Banking Law and Money Market Fund Interaction with Banks — Kuwait

1. Introduction

Money market funds (“MMFs”) are collective investment vehicles designed primarily to invest in short-term, relatively liquid financial assets. In Kuwait, the interaction between money market funds and banks is particularly important because banks may perform several different roles at the same time: they may accept fund deposits, issue instruments purchased by a fund, provide custody or other services, finance temporary liquidity needs, manage or sponsor funds through affiliated entities, and distribute fund units to customers.

Kuwait therefore does not regulate the relationship simply as an ordinary bank-customer contract. Two regulatory systems can overlap:

Central Bank of Kuwait (CBK) → supervision of banks and banking activities.

Capital Markets Authority (CMA) → regulation of securities activities and collective investment schemes, including money market funds.

Law No. 7 of 2010 treats investment funds and other qualifying arrangements as collective investment schemes and requires such schemes to operate within the CMA licensing framework. Articles 76–80 deal with collective investment schemes, licensing, issuance and redemption of units, and fund listing.

The framework remains active and developing. In 2026, the CMA amended the specific investment controls applicable to money market funds through Resolution No. 18 of 2026.

2. Regulatory Division Between the CMA and CBK

The starting point is institutional separation.

A bank remains subject to the CBK in relation to banking matters such as liquidity, solvency, credit activities and prudential supervision. The CBK legislation gives the Central Bank significant powers where a bank's liquidity or solvency becomes endangered, including restricting operations and imposing supervisory measures.

A money market fund, however, is principally governed as a collective investment scheme by the CMA under Law No. 7 of 2010 and Module Thirteen of its Executive Bylaws. The CMA's current Executive Bylaws expressly contain a separate module governing collective investment schemes.

Therefore, where a bank deals with an MMF, it is necessary to identify the bank's exact legal capacity.

For example:

Bank as bank → CBK regulation is central.

Bank or affiliate as fund manager → CMA collective-investment rules become particularly important.

Bank as deposit-taking counterparty → both the fund's investment limits and banking regulation matter.

Bank as issuer of an instrument bought by the fund → securities, credit-risk and concentration requirements can become relevant.

3. Money Market Funds Investing with Banks

The strongest connection between MMFs and banks occurs through investments.

A Kuwaiti money market fund can invest fund assets in instruments connected with banks, subject to the applicable investment controls. Actual Kuwaiti MMFs demonstrate this relationship.

For example, the disclosed investment objective of the Warba Islamic KD Money Market Fund includes investments in cash instruments, deposits with banks, Islamic sukuk offered by central banks, government agencies, banks or high-credit-quality companies, and qualifying money-market-fund units.

The Warba Islamic USD Money Market Fund similarly describes investment in monetary-market instruments, bank deposits, sukuk and qualifying money market funds.

Thus, banks can effectively become counterparties or underlying credit exposures of MMFs.

4. Concentration and Counterparty Risk

This interaction creates concentration risk.

Suppose a money market fund places a very large proportion of its assets with Bank A.

Even though the assets may be short-term, the fund becomes economically dependent upon Bank A's ability to repay.

The regulatory objective is therefore not merely:

invest in short-term instruments.

It is also:

diversify exposures + control maturity + maintain liquidity + manage counterparty risk.

This becomes particularly important where the same banking group performs several roles—for example, deposit counterparty, distributor, custodian or affiliated fund manager.

The legal framework must prevent the fund from being managed primarily for the benefit of the related banking institution rather than the investors.

5. Important 2026 Changes

Resolution No. 18 of 2026 significantly updated Kuwait's fund investment framework.

For money market funds, the CMA described changes including broader opportunities for investment in debt instruments, an increase in permitted positioning in funds from 15% to 25% of net asset value, investment opportunities involving debt-instrument funds and money-market ETFs, hedging through derivatives, revised weighted-average-maturity calculations, and an increase in the maximum borrowing limit from 10% to 15% of net asset value.

These amendments are important for bank-MMF interaction because they potentially expand the channels through which liquidity, debt instruments, financing and other financial exposures can connect funds with regulated financial institutions.

6. Bank-Affiliated Money Market Funds

Kuwait provides practical examples of banks or bank-related investment businesses participating directly in the MMF sector.

The CMA renewed the collective-investment-scheme licence of the Warba Islamic KD Money Market Fund in June 2026. The CMA's decision identifies Warba Bank as the applicant for renewal.

The CMA has also approved or licensed other money market funds, including the KFH Capital USD Money Market Fund, Ahli Capital KD and USD money market funds, Watani KD Money Market Fund II, and KIB USD Money Market Fund.

These examples show that bank-related institutions are an established part of Kuwait's MMF market rather than merely theoretical participants.

7. Liquidity and Redemption

Liquidity is one of the most important legal issues in the relationship.

