The Board

1. 6.1 IFI's Board is ultimately responsible for IFI's compliance with Islamic Shari'ah. The Board is expected to be aware of Shari'ah non-compliance risk and its potential impact on the IFI. Accordingly, the Board is responsible for establishing and implementing a Shari'ah governance framework that is commensurate with the size and complexity of the operations of the IFI and its risk appetite, to ensure the IFI's compliance with Islamic Shari'ah. The Shari'ah governance framework should incorporate the three lines of defense approach comprising the business line, the support and control functions, and internal Shari'ah audit function.
    
2. 6.2 Members of the Board must nominate ISSC members to the general assembly for the establishment of ISSC.
    
3. 6.3 The Board must, in coordination with the ISSC, ensure the development, approval and implementation of internal policies related to the IFI compliance with Islamic Shari'ah.
    
4. 6.4 The Board must maintain effective communication with the ISSC. Meetings must be held to discuss issues pertaining to Shari'ah compliance, with at least one meeting per financial year.
    
5. 6.5 The Board must refer to the ISSC for all Shari'ah matters related to IFI activities, operations and code of conduct.
    
6. 6.6 The Board must ensure that the annual Shari'ah report issued by the ISSC is submitted to the HSA for review and approval before sharing it with shareholders at the general assembly.

Board's Risk Committee

1. 6.7 The Board's Risk Committee ("Risk Committee") must supervise and monitor management of Shari'ah non-compliance risk, and set controls in relation to this type of risk, in consultation with ISSC and through the internal Shari'ah control division or section.
    
2. 6.8 The Risk Committee is responsible to review and approve the establishment of framework for managing Shari'ah non-compliance risk as part of the overall risk management framework of the IFI, and must oversee its implementation by the Senior Management.
    
3. 6.9 The Risk Committee must ensure there is an information system that enables IFI to measure, assess and report Shari'ah non-compliance risk. Reports must be provided on a timely manner to the Board and Senior Management, in formats suitable for their use and understanding.

Board's Audit Committee

1. 6.10 The Board's Audit Committee ('Audit Committee') must:
    
   1. Evaluate the effectiveness of IFI's policies (approved by ISSC) designed to monitor compliance of the IFI with Islamic Shari'ah.
       
   2. Assess the effectiveness and adequacy of internal Shari'ah audit and its contribution in ensuring IFI's compliance with Islamic Shari'ah. The Audit Committee's responsibility includes the following:
      • - Assess the independence, effectiveness and adequacy of internal Shari'ah audit scope and programs.
      • - Review the reports prepared by the internal Shari'ah audit division or section to ensure that all necessary measures have been undertaken.
      • - Facilitate the work of the internal Shari'ah audit division or section.
      • - Hold regular meetings with the head of internal Shari'ah audit division or section twice a year, at minimum.
         
   3. Review the scope, results, and adequacy of the external Shari'ah audit review (if applicable). In addition, the Audit Committee's responsibility includes the following:
      • - Facilitate the work of the external Shari'ah auditor.
      • - Review the reports prepared by external Shari'ah auditor to ensure that the senior management have taken all necessary measures in this regard.
      • - Hold meetings with the external Shari'ah auditor with a minimum of one meeting per financial year.
   
    
2. 6.11 It is recommended that the Audit Committee invite a member of the ISSC to attend the meetings when discussing the internal Shari'ah audit report to ensure compliance of the IFI with the resolution of the ISSC concerning the report. The Audit Committee and the member of ISSC are not authorized to change the ISSC's resolution in this regard.

Senior Management

1. 6.12 The Senior Management must execute and manage the IFI's activities and businesses in compliance with Islamic Shari'ah.
    
2. 6.13 The Senior Management must report to the Board regarding IFI's compliance with Islamic Shari'ah in all of its activities, operations, policies, internal regulations, and code of conduct.
    
