Updates in the Fintech Sector in Kuwait in 2023
Financial Services Focus
2023 was an impactful year for the ever-evolving fintech landscape in Kuwait. The Central Bank of Kuwait (CBK) in May 2023 issued new instructions for regulating the electronic payment of funds in the country (“2023 CBK Instructions”).
Law Update: Issue 365 - Financial Services Focus
Omar HandoushPartner, Banking & Finance
Amna KhanAssociate,Banking & Finance
2023 was an impactful year for the ever-evolving fintech landscape in Kuwait. The Central Bank of Kuwait (CBK) in May 2023 issued new instructions for regulating the electronic payment of funds in the country (“2023 CBK Instructions”), replacing the 2018 instructions for the regulations of electronic funds. The new CBK Instructions introduce several changes and updates to the regulatory framework for electronic payment service providers, aimed at fostering a more innovative and inclusive financial ecosystem. On the other hand, the Kuwait Capital Markets Authority issued in July 2023 a circular prohibiting the use of all virtual assets as a payment tool/currency or recognizing them as a decentralized currency in the State of Kuwait.
This article shall discuss the changes these two new developments bring to the financial sector in Kuwait and what they indicate about Kuwait’s outlook towards the rapidly growing fintech landscape of the GCC region.
The new instructions introduce some significant changes to the electronic payments regime in Kuwait. Firstly, under the 2023 CBK Instructions, CBK establishes various types of licensable activities which are further classified into different categories such as e-payment, e-money, e-payment service operations and others. Licensing requirements and operational restrictions depend upon the size of the service provider and the nature of activities it seeks to undertake. The 2018 instructions did not provide such clear and distinct definitions for these categories of service providers, making it difficult to determine their roles and responsibilities.
The new instructions also set more proportional minimum capital requirements pertaining to service providers, based on the nature and size of their activity. Previously, electronic payment providers had to be financial institutions that took the form of a shareholding company with a paid-up capital of not less than one million Kuwaiti dinars and had been listed in the CBK register to perform operations of electronic payment. The 2023 CBK Instructions delineate different restrictions and requirements for each kind of licensable activity; for example, instead of a blanket requirement, the new regulations set the minimum capital for small e-payment service providers at 50,000 Kuwaiti Dinars, and for large e-payment service providers, at 250,000 Kuwaiti Dinars. Concurrently, there are different requirements and restrictions for e-money service providers and e-payment service operators. The 2023 CBK Instructions therefore effectively allow the CBK to adjust the minimum capital requirements and restrictions based on the size and risk assessment of the service provider, rather than imposing a fixed amount for all service providers.
Additionally, the 2023 CBK Instructions also include the provision of “Buy Now Pay Later” (BNPL) as in-scope activity services within its supervisory and regulatory framework. This now allows business based in Kuwait to offer products on Buy Now Pay Later terms to Kuwaiti consumers. Several countries in the GCC have also recently adopted regulations to govern BNPL services, indicating that this is a regional trend. This is an evolving market which is becoming popular in countries like the UAE and India, attracting the tech-savvy younger generations. Given Kuwait’s highly educated and technology driven population, similar popularity for technology based products is expected.
While the use of virtual assets was not previously encouraged, the Kuwaiti authorities did not initially prohibit their use. However, since July 2023, the Kuwait Capital Markets Authority has, in Circular No. (10) of 2023 (Circular to All Financial Institutions and Specified Non-Financial Businesses and Professions Regarding the Procedures Required for Transactions Associated to Virtual Assets) placed an absolute prohibition on using virtual assets as a payment tool/currency or recognizing them as a decentralized currency in the State of Kuwait. Furthermore, Circular No. (10) of 2023 also prohibits dealing with virtual assets as an investment medium, thus refraining from providing this type of service to any clients and places an absolute ban on all activities related to mining virtual assets/currencies.
It should be noted however that securities regulated by the Central Bank of Kuwait and other securities and financial instruments regulated by the Kuwait Capital Markets Authority are exempted from this prohibition.
The new developments indicate the experimental but cautious approach that Kuwait has tended to take regarding the fintech industry. The 2023 CBK Instructions create a more transparent and standardized regulatory environment for service providers and their customers. These instructions will foster greater financial inclusion and consumer protection, as they enable more people to access and use electronic payment and e-money services, and facilitate provision of licenses to small and medium enterprises as well, which were previously only offered licenses by way of acting as an agent of larger companies. This means that smaller and independently owned enterprises, such as start-ups, have better opportunities to obtain licenses under the 2023 CBK Instructions, which paves the way for a more inclusive e-payment and e-money sector and encourages more innovation and competition.
However, while Kuwait has been welcoming to innovative schemes in the realm of electronic payment, its conservative approach with virtual assets reflects that it will experiment with changes in the fintech industry keeping in mind adherence to Financial Action Task Force (FATF) restrictions. In the circular prohibiting use of virtual assets as a payment tool, the Kuwait Capital Markets Authority adopted the definition used by the FATF, namely “any digital representation of value that can be digitally traded, transferred or used for payment or investment purposes”, indicating that the ban on virtual assets is rooted in broader concerns about financial security and integrity.
These underlying themes are also found in the 2023 CBK instructions, which, while enhancing the efficiency, security, and innovation of the sector, also take care to protect the interests of the customers and the stability of the financial system. This can be seen in the way the instructions set out the obligations and responsibilities of the service providers in terms of performing the activity, customer protection, anti-money laundering and countering the financing of terrorism (AML/CFT), cybersecurity and business continuity, risk management, governance and reporting.
For further information,please contact Omar Hanodush and Amna Khan.
Published in February 2024
