Dubai: Federal Law No 14 of 2018 regarding the Central Bank and Organization of Financial Institutions and Activities has brought in more clarity to the legal framework governing Islamic banks, Islamic financial institutions and any financial institution, which carry on the whole or part of their businesses and activities in accordance with provisions of Sharia.
The law provides for the establishment of a Higher Sharia Authority, which, among other things, determine the rules and standards for Islamic financial institutions and supervise the Internal Sharia Supervisory Committees of such institutions. Islamic financial institutions will be responsible for the costs of such authority. The new authority will replace the authority contemplated by the 2016 Cabinet Resolution.
“The new Banking Law has reinforced the intention to establish a Higher Sharia Authority, an initiative which has been anticipated since it was first discussed in 2016. The establishment of such an Authority follows global standards with such authorities already existing in other countries, and will be responsible for standards of both the financial institutions and their internal Sharia committees,” said Jody Waugh, Partner, Head of Banking & Finance at Al Tamimi.
The Higher Sharia Authority will have a membership not less than five members and not exceeding seven members of sufficient knowledge and experience in the jurisprudence of Islamic financial transactions.
The board of the central bank will form the authority and appoint its members. The board will decide on the working mechanism of the authority, its functions, and responsibilities of its members and their term of office. This authority will be affiliated to the central bank.
The Higher Sharia Authority is empowered to determine the rules, standards, and general principles applicable to Sharia-compliant businesses and licensed financial activities, and shall undertake supervision and oversight of the internal Sharia Supervisory Committees of Financial Institutions.
The Authority is also authorised to approve Islamic monetary and financial tools issued and developed by the central bank to manage monetary policy operations in the government and provide its opinion regarding the specific regulatory rules and instructions relating to the operations and activities of financial institutions which conduct the whole or part of their business and activities in accordance with the provisions of Sharia.
The new law states that fatwas and opinions of the Higher Sharia Authority will be binding on the Internal Sharia Supervisory Committees. The Authority may seek assistance of a specialised party, if necessary, to conduct Sharia external audit of the business of any financial institution, which carry on the whole or part of their businesses and activities in accordance with the provisions of Sharia.
The new law provides for setting up of independent committee named Internal Sharia Supervision Committees within licensed financial institutions. Membership of this committee shall consist of experienced specialists in Islamic financial and banking transactions jurisprudence. The committee is mandated to undertake Sharia supervision of all businesses, activities, products, services, contracts, documents, and conduct of business charters of the concerned institutions.
“The new Law also reconfirms the need for, and status of, internal Sharia committees within each financial institution ensuring there is proper oversight of operations and ongoing Sharia compliance,” said Waugh.
The Internal Sharia Supervision Committee will be appointed by the general assembly of the concerned institution, in accordance with the provisions of the referenced Commercial Companies Law. Members of the Internal Sharia Supervision Committee will require the approval of the Higher Sharia Authority.
In addition to the provision for the Internal Sharia Supervision Committee, the law also provides for the creation of a Sharia audit department to monitor compliance of the concerned institution with the fatwas and opinions of the Internal Sharia Supervision Committee. Such division or section shall report to the Board of Directors of the concerned institution. The law also required the Internal Sharia Supervision Committee to prepare an annual report to be presented to the general assembly on the extent of compliance of management of the concerned institution, with the provisions of Sharia.
Highlights of the law
— Setting up of Higher Sharia Authority
— Provision for internal Sharia supervisory committee is required
— Requirements for internal Sharia audits and monitoring
— Requirement for annual reports to be presented to the general assembly