Real estate finance in Kuwait – evaluation of the approaches of Islamic and conventional banks
Abstract
Just as shelter is one of the basic needs for human beings, it can also be said that
having the necessary finances in place to be able to live in and own a house represents
an equally critical need. Since most people are not in a financial position to pay for their
house in one transaction, the availability of a mortgage or some form of finance has
over time become an essential element in promoting and safeguarding homeownership.
Islamic finance began to emerge and received growing recognition as a new
reality in the world of international finance, particularly when the global financial crisis
occurred in 2008 providing a severe shock to the financial system and markets the world
over. While conventional and traditional banks were seriously affected, Islamic banks,
perhaps surprisingly to some within the sector, remained relatively unscathed and less
prone to the crises that followed in the aftermath. The performance of Islamic banks
through a number of key ratios has produced satisfactory results. In terms of the market
in Kuwait, Islamic banks have a history of conducting business activities within a
somewhat niche market which seeks to attract and offer products and services based on
a profit and loss sharing concept governed by the Islamic principles of Shariah. The
growth of Islamic banking during recent years in Kuwait and their superior performance
compared to the conventional system has helped to increase the relative
competitiveness of both banking systems.
This thesis seeks to provide a comparative study of conventional banks and
Islamic banks in Kuwait in terms of the challenges they face and the benefits they
provide for housing financing. It also identifies the similarities and differences between
Islamic and conventional banks. The Islamic mortgage, which is the housing finance
tool of Islamic banking and finance, offers those who desire it a home ownership
alternative that is in harmony with Islamic Shariah principles and therefore free of
interest, with engaging in interest being forbidden for Muslims. This study also aims to
explore and critically analyse the supply and demand side related to Islamic home
financing by focusing on the different propositions being offered by both Islamic and
conventional banks in Kuwait. In particular, this study explores the risks and benefits
related to Islamic banking by investigating the obstacles that effect the availability of
Islamic home finance.
In order to achieve its principal aim, this study has employed a mixed method
approach whereby data and information was obtained from questionnaire surveys,
interviews and case studies.
The interviews and case study findings have revealed several challenges such as
cancellation of mortgage products, default on payments, remaining interest, lack of
products within the traditional banks and a lack of supply. All of these factors are
collectively believed to be hindering the growth and potential of housing finance in
Kuwait. The study has also noted the problems that arose for the bank, such as central
bank decision and government rules.
The findings of the questionnaire survey have revealed that customer awareness
of Islamic mortgage products is still somewhat low vis-à-vis products offered by their
conventional counterparts. This was particularly the case for Islamic home finance. In
addition, it has been noted that clients opted for Islamic finance mainly due to religious
reasons; and the reason for non-take-up was mainly due to financial costs. However, it
is interesting to note that the majority of the respondents expected the Islamic mortgage
to be capable of safeguarding their interests.
Many of the respondents believed that the Islamic mortgage could achieve the
inherent advantages linked to it, which provides the capability of assisting not only the
individual, but also wider societal interests. This factor is crucial to Islamic banks, as
this situation was broadly agreed upon and expected by a number of respondents.
Going forward, based on the study’s findings, a road map has been developed
to promote a greater understanding of Islamic home finance. It consists of five parts
comprising regulation and policies, challenges and risks, benefits, availability and
obstacles, and comparative criteria. A great deal of modern processing and analysis
techniques have been used to determine the differences between Islamic and
conventional banks. This study asserts that these techniques can help revive the soul of
Islamic Shariah, which will ultimately help to highlight the efficiency and effectiveness
of Islamic finance, particularly home financing, which can benefit all key stakeholders.