Financial Crime World

Kuwait Unveils New Guidelines for Digital Banks Amid Banking Innovation Efforts

In a move to support banking innovation and future economic development, Kuwait’s Central Bank (CBK) has introduced new guidelines for establishing digital banks. The regulations reflect the country’s efforts to keep pace with global financial services developments.

Background on Digital Banking Regulations

The CBK studied regulatory approaches to digital banks in 25 central bank frameworks worldwide, including 40 business plans submitted by various entities. Similar efforts are underway in the UAE and Saudi Arabia as banking digitalization continues to gain momentum globally.

Regulatory Approaches

  • The CBK has introduced a KD75 million ($246.8m) capital requirement for digital banks, matching that for traditional banks.
  • Digital banks are expected to offer reduced costs and greater flexibility compared to traditional institutions.

Key Sections of the Guidelines

The new guidelines outline four key sections:

Defining Digital Banks

  • The guidelines define digital banks as entities that provide banking services through electronic means, including online platforms and mobile applications.
  • These banks are expected to operate with a fully digital presence, without any physical branches.

Corporate Structure

  • Digital banks must have a clear corporate structure, including a board of directors and senior management.
  • The guidelines require digital banks to establish a risk management framework and implement appropriate governance practices.

Permitted Activities

  • Digital banks are permitted to conduct various banking activities, including accepting deposits, granting loans, and providing payment services.
  • These banks must comply with relevant laws and regulations, including anti-money laundering (AML) and know-your-customer (KYC) requirements.

Establishing Digital Banks

  • The CBK has set a June 30 deadline for submitting applications, which must include business plans, risk assessments, target markets, talent development strategies, and risk management frameworks.
  • Applications will be evaluated based on a matrix of quantitative and qualitative criteria derived from relevant laws.
  • The evaluation period is expected to conclude by the end of 2022.

Expected Outcomes

The CBK aims to issue licenses for two digital banks by the end of this year. Three public alliances have been formed to bid for these licenses, including partnerships between Boubyan Bank, Zain Kuwait, and undeclared investors; Ooredoo Kuwait, Warba Bank, the Kuwait Investment Authority sovereign wealth fund, and Islamic finance company Al Manar Financing and Leasing; and Kuwait & Middle East Financial Investment along with other undisclosed investors.

Long-term Implications

The guidelines introduce two long-term implications for Kuwait’s economy and financial sector:

Capacity Building

  • Digital banks must contribute to capacity building in the industry, focusing on developing professionals’ skills to meet demands driven by financial technology expansion.
  • The CBK has developed a cybersecurity framework for the sector in response to the growing use of digital payments and third-party technologies.

Cybersecurity Risks

  • Digital banks are expected to prioritize cybersecurity risks, implementing robust measures to protect against hacking and data breaches.
  • The guidelines emphasize the importance of incident response planning and regular security assessments.