Article 79 of Law No. 7 of 2010 recognises the participant's right to redeem units in accordance with the fund's Articles of Association or contractual arrangements.

This creates an important chain:

Investor redemption request
→ fund needs liquidity
→ fund converts liquid assets or uses permitted liquidity arrangements
→ banking counterparties may become important.

If large numbers of investors seek redemption simultaneously, the fund's ability to access cash becomes critical.

This explains why maturity controls, diversification, borrowing restrictions and liquidity management are not merely investment-policy questions. They protect the fund's capacity to satisfy its obligations toward participants.

8. Borrowing from Banks

MMFs can also interact with banks as borrowers.

The 2026 amendments increased the maximum borrowing limit for money market funds from 10% to 15% of the fund's net asset value and removed the previous requirement that borrowing be used specifically to cover redemption requests.

This is legally significant.

Borrowing can provide flexibility, but leverage can also magnify liquidity and counterparty risks.

Accordingly, borrowing by a fund should remain:

within regulatory limits;

consistent with the fund documentation;

properly authorised;

accurately disclosed and recorded; and

managed consistently with investor interests.

A bank providing financing must separately comply with the rules governing its own banking operations.

9. Custody and Separation of Assets

A further issue concerns custody.

Fund assets must be distinguished from assets belonging personally to the fund manager or another service provider.

This separation is essential because investors should not automatically become unsecured creditors of a fund manager merely because the manager encounters financial problems.

Kuwaiti collective-investment legislation expressly recognises the role of the custodian, and the legislative history of Law No. 7 reflects the replacement of the former terminology of “investment trustee” with “custodian.”

Where a bank performs custody functions, its responsibilities should therefore be distinguished from its separate role as a borrower, deposit-taking institution or commercial counterparty.

10. Related-Party and Conflict-of-Interest Risk

Bank-sponsored MMFs create another important legal issue.

Imagine:

Bank Group A owns Fund Manager A.

The fund manager then places substantial fund assets in deposits issued by Bank A.

Economically, the transaction may be legitimate, but legally it raises questions concerning:

conflicts of interest;

concentration;

pricing;

investor protection;

related-party dealings;

independent decision-making; and

disclosure.

The fund manager should therefore act within the fund mandate and applicable CMA requirements rather than simply directing investor money toward its own banking group.

11. Islamic Money Market Funds

Islamic finance makes the Kuwait position particularly interesting.

Conventional money market funds may use conventional short-term financial instruments, while Sharia-compliant funds structure investments around permissible Islamic instruments.

The Warba Islamic KD and USD funds, for example, expressly describe themselves as complying with Islamic Sharia standards and identify bank deposits structured according to applicable deposit systems and Islamic sukuk among their investment areas.

Accordingly, Islamic MMFs require two overlapping forms of compliance:

financial-regulatory compliance + Sharia-structure compliance.

The label “money market fund” does not remove the need to examine the actual legal structure of every instrument held by the fund.

12. Relevant Case Laws

An important qualification is necessary. Publicly accessible English-language sources do not reveal six Kuwaiti Court of Cassation judgments specifically deciding “money market fund interaction with banks.” It would therefore be inaccurate to invent six MMF cases.

The following are six reported Kuwaiti banking/financial-law authorities that provide relevant principles for analysing bank-MMF relationships. They should be treated as analogical banking authorities, not as six direct MMF judgments.

Case 1 — Kuwait Court of Cassation, Appeal No. 508/2016

This reported authority concerns banking contracts and the effect of mandatory CBK regulation.

The important principle is that a banking agreement does not operate independently of mandatory banking regulation.

MMF relevance: If an MMF enters into a deposit, financing or other transaction with a bank, contractual freedom remains subject to mandatory financial regulation.

Case 2 — Kuwait Court of Cassation, Appeal No. 623/2010

This authority has been reported in connection with the legal effect of CBK rules issued under the statutory banking framework.

Principle: CBK requirements form part of the regulatory environment within which banks conduct their activities.

MMF relevance: A bank dealing with an investment fund cannot disregard CBK requirements simply because the counterparty is a CMA-regulated collective investment scheme.

Case 3 — Kuwait Court of Cassation, Appeal No. 1180/2009

The case has been reported in relation to bank lending and CBK requirements affecting interest.

Principle: Contractual banking arrangements interact with mandatory regulatory requirements.

MMF relevance: The principle becomes relevant where an MMF obtains permitted bank financing or otherwise enters a regulated credit relationship with a bank.

Case 4 — Kuwait Court of Cassation, Appeal No. 666/2021, Judgment of 23 July 2023

This reported banking dispute concerned calculations involving interest, commissions and charges and allegations concerning contractual terms and CBK instructions.

Principle: Accurate banking records, contractual terms and financial calculations can become central evidence in banking disputes.

