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Volume :4 Issue : 15 1978      Add To Cart                                                                    Download

TOWARDS A VIABLE FINANCIAL MARKET IN KUWAIT

Auther : By Dr. A. D. Issa and Dr. H, Elsaid

 

The objective of the study is to examine the anatomy, development and potentials of Kuwait financial market.  In leading up to this discussion, however, the study:

1.     provides a clear definition of the term “financial market”;

2.     discusses the difficulty of an active financial market; and

3.     sets forth the basis prerequisites for the creation of a well-developed financial market.

During the past two decades, Kuwait has shown a remarkable progress in laying the foundation for a viable financial infrastructure.  This progress may be attributed to the country’s rapid population and economic growth coupled with a dramatic saving rate and a desire to become a financial center of the Arab World.

Strictly speaking Kuwait has no money market to speak of.  The commercial banks, which constitute the heart of the money market, are involved mainly in financing foreign trade.  Aside from the commercial bill, which results from trade financing, there is virtually no other money market instrument in Kuwait.  In order to meet their liquidity needs, Kuwaiti individual investors find themselves forced to invest their excess funds in saving and time deposit accounts at the commercial banks.  Large investors, on the other hand, keep large portions of their liquid funds in foreign banks abroad particularly in periods when interest rate differentials are significant.  Commercial banks’ liquidity needs are met through inter-bank loans, through the Central Bank discount window and, most importantly, through holding a substantial proportion of their resources in foreign assets.

There has been no real effort on the part of the Kuwaiti government to issue its own money market instruments and, hence, pave the way for a potentially more vibrant money market.  Private financial instruments will not probably be forthcoming without some government leadership and encouragement in this area.  Another impediment to the evolvement of a viable Kuwaiti money market in the near future stems from the fact that short-term borrowing is still predicated on the personal connection and relationships between borrowers and lenders rather than on impersonal money market criteria.

 Just as its money market, Kuwait’s capital market is till in its infancy.   Impediments to its growth stem from the dominant role played by the government coupled with the relatively small size of the country’s industrial base.  Furthermore, most of the capital market institution did not come into existence until 1974 and, hence, have had little time to play a role in the development of a capital market.

 It was not until 1975, that the first of a series of local bond issues was floated.  The flotation of this bond issue constituted a landmark in the development of Kuwait capital market.  It not only introduced the Kuwaiti investor, for the first time, to a new domestic investment alternative, it also paved the way for the development of a secondary capital and money market.  Furthermore, it allowed, again for the first time, the entire Kuwaiti community to invest in these issues.

 Probably the most developed sector of Kuwait’s financial market is the “equity market”.  It is also the most volatile.  The number if issues currently traded are very small.  The bulk of the outstanding shares are not traded as they are held either by the government or by the founders.  Trading is handed by some 20 over-the-counter broker-dealers.  Competition among these brokers seems to be limited, as no meaningful public quotation system and public surveillance are currently available.  Information made available by corporations lack in both quantity and quality.  And, finally, one half of Kuwait’s population is excluded from stock market participation on the basis of their nationality.

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May 18, 2017

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