Central Bank of Bahrain Volume 2—Islamic Banks
Part A
Introduction
UG UG Users' Guide
UG-A UG-A Introduction
UG-A.1 UG-A.1 Purpose
Executive Summary
UG-A.1.1
The Central Bank of Bahrain ("CBB"), in its capacity as the regulatory and supervisory authority for all financial institutions in Bahrain, issues regulatory instruments that licensees and other specified persons are legally obliged to comply with. These regulatory instruments are contained in the CBB Rulebook. Much of the Rulebook's substantive content was previously issued by the Bahrain Monetary Agency ('the BMA'), and was carried forward when the CBB replaced the BMA in September 2006.
October 07UG-A.1.2
The Rulebook is divided into 7 Volumes, covering different areas of financial services activity. These volumes are being progressively issued. Volumes 1 and 2, covering
conventional bank licensees andIslamic bank licensees respectively, were issued in July 2004 and January 2005; Volume 3, coveringinsurance licensees , was issued in April 2005. Volume 4 was issued in April 2006. Volume 5 (coveringspecialised licensees ), and Volume 6 (capital markets), are being issued progressively. Volume 7 on collective investment undertakings (CIU) was issued in May 2012.Amended: April 2013
Amended: July 2012
Amended: April 2011
October 2007UG-A.1.3
This Users' Guide provides guidance on (i) the status and application of the Rulebook, with specific reference to Volume 1 (Conventional Banks); (ii) the structure and design of the Rulebook; and (iii) its maintenance and version control.
October 07UG-A.1.4
Volume 2 (Islamic banks) covers
Islamic Bank Licensees. It contains prudential requirements (such as rules on minimum capital and risk management). Collectively, these requirements are aimed at ensuring the safety and soundness of CBB-licensed Islamic banks and providing an appropriate level of protection to the clients of such banks.October 07Legal Basis
UG-A.1.5
This Module contains the CBB's Directive (as amended from time to time) regarding the User's Guide for Volume 2, of the CBB Rulebook, and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to all Islamic bank licensees (including their approved persons).
Amended: January 2011
October 2007UG-A.1.6
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 07UG-A.2 UG-A.2 Module History
UG-A.2.1
This Module was first issued in January 2005 by the BMA together with the rest of Volume 2 (Islamic banks). Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 07UG-A.2.2
When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 2 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.
October 07UG-A.2.3
A list of recent changes made to this Module are detailed in the table below:
Module Ref. Change Date Description of Changes UG-2.3 & UG-3.1 4/2006 Explanation of revised dating and numbering system. UG-A.1 10/2007 Updated to reflect new CBB Law; various references changed and new Rule A-1.6 introduced categorising this Module as a Directive. UG-A.2 10/2007 Module History table updated to reflect other 01/2007 changes. UG-1.1-2 10/2007 Amendments to UG-1.1 to reflect new authorities under the CBB Law and new Rules UG-1.2.6 and UG-1.2.7 to reflect the CBB Law; other material reordered as a consequence. UG-A.1.5 01/2011 Clarified legal basis and converted as a rule to be consistent with other parts of the CBB Rulebook. UG-1.3.2, UG-1.4.1 01/2011 Underlined defined term. UG-2.1.2 01/2011 Updated to reflect structure of Volume 5. UG-A.1.2 04/2011 Updated to reflect issue date of Volume 5 and 6. UG-A.1.2, UG-1.2.2, UG-1.2.8, UG-2.1.1, UG-2.1.3 and UG-2.2.2 07/2012 Various minor corrections to reflect structure of Rulebook, including issuance of Volume 7. UG-3.2 and Annex 01/2013 Amended as CBB Rulebook only now available on CBB Website. UG-A.1.2, UG-2.1.2 and UG-2.1.3 04/2013 Minor corrections. UG-1.3.4 10/2016 Added paragraph to clarify reference to 'he' 'his' 'she' and 'her'. UG-3.2.2 04/2020 Amended Paragraph. UG-1 UG-1 Rulebook Status and Application
UG-1.1 UG-1.1 Legal Basis
General
UG-1.1.1
Volume 2 (Islamic banks) of the CBB Rulebook is issued by the CBB pursuant to the Central Bank of Bahrain and Financial Institutions Law 2006 ('the CBB Law'). The CBB Law provides for two formal rulemaking instruments: Regulations (made pursuant to Article 37) and Directives (made pursuant to Article 38). Other articles in the CBB Law also prescribe various specific requirements (for example, requirements relating to licensing (Articles 44 to 49), or the notification and approval of controllers of licensees (Articles 52 to 56)).
October 07UG-1.1.2
The Purpose Section of each Module specifies in all cases the rulemaking instrument(s) used to issue the content of the Module in question, and the legal basis underpinning the Module's requirements.
October 07UG-1.1.3
Islamic bank licensees that are members of the Bahrain Stock Exchange are reminded that they are also subject to the membership and operating rules of that exchange. These rules are issued by the Bahrain Stock Exchange under powers given the Exchange under the Bahrain Stock Exchange Law, Decree No. 4 of 1987 (as amended by Decree No. 21 of 2002). These rules are additional to the requirements contained in Volume 2 (Islamic banks).October 07CBB's Rulemaking Instruments
UG-1.1.4
Regulations are made pursuant to Article 37 of the CBB Law. These instruments have general application throughout the Kingdom and bind all persons ordinarily affected by Bahraini legislative measures (i.e. residents and/or Bahraini persons wherever situated).
October 07UG-1.1.5
Because Regulations have wide general application, they are subject to two important safeguards: (i) the CBB is under a duty to consult with interested parties and to review and consider their comments; and (ii) the finalised Regulations only become effective after they are published in the Official Gazette.
October 07UG-1.1.6
Where Regulations are used to support Rulebook requirements, their contents are included in the CBB Rulebook, as well as published in the Official Gazette. They only have legal effect, however, when published in the Official Gazette.
October 07UG-1.1.7
Directives are made pursuant to Article 38 of the CBB Law. These instruments do not have general application in the Kingdom, but are rather addressed to specific licensees (or categories of licensees), approved persons or registered persons. Directives are binding on those to whom they are addressed.
October 07UG-1.1.8
Unlike Regulations, there is no duty on the CBB to either consult with addressees or publicise a Directive by publishing it in the Official Gazette (save that an addressee must obviously have actual or constructive notice of a Directive). However, as a matter of general policy, the CBB also consults on Rulebook content issued by way of a Directive.
October 07UG-1.2 UG-1.2 Status of Provisions
UG-1.2.1
The contents of the Rulebook have the formal status either of Rules or Guidance.
October 07UG-1.2.2
Rules have a binding effect and breaches of Rules constitute breaches of the CBB Law. If a licensee breaches a Rule to which it is subject, it is liable to enforcement action by CBB and, in certain cases, criminal proceedings by the Office of the Public Prosecutor.
Amended: July 2012
October 07UG-1.2.3
Guidance is not binding. It is material that helps inform a particular Rule or set of Rules, or provides other general information. Where relevant, compliance with Guidance will generally lead the CBB to assess that the business has complied with the rule(s) to which the Guidance relates. Conversely, failure to comply with Guidance will generally be viewed by the CBB as tending to suggest breach of a Rule.
October 07UG-1.2.4
The status of each Paragraph within the Rulebook can be identified by its text format, as follows:
(a) Rules are in bold, font size 12. The Paragraph reference number is also highlighted in a coloured box.(b) Guidance is in normal type, font size 11.October 07UG-1.2.5
The CBB's interpretation of all Rules and Guidance in this Volume is final.
Amended: January 2011
October 2007UG-1.2.6
Paragraph UG-1.2.5 does not prejudice the rights of an authorised person to make a judicial appeal, should it believe that the CBB is acting unreasonably or beyond its legal powers.
October 07UG-1.2.7
All Rulebook content has the formal status of at least a Directive. Some Rulebook content may also have the status of Regulations. Rulebook content that is categorised as a Rule is therefore legally mandatory and must be complied with by those to whom the content is addressed.
October 07UG-1.2.8
[This paragraph was deleted in July 2012].
Deleted: July 2012UG-1.2.9
The CBB's enforcement powers and processes are set out in Module EN.
October 07UG-1.3 UG-1.3 Application
UG-1.3.1
Volume 2 of the CBB Rulebook for the most part applies only to
Islamic bank licensees and to individuals undertaking key functions in those licensees (so-called "approved persons "), except for representative offices of banks which are subject to the relevant requirements in Volume 5 (specialised activities) and conventional banks which are covered in Volume 1.October 07UG-1.3.2
A few Rules and Guidance have general applicability (and thus also have the formal status of a Regulation): for instance no one may carry on Islamic banking business within or from Bahrain without the appropriate license, and
controllers of licensees are also subject to various requirements.Amended: January 2011
October 2007UG-1.3.3
Each Module in Volume 2 contains a Scope of Application Chapter, setting out which Rules and Guidance apply to which particular type of
Islamic bank licensee or person, for the Module concerned. In addition, each Rule (or Section containing a series of Rules) is drafted such that its application is clearly highlighted for the user. Finally, each Module, in its Purpose Section, specifies in all cases the rulemaking instrument(s) used to issue the content of the Module in question (i.e. Directive and/or Regulation), and the legal basis underpinning the Module's requirements.October 07UG-1.3.4
All references in this Module to 'he' or 'his' shall, unless the context otherwise requires, be construed as also being references to 'she' and 'her'.
Added: October 2016UG-1.4 UG-1.4 Effective date
UG-1.4.1
Volume 2 (Islamic Banks) of the CBB Rulebook was first issued in January 2005. It replaces all regulations previously issued with respect to
Islamic banks .Amended: January 2011
October 2007UG-2 UG-2 Rulebook Structure and Format
UG-2.1 UG-2.1 Rulebook Structure
Rulebook Volumes
UG-2.1.1
The Rulebook is divided into 7 Volumes, covering different areas of financial services activity, as follows:
Volume 1 Conventional Banks Volume 2 Islamic Banks Volume 3 Insurance Volume 4 Investment Business Volume 5 Specialised Activities Volume 6 Capital Markets Volume 7 Collective Investment Undertakings Amended: July 2012
October 07UG-2.1.2
Volume 5 (Specialised Activities), covers
money changers ;financing companies ;representative offices ;administrators ;trust service providers ,micro-finance institutions and providers of ancillary services to the financial sector.Amended: April 2013
Amended: January 2011
October 2007Rulebook Contents (overview)
UG-2.1.3
Except for Volumes 5, 6 and 7, the basic structure of each Rulebook is the same. Each Volume starts with a contents page and User's Guide. Subsequent material is organised underneath the following headings:
(a) High-level Standards;(b) Business Standards;(c) Prudential Requirements;(d) Reporting Requirements;(e) Enforcement and Redress; and, where appropriate(f) Sector GuidesAmended: April 2013
Amended: July 2012
Amended: January 2011
October 2007UG-2.1.4
Volume 5 is organised by the Category of specialised firm concerned, whilst Volume 6 by subject area (authorised exchanges; issuers of securities etc).
October 07UG-2.1.5
The material in Volumes 1-4 is contained in Modules, each covering a specific area of requirements (e.g. High-level Controls). In turn, each Module is divided into Chapters, Sections and Paragraphs, as detailed below.
October 07UG-2.1.6
Each Volume has its own appendix Volume containing relevant reporting and authorisation forms; a glossary; and any supplementary information. In all cases, the main Volume is called "Part A" and the appendix Volume is called "Part B".
October 07UG-2.2 UG-2.2 Volume Structure
Modules
UG-2.2.1
Rulebook Volumes are subdivided into Modules, arranged in groups according to their subject matter, underneath the headings listed in Paragraph UG 2.1.3 above.
October 07UG-2.2.2
Each Module in a Volume is referenced using a two- or three-letter code which is usually a contraction or abbreviation of its title. These codes are used for cross-referencing within the text.
Amended: July 2012
October 07Chapters
UG-2.2.3
Each Module consists of Chapters, categorised into two types:
(a) A standard introductory Chapter (referenced with a letter: e.g. UG A); and(b) Chapters containing the substantive content of the Module (referenced with a number: e.g. CA 1, CA 2, etc.)October 07UG-2.2.4
The introductory Chapter summarises the purpose of the Module, its history (in terms of changes made to its contents). A separate introductory Chapter also prescribes the scope of application of the Module's requirements.
October 07Sections and Paragraphs
UG-2.2.5
Chapters are further sub-divided into Sections (numbered consecutively after the Chapter number: e.g. FC 1.1, FC 1.2, FC 1.3 etc). In turn, Sections are sub-divided into Paragraphs (numbered consecutively after the Chapter and Section numbers: e.g. FC 1.1.1, FC 1.1.2, FC 1.1.3 etc.). Where appropriate, sub-Section headings may be used, to guide the reader through a Section: sub-Section headings are italicised and unnumbered, and act purely as an indicator (without limitation as to the status of the Paragraphs that follow.
October 07Table of Contents
UG-2.2.6
Each Volume's contents page lists all the Modules contained within it (Part A), and the information contained in the relevant appendix Volume (Part B).
October 07UG-2.2.7
The contents page of each Module lists the Chapters, Sections and the latest version date of each Section in issue.
October 07UG-2.3 UG-2.3 Format and Page Layout
Headers
UG-2.3.1
The top of each page in the Rulebook identifies the Volume, Module and Chapter in question. Each Module is a separate document. New Chapters start on a fresh page.
October 07Footers
UG-2.3.2
The bottom of each page in the Rulebook (on the left hand side) identifies the Module in question, its Section and page number. Page numbering starts afresh for each Section: the total number of pages in each respective Section is shown as well as the individual page number. The bottom right hand side shows an end calendar quarter issue date. The Contents Page for each Module, and each Section in a Module, are each given their own issue date. In addition, the Module contents page lists the latest issue date for each Section in that Module. The Contents page thus acts as a summary checklist of the current issue date in force for each Section. Further explanation is provided in Section UG-3.1 below.
October 07Defined Terms
UG-2.3.3
Defined terms used in the Rulebook are
underlined . Each Volume has its own glossary listing defined terms and giving their meaning. Definitions of terms used apply only to the Volume in question. It is possible for the same term to be used in a different Volume with a different meaning.October 07Cross-references
UG-2.3.4
Any cross-references given in a text state the Module code, followed (where appropriate) by the numbering convention for any particular Chapter, Section or paragraph being referred to. For example, the cross-reference FC-1.2.3 refers to the third Paragraph in the second Section of the first Chapter of the Financial Crime Module. Many references will be quite general, referring simply to a particular Module, Chapter or Section rather than a specific Paragraph.
October 07Text Format
UG-2.3.5
Each Paragraph is assigned a complete reference to the Module, Chapter, and Section, as well as its own Paragraph number, as explained in UG-2.3.4 above. The format of the Paragraph reference and Paragraph text indicates their status as either a Rule or Guidance, as explained in UG-1.2.4 above.
October 07UG-2.3.6
When cross-referring to specific Paragraphs, and it is important to make clear the status of the Paragraph in question as a Rule or Guidance, then the words 'Rule' or 'Guidance' may be used instead of 'Paragraph', followed by the reference number (e.g. 'As required by Rule FC-1.1.1, licensees must...').
October 07UG-3 UG-3 Rulebook Maintenance and Access
UG-3.1 UG-3.1 Rulebook Maintenance
Quarterly Updates
UG-3.1.1
Any changes to the Rulebook are generally made on a quarterly cycle (the only exception being when changes are urgently required), in early January, April, July and October. When changes are made to a Module, the amended Sections are given a new version date, in the bottom right-hand page.
October 07UG-3.1.2
The contents page for each amended Module is also updated; the table of contents is changed to show the new version date for each amended Section (in the 'Date Last Changed' Column), and the contents page itself is also given its own new version date in the bottom right-hand corner. The Module contents pages thus act as a checklist for hard-copy users to verify which are the current version dates for each Section in that Module.
October 07UG-3.1.3
A summary of any changes made to a Module is included in the 'Regulation history' Section of each Module. The table summarises the nature of the change made, the date of the change and the Module components and relevant pages affected.
October 07UG-3.1.4
Hard-copy users of the CBB Rulebook can check that they have the latest copy of each Module's contents pages, by referring to the overall table of contents for each Volume. The Volume table of contents lists the date each Module was last changed; users can use this table to check the date showing in the bottom right-hand corner of each Module's contents page.
October 07UG-3.1.5
The website version of the Rulebook acts at all times as the definitive version. The updates are posted to the CBB website, together with a summary of changes for that quarter. Licensees are in addition e-mailed the summary of each quarter's changes. Hard-copy users are required to print off the updated pages from the website to incorporate in their Rulebook in order to keep it current.
October 07Changes to Numbering
UG-3.1.6
In order to limit the knock-on impact of inserting or deleting text on the numbering of text that follows the change, the following conventions apply:
(a) Where a new Paragraph is to be included in a Section, such that it would impact the numbering of existing text that would follow it, the Paragraph retains the numbering of the existing Paragraph immediately preceding it, but with the addition of an "A"; a second inserted Paragraph that follows immediately afterwards would be numbered with a "B", and so on. For example, if a new Paragraph needs to be inserted after UG-3.1.6, it would be numbered UG-3.1.6A; a second new Paragraph would be numbered UG-3.1.6B, and so on. This convention avoids the need for renumbering existing text that follows an insertion. The same principle is applied where a new Section or a new Chapter needs to be inserted: for example, UG-3.1A (for a new Section), and UG-3A (for a new Chapter)(b) Where a Paragraph is deleted, then the numbering of the old Paragraph is retained, and the following inserted in square brackets: '[This Paragraph was deleted in April 2006.]' (The date given being the actual end-calendar quarter date of the deletion.) The same principle is applied with respect to Sections and Chapters.October 07UG-3.1.7
Where many such changes have built up over time, then the CBB may reissue the whole Section, Paragraph, Chapter or even Module concerned, consolidating all these changes.
October 07UG-3.2 UG-3.2 Rulebook Access
Availability
UG-3.2.1
The Rulebook is available on the CBB website.
Amended: January 2013
October 07Queries
UG-3.2.2
Questions regarding the administration of the Rulebook (e.g. website availability, the updating of material etc) should be addressed to the Rulebook Section of the Regulatory Policy Unit:
Rulebook Section
Regulatory Policy Unit
Central Bank of Bahrain
PO Box 27
Manama
Kingdom of BahrainTel: + 973 - 17 54 7413
E-mail: rulebook@cbb.gov.bh
Web: www.cbb.gov.bhQuestions regarding interpretation of the policy and requirements contained in the Rulebook should be addressed to the licensee's regular supervisory point of contact within the CBB.
Amended: April 2020
Amended: January 2013
Added: October 07Annexure CBB Rulebook Order Form [This form was deleted in January 2013]
Deleted: January 2013High Level Standards
LR LR Licensing Requirements
LR-A LR-A Introduction
LR-A.1 LR-A.1 Purpose
Executive Summary
LR-A.1.1
The Licensing Requirements Module sets out the Central Bank of Bahrain's (CBB's) approach to licensing providers of
regulated Islamic banking services in the Kingdom of Bahrain.Amended: July 2012
October 2007Legal Basis
LR-A.1.2
This Module contains the CBB's Regulations, Resolutions and Directive (as amended from time to time) relating to Licensing Requirements and is issued under the powers available to the CBB under Articles 37 to 42, 44 to 48 and 180 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). It also includes the requirements contained in Resolution No (1) of 2007 (as amended from time to time) with respect to determining fees categories due for licensees and services provided by the CBB. The Module also contains requirements under Regulation No (1) of 2007 pertaining to the CBB's regulated services issued under Article 39 of the CBB Law and those governing the conditions of granting a license for the provision of regulated services as prescribed under Resolution No.(43) of 2011 and issued under the powers available to the CBB under Article 44(c). The Module contains requirements under Resolution No.(16) for the year 2012 including the prohibition of marketing financial services pursuant to Article 42 of the CBB Law. This Module contains the prior approval requirements for approved persons under Resolution No (23) of 2015. The Directive and Resolutions in this Module are applicable to all
Islamic bank licensees (including theirapproved persons ).Amended: January 2016
Amended: January 2013
Amended: July 2012
Amended: October 2011
Amended: January 2011
Amended October 2010
October 2007LR-A.1.2A
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
Adopted: January 2011Licensing Requirement
LR-A.1.3
Persons wishing to undertake
regulated Islamic banking services are required to be licensed by CBB as anIslamic bank licensee .Regulated Islamic banking services consist of three determinant activities — the acceptance of Shari'a money placements/deposits, the managing of Shari'a profit-sharing investment accounts, and the offering of Shari'a financing contracts. In addition, various supplementary activities may also be undertaken. These activities are defined in Rule LR-1.3.1.Islamic bank licensees must operate all their operations in compliance with Shari'a economic principles; and onlyIslamic bank licensees may hold themselves out to be a fully Shari'a-compliant institution.October 2007LR-A.1.4
In other words, to be licensed as an
Islamic bank , a person must undertake the activity of accepting Shari'a money placements/deposits, and/or managing Shari'a profit-sharing investment accounts. In addition, the activity of offering Shari'a financing contracts must also be undertaken. In addition, they may undertake any of the other activities falling within the definition ofregulated Islamic banking services .Amended: July 2012
October 2007License Categories
LR-A.1.5
Islamic bank licensees are divided into two sub-categories:Islamic retail banks andIslamic wholesale banks . Certain specific regulatory requirements may differ between these two sub-categories, where appropriate to address their different risk profiles. (See Section LR-1.2).October 2007LR-A.1.6
Islamic retail banks may undertake transactions in any currency, with both Bahraini residents and non-residents. To qualify as anIslamic retail bank , the activity of offering Shari’a financing contracts must account for a significant portion of the institution’s business (defined, broadly, as accounting for over 20% of an institution’s assets).October 2007LR-A.1.7
Islamic wholesale banks may also undertake transactions without restriction, when dealing with the Government of Bahrain and its agencies; CBB bank licensees; and non-residents. However, they may only undertake transactions denominated in Bahraini Dinar and/or with a resident of the Kingdom of Bahrain, if these are wholesale in nature. Wholesale transactions are defined in terms of transaction size (broadly, BD 7 million or more for the activities of accepting Shari'a money placements/deposits, and offering Shari'a financing contracts, and US$ 100,000 or more for any of the other activities falling within the definition ofregulated Islamic banking services ).Amended: July 2012
October 2007LR-A.1.8
Collectively, licensed providers of
regulated Islamic banking services are calledIslamic bank licensees . Bahrain-incorporatedIslamic bank licensees are calledBahraini Islamic bank licensees .Islamic bank licensees that are incorporated in an overseas jurisdiction and operate via a branch presence in the Kingdom of Bahrain are calledBranches of Foreign Islamic bank licensees . The same naming convention applies to the two sub-categories of Islamic bank license: thus, Bahraini Islamic retail banks and Bahraini Islamic wholesale banks are those incorporated in Bahrain, whilstretail branches of foreign banks andwholesale branches of foreign banks are those incorporated in an overseas jurisdiction and operating in Bahrain via a branch presence.Amended: July 2017
October 2007Licensing Conditions
LR-A.1.9
Islamic bank licensees are subject to 8 licensing conditions, mostly specified at a high level in Module LR, and further expanded in underlying subject Modules (such as Module CA). These licensing conditions are broadly equivalent to the standards applied in other Volumes of the CBB Rulebook, to other license categories, and are consistent with international good practice, such as relevant Basel Committee and IFSB (Islamic Financial Services Board) standards.October 2007LR-A.1.10
The requirements contained in Chapter LR-2 represent the minimum conditions that have to be met in each case, both at the point of licensing and on an on-going basis thereafter, in order for licensed status to be retained.
October 2007Information Requirements and Processes
LR-A.1.11
Chapter LR-3 specifies the processes and information requirements that have to be followed for applicants seeking an
Islamic bank license , as well as existing licensees seeking to vary the scope of their license, by adding new regulated activities. It also covers the voluntary surrender of a license, or its cancellation by CBB.October 2007Representative Offices and Ancillary Services Providers
LR-A.1.12
Representative offices of Islamic banks and providers of ancillary services to the financial sector are not covered in Volume 2 (Islamic Banks) of the Rulebook. Requirements covering representative offices (for all financial services firms) and providers of ancillary services to the financial sector are included in Volume 5.Amended: July 2017
Amended: July 2012
October 2007LR-A.1.13
Representative offices of Islamic banks are subject to the requirements contained in Volume 5 (Specialised Licensees), common Modules and specific Modules for representative offices. Until such time as all parts of Volume 5 (Specialised Licensees) of the CBB Rulebook is issued, providers of ancillary services to the financial sector remain subject to the requirements contained in the CBB's "Standard Conditions and Licensing Criteria".Amended: July 2017
Amended: July 2012
October 2007LR-A.1.14
[This paragraph was merged with paragraph LR-1.1.12 above in October 2007]
LR-A.1.15
[This paragraph was merged with paragraph LR-1.1.13 above in October 2007]
LR-A.1.16
This paragraph was deleted in October 2007.
LR-A.2 LR-A.2 Module History
Evolution of Module
LR-A.2.1
This Module (Module LR — "Licensing and Authorisation Requirements") was first issued in January 2005, as part of the initial release of Volume 2 of the CBB Rulebook. It was subsequently reissued in full in July 2006 (and renamed "Licensing Requirements").
October 2007LR-A.2.2
The reissued Module was one of several Modules modified to reflect the introduction of the CBB's new integrated license framework. Module LR was amended to reflect the new Islamic bank licenses introduced by the framework, and to more closely align its presentation with that found in other CBB Rulebook volumes.
October 2007LR-A.2.3
The reissued Module is dated July 2006. All subsequent changes were dated with the month and year when the change was made, at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
October 2007LR-A.2.3.A
When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 2 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.
October 2007LR-A.2.4
A list of recent changes made to this Module is provided below:
Module Reference Change Date Description of Changes Whole Module 07/2006 Whole Module reissued to reflect integrated license framework: new license categories and updated licensing conditions introduced. LR-A.1.2 10/2007 New Rule LR-A.1.2 introduced, categorising this Module as a Directive. LR-2.8 10/2007 Changes to provision of information requirements as result of CBB Law LR-3 10/2007 Revised requirements due to new CBB Law LR-4 10/2007 New Chapter LR-4 on application and license fees (incorporating material on fees, previously contained in Module GR). LR-2.5.10 04/2008 New 7% reserve reqt. LR-1.2.16 04/2008 Lower threshold of $100,000 for investment business transactions for wholesale banks LR-2.5.10 07/2009 Minimum daily cash reserve balance with the CBB brought back to 5% from 7%. LR 10/2010 Various minor amendments to ensure consistency in formatting of CBB Rulebook. LR-A.1.2 10/2010 Revised legal basis. LR-1A 10/2010 New Chapter on Approved Persons moved from Section HC-1.2 and from Paragraphs in Section HC-1.5. LR-3.1.12A 10/2010 Added new paragraph, requiring capital to be injected prior to license being issued. LR-3.1.15 10/2010 Additional details pertaining to information required, within 6 months of a license being issued. LR-3.1.15A 10/2010 Transition rule added to comply with new requirement under Subparagraph HC-3.1.15(j). LR-4.2.13 10/2010 Amendment to guidance. LR 01/2011 Various minor amendments to ensure consistency in formatting of CBB Rulebook. LR-A.1.2 01/2011 Clarified legal basis. LR-3.1.5 and 3.1.5A 01/2011 Clarified the use of letters of guarantee as part of the licensing process. LR-4.2.9A 01/2011 Added the requirement for annual fees for SPV's to be in line with the requirements of Resolution No (1) of 2007. LR-3.1.3 04/2011 Clarified the appointment of a representative as part of the licensing process. LR-3.1.5(l) 04/2011 Deleted reference to Phase 1. LR-4.2.9A 04/2011 Clarified the payment of annual license fees for SPVs. LR-2.8.1 07/2011 Corrected due date of audited financial statements to be in line with Article 62 of the CBB Law and Module BR requirements. LR-A.1.2 10/2011 New reference added to reflect the issuance of Resolution No.(43) of 2011. LR-3.3 10/2011 Clarified language on cancellation of a license or closure of a branch to be in line with other Volumes of the CBB Rulebook. LR-1A.1.23 04/2012 Last sentence of Paragraph deleted as cross reference no longer applies. LR-A.1.2 07/2012 Added reference to Regulation No 1 of 2007 pertaining to regulated services. LR-A.1.1, LR-A.1.4, LR-A.1.7, LR-B.1.1, LR-1.1.3, LR-1.2.2, LR-1.2.15, LR-1.2.16, LR-1.3.17A, LR1A.1.18, LR-3.3.6 07/2012 Minor corrections. LR-A.1.12 and LR-A.1.13 07/2012 Amended Paragraphs to reflect updates for Volume 5. LR-B.1.3 07/2012 Corrected cross-reference. LR-1.2.10 07/2012 Reference to other banks deleted. LR-1A.1.20 07/2012 Changed Guidance to Rule. LR-1A.2.4 07/2012 Added cross-reference. LR-1A.3.3 07/2012 Corrected cross-reference. LR-2.8.1 and LR-2.8.2 07/2012 Attributed reference to CBB Law to correct Paragraph. LR-3.1.18 07/2012 Corrected cross-reference. LR-4.2.5 07/2012 Corrected last sentence of Guidance. LR-4.2.9B 07/2012 Added guidance regarding annual fees of SPVs of Bahrain domiciled CIUs. LR-A.1.2 01/2013 Updated legal basis. LR-B.1.1 01/2013 Updated prohibition as per issuance of Resolution No.(16) for the year 2012. LR-1.1 01/2013 References added to requirements under Resolution No.(16) for the year 2012. LR-1.3.17C, LR-1.3.17D, LR-1.3.33, LR-1.3.34, LR-1.3.35 and LR-1.3.36 01/2013 Various amendments to reflect the changes in RIAs as a result of issuing Volume 7 on collective investment undertaking ("CIU"). LR-1A.1.3 01/2013 Clarified approval requirements for controlled functions for Bahrain operations. LR-4.2 07/2013 Amended due date and collection process for annual license fee. LR-1A.1 10/2013 Aligned controlled functions with Module TC. LR-4.2.9A 10/2013 Clarified annual license fees for newly established SPVs. LR-1.2.20 01/2014 Updated to refer to licensed exchange .LR-1A.1.3 01/2014 Correction made to clarify which controlled functions are in relation to Bahrain operations. LR-1A.1.17 01/2014 Amended requirement for notification for appointment of financial instrument trader and moved requirement to Paragraph BR-5.1.7. LR-1A.1 04/2014 Amended Rule on notification requirements dealing with approved persons. LR-A.1.2 01/2016 Legal basis updated to reflect Resolution No (23) of 2015. LR-1A.1 01/2016 Amended to reflect the issuance of Resolution No. (23) of the year 2015 dealing with approved persons. LR-1A.1.20B 04/2016 Clarified approval process for applicants for approved persons. LR-1A.1.18C 07/2016 Clarified Guidance on authorised representative for approval of controlled functions. LR-3.1.11 10/2016 Added definition of Certification. LR-2.5.2 04/2017 Deleted Paragraph on minimum paid up capital requirement. LR-2.5.2A 04/2017 Added new paragraph on minimum capital requirement for locally incorporated retail banks. LR-2.5.2B 04/2017 Added new paragraph on minimum capital requirement for locally incorporated wholesale banks. LR-2.5.6 04/2017 Amended Paragraph to delete the requirement of endowment capital for overseas wholesale banks. LR-1A.1.7 07/2017 Amended paragraph. LR-2.2.2 07/2017 Amended paragraph. LR-3.4 07/2017 Added new Section on Publication of the Decision to Grant, Cancel or Amend a License. LR 07/2017 Changed the term "Overseas" to "foreign branches". LR-1A.1.18 04/2018 Amended Paragraph. LR-3.1.1 04/2018 Amended Paragraph. LR-1.2.20A 10/2018 Added new Paragraph on Providing Trust Services. LR-1.2.23 10/2018 Amended Paragraph. LR-1.3.1 10/2018 Amended Paragraph adding — Providing Trust Services. LR-1.3.51 — LR-1.3.54 10/2018 Added new Sub-section on providing Trust Services. LR-1A.1.2 10/2018 Amended a controlled function title and added a new controlled function. LR-1A.1.9A 10/2018 Amended Paragraph on Shari'a Officer responsibilities. LR-1A.1.14A 10/2018 Added new Paragraph on the responsibilities of the Head of Internal Shari'a Audit function. LR-2.5.2A 10/2018 Amended Paragraph on minimum total shareholders' equity maintained by retail bank licensees. LR-2.5.2B 10/2018 Amended Paragraph on minimum total shareholders' equity maintained by wholesale bank licensees. LR-1.3.46A 04/2019 Added a new Paragraph on robo advice. LR-3.1.1 07/2019 Amended Paragraph to remove references to hardcopy Form 1 submission to online submission. LR-3.2.4 10/2019 Changed from Rule to Guidance. LR-3.4.1 10/2019 Changed from Rule to Guidance. LR-1.3.1A 10/2020 Added a new Paragraph on compliance with AAOIFI Shari’a Standards. LR-1.3.1 07/2021 Amended Paragraph. LR-1.3.1B 07/2021 Added a new Paragraph on obtaining approval for services not included in its application. LR-1.3.58 – LR-1.3.61 07/2021 Added new Paragraphs on Account Information Service and Payment Initiation Services. LR-1.3.1C 01/2022 Added a new Paragraph on submission of information in relation to a bank wishing to undertake regulated banking services which were not included in its application for license. LR-2.5.8 10/2022 Amended Paragraph removing the requirement for agreeing a liquidity management policy with the CBB. LR-A.2.5
[This paragraph was deleted in October 2007]
LR-B LR-B Scope of Application
LR-B.1 LR-B.1 Scope and Prohibitions
LR-B.1.1
The licensing requirements in Chapter LR-1 have general applicability, in that they prevent any person from providing (or seeking to provide)
regulated Islamic banking services within or from the Kingdom of Bahrain, unless they have been licensed as aIslamic bank licensee by the CBB or marketing anyfinancial services unless specifically allowed to do so by the CBB (see Rule LR-1.1.1).Amended: January 2013
Amended: July 2012
October 2007LR-B.1.2
In addition, no one may use the term ‘bank’ in their trading or corporate name, or otherwise hold themselves out to be a bank in Bahrain, unless they hold the appropriate license from the CBB (see Rule LR-1.1.2).
October 2007LR-B.1.3
The remaining requirements in Chapters LR-1 to LR-4 (besides those mentioned in Section LR-B.1 above) apply to all those licensed by CBB as an
Islamic bank licensee , or which are in the process of seeking such a license. They apply regardless of whether the person concerned is incorporated in the Kingdom of Bahrain, or in an overseas jurisdiction, unless otherwise specified.Amended: July 2012
October 2007LR-B.1.4
These remaining requirements prescribe the types of license offered; their associated operating conditions; the licensing conditions that have to be satisfied in order to secure and retain a license; and the processes to be followed when applying or varying a license, or when a license is withdrawn.
October 2007LR-B.1.5
The Rules referred to above are supported by statutory restrictions contained in the CBB Law 2006 (cf. Articles 39 to 41).
October 2007LR-B.2 [This section was merged with section LR-B.1 in October 2007]
LR-1 LR-1 Requirement to Hold a License
LR-1.1 LR-1.1 Islamic Bank Licensees
General Prohibitions
LR-1.1.1
No person may:
(a) Undertake (or hold themselves out to undertake)regulated Islamic banking services within or from the Kingdom of Bahrain unless duly licensed by the CBB;(b) Hold themselves out to be licensed by the CBB unless they have as a matter of fact been so licensed; or(c) Market anyfinancial services in the Kingdom of Bahrain unless:(i) Allowed to do by the terms of a license issued by the CBB;(ii) The activities come within the terms of an exemption granted by the CBB by way of a Directive; or(iii) Has obtained the express written permission of the CBB to offerfinancial services .Amended: January 2013
Amended October 2010
October 2007LR-1.1.1A
In accordance with Resolution No.(16) for the year 2012 and for the purpose of Subparagraph LR-1.1.1(c), the word 'market' refers to any promotion, offering, announcement, advertising, broadcast or any other means of communication made for the purpose of inducing recipients to purchase or otherwise acquire
financial services in return for monetary payment or some other form of valuable consideration.Amended: January 2013
Amended October 2010
October 2007LR-1.1.1B
Persons in breach of Subparagraph LR-1.1.1(c) are considered in breach of Resolution No.(16) for the year 2012 and are subject to penalties under Articles 129 and 161 of the CBB Law (see also Section EN-10.3).
Amended: January 2013
Amended October 2010
October 2007LR-1.1.2
According to Article 41(a) of the CBB Law, only persons licensed to undertake
regulated Islamic banking services (orregulated banking services ), may use the term ‘bank’ in their corporate or trading names, or otherwise hold themselves out to be a bank.October 2007LR-1.1.3
Licensees are not obliged to include the word 'bank' in their corporate or trading names; however, they are required to make clear their regulatory status in their letter heads, customer communications, website and so on.
Amended: July 2012
October 2007LR-1.1.4
For the purposes of Rule LR-1.1.2, persons will be considered in breach of this requirement if they attempt to operate as, or incorporate a bank in Bahrain with a name containing the word "bank" (or the equivalents in any language), without holding the appropriate CBB license or obtaining the prior approval of the CBB.
October 2007Licensing
LR-1.1.5
Persons wishing to be licensed to undertake
regulated Islamic banking services within or from the Kingdom of Bahrain must apply in writing to the CBB.October 2007LR-1.1.6
An application for a license must be in the form prescribed by the CBB and must contain:
(a) A business plan specifying the type of business to be conducted;(b) Application forms for allcontrollers ; and(c) Application forms for allcontrolled functions .Amended October 2010
October 2007LR-1.1.7
The CBB will review the application and duly advise the applicant in writing when it has:
(a) Granted the application without conditions;(b) Granted the application subject to conditions specified by the CBB; or(c) Refused the application, stating the grounds on which the application has been refused and the process for appealing against that decision.Amended October 2010
October 2007LR-1.1.8
Detailed rules and guidance regarding information requirements and processes for license applications can be found in Section LR-3.1. As specified in Paragraph LR-3.1.14, the CBB will provide a formal decision on a license application within 60 calendar days of all required documentation having been submitted in a form acceptable to the CBB.
Amended October 2010
October 2007LR-1.1.9
In granting new licenses, CBB will specify the specific types of
regulated Islamic banking service for which a license has been granted, and on what basis (i.e.Islamic retail bank orIslamic wholesale bank ).October 2007LR-1.1.10
All applicants for an
Islamic bank license must satisfy the CBB that they meet, by the date of their license, the minimum conditions for licensing, as specified in Chapter LR-2. Once licensed,Islamic bank licensees must maintain these criteria on an ongoing basis.October 2007LR-1.1.11
Islamic bank licensees must not carry on any commercial business in the Kingdom of Bahrain or elsewhere other than banking business and activities directly arising from or incidental to that business.October 2007LR-1.1.12
Rule LR-1.1.11 is intended to restrict bank licensees from undertaking any material non-financial business activities. The Rule does not prevent a bank undertaking commercial activities if these directly arise from their financial business: for instance, in the context of Islamic contracts, such as murabaha, ijara and musharaka, where the bank may hold the physical assets being financed or leased. Nor does it restrict a bank from undertaking commercial activities if, in the judgment of the CBB, they are incidental and do not detract from the financial nature of the bank's operations: for example, a bank may rent out spare office space in its own office building, and provide services associated with the rental (e.g. office security or cleaning).
October 2007LR-1.1.13
Rule LR-1.1.11 applies to the legal entity holding the bank license. A bank may thus own subsidiaries that undertake non-financial activities, although the CBB generally does not support the development of significant commercial activities within a banking group. Capital invested in such subsidiaries by a bank would be deducted from the bank's capital base under the CBB's capital rules (see Module CA). In addition, the CBB may impose restrictions — such as dealings between the bank and its commercial subsidiaries — if it was felt necessary to limit the bank's exposure to non-financial risks.
October 2007LR-1.2 LR-1.2 License Sub-Categories
Retail vs. Wholesale
LR-1.2.1
Depending on the nature of activities undertaken,
Islamic bank licensees must be licensed either as anIslamic retail bank or as anIslamic wholesale bank .October 2007LR-1.2.2
The nature of activities allowed under each license sub-Category is specified below (cf. Rule LR-1.2.4 and the following Paragraphs). The
Islamic retail bank Category replaces the Full Commercial Bank (Islamic principles) Category that existed prior to July 2006; theIslamic wholesale bank Category replaces the Offshore Banking Unit and Investment Bank License (Islamic principles) categories.Amended: July 2012
October 2007LR-1.2.3
Banks licensed prior to the introduction of these new license categories in July 2006 are not required to reapply for their license. Rather, their new license category is to be confirmed by an exchange of letters with CBB, and the issuance of a new license certificate. Where (prior to July 2006), the same legal entity holds multiple licenses, CBB will agree transitional measures aimed at rationalizing the number of licenses held.
October 2007Islamic Retail Banks
LR-1.2.4
Islamic retail banks are allowed to transact with both residents and non-residents of the Kingdom of Bahrain, and in both Bahrain Dinar and foreign currencies.October 2007LR-1.2.5
To qualify as an
Islamic retail bank , the person concerned must undertake (as a minimum), the activity of accepting Shari'a money placements/deposits, and/or managing Shari'a profit-sharing investment accounts, as well as the activity of offering Shari'a financing contracts (as defined in Rules LR-1.3.16, LR-1.3.17A and B and LR-1.3.18). The activity of offering Shari'a financing contracts must be a significant part of the bank's business, relative to other activities.Amended: July 2012
October 2007LR-1.2.6
When assessing the significance of Shari'a financing contracts, in the context of Rule LR-1.2.5, the CBB would normally expect to see such contracts constitute at least 20% of the total assets of the institution. Other activities and criteria may also be taken into account, if the CBB believes they are of a financing-related nature, and that such activities constitute a significant share of the bank's overall business.
October 2007LR-1.2.7
In the case of new applicants, the above assessment is made based on the financial projections and business plan provided as part of the license application. Where existing licensees cease to satisfy the condition contained in Rule LR-1.2.5, the CBB will initiate discussion with the licensee as to the appropriateness of its license category; this may result in the licensee being required to change its license category.
October 2007LR-1.2.8
The purpose of Rule LR-1.2.5 is to ensure that, besides the activity of accepting Shari'a money placements/deposits, and managing Shari'a profit-sharing investment accounts, that the core banking activity of providing finance also forms part of the definition of
Islamic retail banks , and accounts for a significant share of their business, in keeping with their intermediation function.October 2007Islamic Wholesale Banks
LR-1.2.9
Islamic wholesale banks are allowed to transact with residents of the Kingdom of Bahrain (irrespective of currency), and in Bahraini Dinar (irrespective of the location of the counterparty), subject to the conditions and exemptions specified in Rules LR-1.2.13, LR-1.2.15, LR-1.2.17 and LR-1.2.19. Foreign currency transactions with non-residents are not subject to these conditions.October 2007LR-1.2.10
The effect of Rule LR-1.2.9 is to limit the on-shore/Bahrain Dinar customer business of
Islamic wholesale banks to larger transactions. By definition, their onshore client base is therefore wholesale in nature (i.e. large corporates and high net-worth individuals).Amended: July 2012
October 2007LR-1.2.11
To qualify as an
Islamic wholesale bank , the person concerned must undertake (as a minimum), the activity of accepting Shari'a money placements/deposits and/or managing Shari'a profit-sharing investment accounts (as defined in Rules LR-1.3.16 and LR-1.3.17A and B), together with the activity of offering Shari'a financing contracts (as defined in Rule LR-1.3.18).Amended: July 2012
October 2007LR-1.2.12
The purpose of Rule LR-1.2.11 is to ensure that the core Islamic banking activities of accepting Shari'a money placements/deposits, and managing Shari'a profit-sharing investment accounts, form part of the definition of
Islamic wholesale banks . However, unlikeIslamic retail banks , there is no requirement that the activity of providing Shari'a financing contracts must be a significant part of the bank's business, relative to other activities. This is to allowIslamic wholesale banks greater flexibility as to the nature of their activities; it also recognises that, because of the wholesale nature of their client base, there is less need to limit the scale of non-credit related risks to which their depositors and profit-sharing investors may be exposed. Rule LR-1.2.11 does not in any way preventIslamic wholesale banks from providing Shari'a-compliant finance as a major activity, should they wish to.October 2007LR-1.2.13
Islamic wholesale banks may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (a), (b) and (c) listed in Rule LR-1.3.1, only where the individual transaction is BD 7 million or above (or its foreign currency equivalent).Amended: July 2012
October 2007LR-1.2.14
To comply with Rule LR-1.2.13, the initial amount taken as a placement/deposit must be BD 7 million or above (or its equivalent in foreign currency); however, subsequent additions and withdrawals from the account may be for any amount. The initial amount taken as placement/deposit may be split between different types of accounts (e.g. call, 3-month and 6-month accounts) — providing at least BD 7 million is taken from the customer on the same day and the bank’s records can demonstrate this. Where subsequent withdrawals lead to a zero balance on an account (or the aggregate of accounts where more than one was originally opened), then a further BD 7 million must be deposited to re-start the ‘wholesale’ relationship, before additional deposits for smaller amounts may be made.
October 2007LR-1.2.15
Similarly, with respect to Shari'a financing transactions, the initial facility amount advised must be BD 7 million or above (or its equivalent); but drawdowns (and repayments) under the facility may be for any amount, as may any subsequent changes to the facility amount. If the facility is fully repaid, then a further BD 7 million transaction must be agreed in order to re-start the 'wholesale' relationship.
Amended: July 2012
October 2007LR-1.2.16
Islamic wholesale banks may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (d) to (j) listed in Rule LR-1.3.1, only where the initial transaction is US$ 100,000 or above (or its foreign currency equivalent).Amended: July 2012
Amended: April 2008
October 2007LR-1.2.17
With respect to activity (c) (managing Unrestricted Shari'a profit-sharing investment accounts), the threshold refers to the initial amount placed as an investment. With respect to activities (d), (e) and (f) (managing Restricted Shari'a profit sharing investment accounts, and dealing in
financial instruments as principal / agent), the threshold refers to the individual transaction size. With respect to activities (g) and (h) (managing / safeguardingfinancial instruments ), the threshold refers to the initial investment amount. With respect to activity (i), (operating acollective investment scheme ), the threshold refers to the minimum investment required for participation in the scheme. With respect to activities (j) and (k) (arranging / advising on deals infinancial instruments ) the threshold refers to the size of the deal arranged or of the investment on which advice is being given.Amended: July 2012
October 2007LR-1.2.18
Note that the threshold with respect to activities (d), (e) and (f) applies to the initial investment amount: where a subsequent distribution to a client, or a reduction in the mark to market value of the investment, reduces the initial investment amount below US$ 100,000, it is still considered a wholesale transaction. The threshold in Rule LR-1.2.16 applies to a client even if the same client satisfies the BD 7m threshold in Rule LR-1.2.13, with respect to money placement /financing activities. Finally, the initial amount taken as an investment may be split between two or more investment products — providing at least US$ 100,000 is taken from the customer on the same day and the bank's records can demonstrate this.
Amended: July 2012
October 2007LR-1.2.19
Islamic wholesale bank licensees may only undertake activities (l) and (m) listed in Rule LR-1.3.1, on behalf of residents of Bahrain and/or in Bahrain Dinar, where the transactions concerned meets either of the thresholds specified in LR-1.2.13 or LR-1.2.16 (in which case, activities (l) and (m) may be undertaken for any amount).Amended: July 2012
Amended: October 2009
October 2007LR-1.2.20
Notwithstanding Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19,
Islamic wholesale banks are allowed to transact in Bahrain Dinar (or any other currency) for any amount with the Government of Bahrain, Bahrain public sector entities (as defined in the guidelines for completion of the PIRI Form), and CBB bank licensees.Islamic wholesale banks may also transact in Bahrain Dinar for any amount, where required to fund their normal operating expenses; when investing for their own account in securities listed on alicensed exchange .Amended: January 2014
October 2007LR-1.2.20A
Islamic wholesale bank licensees may undertake activity (n) listed in Rule LR-1.3.1, on behalf of residents and/or non-residents of the Kingdom of Bahrain and/or in Bahrain Dinar or foreign currency, where the customer concerned meets either of the thresholds specified in LR-1.2.13 or LR-1.2.16.Added: October 2018LR-1.2.21
Any transactions entered into prior to 1 July 2006, which may be in breach of the conditions specified in Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19, must be notified to the CBB. These transactions will be allowed to mature.
October 2007LR-1.2.22
Since the
Islamic wholesale bank regime represents an easing of the restrictions on on-shore business that previously applied to offshore bank licensees (i.e. OBUs and IBLs), there should be few transactions of the type specified in Rule LR-1.2.21 — they are likely to exist only where individual ad-hoc exemptions may have been previously granted by CBB, and these exemptions went further than those now being applied across the Board to allIslamic wholesale bank licensees .October 2007LR-1.2.23
Islamic wholesale banks must seek prior written CBB approval if they wish to undertake transactions of the type specified in Rules LR-1.2.13, LR-1.2.16, LR-1.2.19 and LR-1.2.20A if the transactions are below the thresholds mentioned in LR-1.2.13 or LR-1.2.16.Amended: October 2018
Amended: October 2009
October 2007LR-1.2.24
The approval requirement in Rule LR-1.2.23 only has to be made once, prior to the licensee starting to undertake such transactions. Its purpose is to allow the CBB to monitor the initiation of such business by
Islamic wholesale bank licensees , and to check that adequate systems and controls have been in place, so that such transactions are likely to be well managed. In addition, it is to allow, where relevant, for the necessary arrangements to be made to ensure thatIslamic wholesale banks comply with the CBB’s reserve requirements (which apply to deposit liabilities denominated in Bahrain Dinars — see LR-2.5.10).October 2007LR-1.3 LR-1.3 Definition of Regulated Islamic Banking Services
LR-1.3.1
Regulated Islamic banking services are any of the following activities, carried on by way of business:(a) Accepting Shari'a money placements/deposits;(b) Offering Shari'a Financing Contracts;(c) Managing Unrestricted Shari'a profit-sharing investment accounts;(d) Managing Restricted Shari'a profit sharing investment accounts;(e) Dealing in Shari'a-compliantfinancial instruments as principal;(f) Dealing in Shari'a-compliantfinancial instruments as agent;(g) Managing Shari'a-compliantfinancial instruments ;(h) Safeguarding Shari'a-compliantfinancial instruments ;(i) Operating a Shari'a-compliantCollective Investment Undertaking ;(j) Arranging deals in Shari'a-compliantfinancial instruments ;(k) Advising on Shari'a-compliantfinancial instruments ;(l) Providing money exchange/remittance services;(m) Issuing/ administering means of payment;(n) Providing Trust Services;(o) Providing account information services; and(p) Providing payment initiation services.Amended: July 2021
Amended: October 2018
Amended: July 2012
Amended October 2010
October 2007LR-1.3.1A
All transactions and contracts concluded by
Islamic bank licensees must comply with Sharia standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). The validity of the contract or transaction is not impacted, if at a later date, the relevant AAOIFI Sharia standards are amended.Added: October 2020LR-1.3.1B
An
Islamic bank licensee that wishes to undertakeregulated banking services which were not included in its application for licence must obtain CBB’s written approval prior to offering such services. In such situations, CBB may impose additional conditions that it deems necessary for the provision of such services.Added: July 2021LR-1.3.1C
For the purposes of Paragraph LR-1.3.1B,
Islamic bank licensees must submit the following minimum information in relation to the provision of such services:a) Description of the services/products;b) Proposed fees and charges;c) Experience of resources responsible for such services and their details;d) Policies and procedures for such services;e) Enhancements to its risk management framework to capture, monitor, measure, control and report risks arising from the activity; andf) Relevant staff training plans.Added: January 2022LR-1.3.2
Upon application, the CBB may exclude specific transactions from the definition of
regulated Islamic banking services .October 2007LR-1.3.3
The CBB will normally only consider granting such an exemption when a Bahrain resident is unable to obtain a specific product in Bahrain and it would be unreasonable to require the overseas provider of that product to be licensed for that specific transaction, and the provider has no intention of regularly soliciting such business in Bahrain.
October 2007LR-1.3.4
For the purposes of Rule LR-1.3.1, carrying on a
regulated Islamic banking service by way of business means:(a) Undertaking for commercial gain, at a minimum, either or both of the activities of accepting Shari'a money placements/deposits and managing Shari'a profit-sharing investment accounts, together with the activity of offering Shari'a financing contracts; in addition, any of the remaining activities specified in Rule LR-1.3.1 may also be undertaken;(b) Holding oneself out as willing and able to engage in such activities; or(c) Regularly soliciting other persons to engage in transactions constituting such activities.Amended October 2010
October 2007LR-1.3.5
Licensees should note that they may still undertake activities falling outside the definition of
regulated Islamic banking services , such as investing in physical commodities — subject to Rule LR-1.1.11. The fact that an activity is not included in the definition ofregulated Islamic banking services does not mean that it is prohibited. In transitioning to the new licensing framework, CBB will be closely liaising with licensees to ensure that no disruption occurs to their legitimate business activities.October 2007LR-1.3.6
Licensees should note that the same legal entity cannot combine
regulated Islamic banking services with other regulated services, such asregulated insurance services . However, different legal entities within the same group may of course each hold a different license (e.g. banking and insurance).October 2007General Exclusions
LR-1.3.7
A person does not carry on an activity constituting a
regulated Islamic banking service if the activity:(a) Is carried on in the course of a business which does not ordinarily constitute the carrying on of financial services;(b) May reasonably be regarded as a necessary part of any other services provided in the course of that business; and(c) Is not remunerated separately from the other services.Amended October 2010
October 2007LR-1.3.8
For example, the holding of money as a rent-guarantee in connection with the rental of a property would not be considered a
regulated Islamic banking service , since it satisfies the exemptions in Rule LR-1.3.7.October 2007LR-1.3.9
A person does not carry on an activity constituting a
regulated Islamic banking service if the person is a body corporate and carries on that activity solely with or for other bodies corporate that are members of the same group.October 2007LR-1.3.10
A person does not carry on an activity constituting a
regulated Islamic banking service if such person carries on an activity with or for another person, and they are both members of the samefamily .October 2007LR-1.3.11
A person does not carry on an activity constituting a
regulated Islamic banking service if the sole or main purpose for which the person enters into the transaction is to limit any identifiable risks arising in the conduct of his business, providing the business conducted does not itself constitute a regulated activity.October 2007LR-1.3.12
For example, commercial companies entering into bay salam or istisna transactions in order to protect themselves against future fluctuations in the price of their products, would not be considered to be dealing in financial instruments as principal, and would not therefore require to be licensed as an Islamic bank.
Amended October 2010
October 2007LR-1.3.13
A person does not carry on an activity constituting a
regulated Islamic banking service if that person enters into that transaction solely as a nominee for another person, and acts under instruction from that other person.October 2007LR-1.3.14
A person does not carry on an activity constituting a
regulated Islamic banking service if that person is a government body charged with the management offinancial instruments on behalf of a government or public body.October 2007LR-1.3.15
A person does not carry on an activity constituting a
regulated Islamic banking service if that person is an exempt person, as specified by Royal decree.October 2007Accepting Shari'a Money Placements/Deposits
LR-1.3.16
Accepting Shari'a money placements is defined as the acceptance of sums of money for safe-keeping ('al-wadia', 'q'ard') in a Shari'a compliant framework, under which it will be repaid, either on demand or in circumstances agreed by the parties involved, and which is not referable to the giving of security.
October 2007Managing Unrestricted Shari'a Profit-Sharing Investment Accounts
LR-1.3.17A
Managing an Unrestricted Shari'a profit-sharing investment account is defined as managing an account, portfolio or fund, whereby a sum of money is placed with the service provider on terms that a return will be made according to an agreed Shari'a-compliant profit-sharing arrangement, such as a mudaraba or musharaka partnership without the customer laying down any restrictions as to where, how and for what purpose the funds should be invested. Such equity of unrestricted investment account holders shall be recorded in the books of the bank (see AAOIFI Standard FAS6).
Amended: July 2012
October 2007Managing Restricted Shari'a Profit Sharing Investment Accounts
LR-1.3.17B
Managing a Restricted Shari'a profit sharing investment account is defined as managing an account, portfolio or fund, whereby a sum of money is placed with the service provider on terms that a return will be made according to an agreed Shari'a compliant profit-sharing arrangement, such as a mudaraba or musharaka partnership where the customer imposes certain restrictions as to where, how and for what purpose the funds should be invested. Such assets and liabilities relating to the equity of restricted investment account holders shall be treated separately from the bank's assets and liabilities (see AAOIFI Standard FAS6).
Added: July 2012LR-1.3.17C
With effect from 1st January 2013, banks are no longer allowed to issue or open new profit sharing investment arrangements in the form of 'restricted investment accounts' where the bank acts as mudarib or trustee with the exception of accounts referred to in Paragraph LR-1.3.17D. Any new restricted Shari'a profit sharing investment relationships in the bank's own structured products may only be opened in the form of units or shares in a
collective investment undertaking and will be subject to the Rules and Guidance contained in Volume 7 and relevant sections of Module BC Chapter 9 (Volume 2). Banks should also refer to Paragraphs LR-1.3.33 to LR-1.3.34 of this Module. All existing restricted Shari'a profit sharing investment accounts may continue to be kept open, however banks may not accept any new funds into such accounts.Added: January 2013LR-1.3.17D
Banks will be allowed to open RIAs for investments initiated by the investor at his own discretion, where the investor specifies what he wants to invest into and at what time (non-discretionary asset management), including short term investments in the interbank market. This permission is applicable to an investor on an individual basis but not to a group of investors.
Added: January 2013Offering Shari'a Financing Contracts
LR-1.3.18
Offering Shari'a financing contracts is defined as entering into, or making arrangement for another person to enter into, a contract to provide finance in accordance with Shari'a principles, such as murabaha, bay muajjal, bay salam, ijara wa iktina and istisna'a contracts.
