Weak business laws make Kuwait punch below its weight, says World Bank
Source: BI-ME with Reuters , Author: Posted by BI-ME staff
Posted: Tue May 29, 2012 9:39 pm

KUWAIT. Kuwait is punching below its weight in business due to its weak regulatory framework and needs to improve its insolvency laws so that distressed companies can restructure properly, a World Bank official said on Tuesday.

Major oil producer Kuwait is one of the most financially stable economies in the world thanks to high demand for its natural resources, World Bank Senior Counsel Riz Mokal said.

But its laws are hampering progress and the Gulf state needs to look at improvements to help commerce and industry weather the uncertain global economic environment, he said.

"We think that there is room for improvement at each of the stages of the credit life cycle," Mokal told a forum in Kuwait held by the Ministry of Commerce and Industry.

"The regulatory and institutional framework causes Kuwait to punch below its weight given the immense wealth and human resources which are available to the country," he said.

The global financial crisis hit Kuwait's companies hard and its investment companies suffered in particular.

The stock exchange has suspended trade in around 30 companies for failing to report earnings on time or for accumulating large losses. Some of them have been delisted and others warned they could face the same fate.

Investment Dar secured a 1 billion dinar (US$3.6 billion) debt deal with creditors in February 2011 as part of a restructuring under Kuwait's Financial Stability Law. Global Investment House is undergoing its second voluntary debt restructuring in three years.

Mokal said his team had reviewed Kuwait's insolvency and creditor/debtor regimes at the request of the government.

He said Kuwait's legislation for insolvencies needed improvement because it is based on an Egyptian code dating to the 1940s which was in turn derived "from one of the classic versions of the Napoleonic code."

"This law was framed for a very different economy in a very different time. It does not provide appropriate restructuring mechanisms at all," he said on the sidelines of the event.

Kuwait needs legislation that gives distressed but economically viable companies an opportunity to restructure and the Financial Stability Law, brought in as a response to the financial crisis, did not provide for this, he said.

The law, which was envisaged both as a bailout fund and restructuring provision, ended up being neither, Mokal said.

With much of Kuwait's wealth flowing abroad and lenders becoming more cautious, small and medium-sized companies are struggling to get the funding they need, he said.

"This is precisely the sector which would provide diversity, which would provide stability in the economy, which would provide the main engine for economic growth and for the creation of employment."

World Bank Senior Consultant Gordon Johnson said Kuwaiti banks were well-capitalized and healthier than counterparts elsewhere but their willingness to retain capital rather than lend was a cause for concern.

"It is the weakness within the investment companies and the corporate sector and weaknesses within the legal framework which are themselves creating the risk for the banks," he said.

The banks themselves are not at risk but the underlying framework used to solve problems within the business community is not functioning effectively, he told the forum.

"The banks have been unwilling to lend, they don't find sufficient credit-worthy borrowers, there are not enough credit-worthy projects ... many of the businesses are going hungry," Johnson said

 

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