Islamic Banking Law in Kuwait

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Facts and Figures

• Islamic Banks are regulated by the Central Bank of Kuwait
  
• Central bank of Kuwait Law (Act no 32 /1968) was amended in 2003 to include provisions on Islamic banking
  
• CBK Law contains 1 section with 14 Articles on Islamic banking
  
• CBK Law also requires the establishment of Shariah Supervisory Board at the industry level
  
• The Fatwa Board in the Ministry of Awqaf and Islamic Affairs is the highest authority in Shariah matters
  

Snapshot on the Legal Framework of Islamic Banking in Kuwait

The Islamic banking institutions in Kuwait are regulated by the Central Bank of Kuwait which was established in 1968 under the Central Bank of Kuwait Law (Act no. 32 of 1968} concerning Currency, the Central Bank of Kuwait and the Organization of Banking Business. CBK Law is the same piece of legislation which provides for the Islamic banking regulatory and supervisory framework and sets the requirement for the Shariah Governance framework.

CBK Law comprises 4 chapters wherein Islamic banking provisions which were part of the amendment in 2003, are placed under section 10 of Chapter III. The Chapter deals with the organization of banking business.

What is interesting about the CBK Law is that it explicitly defines Islamic banking business and provides for the Shariah principles which should be part of that business. This is clear from Article 86 of Section 10. The law says that "Islamic Banks exercise the activities pertaining to banking business, and any activities considered by the Law of Commerce or by customary practice as banking activities, in compliance with the Islamic Shari'ah principles." This is a fairly good definition given the width and breadth of the Islamic banking business which operates in contrary to the conventional banking business i.e lender. With emphasis on the banking activities including the ones recognized by customary practices and the Shariah law compliance, the Islamic banking business in Kuwait is set to embark on an unchartered Islamic banking course on its own timeline without that being hindered by the legislative formalities. The definition should be a benchmark principal provision for any Islamic banking regulators and supervisors given the innovative nature of the Islamic banking business and the speed of that business expanding which legislative processes may prove to be a red tape blockage. That is not meant to open the floodgate of unregulated or rather unknown businesses, but worry not, the safeguards could always be set via subsidiary legislation where departments at banking regulatory and supervisory authorities may issue from time to time given rising circumstances.

Article 86 promulgates in detail the scope of activities of the Islamic banks as follows:

• ordinarily accept all types of deposits, in the form of current, savings, or investment accounts, whether for fixed terms and purposes or otherwise.
  
• carry out financing operations for all terms, using Shari'ah Contracts, such as: Murabaha, Musharakah and Mudarabah
  
• provide various types of banking and financial services to their customers and to the public.
  
• conduct financial and direct investment operations whether on their own account or on the account of other parties or in partnership with others, including establishment of companies or holding equity participations in existing companies or companies under establishment, which undertake various economic activities, in accordance with both Islamic Shari'ah principles and controls laid down by the Central Bank, and all that in compliance with the provisions of this Law.
  

While it may work for Kuwait to have the detailed provisions on the saspect of banking business and the types of Shariah principles governing the related transactions, this may not be the same case with other countries given their variance of the level of complexities in the legislative formalities and their specific requirement. But on the principle of legislative flexibility, to have the business and transactional aspects scribed in a principal legislation in lucid detail, the regulatory and supervisory authorities may find themselves in some restrictions given the rigidity of the provisions. Islamic banking is one of the businesses that cannot afford rigidity in its regulation and supervision. The recent developments saw it moving very rapidly that a serious enhancement of the existing regulatory and supervisory framework is required. Certain countries must have acknowledged this and reacted accordingly. We must remember that proposing for legislative amendments is no easy feat particularly when a country is prone to political changes and the newest political authority does not always share the same sentiment with the industry regulators and supervisors. It that happens, they would have wished to subscribe to this principle of legislative flexibility. It means the provision should have the essential features to adequately define the spectrum of Islamic banking business while the transactional details including the Shariah principles be dictated by the regulatory and supervisory authorities in the related subsidiary legislation and by the Islamic scholars.

The above being said, I think every lawyer who have the opportunity to examine the CBK Law would agree that to have the principles of the Shariah such as Murabaha, Musharakah and Mudarabah outlined in a principle legislation is not necessary. While this may be amended later as newest Shariah principles emerge, this may not be in my opinion an ideal provision.

To be fair, despite this minor dissent, overall, I think the Islamic banking legal framework in Kuwait adopts the contemporary requirements of the Islamic banking business required. It is worth noting for even though it is a part of the legislation which establishes the Central Bank. I reiterate that, except for the above anomaly, the CBK Law provides a commendable legal structure of the Islamic banking in Kuwait. With the scope of the Islamic banking business which it centers around deposit taking, financing activities, direct investment and equity participation and such other business as may be prescribed by the Central Bank, the law has indeed covered most if not all, the Islamic banking regulatory and supervisory requirements with a distinctive flexibility for future expansion of such scope of business.

Snapshot on the Shariah Framework of Islamic Banking in Kuwait

Islamic banks in Kuwait are required to have established an independent Shariah Supervisory Board at the point of applying for registration. This is what Article 93 of the CBK Law provides. The structure and governance of the SBB are as follows:

• The SBB shall comprise of not less than three members appointed by the Islamic bank's General Assembly
  
• The Memorandum of Agreement and Articles of Association of the bank shall specify the establishment of the Board as well as its formulation, powers, and workings
  
• In case of a conflict of opinions among members of the SBB concerning a Shari'ah rule, the board of directors of the designated bank may transfer the matter to the Fatwa Board in the Ministry of Awqaf and Islamic Affairs, that shall be the final authority on the matter
  
• The SBB shall annually submit to the bank's General Assembly a report comprising its opinion on the bank's operations in terms of their compliance with the Islamic Shari'ah principles and any comments it may have in this respect. This report shall be part of the bank's Annual Report
  

Even though the establishment of the SBB is provided under the CBK Law, the Central Bank does not have any hand in its governance. The SBB reports directly to the Ministry of Awqaf and Islamic Affairs. I think this is an excellent arrangement which may be unique to countries like Kuwait and Indonesia. This may not work in Malaysia given the constitutional issues regarding the Islamic matters between the Federal and State Governments where the Shariah bodies set up at the industry level report directly to the Shariah Supervisory Council established at the Central Bank of Malaysia and not the The National Council of Fatwas. Notwithstanding the governance structure, the fact that a Shariah supervisory body, which acts as a juristic authority to guide the Islamic banking business and a filtering audit agent to ensure compliance with the Shariah principles, is a strict requirement under by a principal legislation, makes the CBK Law an ideal legislation which sets the framework for legal and Shariah aspects of Islamic banking in Kuwait. Kudos to the Central Bank of Kuwait!

To reiterate the Mantra and due to the distinctive nature of Islamic banking business, it may attract other legislative requirements. As such it is essential to have a set of legislation which facilitates the Islamic banking business. In this respect, I will attempt another posting soon on the transactional laws in Kuwait (the tax law seems to have no relevancy to Kuwait) to see how this aspect is attended to by the authorities.