Enhancing Transparency and Integrity as one of the Principles of Corporate Governance in the Kuwaiti Stock Market: A Study on Derivative Contracts

Dr. Alaa Eltamemey Abdou
Associate Professor of Commercial Law Faculty of Law – Mansoura University – Egypt and the University of Tabuk – Saudi Arabia


We should all recognize that the transformation of the economy depends on workers’ intensity and commitment to a knowledge-based economy. This is reflected in their impact on governments and the banks’ financing methods, which have been adhering to their traditional ways for a long period. They have not engaged in a wave of tremendous development in the field of information technology, which has created new worlds of opportunities for financial transactions. These are not just a breakthrough in the performance of financial markets, but they are a massive revolution in the methods and formulas to deal with, and the quality of the tools that are used in, these markets.
Recently, discussion has increased regarding financial risk management, especially in the field of banking transactions. There is a need to promote the principles of disclosure and transparency, since services liberalization policies have increased the risk of unexpected animated investment ratios across countries. The rapid fluctuations in interest and exchange rates and fluctuations in market prices for stocks jeopardize many of the developmental gains that have been made or were expected to be realized. This will lead to the bankruptcy of many businesses unless there are legal and legitimate frameworks to address these risks. Many financial institutions have taken the initiative to create new financial instruments to address these risks, known as derivatives. Strangely enough, these derivatives can themselves be a source of risk, due to speculators.
The growth of this phenomenon has been assisted by a number of factors, the most important of which is the mobility of capital between different markets of the various countries. This has been facilitated at some points in time by global trade liberalization agreements and at other times by the enormous progress of communications and information systems. In addition to that, intense competition between financial markets has caused innovation in different shapes and financial systems to attract investors, by enabling these systems and the distribution of risk transfer, thereby enabling owners to engage in tools based on speculation.
Both the International Monetary Fund and the World Bank for Reconstruction and Development have been keen to impose ideologies to reformulate economic decision-making, in order to penetrate the financial markets of developing countries. Those entities have promoted the imposition of economic liberalization policies, the liberalization of interest rates and exchange rates, the elimination of tariff barriers and restrictions, removing many forms of protectionism under the pretext of increasing financial cooperation and commercial exchanges.
Although many financial innovations have emerged in recent times, which have been able to meet the needs of many financial institutions in the face of financial risks and control those risks, nevertheless, the developments in financial markets in recent times have revealed the limitations of these tools in the face of new risks. These new risks have caused the decline of profitability and deterioration of the quality of financial products. This calls for new tools to cope with the new risks. Despite that, many feel that some tools that have been developed amount to ‘gambling’.
It is noticeable that the Islamic financial institutions do not have the means and tools to manage risks. The fact that these institutions tend to avoid the risks associated with new tools of financial management, on the basis that they contain the suspicion of illegal activities, significantly reduces their recourse to these new tools. So, the Islamic financial institutions base their management on the known systems and tools, such as speculation and leasing.
In the Kuwaiti context, we can observe that institutions are encountering these risks in the absence of clear legislation to deal with the risks, especially at the level of disclosure and transparency about the size and nature of these transactions, which cannot be underestimated, especially in light of the economic liberalization policies, which dominate the world at the moment.
This research seeks to address this problem in light of the current laws and regulations of Kuwait, particularly Law No. 7 of 2010 on the establishment of a body to govern the Capital Markets Authority, as amended by Law No. 22 of 2015. The article also examines Decree Law No. 25 of 2012 on the new Commercial Companies Law, which saw adjustments in some of its provisions under law No. 97 of 2013, and Decree No. 72 of 2015 on the issuance of the Executive Regulations of the Capital Markets Authority.

Read Full PDF Text (Arabic)