SG-A.1.1

The purpose of the Module is to establish best practice Shari'a governance principles in Bahrain, and to provide protection for investors and other Islamic bank licensees' stakeholders through compliance with these principles.

SG-A.1.2

Shari'a Governance can be defined as a system whereby a Bahraini Islamic bank licensee attempts to comply with Shari'a in all its activities. It is the duty of all the stakeholders to strengthen Shari'a Governance framework of their respective institutions. The main objectives of a Shari'a Governance framework are:

SG-A.1.3

This Module provides support for certain other parts of the Rulebook, mainly:

SG-A.1.4

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

Legal Basis

Evolution of the Module

SG-B.1.1

The contents of this Module — unless otherwise stated — apply to all Bahraini Islamic bank licensees incorporated in the Kingdom of Bahrain.

SG-B.1.2

Branches of foreign bank licensees must satisfy the CBB that equivalent arrangements are in place at the parent entity level, and that these arrangements provide for effective Shari'a governance over activities conducted under the Bahrain license.

SG-B.2.1

Bahraini Islamic bank licensees must ensure that, as a minimum, the same or equivalent provisions of this Module apply to their operating subsidiaries and foreign branches, such that these are also subject to effective Shari'a governance. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.

SG-1.1.1

The Shari'a Governance structure adopted by the Bahraini Islamic bank licensee must be commensurate and proportionate with the size, complexity and nature of its business.

SG-1.1.2

The Shari'a Governance structure must consist, at a minimum, of the following:

SG-1.1.3

It is the responsibility of the Bahraini Islamic Bank Licensee to ensure that the authority and organizational status granted to the various organs of Shari'ah Governance structure are commensurate with their level of responsibility.

SG-2.1.1

All Bahraini Islamic bank licensees must have a Shari'a Supervisory Board (SSB), which must consist of at least three scholars specialized in fiqh al muamalat, and whose members must be approved by the shareholders in their annual general meeting upon the recommendation of the board of directors taking into consideration the CBB regulations, resolutions and directives.

SG-2.1.2

Bahraini Islamic bank licensees must comply with the Shari'a rules and principles as expressed in AAOIFI Shari'ah standards and in the rulings of the Centralized Shari'a Supervisory Board and their respective SSB.

SG-2.2.1

A charter must be prepared by Bahraini Islamic bank licensees and approved by their Board of directors defining the scope of work for the SSB.

SG-2.2.2

A typical charter of the SSB must include, at a minimum, the following:

SG-2.3.1

The SSB must be vested with appropriate power and authority as may be necessary to perform its duties and responsibilities effectively. The fatawa and rulings of the SSB are binding on the Bahraini Islamic bank licensee.

SG-2.3.2

The SSB must supervise the Bahraini Islamic bank licensee's operations and activities to ensure compliance with the Islamic Shari'a, and also monitor and review transactions to ensure full compliance with Shari'a rules and principles and SSB pronouncements.

SG-2.3.3

The Board of Directors must ensure through the Shari'a Governance structure mentioned in Paragraph SG-1.1.2, the existence of an appropriate and functioning internal Shari'a control framework for the compliance with Islamic Shari'a rules and principles.

SG-2.3.4

The SSB must approve the internal Shari'a audit annual plans.

SG-2.3.5

The SSB must notify the CBB in case of any failure by the Board of directors to effectively deal with any major Shari'a non-compliance of the Bahraini Islamic bank licensee. Notification must be in the form of a letter addressed to the Director of Islamic Financial Institutions Directorate at the CBB.

SG-2.3.6

All relevant documentation for new products and services, including contracts, agreements, marketing and promotional materials or other legal documentation used in the Bahraini Islamic bank licensee's business transactions must be approved by the SSB.

SG-2.3.7

The SSB must review and approve the Bahraini Islamic bank licensee's annual Zakah calculations on behalf of the shareholders.

SG-2.3.8

The SSB must put on record, in written form, any opinion that it gives on Shari'a-related issues.

SG-2.3.9

At least one SSB member must be present at the AGM to respond to any enquiries from the Bahraini Islamic bank licensees' shareholders during the discussion of the end of year financial results.

SG-2.3.10

The SSB must review the reports and observations of the Shari'a Coordination and Implementation function and internal Shari'a audit function and provide advice on such reports and observations.

