UG-A.1.1

The Central Bank of Bahrain ("the CBB"), in its capacity as the regulatory and supervisory authority for all financial institutions in Bahrain, issues regulatory instruments that licensees and other specified persons are legally obliged to comply with. These regulatory instruments are contained in the CBB Rulebook. Much of the Rulebook's substantive content was previously issued by the Bahrain Monetary Agency ('the BMA'), and was carried forward when the CBB replaced the BMA in September 2006.

UG-A.1.2

The Rulebook is divided into 7 Volumes, covering different areas of financial services activity. These Volumes are being progressively issued. Volumes 1 and 2, covering conventional bank licensees and Islamic bank licensees respectively, were issued in July 2004 and January 2005; Volume 3, covering insurance licensees, was issued in April 2005. Volume 4 was issued in April 2006. Volume 5 (covering specialised licensees), and Volume 6 (capital markets), are being issued progressively. Volume 7 on collective investment undertakings (CIUs) was issued in May 2012.

UG-A.1.3

This Users' Guide provides guidance on (i) the status and application of the Rulebook, with specific reference to Volume 1 (Conventional Banks); (ii) the structure and design of the Rulebook; and (iii) its maintenance and version control.

UG-A.1.4

Volume 1 (Conventional Banks) covers Conventional Bank Licensees. It contains prudential requirements (such as rules on minimum capital and risk management). Collectively, these requirements are aimed at ensuring the safety and soundness of CBB-licensed conventional banks and providing an appropriate level of protection to the clients of such banks.

UG-A.1.5

This Module contains the CBB's Directive (as amended from time to time) regarding the User's Guide for Volume 1, of the CBB Rulebook, and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to all conventional bank licensees (including their approved persons).

UG-A.1.6

For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

UG-1.1.1

Volume 1 (conventional banks) of the CBB Rulebook is issued by the CBB pursuant to the Central Bank of Bahrain and Financial Institutions Law 2006 ('the CBB Law'). The CBB Law provides for two formal rulemaking instruments: Regulations (made pursuant to Article 37) and Directives (made pursuant to Article 38). Other articles in the CBB Law also prescribe various specific requirements (for example, requirements relating to licensing (Articles 44 to 49), or the notification and approval of controllers of licensees (Articles 52 to 56)).

UG-1.1.2

The Purpose Section of each Module specifies in all cases the rulemaking instrument(s) used to issue the content of the Module in question, and the legal basis underpinning the Module's requirements.

UG-1.1.3

Conventional bank licensees that are members of the Bahrain Stock Exchange are reminded that they are also subject to the membership and operating rules of that exchange. These rules are issued by the Bahrain Stock Exchange under powers given the Exchange under the Bahrain Stock Exchange Law, Decree No. 4 of 1987 (as amended by Decree No. 21 of 2002). These rules are additional to the requirements contained in Volume 1 (conventional banks).

UG-1.1.4

Regulations are made pursuant to Article 37 of the CBB Law. These instruments have general application throughout the Kingdom and bind all persons ordinarily affected by Bahraini legislative measures (i.e. residents and/or Bahraini persons wherever situated).

UG-1.1.5

Because Regulations have wide general application, they are subject to two important safeguards: (i) the CBB is under a duty to consult with interested parties and to review and consider their comments; and (ii) the finalised Regulations only become effective after they are published in the Official Gazette.

UG-1.1.6

Where Regulations are used to support Rulebook requirements, their contents are included in the CBB Rulebook, as well as published in the Official Gazette. They only have legal effect, however, when published in the Official Gazette.

UG-1.1.7

Directives are made pursuant to Article 38 of the CBB Law. These instruments do not have general application in the Kingdom, but are rather addressed to specific licensees (or categories of licensees), approved persons or registered persons. Directives are binding on those to whom they are addressed.

UG-1.1.8

Unlike Regulations, there is no duty on the CBB to either consult with addressees or publicise a Directive by publishing it in the Official Gazette (save that an addressee must obviously have actual or constructive notice of a Directive). However, as a matter of general policy, the CBB also consults on Rulebook content issued by way of a Directive.

UG-2.1.1

The Rulebook is divided into 7 Volumes, covering different areas of financial services activity, as follows:

Volume 1 Conventional Banks

Volume 2 Islamic Banks

Volume 3 Insurance

Volume 4 Investment Business

Volume 5 Specialised Activities

Volume 6 Capital Markets

Volume 7 Collective Investment Undertakings

UG-2.1.2

Volume 5 (Specialised Activities) covers money changers; financing companies; representative offices; administrators; trust service providers, micro-finance institutions and providers of ancillary services to the financial sector.

UG-2.1.3

Except for Volumes 5, 6 and 7 the basic structure of each Rulebook is the same. Each Volume starts with a contents page and User's Guide. Subsequent material is organised underneath the following headings:

UG-2.1.4

Volume 5 is organised by the Category of specialised firm concerned, whilst Volume 6 by subject area (authorised exchanges; issuers of securities etc).

UG-2.1.5

The material in Volumes 1-4 is contained in Modules, each covering a specific area of requirements (e.g. High-level Controls). In turn, each Module is divided into Chapters, Sections and Paragraphs, as detailed below.

UG-2.1.6

Each Volume has its own appendix Volume containing relevant reporting and authorisation forms; a glossary; and any supplementary information. In all cases, the main Volume is called "Part A" and the appendix Volume is called "Part B".

UG-2.2.1

Rulebook Volumes are subdivided into Modules, arranged in groups according to their subject matter, underneath the headings listed in Paragraph UG-2.1.3 above.

UG-2.2.2

Each Module in a Volume is referenced using a two-or three-letter code which is usually a contraction or abbreviation of its title. These codes are used for cross-referencing within the text.

UG-2.2.3

Each Module consists of Chapters, categorised into two types:

UG-2.2.4

The introductory Chapters summarise the purpose of the Module, its history (in terms of changes made to its contents). A separate introductory Chapter also prescribes the scope of application of the Module's requirements.

UG-2.2.5

Chapters are further sub-divided into Sections (numbered consecutively after the Chapter number: e.g. FC-1.1, FC-1.2, FC-1.3 etc). In turn, Sections are sub-divided into Paragraphs (numbered consecutively after the Chapter and Section numbers: e.g. FC-1.1.1, FC-1.1.2, FC-1.1.3 etc.). Where appropriate, sub-Section headings may be used, to guide the reader through a Section: sub-Section headings are italicised and unnumbered, and act purely as an indicator (without limitation as to the status of the Paragraphs that follow.

UG-2.2.6

Each Volume's contents page lists all the Modules contained within it (Part A), and the information contained in the relevant appendix Volume (Part B).

UG-2.2.7

The contents page of each Module lists the Chapters, Sections and the latest version date of each Section in issue.

UG-2.3.1

The top of each page in the Rulebook identifies the Volume, Module and Chapter in question. Each Module is a separate document. New Chapters start on a fresh page.

UG-2.3.2

The bottom of each page in the Rulebook (on the left hand side) identifies the Module in question, its Section and page number. Page numbering starts afresh for each Section: the total number of pages in each respective Section is shown as well as the individual page number. The bottom right hand side shows an end-calendar quarter issue date. The Contents Page for each Module, and each Section in a Module, are each given their own issue date. In addition, the Module Contents page lists the latest issue date for each Section in that Module. The Contents page thus acts as a summary checklist of the current version in force for each Section. Further explanation is provided in Section UG-3.1 below.

UG-2.3.3

Defined terms used in the Rulebook are underlined. Each Volume has its own glossary listing defined terms and giving their meaning. Definitions of terms used apply only to the Volume in question. It is possible for the same term to be used in a different Volume with a different meaning.

UG-2.3.4

Any cross-references given in a text state the Module code, followed (where appropriate) by the numbering convention for any particular Chapter, Section or paragraph being referred to. For example, the cross-reference FC-1.2.3 refers to the third Paragraph in the second Section of the first Chapter of the Financial Crime Module. Many references will be quite general, referring simply to a particular Module, Chapter or Section rather than a specific Paragraph.

