• High Level Standards

    • LR LR Licensing Requirements

      • LR-A LR-A Introduction

        • LR-A.1 LR-A.1 Purpose

          • LR-A.1.1

            The Licensing Requirements Module sets out the BMA's approach to licensing Islamic bank licensees.

          • LR-A.1.2

            The Module builds on the legal requirements contained in Decree Law No. (23) of 1973 (the BMA Law 1973). The Module is issued under legal powers granted to the BMA under the BMA Law 1973, notably Articles 56 to 69.

          • Licensing Requirement

            • LR-A.1.3

              Persons wishing to undertake regulated Islamic banking services are required to be licensed by BMA as an Islamic bank licensee. Regulated Islamic banking services consist of three determinant activities — the acceptance of Shari'a money placements/deposits, the managing of Shari'a profit sharing investment accounts, and the offering of Shari'a financing contracts. In addition, various supplementary activities may also be undertaken. All these activities are defined in Rule LR-1.3.1. Islamic bank licensees must operate all their operations in compliance with Shari'a economic principles; and only Islamic bank licensees may hold themselves out to be a fully Shari'a compliant institution.

            • LR-A.1.4

              In other words, to be licensed as an Islamic bank licensee, a person must undertake the activity of accepting Shari'a money placements/deposits, and/or managing Shari'a profit sharing investment accounts. In addition, the activity of offering Shari'a financing contracts must also be undertaken. In addition, they may undertake any of the other activities falling within the definition of regulated Islamic banking services, providing these are in conformity with Shari'a economic principles.

          • License Categories

            • LR-A.1.5

              Islamic bank licensees are divided into two sub-categories: Islamic retail bank licensees and Islamic wholesale bank licensees. Certain specific regulatory requirements may differ between these two sub-categories, where appropriate to address their different risk profiles.

            • LR-A.1.6

              Islamic retail bank licensees may undertake transactions in any currency, with both Bahraini residents and non-residents. To qualify as an Islamic retail bank licensee, the activity of offering Shari'a financing contracts must account for a significant portion of the institution's business (defined, broadly, as accounting for over 20% of an institution's assets).

            • LR-A.1.7

              Islamic wholesale bank licensees may also undertake transactions without restriction, when dealing with the Government of Bahrain and its agencies; BMA 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 (in summary, BD 7 million or more for the activities of taking Shari'a money placements/deposits, and offering Shari'a financing contracts, and US$ 250,000 or more for any of the other activities falling within the definition of regulated Islamic banking services).

            • LR-A.1.8

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

          • Licensing Conditions

            • LR-A.1.9

              Islamic 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 BMA Rulebook, to other license categories, and are consistent with international good practice, such as relevant Basel Committee and IFSB (Islamic Financial Services Board) standards.

          • Retaining Licensed Status

            • LR-A.1.10

              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.

          • Information Requirements and Processes

            • LR-A.1.11

              Chapter LR-3 specifies the processes and information requirements that have to be followed for applicants seeking an Islamic 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 BMA.

          • Representative Offices and Ancillary Services Providers

            • LR-A.1.12

              Representative offices of overseas Islamic bank licensees are not covered in Volume 2 (Islamic Banks) of the Rulebook. Requirements covering Representative Offices (for all financial services firms) will instead be included in Volume 5, to be issued in 2007.

            • LR-A.1.13

              Until such time as Volume 5 (Specialised Activities) of the BMA Rulebook is issued, representative offices of overseas Islamic bank licensees remain subject to the requirements contained in the BMA's "Standard Conditions and Licensing Criteria" applicable to representative offices of foreign banks, and relevant existing Circulars.

            • LR-A.1.14

              Providers of ancillary services to the financial sector are not covered in Volume 2 (Islamic Banks) of the Rulebook. Requirements covering ancillary services providers will instead be included in Volume 5, to be issued in 2007.

            • LR-A.1.15

              Until such time as Volume 5 (Specialised Activities) of the BMA Rulebook is issued, ancillary services providers remain subject to the requirements contained in the BMA's "Standard Conditions and Licensing Criteria" applicable to providers of ancillary services to the financial sector, and relevant existing Circulars.

          • Updating the BMA Rulebook

            • LR-A.1.16

              Unless the context suggests otherwise, references elsewhere in Volume 2 to Full Commercial Bank should be taken as referring to Islamic retail bank licensees, and references to Offshore Banking Units and Investment Bank Licensees should be taken as referring to Islamic wholesale bank licensees. References to the previous bank license categories that applied prior to 1 July 2006 will be gradually updated over time, across the rest of Volume 2.

        • LR-A.2 LR-A.2 Module History

          • Evolution of Module

            • LR-A.2.1

              This Module (Module LR — "Licensing and Authorisation Requirements") was first issued in January 2005, as part of the initial release of Volume 2 of the BMA 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 BMA's new integrated license framework. Module LR was amended to reflect the new Islamic bank licenses introduced by the framework, and to more closely align its presentation with that found in other BMA Rulebook volumes.

            • LR-A.2.3

              The reissued Module is dated July 2006. All subsequent changes were dated with the month and year when the change was made, at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.

            • LR-A.2.4

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

              Module Reference Change Date Description of Changes
              Whole Module 07/2006 Whole Module reissued to reflect integrated license framework: new license categories and updated licensing conditions introduced.
                   

          • Superseded Requirements

            • LR-A.2.5

              The initial January 2005 version of this Module superseded various circulars and other requirements relating to licensing. Some of these circulars were combined in 1997 into a licensing folder ("Part 1: Licensing", which formed part of the three volume information pack, "The Establishment, regulations and supervision of banks and other financial institutions in Bahrain"). The requirements contained in these circulars were transposed into the initial January 2005 version of this Module unchanged, as follows:

              Circular Reference Date of Issue Module Ref.
              (July 2004 version)
              Circular Subject
              5/77 08/03/77 LR-B.1.1, LR-3.3 Permitted Business Transactions with residents
              OG/16/90 10/01/90 LR-2.3, LR-3.3 Dealing with Residents
              OG/192/98 16/06/98 LR-4 Financial Trust Regulation
              No reference 04/81 LR-5 Precious Metals and Commodities
              BS/07/04 06/05/04 LR-6 Record Keeping Requirements

      • LR-B LR-B Scope of Application

        • LR-B.1 LR-B.1 General Prohibitions

          • LR-B.1.1

            The licensing requirements in Chapter LR-1 have general applicability, in that they prevent any person from providing (or seeking to provide) regulated banking services within or from the Kingdom of Bahrain, unless they have been licensed as a Islamic bank licensee by the BMA (see Rule LR-1.1.1).

          • LR-B.1.2

            In addition, no one may use the term 'bank' in their trading or corporate name, or otherwise hold themselves out to be a bank in Bahrain, unless they hold the appropriate license from BMA (see Rule LR-1.1.2).

          • LR-B.1.3

            The Rules referred to above are supported by statutory restrictions contained in the BMA Law 1973 (cf. Articles 60 and 61).

        • LR-B.2 LR-B.2 Licensed Persons

          • LR-B.2.1

            The remaining requirements in Chapters LR-1 to LR-3 (besides those mentioned in Section LR-B.1 above) apply to all those licensed by BMA as an Islamic bank licensee, or which are in the process of seeking such a license. They apply regardless of whether the person concerned is incorporated in the Kingdom of Bahrain, or in an overseas jurisdiction, unless otherwise specified.

          • LR-B.2.2

            These remaining requirements prescribe the types of license offered; their associated operating conditions; the licensing conditions that have to be satisfied in order to secure and retain a license; and the processes to be followed when applying or varying a license, or when a license is withdrawn.

      • LR-1 LR-1 Requirement to Hold a License

        • LR-1.1 LR-1.1 Islamic Bank Licensees

          • General Prohibitions

            • LR-1.1.1

              No person may:

              (a) undertake (or hold themselves out to undertake) regulated Islamic banking services within or from the Kingdom of Bahrain unless duly licensed by the BMA; or
              (b) hold themselves out to be licensed by the BMA unless they have as a matter of fact been so licensed.

            • LR-1.1.2

              Only persons licensed to undertake regulated Islamic banking services (or regulated 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 may be 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 BMA license or obtaining the prior approval of the BMA.

          • Licensing

            • LR-1.1.5

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

            • LR-1.1.6

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

              (a) a business plan specifying the type of business to be conducted;
              (b) application forms for all controllers; and
              (c) application forms for all controlled functions.

            • LR-1.1.7

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

              (a) granted the application without conditions;
              (b) granted the application subject to conditions specified by the BMA; or
              (c) refused the application, stating the grounds on which the application has been refused and the process for appealing against that decision.

            • 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, BMA will provide a formal decision on a Phase 1 license application within 60 calendar days of all required documentation having been submitted in a form acceptable to BMA.

            • LR-1.1.9

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

            • LR-1.1.10

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

            • LR-1.1.11

              Islamic 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 BMA, 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 BMA 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 BMA's capital rules (see Module CA). In addition, the BMA 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 LR-1.2 License Sub-Categories

          • Retail vs. Wholesale

            • LR-1.2.1

              Depending on the nature of activities undertaken, Islamic bank licensees must be licensed either as an Islamic retail bank licensee or as an Islamic wholesale bank licensee. The same legal entity may not hold both types of license.

            • LR-1.2.2

              The nature of activities allowed under each license sub-category is specified below (cf. Rule LR-1.2.4ff). The Islamic retail bank licensee category replaces the Full Commercial Bank (Islamic principles) category that existed prior to July 2006; the Islamic wholesale bank licensee category replaces the Offshore Banking Unit and Investment Bank License (Islamic 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 BMA, and the issuance of a new license certificate. Where (prior to July 2006), the same legal entity holds multiple licenses, BMA will agree transitional measures aimed at rationalizing the number of licenses held.

          • Islamic Retail Bank Licensees

            • LR-1.2.4

              Islamic retail bank licensees are allowed to transact with both residents and non-residents of the Kingdom of Bahrain, and in both Bahraini Dinar and foreign currencies.

            • LR-1.2.5

              To qualify as an Islamic retail bank licensee, the person concerned must undertake (as a minimum), the activity of accepting Shari'a money placements/deposits, and/or managing Shari'a profit sharing investment accounts, as well as the activity of offering Shari'a financing contracts (as defined in Rules LR-1.3.16, LR-1.3.17 and LR-1.3.18). The activity of offering Shari'a financing contracts must be a significant part of the bank's business, relative to other activities.

            • LR-1.2.6

              When assessing the significance of Shari'a financing contracts, in the context of Rule LR-1.2.5, the BMA would normally expect to see such contracts constitute at least 20% of the total assets of the institution. Other activities and criteria may also be taken into account, if the BMA believes they are of a financing-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 cease to satisfy the condition contained in Rule LR-1.2.5, the BMA 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.

            • LR-1.2.8

              The purpose of Rule LR-1.2.5 is to ensure that, besides the activity of accepting Shari'a money placements/deposits, and managing Shari'a profit sharing investment accounts, that the core banking activity of providing finance also forms part of the definition of Islamic retail bank licensees, and accounts for a significant share of their business, in keeping with their intermediation function.

          • Islamic Wholesale Bank Licensees

            • LR-1.2.9

              Islamic wholesale bank licensees are allowed to transact with residents of the Kingdom of Bahrain (irrespective of currency), and in Bahraini Dinar (irrespective of the location of the counterparty), subject to the conditions and exemptions specified in Rules LR-1.2.13, LR-1.2.15, LR-1.2.17 and LR-1.2.19. 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/Bahraini Dinar customer business of Islamic wholesale bank licensees to larger transactions. By definition, their on-shore client base is therefore wholesale in nature (i.e. other banks, large corporates and high net-worth individuals).

            • LR-1.2.11

              To qualify as an Islamic wholesale bank licensee, the person concerned must undertake (as a minimum), the activity of accepting Shari'a money placements/deposits and/or managing Shari'a profit sharing investment accounts (as defined in Rules LR-1.3.16 and LR-1.3.17), together with the activity of offering Shari'a financing contracts (as defined in Rule LR-1.3.18).

            • LR-1.2.12

              The purpose of Rule LR-1.2.11 is to ensure that the core Islamic banking activities of accepting Shari'a money placements/deposits, and managing Shari'a profit sharing investment accounts, form part of the definition of Islamic wholesale bank licensees. However, unlike Islamic retail bank licensees, there is no requirement that the activity of providing Shari'a financing contracts must be a significant part of the bank's business, relative to other activities. This is to allow Islamic wholesale bank licensees 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 and profit sharing investors may be exposed. Rule LR-1.2.11 does not in any way prevent Islamic wholesale bank licensees from providing Shari'a-compliant finance as a major activity, should they wish to.

            • LR-1.2.13

              Islamic wholesale bank licensees may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (a) and (b) 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 placement/deposit must be BD 7 million or above (or its equivalent in foreign currency); however, subsequent additions and withdrawals from the 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 Shari'a-compliant financing transactions, the initial facility amount advised must be 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

              Islamic wholesale bank licensees may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (c) to (j) listed in Rule LR-1.3.1, only where the initial transaction is US$ 250,000 or above (or its foreign currency equivalent), and where the financial instruments concerned are Shari'a compliant.

            • LR-1.2.17

              With respect to activity (c) (managing Shari'a profit sharing investment accounts), the threshold refers to the initial amount placed as an investment. With respect to activities (d) and (e) (dealing in financial instruments as principal / agent), the threshold refers to the individual transaction size. With respect to activities (f) and (g) (managing / safeguarding financial instruments), the threshold refers to the initial investment amount. With respect to activity (h), (operating a Collective Investment Undertaking), the threshold refers to the minimum investment required for participation in the scheme. With respect to activities (i) and (j) (arranging / advising on deals in 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 (c), (d) and (e) 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$ 250,000, 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 money placement /financing activities. Finally, the initial amount taken as an investment may be split between two or more investment products — providing at least US$ 250,000 is taken from the customer on the same day and the bank's records can demonstrate this.

            • LR-1.2.19

              Islamic wholesale bank licensees may only undertake activities (k) and (l) 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 (k) and (l) 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, Islamic wholesale bank licensees are allowed to transact in Bahraini 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 PIRI Form), and BMA bank licensees. Islamic wholesale bank licensees may also transact in Bahraini Dinar for any amount, where required to fund their normal operating expenses; when investing for their own account in securities listed on the Bahrain Stock Exchange.

            • 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 BMA. These transactions will be allowed to mature.

            • LR-1.2.22

              Since the Islamic wholesale bank licensee 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 BMA, and these exemptions went further than those now being applied across the board to all Islamic wholesale bank licensees.

            • LR-1.2.23

              Islamic wholesale bank licensees wishing to undertake transactions of the type specified in Rules LR-1.2.13, LR-1.2.16 or LR-1.2.19 must seek prior written BMA approval.

            • 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 BMA to monitor the initiation of such business by Islamic 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 Islamic wholesale bank licensees comply with the BMA's reserve requirements (which apply to deposit liabilities denominated in Bahraini Dinars — see LR-2.5.10).

            • LR-1.2.25

              Islamic wholesale bank licensees unclear about the interpretation of the conditions specified in Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19 must consult the BMA, prior to undertaking the transaction concerned.

            • LR-1.2.26

              BMA 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 BMA and may be amended in response to market developments.

        • LR-1.3 LR-1.3 Definition of Regulated Islamic Banking Services

          • LR-1.3.1

            Regulated Islamic banking services are any of the following activities, carried on by way of business:

            (a) Accepting Shari'a money placements/deposits
            (b) Offering Shari'a Financing Contracts
            (c) Managing Shari'a profit sharing investment accounts
            (d) Dealing in Shari'a compliant financial instruments as principal
            (e) Dealing in Shari'a compliant financial instruments as agent
            (f) Managing Shari'a compliant financial instruments
            (g) Safeguarding Shari'a compliant financial instruments
            (h) Operating a Shari'a compliant Collective Investment Undertaking
            (i) Arranging deals in Shari'a compliant financial instruments
            (j) Advising on Shari'a compliant financial instruments
            (k) Providing money exchange/remittance services
            (l) Issuing/ administering means of payment.

          • LR-1.3.2

            Upon application, the BMA may exclude specific transactions from the definition of regulated Islamic banking services.

          • LR-1.3.3

            The BMA will normally only consider granting such an exemption when a Bahrain resident is unable to obtain a specific product in Bahrain and it would be unreasonable to require the overseas provider of that product to be licensed for that specific transaction, and the provider has no intention of regularly soliciting such business in Bahrain.

          • LR-1.3.4

            For the purposes of Rule LR-1.3.1, carrying on a regulated Islamic banking service by way of business means:

            (a) undertaking for commercial gain, at a minimum, either or both of the activities of accepting Shari'a money placements/deposits and managing Shari'a profit sharing investment accounts, together with the activity of offering Shari'a financing contracts; in addition, any of the remaining activities specified in Rule LR-1.3.1 may also be undertaken;
            (b) holding oneself out as willing and able to engage in such activities; or
            (c) regularly soliciting other persons to engage in transactions constituting such activities.

          • LR-1.3.5

            Licensees should note that they may still undertake activities falling outside the definition of regulated Islamic banking services, such as investing in physical commodities — subject to Rule LR-1.1.11. The fact that an activity is not included in the definition of regulated Islamic banking services does not mean that it is prohibited. In transitioning to the new licensing framework, BMA will be closely liaising with licensees to ensure that no disruption occurs to their legitimate business activities.

          • LR-1.3.6

            Licensees should note that the same legal entity cannot combine regulated Islamic banking services with other regulated services, such as regulated insurance services. However, different legal entities within the same group may of course each hold a different license (e.g. banking and insurance).

          • General exclusions

            • LR-1.3.7

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

              (a) is carried on in the course of a business which does not ordinarily constitute the carrying on of financial services;
              (b) may reasonably be regarded as a necessary part of any other services provided in the course of that business; and
              (c) is not remunerated separately from the other services.

            • LR-1.3.8

              For example, the holding of money as a rent-guarantee in connection with the rental of a property would not be considered a regulated Islamic banking service, since it satisfies the exemptions in Rule LR-1.3.7.

            • LR-1.3.9

              A person does not carry on an activity constituting a regulated Islamic 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 Islamic 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 Islamic 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, commercial companies entering into bay salam or istisna transactions in order to protect themselves against future fluctuations in the price of their products, would not be considered to be dealing in financial instruments as principal, and would not therefore require to be licensed as an Islamic bank licensee.

            • LR-1.3.13

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

          • Accepting Shari'a money placements/deposits

            • LR-1.3.16

              Accepting Shari'a money placements is defined as the acceptance of sums of money for safe-keeping ('al-wadia', 'q'ard') in a Shari'a 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.

          • Managing Shari'a profit sharing investment accounts

            • LR-1.3.17

              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, such as a mudaraba or musharaka partnership.

          • Offering Shari'a Financing Contracts

            • LR-1.3.18

              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.

          • Dealing in Shari'a compliant financial instruments as principal

            • LR-1.3.19

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

            • LR-1.3.20

              Rule LR-1.3.22 includes the underwriting of equity and other financial instruments. It also includes the temporary sale of a financial instrument through a repo transaction.

            • LR-1.3.21

              A person does not carry on an activity specified in Rule LR-1.3.19 if the activity relates to the person issuing his own financial instrument.

          • Dealing in Shari'a compliant financial instruments as agent

            • LR-1.3.22

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

            • LR-1.3.23

              A licensee that carries on an activity of the kind specified by Rule LR-1.3.22 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.

          • Managing Shari'a Compliant Financial Instruments

            • LR-1.3.24

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

            • LR-1.3.25

              The activities included under the definition of Rule LR-1.3.24 include activities such as asset management.

          • Safeguarding Shari'a Compliant Financial Instruments (i.e. Custodian)

            • LR-1.3.26

              Safeguarding Shari'a compliant financial instruments means the safeguarding of Shari'a compliant financial instruments for the account of clients.

            • LR-1.3.27

              A person does not carry on an activity specified in Rule LR-1.3.26 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-1.3.28

              A person does not carry on an activity specified in Rule LR-1.3.26 if a third person, namely a qualifying custodian, accepts responsibility with regard to the financial instrument.

            • LR-1.3.29

              A "qualifying custodian" means a person who is:

              (a) a licensee who has permission to carry on an activity of the kind specified in Rule LR-1.3.26; or
              (b) an exempt person in relation to activities of that kind.

            • LR-1.3.30

              A person does not carry on an activity specified in Rule LR-1.3.26 if they are managing a central depository, which is part of an exchange recognised by BMA.

