Executive Summary

Retaining Authorised Status

Legal Basis

Licensing Conditions

Information Requirements and Processes

Evolution of Module

Superseded Requirements

AU-B.1.1

The content of this Module applies to all microfinance institution licensees authorised in the Kingdom of Bahrain, thereafter referred to in this Module as licensees.

AU-B.1.2

Two types of authorisation are prescribed:

AU-B.1.3

The authorisation requirements in Chapter AU-1 have general applicability, in that they prevent any person from providing (or seeking to provide) regulated microfinance services within or from the Kingdom of Bahrain, unless they have been licensed as a microfinance institution (conventional or Islamic) by the CBB or marketing any financial services unless specifically allowed to do so by the CBB (see Rule AU-1.1.1).

AU-B.1.4

The remaining requirements in Chapters AU-1 to AU-3 (besides those mentioned in Section AU-B.1) apply to all those licensed by the CBB as a microfinance institution 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.

AU-B.1.5

Chapter AU-2 applies to licensees (not just applicants), since licensing conditions have to be met on a continuous basis by licensees. Similarly, Chapter AU-3 applies to approved persons on a continuous basis; it also applies to licensees seeking an approved person authorisation. Chapter AU-4 contains requirements applicable to licensees, with respect to the starting up of their operations, as well as to licensees and approved persons, with respect to the amendment or cancellation of their authorised status. Finally, Section AU-5.2 imposes annual fees on licensees.

General Prohibitions

Licensing

AU-1.2.1

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

AU-1.2.1A

Where licensees are undertaking regulated activities in accordance with Shari'a, all transactions and contracts concluded by regulated microfinance services must comply with Sharia standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). The validity of the contract or transaction is not impacted, if at a later date, the relevant AAOIFI Sharia standards are amended.

Providing Conventional Microfinance

Offering Shari'a Compliant Microfinance Contracts

General Exclusions

General Requirements for all Conventional Microfinance Institutions

Additional Requirements

General Requirement

Basis for Approval

AU-2.1.1

The legal status of a licensee must be a Bahraini joint stock company (BSC).

AU-2.2.1

Licensees with their Registered Office in the Kingdom of Bahrain must maintain their Head Office in the Kingdom.

AU-2.2.2

In assessing the location of a licensee's Head Office, the CBB will take into account the residency of its Directors and senior management. The CBB requires the majority of key decision makers in executive management — including the Chief Executive Officer — to be resident in Bahrain.

AU-2.3.1

Licensees must satisfy the CBB that their controllers are suitable and pose no undue risks to the licensee. Licensees must also satisfy the CBB that their close links does not prevent the effective supervision of the licensee by the CBB and otherwise pose no undue risks to the licensee.

AU-2.3.2

Chapter GR-4 contains the CBB's requirements and definitions regarding controllers.

AU-2.3.3

In summary, controllers are persons who directly or indirectly are significant shareholders in a licensee, or who are otherwise able to exert significant influence on the licensee. The CBB 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.

AU-2.3.4

As regards group structures, the CBB 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.

AU-2.3.5

In all cases, when judging applications from existing groups, the CBB will have regard to the reputation and financial standing of the group as a whole. Where relevant, the CBB 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.

AU-2.4.1

Those nominated to carry out controlled functions must satisfy the CBB's approved persons requirements. This Rule is supported by Article 65 of the CBB Law.

AU-2.4.2

The definition of controlled functions is contained in Paragraph AU-1.4.2, whilst Chapter AU-3 sets out CBB's approved persons requirements.

AU-2.4.3

The 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. Licensees must ensure their employees meet any training and competency requirements specified by the CBB.

Capital Funds

Other Sources of Funds

Liquidity

AU-2.6.1

Licensees must maintain systems and controls that are, in the opinion of the CBB, adequate for the scale and complexity of their activities. These systems and controls must meet the minimum requirements contained in Modules HC and RM.

AU-2.6.2

Licensees must maintain systems and controls that are, in the opinion of the CBB, 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 license held.

AU-2.7.1

Article 61 of the CBB Law requires that licensees appoint an external auditor, subject to the CBB's prior approval. The minimum requirements regarding auditors contained in Module AA (Auditors and Accounting Standards) must be met.

Books and Records

Provision of Information

General Conduct

Additional Conditions

AU-3.1.1

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.

AU-3.1.2

The authorisation requirements for persons nominated to carry out controlled functions is contained in Section AU-1.4. The authorisation process is described in Section AU-4.3.

AU-3.1.3

Each applicant applying for approved person status and those individuals occupying approved person positions must comply with the following conditions:

AU-3.1.4

In assessing the conditions prescribed in Rule AU-3.1.3, the CBB will take into account the criteria contained in Paragraph AU-3.1.5. 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 licensee may not be considered to have sufficient expertise and experience to undertake nominally the same controlled function but in a much bigger licensee.

AU-3.1.5

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

AU-3.1.6

With respect to Paragraph AU-3.1.5, 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.

AU-3.1.7

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.

AU-3.1.8

In determining where there may be a conflict of interest arising, factors that may be considered will include whether:

AU-3.1.9

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

AU-3.2.1

[This Paragraph was deleted in January 2016.]

AU-3.2.2

[This Paragraph was deleted in January 2016.]

AU-3.2.3

[This Paragraph was moved to Paragraph AU-3.1.9 in January 2016.]

