Standard Re. Shari’ah Governance for Islamic Financial Institutions

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STANDARD RE. SHARI’AH GOVERNANCE FOR ISLAMIC FINANCIAL INSTITUTIONS

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TABLE OF CONTENTS
Page
Subject
المادة )1( مقدمـــة 3 Introduction) 1 (Article المادة )2( الهــدف 4 Objective) 2 (Article
Article (3) Scope of Application 4 التطــبيق نطـاق( 3 )المادة
المادة )4( التعريفات 5 Definitions) 4 (Article
Article (5) General Requirements for 9
Shari’ah Governance Standard المادة )6( مسؤولية المؤسسة المالية اإلسالمية 11 Institution Financial Islamic) 6 (Article Responsibility المادة )7( لجنة الرقابة الشرعية الداخلية 17 ah’Shari Internal) 7 (Article Supervision Committee المادة )8( مسؤولية لجنة الرقابة الشرعية الداخلية 21 Internal of Responsibility) 8 (Article Shari’ah Supervision Committee المادة )9( الرقابة الشرعية الداخلية 27 ah’Shari Internal) 9 (Article Supervision المادة )10( إدارة أو قسم الرقابة الشرعية الداخلية 28 Control ah’Shari Internal) 10 (Article Division or Section المادة )11( إدارة أو قسم التدقيق الشرعي الداخلي 33 Audit ah’Shari Internal) 11 (Article Division or Section
Article (12) External Shari’ah Audit 37 الخارجي الشرعي التدقيق( 12 )المادة
المادة )13( التوافق مع المعيار 37 the with Compliance) 13 (Article standard

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Article (1)
Introduction
1.1 The Central Bank seeks to promote
development of the banking activities to ensure its effectiveness and efficiency. To achieve this, financial institutions that conduct all or part of their activities and businesses in accordance with the provisions of Islamic Shari`ah (Islamic Financial Institutions “IFIs”) must have in place comprehensive and effective governance frameworks to enhance the compliance with Islamic Shari’ah provisions and principles (“Islamic Shari’ah”) in those institutions. to ensure their resilience, and promote general financial stability. 1.1
1.2 IFIs must have Shari’ah governance
policies and mechanisms that cover all their operations and activities to ensure they are compliant with Islamic Shari’ah. 2.1
1.3 This standard is issued pursuant to the
powers vested in the Central Bank under the provisions of the Decretal Federal Law No. (14) of 2018 Regarding the Central Bank & Organization of Financial Institutions and Activities (the Central Bank Law). 3.1
1.4 Where this standard includes a
requirement to provide information, or to take certain measures, or to address 4.1

4 / 38 certain items listed as a minimum, the Central Bank may impose requirements, which are additional to the requirements provided in the relevant article.
Article (2)
Objective
2.1 The objective of this standard is to set the
minimum requirements for IFIs to ensure their compliance with Islamic Shari’ah in all their objectives, activities, operations, and code of conduct. 1.2
2.2 This standard elaborates on the
supervisory expectations of the Central Bank with respect to Shari’ah Governance for IFIs. 2.2
Article (3)
Scope of Application
3.1 This standard applies to all IFIs. IFIs
established in the UAE with Group relationships, including Subsidiaries, Affiliates, or international branches, must ensure that the Standard is adhered to on a solo and Group-wide basis. 1.3
3.2 This standard must be read in
conjunction with the standards and resolutions issued by Higher Shari’ah Authority and notified to IFIs. 2.3

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Article (4)
Definitions
For the purposes of this standard, the following words and phrases shall have the meanings stated below. a. Senior Management: a The executive management of the Bank responsible and accountable to the Board for the sound and prudent day-to-day management of the Bank or IFI, generally including, but not limited to, the chief executive officer, chief financial officer, chief risk officer, and heads of the compliance and internal audit functions. The term Senior Management includes the head of Islamic banking at the licensed financial Institutions that conduct part of their activities and businesses in accordance with the provisions of Islamic Shari’ah. b. Independence: b Ensuring that the Internal Shari’ah Supervision Committee is not subject to any form of undue influence when issuing resolutions and fatwas in accordance with the Shari’ah parameters, and ensuring that the Internal Shari’ah Control Division or Section and Shari’ah Audit Division or Section are also not subject to any form of undue influence. This should be carried out to strengthen the confidence of both shareholders and stakeholders in the IFIs compliance with Islamic Shari’ah.

