Business as Unusual
By Clare Dunkley • Dec 11th, 2008In March, rules were imposed that lower from 50 percent to 40 percent the maximum amount of borrowers’ monthly salary that could be absorbed by debt servicing and repayment. A highly unpopular 80-20 loan-deposit ratio ceiling has been in place for some years, forcing domestic institutions to chase deposits aggressively while jettisoning the least profitable loans to adhere to the restrictions.
During the first half of the year, CBK moved the repurchase rate – which deposits are tied to – in proportion with US changes. At the same time, CBK left the discount rate, which lending rates are linked to, on hold or reduced by a smaller percentage. That discouraged an expansion of credit. Then the KSE index plunged from a high of more than 15,000 points in June to less than 11,000 points in late October, and bank lending plummeted. So the CBK abruptly and explicitly shifted focus.
“In the beginning, our aim was to direct all our policies towards fighting inflation, but other issues have surpassed this,” Sheikh Salem told reporters in mid-October. “The priority is to enhance confidence and safety in the banking sector.” The KIA pledged to invest in local listed stocks rather than concentrating on investments abroad – many of which are considerably less appealing now given the turmoil in Western financial markets.
At the same time, the government urged both the KIA and other state-owned bodies such as Kuwait Petroleum Corporation and the Social Security Fund to shift deposits held at the CBK into local commercial banks.
The central bank also injected short-term liquidity worth some 100 million Kuwaiti dinars ($370 million) into the system, in a predominantly symbolic gesture compared to the UAE’s 120 billion dirham ($32 billion) in emergency liquidity. Kuwait also raised the 80 percent loan ceiling to 85 percent, allowing – according to the CBK’s estimates – an additional 1.3 billion Kuwaiti dinars ($4.8 billion) to be extended in loans. The response to the US Federal Reserve’s 50 basis point (bp) rate cut in early October exemplified the policy volte face: the CBK slashed the discount rate by 125 bp to 4.5 percent to spur lending while reducing the repurchase rate by a more moderate 100bp to 2.5 percent.
