• CTRL Chapter 9 CTRL Chapter 9 Islamic financial institutions

    • CTRL Part 9.1 CTRL Part 9.1 Preliminary

      • CTRL 9.1.1 Application of Chapter 9

        This Chapter applies to all Islamic financial institutions.

         

        Derived from QFCRA RM/2020-4 (as from 1st July 2021)

      • CTRL 9.1.2 Definitions for Chapter 9

        In this Chapter:

        AAOIFI means the Accounting and Auditing Organisation for Islamic Financial Institutions.

        Islamic financial business means the business of carrying on 1 or more regulated activities in accordance with Shari’a.

         

        Derived from QFCRA RM/2020-4 (as from 1st July 2021)

    • CTRL Part 9.2 CTRL Part 9.2 Policies, procedures, systems and controls

      • CTRL 9.2.1 Policies — compliance with Shari’a

        An Islamic financial institution must establish and implement policies to ensure that its business is conducted in accordance with Shari’a. The policies must include effective and comprehensive procedures to ensure that the firm complies with:

        (a) Shari’a (in general and in relation to the requirements for Islamic financial contracts); and
        (b) the fatwas, rulings and guidelines issued by its Shari’a supervisory board.

         

        Derived from QFCRA RM/2020-4 (as from 1st July 2021)

      • CTRL 9.2.2 Policy and procedures manual for Islamic financial business

        An Islamic financial institution must establish, implement and maintain a policy and procedures manual for Islamic financial business. The manual must address the following matters:

        (a) how the compliance oversight function will be undertaken in relation to compliance with Shari’a;
        (b) how the institution’s Shari’a supervisory board will oversee and advise it in regard to the institution’s business;
        (c) how fatwas, rulings and guidelines of the Shari’a supervisory board will be recorded, disseminated and implemented and the internal Shari’a review undertaken;
        (d) how disputes and differences of opinion between the Shari’a supervisory board and the institution’s governing body in relation to Shari’a compliance will be addressed;
        (e) the process for approving the internal policies, procedures, systems and controls to ensure that:
        (i) the institution’s business is conducted in accordance with Shari’a; and
        (ii) information is disseminated to customers and investors appropriately;
        (f) how conflicts of interest and potential conflicts of interest will be identified and managed.

         

        Derived from QFCRA RM/2020-4 (as from 1st July 2021)

      • CTRL 9.2.3 Evaluation of information given to firm

        An Islamic banking business firm’s governing body must evaluate the suitability and effectiveness of the information and reports that it and the firm’s senior management receive under this Chapter. The test of suitability and effectiveness is whether the information and reports are suitable for effectively overseeing and implementing the principles and requirements set out in this Chapter.

         

        Derived from QFCRA RM/2020-4 (as from 1st July 2021)

      • CTRL 9.2.4 Stress-testing

        In carrying out stress-testing and developing its stress-testing scenarios, an Islamic banking business firm must consider the IFSB’s guiding principles on stress-testing for institutions offering Islamic financial services and the recommended standards for stress-testing issued by the Basel Committee on Banking Supervision.

         

        Derived from QFCRA RM/2020-4 (as from 1st July 2021)

    • CTRL Part 9.3 CTRL Part 9.3 Shari’a supervisory boards

      • CTRL Division 9.3.A CTRL Division 9.3.A Appointment and operation of Shari’a supervisory boards

        • CTRL 9.3.1 Composition of Shari’a supervisory board

          (1) An Islamic financial institution must have a Shari’a supervisory board. The board must have at least 3 members.
          (2) Each member must be capable of exercising strong and independent oversight of, and adequate objective judgment about, Shari’a-related matters.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.3.2 Appointment etc of members of Shari’a supervisory board

          (1) An individual must not be appointed as a member of an Islamic financial institution’s Shari’a supervisory board unless the individual is suitable to exercise the functions of such a member.
          (2) The following are not eligible for appointment as a member of the Shari’a supervisory board of an Islamic financial institution:
          (a) a controller (within the meaning of GENE, rule 8.1.3 (1)) of the institution;
          (b) a member of the institution’s governing body.
          (3) Any appointment, dismissal or other change of a member of the Shari’a supervisory board must be approved by the institution’s governing body.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.3.3 Assessing suitability of proposed members of Shari’a supervisory board

