BCEAO Instruction No. 005-05-2018 on Technical Characteristics of Islamic Finance Operations by Decentralized Financial Systems

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 the regulation of decentralized financial systems (SFD), as amended by Decision No. 011 of September 29, 2017/CM/UMOA of September 29, 2017, particularly Articles 4, 6, 36, and 147; Having regard to the Uniform Act on leasing; Having regard to Instruction No. 003-03-2018 on specific provisions applicable to SFDs exercising Islamic finance activities,

D E C I D E S

Article 1: Purpose
This Instruction aims to define the main operations that SFDs exercising Islamic finance activities are authorized to perform in the West African Monetary Union, hereinafter UMOA.
It describes the technical characteristics of these operations as well as the contracts associated with them.

Article 2: Definition of Islamic finance operations
Any microfinance operation defined in the law on the regulation of SFDs may be exercised by the entities referred to in Article 1, subject to compliance with the principles and rules of Islamic finance.

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The Governor
INSTRUCTION No. 005-05-2018 RELATIVE TO THE TECHNICAL CHARACTERISTICS OF ISLAMIC FINANCE OPERATIONS EXERCISED BY DECENTRALIZED FINANCIAL SYSTEMS OF THE WEST AFRICAN MONETARY UNION (UMOA)

A list of microfinance operations and contracts compliant with the principles and rules of Islamic finance in the Union is presented in the Annex to this Instruction, which forms an integral part of it. Any other product or service not listed in this Annex may be considered an Islamic finance operation, provided it receives, beforehand, a certificate issued by the Internal Compliance Council.

Article 3: Compliance of operations with Islamic finance principles
Each operation referred to in Article 2 requires a certificate issued by the Internal Compliance Council.
The transmission of commercial and contractual documentation to the supervisory authority, as part of an approval or prior authorization procedure, cannot be used as a commercial argument and/or for compliance with the principles and rules of Islamic finance.

Article 4: Guarantee of Islamic finance operations
Financing operations compliant with the principles and rules of Islamic finance may be secured by guarantees provided for by current regulations, for the benefit of the SFD.
The eligibility of these guarantees is subject to prior validation by the Internal Compliance Council.

Article 5: Entry into force
This Instruction, including its annex, enters into force as of its date of signature and is published wherever necessary.
Done in Dakar, on May 2, 2018
Tiémoko Meyliet KONE

ANNEX TO INSTRUCTION No. 005-05-2018 RELATIVE TO THE TECHNICAL CHARACTERISTICS OF ISLAMIC FINANCE OPERATIONS EXERCISED BY DECENTRALIZED FINANCIAL SYSTEMS OF THE WEST AFRICAN MONETARY UNION (UMOA)

DEFINITION AND CHARACTERISTICS OF THE MAIN ISLAMIC FINANCE OPERATIONS EXERCISED BY DECENTRALIZED FINANCIAL SYSTEMS OF THE UMOA

PART 1: NON-PARTICIPATORY FINANCING OPERATIONS

Article 1: Qardh
A loan operation without consideration granted by an SFD is called Qardh.
It is not subject to any fees charged to clients, excluding the reimbursement of outlays or actual costs related to its granting.

Article 2: Mourabaha Financing
The contract for the sale of movable or immovable property, concluded between an SFD owner and a client, based on a known acquisition cost and margin known in advance by both parties, is called Mourabaha Financing. The SFD may mandate the client to acquire, from the seller, the property subject to financing. In this case, the client acts in the name and for the account of the SFD. The latter takes the necessary measures to control the risks associated with such a mandate. The contract called Mourabaha Financing cannot have as its object a property under manufacture or construction. The contract entails an immediate transfer of ownership of the sold property, regardless of the payment terms agreed upon between the parties. No provision contrary to this principle of immediate transfer is admitted. The sale price is paid by the client either in cash or according to other payment modalities agreed upon by the parties. If the contract concerns gold, silver, or foreign currencies, payment must be made in cash. In the event of early payment of the sale price, the client cannot demand any reduction from the SFD. After the conclusion of the contract, the repayment schedule may be extended by the SFD without this giving rise to any consideration, particularly an upward revision of the sale price. The operation is called Mourabaha Financing with purchase order when the property is acquired, at the client's request, by the SFD. The latter thus becomes the owner of the property prior to the sale to the client. Before proceeding to the purchase of the property, the SFD may ask the client to sign a unilateral promise of purchase with the possibility of paying a Good Faith Deposit as defined in Article 9 of this Annex. The Mourabaha Financing contract may provide for the client's commitment to pay, in the event of default or late payment, a determined sum as referred to in Article 10 of this Annex.

