Central Bank of Libya

P.O. Box 1103, Tripoli - The Great Socialist People's Libyan Arab Jamahiriya

Telegram Address: Misrataba - Tripoli

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Circular No. (2010/9) of the Banking Supervision Department

Reference: BSD/1055

Date: 4 Rajab

Corresponding Date: 16 Summer 1378 (Gregorian 2010)

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To: General Managers of Commercial Banks

Subject: Controls and Foundations for Offering Alternative Banking Products Compliant with Sharia Law in Commercial Banks in Libya

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Greetings,

Based on the provisions of Circular BSD No. (9) of the year 1377 (2009 AD), regarding granting permission to commercial banks to begin developing and offering alternative banking products that comply with Sharia law, through dedicated banking windows or branches.

Given that some commercial banks have begun offering these products by opening dedicated windows or branches, it is necessary for banks to follow best practices and standards governing the offering and management of Islamic banking products, based on the Sharia controls and standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and the supervisory standards issued by the Islamic Financial Services Board (IFSB).

In the context of the Central Bank of Libya issuing a series of instructions on how to account for and audit these new banking products according to established standards, commercial banks that have started offering alternative banking products compliant with Sharia law, or those wishing to offer such products, are required to adhere to the following controls and foundations:

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First – Standards Adopted in the Management and Accounting of Sharia-Compliant Banking Products:

Commercial banks offering banking products in accordance with Sharia law are required to apply best practices and international standards related to Islamic banking services, primarily the accounting, auditing, and Sharia controls and standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

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Second – Foundations and Controls for Working with Alternative Products:

In addition to the provisions contained in Circular BSD No. 9 of the year 1377 (2009), all banks offering or wishing to offer alternative banking products compliant with Sharia law through dedicated windows or branches are required to adhere to the following:

1. Banks offering alternative banking products compliant with Sharia law through windows:

• All commercial banks wishing to offer alternative banking products (Sharia-compliant banking services) must submit an application to the Central Bank of Libya to obtain permission, accompanied by an economic feasibility study. This study must address the bank's vision in dealing with Islamic financial products, the approved strategic plan in this regard, the systems, policies, and procedures to be followed in managing and accounting for these new products, the types of targeted banking products in detail (e.g., Murabaha for car purchases, computers, etc.), the distribution of windows across bank branches, and how they are managed by the bank's general management (in terms of independence or subordination). Data regarding who will be assigned to manage the branch or window must also be provided. Advancing banks must comply with all supervisory instructions issued by the Central Bank of Libya, most notably the capital adequacy standard and credit center limits.

• Banks offering Sharia-compliant banking products through windows must ensure the financial, administrative, and accounting independence of these windows from other traditional bank departments. This involves developing specific policies and procedures for the windows, and independent accounting systems and policies compatible with the nature of Islamic banking work, in accordance with Sharia and accounting standards issued by AAOIFI.

• Banks are required to allocate a separate and clear space for the window within the branch, ensuring it is completely separated from other sections in the branch, along with the necessity of placing a clear sign indicating the Islamic window and the nature of its work.

• Banks must disclose the following in their issued financial reports (the report submitted to the General Assembly of the Bank, the annual report, the external auditor's report):

  • The accounting rules followed in recognizing, measuring, and presenting Islamic banking products, with a necessary clarification of the extent to which these rules comply with accounting standards issued by AAOIFI, and areas of difference if the applied accounting rules do not comply with the rules stipulated in AAOIFI accounting standards, specifying the reasons and justifications for this difference.
  • Additional data and information published in the notes to the financial statements, detailing the value and nature of Islamic banking assets and products held by the bank, and a statement of revenues, expenses, and provisions related to Islamic banking services.

2. Banks offering alternative banking products compliant with Sharia law through branches:

Banking:

• Banks wishing to open new Islamic branches or convert existing branches into specialized branches offering Sharia-compliant banking products must observe the controls in effect according to the decision of the Board of Directors of the Central Bank of Libya No. 84 of 2008 regarding determining controls and conditions for establishing banking branches, and the circular letter No. 2009/22. Banks must attach to their application to the Central Bank of Libya for approval to open the required branch a detailed economic feasibility study including the bank's strategic plan and vision for opening the Islamic branch, the products the branch will offer and their types, as well as the plans, policies, and procedures to be followed to ensure the branch's accounting, financial, and administrative independence, and the expected financial data for the branch for the next three years.

