Instruction No. 004-05-2018 on the Technical Characteristics of Islamic Finance Operations Carried Out by Credit Institutions in the West African Monetary Union (WAMU)

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Governor of the Central Bank of West African States (BCEAO), Having regard to the Treaty of the West African Monetary Union (WAMU) dated January 20, 2007, particularly Article 34; Having regard to the Statutes of the Central Bank of West African States (BCEAO) annexed to the WAMU Treaty dated January 20, 2007, particularly Articles 30 and 59; Having regard to the Uniform Act on Banking Regulation, particularly Articles 2, 3, 4, 5, 7, 31, 32, 47, 49 and 56; Having regard to the Uniform Act on Hire-Purchase (Crédit-Bail); Having regard to Instruction No. 002-03-2018 on specific provisions applicable to credit institutions exercising Islamic finance activities, D E C I D E S

Article 1: Purpose
This Instruction aims to define the main operations that credit institutions exercising Islamic finance activities are authorized to carry out 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 banking operation defined in the banking law may be exercised by the credit institutions referred to in Article 1, subject to compliance with the principles and rules of Islamic finance.
A list of banking 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 thereof. Any other product or service not listed in this Annex may be considered an Islamic finance operation, provided it receives prior certification 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 a prior approval or authorization procedure, cannot be used as a commercial and/or compliance argument 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 in current regulations, in favor of the credit institution.
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 signature date and shall be published wherever necessary.
Done at Dakar, on 02 May 2018
Tiémoko Meyliet KONE

ANNEX TO INSTRUCTION NO. 004-05-2018 ON THE TECHNICAL CHARACTERISTICS OF ISLAMIC FINANCE OPERATIONS EXERCISED BY CREDIT INSTITUTIONS OF THE WEST AFRICAN MONETARY UNION (UMOA)

DEFINITION AND CHARACTERISTICS OF THE MAIN ISLAMIC FINANCE OPERATIONS EXERCISED BY CREDIT INSTITUTIONS OF UMOA
PART 1: NON-PARTICIPATORY FINANCING OPERATIONS
Article 1: Qardh
A loan operation without consideration granted by a credit institution is termed Qardh.
It is not subject to any fees charged to clients, excluding reimbursement of outlays or actual costs related to its granting.

Article 2: Mourabaha Financing
The sale contract of a movable or immovable property, concluded between a credit institution as owner and a client, based on a known acquisition cost and margin in advance by both parties, is termed Mourabaha financing. The credit institution may mandate the client to acquire, from the seller, the property subject to financing. In this case, the client acts in the name and on behalf of the credit institution. The latter takes necessary measures to manage risks associated with such a mandate. The contract termed Mourabaha financing cannot have as its object property under fabrication or construction. The contract entails an immediate transfer of ownership of the sold property, regardless of the payment terms agreed between the parties. No contrary provision to this principle of immediate transfer is admitted. The sale price is paid by the client either in cash or according to other mutually agreed terms. If the contract concerns gold, silver, or foreign currencies, payment must be made in cash. In case of early payment of the sale price, the client cannot claim any reduction from the credit institution. After conclusion of the contract, the repayment schedule may be extended by the credit institution without giving rise to any consideration, notably an upward revision of the sale price. The operation is termed Mourabaha financing with purchase order when the property is acquired, at the client's request, by the credit institution. The latter thus becomes owner of the property prior to selling it to the client. Before purchasing the property, the credit institution may request 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 contract termed Mourabaha financing may stipulate the client's obligation to pay, in case of default or late payment, a determined amount 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 sale, explicitly showing the acquisition cost and the margin realized by the credit institution upon sale to the client;
• setup commissions for the operation, where applicable;
• the payment terms of the sale price agreed between the parties.

Article 3: Moussawama Financing
Any sale contract of a movable or immovable property, concluded between a credit institution, owner of said property, and a client based on an agreed price without the seller being obliged to declare its profit margin amount, constitutes a Moussawama financing. All rules governing the contract termed Mourabaha financing, defined in Article 2, apply to Moussawama financing, except for the obligation on the credit institution to disclose the acquisition cost of the property and the profit margin realized upon sale.

