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  • Standard Re External Shari’ah  Audit for Islamic Financial Institutions

    N 5785/2024 Effective from 29/11/2024

    • Article (1) Introduction

      The Central Bank seeks to promote development of the banking activities to ensure their effectiveness and efficiency. To achieve this, financial institutions that conduct all or part of their activities and businesses in accordance with the provisions of Islamic Shari`ah (“Islamic Financial Institutions” or “IFIs”) must comply with the requirements stated in this Standard when appointing a specialized external firm to conduct External Shari’ah Audit.

    • Article (2) Objective

      The objective of this Standard is to set the minimum requirements that must be adhered for conducting an External Shari’ah Audit for the purpose of reassuring shareholders, depositors, and all stakeholders regarding the IFI’s compliance with Islamic Shari’ah Provisions.

    • Article (3) Scope of Application

      3.1This Standard applies to the IFIs in the case where:
       
       -the IFI appoints an External Shari’ah Auditor on a voluntary basis, or
       -there is a regulatory requirement to appoint an External Shari’ah Auditor.
       
      3.2This Standard applies to all incorporated IFIs. IFIs established in the UAE with Group relationships, including Subsidiaries, Affiliates, or international branches, must ensure that the Standard is adhered to on a solo and Group-wide basis. 
      3.3This Standard must be read in conjunction with the standards and resolutions issued by the Central Bank and the Higher Shari’ah Authority (“HSA”) and notified to IFIs.

    • Article (4) Definitions

      For the purposes of this Standard, the following words and phrases shall have the meanings stated below.

      a.Senior Management: The executive management of the IFI responsible and accountable to the Board for the sound and prudent day-to-day management of the IFI, 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.
      b.Internal Shari’ah Control Division (or Section): A technical division (or section) in the IFI that supports the ISSC in its mandate.
      c.Compliance with Islamic Shari’ah Provisions: It refers to compliance with Islamic Shari’ah in according with:
       
       a.The provisions stated in Section Six of Book Three of the Commercial Transactions Law,
       b.The provisions contained in the bylaws issued implementing Section Six of Book Three of the Commercial Transactions Law,
       c.The resolutions, Fatwas, regulations and standards issued or adopted by the Higher Shari’ah Authority in relation to businesses and activities of the IFI ("HSA’s Resolutions"),
       d.The resolutions and Fatwas issued or approved by the Internal Shari’ah Supervision Committee of the respective IFI, in relation to businesses and activities of such IFI ("ISSC’s Resolutions"), provided that they do not contradict HSA’s Resolutions.
       
      d.External Shari’ah Audit: An independent process to inspect and assess the IFI’s compliance with Islamic Shari’ah Provisions, and the level of adequacy and effectiveness of its Shari’ah governance systems for the relevant fiscal year, conducted by an external party.
      e.Internal Shari’ah Audit: The regular process to inspect and assess the IFI’s compliance with Islamic Shari’ah Provisions and the level of adequacy and effectiveness of IFI’s Shari’ah governance systems conducted by the Internal Shari’ah Audit division or department.
      f.Commercial Transactions Law: Federal Decree Law No. (50) of 2022 regarding the Commercial Transactions Law.
      g.Internal Shari’ah Supervision Committee (“ISSC”): A body appointed by an IFI, comprised of scholars specialized in Islamic financial transactions, which independently supervises transactions, activities, and products of the IFI and ensure its compliance with Islamic Shari’ah Provisions in all its objectives, activities, operations, and code of conduct.
      h.Board: Islamic Financial Institution’s board of directors.
      i.Shari’ah Non-Compliance Risks: Probability of financial loss or reputational risk that IFI might incur for not complying with Islamic Shari’ah Provisions.
      j.External Shari’ah Auditor: The Shari’ah audit firm and the individual audit engagement team members conducting the audit. Where relevant, specific references are made to the external Shari’ah audit firm only in certain paragraphs.
      k.Central Bank: The Central Bank of the United Arab Emirates.
      l.Islamic Financial Institutions (“Institutions/IFIs”): The Central Bank licensed financial Institutions that conduct all or part of their activities and businesses in accordance with the provisions of Islamic Shari’ah.
      m.Higher Shari’ah Authority: The authority established in accordance with the Decretal Federal Law No. (14) of 2018 Regarding the Central Bank & Organization of Financial Institutions and Activities, as amends. It exercises the mandates and responsibilities stipulated in the above mentioned decretal law.

    • Article (5) Purpose of the External Shari’ah Audit

      The purpose of the External Shari’ah Audit is to reach reasonable and independent assurance regarding the IFI’s Compliance with Islamic Shari’ah Provisions through an expression of an opinion thereon from the External Shari’ah Auditor.

    • Article (6) Basis of the External Shari’ah Audit

      6.1The External Shari’ah Auditor’s opinion must rely on the Shari’ah basis as per the order stated in Article (4/c).
      6.2If the External Shari’ah Auditor comes across an issue for which no provision is found in the list stated in Article (6.1), the External Shari’ah Auditor must refer to the IFI’s Internal Shari’ah Supervision Committee (ISSC) to obtain a Shari’ah resolution for the same.