            • LR-1.3.31

              The following are examples of activities, when taken in isolation, are unlikely to be regarded an activity of the kind specified under Rule LR-1.3.26:

              (a) providing information as to the number of units or the value of any assets safeguarded; and
              (b) converting currency.

            • LR-1.3.32

              A person undertaking an activity of the kind specified under Rule LR-1.3.26 may also be engaged in the administration of the financial instruments, including related services such as cash/ collateral management.

          • Operating a collective investment undertaking

            • LR-1.3.33

              Operating a collective investment undertaking means operating, establishing or winding up a collective investment undertaking.

            • LR-1.3.34

              For the purposes of LR-1.3.33, a collective investment undertaking means any arrangements, authorised by or registered with the BMA, with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements to participate in or receive profits or income arising from the acquisition, holding or disposal of the property or sums paid out of such profits or income.

            • LR-1.3.35

              A person does not carry on an activity specified in Rule LR-1.3.33 if the activity relates to the person establishing or winding up a collective investment undertaking, and that activity may be reasonably regarded as necessary in the course of providing legal services or providing accounting services.

            • LR-1.3.36

              Collective investment undertakings of the kind specified in Rule LR-1.3.33 may be open-ended (i.e. with shares continuously issued and redeemed to meet investor demand) or closed-ended (where there is a single issue of shares and investors can only realise their investments on the winding-up of the fund).

          • Arranging deals in Shari'a compliant financial instruments

            • LR-1.3.37

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

            • LR-1.3.38

              A person does not carry on an activity specified in Rule LR-1.3.37 if the arrangement does not bring about the transaction to which the arrangement relates.

            • LR-1.3.39

              A person does not carry on an activity specified in Rule LR-1.3.37 if a person's activities are limited solely to introducing clients to licensees.

            • LR-1.3.40

              The exclusion in Rule LR-1.3.39 does not apply if the agent receives from any person, other than the client, any pecuniary reward or other advantage, for 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-1.3.41

              A person does not carry on an activity specified in Rule LR-1.3.37 merely by providing the means of communication between two parties to a transaction.

            • LR-1.3.42

              A person does not carry on an activity specified in Rule LR-1.3.37 if they operate an exchange, duly recognised and authorised by the BMA.

            • LR-1.3.43

              Negotiating terms for an investment on behalf of a client is an example of an activity which maybe regarded as activities of the kind specified in Rule LR-1.3.37.

            • LR-1.3.44

              The following are examples of activities, when taken in isolation, are unlikely to be regarded as an activity of the kind specified in Rule LR-1.3.37:

              (a) appointing professional advisers;
              (b) preparing a prospectus/business plan;
              (c) identifying potential sources of funding;
              (d) assisting investors/subscribers/borrowers to complete and submit application forms; or
              (e) receiving application forms for processing/checking and/or onward transmission.

          • Advising on deals in Shari'a compliant financial instruments

            • LR-1.3.45

              Advising on Shari'a compliant 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 Shari'a compliant financial instrument or exercising any right conferred by such a financial instrument.

            • LR-1.3.46

              The following are examples of activities, which may be regarded as an activity as defined by Rule LR-1.3.45:

              (a) a person may offer to tell a client when shares reach a certain value on the basis that when the price reaches that value it would be a good time to buy or sell them;
              (b) recommendation on the size or timing of transactions; and
              (c) advice on the suitability of the financial instrument, or on the characteristics or performance of the financial instrument or credit facility concerned.

            • LR-1.3.47

              A person does not carry on an activity specified in Rule LR-1.3.45 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:

              (a) that of giving advice of the kind mentioned in Rule LR-1.3.45; nor
              (b) that of leading or enabling persons to buy, sell, subscribe for or underwrite a financial instrument.

            • LR-1.3.48

              The following are examples of activities, when taken in isolation, are unlikely to be regarded as an activity as defined by Rule LR-1.3.45:

              (a) explaining the structure, or the terms and conditions of a financial instrument or credit facility;
              (b) valuing financial instruments for which there is no ready market;
              (c) circulating company news or announcements;
              (d) comparing the benefits and risks of one financial instrument to another; and
              (e) advising on the likely meaning of uncertain provisions in an agreement relating to, or the terms of, a financial instrument or on the effect of contractual terms and their commercial consequences or on terms that are commonly accepted in the market.

          • Providing money exchange / remittance services

            • LR-1.3.49

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

          • Issuing / administering means of payment

            • LR-1.3.50

              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-2 LR-2 Licensing Conditions

        • LR-2.1 LR-2.1 Condition 1: Legal Status

          • LR-2.1.1

            The legal status of an Islamic bank licensee must be:

            (i) a Bahraini joint stock company (BSC); or
            (ii) a branch resident in Bahrain of an Islamic bank incorporated under the laws of its territory of incorporation and authorized as a bank in that territory.

          • LR-2.1.2

            Where the Islamic bank licensee is a branch of an overseas bank, in deciding whether to grant a license, the BMA will pay close regard to its activities elsewhere and how these activities are regulated. If the Islamic bank licensee is not regulated elsewhere or in a jurisdiction not substantially compliant with Basel Core Principles or FATF standards, then an application for licensing can only be considered after exhaustive enquiries into the bank's shareholders, management structure and financial position.

        • LR-2.2 LR-2.2 Condition 2: Mind and Management

          • LR-2.2.1

            Islamic bank licensees with their Registered Office in the Kingdom of Bahrain must maintain their Head Office in the Kingdom. Overseas Islamic bank licensees must maintain a local management presence and premises in the Kingdom appropriate to the nature and scale of their activities.

          • LR-2.2.2

            In assessing the location of an Islamic bank licensee's Head Office, the BMA will take into account the residency of its Directors and senior management. The BMA requires the majority of key decision makers in executive management — including the Chief Executive — to be resident in Bahrain. In the case of overseas Islamic bank licensees, the BMA requires the branch of a foreign company to have a substantive presence, demonstrated by a level of staff and other resources sufficient to ensure adequate local scrutiny and control over business booked in the Bahrain branch, as well as the General Manager of the branch to be resident in Bahrain.

        • LR-2.3 LR-2.3 Condition 3: Controllers

          • LR-2.3.1

            Islamic bank licensees must satisfy the BMA that their controllers are suitable and pose no undue risks to the licensee. Islamic bank licensees must also satisfy the BMA that their group structures do not prevent the effective supervision of the Islamic bank licensee by the BMA and otherwise pose no undue risks to the licensee.

          • LR-2.3.2

            Chapter GR-5 contains the BMA's requirements and definitions regarding controllers.

          • LR-2.3.3

            In summary, controllers are persons who directly or indirectly are significant shareholders in an Islamic bank licensee, or who are otherwise able to exert significant influence on the Islamic bank licensee. The BMA seeks to ensure that controllers pose no significant risks to the licensee. In general terms, controllers are assessed in terms of their financial standing, their judicial and regulatory record, and standards of business and (where relevant) personal probity.

          • LR-2.3.4

            As regards group structures, the BMA seeks to ensure that these do not prevent adequate consolidated supervision being applied to financial entities within the group, and that other group entities do not pose any material financial, reputational or other risks to the licensee.

          • LR-2.3.5

            In all cases, when judging applications from existing groups, the BMA will have regard to the reputation and financial standing of the group as a whole. Where relevant, the BMA will also take into account the extent and quality of supervision applied to overseas members of the group and take into account any information provided by other supervisors in relation to any member of the group.

        • LR-2.4 LR-2.4 Condition 4: Board and Employees

          • LR-2.4.1

            Those nominated to carry out controlled functions must satisfy BMA's approved persons requirements.

          • LR-2.4.2

            The definition of controlled functions is contained in HC-2.1, whilst HC-2.2 sets out BMA's approved persons requirements.

          • LR-2.4.3

            The Islamic bank licensee's staff, taken together, must collectively provide a sufficient range of skills and experience to manage the affairs of the licensee in a sound and prudent manner. Islamic bank licensees must ensure their employees meet any training and competency requirements specified by the BMA.

        • LR-2.5 LR-2.5 Condition 5: Financial Resources

          • Capital Adequacy

            • LR-2.5.1

              Islamic bank licensees must maintain a level of financial resources, as agreed with the BMA, 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

              Islamic bank licensees must maintain a minimum level of paid-up capital of BD 20,000,000 (or its equivalent in foreign currency, where legally permitted and agreed with BMA).

            • LR-2.5.3

              Persons seeking a license as an Islamic 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 an Islamic 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

              Overseas banking 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. Overseas banking 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 Bahraini Islamic bank licensees, funds placed with the bank by way of call and/or unrestricted investment accounts (or similar) must not exceed 20 times their capital and reserves. For overseas Islamic wholesale bank licensees, endowment capital may be required.

            • 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.

          • Liquidity

            • LR-2.5.8

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

            • LR-2.5.9

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

          • Reserve Requirements

            • LR-2.5.10

              Islamic bank licensees must maintain a minimum daily cash reserve balance with the BMA, equivalent to 5% of its total non-bank Bahraini Dinar funds, whether placed by way of call or unrestricted investment accounts (or similar), as well as taken through the issuance of Bahraini Dinar denominated Islamic investment certificates.

        • LR-2.6 LR-2.6 Condition 6: Systems and Controls

          • LR-2.6.1

            Islamic bank licensees must maintain systems and controls that are, in the opinion of the BMA, adequate for the scale and complexity of their activities. These systems and controls must meet the minimum requirements contained in Modules HC and OM.

          • LR-2.6.2

            Islamic bank licensees must maintain systems and controls that are, in the opinion of the BMA, adequate to address the risks of financial crime occurring in the licensee. These systems and controls must meet the minimum requirements contained in Module FC, as specified for the category of license held.

          • LR-2.6.3

            Applicants will be required to demonstrate in their business plan (together with any supporting documentation) what risks their business would be subject to and how they would manage those risks. Applicants may be asked to provide an independent assessment of the appropriateness of their systems and controls to the BMA, as part of the license approval process.

        • LR-2.7 LR-2.7 Condition 7: External Auditors

          • LR-2.7.1

            Islamic bank licensees must appoint external auditors, subject to BMA's prior approval. The minimum requirements regarding auditors contained in Module AU (Auditors and Accounting Standards) must be met.

          • LR-2.7.2

            Applicants must submit details of their proposed external auditors to the BMA as part of their license application.

        • LR-2.8 LR-2.8 Condition 8: Other Requirements

          • Books and Records

            • LR-2.8.1

              Islamic bank licensees must maintain comprehensive books of accounts and other records, and satisfy the minimum record keeping requirements contained in Module GR. Books of accounts must comply with the Financial Accounting Standards issued by the accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), or with International Financial Reporting Standards (IFRS) / International Accounting Standards (IAS), where no relevant AAOIFI standard exists. Audited accounts must be submitted to the BMA within 3 months of the licensee's financial year-end.

          • Provision of Information

            • LR-2.8.2

              Islamic bank licensees must act in an open and cooperative manner with the BMA. Islamic bank licensees must meet the regulatory reporting and public disclosure requirements contained in Modules BR and PD respectively.

          • General Conduct

            • LR-2.8.3

              Islamic bank licensees must conduct their activities in a professional and orderly manner, in keeping with good market practice. Islamic 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.

          • License fees

            • LR-2.8.4

              Islamic bank licensees must comply with any license fee requirements applied by the BMA.

            • LR-2.8.5

              The BMA's license fees are set out in Chapter GR-8.

          • Additional Conditions

            • LR-2.8.6

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

            • LR-2.8.7

              Bank licensees are subject to the provisions of the BMA Law 1973. These include the right of the BMA to impose such terms and conditions, as it may deem necessary when issuing a license. Thus, when granting a license, the BMA 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 BMA may impose additional restrictions or requirements, beyond those already specified in Volume 2, to address specific risks. For instance, a license may be granted subject to strict limitations on intra-group transactions.

            • LR-2.8.9

              Islamic retail bank licensees are subject to the deposit protection scheme of eligible deposits held with the Bahrain offices of the licensee, with respect to certain of their liabilities (see Chapter CP-2).

      • LR-3 LR-3 Information Requirements and Processes

        • LR-3.1 LR-3.1 Licensing

          • LR-3.1.1

            The application process for an Islamic bank license consists of two parts: Phase 1 and Phase 2. For Phase 1, applicants for a license must submit a duly completed Form 1 (Phase 1) (Application for a License), under cover of a letter signed by an authorized signatory of the applicant marked for the attention of the Director, Licensing and Policy Directorate. The application must be accompanied by the documents listed in Paragraph LR-3.1.5, unless otherwise directed by the BMA.

          • LR-3.1.2

            If, after submission of a duly completed Form 1 (Phase 1) and associated documents, an applicant is granted a conditional (in principle) approval for a license, the applicant must submit Form 1 (Phase 2), together with the documents referred to in Paragraph LR-3.1.10.

          • LR-3.1.3

            When referring to the applicant, reference is made to the proposed licensee seeking an Islamic bank license. The applicant may choose to have an authorized representative, acting on its behalf. In instances where the applicant uses an authorized representative, the application form should provide all details regarding the authorized representative and is to be signed by both the applicant and authorized representative.

          • LR-3.1.4

            Islamic bank licensees, who were licensed prior to the publication of the new LR Module of Volume 2, do not need to resubmit an application for a license. Their license category, and the scope of their authorization, will be confirmed in an exchange of letters, and by re-issuing their license certificate.

          • LR-3.1.5

            Unless otherwise directed by the BMA, the following documents must be provided as Part of Phase 1 in support of a license application:

            (a) a duly completed Form 2 (Application for Authorisation of Controller) for each controller of the proposed licensee;
            (b) a duly completed Form 3 (Application for Approved Person status), for each proposed Director of the proposed licensee;
            (c) a comprehensive business plan for the application, addressing the matters described in LR-3.1.6;
            (d) for overseas banks, a copy of the bank's current commercial registration or equivalent documentation;
            (e) where the applicant is a registered institution, a copy of the applicant's commercial registration;
            (f) where the applicant is a corporate body, a certified copy of a Board resolution of the applicant, confirming its decision to seek a BMA Islamic bank license;
            (g) in the case of applicants that are part of a regulated group, a letter of non-objection to the proposed license application from the applicant's home supervisor, together with confirmation that the group is in good regulatory standing and is in compliance with applicable supervisory requirements, including those relating to capital adequacy and solvency requirements;
            (h) in the case of overseas branch applicants, a letter of non-objection to the proposed license application from the applicant's home supervisor, together with confirmation that the applicant is in good regulatory standing and is in compliance with applicable supervisory requirements, including those relating to capital adequacy requirements;
            (i) in the case of branch applicants, copies of the audited financial statements of the applicant (head office) for the three years immediately prior to the date of application; and
            (j) in the case of other applicants, copies of the audited financial statements of the applicant's major shareholder and/or group (as directed by the BMA), for the three years immediately prior to the date of application.

          • LR-3.1.6

            The business plan submitted in support of an application should explain:

            (a) an outline of the history of the applicant and its shareholders;
            (b) the reasons for applying for a license, including the applicant's strategy and market objectives;
            (c) the proposed type of activities to be carried on by the applicant in/from the Kingdom of Bahrain;
            (d) the proposed Board and senior management of the applicant and the proposed organisational structure of the applicant;
            (e) an assessment of the risks that may be faced by the applicant, together with the proposed systems and controls framework to be put in place for addressing those risks and to be used for the main business functions; and
            (f) an opening balance sheet for the applicant, together with a three-year financial projection, with all assumptions clearly outlined, demonstrating that the applicant will be able to meet applicable capital adequacy and liquidity requirements.

          • LR-3.1.7

            The applicant's memorandum and articles of association must explicitly provide for it to undertake the activities proposed in the licensed application, and must preclude the applicant from undertaking other commercial activities, unless these arise out of its banking activities or are incidental to those.

          • LR-3.1.8

            In the case of a new bank's capital being financed by a private placement, the Private Placement Memorandum must also be submitted to BMA for its approval as part of the Phase 2 documentation.

          • LR-3.1.9

            The purpose of Rule LR-3.1.8 is to allow BMA to verify that the contents of the Private Placement Memorandum are consistent with other information supplied to BMA, notably in the business plan, and otherwise meets any applicable regulatory requirements with respect to PPM documents. The BMA's review of the PPM does not in any way constitute an approval or endorsement as to any claims it may contain as to the future value of the proposed bank.

          • LR-3.1.10

            As part of Phase 2 of the licensing application process, unless otherwise directed by the BMA, the following documents and information must be provided:

            (a) a duly completed Form 3 (Application for Approved Person status), for each individual, (other than for Directors, submitted as part of Phase 1) applying to undertake controlled functions in the applicant;
            (b) a draft copy of the applicant's memorandum and articles of association, addressing the matters described in LR-3.1.7;
            (c) a letter of guarantee from the applicant's major shareholder, confirming its willingness to support the proposed licensee in case of need; and
            (d) in the case of overseas branch applicants, a letter of guarantee from the applicant's head office, confirming responsibility for all of the liabilities of the proposed branch, together with evidence of the power to give such a guarantee.

          • LR-3.1.11

            All documentation provided to the BMA as part of an application for a license must be in either the Arabic or English languages. Any documentation in a language other than English or Arabic must be accompanied by a certified English or Arabic translation thereof.

          • LR-3.1.12

            Any material changes or proposed changes to the information provided to the BMA in support of an authorisation application that occurs prior to authorisation must be reported to the BMA.

          • LR-3.1.13

            Failure to inform BMA of the changes specified in LR-3.1.12 is likely to be viewed as a failure to provide full and open disclosure of information, and thus a failure to meet licensing condition LR-2.8.2.

          • LR-3.1.14

            As part of the Phase 1 review of application process, the BMA 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 BMA. Once an "in principal" approval has been granted for Phase 1, the applicant must submit within 6 months of the "in principal" approval, all requirements for Phase 2 as outlined in Paragraph LR-3.1.10. The BMA will provide a final decision within 30 calendar days of all Phase 2 documentation having been submitted in a form acceptable to the BMA. Applicants are encouraged to approach the BMA to discuss their application at an early stage, so that any specific questions can be dealt with prior to the finalisation of the application.

          • LR-3.1.15

            Within 6 months of the license being issued, the new licensee must provide to the BMA:

            (a) a detailed action plan for establishing the operations and supporting infrastructure of the bank, such as the completion of written policies and procedures, and recruitment of remaining employees (having regard to the time limit set by Article 66 of the BMA Law 1973);
            (b) the registered office address and details of premises to be used to carry out the business of the proposed licensee;
            (c) the address in the Kingdom of Bahrain where full business records will be kept;
            (d) the licensee's contact details including telephone and fax number, e-mail address and website;
            (e) a description of the business continuity plan;
            (f) a description of the IT system that will be used, including details of how IT systems and other records will be backed up;
            (g) a copy of the auditor's acceptance to act as auditor for the applicant;
            (h) a copy of the Ministry of Industry & Commerce commercial registration certificate; and
            (i) other information as may be specified by the BMA.

          • LR-3.1.16

            Applicants issued new licenses by the BMA must start operations within 6 months of the license being issued, as per Article 66 of the BMA Law 1973.

          • LR-3.1.17

            Applicants who are refused a license have a right of appeal under the provisions contained in Article 68 of the BMA Law 1973.

        • LR-3.2 LR-3.2 Variations to a License

          • LR-3.2.1

            Islamic bank licensees must seek prior BMA approval before undertaking new regulated Islamic banking services.

          • LR-3.2.2

            Failure to secure BMA approval prior to undertaking a new regulated activity may lead to enforcement action being taken against the licensee concerned.

          • LR-3.2.3

            In addition to any other information requested by the BMA, and unless otherwise directed by the BMA, an Islamic bank licensee requesting BMA approval to undertake a new regulated Islamic banking service must provide the following information:

            (a) a summary of the rationale for undertaking the proposed new activities;
            (b) a description of how the new business will be managed and controlled;
            (c) an analysis of the financial impact of the new activities; and
            (d) a summary of the due diligence undertaken by the Board and management of the Islamic bank licensee on the proposed new activities.

        • LR-3.3 LR-3.3 Withdrawal of a License

          • Voluntary Surrender

            • LR-3.3.1

              All requests for the voluntary surrender of a license are subject to BMA approval. 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 is to be carried out.

            • LR-3.3.2

              Islamic bank licensees must satisfy BMA that their customers' interests are to be safeguarded during and after the proposed voluntary surrender.

            • LR-3.3.3

              The BMA 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 BMA. Also, a voluntary surrender will only take effect once the licensee, in the opinion of the BMA, has discharged all its regulatory responsibilities to customers.

