kuwait complete

8/14/2019 Kuwait Complete

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We dedicate this effort to our parents and

respected teachers, especially to Mr. Usman Sheikh,

who gave us an opportunity to explore understand.


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PrefaceThereportseekstodevelopabetterunderstandingofthepotentialforBanking,financeandStockExchangeofKuwaitandEconomystructureoftheState.Thestudyusesaanalysisbasedapproachtoexaminerules,regulationandcurrentsituationof the financial sector. The analysis structure was provided by Mr. Usman Sheikh, ThisprocedurerangeswithinBankingandForExsectorandalittlewithinindustrial.Rather, thepurpose of the study is tobetter understand the systematic approach of theStatefortheimprovementsofFinancialandEconomicposition.The contributions to this report by different sources other than the group fellows arepleased,especiallyfromtheteachersandtheseniors.

MohammedAminShahidMehmood

KhuramHayatNosherwanAliMasoodAlam


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KuwaitFinancialSector

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Kuwait

Introduction

The State of Kuwait is a sovereign Arab emirate situated in the northeast of the Arabian

PeninsulainWesternAsia.ItisborderedbySaudiArabiatothesouthandIraqtothenorth

andliesonthenorthwesternshoreofthePersianGulf.ThenameKuwaitisderivedfromthe

Arabic"akwat",thepluralof"kout",meaningfortressbuiltnearwater.Theemiratecovers

anareaof20,000squarekilometres(6,880sqmi)andhasapopulationofabout2.9million.

Historically,theregionwasthesiteofCharacene,amajorParthianportfortradebetween

IndiaandMesopotamia.TheBaniUtbahtribeswerethefirstpermanentArabsettlersinthe

regionandlaidthefoundationofthemodernemirate.By19thcentury,Kuwaitcameunder

the

influence

of

the

Ottoman

Empire

and

after

the

World

War

I,

it

emerged

as

an

independentsheikhdomundertheprotectionoftheBritishEmpire.Kuwait's largeoilfields

werediscoveredinthelate1930s.AfteritgainedindependencefromtheUnitedKingdomin

1961,thenation'soilindustrysawunprecedentedgrowth.In1990,Kuwaitwasinvadedand

annexedbyneighboringIraq.ThesevenmonthlongIraqioccupationscametoanendafter

adirectmilitary interventionbyUnitedStatesledforces.Nearly750Kuwaitioilwellswere

set ablaze by the retreating Iraqi army resulting in a major environmental and economic

catastrophe. Kuwait's infrastructure was badly damaged during the war and had to be

rebuilt.

Kuwait is a constitutional monarchy with a parliamentary system of government, with

Kuwait City serving as the country's political and economic capital. The country has the

world'sfifthlargestoilreservesandistheeleventhrichestcountryintheworldpercapita.

Petroleum and petroleum products now account for nearly 95% of export revenues, and

80%ofgovernmentincome.Kuwaitisregardedasoneofthemosteconomicallydeveloped

countries in the Arab League and is designated as a major nonNATO ally of the United

States.

EconomyofKuwait

Kuwaitisasmall,relativelyopeneconomywithprovencrudeoilreservesofabout96billion

barrels (15 km), i.e. about 10% of world reserves. Petroleum accounts for nearly half of

GDP,90%ofexportrevenues,and95%ofgovernment income.Kuwaitlackswaterandhas

practicallynoarableland,thuspreventingdevelopmentofagriculture.About75%ofpotable

watermustbedistilledor imported.Higheroilpricesreducedthebudgetdeficitfrom$5.5

billionto$3billionin1999,andpricesareexpectedtoremainrelativelystrongthroughout

2000.Thegovernmentisproceedingslowlywithreforms.ItinauguratedKuwait'sfirstfree

tradezonein1999andwillcontinuediscussionswithforeignoilcompaniestodevelopfields

inthenorthernpartofthecountry.


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EconomyofKuwait

Currency Kuwaitidinar(KD)

Fiscalyear 1April31March

Tradeorganisations WTOandOPEC

Statistics

GDPranking 76th(2004)

GDP $157.9billion(2008est.)

GDPgrowth 8.1%(2008est.)

GDPpercapita $60,800(2008est.)

GDPbysector agriculture (0.3%), industry (52.2%), services (47.5%) (2007

est.)

Inflation

11.7%(2008

est.)

Labourforce 2.225 million; note: nonKuwaitis represent about 80% of the

laborforce(2008est.)

Unemployment 2.2%(2004est.)

Mainindustries petroleum, petrochemicals, cement, shipbuilding and repair,

desalination,foodprocessing,constructionmaterials

TradingPartners

Exports

$95.46billion

f.o.b.

(2008

est.)

Mainpartners Japan19.9%,SouthKorea17%,Taiwan11.2%,Singapore9.9%,

UnitedStates8.4%,Netherlands4.8%,China4.4%(2007)

Imports $26.54billionf.o.b.(2008est.)

MainPartners United States 12.7%, Japan 8.5%, Germany 7.3%, China 6.8%,

South Korea 6.6%, Saudi Arabia 6.2%, Italy 5.8%, United

Kingdom4.6%(2007)

Publicfinances

Publicdebt $14.21billion(29.6%ofGDP)(2004est.)

External

debt

$38.82

billion

(31

December

2008

est.)

Revenues $113.3billion(2008est.)

Expenses $63.55billion(2008est.)

Economicaid NA

Forpurchasingpowerparitycomparisons,theUSDollarisexchangedat0.48KuwaitiDinars

only.Averagewagesin2007hoveraround$4,250permonthforKuwaitis.Asforskilledand

experiencednonKuwaiti(Engineers,Doctors,andManagers),theaveragemonthlysalaryis

hiked up tremendously, to an average of $10,000+ a month excluding living and other

benefits.Please,alsokeepinmindthatKuwaitisataxfreecountry,soalltheabovefigures

reflectactual

take

home

numbers.


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3|P a g e

Kuwait isasmallcountrywithmassiveoilreserves,whoseeconomyhasbeentraditionally

dominated by the state and its oil industry. During the 1970s, Kuwait benefited from the

dramatic rise in oil prices, which Kuwait actively promoted through its membership in the

Organization of Petroleum Exporting Countries (OPEC). The economy suffered from the

tripleshockofa1982securitiesmarketcrash,themid1980sdropinoilprices,andthe1990

Iraqi invasion and occupation. The Kuwaiti Governmentinexile depended upon its $100

billion in overseas investments during the Iraqi occupation in order to help pay for the

reconstruction.Thus,by1993,thisbalancewascuttolessthanhalfofitspreinvasionlevel.

ThewealthofKuwaitisbasedprimarilyonoilandcapitalreserves,andtheIraqioccupation

severelydamagedboth.

IntheclosinghoursofthePersianGulfWarinFebruary1991,theIraqioccupationforcesset

ablaze or damaged 749 of Kuwait's oil wells. All of these fires were extinguished within a

year.Productionhasbeenrestored,andrefineriesandfacilitieshavebeenmodernized.Oil

exportssurpassed

their

pre

invasion

levels

in

1993

with

production

levels

only

constrained

byOPECquotas.

ForeignRelationsofKuwait

Sinceitsindependencein1961,Kuwaitmaintainedstronginternationalrelationswithmost

countries,especiallynationswithintheArabworld.Itsvastoilreservesgive itaprominent

voiceinglobaleconomicforumsandorganizationsliketheOPEC.

Kuwait's troubled relationship with neighboring Iraq formed the core of its foreign policy

from

late

1980s

onwards.

Its

first

major

foreign

policy

problem

arose

when

Iraq

claimed

Kuwaiti territory. Iraq threatened invasion, but was dissuaded by the United Kingdom's

ready response to the Amir's request for assistance. Kuwait presented its case before the

UnitedNationsandsuccessfullypreserved itssovereignty.UK forceswere laterwithdrawn

and replaced by troops from Arab League nations, which were withdrawn in 1963 at

Kuwait'srequest.

On August 2, 1990, Iraq invaded and occupied Kuwait. Largely through the efforts of King

FahdbinAbdulAzizofSaudiArabiawhowasinstrumentalinobtainingthehelpoftheU.S.,a

multinational coalition was assembled, and, under UN auspices, initiated military action

againstIraq

to

liberate

Kuwait.

Arab

states,

especially

the

other

five

members

of

the

Gulf

Cooperation Council (Saudi Arabia, Bahrain, Qatar, Oman, and the United Arab Emirates),

Egypt, and Syria, supported Kuwait by sending troops to fight with the coalition. Many

EuropeanandEastAsianstatessenttroops,equipment,and/orfinancialsupport.

After its liberation, Kuwait largely directed its diplomatic and cooperative efforts toward

states that had participated in the multinational coalition. Notably, many of these states

were given key roles in the reconstruction of Kuwait. Conversely, Kuwait's relations with

nationsthathadsupportedIraq,amongthemJordan,Sudan,Yemen,andCuba,haveproved

to

be

either

strained

or

nonexistent.


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Since the conclusion of theGulf War, Kuwait has made efforts tosecureallies throughout

theworld,particularlyUnitedNationsSecurityCouncilmembers. InadditiontotheUnited

States, defense arrangements have been concluded with the United Kingdom, Russia, and

France.ClosetiestootherkeyArabmembersoftheGulfWarcoalitionEgyptandSyria

alsohavebeensustained.

Kuwait'sforeignpolicyhasbeendominatedforsometimeby itseconomicdependenceon

oil and natural gas. As a developing nation, its various economies are insufficient to

independentlysupportit.Asaresult,Kuwaithasdirectedconsiderableattentiontowardoil

ornaturalgasrelatedissues.

WiththeoutbreakoftheWaron Iraq,KuwaithastakenastronglyproU.S.stance,having

been the nation from which the war was actually launched. It supported the Coalition

Provisional Authority, with particular stress upon strict border controls and adequate U.S.

troop

presence.

