Kuwait - Banking and securities

The Central Bank of Kuwait, established in 1969, formulates and implements the nation's monetary policy, regulates the currency, and controls the banking system. There are seven commercial banks with 96 branches in Kuwait, of which one is a single-branch operation belonging to a joint-venture bank (the Bank of Bahrain and Kuwait). Apart from this special case, foreign banks are not permitted to operate within Kuwait or to own shares in Kuwaiti-banks. Kuwaiti bank shares are typically closely held, either by the government and its agencies or by the merchant families who founded them. The preeminent bank is the National Bank of Kuwait, which at the end of 1999 accounted for one-third of all Kuwaiti bank branch assets.

The Central Bank of Kuwait only took on a serious regulatory role in 1984, after a debt crisis engulfed commercial banks, all of which had exposure to the collapsed informal stock market. However, the Central Bank's powers are limited, and, although it considers some of the banks to be too weak to be competitive, it has so far been unable to force mergers.

There are three specialized banks, one of which, Kuwait Finance House, operates as a commercial bank restricted to Islamic financial transactions. The other two, Industrial Bank of Kuwait and Kuwait Real Estate Bank, were created to provide long-term credit at a time when the supply of fresh capital from the public sector was not constrained. In the more austere environment since the war, they function like a US investment bank. The idea of establishing more Islamic banks has been welcomed. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $5.4 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $30.0 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 4.62%. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 4.25%.

Kuwait's official securities exchange, the Kuwait Stock Exchange (KSE), first introduced in 1962, was founded in 1977, and handles only government bonds and securities of Kuwaiti companies. An unofficial and unregulated securities exchange, the Souk al-Manakh, listing the stocks of 45 Gulf companies outside Kuwait and considered highly speculative, collapsed suddenly in August 1982. At the time of the crash, some 6,000 investors and $94 billion in postdated checks drawn in anticipation of future stock price increases were said to be involved. In order to limit the effect of the collapse on the Kuwaiti economy, the government created a special rescue fund to pay compensation to small investors for validated claims. All trading operations of the KSE were suspended on the Iraqi invasion of Kuwait on 2 August 1990. The KSE recommenced trading on 28 September 1992. On the exchange, 1995 was a banner year. The combined effect of rapidly expanding credit and privatization resulted in a 36% increase in the stock price index and a 226% increase in trading volume. By the end of 2001, 88 companies were listed with a total capitalization of KD 26.7 billion ($86.9 billion) and a trading value of KD 11.7 billion ($38 billion). Only Gulf Cooperation Council (GCC) citizens are permitted to buy shares in Kuwaiti companies.