In an effort to support Kuwait’s banking sector in keeping pace with the innovations of banking sectors worldwide, The Central Bank of Kuwait (“CBK”) recently developed a regulatory framework for the provision of digital banking services. Presented in CBK’s ‘Stability and Enablement’ virtual event on 31 January 2022, the regulatory framework was brought forth in a series of developments aimed at utilizing the latest advancements in technology to bolster financial stability and meet future economic needs in Kuwait.

The Establishment Requirements of Digital Banks in the State of Kuwait Guideline (the “Guideline”) issued by CBK under the regulatory framework is divided into five sections: (i) Definition of Digital Banks; (ii) Legal Form of Digital Banks; (iii) Authorized Activities of Digital Banks; (iv) Stages and Procedures for the Establishment of Digital Banks; and (v) Compliance with the Laws, Regulations, and Instructions.

The Guideline defines a digital bank as a conventional or Islamic bank which practices the banking profession through digital channels. Moreover, the Guideline under the regulatory framework allows for the provision of digital banking services across three banking models. Specifically, it permits an existing bank to provide digital banking services through either the digital banking units of its organization structure or a third party whom it cooperates with as a Banking-as-a-Service provider. Additionally, the regulatory framework permits a newly established standalone digital bank to provide digital banking services.

While existing banks may use the same licenses they have been granted by CBK to provide digital banking services, standalone digital banks must obtain a license for the provision of digital banking services and CBK has now opened its doors to receiving applications for the same. Per the Guideline, outlined below, CBK has developed a scheme for the licensing of standalone digital banks that comprises of two stages; the first stage involves CBK’s receipt of application forms from standalone digital banks, and the second stage involves CBK’s review of the application forms against certain criteria. Following such review, initial approval by CBK is issued to satisfactory applicants for the purposes of such applicants’ completion of the necessary procedures before CBK registration.

Application Form for the Establishment of Digital Bank

An applicant for the establishment of a standalone digital bank must complete the Application Form for Establishing a Digital Bank in the State of Kuwait (the “Application Form”) issued by CBK and submit the same to CBK by 30 June 2022. The applicant is to provide certain information, and enclose certain documentation, under six sections of the Application Form.

Information on the founder(s) of the proposed standalone digital bank is to be provided under the first section. A draft of the memorandum of incorporation and articles of association of the proposed standalone digital bank is to be provided under the second section. A five-year business strategy and executive plan of the proposed standalone digital bank is to be provided under the third section. A risk management framework to monitor and combat the risks posed to the proposed standalone digital bank, such as money laundering, terrorism financing, and cyber-attacks, is to be provided under the fourth section. An exit plan in the circumstance that the proposed standalone digital bank faces difficulty in achieving its executive plan is to be provided under the fifth section. Lastly, any other information or documentation which supports the application is to be provided under the sixth section.

Review and Approval of a Submitted Application Form 

A submitted Application Form is reviewed by CBK against a matrix of quantitative and qualitative criteria per the requirements of the laws, regulations, and instructions relevant to the establishment of conventional and Islamic banks. The Guideline emphasizes that digital banks must comply with Law No. 32 of 1968 Concerning Currency, The Central Bank of Kuwait, and the Organization of Banking Business, and its amendments, (the “CBK Law”) as well as Law No. 1 of 2016 Promulgating the Companies Law, and its amendments (the “Companies Law”). In this regard, compliance with the required legal form of an institution conducting banking business per Articles 56 and 90 of the CBK Law, namely a shareholding company which offers its shares for public subscription in accordance with the Companies Law, is of particular emphasis. Moreover, in addition to considering the feasibility of the studies provided in the Application Form, including the risk management framework, CBK considers the requirements of the Kuwaiti market and the stability of Kuwait’s banking sector in its review. This period of review, from the date of the said deadline for the submission of an Application Form, ends on 31 December 2022.

Following the period of review, the Application Form and the review conducted by CBK are submitted to the board of directors of CBK for their initial approval or rejection of the applicant’s Application Form. Where initial approval is provided, the required incorporation procedures under the Companies Law must be completed and the required board of directors approvals under Article 68 of the CBK Law must be obtained. Before final approval of the provision of digital banking services by a standalone digital bank, the standalone digital bank is required to register in CBK’s Register of Banks. Once a standalone digital bank obtains a license, it is authorized to practice activities, per Articles 54 and 86 of the CBK Law, in a similar manner to traditional conventional and Islamic banks. In this regard, the licensed digital bank must ensure that it observes CBK regulations for the operation of digital banks and the activities it is permitted to practice under its articles of association.

CBK’s development of a regulatory framework for the provision of digital banking services is an indication that regulators in Kuwait are willing to accommodate the technological advancements which many regulators across various jurisdictions have embraced. In many respects, as reinforced by the Guideline, a standalone digital bank is subject to the same regulations as a traditional bank. While this better facilitates the acclimation of the regulatory framework, it impresses the importance of accounting for the risks posed by digital banking that CBK considers in the process for the establishment of a standalone digital bank. Accordingly, through the development of the regulatory framework for the provision of digital banking services, CBK intends to ensure that a balance is struck between the leveraging of financial technology in Kuwait’s financial sector and the protection of entities from digital banking associated risks.

By Lujain Burhamah, Associate Kuwait Office

For further information, please contact Alex Saleh ( alex.saleh@glaco.com) or Lujain Burhamah (lujain.burhamah@glaco.com)