In August of 1982, an informal Kuwait stock market known as Souk al-Manakh collapsed (Rasmaroni, 2006). This happened when a female speculator presented a post-dated check for payment and it bounced (“Kuwait's Souk”, n.d.). This relatively small destabilising factor caused enormous losses, and the financial system was nearly crippled with some $92 billion (Rasmaroni, 2006) from about 6,000 investors (“Kuwait's Souk”, n.d.). Is this event the only factor that caused the crash? And what made the crash so huge? To reveal the answer we have to dig deeper into history.
It might be interesting to explain some technical terms before we dig deeper into history. It is essential to understand them in order to know what the text is about.
post-dated check: “A check issued at present but with a later maturity date so it cannot get encashed at the present date. The check is like a promissory note and no legal action can be taken if the account closes down or there is shortage of funds.” (“Postdated Check Definition”, n.d.)
over-the-counter (OTC) stock exchange: A market for securities which are not traded on an exchange, usually due to an inability to meet listing requirements (“Over the counter”, n.d.).
bull market: “A prolonged period in which investment prices rise faster than their historical average.” (“Bull market”, n.d.)
The Kuwait stock market started operating soon after its independence from the British in 1961 (Hassan, Al-Sultan, and Al-Saleem, 2003, p. 7). In the late 1970s people in the Persian Gulf countries became very wealthy due to the rise of the oil prices. Kuwait received a large share of the fortune (Veneroso Associates, 1998). Kuwait came into a bull market as new rich Kuwaitis turned to the stock markets to store their wealth (“Kuwait's Souk”, n.d.). These funds prompted a speculation boom in the official stock market in the mid-1970s that culminated in a small crash in 1976 and 1977 (Hassan et al., 2003, p. 7). The government had moved in to support prices, buying heavily for its own account, so that nobody would suffer (“Kuwait's Souk”, n.d.). The response was to introduce stricter regulations on listing of new companies in the stock exchange, and to make forward trade and margin regulations. By the 1978, the Kuwait stock market stabilized (Hassan et al., 2003, p. 7).
The bull market was strengthened by the scarcity of Kuwaiti stocks. Only a few dozen uninteresting companies were traded on the official exchange (“Kuwait's Souk”, n.d.). The scarcity was the result of the royal sheiks’ reluctance to grant the corporate charters necessary for companies to become publicly traded, for fear that companies might become vehicles for stock speculation (Veneroso Associates, 1998). Kuwaiti investors, however, weren’t concerned with risk, as their collective memories recalled a market panic in 1976 and 1977 in which the government had protected the people (“Kuwait's Souk”, n.d.). These traders believed that the government would always be there to help them out of trouble. The stock exchange became regulated and changed into an official exchange. When this official market became overly regulated from the merchants point of view, people started trading on the curb shares not listed on the regular exchange (Seznec, 1995, p. 10).
In 1979, an unofficial over-the-counter stock market was formed, called the Souk al-Manakh. It started specializing in the trade of highly speculative unregulated Kuwaiti-owned foreign companies (Hassan et al., 2003, p. 7), principally from Bahrain and the United Arab Emirates (Veneroso Associates, 1998). “Not long after the founding, the stock market became a hotbed of speculation.” (“Kuwait's Souk”, n.d.) The heavily regulated official stock market became less popular as the Souk al-Manakh earned the reputation of being the more exciting of the two markets. After a while it shared more similarities with a casino than with a stock...