The central bank of the world's fourth-largest oil exporter has given the loosely regulated investment firms two years to comply with tougher leverage rules after risk management at many was found woefully lacking in the financial crisis.

Kuwait's numerous trading and holding companies known as investment houses were hard hit by the meltdown, which prompted a government economic rescue package worth 1.5 billion dinars ($5.15 billion) last year.

Critics note the houses require no banking licenses despite offering investment banking services, some real estate firms are licensed to operate as investment companies, and others lend without having to fulfill reserve requirements like banks.

"This measure is just an attempt to accelerate the process of cleaning up the market," said independent economist Jassem Al-Saadoun. "(The central bank) believes that if things are left without controls, companies will remain hanging between life and death for a long time and that is harmful to shareholders and to confidence in the market."

Al-Saadoun estimated some 40 percent of Kuwait's investment firms were too weak to survive, and 40 percent were in good condition. The rest, like Global Investment House and Investment Dar, were "too big" to be allowed to fall.

Their keeling over would be "catastrophic" for banks, asset prices, individuals who invest in their funds and even the judicial system that could be swamped in the aftermath, he said.

Global has reached a deal with creditors to reschedule $1.7 billion in debt, and Investment Dar, which is struggling to restructure about $3.48 billion of debt, has applied for support under the rescue package.

The central bank demanded in its new directives to all investment companies that their debts not exceed double the size of their capital. Cash and cash equivalents should cover at least 10 percent of liabilities, and a company's investments or contracts outside the country were no longer allowed to account for more than 50 percent of its capital, the regulator said.

In an interview with local daily Al-Rai published on June 15, central bank governor, Sheikh Salem Abdul-Aziz Al-Sabah, said 49 of the 100 investment companies already comply with all of these regulations. The rest adhere to only one or two.

John Sfakianakis, chief economist at Banque Saudi Fransi, said some Kuwaiti firms had already learned a lesson about the dangers of heavy exposure to international markets, but they nonetheless "need to feel the arm of the state" and possible penalties if they digress from regulations.

Because of the small size of Kuwait's economy, investment companies go abroad. "They accumulated a lot of risk based on huge amounts of leverage, the risk was not properly contained and they got hit," he said.

Anwar Al-Kandari, financial adviser to the chief executive of Al-Imtiaz Investment Co., said it will take less than two years for the country's investment sector to slim down.

"At the end of the day, the number of investment companies will go down either through mergers, liquidation or requests to cancel licenses," he said.

Kuwait and its rival bourses in the Gulf Arab region were severely punished in the financial crisis in part due to the lack of transparency or effective regulation that has led to a series of defaults and government interventions.

The country aims to become a financial centre in the next four years, part of a development plan to diversify its state-dominated economy and shift weight to the private sector.

Sfakianakis believes competing against Dubai, Bahrain and Saudi Arabia will be an "enormous" challenge because those markets "have been better regulated, more capital adequate, less risky, more transparent, bigger in size, more global and diversified".

In February, Parliament approved Kuwait's first capital markets authority — a long-overdue step given that Kuwait has the second-largest exchange by value in the Middle East. Half of the investment firms are listed.

The law aims to increase transparency and clamp down on insider trading, now punishable by five years in jail.

A special court has been set up to hear market-related cases, but the head of the regulator has yet to be chosen and the law hasn't gone into effect.

Sadoun Ali, chief executive of KIPCO Asset Management Co., said several candidates have turned down the position because the conditions are very stringent, such as a five-year ban on all investments for the head and his family members.

Sfakianakis believes Kuwait's new market regulator needs to do "a first-hand assessment of what is out there and what could be done to address the issue of paper companies".

"If Kuwait wants to continue to have a share in the region as a whole and to gain the respect of the international investors, they need to implement rules that are abided and followed," he said.