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Institute of Banking Studies Research »
Ideas for Enhancing Retail
Banking in Kuwait
Consultancy and Research Department
January 2016
Retail Banking Institute of Banking Studies – Kuwait
Table of Contents
Section Page Executive Summary .................................................................................................................. 3
Introduction ............................................................................................................................. 5
Section 1: Deposits ................................................................................................................... 6
1.1 Current and salary accounts product offering .......................................................... 6
1.2 Savings accounts product offering ............................................................................ 8
1.3 State of competition ................................................................................................ 11
Section 2: Loans and finance .................................................................................................. 13
2.1 Product offering ...................................................................................................... 13
2.2 State of competition ................................................................................................ 16
Section 3: Other products and services ................................................................................. 19
3.1 Private banking ........................................................................................................ 19
3.2 Credit cards.............................................................................................................. 19
3.3 Insurance and takaful .............................................................................................. 20
3.4 Delivery through technology and the future of retail banking ............................... 21
Conclusion .............................................................................................................................. 27
Endnotes ................................................................................................................................ 28
About the IBS Consulting and Research Team ....................................................................... 29
Retail Banking Institute of Banking Studies – Kuwait
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EXECUTIVE SUMMARY
This study has examined ways in which Kuwaiti banks’ retail offerings can be enhanced. We have
addressed the issue in two ways: firstly by suggesting specific deposit and loan products that are
currently not available to customers in Kuwait; and secondly, by focusing on the state of
competition between the banks, reflecting in part, the regulatory structure.
1. Product enhancement
There are a number of ways in which Kuwaiti banks can enhance their retail banking business by
offering additional products and by developing and utilizing new technology:
Deposit-taking. Kuwaiti banks currently provide a good variety of salary, current, saving and
investment deposit accounts relative to GCC peers. Competition in product offerings,
interest rates and distributions to depositors reflects relatively light regulation. The largest
gap in the product line-up relates to long-term savings plans, especially for retirement. This
likely reflects both a lack of demand given the government’s generous pension plans; and
there being an undeveloped KD-denominated bond market in Kuwait, essential for effective
asset-liability management.
Loans and finance. While there is some notable product innovation, most Kuwaiti banks are
not providing customers with a wide variety of lending and financing options, relative to
GCC peers. More could be done, for instance, to better service distinctive segments of the
market, rather than just offering ‘catch-all’ products, such as the personal loan.
Other products and services, and delivery through technology. Banks should always be
looking to enhance noninterest income by cross-selling new products to existing customers.
One obvious example relates to insurance and takaful. Within the GCC, only banks in Kuwait
and Bahrain do not currently offer a full range of insurance products to customers. The
Central Bank of Kuwait could consider alternative ways to protect consumers, for instance
by allowing bancassurance, while maintaining a ban on agency-only sales.
Digitalization is an opportunity to those players willing to disrupt the market, but an
existential threat to those satisfied with the status quo. Kuwaiti banks need to address the
basics. While there has been some notable success with regards mobile banking
applications, none of the banks are matching GCC and international peers in terms of
website development.
Retail Banking Institute of Banking Studies – Kuwait
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2. Roadmap to the Liberalization of Lending
While there are good examples of significant innovations in lending in Kuwait, especially among
the smaller banks, competition remains limited. Notwithstanding loan offerings within private
banking, regulations set by the Central Bank of Kuwait with regards consumer lending (whether
personal or installment loans) leave relatively little room for manoeuver. As a result, the market
share of the largest banks remains entrenched and there is little incentive for the biggest banks
to enhance customer services.
More freedom to allow banks to set the terms of loans i.e. use of funds, size, duration and
interest rate, would enable the banks to better meet borrowing needs, and would ultimately be
beneficial to the Kuwaiti economy. At present, for instance, with interest rate ceilings set by the
Central Bank of Kuwait, banks are unable to properly price varying degrees of risk.
However, such a process would have to be undertaken carefully and slowly; with the Central
Bank of Kuwait and the banks agreeing to a ‘liberalization roadmap’. Such a roadmap would set
out the necessary steps prior to liberalization. Steps would include the construction of a national
system of credit scoring; demonstration on the part of the banks that there are effective
procedures in place to ensure that borrowed funds are used for the correct purposes; and that
underwriting standards are always maintained at the highest level. Financial education for the
population at large is also a prerequisite. Through enhancements to websites, banks can play an
important role in preparing the population for greater financial freedom.
Retail Banking Institute of Banking Studies – Kuwait
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INTRODUCTION
The purpose of this study is to investigate ways in which Kuwaiti banks can enhance and develop
their retail product offerings. The research has been undertaken at the request of the Institute
of Banking Studies’ Research and Studies Committee. The committee comprises representatives
from each of the commercial banks, conventional and Islamic, the Central Bank of Kuwait and
the IBS.
Our methodology has been to take a comparative approach: benchmarking Kuwaiti banks’
product offering against GCC peers. The guiding research question has been to ask what other
banks offer that Kuwaiti banks do not. Where we have discovered a systematic lack of products,
we have looked to uncover factors that may be impeding product diversification and
competition within Kuwait.
In undertaking our research and preparing this report we have focused on deposits (Section 1),
loans and finance (Section 2), and other products and services (Section 3). In the final section we
have also looked at various ways by which Kuwaiti banks could enhance the delivery of products
and services through technology.
We have surveyed the product offerings of the six largest banks (by assets) servicing retail
customers within each GCC member state, including Kuwait. Total assets in the table below
reflect the most recent annual report.
