“Friendly” moves among banks to halt “interest burning” on loans... Individuals
- Attractive perks for borrowers and Kuwaiti salary accounts spark competitors’ sensitivities
- Flirting with the elite through the lowest interest-rate window, with financing for their key needs provided free of charge
- Kuwaitis in government jobs and those with stable positions in the private sector top the list
- Residents employed in non-erosive jobs are welcomed with attractive credit benefits
- Intense banking competition and narrow growth opportunities fuel some players’ appetite for innovation
Policymakers at credit desks in some local banks have initiated a round of understandings among officials responsible for approving personal loans and attracting deposits, hoping to reach a collective “amicable” agreement that prevents a fierce race to expand the pool of eligible individual borrowers or boost deposit balances through what is known as the “interest margin burning” mechanism.
In detail, officials in the retail banking sector at some banks have recently increased their incentive packages aimed at attracting new borrowers and opening salary accounts for Kuwaitis working in the public sector. These moves have heightened competitors’ sensitivities in this segment, particularly after the offered benefit packages included courting eligible customers with “very cheap” interest rates—effectively reducing the allowed interest margin above the discount rate for funding institutions.
In practice, these financings include consumer and housing loans. Some banks offer certain customer segments highly incentivized loan rates, making it difficult to achieve the prevailing average bank return when measured against the cost of funds provided. These loans are priced at a very narrow margin above the discount rate, and sometimes even below the market average by 2%.
What further complicates the competitive landscape for some banks’ expansion plans is their inability to absorb the interest costs incurred by other banks, especially when these are coupled with incentive benefits for eligible customers who transfer their salaries. These benefits include cash amounts alongside a comprehensive package of banking perks and free financing for their essential needs, including education, healthcare, and sometimes wedding hall services.
It is worth noting here that the preferential pricing offered by some banks on interest rates for individual loans and deposits does not apply to everyone. It is targeted exclusively at eligible customers, particularly Kuwaitis employed in the government sector or in stable, growth-capable industries, as well as residents working in non-erosive jobs with activities that have future growth potential.
Clearly, open amicable discussions in this context are not limited to efforts to mitigate the risks perceived by competitors regarding loans granted at relatively low interest rates. The intense competition also extends to the other side of the retail banking segment, involving attempts by some banks to increase their share of individual deposit portfolios by offering interest rates higher than the prevailing market average.
Officials at some banks’ retail divisions are seeking to offer competitive interest rates both for lending and for attracting individual deposits, aiming to raise market share and expand their customer base in this segment. This is particularly true for elite customers who maintain strong credit profiles or possess stable funds for deposit, making them highly desirable and worthy of exceptional interest rates and, at times, interest-free financing.
In banking terms, the “friendly” efforts to reach a collective agreement ensuring that interest rates are not used as a weapon to attract loans or deposits have elicited mixed reactions. On one hand, some oppose this policy, arguing that any divergence in interest rates within the retail banking sector should be regulated. Proponents of this view contend that retail loan pricing should be based on a fixed margin not exceeding 3% above the regulatory discount rate, implying that all banks should maintain a uniform, or at least very similar, pricing distance from customers. This approach would reflect banks’ commitment to providing a reliable financial environment and avoid the need to expand into unhealthy competition.
At the same time, others believe that the aggressive competition among certain banking policymakers regarding retail loan and deposit rates is legitimate from a banking perspective, and falls within broader moves driven by banks seeking to expand their funding and deposit portfolios.
This view is reinforced by the fact that competition in the local banking market is intense, and growth opportunities are not easily attainable. Consequently, banks with a strong appetite to maximize their market shares in lending and deposits are offering unconventional benefits, taking into account that all banks pursuing this strategy carefully assess their funding opportunities to mitigate risks and employ different return calculations, including the regulatory-mandated yield curve structure.
According to data from the Central Bank of Kuwait for June, the balance of personal facilities increased by 1.6% in the first half of the year to KD 20.346 billion, a rise of KD 318.6 million, compared to KD 20.02 billion at the end of December.
These facilities include “consumer,” “housing,” and “private residential” loans. Consumer loans declined by 1.73%, or KD 36 million, over six months, falling to KD 2.041 billion from KD 2.077 billion in December. Housing loans rose by 2.37%, or KD 410.8 million, to reach KD 17.688 billion. Meanwhile, private and model home loans dropped by 11.75%, or KD 23.3 million, to KD 174.9 million.