October 2007Dealing in Shari'a-Compliant Financial Instruments as Principal
LR-1.3.19
Dealing in Shari'a-compliant
financial instruments as principal means buying, selling, subscribing for or underwriting any Shari'a-compliantfinancial instrument on own account.October 2007LR-1.3.20
Rule LR-1.3.19 includes the underwriting of equity and other
financial instruments . It also includes the temporary sale of afinancial instrument through a repo transaction.October 2007LR-1.3.21
A person does not carry on an activity specified in Rule LR-1.3.19 if the activity relates to the person issuing his own
financial instrument .October 2007Dealing in Shari'a-Compliant Financial Instruments as Agent
LR-1.3.22
Dealing in Shari'a-compliant
financial instruments as agent means buying, selling, subscribing for or underwriting Shari'a-compliantfinancial instruments on behalf of a client.October 2007LR-1.3.23
A licensee that carries on an activity of the kind specified by Rule LR-1.3.22 does not determine the terms of the transaction and does not use its own financial resources for the purpose of funding the transaction. Such a licensee may however receive or hold assets in connection with the transaction, in its capacity as agent of its client.
October 2007Managing Shari'a-Compliant Financial Instruments
LR-1.3.24
Managing Shari'a-compliant
financial instruments means managing on a discretionary basis Shari'a-compliantfinancial instruments on behalf of another person.October 2007LR-1.3.25
The activities included under the definition of Rule LR-1.3.24 include activities such as asset management.
October 2007Safeguarding Shari'a-Compliant Financial Instruments (i.e. Custodian)
LR-1.3.26
Safeguarding Shari'a-compliant
financial instruments means the safeguarding of Shari'a-compliantfinancial instruments for the account of clients.October 2007LR-1.3.27
A person does not carry on an activity specified in Rule LR-1.3.26 if the person receives documents relating to a
financial instrument for the purpose of onward transmission to, from or at the direction of the person to whom thefinancial instrument belongs; or else is simply providing a physical safekeeping service such as a deed box.October 2007LR-1.3.28
A person does not carry on an activity specified in Rule LR-1.3.26 if a third person, namely a
qualifying custodian , accepts responsibility with regard to thefinancial instrument .October 2007LR-1.3.29
A "qualifying custodian" means a person who is:
(a) A licensee who has permission to carry on an activity of the kind specified in Rule LR-1.3.26; or(b) An exempt person in relation to activities of that kind.Amended October 2010
October 2007LR-1.3.30
A person does not carry on an activity specified in Rule LR-1.3.26 if they are managing a central depository, which is part of an exchange recognised by CBB.
October 2007LR-1.3.31
The following are examples of activities, when taken in isolation, are unlikely to be regarded an activity of the kind specified under Rule LR-1.3.26:
(a) Providing information as to the number of units or the value of any assets safeguarded; and(b) Converting currency.Amended October 2010
October 2007LR-1.3.32
A person undertaking an activity of the kind specified under Rule LR-1.3.26 may also be engaged in the administration of the
financial instruments , including related services such as cash/ collateral management.October 2007Operating a Collective Investment Undertaking
LR-1.3.33
Operating a
collective investment undertaking ('CIU') means operating, establishing or winding up a CIU.Amended: January 2013
October 2007LR-1.3.34
For the purposes of Paragraph LR-1.3.33, a CIU is defined in Volume 7 Paragraph ARR-B.1.1.
Amended: January 2013
October 2007LR-1.3.35
[This Paragraph was deleted in January 2013.]
Deleted: January 2013
LR-1.3.36
[This Paragraph was deleted in January 2013.]
Deleted: January 2013
Arranging Deals in Shari'a-Compliant Financial Instruments
LR-1.3.37
Arranging deals in Shari'a-compliant
financial instruments means making arrangements with a view to another person, whether as principal or agent, buying, selling, subscribing for or underwriting deals in Shari'a-compliantfinancial instruments .October 2007LR-1.3.38
A person does not carry on an activity specified in Rule LR-1.3.37 if the arrangement does not bring about the transaction to which the arrangement relates.
October 2007LR-1.3.39
A person does not carry on an activity specified in Rule LR-1.3.37 if a person's activities are limited solely to introducing clients to
licensees .October 2007LR-1.3.40
The exclusion in Rule LR-1.3.39 does not apply if the agent receives from any person, other than the client, any pecuniary reward or other advantage, for which he does not account to the client, arising out of his entering into the transaction. Thus, if A receives a commission from B for arranging credit or deals in investment for C, the exclusion in Rule LR-1.3.42 does not apply.
October 2007LR-1.3.41
A person does not carry on an activity specified in Rule LR-1.3.37 merely by providing the means of communication between two parties to a transaction.
October 2007LR-1.3.42
A person does not carry on an activity specified in Rule LR-1.3.37 if they operate an exchange, duly recognised and authorised by the CBB.
October 2007LR-1.3.43
Negotiating terms for an investment on behalf of a client is an example of an activity which maybe regarded as activities of the kind specified in Rule LR-1.3.37.
October 2007LR-1.3.44
The following are examples of activities, when taken in isolation, are unlikely to be regarded as an activity of the kind specified in Rule LR-1.3.37:
(a) Appointing professional advisers;(b) Preparing a prospectus/business plan;(c) Identifying potential sources of funding;(d) Assisting investors/subscribers/borrowers to complete and submit application forms; or(e) Receiving application forms for processing/checking and/or onward transmission.Amended October 2010
October 2007Advising on Deals in Shari'a-Compliant Financial Instruments
LR-1.3.45
Advising on Shari'a-compliant
financial instruments means giving advice to an investor or potential investor (or a person in his capacity as an agent for an investor or potential investor) on the merits of buying, selling, subscribing for or underwriting a particular Shari'a-compliantfinancial instrument or exercising any right conferred by such afinancial instrument .October 2007LR-1.3.46
The following are examples of activities, which may be regarded as an activity as defined by Rule LR-1.3.45:
(a) A person may offer to tell a client when shares reach a certain value on the basis that when the price reaches that value it would be a good time to buy or sell them;(b) Recommendation on the size or timing of transactions; and(c) Advice on the suitability of thefinancial instrument , or on the characteristics or performance of thefinancial instrument or credit facility concerned.Amended October 2010
October 2007LR-1.3.46A
For the purpose of Rule LR-1.3.45, advising on
financial instruments includes givingdigital financial advice also known as 'robo-advice' or 'automated advice' using a computer program and algorithm to generate the advice.Added: April 2019LR-1.3.47
A person does not carry on an activity specified in Rule LR-1.3.45 by giving advice in any newspaper, journal, magazine, broadcast services or similar service in any medium if the principal purpose of the publication or service, taken as a whole, is neither:
(a) That of giving advice of the kind mentioned in Rule LR-1.3.45; nor(b) That of leading or enabling persons to buy, sell, subscribe for or underwrite afinancial instrument .Amended October 2010
October 2007LR-1.3.48
The following are examples of activities, when taken in isolation, are unlikely to be regarded as an activity as defined by Rule LR-1.3.45:
(a) Explaining the structure, or the terms and conditions of afinancial instrument or credit facility;(b) Valuingfinancial instruments for which there is no ready market;(c) Circulating company news or announcements;(d) Comparing the benefits and risks of onefinancial instrument to another; and(e) Advising on the likely meaning of uncertain provisions in an agreement relating to, or the terms of, afinancial instrument or on the effect of contractual terms and their commercial consequences or on terms that are commonly accepted in the market.Amended October 2010
October 2007Providing Money Exchange / Remittance Services
LR-1.3.49
Means providing exchange facilities between currencies, and the provision of wire transfer or other remittance services.
October 2007Issuing / Administering Means of Payment
LR-1.3.50
Means the selling or issuing of payment instruments, or the selling or issuing of stored value (e.g. credit cards, travellers' cheques, electronic purses).
October 2007Providing Trust Services
LR-1.3.51
Providing trust services is defined as:
(a) Establishment of trusts;(b) Administration of trusts in accordance with the provisions of the trust deed;(c) Providing related ancillary services to trusts in accordance with the provisions of the trust deed; and(d) Providing financial advisory services to trust business clients only.Added: October 2018LR-1.3.52
The related ancillary services under sub-paragraph LR-1.3.51(c) include providing directorship services, company secretarial services, providing a registered address and/or acting as a shareholder to the company holding the assets of a trust.
Added: October 2018LR-1.3.53
Islamic bank licensees must ensure that the trust services in Paragraph LR-1.3.51 are handled by an independent trust service department within the bank.Added: October 2018LR-1.3.54
Islamic bank licensees must comply with the legislative Decree No. (23) of 2016 with regards to Trust, and CBB's resolutions and directives issued in this regard.Added: October 2018Account Information Service and Payment Initiation Services
LR-1.3.58
Providing
account information services (AIS) means the activity of obtaining access and the provision of information tocustomers about their transactions and account balances with otherlicensees (banks, financing companies or payment service providers) and the handling of communication or electronic documents between thecustomer and otherlicensees using an online portal, mobile devices or applications.Added: July 2021LR-1.3.59
Providing
payment initiation services (PIS) means the activity of initiating payment or fund transfers for thecustomer from an account he holds with otherlicensees .Added: July 2021LR-1.3.60
Islamic bank licensees undertaking AIS and/or PIS activities must comply with the requirements in the Open Banking Module (OB Module) included in the CBB Rulebook Volume 5 – Ancillary Service Providers.Added: July 2021LR-1.3.61
Islamic retail bank licensees that wish to offer AIS or PIS services must ensure that an independent review is conducted prior to commencement of AIS or PIS services to confirm compliance with the Operational Guidelines, Security Standards and Guidelines, Open Banking Application Program Interface (API) Specifications and Customer Journey Guidelines included in the Bahrain Open Banking Framework available on the CBB website. Such a review must be conducted by a third-party consultant, other than the external auditor.Added: July 2021LR-1A LR-1A Approved Persons
LR-1A.1 LR-1A.1 CBB Notification and Approval
General Requirement
LR-1A.1.1
All persons wishing to undertake a
controlled function in anIslamic bank licensee must be approved by the CBB prior to their appointment (subject to the variations contained in Rule LR-1A.1.3).October 2010LR-1A.1.2
Controlled functions are those functions occupied by board members and persons in executive positions and include:(a) Board Member;(b)Chief Executive orGeneral Manager and their Deputies;(c) Chief Financial Officer and/or Financial Controller(d) Head of Risk Management;(e) Head of Internal Audit;(f) Shari'a Officer;(g) Compliance officer;(h) Money Laundering Reporting Officer;(i) Deputy Money Laundering Reporting Officer;(j) Head of Internal Shari'a Audit; and(k) Heads of other Functions.Amended: October 2018
Amended: January 2016
Amended: October 2013
October 2010LR-1A.1.3
Prior approval is required for all
controlled functions in relation to Bahrain operations.Controlled functions (g) and (h) may be combined, however (see also FC-4.1, regarding the MLRO function).Amended: January 2014
Amended: October 2013
Amended: January 2013
October 2010Basis for Approval
LR-1A.1.4
Approval under Rule LR-1A.1.1 is only granted by the CBB, if it is satisfied that the person is fit and proper to hold the particular position in the licensee concerned. 'Fit and proper' is determined by the CBB on a case-by-case basis. The definition of 'fit and proper' and associated guidance is provided in Sections LR-1A.2 and LR-1A.3 respectively.
October 2010Definitions
LR-1A.1.5
Board members collectively are responsible for the business performance and strategy of the
Islamic bank licensee , as outlined in more details in Section HC-1.2.Amended: October 2013
October 2010LR-1A.1.6
When taken as a whole, the board of
directors of anIslamic bank licensee must be able to demonstrate that it has the necessary skills and expertise, as outlined in Paragraph HC-1.2.10.Amended: October 2013
October 2010LR-1A.1.7
The
Chief Executive orGeneral Manager means a person who is responsible for the conduct of the licensee (regardless of actual title). TheChief Executive orGeneral Manager must be resident in Bahrain. The scope of authority of theCEO and his deputies is outlined in more detail in Subparagraph HC-6.3.2 (a).Amended: July 2017
Amended: October 2013
October 2010LR-1A.1.8
The head of risk management is responsible for the management and control of all risk exposures arising from the activities of the
Islamic bank licensee .Amended: October 2013
October 2010LR-1A.1.9
The head of internal audit is responsible for providing independent and objective review on the adequacy and effectiveness of the holistic internal control environment within the
Islamic bank licensee . The duties of the head of internal audit are outlined in more detail in Subparagraph HC-6.3.2 (d).Amended: October 2013
October 2010LR-1A.1.9A
The Shari'a Officer in an
Islamic bank licensee is responsible for the product design / development stage to assist the Shari'a Supervisory Board (SSB) in the issuance of Shari'a pronouncements / resolutions, Fatawas, guidelines and instructions about the products and services offered. He is also responsible for assisting the management in implementing the Fatawa and rulings of the SSB in the day to day functioning of the licensee. The Shari'a Officer must also assist the Human Resources department in arranging for Shari'a training of the licensee's employees. Refer to SG-3.1 and SG-3.2 for a detailed description of his responsibilities.Amended: October 2018
Added: October 2013Compliance Officer
LR-1A.1.10
All banks must appoint a senior member of staff with responsibility for the management of compliance risk as their Compliance Officer/Manager.
October 2010LR-1A.1.11
The compliance function must be independent (i.e. it must not be placed in a position where its other duties or responsibilities may cause a conflict of interest with its compliance risk management responsibilities). Therefore the compliance function must be separate from the internal audit function. The compliance officer or manager may however, perform other limited related compliance roles (e.g. the MLRO or legal advisor), subject to the CBB's prior approval.
October 2010LR-1A.1.12
The compliance function must have adequate resources to carry out its functions effectively.
Amended: January 2016
October 2010LR-1A.1.13
The bank must also outline how the compliance function fits into the bank's senior management reporting structure, and must give details of relevant reporting lines within the bank.
Amended: January 2016
October 2010LR-1A.1.14
In the case of locally incorporated banks, the compliance officer/manager must have access to the Board of Directors in addition to the senior management.
October 2010LR-1A.1.14A
The Head of Internal Shari'a Audit function is responsible for examining and evaluating the extent of the licensee's compliance with the following:
(a) Shari'a principles;(b) The SSB's Fatawa, guidelines, pronouncements and instructions/recommendations;(c) Shari'a related regulations, resolutions and directives issued by the CBB;(d) Shari'a standards issued by AAOIFI; and(e) Shari'a related policies and procedures of the Bahraini Islamic bank licensee.Added: October 2018LR-1A.1.15
Heads of other functions, where risk acquisition or control is involved, are responsible for tracking specific functional performance goals in addition to identifying, managing, and reporting critical organisational issues upstream. Certain functions require dealing directly with clients while others do not. Both categories of functions, however, require specific qualifications and experience to meet the objectives as well as compliance requirements of the
Islamic bank licensee .Amended: October 2013
October 2010LR-1A.1.16
Where a firm is in doubt as to whether a function should be considered a
controlled function it must discuss the case with the CBB.October 2010Prior Approval Requirements and Process
LR-1A.1.17
Islamic bank licensees must obtain CBB's prior written approval before a person is formally appointed to acontrolled function ; the request for CBB approval must be made by submitting to CBB a duly completed Form 3 (Application for Approved Person status) and Curriculum Vitae after verifying that all the information contained in Form 3, including previous experience, is accurate. Form 3 is available under in Volume 2 Part B Authorisation Forms of the CBB Rulebook.Amended: January 2016
Amended: January 2014
October 2010LR-1A.1.18
When the request for approved person status forms part of a license application, the Form 3 must be marked for the attention of the Director, Licensing Directorate. When the submission to undertake a controlled function is in relation to an existing
Islamic bank licensee , the Form 3 must be marked for the attention of the Director, Islamic Financial Institutions Supervision. In the case of the MLRO or DMLRO, Form 3 should be marked for the attention of the Director, Compliance Directorate.Amended: April 2018
Amended: January 2016
Amended: July 2012
October 2010LR-1A.1.18A
When submitting Form 3,
Islamic bank licensees must ensure that the Form 3 is:(a) Submitted to the CBB with a covering letter signed by an authorised representative of thelicensee , seeking approval for the proposedcontrolled function ;(b) Submitted in original form;(c) Submitted with a certified copy of the applicant's passport, original or certified copies of educational and professional qualification certificates (and translation if not in Arabic or English) and the Curriculum Vitae; and(d) Signed by an authorised representative of thelicensee and all pages stamped on with thelicensee's seal.Added: January 2016LR-1A.1.18B
Islamic bank licensees seeking to appoint Board Directors must seek CBB approval for all the candidates to be put forward for election/approval at a shareholders' meeting, in advance of the agenda being issued to shareholders. CBB approval of the candidates does not in any way limit shareholders' rights to refuse those put forward for election/approval.Added: January 2016LR-1A-1.18C
For existing
Islamic bank licensees applying for the appointment of a BoardDirector or theChief Executive /General Manager , the authorised representative should be the Chairman of the Board or aDirector signing on behalf of the Board. For all othercontrolled functions , the authorised representative should be theChief Executive /General Manager , or a suitably senior representative of the bank.Amended: July 2016
Added: January 2016LR-1A.1.19
[This Paragraph was deleted in January 2016.]
Deleted: January 2016
October 2010LR-1A.1.20
[This Paragraph was moved to Paragraph LR-1A.1.18B in January 2016.]
Amended: January 2016
Amended: July 2012
October 2010Assessment of Application
LR-1A.1.20A
The CBB shall review and assess the application for
approved person status to ensure that it satisfies all the conditions required in Paragraph LR-1A.2.6 and the criteria outlined in Paragraph LR-1A.2.7.Added: January 2016LR-1A.1.20B
For purposes of Paragraph LR-1A.1.20A,
licensees should give the CBB a reasonable amount of notice in order for an application to be reviewed. The CBB shall respond within 15 business days from the date of meeting all required conditions and regulatory requirements, including but not limited to, where referral to an overseas supervisor is required and receiving the application complete with all the required information and documents as well as verifying references and interviewing the applicant. The CBB will advise theIslamic bank licensee once the application is considered complete.Amended: April 2016
Added: January 2016LR-1A.1.20C
The CBB reserves the right to refuse an application for
approved person status if it does not satisfy the conditions provided for in Paragraph LR-1A.2.6 and does not satisfy the CBB criteria in Paragraph LR-1A.2.7. A notice of such refusal is issued by registered mail to thelicensee concerned, setting out the basis for the decision.Added: January 2016LR-1A.1.21
[This Paragraph was deleted in January 2016.]
Deleted: January 2016
October 2010Appeal Process
LR-1A.1.21A
Islamic bank licensees or the nominatedapproved persons may, within 30 calendar days of the notification, appeal against the CBB's decision to refuse the application forapproved person status. The CBB shall decide on the appeal and notify thelicensee of its decision within 30 calendar days from the date of submitting the appeal.Added: January 2016LR-1A.1.21B
When notification of the CBB's decision to grant a person
approved person status is not issued within 15 business days from the date of meeting all required conditions and regulatory requirements, including but not limited to, receiving the application complete with all the required information and documents,Islamic bank licensees or the nominatedapproved person may appeal to the Executive Director, Banking Supervision of the CBB provided that the appeal is justified with supporting documents. The CBB shall decide on the appeal and notify theIslamic bank licensee of its decision within 30 calendar days from the date of submitting the appeal.Added: January 2016Notification Requirements and Process
LR-1A.1.22
Islamic bank licensees must immediately notify the CBB when anapproved person , for whatever reason, ceases to hold thecontrolled function for which they have been approved (i.e. transferred to another function within the bank, or to another group entity, or else has resigned, been suspended or dismissed). The notification must include the reasons for the action taken.Amended: April 2014
October 2010LR-1A.1.23
[Rule moved to Paragraph BR-5.1.17 in April 2014.]
Amended: April 2014
Amended: April 2012
October 2010LR-1A.1.24
[This Paragraph was deleted in April 2014.]
Deleted: April 2014
October 2010LR-1A.1.25
If a
controlled function falls vacant, theIslamic bank licensee must appoint a permanent replacement (after obtaining CBB approval), within 120 calendar days of the vacancy occurring. Pending the appointment of a permanent replacement, theIslamic bank licensee must make immediate interim arrangements to ensure continuity of the duties and responsibilities of thecontrolled function affected. These interim arrangements must be approved by the CBB.October 2010LR-1A.1.26
Islamic bank licensees must immediately notify the CBB should they become aware of information that could reasonably be viewed as calling into question anapproved person's compliance with CBB's 'fit and proper' requirement (see LR-1A.2).October 2010LR-1A.2 LR-1A.2 Approved Persons Conditions: 'Fit and Proper' Requirement
LR-1A.2.1
Islamic bank licensees seeking anapproved person authorisation for an individual, must satisfy the CBB that the individual concerned is 'fit and proper' to undertake thecontrolled function in question.Amended: January 2016
October 2010LR-1A.2.2
Each applicant applying for
approved person status and those individuals occupyingapproved person positions must comply with the following conditions:(a) Has not previously been convicted of any felony or crime that relates to his/her honesty and/or integrity unless he/she has subsequently been restored to good standing;(b) Has not been the subject of any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud;(c) Has not been adjudged bankrupt by a court unless a period of 10 years has passed, during which the person has been able to meet all his/her obligations and has achieved economic accomplishments;(d) Has not been disqualified by a court, regulator or other competent body, as a director or as a manager of a corporation;(e) Has not failed to satisfy a judgement debt under a court order resulting from a business relationship;(f) Must have personal integrity, good conduct and reputation;(g) Has appropriate professional and other qualifications for thecontrolled function in question (see Appendix TC-1 in Module TC (Training and Competency)); and(h) Has sufficient experience to perform the duties of thecontrolled function (see Appendix TC-1 in Module TC (Training and Competency)).Amended: January 2016
October 2010LR-1A.2.3
In assessing the conditions prescribed in Rule LR-1A.2.2, the CBB will take into account the criteria contained in Paragraph LR-1A.2.4. The CBB reviews each application on a case-by-case basis, taking into account all relevant circumstances. A person may be considered 'fit and proper' to undertake one type of
controlled function but not another, depending on the function's job size and required levels of experience and expertise. Similarly, a person approved to undertake acontrolled function in oneIslamic bank licensee may not be considered to have sufficient expertise and experience to undertake nominally the samecontrolled function but in a much bigger licensee.Amended: January 2016
October 2010LR-1A.2.4
In assessing a person's fitness and propriety, the CBB will also consider previous professional and personal conduct (in Bahrain or elsewhere) including, but not limited to, the following:
(a) The propriety of a person's conduct, whether or not such conduct resulted in a criminal offence being committed, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;(b) A conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;(c) Any adverse finding in a civil action by any court or competent jurisdiction, relating to misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;(d) Whether the person, or any body corporate, partnership or unincorporated institution to which the applicant has, or has been associated with as a director, controller, manager or company secretary been the subject of any disciplinary proceeding, investigation or fines by any government authority, regulatory agency or professional body or association;(e) The contravention of any financial services legislation;(f) Whether the person has ever been refused a license, authorisation, registration or other authority;(g) Dismissal or a request to resign from any office or employment;(h) Whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;(i) The extent to which the person has been truthful and open with supervisors; and(j) Whether the person has ever entered into any arrangement with creditors in relation to the inability to pay due debts.Added: January 2016LR-1A.2.5
With respect to Paragraph LR-1A.2.4, the CBB will take into account the length of time since any such event occurred, as well as the seriousness of the matter in question.
Amended: January 2016
October 2010LR-1A.2.6
Approved persons undertaking acontrolled function must act prudently, and with honesty, integrity, care, skill and due diligence in the performance of their duties. They must avoid conflicts of interest arising whilst undertaking acontrolled function (refer to Chapter HC-2).Amended: January 2016
Amended: July 2012
October 2010LR-1A.2.7
In determining whether a conflict of interest may arise, factors that may be considered include whether:
(a) A person has breached any fiduciary obligations to the company or terms of employment;(b) A person has undertaken actions that would be difficult to defend, when looked at objectively, as being in the interest of thelicensee ; and(c) A person has failed to declare a personal interest that has a material impact in terms of the person's relationship with thelicensee .Amended: January 2016
October 2010LR-1A.2.8
Further guidance on the process for assessing a person's 'fit and proper' status is given in Module EN (Enforcement): see Chapter EN-5.
Amended: January 2016
Amended: July 2012
October 2010LR-1A.3 LR-1A.3 [This Section was deleted in January 2016]
Deleted: January 2016LR-1A.3.1
[This Paragraph was deleted in January 2016]
Deleted: January 2016
October 2010LR-2 LR-2 Licensing Conditions
LR-2.1 LR-2.1 Condition 1: Legal Status
LR-2.1.1
The legal status of an
Islamic bank licensee must be:(i) A Bahraini joint stock company (BSC); or(ii) A branch resident in Bahrain of an Islamic bank incorporated under the laws of its territory of incorporation and authorised as a bank in that territory.Amended October 2010
October 2007LR-2.1.2
Where the
Islamic bank licensee is a branch of a foreign bank, in deciding whether to grant a license, the CBB will pay close regard to its activities elsewhere and how these activities are regulated. If theIslamic bank licensee is not regulated elsewhere or in a jurisdiction not substantially compliant with Basel Core Principles or FATF standards, then an application for licensing can only be considered after exhaustive enquiries into the bank's shareholders, management structure and financial position.Amended: July 2017
October 2007LR-2.2 LR-2.2 Condition 2: Mind and Management
LR-2.2.1
Islamic bank licensees with their Registered Office in the Kingdom of Bahrain must maintain their Head Office in the Kingdom.Branches of foreign Islamic bank licensees must maintain a local management presence and premises in the Kingdom appropriate to the nature and scale of their activities.Amended: July 2017
October 2007LR-2.2.2
In assessing the location of an
Islamic bank licensee 's Head Office, the CBB will take into account the residency of its Directors and senior management. The CBB requires the majority of key decision makers in executive management — including theChief Executive Officer — to be resident in Bahrain. In the case ofbranches of foreign bank licensees , the CBB requires the branch to have a substantive presence, demonstrated by a level of staff and other resources sufficient to ensure adequate local scrutiny and control over business booked in the Bahrain branch or subsidiary.Amended: July 2017
October 2007LR-2.3 LR-2.3 Condition 3: Controllers
LR-2.3.1
Islamic bank licensees must satisfy the CBB that theircontrollers are suitable and pose no undue risks to the licensee.Islamic banks must also satisfy the CBB that their group structures do not prevent the effective supervision of theIslamic bank licensee by the CBB and otherwise pose no undue risks to the licensee.October 2007LR-2.3.2
Chapter GR-5 contains the CBB's requirements and definitions regarding
controllers .October 2007LR-2.3.3
In summary,
controllers are persons who directly or indirectly are significant shareholders in anIslamic bank licensee , or who are otherwise able to exert significant influence on theIslamic bank licensee . The CBB seeks to ensure thatcontrollers pose no significant risks to the licensee. In general terms,controllers are assessed in terms of their financial standing, their judicial and regulatory record, and standards of business and (where relevant) personal probity.October 2007LR-2.3.4
As regards group structures, the CBB seeks to ensure that these do not prevent adequate consolidated supervision being applied to financial entities within the group, and that other group entities do not pose any material financial, reputational or other risks to the licensee.
October 2007LR-2.3.5
In all cases, when judging applications from existing groups, the CBB will have regard to the reputation and financial standing of the group as a whole. Where relevant, the CBB will also take into account the extent and quality of supervision applied to overseas members of the group and take into account any information provided by other supervisors in relation to any member of the group.
October 2007LR-2.4 LR-2.4 Condition 4: Board and Employees
LR-2.4.1
Those nominated to carry out
controlled functions must satisfy CBB'sapproved persons requirements. This Rule is supported by Article 65 of the CBB Law.Amended October 2010
October 2007LR-2.4.2
The definition of
controlled functions is contained in Paragraph LR-1A.1.2, whilst Section LR-1A.2 sets out CBB'sapproved persons requirements.Amended October 2010
October 2007LR-2.4.3
The
Islamic bank licensee's staff, taken together, must collectively provide a sufficient range of skills and experience to manage the affairs of the licensee in a sound and prudent manner.Islamic bank licensees must ensure their employees meet any training and competency requirements specified by the CBB.October 2007LR-2.5 LR-2.5 Condition 5: Financial Resources
Capital Adequacy
LR-2.5.1
Islamic bank licensees must maintain a level of financial resources, as agreed with the CBB, adequate for the level of business proposed. The level of financial resources held must at all times meet the minimum risk-based requirements contained in Module CA (Capital Adequacy), as specified for the Category of banking license held.October 2007LR-2.5.2
This paragraph was deleted in April 2017.
Deleted: April 2017
October 2007LR-2.5.2A
All
Bahraini Islamic retail bank licensees must maintain a minimum total shareholders' equity of BD 100 million.Amended: October 2018
Added: April 2017LR-2.5.2B
All
Bahraini Islamic wholesale bank licensees must maintain a minimum total shareholders' equity of US$100 million.Amended: October 2018
Added: April 2017LR-2.5.3
Persons seeking a license as an
Islamic bank licensee must submit a 3-year business plan, with financial projections. Their proposed level of paid-up capital must be sufficient to cover expected regulatory capital requirements over that period, based on projected activities.October 2007LR-2.5.4
In practice, applicants seeking an
Islamic bank license are likely to be required to hold significantly more capital than the minimum paid-up capital specified in Rule LR-2.5.2.October 2007LR-2.5.5
Foreign bank applicants are required to provide written confirmation from their head office that the head office will provide financial support to the branch sufficient to enable it to meet its obligations as and when they fall due. Foreign bank applicants must also demonstrate that the bank as a whole is adequately resourced for the amount of risks underwritten, and that it and its group meet capital adequacy standards applied by its
home supervisor .Amended: July 2017
October 2007LR-2.5.6
For
Islamic retail bank licensees , funds placed with the bank by way of call and/or unrestricted investment accounts (or similar) must not exceed 20 times their capital and reserves.Amended: April 2017
October 2007LR-2.5.7
Factors taken into account in setting endowment capital for branches includes the financial strength of the parent company, the quality of its risk management, and the nature and scale of the Bahrain operations of the branch.
October 2007Liquidity
LR-2.5.8
Islamic bank licensees must maintain sufficient liquid assets to meet their obligations as they fall due in the normal course of their business.Amended: October 2022
October 2007LR-2.5.9
The CBB would normally expect the mark-to-market value of assets that could be readily realised at short-notice, to exceed 25% of deposit liabilities at all times. Liquidity arrangements may vary, however, particularly for branches of foreign Islamic banks, as agreed with CBB and documented in the liquidity management policy.
Amended: July 2017
Amended: January 2011
October 2007Reserve Requirements
LR-2.5.10
Islamic bank licensees must maintain a minimum daily cash reserve balance with the CBB, set as a ratio of their total non-bank Bahrain Dinar funds, whether placed by way of call or unrestricted investment accounts (or similar), as well as taken through the issuance of Bahrain Dinar denominated Islamic investment certificates. The current required ratio is 5% and may be varied by the CBB at its discretion.Amended July 09
Amended April 08
October 2007LR-2.6 LR-2.6 Condition 6: Systems and Controls
LR-2.6.1
Islamic bank licensees must maintain systems and controls that are, in the opinion of the CBB, adequate for the scale and complexity of their activities. These systems and controls must meet the minimum requirements contained in Modules HC, CM and OM.October 2007LR-2.6.2
Islamic bank licensees must maintain systems and controls that are, in the opinion of the CBB, adequate to address the risks of financial crime occurring in the licensee. These systems and controls must meet the minimum requirements contained in Module FC, as specified for the Category of license held.October 2007LR-2.6.3
Applicants will be required to demonstrate in their business plan (together with any supporting documentation) what risks their business would be subject to and how they would manage those risks. Applicants may be asked to provide an independent assessment of the appropriateness of their systems and controls to the CBB, as part of the license approval process.
October 2007LR-2.7 LR-2.7 Condition 7: External Auditor
LR-2.7.1
Article 61 of the CBB Law requires that
Islamic bank licensees must appoint an external auditor, subject to the CBB's prior approval. The minimum requirements regarding external auditors contained in Module AU (Auditors and Accounting Standards) must be met.Amended October 2010
October 2007LR-2.7.2
Applicants must submit details of their proposed external auditors to the CBB as part of their license application.
October 2007LR-2.8 LR-2.8 Condition 8: Other Requirements
Books and Records
LR-2.8.1
Article 59 of the CBB Law requires that
Islamic bank licensees must maintain comprehensive books of accounts and other records, and satisfy the minimum record-keeping requirements contained in Article 60 of the pre-mentioned Law and in Module OM. Books of accounts must comply with the Financial Accounting Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), or with International Financial Reporting Standards (IFRS) / International Accounting Standards (IAS), where no relevant AAOIFI standard exists.Amended: July 2012
Amended: July 2011
Amended: October 2009
October 2007Provision of Information
LR-2.8.2
Articles 58, 111, 114 and 163 of the CBB Law require that
Islamic bank licensees and their staff must act in an open and cooperative manner with the CBB.Islamic bank licensees must meet the regulatory reporting and public disclosure requirements contained in Modules BR and PD respectively. As per Article 62 of the CBB Law, annual audited financial statements must be submitted to the CBB within 3 months of the licensee's financial year-end.Amended: July 2012
October 2007General Conduct
LR-2.8.3
Islamic bank licensees must conduct their activities in a professional and orderly manner, in keeping with good market practice.Islamic bank licensees must comply with the general standards of business conduct contained in Module PB, as well as the standards relating to treatment ofcustomers contained in Modules BC and CM.October 2007LR-2.8.4
[This paragraph has been moved to chapter LR-4 in October 2007]
LR-2.8.5
[This paragraph has been deleted in October 2007]
Additional Conditions
LR-2.8.6
Islamic bank licensees must comply with any other specific requirements or restrictions imposed by the CBB on the scope of their license.October 2007LR-2.8.7
Bank licensees are subject to the provisions of the CBB Law. These include the right of the CBB to impose such terms and conditions, as it may deem necessary when issuing a license, as specified in Article 45 of the pre-mentioned Law. Thus, when granting a license, the CBB specifies the regulated banking services that the licensee may undertake. Licensees must respect the scope of their license. LR-3.2 sets out the process for varying the scope of an authorisation, should a licensee wish to undertake new activities.
October 2007LR-2.8.8
In addition, the CBB may impose additional restrictions or requirements, beyond those already specified in Volume 2, to address specific risks. For instance, a license may be granted subject to strict limitations on intra-group transactions.
October 2007LR-2.8.9
Islamic retail bank licensees are subject to the deposit protection scheme of eligible deposits held with the Bahrain offices of the licensee, with respect to certain of their liabilities (see Chapter CP-2). This Rule is supported by Article 177 of the CBB Law.Amended October 2010
October 2007LR-3 LR-3 Information Requirements and Processes
LR-3.1 LR-3.1 Licensing
LR-3.1.1
Applicants for a license must fill in the Application Form 1 (Application for a License) online, available on the CBB website under E-services/online Forms. The applicant must upload scanned copies of supporting documents listed in Paragraph LR-3.1.5, unless otherwise directed by the CBB.
Amended: July 2019
Amended: April 2018
October 2007LR-3.1.2
[This paragraph was deleted in October 2007]
LR-3.1.3
References to applicant mean the proposed
licensee seeking authorisation. An applicant may appoint a representative — such as a law firm or professional consultancy — to prepare and submit the application. However, the applicant retains full responsibility for the accuracy and completeness of the application, and is required to certify the application form accordingly. The CBB also expects to be able to liaise directly with the applicant during the authorisation process, when seeking clarification of any issues.Added: April 2011LR-3.1.4
[This paragraph was deleted in October 2007]
LR-3.1.5
Unless otherwise directed by the CBB, the following documents must be provided together with the covering letter referred in LR-3.1.1 above in support of a license application:
(a) A duly completed Form 2 (Application for Authorisation of Controller) for each controller of the proposed licensee;(b) A duly completed Form 3 (Application for Approved Person status), for each proposed Director of the proposed licensee;(c) A comprehensive business plan for the application, addressing the matters described in LR-3.1.6;(d) For branches of foreign banks, a copy of the bank's current commercial registration or equivalent documentation;(e) Where the applicant is an existing institution, a copy of the applicant's commercial registration;(f) Any relevant Private Placement Memoranda or public offering documents (if funds are to be raised by external shareholders);(g) Where the applicant is a corporate body, a certified copy of a Board resolution of the applicant along with minutes of the concerned meeting, confirming the board's decision to seek a CBB Islamic bank license;(h) In the case of applicants that are part of a regulated group, a letter of non-objection to the proposed license application from the applicant'shome supervisor , together with confirmation that the group is in good regulatory standing and is in compliance with applicable supervisory requirements, including those relating to capital adequacy and solvency requirements;(i) In the case of branches of foreign banks applicants, a letter of non-objection to the proposed license application from the applicant's home supervisor, together with confirmation that the applicant is in good regulatory standing and is in compliance with applicable supervisory requirements, including those relating to capital adequacy requirements;(j) In the case of branch applicants, copies of the audited financial statements of the applicant (head office) for the three years immediately prior to the date of application;(k) In the case of applicants for a licence for a locally incorporated bank, copies of the audited financial statements of the applicant's major shareholder and/or group (as directed by the CBB), for the three years immediately prior to the date of application;(l) A duly completed Form 3 (Application for Approved Person status), for each individual, (other than for Directors covered in item (b) above) applying to undertake controlled functions in the applicant; and(m) A draft copy of the applicant's (and parent's where applicable) memorandum and articles of association, addressing the matters described in LR-3.1.7.Amended: July 2017
Amended: April 2011
Amended: January 2011
Amended October 2010
October 2007LR-3.1.5A
The CBB, in its complete discretion may ask for a guarantee from the applicant's controlling or major shareholders on a case by case basis as it deems appropriate/necessary as part of the required documents to be submitted as mentioned in Paragraph LR-3.1.5 above.
Adopted: January 2011LR-3.1.6
The business plan submitted in support of an application should explain:
(a) An outline of the history of the applicant and its shareholders;(b) The reasons for applying for a license, including the applicant's strategy and market objectives;(c) The proposed type of activities to be carried on by the applicant in/from the Kingdom of Bahrain;(d) The proposed Board and senior management of the applicant and the proposed organisational structure of the applicant;(e) An assessment of the risks that may be faced by the applicant, together with the proposed systems and controls framework to be put in place for addressing those risks and to be used for the main business functions; and(f) An opening balance sheet for the applicant, together with a three-year financial projection, with all assumptions clearly outlined, demonstrating that the applicant will be able to meet applicable capital adequacy and liquidity requirements.Amended October 2010
October 2007LR-3.1.7
The applicant’s (and where applicable, its parent’s) memorandum and articles of association must explicitly provide for it to undertake the activities proposed in the licensed application, and must preclude the applicant from undertaking other commercial activities, unless these arise out of its banking activities or are incidental to those.
October 2007LR-3.1.8
In the case of a new bank's capital being financed by a private placement, the Private Placement Memorandum must also be submitted to CBB for its approval as part of the Phase 2 documentation.
October 2007LR-3.1.9
The purpose of Rule LR-3.1.8 is to allow CBB to verify that the contents of the Private Placement Memorandum are consistent with other information supplied to CBB, notably in the business plan, and otherwise meets any applicable regulatory requirements with respect to PPM documents. The CBB's review of the PPM does not in any way constitute an approval or endorsement as to any claims it may contain as to the future value of the proposed bank.
October 2007LR-3.1.10
[This paragraph was deleted in October 2007]
LR-3.1.11
All documentation provided to the CBB as part of an application for a license must be in either the Arabic or English languages. Any documentation in a language other than English or Arabic must be accompanied by a certified English or Arabic translation thereof. Certification must be performed by an official of the concerned licensee (if already licensed), a lawyer, or a Government body such as an Embassy or Ministry. The certification must include the words “original sighted” together with a date and signature of the concerned authorised official (along with corporate stamp where applicable). The certifier's contact details should be clearly available (e.g. business card) with the certification.
Amended: October 2016
October 2007
LR-3.1.12
Any material changes or proposed changes to the information provided to the CBB in support of an authorisation application that occurs prior to authorisation must be reported to the CBB.
October 2007
LR-3.1.12A
Before the final approval is granted to a licensee, confirmation from a retail bank addressed to the CBB that the licensee's capital (injected funds) — as specified in the business plan submitted under Rule LR-3.1.5 — has been paid in must be provided to the CBB.
October 2010
LR-3.1.13
Failure to inform the CBB of the changes specified in LR-3.1.12 is likely to be viewed as a failure to provide full and open disclosure of information, and thus a failure to meet licensing condition LR-2.8.2.
October 2007
LR-3.1.14
As part of the application process, the CBB will provide a formal decision on a license application within 60 calendar days of all required documentation having been submitted in a form acceptable to the CBB, as specified in Article 44 (e) of the CBB Law. The applicant must submit within 6 months of the application date, all remaining requirements or otherwise has to submit a new application to the CBB. Applicants are encouraged to approach the CBB to discuss their application at an early stage, so that any specific questions can be dealt with prior to the finalisation of the application.
October 2007
LR-3.1.15
Within 6 months of the license being issued, the new licensee must provide to the CBB:
(a) A detailed action plan for establishing the operations and supporting infrastructure of the bank, such as the completion of written policies and procedures, and recruitment of remaining employees (having regard to the time limit set by Article 48 (c) of the CBB Law);(b) The registered office address and details of premises to be used to carry out the business of the proposed licensee;(c) The address in the Kingdom of Bahrain where full business records will be kept;(d) The licensee's contact details including telephone and fax number, e-mail address and website;(e) A description of the business continuity plan;(f) A description of the IT system that will be used, including details of how IT systems and other records will be backed up;(g) A copy of the auditor's acceptance to act as auditor for the applicant;(h) A copy of the applicant's notarised memorandum and articles of association, addressing the matters described in Paragraph LR-3.1.7;(i) A copy of the Ministry of Industry & Commerce commercial registration certificate in Arabic and in English;(j) A copy of the bank's business card and any written communication (including stationery, website, e-mail, business documentation, etc.) including a statement that the bank is licensed by the CBB specifying whether it is licensed either as an Islamic wholesale or Islamic retail bank; and(k) Other information as may be specified by the CBB.Amended October 2010
October 2007
LR-3.1.15A
With respect to the requirement under Subparagraph LR-3.1.15(j),
Islamic bank licensees must ensure that they comply with this Rule by 31st March 2011.October 2010
LR-3.1.16
Applicants issued new licenses by the CBB must start operations within 6 months of the license being issued, as per Article 48 (c) of the CBB Law. Failure to comply with this rule lead to enforcement action being taken against the licensee concerned, as specified in Article 128 of the CBB Law.
Islamic bank licensee must at all times keep an approved copy of the licence displayed in a visible place on the Licensee’s premises in the Kingdom, as per Article 47 (b) of the CBB Law.October 2007
LR-3.1.17
Applicants who are refused a license have a right of appeal under the provisions contained in Article 46 of the CBB Law, which shall not be less than thirty days from the date of the decision. The Central Bank will decide on the appeal made by the applicant and notify him of its decision within thirty days from the date of submission of the appeal.
October 2007
LR-3.1.18
Applicants may not publicise in any way the application for a licence for, or formation of a bank before the formal decision referred to in Paragraph LR-3.1.14 is provided to the applicant or the concerned agent.
Amended: July 2012
October 2007
LR-3.2 LR-3.2 Variations to a License
LR-3.2.1
As per Article 48 of the CBB Law of 2006,
Islamic bank licensees must seek prior CBB approval before undertaking newregulated Islamic banking services .October 2007LR-3.2.2
Failure to secure CBB approval prior to undertaking a new regulated activity may lead to enforcement action being taken against the licensee concerned.
October 2007LR-3.2.3
In addition to any other information requested by the CBB, and unless otherwise directed by the CBB, an
Islamic bank licensee requesting CBB approval to undertake a newregulated Islamic banking service must provide the following information:(a) A summary of the rationale for undertaking the proposed new activities;(b) A description of how the new business will be managed and controlled;(c) An analysis of the financial impact of the new activities; and(d) A summary of the due diligence undertaken by the Board and management of theIslamic bank licensee on the proposed new activities.Amended October 2010
October 2007LR-3.2.4
The CBB may amend or revoke a license in any of the following cases:
(a) If the licensee fails to satisfy any of the license conditions;(b) If the licensee violates the terms of this regulations or any of the Volume's directives;(c) If the licensee fails to start business within six months from the date of the licence;(d) If the licensee ceases to carry out the licensed activity in the Kingdom; and(e) The legitimate interests of the customers or creditors of a licensee required such amendment or cancellation.Amended: October 2019
Amended October 2010
October 2007LR-3.2.5
The CBB’s procedures for amending or revoking a license are outlined in detail in the Enforcement Module (EN).
October 2007
LR-3.3 LR-3.3 Withdrawal of a License or Closure of a Branch
Voluntary Surrender of a License or Closure of a Branch
LR-3.3.1
In accordance with Article 50 of the CBB Law, all requests for the voluntary surrender of a license or closure of a branch are subject to the CBB's prior written approval, before ceasing such activities. Such requests must be made in writing to the Executive Director of Banking Supervision, setting out in full the reasons for the request and how the voluntary surrender of the license or branch closure is to be carried out.
Amended: October 2011
October 2007LR-3.3.2
Islamic bank licensees must satisfy the CBB that theircustomers' interests are to be safeguarded during and after the proposed voluntary surrender or closure of the branch. The requirements contained in Chapter GR-7 regarding cessation of business must be satisfied.Amended: October 2011
October 2007LR-3.3.3
The CBB will only approve a voluntary surrender where it has no outstanding regulatory concerns and any relevant
customers ' interests would not be prejudiced. A voluntary surrender will not be accepted where it is aimed at pre-empting supervisory actions by the CBB. Also, a voluntary surrender will only take effect once the licensee, in the opinion of the CBB, has discharged all its regulatory responsibilities tocustomers .October 2007Cancellation of a License by the CBB
LR-3.3.3A
As provided for under Article 48 (c) of the CBB Law, the CBB may itself move to cancel a license. The CBB generally views the cancellation of a license as appropriate only in the most serious of circumstances, and generally tries to address supervisory concerns through other means beforehand. See also Chapter EN-9, regarding the cancellation or amendment of licenses, including the procedures used in such instances and the licensee's right to appeal the formal notice of cancellation issued by the CBB.
October 2011LR-3.3.4
Cancellation of a license requires the CBB to issue a formal notice of cancellation to the person concerned. The notice of cancellation describes the CBB's rationale for the proposed cancellation, as specified in Article 48 (d) of the CBB Law.
Amended: July 2012
Amended: October 2011
October 2007LR-3.3.5
[This Paragraph was deleted in October 2011.]
Deleted: October 2011LR-3.3.6
Where the cancellation of a license has been confirmed by the CBB, the CBB will only effect the cancellation once a licensee has discharged all its regulatory responsibilities to
customers . Until such time, the CBB will retain all its regulatory powers with regards to the licensee, and will direct the licensee such that no newregulated Islamic banking services may be undertaken whilst the licensee discharges its obligations tocustomers .Amended: July 2012
Amended: October 2011
October 2007
LR-3.4 LR-3.4 Publication of the Decision to Grant, Cancel or Amend a License
LR-3.4.1
In accordance with Articles 47 and 49 of the CBB Law, the CBB must publish its decision to grant, cancel or amend a license in the Official Gazette and in two local newspapers, one in Arabic and the other in English.
Amended: October 2019
Added: July 2017LR-3.4.2
For the purposes of Paragraph LR-3.4.1, the cost of publication must be borne by the Licensee.
Added: July 2017LR-3.4.3
The CBB may also publish its decision on such cancellation or amendment using any other means it considers appropriate, including electronic means.
Added: July 2017
LR-4 LR-4 License Fees
LR-4.1 LR-4.1 License Application Fees
LR-4.1.1
With immediate effect, applicants seeking an
Islamic bank license from the CBB must pay a non-refundable license application fee of BD 100 at the time of submitting their formal application to the CBB.October 2007LR-4.1.2
There are no application fees for those seeking
approved person status.October 2007LR-4.2 LR-4.2 Annual License Fees
LR-4.2.1
Islamic bank licensees must pay the relevant annual license fee to the CBB on 1st of December of the previous year for which the fees are due.Amended: July 2013
October 2007LR-4.2.2
Islamic retail bank licensees must pay a variable annual licensing fee based on 1% of their total annual operating expenses by way of an annual license fee, subject to a floor of BD30,000 and a cap of BD240,000.Amended: July 2013
October 2007LR-4.2.3
Bahraini Islamic wholesale bank licensees must pay a variable annual licensing fee based on 0.5% of their total annual operating expenses by way of an annual license fee, subject to a floor of BD13,000 and a cap of BD100,000.Amended: July 2013
October 2007LR-4.2.4
Wholesale branches of foreign banks licensees must pay a variable annual licensing fee based on 0.25% of their total annual operating expenses by way of an annual license fee, subject to a floor of BD13,000 and a cap of BD100,000.Amended: July 2017
Amended: July 2013
October 2007LR-4.2.5
The fees due on 1st December are those covering the following calendar year and are calculated on the basis of the Islamic bank's latest audited financial statements for the previous calendar year: i.e. the fee payable on 1st December 2013 for the 2014 year (for example) is calculated using the audited financial statements for 2012, assuming a 31st December year end. Where a
licensee does not operate its accounts on a calendar-year basis, then the most recent audited financial statements available are used instead.Amended: July 2013
October 2007LR-4.2.6
Relevant operating expenses are defined as the total operating expenses of the licensee concerned, as recorded in the most recent audited financial statements available, subject to the adjustments specified in Rule LR-4.2.7.October 2007LR-4.2.7
The adjustments to be made to relevant operating expenses are the exclusion of the following items from total operating expenses:
(a) Training fees;(b) Charitable donations;(c) Previous year's CBB fees paid; and(d) Non-executiveDirectors' remuneration.Amended: July 2013
October 2007LR-4.2.8
For the avoidance of doubt, operating expenses for the purposes of this Section, do not include items such as depreciation, provisions, profits payable to Investment Account Holders, and dividends.
October 2007LR-4.2.9
The CBB would normally rely on the audited accounts of a licensee as representing a true and fair picture of its operating expenses. However, the CBB reserves the right to enquire about the accounting treatment of expenses, and/or policies on intra-group charging, if it believes that these are being used artificially to reduce a license fee.
October 2007LR-4.2.9A
Islamic bank licensees must pay a fixed annual fee of BD 1,000 for each locally incorporated SPV in Bahrain which is under the control of and/or providing an actual business function, service or activity (whether actively or passively) for the bank and/or others at the bank's direction or having been established under the bank's direction for that purpose. The CBB approval for any new SPV will only be granted, once the annual fee has been paid. The full amount of the BD 1,000 annual fee is due in the year the SPV is set up and it is not prorated for the number of months remaining in the year.Amended: October 2013
Amended: April 2011
Adopted: January 2011LR-4.2.9B
Paragraph LR-4.2.9A does not apply to SPVs of
Bahrain domiciled CIUs . In the case ofBahrain domiciled CIUs , banks should refer to the relevant Chapter in Module ARR of Volume 7, depending on the classification of theBahrain domiciled CIU .Added: July 2012LR-4.2.10
Islamic Bank licensees must complete and submit Form ALF (Annual License Fee) to the CBB 15th October of the preceding year for which the fees are due.Amended: July 2013
October 2007LR-4.2.10A
All
Islamic bank licensees are subject to direct debit for the payment of the annual fees and must complete and submit to the CBB a Direct Debit Authorisation Form by 15th September, available under Part B of Volume 2 (Islamic Banks) CBB Rulebook on the CBB Website.Added: July 2013
LR-4.2.11
For new
licensees , their first annual license fee is payable when their license is issued by the CBB. The amount payable is the floor amount specified forIslamic bank licensees , reduced on a pro-rata basis such that they are charged only for the number of complete months left in the current calendar year.October 2007LR-4.2.12
For example, if an Islamic retail bank is issued a license on 6 June 2007, then it would be asked to pay an annual license fee that same month, covering the remaining period left for the calendar year 2007. The fee would be calculated as BD30,000 (the minimum amount payable by an
Islamic retail bank licensee , multiplied by 6/12 (the number of complete months left in the year, i.e. July to December inclusive, divided by the total number of months in the year), giving a fee liability of BD 15,000. For the following year (2008) annual fee, thelicensee would submit a Form ALF by 15th October 2007, and calculate its fee as the floor amount. For future years, thelicensee would submit a Form ALF by 15th October of the preceding year for which the fees are due and calculate its fee using its last audited financial statements (or alternative arrangements as agreed with CBB, should its first set of accounts cover an 18-month period).Amended: July 2013
October 2007LR-4.2.13
Where a license is cancelled (whether at the initiative of the firm or the CBB), no refund is paid for any months remaining in the calendar year in question, should a fee have been paid for that year.
Amended October 2010
October 2007LR-4.2.14
Islamic bank licensees failing to comply with this Section may be subject to financial penalties for date sensitive requirements as outlined in Section EN-6.2A or may have their licenses withdrawn by the CBB.Added: July 2013
PB PB Principles of Business
PB-A PB-A Introduction
PB-A.1 PB-A.1 Purpose
Executive Summary
PB-A.1.1
The principles of Business are a general statement of the fundamental obligations of all Central Bank of Bahrain ('CBB')
Islamic bank licensees andapproved persons . They serve as a basis for other material in Volume 2 (Islamic Banks), and help address specific circumstances not covered elsewhere in the Rulebook.October 07PB-A.1.2
The Principles of Business have the status of Rules and apply alongside other Rules contained in Volume 2 (Islamic Banks). However, these other Rules do not exhaust the fundamental obligations contained in the Principles. Compliance with all other Rules, therefore, does not necessarily guarantee compliance with the Principles of Business.
October 07Legal Basis
PB-A.1.3
This Module contains the CBB's Directive (as amended from time to time) relating to Principles of Business and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all
Islamic bank licensees (including theirapproved persons ).Amended: January 2011
October 2007PB-A.1.4
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 07PB-A.2 PB-A.2 Module History
PB-A.2.1
This Module was first issued on 1st January 2005 by the BMA as part of the Islamic principles volume. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made; Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 07PB-A.2.2
When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 2 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.
October 07PB-A.2.3
A list of recent changes made to this Module is provided below:
Module Ref. Change Date Description of Changes PB-A.1 10/2007 New Rule PB-A.1.3 introduced, categorising this Module as a Directive. PB-1.1 10/2007 Small expansion of Principle 1 to refer to disclosure of all relevant information to customers, as required by CBB Regulations and Directives. Reordering and expansion of other principles, although no substantive changes. PB-A.1.3 01/2011 Clarified legal basis. PB-B.1.5 01/2011 Corrected cross reference. PB-1.1.10 01/2011 Corrected formatting. PB-B PB-B Scope of Application
PB-B.1 PB-B.1 Scope of Application
PB-B.1.1
The 10 Principles of Business apply to all CBB
Islamic bank licensees , in accordance with Paragraph PB-B.1.2. Principles 1-8 (Paragraphs PB-1.1 to PB-1.8 inclusive) also apply to allapproved persons , in accordance with Paragraph PB-B.1.3.October 07PB-B.1.2
Principles 1 to 10 apply to activities carried out by the Islamic bank licensee, including activities carried out through overseas branches (if any). Principles 9 and 10 also take into account any activities of other members of the group of which the Islamic bank licensee is a member.
October 07PB-B.1.3
Principles 1 to 8 apply to
approved persons in respect of thecontrolled function for which they have been approved.October 07PB-B.1.4
Principles 1 to 8 do not apply to behaviour by an
approved person with respect to any other functions or activities they may undertake. However, behaviour unconnected to theircontrolled function duties may nonetheless be relevant to an assessment of that person's fitness and propriety.October 07PB-B.1.5
The CBB's requirements regarding
approved persons andcontrolled functions are located in Module LR (Licensing Requirements).Amended: January 2011
October 2007PB-B.2 PB-B.2 Non-compliance
PB-B.2.1
Breaching a Principle of Business makes the
Islamic bank licensee orapproved person concerned liable to enforcement action. In the case of a licensee, this may call into question whether they continue to meet the licensing conditions (see Chapter LR-2). In the case of anapproved person , this may call into question whether they continue to meet the "fit and proper" requirements for the function for which they have been approved (see Section HC-2.2).October 07PB-B.2.2
Module EN (Enforcement) sets out the CBB's policy and procedures on enforcement action.
October 07PB-1 PB-1 Principles
PB-1.1 Principles
Principle 1 – Integrity
PB-1.1.1
Islamic bank licensees andapproved persons must observe high standards of integrity and fair dealing. They must be honest and straightforward in their dealings withcustomers , and provide full disclosure of all relevant information to customers, as required by the CBB's Regulations and Directives. Banks' management must safeguard not only the interests of shareholders of the bank, but also those of the Profit Sharing Investment Account (PSIA) holders.Amended: April 2011
October 07Principle 2 – Conflicts of Interest
PB-1.1.2
Islamic bank licensees andapproved persons must take all reasonable steps to identify, and prevent or manage, conflicts of interest that could harm the interests of acustomer . Again the bank's management must bear in mind the interests of shareholders and PSIA holders.Amended: April 2011
October 07Principle 3 – Due Skill, Care and Diligence
PB-1.1.3
Islamic bank licensees andapproved persons must act with due skill, care and diligence.October 07Principle 4 – Confidentiality
PB-1.1.4
Islamic bank licensees andapproved persons must observe in full any obligations of confidentiality, including with respect to customer information. This requirement does not over-ride lawful disclosures.October 07Principle 5 – Market Conduct
PB-1.1.5
Islamic bank licensees andapproved persons must observe proper standards of market conduct, and avoid action that would generally be viewed as improper.October 07Principle 6 – Customer Assets
PB-1.1.6
Islamic bank licensees andapproved persons must take reasonable care to safeguard the assets and deposits ofcustomers for which they are responsible.October 07Principle 7 – Customer Interests
PB-1.1.7
Islamic bank licensees andapproved persons must pay due regard to the legitimate interests and information needs of theircustomers and communicate with them in a fair and transparent manner.Islamic bank licensees andapproved persons , when dealing withcustomers who are entitled to rely on their advice or discretionary decisions, must take reasonable care to ensure the suitability of such advice or decisions.October 07Principle 8 – Relations with Regulators/Supervisors
PB-1.1.8
Islamic bank licensees andapproved persons must act in an open and co-operative manner with the CBB and other regulatory/supervisory bodies under whose authority they come under. They must take reasonable care to ensure that their activities comply with all applicable laws and regulations.October 07Principle 9 – Adequate Resources
PB-1.1.9
Islamic bank licensees must maintain adequate human, financial and other resources sufficient to run their business in an orderly manner.October 07Principle 10 – Management, Systems & Controls
PB-1.1.10
Islamic bank licensees' Boards of Directors and Shari'a Boards (where applicable) and management must take reasonable care to ensure that their affairs are managed effectively and responsibly, with appropriate systems and controls in relation to the size and complexity of their operations.Islamic bank licensees ' systems and controls, as far as is reasonably practical, must be sufficient to manage the level of risk inherent in their business and ensure compliance with the CBB Rulebook. In particular, the CBB requires that banks comply with all AAOIFI issued accounting standards as well as the Shari'a pronouncements issued by the Shari'a Board of AAOIFI.Amended: January 2011
October 2007
HC High-Level Controls
HC-A HC-A Introduction
HC-A.1 HC-A.1 Executive Summary
Purpose
HC-A.1.1
The purpose of this Module is to:
(a) Explicitly reinforce the collective oversight and risk governance responsibilities of the board;(b) Emphasise key components of risk governance such as risk culture, risk appetite and their relationship to alicensee’s risk capacity;(c) Delineate the specific roles of the board, board committees, senior management, chief financial officer, internal auditor, chief risk officer and head of compliance; and(d) Strengthenlicensees’ overall checks and balances.Added: April 2023HC-A.1.2
All references in this Module to ‘he’ or ‘his’ shall, unless the context otherwise requires, be construed as also being references to ‘she’ and ‘her’.
