New Sharia Governance Rules for Financial Institutions: Do You Need a Sharia Board? – Finance and banking

Saudi Arabia: New Sharia Governance Rules for Financial Institutions: Do You Need a Sharia Board?

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The Central Bank of Saudi Arabia (SAMA) has issued new Shariah Governance Rules dated May 2021 (the Rules) for financial institutions operating in Saudi Arabia. The Rules apply to financial institutions engaged in one or more of the following financial activities: (i) real estate financing, (ii) asset financing, (iii) small and medium-sized enterprise financing, (iv) leasing financing, (v) credit cards, and (vi) consumer finance (“Regulated Activities”). The rules aim to establish a governance framework for financial institutions to ensure compliance with Shariah principles in the context of financing operations and to establish clear responsibilities for the management of financial institutions with respect to these operations. This applies even when the financial institution does not claim to be Shariah compliant and is considered a “conventional” finance provider.

According to the rules, financial institutions to which the rules apply must form a Shariah committee (the committee) to oversee compliance with the rules. A copy of the committee’s policies and procedures should be submitted to SAMA, and committee member CVs should be uploaded to the institution’s website.

The rules state that the board is responsible for ensuring that the rules and principles of Shariah are adhered to with respect to the fundraising activities of the institution, as well as the decisions of the committee.

The Board is also responsible for implementing policies defining how the major units of the institutions are to communicate with senior management regarding compliance of fundraising activities with Shariah principles in accordance with the decisions of the committee.

In addition, the Rules set out provisions relating to the Committee, such as functions and responsibilities, membership requirements, independence and confidentiality. The Committee must include at least two members and at most five members. The election of Committee members is subject to the approval of SAMA.

Alternatively, the rules expressly allow outsourcing of the function of the Shariah committee to external Shariah consultants provided that SAMA is notified of such an arrangement.

Next steps for affected financial institutions

The rules will come into effect on January 1, 2022. While financial companies operating in Saudi Arabia are generally intended to be Shariah-compliant, many of these companies do not have Shariah committees or lawyers specializing in Islamic finance. to check their products. Financial institutions and credit card providers operating in regulated activities are encouraged to (a) perform due diligence on all their products for Shariah compliance; and (b) establish a Shariah committee, or set up a subcontract with a Shariah consulting firm, to certify their products. Our Islamic finance lawyers have longstanding working relationships with leading Sharia scholars.

Originally published September 2021

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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