BCEAO Instruction 002-03-2018 on Particular Provisions for Credit Institutions Exercising Islamic Finance Activities

The Governor of the Central Bank of West African States (BCEAO),

Having regard to the Treaty of the West African Monetary Union (UMOA) of January 20, 2007, particularly Article 34;

Having regard to the Statutes of the Central Bank of West African States (BCEAO) annexed to the UMOA Treaty of January 20, 2007, particularly Articles 30 and 59;

Having regard to the Uniform Act on Banking Regulation, particularly Articles 2, 3, 4, 32, 43, 47, 49 and 56,

DECIDES

TITLE I: GENERAL PROVISIONS

Article 1: Definitions

For the purposes of this Instruction, the following terms shall mean:

1. Investment Account: a remunerated deposit account used by the credit institution to carry out investments in accordance with the principles and rules of Islamic finance;

2. General Investment Account: a remunerated deposit account used by the credit institution to carry out investments, at its discretion, on behalf of a client, in accordance with the principles and rules of Islamic finance;

3. Specific Investment Account: a remunerated deposit account used by the credit institution to carry out investments on behalf of a client, in accordance with the directions given by the latter and in compliance with the principles and rules of Islamic finance. These directions may concern, in particular, the type of asset or the geographical zone;

4. Profit Equalization Reserve, abbreviated as PER: a resource constituted from profits generated by investment projects. This reserve aims to improve the rate of return of investment accounts, which are of a volatile nature;

5. Investment Risk Reserve, abbreviated as IRR: a resource constituted from profits realized during previous operations. This reserve aims to fund standard investment accounts to cover loss risks arising from projects financed by investment accounts;

6. Displaced Commercial Risk or DCR: the risk of mass withdrawals attributable to a low remuneration of investment accounts compared to that offered on the conventional market or to the expected rate of return communicated to depositors;

7. Central Compliance Council or Central Sharia Board: the Sharia compliance body attached to the Regulatory Authority, responsible for ensuring the adequacy of Islamic financial practices to the principles and rules of Islamic finance;

8. Internal Compliance Council or Internal Sharia Board: the body designated by the credit institution to assume responsibility for the Sharia compliance of its operations, vis-à-vis clients and Regulatory Authorities.

Article 2: Purpose

This instruction aims to define the conditions for exercising Islamic finance activities in the West African Monetary Union.

Article 3: Scope of Application

The provisions of this Instruction apply to all credit institutions that fully or partially comply, in their operations, with the principles and rules of Islamic finance and exercise their activities on the territory of a Member State of the UMOA.

Article 4: Typology of Credit Institutions Exercising Islamic Finance Activities

Credit institutions compliant with the principles and rules of Islamic finance are classified into two categories:

• Credit institutions exercising Islamic finance activities exclusively. These institutions may use the term "Islamic" in their corporate name, trade name, advertising, or in their activity;

• Credit institutions partially exercising Islamic finance operations through a dedicated branch. These institutions may not use the term "Islamic" in their corporate name and trade name but may use it in contractual and commercial documentation, for investment, financing, and deposit operations, as well as for services offered by the Islamic Branch. For the marketing of Islamic finance operations and services, these institutions must implement a visual identity, dedicated agencies, or counters.

TITLE II: CONDITIONS FOR EXERCISING ISLAMIC FINANCE ACTIVITIES BY CREDIT INSTITUTIONS

Article 5: Conditions for Exercising Islamic Finance Activities

The conditions for exercising Islamic finance activities are determined taking into account the typology set out in Article 4 of this Instruction.

Credit institutions planning to exercise Islamic finance operations exclusively must submit an application for approval under the conditions set out in Articles 6, 7, and 18 of this Instruction.

Credit institutions planning to open an Islamic Branch must:

• If they are seeking approval as a credit institution for the first time, specify their intention to open an Islamic Branch under the conditions set out in Articles 6 and 18 of this Instruction, attaching the documents and information referred to in Annex 2 of this Instruction;

• If they already benefit from approval for conventional finance, submit an application for authorization to extend their activity under the conditions set out in Articles 7 and 18 of this Instruction, prior to exercising the envisaged Islamic finance activities.

