Last month, the Ministry of Awqaf and Islamic Affairs ruled that the ongoing Initial Public Offering (IPO) in Boursa Kuwait, the country’s stock exchange, was ‘haram’ as it breached Islamic law’s prohibition on interest. In addition, the non-binding fatwa from the ministry, pointed out that Boursa Kuwait facilitates and gains “illegal revenues” from trading in stocks of companies that do not comply with Islamic principles. It also accused he Boursa of earning interest on deposits with banks that are not Shariah compliant.
The proposition that it is ‘haram’ for Kuwaitis to invest in companies that do not follow Islamic principles is ridiculous, said one commentator in response to the news. Except for the sand in our desert, nearly everything else that we use, consume or produce relies on goods or services provided for the most part by companies that do not comply with Islamic principles, he added..
The fatwa also raises another interesting question. Where does the money needed to pay the salaries and perks of employees, as well as for facilities and amenities of Awqaf ministry come from? It should be obvious to the ministry that the government’s deficit budget in recent years has been depending on the General Reserve Fund (GRF), which invests surplus funds through the Kuwait Investment Authority in companies that are generally not Sharia compliant, or in compliance with Islamic principles.
Moreover, the ministry should also know that laws in Kuwait are passed by the National Assembly, which closely scrutinize each draft law and is known to delay the promulgation of most laws on the slightest of pretexts. Surely, the Ministry of Awqaf is aware that the IPO of Boursa Kuwait was approved by the assiduous National Assembly. So then, why the fatwa, and why now?
Some political analysts believe conservative lawmakers could be behind the Awqaf Ministry’s initiative. With elections coming up next year, hardline Islamists and other conservative lawmakers are well aware that in Kuwait populism pays. Parliamentarian Mohammed Al-Hayef, the hardline Islamist MP had promised to grill the Finance Minister Nayef Al-Hajraf in the current session of parliament over various issues, including the IPO offerings. The finance minister has since resigned.
Pointing to ambiguity in the Awqaf ruling, the CEO of Boursa Kuwait, Mohammad Al Osaimi said, “Local legislation does not state the bourse must be Shariah-compliant, and moreover, the exchange operates with normal practices seen in other markets in the region.” Expressing optimism in the ongoing IPO subscriptions of the Boursa, Al-Osaimi added, “The IPO is progressing well and will close next month oversubscribed; I’m 100 percent sure it will be covered many times over.”
The sale of 50 percent of the exchange to citizens at a price fixed at 100 fils per share began on 01 October and will end on 01 December. The IPO of half the shares in Boursa Kuwait to citizens is the final stage in a privatization process that began in February of this year, when 44 percent of the Boursa was sold to a consortium of local and international investors comprising the Kuwait’s National Investments Company, First Investment Company and Arzan Financial Group of Kuwait, and the Athens Stock Exchange from Greece. Government-owned Kuwait entity, the Public Institution for Social Security retains the remaining 6 percent stake in the Boursa.
When the privatization process is completed, Boursa Kuwait will become only the second exchange in the Gulf to be publicly traded after Dubai Financial Market in the UAE. The Boursa has been one of the better performing exchanges in the region so far this year, with its main equities index extending its increase this year to 17 percent, the largest rise among major gauges in the Middle East and North Africa (MENA) region.
Trading in Boursa Kuwait stocks is expected to begin in June 2020, by when global index compiler MSCI is set to upgrade the Boursa to emerging-market status. The current upswing in Boursa indices is probably linked to this potential upgrade from frontier to major emerging-markets, which could see over US$3 billion in passive inflows to the country.
Overwhelming response to the Boursa IPO is probably a reflection of the public confidence in the future potential of the exchange. This upbeat sentiment is predicted to spread to the wider market in the coming months with the decision in October by the Board of Directors of the Central Bank of Kuwait (CBK) to lower the discount rate from 3.0 percent to 2.75 percent.
The discount rate is the minimum interest rate charged by CBK on loans made to the commercial banks and other financial institutions in the country. The lower rate, which is the first monetary easing by the CBK since 2012, is expected to encourage commercial banks to offer lower rates to businesses, and hopefully boost market activity. Unless that is, someone comes up with the argument that the CBK charging interest on loans to local banks is ‘haram’.
At a time when the economy can use all the help it can get, and parliament remains mired in frivolous discussions and interpellations, the last thing the country needs is a new set of religious dictates. According to the latest assessment by the International Monetary Fund (IMF), real gross domestic product (GDP) growth in the region is forecast to decelerate this year to 0.7 percent from the 2.0 percent in 2018.
The IMF attributed this decline in GDP growth to slowing global growth, international trade tensions and geopolitical risks, as well as oil production cuts mandated by the Organization of Oil Exporting Countries (OPEC) along with several non-OPEC states. The Fund also notched down the region’s non-oil GDP growth in 2019 to 2.4 percent, from the 2.9 percent growth that it predicted in April.
Warning that falling economic growth in the region could highlight fiscal vulnerabilities while elevating the need for financing and public debt, the IMF urged governments to pursue improvements to their business environment. The Fund noted that enhancing business climate was crucial to catalyze investments, encourage privatization and foster public-private partnerships. Another area that policy-makers should focus on, said the IMF is to incentivize private-sector employment for nationals in a bid to reduce lower productivity caused by high wages and over-employment in the public-sector.
Most of the IMF recommendations are unlikely to be palatable to conservative lawmakers and their supporters in Kuwait. Having managed to remove the finance minister, the lawmakers next focus could very well be the CBK and its policies aimed at opening up the economy, enhancing privatization and encouraging foreign investments.
In announcing the decision to cut the discount rate, CBK Governor Dr. Mohammad Y. Al-Hashel said that the CBK is mandated, as part of its establishment and by law, to maintain monetary and financial stability in the country. Implying that the decision to cut the discount rate was in line with this mandate, the governor said: “The decision fulfils the dual objectives of promoting non-inflationary economic growth conditions in non-oil sectors, and ensuring the continued attractiveness and the competitiveness of the national currency as a reliable store of domestic savings, both of which are mainstays of monetary policy.”
A perennial problem impeding economic progress in Kuwait has been the tendency for various government entities, with overt and covert support from various legislative factions, to pull in opposite directions on critical economic issues. It is hoped that the issue of Boursa Kuwait IPO and support for economic growth of the country will not become another bone of contention, with the CBK and Boursa on one side, and the Awqaf Ministry with its supporters on the other.
The Times Report