Debt Finance 2024 Comparisons

In 2023, Kuwait’s debt finance market experienced an uptick in refinancing activities, a trend that is expected to continue into 2024. This was accompanied by a notable shift among governmental entities, moving from traditional internal financing methods to external sources. A prime example of this shift is the Kuwait National Petroleum Company’s (KNPC) USD6.25 billion ECA-backed syndication loan, illustrating a broader trend towards leveraging external debt instruments.

The non-oil GDP growth in Kuwait was positive at 2.8% year-on-year as of the third quarter, despite a slowing momentum in the non-oil sector and an overall economic contraction of 3.7% due to OPEC+ mandated oil output cuts. The government announced a significant budget deficit, influenced by one-off expenditures which, alongside high property valuations and borrowing costs, led to a slowdown in consumer spending and bank credit growth. This only sets the stage for the reintroduction of public debt law. The previous authorisation to issue such debt instruments expired in 2017.

The projects’ market, however, showed robust activity, marking its most active year since 2017 in terms of contract awards, particularly energised by the completion and ramp-up of operations at the Al-Zour refinery. The banking sector continued to perform strongly, with many institutions reporting substantial growth in net profits and improvements in profitability indicators. Despite higher interest rates, capital adequacy remained solid, and asset quality remained generally good, although domestic loan growth was modest.

In the energy sector, Kuwait’s commitment to sustainability was underscored by Kuwait Petroleum Corporation’s (KPC) initiatives to expand renewable energy sources and achieve carbon neutrality by 2050. KPC’s strategic investments, including a significant allocation towards its 2040 strategy, are pivotal to Kuwait’s energy and economic landscape. The Minister of Oil and KPC announced that part of these investments would be directly funded through the debt finance market.

In summary, Kuwait’s debt finance market in 2023 was characterised by increased refinancing, a strategic pivot towards external financing by governmental entities, and sustained investment in the energy sector, setting the stage for continued growth in 2024.

The tapestry of Kuwait’s debt finance market comprises various market players which include local and foreign banks, government and private borrowers and consumers, in addition to regulators. It is primarily led by public spending and government economic planning. At the sovereign level, entities such as the Kuwait government and the Kuwait Investment Authority have issued and continue to invest in debt instruments both to finance public initiatives and manage the nation’s wealth. The commercial banking sector has a local, regional, and international footprint and is dominated by two large banks: one Islamic and one conventional. Foreign branches of international banks are also active in Kuwait by setting up shop in the country. Such branches, however, do not engage in retail banking and their activities are limited to corporate banking and trade finance. Foreign banks (rather than their in-country branches) also finance Kuwait-based projects and corporates on an off-shore cross-border basis. International banks are mostly present in mega financing in foreign currency.

Corporate borrowers also play a significant role within the market. KNPC, EQUATE Petrochemicals Company KSCC (EQUATE), and Kuwait Projects Holding Company KSCP (KIPCO) have been active borrowers (a notable example being KNPC’s inaugural USD6.25 billion ECA-backed syndication loan).

In Kuwait, the Central Bank of Kuwait (CBK) and the Capital Markets Authority (CMA) are the two main regulatory bodies overseeing financing activities, each with distinct roles and areas of oversight. The CBK serves as the primary financial regulator, focusing on monetary stability, banking oversight, and overall financial system stability. The CMA regulates securities and capital markets, ensuring market integrity and investor protection.

Lastly, the collective actions of retail and institutional investors proved crucial in establishing a responsive and robust market. Kuwaiti consumers play a large role in the financing market with 27% of the banking sector’s profits derived from them through consumer financings. Together, banks, government and private borrowers, consumers, and regulators make up the general gambit of the debt market.

In the complex and ever-changing global arena of 2023, Kuwait was navigating the ripple effects of significant geopolitical events, particularly the ongoing Russia-Ukraine war and the war on Gaza. These international crises, though not directly involving Kuwait, have influenced its geopolitical and economic environment, presenting both challenges and opportunities. Put simply, fluctuations and depression of crude oil prices affect Kuwait’s ability to finance projects and balance budgets.

As the Russia-Ukraine war entered its second year, its impact on the global economy was most acutely felt in the energy sector. The concerted efforts of Europe to reduce dependence on Russian energy imports, coupled with a price cap on Russian oil and gas enforced by the G-7 nations, together with economic sanctions affected the energy markets. This situation, combined with OPEC+’s strategic supply management responses, increased demand and price premiums for medium sour crude types, like Kuwait Export Crude, in comparison with lighter sweet crudes such as Brent.

Amidst these broader geopolitical currents, the war on Gaza has also cast a shadow over some Kuwaiti entities. The war has spurred ongoing movements to boycott certain brands, indirectly impacting their financing. Major franchisees have felt the brunt of these movements, with a coffee giant announcing significant restructuring, including substantial layoffs in the region, to counter the financial strain. Other affected entities have been pushed to extend the availability periods of their revolving credit facilities as a strategy to weather the boycott-driven financial challenges with Kuwait.

The war on Gaza and subsequent Houthi naval blockade in the Red Sea contribute to an increased risk premium on oil and other retail products. Despite fears of a significant price surge, the market has remained relatively stable, buoyed by the reassurance of OPEC+’s reserve production capacity. However, the uncertainty surrounding regional escalation could constrict supply and push crude prices upward. This may be further exacerbated by the potential for more stringent US sanctions on Iran. An example of such sanctions is those imposed by the United States on Iranian steel and automakers as recently as April 2024.

In Kuwait, debt financing is split into two main categories: (i) project and corporate lending, and (ii) consumer lending and real estate finance. The first category encompasses financing for projects and general corporate needs, while the second category pertains to loans for purchasing consumer items like vehicles and electronic devices. Kuwait’s loan market is relatively under-developed, with limited instances of leveraged buyouts (LBO) or notable securitisation transactions. Historically, investors from Kuwait and the region have shown little interest in the high debt levels typically associated with LBOs. Sharia-compliant funds, which have been gaining popularity, often have stringent regulations against such high debt (or debt-like obligations’) levels. Moreover, although this may be changing in lieu of recent IPO trends of family-owned businesses in the Gulf Corporation Council (GCC) which comprise a significant part of the private sector market, these businesses historically preferred not to engage with investors who adopt an aggressive management style aimed at restructuring operations for high returns to service the debt.

Moreover, the debt financing space in Kuwait is dominated by lending provided and/or arranged by local banks and branches of foreign banks with negligible debt financing activity being conducted by other players. Since 2015, the debt capital markets have witnessed a revival with sizeable primary debt issuances by Kuwaiti banks (largely senior unsecured transactions and regulatory capital issuances) and some major corporations such as EQUATE and KIPCO being at the forefront of corporate issuances. The secondary market for debt capital market finance remains underdeveloped and most issuances target cross-border investors.

