personalized service (how well the bank manager knows the customer), trust, and the prestige

attached to certain products, branches or banks. More competitive banking systems tend to

provide a greater variety of loan products that better meet customers’ borrowing needs.


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Installment loans provide a good example. These loans are long-term non-commercial loans

limited to 70,000 KD with durations of not more than 15 years. They are meant to be used for

the repair or purchase of a private residence. However, with property prices now far exceeding

70,000 KD for an average villa, these loans can only realistically be used for renovation. It is well

known that some Kuwaiti families take installment loans for other purposes, often using false

documentation. Banks are now being asked to strictly enforce pre-existing rules requiring

borrowers to present receipts to show the correct use of funds. Applying these rules could lead

to the increased use of false receipts and may even encourage the development of ‘businesses’

specializing in the issue of such receipts. Ensuring the correct use of funds through the

presentation of receipts will likely require the banks to enhance and improve due diligence

practices.

An alternative approach would be to allow banks far more freedom to set their own terms, such

as the use of funds and the duration of the loan. The rule that limits the aggregate amount of

monthly repayments on all loans to 40 percent of salary, after deductions, represents a very

strong and effective way of ensuring that individuals do not over-borrow. Given these controls,

it is arguable that banks could have more freedom to set the terms on their loan and finance

products.

Similar issues arise with regards consumer loans which are used for the purchase of durable

goods, education and medical treatment, and may not exceed 5 years in duration. For instance,

educational loans in the U.S., the largest market for student loans in the world, have 10-year

repayment schedules and students can borrow up to $57,500 from the government, far more

than the 15,000 KD limit in Kuwait.

In addition to controlling use, duration and maximum size of the consumer lending market,

there are also strict limits set on pricing. Currently, the Central Bank of Kuwait sets an interest

rate ceiling of 3 percent above the discount rate. Given a discount rate of 2 percent, the current

effective ceiling is 5 percent. While some banks do provide very small discounts to well-

established customers, say of 25 basis points, generally speaking, there is no price competition

in Kuwait. Moreover, given the expectation that global interest rates are likely to rise over the

next few years, with banks only able to increase interest rates on an installment loan after 5

years, banks are unlikely to offer lower rates that will put further pressure on net interest

margins.

In a liberalized banking system, the banks would be free to offer loans with flexible/variable

interest rates and with rates dependent on the status of the borrower. By reflecting the specific

risk profile of the borrower, ‘rational pricing’ enables a bank to enhance lending to qualifying

lower-status customers, with higher interest rates off-setting potentially higher default rates. At

the same time, increased profitability on higher risk lending provides an opportunity to discount


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interest rates to higher status borrowers. In short, liberalization leads price differentiation,

increased competition and better serving of customers.

As things stand, we believe that the current one-size-fits-all system entrenches current market

share and the dominance of the two largest banks, NBK and KFH. Notwithstanding examples of

innovation, such as Boubyan Bank, ‘normal’ competition, say on loan size, duration and interest

rate, is stifled by regulation.

While we recommend that over the long-term, the Central Bank of Kuwait should aim to provide

banks with more flexibility, we also believe that the process of liberalization should be slow and

controlled. Liberalization, when enacted without appropriate care and attention, invariably

creates unsustainable credit booms, undermining the long-term financial health and security of

ordinary households. Without wholescale reform of housing provision in Kuwait, for instance,

allowing banks to provide mortgages of any amount would de-stabilize the real estate market,

leading to significant economic costs in the future.

As such, we recommend that the Central Bank of Kuwait works with the banks to produce a

‘roadmap to liberalization’. If both sides (regulators and banks) can agree on the end result (say

the removal of controls over uses of funds, size of loan, duration and pricing), then the

necessary steps and provisional timing can agreed in advance.

The Central Bank of Kuwait, for instance, will want to be sure that banks have appropriate

procedures in place to ensure that funds advanced are being used properly. False

documentation must be spotted and borrowers disqualified. The Central Bank of Kuwait will also

need to be sure that the highest underwriting standards are maintained at all times. Moreover,

rational pricing requires a national credit scoring system. Ci-net is currently building such a

system, but to make it effective all the banks and financing companies will need to provide all

the necessary information.

