KUWAIT BANKING AND FINANCE UPDATE, SEPTEMBER 2004

UNCLAS SECTION 01 OF 02 KUWAIT 002909

SIPDIS

STATE FOR NEA/ARP
STATE FOR EB/IFD/OIA ABRYAN
USDOC FOR 4520/ITA/MAC/OME/CLOUSTAUNAU/COBERG

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD PGOV PREL IZ FR KW
SUBJECT: KUWAIT BANKING AND FINANCE UPDATE, SEPTEMBER 2004

(U) This cable is sensitive but unclassified; please protect
accordingly.


1. (SBU) Summary: In this edition of the Kuwait Banking &
Finance Update: the Central Bank raises interest rates; a
Kuwaiti bank limits its business in Iraq due to security
concerns; the banking sector opens to foreign banks; a new
Islamic bank is formed; and a new draft tax law is approved
by the Council of Ministers and referred to the National
Assembly. End Summary.


Interest Rate Hike: Cooling down an overheated economy
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2. (U) In what some news reports called a "surprise move,"
the Central Bank of Kuwait (CBK) raised the discount interest
rate on 3 August from 3.5% to 4%. After initial grumbling in
the press and among some National Assembly (NA) members about
the timing and surprise nature of the announcement, most
financial analysts and members of the banking community
agreed that the rate hike was called for. In an August 19
meeting with EconOff, National Bank of Kuwait (NBK) General
Manager for Asset Management and Treasury George Nasra said
that the recent rate hike was "necessary and understandable,"
and was "needed to cool down the real estate sector and stock
market." Nasra did not foresee the CBK moving away from
keeping interest rate fluctuations in line with US Federal
Reserve interest rate changes. In an August 29 courtesy call
by CDA, Central Bank Governor Sheikh Salem Abdul Aziz
Al-Sabah echoed Nasra's opinion, saying that the Kuwait
economy has become "over-enthusiastic." He added that there
had been "too much expectation of an Iraq reconstruction
boom," and that the interest rate was raised to cool down
some of the excess borrowing.

NBK in Iraq: Eager for business, wary of security
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3. (SBU) In an August 19 meeting, NBK GM Nasra told EconOff
that NBK has acquired about 15 branches of a local Iraqi
bank, with plans to focus on Baghdad and Basra. It will
operate the banks using mostly local employees, with some
management personnel sent from Kuwait. While the original
plan was to begin operations in January 2005, per the January
2004 agreement between the Central Bank of Iraq (CBI) and
NBK, the current security situation was casting that
timeframe into doubt. Nasra said that everything depended on
the security situation, adding that the opening of its
banking operations "depends on what happens today in Najaf."
(Commment: By this, Nasra meant that everything depended on
the security situation in all of Iraq, and not just in the
cities or neighborhoods where NBK planned to operate
branches. End Comment.)


4. (SBU) In an August 24 courtesy call by CDA, NBK CEO
Ibrahim Dabdoub expanded further on NBK's business in Iraq.
He explained that NBK has actually purchased an 85% share of
a bank chain owned by the Kubba family in Iraq, but that NBK
would keep the family name on the bank for the next year or
two. NBK currently has 15 people from the bank in Kuwait for
training. While noting that "the business potential in Iraq
is huge," Dabdoub said that NBK will likely ask the CBI for
an extension on the deadline to be operational, in order to
"let the security situation settle down."


5. (U) NBK is also facilitating wire transfers with two or
three banks in Iraq, according to NBK GM Nasra, but the
demand is very low. He is seeing some demand for global
payments made from Baghdad, but not much the other way, into
Iraq. Nasra said that the Iraq Trade Bank, operated as a
consortium, was working out well so far, and he had no
specific difficulties to report.


First Foreign Bank Licensed in Kuwait
--------------


6. (U) Following on the January 2004 approval by the
National Assembly to allow foreign banks to enter the Kuwaiti
market, the CBK granted BNP Paribas the first license for a
foreign bank in the country in August 2004. The license must
go for approval by the Cabinet of Ministers before it becomes
law. Citigroup, Standard Chartered Bank and HSBC are also
reported to have applied for licenses.



7. (SBU) NBK GM Nasra said that BNP Paribas would start
operating once it has been given GOK approval, and that other
foreign banks were on the way. He saw these new market
entrants as possibly affecting smaller, weaker banks, but not
NBK. He did expect that the foreign banks would eat into
some of NBK,s market share in the areas of wealth
management, credit card services, and other advisory
services, but did not expect NBK to be challenged in retail
banking. Nasra said that a Citibank colleague based in
Bahrain told him that the holdup of Citibank,s entrance into
the Kuwait market was the fault of Citibank, and not the GOK.
CBK Governor Sheikh Salem, in the August 29 courtesy call,
said that Citibank needed to submit more paperwork to meet
certain requirements but that Citibank was definitely
interested in doing business in Kuwait. Sheikh Salem echoed
Nasra's opinion, saying that the presence of foreign banks
would increase competition in the areas of corporate banking,
portfolio management and wealth management.


Islamic Banking: A New Bank and a Growing Market
-------------- ---


8. (U) The Bubiyan Islamic Bank, a new Islamic bank
established by the Kuwait Investment Authority (KIA),is
still in the process of being formed after its May 2004
initial public offering. On August 21, the CBK announced a
proposed list of 15 board members, but there has been some
dispute over the position of the bank chairman. Local
newspapers reported on August 22 that an Islamic party is
supporting a candidate for chairmanship of Bubiyan Bank who
is not on CBK's proposed list of board members.


9. (U) NBK GM Nasra said that NBK currently offers some
Islamic financial services, including leasing, and money
market and real estate funds, but was not yet offering retail
Islamic banking services. In Kuwait, he noted, Islamic
banking and conventional banking are separated by law, so it
is easier for an institution to operate solely one way or the
other. He expected some competition from Bubiyan Islamic
Bank and from other local banks. Nasra said that he sees a
growing demand for such services, both in Kuwait and in the
region.


Draft Tax Law Referred to National Assembly
--------------


10. (U) A draft tax law has been approved by the Council of
Ministers on August 25, and will be sent to the National
Assembly in the fall 2004 session. The draft law calls for a
progressive tax on net income and excludes salaries and
certain low-income wage earners. The draft law exempts the
Amir and Crown Prince from paying the taxes, which will be
collected on January 1 of each year. The proposed law calls
for the following taxes on "net income from commercial,
industrial, private, capital or real estate activities:"

KD 1 to KD 10,000 2.5%
KD 10,000 to KD 50,000 5.0%
KD 50,000 to KD 250,000 10.0%
KD 250,000 to KD 1 million 15.0%
KD 1 million to KD 5 million 20.0%
KD 5 million and higher 25.0%


11. (U) Post will provide additional financial news in
regular update cables.
TUELLER