KuwaitisamemberoftheUNandsomeofitsspecializedandrelatedagencies,includingthe

World Bank (IBRD), International Monetary Fund (IMF), World Trade Organization (WTO),

General Agreement on Tariffs and Trade (GATT); African Development Bank (AFDB), Arab

Fund for Economic and Social Development (AFESD), Arab League, Arab Monetary Fund

(AMF), Council of Arab Economic Unity (CAEU), Economic and Social Commission for

Western Asia (ESCWA), Group of 77 (G77), Gulf Cooperation Council (GCC), INMARSAT,

International Development Association (IDA), International Finance Corporation,

International Fund for Agricultural Development, International Labour Organization (ILO),

InternationalMarine

Organization,

Interpol,

IOC,

Islamic

Development

Bank

(IDB),

League

of

RedCrossandRedCrescentSocieties(LORCS),NonAlignedMovement,OrganizationofArab

Petroleum Exporting Countries (OAPEC), Organization of the Islamic Conference (OIC),

OrganizationofPetroleumExportingCountries(OPEC),andtheInternationalAtomicEnergy

Agency(IAEA).

Internationaldisputes

In November 1994, Iraq formally accepted the UNdemarcated border with Kuwait which

hadbeenspelledoutinSecurityCouncilResolutions687(1991),773(1993),and883(1993);

thisformally

ends

earlier

claims

to

Kuwait

and

to

Bubiyan

and

Warbah

islands;

ownership

of

Qaruh and Umm al Maradim islands disputed by Saudi Arabia. Kuwait and Saudi Arabia

continuenegotiatingajointmaritimeboundarywithIran;nomaritimeboundaryexistswith

IraqinthePersianGulf.

MiddleEast

Iran: On July 13, 2008, Kuwaiti lawmaker Jassem AlKharafi publicly accused the West of

"provoking" Iran on the nuclear issue. In his interview with stateowned Kuwait TV, Al

Kharafisaid,"WhatishappeningisthatthereareprovocativeWesternstatements,andIran


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responds in the same way... I believe that a matter this sensitive needs dialogue not

escalation,anditshouldn'tbedealtwithasifIranwereoneofAmerica'sstates."

Iraq:KuwaitilawmakerAlAmeeriopposesforgivingIraq'sdebt.Thedebt,estimatedat$16

billion,representsloansKuwaitmadetoBaghdadintheSaddamHusseinera,mostlyduring

the19801988IraqIranwar.AlAmeeriarguesthat,"ThedebtowedbyIraqtoKuwaitisthe

right of the Kuwaiti people and no one has the right to negotiate over them." AlAmeeri

believesthattheKuwaitivoicescallingtoforgivethedebtandcompensation"shouldnotbe

heeded and they do not represent the Kuwaiti people." He further opposes the debt

forgivenessbecauseIraqhasconsiderableoilwealthandbecausethe,"Kuwaitipeopleshed

theirblood"duringthe1990IraqiinvasionofKuwait."TheissueisaredlineforKuwaitand

noKuwaitiwilleverconcedetheseloans,"AlAmeerihasbeenquotedassaying.

OnNovember8,2008,Kuwaiti lawmakerAlMullaproposedthatKuwaitallowIraqtoback

pay

its

debt

to

Kuwait

in

natural

gas.

The

Arab

Times

quoted

Al

Mulla

as

saying,

"In

this

manner,KuwaitcantaketheloansbackfromIraqandputanendtotheshortageoffuelin

itspowerstations."

On April 25, 2007, Kuwaiti lawmaker Saleh Ashour called in a statement for reopening

Kuwait'sembassy inBaghdadand forstronglysupportingthegovernment inBaghdad.But

AlGhanimsaidhebelievesthatitwastooearlytoreopentheKuwaitiembassyinBaghdad

andthatthisissueshouldwaituntilsecuritysituationsimprove.

Israel: On December 28, 2008, Kuwaiti lawmakers Mikhled AlAzmi, Musallam AlBarrak,

MarzouqAl

Ghanim,

Jaaman

Al

Harbash,

Ahmad

Al

Mulaifi,

Mohammad

Hayef

Al

Mutairi,

Ahmad AlSaadoun, Nasser AlSane, and Waleed AlTabtabaie protested in front of the

NationalAssembly building against theattacks by Israel on Gaza.Protestersburned Israeli

flags,wavedbannersreading,"Notohunger,notosubmission"andchanted"AllahuAkbar."

Israel launched air strikes against Hamas in the Gaza Strip on December 26 after Hamas

launched rockets into the Israeli town of Sderot following the expiration of a sixmonth

ceasefireonDecember18.

On January 3, 2009, Nasser AlSane, Waleed AlTabtabaie, Adnan Abdulsamad, and other

MPsprotestedinfrontoftheNationalAssemblyagainsttheIsraeliattacksonGaza.

After Friday prayers on January 8, 2009, Jamaan AlHarbash and several other MPs again

protested in front of the National Assembly urging Arab leaders to take a stronger stand

againsttheIsraeliattacksandopenRafahCrossingtoendanembargoimposedbyIsraelon

theresidentsofGaza.

SaudiArabia:AlthoughKuwaitandSaudiArabiaarestrongalliesandcooperatewithinOPEC

and the GCC, Riyadh disputes Kuwait's ownership of the Qaruh and Umm al Maradim

islands.

Yemen:As

a

member

of

the

UN

Security

Council

in

1990

and

1991,

Yemen

abstained

on

a

numberofresolutionsconcerningtheIraqiinvasionofKuwaitandvotedagainstthe"useof


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forceresolution."Kuwaitrespondedbycancelingaidprograms,cuttingdiplomaticcontact,

andexpellingthousandsofYemeniworkers.

Europe

Denmark:OnNovember 6,2006,the Kuwaiti parliament voted 2215 to approvesevering

diplomatic ties with Denmark over the JyllandsPosten Muhammad cartoons controversy

andspendingaboutUS$50(39.20)milliontodefendtheprophet'simageintheWest.Both

votes were nonbinding, meaning the Cabinet does not have to abide by them. Kuwaiti

lawmaker Abdulsamad voted in favor of cutting diplomatic ties, saying, ""We have to cut

diplomatic and commercial ties with Denmark...We don't have to eat Danish cheese." Al

Rashid votedagainst cuttingdiplomatic ties, arguing that Muslimshave to be positiveand

remember that it were some individuals, not governments, who insulted the Prophet

Muhammad.AlRashidwasquotedassaying,"WehereinKuwaitcurseChristiansinmanyof

our

mosques,

should

those

(Christian)

countries

boycott

Kuwait?"

In

February

2008,

MPAbdullahAlRoumicalledforanendtoKuwait'sDemarkboycottandwasquotedassaying,

"NoMuslimcanacceptthisinsultagainsttheProphet...Itisaformofterrorism."

Greece:Greecewasoneofthe34membercountries inthecoalitionwhichassistedinthe

liberationofKuwaitfrom Iraq in1991duringtheGulfWar.Greecealsoparticipated inthe

UNICOMmissiontopatrolthedemilitarizedzonealongtheKuwaitIraqborder.

HolySee

Russia::On

28

December

1991,

Kuwait

recognised

the

Russian

Federation

as

the

successor

statetotheSovietUnion.RussiahasanembassyinKuwaitCity,andKuwaithasanembassy

in Moscow. The current AmbassadorofRussiato Kuwait isAlexander Kinshchak,whowas

appointedbyRussianPresidentVladimirPutinon28January2008,andwhopresentedhis

credentials to Emir Sabah AlAhmad AlJaber AlSabah on 28 April 2008. The current

AmbassadorofKuwaittoRussiaisNasserHajiAlMuzayen,whopresentedhiscredentialsto

VladimirPutinon11December2007.

Turkey: The Ministry of Foreign Affairs in Turkey describes the current relations at

"outstandinglevels".Bilateraltradebetweenthetwocountriesisaround275Milliondollars.

The

two

countries

have

recently

signed

fifteen

agreements

for

cooperation

in

tourism,

health,environment,economy,commercialexchangeandoil.

Restofworld

India:Kuwait is India'ssecond largest supplierofcrudeoiland nonoilbilateral tradewas

overonebillionUSdollarsin2008.Inlightoftheseclosetraderelations,thetwocountries

have bound themselves to both a Mutual Promotion and Reciprocal Protection of

Investments(BIPA)agreementandaDoubleTaxationAvoidanceAgreement(DTAA).InJune

2006,

Emir

Al

Sabah

visited

India,

and

in

April

2007

the

two

countries

inked

a

Memorandum

ofUnderstanding(MoU)onLabor,EmploymentandManpowerDevelopment.


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Pakistan:AftertheendofthefirstGulfWarin1991Pakistaniarmyengineerswereinvolved

inaprogrammeofmineclearanceinthecountry.Kuwaitwasalsothefirstcountrytosend

aidtoisolatedmountainvillagesinKashmirafterthequakeof2005,alsoofferingthelargest

amountofaidintheaftermathofthequake($100m).

People'sRepublicofChina:ChinaandKuwaitinitiateddiplomaticrelationsin1971.In2007,

Kuwait exported $2.3 billion worth of goods to China ($2.1 billion of which was oil) and

Kuwaitimported$1.3billionofgoodsfromChina.

In 2007, Kuwait supplied China with 95,000 barrels of oil per day, accounting for 2.6% of

China's total crude oil imports. Saudi Arabia was China's top supplier with its shipments

jumping 69.8 percent to 3.84 million tons (939,000 bpd), followed by Angola with 2.06

million tons (503,000 bpd), down 27.1 percent. Iran became third, with imports from the

country shrinking 35.3 percent to 1.18 million tons (289,000 bpd). China is the world's

second

biggest

oil

consumer

after

the

US.