3. 6.14 The Senior Management is responsible before the Board for:
   1. submitting Shari'ah matters related to all IFI's businesses and activities, including its policies, internal regulations, code of conduct, all onshore/offshore transactions, services and products to ISSC, and should not consider approval of any of the Group's Shari'ah supervision committees (or equivalent committees) outside the country as substitution to approval of the ISSC,
   2. ensuring implementation of the ISSC's fatwas and resolutions.
   
    
4. 6.15 The Senior Management must fully disclose all relevant information required by the ISSC in a transparent, accurate and timely manner.
    
5. 6.16 The senior management shall provide the ISSC with financial and human resources that are commensurate with the IFI size and the nature of its business.
    
6. 6.17 The Senior Management must:
   • - facilitate work of internal Shari'ah audit and external Shari'ah audit,
   • - ascertain that the Shari'ah auditors are not obstructed in their work,
   • - enable Shari'ah auditors to access information or staff, from all different levels.
   
    
7. 6.18 The Senior Management is responsible to establish sufficient knowledge regarding the Compliance with Islamic Shari'ah requirements and the culture of Islamic Shari'ah compliance banking in the IFI.

Membership and Appointment

1. 7.1 The Board shall nominate the members of ISSC, and send the member's appointment request to HSA for approval prior to presenting its nomination to the general assembly.
    
2. 7.2 IFI's general assembly have the authority to appoint the ISSC members based on the Board's nomination and after HSA's approval.
    
3. 7.3 The composition of ISSC members in IFI should not be less than (5) five members with proper qualifications and competence (as prescribed in this standard).
    

   The CBUAE may exempt IFI from this requirement in consideration to its size and the complexity of its operations during the approval process of IFI's Shari'ah governance framework. The number of members of the ISSC shall not be less than three, in all cases.

4. 7.4 Emirati members in ISSC should not be less than one third.
    
5. 7.5 The membership of each member in the ISSC is subject to the following:
   1. must not exceed three ISSC memberships inside the UAE,
   2. must not exceed a total of (15) fifteen ISSC (or equivalent committees) memberships inside and outside the UAE ¹,
   3. Only one member of the IFI's ISSC may have more memberships stated in (7.5/b).
   
    
6. 7.6 The HSA may exempt UAE nationals from the clause (7.5) if necessary.
    
7. 7.7 If a position of ISSC member becomes vacant, at any time, and that causes lack of quorum, the Board must nominate a substitute member and shall send the appointment request to HSA for approval before presenting the same to the general assembly.
   However, if a position of ISSC member becomes vacant, at any time, and this leads to non-compliance with the clause no. 7.3 in this standard, but it does not breach the quorum, the Board may appoint a member after obtaining the HSA approval on the appointment. It is not required in this case to hold the general assembly for the appointment provided that the appointment is tabled to general assembly for final approval in its next meeting.
    
8. 7.8 The term of office for ISSC members shall be specified in the IFI's engagement letter with a minimum of three years, and may be renewed for a similar period.
   The engagement letter must also specify the responsibilities of the ISSC members and their remunerations. The remuneration must not be linked to the performance of the ISSC members.
    
9. 7.9 Membership of ISSC shall be renewed upon a recommendation from the Board. HSA shall approve the membership renewal request before presenting it to the general assembly. The renewal shall not be considered as new appointment.

Second: Eligibility and Competence

1. 7.10 Members of the ISSC must:
    
   1. be Muslim persons (not a company);
       
   2. hold a bachelor degree (as a minimum) in Islamic Shari'ah, particularly in jurisprudence of transactions, from a university that is acknowledged in Shari'ah studies, especially methodologies of jurisprudence, or have a minimum of 10 years' experience in fatwas issuance related to jurisprudence of financial transactions.
       
   3. have proven competence and expertise, especially in jurisprudence of financial transactions;
       
   4. have a strong comprehension of finance in general and Islamic finance in particular, and should have worked in the spectrum of Islamic finance and/or Shari'ah Supervision for a minimum of (10) ten years whether in direct employment or advisory level, or at least (10) ten years of post-graduation experience in teaching and scientific research related to jurisprudence of financial transactions;
       
   5. have good knowledge of the legal and supervisory framework related to financial and banking activities in the UAE;
       
   6. be excellent in Arabic, and preferably to have good knowledge of English;
       
   7. have good conduct and behavior, particularly with regard to credibility, integrity, and reputation in professional and financial transactions.
   