Financing Corporations and Projects

Project finance

Big-ticket project finance transactions in Kuwait are dominated by projects tendered by the Kuwaiti hydrocarbons sector and are typically centrally managed by KPC. KPC has unveiled a new strategy to increase fossil fuel production. To implement this strategy, KPC is planning to invest USD410 billion through 2040, funded, in part, by external debt. Here, a typical project finance transaction would involve the allocation of financial resources to long-term infrastructure, industrial projects, and public services based on the projected cash flows of the project rather than the balance sheets of the project sponsors. Project finance is often used for large-scale projects such as energy plants, transportation infrastructure, and others. A recent example is KNPC’s Clean Fuels Project. This project, valued over KWD4.68 billion (USD15.25 billion), was financed through an ECA-backed structured finance facility amounting to USD6.25 billion, making it then the largest ever in Kuwait (and worldwide) for such a financing structure.

Project financing transactions in Kuwait remain dominated by the hydrocarbon sector, along with various government initiatives as outlined in Kuwait’s five-year development plans – including the development of a new residential city (South al-Mutla’a) and special economic zone city (Madinat al-Hareer and Boubyan Island). Additionally, the Industrial Bank of Kuwait (IBK) (a specialised bank dedicated to supporting industry in Kuwait incorporated by the Kuwaiti government and a number of private institutions) has been active in the small-to-medium project finance market. It was involved in 24 industrial financing transactions last year funding projects valued at USD167 million. The most common projects funded by the IBK included non-metallic mineral product manufacturing, rubber and plastic manufacturing, and mining support service activities. These projects, in part, have been spurred by a streamlined enforcement regime. As set out in 7.1 Process for Enforcement of Security, the enforcement regime in relation to events of default involving a pledge of a project company’s shares has changed to favour swift and fast enforcement. This development makes it easier for project finance lenders to take control of the project company in the event of default, circumventing the previous long and drawn-out process of requiring court intervention to enforce step-in rights.

General corporate/working capital finance

This outlines how businesses obtain funding to cover their everyday operations, such as managing cash flow, customer payments, and inventory levels, and refinance existing obligations (eg, taking out previous lending with more stringent conditions). Borrowers in Kuwait are still heavily dependent on local and international banks’ foreign branches to obtain financing for general corporate purposes. In Kuwait, it is common for loans to be bilateral or syndicated. In recent years, a large part of corporate lending from banks was allocated towards refinancing existing debt. This trend reflects borrowers’ efforts to improve their loan conditions or postpone their debt repayments. We have also seen major debt obligations being taken out in the debt capital markets by issuing senior unsecured bonds/Sukuk as the case may. By doing so, borrowers from Kuwait have been trying to take advantage of the more favourable terms debt capital markets provide.

On the debt capital markets front, Kuwait has taken proactive steps to enhance the regulatory landscape, aligning it with international standards. Notably, the Kuwait CMA’s membership in the IOSCO has fortified regulatory frameworks, facilitating the exchange of insights and best practices with more developed markets. This exchange has directly improved financial market regulations and practices within Kuwait. Additionally, the privatisation of Boursa Kuwait in 2019 marked a significant milestone, underscored by a series of “market development projects”. These initiatives ranged from expressly regulating financial instruments and practices like REITs, short selling, and securities lending and borrowing, in addition to enhancing market liquidity and transparency through mechanisms such as netting, market makers, and margin lending and trading. Complementary regulatory reforms and infrastructural enhancements were also part of these efforts. However, the absence of a vibrant secondary market for debt instruments poses a notable challenge, limiting the market’s capacity to unlock future growth.

Consumer Finance

Secured transactions to purchase vehicles or electronics comprise most consumer finance transactions.  Kuwait boasts strong labour law protection for employees, and due to the parens patriae approach (a doctrine that underscores the government’s role as a protector of its citizens) of the CBK to consumer loans, most consumer loans are further secured against future paychecks.

Another popular form of consumer financing is secured against term deposits within the bank. Here, a borrower would pledge a minimum amount in their deposit cash accounts and/or securities as collateral.

Real Estate Financing

The dynamics of residential real estate financing in Kuwait are significantly influenced by its legal framework, particularly the restrictions on real estate mortgages due to the Civil and Commercial Procedure Law, which does not allow execution against a pledge or a mortgage on one’s primary residence. This restriction effectively limits real estate mortgages to secondary residential properties, shaping the landscape of residential financing in the country.

The situation is further complicated by the recently enacted Combating Vacant Lands’ Monopoly Act (Law No 126 of 2023), which imposes strict limitations on transactions involving private residential plots. The law specifically prohibits companies, banks, and individual institutions from selling, purchasing, mortgaging, transferring rights, or acting as agents in transactions concerning these plots. The prohibition on companies acquiring properties on behalf of third parties effectively restricts financing structures like rent-to-own schemes, further limiting options for accessing residential financing. This regulatory environment constrains the traditional avenues of residential financing, leading to a reliance on alternative forms of loans.

In response to these challenges, a new mortgage law is being proposed by the executive branch to modernise and expand the scope of real estate financing options available to Kuwaiti citizens. This proposed framework legislation, composed of 11 articles, aims to redefine the legal framework surrounding residential mortgages. It includes provisions for financing from lenders for purchasing, constructing, or renovating private residential properties under the housing care system, with such financing to be secured by officially mortgaging the property. If passed, the new law may significantly broaden the accessibility of housing finance.

In the meantime, consumers in Kuwait often resort to a combination of what is locally referred to as consumer loans (qurood istihlakia) and housing instalment loans for residential financing. CBK regulations cap consumer loans at KWD25,000, and housing instalment loans are capped at KWD70,000. Together, these provide a maximum financing option of KWD95,000 for residential purposes. This means any additional financing to the foregoing amounts will fall outside of the strict statutory regime thereof. This combined cap represents only about 24% of the average house price in Kuwait, highlighting a significant gap in the housing finance market. It is also to be noted that foreign nationals who represent most of the resident population in Kuwait do not have access to these housing loans (under the statutory scheme) due to the fact that such foreign residents are not permitted, except in limited circumstances, to hold residential real estate.

In Kuwait, debt financing is typically accomplished by (i) borrowing funds or (ii) issuing debt securities (eg, bonds or notes) as noted in 2.1 Debt Finance Transactions. Depending on the transaction contemplated, the transaction structure could be either Islamic or conventional, bilateral or syndicated, and secured, unsecured, or subordinated.