Liberalization, if undertaken, would take several years, but we believe that if the process is

managed effectively, the advantages for customers from increased competition will be large.


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SECTION 3: OTHER PRODUCTS AND SERVICES

3.1 Private banking

Four of the six Kuwaiti banks surveyed offer private banking services: NBK, KFH, Burgan and Gulf

Bank. Of the non-Kuwaiti banks in our survey, exactly half the banks offered private banking

services. This suggests that Kuwait is outperforming the region.

In addition to accessing privileged banking accounts and loan facilities, private banking in the

region includes the following services. To a greater and lesser extent, these private banking

services are offered in Kuwait.

Financial Planning: most institutions provide bankers who will work closely with clients

to recommend a comprehensive selection of products best meeting the customer’s

needs.

Brokerage: the ability to buy and sell securities in asset markets around the world.

Discretionary and non-discretionary portfolio management services: banks offer a wide

variety of investment products including fixed income, equities, structured products,

mutual funds, hedge funds, real estate funds and private equities funds. The better

banks offer a wide range of in-house and third party funds for clients to invest in. In this

regard, it should be noted that the range of funds offered to clients by Burgan and KFH

is very limited indeed, compared to GCC peers.

Real estate advisory services: banks can source real estate, commercial and residential,

in international markets, such as London and Paris, and can advise and help clients with

all aspects of real estate transactions.

Trust services: tailored to the need of individual clients and their households, which can

involve tie-ups with international service providers.

3.2 Credit cards

The market for credit cards is well-developed in Kuwait, with all the banks surveyed offering

high levels of variety and choice to customers. Chart 4 below, in particular, shows that the six

largest Kuwaiti banks all perform well from a GCC perspective. The correlation between the

banks’ total assets and the number of credit card products is reasonably high (0.55) and, as the

chart shows, all the six Kuwaiti banks sit above the line. Given these findings and our survey of

the products on offer, we think there is limited scope for expansion in the number of products.


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Chart 4: Kuwaiti banks strong on credit cards

Source: Banks’ websites

3.3 Insurance and takaful

Currently, KFH is the only bank to offer insurance/takaful products that pay out on the event of

death. In general, the suite of insurance products covering property, home contents, personal,

auto, life and travel is not available via the banks in Kuwait. This is in contrast to most of the

GCC, where all these products are sold by the banks. Indeed, the only other GCC member where

no insurance is available via the banks is Bahrain. Both Kuwaiti and Bahraini banks are

potentially missing out on an important source of noninterest income.

The lack of insurance products offered by Kuwaiti is a direct result of the Central Bank of

Kuwait’s circular to all banks in June 2012 requiring local banks “to stop marketing any insurance

service except those related directly to banking services… such as the insurance on a loan.”2

It may be that this action was taken by the Central Bank of Kuwait because it was felt that the

banks were charging too much for re-selling insurance products where the bank was only acting

in a sales/distribution capacity. The ban may also reflect a concern that there was potential for

the banks to ‘miss-sell’ products to customers without the requisite understanding of what they

were buying.

0

2

4

6

8

10

12

14

16

18

0 20 40 60 80 100 120 140

Total assets $'billion, most recently reported

Non-Kuwaiti GCC banks Kuwaiti banks Number of credit card products


21

That said, it may be that a blanket ban on banks being active in the insurance industry goes too

far and that banks should be allowed to create their own insurance products and sell them to

existing customers. The ‘bancassurance’ business model has a long history around the world and

has been proved to be highly successful in increasing access to financial products that enable

customers to better manage their financial risks.

3.4 Delivery through technology and the future of retail banking

Kuwait is a country that, in general, embraces technology, especially mobile technology. Even

so, as Tables 4 and 5 demonstrate there are clear technology enhancements that could be made

by the banks in Kuwait, all of which would help service customers. During our research, for

instance, it became very clear that the general standard of the Kuwaiti banks’ websites was

significantly below regional peers (with the exception of Bahrain).

Notwithstanding the list below, we believe that the banks should look to invest R&D funds in

developing their websites.

