Global Compliance

Laws Pertaining to Local and Islamic Banks in Kuwait

Kuwait is one of the six GCC countries and is a highly wealthy and yet small nation. It has a population of around 4.5 million, and is considered to have the third highest GDP per capita in the world. In the Middle East, it is second behind only Qatar. It has a largely oil based economy, though it has diversified to some extents, and is seen globally as a highly favorable business destination.

The population of the country consists largely of expatriates, with around 3 million of them, while the number of Kuwaiti nationals is closer to 1.5 million. While their population is low, they do make up a vital part of the country’s economy.

The Governing bank of the country is the Central Bank of Kuwait. Their responsibilities and duties are as follows:

• Act as the government bank
• Produce and distribute the national currency throughout the country. The currency is the Kuwaiti Dinar, and is one of the strongest currencies in the world
• Manage the country’s financial industry, and ensure the positive economic growth of the nation
• Produce legislation that must be observed by all of the banking and financial service bodies within the country, and also distributing circulars with any updates or additions to the current legislations

The Banking Regulations

The Central Bank of Kuwait has separate regulations for Islamic banks than it does for conventional banks. However, the general idea with Islamic banks is that they must follow the same laws as conventional banks except in specific areas where it is otherwise stated through the law.

Setting up an Islamic Bank within Kuwait:

The matter of setting up of an Islamic bank in Kuwait is covered under the Central Bank Circular Number 3 for Islamic banks, also known as Instructions Number (2/IBS/114/2003).  Hereinafter referred as Central Bank Circular. In there it is stated that in order to set up a Branch of an Islamic Bank within Kuwait, a written application must first be made to the CBK. The first section of the circular covers what exactly should be present within the application so as to ensure an easy a job as possible for the CBK.

On top of this, the CBK is looking for an economic feasibility study along with the basic application, and what should be included within are:

• The objectives of opening the bank;
• Consideration as to why a banks should be opened in the chosen area, and the extent to which a bank is required in said area;
• How long until the bank will be considered profitable, and the expected rise in banking activities;
• Financial assumptions of the proposed bank branch base on its size, and should include construction costs and operating costs for a period of no less than three years;
• Any other matter the bank has taken into account when considering its set up.

Section 4 of the circular relates to all potential Islamic banks. Under this section, the Central Bank shall take into account certain regulatory standards. These include:

• Assessing the banks general position;
• Looking into whether the bank’s internal control systems are adequate and efficient, and also observing the internal communication systems within the bank and between the branch and its head office;
• Ensuring the bank meets the standard of adherence and complicity with the banking regulations of the country.

Section 5 of the circular states that if the Central Bank approves of the application, there will then be a 12 month period over which the bank must then set up the proposed branch. There is the possibility of a time extension if the bank feels it will be unable to meet the deadline, though generally, 1 year is the given time.

Sharia Compliance:

One key aspect to Islamic banks is the requirement for a sharia supervisory board. The role of this board is to ensure that all of the banking activities fall in line with sharia principles and customs, and the board is covered under Circular Number 13 Instruction Number (2/IBS/100/2003).

Article 2 states that the sharia supervisory board should consist of a minimum of three members, who are to be elected in place by the bank’s board of directors. This supervisory board will hold regular meetings to look into the banks activities.

Section 4 lays out the powers and duties of the board. It will be the duty of the board to ensure that all banking activities are sharia compliant, and in doing so, they shall provide their opinion on the banking activities from a sharia stance. They shall inspect all contracts, agreements, policies and bank transactions. The board shall have the power to request any such documents and the bank will not be in a position to deny them.

In the case that an activity being performed or proposed is one that the board does not have the ability to confirm or deny, they shall be obliged to obtain a fatwa on the matter. Once this is obtained, it should be made available for any who wish to read it, as this will help in future cases and across other branches and banks. This is confirmed in Section 8 of the circular.

Interest:

Finally, one of the primary difference between an Islamic bank and a conventional one would have to be the matter of interest. Islamic banks do not charge interest on loans, and have other methods of obtaining their profits. As such, they are exempt from any pieces of legislation relating to interest.

In general, the regulations governing Islamic banks are the same as those for conventional banks. The only differences arise where the law specifically states that there will be some difference. Areas such as sharia supervisory boards and interest rates are the only differences that are of immediate note.

Glossary

• The Central Bank of Kuwait (CBK): This is the governing bank of the nation of Kuwait and is responsible for the producing of legislation that all other banks follow.
• Law Number 32 of 1968: The Central Bank of Kuwait Law, which was introduced so as to set-up and introduce the Central Bank and outline its powers and responsibilities.
• Islamic Banks: These are banks which follow Sharia Laws and principles in all of their banking activities.
• Conventional Banks: Conventional banks are any banks which are not specifically Islamic Banks.
• Sharia law: Sharia law encompasses Islamic based ideologies and customs in order to dictate the actions of entities.
• Circular Instruction Number (2/IBS/114/2003)
• Circular Instruction Number (2/IBS/100/2003)