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c. External Shari’ah Audit: d An annual
assessment conducted by external body to inspect and assess the IFI’s compliance with Islamic Shari’ah and the level of adequacy and effectiveness of the governance of Shari’ah supervision systems. d. Internal Shari’ah Audit: E regular process to inspect and assess the IFI’s compliance with Islamic Shari’ah and the level of adequacy and effectiveness of IFI’s Shari’ah governance systems. e. Compliance with Islamic Shari’ah refers to compliance with Shari’ah in accordance with :
a. resolutions, fatwas, regulations, and standards issued by the Higher Shari’ah Authority in relation to licensed activities and businesses of IFIs (“HSA’s Resolutions”), and b. resolutions and fatwas issued by ISSC (“ISSC”) of the respective IFI, in relation to licensed activities and businesses of such institution (“the Committee’s Resolutions”), provided they do not contradict HSA’s Resolutions. f. Shari’ah Supervision: monitoring of IFI’s compliance with Islamic Shari’ah in all its objectives, activities, operations, and code of conduct. g. Subsidiary: An entity, owned by another entity by more than 50% of its capital, or under full control of that entity regarding

7 / 38 the appointment of the Board of directors. h. Affiliate: An entity owned by another entity by more than 25% and less than 50% of its capital.
i. Fatwas: juristic opinions on any matter
pertaining to Shari’ah issues in Islamic finance, issued by HSA or ISSC. j. Internal Shari’ah Supervision Division (or Section): a technical division (or
section) in the IFI with a mandate to
support the ISSC in its duties. k. Internal Shari’ah Supervisory Committee (“ISSC”): a body appointed by the IFI, comprised of scholars specialized in Islamic financial transactions, which independently supervises transactions, activities, and products of the IFI and ensures they are compliant with Islamic Shari’ah in all its objectives, activities, operations, and code of conduct.
l. Board: IFI’s board of directors المالية المؤسسة إدارة مجلس :اإلدارة مجلس
m. Group: A group of entities which includes an entity (the ‘first entity’) and:
a. any Controlling Shareholder of the first entity;

8 / 38 b. any Subsidiary of the first entity or of any Controlling Shareholder of the first entity; and
c. any Affiliate, joint venture, sister
company and other member of the Group. n. Shari’ah Non-Compliance Risks:
probability of financial loss or reputational damage that IFI might incur or suffer due to not complying with Islamic Shari’ah. o. Confidential Information: information that is publicly unavailable and its disclosure is not allowed. p. Code of Conduct: refers to the principles that are intended to govern the activities of IFI with regard to (a) protection of their customers’ interest, and (b) market integrity (c) and internal work environment. q. Islamic Financial Institutions (Institutions/IFIs): The CBUAE licensed financial Institutions that conduct all or part of their activities and businesses in accordance with the provisions of Islamic Shari’ah. r. Higher Shari’ah Authority (HSA): is the Central Bank’s Higher Shari’ah Authority for financial and banking activities.

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Article (5)
General Requirements for Shari’ah Governance Standard
5.1 The IFI must comply with Islamic
Shari’ah in all of its goals, activities, operations and code of conduct at all times. 1.5
5.2 An IFI must have in place governance
controls and mechanisms in accordance to its size and complexity of its operations to ensure compliance with Islamic Shari’ah in all of its activities, operations and code of conduct. 2.5
5.3 Branches of foreign licensed financial
institutions that conduct all or part of their activities and businesses in accordance with the provisions of Islamic Shari’ah must adhere to this standard or establish equivalent arrangements to ensure regulatory comparability and consistency. The equivalent arrangement, if applicable, should include the matters related to general assembly, the Board and its Committees without contradicting the prevailing laws in the UAE. The equivalent arrangements shall be submitted to the CBUAE for approval. 3.5
5.4 The Shari’ah governance of IFIs must
include the following as minimum requirements:
4.5

10 / 38 a. Stating the responsibility of the Board in regards to the IFI’s compliance with Islamic Shari’ah, the oversight over the IFI, and establishing an adequate Shari’ah governance framework. b. Identification of the senior management responsibilities related to the IFI’s compliance with Islamic Shari’ah and for providing adequate resources for implementation of Shari’ah governance requirements to ensure that the IFI’s business is carried out in compliance with Islamic Shari’ah.
c. Appointment of a qualified ISSC in
accordance with the eligibility and competence requirements set out in this standard. d. Establishment of Internal Shari’ah Control Division (or Section). e. Establishment of Internal Shari’ah Audit division (or section). f. Publication of the ISSC’s resolutions regarding standard products, services, fees, and other basic mechanisms governing IFIs operations, including late payment fees and the commitment to donate it, or awards granted by the IFI, and other essential matters. g. Providing training and awareness programs related to compliance with