Of course, it goes without saying that technology development continues unabated around the

world, and banks in Kuwait should be aware that simply playing catch-up could still leave them

trailing behind industry-leaders. Efforts to enhance technological capability should always look

to incorporate, where possible and feasible, the latest developments, including for instance the

use of 3D avatars that enable staff-less/lite or virtual branches3; artificial intelligence that allows

more products to be sold online and at ATMs, lessening the need for heavily-staffed call

centers4; and aggregation services that consolidate information from many financial accounts

into one convenient place, such as the home page on an online personal finance application.5

Finally, there are advances in payment systems which enable transactions to be processed via

mobile devices rather than by cash, debit or credit cards6; services which would no doubt be

very popular in Kuwait.

Some of these ideas may be less relevant to Kuwait, where face-to-face personal service is

highly valued. A dense urban population also means that a branch network is more cost-efficient

than in larger countries. Also, given the extent to which the local population uses mobile

devices, the banks may be better off, financially speaking, focusing R&D funds on mobile

applications. It should be noted that some banks in Kuwait have already had great success in this

area.


22

Table 4: Technology-based services: based on largest six Kuwaiti banks

Service Kuwait Bahrain Oman Qatar Saudi Arabia

UAE

Online banking Cash deposit machine Mobile banking Call centers Live chat SMS banking Social media Phone banking Online payments Online statements Online brokerage e-Government e-Trade Online Loan Application Sources: Banks’ websites

Table 5: ATM-based services: based on largest six Kuwaiti banks

Service Kuwait Bahrain Oman Qatar Saudi Arabia

UAE

Alternative languages Account balance enquiry Cash withdrawals Get a mini statement Change your PIN number Transfer funds to other accounts Cash deposit service Deposit a check Cash a check Apply for loans, credit cards and to open new accounts

Foreign currency withdrawal Bill payments Payments to charity Request for a check book Reload prepaid card Pay government fees Sources: Banks’ websites


23

Technology provides both opportunities and challenges to incumbents within the banking

industry. A recent study by McKinsey, for instance, has suggested that ‘digital disruption’ could

wipe out almost two-thirds of traditional non-mortgage based retail bank earnings.7 Indeed this

is a theme much discussed in recent years by many of the leading global consulting houses. In

essence, the digital age raises the expectations of users: customers expect better, quicker and

more tailored services and are more able to transfer business to competitors making better use

of technology. Customers can be won and lost more easily and, in theory, notwithstanding

regulatory barriers, new entrants to a market can gain market share quickly.

In a recent report, A Critical Balancing Act: U.S. Retail Banking in the Digital Era, Accenture has

argued that a failure to build trust and transparency through more compelling offerings,

delivered digitally, could lead to rapid falls in a bank’s customer base, especially in an

environment where competitors are more effective in cross-selling across product lines. The

digital model, they argue, should be used to provide a more personalized service and faster

problem resolution, while at the same time allowing banks to revamp their branch network,

with some branches downgraded to ‘lite’ or kiosk status, others kept as full-service hubs, all the

while keeping a limited number of flagship branches.8

In Retail Banking 2020, Evolution or Revolution?, PriceWaterhouseCoopers, like Accenture, focus

their attention on the opportunities and threats from the digital age. With big data, cloud

computing, smartphones and high bandwidth all commonplace, they believe “’digital’ will drive

huge shifts in industry value – compressing revenues, enabling new attackers, redefining service

and crippling the laggards.”9

The winners, they argue will be the banks that organize themselves around customers instead of

products and channels. This means that technology should be used to equip bankers from

branch management level all the way down to tellers to be able to know their customers and

understand their needs. “Banks today typically do not know their customers very well.” With the

use of technology, banks should be able to “understand a customer’s value potential, track

spending patterns and make targeted offers.” By “joining the dots” the best banks will be able to

gain market share and increase revenues per customer. Over time, a significant portion of the

customer base should come to see their bank as their wealth manager and private banker.10

Both Accenture and PWC paint remarkable pictures of what they expect the future of retail

banking to look like. We quote both in full here.

From Accenture The Everyday Bank

“David and Marie are ready to take the plunge. They intend to become homeowners.