Added: April 2023Legal Basis
HC-A.1.3
This Module contains the CBB’s Directive (as amended from time to time) relating to high-level controls and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 (‛CBB Law’). The Directive in this Module is applicable to
Islamic bank licensees (including theirapproved persons ).Added: April 2023HC-A.1.4
All Rulebook content that is categorized as a rule must be complied with by those to whom the content is addressed. Other parts of this Module are guidance paragraphs which are considered best market practices and
licensees are encouraged to implement the same.Added: April 2023Effective Date
HC-A.1.5
The new requirements in this amended Module are effective from 1st October 2023 on which date the existing Module HC will become redundant, and any exemptions allowed under the existing Module will be subject to grandfathering requirements unless the relevant requirement has undergone change within this amended Module.
Added: April 2023HC-A.2 HC-A.2 Module History
HC-A.2.1
This Module was first issued in June 2004 by the BMA and updated in October 2007 to reflect the switch to the CBB. Following the issuance of the Corporate Governance Code by the Ministry of Industry and Commerce in March 2010, the Module was amended in October 2010 to be in line with the new Corporate Governance Code and to include previous requirements that were in place in the originally issued Module HC. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
Added: April 2023HC-A.2.2
A list of recent changes made to this Module is detailed in the table below:
Module Ref. Change Date Description of Changes Full Module HC 04/2023 New restructured HC Module supersedes the previous version. The new Module is consistent with Corporate Governance Principles for banks Paper issued in July 2015 by the Basel Committee on Banking Supervision. Full Module HC 01/2024 Restructured Module HC containing Part 1 applicable to Bahraini Islamic bank licensees and Part 2 applicable to Branches of foreign banks. HC-B HC-B Scope of Application
HC-B.1 HC-B.1 Scope of Application
HC-B.1.1
This Module consists of two parts; Part one of this Module is applicable to
Bahraini Islamic bank licensees whereas Part two is applicable tobranches of foreign bank licensees .Amended: January 2024
Added: April 2023HC-B.1.2
The implementation of the rules in this Module should be commensurate with the size, complexity, structure, economic significance, risk profile and business model of the
licensee and the group to which it belongs, if any. DSIBs are expected to have in place the corporate governance structure and practices commensurate with their role and potential impact on national financial stability. In cases of certainlicensees (e.g. smaller and limited scope Bahraini banks, Bahraini government owned banks, digital banks and any Bahraini bank wholly owned by another Bahraini bank) where CBB assesses that certain specific rules in this Module are less relevant or too cumbersome to apply, it will be willing to consider alternative governance arrangement.Amended: January 2024
Added: April 2023HC-B.1.3
[This Paragraph has been deleted in January 2024].
Deleted: January 2024
Added: April 2023HC-B.1.4
[This Paragraph has been deleted in January 2024].
Deleted: January 2024
Added: April 2023Part One: Bahraini Islamic Bank Licensees
HC-B.2 HC-B.2 Subsidiaries and Foreign Branches of Bahraini Islamic Bank Licensees
HC-B.2.1
Bahraini Islamic bank licensees must ensure that, as a minimum, the same or equivalent provisions of this Module apply to their subsidiaries and overseas branches. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.Added: April 2023HC-B.2.2
Where an
Islamic bank licensee is unable to satisfy the CBB that itssubsidiaries and overseas branches are subject to the same or equivalent arrangements, the CBB will assess the potential impact of risks to thelicensee arising from inadequate high-level controls. In such instances, the CBB may impose certain restrictions on thelicensee . Where weaknesses in controls are assessed by the CBB to pose a major threat to the financial soundness of thelicensee and/or the financial stability in the Kingdom, then its license may be called into question.Added: April 2023HC-1 HC-1 Board’s Overall Responsibilities
HC-1.1 HC-1.1 Responsibilities of the Board
HC-1.1.1
The board of directors (“Board”) of the
licensee must:(a) Set the “tone at the top” and play a leading role in establishing thelicensee’s corporate culture and values, and oversee management’s role in fostering and maintaining a sound corporate and risk culture;(b) Ensure that no individual or group of directors dominates the Board’s decision-making and no individual or group has unfettered powers of decision.(c) Approve and oversee the development of thelicensee’s strategy, business plans and budget, and monitor their implementation.Bahraini Islamic bank licensees must submit to the CBB for its review their proposed strategy and any major proposed changes to it;(d) Actively engage in the affairs of thelicensee , keep up with material changes in thelicensee’s business and the external environment and act in a timely manner to protect the long-term interests of thelicensee ;(e) Convene and prepare the agenda for shareholder meetings;(f) Approve, and oversee the implementation of, thelicensee’s governance framework, risk management framework and all policies, and review the relevant parts of these as well as review key controls in case a new business activity is considered, or in case of material changes to thelicensee’s size, complexity, business strategy, markets or regulatory requirements, or the occurrence of a major failure of controls;(g) Establish, along with senior management and the chief risk officer, thelicensee’s risk appetite, considering thelicensee’s strategy, competitive and regulatory landscape, thelicensee’s long-term interests, risk exposure and ability to manage risk effectively, and oversee thelicensee’s adherence to the risk appetite statement, risk policy and risk limits;(h) Ensure that:i. Adequate systems, controls, processes and procedures are implemented by senior management in line with the Board approved policies;ii. Thelicensee has adequate processes to ensure full compliance with the requirements of the CBB Law, other relevant laws and the pertinent rulebooks;iii. Thelicensee has a robust finance function responsible for accounting and financial data;iv. The risk management, compliance and internal audit functions are properly positioned, staffed and resourced and carry out their responsibilities independently, objectively and effectively; andv. Senior management maintains an effective and transparent relationship with the CBB;(i) Approve the annual and interim financial statements;(j) At minimum, approve the selection and oversee the performance of the chief executive officer (CEO), chief financial officer and heads of the risk management, compliance and internal audit functions;(k) Actively oversee, with the assistance and advise of the Remuneration Committee, the remuneration system’s design and operation forapproved person s and material risk-takers and monitor and review executive compensation and assess whether it is aligned with thelicensee’s remuneration policy, risk culture and risk appetite; and(l) Consider the legitimate interests of depositors, shareholders and other relevant stakeholders in their decision-making process.Added: April 2023HC-1.1.2
The Board may, where appropriate, delegate some of its functions, but not its responsibilities, to the Board committees.
Added: April 2023HC-1.1.3
The members of the Board must exercise their fiduciary and other duties of care, candor and loyalty to the
licensee in accordance with local laws and regulations.Added: April 2023HC-1.1.4
Each director must:
(a) Understand the Board’s role and responsibilities pursuant to the CBB Rulebook, the Commercial Companies Law and any other laws or regulations that may govern their responsibilities from time to time;(b) Consider themselves as representing all shareholders and must act accordingly; and(c) Ensure that they receive adequate and timely information before each meeting and must study it carefully.Added: April 2023HC-1.2 HC-1.2 Corporate Culture and Values
HC-1.2.1
In order to promote a sound corporate culture, the Board must:
(a) Approve an appropriate code of conduct/ ethics that must outline the acceptable practices that all Board members, senior management and other staff must follow in performing their duties, and the unacceptable practices/ conduct that must be avoided;(b) Set and adhere to corporate values that create expectations that the business must be conducted in a legal, professional and ethical manner, and oversee the adherence to such values by Board members, senior management and other employees;(c) Promote risk awareness within a strong risk culture, convey the Board’s expectation that it does not support risk-taking beyond the risk appetite and risk limits set by the Board, and that all employees are responsible for ensuring that thelicensee operates within the established risk appetite and risk limits;(d) Ensure that the corporate values, professional standards and codes of conduct it sets, together with supporting policies, are adequately communicated throughout thelicensee ; and(e) Ensure that all directors, senior management and other staff are aware that appropriate disciplinary or other actions will follow unacceptable behaviour, practices and transgressions.Added: April 2023HC-1.2.2
Employees must be encouraged and be able to communicate, confidentially and without the risk of reprisal, legitimate concerns about illegal, unethical or questionable practices. This must be facilitated through a well communicated and Board approved whistleblowing policy and adequate procedures and processes, consistent with applicable laws. This includes the escalation of material concerns to the CBB.
Added: April 2023HC-1.2.3
The Board must:
(a) Have oversight of the whistleblowing policy mechanism and ensure that senior management addresses legitimate issues that are raised;(b) Take responsibility for ensuring that staff who raise concerns are protected from detrimental treatment or reprisals, and that their rights are not undermined;(c) Approve and oversee how and by whom legitimate material concerns shall be investigated and addressed such as by an objective and independent internal or external body, senior management and/or the Board itself; and(d) Ensure that, after verifying the validity of the allegations, the person responsible for any misconduct is held accountable and is subjected to an appropriate disciplinary measure.Added: April 2023HC-1.2.4
The Board must establish a conflict of interest policy on identifying and managing potential conflicts of interest related to all
approved person s. The policy must include:(a) Anapproved person ’s duty to:i. Avoid, to the extent possible, activities that could create conflicts of interest or the appearance of conflicts of interest. Anapproved person shall be considered to have a “personal interest” in a transaction with a company if they themselves, or a member of their family (i.e. spouse, father, mother, sons, daughters, brothers or sisters), or another company of which they are a director or controller, are a party to the transaction or have a material financial interest in the transaction or are expected to derive material personal benefit from the transaction (transactions and interests which are de minimis in value should not be included);ii. Promptly disclose any matter that may result, or has already resulted, in a conflict of interest;iii. Abstain from getting involved in or voting on any matter where they may have a conflict of interest or where their objectivity or ability to properly fulfil duties to thelicensee may be otherwise compromised. Any decision to enter into a transaction in which anapproved person appears to have a material conflict of interest must be formally and unanimously approved by the entire Board;iv. Act with honesty, integrity and care for the best interest of thelicensee and its shareholders and other stakeholders;v. Not use properties of thelicensee for their personal needs;vi. Not misuse or misappropriate thelicensee’s assets or resources;vii. Not disclose confidential information of thelicensee or use it for their personal profit or interest;viii. Make every practicable effort to arrange their personal and business affairs to avoid a conflict of interest with thelicensee ;ix. Not take business opportunities of thelicensee for themselves; andx. Not compete in business with thelicensee or serve thelicensee’s interest in any transaction with a company in which they have a personal interest.(b) Examples of where conflict of interest may arise when serving as anapproved person ;(c) A rigorous review and approval process forapproved person s to follow before they engage in certain activities (such as serving on another Board) so as to ensure that such activity will not create a conflict of interest;(d) Adequate requirements that transactions with related parties must be made on an arm’s length basis;(e) Sufficient restrictions on and/or a robust and transparent process for the employment of relatives ofapproved person s;(f) Requirements for properly managing and disclosing conflict of interest that cannot be prevented;(g) Requirements for allapproved person s to annually declare in writing all their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager or other form of significant participation) to the Board or a designated Board committee; and(h) The way in which the Board will deal with any non-compliance with the policy.Added: April 2023HC-1.2.5
Where there is a potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent Board members capable of exercising independent judgement, to address the conflict.
Added: April 2023HC-1.2.6
The CEO/General Manager of the
licensee must disclose to the Board of directors on an annual basis those individuals who are occupying controlled functions and who are relatives of anyapproved person s within thelicensee .Added: April 2023HC-1.3 HC-1.3 Oversight of Senior Management
HC-1.3.1
The Board must exercise proper oversight of senior management against formal performance and remuneration standards consistent with the long-term strategic objectives and the financial soundness of the
licensee . In doing so, the Board must:(a) Meet regularly with senior management;(b) Subject senior management to annual performance assessment and document such assessments;(c) Ensure thatapproved person s’ collective knowledge and expertise remain appropriate given thelicensee’s nature of business and risk profile;(d) Ensure that senior management’s actions are in full compliance with applicable laws and regulations and consistent with the strategy, business plan and policies approved by the Board, including risk appetite;(e) Question, challenge and critically review the explanations and information provided by senior management; and(f) Ensure that appropriate succession plans are in place for allapproved persons within senior management (provided that such plans are subject to review in case of any changes toapproved persons within senior management).Added: April 2023HC-2 HC-2 Board Formation
HC-2.1 HC-2.1 Board Composition
HC-2.1.1
The Board must comprise of individuals with a balance of skills, diversity and expertise, who individually and collectively possess the necessary qualifications commensurate with the size, complexity and risk profile of the
licensee . The Board must have a sufficient number of independent directors.Added: April 2023HC-2.1.2
In case of a
Bahraini Islamic bank licensee with a controller, at least one-third of the Board must be independent.Added: April 2023HC-2.1.3
If the
Bahraini Islamic bank licensee has a controller or a group of controllers acting in concert, such person(s) must recognise their specific responsibility to the minority shareholders as Board members have responsibilities to thelicensee’s overall interests, regardless of who appoints them.Added: April 2023HC-2.1.4
At least half of a
Bahraini Islamic bank licensee ’s Board should be non-executive directors and at least three of those persons should be independent directors.Added: April 2023HC-2.1.5
The CBB may call upon each independent director at its discretion to have a general discussion on the affairs of the
Bahraini Islamic bank licensee .Added: April 2023HC-2.2 HC-2.2 Board Member Selection
HC-2.2.1
The Board must have a clear and rigorous process for identifying, assessing and selecting Board candidates. The Board, and not management, must nominate the candidates for shareholders’ approval.
Added: April 2023HC-2.2.2
Board candidates must:
(a) Possess the knowledge, skills, experience and, particularly in the case of non-executive directors, independence of mind necessary to discharge their responsibilities on the Board in light of thelicensee’s business and risk profile;(b) Have a record of integrity and good repute;(c) Have sufficient time to fully carry out their responsibilities;(d) Not have any conflicts of interest that may impede their ability to perform their duties independently and objectively and subject them to undue influence from:i. Otherapproved persons , controllers or other connected parties;ii. Past or present positions held; oriii. Personal, professional or other economic relationships with otherapproved persons (or with other entities within the group); and(e) Not have more than two directorships of Bahrainibanks , bearing in mind that two directorships oflicensees within the same license category (e.g. ‘Retail Bank’) are not permitted.Added: April 2023HC-2.2.3
Board candidates should not hold more than three directorships in public companies in Bahrain. In case such directorships exist, there must be no conflict of interest, and the Board must not propose the election or re-election of any director where such conflict of interest exists.
Added: April 2023HC-2.2.4
Nominated directors of a
Bahraini Islamic bank licensee must possess the requisite experience and competencies specified in Module TC (Training and Competency).Added: April 2023HC-2.2.5
A CEO of a
Bahraini Islamic bank licensee who has resigned or retired, must not be appointed as an independent director of the same bank unless a period of three years has passed from the date of his/her resignation/ retirement. Additionally, where a CEO is terminated from his/her position, he/she must not be appointed or retained as a Board member of the same bank.Added: April 2023HC-2.2.6
Each proposal by the Board to the shareholders for election or re-election of a director must be accompanied by a recommendation from the Board, a summary of the advice of the Nomination Committee and the following specific information:
(a) The term to be served, which may not exceed three years;(b) Biographical details and professional qualifications;(c) In the case of an independent director, a statement that the Board has determined that the applicable rules and criteria for independent director have been met;(d) Any other directorships held;(e) Particulars of other positions which involve significant time commitments; and(f) Details of relationships (if any) between:i. the candidate and theIslamic bank licensee , andii. the candidate and otherapproved persons of theIslamic bank licensee .Added: April 2023HC-2.2.7
Newly appointed non-executive directors must be made aware of their duties before their nomination, particularly as to the time commitment required.
Added: April 2023HC-2.3 HC-2.3 Board Members’ Appointment and Induction
Board Members’ Appointment
HC-2.3.1
The chairperson of the Board must confirm to shareholders when proposing re-election of a director that, following a formal performance evaluation, the person’s performance continues to be effective and they continue to demonstrate commitment to the role.
Added: April 2023HC-2.3.2
Where an independent director has served three consecutive terms on the Board, such director will lose his independence status and must not be classified as an independent director if reappointed.
Added: April 2023HC-2.3.3
Bahraini Islamic bank licensees must have a written appointment agreement with each director which recites the directors’ powers, duties and responsibilities, accountability, term, the time commitment envisaged, the committee assignment (if any), remuneration, expense reimbursement entitlement and their access to independent legal or other professional advice at the expense of the bank when needed to discharge their responsibilities as directors.Added: April 2023Board Members’ Induction
HC-2.3.4
The Board must ensure that:
(a) Sufficient time, budget and other resources are allocated annually for the Board members’ induction programmes;(b) Each new director receives a formal and tailored induction and has access to ongoing training on relevant issues which may involve internal or external resources to ensure their effective contribution to the Board from the beginning of their term; and(c) The induction programmes include meetings with senior management, visits to theIslamic bank licensee ’s facilities, presentations regarding strategic plans, significant financial, accounting and risk management issues, compliance programs, and meetings with internal and external auditors and legal counsel.Added: April 2023HC-2.3.5
Board members must understand their oversight and corporate governance role and be able to exercise sound, objective judgment about the affairs of the
licensee .Added: April 2023HC-2.3.6
All continuing directors must be invited to attend orientation meetings and all directors must continually educate themselves as to the
Islamic bank licensee ’s business and corporate governance.Added: April 2023HC-3 HC-3 Board’s Structure and Practices
HC-3.1 HC-3.1 Organisation and Assessment of the Board
HC-3.1.1
The Board of a
Bahraini Islamic bank licensee must:(a) Adopt a formal Board charter specifying matters which are reserved for it, which must include, but are not limited to, the specific requirements and responsibilities of directors stipulated in this Module and the Commercial Companies Law;(b) Structure itself in terms of leadership, size and the use of committees so as to effectively carry out its oversight role and other responsibilities. This includes ensuring that the Board has the time and means to cover all necessary subjects in sufficient depth and have a robust discussion of key issues;(c) Maintain and periodically update its governance structure, organisational rules, by-laws and other similar documents setting out its organisation, rights, responsibilities and key activities; and(d) Carry out annual evaluation and assessments – alone or with the assistance of external experts – of the Board, its committees and individual Board members. This must include:i. Assessing how the Board operates in terms of the requirements of the CBB Rulebook and the Commercial Companies Law;ii. Evaluating the performance of each committee considering its specific purposes and responsibilities, which shall include review of the self-evaluations undertaken by each committee;iii. Reviewing each director's work, their attendance at Board and committee meetings, and their independence and constructive involvement in discussions and decision making;iv. Reviewing, based on the Nomination Committee’s advice and assessment, the Board’s current structure, size, composition as well as committees’ structures and composition in order to maintain an appropriate balance of skills, diversity and experience and for the purpose of planned and progressive refreshing of the Board; andv. Recommendations for new directors to replace long-standing members or those members whose contribution to the Board or its committees is not adequate.Added: April 2023HC-3.1.2
Where the Board has serious reservations about the performance or integrity of a Board member, or he ceases to be qualified, the Board must take appropriate action and inform the CBB accordingly.
Added: April 2023HC-3.1.3
The Board must report to the shareholders, at each annual shareholder meeting, that evaluations have been done and report its findings.
Added: April 2023HC-3.1.4
Executive directors must provide the Board with all relevant business and financial information within their knowledge and must recognise that their role as a director is different from their role as a member of management.
Added: April 2023HC-3.1.5
Non-executive directors must be fully independent of management and must constructively scrutinise and challenge management and executive directors.
Added: April 2023HC-3.1.6
The Board must maintain appropriate records of meeting minutes, including key points of discussions held, recommendations made, decisions taken and dissenting opinions (if any).
Added: April 2023HC-3.1.7
The Board must meet at least four times a year to enable it to discharge its responsibilities effectively, and half of all Board meetings in any financial year must be held in the Kingdom of Bahrain.
Added: April 2023HC-3.1.8
Individual Board members must attend at least 75% of all Board meetings in a given financial year, whether in-person or virtually (if needed) so as to enable the Board to discharge its responsibilities effectively (see table below). Voting and attendance proxies for Board meetings are prohibited.
Meetings per year 75% Attendance requirement 4 3 5 4 6 5 7 5 8 6 9 7 10 8 Added: April 2023HC-3.1.9
The absence of Board members at Board and committee meetings must be noted in the relevant meeting minutes. In addition, Board attendance percentage must be reported during any general assembly meeting when Board members stand for re-election (e.g. Board member XYZ attended xx% of scheduled meetings this year).
Added: April 2023HC-3.1.10
If a Board member has not attended at least 75% of Board meetings in any given financial year, the
licensee must notify the CBB, within one month from its financial year-end, indicating which member has failed to satisfy this requirement, their level of attendance and the reason for non-attendance. The CBB shall then consider the matter and determine whether enforcement action pursuant to Article 65 of the CBB Law is appropriate.Added: April 2023HC-3.1.11
Board governance framework should require members to step down if they are not actively participating in Board meetings.
Added: April 2023HC-3.1.12
Non-executive directors should have free access to theBahraini Islamic bank licensee’s management beyond that provided in Board meetings. Such access should be through the chairperson of the Audit Committee or the CEO. The Board should make this policy known to management to alleviate any management concerns about a director’s authority in this regard.Added: April 2023HC-3.2 HC-3.2 Board Chairperson
HC-3.2.1
The Chairperson of the Board of the
Bahraini Islamic bank licensee must:(a) Not be an executive director;(b) Not be the same person as the CEO. This applies also to the deputy chairperson;(c) Commit sufficient time to perform their role effectively;(d) Play a critical role in promoting mutual trust, efficient functioning of the Board, open discussion, constructive dissent from decisions and constructive support for decisions after they have been made;(e) Ensure that all directors receive an agenda, minutes of prior meetings and adequate background information on each agenda item in writing well before each Board meeting;(f) Encourage and promote critical and objective discussion and ensure that dissenting views can be freely expressed, discussed and recorded in the minutes of the Board meeting; and(g) Ensure that Board decisions are taken on sound and well-informed bases.Added: April 2023HC-3.2.2
The chairperson of a
Bahraini Islamic bank licensee should be an independent Board member.Added: April 2023HC-3.3 HC-3.3 Board Committees
HC-3.3.1
The Board of the
Bahraini Islamic bank licensee must establish Audit, Risk, Remuneration and Nomination Committees described elsewhere in this Module.Added: April 2023HC-3.3.2
Objectivity and independence must be ensured by the selection of appropriate Board members in each committee.
Added: April 2023HC-3.3.3
Committees may be combined provided that no conflict of interest arises between the duties of such committees, and subject to the CBB’s prior approval.
Added: April 2023HC-3.3.4
Every committee must have a formal written charter or other instrument which sets out its roles and responsibilities, how the committee will report to the Board, what is expected of committee members and any tenure limits for serving on the committee.
Added: April 2023HC-3.3.5
Each committee must have the resources and the authority necessary to discharge its duties and responsibilities, including the authority to select, retain, terminate and approve the fees of external legal, accounting or other advisors as it deems necessary.
Added: April 2023HC-3.3.6
Each Board committee must maintain appropriate records of their deliberations and decisions in their meeting minutes, including key points of discussions held, recommendations made, decisions taken (and update on their subsequent implementation) and dissenting opinions (if any).
Added: April 2023HC-3.3.7
Each committee must prepare and review with the Board an annual performance evaluation of the committee and its members and must recommend to the Board any improvements deemed necessary or desirable to the committee’s charter or composition. The report must be in the form of a written report presented at any regularly scheduled Board meeting.
Added: April 2023HC-3.3.8
Members of each committee must exercise judgment free from any personal conflicts of interest or bias.
Added: April 2023HC-3.3.9
The Board should consider occasional rotation of membership and chair of the Board committees provided that doing so does not impair the collective skills, experience and effectiveness of these committees.
Added: April 2023HC-3.4 HC-3.4 Audit Committee
HC-3.4.1
The audit committee of the
Bahraini Islamic bank licensee must have at least three directors of which the majority must be independent and have no conflict of interest with any other duties they have.Added: April 2023HC-3.4.2
The Chairperson of the audit committee must:
(a) Be independent;(b) Not be the chairperson of the board, unless he is considered independent; and(c) Not be the chairperson of any other Board committee.Added: April 2023HC-3.4.3
The CEO and other senior management of the
Bahraini Islamic bank licensee must not be members of the audit committee.Added: April 2023HC-3.4.4
The audit committee members must have sufficient experience in audit practices, financial reporting and accounting.
Added: April 2023HC-3.4.5
The audit committee must meet:
(a) At least four times a year.(b) At least twice a year with the external auditor.(c) At least once a year in the absence of the CEO and any executive management, but in presence of the Head of Compliance, Internal Auditor and CRO.Added: April 2023HC-3.4.6
The audit committee must, at minimum:
(a) Ensure that thelicensee has effective and adequate policies covering all its business activities, internal audit, financial reporting, compliance, risk management, prevention of frauds and cyber security breaches, etc.;(b) Oversee the financial reporting process;(c) Oversee and interact with thelicensee’s internal and external auditors;(d) Review the integrity of theIslamic bank licensee ’s financial statements;(e) Recommend to the Board, based on a Board approved objective criteria, the appointment, remuneration, dismissal and rotation of external auditors;(f) Review and approve the internal and external audit and compliance scope;(g) Receive internal and external audit and compliance reports and ensure that senior management is taking necessary corrective actions in a timely manner to address any control weaknesses, non-compliance with policies, laws and regulations, and other problems identified by auditors, the head of compliance and other control functions;(h) Assess once a year the extent to which thelicensee is managing its compliance risk effectively;(i) Ensure that the agenda for their meetings includes compliance and internal audit issues at least every quarter;(j) Recommend the appointment and dismissal of the heads of internal audit and compliance functions. Thelicensee must also discuss the reasons for their dismissal with the CBB.(k) Make a determination, at least once a year, of the external auditor’s independence;(l) Commission every five years a quality review of the effectiveness and efficiency of the internal audit and compliance functions by a third-party consultant, other than the external auditor. The results of such independent review must be provided to the CBB by 30th September of the relevant year;(m) Review and supervise the implementation and enforcement of thelicensee's code of conduct, unless such mandate is delegated to another committee such as the Governance Committee; and(n) Ensure that senior management establishes and maintains an adequate and effective internal control systems, procedures and processes for the business of thelicensee .Added: April 2023HC-3.4.7
In case the
licensee has a different board committee overseeing and monitoring compliance issues, then all of the above compliance-related requirements in Paragraph HC-3.4.6 can be handled by such committee instead.Added: April 2023HC-3.5 HC-3.5 Risk Committee
HC-3.5.1
The risk committee of the
Bahraini Islamic bank licensee must have at least three directors of which the majority must be independent. In addition, the committee members must have experience in risk management issues and practices and have no conflict of interest with any other duties they may have.Added: April 2023HC-3.5.2
The chairperson of the risk committee must:
(a) Be independent;(b) Not be the chairperson of the Board, unless he is considered independent; and(c) Not be the chairperson of any other Board committee.Added: April 2023HC-3.5.3
The CEO and other senior management must not be members of the risk committee.
Added: April 2023HC-3.5.4
The
licensee must have a strong and appropriate risk governance framework which:(a) Includes a strong risk culture, and a well-developed risk appetite articulated through the risk appetite statement (RAS);(b) Outlines actions to be taken when the stated risk limits are breached, including disciplinary actions for excessive risk-taking, escalation procedures and notification to the Board; and(c) Includes well-defined organisational responsibilities for risk management.Added: April 2023HC-3.5.5
The
Bahraini Islamic bank licensee ’s RAS must:(a) Include both quantitative and qualitative considerations;(b) Establish the individual and aggregate level and types of risks that the bank is willing to assume;(c) Define the boundaries and business considerations according to which the bank is expected to operate;(d) Be aligned with the bank’s strategic, capital and financial plans and compensation practices; and(e) Be communicated effectively throughout the bank, linking it to daily operational decision-making and establishing the means to raise risk issues and strategic concerns across the bank on a timely and proactive basis.Added: April 2023HC-3.5.6
Islamic bank licensees must avoid organisational silos that can impede effective sharing of risk information across the organisation and can result in decisions being taken in isolation from the rest of the bank. Accordingly, the Board, senior management and control functions must re-evaluate established practices in order to encourage greater communication.Added: April 2023HC-3.5.7
The risk committee must, at minimum:
(a) Recommend the appointment or removal of the Chief Risk Officer (CRO) or equivalent. Thelicensee must also discuss the reasons for removal with the CBB;(b) Discuss all risk strategies on both an aggregated basis and by type of risk and make recommendations to the Board, and on the risk appetite;(c) Ensure that:i. Risks are identified, measured, aggregated, controlled, mitigated, monitored and reported on an ongoing basis across all business lines, thelicensee as a whole, its subsidiaries and overseas branches (if any);ii. Risk identification and measurement include both quantitative and qualitative elements;iii. Each key risk has a policy, process and controls;iv. Thelicensee has sufficient and robust management information system and policies, supported by appropriate control procedures and processes, designed to ensure that thelicensee’s risk identification, measurement, aggregation, controlling, mitigation, monitoring and reporting capabilities are commensurate with thelicensee’s size, complexity and risk profile. The sophistication of thelicensee’s risk management information system and internal control infrastructure must keep pace with changes to thelicensee’s risk profile, the external risk landscape and industry practices;i. Thelicensee’s risk management infrastructure, including a sufficiently robust data infrastructure, data governance and architecture and information technology infrastructure keeps pace with developments such as balance sheet and revenue growth, increasing complexity of thelicensee’s business, risk configuration or operating structure, geographical expansion, mergers and acquisitions, or the introduction of new products or business lines;ii. Senior management has in place processes to promote thelicensee’s adherence to the approved risk policies and risk appetite;iii. Thelicensee’s policies must determine the key management decisions that must be taken by more than one person;iv. Thelicensee has an adequate communication within thelicensee about risk, both across the organisation and through reporting to the Board and senior management;v. Thelicensee has a strong risk culture that promotes risk awareness and encourages open communication and challenge about risk-taking across the organisation as well as vertically to and from the Board and senior management; andvi. Thelicensee has adequate escalation procedures on risks related matters.(d) Advise the Board on thelicensee’s risk appetite, overseeing senior management’s implementation of the RAS, reporting on the state of risk culture in thelicensee , and interacting with and overseeing the CRO;(e) Oversee the strategies for capital and liquidity management as well as for all relevant risks of thelicensee , such as credit, market, operational, rate of return risk in the banking book and reputational risks, to ensure that they are consistent with the stated risk appetite;(f) Commission every five years a quality review of the effectiveness and efficiency of the risk management framework and function by a third-party consultant, other than the external auditor. The results of such independent review must be provided to the CBB by 31st May of the relevant year. More specifically, anIslamic bank licensee must undertake reviews referred to above with regards to the following individual areas that are relevant to the risk management framework:i. ICAAP Framework referred to in Module IC;ii. Capital adequacy requirements under Module CA;iii. Recovery and resolution planning (RRP) and related documents referred to in Module DS;iv. Credit risk management framework and compliance with Module CM;v. Operational risk management framework and compliance with Module OM;vi. Stress testing framework included in Module ST;vii. Liquidity risk management framework and compliance with Module LM; andviii. Compliance with Module RR.(g) Receive regular reporting and communication from the CRO and other relevant functions about thelicensee’s current risk profile, current state of the risk culture, utilisation against the established risk appetite and limits, limit breaches and mitigation plans.Added: April 2023HC-3.5.8
There must be effective communication and coordination between the audit committee and the risk committee to facilitate the exchange of information and effective coverage of all risks, including emerging risks, and any needed adjustments to the risk governance framework of the bank.
Added: April 2023HC-3.6 HC-3.6 Remuneration Committee
HC-3.6.1
The remuneration committee of the
Bahraini Islamic bank licensee must have at least three directors.Added: April 2023HC-3.6.2
Members of the remuneration committee must be independent of any risk-taking function or committee.
Added: April 2023HC-3.6.3
The remuneration committee should include only independent directors or, alternatively, only non-executive directors of whom a majority are independent directors and the chairperson should be an independent director.
Added: April 2023HC-3.6.4
The remuneration committee should meet at least twice a year.
Added: April 2023HC-3.6.5
The remuneration committee must, at minimum:
(a) Recommend to the Board:i. An appropriate remuneration policy designed to reduce employees’ incentives to take excessive and undue risk, which must be approved by the shareholders; andii. A fair and internally transparent remuneration system, which includes relevant performance measures and effective controls.(b) Ensure on an annual basis that the remuneration policy and its implementation:i. Are in full compliance with CBB requirements;ii. Are consistent with thelicensee’s strategy, culture, long-term business objectives, risk appetite, performance and control environment; andiii. Are creating the desired incentives for managing risk, capital and liquidity.(c) Work closely with the risk committee in evaluating the incentives created by the remuneration system. The risk committee must, without prejudice to the tasks of the remuneration committee, examine whether incentives provided by the remuneration system take into consideration risk, capital, liquidity and the likelihood and timing of earnings;(d) Approve the remuneration package and amounts for each approved person and material risk-taker, as well as the total variable remuneration to be distributed based on the results of the performance evaluation system and taking account of total remuneration including salaries, fees, expenses, bonuses and other employee benefits;(e) Regularly review remuneration outcomes, risk measurements, and risk outcomes for consistency with Board’s approved risk appetite;(f) Question payouts for income that cannot be realised or whose likelihood of realisation remains uncertain at the time of payout;(g) Recommend Board member remuneration based on their attendance and in compliance with the Commercial Companies Law;(h) Evaluate practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain by means of both quantitative and qualitative key indicators. It must demonstrate that its decisions are consistent with the assessment of thelicensee’s financial condition and future prospects; and(i) Obtain feedback on performance evaluation of the Chief Risk Officer, Chief Internal Auditor, Head of Compliance, Head of Internal Shari’a Audit, Shari’a Officer from the designated Board committee responsible for oversight of these functions.Added: April 2023HC-3.7 HC-3.7 Nomination Committee
HC-3.7.1
The nomination committee of the
Bahraini Islamic bank licensee must have at least three independent directors, or alternatively, three non-executive directors of whom the majority must be independent directors including its chairperson.Added: April 2023HC-3.7.2
The committee should meet at least twice a year.
Added: April 2023HC-3.7.3
The nomination committee must, at minimum:
(a) Assess and recommend to the Board from time to time the changes that the committee considers desirable to the size of the Board, any Board committee or management structure;(b) Regularly review the time commitment required from each non-executive director and require them to inform the committee before accepting any Board appointments to another company;(c) Recommend to the Board persons qualified to become members of the Board of directors or CEO and his deputies, chief financial officer, chief operating officer, chief investment officer, chief banking officer, corporate secretary and any equivalent or other senior management positions that the Board determines are subject to its approval. The exceptions are the appointments of the chief internal auditor, chief risk officer and head of compliance who must be recommended by other committees as prescribed in this module;(d) Assess the role and responsibilities of a Board member, the knowledge, experience and competence which the role requires;(e) Assess the Board’s and senior management’s effectiveness;(f) Recommend to the Board appropriate succession plans ofapproved persons within senior management;(g) Recommend to the Board, and oversee the implementation of, appropriate personnel or human resource policies; and(h) Recommend to the Board the prescribed title, authority, duties, accountability and internal reporting responsibilities for each approved person within senior management.Added: April 2023HC-3.8 HC-3.8 Corporate Governance Committee
HC-3.8.1
The
Bahraini Islamic bank licensee must assign to one of its senior management the role of a corporate governance officer who is responsible for the tasks of verifying the bank's compliance with corporate governance rules and regulations.Added: April 2023HC-3.8.2
The Board should establish a corporate governance committee for developing and recommending changes from time to time in the
Islamic bank licensee ’s corporate governance policy framework. Such committee should have at least three directors of which the majority should be independent.Added: April 2023HC-3.8.3
The corporate governance committee should:
(a) Oversee and monitor the implementation of the governance policy framework by working with the management and the Audit Committee; and(b) Provide the Board of directors with reports and recommendations based on its findings in the exercise of its functions.Added: April 2023HC-3.8.4
The responsibilities of the corporate governance officer may be assumed by the head of compliance and should include, at minimum:
(a) Coordinating and following up on thelicensee’s compliance with corporate governance requirements;(b) Ensuring that the corporate governance policies, their implementation and related internal controls are consistent with the regulatory and legal requirements;(c) Working closely with the Board and/or the relevant Board committee to improve the governance framework of thelicensee ; and(d) Reviewing the annual corporate governance disclosure to ensure that its contents are in conformity with thelicensee’s internal policies and the CBB rulebook requirements.Added: April 2023HC-4 HC-4 Shareholders’ Meetings
HC-4.1 HC-4.1 Shareholders’ Meetings
HC-4.1.1
Bahraini Islamic bank licensees must comply with the following with respect to any shareholders’ meeting:(a) Provide the draft agenda to the CBB, for its review and comment, at least 5 working days prior to communicating with the shareholders or publishing in the press;(b) Ensure that CBB’s prior approval has been obtained for any agenda items which require CBB’s approval under relevant regulations, prior to the meeting taking place;(c) Invite a representative of the CBB to attend the meetings at least 5 working days prior to the meeting taking place; and(d) Submit to the CBB a copy of the minutes of the meeting within 15 calendar days of the meeting.Added: April 2023HC-5 HC-5 Group Structures
HC-5.1 HC-5.1 Governance of Group Structures
HC-5.1.1
The Board of a
Bahraini Islamic bank licensee which acts as aparent must:(a) Have the overall responsibility for the group and exercise adequate oversight over subsidiaries and overseas branches while respecting the independent legal and governance responsibilities that might apply to subsidiary Boards;(b) Establish, subject to CBB’s approval, a group structure (including the legal entity and business structure) and a group corporate governance framework with clearly defined roles and responsibilities at both theparent bank’s and the subsidiaries’ level as may be appropriate based on the complexity, risks and significance of the subsidiaries;(c) Set adequate and comprehensive criteria for composing Boards at subsidiaries’ level;(d) Have a clear strategy and group policy for establishing new structures and legal entities, and ensure that they are consistent with the policies and interests of the group;(e) Have sufficient resources at group and subsidiaries levels to monitor risks and compliance at the level of the group and its subsidiaries;(f) Pay special attention and due care to any significant subsidiary based on its risk profile or systemic importance or due to its size relative to theparent bank;(g) Assess and discuss material risks and issues that might affect the group and its subsidiaries and overseas branches;(h) Establish effective group functions at theparent bank, including but not limited to, internal audit, compliance, risk management and financial controls to whom the relevant subsidiaries’ functions must report;(i) Maintain an effective relationship, through the subsidiary Board or direct contact, with the regulators of all subsidiaries and overseas branches; and(j) ensure that:i. The group has appropriate policies and controls to identify and address potential intragroup conflicts of interest, such as those arising from intragroup transactions;ii. The group is governed and operating under clear group strategies, business policies and specific set of group policies on risk management, internal audit, compliance and financial controls;iii. There are no barriers to exchanging information between the subsidiaries and theparent bank and that there are robust systems in place to facilitate the exchange of information to enable theparent bank to effectively supervise the group and manage its risks; andiv. Adequate authority is available to each subsidiary pursuant to local legislations.Added: April 2023Subsidiaries’ Boards
HC-5.1.2
Boards and senior management of subsidiaries of
Bahraini Islamic bank licensees must remain responsible for developing effective governance and risk management framework for their entities and must clearly understand the reporting obligations they have to theparent bank.Added: April 2023HC-5.1.3
The strategy, business plan, policies, risk governance framework, corporate values and corporate governance framework of each subsidiary must align with group strategy and policies, and the subsidiary Board must make necessary adjustments where a group policy conflicts with an applicable legal or regulatory provision or prudential rule or would be detrimental to the sound and prudent management of the subsidiary.
Added: April 2023HC-5.1.4
Material risk-bearing subsidiaries and overseas branches must be captured by the bank-wide risk management system and must be part of the overall risk governance framework.
Added: April 2023Complex or Opaque Structures
HC-5.1.5
The Board and senior management of the
parent bank must be cognisant of the challenges arising from operating under complex or opaque structures, including special purpose vehicles, and must act to avoid or mitigate these by:(a) Avoiding setting up complicated structures that lack economic substance or business purpose;(b) Continually maintaining and reviewing appropriate policies, procedures and processes governing the approval and maintenance of those structures or activities, including fully vetting the purpose, the associated risks and the bank’s ability to manage those risks prior to setting up new structures and initiating associated activities;(c) Having a centralised process for approving the creation of new legal entities and subsidiaries based on established criteria, including the ability to monitor and fulfil each entity’s regulatory, tax, financial reporting, governance and other requirements and for the dissolution of dormant subsidiaries;(d) Establishing adequate policies, procedures and processes to identify and manage all material risks arising from these structures, including lack of management transparency, operational risks introduced by interconnected and complex funding structures, intragroup exposures, trapped collateral and counterparty risk, etc. The bank must only approve structures if the material risks can be properly identified, quantified, monitored and mitigated; and(e) Ensuring that the activities, controls and structures are subject to periodic reviews by compliance, internal audit and risk management functions as well as external audit to ensure effectiveness and consistency with Board-approved strategy and policies.Added: April 2023HC-6 HC-6 Remuneration of Approved Persons and Material Risk-Takers
HC-6.1 HC-6.1 Remuneration of Approved Persons and Material Risk-Takers
HC-6.1.1
All
approved persons and material risk-takers must be remunerated fairly and responsibly. More specifically, the remuneration must be sufficient to attract, retain and motivate persons.Added: April 2023HC-6.1.2
The performance evaluation and remuneration of senior management and staff of the
Islamic bank licensees must be based, among other factors, on their adherence to all relevant laws, regulations and CBB rulebook requirements, including but not limited to AML/CFT requirements in the FC module.Added: April 2023HC-6.1.3
For
approved persons and material risk-takers whose total annual remuneration (including all benefits) is in excess of BD100,000:(a) An appropriate ratio between the fixed and variable components of total remuneration must be set to ensure that fixed and variable components of total remuneration are appropriately balanced and paid on the basis of individual, business-unit and bank-wide measures that adequately measure performance; and(b) The variable proportion of remuneration must increase significantly along with the level of seniority and/or responsibility. More specifically:i. at least 40% of the variable remuneration must be payable under deferral arrangements over a period of at least 3 years; andii. for the CEO, his deputies and the other 5 most highly paid business line employees, at least 60% of the variable remuneration must be payable under deferral arrangements over a period of at least 3 years.Added: April 2023HC-6.1.4
As a minimum, 50% of total variable remuneration (including both the deferred and undeferred portions) must be awarded in shares or share-linked instruments or where appropriate, other non-cash instruments. The remaining portion of the deferred remuneration can be paid as cash remuneration vested over a minimum 3-year period.
Added: April 2023HC-6.1.5
Remuneration, based on both quantitative measures and human judgement, must be adjusted for all types and magnitudes of risks, including intangible and other risks managed by the approved person and material risk-taker, and remuneration outcomes must be symmetric with risk outcomes.
Added: April 2023HC-6.1.6
The mix of cash, equity and other forms of remuneration must be consistent with risk alignment. The mix will vary depending on the employee’s position and role and the
licensee must document the rationale for its mix.Added: April 2023HC-6.1.7
Employees’ incentive payments must be linked to the contribution of the individual and business to such performance.
Added: April 2023HC-6.1.8
Remuneration systems must link the size of the bonus pool to the overall performance of the
licensee .Added: April 2023HC-6.1.9
Awards in shares or share-linked instruments must be subject to a minimum share retention policy of 6 months from the time the shares are awarded, unless the
licensee’s policy requires a longer period.Added: April 2023HC-6.1.10
The only instance where deferred remuneration can be paid out before the end of the vesting period is in the case of the death of the employee where the beneficiaries would receive any unpaid deferred remuneration.
Added: April 2023HC-6.1.11
Licensees must not provide any form of guaranteed variable remuneration as part of the overall remuneration package. Exceptional minimum variable remuneration must only occur in the context of hiring new staff and limited to the first year.Added: April 2023HC-6.1.12
For
Bahraini Islamic bank licensees , where fixed or variable remuneration include common shares,licensees must limit the shares awarded to an annual aggregate limit of 10% of the total issued shares outstanding of thelicensee , at all times.Added: April 2023HC-6.1.13
For
Bahraini Islamic bank licensees , all share incentive plans must be approved by the shareholders.Added: April 2023HC-6.1.14
Approved persons and other staff of risk management, financial controls, internal audit, operations, internal Shari’a audit, Shari’a coordination and implementation, AML/ CFT, compliance, human resources, information technology and legal functions must be remunerated based principally on the achievement of the objectives and targets of their functions. As such the mix of fixed and variable remuneration for these functions’ personnel must be skewed toward fixed remuneration.Added: April 2023HC-6.1.15
The size of the variable remuneration pool and its allocation within the
licensee must not compromise the financial soundness of thelicensee and must take into account the full range of current and potential risks, including:(a) The cost and quantity of capital required to support the risks taken;(b) The cost and quantity of the liquidity risk assumed in the conduct of business; and(c) Consistency with the timing and likelihood of potential future revenues incorporated into current earnings.Added: April 2023HC-6.1.16
Existing contractual payments related to a termination of employment must be re-examined and kept in place only if there is a clear basis for concluding that they are aligned with long-term value creation and prudent risk-taking. Prospectively, any such payments must be related to performance achieved over time and designed in a way that does not reward failure.
Added: April 2023HC-6.1.17
Licensees must have an appropriate compliance mechanism to ensure that their employees commit themselves not to use personal hedging strategies or remuneration- and liability-related insurance to undermine the risk alignment effects embedded in their remuneration arrangements.Added: April 2023HC-6.1.18
Bonuses must either be reduced or be deferred in the event of poor
licensee , divisional or business unit performance. Subdued or negative financial performance of thelicensee must lead to contraction of thelicensee’s total variable remuneration, taking into account both current remuneration and reductions in payouts of amounts previously earned, including through malus and clawback arrangements. Recognition of staff who have achieved their targets or better, may take place by way of deferred compensation, which may be paid once thelicensee’s performance improves.Added: April 2023HC-6.1.19
If the
licensee and/or relevant line of business is incurring losses in any year during the vesting period, any unvested portions must be subject to malus. Accrual and deferral of variable remuneration does not oblige thelicensee to pay the variable remuneration, particularly when the anticipated outcome has not materialised.Added: April 2023HC-6.1.20
Approved persons , including those appointed as members of the Board of special purpose vehicles or other operating companies, are not permitted to take any benefits (commission, fees, shares, consideration in kind, or other remuneration or incentives in respect of the performance of the project or investment) from any projects or investments which are managed by theIslamic bank licensee or promoted to its customers or potential customers except for Board related remuneration linked to their fiduciary duties to the investors of the project/investment.Added: April 2023HC-6.1.21
Remuneration ofnon-executive directors must not include performance-related elements such as grants of shares, share options or other deferred stock-related incentive schemes, bonuses, or pension benefits.Added: April 2023HC-6.1.22
If a
senior manager is also a director, hisremuneration as asenior manager must take into account compensation received in his capacity as a director.Added: April 2023HC-7 HC-7 Senior Management
HC-7.1 HC-7.1 Senior Management
HC-7.1.1
The Board must establish an adequate organisational structure that promotes accountability and transparency and facilitates effective decision-making and good governance throughout the
licensee . This includes clarity on the role, authority and responsibility of the various positions within senior management, including that of the CEO.Added: April 2023HC-7.1.2
Senior management must:
(a) Be selected through an appropriate promotion or recruitment process which considers the qualifications and competencies required for the position in question;(b) Have the necessary experience, competencies, personal qualities and integrity to manage the businesses and employees under their supervision;(c) Be subject to regular training to maintain and enhance their competencies and stay up to date on developments relevant to their areas of responsibility;(d) Assess the training needs of staff across all levels throughout the organisation taking into account the existing skills and competencies and laws and regulations and ensure that such training is provided by competent and skilled personnel (whether internal or external);(e) Act within the scope of their responsibilities which must be clearly defined;(f) Independently assess and question the policies, processes and procedures of thelicensee , with the intent to identify and initiate management action on issues requiring improvement;(g) Not interfere in the independent duties of the risk management, compliance and internal audit functions;(h) Carry out and manage thelicensee’s activities in compliance with all laws and regulations, and in a manner consistent with the business strategy, risk appetite, business plans and remuneration and other policies approved by the Board;(i) Have a robust governance framework for all management committees;(j) Not primarily control the remuneration system in thelicensee ;(k) Actively communicate and consult with the control functions on management’s major plans and activities so that the control functions can effectively discharge their responsibilities; and(l) Provide the Board and its committees with timely, complete, accurate and understandable information and documents so that they are equipped for upholding their responsibilities, and keep them adequately informed and updated on a timely basis about material issues including:i. Changes in the implementation of business strategy, risk strategy and risk appetite;ii. Thelicensee’s performance and financial condition;iii. Breaches of risk limits or regulations;iv. Internal control failures, frauds and cyber-security incidents;v. Legal or regulatory concerns;vi. Customer complaints; andvii. Issues raised as a result of thelicensee’s whistleblowing policy.Added: April 2023HC-7.1.3
Islamic bank licensee’s CEO and chief financial officer must state in writing to the audit committee and the Board that theIslamic bank licensee’s interim and annual financial statements present a true and fair view, in all material respects, of theIslamic bank licensee’s financial condition and results of operations in accordance with applicable accounting standards.Added: April 2023HC-8 HC-8 Risk Management Function
HC-8.1 HC-8.1 Risk Management Function
HC-8.1.1
Islamic bank licensees must have an effective and independent risk management function commensurate with the bank’s size, complexity and risk profile, under the direction of a chief risk officer (CRO) or equivalent, with sufficient stature, independence and skilled resources.Added: April 2023HC-8.1.2
Branches of foreign bank licensees have the choice of having an in-house risk management function in Bahrain, or subject to the CBB’s approval to outsource such role to their regional or head office.Added: April 2023HC-8.1.3
The risk management function must:
(a) Be sufficiently independent of the business units, thus ensuring that it is not involved in revenue generation;(b) Be responsible for overseeing risk-taking activities across thelicensee and must have authority within the organisation to do so;(c) Have procedures in place to identify and assess the possible increased reputational risk to thelicensee if it offers products or carries out activities outside Bahrain;(d) Have access to all business lines that have the potential to generate risk to thelicensee as well as to relevant risk-bearing subsidiaries, associated companies and overseas branches;(e) Challenge business units effectively regarding all aspects of risk arising from thelicensee’s activities; and(f) Have a sufficient number of employees who possess the requisite experience and qualifications, including market and product knowledge as well as command of risk disciplines, and are subject to regular training.Added: April 2023HC-8.1.4
Key activities of the risk management function must include:
(a) Implementing an enterprise-wide risk governance framework that includes appropriate policies, procedures and limits;(b) Identifying material individual, aggregate and emerging risks, including risks arising from potential mergers and acquisitions and hard to quantify risks, such as reputational risk;(c) Regularly and on an ad-hoc basis, evaluating the risks faced by thelicensee and its overall risk profile. The risk assessment process must include ongoing analysis of existing risks as well as the identification of new or emerging risks. The results of such assessments must be reported to both the Risk Committee and senior management;(d) Ongoing monitoring of the risk-taking activities and risk exposures in line with the Board-approved risk policies and appetite;(e) Establishing an early warning or trigger system for breaches of thelicensee’s risk appetite or limits;(f) Using risk measurement and modelling techniques in addition to qualitative risk analysis and monitoring;(g) Evaluating possible ways to mitigate risk exposures;(h) Reporting regularly to the risk committee and senior management on risks, including but not limited to, material exemptions and risk-mitigating actions;(i) Regularly comparing actual performance against risk estimates (i.e. Backtesting) to assist in judging the accuracy and effectiveness of the risk management process and making necessary adjustments; and(j) Challenging decisions that give rise to material risk.Added: April 2023HC-8.1.5
Licensees must have adequate risk management and approval processes for new or expanded products or services, lines of business and markets, outsourcing arrangements as well as for large and complex transactions. If such processes are not in place, a new product, service, business line or third-party relationship or major transaction must be delayed. There must also be a process to assess risk and performance relative to initial projections and to adapt the risk management treatment accordingly as the business matures. The risk management function must provide input on risks as part of such processes and on the outsourcer’s ability to manage risks and comply with legal and regulatory obligations. Such processes must entail the following:(a) A full assessment of risks under a variety of scenarios as well as an assessment of potential shortcomings in the ability of thelicensee’s risk management and internal controls to effectively manage associated risks; and(b) An assessment of the extent to which thelicensee’s risk management, legal and regulatory compliance, information technology, internal control and business functions have adequate tools and the expertise necessary to measure and manage related risks.Added: April 2023HC-8.1.6
Licensees must appoint a chief risk officer (CRO) or equivalent with an overall responsibility for thelicensee’s risk management function.Added: April 2023HC-8.1.7
The CRO must:
(a) Be actively engaged, together with management, in monitoring performance relative to risk-taking and risk limit adherence;(b) Manage and participate in key decision-making processes (e.g. Strategic planning, capital and liquidity planning, new products and services, compensation design and operation);(c) Be independent and have duties distinct from other executive function. This means that he must not have managerial or financial responsibility or approval authority related to any business lines or revenue-generating functions, and there must be no “dual hatting”, i.e. otherapproved persons within senior management must not serve as the CRO.(d) Have access to any information necessary to perform his duties;(e) Report directly to the risk committee without impediment, and administratively to the CEO;(f) Have the ability to interpret and articulate risk in a clear and understandable manner and to effectively engage the risk committee and senior management in a constructive dialogue on key risk issues;(g) Meet regularly with the non-executive directors, the board or its risk committee without executive directors and the CEO being present;(h) Keep the risk committee and senior management apprised of the assumptions used in and potential shortcomings of thelicensee’s risk models and analyses;(i) Consistently remind all staff, through a regular process, under the sponsorship of the CEO, of the risk management requirements to ensure a common understanding of these requirements across thelicensee ; and(j) Ensure that:i. Risk reporting to the risk committee is carefully designed to convey bank-wide, individual portfolio and other risks in a concise and meaningful manner. Reporting must accurately communicate risk exposures and results of stress tests or scenario analyses and must provoke a robust discussion of, for example, the bank’s current and prospective exposures (particularly under stressed scenarios), risk/return relationships and risk appetite and limits. Reporting must also include information about the external environment to identify market conditions and trends that may have an impact on the bank’s current or future risk profile;ii. Material risk-related ad-hoc information that requires immediate decisions or reactions is promptly presented to senior management and, as appropriate, the risk committee, the responsible officers and, where applicable, the heads of control functions so that suitable measures and activities can be initiated at an early stage; andiii. Thelicensee has accurate internal and external data to be able to identify, assess and mitigate risks.Added: April 2023HC-9 HC-9 Compliance
HC-9.1 HC-9.1 Compliance
HC-9.1.1
The Board must:
(a) Oversee the management of thelicensee’s compliance risk;(b) Establish an independent compliance function and approve an appropriate compliance framework for thelicensee based on its size and complexity of its operations;(c) Set priorities for the management of its compliance risk in a way that is consistent with its risk management strategy and structures;(d) Not outsource the compliance function; and(e) Approve thelicensee’s compliance policy for identifying, assessing, monitoring, reporting and advising on compliance risk.Added: April 2023HC-9.1.2
The compliance function and the internal audit function must be separate.
