Banking Law and Perpetual Capital Instruments in Kuwait

1. Introduction

Perpetual capital instruments are securities with no fixed maturity date, commonly issued by banks to strengthen regulatory capital. In Kuwait, they are especially relevant to Basel III Additional Tier 1 (AT1) capital.

A Kuwaiti bank may issue a perpetual sukuk or similar instrument that economically resembles a bond because investors receive periodic distributions, but legally and prudentially it is designed to absorb losses and remain outstanding indefinitely unless the issuer exercises a permitted call.

The principal framework includes:

• Law No. 32 of 1968 concerning Currency, the Central Bank of Kuwait and the Organisation of Banking Business, as amended;
• Central Bank of Kuwait (CBK) Basel III capital-adequacy requirements;
• Law No. 7 of 2010 regarding the Establishment of the Capital Markets Authority and Regulation of Securities Activity, as amended;
• CMA regulations and offering/listing requirements;
• contractual terms of the particular capital instrument;
• Islamic-finance principles where the instrument is a sukuk; and
• insolvency and bank-resolution principles.

The fundamental regulatory idea is:

A perpetual instrument qualifies as regulatory capital because it can absorb losses and is structurally subordinated—not simply because its documentation calls it “perpetual.”

2. Meaning of “Perpetual”

An ordinary bond normally has a maturity date.

For example:

Issue: KWD 100 million
Maturity: 10 years
Coupon: 5%

At maturity, principal normally becomes repayable according to the terms.

A perpetual instrument instead may provide:

Issue: KWD 100 million
Maturity: None
Periodic distribution: subject to contractual/regulatory conditions.

Therefore, investors cannot ordinarily demand repayment merely because they have held the security for many years.

3. Why Kuwaiti Banks Issue Perpetual Instruments

Banks need capital capable of absorbing unexpected losses.

Basel III divides regulatory capital broadly into:

Common Equity Tier 1 (CET1)
↓
Additional Tier 1 (AT1)
↓
Tier 2

Perpetual instruments are particularly associated with AT1 capital.

They allow banks to obtain capital from investors without issuing ordinary shares, provided the instruments satisfy the applicable regulatory criteria.

4. Additional Tier 1 Capital

AT1 occupies a position between ordinary equity and conventional senior debt.

A simplified hierarchy is:

CET1 ordinary equity

↓

AT1 perpetual capital

↓

Tier 2 subordinated instruments

↓

Senior unsecured liabilities

↓

Certain protected/preferred liabilities

The exact legal priority depends on the instrument and applicable law.

AT1 investors accept greater risk than ordinary senior creditors because their investment is intended to absorb losses when the bank experiences severe financial stress.

5. Core Characteristics

A qualifying perpetual AT1 instrument typically has several important features.

No maturity

The instrument is perpetual.

Subordination

Claims rank below senior creditors.

Distribution discretion

Periodic payments can generally be cancelled under specified contractual or regulatory circumstances.

No ordinary investor redemption right

Investors generally cannot require repayment on a fixed date.

Loss absorption

The instrument must be capable of absorbing losses in accordance with applicable capital rules and its contractual terms.

Regulatory control over calls

The bank generally cannot simply repay the instrument whenever it chooses if doing so would undermine its regulatory capital.

6. Call Options

“Perpetual” does not mean that the instrument can never be redeemed.

Many AT1 securities contain an issuer call after a specified period—for example, after five years.

Example:

Issue date: 2026
First call: 2031
Legal maturity: None

The bank may have an option to call the security in 2031, subject to its contractual terms and applicable regulatory requirements.

But:

Call date ≠ maturity date.

Investors should not treat the first call date as a guaranteed repayment date.

7. CBK Approval

Because redemption removes regulatory capital from the bank, the CBK's capital rules are highly relevant to calls and redemptions.

A bank generally needs to satisfy regulatory conditions before an AT1 instrument can be redeemed or repurchased.

The supervisor will be concerned with whether the bank remains appropriately capitalized after redemption.

This prevents banks from issuing nominally perpetual capital that functions economically like short-term debt.

8. No Incentive to Redeem

Basel capital principles seek to prevent contractual arrangements that effectively force banks to redeem instruments.

If investors are economically certain that the bank must redeem at year five, the security does not provide the same permanence as genuine regulatory capital.

Terms creating excessive redemption incentives can therefore affect capital eligibility.

9. Distribution Cancellation

One of the most important differences between AT1 and ordinary senior debt concerns periodic payments.

With conventional senior debt:

failure to pay interest may constitute default.

With qualifying AT1:

contractual distributions can generally be cancellable under the governing terms and regulatory framework.

