KUWAIT (Reuters) – Kuwait’s weak financial regulation is compounding the effects of the global credit crisis, unsettling investors there and threatening the government’s attempts to diversify its oil-driven economy.
A series of bombshell announcements from companies including Kuwait’s biggest investment bank, Global Investment House, that they are struggling to cope with the financial storm have highlighted the Gulf state’s lax rules on company disclosure.
Until late last year, none of the country’s investment or holding companies, which make up half of all listed companies on the Kuwait bourse, had given investors any indication of the problems they faced in a crisis that has hit banks around the world. Now many say they need loans and are considering asset sales or mergers.
Mustafa Behbehani, a director at Gulf Consulting Co, which invests in the local bourse, said the lack of transparency was adding to problems for investors already unnerved by the credit crunch.
“We don’t have transparency, our old problem, which makes the crisis worse,” he said.
Kuwait is home to the Arab world’s second-largest bourse but has no financial regulator and lax rules, by international standards, on what companies must tell the stock market.
A political crisis has paralyzed legislation to set up a regulator to monitor the market, prompting a rare appeal this week from the central bank governor who called for new laws — bankruptcy protection or improved merger rules — to help firms survive the financial crisis.
Birgit Ebner at Germany’s Frankfurt Trust, who helps manage a Middle Eastern stock fund, said Kuwait was not an attractive investment compared with others in the region.
“We are underweight in Kuwait because in Kuwait there are many holding firms dominating the market. And on top of it, the transparency is currently lower than in other Gulf states.”
“The risk-profit ratio is not balanced, making the market currently unattractive…Some (investment firms) firms struggle to prolong credit lines and have to sell assets which is pressuring both parent firms and listed units,” she said.
Two of the sector’s top players — Global Investment House, and the largest Islamic firm, Investment Dar — shocked markets last month with news they were seeking up to $1 billion in loans.
This came only weeks after both companies, whose shares have since plunged, announced huge profit gains in the last quarter without mentioning any need for fresh funds or levels of debt.
“It came as a big surprise to many that these giants may be in trouble without the help of the government,” said Naser al-Nafisi, general manager at the al-Joman Center for Economic Consultancy in Kuwait.
Nafisi put the total debt of all listed and unlisted Kuwaiti investment firms at 8 billion dinars ($29 billion) in December.
Rami Sidan, head of MENA Investments at Schroders Investment Management in Dubai said: “The situation of investment firms is extremely serious. These companies need to be much more regulated going forward.”
Kuwait wants to diversify its oil-driven economy and attract more investment from overseas, like Gulf neighbors Dubai, Bahrain or Qatar. But it has made little progress because many plans – including the proposed financial regulator – have been stalled due to a standoff between the cabinet and parliament.
Legislation has been halted since November when the cabinet resigned after three MPs moved to question the prime minister.
Critics say rules for investment firms are too relaxed. For example, they do not require a banking license despite offering investment banking services such as corporate finance. Meanwhile, some real estate firms are licensed to operate as investment firms, while other companies lend without having to fulfill minimum reserve requirements like banks.
But several analysts say the government bill to set up a regulator will not improve transparency.
“The bill is only enhancing the current status. A chapter to improve disclosure rules was deleted from an original draft,” said Kuwait University’s Amani Bouresli, an expert on financial reporting who co-authored the market regulator draft bill at the government’s request.
The government says the bill will improve investor rights but according to a copy obtained by Reuters it does not toughen up rules under which firms have to disclose only the minimum such as net profit to the stock market, and then in Arabic only.