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Islamic Shari’ah in the IFI, this should include all levels in the organization.
5.5 This standard must be implemented
through a set of policies and procedures that outline the structure, roles, responsibilities, accountability, scope and duties of different functions, and reporting lines and communication channels between different functions with regard to the IFI’s compliance with Islamic Shari’ah. 5.5
5.6 The IFI must spread awareness regarding
Islamic finance and boost the culture of compliance with Islamic Shari’ah within the IFI, including workshops for the members of the Board and senior management on Islamic financial transactions and compliance with Islamic Shari’ah. 6.5
Article (6)
IFI’s Responsibility
مجلس اإلدارة Board The
6.1 IFI’s Board is ultimately responsible for
IFI’s compliance with Islamic Shari’ah. The Board is expected to be aware of Shari’ah non-compliance risk and its potential impact on the IFI. Accordingly, the Board is responsible for establishing and implementing a Shari’ah governance framework that is commensurate with the size and complexity of the operations of the IFI and its risk appetite, to ensure the IFI’s compliance with Islamic Shari’ah. 1.6

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The Shari’ah governance framework should incorporate the three lines of defense approach comprising the business line, the support and control functions, and internal Shari’ah audit function.
6.2 Members of the Board must nominate
ISSC members to the general assembly for the establishment of ISSC. 2.6
6.3 The Board must, in coordination with the
ISSC, ensure the development, approval and implementation of internal policies related to the IFI compliance with Islamic Shari’ah. 3.6
6.4 The Board must maintain effective
communication with the ISSC. Meetings must be held to discuss issues pertaining to Shari’ah compliance, with at least one meeting per financial year. 4.6
6.5 The Board must refer to the ISSC for all
Shari’ah matters related to IFI activities, operations and code of conduct. 5.6
6.6 The Board must ensure that the annual
Shari’ah report issued by the ISSC is submitted to the HSA for review and approval before sharing it with shareholders at the general assembly. 6.6

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لجنة المخاطر التابعة لمجلس اإلدارة Committee Risk s’Board
6.7 The Board’s Risk Committee (“Risk
Committee”) must supervise and monitor management of Shari’ah non-compliance risk, and set controls in relation to this type of risk, in consultation with ISSC and through the internal Shari’ah control division or section. 7.6
6.8 The Risk Committee is responsible to
review and approve the establishment of framework for managing Shari’ah noncompliance risk as part of the overall risk management framework of the IFI, and must oversee its implementation by the Senior Management. 8.6
6.9 The Risk Committee must ensure there
is an information system that enables IFI to measure, assess and report Shari’ah non-compliance risk. Reports must be provided on a timely manner to the Board and Senior Management, in formats suitable for their use and understanding. 9.6 لجنة التدقيق التابعة لمجلس اإلدارة Committee Audit s’Board
6.10 The Board’s Audit Committee (‘Audit
Committee’) must:
10.6 a. Evaluate the effectiveness of IFI’s
policies (approved by ISSC) designed to monitor compliance of the IFI with Islamic Shari’ah.

14 / 38 b. Assess the effectiveness and adequacy of internal Shari’ah audit and its contribution in ensuring IFI’s compliance with Islamic Shari’ah. The Audit Committee’s responsibility includes the following:

• Assess the independence,
  effectiveness and adequacy of internal Shari’ah audit scope and programs.
• Review the reports prepared by the
  internal Shari’ah audit division or
  section to ensure that all necessary
  measures have been undertaken.
• Facilitate the work of the internal
  Shari’ah audit division or section.
• Hold regular meetings with the head
  of internal Shari’ah audit division or
  section twice a year, at minimum.
  c. Review the scope, results, and adequacy
  of the external Shari’ah audit review (if applicable). In addition, the Audit Committee’s responsibility includes the following:
• Facilitate the work of the external
  Shari’ah auditor.
• Review the reports prepared by
  external Shari’ah auditor to ensure that the senior management have taken all necessary measures in this regard.
• Hold meetings with the external
  Shari’ah auditor with a minimum of one meeting per financial year.

