BCEAO Instruction No. 003-03-2018 on Particular Provisions for Decentralized Financial Systems Engaging in Islamic Finance

Governor of the Central Bank of West African States (BCEAO), Having regard to the Treaty of the West African Monetary Union (UMOA) dated 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 dated January 20, 2007, particularly Articles 30 and 59; Having regard to the Uniform Act governing decentralized financial systems (SFD), as amended by Decision No. 011 dated September 29, 2017/CM/UMOA of September 29, 2017, particularly Articles 4, 6, 36, and 147,

DECIDES

TITLE ONE: GENERAL PROVISIONS
Article 1: Definitions
For the purposes of this Instruction, the following terms shall mean:

1. Investment Account: a remunerated deposit account in accordance with the principles and rules of Islamic finance, used by an SFD to carry out investments;
2. General Investment Account: a remunerated deposit account used by the SFD 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 SFD to carry out investments on behalf of a client, in accordance with the directions provided by said client and respecting the principles and rules of Islamic finance. These directions may particularly concern the type of asset or geographic zone;
4. Profit Equalization Reserve (PER): a resource constituted from profits generated by investment projects. This reserve aims to improve the rate of return on volatile investment accounts;
5. Investment Risk Reserve (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 (DCR): the risk of mass withdrawals attributable to a low remuneration of investment accounts compared to that offered in the conventional market or the expected rate of return communicated to depositors;
7. Central Sharia Board: the Sharia compliance body attached to the regulatory authority, responsible for ensuring that Islamic financial practices align with the principles and rules of Islamic finance;
8. Internal Sharia Board: the body designated by the SFD to assume responsibility for the Sharia compliance of its operations, vis-à-vis clients and regulatory authorities.

Article 2: Object
This Instruction aims to define the conditions for exercising Islamic finance activities within the West African Monetary Union (UMOA).

Article 3: Scope of Application
The provisions of this Instruction apply to all SFDs that fully or partially comply, in their operations, with the principles and rules of Islamic finance and exercise their activities within the territory of a UMOA Member State.

Article 4: Typology of Decentralized Financial Systems Exercising Islamic Finance Activities
SFDs compliant with the principles and rules of Islamic finance are classified into two categories:

• SFDs exercising Islamic finance activities exclusively. These institutions may use the term "Islamic" in their corporate name, trade name, advertising, or activities;
• SFDs 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 marketing Islamic finance operations and services, these institutions must establish a visual identity, dedicated agencies, or counters.

TITLE TWO: CONDITIONS FOR EXERCISING ISLAMIC FINANCE ACTIVITIES BY DECENTRALIZED FINANCIAL SYSTEMS
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.
SFDs planning to exercise Islamic finance operations exclusively must submit an approval application under the conditions set out in Articles 6, 7, and 18 of this Instruction. SFDs planning to open an Islamic Branch must:

• if applying for approval as an SFD 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;
• if already holding approval for conventional finance, submit an application for authorization to extend their activities under the conditions set out in Articles 7 and 18, prior to exercising the envisaged Islamic finance activities.

Article 6: List of Documents and Information Constituting the Approval Application File for SFDs Planning to Exercise Exclusively Islamic Finance Operations
The approval application file for SFDs planning to exercise exclusively Islamic finance operations must comply with the Central Bank's Instruction establishing the list of documents and information constituting the SFD approval file. This list is supplemented by the documents and information referred to in Annex 1 of this Instruction.

Article 7: Prior Authorization for Decentralized Financial Systems to Open an Islamic Branch
SFDs may not establish an Islamic Branch without prior authorization granted as in the case of approval.
The prior authorization application includes the documents and information listed in Annex 2 of this Instruction.

TITLE THREE: PROCEDURES FOR CONTROLLING COMPLIANCE WITH THE PRINCIPLES AND RULES OF ISLAMIC FINANCE
Article 8: Appointment of an Internal Sharia Board
Each SFD exercising Islamic finance activities must be equipped with an Internal Sharia Board. This body must enjoy independence.
However, the SFD's Sharia Board may be that of the parent structure, subject to compliance with Articles 9 and 10.

Article 9: Functions of the Internal Sharia Board
The Sharia Board is responsible for:

• advising the SFD on compliance with the principles and rules of Islamic finance;
• analyzing the compliance of the SFD's operations with the principles and rules of Islamic finance;
• examining and approving annually the audit reports on compliance with the principles and rules of Islamic finance;
• issuing an independent opinion by providing a Certificate of Compliance for the envisaged operations and services.