Abdullatif

Al

Houti,

Managing

Director

of

International Marketing at staterun Kuwait Petroleum Corporation (KPC), told KUNA in

OctoberthatKuwaitisoncourseforitsChinaboundcrudeoilexporttargetof500,000bpd

by 2015, but success will heavily depend on the SinoKuwaiti refinery project. The two

countries have been in talks for the planned 300,000 bpd refinery in China's southern

Guangdong Province. The complex is expected to be onstream by 2012, but the joint

venture still awaits approval from the National Development and Reform Commission,

China'stopeconomicplanningagency.

UnitedStates:TheUnitedStatesopenedaconsulateinKuwaitinOctober1951,whichwas

elevatedto

embassy

status

at

the

time

of

Kuwait's

independence

10

years

later.

The

United

StatessupportsKuwait'ssovereignty,security,andindependence,aswellasitsmultilateral

diplomaticeffortstobuildgreatercooperationamongtheGCCcountries.

Strategic cooperation between the United States and Kuwait increased in 1987 with the

implementation of a maritime protection regime that ensured the freedom of navigation

throughthePersianGulffor11KuwaititankersthatwerereflaggedwithU.S.markings.

TheU.S.Kuwaitistrategicpartnership intensifieddramaticallyagainafter Iraq's invasionof

Kuwait. The United States spearheaded UN Security Council demands that Iraq withdraw

fromKuwait

and

its

authorization

of

the

use

of

force,

if

necessary,

to

remove

Iraqi

forces

from the occupied country. The United States also played a dominant role in the

development of the multinational military operations Desert Shield and Desert Storm that

liberated Kuwait. The U.S.Kuwaiti relationship has remained strong in the postGulf War

period. Kuwait and the United States worked on a daily basis to monitor and to enforce

Iraq's compliance with UN Security Council resolutions, and Kuwait has also provided the

mainplatformforOperationIraqiFreedomsince2003.

Since Kuwait's liberation, the United States has provided military and defense technical

assistance to Kuwait from both foreign military sales (FMS) and commercial sources. The

U.S. Office of Military Cooperation in Kuwait is attached to the American embassy and


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managestheFMSprogram.Therearecurrentlyover100openFMScontractsbetweenthe

U.S.militaryandtheKuwaitMinistryofDefensetotaling$8.1billion.PrincipalU.S.military

systemscurrentlypurchasedbytheKuwaitDefenseForcesarePatriotMissilesystems,F18

Hornet fighters, the M1A2 main battle tank, AH64D Apache helicopter, and a major

recapitalizationofKuwait'sNavywithU.S.boats.

Kuwaiti attitudes toward American products have been favorable since the Gulf War. In

1993,Kuwaitpubliclyannouncedabandonmentofthesecondaryandtertiaryaspectsofthe

Arab boycott of Israel (those aspects affecting U.S. firms). The United States is currently

Kuwait'slargestsupplierofgoodsandservices,andKuwaitisthefifthlargestmarketinthe

Middle East.U.S.exports toKuwait totaled $2.14billion in 2006.Provided theirprices are

reasonable, U.S. firms have a competitive advantage in many areas requiring advanced

technology, such as oil field equipment and services, electric power generation and

distributionequipment,telecommunicationsgear,consumergoods,andmilitaryequipment.

Kuwaitalso isan importantpartner intheongoingU.S.ledcampaignagainst international

terrorism,providing assistance in the military, diplomatic,and intelligencearenas andalso

supporting efforts to block financing of terrorist groups. In January 2005, Kuwait Security

Services forces engaged in gun battles with local extremists, resulting in fatalities on both

sidesinthefirstsuchincidentinKuwait'shistory.


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BankingandFinance

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.In1959theCentralBankofKuwaitwascreatedandtookoverthefunctionsofthe

currencyboardandtheregulationofthebankingsystem.

The first bank in Kuwait was established in 1941 by British investors. Subsequent laws

prohibitedforeignbanksfromconductingbusiness inthecountry.WhentheBritishbank's

concessionended in1971,thegovernmentbought51percentownership.In1952another

bank, the National Bank of Kuwait, the largest commercial bank, was founded. The

establishment of several other banks, all under Kuwaiti ownership, followed. Some

specializedfinancial

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

andlongtermindustrialfinancing;andtheprivateRealEstateBankofKuwait.Bythe1980s,

Kuwait'sbankswereamongtheregion's largestandmostactivefinancialinstitutions.Then

cametheSuqalManakhstockmarketcrashin1982.

Thelargerevenuesofthe1970sleftmanyprivateindividualswithsubstantialfundsattheir

disposal.Thesefundspromptedaspeculationboomintheofficialstockmarketinthemid

1970sthatculminatedinasmallcrashin1977.Thegovernment'sresponsetothiscrashwas

to bail out the affected investors and to introduce stricter regulations. This response

unintentionallycontributedtothefarlargerstockmarketcrashofthe1980sbydrivingthe

leastriskaversespeculatorsintothetechnicallyillegalalternatemarket,theSuqalManakh.

TheSuqalManakhhademergednexttotheofficialstockmarket,whichwasdominatedby

severalolderwealthyfamilieswhotraded,largelyamongthemselves,inverylargeblocksof

stock.TheSuqalManakhsoonbecamethemarketforthenewinvestorand,intheend,for

manyoldinvestorsaswell.

Sharedealingsusingpostdatedcheckscreatedahugeunregulatedexpansionofcredit.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 thattotal outstanding checks amounted to theequivalent ofUS$94

billionfromabout6,000 investors.Kuwait'sfinancialsectorwasbadlyshakenbythecrash,

aswastheentireeconomy.Thecrashpromptedarecessionthatrippledthroughsocietyas

individual families were disrupted by the investment risksof particular members made on

familycredit.Thedebtsfromthecrash leftallbutonebank inKuwaittechnically insolvent

helduponlybysupportfromtheCentralBank.OnlytheNationalBankofKuwait,thelargest

commercialbank,survivedthecrisisintact.Intheend,thegovernmentsteppedin,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

invasionchangedtheentirefinancialpicture.


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CentralBankofKuwait

EstablishmentoftheCentralBank

The

Central

Bank

of

Kuwait

began

operating

in

April

1969

in

accordance

with

Law

No.

32

of

1968 concerning Currency, the Central Bank of Kuwait and the Organisation of Banking

Business.

Banksupervision:TheCentralBankofKuwaitsupervisesthebankingsectorinthecountry.

ObjectivesoftheCentralBank

TheobjectivesoftheCentralBankshallbe:

Toexercise

the

privilege

of

the

issue

of

currency

on

behalf

of

the

State;

1. ToendeavortosecurethestabilityoftheKuwaiticurrencyanditsfreeconvertibilityintoforeigncurrencies;

2. To endeavor to direct credit policy in such a manner as to assist the social andeconomicprogressandthegrowthofnationalincome;

3. TocontrolthebankingsystemintheStateofKuwait;4. ToserveasBankertotheGovernment;5. TorenderfinancialadvicetotheGovernment

Operationsof

the

Central

Bank

RelationswiththeGovernment

TheCentralBankwillofferadvicetotheGovernmentinordertofacilitatetherealizationof

itsobjectivesandfunctions,andtheGovernmentwillconsulttheBankinmattersrelatingto

monetaryandcreditpolicy.

TheCentralBankshallactasbankerandfiscalagentfortheGovernment.Onthisbasis:

a. Government funds in Kuwaiti Dinars on current accounts shall be held solely withtheBank.NointerestshallbepaidbytheBankonsuchdeposits.

b. TheBankshallingeneralcarryout,freeofcharge,bankingtransactionsandservicesrelatingtotheGovernmentinsideandoutsidethecountry.

c. TheGovernmentmay place funds in KuwaitiDinarswith local banks,after seekingtheopinionoftheCentralBankand inamannernotconflictingwiththemonetary

policyinforce.

d. TheMinisterofFinancemayentrusttheCentralBankwiththeadministrationofanyotherGovernmentfundsinaccordancewiththeconditionsagreeduponatthetime.


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11|P a g e

e. TheMinistryofFinanceshalltransfertotheCentralBanksuchamountsasmaybenecessary for the implementation of any particular monetary policy, after the

MinisterofFinancehasapprovedsuchpolicy.

RelationswithLocalBanks

TheCentralBankmay:

a. Opendepositaccountsforbanksandfinancial institutionsoperatingintheStateofKuwait,andforpubliccreditinstitutions.

b. Open deposit accounts for other institutions, upon approval of the Minister ofFinance.Nointerestshallbepaidontheaccountsreferredtointheprecedingtwo

paragraphsexceptinsuchspecialcasesasmaybedecidedbytheBoardofDirectors

oftheCentralBankandapprovedbytheMinisterofFinance.

c. OpenaccountsinKuwaitiDinarswithbanks.d. Participatewithbanksinanyschemerelatingtotheinsuranceofdeposits.

TheCentralBankmaycarryoutthefollowingoperationswithbanksonly,andnototherwise:

a. Sell,purchase,discountorrediscountcommercialpapers,providedthattheseshallmaturewithinoneyearfromthedateofacquisition,discountorrediscountbythe

Bank.

b. Give loans or advances, in emergency cases, through current account for a periodnotexceedingsixmonthsagainstsuchcollateralastheBankmayconsideradequate.