It notably contains the following mandatory mentions:

• the description of the property subject to the contract;
• the price of the property subject to the sale, explicitly showing the acquisition cost and the margin realized by the SFD during the sale to the client;
• the setup commissions for the operation, if applicable;
• the payment modalities for the sale price agreed upon by the parties.

Article 3: Moussawama Financing
Any contract for the sale of movable or immovable property, concluded between an SFD, owner of said property, and a client based on a price agreed upon by the parties without obligation for the seller to declare the amount of its profit margin, constitutes a Moussawama Financing. All rules governing the contract called Mourabaha Financing, defined in Article 2, apply to Moussawama Financing, except for the obligation imposed on the SFD to reveal the acquisition cost of the property and the profit margin realized during the sale.

Article 4: Ijara Financing
Any lease contract for movable or immovable property established between an SFD and a client is called Ijara.
The Ijara contract takes the form of Ijara Financing when, on the one hand, the acquired property is intended for professional use, and on the other hand, the possibility is offered to the client to exercise, at term or before the end of the contract, an option to purchase all or part of the leased property, based on an agreed price. Regardless of its form, the Ijara contract must necessarily contain the following mentions:

• the duration of the lease;
• the amount of the first rent;
• the repayment schedule for rents;
• the nature of the property leased and its characteristics.
  The Ijara Financing contract also provides for clauses relating to:
• the purchase option offered to the client at the end of the contract or before its expiration;
• the exercise price of the option to purchase the leased property at term or before term.
  The Ijara contract may contain clauses assigning the client the obligation to maintain and service the leased property as well as provisions giving them mandate to perform, for the account of the SFD, certain major repair works. However, no clause could exempt the SFD from its responsibility as owner of the leased property, nor place the major maintenance works on the client.

The SFD may, at the client's request, acquire the leased property. In this case, it may demand from the latter a unilateral promise of lease as well as the constitution of a Good Faith Deposit as defined in Article 9 of this Annex. This sum will be returned at the end of the lease duration, after verification of the client's compliance with its contractual obligations. The Ijara contract may provide for the client's commitment to pay the SFD, in the event of default or late payment of rent, a determined sum under the conditions provided in Article 10 of this Annex. The SFD may require the client to provide real or personal guarantees, provided they are compliant with the principles and rules of Islamic finance. These guarantees aim to cover unpaid amounts recorded or deterioration of the property observed due to the client's negligence or fault at the time of returning the leased property. The unilateral promise of lease, the contract for the acquisition of the property by the SFD, the Ijara or Ijara Financing contract, and the commitment to transfer or acquire the property must be separate and independent contracts, regarding the effects they produce. The total destruction or loss of the leased property terminates the Ijara contract. In the event of partial destruction of the leased property not calling into question its use, the amount of rent paid by the client may be reduced according to terms to be agreed upon by the parties.

Article 5: Istisna
Any contract concluded between an SFD and a manufacturer or constructor, by which the latter commits to deliver a manufactured property with agreed characteristics, at a fixed price and according to payment modalities agreed upon by the parties, notably in cash, deferred, or at term, is called Istisna. Payment is made, either in cash, in kind, or by assignment of the usufruct right of said property for a determined period. The SFD may carry out a second operation, called Parallel Istisna, with a client, the buyer of the property. In this case, the SFD assumes the responsibilities of manufacturer or constructor. The Istisna and Parallel Istisna contracts are two independent contracts, regarding the effects they produce. The Istisna contract notably contains:

• the characteristics of the movable, immovable, fungible or non-fungible property subject to manufacture or transformation;
• the delivery date;
• the place of delivery;
• the payment modalities.
  The Istisna contract may provide for the client's commitment to pay a determined sum, in the event of late delivery of the property, under the conditions referred to in Article 10 of this Annex.

No principal, whether the SFD or the client, can conclude an Istisna contract for its own account with a manufacturer in which it holds, directly or indirectly, at least one-third of the share capital.