Added: April 2023HC-9.1.3
The Board, Audit Committee or the designated Board committee and senior management must:
(a) Ensure that, based on an agreed remedial action plan, all compliance findings are resolved within a reasonable period of time to be set based on level and magnitude of risk;(b) Not restrict the compliance function from reporting any irregularities or breaches that are identified as a result of its work or investigations, and must ensure that such reporting can be done without fear of retaliation or disfavour from management, board members or other staff members;(c) Ensure that the head of compliance and his staff are not placed in a position where there is a possible conflict of interest between their compliance responsibilities and any other responsibilities they may have;(d) Not consider the compliance function as a cost center; instead it should be viewed as an activity that helps thelicensee avoid enforcement action for non-compliance, enhances thelicensee’s reputation and promotes the right environment for better financial performance; and(e) Ensure the compliance function’s right to:i. Have unrestricted access to any records or files necessary to carry out its responsibilities, and the corresponding duty oflicensee staff to co-operate in supplying this information;ii. Conduct investigations of possible breaches of the applicable laws, regulations and the compliance policy; andiii. Appoint, subject to audit committee’s approval, outside experts to perform a specific task, if appropriate.Added: April 2023HC-9.1.4
Licensees must appoint a head of compliance with overall responsibility for thelicensee’s compliance function.Added: April 2023HC-9.1.5
In banking groups:
(a) The audit committee and senior management, with assistance of the group head of compliance, must ensure that adequate resources, commensurate with the scale and complexity of operations, are assigned for compliance activities at the head office, subsidiaries and overseas branches; and(b) The group head of compliance must ensure that:i. Adequate reports and information are received from subsidiaries and overseas branches on compliance related issues and must report the same to the audit committee; andii. It conducts annual compliance testing on subsidiaries and overseas branches whose total revenue represents 20% or more of the group’s total revenue and every two years for other overseas operations.Added: April 2023HC-9.1.6
Subject to the CBB’s approval, the role of head of compliance may be combined with the head of risk if the size and nature of the
Islamic bank licensee justify the same.Added: April 2023HC-9.1.7
The head of compliance must:
(a) Report to the Audit Committee or the designated Board committee and administratively to the CEO. In the case ofbranches of foreign bank licensees , the reporting must be to the Group or Regional Head of Compliance and administratively to the CEO/GM of the branch;(b) Establish the operating compliance procedures and processes for identifying, assessing, monitoring, reporting and advising on compliance risk;(c) Establish written guidance to thelicensee’s staff on the appropriate implementation of laws and regulations;(d) Conduct, under the sponsorship of the CEO, awareness sessions for thelicensee’s staff on compliance policy requirements and issues; and(e) Report to the Audit Committee:i. On a quarterly basis, thelicensee’s management of its compliance risk, in such a manner as to assist committee members to make an informed judgment on whether thelicensee is managing its compliance risk effectively; andii. Immediately any material compliance failures as they arise (e.g. failures that may attract a significant risk of legal or regulatory sanctions, material financial loss, or loss of reputation).Added: April 2023HC-9.1.8
The compliance function must:
(a) Have a formal status with sufficient authority within thelicensee ;(b) Carry out its responsibilities under a risk-based compliance programme that sets out its planned activities, such as the implementation and review of specific policies and procedures, compliance risk assessment and compliance testing;(c) Assess in cooperation with the relevant functions, in case of new regulations, the appropriateness of thelicensee’s relevant policies as well as the compliance policy and related procedures and processes. It must promptly follow up regarding any identified deficiencies, and, where necessary, formulate proposals for amendments in cooperation with the relevant functions;(d) On a proactive basis, identify, measure, document and assess the compliance risks associated with thelicensee’s business activities including the development of new products and business practices, proposed establishment of new types of business or customer relationships, or material changes in the nature of such relationships. If thelicensee has a new products and services committee, the compliance function staff must be represented on the committee;(e) Monitor and test compliance by performing sufficient and representative compliance testing. The results of such testing must be reported to the Audit Committee;(f) Advise the audit committee and senior management on all relevant laws, regulations and standards in all jurisdictions in which thelicensee conducts its business and inform them on developments on the subject;(g) Provide to the CBB a compliance assessment report on every application/request for approval to the CBB confirming that all related legal and regulatory requirements pertaining to the request have been thoroughly checked, including the impact of such request on thelicensee’s financial position and compliance status, and a reference must be made to any previously approved arrangements by the CBB. In cases where the requests have a potential financial impact on thelicensee , a report from the financial control function in consultation with external auditors must also be submitted as part of the compliance assessment report, whereas in case of any legal implication of such a request a legal opinion on the matter must be submitted;(h) Act as a contact point within thelicensee for compliance queries from staff members; and(i) Have sufficient and appropriate resources to carry out its functions effectively, commensurate with the size and complexity of thelicensee .Added: April 2023HC-9.1.9
The compliance function staff must:
(a) Have the necessary qualifications, experience and professional and personal qualities to enable them to carry out their specific duties;(b) Have a sound understanding of applicable laws, regulations and standards and their practical impact on thelicensee’s business activities and operations; and(c) Be subject to regular and systematic training to remain up-to-date with developments in laws, regulations and standards.Added: April 2023HC-9.1.10
The CBB may at its own discretion communicate directly with the Head of Compliance to discuss issues of material concerns related to compliance risk.
Added: April 2023HC-10 HC-10 Internal Audit
HC-10.1 HC-10.1 Internal Audit
HC-10.1.1
Islamic bank licensees must establish an effective and independent internal audit function (IAF).Added: April 2023HC-10.1.2
The Audit Committee remains ultimately responsible for the IAF regardless of whether internal audit activities are outsourced.
Added: April 2023HC-10.1.3
The Board, Audit Committee and senior management must:
(a) Promote a strong and robust internal control environment within thelicensee ;(b) Provide the IAF staff full and unconditional access to all files, records, data, documents, systems, properties, subsidiaries and overseas branches of thelicensee ;(c) Require that all internal audit findings and recommendations are resolved within a reasonable period of time to be set based on level and magnitude of risk;(d) Allocate sufficient annual budget to support the IAF’s activities and plans; and(e) Inform the IAF of new developments, initiatives, projects, products and operational changes.Added: April 2023HC-10.1.4
All
Bahraini Islamic bank licensees must have an internal audit charter which must be drawn up and reviewed annually by the head of internal audit and approved by the Board or Audit Committee. It must be available to all internal stakeholders, and to external stakeholders in case of a listed bank.Added: April 2023HC-10.1.5
The internal audit charter must establish, at a minimum:
(a) The IAF’s standing within thelicensee , its authority, responsibilities and relations with other control functions in a manner that promotes the effectiveness of the function;(b) The purpose and scope of the IAF;(c) The obligation of the internal auditors to communicate the results of their engagements and a description of how and to whom this must be done (reporting line);(d) The criteria for when and how the IAF may outsource some of its engagements to external experts;(e) The terms and conditions according to which the IAF can be called upon to provide consulting or advisory services or to carry out other special tasks without creating a conflict with its core function;(f) The responsibility and accountability of the head of internal audit;(g) The requirement to comply with the international standard on internal audit issued by The Institute of Internal Auditor; and(h) Procedures for the coordination of the IAF with the external auditor.Added: April 2023HC-10.1.6
The IAF must:
(a) Be independent of all functions;(b) Have sufficient standing and authority within thelicensee ;(c) Have sufficient skilled resources to be able to judge outcomes and make an impact at the highest level of the organization;(d) Be able to perform its assignments on its own initiative in all areas and functions of thelicensee based on the audit plan established by the head of the IAF and approved by the audit committee;(e) Be free to report its findings and assessments internally;(f) Independently review and evaluate the effectiveness and efficiency of all functions, internal controls, risk management, internal risk and finance models, governance framework, policies, procedures, systems and processes, including thelicensee’s outsourced activities and its subsidiaries (including SPVs) and local and overseas branches, and must ensure adequate coverage of matters of regulatory interest within the audit plan;(g) Develop an independent and informed view of the risks faced by thelicensee based on its access to alllicensee records and data, its enquiries and its professional competence;(h) Discuss its views, findings and conclusions directly with the audit committee and, if necessary, with the board of directors at their routine quarterly meetings; and(i) Not be involved in designing, selecting, implementing or operating specific internal control measures. However, the independence of the IAF must not prevent senior management from requesting input from the IAF on matters related to risk and internal controls. Nevertheless, the development and implementation of internal controls must remain the responsibility of management.Added: April 2023HC-10.1.7
Licensees must appoint a head of internal audit who shall:(a) Report directly to the Audit Committee and administratively to the CEO;(b) Demonstrate appropriate leadership and have the necessary personal characteristics and professional skills to fulfil his responsibility for maintaining the function’s independence and objectivity;(c) Inform senior management of all significant findings so that timely corrective actions can be taken, and subsequently, he must follow up with senior management on the outcome of those corrective measures;(d) Report quarterly to the Audit Committee the status of pending findings;(e) Arrange appropriate ongoing training for the internal audit staff to meet the growing technical complexity of theIslamic bank licensee ’s activities and the increasing diversity of tasks that need to be undertaken as a result of the introduction of new products and processes and other developments in the financial sector;(f) Establish an annual internal audit plan approved by the audit committee. The plan must be based on a robust risk assessment, including direct or indirect input from the board, audit committee and senior management;(g) Develop and maintain appropriate tools to assess the quality of the IAF; and(h) Define, in a banking group structure, the group’s internal audit strategy, determine the organisation of the internal audit function both at theparent ’s and the subsidiary’s level (in consultation with these entities’ respective audit committees and in accordance with local laws) and formulate the internal audit principles, the audit methodology and quality assurance measures. He must also determine the audit scope for every internal audit exercise, by the parent’s internal audit function, for every subsidiary on an annual basis in compliance with local regulations and incorporate local knowledge and experience.Added: April 2023HC-10.1.8
The head of IAF should, whenever practicable and without jeopardising competence and expertise, periodically rotate internal audit staff within the internal audit function.
Added: April 2023HC-10.1.9
The CBB may at its own discretion communicate directly with the head of the IAF to discuss issues of material concerns related to risks, compliance and internal controls.
Added: April 2023HC-10.1.10
Internal audit reports must be provided to the audit committee without management filtering.
Added: April 2023HC-10.1.11
All internal audit staff must:
(a) Apply the care and skills expected of a reasonably prudent and competent professional. Due professional care does not imply infallibility. Internal auditors having limited competence and experience in a particular area must be appropriately supervised by more experienced staff;(b) Avoid conflicts of interest. Internal auditors appointed from within thelicensee must not engage in auditing activities for which they have had previous responsibility before a one year “cooling off” period has elapsed;(c) Act with integrity (being straightforward, honest and truthful);(d) Be diligent in the protection of information acquired in the course of their duties and must not use it for personal gain or malicious action;(e) Adhere to the code of ethics of thelicensee , the institute of internal auditors and any other relevant professional or standard setting body;(f) Collectively be competent to examine all areas in which thelicensee operates; and(g) Adhere to international professional standards established by the institute of internal auditors.Added: April 2023Part Two: Branches of Foreign Banks
HC-C Scope of Application
HC-C.1 Scope of Application
HC-C.1.1
This chapter applies to
branches of foreign bank licensees who should satisfy the CBB that equivalent or similar arrangements are in place at either the branch or theparent entity level, and that such arrangements provide for effective high-level controls over activities conducted by the branch, commensurate with the size, complexity, nature and the risk profile of the branch. If the branch is unable to satisfy the CBB that the governance arrangements are equivalent, the CBB will assess the potential impact of risks and require that thelicensee satisfies that compensating alternative arrangements are in place to address any risks relevant to the Bahrain operations.Added: January 2024HC-11 Responsibilities, Corporate Culture and Values
HC-11.1 Overall Responsibilities, Corporate Culture and Values
HC-11.1.1
The
licensee must have in place:(a) A sound and proper corporate and risk culture and values;(b) Strategy, business plan and budget;(c) An appropriate framework of governance and risk management, inclusive of risk appetite, policies, procedures, systems and internal controls which must be reviewed in case a major new business activity is considered, or in case of material changes to thelicensee’s size, complexity, business strategy, markets or regulatory requirements, or the occurrence of a major failure of controls;(d) Adequate processes to ensure full compliance with the requirements of the CBB Law, other relevant laws and the pertinent rulebooks;(e) A robust finance function responsible for accounting and financial data;(f) Properly positioned risk management, compliance and internal audit functions which are adequately staffed and resourced and carry out their responsibilities independently, objectively and effectively;(g) An effective and transparent relationship with the CBB;(h) An appropriate code of conduct/ethics that must:
i. outline the acceptable practices that all senior management and other staff must follow in performing their duties, and the unacceptable practices/conduct that must be avoided;ii. include the corporate values that create expectations that the business must be conducted in a legal, professional and ethical manner, and oversee the adherence to such values by senior management and other employees;iii. promote risk awareness within a strong risk culture, that does not support risk-taking beyond the risk appetite and risk limits of the licensee, and that all employees are responsible for ensuring that the licensee operates within the established risk appetite and risk limits;iv. ensure that the code, corporate values and professional standards it sets, together with supporting policies, are adequately communicated throughout the licensee; andv. ensure that all senior management and other staff are aware that appropriate disciplinary or other actions will follow unacceptable behaviour, practices and transgressions.(i) An approved and well communicated whistleblowing policy and adequate procedures and processes, consistent with applicable laws. Such policy must encourage employees to communicate, confidentially and without the risk of reprisal, legitimate concerns about illegal, unethical or questionable practices, and must include the escalation process of material concerns to the CBB. The CEO of the Branch must:
i. have oversight of the whistleblowing policy mechanism and ensure that senior management addresses legitimate issues that are raised;ii. take responsibility for ensuring that staff who raise concerns are protected from detrimental treatment or reprisals, and that their rights are not undermined;iii. approve and oversee how and by whom legitimate material concerns shall be investigated and addressed such as by an objective and independent internal or external body, senior management; andiv. ensure that, after verifying the validity of the allegations, the person responsible for any misconduct is held accountable and is subjected to an appropriate disciplinary measure.(j) A conflict of interest policy on identifying and managing potential conflicts of interest related to all approved persons. The policy must include:
i. An approved person’s duty to:
1. Avoid, to the extent possible, activities that could create conflicts of interest or the appearance of conflicts of interest. Anapproved person shall be considered to have a “personal interest” in a transaction with a company if they themselves, or a member of their family (i.e. spouse, father, mother, sons, daughters, brothers or sisters), or another company of which they are a director or controller, are a party to the transaction or have a material financial interest in the transaction or are expected to derive material personal benefit from the transaction (transactions and interests which are de minimis in value should not be included);2. Promptly disclose any matter that may result, or has already resulted, in a conflict of interest;3. Abstain from getting involved in or voting on any matter where they may have a conflict of interest or where their objectivity or ability to properly fulfil duties to thelicensee may be otherwise compromised. Any decision to enter into a transaction in which anapproved person appears to have a material conflict of interest must be formally approved by the Regional Office or Head Office;4. Act with honesty, integrity and care for the best interest of the licensee and its stakeholders;5. Not use properties of the licensee for their personal needs;6. Not misuse or misappropriate the licensee’s assets or resources;7. Not disclose confidential information of the licensee or use it for their personal profit or interest;8. Make every practicable effort to arrange their personal and business affairs to avoid a conflict of interest with the licensee;9. Not take business opportunities of the licensee for themselves; and10. Not compete in business with the licensee or serve the licensee’s interest in any transaction with a company in which they have a personal interest.ii. Examples of where conflict of interest may arise when serving as an approved person;iii. A rigorous review and approval process for approved persons to follow before they engage in certain activities so as to ensure that such activity will not create a conflict of interest;iv. Adequate requirements that transactions with related parties must be made on an arm’s length basis;v. Sufficient restrictions on and/or a robust and transparent process for the employment of relatives of approved persons;vi. Requirements for properly managing and disclosing conflict of interest that cannot be prevented;vii. Requirements for all approved persons to annually declare in writing all their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager or other form of significant participation) to the Regional Office or Head Office;viii. The way in which the Licensee will deal with any non-compliance with the policy; andix. The CEO/General Manager of the licensee must disclose to the Regional Office or Head Office on an annual basis those individuals who are occupying controlled functions and who are relatives of any approved persons within the licensee.Added: January 2024HC-11.2 Senior Management
HC-11.2.1
The
licensee must have an adequate organisational structure that promotes accountability and transparency and facilitates effective decision-making and good governance. This includes clarity on the role, authority and responsibility of the various positions within senior management, including that of the CEO.Added: January 2024HC-11.2.2
Senior management must:
(a) be selected through an appropriate promotion or recruitment process which considers the qualifications and competencies required for the position in question;(b) have the necessary experience, competencies, personal qualities and integrity to manage the business and the employees under their supervision;(c) be subject to regular training to maintain and enhance their competencies and stay up to date on developments relevant to their areas of responsibility;(d) assess the training needs of staff across all levels throughout the organisation taking into account the existing skills, competencies, laws and regulations and ensure that such training is provided by competent and skilled personnel (whether internal or external);(e) act within the scope of their responsibilities which must be clearly defined;(f) independently assess and question the policies, processes and procedures of thelicensee , with the intent to identify and initiate management action on issues requiring improvement;(g) not interfere in the independent duties of the risk management, compliance and internal audit functions;(h) carry out and manage thelicensee’s activities in compliance with all laws and regulations, and in a manner consistent with the business strategy, risk appetite, business plan and policies approved by the Regional Office/Head Office;(i) have a robust governance framework for all management committees;(j) not primarily control the remuneration system within thelicensee ;(k) actively communicate and consult with the control functions on management’s major plans and activities so that the control functions can effectively discharge their responsibilities; and(l) provide the Regional Office/Head Office with timely, complete, accurate and understandable information and documents so that they are equipped for upholding their responsibilities, and keep them adequately informed and updated on a timely basis about material issues including:
i. Changes in the implementation of business strategy, risk strategy and risk appetite;ii. The licensee’s performance and financial condition;iii. Breaches of risk limits or regulations;iv. Internal control failures, frauds and cyber-security incidents;v. Legal or regulatory concerns;vi. Customer complaints; andvii. Issues raised as a result of the licensee’s whistleblowing policy.Added: January 2024HC-11.2.3
The
licensee’s CEO and Chief Financial Officer must state in writing to the Regional Office/Head Office that thelicensee’s interim (if any) and annual financial statements present a true and fair view, in all material respects, of thelicensee’s financial condition and results of operations in accordance with applicable accounting standards.Added: January 2024
AU AU Auditors and Accounting Standards
AU-A AU-A Introduction
AU-A.1 AU-A.1 Purpose
AU-A.1.1
This Module presents requirements that have to be met by
Islamic bank licensees with respect to the appointment of external auditors. This Module also sets out certain obligations that external auditors have to comply with, as a condition of their appointment byIslamic bank licensees .October 07AU-A.1.2
This Module is issued under the powers given the Central Bank of Bahrain ('CBB') under Decree No. (64) of 2006 with respect to promulgating the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). It supplements Article 61 of the CBB Law, which requires
licensees to appoint an external auditor acceptable to the CBB.October 07Legal Basis
AU-A.1.3
This Module contains the CBB's Directive (as amended from time to time) relating to auditors and accounting standards used by
Islamic bank licensees , and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to allIslamic bank licensees .Amended: January 2011
October 07AU-A.1.4
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 07AU-A.2 AU-A.2 Module History
AU-A.2.1
This Module was first issued as Module AU (Audit Firms) in January 2005, as part of the first release of Volume 2 (Islamic banks) of the CBB Rulebook. It was subsequently reissued in full in July 2006 (and renamed 'Auditors and Accounting Standards').
October 07AU-A.2.2
The reissued Module was one of several Modules modified to reflect the introduction of the CBB's new integrated license framework. Although the new framework did not change the substance of the requirements contained in this Module, the Module was re-issued in order to simplify its drafting and layout and align it with equivalent Modules in other Volumes of the CBB Rulebook.
October 07AU-A.2.3
This Module is dated July 2006. Pages that are subsequently changed in this Module are updated with the end-calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 07AU-A.2.4
When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.
October 07AU-A.2.5
A list of changes made to this Module is provided below:
Module Reference Change Date Description of Changes Whole Module July 2006 Module renamed as Module AU (Auditors and Accounting Standards). Text redrafted but substance of requirements left unchanged. AU-A.1 10/2007 New Rule AU-A.1.3 introduced, categorising this Module as a Directive. AU-1.2 10/2007 Rule AU-1.2.3 redrafted to clarify reporting obligation. AU-1.5 10/2007 Paragraphs AU-1.5.4 and AU-1.5.6 updated to reflect CBB Law requirements on auditor independence. AU-3.6 04/2008 New requirement for auditors to review PIR as part of Basel 2. AU-3.6 01/2009 Paragraph AU-3.6.1 updated in respect of agreed upon procedures report for review of PIR by external auditors. AU-5 01/2009 New Chapter inserted for the role of the reporting accountant. AU-5.1 10/2009 Clarification of fee arrangements for reporting accountants. AU-A.1.3 01/2011 Clarified legal basis. AU-1.1, AU-1.2 , AU-1.5, AU-2.1, AU-3, AU-5 01/2011 Various minor amendments made for consistency in formatting. AU-3.3 01/2011 Section deleted to ensure consistency with Volume 1 and requirements already included in PD-1.3.43 of Volume 2. AU-3.2.2 04/2011 Added cross reference to Module FC and clarified due date of report. AU-3.1 10/2011 Clarification of existing requirement for the Agreed Upon Procedures Report and setting a deadline for the submission of the report. AU-5 10/2011 Chapter amended and content moved to Section BR-6.5 and retitled as Role of the Appointed Expert. AU-3.1.3 01/2012 Corrected cross reference. AU-2.2.1 04/2012 Corrected cross reference. AU-1.3.1 07/2013 Removed potential exemption regarding audit partner rotation. AU-3.1.1 07/2013 Removed potential exemption for external auditor to review published financial disclosures prior to their publication. AU-3.2.1 07/2013 Clarified that an approved consultancy firm can also provide the report on compliance with financial crime rules required under Section FC-4.3. AU-3.7 01/2014 New Section added dealing with the report on compliance with remuneration rules. AU-3.4.1 04/2014 Removed reference to monthly statements of assets and liabilities. AU-3.7.1 04/2014 Corrected typo. AU-3.8 04/2014 New Section added on the Report on Eligible Accounts for the Deposits/Unrestricted Investment Accounts Protection Funds. AU-1.1.1A 07/2014 Added guidance clarifying the information required when seeking the CBB's approval for appointment or re-appointment of the external auditor. AU-3.7 07/2014 Where a conventional bank licensee has no approved persons or material risk-takers whose total annual remuneration is in excess of BD100,000, the report on compliance with remuneration rules need not be completed by the external auditor. AU-1.5.4 10/2014 Clarified wording of guidance. AU-3.6.3 04/2015 Existing exemptions in respect of PIRI review will cease as at 31st December 2014 for all Bahraini Islamic bank licensees. AU-3.5.1 07/2015 Corrected cross reference to Section in PIRI. AU-3.7.1 07/2015 Amended to allow for CBB-approved consultancy firm to prepare report on the bank's compliance with the remuneration Rules outlined in Chapter HC-5. AU-3.1.4 01/2016 Aligned as per the requirements of Module BR. AU-3.1.3 07/2017 Amended agreed upon procedures report submission deadline. AU-1.5.1 04/2019 Deleted Paragraph on Financial Transactions with Auditor. AU-B.1.2 04/2020 Amended Paragraph. AU-1.1.4 04/2020 Amended Paragraph. AU-1.5.5 04/2020 Amended Paragraph. AU-3.1.2 04/2020 Amended Paragraph. AU-3.2.2 07/2021 Amended Paragraph. AU-1.1.1 10/2022 Amended Paragraph on auditor’s appointment period. AU-B AU-B Scope of Application
AU-B.1 AU-B.1 Islamic Bank Licensees
AU-B.1.1
The contents of this Module – unless otherwise stated – apply to all
Islamic bank licensees .October 07AU-B.1.2
The contents of Chapters AU-1 to AU-4 apply to both
Bahraini Islamic bank licensees andbranches of foreign bank licensees .Amended: April 2020
Added: October 07AU-B.2 AU-B.2 Auditors
AU-B.2.1
Certain requirements in this Module indirectly extend to auditors, by virtue of their appointment by
Islamic bank licensees . Auditors appointed byIslamic bank licensees must be independent (cf. Sections AU-1.4 and AU-1.5). Auditors who resign or are otherwise removed from office are required with their licensees to inform the CBB in writing of the reasons for the termination of their appointment (cf. Section AU-1.2). Other requirements are contained in Sections AU-1.3 (Audit partner rotation) and AU-3 (Auditor reports).October 07AU-1 AU-1 Auditor Requirements
AU-1.1 AU-1.1 Appointment of Auditor
AU-1.1.1
Islamic bank licensees must obtain prior written approval from the CBB before appointing or re-appointing their auditor, within 4 months of their financial year-end.Amended: October 2022
Amended: January 2011
October 07AU-1.1.1A
When seeking the CBB's approval for the appointment or re-appointment of the external auditor, the request for approval should specify the name of the audit firm, the name of the responsible partner, as well as the year which the responsible partner was initially appointed by the
Islamic bank licensee .Added: July 2014AU-1.1.2
As the appointment of auditors normally takes place during the course of the firm's annual general meeting,
Islamic bank licensees should notify the CBB of the proposed agenda for the annual general meeting in advance of it being circulated toshareholders . The CBB's approval of the proposed auditor does not limit in any wayshareholders' rights to subsequently reject the Board's choice.Amended: January 2011
October 07AU-1.1.3
The CBB, in considering the proposed (re-) appointment of an auditor, takes into account the expertise, resources and reputation of the audit firm, relative to the size and complexity of the
licensee . The CBB will also take into account the track record of the audit firm in auditingIslamic bank licensees within Bahrain; the degree to which it has generally demonstrated independence from management in its audits; and the extent to which it has identified and alerted relevant persons of significant matters. Finally, the CBB will also consider the audit firm's compliance with applicable laws and regulations (including legislative Decree No. 26 of 1996; the Ministry of Industry and Commerce's Ministerial Resolution No. 6 of 1998; and relevant Bahrain Stock Exchange regulations).October 07AU-1.1.4
In the case of
branches of foreign bank licensees , the CBB will also take into account who acts as the auditor of the parent firm. As a general rule, the CBB does not favour different parts of a banking firm or group having a different auditor.Amended: April 2020
Amended: January 2011
Added: October 07AU-1.2 AU-1.2 Removal or Resignation of Auditor
AU-1.2.1
Islamic bank licensees must notify the CBB as soon as they intend to remove their auditor, or if their auditor intends to resign, with an explanation of their decision, or as soon as their auditors resigns.Amended: January 2011
October 07AU-1.2.2
Islamic bank licensees must ensure that a replacement auditor is appointed (subject to CBB approval as per Section AU-1.1), as soon as reasonably practicable after a vacancy occurs, but no later than three months.October 07AU-1.2.3
In accordance with the powers granted to CBB under Article 63 of the CBB Law, auditors of
Islamic bank licensees and their licensees must inform the CBB in writing, should they resign or their appointment as auditor be terminated, within 30 calendar days, of the event occurring, setting out the reasons for the resignation or termination.October 07AU-1.3 AU-1.3 Audit Partner Rotation
AU-1.3.1
Islamic bank licensees must ensure that the audit partner responsible for their audit does not undertake that function more than five years in succession.Amended: July 2013
October 07AU-1.3.2
Islamic bank licensees must notify the CBB of any change in audit partner.October 07AU-1.4 AU-1.4 Auditor Independence
AU-1.4.1
Article 61(d) of the CBB Law imposes conditions for the auditor of a licensee to be considered "independent". Before an
Islamic bank licensee appoints an auditor, it must take reasonable steps to ensure that the auditor has the required skill, resources and experience to carry out the audit properly, and is independent of thelicensee .October 07AU-1.4.2
For an auditor to be considered independent, it must, among things, comply with the restrictions in Section AU-1.5.
October 07AU-1.4.3
If an
Islamic bank licensee becomes aware at any time that its auditor is not independent, it must take reasonable steps to remedy the matter and notify the CBB of the fact.October 07AU-1.4.4
If, in the opinion of the CBB, independence has not been achieved within a reasonable timeframe, then the CBB may require the appointment of a new auditor.
October 07AU-1.5 AU-1.5 Licensee/Auditor Restrictions
[This Subsection was deleted in April 2019].
AU-1.5.1
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Amended: January 2011
October 07Outsourcing to Auditor
AU-1.5.2
Section OM-3.7 generally prohibits
Islamic bank licensees from outsourcing their internal audit function to the same firm that acts as their external auditor. However, the CBB may allow short-term outsourcing of internal audit operations to anIslamic bank licensee's external auditor, to meet unexpected urgent or short-term needs (for instance, on account of staff resignation or illness). Any such arrangement will normally be limited to a maximum period of one year and is subject to CBB prior approval.Amended: January 2011
October 07Other Relationships
AU-1.5.3
Islamic bank licensees and their auditor must comply with the restrictions contained in Article 217 (c) of the Commercial Companies Law (Legislative Decree No. (21) of 2001), as well as in Article 61(d) of the CBB Law.Amended: January 2011
October 07AU-1.5.4
Article 217(c) of the Commercial Companies Law prohibits an auditor from (i) being the chairman or a member of the Board of Directors of the company he/she audits; (ii) holding any managerial position in the company he/she audits; and (iii) acquiring any shares in the company he/she audits, or selling any such shares he/she may already own, during the period of his audit. Article 61 (d) of the CBB Law prohibits an
auditor from (i) being the chairman or a director of the company he/she audits (ii) acting as a managing director, agent or representative of the company concerned; and (iii) taking up any administrative work in the company, or supervising its accounts, or having a next of kin in such a position. Furthermore, theauditor must not be a relative (up to the second degree) of a person assuming management or accounting duties in the company.Amended: October 2014
October 07AU-1.5.5
The restrictions in Paragraph AU-1.5.3 apply to
branches of foreign bank licensees as well asBahraini Islamic bank licensees .Amended: April 2020
Amended: October 2011
Added: October 07AU-1.5.6
A partner, Director or manager on the engagement team of auditing an
Islamic bank licensee may not serve on the Board or in acontrolled function of thelicensee , for two years following the end of their involvement in the audit, without prior authorisation of the CBB.October 07AU-1.5.7
[This Guidance was deleted in January 2011].
Deleted: January 2011Definition of "Auditor"
AU-1.5.8
For the purposes of Section AU-1.5, 'auditor' means the partners, Directors and managers on the engagement team responsible for the audit of the
Islamic bank licensee .October 07AU-2 AU-2 Access
AU-2.1 AU-2.1 CBB Access to Auditor
AU-2.1.1
Islamic bank licensees must waive any duty of confidentiality on the part of their auditor, such that their auditor may report to the CBB any concerns held regarding material failures by theIslamic bank licensee to comply with CBB requirements.Amended: January 2011
October 07AU-2.1.2
The CBB may, as part of its on-going supervision of
Islamic bank licensees , request meetings with alicensee's auditor. If necessary, the CBB may direct that the meeting be held without the presence of thelicensee 's management orDirectors .Amended: January 2011
October 07AU-2.2 AU-2.2 Auditor Access to Outsourcing Providers
AU-2.2.1
Rule OM-3.5.1 (c) on
outsourcing agreements betweenIslamic bank licensees andoutsourcing providers requireslicensees to ensure that their internal and external auditors have timely access to any relevant information they may require to fulfil their responsibilities. Such access must allow them to conduct on-site examinations of theoutsourcing provider , if required.Amended: April 2012
October 07AU-3 AU-3 Auditor Reports
AU-3.1 AU-3.1 Review of Financial Disclosures
AU-3.1.1
Islamic bank licensees that are required to publish financial disclosures in accordance with Chapters PD-2 and PD-3 must arrange for their external auditor to review these prior to their publication.Amended: July 2013
Amended: January 2011
October 07AU-3.1.2
Chapter PD-2 requires
branches of foreign bank licensees operating as retail banks to publish on semi-annual basis summary information on their balance sheet and profit and loss account, in the same format as their annual audited accounts. Chapter PD-3 requires all locally incorporatedIslamic bank licensees to publish quarterly financial statements, in accordance with Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). For products and activities not covered by AAOIFI, International Accounting Standards (IAS) should be followed.Amended: April 2020
Added: October 07AU-3.1.3
Locally incorporated banks must arrange for their external auditor to review the annual disclosures required in Module PD, Section PD-1.3 and Chapter PD-6, prior to their submission to the CBB or their publication. This review must be in the form of an agreed- upon procedures report (see also PD-A.2.4). The report must be submitted to the CBB within 4 months of the year end of the concerned bank (see also Paragraph BR-1.1.4(c)).
Amended: July 2017
Amended: January 2012
Added: October 2011AU-3.1.4
Locally incorporated banks must arrange for their external auditor to review the disclosures in the half-yearly financial statements required by Module PD, Paragraph PD-3.1.6 prior to their submission to the CBB or their publication. This review must be in the form of an agreed upon procedure report. This report must be submitted to the CBB within 2 months of the end of the half-year reporting period of the concerned bank (see also Section BR-2.2).
Amended: January 2016
Added: October 2011AU-3.2 AU-3.2 Report on Compliance with Financial Crime Rules
AU-3.2.1
Islamic bank licensees must arrange for their external auditor or a consultancy firm approved by the CBB as per Paragraphs FC-4.3.2 and FC-4.3.2A, to report on thelicensee's compliance with the requirements contained in Module FC (Financial Crime), at least once a year.Amended: July 2013
Amended: January 2011
October 07AU-3.2.2
The report specified in Rule AU-3.2.1 must be in the form agreed by CBB, and must be submitted to the Compliance Directorate at the CBB by the 30th of June of the following year (See Paragraph FC-4.3.5).
Amended: July 2021
Amended: April 2011
October 2007AU-3.2.3
The context to the above requirement can be found in Section FC-4.3.
October 07AU-3.3 AU-3.3 [deleted]
[This Section was deleted in January 2011].
AU-3.3.1
[This paragraph was deleted in January 2011].
Deleted: January 2011AU-3.3.2
[This paragraph was deleted in January 2011]
Deleted: January 2011AU-3.4 AU-3.4 Report on Material Differences
AU-3.4.1
Islamic bank licensees must arrange for their external auditor to provide to the CBB explanations for any material differences in data reported in the bank's audited or reviewed accounts and in the Prudential Information Returns for Islamic Banks (PIRI).Amended: April 2014
Amended: January 2011
October 07AU-3.5 AU-3.5 Report on Behavioural Adjustments
AU-3.5.1
Islamic bank licensees that have been given CBB approval to apply behavioural adjustments to the liquidity data provided in Section E of the PIRI Form, must arrange for their external auditor to verify the supporting data used to support the behavioural adjustments made.Amended: July 2015
Amended: January 2011
Amended July 09
October 07AU-3.5.2
Please refer to Module LM and to Section BR-5.2. Banks that have at least 2 years' worth of supporting data may seek CBB approval to apply behavioural adjustments to certain of their reported liquidity data, instead of reporting contractual maturities.
October 07AU-3.6 AU-3.6 Review of Quarterly Prudential Information Returns
AU-3.6.1
Islamic bank licensees must arrange for their auditor to review the licensee's quarterly Prudential Information Returns to the CBB, prior to their submission, unless otherwise exempted in writing by the CBB. The review must be made in the form of an Agreed Upon procedures Report (as outlined in BR-3).Amended: January 2011
Amended January 2009
Added April 08AU-3.6.2
Islamic bank licensees are required to submit a quarterly Prudential Information Return (PIR).Islamic bank licensees may apply in writing to CBB for an exemption from the requirement that the PIR be reviewed by the licensee's external auditor: this exemption would normally only be given where the licensee had established a track record of accurate and timely reporting, and there were no other supervisory issues of concern. Further details on the CBB's reporting and related requirements, including the precise scope of the auditor's review and attestation, are contained in Module BR (CBB Reporting).Amended: January 2011
Added: April 08AU-3.6.3
For
Bahraini Islamic bank licensees , all existing exemptions in respect of PIRI review as at 31st December 2014 will cease.Added: April 2015AU-3.7 AU-3.7 Report on Compliance with Remuneration Rules
AU-3.7.1
Unless specifically excluded in accordance with Paragraph AU-3.7.3,
Islamic bank licensees must arrange for their external auditor or a consultancy firm approved by the CBB as per Paragraph BR-4A.3.2, to report on the bank's compliance with the requirements contained in Chapter HC-5, at least once a year.Amended: July 2015
Amended: July 2014
Amended: April 2014
Added: January 2014AU-3.7.2
The report specified in Rule AU-3.7.1 must be in the form agreed by the CBB, and must be submitted by the bank to the supervision point of contact at the CBB when the audited financial statements are submitted, i.e. within 3 months of the bank's year end (See Section BR-4A.3).
Added: January 2014AU-3.7.3
Where an
Islamic bank licensee has no:(a)Approved persons ; or(b)Material risk-takers whose total annual
remuneration (including all benefits) is in excess of BD100,000, Paragraph AU-3.7.1 does not apply. In this instance, an annual notification must be sent to the CBB once it is determined that this situation applies.Added: July 2014AU-3.8 AU-3.8 Report on Eligible Accounts for the Deposits/Unrestricted Investment Accounts Protection Funds
AU-3.8.1
Islamic bank licensees must arrange for their external auditor to confirm the accuracy of the data reported on the Eligible accounts report for the deposits/unrestricted investment account protection funds (Appendix BR-16) as required under Paragraph BR-1.4.2.Added: April 2014AU-3.8.2
The report from the external auditor required under Paragraph AU-3.8.1 must be submitted to the CBB at the same time as the due date for Appendix BR-16, that is, two months after the financial year end.
Added: April 2014AU-4 AU-4 Accounting Standards
AU-4.1 AU-4.1 General Requirements
AU-4.1.1
Islamic bank licensees must comply with Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). For products and activities not covered by AAOIFI, International Financial Reporting Standards (IFRS) / International Accounting Standards (IAS) must be followed.October 07AU-5 AU-5 Role of External Auditor as Appointed Expert
AU-5.1 AU-5.1 General Requirements
AU-5.1.1
In accordance with Articles 114 and 121 of the CBB Law, the CBB may appoint
appointed experts to undertake on-site examinations or report by way of investigations on specific aspects of a bank's business. External auditors may be called upon to beappointed experts and should be aware of their role in that capacity by referring to Section BR-6.5.[The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].
Amended October 2011
Added January 2009AU-5.1.2
The purpose of the contents of this chapter is to set out the roles and responsibilities of reporting accountants when appointed pursuant to Article 114 of the CBB Law (see EN-7.1.1). This Article empowers the CBB to assign some of its officials or others to inspect licensees' or listed companies' businesses.
Added January 2009AU-5.1.3
The CBB uses its own inspectors to undertake on-site examinations of licensees as an integral part of its regular supervisory efforts. In addition, the CBB may commission reports on matters relating to the business of licensees in order to help it assess their compliance with CBB requirements, as contained in Article 114 of the CBB Law. Such inspections may be carried out either by the CBB's own officials, by duly qualified "Reporting Accountants" appointed for the purpose by the CBB, or a combination of the two. Article 111 requires licensees to make available to the CBB's inspectors, their books and other records, and to provide all relevant information within the time limits deemed reasonable.
Amended: January 2011
Added January 2009AU-5.1.4
Banks must provide all relevant information and assistance to reporting accountants on demand as required by Articles 111 and 114 of the CBB Law. Failure by licensees to cooperate fully with the CBB's inspectors or reporting accountants, or to respond to their examination reports within the time limits specified, will be treated as demonstrating a material lack of cooperation with the CBB which will result in other enforcement measures being considered, as described elsewhere in EN Module. This rule is supported by Article 114(a) of the CBB Law.
Amended: January 2011
Added January 2009AU-5.1.5
Article 163 of the CBB Law provides for criminal sanctions where false or misleading statements are made to the CBB or any person /reporting accountant appointed by the CBB to conduct an inspection on the business of the licensee or the listed company.
Amended: January 2011
Added January 2009AU-5.1.6
The CBB will not, as a matter of general policy, publicise the appointment of reporting accountants, although it reserves the right to do so where this would help achieve its supervisory objectives. Both the reporting accountants and the CBB are bound to confidentiality provisions restricting the disclosure of confidential information with regards to any such information obtained in the course of the investigation.
Added January 2009AU-5.1.7
Unless the CBB otherwise permits, reporting accountants should not be the same firm appointed as external auditors of the bank.
Amended: January 2011
Added January 2009AU-5.1.8
Reporting accountants will be appointed in writing, through an appointment letter, by the CBB. In each case, the CBB will decide on the range, scope and frequency of work to be carried out by reporting accountants.
Amended: January 2011
Added January 2009AU-5.1.9
Reporting accountants will report directly to and be responsible to the CBB in this context and will specify in their report any limitations placed on them in completing their work (for example due to the relevant bank's group structure). The report produced by the reporting accountants is the property of the CBB (but is usually shared by the CBB with the firm concerned). The cost of the reporting accountant's work must be borne by the licensee concerned.
Amended: January 2011
Amended: October 2009
Added: January 2009AU-5.1.10
Compliance by reporting accountants with the contents of this chapter will not, of itself, constitute a breach of any other duty owed by them to a particular bank (i.e. create a
conflict of interest ).Added January 2009AU-5.1.11
The CBB may appoint one or more of its officials to work on the reporting accountants' team for a particular bank.
Amended: January 2011
Added January 2009AU-5.2 AU-5.2 The Required Report
[The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].
AU-5.2.1
Commissioned reporting accountants would normally be required to report on one or more of the following aspects of a bank's business:
(a) Accounting and other records;(b) Internal control systems;(c) Returns of information provided to the CBB;(d) Operations of certain departments; and/or(e) Other matters specified by the CBB.Amended: January 2011
Added January 2009AU-5.2.2
Reporting accountants will be required to form an opinion on whether, during the period examined, the bank is in compliance with the relevant provisions of the CBB Law and the CBB's relevant requirements, as well as other requirements of Bahrain Law and, where relevant, industry best practice locally and/or internationally.
Amended: January 2011
Added January 2009AU-5.2.3
The reporting accountants' report must follow the format set out in Appendix AU 1.
Amended: January 2011
Added January 2009AU-5.2.4
Unless otherwise directed by the CBB or unless the circumstances described in section AU 5.3 apply, the report should be discussed with board of directors and/or senior management in advance of its being sent to the CBB.
Amended: January 2011
Added January 2009AU-5.2.5
Where the report is
qualified by exception , the report should clearly set out the risks which the bank runs by not correcting the weakness, with an indication of the severity of the weakness should it not be corrected. Reporting accountants will be expected to report on the type, nature and extent of any weaknesses found during their work, as well as the implications of a failure to address and resolve such weaknesses.Added January 2009AU-5.2.6
If the reporting accountants conclude, after discussing the matter with the bank, that they will give a negative opinion (as opposed to one
qualified by exception ) or that the issue of the report will be delayed, they must immediately inform the CBB in writing giving an explanation in this regard.Amended: January 2011
Added January 2009AU-5.2.7
The report should be completed, dated and submitted, together with any comments by directors or management (including any proposed timeframe within which the bank has committed to resolving any issues highlighted by the report), to the CBB within the timeframe applicable.
Amended: January 2011
Added January 2009AU-5.3 AU-5.3 Other Notifications to the CBB
[The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].
AU-5.3.1
Reporting accountants should communicate to the CBB, during the conduct of their duties, any reasonable belief or concern they may have that any of the requirements of the CBB, including the criteria for licensing a bank (see Module LR), are not or have not been fulfilled, or that there has been a material loss or there exists a significant risk of material loss in the concerned bank, or that the interests of customers are at risk because of adverse changes in the financial position or in the management or other resources of a bank. Notwithstanding the above, it is primarily the bank's responsibility to report such matters to the CBB.
Amended: January 2011
Added January 2009AU-5.3.2
The CBB recognises that reporting accountants cannot be expected to be aware of all circumstances which, had they known of them, would have led them to make a communication to the CBB as outlined above. It is only when reporting accountants, in carrying out their duties, become aware of such a circumstance that they should make detailed inquiries with the above specific duty in mind.
Amended: January 2011
Added January 2009AU-5.3.3
If reporting accountants decide to communicate directly with the CBB in the circumstances set out in paragraph AU 5.3.1 above, they may wish to consider whether the matter should be reported at an appropriate senior level in the bank at the same time and whether an appropriate senior representative of the bank should be invited to attend the meeting with the CBB.
Amended: January 2011
Added January 2009AU-5.4 AU-5.4 Permitted Disclosure by the CBB
[The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].
AU-5.4.1
Information which is confidential and has been obtained under, or for the purposes of, this chapter or the CBB Law may only be disclosed by the CBB in the circumstances permitted under the Law. This will allow the CBB to disclose information to reporting accountants to fulfil their duties. It should be noted, however, that reporting accountants must keep this information confidential and not divulge it to a third party except with the CBB's permission and/or unless required by Bahrain Law.
Amended: January 2011
Added January 2009AU-5.5 AU-5.5 Trilateral Meeting
[The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].
AU-5.5.1
The CBB may, at its discretion, call for a
trilateral meeting (s) to be held between the CBB and representatives of the relevant bank and the reporting accountants. This meeting will provide an opportunity to discuss the reporting accountants' examination of, and report on, the bank.Amended: January 2011
Added January 2009
GR GR General Requirements
GR-A GR-A Introduction
GR-A.1 GR-A.1 Purpose
Executive Summary
GR-A.1.1
The General Requirements Module presents a variety of different requirements that are not extensive enough to warrant their own stand-alone Module, but for the most part are generally applicable. These include general requirements on books and records; on the use of corporate and trade names; and on
controllers . Each set of requirements is contained in its own Chapter: a table listing these and their application to licensees is given in Chapter GR-B.October 07Legal Basis
GR-A.1.2
This Module contains the Central Bank of Bahrain's ('CBB') Regulation No.(31) of 2008 and Directive (as amended from time to time) governing bank control and general requirements and is issued under the powers available to the CBB under Articles 38 and 52 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Module also contains requirements pertaining to
controllers as prescribed under Resolution No.(43) of 2011 governing the conditions of granting a license for the provision of regulated services and is issued under the powers available to the CBB under Article 44(c). The requirements of Resolution No.(33) for the year 2012 with respect to the issuance of the Regulation setting the procedures for processing applications of banks to transfer financial services business in the Kingdom of Bahrain are included in Chapter GR-4. The Regulation, Resolutions and Directive in this Module are applicable to allIslamic bank licensees .Amended: October 2012
Amended: October 2011
Added: January 2011
GR-A.1.3
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
Added: January 2011
GR-A.2 GR-A.2 Module History
Evolution of Module
GR-A.2.1
This Module was first issued in July 2006, with immediate effect, as a new Module aimed at aligning the structure and contents of Volume 2 with other Volumes of the CBB Rulebook. All subsequent changes to this Module are annotated with the end-calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
Amended: January 2014
October 07GR-A.2.2
The October 2007 version incorporates the requirements relating to
controllers , previously contained in Chapter HC-2 of the High-Level Controls Module. It also expands on certain requirements contained in the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).October 07GR-A.2.3
A list of recent changes made to this Module is detailed in the table below:
Module Ref. Change Date Description of Changes GR-5 04/2008 New notification requirements and limits concerning "controllers" GR-4, GR-5.4, GR-7 10/2007 Administrative changes due to implementation of CBB Law. Revised notification deadlines etc. GR-1 10/2007 This Chapter has been relocated to OM Module. GR-8 10/2007 CBB Fees Chapter has been transferred to Module LR. GR-5.3 01/2010 Revised approval threshold for controllers which are financial institutions. GR 01/2011 Various minor amendments to ensure consistency in CBB Rulebook. GR-A.1.2 and A.1.3 01/2011 Added legal basis. GR-3.1.1 04/2011 Clarified Rule pertaining to announcement of dividend. GR-4.1.2 04/2011 Clarified Guidance and deleted reference to outsourcing and winding up proceedings. GR-4.1 07/2011 Noted that the Regulation dealing with Asset/Liability transfers is under consultation. GR-A.1.2 and GR-5.3.5A 10/2011 New reference added to reflect the issuance of Resolution No.(43) of 2011, and reference made to controllers. GR-3.1 10/2011 Clarified guidance Paragraphs on CBB's non-objection for dividends. GR-5.2.2 10/2011 Clarified the definition of "associate". GR-7 10/2011 Chapter redrafted to be consistent with other Volumes of the CBB Rulebook. GR-5.3.8 07/2012 Percentage amended to be consistent with Paragraph GR-5.3.5. GR-A.1.2 10/2012 Updated legal basis. GR-4 10/2012 Amended to reflect the issuance of Resolution No.(33) for 2012. GR-4.2.3 01/2013 Specified timeline for CBB preliminary assessment. GR-5.4.1 and GR-5.4.3 04/2013 Changed Rules to Guidance. GR-5 07/2013 Changes made to be in line with Regulation No.(31) for the year 2008. GR-A.2.1 01/2014 Deleted repetitive sentence. GR-5.3.8 04/2014 Corrected cross reference. GR-7.1.12 10/2016 Added additional requirements for cessation of business to be in line with Volume 4. GR-5.1.7 01/2017 Consistency of notification timeline rule on Controllers with other Volumes of the CBB Rulebook. GR-3.1.3 10/2017 Amended paragraph and changed from Guidance to Rule. GR-6 04/2019 Added Section on Open Banking. GR-B.1.2 04/2020 Amended Paragraph. GR-B.1.3 04/2020 Amended Paragraph. GR-2.1.2 04/2020 Amended Paragraph. GR-4.1.5 04/2020 Amended Paragraph. GR-4.3.2 (d) 04/2020 Amended Paragraph. GR-5.1.1 04/2020 Amended Paragraph. GR-5.1.10 04/2020 Amended Paragraph. GR-7.1.4 04/2020 Amended Paragraph. GR-7.1.12 04/2020 Amended Paragraph. GR-9 01/2021 Added a new Chapter on Prepaid Cards. GR-5 07/2021 Deleted Chapter and superseded by Resolution No. 16 of 2021. GR-6.1.3 07/2021 Amended Paragraph. GR-6.1.5 07/2021 Amended Paragraph. GR-6.1.7 07/2021 Amended Paragraph. GR-6.1.8 07/2021 Added a new Paragraph on access to customer information and data. GR-6.2.1 07/2021 Amended Paragraph. GR-6.2.3 07/2021 Amended Paragraph. GR-6.2.6 07/2021 Amended Paragraph. GR-6.3.8 07/2021 Paragraph moved to GR-6.1.7. GR-6.3.12 07/2021 Amended Paragraph. GR-6.3.13 07/2021 Amended Paragraph. GR-6.3.14 07/2021 Amended Paragraph. GR-6.3.15 07/2021 Amended Paragraph. GR-6.4.1 07/2021 Amended Paragraph. GR-6.4.2 07/2021 Amended Paragraph. GR-6.5 07/2021 Deleted Section. GR-2.1.1 01/2022 Amended Paragraph. GR-6.1.5 04/2022 Amended Paragraph on MCCs. GR-6.1.8 04/2022 Amended Paragraph on payment data provided including MCCs. GR-6.2.5 04/2022 Amended Paragraph on Bahrain Open Banking Framework Developer Portal. GR-3 07/2023 Amended Chapter on Dividends and Profit Repatriation. GR-3 01/2024 Amended Chapter on Dividends and Profit Repatriation. Superseded Requirements
GR-A.2.4
This Module supersedes:
Circular / other reference Provision Subject Module LR (April 2006 version) LR-6: Record-Keeping Record-keeping requirements were moved to GR-1, and edited down to simplify and avoid duplication of record-keeping requirements contained in Module FC. Module HC (April 2006 version) HC-2: 'Fit and Proper Requirement' Requirements relating to controllers were moved to GR-5. Remaining 'fit and proper' elements regarding Directors and key employees of licensees were retained in HC-2, in a re-drafted form. October 07GR-B GR-B Scope of Application
GR-B.1 GR-B.1 Islamic Bank Licensees
License Categories
GR-B.1.1
The requirements in Module GR (General Requirements) apply to both
retail andwholesale Islamic bank licensees .October 07Bahraini and Branches of Foreign Islamic Bank Licensees
GR-B.1.2
The scope of application of Module GR (General Requirements) is as follows:
Chapter Bahraini bank licensees Branches of foreign bank licensees GR-2 Applies to the whole bank. Applies to the Bahrain branch only. GR-3 Applies to the whole bank. Doesn't apply. GR-4 Applies to the whole bank. Applies to the Bahrain branch only. GR-5 Applies to the whole bank. Applies to the whole bank. GR-6 Applies to the conventional retail bank. Does not apply. GR-7 Applies to the whole bank. Applies to the Bahrain branch only. Amended: April 2020
Amended: April 2019
Added: October 07GR-B.1.3
In the case of
Bahraini Islamic bank licensees , certain requirements apply to the whole bank, irrespective of the location of its business; other requirements apply only in respect to business booked in Bahrain. In the case ofbranches of foreign bank licensees , the requirements of Module GR mostly only apply to business booked in the Bahrain branch.Amended: April 2020
Added: October 07GR-1 Books and Records
[This Chapter has been relocated to Module OM.]
October 07GR-2 GR-2 Corporate and Trade Names
GR-2.1 GR-2.1 Vetting of Names
GR-2.1.1
Licensees must obtain CBB’s prior written approval for any change in their legal name.Licensees must notify the CBB of any change in their corporate name at least one week prior to effecting the proposed change.Amended: January 2022
October 07GR-2.1.2
GR-2.1.1 applies to
branches of foreign bank licensees only with respect to their Bahrain branch.Amended: April 2020
Added: October 07GR-2.1.3
Rules GR-2.1.1 and GR-2.1.2 refers to the requirements contained in Article 41 of the CBB Law.
October 07GR-2.1.4
In approving a corporate or trade name, the CBB seeks to ensure that it is sufficiently distinct as to reduce possible confusion with other unconnected businesses, particularly those operating in the financial services sector. The CBB also seeks to ensure that names used by unregulated subsidiaries do not suggest those subsidiaries are in fact regulated.
October 07GR-3 GR-3 Dividends and Profit Repatriation
GR-3.1 GR-3.1 CBB Non-Objection
GR-3.1.1
Bahraini Islamic bank licensees must obtain CBB’s prior approval for any proposed cash or stock dividend before any public announcements or the Annual General Meeting.Amended July 2023
Amended April 2011
October 2007GR-3.1.2
[This Paragraph was deleted in July 2023].
Deleted: July 2023
Amended: October 2011
October 07GR-3.1.3
For the purpose of Paragraph GR-3.1.1,
Islamic bank licensees must:(a) Submit the following:
(i) The intended percentage and amount of proposed dividends;(ii) The impact of proposed dividends on:
(a) Capital Adequacy Ratio (CAR), Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), and Leverage Ratio (LR) showing the ratios before and after the proposed dividends;(b) The cash flow position and shareholders’ equity level before and after the proposed dividends;(iii) Stress testing results evidencing that the proposed dividends would not lead to any breach of the regulatory requirements (CAR, LCR, NSFR and LR) in the last financial year and the next two years under normal and stressed scenarios.(b) Satisfy the CBB of the adequacy of impairment provisions during the review of the annual/interim financial statements;(c) Ensure that any unrealized gains arising from assets or liabilities fair value assessment are excluded from net income in the determination of the proposed dividends, given that CBB does not permit distribution of unrealised profit;(d) Ensure that the amount of realised profits included in the retained earnings as at the year-end is sufficient to cover the proposed dividend amount; and(e) Ensure that any negative fair value on assets held at amortised cost do not have any material adverse impact on the capital and liquidity positions where such assets may need to be liquidated before maturity to satisfy any financial obligations, including deposit withdrawals.Amended: January 2024
Amended: July 2023
Amended: October 2017
Amended: October 2011
October 07GR-3.2 Repatriation of Profits by Retail Branches of Foreign Banks
GR-3.2.1
Retail
branches of foreign banks must comply with the following when repatriating profits to Head Office:(a) The gearing ratio stipulated in Paragraph CA-10.6.3 after repatriation;(b) Satisfy the CBB of the adequacy of impairment provisions during the CBB’s review of the annual financial statements;(c) Ensure that any unrealized gains arising from assets or liabilities fair value assessment are excluded from net income in the determination of the repatriation;(d) Ensure that the amount of realised profits included in the retained earnings (unremitted profits due to head office) as at the year-end is sufficient to cover the proposed profit repatriation amount; and(e) Ensure that any negative fair value on assets held at amortised cost do not have any material adverse impact on the capital and liquidity positions where such assets may need to be liquidated before maturity to satisfy any financial obligations, including deposit withdrawals.Amended: January 2024
Added: July 2023GR-4 GR-4 Business Transfers
GR-4.1 GR-4.1 [deleted]
[This Section was deleted in July 2011 as Regulation on Asset/Liability transfers currently under consultation].
GR-4.1.1 [deleted]
Deleted: July 2011
GR-4.1.2 [deleted]
Deleted: July 2011
GR-4.1.3 [deleted]
Deleted: July 2011
GR-4.1.4 [deleted]
Deleted: July 2011
GR-4.1.5 [deleted]
Deleted: July 2011
GR-4.1.6 [deleted]
Deleted: July 2011
GR-4.1 GR-4.1 CBB Approval
GR-4.1.1
In accordance with the CBB Governor s Resolution No.(33) for the year 2012 issued pursuant to Article 66 of the CBB Law, an
Islamic bank licensee (transferor ) must seek prior written approval from the CBB before transferring any regulated banking service to a person (transferee ), except in the following circumstances:(a) Where the transferred business is limited to the assets and/or liabilities of thetransferor and does not include anyregulated banking services ; or(b) Where the regulated service transferred accounts for less than 5% of thetransferor s total assets and/or liabilities as recorded in the unconsolidated balance sheet of the financial quarter preceding the date of the transfer of business application.Added: October 2012GR-4.1.2
For purposes of Paragraph GR-4.1.1 (a), a business transfer refers to a transfer of the rights and obligations of one
Islamic bank licensee to a third party, so that the customers continue to be subject to the same terms and conditions as those originally agreed.Added: October 2012GR-4.1.3
In instances where Subparagraph GR-4.1.1(b) applies,
Islamic bank licensees must notify the CBB before transferring anyregulated banking service to atransferee one month prior to the transfer taking place.Added: October 2012GR-4.1.4
Rule GR-4.1.1 is intended to apply to circumstances where a bank wishes to transfer all or part of its business (examples: credit card business, asset management business) to a third party, or is undertaking winding up proceedings.
Added: October 2012GR-4.1.5
In the case of a
Bahraini Islamic bank licensee , Chapter GR-4 applies to its assets and liabilities booked in Bahrain. In the case ofbranches of foreign bank licensee , Chapter GR-4 applies only to assets and liabilities booked in the bank's Bahrain branch.Amended: April 2020
Added: October 2012GR-4.2 GR-4.2 Procedure with Respect to Applications
GR-4.2.1
Islamic bank licensees wishing to transfer banking business in the Kingdom must apply to the Executive Director of Banking Supervision by submitting an application form along with the supporting documents as specified by the CBB (see Part B, Supplementary Information, Appendix GR-1). Unless otherwise directed by the CBB, the application must provide:(a) Full details of the business to be transferred including a detailed list of all liabilities or assets that will be transferred;(b) The rationale for the proposed transfer;(c) If applicable, an assessment of the impact of the transfer on anycustomers directly affected by the transfer, and any mitigating factors or measures;(d) If applicable, an assessment of the impact of the transfer on the transferor's remaining business andcustomers ; and(e) Evidence that the proposed transfer has been duly authorised by thetransferor (such as a certified copy of a Board resolution approving the transfer).Added: October 2012GR-4.2.2
Banks intending to apply to transfer a regulated service are advised to contact the CBB at the earliest possible opportunity, in order that the CBB may determine the nature and level of any documentation and/or the need for an auditor or other expert opinion to be provided. The CBB will grant its permission where the transfer will have no negative impact on the financial soundness of the bank, and does not otherwise compromise the interests of the bank's depositors and creditors. In all cases, the CBB will only grant its permission where the institution acquiring the regulated service holds the appropriate regulatory approvals and is in good regulatory standing.
Added: October 2012Preliminary Assessment
GR-4.2.3
The CBB will make a preliminary assessment of whether the proposed transfer is of a type that could be considered for approval or not based on the receipt of the documents referred to in Paragraph GR-4.2.1. If rejected, the applicant will be informed accordingly. The CBB will approve/reject the transfer of business application form after the submission of all necessary documents within 14 calendar days of the date where all documents have been submitted.