This feature allows the bank to conserve capital during financial stress.

The exact consequences depend upon the issue documentation.

10. Non-Cumulative Distributions

AT1 distributions are commonly non-cumulative.

Suppose a bank would otherwise make a KWD 5 million distribution.

The distribution is validly cancelled.

With a non-cumulative structure, the investor generally cannot simply demand that KWD 5 million as accumulated arrears at a later date.

This materially distinguishes AT1 from ordinary debt.

11. Loss Absorption

The defining economic feature of AT1 is its capacity to absorb losses.

Depending on the instrument and regulatory framework, loss absorption can potentially involve mechanisms such as:

• principal write-down;
• conversion;
• cancellation;
• other contractual loss-absorption provisions.

The exact mechanism must be established from the terms of the particular instrument and applicable CBK rules.

Investors therefore face materially greater downside risk than depositors or ordinary senior creditors.

12. Capital Trigger

Some regulatory capital instruments contain a trigger associated with the issuer's regulatory capital position.

Conceptually:

Bank capital deteriorates

↓

Regulatory trigger reached

↓

AT1 loss-absorption mechanism activates

↓

Instrument absorbs losses

The objective is to strengthen the bank's ability to survive severe financial stress.

13. Perpetual Sukuk

Kuwaiti banks frequently operate under Islamic banking models, making perpetual sukuk particularly important.

A sukuk cannot simply be treated as an interest-bearing conventional bond under Islamic-finance principles.

Structures may use arrangements such as:

• mudarabah;
• wakalah; or
• other Sharia-compliant structures.

The legal documentation therefore has to satisfy both:

prudential capital requirements

and

the applicable Sharia structure.

14. Mudarabah-Based AT1

A simplified structure can be:

Investors

↓

subscribe for certificates

↓

Mudarabah structure

↓

capital used within defined arrangements

↓

periodic distributions, subject to terms

↓

loss absorption / perpetual capital characteristics

The documentation must ensure that the economic arrangement remains compatible with CBK capital requirements while satisfying applicable Islamic-finance governance.

15. Sharia Governance

For an Islamic bank, the perpetual instrument may require review under the bank's Sharia-governance framework.

Important questions can include:

• whether the underlying contractual structure is permissible;
• treatment of profits and losses;
• distribution calculation;
• investor rights;
• termination;
• purchase undertakings; and
• loss-absorption mechanics.

A structure should not undermine regulatory permanence merely to reproduce conventional debt economics.

16. Capital Markets Authority

Where perpetual instruments constitute securities offered or listed within the relevant Kuwaiti capital-market framework, the Capital Markets Authority (CMA) and Law No. 7 of 2010 become important.

Depending upon the transaction, requirements can concern:

• offering documents;
• disclosure;
• listing;
• professional investors;
• securities activities;
• market conduct; and
• continuing disclosure.

Thus, a bank AT1 issue may simultaneously involve:

CBK → prudential capital

and

CMA → securities-market regulation.

17. Disclosure

AT1 instruments are complicated and potentially high-risk.

Offering documentation should clearly describe matters such as:

• perpetual nature;
• subordination;
• call rights;
• absence of guaranteed redemption;
• distribution cancellation;
• non-cumulative payments;
• loss absorption;
• regulatory intervention;
• insolvency ranking;
• tax considerations;
• governing law; and
• Sharia structure where applicable.

Calling an instrument “fixed income” cannot eliminate its loss-absorbing characteristics.

18. Investor Expectations and the First Call Date

One recurring market risk arises when investors assume:

“The bank will definitely call the instrument after five years.”

That assumption may be wrong.

If the instrument is perpetual, redemption generally depends upon:

• issuer decision;
• regulatory conditions;
• capital position;
• refinancing economics; and
• contractual provisions.

Therefore:

First call date is an option, not a promise of repayment.

19. Subordination

Suppose a Kuwaiti bank enters insolvency with the following simplified claims:

• protected/preferred claims;
• senior liabilities;
• Tier 2;
• AT1;
• ordinary equity.

AT1 holders generally occupy a deeply subordinated position.

Their potential recovery may therefore be significantly smaller than that of senior creditors.

That subordination is one reason AT1 can count as loss-absorbing capital.

20. Depositors Versus AT1 Investors

The two should not be confused.

Depositor

Places money with a bank under a deposit relationship.

AT1 investor

Purchases a deeply subordinated regulatory-capital security.

They have fundamentally different risk profiles.

A KWD 100,000 deposit should therefore not automatically be compared with a KWD 100,000 investment in a perpetual bank sukuk merely because both involve the same bank.