SG-2.3.11

The SSB must approve the profit/loss allocation to the investment account holders.

SG-2.3.12

The SSB must specify the means of disposal of earnings that have been realised from sources or by means prohibited by Shari'a rules and principles.

SG-2.3.13

The SSB must approve the appointment and removal of the Shari'a Officer and the head of internal Shari'a audit function and supervise their work.

SG-2.3.14

The SSB must evaluate and assess, in consultation with the CEO, the performance of Shari'a Officer and Head of Internal Shari'a Audit on an annual basis.

Operating Procedures

Relationship with the Board of Directors

SSB Meetings

SSB Report

Handling Confidential Information

SG-2.4.1

The appointment of the SSB must be made formally in writing, by way of a contract for service for a minimum period of three years.

SG-2.4.2

Benefits and remuneration of the SSB must be set in aggregate by the general assembly.

SG-2.4.3

Where the Bahraini Islamic bank licensee fails to appoint the SSB within 3 months of the annual general meeting or to extend the term of the previous SSB, the CBB has the right to appoint a temporary SSB for which all costs related to the appointment will be borne by the Bahraini Islamic bank licensee in addition to any liabilities related to the delay in the appointment of the SSB.

SSB Competence/ Fit and Proper Criteria

Good Character

Competence and Capability

SG-2.5.1

The SSB must play a strong and independent oversight role, with adequate capability to exercise objective judgement on Shari'a-related matters. No individual or group of individuals must be allowed to dominate the SSB's decision-making.

SG-2.5.2

The SSB members must be truly independent and must be able to exercise independent judgement without undue influence or duress, especially from the board of directors and/or management of the Bahraini Islamic bank licensee. In this respect, a Bahraini Islamic bank licensee must formalise the independence of the SSB and its members.

SG-2.5.3

The SSB must not include members of the executive/ management team, directors or controllers of the Bahraini Islamic bank licensee.

SG-2.5.4

One SSB member should be a member of the corporate governance committee of the Bahraini Islamic bank licensee to provide guidance and advice on Shari'a related matters and also to coordinate and link complementary roles and functions of the corporate governance committee and the SSB.

SG-2.5.5

Bahraini Islamic bank licensees must have in place a board approved policy on the employment of approved persons who are relatives of SSB members and a summary of such policy must be disclosed in the annual report of the Bahraini Islamic bank licensee.

SG-2.5.6

In case of a conflict of interest, the member of the SSB must declare it in writing to the SSB of the Bahraini Islamic bank licensee. He must similarly report any such conflict in regard to members of his family, business associates or companies in which he has an interest. Where there is such a conflict of interest, or a duty to another party, then he must abstain from participating in the relevant discussion, decision or action. Where a notification is made of a conflict, it must be recorded and retained by a designated officer.

SG-2.6.1

Bahraini Islamic bank licensees must facilitate and sponsor appropriate induction programs and training for their continuous professional development, in order to enhance the professionalism and effectiveness of persons serving as members of the SSB.

SG-2.7.1

Bahraini Islamic bank licensees must specify and adopt a process for assessing the effectiveness of the SSB as a whole, as well as the contribution by each individual member to its effectiveness on an annual basis. Members of the SSB must be notified of this assessment process at the time of their appointment, so that they have a precise idea as to what is expected of them. This must be done on a self-assessment basis.

SG-2.7.2

For purposes of Paragraph SG-2.7.1, the assessment should be made based on an objective performance measurement that is developed in consultation with the SSB and endorsed by the board of directors.

SG-2.7.3

The performance assessment report should be submitted to the board of directors for observation and constructive comments. Where appropriate, the Bahraini Islamic bank licensee should act on the results of the performance evaluation, such as considering nominations of new members to be appointed to the SSB or seeking the resignation of any member of the SSB who fails to meet adequately the terms and conditions of his contract.

SG-2.8.1

Bahraini Islamic bank licensees must not dismiss any member of the SB without the CBB's prior approval and the approval of the general assembly.

SG-2.8.2

Bahraini Islamic bank licensees must ensure that its SSB has:

SG-2.8.3

Bahraini Islamic bank licensees must equip their SSB with:

SG-2.8.4

The management of a Bahraini Islamic bank licensee must provide the SSB with complete, adequate and timely information prior to all meetings and on an ongoing basis.

