KUWAIT May 29 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
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 ($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.
OLD LAWS, HUNGRY COMPANIES
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
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.
(Editing by Susan Fenton)