21. Accounting and Regulatory Capital

Accounting classification and prudential classification are related but not identical questions.

An instrument might possess characteristics of debt or equity for accounting purposes while its treatment for regulatory capital depends on whether it satisfies CBK/Basel requirements.

Banks therefore need to consider separately:

• accounting treatment;
• regulatory-capital treatment;
• tax treatment;
• contractual characterization; and
• insolvency ranking.

22. Capital Adequacy

Assume:

Risk-weighted assets: KWD 10 billion
Eligible AT1: KWD 500 million

The AT1 instrument can contribute to the bank's regulatory capital calculations only to the extent permitted under the applicable capital framework.

Merely raising KWD 500 million through a perpetual security does not automatically make the full amount eligible regulatory capital.

Eligibility depends on satisfying the prescribed criteria.

23. Stress Scenario

Consider a bank experiencing significant credit losses.

Before losses:

CET1: KWD 1.2 billion
AT1: KWD 300 million

Major losses then reduce the bank's capital position.

The AT1 layer exists partly to absorb losses or preserve the bank's capital position according to its contractual and regulatory mechanics.

This illustrates why investors receive higher expected distributions than investors in lower-risk senior instruments: they accept substantially greater loss exposure.

24. Regulatory Intervention

CBK supervision becomes especially important when the issuing bank experiences stress.

Potential supervisory measures under the applicable banking framework can affect:

• distributions;
• capital conservation;
• redemption;
• new issuance;
• restructuring;
• recapitalization; and
• other remedial measures.

Contractual rights in a capital instrument therefore cannot be analyzed independently from mandatory banking regulation.

25. Insolvency and Perpetual Capital

Kuwait's insolvency framework, including Law No. 71 of 2020 promulgating the Bankruptcy Law, may also become relevant, subject to special rules applicable to regulated financial institutions.

The key questions include:

• ranking;
• subordination;
• accrued distributions;
• write-down provisions;
• enforceability;
• treatment of security holders; and
• interaction with banking intervention.

For AT1 investors, insolvency recovery is intentionally weaker than for ordinary senior creditors.

26. Governing Law

International AT1 and sukuk transactions can involve multiple legal systems.

For example:

Kuwaiti issuer

English-law transaction documents

Kuwaiti regulatory capital rules

international listing

Sharia structure

This means a dispute might require simultaneous analysis of contractual governing law and mandatory Kuwaiti banking regulation.

A foreign governing-law clause cannot simply eliminate mandatory CBK prudential requirements.

27. Kuwaiti Case-Law Position

There is an important limitation concerning case law.

Publicly accessible Kuwaiti jurisprudence specifically deciding disputes over Basel III AT1 perpetual bank instruments is limited. It would therefore be unreliable to invent six case citations and describe them as Kuwaiti AT1 precedents.

The relevant judicial framework instead comes primarily from broader Kuwaiti Court of Cassation doctrines on contracts, banking obligations, securities, subordination and commercial interpretation.

Principle 1 — Contractual terms govern commercial obligations

Kuwaiti Court of Cassation jurisprudence generally gives substantial importance to the parties' contractual terms, subject to mandatory law and public policy.

AT1 relevance: The instrument documentation is critical when determining call rights, distributions and investor rights.

Principle 2 — Courts examine substance and contractual intention

Kuwaiti commercial jurisprudence permits courts to determine the true legal character of contractual relationships from their terms and circumstances.

AT1 relevance: Calling a security a “bond” or “sukuk” does not alone determine its regulatory or insolvency treatment.

Principle 3 — Clear contractual provisions

Where contractual language is clear, Kuwaiti civil and commercial principles generally place significant weight on that wording.

AT1 relevance: Clear provisions establishing perpetuity, subordination and discretionary distributions can therefore be decisive.

Principle 4 — Mandatory regulatory law prevails

Private contractual arrangements cannot normally override mandatory banking regulation.

AT1 relevance: Investors and issuers cannot contract around CBK requirements necessary for regulatory-capital recognition.

Principle 5 — Priority requires a legal or contractual basis

Kuwaiti commercial and insolvency principles require creditor priority or subordination to be established through the applicable legal framework and enforceable contractual arrangements.

AT1 relevance: The precise ranking language of perpetual securities is crucial during financial distress.

Principle 6 — Expert evidence in complex financial disputes

Kuwaiti courts frequently rely on experts in complicated banking, accounting and commercial disputes.

AT1 relevance: Expert evidence may be needed to determine capital calculations, distribution amounts, financial condition or the operation of a complex sukuk structure.

These principles are useful analogies, not six reported Kuwait-specific AT1 judgments.

