Kuwait Finance House Bank System with no Interest

Date of Submission

1982

Document Type

Thesis

Degree Name

Master of Science in Accounting

Department

Accounting

Advisor

Robert Rainish

LCSH

Banks and banking--Kuwait, Kuwait--Economic conditions

Call No. at the Univ. of New Haven Library

AS 36 .N29 Acc. 1982 no.14

Abstract

Introduction, pp. 1-4:

Given the simplicity of the operations involved in lending and in receiving deposits, it is probable that banking activities have been undertaken and carried on in every country by individuals long in advance of any public establishments. For example, private lenders established banking in Venice two centuries before the Italian government opened its first public bank of deposit.

The establishments of banks around the world increased and grew with the world economic developments. Banks became money institutions working to help develop the economies of various countries and states. The State of Kuwait is one of these states which values the importance of its banks and money system.

Before the discovery of vast oil deposits in Kuwait prior to 1936, there was only one major bank in the country— the British Bank of the Middle East. The bank was established with both British and Kuwaitese capital. As a result of the discovery of vast oil reserves in Kuwait, the revenues from oil sales literally flooded the country. The necessity for banking institutions throughout the country increased, and as time went on, it became necessary for the Kuwaiti Government to establish the first Kuwaiti Bank in May of 1952, using only Kuwaiti capital. The bank was called the National Bank of Kuwait. This led to a number of new commercial banks being established throughout Kuwait leading to the establishment of the last commercial bank, the Burgan Bank, in 1975.

Since the religion of the state is Islam, the establishment of commercial banks faced stern public objections because it operated under the concept of interest charges and collection—a concept which is strictly forbidden by Islamic principles. In other words, the banking act of charging high interest rate on loans and giving too little interest rate to the depositors is forbidden. This lead the citizens of the state to request the establishment of Islamic Banks rather than only the establishment of commercial banks. They brought up the fact that the idea of Islamic banks prevailed in a number of Islamic countries, such as Egypt, Dubai (United Arab Emirate) and Sudan. Also, all of the Islamic banks in these and other countries have enjoyed broad success and proved to be extremely profitable .

With this in mind, the Kuwait government decided to allow the citizens of the country to establish an Islamic bank in the State of Kuwait, similar to those Islamic banks which had been established in other Islamic countries throughout the world. The bank was called the Kuwait Finance House (K.F.H.) and it was formally established in 1977. The study of this bank is one of the primary purposes of my research and ultimately an important part for my thesis. I will discuss in this thesis, the idea of banking in the State of Kuwait; and comparing Commercial Banks to the Islamic banks (Kuwait Finance House. I will direct my discussion to four major areas which will be focused upon in individual chapters.

In Chapter II, I will give a historical view, the primary concern as well as the intended purpose of the K.F.H. (Kuwait Finance House).

In Chapter III, I will analyze their investment portfolio, focusing on their uses and sources of funds, type of investments and their profitabilities.

In Chapter IV, I will discuss the similarities and differences in the performance of Islamic banks and Kuwait Commercial Banks. I will display the growth in banks accounts and analyze the banks balance sheets and income statements. Also, I will write about the public relation and profit sharing plans in both banks.

Finally, in Chapter V, the last chapter in this research project, I will discuss the future prospects for both kinds of banks; discuss if there is a possibility of merging; and discuss their plans to increase their market shares.

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