Kuwait Finance House

02 February 2010

Making a clear choice to maintain levels of liquidity, the sharia-compliant bank is well placed for growth.


Kuwait Finance House (KFH) was established in 1977 as the first bank in the country to operate according to the principles of sharia law. Since then, it has extended its domestic retail and corporate banking activities into foreign markets, such as Bahrain, Turkey and Malaysia, as well as developing a range of investment activities.

KFH has direct stakes in several companies, chiefly in the financial and real estate sectors, and also provides finance for investments and acts as an asset manager.

The group is listed on the Kuwait Stock Exchange but is 44 per cent state-owned. As a flagship Kuwaiti financial institution, symbolic of the country’s track record in developing its domestic financial sector, KFH commands respect and solid political support at home. It also enjoys genuine regional and international status, as the world’s number two Islamic bank by asset size after Saudi Arabia’s Al-Rahji Bank.

This status reinforces its significance as a symbol of national prestige, perhaps equalled only by the Kuwait Investment Authority.

Company snapshot

Date established1977
Main business sectorsRetail and corporate banking, treasury, investment and asset management
Main business regionsGulf, Malaysia, Turkey, Europe
Business valueTotal assets of KD8.78bn ($31.57bn) and profit of KD527m in 2007
Chairman and managing directorBader Abdul Mohsen al-Mukhaizeem


Like other Kuwaiti financial institutions, KFH has not been afraid to expand beyond core personal and commercial banking activities into a diverse range of investment operations. Alongside this diversification, it has always sought to maintain a strong retail market presence, and has used this to build up its funding base.

The bank took full advantage of the recent economic boom to build up deposits. It ended 2007 with total assets of KD8.8bn ($30bn), 39 per cent up on 2006 and representing a substantial increase in financing exposure. But its client account balances were up by 44 per cent, at KD5.3bn, thus strengthening the ratio of deposits to financing. Profits were up 53 per cent, at KD527m.

The most recent results released by KFH, for the third quarter of 2008, show the bank sustaining the growth trend through the early phases of the downturn, albeit at a slower pace, with net profit to shareholders up 25 per cent.

KFH’s strong liquidity position should stand it in good stead now that global and local conditions have so dramatically deteriorated and interbank lending has dried up (see panel).

Despite its rising international and investment finance profile, KFH has not allowed itself to lose touch with its domestic consumer client base. The bank has invested heavily in the rollout of modern retail financial services such as microchip point-of-sale technology, 24-hour-a-day telephone banking with voice recognition systems, and online services for the tracking and trading of sharia-compliant shares on the stock market.

It has developed a broad range of customer accounts and marketed these at schools and youth centres. It has sought to expand real estate and corporate finance services as well as consumer finance.

Internationally, it has shrewdly eschewed costly efforts to break into the hugely competitive wholesale markets, such as London, New York and Tokyo, opting instead to build up solid local banking operations in major markets with potential for Islamic retail and business finance, such as Turkey, Bahrain and Malaysia.


KFH plans to launch an investment bank in Jordan and its foreign operations are also being used as channels to build a portfolio of investments outside banking, in real estate in Bahrain and China, healthcare in Malaysia and petrochemicals in Singapore. These overseas markets have also been used to develop sukuk (Islamic bond) financing, an area that has potential at home, but for the moment remains limited by Kuwaiti regulatory constraints.

In 2007, KFH’s management sought to develop a strategy that would allow the institution to maintain its role as an international leader in Islamic finance, as well as catering to the investment and wealth management needs of a home economy enriched by the surge in oil prices.

Despite its role as a developer of new products for the Islamic finance sector, KFH remains focused on compliance, both through sharia principles and domestic and international prudential regulation, notably the application of international Basel II standards.

In a country with significant consumer debt problems, where the government is under parliamentary pressure to finance a massive loans write-off, KFH has been upgrading procedures for controlling cash limits and overdrafts, and dealing with bounced cheques.

But one area where KFH may well have to revise its strategy is real estate. Like so many other Gulf institutions, it has become involved both as a financier of real estate and, directly, as a participating investor. With the sector now having suffered a dramatic slump, and facing a highly uncertain outlook, even the relatively conservative KFH may have to take a hard look at its portfolio to assess which real estate projects can still demonstrate a solid grounding on the basis of genuine demand.