Amended: January 2013
Added: October 2012Publication of the Transfer of Business Application
GR-4.2.4
In instances where the CBB is in favor of the transfer requested, and in accordance with Article 66(c) of the CBB Law, the transfer of business application will be published by the CBB in the Official Gazette and in two daily newspapers in the Kingdom of Bahrain (one in Arabic and one in English). The CBB notice will include a statement that written representations concerning the transfer of business application may be sent to the CBB within three months from the date of publication.
Added: October 2012GR-4.2.5
If the liabilities are located in a jurisdiction outside Bahrain, the CBB may also publish such notice in the jurisdiction in which the risk is situated.
Added: October 2012GR-4.2.6
In all cases, the costs of publication of the notices referred to in Paragraphs GR-4.2.5 and GR-4.2.6 must be met by the
transferor .Added: October 2012GR-4.3 GR-4.3 Determination of Application
GR-4.3.1
The CBB will consider an application under Paragraph GR-4.2.1 if it is satisfied that:
(a) Any objections received to the application to transfer the business following its publication in the Official Gazette and in two daily newspapers in the Kingdom of Bahrain (one in Arabic and one in English) as required under Article 66(d) have been reviewed and resolved by the CBB.(b) Except in so far as the CBB has otherwise directed, a copy of the notice has been sent to every affected customer and every other person who claims an interest in an asset or liability included in the proposed transfer (and has given written notice of his claim to thetransferor );(c) Copies of a statement, approved by the CBB, setting out particulars of the transfer, have been available for inspection at one or more places in Bahrain for at least 30 days, from the date of publication of the notice specified in Paragraph GR-4.2.3; and(d) Where the proposed transfer includes any contract where the risk is situated in a jurisdiction other than Bahrain, a statement, approved by the CBB, setting out particulars of the transfer, has been available for inspection at one or more places in that jurisdiction for at least 30 days, starting with the date of publication of the notice specified in Paragraph GR-4.2.3.Added: October 2012GR-4.3.2
The CBB will not approve the transfer, under the terms of Paragraph GR-4.2.1, unless it is satisfied that:
(a) Thetransferee is authorised to carry onregulated banking services in Bahrain or (where relevant) is authorised or otherwise permitted to carry onregulated banking services in the jurisdiction where any overseas risks are situated;(b) Every transaction or account or relationship included in the transfer evidences a contract which was entered into before the date of the application;(c) Thetransferee possesses the necessary solvency required by the regulatory authorities to which he is subject to, after taking the proposed transfer into account;(d) Where transactions, accounts, or customer relationships are being transferred from an overseasbranch of a bank licensee, or thetransferee is abranch of foreign bank licensee , the relevant overseas regulatory authority has been consulted about the proposed transfer, the law of that jurisdiction provides for the possibility of such a transfer, and the relevant supervisory authority in that jurisdiction has agreed to the transfer;(e) The transfer will not breach any applicable laws and regulations, and will not create any supervisory concerns;(f) The business transferred is not prohibited by the CBB; and(g) There are no material adverse consequences from the transfer on thetransferee or the security of customers and creditors and their rights and obligations are protected.Amended: April 2020
Added: October 2012GR-4.3.3
In assessing the criteria outlined in Paragraph GR-4.3.2, the CBB will, amongst other factors, take into account the financial strength of the
transferee ; its capacity to manage the business being transferred; its track record in complying with applicable regulatory requirements; and (where applicable) its track record in treatingcustomers fairly. The CBB will also take into account the impact of the transfer on thetransferor , and any consequences this may have for thetransferor's remainingcustomers .Added: October 2012GR-4.3.4
The CBB will review the application and any other documents or information requested by the CBB taking into consideration any objections received and conditions stated in Article 66 (d) of the CBB law.
Added: October 2012GR-4.3.5
The CBB reserves the right to impose additional requirements if, in the opinion of the CBB, additional requirements are necessary to protect customer interests. In all cases where additional requirements are imposed, the CBB shall state the reasons for doing so.
Added: October 2012GR-4.3.6
The CBB will communicate its final decision to the
transferor within 5 working days of the expiry of the period for submitting objections to the CBB (see Paragraph GR-4.2.4).Added: October 2012GR-4.4 GR-4.4 CBB Decision
GR-4.4.1
In accordance with Article 67 (d) of the CBB Law and Article 8 of the Regulation issued pursuant to Resolution No.(33) of 2012, the CBB's decision regarding the application for transfer made under Section GR-4.2, will be published as a notice in the Official Gazette and in two local newspapers (one in Arabic and one in English) and will come into effect from this date.
Added: October 2012GR-4.4.2
If the liabilities are located in a jurisdiction outside Bahrain, the CBB may also publish such notice in the jurisdiction in which the risk is situated.
Added: October 2012GR-4.4.3
The costs of publication of the notices referred to in Paragraphs GR-4.4.1 and GR-4.4.2 must be met by the
transferor .Added: October 2012GR-4.4.4
Article 67(e) of the CBB Law notes that where the application for business transfer has been turned down by the CBB or includes restrictions, the applicant may appeal to a competent court within 30 calendar days from the date of publication referred to in Paragraph GR-4.4.1.
Added: October 2012GR-5 Controllers
[This Chapter was deleted in July 2021 and superseded by Resolution No. (16) of 2021 with respect to promulgating the Regulation Pertaining to Control in Banks]
GR-6 GR-6 Open Banking
GR-6.1 GR-6.1 Access to PISPs and AISPs
GR-6.1.1
The CBB has recognised the need to revise its rules in keeping with the following changes at a systemic level, both globally and regionally:
a) market growth in e-commerce activities;b) increased use of internet and mobile payments;c) consumer demand to increasingly use smart device based payment solutions;d) the developments in innovative technology; ande) a trend towards customers having multiple account providers.This section sets forth the rules applicable to
Islamic retail bank licensees with regards to the new category ofancillary service providers described below.Added: April 2019GR-6.1.2
The CBB has established a Directive contained in "Module OB: Open Banking" in Volume 5 of the CBB Rulebook that deals with a new sub category of
ancillary service providers who, under the terms of the CBB license, may provide "payment initiation services " and/or "account information services ". Such licensees are termed "payment initiation service providers " or PISPs and "account information service providers " or AISPs. Banks and other licensees which maintain a customer account is referred to in the CBB Rulebook Volume 5 as "licensees maintaining customer accounts".Added: April 2019GR-6.1.3
Islamic retail bank licensees must:(a) grantancillary service providers of the types referred to in Paragraph AU-1.2.1 (f) and (g) of Rulebook Volume 5: Ancillary Service Providers Authorisation Module, access to customer accounts on an objective, non-discriminatory basis based on consents obtained from the customer;(b) provide the criteria that theIslamic retail bank licensees apply when considering requests pursuant to sub-paragraph (a) above for such access; and(c) ensure that those criteria are applied in a manner which ensures compliance with sub-paragraph (a) above while ensuring adherence to Law No 30 of 2018, Personal Data Protection Law (PDPL) issued on 12 July 2018.Amended: July 2021
Added: April 2019GR-6.1.4
Access to customer accounts granted pursuant to Paragraph GR-6.1.3 must be sufficiently extensive to allow the AISP and PISP access in an unhindered and efficient manner.
Added: April 2019GR-6.1.5
Access to customer accounts granted pursuant to Paragraph GR-6.1.3 shall mean that at customer’s direction, the
licensees are obliged to share, without charging a fee, all information that has been provided to them by the customer and that which can be accessed by the customer in a digital form. The obligation should only apply where thelicensee keeps that information in a digital form. Furthermore, the obligation should not apply to information supporting identity verification assessment; which thelicensees should only be obliged to share with the customer directly, not a data recipient. The information accessed and shared shall include transaction data, relevant Merchant Category Code information and product and services data that banks are required to publicly disclose, such as price, fees, and other charges should be made publicly available under open banking. Fees may be charged by banks to AISPs for sharing ‘Value Added Data’ and ‘Aggregated Data’ are not required to be shared. Value added data or derived data results from material enhancement by the application of insights, analysis, or transformation on customer data by thelicensee . Aggregated data refers to data which is aggregated across thelicensee ’s customer segments for the purpose of analysis.Amended: April 2022
Amended: July 2021
Added: April 2019GR-6.1.6
If an
Islamic retail bank licensee refuses a request for access to such services or withdraws access to such services, it must seek approval of the CBB in a formal communication which must contain the reasons for the refusal or the withdrawal of access and contain such information as the CBB may direct. The CBB shall approve the request if it is satisfied that the impact of not giving access is minimal. If the request is rejected, theIslamic retail bank licensee must adhere to the direction provided by the CBB.Added: April 2019GR-6.1.7
Islamic retail bank licensees must comply with each of the following requirements:(a) provide access to the same information from designated customer accounts made available to the customer when directly requesting access to the account information, provided that this information does not include sensitive payment data (such as customer security credentials or other personalised data, the holding of which or the use of which is not authorised by the customer; and data which may be used by the holder for unauthorised, fraudulent, illegal or activity or transactions);(b) provide, immediately after receipt of the payment order, the same information on the initiation and execution of the payment transaction provided or made available to the customer when the transaction is initiated directly by the latter;(c) upon request, immediately provide PISPs with a confirmation whether the amount necessary for the execution of a payment transaction is available on the payment account of the payer. This confirmation must consist of a simple 'yes' or 'no' answer.Added: July 2021GR-6.1.8
For the purposes of this Chapter,
Islamic retail bank licensees must provide access to and share information and data pertaining tocustomer account activity, including the Merchant Category Code information relevant to the payments from the customer account, and balances covering a period of 12 full months or 365 days at the time of access to the AISPs in respect of the following services/products offered by thelicensee :(a) Savings accounts;(b) Current accounts;(c) Term and call deposits;(d) Foreign currency accounts;(e) Unrestricted investment accounts;(f) Restricted investment accounts;(g) Mortgage/housing finance products;(h) Auto loans;(i) Consumer loans/financing;(j) Overdrafts (personal);(k) Credit and charge cards;(l) Electronic wallets and prepaid cards; and(m) Other accounts which are accessible to thecustomer through e-banking portal or mobile device.Amended: April 2022
Added: July 2021GR-6.2 GR-6.2 Communication Interface for PISPs and AISPs
GR-6.2.1
Islamic retail bank licensees that offer a customer account that is accessible online must have in place at least one interface which meets each of the following requirements:(a) AISPs and PISPs must identify themselves in sessions withIslamic retail bank licensees ;(b) AISPs and PISPs must communicate securely to request and receive information on one or more designated payment accounts and associated payment transactions; and(c) PISPs must communicate securely to initiate a payment order from the payer's payment account and receive information on the initiation and the execution of payment transactions.Amended: July 2021
Added: April 2019GR-6.2.2
Islamic retail bank licensees must establish the interface(s) referred to in Paragraph GR-6.2.1 by means of a dedicated interface.Added: April 2019GR-6.2.3
For the purposes of authentication of the customer, the interfaces referred to in paragraph GR-6.2.1 must allow AISPs and PISPs to rely on the authentication procedures provided by the
Islamic retail bank licensee to the customer. In particular, the interface must meet all of the following requirements:(a) process for instructing and authentication by theIslamic retail bank licensee ;(b) establishing and maintaining authentication of communication sessions between theIslamic retail bank licensee , the AISP, the PISP and the customer(s); and(c) ensuring the integrity and confidentiality of the personalised security credentials and of authentication codes transmitted by or through the AISP or the PISP.Amended: July 2021
Added: April 2019GR-6.2.4
Islamic retail bank licensees must ensure that their interface(s) follows standards of communication which are agreed by the CBB and that the protocols are technology neutral. They must ensure that the technical specifications of the interface are documented and are made available to AISPs and PISPs when requested.Added: April 2019GR-6.2.5
Islamic retail bank licensees must establish and make available a testing facility, in accordance with the operational guidelines included in the Bahrain Open Banking Framework (see Section 4.1), to authorised AISPs and PISPs, companies operating in the CBB’s Regulatory Sandbox as open banking service providers and AISPs/PISPs granted in-principle confirmation to proceed with the CBB’s licensing process. No sensitive information must be shared through the testing facility.Licensees must display a link to the testing facility on their website.Amended: April 2022
Added: April 2019GR-6.2.6
Islamic retail bank licensees must ensure that the dedicated interface established for the AISPs and PISPs offers the same level of availability and performance, including support, as well as the same level of contingency measures, as the interface made available to the customer for directly accessing its payment account online.Amended: July 2021
Added: April 2019GR-6.2.7
For the purposes of GR-6.2.6, the following requirements apply:
(a)Islamic retail bank licensees must monitor the availability and performance of the dedicated interface and make the resulting statistics available to the CBB upon their request;(b) where the dedicated interface does not operate at the same level of availability and performance as the interface made available to theIslamic retail bank licensee's customer when accessing the payment account online, the bank must report it to the CBB and must restore the level of service for the dedicated interface without undue delay and take the necessary action to avoid its reoccurrence.(c) The report referred to in (b) above must include the causes of the deficiency and the measures adopted to re-establish the required level of service; and(d) AISPs and PISPs making use of the dedicated interface offered byIslamic retail bank licensees must also report to the CBB any deficiency in the level of availability and performance required of the dedicated interface.Added: April 2019GR-6.2.8
Islamic retail bank licensees must include in the design of dedicated interface, a strategy and plans for contingency measures in the event of an unplanned unavailability of the interface and systems breakdown. The strategy must include communication plan to inform the relevant AISP/PISP making use of the dedicated interface in the case of breakdown, measures to bring the system back to 'business as usual' and a description of alternative options AISPs and PISPs may make use of during the unplanned downtime.Added: April 2019GR-6.3 GR-6.3 Security of Communication Sessions and Authentication
GR-6.3.1
Islamic retail bank licensees must ensure that communication sessions with PISPs and AISPs including merchants, relies on each of the following:(a) a unique identifier of the session;(b) security mechanisms for the detailed logging of the transaction, including transaction number, timestamps and all relevant transaction data;(c) timestamps which must be based on a unified time-reference system and which must be synchronised according to an official time signal.Added: April 2019GR-6.3.2
Islamic retail bank licensees must ensure secured identification when communicating with AISPs and PISPs.Added: April 2019GR-6.3.3
Islamic retail bank licensees must ensure that, when exchanging data via the internet, with PISPs and AISPs, secure encryption is applied between the communicating parties throughout the respective communication session in order to safeguard the confidentiality and the integrity of the data, using strong and widely recognised encryption techniques.Added: April 2019GR-6.3.4
PISPs and AISPs must keep the access sessions offered by
Islamic retail bank licensees as short as possible and they must actively terminate the session as soon as the requested action has been completed.Added: April 2019GR-6.3.5
When maintaining parallel network sessions with the PISPs and AISPs,
Islamic retail bank licensees must ensure that those sessions are securely linked to relevant sessions established in order to prevent the possibility that any message or information communicated between them could be misrouted.Added: April 2019GR-6.3.6
Islamic retail bank licensees' sessions with PISPs and AISPs must contain unambiguous reference to each of the following items:(a) the customer and the corresponding communication session in order to distinguish several requests from the same customer;(b) forpayment initiation services , the uniquely identified payment transaction initiated;(c) for confirmation on the availability of funds, the uniquely identified request related to the amount necessary for the execution of the transaction.Added: April 2019GR-6.3.7
Islamic retail bank licensees must ensure that where they communicate personalised security credentials and authentication codes, these are not readable by any staff at any time.Added: April 2019GR-6.3.8
[This Paragraph was moved to GR-6.1.7].
Amended: July 2021
Added: April 2019GR-6.3.9
In case of an unexpected event or error occurring during the process of identification, authentication, or the exchange of the data elements, the
Islamic retail bank licensees must send a notification message to the relevant PISP or AISP which explains the reason for the unexpected event or error.Added: April 2019GR-6.3.10
Where the
Islamic retail bank licensee offers a dedicated interface, it must ensure that the interface provides for notification messages concerning unexpected events or errors to be communicated by any PISP or AISP that detects the event or error to the other licensees participating in the communication session.Added: April 2019GR-6.3.11
Islamic retail bank licensees must provide access to information from customer accounts to AISPs whenever the customer requests such information.Added: April 2019Secure authentication
GR-6.3.12
Islamic retail bank licensees must have in place a strong customer authentication process and ensure the following:(a) no information on any of the elements of the strong customer authentication can be derived from the disclosure of the authentication code;(b) it is not possible to generate a new authentication code based on the knowledge of any other code previously generated; and(c) the authentication code cannot be forged.Amended: July 2021
Added: April 2019GR-6.3.13
Islamic retail bank licensees must adopt security measures that meet the following requirements for payment transactions:(a) the authentication code generated must be specific to the amount of the payment transaction and the payee agreed to by the payer when initiating the transaction;(b) the authentication code accepted by the licensee maintaining customer account corresponds to the original specific amount of the payment transaction and to the payee agreed to by the payer;(c) a SMS message must be sent to the customer upon accessing the online portal or application and when a transaction is initiated; and(d) any change to the amount or the payee must result in the invalidation of the authentication code generated.Amended: July 2021
Added: April 2019Independence of elements of strong authentication
GR-6.3.14
Islamic retail bank licensees must establish adequate security features for customer authentication including the use of the following three elements:(a) an element categorised as knowledge (something only the user knows), such as length or complexity of the pin or password;(b) an element categorised as possession (something only the user possesses) such as algorithm specifications, key length and information entropy, and(c) for the devices and software that read, elements categorised as inherence (something the user is), i.e. algorithm specifications, biometric sensor and template protection features.Amended: July 2021
Added: April 2019GR-6.3.15
Islamic retail bank licensees must ensure that the elements referred to in Paragraph GR-6.3.14 are independent, so that the breach of one does not compromise the reliability of the others, in particular, when any of these elements are used through a multi-purpose device, i.e. a device such as a tablet or a mobile phone which can be used for both giving the instruction to make the payment and for being used in the authentication process. The CBB will consider exempting from a 3 factor authentication on a case to case basis provided that thelicensee is able to demonstrate to CBB that it has established robust controls to mitigate the relevant key risks.Amended: July 2021
Added: April 2019GR-6.4 GR-6.4 Standards for Program Interfaces and Communication
GR-6.4.1
Islamic retail bank licensees must adhere to the Operational Guidelines, Security Standards and Guidelines, Open Banking Application Program Interface (API) Specifications and Customer Journey Guidelines included in Bahrain Open Banking Framework (see CBB website).Amended: July 2021
Added: April 2019GR-6.4.2
Islamic retail bank licensees must ensure that compliance with standards and guidelines specified in Paragraph GR-6.4.1 is subject to independent review and tests, including testing in a test environment., by an independent consultant upon implementation.Amended: July 2021
Added: April 2019GR-6.4.3
To remain technologically neutral the technical standards adopted by
Islamic retail bank licensees must not require a specific technology. Authentication codes must be based on solutions such as generating and validating one-time passwords, digital signatures or other cryptographically underpinned validity assertions using keys and/or cryptographic material stored in the authentication elements, as long as the security requirements are fulfilled.Added: April 2019GR-6.5 GR-6.5 [This Section was deleted in July 2021].
GR-6.5.1
[This Paragraph was deleted in July 2021].
Deleted: July 2021
Added: April 2019GR-7 GR-7 Cessation of Business
GR-7.1 GR-7.1 CBB Approval
GR-7.1.1
As specified in Article 50 of CBB Law, an
Islamic bank licensee wishing to cease to provide or suspend any or all of the licensed regulated services, completely or at any of its branches must obtain prior written approval from the CBB, setting out how it proposes to do so and, in particular, how it will treat any Shari'a money placements/deposits, and investment accounts, that it holds.Amended: October 2011
October 07GR-7.1.2
[This Paragraph was deleted in October 2011].
Deleted: October 2011GR-7.1.3
If the
Islamic bank licensee wishes to liquidate its business, the CBB will revise its license to restrict the firm from entering into new business. The licensee must continue to comply with all applicable CBB requirements until such time as it is formally notified by the CBB that its obligations have been discharged and that it may surrender its license.October 07GR-7.1.4
In the case of a
Bahraini Islamic bank licensee , Chapter GR-7 applies both to its business booked in Bahrain and the licensee's overseas branches. In the case ofbranches of foreign bank licensees , Chapter GR-7 applies only to business booked in the licensee's Bahrain branch.Amended: April 2020
Adopted: October 2011GR-7.1.5
Licensees seeking to obtain the CBB's permission to cease business must apply to the CBB in writing, in the form of a formal request together with supporting documents. Unless otherwise directed by the CBB, the following information/documentation must be provided in support of the request:
(a) Full details of the business to be terminated;(b) The rationale for the cessation;(c) How theIslamic bank licensee proposes to cease business;(d) Notice of an extraordinary shareholder meeting setting out the agenda to discuss and approve the cessation, and inviting the CBB for such meeting;(e) Evidence that the proposed cessation has been duly authorised by theIslamic bank licensee (such as a certified copy of a Board resolution approving the cessation);(f) Formal request to the CBB for the appointment of a liquidator acceptable to the CBB;(g) A cut-off date by which theIslamic bank licensee will stop its operations;(h) If theIslamic bank licensee wishes to cease its whole business, confirmation that theIslamic bank licensee will not enter into new business with effect from the cut-off date;(i) If applicable, an assessment of the impact of the cessation on any customers directly affected by the cessation, and any mitigating factors or measures; and(j) If applicable, an assessment of the impact of the cessation on theIslamic bank licensee's remaining business and customers, and any mitigating factors or measures.Adopted: October 2011GR-7.1.6
Islamic bank licensees intending to apply to cease business are advised to contact the CBB at the earliest opportunity, prior to submitting a formal application, in order that the CBB may determine the nature and level of documentation to be provided and the need for an auditor or other expert opinion to be provided to support the application. The information/documentation specified in Paragraph GR-7.1.5 may be varied by the CBB, depending on the nature of the proposed cessation, such as the materiality of the business concerned and its impact on customers.Adopted: October 2011GR-7.1.7
Approval to cease business will generally be given where adequate arrangements have been made to offer alternative arrangements to any affected customers. The CBB's approval may be given subject to any conditions deemed appropriate by the CBB. In all cases where additional requirements are imposed, the CBB shall state the reasons for doing so.
Adopted: October 2011GR-7.1.8
An
Islamic bank licensee in liquidation must continue to meet its contractual and regulatory obligations to depositors, other clients and creditors.Amended: October 2011
October 07GR-7.1.9
[This Paragraph was deleted in October 2011].
Deleted: October 2011GR-7.1.10
[This Paragraph was deleted in October 2011].
Deleted: October 2011GR-7.1.11
[This Paragraph was deleted in October 2011].
Deleted: October 2011GR-7.1.12
Upon satisfactorily meeting the requirements set out in GR-7.1.4, the
Islamic bank licensee must surrender the original license certificate issued by the Licensing Directorate at the time of establishment, and submit confirmation of the cancellation of its commercial registration from the Ministry of Industry, Commerce and Tourism.Amended: April 2020
Added: October 2016GR-8 CBB Fees
[This Chapter has been transferred to Module LR.]
October 07GR-9 GR-9 Prepaid Cards
GR-9.1 GR-9.1 General Requirements
GR-9.1.1
Islamic retail bank licensees must place any prepaid card which is inactive for a period of six months on the “dormant” list.Added: January 2021
SG SG Shari'a Governance
SG-A SG-A Introduction
SG-A.1 SG-A.1 Purpose
SG-A.1.1
The purpose of the Module is to establish best practice Shari'a governance principles in Bahrain, and to provide protection for investors and other
Islamic bank licensees' stakeholders through compliance with these principles.August 2017SG-A.1.2
Shari'a Governance can be defined as a system whereby a
Bahraini Islamic bank licensee attempts to comply with Shari'a in all its activities. It is the duty of all the stakeholders to strengthen Shari'a Governance framework of their respective institutions. The main objectives of a Shari'a Governance framework are:(a) To provide a structure and a system to govern all the business activities of theBahraini Islamic bank licensee in order to ensure Shari'a compliance at all times and at all levels.(b) To enable theBahraini Islamic bank licensee to be perceived as Shari'a compliant by the stakeholders including the general public.August 2017SG-A.1.3
This Module provides support for certain other parts of the Rulebook, mainly:
(a) High-level Controls;(b) Licensing Requirements; and(c) Training and Competency.August 2017SG-A.1.4
All references in this Module to 'he' or 'his' should, unless the context otherwise requires, be construed as also being references to 'she' and 'her'.
August 2017Legal Basis
SG-A.1.5
This Module contains the CBB's Directive (as amended from time to time) relating to Shari'a Governance and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all
Bahraini Islamic bank licensees (including theirapproved persons ).August 2017SG-A.1.6
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
August 2017SG-A.2 SG-A.2 Module History
Evolution of the Module
SG-A.2.1
This Module was first issued in [August 2017] by the CBB. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
August 2017SG-A.2.2
The most recent changes made to this Module are detailed in the table below:
Module Ref. Change Date Description of Changes SG-4.1.1 10/2018 Amended Paragraph. SG-5.2.3 01/2019 Amended Paragraph to reflect activities hierarchy. SG-5.2.9 01/2019 Added new Paragraph on IESCA communications. SG-3.1.2 & SG-4.1.2 01/2020 Amended Paragraphs on policy and procedures approval. SG-5.1.1 10/2022 Amended Paragraph on Independent External Shari’a Compliance Auditor appointment period. SG-2.5.4 01/2024 Deleted reference. SG-B SG-B Scope of Application
SG-B.1 SG-B.1 Scope of Application
SG-B.1.1
The contents of this Module — unless otherwise stated — apply to all
Bahraini Islamic bank licensees incorporated in the Kingdom of Bahrain.August 2017SG-B.1.2
Branches of foreign bank licensees must satisfy the CBB that equivalent arrangements are in place at theparent entity level, and that these arrangements provide for effective Shari'a governance over activities conducted under the Bahrain license.August 2017SG-B.2 SG-B.2 Subsidiaries and Foreign Branches
SG-B.2.1
Bahraini Islamic bank licensees must ensure that, as a minimum, the same or equivalent provisions of this Module apply to their operatingsubsidiaries and foreignbranches , such that these are also subject to effective Shari'a governance. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.August 2017SG-1 SG-1 Shari'a Governance Structure
SG-1.1 SG-1.1 Principle
SG-1.1.1
The Shari'a Governance structure adopted by the
Bahraini Islamic bank licensee must be commensurate and proportionate with the size, complexity and nature of its business.August 2017SG-1.1.2
The Shari'a Governance structure must consist, at a minimum, of the following:
(a) Shari'a Supervisory Board (SSB);(b) Shari'a Coordination and Implementation Function;(c) Internal Shari'a Audit Function; and(d) Independent External Shari'a Compliance Audit (IESCA)August 2017SG-1.1.3
It is the responsibility of the Bahraini Islamic Bank Licensee to ensure that the authority and organizational status granted to the various organs of Shari'ah Governance structure are commensurate with their level of responsibility.
August 2017SG-2 SG-2 Shari'a Supervisory Board (SSB)
SG-2.1 SG-2.1 Principle
SG-2.1.1
All
Bahraini Islamic bank licensees must have a Shari'a Supervisory Board (SSB), which must consist of at least three scholars specialized in fiqh al muamalat, and whose members must be approved by the shareholders in their annual general meeting upon the recommendation of the board of directors taking into consideration the CBB regulations, resolutions and directives.August 2017SG-2.1.2
Bahraini Islamic bank licensees must comply with the Shari'a rules and principles as expressed in AAOIFI Shari'ah standards and in the rulings of the Centralized Shari'a Supervisory Board and their respective SSB.August 2017SG-2.2 SG-2.2 SSB Charter
SG-2.2.1
A charter must be prepared by
Bahraini Islamic bank licensees and approved by their Board of directors defining the scope of work for the SSB.August 2017SG-2.2.2
A typical charter of the SSB must include, at a minimum, the following:
(a) Purpose of the charter;(b) Authorisation of the charter;(c) Membership of the SSB;(d) Composition of the SSB;(e) Chairperson;(f) Secretary;(g) Possible cause/course of removal and replacement of a Member;(h) Authority of the SSB;(i) Responsibilities of the SSB;(j) Meetings;(k) Voting and decisions;(l) Amendments to the charter; and(m) Relationship with the Board of Directors, senior management and other departments.August 2017SG-2.3 SG-2.3 Roles and Responsibilities of the SSB
SG-2.3.1
The SSB must be vested with appropriate power and authority as may be necessary to perform its duties and responsibilities effectively. The fatawa and rulings of the SSB are binding on the
Bahraini Islamic bank licensee .August 2017SG-2.3.2
The SSB must supervise the
Bahraini Islamic bank licensee's operations and activities to ensure compliance with the Islamic Shari'a, and also monitor and review transactions to ensure full compliance with Shari'a rules and principles and SSB pronouncements.August 2017SG-2.3.3
The Board of Directors must ensure through the Shari'a Governance structure mentioned in Paragraph SG-1.1.2, the existence of an appropriate and functioning internal Shari'a control framework for the compliance with Islamic Shari'a rules and principles.
August 2017SG-2.3.4
The SSB must approve the internal Shari'a audit annual plans.
August 2017SG-2.3.5
The SSB must notify the CBB in case of any failure by the Board of directors to effectively deal with any major Shari'a non-compliance of the Bahraini Islamic bank licensee. Notification must be in the form of a letter addressed to the Director of Islamic Financial Institutions Directorate at the CBB.
August 2017SG-2.3.6
All relevant documentation for new products and services, including contracts, agreements, marketing and promotional materials or other legal documentation used in the
Bahraini Islamic bank licensee's business transactions must be approved by the SSB.August 2017SG-2.3.7
The SSB must review and approve the
Bahraini Islamic bank licensee's annual Zakah calculations on behalf of the shareholders.August 2017SG-2.3.8
The SSB must put on record, in written form, any opinion that it gives on Shari'a-related issues.
August 2017SG-2.3.9
At least one SSB member must be present at the AGM to respond to any enquiries from the
Bahraini Islamic bank licensees' shareholders during the discussion of the end of year financial results.August 2017SG-2.3.10
The SSB must review the reports and observations of the Shari'a Coordination and Implementation function and internal Shari'a audit function and provide advice on such reports and observations.
August 2017SG-2.3.11
The SSB must approve the profit/loss allocation to the investment account holders.
August 2017SG-2.3.12
The SSB must specify the means of disposal of earnings that have been realised from sources or by means prohibited by Shari'a rules and principles.
August 2017SG-2.3.13
The SSB must approve the appointment and removal of the Shari'a Officer and the head of internal Shari'a audit function and supervise their work.
August 2017SG-2.3.14
The SSB must evaluate and assess, in consultation with the CEO, the performance of Shari'a Officer and Head of Internal Shari'a Audit on an annual basis.
August 2017Operating Procedures
SG-2.3.15
The SSB must develop its own operating procedures.
August 2017Relationship with the Board of Directors
SG-2.3.16
The SSB must report administratively to the Board of directors. This reporting structure particularly reflects the SSB's independence from the management of the
Bahraini Islamic bank licensee .August 2017SG-2.3.17
The SSB must meet with the Board of directors of the
Bahraini Islamic bank licensee at least once a year to discuss issues of common interest. Such meeting must have a clear and specific agenda including the difficulties faced by both parties and ways to resolve them.August 2017SSB Meetings
SG-2.3.18
The SSB should meet at least on a quarterly basis to review and approve key decisions relating to Shari'a matters.
August 2017SG-2.3.19
Each member of SSB must attend at least three fourth (75%) of the meetings during a calendar year. Attendances through video or conference calls are accepted. Further, in addition to the regular meetings, the SSB chairperson may convene SSB meetings as and when he deems necessary.
August 2017SG-2.3.20
All meetings must be chaired by the SSB chairperson and in his absence, by the vice chairperson.
August 2017SG-2.3.21
The quorum of SSB meetings must be majority of its members. The SSB decisions must be made through majority vote of SSB members.
August 2017SG-2.3.22
The agenda of the SSB meetings along with sufficient details must be sent to the SSB members well in advance, enabling them to come prepared in the meetings. The specific timelines for submission of the agenda must be set by the SSB itself.
August 2017SG-2.3.23
All the SSB approvals taken through circulation must be part of the minutes of the next SSB meeting.
August 2017SG-2.3.24
The minutes of meetings must be prepared and circulated to the SSB members. The SSB must ensure that the minutes of its meetings have necessary details of all the decisions made and / or fatawa issued along with the detailed rationale (Fiqhi or other) and difference of opinion or dissenting note, if any. Further, the minutes must be signed by all the SSB members who attend the meeting to confirm the matters addressed therein, no later than in the next meeting.
August 2017SG-2.3.25
For purposes of Paragraph SG-2.3.23, decisions taken in SSB meetings must be reflected, as appropriate, in policies and procedures and day to day operations of the
Bahraini Islamic bank licensee as applicable.August 2017SSB Report
SG-2.3.26
The SSB must submit its report as part of the annual report (See also Paragraph SG-6.1.1) to the shareholders with a copy to the Board of directors and the CBB as per AAOIFI, on the
Bahraini Islamic bank licensee's Shari'a compliance. The SSB report must also include any non-compliance issues, if present, to the Shari'a rules and principles.August 2017SG-2.3.27
The SSB's report must contain, at the minimum, the following basic elements:
(a) Title;(b) Addressee;(c) Opening or introductory paragraph;(d) Scope paragraph describing the nature of the work performed;(e) Opinion paragraph containing an expression of opinion on the compliance of theBahraini Islamic bank licensee with Islamic Shari's Rules and Principles;(f) Date of report;(g) Signature of the members of the SSB.August 2017SG-2.3.28
The opinion paragraph of the report must at least contain the following:
(a) Whether or not in the SSB's opinion, the contracts, transactions and dealings entered into by theBahraini Islamic bank licensee are in compliance with the rules and principles of Shari'a;(b) Whether or not in the SSB's opinion, the allocation of funds, weightages, profit sharing ratios, profits and charging of losses (if any) relating to investment accounts conform to the basis given by the SSB in accordance with Shari'a rules and principles;(c) Whether or not in the SSB's opinion, any earnings that have been realised from sources or means prohibited by Shari'a rules and principles have been disposed to charitable causes;(d) Whether or not in the SSB's opinion, the calculation of Zakah is in compliance with Islamic Shari'a rules and principles; and(e) If the SSB has ascertained that the management of theBahraini Islamic bank licensee has not complied with Shari'a rules and principles or the fatawa, rulings and guidelines issued by the SSB, then the SSB has to report the non-compliance issues in the opinion paragraph of its report.August 2017SG-2.3.29
The SSB report must be read by a SSB member at the annual general meeting of the
Bahraini Islamic bank licensee .August 2017Handling Confidential Information
SG-2.3.30
SSB members must ensure that information obtained in the course of their duties is kept confidential as per Article (117) of the CBB Law.
August 2017SG-2.3.31
In the performance of their duties, members of the SSB may have access to files, records, draft materials and conversations that are, under the
Bahraini Islamic bank licensee's internal procedures and by market practice, deemed confidential. Where a member of the SSB serves severalBahraini Islamic bank licensees simultaneously, the issue arises as to how they handle confidential or commercially sensitive information obtained in the course of performing their duties. It is a key concern of professional ethics that confidential or sensitive information obtained by a member of the SSB while serving aBahraini Islamic bank licensee should not be used by them in ways that could be detrimental to thatBahraini Islamic bank licensee , particularly in ways that might give a competitive advantage to its competitors.August 2017SG-2.3.32
The duty to observe confidentiality applies to all information with which members of the SSB are entrusted by the licensee, or which is brought to their attention during or at any time after the carrying out of their assignment. Confidentiality obligations do not end when a member of the SSB ceases to serve a
Bahraini Islamic bank licensee or when a matter is completed or closed. Members of the SSB must observe the same restrictions unless they have obtained express authorisation from theBahraini Islamic bank licensee that relieves them from such obligation.August 2017SG-2.3.33
Where a SSB member has a dissenting opinion on a fatwa given by the SSB, he must not criticize such fatwa publicly.
August 2017SG-2.4 SG-2.4 Terms of Appointment and Competence of the SSB
SG-2.4.1
The appointment of the SSB must be made formally in writing, by way of a contract for service for a minimum period of three years.
August 2017SG-2.4.2
Benefits and remuneration of the SSB must be set in aggregate by the general assembly.
August 2017SG-2.4.3
Where the
Bahraini Islamic bank licensee fails to appoint the SSB within 3 months of the annual general meeting or to extend the term of the previous SSB, the CBB has the right to appoint a temporary SSB for which all costs related to the appointment will be borne by theBahraini Islamic bank licensee in addition to any liabilities related to the delay in the appointment of the SSB.August 2017SSB Competence/ Fit and Proper Criteria
SG-2.4.4
The Board of directors of the
Bahraini Islamic bank licensee must carry out a background check and consider the following criteria when assessing the fitness and propriety of individuals to serve on the SSB:(a) Have a clean background, a good character and conduct by being recognised for honesty, integrity and good reputation in their professional business and/or financial dealings, and not previously been convicted of any moral turpitude, felony or criminal offence (See SG-2.4.5);(b) Have competence, diligence, capability and soundness of judgement (See SG-2.4.7);(c) Have strong proficiency in Arabic, as they need to be very conversant with the primary sources of the Shari'a.(d) Have at least a bachelor degree (or its equivalent) in Islamic Shari'a;(e) Have a certified degree in Fiqh al Muamalat (Islamic commercial jurisprudence) with strong understanding of Usul Al Fiqh (rules of Islamic jurisprudence);(f) Have adequate understanding of banking, Islamic finance and accounting; and(g) Have accumulated overall experience of at least seven years in Shari'a related scholarly pursuits (e.g. teaching, research, fatawa issuance, etc).August 2017SG-2.4.5
For purposes of Paragraph SG-2.4.4, at least one SSB member should have a fair understanding of the legal and regulatory framework applicable to the functions of the
Bahraini Islamic bank licensee .August 2017Good Character
SG-2.4.6
Good character — that is, honesty, integrity, fairness and reputation — are qualities that are demonstrated over time. In determining a person's good character, and to guide the hiring criteria to be applied before appointing someone to serve on the Shari'a board, the
Bahraini Islamic bank licensee should, just as when considering nominations for the Board of directors, the chief executive officer or keysenior management , put in place a transparent process that considers all the appropriate factors, including, but not limited to whether the person:(a) Has been convicted of a criminal offence, particularly an offence relating to dishonesty, fraud or financial crime;(b) Has been the subject of any adverse findings or any settlement in civil proceedings, particularly in connection with banking or other financial business, misconduct, fraud, or any business in which the person is a controlling shareholder or has a controlling interest or exercises significant influence, has been investigated and disciplined or suspended by a regulatory or professional body, a court or tribunal, whether publicly or privately;(c) Has been the owner, manager or director of a company, partnership or other organisation that has been refused registration, authorisation, membership or a license to conduct trade, business or profession, or has had that registration, authorisation, membership or license revoked, withdrawn or terminated, resulting in the person being refused the right to carry on a trade, business or profession requiring such a license, registration or other authorisation;(d) Has been a director, partner or otherwise involved in the management of a business that has gone into receivership, insolvency or compulsory liquidation while the person was connected with that organisation or within a reasonably short period (e.g. one year) after the person's departure from the institution;(e) Has been dismissed, asked to resign, or resigned from employment or from a position of trust, fiduciary appointment or similar position because of questions about honesty and integrity;(f) Has ever been disqualified from acting as a director or serving in a managerial capacity because of wrongdoing;(g) Has not been fair, truthful and forthcoming in dealings with customers, superiors, auditors and regulatory authorities in the past and/or has been the subject of any justified complaint relating to regulated activities; and(h) Demonstrates a readiness and willingness to comply with the requirements and standards of the regulatory system and other legal, regulatory, or professional requirements and standards.August 2017Competence and Capability
SG-2.4.7
The
Bahraini Islamic bank licensee should ensure that members of the SSB demonstrate the competence and ability to understand the technical requirements of the business, the inherent risks therein, and the management processes required to conduct its operations effectively, with due regard to the interests of all stakeholders. In assessing the competence and capability of a person, all relevant factors should be considered, including, but not limited to whether the person:(a) Has demonstrated, through qualifications and experience, the capacity to successfully undertake the responsibilities of the position;(b) Is physically and mentally fit to perform his duties;(c) Has sound knowledge of the business; and(d) Can allocate sufficient time and attention to the licensee taking into account his existing Shari'a board memberships with other organizations.August 2017SG-2.4.8
The level of knowledge expected from a member serving on a Shari'a board may vary according to the level of responsibility and the type of regulated activity to be carried out by the
Bahraini Islamic bank licensee . However, a member of the Shari'a board is generally expected to be able to display an understanding of the:(a) Shari'a rules and principles that apply to theBahraini Islamic bank licensee's proposed activities;(b) General legal and regulatory framework that may apply to the functions that he performs; and(c) Broad impact of introducing financial products to the market and the public taking into account Maqasid al-Shari'a.August 2017SG-2.5 SG-2.5 Independence of SSB Members
SG-2.5.1
The SSB must play a strong and independent oversight role, with adequate capability to exercise objective judgement on Shari'a-related matters. No individual or group of individuals must be allowed to dominate the SSB's decision-making.
August 2017SG-2.5.2
The SSB members must be truly independent and must be able to exercise independent judgement without undue influence or duress, especially from the board of directors and/or management of the
Bahraini Islamic bank licensee. In this respect, aBahraini Islamic bank licensee must formalise the independence of the SSB and its members.August 2017SG-2.5.3
The SSB must not include members of the executive/ management team, directors or
controllers of theBahraini Islamic bank licensee .August 2017SG-2.5.4
One SSB member should be a member of the corporate governance committee of the
Bahraini Islamic bank licensee to provide guidance and advice on Shari'a related matters and also to coordinate and link complementary roles and functions of the corporate governance committee and the SSB.Amended: January 2024
August 2017SG-2.5.5
Bahraini Islamic bank licensees must have in place a board approved policy on the employment ofapproved persons who are relatives of SSB members and a summary of such policy must be disclosed in the annual report of the Bahraini Islamic bank licensee.August 2017SG-2.5.6
In case of a conflict of interest, the member of the SSB must declare it in writing to the SSB of the
Bahraini Islamic bank licensee . He must similarly report any such conflict in regard to members of his family, business associates or companies in which he has an interest. Where there is such a conflict of interest, or a duty to another party, then he must abstain from participating in the relevant discussion, decision or action. Where a notification is made of a conflict, it must be recorded and retained by a designated officer.August 2017SG-2.6 SG-2.6 SSB Continuous Professional Development
SG-2.6.1
Bahraini Islamic bank licensees must facilitate and sponsor appropriate induction programs and training for their continuous professional development, in order to enhance the professionalism and effectiveness of persons serving as members of the SSB.August 2017SG-2.7 SG-2.7 Assessment of the SSB
SG-2.7.1
Bahraini Islamic bank licensees must specify and adopt a process for assessing the effectiveness of the SSB as a whole, as well as the contribution by each individual member to its effectiveness on an annual basis. Members of the SSB must be notified of this assessment process at the time of their appointment, so that they have a precise idea as to what is expected of them. This must be done on a self-assessment basis.August 2017SG-2.7.2
For purposes of Paragraph SG-2.7.1, the assessment should be made based on an objective performance measurement that is developed in consultation with the SSB and endorsed by the board of directors.
August 2017SG-2.7.3
The performance assessment report should be submitted to the board of directors for observation and constructive comments. Where appropriate, the
Bahraini Islamic bank licensee should act on the results of the performance evaluation, such as considering nominations of new members to be appointed to the SSB or seeking the resignation of any member of the SSB who fails to meet adequately the terms and conditions of his contract.August 2017SG-2.8 SG-2.8 Management Duties to the SSB
SG-2.8.1
Bahraini Islamic bank licensees must not dismiss any member of the SB without the CBB's prior approval and the approval of the general assembly.August 2017SG-2.8.2
Bahraini Islamic bank licensees must ensure that its SSB has:(a) Clear terms of reference regarding its mandate and responsibility;(b) Well-defined operating procedures and reporting lines; and(c) Good understanding of, and familiarity with, professional ethics and conduct.August 2017SG-2.8.3
Bahraini Islamic bank licensees must equip their SSB with:(a) A mandate that grants it appropriate powers to carry out its role and functions;(b) Well-organised operating procedures with regard to meetings, the recording of meetings, the manner in which a submission or request for Shari'a pronouncements/resolutions should be made to the SSB, decision-making processes and to whom its decisions will be passed for effective implementation, including processes to review those decisions whenever necessary;(c) A sound code of ethics and conduct that would enhance the integrity, professionalism and credibility of the members of the SSB; and(d) A procedure either for each individual member or as a group, in the furtherance of their duties, to take independent professional advice, such as on legal, accounting, financial or valuation issues, if necessary, at theBahraini Islamic bank licensee's expense.August 2017SG-2.8.4
The management of a
Bahraini Islamic bank licensee must provide the SSB with complete, adequate and timely information prior to all meetings and on an ongoing basis.August 2017SG-2.8.5
The SSB must have complete and unhindered access to all records, transactions, and information from all sources including professional advisors and the
Bahraini Islamic bank licensees' employees.August 2017SG-2.8.6
Information provided must include background or explanatory information relating to matters to be brought before the SSB, copies of disclosure documents, financial statements, legal agreements and opinions given, product and/or transaction structure, promotional materials, and risk assessment reports. As far as possible, such information must be presented in a manner that would assist the SSB to analyse not only the form of, but also the substance surrounding, the issues brought before them.
August 2017SG-2.9 SG-2.9 Shari'a Pronouncements/Resolutions
SG-2.9.1
Bahraini Islamic bank licensees must have in place an appropriate mechanism for obtaining rulings from the SSB, applying fatawa and monitoring Shari'a compliance in all aspects of their products, operations and activities.August 2017SG-2.9.2
The mechanism for obtaining rulings from the SSB, applying fatawa and monitoring Shari'a compliance must cover:
(a) Both ex ante and ex post aspects of all financial transactions carried out by theBahraini Islamic bank licensee — that is, to ensure Shari'a compliance of the contracts and, later, the performance of obligations under the contracts; and(b) Operations of theBahraini Islamic bank licensee , including aspects such as Shari'a compliance review, investment policies, disposal of Shari'a non-compliant income, charitable activities, etc.August 2017SG-2.9.3
For purposes of Subparagraph SG-2.9.2(b),
Bahraini Islamic bank licensees must ensure the following:(a) Disbursement of Shari'ah non-compliant income must be made to independent and reputed charity organizations not related directly or indirectly to theBahraini Islamic bank licensee's approved persons and the SSB. Such disbursement must be made within 12 months unless approved by the SSB, and no more than 24 months in any circumstances.(b) The SSB, Shari'ah officer, Internal Shari'ah Auditor and External Independent Shari'ah Compliance Auditor are responsible to review the nature of charity transactions, the causes of non-compliance and establish procedures and processes to ensure that such cases are not repeated in the future.August 2017SG-2.9.4
Bahraini Islamic bank licensees should evaluate and assess the impact of their charity on the relevant causes / communities and disclose the findings in their annual report.August 2017SG-2.9.5
The
Bahraini Islamic bank licensee must fully understand the legal and regulatory framework for issuance of Shari'a pronouncements/resolutions in the jurisdiction where it operates. It must ensure that its SSB strictly observes the said framework.August 2017SG-2.9.6
The
Bahraini Islamic bank licensee must ensure that the SSB adopts a specified process for changing, amending or revising any Shari'a pronouncements/resolutions issued by it. Appropriate and timely disclosure must be made to shareholders and/or the public whenever the SSB departs from or revises any of its Shari'a pronouncements/resolutions subject to SSB approval.August 2017SG-2.10 SG-2.10 SSB Relationship with the CBB's Centralised SSB (CSSB)
SG-2.10.1
In all cases,
Bahraini Islamic bank licensees must comply with the Shari'a pronouncements and opinions issued by the CSSB.August 2017SG-2.10.2
In case of a conflict between the opinion or interpretation of the CSSB and the SSB of the
Bahraini Islamic bank licensee with respect to any Shari'a matter, the opinion of the CSSB shall prevail.August 2017SG-3 SG-3 Shari'a Coordination and Implementation
SG-3.1 SG-3.1 Principle
SG-3.1.1
Bahraini Islamic bank licensees must have a dedicated Shari'a Coordination and Implementation function comprised of Shari'a officers and staff. The head of the function must report technically to the SSB and administratively to the CEO to ensure his independence. The function must be adequately staffed with proficient persons having the relevant qualification and experience (See Appendix TC-1 in Module TC (Training and Competency)).August 2017Policy and Procedures
SG-3.1.2
The Shari'a Coordination and Implementation function must be governed by a policy and procedures manual prepared by the management in consultation by SSB. The policy must be approved by the board of directors while the procedures must be approved by
senior management .Amended: January 2020
August 2017Shari'a Officer
SG-3.1.3
The Shari'a Officer must be a full time employee of the
Bahraini Islamic bank licensee and must be responsible at the product design/development stage for assisting the SSB in the issuance of Shari'a pronouncements/resolutions, fatawa, guidelines and instructions about the products and services offered by theBahraini Islamic bank licensee. August 2017SG-3.1.4
The Shari'a Officer must be appointed by the management subject to the approval of the SSB and the approval of the CBB (See Chapter LR-1A).
August 2017SG-3.1.5
Bahraini Islamic bank licensees must immediately notify the CBB when the Shari'a Officer, for whatever reason, ceases to hold the position (i.e. has resigned, been suspended or dismissed). In case of suspension or dismissal, the notification must include the reasons for the action taken (See Chapter LR-1A).August 2017SG-3.1.6
The Shari'a Officer or the Head of Internal Shari'a Audit function must be appointed as the secretary to the SSB.
August 2017SG-3.2 SG-3.2 Roles and Responsibilities of the Shari'a Officer
SG-3.2.1
The Shari'a Coordination and Implementation function must review and evaluate, before any product or transaction is offered to the customer, the contracts, agreements, fees, charges, policies, procedures, product manuals, product transaction structures, complete offering documentation including promotion and marketing materials, advertisements and other communications to general public, memorandum and articles of association, and any other matter which can potentially impact the Shari'a compliance of the
Bahraini Islamic bank licensee or influence the perception of its Shari'a compliance, and submit thereafter their report, along with all the relevant documentation, to the SSB for their review and decision.August 2017SG-3.2.2
The Shari'a Coordination and Implementation function must be involved in the testing and implementation of any new products or services to ensure full Shari'a compliance under the relevant fatawa. The function must also assist the relevant staff in dealing with any Shari'a non-compliance issues arising from the implementation stage.
August 2017SG-3.2.3
The Shari'a Officer must participate in and arrange, in conjunction with the Human Resources Training Department, the training of the
Bahraini Islamic bank licensee's employees. This can be done through holding regular meetings, discussion forums, arranging courses and seminars, etc. He must also disseminate knowledge by publishing and distributing pamphlets, brochures, etc., explaining principles of fiqh al-muamalat in general, and raising awareness of the fatawa issued by the SSB about the products and services offered by theBahraini Islamic bank licensee .August 2017SG-4 SG-4 Internal Shari'a Audit
SG-4.1 SG-4.1 Principle
SG-4.1.1
Bahraini Islamic bank licensees must have an internal Shari'a audit function reporting to the SSB and administratively to the CEO. The function must be adequately resourced with proficient staff having the relevant qualification and experience.Amended: October 2018
August 2017Policy and Procedures
SG-4.1.2
The internal Shari'a audit function must be governed by a policy and procedures manual prepared by the management in consultation by SSB. The policy must be approved by the board of directors while the procedures must be approved by
senior management .Amended: January 2020
August 2017SG-4.1.3
For purposes of Paragraph SG-4.1.2, the policy and procedures manual must include, but is not limited to, the statement of purpose, authority and responsibility. The policy and procedures manual must make clear that the internal Shari'a audit staff have no executive authority or responsibility for the activities they audit.
August 2017Head of Internal Shari'a Audit Function
SG-4.1.4
The head of internal Shari'a audit function must be a full time employee of the
Bahraini Islamic bank licensee and must be responsible for examining and evaluating the extent of the Islamic bank licensee's compliance with the following:(a) Shari'a principles;(b) The SSB's Fatawa, guidelines, pronouncements and instructions/recommendations;(c) Shari'a related regulations, resolutions and directives issued by the CBB;(d) Shari'a standards issued by AAOIFI; and(e) Shari'a related policies and procedures of theBahraini Islamic bank licensee .August 2017SG-4.1.5
The head of internal Shari'a audit function must express his opinion on the extent of Shari'a compliance of the
Bahraini Islamic bank licensee's operations through an actual audit of the business transactions.August 2017SG-4.1.6
The head of internal Shari'a audit function must be appointed by the management subject to the approval of the SSB in consultation with the Audit Committee and the approval of the CBB (refer to Chapter LR-1A).
August 2017SG-4.1.7
Bahraini Islamic bank licensees must immediately notify the CBB when the head of internal Shari'a audit function, for whatever reason, ceases to hold the position (i.e. has resigned, been suspended or dismissed). In case of suspension or dismissal,the notification must include the reasons for the action taken (See Chapter LR-1A).August 2017SG-4.2 SG-4.2 Roles and Responsibilities of the Head of Internal Shari'a Audit Function
SG-4.2.1
The head of internal Shari'a audit function must review and examine the adequacy and effectiveness of the
Bahraini Islamic bank licensee's Shari'a compliance system. This must cover all aspects of theBahraini Islamic bank licensee's business operations and activities in order to assess the extent of Shari'a compliance requirements as stated under Paragraph SG-4.1.4.August 2017SG-4.2.2
The head of internal Shari'a audit function must have direct and regular communications with all levels of management, SSB, Audit Committee, Shari'a Officer and IESCA. No scope limitation and/or restriction of access to documents, reports, etc. must be placed on internal Shari'a audit staff.
August 2017SG-4.2.3
Internal Shari'a audit staff must be objective and maintain independent attitude in performing their internal Shari'a audit. They must reach objective conclusions based on work performed and the results thereof.
August 2017Internal Shari'a Audit Report
SG-4.2.4
The head of internal Shari'a audit function must prepare periodic reports to the SSB, based on the audit plan, for consideration and appropriate action. A copy of such reports must also be presented to the Audit Committee and the CEO.
August 2017SG-4.2.5
For purposes of Paragraph SG-4.2.4, the report presented by the head of internal Shari'a audit function to the Audit Committee should also include a summary of the SSB's response to the points highlighted in the report.
August 2017SG-4.2.6
The head of internal Shari'a audit function must follow up to ascertain that appropriate action is taken on his reported findings and recommended corrective actions. In addition, any other recommendations relating to Shari'a matters made by the SSB, the IESCAs and the CBB must be followed up.
August 2017SG-4.2.7
Any difference of opinion between the management and the head of internal Shari'a audit function on matters relating to Shari'a interpretation must be referred to and decided by the SSB.
August 2017Shari'a Audit Plan
SG-4.2.8
The head of internal Shari'a audit function must have an internal hari'a audit plan in place which must be approved by the SSB on an annual basis.
August 2017SG-4.2.9
For purposes of Paragraph SG-4.2.8, the internal Shari'a audit planning process must include, but not be limited to, the following:
(a) Developing an internal Shari'a audit program;(b) Obtaining background information about the activities to be audited, such as locations, products/services, branches, divisions, etc.;(c) Establishing internal Shari'a audit objectives and scope of work;(d) Obtaining SSB fatawa, guidelines, instructions, prior year internal and independent external Shari'a compliance audit results, relevant correspondence including with the CBB;(e) Determining the resources necessary to perform internal Shari'a audit;(f) Communicating with all the individuals at theBahraini Islamic bank licensee who need to know about internal Shari'a audit;(g) Performing, as appropriate, a survey to become familiar with activities, risks and controls to identify areas of internal Shari'a audit emphasis, and to invite comments and suggestions; and(h) Establishing a risk-based Shari'a audit plan.August 2017SG-5 SG-5 Independent External Shari'a Compliance Audit
SG-5.1 SG-5.1 Principle
SG-5.1.1
Bahraini Islamic bank licensees must appoint, within 4 months of their financial year-end, an independent external Shari'a compliance auditor (IESCA) approved by the CBB.Amended: October 2022
August 2017SG-5.1.2
For the purpose of Paragraph SG-5.1.1,
Bahraini Islamic bank licensees may engage their external auditor or other independent audit firms as approved by the CBB.August 2017SG-5.1.3
The IESCA must be adequately resourced with proficient staff having the relevant qualification and experience.
August 2017SG-5.2 SG-5.2 Roles and Responsibilities of Independent External Shari'a Compliance Audit
SG-5.2.1
The IESCA must conduct an annual independent external Shari'a compliance audit, to be completed before the issuance of the annual SSB Report, and submit his independent assurance report on the management's report (See SG-5.3.1) to the Audit Committee and thereafter to the SSB and the management of the
Bahraini Islamic bank licensee (See Appendix SG-1 under Part B of the CBB Rulebook Volume 2).August 2017SG-5.2.2
IESCA must assess the existence of relevant controls and their effectiveness in implementation by the
Bahraini Islamic bank licensee's management of the policies, procedures and decisions of the SSB to achieve Shari'a compliance.August 2017SG-5.2.3
The independent external Shari'a compliance audit report must be guided by International Standards on Assurance Engagements 3000, Assurance other than Audits or Reviews of Historical Financial Information in order to ensure that
Bahraini Islamic bank licensee's activities are conducted in a Shari'a compliant manner in accordance with and following the below hierarchy:a. relevant CBB regulations, resolutions and directives;b. applicable AAOIFI standards;c. the rulings of the Centralised Shari'a Supervisory Board; andd. Shari'a guidelines / directives issued by its SSB.Amended: January 2019
August 2017SG-5.2.4
The IESCA should have no responsibility for assessing the competence of the members of the SSB other than whether they meet the fit & proper criteria specified by the CBB.
August 2017SG-5.2.5
The IESCA should satisfy himself that the
Bahraini Islamic bank licensee's process for introducing new products, transactions or services or modifying existing ones includes appropriate procedures for ensuring compliance with Shari'a rules and principles including reviews by theBahraini Islamic bank licensee's senior management , internal audit and SSB.August 2017SG-5.2.6
The IESCA must test on a sample basis the transaction level controls, product specific controls and other relevant controls. For detailed work requirement, see Appendix SG-1 under Part B of the CBB Rulebook Volume 2.