    
2. 7.11 HSA may exempt UAE candidates from some of the above clauses that would not impair their competence in performing their duties, provided that the candidate commits to the development and training required by the HSA.

Third: Termination or Resignation of ISSC member

1. 7.12 Termination of appointment or resignation of ISSC members is not considered effective until the termination or resignation request is approved by HSA, before it is presented to the general assembly for approval.
    
2. 7.13 The request must clarify the reasons for termination or resignation of the ISSC member.

¹ This is not applicable to companies of under one group. The ISSC member may be an ISSC member of the group's companies and that will count as one membership.

1. 8.1 ISSC undertakes Shari'ah supervision of all businesses, activities, products, services, contracts, documents, and code of conducts of the IFI.
   ISSC issues Shari'ah fatwas and resolutions that are binding upon IFI. The members of ISSC are accountable for the resolutions and fatwas they issue to the IFI, and their compliance with the resolutions and standards issued by the HSA.
    
2. 8.2 ISSC must monitor, through internal Shari'ah control division or section and internal Shari'ah audit, the IFI's compliance with Islamic Shari'ah.
    
3. 8.3 In case a Shari'ah non-compliance issue is identified in an IFI, the ISSC must review and approve:
   1. corrective measures, if the correction is feasible,
   2. remediation required by the Islamic Shari'ah regarding the consequences arising from the Shari'ah non-compliance issue if the correction is not feasible,
   3. preventive measures to avoid reoccurrence of such issues.
   
    
4. 8.4 ISSC shall review and approve from Shari'ah perspective:
   1. the method for calculation and distribution of profits, and for allocation of expenditures and costs and their division between holders of investment accounts and shareholders.
   2. final annual accounts before presenting them to the Central Bank.
   
    
5. 8.5 In case where an IFI is a branch or subsidiary of an offshore bank, the ISSC of such IFI should approve all business operations, products, services investments, and financial securities that IFI executes, issues, manages, promotes, offers to its customers, or participates in. The approvals from offshore Shari'ah committees (or similar committees) in relation to the above should not be used as a substitute for the onshore ISSC approval.
    
6. 8.6 The ISSC must issue an annual report stating the extent of IFI's compliance with Islamic Shari'ah that is published within the financial statement in the IFI's disclosures and other available means.
    
7. 8.7 The annual Shari'ah report of ISSC must contain the main components specified by the HSA in the annual Shari'ah report form.
    
8. 8.8 The annual Shari'ah report should be submitted to the HSA for review and approval prior to presenting the same to the general assembly.

Performance Assessment of ISSC

1. 8.9 The IFI in coordination with the chairman of the ISSC should develop an assessment for ISSC based on the following aspects:
    

   First: Shari'ah and scholarly aspects in terms of the member's participation in decision making, discussions, and review of contracts, documents and reports submitted to ISSC. This should account for 70% of the assessment.

   Second: Organizational aspect in terms of members' attendance of meetings and adherence to meeting schedule (dates and times), and other procedures prescribed by ISSC charter, in line with this standard. This should account for 30% of the assessment.

   The IFI should inform each ISSC member upon appointment and at the beginning of each fiscal year about the assessment criteria.

2. 8.10 At the end of a fiscal year, the Chairman of the ISSC shall provide HSA with a report on performance assessment.

ISSC Charter

1. 8.11 IFI must adopt a charter for the ISSC that defines details of decision making process and their implementation, and setting of adequate methods to fulfil ISSC's responsibilities without prejudice to the requirements of this standard, and in accordance to the format approved by the HSA.

