Conditions for the Establishment of Islamic Banks

CENTRAL BANK OF DJIBOUTI INSTRUCTION 2012-01 ON THE CONDITIONS FOR THE ESTABLISHMENT OF ISLAMIC BANKS

The Governor of the Central Bank of Djibouti, Having regard to Law No. 16/AN/6èmeL of January 22, 2011 on the establishment of Islamic banks in Djibouti, Having regard to Law No. 18/AN/06/6èmeL of January 22, 2011 amending the Statutes of the Central Bank of Djibouti, Having regard to Law No. 119/AN/06/6èmeL of January 22, 2011 on the establishment and supervision of credit institutions and financial auxiliaries, Having regard to Decree No. 2011-10/PRE of January 24, 2011 appointing the Governor of the Central Bank of Djibouti, Has decided:

Article 1 Islamic banking activities are exclusively authorized for the following institutions:

• Islamic banks established in Djibouti.
• Branches of foreign Islamic banks established in Djibouti.
• Islamic counters within conventional banks.

Article 2 a) An Islamic bank must be founded by Djiboutian banks or foreign Islamic banks competent in Islamic banking operations, or having strategic relationships with a Djiboutian bank or a foreign Islamic bank, and all other persons or entities deemed acceptable by the Central Bank of Djibouti. A minimum equivalent to one quarter of the total shares of the Islamic bank must be held by banks or entities belonging to the categories listed in Paragraph (a) of this Article for at least 5 years from the date of commencement of effective Islamic banking activity. b) The Central Bank of Djibouti may fully or partially exempt the applicant from this minimum shareholding requirement, either when granting approval or upon a subsequent request after commencing banking activity.

Article 3 The minimum capital of Islamic banks or branches of foreign Islamic banks authorized to operate in Djibouti is set at one billion Djiboutian Francs (FDJ). In justified exceptional cases, particularly when the banks seeking authorization possess significant professional competence, the Central Bank of Djibouti may, under conditions it determines, grant a specified period to an Islamic bank or a branch of a foreign Islamic bank to increase its capital up to the aforementioned minimum threshold.

Article 4 The authorization request for the establishment of an Islamic bank must be submitted to the Central Bank of Djibouti and accompanied by documents normally required by the current regulations for establishing a bank in Djibouti. The statutes of Islamic banks must include a section regarding the Sharia Committee, as referenced in Article 6 of Law No. 16/AN/6èmeL of January 22, 2011 on the establishment of Islamic banks in Djibouti, specifying in particular the provisions governing the appointment of committee members, their relationship with the bank and their prerogatives, including provisions related to internal control in compliance with Sharia prescriptions. These provisions must clearly demonstrate the concerned bank's commitment to complying, in all its transactions and operations, with Sharia principles. The organization of the Islamic bank must comply with the provisions of Law No. 16/AN/6èmeL of January 22, 2011 on the establishment of Islamic banks and must not contradict the regulations promulgated by the Central Bank of Djibouti.

Article 5 The authorization request for the establishment of a branch of a foreign Islamic bank must be submitted to the Central Bank of Djibouti and accompanied by documents normally required by current regulations for establishing a foreign bank branch in Djibouti. The Central Bank of Djibouti grants authorization for the establishment of the bank insofar as it considers its establishment beneficial to the public interest and after ensuring that all legal and regulatory conditions are met.

Article 6 Article 7 The Islamic bank or branch of a foreign Islamic bank whose establishment is authorized by the Central Bank of Djibouti must complete its establishment formalities within a maximum period of six months from the date of notification of authorization, failing which the authorization shall be annulled.

Particular Measures for the Practice of Islamic Finance within a Conventional Bank

Article 8 Pursuant to Article 9 of the Banking Law No. 19/AN/11/6èmeL, the practice of Islamic finance by a conventional bank must be duly authorized by the Central Bank of Djibouti. An Islamic counter refers to a division within a conventional bank that exclusively provides services and products compatible with Sharia principles. The Islamic counter must be financially independent from the other activities and branches of the bank. The Islamic counter must have resources distinct from those available to the rest of the bank's activities. The accounting separation between the Islamic counter and the other activities of the bank is concretized by:

• The independence of the Islamic counter's client accounts from the rest of the bank's accounts.
• The existence of an accounting system independent from that of the rest of the bank's activities.
• The existence of an accounting section or financial department specific to the Islamic counter, one of whose main roles is preparing the financial statements specific to the Islamic counter, including a balance sheet showing the assets and liabilities of the Islamic counter as well as a detailed statement of revenues and expenses.

Article 9 The Islamic counter must have autonomous capital which must not be less than 30% of the minimum capital required for conventional banks. The financing of the capital must comply with Sharia principles.

The administrative independence of the Islamic counter from the bank's organization is concretized by: Article 10

• The creation of an administration responsible for supervising Islamic financial activity, with independent personnel.
• The existence of an organizational chart composed of a Director, certain departments and sections, including a financial section and an accounting section.
• The existence of procedures, documents, and contracts specific to the Islamic counter that meet all technical, legal, and Sharia conditions.
• The establishment of a Sharia Committee in accordance with the provisions of Article 6 of Law No. 16/AN/6èmeL of January 22, 2011 on the establishment of Islamic banks in Djibouti.

Article 11 In the event of multiple Islamic counters within the same conventional bank, the latter must treat all these counters as a single entity. A consolidated financial statement will be prepared and included in the annex to the bank's financial statements.

Article 12 In addition to the provisions of this Decision and unless otherwise stipulated, Islamic banks are governed by all provisions and regulations relating to non-Islamic banks.

Article 13 This Instruction shall enter into force as of its date of signature. November 2012