CBB Volume 2: Contents
LR-1.3 Definition of Regulated Islamic Banking Services
Regulated Islamic banking servicesG are any of the following activities, carried on by way of business:(a) Accepting Shari'a money placements/deposits(b) Offering Shari'a Financing Contracts(c) Managing Shari'a profit sharing investment accounts(d) Dealing in Shari'a compliant financial instrumentsG as principal(e) Dealing in Shari'a compliant financial instrumentsG as agent(f) Managing Shari'a compliant financial instrumentsG(g) Safeguarding Shari'a compliant financial instrumentsG(h) Operating a Shari'a compliant Collective Investment UndertakingG(i) Arranging deals in Shari'a compliant financial instrumentsG(j) Advising on Shari'a compliant financial instrumentsG(k) Providing money exchange/remittance services(l) Issuing/ administering means of payment.
Upon application, the BMA may exclude specific transactions from the definition of regulated Islamic banking servicesG .
The BMA will normally only consider granting such an exemption when a Bahrain resident is unable to obtain a specific product in Bahrain and it would be unreasonable to require the overseas provider of that product to be licensed for that specific transaction, and the provider has no intention of regularly soliciting such business in Bahrain.
LR-1.3.4(a) undertaking for commercial gain, at a minimum, either or both of the activities of accepting Shari'a money placements/deposits and managing Shari'a profit sharing investment accounts, together with the activity of offering Shari'a financing contracts; in addition, any of the remaining activities specified in Rule LR-1.3.1 may also be undertaken;(b) holding oneself out as willing and able to engage in such activities; or(c) regularly soliciting other persons to engage in transactions constituting such activities.
Licensees should note that they may still undertake activities falling outside the definition of regulated Islamic banking servicesG , such as investing in physical commodities — subject to Rule LR-1.1.11. The fact that an activity is not included in the definition of regulated Islamic banking servicesG does not mean that it is prohibited. In transitioning to the new licensing framework, BMA will be closely liaising with licensees to ensure that no disruption occurs to their legitimate business activities.
Licensees should note that the same legal entity cannot combine regulated Islamic banking servicesG with other regulated services, such as regulated insurance servicesG . However, different legal entities within the same group may of course each hold a different license (e.g. banking and insurance).
A person does not carry on an activity constituting a regulated Islamic banking serviceG if the activity:(a) is carried on in the course of a business which does not ordinarily constitute the carrying on of financial services;(b) may reasonably be regarded as a necessary part of any other services provided in the course of that business; and(c) is not remunerated separately from the other services.
For example, the holding of money as a rent-guarantee in connection with the rental of a property would not be considered a regulated Islamic banking service, since it satisfies the exemptions in Rule LR-1.3.7.
A person does not carry on an activity constituting a regulated Islamic banking serviceG if the person is a body corporate and carries on that activity solely with or for other bodies corporate that are members of the same group.
A person does not carry on an activity constituting a regulated Islamic banking serviceG if such person carries on an activity with or for another person, and they are both members of the same familyG .
A person does not carry on an activity constituting a regulated Islamic banking serviceG if the sole or main purpose for which the person enters into the transaction is to limit any identifiable risks arising in the conduct of his business, providing the business conducted does not itself constitute a regulated activity.
For example, commercial companies entering into bay salam or istisna transactions in order to protect themselves against future fluctuations in the price of their products, would not be considered to be dealing in financial instruments as principal, and would not therefore require to be licensed as an Islamic bank licenseeG .
A person does not carry on an activity constituting a regulated Islamic banking serviceG if that person enters into that transaction solely as a nominee for another person, and acts under instruction from that other person.
A person does not carry on an activity constituting a regulated Islamic banking serviceG if that person is a government body charged with the management of financial instrumentsG on behalf of a government or public body.
A person does not carry on an activity constituting a regulated Islamic banking serviceG if that person is an exempt person, as specified by Royal decree.
Accepting Shari'a money placements/deposits
Accepting Shari'a money placements is defined as the acceptance of sums of money for safe-keeping ('al-wadia', 'q'ard') in a Shari'a compliant framework, under which it will be repaid, either on demand or in circumstances agreed by the parties involved, and which is not referable to the giving of security.
Managing Shari'a profit sharing investment accounts
Managing a Shari'a profit sharing investment account is defined as managing an account, portfolio or fund, whereby a sum of money is placed with the service provider on terms that a return will be made according to an agreed Shari'a compliant profit-sharing arrangement, such as a mudaraba or musharaka partnership.
Offering Shari'a Financing Contracts
Offering Shari'a financing contracts is defined as entering into, or making arrangement for another person to enter into, a contract to provide finance in accordance with Shari'a principles, such as murabaha, bay muajjal, bay salam, ijara wa iktina and istisna'a contracts.
Dealing in Shari'a compliant financial instruments as principal
Dealing in Shari'a compliant financial instruments as agent
A licensee that carries on an activity of the kind specified by Rule LR-1.3.22 does not determine the terms of the transaction and does not use its own financial resources for the purpose of funding the transaction. Such a licensee may however receive or hold assets in connection with the transaction, in its capacity as agent of its client.