GoldandForeignExchangeOperationsInsideandOutsidetheCountry

TheCentralBankmay:

a. Purchase,sell,importandexportgoldandsilvercoinsandbullion;b. Carryoutforeignexchangeoperationsandtransfersofallkinds;c. Open accounts with foreign central banks or other banks and with international

financialormonetaryinstitutions;

d. Open accounts for central banks, or other foreign banks and for internationalfinancial

or

monetary

institutions,

and

act

as

correspondent

for

such

banks

and

institutions;

e. Grant advances or credits to central banks, other foreign banks or internationalfinancialormonetaryinstitutions,andobtaincredits,advancesorloansfromthem,

providedthatsuchoperationsarewithinthescopeofitsfunctionsascentralbank;

f. Purchase, sell, discount or rediscount bills or securities or certificates issued orguaranteed by foreign governments or international financial or monetary

institutions, provided that they are expressed in freely convertible currencies and

areeasilynegotiableinfinancialmarkets;

g. Purchase and sell foreign bonds or bills other than those issued or guaranteed byforeign

governments

or

international

financial

or

monetary

institutions,

provided


17/52


12|P a g e

thattheyareexpressedinconvertibleforeigncurrenciesandareeasilynegotiablein

financialmarkets;

h. Purchaseandsellcommercialpapersacceptabletoforeignbanks.TheCentralBankmay:

a. InvestthePensionFundsetupforthebenefitoftheofficialsandemployeesoftheBank, and grant loans to such officials and employees in accordance with the

regulationsdecidedbytheBoardofDirectors;

b. Own only such immovable property as assigned for running the business of theBank;

c. Ingeneral,carryoutalloperationscustomarilycarriedoutbycentralbanksandnotinconsistentwiththeexerciseofitspowersorthedischargeofitsdutiesunderthis

Law,andundertakesuchdutiesasmaybeassignedtoitunderanyotherlaw.

AccountsandStatements

ThefinancialyearoftheCentralBankshallbethesameasthefinancialyearoftheState.

ThebasesforevaluationoftheassetsoftheCentralBankshallbespecifiedbydecree.

Creditbalances on this account shall not be entered in the Profitand Loss Account of the

Bank.DebitbalancesshallbemetbytheGovernmentunlesstheBoardofDirectorsdecides

otherwise.

Theaccounts of the Central Bank shall beauditedby one auditorormore. The Council of

Ministersshall,ontheproposaloftheMinisterofFinance,selecttheauditororauditorsand

fixtheirfees.

TheGovernoroftheCentralBankshallsubmittotheMinisterofFinance:

a. AmonthlystatementshowingtheassetsandliabilitiesoftheBank.SuchstatementshallbepublishedintheOfficialGazette.

b. An annual report on the Bank's operations, including the Balance Sheet and theProfit

and

Loss

Account

for

the

ending

financial

year,

and

a

general

review

of

the

monetary, banking, financial and economic affairs. This report shall be submitted

notlaterthanfourmonthsaftertheendofthefinancialyear.

c. A report on the events affecting the monetary or financial position, including thecausesandoutcomeofsucheventsandrecommendationsforhandlingthem.

GeneralProvisions

The Central Bank shall be exempt from all taxes, duties and financial dues whatsoever,

whethertheybeforthetreasury,municipalitiesoranyotherpublicinstitutionorbody.


18/52


13|P a g e

The Bank shall also be exempt from the advance payment ofjudicial fees, deposits and

guarantees,andsettlementthereofshallbedeferreduntilthecaseunderlitigationhasbeen

decided.

Debts due to the Central Bank shall be treated in the same way as debts due to the

Government,andshalltakepriorityoverdebtsduetoother creditors.Suchdebtsshallbe

collectedbythesameproceduresprovidedforthecollectionofdebtsduetotheState.

TheCentralBankmayonlybeliquidatedbyalawspecifyingtheliquidationproceduresand

theirdates.

OrganizationofBankingBusiness

EstablishmentofBanks

Banksarethoseinstitutionswhosebasicandusualfunctionsinvolvethereceiptofdeposits

for use in banking operations, such as: the discount, purchase and sale of commercial

papers,grantingofloansandadvances,issuingandcollectingcheques,placingofpublicand

private loans, dealing in foreign exchange and precious metals, and any other credit

operations or operations considered by the Law of Commerce or by custom as banking

operations. For the purposes of implementation of the provisions of this Law, and unless

otherwise provided, the branches of any bank operating in the State of Kuwait shall be

consideredasonebank.

Theprovisions

of

this

Chapter

shall

not

apply

to:

a. Publiccreditinstitutionssetupbylaw.b. Financialand investment institutionsandcompanieseven if theyarepermittedby

their articles ofassociation to receive depositsand execute investment operations

andsomebankingoperations.

c. Realestatecompanieswhichundertakethepartitionoflandortheconstructionofbuildingsandthesalethereofoncredit.

TheBoardofDirectorsoftheCentralBankmay uponapprovaloftheMinisterofFinance

subjectall

or

some

of

the

institutions

and

companies

referred

to,

or

today

rules

which

the

BoardofDirectorsmaydrawupforpurposesofsupervisionandwhichareinharmonywith

the nature of the activities of such institutions and companies. The opinion of the Central

Bank shall be sought in respect of the Articles of Association and Memorandums of

Agreement relating to financial and investment companies, or amendments thereto, in

ordertoascertaintheeconomicviabilityofsuchcompanies.

Without prejudice to the provisions of the Law of Commerce, wherever they are not in

conflict with the provisions of this Law, banking business may only be practiced by

institutionssetup intheformofjointstockcompanies,thesharesofwhichareplacedfor

publicsubscription.


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14|P a g e

BanksfoundedorcofoundedbytheGovernment,andbranchesofforeignbanks licensed

to operate in theState ofKuwait,may be exempted from the provisionsof the preceding

ParagraphbyadecisionoftheCouncilofMinisters.

FundsallocatedforopeningaforeignbanksbranchintheStateofKuwait,shallnotbeless

than fifteen million Dinars. This amount may be increased by decision of the Board of

Directors of the Central Bank. The Board of Directors of the Central Bank lays down the

bases,rulesandregulationstobecompliedwith inregardtotheoperationofbranchesof

foreignbanksintheStateofKuwait.Aforeignbanksbranchshallbedeemedasonebankin

theapplicationoftheprovisionsofthisLaw.

Before the formalities of incorporation are processed, the applications to establish banks

should be presented to the Board of Directors of the Central Bank to issue the

recommendationsnecessary.

RegistrationofBanks

Without prejudice to the provisions of the Law of Commerce and the Law of Commercial

Companies, wherever they are not in conflict with the provisions of this Law, no banking

institutionisallowedtostartoperationuntilithasbeenregisteredintheRegisterofBanks

attheCentralBank.

No institutionsotherthanthoseregistered intheRegisterofBanksareallowedtopractice

banking business or use in their business addresses, publications or advertisements the

terms:

"bank,

banker,

bank

owner"

or

any

other

wording

the

usage

of

which

may

mislead

thepublicastothenatureofthe institution.No institutionsotherthanthoseregistered in

the Central Bank Register of Banks or Register of Investment Companies are allowed to

receivemoneyforinvestmentfromthirdparties.

The Central Bank may where necessary ascertain by any means it deems fit that no

particular company or individual firm violates the provisions of the preceding two

paragraphs. Without prejudice to any severer penalty under any other law, anyone who

violatestheprovisionsofthefirst,secondandthirdparagraphsofthisArticleshallbeliable

to imprisonment for a term not exceeding two years and the payment of a fine not

exceedinga

hundred

thousand

Dinars,

or

to

either

of

these

penalties.

The licensing body shall, at the Central Bank request, revoke the operating license of the

business which exercised the contravening activity, and undertake all necessary

arrangementstopreventitsrepeatedexerciseofsuchactivity.

RegistrationorrefusalofregistrationofbanksshallbeaffectedbyadecisionoftheMinister

ofFinanceontherecommendationoftheBoardofDirectorsoftheCentralBank.

The Minister of Finance shall, on the recommendation of the Board of Directors of the

CentralBank,

issue

regulations

for

the

registration

of

banks,

including

the

rules,

procedures

anddatesforregistration,amendmentsandpublicationofregistration.


20/52


15|P a g e

a. Registered banks shall notify the Central Bank of any amendments they intend tomake to their Memorandums of Agreement or Articles of Association. If such

amendments are approved in principle by the Central Bank, the formalities

necessary for processing them may then be accomplished in accordance with the

provisions of the Law of Commercial Companies. Such amendments shall not be

effectiveuntiltheyhavebeenenteredintheRegisterofBanks.

b. AmendmentofentriesrelatedtootherdatawhicharesubjecttoregistrationintheRegister but not involving amendment of the Articles of Association or

Memorandums of Agreement may be effected upon approval thereof by the

GovernoroftheCentralBank.

DeletionfromRegisterandLiquidationofBanks

Without prejudice to the provisions of the Law of Commercial Companies, no bank may

cease isoperationsormergewithanyotherbankunless it isgivenadvancepermissionby

the Minister of Finance on the recommendation of the Board of Directors of the Central

Bank.TheBoardofDirectorsoftheCentralBankshall,insuchacase,ascertainthatthebank

hasdischargedallitsobligationstowardsitscustomersandcreditorsinaccordancewiththe

generalprovisionslaiddowninthisrespect.

AbankmaybedeletedfromtheRegisterofBanks

a. Atitsownrequest;b. If it does not start business within one year from the date it is notified of the

decisionregarding

its

registration

in

the

Register

of

Banks;

c. Ifitisdeclaredbankrupt;d. Ifitmergeswithanotherbank;e. Ifitceasesitsoperationsorifitsliquidityorsolvencyareendangered;f. IfitcommitsanyactinviolationoftheprovisionsofthisLaw.

The deletion of any bank under (e) and (f) above shall not be proposed until the bank

concernedhasbeennotifiedoftheproposalandgivenanopportunitytoexpress itsviews.

TheMinisterofFinanceshall,ontheproposaloftheBoardofDirectorsoftheCentralBank,

issueadecisionregardingthedeletion.Thedecisionshallbeeffective fromthedateof its

publicationin

the

Official

Gazette.

Before

proposing

the

deletion

from

the

register

of

any

banktheliquidityorsolvencyofwhichisendangered,theBoardofDirectorsoftheCentral

Bankmaytakeanyorallofthefollowingmeasures:

a. Forbidthebankfromundertakingcertainoperations,orsetlimitsonthebusinessofthebank;

b. Appointatemporarycontrollertosupervisetheprogressofthebank'sbusiness;c. Assign the Central Bank to manage the bank for a certain period of time, and

thereafterdecidewhetherthebankcancarryonbyitselforshouldbedeletedfrom

the Register and liquidated. Expenses incurred for management purposes shall be

bornebythebankinvolved.


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16|P a g e

In all cases, the Central Bank may if it deems it in the interest of depositors ask the

appropriate court to issue a decision prohibiting measures against the bank involved and

stayingalllawsuitsfiledagainst.Suchadecisionshallbevalidforoneyear.Everybankwhich

ithasbeendecidedto delete fromtheRegister of Banks shall be liquidated. TheBoard of

Directors of the Central Bank shall specify the rules for liquidating the transactions

outstandingatthetimethedecisionisissued.

ActivitiesNottobeUndertakenbyBanks

Banksmustnot:

a. Engageintradeorindustry,orownanygoodsunlesssuchgoodshavebeenacquiredinsettlementofdebtsduetothem.Suchgoodsshallbesoldbythebankwithinone

yearfromthedateofacquisition;

b. Purchase any real estate other than the required for conducting their business oraccommodatingtheirstaff,unlesssuchpropertyhasbeenacquiredinsettlementof

debts. In the latter case, the bank shall sell the real estate within a period not

exceedingthreeyears.Thesaidperiod,however,maybeextendedbyadecisionof

theBoardofDirectorsoftheCentralBank;

c. Own or deal in their own shares unless such shares have been acquired insettlementofdebtsduetothem,andprovidedthattheysellthemwithintwoyears

fromthedateofacquisition.

Banksmay:

a. Purchase, for their own account, shares of other commercial companies within alimitof50%ofthebank'sownfunds.Thislimitmaynotbeexceededwithoutprior

approvalbytheCentralBank.

b. Ownsharesorotherassetsheldwiththem insettlementofdebtsduetothem. Insuchcases,thebankshalldisposeoftheseassetswithintwoyearsfromthedateof

acquisition.

TobeamemberofaBank'sBoardofDirectors,orinchargeoftheExecutiveStaffofabank,

or Deputy or Assistant thereof, or to continue occupying any of these posts, requires the

fulfillmentof

the

following

conditions:

a. Not to have been adjudged guilty in an offense involving dishonesty, or breach oftrust;

b. Nottohavebeendeclaredbankrupt;c. Nottohaveabstainedfrompayment,evenonce;d. Tobeofgoodreputation;e. Tohaveadequateexperienceinbanking,financialoreconomicaffairsinf. Compliance with the Rules and Regulations laid down under a resolution of the

BoardofDirectorsoftheCentralBankofKuwait;

g. Not to be a member of a Board of Directors or staff in any of the other banksoperatingintheStateofKuwait.


22/52


17|P a g e

Chairmenofbanks'BoardsofDirectorsshallnotifytheCentralBankofKuwaitofnominees

tothemembershipofthatBoard,thirtydayspriortothedatefixedforthemeetingofthe

General Assembly expected to be held to elect the members of the Board of Directors.

Moreover, the Central Bank of Kuwait shall be notified of the names of the candidates

standing for holding the positions referred to in the preceding paragraph. The Board of

Directorsofthe

Central Bank of Kuwait shall have the right within twentyone days from the date of its

notificationtoobjecttotheappointmentofanysuchnomineesunderaresolutionshowing

therelevantreason,forfailuretofulfilltherequiredconditions.

Suchobjectionshallresult intheexclusionof thenominee in question fromcandidacy for

theBoardofDirectorsorfromoccupyinganysuchpositions,asthecasemaybe.Nominees

not notified to the Central Bank or candidates objected to by the Central Bank of Kuwait

according

to

the

provisions

of

this

TheBoardofDirectorsoftheCentralBankmayrequestfromtheBoardofDirectorsofthe

concerned bank the removal of any of those mentioned in the first paragraph, if those

occupying these posts lose during the time of their service any of the conditions

mentioned in this article, or if the Board of Directors of the Central Bank sees in that

measure the safeguard of the depositors funds or shareholders interests or the banks

general interest. If the removal does not take place, the Board of Directors of the Central

Bankshallhavetherighttoissuearesolutionshowingtherelevantreasonfortheremoval

ofanyoftheabovementionedfromtheirposts,andmakearelevantentryintheRegisterof

Banks.

Banks must not, in any form, give loans or overdrafts through current account or issue

guarantees in favor of the members of their Boards of Directors without prior permission

fromtheGeneralAssembly.

Such loans, advances and guarantees shall be subject to the rules applied by the bank to

othercustomers.Thisprohibitionshallnot includetheopeningofdocumentarycredits.No

bankmayissue"Travelers'Cheques"withoutpriorpermissionfromtheCentralBank.

ProvisionsRelating

to

Supervision

TheCentralBankmayissuetothebankssuchinstructionsasitdeemsnecessarytorealizeits

creditormonetarypolicyortoensurethesoundprogressofbankingbusiness.

ThisprovisionappliestounitssubjecttothesupervisionoftheCentralBankofKuwait.

Branchesofforeignbanksareboundtocomplywiththatratiowithinthreeyearsfromthe

dateoftheirlicensingtooperateintheStateofKuwait.

TheKuwaiti

banks,

branches

of

foreign

banks,

and

units

mentioned

in

the

first

paragraph,

operatingatthetimeofapplicationofthislawshallcarryoutthenecessaryadjustmentsin


23/52


24/52


19|P a g e

SpecializedBanks

Specialized banks are meant to be those banks the main function of which is to finance

certaineconomicsectors,suchastherealestate,industrialoragriculturalsectors,andwhich

donotbasicallyreceivedemanddeposits.

Specialized banksshallbesubjecttothe provisionsrelating tothe organizationof banking

business, wherever such provisions are not in conflict with the nature of the activities of

thesebanks.

TheBoardofDirectorsoftheCentralBankmaylaydownspecialrulesforthesupervisionof

eachtypeofthespecializedbanks.Suchrulesshall,inparticular,coverthefollowing:

a. Termsforreceiptofdeposits.b. Themaximumlimitforthevalueofbondsspecializedbanksmayissue,aswellasthe

termsforsuchissue.

c. Thetermsrelatingtoloansandothercreditfacilitiesgivenbyspecializedbanks.d. Therulesrelatingtoparticipation inestablishingothercompanies,orthepurchase

oftheirshares.

InspectionofBanksandInstitutionsSubjecttoSupervisionbytheCentralBank

a. The Central Bank may, at any time, inspect banks and financial companies andinstitutionssubjecttotheCentralBanksupervisionundertheprovisionsofthisLaw,

in addition to branches, companies and banks that operate abroad and are

subsidiariesofKuwaitibanks.Coordinationshallbecarriedout inthisregardwith

thecentralbanksorbankingsupervisionauthoritiesintheconcernedcountries.The

bankingsupervisionauthorities intheothercountriesshallcarryoutthe inspection

of branches of their banks operating in the State of Kuwait. In this regard, co

ordinationwiththeCentralBankofKuwaitshallprecedeinspection.

b. CentralBank staff authorized to conduct inspection shall have the right to seetheaccounts, books, records, instruments and all documents they deem necessary for

inspection.Theymayaskanymemberoftheboardofdirectors,oranyofficialofthe

bank or institution to submit and give such data and information they deem

necessaryfor

the

purposes

of

inspection.

Review

of

books,

records

and

instruments

shallbecarriedoutwithinthepremisesofthebankorinstitutioninspected.

c. The Central Bank shall makea comprehensive report on the findings of inspectionmade inanybankor institution.Thereportshall incorporaterecommendationson

the measures the Central Bank deems useful for rectifying any unsound position

discoveredthrough inspection.TheGovernoroftheCentralBankshallsendacopy

of the report to the Chairman of the Board of Directors or to the Manager of the

bankor institutioninspected.TheGovernoroftheCentralBankmayfixaperiodof

graceforthebankorinstitutiontoeliminateviolationsorcorrectunsoundpositions

discoveredthrough inspection.Periodicdatesandrules relatingto inspection shall

beset

by

the

Board

of

Directors

of

the

Central

Bank.


25/52


20|P a g e

Withoutprejudicetoanysevererpenaltyunderanyotherlaw,everymemberoftheboard

ofdirectors,manager,orofficialofthebankor institutioninspectedwhorefusestosubmit

information and data or to present books, records, and instruments required by the

inspectorforinspectionpurposes,orwhogivesinformationordatawhileknowingthatitis

untrue, shall be liableto imprisonment for atermnotexceedingthree monthsandtothe

payment of a fine not less than one hundred but not exceeding two hundred twentyfive

Dinars,ortoeitherofthesetwopunishments.

CentralBankofficialsauthorizedtoconductinspectionshall duringthetermoftheirservice

andafterquittingtheirjobs maintainthesecrecyofaccounts,booksandinstrumentsthey

reviewbyvirtueoftheirduty.Theyshallnotdiscloseanyinformationrelatingtotheaffairs

ofbanksor institutions inspected,ortotheaffairsoftheircustomers,except insuchcases

whereitispermissibletodosobylaw.

Without

prejudice

to

any

severer

punishment

under

any

other

law,

every

person

who

violates the prohibition provided for in the preceding paragraph shall be liable to

imprisonment for a period not exceeding three months and to the payment of a fine not

exceeding two hundred twentyfive Dinars, or to either of these two punishments, plus

dischargefromservice.

AccountsandStatements

Banksshalldothefollowing:

a.

End

their

financial

year

on

the

thirty

first

of

December

every

year;

b. SubmittotheCentralBank,withinthreemonthsfromtheendoftheirfinancialyear,theirBalanceSheetandProfitandlossAccount.

Foreign bank branches permitted to be opened under the provisions of this Law shall

maintain independentaccounts forall theiroperations inKuwait, includingbalancesheets

andprofitandlossaccounts.

TheCentralBankmayaskthebankstosubmitsuchstatements, informationandstatistical

dataastheBankconsidersnecessarytocarryout its functions.TheCentralBankmayalso

establisha

system

for

the

collection

of

statistics

on

banking

credit

on

periodical

basis.

The

natureof such statements, information and statisticaldata,aswell astheir formsandthe

periodsduringwhichtheyshouldbesubmitted,shallbespecifiedbytheBoardofDirectors

oftheCentralBank.

Banks must submit to the Central Bank all data, information and statistics it requests, in

accordance with the system the Central Bank lays down for this purpose. All these

informationshallremainconfidential,exceptforstatisticaldata inanaggregateform,data

andinformationexchangedbetweentheCentralBankofKuwaitandothercentralbanksand

bankingsupervisionauthorities, infulfillmentoftheobjectivesofaggregatesupervisionon

banks,branches

and

companies

that

are

subsidiaries

of

these

banks.

Exchange

of

these

data


26/52


21|P a g e

and information shall be in accordance with the arrangements agreed on between the

CentralBankofKuwaitandtheconcernedcentralbanksorbankingsupervisionauthorities.

The Central Bank may establish a System of Risks for the purpose of assisting banks to

evaluate the financial positions of persons applying to them for credit, and to enable the

Central Bank to be constantly aware of the trends of banking credit and to assist in the

applicationofthesystemofdiscountandrediscountattheCentralBank.

TheBoardofDirectorsoftheCentralBankshall laydowntherulesandproceduresforthe

System,andshallfixthedataandreturnsrelatingtoitsenforcement.Dataandinformation

acquired through the System of Risks shall only be disclosed to persons who should be

advisedthereofundertheruleslaiddownfortheimplementationoftheSystem.

Withoutprejudicetoanysevererpunishmentunderanyotherlaw,anyonewhoviolatesthis

prohibition shall be liable to imprisonment for a term not exceeding three months and to

the payment of a fine not exceeding two hundred twentyfive Dinars, or to either one of

thesetwopunishments,plusdischargefromserviceinallcases.

Theauditorshall indicate inhisannualreporttherulesandmeansreliedupon inverifying

theexistenceofassets,themethodsappliedintheirevaluationthereof,andtheprocessof

assessing outstanding liabilities. The auditors annual report shall include the auditors

opinionontheadequacyofinternalcontrolsystemsappliedinthebank,andthesufficiency

ofprovisionsagainstanydecline inassetsvalueandagainstthebank liabilities,alongwith

determiningtheshortageintheseprovisionsifapplicable.

Theauditorshallclarify inhisreportwhethertheoperationsauditedwerecontrarytoany

rulesorprovisionsoftheLawconcerningtheCentralBankandtheOrganizationofBanking

Business,ortotheregulationsanddecisionsissuedinpursuanceofthesaidLaw.Acopyof

thereportshallbeforwardedtotheGovernoroftheCentralBank.

Theauditorshall onrequestoftheCentralBankcheckandauditanytransactionscarried

outbythebankwhoseaccountsareauditedbyhimandpresentareportaccordinglytothe

Central Bank. Furthermore, the auditor shall sign any statements or accounting data

forwardedbythebanktotheCentralBank.Suchsignatureshalltestifytothecorrectnessof

thesesstatements

and

data.

Theauditormaynotreceiveany loans whetherwithorwithoutcollateral orguarantees

fromthebanktheaccountsofwhichheaudits.

AdministrativePenalties

1. IfabankviolatestheprovisionsofthisLaworthedecisionsandinstructionsissuedin pursuance thereof, or the provisions of its Articles of Association, or fails to

submitthedocuments,statementsor informationwhich it isrequiredtosubmitto

the

Central

Bank,

or

submits

statements

discrepant

with

facts,

the

following

penaltiesmaybeimposed:


27/52


22|P a g e

a. Warning.b. Imposefinancialpenaltiesthatarecommensuratewiththegravenessofthe

violation,anddonotexceedfiftythousandDinars.

c. Temporarily suspend some or all operations usually carried out by theCentralBankwithbanks.

d. Prohibit the bank from carrying out certain operations, or imposing anyotherlimitationsonitsbusiness.

e. Request the removal or replacement of the employee responsible for theviolation, ifthatemployee isamongthose inchargeofthemainsectorsof

thebanksactivity.

f. ConsiderthememberofthebanksBoardofDirectors,whichisresponsiblefortheviolation,unfitfortheBoardmembership.

g. Appoint a temporary controller to supervise the progress of work at thebank. Thepowers and competences of that controller shall bedetermined

bythe

Board

of

Directors

of

the

Central

Bank.

h. Dissolve the banks Board of Directors and appoint a commissioner tomanagethebankuntiltheelectionofanewBoard.

i. DeletingfromtheRegisterofBanks.2. Thepenaltiesprovidedforinparagraphs(a)and(c)shallbeimposedbyadecisionof

theGovernor. Thepenalties provided for in paragraphs (b), (d), (e), (f), (g) and (h)

shall be imposed by a decision of the Board of Directors of the Central Bank. The

penaltyprovidedforinparagraph(i)shallbeimposedbyadecisionoftheMinister

of Finance, after the approval of the Board of Directors of the Central Bank, and

afterperusaloftheconcernedbanksexplanation inthisregard.Unless involvinga

third

partys

rights,

any

money

achieved

by

the

violating

bank

as

a

result

of

the

committed violations, shall become the property of the Public Treasury.

Furthermore, all financial gains achieved by a member of the banks Board of

Directors,orthebanksemployee,asaresultofcommittedviolationsshallbecome

the property of the Public Treasury.The Board of Directorsof the Central Bank of

Kuwaitlaysdowntherulesandprinciplestobeappliedindeterminingtheamounts

thatshallbecomethepropertyofPublicTreasury.

3. MembersofBoardofDirectors,theofficerinchargeoftheExecutiveStaff,GeneralManagers, Deputies or Assistants thereof, Sector Managers, and Branch Managers

oftheviolatingbankshallallwithintheirrespectivecompetences beresponsible

fordeliberatelycommittinganyactthatresulted inthebanksviolationofthisLaw

andthedecisionsand instructions issued inpursuancethereofortheprovisionsof

thebanksArticlesofAssociation,orforfailingtosubmitthedocuments,statements

or informationwhich it isrequiredtosubmittotheCentralBank,orforsubmitting

statementsdiscrepantwithfacts.Thepersonresponsiblefortheviolationshallbear

allensuingdamagestothebank,itsshareholdersorthirdparties,asaresultofthe

violation.

Exceptforcasesallowedbythelaw,anymemberofthebanksBoardofDirectors,orbank

manageror

employee

or

worker,

shall

not

disclose

any

information

during

the

period

of

his

employment or after leaving work at the bank regarding the affairs of the bank or its


28/52


23|P a g e

customers,orotherbanksaffairs,whichhemayhavebecomeawareofduetotheactivities

inherentinhisposition.

Withoutprejudicetoanysevererpunishmentunderanyotherlaw,anyonewhoviolatesthe

prohibitionmentionedinthepreviousparagraphshallbeliabletoimprisonmentforaterm

not exceeding three months and the payment of a fine not exceeding two hundred and

twentyfiveDinars,ortoeitherofthesepunishments,plusdismissalfromtheservice.

IslamicBanks

Islamic Banks exercise the activities pertaining to banking business, and any activities

considered by the Law of Commerce or by customary practice as banking activities, in

compliance with the Islamic Shari'ahprinciples. Islamic banks ordinarily accept all types of

deposits, in the form of current, savings, or investment accounts, whether for fixed terms

andpurposesorotherwise.Thesebankscarryout financingoperationsforallterms,using

Shari'ah Contracts, such as: Murabaha, Musharakah and Mudarabah. Furthermore, these

banksprovidevarioustypesofbankingandfinancialservicestotheircustomersandtothe

public. They conduct financial and direct investment operations whether on their own

account or on the account of other parties or in partnership with others, including

establishment of companies or holding equity participations in existing companies or

companiesunderestablishment,whichundertakevariouseconomicactivities,inaccordance

withbothIslamicShari'ahprinciplesandcontrolslaiddownbytheBoardofDirectorsofthe

CentralBank,andallthatincompliancewiththeprovisionsofthisLaw.

The

Central

Bank

shall

lay

down

the

rules

and

controls

that

regulate

the

activities

of

branchesofforeignIslamicbanksauthorizedtooperateintheStateofKuwait.Insofarasthe

provisionsofthisLawareconcerned,thebranchesofanyforeignIslamicbankoperating in

theStateofKuwaitshallbeconsideredasonebank.

As an exception of the provisions of the Commercial Companies Law pertaining to the

establishmentofcompanies,andoftheprovisionsofthisLaw(onIslamicbanks)pertaining

to capital and share percentages of founders' subscription, Kuwaiti banks with the

approvaloftheCentralBankmayestablishsubsidiarycompaniestoconductactivitiesof

Islamic Banks in accordance with Shari'ah principles and the provisions of this Law. Each

Kuwaitibank

may

not

establish

more

than

one

company

with

only

one

premises,

and

the

capitalofthecompanyshallnotbelessthanfifteenmillionKuwaitiDinars.Thefounderbank

shall subscribe for a share of not less than 51% in the capital of the company, and shall

maintainthatpercentageatalltimesaftertheestablishment.Theremainingsharesshallbe

placed for public subscription. If placement is not entirely covered by public subscription,

theremainingsharesshallbecoveredbythefounderbankitself.

