Kuwait ready to recapitalize Gulf Bank

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MPs nod to full deposit guarantee
KUWAIT CITY: The Kuwait Parliament on Wednesday approved a law stipulating state guarantee on all deposits in local banks to the tune of $23 billion. A total of 50 out of 57 legislators, including Cabinet members, voted in favor of the law. According to the first article of the law, the state should insure all types of deposits, including savings and current accounts, in all local banks within the state of Kuwait. The second article stipulates that the Ministry of Finance should cover deficiencies of banks which failed to sustain their clients from the general reserves of the state. The Central Bank of Kuwait (CBK)Central Bank of Kuwait (CBK) will retrieve this money according to conditions and regulations specified by the Minister of Finance based on the recommendations of the CBKCBK board of directors.

The MPs agreed to amend this article to oblige the Cabinet to provide the Parliament and Audit Bureau with a detailed report about the bank that requires financial support, amount of money needed to support the bank, and regulations that CBKCBK should adhere to in getting back the money. The third article compels the Cabinet and all concerned government institutions to strictly enforce the law. In its report about the law, the parliamentary Financial and Economic Affairs Committee affirmed that the status of local banks is secure and sound in terms of liquidity, yet the passage of this law is essential to enable local banks to compete with banks whose countries of origin guarantee deposits, which can have a negative impact on deposition movement in local banks.

Chairman of the parliamentary Financial and Economic Affairs Committee Abdulwahid Al-Awadhi said this law is vital in confronting the current global financial crisis to regain the people's trust in local banks and protect 'original deposits'. Expressing his support for the law, MP Raja Hujailan said the passage of this bill will assuage people's fear of losing their deposits and rebuild their trust in Kuwait's economy, which is crucial at this point when the whole world is experiencing a financial crisis.

MP Mohammad Al-Saqer, on the other hand, reiterated that Kuwait's banking system is secure and its economy is stable "but we need to reassure people through the intervention of the Cabinet in the form of passing such laws".

Asserting that Kuwait's central bank is ranked amongst the best in the region and Kuwait is the only GCC country that has yet to implement this law, Al-Saqer averred Kuwait adopted a similar law before the Iraqi invasion when oil prices were only $10 a barrel.

"Rejecting this law might prompt clients of local banks to transfer their savings to banks in countries that guarantee deposits," Al-Saqer warned, saying the total amount of deposits in local banks is approximately 23 billion dinars and none of them is in danger so far.

Meanwhile, MP Musallam Al-Barrak is against the law and accused the Cabinet of speeding up its passage for the benefit of monetary tycoons while delaying support for small investors and citizens, who might be imprisoned for failure to pay their debts. He said violators might be the only ones who will benefit from this law, alleging that Gulf BankGulf Bank officials have committed financial violations which resulted in its current status.

MP Dr Waleed Al-Tabtabaei also criticized the speed at which this law was debated on and passed in one day. He proposed a partial guarantee of KD 100,000 for deposits in local banks.

Meanwhile, CBKCBK Governor Sheikh Salem Al-Abdulaziz Al-Sabah said Kuwait was the first country in the world that provided state insurance to deposits in 1986, adding that although Kuwait's banks are secure, the current financial crisis could lead to the collapse of any bank. "This law is aimed at restoring the confidence of bank customers and discouraging them from withdrawing their deposits. No money will be paid," he reassured.

The seven legislators who voted against the law were Jaber Al-Muhailbi, Hussein Al-Qallaf, Dr Daifallah Buramiya, Mohammed Al-Obaid, Mohamed Al-Mutairi, Musallam Al-Barrak and Dr Waleed Al-Tabtabaei. Speaking to the Arab Times after the session, Minister of Finance Mustafa Al-Shamali said the law will have a positive impact on banking institutions and greatly contribute to stabilizing the stock market, allay the fears of depositors, and secure deposits.

Indicating Kuwait is one of the first countries that set up this type of law that was initially implemented from 1986 to 2004, Al-Shamali confirmed the banks in Kuwait are strong despite the global financial meltdown. He thinks there is no need to enforce this law but, at this stage, Kuwait should follow the example of its neighboring countries that guaranteed bank deposits.

Commenting on reports that several Gulf BankGulf Bank clients withdrew their savings in the last few days, Al-Shamali affirmed the situation is under control especially after the Parliament approved the law to secure bank deposits. He reiterated "we will intervene and Kuwait will support any bank that might suffer the brunt of the global financial crisis." He urged bank owners to increase their capital, adding the state will support banks whose major shareholders fail to contribute in the capital increase.

MPs vote on law insuring bank deposits
Vote
Ahmed Lari Yes
Ahmed Al-Sadoun Yes
Ahmed Al-Mulaifi yes
Ahmed Baquer Yes
Badr Al-Dowaila Yes
Jaber Al-Khaled Al-Sabah
Jaber Al-Mohailbe No
Jaber Al-Mubarak Al-Sabah
Jasem Al-Khorafi Yes
Jamaan Al-Harbash Yes
Hassan Jowhar Yes
Hussein Al-Qallaf yes
Hussein Al-Mutairi No
Hussein Al-Huraiti yes
Khaled Sultan Yes
Khalaf Al-Enezi Yes
Raja Al-Mutairi Yes
Rowdhan Al-Rowdhan Yes
Saad Al-Khanfour Yes
Saadoun Al-Otaibi yes
Saleh Ashour
Askar Al-Enezi Yes
Essam Al-Dabous Yes
Ali Al-Hajeri
Ali Al-Dekbasi Yes
Ali Al-Omair Yes
Ali Al-Rashed Yes
Ali Al-Barrack Yes
Fadhel Ali Yes
Fahad Al-Mae Yes
Faisal Al-Muslem
Faisal Al-Hajji yes
Mohamed Al-Mutair Yes
Mohamed Al-Sagr Yes
Mohamed Al-Kandari Yes
Mohamed Al-Reshaidi Yes
Mohamed Al-Salem Yes
Mohamed Al-Abdeljader Yes
Mohamed Al-Olaim Yes
Mohamed Al-Obaid Yes
Mohamed Al-Howaila Yes
Mohamed Al-Mutairi No
Saleh Al-Mulla Yes
Sabah Al-Khaled Al-Sabah Yes
Daifallah Buramya No
Adel Al-Sarawi Yes
Abdulrahman Al-Ghoneim Yes
Abdulaziz Al-Shaejy Yes
Abdullatif Al-Ameeri Yes
Abdullah Al-Barghash Yes
Abdullah Al-Fahma Yes
Abdullah Al-Roumi Yes
Abdulwahed Al-Awadhi Yes
Adnan Abdulsamad Yes
Mikhled Al-Azmi Yes
Marzouq Al-Ghanem Yes
Marzouq Al-Hobaini Yes
Musallam Al-Barrack No
Mostafa Al-Shimmali Yes
Modhi Al-Humoud Yes
Nasser Al-Ahmed
Nasser Al-Sane Yes
Nasser Al-Dowaila
Nouriyah Al-Subih Yes
Waleed Al-Tabtabaei No

The parliament also approved a law on postponing the usage of election cards until completion of complementary elections for municipality council in the Eighth Constituency.

The Parliament-adopted bill to ensure deposits of the local banks will be in effect in a few days, a senior official announced on Wednesday.

Deputy Prime Minister and Minister of State for Cabinet Affairs Faisal Al-Hajji said in a statement after the Parliament session that the Assembly approval of the bill "affirms all parties' concern at what is happening in the local and international markets and proves that our authorities rise up to the challenges when warranted."

He praised the fruitful cooperation between the legislative and executive authorities, and affirmed that the decision would lead to positive results on the domestic financial and economic conditions.

Al-Shimali also assured the depositors in the local banks that no "harm" would affect their assets or accounts "because the state has decided to insure them."

"We will interfere and we will not let any bank sustain grave effects and the state will support the affected banks," the minister of finance re-assured the bankers.

He added that the banks and the main shareholders should increase the capital "and those who fail to do so will be covered by the state."

He expressed deep gratitude to the members of the committee of financial affairs and the members of the Parliament for their rapid response and endorsement of the bill.

MPs
Some MPs tried ahead of the vote to limit guaranteed deposits to a maximum of 200,000 dinars ($745,017) each, but their suggestion was not taken up by other lawmakers.

As well as its 50 elected members, Parliament also comprises 15 cabinet ministers.

The central bank of Kuwait said on Sunday the Gulf BankGulf Bank incurred losses from derivatives deals on behalf of some clients who defaulted.

The bank on Tuesday accepted the resignation of its chairman Bassam Al-Ghanem and appointed his brother Kutayba Alghanim as its new chief.

The new chairman announced that the bank has abolished all trades in "derivatives and options," and said the main shareholders were prepared to inject any amount of liquidity needed by the bank.

Gulf Bank
Alghanim on Wednesday extended his gratitude to Minister of Finance Mustafa Al-Shimali's declaration that the government was ready to support the bank by becoming one of its active shareholders, upon the bank's recapitalization.

This step by the government is further proof of its support of the bank and an addition to support the bank has received from the Central Bank of KuwaitCentral Bank of Kuwait, in efforts exerted to head off some of the problems that the bank has been embroiled in, said Alghanim in a press statement here.

Al-Shimali had announced yesterday that the government was not only going to give total insurance to depositors of Gulf BankGulf Bank but also to take part in the recapitalization of the bank, in case the bank did not collect enough recapitalizaton funds from its present shareholders.

Alghanim had indicated Tuesday that major Gulf BankGulf Bank contributors were mulling over options to save the bank from its current predicament, and one option was to increase the bank's capital.

The bank had become mired in trouble when a number of its major customers could not meet their financial obligations in a few transactions based on derivatives concluded in international money markets. The bank paid off these obligations and consequently asked those customers to pay it back.

The customers balked and the entire episode is now in the hands of the courts.

Here is the full text of the statement issued by the Gulf BankGulf Bank chairman Wednesday.

Yesterday, the Minister of Finance, Mustafa Al Shamali, announced that in addition to the governmental procedures, and to secure the money of depositors in Gulf BankGulf Bank, the government is ready to contribute in increasing the bank's capital in case of non-completion of the existing contributions from its shareholders.

Al Shamali added, "This comes from the government to support the financial position of the bank to maintain its credit ratings, by confirming its commitment to return the rights of shareholders as it was before Oct 23, 2008."

Kutayba Y. Alghanim stated "On behalf of the Board and Shareholders of Gulf BankGulf Bank, we sincerely appreciate the recent announcement by the Minister of Finance that the government is willing to become a shareholder in Gulf BankGulf Bank by participating in its re-capitalization". The Chairman added, "This announcement by the government continues to demonstrate the strong support Gulf BankGulf Bank is receiving from the Central Bank of KuwaitCentral Bank of Kuwait and the State of Kuwait in response to the recent issues faced by the bank".

Like the rest of the world, the region's banking sector has been thrust into turmoil amid the global financial crisis, with central banks forced to inject liquidity into the system to ease tight credit conditions.

Saudia Arabian central bank Governor Hamad Saud al-Sayyari said the world's top oil exporter had no need to merge its banks in response to the global financial crisis, dampening speculation that such a move may be at hand.

"They don't need any assistance, they are highly liquid and have good capitalisation," Sayyari told reporters on the sidelines of a meeting of Middle East and Asian central bankers in the Gulf Arab trading hub of Dubai on Wednesday.

When asked by Reuters if there was a need for Saudi banks to merge to cope with the credit crunch, he said: "No, no there is no need."

Sayyari also said that Saudi foreign investments are "very safe" and have not been affected by the global crisis.

Qatari central bank Governor Sheikh Abdullah bin Saud al-Thani echoed that confidence, saying the world's top liquefied gas exporter had no need to take policy steps in the face of the global turmoil now, but stood ready if needed.

"The central bank has lots of instruments in the open market and we can utilise them whenever needed," he told reporters, adding Qatari banks are "solid, highly capitalised and liquid."

"There is nothing that needs to be done," he said, declining to specify which instruments Qatar might use.

The Saudi Arabian Monetary Agency (SAMA)Saudi Arabian Monetary Agency (SAMA), or central bank, has poured about $3 billion in US dollar liquidity into bank deposits. To cope with the global crisis, the kingdom this month made a rare benchmark interest rate cut in addition to pouring billions into banks to ease tight liquidity conditions.

The Supreme Economic Council, the top Saudi economic body, has also offered guarantees for bank deposits.

Fears of global recession have sparked a rout on Gulf markets. Saudi Arabia, the world's largest oil exporter, saw its bourse tumble to its lowest level in at least two years earlier this week. The largest Arab bourse is down 49 percent this year.

Qatar whose sovereign wealth fund has promised to buy up to 20 percent of listed banks' capital to boost confidence in the market has been more modest in its approach, opting not to trim interest rates when other Gulf states cut earlier this month. Gulf Arab economies which, with the exception of Kuwait, all peg their currencies to the greenback, are also expected to track US interest rate cuts to maintain their exchange rates despite the fact that they face high inflation and growth. "We will manage our monetary policy in accordance with our domestic needs," Sayyari said when asked about interest rate cuts. On Monday, United Arab Emirates central bank Governor Sultan Nasser al-Suweidi said a liquidity crunch in the country's banking sector was stabilising. Gulf Arab stock markets rallied on Wednesday, tracking rises in global markets on expectations of a US interest rate cut.

By Dahlia Kholaif and Abubakar A. Ibrahim

© Arab Times 2008