Part I: Introduction, Regulatory Framework, Governance Reforms, Sukuk Regulation and Public Debt Law

Introduction

Islamic finance has evolved into a foundational pillar of Kuwait’s financial architecture, now representing nearly half of the country’s banking assets. As of 2025, the government of Kuwait and its regulatory bodies, primarily the Central Bank of Kuwait (CBK) and the Capital Markets Authority (CMA), have embarked upon a rigorous programme of reform and modernisation aimed at fortifying the legal and regulatory framework supporting Sharia-compliant finance. This article presents a comprehensive analysis of Kuwait’s Islamic finance sector, tracing key legal developments, market trends, and judicial interpretations that are shaping the landscape. It is tailored for legal practitioners, corporate clients, and institutional investors seeking to navigate Kuwait’s dynamic financial sector with confidence.

Legal and regulatory foundations

Article 1 of the Civil Code is especially important:

“In the absence of a provision in this Law, the judge shall rule according to the Islamic Shari’a, and in the absence thereof, according to custom, and in the absence thereof, according to the principles of natural law and rules of equity.”

This enables courts to apply Islamic principles as a supplementary source where no explicit codified rule applies.

Companies Law – Article 15

A cornerstone of Kuwait’s Islamic corporate finance regime, Article 15 of the Companies Law provides that any company may adopt Sharia principles in its operations, provided this is stated in its constitutional documents. Such companies are required to form a Sharia Supervisory Board composed of at least three qualified scholars.

Companies may operate in accordance with Sharia if explicitly stated in their memorandum and articles of association. Such companies must establish an independent Sharia Supervisory Board (SSB) of at least three members. The SSB must submit an annual report on Sharia compliance.

Companies operating under Islamic contracts are exempt from the following local laws’ provisions that hinder the application of Sharia principles:

• Article 508 of the Civil Law which qualifies repo transactions as loans;
• Article 992 of the Civil Law which nullifies any clause of agreement allowing a mortgagee to own the mortgaged assets upon foreclosure;
• Article 1041 of the Civil Code which imposes restrictions against and in favour of a third-party mortgagor, eg, foreclosures only with respect to assets mortgaged by the third party, and right to agree not to foreclose against the third-party mortgagor before full foreclosure on the debtor; and
• Article 237 of the Commercial Law which restricts any direct foreclosure without a court order and nullifies any clause of agreement allowing a mortgagee to own the mortgaged assets upon foreclosure.

This article anchors Islamic finance operations within the general corporate law framework and ensures legal recognition of Sharia-based financial products.

Central Bank of Kuwait law

The legal basis for Islamic banking in Kuwait was established by the 2003 amendment to Law No 32 of 1968, as amended, which formally recognised Islamic banks as institutions operating in accordance with the principles of Sharia. These banks are licensed and supervised by the CBK, which requires the establishment of internal Sharia Supervisory Boards and mandates annual Sharia compliance audits.

In 2016, the CBK issued the “Instructions on Shariah Supervisory Governance” (Circular No 2/IBS/369/2016), which laid down enhanced rules for internal Sharia governance, audit mechanisms, and external Sharia reviews. These instructions were heavily influenced by the standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB), both of which serve as reference frameworks in Kuwait.

Sharia governance reform: central oversight and legal certainty

In a landmark reform, the CBK established a centralised Higher Committee of Shariah Supervision, tasked with ensuring harmonisation and consistency in the application of Sharia principles across the banking sector. Reporting directly to the CBK Board of Directors, the Committee is vested with the following key functions.

• Reviewing the Sharia compliance of all CBK-issued regulations affecting Islamic banks.
• Issuing general Sharia guidelines for product structures.
• Approving the appointment of members to the SSBs of Islamic banks.
• Acting as an appellate authority in case of intra-board disagreement within Islamic institutions.
• Advising courts and arbitral tribunals on Sharia-related legal questions.

This model follows best practice as seen in Malaysia and the UAE and mitigates risks of inconsistent Sharia interpretations which might otherwise jeopardise the enforceability of Islamic finance contracts. For legal practitioners, this development has enhanced certainty in structuring, enforcing, and litigating Islamic financial agreements.

