There have been times in recent years when Kuwait’s businessmen and bankers complained about the discipline central bank governor Sheikh Salem AbdulAziz Al-Sabah imposed on the country’s financial sector. But with the global economy facing its most serious crisis for years, they now have good reason to welcome the sound judgement of the veteran Sheikh Salem, who has been governor since October 1986.
Sheikh Salem, who played an important part in protecting Kuwait’s reserves when Iraq invaded in 1990 and led the post-war financial reconstruction, has always adopted a robust attitude to stop signs of speculative lending.Characteristic of this prudent approach was his instruction earlier this year to banks relating to risk weightings for loans granted for financing trading in stocks and real estate. The measures were designed to reduce the concentration of credit risks, to curb credit growth and to reduce risk. “They aim at sustaining the financial stability of the country by prompting banks to improve their risk management,” Sheikh Salem tells Emerging Markets.
These, though, are only the latest steps in a strategy that has ensured that the Kuwaiti banking and financial sector has managed to expand while not risking standards of prudence. For example, Kuwait was the first country in the world to apply Basel II capital adequacy standards. “We are determined to sustain financial stability and international supervision standards,” he says.
Equally important has been the way he has expanded the banking sector, introducing legislation for the regulation of Islamic banks and removing restrictions on the entrance of foreign banks into the market – three international and nine regional banks have been given licences.
“The financial liberalization process has contributed to expanding and diversifying the banking system base, enhancing the competitive environment and supporting efforts to convert Kuwait into a major financial and trade centre,” he says.Sheikh Salem has been equally professional in ensuring that inflationary pressures, which he identifies as a real concern, remain under control, while ensuring there is adequate liquidity in the system. He has introduced measures to curb the acceleration in bank credit growth and reduce excessive concentration in certain areas of risk. “These ensure that we can maintain financial stability and confront the inflationary pressures that were starting to grow in the Kuwait economy,” he says.
Controlling inflation was also one of the reasons why Kuwait last year decided to depeg the Kuwaiti dinar from the US dollar and return to its previous policy of having it pegged to a weighted basket of currencies. “This policy provided the Central Bank of Kuwait with more flexibility to reduce external inflationary pressures associated with exchange rate developments,” he says.
But Sheikh Salem has been equally ready to pump money into the market when he has considered it necessary to shore up confidence in the financial sector. This September, he offered one week and one month funds in a signal to the markets that there was sufficient liquidity available.
In his 22 years as governor, Sheikh Salem has acquired considerable experience in dealing with regional and international issues, and his experience will be needed as the global financial turmoil continues.
The governor himself has no doubt that the central bank will have its work cut out. “In this era of trade globalization and the liberalization of financial services, the challenges emanating from the regional or international environment of the banking business are increasing in importance,” he says.