          • Cancellation

            • LR-3.3.4

              Cancellation of a license requires BMA to issue a formal notice of cancellation to the person concerned. The notice of cancellation must describe the BMA's rationale for the proposed cancellation.

            • LR-3.3.5

              Failure to meet the relevant conditions contained in Chapter LR-2 can lead to cancellation of a license. The BMA generally views cancellation of a license as appropriate only in the most serious of circumstances, and generally tries to address supervisory concerns through other means beforehand. Further guidance is contained in Module EN (Enforcement), regarding BMA's approach to enforcement and on the process for issuing a notice of cancellation and the recipient's right to appeal the notice.

            • LR-3.3.6

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

    • PB PB Principles of Business

      • PB-A PB-A Introduction

        • PB-A.1 PB-A.1 Purpose

          • PB-A.1.1

            The principles are a general statement of the fundamental obligations of all banks.

          • PB-A.1.2

            This module requires banks to establish an adequate system and procedures to ensure:

            (a) compliance with the guidance set forth in this module, and
            (b) that the personnel responsible for maintaining such systems and controls are adequately qualified and competent in discharging their duties.

          • PB-A.1.3

            This module provides support to all regulations provided in this Rulebook.

        • PB-A.2 PB-A.2 Module history

          • PB-A.2.1

            This module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.

          • PB-A.2.2

            A list of most recent changes made to this module are detailed in the table below:

            Summary of changes

            Module Ref. Change Date Description of Changes
                 
                 
                 
                 
                 

      • PB-B PB-B Non-compliance with the principles

        • PB-B.1 PB-B.1 Non-compliance

          • PB-B.1.1

            A breach of the principles outlined in this module may call into question whether the Board and management of a licensee with a BMA license are still fit and proper, and whether the licensee may continue to be licensed.

          • PB-B.1.2

            Breaching a principle makes a licensee liable to disciplinary sanctions. In determining whether a principle has been breached it is necessary to look to the standard of conduct required by the principle in question. The BMA will determine, after collating all the relevant information required (through its regulatory reporting authority), whether a licensee is in breach of these principles.

      • PB-1 PB-1 Principles

        • PB-1.1 PB-1.1 Integrity

          • PB-1.1.1

            All relevant persons should be straightforward and honest in their services and conduct. Integrity is not just limited to honesty but also includes fair dealing and full disclosure of all relevant information. Banks' management must safeguard not only the interests of shareholders of the bank, but also those of the Profit Sharing Investment Account (PSIA) holders.

        • PB-1.2 PB-1.2 Objectivity

          • PB-1.2.1

            All relevant persons should be fair and should not allow prejudice, bias, conflict of interest or influence to override their objectivity. Again the bank's management must bear in mind the interests of shareholders and PSIA holders.

        • PB-1.3 PB-1.3 Competence, skill care and due diligence

          • PB-1.3.1

            All relevant persons should perform services with competence, due care and diligence and have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional services based on up-to-date developments in practice, legislation and techniques.

        • PB-1.4 PB-1.4 Confidentiality

          • PB-1.4.1

            All relevant persons should treat client information with the strictest of confidentiality unless disclosure is warranted under specific authority or there is a legal or professional duty to disclose.

        • PB-1.5 PB-1.5 Management and control

          • PB-1.5.1

            The Board of Directors and Shari'a Board (where applicable) and management must take reasonable care to organise and control the affairs of the licensee responsibly and effectively with adequate risk management systems. The organisational structure should be clearly delineated and reporting lines completely transparent to promote full disclosure.

        • PB-1.6 PB-1.6 Market conduct

          • PB-1.6.1

            All relevant persons should observe proper standards of market conduct. In particular, the Agency requires that banks comply with all AAOIFI issued accounting standards as well as the Shari'a pronouncements issued by the Shari'a Board of AAOIFI.

        • PB-1.7 PB-1.7 Communications with client

          • PB-1.7.1

            All relevant persons must pay due regard to the information needs of their clients and communicate information to them in a manner which is clear, fair and not misleading.

        • PB-1.8 PB-1.8 Relationship of trust

          • PB-1.8.1

            All relevant persons must take reasonable care to ensure the suitability of their advice and discretionary decisions for any customer who is entitled to rely upon their judgment.

    • HC HC High Level Controls

      • HC-A HC-A Introduction

        • HC-A.1 HC-A.1 Purpose

          • HC-A.1.1

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

            (a) the role and composition of their Boards and Board Committees; and
            (b) related high-level controls and policies.

          • HC-A.1.2

            In addition, this Module contains requirements for the notification and pre-approval of individuals, undertaking certain designated functions with respect to Islamic bank licensees. These functions (called "controlled functions"), include Directors and members of senior management. The controlled functions regime supplements the BMA's corporate governance requirements by ensuring that key persons involved in the running of Islamic bank licensees are fit and proper. Those approved by the BMA to undertake controlled functions are called approved persons.

          • HC-A.1.3

            Finally, this Module contains certain notification and approval requirements regarding the use of Special Purpose Vehicles ("SPVs"; see Section HC-1.5).

          • HC-A.1.4

            This Module supplements various provisions relating to corporate governance contained in Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law ("Commercial Companies Law 2001"). In case of conflict, the Commercial Companies Law shall prevail. The Module also supplements (for companies listed on the Bahrain Stock Exchange), Stock Exchange regulations that are relevant to corporate governance and high-level controls. Compliance with this Module does not guarantee compliance with either the Commercial Companies Law 2001 or the BSE regulations.

        • HC-A.2 HC-A.2 Key requirements

          • Corporate governance

            • HC-A.2.1

              The Chairman of the Board must be non-executive and independent. The role of Chairman and Chief Executive may not be exercised by the same person. (See Rule HC-1.3.9.)

            • HC-A.2.2

              The Board must approve a code of conduct for itself, senior management and employees, and define the responsibilities of itself and senior management. This should include procedures for dealing with conflicts of interest, and a prohibition on insider trading. (See Paragraphs HC-1.2.9 to HC-1.2.13.)

            • HC-A.2.3

              The Board must meet at least four times per year (see Rule HC-1.3.3).

            • HC-A.2.4

              Boards must have an adequate number of members that are "independent" and "non-executive" to serve the interests of minority shareholders and other stakeholders. (See Paragraphs HC-1.3.5 and HC-1.3.6.)

            • HC-A.2.5

              The Board should consider the setting up of committees to assist it in fulfilling its responsibilities. The setting up of an Audit Committee and a Shari'a Committee is mandatory. (See Paragraphs HC-1.3.10 to HC-1.3.13.)

            • HC-A.2.6

              All licensees must submit their organisational structure as approved by the Board of Directors. All licensees must establish independent functions for Internal Audit and Risk Management.

            • HC-A.2.7

              Islamic bank licensees are required to notify the BMA, in writing, of all major changes (regardless of type and/or effect) proposed to the strategy and/or corporate plan of the bank prior to implementation, as well as of any Special Purpose Vehicle they intend to establish as a subsidiary, or with respect to which they intend to act as sponsor or manager (see Section HC-1.5).

          • Approved Persons

            • HC-A.2.8

              Islamic bank licensees are required to secure prior BMA approval for those persons wishing to undertake a controlled function. Such persons are assessed against BMA's "fit and proper" requirements. Islamic bank licensees must also notify the BMA of any changes in their approved persons. (See Chapter HC-2)

          • Compliance officer/manager

            • HC-A.2.9

              Islamic bank licensees must appoint a senior member of staff with responsibility for compliance. The Compliance Officer is a controlled function. (See Chapter HC-3.1.)

        • HC-A.3 HC-A.3 Module history

          • Evolution of the Module

            • HC-A.3.1

              This Module was first issued in January 2005, as part of the initial release of Volume 2 of the BMA Rulebook. It was dated January 2005. All subsequent changes to this Module are shown with the month and year in which the change was made, at the base of the relevant page and in the Table of Contents. Chapter UG-3 provides further details on Rulebook maintenance and version control.

            • HC-A.3.2

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

              Module Ref. Change Date Description of Changes
              HC-1.5 01/07/05 Transparency requirements formalised
              HC-1.6 01/07/05 Notification concerning senior positions/controllers
              HC-1.1, HC-1.2 & HC-1.4 01/10/05 High level controls
              HC-1.5 01/10/05 New SPV requirements
              HC-3.1HC-3.2 01/10/05 Revised compliance function requirements
              HC-1.5.3, HC-1.5.5, & HC-4.1 01/01/06 Revised notification requirements for SPVs and dealing staff
              HC-2, HC-3 and HC-4 01/07/06 Requirements relating to controllers moved to Module GR; Remaining requirements relating to 'fit and proper' re-drafted to ensure consistent terminology and procedures with other Rulebook Volumes (without changing the substance of the previous 'fit and proper' requirements); Requirements relating to dealers incorporated into the 'fit and proper' requirements.

          • Superseded Requirements

            • HC-A.3.3

              Prior to the development of this Rulebook, the BMA issued various circulars covering different aspects of corporate governance. These circulars were consolidated into the first version of this Module as shown below:

              Circular Ref. Date of Issue Module Ref.
              (July 2004 version)
              Circular Subject
              BC/23/99 8 Nov 1999 HC-1 'Enhancing Corporate Governance in Banking Organisations'
              BC/904/95 24 Jul 1995 HC-1.6 Notification to, and approval from the Agency for certain matters
              ODG/329/03 10 Sep 2003 HC-1.6 Corporate Governance Reporting
              BC/11/98 27 Jul 1998 HC-2 Terms and Definitions Applying to the Management of Banks and Financial Institutions
              BC/8/00 24 May 2000 HC-2 Controllers of, and holdings and transfers of significant ownership or controlling interests in, Agency licensees
              BC/13/99 15 Jun 1999 HC-3 Compliance, Risk Management and Internal Controls
              BMA/1287/94 6 Nov 1994 HC-4 Foreign Exchange, Securities and Other Dealers

            • HC-A.3.4

              The contents in this Module are effective from the dates depicted in HC-A.3.2 and HC-A.3.3, from which the requirements are compiled. Section HC-1.3 is effective from January 2007.

      • HC-B HC-B General guidance and best practice

        • HC-B.1 HC-B.1 Guidance provided by other international bodies

          • Basel Committee: Enhancing Corporate Governance in Banking Organisations and High Level Controls for Banks

            • HC-B.1.1

              These papers (see www.bis.org/publ/bcbs56.pdf) issued in September 1998 and September 1999 provide guidance on corporate governance and high-level controls in banks. These papers form part of an ongoing effort by the Committee to strengthen procedures for risk management and disclosure in banks.

            • HC-B.1.2

              The papers draw on supervisory experience with corporate governance problems at banking organisations and suggest the types of practices that could help to avoid such problems. They identify a number of practices as critical elements of any financial institution's corporate governance process.

            • HC-B.1.3

              The Agency draws banks' attention to the Basel papers as benchmarks of best practice for corporate governance standards and high-level controls to be followed by banks operating in the Kingdom of Bahrain.

        • HC-B.2 HC-B.2 Enforceability

          • HC-B.2.1

            The requirements of Chapter 1, Sections HC-1.1HC-1.4 are binding requirements which banks and their Boards should follow on an "apply or explain" basis. If a Board or a bank elects not to follow these requirements, they must explain why to the Agency and document the reasons for not applying the concerned requirements in the Minutes of the Board. The remaining chapters are binding requirements except where shown as guidance.

          • HC-B.2.2

            This Module and Chapter 1 in particular supplements various provisions relating to Corporate Governance contained in Legislative Decree No. 21 of 2001 with respect to promulgating the Commercial Companies Law. In any cases of potential conflict, the Commercial Companies Law shall prevail. Compliance with this Module does not guarantee compliance with the Commercial Companies Law.

      • HC-1 HC-1 Corporate governance

        • HC-1.1 HC-1.1 Scope

          • HC-1.1.1

            The contents of this Chapter are applicable to locally incorporated banks. Bahrain branches of foreign banks must satisfy the Agency that equivalent arrangements are in place at the parent level and that these arrangements provide for effective high-level controls over activities conducted under the Bahrain license.

          • HC-1.1.2

            This Chapter covers the high-level controls aspects of corporate governance of banks, and therefore focuses on the functions of the constituent parts of high-level controls, starting with the respective roles and responsibilities of the Board and senior management.

          • HC-1.1.3

            This Chapter therefore does not cover matters of corporate governance relating to the Commercial Companies Law (e.g. General Meetings, the role of shareholders and other administrative matters) or Listing Requirements.

          • HC-1.1.4

            The BMA has historically pursued a "best practice" guidance approach to high-level controls and corporate governance, rather than a prescriptive rules-based approach. The Agency has chosen to notify licensees of international best practice standards, and allowed banks to interpret these, according to the scope of operations of the concerned bank. This Chapter blends a best practice-based approach with minimum requirements.

          • HC-1.1.5

            Banks must satisfy the BMA that financial services activities conducted in subsidiaries and other group members including foreign branches are subject to the same or equivalent arrangements for ensuring effective high-level controls over their activities. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.

          • HC-1.1.6

            Where a bank is unable to satisfy the BMA that its subsidiaries and other group members or foreign branches are subject to the same or equivalent arrangements, the BMA will assess the potential impact of risks — both financial and reputational — to the bank arising from inadequate high-level controls in the rest of the group of which it is a member. In such instances, the BMA may impose restrictions on dealings between the bank and other group members. Where weaknesses in controls are assessed by the BMA to pose a major threat to the stability of the bank, then its authorisation may be called into question.

        • HC-1.2 HC-1.2 The Board of Directors — Its Functions and Responsibilities

          • Strategy

            • HC-1.2.1

              In most banks, shareholders, creditors, employees, depositors and investment account holders ("stakeholders") are unable to closely monitor management, its strategies and the bank's performance due to a lack of information and resources. A key responsibility of the Board is to fill the gap between uninformed stakeholders to whom it owes a duty of care, and the more fully informed executive management by monitoring management closely on behalf of stakeholders.

            • HC-1.2.2

              The Board is ultimately accountable and responsible for the affairs and performance of the bank. The Board must establish the objectives of the bank and develop the strategies that direct the ongoing activities of the bank to achieve these objectives. The strategies should be communicated throughout the bank, and be disclosed publicly (e.g. via the website or in the annual report in an abbreviated form as applicable). In its strategy document, the Board must demonstrate that it is able to proactively identify and understand the significant risks that the bank faces in achieving its business objectives through its business strategies and plans.

            • HC-1.2.3

              The precise functions reserved for the Board, and those delegated to management and committees will vary, dependent upon the business of the institution, its size and ownership structure. However, at a minimum, the Board must establish and maintain a statement of its responsibilities for:

              (a) The adoption and annual review of strategy;
              (b) The adoption and review of management structure and responsibilities;
              (c) The adoption and review of the systems and controls framework; and
              (d) Monitoring the implementation of strategy by management.

            • HC-1.2.4

              In its strategy review process, the Board should:

              (a) Review the bank's business plans and the inherent level of risk in these plans;
              (b) Assess the adequacy of capital to support the business risks of the bank.
              (c) Set performance objectives;
              (d) Review the performance of executive management; and
              (e) Oversee major capital expenditures, divestitures and acquisitions.

            • HC-1.2.5

              The BMA expects the Board to have effective policies and processes in place for:

              (a) Ensuring a formal and transparent Board nomination process;
              (b) Appointing senior managers, and ensuring that they have the necessary integrity, technical and managerial competence, and experience;
              (c) Overseeing succession planning and replacing key executives when necessary, and ensuring appropriate resources are available, and minimising reliance on key individuals;
              (d) Reviewing the remuneration and incentive packages of the executive management and members of the Board of Directors and ensuring that such packages are consistent with the corporate values and strategy of the bank;
              (e) Effectively monitoring and making formal (annual) evaluations of senior management's performance in implementing agreed strategy and business plans;
              (f) Approving budgets and reviewing performance against those budgets and key performance indicators; and
              (g) The management of the bank's compliance risk.

          • Risk Recognition and Assessment

            • HC-1.2.6

              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.

              In assessing the systems and controls framework, the BMA expects the Board to demonstrate that the bank's operations, individually and collectively:

              (a) Are measured, monitored and controlled by appropriate, effective and prudent risk management systems commensurate with the scope of the bank's activities. The Board should ensure that senior management have put in place appropriate systems of control for the business of the bank and the information needs of the Board; in particular, there should be appropriate systems and functions for identifying as well as for monitoring risk, the financial position of the bank, and compliance with applicable laws, regulations and best practice standards. The systems should produce information on a timely basis; and
              (b) Are supported by an appropriate control environment. The compliance, risk management and financial reporting functions must be adequately resourced, independent of business lines and must be run by individuals not involved with the day-to-day running of the various business areas. The Board must additionally ensure that management develops, implements and oversees the effectiveness of comprehensive know your customer standards, as well as ongoing monitoring of accounts and transactions, in keeping with the requirements of relevant law, regulations and best practice (with particular regard to anti-money laundering measures). The control environment should maintain necessary client confidentiality and ensure that the privacy of the bank is not violated, and ensure that clients rights and assets are properly safeguarded.

            • HC-1.2.7

              In its review of the systems and controls framework, the Board should:

              (a) Effectively make use of the work of internal and external auditors. The Board should ensure the integrity of the bank's accounting and financial reporting systems through regular independent review (by internal and external audit). Audit findings should be used as an independent check on the information received from management about the bank's operations and performance and the effectiveness of internal controls; and
              (b) Identify any significant issues related to the bank's adopted governance framework, processes and practices and ensure that appropriate and timely action is taken to address identified adverse deviations from the requirements of this Module.

              The determinations under HC-1.2.6 and this paragraph might be made through the use of self-assessments, stress/scenario tests, and/or independent judgments made by external advisors. The Board may appoint supporting committees, and engage senior management to assist it in the oversight of risk management, but the Board may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance process is in place.

          • Corporate Ethics, Conflicts of Interest and Code of Conduct

            • HC-1.2.8

              Banks are subject to a wide variety of laws, regulations and codes of best practice that directly affect the conduct of business. Such laws involve the Bahraini Stock Exchange Law, the Labour Law, the Commercial Companies Law, occupational health and safety, even environment and pollution laws, as well as codes of conduct and regulations of the Agency. The Board sets the "tone at the top" of a bank, and has a responsibility to oversee compliance with these various requirements. The Board should ensure that the staff conduct their affairs with a high degree of integrity, taking note of applicable laws, codes and regulations.

            • HC-1.2.9

              The Board should establish corporate standards for itself, senior management, and employees. This requirement should be met by way of a documented and published code of conduct or similar document. These values should be communicated throughout the bank, so that the Board and senior management 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' Boards, senior management and staff must be informed of and be required to fulfil their fiduciary responsibilities to the bank's stakeholders.

            • HC-1.2.10

              An internal code of conduct is separate from the business strategy of a bank. A code of conduct should outline the practices that Directors, senior management 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:

              (a) Commitment by the Board and management to the code. The code of conduct should be linked to the objectives of the bank, and its responsibilities and undertakings to customers, shareholders, staff and the wider community (see HC-1.2.8 and HC-1.2.9). The code should give examples or expectations of honesty, integrity, leadership and professionalism;
              (b) Commitment to the law and best practice standards. This commitment would include commitments to following accounting standards, industry best practice (such as ensuring that information to clients is clear, fair, and not misleading), transparency, and rules concerning potential conflicts of interest (see HC-1.2.11);
              (c) Employment practices. This would include rules concerning health and safety of employees, training, policies on the acceptance and giving of business courtesies, prohibition on the offering and acceptance of bribes, and potential misuse of company assets;
              (d) How the company deals with disputes and complaints from clients and monitors compliance with the code; and
              (e) Confidentiality. Disclosure of client or bank information should be prohibited, except where disclosure is required by law (see HC-1.2.6 (b)).

            • HC-1.2.11

              The Board must establish and disseminate to its members and management, policies and procedures for the identification, reporting, disclosure, prevention, or strict limitation of potential conflicts of interest. It is senior management's responsibility to implement these policies. Rules concerning connected party transactions and potential conflicts of interest may be dealt with in the Code of Conduct (see HC-1.2.9). In particular, the Agency requires that any decisions to enter into transactions, under which Board members or any member of management would have conflicts of interest that are material, should be formally and unanimously approved by the full Board. Best practice would dictate that a Board member or member of senior management should:

              (a) Not enter into competition with the bank;
              (b) Not demand or accept substantial gifts from the bank for himself or his associates;
              (c) Not misuse the banks' assets;
              (d) Not use company privileged information or take advantage of business opportunities to which the company is entitled for himself or his associates;
              (e) Report to the Board any (potential) conflict of interest in their activities with, and commitments to other organisations. In any case, all Board members and members of senior management must declare in writing all of their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager, or other form of significant participation) to the Board (or the Nominations or Audit Committees) on an annual basis; and
              (f) Absent themselves from any discussions or decision-making that involves a subject where they are incapable of providing objective advice, or which involves a subject or (proposed) transaction where a conflict of interest exists.