Application Form and Documents

Licensing Process and Timelines

Starting Operations

AU-4.2.1

Licensees must obtain the CBB's prior written approval before a person is formally appointed to a controlled function. The request for CBB approval must be made by submitting to the CBB a duly completed Form 3 (Application for Approved Person status) and Curriculum Vitae after verifying that all the information contained in the Form 3, including previous experience, is accurate. Form 3 is available under Volume 5 Part B Authorisation Forms of the CBB Rulebook.

AU-4.2.2

When the request for approved person status forms part of a license application, the Form 3 must be marked for the attention of the Director, Licensing Directorate. When the submission to undertake a controlled function is in relation to an existing licensee, the Form 3, except if dealing with a MLRO, must be marked for the attention of the applicable Banking Supervision Director. In the case of the MLRO, Form 3 should be marked for the attention of the Director, Compliance Directorate.

AU-4.2.3

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

AU-4.2.4

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

AU-4.2.5

[This Paragraph was deleted in July 2015.]

AU-4.2.6

Licensees seeking to appoint Board Directors must seek CBB approval for all the candidates to be put forward for election/approval 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/approval.

Assessment of Application

Appeal Process

Notification Requirements and Process

Change in Controlled Function

Licenses

AU-4.4.1

In accordance with Articles 47 and 49 of the CBB Law, the CBB will publish its decision to grant, cancel or amend a license in the Official Gazette and in two local newspapers, one in Arabic and the other in English.

AU-4.4.2

For the purposes of Paragraph AU-4.4.1, the cost of publication must be borne by the Licensee.

AU-4.4.3

The CBB may also publish its decision on such cancellation or amendment using any other means it considers appropriate, including electronic means.

AU-5.1.1

Applicants seeking a microfinance institution license from the CBB must pay a non-refundable license application fee of BD 100 at the time of submitting their formal application to the CBB.

AU-5.1.2

There are no application fees for those seeking approved persons status.

AU-5.2.1

Licensees must pay the relevant annual license fee to the CBB on 1^st of December of the preceding year for which the fee is due.

AU-5.2.2

Licensees must pay an annual license fee of BD1,000.

AU-5.2.3

All annual fees are collected by direct debit and all licensees must ensure that they submit to the CBB the completed Direct Debit Authorisation Form (available under Part B of Volume 5) by 15^th October prior to the year for which the fees are due.

AU-5.2.4

For new licensees, their first annual license fee of BD1,000 is payable when their license is issued by the CBB.

AU-5.2.5

Where a license is cancelled (whether at the initiative of the firm or the CBB), no refund is paid for any months remaining in the calendar year in question, should a fee have been paid for that year.

Executive Summary

Structure of this Module

The Comply or Explain Principle

Monitoring and Enforcement of Module HC

Legal Basis

Effective Date

HC-A.2.1

This Module was first issued in January 2014. 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.

HC-A.2.2

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

Superseded Requirements

HC-B.1.1

The content of this Module applies to all microfinance institution licensees authorised in the Kingdom of Bahrain, thereafter referred to in this Module as licensees.

HC-B.1.2

Overseas licensees must satisfy the CBB that equivalent arrangements are in place at the parent entity level, and that these arrangements provide for effective high-level controls over activities conducted under the Bahrain license.

HC-1.1.1

All licensees must be headed by an effective, collegial and informed board of directors ('the board').

HC-1.2.1

All directors must understand the board's role and responsibilities under the Commercial Companies Law and any other laws or regulations that may govern their responsibilities from time to time. In particular:

HC-1.2.2

The board's role and responsibilities include but are not limited to:

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 licensee, its size and ownership structure. However, as a minimum, the board must establish and maintain a statement of its responsibilities for:

HC-1.2.4

The directors are responsible both individually and collectively for performing the responsibilities outlined in Paragraph HC-1.2.1 to HC-1.2.3. Although the board may delegate certain functions to committees or management, it may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance framework is in place.

HC-1.2.5

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

HC-1.2.6

Licensees must notify the CBB in writing of all major proposed changes to the strategy of the licensee prior to implementation.

HC-1.2.7

The board is expected to have effective policies and processes in place for:

HC-1.2.8

When a new director is inducted, the chairman of the board, assisted by the licensee's legal counsel or compliance officer, should review the board's role and duties with that person, particularly covering legal and regulatory requirements and Module HC (see also HC-4.5.1).

HC-1.2.9

The licensee must have a written appointment agreement with each director which recites the directors' powers, duties, responsibilities and accountabilities and other matters relating to his appointment including his term, the time commitment envisaged, the committee assignment if any, his remuneration and expense reimbursement entitlement, and his access to independent professional advice when that is needed.

Risk Recognition and Assessment

HC-1.3.1

The board must be collegial and deliberative, to gain the benefit of each individual director's judgment and experience.

HC-1.3.2

The chairman must take an active lead in promoting mutual trust, open discussion, constructive dissent and support for decisions after they have been made.

HC-1.3.3

The board must meet frequently to enable it to discharge its responsibilities effectively but in no event less than four times a year. All directors must attend the meetings whenever possible and the directors must maintain informal communication between meetings.

HC-1.3.4

Individual board members must attend at least 75% of all board meetings in a given financial year to enable the board to discharge its responsibilities effectively (see table below). Voting and attendance proxies for board meetings are prohibited at all times.

HC-1.3.5

The absence of board members at board and committee meetings must be noted in the meeting minutes. In addition, board attendance percentage must be reported during any general assembly meeting when board members stand for re-election (e.g. board member XYZ attended 95% of scheduled meetings this year).