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6.11 It is recommended that the Audit
Committee invite a member of the ISSC to attend the meetings when discussing the internal Shari’ah audit report to ensure compliance of the IFI with the resolution of the ISSC concerning the report. The Audit Committee and the member of ISSC are not authorized to change the ISSC’s resolution in this regard. 11.6 اإلدارة العليا Management Senior
6.12 The Senior Management must execute
and manage the IFI’s activities and businesses in compliance with Islamic Shari’ah. 12.6
6.13 The Senior Management must report to
the Board regarding IFI’s compliance with Islamic Shari’ah in all of its activities, operations, policies, internal regulations, and code of conduct. 13.6
6.14 The Senior Management is responsible
before the Board for:
a. submitting Shari’ah matters related to all IFI’s businesses and activities, including its policies, internal regulations, code of conduct, all onshore/offshore transactions, services and products to ISSC, and should not consider approval of any of the Group’s Shari’ah supervision committees (or equivalent committees) outside the country as substitution to approval of the ISSC, 14.6

16 / 38 b. ensuring implementation of the ISSC’s fatwas and resolutions.
6.15 The Senior Management must fully
disclose all relevant information required by the ISSC in a transparent, accurate and timely manner. 15.6
6.16 The senior management shall provide the
ISSC with financial and human resources that are commensurate with the IFI size and the nature of its business. 16.6
6.17 The Senior Management must:

• facilitate work of internal Shari’ah
  audit and external Shari’ah audit,
• ascertain that the Shari’ah auditors
  are not obstructed in their work,
• enable Shari’ah auditors to access
  information or staff, from all different levels. 17.6
  6.18 The Senior Management is responsible to
  establish sufficient knowledge regarding the Compliance with Islamic Shari’ah requirements and the culture of Islamic Shari’ah compliance banking in the IFI. 18.6

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Article (7)
ISSC
Membership and Appointment والعضوية التعيين
7.1 The Board shall nominate the members
of ISSC, and send the member’s appointment request to HSA for approval prior to presenting its nomination to the general assembly. 1.7
7.2 IFI’s general assembly have the authority
to appoint the ISSC members based on the Board’s nomination and after HSA’s approval. 2.7
7.3 The composition of ISSC members in IFI
should not be less than (5) five members with proper qualifications and competence (as prescribed in this standard). The CBUAE may exempt IFI from this requirement in consideration to its size and the complexity of its operations during the approval process of IFI’s Shari’ah governance framework. The number of members of the ISSC shall not be less than three, in all cases. 3.7
7.4 Emirati members in ISSC should not be
less than one third.
4.7
7.5 The membership of each member in the
ISSC is subject to the following:
5.7

18 / 38 a. must not exceed three ISSC memberships inside the UAE, b. must not exceed a total of (15) fifteen ISSC (or equivalent committees) memberships inside and outside the UAE 1 ,
c. Only one member of the IFI’s ISSC
may have more memberships stated in (7.5/b).
7.6 The HSA may exempt UAE nationals
from the clause (7.5) if necessary. 6.7
7.7 If a position of ISSC member becomes
vacant, at any time, and that causes lack of quorum, the Board must nominate a substitute member and shall send the appointment request to HSA for approval before presenting the same to the general assembly. However, if a position of ISSC member becomes vacant, at any time, and this leads to non-compliance with the clause no. 7.3 in this standard, but it does not breach the quorum, the Board may appoint a member after obtaining the HSA approval on the appointment. It is not required in this case to hold the general assembly for the appointment provided that the appointment is tabled to 7.7

1
This is not applicable to companies of under one group. The ISSC member may be an ISSC member of the group’s companies and that will count as one membership.

19 / 38 general assembly for final approval in its next meeting.
7.8 The term of office for ISSC members
shall be specified in the IFI’s engagement letter with a minimum of three years, and may be renewed for a similar period. The engagement letter must also specify the responsibilities of the ISSC members and their remunerations. The remuneration must not be linked to the performance of the ISSC members. 8.7
7.9 Membership of ISSC shall be renewed
upon a recommendation from the Board. HSA shall approve the membership renewal request before presenting it to the general assembly. The renewal shall not be considered as new appointment. 9.7 Second: Eligibility and Competence والكفاءة األهلية :ثانيا يجب أن يكون عضو لجنة الرقابة الشرعية :must ISSC the of Members 7.10 10.7 a. be Muslim persons (not a company); .)شركة وليس )مسلما شخصا أ b. hold a bachelor degree (as a minimum) in Islamic Shari’ah, particularly in jurisprudence of transactions, from a university that is acknowledged in Shari’ah studies, especially methodologies of jurisprudence, or have a minimum of 10 years’ experience in fatwas issuance related to jurisprudence of financial transactions.

