Sunday 22 July 2018

The Central Bank of Bahrain rules

New Bahrain Islamic banking rules are credit positive: Moody's

MANAMA, September 19, 2017

The Central Bank of Bahrain's (CBB) new Shari’ah governance regulations applicable to wholesale and retail Islamic banks in Bahrain are credit positive for investors because they will lead to a more consistent and robust system for ensuring Shari’ah compliance for Islamic products and most importantly Sukuk issued in the kingdom, said a Moody's Investor Service report.

The new regulations will reduce the possibility that issuers cite non-compliance as a defense against payment, it said.

Effective June 2018, the new regulations will make Islamic banks subject to an independent external Shari’ah compliance audit, to ensure that all Islamic banks' activities are Shari’ah compliant. Additionally, all internal Shari’ah board rulings will be made public for banks’ clients and investors.

The regulations set guidelines for banks’ internal Shari’ah boards: their role and responsibility to ensure full independence from commercial activities within the bank, and to
address any conflicts of interest that arise from their compensation from banks for vetting their products. The regulations call for the presentation of the first full externally audited Shari’ah report in 2020 based on 2019 activities, it said.

Islamic banks in Bahrain and other member states of the Gulf Cooperation Council (GCC) currently have their own internal Shari’ah boards to vet and confirm products’ Shari’ah compliance. The lack of a single standard contributes to Shari’ah compliance risk because interpretation of Shari’ah principles is subjective and various schools of Islamic thought differ.

The approach to Shari’ah compliance in the GCC region, where banks have individual Shari’ah boards, contrasts with Malaysia, where there is a single regulatory authority that provides a clear and comprehensive Sukuk framework that standardises documentation and reporting. In May, the UAE cabinet approved the central bank’s creation of a centralised high Shari’ah authority for Islamic finance to support its growth and development.

The CBB’s new regulations enhance standardisation of Islamic finance governance in Bahrain and aim to increase transparency, consistency and competence.  The ultimate goal is to achieve standardised Shari’ah principles and products that support the sector’s growth.

As per the CBB’s latest financial feasibility report in February, there are 105 licensed banks in Bahrain, of which 26 are Islamic banks with a total consolidated balance sheet of nearly $27 billion as of April 2017. Of the $27 billion, nearly $8.8 billion, or 33 per cent, are liabilities funded by sources outside Bahrain and these are generally more sensitive to risk, including Shari’ah compliance risk, the report said. - TradeArabia News Service

Tags: Bahrain | CBB |

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