GCC banks surveyed, assets in U.S. $ billions
Bank Country Assets Bank Country Assets Qatar National Bank Qatar 133.6 Qatar Islamic Bank Qatar 26.4 National Commercial Bank Saudi Arabia 116.0 Bank Muscat Oman 25.3 National Bank of Abu Dhabi UAE 102.4 Al Baraka Bank Group Bahrain 23.5 Emirates NBD UAE 98.8 Al Rayan Qatar 22.0 Al Rajhi Bank Saudi Arabia 82.1 Doha Bank Qatar 20.7 National Bank of Kuwait Kuwait 74.3 Gulf Bank Kuwait 18.2 Kuwait Finance House Kuwait 58.6 Al-Khaliji Commercial Bank Qatar 14.4 Samba Financial Group Saudi Arabia 58.0 Commercial Bank of Kuwait Kuwait 14.4 First Gulf Bank UAE 57.8 Al Ahli Bank Kuwait Kuwait 11.9 Abu Dhabi Commercial Bank UAE 55.5 Bank of Bahrain and Kuwait Bahrain 9.3 Banque Saudi Fransi Saudi Arabia 50.3 Bank Dhofar Oman 8.3 Saudi British Bank Saudi Arabia 50.0 Ithmar Bank Bahrain 7.9 Arab National Bank Saudi Arabia 43.9 National Bank of Bahrain Bahrain 7.3 Dubai Islamic Bank UAE 33.7 HSBC Bank Oman Oman 5.8 Ahli United Bank Bahrain 33.4 Bank Sohar Oman 5.4 Commercial Bank of Qatar Qatar 31.8 Al Salam Bank Bahrain 5.2 Abu Dhabi Islamic Bank UAE 30.5 Oman Arab Bank Oman 4.7 Burgan Bank Kuwait 26.4 Ahli Bank - Oman Oman 3.5 Sources: IBS GCC Banks Financial Report, gulfbusiness.com
Retail Banking Institute of Banking Studies – Kuwait
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SECTION 1: DEPOSITS
2.1 Current and salary accounts product offering
Chart 1 shows the number of current and salary account products that each GCC countries’ six
largest banks offer their retail customers. An explanation of the charts is provided below.
Chart 1: Kuwaiti banks offer a wide variety of current and salary deposit accounts
Sources: Banks’ websites, IBS calculations
0
1
2
3
4
5
6
7
8
9
10
Kuwait Bahrain Oman Qatar Saudi Arabia UAE
0
1
2
3
4
5
6
7
8
9
10
0 20 40 60 80 100 120 140
Total assets $'billion, most recent annual report
Kuwaiti banks Non-Kuwaiti GCC banks
Number of current and salary accounts
Number of current and salary accounts
Retail Banking Institute of Banking Studies – Kuwait
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The top diagram displays a ‘box’ for each country, showing the number of current and salary
account products offered by the banks lying between the 20th to 80th percentiles. For instance, in
a country where there are six banks, and each bank offers 1, 2, 3, 4, 5 and 6 products
respectively, the ‘middle 60’ percentiles is taken up by banks offering 2, 3, 4 and 5 products. In
Kuwait, of the six banks surveyed, the ‘middle 60’ is populated by banks offering either 3 or 4
current and salary accounts.
The top chart shows that Kuwait offers a good degree of current and salary account choice
relative to other GCC countries. In Bahrain and Qatar, for instance, the ‘middle 60’ percentiles
are constituted by banks offering either 1 or 2 products; in Oman, the equivalent is 2 to 3
products (still lower than Kuwait). Perhaps unsurprisingly, given the relative size of the economy
and population, Saudi Arabia and the UAE perform better. Yet in Saudi, the top of the box only
extends to 4 product offerings. Only in UAE does the ‘middle 60’ extend to a bank offering 5
products; yet three out of the six banks surveyed in the UAE only offer 1 product. Thus in
Kuwait, in terms of current and salary accounts, there is a depth to the market lacking
elsewhere in the region.
The top chart also includes ‘whiskers’. The top whisker shows the highest recorded value for the
number of currency and salary accounts by any one bank; the bottom whisker shows the lowest
recorded number. Three countries, Kuwait, Oman and the UAE, have one ‘outlier’ bank that is
offering significantly more products than their competitors; Gulf Bank, Bank Muscat and
National Bank of Abu Dhabi. In this respect, Gulf Bank stands out, as both Bank Muscat and
NABD are the largest banks in their respective countries.
The lower chart is presented on the basis that one would expect larger banks to offer more
products. In fact, the relationship between size and the number current and salary accounts is
not as strong as one might expect (the correlation in our population of 36 banks is only 0.34). All
the same, the chart does show that, on the whole, Kuwaiti banks are performing well on this
metric, given their size; only one bank is on the line, the rest are above the line. In essence,
Kuwaiti banks can be said to be ‘punching above their weight’.
Even so, as Table 1 below shows, there are additional product ideas that could be explored in
Kuwait, based on what is available to customers elsewhere in the GCC. While these product
ideas reflect, in most cases, marketing rather than banking innovation, many would appear to
be suitable for the Kuwaiti market.
As will be seen in Table 1, throughout this report, in order to provide more ideas and enhance
the usefulness of our research, in addition to the GCC banks we have also surveyed large banks
in the U.S. and U.K. In the case of salary and current accounts, we were able to find additional
products in the U.K. (Lloyds Bank), but no additional products in the U.S. (Wells Fargo and Bank
of America).
Retail Banking Institute of Banking Studies – Kuwait
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Table 1: GCC current and salary account products not offered in Kuwait
Product Example bank Description
Favorite football club accounts
NBAD Included either in a basic current account or Elite account are exclusive offers, merchandise and prizes related to Real Madrid. (Note: some of these accounts may not comply with Sharia banking principles).
Free services NBAD Certain accounts come from with free services; e.g. the first international remittance is free each month; or the first 4 cash withdrawals are free in-country; or the first 6 teller transactions are free every month.
Interest paying current accounts
Lloyds Variable tiered interest rates of 1%, 2% and 4% up to balances of £5,000; no interest over balances of £5,000.
Accounts with added benefits
Lloyds For a monthly fee of £10, accounts offer free annual travel insurance, motor vehicle breakdown cover, and mobile phone insurance.
Special overdraft facilities
Lloyds For pre-planned overdrafts, the interest rate applied is tiered. For instance, in the Platinum account, no interest is charged on the first £300, the next £900 comes with a 17.28% APR.
Source: Bank websites
1.2 Savings accounts product offering
In this category of accounts we include conventional savings accounts, call accounts (unless
otherwise specified as a call current account), fixed term deposits, flexible term deposits and
Islamic investment deposit accounts.