          When the governing body of an Islamic financial institution is assessing an individual’s suitability for appointment as a member of the institution’s Shari’a supervisory board, the governing body must take into account:

          (a) the individual’s good character (honesty, integrity, fairness and reputation);
          (b) the individual’s competence, diligence, capability and soundness of judgment; and
          (c) anything else that the governing body considers relevant.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.3.4 Assessing good character of proposed members of Shari’a supervisory board

          In assessing an individual’s good character for rule 9.3.3, an Islamic financial institution’s governing body must consider:

          (a) whether the individual:
          (i) has ever been convicted of a criminal offence, particularly an offence relating to dishonesty, fraud or financial crime;
          Note For the meaning of financial crime, see the Glossary.
          (ii) has been the subject of any adverse findings or any settlement in civil proceedings, particularly in connection with banking or other financial business, misconduct or fraud;
          (iii) has been the owner, manager or director of a company, partnership or other entity that:
          (A) has been refused registration, authorisation, membership or a licence to conduct a trade, business or profession; or
          (B) has had that registration, authorisation, membership or licence revoked, withdrawn or terminated;
          resulting in the individual being refused the right to carry on a trade, business or profession requiring such a licence, registration or other authorisation;
          (iv) has been a director, partner or otherwise involved in the management of a business that has gone into receivership, insolvency or compulsory liquidation while the individual was connected with that business or within 1 year after the individual’s departure from it;
          (v) has been dismissed or asked to resign, or has resigned, from employment or from a position of trust, fiduciary appointment or similar position because of questions about his or her honesty and integrity;
          (vi) has ever been disqualified from acting as a director or serving in a managerial capacity because of wrongdoing; or
          (vii) has not been fair, truthful and forthcoming in dealings with customers, superiors, auditors and regulatory authorities in the past and has been the subject of any justified complaint relating to regulated activities;
          (b) whether the individual shows readiness and willingness to comply with the requirements and standards of the regulatory system in the QFC and other legal, regulatory, or professional requirements and standards;
          (c) whether the individual (or any business in which he or she is a controlling shareholder or has a controlling interest or exercises significant influence) has been investigated and disciplined or suspended by a regulatory or professional body, a court or a tribunal, whether publicly or privately; and
          (d) anything else that the governing body considers relevant.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.3.5 CTRL 9.3.5 Assessing competence of proposed members of Shari’a supervisory board

          (1) To be suitable for appointment as a member of the Shari’a supervisory board of an Islamic financial institution, an individual must be able to demonstrate the competence and ability to understand:
          (a) the technical requirements of the institution’s business;
          (b) the risks inherent in the institution; and
          (c) the processes required to conduct the institution’s operations effectively.
          (2) In making the assessment required by subrule (1), the institution’s governing body must consider:
          (a) whether the individual has demonstrated, through qualifications and experience, the capacity to successfully undertake the responsibilities of the position;
          (b) whether the individual is physically, mentally and emotionally fit to perform the duties of the position;
          (c) whether the individual has a sound knowledge of the institution’s business and the responsibilities of the position; and
          (d) anything else that the governing body considers relevant.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

          • CTRL 9.3.5 Guidance

            1 The Regulatory Authority expects an Islamic financial institution to carry out background checks, and to verify that a person to be appointed as a member of the institution’s Shari’a supervisory board has at least the minimum qualifications and experience set out in Appendix 4 of IFSB 10: Guiding Principles on Shari’a Governance Systems for Institutions offering Islamic Financial Services.
            2 So far as possible, such an institution should use the suitability criteria and factors in this Division when appointing an individual to exercise the Shari’a compliance function and internal Shari’a review function. In addition, such an individual is expected to have:
            • adequate training in Shari’a
            • additional qualifications in finance
            • good communication skills to enable him or her to liaise and work effectively with the Shari’a supervisory board
            • organisational skills.