Sukuk law and capital market reforms

CMA jurisdiction and Shariah Control Board

Kuwait’s capital markets are governed by the Capital Markets Authority (CMA), created under Law No 7 of 2010 (as amended by Law No 22 of 2015). The CMA exercises oversight over all securities transactions, including Islamic instruments such as Sukuk. It operates a dedicated Shariah Control Board which reviews and approves Islamic financial products and ensures compliance with Sharia principles in the capital markets domain.

Sukuk regulatory framework

Historically, the development of Kuwait’s Sukuk market was constrained by the absence of clear legal provisions facilitating asset-backed or asset-based securities. However, regulatory momentum has shifted in recent years.

• In 2022, the CMA issued guidelines for green and sustainable Sukuk, aligning with ESG principles.
• The CBK released sustainability guidelines for Islamic banks, encouraging integration of environmental and social goals into Sharia-compliant products.
• Most notably, in 2025, a dedicated Sovereign Sukuk Law is under review by the Council of Ministers. This law is expected to establish a clear legal regime governing both corporate and Sovereign Sukuk issuances, including:
1. structuring requirements (eg, trust certificates, and SPVs);
2. investor protection mechanisms;
3. clarification of asset ownership and bankruptcy remoteness; and
4. listing and trading rules on Boursa Kuwait.

The enactment of the Sukuk Law will significantly enhance legal certainty for issuers and investors and position Kuwait as a more competitive player in regional Islamic capital markets.

Public Debt Law 60 of 2025 and Sovereign Sukuk

Following a multi-year hiatus in sovereign debt issuance, Kuwait enacted the Financing & Liquidity Law, authorising the government to issue up to KWD30 billion (USD97 billion) in public debt instruments, including Islamic Sukuk, over a 50-year horizon. This reform is instrumental in financing long-term infrastructure under the Vision 2035 development strategy. Kuwait already borrowed USD16.3 billion of debt of which 27% is in the form of Sukuk.

Key features of the Public Debt Law include the following.

• Debt ceiling: KWD30 billion.
• Debt maturity: up to 50 years.
• Debt-to-GDP cap: 60%, to ensure fiscal discipline.
• Instrument types: both conventional bonds and Islamic Sukuk are permitted.

Implementation is overseen by the Ministry of Finance, which has indicated its intention to develop a separate regulatory framework for Sovereign Sukuk. This is likely to involve:

• creation of state-owned SPVs;
• Sharia validation of sovereign instruments; and
• asset allocation rules and investor protections.

For Islamic finance stakeholders, this development is strategically significant. It creates a new supply of high-quality, Sharia-compliant sovereign instruments, enhances Islamic banks’ liquidity management, and supports the integration of Islamic finance into national fiscal policy.

Part II: Market Trends, Fintech Integration, Case Law, and Enforcement

Consolidation and growth in Kuwait’s Islamic banking sector: legal and regulatory considerations

Kuwait’s Islamic banking sector has experienced significant expansion in recent years, accounting for approximately 51% of total banking sector assets as of 2025. This growth is driven by rising consumer demand for Sharia-compliant financial products, strong profitability indicators, and a strategic wave of mergers and acquisitions.

In 2025, Warba Bank undertook a major strategic investment by acquiring a 32.75% stake in Gulf Bank for approximately USD1.6 billion. This acquisition elevated Warba Bank to the position of Kuwait’s third-largest bank and the second-largest Islamic bank after Kuwait Finance House (KFH).

One of the most prominent developments in this regard was the merger during 2024 between KFH and with Ahli United Bank, Kuwait, which reinforced KFH market position after the landmark cross-border merger with Bahrain’s Ahli United Bank (AUB) in 2022, establishing KFH as the world’s second-largest Islamic bank by assets.

Other Kuwaiti Islamic banks have also pursued expansionary strategies. Boubyan Bank, for example, acquired the Bank of London and The Middle East (BLME), a UK-based financial institution. This acquisition facilitated the launch of “Nomo” in 2021, a fully digital, Sharia-compliant bank based in the United Kingdom, broadening Boubyan’s international Islamic banking footprint.

This wave of consolidation carries important legal and regulatory implications.

