Shariah governance has become an important requirement in the Islamic banking industry. Its effectiveness can lead to achieving a number of benefits, the most important of which are:

Limiting the risk of non-compliance with Shariah principles and rules.

Supporting the Islamic banking industry stability and economic growth.

Improving operational efficiency and decision making of the Islamic banking industry.

 Attracting foreign investment in Shariah-compliant assets.

 Increasing efficiency of internal capital management.

Enhancing trust among key stakeholders.

 Strengthening relations with depositors, investors, and financiers.

In order to implement the effective Shariah governance requirements for banks and ensure that Islamic banking transactions in Saudi Arabia are Shariah compliant, SAMA issued this framework. To establish a robust and effective Shari’ah Governance Framework (SGF) for the banks conducting Shari’ah compliant banking, a minimum set of regulations and guidelines are issued for compliance by the banks. SGF does not contradict the requirements of other regulations rather it compliment already issued regulations and guidelines.

This framework aims to enhance the environment for compliance with Shariah principles and rules in banks in general. It also aims to define the tasks and responsibilities of the board of directors, executive management, Shariah committee, compliance department, risk management department, and internal audit department in relation to the application of the requirements of this framework. To achieve this, the board and the executive management of the bank are expected to have a reasonable understanding of Shariah principles and their broad application in Islamic finance. The Shariah committee is expected to have sufficient knowledge of financial and banking aspects in general and Islamic finance in particular so as to be able to understand the Shariah matters presented to it. In addition, the committee is expected to constantly gain knowledge of Shariah and financial matters and laws, attend relevant training programs, continue to enhance knowledge and understanding, and keep abreast of the latest developments in the field of Islamic finance.

The following words and phrases, wherever mentioned in this framework, will have the meanings assigned to them unless the context requires otherwise:

• SAMA: The Saudi Central Bank.

• Bank: Any local bank that is licensed to carry out banking business in Saudi Arabia in accordance with the provisions of the Banking Control Law and that conducts Islamic banking.

• Board: The board of directors of the bank.

• Management: The bank executive management and senior executives that manage the bank business as well as propose and implement strategic decisions.

• Committee: A Shariah committee responsible for supervising compliance with Shariah principles and rules and their application in the bank.

• Committee Members: A group of specialists whose knowledge and experience are not limited only to the Shariah and related matters, but also include the jurisprudence of contemporary financial transactions used to form Shariah decisions given to the bank. These Shariah decisions are usually not directed to the public or entities engaging in other activities.

• Independent Committee Member: A person who is completely independent in position and decisions and who meets the requirements for independence as stipulated in Paragraph 3 of Article 7 of this framework.

• Shariah Compliant: Compliance with Shariah decisions issued by the bank’s Shariah committee.

• Islamic Window : That part of a conventional bank (which may be a branch or a dedicated unit of that bank) that provides Shariah compliant finance and investment services both for assets and liabilities products.

• Investment Account Holders: Bank customers who have Shariah-compliant investment accounts which may be restricted or unrestricted according to their Shariah and accounting status.

• Bank Subsidiaries: Any legal entity controlled by the bank by owning more than half of its capital or voting rights or by forming its board of directors, including specialpurpose entities.

• Relatives:

  • - Fathers and mothers, grandfathers and grandmothers.

  • - Offspring and their children.

  • - Full and half siblings.

  • - Spouses.

• Stakeholders: Any person who has an interest in the bank, such as shareholders, employees, investors, creditors, customers, suppliers and supervisors.

The bank shall establish a Shariah governance framework with emphasis on the key functions and elements that ensure effective implementation of this framework and according to the following:

• 1. The Shariah governance framework shall consist of a set of policies and procedures that describe the structure, roles, responsibilities, and tasks of the relevant departments as well as the communication arrangements among them.

• 2. These policies and procedures shall define the mechanism that a bank must follow to meet the requirements of this framework, including how committee meetings shall be conducted, how decisions are made and recorded, and how reports shall be prepared and submitted.

• 3. The bank shall establish formal reporting channels among the key units/departments to ensure effective and timely reporting. In this regard, the committee shall report to the board of directors.