24

After connecting with their bank’s loan officer to get the ball rolling, they receive a

Facetime call from their day-to-day banking contact, Charles. “Congratulations!” he

says. “Based on all we know about you two, we recommend house hunting in the

Wolcott Heights neighborhood. It’s close to both of your workplaces. Given your lifestyle

and purchases you’ve made, I believe you’ll fit well with this community—and I think

you’ll love the schools. I’ve just sent sample listings directly to our app. I’m also passing

on a realtor specializing in homes at your price range, who offers a low commission fee.”

Using the bank’s app, David and Marie can point their mobile phone cameras at

properties and pull up property details and interior photos, as well as interest rate and

loan-related data, estimates around purchase price and monthly payments, plus the

bank’s assessment of affordability given David and Marie’s spending, saving and lifestyle

habits.

Weeks later, ready to buy their dream home, they use their tablet to visit the bank’s

website and begin the mortgage process. Logging into their account, David and Marie

receive recommendations around type of loan, interest rates and payment plans, all

geared toward their needs. An automated window pops open to step them through the

online “paperwork.” Digital signatures can be used, and the tablet camera can scan the

couple’s drivers licenses—or even their retinas—to confirm identification.

When their application is complete a second window opens, offering links to a lawyer, a

home insurance provider, a home inspector and a moving company—all specific to their

needs and offering discounted low rates. Later, when the purchase is finalized, an e-mail

arrives indicating the bank will handle reconnecting the couple’s utilities from their

current apartment to the new home.

David and Marie rave to their friends about their bank’s involvement in their home

purchase. Not only did their trusted institution offer reliable advice—before they knew

they needed it—but it connected them to low-cost key resources, tailored just for them,

to help them buy their first home and manage the move.

Their bank has saved them both time and money, and come to know them even

better.”11

From PWC, Retail Banking 2020, Evolution or Revolution?

“Anna, 56, boards a high-speed train for her commute to one of the world’s emerging

megacities. She settles in and blinks twice, activating the display in her glasses. She is

authenticated by retina scan, and reviews her messages.


25

A message from her financial adviser notes they sold her holdings from a recent IPO and

transferred the proceeds into a new African high-tech fund. She made this decision after

consulting with her financial adviser and reviewing recommendations from several

independent investor analytics engines she reached through her bank’s wealth

management platform.

She then watches a message from the bank’s leading education expert, suggesting it is

time to set up a university savings account for her 13-year-old son. The adviser asks

whether Anna expects her son to attend the new flagship online university, or a much

more expensive residential program overseas. She quickly outlines the estimated costs

and benefits of each, taking into account Anna’s age and planned retirement at 70. She

recommends the flagship, and suggests supplementing her son’s education with less

expensive summer programs in Mumbai, San Francisco and Beijing. Anna agrees, and

the adviser seamlessly sets up the savings account and the auto-deposit.

At lunch, Anna browses the local electronics display, where the latest holovision catches

her eye. A quick scan from her glasses returns customer recommendations, coupons and

financing offers from multiple providers including her own bank (which itself has

instantly reviewed the returns from the scan to ensure their offering is competitive). She

makes her choice and completes the purchase, using a new peer-to-peer lender that

offers a more competitive rate, due to a lower cost structure, thanks to a lack of legacy

infrastructure and a less stringent regulatory regime.

The next day, Anna accepts an invitation for a video conversation with her bank business

adviser. The bank had been monitoring the favorable social media coverage Anna has

been receiving and concluded that her business might need additional services. The

business adviser has already arranged for a commercial estate agent and loan officer to

join them, and they discuss Anna’s questions and offer advice on a range of small

business topics. She shares that she is thinking of expanding her business into additional

locations, and they explain the difference between the bank’s products and the

government small business facility, which offers less service, but a lower rate of interest

and longer repayment periods. Also, Anna is passionate about environmental protection.

The bank recognizes this, and through its own programs and partnerships, is able to

present an offer where Anna’s use of the bank’s products results in direct donations to

Anna’s favorite charity. She accepts – happy she has found a bank that really seems to

understand her.”12

No one should expect these ‘visions of the future’ to be realized overnight; neither in the U.S.

nor the GCC. But, all the same, they illustrate the potential for retail banking given an

appropriate application of processing power, big data, hardware and customer focus. It is, we


26

believe, critical for Kuwaiti banks to understand where banking is going and have a vision of the

future guiding strategic planning in the present.

