The Banking Industry during an Extended Financial Crisis: An Empirical Assessment of Kuwait Banks

Article excerpt

INTRODUCTION

After the financial crisis of 2008 and its negative impact on the banking industry, many investors and depositors began to worry about their investments and deposits. Currently, the European debt crisis that began in July 2011 is making headlines. Such negative economic news and negative bank performance attracts the attention of investors, raising questions such as whether the banks in which they have invested can continue operations and which banks will face hard economic conditions. Therefore, the evaluation of bank performance is important for depositors, investors, managers, and regulators. The impact of the financial crisis that originated in the United States and the euro zone has hit the rest of the world. The Gulf Cooperation Council [GCC, made up of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)] was one region affected by this crisis, which had a negative impact on GCC banks in terms of non-performing loans and a decrease in profits. In the GCC, banks can be divided into two categories: conventional banks and Islamic banks.

The Kuwaiti banking system began in 1941, when the first banking and financial institution in Kuwait, a branch of the British "Iranian Imperial Bank" (as it was known at the time) opened. On May 19, 1952, the first Kuwaiti bank, the National Bank of Kuwait (NBK), was formed; NBK began operating on November 15, 1952. In 1977, Islamic banking was launched in Kuwait with the establishment of the first Kuwaiti Islamic bank, Kuwait Finance House (KFH).

Currently, there are 21 banks operating in Kuwait, of which 11 are Kuwaiti banks and 10 are foreign. Competition in the banking industry has a direct effect on the efficiency of financial services, the quality of financial products, and the degree of innovation and stability. This competition has led to the development of high-risk instruments with a high level of risk exposure that allow banks to gain a high level of profit. Therefore, banks in Kuwait have high credit exposures to real estate and investment companies, which means that they are exposed to significant risk. Real estate and investment companies are considered high risk because they are highly volatile given the limited diversification of the economy.

In this paper, we focus on two main questions involving the Kuwaiti banking sector and the GCC state: (1) Have Kuwaiti banks been affected by the financial crisis? and (2) Is there any difference in the effect of the financial crisis between conventional and Islamic banks? This paper examines the effect of the financial crisis on Kuwaiti banks. We will examine the differences between Islamic and conventional banks' performance after the financial crisis during 2007-2010 using financial ratios and a t-test.

Our analysis incorporates the extended bear-period beginning with the start of the financial crisis in 2008. Our study extends the literature by presenting evidence using data from Kuwait, which is a frontier market that has not been previously covered in terms of bank performance during the global financial crisis. The results of our study should be beneficial to individual investors, institutional investors, and portfolio managers interested in investing in the banking industry as well as to governments.

The paper is divided into four parts. First, the literature review discusses previous studies conducted on this topic, outlines the beginnings of the Kuwaiti banking industry, defines Islamic banking, and explains the differences between Islamic and conventional banks. Second, we explain the data set and methodology. Third, we undertake the analysis of our empirical results and discuss it from the perspectives of Kuwaiti and global investors and governments. Finally, we offer a conclusion.

LITERATURE REVIEW

Although a large number of empirical studies have been conducted on developed and developing countries, few empirical studies have addressed the GCC or Kuwait. …

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