HC-1.3.6

In the event that a board member has not attended at least 75% of board meetings in any given financial year, the licensee must immediately notify the CBB indicating which member has failed to satisfy this requirement, his level of attendance and any mitigating circumstances affecting his non-attendance. The CBB shall then consider the matter and determine whether disciplinary action, including disqualification of that board member pursuant to Article 65 of the CBB Law, is appropriate. Unless there are exceptional circumstances, it is likely that the CBB will take disciplinary action.

HC-1.3.7

To meet its obligations under Rule HC-1.3.3 above, the full board should meet 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. Board members are reminded that non attendance at board meetings does not absolve them of their responsibilities as directors. It is important that each individual director should allocate adequate time and effort to discharge his responsibilities. All directors are expected to contribute actively to the work of the board in order to discharge their responsibilities and should make every effort to attend board meetings where major issues are to be discussed. Licensees are encouraged to amend their articles of association to provide for telephonic and videoconference meetings. Participation in board meetings by means of video or telephone conferencing is regarded as attendance and may be recorded as such.

HC-1.3.7A

At least half the Board meetings of Bahraini licensees in any twelve-month period must be held in the Kingdom of Bahrain.

HC-1.3.8

All licensees 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-5.

HC-1.3.9

The chairman is responsible for the leadership of the board, and for the efficient functioning of the board. The chairman must ensure that all directors receive an agenda, minutes of prior meetings, and adequate background information in writing before each board meeting and when necessary between meetings. Therefore it is vital that the chairman commit sufficient time to perform his role effectively. All directors must receive the same board information. At the same time, directors have a legal duty to inform themselves and they must ensure that they receive adequate and timely information and must study it carefully (See also Chapter HC-7 for other duties of the chairman).

HC-1.3.10

The board should have no more than 15 members, and should regularly review its size and composition to ensure that it is small enough for efficient decision making yet large enough to have members who can contribute from different specialties and viewpoints. The board should recommend changes in board size to the shareholders when a needed change requires amendment of the licensee's Memorandum of Association.

HC-1.3.11

Potential non-executive directors should be made aware of their duties before their nomination, particularly as to the time commitment required. Where there is a nominating committee, it should regularly review the time commitment required from each non-executive director and should require each non-executive director to inform the committee before he accepts any board appointments to another licensee.

HC-1.3.12

One person should not hold more than three directorships in public companies in Bahrain with the provision that no conflict of interest may exist, and the board should not propose the election or reelection of any director who does.

HC-1.4.1

Every director must bring independent judgment to bear in decision-making. No individual or group of directors must dominate the board's decision-making and no one individual should have unfettered powers of decision.

HC-1.4.2

Executive directors must provide the board with all relevant business and financial information within their cognizance, and must recognise that their role as a director is different from their role as a member of management (see HC-2.3.2).

HC-1.4.3

Non-executive directors must be fully independent of management and must constructively scrutinise and challenge management including the management performance of executive directors.

HC-1.4.4

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 board members capable of exercising independent judgement.

HC-1.4.5

At least half of a licensee's board should be non-executive directors and at least three of those persons should be independent directors. (Note the exception for controlled companies in Paragraph HC-1.5.2.). Due to the nature of the business carried out by licensees, and government participation in such entities, government representatives are considered independent for the purpose of this Module.

HC-1.4.6

The chairman of the board should be an independent director, so that there will be an appropriate balance of power and greater capacity of the board for independent decision making.

HC-1.4.7

The chairman and/or deputy chairman must not be the same person as the chief executive officer (CEO).

HC-1.4.8

The chairman must not be an executive director.

HC-1.4.9

The board should review the independence of each director at least annually in light of interests disclosed by them, and their conduct. Each independent director shall provide the board with all necessary and updated information for this purpose.

HC-1.4.10

To facilitate free and open communication among independent directors, each board meeting should be preceded or followed with a session at which only independent directors are present, except as may otherwise be determined by the independent directors themselves.

HC-1.4.11

Where an independent director has served three consecutive terms on the board, such director will lose his/her independence status and must not be classified as an independent director if reappointed.

HC-1.4.12

Where a Chief Executive Officer of a microfinance institution licensee, who is also a Board member, no longer occupies the CEO position, whether due to resignation, retirement or termination, his/her Board Membership must also be immediately terminated.

HC-1.5.1

Each director must consider himself as representing all shareholders and must act accordingly. The board must avoid having representatives of specific groups or interests within its membership and must not allow itself to become a battleground of vested interests. If the licensee has controllers (as defined by Section GR-4.2) (or a group of controllers acting in concert), the latter must recognise its or their specific responsibility to the other shareholders, which is direct and is separate from that of the board of directors.

HC-1.5.2

In licensees with a controller, at least one-third of the board must be independent directors. Minority shareholders must generally look to independent directors' diligent regard for their interests, in preference to seeking specific representation on the board.

HC-1.5.3

In licensees with controllers, both controllers and other shareholders should be aware of controllers' specific responsibilities regarding their duty of loyalty to the licensee and conflicts of interest (see Chapter HC-2) and also of rights that minority shareholders may have to elect specific directors under the Company Law or if the licensee has adopted cumulative voting for directors. The chairman of the board should take the lead in explaining this with the help of the licensee's lawyers.

HC-1.6.1

The board must ensure by way of formal procedures that individual directors have access to independent legal or other professional advice at the licensee's expense whenever they judge this necessary to discharge their responsibilities as directors and this must be in accordance with the licensee's policy approved by the board.

HC-1.6.2

Individual directors must also have access to the licensee's corporate secretary, who must have responsibility for reporting to the board on board procedures. Both the appointment and removal of the corporate secretary must be a matter for the board as a whole, not for the CEO or any other officer.