SG-2.8.5

The SSB must have complete and unhindered access to all records, transactions, and information from all sources including professional advisors and the Bahraini Islamic bank licensees' employees.

SG-2.8.6

Information provided must include background or explanatory information relating to matters to be brought before the SSB, copies of disclosure documents, financial statements, legal agreements and opinions given, product and/or transaction structure, promotional materials, and risk assessment reports. As far as possible, such information must be presented in a manner that would assist the SSB to analyse not only the form of, but also the substance surrounding, the issues brought before them.

SG-2.9.1

Bahraini Islamic bank licensees must have in place an appropriate mechanism for obtaining rulings from the SSB, applying fatawa and monitoring Shari'a compliance in all aspects of their products, operations and activities.

SG-2.9.2

The mechanism for obtaining rulings from the SSB, applying fatawa and monitoring Shari'a compliance must cover:

SG-2.9.3

For purposes of Subparagraph SG-2.9.2(b), Bahraini Islamic bank licensees must ensure the following:

SG-2.9.4

Bahraini Islamic bank licensees should evaluate and assess the impact of their charity on the relevant causes / communities and disclose the findings in their annual report.

SG-2.9.5

The Bahraini Islamic bank licensee must fully understand the legal and regulatory framework for issuance of Shari'a pronouncements/resolutions in the jurisdiction where it operates. It must ensure that its SSB strictly observes the said framework.

SG-2.9.6

The Bahraini Islamic bank licensee must ensure that the SSB adopts a specified process for changing, amending or revising any Shari'a pronouncements/resolutions issued by it. Appropriate and timely disclosure must be made to shareholders and/or the public whenever the SSB departs from or revises any of its Shari'a pronouncements/resolutions subject to SSB approval.

SG-2.10.1

In all cases, Bahraini Islamic bank licensees must comply with the Shari'a pronouncements and opinions issued by the CSSB.

SG-2.10.2

In case of a conflict between the opinion or interpretation of the CSSB and the SSB of the Bahraini Islamic bank licensee with respect to any Shari'a matter, the opinion of the CSSB shall prevail.

SG-3.1.1

Bahraini Islamic bank licensees must have a dedicated Shari'a Coordination and Implementation function comprised of Shari'a officers and staff. The head of the function must report technically to the SSB and administratively to the CEO to ensure his independence. The function must be adequately staffed with proficient persons having the relevant qualification and experience (See Appendix TC-1 in Module TC (Training and Competency)).

Policy and Procedures

Shari'a Officer

SG-3.2.1

The Shari'a Coordination and Implementation function must review and evaluate, before any product or transaction is offered to the customer, the contracts, agreements, fees, charges, policies, procedures, product manuals, product transaction structures, complete offering documentation including promotion and marketing materials, advertisements and other communications to general public, memorandum and articles of association, and any other matter which can potentially impact the Shari'a compliance of the Bahraini Islamic bank licensee or influence the perception of its Shari'a compliance, and submit thereafter their report, along with all the relevant documentation, to the SSB for their review and decision.

SG-3.2.2

The Shari'a Coordination and Implementation function must be involved in the testing and implementation of any new products or services to ensure full Shari'a compliance under the relevant fatawa. The function must also assist the relevant staff in dealing with any Shari'a non-compliance issues arising from the implementation stage.

SG-3.2.3

The Shari'a Officer must participate in and arrange, in conjunction with the Human Resources Training Department, the training of the Bahraini Islamic bank licensee's employees. This can be done through holding regular meetings, discussion forums, arranging courses and seminars, etc. He must also disseminate knowledge by publishing and distributing pamphlets, brochures, etc., explaining principles of fiqh al-muamalat in general, and raising awareness of the fatawa issued by the SSB about the products and services offered by the Bahraini Islamic bank licensee.

SG-4.1.1

Bahraini Islamic bank licensees must have an internal Shari'a audit function reporting to the SSB and administratively to the CEO. The function must be adequately resourced with proficient staff having the relevant qualification and experience.

Policy and Procedures

Head of Internal Shari'a Audit Function

SG-4.2.1

The head of internal Shari'a audit function must review and examine the adequacy and effectiveness of the Bahraini Islamic bank licensee's Shari'a compliance system. This must cover all aspects of the Bahraini Islamic bank licensee's business operations and activities in order to assess the extent of Shari'a compliance requirements as stated under Paragraph SG-4.1.4.