Article 4: Ijara Financing
Any lease contract of a movable or immovable property established between a credit institution and a client is termed Ijara.
The Ijara contract takes the form of an Ijara financing when, on the one hand, the acquired property is intended for professional use and, on the other hand, the client has the option to exercise, at term or before the contract's expiration, a purchase option on all or part of the leased property, based on an agreed price. Regardless of its form, the Ijara contract must obligatorily contain the following mentions:

• the lease duration;
• the amount of the first rent;
• the repayment schedule for rents;
• the nature of the leased property and its characteristics.
  The Ijara financing contract further provides clauses relating to:
• the purchase option offered to the client at the end of or before the expiration of the contract;
• the exercise price for purchasing the leased property at term or before term.
  The Ijara contract may contain clauses assigning the client the obligation to maintain and repair the leased property, as well as provisions granting them a mandate to perform certain major repair works on behalf of the credit institution. However, no clause may exempt the credit institution from its liability as owner of the leased property, nor charge the client with major maintenance works. The credit institution may, at the client's request, acquire the leased property. In this case, it may require a unilateral promise of lease as well as the constitution of a Good Faith Deposit as defined in Article 9 of this Annex. This amount will be returned at the end of the lease duration, after verification by the client of compliance with its contractual obligations. The Ijara contract may stipulate the client's obligation to pay the credit institution, in case of default or late rent payment, a determined amount under the conditions provided in Article 10 of this Annex. The credit institution may require real or personal guarantees from the client, provided they comply with the principles and rules of Islamic finance. These guarantees aim to cover unpaid amounts or deterioration of the property due to client negligence or fault at the time of returning the leased property. The unilateral promise of lease, the contract for acquisition of the property by the credit institution, the Ijara or Ijara financing contract, and the commitment to transfer or acquire the property must be separate and independent contracts regarding their effects. Total destruction or loss of the leased property terminates the Ijara contract. In case of partial destruction not affecting the use of the property, the rent amount paid by the client may be adjusted downwards according to terms agreed between the parties.

Article 5: Istisna
Any contract concluded between a credit institution 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 mutually agreed payment terms (notably in cash, deferred, or installment), is termed Istisna. Payment is made either in cash, in kind, or by transfer of the usufruct right of said property for a determined period. The credit institution may carry out a second operation, termed parallel Istisna, with a client who is the purchaser of the property. In this case, the credit institution assumes the responsibilities of manufacturer or constructor. The Istisna and parallel Istisna contracts are two independent contracts regarding their effects. The Istisna contract notably contains:

• the characteristics of the movable, immovable, fungible or non-fungible property subject to fabrication or transformation;
• the delivery date;
• the delivery location;
• the payment terms.
  The Istisna contract may stipulate the client's obligation to pay a determined amount in case of late delivery of the property, under conditions referred to in Article 10 of this Annex.
  No principal, whether the credit institution or the client, may conclude an Istisna contract on its own behalf with a manufacturer of which it holds, directly or indirectly, at least one-third of the share capital.

Article 6: Salam
Salam designates any contract by which one party, the seller, commits to deliver to the other party, the purchaser, within an agreed timeframe, a determined property whose price is paid in full in cash. Payment may exceptionally be made within three days after conclusion of the contract and, in all cases, before delivery of the property. The date and terms of delivery are indicated in the contract. The purchaser's claims against the seller cannot be used to offset all or part of the sale price payment. The property subject to the Salam operation must be a commodity available and negotiable in commerce at the delivery date, allowing the seller to procure supplies to honor its commitment within agreed timeframes, notably in cases where it has not produced the asset itself. Agricultural goods or other properties subject to a Salam operation must, under penalty of nullity, be determined by nature, through their quantity, quality, weight, or measure. When sold properties cannot be counted or weighed, the quality must be exactly determined. When the contract property concerns an agricultural good, the purchaser cannot require that it originate 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 force majeure reasons, the seller is unable to honor its delivery commitment, the purchaser may request contract termination. The seller may conclude a second parallel Salam contract as purchaser, 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 their effects.

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 its 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 case of client's waiver, the Arboun automatically reverts to the seller who may decide whether or not to refund the advance received.

Article 8: Waad
Waad designates any unilateral promise, revocable or irrevocable, notably to purchase, sell, or lease a property.
In case of non-compliance with an irrevocable Waad, the beneficiary has the option to claim against the promisor in case of damage.
The damage may be the difference between, on the one hand, the acquisition cost of the property by the Waad beneficiary and, on the other hand, its resale price to a third party, taking into account other direct costs if any. The loss of opportunity for the Waad beneficiary cannot be considered as damage.

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 client's financial capacity and, on the other hand, to protect the seller against potential actual damages resulting from client's non-compliance with its commitment. The Good Faith Deposit is returned to the client, provided that the latter complies with its promise. In case of non-compliance, the deposit cannot be returned to the client unless it has been established that the Waad beneficiary suffered no actual damage resulting from its withdrawal. Where applicable, the damage amount is deducted from the Good Faith Deposit and the remaining sum is returned upon materialization of the sale to a third party. Compensation is possible between the Good Faith Deposit and the price or rent due by the client.

