1.1. Introduction

The purpose of this IBB Rules is to establish the prudential framework for Authorised Firms carrying out Islamic Banking Business, Providing Islamic Financing or carrying out other Regulated Activities which involve assuming prudential risks by way of employing Islamic Financial Contracts. These rules are based on:

• (a) the standards and guidelines issued by the Islamic Financial Services Board on Capital adequacy;
• (b) the Basel Accords; and
• (c) the Basel Core Principles for Effective Banking Supervision, issued by the Basel Committee on Banking Supervision.

1.2. Commencement

These rules commence on 1 January 2018.

1.3. Effect of definitions, notes, examples and references

A definition in the glossary to these rules also applies to any instructions or document made under these rules.

• (a) A note in or to these rules is explanatory and is not part of these rules. However, examples and guidance are part of these rules.
• (b) An example is not exhaustive, and may extend, but does not limit, the meaning of these rules or the particular provision of these rules to which it relates.
• (c) Unless the contrary intention appears, a reference in these rules to an accord, principle, standard or other similar instrument is a reference to that instrument as amended from time to time.

1.4. Islamic Banking Business

Islamic Banking Business is defined in Schedule 1 of the AIFC GEN Rules as a Regulated Activity, which means carrying out the following activities, in a Shari’ah-compliant manner:

• (a) Raising, accepting and managing funds or money placements; and/or
• (b) Managing Unrestricted Profit Sharing Investment Accounts (UPSIAs); and
• (c) Providing financing or making Investments by entering as principal or agent into any Islamic Financial Contract.

Guidance

A firm that conducts any of the activities that make up Islamic Banking Business, or a combination of Islamic banking with other Shari’ah-compliant activities, will need to consider the extent to which its business model is subject to the prudential requirements set out in these rules. These rules are designed to address the different risks that could arise from the broad range of business models, risk appetites and risk profiles of Islamic Banks.

For example, a firm that solely conducts the activity of dealing in investments as principal in a Shari’ah-compliant manner, (that is, an Islamic Broker Dealer) will need to consider the extent to which its activities in buying, selling, subscribing to or underwriting investments attract risks that are subject to the requirements of these rules. In contrast, a firm that is an Islamic bank and that also deals in investments as principal would be subject to a broader range of prudential requirements. In both examples, these rules apply in accordance with the nature, scale and complexity of an Islamic business.

1.5. Islamic Bank

(1) An Authorised Firm is an Islamic Bank if it is an Islamic Financial Institution or an Islamic Window as defined in IFR Rules, which is authorised to conduct Islamic Banking Business, as defined in GEN Rules.

(2) An Islamic Financial Institution is an Islamic Bank even if it is also authorised to conduct any other Regulated Activity. An Authorised Firm does not cease to be an Islamic Bank only because it conducts other Regulated Activities included in its authorisation (provided an Islamic Bank conducts them in accordance with Shari’ah).

1.6. Islamic Broker Dealer

(1) An Authorised Firm is an Islamic Broker Dealer if it is an Islamic Financial Institution or an Islamic Window, that is authorised to conduct the Regulated Activity of Dealing in Investments as principal in a Shari’ah-compliant manner and it is not an Islamic bank.

(2) An Islamic Broker Dealer may raise funds using Islamic Financial Contracts but must not manage UPSIAs.

(3) An Authorised Firm is an Islamic Broker Dealer even if it is also authorised to conduct any other activity that is not Islamic Banking Business. An Authorised Firm does not cease to be an Islamic Broker Dealer only because it conducts other activities included in its authorisation.

(4) An Islamic Broker Dealer may provide financing using Islamic Financial Contracts, if it receives the necessary authorisation from the AFSA.

1.7. Islamic Financing Company (IFC)

(1) An Authorised Firm is an Islamic Financing Company (IFC) if it is an Islamic Financial Institution or an Islamic Window, that is authorised to conduct the Regulated Activity of Providing Islamic Financing and it is neither an Islamic Bank nor an Islamic Broker Dealer.

(2) IFCs may raise funds using Islamic Financial Contracts but must not manage UPSIAs.

(3) An Authorised Firm is an IFC even if it is also authorised to conduct any Regulated Activity other than Providing Islamic Financing. An Authorised Firm does not cease to be an IFC only because it conducts other activities included in its authorisation.

(4) An IFC may conduct the Regulated Activity of dealing in Investments as principal using Islamic Financial Contracts, if it receives the necessary authorisation from the AFSA.

1.8. Legal form that Islamic Banks must take

(1) An Islamic Bank must take any one of the following legal forms:

• (a) a limited liability company incorporated under the Companies Regulations of AIFC;
• (b) a limited liability partnership incorporated under the Limited Liability Partnerships Regulations of AIFC;
• (c) a branch that is registered with the AIFC Companies Regulations.

1.9. Application of these rules—general

(1) Except as stated otherwise, these rules apply to a Person that has, or is applying for, an authorisation to conduct Islamic Banking Business, Providing Islamic Financing or to act as an Islamic Broker Dealer.

(2) Except as stated otherwise, all references to Islamic Bank in the rest of this IBB Rules must be taken as referring also to Islamic Broker Dealers and Islamic Financing Companies (IFCs). Consequently, all the regulatory requirements imposed by rules in this IBB module apply to entities licensed to carry out Islamic Banking Business, Providing Islamic Financing and dealing in Investments as principal in a Shari’ah-compliant manner, except for specific rules wherein their applicability is defined.

Guidance

It is possible for an Authorised Firm to be authorised both as an Islamic Bank under these rules and to hold authorisations for carrying out Regulated Activities defined in Schedule 1 of the AIFC GEN Rules. Both these rules and the relevant rules for those activities could apply to such an Authorised Firm in relation to the activities they are involved in. In relation to such an Authorised Firm, however, the Capital requirements in these rules apply. If that Authorised Firm complies with the Capital requirements in these rules, it is taken to comply with the prudential rule requirements specified in PRU Rules of the AFSA rulebook.

1.10. Application of these rules—branches

(1) Chapter 4 (Capital adequacy and Capital requirements) does not apply to an Authorised Firm carrying out Islamic Banking Business in the form of a branch in so far as that Chapter would require the branch to hold Capital.

(2) However, the AFSA may require a branch to have Capital resources or to comply with any other Capital requirement if the AFSA considers it necessary or desirable to do so in the interest of effective supervision of the branch.

1.11. Stress-testing

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