In counting the various products on offer, we have: 1) counted all youth and child accounts as
one type of product; 2) not counted foreign currency savings accounts as an additional product
so long as they offer a similar duration and conditions as the equivalent KD-denominated
savings account and; 3) counted the account as separate in the case of either the initial balance
or minimum deposit being different from other products or if the interest rate is different from
other products.
Chart 2 shows the number of savings account products that each GCC countries’ six largest
banks offer their retail customers.
Retail Banking Institute of Banking Studies – Kuwait
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Chart 2: Kuwaiti banks offer wide variety of savings deposit accounts relative to GCC
Sources: Banks’ websites, IBS calculations
0
1
2
3
4
5
6
7
8
9
Kuwait Bahrain Oman Qatar Saudi Arabia UAE
0
1
2
3
4
5
6
7
8
9
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140
Total assets $'billion, most recent annual report
Non-Kuwaiti GCC Banks
Number of savings accounts
Number of savings accounts Kuwaiti Banks
Retail Banking Institute of Banking Studies – Kuwait
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As with currency and salary accounts, relative to GCC peers, Kuwaiti banks are offering their
customers a wide variety of ways to save. Indeed, one can quickly see from viewing the upper
graphic in Chart 2 that, in terms of the number of savings products, Kuwait is second in the
region, only to the UAE. Specifically, in Kuwait, four of the six banks offer between 4 and 7
products, with one bank (KFH) offering 8 products, the other (NBK) offering 3.
The lower graphic shows that there is little correlation (0.11) between the size of the bank and
the number of savings products on offer. Indeed, in Kuwait, the bank with the lowest number of
savings products, NBK, is also the largest bank, around three times the size of the two
institutions, Burgan Bank and Gulf Bank, which each offer the most savings products. It may be
that these smaller banks need to offer a greater variety of savings products to compete with
NBK, the dominant player in conventional banking.
All in all, Kuwaiti banks are providing their retail customers with a strong offering of deposit
accounts, relative to the region. There is a high level of competition which, as we discuss in
Section 1.3 below, reflects a reasonably light touch deposit-taking regulatory regime.
Even so, as with our analysis of current and salary accounts, Table 2 below shows that there are
ideas from the region and beyond which Kuwaiti banks could potentially use to expand their
product offerings, with varying degrees of banking and marketing innovation.
Retail Banking Institute of Banking Studies – Kuwait
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Table 2: GCC savings account products not offered in Kuwait
Product Example bank Description
Retirement savings plan Bank Muscat The saver chooses the monthly deposit amount, the savings term and the terms of the pension (how much and when the pension should begin and end). Additional bonuses and enticements are offered. (Only KFH offers such long-term savings plans in Kuwait).
Retirement and education savings plans with guaranteed returns
Emirates NBD Long-term planning with monthly premiums starting at $150 per month and guaranteed returns
Favorite football club savings account
Emirates NBD Access to Manchester United merchandise, possibilities of winning a trip to see the team play.
Technology assisted saving Emirates NBD The ‘shake n’ save’ account enables the account holder to save small amounts of money instantly, whenever and wherever, just with a shake of his or her mobile phone.
Enhanced interest rates for regular saving/ recurrent deposit accounts
Lloyds Bank While the normal savings account pays 0.75% interest; the ‘monthly saver’ account pays 4% for the first 12 months if the customer saves between £25 and £400 every month via standing order. After 1 year, the account converts to a basic saving account.
Health savings account Wells Fargo Benefiting from tax advantages in the U.S., customers save long-term for future health costs.
Source: Bank websites
1.3 State of Competition
Notwithstanding the potential to expand the product range (as demonstrated in Tables 1 and 2),
Kuwaiti banks offer a broad range of deposit products, whether salary accounts, current
accounts, saving accounts, fixed term deposits or investment deposits (Islamic banking).
There is, in short, a healthy degree of competition in the market place that has led to product
diversification and attention to customer needs. Indeed, in contrast to lending which is strictly
regulated, deposit-taking is one area the banks are generally free to compete in. The Central
Bank of Kuwait neither prescribes the types of deposit accounts that a bank can offer or the
interest rates/distributions to depositors that a bank can make. Since 1995, the Central Bank of
Kuwait has ordained that interest rates on deposits should reflect conditions of supply and
demand.
As a result, banks compete with each other not just on product offerings but on interest rates as
well. For instance, as of writing, Gulf Bank is offering customers 0.875 percent on a 200-day
Retail Banking Institute of Banking Studies – Kuwait
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deposit of KD 50,000; whereas Commercial Bank of Kuwait is offering 1.125 percent on the same
size and duration.
While there is no formal regulation requiring new products to be cleared by the Central Bank of
Kuwait prior to launch; in practice, the banks do seek approval. In some limited cases, a long
lead time can undermine attempts by individual banks to respond quickly to new customer
needs and can dilute advantages that would accrue from being a leader in innovation.
Moreover, with limited ability to charge fees to customers on deposit accounts (Commerce Law
Article III requires that there is a ‘justifiable’ service provided against all fees), some new
products, such as a football account, can remain uneconomic. In the UAE, where retail banking
is much more important to the banks, greater regulatory freedom and the ability to levy fees has
led to an enhanced product offering.
Perhaps the most obvious gap in product line-up relates to the lack of retirement and other
long-term saving plans. Notwithstanding KFH, which does offer a range of long-term savings
plans, including retirement and education, Kuwaitis are not serviced well in this area. This may
reflect the general view that government pensions and other savings are sufficient for
retirement, thus there is little demand for such products. Yet it may be that many banks are
unwilling to supply such products to customers because asset-liability matching would be too
challenging, given the lack of a developed KD-denominated sovereign and corporate bond
market with a range of short to long term duration bonds.
Retail Banking Institute of Banking Studies – Kuwait
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SECTION 2: LOANS AND FINANCE
2.1 Product offering
While Kuwaiti banks rank well from a regional perspective in terms of the number of deposit
account products available to customers, they are less well positioned with respect to lending
and finance. To some extent, as we discuss below, this outcome is a reflection of regulation; but
it also, perhaps, demonstrates a lack of innovative thinking and desire to compete.
