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Article (3) Definitions

CBUAE/BSD N 1198/2021 Effective from 25/2/2021
  1. a.Affiliate: An entity that, directly or indirectly, controls, or is controlled by, or is under common control with another entity. The term control as used herein to mean the holding, directly or indirectly, of voting rights in another entity, or of the power to direct or cause the direct of the management of another entity.
  2. b.Board: The Islamic Bank’s board of directors.
  3. c.Central Bank: The Central Bank of the United Arab Emirates.
  4. d.Central Bank Law: Decretal Federal Law No. (14) of 2018 Regarding the Central Bank & Organization of Financial Institutions and Activities and its amendments.
  5. e.Central Bank Regulations: Any resolution, regulation, circular, rule, standard or notice issued by the Central Bank.
  6. f.Credit Risk: The potential that a counterparty fails to meet its obligations in accordance with agreed terms. Credit risk includes the risk arising in the settlement and clearing transactions.
  7. g.Compliance with Islamic Shari’ah refers to compliance with Shari’ah in accordance with:

    a.resolutions, fatwas, regulations, and standards issued by the Higher Shari’ah Authority in relation to licensed activities and businesses of IBs (“HSA’s Resolutions”), and

    b.resolutions and fatwas issued by Internal Shari’ah Supervision Committee (“ISSC”) of the respective IB, in relation to licensed activities and businesses of such institution (“the ISSC’s Resolutions”), provided they do not contradict HSA’s Resolutions.

  8. h.Displaced Commercial Risk: Risk where the IB may be under market pressure to voluntarily pay a return that exceeds the rate that has been earned on assets financed by Investment Account Holder when the return on assets is under-performing as compared with competitors’ rates.
  9. i.Equity Investment Risk: Risk arising from entering into a partnership for the purpose of undertaking or participating in a particular financing or general business activity as described in the contract, and in which the provider of finance shares in the business risk.
  10. j.Fiduciary responsibilities and duties refers to the responsibilities of IB to treat all their fund providers appropriately and in accordance with the terms and conditions of their investment agreements.
  11. k.Fiduciary Risk: Risk that arises from IBs’ failure to perform in accordance with explicit and implicit Standards applicable to their fiduciary responsibilities.
  12. l.Fund Providers: Refers to the deposits received by IB and that includes (a) current account holders; and (b) Investment Account Holders.
  13. m.Group: A group of entities which includes an entity (the ‘first entity’) and:

    a.any Controlling Shareholder of the first entity;

    b.any Subsidiary of the first entity or of any Controlling Shareholder of the first entity; and

    c.any Affiliate, joint venture, sister company and other member of the Group.

  14. n.Internal Shari’ah Audit: Regular process to inspect and assess the IB’s compliance with Islamic Shari’ah and the level of effectiveness of the IB’s Shari’ah governance systems.
  15. o.Internal Shari’ah Supervision Committee (ISSC): A body appointed by the IB, comprised of scholars specialized in Islamic financial transactions, which independently supervises the transactions, activities, and products of the IB and ensures they compliance with Islamic Shari’ah in all its objectives, activities, operations, and code of conduct.
  16. p.Internal Shari’ah Control Division (or Section): Technical division (or section) in the IBs with a mandate to support the ISSC its mandate.
  17. q.Investment Risk Reserve: Investment risk reserve is the amount appropriated by the IBs out of the income of Investment Account Holder (IAH), after allocating the Mudarib’s share, in order to cushion against future investment losses for IAH.
  18. r.Investment Account: Refers to the deposits accepted by IBs on the basis of Mudarabah or Wakalah contract or any other profit generating contract.
  19. s.Islamic Window: Refers to the licensed activities that are conducted in accordance with the Islamic Shari’ah that are carried by financial institutions for their account or for the account of or in partnership with third parties which comply with the regulatory requirements stated in this Standard and other regulations issued by the Central Bank.
  20. t.Market Risk: Refers to the potential impact of adverse price movements such as benchmark rates, foreign exchange (FX) rates, equity prices and commodity prices, on the economic value of an asset.
  21. u.Parent: An entity (the ‘first entity’) which:
    1. a.Holds a majority of the voting rights in another entity (‘the second entity’);
    2. b.Is a shareholder of the second entity and has the right to appoint or remove the majority of the board of directors or managers of the second entity; or
    3. c.Is a shareholder of the second entity and controls alone, pursuant to an agreement with other shareholders, a majority of the voting rights in the second entity; or
    4. d.If the second entity is a subsidiary of another entity which is itself a subsidiary of the first entity.
  22. v.Profit Equalization Reserve: The amount appropriated out of the Mudaraba profits, in order to maintain a certain level of return on investment for the Mudarib and unrestricted investment account holders and mitigate displaced commercial risk.
  23. w.Rate of Return Risk: Overall balance sheet exposures where mismatches arise between assets and balances from fund providers.
  24. x.Restricted Investment Accounts: The account holders authorize the IBs to invest their funds based on Mudaraba or Wakala contracts with certain restrictions as to where, how and for what purpose these funds are to be invested.
  25. y.Risk Appetite: The aggregate level and types of risk an IB is willing to assume, decided in advance and approved by the Board and within its risk capacity, to achieve its strategic objectives and business plan.
  26. z.Risk Limits: Specific quantitative measures that must not be exceeded based on, for example, forward-looking assumptions that allocate the bank’s aggregate risk appetite to business lines, legal entities or management units within the bank or group in the form of specific risk categories, concentrations or other measures as appropriate.
  27. aa.Risk Profile: Point in time assessment of the bank’s gross (before the application of any risk mitigants) or net (after taking into account risk mitigants) risk exposures aggregated within and across each relevant risk category based on current or forward-looking assumptions.
  28. bb.Risk Governance Framework: As part of the overall approach to corporate governance, the framework through which the Board and management establish and make decisions about the bank’s strategy and risk approach; articulate and monitor adherence to the risk appetite and risk limits relative to the bank’s strategy; and identify, measure, manage and control risks.
  29. cc.Risk Management Function: Collectively, the systems, structures, policies, procedures and people that measure, report and monitor risk on a bank-wide and, if applicable, group-wide basis.
  30. dd.Senior Management: The executive management of the Bank responsible and accountable to the Board for sound and prudent day-to-day management of the Bank, generally including, but not limited to, the chief executive officer, chief financial officer, chief risk officer and heads of the compliance and internal audit functions.
  31. ee.Shari’ah Non-Compliance Risk: Probability of financial loss or reputational damage that IB might incur or suffer due to not complying with Islamic Shari’ah.
  32. ff.Subsidiary: An entity (the ‘first entity’) is a subsidiary of another entity (the ‘second entity’) if the second entity:
    1. a.Holds a majority of the voting rights in the first entity;
    2. b.Is a shareholder of the first entity and has the right to appoint or remove the majority of the board of directors or managers of the first entity; or
    3. c.Is a shareholder of the first entity and controls alone, pursuant to an agreement with other shareholders, a majority of the voting rights in the first entity; or
    4. d.If the first entity is a subsidiary of another entity which is itself a subsidiary of the second entity.
  33. gg.Unrestricted Investment Accounts: The account where the holders authorize the IBs to invest their funds based on Mudaraba or Wakala (agency) contracts without laying any restriction on how the investment is to be managed. The IBs can commingle these funds with their own funds and invest them in pooled portfolio.