            • HC-1.2.12

              The Agency expects that the Board and its members individually and collectively:

              (a) Act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the bank and its shareholders and other stakeholders (see paragraphs HC-1.2.8 to HC-1.2.11);
              (b) Act within the scope of their responsibilities (which should be clearly defined — see HC-1.3.7 and HC-1.3.8 below) and not participate in the day-to-day management of the bank;
              (c) Have a proper understanding of, and competence to deal with the affairs and products of the bank and devote sufficient time to their responsibilities;
              (d) To independently assess and question the policies, processes and procedures of the bank, with the intent to identify and initiate management action on issues requiring improvement. (i.e. to act as checks and balances on management).

            • HC-1.2.13

              All Directors whether non-executive or executive should exercise independence in their decision-making. To facilitate independence, the Board should agree procedures whereby the Board or its individual members (or committees) may take independent professional advice at the bank's expense.

        • HC-1.3 HC-1.3 Board Composition and the Role of Committees

          • Board Composition & Frequency of Meetings

            • HC-1.3.1

              To fulfil its responsibility for the review of the systems and controls framework (HC-1.2.3 (c)), the Board must periodically assess its composition and size and, where appropriate, reconstitute itself and its committees by selecting new Directors to replace long-standing members or those members whose contribution to the bank or its committees (such as the audit committee) is not adequate.

            • HC-1.3.2

              No Board member may have more than one directorship of a Full Commercial Bank and an Offshore Banking Unit or Investment Bank. This would mean an effective cap of a maximum of two directorships of financial institutions inside Bahrain. Two directorships of licensees within the same category (e.g. "OBU") would not be permitted. Banks may approach the Agency for exemption from this limit where the directorships concern banks or financial institutions within the same group.

            • HC-1.3.3

              The Board must meet sufficiently often to enable it to discharge its responsibilities effectively, taking into account the bank's scale and complexity. The full Board should meet preferably no less than four times per year. The Agency recommends that meetings should take place once every quarter to address the Board's responsibilities for management oversight and performance monitoring.

            • HC-1.3.4

              Board rules should require members to step down if they are not actively participating in Board meetings.

          • Independent and Non-Executive Directors

            • HC-1.3.5

              Where there is the potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent non-executive Board members capable of exercising independent judgment. The Board should outline its criteria and materiality thresholds in the annual report for the definition of "independence". The Directors should be identified in the annual report as executive, non-executive, and independent non-executive, as follows:

              (a) Executive Director (or "Managing Director" under the Commercial Companies Law "CCL") — A person who is involved in the day-to-day management and/or is in full-time employment of the bank and/or any of its affiliates or subsidiaries or parent companies. An executive Director may not occupy the post of "Chairman";
              (b) Non-Executive Director — A person not involved in the day-to-day management and/or is not a full-time salaried employee of the bank and/or any of its affiliates, or subsidiaries or parent companies; and
              (c) Independent Non-Executive Director — A non-executive Director (as defined above), who also:
              •  Is not a "controller" of the bank (see Section HC-2.1).
              •  Is not an Associate (see paragraph HC-2.1.4(g)) of a Director or a member of senior management of the bank.
              •  Is not a professional advisor to the bank or group (A partner or member of senior management of an accountancy or law firm that provides services to the bank would not be perceived by the Agency as an independent non-executive Director).
              •  Is not a large depositor with, or large borrower from the bank (i.e. whose deposits or credit facilities exceed 10% of the capital base of the bank).
              •  Has no significant contractual, or business relationship with the bank or group which could be seen to materially interfere with the person's capacity to act in an independent manner.

            • HC-1.3.6

              Independent non-executive Directors should be permitted to meet periodically (for example at separate meetings from the main Board) without executive management present.

          • Checks and Balances

            • HC-1.3.7

              To ensure a clear segregation of duties, the Board should clearly define, document and enforce its own responsibilities, including those of its Chairman, as well as the delegated authorities, responsibilities and accountabilities of the Board and management committees, the bank's Chief Executive and senior management to the stakeholders of the bank.

            • HC-1.3.8

              In particular, the Board should issue formal letters of appointment both to senior management and Board members, outlining their specific responsibilities and accountabilities. Wherever possible, these documents or a summary of responsibilities should be disclosed publicly, for example in the annual report. Letters of appointment facilitate better understanding of the respective accountabilities of the Board and management.

          • Responsibilities of the Chairman

            • HC-1.3.9

              The Chairman is responsible for the leadership of the Board, and for the efficient functioning of the Board. The Chairman is responsible for ensuring that Board members are adequately briefed in sufficient time for issues arising at Board meetings; therefore it is vital that the Chairman commit sufficient time to perform his role effectively, taking into account the points below:

              (a) First, the Chairman of the Board preferably should be non-executive and independent (see HC-1.3.6 for the definitions of "non-executive" and "independent");
              (b) Also, the role of Chairman and Chief Executive may not be exercised by the same person; and
              (c) Furthermore, there needs to be a clear division of responsibility between these two positions (see also HC-1.3.8 in this regard).

          • The benefits and functions of committees

            • HC-1.3.10

              In order to perform its duties more efficiently, the Board may set up committees where it feels appropriate with specific responsibilities, which must be documented. Where committees are set up, they should keep full minutes of their activities and meet regularly to fulfil their mandates. In particular, there are three areas where there is a need for checks and balances within the Board itself:

              (a) The nomination of Directors;
              (b) The remuneration of Directors; and
              (c) The audit of the bank's financial performance.

              In these areas, executive Directors have clear potential conflicts of interest. Nomination is all about the continuation of their own jobs and the jobs of their colleagues and potential new colleagues. Remuneration is all about the rewards that executive Directors and/or senior management receive for their services to the bank. Audit concerns the probity of the financial and non-financial reporting of the performance of the company by the very same persons who are responsible for its performance.

              For larger banks that deal with the general public, committees can be a more efficient mechanism to assist the main Board in its monitoring and control of the activities of the bank. The establishment of committees should not mean that the role of the Board is diminished, or that the Board becomes fragmented. Each Committee must have a clear written mandate outlining its purpose, objectives and responsibilities, including composition, frequency of meetings and reporting relationships.

          • Audit Committee

            • HC-1.3.11

              The Agency requires all banks to establish an Audit Committee. The committee members must have sufficient technical expertise to enable the committee to perform its functions effectively. Preferably, there should be at least one qualified and appropriately experienced accountant in the committee. All members of the committee must be financially literate. The CEO may not be a member of this committee.

            • HC-1.3.12

              Responsibilities of the Audit Committee are as follows:

              (a) To review the integrity of the bank's financial reporting (particularly with reference to information passed to the Board — see HC-1.2.6 (a). This review should include the choice of accounting policies. The information needs of the Board to perform its monitoring responsibilities must be defined in writing, and regularly monitored by the Audit Committee;

              To oversee the selection and compensation of the external auditor for appointment and approval at the shareholders' meeting. The audit committee should oversee relations with the external auditors, including ensuring the external auditor's independence (in particular, making sure that the external audit firm and its partners have no other financial or business relationship without the Board's knowledge), the terms and conditions of the auditor's appointment and remuneration arrangements. The committee should monitor rotation arrangements for audit engagement partners. The audit committee should monitor the performance of the external auditor and the non-audit services provided by the external auditor. The committee should meet with the external auditor at least twice per year, and at least once per year in the absence of any members of executive management;
              (b) To regularly review the activities and performance of the internal audit function;
              (c) To review whether the bank complies with all relevant laws, regulations, codes and business practices, and ensure that the bank communicates with shareholders and relevant stakeholders (internal and external) openly and promptly, and with substance of compliance prevailing over form; and
              (d) To review and supervise the implementation of, enforcement of and adherence to the bank's code of conduct.

            • HC-1.3.13

              Below the Audit Committee, the bank must set up an internal audit function, which reports directly to the Audit Committee (with a parallel reporting line to senior management for day-to-day matters as appropriate).

          • Shari'a Supervision Committee

            • HC-1.3.14

              The Agency requires all banks to establish an independent Shari'a Supervision Committee complying with AAOIFI's governance standards for Islamic Financial Institutions No. 1 and No. 2.

            • HC-1.3.15

              All banks must comply with all AAOIFI issued accounting standards as well as the Shari'a pronouncement issued by the Shari'a Board of AAOIFI. The bank must have a separate function of Shari'a review to verify compliance with the above. This internal Shari'a review must be carried out in accordance with AAOIFI's governance standard No. 3. The Shari'a review function may be located in the Internal Audit function of the bank.

        • HC-1.4 HC-1.4 Transparency of Structure and Strategy

          • Board's Responsibility for Disclosure

            • HC-1.4.1

              The Board should oversee the process of disclosure and communications with internal and external stakeholders. The Board should ensure that disclosures made by the bank are fair, transparent, comprehensive and timely and reflect the character of the bank and the nature, complexity and risks inherent in the bank's business activities. Disclosure policies must be reviewed for compliance with the Agency's disclosure requirements (see Rulebook Chapter PD-1).

            • HC-1.4.2

              To promote sound corporate governance, the bank must submit its organizational structure approved by the Board of Directors, which notes the designations and responsibilities of its key management personnel, highlighting their qualifications and relevant industry experience. The organizational structure should be clearly delineated and reporting lines completely transparent to promote full disclosure. It is the General Manager's responsibility to ensure that this occurs.

            • HC-1.4.3

              The bank must submit a statement of its strategy and objectives to the Agency at the time of licensing. This statement should cover a minimum period of three years. The Agency may request a formal review by the Board of the bank's statement from time to time.

        • HC-1.5 HC-1.5 Notification, reporting, and approval requirements for changes to activities, personnel and ownership, strategy, board meetings and special purpose vehicles ("SPVs")

          • HC-1.5.1

            Banks must notify the Agency in writing of all major proposed changes to the strategy and/or corporate plan of the bank prior to implementation.

          • HC-1.5.2

            Banks must notify the Agency in writing of any proposed changes to senior positions or ownership changes mentioned in sections HC-2.1, HC-3.2 and HC-4.1 (whether in terms of structure or identity of personnel) prior to the change. The communication should include the reason for the departure of the personnel and the Curriculum Vitae of any new persons taking up the relevant positions in the bank. See also section BR-5.1 for notification requirements concerning contact details of senior staff.

          • HC-1.5.3

            All locally incorporated banks, in addition to the requirements in paragraphs HC-1.5.1 and HC-1.5.2, should obtain the Agency's prior specific written approval before establishing any subsidiaries (including SPVs where the bank exercises a majority shareholding or has majority voting control by virtue of direct ownership or by proxy/nominee arrangements), branches and/or representative offices, either inside or outside of Bahrain. In order to avoid any delays and/or disruption in implementation of banks' plans in this context, the Agency should be approached as soon as possible, even at a very preliminary stage.

          • HC-1.5.4

            All locally incorporated banks are required to submit, on an annual basis, as an attachment to the year-end quarterly PIR, a report recording the meetings during the year by their Board of Directors. For a sample report, refer to Appendix BR-10.

          • HC-1.5.5

            All locally incorporated banks must notify the Agency if they intend to act as sponsor or manager of a special purpose vehicle ("SPV"), or if they intend to participate in the creation of an SPV, or if they intend to acquire shares in an SPV. All locally incorporated banks must notify the Agency if they are appointed as nominee shareholders of SPVs or hold votes by proxy arrangement in SPVs on behalf of other investors. In all cases listed above, the concerned bank must notify the Agency quarterly of any new commitments to, or engagements in business arrangements with SPVs. These reporting and notification arrangements apply in addition to arrangements under HC-1.5.3 where the SPV is a subsidiary.

          • HC-1.5.6

            The Agency requires any locally incorporated bank associated with an SPV to give the background to the following points in any notification under HC-1.5.5 above:

            (a) the purpose of the SPV;
            (b) the nature of the relationship between the bank and the SPV (i.e. sponsor, manager, investor, controller etc.);
            (c) the external auditor's proposed consolidation/accounting treatment of the SPV;
            (d) the availability of financial and other information relevant to the SPV and access to its business premises and records;
            (e) whether the bank is providing any guarantees, warranties or financial/liquidity support of any kind to the SPV.

          • HC-1.5.7

            Where the SPV is consolidated into the accounts of a locally incorporated bank, the bank must provide separate accounting information on the SPV to the Agency on a quarterly basis. Furthermore, the annual audited financial statements of all consolidated SPVs must be submitted to the Agency within 3 months of the year end of the concerned SPV.

          • HC-1.5.8

            Where a locally incorporated bank has a controller or majority ownership relationship with an SPV, or acts as sponsor, the bank must obtain the prior approval of the Agency for any changes to the capital, ownership, management or control of the SPV. All locally incorporated banks must also notify the Agency of any significant events in relation to the SPV. If necessary, the Agency may require that formal information exchange arrangements are put in place (e.g. a memorandum of understanding) if the SPV is located in a foreign jurisdiction and its activities are not supervised locally.

      • HC-2 HC-2 Approved Persons

        • HC-2.1 HC-2.1 BMA Notification and Approval

          • General Requirement

            • HC-2.1.1

              All persons wishing to undertake a controlled function in an Islamic bank licensee must be notified to the BMA prior to their appointment and, where required, approved by the BMA (see Rule HC-2.1.3).


            • HC-2.1.2

              Controlled functions are those of:

              (a) Director;
              (b) Member of Shari'a Supervisory Board
              (c) Chief Executive or General Manager;
              (d) Senior Manager;
              (e) Compliance officer;
              (f) Money Laundering Reporting Officer; and
              (g) Financial Instruments Trader.

            • HC-2.1.3

              Prior approval is required for controlled functions (a), (b), (c), (d), (e) and (f). Controlled functions (e) and (f) may be combined, however. Controlled function (g) does not require prior approval: instead, notification only is required, once the person concerned has accepted to undertake that function.

          • Basis for Approval

            • HC-2.1.4

              Approval under Rule HC-2.1.1 is only granted by the BMA, 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 BMA on a case-by-case basis. The definition of "fit and proper" and associated guidance is provided in Sections HC-2.2 and HC-2.3 respectively.


          • Definitions

            • HC-2.1.5

              Director is any person who occupies the position of a Director, as defined in Article 173 of the Commercial Companies Law (Legislative Decree No. 21 of 2001).

            • HC-2.1.6

              The fact that a person may have "Director" in their job title does not of itself make them a Director within the meaning of the definition noted in Rule HC-2.1.5. For example, a 'Director of Marketing', is not necessarily a member of the Board of Directors and therefore may not fall under the definition of Rule HC-2.1.5.

            • HC-2.1.7

              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. This person is responsible, alone or jointly, for the conduct of the whole of the firm, or, in the case of an overseas Islamic bank licensee, for all of the activities of the branch (in which case, he may hold the title of "Branch Manager").

            • HC-2.1.8

              Senior Manager means a person who, under the immediate authority of a Director or the Chief Executive/General Manager, exercises major managerial responsibilities, is responsible for a significant business or operating unit, or has major managerial responsibility for maintaining accounts or other records of the licensee.

            • HC-2.1.9

              Whether a person is a Senior Manager will depend on the facts in each case and is not determined by the presence or absence of the word in their job title. Examples of Senior Managers might include, depending on the scale, nature and complexity of the business, a deputy Chief Executive; and heads of departments such as Risk Management, or Internal Audit; or the Chief Financial Officer.

            • HC-2.1.10

              Financial Instruments Trader means a person who is engaged in buying or selling financial instruments.

            • HC-2.1.11

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

          • Notification Requirements and Process

            • HC-2.1.12

              Islamic bank licensees must obtain BMA approval before a person is formally appointed to a controlled function; the request for BMA approval must be made by submitting to BMA a duly completed Form 3 (Application for Approved Person status). In the case of a financial instruments trader, notification only is required (see Rule HC-2.1.3): this notification must also be made by submitting a Form 3.

            • HC-2.1.13

              In the case of license applications, the Form 3 must be marked for the attention of the Director, Licensing and Policy Directorate. When made by an Islamic bank licensee, the Form 3 must be marked for the attention of the Director, Islamic Financial Institutions.

            • HC-2.1.14

              Licensees should give the BMA a reasonable amount of notice in order for an application for approval to be reviewed. The BMA aims to respond within 2 weeks of receipt of an application, although in some cases, where referral to an overseas supervisor is required, the response time is likely to be longer.

            • HC-2.1.15

              Licensees seeking to appoint Board Directors should seek BMA approval for all the candidates to be put forward for election at a shareholder meeting, in advance of the agenda being issued to shareholders. BMA approval of the candidates does not in any way limit shareholders' rights to refuse those put forward for election.

            • HC-2.1.16

              All refusals by the BMA to grant a person approved person status have to be reviewed and approved by an Executive Director of the BMA. A notice of intent is issued to the person concerned, setting out the basis for the decision. The person has 30 calendar days from the date of the notice in which to appeal the decision. The BMA then has 30 calendar days from the date of the representation in which to make a final determination. See also Chapter EN-5.

            • HC-2.1.17

              Islamic bank licensees must immediately notify BMA when an approved person ceases to hold the controlled function, for which they have been approved, and for whatever reason.

            • HC-2.1.18

              Thus, licensees are required to notify BMA should an approved person transfer to another function within the licensee, or to another group entity; or else resign, be suspended or dismissed. BMA may require further clarification as to the reasons for the person's transfer or departure. BMA will automatically withdraw the individual's approved person status: should the person wish to undertake another controlled function, whether within the same licensee or in another licensee, then a new application should be resubmitted.

            • HC-2.1.19

              Islamic bank licensees must immediately notify BMA should they become aware of information that could reasonably be viewed as calling into question an approved person's compliance with BMA's "fit and proper" requirement (see HC-2.2).

        • HC-2.2 HC-2.2 "Fit and proper" requirement

          • HC-2.2.1

            Licensees seeking an approved person authorisation for an individual, must satisfy the BMA that the individual concerned is "fit and proper" to undertake the controlled function in question.

          • HC-2.2.2

            To be considered "fit and proper", those nominated must demonstrate:

            (a) personal integrity, honesty and good reputation;
            (b) professional competence, experience and expertise, sufficient for the controlled function for which authorisation is being applied for, and given the scale, complexity and nature of the Islamic bank licensee concerned; and
            (c) financial soundness.

          • HC-2.2.3

            In assessing the conditions prescribed in Rule HC-2.2.2, the BMA will take into account the criteria contained in Section HC-2.3. The BMA reviews each application on a case-by-case basis, taking into account all relevant circumstances. A person may be considered "fit and proper" to undertake one type of controlled function but not another, depending on the function's job size and required levels of experience and expertise. Similarly, a person approved to undertake a controlled function in one Islamic bank licensee may not be considered to have sufficient expertise and experience to undertake nominally the same controlled function but in a much bigger licensee.

          • HC-2.2.4

            Approved persons undertaking a controlled function must act prudently, and with honesty, integrity, care, skill and due diligence in the performance of their duties. They must avoid conflicts of interest arising whilst undertaking a controlled function.

          • HC-2.2.5

            In determining whether a conflict of interest may arise, factors that may be considered include whether:

            (a) a person has breached any fiduciary obligations to the company or terms of employment;
            (b) a person has undertaken actions that would be difficult to defend, when looked at objectively, as being in the interest of the licensee; and
            (c) a person has failed to declare a personal interest that has a material impact in terms of the person's relationship with the licensee.

        • HC-2.3 HC-2.3 Interpretative Guidance on "Fit and Proper" Requirement

          • HC-2.3.1

            In assessing a person's fitness and propriety, the BMA will consider previous professional and personal conduct (in Bahrain or elsewhere) including, but not limited to, the following:

            (a) the propriety of a person's conduct, whether or not such conduct resulted in a criminal offence being committed, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;
            (b) a conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;
            (c) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;
            (d) whether the person has been the subject of any disciplinary proceeding by any government authority, regulatory agency or professional body or association;
            (e) the contravention of any financial services legislation or regulation;
            (f) whether the person has ever been refused a license, authorisation, registration or other authority;
            (g) dismissal or a request to resign from any office or employment;
            (h) disqualification by a court, regulator or other competent body, as a Director or as a manager of a corporation;
            (i) whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;
            (j) the extent to which the person has been truthful and open with supervisors;
            (k) the extent to which the person has appropriate professional and other qualifications for the controlled function in question;
            (l) the extent to which the person has sufficient experience, or is otherwise able to perform the functions of the controlled function in question;
            (m) whether the person has ever been adjudged bankrupt, entered into any arrangement with creditors in relation to the inability to pay due debts, or failed to satisfy a judgment debt under a court order.

