Ibrahim Sattout

ASAR − Al Ruwayeh & Partners, Kuwait

isattout@asarlegal.com

Hussein Azmy

ASAR − Al Ruwayeh & Partners, Kuwait

hazmy@asarlegal.com

Introduction

In recent years, Kuwait has accelerated the pace at which it has reformed and modernised its banking and capital market regulations in order to enhance their sophistication and accommodate the needs of market players and new investors. Key among such reforms are developments in the area of Fintech and the regulation of novel tradeable debt instruments. In this regard, the Central Bank of Kuwait (‘CBK’) issued in 2018 two key regulations: (1) instructions for the regulation of the electronic payment of funds (the ‘Electronic Payment Regulation’); and (2) the regulatory sandbox framework (the ‘Sandbox Framework’), which aim at providing alternative path for the licensing of innovative Fintech products and services, such as Buy Now Pay Later (BNPL) and open banking.

More recently, and in response to the increasing need to digitalise financial operations, the CBK issued in February 2022 guidelines for the set up of digital banks in Kuwait (the ‘Digital Banking Guidelines’). Digital banking represents the latest Fintech innovation and offers a convenient alternative to traditional banking by allowing customers to benefit from all banking services through a digital platform accessible through their electronic devices.

In addition to the above CBK-initiated regulatory reforms, the Capital Markets Authority of Kuwait (‘CMA’) has, in February 2022, extensively amended Module 11 of the Executive Bylaws of the Capital Markets Law[1] by its Resolution No 28 of 2022 (‘Resolution No 28’) to introduce and regulate new types of bonds/sukuk, including green, sustainable, and social impact bonds and sukuk, among other things.

We examine below each of the above regulatory reforms and provide an overview of the same.

Electronic Payment Regulations[1]

Electronic payments services carried out from within Kuwait must comply with the Electronic Payment Regulation, which has been supplemented by various circulars issued by the CBK. The Electronic Payment Regulation requires the electronic payment infrastructure provider (‘EPIP’) or its electronic payment agent (‘EPA’) to be licensed by, and registered with, the CBK and the Ministry of Commerce and Industry. Under the Electronic Payment Regulation, the CBK has established itself as the primary regulator of EPIPs and EPAs.

The Electronic Payment Regulation covers any service that ‘…enables money withdrawal and deposit or processing of payment and settlement transactions through the electronic payment channels such as Automated Teller Machines (ATMs), Point of Sale (POS) devices and any service for transfer or issuing of funds, and/or obtaining means of electronic payment.’[2]

The Electronic Payment Regulation subjects the undertaking of the electronic payment activity within Kuwait to stringent requirements, which include:

(1) the EPIP must be a financial institution incorporated as a joint stock company; however, the EPA may take the form of either a joint stock company or a company with limited liability;

(2) the share capital of the EPIP must be at least KWD 1m (approximately US$3.3m), and the capital of the EPA must be at least KWD 20,000 (approximately US$66,000);

(3) the submission of several documents and information to the CBK as part of the licensing application; such documents and information include: (i) an irrevocable and unconditional letter of guarantee valued at no less than KWD 100,000 issued by a local bank in favour of the CBK, which should be valid for a three-year period, renewable for similar periods; (ii) memorandum and articles of association of the applicant and an extract of its commercial registration; and (iii) the company’s shareholding structure;

(4) criminal background certificates of the applicant’s board members and Chief Executive Officer (for joint stock companies) or managers (for companies with limited liabilities); 

(5) a business plan covering a period of three years; and

(6) specific policies and procedural bylaws relating to the electronic payment.

EPIPs and EPAs are required to comply with several requirements while providing their services, including compliance with: (1) the CBK instructions and standards; (2) anti-money laundering and counter-terrorism financing requirements; (3) confidentiality requirements; and (4) for EPAs, the daily dealing limit set by the service provider for the EPA’s daily transactions relating to electronic payment services, and the guarantees required from the agents to meet their obligations towards customers.

It is worth noting that the CBK is currently in the process of updating the Electronic Payment Regulation and issued on 1 February 2022 a draft of the updated Electronic Payment Regulation for public feedback. The CBK has stated that the purpose of the update is ‘…to encourage innovation and support both existing institutions and startups.’[3] It is expected that the updated Electronic Payment Regulation will be published in mid-2022.

Sandbox Framework[4]

By way of exception from the traditional licensing routes contemplated by the Kuwait Banking Law No 32 of 1968, the Sandbox Framework was issued by the CBK in 2018 to enable companies wishing to offer innovative Fintech products in the Kuwaiti market to apply for and obtain the CBK’s approval to test said products and, should the product be successful, obtain the CBK’s final approval.

The Sandbox Framework lists four key stages for its licensing process, which should be completed within one year (which may be extended at the discretion of the CBK). The four stages are: (1) the application stage; (2) the evaluation stage; (3) the experimentation stage; and (4) the accreditation stage. We set out below a summary of each stage.

