The Souk Al-Manakh was a classic financial bubble that comprised of investors from around the oil-rich Persian Gulf, and it exploded after confidence in the system was affected. In August 1982, Investors’ checks were reported to bounce and the stock market exchange buckled within a month. The Kuwaiti Ministry of Finance demanded the clearance of all postdated checks by Banks to speed the close down of the stock exchange. The Kuwaiti government conveyed a clearinghouse company that tried to solve disputes and other plights of the investors and brokers (Al-Deera Holding). The arbitration panel was expected to address all the issues in a proper manner to satisfy all stakeholders. Nonetheless, $1.7 billion was set aside to recompense the less speculative investors. The situation was less generous than the compensation package that arose in the collapse of 1977 after an investigation illustrated that more than 6,000 investors had engaged in fraud after they passed $100 billion in bad checks (Elimam et.al 92).
The collapse of Souk Al-Manakh prompted a major crisis in the Kuwaiti economy, and to a less significant extent, the economies of nations in the Persian Gulf. The economy of Kuwait was based less on individuals than on families. As a result, the ability of a single member of the family to use a family credit to fund elicited speculations. The Kuwaiti Bank faced challenges because of the unpaid debts that caused insolvency. The National Bank of Kuwait is the only financial institution that was not affected by the crisis. The Souk Al-Manakh crash enfeebled the economy and the impact could be felt at the family level. . Later in the 1980s, Kuwait experienced intense deterioration of the oil prices that caused a recession in the Persian Gulf region.
The Souk Al-Mannakh could not be restored without the implementation of different policies by the government. Companies were expected to meet the standards encrypted in the new regulations and policies. The government monitored operations of business entities to ensure that they paid their debts. The Souk Al-Mannakh crash created suspicion and tension between dealers and the creditors. The government stepped in to clear the air and reconcile all conflicting parties. Policymakers helped the government to formulate effective strategies that would benefit all parties involved in the transactions. It was unsure whether the government provided long-term solutions or created more problem to the crisis (Ramady, 102). For example, despite the help by the government to pay debts, the set terms and conditions could benefit the dealers to a great extent. There was a need to ensure that mutual benefits resulted from the process and no party benefit more than the other.
At the same time, the Kuwaiti government introduced stringent measures and reforms that aimed at enhancing the efficiency of the stock exchange. Examples of these reforms include the introduction of a daily price change limit system and the written action system. Others included splitting the market into two parts, official and parallel market which comprised 30 Stock Market Efficiency. Nonetheless, the Kuwaiti government also introduced reforms on the imposition of disclosure rules to enhance the transparency and accountability of the exchange market and registration of the brokerage companies and dealers. Such reforms played a crucial role in promoting the competence of the Kuwait Stock Exchange.
The government improved its efforts to solve the crisis through the classification of traders. The traders in the stock market were categorized into various groups. These included solvent traders and insolvent traders. The solvent traders acquired assets that exceeded their payables. The approach expected the solvent merchants first to settle all debt before paying their receivables. This decreased the financial risk rating in debt service and exchange stability. Individuals or companies that acquired assets and receivables that exceeded the payables could reduce debts less than their payables. On the other hand, the insolvent traders were restricted to issuing debts more than their receivables if only their payables exceeded their assets and receivables or had zero receivables. In the future, the stock market would turn in the favor of insolvent traders if they overextend their services concerning postdated checks.
The Souk Al-Manakh crash that occurred in August 1982 gave rise to an outstanding debt of US $94 billion. The debt exposed banks to high risks and triggered an economic recession, bankruptcies, and business failures in the entire Gulf region. Courts experienced hitches when trying to settle the debt of traders because of their predicament. To solve the crisis, a linear programming model to identify insolvent debt traders was introduced. The model was efficacious as it assisted the government to solve the crisis in an effective, equitable and robust manner. In the absence of the linear programming model, courts would have been occupied with numerous unsolved crisis for a long span of time. The model helped the government to save more than $10 billion in court costs and attorney fees.
The government introduced an approach that could determine debt settlement. Policymakers designed a linear programming model that identified the insolvent traders that resulted from the deteriorating condition of the exchange market. To create a balance in the model, the assets are speculated to have a homogeneous identical and apt for the risks. The linear programming model classified the Al-Mannakh traders as insolvent traders because of the capability to fully settle their debts. The ability to distinguish the solvent merchants from insolvent merchants helped the government to determine debt settlement in the investors. The model helps to examine how assets could be used to settle the debt. Although the debt settlement approach acted for the solvent merchants who could pay their debts, it produced a double crisis to the insolvent merchants who were not recognized in the linear programming model.
Distribution of Payment by Asset Type
According to Elimam et.al (97), the assets of the traders were classified into four main categories, from the least to the riskiest. These include i) Cash and equities of Kuwaiti KSE-listed companies, (ii) real estate, (iii) receivables from solvent traders, and (iv) Equities of Gulf and Kuwaiti closed joint stock companies. It was challenging to formulate a method that determined the combination of assets involved when creditors pay debts.
The categories in the distribution of payment by asset type could only be fair if the creditors were not treated differently and were subjected to same proportions. Ramady asserts that “despite efforts to reform the civil service, Kuwait is perceived to suffer from excessive bureaucracy and department overstaffing, which reflect the Kuwaiti population’s preference for government jobs as an employer of the first choice” (p.103).
The elimination of post-dated checks.
