QFC Regulatory Authority Proposed Islamic Banking Business Prudential Rules 2015

PROPOSED ISLAMIC BANKING BUSINESS PRUDENTIAL RULES 2015

 

Invitation to comment

 

The QFC Regulatory Authority (“Regulatory Authority”) seeks public comment on the proposed Islamic Banking Business Prudential Rules 2015 (“the draft Rules”) (see Attachment 1).  The proposed rules apply to authorised firms which undertake the activities of accepting deposits, providing credit and dealing in investments as principal.  These activities are undertaken through managing Shari’a-compliant sources of funding (other than restricted Profit Sharing Investment Accounts), and financing and holding investments made under Shari’a-compliant transactions.  Firms conducting these activities may be an Islamic bank or an Islamic investment dealer and are collectively referred to as Islamic banking business firms in the draft Rules. 

 

These proposals significantly upgrade the prudential framework for Islamic banking business firms and have been undertaken in support of the State of Qatar’s Strategic Plan for Financial Sector Regulation 2013-2016 which identifies objectives to develop Qatar as an Islamic finance centre. 

As a result of these proposals, there are a limited set of consequential amendment proposals to other Regulatory Authority rules.  The Regulatory Authority is therefore also seeking public comment on the Islamic Banking Business Prudential (Consequential) and Miscellaneous Amendments Rules 2015 (see Attachment 2).

These revisions support the Regulatory Authority’s commitment to the maintenance of high international regulatory standards for Islamic financial services and the continued development of the QFC as a leading financial and business centre in the Middle East.

1.             Proposal on application of the draft Rules

2.1               The Regulatory Authority is proposing that an Islamic banking business firm may be an Islamic bank or an Islamic investment dealer and that the draft Rules apply to firms conducting the following Islamic banking business activities:

a.                  deposit taking;

b.                  providing credit facilities; and

c.                  dealing in investments as principal.

2.2               These activities are typically undertaken through managing Shari’a-compliant sources of funding (other than restricted Profit Sharing Investment Accounts), and financing and holding investments made under Shari’a-compliant transactions.

Interaction between rulebooks

2.3               A firm undertaking Islamic banking business activities in the QFC can also be authorised to conduct a full spectrum of other Islamic financial activities under the Financial Services Regulations, provided the activities are conducted in accordance with Shari’a.  For example, firms undertaking Islamic finance advisory or investment management activities would be subject to the Investment Management and Advisory Rules 2014 (“INMA”) for those activities.  However, for firms conducting both Islamic banking business and INMA activities, it is proposed the more onerous prudential capital requirements in the draft Rules will apply as these firms present a higher risk by the nature of their activities.

Changes to BANK and other rulebooks

2.4               Following the development of the draft Rules as a standalone rulebook for Islamic banking business, the Regulatory Authority has taken the opportunity to move the current placeholder Islamic banking rules in BANK into the draft Rules.  This process has also provided the opportunity to:

a.                  add minor and technical amendments to BANK to reflect recent clarifications to the Basel framework; and

b.                  align BANK and the draft Rules to each other. 

2.5               The draft Rules will also result in consequential amendments to a range of other rulebooks. 

2.6               In addition, the Regulatory Authority is also proposing a range of miscellaneous amendments to a range of rulebooks which are minor and technical in nature.  All of these proposed changes are reflected in the Proposed Islamic Banking Business Prudential (Consequential) and Miscellaneous Amendments Rules 2015 (see Attachment 2).

2.             Proposal on compliance with Shari’a

3.1               The IFSB-17 states that an Islamic financial institution must have a robust Shari’a governance system in order to ensure an effective independent oversight of Shari’a compliance over various structures and processes within the organisation framework. In line with IFSB Core principles and the current ISFI rulebook requirements, the Regulatory Authority is proposing to grant an authorisation to conduct Islamic banking business only if its business is intended to be fully conducted in accordance with Shari’a. 

3.2               The Regulatory Authority is also proposing new Shari’a compliance requirements for firms which focus on the firm’s policies, disclosure and reporting obligations, financial communications and internal Shari’a review.