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c. have proven competence and expertise,
especially in jurisprudence of financial transactions; d. have a strong comprehension of finance in general and Islamic finance in particular, and should have worked in the spectrum of Islamic finance and/or Shari’ah Supervision for a minimum of (10) ten years whether in direct employment or advisory level, or at least (10) ten years of post-graduation experience in teaching and scientific research related to jurisprudence of financial transactions; e. have good knowledge of the legal and supervisory framework related to financial and banking activities in the UAE; f. be excellent in Arabic, and preferably to have good knowledge of English; g. have good conduct and behavior, particularly with regard to credibility, integrity, and reputation in professional and financial transactions.
7.11 HSA may exempt UAE candidates from
some of the above clauses that would not impair their competence in performing their duties, provided that the candidate commits to the development and training required by the HSA. 11.7

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Third: Termination or Resignation of ISSC member
7.12 Termination of appointment or
resignation of ISSC members is not considered effective until the termination or resignation request is approved by HSA, before it is presented to the general assembly for approval. 12.7
7.13 The request must clarify the reasons for
termination or resignation of the ISSC member. 13.7
Article (8)
Responsibility of ISSC
8.1 ISSC undertakes Shari’ah supervision of
all businesses, activities, products, services, contracts, documents, and code of conducts of the IFI. ISSC issues Shari’ah fatwas and resolutions that are binding upon IFI. The members of ISSC are accountable for the resolutions and fatwas they issue to the IFI, and their compliance with the resolutions and standards issued by the HSA. 1.8
8.2 ISSC must monitor, through internal
Shari’ah control division or section and internal Shari’ah audit, the IFI’s compliance with Islamic Shari’ah. 2.8

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8.3 In case a Shari’ah non-compliance issue
is identified in an IFI, the ISSC must review and approve:
a. corrective measures, if the correction is feasible, b. remediation required by the Islamic Shari’ah regarding the consequences arising from the Shari’ah noncompliance issue if the correction is not feasible,
c. preventive measures to avoid
reoccurrence of such issues.
3.8
8.4 ISSC shall review and approve from
Shari’ah perspective:
a. the method for calculation and distribution of profits, and for allocation of expenditures and costs and their division between holders of investment accounts and shareholders. b. final annual accounts before presenting them to the Central Bank. 4.8
8.5 In case where an IFI is a branch or
subsidiary of an offshore bank, the ISSC of such IFI should approve all business operations, products, services investments, and financial securities that IFI executes, issues, manages, promotes, offers to its customers, or participates in. The approvals from offshore Shari’ah committees (or similar committees) in relation to the above should not be used as a substitute for the onshore ISSC approval. 5.8

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8.6 The ISSC must issue an annual report
stating the extent of IFI’s compliance with Islamic Shari’ah that is published within the financial statement in the IFI’s disclosures and other available means. 6.8
8.7 The annual Shari’ah report of ISSC must
contain the main components specified by the HSA in the annual Shari’ah report form. 7.8
8.8 The annual Shari’ah report should be
submitted to the HSA for review and approval prior to presenting the same to the general assembly. 8.8 تقييم عمل لجنة الرقابة الشرعية الداخلية ISSC of Assessment Performance
8.9 The IFI in coordination with the
chairman of the ISSC should develop an assessment for ISSC based on the following aspects:
First: Shari’ah and scholarly aspects in terms of the member’s participation in decision making, discussions, and review of contracts, documents and reports submitted to ISSC. This should account for 70% of the assessment. Second: Organizational aspect in terms of members’ attendance of meetings and adherence to meeting schedule (dates and times), and other procedures prescribed by ISSC charter, in line with this 9.8

24 / 38 standard. This should account for 30% of the assessment. The IFI should inform each ISSC member upon appointment and at the beginning of each fiscal year about the assessment criteria.
8.10 At the end of a fiscal year, the Chairman
of the ISSC shall provide HSA with a report on performance assessment. 10.8
8.11 IFI must adopt a charter for the ISSC that
defines details of decision making process and their implementation, and setting of adequate methods to fulfil ISSC’s responsibilities without prejudice to the requirements of this standard, and in accordance to the format approved by the HSA. 11.8 استقاللية لجنة الرقابة الشرعية الداخلية Independence ISSC
8.12 The following controls and guidelines, as
a minimum, must be observed to ensure the independence of ISSC members:
12.8 a. Members of the ISSC must not have a
first-degree relative as member of IFI’s Board or executive body in the IFI.