ISSC Independence

1. 8.12 The following controls and guidelines, as a minimum, must be observed to ensure the independence of ISSC members:
    
   1. Members of the ISSC must not have a first-degree relative as member of IFI's Board or executive body in the IFI.
       
   2. Should not be an owner/shareholder of/in a company that provides consultancy or Shari'ah services to the IFI where he acts as member of ISSC.
       
   3. Members of the ISSC should not be employees at the IFI or any of its affiliates when serving as members of the committee and should not provide services to the IFI outside the scope of ISSC's assigned functions.
       
   4. Members of the ISSC shall not accept any allowance from IFI or its affiliates other than the allowance they receive for being members of the ISSC, the allowance for attending ISSC meetings, and other matters related thereto. If a financing is granted to a member of the ISSC, such member should be treated as ordinary customers and should not receive any preferential treatment,
       
   5. Member of ISSC or his first or second-degree relatives, shall not own a share equal to/or more than 5% that entitles him to act as executives or managers in any commercial company to which the IFI has paid, or received from, payments of material size, or one of its subsidiaries during the current or previous fiscal year.
       
   6. The entitlement to ISSC allowances should not be conditional on achieving certain results, or linking it to the results of the services provided by the ISSC (conditional remuneration).
       
   7. The foregoing cases are examples of ISSC members' independence. In case the IFI desires to treat ISSC members independent despite the existence of one or more of the above relationships, it must transparently disclose those instances and bear the responsibility for clarifying the reason for considering such members independent.
       
   8. In case of inevitable conflict of interest, member of the ISSC must notify the IFI management thereof in writing. He must also disclose any conflict of interest cases related to his family members or business partners or companies he has interest in. Also in cases where conflict of interest is related to a third party, he has to refrain from participating in the decision. In case of reporting conflict of interests, this must be recorded.
       
   9. The IFI must immediately notify the central bank if it become aware of any material information that may negatively affect the independence of any ISSC member.

Confidentiality

1. 8.13 Member of the ISSC must not disclose Confidential Information of the IFI unless such disclosure is required by law or by the Central Bank.

Consistency

1. 8.14 The ISSC members should try to achieve agreement related to fatwas and resolutions, to the extent possible. ISSC shall not resort to majority vote unless members are unable to reach agreement within a reasonable period.

1. 9.1 The IFI must establish effective internal Shari'ah controls comprising of three lines of defense approach that are independent from each other, which includes:

   - the first line of defense, represented by the business line, which should set clear policies, procedures, and controls, approved by ISSC, and execute the business activities in a manner compliant with Islamic Shari'ah at all times,
   - the second line of defense, represented by the internal Shari'ah control division or department, which undertakes the functions prescribed in the Article 10, and it should not be organizationally part of any business division or reporting to it,
   - the third line of defense represented by internal Shari'ah audit division or department, which undertakes Shari'ah audit and monitors compliance, and it should not be organizationally part of any business division or reporting to it.

2. 9.2 The IFI must provide sufficient financial and human resources that suit the size and nature of IFI's activities so that internal Shari'ah control section and internal Shari'ah audit section can carry their work effectively and efficiently, in consultation with the ISSC.
    
3. 9.3 The internal Shari'ah control division or section and internal Shari'ah audit division or section perform two different tasks, and must stay separate from each other in terms of reporting and human resources in accordance with the three lines of defense approach.

1. 10.1 This division or section supports the ISSC in its duties. It is comprised of the number of employees of the size that is commensurate with the size and nature of the IFI operations. The ISSC shall supervise the work of this division or section from the technical perspective.
    
2. 10.2 The IFI should appoint a head for internal Shari'ah control division or section, who shall report to the Board.
   The head for internal Shari'ah control division or section must:
   1. be a Muslim,
       
   2. have a university degree in Islamic Shari'ah, or relevant specializations,
       
   3. have a professional certificate in Shari'ah and Islamic Banking Control from one of the organizations that supports Islamic Finance like the Accounting and Auditing Organization for IFIs (AAOIFI) and the General Council for Islamic Banks And Financial Institutions (CIBAFI),
       
   4. have an experience of 10 years (at least), as a minimum, in the field of Shari'ah Supervision,
       
   5. not have been sentenced by a court in crimes related to honor or honesty, or was convicted of offences and sentenced to imprisonment,
       
   6. have strong command of English and reasonable command of Arabic.
   