• The bank must take measures that clearly show the nature of the Islamic branch's work, as follows:

  • Clarifying the nature of the branch's work clearly on the branch's external signboard.
  • Clearly indicating the nature of the branch's work (Islamic branch belonging to a commercial bank) in all letters, documents, and papers issued by the branch.

• The Islamic branch must be financially independent from other departments and branches of the bank, such that its sources of funds are independent and different from traditional fund sources. This is achieved by accepting deposits and investments, and the branch must have independent capital (after being raised to ten million Libyan Dinars), and the capital funding process must be consistent with the principles and tenets of Sharia law.

• The Islamic branch must enjoy accounting independence from the accounts of the parent bank and its affiliated branches, as follows:

  • The branch's accounts and its clients' accounts must be independent from the accounts of the parent bank, its affiliated branches, and their clients.
  • There must be independent accounting systems and a documentary and accounting cycle independent from the parent bank.
  • There must be an accounting department within the branch, one of its main tasks being to prepare independent financial statements for the branch, including a balance sheet showing the branch's assets and liabilities and an income statement showing its revenues and expenses.

• Separate financial statements must be prepared for the Islamic branch and placed as an appendix within the notes to the financial statements in the reports issued by the bank. In case there is more than one Islamic branch in the bank, the bank must treat Islamic branches as a single group, preparing unified financial statements for these branches, consistent with accounting standards issued by AAOIFI, and disclosing these statements as an appendix within the notes to the bank's financial statements.

• The Islamic branch must enjoy administrative independence from other departments and branches of the bank, adhering to the following:

  • Establishing an independent Islamic operations management within the bank, with independent staff, capable of supervising the achievement of the Islamic banking branch's accounting, financial, and funding independence.
  • Having an independent organizational structure within the branch, including a manager, departments, and sections, including an accounting department.
  • Having specific policies, procedures, mechanisms, document templates, and contracts for the Islamic branch that meet all legal, Sharia, and accounting requirements for work.

• Commercial banks offering alternative banking products compliant with Sharia law through branches must establish a general framework and clear detailed procedures governing the relationship between Islamic branches and the parent bank, approved by the Sharia Supervisory Board. These procedures should address, for example, how Islamic branches benefit from the parent bank's banking services (e.g., dealing with correspondents) and the Sharia controls for any investments or operations conducted between Islamic branches and the parent bank.

3. General controls for all commercial banks offering alternative, Sharia-compliant products:

Sharia Law:

• Banks offering alternative banking products compliant with Sharia law must appoint a Sharia Supervisory Board (committee) according to the specifications and conditions stipulated in Item Three of this Circular.

• Banks offering alternative banking products compliant with Sharia law must appoint an internal Sharia auditor whose task is to verify the correctness of practical steps for daily transactions in Islamic branches or windows, review and examine documents and contracts involved in transactions and investment agreements, and their compliance with decisions issued by the Sharia Supervisory Board, as well as prepare monthly reports presented to the Sharia Supervisory Board in its meetings and other duties.

• The bank must include in its financial reports the following:

  • Sources and uses of funds, and how they are invested through the alternative banking services compliant with Sharia law offered by the bank (through branches or windows), and sources of covering financing deficits or losses in case they occur.
  • Revenues or expenses realized by the Islamic window or branch, or those violating Sharia principles and tenets, including all reasons. In addition, how these revenues are disposed of, if any, which must be done according to what the Sharia Supervisory Board decides.
  • Reserves deducted from funds accepted according to Sharia principles and tenets, and the purposes of these reserves, and their destination in case the bank stops offering alternative banking products compliant with Sharia law.
  • The ratio of funds related to alternative banking services compared to the ratio of funds related to traditional banking services.
  • Profit distribution ratios between the bank as a Mudarib (manager) and investment account holders as Rab al-Maal (capital providers).