25 / 38 b. Should not be an owner/shareholder of/in a company that provides consultancy or Shari’ah services to the IFI where he acts as member of ISSC.
c. D
.
Members of the ISSC should not be employees at the IFI or any of its affiliates when serving as members of the committee and should not provide services to the IFI outside the scope of ISSC’s assigned functions. d. Members of the ISSC shall not accept any allowance from IFI or its affiliates other than the allowance they receive for being members of the ISSC, the allowance for attending ISSC meetings, and other matters related thereto. If a financing is granted to a member of the ISSC, such member should be treated as ordinary customers and should not receive any preferential treatment, e. Member of ISSC or his first or seconddegree relatives, shall not own a share equal to/or more than 5% that entitles him to act as executives or managers in any commercial company to which the IFI has paid, or received from, payments of material size, or one of its subsidiaries during the current or previous fiscal year. f. The entitlement to ISSC allowances should not be conditional on achieving certain results, or linking it to the results

26 / 38 of the services provided by the ISSC (conditional remuneration). g. The foregoing cases are examples of ISSC members’ independence. In case the IFI desires to treat ISSC members independent despite the existence of one or more of the above relationships, it must transparently disclose those instances and bear the responsibility for clarifying the reason for considering such members independent. h. In case of inevitable conflict of interest, member of the ISSC must notify the IFI management thereof in writing. He must also disclose any conflict of interest cases related to his family members or business partners or companies he has interest in. Also in cases where conflict of interest is related to a third party, he has to refrain from participating in the decision. In case of reporting conflict of interests, this must be recorded.
i. The IFI must immediately notify the
central bank if it become aware of any material information that may negatively affect the independence of any ISSC member. السرية Confidentiality
8.13 Member of the ISSC must not disclose
Confidential Information of the IFI 13.8

27 / 38 unless such disclosure is required by law or by the Central Bank. االتساق Consistency
8.14 The ISSC members should try to achieve
agreement related to fatwas and resolutions, to the extent possible. ISSC shall not resort to majority vote unless members are unable to reach agreement within a reasonable period. 14.8
Article (9)
Internal Shari’ah Controls
9.1 The IFI must establish effective internal
Shari’ah controls comprising of three lines of defense approach that are independent from each other, which includes:

• the first line of defense, represented by
  the business line, which should set clear policies, procedures, and controls, approved by ISSC, and execute the business activities in a manner compliant with Islamic Shari’ah at all times,
• the second line of defense, represented
  by the internal Shari’ah control division or department, which undertakes the functions prescribed in the Article 10, and it should not be organizationally part of any business division or reporting to it,
• the third line of defense represented by
  internal Shari’ah audit division or department, which undertakes Shari’ah audit and monitors compliance, and it 1.9

28 / 38 should not be organizationally part of any business division or reporting to it.
9.2 The IFI must provide sufficient financial
and human resources that suit the size and nature of IFI’s activities so that internal Shari’ah control section and internal Shari’ah audit section can carry their work effectively and efficiently, in consultation with the ISSC. 2.9
9.3 The internal Shari’ah control division or
section and internal Shari’ah audit
division or section perform two different tasks, and must stay separate from each other in terms of reporting and human resources in accordance with the three lines of defense approach. 3.9
Article (10)
Internal Shari’ah Control Division or
Section
10.1 This division or section supports the
ISSC in its duties. It is comprised of the number of employees of the size that is commensurate with the size and nature of the IFI operations. The ISSC shall supervise the work of this division or
section from the technical perspective.
1.10
10.2 The IFI should appoint a head for internal
Shari’ah control division or section, who shall report to the Board. The head for internal Shari’ah control division or section must:
2.10 a. be a Muslim, ،مسلما .أ