General Corporate Purposes/Working Capital

Many businesses maintain some sort of revolving credit facility or “revolver” to accommodate working capital needs and to ensure liquidity and finance inventory and other obligations. Revolving credit facilities may be coupled with term loan facilities in a single set of loan documents. The term loan is initially used to refinance existing debt or to fund an acquisition or other capital needs of the borrower. These facilities are typically (and depending on the risk profile of the borrower) bilateral and unsecured and are common in contracting and seasonal businesses. The use of proceeds in such loans is typically broad and is for “general corporate purposes” – ie, not limited to the borrower’s ability to spend the funds raised on specific matters and thereby not triggering events of default under the facilities because of the use of funds.

There is also quite a bit of borrowing activity by corporates and financial institutions in US dollars and sizeable financial institution-to-financial institution lending involving local borrowers and a mix of local and foreign lenders to increase a borrower’s exposure to international currencies such as the US dollar.

Further, financial institutions and major corporations have been relatively active issuers of debt capital markets instruments (both Islamic and conventional). For example, the Kuwait-based Sultan Center Food Products Company has completed the first-ever issuance of a KD-denominated convertible bond with a nominal value of KWD9.65 million (USD31.4 million) for a ten-year term. However, most debt capital market financing, as indicated above, seems to target foreign investors and is listed on international stock exchanges (eg, Euronext Dublin). Strictly local activity in debt capital markets issuance appears to be small.

Project Finance

In Kuwait, recent examples of project finance transactions involved multi-tranche facilities combining conventional and Islamic structures. These financing arrangements are tailored to large-scale infrastructure and industrial projects, such as energy facilities, transport networks, and commercial developments – the KNPC clean fuel project being a prime example. Kuwait Integrated Petroleum Industries Company’s (KIPIC) LNG import infrastructure project is another key example. KIPIC secured USD2.3 billion from local and international banks.

The repayment of these facilities is commonly structured to be fully amortising over the life of the project, meaning that the cash flows generated from the project are used to pay down the principal and interest/profit on the facility until it is fully repaid by the end of the loan term.

As for Islamic finance debt capital markets structures in Kuwait, they predominantly adopt an “asset-based” approach rather than being “asset-backed”. In essence, this distinction means that investors rely on the credit of the obligor for recourse, rather than on the issuer or the assets underlying a Sukuk offering. Such structures are diverse and may include financial arrangements like Istisna (industrial finance), Ijara (leasing), Wakala (agency), and Murabaha (cost-plus financing), often in combination. These combinations are carefully designed with respect to the tangibility and tradability of assets, generally ensuring that at least 51% of the assets are tangible at the date of the Sukuk issuance, in accordance with Sharia principles and AAIOFI (Accounting and Auditing Organization for Islamic Financial Institutions) standards.

Notably, Murabaha transactions, which typically do not involve tangible assets held by the obligor as they are based on deferred sales of commodities for profit, are frequently incorporated into Sukuk programmes. This inclusion provides flexibility for subsequent drawdowns without the necessity of sourcing new tangible assets. To enhance the versatility in designating Sukuk assets, local banks in Kuwait often opt for a Wakala (agency) or Mudaraba (investment agency) structure, complemented by a Murabaha component.

It is important to recognise that in Kuwait, like many jurisdictions, there are specific regulations for real estate transactions which require a mandatory local component and registration, stamp duty, and fee requirements. These regulations pose potential enforceability challenges when structuring Sukuk. These challenges particularly arise when Sukuk involves real estate assets, questioning the validity of sales to foreign Sukuk-holders without proper registration. However, the predominantly “asset-based” nature of Kuwaiti Sukuk offers a reprieve, as it necessitates only a beneficial sale. Most offerings are meticulously structured, with contingencies to address situations where a beneficial real estate sale, instrumental in originating an “asset-based” Sukuk, is deemed invalid or unenforceable.

Refinancings

The refinancing landscape in Kuwait has been significantly influenced by legislative changes in 2015 onwards and the “bond phenomenon of 2019”, which saw record-low interest rates. This confluence of factors is leading to an uptick in refinancing activities, especially as debts from this period approach maturity. The trend, which started in 2023, is anticipated to extend into 2024, propelled by the five-year tenor that began during the 2019 surge in debt financing.

Conventional bilateral term loans are typically structured as simple loan agreements between a borrower and a single lender, and are most commonly unsecured (but guaranteed) and priced in accordance with the borrower’s creditworthiness. For larger financing needs, unsecured syndicated loans are typically a combination of local and international banks and substantially follow the Loan Market Association Standard (LMA) format.

As for Islamic or Sharia-compliant loans, Murabaha is considered the most common financing instrument in Kuwait.

Kuwait has shown active engagement in the refinancing debt market with notable transactions. EQUATE secured an undisclosed bridge bilateral loan, KIPCO made history by issuing the first Kuwaiti Dinar-denominated Sukuk by a corporate entity, amounting to KWD103 million, partly to prepay an existing senior unsecured facility with regional banks, and Zain, Kuwait’s Mobile Telecommunications Company, initiated the syndication of a USD1.2 billion Islamic loan, aimed at refinancing a loan due in December 2023, structured as a Murabaha.

The Main Advantages and Disadvantages of Syndicated Bank Loans Versus Debt Securities

The choice between syndicated bank loans and debt securities involves an array of advantages and disadvantages, each of which falls into distinct categories. Below is a summary of each.

Process and documentation

Bank loan facilities may be memorialised in simple documents, but may also be complex depending on the level of security required and participants in a given transaction. However, most debt capital markets transactions with a Kuwaiti nexus (even the simplest ones) would involve a host of interrelated offering and contractual documents in addition to requiring external approvals by regulators and potential market disclosures.

Transaction costs

In Kuwait, as in many other countries, the cost implications of raising finance through debt securities or loans can be significant and are influenced by various factors, including the complexity of the transaction and the amount of documentation required. When Kuwaiti companies opt for issuing debt securities, they often face higher initial costs due to the involvement of numerous documents, parties, and the requirements to engage many advisers (accounting, legal, tax, investment banks, underwriters, bookrunners, and the like). This complexity can lead to substantial legal, administrative, and underwriting fees. To mitigate these expenses, issuers in Kuwait might consider making large-scale issues to absorb the costs into the large financing size or establishing a debt issuance programme that allows for repeated drawdowns under the same documentation framework, thereby reducing the costs of subsequent issuances.

