Investments in financial derivatives by local banks in Kuwait experienced a notable trend over the past year. In December 2022, they stood at 10 billion dinars, but by August 2023, they had decreased by 2 percent to 9.928 billion dinars, according to data from the Central Bank of Kuwait.
Interestingly, these investments showed an annual increase of 13.1 percent, reaching 1.131 billion dinars in August 2023, compared to 9.344 billion dinars in the same month of the previous year. However, on a monthly basis, they declined by 2 percent, equivalent to approximately 210.9 million dinars, compared to the 10.3 billion dinars reported at the end of the preceding year in July.
This trend has been subject to fluctuations throughout the previous year, with investments generally on the rise, but occasional dips. For instance, they climbed from 8.063 billion dinars in December 2021 to 10.934 billion dinars in February 2023, reaching their highest point. Subsequently, they decreased to 10 billion dinars in April, followed by further fluctuations in the subsequent months.
Financial derivatives encompass a range of investment instruments derived from the value of various financial assets, including stocks, bonds, real estate, currencies, and commodities. These instruments can be bought, sold, and traded and include futures contracts, options contracts, and more.
Futures contracts are binding agreements to buy or sell an asset at a predetermined price and date. Similarly, options contracts grant the holder the right (but not the obligation) to buy or sell an asset at a specific price on a future date in exchange for a premium.
In recent years, Kuwaiti banks have established special purpose companies in the Cayman Islands to engage in financial derivatives contracts, with approval from the Bank of Kuwait. Regulatory authorities, including the Central Bank of Kuwait and the Capital Markets Authority, have worked together to establish a regulatory framework for derivatives trading, issuing important decisions to regulate the market.
Looking ahead, the Capital Markets Authority is actively pursuing an ambitious strategy to upgrade the Kuwaiti market to an “advanced emerging” status with the FTSE Russell index. This strategy includes expanding the offering of financial products and services such as bonds, sukuks, exchange-traded funds, and financial derivatives. These initiatives aim to enhance the attractiveness of the local stock market to both foreign and domestic investors, positioning Kuwait as a competitive regional financial and commercial center in the Gulf region.
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