August 2017SG-5.2.7
The IESCA must review the findings of all internal Shari'a audits carried out by the
Bahraini Islamic bank licensee's internal Shari'a audit function.August 2017SG-5.2.8
For the independent external Shari'a compliance audit, the audit committee in consultation with the SSB must ensure as far as possible that the IESCA is capable of conducting, and does conduct, ex post Shari'a compliance reviews.
August 2017SG-5.2.9
IESCA must communicate its comments and concerns on the
Bahraini Islamic bank licensee's relevant controls and their effectiveness to the board of directors and Shari'a Supervisory Board.Added: January 2019SG-5.3 SG-5.3 Management Duties to the Independent External Shari'a Compliance Audit
SG-5.3.1
The
Bahraini Islamic bank licensee must prepare, on an annual basis, a management report titled "Management's Shari'a compliance and governance report" on control procedures relating to Shari'a compliance and governance structure at theBahraini Islamic bank licensee and the management's assertion on the design and operating effectiveness of these controls. This report will form the basis on which the IESCA would issue his independent assurance report (See SG-5.2.1).August 2017SG-6 SG-6 Disclosure Requirements
SG-6.1 SG-6.1 Disclosure Requirements
SG-6.1.1
The SSB report must be published as part of the annual report and must include an opinion paragraph containing an expression of opinion on the compliance of the
Bahraini Islamic bank licensee with Shari'a rules and principles, the SSB's fatawa and guidelines, Shari'a related policies and procedures of the licensee, AAOIFI's Shari'a standards, relevant rulings of the CSSB and the regulations, resolutions and directives issued by the CBB.August 2017SG-6.1.2
Bahraini Islamic bank licensees must make SSB's rulings of standard products and their evidence (fiqhi and other), and any changes to any product-specific fatawa available to the customers and the general public through appropriate publication and communication channels (e.g. making available on the website and the annual report).August 2017SG-6.1.3
Bahraini Islamic bank licensees must disclose in their annual report the aggregate remuneration paid to SSB members during the year.
August 2017
Business Standards
BC BC Business and Market Conduct
BC-A BC-A Introduction
BC-A.1 BC-A.1 Purpose
BC-A.1.1
This Module contains requirements that have to be met by
Islamic bank licensees with regards to their dealings with its stakeholders. The Rules contained in this Module aim to ensure thatIslamic bank licensees deal with their stakeholders in a fair and open manner, and address their stakeholders' information needs.Amended: July 2015
October 07BC-A.1.2
The Rules build upon several of the Principles of Business (see Module PB (Principles of Business)). Principle 1 (Integrity) requires
Islamic bank licensees to observe high standards of integrity and fair dealing, and to be honest and straightforward in their dealings withcustomers . Principle 3 (Due skill, care and diligence) requiresIslamic bank licensee s to act with due skill, care and diligence when acting on behalf of theircustomers . Principle 7 (Client Interests) requiresIslamic bank licensees to pay due regard to the legitimate interests and information needs of theircustomers , and to communicate with them in a fair and transparent manner.October 07BC-A.1.3
This Module also provides support for certain aspects relating to business and market conduct in the Bahrain Commercial Companies Law of 2001 (as amended).
October 07Legal Basis
BC-A.1.4
This Module contains the Central Bank of Bahrain's ('CBB') Directive (as amended from time to time) on business conduct by
Islamic bank licensees , and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain of Bahrain and Financial Institutions Law 2006 (CBB Law). The directive in this Module is applicable to allIslamic bank licensees .Amended January 2011
October 07BC-A.1.5
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 07BC-A.2 BC-A.2 Scope of Application and Key Requirements
BC-A.2.1
This Module applies to all
Islamic bank licensees unless indicated otherwise.Amended: July 2015
October 07BC-A.2.2
Bahraini Islamic bank licensees must ensure that their branches and subsidiaries operating in foreign jurisdictions comply, at a minimum, with local conduct of business standards and regulatory requirements (where applicable).Amended: July 2015
Amended: October 2011
Amended: April 2008
October 2007BC-A.2.3
For
overseas Islamic bank licensees , these requirements only apply to the business andcustomers of the Bahrain branch.Added: July 2015BC-A.2.4
The CBB encourages
Bahraini Islamic bank licensees to apply—with respect to their overseas branches and subsidiaries—conduct of business standards at least equivalent to those set out in this Module. Where this is not the case, the CBB will consider any potential risk to theIslamic bank licensee that may arise through adverse reputational or other consequences.Added: July 2015BC-A.2.5
This Module covers the following activities by
Islamic bank licensees :(a) General Principles (Chapter BC-B);(b) Promotion of financial products and services (Chapter BC-1);(c) Code of Conduct for bank dealers and foreign exchange dealers (Chapter BC-2);(d) Client confidentiality (Chapter BC-3);(e) Customer account services and charges (Chapter BC-4);(f) Dishonoured cheques (Chapter BC-5);(g) ATMs and charges for their use (Chapter BC-6);(h) Mudaraba contracts (Chapter BC-7);(i) Margin trading system (Chapter BC-8);(j) Regulated banking services (Chapter BC-9);(k) Customer complaints procedures (Chapter BC-10); and(l) Measures and Procedures for Services Provided to Disabled Customers by Bahraini Retail Banks (Chapter BC-11).Amended: April 2016
Added: July 2015BC-A.3 BC-A.3 Module History
BC-A.3.1
This Module was first issued on 1st January 2005 by the BMA as part of the Islamic principles volume. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 07BC-A.3.2
When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 2 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.
October 07BC-A.3.3
The most recent changes to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes BC 4.6 01/10/05 Streamlined requirements for new products BC 8 01/04/06 Margin trading rules and guidance BC-A.1 10/2007 New Rule BC-A.1.4 introduced, categorising this Module as a Directive. BC-9 04/2008 New Investment Business related requirements for conduct of business. BC-4.8 04/2008 New requirement to comply with Code of Best Practice on Consumer Credit and Charging. BC-8.2 07/2009 Removal of numerical restrictions related to margin trading requirement. BC-9.5.17 10/2010 Clarified the wording of Rule by replacing the term "legal" with "licensing". BC 01/2011 Various minor amendments to ensure consistency in formatting of CBB Rulebook BC-A.1.4 01/2011 Clarified legal basis. BC-1.1.13 01/2011 Corrected reference to Ministry of Industry and Commerce. BC-8 01/2011 Changes made to reflect new definitions related to licensed exchange(s). BC-1.1.11 04/2011 Clarified retention period of records for promotional schemes. BC-3.1.1 and BC-4.2 04/2011 Minor amendments to clarify Rules. BC-A.2.2 10/2011 Added new Section to list of activities covered by this Module. BC-4.6.3 10/2011 Deleted Paragraph. Reduced notification requirements on new or expanded products and facilities. BC-4.7.2 10/2011 Updated name of Ministry of Justice and Islamic Affairs. BC-4.9 10/2011 Added new Section on transaction advice. BC-9.11 and BC-10 10/2011 Replaced Section BC-9.11 dealing with complaints and added Chapter BC-10 Customer Complaints Procedures in line with results of consultation and made it applicable to all regulated banking services. BC-10 01/2012 Minor corrections to correct typos and clarify language. BC-10.3.9 01/2012 Paragraph deleted as it repeats what is in Paragraph BC-10.3.7. BC-6.1.6 04/2012 Cross reference added. BC-6.1.10 and BC-6.1.11 04/2012 Rule clarified and split into one Rule and one Guidance Paragraphs. BC-9.2.1 04/2012 Corrected cross reference. BC-1.2 07/2012 Added Section on advertisements for retail banking products and services. BC-4.2.3 07/2012 Paragraph deleted as cross-reference is not applicable. BC-9.5.12A 07/2012 Added guidance to clarify promotion material from banks. BC-10.1.3A 07/2012 Added guidance on the appointment of the customer complaints officer. BC-1.1.2 10/2012 Added cross reference to advertising requirements under Section BC-1.2. BC-4.2 10/2012 Section amended to reflect outcome of consultation on disclosure of interest/profit rate fees and charges by retail banks. BC-4.7 10/2012 Amended to make Rules clearer. BC-6.1.2 10/2012 Clarified process for applications for the installation of off-site ATMs. BC-4.3 01/2013 This Section was deleted and requirements are now covered under Section FC-1.6. BC-1.2.2 04/2013 Corrected cross reference. BC-4.2.2 04/2013 Clarified Rule on instances when customers must be kept informed of charges. BC-9.9.14 and BC-9.9.16(e)(v) 04/2013 Clarified Rules on allocations. BC-10.7 07/2013 Additional details provided on reporting of complaints. BC-5.3 10/2013 Updated penalty charges on dishonoured cheques. BC-6.3 01/2014 Added new Section on local ATM network charges. BC-4.2 04/2014 Changes made to align language with Islamic terminology. BC-4.11 04/2014 Added new Section on donations to NGO accounts. BC 07/2015 Module amended to reflect IFSB-9 'Guiding principles on conduct of business for institutions offering Islamic financial services'. BC-B.2.1 and BC-9.9.22 10/2015 Corrected cross reference. BC-B.5.10 10/2015 Deleted incorrect cross reference. BC-B.5.12A 10/2015 Added guidance on when a 'cooling off period' may be waived. BC-4.12 10/2015 Added new Section on credit check reports. BC-9.12.15 10/2015 Minor correction. BC-9.13.9 10/2015 Deleted reference to securities lending. BC-A.2.5, and BC-11 04/2016 Added new Section on Measures and Procedures for Services Provided to Disabled Customers. BC-6.3 04/2016 Amendment to local ATM charges. BC-6.1.6 07/2016 Deleted reference to Ministry of Interior. BC-4.6 10/2016 Updated Section on "Notification to the CBB on Introduction of New or Changes to Customer Products and Facilities" BC-4.9.1 10/2016 Amendment to Transaction Advice BC-8.2.5 10/2016 Rectified term 'Credit Reference Bureau' BC-5A 01/2017 Added new Section on Return Policy — Post-Dated Cheques BC-11.1, BC-11.2 and BC-11.3 04/2017 Amended Sections to clarify applicability of Rules. BC-5.3.1 07/2017 Amended Paragraph to include penalty charges on returned cheques for the reason of Insufficient Funds. BC-4.1 04/2018 Deleted Section on "Minimum Balance and Charges on Savings Accounts". BC-4.13 04/2018 Added new Section on "Fees and Charges for Services Provided to Individuals". BC-5.3.2 04/2018 Deleted Paragraph on "Dishonoured Cheques'. BC-6.2 04/2018 Deleted Section on "GCC ATM Network Charges". BC-6.3 04/2018 Deleted Section on "Local ATM Network Charges". BC-4.2.28A 07/2018 Added new Paragraph on existing "Early Repayment" requirements. BC-4.14 10/2018 Added a new Section on Fees and Charges for Services Provided to Companies under Formation. BC-12 10/2018 Added a new Chapter on Financial Advice Programme. BC-4.2.22 01/2019 Amended Paragraph on disclosure of charges by retail banks. BC-4.2.24 01/2019 Amended Paragraph on disclosure to individual customers. BC-4.2.25A 01/2019 Added a new Paragraph on rounding off in transactions. BC-4.13.2 01/2019 Added a new Paragraph on waived fees and charges. BC-4.15 07/2019 Added a new Section on Profit/Fees on Credit Card Transactions. BC-4.16 10/2019 Added a new Section Profit on Credit Facilities. BC-6.1 10/2019 Deleted Section. BC-11.2.2 01/2020 Amended Paragraph. BC-4.17 04/2020 Added a new Section on Blocking Customer Accounts. BC-10.3.15 04/2020 Amended Paragraph adding reference to CBB consumer protection. BC-10.5.6 04/2020 Amended Paragraph adding reference to CBB consumer protection. BC-10.7.1 -
BC-10.7.304/2020 Amended Paragraph adding reference to CBB consumer protection. BC-C 10/2020 Added a new chapter on Provision of Financial Services on a Non-discriminatory Basis. BC-4.18 10/2020 Added a new Section on Fund Transfers by Customers of Payment Service Providers (PSP). Table of Content 04.2021 Amended Appendix BC-7 title in ToC. BC-4.19 04/2021 Added a new Section on ‘Merchant Fees on Payments to Zakat and Charity Fund’. BC-1.2.1 07/2021 Deleted Paragraph. BC-1.2.2 07/2021 Deleted Paragraph. BC-4.2.6 07/2021 Amended Paragraph. BC-1.1 01/2022 Added new enhanced Section on Promotions. BC-1.2 01/2022 Added new enhanced Section on Advertisements. BC-4.20 01/2022 Added a new Section on Dormant Accounts and Unclaimed Balances. BC-12.1.3 01/2022 Deleted Paragraph. BC-2.8.2 04/2022 Deleted Subparagraph (b). BC-4.20.7 07/2022 Amended Paragraph on dormant accounts activity. BC-12.1.1 07/2022 Amended Paragraph on Financial Advice Program (FAP). BC-4.21 01/2024 Added a new Section on Insurance cover on financing. Effective Date and Evolution of the Module
BC-A.3.4
Prior to the Rulebook, the CBB had issued various circulars covering different aspects of Business and Market Conduct. These circulars have now been consolidated into this Module. The contents of this Module are effective from the date depicted in the original circulars listed below or from the dates indicated in Paragraph BC-A-3.3 above:
Circular Ref. Date of Issue Module Ref. Circular Subject EDBC/73/96 1 May 1996 BC-1.1 Explanatory note on the promotion of Banking and Financial Products. BS.C7/91/442 10 Sep 1991 BC-1.1 Promotion of Banking Services 85/25 2 May 1985 BC-2 Code of Conduct for Foreign Exchange Dealers and Brokers 83/5 10 Apr 1983 BC-3 Disclosure of Information about Individual Accounts BS.C7/90/34 31 Jan 1990 BC-4.2 Dinar Certificates of Deposits EDBO/51/02 2 Apr 2002 BC-4.2 Charges to Customers BC/5/00 8 Mar 2000 BC-4.3 Accounts held for Clubs and Societies BSD(111)/94/157 24 Sep 1994 BC-4.4 Fees on Current Accounts BC/2/01 3 Mar 2001 BC-4.5 Brokerage Fees in Bahrain ODG/145/92 18 Aug 1992 BC-4.6 New products in the Retail Banking Field EDBO/46/03 8 Apr 2003 BC-4.7 Inheritance – Financial Procedures EDBO/27/96 25 Sep 1996 BC-5.1 Regulation for 'Dishonoured Cheques' OG/399/94 28 Nov 1994 BC-5.2 Returned Cheques EDBO/49/01 6 May 2001 BC-5.3 Penalty Charges on Returned Cheques BC/8/98 24 May 1998 BC-6.1 Off-site ATMs EDBO/45/02 13 Mar 2002 BC-6.2 GCC ATM Network Charges EDBC/105/96 26 June 1996 BC-7 Mudaraba Contracts – Minimum Terms and Conditions BS/11/2004 10 August 2004 BC-4 Bank Charges on Savings Accounts EDBS/KH/C/73/2018 22 Nov 2018 BC-4.2.25A Rounding off in Transactions. Amended: January 2019
Amended: October 2010
October 07BC-B BC-B General Principles
BC-B.1 BC-B.1 Principle 1: Truthfulness, Honesty and Fairness
BC-B.1.1
Islamic bank licensees are required to develop a Code of Business Conduct that contractually obliges the bank's employees and representatives to carry out their duties and responsibilities in a fair and honest manner. Banks must also refer to Module HC 'High- level Controls' for requirements on code of business conduct.Added: July 2015BC-B.1.2
An
Islamic bank licensee must aspire to the highest standards of truthfulness, honesty and fairness in all its statements and dealings, and must treat its customers fairly.Added: July 2015BC-B.1.3
The fundamental requirement with regard to truthfulness, honesty and fairness is that an
Islamic bank licensee must not, either deliberately or through negligence, issue information that is potentially misleading to stakeholders or the market, nor must it manipulate prices by using any of the means whereby this may be done. Such means include, but not limited to, making a false market, issuing misleading price-sensitive information and price-fixing in conjunction with other market players. Where applicable, banks must also refer to Volume 6 (Capital Markets)—Prohibition of Market Abuse and Manipulation Module 'MAM'.Added: July 2015BC-B.1.4
An
Islamic bank licensee must not, either deliberately or through negligence, issue information that is misleading to stakeholders or the market regarding the Shari'a compliance of its products or services, or of Sukuk issuances with which it is involved.Added: July 2015BC-B.1.5
An
Islamic bank licensee must not mislead clients or the market through the withholding of material information.Added: July 2015BC-B.1.6
An
Islamic bank licensee must have appropriate procedures whereby whistle-blowers are treated honestly and fairly, with no cover-ups or victimisation. See Section BC-B.1.7. With regard to fairness, anIslamic bank licensee must follow best practice in establishing procedures for handling complaints from clients. See Chapter BC-10.Added: July 2015BC-B.1.7
An
Islamic bank licensee should establish a procedure that can be made clear to the public whereby their employees and representatives are contractually obliged to carry out their duties and responsibilities in accordance with a code of business conduct that requires fairness and honesty. To embody this self-binding commitment, anIslamic bank licensee should publish a client's charter that sets out the relevant parts of its code of business conduct as a written promise to guarantee the delivery of honest and fair service to its clients as demanded by Shari'a. AnIslamic bank licensee should refer to Paragraphs BC-B.1.8 and BC-B.1.9. This charter will include such matters as procedures for dealing fairly, honestly and efficiently with complaints fromcustomers or investors, and with whistle-blowers and any problems to which they draw attention. Refer to Paragraph HC-3.3.3.Added: July 2015BC-B.1.8
A client's charter is a written commitment made by an
Islamic bank licensee in terms of the deliverance of its outputs or services to itscustomers inclusive of stakeholders. It is an assurance by theIslamic bank licensee that outputs or services rendered will comply with the standards declared as quality standards. Generally, quality standards of outputs or services are standards that will fulfil clients' needs and tastes.Added: July 2015BC-B.1.9
The assurances contained in the charter will ensure the generation of more disciplined, prepared and responsible
Islamic bank licensee . Various benefits will be obtained from the establishment of the client's charter.Benefits to the Public:
(a) Enables the public to know specifically the quality of service to expect from theIslamic bank licensee ;(b) Enables the public to evaluate the performance of the services rendered;(c) Reduces uncertainties over the delivery of services;(d) Facilitates comparisons betweenIslamic bank licensee that offer similar services; and(e) Allows the public to be more aware of the conduct commitment of eachIslamic bank licensee .Benefits to the
Islamic bank licensee :(a) Acts as a performance indicator, which will enable theIslamic bank licensee to evaluate its conduct practices; and(b) Upgrades the discipline, responsibility and accountability of theIslamic bank licensee , which in turn will contribute to a more transparent Islamic finance industry.Added: July 2015BC-B.1.10
The
Islamic bank licensee must establish a policy with regard to 'whistle-blowing' so as to encourage all employees to report promptly to an appropriate level of management any breach or suspected breach of business conduct principles. The policy must, among other things, clarify:(a) The procedures according to which an employee can report any instance of conduct that he or she considers to be in breach of such principles;(b) Actions to be carried out by management upon receipt of the report; and(c) The obligations of theIslamic bank licensee to take measures to prevent future breaches.Added: July 2015BC-B.1.11
Islamic bank licensees must apply the requirements of Module PD pertaining to enhancing corporate governance and financial transparency in order to protectcustomers and facilitate market discipline through better practice in public disclosure.Added: July 2015BC-B.2 BC-B.2 Principle 2: Due Care and Diligence
BC-B.2.1
An
Islamic bank licensee must exercise due care and diligence and in the best interests of their stakeholders in all its operations, including the way it structures and offers its products and provides financing, with particular regard to Shari a compliance, and to the thoroughness of research and risk management. See Paragraphs BC-9.12.8 to BC-9.12.13.Amended: October 2015
Added: July 2015BC-B.2.2
Paragraph BC-B.2.1 includes any duty of best execution. In Islamic finance, there are typically two major categories of investors—that is, the shareholders and the investment account holders (IAH).
Islamic bank licensees are required to exercise due care and diligence in safeguarding the interests of such investors. Refer to Principle 6 (BC-B.6).Added: July 2015BC-B.2.3
An
Islamic bank licensee must have in place appropriate safeguards against occurrences of behaviour that constitutes a lack of due care and diligence amounting to culpable negligence. These safeguards include appropriate staff training. Refer to Principle 3 (BC-B.3).Added: July 2015BC-B.2.4
An
Islamic bank licensee offering Shari'a-compliant financing must exercise due diligence in making such financing available to customers, in the interests of both its fund providers and its customers. It is not acceptable business conduct for anIslamic bank licensee to be lax in applying criteria of creditworthiness, or relying only on collateral to mitigate credit losses, especially in cases where theIslamic bank licensee exercising its rights over the collateral would inflict hardship on the debtor.Added: July 2015BC-B.2.5
An
Islamic bank licensee should endeavour to take all reasonable steps to assist the debtor.Added: July 2015BC-B.2.5.A
An example of assisting debtors is by restructuring the financing, prior to exercising the
Islamic bank licensee's rights over the collateral.Added: July 2015BC-B.2.6
An
Islamic bank licensee must balance the interests of its various stakeholders, which may include IAH as well as debtors.Added: July 2015BC-B.2.7
An
Islamic bank licensee must exercise due diligence in the placement of IAH s money to fund financing facilities or investments, and in any other activities where a proper evaluation of risks, with the collection and analysis of the information necessary for this purpose, is called for.Added: July 2015BC-B.3 BC-B.3 Principle 3: Capabilities
BC-B.3.1
An
Islamic bank licensee must ensure that it has in place the necessary systems and procedures, and that its employees have the necessary knowledge and skills, to comply with this Module and other CBB requirements in Volume 2 Rulebook.Added: July 2015BC-B.3.2
This principle requires that the board of directors,
senior management , staff and representatives (such as agents) of anIslamic bank licensee must be capable of discharging their duties competently. The required capabilities must include having an understanding of the rules and principles of Shari'a that is appropriate to their responsibilities, including Shari'a-compliant characteristics of the financial products and services offered by theIslamic bank licensee .Added: July 2015BC-B.3.3
Capabilities may relate to designing products, to selling and distributing the products, or to the competencies necessary for successfully carrying out the business activities of the
Islamic bank licensee , such as risk management, including asset-liability and liquidity management and the placement and management of funds. Lack of the necessary capabilities may result in flawed products, defective contracts and other paperwork, bad credit decisions, poor and costly underwriting decisions, and products that do not meet legal or regulatory requirements. These shortcomings can in turn result in operating losses or underwriting deficits, and products being mis-sold.Added: July 2015BC-B.3.4
An
Islamic bank licensee must ensure that the persons entrusted to deal on behalf of theIslamic bank licensee are equipped with an appropriate level of knowledge of the Shari'a-compliant characteristics of the financial products and services offered by theIslamic bank licensee . Having staff with the necessary capabilities is key to avoiding excessive levels of operational risk in banking.Added: July 2015BC-B.3.5
Staff training and development are most important in fostering the required capabilities and must include an emphasis on the Code of Business Conduct that the
Islamic bank licensee has developed, which should be consistent with these General Principles. Continuous training and development of awareness of employees at all levels are required in order to arrive at a clear framework of guidance that indicates what is acceptable conduct, as well as the sanctions to be applied to violators of the code.Added: July 2015BC-B.4 BC-B.4 Principle 4: Information about Clients
BC-B.4.1
An
Islamic bank licensee must take steps to ensure that it understands the nature and circumstances of its clients, so that it offers those products most suitable for their needs, as well as offering financing only for Shari'a-compliant projects. See Section BC-9.7.Added: July 2015BC-B.4.2
An
Islamic bank licensee must ensure that its customers' businesses and the purpose of any financing provided are consistent with the Shari'a.Added: July 2015BC-B.4.3
An
Islamic bank licensee must gauge the needs of their clients to ensure that the products or services rendered will reasonably meet those needs, and must ensure that any advice tocustomers is aimed at thecustomers' interests and based on adequate standards of research and analysis.Added: July 2015BC-B.4.4
Among the methods that are commonly used to gauge clients' needs are questionnaires and interviews with the clients, a written record being required. Questionnaires must be either completed or signed by the client, and where appropriate a summary of any interview must be signed by the client.
Added: July 2015BC-B.4.5
It is the responsibility of the
Islamic bank licensee to provide its customers full and timely disclosure of material facts relevant to the proposed transaction, their rights and obligations before signing any documents, to avoid any conflicts in the future.Added: July 2015BC-B.4.6
For example, if a client considering a savings or investment product, or a home purchase product, chooses not to provide all the information requested, the client must be cautioned that the
Islamic bank licensee may not be able to give suitable advice without complete information and the client might risk making payments or entering into financial commitments which may not be appropriate to his or her needs or ability to pay. In this context, the principle of due diligence also applies to any such information seeking.Added: July 2015BC-B.5 BC-B.5 Principle 5: Information to Clients
BC-B.5.1
An
Islamic bank licensee must provide clear and truthful information both in any public document issued and to its actual and prospective clients, both during the sales process and in subsequent communications and reports. See Sections BC-9.5, BC-9.6, BC-9.8 and BC-9.10.Added: July 2015BC-B.5.2
An
Islamic bank licensee must ensure that every advertisement is designed to disclose all relevant information to the subject matter.Added: July 2015BC-B.5.3
This principle is concerned with transparency in dealings with clients and prospective clients. In conjunction with Principle 1 (BC-B.1 Truthfulness, Honesty and Fairness), an
Islamic bank licensee is required to provide appropriate and clear information to all clients and prospective clients regarding its products and services and the rights, obligations and risks involved to make informed decisions. This requirement also applies to information to clients and prospective clients concerning the Shari'a compliance of products and services.Added: July 2015BC-B.5.4
An
Islamic bank licensee must maintain fair treatment of customers through the lifetime of the customer relationships, and ensure thatcustomers are kept informed of important events.Added: July 2015BC-B.5.5
An example of achieving fairness through transparent business dealing from the Shari'a perspective is in the requirement that for a Murabaha contract to be valid, the seller has to disclose the original cost (including any discounts received) and the profit margin/mark-up.
Added: July 2015BC-B.5.6
The use of 'small print' to make potentially important information less visible is not compatible with good business conduct, and must be avoided. Likewise, there should be no 'hidden costs' in financing products, such as commissions or agency fees that are not disclosed to the client.
Added: July 2015BC-B.5.7
All commission and similar arrangements must be fully disclosed to the subject clients. In selecting a product for recommendation to a client, the overriding criterion must be the benefits to the client and not the attractiveness of the commission to the
Islamic bank licensee or its representative. Refer to (BC-4.2) and (BC-9.8).Added: July 2015BC-B.5.8
When introducing new, enhanced, supplementary or replacement services and/or products with cost or potential liability in the future,
Islamic bank licensees must providecustomers with full particulars of the change at least thirty calendar days prior to the date the change takes effect, and must obtain prior-written consent from eachcustomer . Such notice is to enable thecustomer to decide whether to accept the new terms or terminate the agreement.Added: July 2015BC-B.5.9
The use by an
Islamic bank licensee or its representatives of 'negative or hard selling' techniques intended to push a client into an agreement without having properly evaluated the benefits and costs is not consistent with good business conduct.Added: July 2015BC-B.5.10
Negative selling occurs when a bank provides unordered services/products to a
customer and then bills thecustomer . Often, the supply is accompanied by a form of notice instructing thecustomer that if the offer is not rejected within a certain time, the bank will send an invoice or debit an existing account or line of credit.Amended: October 2015
Added: July 2015BC-B.5.11
'Hard selling' has been defined as applying psychological pressure (by appealing to someone's fears, greed or vanity) to persuade the prospect to make a quick purchase decision.
Added: July 2015BC-B.5.12
Given the complexity of many financial products,
Islamic bank licensees should give theircustomers a 'cooling off period' so as to have ample time to evaluate the benefits and costs of a product before finally committing themselves. This guidance applies to long term commitments, such as investments and mortgage financing, provided that it is not sensitive to daily fluctuations.Added: July 2015BC-B.5.12A
The only instance where a 'cooling off period' may be waived is when the
Islamic bank licensee has received written confirmation from thecustomer that he/she wishes to waive his/her right to the 'cooling off period'.Added: October 2015BC-B.5.13
The principle of the 'cooling off period' is that the
customer enters into a non-binding commitment to enter into a contract which becomes binding (i.e. the contract is concluded) only after a specified period has elapsed and provided thecustomer has not indicated otherwise.Added: July 2015BC-B.6 BC-B.6 Principle 6: Conflicts of Interest and of Duty
BC-B.6.1
An
Islamic bank licensee must recognise the conflicts of interest between itself and its clients that arise from the type of products it offers, and either avoid them, or disclose and manage them, bearing in mind its fiduciary duties to investment account holders (IAH) as well asshareholders . See Section BC-9.12.Added: July 2015BC-B.6.2
In addressing the issue of conflicts of interest, this principle stresses the importance of
Islamic bank licensees doing their best to avoid conflicts of interest, and when they cannot be avoided, the need to ensure that stakeholders are fairly treated. This principle recognises that conflicts of interest should be managed, and that proper management to ensure fair treatment of stakeholders may require disclosure of certain facts or information, internal rules of confidentiality, or other appropriate methods or combinations of methods. Conflicts of interest may arise in fund management which requires proper management so as to achieve honesty and fairness in accordance with Principle 1 (BC-B.1).Added: July 2015BC-B.6.3
In
Islamic bank licensees , conflicts of duty may occur since their management is required to act in the best interests of two categories of stakeholders who may have differing interests, such as shareholders and IAH. Hence, conflicts of interest between two categories of stakeholders are translated into conflicts of duty for the board of directors and management of theIslamic bank licensee . In this connection, the fiduciary duties of anIslamic bank licensee to stakeholders, including IAH, are crucial.Added: July 2015BC-B.6.4
Good business practice is linked to good governance, particularly with regard to the proper management of conflicts of interest and of duty. The existence of such conflicts must not be hidden, but
Islamic bank licensees must be transparent about them while making clear what mechanisms are in place to manage them properly.Added: July 2015BC-B.6.5
Islamic bank licensees must ensure that their systems of remuneration and compensation do not provide perverse incentives to their management, staff, agents or other representatives that could lead to conflicts of interest.Added: July 2015BC-B.7 BC-B.7 Principle 7: Shari'a Compliance
BC-B.7.1
An
Islamic bank licensee must be able to demonstrate that its operations are governed by an effective system of Shari'a governance and that it conducts its business in a socially responsible manner.Added: July 2015BC-B.7.2
An
Islamic bank licensee must comply with all applicable legal and regulatory requirements and Shari'a requirements.Added: July 2015BC-B.7.3
An
Islamic bank licensee must employ a highly competent head of Shari'a review (Refer to Principle 3, BC-B.3: Capabilities) having a sufficient level of authority to make compliance with all applicable legal, regulatory and Shari'a requirements a key management policy that is applied effectively in practice. Banks must also refer to Module LR (Licensing Requirements), LR-1A for requirements on the appointment of head of Shari'a review and Appendix TC-1 in Module TC (Training and Competency).Added: July 2015BC-C BC-C Provision of Financial Services on a Non-discriminatory Basis
BC-C.1 BC-C.1 Provision of Financial Services on a Non-discriminatory Basis
BC-C.1.1
Islamic bank licensees must ensure that all regulated financial services are provided without any discrimination based on gender, nationality, origin, language, faith, religion, physical ability or social standing.Added: October 2020BC-1 BC-1 Promotion of Financial Products and Services
BC-1.1 BC-1.1 Promotions
Introduction
BC-1.1.1
The purpose of the content of this Section is to set out requirements pertaining to the promotion of financial services and products offered in/from Bahrain by
Islamic retail bank licensees . For the purposes of this Section, promotions mean all types of promotional campaigns, competitions, merchant discount schemes/loyalty programmes or other schemes of similar nature offered to customers or prospective customers by means of incentives etc.Amended: January 2022
Added: October 07BC-1.1.2
Islamic retail bank licensees must ensure that all the following requirements are met with regards to promotion of products or services:(a) They do not involve a breach of Bahrain law or any other relevant applicable law or regulation or Shari’a Principles;(b) All documentation concerning promotions is in a language necessary for customers to fully understand and appreciate the products or services;(c) Customers to whom promotions are directed must enjoy equal opportunity in terms of access to, and treatment within such schemes;(d) The communication concerning promotions must be clear, concise, truthful, unambiguous and complete to enable customers to make a fully informed decision; and(e) Where the promotion involves communication of earnings potential or benefits associated with the products or services promoted, all costs, charges or levies and risks are also disclosed.Amended: January 2022
Amended October 2012
Amended January 2011
Added: October 2007BC-1.1.3
Licensees using character-limited media (e.g. social media platforms such as Instagram, Facebook etc.) as a means of promoting complex features of financial products or services should provide a reference or link to more comprehensive information available elsewhere.Amended: January 2022
Amended January 2011
Added: October 2007BC-1.1.4
Islamic retail bank licensees must ensure that the following requirements are met with regards to raffles/lotteries:(a) Adequate systems and documented procedures are in place that describe the checks and balances to ensure fair play, impartiality and the inclusion of eligible participants as well as for informing participants of the results of a raffle/lottery without delay;(b) They are subject to the rules and requirements (including prior authorisation/approval) laid down by the Ministry of Industry, Commerce and Tourism;(c) The raffle draw date of the announced prize/incentive/campaign is disclosed in advance to the public and that other subsequent announced prize/incentive/campaign follow the same approach. Raffle dates must not be postponed unless a valid reason is stated/indicated;(d) The winner(s) report includes the winner's name, CPR number, mobile number and the number of chances (e.g. tickets/ certificates) in the draw;(e) Each draw of the raffle/lottery held as part of the bank’s promotional scheme is independently verified and monitored/witnessed by the bank’s internal auditor and, additionally, draws involving prizes of BD 10,000 or above in aggregate must be independently verified and monitored/witnessed by the bank’s external auditors;(f) An annual check and a comprehensive audit on the “raffle draw” system is conducted by the external IT auditor. In addition, a detailed report in this regard from such auditor must be submitted to the CBB within 3 months from year-end and a copy is sent to the consumer protection department in the Ministry of Industry, Commerce and Tourism; and(g) The internal auditor periodically reviews, at least annually, all promotions, raffles/lotteries in addition to the systems, procedures, processes and related operational risks.Amended: January 2022
Amended: April 08
Added: October 07General Requirements
BC-1.1.5
The requirements of Paragraph BC-1.1.4 do not apply to promotions or giveaways generally offered and selected through draws to customers on an ad hoc basis (at no cost to the customer, implicit or otherwise). In such cases, there is no direct link between the acquisition of the products or services by the customers and the periodic raffle draw/lotteries.
Amended: January 2022
Amended: July 2015
Amended April 2011
Added April 2008BC-1.1.6
While there is to be no formal restriction on the types of incentive which may be used by institutions, care should be taken to ensure that promotional schemes do not negatively affect the integrity, reputation, good image and standing of Bahrain and/or its financial sector, and do not detrimentally affect Bahrain's economy.
Amended: April 08
October 07BC-1.1.7
Bearing in mind the reputation of, and the requirement to develop, the financial sector in Bahrain, as well as the need to act at all times in the best interests of the customer, retail Islamic bank licensees need to take adequate care to ensure that promotional schemes do not unreasonably divert the attention of the public from other important considerations in choosing an institution or a banking/financial product.
Amended: April 08
October 07BC-1.1.8
All documentation concerning promotional schemes should be in Arabic and English and, if relevant, any other language necessary for customers to fully understand and appreciate their terms and conditions. Such terms and conditions, including any related advertising, need to be clear, concise, truthful, unambiguous and complete so as to enable customers to make a fully informed decision.
Amended: April 08
October 07BC-1.1.9
Customers to whom promotional schemes are directed should enjoy equal opportunity in terms of access to, and treatment within, such schemes.
Amended: April 08
October 07BC-1.1.10
No costs (including funding costs), charges or levies associated with promotional schemes should be concealed from prospective customers.
Amended: April 08
October 07BC-1.1.11
All materials related to promotional schemes, particularly where raffles/lotteries etc. are concerned, must be maintained for a minimum period of 5 years (see Paragraph OM-7.3.4).
Amended April 2011
Amended April 2008
October 2007BC-1.1.12
Any raffles/lotteries etc. held as part of promotional schemes should be independently monitored (e.g. by the institution's external auditor) and adequate systems put in place to ensure fair play and impartiality.
Amended: April 08
October 07BC-1.1.13
An appropriate system must also exist for informing participants of the results of a raffle without delay. Institutions must note that raffles may be subject to rules and requirements (including prior authorisation/approval) laid down by the Ministry of Industry and Commerce.
Amended: July 2015
Amended April 2011
Amended January 2011
Amended April 2008
October 2007BC-1.1.14
Retail Islamic bank licensees may use small 'gifts' as an inducement to members of the public to use banks' services, provided such gifts are offered on a general basis and have a low monetary value.
Amended: April 08
October 07BC-1.1.15
Due note should be taken of the overriding provisions of Bahrain (and any other relevant) law in relation to institutions' duties to customers to the extent (if any) that promotional schemes might impact on such duties.
Amended: January 2011
Amended: April 2008
October 2007BC-1.2 BC-1.2 Advertisements
BC-1.2.1
Islamic retail bank licensees must allow a means for customers to opt-out from receiving promotional or advertisement material through email, SMS, WhatsApp or other communication means should such customers want to opt-out. The opt-out can be in writing or electronically.Amended: January 2022
Deleted: July 2021
Added: July 2012BC-1.2.2
The CBB may, at its discretion, require the
licensee to withdraw the advertisement or any material thereof, if it believes that the advertisement is not compliant with the requirements of this Module or that it has a negative impact on the financial sector or on the society.Amended: January 2022
Deleted: July 2021
Amended: April 2013
Added: July 2012BC-1.2.3
Islamic retail bank licensees must ensure thatadvertisements :a) Are clear, fair, accurate and not misleading;b) Are simple to understand and presented in a way that is likely to be understood by the average person to whom it is directed;c) Clearly state what the letters stand for if acronyms are used (for e.g. APR);d) Font size for all advertisements must be clear and readable, including footnotes;e) Terms and conditions are easily accessible by customers;f) Any concessionary offer/promotion in anadvertisement contains the validity period of such offer/promotion;g) Clearly present any comparison or contrast (if any) in a fair and balanced way. Such comparison or contrast must be meaningful and presented in general terms, i.e. banks must avoid making direct comparisons of their products with those of their competitors;h) Are publicly announced by thelicensee only;i) Clearly state the name of the bank, bank logo, and contact details;j) The name of the product and its details are clear to the customers;k) Include a proper link to the terms and conditions including fees and charges;l) Include a statement that the bank is licensed by CBB as aIslamic retail bank licensee ; andm) Do not make use of the name of CBB in anyadvertisement in such a way that would indicate endorsement or approval of its products or services.Added: January 2022BC-1.2.4
Islamic retail bank licensees must ensure thatadvertisements do not:a) Include the expression ‘profit free’ or any similar expression when there is implicit profit embedded in the product or service;b) Include the descriptions of product or service as ‘free’ or ‘with no cost’ or any similar expression if any type of fee would be imposed;c) Include the descriptions of feature of a product or service as ‘guaranteed’ or ‘secured’ or use a similar expression unless the bank communicates all the necessary information, and present that information with sufficient clarity and prominence to make the use of that term fair, clear and not misleading;d) Contain any statement such as “the best in”, “the most competitive”, “the best rate in”, “the first in”, ‘the highest’ or ‘the lowest’ or ‘the best’ in the market unless it is fully supported by evidential documents;e) Emphasise any potential benefits of a product or service without also giving a fair and prominent indication of any relevant risks; andf) Disguise, omit, diminish or obscure important information, statements or warnings.Added: January 2022Digital Advertisements
BC-1.2.5
Islamic retail bank licensees must ensure that each digitaladvertisement through the internet/social media (e.g. Twitter, Instagram, WhatsApp, Facebook, web page, etc.) complies with the requirements in this Section.Added: January 2022BC-1.2.6
Where a
licensee publishes customer feedback/review on the internet/social media, it must display both positive and negative feedback/review.Added: January 2022BC-2 BC-2 Code of Conduct for Bank Dealers and Foreign Exchange and Money Brokers in the Interbank Market
BC-2.1 BC-2.1 Introduction
BC-2.1.1
The Code of Conduct which is prepared in cooperation with the Bankers' Society of Bahrain and the foreign exchange brokers, provide rules in respect of certain kinds of practice which experience has shown may cause difficulty and may jeopardise the good standing of the Bahrain market. Management of banks and money brokers are responsible for ensuring that their institutions are in full compliance with the Code.
October 07BC-2.1.2
Every broker and dealer shall at all times comply with the criteria in respect to market practice, integrity and conduct. Failure to comply with such criteria will be regarded as a serious offence by the CBB, which reserves the right to investigate any complaints brought to its attention. All participants should adhere to the spirit as well as to the letter of the Code.
October 07BC-2.1.3
The Code is shown in full, although many Paragraphs are not strictly relevant for Islamic banks. Treasury staff should refer to the relevant Paragraphs as appropriate.
Amended January 2011
October 2007BC-2.2 BC-2.2 Market Terminology and Definitions
BC-2.2.1
The use of generally accepted precise terminology should reduce misunderstandings and frustration, and to this end Appendix BC-5 sets out, without claiming to be exhaustive, accepted market terminology and definitions.
October 07BC-2.2.2
For the purpose of this Chapter, the following definitions apply:
(a) 'Broker' means a money and foreign exchange broker who is authorised by the CBB to operate in Bahrain;(b) 'Principal' means a party undertaking a transaction through a broker; and(c) 'Bank' means any institution, holding a banking license.Amended April 2011
October 2007BC-2.3 BC-2.3 Confidentiality and Market Practice
BC-2.3.1
Confidentiality is vital for the preservation of a reputable and efficient market. Accordingly, the exchange of confidential information in respect of third parties is forbidden.
October 07BC-2.3.2
The rules which follow are not intended to define exhaustively the obligations of dealers and brokers but set down specific ways in which confidentiality should be safeguarded and operations should be conducted:
(a) Use of phrases and terms likely to identify the name of the principal should be avoided at all times;(b) In foreign exchange transactions brokers should not disclose the name of the principal until the deal is being closed.
A broker asking for a specific support price should be prepared to qualify the principal in terms of geographical location, by country or by region when the broker genuinely believes it will enable business to be concluded satisfactorily to the benefit of both broker and principal;(c) Indeposit transactions, brokers should not disclose the name of the borrower until the broker is satisfied that the potential lender seriously intends to do business. Once a lender has asked for the identity of the borrower ('Who pays?'), the lender is committed to do business at the rate quoted with an acceptable name, until the lending bank takes the broker 'off' or puts himself under reference. In the event of the first disclosed name being unacceptable to the lender, the lender will be prepared to check other acceptable names provided that such names are shown to the lender by the broker within a reasonable amount of time, which should be stipulated if necessary;(d) In the deposit market, banks should whenever possible give brokers prior indication of those categories of principals and of any centres and areas with which they would be unwilling to do business, in order that the smooth operation of markets be facilitated and frustration be minimized. Lenders should indicate the amounts they are prepared to place with particular categories of borrower. Brokers should classify bids with an indication of the type and quality of names they are in a position to pass;(e) Practices whereby banks reject a succession of names in order to assess the market and brokers offer banks deals which have no chance of being concluded, merely in order to establish their interest, are totally unacceptable;(f) A principal is urged whenever possible to specify to a broker the rate, the amount, the currency, and the period of his requirements. The principal shall be willing to deal in a marketable amount with acceptable names and shall remain bound so to deal at the quoted rate unless either the broker is:(i) Informed otherwise at the time of acceptance, or(ii) A time limit was placed (for example, 'Firm for one minute only').A broker who quotes a firm rate without qualification shall be prepared to deal at the rate, in a marketable amount. A broker, if quoting only the basis of one or two names shall qualify his quotation, e.g., 'one small offeror – only two names paying'. The broker should indicate whether prices are firm or simply for guidance and, if requested by the principal, should be willing to indicate the amount involved. Further he should confirm with banks at reasonable intervals that their interest is still firm.
It is the responsibility of the principal to ensure the broker is made aware of any circumstances which materially affect the validity of the order placed with the broker.(g) A principal, by selecting to 'put a broker on' is deemed to have a serious intention of completing business, and should allow the broker sufficient time to quote the principal's interest to a potentialcounterparty with a view to doing business. In quantifying a 'sufficient time' factors such as the currency, market conditions and communication systems employed, should be taken into account;(h) A broker is held responsible for advising a principal on every occasion that hisdeposit rates are being checked by a potentialcounterparty . This action should help minimise the occasional difficulties that arise when a principal 'takes a broker off' simultaneously to having his prices checked.
Whenever possible and subject to market conditions, a bank in the deposit market should, before he 'takes a broker off' either a single order or several orders, check whether the broker is already committed to deal on his behalf;(i) 'Under reference' orders placed by banks with brokers without having first being placed as 'firm', are to be discouraged. Firm orders which are later qualified by a request to 'put me under reference' indicate a principal's weakening desire to conclude business with that broker. 'Under reference' orders should not be left with a broker for more than a few minutes. A principal must ensure that the broker has the opportunity frequently to check the validity of an 'under reference' order;(j) No person may visit the dealing room of any broker or any bank except with the consent of a Manager or Director of that institution. A broker shall not in any circumstances permit any visitors from a bank to deal for his bank in the dealing room of that broker;(k) Management of banks should issue clear directions to staff on the monitoring, control and recording of 'after hours' dealing from premises other than bank dealing rooms. All deals of this kind must be properly authorised and confirmed;(l) A bank dealer shall not apply unfair pressure upon a broker to pass information which it would be improper for the broker to pass. Unfair pressure would for example include a statement made in any form that a failure to co-operate would lead to reduction in the business given by the principal or by other principals to the broker;(m) A principal should not place an order with a broker solely with the intention of finding out the name of a counterparty, who can be contacted directly with a view to concluding further deals;(n) Management of banks and brokers should lay down clear directions to staff on the extent to which dealing in foreign exchange ordeposit for personal account is permitted. Any such dealing must be strictly controlled;(o) Care should be taken over the positioning of 2-way loudspeakers in dealing rooms; and(p) Brokers and dealers should inform each other if conversations are being recorded. The use of such equipment is encouraged as a sensible means of enabling any subsequent disputes and differences to be settled.Amended April 2011
Amended January 2011
October 2007BC-2.4 BC-2.4 Passing of Details
BC-2.4.1
The passing and recording of details form an essential part of the transaction and the possibility of errors and misunderstanding is increased by delay and by the passing of details in batches. Brokers should pass details verbally, and principals should be prepared to receive them, normally within a few minutes after deals have been concluded.
Amended January 2011
October 2007BC-2.4.2
When arranging and passing details on forward contracts in foreign exchange, banks and brokers must ensure that the rate applied to the spot end of the transaction bears a close relationship to the spot rate at the time the deal was concluded.
October 07BC-2.5 BC-2.5 Confirmations
BC-2.5.1
Written confirmation by a broker is the final check on the details of the transaction. The handling of confirmations must take account of the desire of brokers to have a realistic time-limit placed on their liability for differences. There is an obligation on recipients to check such confirmations. Initial confirmations should be sent out by telex without delay, and at the latest by close of business on the same working day. They should be followed up by written confirmation, normally hand-delivered and receipted before close of business on the following working day.
October 07BC-2.5.2
Banks must check all confirmations carefully upon receipt so that discrepancies shall be quickly revealed and differences minimised. Principals shall also make enquiries of brokers about particular confirmations which have not been received within an appropriate time (as above) or about any changes in contract terms.
October 07BC-2.5.3
In the case of deals where a bank pays against telex confirmation, the broker remains liable for differences until receipt of written confirmation is provided by the bank.
October 07BC-2.6 BC-2.6 Differences and Disputes
BC-2.6.1
The majority of differences payable by brokers arise from errors occurring in payment or repayment instructions. They also arise from a broker, having in good faith indicated a firm rate, being unable to substantiate his quotation.
October 07BC-2.6.2
Any differences deemed payable by a broker to a bank (or by a bank to a broker) should be settled as soon as possible. The parties should provide each other with documents, setting out the exact details of and circumstances surrounding the deal.
October 07BC-2.6.3
It is acknowledged that differences are sometimes paid by 'points'. The management of broking firms should always ensure that this practice is strictly controlled and monitored.
October 07BC-2.6.4
All differences settled by direct payment should be advised in writing by the broker to the Director of Reserve Management, CBB, (copied to the Bank) indicating the amount paid and the other party's name. The CBB reserves the right to ask for further information at its discretion.
October 07BC-2.7 BC-2.7 Conduct
BC-2.7.1
The CBB will regard any breaches of the rules stated below regarding gifts, favours, betting and entertainment unacceptable.
October 07Gifts and Favours
BC-2.7.2
No broker, including management, employees and other persons acting on their behalf, shall offer or give inducements to dealing room personnel of a bank. No gifts or favours whatsoever shall be so given unless the broker is satisfied that the person responsible for dealing operations in the bank concerned has been informed of the nature of the gift or favour.
October 07BC-2.7.3
Employees of banks shall not solicit inducements from brokers, nor shall they receive unsolicited gifts or favours from brokers without informing the person responsible for dealing operations in the bank concerned of the nature of such gifts or favours.
October 07Bets
BC-2.7.4
The making or arranging of bets between brokers and banks dealers is totally unacceptable.
October 07Entertaining
BC-2.7.5
It shall be the responsibility of management in both banks and brokers to ensure that entertainment offered in the course of business does not exceed reasonable limits and does not infringe standards of propriety and decency.
October 07BC-2.8 BC-2.8 Responsibility
BC-2.8.1
Brokers shall be responsible for ensuring that:
(a) Their principals understand fully the limitations of the brokers' responsibilities for business and market conducted;(b) All their principals understand that they are required to conform, where appropriate, to the Code of Conduct;(c) Their staff carrying out transactions on behalf of principals are adequately trained both in the practices of the market-place and in the firm's responsibilities to principals; and(d) The CBB is notified of any changes in broking staff, in accordance with CBB requirements.Amended January 2011
October 2007BC-2.8.2
Bankers shall be responsible for ensuring that:
(a) Their dealing staff are adequately trained and supervised in the practices of the market (the requirement of this Code of Conduct should be fully understood by all staff involved in foreign exchange and currencydeposit operations);(b) [This Subparagraph was deleted in April 2022];(c) Their staff understand that the ultimate responsibility for assessing the creditworthiness of a borrower or lender lies with the bank and not the broker;(d) Brokerage is normally payable at the end of the month in which the money passes, or otherwise by special arrangement; and(e) There is no pressure on brokers to reduce charges below the approved minimum rates.Amended April 2022
Amended January 2011
October 2007BC-2.9 BC-2.9 Market Regulations – Foreign Exchange
Currencies
BC-2.9.1
A broker will, in response to an enquiry from any bank, make known the currencies which it elects to quote and to make a service in.
October 07BC-2.9.2
Each broker shall provide, on request by a bank taking a service, general market information on all currencies handled (whether for the time being active or not) by that broker.
October 07Brokerage
BC-2.9.3
Brokers shall comply with the minimum scales of brokerage charges (see Section BC-4.6) agreed in consultation with the Bankers' Society Council from time to time, or laid down by the CBB.
In cases where there is no established minimum scale of brokerage charges, no deals shall be transacted until a rate has been agreed. Rates of brokerage in these cases should be agreed in advance, and only by Directors or senior managers on each side, and in no event by the dealers themselves.
October 07BC-2.9.4
Put-through deals may be net of brokerage.
October 07BC-2.9.5
Brokerage should be expressed in US dollars.
October 07BC-2.10 BC-2.10 Market Regulations – Currency Deposits
Brokerage
BC-2.10.1
Brokers shall comply with the minimum scales of brokerage charges (see Section BC-4.5) agreed in consultation with the Bankers' Society Council from time to time, or laid down by the CBB. In cases where there is no established minimum scale of brokerage charges, no deals shall be transacted until a rate has been agreed. Rates of brokerage in these cases should be agreed in advance, and only by Directors or senior managers on each side, and in no event by the dealers themselves.
Amended: July 2015
October 07BC-2.10.2
Calculation of brokerage on all currency deposits shall be worked out on a 360-day year, or a 365-day year, according to normally accepted market practice. For example, Sterling and Kuwaiti Dinars are on a 365-day year basis, and US dollars and Saudi Riyals are on a 360-day year basis.
Brokers' confirmations and statements should express brokerage in US dollars.
October 07BC-2.10.3
In a forward-forward
deposit (e.g. one month against six months) the brokerage to be charged shall be on the actual intervening period (i.e. in the above example - five months).October 07BC-2.10.4
Put-through deals may be net of brokerage.
October 07BC-2.11 BC-2.11 Market Discipline
BC-2.11.1
As part of its responsibility for supervising the conduct of brokers and dealers in the foreign exchange and currency markets, the CBB may, at its discretion:
(a) Investigate any complains concerning the conduct of brokers and dealers;(b) Investigate possible breaches of this Code by brokers and banks; and/or(c) Take such further action as it considers appropriate, in the light of all the relevant facts.Amended January 2011
October 2007BC-2.12 BC-2.12 Adjustment of Value Dates in Case of Unexpected Banking Closing Dates
BC-2.12.1
Spot transactions and outrights:(a) Original agreed upon value date for identical currency sold and purchased: extension of value date to next possible value date for both currencies; and(b) Original agreed upon value date for non-identical currency sold and purchased (for instance, Friday for US Dollars and Saturday for Gulf Currencies): as unexpected banking closing days for non-Middle Eastern currencies are unlikely - value of non-Gulf currencies unchanged and value of Gulf currency on the next working day, adjusting spot or outright rate taking into account interest rate difference between the two currencies.For pure outrights it would be advisable to adopt the same system as for
swaps ; however, impliedswap difference is not visible or identical for both parties.• It can be assumed that, if the above rule would cause substantial losses for one party, dealers will re-negotiate a new rate, on a case-by case basis; if no agreement can be reached, the CBB, - as final Arbitrator - will fix the interest rates, prevailing at that time, which will be used to calculate the points difference, with which the outright rate will be adjusted.It is possible that payment instructions for counter-currency are already sent out and cannot be cancelled; in that case the paying party should be entitled to the proceeds of the unexpected use of funds by the receiving party.
Amended April 2011
Amended October 2009
October 2007BC-2.12.2
Deposits :(a) Maturing on unexpected closing day(s): Extendingdeposit to next possible value date; profit to be calculated in the extended period at original agreed upon profit rate;(b) Starting on unexpected closing day(s) and maturing after unexpected closing day(s): Starting date will be extended to next possible value date without altering maturing date; profit to be calculated on the shortened period at the originally agreed upon profit rate; and(c) Starting on unexpected closing day(s) and maturing before or on next possible value date: Cancellation of deal:1. If payment instructions are already sent out by lender and can only be executed on next possible value date, and cannot be cancelled, borrower ensures repayment will be done on the same next possible value date. If in that case borrower cannot repay because of deadline of receiving instructions by correspondent on same next possible value day, parties negotiate a new deal starting at value date of payment by lender and maturing according to new deal.2. If payment instructions are already sent out by lender for capital and by borrower for capital and profit both payments will be executed at same next possible value date, lender should refund to borrower unearned profit.Amended April 2011
Amended October 2009
October 2007BC-2.12.3
Swaps :(a) Maturing on unexpected closing day(s): Extendingswap to next possible value date for both currencies, adjustingswap difference according to formula -swap difference divided by original number of days and multiplied by new number of days;(b) Starting on unexpected closing day(s) and maturing after unexpected closing day(s): Starting date for both currencies would be extended to next possible value date for both currencies without altering maturing date, adjustingswap difference according to Formula under Paragraph BC-2.12.3(a); and(c) Starting on unexpected closing day(s) and maturing before or on next possible value date: Deals are cancelled.If starting or maturing date of original
swap under Paragraph BC-2.12.1 or Paragraph BC-2.12.2 is substantially different, per currencyswap difference has to be recalculated in mutual agreement between the dealers;• It is possible that payment instructions for counter currency are already sent out and cannot be cancelled - in that case paying party should be entitled to the proceeds of the unexpected use of funds by the receiving party;• It is possible that payment instructions for Gulf currencies are already sent out and cannot be cancelled - in these cases rules according to Paragraph BC-2.12.2(c)-1 and Paragraph BC-2.12.2(c)-2 should be applied.Amended April 2011
Amended January 2011
October 2007BC-3 BC-3 Client Confidentiality
BC-3.1 BC-3.1 Disclosure of Information about Individual Accounts
BC-3.1.1
In accordance with Article 117 of the CBB Law, banks must not publish or release information to third parties concerning the accounts or activities of their individual customers, unless:
(a) Such information is requested by the CBB or by an order from the Courts;(b) The release of such information is approved by the customer concerned; or(c) It is in compliance with the provision of the law or any international agreements to which the Kingdom is a signatory.Amended April 2011
Amended January 2011
October 2007BC-4 BC-4 Customer Account Services and Charges
BC-4.1 BC-4.1 Minimum Balance and Charges on Accounts [This Section was deleted in April 2018]
BC-4.1.1
[This paragraph was deleted in April 2018].
Deleted: April 2018
October 07BC-4.1.2
[This paragraph was deleted in April 2018].
Deleted: April 2018
October 07BC-4.2 BC-4.2 Disclosure of Charges by Retail Banks
BC-4.2.1
In order to improve
customer awareness and enhance transparency of retail banks charging structures, all retail banks must display in a prominent position, in Arabic and in English, by notice in their banking halls (both head offices andbranches ), a list of all applicable charges.Amended: July 2015
Added: October 2012BC-4.2.2
Retail banks must also ensure that each customer is in receipt of their current list of charges, by enclosing such a list with account statements and displaying such charges on their websites. The list must specify standard charges and commissions that will be applied by the retail bank to individual services and transactions and to specific areas of business. Such notification must be made in instances where there are changes in the fees or when new fees are introduced.
Amended: April 2013
Added: October 2012Credit Agreements
BC-4.2.3
A retail bank must make available, at their premises, information leaflets containing information on the key products and services in respect of credit agreements including:
(a) The Annual Percentage Rate of profit, hereinafter referred to as APR and defined in Paragraph BC-4.2.10, for instalment financing facilities only; and(b) The annual profit rate on credit facilities (as referred to in Paragraph BC-4.2.14), commission, fees, one-off charges, expenses on behalf of third parties, exchange rates applied and any other charges.Amended: July 2015
Amended: April 2014
Added: October 2012BC-4.2.4
For the purpose of this Section, the following definitions apply:
(a) Credit agreement — Means all instalment financing agreements and lease agreements, as well as credit cards, revolving and other types of credit offered tocustomers ;(b)Customer — Means both the debtor and the guarantor (if any) and/or any potential debtor or guarantor;(c) Conspicuous notice — Means a written statement in both Arabic and English languages which is easily visible and legible and displayed in all retail banks' premises open to the public (head offices andbranches ), and via means such as websites, newspapers and other press notices;(d) Nominal annual rate — Means the profit rate charged to thecustomer , calculated by dividing the amount of the total profit by the amount of the funds provided to thecustomer and excluding any other charges, the results of which is divided by the number of years of the term of the credit agreement;(e) Outstanding credit amount — Means the amount outstanding under a credit agreement representing the amount of funds provided to thecustomer and any other charges that are included as part of the principal amount to be repaid by thecustomer over the duration of the agreement less any repayment made related to the principal amount at a specified date; and(f) Principal — Means the amount of credit received plus any other charges, the total of which is subject to profit.Amended: July 2015
Amended: April 2014
Added: October 2012General Rules
BC-4.2.5
Where a
customer has a credit agreement with a retail bank, retail banks must:(a) Duly inform theircustomers in accordance with this Module about the nature and the characteristics (including relevant risks) of the credit agreements and services offered by them, and about the terms and conditions governing such agreements;(b) Periodically inform, in writing, theircustomers on the evolution and the terms of any credit agreement signed, throughout the duration of the contract (refer to Paragraphs BC-4.2.24 and BC-4.2.25);(c) Respond in due time, tocustomers' requests for the provision of information and clarifications regarding the application of contractual terms (refer to Paragraphs BC-4.2.29 and BC-4.2.30);(d) Appoint acustomer complaints officer and publicise his/ her contact details (refer to Chapter BC-10 on Customer Complaints Procedures);(e) Ensure the proper training of employees involved in interfacing and providing specific information tocustomers ;(f) Disclose information required in this document in both Arabic & English languages;(g) Show clearly the APR for instalment facilities and the annual rate of profit for other credit facilities on the credit agreement application and 'key terms disclosure' document; and(h) Disclose all information in a clear and readable form (refer to BC-4.2.6).Amended: July 2015
Added: October 2012BC-4.2.6
Marketing of customer credit agreements, advertising and sales promoting credit agreements, irrespective of the media used (SMS, Internet, printed material, telephone solicitation) must be clear and understandable, must be true and not misleading and meet the basic customer information requirements as defined in this Module. Retail banks are also asked to take special care to ensure that the content of any advertising material does not mislead or deceive the public in any way.
Amended: July 2021
Added: October 2012BC-4.2.7
Retail banks must avoid the use of 'small print' which might make potentially important information less visible.
Amended: July 2015
Added: October 2012Minimum Disclosure Requirements
BC-4.2.8
Retail banks must make:
(a) Public disclosure regarding credit agreements; and(b) Disclosures tocustomer(s) , whether these be during the course of the initial negotiation of the credit agreement or during the term of the facility being offered.Amended: July 2015
Added: October 2012Public Disclosure Requirements for all Credit agreements
BC-4.2.9
The following public disclosures must be made by
conspicuous notice for all types of credit agreements:(a) Any obligation on the part of the customer to open a deposit account with the retail bank as a condition of granting the credit agreement;(b) Any late payment charges;(c) The level of fees for any special services rendered, or one-off expenses, as well as any amount collected by retail banks on behalf of third parties;(d) Any fees or charges payable under any linked or mandatory contract entered into as a condition for the granting of the credit agreement, such as payment protection insurance; and(e) Any other charges not included above.Added: October 2012Additional Public Disclosure for Instalment Financing Facilities
BC-4.2.10
In addition to the requirements under Paragraph BC-4.2.9, retail banks must publicly disclose by
conspicuous notice for instalment financing facilities:(a) The current APR as calculated using the APR methodology in Paragraph BC-4.2.31. The APR displayed must be calculated based on the following scenarios. In case of consumer finance, amount borrowed is BD10, 000 for a 7-year term and for housing facilities, BD100,000 for 25 years;(b) The APR must be broken down as follows:(i) The annual nominal profit rate payable on the instalment financing;(ii) Administration/handling fees;(iii) In the case of Ijara contracts or deferred purchase contracts, any fees for purchasing the asset; and(iv) Any other mandatory charges (contingent costs are excluded); and(c) The terms and conditions for early repayment, partial or full, of the credit agreement, or for any change in the terms and covenants of the credit agreement, as well as any relevant charges (where permitted) and the way in which these are calculated.Amended: April 2014
Added: October 2012BC-4.2.11
The APR is a standard measure that allows customers to compare total charges for instalment financing facilities on a like-for-like basis. The APR allows the customer to compare the total charge for credit over differing periods (e.g. — two versus three years) or offered by different retail banks with differing payment profiles and taking into account the payment of any other fees payable as a condition of the contract, such as administration fees or insurance premiums.
Added: October 2012BC-4.2.12
Any advertising through any media means of instalment financing facilities, offered by the retail banks must specify only the APR (including all fees and charges) and no other rates, i.e. nominal, base, flat or rates by any other names.
Added: October 2012BC-4.2.13
For the purposes of Paragraph BC-4.2.10, the disclosures can be provided as one APR or a range of APRs for retail banks that provide instalment financing to different segments and products. A retail bank may have different customer segments with different risk profiles, for whom the APR offered on the same product may vary. However, the disclosures must comply with the scenarios outlined in Subparagraph BC-4.2.10 (a).
Added: October 2012Additional Public Disclosure for Credit Agreements other than Instalment Financing Facilities
BC-4.2.14
In addition to the requirements under Paragraph BC-4.2.9, retail banks must publicly disclose by
conspicuous notice for Credit Agreements other than instalment financing facilities listed below:(a) For credit cards, the monthly and the annual rate of profit plus other fees and charges;(b) [This Subparagraph was deleted in April 2014];(c) [This Subparagraph was deleted in April 2014]; and(d) For instances where thecustomer exceeds contractual credit lines, the terms and any relevant charges.Amended: July 2015
Amended: April 2014
Added: October 2012BC-4.2.15
For credit agreements other than instalment financing facilities, any advertising through any media means must specify only the annual profit rate and other fees and charges.
Added: October 2012BC-4.2.16
For credit agreements other than instalment financing facilities, banks are prohibited from using the term APR in any advertising.
Added: October 2012Disclosure to Customers: Initial Disclosure Requirements of Key Terms
BC-4.2.17
Retail banks must make clear to potential customers, prior to entering into a credit agreement, all relevant key terms of the agreement in the credit agreement application and 'key terms disclosure' document, in order for them to clearly understand the characteristics of the services and products on offer. Retail banks must also comply with the disclosure requirements under the "Code of Best Practice on Consumer Credit and Charging" (see Appendix CM-2).
Added: October 2012BC-4.2.18
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: October 2012BC-4.2.19
For credit agreements where a retailer extends credit to purchase goods or services by operating in agreement with retail banks, all conditions of the credit agreement must be disclosed in the credit agreement application and 'key terms disclosure' document, including when profit will begin to accrue, along with information on any indirect charges.
Added: October 2012BC-4.2.20
Credit agreements, referred to in Paragraph BC-4.2.19, must be finalised with an employee of the retail bank, whether located at the premises of the retailer or at the premises of the retail bank providing the credit. Profit must in no event be charged before the disbursement of funds.
Added: October 2012BC-4.2.21
Retail banks must inform the customers on the nature of their contractual relationship with the retail outlet and the customers' rights arising as a result of this relationship.
Added: October 2012BC-4.2.22
In addition to the initial disclosure of key terms noted in Paragraphs BC-4.2.17 to BC-4.2.21, the "key terms disclosure" document must at the time of signing the credit agreement, amongst other things, make clear:
(a) The detailed breakdown of the payments:(i) Theprincipal amount and profit per month of the financing facility and the maturity of the credit/financing agreement;(ii) The net amount provided to thecustomer after deducting or applying any upfront or other charges;(iii) The total profit payments andprincipal repayment for the term of the credit agreement; and(iv) The total administration/handling fees and any other fees and charges spread over the term of the credit agreement.(b) The APR and annual nominal rate as defined in Paragraph BC-4.2.31;(c) Whether the rate of profit is fixed or can be varied, and under what circumstances;(d) The basis on which profit is charged (e.g. actual reducing balance) and applied to the account (e.g. monthly or quarterly compounding) and whetherprincipal repayments are taken into account in the calculation, together with an illustration of the calculation method;(e) The detailed costs associated with alternative arrangements for extending additional credit or early repayments, whether partial or full, of amounts due including the treatment of remaining profit and the payment of premium for takaful;(f) Any late payment charges;(g) The annual profit rate and credit limit being offered for credit agreements such as credit cards; and(h) Any other charges related to the credit agreement not included above.Amended: January 2019
Amended: July 2015
Amended: April 2014
Added: October 2012BC-4.2.23
Retail banks are free to design the layout and wording to be used in their 'key terms disclosure' document, as they see fit, providing they contain the information specified in Paragraph BC-4.2.22. The CBB will monitor compliance with the spirit as well as the letter of the requirements in this Chapter.
Added: October 2012Disclosure to Customers: During the Term of the Credit Agreement
BC-4.2.24
Retail banks must, at the time of signing the credit agreement, give the clients information on the payment schedule of the credit agreement, including the breakdown of principal, profit and other charges per month for the whole life of the facility. Information must be given, free of charge, at least on a semi-annual basis, unless the period of financing is shorter or where there exists a prior agreement on a more frequent basis.
Amended: January 2019
Amended: April 2014
Added: October 2012BC-4.2.25
In addition to the requirements under Paragraph BC-4.2.24, when credit is granted through credit cards, monthly statements must be provided and include information on minimum payment.
Amended: April 2014
Added: October 2012BC-4.2.25A
Retail banks licensees must, when billing their customers, reflect the card transactions without rounding off the amounts in Fils. Retail banks licensees must collaborate with acquirers and Visa/MasterCard network schemes to ensure that there is no rounding off in any transaction irrespective of the currency of the transaction.
Added: January 2019Variation Disclosures Requirements
BC-4.2.26
Retail banks must disclose to the customer in advance, either collectively or individually, all relevant changes or variations to a credit agreement. The circumstances in which a customer must be provided with variation disclosures are:
(a) If both the retail bank and customer agree to change the credit agreement; in this case, the customer must be provided in writing with full particulars of the change, at least seven calendar days before it takes effect; and(b) If the credit agreement gives the retail bank power to vary fees or charges, the amount or timing of payments, the profit rate or the way profit is calculated, and the retail bank decides to exercise that power, the customer must be provided with full particulars of the change, including an updated schedule of the total profit payments andprincipal repayment for the remaining term of the credit agreement, at least thirty calendar days prior to the date the change takes effect. Such notice is to enable the customer to decide whether to accept the new terms or terminate the agreement by settling the outstanding credit amount, in accordance with relevant provisions therein, which must have been stated in a clear and understandable manner.Added: October 2012BC-4.2.27
Any increase of the profit rate or the amount of any fee or charge payable under a credit agreement, must be disclosed publicly, by
conspicuous notice , at least thirty calendar days prior to the date the change takes effect by:(a) Displaying the information prominently at the retail bank's place of business; and(b) Posting the information on the retail bank's website.Added: October 2012Early Repayment
BC-4.2.28A
All requests for early repayment must satisfy the condition requiring the
Islamic bank licensees to restrict the profit on the transaction to one month profit; i.e. the month in which the actual early repayment takes place. This is effective from 1st October 2011.Request Disclosure
BC-4.2.29
The retail bank must provide a reply to any request for disclosure within fifteen business days of receiving the request.
Added: October 2012BC-4.2.30
Disclosures requested by the customer may include but are not limited to any or all of the following information about a credit agreement:
(a) The effect of part prepayment on the customer's obligations;(b) Full particulars of any changes to the agreement since it was made;(c) The amount of any fee payable on part prepayment and how the fee will be calculated;(d) The amount required for full prepayment on a specified date and how the amount will be calculated;(e) The outstanding credit amount, including any outstanding profit charge (calculated at the date the disclosure statement is prepared);(f) The amount of payments made or to be made or the method of calculating the amount of those payments;(g) The number of payments made or to be made (if ascertainable);(h) How often payments are to be made;(i) The total amount of payments to be made under the agreement, if ascertainable; and(j) A copy of any disclosure statement that was or should have been provided before the request was made.Added: October 2012BC-4.2.31
The APR must be calculated using the following methodology:
K=m K'=m' Σ Ak
(1 + i) tk =Σ A'k'
(1 + i) tk'K=1 K'=1 Added: October 2012BC-4.2.32
The meaning of letters and symbols used in the above formula are:
K is the number identifying a particular advance of credit;K' is the number identifying a particular instalment;Ak is the amount of advance K;A'k' is the amount of instalment K;Σ represents the sum of all the terms indicated;m is the number of advances of credit;m' is the total number of instalments;tk is the interval, expressed in years between the relevant date and the date of advance K;tk' is the interval expressed in years between the relevant date and the date of instalment K';i is the APR, expressed as a decimal.Added: October 2012BC-4.2.33
For the purpose of this Chapter, the 'relevant date' is the earliest identifiable date on which the customer is able to acquire anything which is the subject of the agreement (e.g. delivery of goods), or otherwise the 'relevant date' is the date on which the credit agreement is made.
Amended: April 2014
Added: October 2012BC-4.3 BC-4.3 Accounts Held for Clubs and Societies in Bahrain [This Section was deleted in January 2013 as requirements are covered under Section FC-1.6]
BC-4.3.1
[This Paragraph was deleted in January 2013].
Deleted: January 2013
BC-4.3.2
[This Paragraph was deleted in January 2013].
Deleted: January 2013
BC-4.3.3
[This Paragraph was deleted in January 2013].
Deleted: January 2013
BC-4.4 BC-4.4 Current Accounts
BC-4.4.1
Retail bank licensees levying fees on their low-balance customer current accounts, are required by the CBB to apply such fees to average balances when these fall below a prescribed level during a specified period.
Amended January 2011
October 2007BC-4.4.2
In order to prevent incidences of returned cheques due to maintenance of low-balance current accounts, the banks may convert some low-balance and/or inactive current accounts to savings accounts.
October 07BC-4.5 BC-4.5 Brokerage Fees
BC-4.5.1
The purpose of the contents of this Section is to set out the scale of brokerage fees effective for all banks in Bahrain.
Amended: October 2012
October 07BC-4.5.2
The scale of fees is the result of discussion and consultation between The Bankers' Society and the Bahrain Money Brokers.
Amended: October 2012
October 07BC-4.5.3
For the list of brokerage fee, see Appendix BC-6.
October 07BC-4.6 BC-4.6 Notification to the CBB on Introduction of New or Changes to Customer Products and Facilities
BC-4.6.1
[This Paragraph was deleted in October 2016.].
Deleted: October 2016
Amended January 2011
October 2007BC-4.6.2
All Islamic retail banks licensed by the CBB are required to notify the CBB before the introduction of any new or expanded customer products and facilities. The CBB will respond to the concerned bank within one week of receipt of the notification if it has any observations on the new product.
Amended: October 2016
Amended January 2011
October 2007BC-4.6.2A
The reference to changes in existing product/service refers to changes that will have an additional financial cost to the customers.
Added: October 2016BC-4.6.3
[This Paragraph was deleted in October 2011].
Deleted: October 2011BC-4.7 BC-4.7 Dealing with Inheritance Claims
BC-4.7.1
Licensees must ensure that no transfer of legal ownership of financial assets is made until they have sight of documentation (which must be duly copied for their records) from the Ministry of Justice and Islamic Affairs confirming the entitlement of a person or persons to inherit from the deceased. Such documentation must be complied with precisely. Particular care must be taken where minors (children) or other people lacking full legal capacity are named as inheritors.
Amended October 2012
Amended January 2011
October 2007BC-4.7.2
Without prejudice to Paragraph BC-4.7.1, financial assets may be distributed to the order of an individual provided that individual is named in a mandate, duly certified by the Ministry of Justice and Islamic Affairs, as having the permission to act on behalf of all of the inheritors.
Amended October 2012
Amended October 2011
Amended January 2011
October 2007BC-4.8 BC-4.8 Compliance with the Code of Best Practice on Consumer Credit and Charging
BC-4.8.1
Islamic bank licensees must comply with the Code of Best Practice on Consumer Credit and Charging as attached in Appendix CM-2 throughout the lifetime of their relationship with acustomer .Amended: July 2015
Added: April 08BC-4.8.2
Islamic bank licensees must take responsibility for compliance with the above requirements by all persons carrying outregulated banking services on their behalf.Islamic bank licensees must put in place appropriate measures across all their business operations and distribution channels to ensure compliance with the requirements of the Code of Best Practice on Consumer and Charging where relevant.Amended: October 2012
Added: April 08BC-4.9 BC-4.9 Transaction Advice
BC-4.9.1
All retail banks must provide at no charge, a transaction advice service for its customers (natural persons) through short message services (SMS) on all types of withdrawals/deductions from customer's account and any credit and pre-paid card transaction, including, but not limited to:
(a) ATM withdrawals;(b) Internal and external transfers from the customer's account/credit and pre-paid cards;(c) Withdrawals through a bank counter;(d) Point of sale (POS) transactions;(e) Any withdrawals and payments from the customer's account and credit and pre-paid-cards through mobile, internet or other electronic means;(f) Any repayment of outstanding credit card balances; and(g) Any other withdrawals or deductions from the customer's account and credit and pre-paid cards.Amended: October 2016
Added: October 2011BC-4.9.2
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: October 2011BC-4.10 [This Section has been left blank.]
BC-4.11 BC-4.11 Donations to NGO Accounts
BC-4.11.1
All retail banks must waive any administrative fees when transferring donated funds from the donor accounts to the accounts of NGOs registered with the Ministry of Social Development (MoSD), provided that a valid funds collection license is presented to the bank by the concerned NGO.
Added: April 2014BC-4.11.2
All retail banks must refrain from transferring any funds, collected by way of donations or fund raising, to the account of any society or club where the NGO has not submitted a valid written fund collection license to the bank, as required under Paragraph BC-4.11.1.
Added: April 2014BC-4.11.3
Banks must notify the CBB in instances where donated funds have been received and no valid license was submitted. The CBB will then inform the MoSD accordingly.
Added: April 2014BC-4.11.4
NGOs, including societies and clubs, registered with the MoSD, and having fund collection licenses, are listed in the NGOs fund collection directory, available on the website of the MoSD.
Added: April 2014BC-4.11.5
NGOs registered with the MoSD and holding a fund collection license must present such license to the concerned banks in order for the related administration fee to be waived.
Added: April 2014BC-4.11.6
Administration fees will be waived by the banks only for the period of the validity of the funds collection license.
Added: April 2014BC-4.12 BC-4.12 Credit Check Reports
BC-4.12.1
Where a pensioner has been requested to produce a credit report by the Social Insurance Organization (SIO) to establish his/her credit standing, Islamic retail bank licensees must not levy any administrative charges.
Added: October 2015BC-4.13 BC-4.13 Fees and Charges for Services Provided to Individuals
BC-4.13.1
Retail banks must comply with the caps on fees and charges for standard services provided to individuals effective from 1st May 2018 as per the table in Appendix BC-8 in Part B of the CBB Rulebook Volume 2.
BC-4.13.2
Fees and charges on withdrawals done through bank counters for amounts below the ATM withdrawal limit must be waived for all of the following customers:
(a) Orphans;(b) Widows;(c) Pensioners;(d) Individuals receiving social subsidies from Ministry of Labor and Social Affairs;(e) Students; and(f) Bahraini nationals with a monthly salary below BD 250.Added: January 2019BC-4.14 BC-4.14 Fees and Charges for Services Provided to Companies under Formation
BC-4.14.1
Islamic retail bank licensees may charge companies under formation a fee capped at BD 10 for the issuance of letter of confirmation of capital maintained with the bank regardless of the capital amount deposited and maintained.Added: October 2018BC-4.14.2
Islamic retail bank licensees must not charge any setup fees for opening bank accounts for companies under formation.Added: October 2018BC-4.15 BC-4.15 Profit/ Fees on Credit Card Transactions
BC-4.15.1
Islamic retail bank licensees must comply with the following requirements with regards to charging profit/ fees on credit card statement dues:(a) Profit/ fees must not be charged if the customer pays the full amount billed and due before or on the due date specified in the monthly credit card statement except for cash withdrawal transactions;(b) Profit/ fees must not be charged on partial payments made by the customer on or before the due date specified in the monthly credit card statement against credit card amount billed and due;(c) Profit/ fees on cash withdrawal transactions must be computed from the date of the transaction ("transaction date");(d) Profit/ fees on credit card amounts billed but unpaid on or before the due date must be computed from the statement cycle date; and(e) Profit/ fees must not be charged on outstanding profit/ fees amounts and other charges due from the customer.Added: July 2019BC-4.16 BC-4.16 Profit on credit facilities
BC-4.16.1
Islamic retail bank licensees must not charge profit on credit facilities using a 'monthly flat rate'; they must instead use an effective profit rate based on a reducing balance method.Added: October 2019BC-4.18 BC-4.18 Fund Transfers by Customers of Payment Service Providers (PSP)
BC-4.18.1
Islamic bank licensees that act as acquirers or payment gateways for PSPs, must not charge more than 100 fils in line with the Electronic Fund Transfer System (EFTS) requirements to the customers of PSPs for normal fund transfers made electronically.Added: October 2020BC-4.19 Merchant Fees on Payments to Zakat and Charity Fund
BC-4.19.1
Islamic bank licensees must exempt the Zakat and Charity Fund (“the Fund”) of the Ministry of Justice, Islamic Affairs and Awqaf from merchant fees for payments made to the Fund.Added: April 2021BC-4.20 BC-4.20 Dormant Accounts and Unclaimed Balances
BC-4.20.1
This section sets out the requirements relating to dormant accounts which represents unrestricted investment accounts, restricted investment accounts, current or call accounts which turn dormant due to inactivity or no claim or renewal request being made and unclaimed balances relating to various negotiable instruments such as manager cheques, amounts remaining unpaid to customers relating to their investments or amounts remaining unclaimed for other reasons such as cash not dispensed from ATMs etc.
Added: January 2022BC-4.20.2
Islamic retail bank licensees must establish policies and procedures to deal with dormant accounts and unclaimed balances which must include measures to contact the customer concerned, activation of the accounts where appropriate, return of the moneys to the customer and control measures to prevent frauds and misuse of such accounts.Added: January 2022Dormant Accounts Treatment
BC-4.20.3
Islamic retail bank licensees must treat customer accounts as dormant accounts in the following cases:(a) Current and call accounts, where there have been no transactions initiated by the customer for a period of 12 months; or(b) Unrestricted investment Accounts (savings accounts) with no fixed maturity dates of any type, where there have been no transactions for a period of 24 months; or(c) Unrestricted investment accounts and other accounts which have fixed maturity dates where there has been no claim or renewal request for a period of 6 months from the maturity date.Added: January 2022BC-4.20.4
For the purpose of Paragraph BC-4.20.3 (b), savings certificates with no expected withdrawals and deposit should not be considered as “dormant” unless the
licensee has become aware of non-traceability of the customer and there is evidence for the same.Added: January 2022BC-4.20.5
Islamic retail bank licensees must not treat a customer account as dormant if any one or more of the following criteria are met:a) The customer has other accounts, of any nature, with thelicensee in respect of which there are active transactions initiated by the account holder;b) The account is blocked under the requirements of a relevant competent authority; orc) The account is subject to litigations or constraints from other regulatory authorities or the customer is deceased.Added: January 2022BC-4.20.6
Notwithstanding the requirement under BC-4.20.5,
Islamic retail bank licensees must notify the customer by mail, e-mail or other communication channel, when any of his accounts becomes inactive.Added: January 2022BC-4.20.7
Islamic retail bank licensees must ensure that no withdrawal or transfer or inward clearing cheque is permitted from dormant accounts unless the activation procedures set out in this section are complied with.Amended: July 2022
Added: January 2022BC-4.20.8
Islamic retail bank licensees must comply with the following additional requirements in transactions relating to dormant accounts:(a) Allow electronic and manual transfers to the account;(b) Accrue profit in respect of profit-bearing accounts at rates depending on the terms of the contract between the bank and the customer;(c) Ensure only fees or expenses permitted by CBB is charged, provided, however, that no fee is charged when the account balances become zero;(d) Ensure that an account is closed within six months from the date the account becomes dormant and its balance becomes zero following which, a closure notification is sent to the customer by mail, e-mail or other communication channel;(e) Make attempts to periodically contact the customer through different communication means and such attempts must be documented;(f) Ensure that the movements in dormant accounts are monitored to ensure that such accounts are not being used for money laundering or fraudulent purposes by internal or external parties;(g)Licensees must ensure that any movement in dormant accounts is subject to principles of “four-eyes” or “maker and checker” involving at least one authorised signatory of thelicensee ; and(h) Ensure that changes in respect of the dormant accounts, including movement in balances, change of customer contact details, status etc. are subject to internal audit every six months.Added: January 2022BC-4.20.9
Islamic retail bank licensees must ensure that the terms and conditions of deposit agreements include provisions relevant to Subparagraphs BC-4.20.8 (a) and (d) above.Added: January 2022Activation of Dormant Accounts
BC-4.20.10
To activate a dormant account,
Islamic retail bank licensees must ensure the following:(a) The customer provides thelicensee with a written or electronic request to activate the account stating the reasons for dormancy of the account;(b) The customer submits updated KYC information;(c) Activation of the account is subject to principles of “four-eyes” or “maker and checker” / dual authority checks involving at least one authorised signatory of thelicensee ; and(d) In case of a joint account, the request for activation of the dormant account is signed by the joint accountholders authorised to operate the account unless a valid power of attorney is given.Added: January 2022BC-4.20.11
In case of requests for activation of a dormant account through electronic channels using digital signature, the
Islamic retail bank licensee must check the authenticity of the request and related information, for example, through telephone or video calls, email or other measures to satisfy itself about the authenticity.Added: January 2022Unclaimed Balances
BC-4.20.12
Islamic retail bank licensees must treat the following balances that remain unpaid due to operational or other reasons as unclaimed balances:(a) Unclaimed balances relating to manager cheques, demand drafts, or cashier cheques which have not been presented /claimed during their validity periods;(b) Positive credit card balances relating to credit cards not used for a period of 1 year or more;(c) Unclaimed cash due to failed ATM/POS or electronic transactions for a period of 1 month or more;(d) Dividends that remained unpaid by non-listedIslamic retail bank licensees for a period of 1 year or more; and(e) Unclaimed balances relating to investments, including undistributed profits and accrued profit for a period of 1 year or more.Added: January 2022BC-4.20.13
For purposes of Subparagraph BC-4.20.12 (d), listed companies must follow the guidelines stipulated in Bahrain Bourse Resolution of year 2020, mandating the transfer of unclaimed cash dividends into the Unclaimed Cash Dividends Fund account maintained by Bahrain Clear.
Added: January 2022BC-4.20.14
Islamic retail bank licensees must make attempts to periodically contact the relevant customers or the rightful parties to return the unclaimed balances through different communication means. The licensee must maintain documentary evidence of such attempts.Added: January 2022Reporting
BC-4.20.15
Islamic retail bank licensees must report the particulars of dormant accounts and unclaimed balances in the relevant section of the Prudential Information Return for Islamic Banks ('Form PIRI').Added: January 2022Prohibition of Transfer of Balances
BC-4.20.16
Islamic retail bank licensees must not transfer any of the balances in dormant accounts or unclaimed balances to their income statements.Added: January 2022BC-4.21 Insurance Cover on Financing
BC-4.21.1
The requirements in this Section apply to
Islamic retail bank licensees which seek life or other insurance cover in respect of financing to a borrower. These requirements are effective from 1st April 2024, i.e. all credit exposures that mature or are repaid/prepaid in full on or after 1st April 2024 must be subject to the requirements in this Section.Added: January 2024BC-4.21.2
Islamic retail bank licensees using insurance cover as risk mitigant for its financing to individuals must comply with the following requirements:(a) Credit policies must specify whether thelicensee will bear the cost of insurance cover or if it will recover the cost from the customer;(b) If a customer wishes to buy his own insurance cover, thelicensee must not refuse to accept assignment of such policy, however, thelicensee may require the customer to ensure that the insurance policy terms, duration and features match its requirements;(c) If insurance is arranged by thelicensee for its customer, the cost recovered from the customer must be the actual cost paid by thelicensee to the insurance provider;(d) The insurance cost recovered from the customer, in the case of group insurance cover, must not exceed the proportionate aggregate cost payable to the insurance company attributable to the credit facility.Licensees must, on an annual basis, evaluate the insurance costs, which must be based on the actual insurance premiums levied by the insurer for the purpose of determining the insurance cost to be recovered for new facilities. At maturity of the financing or at the point of early repayment, thelicensee must refund any excess insurance cost amount collected;(e)Licensee must not receive any commission, referral fees or any other fees from the insurance provider and/or receive any commission from the borrower;(f) Full disclosure with respect to the insurance arrangement (whether individual or group insurance cover), must be made to the customer prior to signing the financing agreement regarding:
(i) The terms of the insurance coverage and name of the insurance provider;(ii) Benefits and exclusions;(iii) Need for medical examinations, underlying illnesses not covered and the implications of health conditions on the insurance cost or the insurance claim;(iv) Payment method for the insurance cost (i.e. one time upfront payment or addition to financing amount and recovered as part of repayment instalments);(v) The insurance premium rate currently applicable and(vi) The basis and method of calculation of the insurance cost at the time of granting of the financing;(vii) Refund/adjustment of insurance cost in the case of early repayment/ pre-payments and top-ups;(g) Customers must be informed in writing if:
(i) There is a change in the insurance provider in the case of individual insurance cover;(ii) There is a possibility of additional costs to be recovered or refunds in case of upfront payments due to changes in insurance premium rates; and(iii) Additional insurance costs would be recovered from the customer if financing repayment instalments are not paid on time; and(h) The statements of account must clearly show the insurance cost as a separate item where applicable.Added: January 2024BC-4.21.3
If
licensees decide to restructure the financing but cannot obtain insurance coverage due to the customer's age or due to a ‘retiree’ status, they must inform the customer in writing about the unavailability of insurance for the extended financing period. In such cases, thelicensee must not demand full repayment of financing by the customer due to the customer’s age.Added: January 2024BC-4.21.4
Licensees ’ credit policy must specify, at a minimum, the following:(a) Disclosures to be made to customers prior to signing of the financing agreement;(b) Age limits, if any, that apply for insurance cover as per thelicensee’s arrangements with the insurer and the options available to customers not meeting the age limits;(c) Measures or implications of default or extension of tenor for any reason, particularly for financing which have an expiry date falling in a higher age bracket at the time of grant of the financing; and(d) Any additional terms that apply to customers who fall within the higher age bracket.Added: January 2024BC-4.21.5
Licensees ’ credit policy must also specify its approach with regard to financing and the corresponding insurance coverage implications for customers who fall within higher age groups (to be defined by the licensee) and those who have retired from employment or will retire during the tenor of the financing.Added: January 2024BC-4.21.6
For the purposes of BC-4.21.5, extension of financing to individuals who are beyond the retirement age should take into account, in addition to other factors, the increases in life expectancy in Bahrain and the general trend in loss ratios. For this purpose,
licensees should agree with their insurer the terms, conditions and procedures in order to meet the needs of individuals above the insurable age of the group financing portfolio and consider measures to be taken in the case of exceptional scenarios such as a customer in the higher age group needing to restructure a facility.Added: January 2024BC-4.21.7
Licensees using group insurance cover must perform a due diligence of the insurance provider at periodic intervals to ensure optimum benefits are obtained for their customers. The due diligence must also involve assessment of various insurance plans and loss ratios.Added: January 2024BC-4.21.8
If the insurance provider is a related party of the
licensee , the insurance cost must not be higher than the market quotes for similar insurance cover.Added: January 2024BC-5 BC-5 Dishonoured Cheques
BC-5.1 BC-5.1 Penalty System for Dishonoured Cheques
BC-5.1.1
The purpose of the contents of this Section is to set out Rules relating to the system of penalising any person, whether natural or corporate in form, (referred to as a 'customer' in this Chapter) whose cheque is:
(a) Presented for payment, but is returned due to insufficient funds being available on his current account, where,(b) In the opinion of the bank on whom the cheque is drawn, such cheque has been issued by the customer in bad faith.Cheques falling within this system are referred to as 'dishonoured cheques'. Due regard must be given by retail banks to the general provisions of Bahrain Law regarding
joint accounts , partnership accounts and accounts in the name of corporate entities, as well as to the customer mandate in each case, to determine how such accounts may be dealt with for purposes of the Rules in this Chapter.Amended October 2012
Amended January 2011
October 2007Procedures to be Followed
BC-5.1.2
On each occasion that a retail bank becomes aware of a dishonoured cheque of one of its customers, that retail bank will send a written warning to the relevant customer informing him/her of the existence of the dishonoured cheque, requesting him/her to immediately make good the insufficiency in his current account in order to clear the cheque. This written warning will also inform the customer of the provisions of this system with regard to dishonoured cheques and abusers of cheques.
October 07BC-5.1.3
On the first working day of each calendar month, each retail bank should provide to the CBB a list of the names, supported with I.D. numbers (CPR or CR numbers (as applicable) for Bahrain
residents , Passport or CR-equivalent numbers (as applicable) for non-Bahrain residents) of those customers to whom one (or more) written warning(s) has been sent in accordance with Paragraph BC-5.1.2 above during the immediately preceding calendar month. This list should specify the number of written warnings relating to dishonoured cheques for each customer of the relevant retail bank for the month in question and shall be in the form set out in Appendix BC-1. Retail banks will be responsible for ensuring the accuracy of all details on their respective lists.Amended: January 2011
October 2009
October 2007BC-5.1.4
Using the lists referred to in Paragraph BC-5.1.3 above, the CBB will prepare a further list (the 'Control List') of those customers to whom two or more written warnings were sent by any one or more retail bank at any time within a maximum period of three consecutive calendar months. The Control List, which will be in the form set out in Appendix BC-2, will specify the name and I.D. numbers of each such customer, the total number of dishonoured cheques for that customer included in the lists referred to in Paragraph BC-5.1.3 above, the name of the relevant retail bank(s) on whose list(s) the customer's name has been included, and other relevant details for retail banks' information and checking in accordance with Paragraph BC-5.1.5 below. Any customer to whom more than two written warnings relating to dishonoured cheques were sent by any one or more retail bank at any time within a maximum period of three consecutive calendar months will be automatically deemed an abuser of cheques for the purposes of Paragraph BC-5.1.7 below.
Amended January 2011
October 2007BC-5.1.5
On the second working day of each calendar month, the CBB will circulate a draft copy of the Control List to retail banks. Retail banks will be requested to check the accuracy of the Control List by reference to the information they have sent to the CBB in accordance with Paragraph BC-5.1.3 above, and to notify the CBB within a maximum period of one week of receiving the list of any inaccuracies on the Control List. The Control List, as amended if appropriate, will be circulated to the retail banks by the CBB on the second working day after it receives all responses from the retail banks. Retail banks will be required to monitor the customers on this Control List to establish whether any one or more of them issued another dishonoured cheque in the instant calendar month. Any retail bank becoming aware of a dishonoured cheque of one or more of its customers on the Control List during this month should notify the CBB of this fact, using the relevant Section in Appendix BC-1, on the first working day of each calendar month.
Amended January 2011
October 2007BC-5.1.6
If the CBB does not receive any notification as contemplated in Paragraph BC-5.1.5 above for a particular customer on the Control List, that customer's name shall be withdrawn from the next issue of the Control List. However, the CBB will monitor the names of customers appearing on the Control List during the three consecutive calendar months falling immediately after the calendar month in which a customer's name is taken off the Control List. If any such customer's name is again reported to the CBB pursuant to Paragraph BC-5.1.3 above at any time during this three-month period,
(a) His name will be returned to the Control List on the date of its next issue if there is only one dishonoured cheque reported in this context; or(b) He will be automatically deemed an abuser of cheques for the purposes of Paragraph BC-5.1.7 below if there is more than one dishonoured cheque reported in this context.If, however, his name is not reported to the CBB in this regard, the CBB will cease its monitoring thereof.
Amended January 2011
October 2007BC-5.1.7
If the CBB does receive notification as contemplated in Paragraph BC-5.1.5 above for a particular customer on the Control List, or if a customer is deemed to be an abuser of cheques within Paragraph BC-5.1.4 or Paragraph BC-5.1.6 above, such customer (herein referred to as an 'abuser of cheques') will be penalised as follows. Using Appendix BC-3, on the second working day of the calendar month following the receipt of the information referred to above, the CBB will circulate a draft list to retail banks. Retail banks will be requested to check the accuracy of this list by reference to the information they have sent to the CBB in accordance with Paragraph BC-5.1.5 above, and to notify the CBB within a maximum period of one week of receiving the list of any inaccuracies on that list. The list, as amended if appropriate, will be circulated to retail banks by the CBB on the second working day after it receives all responses from retail banks, and will direct the retail bank(s) which has/have reported an abuser of cheques to withdraw all cheque books held by that abuser of cheques, and to close such person's current account(s) by transferring any balances therein to saving and/or any other accounts held with that/those retail bank(s). Furthermore, those retail bank(s) will be required not to provide current account facilities to that abuser of cheques for the twelve calendar month period immediately following the date of issue of the relevant list. All other retail banks should, within a maximum period of one month after the issue of the relevant list, also withdraw current account facilities from that abuser of cheques for the same twelve calendar month period. Retail banks will be entitled to recover any amounts due to them from abusers of cheques as a result of compliance with this system by availing of their set-off rights under Bahrain Law.
Amended January 2011
October 2007BC-5.1.8
On Appendix BC-4, the CBB will notify retail banks of those abusers of cheques in respect of whom the twelve calendar month period referred to in Paragraph BC-5.1.7 above has ended, and to whom retail banks may reinstate/offer current account facilities at their discretion.
Amended January 2011
October 2007BC-5.1.9
Nothing in this Directive shall prejudice the rights of banks against customers otherwise existing under Bahrain Law and/or under any particular bank/customer agreement. Furthermore, retail banks will be entitled to the same immunity from prosecution as the CBB for any harm suffered, or alleged to be suffered, by customers as a result of retail banks complying with the Rules in this Chapter.
Amended January 2011
October 2007BC-5.1.10
The Rules in this Chapter may be amended, in whole or in part, from time to time by the CBB. In addition, the CBB may, at its discretion and as it so deems appropriate, issue specific directions to all or any retail banks regarding abusers of cheques or any particular abuser of cheques.
Amended January 2011
October 2007BC-5.2 BC-5.2 General Guidance on Administration of Dishonoured Cheques
BC-5.2.1
Retail banks which wish to issue cheque guarantee cards for an amount not exceeding BD 200 may do so, subject to informing the Director of Banking Services at the CBB of their intention and the arrangements governing the issue of such cards.
Amended January 2011
October 2007BC-5.2.2
Retail banks, generally, should take steps to extend their administrative supervision and control over current account customers (in particular those who are in repeated breach of normally-accepted behaviour), and to stress to account holders the need for an appropriate level of discipline in the usage of cheques.
October 07BC-5.2.3
Retail banks should exercise greater vigilance over borrowers, especially in the area of consumer finance, where such borrowers maintain their current accounts at a bank or banks other than at the lending bank.
October 07BC-5.2.4
The CBB will monitor the incidence of returned cheques on a monthly basis (as stipulated in Section BC-5.1) in order to determine the extent to which such incidence is being reduced or otherwise.
Amended January 2011
October 2007BC-5.3 BC-5.3 Penalty Charges on Dishonoured Cheques
BC-5.3.1
The CBB will impose penalty charges of BD 7 (seven Bahrain Dinars) on each returned cheque for the reasons of 'Insufficient Funds', 'Refer to Drawer', 'Not Arranged For', 'Present the cheque again', and 'Account Closed'. Individual banks will continue to be informed daily of any charges accruing to their accounts. The respective accounts will be debited on the same day.
Amended: July 2017
Amended: October 2013
Amended January 2011
October 2007BC-5.3.2
[This paragraph was deleted in April 2018].
Deleted: April 2018
Amended: October 2013
October 07BC-5A BC-5A Return Policy — Post-Dated Cheques
BC-5A.1 BC-5A.1 Return Policy — Post-Dated Cheques
BC-5A.1.1
When a customer fully repays his/her credit outstanding amount in full or settles in part pursuant to a settlement agreement, the subject retail bank licensee must immediately return all holding of the customer's post-dated cheques taken as collateral or destroy such cheques and inform the customer in writing.
Added: January 2017BC-6 BC-6 Automated Teller Machine (ATM)
BC-6.1 BC-6.1 [This Section was deleted in October 2019].
BC-6.1.1
[This Paragraph was deleted in October 2019].
Deleted: October 2019
October 07BC-6.1.2
[This Paragraph was deleted in October 2019].
Deleted: October 2019
Amended October 2012
Amended January 2011
October 2007[This Subsection was deleted in October 2019].
BC-6.1.3
[This Paragraph was deleted in October 2019].
Deleted: October 2019
Amended January 2011
October 2007BC-6.1.4
[This Paragraph was deleted in October 2019].
Deleted: October 2019
Amended January 2011
October 2007BC-6.1.5
[This Paragraph was deleted in October 2019].
Deleted: October 2019
October 07BC-6.1.6
[This Paragraph was deleted in October 2019].
Deleted: October 2019
Amended: July 2016
Amended April 2012
Amended January 2011
October 2007BC-6.1.7
[This Paragraph was deleted in October 2019].
Deleted: October 2019
Amended January 2011
October 2007BC-6.1.8
[This Paragraph was deleted in October 2019].
Deleted: October 2019
Amended January 2011
October 2007BC-6.1.9
[This Paragraph was deleted in October 2019].
Deleted: October 2019
Amended January 2011
October 2007BC-6.1.10
[This Paragraph was deleted in October 2019].
Deleted: October 2019
Amended April 2012
Amended January 2011
October 2007BC-6.1.11
[This Paragraph was deleted in October 2019].
Deleted: October 2019
Added April 2012
BC-6.2 BC-6.2 GCC ATM Network Charges [This Section was deleted in April 2018]
BC-6.2.1
[This paragraph was deleted in April 2018].
Deleted: April 2018
October 07BC-6.2.2
[This paragraph was deleted in April 2018].
Deleted: April 2018
October 07BC-6.2.3
[This paragraph was deleted in April 2018].
Deleted: April 2018
Amended January 2011
October 2007BC-6.3 BC-6.3 Local ATM Network Charges [This Section was deleted in April 2018]
BC-6.3.1
[This paragraph was deleted in April 2018].
Deleted: April 2018
Amended: April 2016
Added: January 2014BC-6.3.2
[This Paragraph was deleted in April 2016.]
Deleted: April 2016
Added: January 2014BC-6.3.3
[This Paragraph was deleted in April 2016.]
Deleted: April 2016
Added: January 2014BC-7 BC-7 Mudaraba contracts
BC-7.1 BC-7.1 Minimum Terms and Conditions
BC-7.1.1
As part of its on-going supervision of Islamic banks, the CBB has set out in Appendix BC-7 details of the type of terms and conditions which it believes Islamic banks should include, as a minimum, in such Mudaraba contracts.
Amended January 2011
October 2007BC-7.1.2
All Mudaraba contracts entered into by an Islamic bank (whether new or renewed contracts) must meet the standards referred to under Paragraph BC-7.1.1.
Amended: July 2015
Amended January 2011
October 2007BC-7.1.3
Banks must have a policy statement as to the policies and procedures in place to safeguard the interest of the PSIA holders. The statement must, as a minimum, cover the following areas:
(a) Basis for allocation of profit or loss to the PSIA;(b) Policy for making provisions and reserves against assets and equity for PSIA (refer to FAS 11, issued by AAOIFI, for recognition and measurement of provisions and reserves) and to whom these provisions and reserves revert to in case of write-back or recovery;(c) Policy on the priority for investment of own funds and those of unrestricted investment account holders; and(d) Basis for allocating expenses to the PSIA.Banks must agree their Policy Statements with the CBB.
Amended January 2011
October 2007BC-8 BC-8 Margin Trading System
BC-8.1 BC-8.1 Introduction
BC-8.1.1
This Chapter applies to all retail banks in Bahrain.
October 07BC-8.1.2
Investors purchasing
securities listed on anylicensed exchange may pay for them under the Margin Trading System ('The System') by borrowing a portion of the purchase price from a participating bank. The System is subject to relevant provisions of the CBB Law, the Rulebook of thelicensed exchange , any rules and regulations issued pursuant to such Law, Rulebook and this Module. The System applies to equities in companies listed on anylicensed exchange . Unless restrictions apply under Bahrain law in this regard, the System shall be available to Bahraini or non-Bahraini investors, whether resident or non-resident in Bahrain.Amended January 2011
October 2007BC-8.1.3
The main objective of introducing the System is to enhance the overall activity on any
licensed exchange , allowing investors to leverage their investments, in a controlled manner.Amended January 2011
October 2007General Criteria
BC-8.1.4
Only retail banks will be permitted as participating banks for the System. Participating banks must each receive the prior general written approval of the CBB in order to take part in the System. The CBB will notify the
licensed exchange of the identity of participating banks. The CBB's approval may be withdrawn at its discretion.Amended January 2011
October 2007BC-8.1.5
SRO members who are not retail banks will not be permitted to act as lenders for the System.Amended January 2011
October 2007BC-8.2 BC-8.2 Limits and Trading Rules
BC-8.2.1
An investor may, through his relationship with any participating bank under the System, invest in securities made up by way of the investor's own initial margin and by way of financing from the relevant participating bank to that investor.
Amended July 09
October 07BC-8.2.2
Such financing referred to in Paragraph BC-8.2.1 is subject to the limit on margin percentage given in Paragraph BC-8.2.10.
Amended January 2011
July 2009
October 2007BC-8.2.3
The amount of the margin facility made to an investor under the System shall be included as an exposure to that customer, and contribute towards the large exposures limit and the consumer finance limit for that person.
October 07BC-8.2.4
The total amount of financing granted by an individual participating bank to all investors under the System shall not, at any time exceed 15% of that participating bank's capital base, such percentage to be reviewed by the CBB at its discretion from time to time.
October 07BC-8.2.5
The CBB will require participating banks to inform the Credit Reference Bureau ('CRB') of all facility limits approved to investors under the System from time to time. Participating banks must check with the CRB on the amount of facility limits outstanding under the System at any time to a particular investor.
Amended: October 2016
Amended January 2011
October 2007SRO Members
BC-8.2.6
Only licensed
SRO members who meet the requirements to participate in the System and are authorised as such by thelicensed exhange and the CBB will be permitted to act as brokers for the System.Amended January 2011
October 2007Documentation
BC-8.2.7
Only standard-form documents (application forms and agreements) will be used for the System. Standard-form agreements, drafted and approved in advance by the
licensed exchange , will be entered into between the participating bank and the investor (in respect of financing), and between the participating bank and the investor and theSRO member (in respect of trading) and, as relevant, these agreements shall (amongst other things) confirm that:(a) The investor is borrowing or financing a stated amount from the participating bank for the purpose of taking part in the System;(b) The investor will repay such stated amount, together with any profit or charges thereon, when due and in accordance with the agreement;(c) The investor understands the risks involved in margin trading as well as the implications of the undertakings given by him;(d) The participating bank can sell the securities bought through the System if the relevant margin is called and not met, without further formalities being required;(e) TheSRO member is liable for marking thesecurities to market on a daily (or more frequent) basis and for keeping the participating bank updated as to the participating bank's exposure to the investor;(f) The investor can place orders with theSRO member for the purchase ofsecurities up to the limit permitted by the agreement;(g) Each party to the agreement in question shall abide by the duty of confidentiality imposed on him in relation to the matters set out in the agreement; and(h) There is an overriding obligation on the parties thereto to comply with Bahrain law in general and, in particular, with the share-ownership restrictions applying to certain types ofsecurities Amended: January 2011
October 2009
October 2007Owner of the Securities bought Using the System
BC-8.2.8
For ease of transfer and sale of the securities in the event that a margin is called by the participating bank but not met by the investor, the
securities will be registered in the participating bank's name (for the account of the investor) and held by a custodian.Amended January 2011
October 2007BC-8.2.9
Under Paragraph BC-8.2.8 above; (a) the
securities should not be considered as part of the bank's own assets for the purposes of determining ownership/control under Bahrain law, and (b) if the investor has discharged his obligations to the participating bank under the System and thesecurities have not been sold, thesecurities shall be transferred into the legal ownership of the investor.Amended January 2011
October 2007Margin Percentage
BC-8.2.10
For equities listed on any
licensed exchange , an investor shall have the right to obtain financing, the value of which shall not exceed 50% of the total value of the funds being invested (i.e. 1:1). The CBB and thelicensed exchange shall coordinate in making any change to the margin percentages set for the System.Amended: July 2015
Amended January 2011
October 2007Margin Call Top-up
BC-8.2.11
The margin call top-up shall be 30% of the total value of the funds invested by an investor through a margin account with a participating bank. An investor shall settle a margin call on the settlement date (as determined by the BSE) by making a cash payment of such amount to the participating bank. Such cash payment may, at the investor's discretion and in whole or part, come from the sale of the
securities bought through the System, or otherwise. Failure to meet such margin call will, however, give the participating bank the right to sell thesecurities bought through the System.Amended January 2011
October 2007Margin Charges
BC-8.2.12
The participating bank shall impose charges on the financing amount granted to the investor at a rate or on a basis to be determined by the participating bank. In the event that investor's margin account is in credit in excess of the margin applicable thereto, profit shall be paid on the excess at a rate to be determined by the participating bank.
October 07BC-9 BC-9 Regulated Islamic Banking Services
BC-9.1 BC-9.1 Scope of Application in Relation to Customer Categories [Deleted]
[This Section was deleted in July 2015]
Deleted: July 2015
BC-9.1.1
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Added: April 08BC-9.1.2
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Added: April 08Overseas Branches and Subsidiaries [Deleted]
[This heading was deleted in July 2015]
BC-9.1.3
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Added: April 08BC-9.1.4
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Amended: January 2011
Added: April 2008BC-9.1.5
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Amended: January 2011
Added: April 2008BC-9.2 BC-9.2 General Rules
BC-9.2.1
This Chapter applies to all the
regulated Islamic banking services listed in Paragraph LR-1.3.1 of allIslamic bank licensees , except where otherwise indicated.Amended: July 2015
Amended: April 2011
Amended: January 2011
Added: April 2008BC-9.2.1A
Where reference is made to investment activities, these refer to
regulated Islamic banking services as per Subparagraphs LR-1.3.1 (c to k).Added: July 2015BC-9.2.2
This Module aims to encourage high standards of business conduct, which are broadly applicable to all
Islamic bank licensees , allregulated banking services referred to in Paragraph BC-9.2.1, and all types ofcustomers .Amended: July 2015
Amended: January 2011
Added: April 2008BC-9.2.3
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08BC-9.2.4
Islamic bank licensees must maintain adequate records, as required in Chapter OM-7 to demonstrate compliance with the requirements of this Module, in addition to the requirements in the 'Code of Best Practice for Consumer Finance'.Amended: July 2015
Added: April 08BC-9.2.5
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08BC-9.3 BC-9.3 Overarching Principles [Deleted]
[This Section was deleted in July 2015]
Deleted: July 2015
BC-9.3.1
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Amended: January 2011
Added: April 2008BC-9.3.2
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Added: April 08BC-9.4 BC-9.4 Customer Classification [Deleted]
[This Section was deleted in July 2015]
Deleted: July 2015
BC-9.4.1
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Amended: January 2011
Added: April 2008BC-9.4.2
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Added: April 08BC-9.4.3
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Amended: January 2011
Added: April 2008BC-9.4.4
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Added: April 08BC-9.4.5
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Added: April 08Accredited Investors
[This heading was deleted in July 2015]
BC-9.4.6
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Amended: January 2011
Added: April 2008BC-9.4.7
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Amended: January 2011
Added: April 2008BC-9.4.8
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Amended: January 2011
Added: April 2008BC-9.4.9
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Amended: January 2011
Added: April 2008Retail Customer
[This heading was deleted in July 2015]
BC-9.4.10
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Amended: January 2011
Added: April 2008Records
[This heading was deleted in July 2015]
BC-9.4.11
[This Paragraph was deleted in July 2015]
Deleted: July 2015
Added: April 08BC-9.5 BC-9.5 Marketing and Promotion
BC-9.5.1
The requirements of this section apply to product specific or service specific material and not to general brand awareness promotional material. In addition to the requirements of this Section, licensees should consider Section BC-9.8.
Amended: July 2015
Added: April 08BC-9.5.2
Islamic bank licensees must ensure that all advertising and promotional material for specific products that is sent to any class ofcustomer is fair, clear and not misleading.Added: April 08BC-9.5.3
With respect to
customers , in ensuring that the description of the product or the service in the promotional material is fair, clear and not misleading, theIslamic bank licensee should, among other precautionary measures, ensure that:(a) The purpose, and to the extent practicable, the content, of the information or communication are likely to be understood by the average member of the group to whom the communication is addressed;(b) Key items contained in the information are given due prominence;(c) The method of presentation in the information does not disguise, diminish, or obscure important risks, warnings or information; and(d) The communication does not omit information that is material to ensure it is fair, clear and not misleading.Amended: July 2015
Added: April 08BC-9.5.4
In ensuring that the description of the product or the service in the promotional material is fair, the
Islamic bank licensee should avoid exaggerating the potential benefits of the products or services being offered in any communication with acustomer or potentialcustomer .Amended: July 2015
Added: April 08BC-9.5.5
In ensuring that the description of the product or the service in relation to promotional material directed at
customers is adequate, theIslamic bank licensee should: ensure that the promotional material contains a balanced description of the main characteristics of the product or service it relates to, including the nature of the financial commitment and risks involved.Amended: July 2015
Added: April 08BC-9.5.5A
In addition, the description must state the name of the person, if the communication relates to a product or service of a person other than the
Islamic bank licensee .Added: July 2015BC-9.5.5B
In the case of investment activities, the description should indicate whether or not the
financial instruments involved are illiquid, and traded in a recognised exchange or market; the existence or absence of any right of withdrawal or cancellation and, where such a right exists, its duration and the conditions for exercising it, including information on any amount that thecustomer may be required to pay to exercise that right; and state if the communication relates to afinancial instrument or service of a person other than theIslamic bank licensee , the name of the person.Added: July 2015BC-9.5.6
Islamic bank licensees must ensure that the accuracy of all material statements of fact in promotional materials is supported by adequate evidence.Added: April 08BC-9.5.7
Islamic bank licensees must not, in any form of communication with an individualcustomer or any class ofcustomer , unreasonably attempt to limit or avoid any duty or liability it may have to that individualcustomer or class ofcustomer in relation toregulated banking services , unless otherwise agreed in writing by both parties.Added: April 08BC-9.5.8
An example of an unreasonable attempt to limit liability is where a financial product is given protection or compensation status in its home country and such status is not given by the Bahrain Bank (or branch) to its customers.
Added: April 08BC-9.5.9
Islamic bank licensees that underwrite or marketpublic offerings must ensure that their promotional material complies with the relevant capital markets disclosure standards of the CBB.Added: April 08BC-9.5.10
Capital markets disclosure standards are currently contained in the Disclosure Standards Regulation of 3 December 2003.
Added: April 08Content of Promotions
BC-9.5.11
Before an
Islamic bank licensee communicates any promotional material on a specific product or service to acustomer or a potentialcustomer it must ensure that the promotional material at the very least contains the information laid out in Paragraph BC-9.13.1.Added: April 08BC-9.5.12
Islamic bank licensees must not make use of the name of the CBB in anypromotion in such a way that would indicate endorsement or approval of its products or services.Added: April 08BC-9.5.12A
For greater certainty, notification in promotion material that a bank is licensed by the CBB is not regarded as endorsement or approval by the CBB of any products or services being offered by the bank and does not contravene the requirements of Paragraph BC-9.5.12.