Chart 3 below provides both ‘box-and-whisker’ and ‘scatter-plot’ charts of GCC lending
products. The upper-graphic shows that Kuwaiti banks are offering a similar range of products
when compared to Oman; while outperforming Saudi and Bahraini banks in terms of variety and
number. The graphic also shows that Kuwait is lagging Qatar and the UAE. That UAE banks make
up the vanguard is perhaps to be expected, as the country acts as the financial hub for the
region; less expected, perhaps, is the extent to which their banks distinguish themselves in
terms of product variety, leaving other banks in the GCC trailing by a significant margin.
The lower graphic is more concerning. There is a reasonably pronounced correlation between
lending products and total asset size (0.47) -- higher than the correlations between deposit
products and asset size-- which means that it is a more important metric with which to measure
Kuwaiti banks’ performance. And, as the graphic shows, when scaled by size, Kuwaiti banks do
not appear to be performing strongly. Out of the six banks surveyed, four are below the line,
one is on the line (KFH) and only one is above the line (Gulf Bank). In other words, from a GCC
perspective, given the size of these banks, one would expect to see more lending products on
offer to retail customers.
Additional ideas for loan and finance products are presented in Table 3 below.
Retail Banking Institute of Banking Studies – Kuwait
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Chart 3: Kuwaiti banks far behind GCC leaders in terms of loan products
Sources: Banks’ websites, IBS calculations
0
2
4
6
8
10
12
14
16
Kuwait Bahrain Oman Qatar Saudi Arabia UAE
0
2
4
6
8
10
12
14
16
0 20 40 60 80 100 120 140
Total assets $'billion, most recent annual report
Number of loan products
Number of loan products Kuwaiti Banks Non-Kuwaiti GCC banks
Retail Banking Institute of Banking Studies – Kuwait
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Table 3: GCC loan products not offered in Kuwait
Product Example bank(s) Description
Mortgages Commercial Bank of Qatar Products include loans for the cost of purchasing real estate for investment or residential purposes, construction finance, mortgages for foreign nationals looking to purchase freehold real estate in Qatar, and equity releases loans against pre-existing property.
Overdrafts Doha Bank, Emirates NBD Short-term cash flow needs can be met with pre-arranged overdrafts. (While overdrafts are not allowed for normal customers, it should be noted that credit cards perform a similar function in Kuwait).
Flexible installments
National Bank of Bahrain The flexi-loan program allows the borrower the flexibility to pay back the loan with installments that increase in size with the loan tenor. The installments start low and increase every year, helping the borrower better manage their cash flow (given the assumption of increasing salaries over time).
Early-term and other incentives
HSBC Bank Oman The first three months of a home loan is refunded to the borrower. Instalment deferral on personal loans is allowed twice a year during Eid.
Loans for specific events
Doha Bank, Emirates NBD Doha offers a marriage loan with no arrangement fee and two months grace period. Emirates NBD offers customers loans if they are new to the country or starting a new job.
Loans for specific individuals
Emirates NBD, Al Rajhi Banking Corporation
Emirates NBD offers loans to non-resident Indians of up to 90% of fixed deposit amounts in AED and up to 80% of INR fixed deposits. Al Rahji offers special loans for doctors and bankers.
Auto loans additional features
Emirates NBD Numerous variations include staggered installment plans; the balloon 50:50 buy bank program which allows borrowers to reduce monthly payments with a unique balloon payment on Toyota and Nissan vehicles; and the fixed deposit auto loan, which offers customers a guaranteed return by placing the deposit for the car purchase on deposit.
Offset loans or multi-purpose accounts
Barclays Bank Balances in deposit accounts are automatically deducted from the loan to reduce the outstanding balance on which interest is charged. Because the monthly repayment remains the same, a customer with deposits automatically overpays.
Source: Bank websites
Retail Banking Institute of Banking Studies – Kuwait
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2.2 State of Competition
Many of the product ideas listed in Table 3 above are driven by marketing rather than product
innovation. For instance, a personal loan in Kuwait can be taken for a variety of purposes,
including, for instance, marriage. Rather than ‘carving out’ a marriage loan as a specific product
as Doha bank does, Kuwaiti banks, in the main, choose to offer only one generic consumer loan
product. Likewise, while many banks in the GCC offer separate financing for the purchase,
construction materials and construction of a property, most Kuwaiti banks (the exceptions being
KFH and Boubyan), include all these possibilities in one loan product – the installment loan.
Marketing the same loan under various headings may be seen by some as window dressing; but
addressing specific niches (say construction rather than materials) could affect a borrower’s
decision to opt for one bank over another. Moreover, distinguishing loans between different
uses also increases the scope for specific enticements. In general, thinking about a particular
segment of borrowers can lead to innovating new solutions to meet borrowers’ needs.
Boubyan Bank (not one of Kuwait’s biggest six banks by asset size), for instance, has created
specific health and education financing products that come with zero finance cost and do not
require the borrower to transfer his or her salary to Boubyan. The financing is profitable for
Boubyan because while the bank is repaid the full cost of treatment by its customer, Boubyan
receives a discount on the services it is paying to the participating clinic on behalf of the client.
Presumably each clinic or hospital is willing to accept the discount in order to win more patients.
To some, however, a proliferation of products does not necessarily represent the most effective
strategy going forward. Some within the banking community believe that streamlining offerings
may help customers better navigate the complexities of finance. ABK, for instance, are hoping to
gain market share through a deliberate strategy of making banking “Simpler”: less products,
simpler website etc., etc.
The current regulatory structure makes adopting either strategy (product proliferation or
streamlining) challenging. Simplifying the number of products requires that each type of product
is more flexible in nature. Likewise, increasing the number of products is difficult when the
terms and conditions of loans are limited to installment loans with 15 year terms and consumer
loans with 5 year terms.
