The Central Bank of Bahrain (CBB) announced new Shari’ah governance regulations applicable to wholesale and retail Islamic banks in Bahrain on 9 September.
The new regulations 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 Bahrain and will reduce the possibility that issuers cite non-compliance as a defence against payment.
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.
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. This risk was highlighted in June 2017, when Dana Gas (unrated), facing financial difficulties, claimed that $700 million Sukuk it issued in 2013 was non-Shari’ah compliant under United Arab Emirates’ law.—Agencies