There are of course many hurdles in Kuwait to achieving this vision: some relate to regulatory

structures; some relate to organizational structure and business culture that may fail to

effectively harness creative and innovation thinking; and some relate to a gap between what is

spent and what should be spent on technology and website development. These hurdles may

seem insurmountable to some, but it should be clear from the descriptions above that those

banks that can deliver will be the winners, leaving the rest of the field far behind.

At the same time, questions need to be asked about the level of financial know how in the

population at large. Are Kuwaitis ready for a different style of banking? How would Kuwaitis

respond to a liberalization of credit?

Clearly education in financial literacy is as critical to the development retail banking in Kuwait as

investment in technology; and to some extent this is outside the scope of what the banking

community can control. All the same, this final point also provides a good illustration of how

Kuwaiti banks are falling behind. A brief glance, for instance, at the websites of many banks in

the U.K., such as Lloyds, quickly illustrates the extent to which these banks are using their

websites as a way to educate the public. Specifically, these banks’ websites include tools,

illustrations and videos to explain a whole range of products from deposit accounts to loans and

other products and services.

While not as developed, many banks across the GCC also offer educational features on their

websites. The inclusion of such features demonstrates a keen awareness of the challenges

ahead: how to utilize technology to enhance the retail banking service being offered, while

ensuring that customers are equipped to know how to make best use what is on offer to them.


27

CONCLUSION

The Consulting and Research Department of the Institute of Banking Studies was asked by the

IBS Committee for Research and Studies to prepare a report considering the ways in which

Kuwaiti banks could enhance their retail banking offerings to customers.

This report has offered a number of ideas related to deposit accounts, loans and finance that

the banks could adopt. Some of these ideas are more marketing-related, some involve a greater

degree of banking innovation.

As things stand, Kuwaiti banks are a providing greater variety of deposit products than they are

loans and finance, relative to GCC peers. This most likely reflects the regulatory structure: banks

are relatively free from regulation with regards deposit-taking, more firmly supervised with

regards to lending and finance. Given the regulatory environment and market dynamics, many

local banks are focusing resources and attention on growth outside of Kuwait.

Technology also presents challenges to Kuwaiti banks. Kuwait is a technology-savvy country

whose population exhibits a pronounced willingness to experiment with internet-based

applications. Yet, at present, with some notable exceptions, we do not believe that the banks

are investing sufficiently in technology, especially with regards to their website. The future of

retail banking, and the winners and losers in that future, will be determined by the extent to

which a bank can successfully harness technology. In this, Kuwaiti banks are presented with

both opportunities and threats.


28

ENDNOTES

1 Competition on speed of service may now be more difficult, given new rules on that require banks to

provide customers with a 2-day reflection period prior to signing a loan contract, see Central bank of Kuwait Press Release, CBK Amends Principles and Rules of Consumer and Installment Loans, Issues Consumer Protection Guide and Instructions to Banks Regarding Services Provided to Special Needs Customers, http://www.cbk.gov.kw/en/cbk-news/announcements-and-press-releases/press-releases.jsp?kcp=1~n5Jn2tEVfwdWHwta9ITDindF+FRQ+gmqf+ysslYvFZU, July 5, 2015 2 Central Bank of Kuwait, Circular no. 2/RB/RBA/285/2012, June 14, 2012

3 For example Visyt, a technology company, develops virtual avatar communicators primarily for financial

services companies, see http://www.visyt.com/banking. 4 For example IPSoft have developed, ‘Amelia’, a cognitive knowledge worker who interfaces on human

terms. She is a virtual agent who, according to the developer, understands what people ask and what they feel – when they call for service. Artificial intelligence enables Amelia to learn from past communication difficulties how to better service the customer; a service that could be ideal for granting loans via ATMs, see http://www.ipsoft.com/what-we-do/amelia/. 5 For example, see Mint.com or Quickenloans.com