    
3. 10.3 The internal Shari'ah control division or section should not issue fatwas or resolutions. Instead, the internal Shari'ah control division should refer back to ISSC in all matters that it considers and all tasks it carries out, unless there were fatwas or resolutions issued for the matters before.
    
4. 10.4 In matters related to promotions, bonus, performance assessment, and removal, the internal Shari'ah control division or section head and staff shall not report to the senior management, but to the Board or its committees in consultation with the ISSC.
    
5. 10.5 Internal Shari'ah control division or section staff shall not assume any executive powers or responsibilities related to the businesses and activities that may be monitored by themselves.
    
6. 10.6 The internal Shari'ah control division or section shall assume the following functions:
    
   1. ISSC Secretariat Function: undertakes the following:
      • - preparing, and organizing the meetings of the ISSC,
      • - preparing and drafting the minutes of the meetings,
      • - communicating the resolutions to the internal Shari'ah control division and internal Shari'ah audit division in addition to other divisions and sections of the IFI,
      • - following up with resolution implementation as per the follow-up list required by ISSC,
      • - filing fatwas and resolutions, and
      • - follow-up administrative matters related to ISSC.
      
       
   2. Shari'ah Consultations Function: provides consultation based on the ISSC's fatwas and resolutions in regards to:
      • - contracts and documents and other aspects related to the IFI's financial products and services, including products manual, policies, internal procedures,
      • - IFI's Shari'ah related inquiries and issues,
      • - Promotional / advertising materials and publications,
      • - Customers complaints (related to the compliance with Islamic Shari'ah), and
      • - other Shari'ah issues faced by the IFI especially the ones related to structuring and products.
         

      The IFI must ensure that persons tasked with this function must have high Shari'ah expertise and qualifications, and must be familiar with Islamic financial products, IT systems, and internal procedures.

      
       
   3. Shari'ah Research & Development Function: undertakes the following:
      • - conducting researches for related Shari'ah and procedural issues requested by ISSC,
      • - contributing, with other relevant sections in the IFI, to the development of products and formulation of policies, procedures, contracts, and
      • - other areas of development in IFIs .
      
       
   4. Shari'ah Compliance Function: is responsible to continuously monitor compliance of IFI's businesses and activities with resolutions, fatwas, regulations, standards, which are issued by the HSA.
       
      • - The Shari'ah compliance function must not be outsourced to external entities.
         
      • - The Shari'ah compliance report must be submitted to the ISSC to look at the technical Shari'ah related matters prior to submitting the same to the chief executive officer. The Shari'ah compliance must have a right of direct access to the Board.
         
      • - The work of the Shari'ah compliance function must be integrated within the overall compliance function of the IFI. It must have a dotted reporting line to the head of compliance of the IFI to submit reports regarding the compliance with Islamic Shari'ah.
         
   5. Shari'ah Training Function: conducts training for IFI's staff on those aspects of their duties related to IFI's compliance with Islamic Shari'ah.
      This function also provides adequate trainings for the staff on what they need to be equipped with information and skills, depending on nature of work of each employee, to ascertain that the IFI complies with Islamic Shari'ah at all times.

1. 11.1 The internal Shari'ah audit division or section undertakes Shari'ah audit and monitors IFI's compliance with Islamic Shari'ah. This is conducted through an annual plan to collect and assess evidence of IFI's activities and transactions to ensure their compliance with Islamic Shari'ah and ensure the adequacy of internal procedures and Shari'ah governance frameworks.
    
