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WEEKLY NEWSLETTER
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Kuwait
Index
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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