HC-1.6.3

Whenever a director has serious concerns which cannot be resolved concerning the running of the licensee or a proposed action, he should consider seeking independent advice and should ensure that the concerns are recorded in the board minutes and that any dissent from a board action is noted or delivered in writing.

HC-1.6.4

Upon resignation, a non-executive director should provide a written statement to the chairman, for circulation to the board, if he has any concerns such as those in Paragraph HC-1.6.3.

HC-1.7.1

The board must encourage participation by management regarding matters the board is considering, and also by management members who by reason of responsibilities or succession, the CEO believes should have exposure to the directors.

HC-1.7.2

Non-executive directors should have free access to the licensee's management beyond that provided in board meetings. Such access should be through the chairman of the audit committee or CEO. The board should make this policy known to management to alleviate any management concerns about a director's authority in this regard.

HC-1.8.1

The board must create specialised committees when and as such committees are needed.

HC-1.8.2

In addition to the audit, remuneration and nominating committees described elsewhere in this Module, specialised committees may include an executive committee to review and make recommendations to the whole board on the licensee's actions, or a risk committee to identify and minimize specific risks of the licensee's business.

HC-1.8.3

The board shall establish a corporate governance committee of at least three independent members which shall be responsible for developing and recommending changes from time to time in the licensee's corporate governance policy framework.

HC-1.8.4

The board or a committee may invite non-directors to participate in, but not vote at, a committee's meetings so that the committee may gain the benefit of their advice and expertise in financial or other areas.

HC-1.8.5

Committees must act only within their mandates and therefore the board must not allow any committee to dominate or effectively replace the whole board in its decision-making responsibility.

HC-1.8.6

Committees may be combined provided that no conflict of interest might arise between the duties of such committees, subject to CBB prior approval.

HC-1.8.7

Every committee must have a formal written charter similar in form to the model charters which are set forth in Appendices A, B and C of this Module for the audit, nominating and remuneration committees.

HC-1.8.8

Where committees are set up, they must keep full minutes of their activities and meet regularly to fulfill their mandates.

HC-1.9.1

At least annually the board must conduct an evaluation of its performance and the performance of each committee and each individual director.

HC-1.9.2

The evaluation process must include:

HC-1.9.3

While the evaluation is a responsibility of the entire board, it should be organised and assisted by an internal board committee and, when appropriate, with the help of external experts.

HC-1.9.4

The board should report to the shareholders, at each annual shareholder meeting, that evaluations have been done and report its findings.

HC-2.1.1

The approved persons must have full loyalty to the licensee.

HC-2.2.1

Licensees 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 Rulebook of the licensed exchange, the Labour Law, the Commercial Companies Law, occupational health and safety, even environment and pollution laws, as well as the Law, codes of conduct and regulations of the CBB (as amended from time to time). The board sets the 'tone at the top' of a licensee, 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.

Corporate Ethics, Conflicts of Interest and Code of Conduct

HC-2.3.1

Each approved person must make every practicable effort to arrange his personal and business affairs to avoid a conflict of interest with the licensee.

HC-2.3.2

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-2.2.4). In particular, the CBB requires that any decisions to enter into transactions, under which approved persons would have conflicts of interest that are material, should be formally and unanimously approved by the full board. Best practice would dictate that an approved person must:

HC-2.4.1

Each approved person must inform the entire board of potential conflicts of interest in their activities with, and commitments to other organisations as they arise. Board members must abstain from voting on the matter in accordance with the relevant provisions of the Company Law. This disclosure must include all material facts in the case of a contract or transaction involving the approved person. The approved persons must understand that any approval of a conflicted transaction is effective only if all material facts are known to the authorising persons and the conflicted person did not participate in the decision. In any case, all approved persons 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 licensee, a manager, or other form of significant participation) to the board (or the nominations or audit committees) on an annual basis.

HC-2.4.2

The board should establish formal procedures for:

HC-2.5.1

The licensee must disclose to its shareholders in the notes to the audited financial statements any abstention from voting motivated by a conflict of interest and must disclose to its shareholders any authorisation of a conflict of interest contract or transaction in accordance with the Company Law.

HC-3.1.1

The board must have rigorous controls for financial audit and reporting, internal control, and compliance with law.

HC-3.2.1

The board must establish an audit committee of at least three directors of which the majority must be independent including the chairman. The committee must:

HC-3.2.2

In its review of the systems and controls framework in Paragraph HC-3.2.1, the audit committee must:

HC-3.2.3

The licensee must set up an internal audit function, which reports directly to the audit committee and administratively to the CEO.

HC-3.2.4

The CEO must not be a member of the audit committee.

HC-3.3.1

The audit committee must adopt a written charter which shall, at a minimum, state the duties outlined in Paragraph HC-3.2.1 and the other matters included in Appendix A to this Module.

HC-3.3.2

A majority of the audit committee members must have the financial literacy qualifications stated in Appendix A.

Whistleblower Program

HC-3.4.1

To encourage management accountability for the financial statements required by the directors, the licensee's CEO and chief financial officer (CFO) must state in writing to the audit committee and the board as a whole that the licensee's interim and annual financial statements present a true and fair view, in all material respects, of the licensee's financial condition and results of operations in accordance with applicable accounting standards.

HC-4.1.1

The licensee must have rigorous and transparent procedures for appointment, training and evaluation of the board.

HC-4.2.1

The board should establish a nominating committee of at least three directors which should:

HC-4.2.2

The committee should include only independent directors or, alternatively, only non-executive directors of whom a majority should be independent directors and the chairman should be an independent director. This is consistent with international best practice and it recognises that the nominating committee should exercise judgment free from personal career conflicts of interest.

