CBK lists negatives of buying loans; Budget burden.

The Central Bank of Kuwait reaffirmed the shortcomings of approving the loan purchase proposal, revealing that previous experiences showed that some beneficiaries of the Defaulting Fund and the Family Support Fund borrow again, in light of the additional available space for them, reports Al-Qabas daily. In response to a question by MP Osama Al-Zaid, a copy of which is obtained by the daily, CBK said taking into account that buying or dropping loans by the state provides citizens with new purchasing power, however, this involves a set of drawbacks and caveats, in terms of the negative impact on public money and the violation of the principle of justice and equality stipulated in the Constitution of the State of Kuwait, and the caveats and reservations related to the legal aspects of applying such proposals. This is in addition to its impact on the performance of the banking sector, governance standards, and monetary and financial stability.

These drawbacks and caveats can be summarized as follows:

■ The state’s purchase of public money loans carries a high cost, whether in the form of the money the state pays directly or in the lost revenues from any funds that are allocated within the framework of repaying these loans on behalf of citizens.

■ Considerations of buying indebtedness to bank clients, including the drawbacks it entails related to the financial burdens on the general budget, are not commensurate with the state’s orientations within the framework of the required financial and economic reforms.

■ Such a procedure is devoted – if it applies to citizens’ convictions and the impression they have that the state will always bear the burdens of loans, which encourages more borrowing and laxity in paying new loans while waiting for the state to drop them again as before, based on the demand for reciprocity, so that it sets a precedent in the field of the state bearing the burdens of loans that citizens obtained under normal circumstances, which results in an increase in moral risks in the banking and financial system, and the associated weakening of the principles of sound management in banks in the field of lending and credit risk management, in addition to the difficulty of confronting such claims in the future.

■ The process of purchasing these loans will result in an impact on the banks’ revenues, as they are deprived of regular returns on those loans, and thus profitability rates and related indicators will be affected until the entire balance of the purchased indebtedness is re-employed, which could negatively affect the financial conditions of banks and the financial stability.

■ Purchasing these loans and bearing their burdens involves an explicit violation of the principle of justice stipulated in the Constitution of the State of Kuwait as one of the basic foundations of Kuwaiti society, in several respects. This matter, if applied, will prejudice the justice between generations, as the benefits of the current generation will increase at the expense of future generations.

■ The process of buying loans will lead to the waste of the principle of the binding force of the contract stipulated in the civil law, and to destabilize the stability and integrity of financial transactions in the state, and there is no doubt that the integrity and stability of financial transactions in the state are considered among the main principles that are viewed inside and outside the state as evidence of the strength and rationality of the legal system and the financial system in the country.

■ The process of buying loans leads to an imbalance in the economic contracts. It is well known that contracts related to commercial and financial transactions are based on an economic balance between the interests of the two parties, so that the interest of one party does not prevail over the other, otherwise this creates an imbalance in the balance of financial and commercial transactions, and leads to filing a large number of lawsuits before the courts, and obstructs the the rights arranged by those contracts.

■ It should also be noted that the mechanism for applying the proposals related to the purchase of loans involves pumping funds into the Kuwaiti economy and the size that leads to inflationary pressures that may have negative repercussions on the monetary and financial conditions, due to its negative effects on the performance of the banking sector, as it may affect the profitability of banks in light of their high liquidity surpluses until the re-employment of these funds by banks. Likewise, the intervention of the Central Bank of Kuwait to regulate liquidity levels in the banking sector, in light of the state’s purchase and repayment of the balance of the consumer and housing loan portfolio, in order to maintain monetary and financial stability, will have a cost that the state will have to bear.

Source- Arab Times.