          • HC-2.3.2

            With respect to HC-2.3.1(b), (c), (d) and (e), the BMA will take into account the length of time since any such event occurred, as well as the seriousness of the matter in question.

          • HC-2.3.3

            Further guidance on the process for assessing a person's "fit and proper" status is given in Module EN (Enforcement): see Chapter EN-8.

        • HC-2.4 [deleted]

          [This Section was deleted in 07/2006: it has been left blank.]

      • HC-3 HC-3 Compliance officer/manager

        • HC-3.1 HC-3.1 Introduction

          • HC-3.1.1

            In order to promote best practice with respect to banks' internal systems and controls and international banking supervision, the Agency, in this chapter, outlines its requirements for the compliance function of banks. The expression "Compliance Function" in this Chapter is used to describe staff carrying out compliance duties.

          • HC-3.1.2

            The expression 'Compliance Risk', in this chapter refers to the risk of legal or regulatory sanctions, material or financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, reporting requirements, standards and codes of conduct applicable to its activities, rather than purely compliance with a bank's internal limits or procedures.

          • HC-3.1.3

            For further information and guidance on compliance risk and the compliance function, the Agency recommends that banks refer to the Basel Committee publication, "Compliance and the compliance function in banks" (see www.bis.org/publ published April 2005). The Agency expects banks to carry out a review of their compliance with the principles in this paper on a regular basis (either by way of a self-assessment or by way of a review by the internal or external audit function).

        • HC-3.2 HC-3.2 Requirement for and approval of a compliance officer/manager

          • HC-3.2.1

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

          • HC-3.2.2

            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 perform other limited related compliance roles (e.g. MLRO or legal advisor), subject to the Agency's prior approval.

          • HC-3.2.3

            The compliance officer/manager must be appropriately qualified and experienced and the compliance function must have adequate resources to carry out its functions effectively.

          • HC-3.2.4

            The appointment of a compliance manager/officer requires the Agency's prior approval and the submission of the appointee's Personal Questionnaire (Appendix LR 2) and Curriculum Vitae to the Agency. 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.

          • HC-3.2.5

            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.

      • HC-4 [deleted]

        [This chapter deleted 07/2006 — left blank.]

    • HC HC High-level Controls[versions up to October 2010]

      • HC-A HC-A Introduction[versions up to October 2010]

        • HC-A.1 HC-A.1 Purpose[versions up to October 2010]

          • HC-A.1.1 [versions up to October 2010]

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

            a) the role and composition of their Boards and Board Committees; and
            b) related high-level controls and policies.
            October 07

          • HC-A.1.2 [versions up to October 2010]

            In addition, this Module contains requirements for the notification and pre-approval of individuals, undertaking certain designated functions with respect to Islamic bank licensees. These functions (called 'controlled functions'), include Directors and members of senior management. The controlled functions regime supplements the CBB's corporate governance requirements by ensuring that key persons involved in the running of Islamic bank licensees are fit and proper. Those approved by the CBB to undertake controlled functions are called approved persons.

            October 07

          • HC-A.1.3 [versions up to October 2010]

            Finally, this Module contains certain notification and approval requirements regarding the use of Special Purpose Vehicles ('SPVs'; see Section HC-1.5).

            October 07

          • HC-A.1.4 [versions up to October 2010]

            This Module supplements various provisions relating to corporate governance contained in Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law ('Commercial Companies Law 2001'). In case of conflict, the Commercial Companies Law shall prevail. The Module also supplements (for companies listed on the Bahrain Stock Exchange), Stock Exchange regulations that are relevant to corporate governance and high-level controls. Compliance with this Module does not guarantee compliance with either the Commercial Companies Law 2001 or the BSE regulations.

            October 07

          • Legal Basis[versions up to October 2010]

            • HC-A.1.5 [versions up to October 2010]

              This Module contains the CBB's Directive relating to the credit risk management of Islamic bank licensees, 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 Islamic bank licensees.

              October 07

            • HC-A.1.6 [versions up to October 2010]

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

              October 07

        • HC-A.2 HC-A.2 Key requirements[versions up to October 2010]

          • Corporate governance[versions up to October 2010]

            • HC-A.2.1 [versions up to October 2010]

              The Chairman of the Board should preferably be non-executive and independent. The role of Chairman and Chief Executive may not be exercised by the same person. (See Rule HC-1.3.9.)

              Amended: October 2009
              October 2007

            • HC-A.2.2 [versions up to October 2010]

              The Board must approve a code of conduct for itself, senior management and employees, and define the responsibilities of itself and senior management. This should include procedures for dealing with conflicts of interest, and a prohibition on insider trading. (See Paragraphs HC-1.2.9 to HC-1.2.11.)

              October 07

            • HC-A.2.3 [versions up to October 2010]

              The Board should meet at least four times per year (see Rule HC-1.3.3).

              Amended: October 2009
              October 2007

            • HC-A.2.4 [versions up to October 2010]

              Boards must have an adequate number of members that are 'independent' and 'non-executive' to serve the interests of minority shareholders and other stakeholders. (See Paragraphs HC-1.3.5 and HC-1.3.6.)

              October 07

            • HC-A.2.5 [versions up to October 2010]

              The Board should consider the setting up of committees to assist it in fulfilling its responsibilities. The setting up of an Audit Committee and a Shari'a Committee is mandatory. (See Paragraphs HC-1.3.11 to HC-1.3.16.)

              October 07

            • HC-A.2.6 [versions up to October 2010]

              All licensees must submit their organisational structure as approved by the Board of Directors. All licensees must establish independent functions for Internal Audit and Risk Management.

              October 07

            • HC-A.2.7 [versions up to October 2010]

              Islamic bank licensees are required to notify the CBB, in writing, of all major changes (regardless of type and/or effect) proposed to the strategy and/or corporate plan of the bank prior to implementation, as well as of any Special Purpose Vehicle they intend to establish as a subsidiary, or with respect to which they intend to act as sponsor or manager (see Section HC-1.5).

              October 07

          • Approved Persons[versions up to October 2010]

            • HC-A.2.8 [versions up to October 2010]

              Islamic bank licensees are required to secure prior CBB approval for those persons wishing to undertake a controlled function. Such persons are assessed against CBB's 'fit and proper' requirements. Islamic bank licensees must also notify the CBB of any changes in their approved persons. (See Chapter HC-2)

              October 07

          • Compliance officer/manager[versions up to October 2010]

            • HC-A.2.9 [versions up to October 2010]

              Islamic bank licensees must appoint a senior member of staff with responsibility for compliance. The Compliance Officer is a controlled function. (See Chapter HC-3.1.)

              October 07

        • HC-A.3 HC-A.3 Module History[versions up to October 2010]

          • Evolution of the Module[versions up to October 2010]

            • HC-A.3.1 [versions up to October 2010]

              This Module was first issued in January 2005, as part of the initial release of Volume 2 of the CBB Rulebook. It was dated January 2005. 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.

              October 07

            • HC-A.3.2 [versions up to October 2010]

              When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 2 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.

              October 07

            • HC-A.3.3 [versions up to October 2010]

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

              Module Ref. Change Date Description of Changes
              HC-1.5 01/07/05 Transparency requirements formalised
              HC-1.6 01/07/05 Notification requirements formalised
              HC-1.1, 1.2 & 1.4 01/10/05 High-level controls
              HC-1.5 01/10/05 New SPV requirements
              HC-3.1 – HC-3.2 01/10/05 Revised compliance function requirements
              HC-1.5.3, 1.5.5 & 4.1 01/01/06 Revised notification requirements for SPVs and dealing staff
              HC-2, HC-3 and HC-4 01/07/06 Requirements relating to controllers moved to Module GR; Remaining requirements relating to 'fit and proper' re-drafted to ensure consistency with other Rulebook Volumes (without changing the substance of the previous 'fit and proper' requirements); Requirements relating to dealers incorporated into the 'fit and proper' requirements.
              HC-1.2 & HC-1.3 01/10/07 Reordering of Paragraphs to separate Rules and Guidance
              HC-A.1 10/2007 New Rule HC-A.1.5 introduced, categorising this Module as a Directive.
              HC-1.3.5 04/2008 Mandatory requirement for at least one independent non-executive director
              HC-2.1.16 01/2009 Amendment to notification process for "approved person" status
              HC-1.5.3 01/2009 Requirement to appoint a permanent replacement within 120 days when a controlled function falls vacant.
              HC-2.1.2 10/2009 CBB prior approval requirement for appointment of Deputy MLRO.

            • HC-A.3.4 [versions up to October 2010]

              The contents in this Module are effective from July 2004 and the dates depicted in HC-A.3.3. Section HC-1.3 is effective from October 2007.

              October 07

      • HC-B HC-B General guidance and best practice[versions up to October 2010]

        • HC-B.1 HC-B.1 Guidance provided by other international bodies[versions up to October 2010]

          • Basel Committee: Enhancing Corporate Governance in Banking Organisations and High-level Controls for Banks[versions up to October 2010]

            • HC-B.1.1 [versions up to October 2010]

              These papers (see www.bis.org/publ/bcbs56.pdf) issued in September 1998 and September 1999 provide guidance on corporate governance and high-level controls in banks. These papers form part of an on-going effort by the Committee to strengthen procedures for risk management and disclosure in banks.

              October 07

            • HC-B.1.2 [versions up to October 2010]

              The papers draw on supervisory experience with corporate governance problems at banking organisations and suggest the types of practices that could help to avoid such problems. They identify a number of practices as critical elements of any financial institution's corporate governance process.

              October 07

            • HC-B.1.3 [versions up to October 2010]

              The CBB draws banks' attention to the Basel papers as benchmarks of best practice for corporate governance standards and high-level controls to be followed by banks operating in the Kingdom of Bahrain.

              October 07

        • HC-B.2 HC-B.2 Enforceability[versions up to October 2010]

          • HC-B.2.1 [versions up to October 2010]

            The requirements of Chapter 1, Sections HC-1.1HC-1.4 are binding requirements, which banks and their Boards should follow on an 'apply or explain' basis. If a Board or a bank elects not to follow these requirements, they must explain why to the Central Bank and document the reasons for not applying the concerned requirements in the Minutes of the Board. The remaining Chapters are binding requirements except where shown as guidance.

            October 07

      • HC-1 HC-1 Corporate Governance[versions up to October 2010]

        • HC-1.1 HC-1.1 Scope[versions up to October 2010]

          • HC-1.1.1 [versions up to October 2010]

            The contents of this Chapter are applicable to locally incorporated banks. Bahrain branches of foreign banks must satisfy the Central Bank that equivalent arrangements are in place at the parent level and that these arrangements provide for effective high-level controls over activities conducted under the Bahrain license.

            October 07

          • HC-1.1.2 [versions up to October 2010]

            This Chapter covers the high-level controls aspects of corporate governance of banks, and therefore focuses on the functions of the constituent parts of high-level controls, starting with the respective roles and responsibilities of the Board and senior management.

            October 07

          • HC-1.1.3 [versions up to October 2010]

            This Chapter therefore does not cover matters of corporate governance relating to the Commercial Companies Law (e.g. General Meetings, the role of shareholders and other administrative matters) or Listing Requirements.

            October 07

          • HC-1.1.4 [versions up to October 2010]

            The CBB has historically pursued a 'best practice' guidance approach to high-level controls and corporate governance, rather than a prescriptive rules-based approach. The Central Bank has chosen to notify licensees of international best practice standards, and allowed banks to interpret these, according to the scope of operations of the concerned bank. This Chapter blends a best practice-based approach with minimum requirements.

            October 07

          • HC-1.1.5 [versions up to October 2010]

            Banks must satisfy the CBB that financial services activities conducted in subsidiaries and other group members including foreign branches are subject to the same or equivalent arrangements for ensuring effective high-level controls over their activities. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.

            October 07

          • HC-1.1.6 [versions up to October 2010]

            Where a bank is unable to satisfy the CBB that its subsidiaries and other group members or foreign branches are subject to the same or equivalent arrangements, the CBB will assess the potential impact of risks – both financial and reputational – to the bank arising from inadequate high-level controls in the rest of the group of which it is a member. In such instances, the CBB may impose restrictions on dealings between the bank and other group members. Where weaknesses in controls are assessed by the CBB to pose a major threat to the stability of the bank, then its authorisation may be called into question.

            October 07

        • HC-1.2 HC-1.2 The Board of Directors – Its Functions and Responsibilities[versions up to October 2010]

          • Strategy[versions up to October 2010]

            • HC-1.2.1 [versions up to October 2010]

              In most banks, shareholders, creditors, employees, depositors and investment account holders ('stakeholders') are unable to closely monitor management, its strategies and the bank's performance due to a lack of information and resources. A key responsibility of the Board is to fill the gap between uninformed stakeholders to whom it owes a duty of care, and the more fully informed executive management by monitoring management closely on behalf of stakeholders.

              October 07

            • HC-1.2.2 [versions up to October 2010]

              The Board is ultimately accountable and responsible for the affairs and performance of the bank. The Board must establish the objectives of the bank and develop the strategies that direct the on-going activities of the bank to achieve these objectives. The strategies must be communicated throughout the bank, and be disclosed publicly (e.g. via the website or in the annual report in an abbreviated form as applicable). In its strategy document, the Board must demonstrate that it is able to proactively identify and understand the significant risks that the bank faces in achieving its business objectives through its business strategies and plans.

              October 07

            • HC-1.2.3 [versions up to October 2010]

              The precise functions reserved for the Board, and those delegated to management and committees will vary, dependent upon the business of the institution, its size and ownership structure. However, as a minimum, the Board must establish and maintain a statement of its responsibilities for:

              a) The adoption and annual review of strategy;
              b) The adoption and review of management structure and responsibilities;
              c) The adoption and review of the systems and controls framework; and
              d) Monitoring the implementation of strategy by management.

              The Board may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance process is in place.

              October 07

            • HC-1.2.4 [versions up to October 2010]

              In its strategy review process under Paragraphs HC-1.2.3 a) and d), the Board must:

              a) Review the bank's business plans and the inherent level of risk in these plans;
              b) Assess the adequacy of capital to support the business risks of the bank.
              c) Set performance objectives;
              d) Review the performance of executive management; and
              e) Oversee major capital expenditures, divestitures and acquisitions.
              October 07

            • HC-1.2.5 [versions up to October 2010]

              The CBB expects the Board to have effective policies and processes in place for:

              a) Ensuring a formal and transparent Board nomination process;
              b) Appointing senior managers, and ensuring that they have the necessary integrity, technical and managerial competence, and experience;
              c) Overseeing succession planning and replacing key executives when necessary, and ensuring appropriate resources are available, and minimising reliance on key individuals;
              d) Reviewing the remuneration and incentive packages of the executive management and members of the Board of Directors and ensuring that such packages are consistent with the corporate values and strategy of the bank;
              e) Effectively monitoring and making formal (annual) evaluations of senior management's performance in implementing agreed strategy and business plans;
              f) Approving budgets and reviewing performance against those budgets and key performance indicators; and
              g) The management of the bank's compliance risk.
              October 07

          • Risk Recognition and Assessment[versions up to October 2010]

            • HC-1.2.6 [versions up to October 2010]

              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:

              a) The bank's operations, individually and collectively are measured, monitored and controlled by appropriate, effective and prudent risk management systems commensurate with the scope of the bank's activities; and
              b) The bank's operations are supported by an appropriate control environment. The compliance, risk management and financial reporting functions must be adequately resourced, independent of business lines and must be run by individuals not involved with the day-to-day running of the various business areas. The Board must additionally ensure that management develops, implements and oversees the effectiveness of comprehensive know your customer standards, as well as on-going monitoring of accounts and transactions, in keeping with the requirements of relevant law, regulations and best practice (with particular regard to anti-money laundering measures). The control environment should maintain necessary client confidentiality and ensure that the privacy of the bank is not violated, and ensure that clients rights and assets are properly safeguarded.
              c) Where the Board has identified any significant issues related to the bank's adopted governance framework, appropriate and timely action is taken to address any identified adverse deviations from the requirements of this Module.
              October 07

            • HC-1.2.7 [versions up to October 2010]

              In its review of the systems and controls framework in Paragraph HC-1.2.6, the Board must:

              a) Make effective use of the work of external and internal auditors. The Board must ensure the integrity of the bank's accounting and financial reporting systems through regular independent review (by internal and external audit). Audit findings must be used as an independent check on the information received from management about the bank's operations and performance and the effectiveness of internal controls; and
              b) Make use of self-assessments, stress/scenario tests, and/or independent judgments made by external advisors. The Board may appoint supporting committees, and engage senior management to assist it in the oversight of risk management; and
              c) Ensure that senior management have put in place appropriate systems of control for the business of the bank and the information needs of the Board; in particular, there must be appropriate systems and functions for identifying as well as for monitoring risk, the financial position of the bank, and compliance with applicable laws, regulations and best practice standards. The systems must produce information on a timely basis.
              October 07

          • Corporate Ethics, Conflicts of Interest and Code of Conduct[versions up to October 2010]

            • HC-1.2.8 [versions up to October 2010]

              Banks are subject to a wide variety of laws, regulations and codes of best practice that directly affect the conduct of business. Such laws involve the Bahraini Stock Exchange Law, the Labour Law, the Commercial Companies Law, occupational health and safety, even environment and pollution laws, as well as codes of conduct and regulations of the Central Bank. The Board sets the 'tone at the top' of a bank, and has a responsibility to oversee compliance with these various requirements. The Board should ensure that the staff conduct their affairs with a high degree of integrity, taking note of applicable laws, codes and regulations.

              October 07

            • HC-1.2.9 [versions up to October 2010]

              The Board must establish corporate standards for itself, senior management, and employees. This requirement should be met by way of a documented and published code of conduct or similar document. These values must be communicated throughout the bank, so that the Board and senior management 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' Boards, senior management and staff must be informed of and be required to fulfill their fiduciary responsibilities to the bank's stakeholders.

              October 07

            • HC-1.2.10 [versions up to October 2010]

              An internal code of conduct is separate from the business strategy of a bank. A code of conduct should outline the practices that Directors, senior management 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:

              a) Commitment by the Board and management to the code. The code of conduct should be linked to the objectives of the bank, and its responsibilities and undertakings to customers, shareholders, staff and the wider community (see HC-1.2.8 and HC-1.2.9). The code should give examples or expectations of honesty, integrity, leadership and professionalism;
              b) Commitment to the law and best practice standards. This commitment would include commitments to following accounting standards, industry best practice (such as ensuring that information to clients is clear, fair, and not misleading), transparency, and rules concerning potential conflicts of interest (see HC-1.2.11);
              c) Employment practices. This would include rules concerning health and safety of employees, training, policies on the acceptance and giving of business courtesies, prohibition on the offering and acceptance of bribes, and potential misuse of company assets;
              d) How the company deals with disputes and complaints from clients and monitors compliance with the code; and
              e) Confidentiality. Disclosure of client or bank information should be prohibited, except where disclosure is required by law (see HC-1.2.6 b).
              October 07

            • HC-1.2.11 [versions up to October 2010]

              The Board must establish and disseminate to its members and management, policies and procedures for the identification, reporting, disclosure, prevention, or strict limitation of potential conflicts of interest. It is senior management's responsibility to implement these policies. Rules concerning connected party transactions and potential conflicts of interest may be dealt with in the Code of Conduct (see HC-1.2.9). In particular, the Central Bank requires that any decisions to enter into transactions, under which Board members or any member of management would have conflicts of interest that are material, should be formally and unanimously approved by the full Board. Best practice would dictate that a Board member or member of senior management must:

              a) Not enter into competition with the bank;
              b) Not demand or accept substantial gifts from the bank for himself or his associates;
              c) Not misuse the banks' assets;
              d) Not use company privileged information or take advantage of business opportunities to which the company is entitled for himself or his associates;
              e) Report to the Board any (potential) conflict of interest in their activities with, and commitments to other organisations. In any case, all Board members and members of senior management must declare in writing all of their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager, or other form of significant participation) to the Board (or the Nominations or Audit Committees) on an annual basis; and
              f) Absent themselves from any discussions or decision-making that involves a subject where they are incapable of providing objective advice, or which involves a subject or (proposed) transaction where a conflict of interest exists.
              October 07

            • HC-1.2.12 [versions up to October 2010]

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

              a) Act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the bank and its shareholders and other stakeholders (see Paragraphs HC-2.8 to HC-1.2.11);
              b) Act within the scope of their responsibilities (which should be clearly defined – see HC-1.3.7 and HC-1.3.8 below) and not participate in the day-to-day management of the bank;
              c) Have a proper understanding of, and competence to deal with the affairs and products of the bank and devote sufficient time to their responsibilities;
              d) To independently assess and question the policies, processes and procedures of the bank, with the intent to identify and initiate management action on issues requiring improvement. (i.e. to act as checks and balances on management).
              October 07

            • HC-1.2.13 [versions up to October 2010]

              All Directors whether non-executive or executive should exercise independence in their decision-making. To facilitate independence, the Board should agree procedures whereby the Board or its individual members (or committees) may take independent professional advice at the bank's expense.