HC-4.3.1

The nominating committee should adopt a formal written charter which should, at a minimum, state the duties outlined in Paragraph HC-4.2.1 and the other matters included in Appendix B to this Module.

HC-4.4.1

Each proposal by the board to the shareholders for election or reelection of a director must be accompanied by a recommendation from the board, a summary of the advice of the nominating committee, as applicable, and the following specific information:

HC-4.4.2

The chairman of the board should confirm to shareholders when proposing re-election of a director that, following a formal performance evaluation, the person's performance continues to be effective and continues to demonstrate commitment to the role. Any term beyond six years (e.g. two three-year terms) for a director should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the board. Serving more than six years is relevant to the determination of a non-executive director's independence.

HC-4.5.1

The chairman of the board must ensure that each new director receives a formal and tailored induction to ensure his contribution to the board from the beginning of his term. The induction must include:

HC-4.5.2

The tailored induction for new directors may be provided by the licensee's compliance officer.

HC-4.5.3

All continuing directors must be invited to attend orientation meetings and all directors must continually educate themselves as to the licensee's business and corporate governance.

HC-4.5.4

Management, in consultation with the chairman of the board, should hold programs and presentations to the directors respecting the licensee's business and industry, which may include periodic attendance at conferences and management meetings. The nominating committee shall oversee directors' corporate governance educational activities.

HC-5.1.1

The licensee must remunerate approved persons fairly and responsibly.

HC-5.2.1

The board should establish a remuneration committee of at least three directors which should:

HC-5.2.2

The committee may be merged with the nominating committee.

HC-5.3.1

The committee should adopt a written charter which should, at a minimum, state the duties in Paragraph HC-5.2.1 and other matters in Appendix C of this Module.

HC-5.3.2

The committee should include only independent directors or, alternatively, only non-executive directors of whom a majority are independent directors and the chairman is an independent director. This is consistent with international best practice and it recognises that the remuneration committee must exercise judgment free from personal career conflicts of interest.

HC-5.4.1

Remuneration of approved persons must be sufficient enough to attract, retain and motivate persons of the quality needed to run the licensee successfully, but the licensee must avoid paying more than is necessary for that purpose.

Alignment of All Staff Remuneration with Compliance with AML/CFT Requirements

HC-5.5.1

Remuneration of independent directors and non-executive directors must not include performance-related elements such as grants of shares, share options or other deferred stock-related incentive schemes, bonuses, or pension benefits.

HC-5.6.1

Remuneration of senior management must be structured so that a portion of the total is linked to the licensee's and individual's performance and aligns their interests with the interests of the shareholders.

HC-5.6.2

Such rewards may include grants of shares, share options and other deferred stock-related incentive schemes, bonuses, and pension benefits which are not based on salary.

HC-5.6.3

If a senior manager is also a director, his remuneration as a senior manager must take into account compensation received in his capacity as a director.

HC-5.6.4

All share incentive plans must be approved by the shareholders.

HC-5.6.5

All performance-based incentives should be awarded under written objective performance standards which have been approved by the board and are designed to enhance shareholder and the licensee's value, and under which shares should not vest and options should not be exercisable within less than two years of the date of award of the incentive.

HC-5.6.6

All plans for performance-based incentives should be approved by the shareholders, but the approval should be only of the plan itself and not of the grant to specific individuals of benefits under the plan.

HC-6.1.1

The board must establish a clear and efficient management structure.

HC-6.2.1

The board must appoint senior management whose authority must include management and operation of current activities of the licensee, reporting to and under the direction of the board. The senior management must include at a minimum:

and must also include such other approved persons as the board considers appropriate.

HC-6.3.1

The board must adopt by-laws and issue formal letters of appointment prescribing each senior manager's title, authorities, duties, accountabilities and internal reporting responsibilities. This must be done in consultation with the CEO, to whom the other senior managers should normally report.

HC-6.3.2

These provisions must include but should not be limited to the following:

HC-6.3.3

The board should also specify any limits which it wishes to set on the authority of the CEO or other senior managers, such as monetary maximums for transactions which they may authorise without separate board approval.

HC-6.3.4

The corporate secretary should be given general responsibility for reviewing the licensee's procedures and advising the board directly on such matters (see Rule HC-6.3.2(c)). Whenever practical, the corporate secretary should be a person with legal or similar professional experience and training.

HC-6.3.5

At least annually the board shall review and concur in a succession plan addressing the policies and principles for selecting a successor to the CEO, both in emergencies and in the normal course of business. The succession plan should include an assessment of the experience, performance, skills and planned career paths for possible successors to the CEO.

HC-6.4.1

The CBB expects licensees to carry out a review of their compliance with the principles in this Module on a regular basis (either by way of a self-assessment or by way of a review by the internal audit function).

HC-7.1.1

The licensee must communicate with shareholders, encourage their participation, and respect their rights.

HC-7.2.1

The board must observe both the letter and the intent of the Company Law's requirements for shareholder meetings. Among other things:

HC-7.2.2

The licensee should require all directors to attend and be available to answer questions from shareholders at any shareholder meeting and, in particular, ensure that the chairs of the audit, remuneration and nomination committees, where applicable, are ready to answer appropriate questions regarding matters within their committee's responsibility (being understood that confidential and proprietary business information may be kept confidential).

HC-7.2.3

The licensee should require its external auditor to attend the annual shareholders' meeting and be available to answer shareholders' questions concerning the conduct and conclusions of the audit.

HC-7.2.4

A licensee should maintain a website. The licensee should dedicate a specific section of its website to describing shareholders' rights to participate and vote at each shareholders' meeting, and should post significant documents relating to meetings including the full text of notices and minutes. The licensee may also consider establishing an electronic means for shareholders' communications including appointment of proxies. For confidential information, the licensee should grant a controlled access to such information to its shareholders.

HC-7.2.5

In notices of meetings at which directors are to be elected or removed the licensee should ensure that:

HC-7.3.1

The chairman of the board (and other directors as appropriate) must maintain continuing personal contact with controllers to solicit their views and understand their concerns. The chairman must ensure that the views of shareholders are communicated to the board as a whole. The chairman must discuss governance and strategy with controllers. Given the importance of market monitoring to enforce the "comply or explain" approach of this Module, the board must encourage shareholders to help in evaluating the licensee's corporate governance (see also Sections HC-1.2 and 1.3 for other duties of the chairman).

HC-7.4.1

In licensees with one or more controllers, the chairman and other directors must actively encourage the controllers to make a considered use of their position and to fully respect the rights of minority shareholders (see also Sections HC-1.2 and 1.3 for other duties of the chairman).

HC-8.1.1

The licensee must disclose its corporate governance.

HC-8.2.1

In each licensee:

Board's Responsibility for Disclosure

HC-9.1.1

Companies which refer to themselves as "Islamic" must follow the principles of Islamic Shari'a.

HC-9.2.1

Licensees which are guided by the principles of Islamic Shari'a have additional responsibilities to their stakeholders. Licensees which refer to themselves as "Islamic" are subject to additional governance requirements and disclosures to provide assurance to stakeholders that they are following Shari'a principles. In ensuring compliance with Shari'a principles, each licensee must appoint a minimum of one Shari'a scholar.

HC-9.2.2

In addition to its duties outlined in Chapter HC-3 and Appendix A, the audit committee shall communicate and co-ordinate with the licensee's corporate governance committee and the appointed Shari'a scholar to ensure that information on compliance with Islamic Shari'a rules and principles is reported in a timely manner.

HC-9.2.3

The Board shall set up a corporate governance committee (see also Paragraph HC-1.8.2). In this case, the committee shall comprise at least three members to coordinate and integrate the implementation of the governance policy framework.

HC-9.2.4

The corporate governance committee established under Chapter HC-9 shall comprise at a minimum of:

HC-9.2.5

The corporate governance committee shall be empowered to:

Executive Summary

Legal Basis

Evolution of Module

Superseded Requirements

GR-B.1.1

This Module is applicable to all microfinance institution licensees, authorised in the Kingdom, thereafter referred to in this Module as licensees.

GR-1.1.1

In accordance with Article 59 of the CBB Law, all 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 ten years according to Article 60 of the CBB Law.

GR-1.1.2

Paragraph GR-1.1.1 includes accounts, books, files and other records (e.g. trial balance, general ledger, nostro/vostro statements, reconciliations, list of counterparties, etc.). 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).

GR-1.1.3

Separately, Bahrain Law currently requires other corporate records to be retained for at least five years (see Ministerial Order No. 23 of 2002, Article 5(2), made pursuant to the Amiri Decree Law No. 4 of 2001).

GR-1.1.4

Unless otherwise agreed to by the CBB in writing, records must be kept in either English or Arabic. Any records kept in languages other than English or Arabic must be 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 CBB.

GR-1.1.5

Translations produced in compliance with Rule GR-1.1.4 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-1.1.6

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

GR-1.1.7

Where older records have been archived, the CBB may accept that records be accessible within a reasonably short time frame (e.g. within 5 business days), instead of immediately. The CBB may also agree similar arrangements where elements of record retention and management have been centralised in another group company, whether inside or outside of Bahrain.

GR-1.1.8

Paragraphs GR-1.1.1 to GR-1.1.7 apply to licensees, with respect to all business activities.

GR-1.2.1

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 terminated). Records of terminated transactions must be kept whether in hard copy or electronic format as per the Legislative Decree No. (54) of 2018 with respect to Electronic Transactions “The Electronic Communications and Transactions Law” and its amendments.

GR-1.2.2

[This Paragraph has been deleted in July 2017].

GR-1.2.3

Rule GR-1.2.1 applies only to transactions relating to business booked in Bahrain by the licensee.

Corporate Records

Customer Records

GR-2.1.1

Licensees must obtain CBB’s prior written approval for any change in their legal name. Licensees must notify the CBB of any change in their corporate name at least one week prior to effecting the proposed change.

GR-2.1.2

Licensees must ensure that the words 'microfinance institution' appears in their corporate and trade name.

GR-2.1.3

In approving a change in a legal name, the CBB 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 CBB also seeks to ensure that names used by unregulated subsidiaries do not suggest those subsidiaries are in fact regulated.

GR-2.2.1

Any written communication, including stationery, business cards or other business documentation published by the licensee, or used by its employees must include a statement that the licensee is regulated by the Central Bank of Bahrain, the type of license and the legal status.

GR-3.1.1

Licensees must obtain a letter of no-objection from the CBB to any dividend proposed, before announcing the proposed dividend by way of press announcement or any other means of communication and prior to submitting a proposal for a distribution of profits to a shareholder vote.

GR-3.1.2

The CBB 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 CBB'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, licensees must provide the CBB with:

GR-4.1.1

Licensees must obtain prior approval from the CBB for any of the following changes to their controllers (as defined in Section GR-4.2 and subject to the limits as outlined in GR-4.3):

GR-4.1.1A

Licensees must not incur or otherwise have an exposure (either directly or indirectly) to their controllers, including subsidiaries and associated companies of such controllers.

