The Gulf Stock Exchange Crash

The Rise and Fall of the Souq Al-Manakh

Fida Darwiche

• Publisher: Routledge
• Year: 2020
• Print ISBN: 9781138184053
• eBook ISBN: 9781000156331
• Edition: 1
• Topic: Business
• Subtopic: Government & Business
• Index: Business

The collapse of Souq Al-Manakh in Kuwait in August 1982 was the most spectacular financial crash of recent years. The market had developed as a parallel stock exchange dealing in the shares of Gulf companies not resident in Kuwait. Fuelled by manic speculation, the market grew at a phenomenal rate throughout 1981 and early 1982. Inexperienced investors gambled huge sums on the shares of shell companies promoted largely for share speculation. At the height of the market US$92 billion was outstanding on nearly 30, 000 postdated cheques, the usual form of payment used in the market. The financial crisis created by the collapse of the Souq Al-Manakh threatened the stability of Kuwait. The government was forced to intervene and absorb the major part of the loss. This book, first published in 1986, traces the growth of the stock market and analyses its collapse. It also discusses in detail the wider impact of this debacle on the economic life of the Gulf.

1

Kuwaiti Public Companies 1950–80

Historical Development

The emergence of the public company heralds a significant transition in the development of modern societies. Private enterprise founded on a small capital base has been eclipsed by the public company with multiple resources. Whereas management enterprise in a private company is limited by the talent and will of the owner, no public company owned by a multitude of shareholders can be run by all shareholders simultaneously.

As a result, the appointment of a separate managerial body became imperative, which released the potential to develop business management skills.¹ With the growth and expansion of the economic structure and the start of economic and social development plans, the road was clear for investors to put their funds into such companies.

Public companies began to spring up in the Gulf, and particularly in Kuwait, after the discovery of oil in the area. Although Kuwaitis, encouraged by the new wealth, began to think along the lines of establishing public companies as early as the fifties, reform of the banking system came first in view of its importance and the high risk involved. The only bank operating throughout Kuwait at the time was the British Bank for the Middle East. Opened in 1941² and owned by foreign shareholders, it had a monopoly of all banking business and transactions.

In 1951, a study was undertaken to establish a Kuwaiti national bank that would be owned and run exclusively by nationals. The bank opened on 25th September 1952 with a capital of KD 19,465,875,³ Kuwait’s first public company. As shares were open for public subscription, this heralded the beginning of the country’s money market. Encouraged by the success of the venture, investors began to form other public companies. The second was the National Kuwaiti Cinema Company, formed on 5th October 1954 with capital of KD 1,630,263, followed by Kuwaiti Oil Tankers on 19th September 1957, with capital of KD 25,936,605, in which the Kuwaiti government took a 53 per cent stake.⁴

The existence of these three public companies allowed the first buying and selling of shares. Trading in new-company shares became so popular that several newly-formed companies were over-subscribed ten times, a phenomenon which reflected people’s strong interest in channelling their savings into good investments. However, the investors’ lack of business acumen, combining with the fact that speculation was unknown in this field, meant that the circulation of stocks was limited to what was virtually a closed circle. Not for long. Speculation and deals began to steer a chaotic course, as speculators exploited soaring share prices in order to make quick profits.⁵

In view of this and the zeal of investors to launch further companies, the Kuwaiti government intervened to regulate the incorporation of new companies and dealings in their stock by the first Commercial Companies Act, No. 15/1960.⁶ The Act covered joint stock companies, partnerships and joint ventures, as well as companies with assets (limited liability companies and public companies).

The Act stipulated the following with respect to public companies:

1. All public companies formed in the country must be Kuwaiti. The shareholders must be Kuwaiti nationals and the head office located in that country. Notwithstanding this provision, exceptions were allowed with respect to companies outside the banking and insurance sectors. This was so as to allow public companies to respond to contingencies such as the injection of foreign capital and expertise. The Act stipulated that Kuwaiti control should never fall below 51 per cent and that prior authorisation should be had from the government department concerned.

2. The Act made no distinction between founders and shareholders. Both were treated alike as members of the company, enjoying equal rights and subject to the same liabilities.

3. The Act stipulated that the first balance sheet should cover a period of no less than twelve months and prohibited the assignment or transfer of shares and debentures before that date. The Court was allowed to rule automatically null and void any earlier assignment.

4. Founders were not allowed to dispose of their shares until at least three years after the incorporation ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Copyright Page
• Table of Contents
• List of Figures and Tables
• Foreword
• Dedication
• Introduction
• 1. Kuwaiti Public Companies 1950–80
• 2. Gulf Public Companies 1976–82
• 3. Gulf Stock Exchange
• 4. Gulf Stock Exchange Crisis
• Bibliography
• Postscript
• Index