1.2 RELEVANCE OF THE STUDY TO KUWAIT
Making responsible decisions in real estate lending is a concern that is largely relevant to the economic setup of Kuwait. The economy of Kuwait, firmly founded on industries related to oil and gas, business and commercial services, and real estate, largely rests on its strong banking system. Kuwaiti banks are known for high capitalization and derive strength from government support via policies and intervention via the Central Bank of Kuwait. However, it is noteworthy to emphasize that the real estate and investment sectors of Kuwait have been exposed to the economically hazardous effects of the global financial crisis of 2008, which led to the massive decline of financial institutions in the United States. Moreover, the fact that the global financial crisis has featured the heavily detrimental effects of irresponsible real estate lending practices poses a cautionary note to Kuwait, which has real estate accounting for a large share of its lending activities as of late. Therefore, this study stands to contribute to the economic well-being of Kuwait in light of its strong banking system and its increasingly thriving real estate industry. Providing lessons underlining the ill effects of irresponsible real estate lending activities could further lead Kuwait to improve in its diversification agenda as well, given its continued reliance on oil and gas. Furthermore, as a major producer of oil and gas for the global market, Kuwait cannot simply afford to compromise its financial situation over irresponsible real estate lending decisions – a matter this study seeks to remedy for the benefit of the Kuwaiti banking system (Al-Kulaib et al., 2013; Kaganova et al., 2005).
The engagement of Kuwait in the global market, particularly in terms of its oil and gas production, entails the exposure of its banking system to major financial crises such as the global financial crises. For instance, the United States, being among the major importers of Kuwaiti oil and gas, could inevitably affect Kuwait once it experiences a repeat of the global financial crisis, regardless of the degree. Once the purchasing power of the United States for Kuwaiti oil and gas declines, Kuwait faces the prospect of losing customers for its oil and gas exports. Consequently, investors in the Kuwaiti market would be affected by any financial crisis hitting the United States, given that they have investments connected to financial institutions in the United States in one way or another. Such would affect investors in terms of their integrity and capacity to pay when they borrow loans from Kuwaiti banks, especially those involving the real estate sector of Kuwait (Kaganova et al., 2005). Given the foregoing, studying how real estate lending decisions in Kuwaiti banks should be designed is an urgent matter for Kuwait to consider, given the exposure of the banking system of Kuwait to the global market, whose major players such as the United States may cause peril to it due to economic mishaps such as the global financial crisis. Practicing prudence in making real estate lending decisions is a practice that Kuwaiti banks must consider; this study stands as a scholarly endeavor to assist such effort via the description and analysis of available literature and the construction of solutions and recommendations based on quantitative and qualitative methods testing models formed from the available literature (Al-Kulaib et al., 2013; McCormick, 2009; Strischek, 2009).
Apart from exposure to financial crises suffered by key players in the global market, one should consider as well the domestic implications of irresponsible real estate lending decisions. After all, real estate lending decisions haphazardly committed by Kuwaiti banks could result to financial crises happening within Kuwait itself, akin to that suffered by the United States in recent history. Subprime lending – one that is committed when banks and other financial institutions allow the issuance of loans to borrowers who are not capable enough to issue repayments, has caused peril unto the banking system of the United States and has spread worldwide due to the vast exposure of other markets around the world to American financial institutions. The same may happen to Kuwait if it proves itself irresponsible in lending out real estate loan to subprime borrowers. After all, real estate involves properties whose values may have to be written off significantly in case the accumulation of subprime borrowers rises at an alarming and unsustainable rate. Therefore, if Kuwaiti banks start issuing real estate loans without taking prudent steps to ensure that their borrowers are really capable of issuing repayments, then they face lesser prospects of accumulating debts coming from subprime borrowers. After all, subprime borrowers possess greater risk of losing the ability to pay their loans altogether – in this case, for real estate properties. Once Kuwaiti banks become irresponsible in granting more loans to subprime borrowers, they face not only the risk of receiving little to no repayments at all, but also the prospect of a real estate market crash characterized by extremely written-off real estate property prices brought forth by the immediate need of banks for repayments. This study is greatly relevant to the foregoing possibility Kuwaiti banks may face, in that it seeks to provide recommendations to the banking system on Kuwait on screening rightful candidates for real estate loans. Making the right decisions for real estate lending involves having to know more about prospective borrowers, on whether they are rightfully capable or subprime – a concern this study seeks to address in terms of its qualitatively and quantitatively tested recommendations (Al-Kulaib et al., 2013; Kaganova et al., 2005).
Therefore, the relevance of this study to Kuwait is justified in terms of the exposure of its economy to risks affecting the global market and the possibilities of ill economic effects arising from the irresponsible actions of its domestic banking system. The crux of the matter here is clear – the exposure of Kuwait to economic hazards affecting the global markets urge the need for prudent real estate lending decisions to help Kuwaiti banks in dealing with affected investors, while the impending consequence of poor real estate lending decisions places the Kuwaiti banking system in a position of greater responsibility to protect itself against subprime borrowers and their accumulation through an effective set of guidelines for making safe real estate lending decisions (Al-Kulaib et al., 2013; Kaganova et al., 2005).
References
Al-Kulaib, Y. A., Almudhaf, F. W. and Al-Jassar, S. A. 2013. The banking industry during an extended financial crisis: An empirical assessment of Kuwait banks. Academy of Banking Studies Journal, 12.
Kaganova, O., Alsultan, F. and Speakman, J. 2005. Overview of Real Estate Market in Kuwait. Journal of Real Estate Literature, 13 (3), pp. 289-302.
McCormick, T. 2009. The 20 'C's of Credit: Basic considerations the banks overlooked. Accountancy Ireland, 41 (4), pp. 18-21.
Strischek, D. 2009. The Five C's of Credit. The RMA Journal, 91 (8).
