Earlier this year, a new chapter was added to Kuwait’s long history of using its vast oil wealth to write off consumer debt. On 3 April, the National Assembly (parliament) approved a law creating the Family Fund, a scheme under the Finance Ministry that would buy up consumer loans from banks and reschedule them for up to 15 years.

The move is expected to cost about KD744m ($2.6bn), or about 1.5 per cent of Kuwaiti bank assets. In contrast to previous debt-relief initiatives, the latest plan is more limited in scope and its affect on the banking sector mixed.

Under the plan, the Finance Ministry will buy outstanding loans issued before 2008 from the banks and then reschedule them for anywhere up to 15 years. The Finance Ministry will not charge any interest on the loans it reschedules. This means the plan is not so much debt relief as assistance in making the repayments more manageable. Loans from Islamic banks are not included and only about 47,000 Kuwaitis will be eligible to join the Family Fund.

Credit growth

There are positive aspects of this for the banks. Lenders that have already provisioned for bad loans will be able to write-back those provisions, which should provide a minor fillip to profits, although banking analysts are not expecting any significant impact.

It could also help boost credit growth as people with high debt burdens reschedule their loans, giving them capacity to take out new ones. National Bank of Kuwait (NBK), the country’s largest lender, estimates the move could encourage an additional KD550m of new lending. “This could have a relatively strong impact on consumer spending, but in practice is likely to be only moderately significant,” says one local analyst.

Any impact on credit growth would most likely be spread over about 12 months, making the overall effect on already rapidly accelerating credit growth fairly minimal. In March 2013, credit growth was about 20 per cent. Credit growth has been buoyed by the KD1.3bn stimulus in 2011 from government grants and salary increases, and the KD800m in salary increases in 2012. “This latest measure will keep credit growth at current levels,” says the local analyst.

Whether the positive impacts will outweigh the negative consequences is unclear. Banks will lose interest income from loans bought by the state, although this is expected to be fairly minimal. They will also have to pay back to consumers any interest the lenders collected in excess of 4 per cent of the loan value. That move is intended to ensure borrowers who took out loans before new regulations were enacted in March 2008 are not suffering because banks had been able to charge higher rates before then. The government also faces the lost opportunity cost of investing $2.6bn, which will have no direct return for the state coffers. But considering the government’s historic failure to productively invest its budget surpluses, this is only a minor concern.

In the short term, Kuwait has the fiscal position to do this. Longer term, these kinds of measures will become more difficult to afford. The Washington-headquartered IMF has said that on current spending trends, oil revenues will no longer be enough to fund expenditures by 2017.

There are also suggestions that, by repeatedly bailing out citizens, Kuwait is encouraging bad behaviour. “There is definitely a feeling that this can induce more consumption and people become dependent on the government to repay their loans,” says one banker in Kuwait.

“The government has been talking about this for years and, originally, the parliament wanted to write off all debts. That has probably also had an impact on consumer behaviour, as people thought all loans were going to be written off,” says another source at a Kuwaiti lender. “It also sets a bad precedent, as it essentially asks banks to give their customer the option to renege on a contract.”

Populist move

The latest measures follow the December 2012 election, where many candidates had made debt relief a key part of their campaign. “It has been driven by a very populist political sentiment that the government has tried to restrain,” says the local analyst.

As it stands, the impact of the debt relief should be modest on the banking sector. The decision to dissolve parliament in mid-June is set to return a much more combative National Assembly, which could seek to make the programme more expansive.

With its long history of such initiatives, no one would be surprised if the current debt-relief measures become larger in scope or if a fresh set of measures are tabled by parliament to fully write off the debts, rather than just reschedule them.