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The Kuwaiti Commercial Civil Summary Court of the Court of First Instance issued a verdict emphasizing it is ineligible for the banks to “impose interests on its customers because interest is against the text of Article II of the Kuwaiti Constitution.”

 

The court order said: “In this context, we refer to the Article II of the Constitution which stipulates the religion of the State is Islam, and the Islamic Sharia shall be a main source of legislation’. The court ruling was a result of a case in which a Kuwaiti sued a local bank for charging him interest on a loan he took out. He argued interest is not Islamic. The court ruled the interest referred to in the contract concluded by a local bank and one of its customers which was also the subject of the relevant case are usurious in nature and this type of interest is forbidden by Islamic Sharia.

 

The court verdict is expected to be appealed in the Court of Appeals and afterwards, the Court of Cessation.

 

March 23, 2010

 

 

Analysis and Forecast: Increasing Risk

 

This is the first time a court has ruled against the legitimacy of conventional banks. Conventional banks exist side by side in Kuwait, as well as in most other GCC states and are therefore regulated by local commercial laws and regulations. The court’s decision is far-reaching in that it effectively questions the legitimacy of those laws regulating the operation of conventional banks, including foreign banks in Kuwait.

 

Islamist politicians warmly welcomed the verdict. If upheld, the decision will carry long-term and far-reaching repercussions for the whole of the Kuwaiti banking system. Existing commercial conventional banks that have existing contracts whereby they have lent billions of dollars on terms that fall outside the definition of Islamic banking may end up finding their contracts invalidated. The verdict, although not final, has long-term implications both for Kuwait as well as other GCC and Arab states whose constitutions state that the state religion is Islam. Islamic banking is a relatively new phenomena, but now that it is well represented in most Arab countries, it presents itself as a viable alternative to conventional banking.

 

The verdict increases the risk to existing banks and also to the whole economic system in Kuwait, largely underwritten by conventional, non-Islamic banking.