Islamic Banking Law in Kuwait

The famous Kuwait Towers

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.

Sri Lanka - A closer look at the Islamic banking framework

Facts and Figures

• Single legislation and regulator for banking system:Banking Act No.33 of 1988 and
  the Central Bank of Sri Lanka (CBSL)
  
• Banking Act was amended in 2005 to insert provisions on Islamic banking in Schedule II and IV
  
• CBSL issued a directive on Islamic banking in 2005
  
• Amana Investment Limited and Ceylinco Islamic Investment Corporation are the two Shariah compliant institutions in Sri Lanka
  
• There is no explicit provision on the Shariah governance framework
  

The history of Islamic finance in Sri Lanka could be traced back in 1997 with the establishment of Amana Investment limited to operate an interest free bank. In 2003, Ceylinco Islamic Investment Corporation (CIIC) was set up to capture the untapped takaful market. But it was only in 2005,a legislative breakthrough was finally effected with the amendment of the Banking Act 1988 to legalise the operations of Shariah compliant banks. While the credit should be given to Amana Investment for their constant lobbying to the CBSL on the Islamic banking framework, it remains to be seen as far as legal framework of takaful business is concerned.

SnapShots of the Legislative Amendments
There is no specific mention about Islamic bank in the legislation except the directive issued by the Supervision Department of CBSL. There is also no attempt by CBSL to define Islamic banking but there are two elements of Islamic banking which have been clearly provided in the legislation:

• receipt of money for investment in a business venture based on the profit loss sharing (PLS; and
  
• buy and sale (and sale and buy back) transactions based on deferred payment terms.
  

The Shariah concepts of Mudaraba and musyarakah would be likely applied in the first element. While Murabaha, Musyarakah Mutanaqisah, Bai' Salam and even the controversial Bai' Bi Thaman Ajil and Bai' Inah concepts would fit in the second element.

Comment
There should have been some flexibility in describing Shariah compliant transactions in a legislation in anticipating future emerging transactions. It is sufficient to have an enabling provision with the detailed framework to be taken up through subsidiary legislation. Islamic banking is a highly innovative business and it moves at a speed that, from the perspective of a regulator, a lengthy and complicated legislative intervention processes may post obstacles to its rapid growth. From the bare reading of the provisions, it appears that banking transactions in Sri Lanka are merely confined within the sphere of the aforementioned two Shariah elements. Unless the banking legislation is amended, other tangible Shariah principles providing wider business ventures to the Islamic banking institutions would not see themselves anytime soon. To make a case, I just do not see how the description would cover Ijarah as another potent and less controversial Shariah tool for a business entity to venture into leasing business not to mention the issuance of Ijarah dominance Sukuks.

CBSL has further enhanced the legislative framework of Islamic finance by having in place the followings:

• The definition of deposit in the Banking Act to include money received for the purpose of Islamic banking business; and
  
• The issuance of a directive for the setting up of Islamic windows or even for full fledged Islamic banks . Window institutions need to have separate books of accounts and the existing prudential regulation is still applicable to them.
  

Comment
It may be inappropriate to wholly categorise the money received or invested under the Islamic banking business to fall under the definition of deposit akin to the commercial banking concept. Islamic banking business comprises two tiers of transactions, first, retail business which involves deposit taking and second, investment business in accordance with the PLS concept. The former would tally with the nature of deposit definition while the latter would need to stay out of the deposit league. The investment accounts are not guaranteed and maintained in accordance with the pre-agreed arrangements between the bank and their customers. They are not maintained the way the deposit accounts are. This goes similarly to the issue of deposit insurance.

Sri Langka - What have they accomplished?

Colombo, Sri Langka

Facts and Figures:

• 77 percent of its population Buddhists and Muslims constituting 8.5 percent, is one of the few non-Islamic countries to have legislations for Islamic banking.
  
• The revised Banking Act No. 30 of 1988, amended in 2005, allows both commercial banks and specialised banks to operate on a Syariah-compliant basis.
  
• 22 commercial banks, comprising two large state-owned banks -- Bank of Ceylon and Peoples Bank together with nine private banks and 11 foreign banks.
  
• Total assets as at end of July 2005 was US$11.76 billion. The two-state banks accounted for about 48 percent of the total assets while the foreign banks accounted for 14 percent.
  
• 13 licensed insurance companies e.g a takaful operator named Amana Takaful.
  

Regulator of financial institutions in Sri Langka:
The Central Bank of Sri Langka. Established in 1950 under the Monetary Law Act No 58 of 1949.

Snapshot on the Legislative Framework in Sri Langka

Key legislative enactments under the administration of the Central Bank:

• Monetary Law Act (MLA) No. 58 of 1949. An Act to establish the Monetary System of Sri Lanka and the Central Bank, to administer and regulate the system and to confer and impose upon the Monetary Board of the Central Bank powers, functions and responsibilities necessary for the purposes of such administration and regulation, and to provide for connected matters.
  
  
• Local Treasury Bills Ordinance No. 8 of 1923. An ordinance to provide for the borrowing of money by the issue of Treasury Bills in Sri Lanka.
  
  
• Registered Stock and Securities Ordinance No. 7 of 1937. An ordinance to make provision for the creation and issue of registered stock, government promissory notes and bearer bonds for the purpose of raising loans in Sri Lanka.
  
  
• Exchange Control Act No. 24 of 1953. An Act to make provision conferring powers, and imposing duties and restrictions, in relation to gold, currency, payments, securities, debts, and the import, export, transfer and settlement of property, to authorise the Central Bank to administer the provisions aforesaid, and to provide for matters connected therewith.
  
  
• Banking Act No. 30 of 1988. An Act to provide for the introduction and operation of a procedure for the licensing of persons carrying on banking business; for the regulation and control of matters relating to the business of banking; and to provide for matters connected therewith or incidental thereto.
  
  
• Finance Companies Act No. 78 of 1988. An Act to control and supervision of Finance Companies and to provide for matters connected therewith or incidental thereto.
  
  
• Finance Leasing Act No.56 of 2000. An Act to provide for the regulation and monitoring of finance leasing businesses; to specify the rights and duties of lessors and lessees and suppliers of equipment; and to provide for matters connected therewith or incidental thereto.
  
  
• Payment and Settlement Systems Act No 28 of 2005. An Act to provide for the regulation of payment, clearing and settlement systems; for the disposition of securities on the books of the Central Bank; for the regulation of providers of money services; for the electronic presentment of cheques; and to and to provide for matters connected therewith or incidental thereto.
  
  
• Financial Transactions Reporting Act No. 6 of 2006.An Act to provide for the collection of data relating to suspicious financial transactions to facilitate the prevention, detection, investigation and prosecution of the offences of money laundering and the financing of terrorism respectively; to require certain institutions to undertake due diligence measures to combat money laundering and the financing of terrorism; to identify the authority which will be responsible for monitoring the activities of all institutions to whom this act applies; and to provide for matters connected therewith or incidental thereto.