Article 10: Composition of the Internal Sharia Board
The Sharia Board for compliance with the principles and rules of Islamic finance is established by the General Assembly upon proposal of the Board of Directors or equivalent body. It comprises at least three members. The members composing the Sharia Board must:

• enjoy good moral standing and not have been convicted, particularly for offenses related to property or integrity;
• possess the necessary skills to perform their duties, having experience or training in Muslim commercial law or Islamic financial law, as well as a good knowledge of the banking regulations applicable in UMOA;
• hold citizenship of a UMOA Member State or benefit from assimilation to nationals of a Member State under a treaty of establishment.
  However, the Central Bank may grant individual derogations to SFDs upon duly motivated request. A Central Bank Instruction determines the conditions for granting these derogations. The revocation of Sharia Board members is pronounced in the same form as their appointment by the General Assembly, upon proposal of the Board of Directors or equivalent body. The duly motivated revocation decision is communicated to the BCEAO, the Ministerial Monitoring Structure, and the UMOA Banking Commission (for SFDs subject to its supervision) within thirty working days. The appointment of Sharia Board members and all changes affecting the composition of said Board must be notified to the BCEAO, the Ministerial Monitoring Structure, and the Banking Commission (for SFDs subject to its supervision).

Article 11: Client Information
SFDs exercising Islamic finance activities inform their clients, by all means, of the identity of the Sharia Board members and any changes in its composition.
They make available to clients the reports, opinions, and certificates of compliance issued by the Sharia Board for compliance with the principles and rules of Islamic finance.

Article 12: Internal Verification Mechanism
SFDs exercising Islamic finance activities integrate an adequate mechanism into their internal control system to verify, assess, and monitor the compliance of operations executed against the opinions and certificates issued by the Sharia Board for compliance with the principles and rules of Islamic finance.

Article 13: Obligations of the Deliberative and Executive Bodies of the Decentralized Financial System
The deliberative and executive bodies ensure that the SFD complies with the principles and rules of Islamic finance.
The executive body ensures that the Sharia Board has the necessary information and means and enjoys the required independence to carry out its assigned duties. It must also ensure that the Sharia Board is associated with:

• all SFD projects likely to generate non-compliance risk with the principles and rules of Islamic finance, particularly the launch of new products and communication campaigns;
• the development of institutional policies and procedures relating to the principles and rules of Islamic finance.

Article 14: Compliance Audit
SFDs exercising Islamic finance activities integrate compliance with the principles and rules of Islamic finance into their internal audit mechanism. They prepare an annual compliance audit report on the principles and rules of Islamic finance addressed to the Sharia Board, the BCEAO, and the UMOA Banking Commission, where applicable.

Article 15: Non-Compliance Risk
SFDs exercising Islamic finance activities annually produce a risk map of non-compliance with the principles and rules of Islamic finance.

Article 16: Displaced Commercial Risk
Without prejudice to provisions on risks applicable to any SFD, SFDs exercising Islamic finance activities adopt an investment strategy taking into account investment risks by distinguishing the General Investment Account from the Specific Investment Account. SFDs exercising Islamic finance activities develop a management procedure for Displaced Commercial Risk (DCR) resulting from the management of General Investment Accounts, particularly regarding variable remuneration. This procedure includes the establishment of two types of reserves defined in Article 1, namely:

• Profit Equalization Reserve (PER);
• Investment Risk Reserve (IRR).

Article 17: Principle of Establishing a Central Sharia Board
The Central Sharia Board is responsible for:

• ensuring the compliance of Islamic financial practices within UMOA with Sharia principles;
• standardizing practices and products;
• ruling, where applicable, as the final authority on any divergent interpretation of a product by Internal Sharia Boards;
• evaluating the compliance of operations and activities after analyzing annual reports submitted;
• setting directives for the Union regarding Sharia governance.
  A BCEAO Instruction specifies the organization and functioning of the Central Sharia Board.

TITLE FOUR: 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 Sharia Board, the BCEAO submits applications 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 issued following consultation is binding on all concerned SFDs.

Article 19: Transitional Provisions
SFDs 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 signature date 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 APPROVAL APPLICATION AS A DECENTRALIZED FINANCIAL SYSTEM BY INSTITUTIONS PLANNING TO EXERCISE ISLAMIC FINANCE ACTIVITIES EXCLUSIVELY The following documents and information must be attached to the approval file.

I – REQUIRED LEGAL AND ADMINISTRATIVE DOCUMENTS AND INFORMATION
1.1. Legal or administrative documents and information

• decision of the General Assembly of shareholders confirming that the operations envisaged by the institution comply with the principles and rules of Islamic finance;
• decision of the General Assembly of shareholders or members (i) authorizing the institution to establish a Sharia Board for compliance with the principles and rules of Islamic finance, and (ii) committing it not to use deposits collected for activities non-compliant with the principles and rules of Islamic finance.

