Souk Al-Manakh also referred to as Kuwait stock market collapsed in August 1982. The crash was caused by the bouncing of a presented post-dated check by a female speculator for payment. The crash subjected high risks to banks where there was an outstanding debt of US $94 billion. The crash contributed to business failures, bankruptcies and also precipitated recession in the economy. It made Kuwait incur enormous losses that nearly crippled the financial system by around $92 billion. The crash made the government step in and post a complicated set of policies regarding the rigorous credit resettlement program. There are various approaches that Kuwait’s Al-Manakh stock market chose to take in the attempt of adopting the solutions for the crisis. The evolution of solution strategies impacted both negatively and positively to the traders and even the entire Kuwait country.
The government used different methods to restoring the Souk Al-Manakh after the crash. The government set various regulations and policies regarding the crash so that the company could use the terms of the government to run their business in future and pay debts. The crash brought a lot of tension between the dealers and the creditors that required the government to be involved in its solution. The government was to design a strategy for paying the debts of the creditors. The involvement of the government could help in solving the problem or create more problem for the company (Ramady, 102). For instance, the government could assist the company in paying the debts but the terms and conditions put might not be favorable to the dealers.
The first approach set by the government to solve the crash was a classification of traders. The Al Manakh stock market traders were classified into different groups that are solvent traders who had assets exceeding their payables and insolvent traders. The approach required the undoubtedly solvent merchants to pay all their debts before paying their receivables (Ramady, 102). “The overall financial risk rating for Kuwait is very low with a low probability for risk for debt service and risk for exchange stability (Ramady, 110).”Those who had the assets and receivables exceeding payables could render debts less than their payables. The insolvent traders who had payables exceeding their assets and receivables and those with zero receivables had to issue debts more than their receivables. In contrast, if the insolvent traders would overextend their services on the issue of postdated checks, in the future they should expect the stock market to turn in their favor.
Another approach is a determination of debt settlement. In the approach, a linear programming model was designed to identify the traders who were seemingly insolvent traders and had become insolvent traders due to the worsening condition of the market (Ramady, 102). Only the balance is entered into the model, and all the assets are assumed to be homogeneous identical and suitable for the risks. The model reveals that all the Al-Manakh traders were insolvent traders and were capable of paying their debts in full. Therefore, the problem is solved by identifying solvent merchants from insolvent traders whose assets could be used to settle the debt using the linear programming model (Ramady, 102). The approach could only favor the solvent traders who can resolve their debts but create a double crisis to the insolvent traders who were not identified in the linear programming model.
Distribution of payment by asset type can also be used to solve the crash of 1982. The strategy was used by the government to find ways in which the debts could be paid to the creditors. The trader’s assets were divided into various categories from the least risky to the most hazardous. The categories include real estate, equities of Gulf, receivables from solvent traders and cash and equities of Kuwait. The decision of categorizing traders was challenging because one group could have an advantage over the other traders. The grouping or categorizing could only be fair if the creditors were given the same proportion rather than treating them differently (Ramady, 102).”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 first choice.(Ramady 103).”
The government also proposed another mode of the transaction rather than using postdated checks. The use of postdated checks brought fraud in business where the banks ran at a loss when billions of capital were lost. Therefore, for the prosperity of the company, the government had to stop the application of postdated checks in the Al-Manakh. The effort of the government to provide an alternative method of transaction that replaces the current model could help to stop the corruption and loss of resources by the company (Ramady, 102).
In conclusion, the crash of the Souk Al-Manakh could be well corrected by the government’s policies that disregard the issue of postdated checks that caused fraud among the dealers thus led to the collapse of the sector.”The Kuwait government has now embarked on a privatization program to open up ownership of state enterprises to the private sector (Ramady, 98). ”The government should enable a partnership of Souk Al-Manakh and the entire Kuwait market so that in case there is a fraud in one sector, the other sector can continue operating using terms and conditions of the company in a recession. Burning the use of postdated checks could somehow help in solving the problem to enable future prosperity of the company.
Work Cited
Ramady, Mohamed A. Political, Economic and Financial Country Risk: Analysis of the Gulf Cooperation Council. Cham: Imprint: Springer, 2014. Internet resource.