Managing Shari'a Compliant Financial Instruments
The activities included under the definition of Rule LR-1.3.24 include activities such as asset management.
Safeguarding Shari'a Compliant Financial Instruments (i.e. Custodian)
A person does not carry on an activity specified in Rule LR-1.3.26 if the person receives documents relating to a financial instrumentG for the purpose of onward transmission to, from or at the direction of the person to whom the financial instrumentG belongs; or else is simply providing a physical safekeeping service such as a deed box.
A "qualifying custodian" means a person who is:(a) a licensee who has permission to carry on an activity of the kind specified in Rule LR-1.3.26; or(b) an exempt person in relation to activities of that kind.
A person does not carry on an activity specified in Rule LR-1.3.26 if they are managing a central depository, which is part of an exchange recognised by BMA.
The following are examples of activities, when taken in isolation, are unlikely to be regarded an activity of the kind specified under Rule LR-1.3.26:(a) providing information as to the number of units or the value of any assets safeguarded; and(b) converting currency.
A person undertaking an activity of the kind specified under Rule LR-1.3.26 may also be engaged in the administration of the financial instrumentsG , including related services such as cash/ collateral management.
Operating a collective investment undertaking
For the purposes of LR-1.3.33, a collective investment undertakingG means any arrangements, authorised by or registered with the BMA, with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements to participate in or receive profits or income arising from the acquisition, holding or disposal of the property or sums paid out of such profits or income.
A person does not carry on an activity specified in Rule LR-1.3.33 if the activity relates to the person establishing or winding up a collective investment undertakingG , and that activity may be reasonably regarded as necessary in the course of providing legal services or providing accounting services.
Collective investment undertakingsG of the kind specified in Rule LR-1.3.33 may be open-ended (i.e. with shares continuously issued and redeemed to meet investor demand) or closed-ended (where there is a single issue of shares and investors can only realise their investments on the winding-up of the fund).
Arranging deals in Shari'a compliant financial instruments
Arranging deals in Shari'a compliant financial instrumentsG means making arrangements with a view to another person, whether as principal or agent, buying, selling, subscribing for or underwriting deals in Shari'a compliant financial instrumentsG .
A person does not carry on an activity specified in Rule LR-1.3.37 if the arrangement does not bring about the transaction to which the arrangement relates.
The exclusion in Rule LR-1.3.39 does not apply if the agent receives from any person, other than the client, any pecuniary reward or other advantage, for which he does not account to the client, arising out of his entering into the transaction. Thus, if A receives a commission from B for arranging credit or deals in investment for C, the exclusion in Rule LR-1.3.42 does not apply.
A person does not carry on an activity specified in Rule LR-1.3.37 merely by providing the means of communication between two parties to a transaction.
A person does not carry on an activity specified in Rule LR-1.3.37 if they operate an exchange, duly recognised and authorised by the BMA.
Negotiating terms for an investment on behalf of a client is an example of an activity which maybe regarded as activities of the kind specified in Rule LR-1.3.37.
The following are examples of activities, when taken in isolation, are unlikely to be regarded as an activity of the kind specified in Rule LR-1.3.37:(a) appointing professional advisers;(b) preparing a prospectus/business plan;(c) identifying potential sources of funding;(d) assisting investors/subscribers/borrowers to complete and submit application forms; or(e) receiving application forms for processing/checking and/or onward transmission.
Advising on deals in Shari'a compliant financial instruments
Advising on Shari'a compliant financial instrumentsG means giving advice to an investor or potential investor (or a person in his capacity as an agent for an investor or potential investor) on the merits of buying, selling, subscribing for or underwriting a particular Shari'a compliant financial instrumentG or exercising any right conferred by such a financial instrumentG .
The following are examples of activities, which may be regarded as an activity as defined by Rule LR-1.3.45:(a) a person may offer to tell a client when shares reach a certain value on the basis that when the price reaches that value it would be a good time to buy or sell them;(b) recommendation on the size or timing of transactions; and
A person does not carry on an activity specified in Rule LR-1.3.45 by giving advice in any newspaper, journal, magazine, broadcast services or similar service in any medium if the principal purpose of the publication or service, taken as a whole, is neither:(a) that of giving advice of the kind mentioned in Rule LR-1.3.45; nor(b) that of leading or enabling persons to buy, sell, subscribe for or underwrite a financial instrumentG .
The following are examples of activities, when taken in isolation, are unlikely to be regarded as an activity as defined by Rule LR-1.3.45:(a) explaining the structure, or the terms and conditions of a financial instrumentG or credit facility;(b) valuing financial instrumentsG for which there is no ready market;(c) circulating company news or announcements;(d) comparing the benefits and risks of one financial instrumentG to another; and(e) advising on the likely meaning of uncertain provisions in an agreement relating to, or the terms of, a financial instrumentG or on the effect of contractual terms and their commercial consequences or on terms that are commonly accepted in the market.
Providing money exchange / remittance services
Means providing exchange facilities between currencies, and the provision of wire transfer or other remittance services.
Issuing / administering means of payment