Practice of Islamic Banking in Lebanon

Circular No. 455

For Banks

We enclose herewith a copy of Intermediary Decision No. 12497 dated 10/4/2017 regarding the amendment of Basic Decision No. 8828 dated 26/8/2004 (Practice of Islamic Banks' work in Lebanon), attached to Basic Circular No. 94.

Beirut, on 10 April 2017

Governor of the Central Bank of Lebanon

Riad T. Takieddine

Intermediary Decision No. 12497

Amendment of Basic Decision No. 8828 dated 26/8/2004

The Governor of the Central Bank of Lebanon, Based on the Monetary and Loan Law, particularly Article 70 thereof, And based on Law No. 575 dated 11/2/2004 regarding the establishment of Islamic Banks in Lebanon, particularly Articles 3 and 4 thereof, And based on Basic Decision No. 8828 dated 26/8/2004 and its amendments regarding the practice of Islamic Banks' work in Lebanon, And based on the decision of the Central Council of the Central Bank of Lebanon taken in its session held on 5/4/2017,

Decides as follows:

Article One: The text of the first article of Basic Decision No. 8828 dated 26/8/2004 is repealed and replaced with the following text:

"Based on the provisions of the second paragraph of Article 3 of Law No. 575 dated 11/2/2004 regarding the establishment of Islamic Banks in Lebanon, The following principles are adopted: Creation of contracts and determination of returns of deposit accounts that Islamic Banks can receive, linked to the Bank's annual results or to the results of operations:

First: Types of Deposits: 1- Current accounts and deposits received according to the provisions of the first and second paragraphs of Article 307 of the Commercial Law, and the laws and regulations governing them apply to each of them. 2- Deposits received under a Mudaraba contract. 3- Deposits received under an Wakala (Agency) contract.

Second: Creation of the Deposit Contract: 1- The deposit contract received according to the provisions of items (2) and (3) of the "First" section above must, at a minimum and explicitly, include the following:

• a) The amount of the deposited capital and the terms of its disposal by the Bank, and its maturity date.
• b) The share of each party in the profit, provided that the percentage is a common percentage and not a fixed amount in Mudaraba contracts.
• c) All expenses borne by the capital provider.
• d) The possibility or impossibility of the depositor withdrawing part or all of the deposit before its maturity, and the conditions of such withdrawal. 2- In addition to the conditions mentioned in item (1) of the "Second" section, the deposit contract received according to the provisions of item (2) of the "First" section of this Article must explicitly include a clause indicating that the percentage deducted to form the "Investment Risk Reserve" account and the "Profit Rate Reserve" account is given as a donation (Tabarru).

Third: Returns of Deposit Accounts: 1- Regarding returns linked to the Bank's annual results: The deposit's results are linked to the Bank's annual results if it is agreed in the deposit contract that the Islamic Bank has absolute authority in investing the funds of the owner of the current account or deposits received according to the provisions of the first and second paragraphs of Article 307 of the Commercial Law. 2- Regarding returns linked to the results of operations: The results of deposits received according to the provisions of the Mudaraba contract or the Wakala contract are linked to the results of the operations belonging to them. Deposits received according to the provisions of the Mudaraba contract are recorded within the Bank's balance sheet when the Islamic Bank has wide discretionary authority (Significant Influence) in investing these funds. Deposits received according to the provisions of the Wakala contract or the Mudaraba contract are recorded outside the Bank's balance sheet when the Islamic Bank does not have wide discretionary authority in investing these funds. 3- Regarding the application of result percentages: The percentage due to the deposit owners at the end of the agreed financial period is applied, periodically or annually, based on the book value (balance recorded in the Bank's books)."

Article Two: The text of the fourth article of Basic Decision No. 8828 dated 26/8/2004 is repealed and replaced with the following text:

1- "In addition to the reserves mandated by laws and regulations on non-Islamic banks, the Islamic Bank must form an 'Investment Risk Reserve' to cover losses resulting from investment operations funded from customers' investment accounts under Mudaraba contracts. A deduction of at least 10% of the net investment profits annually, after deducting the Bank's share as a Mudarib, is made until the accumulated amount becomes 20% of investment accounts. To calculate the 'Investment Risk Reserve', or part of it, as part of the provisions required to be formed to cover losses, prior approval from the Banking Supervision Committee is required. In other cases, the Banking Supervision Committee has the right, within the framework of the powers granted to it, to object to any use of the 'Investment Risk Reserve' account and any action taken regarding it. Upon the voluntary liquidation of the Islamic Bank, the 'Investment Risk Reserve' is not considered part of the rights of the shareholders of the Islamic Bank, and the disposal of the remaining balance of the account is decided by the liquidator after obtaining the approval of the Bank's Shariah Board. The Islamic Bank must invest the 'Investment Risk Reserve' exclusively at the Central Bank of Lebanon, and the returns resulting from it are added to the balance of this reserve after deducting the Islamic Bank's share of the return, which may reach a maximum of 10%."

2- Islamic Banks may form a 'Profit Rate Reserve' to improve returns when returns on customers' investment accounts decline relative to returns on similar operations in the banking market. The formation is from the profits of operations before deducting the Bank's share as a Mudarib, until the accumulated amount becomes 5% of investment accounts. Upon the voluntary liquidation of the Islamic Bank, the 'Profit Rate Reserve' specific to customers' investment accounts is not considered part of the rights of the shareholders of the Islamic Bank, and the disposal of the balance of this reserve is decided by the liquidator after obtaining the approval of the Bank's Shariah Board. The ability to invest the 'Profit Rate Reserve' specific to customers' investment accounts is restricted to the Central Bank of Lebanon, and the returns resulting from the deployment of funds in the 'Profit Rate Reserve' account are added to the balance of the reserve after deducting the Islamic Bank's share of the return, which may reach a maximum of 10%."

Article Three: This Decision takes effect immediately upon its issuance.

Article Four: This Decision is published in the Official Gazette.

Beirut, on 10 April 2017 Governor of the Central Bank of Lebanon

Riad T. Takieddine