Article 6: Salam
Salam designates any contract by which one of the parties, the seller, commits to deliver to the other party, the buyer, within an agreed timeframe, a determined property whose price is paid in full in cash. Payment may exceptionally be made within a period of three days after the conclusion of the contract and, in all cases, before the delivery of the property. The date and modalities of delivery are indicated in the contract. The buyer's claims against the seller cannot be used to offset all or part of the payment of the sale price. The property subject to the Salam operation must be a merchandise available and negotiable in commerce at the date of delivery, allowing the seller to supply themselves to honor their commitment within the agreed timeframe, notably in the case where they could not produce themselves the asset they have sold. Goods or other properties subject to a Salam operation must, under penalty of nullity, be determined by their nature, through their quantity, quality, weight, or measure. When the sold properties cannot be counted or weighed, the quality must be exactly determined. When the property subject to the contract concerns an agricultural commodity, the buyer cannot demand that it come from a determined farm. The Salam operation cannot concern gold, silver, or foreign currencies when payment is made in the form of gold, silver, or foreign currencies. If, for reasons of force majeure, the seller finds themselves unable to honor their commitment to deliver the property, the buyer is entitled to request the resolution of the contract. The seller may conclude a second contract called Parallel Salam, as buyer, with a third party, concerning a property having the same characteristics as the property subject to the first Salam operation. The two contracts are independent regarding the effects they produce.

Article 7: Arboun
Arboun designates any sum paid by a client to a potential seller, notably within the framework of a Mourabaha, Moussawama, or Ijara contract, to materialize their commitment to acquire a specific property. At the conclusion of the sale, the client settles the difference between the agreed price and the amount of the advanced arboun. In the event of the client's renunciation, the arboun belongs of right to the seller who may decide to refund or not the advance received.

Article 8: Waad
Waad designates any unilateral promise, revocable or irrevocable, notably to buy, sell, or lease a property.
In the event of non-respect of an irrevocable Waad, the beneficiary has the possibility to turn against the promisor, in case of prejudice.
The prejudice may be the difference between, on the one hand, the cost price of the property acquired by the beneficiary of the Waad and, on the other hand, its resale price to the third party, taking into account other direct expenses if any. The loss of opportunity for the beneficiary of the Waad cannot be considered as a prejudice.

Article 9: Good Faith Deposit
A Good Faith Deposit designates any sum of money paid by a client, the promisor, to a seller, the beneficiary, within the framework of an irrevocable Waad, notably in support of Mourabaha Financing contracts with purchase order or Ijara Financing. The Good Faith Deposit aims, on the one hand, to ensure the financial capacity of the client and, on the other hand, to protect the seller against potential actual prejudices that may result from the non-respect of the commitment by the client. The Good Faith Deposit is returned to the client, provided that the latter respects their promise. In the contrary case, the deposit cannot be returned to them unless it has been established that the beneficiary of the Waad has not suffered any actual prejudice resulting from their retraction. If applicable, the amount of the prejudice is deducted from the Good Faith Deposit and the remaining sum is returned to them upon the materialization of the sale to a third party. A compensation is possible between the Good Faith Deposit and the price or rent due by the client.

Article 10: Other precautions against non-respect of contractual obligations and commitments
Financing contracts may be subject to the obligation, for the debtor party, to pay to the creditor party a predefined lump sum, in the event of late payment or default or when they do not respect their contractual commitment. Contracts may also provide for the payment, to the SFD, of a sum covering the outlays and actual costs incurred by the latter due to the late payment or default of the client. The payment of the sums provided for intervenes after the settlement of the amount due to the creditor. The amounts received are remitted to a charitable work. In this regard, the opinion of the Internal Compliance Council may be solicited by the SFD.

PART 2: PARTICIPATORY FINANCING OPERATIONS

Article 11: Moudaraba Financing
Moudaraba Financing designates any contract by which an SFD apportions capital to a client, with a view to the realization of investment projects.
The Moudaraba Financing contract is called specific when it concerns a determined investment.
It is general when the client can freely choose the investments.
The SFD, provider of capital, does not intervene in the daily management of the investments or the project subject to Moudaraba Financing.
The profits realized at the end of the operation are shared between the two parties, after repayment of the capital, according to a distribution agreed upon in advance.
The losses resulting from the contract are borne solely by the SFD, when they are not attributable to the fault, negligence, or violation of the Moudaraba Financing conditions by the client.
The Moudaraba Financing contract must notably mention, clearly and precisely:

