Banking Law and Crisis Resolution in Islamic Financial Institutions in Kuwait

1. Introduction

Islamic banking in Kuwait operates within a dual regulatory framework:

1. General banking regulation, principally under Law No. 32 of 1968 concerning Currency, the Central Bank of Kuwait and the Organization of Banking Business, as amended; and
2. Special Islamic-banking provisions, introduced principally by Law No. 30 of 2003, which added a dedicated section for Islamic banks to the 1968 Central Bank Law. 

This creates an important distinction. An Islamic bank is not outside Kuwait's ordinary banking law merely because its transactions must comply with Shariah. Rather, it is a licensed bank subject to prudential supervision by the CBK, with additional rules governing Shariah-compliant financing, liquidity, investments and governance.

The crisis-resolution problem is therefore:

How can Kuwait preserve financial stability and protect depositors when an Islamic bank experiences liquidity or solvency problems, while ensuring that emergency measures and restructuring remain compatible with Shariah?

This is particularly significant because conventional lender-of-last-resort mechanisms based on interest-bearing loans cannot simply be transplanted into Islamic banking.

2. Principal Sources of Kuwaiti Banking Law

The principal legal sources can be organized as follows.

A. Law No. 32 of 1968

This is the foundational banking statute. It establishes the CBK's supervisory powers and regulates banking activities, licensing, liquidity and solvency, bank management and liquidation.

B. Law No. 30 of 2003

Law No. 30 of 2003 introduced a special section on Islamic banks into Chapter III of Law No. 32 of 1968. The CBK itself identifies this as the principal statutory basis for the Islamic-banking framework.

C. Law No. 3 of 2020

This strengthened the Shariah-supervision framework, including the establishment of the CBK's Higher Committee of Shariah Supervision. The Committee provides opinions on Shariah issues referred to the CBK and has an important role where disagreements arise concerning Shariah rulings.

D. Bankruptcy Law No. 71 of 2020

Kuwait's modern insolvency framework is principally based on Law No. 71 of 2020. It introduced mechanisms including:

• preventive settlement;
• restructuring;
• bankruptcy proceedings; and
• a more rehabilitation-oriented approach to financially distressed businesses.

Academic analysis describes the legislation as a major change from the older bankruptcy provisions contained in the Commercial Law.

However, bank resolution is not identical to ordinary corporate bankruptcy. Banks are systemically important, heavily regulated entities, and the CBK has special intervention powers.

3. Why Islamic Banks Require Special Crisis-Resolution Rules

A conventional bank's liquidity problem can often be addressed through an interest-bearing central-bank facility.

An Islamic bank faces a different problem.

For example, if an Islamic bank suddenly experiences substantial withdrawals, it needs emergency liquidity. But a conventional central-bank loan carrying interest may conflict with Shariah principles.

Kuwait therefore created specific statutory mechanisms.

Article 95 — Emergency finance

Article 95 permits the CBK to provide emergency finance to Islamic banks for a period not exceeding six months, using instruments and methods compliant with Islamic Shariah principles.

The period can be extended for another period not exceeding six months.

This is one of the most important provisions for crisis management.

In simplified form:

Liquidity crisis → CBK intervention → Shariah-compliant emergency finance → temporary stabilization

The CBK may also buy and sell securities and other instruments complying with Shariah principles with Islamic banks.

4. Shariah-Compliant Lender of Last Resort

The traditional lender-of-last-resort model presents three difficulties for Islamic banks:

1. Interest

A conventional emergency loan generally involves interest. Islamic finance prohibits riba.

2. Asset eligibility

The central bank needs acceptable assets or instruments against which liquidity can be provided.

3. Shariah compliance

The emergency transaction must be structured consistently with the bank's Shariah obligations.

Kuwait's Article 95 addresses this by expressly permitting emergency finance through Shariah-compliant instruments and methods.

