KUWAIT'S PRIVATE INVESTMENT COMPANIES ADVANCING ON

UNCLAS SECTION 01 OF 12 KUWAIT 002197

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN EINV KU KGCC
SUBJECT: KUWAIT'S PRIVATE INVESTMENT COMPANIES ADVANCING ON
ALL FRONTS

REF: KUWAIT 0638

This cable is sensitive but unclassified; please protect
accordingly. Not for Internet distribution.


1. (U) Summary and Key Findings: During May 2005, Ambassador
met with the leading figures in the Kuwaiti private
investment sector. The Ambassador encouraged continued
investment in the U.S. and new investments in Iraq and in
other countries of U.S. interest. The Ambassador encouraged
the investment sector's involvement in economic reform in
Kuwait and urged the executives to focus on corporate
governance and transparency.


2. (U) There are over seventy private sector investment
companies in Kuwait, with most of them focusing on capital
investments in the local market. About ten to fifteen of the
top companies have extensive investments outside of Kuwait
and are leading the way in bringing new investment banking
products and services to the Kuwait market. In meetings with
the top executives of these companies, we discussed: the
development of the investment sector in Kuwait; the current
outlook for Kuwait's economy and that of the Gulf region;
flows of capital back into Kuwait and the region; efforts at
economic reform and privatization; the evolution of the large
merchant family businesses in Kuwait; the performance and
oversight of the Kuwait Stock Exchange; the investment
outlook for Iraq; the growth of Islamic investments and
financial products; the Kuwaiti real estate market;
regulation and corporate governance in the financial sector;
training and workforce issues; and the expansion of the
sector and new directions. (See reftel for similar reporting
on the commercial banking sector.)


3. (SBU) Key Findings
--------------

-- The Kuwaiti investment sector has a long tradition in the
merchant families and many of the top families have
substantial investments with the leading investment firms.

-- Most of the top executives in the investment field got
started at one of two government-backed companies in the
1970s and 1980s, and then branched out on their own in the
1990s. They are all well-connected and most are from among
Kuwait's oldest merchant families.

-- There is no shortage of capital in Kuwait or the Gulf,
although Kuwaitis continue to diversify their holdings
internationally.

-- The regional outlook is very good, according to these
executives, with Oman and Qatar both seen as the most highly
promising areas.

-- Everyone thought that the GOK needed to move beyond
rhetoric and back up its talk on economic reform with real
action.

-- The private sector is seen as flexible and advanced and
only needs to be unleashed by the GOK. The laws on taxation
and privatization and the basic commercial law are seen as
outdated or useless.

-- The Kuwait stock market is a source of funds for the
investment companies through listing their own stocks and
through their extensive holdings in other publicly-traded
companies.

-- Most agreed that the Kuwait Stock Exchange (KSE) needed a
regulatory body, much like the U.S. SEC, and that the GOK
should stop trying to be both owner and regulator of the
exchange.

-- No one is quite ready to invest in Iraq, but everyone
recognizes the potential, with some companies having already
established funds and holding companies for future
investments.

-- Islamic investments are seen as highly profitable, and
some of the executives think that Islamic financial services
could grow from about 35% of the financial market in the Gulf
today to as high as 75%, given the right conditions.

-- The lack of competition and the lack of standards and
agreement on Sharia'a compliance have held back the
development of the Islamic investment market.

-- Real estate is still a big winner for many of the
investors, with the Kuwait and Gulf market riding high for
the foreseeable future.
-- Many of the Kuwaiti investment companies have large stakes
in the big real estate projects throughout the region.
-- The investment companies said that the Central Bank
provides adequate supervision of their companies, but that
better corporate governance is needed overall in Kuwait.

-- No one had any significant complaints about corruption,
either at the pubic or private level, and most thought that
Kuwait provided an adequate legal system through which to
settle commercial disputes.
-- The investment companies are hiring more women and more
young people, but are still struggling with meeting the
requirements for their Kuwaitization quota.

-- The forward-looking companies are branching out beyond
investment in Kuwait to invest in the Gulf and worldwide, and
some are providing extensive value-added financial research
to their clients.

-- The investment companies are offering online stock
trading, options trading, and other complex financial
instruments to their clients.


4. (SBU) List of Meetings
--------------

-- Kuwait Financial Center ("Markaz") Executive Vice
President Ali Khalil
-- Kuwait and Middle East Financial Investment Company
Chairman Hamed Al-Saif
-- Bayan Investment Company (BIC) Chairman Faisal Al-Mutawa
-- National Investment Company (NIC) Chairman Fowzan
Al-Fares and Managing Director Asaas Al-Banwan
-- Global Investment House (GIH) Vice Chairwomen & Managing
Director Maha Al-Ghunaim and Head of Research Shailesh Dash
-- International Financial Advisors (IFA) Chairman Jassim
Al-Bahar
-- The International Investor (TII) Chairman Adnan Al-Bahar
-- Securities Group Chairman Ali Al-Mousa
-- Kuwait Investment Company (KIC) Chairman Bader N.
Al-Subaiee, GM Yousef Al-Hassawi, Asst. GM Raed Al-Saleh
-- Al-Ahlia Investment Company Chairman Abdulsalam Al-Awadi
and CEO Abdullah Al-Gabandi

End Summary and Key Findings.

