The Central Bank of Kuwait (CBK) has once again brought about a few changes in the banking system regulations related particularly to the retail banking segment (consumer and installment loans). These changes, effective from March 30, 2008 on incremental loans, may be outlined as:
Limiting banks from lending consumer loans exceeding more than 40% of the borrower’s salary. Previously the cap was at 50%
Reducing the lending spread over the discount rate to a maximum of 3%; bringing it down from 4% previously
Changing the method of charging interest by fixing the interest rate for 5 years from the date of the loan, to be then reviewed and changed by not more than 2%. As per previous policy, the interest rates were changed whenever the Discount Rate was changed
Abolishing upfront charge of interest on the said loans
And,
Defining consumer loans as personal medium term loans to finance personal consumption of (goods, durables, education, and health care) to be repaid on monthly installments over a maximum period up to 5 years
Defining installment loans (residential loans) as personal long term loans to finance non commercial purposes – especially to finance the maintenance or purchase of personal housing units to be repaid on monthly installments over a maximum period up to 15 years
The possible rationale behind the move…
Increasing inflation may be quoted as one of the major reasons behind the CBK’s recent move whereby regulations have become tightening by restraining the banks’ lending or in other words by clipping the borrower’s borrowing capability.
Albeit this may provide some relief to the high inflation levels, inflation may nevertheless require more aggressive steps given the fact that domestic burgeoning property rentals and global rising food and commodity prices have been the major reasons behind Kuwait’s inflation.
The current status of consumer and installment loans…
The present status of consumer and installment loans (CI-loans) can be gauged by the following (as of December 2007 figures):
1. CI-loans constitute a major 22.5% of the total loans
2. CI-loans have constituted one-quarter of the incremental loans of the banking system on an average over the last 5 years. The contribution of CI-loans to incremental loans has however decreased to 12% in CY07
3. CI-loans have grown by a staggering 6-year CAGR of 18%
We believe that while demand for CI-loans exists, a further restriction on the allowable
limit may taper-off the overall CI-loans disbursement and hence the growth of CI-loans.
Moreover, spreads on incremental CI-loans will take a hit and the impact on overall spreads will be a function of the proportion of incremental CI-loans in the incremental loans and consequently in the overall loans of the bank. This situation may exacerbate if current borrowers prepay existing loans (on higher yields) and opt to refinance themselves at newer lower rates.
This is however subject to the presence of pre-payment penalties, if any, in the loan agreements. Furthermore, one change that may benefit banks in a declining discount rate scenario is the regulation regarding locking the interest rates on transactions for 5 years. In case, the CB decides to decrease its discount rate going forward, the banks will not be required to follow suit until the expiration of the 5 years since the disbursement of the loans. Banks may therefore still enjoy higher spreads meanwhile, subject to the terms of the loan agreement pertaining to prepayment. On the flip side, if the discount rates increase, the same regulation will safeguard the interests of the borrowers.
Banks Credit Facilities by Sector:
D mn 2001 2002 2003 2004 2005 2006 2007 CAGR 01-07
Trade 811.9 1021.9 1072.2 1276.2 1371.2 1702.0 1899.8 15%
Industry 394.3 465.5 441.7 447.1 467.9 608.9 1071.0 18%
Construction 356.4 454.1 632.6 591.5 769.8 1069.6 1366.8 25%
Agriculture and Fishing 13.9 20.1 48.7 22.8 19.1 36.0 14.6 1%
NBFI 612.5 538.1 650.2 781.0 932.8 1427.0 2408.7 26%
Personal Facilities 2307.8 2628.0 3442.5 4169.2 5137.5 6052.4 7092.6 21%
Consumer loans 633.5 698.0 748.8 736.4 789.0 756.0 631.2 0%
Installment loans 1057.9 1397.3 1558.4 2074.5 2447.5 3154.1 3891.4 24%
Purchase of securities 385.8 398.3 755.1 907.5 1248.3 1604.6 2156.9 33%
Other loans 230.6 134.4 380.2 450.8 652.7 537.7 413.1 10%
Real Estate 1165.3 1298.4 1434.3 2029.5 2538.5 3288.0 5001.9 28%
Crude oil and gas 45.0 66.6 73.0 54.7 51.5 51.3 58.9 5%
Public services 0.5 0.4 1.2 0.1 4.8 4.7 2.8 33%
Other 319.5 360.5 622.9 494.9 534.3 694.0 1221.6 25%
Total 6,027.1 6,853.6 8,419.3 9,867.0 11,827.4 14,933.9 20,138.7 22%
Source : Central Bank Of Kuwait
