Kuwait’s first banking merger is long overdue

Reuters/Stephanie McGehee

Are we about to see the first ever in-market merger between two Kuwaiti banks? It’s highly possible.

Over the summer, Gulf Bank and Boubyan Bank made formal disclosures to the Kuwaiti stock exchange that their boards of directors had agreed to explore a merger. 

In recent years, we’ve seen mergers between banks in every other GCC state, reducing the total number of active commercial banks in the region to 60 today from 73 in 2018. 

But despite obvious overcrowding in the Kuwaiti banking market and long-term underperformance by some (though not all) of its banks, we have yet to see a banking merger in Kuwait. 

It’s true that Kuwait Finance House (KFH) has taken over the local Ahli United Bank, but that came as part of KFH’s acquisition of Bahrain’s Ahli United Bank, which owned a sharia-compliant subsidiary in Kuwait. 

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What we’ve been seeing elsewhere in the GCC is large banks merging to create regional champions – think of Saudi National Bank and Samba Financial Group, and National Bank of Abu Dhabi and First Gulf Bank (to create First Abu Dhabi Bank).

We’ve also seen large banks gently acquiring smaller compatriots who were finding it hard to fulfill their potential – think of Qatar’s Masraf Al-Rayan acquiring local neighbour Al-Khaliji, and National Bank of Bahrain acquiring Bahrain Islamic Bank.

But nothing in Kuwait. 

Kuwait has nine commercial banks (after the incorporation of Ahli United Bank into KFH), only one fewer than Saudi Arabia, although assets, loans and deposits in the Saudi banking system are nearly three times those in Kuwait. 

In Qatar, as a result of recent mergers, there are now eight commercial banks covering a banking system that is about 50 percent larger than that of Kuwait. 

The ownership structure of Kuwaiti banks has been the biggest obstacle to domestic mergers

Comparisons with the UAE are difficult to make, due to the Emirates’ federal structure: several Emirati banks reflect the desire of individual emirates to have their own, locally incorporated, institutions.

Comparisons with Bahrain are also difficult: Bahrain’s previous role as the region’s international banking centre led to it having a large number of registered banks that were focused on regional, not Bahraini business. 

The ownership structure of Kuwaiti banks has been the biggest obstacle to domestic mergers. Most of the banks are effectively controlled by a big merchant family, and mergers would lead to one party having to give up their dominant position.

In Saudi Arabia, government investment and pension funds hold large stakes in many of the banks and so have been able to exercise a lot of influence. And in Abu Dhabi, bank mergers have been driven, to a large extent, by the desire of the government authorities to tidy up their wide-ranging investments in a variety of local banks. 

Kuwait’s Al-Ghanim family is the major investor in Gulf Bank, with 33 percent, according to stock exchange filings. The Behbehani family has 6 percent, alongside its interest in Al Ahli Bank (which must not be confused with Ahli United Bank, the bank mentioned above). 

National Bank of Kuwait (NBK) is the major investor in Boubyan Bank, with 60 percent, according to stock exchange filings. 

Between them, NBK and KFH account for two thirds of Kuwaiti banks’ assets and liabilities. The other seven share the remaining third between them.

Boubyan is one of Kuwait’s younger banks: it was only established in 2004 and listed on the stock exchange in 2006. It is also fully sharia compliant. And Boubyan holds 72 percent of Bank of London and the Middle East, a London-incorporated Islamic Bank that is known for its innovative digital account, Nomo, which is also made available to Boubyan customers in Kuwait. 

NBK is proud that it has significant conventional business and sharia-compliant business, rooted in different institutions that are separately branded. 

There are many ways in which Gulf Bank and Boubyan could be combined, but it is reasonable to assume that any merger would see NBK’s control of Boubyan, and its sharia-compliant franchise, diluted. 

A merger between Gulf Bank and Boubyan will not transform the Kuwaiti banking system: NBK and KFH will continue to dominate. But a merger would indicate that shareholders are willing to take a more hard-headed approach to their banking investments, focusing on the strength of business lines, realistic opportunities for expansion and, ultimately, profitability. 

Let us hope that Kuwait’s financial regulators are looking on with favour.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems