Kuwaitis were traders long before oil first appeared and trading has remained in their blood. It is no surprise therefore that Kuwait became the first state in the Gulf to develop an appetite for trading financial instruments – securities trading began in 1952 – and was also the first state to have a dramatic financial crisis.
The collapse of the Souk Al-Manakh (unofficial stock market) in 1982 led not only to massive losses at the time but also taught Kuwaitis about exchanges the hard way. In 1983, the official Kuwait Stock Exchange (KSE) was restructured and since then, despite the Iraqi invasion in 1990, it has become arguably the most sophisticated market in the region.
“We are the only market that offers futures and options as well as index and forward trading,” says Wafa Mohamed Al-Rashed, director of the KSE’s technical bureau.
But despite having a wider range of products and a better clearing system than its neighbours, the KSE’s structure, which does not have a separate capital markets authority, has been seen as antiquated and lacking credibility in an international environment.
“We have been slow to develop and the KSE has fallen behind,” says Maha Al-Ghunaim, managing director of Global Investment House.
Time for action
But the new government of the new Amir, Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, and the falls in regional markets, including a 14.3% decline in the KSE index in March, appear to have triggered some major reform moves. And the International Monetary Fund Article IV Consultation report in early April also provided some clear recommendations.
“[IMF] staff called for [a] strengthening [of] the legal and technical capabilities of the KSE to supervise the investment companies’ portfolio management and for enhancing coordination with the Central Bank of Kuwait.”
The IMF added: “The KSE’s supervisory role is hampered by the lack of legal backing to regulate and supervise investment advisory services, and by its relatively weak technical expertise.”
All these factors have helped focus attention on the regulatory deficiencies of the KSE and have led to calls for the creation of a Kuwait capital markets authority. The KSE’s Ms
Al-Rashid told The Banker a team of British consultants has been working on the project of forming a separate authority and working to apply International Organisation of Securities Commissions standards for some time. But like all things in Kuwait, political will is necessary for progress and reforms can be delayed indefinitely in parliament.
Nevertheless, pressure to improve oversight of the stock market and concerns over the dual functions of the existing regulatory body, which deals with both clearing and regulation, have spurred long-awaited action. In early May, the creation of the Kuwait Capital Markets Authority was green-lighted by parliament and change is slowly happening.
Reaction has been broadly positive. “This is what we’ve been needing. All this while what we had was a stock exchange that is regulating itself, which is not seen in other parts of the world. Even in Saudi, UAE and Qatar, they have independent bodies that police stock market activities,” says Global Investment House head of research Shailesh Dash.
Investor unease
While professionals have welcomed the move, convinced it will improve the credibility of the KSE for international and domestic investors alike, some local commentators worry that such a move, coming at a time of market corrections, could be seen as a danger signal for retail investors.
The development of the KCMA, however, will take time and Ms Al-Rashid believes final parliamentary approval will not take place until November. And even then, considerable political will will still be needed to implement the new independent authority. With Saudi Arabia recently announcing plans for a financial centre, competition in the Gulf is fierce and bringing the stock market up to international standards is essential.
Global’s Mr Al-Ghunaim says: “If we move fast enough we can develop the capital markets and can become the financial centre of the region.”