Possible conceptual structures include transactions based on:

• commodity-based arrangements;
• sale and repurchase structures;
• wakalah;
• mudarabah;
• murabaha;
• Shariah-compliant securities; and
• other instruments approved under the applicable CBK framework.

The precise permissible mechanism depends on the applicable CBK rules and Shariah determinations.

5. Depositor Protection

A particularly important provision is Article 96.

The CBK's published text states that Islamic banks are obliged to fully repay sight deposits upon request, and that such deposits should not incur losses.

This has major implications for crisis resolution.

Islamic banks may have different categories of investment/deposit relationships, and not every Islamic investment account necessarily has the same legal characteristics as a conventional demand deposit.

Therefore, crisis resolution requires distinguishing between:

A. Sight deposits

These receive particularly strong protection under Article 96.

B. Investment accounts

Depending upon their legal structure, these may involve investment risk and different allocation of profits and losses.

C. Shareholders' capital

Shareholders are normally exposed to losses after the institution's liabilities have been taken into account.

This produces an important hierarchy:

Protected demand depositors → other creditors/investors according to their legal rights → shareholders

The exact priority depends upon the applicable legislation, contractual structure and resolution/insolvency procedure.

6. Early Intervention Before Insolvency

One of the most important aspects of Kuwaiti banking law is that the CBK does not necessarily have to wait until a bank becomes formally bankrupt.

Article 63 of the Central Bank Law permits deletion of a bank from the Register of Banks in circumstances including:

• bankruptcy;
• cessation of operations;
• danger to liquidity or solvency; or
• violations of the Central Bank Law. 

More importantly, Article 64 gives the CBK intervention powers before deletion.

Where a bank's liquidity or solvency is endangered, the CBK Board may:

1. prohibit particular operations;
2. impose limits on the bank's business;
3. appoint a temporary controller;
4. take over management of the bank for a specified period; and
5. subsequently determine whether the bank can continue independently or should be deleted and liquidated. 

This is essentially an early-intervention framework.

7. Crisis-Resolution Process

A simplified Kuwaiti crisis-resolution model can therefore be represented as:

Stage 1 — Monitoring

CBK continuously monitors:

• capital;
• liquidity;
• credit exposure;
• investments;
• financing concentration;
• governance;
• Shariah compliance; and
• other prudential indicators.

The CBK's Islamic-bank instructions include rules concerning liquidity, financing concentration, classification of financing/investment transactions and direct investment.

Stage 2 — Early warning

If the bank's liquidity or solvency deteriorates, the CBK can intervene.

Stage 3 — Restriction

The CBK may restrict particular activities or impose business limits.

Stage 4 — Temporary control

A temporary controller can be appointed.

Stage 5 — Emergency liquidity

If the problem is principally liquidity rather than fundamental insolvency, Article 95 allows Shariah-compliant emergency financing.

Stage 6 — Management by CBK

If necessary, the CBK may assume management temporarily.

Stage 7 — Rehabilitation/restructuring

If the bank is viable, restructuring or rehabilitation may be pursued.

Stage 8 — Exit

If rehabilitation fails and the bank is no longer viable, deletion from the register and liquidation can follow.

8. Stay of Legal Proceedings

Another important protection is the possibility of obtaining a judicial order preventing actions against the troubled bank.

Article 64 allows the CBK, where it considers this to be in the interests of depositors, to ask the competent court to issue an order:

• prohibiting measures against the bank; and
• staying lawsuits against it.

The order can remain effective for one year.

This is crucial during a banking crisis.

Without a stay, individual creditors could attempt to seize assets or enforce individual claims, potentially creating a run on the bank.

The stay therefore serves a collective purpose:

Preserve the bank's asset pool while the regulator determines whether rehabilitation or liquidation is appropriate.

9. Bankruptcy Law No. 71 of 2020

Kuwait subsequently adopted a modern bankruptcy regime through Law No. 71 of 2020.

The legislation emphasizes alternatives to immediate liquidation, including:

Preventive settlement

The financially distressed debtor attempts to reach an agreement with creditors before the situation becomes irreversible.