The Kuwaiti government also recommended another approach of the transaction instead of using the postdated checks. In the past, postdated checks had been associated with massive fraud in business and most banks generated huge losses as billions of money disappeared in the scheme. As a result, the Kuwaiti government stopped the use of postdated checks in Kuwait and the Gulf region to boost the success of the company. The elimination of post-dated checks and introduction of an alternative method could do away with the current model. In the end, the government would achieve a corrupt free system and avoid the loss of resources experienced by companies in the past.
Merits of the Linear Programming Model
In the long run, the Kuwaiti government benefited from the implementation of the LP model in the distribution of payment by asset type. The model was beneficial because of the following reasons
The government developed a robust quantitative tool that was used to determine DSRs, identify insolvent traders, and measure the sensitivity of the DSR to the changes in the value of assets or the addition of new insolvent trader
The LP established a mathematical formula that was straightforward, efficient, and applied to redistribute the payments of insolvent traders to their creditors by asset’s type.
The LP model approach was better than the arbitration approach as it accurately and systematically maximized the sum of the Debt Settlement Ratios (DSRs) for all business people thus improving the economy. All the traders received a similar DSR as the formula promoted equality and fairness.
Irrespective of the number of traders involved in the system, and the difficulty associated with intratrader cash-flow relationships, the LP model approach conveyed accurate DSRs. The approach had the ability to settle both the direct and indirect debt interrelationships.
In conclusion, the LP model is regarded as a distinct structure and a government tool that can compute bonds and assist in distributing insolvent merchant payments to the creditors.
Bahrain was the epicenter of the companies operating in the Souk Al-Manakh. The registration of the companies took place here and also, Bahrain was their headquarters. Bahrain ensured it well-preserved its status as a financial epicenter and at the same time, it restricted the growth of its stock markets (Colombo). The occurrences instilled fear to the Saudi authorities. They believed that the events could trigger extreme dangers of a liberal capital market environment.
The Souk Al-Manakh crash affected the entire Persian Gulf. Since 1982, the capital markets in the region has improved immensely. Currently, the region experiences a vivacious stock exchange with numerous companies in the entire region. Even though the stock exchange has had a positive progress since the crisis, it is still exposed to susceptibility, gossips, and rumors. The stock market is also affected since it undermines the rights of the minority shareholders. The stock exchange market should incorporate elements of corporate governance and avoid the disclosure of information through incompetent annual reports.
The reactions of the government of Bahrain to the Souk Al-Manakh crisis
Two investment companies situated in Bahrain asserted that they had introduced measures to compensate for the losses that generated from substantial provisions of the post-dated checks in Souk Al-Manakh crisis. For example, the Gulf Investments Company in Bahrain set provisions that totaled $54 million as it was exposed to $199 million loss. Another example is that of the Pearl Investment Company where its annual report indicated provisions of $32.6 of a total of $233 million that stemmed from the share of postdated checks. The provisions were allotted to five investment portfolios of Pearl Investment Company. The postdated checks led to massive losses in companies, as the investors were expected to honor the checks so that total debts could be settled.
The accumulation of bouncing checks increased immensely and this caused the collapse of the Souk Al-Manakh. The crash affected the entire Gulf region as Bahrain was the most affected since most companies dwelled there. The UAE and the Bahrain’s government made a decision to establish independent boards that would evaluate the effect of Souk Al-Manakh crash on businesses situated on their territory. The government of Bahrain reacted to the collapse of Souk Al-Manakh by establishing a Rescue Fund. The rescue fund aimed at bailing out companies affected by the chaotic stock market. The government also worked to restrict the flow of bank credits into the agitated market. The government also reacted by ordering banks to disallow the postdated checks from the Persian Gulf companies. Companies in Bahrain, therefore, stopped to engage in business where payments were made by postdated checks, and this lessened the generation of more losses.
Conclusion
The elucidation above illustrates that a series of events caused the Souk Al-Mannakh crisis, and this augmented the stock bubble. The bubble increased because the government and investors had placed an excessive amount of money at the disposal of the deteriorating oil prices in the Gulf region. Also, the excessive use of postdated checks caused more harm to the status of the economy. Investors focused on making huge profits and were less concerned about the repercussions that would emerge. The Souk Al-Mannakh had destabilized and was to explode within no time.
The government had the capacity to fix the Souk Al-Mannakh crisis. After the crash, the policymakers introduced policies and regulations to correct the situation. For instance, the government unheeded the use of postdated checks since they had been applied in numerous fraud cases. In fact, the Souk Al-Mannakh collapsed as a result of excessive use of the checks. The efforts of the Kuwait government cannot be underestimated. It has established a privatization program to encourage the ownership of state enterprises to the private sector (Ramady, 98). Needless to say, the government should work on a partnership of Souk Al-Mannakh and the whole Kuwait market. The partnership will help various agencies to raise the alarm when cases of fraud are detected in a particular department. All sectors in the market must be subjected to the terms and conditions set after the recession. The Linear programming model was also implemented to assist in the effective distribution of payment by asset type.
Work cited
Elimam, A. A., M. Girgis, and S. Kotob. "A solution to post crash debt entanglements in Kuwait's al-Manakh stock market." Interfaces 27.1 (1997): 89-106.
Ramady, Mohamed A. Political, Economic and Financial Country Risk: Analysis of the Gulf Cooperation Council. Cham: Imprint: Springer, 2014. Internet resource.
Al-Deera Holding". Aldeeraholding.com. N.p., 2016. Web. 21 Mar. 2016.
Colombo, Jesse. "Kuwait’s Souk Al-Manakh Stock Bubble"Kuwait's Souk Al-Manakh Stock Bubble." Thebubblebubble.com. N.p., 2016. Web. 21 Mar. 2016.