• 4. The bank must establish a control mechanism to ensure that the objectives and operations of its Islamic banking activities are in compliance with Shariah principles and rules at all times.

• 5. The composition of the Shariah governance framework shall be supported by pillars that include effective tasks and responsibilities carried out by the board and the management, independence of the committee, and qualification of its members in addition to the effectiveness of the internal control functions which are Shariah compliance, Shariah non-compliance risk management, and Shariah internal audit

• 6. Continuous assessment of the bank’s compliance with the Shariah principles and rules shall be carried out.

• 7. The bank shall manage the potential Shariah non-compliance risk resulting from Islamic banking which includes identifying the inherent risk and establishing controls to mitigate such risk.

• 8. A regular and periodic Shariah internal audit shall be conducted to verify the level of compliance of Islamic banking activities and operations with the Shariah principles and rules.

• 9. The bank shall establish a unit/department responsible for conducting research and studies on Shariah, coordinating between the management and the committee, and disseminating Shariah decisions to stakeholders within the bank in addition to acting as secretariat to the committee.

1. The board is primarily responsible for the overall Shariah governance framework of the bank and the compliance of its Islamic banking activities with the Shariah principles and rules. The board is also responsible for approving the bank’s Shariah governance framework, performing continuous oversight over the effective functioning of the framework, and ensuring that the framework is commensurate with the size, complexity, and nature of the bank’s business.

2. The board shall approve all Shariah policies of the bank and supervising the effective implementation of these policies.

3. The board shall provide the necessary mechanisms and methodology for risk management to protect the interests of investment account holders through Profitlost sharing accounts.

4. The board shall supervise the bank’s compliance and implementation of the Shariah decisions issued by the committee.

5. The board shall ensure that an effective communication policy among the key functions of the bank is in place to facilitate and allow the escalation of important matters related to compliance of Islamic banking activities with the Shariah principles and rules.

6. The board shall remunerate the Shariah committee members appropriately based on the recommendation of the nomination and remuneration committee of the board. Such remuneration shall be commensurate with the duties and responsibilities of these members and consistent with SAMA’s relevant instructions.

7. A formal procedure shall be adopted, as proposed by the nomination and remuneration committee, to assess the performance of the Shariah committee members based on competence, knowledge, contribution and effectiveness.

8. The resume of all the Shariah committee members shall be disclosed so that shareholders and investors can judge the competence and ability of these members to carry out their duties effectively.

9. The mechanism used to supervise the integrity and performance of the committee members shall be disclosed. Moreover, it must be taken into account not to nominate any member who has previously been convicted by a court judgment or of a crime impinging on honor or integrity.

1. The management shall identify and refer any Shariah issues to the Shariah committee for decisions and provide the committee with the required information and disclosures in a timely manner.

2. The management shall monitor and implement the Shariah decisions issued by the committee.

3. The management shall provide continuous education and training programs to key internal stakeholders, including the board, the Shariah committee, and the employees related to Shariah and finance matters. This is to ensure that all departments/units associated with the Shariah governance framework of the bank are sufficiently exposed to current developments in Shariah related matters.

4. The management shall develop and adopt a holistic culture of Shariah compliance within the bank to comply with the Shariah principles and rules in its overall Islamic banking activities. In addition, all relevant employees are expected to be familiar with the Shariah-compliant products offered by the bank as well as similarities and differences between Shariah-compliant banking products and services and others that are conventional.

5. The management must ensure that Shariah policies and procedures are accessible to employees involved in the implementation of the Shariah governance framework.

6. The management shall ensure that all Islamic banking operations are carried out according to the bank’s Shariah policies and procedures and shall constantly review and update the policies and procedures to reflect market practices and developments.

7. If the management becomes aware that certain financial or Islamic banking transactions appear to involve operations that are not Shariah-compliant, the management shall:

• a) Immediately inform the board and the committee.

• b) Immediately stop providing any banking services or products in that business line related to the Shariah non-compliant operation.

Within (30) business days of becoming aware of such non-compliance, submit a plan to rectify the state of non-compliance with the Shariah principles and rules, to be approved by the board and endorsed by the committee.