KUWAIT: An Introduction to Corporate & Finance

Kuwait’s economy is largely driven by and dependent on its significant oil reserves. In order to mitigate the risk of falling oil prices, the Kuwait Vision 2035 (“New Kuwait”) sets the country on a vigorous road to diversify its economy, reduce its dependence on hydrocarbons, encourage job creation and private sector investment, and attract foreign investment.

The Kuwaiti government has recently taken steps to encourage economic growth and development, including modernising the financial system and increasing investment in technology and innovation. The country has seen a rise in private sector investment following the pandemic, with a number of international companies establishing operations in Kuwait. As a result, the corporate landscape in Kuwait is evolving and adapting to new trends.

Investment in Technology and Digitalisation 

One of the most notable trends in the Kuwaiti corporate and finance sectors is the increasing importance of technology and digitalisation. Companies are investing in digital solutions to streamline their operations, improve efficiency and stay competitive in a rapidly changing business environment.

From cloud computing and artificial intelligence to big data and the IoT, technology is transforming the way businesses operate in Kuwait. This is in part due to the government’s commitment to digital transformation and its efforts to support the private sector in making the shift to digital processes.

Kuwait’s government became a member of the Digital Cooperation Organization established by the Kingdom of Saudi Arabia in November 2020 during the Kingdom’s presidency of the G20. The Saudi initiative aims to expedite digital economy growth and the adoption of digital transformation around the world.

Most Gulf Cooperation Council (GCC) countries have made investing in digital technologies a top priority in order to facilitate online access to government services and foster efficiency in the government sectors. At the beginning of 2023, Kuwait followed their lead by signing a strategic partnership agreement with Google Cloud to support digital transformation in government and state-owned entities. Kuwait’s digital transformation strategy is aimed at creating a digital economy and improving the country’s business environment.

Cloud computing is becoming increasingly popular among businesses in Kuwait. This led the Communications and Information Technology Regulatory Authority (CITRA) to publish Resolution No 112 of 2021 regarding its Cloud Computing Regulatory Framework, followed by several related regulations including Cloud Service Providers’ Controls and Obligations, Cloud-First Policy, Data Classification Policy, Data Privacy Protection Regulation, Subscribers’ Guide to Cloud Services and Cloud Migration Guide. On 1 July 2022, CITRA issued a new Data Privacy Protection Regulation.

Several Kuwaiti banks are now using cloud computing services. As such, on 31 January 2022, the Central Bank of Kuwait (CBK) published guidelines for the licensing framework in respect of digital banks in Kuwait, which allow for the licensing of standalone digital banks.

Another trend in corporate digitalisation is the adoption of digital marketing tools and e-commerce. Businesses are using digital marketing tools and electronic applications to reach more potential customers and generate leads. Businesses are also taking advantage of social media platforms to promote their products and services and engage with customers.

 The Ministry of Interior issued Resolution No 724 of 2020 regarding Electronic Applications, which requires companies and establishments conducting commercial activities or mediating transport activity through electronic applications to acquire – as applicable – licences from CITRA, the General Department of Traffic, and the Ministry of Commerce and Industry, as well as approval from the Criminal Investigation Bureau. On 1 February 2022, the CBK issued an updated draft of e-payment instructions for public consultation. This draft contained improvements to the instructions issued in 2018 pursuant to Law No (20) of 2014, which gave the CBK regulatory and supervisory authority on e-payments.

Technology and digitisation are also being increasingly employed in the oil and gas sector. The Kuwait Integrated Digital Field (KwIDF) is a large-scale project aimed at the digitalisation of oil fields. It uses advanced technology to remotely monitor and control oil fields belonging to the Kuwait Oil Company, which is the state-owned company responsible for oil production.

Finally, the Kuwait Direct Investment Promotion Authority (KDIPA) adopted an amended Mechanism for Evaluating Investment Licensing and Granting Incentives Applications. The KDIPA is a governmental agency that provides tax, customs and other incentives to foreign investors and can license fully foreign-owned businesses operating in Kuwait in certain sectors and activities. The points-scoring mechanism is based on five criteria with equal weight, including the transfer and settlement of technology (both innovative tangible technology and innovative intangible technology) – in light of the important focus on investment in technology in both the private and public sector in Kuwait.

