KUWAIT FINANCE HOUSE: A GROWING ISLAMIC INVESTMENT BANK

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 000076



SIPDIS



STATE FOR NEA/ARPI

EB/IFD/OIA ABRYAN

EB/ESC/TFS BSTEPHENSON

S/CT TKUSHNER

OFAC DIRECTOR RWERNER



E.O. 12958: DECL: 01/05/2015

TAGS: ECON, EFIN, ETTC, KU, Banking

SUBJECT: KUWAIT FINANCE HOUSE: A GROWING ISLAMIC INVESTMENT

BANK



Classified By: Ambassador Richard LeBaron for reason 1.4 (d)



1. (U) Summary: Ambassador met January 4 with Kuwait

Finance House (KFH) Chairman Bader Al-Mukhaizeem and other

senior management to discuss the history and structure of the

institution, Islamic bonds, terror finance controls, and

Kuwaiti investment patterns. Al-Mukhaizeem emphasized that

KFH is an investment bank, described some of its investments

in regional real estate projects, and noted a growing

interest in Islamic bonds (sukuk) in Kuwait and elsewhere.

His staff also described some of the measures taken to

control financial flows and how the bank complies with OFAC

regulations. End Summary.



KFH: $10 Billion Strong, and Growing

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2. (U) On January 4, Ambassador met with Kuwait Finance

House (KFH) Chairman Bader Al-Mukhaizeem, General Manager

Jassar Al-Jassar, and Investment Sector Assistant General

Manager Mohammad Al-Omar. KFH is Kuwait's leading Islamic

banking institution, with 2003 reported assets of $10.3

billion, depositor accounts totaling $7.8 billion, and a

reported net profit of $197 million. KFH has subsidiary

operations in Bahrain and Oman, offers some services in

Malaysia and Turkey, and hopes to expand further. The bank

was established in 1977 with 49% GOK ownership, since

expanded to 56% ownership.



3. (U) Al-Mukhaizeem explained that the main difference

between Islamic banks and regular banks is that no interest

can be paid to depositors by an Islamic bank. Instead, the

deposits are invested in a portfolio, from which a dividend

is paid. Instead of interest-based loans, the bank makes

investments. It is heavily invested in the region, but also

has real estate investments throughout the world, including

in the U.S. in Texas, California, and Georgia. KFH waits

until the end of each year and then pays out dividends based

on its investment profits. According to the KFH officers, it

has done consistently well over time, regularly beating out

interest rate returns from other Kuwaiti banks. The KFH

officers said that Kuwaitis are attracted to the bank both

for its Islamic character and for its profitability. "If

it's Islamic but doesn't make any money," Al-Mukhaizeem

admitted, "no one would put their money with us." The

Chairman said that the most difficult part of running an

Islamic bank was finding staff who understood principles of

banking and of Islamic law (sharia). He said the bank

provides internal training to address this problem.



Sukuk: Islamic Bonds Used for Project Finance

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4. (U) The KFH officers described the growing trend of using

Islamic bonds, or "sukuk," to finance large projects. The

bonds are generally being used for projects with long-term,

medium-to-high rates of returns. The individual bond-holders

have an ownership in the asset and the bonds can be traded as

a receivable. KFH's Bahrain-based subsidiary just

participated in a sukuk issue for the "Durrat Al-Bahrain"

island resort project, and hopes to use this financing method

for other projects in the region. Al-Mukhaizeem said the

Bahraini government has used sukuk bonds for government

project and that KFH has worked with the governments of

Bahrain, Qatar and Malaysia on sukuk financing. KFH has also

spoken with the Central Bank of Kuwait about sukuk financing,

according to Al-Mukhaizeem, and the GOK appeared interested.

The KFH officers said that the project financing

opportunities in Kuwait were limited due to the amount of

bureaucracy involved in any project.



KFH Talks the Talk on Terror Finance

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5. (C) Ambassador raised USG concerns about terror financing

and the KFH officers said that KFH takes its responsibilities

very seriously and coordinates with the Central Bank, OFAC

and U.S. financial institutions such as Citibank to make sure

it is in compliance with all terror finance and anti-money

laundering legislation. Al-Omar said that all transfers in

and out of Kuwait were closely regulated. With no personal

taxes in Kuwait, Al-Omar explained, there is not much of an

underground economy and thus no reason to hide assets or move

cash across borders. With Know Your Customer (KYC)

regulations, Al-Mukhaizeem said, the bank was demanding more

information from customers than they traditionally wanted to

give, but he said that KFH was complying with the

regulations, and customers are getting used to it.

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Visit Embassy Kuwait's Classified Website:

http://www.state.sgov.gov/p/nea/kuwait/

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LEBARON