SG-4.2.2

The head of internal Shari'a audit function must have direct and regular communications with all levels of management, SSB, Audit Committee, Shari'a Officer and IESCA. No scope limitation and/or restriction of access to documents, reports, etc. must be placed on internal Shari'a audit staff.

SG-4.2.3

Internal Shari'a audit staff must be objective and maintain independent attitude in performing their internal Shari'a audit. They must reach objective conclusions based on work performed and the results thereof.

Internal Shari'a Audit Report

Shari'a Audit Plan

SG-5.1.1

Bahraini Islamic bank licensees must appoint, within 4 months of their financial year-end, an independent external Shari'a compliance auditor (IESCA) approved by the CBB.

SG-5.1.2

For the purpose of Paragraph SG-5.1.1, Bahraini Islamic bank licensees may engage their external auditor or other independent audit firms as approved by the CBB.

SG-5.1.3

The IESCA must be adequately resourced with proficient staff having the relevant qualification and experience.

SG-5.2.1

The IESCA must conduct an annual independent external Shari'a compliance audit, to be completed before the issuance of the annual SSB Report, and submit his independent assurance report on the management's report (See SG-5.3.1) to the Audit Committee and thereafter to the SSB and the management of the Bahraini Islamic bank licensee (See Appendix SG-1 under Part B of the CBB Rulebook Volume 2).

SG-5.2.2

IESCA must assess the existence of relevant controls and their effectiveness in implementation by the Bahraini Islamic bank licensee's management of the policies, procedures and decisions of the SSB to achieve Shari'a compliance.

SG-5.2.3

The independent external Shari'a compliance audit report must be guided by International Standards on Assurance Engagements 3000, Assurance other than Audits or Reviews of Historical Financial Information in order to ensure that Bahraini Islamic bank licensee's activities are conducted in a Shari'a compliant manner in accordance with and following the below hierarchy:

SG-5.2.4

The IESCA should have no responsibility for assessing the competence of the members of the SSB other than whether they meet the fit & proper criteria specified by the CBB.

SG-5.2.5

The IESCA should satisfy himself that the Bahraini Islamic bank licensee's process for introducing new products, transactions or services or modifying existing ones includes appropriate procedures for ensuring compliance with Shari'a rules and principles including reviews by the Bahraini Islamic bank licensee's senior management, internal audit and SSB.

SG-5.2.6

The IESCA must test on a sample basis the transaction level controls, product specific controls and other relevant controls. For detailed work requirement, see Appendix SG-1 under Part B of the CBB Rulebook Volume 2.

SG-5.2.7

The IESCA must review the findings of all internal Shari'a audits carried out by the Bahraini Islamic bank licensee's internal Shari'a audit function.

SG-5.2.8

For the independent external Shari'a compliance audit, the audit committee in consultation with the SSB must ensure as far as possible that the IESCA is capable of conducting, and does conduct, ex post Shari'a compliance reviews.

SG-5.2.9

IESCA must communicate its comments and concerns on the Bahraini Islamic bank licensee's relevant controls and their effectiveness to the board of directors and Shari'a Supervisory Board.

SG-5.3.1

The Bahraini Islamic bank licensee must prepare, on an annual basis, a management report titled "Management's Shari'a compliance and governance report" on control procedures relating to Shari'a compliance and governance structure at the Bahraini Islamic bank licensee and the management's assertion on the design and operating effectiveness of these controls. This report will form the basis on which the IESCA would issue his independent assurance report (See SG-5.2.1).

SG-6.1.1

The SSB report must be published as part of the annual report and must include an opinion paragraph containing an expression of opinion on the compliance of the Bahraini Islamic bank licensee with Shari'a rules and principles, the SSB's fatawa and guidelines, Shari'a related policies and procedures of the licensee, AAOIFI's Shari'a standards, relevant rulings of the CSSB and the regulations, resolutions and directives issued by the CBB.

SG-6.1.2

Bahraini Islamic bank licensees must make SSB's rulings of standard products and their evidence (fiqhi and other), and any changes to any product-specific fatawa available to the customers and the general public through appropriate publication and communication channels (e.g. making available on the website and the annual report).

SG-6.1.3

Bahraini Islamic bank licensees must disclose in their annual report the aggregate remuneration paid to SSB members during the year.