              October 07

        • HC-1.3 HC-1.3 Board Composition and the Role of Committee[versions up to October 2010]

          • Board Composition & Frequency of Meetings[versions up to October 2010]

            • HC-1.3.1 [versions up to October 2010]

              To fulfil its responsibility for the review of the systems and controls framework (HC-1.2.3 c), the Board must periodically assess its composition and size and, where appropriate, reconstitute itself and its committees by selecting new Directors to replace long-standing members or those members whose contribution to the bank or its committees (such as the audit committee) is not adequate.

              October 07

            • HC-1.3.2 [versions up to October 2010]

              No Board member may have more than one Directorship of a Retail Bank and a Wholesale Bank. This would mean an effective cap of a maximum of two Directorships of licensees inside Bahrain. Two Directorships of licensees within the same Category (e.g. 'Retail Bank') would not be permitted. Banks may approach the Central Bank for exemption from this limit where the Directorships concern banks or financial institutions within the same group.

              Amended January 2009
              October 07

            • HC-1.3.3 [versions up to October 2010]

              The Board must meet sufficiently often to enable it to discharge its responsibilities effectively, taking into account the bank's scale and complexity.

              October 07

            • HC-1.3.4 [versions up to October 2010]

              To meet its obligations under Rule HC-1.3.3 above, the full Board should meet preferably no less than four times per year. The Central Bank recommends that meetings should take place once every quarter to address the Board's responsibilities for management oversight and performance monitoring. Furthermore, Board rules should require members to step down if they are not actively participating in Board meetings.

              October 07

          • Independent and Non-Executive Directors[versions up to October 2010]

            • HC-1.3.5 [versions up to October 2010]

              Where there is the potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent non-executive Board members capable of exercising independent judgment. At a minimum, all locally incorporated banks must appoint one independent non-executive director. The Board must outline its criteria and materiality thresholds in the annual report for the definition of 'independence'. The Directors must be identified in the annual report as executive, non-executive, and independent non-executive, as follows:

              a) Executive Director (or 'Managing Director' under the Commercial Companies Law 'CCL') - A person who is involved in the day-to-day management and/or is in full-time employment of the bank and/or any of its affiliates or subsidiaries or parent companies. An executive Director may not occupy the post of 'Chairman';
              b) Non-Executive Director - A person not involved in the day-to-day management and/or is not a full-time salaried employee of the bank and/or any of its affiliates, or subsidiaries or parent companies; and
              c) Independent Non-Executive Director - A non-executive Director (as defined above), who also:
              •   Is not a 'controller' of the bank (see Section GR-5.2).
              •   Is not an Associate (see Section GR-5.2) of a Director or a member of senior management of the bank.
              •   Is not a professional advisor to the bank or group (A partner or member of senior management of an accountancy or law firm that provides services to the bank would not be perceived by the Central Bank as an independent non-executive Director).
              •   Is not a large depositor with, or large borrower from the bank (i.e. whose deposits or credit facilities exceed 10% of the capital base of the bank).
              •   Has no significant contractual, or business relationship with the bank or group which could be seen to materially interfere with the person's capacity to act in an independent manner.
              October 07
              Amended: April 2008

            • HC-1.3.6 [versions up to October 2010]

              Independent non-executive Directors should be permitted to meet periodically (e.g. at separate meetings from the main Board) without executive management present.

              October 07

          • Checks and Balances[versions up to October 2010]

            • HC-1.3.7 [versions up to October 2010]

              To ensure a clear segregation of duties, the Board must clearly define, document and enforce its own responsibilities, including those of its Chairman, as well as the delegated authorities, responsibilities and accountabilities of the Board and management committees, the bank's Chief Executive and senior management to the stakeholders of the bank.

              October 07

            • HC-1.3.8 [versions up to October 2010]

              In particular, the Board must issue formal letters of appointment both to senior management and Board members, outlining their specific responsibilities and accountabilities. Wherever possible, these documents or a summary of responsibilities should be disclosed publicly, for example in the annual report. Letters of appointment facilitate better understanding of the respective accountabilities of the Board and management.

              October 07

          • Responsibilities of the Chairman[versions up to October 2010]

            • HC-1.3.9 [versions up to October 2010]

              The Chairman is responsible for the leadership of the Board, and for the efficient functioning of the Board. The Chairman is responsible for ensuring that Board members are adequately briefed in sufficient time for issues arising at Board meetings; therefore it is vital that the Chairman commit sufficient time to perform his role effectively, taking into account the points below:

              a) The role of Chairman and Chief Executive may not be exercised by the same person; and
              b) Furthermore, there needs to be a clear division of responsibility between these two positions (see also HC-1.3.8 in this regard).
              October 07

            • HC-1.3.10 [versions up to October 2010]

              The Chairman of the Board should preferably be non-executive and independent (see HC-1.3.5 for the definitions of 'non-executive' and 'independent').

              October 07

          • The benefits and functions of committees[versions up to October 2010]

            • HC-1.3.11 [versions up to October 2010]

              In order to perform its duties more efficiently, the Board may set up committees where it feels appropriate with specific responsibilities, which must be documented. Where committees are set up, they should keep full minutes of their activities and meet regularly to fulfil their mandates. In particular, there are three areas where there is a need for checks and balances within the Board itself:

              a) The nomination of Directors;
              b) The remuneration of Directors; and
              c) The audit of the bank's financial performance.

              In these areas, executive Directors have clear potential conflicts of interest. Nomination is all about the continuation of their own jobs and the jobs of their colleagues and potential new colleagues. Remuneration is all about the rewards that executive Directors and/or senior management receive for their services to the bank. Audit concerns the probity of the financial and non-financial reporting of the performance of the company by the very same persons who are responsible for its performance.

              For larger banks that deal with the general public, committees can be a more efficient mechanism to assist the main Board in its monitoring and control of the activities of the bank. The establishment of committees should not mean that the role of the Board is diminished, or that the Board becomes fragmented. Each Committee must have a clear written mandate outlining its purpose, objectives and responsibilities, including composition, frequency of meetings and reporting relationships.

              October 07

          • Audit Committee[versions up to October 2010]

            • HC-1.3.12 [versions up to October 2010]

              The Central Bank requires all banks to establish an Audit Committee. The committee members must have sufficient technical expertise to enable the committee to perform its functions effectively. There must be at least one qualified and appropriately experienced accountant in the committee. All members of the committee must be financially literate. The Audit Committee must be composed of non-executive Directors only. The CEO may not be a member of this committee.

              October 07

            • HC-1.3.13 [versions up to October 2010]

              Responsibilities of the Audit Committee are as follows:

              a) To review the integrity of the bank's financial reporting (particularly with reference to information passed to the Board - see HC-1.2.6 a). This review must include the choice of accounting policies. The information needs of the Board to perform its monitoring responsibilities must be defined in writing, and regularly monitored by the Audit Committee;
              b) To oversee the selection and compensation of the external auditor for appointment and approval at the shareholders' meeting. The audit committee must oversee relations with the external auditors, including ensuring the external auditor's independence (in particular, making sure that the external audit firm and its partners have no other financial or business relationship without the Board's knowledge), the terms and conditions of the auditor's appointment and remuneration arrangements. The committee must monitor rotation arrangements for audit engagement partners. The audit committee must monitor the performance of the external auditor and the non-audit services provided by the external auditor. The committee must meet with the external auditor at least twice per year, and at least once per year in the absence of any members of executive management.
              c) To regularly review the activities and performance of the internal audit function;
              d) To review whether the bank complies with all relevant laws, regulations, codes and business practices, and ensure that the bank communicates with shareholders and relevant stakeholders (internal and external) openly and promptly, and with substance of compliance prevailing over form; and
              e) To review and supervise the implementation of, enforcement of and adherence to the bank's code of conduct.
              October 07

            • HC-1.3.14 [versions up to October 2010]

              Below the Audit Committee, the bank must set up an internal audit function, which reports directly to the Audit Committee (with a parallel reporting line to senior management for day-to-day matters as appropriate).

              October 07

          • Sharia Supervision Committee[versions up to October 2010]

            • HC-1.3.15 [versions up to October 2010]

              The Central Bank requires all banks to establish an independent Shari'a Supervision Committee complying with AAOIFI's governance standards for Islamic Financial Institutions No. 1 and No.2

              October 07

            • HC-1.3.16 [versions up to October 2010]

              All banks must comply with all AAOIFI issued accounting standards as well as the Shari'a pronouncement issued by the Shari'a Board of AAOIFI. The bank must have a separate function of Shari'a review to verify compliance with the above. This internal Shari'a review must be carried out in accordance with AAOIFI's governance standards No. 3. The Shari'a review function may be located in the Internal Audit function of the bank.

              October 07

        • HC-1.4 HC-1.4 Transparency and Disclosure[versions up to October 2010]

          Board's Responsibility for Disclosure

          October 07

          • HC-1.4.1 [versions up to October 2010]

            The Board should oversee the process of disclosure and communications with internal and external stakeholders. The Board should ensure that disclosures made by the bank are fair, transparent, comprehensive and timely and reflect the character of the bank and the nature, complexity and risks inherent in the bank's business activities. Disclosure policies must be reviewed for compliance with the Central Bank's disclosure requirements (see Rulebook Chapter PD-1).

            October 07

          • HC-1.4.2 [versions up to October 2010]

            To promote sound corporate governance, the bank must submit its organisational structure approved by the Board of Directors, which notes the designations and responsibilities of its key management personnel, highlighting their qualifications and relevant industry experience. The organisational structure should be clearly delineated and reporting lines completely transparent to promote full disclosure. It is the General Manager's responsibility to ensure that this occurs.

            October 07

          • HC-1.4.3 [versions up to October 2010]

            The bank must submit a statement of its strategy and objectives to the Central Bank at the time of licensing. This statement should cover a minimum period of three years. The Central Bank may request a formal review by the Board of the bank's statement from time to time.

            October 07

        • HC-1.5 HC-1.5 Notification, reporting, and approval requirements for changes to activities, personnel and ownership, strategy, Board meetings and special purpose vehicles ('SPVs')[versions up to October 2010]

          • HC-1.5.1 [versions up to October 2010]

            Banks must notify the Central Bank in writing of all major proposed changes to the strategy and/or corporate plan of the bank prior to implementation.

            October 07

          • HC-1.5.2 [versions up to October 2010]

            Banks must notify the Central Bank in writing of any proposed changes to senior positions or ownership changes mentioned in Sections HC-2.1 and HC-3.2 (whether in terms of structure or identity of personnel) prior to the change. The communication should include the reason for the departure of the personnel and the Curriculum Vitae of any new persons taking up the relevant positions in the bank (see also HC-2.1.17). See also Section BR-5.1 for notification requirements concerning contact details of senior staff.

            Amended: October 2009
            Amended: January 2009
            October 2007

          • HC-1.5.3 [versions up to October 2010]

            If a controlled function falls vacant, all banks 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 bank 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.

            Added January 2009

          • HC-1.5.4 [versions up to October 2010]

            All locally incorporated banks, in addition to the requirements in Paragraphs HC-1.5.1 and HC-1.5.2, should obtain the Central Bank's prior specific written approval before establishing any subsidiaries (including SPVs where the bank exercises a majority shareholding or has majority voting control by virtue of direct ownership or by proxy/nominee arrangements), branches and/or representative offices, either inside or outside of Bahrain. In order to avoid any delays and/or disruption in implementation of banks' plans in this context, the Central Bank should be approached as soon as possible, even at a very preliminary stage.

            Renumbered January 2009
            October 07

          • HC-1.5.5 [versions up to October 2010]

            All locally incorporated banks are required to submit, on an annual basis, as an attachment to the year-end quarterly PIR, a report recording the meetings during the year by their Board of Directors. For a sample report, refer to Appendix BR-10.

            Renumbered January 2009
            October 07

          • HC-1.5.6 [versions up to October 2010]

            All locally incorporated banks must notify the Central Bank if they intend to act as sponsor or manager of a special purpose vehicle ('SPV'), or if they intend to participate in the creation of an SPV, or if they intend to acquire shares in an SPV. All locally incorporated banks must notify the Central Bank if they are appointed as nominee shareholders of SPVs or hold votes by proxy arrangement in SPVs on behalf of other investors. In all cases listed above, the concerned bank must notify the Central Bank quarterly of any new commitments to, or engagements in business arrangements with SPVs. These reporting and notification arrangements apply in addition to arrangements under HC-1.5.4 where the SPV is a subsidiary.

            Renumbered January 2009
            October 07

          • HC-1.5.7 [versions up to October 2010]

            The Central Bank requires any locally incorporated bank associated with an SPV to give the background to the following points in any notification under HC-1.5.6 above:

            a) the purpose of the SPV;
            b) the nature of the relationship between the bank and the SPV (i.e. sponsor, manager, investor, controller etc.);
            c) the external auditor's proposed consolidation/accounting treatment of the SPV;
            d) the availability of financial and other information relevant to the SPV and access to its business premises and records;
            e) whether the bank is providing any guarantees, warranties or financial/liquidity support of any kind to the SPV.
            Renumbered January 2009
            October 07

          • HC-1.5.8 [versions up to October 2010]

            Where the SPV is consolidated into the accounts of a locally incorporated bank, the bank must provide separate accounting information on the SPV to the Central Bank on a quarterly basis. Furthermore, the annual audited financial statements of all consolidated SPVs must be submitted to the Central Bank within 3 months of the year end of the concerned SPV.

            Renumbered January 2009
            October 07

          • HC-1.5.9 [versions up to October 2010]

            Where a locally incorporated bank has a controller or majority ownership relationship with an SPV, or acts as sponsor, the bank must obtain the prior approval of the Central Bank for any changes to the capital, ownership, management or control of the SPV. All locally incorporated banks must also notify the Central Bank of any significant events in relation to the SPV. If necessary, the Central Bank may require that formal information exchange arrangements are put in place (e.g. a memorandum of understanding) if the SPV is located in a foreign jurisdiction and its activities are not supervised locally.

            Renumbered January 2009
            October 07

      • HC-2 HC-2 Approved Persons[versions up to October 2010]

        • HC-2.1 HC-2.1 CBB Notification and Approval[versions up to October 2010]

          • General Requirement[versions up to October 2010]

            • HC-2.1.1 [versions up to October 2010]

              All persons wishing to undertake a controlled function in an Islamic bank licensee must be notified to the CBB prior to their appointment and, where required, approved by the CBB (see Rule HC-2.1.3).

              October 07

            • HC-2.1.2 [versions up to October 2010]

              Controlled functions are those of:

              (a) Director;
              (b) Member of Shari'a Supervisory Board
              (c) Chief Executive or General Manager;
              (d) Senior Manager;
              (e) Compliance officer;
              (f) Money Laundering Reporting Officer;
              (g) Deputy Money Laundering Reporting Officer; and
              (h) Financial Instruments Trader.
              Amended: October 2009
              October 2007

            • HC-2.1.3 [versions up to October 2010]

              Prior approval is required for controlled functions (a), (b), (c), (d), (e), (f) and (g). Controlled functions (e) and (f) may be combined, however (see also FC-4.1, regarding the MLRO function). Controlled function (h) does not require prior approval: instead, notification only is required, once the person concerned has accepted to undertake that function.

              Amended: October 2009
              October 2007

          • Basis for Approval[versions up to October 2010]

            • HC-2.1.4 [versions up to October 2010]

              Approval under Rule HC-2.1.1 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 HC-2.2 and HC-2.3 respectively.

              October 07

          • Definitions[versions up to October 2010]

            • HC-2.1.5 [versions up to October 2010]

              Director is any person who occupies the position of a Director, as defined in Article 173 of the Commercial Companies Law (Legislative Decree No. 21 of 2001).

              October 07

            • HC-2.1.6 [versions up to October 2010]

              The fact that a person may have 'Director' in their job title does not of itself make them a Director within the meaning of the definition noted in Rule HC-2.1.5. For example, a 'Director of Marketing', is not necessarily a member of the Board of Directors and therefore may not fall under the definition of Rule HC-2.1.5.

              October 07

            • HC-2.1.7 [versions up to October 2010]

              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. This person is responsible, alone or jointly, for the conduct of the whole of the firm, or, in the case of an overseas Islamic bank licensee, for all of the activities of the branch (in which case, he may hold the title of 'Branch Manager').

              October 07

            • HC-2.1.8 [versions up to October 2010]

              Senior Manager means a person who, under the immediate authority of a Director or the Chief Executive/General Manager, exercises major managerial responsibilities, is responsible for a significant business or operating unit, or has major managerial responsibility for maintaining accounts or other records of the licensee.

              October 07

            • HC-2.1.9 [versions up to October 2010]

              Whether a person is a Senior Manager will depend on the facts in each case and is not determined by the presence or absence of the word in their job title. Examples of Senior Managers might include, depending on the scale, nature and complexity of the business, a deputy Chief Executive; and heads of departments such as Risk Management, or Internal Audit; or the Chief Financial Officer.

              October 07

            • HC-2.1.10 [versions up to October 2010]

              Financial Instruments Trader means a person who is engaged in buying or selling financial instruments.

              October 07

            • HC-2.1.11 [versions up to October 2010]

              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.

              October 07

          • Notification Requirements and Process[versions up to October 2010]

            • HC-2.1.12 [versions up to October 2010]

              Islamic bank licensees must obtain CBB approval before a person is formally appointed to a controlled function; the request for CBB approval must be made by submitting to CBB a duly completed Form 3 (Application for Approved Person status). In the case of a financial instruments trader, notification only is required (see Rule HC-2.1.3): this notification must also be made by submitting a Form 3.

              October 07

            • HC-2.1.13 [versions up to October 2010]

              In the case of license applications, the Form 3 must be marked for the attention of the Director, Licensing and Policy Directorate. When made by an Islamic bank licensee, the Form 3 must be marked for the attention of the Director, Islamic Financial Institutions.

              October 07

            • HC-2.1.14 [versions up to October 2010]

              Licensees should give the CBB a reasonable amount of notice in order for an application for approval to be reviewed. The CBB aims to respond within 2 weeks of receipt of an application, although in some cases, where referral to an overseas supervisor is required, the response time is likely to be longer.

              October 07

            • HC-2.1.15 [versions up to October 2010]

              Licensees seeking to appoint Board Directors should seek CBB approval for all the candidates to be put forward for election at a shareholder 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.

              October 07

            • HC-2.1.16 [versions up to October 2010]

              All refusals by the CBB to grant a person approved person status have to be reviewed and approved by an Executive Director of the CBB. A notice of intent is issued to the licensee concerned, setting out the basis for the decision. The licensee has 30 calendar days from the date of the notice in which to appeal the decision. The CBB then has 30 calendar days from the date of the representation in which to make a final determination. See also Chapter EN-5.

              Amended January 2009
              Added October 2007

            • HC-2.1.17 [versions up to October 2010]

              Islamic bank licensees must immediately notify CBB when an approved person ceases to hold the controlled function, for which they have been approved, and for whatever reason (see also HC-1.5.2).

              Amended January 2009
              October 07

            • HC-2.1.18 [versions up to October 2010]

              Thus, licensees are required to notify CBB should an approved person transfer to another function within the licensee, or to another group entity; or else resign, be suspended or dismissed. CBB may require further clarification as to the reasons for the person's transfer or departure. CBB will automatically withdraw the individual's approved person status: should the person wish to undertake another controlled function, whether within the same licensee or in another licensee, then a new application should be resubmitted.

              October 07

            • HC-2.1.19 [versions up to October 2010]

              Islamic bank licensees must immediately notify 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 HC-2.2).

              October 07

        • HC-2.2 HC-2.2 "Fit and proper" requirement[versions up to October 2010]

          • HC-2.2.1 [versions up to October 2010]

            Licensees seeking an approved person authorisation for an individual, must satisfy the CBB that the individual concerned is 'fit and proper' to undertake the controlled function in question.