While the example of Boubyan above proves that innovation is possible within the current
framework, generally speaking, the regulatory environment limits competition and thereby
innovation. As a result, banks compete on qualitative issues, such as speed of service1,
personalized service (how well the bank manager knows the customer), trust, and the prestige
attached to certain products, branches or banks. More competitive banking systems tend to
provide a greater variety of loan products that better meet customers’ borrowing needs.
Retail Banking Institute of Banking Studies – Kuwait
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Installment loans provide a good example. These loans are long-term non-commercial loans
limited to 70,000 KD with durations of not more than 15 years. They are meant to be used for
the repair or purchase of a private residence. However, with property prices now far exceeding
70,000 KD for an average villa, these loans can only realistically be used for renovation. It is well
known that some Kuwaiti families take installment loans for other purposes, often using false
documentation. Banks are now being asked to strictly enforce pre-existing rules requiring
borrowers to present receipts to show the correct use of funds. Applying these rules could lead
to the increased use of false receipts and may even encourage the development of ‘businesses’
specializing in the issue of such receipts. Ensuring the correct use of funds through the
presentation of receipts will likely require the banks to enhance and improve due diligence
practices.
An alternative approach would be to allow banks far more freedom to set their own terms, such
as the use of funds and the duration of the loan. The rule that limits the aggregate amount of
monthly repayments on all loans to 40 percent of salary, after deductions, represents a very
strong and effective way of ensuring that individuals do not over-borrow. Given these controls,
it is arguable that banks could have more freedom to set the terms on their loan and finance
products.
Similar issues arise with regards consumer loans which are used for the purchase of durable
goods, education and medical treatment, and may not exceed 5 years in duration. For instance,
educational loans in the U.S., the largest market for student loans in the world, have 10-year
repayment schedules and students can borrow up to $57,500 from the government, far more
than the 15,000 KD limit in Kuwait.
In addition to controlling use, duration and maximum size of the consumer lending market,
there are also strict limits set on pricing. Currently, the Central Bank of Kuwait sets an interest
rate ceiling of 3 percent above the discount rate. Given a discount rate of 2 percent, the current
effective ceiling is 5 percent. While some banks do provide very small discounts to well-
established customers, say of 25 basis points, generally speaking, there is no price competition
in Kuwait. Moreover, given the expectation that global interest rates are likely to rise over the
next few years, with banks only able to increase interest rates on an installment loan after 5
years, banks are unlikely to offer lower rates that will put further pressure on net interest
margins.
In a liberalized banking system, the banks would be free to offer loans with flexible/variable
interest rates and with rates dependent on the status of the borrower. By reflecting the specific
risk profile of the borrower, ‘rational pricing’ enables a bank to enhance lending to qualifying
lower-status customers, with higher interest rates off-setting potentially higher default rates. At
the same time, increased profitability on higher risk lending provides an opportunity to discount
Retail Banking Institute of Banking Studies – Kuwait
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interest rates to higher status borrowers. In short, liberalization leads price differentiation,
increased competition and better serving of customers.
As things stand, we believe that the current one-size-fits-all system entrenches current market
share and the dominance of the two largest banks, NBK and KFH. Notwithstanding examples of
innovation, such as Boubyan Bank, ‘normal’ competition, say on loan size, duration and interest
rate, is stifled by regulation.
While we recommend that over the long-term, the Central Bank of Kuwait should aim to provide
banks with more flexibility, we also believe that the process of liberalization should be slow and
controlled. Liberalization, when enacted without appropriate care and attention, invariably
creates unsustainable credit booms, undermining the long-term financial health and security of
ordinary households. Without wholescale reform of housing provision in Kuwait, for instance,
allowing banks to provide mortgages of any amount would de-stabilize the real estate market,
leading to significant economic costs in the future.
As such, we recommend that the Central Bank of Kuwait works with the banks to produce a
‘roadmap to liberalization’. If both sides (regulators and banks) can agree on the end result (say
the removal of controls over uses of funds, size of loan, duration and pricing), then the
necessary steps and provisional timing can agreed in advance.
The Central Bank of Kuwait, for instance, will want to be sure that banks have appropriate
procedures in place to ensure that funds advanced are being used properly. False
documentation must be spotted and borrowers disqualified. The Central Bank of Kuwait will also
need to be sure that the highest underwriting standards are maintained at all times. Moreover,
rational pricing requires a national credit scoring system. Ci-net is currently building such a
system, but to make it effective all the banks and financing companies will need to provide all
the necessary information.
Liberalization, if undertaken, would take several years, but we believe that if the process is
managed effectively, the advantages for customers from increased competition will be large.
Retail Banking Institute of Banking Studies – Kuwait
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SECTION 3: OTHER PRODUCTS AND SERVICES
3.1 Private banking
Four of the six Kuwaiti banks surveyed offer private banking services: NBK, KFH, Burgan and Gulf
Bank. Of the non-Kuwaiti banks in our survey, exactly half the banks offered private banking
services. This suggests that Kuwait is outperforming the region.
In addition to accessing privileged banking accounts and loan facilities, private banking in the
region includes the following services. To a greater and lesser extent, these private banking
services are offered in Kuwait.
Financial Planning: most institutions provide bankers who will work closely with clients
to recommend a comprehensive selection of products best meeting the customer’s
needs.
Brokerage: the ability to buy and sell securities in asset markets around the world.
Discretionary and non-discretionary portfolio management services: banks offer a wide
variety of investment products including fixed income, equities, structured products,
mutual funds, hedge funds, real estate funds and private equities funds. The better
banks offer a wide range of in-house and third party funds for clients to invest in. In this
regard, it should be noted that the range of funds offered to clients by Burgan and KFH
is very limited indeed, compared to GCC peers.
Real estate advisory services: banks can source real estate, commercial and residential,
in international markets, such as London and Paris, and can advise and help clients with
all aspects of real estate transactions.
Trust services: tailored to the need of individual clients and their households, which can
involve tie-ups with international service providers.
3.2 Credit cards
The market for credit cards is well-developed in Kuwait, with all the banks surveyed offering
high levels of variety and choice to customers. Chart 4 below, in particular, shows that the six
largest Kuwaiti banks all perform well from a GCC perspective. The correlation between the
banks’ total assets and the number of credit card products is reasonably high (0.55) and, as the
chart shows, all the six Kuwaiti banks sit above the line. Given these findings and our survey of
the products on offer, we think there is limited scope for expansion in the number of products.