29 / 38 b. a
. have a university degree in Islamic Shari’ah, or relevant specializations, .
c. have a professional certificate in Shari’ah
and Islamic Banking Control from one of the organizations that supports Islamic Finance like the Accounting and Auditing Organization for IFIs (AAOIFI) and the General Council for Islamic Banks And Financial Institutions (CIBAFI), . d. have an experience of 10 years (at least), as a minimum, in the field of Shari’ah Supervision, . e. not have been sentenced by a court in crimes related to honor or honesty, or was convicted of offences and sentenced to imprisonment, . f. have strong command of English and reasonable command of Arabic. .
10.3 The internal Shari’ah control division or
section should not issue fatwas or
resolutions. Instead, the internal Shari’ah control division should refer back to ISSC in all matters that it considers and all tasks it carries out, unless there were fatwas or resolutions issued for the matters before. 3.10
10.4 In matters related to promotions, bonus,
performance assessment, and removal, 4.10

30 / 38 the internal Shari’ah control division or
section head and staff shall not report to
the senior management, but to the Board or its committees in consultation with the ISSC.
10.5 Internal Shari’ah control division or
section staff shall not assume any
executive powers or responsibilities related to the businesses and activities that may be monitored by themselves. 5.10
10.6 The internal Shari’ah control division
or section shall assume the following functions:
6.10 a. ISSC Secretariat Function: undertakes
the following:

• preparing, and organizing the
  meetings of the ISSC,
• preparing and drafting the minutes of
  the meetings,
• communicating the resolutions to the
  internal Shari’ah control division and internal Shari’ah audit division in addition to other divisions and sections of the IFI,
• following up with resolution
  implementation as per the follow-up list required by ISSC,
• filing fatwas and resolutions, and
• follow-up administrative matters
  related to ISSC. b. Shari’ah Consultations Function:
  provides consultation based on the ISSC’s fatwas and resolutions in regards to:

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• contracts and documents and other
  aspects related to the IFI’s financial products and services, including products manual, policies, internal procedures,
• IFI’s Shari’ah related inquiries and
  issues,
• Promotional / advertising materials
  and publications,
• Customers complaints (related to the
  compliance with Islamic Shari’ah), and
• other Shari’ah issues faced by the IFI
  especially the ones related to structuring and products. The IFI must ensure that persons tasked with this function must have high Shari’ah expertise and qualifications, and must be familiar with Islamic financial products, IT systems, and internal procedures.
  c. Shari’ah Research & Development
  Function: undertakes the following:
• conducting researches for related
  Shari’ah and procedural issues requested by ISSC,
• contributing, with other relevant
  sections in the IFI, to the development of products and formulation of policies, procedures, contracts, and
• other areas of development in IFIs .

32 / 38 d. Shari’ah Compliance Function: is responsible to continuously monitor compliance of IFI’s businesses and activities with resolutions, fatwas, regulations, standards, which are issued by the HSA.

• The Shari’ah compliance function must
  not be outsourced to external entities. -
• • The Shari’ah compliance report must be
    submitted to the ISSC to look at the technical Shari’ah related matters prior to submitting the same to the chief executive officer. The Shari’ah compliance must have a right of direct access to the Board. -
• The work of the Shari’ah compliance
  function must be integrated within the overall compliance function of the IFI. It must have a dotted reporting line to the head of compliance of the IFI to submit reports regarding the compliance with Islamic Shari’ah. - e. Shari’ah Training Function: conducts training for IFI’s staff on those aspects of their duties related to IFI’s compliance with Islamic Shari’ah. This function also provides adequate trainings for the staff on what they need to be equipped with information and skills, depending on nature of work of each employee, to ascertain that the IFI

33 / 38 complies with Islamic Shari’ah at all times.
Article (11)
Internal Shari’ah Audit Division or
Section
11.1 The internal Shari’ah audit division or
section undertakes Shari’ah audit and
monitors IFI’s compliance with Islamic Shari’ah. This is conducted through an annual plan to collect and assess evidence of IFI’s activities and transactions to ensure their compliance with Islamic Shari’ah and ensure the adequacy of internal procedures and Shari’ah governance frameworks. 1.11
11.2 The Board should appoint a Shari’ah
controller to serve as head for internal Shari’ah audit division or section. The head for internal Shari’ah audit division or section must:
a. be Muslim, b. have a university degree in Islamic Shari’ah, or relevant specializations,
c. have a professional certificate in
Shari’ah and Islamic Banking Audit from one of the organizations that support Islamic Finance like the Accounting and Auditing Organization for IFIs (AAOIFI) and the General Council for Islamic Banks And Financial Institutions (CIBAFI). It is also preferable to have a professional certificate in 2.11

