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  • IFR 2 Islamic Finance

    • IFR 2.1 Application

      • IFR 2.1.1

        This chapter applies to every PersonG to whom this module applies in accordance with IFR Section 1.1.

        Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]

    • IFR 2.2 Activities that Constitute Islamic Financial Business

      • IFR 2.2 Guidance

        1. Article 10 of the Law Regulating Islamic Financial Business 2004 prescribes what constitutes Islamic Financial Business.G In essence, where a PersonG engages in any activity that constitutes a Financial ServiceG and carries on or holds out the activity as being conducted in accordance with Shari'a, that activity constitutes Islamic Financial BusinessG .
        2. GEN section 2.2 sets out the activities that constitute a Financial ServiceG .
        Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]

    • IFR 2.3 Conducting Islamic Financial Business

      • IFR 2.3 Guidance

        1. Article 9 of the Law Regulating Islamic Financial Business 2004 provides that in order to conduct Islamic Financial BusinessG , the Authorised PersonG must have an endorsed Licence authorising it to conduct such business:
        a. as an Islamic Financial InstitutionG ; or
        b. by operating an Islamic WindowG .
        2. Article 11 of the Law Regulating Islamic Financial Business 2004 governs the making of an application for an endorsement to conduct Islamic Financial BusinessG .
        3. Article 11(5) of the Law Regulating Islamic Financial Business 2004 governs the grant of an endorsement to conduct Islamic Financial BusinessG as either an Islamic Financial InstitutionG or by operating an Islamic WindowG . A PersonG must obtain the relevant endorsement before carrying on Islamic Finance BusinessG as an Islamic Financial InstitutionG or through an Islamic WindowG .
        4. An Authorised PersonG with an endorsement to operate an Islamic WindowG may conduct some of its activities as a conventional Financial ServiceG while conducting its Islamic Financial BusinessG through the Islamic WindowG .
        5. If Islamic Financial BusinessG (whether through an Islamic Financial InstitutionG or Islamic WindowG ) is provided to Retail ClientsG , the Authorised PersonG must also have a Retail EndorsementG on its LicenceG .
        6. A PersonG may, subject to any restrictions in the DFSA Rules, carry on more than one Financial ServiceG , provided that PersonG has the relevant authorisations or endorsements on its LicenceG as are applicable.
        Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]
        [Amended] DFSA RM139/2014 (Made 21st August 2014). [VER8/06-14]

    • IFR 2.4 Islamic Financial Instruments and Products

      • IFR 2.4 Guidance

        1. The DFSA regulatory regime applies to a PersonG carrying on any Islamic financial activities in or from the DIFC if the activity:
        a. relates to a financial instrument or product of the kind described in Guidance Notes 3 (Profit Sharing Investment AccountsG ), 5 (Investments), and 7 (Takaful insurance) below; and
        b. is conducted by way of business and not expressly excluded from regulation as a Financial ServiceG . Note there are a number of such exclusions in GEN chapter 2.
        2. The DFSAG will, when considering the treatment of Islamic Financial BusinessG arrangements, take a "substance over form" approach.
        3. The issue of financial products which are SecuritiesG such as SharesG , DebenturesG or UnitsG as defined in GEN A2.1.2 (which are a subset of the definition of Investments — see Guidance Note 5), attracts product specific disclosure requirements such as ProspectusG or Exempt Disclosure StatementsG . Where such products are included on an Official List of SecuritiesG or made available to the public in the DIFC, there are initial and ongoing disclosure and other obligations that apply to the Reporting EntityG (generally the issuer) under the MKT module. These MKT obligations are quite distinct from the obligations that apply to PersonsG carrying on Financial ServicesG in respect of such financial products.