Retail Banking Institute of Banking Studies – Kuwait
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Chart 4: Kuwaiti banks strong on credit cards
Source: Banks’ websites
3.3 Insurance and takaful
Currently, KFH is the only bank to offer insurance/takaful products that pay out on the event of
death. In general, the suite of insurance products covering property, home contents, personal,
auto, life and travel is not available via the banks in Kuwait. This is in contrast to most of the
GCC, where all these products are sold by the banks. Indeed, the only other GCC member where
no insurance is available via the banks is Bahrain. Both Kuwaiti and Bahraini banks are
potentially missing out on an important source of noninterest income.
The lack of insurance products offered by Kuwaiti is a direct result of the Central Bank of
Kuwait’s circular to all banks in June 2012 requiring local banks “to stop marketing any insurance
service except those related directly to banking services… such as the insurance on a loan.”2
It may be that this action was taken by the Central Bank of Kuwait because it was felt that the
banks were charging too much for re-selling insurance products where the bank was only acting
in a sales/distribution capacity. The ban may also reflect a concern that there was potential for
the banks to ‘miss-sell’ products to customers without the requisite understanding of what they
were buying.
0
2
4
6
8
10
12
14
16
18
0 20 40 60 80 100 120 140
Total assets $'billion, most recently reported
Non-Kuwaiti GCC banks Kuwaiti banks Number of credit card products
Retail Banking Institute of Banking Studies – Kuwait
21
That said, it may be that a blanket ban on banks being active in the insurance industry goes too
far and that banks should be allowed to create their own insurance products and sell them to
existing customers. The ‘bancassurance’ business model has a long history around the world and
has been proved to be highly successful in increasing access to financial products that enable
customers to better manage their financial risks.
3.4 Delivery through technology and the future of retail banking
Kuwait is a country that, in general, embraces technology, especially mobile technology. Even
so, as Tables 4 and 5 demonstrate there are clear technology enhancements that could be made
by the banks in Kuwait, all of which would help service customers. During our research, for
instance, it became very clear that the general standard of the Kuwaiti banks’ websites was
significantly below regional peers (with the exception of Bahrain).
Notwithstanding the list below, we believe that the banks should look to invest R&D funds in
developing their websites.
Of course, it goes without saying that technology development continues unabated around the
world, and banks in Kuwait should be aware that simply playing catch-up could still leave them
trailing behind industry-leaders. Efforts to enhance technological capability should always look
to incorporate, where possible and feasible, the latest developments, including for instance the
use of 3D avatars that enable staff-less/lite or virtual branches3; artificial intelligence that allows
more products to be sold online and at ATMs, lessening the need for heavily-staffed call
centers4; and aggregation services that consolidate information from many financial accounts
into one convenient place, such as the home page on an online personal finance application.5
Finally, there are advances in payment systems which enable transactions to be processed via
mobile devices rather than by cash, debit or credit cards6; services which would no doubt be
very popular in Kuwait.
Some of these ideas may be less relevant to Kuwait, where face-to-face personal service is
highly valued. A dense urban population also means that a branch network is more cost-efficient
than in larger countries. Also, given the extent to which the local population uses mobile
devices, the banks may be better off, financially speaking, focusing R&D funds on mobile
applications. It should be noted that some banks in Kuwait have already had great success in this
area.
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Table 4: Technology-based services: based on largest six Kuwaiti banks
Service Kuwait Bahrain Oman Qatar Saudi Arabia
UAE
Online banking Cash deposit machine Mobile banking Call centers Live chat SMS banking Social media Phone banking Online payments Online statements Online brokerage e-Government e-Trade Online Loan Application Sources: Banks’ websites
Table 5: ATM-based services: based on largest six Kuwaiti banks
Service Kuwait Bahrain Oman Qatar Saudi Arabia
UAE
Alternative languages Account balance enquiry Cash withdrawals Get a mini statement Change your PIN number Transfer funds to other accounts Cash deposit service Deposit a check Cash a check Apply for loans, credit cards and to open new accounts
Foreign currency withdrawal Bill payments Payments to charity Request for a check book Reload prepaid card Pay government fees Sources: Banks’ websites
Retail Banking Institute of Banking Studies – Kuwait
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Technology provides both opportunities and challenges to incumbents within the banking
industry. A recent study by McKinsey, for instance, has suggested that ‘digital disruption’ could
wipe out almost two-thirds of traditional non-mortgage based retail bank earnings.7 Indeed this
is a theme much discussed in recent years by many of the leading global consulting houses. In
essence, the digital age raises the expectations of users: customers expect better, quicker and
more tailored services and are more able to transfer business to competitors making better use
of technology. Customers can be won and lost more easily and, in theory, notwithstanding
regulatory barriers, new entrants to a market can gain market share quickly.
In a recent report, A Critical Balancing Act: U.S. Retail Banking in the Digital Era, Accenture has
argued that a failure to build trust and transparency through more compelling offerings,
delivered digitally, could lead to rapid falls in a bank’s customer base, especially in an
environment where competitors are more effective in cross-selling across product lines. The
digital model, they argue, should be used to provide a more personalized service and faster
problem resolution, while at the same time allowing banks to revamp their branch network,
with some branches downgraded to ‘lite’ or kiosk status, others kept as full-service hubs, all the
while keeping a limited number of flagship branches.8
In Retail Banking 2020, Evolution or Revolution?, PriceWaterhouseCoopers, like Accenture, focus
their attention on the opportunities and threats from the digital age. With big data, cloud
computing, smartphones and high bandwidth all commonplace, they believe “’digital’ will drive
huge shifts in industry value – compressing revenues, enabling new attackers, redefining service
and crippling the laggards.”9
The winners, they argue will be the banks that organize themselves around customers instead of
products and channels. This means that technology should be used to equip bankers from
branch management level all the way down to tellers to be able to know their customers and
understand their needs. “Banks today typically do not know their customers very well.” With the
use of technology, banks should be able to “understand a customer’s value potential, track
spending patterns and make targeted offers.” By “joining the dots” the best banks will be able to
gain market share and increase revenues per customer. Over time, a significant portion of the
customer base should come to see their bank as their wealth manager and private banker.10
Both Accenture and PWC paint remarkable pictures of what they expect the future of retail
banking to look like. We quote both in full here.
