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16 January 2018

New CBB Governance Principles for Islamic Banks

On 9 August 2017, the Central Bank of Bahrain (the CBB) announced the introduction of a new module of the CBB Rulebook regulating the governance of Islamic retail and wholesale banking institutions based in Bahrain in a Sharia’a compliant manner. The module also covers subsidiaries or branches of those institutions, whether in Bahrain or overseas, and will also apply to the Bahrain branches of any Islamic banking institutions headquartered overseas.

The Sharia’a Governance module cements the CBB’s initiative to put the Kingdom at the forefront of innovation in the Islamic financial marketplace following the formation of the CBB’s Centralised Sharia’a Supervisory Board in 2016.

The new module is effective from 30 June 2018. Under the new regulations, Islamic banks in the Kingdom of Bahrain will be required to undertake an independent external Sharia’a compliance audit. The first audit reports are to be issued in 2020, though there is no requirement for such reports to be made public.

The new module focuses on four elements of an Islamic banking institution in order to set common standards across the Islamic banking sector in Bahrain:

  1. The Sharia’a Supervisory Board (the SSB);
  2. The Sharia’a coordination and implementation function;
  3. The internal Sharia’a audit; and
  4. The external Sharia’a compliance audit.

The new module requires all SSBs within Bahrain to have at least three scholars specialising in Islamic commercial jurisprudence, as well as setting forth the qualifications of each member of the SSB and the procedure by which each scholar must be appointed and confirmed by the shareholders at the institution’s annual general meeting.

The new module requires each Islamic banking institution to have a charter setting out the SSB’s scope of work including the membership of the SSB, the responsibilities of the SSB and how voting and decisions are made.

The module reaffirms that each Islamic banking institution must comply with the AAOIFI’s Sharia’a standards, the rulings of the CBB’s Centralised Sharia’a Supervisory Board, and the institution’s own SSB.

The introduction of this module regulating Sharia’a governance in the Kingdom’s Islamic banks will bolster Bahrain’s reputation as a regional leader in Islamic finance and provide certainty and transparency to the banking institution’s transactions with customers, investors, and regulators.

This article was first published by Lexis Nexis in the MENA Business Law Review in the 4th quarter of 2017.

This article was written by Benjamin O'Brien-McQueenie. For more information please contact Benjamin on +973 1713 3207 or at Benjamin.O'