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Margin between lending and depositing declined to 1.75%
KUWAIT CITY, Sept 20: The interests on deposits with some banks recently increased to 4 percent record as minimum, record, however, a historical interest rate for funds that deposits have not reached since around 2008, when they were trading until the end of last year at a barrier even lower than the prescribed Zakat rate of 2.5 percent, reports Al-Rai daily. It seems that the gradual transition of banks from cheap to high interest, compared to the rate circulating at the beginning of the year and the past 14 years, will not mark the end of the escalation of the money-attraction pricing fever, as deposit rates are expected to reach 5 percent and perhaps more in the coming months, especially if the lending interest exceeds 7 percent.
For a banker, the lending rate is currently 5.75 percent, compared to 4 percent for depositing, which means that the margin between them has shrunk to about 1.75 percent, a rate that some banks may maintain in the future, and may have to narrow it further. Perhaps what enhances the expectations of adjusting interest rates again to exceed 4 percent more than the following considerations includes: — Growing expectations about the Central Bank of Kuwait’s tendency to raise the discount rate again on Wednesday, in parallel with the prospects of the US Federal Reserve raising the dollar’s interest on the same day, even if this is gradual.
The important thing is that this trend pushes to increase the margin that banks must have to cover it in its subsequent pricing. — Of the banks that announced the 4 percent interest, those which officially stated that the new interest rate represents only the minimum ceiling for them indicates the possibility of granting additional interest to some privileged customers, as this refl ects their planning to expand the margin soon, especially if the fever of deposits increases and their interests between banks. — Adjusting deposit rates in Kuwait is different from loans.
In the first case, banks face a procedure that the majority of the deposit portfolio funds (total 47.3 billion dinars) are replenished locally at about the same time, with an average term of 45 days, whether from companies or individuals who prefer that their deposits be between one month and 45 days, and sometimes 3 months, while their desire for year’s deposits decreases; these deadlines refl ect the pricing of new loans, which is usually quarterly or semi-annually, noting that the adjustment of the prices of existing loans at the applicable prices is every 5 years from granting the financing, according to the instructions of the Central Bank and faced with this reality, the banks find themselves obligated to ensure that the new money and the renewed deposits benefit from the interest movements in full. — With the realization of interest trends globally and locally by raising it to about 5 times during this year, it has been decided by Kuwait 4 so far, while the fifth increase is expected to be approved after two days, the segment of depositors that tends to renew their deposits for short periods has expanded, hoping to achieve additional benefits with an increase in the return margin which is currently expected to be every two months; hence, some banks prefer to attract additional layers of funds at higher prices than traded, provided that the new price covers longer periods, and thus the total cost on them decreases, and if this is not achieved at least, their ability to meet their liquidity ratios will increase, if the profit margin achieved between loans. and deposits narrows the target; but for a banker such moves reinforce what is known as hostile deals between banks, where such behavior stimulates the banks’ quiet appetite to participate in the competition, albeit relatively.
• Local banks, especially the major ones, enjoy additional levels of liquidity derived from their current accounts and other sources of cheap funds, which raises the possibility of offering additional offers on deposits; compared to the one circulating in the market, by virtue of its cheap money surpluses, it can raise the intensity of competition for deposits to a pricing that most banks are unable to reach.
• Contrary to the Fed Reserve which prioritizes combating infl ation rather than employment, and even if this leads to the entry of the American economy into a severe recession, which pushes it to raise interest rates more than expected, the CBK aims to achieve a balance between economic growth and maintaining the attractiveness of the local currency, without harming any sector, including the banking sector, which makes it ready to intervene with its various tools to compensate the banks for paying interest that is not restricted to the equation of supply and demand only, but directed to address the migration of customers from the dinar to the dollar.
• The Central Bank of Kuwait directed banks some time ago to implement a new mechanism in pricing deposits in dinars, especially those whose maturity date is approaching, as well as those whose deadlines are nearing and work is underway to renew them.
The regulator obligated banks to disclose and advise clients, especially with regard to the application of the interest rate on clients’ deposits in dinar, provided that the client is fully aware of the bank’s procedures taken in this regard.
The Central Bank’s move, which comes within the framework of dedicating its supervisory role in the field of protecting customers’ rights, especially with regard to applying deposit prices to customers in dinar, allows obtaining the highest possible pricing for its deposits compared to the highest levels traded in the market.