Restructuring

A restructuring plan can be developed to allow the debtor to continue operating while addressing its financial problems.

Bankruptcy

Where rehabilitation is impossible, formal bankruptcy proceedings may follow.

Academic commentary describes the 2020 law as adopting a more modern philosophy focused on reorganizing financially distressed enterprises, although it also identifies procedural complexity and restrictions.

Another 2024 study specifically concludes that a number of the preventive-settlement and bankruptcy provisions are compatible with principles found in Islamic jurisprudence, although not every provision corresponds identically to classical Islamic law.

10. Relationship Between Bankruptcy Law and Bank Resolution

This is an important examination point.

Ordinary corporate insolvency ≠ banking resolution.

A normal company can generally enter restructuring or bankruptcy without posing an immediate systemic threat.

A bank is different because its failure can cause:

• depositor panic;
• contagion to other banks;
• payment-system disruption;
• loss of confidence;
• fire sales of assets;
• interbank-market stress.

Consequently, the CBK's special intervention powers remain central.

The IMF noted that Kuwait historically applied general bankruptcy rules to banks while working toward a dedicated bank-resolution framework, and identified the need for stronger resolution arrangements.

Thus, the Kuwaiti framework has historically involved an interaction between:

CBK supervisory intervention + banking legislation + insolvency law

rather than simply treating an Islamic bank like an ordinary commercial company.

11. Shariah Governance

Crisis resolution cannot be considered purely from a conventional insolvency perspective.

An Islamic bank must also remain Shariah compliant.

Law No. 3 of 2020 strengthened the institutional structure by establishing the Higher Committee of Shariah Supervision at the CBK.

The Committee has an advisory/interpretive role regarding Shariah compliance of:

• transactions between the CBK and Islamic banks;
• CBK instructions applicable to Islamic banks; and
• other Shariah issues referred to it.

The 2020 CBK annual report states that the Higher Committee can also act as the final authority where members of an Islamic bank's Shariah supervisory board disagree concerning a Shariah ruling.

This is particularly important during crisis management.

12. Why Shariah Governance Matters in Resolution

Suppose an Islamic bank has a portfolio of murabaha transactions.

The resolution authority cannot simply treat every transaction as an ordinary interest-bearing loan.

It must examine:

• the underlying asset;
• ownership;
• transfer of title;
• payment obligations;
• security;
• guarantees;
• agency arrangements;
• profit element;
• default provisions; and
• Shariah compliance.

Similarly, if sukuk are involved, their legal treatment depends heavily upon their underlying structure.

Thus:

Islamic-bank resolution requires both legal restructuring and Shariah restructuring.

13. Court of Cassation and Islamic Finance

Kuwaiti judicial practice is particularly important because disputes involving Islamic financial institutions often reach the Court of Cassation.

The Kuwait International Law School has published specific research examining the role of Court of Cassation decisions in regulating investment and financing contracts in Islamic financial institutions.

This is important because Kuwaiti courts generally examine the legal substance of the relationship, not merely the label placed on a financial product.

14. Case Law: Investment Dar Bankruptcy

One of the most significant Kuwaiti insolvency cases relevant to financial institutions is the Investment Dar litigation.

Investment Dar became involved in extensive financial difficulties and disputes with creditors, including Kuwaiti banks.

The litigation ultimately reached the Court of Cassation, and in 2023 the Court upheld the bankruptcy position against Investment Dar. The reported creditors included Burgan Bank, Commercial Bank of Kuwait, Kuwait Industrial Bank, Kuwait International Bank and others.

Significance

The case demonstrates several important principles:

1. Financial distress can ultimately result in formal bankruptcy proceedings.
2. Bank creditors can participate in insolvency litigation against financially distressed counterparties.
3. The Court of Cassation plays a central role in determining the final legal position.
4. Restructuring and insolvency questions can continue for years where substantial financial interests are involved.

