Banks' Appetite for Funds Equals Loan Interest on Deposits!

- Stable liquidity helps in ordering the maturity ladder, even with a dollar gap

- Banks lend to the “elite of the elite” at up to 95,000 dinars with interest rates as low as 4 percent

- High pricing is targeted at depositors with amounts starting from 15 million dinars

- Individual deposits are excluded from this exception unless they fall into the “jumbo” category (six zeros)

- 27.5 percent of deposits in Kuwaiti banks belong to government entities and public institutions

- The acceleration of funds-raising activities for auctions intensifies the exceptional pricing environment

- Easing pressure on the cost of funds through diverse debt instruments enhances liquidity

- Interest rates on deposits ranging from 50,000 to 1 million dinars vary between 3.75 and 4.25 percent

As Kuwait prepares to experience the autumnal equinox on September 27, deposit interest rates are reaching levels consistent with loan pricing, a rare banking phenomenon that has been growing locally. The two extremes are occasionally meeting at a ceiling of approximately 4.8 percent, considering that other funding sources still adhere to a 6.5 percent pricing rate. What is the story behind this?

Initially, it is worth noting that the rise in deposit interest rates, which is similar to or close to loan pricing, is not universal. High pricing is typically directed at amounts starting from 15 million dinars, meaning individual funds do not fall into this category unless classified as “jumbo” (six zeros) and placed in terms of at least one year.

In detail, banks have been collecting more medium and large deposits for some time, particularly those offered in government auctions. However, this move was not accidental; it represents a continuous trend that has driven the pricing of some deposits to jump to the average interest rate for prime customer loans, reaching approximately 4.8 percent, thereby eliminating the margin.

Perhaps the greater paradox is that some banks lend to customers colloquially referred to as the “elite of the elite” at interest rates of only about 4 percent. This circle is limited to Kuwaiti government employees qualified to borrow up to 95,000 dinars and who hold deposits. Meanwhile, interest rates on deposits ranging from 50,000 to 1 million dinars vary between 3.75 and 4.25 percent.

Some banks’ departure from the collective competition in pricing loans and deposits runs counter to the prevailing banking tradition since the global crisis that erupted in 2008, which maintained an average margin of no less than 3 percent in favor of lending.

To decode this shift, one must start with the US Federal Reserve, which, during its meeting held on September 16, clearly adopted a tighter monetary policy by raising interest rates by 25 basis points, bringing the target range to between 3.75 and 4 percent.

Although the Central Bank of Kuwait did not follow suit and decided to keep the discount rate unchanged at 3.5 percent, the Fed’s decision, which was expected, represents a pivotal turning point in global financial markets. This necessitates that Kuwait’s banking policymakers follow future signals, which reflect expectations of a second rate hike before the end of 2026. Meanwhile, financing for real estate and participating companies involved in implementing Kuwait’s Vision 2035 is likely to remain the main driver of credit expansion, requiring the accumulation of deposits that meet regulatory ratios while simultaneously enhancing credit expansion.

In this context, the importance of stable deposits emerges as a core pool for expanding loan portfolios, while arranging the liquidity maturity ladder in accordance with Central Bank directives and Basel 3 requirements, particularly amid pressures stemming from regional and global geopolitical tensions. This provides ample liquidity space to absorb any decline in the money supply, even if the gap is recorded in dollar terms.

According to global regulatory standards, banks can increase dinar-denominated deposit mobilization and use the surplus to cover any gaps arising from reduced inflows of other currencies, which would otherwise force them to raise interest rates on medium- and large-term deposits without regard for the cost of funds index.

Regulatorily, banks are required to hold sufficient liquid assets to withstand stress scenarios, with key metrics including the Liquidity Coverage Ratio (LCR), which ensures access to enough high-quality liquid assets to cover net cash outflows over a 30-day stress period, and the Net Stable Funding Ratio (NSFR), which encourages banks to fund their activities with stable, long-term sources.

To simplify, thanks to deposits accounting for approximately 60% of their liabilities, local banks maintain compliance with supervisory ratios within the maturity ladder that governs their liquidity requirements. The surplus generated creates a primary source for funding their credit share and expanding their presence in the loan market.

The attractiveness of stable, medium- and large-term deposits to banks is such that they are willing to exceed the cost of funds threshold when necessary. These deposits are characterized by their robustness and regulatory capacity to provide comfortable liquidity for funding credit activities. Furthermore, they have proven effective in maintaining banking capital adequacy ratios during various stress periods, including the repercussions of the regional conflict that erupted on February 28 last year.

According to global rating agencies, the Kuwaiti banking sector enjoys strong support, a solid financial base, and deposits capable of absorbing shocks. Notably, according to data released by the Central Bank of Kuwait for July last year, the volume of government and public institution deposits held in Kuwaiti banks is estimated at approximately 17 billion dinars out of a total of 62.636 billion, representing about 27.5%.

To alleviate the pressure of expensive deposit funding costs, some banks have increased their reliance on external financing and issued various debt instruments as liquidity sources, including direct loans and senior bonds/sukuk, as well as perpetual sukuk with no specific maturity date, which are often issued to bolster capital adequacy ratios, alongside certificates of deposit. This has increased the volume of interbank liabilities alongside foreign liabilities.

Government funds are the biggest winners in the intense banking race to attract stable deposits and raise interest rates to levels not seen in approximately 18 years, specifically since the 2008 crisis.

From an accounting perspective, the intervention of the Public Authority for Investment, public insurance institutions, or government entities with surplus funds eligible for deposit to provide comfortable liquidity to banks is no longer viewed as support during crises as in the past, but rather driven by the dual interest of both parties. This approach supports bank liquidity while simultaneously achieving the best market pricing to safeguard public funds.

As a result of this trend, banks offering the highest pricing win government deposits. To govern this process, some entities auction their funds and receive sealed bids, while others rely on pricing above the treasury rate, reaching up to 1.5 percent, compared to 0.8 percent previously.