UG-2.3.5

Each Paragraph is assigned a complete reference to the Module, Chapter, and Section, as well as its own Paragraph number, as explained in UG-2.3.4 above. The format of the Paragraph reference and Paragraph text indicates their status as either a Rule or Guidance, as explained in UG-1.2.4 above.

UG-2.3.6

When cross-referring to specific Paragraphs, and it is important to make clear the status of the Paragraph in question as a Rule or Guidance, then the words 'Rule' or 'Guidance' may be used instead of 'Paragraph', followed by the reference number (e.g. 'As required by Rule FC-1.1.1, licensees must...').

UG-3.1.1

Any changes to the Rulebook are generally made on a quarterly cycle (the only exception being when changes are urgently required), in early January, April, July and October. When changes are made to a Module, the amended Sections are given a new version date, in the bottom right-hand page.

UG-3.1.2

The contents page for each amended Module is also updated; the table of contents is changed to show the new version date for each amended Section (in the 'Date Last Changed' Column), and the contents page itself is also given its own new version date in the bottom right-hand corner. The Module contents pages thus act as a checklist for hard-copy users to verify which are the current version dates for each Section in that Module.

UG-3.1.3

A summary of any changes made to a Module is included in the Module History Section of each Module. The table summarises the nature of the change made, the date of the change and the Module components and relevant pages affected. The Module History can thus be used to identify which pages were updated within individual Sections.

UG-3.1.4

Hard-copy users of the CBB Rulebook can check that they have the latest copy of each Module's contents pages, by referring to the overall table of contents for each Volume. The Volume table of contents lists the date each Module was last changed; users can use this table to check the date showing in the bottom right-hand corner of each Module's contents page.

UG-3.1.5

The website version of the Rulebook acts at all times as the definitive version of the Rulebook. CBB tries to limit changes as much as possible, in order to minimise the compliance burden on licensees. The updates are posted to the CBB website, together with a summary of changes for that quarter. Licensees are in addition e-mailed the summary of each quarter's changes. Hard-copy users are required to print off the updated pages from the website to incorporate in their Rulebook in order to keep it current.

UG-3.1.6

In order to limit the knock-on impact of inserting or deleting text on the numbering of text that follows the change, the following conventions apply:

UG-3.1.7

Where many such changes have built up over time, then the CBB may reissue the whole Section, Paragraph, Chapter or even Module concerned, consolidating all these changes.

UG-3.2.1

The Rulebook is available on the CBB website.

UG-3.2.2

Questions regarding the administration of the Rulebook (e.g. website availability, the updating of material etc) should be addressed to the Rulebook Section of the Regulatory Policy Unit:
Rulebook Section
Regulatory Policy Unit
Central Bank of Bahrain
PO Box 27
Manama
Kingdom of Bahrain

Tel: + 973 - 17 54 7413
E-mail: rulebook@cbb.gov.bh
Web: www.cbb.gov.bh

Questions regarding interpretation of the policy and requirements contained in the Rulebook should be addressed to the licensee's regular supervisory point of contact within the CBB.

LR-A.1.1

The Licensing Requirements Module sets out the Central Bank of Bahrain's ('CBB's) approach to licensing providers of regulated conventional banking services in the Kingdom of Bahrain.

LR-A.1.2

This Module contains the CBB's Regulations, Resolutions and Directive (as amended from time to time) relating to Licensing Requirements and is issued under the powers available to the CBB under Articles 37 to 42, 44 to 48 and 180 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). It also includes the requirements contained in Resolution No (1) of 2007 (as amended from time to time) with respect to determining fees categories due for licensees and services provided by the CBB. The Module also contains requirements under Regulation No (1) of 2007 pertaining to the CBB's regulated services issued under Article 39 of the CBB Law and those conditions of granting a license for the provision of regulated services as prescribed under Resolution No.(43) of 2011 and issued under the powers available to the CBB under Article 44(c). The Module contains requirements under Resolution No.(16) for the year 2012 including the prohibition of marketing financial services pursuant to Article 42 of the CBB Law. This Module contains the prior approval requirements for approved persons under Resolution No (23) of 2015. The Directive and Resolutions in this Module are applicable to all conventional bank licensees (including their approved persons).

LR-A.1.2A

For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

LR-A.1.3

Persons wishing to undertake regulated banking services are required to be licensed by the CBB as a conventional bank licensee. Regulated banking services consist of two determinant activities undertaken in combination — deposit-taking and providing credit. In addition, various supplementary regulated activities may also be undertaken. These activities are defined in Rule LR-1.3.1.

LR-A.1.4

In other words, persons wishing to undertake deposit-taking must also undertake the activity of providing credit. In addition, they may undertake any of the other activities falling within the definition of regulated banking services. Deposit-taking may not be undertaken on its own, without the activity of providing credit also being undertaken. Persons wishing to provide credit without undertaking deposit-taking may qualify as a finance company, a Category of specialised licensee (see separate regulations regarding these: they will fall under Volume 5 of the CBB Rulebook, when issued in the future).

LR-A.1.5

Conventional bank licensees are divided into two sub-categories: conventional retail banks and conventional wholesale banks. Certain specific regulatory requirements may differ between these two sub-categories, where appropriate to address their different risk profiles. (See Section LR-1.2.)

LR-A.1.6

Conventional retail banks may undertake transactions in any currency, with both Bahraini residents and non-residents. To qualify as a conventional retail bank, the activity of providing credit must account for a significant portion of the institution's business (defined, broadly, as accounting for over 20% of an institution's assets — See Paragraphs LR-1.2.4–LR-1.2.8).

LR-A.1.7

Conventional wholesale banks may also undertake transactions without restriction, when dealing with the Government of Bahrain and its agencies; CBB bank licensees; and non-residents. However, they may only undertake transactions denominated in Bahraini Dinar and/or with a resident of the Kingdom of Bahrain, if these are wholesale in nature. Wholesale transactions are defined in terms of transaction size (broadly, BD 7 million or more for a credit or deposit transaction, and US$ 100,000 or more for an investment transaction — See Paragraphs LR-1.2.9–LR-1.2.26).

LR-A.1.8

Collectively, licensed providers of regulated banking services are called conventional bank licensees. Bahrain-incorporated conventional bank licensees are called Bahraini conventional bank licensees. Conventional bank licensees that are incorporated in an overseas jurisdiction and operate via a branch presence in the Kingdom of Bahrain are called branches of foreign conventional bank licensees. The same naming convention applies to the two sub-categories of conventional bank license: thus, Bahraini conventional retail bank licensees and Bahraini conventional wholesale bank licensees are those incorporated in Bahrain, whilst retail branches of foreign banks and wholesale branches of foreign banks are those incorporated in an overseas jurisdiction and operating in Bahrain via a branch presence.

LR-A.1.9

Conventional bank licensees may not hold themselves out as an Islamic bank. They may nonetheless enter into Shari'a compliant transactions, subject to certain restrictions outlined in Section LR-1.4.

LR-A.1.10

Conventional bank licensees are subject to 8 licensing conditions, mostly specified at a high level in Module LR, and further expanded in underlying subject Modules (such as Module CA). These licensing conditions are broadly equivalent to the standards applied in other Volumes of the CBB Rulebook, to other license categories, and are consistent with international good practice, such as relevant Basel Committee standards.

LR-A.1.11

The requirements contained in Chapter LR-2 represent the minimum conditions that have to be met in each case, both at the point of licensing and on an on-going basis thereafter, in order for licensed status to be retained.

LR-A.1.12

Chapter LR-3 specifies the processes and information requirements that have to be followed for applicants seeking a conventional bank license, as well as existing licensees seeking to vary the scope of their license, by adding new regulated activities. It also covers the voluntary surrender of a license, or its cancellation by the CBB.

LR-A.1.13

Representative offices of conventional banks, and providers of ancillary services in the financial sector are not covered in Volume 1 (Conventional Banks) of the Rulebook. Requirements covering representative offices (for all financial services firms) and providers of ancillary services to the financial sector are included in Volume 5.

LR-A.1.14

Representative offices of conventional banks are subject to requirements contained in Volume 5 (Specialised Licensees), common Modules and specific Modules for representative offices. Until such time as all parts of Volume 5 (Specialised Licensees) of the CBB Rulebook is issued, providers of ancillary services to the financial sector remain subject to the requirements contained in the CBB's "Standard Conditions and Licensing Criteria".