    • Article (7) Fit and Proper

      7.1To conduct External Shari’ah Audit for IFIs, the external Shari’ah audit firm must be approved by the Central Bank. The firm will be granted the Central Bank approval after fulfilling certain criteria, including that the firm must have:
       
       a.a license issued by competent authorities to perform its business in the UAE,
       b.at least three years of experience in Shari’ah audit. As for new firms, the approval may be granted to such external Shari’ah audit firms under special conditions that enable them to gain experience in External Shari’ah Audit,
       c.adequate resources to conduct the duties of External Shari’ah Audit and disclose the names of personnel specialized in Shari’ah audit engaged by the firm,
       d.an External Shari’ah Audit team that meets the competencies required to carry out External Shari’ah Audit duties. These include Shari’ah proficiency, accounting and legal experience, and other competencies according to the nature of the IFI’s business. In all cases, the personnel specialized in Shari’ah audit who meet the conditions stipulated in Article )7.3) must not be less than two-thirds of the team members,
       e.formal manual that states its methodology in conducting External Shari’ah Audit’s duties. The manual should be in line with the best practices in this field.
       
      7.2Firms that conduct external audit and are not specialized in External Shari’ah Audit may perform External Shari’ah Audit as long as they meet the criteria stipulated in this Standard and they must be approved by the Central Bank.
      7.3Personnel specialized in Shari’ah audit must fulfil the following conditions:
       
       a.Should have a university degree in Islamic Shari’ah or relevant specializations,
       b.Should have a professional certificate in Shari’ah Auditing such as certificates issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) or the General Council for Islamic Banks and Financial Institutions (CIBAFI),
       c.Should have sufficient expertise of at least seven years in Shari’ah Audit,
       d.Proficiency in Arabic and English,
       e.Should not be sentenced by a final decision in crimes related to honor or honesty, or convicted of offences and sentenced by imprisonment.

    • Article (8) Appointment of External Shari’ah Auditor

      8.1The Board or its audit committee, in coordination with the ISSC, must recommend to the general assembly the appointment, re-appointment, dismissal, or the remuneration of the firm after ensuring that the firm has been pre-approved by the Central Bank. 
      8.2The general assembly of the Islamic Financial Institution appoints, reappoints or dismisses the firm, and sets its remuneration, on an annual basis, in order for the firm to carry out its duties as specified in this Standard or as determined by the Central Bank and the HSA. 
      8.3The audit committee must ensure that the External Shari’ah Audit team members as a whole have the expertise stated in Article (7.1/d) and that at least two-thirds of the team members are qualified personnel in Shari’ah audit who meet the conditions stated in Article (7.3) before submitting the appointment recommendation. 
      8.4The IFI, any of its Board members, any ISSC member, or their relatives including their second-degree must not be shareholders in the appointed external Shari’ah audit firm. This is also applicable to the External Shari’ah Audit team. 
      8.5The IFI must determine the External Shari’ah Auditor’s terms of engagement in written contract, which at a minimum, provides that:
             		 
       a.the External Shari’ah Auditor must meet with the Central Bank as deemed necessary for supervisory purposes. The Central Bank will determine whether the IFI will participate in such meetings;
       b.the External Shari’ah Auditor bears no duty of confidentiality to the IFI with respect to any notification of meeting with the Central Bank required by this Standard, or the provision of any document or information required to be submitted to, or requested by, the Central Bank for supervisory purposes; and
       c.the External Shari’ah Auditor must provide, upon the request of the Central Bank, access to any documents that support conclusions made in the external Shari’ah audit opinion.
       
      8.6The External Shari’ah Auditor or any of its Subsidiaries or Affiliates companies must not provide any consulting services or services other than External Shari’ah Audit scope that would jeopardize its objectivity or independence during the years of the assignment as an External Shari’ah Auditor. 
      8.7The External Shari’ah Auditor must not obtain any financial or in-kind consideration or benefits other than the contractual compensation/consideration for the External Shari’ah Audit work. 
      8.8The IFI must terminate the contract or dismiss the external Shari’ah audit firm if it is proven to be not in adherence to the relevant professional standards, lacks sufficient experience or independence, or there are supervisory observations regarding the firm from the Central Bank. In any case, the approval of the Central Bank must be obtained before terminating or dismissing the services of the firm. 
      8.9The IFI must rotate their external Shari’ah audit firm at least every 6 years, subject to the conduct of a procurement procedure. In addition, the IFI must rotate their external Shari’ah audit firm’s partner in charge of the audit every 3 years. 

    • Article (9) Responsibility of the Islamic Financial Institution

      9.1The IFI must comply with the requirements stated in this Standard and the relevant Shari’ah governance standards. The Board has the ultimate responsibility in this regard and it may delegate some relevant duties to the audit committee.
      9.2The audit committee should follow up on the work of the External Shari’ah Audit in accordance with this Standard and the relevant Shari’ah governance standards.