MEED assessment

These are testing times for any Kuwaiti bank or investment house. A country that had prided itself on a long track record of indigenous financial sector development has had its confidence shaken by the huge pressures exerted by the global crisis and the subsequent slide in oil prices.

The government has set a steely and almost ruthless tone in its handling of the situation, and some institutions will be feeling exposed. But KFH is not in this vulnerable position.

Like National Bank of Kuwait, it is a flagship finance house that, thanks to its size and track record of good management, has established itself among the most important banks in the Middle East. While real estate exposure will inevitably cause it some discomfort, at least in the short term, KFH has the liquidity, strength and a broad retail base in Kuwait, and key foreign Islamic finance markets, to ride out the downturn securely.

Ratings downgrades hit kuwait’s banks

The international banking crisis and the slump in investment confidence in Kuwait have created tough operating conditions for the country’s financial institutions.

Despite the importance of Kuwait Finance House (KFH) to the national banking sector, and the development of Islamic finance worldwide, credit ratings agency Standard & Poor’s (S&P) revised its ratings outlook for the bank to stable, from positive, at the end of December 2008.

The agency is concerned that the Kuwaiti government may no longer be counted on to guarantee the survival of all major financial institutions.

The authorities took an initially cautious approach to propping up Gulf banks after it emerged in October 2008 that the banks had suffered losses from derivatives trading, before eventually deciding that intervention was unavoidable. They have refused similar backing for rival Kuwait bank Global Investment House, which has been forced to reschedule its debts.

Revised outlook

Consequently, S&P has revised its outlook for Kuwait’s Burgan Bank to negative, while Fitch Ratings has gone so far as to downgrade Commercial Bank of Kuwait from B/C to C, and Global Investment House from C to E. So KFH is not alone in having its rating reassessed.

However, Moody’s Investors Service takes a different view to S&P when it comes to KFH, arguing that the bank has maintained a strong liquidity position and, in any case, is far too important to both the local economy and as a symbol of pioneering national leadership in Islamic finance for the Kuwaiti authorities to permit it to fail.

KFH holds 20 per cent of all deposits in the country, outranked only by market leader National Bank of Kuwait (NBK), which has more than 30 per cent of deposits.

“KFH is systemically important in a country that is considered interventionist and supportive of its banking system,” says Anouar Hassoune, Islamic finance analyst at Moody’s.

Inevitably, in credit crunch conditions, the bank’s own funding costs have risen, putting a squeeze on margins. But its management has succeeded in keeping core liquidity above 17 per cent of total assets, a key indicator of underlying financial strength.

Table: KFH third-quarter results, 2008

Net profit from June to September 2008KD463m
The increase in net profit in 2008 compared with the same period in 200725 per cent
Total assets, up 28 per cent on the same period in 2007KD10.5bn
Source: Kuwait Finance House

In favourable economic conditions, banks seek to extend their financing activities because they generate good profits - as, to a lesser extent, do investments. Core liquid assets look dull, generating low returns.

But in today’s credit crunch circumstances, says Hassoune, profit on credit business becomes less important. What matters is access to liquid assets.

In Moody’s view, KFH’s focus on protecting liquidity is a strategy that leaves the bank solidly placed to withstand today’s troubled financial market conditions.

“In the trade-off between liquidity and profitability, KFH made a clear choice,” says Hassoune. “It decided to maintain its core liquidity so that it had easy access to funds, should the need arise, at the expense of profits.

“KFH has been so profitable in the years before that it does not need another year of high profits. In these times of crisis, we prefer banks that are well equipped in terms of liquidity and capacity, rather than banks that seek to protect their profitability. It is less important that a bank is incredibly profitable.”

Domestic strength

Moreover, says Hassoune, this stance reflects a clear view among KFH shareholders - of which the state is by far the largest - that the bank should protect its position as a domestic financial institution and as the world’s second-largest Islamic bank.

In any case, even if profits are held down for some time, Moody’s says it will be well equipped to grow its business over the longer term, once the market recovers and demand rises once again.

“KFH has good products, service and diversification,” says Hassoune. “It is well run and is one of the strongest banks in the Gulf.”

As a sharia-compliant institution facing regulatory hurdles in its domestic market, KFH may not have been able to develop such a wide a range of products as a conventional financial institution like NBK, but it has developed an enviable niche.

“KFH products are, in the Islamic finance industry, well recognised and probably ahead of the game,” says Hassoune.

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