LR-A.1.15

This paragraph was merged with paragraph LR-A.1.13 above in October 2007]

LR-A.1.16

This paragraph was merged with paragraph LR-A.1.14 above in October 2007]

LR-A.1.17

This paragraph was deleted in October 2007.

LR-A.2.1

This Module (Module LR — "Licensing and Authorisation Requirements") was first issued in July 2004, as part of the initial release of Volume 1 of the CBB Rulebook. It was subsequently reissued in full in July 2006 (and renamed "Licensing Requirements").

LR-A.2.2

The reissued Module was one of several Modules modified to reflect the introduction of the CBB's new integrated license framework. Module LR was amended to reflect the new conventional bank licenses introduced by the framework, and to more closely align its presentation with that found in other CBB Rulebook volumes.

LR-A.2.3

The reissued Module is dated July 2006. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made; Chapter UG-3 provides further details on Rulebook maintenance and version control.

LR-A.2.3A

When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

LR-A.2.4

A list of recent changes made to this Module is provided below:

LR-A.2.5

[This Paragraph was deleted in October 2007]

LR-1.1.1

No person may:

LR-1.1.1A

In accordance with Resolution No.(16) for the year 2012 and for the purpose of Subparagraph LR-1.1.1(c), the word 'market' refers to any promotion, offering, announcement, advertising, broadcast or any other means of communication made for the purpose of inducing recipients to purchase or otherwise acquire financial services in return for monetary payment or some other form of valuable consideration.

LR-1.1.1B

Persons in breach of Subparagraph LR-1.1.1(c) are considered in breach of Resolution No.(16) for the year 2012 and are subject to penalties under Articles 129 and 161 of the CBB Law (see also Section EN-10.3).

LR-1.1.2

According to Article 41(a) of the CBB Law, only persons licensed to undertake regulated banking services (or regulated Islamic banking services), may use the term 'bank' in their corporate or trading names, or otherwise hold themselves out to be a bank.

LR-1.1.3

Licensees are not obliged to include the word 'bank' in their corporate or trading names; however, they are required to make clear their regulatory status in their letter heads, customer communications, website and so on.

LR-1.1.4

For the purposes of Rule LR-1.1.2, persons will be considered in breach of this requirement if they attempt to operate as, or incorporate a bank in Bahrain with a name containing the word "bank" (or the equivalents in any language), without holding the appropriate CBB license or obtaining the prior approval of the CBB.

LR-1.1.5

Persons wishing to be licensed to undertake regulated banking services within or from the Kingdom of Bahrain must apply in writing to the CBB.

LR-1.1.6

An application for a license must be in the form prescribed by the CBB and must contain:

LR-1.1.7

The CBB will review the application and duly advise the applicant in writing when it has:

LR-1.1.8

Detailed rules and guidance regarding information requirements and processes for license applications can be found in Section LR-3.1. As specified in Paragraph LR-3.1.14, the CBB will provide a formal decision on a license application within 60 calendar days of all required documentation having been submitted in a form acceptable to the CBB.

LR-1.1.9

In granting new licenses, the CBB will specify the specific types of regulated banking service for which a license has been granted, and on what basis (i.e. conventional retail bank or conventional wholesale bank).

LR-1.1.10

All applicants for conventional bank licenses must satisfy the CBB that they meet, by the date of their license, the minimum conditions for licensing, as specified in Chapter LR-2. Once licensed, conventional bank licensees must maintain these criteria on an on-going basis.

LR-1.1.11

Conventional bank licensees must not carry on any commercial business in the Kingdom of Bahrain or elsewhere other than banking business and activities directly arising from or incidental to that business.

LR-1.1.12

Rule LR-1.1.11 is intended to restrict bank licensees from undertaking any material non-financial business activities. The Rule does not prevent a bank undertaking commercial activities if these directly arise from their financial business: for instance, in the context of Islamic contracts, such as murabaha, ijara and musharaka, where the bank may hold the physical assets being financed or leased. Nor does it restrict a bank from undertaking commercial activities if, in the judgment of the CBB, they are incidental and do not detract from the financial nature of the bank's operations: for example, a bank may rent out spare office space in its own office building, and provide services associated with the rental (e.g. office security or cleaning).

LR-1.1.13

Rule LR-1.1.11 applies to the legal entity holding the bank license. A bank may thus own subsidiaries that undertake non-financial activities, although the CBB generally does not support the development of significant commercial activities within a banking group. Capital invested in such subsidiaries by a bank would be deducted from the bank's capital base under the CBB's capital rules (see Module CA). In addition, the CBB may impose restrictions — such as dealings between the bank and its commercial subsidiaries — if it was felt necessary to limit the bank's exposure to non-financial risks.

LR-1.2.1

Depending on the nature of activities undertaken, conventional bank licensees must be licensed either as a conventional retail bank or as a conventional wholesale bank.

LR-1.2.2

The nature of activities allowed under each license sub-Category is specified below (cf. Rule LR-1.2.4 and the following Paragraphs). The conventional retail bank Category replaces the Full Commercial Bank (conventional principles) Category that existed prior to July 2006; the conventional wholesale bank Category replaces the Offshore Banking Unit and Investment Bank License (conventional principles) categories.

LR-1.2.3

Banks licensed prior to the introduction of these new license categories in July 2006 are not required to reapply for their license. Rather, their new license Category is to be confirmed by an exchange of letters with the CBB, and the issuance of a new license certificate. Where (prior to July 2006) the same legal entity holds multiple licenses, the CBB will agree transitional measures aimed at rationalizing the number of licenses held.

LR-1.2.4

Conventional retail banks are allowed to transact with both residents and non-residents of the Kingdom of Bahrain, and in both Bahrain Dinar and foreign currencies.

LR-1.2.5

To qualify as a conventional retail bank, the person concerned must undertake (as a minimum), the activities of deposit-taking and providing credit (as defined in Rules LR-1.3.16 and LR-1.3.18). The activity of providing credit must be a significant part of the bank's business, relative to other activities.

LR-1.2.6

When assessing the significance of credit-related activities, in the context of Rule LR-1.2.5, the CBB would normally expect to see loans and other credit-related activity (such as overdraft facilities, loan commitments, letters of credit, guarantees and other activities falling under the definition of providing credit), to constitute at least 20% of the total assets of the institution. Other activities and criteria may also be taken into account, if the CBB believes they are of a credit-related nature, and that such activities constitute a significant share of the bank's overall business.

LR-1.2.7

In the case of new applicants, the above assessment is made based on the financial projections and business plan provided as part of the license application. Where existing licensees fail to satisfy the condition contained in Rule LR-1.2.5, the CBB will initiate discussion with the licensee as to the appropriateness of their license category: this may result in the licensee being required to change its license category. A branch of an overseas bank may nonetheless be allowed to hold a bank license in Bahrain, even if it fails to undertake the activities specified in Rule LR-1.2.5, providing that it undertakes other regulated banking services in Bahrain and its head office is licensed as a bank in its home country.

LR-1.2.8

The purpose of Rule LR-1.2.5 is to ensure that, besides deposit-taking, the core banking activity of providing credit forms part of the definition of conventional retail banks, and accounts for a significant share of their business, in keeping with their intermediation function.

LR-1.2.9

Conventional wholesale banks are allowed to transact with residents of the Kingdom of Bahrain (irrespective of currency), and in Bahrain Dinar (irrespective of the location of the counterparty), subject to the conditions and exemptions specified in Rules LR-1.2.11, LR-1.2.13, LR-1.2.16 and LR-1.2.18. Foreign currency transactions with non-residents are not subject to these conditions.

LR-1.2.10

The effect of Rule LR-1.2.9 is to limit the on-shore/Bahrain Dinar customer business of conventional wholesale banks to larger transactions. By definition, their on-shore client base is therefore wholesale in nature (i.e. large corporates and high net-worth individuals).

LR-1.2.11

To qualify as a conventional wholesale bank, the person concerned must undertake (as a minimum), the activities of deposit-taking and providing credit (as defined in Rules LR-1.3.16 and LR-1.3.18).

