Standard Re Shari’ah Compliance Function At Islamic Financial Institutions

1 / 8 CBUAE Classification: Public STANDARD RE SHARI’AH COMPLIANCE FUNCTION AT ISLAMIC FINANCIAL INSTITUTIONS

2 / 8 CBUAE Classification: Public TABLE OF CONTENTS Page Subject المادة )1( مقدمة 3 Introduction) 1 (Article المادة )2( الهدف 4 Objective) 2 (Article Article (3) Scope of Application 4 التطبيق نطاق( 3 )المادة Compliance ah’Shari المادة )4( وظيفة االمتثال الشرعي 4 Function Article (4) Stages of the Review Process in Shari’ah Compliance Function Article (5) Article (6) Development of Annual Plan 6 السنوية الخطة إعداد( 6 )المادة 6 النطاق وتحديد التخطيط( 7 )المادة Planning and Scoping of the Review Article (7) المادة )8( المراجعة الميدانية 6 Review Field) 8 (Article Article (9) Issues and Actions 6 والمعالجات النتائج( 9 )المادة المادة )10( التقارير 7 Reports) 10 (Article المادة )11( متابعة حالة التنفيذ 8 Monitoring Status Progress) 11 (Article Article (12) Compliance with the Standard 8 المعيار لمتطلبات االمتثال( 12 )المادة

3 / 8 CBUAE Classification: Public Article (1) Introduction 1.1 This Standard Re Shari’ah Compliance Function at Islamic Financial Institutions (“the Standard”) complements the Standard re Shari’ah Governance for Islamic Financial Institutions (“the Shari’ah Governance Standard” or “SGS”) with the aim to promote the development of the banking system and to ensure its effectiveness and efficiency. 1.1 1.2 The licensed financial institutions that conduct all or part of their activities and businesses in accordance with the provisions of Islamic Shari’ah (“Islamic Financial Institutions” or “IFIs”) must establish Shari’ah governance policies and governance mechanisms to ascertain compliance with requirements outlined in the Standard and requirements outlined in the relevant regulations, standards, resolutions and other notices issued by the Central Bank and by the Higher Shari’ah Authority (“HSA”) in relation to compliance with Islamic Shari’ah (“Regulatory Requirements”). 2.1 1.3 Where the Standard contains a requirement to provide information, or undertake certain measures, or address particular terms stated as a minimum requirement, the Central Bank may impose additional requirements to those specified in the relevant article in the Standard. 3.1

4 / 8 CBUAE Classification: Public Article (2) Objective The Standard sets supervisory expectations to implement the requirements specified in the SGS in relation to Shari’ah Compliance Function as part of the second line of defense. Article (3) Scope of Application 3.1 The Standard applies to all Islamic Financial Institutions licensed by the Central Bank. 1.3 3.2 The Standard must be read in conjunction with the SGS and the standards and resolutions issued by HSA and notified to IFIs. 2.3 Article (4) Shari’ah Compliance Function 4.1 In accordance to Article No. (10.6) of the Shari’ah Governance Standard, the internal Shari’ah control division or section shall perform various functions, including Shari’ah Compliance Function (“SCF”). The SCF is responsible to continuously monitor compliance of an IFI’s businesses and activities with resolutions, fatwas, regulations, and standards, which are issued by the HSA. 1.4 4.2 The SCF is different from Shari’ah audit in terms of reporting line, frequency of the review, as well as the fact that SCF conducts reviews before and during the 2.4

5 / 8 CBUAE Classification: Public execution, while Shari’ah audit conducts review post execution. 4.3 The responsibility regarding managing Shari’ah Non-Compliance Risk lies with the IFI’s risk management department, not with the SCF. However, the two departments should provide each other with information in order to achieve compliance with Islamic Shari’ah and manage Shari’ah Non-Compliance Risk in a prudent manner. 3.4 Article (5) Stages of the Review Process in Shari’ah Compliance Function 5.1 The SCF shall conduct reviews and evaluate the Shari’ah Non-Compliance controls and their applications, issue reports on the same and monitor remedial actions to ensure that Shari’ah compliance controls are adequate and operate as intended. 1.5 5.2 The IFI must develop internal procedures and policies regarding SCF review exercises that should include, at least, the following stages: 2.5 a. Develop an Annual Plan, ،السنوية الخطة إعداد .أ b. Planning and Scoping of the review, ،النطاق وتحديد التخطيط .ب c. Conduct a Field Review, ،الميدانية المراجعة .ج د. توثيق النتائج والمعالجات، ,Actions & Issues Documenting .d e. Draft Reports, and ،التقارير إعداد .ه و. ومتابعة حالة تنفيذ المعالجات. .Progress Monitor .f

6 / 8 CBUAE Classification: Public The IFI may refer to the review stages that are stated in the guidance note of this Standard. Article (6) Development of Annual Plan The SCF shall be responsible for developing the annual review plan (“Annual Plan”) which must be approved by the Internal Shari’ah Supervision Committee (“ISSC”) and the Board. Article (7) Planning and Scoping of the Review The SCF shall set a planning and scoping of the review process (“Planning”), and it involves gathering information from the business or function under review, allowing development of the scope, objectives and approach to the review, and determining the planned review procedures. Article (8) Field Review The IFI’s SCF shall conduct a field review for the IFI that consists of procedures built on robust methodology basis. The details regarding field review may be referred to in the guidance note of this Standard. Article (9) Issues and Actions

7 / 8 CBUAE Classification: Public The SCF shall record each identified finding/incident in the report that follows every field review. The identified issues must be factual, accurate, precise, objective, clear, concise, complete and supported with: a. Adequate evidence that demonstrates the accuracy and factuality of the identified finding. b. Determination of the Shari’ah or governance or other documents and the relevant paragraphs from which deviation has occurred, if applicable, such as, but not limited to specific Regulatory Requirements, ISSC’s Resolutions, or the Products Manual. c. Specification of the root cause that has triggered the identified finding. d. Establishment of a clear action plan that adequately addresses the root cause and closes the gap, and specification of the party responsible for the action plan. e. Specification of risk rating of the identified incident according to the approved risk matrix of the IFI which is prepared by risk management department. Article (10) Reports 10.1 The SCF shall record the issues of the field review in a report that shall be developed through robust procedures before dissemination, as follows: 1.10 أ. تقرير النتائج األولية Report Issues Preliminary .a b. Response from Respective Parties المعنية األطراف رد .ب ج. االجتماع الختامي Meeting Closing .c د. تقرير نهائي Report Final .d

8 / 8 CBUAE Classification: Public ه. اعتماد التقرير النهائي Approval Report Final .e و. نشر التقرير النهائي Dissemination Report Final .f The IFI may refer to the detailed guidance in the guidance note of this Standard. 10.2 The final report shall be disseminated to the CEO and the relevant parties within five working days after being approved by the ISSC. This is to ensure the implementation of its contents within the period specified by the ISSC in the final report. 2.10 Article (11) Progress Status Monitoring The SCF shall monitor progress updates provided by the relevant parties, and monitor the implementation of the action plan. The IFI may refer to the guidance note of this Standard for further guidance regarding the procedures that should adopted at this stage. Article (12) Compliance with the standard The IFI must comply fully with the requirements of this Standard within one year from its date of issuance. Khaled Mohamed Balama Governor of the Central Bank of the UAE