Article 10: Other Precautions against Non-Compliance with Contractual Obligations and Commitments
Financing contracts may be subject to the obligation, for the debtor party, to pay a predetermined fixed sum to the creditor party in case of late or default payment or when it does not comply with its contractual commitment. Contracts may also stipulate the payment to the credit institution of a sum covering outlays and actual costs incurred by the latter due to client's late or default payment. Payment of the stipulated sums occurs after settlement of the amount due to the creditor. The received amounts are forwarded to a charitable cause. In this regard, the credit institution may solicit the opinion of the Internal Compliance Council.

PART 2: PARTICIPATORY FINANCING OPERATIONS
Article 11: Moudaraba Financing
Moudaraba financing designates any contract by which a credit institution provides capital to a client, for the realization of investment projects.
The Moudaraba financing contract is termed specific when it concerns a determined investment. It is general when the client can freely choose investments.
The credit institution, as capital provider, does not intervene in the routine management of investments or the project subject to Moudaraba financing.
Profits realized at the end of the operation are shared between the two parties, after capital repayment, according to a pre-agreed distribution.
Losses resulting from the contract are borne solely by the credit institution, when they are not attributable to fault, negligence, or violation of Moudaraba financing conditions by the client.
The Moudaraba financing contract must notably mention, clearly and precisely:

• the amount of capital provided, whether in cash or in kind. In-kind contributions are subject to expert valuation in accordance with common law provisions;
• the date and terms of capital handover for Moudaraba;
• the duration of the Moudaraba and possible extension options;
• the rights and obligations of the parties, notably the terms for providing periodic reports attesting to capital utilization in accordance with agreed provisions;
• guarantees provided by the client against any negligence, fault, or violation of Moudaraba conditions entitling restitution of capital to the party providing capital;
• the profit distribution method for Moudaraba, as a percentage of net profit after capital restitution and deduction of charges;
• the periodicity of profit distribution according to a schedule determined by the parties.
  The Moudaraba financing contract may provide for excess profits and define their allocation terms, where applicable, when they exceed a determined threshold.

Article 12: Moucharaka
Moucharaka designates any contract by which one or more investors and a credit institution pool capital with immediate or deferred disbursement, to realize a determined investment project.
The capital provided by each party or their commitment must be determined. In-kind contributions are subject to valuation to determine the contributor's share in capital.
The parties designate one of them for project or investment management.
A Moucharaka contract may have a determined or undetermined duration. A separate agreement may provide for gradual exit terms of one party.
The profit resulting from the contract subject is distributed among parties according to an agreed distribution key. The contract must stipulate profit distribution terms. Advances may be granted by mutual agreement between parties, subject to regularization either at contract end or upon closure of the fiscal year. Any remuneration, other than profit, paid to one contracting party in 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 with legal personality and distinct assets, provided this obligation is recorded in a separate act, without consideration, and that the third party (the guarantor) is neither the parent company nor the subsidiary of the beneficiary entity. The contract cannot in any case:

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

PART 3: DEPOSIT COLLECTION AND INVESTMENT ACCOUNT OPERATIONS
Article 13: Main Characteristics of Deposits and Investment Accounts
Credit institutions exercising Islamic finance activities may offer all deposit services related to conventional finance, notably current accounts and savings accounts, provided they do not involve the collection or payment of interest. Remunerated deposits take the name of investment accounts. Investment accounts are term deposits, considered as capital contributions by the receiving credit institution, which is obliged to fructify them in the most adequate manner for the client's account. Funds received from the public by credit institutions 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: Remuneration Terms for Deposits and Investment Accounts
Credit institutions exercising Islamic finance activities may remunerate client deposits, in compliance with Articles 15, 16, and 17 of this Annex.
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 activities, or investments realized by credit institutions for depositors' account. Negative remuneration occurs in case of total or partial loss of client-deposited funds. The depositor and the credit institution share profits and losses according to their respective contributions to the operation concerned. Credit institutions 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 and investment objectives are adapted to capital loss risk.

Article 15: General Moudaraba Investment Account
A general Moudaraba investment account designates any term deposit made by a client with a credit institution, for the realization of investments in compliance with Islamic finance principles and rules. Investments may concern all or part of the credit institution's activities. The general Moudaraba investment account agreement must contain the following mentions:

• the possibility of negative remuneration, which exposes the client to partial or total loss of deposited funds;
• the possible fixed opening commissions...