Apart from the exception stipulated in the preceding paragraph, the subsidiary company

mentioned in that paragraph, which conducts its activity in accordance with the Shari'ah

principles, shall be considered an independent Islamic bank in the application of the

provisions of this Law. The bank shall not sell or transfer the property of its subsidiary


29/52


24|P a g e

company or any part thereof to any other party. Before starting the formalities of

incorporation, applications forestablishing Islamic banks shall be presented to the Central

Bank,togetherwiththefollowingdocuments:

a. Astatementcitingthefounders'names,nationalities,addresses,andshares inthebank'scapital;

b. AdraftoftheMemorandumofAgreementandArticlesofAssociation;c. Thefeasibilitystudyforestablishingthebank;andd. AnyotherdocumentsthattheCentralBankmayrequire.

Application forms for establishing branches of foreign Islamic banks shall be presented to

theCentralBank,togetherwiththefollowingdocuments:

a. A copy of the Memorandum of Agreement and Articles of Association of theapplicantbank;

b. Thefeasibilitystudyforestablishingthebranch;c. EvidencethattheHeadquartersoftheforeignIslamicbank issubjecttotheparent

country supervisory authority, together with the relevant approval thereof to

establishthebranchappliedfor,and

d. AnyotherdocumentsthattheCentralBankmayrequire.ApplicationstoestablishIslamicbanksorabranchofforeignIslamicbankshallbesubmitted

totheBoardofDirectorsoftheCentralBankforitsapprovalinprincipleorrefusalthereof.

ThelicensegiventoestablishabranchofaforeignIslamicbankshallnotbetransferableto

anyother

party.

Islamic

banks

shall

be

registered

in

a

special

register

for

Islamic

Banks

at

the

Central Bank, pursuant to applications presented to the Central Bank on relevant forms.

Registration therein shall be affected by a decision of the Minister of Finance on

recommendationoftheBoardofDirectorsoftheCentralBank.IslamicBanksshallnotstart

operationuntiltheyhavebeenregisteredinthatRegister.

IslamicbanksshallnotestablishbranchesinsideoroutsideKuwaitwithoutpriorpermission

from the Central Bank, and before having these branches registered in the Islamic Bank

Register.TheMinisterofFinanceshall,ontherecommendationoftheBoardofDirectorsof

theCentral Bank, issuean Islamic BankRegister Bylawthatshall includerules,procedures

and

timings

of

effecting,

amending

and

declaring

Register

entries.

In

keeping

with

the

provisionsoftheLawofCommercialCompanies,andwithoutprejudicetotheprovisionsof

thisLaw,registrationofIslamicbanksintheRegistershallrequirethefollowing:

a. The bank takes the form of ajointstock company that places its shares for publicsubscription. Branches of foreign Islamic banks, once permitted in the State of

Kuwait, may be excluded from this provision by a decision of the Council of

Ministers,upontheproposaloftheBoardofDirectorsoftheCentralBankandthe

approvaloftheMinisterofFinance.

b. The Central Bank approvesthe bank's Memorandum of Agreementand Articles ofAssociation.


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25|P a g e

Registration of branchesof foreign Islamic banks in the Register,shall require provisionof

thefollowingdocumentstotheCentralBank:

a. An affidavit by the Headquarters of the foreign bank declaring its commitment toanyrightsofdepositorsandcreditorsaswellasallliabilitiesthatmayaccrueonthe

branch;

b. EvidenceofthetransferoftheminimumamountoffundsallocatedforthebranchoperationsintheStateofKuwait,asstipulatedinthisLaw;

c. Anyothercommitment,documentorinstrumentthattheCentralBankmayrequire.Withoutprejudicetotheprovisionsandtheprovisionsofenforcedlaws,thepaidupcapital

ofanyIslamicbankshallnotbelessthanseventyfivemillionKuwaitiDinars.Thefounders'

shareinthebankcapitalshallnotrecedebelow10%norexceed20%.

With regard to the branches of foreign Islamic banks the amount of funds allocated for a

branch in the State of Kuwait shall not be less than fifteen million Kuwaiti Dinars. The

founders'share in the amount of fundsallocated forabranch in Kuwaitmaybe amended

andsotheamountoffundsallocatedforthebranchincreasedbyadecisionoftheBoardof

DirectorsoftheCentralBank,whennecessary.

IfthecapitalofabankortheamountoffundsallocatedforabranchofforeignIslamicbank

fallbelowtherequiredminimumlimitasaresultofoperationallossesorotherreasons,the

bankshallcoverthedifferencewithinsuchaperiodasmaybespecifiedbytheCentralBank.

EachIslamic

bank

shall

have

an

independent

Shari'ah

Supervisory

Board,

comprised

of

not

lessthanthreemembersappointedbythebank'sGeneralAssembly.TheMemorandumof

Agreement and Articles of Association of the bank shall specify the establishment of the

Board as well as its formulation, powers, and workings. In case of a conflict of opinions

amongmembersoftheShari'ahSupervisoryBoardconcerningaShari'ahrule,theboardof

directorsofthedesignatedbankmaytransferthemattertotheFatwaBoardintheMinistry

ofAwqafandIslamicAffairsthatshallbethefinalauthorityonthematter.

The Shari'ah Supervisory Board shall annually submit to the bank's General Assembly a

reportcomprisingitsopiniononthebank'soperationsintermsoftheircompliancewiththe

IslamicShari'ah

principles

and

any

comments

it

may

have

in

this

respect.

This

report

shall

be

includedinthebank'sAnnualReport.

TheCentralBankmay:

a. Open accounts denominated in Kuwaiti Dinar or foreign currencies with Islamicbanks;

b. OpenaccountsdenominatedinKuwaitiDinarorforeigncurrencyforIslamicbanks;c. AuthorizeIslamicbankstoparticipateintheClearingChamber.Suchactionsshallbe

performedinaccordancewiththetermsandconditionsthatarenotincontradiction

withthe

Islamic

Shari'ah

principles

and

are

as

decided

by

the

Central

Bank.


31/52


26|P a g e

TheCentralBankmaycarryoutthefollowingoperations:

a. Provideemergency financeto Islamicbanks foraperiodnotexceedingsixmonthsusing instruments and methods that conform with the Islamic Shari'ah principles,

andinaccordancewiththetermsandconditionssetbytheBoardofDirectorsofthe

CentralBank.Thetermofsuchfinancemaybeextendedforaperiodnotexceeding

furthersixmonths.

b. Sell to and purchase from Islamic banks securities and other instruments thatcomplywiththeIslamicShari'ahprinciples.

c. Issue instruments that comply with the Islamic Shari'ah principles, in accordancewith the limits and conditions set by the Board of Directors of the Central Bank.

Dealing in these instruments, by sale and purchase, may be carried out with both

IslamicbanksandotherinstitutionssubjecttothesupervisionoftheCentralBank.

Islamic

banks

shall

be

under

the

obligation

to

fully

repay

sight

deposits

to

their

depositors

uponrequest,whilesuchdepositsshallnotincuranylosses.Ownersofinvestmentdeposits

shall participate in the profits and losses from the bank's business in proportion to the

amountsoftheirparticipation inthe investment,pursuanttothecontractsconcludedwith

theminthisregard,andinaccordancewiththeprovisionsofthisLaw.

The Board of Directors of the Central Bank shall set the rules and regulations for the

supervision of Islamic banks with respect to liquidity, solvency, and business organization,

includinginparticular:

a. Asystemforliquidityandelementsthereof;b. Capitaladequacystandardsthroughspecifyingtheratioofcapitaltoassetelements;c. Rulesforcalculationoftherequiredprovisionsforassetrisks.

TheBoardofDirectorsoftheCentralBankmayspecifyforIslamicBanksallorsomeofthe

following:

a. Themaximumvalueofoperationspertainingtoaspecificactivity;b. The maximum limit of a bank's equity holdings in companies that it incorporates,

participatesinestablishment,orownssharestherein;andtherulesandregulations

thereof,

in

addition

to

the

maximum

limit

of

a

bank's

participation

in

any

single

project;

c. The maximum limit of a single customer's liability to the bank while granting arelativeadvantagetosubsidiariesofthebankaccordingtotheconditionslaiddown

bytheCentralBank;

d. Theamountoffundsthatmustbeinvestedinthelocalmarket;e. The portion of deposits with the bank that must be deposited in cash with the

CentralBank;

f. The rules and regulations that must be observed in a bank's relationship with itscustomers,andbetweenitscustomersandshareholders.


32/52


27|P a g e

WithoutprejudicetotheprovisionsofthisLaw,Islamicbanksshallnotownordealinprivate

residentialbuildingsandplotsintheStateofKuwaitwiththeexceptionofthose:

a. Acquiredordealtinforthepurposesofexecutingfinanceoperationsthathavebeenagreedtoor arebeing concludedwithcustomers inaccordancewith the methods

andformsoffundingthatareincompliancewiththeIslamicShari'ahprinciples;

b. Requiredfortheconductoftheirbusinessorfortheaccommodationorrecreationoftheirstaff;

c. Acquiredbyreversionoftitleinsettlementofothers'unfulfilledobligationstowardsthem, provided that these are sold off within a period not exceeding three years

from the date of reversion. The said period, however, may be extended by a

decisionoftheBoardofDirectorsoftheCentralBank,whennecessary.

Unlessotherwisestipulatedinthissection,Islamicbanksshallbesubjecttotheprovisionsof

this

Law

without

prejudice

to

the

Islamic

Shari'ah

principles.


33/52


28|P a g e

BankingSectorinKuwait

Regulatorystepstoenhanceanddiversifytheeconomicactivityarelikelytoprovideasolid

base

for

sustained

economic

growth.

The

conducive

macroeconomic

environment

and

increasedgovernmentandprivatesectorspending is likelytogiveafurtherfilliptobolster

economicgrowth.Thebiggestbeneficiaryfromthestrongeconomicgrowth isthefinancial

andbankingsector.