--------------
Major Themes
--------------
Historical Development of the Investment Sector
-------------- --


5. (SBU) The Kuwaiti investment sector is among the most
sophisticated in the region and is closely linked to the long
tradition of trading and commercial families in Kuwait's
history. Just about every investment official and executive
we met with had cut their teeth at either the Kuwait
Investment Company (KIC) or the Kuwait Foreign Trading,
Contracting and Investment Company (KFTCIC). Al-Banwan of
NIC referred to these companies as the "School of Investment"
for Kuwait. KIC took over KFTCIC in 1997; the GOK holds a
76% share in the combined company.


6. (SBU) Most of the other investment companies were formed
by KIC/KFTCIC "graduates" in the 1980s or 1990s. Most
started out with small family and individual investments and
have grown their assets substantially. NIC, for example,
started out managing $3 million in 1990 and now manages over
$4 billion in client assets. "Most Kuwaitis prefer to manage
their own money," according to Securities Group Chairman
Al-Mousa. "Kuwaitis are very sophisticated investors,"
according to Al-Ghunaim of GIC, so the investment companies
need to be very good to attract clients.


7. (SBU) Kuwait Financial Center (KFC) Executive Vice
President Ali Khalil provided a good historical overview of
the recent factors contributing to the current market
situation. He explained that the Souk Al-Manakh banking and
financial crisis of 1983 had kept the investment sector from
expanding for many years, all the way through the mid-1990s.
Towards the end of the 1990s, by 1997 and 1998, all of the
bad debt and other outstanding issues from Souk Al-Manakh had
been mostly cleared up, so the investment companies could
start operating freely again. The rebirth of the investment
sector was "a function of liquidity" and this was the first
phase of the rehabilitation of the Kuwaiti market. The next
stage was characterized by an inflow of money to the Kuwaiti
market, from three specific sources. The first source was
the United Nations Compensation Committee (UNCC) payments,
which were especially heavy at the very end of the 1990s
through 2001. These payments injected a significant amount
of liquidity into the market. The second source was the GOK
itself, as the Kuwait Investment Authority decided to invest
more money in the local market. It did so by creating
investment funds in partnership with the local investment
companies. The third source of new funds was the
repatriation of funds from overseas, especially from the
U.S., as the Patriot Act and other post-9/11 regulations
temporarily scared investors away from the U.S. market. The
most recent phase in the growth of the Kuwaiti investment
market, according to Khalil, is the performance of the Kuwait
Stock Exchange (KSE),and more specifically, the earnings
being generated by a handful of logistics companies with
large U.S. military contracts.

Promising Economic Outlook for Kuwait
--------------


8. (SBU) Most of the investment officials were positive
about the future of the Kuwaiti economy. Al-Ahlia Chairman
Al-Awadi called the outlook "very bright" and said that the
"security issue is now better" than in the past. "Kuwaitis
still worry," he added, but not as much as long as Kuwait
"has the support of the U.S."


9. (SBU) Most also believed that the economic boom in Kuwait
was built on solid fundamentals and not just speculation.
"With security and money," Al-Ahlia Chairman Al-Awadi said,
"any country's economy will work like Kuwait's." Many also
saw the current period of economic expansion as one that was
long overdue, "pending for twenty years," in the words of one
interlocutor. The other Gulf countries "have not had (the
same) problems with security over time," that Kuwait has had,
Al-Awadi explained. "The boom is real," echoed NIC's
Al-Fares, "because of oil prices and Saddam's downfall."
Although not mentioned as often as oil prices and the
liberation of Iraq, payments from the United Nations
Compensation Committee (UNCC) to Kuwait based on claims from
the Gulf War are also seen as having had a "high
macroeconomic impact" on the Kuwaiti economy over the past
few years.


10. (SBU) Not everyone painted a rosy picture of the Kuwait
economy. KFC EVP Khalil said that there was "a lot of hype
in this market" and that his "biggest nightmare is when the
values (of KSE-listed companies) readjust." The impact
locally will be significant, he said.

Regional Outlook Very Good
--------------


11. (SBU) Most saw the outlook for the GCC countries as very
good, at least through the end of this decade. Al-Ghunaim of
GIH described Oman as "very sophisticated in financial
regulations and transparency," but added that "Omanis don't
have the money to funnel into the system" that Kuwait does.
Al-Subaiee of KIC also said that Oman was very well
regulated. Al-Ghunaim said that, in terms of overall
economic growth around the world, until the end of the
decade, "the story is here (in the Gulf)." KMEFIC Chairman
Al-Saif said that "this is the right time to make plans for
the future" for the region. Many of the Kuwaiti investment
companies have taken large stakes in the most significant
projects in the region, including the Palm Island development
in Dubai, the Bahrain Financial Harbor in Manama.

Capital Flows No Problem
--------------


12. (SBU) The investment officials all saw an increase in
capital in Kuwait in the past few years, but did not ascribe
it to any one specific reason. Rather, our interlocutors saw
a combination of forces bringing capital back into the
region. These forces include increased security, rising oil
prices, concerns about U.S. investments in the post-9/11
regulatory environment, and a general lack of good investment
opportunities elsewhere in the world. Unique to Kuwait, some
of the investment officials pointed out, was the bump in
capital inflows from the UNCC payments resulting from the
first Gulf War. One executive pointed out that the
commercial banks were actually depositing money back with the
Central Bank of Kuwait around 2000 and 2001 because so much
UNCC money was coming in and the banks had nothing to do with
the money. Some executives, such as KFC EVP Khalil, said
that they were now seeing money begin to flow back to the
U.S. as investors gained a better understanding of the
Patriot Act and other financial reporting requirements.
"People have learned to deal with the Patriot Act," he said,
adding that "it was the liability that scared people, not the
lack of privacy."
Economic Reform Lagging
--------------


