News of the finance

The Central Bank of Kuwait's recent steps in an effort to reduce the money supply and eventually lower inflation will have severe consequenses on the local banking sector. To recap the following steps were taken by the CBK:

• Consumer loans cap will be 40% of salary, from 50%
• Pensioners loans' cap to 30% of income
• A new limit on interest rates of 3% over discount rate, from 4%

The banking sector in general relies heavily on lending funds to consumers at high rates at long term intervals. The loan cap on potential customers will decrease the amounts banks can lend and along with the limits on the interest rate charged will lower returns on the already decreased amounts taken. This step in itself will lower the revenues' for the banking sector which will be evident in the 2009 statements.  My prediction is that, based on the new regulations, banks' revenues will be between 20 -25% lower than last year. 

Other regulations being discussed are that the lending amounts interest must not exceed initial amount. For example: Mohammad decides to get a loan, here are the details:

• KD 70,000
• @ rate of 10.5%
• For 20 years

The amount repaid to the bank after 20 years will be approx. KD 147,000

This regulation is based on recommendations by parliamentarians. If this amendment is passed and becomes law, banks would likely shutdown and move on to other sectors. The most basic of lending fundamentals is the time value of money and to some illiterate parliamentarians, regretfully; mathematics or the most basic of logic cannot be fathomed. New regulations should be imposed on the next elections the first should be a basic mathematics examination, but they will surely find a way to cheat.

Kuwait's prospects are not the best in the Gulf. Based on the corruption index Kuwait has increased on the scale, the parliament is economically inefficient, business regulations limit expansion, and laws drafted decades ago are implemented this year among much, much more! It seems as though the future of the banking sector is just one of the failing sectors. Although it is the most important sector for the progression of the economy it is the least on the agenda. While the election speeches revolve around bad debts repayments, an increase in salaries, or reduction in real estate prices, average the citizens' dependence grows even greater.

What is happening?

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