Article 6: List of Documents and Information Constituting the Application File for Credit Institutions Planning to Exercise Islamic Finance Operations Exclusively

The application file for approval of credit institutions planning to exercise exclusively Islamic finance operations must comply with the Instruction of the Central Bank establishing the list of documents and information constituting the approval file as a credit institution.

This list is supplemented by the documents and information referred to in Annex 1 of this Instruction.

Article 7: Prior Authorization of Credit Institutions for the Opening of an Islamic Branch

Credit institutions may not set up an Islamic Branch without prior authorization granted as in the case of approval.

The application for prior authorization includes the documents and information listed in Annex 2 of this Instruction.

TITLE III: MODALITIES FOR CONTROLLING COMPLIANCE WITH THE PRINCIPLES AND RULES OF ISLAMIC FINANCE

Article 8: Designation of an Internal Compliance Council

Each credit institution exercising Islamic finance activities must be equipped with an Internal Compliance Council or Internal Sharia Board. This body must enjoy independence.

However, the Compliance Council may be that of the parent house or the financial holding company of the credit institution, subject to compliance with the provisions of Articles 9 and 10 of this Instruction.

Article 9: Missions of the Internal Compliance Council

The Compliance Council is responsible for:

• Advising the credit institution on compliance with the principles and rules of Islamic finance; • Analyzing the compliance of the credit institution's operations with the principles and rules of Islamic finance; • Analyzing and approving annually the audit reports on compliance with the principles and rules of Islamic finance; • Issuing an independent opinion by delivering a Certificate of Compliance for envisaged operations and services.

Article 10: Composition of the Internal Compliance Council

The Compliance Council for the principles and rules of Islamic finance is established by the General Meeting upon proposal of the Board of Directors or any body acting in its place. It is composed of at least three members.

The members composing the Compliance Council must:

• Enjoy good moral standing and not have been convicted, in particular, for offenses relating to property or those affecting probity; • Possess the necessary skills to perform their mission, having in particular experience or training in Muslim business law or Muslim financial law, as well as a good knowledge of the banking regulation applicable in the UMOA; • Hold the nationality of a Member State of the UMOA or benefit from assimilation to nationals of a Member State, under a settlement convention.

However, the Central Bank may grant, upon duly motivated request from credit institutions, individual derogations from the provisions of the preceding paragraph. An Instruction of the Central Bank determines the conditions for granting derogations.

The revocation of members of the Compliance Council is pronounced in the same forms as their nomination by the General Meeting, upon proposal of the Board of Directors or any other body acting in its place.

The decision of revocation, duly motivated, is communicated to the BCEAO and the UMOA Banking Commission within thirty working days.

The designation of members of the Compliance Council as well as all changes affecting the composition of said Council must be notified to the BCEAO and the Banking Commission.

Article 11: Information of Clients

Credit institutions exercising Islamic finance activities inform their clients, by all means, of the identity of the members of the Compliance Council as well as any changes occurring in its composition.

They make available to clients the reports, opinions, and certificates of compliance issued by the Compliance Council for the principles and rules of Islamic finance.

Article 12: Internal Verification Mechanism

Credit institutions exercising Islamic finance activities integrate into their internal control system an adequate mechanism to verify, evaluate, and monitor the compliance of operations executed with respect to the opinions and certificates issued by the Compliance Council for the principles and rules of Islamic finance.

Article 13: Obligations of the Deliberative and Executive Bodies of the Credit Institution

The deliberative and executive bodies ensure that the credit institution respects the principles and rules of Islamic finance.

The executive body ensures that the Compliance Council has the necessary information and means and enjoys the required independence to carry out the missions entrusted to it. It must also ensure that the Compliance Council is associated in particular with:

• All projects initiated by the institution, likely to generate a risk of non-compliance with the principles and rules of Islamic finance, in particular the launch of new products as well as communication campaigns; • The development of the institution's policies and procedures relating to the principles and rules of Islamic finance.

Article 14: Compliance Audit

Credit institutions exercising Islamic finance activities integrate into their internal audit device the respect for the principles and rules of Islamic finance. They prepare an annual audit report on compliance with the principles and rules of Islamic finance addressed to the Compliance Council, the BCEAO, and the UMOA Banking Commission, where applicable.