13. (SBU) All of the investment officials agreed that
economic reform was badly needed in Kuwait and that the GOK
needed to put its weight behind real reform efforts.
"Globalization is coming to Kuwait," said IFA Chairman
Al-Bahar, "whether we like it or not." Some investment
officials explained that they were trying to work through
groups such as the Kuwait Chamber of Commerce and Industry
(KCCI) to create more opportunities for the private sector,
while others were trying to pressure the GOK directly to
remove some of the bureaucratic obstacles to greater private
sector investment. There were some investment officials,
though, that had simply given up on the GOK and had taken
their investments elsewhere, keeping minimal or no
investments in Kuwait. GIH, for example, does not invest in
the Kuwait market beyond the minimum required, according to
Managing Director Al-Ghunaim.


14. (SBU) The private sector in Kuwait was often described
as "flexible" and "advanced", when it was allowed to operate
and take initiatives. Accepting congratulations on the first
"Kuwait Economic Forum" (KEF),organized by his company,
Bayan Investment Chairman Al-Mutawa said that he organized
the KEF to "tell the Prime Minister that we're lagging
behind, that the bureaucracy must be lessened." He said that
the GOK needed to get the message that it needed to limit
itself to appropriate regulations, and get out of business.
The Al-Sabahs know that the GOK should get out of the
business sector, Al-Mutawa said, but they don't have the
right people or ideas. He said that he was going to
summarize the main points of the KEF and present them to the
Prime Minister, with an emphasis on the question that former
Director General of the WTO Mike Moore posed at the Forum:
"Why Wait (for economic reform)"?


15. (SBU) Al-Mutawa (please protect) said that one specific
problem was that the Prime Minister does not have any good
economic advisors around him right now. He said that when
the current Amir was Finance Minister, he had a number of
internationally respected economic advisors upon whom he
could call. Now, instead of having advisors, Al-Mutawa
explained, "the Prime Minister has followers." He added that
the PM "does not have any list of priorities," and moves from
one project to the next without focusing on what it will take
to get each thing done. He also described as a problem that
the Prime Minister "has no one to mediate between him and the
National Assembly." The GOK is "confused and has no sense of
direction (on economic policy)," according to Al-Mousa of SG.
"We're living day to day," he added, and "there must be a
larger role for the private sector." Ministers with prior
experience in the private sector were seen as welcome
additions to the Cabinet, with a few of the investment
officials specifically praising Minister of Commerce and
Industry Abdullah Al-Taweel for trying to move forward with
economic reform measures. KIC Chairman Al-Subaiee suggested
that the PM appoint a "Minister of Economics" to guide the
country's economic reform strategy.


16. (SBU) Every single investment executive and official
agreed that the recent salary increase approved by the GOK
for government employees was unnecessary and "exactly the
wrong move." (Note: The raise was seen by many here as the
price the GOK had to pay in the National Assembly in order to
seal passage of political rights for women. End Note.) It
"offers no encouragement to Kuwaitis to work better," and
simply adds to the problems of the bureaucracy, according to
our interlocutors. SG Chairman Al-Mousa said that he was
against the salary increase, "not because of the money, but
because it encourages backwardness." Other laws and
regulations are greeted with similar skepticism. Bayan
Chairman Al-Mutawa called the taxation law "a joke", and said
the law governing how companies operate is known as the
"Rupeeah Law", because he said that the law dates from the
time that Kuwait still used the Indian rupee as its currency,
pre-1960. Al-Ghunaim of GIH agreed that Kuwait needs a new
commercial law. "The private sector rebuilt Kuwait (after
the Gulf War)," she added, "but is still waiting for the
government to move (on economic reform.)"


17. (SBU) While Al-Mutawa said that recognition exists
within the GOK that economic reform is a necessity, he
explained that "the power of employment is one of the biggest
powers (of the GOK),by encouraging privatization, they will
lose some of that power." He also said that so many private
businesses have such large vested interests in the government
sector that "they don't want to criticize and push for new
economic policies." The expansion of the private sector
would be the key to both political and economic reform,
according to Al-Mousa of SG. Al-Mutawa described Kuwait as a
"boutique shop" that just needs "efficient management" to run
itself. Al-Ghunaim of GIH called Kuwait "an oil company,
nothing more," and added that the country needed to diversify
its revenue base. Al-Mousa of SG said that his company was
currently investing in Qatar and not Kuwait, because there
was "too much red tape in Kuwait." He added that "more
public discussion is needed," and that Kuwaitis had to choose
to "either get used to it, or change it."


18. (SBU) IFA Chairman Al-Bahar said that other laws and
regulations were "paralyzing economic growth," and that "no
decisions are taken for fear of taking decisions." He added
that he would "love to invest in my country," but that the
GOK is still reluctant to let the private sector flourish and
"the Parliament is out of control." Comparing Kuwait to
Dubai, Al-Bahar said that it was "a pleasure to see Dubai in
action," and that Dubai operates on a "survival of the
fittest" mindset. He did note that, despite his many
difficulties with other companies and government agencies
over the years, compared to other places, "there is a legal
system in Kuwait, if you have perseverance." To prove the
point, he rattled off a list of legal decisions that he and
his companies have won over the years against the Central
Bank, Ministry of Commerce, Kuwait Stock Exchange, and other
GOK agencies. Khalil of KFC said that "the government must
privatize both its functions and its assets" in order to
encourage the private sector in Kuwait.