1.2. Economic and financial documents and information

• investment account management procedures.

1.3. Documents and information regarding compliance with the principles and rules of Islamic finance

• list of operations and/or services to be offered;
• certificate(s) of compliance issued by the Sharia Board for compliance with 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 SFDs plan to offer to their clients;
• procedures manuals for financing and deposit operations, including risk management provisions envisaged.

1.4. Other documents and information

• charter or operating guidelines of the Sharia Board for compliance with the principles and rules of Islamic finance, outlining its powers, members, and nomination/revocation procedures;
• specific provisions taken by the institution to account for compliance with the principles and rules of Islamic finance in its internal control system;
• staff and management training program on the principles and rules of Islamic finance;
• audit and compliance control plan for compliance with the principles and rules of Islamic finance;
• procedure regarding information to be communicated annually: income statement, compliance audit report, capital resources and uses, identification of non-compliant revenues, investments made under General Investment Accounts.

II – DOCUMENTS AND INFORMATION ON THE SHARIA BOARD

• dated and signed curriculum vitae, outlining the academic training of identified Sharia Board members, and their experience in banking, finance, or any other field compatible with the envisaged duties;
• draft agreement between the institution and the Sharia Board for compliance with the principles and rules of Islamic finance;
• organizational chart showing the hierarchical attachment of the Sharia Board for compliance with the principles and rules of Islamic finance.
  Note: For newly created Islamic SFDs, the Sharia Board must be established upon the legal creation of the company.

ANNEXE 2
LIST OF DOCUMENTS AND INFORMATION TO BE PROVIDED IN THE FRAMEWORK OF A PRIOR AUTHORIZATION APPLICATION FOR CREATING AN ISLAMIC BRANCH BY A DECENTRALIZED FINANCIAL SYSTEM

1. Legal or administrative documents and information

• document confirming approval by the deliberative and executive bodies for establishing the Islamic Branch;
• amended statutes;
• certificate confirming that (i) the SFD commits to implementing total separation between conventional capital and capital allocated to establishing the Islamic Branch, (ii) the Islamic Branch will be equipped with a Sharia Board for compliance with the principles and rules of Islamic finance, and (iii) the SFD commits not to use deposits collected in the Islamic Branch for activities non-compliant with the principles and rules of Islamic finance.

2. Economic and financial documents and information

• market study taking into account national and regional deployment plans for dedicated Islamic Branch agencies and target clientele;
• amount of financial resources allocated to the Islamic Branch and schedule for their allocation to activities;
• five-year activity program of the Islamic Branch, comprising three scenarios (high, medium, and low), presenting the nature and volume of operations envisaged;
• five-year projected situation of the SFD regarding the prudential framework in force in UMOA.

3. Human resources documents and information

• dated and signed curriculum vitae, outlining the academic training of nominated Administrators and executives;
• number of employees dedicated to the Islamic Branch, distinguishing those exclusively assigned to the Islamic Branch from those dedicating part of their time to it;
• training plan in Islamic finance for dedicated and/or assigned staff.

4. Documents and information regarding the Sharia Board for compliance with the principles and rules of Islamic finance

• dated and signed curriculum vitae, outlining the academic training of Sharia Board members for compliance with the principles and rules of Islamic finance and their experience in banking, finance, or any other compatible field;
• draft service agreement with the Sharia Board for compliance with the principles and rules of Islamic finance;
• organizational chart showing the hierarchical attachment of the Sharia Board for compliance with the principles and rules of Islamic finance.

5. Documents and information concerning products and services compliant with the principles and rules of Islamic finance

• list of planned contracts, products, and/or services;
• compliance note for contracts and services regarding the provisions of the Central Bank's Instruction on technical characteristics of Islamic finance operations that SFDs may offer to clients;
• certificate(s) of compliance issued by the Sharia Board;
• note detailing for each contract type, including those not described in the aforementioned instruction, the relationship between the SFD and the client, financial flows, and target clientele;
• contractual and commercial documentation of the Islamic Branch;
• procedures manuals for financing, deposit, and payment operations compliant with the principles and rules of Islamic finance.

6. Documents and information concerning periodic monitoring of the Islamic Branch

• procedure to accountably identify the Islamic Branch from conventional activities;
• procedure regarding information to be communicated annually: income statement of the Islamic Branch, compliance audit report on principles and rules of Islamic finance, capital resources and uses, balance sheet, specific report related to the Islamic Branch, identification of non-compliant revenues, and policy for redistributing said revenues.

7. Information concerning communication

• visual identity and trade name retained for the Islamic Branch.