The Effect of Banks Governance on Capital Markets’ Stability – Kuwaiti Banks Case
Prof. Zeineb Awad-Allah
School of Law – Kuwait University
This research sheds light on the mechanisms of exercising corporate governance within banking institutions. ‘Governance’ is the short term used in this regard to underline its on-going impact on financial markets and its major importance in national economies. This term requires careful examination and assessment.
Most countries have suffered from financial and economic crises or have experienced banking problems. This has been considered to be the result of banking risks, especially concerning credit issues. A healthy banking system is vital to ensuring the safety of both financial markets and the economy. Moreover, having a code of conduct and good practices leads to a healthy implementation of banking administration.
In fact ‘governance’ provides an adequate and secured infrastructure enabling banks to draw on their own means to achieve their targets and monitor their performance along with more efficient use of their resources. Adopting ‘governance’ aims, in particular, at reducing bank risks, including credit risks.
Within this framework, instructions have been imposed on traditional and Islamic banks in Kuwait to ensure governance of Kuwaiti banks. These instructions replace the instructions dated 3 May 2004, in light of the experience gained from international financial crises and new versions of governance in banking, especially the ‘Basel Paper’ on bank control dated October 2010. The new instructions seek to emphasize governance and the principals adopted by the Council of Financial Stability regarding compensations along with the Recommendations of the Working Group of the World Bank on reassessment of Governance Criteria in Kuwaiti Banks, as published in 2010 at the request of the Central Bank of Kuwait. The new instructions came into force from 1 July 2013.
The aforementioned instructions took into consideration the mechanisms of the Kuwaiti banking sector and the characteristics of its economy along with its integration within the global economy. They recognize the importance and the need to ensure proper governance within Kuwaiti banks in order to improve the working environment and enhance the global economy as a whole. The new instructions constitute minimal norms for governance within Kuwaiti banks and are in conformity with international norms. Their ultimate aim is to enhance confidence in the banking sector on both domestic and international levels.