Roots In Family Businesses
--------------


19. (SBU) Most of the investment firms grew out of family
business investments and most companies are managing a
significant amount of their own extended family's money.
Their reputations as investment firms are also linked to
their reputations as successful merchant families. Al-Ahlia
Investment Company Chairman Al-Awadi, for example, explained
that his family had transferred all of its assets into a
shareholding company, and that it was the first family-owned
shareholding company in Kuwait. IFA was taken over by the
Al-Bahar family in 1992, explained Chairman Jassim Al-Bahar.
Some families or individuals hold large stakes in the
investment companies, making the companies an extension of
the family's business reach. Nasser Al-Khorafi, for example,
holds a 35% stake in NIC.


20. (SBU) Some family businesses are linked to each other
through both tribal and business connections. The Jana'at
clan, for example, currently controls four of the most
successful companies listed on the Kuwait Stock Exchange
(KSE): Public Warehousing Company (PWC),National Real Estate
Company, Sultan Center, and Bayan Investment. Al-Mutawa of
Bayan Investment called these four companies the "Golden
Square" and said that they all invest in each other. (Note:
The Jana'at clan has roots in Iraq and takes pride in its
independence from both other Kuwaiti merchant families and
the GOK. It is made up of seven branches, the most prominent
being the Al-Mutawa and Al-Suri.)


21. (SBU) The nature of the family businesses and the small
society in Kuwait means that political and familial disputes
are bound to spill over into the commercial arena, and vice
versa. IFA Chairman Al-Bahar said that his family's
companies "are very aggressive" and pay a price in increased
scrutiny by regulatory agencies, but that "it was worth it."

The Stock Market Thriving But Needs An SEC
--------------


22. (SBU) The Kuwait Stock Exchange (KSE) attracts a large
amount of individual and institutional investment and just
about all of the companies we met with are heavily invested
in KSE-listed companies. This investment had paid off
handsomely for these companies, with the KSE growing from
1,000 points in 2001 to over 8,000 points today. Many of the
people we spoke with considered the KSE still "very cheap" in
terms of value for money, and quite a few said that it was
"the cheapest stock market in the region." Most of the
biggest investment companies in Kuwait are publicly traded on
the KSE and most have done very well on the market. Any
security-related events affect the KSE and would continue to
do so, many of our contacts explained. A civil war in Iraq,
or a U.S. attack on Iran, they said, would drive the Kuwaiti
market down. (Note: Misinformation about a mass casualty
drill at the Embassy temporarily knocked several points off
the KSE index last month.)


23. (SBU) Many of the investment companies actually fund and
form subsidiary companies themselves, when they see a
specific market demand. Al-Ahlia, for example, has the
Shuaiba Recycling Company, Ahlia Industrial Products, and a
few other companies that are publicly traded. Because the
investment companies own other publicly traded companies and
have their own companies listed on the KSE, their balance
sheets have been growing exponentially with the rise of the
KSE over the past two years. Bayan Investment Chairman
Al-Mutawa told us that his company just registered the
highest declared profit for the past quarter ever by any
company in the history of the market, but that it was due to
the need to reflect the price of all of his company's stock
holdings on its balance sheet. Other officials concurred
that much of the profits shown on the balance sheets of the
publicly traded companies are from stock price increases and
not operations. SG Chairman Al-Mousa said that his company
is locally focused and is mostly invested in companies listed
on the KSE. He said that SG has done "exceptionally good"
over the past few years, but he said that the market was
"getting dangerous" and he saw a need to diversify.


24. (SBU) All of the investment officials agreed that the
GOK should set up a separate entity to regulate the stock
market, and all agreed that the U.S. Securities and Exchange
Commission would be a good model. Most agreed that the stock
market was not suitably regulated under the current
structure, with the GOK acting as both owner and regulator of
the market, despite it being funded by the listed companies.
Al-Mousa of SG said that he was "not satisfied with the
structure or the supervision of the market," and that it
needed to modernize and become more transparent. Khalil of
KFC called the KSE structure "a horrible idea" and said that
he and his colleagues were continuing to push for a separate
regulatory body. KIC Chairman Al-Subaiee called the KSE
regulation "ok, not good." At the same time, some of the
investors saw the KSE as "more advanced than others in the
Gulf," saying that Kuwait "had learned from the mistakes of
the 1970s and 1980s. The KSE is against giving up its
regulatory capacity, according to many of the executives we
spoke with, but some said that they thought Minister of
Commerce Al-Taweel would push for a separate regulatory
agency.


25. (SBU) Insider trading was considered a difficult thing
to avoid in Kuwait by many of the investment officials.
"Everything is discussed in the diwaniyas, everything is
insider trading," according to KIC Chairman Al-Subaiee.
"Insider trading is what drives the market here," said Khalil
of KFC. The penalties and fines for insider trading are also
not sufficient to deter people. Within hours, sometimes even
minutes, everything is known, even from the most high-level
meetings involving the Council of Ministers, according to
Al-Mutawa of Bayan.


26. (SBU) Many of our interlocutors saw the recent growth in
the Kuwaiti stock market as being directly linked to the
rising fortunes of the Public Warehousing Company (PWC),
specifically tied to recently concluded multi-billion dollar
deals for PWC logistical support to DoD. Some of them wanted
to see more information divulged about the contracts, though,
saying that it was not clear how much PWC would really make
as profit on the contracts. KIC Chairman Al-Subaiee said
"the whole volatility (in the market) is coming from PWC,
because they are not disclosing enough information (about
contracts.)" Al-Saif of KMEFIC echoed this sentiment, saying
that PWC and other companies that had been awarded very large
U.S. military supply contracts were "bending the rules" by
not disclosing all of the details behind the contracts.

