Commentary on New Regulations on the Kuwait Investment Sector

27/06/2010

Given the severe losses sustained by the investment sector in Kuwait, which dwarf those of other GCC nations, a move towards increased regulation of the sector has been expected for some time says a recently released commentary by Kuwait Financial Centre “Markaz” entitled “The New Regulations on the Kuwait Investment Sector” which aims to analyze the current state of the investment sector in light of new regulations by CBK. The sector lost over USD 2 bn in 2009 following a monstrous loss of upwards of USD 3 bn in 2008, and continues to post an aggregate loss of over USD 100 mn in 1Q10 (an annual run rate of USD 400 mn). The losses are tied to impaired assets which companies have been writing-off in an attempt to restore some health to their balance sheets. Liquidity and over-leverage have also been an issue for the sector, whose assets are often comprised of difficult to value and illiquid investments which are then pledged as collateral against further borrowings. These issues were not bothersome during the boom periods; however, when the global financial crisis hit, it exposed the sector’s vulnerabilities resulting in a massive destruction of wealth.

Consequently, in June 2010, the Central Bank of Kuwait (CBK) issued an announcement of tightened regulation over the sector through three criteria spanning liquidity and leverage. The new regulations are effective immediately with the CBK expecting quarterly reports on the same, but it has given the sector until June 2012 to fully comply with the new measures or face as yet unnamed action from the CBK. According to CBK, nearly 50% of investment companies (both listed and unlisted) comply fully with all the three criteria. Given the fact that CBK’s criteria are more stringent than the traditional definition of these ratios; this will likely alleviate much of the negative sentiment associated with investment companies due to the financial crisis.

According to the report, the new regulations aim to increase transparency, credibility and uniformity in the investment sector, which has grown to be of systemic importance to the Kuwait financial sector; the move from CBK would have also been inspired by its pioneering engagement with Basel II banking accords (Kuwait was the first Arab country to adopt the accords back in 2005). The new regulations may mirror those of Basel due to the similar skill set required in implementation which CBK would already posses.

These regulations provide a level playing field of sorts whereby the health of the sector, and its constituent firms, could be objectively measured and compared, which would significantly ramp up investor confidence in the country with a positive trickledown effect to the banking sector.

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Kuwait Financial Centre S.A.K. 'Markaz', with total assets under management of over KD921 million as of March 31, 2010, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997.