GR-4.1.1B

For the purpose of Paragraph GR-4.1.1A, licensees that already have an exposure to controllers must have an action plan agreed with the CBB's supervisory point of contact to address such exposures within a timeline agreed with the CBB.

GR-4.1.2

Condition 3 of the CBB's licensing conditions specifies, among other things, that licensees must satisfy the CBB that their controllers are suitable and pose no undue risks to the licensee (See Paragraph AU-2.3.1). There are also certain procedures which are set out in Articles 52 to 56 of the CBB Law on controllers. Licensees and their controllers must also observe the CBB's Capital Markets requirements in respect of changes in holdings of shares of listed companies.

GR-4.1.3

Applicants for a license must provide details of their controllers, by submitting a duly completed Form 2 (Application for Authorisation of Controller). (See sub-Paragraph AU-4.1.4(a)).

GR-4.1.4

There are strict limits on changes in the holdings of shares held by controllers in licensees or the extent of voting control exercised by controllers in licensees. These limits are outlined in Section GR-4.3.

GR-4.1.5

Failure to observe the limits outlined in this Section or to comply with an order issued by the CBB in relation to violating the share acquisition rules may lead to imposition of enforcement provisions of the Rulebook on the licensee and other penalties on the controller under the provisions of the CBB Law as outlined in Paragraph GR-4.1.2, including loss of voting power or transfer of shares.

GR-4.1.6

Where a controller is a legal person, any change in its shareholding must be notified to the CBB at the earlier of:

GR-4.1.7

For approval under Paragraph GR-4.1.1 to be granted, the CBB must be satisfied that the proposed controller or increase in control poses no undue risks to the licensee. The CBB will therefore consider or reconsider the criteria outlined in Paragraphs GR-4.3.6 to GR-4.3.8 in any request for approval. The CBB may impose any restrictions that it considers necessary to be observed in case of its approval of a new controller, or any of the changes listed to existing controllers in Paragraph GR-4.1.1. These restrictions will include the applicable maximum allowed limit of holding or control (as outlined in Section GR-4.3). A duly completed Form 2 (Controllers) must be submitted as part of the request for a change in controllers. An approval of controller will specify the applicable period for effecting the proposed acquisition of shares.

GR-4.1.8

If, as a result of circumstances outside the licensee's knowledge and/or control, one of the changes specified in Paragraph GR-4.1.1 is triggered prior to CBB approval being sought or obtained, the licensee must notify the CBB no later than 15 calendar days on which those changes have occurred.

GR-4.1.9

The approval provisions outlined above do not apply to existing holdings or existing voting control by controllers already approved by the CBB. The approval provisions apply to new/prospective controllers or to increases in existing holdings/voting control as outlined in Paragraph GR-4.1.1.

GR-4.1.10

Licensees are required to notify the CBB as soon as they become aware of events that are likely to lead to changes in their controllers. The criteria by which the CBB assesses the suitability of controllers are set out in Section GR-4.3. The CBB aims to respond to requests for approval within 30 calendar days and is obliged to reply within 3 months to a request for approval. The CBB may contact references and supervisory bodies in connection with any information provided to support an application for controller. The CBB 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-4.1.11

Licensees must submit, within 3 months of their financial year-end, a report on their controllers (See Subparagraph BR-1.1.2(f)). This report must identify all controllers of the licensee, as defined in Section GR-4.2 and the extent of their shareholding interests.

GR-4.2.1

A controller of a licensee is a natural or legal person who either alone, or with his associates:

GR-4.2.2

For the purposes of Paragraph GR-4.2.1, "associate" includes:

GR-4.2.3

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

GR-4.3.1

All new controllers or prospective controllers (as defined in Section GR-4.2) of a licensee must obtain the approval of the CBB. Any increases to existing controllers' holdings or voting control (as outlined under Paragraph GR-4.1.1) must also be approved by the CBB and are subject to the conditions outlined in this Section. Such changes in existing controllers or new/prospective controllers of a licensee must satisfy the CBB of their suitability and appropriateness according to the criteria outlined in Paragraphs GR-4.3.6 to GR-4.3.8. The CBB will issue an approval notice or notice of refusal of a controller according to the approval process outlined in Section GR-4.4 and Paragraph GR-4.1.6.

GR-4.3.2

All controllers or prospective controllers (whether natural or legal persons) of all licensees are subject to the approval of the CBB. Persons who intend to take ownership stakes of 10% or above of the voting capital of a licensee are subject to enhanced scrutiny, given the CBB's position as home supervisor of such licensees. The level of scrutiny and the criteria for approval become more onerous as the level of proposed ownership increases. Existing and prospective controllers should therefore take particular note of the requirements of Paragraphs GR-4.3.3 to GR-4.3.8 if they wish to take more substantial holdings or control.

As a matter of policy, the CBB distinguishes between regulated legal persons (i.e. financial institutions) and unregulated legal persons and natural persons as controllers. Regulated legal persons must satisfy home country prudential requirements. As a regulated legal person can own a greater percentage of issued and pid up share capital, it is subject to additional conditions as outlined in Paragraph GR-4.3.8. The CBB may also contact their home regulators for information on their "fit & proper" status.

GR-4.3.3

A natural person will not be allowed to own or control more than 15% of the issued and paid up capital of a licensee. Such person must satisfy the conditions in Paragraph GR-4.3.6 below.