From Accenture The Everyday Bank
“David and Marie are ready to take the plunge. They intend to become homeowners.
Retail Banking Institute of Banking Studies – Kuwait
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After connecting with their bank’s loan officer to get the ball rolling, they receive a
Facetime call from their day-to-day banking contact, Charles. “Congratulations!” he
says. “Based on all we know about you two, we recommend house hunting in the
Wolcott Heights neighborhood. It’s close to both of your workplaces. Given your lifestyle
and purchases you’ve made, I believe you’ll fit well with this community—and I think
you’ll love the schools. I’ve just sent sample listings directly to our app. I’m also passing
on a realtor specializing in homes at your price range, who offers a low commission fee.”
Using the bank’s app, David and Marie can point their mobile phone cameras at
properties and pull up property details and interior photos, as well as interest rate and
loan-related data, estimates around purchase price and monthly payments, plus the
bank’s assessment of affordability given David and Marie’s spending, saving and lifestyle
habits.
Weeks later, ready to buy their dream home, they use their tablet to visit the bank’s
website and begin the mortgage process. Logging into their account, David and Marie
receive recommendations around type of loan, interest rates and payment plans, all
geared toward their needs. An automated window pops open to step them through the
online “paperwork.” Digital signatures can be used, and the tablet camera can scan the
couple’s drivers licenses—or even their retinas—to confirm identification.
When their application is complete a second window opens, offering links to a lawyer, a
home insurance provider, a home inspector and a moving company—all specific to their
needs and offering discounted low rates. Later, when the purchase is finalized, an e-mail
arrives indicating the bank will handle reconnecting the couple’s utilities from their
current apartment to the new home.
David and Marie rave to their friends about their bank’s involvement in their home
purchase. Not only did their trusted institution offer reliable advice—before they knew
they needed it—but it connected them to low-cost key resources, tailored just for them,
to help them buy their first home and manage the move.
Their bank has saved them both time and money, and come to know them even
better.”11
From PWC, Retail Banking 2020, Evolution or Revolution?
“Anna, 56, boards a high-speed train for her commute to one of the world’s emerging
megacities. She settles in and blinks twice, activating the display in her glasses. She is
authenticated by retina scan, and reviews her messages.
Retail Banking Institute of Banking Studies – Kuwait
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A message from her financial adviser notes they sold her holdings from a recent IPO and
transferred the proceeds into a new African high-tech fund. She made this decision after
consulting with her financial adviser and reviewing recommendations from several
independent investor analytics engines she reached through her bank’s wealth
management platform.
She then watches a message from the bank’s leading education expert, suggesting it is
time to set up a university savings account for her 13-year-old son. The adviser asks
whether Anna expects her son to attend the new flagship online university, or a much
more expensive residential program overseas. She quickly outlines the estimated costs
and benefits of each, taking into account Anna’s age and planned retirement at 70. She
recommends the flagship, and suggests supplementing her son’s education with less
expensive summer programs in Mumbai, San Francisco and Beijing. Anna agrees, and
the adviser seamlessly sets up the savings account and the auto-deposit.
At lunch, Anna browses the local electronics display, where the latest holovision catches
her eye. A quick scan from her glasses returns customer recommendations, coupons and
financing offers from multiple providers including her own bank (which itself has
instantly reviewed the returns from the scan to ensure their offering is competitive). She
makes her choice and completes the purchase, using a new peer-to-peer lender that
offers a more competitive rate, due to a lower cost structure, thanks to a lack of legacy
infrastructure and a less stringent regulatory regime.
The next day, Anna accepts an invitation for a video conversation with her bank business
adviser. The bank had been monitoring the favorable social media coverage Anna has
been receiving and concluded that her business might need additional services. The
business adviser has already arranged for a commercial estate agent and loan officer to
join them, and they discuss Anna’s questions and offer advice on a range of small
business topics. She shares that she is thinking of expanding her business into additional
locations, and they explain the difference between the bank’s products and the
government small business facility, which offers less service, but a lower rate of interest
and longer repayment periods. Also, Anna is passionate about environmental protection.
The bank recognizes this, and through its own programs and partnerships, is able to
present an offer where Anna’s use of the bank’s products results in direct donations to
Anna’s favorite charity. She accepts – happy she has found a bank that really seems to
understand her.”12
No one should expect these ‘visions of the future’ to be realized overnight; neither in the U.S.
nor the GCC. But, all the same, they illustrate the potential for retail banking given an
appropriate application of processing power, big data, hardware and customer focus. It is, we
Retail Banking Institute of Banking Studies – Kuwait
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believe, critical for Kuwaiti banks to understand where banking is going and have a vision of the
future guiding strategic planning in the present.
There are of course many hurdles in Kuwait to achieving this vision: some relate to regulatory
structures; some relate to organizational structure and business culture that may fail to
effectively harness creative and innovation thinking; and some relate to a gap between what is
spent and what should be spent on technology and website development. These hurdles may
seem insurmountable to some, but it should be clear from the descriptions above that those
banks that can deliver will be the winners, leaving the rest of the field far behind.
At the same time, questions need to be asked about the level of financial know how in the
population at large. Are Kuwaitis ready for a different style of banking? How would Kuwaitis
respond to a liberalization of credit?
Clearly education in financial literacy is as critical to the development retail banking in Kuwait as
investment in technology; and to some extent this is outside the scope of what the banking
community can control. All the same, this final point also provides a good illustration of how
Kuwaiti banks are falling behind. A brief glance, for instance, at the websites of many banks in
the U.K., such as Lloyds, quickly illustrates the extent to which these banks are using their
websites as a way to educate the public. Specifically, these banks’ websites include tools,
illustrations and videos to explain a whole range of products from deposit accounts to loans and
other products and services.
