Taming Kuwait’s personal real estate debt

Politically motivated cries of outrage over interest charges have reverberated around the country, but sober lending data provides a sense of perspective

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Outrage over interest charges and astronomical land prices have reverberated around Kuwait

Taming Kuwait’s personal real estate debt

Amer Ziab Al-Tamimi

last update on 29 Jul 2024

Household financing and bank lending has become a hot political issue in Kuwait, where there have been populist calls for the state to pay off personal loans for struggling families.

They came after a rise in the use of credit followed a real estate boom, with many citizens taking out mortgages to buy land and build homes.

Further borrowing to furnish and fit out houses raised concern at high levels of debt, leading to calls from some politicians and for the state to buy some loans and, in effect, pay them off.

There has been controversy over such suggestions in Kuwait’s parliament, where the issue remains capable of causing heated debate.

Whatever the political rhetoric over calls to help people in debt – dismissed by opponents citing the need to control state spending – there is now clear insight into the extent of borrowing from official data.

According to the Central Bank of Kuwait, total loans at the end of last May reached over $180.5bn, or 55.3bn dinars in local currency. Personal, consumer, and housing loans accounted for 34.2% of that figure, amounting to $62bn, or 18.9bn dinars, a significant proportion of the total.

There are already interest-free loans on offer from the government-run Kuwait Credit Bank. It typically lends for real estate – where husbands and wives jointly commit to repay and both own the property – or for social enterprises.

Borrowers are also turning to traditional and Islamic banks for loans with fixed interest rates.

These are popular ways of financing the building of private housing on land allocated for development by the government. Repayments typically run for longer periods than at the Credit Bank, up to a usual limit of 15 years.

Consumer finance controversy

Away from real estate financing, there has also been growth in the use of consumer and instalment loans. These are typically used to buy cars and household appliances, but can also be used for wider spending. This form of personal debt has been the focus for populist politicians and the debate they have stoked.

Demands to cancel the debt, or wipe out the interest charged on the loans, have reverberated through Kuwait’s national debate.

The government has previously taken measures to ease the burden on debtors, guaranteeing repayments and setting up interest-free mechanisms. But it has resisted the extent of the populists demands, amid concern about the precedent that would be set and the potential knock-on effects on the national finances.

The Central Bank of Kuwait has repeatedly made it clear that loans are being repaid properly

And the Central Bank of Kuwait has repeatedly made it clear that loans are being repaid properly. Bad debt levels do not exceed 2% of total personal loans.

Consumer credit is important to the banks, which are running campaigns to encourage citizens to take advantage it under attractive conditions.

Powering the property sector

The real estate sector – one of Kuwait's most important economic areas outside the oil industry – is a significant beneficiary of credit facilities, ranking second after personal loans.

At the end of May, the value of real-estate loans reached $33bn, or 10bn dinars, at 18% of total bank loans. Demand is strong for investment in housing, residential apartment buildings, office buildings, and retail outlets.

Shutterstock — At the end of May, the value of real estate loans reached $33bn, which is 18% of total bank loans.

Many Kuwaitis have become wealthy through their involvement in the real estate market, and many prefer this activity because land and buildings offer a guarantee of value and are not subject to serious risks.

Developed land in Kuwait for various activities and uses – including infrastructure, roads, various utilities, and logistical services – does not exceed 8% of the country's total area.

The Kuwaiti government owns more than 90% of the country's land, making usable plots scarce, especially after urban expansion and population growth

The Kuwaiti government owns more than 90% of the country's land, making usable plots scarce, especially after urban expansion and population growth.

These factors have led to astronomical land prices. And the process of acquiring land and permission to build can be lengthy. Waits have even reached three decades.

Diversification

Lending to the rest of Kuwait's economy included $3.6bn to the trade sector, or 6.5% of the total. The manufacturing sector borrowed $8.8bn, or 4.8%

Both remain important and serve the local market well, although the manufacturing sector is still far from playing a major role in the development of non-oil exports. And there is still much to do to diversify the economic base away from oil and increase the contribution of other sectors to national gross domestic product, or GDP.

AFP — Kuwait's most important economic area after oil, the real estate sector is a significant beneficiary of credit facilities

Bank lending – one of the means of sparking GDP growth outside the energy industry – is active, over its overall rate of expansion was 0.08%.

Kuwait's banks have achieved good results, with net profits reaching $1.3bn, or 411.4mn dinars in the first quarter of this year, up 6.7% year-on-year.

Banks have a reasonable credit base and have collateral backing their loans includes stocks and land. The Central Bank is satisfied with credit quality and safety. Defaults remain within safe limits.

Lenders also have sufficient and significant means to cope with the level of risk they have taken on.

Whatever the tone of the political debate over debt, Kuwait has strong potential to keep using it to finance vital activities. It needs continued economic restructuring to increase demand for finance.

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