            October 07

          • HC-2.2.2 [versions up to October 2010]

            To be considered 'fit and proper', those nominated must demonstrate:

            (a) personal integrity, honesty and good reputation;
            (b) professional competence, experience and expertise, sufficient for the controlled function for which authorisation is being applied for, and given the scale, complexity and nature of the Islamic bank licensee concerned; and
            (c) financial soundness.
            October 07

          • HC-2.2.3 [versions up to October 2010]

            In assessing the conditions prescribed in Rule HC-2.2.2, the CBB will take into account the criteria contained in Section HC-2.3. The CBB reviews each application on a case-by-case basis, taking into account all relevant circumstances. A person may be considered 'fit and proper' to undertake one type of controlled function but not another, depending on the function's job size and required levels of experience and expertise. Similarly, a person approved to undertake a controlled function in one Islamic bank licensee may not be considered to have sufficient expertise and experience to undertake nominally the same controlled function but in a much bigger licensee.

            October 07

          • HC-2.2.4 [versions up to October 2010]

            Approved persons undertaking a controlled function must act prudently, and with honesty, integrity, care, skill and due diligence in the performance of their duties. They must avoid conflicts of interest arising whilst undertaking a controlled function.

            October 07

          • HC-2.2.5 [versions up to October 2010]

            In determining whether a conflict of interest may arise, factors that may be considered include whether:

            (a) a person has breached any fiduciary obligations to the company or terms of employment;
            (b) a person has undertaken actions that would be difficult to defend, when looked at objectively, as being in the interest of the licensee; and
            (c) a person has failed to declare a personal interest that has a material impact in terms of the person's relationship with the licensee.
            October 07

        • HC-2.3 HC-2.3 Interpretative Guidance on 'Fit and Proper' Requirement[versions up to October 2010]

          • HC-2.3.1 [versions up to October 2010]

            In assessing a person's fitness and propriety, the CBB will consider previous professional and personal conduct (in Bahrain or elsewhere) including, but not limited to, the following:

            (a) the propriety of a person's conduct, whether or not such conduct resulted in a criminal offence being committed, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;
            (b) a conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;
            (c) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;
            (d) whether the person has been the subject of any disciplinary proceeding by any government authority, regulatory agency or professional body or association;
            (e) the contravention of any financial services legislation or regulation;
            (f) whether the person has ever been refused a license, authorisation, registration or other authority;
            (g) dismissal or a request to resign from any office or employment;
            (h) disqualification by a court, regulator or other competent body, as a Director or as a manager of a corporation;
            (i) whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;
            (j) the extent to which the person has been truthful and open with supervisors;
            (k) the extent to which the person has appropriate professional and other qualifications for the controlled function in question;
            (l) the extent to which the person has sufficient experience, or is otherwise able to perform the functions of the controlled function in question;
            (m) whether the person has ever been adjudged bankrupt, entered into any arrangement with creditors in relation to the inability to pay due debts, or failed to satisfy a judgement debt under a court order.
            October 07

          • HC-2.3.2 [versions up to October 2010]

            With respect to HC-2.3.1.(b), (c), (d) and (e), the CBB will take into account the length of time since any such event occurred, as well as the seriousness of the matter in question.

            October 07

          • HC-2.3.3 [versions up to October 2010]

            Further guidance on the process for assessing a person's 'fit and proper' status is given in Module EN (Enforcement): see Chapter EN-8.

            October 07

        • HC-2.4 [This Section was deleted in 07/2006: it has been left blank.][versions up to October 2010]

      • HC-3 HC-3 Compliance officer/manager[versions up to October 2010]

        • HC-3.1 HC-3.1 Introduction[versions up to October 2010]

          • HC-3.1.1 [versions up to October 2010]

            In order to promote best practice with respect to banks' internal systems and controls and international banking supervision, the Central Bank, in this Chapter, outlines its requirements for the compliance function of banks. The expression 'Compliance Function' in this Chapter is used to describe staff carrying out compliance duties.

            October 07

          • HC-3.1.2 [versions up to October 2010]

            The expression 'Compliance Risk', in this Chapter refers to the risk of legal or regulatory sanctions, material or financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, reporting requirements, standards and codes of conduct applicable to its activities, rather than compliance with a bank's internal limits or procedures.

            October 07

          • HC-3.1.3 [versions up to October 2010]

            For further information and guidance on compliance risk and the compliance function, banks should refer to the Basel Committee publication, 'Compliance and the compliance function in banks' (www.bis.org/publ April 2005). The Central Bank expects banks to carry out a review of their compliance with the principles in this paper on a regular basis (either by way of a self-assessment or by way of a review by the internal or external audit function).

            October 07

        • HC-3.2 HC-3.2 Requirement for and approval of a compliance officer/manager[versions up to October 2010]

          • HC-3.2.1 [versions up to October 2010]

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

            October 07

          • HC-3.2.2 [versions up to October 2010]

            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 Central Bank's prior approval.

            October 07

          • HC-3.2.3 [versions up to October 2010]

            The compliance officer/manager must be appropriately qualified and experienced and the compliance function must have adequate resources to carry out its functions effectively.

            October 07

          • HC-3.2.4 [versions up to October 2010]

            The appointment of a compliance manager/officer requires the Central Bank's prior approval and the submission of the appointee's Personal Questionnaire (Appendix LR 2) and Curriculum Vitae to the Central Bank. 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.

            October 07

          • HC-3.2.5 [versions up to October 2010]

            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.

            October 07

      • HC-4 [This Chapter deleted 07/2006 – left blank.][versions up to October 2010]

    • AU AU Auditors and Accounting Standards

      • AU-A AU-A Introduction

        • AU-A.1 AU-A.1 Purpose

          • AU-A.1.1

            This Module presents requirements that have to be met by Islamic bank licensees with respect to the appointment of external auditors. This Module also sets out certain obligations that external auditors have to comply with, as a condition of their appointment by Islamic bank licensees.

          • AU-A.1.2

            This Module is issued under the powers given the BMA under Article 41 of the BMA Law 1973. It supplements Article 79 of the BMA Law, which requires licensees to appoint an external auditor acceptable to the BMA.

        • AU-A.2 AU-A.2 Module History

          • Evolution of Module

            • AU-A.2.1

              This Module was first issued as Module AU (Audit Firms) in January 2005, as part of the first release of Volume 2 (Islamic banks) of the BMA Rulebook. It was subsequently reissued in full in July 2006 (and renamed "Auditors and Accounting Standards").

            • AU-A.2.2

              The reissued Module was one of several Modules modified to reflect the introduction of the BMA's new integrated license framework. Although the new framework did not change the substance of the requirements contained in this Module, the Module was re-issued in order to simplify its drafting and layout and align it with equivalent Modules in other Volumes of the BMA Rulebook.

            • AU-A.2.3

              This Module is dated July 2006. Pages that are subsequently changed in this Module are updated with the end-calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

            • AU-A.2.4

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

              Module Reference Change Date Description of Changes
              Whole module July 2006 Module renamed as Module AU (Auditors and Accounting Standards). Text redrafted but substance of requirements left unchanged.

          • Superseded Requirements

            • AU-A.2.5

              Circular Ref Date of Issue Module Ref.
              (July 2004 version)
              Circular Subject
              BC/5/82 5 Aug 1982 AU 1.1 Approval of Appointment of Auditors
              ODG/59/99 15 Jul 1999 AU 1.1–AU 1.2 Audit Partners of External Auditors and Reporting Accountants of Locally Incorporated Banks
              PIRI Pack - - - - - AU 1.4, AU 3.7 Prudential Information Returns for Islamic Financial Institutions
              ODG/162/03 (partial) 21 May 2003 AU 1.4–AU 1.4, AU 2.2 Outsourcing
              BS/9/03 (partial) 14 Sep 2003 AU 1.5 Operational Risk Management
              BC/1/97 12 Feb 1997 AU 1.6 Request for Approval for Dividend Distribution
              BC/4/99 (partial) 17 Mar 1999 AU 1.6, AU 3.7 Annual Accounts for the Year Ending 31 December 1999
              14/86 19 Jun 1986 AU 2.1 Auditors' Relationship with Supervisors
              BMA/751/93 (partial) 8 Jul 1993 AU 3.2 Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange.
              BC/1/99 22 Feb 1999 AU 3.3 Enhancing Bank Transparency
              EDBC/6/01 (partial) 14 Oct 2001 AU 3.4 Money laundering Regulation
              BC/6/97 21 Apr 1997 AU 4 Reporting Accountants

      • AU-B AU-B Scope of Application

        • AU-B.1 AU-B.1 Islamic bank Licensees

          • AU-B.1.1

            The contents of this Module — unless otherwise stated — apply to all Islamic bank licensees.

          • AU-B.1.2

            The contents of Chapters AU-1 to AU-4 apply to both Bahraini Islamic bank licensees and overseas Islamic bank licensees.

        • AU-B.2 AU-B.2 Auditors

          • AU-B.2.1

            Certain requirements in this Module extend to auditors, by virtue of their appointment by Islamic bank licensees. Auditors appointed by Islamic bank licensees must be independent (cf. Sections AU-1.4 and AU-1.5). Auditors who resign or are otherwise removed from office must inform the BMA in writing of the reasons for the termination of their appointment (cf. Section AU-1.2). Other requirements are contained in Sections AU-1.3 (Audit partner rotation) and AU-3 (Auditor reports).

      • AU-1 AU-1 Auditor Requirements

        • AU-1.1 AU-1.1 Appointment of Auditors

          • AU-1.1.1

            Islamic bank licensees must obtain prior written approval from the BMA before appointing or re-appointing their auditors.

          • AU-1.1.2

            As the appointment of auditors normally takes place during the course of the firm's annual general meeting, Islamic bank licensees should notify the BMA of the proposed agenda for the annual general meeting in advance of it being circulated to shareholders. The BMA's approval of the proposed auditors does not limit in any way shareholders' rights to subsequently reject the Board's choice.

          • AU-1.1.3

            The BMA, in considering the proposed (re-)appointment of an auditor, takes into account the expertise, resources and reputation of the audit firm, relative to the size and complexity of the licensee. The BMA will also take into account the track record of the audit firm in auditing Islamic bank licensees within Bahrain; the degree to which it has generally demonstrated independence from management in its audits; and the extent to which it has identified and alerted relevant persons of significant matters. Finally, the BMA will also consider the audit firm's compliance with applicable laws and regulations (including legislative Decree No. 26 of 1996; the Ministry of Industry and Commerce's Ministerial Resolution No. 6 of 1998; and relevant Bahrain Stock Exchange regulations).

          • AU-1.1.4

            In the case of overseas Islamic bank licensees, the BMA will also take into account who act as the auditors of the parent firm. As a general rule, the BMA does not favour different parts of a banking firm or group having different auditors.

        • AU-1.2 AU-1.2 Removal or Resignation of Auditors

          • AU-1.2.1

            Islamic bank licensees must notify the BMA as soon as they intend to remove their auditors, with an explanation of their decision, or as soon as their auditors resign.

          • AU-1.2.2

            Islamic bank licensees must ensure that a replacement auditor is appointed (subject to BMA approval as per Section AU-1.1), as soon as reasonably practicable after a vacancy occurs, but no later than three months.

          • AU-1.2.3

            An auditor who resigns or is otherwise removed from the office of auditor must, within 30 days of the resignation or removal, write to the BMA setting out the reasons for the resignation or removal.

        • AU-1.3 AU-1.3 Audit Partner Rotation

          • AU-1.3.1

            Unless otherwise exempted by the BMA, Islamic bank licensees must ensure that the audit partner responsible for their audit does not undertake that function more than five years in succession.

          • AU-1.3.2

            Islamic bank licensees must notify the BMA of any change in audit partner.

        • AU-1.4 AU-1.4 Auditor Independence

          • AU-1.4.1

            Before an Islamic bank licensee appoints an auditor, it must take reasonable steps to ensure that the auditor has the required skill, resources and experience to carry out the audit properly, and is independent of the licensee.

          • AU-1.4.2

            For an auditor to be considered independent, it must, among things, comply with the restrictions in Section AU-1.5.

          • AU-1.4.3

            If an Islamic bank licensee becomes aware at any time that its auditor is not independent, it must take reasonable steps to remedy the matter and notify the BMA of the fact.

          • AU-1.4.4

            If in the opinion of the BMA, independence has not been achieved within a reasonable timeframe, then the BMA may require the appointment of a new auditor.

        • AU-1.5 AU-1.5 Licensee/Auditor Restrictions

          • Financial Transactions with Auditors

            • AU-1.5.1

              Islamic bank licensees must not lend to their auditors, nor enter into any contracts of professional indemnity insurance with their auditors.

          • Outsourcing to Auditors

            • AU-1.5.2

              Section OM-2.7 generally prohibits Islamic bank licensees from outsourcing their internal audit function to the same firm that acts as their external auditors. However, the BMA may allow short-term outsourcing of internal audit operations to an Islamic bank licensee's external auditor, to meet unexpected urgent or short-term needs (for instance, on account of staff resignation or illness). Any such arrangement will normally be limited to a maximum period of one year and is subject to BMA prior approval.

          • Other Relationships

            • AU-1.5.3

              Islamic bank licensees and their auditors must comply with the restrictions contained in Article 217 (c) of the Commercial Companies Law (Legislative Decree No. (21) of 2001).

            • AU-1.5.4

              Article 217(c) prohibits an auditor from (i) being the chairman or a member of the Board of Directors of the company he/she audits; (ii) holding any managerial position in the company he/she audits; and (iii) acquiring any shares in the company he/she audits, or selling any such shares he/she may already own, during the period of his audit. Furthermore, the auditor must not be a relative (up to the second degree) of a person assuming management or accounting duties in the company.

            • AU-1.5.5

              The restriction in Paragraph AU-1.5.3 applies to overseas Islamic bank licensees as well as Bahraini Islamic bank licensees.

            • AU-1.5.6

              A partner, Director or manager on the engagement team of auditing an Islamic bank licensee may not serve on the Board or in a controlled function of the licensee, for two years following the end of their involvement in the audit, without prior authorisation of the BMA.

            • AU-1.5.7

              Chapter HC-2 sets out the BMA's "controlled functions" requirements.

          • Definition of "Auditor"

            • AU-1.5.8

              For the purposes of Section AU-1.5, "auditor" means the partners, Directors and managers on the engagement team responsible for the audit of the Islamic bank licensee.

      • AU-2 AU-2 Access

        • AU-2.1 AU-2.1 BMA Access to Auditors

          • AU-2.1.1

            Islamic bank licensees must waive any duty of confidentiality on the part of their auditors, such that their auditors may report to the BMA any concerns held regarding material failures by the Islamic bank licensee to comply with BMA requirements.

          • AU-2.1.2

            The BMA may, as part of its on-going supervision of Islamic bank licensees, request meetings with a licensee's auditors. If necessary, BMA may direct that the meeting be held without the presence of the licensee's management or Directors.

        • AU-2.2 AU-2.2 Auditor Access to Outsourcing Providers

          • AU-2.2.1

            Rule OM-2.5.1 (c) on outsourcing agreements between Islamic bank licensees and outsourcing providers requires licensees to ensure that their internal and external auditors have timely access to any relevant information they may require to fulfil their responsibilities. Such access must allow them to conduct on-site examinations of the outsourcing provider, if required.

      • AU-3 AU-3 Auditor Reports

        • AU-3.1 AU-3.1 Review of Financial Disclosures

          • AU-3.1.1

            Islamic bank licensees that are required to publish financial disclosures in accordance with Chapters PD-2 and PD-3 must arrange for their external auditors to review these prior to their publication, unless otherwise exempted in writing by BMA.

          • AU-3.1.2

            Chapter PD-2 requires overseas Islamic bank licensees operating as retail banks to publish on semi-annual basis summary information on their balance sheet and profit and loss account, in the same format as their annual audited accounts. Chapter PD-3 requires all locally incorporated Islamic bank licensees to publish quarterly financial statements, in accordance with Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). For products and activities not covered by AAOIFI, International Accounting Standards (IAS) should be followed.

        • AU-3.2 AU-3.2 Report on Compliance with Financial Crime Rules

          • AU-3.2.1

            Islamic bank licensees must arrange for their external auditors to report on the licensee's compliance with the requirements contained in Module FC (Financial Crime), at least once a year.

          • AU-3.2.2

            The report specified in Rule AU-3.2.1 must be in the form agreed by BMA, and must be submitted to the BMA within four months of the licensee's financial year-end.

          • AU-3.2.3

            The context to the above requirement can be found in Section FC-4.3.

        • AU-3.3 AU-3.3 Review of Compliance with relevant laws

          • AU-3.3.1

            Islamic bank licensees must arrange for their external auditors to review the bank's compliance with applicable laws and declare, in the auditors report, that no material violations of the following laws and regulations have taken place:

            (a) The Bahrain Commercial Companies Law of 2001;
            (b) The BMA Law 1973; and
            (c) The BMA's licensing conditions, and other rules contained in Volume 2 of the BMA Rulebook.

          • AU-3.3.2

            For the purposes of Rule AU-3.3.1, material violations are violations that have any material impact on the financial statements of the bank.

        • AU-3.4 AU-3.4 Report on material differences

          • AU-3.4.1

            Islamic bank licensees must arrange for their external auditors to provide to the BMA explanations for any material differences in data reported in the bank's audited accounts and in the following reports provided to the BMA:

            (a) Prudential Information Returns for Islamic Banks (PIRI); and
            (b) Monthly Statements of Assets and Liabilities.

        • AU-3.5 AU-3.5 Report on behavioural adjustments

          • AU-3.5.1

            Islamic bank licensees that have been given BMA approval to apply behavioural adjustments to the liquidity data provided in Section E of the PIRI Form, must arrange for their external auditors to verify the supporting data used to support the behavioural adjustments made.

          • AU-3.5.2

            Please refer to Module LM and to Section BR-5.2. Banks that have at least 2 years' worth of supporting data may seek BMA approval to apply behavioural adjustments to certain of their reported liquidity data, instead of reporting contractual maturities.

      • AU-4 AU-4 Accounting Standards

        • AU-4.1 AU-4.1 General Requirements

          • AU-4.1.1

            Islamic bank licensees must comply with Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). For products and activities not covered by AAOIFI, International Financial Reporting Standards (IFRS) / International Accounting Standards (IAS) must be followed.

    • GR GR General Requirements

      • GR-A GR-A Introduction

        • GR-A.1 GR-A.1 Purpose

          • GR-A.1.1

            The General Requirements Module presents a variety of different requirements that are not extensive enough to warrant their own stand-alone Module, but for the most part are generally applicable. These include general requirements on books and records; on the use of corporate and trade names; and on controllers. Each set of requirements is contained in its own Chapter: a table listing these and their application to licensees is given in Chapter GR-B.

        • GR-A.2 GR-A.2 Module History

          • Evolution of Module

            • GR-A.2.1

              This Module was first issued in July 2006, with immediate effect, as a new Module aimed at aligning the structure and contents of Volume 2 with other Volumes of the BMA Rulebook. It is dated July 2006. All subsequent changes to this Module are annotated with the end-calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

            • GR-A.2.2

              The July 2006 version of Module GR does not introduce new requirements. Rather, it incorporates the record keeping requirements previously contained in Chapter LR-6 of the Licensing and Authorisation Requirement Module (reissued, in July 2006, as the Licensing Module). It also incorporates the requirements relating to controllers, previously contained in Chapter HC-2 of the High-Level Controls Module. Finally, Module GR expands on certain requirements that were previously contained only in the BMA Law 1973, such as the requirement to seek BMA approval for use of a corporate or trading name.

            • GR-A.2.3

              A list of recent changes made to this Module is detailed in the table below:

              Module Ref. Change Date Description of Changes
                   
                   
                   
                   

          • Superseded Requirements

            • GR-A.2.4

              This Module supersedes:

              Circular / other reference Provision Subject
              Module LR (April 2006 version) LR-6: Record Keeping Record keeping requirements were moved to GR-1, and edited down to simplify and avoid duplication of record keeping requirements contained in Module FC.
              Module HC (April 2006 version) HC-2: 'Fit and Proper Requirement' Requirements relating to controllers were moved to GR-5. Remaining 'fit and proper' elements regarding Directors and key employees of licensees were retained in HC-2, in a re-drafted form.
                   

      • GR-B GR-B Scope of Application

        • GR-B.1 GR-B.1 Islamic Bank Licensees

          • License categories

            • GR-B.1.1

              The requirements in Module GR (General Requirements) apply to both retail and wholesale Islamic bank licensees.

