Global Compliance

Kuwait’s Banking Rules for Foreign Companies Obtaining Corporate Loans

Kuwait Economy Overview

Kuwait is a member of the Gulf Co-operation Council (GCC). It is a country known for its progressive business attitude and its vast wealth. It has one of the strongest currencies of in the world and is a highly developed business and financial hub. As of 2015, its annual GDP is around US Dollars 114 billion, and the country has a population of around 4.2 million people. There are a very large number of expats within the country, as they total around an estimated 70% of the population as a whole. As such, there are a vast number of foreign businesses, and obtaining loans for businesses is a common practice.

Kuwait, much like most of the countries in the Middle East, is an Islamic country. Within the country, there are both Islamic banks, and conventional banks. The difference between a conventional bank and an Islamic bank is primarily how they deal with interest. There is no interest charged on a loan taken through an Islamic bank.

Foreign businesses that wish to arise in Kuwait often require a Kuwait partner. This partner would generally have to own 51% of the businesses shares. However, this is not always the case. With legal reforms in Kuwait, there are situations where a 51% local ownership is not required. One way in which this would be possible is if the foreign business were to set up in Kuwait as a WLL (wholly foreign-owned LLC), as set out in Law Number 116 of 2013, which relates to Foreign Direct Investment (FDI).

It is not secret that Kuwait is a highly attractive business destination. With US Dollars 3.9 billion in FDI in 2017, there is no shortage of investors who wish to enter into the highly lucrative market. Kuwait has zero income tax, and as such is viewed by many foreigners as a tax haven. This is one of the reasons for the numerous business set-ups that occur.

Obtaining a Loan
General Requirements and documentation:

Obtaining a corporate loan in Kuwait is a process which doesn’t have the greatest amount of regulation in the law, especially when compared to obtaining a personal loan. While obtaining a personal loan, the laws relating to the processes and the laws that regulate the loan amount and interest are all covered by the Central Bank of Kuwait. However, corporate loans are not covered under the Central Banks laws or circulars. As such, the terms of the loans within the country will mostly depend upon the parties involved.

Most banks offer a variety of corporate and business financing options. However, the requirements for these options are quite varying. Since businesses are very different, the documentation requirements will vary accordingly. Generally, banks will request businesses to get into contact with them, often through email, and from this point, there will be direct communication between the company and the bank.

General requirements and documentation that may be asked for would by the bank could include:

• The business trade license;
• A business plan and;
• Recent financial records of the business.

The requirements may very well include more than this, though these are the minimums that should be expected, depending on the purpose and amount of the loan.
Interest:
Conventional banks will charge interest on any and all loans that they provide. However, while interest is more highly regulated for general consumer loans, there is less regulation for corporate loans. As such, the interest rate will likely be one that is competitive and similar to other banks.
Islamic banks:

Islamic banks would function in much the same way as conventional banks, in the sense that they can provide loans for similar periods and of similar amounts to the conventional banks. However, the area in which the splitting occurs between these forms of banks is in the matter of interest. Islamic banks do not charge interest, and instead, gain their profits through other means. Islamic banks are required to have Shari'a Supervisory Boards, these boards ensure the banks maintain their reputation, and also ensure that their activities are within the bounds of Sharia’s law. 

Obtaining the loan:

In 2006, there was a Handicraft and Small Enterprises Financing Portfolio introduced, which allowed for funds to be provided to new business start-ups. This was introduced only for the use of Kuwaiti nationals due to the high level of unemployment across the population. The idea was to get more Kuwaiti nationals into jobs. There was also the issue of too many government jobs being present for the locals with no actual purpose behind those jobs other than to provide employment, and as such, money is being used to pay for individuals with no work to do. The financing portfolio would also look to get these people out of government jobs and into the private sector. However, as of this point, the number of new set-ups has been minimal.

While this is only for Kuwaiti locals, with there being such a large number of foreign businesses with majority Kuwaiti partners, any new business with a Kuwaiti partner would technically be eligible. 

This portfolio is managed by the Industrial Bank of Kuwait, and they provide the financing packages to Kuwaiti Youth of up to Kuwaiti Dinar (KD) 400,000, which is secured on project assets. There is also KD 25,000 provided to cover operational costs of the business on a monthly basis. 

These loans are only for handicraft and small enterprise business and could provide much-needed injections of cash into a business at its early stages. Of course, while the loan is provided, licenses and other requirements the business should have are not provided and must be obtained before the financing can occur.

There is a possible downside to opening a 100% foreign owned business within the country that they will not be eligible for this financing, and will have to obtain a normal loan through a bank.

The contract:

Once the necessary documentation has been provided and the bank of choice has had an opportunity to look through the business plan and further documents, they will come to a decision as to whether to provide the loan or not. If they choose to provide one, a contract will then have to be signed between the parties. This contract must outline the total value of the loan, the repayment period, and the interest rates (and must specify any potential changes to the rate over the total period), or in the case of Islamic banks, the method through which the money will be obtained and the profits of the bank. 

Of course, each bank is different, and while they follow the overarching rules of the country, the area of corporate loans is one where there is far less of a structure. As such, the different financial entities will be able to provide a variety of business loans including corporate credit, trade finance and more.

The process of obtaining a corporate loan within the country of Kuwait is one which is fairly normal and is much simpler. The laws within the country on the matter are fairly sparse though, as while one would expect the Kuwait Central Bank to cover the matter, it is very little in the way of legislation present. 

Glossary

• Corporate loan: a loan provided to a company in order for it to make business-related purchases. This is as opposed to a personal loan which would be for a private individual to make their own non-business-related purchases or cover costs.
• Islamic banks: these are banks that follow Sharia law. The primary difference is that they do not charge interest on their loans.
• Conventional bank: This would include any bank that is not an Islamic bank.
• Central Bank of Kuwait (CBK): this is the governing bank of Kuwait, and it produces legislation and monitors all the nation's banks. It also acts as the government's bank and ensures the steady growth of the country's economy.
• CBK Law: this is the law which sets out the powers of the Central Bank of Kuwait and how it can and shall interact with the other banks.
• Sharia Law: Islamic law that forms part of Islamic countries traditions. The rulings are derived from religious sources, and Islamic banks follow sharia law in that they do not charge interest on their loans.
• Law Number 32 of 1968: the piece of legislation that sets out the powers and responsibilities of the CBK.
• Circulars: these are documents that the central bank sends out to all the other banks of the country outlining new legislation and other updates the banks should be aware of.