Executive Summary
Banks play a pivotal role in transmission of interest rate changes by central banks through their lending and borrowing rates. These interest rate changes influence banks’ profitability and is captured through the analysis of banks’ net interest margin (NIM). As market participants await rate cuts by central banks like U.S Fed and CBK, impact of such cuts on NIM is of interest.
Ideally, when the central bank increases interest rates, banks’ net interest margin is also expected to increase and vice-versa. However, this may not be the case in practice as banks may choose to passthrough a smaller magnitude of policy rate change. This passthrough depends on financial sector concentration, liquidity, and the availability of deposits and lending opportunities.
In Kuwait, banks’ overall NIM has broadly moved in line with policy rate change with some differences with respect to time of change. However, at bank level, NIM has not always moved in tandem with policy rate as various other factors have influenced this key banking indicator.