It is important to distinguish this case from an Islamic-bank failure itself: Investment Dar was not simply a failed Islamic bank, but the litigation is highly relevant to understanding Kuwait's treatment of major financial insolvency.

15. Case Law: Kuwait International Bank Litigation

Public disclosures by Kuwait International Bank provide examples of disputes involving Islamic-financing transactions.

In one disclosed matter, a customer was ordered at first instance to pay approximately KD 9.905 million, without profits, in connection with a banking dispute. The case was subsequently appealed.

The importance of such cases is not that every customer dispute constitutes a "crisis-resolution case." Rather, they demonstrate the judicial environment in which Islamic banks enforce financing obligations.

16. Case Law: Mortgage/Sukuk Security Issue

Kuwait International Bank also disclosed a Court of Cassation judgment involving the annulment of a mortgage contract connected with a group of foreign banks and financial institutions, where KIB acted as guaranty agent for sukuk holders. KIB clarified that its participation in the transaction was limited and that its own principal participation was not itself the subject of judicial dispute.

This is particularly interesting for Islamic-finance crisis resolution because it illustrates the importance of:

• security interests;
• mortgage enforcement;
• sukuk structures;
• agency relationships; and
• the legal enforceability of collateral.

When an Islamic financial institution enters distress, these issues become central to determining how quickly assets can be realized.

17. Case Law: Unlicensed Financial Activity

A more recent Court of Cassation development is Commercial Appeal No. 14 of 2022, decided on 23 September 2025.

The case concerned investment contracts concluded without the required regulatory authorization. The reported analysis of the judgment describes the Court as treating the relevant licensing requirements as part of economic public order, with unauthorized investment arrangements potentially being void.

Importance for Islamic financial institutions

The principle is significant:

Parties cannot necessarily contract around mandatory financial regulation.

Therefore, if an institution or individual conducts regulated financial activity without the required authorization, the private contract cannot automatically defeat the regulatory regime.

This principle is highly relevant to Islamic finance because Shariah compliance does not replace licensing requirements.

A transaction must satisfy both:

Shariah requirements + mandatory Kuwaiti regulatory requirements.

18. Case Law: Bank Guarantees and Underlying Debt

A 2025 Kuwaiti Court of Cassation decision concerning a bank guarantee/loan dispute is also instructive.

The reported decision emphasized that the court should examine the true underlying relationship, rather than treating supporting instruments in isolation. The court reportedly required repayments already made by the borrower to be taken into account in determining the outstanding indebtedness and rejected treating guarantee instruments as independent sources of debt in circumstances where the underlying relationship was a loan.

Relevance to Islamic banking

This reinforces a broader judicial principle:

The substance and economic/legal reality of the transaction matter.

This is particularly important in Islamic finance, where a financing product may be documented through several agreements.

For example, a murabaha arrangement may involve:

• master agreement;
• purchase order;
• agency agreement;
• sale contract;
• promissory instruments;
• security;
• guarantee.

A court may need to examine the entire transaction to determine the parties' actual rights and obligations.

19. Case Law: KCC Appeal No. 508/2016

Another reported Court of Cassation decision, Appeal No. 508/2016, concerned a banking dispute involving an increase in the applicable interest rate and the interaction between the bank's contractual rights and CBK requirements.

Although it concerned conventional rather than Islamic financing, its broader regulatory principle is relevant:

A bank's contractual rights operate within the mandatory regulatory framework established by the CBK.

This is highly relevant to Islamic banks because contractual freedom is similarly constrained by:

• the Central Bank Law;
• CBK instructions;
• consumer/banking regulations;
• mandatory public-order provisions; and
• applicable Shariah requirements.

20. Crisis Resolution of an Islamic Bank: Hypothetical Example

Consider an Islamic bank in Kuwait experiencing a severe liquidity crisis.

Facts

Suppose:

• deposit withdrawals increase dramatically;
• the bank has insufficient liquid assets;
• several murabaha customers default;
• sukuk investments have fallen in value;
• capital remains positive but liquidity is inadequate.