The application stage

In this stage, the applicant should file an application on the CBK’s website along with the required documents (a list of which was not available on the CBK’s website). Following the CBK’s receipt of the application, it shall verify whether the product/service falls within the scope of the Sandbox Framework.

The CBK takes into account several eligibility criteria during its assessment, which include the degree of innovation of the product or service and the extent of its applicability, among others. The CBK will notify the applicant of its decision to approve or reject the application at the end of this stage.

The evaluation stage

In this stage, the CBK will evaluate the product/service from a technical, security and regulatory standpoint. Upon completion of its evaluation, the CBK will notify the applicant of the outcome and whether the application will move on to the next stage.

The experimentation stage

The CBK will collaborate with the applicant for the implementation of technical, safety, and operational testing of the proposed product/service in a controlled environment. The scope of the testing is determined on a case-by-case basis. Thereafter, the CBK will decide whether the product/service will move to the next stage.

The accreditation stage

The CBK issues a final approval, an initial approval, or a rejection decision and notifies the applicant accordingly. With regards to the initial approval, the CBK issues the same subject to the applicant’s compliance with the requirements and measures relating to a soft launch of the product/service to volunteer customers. Upon the completion of the soft launch, and after sharing its results with the CBK, the latter will either issue its final approval, return the product/service to an earlier stage of the Sandbox Framework, or issue a decision of rejection.

Digital Banking Guidelines[5]

The CBK issued the Digital Banking Guidelines along with an invitation for the submission of applications for the setting-up of digital banks until 30 June 2022. The CBK will assess such applications for a period of six months and, thereafter, it will grant the successful applicants an initial approval. The Digital Banking Guidelines maintain the traditional requirement that a bank (whether conventional or Islamic), digital or not, should take the form of a public joint stock company. The CBK’s insistence on such legal form reflects its concern for ensuring the highest level of transparency and corporate governance within financial institutions (regardless of whether their operations are physical or virtual). It is noteworthy that while the Governor of the CBK, Mohammad Y Al-Hashel, has stated on 2 February 2022 that a digital bank may function as a unit within a traditional bank,[6] the Digital Banking Guidelines do not currently seem to account for this. Further clarification from the CBK will be needed in this respect.

The Digital Banking Guidelines further provide for documentary requirements that should be satisfied as part of the application. This includes the submission of certain information and documents relating to the digital bank’s founders, as well as certain documents relating to the anticipated operations and strategies of the digital bank, for example, proposed business strategies, the anticipated economic value of the bank, financial plans and projections, a risk management framework, and a market exit plan. It is worthy of note that the risk management framework should also cover cybersecurity-related risks; hence, it would need to comply with the cybersecurity framework for the banking sector in Kuwait published by the CBK on 18 February 2020.[7] These documents are largely identical to those that the CBK requires in the context of licensing of traditional banks. The CBK may ask for documents and information additional to those mentioned in the Digital Banking Guidelines while assessing the licensing applications.

Following the grant of approval by the CBK, the digital bank will be registered with the registry of banks maintained by the CBK. It should be noted that there is no separate registry for digital banks.

It is likely that the issuance of the aforementioned Digital Banking Guidelines will not be the last step taken by the Kuwaiti government to enhance the digitalisation of the banking industry. In order to maintain their regional competiveness and to mitigate the implications of the ongoing Covid-19 pandemic, the digitalisation of the banking sector, and potentially other key economic sectors, is now more important than ever before.

CMA Resolution No 28[8]​​​​​​​

On 22 February 2022, the CMA has comprehensively amended Module 11 of the Executive Bylaws of the Capital Markets Law to, inter alia, introduce new debt instruments and structures recognised in the international financial markets and regulate the process for the issuance, listing and subscription. Among such newly introduced instruments and structures are short-term bonds and sukuk, sustainable bonds/sukuk, social impact bonds/sukuk and green bonds/sukuk.

The short-term bonds/sukuk perform the crucial function of serving as highly liquid securities; hence, their role will largely be identical to that played by commercial papers in the global financial market. As for the sustainable, social impact and green bonds/sukuk, these are part of a larger policy adopted by His Highness the Emir Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah, aiming at the issuance of legislation that enhance environmental protection and the combatting of the climate crisis. These new green and sustainable structures and instruments grant investors and issuers a variety of options for the funding of, inter alia, environmental, and social initiatives which are typically limited in terms of financing to charities and crowdfunding. Through its regulatory recognition of these new environment-oriented securities, Kuwait demonstrates its appreciation for the novelty of financial instruments that aim to achieve more than simply meeting financing requirements.

Conclusion

The above regulatory initiative and reforms are a testament to Kuwait’s commitment to the continuous development of its banking and capital market frameworks to become as sophisticated as those belonging to some of its neighbours. This commitment has now become more important than ever to accommodate and deal with the economic implications of recent global events, including the Covid-19 pandemic and the oil and gas crisis arising from the Russian invasion of Ukraine. It is expected that further reforms will take place in the near future to fully bring the Kuwaiti banking and capital markets sector up to speed with the prevalent international market practices.