Financial performance of Islamic banking in Kuwait

The Kuwaiti economy has witnessed remarkable changes especially since the oil boom in the 1970s. Kuwait is one of the world's richest countries in terms of GNP per capita (WBA, 1997). However, the country has hitherto been entirely dependent on oil exports and as petroleum prices increased during the 1 970s, imports also increased. The government undertook a major industrial development program (such as manufacturing industries including cement and other building material, petrochemicals, plastic products and boats). With Iraq's invasion of Kuwait in the early 1 990s, much of the infrastructure of the country was ruined. Post-war Kuwait faced serious problems including shortages of food, fresh water, and electricity, oil well fires and the resulting environmental damage. It is vital for Kuwait to have a thriving and efficient financial system that helps meet the country's developmental and investment targets. The country has two types of financial institutions Islamic and conventional, both of which exist side by side. Both types of institutions take part in investing in the country to improve the infrastructure and industrial base of the economy. Therefore, a successful financial system can only bode well for the country as a whole. In this study, we evaluate the performance of Islamic banks by analyzing their financial indicators and comparing them with those of conventional, commercial banks. This will lead to a better appreciation of advantages and disadvantages of Islamic banking institutions, as well as their efficiency as compared to that of the conventional banks. For this purpose we conduct a case study of the Kuwait Finance House, which runs its activities according to Islamic principles, and also the National Bank of Kuwait, which is the leading conventional bank in Kuwait - comparing and assessing their structure and performance. Both case studies are carried out by examining the differences in their respective internal and external environments and the way they affect financial behavior; our hypotheses are: (1) Islamic financial institutions are on par with traditional (commercial) banking institutions in securing funds; (2) Islamic financial institutions are on par with traditional (commercial) banking institutions in performance and efficiency. (3) Clients' religious attitudes are not the only (or primary) reason behind the success of such institutions in securing funds; (4) legal restrictions imposed on such institutions do not constitute an obstacle against their ability to compete in the tough financial market. In the light of the above evaluation, the nature of the difference in the framework of assets and liabilities between the two types of banks is discerned. We also seek an understanding of the effect of the difference in the nature of revenues earned by both types of institutions - on its framework and management.