The Central Bank of Kuwait was established in 30 June 1969 to offer a flexible currency system on behalf of the State of Kuwait. The Central Bank is currently building their new building in the Sahrq area.

In August 2011, following reports that some members of the Kuwaiti National Assembly had received millions of dinars to their accounts, opposition MP Musallam Al-Barrak called for the bank's governor to resign.

History

The period between the two world wars (world War I & II) witnessed a kind of monetary disorder, which locally affected certain countries. Perhaps the ineffectiveness of central banks and the limited regional outlook that governed the concept of foreign trade led to those severe effects which resulted from the Great Depression (1929-1933).

Whatever the causes and factors that affected this period were, countries had mutually agreed by the end of the Second World War to establish the International Monetary Fund (IMF) and to lay down a basis for evaluating countries’ currencies. They also agreed that each country should regulate its monetary affairs to maintain domestic stability (local prices), which had remarkable effects on foreign stability (exchange rate) and thereby on other countries.

Therefore, the post-World War II decade witnessed the establishment of many central banks. Kuwait was not yet independent; it was dealing in the Indian rupee due to the non-existence of local Kuwaiti currency, and thus there was no need for the existence of a central bank.

In 1960 the Kuwaiti Currency Board was established by Amiri Decree No. 41 of 1960 and the Kuwaiti Dinar was put for circulation on April 1, 1961.

During the post-independence period 1960-1968 four commercial banks were established, expanding banking activity which entailed the establishment of the Central Bank of Kuwait on June 30, 1968 under Law No. 32 of the year 1968 concerning currency, the Central Bank of Kuwait and the organisation of banking business, to supervise banks and perform other functions of central banks.

Objectives of the Central Bank of Kuwait:

Article (15) of Law No. 32 of the year 1968 stated above provided that the objectives of the Central Bank shall be:

• To exercise the privilege of the currency issuance on behalf of the state;
• To secure the stability of the Kuwaiti currency and its free convertibility into foreign currencies;
• To direct credit policy in a manner that assists social and economic progress and the growth of national income;
• To control the banking system in the State of Kuwait;
• To serve as banker to the Government;
• To render financial advice to the Government.

The above objectives are in harmony with one another on the one hand, and in line with the international concept of central bank objectives on the other. Undoubtedly, the relative novelty in the establishment of the Central Bank of Kuwait enabled it to benefit from other countries’ experiences in this respect, resulting in the above stated harmony, which means that the realization of one objective is correlated with the realization of other objectives.

The currency issuance will not be efficient unless made in the light of monitoring the general monetary positions of banks and being aware of the expected government expenditure. This awareness of monetary conditions and thereby putting them in the appropriate framework will be reached by the control of the banking system, whereas the identification, or even proposing the adequate volume of the expected government expenditure will be made by the Central Bank’s role as banker to the Government and by rendering the adequate financial advice to it.

In this respect, light should be cast on both the functions of securing the stability of Kuwaiti currency and the control of banks, due to their importance which is almost equal to the importance of other functions.

Functions of the Central Bank of Kuwait

The functions of central banks can be summarized as follows:

1. Regulating the volume of currency to meet the needs of business and individuals in general. Therefore, they are exclusively authorized to issue currency.
2. Carrying out government banking operations on behalf of the government.
3. Maintaining the commercial banks fund needs.
4. Managing the State’s reserves of foreign currencies.
5. Granting credit facilities to banks in any form whatsoever, whether through lending, discounting their commercial papers or re lending, i.e. the central bank acts as the bankers bank or lender of last resort.
6. Settling payments among banks through clearing.
7. Supervising credit to be qualitatively and quantitatively in line with economic needs. It implements the monetary policy adopted by the Government.

It is noteworthy to mention that none of the above functions has any priority or importance over the others. Central banks, however, cannot perform efficiently any of the above functions without performing the other functions properly.

The capital of the Central Bank of Kuwait is five million Kuwaiti Dinars, fully paid up by the Government. This capital may be increased by virtue of a decree and the increase drawn from the General Reserve of the Bank.

Central Bank Ownership and Management

Almost all central banks are state-owned, although they began as private banks in most countries. Even when these banks were private, the governments were keen on being represented on the boards of these banks, so that the public interest would not be neglected in their decisions.

It should be noted, however, that the management of these banks was not at all subordinated to governments, due to the risk of over financing government needs by these banks, if they were completely subject to their governments desires. This would consequently lead to currency devaluation resulting from over-expansion of currency to finance deficits in government budgets.

To avert this, all international banking legislation contain regulations keeping central banks beyond the scope of their governments control, securing for these banks independence in management and decision-making. These regulations may be either in the form of clauses, curbing the right of governments to borrow or stipulating the formation of boards of directors in a manner that would enable them to take their decisions freely.

The independence of central bank decision-making is not an absolute concept, as the independence of the central bank traditionally falls within the scope of the government. To explain this it may be said that the general government objectives, regarding both development rates and the size of employment expansion, are binding on central banks.

But when a government starts implementing these policies, the central bank may realize that the government estimates are not based on realistic foundations, nor are the estimated resources available to that government, which makes that government borrow from the central bank to meet the deficit in its resources.

On the other hand, if the central bank finds that these loans will disturb the monetary stability and will consequently prevent the original objectives from being achieved, the central bank must reject government demands and resort to the method regulated by its governing law regarding the settlement of disputes arising between it and the government.

Useful links

Currency of Kuwait:

Kuwaiti dinar

List of Central Banks:

Central Banks

Official website of Central Bank of Kuwait:

Ministry of Finance of Kuwait:

en.mof.gov.kw