Conversely, simple loan arrangements in Kuwait can be relatively cost-effective to execute, especially for straightforward transactions between a single borrower and lender. The overall expenses associated with a loan in Kuwait, however, will vary based on the loan’s complexity, size, and the specific terms agreed upon. For instance, a secured loan requiring collateral might entail additional legal and valuation fees. Similarly, syndicated loans involving multiple lenders can increase administrative and co-ordination costs. Kuwaiti businesses, therefore, should weigh up these factors carefully when choosing between debt securities and loans as financing options, considering both the immediate and long-term cost implications of each approach within the Kuwaiti financial context.

Taxes

Returns from securities in Kuwait are tax-exempt, while loans are categorised based on the lender’s presence in the country. Income from lending within Kuwait is taxable, with net interest from loans to local entities subject to a 15% tax rate (with certain exemptions afforded to local entities). Since 2008, foreign financial institutions have faced uncertainty regarding the taxation of lending transactions and the application of tax treaties, which typically tax interest income in the lender’s home country. For more detailed information, see 9.1 Tax Considerations.

Terms

Though transaction costs of issuing bonds or Sukuk may be higher, they typically yield more favourable interest or profit rates in comparison with loans.

Disclosure requirements

In Kuwait, issuing debt capital markets instruments requires detailed disclosures by listed companies, such as interim and annual financial statements in both Arabic and English, to Boursa Kuwait. These must meet deadlines after the fiscal periods’ end. Additionally, material information like new securities’ listings, major contracts, legal disputes, and debt defaults must be disclosed, per Module 10 of Executive Bylaws of Law No 7 of 2010 concerning the Establishment of the CMA, the Regulations of Securities’ Activities and its Amendments (the “CML Executive Bylaws”). In Kuwait, rumours and news must also be addressed if they could lead to unusual trading activities. Loans, in contrast, have fewer public disclosure requirements unless they involve significant transactions by listed company. There are, however, certain regulatory disclosures that the bank must make to the CBK, including Basel III and Leverage Disclosures. Furthermore, if a single loan transaction comprises 15% of a given bank’s capital base, CBK approval is required.

Transferability

In the realm of securities, debt capital markets instruments are generally designed for ease of transferability on an exchange or over the counter. This contrasts with bank facilities, which are usually less transferrable. In Kuwait’s context, while debt securities aimed at the international market and those listed on exchanges are easily transferable and can be traded with relative ease, local bonds and Sukuk suffer from a lack of an active secondary market. This is partly due to a prevailing “buy and hold” mentality among investors and the absence of streamlined listing and clearing rules for such debt instruments. We understand that this issue is on the radar of Boursa Kuwait and the Kuwait Clearing Company (KCC) and might see significant changes soon.

Covenants

Kuwaiti debt securities, such as bonds and sukuk, typically feature lighter covenants, largely due to the issuers’ strong credit ratings. Investors rely heavily on credit rating agencies to assess and monitor the credit wherewithal of issuers, a crucial practice in Kuwait’s economy, which is sensitive to oil prices and geopolitical factors. Conversely, the loan market in Kuwait, particularly for corporate or significant financing needs, is marked by more stringent covenants. Lenders, including banks and private financiers, mandate a comprehensive information flow and strict compliance with financial ratios from borrowers.

The Types of Investors That Participate in Bank Loan and Debt Securities Financings

In Kuwait, the investment landscape for bank loans and debt securities is characterised by participation from sovereign wealth funds, pension funds, commercial banks, and financial institutions (both local and international). These entities play a pivotal role in the financial markets, each bringing substantial capital and specific investment objectives. Sovereign wealth funds and pension funds typically seek stable, long-term returns, aligning with the risk profile of debt securities. Meanwhile, commercial banks and financial institutions engage in both extending bank loans and investing in debt securities, driven by portfolio diversification and yield optimisation strategies. Interestingly, Kuwait did not allow foreign investors to hold and trade shares in local banks until 2018. Resolution No 694 of 2018 allows foreign investors to own up to 5% of a Kuwaiti bank’s capital directly or indirectly. Further, the National Assembly passed legislation granting foreign banks the ability to establish operations in Kuwait. Currently, 12 foreign banks have branches in Kuwait. Well-known financial institutions such as Citi Bank, BNP-Paribas, and HSBC operate in Kuwait.

Depending on whether the transaction is a consumer or a corporate loan, the documents differ.

Consumer Loans

Personal loans

In Kuwait, banks set their document requirements based on internal procedures, guided by the CBK’s directives. At a minimum, these include exhibiting a salary certificate detailing the customer’s monthly earnings and deductions, a commitment to submit all lender-requested documents (like those verifying the use of housing loans for their intended purpose), a credit report statement signed by the customer showing other loans or commitments under CBK supervision, and a valid civil ID copy.

Consumer housing loans

As for housing loans or financing in Kuwait, customers must supply all documents the lender requires, including bills and documents that prove the use of the loan is for housing purposes. Failure to comply within the specified period disqualifies the customer from future facilities. Contracts must clearly outline verification methods, necessary documents, submission timelines, and details on the financed property.

Corporate Loans

In Kuwait, sizeable debt finance transactions in sectors such as hydrocarbons and financial institutions often follow LMA standards, while Islamic Finance transactions typically adhere to AAOIFI standards. Key considerations in these transactions include regulatory oversight (mainly by the CBK and sometimes the CMA), timeline constraints, and the governing law, which is often English Law for cross-border transactions. As for the written language, regulatory authorities and the judiciary in Kuwait typically require documentation to be submitted in original or translated Arabic. However, due to the international nature of the markets, there is often a need for documentation to be available in English as well. Therefore, it is common for documents to be prepared in both languages to meet local regulatory expectations and accommodate international stakeholders.

In Kuwait’s banking landscape, diverse investor types such as commercial banks, sovereign funds, individual investors, and foreign lenders each bring specific expectations and requirements to bank loan terms. Commercial banks, constrained by the CBK’s rigorous standards, maintain a low to medium risk appetite through strict adherence to enhanced capital adequacy requirements, liquidity and loan-to-deposit ratios, and defined lending limits. Sovereign funds, characterised by their low-risk profile, generally engage external fund managers for their investment activities. Individual and high net worth investors, which include significant family-run entities, navigate within a framework set by less restrictive Civil and Commercial Codes, offering them a broader risk spectrum. Conversely, foreign lenders, especially in cross-border transactions, often incorporate arbitration clauses and are predominantly governed by English law, distinguishing them from local transactions that almost exclusively adhere to Kuwaiti law and court jurisdiction. Moreover, variation in risk tolerance and regulatory adherence among investors leads to differences in the structuring of loans as either secured or unsecured. Secured loans, preferred by those seeking lower risk exposure, necessitate additional documentation and steps to ensure the legal attachment and perfection of the underlying collateral.