34 / 38 auditing issued by an international organization, d. have an experience of 10 years (at least), as a minimum, in the field of Shari’ah audit, e. not have been sentenced by a court in crimes related to honor or honesty, or sentenced by imprisonment, and f. have strong command of English and reasonable commend of Arabic.
11.3 The head of internal Shari’ah audit
division or department shall report to the Board. The head of internal Shari’ah audit division or section shall submit the reports to the ISSC for resolutions on Shari’ah matters mentioned in his/her reports. He/She shall then report with the ISSC resolutions to the Board’s audit committee for the implementation of their content and follow-up of their requirements. 3.11
11.4 The internal Shari’ah audit division or
section submits its reports to the ISSC
and to the Board audit committee biannually (at minimum). . 4.11
11.5 The internal Shari’ah audit division and
the internal audit division must coordinate and exchange their findings and reports. 5.11

2
The frequency of reports submitted by the internal Shari’ah audit division or section depends on the size and nature of the IFI’s works, which might require submitting more reports

35 / 38
11.6 In matters related to promotions, bonus,
performance assessment, and removal, internal Shari’ah audit division or section head and staff shall not report to the senior management they are auditing, but to the Board, through the audit committee, and in consultation with the ISSC. 6.11
11.7 Internal Shari’ah audit division or section
staff shall not assume any executive powers or responsibilities related to the businesses, activities, and contracts that may be audited by them. 7.11
11.8 Internal Shari’ah audit division or section
must carry out its duties in line with specified work procedures. 8.11
11.9 The internal Shari’ah auditor must meet
the requirements mentioned in (11.2) above, except for the condition of experience; where the internal Shari’ah auditor must have a minimum practical experience of five years in Shari’ah internal audit. 9.11
11.10 Internal Shari’ah audit division or section
shall carry out the following duties:
10.11 a. a
.
Development of internal Shari’ah audit manual, and to undertake review and update of the manual on a regular basis. . b. b . Prepare the annual Shari’ah audit plan, which must be approved by the ISSC in coordination with the audit committee, .

36 / 38 while upholding the best practices in this process (e.g. Risk based Shari’ah Audit ).
c. c
.
Undertake assessment of businesses and activities of IFI to ensure the IFI’s compliance with Islamic Shari’ah. . d. d . Assess effectiveness of the internal Shari’ah supervision to ensure that the IFI’s compliance with Islamic Shari’ah. . e. e . Ensure that the products, services forms, contracts, agreements, activities and transactions execution procedures, and other related matters are approved by ISSC. . f. f . Ensure the IFI’s branches, its internal and external departments, and affiliates comply with Islamic Shari’ah. . g. g . Conduct regular field audit to the IFI’s internal and external departments, and branches (if any). . h. h . Prepare internal audit forms and programs required for conducting inspection, and to verify and documents the sound execution of transactions in light of the ISSC’s fatwas and HSA’s resolutions. .
i. Conduct meetings with IFI’s
departments and branches to discuss the Shari’ah observations and request .

37 / 38 putting in place appropriate measures to prevent recurrences of similar issues, and in cooperation with relevant entities inside the IFI. j. j . Prepare a report of the outcomes of the Internal Shari’ah audit. .
11.11 The internal Shari’ah audit must not be
outsourced to external entities. The internal Shari’ah audit division may be assisted by additional external bodies after the approval of the CBUAE. 11.11
Article (12)
External Shari’ah Audit
12.1 IFI may appoint a specialized external
body to conduct external Shari’ah audit. 1.12
Article (13)
Compliance with the standard
13.1 The IFI must set a Shari’ah governance
framework in accordance to this standard within 180 days from issuing this standard. The same must be submitted to the CBUAE for approval. 1.13
13.2 The IFIs should comply fully with these
standard requirements within one year from publishing this standard. 2.13

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13.3 The Regulatory Development Division
of the Central bank shall be the reference for interpretation of the provisions of this standard. 3.13 Abdulhamid Saeed Governor Issued in Abu Dhabi on 21/04/2020 2020/04/21 بتاريخ أبوظبي في صدر