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Kuwait
Banking and Finance
Before independence in 1961, foreign monies, largely the Indian
rupee in the period between 1930 and 1960, circulated in Kuwait.
At independence the Kuwaiti dinar was introduced, and a currency
board was established to issue dinar notes and to maintain reserves.
In 1959 the Central Bank of Kuwait was created and took over the
functions of the currency board and the regulation of the banking
system.
The first bank in Kuwait was established in 1941 by British investors.
Subsequent laws prohibited foreign banks from conducting business
in the country. When the British bank's concession ended in 1971,
the government bought 51 percent ownership. In 1952 another bank,
the National Bank of Kuwait, the largest commercial bank, was
founded. The establishment of several other banks, all under Kuwaiti
ownership, followed. Some specialized financial institutions also
emerged: the Credit and Savings Bank, established in 1965 by the
government to channel funds into domestic projects in industry,
agriculture, and housing; the Industrial Bank of Kuwait, established
in 1974 to fill the gap in medium- and long-term industrial financing;
and the private Real Estate Bank of Kuwait. By the 1980s, Kuwait's
banks were among the region's largest and most active financial
institutions. Then came the Suq al Manakh stock market crash in
1982.
The large revenues of the 1970s left many private individuals
with substantial funds at their disposal. These funds prompted
a speculation boom in the official stock market in the mid-1970s
that culminated in a small crash in 1977. The government's response
to this crash was to bail out the affected investors and to introduce
stricter regulations. This response unintentionally contributed
to the far larger stock market crash of the 1980s by driving the
least risk-averse speculators into the technically illegal alternate
market, the Suq al Manakh. The Suq al Manakh had emerged next
to the official stock market, which was dominated by several older
wealthy families who traded, largely among themselves, in very
large blocks of stock. The Suq al Manakh soon became the market
for the new investor and, in the end, for many old investors as
well.
Share dealings using postdated checks created a huge unregulated
expansion of credit. The crash of the unofficial stock market
finally came in 1982, when a dealer presented a postdated check
for payment and it bounced. A house of cards collapsed. Official
investigation revealed that total outstanding checks amounted
to the equivalent of US$94 billion from about 6,000 investors.
Kuwait's financial sector was badly shaken by the crash, as was
the entire economy. The crash prompted a recession that rippled
through society as individual families were disrupted by the investment
risks of particular members made on family credit. The debts from
the crash left all but one bank in Kuwait technically insolvent,
held up only by support from the Central Bank. Only the National
Bank of Kuwait, the largest commercial bank, survived the crisis
intact. In the end, the government stepped in, devising a complicated
set of policies, embodied in the Difficult Credit Facilities Resettlement
Program. The implementation of the program was still incomplete
in 1990 when the Iraqi invasion changed the entire financial picture
(see Economic Reconstruction , this ch.).
Data as of January 1993
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