LR-1.2.12

The purpose of Rule LR-1.2.11 is to ensure that the core banking activities of deposit taking and providing credit form part of the definition of conventional wholesale banks. However, unlike conventional retail banks, there is no requirement that the activity of providing credit must be a significant part of the bank's business, relative to other activities. This is to allow conventional wholesale banks greater flexibility as to the nature of their activities; it also recognises that, because of the wholesale nature of their client base, there is less need to limit the scale of non-credit related risks to which their depositors may be exposed. Rule LR-1.2.11 does not in any way prevent conventional wholesale banks from developing the provision of credit as a major activity, should they wish to. The Guidance provided in Paragraph LR-1.2.7 with regards to overseas banks is also applicable to Rule LR-1.2.11.

LR-1.2.13

Conventional wholesale banks may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (a) to (e) listed in Rule LR-1.3.1, only where the individual transaction is BD 7 million or above (or its foreign currency equivalent).

LR-1.2.14

To comply with Rule LR-1.2.13, the initial amount taken as a deposit must be BD 7 million or above (or its equivalent in foreign currency); however, subsequent additions and withdrawals from that deposit account may be for any amount. The initial amount taken as deposit may be split between different types of accounts (e.g. call, 3-month and 6-month accounts) — providing at least BD 7 million is taken from the customer on the same day and the bank's records can demonstrate this. Where subsequent withdrawals lead to a zero balance on an account (or the aggregate of accounts where more than one was originally opened), then a further BD 7 million must be deposited to re-start the 'wholesale' relationship, before additional deposits for smaller amounts may be made.

LR-1.2.15

Similarly, with respect to credit-related transactions, the initial facility amount advised must be for BD 7 million or above (or its equivalent); but drawdowns (and repayments) under the facility may be for any amount, as may any subsequent changes to the facility amount. If the facility is fully repaid, then a further BD 7 million transaction must be agreed in order to re-start the 'wholesale' relationship.

LR-1.2.16

Conventional wholesale banks may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (f) to (l) listed in Rule LR-1.3.1, only where the individual transaction is US$ 100,000 or above (or its foreign currency equivalent).

LR-1.2.17

With respect to activities (f) and (g) (dealing in financial instruments as principal / agent), the threshold refers to the individual transaction size. With respect to activities (h) and (i) (managing / safeguarding financial instruments), the threshold refers to the initial investment amount. With respect to activity (j) (operating a collective investment scheme), the threshold refers to the minimum investment required for participation in the scheme. With respect to activities (k) and (l) (arranging deals in / advising on financial instruments), the threshold refers to the size of the deal arranged or of the investment on which advice is being given.

LR-1.2.18

Note that the threshold with respect to activities (h) and (i) applies to the initial investment amount: where a subsequent distribution to a client or a reduction in the mark to market value of the investment reduces the initial investment amount below US$ 100,000 it is still considered a wholesale transaction. The threshold in Rule LR-1.2.16 applies to a client even if the same client satisfies the BD 7m threshold in Rule LR-1.2.13, with respect to deposit/credit activities. Finally, the initial amount taken as an investment may be split between two or more investment products — providing at least US$ 100,000 is taken from the customer on the same day and the bank's records can demonstrate this.

LR-1.2.19

Conventional wholesale bank licensees may only undertake activities (m) and (n) listed in Rule LR-1.3.1, on behalf of residents of Bahrain and/or in Bahrain Dinar, where the customer concerned meets either of the thresholds specified in LR-1.2.13 or LR-1.2.16 (in which case, activities (m) and (n) may be undertaken for any amount).

LR-1.2.20

Notwithstanding Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19, conventional wholesale banks are allowed to transact in Bahrain Dinar (or any other currency) for any amount with the Government of Bahrain, Bahrain public sector entities (as defined in the Guidelines for completion of the Prudential Information Reports), and CBB bank licensees. Conventional wholesale banks may also transact in Bahrain Dinar for any amount, where required to fund their normal operating expenses; or when investing for their own account in securities listed on a licensed exchange.

LR-1.2.20A

Conventional wholesale bank licensees may undertake activity (o) listed in Rule LR-1.3.1, on behalf of residents and/or non-residents of the Kingdom of Bahrain and/or in Bahrain Dinar or foreign currency, where the customer concerned meets either of the thresholds specified in LR-1.2.13 or LR-1.2.16.

LR-1.2.21

Any transactions entered into prior to 1 July 2006 which may be in breach of the conditions specified in Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19 must be notified to the CBB. These transactions will be allowed to mature.

LR-1.2.22

Since the conventional wholesale bank regime represents an easing of the restrictions on on-shore business that previously applied to offshore bank licensees (i.e. OBUs and IBLs), there should be few transactions of the type specified in Rule LR-1.2.21 — they are likely to exist only where individual ad-hoc exemptions may have been previously granted by the CBB, and these exemptions went further than those now being applied across the Board to all conventional wholesale bank licensees.

LR-1.2.23

Conventional wholesale banks must seek prior written CBB approval if they wish to undertake transactions of the type specified in Rules LR-1.2.13, LR-1.2.16, LR-1.2.19 and LR-1.2.20A if the transactions are below the thresholds mentioned in LR-1.2.13 or LR-1.2.16.

LR-1.2.24

The approval requirement in Rule LR-1.2.23 only has to be made once, prior to the licensee starting to undertake such transactions. Its purpose is to allow the CBB to monitor the initiation of such business by conventional wholesale bank licensees, and to check that adequate systems and controls have been in place, so that such transactions are likely to be well managed. In addition, it is to allow, where relevant, for the necessary arrangements to be made to ensure that conventional wholesale banks comply with the CBB's reserve requirements (which apply to deposit liabilities denominated in Bahraini Dinars — see LR-2.5.10).

LR-1.2.25

Conventional wholesale banks that are unclear about the interpretation of the conditions specified in Rules LR-1.2.13, LR-1.2.16 or LR-1.2.19 must consult the CBB prior to undertaking the transaction concerned.

LR-1.2.26

The CBB may publish additional interpretative guidance on the above conditions, in response to licensees' queries. The minimum thresholds specified under Rules LR-1.2.13 and LR-1.2.16 will be kept under review by the CBB and may be amended in response to market developments.

LR-1.2.27

Conventional bank licensees may not hold themselves out as an Islamic bank. Conventional bank licensees may only enter into activities (c) to (e) listed in Rule LR-1.3.1, in accordance with the conditions outlined in Section LR-1.4.

LR-1.2.28

[This paragraph was deleted in October 2007]

LR-1.2.29

Conventional bank licensees may freely deal in financial instruments or operate a collective investment scheme that happens to be Shari'a compliant (because of the nature of the financial instruments concerned).

LR-1.3.7

A person does not carry on an activity constituting a regulated banking service if the activity:

LR-1.3.8

For example, the taking of a deposit in connection with the rental of a property would not be considered a regulated banking service, since it satisfies the criteria in Rule LR-1.3.7.

LR-1.3.9

A person does not carry on an activity constituting a regulated banking service if the person is a body corporate and carries on that activity solely with or for other bodies corporate that are members of the same group.

LR-1.3.10

A person does not carry on an activity constituting a regulated banking service if such person carries on an activity with or for another person, and they are both members of the same family.

LR-1.3.11

A person does not carry on an activity constituting a regulated banking service if the sole or main purpose for which the person enters into the transaction is to limit any identifiable risks arising in the conduct of his business, providing the business conducted does not itself constitute a regulated activity.

LR-1.3.12

For example, an industrial company entering into an interest rate swap to switch floating-rate borrowings for fixed rate borrowings, in order to manage interest rate risk, would not be considered to be dealing in financial instruments as principal, and would not therefore be required to be licensed as a conventional bank.

LR-1.3.13

A person does not carry on an activity constituting a regulated banking service if that person enters into that transaction solely as a nominee for another person, and acts under instruction from that other person.

LR-1.3.14

A person does not carry on an activity constituting a regulated banking service if that person is a government body charged with the management of financial instruments on behalf of a government or public body.

LR-1.3.15

A person does not carry on an activity constituting a regulated banking service if that person is an exempt person, as specified by Royal decree.