For cross-border loan documentation in Kuwait, Article 702 of the Kuwaiti Civil Code necessitates special approval for arbitration agreements, emphasising that such an agreement is beyond ordinary management acts and requires explicit authorisation.

Regarding the terms of the loan, also note that compound interest (ie, interest on interest) is contrary to Kuwaiti public policy pursuant to the Commercial Code.

Moreover, in the realm of Islamic financing, certain lenders and/or borrowers who wish to adhere to Islamic principles seek the inclusion of a customary qualification in governing law clauses which reads “to the extent that these laws do not conflict with the provisions of Sharia”. However, introducing such language in Kuwait could complicate matters significantly. Governing law clauses and in particular choices of substantive and procedural laws should be clearly and unambiguously drafted. Sharia board approval and external Sharia auditors should address concerns regarding compliance with Sharia principles in their commercial dealings and not in the governing law clause. Inclusion of such qualification creates uncertainty as to which law is applicable as Shaira principles are not uniform, allow open room for multiple interpretations, and should not be considered a “governing law” from a choice of law perspective.

To mitigate the jurisdiction-specific risks, it is important for the finance parties to engage experienced local counsel in the applicable foreign jurisdiction and domestic counsel with cross-border experience. In most cases the lender too should obtain a formal legal opinion from local counsel addressing legal issues that are unique to Kuwait. This includes corporate status and capacity, authorisation, tax issues, enforcement risks, lien priority, and time considerations.

In financing transactions in Kuwait, the typical assets that are used to secure debt obligations can be either (i) movable/possessory liens, (ii) immovable (ie, real estate) or, what the law terms as (iii) “funds” (e.g., cash accounts, shares, or other securities) in addition to membership interests in companies with limited liability (W.L.Ls) or Single Person Companies (SPCs)).

Kuwait law provides that security interests over immovables can be granted to secure conditional, future, or contingent debt and can also be granted in the form of an open-end credit provided the value of the debt secured or the pre-determined limit of the security interest be recorded in the title deed of the immovable asset. To create security over real estate, finance parties need a document evidencing the obligation together with adherence to the perfection rules which entail notarising the debt instrument and annotating this arrangement in the public register. In the event a security interest in an immovable is granted to multiple creditors, creditor priority is determined by the date of perfection in accordance with the applicable notarisation and registration procedures. The law also allows a creditor, within the limits of the value of secured debt, to assign their rank in favour of another creditor provided that each of the security interests is inscribed in the same property.

The same process of perfection is substantially followed when security interests are created over funds (called possessory liens over funds) through notation of the share certificate in the company’s share ledger indicating the share pledge to the creditor. It is to be noted that enforcing on movables and/or funds does not entail “step-in” rights and often entails a lengthy notice, auction, and sale process which involves the local courts. However, the introduction of Articles 9-13 and 9-14 of Module 11 of the CML Executive Bylaws liberalised and streamlined the rules regarding creating security over and enforcing them against shares (and other securities) (see 7.1 Process for Enforcement of Security for more details). The relatively new process allows direct and speedy transfer of registered ownership to the secured party without the court’s involvement if the parties agree so in writing and follow simplified procedures of creating the security.

Exercising security interests over shares (otherwise known as membership interests to differentiate from tradable shares/stocks) in W.L.Ls follows substantially the same process of contractual creation of the security interest between the parties inter se then perfection in the public register to indicate that the security binds the world and to indicate the ranking of secured interests. Similarly to immovables, the enforcement of a security interest over shares in W.L.L.s and SPCs involves a sale and auction procedure.

Lastly, liens over movables require physical possession or control of the movable which is the subject matter of the pledge in order to perfect the security interest in it.

Granting guarantees under Kuwaiti law is considered an act of “disposition”. This means that a grantor of a guarantee must obtain specific approval from their governing body. In a Kuwaiti company, the default rules reserve the right of granting guarantees to shareholders unless specifically delegated down by the company’s constitutive documents. Financing transactions often include guarantees and the validity of a guarantee and its scope is often at issue. As such, big-ticket financing transactions with cross-border elements often include, as a condition precedent to closing, legal opinions that address whether a guarantee has been validly executed and approved. In general, guarantees are limited by the following:

• The underlying obligations of a guarantor towards an obligor may not be enforceable in the event such underlying obligations are invalid and/or unenforceable under the laws of Kuwait, including agreement to indemnify a creditor if an underlying obligation is deemed legally invalid or unenforceable.
• The obligations of a guarantor may not exceed the liabilities of the obligor; accordingly, a guarantee is discharged if the associated debt has been discharged.
• If the obligations of an obligor are interpreted as a gratuitous act in that the obligor derives no corporate benefit from the provision of a guarantee, the guarantee may be deemed invalid and/or unenforceable by Kuwait courts.

Guarantees are also limited by the overriding concept of whether or not the granting thereof is consistent with corporate benefit principles.

Separately, and since many of the big-ticket financings include state involvement, like the financing transactions in the energy sector (which typically includes a backstop guarantee by KPC), the rules surrounding the granting of guarantees by KPC require approval by the Council of Ministers.

Similar to guarantees, the granting of security to support the financing of a party follows substantially the same principles and is limited by the corporate benefit principles. In particular, the granting of security is considered an act of disposition (as opposed to an act of management).

As such, corporate approvals in the context of financing should specifically address the above key considerations to ensure both guarantees and securities are validly authorised and duly executed.

It is to be noted that the granting of upstream guarantees and securities by a subsidiary in support of a parent’s financing obligation is not strictly prohibited in the State of Kuwait and similarly follows the corporate benefit principles.

Multi-facility syndicated financings in Kuwait often include a common terms agreement (CTAs). CTAs stipulate the terms and conditions applicable to the borrower and finance parties and are specifically incorporated by reference into each loan facility. As such, CTAs ensure standardisation and common understanding of the terms of the debt financing, allocate the roles of specific parties (such as agents and global co-ordinators) and stipulate events of default. We see CTAs appear also in facilities that include both Islamic and Conventional components and the CTAs include an “if-then” menu of options that can be selectively activated when a utilisation request is made under either component.

Intercreditor provisions, whether in a standalone intercreditor agreement or housed within a CTA, are generally enforceable in the State of Kuwait. However, tension regarding the enforceability of intercreditor arrangements can arise in the event of borrower insolvency. While a bankruptcy court should in theory defer to the parties’ agreement, whether such agreement would be enforceable or not is not sufficiently tested in the newly established bankruptcy courts in Kuwait.

