The Saudi Central Bank (SAMA) has issued new Shariah Governance Rules dated May 2021 (the Rules) for financial institutions operating in Saudi Arabia. The Rules apply to financial institutions engaged in one or more of the following finance activities: (i) real estate financing, (ii) asset financing, (iii) small and medium enterprise financing, (iv) lease financing, (v) credit cards, and (vi) consumer financing ("Regulated Activities"). The Rules aim to put in place a governance framework for financial institutions to ensure that Shariah principles are complied with in the context of financing transactions, and to establish clear responsibilities for the management of financial institutions in respect of such transactions. This applies even where the financial institution does not purport to be Shariah compliant and is considered to be a "conventional" finance provider.

Pursuant to the Rules, financial institutions to which the Rules apply must form a Shariah Committee (Committee) to oversee compliance with the Rules. A copy of the policies and procedures of the Committee must be submitted to SAMA, and CVs of the Committee members must be uploaded to the institution's website.

The Rules state that the board of directors is responsible for ensuring that Shariah rules and principles are adhered to in respect of the institution's financing activities, as well as the decisions of the Committee.

The board is also responsible for the implementation of policies setting out the manner in which the main units of the institutions should communicate with the senior management in respect of compliance of financing activities with the Shariah principles in accordance with the Committee's decisions.

Further, the Rules set out provisions relating to the Committee, such as functions and responsibilities, membership requirements and independence and confidentiality. The Committee must comprise a minimum of two members and not exceed five members. The election of the Committee's members is subject to SAMA's approval.

Alternatively, the rules expressly permit the outsourcing of the Shariah Committee function to external Shariah consultancies provided that SAMA is notified of such arrangement.

Next Steps For Impacted Financial Institutions

The Rules will come into effect on 1 January 2022. While finance companies operating in Saudi Arabia are generally intended to be Shariah compliant, many such companies do not have a Shariah Committee or specialist Islamic finance lawyers to vet their products. Financial institutions and credit card providers operating in the Regulated Activities are urged to (a) conduct due diligence of all of their products for Shariah compliance; and (b) establish a Shariah Committee, or put in place an outsourcing contract with a Shariah consultancy, to certify their products. Our specialist Islamic finance lawyers maintain longstanding working relationships with eminent Shariah scholars.

Originally Published September 2021

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