The Central Bank of Kuwait (CBK) introduced new guidelines in February 2022 for establishing digital banks. These regulations reflect Kuwait’s efforts to support banking innovation for future economic development and financial stability. The new guidelines are expected to help the country’s banking sector keep pace with developments in global financial services.
The guidelines were issued after the CBK carried out a study of regulatory approaches to digital banks that included 40 digital bank business plans under 25 central bank regulatory frameworks. Kuwait is not alone in taking this step, with banking digitalisation also increasing in the UAE and Saudi Arabia.
The capital required to establish a digital bank would be around KD75m ($246.8m), the same amount required for a traditional bank, Waleed Al Awadhi, executive director of the supervision sector at the CBK, told local media. Fully digital banks have a number of advantages over traditional banks, including reduced costs as well as being free from the challenges associated with the digitalisation of legacy institutions.
Framework & Timeline
The initial three sections of the regulations define digital banks, their corporate structure and the activities they are permitted to carry out. The fourth section highlights the stages and procedures for establishing digital banks, beginning with submitting an application by June 30, 2022.
Applications required a five-year business plan with corresponding risks, as well as the added value the bank would provide and its target market. The application also included plans for developing specialised local talent and capabilities, and details about how the digital bank would contribute to the development of the economy. Lastly, applications required a general framework for risk management, identifying the primary risks in the business model, the mechanisms to mitigate them and an exit strategy.
The CBK assessed the applications according to a matrix of quantitative and qualitative criteria based on relevant laws. The evaluation period for applications is set to conclude at the end of 2022. Once the procedures for establishing a digital bank are completed, the licences have been issued and the bank is ready to begin operations, it will be registered by the CBK, subject to approval by the Minister of Finance and the CBK board, after which the bank may begin its activities.
Prospects and Implications
Two digital bank licences are expected to be granted at the end of 2022. This is in addition to seven listed companies already in the country. Three publicly known alliances were formed to bid for the licences, including one made up of Boubyan Bank, telecoms establishment Zain Kuwait and undeclared investors; another comprising telecoms firm Ooredoo Kuwait, Warba Bank, the Kuwait Investment Authority sovereign wealth fund, and Islamic finance company Al Manar Financing and Leasing; and a third composed of asset-management organisation Kuwait & Middle East Financial Investment along with undeclared investors.
The guidelines include two stipulations that have long-term implications for Kuwait’s economy and the financial sector, namely the requirement that digital banks contribute to capacity building and the need for digital banks to focus on cybersecurity risks. The expansion of financial technologies in the banking sector and the speed of technical innovation necessitate the development of new skills for professionals working in the industry. By including capacity building within the new digital bank guidelines, the CBK seeks to ensure that the talent pool expands to meet growing demands.
The CBK introduced a cybersecurity framework for the sector in February 2020 in response to the prevalence of digital payments and reliance on third-party technologies and applications, which increase the risks of hacking and data breaches. Ensuring that banks are in accordance with global cybersecurity standards reduces the potential loss of assets and facilitates security relationships between domestic organisations.
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