LR-1.3.16

Deposit-taking is defined as receiving a sum of money paid on terms under which it will be repaid in full, with or without interest or a premium, and either on demand or in circumstances agreed by the parties involved. It excludes sums referable to the giving of security or as a fee paid in advance for goods or services. It also excludes money received by a person in consideration for debt instruments issued by the same person, or money received by a person entering into a loan or other financing agreement.

LR-1.3.17

The above definition, therefore, includes savings, current, notice, fixed and time deposits.

LR-1.3.18

Providing credit is defined as the provision of credit to a person in his capacity as borrower or potential borrower. This includes consumer and mortgage credit; and providing credit by way of finance leases, factoring, forfaiting, and reverse repo transactions. It also includes the issuance or endorsement of letters of credit; the issuance of letters of guarantee and other contingent credit activities (such as the underwriting of loans); the purchase on the secondary market of loans and other contracts of credit (that do not otherwise fall under the definition of financial instruments); and the provision of ancillary credit-related activities, such as advising on or arranging loans. It excludes money advanced to a person in consideration for debt instruments issued by the same person.

LR-1.3.19

Accepting Shari'a money placements is defined as the acceptance of sums of money for safe-keeping ('al-wadia', 'q'ard') in a Shar'ia compliant framework, under which it will be repaid, either on demand or in circumstances agreed by the parties involved, and which is not referable to the giving of security.

LR-1.3.20

Offering Shari'a financing contracts is defined as entering into, or making arrangement for another person to enter into, a contract to provide finance in accordance with Shari'a principles, such as murabaha, bay muajjal, bay salam, ijara wa iktina and istisna'a contracts.

LR-1.3.21

Managing a Shari'a profit sharing investment account is defined as managing an account, portfolio or fund, whereby a sum of money is placed with the service provider on terms that a return will be made according to an agreed Shari'a compliant profit-sharing arrangement, based either on a mudaraba or musharaka partnership.

LR-1.3.22

Dealing in financial instruments as principal means buying, selling, subscribing for or underwriting any financial instrument on one's own account.

LR-1.3.23

Rule LR-1.3.22 includes the underwriting of equity and other financial instruments. The underwriting of loans comes under the activity of providing credit (see Rule LR-1.3.18). It also includes the temporary sale of a financial instrument through a repo transaction.

LR-1.3.24

A person does not carry on an activity specified in Rule LR-1.3.22 if the activity relates to the person issuing his own shares/debentures, warrants or bonds.

LR-1.3.25

Dealing in financial instruments as agent means buying, selling, subscribing for or underwriting financial instruments on behalf of a client.

LR-1.3.26

A licensee that carries on an activity of the kind specified by Rule LR-1.3.25 does not determine the terms of the transaction and does not use its own financial resources for the purpose of funding the transaction. Such a licensee may however receive or hold assets in connection with the transaction, in its capacity as agent of its client.

LR-1.3.27

Managing financial instruments means managing on a discretionary basis financial instruments on behalf of another person.

LR-1.3.28

The activities included under the definition of Rule LR-1.3.27 include activities such as asset management.

LR-1.3.29

Safeguarding financial instruments means the safeguarding of financial instruments for the account of clients.

LR-1.3.30

A person does not carry on an activity specified in Rule LR-1.3.29 if the person receives documents relating to a financial instrument for the purpose of onward transmission to, from, or at the direction of the person to whom the financial instrument belongs; or else is simply providing a physical safekeeping service such as a deed box.

LR-1.3.31

A person does not carry on an activity specified in Rule LR-1.3.29 if a third person, namely a qualifying custodian, accepts responsibility with regard to the financial instrument.

LR-1.3.32

A "qualifying custodian" means a person who is:

LR-1.3.33

A person does not carry on an activity specified in Rule LR-1.3.29 if they are managing a central depository, which is part of an exchange recognised by the CBB.

LR-1.3.34

The following are examples of activities, which when taken in isolation, are unlikely to be regarded as an activity of the kind specified under Rule LR-1.3.29:

LR-1.3.35

A person undertaking an activity of the kind specified under Rule LR-1.3.29 may also be engaged in the administration of the financial instruments, including related services such as cash/collateral management.

LR-1.3.36

Operating a collective investment undertaking ('CIU') means operating, establishing or winding up a collective investment undertaking.

LR-1.3.37

For the purposes of LR-1.3.36, a CIU is defined in Volume 7 Paragraph ARR-B.1.1

LR-1.3.38

[This Paragraph was deleted in January 2013].

LR-1.3.39

[This Paragraph was deleted in January 2013].

LR-1.3.40

Arranging deals in financial instruments means making arrangements with a view to another person, whether as principal or agent, buying, selling, or subscribing for, or underwriting deals in, financial instruments.

LR-1.3.41

A person does not carry on an activity specified in Rule LR-1.3.40 if the arrangement does not bring about the transaction to which the arrangement relates.

LR-1.3.42

A person does not carry on an activity specified in Rule LR-1.3.40 if a person's activities are limited solely to introducing clients to licensees.

LR-1.3.43

The exclusion in Rule LR-1.3.42 does not apply if the agent receives from any person, other than the client, any pecuniary reward or other advantage, which he does not account to the client, arising out of his entering into the transaction. Thus, if A receives a commission from B for arranging credit or deals in investment for C, the exclusion in Rule LR-1.3.42 does not apply.

LR-1.3.44

A person does not carry on an activity specified in Rule LR-1.3.40 merely by providing the means of communication between two parties to a transaction.

LR-1.3.45

A person does not carry on an activity specified in Rule LR-1.3.40 if they operate an exchange, duly recognised and authorised by the CBB.

LR-1.3.46

Negotiating terms for an investment on behalf of a client is an example of an activity which may be regarded as an activity of the kind specified in Rule LR-1.3.40.

LR-1.3.47

The following are examples of activities, which when taken in isolation, are unlikely to be regarded as an activity of the kind specified in Rule LR-1.3.40:

LR-1.3.48

Advising on financial instruments means giving advice to an investor or potential investor (or a person in his capacity as an agent for an investor or potential investor) on the merits of buying, selling, subscribing for or underwriting a particular financial instrument or exercising any right conferred by such a financial instrument.

LR-1.3.49

The following are examples of activities, which may be regarded as an activity as defined by Rule LR-1.3.48:

LR-1.3.49A

For the purpose of Rule LR-1.3.48, advising on financial instruments includes giving digital financial advice also known as 'robo-advice' or 'automated advice' using a computer program and algorithm to generate the advice.

LR-1.3.50

A person does not carry on an activity specified in Rule LR-1.3.48 by giving advice in any newspaper, journal, magazine, broadcast services or similar service in any medium if the principal purpose of the publication or service, taken as a whole, is neither that of:

LR-1.3.51

The following are examples of activities, which when taken in isolation, are unlikely to be regarded as an activity as defined by Rule LR-1.3.48:

LR-1.3.52

Means providing exchange facilities between currencies, and the provision of wire transfer or other remittance services.

LR-1.3.53

Means the selling or issuing of payment instruments, or the selling or issuing of stored value (e.g. credit cards, travellers' cheques, electronic purses).

LR-1.3.54

Providing trust services is defined as:

LR-1.3.55

The related ancillary services under sub-paragraph LR-1.3.54(c) include providing directorship services, company secretarial services, providing a registered address and/or acting as a shareholder to the company holding the assets of a trust.

LR-1.3.56

Conventional bank licensees must ensure that the trust services in Paragraph LR-1.3.54 are handled by an independent trust service department within the bank.

LR-1.3.57

Conventional bank licensees must comply with the legislative Decree No. (23) of 2016 with regards to Trust, and CBB's resolutions and directives issued in this regard.

LR-1.4.1

Conventional bank licensees may not hold themselves out as an Islamic bank. Conventional bank licensees are allowed to enter into activities (c) to (e) listed in Rule LR-1.3.1 under the conditions outlined in the remainder of this section, subject to the thresholds and conditions outlined in Section LR-1.2 (concerning facilities offered to Bahrain residents and facilities in Bahrain Dinar in particular).

LR-1.4.2

Shari'a compliant financing facilities provided by conventional bank licensees are treated as normal risk-weighted assets in the PIR and are not subject to the risk-weighting treatment under Volume 2.