    • Article (10) Scope of External Shari’ah Audit

      10.1The scope of work of the External Shari’ah Auditor includes any aspect that is deemed necessary to express an opinion on the extent of the IFI’s compliance with provisions of Islamic Shari’ah in accordance with the approved Shari’ah basis, and this may include:
       
       a.The IFI and its branches, departments, and Subsidiaries and Affiliates.
       b.Any existing activity, product and service.
       c.Forms, contracts, agreements, and operation processes/procedures.
       d.Bylaws, instructions, work procedures, and product programs.
       e.Basis for calculating and distributing the profit and ensuring the expenses are well allocated between shareholders’ account and investment accounts.
       f.Accounting systems and Information Technology systems.
       g.The IFI’s Shari’ah governance systems and framework, the evaluation of the independence of the internal Shari’ah control departments and their effectiveness, and verification of the IFI’s adherence to its policies and procedures in this regard, including its commitment to its responsibilities stipulated in ISSC’s charter.
       h.Internal Shari’ah audit manual and plan to ensure that they have been approved by the ISSC, as decided by HSA.
       i.Any other aspects that the External Shari’ah Auditor needs to examine for the purpose of forming its opinion.
       
      10.2The External Shari’ah Auditor is not responsible to ensure the competency of the members of the ISSC or to evaluate their resolutions.
      10.3The External Shari’ah Auditor may determine the extent of reliance on the work of the internal Shari’ah auditor after examining four elements:
       
       a.Organizational structure including administrative reporting and submission reports,
       b.Scope of work,
       c.Professional competency,
       d.Professional performance.

    • Article (11) External Shari’ah Audit Frequency

      In case there is no regulatory requirement to appoint an external Shari’ah audit firm to conduct the External Shari’ah Audit for the IFI, it is recommended to conduct External Shari’ah Audit at least once every three years.

    • Article (12) External Shari’ah Auditor Report

      12.1The External Shari’ah Auditor must submit its report to the general assembly, after the report is approved by the Central Bank. A copy of the report shall be sent to the Board and to the ISSC. If the IFI does not have a general assembly, the report shall be submitted to the Board.
      12.2A copy of the External Shari’ah Auditor report shall be sent to the ISSC before the ISSC issues the annual Shari’ah report.
      12.3A copy of the External Shari’ah Auditor report shall be published in the IFI’s annual financial statements, and if there are reservations in the report, these must be stated without prejudice to the confidentiality of the related transactions.
      12.4The External Shari’ah Auditor report must contain at least the following points:
       
       a.Report title;
       b.The party to whom the report is submitted;
       c.Scope of audit engagement;
       d.An introductory paragraph about the details of the work during the audit, such as the number and dates of field visits, etc.;
       e.The responsibility of the Board and the IFI's Senior Management for compliance with the provisions of Islamic Shari’ah;
       f.Responsibility of the External Shari’ah Auditor;
       g.Expression of opinion paragraph; and
       h.Date, address, and signature of the External Shari’ah Auditor.
       
      12.5The External Shari’ah Auditor must report the observed weaknesses in the IFI’s internal Shari’ah control system, or any other weaknesses observed during the audit. It should be submitted to the IFI’s audit committee and to the ISSC, with a special detailed report addressed to them only.
      12.6If the External Shari’ah Auditor finds, during the audit, a mismatch between any resolution of the IFI’s ISSC and the resolutions of the HSA; a special report on this matter must be sent to the ISSC for information. If the ISSC approves the observations, it must take appropriate measures in this regard, and its secretariat will retain the report for regulatory purposes.
      12.7In the event of a conflict of opinion between the ISSC and the External Shari’ah Auditor regarding Shari’ah aspects, the opinion of the ISSC shall prevail.

    • Article (13) Duty to Report to the Central Bank

      13.1External Shari’ah Auditors must promptly report to the Central Bank, regarding any violations of the relevant laws, regulations, instructions and any matters of significance arising from their audit of the IFI. External Shari’ah Auditors making such reports in good faith shall not be considered to have breached any of their obligations.
      13.2The IFI must promptly notify the Central Bank in case of resignation of their External Shari’ah Auditor and the reasons thereof, as well as obtain the no-objection from the Central Bank in case of their dismissal or change. Divergence of opinions between the IFI and its External Shari’ah Auditor cannot be ground for dismissal.

    • Article (14) Interpretation of Standard

      The Regulatory Development Department of the Central Bank shall be the reference for interpretation of the provisions of this Standard.

    • Article (15) Compliance with the Standard

      Appointing an External Shari’ah Auditor is not mandatory unless it required by the Central Bank or the HSA. However, if an IFI appoints an External Shari’ah Auditor, it must fully comply with the requirements stated in this Standard. This Standard becomes effective one financial year after its date of issuance.