• In addition to the most important disclosure requirements mentioned in this Circular, commercial banks offering alternative banking products compliant with Sharia law through windows or branches must observe the disclosure requirements contained in Financial Accounting Standard No. (1) issued by AAOIFI, and general disclosure in the financial statements of banks and Islamic financial institutions.

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Third – Sharia Supervisory Board:

All banks offering alternative banking products compliant with Sharia law must appoint a Sharia Supervisory Board responsible for directing their activities related to offering alternative banking products, monitoring and supervising them to ensure compliance with Sharia law principles and tenets, and the board's fatwas and decisions are binding on the bank.

1. Composition of the Sharia Supervisory Board and Conditions for Appointment:

• The Sharia Supervisory Board must consist of at least three members, who must be jurists specialized in transaction jurisprudence. One of the members may be a non-jurist specialized in the field of Islamic financial institutions, with expertise in transactions.

• The Board is appointed by the General Assembly of the Bank, upon the recommendation of the Board of Directors. The General Assembly may dismiss any member of the Sharia Supervisory Board upon the recommendation of the Board of Directors.

• Board members must be independent within the bank and exercise their duties with integrity and objectivity, avoiding any situations that may affect their ability to form an independent and objective opinion regarding the tasks entrusted to them. To this end, no member of the Sharia Supervisory Board may hold any other position in the bank, nor should they be related in any way to any administrative decisions or executive responsibilities within the bank. The bank is prohibited from appointing:

  • The General Manager of the bank, his deputies and assistants, heads of main departments, members of its board of directors, and senior assistants (whose shareholding percentage in the bank is 5% and above).
  • Relatives of the persons mentioned above, up to the second degree, or persons considered partners with any of the persons specified above, or persons holding positions in companies or entities affiliated with the persons specified above.
  • Persons indebted to the bank or any of its affiliated institutions directly or indirectly.

• Members of the Sharia Supervisory Board must continuously evaluate their independence and identify any factors or situations that may limit their independence, and report these situations to the Sharia Supervisory Board collectively for discussion and review. In case a negative impact on independence is identified, they must inform the Sharia Supervisory Board and notify the General Assembly of the Bank.

• The term of membership in the Sharia Supervisory Board is determined at three years, renewable.

• Remuneration for members of the Sharia Supervisory Board is determined by the General Assembly of the Bank, and the Board of Directors may be delegated to determine the remuneration of board members. Board members must refrain from receiving any financing or other benefits from the bank where they perform Sharia supervision duties, or from any of their family members.

• The Sharia Supervisory Board may, as it deems appropriate, engage specialists in the fields of business management, economics, law, or accounting to assist it in performing its duties.

2. Main Tasks and Objectives of the Sharia Supervisory Board:

• Sharia guidance for bank activities related to alternative banking products compliant with Sharia law by:

  • Reviewing policies and guidelines related to alternative banking products and ensuring their integrity and suitability for Sharia law.
  • Approving documents related to alternative banking products and adopting them, including contracts, agreements, and other documents and templates used in commercial transactions for windows and branches offering alternative banking products compliant with Sharia law.
  • Reviewing and examining operations occurring in bank windows and branches offering alternative banking products, and verifying that they were executed according to decisions issued by the Sharia Supervisory Board, and in accordance with Sharia law principles and tenets. The most important operations requiring review include:
    • Verifying all transactions, contracts, and operations related to alternative banking products and ensuring they were executed according to what the Board approved and in accordance with Sharia law principles and tenets.
    • Verifying that profit distribution and loss bearing on investment accounts in branches offering alternative banking products comply with the foundations adopted by the Board according to Sharia law.
    • Verifying that profits of windows and branches from alternative banking products, realized from sources or operations not compliant with Sharia law principles and tenets, have been spent on charitable purposes (according to the provisions of Standard No. 1 issued by AAOIFI).

• Verifying that the calculation of Zakat on the bank's funds in windows and branches dedicated to alternative banking products compliant with Sharia law has been done according to Sharia law principles and tenets, and in line with fatwas and decisions of the Sharia Supervisory Board in the bank.

• Providing advice to the bank's Board of Directors on Sharia matters and issues.