LR-1.4.3

When offering any of the Shari'a compliant activities (c) to (e) listed in Rule LR-1.3.1, conventional bank licensees must have staff trained in Shari'a compliant banking business. The bank must also disclose in the notes to its Annual Report/Financial Statement all quantitative and qualitative disclosures on its Shari'a compliant business as required by AAOIFI accounting and auditing standards.

LR-1.4.4

Conventional bank licensees may invest in Shari'a compliant financial instruments for their own account or make an investment in a Shari'a compliant syndication where the bank's role is limited to provide the funding for such investment and the bank has not participated in the structuring nor the preparation of any documentation in relation to this investment.

LR-1.4.5

Conventional retail bank licensees may provide Shari'a compliant activities (c) to (e) listed in Rule LR-1.3.1 in any amount and in any currency to customers subject to the following conditions:

LR-1.4.6

Retail bank branches of foreign banks may provide Shari'a compliant financing (activity (e) listed in Rule LR-1.3.1) in any amount and in any currency to customers for the purpose of purchasing land or properties in Bahrain subject to the conditions below:

LR-1A.1.1

Conventional bank licensees must obtain the CBB's prior written approval for any person wishing to undertake a controlled function in a conventional bank licensee. The approval from the CBB must be obtained by the CBB prior to their appointment (subject to the variations contained in Rule LR-1A.1.3).

LR-1A.1.2

Controlled functions are those functions occupied by board members and persons in executive positions and include:

LR-1A.1.3

Prior approval is required for all controlled functions in relation to Bahrain operations. Controlled functions (g) and (h) may be combined, however (see also FC-4.1, regarding the MLRO function).

LR-1A.1.4

Approval under Rule LR-1A.1.1 is only granted by the CBB, if it is satisfied that the person is fit and proper to hold the particular position in the licensee concerned. 'Fit and proper' is determined by the CBB on a case-by-case basis. The definition of 'fit and proper' and associated guidance is provided in Sections LR-1A.2 and LR-1A.3 respectively.

LR-1A.1.5

Board members collectively are responsible for the business performance and strategy of the conventional bank licensee, as outlined in more details in Section HC-1.2.

LR-1A.1.6

When taken as a whole, the board of directors of a conventional bank licensee must be able to demonstrate that it has the necessary skills and expertise, as outlined in Paragraph HC-1.2.10.

LR-1A.1.7

The Chief Executive or General Manager means a person who is responsible for the conduct of the licensee (regardless of actual title). The Chief Executive or General Manager must be resident in Bahrain. The scope of authority of the CEO and his deputies is outlined in more detail in Subparagraph HC-6.3.2 (a).

LR-1A.1.8

The head of risk management is responsible for the management and control of all risk exposures arising from the activities of the conventional bank licensee.

LR-1A.1.9

The head of internal audit is responsible for providing independent and objective review on the adequacy and effectiveness of the holistic internal control environment within the conventional bank licensee. The duties of the head of internal audit are outlined in more detail in Subparagraph HC-6.3.2 (d).

LR-1A.1.9A

The head of Shari'a review in a conventional bank licensee, dealing with Islamic products and services, is responsible for the examination of the extent of a conventional bank licensee's compliance, in all its activities, with the Shari'a. This examination includes contracts, agreements, policies, products, transactions memorandum and articles of association, financial statements, reports (especially internal audit and central bank inspection), circulars, etc. The objective of the Shari'a review is to ensure that the activities carried out by a conventional bank licensee do not contravene the Shari'a.

LR-1A.1.10

All banks must appoint a senior member of staff with responsibility for the management of compliance risk as their Compliance Officer/Manager.

LR-1A.1.11

The compliance function must be independent (i.e. it must not be placed in a position where its other duties or responsibilities may cause a conflict of interest with its compliance risk management responsibilities). Therefore the compliance function must be separate from the internal audit function. The compliance officer or manager may however, perform other limited related compliance roles (e.g. the MLRO or legal advisor), subject to the CBB's prior approval.

LR-1A.1.12

The compliance function must have adequate resources to carry out its functions effectively.

LR-1A.1.13

The bank must also outline how the compliance function fits into the bank's senior management reporting structure, and must give details of relevant reporting lines within the bank.

LR-1A.1.14

In the case of locally incorporated banks, the compliance officer/manager must have access to the Board of Directors in addition to the senior management.

LR-1A.1.15

Heads of other functions, where risk acquisition or control is involved, are responsible for tracking specific functional performance goals in addition to identifying, managing, and reporting critical organisational issues upstream. Certain functions require dealing directly with clients while others do not. Both categories of functions, however, require specific qualifications and experience to meet the objectives as well as compliance requirements of the conventional bank licensee.

LR-1A.1.16

Where a firm is in doubt as to whether a function should be considered a controlled function it must discuss the case with the CBB.

LR-1A.1.17

Conventional bank licensees must obtain CBB's prior written approval before a person is formally appointed to a controlled function; the request for CBB approval must be made by submitting to the CBB a duly completed Form 3 (Application for Approved Person status) and Curriculum Vitae after verifying that all the information contained in Form 3, including previous experience, is accurate. Conventional bank licensees must fill in the Application Form 3 (Application for Approved Person status) online, available on the CBB website under E-services/online Forms and must upload scanned copies of supporting documents listed in Paragraph LR-1A.1.18A, unless otherwise directed by the CBB.

LR-1A.1.18

When the request for approved person status forms part of a license application, the Form 3 must be marked for the attention of the Director, Licensing Directorate. When the submission to undertake a controlled function is in relation to an existing conventional bank licensee, the Form 3 must be marked for the attention of either the Director, Retail Banks Supervision or the Director, Wholesale Banks Supervision, as appropriate. In the case of the MLRO or DMLRO, Form 3 should be marked for the attention of the Director, Compliance Directorate.

LR-1A.1.18A

When submitting Form 3, conventional bank licensees must ensure that the Form 3 is:

LR-1A.1.18B

Conventional bank licensees seeking to appoint Board Directors must seek CBB approval for all the candidates to be put forward for election/approval at a shareholders' meeting, in advance of the agenda being issued to shareholders. CBB approval of the candidates does not in any way limit shareholders' rights to refuse those put forward for election/approval.

LR-1A-1.18C

For existing conventional bank licensees applying for the appointment of a Board Director or the Chief Executive/General Manager, the authorised representative should be the Chairman of the Board or a Director signing on behalf of the Board. For all other controlled functions, the authorised representative should be the Chief Executive/General Manager, or a suitably senior representative of the bank.

LR-1A.1.19

[This Paragraph was deleted in January 2016.]

LR-1A.1.20

[This Paragraph was moved to Paragraph LR-1A.1.18B in January 2016.]

LR-1A.1.20A

The CBB shall review and assess the application for approved person status to ensure that it satisfies all the conditions required in Paragraph LR-1A.2.6 and the criteria outlined in Paragraph LR-1A.2.7.

LR-1A.1.20B

For purposes of Paragraph LR-1A.1.20A, conventional bank licensees should give the CBB a reasonable amount of notice in order for an application to be reviewed. The CBB shall respond within 15 business days from the date of meeting all required conditions and regulatory requirements, including but not limited to, receiving the application complete with all the required information and documents, as well as verifying references and interviewing the applicant. The CBB will advise the conventional bank licensee once the application is considered complete.

LR-1A.1.20C

The CBB reserves the right to refuse an application for approved person status if it does not satisfy the conditions provided for in Paragraph LR-1A.2.6 and does not satisfy the CBB criteria in Paragraph LR-1A.2.7. A notice of such refusal is issued by registered mail to the conventional bank licensee concerned, setting out the basis for the decision.

LR-1A.1.21

Conventional bank licensees or the nominated approved persons may, within 30 calendar days of the notification, appeal against the CBB's decision to refuse the application for approved person status. The CBB shall decide on the appeal and notify the conventional bank licensees of its decision within 30 calendar days from the date of submitting the appeal.

LR-1A.1.21A

When notification of the CBB's decision to grant a person approved person status is not issued within 15 business days from the date of meeting all required conditions and regulatory requirements, including but not limited to, receiving the application complete with all the required information and documents, conventional bank licensees or the nominated approved person may appeal to the Executive Director, Banking Supervision of the CBB provided that the appeal is justified with supporting documents. The CBB shall decide on the appeal and notify the conventional bank licensees of its decision within 30 calendar days from the date of submitting the appeal.

