THE CONVERSION OF KUWAIT REAL ESTATE BANK: A CASE

UNCLAS SECTION 01 OF 02 KUWAIT 004554

SIPDIS

SENSITIVE
SIPDIS

STATE FOR NEA/ARP, EB
TREASURY FOR DAS AHMED SAEED AND JONATHAN ROSE

E.O. 12958: N/A
TAGS: PREL EFIN KU
SUBJECT: THE CONVERSION OF KUWAIT REAL ESTATE BANK: A CASE
STUDY IN ISLAMIC BANKING



1. (SBU) Summary: On December 2, Ambassador met with Kuwait
Real Estate Bank (KREB) Chairman Abdulwahab Mohammed Ali
Al-Wazzan to discuss KREB's ongoing conversion into an
Islamic bank. Two and a half years into the process,
Al-Wazzan said that although the conversion has taken longer
than expected, operating as an Islamic bank will ensure
KREB's long-term success by allowing it to offer products and
services beyond real estate, including cars and appliances.
Al-Wazzan, a former Minister of Commerce and Industry,
believes the conversion will receive final approval from the
Central Bank of Kuwait in 1-2 months. Once approved, the
Kuwait Real Estate Bank will become an Islamic bank operating
under the name "Kuwait International Bank." He also
expressed pride in KREB's mixed Sunni and Shia Sharia
council. End summary.

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Background and Rationale
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2. (SBU) Kuwait Real Estate Bank's (KREB) conversion into an
Islamic bank began almost three years ago. As Chairman of a
specialized real estate bank founded in 1973, Al-Wazzan and
other board members recognized that KREB,s options for
future expansion were limited. Noting the rapid expansion of
Islamic banking worldwide, KREB conducted a feasibility study
and concluded that converting to an Islamic bank offered the
best options for long-term growth. As an Islamic bank, KREB
will be able to offer financing for consumer products
including cars and appliances in addition to real estate.
Two and a half years ago, KREB applied to the Central Bank of
Kuwait (CBK) for a license to operate as an Islamic bank
under the name "Kuwait International Bank." To comply with
the principles of Islamic banking and to satisfy CBK,s
requirements, which Al-Wazzan described as some of the
toughest in the region, KREB had to change its policies and
procedures, and re-train human resources. KREB also had to
convert its traditional loans into Islamic instruments. No
customers have objected to the change.


3. (SBU) To achieve this systemic overhaul, KREB reached out
to a number of specialty consulting firms including Ernst and
Young, McKinsey, Euro Money and Moodys. Ernst and Young
played a key role in project management; McKinsey developed a
5-year strategy; and Euro Money and Moodys provided
specialized training to some of KREB's 400 employees.
Al-Wazzan added that technical assistance from Ernst and
Young, which has a permanent project management team onsite,
and Euro Money continues.

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Key Challenges
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4. (SBU) Without hesitation, Al-Wazzan said that the most
difficult aspect of this conversion has been the human
resource component. Although the increase in the range of
services that KREB will offer as an Islamic bank will not
require an increase in personnel, it does require employees
with specialized knowledge in the area of Islamic banking.
There was already a shortage of skilled staff with two
Islamic banks, Kuwait Finance House and Boubyan Islamic Bank,
operating in Kuwait. The increased demand caused by KREB,s
entry into the sector has further exacerbated this shortage
and banks are increasingly recruiting from well-established
firms abroad. Al-Wazzan, for example, recruited KREB,s
current Pakistani/British GM from a British bank that had
stationed him in Hanoi.


5. (SBU) Al-Wazzan also noted that integrating the new
policies and procedures into their IT was also more
challenging than expected. Fortunately, KREB,s IT Manager
is knowledgeable about both Islamic banking and IT
integration.

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"Mixed" Sharia Council
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6. (SBU) CBK conducts periodic reviews of KREB's progress to
ensure that all policies and procedures are in compliance
with CBK regulation of Islamic banking. KREB has its own
Sharia council which evaluates and recommends internal
policies. This council is comprised of five Islamic banking
specialists, three Sunni and two Shia. This integrated
approach, said Al-Wazzan, is not the norm as most Islamic
banking establishments are dominated by one sect. Despite

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their initial misgivings about the wisdom of this approach,
he continued, the five council members have worked well
together. Al-Wazzan explained that the two sects have almost
"95% in common in their approach to Islamic banking" and this
type of joint effort should be the norm as it helps
communication and understanding. However, he said that most
banks, including Kuwait Finance House and Investment Dar,
continue to employ Muslims of one sect almost exclusively.
If there are non-Muslims, he said, they are few and far
between.

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For more Embassy Kuwait reporting, see:
http://www.state.sgov.gov/p/nea/kuwait/index. cfm?cables

Or Visit Embassy Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
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LEBARON