• Sharia due diligence and compliance – mergers involving Islamic financial institutions necessitate rigorous due diligence focused on the structure, classification, and Sharia-compliance of assets and liabilities.
• Harmonisation of Sharia governance – integrating Sharia supervisory boards and aligning internal Sharia policies and practices across merging institutions is essential to ensure post-merger compliance.
• Regulatory supervision – the Central Bank of Kuwait (CBK) and the Capital Markets Authority (CMA) actively supervise such transactions, issuing circulars and guidance to promote transparency, ensure systemic stability, and safeguard depositor interests.

Legal practitioners advising on these transactions must adeptly navigate a multi-disciplinary regulatory framework encompassing banking and financial services law, corporate and commercial law, competition regulations, and Sharia governance. The complexity and sensitivity of these mergers demand close co-ordination with regulatory bodies and a nuanced understanding of both conventional and Islamic legal principles.

Digital transformation and fintech in Islamic finance

Kuwait has embraced financial technology as a vehicle for improving Islamic financial inclusion and efficiency. In 2022, the CBK issued digital banking guidelines, enabling both conventional and Islamic banks to offer digital services. Several digital Islamic banking arms have since emerged, including the following.

• Tam by KFH – Kuwait’s first fully Sharia-compliant digital bank.
• Nomo by Boubyan – a cross-border digital Islamic bank operating from London.

In parallel, the CBK has operated a Regulatory Sandbox since 2018, which allows fintech firms, including Islamic finance start-ups, to test innovations under relaxed regulatory conditions. Sharia-compliant offerings include:

• E-Wakala and digital savings accounts;
• AI-powered Islamic robo-advisers; and
• P2P Islamic lending platforms.

Legal and regulatory considerations

The rise of Islamic fintech presents a series of novel legal issues.

• Sharia compliance in algorithmic decision-making – institutions must ensure that automated credit assessments and product offerings align with Islamic principles.
• Data privacy and cybersecurity – governed by Kuwait’s Data Privacy Law (2021), digital platforms must ensure secure handling of client data.
• Digital contracting – enforceability of e-agreements and digital signatures must comply with Kuwaiti civil law, while also respecting Islamic norms concerning consent and disclosure.

The CBK has responded by issuing further regulatory guidance and continues to explore frameworks for AI, blockchain, and digital assets. Notably, crypto-assets remain restricted, but Central Bank Digital Currency (CBDC) feasibility studies are ongoing.

Judicial interpretation and case law in Islamic finance

Kuwaiti courts, while grounded in a civil law tradition, have shown increasing sophistication in handling Islamic finance disputes. Several judicial principles have crystallised in recent years.

Enforceability of Islamic contracts

Islamic contracts are generally upheld by the courts in Kuwait, provided that their form and substance conform to both Sharia principles and applicable civil and commercial laws. Nonetheless, legal complexities frequently arise in the context of Ijarah Muntahiya Biltamleek (lease-to-own contracts), particularly where courts have recharacterised such arrangements as instalment sale contracts. This judicial approach is often invoked to prevent automatic termination in instances where the purchaser (lessee) has defaulted on a single instalment payment. In such cases, the courts have invoked Articles 135 and 140 of the Law of Commerce to afford protection to the debtor, especially where the lessee has discharged the majority of the agreed rental obligations.

Furthermore, the judiciary has made it clear that it will not endorse artificial Murabaha arrangements. Courts scrutinise the underlying documentation with particular rigour, examining whether there is conclusive evidence of an actual transfer of title in respect of the purchased asset, and whether the Murabaha contract genuinely reflects a sale transaction rather than a disguised interest-bearing loan. The integrity of the transaction must be demonstrated through proper documentation of the asset purchase by the bank, the subsequent resale to the customer, and the existence of clear and enforceable terms regarding ownership and lease obligations, where applicable.

In one appellate decision concerning a disputed Murabaha contract, the court underscored the necessity of proving that the bank had, in fact, acquired the asset prior to its resale to the customer. Failure to adduce such evidence, the court held, may result in the recharacterisation of the transaction as a soft loan, in which case the imposition of profit – tantamount to interest – would be impermissible.

