Kuwait’s banking sector is expected to continue its path of growth and stability in 2025, despite facing challenges such as tax reforms and regional risks. The sector’s resilience is attributed to solid risk management, strong capital levels, and the ongoing growth of the non-oil economy, which is expected to drive demand for financing.
Growth in Credit Demand
The banking sector remains integral to the country’s economic stability, with non-oil sector growth forecasted at 3%-3.5% in 2025. This growth will further support the demand for financing, especially as major government development projects, such as the Mubarak Al-Kabeer Port, new residential cities, and the expansion of Kuwait International Airport, move forward. These projects are expected to create significant opportunities for banks, especially in real estate investments and credit facilities.
The overall credit expansion for 2025 is expected to be between 5%-6%, with the business sector seeing the most substantial financing, representing 60.9% of total credit facilities for residents by the end of 2024. This marks a 4.1% increase in business credit, with a total of KD 30.1 billion in loans extended to the business sector.
Capital Strength and Loan Quality
Kuwaiti banks have maintained strong capital adequacy, adhering to international Basel III standards, and ensuring a robust ability to withstand potential economic shocks. Core capital ratios are expected to remain steady at 13.5%-14% of total risk-weighted assets. Additionally, the non-performing loan (NPL) ratio remains low at 1.5%-2%, among the best in the region. Banks have substantial reserves, covering 243% of their total NPLs, further enhancing their financial stability.
Liquidity and Sustainable Financing
Kuwaiti banks are also characterized by high liquidity, with liquid assets accounting for about 30% of their total tangible assets. This ensures that they can meet their financing obligations without difficulty. The banking sector primarily relies on customer deposits, which constitute 73% of its non-equity financing, significantly reducing the need for external borrowing and enhancing stability. Despite an increase in loan volumes, the loan-to-deposit ratio remains stable at around 90%, maintaining a healthy balance between credit growth and available deposits.
Challenges Ahead
Despite a promising outlook, the banking sector faces challenges in 2025. A 15% minimum tax on banks with international operations, as outlined in recent tax reforms, may lead to a slight decline in profits, lowering net income expectations. Additionally, some banks have exposure to foreign markets, such as Turkey and Egypt, which could increase their vulnerability to market volatility. However, thanks to prudent management policies, these risks are expected to remain manageable.
Interest rate fluctuations could also affect the sector, potentially reducing returns on banking assets. However, these fluctuations may be offset by declining returns and lower funding costs.
Government Support and Confidence
The banking sector benefits from strong government backing, which enhances customer confidence. The government’s formal deposit guarantee system provides further assurance to depositors. This support has led to improved credit ratings for Kuwaiti banks, with several receiving a four-notch upgrade. Kuwait’s stable A1 credit rating reflects the strength of the national economy and the government’s commitment to supporting the banking sector during times of crisis.
As Kuwait’s banking sector enters 2025, it remains poised for growth and stability, despite facing some challenges. With continued government support, prudent financial management, and a strong outlook for credit demand, the sector is set to contribute significantly to the country’s economic development.
