* Kuwait agrees $2.6 billion loan relief plan
* Gulf state has long history of handouts
* Impact on banks' profits expected to be small
* But bankers warn of moral hazard
* Economists say Kuwait spending growth unsustainable
By Sylvia Westall and David French
KUWAIT, April 10 At a parliamentary debate on
consumer debt relief in Kuwait last week, lawmakers described
how thousands of Kuwaitis were struggling to make ends meet in
one of the world's richest countries per capita.
Citizens had taken out personal loans, often more than one -
perhaps to buy a car or renovate a house - and were unable to
pay the money back. They were victims of high interest rates and
punishing repayment schedules, the lawmakers said.
Their solution was for the government to come to the rescue,
using Kuwait's oil wealth to ease the "suffering" of indebted
citizens. They advocated the kind of largesse which has defined
the Gulf state's relationship with its people for decades.
After three hours of debate, parliament and the cabinet
agreed on a law allowing the state to spend up to 744 million
dinars ($2.6 billion) to buy loans taken out from banks before
March 2008, write off the interest and reschedule repayments.
Bankers and economists were not impressed, saying the plan
rewarded poor money management and would be bad for a banking
sector which is still recovering from the global financial
crisis. Some banks may lose money in the scheme and beyond that,
the exercise could encourage irresponsible behaviour that might
hurt the sector in future, the bankers argued.
"It will create a moral hazard for the banking system," said
Ananthakrishnan Prasad, mission chief for Kuwait at the
International Monetary Fund.
"It will raise the incentives for banks to take riskier
positions, and it will raise the incentives for borrowers to
take more debt in the future," he said on the sidelines of a
finance conference in Kuwait this week.
Prasad said the IMF had warned Kuwait about such issues
before, and that it would give such guidance to any other
country which thought about writing off its citizens' debt.
In most parts of the world, a scheme to use state money to
pay for delinquent borrowers' consumer loans would arouse
widespread public criticism.
The fact that it did not in Kuwait - most people expressed
no surprise - underlined how the country has developed a pattern
of using its vast oil wealth for political patronage.
Many Gulf Arab nations use state money for such handouts.
Last May, for example, the United Arab Emirates government said
it would settle up to 5 million dirhams ($1.36 million) worth of
defaulted loans for each indebted local citizen.
Such generosity may be one reason that most countries in the
region have avoided the severe social unrest which has hit other
parts of the Arab world since 2011.
But the Kuwaiti loan plan is unusual in its large scale and
the fact that it appears to have been pressed on a reluctant
cabinet by the Kuwaiti parliament, which is the most independent
and outspoken in the six-nation Gulf Cooperation Council.
Members of parliament justified the scheme by arguing that
the central bank had not been strict enough on banks' lending
practices before 2008.
"We began to realise that the problems were not in the loans
but in the unjust and unfair and illegal interest that the banks
were calculating and accumulating their profits and hurting the
people," MP Maasouma al-Mubarak said ahead of last week's vote.
Under the scheme, banks assessed to have overcharged
interest, by asking for more than 4 percentage points above the
central bank's discount rate, would have to pay it back to
customers. The plan will affect around 47,000 Kuwaitis in a
country of 1.2 million citizens; it is not yet clear if banks as
a group will end up losing money in the scheme, or how much.
Banking executives rejected the lawmakers' accusations,
saying lenders had been working within parameters set by the
central bank and had done nothing wrong.
"That is why I am surprised...at the reaction that says the
banks have been overcharging and so on," Michel Accad, chief
executive of Gulf Bank, Kuwait's fourth largest lender
by market value, told the audience at the conference.
"I mean, come on, let's be realistic. Not only they haven't
overcharged, generally speaking, but this is also one of the
lowest spreads in any country for consumer loans." The loans
were generally charging about 3 percentage points above the
discount rate, he added.
By 2011, consumer lending in Kuwait had more than doubled to
607.7 million dinars from 276.5 million in 2008, according to
statistics from the central bank.
The debt plan means Kuwaitis will want to borrow even more,
Finance Minister Mustafa al-Shamali told reporters this week.
"Sure, it will encourage more borrowing...because you eased
the burden on a large amount of people and they have the freedom
to borrow again," said Shamali, who had long warned against
writing off loans.
The cost of the scheme for Kuwaiti banks will be limited,
said Hamad al-Marzouq, chairman of Ahli United Bank
and head of Kuwait's banking association. But parliament's
debate was an unfair attack on the banks' reputations, he said.
"Many of the politicians were looking for an excuse to make
political gains, and there were a lot of false allegations
regarding banks committing violations."
Kuwaiti banks are still recovering from a collapse of the
country's investment sector. Many firms borrowed cheaply in the
mid-2000s to invest in local stocks and real estate; the global
crisis meant loans could not be refinanced and asset values
plummeted - the local stock market has dropped more than 55
percent from its June 2008 peak - forcing local banks to
provision for billions of dinars of debt restructurings.
Many of the lawmakers elected to a new parliament last
December made debt relief a major part of their campaign
platforms. They put heavy pressure on the cabinet to approve a
plan - pressure which the cabinet, keen to avoid the friction
which marred its relations with the last parliament, felt it
could not entirely resist.
The MPs could cite a long tradition of financial aid for
Kuwaiti citizens. Kuwait wrote off almost all consumer debt
after the 1991 Gulf War as part of a series of handouts to help
Kuwaitis return from exile.
It wiped out millions more in a plan to settle $20 billion
in bad loans stemming mostly from a 1982 stock market crash that
was caused by investors speculating on stocks.
With 14 consecutive years of budget surpluses, Kuwait can
easily afford its new loan buyout plan. But while the debt
relief could boost consumer spending, it is not the best way to
help the economy in the long run, economists say.
They argue that Kuwait needs instead to implement major
parts of a 30 billion dinar development plan, which includes big
infrastructure projects and seeks to attract foreign invesment.
The plan was announced in late 2010 but has faced delays due
partly to disagreements between the cabinet and parliament.
Economists also warn that Kuwait may not have the money to
spend on such debt relief programmes in future. The IMF has
calculated that Kuwait may have exhausted all of its oil savings
by 2017 if it keeps raising state spending at the current rate.
In March last year, after the cabinet agreed a 25 percent
pay rise for government employees, customs workers responded by
going on strike for even bigger salary hikes, followed by staff
at the state airline.
MPs argued during the debate on the loan buyout plan that
some Kuwaitis were paying loan installments equivalent to 60 or
70 percent of their salaries.Ÿ But Ahli United's Marzouq said
this did not take into account the trend of rising wages.
"Salaries from that period until now have probably at least
doubled, with the generosity of the government," he said.
The plan has also drawn criticism from some Kuwaitis who
have loans from Islamic banks, which are not covered by the
scheme, and from people who have managed their money carefully.
"I don't agree with it - I don't have a loan so where is the
fairness?" said student Fahad, 30, sitting at a coffee shop with
his laptop on the outskirts of the capital.
"This is (the debtors') problem. Why didn't they calculate
their income and expenditure? It is not up to the government to
solve these mistakes," he said.
His 32-year-old friend, Assem Malallah, had another
solution. Why not just spread state money between all Kuwaitis,
rather than only the indebted ones?
"They should be fair with the money and give the same amount
to all of us," he said.