Constitutional Court ruling on interest

In a landmark historical case, Kuwait’s Constitutional Court upheld the validity of interest in commercial transactions, ruling that Article 2 of the Constitution, which declares Islamic Sharia a principal source of legislation, is directive rather than mandatory. Consequently:

• interest in civil loans is prohibited under Article 547 of the Civil Code; and
• interest in commercial loans remains permissible under the Law of Commerce Code (Articles 110 and 113).

This constitutional interpretation provides dual legitimacy to both conventional and Islamic finance frameworks and offers legal certainty for all financial actors.

Role of Sharia Supervisory Boards in disputes

Kuwaiti courts typically defer to the Sharia approvals granted by banks’ internal SSBs or by the CBK’s Higher Committee of Shariah Supervision. Disputes invoking non-compliance with Sharia standards may be referred for advisory opinions, but courts will not substitute their own views for qualified Sharia scholars.

This principle was reinforced in several cases involving Wakala and Mudaraba arrangements, where the courts declined to void contracts so long as the parties had adhered to pre-approved Sharia-compliant structures.

Enforcement mechanisms and contractual integrity

Islamic finance contracts in Kuwait are governed either by local law or by foreign law (in cross-border arrangements), subject to public policy considerations.

Key points of enforcement

• Murabaha contracts – courts enforce the full sale price, including markup, provided the sale is real and documented.
• Ijara leases – banks may reclaim leased assets upon default but must assume ownership-related obligations (eg, insurance and major maintenance).
• Mudaraba and Musharaka contracts – profits and losses are enforced as per agreed ratios. The managing party is liable only in cases of proven negligence.
• Late payment charges – these may be imposed only as donations to charity and cannot enrich the lender, in line with AAOIFI standards.
• Governing law and arbitration – Kuwaiti courts generally uphold foreign governing law clauses and international arbitral awards under the New York Convention (1958) on the Recognition and Enforcement of Foreign Arbitral Awards, provided they do not contravene public order.

Part III: Contract Structuring, Risk Management, ESG Integration, and Outlook

Structuring Islamic finance contracts in practice

Kuwaiti practitioners and institutions regularly structure a wide variety of Sharia-compliant instruments. Each comes with distinct legal challenges and compliance considerations.

Murabaha (cost-plus sale)

Widely used in retail and corporate finance, Murabaha requires the bank to first acquire the asset and then resell it to the customer at a markup. Legally, the bank must:

• prove it took ownership of the asset;
• avoid selling back to the supplier or using impermissible agents; and
• register the asset where legally required (eg, real estate or vehicles).

Failure to execute a real sale risks reclassification as a usurious loan. Most banks include customer purchase undertakings and agency agreements, carefully structured to comply with Sharia rules and supported by standardised documentation.

Ijara (leasing)

Used in asset and project finance, Ijara contracts must allocate ownership risks to the bank and lease obligations to the customer. Key considerations include the following.

• Maintenance liabilities must remain with the bank.
• Rent is not to include profit from delays or default.
• End-of-term transfer must not be pre-agreed at a nominal price (unless structured as a separate undertaking).

The lease must be registered to enable enforcement. The court recognises Ijara as a lease (not a disguised sale) if correctly documented.

Mudaraba and Musharaka (profit-sharing and joint venture)

These equity-based modes pose greater legal complexity. The bank (as investor) shares in profits but must absorb losses unless caused by misconduct. The agreements should:

• clearly define roles, capital contributions, and profit/loss allocations;
• include dispute resolution clauses and valuation mechanisms; and
• avoid guarantees that would nullify the risk-sharing essence.

Where Mudaraba is used in investment funds, regulators require clear disclosures and adherence to governance principles.

Sukuk (Islamic bonds)

Structuring Sukuk requires assembling multiple contracts (sale, lease, agency, and trust declarations). Legal challenges include:

• establishing valid asset ownership and true sale to the SPV;
• navigating tax and transfer formalities; and
• ensuring enforceability of profit distribution and redemption terms.

The forthcoming Sovereign Sukuk Law is expected to resolve these uncertainties and facilitate Boursa Kuwait listings.