• Based on the audit procedures and tasks mentioned above, the Sharia Supervisory Board prepares an annual report for shareholders (included in the bank's annual report), regarding the extent of the bank's compliance with Sharia law principles and tenets in windows and branches offering alternative banking products, according to practices followed in international standards and standards issued by AAOIFI, specifically Standard No. (1) regarding "Appointment of the Sharia Supervisory Board" and Standard No. (2) regarding "Sharia Supervision". To this end, the Sharia Supervisory Board has the right to full, unrestricted access to all sources, including referring to the bank's appointed advisors and bank staff related to alternative banking products compliant with Sharia law.

3. Meetings of the Sharia Supervisory Board:

• The Board meets at least once a month, unless work circumstances dictate otherwise.
• The Chairman of the Board presides over the meeting, and in his absence, the senior-most member presides.
• The Board's meeting is valid with the presence of two of its members, and the Board's decisions are made by majority vote.
• The Chairman and Board members have the right to attend General Assembly meetings.
• The internal Sharia auditor must coordinate regarding all Sharia Supervisory Board meetings and attend them to follow up on the implementation of its decisions and recommendations, without having the right to vote on its decisions.

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Fourth – Information and Data Required to be Sent to the Central Bank of Libya:

Commercial banks offering alternative banking products compliant with Sharia law through windows or branches must provide the following information and data to the Banking and Currency Supervision Department at the Central Bank of Libya, regarding the Sharia Supervisory Board:

• The decision appointing members of the Sharia Supervisory Board, accompanied by the CV of each member (when appointing board members for the first time and when appointing new members to replace dismissed members, those who resigned, or whose term has ended).
• Any cases of dismissal or resignation of Sharia Supervisory Board members and the reasons and justifications for doing so.
• The annual report prepared by the Sharia Supervisory Board and submitted to the General Assembly of Shareholders at its annual meeting.
• Banks offering alternative banking products compliant with Sharia law must send the following data and statistics monthly to the Banking and Currency Supervision Department at the Central Bank of Libya, within a deadline not exceeding fifteen days from the following month:
  • The unified balance sheet for all Islamic branches and windows in the bank according to Form No. (1) attached.
  • The unified income statement for all Islamic branches and windows in the bank according to Form No. (2) attached.
  • Statistics including financial information for each Islamic branch or Islamic window in the bank, individually, according to Form No. (3) attached.

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Peace, mercy, and blessings of God be upon you,

Dr. Muhammad Abdul Jalil Abusnina Director of Banking and Currency Supervision Department

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Attachments:

• Copy to His Excellency the Governor
• Copy to His Excellency the Deputy Governor
• Copy to His Excellency the Director of Audit Department
• Copy to His Excellency the Director of Legal Department
• Copy to / Banking Follow-up and Compliance Monitoring Department
• Copy to / Analysis and Supervisory Review Department
• Copy to / Planning Department

Required Data and Statistics Forms:

• Unified Balance Sheet for all Islamic Branches / Windows
• Unified Income Statement for all Islamic Branches / Windows
• Individual Financial Information for each Islamic Branch or Islamic Window

Detailed Guide on Required Data and Statistics

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Central Bank of Libya

Banking and Currency Supervision Department

Form No. (1): Unified Balance Sheet for Islamic Branches / Windows

Bank Name: Date: ---- / -- / --

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1- Assets

(Amounts valued in thousands of Libyan Dinars)

Description	Libyan Dinar	Foreign Currency	Total
Cash
Deposits and Accounts with Central Bank of Libya (*)
Balances and Accounts with Banks and Financial Institutions (*)
Deferred Sales Receivables
- Murabaha Operations Receivables
- Salam Operations Receivables
- Istisna Operations Receivables
Financing:
- Mudaraba
- Musharaka
Investments:
- Securities
- Shareholdings
- Goods
- Real Estate
- Assets Acquired for Lease
Fixed Assets (Net)
Other Assets (**)
Total Assets

(*) A detailed statement of the types and nature of these accounts and deposits is attached (**) A detailed statement is attached