6 For example, see Squareup.com

7 Financial Times, McKinsey warns banks face wipeout in some financial services, Sept. 30, 2015,

http://www.ft.com/cms/s/0/a5cafe92-66bf-11e5-97d0-1456a776a4f5.html#axzz3nHvK18xG. 8 Accenture, A Critical Balancing Act: U.S. Retail Banking in the Digital Era, 2013,

http://nstore.accenture.com/IM/FinancialServices/AccentureLibrary/data/pdf/US_Retail_Banking_in_the_Digital_Era.pdf, pp. 4, 6, 10. 9 PriceWaterhouseCoopers, Retail Banking 2020, Evolution or Revolution?, 2014,

https://www.pwc.com/gx/en/banking-capital-markets/banking-2020/assets/pwc-retail-banking-2020-evolution-or-revolution.pdf, p. 11. 10

Ibid, pp. 15, 22 11

Accenture, The Everyday Bank: How Digital is Revolutionizing Banking and the Customer Ecosystem, 2014, http://www.accenture.net/microsite/everydaybank/Documents/media/EverydayBank-POV.pdf, p. 2 12

PriceWaterhouseCoopers, Retail Banking 2020, Evolution or Revolution?, 2014, https://www.pwc.com/gx/en/banking-capital-markets/banking-2020/assets/pwc-retail-banking-2020-evolution-or-revolution.pdf, p. 4.

http://www.cbk.gov.kw/en/cbk-news/announcements-and-press-releases/press-releases.jsp?kcp=1~n5Jn2tEVfwdWHwta9ITDindF+FRQ+gmqf+ysslYvFZU

http://www.cbk.gov.kw/en/cbk-news/announcements-and-press-releases/press-releases.jsp?kcp=1~n5Jn2tEVfwdWHwta9ITDindF+FRQ+gmqf+ysslYvFZU

http://www.visyt.com/banking

http://www.ipsoft.com/what-we-do/amelia/

http://www.ft.com/cms/s/0/a5cafe92-66bf-11e5-97d0-1456a776a4f5.html#axzz3nHvK18xG

http://nstore.accenture.com/IM/FinancialServices/AccentureLibrary/data/pdf/US_Retail_Banking_in_the_Digital_Era.pdf

http://nstore.accenture.com/IM/FinancialServices/AccentureLibrary/data/pdf/US_Retail_Banking_in_the_Digital_Era.pdf

https://www.pwc.com/gx/en/banking-capital-markets/banking-2020/assets/pwc-retail-banking-2020-evolution-or-revolution.pdf


http://www.accenture.net/microsite/everydaybank/Documents/media/EverydayBank-POV.pdf




29

ABOUT THE IBS CONSULTING AND RESEARCH TEAM

Dr. Christopher Payne, Head of Department

Dr. Payne joined IBS in September 2014. Previously, he was senior economist at Bloomberg

Government, based in Washington D.C., where he authored numerous studies on Dodd-Frank,

Basel III, and U.S. monetary and fiscal policy. Prior to that, based in London, he was Vice

President of Asian equities for JPMorgan and fund manager of Emerging Market equities at F&C

Asset Management. He began his career at PriceWaterhouse Coopers, where he qualified as a

chartered accountant. He holds a bachelor’s degree from Cambridge University, England, and

masters and doctorate degrees from the London School of Economics. His book, “The

Consumer, Credit and Neoliberalism: Governing the Modern Economy” relates economic theory

to monetary and banking policy in the U.K. and U.S. leading up the financial crisis of 2008.

Fidaa E. Al-Hanna, Senior Researcher

Fidaa joined IBS in 1992. She holds a bachelor’s degree in Business Administration, with a focus

on banking and finance, from Kuwait University and is a qualified member of the Institute of

Certified Professional Managers.

Naheel Y. Al-Kayyali, Senior Researcher

Naheel joined IBS in 1995. She holds a bachelor’s in Administrative Sciences, with a major in

financial and banking sciences, from Al-Yarmouk University- Jordan. She is also a qualified

member of the Institute of Certified Professional Managers.

Both Fidaa and Naheel have been involved in writing over 50 analytical studies in a number of

fields covering finance, credit, marketing, investment, management, organization, economy,

human resources development and e-banking.

Ali Abbas, Researcher

Ali joined the research department of IBS in 2015 having worked in the training department

since 2008. He holds a bachelor’s degree in Business Administration, with a double major in

management and marketing from the American University of Kuwait. In addition, he holds an

MBA from the University of Brighton, England.