Tawarruq (commodity Murabaha)

Commonly used for liquidity generation, Tawarruq is recognised if properly executed via independent commodity trades. Regulatory scrutiny ensures:

• no circular transactions;
• valid ownership transfer of commodities; and
• use of approved exchanges (eg, London Metal Exchange).

While some Sharia boards disapprove of Tawarruq, it remains lawful if conducted transparently.

Risk management and legal safeguards

Islamic finance entails unique risks – asset performance, counterparty risk in non-recourse structures, and reputational risk if Sharia compliance fails.

Legal documentation must therefore:

• anticipate early termination events and set recovery mechanisms aligned with Sharia rules;
• avoid conventional interest rate penalties, using alternative remedies like liquidated damages or charitable donations;
• incorporate fall-back clauses where benchmarks (eg, LIBOR) are replaced, ensuring continued enforceability of profit rates; and
• define default and acceleration provisions within the bounds of permissibility (eg, Murabaha acceleration for due deferred price, but not added profit).

Legal teams also ensure contracts comply with general Kuwaiti consumer and commercial law – especially caps on charges, disclosure requirements, and contract formalities.

ESG, Maqasid Al-Shariah, and sustainable finance

Islamic finance’s alignment with ethical investment has made it a natural partner to ESG principles. Kuwait has embraced this synergy.

• Green and ESG-linked Sukuk are now permitted under CMA guidelines.
• Kuwaiti Islamic banks (eg, KFH, Warba, and KIB) are publishing sustainability reports and investing in renewable energy projects.
• CBK ESG guidance (2022) encourages Sharia-compliant banks to support environmentally and socially responsible finance.

Future regulations may integrate ESG performance into capital treatment or disclosures. From a legal perspective, ESG-linked Sukuk require:

• precise use-of-proceeds clauses;
• impact reporting obligations; and
• Sharia and ESG screening mechanisms.

The broader adoption of Maqasid Al-Shariah, the objectives of Islamic law (such as public welfare and equity), has further embedded social responsibility into product design and judicial reasoning.

Future outlook and legal implications

Strategic legislative initiatives

The pending Sovereign Sukuk Law and potential Islamic Banking Law amendments are expected to catalyse product innovation, market liquidity, and foreign investment. The Ministry of Finance is also preparing for Sovereign Sukuk issuance, which will provide a pricing benchmark for the domestic market.

Centralised Sharia supervision

The Higher Committee’s anticipated standardisation of contracts and issuance of Fatwas will reduce ambiguity and create a semi-formal body of Sharia jurisprudence in finance. Future reforms may:

• introduce formal recognition of these Fatwas in court; or
• provide for binding arbitration mechanisms under Islamic law.

Dispute resolution and specialised forums

There is increasing momentum towards:

• specialised judicial circuits for Islamic finance disputes;
• enhanced arbitration capacity, with AAOIFI-aligned rules and Sharia expertise; and
• possible codification of select AAOIFI standards to anchor judicial reasoning.

These developments will reinforce legal certainty and reduce forum-shopping or protracted litigation.

Digital Islamic banking and cross-border regulation

Kuwait’s Regulatory Sandbox and CBK’s digital licensing regime may eventually enable fully independent Islamic neobanks, raising questions of cross-border compliance, fintech licensing, and data regulation. These innovations will require:

• harmonised GCC digital finance regulations;
• bilateral memoranda of understanding on consumer protection; and
• greater reliance on regtech tools for compliance assurance.

Conclusion

Kuwait’s Islamic finance sector in 2025 is marked by a judicious blend of tradition and modernity. The legal infrastructure, anchored in civil law, augmented by specific statutes, and shaped by regulatory innovation, has matured to offer both flexibility and fidelity to Islamic jurisprudence. The anticipated enactment of the Sovereign Sukuk Law, continued integration of ESG standards, and the rise of Islamic digital finance all point to a vibrant future.

For legal professionals and corporate clients, Kuwait offers a compelling jurisdiction: one that respects contractual autonomy, provides enforceability for Sharia-compliant transactions, and supports innovation through prudent regulatory stewardship. Vigilant contract drafting, Sharia alignment, and awareness of forthcoming reforms will be essential to success in this evolving landscape.