Sustainability   

Another trend that is shaping the corporate and finance landscape in Kuwait is sustainability. Sustainability is an integral part of the New Kuwait 2035 Vision. The corporate sustainability trends in Kuwait were in their infancy until recently but are now developing rapidly. Companies can no longer delay embarking on the ESG journey. Even though ESG rules are not yet mandatory in Kuwait, they are likely to become so in the not-too-distant future.

In December 2017, Boursa Kuwait launched its ESG Reporting Guide (the “Boursa Guide”). In so doing, it became the 20th stock exchange to issue voluntary guidance on sustainability reporting to its market since the launch of the United Nations-led Sustainable Stock Exchanges ESG reporting campaign. The ESG disclosures under the Boursa Guide are voluntary; however, they are widely recognised as authoritative guidance for listed and regulated entities. It would not be surprising if Boursa Kuwait moves towards making these rules mandatory in response to the globally rising importance of ESG monitoring. Listed companies will have to include ESG compliance in their disclosures, with the same importance and transparency as their financial disclosures.

At the beginning of 2022, the Capital Markets Authority (CMA) developed an integrated regulatory framework for sustainable debt instruments (sukuk and bonds) and assigned green financing tools to finance or refinance green projects that are environmentally friendly. The newly introduced “green and social” regulation provides for standards that are on a par with international sustainability standards. Unlike the voluntary sustainability disclosures under the Boursa Guide, the CMA regulation provides for compulsory disclosures by the issuer of green, social or sustainable bonds or sukuk to the bondholders’ and sukukholders’ associations. The CMA also announced in its Eleventh Annual Report for 2021–22 that sustainable financing represents one of the main pillars of CMA’s targeted sustainability and that, as a long-term direction, it intends to issue sustainability funds.

Sustainable development was added to the evaluation criteria adopted by KDIPA to license foreign-owned businesses in Kuwait. As such, KDIPA now assesses the applicant’s contribution to sustainable development goals and corporate social responsibility. KDIPA further revealed in its Annual Report 2021–22 that it intends to integrate sustainability in its promotional, regulatory, developmental and advocacy functions, as well as assessing the economic, social, and environmental impact attained. This will mean reviewing all the necessary requirements and adopting optimal international practices when preparing sustainability reports.

Alternative Corporate Financing  

Kuwait has seen a steady increase in corporate financing, driven by the country’s strong financial sector and supportive government policies that have provided a stable environment for corporate financing activities. Nevertheless, the corporate financing landscape in Kuwait has recently been characterised by an increasing focus on alternative corporate financing as a way for corporations to raise capital without relying on traditional sources of funding such as bank loans and government programmes. This is even more likely to be the case after 26 January 2023, when the CBK raised its discount rate from 3.5% to 4.0% in response to recent developments in local and international economic conditions, global inflation, and changes to the interest rates on other major currencies.

In the post-pandemic world, many shareholding companies and banks in Kuwait are issuing – or currently looking to issue – convertible bonds and sukuk. In 2022, Boursa Kuwait witnessed the IPO of Ali AlGhanim and Sons Automotive Company. This was one of the largest private sector IPOs in Kuwait and came after numerous IPO-dry years. It is expected that convertible bonds and sukuk issuances and IPOs will continue to gain traction in 2023 and 2024 for large companies looking to raise funds.

As regards SMEs, another emerging trend that is likely to gain popularity is crowdfunding. At the beginning of 2023, the CMA issued Resolution No 10 of 2023 establishing a regulatory framework for fintech, which regulates equity crowdfunding. Only SMEs are eligible to access capital through crowdfunding in order to start their business and this excludes – inter alia – public companies, companies with a capital exceeding KWD500,000 (approximately USD1.65 million), and single-person companies.

Conclusion  

Kuwait is embarking on a sustainability journey in line with the global pace trend. It is yet to be seen if the scope of the sustainability regulations in Kuwait will soon be widened and made entirely mandatory. Corporate and government digitalisation is evolving rapidly. The regulations are catering for the rising need for alternative financing among SMEs. By taking advantage of these trends, Kuwait is on the way to creating a more efficient, sustainable, financially secure and inclusive economy.