2. 11.2 The Board should appoint a Shari'ah controller to serve as head for internal Shari'ah audit division or section.
   The head for internal Shari'ah audit division or section must:
   1. be Muslim,
   2. have a university degree in Islamic Shari'ah, or relevant specializations,
   3. have a professional certificate in Shari'ah and Islamic Banking Audit from one of the organizations that support Islamic Finance like the Accounting and Auditing Organization for IFIs (AAOIFI) and the General Council for Islamic Banks And Financial Institutions (CIBAFI). It is also preferable to have a professional certificate in auditing issued by an international organization,
   4. have an experience of 10 years (at least), as a minimum, in the field of Shari'ah audit,
   5. not have been sentenced by a court in crimes related to honor or honesty, or sentenced by imprisonment, and
   6. have strong command of English and reasonable commend of Arabic.
       
3. 11.3 The head of internal Shari'ah audit division or department shall report to the Board. The head of internal Shari'ah audit division or section shall submit the reports to the ISSC for resolutions on Shari'ah matters mentioned in his/her reports. He/She shall then report with the ISSC resolutions to the Board's audit committee for the implementation of their content and follow-up of their requirements.
    
4. 11.4 The internal Shari'ah audit division or section submits its reports to the ISSC and to the Board audit committee biannually (at minimum)².
    
5. 11.5 The internal Shari'ah audit division and the internal audit division must coordinate and exchange their findings and reports.
    
6. 11.6 In matters related to promotions, bonus, performance assessment, and removal, internal Shari'ah audit division or section head and staff shall not report to the senior management they are auditing, but to the Board, through the audit committee, and in consultation with the ISSC.
    
7. 11.7 Internal Shari'ah audit division or section staff shall not assume any executive powers or responsibilities related to the businesses, activities, and contracts that may be audited by them.
    
8. 11.8 Internal Shari'ah audit division or section must carry out its duties in line with specified work procedures.
    
9. 11.9 The internal Shari'ah auditor must meet the requirements mentioned in (11.2) above, except for the condition of experience; where the internal Shari'ah auditor must have a minimum practical experience of five years in Shari'ah internal audit.
    
10. 11.10 Internal Shari'ah audit division or section shall carry out the following duties:
     
    1. Development of internal Shari'ah audit manual, and to undertake review and update of the manual on a regular basis.
        
    2. Prepare the annual Shari'ah audit plan, which must be approved by the ISSC in coordination with the audit committee, while upholding the best practices in this process (e.g. Risk based Shari'ah Audit ).
        
    3. Undertake assessment of businesses and activities of IFI to ensure the IFI's compliance with Islamic Shari'ah.
        
    4. Assess effectiveness of the internal Shari'ah supervision to ensure that the IFI's compliance with Islamic Shari'ah.
        
    5. Ensure that the products, services forms, contracts, agreements, activities and transactions execution procedures, and other related matters are approved by ISSC.
        
    6. Ensure the IFI's branches, its internal and external departments, and affiliates comply with Islamic Shari'ah.
        
    7. Conduct regular field audit to the IFI's internal and external departments, and branches (if any).
        
    8. Prepare internal audit forms and programs required for conducting inspection, and to verify and documents the sound execution of transactions in light of the ISSC's fatwas and HSA's resolutions.
        
    9. Conduct meetings with IFI's departments and branches to discuss the Shari'ah observations and request putting in place appropriate measures to prevent recurrences of similar issues, and in cooperation with relevant entities inside the IFI.
        
    10. Prepare a report of the outcomes of the Internal Shari'ah audit.
         
11. 11.11 The internal Shari'ah audit must not be outsourced to external entities. The internal Shari'ah audit division may be assisted by additional external bodies after the approval of the CBUAE.
     

² The frequency of reports submitted by the internal Shari'ah audit division or section depends on the size and nature of the IFI's works, which might require submitting more reports

1. 12.1 IFI may appoint a specialized external body to conduct external Shari'ah audit.

1. 13.1 The IFI must set a Shari'ah governance framework in accordance to this standard within 180 days from issuing this standard. The same must be submitted to the CBUAE for approval.
    
2. 13.2 The IFIs should comply fully with these standard requirements within one year from publishing this standard.
    
3. 13.3 The Regulatory Development Division of the Central bank shall be the reference for interpretation of the provisions of this standard.