Contractual subordinations should be recognised by the Kuwaiti courts. For example, ranking provisions are commonly incorporated in (among other financing structures) loan facilities through credit enhancement provisions such as subordination of debt (as an alternative to equity cures) from a parent in structures implicating group companies. Other examples include the customary regulatory capital instruments of additional tier 1 and tier 2 Basel III-compliant capital in debt capital markets transactions. Here, the CBK’s regulations specifically recognise such subordinated obligations to enhance the capital base of financial institutions.

Within the realm of legal subordination, on the other hand, Kuwait subscribes to its default principle of “first in time, first in right”, subject to higher-ranking priorities afforded by statute. For example, judicial expenses, governmental taxes and dues, and employee wages and salaries, take priority over secured creditors by virtue of the default creditor ranking principle in addition to other intercreditor arrangements.

In addition, the relatively recent insolvency regime affords distressed borrowers multiple avenues of protection against enforcement of creditor claims. Examples include the pause or cancellation of secured liens after bankruptcy, restructuring, or preventative settlement proceedings for the purpose of maintaining a balance between creditors’ rights and the company’s operational integrity (see 8.2 Main Insolvency Law Considerations for more details).

Whether contractual subordination is fully enforceable in light of insolvency/bankruptcy proceedings remains a relatively open question due to the lack of precedent. However, validly concluded subordination provisions with proper notice to other creditors should be enforceable if concluded before the onset of bankruptcy proceedings and engagement of the Kuwait insolvency regime. Actions and contracts concluded after such cut-off point are not enforceable outside the legally mandated settlement provisions or judge-supervised creditor agreements. 

Historically, enforcement of certain types of security instruments, such as the pledging of securities, used to be a cumbersome process. In 2015, the CMA introduced a streamlined process for the pledge of securities and for enforcing those pledges without the need for a court process by enabling the creditor or mortgagee to approach the KCC to transfer the securities.

Streamlined Enforcement Process

Articles 9-13 of Module 11 of the CML Executive Bylaws allow parties, including banks or financial institutions as creditors and debtors or clients, to agree on the acquisition or sale of pledged assets either at the time of concluding the pledge contract or later. This agreement empowers the creditor or mortgagee to acquire or sell the pledged asset in the event of the debtor’s breach of obligations, without the need to adhere to the provisions of Decree No 68 of 1980 concerning the enactment of the Commercial Code (the “Commercial Code”) or by Decree No 38 of 1980 (as amended) concerning the enactment of the Civil and Commercial Procedures Law (CCPL).

Execution of Instructions

Article 9-14 of Module 11 of the CML Executive Bylaws stipulate that upon exercising the rights under Article 9-13, the investment portfolio manager and clearance agency, if applicable, are obligated to execute instructions issued by the creditor or mortgagee for the acquisition or sale of securities. However, this action is contingent upon the debtor and in-kind guarantor, if any, receiving written notice in accordance with the pledge contract at least five business days before the transaction. Additionally, the sale cannot include additional securities than necessary to settle the creditor or mortgagor’s debt.

Streamlined Enforcement Process

The recent regulatory changes have significantly transformed the enforcement landscape previously dictated by the Commercial Code and the CCPL. Key provisions within these statutes have been revised, effectively eliminating the requirement for public auctions to liquidate pledged securities. Securities can now be directly transferred to the creditor or a designated third party, allowing lenders to swiftly assume control in the event of a borrower’s default. This streamlined enforcement process enhances lenders’ ability to protect their investments and directly access proceeds, bolstering their confidence. Additionally, this reform is particularly beneficial in scenarios where using real estate as collateral poses complexities, offering a more straightforward pathway for securing loans.

Enforcement of Foreign Court Judgment

In Kuwait, foreign court judgments are recognised and enforced under the CCPL. To enforce such a judgment, a party must initiate a procedure in Kuwaiti courts to secure a “writ of execution”. This procedure is not a retrial but verifies the foreign judgment’s compliance with specific criteria set out in Article 199 of the CCPL:

• Reciprocity: The foreign court’s country must recognise Kuwaiti judgments in a manner similar to how its own judgments are treated.
• Competency: The foreign judgment must be rendered by a competent court in accordance with the applicable laws of the foreign jurisdiction.
• Due Process: The parties must have been properly summoned and represented in the original proceedings.
• Finality: The judgment must be final and binding in its origin country.
• Consistency: The judgment must not conflict with any previous judgments by Kuwaiti courts.
• Public Policy: The content of the judgment must not violate Kuwait’s public policy or moral standards.

Challenges may arise when dealing with countries lacking a reciprocal enforcement treaty with Kuwait. The Kuwait Court of Cassation’s rulings have varied, with some cases emphasising the need for clear evidence of reciprocity, while in others, the court concluded that claimants had not provided sufficient evidence for the existence of criteria set out in Article 199 of the CCPL. The key to enforcing a foreign judgment in Kuwait lies in providing convincing evidence that the originating country reciprocates by recognising Kuwaiti judgments, often through attaching an appendix demonstrating equal treatment of Kuwaiti judgments.

Enforcement of Judgments from the Gulf Cooperation Council (GCC)

Enforcing judgments from GCC member states in Kuwait is streamlined by the GCC Convention for the Execution of Judgments, which Kuwait has ratified into its national law through Law No 44 of 1998. This convention simplifies the process by limiting the judicial entity’s role to merely verifying the judgment’s compliance with the convention’s requirements, without delving into the case’s merits again. Key prerequisites for enforcement under Article 9 include providing a certified copy of the judgment, a certificate of finality, and, for judgments in absentia, proof of proper notification to the defendant.

Enforcement of Foreign Arbitral Awards

In Kuwait, the enforcement of foreign arbitral awards falls under the New York Convention (1958) and the CCPL. This procedure tends to be more straightforward compared to the enforcement of foreign court judgments. Specifically, the reciprocity requirement, crucial for foreign judgments, is assumed to be met simply by the signing of the New York Convention. According to Article 200 of the CCPL, foreign arbitral awards must be recognised and enforced under conditions similar to those for foreign judgments, provided the matter is arbitrable under Kuwaiti law and the award is enforceable in its country of origin.

On 25 July 2021, Law No 71 of 2020 concerning insolvency (the “Insolvency Law”) came into effect followed by the implementation of regulations. The previous bankruptcy regime was underdeveloped and not substantially tested due to very few bankruptcy occurrences. The CBK responded to the financial instability caused by the global credit crunch in 2008 by implementing a targeted and temporary rescue operation, along with specialised regulations, to shield distressed borrowers from traditional bankruptcy procedures. The new Insolvency Law, however, is detailed and includes a fully developed insolvency and rescue regime. However, it is still not substantially tested.