Article 15: Risk of Non-Compliance

Credit institutions exercising Islamic finance activities produce annually a map of risks of non-compliance with the principles and rules of Islamic finance.

Article 16: Displaced Commercial Risk

Without prejudice to the provisions relating to risks applicable to any credit institution, credit institutions exercising Islamic finance activities adopt an investment strategy distinguishing the General Investment Account from the Specific Investment Account.

Credit institutions exercising Islamic finance activities develop a procedure for managing Displaced Commercial Risk or DCR resulting from the management of General Investment Accounts and in particular the random remuneration offered.

This procedure includes the constitution of two types of reserves defined in Article 1, namely:

• The Profit Equalization Reserve, abbreviated as PER; • The Investment Risk Reserve, abbreviated as IRR.

Article 17: Principle of Creating a Central Compliance Council or Central Sharia Board

The Central Compliance Council or Central Sharia Board is responsible for:

• Ensuring the compliance of Islamic financial practices within the UMOA with the principles of Sharia; • Standardizing practices and products; • Ruling, where applicable, as a final resort, on any divergent interpretation of a product by Internal Compliance Councils; • Evaluating the compliance of operations and activities after analysis of annual reports communicated; • Setting directives, for the Union, in matters of Sharia governance.

An Instruction of the BCEAO specifies the organization and functioning of the Central Compliance Council or Central Sharia Board.

TITLE IV: TRANSITIONAL AND FINAL PROVISIONS

Article 18: Opinion on Compliance with the Principles and Rules of Islamic Finance

As a transitional measure and before the establishment of the Central Compliance Council or Central Sharia Board, the BCEAO submits the requests referred to in Article 5 to the opinion of any other entity or expert specialized in compliance with the principles and rules of Islamic finance. The opinion delivered, at the end of the consultation, is binding on all concerned credit institutions.

Article 19: Transitional Provisions

Credit institutions approved before the entry into force of this Instruction and offering Islamic finance products and services to the public must communicate the required information according to their typology, in accordance with the procedure defined in Article 5 above, before June 30, 2018.

Article 20: Entry into Force

This Instruction, including its annexes which form an integral part thereof, enters into force as of its date of signature and is published wherever necessary.

Done in Dakar, on March 21, 2018

Tiémoko Meyliet KONE

ANNEXE 1 LIST OF ADDITIONAL DOCUMENTS AND INFORMATION TO BE ATTACHED TO AN APPLICATION FOR APPROVAL AS A CREDIT INSTITUTION BY INSTITUTIONS PLANNING TO EXERCISE ISLAMIC FINANCE ACTIVITIES EXCLUSIVELY

The following documents must be attached to the approval file.

I – DOCUMENTS AND INFORMATION REQUIRED ON THE LEGAL ENTITY

1.1. Documents and information of a legal or administrative nature • Decision of the General Meeting of shareholders attesting that the operations envisaged by the institution are compliant with the principles and rules of Islamic finance; • Decision of the General Meeting of shareholders (i) authorizing the institution to establish a Compliance Council for the principles and rules of Islamic finance and (ii) committing it not to use deposits collected in the context of activities non-compliant with the principles and rules of Islamic finance.

1.2. Documents and information of an economic and financial nature • Modalities for the management of Investment Accounts.

1.3. Documents and information relating to compliance with the principles and rules of Islamic finance • List of operations and/or services that will be offered; • Certificate(s) of respect issued by the Compliance Council for the principles and rules of Islamic finance; • Contractual and commercial documentation of operations and services compliant with the principles and rules of Islamic finance; • Detailed description of any contract, operation, or service not provided for by the Central Bank's Instruction on the main characteristics of Islamic finance operations, which credit institutions intend to offer to their clients; • Procedure manuals for financing and deposit operations including, in particular, the envisaged risk management provisions.