MMF relevance: MMFs regularly generate valuations, financing costs, deposit returns, fees and counterparty balances. Reliable documentation is therefore crucial where the bank and fund disagree about amounts payable.

Case 5 — Kuwait Court of Cassation, Appeal No. 1384/2019, Judgment of 22 February 2024

This reported decision concerned loans granted by banks in the ordinary course of banking activity.

Principle: The legal character of ordinary banking lending is connected principally with the banking activity involved rather than merely the identity of the borrower.

MMF relevance: If a bank provides permitted financing to an investment fund, the fact that the borrower is a regulated fund does not automatically remove the transaction from the banking-law framework.

Case 6 — Kuwait Court of Cassation, Appeal No. 14/2022, Judgment of 23 September 2025

This is particularly relevant to investment regulation.

The reported dispute concerned investment arrangements entered into without required regulatory authorisation. The Court reportedly treated mandatory financial-sector requirements as connected with economic public order, with serious consequences for unauthorised financial activities.

MMF relevance: Licensing is fundamental. A private agreement cannot simply replace regulatory authorisation where Kuwaiti law requires a licence.

This corresponds closely with Article 77 of Law No. 7 of 2010, under which units in a collective investment scheme may not be managed or sold unless the scheme has been licensed in accordance with the CMA framework.

13. Investor Protection

Investor protection sits behind much of the regulatory structure.

Investors in an MMF should understand that investment in fund units is legally different from simply placing money in an ordinary bank account.

The investor generally holds:

units in the collective investment scheme

rather than:

an ordinary deposit claim directly against every bank in which the fund invests.

That distinction affects contractual rights, redemption, risk allocation and remedies.

The fund's prospectus, Articles of Association, valuation rules and investment mandate therefore have considerable legal importance.

14. Systemic Importance of Bank-MMF Interaction

The relationship can also have wider financial-stability implications.

Consider the following sequence:

large investor redemptions
→ MMF needs cash
→ MMF withdraws bank deposits or sells bank instruments
→ bank funding conditions tighten
→ wider liquidity pressure may develop.

The opposite direction is also possible:

financial difficulty at a bank
→ MMF's exposure to that bank loses liquidity or value
→ MMF faces redemption pressure
→ investors withdraw from similar funds.

This interconnectedness explains why prudential banking regulation and investment-fund regulation cannot be considered completely separately.

15. Role of the Capital Markets Court

Law No. 7 of 2010 establishes specialised Capital Markets Court jurisdiction.

The non-penal circuits have jurisdiction over commercial, civil and administrative disputes arising from implementation of the Capital Markets Law and its regulations and bylaws.

Consequently, disputes concerning the regulatory operation of collective investment schemes may enter the specialised capital-markets judicial structure, while ordinary banking and contractual issues may involve additional questions of banking, commercial and civil law.

Correct classification of the dispute is therefore important.

16. Practical Compliance Framework

A Kuwait-based MMF interacting with banks should effectively operate through several layers of control:

CMA licensing — the fund must be properly authorised as a collective investment scheme.

Investment restrictions — deposits, debt instruments, fund units and other assets must remain within applicable limits.

Counterparty assessment — exposure to individual banks must be monitored.

Liquidity management — assets should support expected redemption obligations.

Borrowing controls — bank financing must remain within applicable limits.

Custody and asset segregation — fund assets should remain properly identified and protected.

Conflict management — particularly important for bank-sponsored or bank-affiliated funds.

Valuation and disclosure — investors require reliable information about the fund and its assets.

CBK compliance by banks — banks remain subject to their separate prudential and banking-law obligations.

Sharia compliance where applicable — Islamic MMFs must ensure that the instruments and structures used conform to the fund's stated Sharia framework.

17. Conclusion

The interaction between money market funds and banks in Kuwait is governed by an overlapping regulatory structure rather than one isolated rule.

The CMA regulates money market funds primarily through Law No. 7 of 2010, its Executive Bylaws and particularly Module Thirteen on Collective Investment Schemes, while the CBK supervises banks under Kuwait's banking legislation. Recent CMA reforms, particularly Resolution No. 18 of 2026, demonstrate that the MMF framework continues to develop.

Banks may interact with MMFs as deposit-taking counterparties, financing providers, issuers of instruments, custodians, distributors, affiliated managers or sponsors. Each relationship produces different legal risks involving liquidity, concentration, conflicts of interest, custody, borrowing, disclosure and investor protection.

The most important legal principle is therefore regulatory duality:

MMF activity → CMA supervision

Banking activity → CBK supervision

Bank–MMF transaction → potentially both frameworks simultaneously.

The six cases discussed above provide useful banking and financial-law principles, but they should not be misrepresented as six direct Kuwaiti MMF judgments. For money market funds specifically, the strongest authorities remain Law No. 7 of 2010, Module Thirteen of the Executive Bylaws, current CMA resolutions and the individual fund's constitutional and offering documents.