LR-1A.1.22

Conventional bank licensees must immediately notify the CBB when an approved person, for whatever reason, ceases to hold the controlled function for which they have been approved (i.e. transferred to another function within the bank, or to another group entity, or else has resigned, been suspended or dismissed). The notification must include the reasons for the action taken.

LR-1A.1.23

[Rule moved to Paragraph BR-5.1.17 in April 2014.]

LR-1A.1.24

[This Paragraph was deleted in April 2014].

LR-1A.1.25

If a controlled function falls vacant, the conventional bank licensee must appoint a permanent replacement (after obtaining CBB approval), within 120 calendar days of the vacancy occurring. Pending the appointment of a permanent replacement, the conventional bank licensee must make immediate interim arrangements to ensure continuity of the duties and responsibilities of the controlled function affected. These interim arrangements must be approved by the CBB.

LR-1A-1.26

Conventional bank licensees must immediately notify the CBB should they become aware of information that could reasonably be viewed as calling into question an approved person's compliance with CBB's 'fit and proper' requirement (see LR-1A.2).

LR-2.5.1

Conventional bank licensees must maintain a level of financial resources, as agreed with the CBB, adequate for the level of business proposed. The level of financial resources held must at all times meet the minimum risk-based requirements contained in Module CA (Capital Adequacy), as specified for the Category of banking license held.

LR-2.5.2

This paragraph was deleted in April 2017.

LR-2.5.2A

All Bahraini conventional retail banks licensees must maintain a minimum total shareholders equity of BD 100 million.

LR-2.5.2B

All Bahraini conventional wholesale banks licensees must maintain a minimum total shareholders equity of US$ 100 million.

LR-2.5.3

Persons seeking a license as a conventional bank licensee must submit a 3-year business plan, with financial projections. Their proposed level of paid-up capital must be sufficient to cover expected regulatory capital requirements over that period, based on projected activities.

LR-2.5.4

In practice, applicants seeking a conventional bank license are likely to be required to hold significantly more capital than the minimum paid-up capital specified in Rule LR-2.5.2.

LR-2.5.5

Foreign bank applicants are required to provide written confirmation from their head office that the head office will provide financial support to the branch sufficient to enable it to meet its obligations as and when they fall due. Foreign bank applicants must also demonstrate that the bank as a whole is adequately resourced for the amount of risks underwritten, and that it and its group meet capital adequacy standards applied by its home supervisor.

LR-2.5.6

For conventional retail bank licensees, deposit liabilities must not exceed 20 times their capital and reserves.

LR-2.5.7

Factors taken into account in setting endowment capital for branches includes the financial strength of the parent company, the quality of its risk management, and the nature and scale of the Bahrain operations of the branch.

LR-2.5.8

Conventional bank licensees must maintain sufficient liquid assets to meet their obligations as they fall due in the normal course of their business. Conventional bank licensees must agree a liquidity management policy with the CBB.

LR-2.5.9

The CBB would normally expect the mark-to-market value of assets that could be readily realised at short-notice to exceed 25% of deposit liabilities at all times. Liquidity arrangements may vary, however, particularly for branches of foreign conventional banks, as agreed with the CBB and documented in the liquidity management policy.

LR-2.5.10

Conventional bank licensees must maintain a minimum daily cash reserve balance with the CBB set as a ratio of its total non-bank Bahrain Dinar deposits and Bahrain Dinar denominated Certificates of Deposit. The current required ratio is 5% and may be varied by the CBB at its discretion.

LR-2.8.1

Article 59 of the CBB Law requires that conventional bank licensees must maintain comprehensive books of accounts and other records, and satisfy the minimum record-keeping requirements contained in Article 60 of the pre-mentioned Law and Module OM. Books of accounts must comply with the financial accounting standards issued by the International Financial Reporting Standards (IFRS)/International Accounting Standards (IAS), as updated from time to time.

LR-2.8.2

Article 58, 111, 114 and 163 of the CBB Law require that conventional bank licensees and their staff must act in an open and cooperative manner with the CBB. Conventional bank licensees must meet the regulatory reporting and public disclosure requirements contained in Modules BR and PD respectively. As per Article 62 of the CBB Law, audited financial statements must be submitted to the CBB within 3 months of the licensee's financial year-end.

LR-2.8.3

Conventional bank licensees must conduct their activities in a professional and orderly manner, in keeping with good market practice. Conventional bank licensees must comply with the general standards of business conduct contained in Module PB, as well as the standards relating to treatment of customers contained in Modules BC and CM.

LR-2.8.4

[This paragraph has been moved to chapter LR-4 in October 2007]

LR-2.8.5

[This paragraph has been deleted in October 2007]

LR-2.8.6

Conventional bank licensees must comply with any other specific requirements or restrictions imposed by the CBB on the scope of their license.

LR-2.8.7

Bank licensees are subject to the provisions of the CBB Law. These include the right of the CBB to impose such terms and conditions, as it may deem necessary when issuing a license, as specified in Article 45 of the CBB Law. Thus, when granting a license, the CBB specifies the regulated banking services that the licensee may undertake. Licensees must respect the scope of their license. LR-3.2 sets out the process for varying the scope of an authorisation, should a licensee wish to undertake new activities.

LR-2.8.8

In addition, the CBB may impose additional restrictions or requirements, beyond those already specified in Volume 1, to address specific risks. For instance, a license may be granted subject to strict limitations on intra-group transactions.

LR-2.8.9

Conventional retail bank licensees are subject to the deposit protection scheme of eligible deposits held with the Bahrain offices of the licensee (see Chapter CP-2). This Rule is supported by Article 177 of the CBB Law.

LR-3.3.1

In accordance with Article 50 of the CBB Law, all requests for the voluntary surrender of a license or closure of a branch are subject to the CBB's prior written approval, before ceasing such activities. Such requests must be made in writing to the Executive Director of Banking Supervision, setting out in full the reasons for the request and how the voluntary surrender of the license or branch closure is to be carried out.

LR-3.3.2

Conventional bank licensees must satisfy the CBB that their customers' interests are to be safeguarded during and after the proposed voluntary surrender or closure of the branch. The requirements contained in Chapter GR-7 regarding cessation of business must be satisfied.

LR-3.3.3

The CBB will only approve a voluntary surrender where it has no outstanding regulatory concerns and any relevant customers' interests would not be prejudiced. A voluntary surrender will not be accepted where it is aimed at pre-empting supervisory actions by the CBB. Also, a voluntary surrender will only take effect once the licensee, in the opinion of the CBB, has discharged all its regulatory responsibilities to customers.

LR-3.3.3A

As provided for under Article 48 (c) of the CBB Law, the CBB may itself move to cancel a license. The CBB generally views the cancellation of a license as appropriate only in the most serious of circumstances, and generally tries to address supervisory concerns through other means beforehand. See also Chapter EN-9, regarding the cancellation or amendment of licenses, including the procedures used in such instances and the licensee's right to appeal the formal notice of cancellation issued by the CBB.

LR-3.3.4

Cancellation of a license requires the CBB to issue a formal notice of cancellation to the person concerned. The notice of cancellation must describe the CBB's rationale for the proposed cancellation, as specified in Article 48(d) of the CBB Law.

LR-3.3.5

[This Paragraph was deleted in October 2011].

LR-3.3.6

Where the cancellation of a license has been confirmed by the CBB, the CBB will only effect the cancellation once a licensee has discharged all its regulatory responsibilities to customers. Until such time, the CBB will retain all its regulatory powers with regards to the licensee, and will direct the licensee such that no new regulated banking services may be undertaken whilst the licensee discharges its obligations to customers.

PB-A.1.1

The Principles of Business are a general statement of the fundamental obligations of all Central Bank of Bahrain ('CBB') conventional bank licensees and approved persons. They serve as a basis for other material in Volume 1 (Conventional Banks), and help address specific circumstances not covered elsewhere in the Rulebook.

PB-A.1.2

The Principles of Business have the status of Rules and apply alongside other Rules contained in Volume 1 (Conventional Banks). However, these other Rules do not exhaust the fundamental obligations contained in the Principles. Compliance with all other Rules, therefore, does not necessarily guarantee compliance with the Principles of Business.