             

            Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.3.6 Policy in relation to appointments etc to Shari’a supervisory boards

          An Islamic financial institution must document its policy in relation to:

          (a) how appointments, dismissals or changes to the institution’s Shari’a supervisory board will be made;
          (b) the process through which the suitability of the members will be considered; and
          (c) the remuneration of the members.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.3.7 Records of assessment of suitability of Shari’a supervisory board members

          (1) An Islamic financial institution must retain a record, for each individual who is or has been a member of its Shari’a supervisory board, of:
          (a) its assessment of the individual’s suitability to be such a member; and
          (b) the agreed terms of engagement of the individual as such a member.
          (2) The record for a member must include:
          (a) the factors that were taken into account when assessing the member’s suitability;
          (b) the qualifications and experience of the member;
          (c) the basis upon which the institution considered that the member was suitable; and
          (d) details of any other Shari’a supervisory boards of which the member is, or has been, a member.
          (3) The institution must retain the record for a former member of its Shari’a supervisory board for at least 6 years after the date on which he or she ceased to be such a member.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.3.8 Islamic financial institution’s obligations to Shari’a supervisory board

          (1) An Islamic financial institution must take reasonable steps to ensure that the members of its Shari’a supervisory board are independent of the institution, and not subject to any conflict of interest with it.
          Guidance
          An Islamic financial institution’s Shari’a supervisory board can be considered independent only if none of its members has a blood or close relationship with the institution, the institution’s officers or related parties, that could interfere (or be reasonably perceived as interfering) with the exercise by the board of independent judgment.
          (2) The institution and its employees:
          (a) must give the Shari’a supervisory board any assistance that it reasonably requires to perform its duties;
          (b) must give the board right of access at all reasonable times to relevant records and information;
          (c) must not interfere with the board’s ability to perform its duties; and
          (d) must not provide false or misleading information to the board.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.3.9 Information about Shari’a supervisory board to be given to Regulatory Authority

          An Islamic financial institution must provide the Regulatory Authority, on the Authority’s request, with information about the qualifications, skills, experience and independence of the members or proposed members of the institution’s Shari’a supervisory board.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

      • CTRL Division 9.3.B CTRL Division 9.3.B Shari’a supervisory board reports

        • CTRL 9.3.10 Annual Shari’a supervisory board report

          (1) An Islamic financial institution must commission, from its Shari’a supervisory board, an annual report that complies with AAOIFI Standards on Governance, GSIFI No 1.
          (2) The institution must give the Regulatory Authority a copy of each such annual report within 3 months after the day the relevant financial year of the institution ends.
          Example
          If a financial year of an Islamic financial institution ends on 31 December in a year, the annual report of the institution’s Shari’a supervisory board must be given to the Regulatory Authority before 1 April in the next year.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.3.11 Other Shari’a supervisory board reports

          An Islamic financial institution must ensure that its Shari’a supervisory board prepares all the reports required by AAOIFI Standards on Governance, GSIFI No 2.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

      • CTRL Division 9.3.C CTRL Division 9.3.C Internal Shari’a reviews

        • CTRL 9.3.12 Islamic financial institutions to carry out internal Shari’a reviews

          (1) An Islamic financial institution must from time to time carry out an internal Shari’a review to assess the extent to which the institution complies with Shari’a and with the fatwas, rulings and guidelines issued by its Shari’a supervisory board.
          (2) The interval between reviews must be determined by the institution’s Sharia supervisory board, taking into account the nature, scale and complexity of the institution’s business.
          (3) The objective of such a review is to ensure that the governing body and senior management of the institution carry out their responsibilities in relation to Shari’a (as determined by the firm’s Shari’a supervisory board).
          (4) The review must be carried out, in accordance with the AAOIFI standards relating to Shari’a governance, by:
          (a) the institution as part of its internal audit function; or
          (b) an independent entity that is competent to do so.
          Guidance
          1 For the purposes of assessing the competency of personnel or entities that carry out the internal Shari’a review, the institution should consult the AAOIFI Standards on Governance (GSIFI No. 3) and Appendix 4 of IFSB 10: Guiding Principles on Shari’a Governance Systems for Institutions offering Islamic Financial Services.
          2 IFSB 3 states that fatwas, rulings, pronouncements and resolutions issued by the Shari’a supervisory board should be strictly adhered to. A person should not be assigned to carry out an internal Shari’a review unless the person:
          • is adequately trained in Shari’a compliance
          • has a competent grasp of the review process.
          (5) The results of each review (including any instance of non-compliance) must be documented, and the institution must ensure that any non-compliance is rectified, so far as possible.
          (6) The function or entity that carried out the review or reviews during a period must report on its findings in time for the next meeting of the Shari’a supervisory board. If the function or entity did not conduct any review during the period preceding a meeting, it must notify the board of the fact.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.3.13 Institution must give copy of report to Regulatory Authority

