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Sunday , October 24 2021

CBK, comm banks in talks to help SMEs over Covid-19 repercussions

Proposal to set up fund with KD10 million capital

KUWAIT CITY, Sept 18: Discussions were recently held between the supervisory leaders of the Central Bank of Kuwait (CBK) and officials of commercial banks to determine the situation of the entrepreneurs in terms of lending difficulties and the opportunities to address the situation, in light of the conditions imposed by the law to rescue small and medium enterprises affected by the repercussions of the COVID-19 crisis, reports Al-Rai daily quoting informed sources. They explained that there is a proposal concerning the need for banks to establish a fund with a capital of KD 10 million to be paid by all banks with different shares to be estimated later, provided that these amounts are allocated to cover the defaults that may arise in the loan portfolio that will be disbursed to eligible entrepreneurs in accordance with regulatory and banking standards. The initiative’s loan portfolio targeted outside the law to rescue them will reach KD 100 million. Based on these expectations, the fund’s capital was estimated on the basis that the maximum default according to the credit history will not exceed ten percent of the value of the loans granted in the worst case conditions. In the event that this banking move is proceeded, funding will be granted to eligible entrepreneurs with more flexible terms than the conditions in the current law.

Revealed
The sources revealed that the banking supervisory discussion comes after the continued inability of the entrepreneurs to access loans in accordance with the law to rescue small and medium enterprises that was published in the official gazette on April 18. They said, “What reduces the chances of entrepreneurs benefiting from the law is its conditions that prohibit the use of financing for the purposes of paying installments or the burdens of credit facilities based on the customer at the time of the issuance of this law and provided by banks or any other donor, which led to the exclusion of a large segment of entrepreneurs. The conditions constitute additional obstacles with regard to obliging the borrowing clients to maintain the national labor working under them by the list of 31/12/2019, as well as the obligation to reach the percentage of national labor prescribed for the activity in which they work by 31/12/2021, as it is not guaranteed to bet on fulfilling the required percentages on the specified dates”. Meanwhile, reliable sources said the Central Bank of Kuwait is preparing a draft law for lifting the government guarantee on deposits that was approved in 2008 within the law to promote financial stability. They explained that the objectives of the expected law include the replacement of guarantee for the entire amounts deposited with another that covers a specific ceiling for every customer deposit balances in local banks which are close to KD 44.2 billion. The Central Bank’s approach in this regard is linked to a package of global and local considerations, including Kuwait’s sovereign rating.

Obligation
It was noticed in the recent period that international rating agencies put among their considerations that the government guarantee of deposits constitutes an obligation on the state, which represents pressure on the sovereign rating although this obligation is indirect. These agencies take into account the fact that the state will pay the deposits to customers in the event that its banks default on that. This aspect puts pressure on the rating – even if these agencies see the impossibility of this happening – due to the financial strength of Kuwaiti banks and their creditworthiness. The Central Bank is currently calculating with high accuracy the cost of lifting the guarantee as opposed to maintaining it, and taking the most appropriate decision that will represent protection buffers for the market and for banks in the event that the cost of lifting is less than the cost of maintaining the guarantee. The Central Bank is working, through its study, to “establish a guarantee system as an effective alternative to the state guarantee, and that there is more than one scenario for this, including the establishment of a body or fund that guarantees, with the cooperation of banks, a portion of customers’ deposits”. Among the proposed scenarios is also the fact that the state remains a guarantor of a certain minimum amount of money, regardless of the value of the deposit. The sources said, “In the event of lifting the state guarantee, customers’ choice of banks in which they will deposit their money in the future will depend on two main considerations. It will either be based on the name and position of the bank, or the value of the interest that it will obtain, which allows raising the level of competition among local banks”.

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