GR-4.3.4

An unregulated legal person (including companies, trusts, partnerships) will not be allowed to own or control more than 50% of the issued and paid up capital of a licensee. All such persons must satisfy the conditions in Paragraph GR-4.3.7 below.

GR-4.3.5

The CBB will only permit financial institutions which are subject to effective consolidated supervision under a regulatory framework consistent with the Basel Core Principles, the IOSCO Principles or the IAIS Principles to become controllers with a holding of 100% of the issued and paid up capital of a licensee. Furthermore, the concerned regulated financial institution must satisfy the conditions in Paragraph GR-4.3.7 and also the specific conditions in Paragraph GR-4.3.8.

GR-4.3.6

In assessing the suitability and the appropriateness of new/prospective controllers (and existing controllers proposing to increase their shareholdings) who are natural persons, the CBB considers their professional and personal conduct, including, but not limited to, the following:

GR-4.3.7

In assessing the suitability and appropriateness of legal persons as controllers (wishing to increase their shareholding) or new/potential controllers, the CBB has regard to their financial standing, judicial and regulatory record, and standards of business practice and reputation, including, but not limited to, the following:

GR-4.3.8

Regulated financial institutions wishing to acquire more than 50% of the voting capital of a licensee must observe the following additional conditions:

GR-4.4.1

Within 3 months of receipt of an approval request under Paragraph GR-4.1.1, the CBB will issue an approval notice (with or without restrictions) or a written notice of refusal if it is not satisfied that the person concerned is suitable to increase his shareholding in, or become a controller of the licensee. The notice of refusal or notice of approval with conditions will specify the reasons for the objection or restriction and specify the applicant's right of appeal in either case. Where an approval notice is given, it will specify the period for which it is valid and any conditions that attach (see Paragraph GR-4.1.6). These conditions will include the maximum permitted limit of holding or voting control exercisable by the controller.

GR-4.4.2

Notices of refusal have to be approved by an executive director of the CBB. The applicant has 30 calendar days from the date of the notice in which to make written representation as to why his application should not be refused. The CBB then has 30 calendar days from the date of receipt of those representations to reconsider the evidence submitted and make a final determination, pursuant to Article 53 of the CBB Law and Module EN (Enforcement).

GR-4.4.3

Pursuant to Article 56 of the CBB Law, where a person has become a controller by virtue of his shareholding in contravention of Paragraph GR-4.1.1, or a notice of refusal has been served to him under Paragraph GR-4.4.1 and the period of appeal has expired, the CBB may, by notice in writing served on the person concerned, direct that his shareholding shall be transferred or until further notice, no voting right shall be exercisable in respect of those shares.

GR-4.4.4

Article 56 of the CBB Law empowers the CBB to request a court of law to take appropriate precautionary measures, or sell such shares mentioned in Paragraph GR-4.4.3, if the licensee fails to carry out the order referred to in the preceding Paragraph.

GR-5.1.1

Condition 3 of the CBB's licensing conditions specifies, amongst other things, that licensees must satisfy the CBB that their close links do not prevent the effective supervision of the licensee and otherwise pose no undue risks to the licensee. (See Paragraph AU-2.3.1).

GR-5.1.2

Applicants for a license must provide details of their close links, as provided for under Form 1 (Application for a License). (See Paragraphs AU-4.1.1 and AU-4.1.4 (f)).

GR-5.1.3

Licensees must submit to the CBB, within 3 months of their financial year-end, a report on their close links (See Subparagraph BR-1.1.3(g)). The report must identify all undertakings closely linked to the licensee, as defined in Section GR-5.2.

GR-5.1.4

Licensees may satisfy the requirement in Paragraph GR-5.1.3 by submitting a corporate structure chart, identifying all undertakings closely linked to the licensee.

GR-5.1.5

Licensees must provide information on undertakings with which they are closely linked, as requested by the CBB.

GR-5.2.1

A licensee ('L') has close links with another undertaking ('U'), if:

GR-5.3.1

In assessing whether a licensee's close links may prevent the effective supervision of the firm, or otherwise poses no undue risks to the licensee, the CBB takes into account the following:

GR-6.1.1

As specified in Article 50 of the CBB Law, a licensee wishing to cease to provide or suspend any or all of the licensed regulated services of its operations and/or liquidate its business must obtain the CBB's prior approval.

GR-6.1.2

Licensees must notify the CBB in writing at least six months in advance of their intended suspension of any or all the licensed regulated services or cessation of business, setting out how they propose to do so and, in particular, how they will treat any of their liabilities.

GR-6.1.3

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

GR-6.1.4

A licensee in liquidation must continue to meet its contractual and regulatory obligations to its clients and creditors.

GR-6.1.5

Once the licensee believes that it has discharged substantially all its remaining contractual obligations to clients and creditors, it must publish a notice in two national newspapers in Bahrain approved by the CBB (one being in English and one in Arabic), stating that it has settled all its dues and wishes to leave the market. According to Article 50 of the CBB Law, such notice shall be given after receiving the approval of the CBB, not less than 30 days before the actual cessation is to take effect.

GR-6.1.6

The notice referred to in Paragraph GR-6.1.5 must include a statement that written representations concerning the liquidation may be sent to the CBB before a specified day, which shall not be later than thirty days after the day of the first publication of the notice. The CBB will not decide on the application until after considering any representations made to the CBB before the specified day.

GR-6.1.7

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

GR-6.1.8

Upon satisfactorily meeting the requirements set out in GR-6.1., the licensees must surrender the original license certificate issued by the Licensing Directorate at the time of establishment, and submit confirmation of the cancellation of its commercial registration from the Ministry of Industry, Commerce and Tourism.