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2- Liabilities

Description	Libyan Dinar	Foreign Currency	Total
Balances and Accounts of Banks and Financial Institutions
Current Accounts and Savings Accounts
Accounts Payable
Cash Collateral and Guarantees
Profits to be Distributed to Equity Holders
Other Liabilities (*)
Investment Accounts Entrusted
Provisions
Paid-in Capital
Reserves
Retained Earnings / (Carried Forward Losses)
Current Financial Period Profits / (Losses)
Total Liabilities and Equity

(*) A detailed statement is attached

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3- Off-Balance Sheet Accounts

Description	Libyan Dinar	Foreign Currency	Total
Acceptances
Documentary Credits
Letters of Guarantee
Restricted Investment Accounts
Total Off-Balance Sheet Accounts

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Central Bank of Libya

Banking and Currency Supervision Department

Form No. (2): Unified Income Statement for Islamic Branches / Windows

Bank Name: Date: ---- / -- / --

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(Amounts valued in thousands of Libyan Dinars)

Description	Value
Revenues / (Losses) Related to Alternative Banking Products
Net Income (Loss) from Deferred Sales
- Murabaha Operations
- Other Operations (*)
Net Income (Loss) from Financing and Investments
- Securities
- Mudaraba
- Musharaka
- Other Investments (*)
Less: Return to Investment Account Holders before Zakat
Branch's Share of Income (Loss) (as Mudarib)
Income (Loss) from Own Investments
Share from Income of Restricted Investments as Mudarib
Share from Management of Restricted Investments as Agent
Banking Service Revenues
Net Revenues / (Other Losses) (*)
Total Revenues / (Losses)
Expenses
Administrative and General Expenses
Depreciation
Provisions
Other Expenses (*)
Total Expenses
Profit / (Loss) before Zakat and Tax
Zakat Payable
Tax
Net Profit / (Loss)

(*) A detailed statement is attached

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Central Bank of Libya

Banking and Currency Supervision Department

Form No. (3): Individual Financial Information for Islamic Branches / Windows

Bank Name: Date: ---- / -- / --

Branch / Window Name	Amounts Valued in Thousands of Libyan Dinars	Total
	(1)	(2)
1 Window / Branch
2 Window / Branch
3 Window / Branch
... Window / Branch
... Window / Branch
... Window / Branch

Notes:

• (1) Murabaha
• (2) Musharaka
• (3) Mudaraba
• (4) Other alternative banking products
• (5) Other assets
• (6) Total
• (7) Liabilities
• (8) Equity
• (9) Revenues
• (10) Expenses
• (11) Net Profit (Loss)
• (12) Total

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Data and Statistics Guide

(Accounts of Islamic Branch or Window)

Definitions

Murabaha: It is the sale of an asset (commodity), owned by the seller (the bank), to the buyer (the client) at historical cost plus a known profit.

Musharaka: It is the provision of capital by the bank (Islamic branch) and the client in equal or varying proportions to create a new project or participate in an existing project, so that each becomes a shareholder in the capital with a fixed or decreasing share and entitled to their share of profits.

Mudaraba: It is operations based on profit sharing between the capital provider (Rab al-Maal) and the client (Mudarib). This refers to Mudaraba operations conducted by the Islamic branch as the Mudarib, whether the capital is from the branch's own funds or from funds mixed with its investment accounts.

Salam: It is forward purchase operations in debt for a present price with special conditions, or forward sale for immediate delivery.

Ijarah: It is operations of acquiring utility in exchange for consideration. Ijarah operations include two types: Operating Ijarah, referring to Ijarah contracts that do not end with the lessee acquiring the leased assets, and Ijarah ending with ownership (Finance Lease), referring to Ijarah that ends with the lessee acquiring the leased assets.

Istisna: It is a sales contract between the Istisna'ee (buyer) and the Mustasni' (seller), whereby the latter, upon the request of the former, manufactures a commodity with specific specifications (the manufactured item) or obtains it by a delivery date, with the manufacturing material and labor cost borne by the manufacturer, in exchange for the agreed price and payment method.

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Form No. (1)

Unified Balance Sheet for Islamic Branches / Windows

First / Asset Side:

(1) Cash This account records