Sharia-Monitoring Committees for Su

On 19 March 2019, the Financial Regulatory Authority (“FRA”) published on its website the rules for the formation and membership of Sharia-monitoring committees for the issuance of Sharia-compliant sukuk. The decision contains the rules and membership requirements for a central sharia-monitoring committee to be formed at FRA, as well as the rules for internal sharia-monitoring committees in relevant non-banking financial companies. The new decision is applicable one day following its publication in the Egyptian Gazette.

Background

A year ago, an amendment[1] to the Capital Market Law (“CML”) introduced – among other things – new regulation of Islamic bonds “sukuk” by repealing a 2013 law that regulated the matter and replacing it with articles (14) bis to (14) bis-19 under the CML. Similar to bonds, sukuk are securities issued by companies and authorized institutions in order to raise finance from those wishing to subscribe. However, sukuk are distinguishable from other bonds in that they do not represent a direct debt, but rather a share of specified cash flows/returns from specific assets owned by the company/issuing entity and assigned to the subscribers of these sukuk. The new CML provisions define sukuk as “nominal securities of equal value issued for a specified period that may not exceed 30 years; each representing a common share in the ownership of assets, benefits, rights, or a defined project its rights or cash flows.” Another distinction between sukuk and bonds in general is that the former are not directly issued by the company/entity wishing to raise finance. Rather they are issued by a company called the “taskik company,” the sole purpose of which is to own the assets and rights being financed, and issue sukuk. In that sense, the taskik company resembles companies that issue securitization bonds. According to the CML, not all sukuk are described as “Islamic.” An issuer wishing to explicitly pronounce their sukuk Islamic or sharia-compliant must fulfil special conditions that are set out under the CML and according to FRA regulations. The most important of these conditions is that the issuer appoints a Sharia-monitoring committee (“SMC”) in accordance with rules issued by FRA following approval from Al Azhar. SMC approval must then be obtained in all stages of issuance, registration, and offering.

FRA’s Central Sharia-Monitoring Committee (“CSMC”)

FRA Decision No. 42 of 2019 (the “Decision”)[2] came out this March with the rules and membership conditions of CSMC as well as internal company SMCs. CSMC is formed by an FRA Board decision for a term of three years. It oversees all SMCs in authorized non-banking financial companies. CSMC is to ratify the issuance of Sharia-compliant sukuk and monitor how their yields are being used. It also monitors quarterly reports that are submitted to FRA by the SMCs. CSMC consists of nine Sharia scholars who are registered in accordance with a previous FRA decision issued in 2014 (“2014 decision”)[3] on the same topic. Said decision requires, as one of other conditions for registration, that the individual holds a degree from Al Azhar, is recommended by the High Sheikh of Al Azhar, or has spent at least three years as an SMC member in a bank or a non-banking financial institution. According to FRA’s recent Decision, CSMC members must have relevant experience in legal, financial and banking matters and they may not be a main shareholder or board member of any CML companies within the two years that precede their membership in CSMC. CSMC head and company boards must submit to the FRA any cases of conflict of interest in this respect. CSMC duties as listed in the Decision include setting out templates for sukuk issuance agreements for Sharia-compliant sukuk; issuing opinions and recommendations regarding the classification of sukuk containing an assessment of risk levels; and responding to opinion requests by SMCs. In addition, CSMC looks into disputes that arise between non-banking financial companies and SMCs on matters of fiqh (Islamic jurisprudence) and the interpretation of relevant Sharia principles. Furthermore, CSMC assists FRA in putting in place programs for training SMC members, and submits an annual report to FRA on its duties and operations of subordinate SMCs. CSMC has the right to review any documents or records it deems necessary for the performance of its duties and to conduct inspections on SMC operations.

SMC Regulation

Company SMCs must be comprised of three to five members, most of whom must be experts in fiqh and preferably knowledgeable in matters of economics, accounting, and the law. SMC members are appointed by the company’s general assembly (or other relevant internal body) and must be registered at the FRA in accordance with the 2014 decision. The term of membership in an SMC is three renewable years, and the committee must convene at least once a month. SMCs review subscription memoranda and issuance contracts of sukuk or other Sharia-compliant financial instruments. Sharia-compliant sukuk must be authorized from the company’s SMC as well as CSMC. SMC decisions and opinions must be kept in special records that are maintained for at least five years.   [1] Law No. 17/2018 amending certain provisions of the Capital Market Law No. 95/1992, Official Gazette, Issue No. 10 (bis) (h), 14 March 2018. [2] FRA Board of Directors Decision No. 42/2019 on the rules for the formation and membership of Sharia-monitoring committees for the issuance of Sharia-compliant sukuk, available through this link (in Arabic). [3] EFSA Board of Directors Decision No. 8/2014 on the regulation of the operation of internal sharia-monitoring committees of sharia-compliant financial products, Egyptian Gazette, Issue No. 24, 1 February 2014.