Investment in Iraq: Not Yet
--------------


27. (SBU) Investment in Iraq was seen as a tempting prospect
by most of the investment officials, but one that was not
necessarily ripe. Concerns over security and stability still
worried most of our interlocutors, with some choosing to stay
out of the market completely and others taking tentative
steps toward laying the groundwork for future investments.
Al-Banwan of NIC said that his company wanted to see how the
new Iraqi government would operate before going ahead with
any major investments there. When the time is right for
investment in Iraq, he added, NIC would prefer to partner
with other foreign firms, rather than go it alone. He said
that NIC would most likely consider investing in Iraq in
cement, electricity cables, and real estate. Al-Ghunaim of
GIH said that her company had established a Kuwaiti company
to manage investments in Iraq for GIH clients, but that it
had not yet undertaken any actual projects in Iraq. KIC also
has established some funds for Iraqi investments, but has yet
to invest in any specific projects.

28. (SBU) Al-Mousa of Securities Group said that Iraq was
"very much an attractive investment opportunity," but also
called the "Kuwait-as-gateway-to-Iraq" theory "a myth."
Business can be conducted from anywhere in the world, he
explained, and investments in Iraq did not necessarily need
to be administered from Kuwait. He did add that he thought
Kuwaiti companies could do particularly well in the South of
Iraq because it was close and that the best prospects for
Kuwaitis would be direct investment in Iraq. KIC Chairman
Al-Subaiee said that Kuwait could again be a gateway to the
Iraqi market as it was in the past, but that Iraq was
currently "not mature enough to invest." A lot of
opportunities had come along, he added, but KIC has passed on
most of them, instead waiting for the formation of a
government and for the security situation to stabilize.


29. (SBU) Many of our interlocutors saw Kuwait as being in a
position to help Iraq, logistically and financially. They
also all remained hopeful for the Iraqi people. "Give them
stability and they will be as modern as Kuwait," said
Al-Mousa of SG. Al-Subaiee of KIC described Iraq as "a rich
country, in oil, minerals, water, soil and people."

Islamic Investment Booming
--------------


30. (SBU) All of the investment officials we met with agreed
that Islamic investment products were very profitable and
many of them offered such products through their companies.
Some companies, such as The International Investor (TII)
focus solely on Islamic investments, while others simply
offer a small selection of Islamic financial products
alongside their other commercial products. KIC Chairman
Al-Subaiee saw Islamic products having a higher yield than
conventional trading, noting that "all Islamic investment
deals have better payoffs." Some of the companies have their
own Sharia'a Board, which advises them on whether certain
financial products and services are Sharia'a compliant, and
others rely on outside boards or consultants. Most Sharia'a
advisors are individuals, according to TII Chairman Adnan
Al-Bahar, but he said that the industry is beginning to see
the formation of companies, much like law firms or
partnerships, among qualified advisors. Al-Subaiee of KIC
said that most investment companies outsource their Sharia'a
compliance requirements. Despite the increasingly
multinational aspect of many of the leading Islamic financial
institutions, Al-Bahar said that it was still important to
have local Sharia'a councils in each country review the
products and services offered, because the interpretation may
be different from place to place.


31. (SBU) Al-Bahar of TII said that he got into Islamic
investments because he found it "challenging," and because it
"talked to (his) value system." His family and friends
thought that he was making a sacrifice to go into Islamic
finance, but he ended up doing very well in this lucrative
field, he explained. In a pragmatic assessment of Islamic
financial services, he said that marketing and selling them
were "no different than selling McDonald's" in a Muslim
country. McDonald's doesn't sell pork products in the Muslim
world, Al-Bahar explained, and Islamic financial services
simply had to "cleanse the product" the same way. It was
simply about avoiding what the consumer doesn't want, he
added.


32. (SBU) Al-Bahar of TII said that his company and others
were looking for flexible Sharia'a-compliant solutions, in
order to expand its range of products and services. The
companies might find multiple Sharia'a opinions on any given
financial issue, he explained, but added that his company and
other leading Islamic financial companies had to forge ahead
with new products and services even in the absence of unified
opinions among the Sharia'a Boards. "We don't want to miss
out on an innovative product," he said. He described the
Sharia'a governing financial transactions as "a maturing
legal body" which would get better and more comprehensive as
the demand for Islamic financial products continued to rise.
In order to attract and keep customers in this business, "you
must be creative, but you can't be wrong," according to
Al-Bahar.


33. (SBU) Al-Bahar estimated that 30-40% of the market share
of financial services in the Gulf was held by Islamic
financial institutions or in Islamic instruments and that
this could rise to 70-80%, at least at the retail level, with
maturity of the market. He noted that in Kuwait, the Kuwait
Finance House (KFH) had managed to secure a 30% market share
in financial services while being the only Islamic banking
institution. With the recent addition of new players in this
market, Al-Bahar expected the Islamic investment and banking
market share to increase. Overall, he saw increasing
competition in the Islamic financial services sector as good
for the industry and good for the customers. He thought that
the Gulf would become the natural home base for the future
global leaders in Islamic finance, and expected the large
multinational banks to open up Islamic banking subsidiaries
in the region. "Effective Islamic banking is not possible
without the participation of conventional banks offering
Islamic services," he added. Al-Subaiee of KIC said that
most Islamic investments were focused on real estate but that
the sector was expanding into other types of investments.
Al-Ghunaim of GIH agreed with Al-Bahar's assessment of 70-80%
of the financial market in the Gulf going to Islamic
financial products over time, but noted that the conventional
market "is still more sophisticated." She said that there
were still "no uniform opinions in Islam and Sharia'a on
financial questions."


34. (SBU) Although everyone agreed that Islamic investments
and financial products had become very profitable, not
everyone agreed on how different the Islamic investments were
from regular investments. Al-Awadi of Al-Ahlia called
Islamic investments "a joke," and said that he thought
Islamic investment institutions were the same as any other
investment bank, just using different terminology. KIC
Chairman Al-Subaiee noted that some people with bad credit
ratings go to Islamic investments banks for loans if they are
turned down by the commercial banks. KMEFIC Chairman Al-Saif
said that his company tried to offer Islamic investment
products but could not compete in that market. "They prefer
to go to their friends," he said, while stroking an imaginary
long beard. He did add that Kuwait Finance House (KFH) and
other Islamic institutions have asked KMEFIC to provide its
online trading platform and its built-in "Islamic Filter,"
which can check publicly-traded companies for Sharia'a
compliance. Khalil of KFC said that he was worried about
Islamic investment companies, that they were overextended in
their debt and that they were "lending at will." He said
that the Islamic companies ability to service their debt was
coming into question, especially as real estate prices begin
to level off. He estimated that 20% of Islamic financial
institutions' customers go for the value system, the rest "go
for the easy money." He said that the Central Bank needed to
better understand and supervise the Islamic companies and
Islamic financial services. (Note: Kuwait Finance House
first came under full Central Bank supervision only at the
beginning of 2005.)

Real Estate Still Hot
--------------


35. (SBU) Most of the officials thought that the real estate
market would stay strong in Kuwait, and some noted the
fondness of Kuwaitis for real estate. "The old people love
to invest in real estate," said Al-Fares of NIC. Al-Ghunaim
of GIH said that the Kuwait real estate market was still
underdeveloped, and that investment in real estate was now
moving towards institutional, rather than individual,
investment. Al-Saif of KMEFIC said that he thought he was
beginning to see more "first-class" office development and
more opportunities for office and commercial real estate
investment in Kuwait. He added that the problem remains of
"no regulations and no requirements" and pointed out a nearby
building that was sitting empty. The developer did not
provide any parking for the building's tenants, so no one
wanted to rent there. He said that his company was trying to
create the first local Real Estate Investment Trust (REIT)
for the KSE.


36. (SBU) Many of the investment companies are heavily
invested in real estate, in Kuwait, throughout the Gulf and
elsewhere in the world. National Investment Company (NIC),
for example, has direct investments in eight hotels in
Europe, including the Sheraton Frankfurt. IFA was the first
investor in the Palm Island project in Dubai, according to
Chairman Jassim Al-Bahar, and owns a resort in Portugal. IFA
is also increasing its property holdings and investments in
the tourism and resort sector in Africa. Noting that some
Kuwaitis and other Gulf residents had stopped traveling to
the U.S. and Europe after 9/11, Al-Bahar said that he
"follows (Kuwaiti) tourists" with his company's investments
in Africa. He said that his company created 5,000 jobs in
South Africa through its investments there. IFA will take
its real estate subsidiary, IFA Hotels and Resorts, public
soon and Al-Bahar expects it to have a market capitalization
of over $2 billion.
Regulation and Corporate Governance Need More Work
-------------- --------------

37. (SBU) The investment companies are considered investment
banks by the GOK and fall under the supervision of the
Central Bank of Kuwait. Because many of them are also
publicly-traded companies, they are also answerable to the
Kuwait Stock Exchange (KSE) for anything related to their
trading activities. Al-Awadi of Al-Ahlia said that there was
transparency in the investment sector and described the
Central Bank supervision of the banking and investment sector
as "strong."


38. (SBU) NIC Managing Director Al-Banwan said that
investors are now looking more at "who is the owner of the
company, who is the management," and focusing on the
operational aspects, rather than just looking at whether the
company is reporting a profit. Al-Mousa of SG said that
KSE-listed companies still have "some way to go" on their
accounting standards and wished to see more international
standards adopted in Kuwait. KFC EVP Khalil agreed that
investors needed to "rely on the values and behavior of the
management teams" because there were not enough policies,
procedures, and practices of good corporate governance.


39. (SBU) Some of the companies have developed their own
internal rules and regulations regarding trading in their own
shares or, in the case of the investment firms that offer
research services, in the shares of companies their analysts
are researching. GIH executives explained, for example, that
GIH has a compliance officer who monitors the trading
activities of its employees.


40. (SBU) None of the people we met with mentioned
corruption as a serious problem in Kuwait, either in the
government or private sector.

Training and Workforce Issues
--------------


41. (SBU) Many of the investment officials rely on family
and friends to help them run their businesses and the
investment community leaders seem to know one another fairly
well. They poach good people from each other when they can,
or from the banking sector, as Al-Ahlia Chairman Al-Awadi
said he does. Most said that they can find some good people
locally but also need to bring in people from outside.
Al-Banwan of NIC said that his company prefers graduates of
U.S. universities, but that it is highly selective about its
employees in general. He explained that, if NIC's clients
were trusting the company with their individual and family
portfolios, he had to have good employees whom he could trust
to maintain the secrecy that Kuwaitis value concerning their
wealth. He said that, of NIC's roughly 100 employees, about
45% are Kuwaiti. This figure is comparable to most of the
other investment companies. South Asians are well
represented in the companies.


42. (SBU) GIH MD Al-Ghunaim said that her company is full of
people who are "smart, young, open-minded, and cosmopolitan,"
and that if someone were uncomfortable with that kind of
atmosphere, "they probably wouldn't fit in." She said that
she would love to hire more Kuwaitis, but "by brains, not
nationality," meaning that she would prefer to choose people
based on their skills and not on a requirement that she must
hire Kuwaitis. KIC Chairman Al-Subaiee said that it was not
a problem finding good people, but that "the good people are
expensive." Thankfully, he added, "the young generation is
attracted to the private sector." He said that a lot of
women were coming into the investment sector. (Note: GIH's
Al-Ghunaim was the only woman we met with at the top of a
company, although most said that women were well represented
as traders and researchers. End Note.)


43. (SBU) Some of the investment companies rely on
well-known financial advisors and consultants to either help
manage their investments or to provide direction and guidance
for future strategies. Kuwait Investment Company (KIC),for
example, has hired former U.S. Treasury Secretary William
Miller as an advisor.

Expansion and New Directions
--------------


44. (SBU) Some of the investment companies appear to be
following up on the Prime Minister's 2004 "economic
diplomacy" trip to Asia by starting Asian investment funds or
looking for direct investment opportunities in that region.
Al-Ahlia, for example, is starting a Far East Investment
Fund, which it will administer through Singapore. NIC has
created a KD 80 million fund for investment in Asia, and has
created the "Kuwait-Chinese Holding Company" to manage its
future investments in China.


45. (SBU) Jordan was also a target for investment by some of
the companies, with Bayan Chairman Al-Mutawa saying that he
was "very impressed with the openness" of the Jordanian
economy, and that his company was developing a shopping mall
near Amman. Egypt was also seen as an opportunity for some,
with investments common in the real estate and tourism
sector. Al-Mutawa of Bayan said that his company had created
a partnership with PWC to purchase a large tract of land near
the Ismaliya airport for a logistics operation. NIC has
established a "Kuwait-Egypt Holding Company" to manage its
investments there, which Al-Banwan of NIC said are in the
gas, real estate and glass sectors. NIC is also designing a
new resort in Egypt, he said. Qatar was a tempting market
for many of the investors, with the wealth being generated by
Qatar's enormous gas reserves seen as paving the way for
extensive investment opportunities. Bayan is looking at a
mall development there, according to Chairman Al-Mutawa.


46. (SBU) The International Investor (TII) Chairman Al-Bahar
said that his company was expanding its investments in
Turkey, and that business there was "very good." He also saw
promising future revenue streams from non-banking financial
services, such as fleet leasing and consumer credit services.
Reflecting on the difficulty of building up a regional
banking structure at the retail or even private banking
level, he said that non-banking services were much less
regulated and easier to enter as a top competitor.


47. (SBU) Few of the investment officials saw Iran as a
stable market for investment, but KIC Chairman Al-Subaiee did
describe Iran as "a booming market," and said that all of his
clients "are positive about Iranian investments," and want to
invest now to be "pioneers." He recognized that any investor
in Iran needed to "go in carefully," but said that he was
seeing new laws encouraging foreign investment in Iran.


48. (SBU) While not all of the companies are successfully
adapting their business models to changing times, some are
more forward-looking than others. Some of the companies have
recognized that relying on recurring fees from fund
management and research services for their profits rather
than one-time fees is a better business model and are moving
in that direction. Global Investment House (GIH) is
definitely the leader in this regard, and the other companies
appear to be following its lead. GIH gets about 60% of its
revenues from recurring fees, according to Al-Ghunaim. She
also explained that her company was the first to offer stock
recommendations and sector research reports on the Kuwaiti
market. She added that she hopes to expand her company's
footprint throughout the GCC over the next five years, and is
looking for major shareholders throughout the Gulf.


49. (SBU) The opposite of GIH is Securities Group, which has
only 35 employees, does not have any expansion plans, and
focuses on serving a small number of high net worth
individuals. Chairman Al-Mousa described SG as a
"conservative, focused company," but did say that SG was
looking at some investments in Bahrain.


50. (SBU) While GIH is probably the most forward-looking
company in terms of its business model, research capabilities
and revenue stream, KMEFIC is definitely the most tech-savvy
company of the top investment firms. KMEFIC was the first
company to offer online trading for the KSE and now licenses
its online trading platform to other banks and investment
firms. The company purchased a brokerage license auctioned
by the KSE earlier this year for KD 12.5 million ($42.5
million) and now simply charges the normal brokerage fees and
offers the online trading for free. KMEFIC's customers can
buy and sell shares on the KSE and on the major U.S. stock
markets, all from the same online account. It hopes to add
online trading for other stock markets throughout the Gulf.
"When we first started the online trading everyone said it
couldn't be done," said KMEFIC Chairman Al-Saif, "and now
everybody wants online trading."


51. (SBU) Al-Saif also laid out the plans for the Arab Stock
Exchange (ASE),to be headquartered in Egypt and to provide a
single market for trading the largest blue-chip stocks in the
region and bond issuances. He said that KMEFIC will provide
the online trading component of the ASE.

--------------

52. (SBU) Bio Notes
--------------
-- Abdulsalam Al-Awadi, Al-Ahlia Investment Company Chairman--
58 years old. One brother is currently the Kuwaiti
Ambassador in Vienna, previously Ambassador to Berlin.
Al-Awadi is well known as a real estate family. His father,
Abdullah Al-Awadi, established the family business 80 years
ago as a textile merchant, then shifted into real estate.
The family owns over 30 buildings throughout Kuwait. His
father married three wives and had 11 sons and 11 daughters.
One of Abdulsalam's sisters, Badreea Al-Awadi, has a PhD and
is Dean of the Kuwait University Faculty of Law. He is
married and has two sons, a third son died. His sons are
both graduates of Boston University, and one son is now in
charge of Direct Investments for Al-Ahlia. Al-Awadi started
his career in the Economic Office of the then-Prime Minister,
now the Amir, in the 1970s. He knows history very well, can
rattle off dates and historical events, and has good English.
His business is his hobby, he said, and he often comes into
the office on weekends.

-- Faisal Al-Mutawa, Bayan Investment Company Chairman--
Five children, all graduates of Boston colleges and
universities. (BU, Bentley and Northeastern.) Involved in
American University of Beirut alumni activities. Al-Muwata
said that he has a nephew, "Sa'ad", that is doing business in
Egypt and has "strong ties, all the way up to Hosni Mubarak."
One of Faisal's sons is married to the Amir's granddaughter,
the daughter of the Amir's son Shaykh Mubarak, whose mother
still lives with the Amir and takes care of him. (Al-Mutawa
said that the Amir's other son from this wife is the current
Kuwaiti Ambassador to Spain. Shaykh Mubarak is not
interested in politics, according to Al-Mutawa. He is
married to an American. He added that the Prime Minister's
eldest son, Abdullah, is married to Shaykh Mubarak's other
daughter.)

-- Asaad Al-Banwan, National Investment Company Managing
Director--
Appointed in March 2005 as Chairman of MTC, one of two mobile
operators in Kuwait and a growing mobile provider in the
region. Born 1959, married. BS in Finance/Administration
from Kuwait University, 1982. Basketball player, was on
Kuwait championship national team in 1980s, now serves as
Director of Kazma Club, a Kuwaiti basketball team. Speaks
good English.

-- Fouzan Al-Fares, National Investment Company Chairman--
Born 1960, married, 5 children. Degree in Economics from
Kuwait University, 1982. General Manager of Dar Qabas
Publishing, publisher of Al-Qabas newspaper.

-- Maha Al-Ghunaim, Global Investment House Vice Chairwoman
and Managing Director--
BS in Mathematics from San Francisco State University.
Founded GIH in 1998. Started out at KFTCIC. Excellent
English, very forward looking.

-- Jassim Mohammed Al-Bahar, International Financial Advisors
Chairman and Managing Director--
Jassim is the son of Mohammed Al-Bahar, Chairman of National
Bank of Kuwait and head of the Al-Bahar family business
empire, which includes the largest Caterpillar franchise in
the world. He has studied at the London School of Economics
and at USC, where he received degrees in Political Science
and International Relations. With the size and weight of his
family's and his company's investments around the world,
Al-Bahar regularly meets with Prime Ministers and other
high-level officials who wish to attract investment to their
countries.

-- Adnan Abdulaziz Al-Bahar, The International Investor
Chairman and Managing Director--
Second cousin of IFA Chairman Jassim Al-Bahar. BA in
International Business from American College in Switzerland.
Heavily involved in Islamic finance, but does not appear to
be a heavily religious person. "I drink, and I pray," he
says. Very talkative, excellent English. Worked at Kuwait
Finance House, became General Manager of KFH at 32 years of
age, but did not agree with the management there. Left KFH,
worked as GM of Burgan Bank until 1990, worked in London, and
then started TII in 1992.

-- Ali Mousa Al-Mousa, The Securities Group Chairman and
Managing Director--
Born 1947. BA in Public Administration, American University
of Beirut, 1970. Minister of Planning, 1998-1999. Deputy
Governor of Central Bank, 1992-1998. On KPC Board of
Directors, 1993-1998.

-- Bader Nasser Al-Subaiee, Kuwait Investment Company
Chairman and Managing Director--
Born 1958, married. Graduated Cairo University, Accounting
major, 1980. MBA from American International College,
Massachusetts, 1983. Chairman and MD of KIC since 2000.
Previously with Kuwait Investment Authority (KIA),1993-2000.

-- Hamed Al-Saif, Kuwait and Middle East Financial Investment
Company Chairman--
Born 1945. Married. Children all graduated from American
School of Kuwait. One son now studying finance in Arizona,
two other children are in Kuwait at Gulf University of
Science and Technology. Al-Saif studied English as Oregon
State University in 1978, BA in Economics from Beirut
University, 1973. Previously with American Investment
Department of Kuwait Investment Authority, 1975-1985.

-- Ali Khalil, Kuwait Financial Center Executive Vice
President--
A U.S. citizen. MBA from INSEAD (France),and MS in
Industrial Engineering from Texas A&M. Previously served as
President of KFC's Mar-Gulf Management Company subsidiary, a
real estate management company based in Los Angeles. He said
that he got his start in the investment sector in Kuwait
because his father used to work for Shaykh Sabah Al-Salem,
who was Amir of Kuwait from 1965-1977.

********************************************
Visit Embassy Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
********************************************
LEBARON