Title: Kuwait’s Central Bank and Capital Markets Authority Embrace Financial Innovation: A Look at Recent Regulatory Developments

By Hussein Azmy and Ibrahim Sattout, ASAR - Al Ruwayeh & Partners, Kuwait (hazmy@asarlegal.com, satout@asarlegal.com)

Kuwait’s financial sector has experienced significant modernization and sophistication in recent years, owing to notable regulatory reforms. Two pivotal regulatory bodies, the Central Bank of Kuwait (CBK) and the Capital Markets Authority of Kuwait (CMA), have spearheaded these groundbreaking changes, advancing Kuwait’s stance in fintech, electronic payments, and digital banking.

Electronic Payment Regulation

The Central Bank of Kuwait (CBK) issued the Electronic Payment Regulation in 2018 and subsequent circulars to oversee the provision of electronic payment services within Kuwait. This section covers the key requirements and regulations for Electronic Payment Infrastructure Providers (EPIPs) and Electronic Payment Agents (EPAs).

EPIPs and EPAs: Licensing and Compliance

EPIPs and EPAs must adhere to strict licensing requirements to operate in Kuwait. EPIPs must be financial institutions established as joint-stock companies, whereas EPAs may take the form of a joint-stock company or a company with limited liability. Minimum share capital requirements apply to both EPIPs and EPAs.

Licensing Application and Ongoing Requirements

The application process involves submitting several documents such as criminal background checks for board members and executives, a business plan, and specific policies and procedural bylaws. EPIPs and EPAs are subject to ongoing regulatory requirements that include anti-money laundering measures, confidentiality requirements, and daily dealing limits for EPAs.

Electronic Payment Regulation Updates

The CBK is updating the Electronic Payment Regulation to promote innovation and support both established institutions and startups.

Regulatory Sandbox Framework

In 2018, the CBK introduced the Regulatory Sandbox Framework to provide alternative licensing paths for innovative Fintech products, like Buy Now Pay Later (BNPL) and open banking.This framework consists of four stages: application, evaluation, experimentation, and accreditation.

Applicant Selection and Evaluation

Companies seeking approval must submit their product information and documentation for the CBK’s evaluation. Eligibility criteria include the degree of innovation and applicability of the product.

Regulatory and Technical Assessment

Upon successful application, the product enters the evaluation stage, where the CBK assesses the technical, security, and regulatory aspects.

Testing and Feedback

Upon completion of the evaluation stage, companies are invited to collaborate with the CBK for testing in a controlled environment.

Digital Banking Guidelines

In February 2022, the CBK released guidelines for digital banks in Kuwait, enabling interested parties to apply until 30 June 2022. Digital banks will be required to adhere to the traditional requirement of registering as public joint-stock companies, emphasizing transparency, corporate governance, and public trust.

Application Process

Applicants must submit documentation related to the digital bank’s founders, proposed business strategies, financial plans, and risk management framework, which includes addressing cybersecurity concerns in line with existing Kuwaiti cybersecurity regulations.

CMA Resolution No. 28

The Capital Markets Authority of Kuwait (CMA) amended Module 11 of the Executive Bylaws of the Capital Markets Law through Resolution No. 28 in February 2022, introducing and regulating new types of bonds and sukuk, such as green, sustainable, and social impact bonds and sukuk.

The CMA aims to enhance environmental protection and combat climate change, making these new structures a crucial addition to the Kuwaiti capital markets.

Conclusion

The aforementioned regulatory initiatives underscore Kuwait’s dedication to maintaining a competitive and adaptive financial sector that keeps pace with international market practices and technological advancements. Despite the challenges posed by the Covid-19 pandemic, the ongoing oil and gas crisis, and the Russian invasion of Ukraine, Kuwait’s financial ecosystem shows promise, with further regulatory reforms expected in the near future.