A Proposal relating to Central Shari’ah Board

5. In December 2017, the AFSA adopted the Islamic Finance Rules setting special provisions on functions of Central Shari’ah Board in the AIFC, including supervisory functions and providing services to Islamic Financial Institutions.

6. In December 2017, Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), an international organisation setting shariah, accounting, governance and ethical standards for Islamic financial institutions, issued a new governance standard No 8 “Central Shari’ah Board” providing guidance on the definition, scope of work, responsibilities, appointments, compositions, independence, terms of reference of a Central Shari’ah Board and other relevant issues.

7. According to the Standard, Central Shari’ah Board (CSB) – a broad level board or similar body of specialised jurists in Islamic commercial jurisprudence and experts in Islamic banking, finance, economics, law, accounting, etc. providing guidance and advice on Shari’ah matters with limited supervision, that is established in a specific country or jurisdiction for providing uniformity and harmony in the products and practices with regard to Islamic finance through Fatwas, rulings and guidelines. The CSB decision are applicable on a broader base in the jurisdiction rather than a single institution. The CSB shall focus on harmony of Islamic banking and finance practices:

(a) globally, through adoption of AAOIFI Shari’ah standards and /or other widely accepted Shari’ah standards, which do not conflict with AAOIFI Shari’ah standards;

(b) locally, by providing principles, rulings, guidelines and other functional support as prescribed in the Standard, primarily considering global practice and having regard to the local context.

The Standard encourages that all CSBs should primarily have advisory function coupled with a limited level of supervisory authority. The function of the Board may be divided in three broad categories which are

(a) advisory and Fatwa;

(b) regulations; and

(c) oversight and limited supervision.

Most of the functions of a CSB related to advisory and Fatwa are passive in nature,

i.e. the board provides Fatwa or advice or guidance only when asked for it by the appointing authority or the regulator. The board shall be proactive in nature when, and only when, the following conditions are met:

(a) it concludes that a major non-compliance of Shari’ah principles and rules has occurred which has not being taken care of by the appointing authority;

(b) it concludes that a perception in the market exists that such non-compliance is in the knowledge of, or with the due approval of, the board; and

(c) it concludes that unless a proactive step is taken with respect to such matter, the larger stakeholders’ interest will be compromised.

8. In this regard, we propose to remove provisions related to supervisory functions of the AIFC Central Shariah Board and Shariah Supervisory Board functions for Islamic Financial Institutions.

9. In addition, considering that Central Shariah Board should perform advisory functions, we propose to include guidance that the AFSA may request the AIFC Central Shari’ah Board to provide guidance or advice on Shari’ah matters. The proposed amendments are presented in Annex 1.

Questions:

(1) Do you have any concerns relating to our proposals to remove provisions related to supervisory functions of the AIFC Central Shariah Board? If so, what are they, and how should they be addressed?

(2) Do you have any concerns relating to our proposals to remove provisions related to Shariah Supervisory Board functions for Islamic Financial Institutions? If so, what are they, and how should they be addressed?

(3) Do you have any concerns relating to our proposals to include guidance that the AFSA may request the AIFC Central Shari’ah Board to provide guidance or advice on Shari’ah matters? If so, what are they, and how should they be addressed?

B Proposal relating to Islamic Financial Institution Definition

10. In December 2017, the AFSA adopted the Islamic Finance Rules where the Islamic Financial Institution is defined as an Authorised Firm whose license or authorisation includes a specific condition that the whole of its business is conducted in a manner fully compliant with Shari’ah. The current definition of Islamic Financial Institutions (IFI) does not cover capital market players as they may conduct both conventional and Islamic businesses.

11. In 2016 Bursa Malaysia (Exchange) launched Bursa Malaysia-i delivering the world’s first end-to-end integrated Islamic securities exchange platform that offers investors the choice to invest and trade Shariah-compliant products via a Shariah- compliant platform. Bursa Malaysia-i incorporates the full range of Shariah- compliant exchange-related services including listing, trading, clearing, settlement and depository services, to underscore Bursa Malaysia’s leadership as the global marketplace for Shariah listing and investments.

12. Considering the international experience, we propose to extend the current definition of Islamic Financial Institutions by including Authorised Market Institutions to regulate Islamic exchanges, Islamic Private E-currency Trading Facility and other market institutions. The proposed amendments are presented in Annex 2.

Question:

(4) Do you have any concerns relating to our proposals to extend the definition of Islamic Financial Institutions by including Authorised Market Institutions? If so, what are they, and how should they be addressed?