28. Comparative Case Law — Why Credit Suisse AT1 Matters

A useful comparative illustration comes from the Credit Suisse AT1 write-down in Switzerland in March 2023.

Approximately CHF 16 billion of Credit Suisse AT1 instruments were written down during the UBS transaction, producing extensive litigation and regulatory debate.

This was not a Kuwaiti case and Swiss rules cannot simply be applied to Kuwait.

Its importance for Kuwaiti banking analysis is the lesson it demonstrated internationally:

The legal consequences of AT1 instruments depend heavily on their contractual loss-absorption provisions and the applicable regulatory framework.

Investors should therefore read the actual terms rather than assume AT1 behaves like ordinary senior debt.

29. Example: Kuwaiti Perpetual Sukuk

Suppose Bank K issues:

AT1 perpetual sukuk: KWD 200 million
Distribution: 6%
First call: Year 5
Maturity: None

At year five, market interest rates have risen substantially.

Refinancing would cost the bank 9%.

Investors expect redemption, but the bank decides not to exercise the call, consistently with the terms and applicable regulatory requirements.

The investors cannot ordinarily argue:

“Five years have passed, therefore principal is automatically due.”

There is no contractual maturity merely because the first call date arrived.

30. Example: Distribution Cancellation

Assume the same bank experiences major losses.

The instrument's terms and applicable capital rules permit a KWD 12 million scheduled distribution to be cancelled.

If the payment is genuinely discretionary and non-cumulative, cancellation does not operate like an ordinary missed payment on senior debt.

That feature is precisely part of what makes the instrument capable of functioning as regulatory capital.

31. Example: Loss Absorption

Suppose:

AT1 principal: KWD 200 million

A defined regulatory loss-absorption event occurs.

Depending on the instrument, the terms might provide for an applicable write-down or another regulatory capital mechanism.

Investors could therefore lose part or potentially a substantial portion of their investment before ordinary senior creditors experience equivalent losses.

Again, the exact outcome depends on the specific contractual and regulatory structure.

32. Key Risks

33. Governance Responsibilities of the Issuing Bank

Before issuing AT1, a Kuwaiti bank should address:

1. board approval;
2. regulatory-capital eligibility;
3. CBK requirements;
4. offering documentation;
5. CMA requirements where applicable;
6. investor disclosure;
7. Sharia approval for Islamic instruments;
8. accounting treatment;
9. tax consequences;
10. loss-absorption mechanics;
11. distribution restrictions;
12. call/redemption conditions;
13. stress testing; and
14. ongoing capital reporting.

34. Relationship with Basel III

The structure can be summarized as:

Basel III international capital standards

↓

CBK prudential implementation

↓

Kuwaiti bank capital requirements

↓

CET1 + AT1 + Tier 2

↓

AT1 perpetual securities/sukuk

↓

Loss-absorbing bank capital

Basel standards provide the international prudential architecture, while the legally operative requirements for a Kuwaiti bank come through Kuwait's applicable regulatory framework and the instrument documentation.

35. Why Perpetual Instruments Matter for Banking Stability

Ordinary debt creates a fixed repayment obligation.

If a bank had to refinance huge volumes of debt during a crisis, that obligation could intensify financial stress.

Perpetual capital avoids a mandatory maturity and allows qualifying distributions to be restricted or cancelled.

Therefore:

No maturity

Subordination

Distribution flexibility

Loss absorption

=

greater capacity to absorb banking losses

That is the fundamental regulatory logic behind AT1.

36. Conclusion

Perpetual capital instruments in Kuwait are principally governed through the interaction of CBK prudential regulation, Law No. 32 of 1968, Basel III capital principles, securities regulation under Law No. 7 of 2010 and the contractual terms of each issuance. For Islamic banks, Sharia governance and the particular perpetual-sukuk structure add another layer.

The essential characteristics are permanence, deep subordination, discretionary/non-cumulative distributions, limited redemption rights and meaningful loss-absorption capacity.

A particularly important distinction is:

A first call date is not a maturity date, and an AT1 distribution is not necessarily equivalent to interest that must always be paid on ordinary senior debt.

For banking-law analysis, the critical issues are therefore CBK capital eligibility, subordination, loss absorption, distribution cancellation, call restrictions, CMA disclosure, Sharia structuring, insolvency ranking and investor disclosure.

Finally, Kuwait-specific reported case law directly addressing modern Basel III AT1 instruments remains limited. General Kuwaiti Court of Cassation doctrines on contract interpretation, mandatory banking regulation, creditor ranking, commercial obligations and expert evidence are therefore more defensible legal authorities than presenting unrelated decisions as direct perpetual-capital precedents.