          • Bahraini and overseas Islamic bank licensees

            • GR-B.1.2

              The scope of application of Module GR (General Requirements) is as follows:

              Chapter Bahraini Islamic bank licensees Overseas bank licensees
              GR-1 GR-1.1 and GR-1.3 apply to the whole bank; GR-1.2 applies to business booked in Bahrain only. Applies to the Bahrain branch only.
              GR-2 Applies to the whole bank. Applies to the Bahrain branch only.
              GR-3 Applies to the whole bank. Doesn't apply.
              GR-4 Applies to the whole bank. Applies to the Bahrain branch only.
              GR-5 Applies to the whole bank. Applies to the whole bank.
              GR-6 [This chapter has been left blank.] [This chapter has been left blank.]
              GR-7 Applies to the whole bank. Applies to the Bahrain branch only.

            • GR-B.1.3

              In the case of Bahraini Islamic bank licensees, certain requirements apply to the whole bank, irrespective of the location of its business; other requirements apply only in respect to business booked in Bahrain. In the case of overseas Islamic bank licensees, the requirements of Module GR mostly only apply to business booked in the Bahrain branch.

      • GR-1 GR-1 Books and Records

        • GR-1.1 GR-1.1 General Requirements

          • GR-1.1.1

            The requirements in Section GR-1.1 apply to Bahraini Islamic bank licensees, with respect to the business activities of the whole bank (whether booked in Bahrain or in a foreign branch). The requirements in Section GR-1.1 also apply to overseas Islamic bank licensees, but only with respect to the business booked in their branch in Bahrain.

          • GR-1.1.2

            All Islamic bank licensees must maintain books and records (whether in electronic or hard copy form) sufficient to produce financial statements and show a complete record of the business undertaken by a licensee. These records must be retained for at least the minimum period specified under Bahrain law.

          • GR-1.1.3

            GR-1.1.2 includes accounts, books, files and other records (e.g. trial balance, general ledger, nostro/vostro statements, reconciliations and lists of counterparties). It also includes records that substantiate the value of the assets, liabilities and off balance sheet activities of the licensee (e.g. client activity files and valuation documentation). Finally, it includes any email records that are directly related to transactions (such as payment instructions from customers or other third parties).

          • GR-1.1.4

            Bahrain law currently requires corporate records to be retained for at least 5 years (see Ministerial Order No. 23 of 2002, made pursuant to the Amiri Decree Law No. 4 of 2001).

          • GR-1.1.5

            Unless otherwise agreed with the BMA in writing, records must be kept in either English or Arabic; or else accompanied by a certified English or Arabic translation. Records must be kept current. The records must be sufficient to allow an audit of the licensee's business or an on-site examination of the licensee by the BMA.

          • GR-1.1.6

            If a licensee wishes to retain certain records in a language other than English or Arabic without translation, the licensee should write to the BMA, explaining which types of records it wishes to keep in a foreign language, and why systematically translating these may be unreasonable. Generally, only financing contracts or similar original transaction documents may be kept without translation. Where exemptions are granted by BMA, the licensee is nonetheless asked to confirm that it will make available certified translations of such documents, if requested by BMA for an inspection or other supervisory purpose.

          • GR-1.1.7

            Translations produced in compliance with Rule GR-1.1.5 may be undertaken in-house, by an employee or contractor of the licensee, providing they are certified by an appropriate officer of the licensee.

          • GR-1.1.8

            Records must be accessible at any time from within the Kingdom of Bahrain, or as otherwise agreed with the BMA in writing.

          • GR-1.1.9

            Where older records have been archived, or in the case of records relating to overseas branches of Bahraini Islamic bank licensees, the BMA may accept that records be accessible within a reasonably short time frame (e.g. within 5 business days), instead of immediately. The BMA may also agree similar arrangements for overseas Islamic bank licensees, as well as Bahraini Islamic bank licensees, where elements of record retention and management have been centralised in another group company, whether inside or outside of Bahrain.

          • GR-1.1.10

            All original account opening documentation, due diligence and transaction documentation should normally be kept in Bahrain, if the business is booked in Bahrain. However, where a licensee books a transaction in Bahrain, but the transaction documentation is handled entirely by another (overseas) branch or affiliate of the licensee, the relevant transaction documentation may be held in the foreign office, provided electronic or hard copies are retained in Bahrain; the foreign office is located in a FATF member state; and the foreign office undertakes to provide the original documents should they be required.

          • GR-1.1.11

            Licensees should also note that to perform effective consolidated supervision of a group (or sub-group), the BMA needs to have access to financial information from foreign operations of a licensee, in order to gain a full picture of the financial condition of the group: see Module BR (BMA Reporting), regarding the submission of consolidated financial data. If a licensee is not able to provide to the BMA full financial information on the activities of its branches and subsidiaries, it should notify the BMA of the fact, to agree alternative arrangements: these may include requiring the group to restructure or limit its operations in the jurisdiction concerned.

          • GR-1.1.12

            In the case of Bahraini Islamic bank licensees with branch operations overseas, where local record keeping requirements are different, the higher of the local requirements or those contained in this Chapter must be followed.

        • GR-1.2 GR-1.2 Transaction Records

          • GR-1.2.1

            Islamic bank licensees must keep completed transaction records for as long as they are relevant for the purposes for which they were made (with a minimum period in all cases of five years from the date when the transaction was completed). Records of completed transactions must be kept in their original form (whether in hard copy and / or electronic format), for at least five years from the date of the transaction.

          • GR-1.2.2

            For example, if the original documents are paper, they must be kept in their original form. Electronic payments and receipts may be kept electronically without the need for hard copies. The record format selected must be capable of producing complete and accurate financial, management and regulatory reports, and allow monitoring and review of all transactions.

          • GR-1.2.3

            Rule GR-1.2.1 applies to all transactions entered into by a Bahraini Islamic bank licensee, whether booked in Bahrain or in an overseas branch. With respect to overseas Islamic bank licensees, it applies only to transactions booked in the Bahrain branch.

          • GR-1.2.4

            In the case of overseas Islamic bank licensees, Rule GR-1.2.1 therefore only applies to business booked in the Bahrain branch, not in the rest of the company.

        • GR-1.3 GR-1.3 Other Records

          • Corporate Records

            • GR-1.3.1

              Islamic bank licensees must maintain the following records in original form or in hard copy at their premises in Bahrain:

              (a) internal policies, procedures and operating manuals;
              (b) corporate records, including minutes of shareholders', Directors' and management meetings, and Shari'a board meetings;
              (c) correspondence with the BMA and records relevant to monitoring compliance with BMA requirements;
              (d) reports prepared by the Islamic bank licensee's internal and external auditors; and
              (e) employee training manuals and records.

            • GR-1.3.2

              In the case of Bahraini Islamic bank licensees, these requirements apply to the licensee as a whole, including any overseas branches. In the case of overseas Islamic bank licensees, all the requirements of Chapter GR-1 are limited to the business booked in their branch in Bahrain and the records of that branch (see Rule GR-1.1.1). They are thus not required to hold copies of shareholders' and Directors' meetings, and Shari'a board meetings, except where relevant to the branch's operations.

          • Customer Records

            • GR-1.3.3

              Record keeping requirements with respect to customer records, including customer identification and due diligence records, are contained in Module FC (Financial Crime). These requirements address specific requirements under the Amiri Decree Law No. 4 of 2001, the standards promulgated by the Financial Action Task Force, as well as to the best practice requirements of the Basel Committee Core Principles methodology, and its paper on "Customer due diligence for banks".

      • GR-2 GR-2 Corporate and Trade Names

        • GR-2.1 GR-2.1 Vetting of Names

          • GR-2.1.1

            Islamic bank licensees must seek prior written approval from the BMA for their corporate name and any trade names, and those of their subsidiaries located in Bahrain.

          • GR-2.1.2

            GR-2.1.1 applies to overseas Islamic bank licensees only with respect to their Bahrain branch.

          • GR-2.1.3

            Rules GR-2.1.1 and GR-2.1.2 implement the requirements contained in Article 62 of the BMA Law 1973.

          • GR-2.1.4

            In approving a corporate or trade name, the BMA seeks to ensure that it is sufficiently distinct as to reduce possible confusion with other unconnected businesses, particularly those operating in the financial services sector. The BMA also seeks to ensure that names used by unregulated subsidiaries do not suggest those subsidiaries are in fact regulated.

      • GR-3 GR-3 Dividends

        • GR-3.1 GR-3.1 BMA Non-Objection

          • GR-3.1.1

            Bahraini Islamic bank licensees must obtain a letter of no-objection from the BMA to any dividend proposed, before submitting a proposal for a distribution of profits to a shareholder vote.

          • GR-3.1.2

            The BMA will grant a no-objection letter where it is satisfied that the level of dividend proposed is unlikely to leave the licensee vulnerable — for the foreseeable future — to breaching the BMA's capital requirements, taking into account (as appropriate) trends in the licensee's business volumes, expenses, overall performance and the adequacy of provisions against impaired loans or other assets.

          • GR-3.1.3

            To facilitate the prior approval required under Paragraph GR-3.1.1, Islamic bank licensees subject to GR-3.1.1 should provide the BMA with a copy of the proposed agenda for the annual general meeting or other special meeting, noting the licensee's intended declared dividends for the coming year.

          • GR-3.1.4

            Islamic bank licensees must also comply with the provisions contained in Articles 72 to 75 of the BMA Law 1973.

      • GR-4 GR-4 Asset / Liability Transfers

        • GR-4.1 GR-4.1 BMA Approval

          • GR-4.1.1

            Islamic bank licensees must seek prior written approval from the BMA before transferring assets or liabilities of a material nature to a third party, except where such transfers are effected within the normal scope of the bank's operations.

          • GR-4.1.2

            Rule GR-4.1.1 is intended to apply to circumstances where a bank wishes to sell part of its business or a portfolio to a third party, or is undertaking winding up proceedings. It implements the provisions contained in Article 65(A)(2) of the BMA Law 1973.

          • GR-4.1.3

            For the purposes of Rule GR-4.1.1, assets or liabilities of a material nature would be assets or liabilities that comprise 5% or more of the total assets or liabilities of the bank concerned, and any amounts placed with the banks through investment accounts and safe-keeping accounts.

          • GR-4.1.4

            In the case of a Bahraini Islamic bank licensee, Chapter GR-4 applies to its assets and liabilities booked in Bahrain and in the bank's overseas branches. In the case of an overseas Islamic bank licensee, Chapter GR-4 applies only to assets and liabilities booked in the bank's Bahrain branch.

          • GR-4.1.5

            Islamic banks intending to apply to transfer assets or liabilities are advised to contact the BMA at the earliest possible opportunity, in order that the BMA may determine the nature and level of any documentation to be provided and the need for an auditor or other expert opinion to be provided. The BMA will grant its permission where the transfer will have no negative impact on the financial soundness of the bank, and does not otherwise compromise the interests of the bank's investment accounts holders, depositors and creditors. In all cases, the BMA will only grant its permission where the institution acquiring the assets or investment account/deposit liabilities holds the appropriate regulatory approvals and is in good regulatory standing.

      • GR-5 GR-5 Controllers

        • GR-5.1 GR-5.1 Key Provisions

          • GR-5.1.1

            Condition 3 of BMA's licensing conditions specifies, amongst other things, that Islamic bank licensees must satisfy the BMA that their controllers are suitable and pose no undue risks to the licensee. (See Paragraph LR-2.3.1.)

          • GR-5.1.2

            Applicants for an Islamic bank license must provide details of their controllers, by submitting a duly completed Form 2 (Application for authorisation of controller). (See sub-paragraph LR-3.1.5(a).)

          • GR-5.1.3

            Islamic bank licensees must obtain prior approval from the BMA for any of the following changes to its controllers (as defined in Section GR-5.2):

            (a) a new controller;
            (b) an existing controller increasing its holding from below 20% to above 20%;
            (c) an existing controller increasing its holding from below 33% to above 33%;
            (d) an existing controller increasing its holding from below 50% to above 50%; and
            (e) an existing controller increasing its holding from below 75% to above 75%.

          • GR-5.1.4

            For approval under Paragraph GR-5.1.3 to be granted, the BMA must be satisfied that the proposed increase in control poses no undue risks to the licensee. A duly completed Form 2 (Controllers) must be submitted as part of the request for a change in controllers.

          • GR-5.1.5

            If, as a result of circumstances outside the Islamic bank licensee's knowledge and/or control, one of the changes specified in Paragraph GR-5.1.3 is triggered prior to BMA approval being sought or obtained, the Islamic bank licensee must notify the BMA as soon as it becomes aware of the fact and no later than 7 days.

          • GR-5.1.6

            Islamic bank licensees are encouraged to notify the BMA as soon as they become aware of events that are likely to lead to changes in their controllers. The criteria by which the BMA assesses the suitability of controllers are set out in Section GR-5.3. The BMA aims to respond to requests for approval within 30 calendar days. The BMA may contact references and supervisory bodies in connection with any information provided to support an application for controller. The BMA may also ask for further information, in addition to that provided in Form 2, if required to satisfy itself as to the suitability of the applicant.

          • GR-5.1.7

            Islamic bank licensees must submit, within 3 months of their financial year-end, a report on their controllers. This report must identify all controllers of the licensee, as defined in Section GR-5.2.

        • GR-5.2 GR-5.2 Definition of Controller

          • GR-5.2.1

            A controller of an Islamic bank licensee is a natural or legal person who:

            (a) holds 10% or more of the shares in the licensee ("L"), or is able to exercise (or control the exercise) of more than 10% of the voting power in L; or
            (b) holds 10% or more of the shares in a parent undertaking ("P") of L, or is able to exercise (or control the exercise) of more than 10% of the voting power in P; or
            (c) is able to exercise significant influence over the management of L or P.

          • GR-5.2.2

            For the purposes of Paragraph GR-5.2.1, "person" means the person ("H") or any of the person's associates, where associate includes:

            (a) the spouse, child or stepchild of H;
            (b) an undertaking of which H is a Director;
            (c) a person who is an employee or partner of H;
            (d) if H is a corporate entity, a Director of H, a subsidiary of H, or a Director of any subsidiary undertaking of H.

          • GR-5.2.3

            Associate also includes any other person or undertaking with which the person H has entered into an agreement or arrangement as to the acquisition, holding or disposal of shares or other interests in the Islamic bank licensee, or under which they undertake to act together in exercising their voting power in relation to the Islamic bank licensee.

        • GR-5.3 GR-5.3 Suitability of Controllers

          • GR-5.3.1

            A controller of an Islamic bank licensee must satisfy the BMA of his suitability.

          • GR-5.3.2

            In assessing the suitability of controllers who are natural persons, BMA has regard to their professional and personal conduct, including, but not limited to, the following:

            (a) the propriety of a person's conduct, whether or not such conduct resulted in conviction for a criminal offence, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;
            (b) a conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;
            (c) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;
            (d) whether the person has been the subject of any disciplinary proceeding by any government authority, regulatory agency or professional body or association;
            (e) the contravention of any financial services legislation or regulation;
            (f) whether the person has ever been refused a license, authorisation, registration or other authority;
            (g) dismissal or a request to resign from any office or employment;
            (h) disqualification by a court, regulator or other competent body, as a Director or as a manager of a corporation;
            (i) whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;
            (j) the extent to which the person has been truthful and open with regulators; and
            (k) whether the person has ever been adjudged bankrupt, entered into any arrangement with creditors in relation to the inability to pay due debts, or failed to satisfy a judgement debt under a court order.

          • GR-5.3.3

            In addition, the following criteria are also taken into consideration:

            (a) the financial resources of the person and the likely stability of their shareholding;
            (b) existing directorships or ownership of more than 20% of the capital or voting rights of any financial institution in the Kingdom of Bahrain or elsewhere, and the potential for conflicts of interest that such directorships or ownership may imply;
            (c) the interests of depositors, creditors and shareholders of the licensee; and
            (d) the interests of Bahrain's banking and financial sector.

          • GR-5.3.4

            In assessing the suitability of corporate controllers, BMA has regard to their financial standing, judicial and regulatory record, and standards of business practice and reputation, including, but not limited to, the following:

            (a) the financial strength of the controller, its parent(s) and other members of its group, its implications for the Islamic bank licensee and the likely stability of the controller's shareholding;
            (b) whether the controller or members of its group have ever entered into any arrangement with creditors in relation to the inability to pay due debts;
            (c) the controller's jurisdiction of incorporation, location of Head Office, group structure and close links, and the implications for the Islamic bank licensee as regards effective supervision of the Islamic bank licensee and potential conflicts of interest;
            (d) the controller's (and other group members') propriety and general standards of business conduct, including the contravention of any laws or regulations, or the institution of disciplinary proceedings by a government authority, regulatory agency or professional body;
            (e) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct;
            (f) any criminal actions instigated against the controller or other members of its group, whether or not this resulted in an adverse finding; and
            (g) the extent to which the controller or other members of its group have been truthful and open with regulators and supervisors.

          • GR-5.3.5

            In addition, the following criteria are also taken into consideration:

            (a) the interests of investment account holders, depositors, creditors and shareholders of the licensee; and
            (b) the interests of Bahrain's banking and financial sector.

        • GR-5.4 GR-5.4 Approval Process

          • GR-5.4.1

            Following receipt of an approval request under Paragraph GR-5.1.3, the BMA will issue a written notice of objection if it is not satisfied that the person concerned is suitable to become a controller of the Islamic bank licensee. The notice of objection will specify the reasons for the objection and specify the applicant's right of appeal.

          • GR-5.4.2

            Notices of objection have to be approved by an Executive Director of the BMA. The applicant has 30 calendar days from the date of the notice in which to make written representations. The BMA then has 30 calendar days from the date of the representation in which to consider any mitigating evidence submitted and make a final determination. See Module EN (Enforcement).

          • GR-5.4.3

            Where a person has become a controller by virtue of his shareholding in contravention of Paragraph GR-5.1.3, or a notice of objection has been served to him under Paragraph GR-5.4.1 and the period of appeal has expired, the BMA may, by notice in writing served on the person concerned, direct that his shareholding shall, until further notice, be subject to all or any of the following restrictions:

            (a) no voting right shall be exercisable in respect of those shares; and
            (b) except in a liquidation, no payment shall be made of any sum due on the shares from the Islamic bank licensee, whether in respect of capital, dividend or otherwise.

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      • GR-7 GR-7 Suspension of Business

        • GR-7.1 GR-7.1 BMA Approval

          • GR-7.1.1

            An Islamic bank licensee wishing to suspend its operations and liquidate its business must notify the BMA in writing at least six months in advance of its intended suspension, setting out how it proposes to do so and, in particular, how it will treat any Shari'a money placements/deposits, and investment accounts, that it holds.

          • GR-7.1.2

            The notice period under Rule GR-7.1.1 is a statutory requirement, specified in Article 91 of the BMA Law 1973. Article 91, however, also provides for the notice period to be reduced, by prior agreement with the BMA, if in the BMA's view the rights of depositors are safeguarded.

          • GR-7.1.3

            If the Islamic bank licensee wishes to transfer assets or liabilities to a third party, it must comply with the requirements contained in Chapter GR-4.

          • GR-7.1.4

            If the Islamic bank licensee wishes to liquidate its business, the BMA will revise its license to restrict the firm from entering into new business. The licensee must continue to comply with all applicable BMA requirements until such time as it is formally notified by the BMA that its obligations have been discharged and that it may surrender its license.

          • GR-7.1.5

            An Islamic bank licensee in liquidation must continue to meet its contractual and regulatory obligations to depositors, other clients and creditors.

          • GR-7.1.6

            Once the Islamic bank licensee believes that it has discharged all its remaining contractual obligations to investment account holders, depositors, clients and creditors, it must publish a notice in two national newspapers in Bahrain approved by the BMA (one being in English and one in Arabic), stating that is has settled all its dues and wishes to leave the market.

          • GR-7.1.7

            The notice referred to in Paragraph GR-7.1.6 must include a statement that written representations concerning the liquidation may be sent to the BMA before a specified day, which shall not be earlier than sixty days after the day of the first publication of the notice. The BMA will not decide on the application until after considering any representations made to the BMA before the specified day.

          • GR-7.1.8

            If no objections to the liquidation are upheld by the BMA, then the BMA may issue a written notice of approval for the surrender of the license.

      • GR-8 GR-8 BMA Fees

        • GR-8.1 GR-8.1 Annual License Fees

          • GR-8.1.1

            Islamic bank licensees must pay the relevant annual license fee to the BMA, upon the issuance of their license and thereafter on 1 January each year. The annual license fee charged upon issuance of a license is charged on a pro-rata basis, proportionate to the period remaining between the issuance of the license and the end of the calendar year in question (subject to a minimum charge of BD 1,000).