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A number of Kuwaiti banks have decided to launch legal proceedings against two troubled Saudi business groups for debt estimated at around US $1.5 billion. The banks took the decision after months of negotiations with the Saad and Algosaibi groups ended in deadlock.

 

The creditor banks including Gulf Bank, Commercial Bank and Burgan Bank, in addition to Kuwait Finance House, the largest Islamic lender, have formed a joint committee to pursue the issue, the report said. The banks are expected to file lawsuits in Kuwait, Saudi Arabia and in Britain. Another Kuwaiti lender, Al Ahli Bank has already filed a lawsuit against the two Saudi groups in New York. Kuwait froze dealings with the two Saudi conglomerates in 2009.

 

March 18, 2010

 

 

Analysis and Forecast: Increasing Risk

 

This is not a particularly new story. However, the news demonstrates that there is still no solution in sight for one of the GCC’s biggest failures of family businesses. Large family businesses are the backbone of all the GCC economies and their prominence is very closely linked with the independence and development of their states. They have mushroomed in size and sectors, particularly since the independence of some states in the 1960’s and 70’s, and earlier in Saudi Arabia.  However, despite their large size, they have largely been secretive in the way they are run. Banks, also often owned by large family businesses, provided almost unlimited credit without guarantee. The collapse of the Saad and Algosaibi groups highlighted the exposure of the banks to those large family businesses.

 

Political Capital has warned last year that the problem of disintegrating family businesses will likely increase in the coming years for two main reasons. First, as the founders of those businesses age, their estates are divided according to Islamic inheritance law which effectively breaks down the businesses. Second, exposure to the international markets made their local businesses more vulnerable to the global economy than ever before. Previously, they essentially relied on the expanding local markets.

 

With more creditors likely to sue to Saad and Algosaibi groups, the internal workings of those groups will be exposed in the various courts, highlighting weaknesses in the corporate governance structures of large family businesses. This will shake confidence in all GCC economies where large families were protected by ruling families, themselves also engaged in large businesses, and effectively monopolized most non-oil industries. No serious effort has followed the Saad and Algosaibi fiasco and the longer the GCC states take to open-up the large family businesses, the greater the aftershocks will be.