1.4. Other documents and information • Charter or operating directives of the Compliance Council for the principles and rules of Islamic finance, setting out its prerogatives, the members who compose it, as well as the modalities of their nomination and revocation; • Specific provisions taken by the institution to take into account, in its internal control device, compliance with the principles and rules of Islamic finance; • Prospective training program for staff and governing bodies on the principles and rules of Islamic finance; • Audit and compliance control plan for the principles and rules of Islamic finance; • Procedure regarding information to be communicated annually: income statement, compliance audit report, resources and uses of capital, identification of revenues non-compliant with the principles and rules of Islamic finance, investments made in the context of General Investment Accounts.

II – DOCUMENTS AND INFORMATION ON THE COMPLIANCE COUNCIL • Dated and signed curricula vitae, outlining in particular the academic training of the identified members of the Compliance Council, and their experience in the banking, financial, or any other field deemed compatible with the envisaged missions; • Draft convention between the institution and the Compliance Council for the principles and rules of Islamic finance; • Organizational chart showing the hierarchical attachment of the Compliance Council for the principles and rules of Islamic finance.

Note: For Islamic finance credit institutions in creation, the Compliance Council must be set up as soon as the legal entity is created.

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ANNEXE 2 LIST OF DOCUMENTS AND INFORMATION TO BE PROVIDED IN THE FRAMEWORK OF A REQUEST FOR PRIOR AUTHORIZATION FOR THE CREATION OF AN ISLAMIC BRANCH BY A CREDIT INSTITUTION

1. Documents and information of a legal or administrative nature • Document attesting to the approval by the deliberative bodies of the establishment of the Islamic Branch; • Amended statutes; • Certificate certifying that (i) the institution commits to implementing total segregation of conventional capital and capital intended for the establishment of the Islamic Branch, (ii) the Islamic Branch will be equipped with a Compliance Council for the principles and rules of Islamic finance, and (iii) the institution commits not to use deposits collected in the Islamic Branch in activities non-compliant with the principles and rules of Islamic finance.

2. Documents and information of an economic and financial nature • Market study taking into account the forecasts for the national and regional implementation of dedicated agencies of the Islamic Branch and the target clientele; • Amount of financial resources allocated to the Islamic Branch and schedule of their allocation to the activity; • Activity program of the Islamic Branch for at least five years, comprising three scenarios (high, medium, and low) and presenting the nature and volume of operations envisaged; • Prospective situation, over five years, of the credit institution with regard to the prudential device in force in the UMOA.

3. Documents and information concerning human resources • Dated and signed curricula vitae, outlining in particular the academic training of the proposed administrators and/or executives; • Number of employees dedicated to the Islamic Branch, distinguishing employees who will be exclusively assigned to the Islamic Branch from those who will devote part of their time to this Branch; • Training plan in Islamic finance for dedicated and/or assigned personnel to the Islamic Branch.

4. Documents and information relating to the Compliance Council for the principles and rules of Islamic finance • Dated and signed curricula vitae, outlining in particular the academic training of the members of the Compliance Council for the principles and rules of Islamic finance and their experience in the banking, financial, or any other field deemed compatible with the envisaged functions; • Draft service provision convention with the Compliance Council for the principles and rules of Islamic finance; • Organizational chart of the institution showing the hierarchical attachment of the Compliance Council for the principles and rules of Islamic finance.

5. Documents and information concerning operations and services compliant with the principles and rules of Islamic finance • List of contracts and/or operations and/or services planned; • Compliance note of contracts and services with regard to the provisions of the Central Bank's Instruction on the technical characteristics of Islamic finance operations that credit institutions can offer to their clients; • Certificate(s) of respect issued by the Compliance Council; • Note detailing for each type of contract, including those not described in the aforementioned instruction, the relationship between the credit institution and the client, financial flows, as well as the target clientele; • Contractual and commercial documentation of the Islamic Branch; • Procedure manuals for financing, deposit, and payment operations compliant with the principles and rules of Islamic finance.

6. Documents and information concerning the periodic monitoring of the Islamic Branch • Procedure allowing the Islamic Branch to be identified accounting-wise from conventional activity; • Procedure regarding information to be communicated annually: income statement of the Islamic Branch, compliance audit report, resources and uses of capital, balance sheet, and specific report related to the Islamic Branch, identification of revenues non-compliant with the principles and rules of Islamic finance, and policy for the redistribution of said revenues.

7. Information concerning communication • Visual identity and trade name retained for the Islamic Branch.