Clarity on Islamic finance framework

Federal Law No 14 of 2018 regarding the Central Bank and Organisation 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 businesses and activities in accordance with Sharia provisions.

The law provides for establishment of a Higher Sharia Authority, which, among other things, determines the rules and standards for Islamic financial institutions and supervises 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 and Finance at Al Tamimi.

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 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 relating to the operations and activities of Islamic financial institutions.

The new law states that fatwas and opinions of the Higher Sharia Authority will be binding on the Internal Sharia Supervisory Committees.

“The new Law also reconfirms the need for, and status of, internal Sharia committees within each fin-ancial 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 addition, 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.

■ This article is part of a five-part series on the new UAE Banking Law.