CBK Bars State Property as Collateral for Bank Loans

The Central Bank of Kuwait (CBK) is implementing a new policy within its proactive and precautionary framework, which the banking sector also adopts, concerning real estate pledges and guarantees classified as state property. These will no longer be accepted or categorized as collateral for banking facilities or loans. As part of ongoing reviews primarily aimed at minimizing risks, the CBK has instructed local banks, investment companies, and finance firms not to rely on structures built on state property as guarantees for credit facilities or client financing operations. Furthermore, these assets should not be included in the calculated guarantees for fulfilling relevant regulatory requirements when preparing and submitting periodic reports for future periods.

The Central Bank clarified that these directives are intended to rationalize and regulate credit and financing policies. They also highlight the importance of considering the nature of guarantees provided by beneficiary entities to banks to ensure their ability to reduce credit risks and their enforceability and liquidity when needed. The CBK stressed the importance of conducting a comprehensive evaluation of existing and granted credit facilities against such guarantees, if any, within the framework of prudent practice. This includes assessing the need for additional acceptable guarantees within a sufficient period, as stipulated by instructions regarding the rationalization and regulation of credit and financing policies.

Banking sources confirmed that banks already have prior precautions regarding this issue. They emphasized that facilities are not granted solely against vacant plots; instead, the focus is on the operational nature and cash flows of the facilities built on these plots, such as productive factories. There is a clear distinction between the value of the facility itself and the land as state property. Sources added that in other cases, some companies had included these real estate assets within their general assets, thereby consolidating them into certain company balance sheets. Such cases will now require a review of the value of guarantees after excluding the value of real estate assets identified as state property.

The sources further explained that state property has always been known to be dealt with as a right of usufruct, meaning it cannot be accepted individually or as a sole or primary asset in the equation of pledges and guarantees. They noted that the banks' prior caution and precise technical understanding of this matter make these directives mandatory, solidifying them as fixed principles within regulatory guidelines. It is widely known that state property does not constitute an absolute or inherent right for beneficiary entities; rather, it is a contractual relationship and a usufruct right with a specified term, surrounded by conditions and controls, which is subject to termination either by contract expiry or in case of any violation of the contract terms.