The Insolvency Law applies to: (i) any individual carrying out commercial activities in Kuwait; (ii) any Kuwaiti company, including special purpose vehicles and branches of foreign companies; and (iii) Kuwaiti investment funds that are legal persons.

The insolvency regime provides for two main types of rehabilitative proceedings (i) preventative settlements and (ii) financial restructuring.

Preventative Settlement

Similar to the Company Voluntary Arrangement under English Law and the sauvegardé proceedings under French Law, Kuwait offers a procedure known as Preventative Settlement for insolvent entities with potential to continue operation while reconciling with their creditors. In this procedure, initiated by the debtor, there will be a moratorium on claims for three months extendable upon the debtor’s request. During the stay on claims period, the debtor is expected to present settlement terms to a creditor committee.

Approval is required from creditors representing at least two-thirds of the total value of the claims to reach a Preventative Settlement. Notably, once the Preventative Settlement procedure is initiated, the debtor must obtain approval from the bankruptcy judge for any actions outside the normal scope of business operations, ensuring that the process is conducted under close judicial supervision. As for the creditors, during the moratorium period, they are prohibited from taking legal action to enforce their rights under a loan, guarantee, or security. This includes refraining from initiating or continuing any lawsuits or foreclosure actions against the debtor. However, if the committee does not accept the proposed terms, their ability to enforce their rights would still be restricted until the end of the moratorium period. Once a bankruptcy court approves a settlement, creditors must follow its terms, preventing them from suing the debtor as long as the debtor abides by the terms of the agreement.

The debtor upholds existing contracts unless (i) obligations are breached; (ii) such contracts are included in preventative settlement; or (iii) the moratorium period ends. In these cases, the bankruptcy court may nullify these contracts at the debtor’s request. The debtor can seek financing after a decision has been rendered if such provision is specified in the preventative settlement proposal or if it has been approved by the requisite majority in the Insolvency Law.

Financial Restructuring

Financial restructuring refers to the process of reorganising the financial assets and liabilities of a company or individual in distress. This process can involve renegotiating debt terms, restructuring equity, selling off assets to improve liquidity, merging with or acquiring other businesses, and making operational changes to reduce costs and increase revenue.

Unlike preventative settlements, either the debtor, creditor, or the supervisory authority may initiate financial restructuring proceedings. When the initiating party petitions the Bankruptcy Court for financial restructuring, the party must show the debtor meets specific criteria: (i) the debtor must have defaulted on their debt payments; (ii) the debtor must be experiencing financial distress; and (iii) their business must be deemed viable.

Once in the restructuring, the debtor retains command over their assets, albeit within a framework supervised by a trustee and under the scrutiny of a bankruptcy judge. This governance model permits routine business transactions and operational continuity, with the condition that such transactions do not infringe upon creditors’ rights. However, any activity that strays from regular business dealings necessitates judge approval. Nevertheless, upon the request of the bankruptcy trustee or a creditor, the court reserves the right to transfer managerial responsibilities to the trustee. Also, during restructuring, the parties involved enter into a period where all legal actions against the debtor are temporarily halted, giving them a window to restructure without the immediate threat of litigation. This stay remains in effect until the court approves a restructuring plan or decides to end the restructuring proceedings.

An important aspect to note is that existing contracts, including loan agreements, are maintained throughout the restructuring process. The debtor must continue to fulfil their contractual obligations and make necessary payments. At the same time, the debtor is allowed to seek new financing, maintaining a delicate balance between preserving the company’s operational integrity and respecting the creditors’ rights.

In essence, financial restructuring provides a structured opportunity for entities under financial strain to reorganise and strategise for recovery, all within a legal framework designed to ensure fair treatment of all parties involved.

The Insolvency Law grants creditors significant powers to protect their interests in times of debtors’ distress. These include initiating restructuring and bankruptcy proceedings, reclaiming assets pledged as security, and efficiently enforcing secured debts. Concurrently, the bankruptcy court assumes the responsibility of imposing restrictions on debtor actions to prevent creditor harm during debtors’ distress. Additionally, it has the authority to cancel any claims or legal rights against debtor assets that arise in post-bankruptcy proceedings. These measures are essential for minimising potential losses for creditors and maintaining a stable lending environment when borrowers face insolvency.

Initiating Restructuring and Bankruptcy Proceedings

The law permits creditors to initiate restructuring or bankruptcy proceedings under specific conditions, such as individual debts exceeding KWD20,000 or collective debts from at least three creditors reaching a threshold of KWD10,000 each. Preceding any action, creditors must provide debtors with a formal one-month notice. Notably, creditors with secured debts enjoy stronger rights, including priority claims on debtor assets, provided these assets are valued below the outstanding debt.

Reclaiming Assets

Creditors can request the bankruptcy court’s permission to reclaim assets held by the debtor. This right is contingent on demonstrating that failing to retrieve the assets would significantly harm the creditor, outweighing potential losses to the debtor and other creditors. This right can be exercised in bankruptcy, restructuring or preventative settlement proceedings.

Enforcing Secured Debt

For secured creditors, the law offers a streamlined path to reclaim funds or initiate the sale of collateral, bypassing traditional enforcement methods. Secured creditors have the right to either (i) reclaim the funds securing their debts or (ii) initiate the sale of collateral by a trustee without resorting to conventional enforcement procedures. If a trustee has not been appointed beforehand, the bankruptcy judge may assign one at the creditor’s request. This right can be exercised in bankruptcy, restructuring or preventative settlement proceedings.

Safeguarding Against Prejudicial Actions

The Insolvency Law empowers the bankruptcy court to annul debtor actions that disadvantage creditors, particularly those made in the three months leading up to payment cessation. Actions subject to scrutiny include significant donations and imbalanced transactions, among others, ensuring that all moves are made with commercial justification and in good faith.

Equitable Subordination and Fairness

In bankruptcy proceedings, courts have discretion to rearrange debtors’ claims through a process similar to “equitable subordination” as outlined in the US Bankruptcy Code. The court can invalidate any claims or legal rights (such as liens or privileges) against the debtor’s assets made after the start of bankruptcy, provided the creditor was aware of the payment cessation. However, rights secured before payment cessation or based on pre-existing contracts that were officially recognised (notarised) are upheld.

Classification of Creditors

In bankruptcy cases, the Insolvency Law follows the customary waterfall model of distributing proceeds from the sale of the bankrupt’s assets. At the top of this hierarchy are secured creditors, who have established their security interests earliest, giving them precedence over unsecured creditors.