While not as developed, many banks across the GCC also offer educational features on their
websites. The inclusion of such features demonstrates a keen awareness of the challenges
ahead: how to utilize technology to enhance the retail banking service being offered, while
ensuring that customers are equipped to know how to make best use what is on offer to them.
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CONCLUSION
The Consulting and Research Department of the Institute of Banking Studies was asked by the
IBS Committee for Research and Studies to prepare a report considering the ways in which
Kuwaiti banks could enhance their retail banking offerings to customers.
This report has offered a number of ideas related to deposit accounts, loans and finance that
the banks could adopt. Some of these ideas are more marketing-related, some involve a greater
degree of banking innovation.
As things stand, Kuwaiti banks are a providing greater variety of deposit products than they are
loans and finance, relative to GCC peers. This most likely reflects the regulatory structure: banks
are relatively free from regulation with regards deposit-taking, more firmly supervised with
regards to lending and finance. Given the regulatory environment and market dynamics, many
local banks are focusing resources and attention on growth outside of Kuwait.
Technology also presents challenges to Kuwaiti banks. Kuwait is a technology-savvy country
whose population exhibits a pronounced willingness to experiment with internet-based
applications. Yet, at present, with some notable exceptions, we do not believe that the banks
are investing sufficiently in technology, especially with regards to their website. The future of
retail banking, and the winners and losers in that future, will be determined by the extent to
which a bank can successfully harness technology. In this, Kuwaiti banks are presented with
both opportunities and threats.
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ENDNOTES
1 Competition on speed of service may now be more difficult, given new rules on that require banks to
provide customers with a 2-day reflection period prior to signing a loan contract, see Central bank of Kuwait Press Release, CBK Amends Principles and Rules of Consumer and Installment Loans, Issues Consumer Protection Guide and Instructions to Banks Regarding Services Provided to Special Needs Customers, http://www.cbk.gov.kw/en/cbk-news/announcements-and-press-releases/press-releases.jsp?kcp=1~n5Jn2tEVfwdWHwta9ITDindF+FRQ+gmqf+ysslYvFZU, July 5, 2015 2 Central Bank of Kuwait, Circular no. 2/RB/RBA/285/2012, June 14, 2012
3 For example Visyt, a technology company, develops virtual avatar communicators primarily for financial
services companies, see http://www.visyt.com/banking. 4 For example IPSoft have developed, ‘Amelia’, a cognitive knowledge worker who interfaces on human
terms. She is a virtual agent who, according to the developer, understands what people ask and what they feel – when they call for service. Artificial intelligence enables Amelia to learn from past communication difficulties how to better service the customer; a service that could be ideal for granting loans via ATMs, see http://www.ipsoft.com/what-we-do/amelia/. 5 For example, see Mint.com or Quickenloans.com
6 For example, see Squareup.com
7 Financial Times, McKinsey warns banks face wipeout in some financial services, Sept. 30, 2015,
http://www.ft.com/cms/s/0/a5cafe92-66bf-11e5-97d0-1456a776a4f5.html#axzz3nHvK18xG. 8 Accenture, A Critical Balancing Act: U.S. Retail Banking in the Digital Era, 2013,
http://nstore.accenture.com/IM/FinancialServices/AccentureLibrary/data/pdf/US_Retail_Banking_in_the_Digital_Era.pdf, pp. 4, 6, 10. 9 PriceWaterhouseCoopers, Retail Banking 2020, Evolution or Revolution?, 2014,
https://www.pwc.com/gx/en/banking-capital-markets/banking-2020/assets/pwc-retail-banking-2020-evolution-or-revolution.pdf, p. 11. 10
Ibid, pp. 15, 22 11
Accenture, The Everyday Bank: How Digital is Revolutionizing Banking and the Customer Ecosystem, 2014, http://www.accenture.net/microsite/everydaybank/Documents/media/EverydayBank-POV.pdf, p. 2 12
PriceWaterhouseCoopers, Retail Banking 2020, Evolution or Revolution?, 2014, https://www.pwc.com/gx/en/banking-capital-markets/banking-2020/assets/pwc-retail-banking-2020-evolution-or-revolution.pdf, p. 4.
Retail Banking Institute of Banking Studies – Kuwait
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ABOUT THE IBS CONSULTING AND RESEARCH TEAM
Dr. Christopher Payne, Head of Department
Dr. Payne joined IBS in September 2014. Previously, he was senior economist at Bloomberg
Government, based in Washington D.C., where he authored numerous studies on Dodd-Frank,
Basel III, and U.S. monetary and fiscal policy. Prior to that, based in London, he was Vice
President of Asian equities for JPMorgan and fund manager of Emerging Market equities at F&C
Asset Management. He began his career at PriceWaterhouse Coopers, where he qualified as a
chartered accountant. He holds a bachelor’s degree from Cambridge University, England, and
masters and doctorate degrees from the London School of Economics. His book, “The
Consumer, Credit and Neoliberalism: Governing the Modern Economy” relates economic theory
to monetary and banking policy in the U.K. and U.S. leading up the financial crisis of 2008.
Fidaa E. Al-Hanna, Senior Researcher
Fidaa joined IBS in 1992. She holds a bachelor’s degree in Business Administration, with a focus
on banking and finance, from Kuwait University and is a qualified member of the Institute of
Certified Professional Managers.
Naheel Y. Al-Kayyali, Senior Researcher
Naheel joined IBS in 1995. She holds a bachelor’s in Administrative Sciences, with a major in
financial and banking sciences, from Al-Yarmouk University- Jordan. She is also a qualified
member of the Institute of Certified Professional Managers.
Both Fidaa and Naheel have been involved in writing over 50 analytical studies in a number of
fields covering finance, credit, marketing, investment, management, organization, economy,
human resources development and e-banking.
Ali Abbas, Researcher
Ali joined the research department of IBS in 2015 having worked in the training department
since 2008. He holds a bachelor’s degree in Business Administration, with a double major in
management and marketing from the American University of Kuwait. In addition, he holds an
MBA from the University of Brighton, England.