          An Islamic financial institution must give the Regulatory Authority a copy of the report or reports prepared by the institution’s Shari’a supervisory board. The report or reports must be given within 3 months after the day the relevant financial year of the institution ends.

          Example
          If a financial year of an Islamic financial institution ends on 31 December in a year, the report of the Shari’a supervisory board must be given to the Regulatory Authority before 1 April in the next year. The Shari’a supervisory board’s compliance report usually forms part of the institution’s Annual Financial Report, but there could also be a second more detailed report of the compliance work undertaken addressed specifically to the Regulatory Authority.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)

    • CTRL Part 9.4 CTRL Part 9.4 Conduct of Islamic financial business

      • CTRL 9.4.1 Other firms not to be held out as Islamic financial institutions

        An authorised firm that is not an Islamic financial institution must not hold itself out as an Islamic financial institution.

         

        Derived from QFCRA RM/2020-4 (as from 1st July 2021)

      • CTRL 9.4.2 Islamic financial institutions not to conduct other financial business etc

        An Islamic financial institution:

        (a) must not hold itself out as conducting financial business other than Islamic financial business; and
        (b) must not carry on any regulated activity otherwise than in accordance with Shari’a.

         

        Derived from QFCRA RM/2020-4 (as from 1st July 2021)

      • CTRL 9.4.3 Disclosure about Shari’a supervisory board

        (1) An Islamic financial institution must disclose the information specified in subrule (2) to a person with whom or on behalf of whom the institution conducts (or proposes to conduct) Islamic financial business, if the person so requests.
        (2) The information is:
        (a) the names of the members of the institution’s Shari’a supervisory board; and
        (b) how, and how often, the institution conducts Shari’a reviews.

         

        Derived from QFCRA RM/2020-4 (as from 1st July 2021)

      • CTRL 9.4.4 CTRL 9.4.4 Disclosure by Islamic insurers

        An Islamic financial institution that effects or carries out contracts of takaful must disclose in its financial statements:

        (a) the matters set out in AAOIFI FAS 12, in the way required by AAOIFI FAS 12; and
        (b) the matters set out in AAOIFI FAS 13.

         

        Derived from QFCRA RM/2020-4 (as from 1st July 2021)

        • CTRL 9.4.4 Guidance

          1 An important matter that an Islamic financial institution must disclose under AAOIFI FAS 13, as applied by rule 9.4.4 (b), is how the institution would treat an insurance deficit or surplus. Appendix B to AAOIFI FAS 13 provides some guidance as to how to treat a deficit or surplus.
          2 That appendix states that there are a number of ways to treat a deficit, including:
          (a) settling the deficit from the reserve of policyholders, if any;
          (b) borrowing the amount of the deficit from the shareholders’ funds or from others (and paying it back from future surpluses);
          (c) asking the policyholders to meet the deficit pro rata; and
          (d) increasing the future premium contribution of policyholders on a pro-rata basis.
          3 That appendix also states that there are a number of ways to allocate a surplus, including:
          (a) allocating the surplus to all policyholders, regardless of whether or not they have made claims on the policy during the relevant financial period;
          (b) allocating the surplus only among policyholders who have not made any claims during that financial period;
          (c) allocating the surplus among policyholders who have not made any claims and those who have made claims of amounts less than their insurance contributions, provided that the latter category of policyholders should receive only the difference between their insurance contributions and their claims during the financial period;
          (d) allocating the surplus between policyholders and shareholders; and
          (e) allocating the surplus in other ways.

           

          Derived from QFCRA RM/2020-4 (as from 1st July 2021)