• the amount of capital contributed, whether in cash or in kind. Contributions in kind are subject to valuation by expertise in accordance with the provisions of common law;
• the date and modalities of handing over the Moudaraba capital;
• the duration of the Moudaraba and any possibilities of extension of the deadline;
• the rights and obligations of the parties, notably the modalities for communicating a periodic report attesting to the use of capital in accordance with the provisions agreed upon between the parties;
• the guarantees provided by the client against any negligence, fault, or violation on their part of the Moudaraba conditions opening the right to restitution of the capital to the party having contributed the capital;
• the mode of distribution of Moudaraba profits, in the form of a percentage of net profit, after restitution of capital and deduction of charges;
• the periodicity of profit distribution according to a schedule determined by the parties.
  The Moudaraba Financing contract may provide for the possibility of excess profits and define the modalities for their allocation, if applicable, when they exceed a determined threshold.

Article 12: Moucharaka
Moucharaka designates any contract by which one or more investors and an SFD pool capital with immediate or deferred disbursement, to realize a determined investment project.
The capital contributed by each party or their commitment must be determined. Contributions in kind are subject to valuation, in order to determine the contributor's share in the capital.
The parties designate one of them for the management of the project or investments.
A Moucharaka contract may have a determined or undetermined duration. A separate convention may provide for the modalities of progressive exit of one of the parties.
The profit resulting from the operation subject to the contract is distributed among the parties according to an agreed distribution key. The contract must provide for the modalities of distribution of these benefits. Advances may nevertheless be granted by mutual agreement between the parties, subject to regularization either at the end of the contract or at the closing of the fiscal year. Any remuneration, other than profit, paid to one of the contracting parties in the Moucharaka must be subject to a distinct act. Losses are borne by each party proportionally to their contribution. Losses resulting from the Moucharaka contract may be guaranteed by a third party having a legal personality and assets distinct from the parties, provided that this obligation is recorded in a separate act, without consideration and that the third party, namely the guarantor, is neither the parent company nor the subsidiary of the beneficiary entity. The contract can in no case:

• provide for a fixed or variable profit that would be guaranteed and indexed on the initial capital;
• contain provisions guaranteeing in advance the restitution of the contributed capital;
• provide for the early restitution of the contributed capital, except in the case of violation by the other party of any provision of the "Moucharaka" contract or in the case of negligence or fault of the other party.

PART 3: DEPOSIT COLLECTION AND INVESTMENT ACCOUNTS OPERATIONS

Article 13: Main characteristics of deposits and investment accounts
SFDs exercising Islamic finance activities may offer all deposit services relevant to conventional finance, notably current accounts and savings accounts, provided that they do not give rise to the perception or payment of interest. Remunerated deposits take the name of investment accounts. Investment accounts are term deposits, considered as capital contributions by the SFD receiving them, with the obligation for it to fructify them in the most adequate manner possible for the account of the client. The funds received from the public by SFDs and investment accounts are employed in operations compliant with the principles and rules of Islamic finance. Investment accounts may be backed by Moudaraba or Wakala contracts.

Article 14: Modalities for remunerating deposits and investment accounts
SFDs exercising Islamic finance activities may remunerate client deposits, in respect of the provisions of Articles 15, 16, and 17 of this Annex.
The remuneration of an investment account cannot be contractually guaranteed in advance. It may be positive or negative depending on the results of all or part of the activities, or investments realized by SFDs for the account of depositors. Negative remuneration occurs in the event of total or partial loss of funds deposited by a client. The depositor and the SFD share the profits and losses in proportion to their respective contributions to the operation concerned. SFDs offering investment accounts are required to verify that clients requesting said accounts possess sufficient knowledge and experience in investment matters, and that their financial situations as well as their investment objectives are adapted to a risk of capital loss.

Article 15: General Moudaraba Investment Account
A General Moudaraba Investment Account designates any term deposit made by a client with an SFD, with a view to realizing investments in respect of the principles and rules of Islamic finance. Investments may concern all or part of the SFD's activity. The General Moudaraba Investment Account convention must contain the following mentions:

• the possibility of negative remuneration, which exposes the client to a partial or total loss of deposited funds;
• any fixed opening commissions for the Moudaraba investment account;
• the modalities for paying the client's share of profits or deductions;
• the tax base and profit distribution key in the event that the SFD associates its own funds with those of the clients;
• the client's share determined, either periodically, or on an annual basis or according to any other modality.

Article 16: Specific Moudaraba Investment Account
A Specific Moudaraba Investment Account designates any term deposit made by a client with an SFD, with the obligation for the latter to invest them in specific operations defined by agreement...

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