Bahrain’s regulations for Islamic banks ‘credit positive’, says Moody’s

The Central Bank of Bahrain’s (CBB) has issued new shariah governance regulations applicable to wholesale and retail Islamic banks, which are credit positive for investors, Moody’s Investors Service said in a report.

Effective June 2018, the new regulations will make Islamic banks subject to an Independent External Shariah Compliance Audit, to ensure that all Islamic banks activities are  compliant.

The new regulations set guidelines for banks’ internal shariah boards: their role and responsibility to ensure full independence from commercial activities within the bank, and to address any conflicts of interest that arise from their compensation from banks.

Such regulations will reduce the possibility that issuers cite non-compliance as a defense against payment.

The approach to shariah compliance in the GCC region, where banks have individual shariah boards, contrasts with Malaysia, where there is a single regulatory authority provides a clear and comprehensive sukuk framework. Last May, the United Arab Emirates’ cabinet approved the central bank’s formation of a centralized high shariah authority for Islamic finance to support its growth and development.

There are 105 licensed banks in Bahrain, of which 26 are Islamic banks with a total consolidated balance sheet of nearly $27 billion as of April 2017. Of the $27 billion, nearly $8.8 billion, or 33%, are liabilities funded by sources outside Bahrain and these are generally more sensitive to risk, including shariah compliance risk.