Secured creditors rank above the claims of any unsecured and un-subordinated creditors but may be subject to priority claims, including legal proceedings costs, state treasury obligations, and debts incurred within six months prior to the debtor’s insolvency. These priority claims encompass employee wages, vital supplies such as food, and alimony for individual traders.

A full list of creditor hierarchy can be found in Article 189 of the Insolvency Law and Articles 1070-1082 of the Civil Code. These articles also provide details on how these priorities are determined and how to handle cases where the asset sales do not fully cover the claims.

Kuwait is a relatively low-tax environment and limits taxation to corporate income tax. It is overseen by the Ministry of Finance’s Department of Income Tax (DIT). The DIT primarily taxes corporate net profits (including capital gains) but imposes no taxation on individuals. Nevertheless, concerns persist regarding the inconsistent enforcement of tax laws by the DIT, particularly in the context of tax relief arising out of double taxation treaties. There is an opportunity for Kuwaiti courts to refine the implementation of these treaties (in line with persuasive treaty commentary, which is often overlooked), which could lead to improved efficiency and fairness in taxation practices.

Income Tax

Decree No 3 of 1955 (as amended) (the “Income Tax Law”) and its Executive Bylaws (collectively referred to as “Taxation Laws”) apply to, amongst others, foreign entities that have a permanent establishment in Kuwait. However, the Taxation Laws do not provide a clear definition or guidelines on what constitutes a “permanent establishment” in Kuwait. A place of business or the presence of company employees or representatives in Kuwait, even if for short-term visits, may trigger taxation.

Furthermore, the DIT has the authority to tax either the profits linked to the permanent establishment or the entire contract value, including the work conducted both within and outside Kuwait. According to the Taxation Laws, corporate entities conducting business in Kuwait, regardless of their incorporation location, are subject to income tax at a flat rate of 15% on net income and capital gains. However, the DIT has made an exception (as a matter of practice) for companies registered in Kuwait or other GCC countries provided that their ultimate beneficial holders are GCC natural persons.

Tax in Relation to Debt Financing

Under CML Executive Bylaws, income earned from lending funds in Kuwait is deemed business income and is subject to income tax for foreign corporate entities. However, Law No 22 of 2015, which amends CML Law, provides exemptions for returns of securities, bonds, finance Sukuk, and similar instruments from taxation, irrespective of the issuer. These tax exemptions were affirmed by Administrative Resolution No 2028 of 2015.

Although these tax exemptions have not been sufficiently tested in court yet, the DIT seems to tolerate them and does not challenge their applicability.

Tax Retention

Kuwait-based parties making payments to parties with tax obligations are required to retain 5% of the amount of each payment until the DIT issues a tax clearance certificate (or otherwise determines that the payor is not subject to tax) approving the release of such amount. This withholding applies to payments, including principal and interest.

Value Added Tax (VAT)

As at the date of this writing, Kuwait does not impose VAT on any good or service. As such, VAT is not applicable on banking and finance transactions in Kuwait. However, while the GCC states, including Kuwait, have agreed to the implementation of the GCC-wide VAT framework, to be introduced at a rate of 5% (the “VAT Framework”), the national legislation of Kuwait implementing the VAT Framework has yet to be introduced to, and passed by, parliament. Further, Kuwait has yet to publish the proposed details of its VAT regime (including potential zero rating or exceptions). Therefore, it is unclear when VAT will be introduced in Kuwait or what would be its terms and conditions. The latter is due to the fact that the VAT Framework is wide enough and allows each member state discretion to design its VAT legislation in accordance with national policy.

Zakat Tax

Law No 46 of 2006 concerning Zakat and the Contribution of Public and Closed Shareholding Companies to the State Budget (also known as the “Zakat Law”) mandates the collection of an annual percentage of 1% from the net profits of Kuwaiti shareholding companies, whether public, closed, listed or non-listed (ie, WLLs, SPC are not subject to Zakat Law). The Zakat Tax Law exempts certain shareholding companies from the payment of the zakat tax, such as companies wholly owned by the state and companies that are subject to the Income Tax Law.

Other Taxes

There are other taxes, such as the National Labor Support Tax, which imposes a 2.5% rate on the annual net profits of companies listed on the Kuwait Stock Exchange under Law No 19 of 2000 concerning the Support and Encouragement of Kuwaitis to Work in the Private Sector. Additionally, there is a 1% tax on shareholding companies’ annual net profits imposed by the Kuwait Foundation for the Advancement of Science Tax. This contribution qualifies as a formally imposed tax by Kuwait; however, in practice, the majority of companies adhere to this contribution.

In Kuwait, navigating the terrain of debt finance requires attention to several regulatory considerations. Alongside the factors previously outlined, it is helpful to consider the single obligor limits, the dual regulatory burden for certain entities, and the transition from LIBOR to SOFR. Each of these considerations reflects a specific aspect of Kuwait’s approach to financial regulation.

Single Obligor Limit

According to the CBK Instructions, a bank’s credit exposure to a single borrower cannot exceed 15% of the bank’s capital base. This rule is intended to mitigate concentration risk by ensuring that a bank’s exposure is spread across multiple borrowers. The definition of a “single borrower” extends to entities that are economically or legally connected, requiring a consolidated view of credit liability. While exceptions can be sought with preapproval by the CBK and if the obligor is a bank, the rule underscores the regulatory emphasis on risk diversification.

Dual Regulatory Burden

For entities under the supervision of the CBK, there is an additional layer of regulatory complexity. Such entities must navigate the requirements of both the CBK and the CMA, leading to what is often referred to as a dual regulatory burden. Despite efforts to streamline processes — highlighted by a Memorandum of Understanding between the CBK and CMA aimed at delineating oversight responsibilities — entities still face challenges in reconciling the requirements of both regulators.

Transition from LIBOR to SOFR

Kuwait has aligned with the global shift from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) for benchmarking interest rates. This transition, while not unique to Kuwait, is part of the country’s adherence to evolving international financial standards. For transactions that previously referenced LIBOR, the transition to SOFR necessitates the inclusion of fallback mechanisms to ensure continuity and stability in financial contracts.

Interest Rates are Capped by the CBK

Under the Commercial Code, contracting parties can agree on an interest rate, but it must not surpass the maximum rates set by the CBK, as determined by its Board of Directors and approved by the Minister of Finance. Should an agreed rate exceed these limits, it must be adjusted down to the declared rates at the contract’s inception, with any excess refunded. Additionally, any commission or benefit defined by the creditor, if it exceeds the interest rate cap in combination with the agreed interest, is considered hidden interest and is subject to reduction unless tied to a verifiable service or legitimate expense.

There are no additional notable points beyond those discussed elsewhere in this chapter.