3.3               The proposals also set out additional requirements relating to Shari’a supervisory board governance, these include:

a.                  clear terms of reference regarding its mandate and responsibility;

b.                  well-defined operating procedures and lines of reporting;

c.                  good understanding of, and familiarity with, professional ethics and conduct;

d.                  fitness and propriety criteria for the Governing Body to assess the appointment of a member of the Shari’a supervisory board; and

e.                  members of the Shari’a supervisory board being capable of exercising strong and independent oversight, and adequate objective judgement.

3.4               Please refer to Chapter 12 of the draft Rules.

3.             Proposal for classification of Islamic financial contracts

4.1               Innovation in the Islamic banking market has resulted in the development of a variety of products and services which are underpinned by Islamic financial contracts.  In a number of cases, Islamic financial contracts share common characteristics and structures and can therefore be grouped under generic classification.  On that basis, the Regulatory Authority is proposing to classify Islamic financial contracts into 5 main types, as follows:

a.                  sale-based contracts - such as murabahah and its variations, salam and istisna;

b.                  lease-based contracts - such as ijarah and its variations;

c.                  equity-based contracts - such as mudarabah and musharakah and their variations;

d.                  loan-based contracts - such as qardh;

e.                  service-based contracts - such as wakalah and wadi’ah.

4.2               The framework is designed to provide for product and service contract innovation. The types of financial contracts are not intended to be exhaustive. Please refer to rule 1.3.2 of the draft Rules.

4.             Proposal for credit risk mitigation and risk-weighting for Islamic financial contracts

5.1               The Regulatory Authority is proposing to require firms to adopt the standardised approach for credit risk which allows firms to employ credit risk mitigation techniques through the use of the following types of Islamic financial collateral instruments:

a.                  Hamish jiddiyah - promise to purchase contract

b.                  Urbun down payment contract with revocation option akin to a call option in the conventional sense

c.                  Sukuk - Islamic financial certificate, similar to a bond in Western finance

d.                  Shari’a-compliant equities

e.                  Units in Islamic collective investment schemes.

5.2               In addition, an Islamic banking business firm may accept as collateral (by way of pledge) a specified asset that can be lawfully owned, sold and delivered.  The pledge must be enforceable and the asset must be free of encumbrance.  Please refer to rules 4.6.8 and 4.6.9 of the draft Rules.

 

5.3               In alignment with IFSB standards, the Regulatory Authority is proposing to adopt the standardised approach for credit risk assessment.  This requires an Islamic banking business firm to establish and implement policies to identify, measure, evaluate, manage and control or mitigate credit risk and to calculate its credit risk capital requirement in accordance with prescribed risk-weights.

 Click here to view PDF Version of Consultation Paper 2015/2.

Click here to view Word Version of Consultation Paper 2015/2.

Click here to view PDF Version of Attachment 1 to Consultation Paper 2015/2.
Click here to view Word Version of the Attachment 1 to Consultation Paper 2015/2.

Click here to view PDF Version of Attachment 2 to Consultation Paper 2015/2.
Click here to view Word Version of the Attachment 2 to Consultation Paper 2015/2

Please submit your comments by 1 November 2015 including contact details for the organisation represented, to:

Mr Shaun Swan

Director, Policy

Policy and Legislative Counsel Department

QFC Regulatory Authority

PO Box 22989

Doha

Qatar

Or email to: ConsultationPapers@qfcra.com

These proposals are relevant to all authorised firms as well as prospective firms seeking approval for authorisation.

This Consultation Paper contains the following appendices:

Attachment 1:   Proposed Islamic Banking Business Prudential Rules 2015

Attachment 2: Proposed Islamic Banking Business Prudential (Consequential) and Miscellaneous Amendments Rules 2015

 

In accordance with its statutory objectives, it is the Regulatory Authority’s policy to make all responses to formal consultation available to the public.  Respondents who would like their submission, or part of their submission, to remain confidential should provide this information marked as confidential.  A standard confidentiality statement in an email message will not be regarded as a request for non-disclosure.