Tuesday 03, January 2017 by William Mullally

Central Bank of Kuwait issue new Shari'ah governance guidelines

The Governor of the CBK Al Hashel announced the governance instructions to be implemented by 1 January 2018.

On 20 December, His Excellency, the Governor of the Central Bank of Kuwait (CBK), Dr. Mohammad Y. Al Hashel announced that the CBK Board of Directors has resolved to issue instructions on “Shari'ah Supervisory Governance for Kuwaiti Islamic Banks.” The issuance of these instructions are in line with the continuing efforts exerted by the CBK to promote Islamic banking activities in the State of Kuwait and accordingly to develop Shari'ah supervisory regulations for Islamic banks as per applicable best practises. The aforesaid instructions replace the CBK’s instructions regarding “Rules and Conditions for the Appointment and Responsibilities of the Shari'ah Supervisory Board in Islamic Banks” issued on 15 June and 19 June, 2003 and complement the instructions related to “Rules & Standards of Corporate Governance in Kuwaiti Banks” issued in 2012.

His Excellency, the Governor, added that the issuance of these instructions are in light of the substantial developments in the Islamic banking industry. In particular, the growth of the Kuwaiti Islamic banking sector in terms of its size and quality of operations since the issuance of the previously mentioned instructions in June 2003 has increased the importance of the role of Shari'ah supervision governance in Islamic banks. Furthermore, the growth in Islamic banking in Kuwait has made this topic a vital component of financial stability.

Dr. Al-Hashel explained that one of the major challenges facing the development of Islamic banking is the necessity of according importance to ensuring that Shari'ah principles are complied with, otherwise known as “Shari'ah auditing.” Shari'ah auditing is considered an integral part of the Shari'ah supervisory system and governance in an Islamic bank. Accordingly, the new instructions provide a comprehensive framework, clearly outlining the duties and responsibilities of the Shari'ah Supervisory Board, Internal Shari'ah Audit, and External Shari'ah Audit.

Dr. Al-Hashel clarified that the new instructions are organised and divided into the following sections on Shari'ah supervision governance: definitions, general requirements of the framework, principles of Shari'ah supervision and governance including oversight, accountability and responsibility, roles of the board of directors, executive management and Shari'ah supervisory board, independence requirements, “Fit and Proper” requirements for the board members, confidentiality of information, and requirements for consistency among board members in their decision-making and in providing advice to the bank. Dr. Al-Hashel further explained that these instructions incorporate both internal and external Shari'ah auditing, including the scope and objectives of the audit, and the qualifications required of Shari'ah auditors.

The Governor mentioned that Kuwaiti Islamic banks would be given until 31 December 2017 to fulfil the requirements as the instructions shall take effect starting on 1 January 2018. Accordingly, Kuwaiti Islamic banks are required to provide the CBK with a quarterly report including policies, procedures and actions taken by the respective Islamic bank in order to comply with the above-mentioned instructions. It is important that this quarterly status report demonstrate that the bank is making tangible progress in its compliance with these instructions according to the given timeline.

On the other hand, Dr. Al-Hashel emphasised that the implementation of these instructions by Kuwaiti Islamic banks is an integral part of corporate governance and will instil confidence in the Kuwaiti banking system both domestically and internationally. Hence, the implementation of the Shari'ah Supervision Governance instructions will result in an improved operating environment for Kuwaiti Islamic banks and the banking system, and thus further improve Kuwait’s macroeconomic performance.

Within the same context, Dr. Al-Hashel highlighted the increasing importance Kuwaiti Islamic banks already have been placing on various areas of Shari'ah supervision. Fittingly, the CBK’s development and issuance of the new instructions on Shari'ah Supervision Governance will provide employment opportunities for Kuwaiti youth in the Islamic banking sector. Accordingly, Shari'ah financial education centres such as the Faculty of Shari'ah at Kuwait University play an important role in providing the competencies required to implement the instructions in Shari'ah Supervisory Governance. Therefore, the CBK has initiated a dialogue with Kuwait University in this respect.

In addition, the Governor underlined that the new instructions in Shari'ah Supervision Governance along with the Kuwaiti banks’ increased attention to Shari'ah supervision play an important role in strengthening the position and the professionalism of the Shari'ah audit and ensuring its pre-eminence locally and internationally.

Dr. Al-Hashel concluded his statement by emphasising that the CBK is keen to continue its intensive efforts to provide the necessary environment to further the development of Islamic banking in Kuwait. Moreover, these internationally recognised and appreciated endeavours include the CBK’s organisation of the “Global Islamic Finance Conference” in collaboration with the International Monetary Fund on 11 November 2015 as well as the CBK’s contribution to several forums organised by local and international specialised institutions.







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