Introduction

On 9 August 2026, the Central Bank of Kuwait (“CBK“) issued Circular No. 2/105/ addressed to all local banks, investment companies, and finance companies (the “Circular”). The Circular directs that plots of land established on state-owned property shall not be relied upon as collateral against credit facilities or financing operations, and shall not be included among collateral counted for the purposes of meeting regulatory requirements in periodic reports. The Circular further instructs institutions currently holding such collateral to reassess the relevant facilities and consider requiring additional acceptable guarantees.

While the Circular’s text refers to “plots of land established on state-owned property,” based on our discussions with the CBK, the intent of this Circular extends further: it is designed to stop the practice of lenders accepting mortgages over buildings and structures erected on state-owned land by usufruct licensees or lessees. A school of thought had developed among certain market participants that, even though the underlying government land itself could not be mortgaged, a party holding a usufruct or lease who constructed a building on that land could separately pledge the building by way of mortgage. The CBK’s Circular is intended to put an end to that practice. 

This Law Update examines the implications of the Circular, particularly in the context of project finance and lending to Public-Private Partnership (“PPP“) projects in Kuwait, and confirms the continued availability of the commercial premises pledge as an alternative security instrument.

Background: The Regulatory Framework

The Circular is issued under the CBK’s longstanding authority to rationalize and regulate credit policy. Since the issuance of Instructions No. BSB/105/1993, the CBK has maintained a framework requiring banks to ensure the quality and enforceability of collateral supporting their credit portfolios. The CBK has periodically reinforced these requirements, including through Circular No. 2/BS/233/2008 directing banks to enhance collateral submitted by customers against credit facilities.

The new Circular adds a categorical exclusion: land situated on state-owned property — and, critically, buildings and structures erected thereon — may no longer be treated as qualifying collateral. This aligns with broader principles under Kuwaiti law, including Article 25 of the Civil Law No. 67 of 1980, as amended (which allocates assets factually or legally dedicated to public utility as immune from attachment) and Article 216 of the Civil and Commercial Procedures Law No. 38 of 1980 (the “CCPL”), which forbids attachment or seizure of private or public assets belonging to the State.

However, a gap had emerged in market practice: certain lenders took the position that where a usufruct licensee or lessee constructed buildings on state-owned land at its own expense, those buildings could be separately mortgaged on the basis that they were the licensee’s property rather than the State’s. The CBK has now moved to close this gap from a regulatory standpoint, making clear that such structures cannot be counted as qualifying collateral regardless of the ownership theory advanced.

Implications for PPP and Project Finance

For project lenders, the Circular formally codifies from a banking-regulatory perspective what has long been understood as a matter of substantive law under the PPP framework. Under Article 23(1) of Law No. 116 of 2014 (the “PPP Law“), the contracting investor or the project company may not sell or mortgage the land on which the project is established. The Kuwait Authority for Partnership’s PPP Projects Guidelines, prepared pursuant to the PPP Law (the “KAPP Guidelines”), have consistently reiterated that “the Project Company may not sell or mortgage the land on which the project is established, since under Kuwaiti law all land is owned by the State.”

Accordingly, lenders to PPP projects in Kuwait have never been able to take a mortgage or security interest directly over the project site land.

However, outside the PPP context, a number of lenders had accepted mortgages over buildings constructed by usufruct licensees on state land, particularly in connection with industrial plots, commercial developments, and BOT-style arrangements that fall outside the scope of the PPP Law. The rationale was that the building, having been erected at the licensee’s cost, constituted the licensee’s own asset capable of being separately encumbered. The Circular now makes clear that this practice is no longer acceptable from a prudential standpoint: such buildings will not be counted as qualifying collateral in regulatory reports, and institutions holding such security must seek additional guarantees.

For PPP project finance, the practical impact is confirmatory rather than constitutive. The PPP Law already prohibited this structure. But for other categories of project lending, particularly where developers have constructed facilities on land leased from the State under Decree Law No. 105 of 1980 on the State-owned Property System, the impact is significant and may require renegotiation of security packages.

The Commercial Premises Pledge Remains Available

Crucially, the Circular does not affect the availability of the commercial premises pledge, which remains the principal security, similar to “floating charges” in common law countries, available to project lenders in Kuwait. Under Articles 34 and 40–46 of the Commercial Law issued by Decree-Law No. 68 of 1980, a mortgage over business premises creates a floating charge over the fluctuating movable assets of a commercial establishment.

In the PPP context, the business premises mortgage covers tangible and intangible elements including goods, business furniture, industrial machinery, customers, trade name, right to lease, trademarks, patents, licenses, designs, and models. The mortgage is constituted by notarized deed and registered at the Commercial Register of the Ministry of Commerce and Industry.

Public notaries at the Ministry of Justice have confirmed that they have no objection to registering a business premises mortgage over the assets owned by a project company, even where the project is situated on government land. This is because the commercial premises pledge attaches to the privately-owned movable and intangible assets of the going concern — not to the land itself. It is, in substance, a charge over the project company’s commercial enterprise as distinct from the state-owned site.

The Broader Security Package

The Circular is a timely reminder that project lenders in Kuwait must continue to rely on a bespoke security package tailored to the legal constraints of state land. The typical Kuwaiti PPP security package comprises: (i) share pledges over the consortium holding company’s shares in the project company (subject to Higher Committee approval); (ii) assignments over the project company’s rights to project revenues; (iii) assignments over project agreements; (iv) pledges over project bank accounts; (v) assignments of project company insurances; and (vi) the commercial premises pledge.

Recommended Actions

Financial institutions should:

1. Audit existing portfolios to identify any credit facilities where state land plots have been counted as qualifying collateral in periodic CBK reports.
2. Reassess affected facilities and determine whether additional acceptable guarantees are required from relevant borrowers.
3. Confirm documentation for PPP project finance facilities, ensuring that commercial premises pledges are properly notarized and registered, and that the omnibus security agreement clearly distinguishes privately-owned project assets from state-owned assets.

Conclusion

The Circular closes an important gap between the substantive legal prohibition on encumbering state property and the regulatory treatment of buildings erected thereon as collateral. By targeting the practice of mortgaging structures built on state-owned land by usufruct licensees and lessees, the CBK has made clear that the protection afforded to state property under Article 216 of the CCPL extends, for banking-regulatory purposes, to improvements constructed on that property, regardless of who funded the construction.

For PPP project lenders, the Circular confirms established practice: security in Kuwaiti PPP transactions must be structured around the project company’s privately-owned assets, contractual rights, and revenue streams — not the land or the buildings affixed to it. For lenders in other sectors (including industrial, commercial, and BOT developments on state land), the Circular necessitates an immediate review of security packages. In all cases, the commercial premises pledge, properly taken over a project company’s going concern on government land, remains a valid and registrable security instrument that is not affected by this Circular.

Authors: Ashraf Hendi, Partner & Head of Banking and Finance and Maryam Tarek, Associate