Kuwait’s central bank fine-tunes governance of Islamic banks

Reuters

Kuwait’s central bank has issued new governance rules for Islamic banks, including requirements for external sharia audits, as regulators seek more transparency and accountability in the sector.
Regulatory scrutiny over Islamic banks has been building as they now hold around a quarter of total banking assets in the Gulf, while in Kuwait that figure stands at around 40 percent.
Kuwait’s central bank said the rules published this week aim to increase customer confidence in Islamic banking by strengthening both internal and external oversight.
This follows similar steps by Bahrain which proposed new requirements in September for its Islamic banks, including external sharia audits.
The central bank directive, which must be fully implemented by Jan. 2018, provides guidance covering independence of sharia boards as well as fit and proper criteria for scholars. Islamic banks have traditionally used in-house boards of scholars to determine whether religious principles are being obeyed, a self-policing approach often criticised for leaving banks open to conflicts of interest.
Under the rules, scholars can only serve on the sharia boards of three Islamic banks in Kuwait or fewer and they must have a minimum of five years relevant industry experience.
There are no specific term limits for scholars, but they must attend a minimum number of sharia board meetings during a given year or risk losing their
eligibility.
The central bank also wants to encourage consistency and timeliness of rulings from sharia boards, which must provide an annual report on their activities.
But is also wants to shield them from undue influence: sharia board rulings will be binding on banks’ managements, according to the rules.