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Superseded Requirements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: