Overview
Kuwait, an Islamic nation, ranks sixth globally in oil wealth and holds the title of the richest country by currency value. The oil sector contributes 40% to its GDP and targets positioning itself within the top 35% of global nations by 2035. Kuwait’s legal system is a blend, incorporating Shariah law, French civil law for legislation and common law. The population of Kuwait is predominantly Muslim, comprising 75% of the nation’s total population.
Islamic finance has experienced significant growth in recent decades within the Middle East, with Kuwait emerging as a key participant in the sector. The roots of Islamic finance in Kuwait can be traced back to the 1980s when Kuwait Finance House (KFH), the country’s first Islamic bank, was founded. Regulatory development by the Central Bank of Kuwait (CBK) has been instrumental in nurturing a conducive environment for the expansion of Islamic finance in Kuwait.
Kuwaiti banks have broadened their offerings in Islamic wealth management services to meet the needs of high-net-worth individuals who seek Shariah compliant investment opportunities. These services encompass portfolio management, estate planning, and strategies for wealth preservation that align with Islamic principles.
Regulatory environment
The CBK is the approving authority for any investment or banking institution in Kuwait. In terms of formal oversight, the Capital Markets Authority (CMA) of Kuwait has jurisdiction over Islamic investment companies, collective investment schemes and public-traded Shariah compliant firms. The Ministry of Commerce and Industry through the Insurance Regulatory Unit oversees the Takaful segment.
The Higher Committee of Shariah Supervision appointed by the CBK has the mandate to propose rules and regulations on Shariah financing which will then be approved by the CBK. Some aspects that the Shariah committee proposes are the general Shariah guidelines for products and services offered by Islamic banks and institutions, carrying out internal and external audits, governing activities related to Fatwa and providing supervision in Islamic banks and financial institutions. The committee is also responsible for issuing decisions to override any Shariah board in Islamic banks and institutions when there is a disagreement in opinions.
However, this does not imply that Kuwait’s Shariah board operates as a centralized body. Private entities have the autonomy to establish their own Shariah committees, a responsibility delegated by their respective board of directors.
Investment market
The Kuwaiti bourse was privatized in 2019, which brought about better efficiency. In Q1 2024, the bourse experienced a 68.65% increase in volume, 34.21% rise in value and 8.63% increase in net profit, proving its exceptional management and resilience despite geopolitical conflicts. The nation’s oil-dependent economy withstood the real-life stress test of a dramatic oil price crash during the COVID-19 years, further spotlighting its strong regulations and sound framework. The bourse’s first quarter report also outlined a 7.08% growth in market capitalization since Q4 2023.
As far as securities are concerned, the bourse lists companies in two different markets, the Premier Market and the Main Market, with different requirements. The Premier Market has more stringent prerequisites than the Main Market and is close to four times bigger in terms of market capitalization despite having only a handful of companies. As of May 2024, 112 companies are listed on the Main Market and 33 on the Premier Market, where financial services, real estate and industrials have the most listings with 44, 31 and 22 listed companies respectively. It is also worth mentioning that although the banking sector consists of only nine listed companies, its trading volume is the third-largest behind financial services and real estate, signifying the liquidity that is offered in this sector.
Like Islamic banks, Islamic financial institutions are subject to rules laid out by the CBK. Institutions shall appoint independent Shariah supervisory board members who are recognized Shariah scholars. The board is required to have a minimum number of Shariah scholars, not including members who may cause a conflict of interest like a majority shareholder. The Shariah framework follows the principles outlined by the IFSB and governance standards by AAOIFI.
Foreign investments are regulated, and the nation has laid out policies for foreign investments where investments in certain industries allow 100% ownership of a foreign entity; investments in banks however are subject to the CBK’s approval.
Investment in real estate also remained sluggish in Q1 2024.
Chart 1: Islamic funds breakdown by asset class in Kuwait
Asset management
On the asset management front, a total of 16 companies are registered with the Kuwaiti bourse, offering 49 funds, with two funds — Boubyan KD Money Market Fund II and KFH Capital Premier Market Fund — launched in 2023.
According to the IFN Investor Fund Database, the largest Kuwaiti fund — the Watani KD Money Market Fund II — is managed by the National Bank of Kuwait (NBK) with assets under management (AuM) of US$1.38 billion. In terms of company size by AuM, NBK, Boubyan Capital and Kuwait Financial Centre’s Markaz take the top three spots. Together, these companies offer a combined 11 different Islamic unit trusts. At the time of writing, the IFN Investor Fund Database recorded 29 Shariah compliant funds offered by Kuwaiti banks and asset managers with a combined value of US$3.84 billion. In Q1 2024, the top three performing funds are KAMCO Islamic Fund by Kamco Invest, Gulf Equity Investment Fund by NBK Wealth Management and Noor GCC Islamic Fund managed by Noor Investment.
Outlook
The evolution of Islamic finance in Kuwait has demonstrated significant growth and adaptation in recent decades, drawing from a historical foundation rich in Shariah laws. Key entities like the CBK and CMA play crucial roles in shaping the industry’s trajectory. Combining macro forces and the sector movement reported by the CBK, the slowdown in real estate may pose a challenge to investments in this asset class. The equity class continues to shine, but slowing domestic demand warrants attention to ensure the market is self-sustainable and not overreliant on oil exports.
This report was produced by Aravinth Rajendran and Elliot Yip, financial data analysts at IFN Investor.
