Fintech helps financial sector improve performance

Improved quality of assets held by banks that contributed to a doubling of net bank income from 9 percent in 2017 to 18 percent last year, business consolidations in banking and non-banking financial sectors, and progressive legislative reforms, including fintech regulations, have contributed to continued stability and soundness of Kuwait’s banking and financial sectors.

The decision by Kuwait’s leading asset management and investment banking firm KAMCO Investment House to acquire a 70 percent stake in Global Investment House, and the near completion of a merger between Kuwait Finance House and Bahrain’s Ahli United Bank of Bahrain, which could create the sixth biggest lender in the region with assets of over US$100 billion, are some of the major consolidation moves in banking and non-banking sector.

Another landmark development impacting financial sector in recent months was the decision by Capital Markets Authority (CMA) to launch an initial public offering of 50 percent of its shares in Boursa Kuwait (previously the Kuwait Stock Exchange) to Kuwaiti citizens in the last quarter of the year.

The share sale will mark the second and final stage of the privatisation process of Boursa Kuwait. Earlier the CMA had sold 44 percent of its shares held in the capital of Boursa Kuwait to an international consortium comprised of the Athens Stock Exchange, National Investments Company, Al Oula Investment and Arzan Financial Group. The remaining 6 percent of shares will be held by the government through the Public Institution for Social Security.

The privatisation of Boursa Kuwait is considered an important step towards achieving the ambitious national development objectives set forth in Kuwait’s Vision 2035, which aims to diversify the economy away from its over reliance on hydrocarbon revenues, attract foreign investments, give the private sector a stronger role and more opportunities in developing the national economy, and in the process transform the country into a regional center of finance, commerce and culture by 2035.

But considering the country’s relatively small financial ecosystem, attracting sufficient investments into this sector has proven elusive in the past. Aware of this shortcoming, Kuwait’s financial gate-keepers are now banking on launching innovative financial technologies (fintech), and embracing technology as a core component of their strategy to attract international investments, and help in ensuring and securing future development of the country.

Fintech is helping to bring together entrepreneurs, technology companies and the financial sector to develop ideas and innovations that can harness the power of the digital age to create better, sustainable financial services for the wider community.

Fintech has certainly come a long way from the credit cards and ATMs in the 1960s to online data storage in the 1990s. Today, fintech is an almost indispensable tool in all customer-facing processes and in helping to ease the country’s move towards becoming an attractive financial investment destination. In recent months, the authorities in Kuwait have been pushing ahead with innovations in both traditional payments systems and modern payment settlement systems, including those that involve blockchain technologies.

The Central Bank of Kuwait (CBK) and its current Governor Dr. Mohammad Al-Hashel have been strong proponents of launching innovative fintech models in the country. But they have also been wary of rapid introduction without robust regulatory oversight. As such, the authorities are keen to push ahead with innovations in both traditional payments systems and modern payment settlement systems, including those that involve blockchain technologies, but only after strong regulations have been put in place.

In line with this thought, the CBK recently issued regulations governing electronic payments and settlement systems. Under the new regulations, the CBK will now have increased supervision over electronic infrastructure providers such as banks and telecommunication companies, as well as electronic payment agents, such as third-party e-payment applications. The regulations call for data protection and confidentiality for information related to e-payments, and risk management by e-payment infrastructure providers and agents. All e-payment infrastructure providers and agents are required to obtain CBK approval prior to operating any e-payment platforms and all providers must observe anti-money laundering and counter terrorism financing regulations.

An international banking conference under the theme of ‘Shaping the Future’, which was held under the patronage of His Highness the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah and hosted lby the CBK last week helped to further promote fintech in the country. The conference, which was attended by Acting Prime Minister and Defense Minister Sheikh Nasser Sabah Al-Ahmad Al-Sabah, saw more than forty-five participants including over 25 fintech companies showcase their capabilities. The show provided delegates with an opportunity to learn first-hand about the fintech innovations that are reshaping financial services in the region.

In his welcome address at the conference CBK Governor Dr. Al-Hashel said, “Global economy was facing intensifying headwinds, and the financial industry was at a cross-road which required exploration of new service methods. Fintech has a strong appeal to various segments of societies, as it caters to the needs of unbanked people, and meets clients’ expectations. The demand for fintech is not only reshaping the banking industry’s landscape, but has a role in setting elevated expectations of a frictionless experience. Therefore, the harnessing of innovative technologies is a key success factor for financial institutions going forwards, or they could face the risk of becoming irrelevant.”

In December last year, the CBK Governor had said that the Kuwait National Payment System (KNPS), which was being developed with local banks and payment gateways, will be rolled out in two phases in 2019 and 2020. The system will cover various initiatives including the government electronic banking system, wages protection system, digital currency, and automated clearing house.

“Each initiative is designed to enhance the stability and efficiency of the financial system, and build the necessary infrastructure to address future needs,” said the governor. The government electronic banking system, which aims to replace a paper-based process, is already being rolled out to all ministries and government entities.

The CBK is also reported to be examining the potential for introducing digital currency infrastructure, similar to that introduced by regulators in the UK, Canada, Singapore and Australia. “In case the Central Bank of Kuwait decides to issue digital currency in the future, we will have the tools ready to go live. In addition to e-wallets, this includes a Digital Kuwaiti Dinar, which will facilitate exchange against tokenized assets,” disclosed Governor Al-Hashel.

In addition, highlighting the bank’s recent regulatory sandbox framework, the governor explained that the sandbox would be “a monitored and safe space for fintechs to experiment with innovative products and services.” While regulators keep an eye on fintechs in a sandbox, regulations are lighter to encourage experimentation. Fintechs in the sandbox could also benefit from fast-tracked approvals or, lower capital requirements.

OIl prices that have remained bogged in a narrow fluctuating band for the past several months have increased pressure on the finances of oil producers. Kuwait is no exception and hence a renewed interest in other sources of income. The financial sector led by the banking industry has in the past contributed to improving economies in many other parts of the world. Kuwait hopes that enabling innovative fintech will add value and efficiency to the services provided by financial institutions, and help meet the needs and expectations of customers, while also attracting much-needed investments into the country’s economy.