Step 1 — CBK supervision

The CBK identifies the deterioration through prudential supervision.

Step 2 — Restrictions

The CBK can restrict certain activities under its intervention powers.

Step 3 — Emergency liquidity

The bank can seek Shariah-compliant emergency finance under Article 95.

Step 4 — Depositor protection

Sight deposits receive the protection contemplated by Article 96.

Step 5 — Temporary controller

If necessary, the CBK may appoint a temporary controller.

Step 6 — Judicial stay

The CBK can seek a court order staying legal actions where this is necessary to protect depositors.

Step 7 — Rehabilitation

If the bank remains viable, restructuring may be attempted.

Step 8 — Resolution/liquidation

If the bank is no longer viable, deletion from the register and liquidation can ultimately follow.

This illustrates why early intervention is preferable to waiting for formal insolvency.

21. Difference Between Liquidity Crisis and Solvency Crisis

This distinction is fundamental.

Liquidity crisis

The bank has assets greater than liabilities but cannot obtain cash quickly enough.

Example:

Assets = KD 10 billion
Liabilities = KD 9 billion
But immediate cash = only KD 100 million.

The bank may be fundamentally viable.

Emergency liquidity assistance may solve the problem.

Solvency crisis

The bank's liabilities exceed the realizable value of its assets.

Example:

Assets = KD 8 billion
Liabilities = KD 10 billion.

Emergency liquidity alone cannot solve this.

The institution requires:

• restructuring;
• recapitalization;
• merger;
• transfer of assets/liabilities;
• other resolution measures; or
• liquidation.

This distinction explains why Article 95 emergency finance should not be confused with a permanent bailout.

22. Islamic Finance and Loss Allocation

One of the hardest legal issues is the treatment of investment accounts.

Islamic finance theoretically distinguishes between:

Mudarabah-type investment

The investor provides capital and the manager operates the investment.

Profit is shared according to an agreed ratio, while genuine investment loss is generally borne by the capital provider unless caused by negligence, misconduct or breach.

Murabaha financing

The bank purchases an asset and sells it to the customer at cost plus disclosed profit, normally with deferred payment.

Ijarah

The bank owns an asset and leases it to the customer.

Musharakah

The parties participate jointly in capital and share profits and losses according to the applicable rules.

These structures create different claims when the institution enters distress.

Consequently, resolution law cannot simply say:

"All customers are creditors of the same kind."

The legal characterization of each relationship matters.

23. The Role of Collateral

Collateral is particularly important during Islamic-bank resolution.

Common security arrangements may include:

• mortgages;
• pledges;
• guarantees;
• assignments;
• security over financial assets;
• corporate guarantees.

But enforceability depends on Kuwaiti law and the particular transaction.

The KIB mortgage/sukuk litigation mentioned above illustrates why collateral documentation can become a major issue in court.

For resolution purposes, the objective is to determine:

What assets can legally be realized, how quickly, and for whose benefit?

24. Shariah vs State Law

A common misconception is:

"If a transaction is Shariah compliant, the Shariah ruling determines the legal result."

That is not necessarily correct.

In Kuwait, the relationship is more accurately expressed as:

State law establishes the legally enforceable framework + Shariah determines compliance within Islamic banking.

For example:

A financing arrangement may be Shariah compliant but nevertheless unenforceable if it violates a mandatory statutory requirement.

Conversely, a legally valid contract may present a Shariah-compliance issue within the institution's internal governance structure.

The 2020 reforms reinforce the institutional role of the CBK's Higher Committee of Shariah Supervision.

25. Major Legal Issues in Islamic Bank Crisis Resolution

The most important issues can be summarized as follows:

26. Critical Evaluation

Kuwait's framework has several strengths.

Strength 1 — Special treatment of Islamic liquidity

Article 95 directly recognizes that Islamic banks cannot simply rely on conventional interest-bearing emergency finance.