Significant mega projects in the oil and gas sector underpinned the strong growth in the

banking sector. The increasing demand for and supply of raw materials, consumables and

otherconsumer itemsresulted in trading sectortoo registering stronggrowth.Real estate

sector continues to expand as more real estate development projects are already under

implementationorareinthepipeline.Consolidatedassetsoflocalbanksgrewby24.9%yo

yto

reach

KD27.0bn

at

the

end

of

2006,

thanks

to

the

credit

facilities

to

residents

growing

by

26.3%toKD14.9bn.Duringtheperiod200306,theconsolidatedassetsoflocalbanksgrew

ataCAGRof12.8%fromKD18.8bnin2003toKD27.0bnin2006

LocalBanks

Commercialbanks

NationalBankofKuwait(NBK) CommercialBankofKuwait(CBoK) GulfBank(GB) AlAhliBankofKuwait(ABK) TheBankofKuwait&theMiddleEast(BKME) BurganBank(BB) TheBranchoftheBankofBahrain&Kuwait TheBranchoftheBNPParibasBank TheBranchofHSBCMiddleEastBank TheBranchoftheNationalBankofAbuDhabi TheBranchofCitibankofNewYork

Specializedbanks

KuwaitRealEstateBank(KREB) IndustrialBankofKuwait

IslamicBanks

KuwaitFinanceHouse(KFH) BoubyanBank(Boubyan)


34/52


29|P a g e

LiabilityMixofBanks

Private sector deposits (both sight deposits in KD and quasimoney) continued to register

stronggrowthduringthelastthreeyears.PrivatesectordepositsincreasedfromKD9.9bnin

2003toKD15.3bnin2006,recordingCAGRof15.5%ascomparedtotheoverallliabilitiesof

local banks growth of 12.8% during the same period. The contribution of private sector

deposits to total liabilities increased from 52.7% in 2003 to 56.6% in 2006. Sight deposits

increased from KD2.1bn in 2003 to KD2.9bn in 2006, registering CAGR of 11.0% for the

periodunderreview.Proportionofsightdepositstototalliabilitiesdeclinedmarginallyfrom

11.3% in2003to10.7% in2006.Quasimoneydeposits increasedfromKD7.8bn in2003to

KD12.4bnin2006,CAGRof16.7%fortheperiod200306.Shareofquasimoneydepositsto

total liabilities increased from 41.4% in 2003 to45.8% in 2006.Own funds increased from

KD2.0bn in 2003 to KD3.1bn in 2006, registering a CAGR of 15.9% for the period under

consideration. Contribution of own funds to overall balance sheet size of local banks

increased

from

10.7%

in

2003

to

11.6%

in

2006.

The

local

interbank

deposits

to

consolidatedbalancesheetoflocalbanksdeclinedfrom13.6%in2003to4.8%in2006.

AmountinKDmn 2003 2004 2005 2006Assets

Cash 91 75 106 149

SightDepositswithCBK 108 175 112 50

TimeDepositswithCBK 348 126 440 926

CBKBonds 124 356

ClaimsonGovernment

PublicDebtInstruments 2,232 2,146 2,085 1,989

DebtPurchase

Bonds

818

604

378

176

ClaimsonPrivateSector

OtherLocalinvestments 959 1,019 1,109 1,215

CreditsFacilitiestoResidents 8,419 9,867 11,827 14,934

ForeignAssets 2,425 3,192 3,794 5,246

LocalInterbankDeposits 2,914 1,405 1,014 1,291

OtherAssets 498 535 622 659

TotalAssets 18,814 19,144 21,612 26,989

Liabilities

PrivateSectorDeposits

SightDeposits

in

KD

2,117

2,643

3,149

2,894

Quasi Money 7,790 8,481 9,359 12,370

GovernmentDeposits 634 842 996 1,434

ForeignLiabilities 1,925 1,822 2,260 3,117

OwnFunds 2,009 2,311 2,800 3,130

LocalInterbankDeposits 2,561 1,369 853 1,302

OtherLiabilities 1,778 1,676 2,195 2,742

TotalLiabilities 18,814 19,144 21,612 26,989

ConsolidatedBalanceSheetofLocalBanksinKuwaitThe

overall

deposits,

which

includes

both

private

sector

as

well

as

Government

deposits

increasedfromKD10.5bn in2003toreachKD16.7bn in2006,recordingCAGRof16.6%for


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30|P a g e

theperiodunderreview.Fortheyearended2006,thesedepositsincreasedfromKD13.5bn

in2005toKD16.7bnin2006,ayoygrowthof23.7%.Privatesectordepositsincreasedfrom

KD9.9bnin2003toKD15.3bnin2006,registeringCAGRof15.5%fortheperiod200306.The

shareofprivatesectordepositstototaldeposits declined from94.0% in 2003 to 91.4% in

2006.Ontheotherhand,GovernmentdepositsregisteredaCAGRof31.3%fromKD634mn

in 2003 to KD1,434mn in 2006. Contribution of Government deposits to total deposits

increasedfrom6.0%in2003to8.6%in2006.

AssetCompositionofBanks

CreditfacilitiestoresidentsduringtheperiodunderreviewgrewataCAGRof21.0%from

KD8.4bn in2003toreachKD14.9bn in2006. Thedeploymentbywayof credit facilities to

residents increasedduringthisperiodresulting in itscontributiontoconsolidatedassetsof

local banks increase from 44.8% in 2003 to 55.3% in 2006. Foreign assets too witnessed

stronggrowth

during

the

period

2003

06,

as

it

registered

a

CAGR

of

29.3%

as

it

grew

from

KD2.4bn in2003toreachKD5.2bn in2006resulting inhighercontributiontowardsoverall

consolidated assets of local banks. Share of foreign assets to consolidated assets of local

banksincreasedfrom12.9%in2003to19.4%in2006.Creditfacilitiestoresidentsincreased

by26.3%yoyin2006ascomparedtothepreviousyear.Deploymenttowardsthissegment

increased from KD8.4bn in 2003 to reach KD14.9bn in 2006, recording CAGR of 21.0%.

Withinthissegment,credit for personal facilitiesandrealestatecontributed62.8% ofthe

total credit facilities to residents in 2006. The contribution of these two segments was at

57.9%in2003.

Amount in KD mn 2003 2004 2005 2006

Trade 1,072 1,276 1,371 1,702

Industry 442 447 468 606

Construction 633 592 770 1,070

Agriculture and Fishing 49 23 19 36

Non-bank Financial Institutions 650 781 933 1,427

Personal Facilities

Consumer loans 749 736 789 756

Installment Loans 1,558 2,075 2,448 3,167

Purchase of Securities 755 908 1,248 1,637

Other Loans 380 451 653 527Real Estate 1,434 2,030 2,539 3,288

Crude Oil and Gas 73 55 52 51

Public Services 1 0 5 5

Other 623 495 534 662

Total 8,419 9,867 11,827 14,934

SectoralDistributionofBalancesofUtilizedCashCreditFacilitiestoResidentsCredittopersonalfacilitiesgrewataCAGRof20.9%fromKD3.4bnin2003toreachKD6.1bn

in2006,resultinginsharetototalcreditfacilitiesat40.8%in2006.Deploymenttowardsreal

estatesectorgrewataCAGRof31.9%fromKD1.4bnin2003toreachKD3.3bnin2006.The


36/52


31|P a g e

proportionofrealestatetototalcreditfacilitiestoresidents increasedfrom17.0% in2003

to22.0%in2006.Withinpersonalfacilities,deploymenttowardsinstallmentloansandloans

for purchase of securities contributed 78.9% of the disbursement by way of personal

facilities. Installment loans and loans for purchase of securities contributed 67.2% of the

totalpersonalfacilities in2003.Installment loansaspercentageofthetotalcreditfacilities

to residents were 18.5% in 2003, which increased to 21.2% in 2006. Similarly, loans for

purchaseofsecuritiesaspercentageoftotalcreditfacilitiestoresidentsincreasedfrom9.0%

in2003to11.0%in2006.

KuwaitBankingSectorRisksManagement

Banks inKuwaitbenefitedfromstrongeconomicgrowthduringthe lastthreeyearsonthe

backofhighoilpricesandproduction.Thestrengthofdomesticdemandcontinuestofuel

momentum in nonoil activities. Growth of the private sector is on the back of increased

investmentin

infrastructure

and

expansion

projects.

Governmentseffortstodiversifytheeconomyandimprovetheinvestmentclimatethrough

regulatory and structural measures in various sectors augur well for the banking sector.

Buoyancy inthecapitalmarketactivityhelpedbanksregisterstrongprofitabilitybywayof

enhanced fee income and gains on their investment portfolio. Despite the correction in

regionalmarketsin2006,bankscontinuedtoregisterearningsgrowthonthebackofstrong

corebankingbusiness.

On the funding side, banks are increasing their branch network in order to enhance its

depositbase.

We

believe

the

growth

in

time

deposits

is

likely

to

remain

strong

over

the

next

twoyearsasbanksstructureinnovativeproductscoupledwithhigherratesoffered.Inorder

to support loan growth, banks will require increasing their deposit franchise. Most banks

witnessedasurgeintheircostoffundsin2006,asbankswereofferinghigherratesonterm

depositstoattractdepositors.Asaconsequence,theircostoffundinghas increased.With

the demand for funds being strong due to strong economic growth and massive

infrastructure projects in different sectors, we expect banking sectors growth to remain

strong.

TheneartermviewfortheKuwaitibanks is likelytobe influencedbydevelopments inthe

domestic

economy,

fluctuations

in

the

oil

priceand

the

level

of

public

spending.

High

oil

prices are resulting in high liquidity in the banking system and increased government

spending.Goingforward,buoyantoperatingenvironment, increasedgovernmentspending

and positive business and consumer sentiment are likely to be the key drivers for the

bankingsector.

Inanutshell,coreunderlyingbankingincomeislikelytoremainstrong.Governmentthrust

towards providing further impetus to economic growth is likely to benefit the banking

sector.Inouropinion,thelongtermoutlookforthebankingsectorispositiveonthebackof

buoyant

core

banking

activities


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