        Profit Sharing Investment Accounts (PSIAs)

        4. PSIAsG do not fall within the GEN definitions of InvestmentsG . They are contractual arrangements under which Authorised FirmsG invest clients' funds, often (though not always) on a pooled basis, and are generally treated by the firm as off balance sheet. They are sometimes structured under MudarabaG , so that the investor in principle bears the full investment risk. Although PSIAsG have the characteristics of a Collective Investment FundG , under an express exclusion provided under CIR Rule 2.1.13, they are not treated as such. Instead, Managing a PSIAG is a distinct Financial ServiceG as defined in Rules GEN 2.2.2(r) and GEN 2.21.
        5. As Managing a PSIAG is a Financial ServiceG , the DFSA regulatory regime that applies to PersonsG carrying on Financial ServicesG in or from the DIFC applies to Authorised FirmsG that manage PSIAsG . As PSIAsG are not InvestmentsG , the offer of PSIAsG , does not attract prospectus-like disclosure. Instead, it attracts a tailored regulatory regime that applies to the entity, i.e. an Authorised FirmG , that manages the PSIAsG (see IFR chapter 5 for these Rules). The Financial Service of AdvisingG on Financial ProductsG will apply to a PersonG giving advice on the merits of investing in a PSIAG (as a PSIAG is defined as a 'financial product' for the purposes of that activity). However, other activities such as dealing and arranging and COB requirements relating to those activities do not apply to a PSIAG (as it is not an InvestmentG as defined in GEN).

        Investments

        6. InvestmentsG comprise two types of products; SecuritiesG and DerivativesG . These products are defined in GEN App2. Most of the conventional Investments defined in GEN App2 can be offered as Islamic financial products, provided the relevant requirements including Shari'a principles are adhered to and in accordance with any Shari'a Supervisory BoardG rulings as applicable. While not an exhaustive list, conventional Investments that are commonly used as Islamic financial products include SharesG , SukuksG , Units of Islamic FundsG and also Structured ProductsG . Increasingly, DerivativesG are also being developed in accordance with Shari'a, such as a contract where the rights and liabilities of the parties are determined by reference to an underlying factor such as property of any description, currency rate or index, provided that the underlying factor in itself is Shari'a compliant and the contract does not involve any fundamental uncertainty (Gharar).
        7. The DFSA regulatory regime applies to PersonsG who carry on in or from the DIFC any Financial ServicesG activity in relation to any Islamic financial products that fall within the definition of InvestmentsG . However, particular products or instruments such as Profit Sharing Investment AccountsG (PSIAs), TakafulG and Islamic FundsG attract product/instrument specific additional conduct and other requirements, which are included in this module.

        Takaful insurance

        8. Takaful insurance generally refers to an arrangement where an insurer establishes a Shari'a compliant fund, predicated for mutual protection, where participants donate a part of their contributions to the common fund which will be used to meet claims payments and any participation rights. The TakafulG insurer's role is generally confined to managing the insurance activities and investing the fund assets in accordance with Shari'a.
        9. Persons conducting TakafulG insurance are conducting Insurance BusinessG . There are two types of Financial ServicesG that comprise Insurance BusinessG , ie, Effecting Contracts of InsuranceG or Carrying out Contracts of InsuranceG . Accordingly, any PersonG carrying on these Financial ServicesG activities is subject to the DFSA regime for regulating Financial ServicesG . Where such activities are carried out as TakafulG insurance, there are additional TakafulG specific requirements that apply to such an insurer, which are set out in this module (see IFR chapter 8). In addition, there are certain activities relating to insurance, such as advising and arranging, which are regulated as Insurance IntermediationG (see GEN section 2.19). PersonsG conducting those activities in relation to TakafulG insurance are regulated in the same way as PersonsG conducting such activities in relation to conventional insurance.
        Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]
        Amended in accordance with Notice of Amendments to Legislation April 2011 [VER3/02-11]
        [Amended] DFSA RM94/2012 (Made 14th June 2012). [VER4/06-12]
        [Amended] RM192/2016 (Made 7th December 2016). [VER11/02-17]