Central Bank of Tunisia Circular to Banks and Financial Institutions No. 2019-08 dated October 14, 2019

Tunis, October 14, 2019 CIRCULAR TO BANKS AND FINANCIAL INSTITUTIONS NO. 9102-08 Subject: Definition of Islamic banking operations and establishment of the terms and conditions for their exercise. The Governor of the Central Bank of Tunisia, Having regard to Law No. 89-94 of July 26, 1994, concerning leasing; Having regard to Law No. 2016-35 of April 25, 2016, fixing the status of the Central Bank of Tunisia; Having regard to Law No. 2016-48 of July 11, 2016, concerning banks and financial institutions, particularly Articles 11 et seq.; Having regard to the opinion of the Compliance Control Committee No. 9102-10 dated October 9, 2019, as provided by Article 42 of Law No. 2016-35 above; Decides:

Article 1: This circular aims to define Islamic banking operations and establish the terms and conditions for their exercise by banks and financial institutions authorized to engage in them, in accordance with the provisions of Law No. 2016-48 of July 11, 2016, concerning banks and financial institutions.

Article 2: For the purposes of this circular, Islamic banking operations take the form of either commercial financing operations, participatory financing operations, or investment deposits.

Title I: Commercial Financing Operations Article 3: Commercial financing operations include Mourabaha, Ijara, Istisna’a, and Salam.

Article 4: "Mourabaha" financing is an operation whereby the bank or financial institution, following the request of the client/order giver, acquires movable or immovable goods or services from a third party and resells them to the order giver at a price equivalent to their acquisition cost plus a predetermined profit margin, in the form of a fixed amount or percentage of the initial acquisition value and payable according to an agreed schedule.

Article 5: Mourabaha financing is granted to:

1. Professionals in the form of:

• pre-financing for operations to acquire raw materials, finished goods, or semi-finished products necessary for production or commerce;
• financing the acquisition of assets, rights, or services, within the framework of investment projects carried out by natural or legal persons in all economic sectors.

2. Individuals to finance:

• the acquisition, construction, or extension of immovable property;
• the acquisition of movable goods;
• the acquisition of services.

Article 6: "Ijara" financing for professionals is an operation whereby the bank or financial institution acquires and takes ownership of an asset, then leases it to the client while granting a purchase option.

Article 7: "Salam" financing is an operation whereby the bank or financial institution purchases at a cash price in advance movable corporeal goods determined by the client. The bank or financial institution is required to sell the movable goods subject to "Salam" after their receipt, or to authorize the client to do so, within the fixed deadlines. The bank or financial institution may sell the goods subject to "Salam" before their receipt as part of a second "Salam" in favor of a third party.

Article 8: "Istisna’a" financing is an operation whereby the bank or financial institution finances the manufacturing of a movable or immovable good for its client, in the capacity of "Mostasni’i", according to specified requirements. To this end, the bank or financial institution:

• commissions a third party known as "Sani’i" to manufacture the requested asset, according to a second "Istisna’a" operation, in accordance with the specifications defined by the client.
• delivers the asset to the client in exchange for a determined price payable according to an agreed schedule. The bank or financial institution may commit as "Sani’i" or "Mostasni’i". The total commitments of the bank or financial institution regarding the second "Istisna’a" may in no case exceed that fixed during the first "Istisna’a".

Title II: Participatory Financing Operations Article 9: Participatory financing operations notably include "Moucharaka" financing and "Moudharaba" financing.

Article 10: "Moucharaka" financing is an operation whereby the bank or financial institution co-finances, with its client, according to agreed proportions and duration, the cost of implementing a project, an activity, or occasional commercial operations.

Article 11: "Mudharaba" financing is an operation whereby the bank or financial institution provides all of the capital to the client in order to finance a project or activity. The client's contribution is limited to expertise and management.

Title III: Investment Deposits Article 12: Amounts lodged by their holders, by any means of payment whatsoever, in an investment account opened with a bank, are considered investment deposits, for the purpose of investing them, under a "Moudharaba" or "Wakala investment" contract, in assets for a specified period, with or without restrictions. "Wakala investment" is an operation whereby the client mandates the bank to invest, in its name and on its behalf, its funds in assets, during a specified period, with or without restrictions. "Mudharaba" is carried out according to the following two modalities:

• "Restrictive Mudharaba", whereby the client mandates the bank to invest its funds in well-defined projects and according to agreed deadlines and conditions. In this case, the investment risk is borne by the client.
• "Non-restrictive Mudharaba", which grants the bank freedom to invest the client's funds without any restrictions.

Article 13: The return on investment deposits is linked to the results of the investment. Investment deposits bear direct costs related to investment operations as well as their share in common expenses. These deposits do not bear costs related to the bank's own activities. The returns and investment risks are shared between the bank and the holders of investment accounts according to the specificity of each investment mode.

Article 14: The bank is required to communicate, before each investment operation it performs, its status as "Mudharib" or "Wakil", its investment policy, and the risk rate associated with it.

Article 15: Every six months, the bank is required to inform its clients holding investment accounts of the nature of the investment operations performed, their direct and indirect shares, as well as the profit and loss distribution modalities.

Title IV: General Provisions Article 16: The financing operations provided for by this circular may be accompanied by guarantees in favor of banks or financial institutions, in the form of mortgages, sureties, or other guarantees provided by current legislation, to the extent that recourse to these guarantees does not contradict international standards for Islamic banking operations.

Article 17: The bank or financial institution may, before concluding any commercial financing contract, require its client to pay an amount called "seriousness pledge" equal to a determined percentage of the acquisition value. The "seriousness pledge" is intended to guarantee contract execution and should be managed according to the conditions agreed between the bank or financial institution and the client.

Article 18: Banks and financial institutions must inform the Central Bank of Tunisia of any financial product or service they intend to commercialize within the framework of Islamic banking operations, in order to control their conformity with international standards practiced in this field. The Central Bank of Tunisia may, within a period of ten working days from the communication of all information it requests, oppose, by a reasoned decision, the commercialization of the financial product or service.

Article 19: Banks and financial institutions are required, regarding contracts and Islamic banking operations, to comply with international standards adopted in the field of Islamic banking operations, particularly those of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), to the extent that these standards do not contradict current legal and regulatory provisions. The Sharia-compliant aspects of Islamic banking operations exercised by banks and financial institutions are subject to the approval of their Sharia compliance control committee, in accordance with the provisions of Article 54 of Law No. 2016-48 mentioned above. Banks and financial institutions are subject, in the framework of exercising Islamic banking operations, to current regulations regarding the granting of financing, their control, and the monitoring of associated risks.

Article 20: The Central Bank of Tunisia monitors the conformity of Islamic banking operations with international standards practiced in this field. To this end, banks and financial institutions engaging in Islamic banking operations must submit to the Central Bank of Tunisia an annual report on the control operations carried out by the Sharia compliance control committee, within a maximum period of one month before the holding of the general meeting of shareholders. The Central Bank of Tunisia may request clarifications concerning the committee's opinion and the results of its work as stated in the aforementioned report.

THE GOVERNOR Marouane EL ABBASSI