PB-A.1.3

This Module contains the CBB's Directive (as amended from time to time) relating to Principles of Business and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all conventional bank licensees (including their approved persons).

PB-A.1.4

For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

PB-1.1.1

Conventional bank licensees and approved persons must observe high standards of integrity and fair dealing. They must be honest and straightforward in their dealings with customers, and provide full disclosure of all relevant information to customers, as required by the CBB's Regulations and Directives.

PB-1.1.2

Conventional bank licensees and approved persons must take all reasonable steps to identify, and prevent or manage, conflicts of interest that could harm the interests of a customer.

PB-1.1.3

Conventional bank licensees and approved persons must act with due skill, care and diligence.

PB-1.1.4

Conventional bank licensees and approved persons must observe in full any obligations of confidentiality, including with respect to customer information. This requirement does not over-ride lawful disclosures.

PB-1.1.5

Conventional bank licensees and approved persons must observe proper standards of market conduct, and avoid action that would generally be viewed as improper.

PB-1.1.6

Conventional bank licensees and approved persons must take reasonable care to safeguard the assets and deposits of customers for which they are responsible.

PB-1.1.7

Conventional bank licensees and approved persons must pay due regard to the legitimate interests and information needs of their customers and communicate with them in a fair and transparent manner. Conventional bank licensees and approved persons, when dealing with customers who are entitled to rely on their advice or discretionary decisions, must take reasonable care to ensure the suitability of such advice or decisions.

PB-1.1.8

Conventional bank licensees and approved persons must act in an open and co-operative manner with the CBB and other regulatory/supervisory bodies whose authority they come under. They must take reasonable care to ensure that their activities comply with all applicable laws and regulations.

PB-1.1.9

Conventional bank licensees must maintain adequate human, financial and other resources sufficient to run their business in an orderly manner.

PB-1.1.10

Conventional bank licensees must take reasonable care to ensure that their affairs are managed effectively and responsibly, with appropriate systems and controls in relation to the size and complexity of their operations. Conventional bank licensees' systems and controls, as far as is reasonably practical, must be sufficient to manage the level of risk inherent in their business and ensure compliance with the CBB Rulebook.

HC-A.1.1

This Module presents requirements that have to be met by conventional bank licensees with respect to:

HC-A.1.2

The Principles referred to in this Module are in line with the Principles relating to the Corporate Governance Code issued by the Ministry of Industry and Commerce.

HC-A.1.3

The purpose of the Module is to establish best practice corporate principles in Bahrain, and to provide protection for investors and other conventional bank licensee's stakeholders through compliance with those principles.

HC-A.1.4

Whilst the Module follows best practice, it is nevertheless considered as the minimum standard to be applied. This Module also includes additional rules and guidance issued by the CBB prior to the publication of the Code and previously contained in Module HC.

HC-A.1.5

This Module follows the structure of the Corporate Governance Code and each Chapter deals with one of the eight Principles of corporate governance. The numbered directives included in the Code are Rules for purposes of this Module. Recommendations under the Code have been included as guidance. However, where the previous version of Module HC had a similar recommendation as a Rule, the Module retains this Paragraph as a Rule.

HC-A.1.6

The Module also incorporates other high-level controls and policies that apply in particular to conventional bank licensees.

HC-A.1.7

All references in this Module to 'he' or 'his' shall, unless the context otherwise requires, be construed as also being references to 'she' and 'her'.

HC-A.1.8

This Module is issued as a Directive (as amended from time to time) in accordance with Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). In common with other Rulebook Modules, this Module contains a mixture of Rules and Guidance (See Module UG-1.2 for detailed explanation of Rules and Guidance). All Rulebook content that is categorised as a Rule must be complied with by those to whom the content is addressed. Other parts of this Module are Guidance; nonetheless every conventional bank licensee to whom Module HC applies, is expected to comply with recommendations made as Guidance in Module HC or explain its noncompliance in the Annual Report in accordance with Subparagraph PD-1.3.8(x) and to the CBB (see Chapter HC-8).

HC-A.1.9

Disclosure and transparency are underlying principles of Module HC. Disclosure is crucial to allow outside monitoring to function effectively. This Module looks to a combined monitoring system relying on the board, the conventional bank licensee's shareholders and the CBB.

HC-A.1.10

It is the board's responsibility to see to the accuracy and completeness of the conventional bank licensee's corporate governance guidelines and compliance with Module HC. Failure to comply with this Module is subject to enforcement measures as outlined in Module EN (Enforcement).

HC-A.1.11

This Module contains the CBB's Directive (as amended from time to time) relating to high-level controls and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to conventional bank licensees (including their approved persons).

HC-A.1.12

For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

HC-A.1.13

The previous version of Module HC is applicable until 31^st December 2010. This updated Module issued in October 2010, is effective on 1^st January 2011. All conventional bank licensees to which Module HC applies should be in full compliance by the financial year end 2011. At every conventional bank licensee's annual shareholder meeting held after 1^st January 2011, corporate governance should be an item on the agenda for information and any questions from shareholders regarding the conventional bank licensee's governance. Where possible, the conventional bank licensee should also have corporate governance guidelines in place at that time and should have a "comply or explain" report as described in Paragraph HC-A.1.8.

HC-1.2.10

The Board is responsible for ensuring that the systems and controls framework, including the Board structure and organisational structure of the bank, is appropriate for the bank's business and associated risks (see HC-1.2.3 c). The Board must ensure that collectively it has sufficient expertise to identify, understand and measure the significant risks to which the bank is exposed in its business activities.

The Board must regularly assess the systems and controls framework of the bank. In its assessments, the Board must demonstrate to the CBB that:

HC-1.2.11

The board must adopt a formal board charter or other statement specifying matters which are reserved to it, which should include but need not be limited to the specific requirements and responsibilities of directors. This charter must cover the points in HC-1.2.1 to HC-1.2.10. Wherever possible, the documents referred to in HC-1.2.3 to HC-1.2.10 or a summary of responsibilities should be disclosed publicly, for example in the annual report, which must be submitted to the CBB in line with the requirements of Module BR.

HC-2.2.2

Each member of the board must understand that under the Company Law he is personally accountable to the conventional bank licensee and the shareholders if he violates his legal duty of loyalty to the conventional bank licensee, and that he can be personally sued by the conventional bank licensee or the shareholders for such violations.

HC-2.2.3

The Board must establish corporate standards for approved persons and employees. This requirement should be met by way of a documented and published code of conduct or similar document. These standards must be communicated throughout the bank, so that the approved persons and staff understand the importance of conducting business based on good corporate governance values and understand their accountabilities to the various stakeholders of the licensee. Banks' approved persons and staff must be informed of and be required to fulfil their fiduciary responsibilities to the bank's stakeholders.

HC-2.2.4

An internal code of conduct is separate from the business strategy of a bank. A code of conduct should outline the practices that approved persons and staff should follow in performing their duties. Banks may wish to use procedures and policies to complement their codes of conduct. The suggested contents of a code of conduct are covered below:

HC-2.2.5

The Central Bank expects that the Board and its members individually and collectively:

HC-2.2.6

The duty of loyalty (mentioned in Paragraph HC-2.2.2 above) includes a duty not to use property of the conventional bank licensee for his personal needs as though it was his own property, not to disclose confidential information of the conventional bank licensee or use it for his personal profit, not to take business opportunities of the conventional bank licensee for himself, not to compete in business with the conventional bank licensee, and to serve the conventional bank licensee's interest in any transactions with a company in which he has a personal interest.

HC-2.2.6A

[This Paragraph was moved to Paragraph HC-5.4.39].

HC-2.2.6B

[This Paragraph was moved to Paragraph HC-5.4.40].

HC-2.2.7

For purposes of Paragraph HC-2.2.6, an approved person should be considered to have a "personal interest" in a transaction with a company if:

is a party to the transaction or has a material financial interest in the transaction. (Transactions and interests which are de minimis in value should not be included.)

HC-5.4.4

Banks operating as overseas conventional bank licensees in Bahrain must apply the most stringent set of remuneration rules to which they may be subject to. Such rules are: