IMF warns Kuwait to toughen up finance rules

Kuwait investment companies have a limited capacity to withstand further financial shocks and need greater regulatory supervision, the IMF has warned. In the event of a significant deterioration in the value of their assets, such firms would need a capital injection equivalent to about 2 per cent of Kuwait's GDP, the IMF said. "The stress analyses for investment companies point to a limited capacity to withstand adverse shocks," the fund, based in Washington, said in a report about the stability of Kuwait's financial system.

The IMF conducted a series of stress tests of the country's financial sector to gauge its ability to survive additional knocks from a slide in the value of assets such as property, stocks and bonds. Comfortable capital and liquidity buffers meant the country's banks could broadly withstand significant shocks, the report concluded. Nonetheless, several of Kuwait's investment companies would be vulnerable to further crises, given their exposure to the property and equity markets.

The country's financial investment industry has already undergone a hefty shake-up after several investment companies started to default on financial obligations. The Kuwait central bank's (CBK) regulations had not been sufficient enough to avert the turmoil investment companies suffered in the global crisis, the IMF report said. Under the fund's stress test scenario, assuming a 15 to 33 per cent default or loss rate, three out of 11 investment companies would lose all their capital and seven would have a capital-to-assets ratio of below 10 per cent.

"The CBK's macro-prudential framework needs to be strengthened to better measure and anticipate systemic risks within the financial system," it said. The IMF recommended the establishment by the CBK of a financial stability unit responsible for macro-prudential supervision. Within the investment companies sector, it recommended strengthening regulations on licensing, corporate governance, risk management and putting limits on borrowing levels.