Strength 2 — Strong CBK intervention powers

Article 64 allows intervention before complete failure.

Strength 3 — Depositor protection

Article 96 gives particularly strong protection to sight deposits.

Strength 4 — Shariah institutionalization

The Higher Committee of Shariah Supervision provides centralized Shariah oversight.

Weakness/Challenge — Bank-specific resolution

The historical development of Kuwait's framework shows that ordinary insolvency law and bank-specific resolution mechanisms have not always been perfectly integrated. The IMF specifically identified the need to strengthen the special bank-resolution regime.

Challenge — Complex Islamic contracts

Resolution becomes more complicated when the bank holds portfolios involving:

• murabaha;
• mudarabah;
• musharakah;
• ijarah;
• sukuk;
• wakalah; and
• other structured transactions.

The resolution authority must determine the legal and Shariah status of each asset.

27. Overall Legal Model

The Kuwaiti model can be represented as:

Islamic Bank

↓

CBK Prudential Supervision

↓

Early Warning

↓

Liquidity Problem?

→ Yes: Shariah-compliant emergency finance under Article 95

→ No / serious deterioration: supervisory intervention

↓

Article 64 measures

• business restrictions
• temporary controller
• CBK management
• possible judicial stay

↓

Is the bank viable?

YES

→ rehabilitation/restructuring

NO

→ deletion from banking register

→ liquidation/insolvency process

Throughout the process:

Depositor protection + Shariah compliance + financial stability + creditor rights

must be balanced.

28. Key Cases to Cite in an Academic Answer

For a dissertation, research paper or examination answer, I would use the cases/principles cautiously because publicly accessible English reporting of Kuwaiti judgments is limited.

1. Investment Dar bankruptcy litigation — Court of Cassation, 2023

Useful for:

• insolvency;
• creditor claims;
• bankruptcy;
• banking-sector exposure;
• judicial treatment of major financial distress.

The Court of Cassation ultimately upheld the bankruptcy position involving Investment Dar and major financial-sector creditors.

2. KCC Appeal No. 14/2022 — judgment of 23 September 2025

Useful for:

• licensing;
• mandatory banking/financial regulation;
• economic public order;
• invalidity of unauthorized investment arrangements. 

3. KCC Appeal No. 508/2016

Useful for:

• relationship between banking contracts and CBK regulation;
• mandatory regulatory requirements;
• limits on contractual banking rights. 

4. KIB mortgage/sukuk litigation

Useful for:

• Islamic financing;
• sukuk;
• mortgage/security;
• enforceability of collateral;
• judicial treatment of Islamic financial structures. 

5. 2025 Court of Cassation bank-guarantee/loan judgment

Useful for:

• substance over form;
• underlying debt;
• repayment;
• bank documentation;
• unjust enrichment and creditor calculations. 

29. Conclusion

Kuwait's legal framework for Islamic financial institutions is best understood as a hybrid regulatory and resolution system.

The foundation is Law No. 32 of 1968, supplemented by the special Islamic-bank provisions introduced by Law No. 30 of 2003. Islamic banks remain subject to ordinary banking supervision, but Kuwait has expressly accommodated their Shariah requirements, particularly through Article 95's Shariah-compliant emergency financing mechanism and Article 96's protection of sight deposits.

The CBK also possesses significant early-intervention powers under Article 64, including restrictions on banking operations, appointment of a temporary controller, temporary CBK management and the possibility of obtaining a judicial stay of proceedings.

The Bankruptcy Law No. 71 of 2020 adds modern preventive settlement and restructuring mechanisms, while the 2020 Shariah-supervision reforms provide a more centralized institutional mechanism for resolving Shariah questions.

The central legal challenge remains balancing four objectives:

financial stability + depositor protection + creditor rights + Shariah compliance.

For an Islamic bank in distress, the objective should therefore not simply be "liquidation." The preferred sequence is generally early intervention → liquidity support where appropriate → stabilization → restructuring/rehabilitation → orderly exit if rehabilitation fails.