Added: July 2012Records
BC-9.5.13
Islamic bank licensees must maintain a record of all promotional materials issued by them or on their behalf.Added: April 08Real Time Promotions
BC-9.5.14
Islamic bank licensees must not make areal time promotion tocustomers unless the concernedcustomer has been notified of the fact in advance and has agreed in writing to receivereal time promotions .Amended: July 2015
Added: April 08BC-9.5.15
For the purposes of Paragraph BC-9.5.14, a
real time promotion is a promotion made in the course of a personal visit, telephone conversation or other interactive dialogue.Added: April 08BC-9.5.16
Consent to receive
real time promotions could be, for instance, at the time of the initial customer profiling, by means of signing a form clearly indicating such consent.Added: April 08BC-9.5.17
A representative of the
Islamic bank licensee must, on making contact for the first time with acustomer , and again at any time when asked to do so by thecustomer :(a) Identify himself as being a representative of theIslamic bank licensee ;(b) State the name of theIslamic bank licensee ; and(c) Present the customer with a business card on meeting that customer, unless he has given him such a card at a previous meeting. The business card must include a statement of the Islamic bank licensee's licensing status.Amended October 2010
Added: April 08BC-9.5.18
For the purposes of Rule BC-9.5.17(c), the statement on the business card should make clear the licensing status of the
Islamic bank licensee ; however it should not lead the customer to believe that the product being offered has been approved by the CBB. The suggested wording for the statement of licensing status is as follows: “Licensed as an Islamic retail/wholesale bank by the CBB”.Amended: October 2010
Added: April 08BC-9.5.19
In oral communications with a
customer , whether in person or by telephone, the representative of theIslamic bank licensee must:(i) Conduct himself in a polite manner and respect the wishes of thecustomer ;(ii) State the genuine purpose of the call at the commencement of the conversation;(iii) Ascertain whether or not thecustomer wishes him to proceed with the conversation if the time of the conversation was not previously agreed by thecustomer ;(iv) Explain clearly the financial products or other services which he is authorised to arrange;(v) Recognise and respect the right of thecustomer to terminate the call at any time; and(vi) If he requests another appointment and thecustomer refuses, shall accept that refusal courteously and in such a manner as to cause no embarrassment to thecustomer .Amended: July 2015
Amended: January 2011
Added: April 2008Records
BC-9.5.20
Islamic bank licensees must keep sufficient records ofreal time promotions made by them, or on their behalf by other persons, for CBB’s supervision purposes.Added: April 08BC-9.5.21
These records should include evidence that
customers have been notified in advance and agreed to receivereal time promotions , as required under Rule BC-9.5.14.Added: April 08BC-9.6 BC-9.6 Accepting Customers
Applicability
BC-9.6.1
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08Terms of Business
BC-9.6.2
Islamic bank licensees must provide theircustomers with their terms of business, setting out the basis on which theregulated banking services are to be conducted (see also Paragraph BC-9.8.13).Amended: July 2015
Amended: January 2011
Amended: October 2009
Added: April 2008BC-9.6.3
The terms of business in relation to providing
regulated banking services as defined in Paragraph BC-9.2.1 to acustomer must take the form of a customer agreement.Amended: July 2015
Amended: January 2011
Amended: October 2009
Added: April 2008BC-9.6.4
The terms of business must include the rights and obligations of parties to the agreement, as well as other terms relevant to the
regulated banking services . The terms of business must include, but are not limited to, the items included in Paragraph BC-9.13.2.Amended: October 2009
Added: April 08BC-9.6.5
An application form in relation to
regulated banking services will be deemed to be acustomer agreement , provided the form includes the principal terms and conditions of the service, such that thecustomer is provided sufficient information to allow him to understand the basis on which the service is to be conducted.Added: April 08BC-9.6.6
The
customer agreement must be provided in good time prior to providing theregulated banking service .Added: April 08BC-9.6.7
For the purposes of Rule BC-9.6.6, "good time" should be taken to mean sufficient time to enable the
customer to consider properly the product or service on offer before he is bound, and that customer agreement must comply with the requirements in BC-B.5.13 regarding a 'cooling off period'.Amended: July 2015
Added: April 08Customer Understanding and Acknowledgement
BC-9.6.8
Islamic bank licensees must not enter into a customer agreement unless they have taken reasonable care to ensure that theircustomer has had a proper opportunity to consider the terms.Amended: July 2015
Added: April 08BC-9.6.9
Islamic bank licensees must obtain theircustomer's consent to the terms of the customer agreement as evidenced by a signature or an equivalent mechanism.Amended: July 2015
Added: April 08BC-9.6.10
The equivalent mechanism refers to instances where a
customer may have signed a mandate letter or other document accompanying the terms of the customer agreement.Amended: October 2009
Added: April 2008BC-9.6.11
The customer agreement must contain the signatures of both parties to the agreement. If the agreement is signed by only the
customer (in case it is in the form of an application), copies of the signed agreement must be provided by theIslamic bank licensee to thecustomer .Amended: October 2009
Added: April 2008Records
BC-9.6.12
Islamic bank licensees must keep sufficient records of customer agreements and any documents referred to in the customer agreement as soon as the agreement comes into force, for CBB's supervision purposes.Amended: October 2009
Added: April 2008BC-9.7 BC-9.7 Suitability
Applicability
BC-9.7.1
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08Information and Communication
BC-9.7.2
Islamic bank licensees must seek information from theircustomers (and potentialcustomers ) about their needs, circumstances and investment objectives (including their risk appetite), relevant to the services to be provided.Amended: July 2015
Amended: July 2014
Amended: January 2011
Added: April 2008BC-9.7.3
For the purposes of Rule BC-9.7.2, the
Islamic bank licensee , when providing the regulated Islamic banking services, should ask thecustomer or potentialcustomer to provide information regarding his knowledge and experience in the field relevant to the specific type of financial products and/or services offered or demanded so as to enable the licensee to assess whether the financial product or service is appropriate to thecustomer . The evaluation of thecustomer's needs, circumstances and objectives (including risk appetite) can be done through a structured questionnaire.Amended: July 2015
Added: April 08BC-9.7.4
For the purposes of satisfying the requirement under Rule BC-9.7.2,
Islamic bank licensees must ensure that the information and facts they hold about theircustomers are accurate, complete and up to date.Added: April 08BC-9.7.5
In case of investment activities, where an
Islamic bank licensee is managingfinancial instruments for acustomer , it must periodically assess whether thecustomer's portfolio or account remains suitable over the lifetime of thecustomer relationship and advise thecustomer if it is no longer suitable.Amended: July 2015
Added: April 08BC-9.7.6
In case of investment activities, where an
Islamic bank licensee has pooled acustomer's assets with those of others, with a view to taking common discretionary management decisions, theIslamic bank licensee must take reasonable steps to ensure that the transaction is suitable for the relatedcustomers having regard to their stated investment objectives.Amended: July 2015
Added: April 08Records
BC-9.7.7
Islamic bank licensees must keep a record of each recommendation made tocustomers , and be able to demonstrate to the CBB compliance with this Section.Amended: July 2015
Added: April 08BC-9.8 BC-9.8 Disclosure of Information
Applicability
BC-9.8.1
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08Initial Disclosure Requirement
BC-9.8.2
An
Islamic bank licensee must provide (with respect toregulated banking services ), comprehensible information tocustomers or potentialcustomers on:(a) Itself and the types of services that it can provide;(b) [This Subparagraph was deleted in July 2015];(c) Fees, costs and associated charges payable by thecustomer such as:(i) The basis or amount of its charges, remuneration and commission for conducting regulated financial services and(ii) The nature or amount of any other income receivable by it or, to its knowledge, by its associate and attributable to thatregulated banking service ; and(d) [This Subparagraph was deleted in July 2015];(e) Information about methods of redress.Amended: July 2015
Amended: January 2011
Added: April 2008BC-9.8.3
This Paragraph was deleted in July 2015.
Amended: July 2015
Amended: January 2011
Added: April 2008Risks
BC-9.8.4
Islamic bank licensees must disclose adequate information to all classes ofcustomers about risks underlying the financial products or services that are not readily apparent and which relate to theregulated Islamic banking service being provided.Amended: July 2015
Added: April 08Disclosure of Information for Investment Activities
BC-9.8.5
In case of investment activities,
Islamic bank licensees must providecustomers with appropriate guidance on, and warnings of, relevant risks when providingregulated banking services , in relation to:(a) Transactions in illiquidfinancial instruments ;(b) Leveraged transactions, including asset portfolios or collective investment schemes that have embedded leverage;(c)Financial instruments subject to high volatility in normal market conditions;(d) Securities repurchase agreements or securities lending agreements;(e) Transactions which involve credit, margin payments, or deposit of collateral;(f) Transactions involving material foreign exchange risk;(g) Interests in real estate; and/or(h) Islamicfinancial instruments .Amended: July 2015
Added: April 08BC-9.8.6
In relation to transactions involving derivatives,
Islamic bank licensees must providecustomers with a written statement that includes explanations of their characteristics, in particular their leverage effect, liquidity and price volatility.Amended: July 2015
Added: April 08BC-9.8.7
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08BC-9.8.8
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08BC-9.8.9
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08BC-9.8.10
In relation to a transaction in a
financial instrument that is not readily realisable,Islamic bank licensees must:(a) Warn thecustomer that there is a restricted market for suchfinancial instruments , and that it may therefore be difficult to deal in thefinancial instrument or to obtain reliable information about its value; and(b) Disclose any position knowingly held by theIslamic bank licensee or any of its associates in thefinancial instrument or in a relatedfinancial instrument .Amended: July 2015
Amended: January 2011
Added: April 2008BC-9.8.11
The risk warning given to a
customer or potentialcustomer must be given due prominence in all related materials and must not be concealed or masked in any way by the wording, design or format of the information provided.Amended: July 2015
Added: April 08BC-9.8.12
Risk warnings provided to a
customer or potentialcustomer about Shari'a compliant derivatives must make clear that the instrument can be subject to sudden and sharp falls in value. Where thecustomer may not only lose his entire investment but may also be required to pay more later, he must also be warned about this fact and the possible obligation to provide extra funding.Amended: July 2015
Added: April 08Cancellation and Withdrawals
BC-9.8.13
Islamic bank licensees must disclose in their terms of business the existence or absence of a right to cancel as per the provisions of Paragraph BC-9.6.2.Added: April 08BC-9.8.14
Islamic bank licensees must pay due regard to the interests of theircustomers and treat them fairly.Added: April 08Records
BC-9.8.15
Islamic bank licensees must keep a record of statements issued in compliance with Rules in this Chapter, and of other information or recommendations provided to theircustomers , and be able to demonstrate to the CBB compliance with this Chapter.Amended: July 2015
Added: April 08BC-9.9 BC-9.9 Dealing and Managing
BC-9.9.1
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08Best and Timely Execution
BC-9.9.2
Islamic bank licensees must take all reasonable steps to obtain, when executing orders, the best possible result forcustomers taking into account price, costs, speed, likelihood of execution and settlement, and any other consideration relevant to the execution of the order (subject to Paragraph BC-9.9.5 below).Amended: January 2011
Added: April 2008BC-9.9.3
Islamic bank licensees must establish and implement effective arrangements for complying with Rule BC-9.9.2:a) Execution policies for each class offinancial instrument ;b) Maintenance of and disclosure tocustomers of information regarding execution venues and arrangements for disclosure tocustomers if orders are to be executed outside regulated markets;c) Monitoring of effectiveness of the order execution arrangements and execution policies in order to identify and, where appropriate, correct any deficiencies; andd) Maintenance of audit trails to demonstrate to theircustomers that orders were executed in accordance with the relevant execution policy.Added: April 08BC-9.9.4
This Paragraph was deleted in July 2015.
Deleted: July 2015
Amended: January 2011
Added: April 2008BC-9.9.5
In determining whether an
Islamic bank licensee has taken reasonable care to provide the best overall price for acustomer in accordance with Rules BC-9.9.2 to BC-9.9.4, the CBB will take into account whether anIslamic bank licensee has:(a) Executed orders promptly and sequentially;(b) Discounted any fees and charges previously disclosed to thecustomer ;(c) Disclosed the price at which an order is executed; and(d) Taken into account the available range of price sources for the execution of itscustomers' transactions. In the case where theIslamic bank licensee has access to prices of different regulated financial markets or alternative trading systems, it must execute the transaction at the best overall price available having considered other relevant factors.Added: April 08BC-9.9.6
Islamic bank licensees may only postpone the execution of a transaction if it is in the best interests of thecustomer , and the prior consent of thecustomer has been given, or when circumstances are beyond its control. TheIslamic bank licensee must maintain a record of all postponements together with the reasons for the postponement.Added: April 08BC-9.9.7
Factors relevant to whether the postponement of an existing
customer order may be in the best interests of thecustomer include where:(a) Thecustomer order is received outside of normal trading hours;(b) A foreseeable improvement in the level of liquidity in thefinancial instrument is likely to enhance the terms on which theIslamic bank licensee can execute the order; or(c) Executing the order as a series of partial executions over a period of time is likely to improve the terms on which the order as a whole is executed.Added: April 08Non-market Price Transactions
BC-9.9.8
Islamic bank licensees must not enter into a non-market price transaction in any capacity, with or for acustomer , if it has reasonable grounds to suspect that thecustomer is entering into the transaction for an illegal or improper purpose.Added: April 08BC-9.9.9
For the purposes of Paragraph BC-9.9.8, a non-market price transaction is one where the price paid by the
Islamic bank licensee , or itscustomer , differs from the prevailing market price. With respect to transactions infinancial instruments traded on alicensed exchange , licensees are reminded that in Bahrain the law prohibits off-market transactions.Amended: January 2011
Added: April 2008BC-9.9.10
For the purposes of Paragraph BC-9.9.8, examples of improper purposes for transactions include:
(a) The perpetration of a fraud;(b) The disguising or concealment of the nature of a transaction or of profits, losses or cash flows;(c) Transactions which amount to market abuse;(d) High-risk transactions under the Anti Money Laundering Regulations; and(e) "Window dressing", in particular around the year end, to disguise the true financial position of the person concerned.Added: April 08BC-9.9.11
Rule BC-9.9.8 does not apply to a non-market-price transaction if it is subject to the rules of a recognised investment exchange.
Added: April 08Aggregation and Allocation
BC-9.9.12
Islamic bank licensees may only aggregate an order for acustomer with an order for othercustomers , or with an order for its own account, where:(a) It is unlikely that the aggregation will disadvantage thecustomers whose orders have been aggregated; and(b) It has disclosed to eachcustomer concerned in writing that it may aggregate orders, where these work to thecustomer's advantage.Added: April 08BC-9.9.13
If an
Islamic bank licensee has aggregated orders ofcustomers , it must make a record of the intended basis of allocation and the identity of eachcustomer before the order is effected (subject to the “best execution” provisions of Paragraph BC-9.9.2).Amended: January 2011
Added: April 2008BC-9.9.14
Where an allocation takes place, prices must not be changed. The order must be allocated equally so that no customer or broker is advantaged over any change.
Amended: April 2013
Added: April 08BC-9.9.15
Islamic bank licensees must have written policies on aggregation and allocation which are consistently applied; these must include the policy that will be adopted when only part of the aggregated order has been filled.Added: April 08BC-9.9.16
Where an
Islamic bank licensee has aggregated acustomer order with an order for othercustomers or with an order for its own account, and part or all of the aggregated order has been filled, it must:(a) Promptly allocate thefinancial instruments concerned;(b) Allocate thefinancial instruments in accordance with its stated policy;(c) Ensure the allocation is done fairly and uniformly by not giving undue preference to itself or to any of those for whom it dealt;(d) Give priority to satisfyingcustomer orders where the aggregation order combines acustomer order and an own account order, if the aggregate total of all orders cannot be satisfied, unless it can demonstrate on reasonable grounds that without its own participation it would not have been able to execute those orders on such favourable terms, or at all; and(e) Make and maintain a record of:(i) The date and time of the allocation;(ii) The relevantfinancial instruments ;(iii) The identity of eachcustomer concerned;(iv) The amount allocated to each customer and to theIslamic bank licensee ; and(v) The price of eachfinancial instrument and allocation.Amended: April 2013
Added: April 08Excessive Dealing
BC-9.9.17
Islamic bank licensees must not advise anycustomer to transact with a frequency or in amounts that might result in those transactions being deemed excessive in light of historical volumes, market capitalisation,customer portfolio size and related factors.Amended: July 2015
Amended: October 2009
Added: April 2008Right to Realise a Customer's Assets
BC-9.9.18
Islamic bank licensees must not realise acustomer's assets, unless it is legally entitled to do so, and has either:(a) Set out in the terms of business:(i) The action it may take to realise any assets of thecustomer ;(ii) The circumstances in which it may do so;(iii) The asset (if relevant) or type or class of asset over which it may exercise the right; or(b) Given thecustomer written or oral notice of its intention to exercise its rights before it does so.Amended: July 2015
Added: April 08Margin Requirements
BC-9.9.19
Before conducting a transaction with or for a
customer ,Islamic bank licensees must notify thecustomer of:(a) The circumstances in which thecustomer may be required to provide any margin;(b) The form in which the margin may be provided;(c) The steps theIslamic bank licensee may be required or entitled to take if thecustomer fails to provide the required margin, including:(i) The fact that thecustomer's failure to provide margin may lead to theIslamic bank licensee closing out his position after a time limit specified by the firm;(ii) The circumstances in which theIslamic bank licensee will have the right or duty to close out thecustomer's position; and(iii) The circumstances, other than failure to provide the required margin, that may lead to theIslamic bank licensee closing out thecustomer's position without prior reference to him.Amended: July 2015
Added: April 08BC-9.9.20
Islamic bank licensees must close out acustomer's open position if thatcustomer has failed to meet a margin call within a maximum of five business days following the date on which the obligation to meet the call accrues, unless:(a) TheIslamic bank licensee has received confirmation from a relevant third party (such as a clearing firm) that thecustomer has given instructions to pay in full; or(b) TheIslamic bank licensee has taken reasonable care to establish that the delay is owing to circumstances beyond thecustomer's control.Amended: July 2015
Amended: January 2011
Added: April 2008BC-9.9.21
For the purposes of Rule BC-9.9.20,
Islamic bank licensees may require the closing of acustomer's open position in less than five business days, for their own risk management purposes.Amended: July 2015
Added: April 08BC-9.9.22
Islamic bank licensees must also follow the requirements of Chapter BC-8 concerning the operation of the margin trading system.Amended: October 2015
Amended: January 2011
Added: April 2008Programme Trading
BC-9.9.23
Before an
Islamic bank licensee executes a programme trade, it must disclose to itscustomer whether it will be acting as a principal or agent. AnIslamic bank licensee must not subsequently act in a different capacity from that which is disclosed without the prior consent of thecustomer .Added: April 08BC-9.9.24
The term “programme trade” describes a single transaction or series of transactions executed for the purpose of acquiring or disposing of, for a
customer , all or part of a portfolio or a large basket offinancial instruments .Added: April 08BC-9.9.25
Islamic bank licensees must ensure that neither they, nor an associate, execute an own account transaction in anyfinancial instrument included in a programme trade, unless they have notified thecustomer in advance that they may do this, or can otherwise demonstrate that they have provided fair treatment to thecustomer concerned.Added: April 08Records
BC-9.9.26
Islamic bank licensees must keep a record of each step they undertake in relation to each transaction to demonstrate to the CBB compliance with Section BC-9.9.Added: April 08BC-9.10 BC-9.10 Reporting to Customers
BC-9.10.1
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08Confirmation of Transactions
BC-9.10.2
When an
Islamic bank licensee providesregulated Islamic banking services , it must establish procedures to keep thecustomer informed of the essential details of the financial product or service.Amended: July 2015
Added: April 08Periodic Statements
BC-9.10.5
Islamic bank licensees must promptly and at suitable intervals provide theircustomers with periodic statements onregulated Islamic banking services provided, throughout the duration of the contractual relationship between the bank and thecustomer .Added: July 2015BC-9.10.6A
In case of credit activities,
Islamic bank licensees must provide periodic statements as required by the Code of Best Practice on Consumer Credit and Charging and in accordance with Section BC-4.3.Added: July 2015BC-9.10.6B
In case of investment activities,
Islamic bank licensees must promptly and at suitable intervals provide theircustomers with a written statement when they:(a) Undertake the activity of managingfinancial instruments ; or(b) Operate acustomer's account containingfinancial instruments .Amended: July 2015
Added: April 08BC-9.10.6C
For the purposes of Rule BC-9.10.6B suitable intervals means:
(a) Monthly, if thecustomer's portfolio includes derivative transactions in highly volatile classes of financial instruments or leveraged transactions; or(b) At least six-monthly in other cases.Added: July 2015BC-9.10.6
Islamic bank licensees must provide a periodic statement:(a) Monthly, if thecustomer is aretail customer and theretail customer's portfolio includes derivative transactions in highly volatile classes offinancial instruments or leveraged transactions; or(b) At least six-monthly in other cases.Added: April 08BC-9.10.7
Periodic statements, issued in accordance with Rule BC-9.10.6 (A and B), must contain, at the very least, the information contained in Paragraph BC-9.13.8, as at the end of the period covered.
Amended: July 2015
Amended: January 2011
Added: April 2008BC-9.10.8
Where an
Islamic bank licensee undertakes the activity of managingfinancial instruments on a discretionary basis, the periodic statements, issued in accordance with Rule BC-9.10.6, must also include at the very least the information included in Paragraph BC-9.13.9.Amended: July 2015
Amended: January 2011
Added: April 2008Records
BC-9.10.10
Islamic bank licensees must immediately record the essential elements of all orders that are received.Added: April 08BC-9.10.11
For the purposes of Rule BC-9.10.10, essential elements of orders received include the particulars of the
customer and order, time, price of execution, and number of instruments.Added: April 08BC-9.10.12
Islamic bank licensees must immediately record the essential elements of individual orders received, including:(a) Particulars of thecustomer and order;(b) Time of execution;(c) Price of execution; and(d) Number of instruments.Amended: July 2015
Added: April 08BC-9.10.13
For purposes of Rule BC-9.10.12,
Islamic bank licensees should include, at the very least, the information provided in Paragraph BC-9.13.9.Amended: July 2015
Added: April 08BC-9.10.14
Islamic bank licensees must make a copy of any confirmation of a transaction or periodic statement provided to acustomer , and retain it for at least five years from the date on which it was provided.Added: April 08BC-9.11 BC-9.11 Complaints
[This section was deleted in October 2011]
BC-9.11.1
[This paragraph was deleted in October 2011].
Deleted: October 2011BC-9.11.2
[This paragraph was deleted in October 2011].
Deleted: October 2011BC-9.11.3
[This paragraph was deleted in October 2011].
Deleted: October 2011[Deleted]
Deleted: October 2011BC-9.11.4
[This paragraph was deleted in October 2011].
Deleted: October 2011BC-9.11.5
[This paragraph was deleted in October 2011].
Deleted: October 2011BC-9.12 BC-9.12 Conflicts of Interest
BC-9.12.1
Islamic bank licensees must undertake all reasonable steps to identify conflicts of interest between themselves (or any person directly or indirectly linked to them by control) and theircustomers , which may arise in the course of providing aregulated Islamic banking service .Amended: July 2015
Added: April 08BC-9.12.2
Where conflicts arise,
Islamic bank licensees must:(a) Disclose any material interest or conflict of interest to thecustomer in writing (which may include a disclosure in theIslamic bank licensee's terms of business) either generally or in relation to a specific transaction, and take reasonable steps to ensure that thecustomer does not object;(b) Establish information barriers between activities such as proprietary trading, portfolio management and corporate finance business; and(c) Produce a written policy of independence, which requires an employee to disregard any conflict of interest or material interest when advising acustomer or exercising discretion.Added: April 08BC-9.12.3
If an
Islamic bank licensee determines that it is unable to manage a conflict of interest or material interest using one of the methods described in Rule BC-9.12.2 it must decline to act for thecustomer .Added: April 08Personal Account Transactions
BC-9.12.4
Islamic bank licensees must establish and maintain adequate policies and procedures, to ensure that:(a) Employees involved with advising and arranging do not undertake apersonal account transaction unless:(i) TheIslamic bank licensee has, in a written notice, drawn to the attention of the employee the conditions upon which the employee may undertake personal account transactions and that the contents of such a notice are made a term of his contract of employment or services;(ii) TheIslamic bank licensee has given its written permission to that employee for that transaction or to transactions generally infinancial instruments of that kind; and(iii) The transaction will not conflict with theIslamic bank licensee's duties to itscustomers ;(b) It receives prompt notification or is otherwise aware of each employee'spersonal account transactions ; and(c) If an employee'spersonal account transactions are conducted with theIslamic bank licensee , each employee's account must be clearly identified and distinguishable from othercustomers' accounts.Added: April 08BC-9.12.5
The written notice in sub-Paragraph BC-9.12.4 (a)(i) must make it explicit that, if an employee is prohibited from undertaking a
personal account transaction , he must not, except in the proper course of his employment:(a) Procure another person to enter into such a transaction; or(b) Communicate any information or opinion to another person if he knows, or ought to know, that the person will as a result, enter into such a transaction or procure some other person to do so.Added: April 08BC-9.12.6
Where an
Islamic bank licensee has taken reasonable steps to determine that an employee will not be involved to any material extent in, or have access to information about, theIslamic bank licensee's investment business, then the conditions or restrictions onpersonal account transactions , in Rule BC-9.12.4, need not be applied to that employee.Added: April 08BC-9.12.7
Islamic bank licensees must establish and maintain procedures and controls so as to ensure that aninvestment analyst does not undertake apersonal account transaction in afinancial instrument if theinvestment analyst is preparing investment research:(a) On that investment or its issuer; or(b) On a related investment, or its issuer;until theinvestment research is published or made available to theIslamic bank licensee's customers .Added: April 08Investment Research
BC-9.12.8
Where an
Islamic bank licensee issuesinvestment research , its conflicts policy must specify the types ofinvestment research issued by it. AnIslamic bank licensee that prepares and publishes investment research must have adequate procedures and controls to ensure:(a) The effective supervision ofinvestment analysts by following at the very least the items listed in Paragraph BC-9.13.11;(b) That any actual or potential conflicts of interest are managed in accordance with Rule BC-9.12.1; and(c) That the investment research issued tocustomers is not biased.Added: April 08BC-9.12.9
Islamic bank licensees that publishinvestment research must take reasonable steps to ensure that theinvestment research :(a) Identifies the types ofcustomers for which it is principally intended;(b) Distinguishes fact from opinion or estimates, and includes references to sources of data used;(c) Specifies the date when it was first published;(d) Specifies the period the ratings or recommendations are intended to cover;(e) Contains a clear and unambiguous explanation of the rating or recommendation system used;(f) Includes a price chart or line graph depicting the performance of the financial instrument for the period that the Islamic bank licensee has assigned a rating or recommendation for that financial instrument, which must also show the dates on which the ratings were revised; and(g) Includes a distribution of the different ratings or recommendations, in percentage terms:(i) For allfinancial instruments in respect of which theIslamic bank licensee publishes investment research; and(ii) Forfinancial instruments , if any, where theIslamic bank licensee has undertaken corporate finance business with or for the issuer over the past 12 months.Added: April 08BC-9.12.10
An
Islamic bank licensee must take reasonable steps to ensure that when it publishesinvestment research , disclosure is made of the following matters:(a) Any financial interest or material interest that theinvestment analyst or a close relative has, which relates to thefinancial instrument ;(b) Any shareholding by theIslamic bank licensee or its associate of 1% or more of the total issued share capital of the issuer;(c) Whether theIslamic bank licensee or its associate acts as corporate broker for the issuer;(d) Any material shareholding by the issuer in theIslamic bank licensee ;(e) Any corporate finance business undertaken by theIslamic bank licensee with or for the issuer over the past 12 months, and any future relevant corporate finance business initiatives; and(f) Whether theIslamic bank licensee is a market maker in thefinancial instrument .Amended: January 2011
Added: April 2008BC-9.12.11
If an Islamic bank licensee acts as a manager or co-manager of an initial public offering or a secondary offering it must take reasonable steps to ensure that it does not publish
investment research relating to thefinancial instrument during the period beginning on the day of publication of the listing particulars or a prospectus relating to the offering of thatfinancial instrument and ending on the 30th calendar day after the day on which thefinancial instrument is admitted to trading.Amended: January 2011
Added: April 2008BC-9.12.12
An
Islamic bank licensee and its associates must not knowingly execute an own account transaction in afinancial instrument , which is the subject ofinvestment research , prepared either by theIslamic bank licensee or its associate, until thecustomers for whom theinvestment research was principally intended have had a reasonable opportunity to act upon it.Amended: January 2011
Added: April 2008BC-9.12.13
The restriction in Rule BC-9.12.11 does not apply if:
(a) TheIslamic bank licensee or its associate is a market maker in the relevantfinancial instrument ;(b) TheIslamic bank licensee or its associate executes an unsolicited transaction for acustomer ; or(c) It is not expected to materially affect the price of thefinancial instrument .Added: April 08Inducements
BC-9.12.14
Islamic bank licensees must have systems and controls, policies and procedures to ensure that neither they, nor any of their employees, offer, give, solicit or accept any inducement which is likely to conflict significantly with any duty that they owe to theircustomers .Added: April 08BC-9.12.15
An
Islamic bank licensee may only accept goods and services under asoft dollar agreement if:(a) The goods and services do not constitute an inducement;(b) The goods and services are reasonably expected to assist in the provision of regulated investment services to theIslamic bank licensee's customers ;(c) The agreement is a written agreement for the supply of goods or services described in Rule BC-9.12.14, and these goods and services do not take the form of, or include, cash or any other direct financial benefit; and(d) TheIslamic bank licensee makes adequate disclosures regarding the use ofsoft dollar agreements .Amended: October 2015
Added: April 08BC-9.12.16
For the purpose of Sub-Paragraph BC-9.12.15(d), Paragraph BC-9.12.12 sets out the minimum disclosure requirements.
Added: April 08BC-9.12.17
A
soft dollar agreement is an agreement in any form under which anIslamic bank licensee receives goods or services in return for investment business put through or in the way of another person.Added: April 08BC-9.12.18
Before an
Islamic bank licensee enters into a transaction for acustomer , either directly or indirectly, with or through the agency of another person, under asoft dollar agreement which theIslamic bank licensee has, or knows that another member of its group has, with that other person, it must disclose to itscustomer :(a) The existence of thesoft dollar agreement ; and(b) TheIslamic bank licensee's or its group’s policy relating tosoft dollar agreements .Added: April 08BC-9.12.19
If an
Islamic bank licensee has asoft dollar agreement under which theIslamic bank licensee deals for acustomer , theIslamic bank licensee must provide thatcustomer with information as set out in Paragraph BC-9.13.12.Added: April 08BC-9.13 BC-9.13 Appendix
BC-9.13.1
For the purpose of Paragraph BC-9.5.11, the minimum information that should be contained in promotional material for specific products includes:
(a) The name of theIslamic bank licensee communicating the promotional material;(b) The licensing status of theIslamic bank licensee ;(c) TheIslamic bank licensee's address;(d) A description of the main characteristics of the financial product involved or service offered;(e) Suitable warning regarding the risks of the financial product involved and/or service offered; and(f) A clear statement indicating that, if acustomer (as defined in Section BC-9.4) is in any doubt about the suitability of the agreement which is the subject of the promotion, he should consult his own financial adviser, or else theIslamic bank licensee .Amended: July 2015
Added: April 08BC-9.13.2
For the purpose of Paragraph BC-9.6.2, the minimum information that should be contained in terms of business includes:
(a) The licensing status of theIslamic bank licensee ;(b) A statement that the licensee is bound by the CBB's regulation and licensing conditions;(c) The licensee's name, address, e-mail and telephone number;(d) A statement of the products and services provided by the licensee, as permitted by the CBB;(e) The total price to be paid by thecustomer to theIslamic bank licensee for its services, or, where an exact price cannot be indicated, the basis for the calculation of the price enabling thecustomer to verify it;(f) Information on any rights the parties may have to terminate the contract early or unilaterally under its terms, including any penalties imposed by the contract in such cases;(g) Where appropriate, thecustomer's investment objectives;(h) Where appropriate, the extent to which theIslamic bank licensee will consider thecustomers' personal circumstances when considering suitability (as required under Section BC-9.7) and the details of such matters that will be taken into account;(i) Any conflict of interest disclosure as required by Section BC-9.12;(k) A statement that clearly indicates the following:(i) Thecustomer's right to obtain copies of records relating to his business with the licensee;(ii) Thecustomer's record will be kept for 5 years or as otherwise required by Bahrain Law; and(iii) The name and job title, address and telephone number of the person in theIslamic bank licensee to whom any complaint should be addressed (in writing) by thecustomer .Amended: July 2015
Added: April 08BC-9.13.3
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08BC-9.13.4
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08BC-9.13.5
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08BC-9.13.6
This Paragraph was deleted in July 2015.
Deleted: July 2015
Added: April 08BC-9.13.7
For the purpose of Paragraph BC-9.10.4, the minimum information that should be included in a transaction confirmation includes:
(a) TheIslamic bank licensee's name and address;(b) Whether theIslamic bank licensee executed the transaction as principal or agent;(c) Thecustomer's name, account number or other identifier;(d) Where relevant, a description of thecollective investment undertaking or fund, including the amount invested or number of units involved;(e) Whether the transaction was a sale or purchase;(f) The price or unit price at which the transaction was executed;(g) If applicable, a statement that the transaction was executed on an execution only basis;(h) The date and time of the transaction or a statement that the time of execution will be provided on request;(i) Due date and procedure for settlement of transaction and the bank account;(j) The amount theIslamic bank licensee charges in connection with the transaction, including commission charges and the amount of any mark-up or mark-down, fees, taxes or duties;(k) The amount or basis of any charges shared with another person or statement that this will be made available on request;(l) Forcollective investment undertakings , a statement that the price at which the transaction has been executed is on a historic price or forward price basis, as the case may be;(m) The regulated market on which the transaction was carried out or the fact that the transaction was undertaken outside a regulated market; and(n) Whether thecustomer's counterparty was theIslamic bank licensee itself or any other person in the Islamic bank group.Amended: July 2015
Amended: January 2013
Added: April 08BC-9.13.8
For the purpose of Paragraph BC-9.10.7, the minimum information that should be included in a periodic statement includes:
(a) The number, description and value of eachfinancial instrument ;(b) The amount of cash held;(c) The total value of the portfolio; and(d) A statement as to the basis on which the value of eachfinancial instrument was calculated.Amended: July 2015
Added: April 08BC-9.13.9
For the purpose of Paragraph BC-9.10.8, the minimum information that should be included in a periodic statement, where the relationship includes portfolio management, includes:
(a) [This Subparagraph was deleted in October 2015];(b) The aggregate of any payments made and income received during the account period in respect of financing or borrowings made during that period;(c) A management report on the strategy implemented (provided at least yearly);(d) Total amount of fees and charges incurred during the period and an indication of their nature;(e) Information on any remuneration received from a third party and details of calculation basis;(f) Total amount of dividends, and other payments received during the period in relation to thecustomers portfolio;(g) Details of each transaction which have been entered into for the portfolio during the period;(h) The aggregate of money and details of allfinancial instruments transferred into and out of the portfolio during the period;(i) The aggregate of any payments including the dates of their application and dividends or other benefits received by theIslamic bank licensee from the portfolio for its own account during that period;(j) A statement of the aggregate charges of theIslamic bank licensee and its associates; and(k) A statement of the amount of any remuneration received by theIslamic bank licensee or its associates or both from a third party.Amended: October 2015
Amended: July 2015
Added: April 08BC-9.13.10
For the purpose of Paragraph BC-9.10.9, the minimum information that should be included in periodic statements, where the relationship includes contingent liability investment transactions, includes:
(a) The aggregate of money transferred into and out of the portfolio during the valuation period;(b) In relation to each open position in the account at the end of the account period, the unrealised profit or loss to thecustomer (before deducting or adding any commission which would be payable on closing out);(c) In relation to each transaction executed during the account period to close out acustomer's position, the resulting profit or loss to thecustomer after deducting or adding any commission; and(d) The aggregate of each of the following in, or relating to, thecustomer's portfolio at the close of business on the valuation date:(i) Cash;(ii) Collateral value;(iii) Management fees; and(iv) Commissions;(e) [This Subparagraph was deleted in July 2015.]Amended: July 2015
Added: April 08BC-9.13.11
For the purpose of Paragraph BC-9.12.8, the minimum requirements that should be met where the
Islamic bank licensee prepares and publishesinvestment research include:(a) Analysts must not trade in securities or related derivatives ahead of publishing research on the issuer of these securities;(b) Analysts must not trade in securities or related derivatives of any issuer that they review in a manner contrary to their existing recommendations except in special circumstances subject to pre-approval by compliance or legal personnel;(c) Analysts must not accept inducements by issuers or others with a material interest in the subject matter of investment research; and(d) Islamic banks must not promise issuers favourable research coverage, specific ratings or specific target prices in return for a future or continued business relationship, service or investment.Amended: July 2015
Amended: January 2011
Added: April 2008BC-9.13.12
For the purpose of Paragraph BC-9.12.17, the minimum requirements that should be met where the
Islamic bank licensee has asoft dollar agreement under which it deals withcustomers include:(a) The percentage paid undersoft dollar agreements of the total commission paid by or at the direction of:(i) TheIslamic bank licensee ; and(ii) Any other member of theIslamic bank licensee's group which is a party to those agreements;(b) The value, on a cost price basis, of the goods and services received by theIslamic bank licensee undersoft dollar agreements , expressed as a percentage of the total commission paid by or at the direction of:(i) TheIslamic bank licensee ; or(ii) Other members of theIslamic bank licensee's group;(c) A summary of the nature of the goods and services received by theIslamic bank licensee under thesoft dollar agreements ; and(d) The total commission paid from the portfolio of thatcustomer .Amended: July 2015
Amended: April 2011
Added: April 2008BC-10 BC-10 Customer Complaints Procedures
BC-10.1 BC-10.1 General Requirements
BC-10.1.1
All
Islamic bank licensees must have appropriate customer complaints handling procedures and systems for effective handling of complaints made by customers by 31st March 2012.Added: October 2011BC-10.1.2
Customer complaints procedures must be documented appropriately and their customers must be informed of their availability.
Added: October 2011BC-10.1.3
All
Islamic bank licensees must appoint a customer complaints officer and publicise his/ her contact details at all departments and branches and on the bank's website. The customer complaints officer must be of a senior level at the Islamic bank and must be independent of the parties to the complaint to minimize any potential conflict of interest.Amended: January 2012
Added: October 2011BC-10.1.3A
The position of customer complaints officer may be combined with that of compliance officer.
Added: July 2012BC-10.1.4
In the case of an overseas
Islamic bank licensee , a local complaints officer must be present and must report all complaints to the head office complaints unit.Amended: January 2012
Added: October 2011BC-10.2 BC-10.2 Documenting Customer Complaints Handling Procedures
BC-10.2.1
In order to make customer complaints handling procedures as transparent and accessible as possible, all
Islamic bank licensees must document their customer complaints handling procedures. These include setting out in writing:(a) The procedures and policies for:(i) Receiving and acknowledging complaints;(ii) Investigating complaints;(iii) Responding to complaints within appropriate time limits;(iv) Recording information about complaints;(v) Identifying recurring system failure issues.(b) The types of remedies available for resolving complaints; and(c) The organisational reporting structure for the complaints handling function.Amended: January 2012
Added: October 2011BC-10.2.2
Islamic bank licensees must provide a copy of the procedures to all relevant staff, so that they may be able to inform customers. A simple and easy-to-use guide to the procedures must also be made available to all customers, on request, and when they want to make a complaint.Added: October 2011BC-10.2.3
Islamic bank licensees are required to ensure that all financial services related documentation (such as financing documentation) provided to thecustomer includes a statement informing thecustomer of the availability of a simple and easy-to-use guide oncustomer complaints procedures in the event thecustomer is not satisfied with the services provided.Amended: July 2015
Amended: January 2012
Added: October 2011BC-10.3 BC-10.3 Principles for Effective Handling of Complaints
BC-10.3.1
Adherence to the following principles is required for effective handling of complaints:
Added: October 2011Visibility
BC-10.3.2
"How and where to complain" must be well publicised to customers and other interested parties, in both English and Arabic languages.
Added: October 2011Accessibility
BC-10.3.3
A complaints handling process must be easily accessible to all customers and must be free of charge.
Added: October 2011BC-10.3.4
While an
Islamic bank licensee's website is considered an acceptable mean for dealing with customer complaints, it should not be the only means available to customers as not all customers have access to the internet.Amended: January 2012
Added: October 2011BC-10.3.5
Process information must be readily accessible and must include flexibility in the method of making complaints.
Added: October 2011BC-10.3.6
Support for customers in interpreting the complaints procedures must be provided, upon request.
Added: October 2011BC-10.3.7
Information and assistance must be available on details of making and resolving a complaint.
Added: October 2011BC-10.3.8
Supporting information must be easy to understand and use.
Added: October 2011BC-10.3.9
[This Paragraph was deleted in January 2012].
Deleted: January 2012Responsiveness
BC-10.3.10
Receipt of complaints must be acknowledged in accordance with Section BC-10.5 "Response to Complaints".
Added: October 2011BC-10.3.11
Complaints must be addressed promptly in accordance with their urgency.
Added: October 2011BC-10.3.12
Customers must be treated with courtesy.
Added: October 2011BC-10.3.13
Customers must be kept informed of the progress of their complaint, in accordance with Section BC-10.5.
Added: October 2011BC-10.3.14
If a customer is not satisfied with an
Islamic bank licensee's response, theIslamic bank licensee must advise the customer on how to take the complaint further within the organisation.Added: October 2011BC-10.3.15
In the event that they are unable to resolve a complaint,
Islamic bank licensees must outline the options that are open to that customer to pursue the matter further, including, where appropriate, referring the matter to the Consumer Protection Unit at the CBB.Amended: April 2020
Added: October 2011Objectivity and Efficiency
BC-10.3.16
Complaints must be addressed in an equitable, objective, unbiased and efficient manner.
Amended: January 2012
Added: October 2011BC-10.3.17
General principles for objectivity in the complaints handling process include:
(a) Openness:
The process must be clear and well publicised so that both staff and customers can understand.(b) Impartiality:(i) Measures must be taken to protect the person the complaint is made against from bias;(ii) Emphasis must be placed on resolution of the complaint not blame; and(iii) The investigation must be carried out by a person independent of the person complained about.(c) Accessibility:(i) The bank must allow customer access to the process at any reasonable point in time; and(ii) A joint response must be made when the complaint affects different participants.(d) Completeness:
The complaints officer must find the relevant facts, talk to both sides, establish common ground and verify explanations wherever possible;(e) Equitability:
Give equal treatment to all parties.(f) Sensitivity:
Each complaint must be treated on its merits and paying due care to individual circumstances.(g) Objectivity for personnel – complaints handling procedures must ensure those complained about are treated fairly which implies:(i) Informing them immediately and completely on complaints about performance;(ii) Giving them an opportunity to explain and providing appropriate support;(iii) Keeping them informed of the progress and result of the complaint investigation;(iv) Full details of the complaint are given to those the complaint is made against prior to interview; and(v) Personnel must be assured they are supported by the process and should be encouraged to learn from the experience and develop a better understanding of the complaints process.(h) Confidentiality:(i) In addition to customer confidentiality, the process must ensure confidentiality for staff who have a complaint made against them and the details must only be known to those directly concerned;(ii) Customer information must be protected and not disclosed, unless the customer consents otherwise; and(iii) Protect the customer and customer's identity as far as is reasonable to avoid deterring complaints due to fear of inconvenience or discrimination.(i) Objectivity monitoring:
Islamic bank licensees must monitor responses to customers to ensure objectivity which could include random monitoring of resolved complaints.(j) Charges:
The process must be free of charge to customers;(k) Customer Focused Approach:(i)Islamic bank licensees must have a customer focused approach;(ii)Islamic bank licensees must be open to feedback; and(iii)Islamic bank licensees must show commitment to resolving problems.(l) Accountability:
Islamic bank licensees must ensure accountability for reporting actions and decisions with respect to complaints handling.(m) Continual improvement:
Continual improvement of the complaints handling process and the quality of products and services must be a permanent objective of theIslamic bank licensee .Amended: January 2012
Added: October 2011BC-10.4 BC-10.4 Internal Complaint Handling Procedures
BC-10.4.1
An
Islamic bank licensee's internal complaint handling procedures must provide for:(a) The receipt of written complaints;(b) The appropriate investigation of complaints;(c) An appropriate decision-making process in relation to the response to a customer complaint;(d) Notification of the decision to the customer;(e) The recording of complaints; and(f) How to deal with complaints when a business continuity plan (BCP) is operative.Added: October 2011BC-10.4.2
An
Islamic bank licensee's internal complaint handling procedures must be designed to ensure that:(a) All complaints are handled fairly, effectively and promptly;(b) Recurring systems failures are identified, investigated and remedied;(c) The number of unresolved complaints referred to the CBB is minimised;(d) The employee responsible for the resolution of complaints has the necessary authority to resolve complaints or has ready access to an employee who has the necessary authority; and(e) Relevant employees are aware of theIslamic bank licensee's internal complaint handling procedures and comply with them and receive training periodically to be kept abreast of changes in procedures.Added: October 2011BC-10.5 BC-10.5 Response to Complaints
BC-10.5.1
An
Islamic bank licensee must acknowledge in writing customer written complaints within 5 working days of receipt.Added: October 2011BC-10.5.2
An
Islamic bank licensee must respond in writing to a customer complaint within 4 weeks of receiving the complaint, explaining their position and how they propose to deal with the complaint.Added: October 2011Redress
BC-10.5.3
An
Islamic bank licensee should decide and communicate how it proposes (if at all) to provide the customer with redress. Where appropriate, theIslamic bank licensee must explain the options open to the customer and the procedures necessary to obtain the redress.Added: October 2011BC-10.5.4
Where an
Islamic bank licensee decides that redress in the form of compensation is appropriate, theIslamic bank licensee must provide the complainant with fair compensation and must comply with any offer of compensation made by it which the complainant accepts.Added: October 2011BC-10.5.5
Where an
Islamic bank licensee decides that redress in a form other than compensation is appropriate, it must provide the redress as soon as practicable.Added: October 2011BC-10.5.6
Should the customer that filed a complaint not be satisfied with the response received as per Paragraph BC-10.5.2, he can forward the complaint to the Consumer Protection Unit at the CBB within 30 calendar days from the date of receiving the letter.
Amended: April 2020
Added: October 2011BC-10.6 BC-10.6 Records of Complaints
BC-10.6.1
An
Islamic bank licensee must maintain a record of all customers' complaints. The record of each complaint must include:(a) The identity of the complainant;(b) The substance of the complaint;(c) The status of the complaint, including whether resolved or not, and whether redress was provided; and(d) All correspondence in relation to the complaint. Such records must be retained by theIslamic bank licensees for a period of 5 years from the date of receipt of the complaint.Added: October 2011BC-10.7 BC-10.7 Reporting of Complaints
BC-10.7.1
An
Islamic bank licensee must submit to the CBB's Consumer Protection Unit, 20 days after the end of the quarter, a quarterly report summarising the following:(a) The number of complaints received;(b) The substance of the complaints;(c) The number of days it took theIslamic bank licensee to acknowledge and to respond to the complaints; and(d) The status of the complaint, including whether resolved or not, and whether redress was provided.Amended: April 2020
Added: October 2011BC-10.7.2
The report referred to in Paragraph BC-10.7.1 must be sent electronically to complaint@cbb.gov.bh.
Amended: April 2020
Added: July 2013BC-10.7.3
Where no complaints have been received by the licensee within the quarter, a 'nil' report should be submitted to the CBB's Consumer Protection Unit.
Amended: April 2020
Added: July 2013BC-10.8 BC-10.8 Monitoring and Enforcement
BC-10.8.1
Compliance with these requirements is subject to the ongoing supervision of the CBB as well as being part of any CBB inspection of a licensee. Failure to comply with these requirements is subject to enforcement measures as outlined in Module EN (Enforcement).
Added: October 2011BC-11 BC-11 Measures and Procedures for Services Provided to Disabled Customers by Bahraini Retail Banks
BC-11.1 BC-11.1 General Requirements
This Chapter BC-11 is applicable only to Bahraini Islamic retail banks that operate 10 or more branches.
Amended: April 2017BC-11.1.1
Bahraini Islamic retail banks must develop special measures and procedures when providing financial and banking services and transactions fordisabled customers to safeguard their rights in requesting and receiving information to ensure equal treatment amongst all customers.Disabled customers must be identified based on the certificate issued by the Ministry of Labour and Social Development or a medical certificate issued by a qualified doctor.Amended: April 2017
Added: April 2016BC-11.1.2
Bahraini Islamic retail banks are encouraged to enhance thedisabled customers ' access to their ranges of banking services by:(a) Liaising with organisations representingdisabled customers to provide assistance; and(b) Keeping pace with changing technologies involving ATMs, electronic and internet banking.Amended: April 2017
Added: April 2016BC-11.1.3
Bahraini Islamic retail banks must have in place appropriate methods to communicate with the disabled to address their specific needs.Amended: April 2017
Added: April 2016BC-11.1.4
Bahraini Islamic retail banks must ensure that all legal requirements/documentations are taken into consideration when entering into contracts withdisabled customers with the aim of protecting thedisabled customers and themselves in court cases.Amended: April 2017
Added: April 2016BC-11.1.5
Bahraini Islamic retail banks must ensure thatdisabled customers are provided full access to all banking and financial services offered by the bank, including the provision of ATM cards on the same basis as for all other bank customers.Amended: April 2017
Added: April 2016BC-11.1.6
Bahraini Islamic retail banks must provide fast track and/or priority services fordisabled customers to address their banking needs.Amended: April 2017
Added: April 2016Fees and Charges
BC-11.1.7
Fees and charges on withdrawals, done through bank counters must be waived for all
disabled customers .Added: April 2016BC-11.1.8
Monthly fees and charges on current and savings account, including minimum balance charges, must be waived for all
disabled customers .Added: April 2016Branch and ATM Requirements
BC-11.1.9
Bahraini Islamic retail banks must provide at least one branch for serving thedisabled customers in line with the requirements in this Module, in addition to the normal branch activities. At least one ATM machine must be provided in the branch to serve thedisabled customers .Amended: April 2017
Added: April 2016BC-11.1.10
To ensure an adequate geographical distribution within the Kingdom of Bahrain, the CBB will expect two specially equipped branches within each governorate of the Kingdom. The geographical distribution will be coordinated by the CBB.
Added: April 2016BC-11.1.11
With reference to Paragraph BC-11.1.9, the ATM devices must be equipped with technology specially adapted for customers with disabilities where ATMs must:
(a) Be wheelchair accessible, ensuring that the ATM is set at an appropriate height and track for movement; and(b) Provide Braille alphabet and voice software technology (talking ATM) for the visually impaired customers.Added: April 2016Customer Account Numbers
BC-11.1.12
Customer account numbers provided for accounts of
disabled customers must be identifiable among other customer accounts to ensure that thedisabled customers are offered the specialised services as outlined in this Chapter and that all bank staff offers the bank's services accordingly, whether in person or by phone.Added: April 2016In Branch Services
BC-11.1.13
Bahraini Islamic retail banks must provide a special priority desk fordisabled customers , clearly designated with a special logo. In addition parking facilities and easy access entrances must also be provided.Amended: April 2017
Added: April 2016BC-11.1.14
Within the branch itself, special layout and signage must be used to facilitate the movement of
disabled customers , including the use of any elevators, should this be the case.Added: April 2016Training for Bank Staff
BC-11.1.15
Bahraini Islamic retail banks must ensure that their staff dealing withdisabled customers are enrolled in specialised training to ensure that they are qualified and fully familiar with the use of any specialised technology adapted for such customers and to address any other special requirements in dealing with these customers. Such training must be part of the staff's overall training requirements.Amended: April 2017
Added: April 2016Personal Banking
BC-11.1.16
Bahraini Islamic retail banks must provide special door step non-cash financial services todisabled customers .Amended: April 2017
Added: April 2016BC-11.2 BC-11.2 Special Services for Visually Impaired Customers
BC-11.2.1
Bahraini Islamic retail banks must provide the following application forms along with the terms and conditions of contracts signed by visually impaired customers for all conducted transactions in Braille format or voice records or screen readers or any other advanced and secured means:(a) Account opening forms;(b) Facilities contracts;(c) Investment and transactions documents;(d) Instructions manuals; and(e) Customer notifications.Amended: April 2017
Added: April 2016BC-11.2.2
Bahraini retail banks may accept electronic signatures and electronic finger print as a satisfactory form of signature to meet the needs of thedisabled customers . Banks should refer to Legislative Decree No. (54) of 2018 with respect to Electronic Transactions "The Electronic Communications and Transactions Law" and its amendments. Banks may determine the terms and conditions on which the facilities of biometric identification can be extended to thedisabled customers .Amended: January 2020
Amended: April 2017
Added: April 2016BC-11.2.3
Bahraini Islamic retail banks must ensure that two bank employees witness when transactions undertaken by visually impaired customers. In case of customers with visual as well as hearing impairments, Bahraini retail banks must ensure that witnesses (other than bank staff) are present for the signature of any transaction and that documents providing the identity of such witnesses are submitted.Amended: April 2017
Added: April 2016BC-11.2.4
Bahraini Islamic retail banks must provide speaking screens for the priority waiting area of banks for visually impaired customers.Amended: April 2017
Added: April 2016BC-11.3 BC-11.3 Special Services for Hearing Impaired Customers
BC-11.3.1
Bahraini Islamic retail banks must ensure that their staff dealing with hearing impaired customers are enrolled in specialised training on sign language or provide a full time translator/interpreter in the bank's premises, dedicated to communicate with such customers.Amended: April 2017
Added: April 2016BC-11.3.2
To facilitate the implementation of Paragraph BC-11.3.1, Islamic retail banks should provide a banking dictionary designed to address banking vocabulary by way of sign language through video clips and pictures to enable such customers to have a clear understanding of the banking terminology being used.
Amended: April 2017
Added: April 2016BC-12.1 BC-12.1 Financial Advice Programme
BC-12.1.1
All banks must ensure that staff members who provide financial advice to customers are enrolled in the BIBF Financial Advice Programme (“FAP”). Staff members with less than three years of experience must be enrolled for the foundation level course while staff members with three to five years of experience must be enrolled in the Level 2 programme. Staff members with five years of experience must be enrolled for the Level 3 FAP program. However, FAP is not mandatory for employees who occupy controlled functions or employees who have the Chartered Financial Analyst (CFA) or the Certified Financial Planner (CFP) qualifications.
Amended: July 2022
Added: October 2018BC-12.1.2
All banks must ensure that a suitably experienced designated senior manager monitors compliance with the requirement in BC-12.1.1 on an on-going basis.
Added: October 2018BC-12.1.3
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2018CA CA Capital Adequacy
PART 1: PART 1: Definition of Capital
CA-A CA-A Introduction
CA-A.1 CA-A.1 Purpose
Executive Summary
CA-A.1.1
The purpose of this Module is to set out the Central Bank of Bahrain (CBB)'s
capital adequacy Rules and provide guidance on the risk measurements for the calculation of capital requirements byBahraini Islamic bank licensees . This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).January 2015CA-A.1.2
Principle 9 of the Principles of Business requires that
Islamic bank licensees maintain adequate human, financial and other resources, sufficient to run their business in an orderly manner (see Section PB-1.9). In addition, Condition 5 of CBB's Licensing Conditions (Section LR-2.5) requiresIslamic bank licensees to maintain financial resources in excess of the minimum requirements specified in Module CA (Capital Adequacy).January 2015CA-A.1.3
This Module also sets out the minimum leverage requirements which
Islamic bank licensees (referred to in Section CA-B.1) must meet as a condition of their licensing.January 2015CA-A.1.4
The requirements specified in this Module vary according to the inherent risk profile of a licensee, and the volume and type of business undertaken. As one of the principal objectives of the CBB (as outlined in Article 3 of the CBB Law 2006) is the protection of depositors, it is essential to ensure that the capital recognised in regulatory capital measures is readily available for those depositors and to ensure that
Islamic bank licensees hold sufficient capital to provide some protection against unexpected losses in the normal course of business, and otherwise allow Islamic banks to effect an orderly wind-down of their operations. The minimum capital requirements specified here may not be sufficient to absorb all unexpected losses. The CBB therefore may impose more stringent capital requirements than those stated in this Module on certain banks taking into account the riskiness of the activities conducted by the concerned bank (see Paragraph CA-A.1.5A).January 2015CA-A.1.5
The CBB requires that
Islamic bank licensees maintain adequate capital, in accordance with the requirements of this Module, against their risks. In particular, allBahraini Islamic bank licensees are required to maintain capital adequacy ratios or CARs (both on a solo and a consolidated basis where applicable) above the minimum levels set out in Chapters CA-B and CA-2. Failure to remain above these ratios will result in enforcement and other measures as outlined in Section CA-1.2 and Module EN. The detailed methodology for calculating the CARs is set out in the instructions for the form PIRI.January 2015CA-A.1.5A
All
Bahraini Islamic bank licensees must maintain their own target capital ratios above the supervisory CARs mentioned in Section CA-B.2. Each concerned licensee must observe individual target ratios as agreed with the CBB on a case-by-case basis subject to a methodology to be disclosed in due course.January 2015CA-A.1.6
This Module provides support for certain other parts of the Rulebook, mainly:
(a) Prudential Consolidation and Deduction Requirements;(b) Licensing and Authorisation Requirements;(c) CBB Reporting Requirements;(d)Credit Risk Management;(e)Operational Risk Management;(f) High Level Controls:(g) Relationship with Audit Firms; and(h) Enforcement.January 2015Legal Basis
CA-A.1.7
This Module contains the CBB's Directive (as amended from time to time) relating to the capital adequacy of
Islamic bank licensees , and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable in its entirety to allBahraini Islamic bank licensees .January 2015CA-A.1.8
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
January 2015CA-A.2 CA-A.2 Module History
CA-A.2.1
This Module was first issued in January 2005 as part of the Islamic principles volume. Material changes took place in January 2008 to implement Basel II and the IFSB Capital Adequacy Standard (IFSB-2). Other changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the changes were made. Chapter UG-3 provides further guidance on Rulebook maintenance and version control.
January 2015CA-A.2.1A
The most recent changes are detailed in the Table below.
Summary of Changes
Module Ref. Change Date Description of Changes CA-A.2 10/2007 New Rule CA-A.2.5 introduced, categorising this Module as a Directive. CA-1 to CA-6 01/2008 Basel II implementation. CA-1.5 01/2008 Review of PIR by external auditors CA-4.6 04/2008 Recognition of IIRA as ECAI and mapping of ratings CA-4.2.15-18 01/2009 New guidance and rules on SMEs CA-A 01/2011 Various minor amendments to ensure consistency in CBB Rulebook. CA-A.2.5 01/2011 Clarified legal basis. CA-5.1 & CA-5.3 01/2012 Changes in respect of July 2009 and February 2011 amendments to Basel II. CA-4.2.10 and CA-4.2.11A 04/2012 Amendment made for claims on banks dealing with self-liquidating letters of credit. CA-2.1.4(g) 10/2013 Added Rule to include limited general provision against unidentified future losses as part of Tier 2. CA-2.1.4(f), CA-2.1.4A to CA-2.1.4C and CA-2.2.1 10/2013 Added Rules to deal with subordinated issued for Tier 2 capital. CA-5.5.13 10/2013 Clarified Rules on structural positions for foreign exchange risk. Module CA 1/2015 Extensive changes in respect of IFSB-15 (capital adequacy). CA-1.3.3 04/2015 Existing exemptions in respect of PIRI review will cease as at 31st December 2014 for all Bahraini Islamic bank licensees. CA-2.1.2 04/2015 Underlined the term 'financial instrument' so that it is linked to the glossary definition. CA-2.4.2 04/2015 Clarified that intangible assets other than goodwill and mortgage servicing rights are subject to transitional arrangements and are phased out as regulatory adjustments as outlined in Subparagraph CA-B.2.1(d). CA-2.4.12 04/2015 Clarified that shares of the bank held as collateral are considered as shares held indirectly and are subject to deduction under regulatory adjustments. CA-2.4.25 04/2015 Clarified the rule on significant investments in commercial entities by adding cross reference to definition. CA-2A.3.3 04/2015 Paragraph deleted as not applicable on the implementation of the capital conservation buffer. CA-B.2.1(d) 07/2015 Amendment made to clarify that during the transition period, the remainder not deducted from capital is subject to the risk weights outlined in the October 2014 version of Chapter CA-3. CA-2.4.25 and CA-2.4.26 07/2015 Amendment made to reflect the treatment of the risk weighting for exposures below the threshold limits. CA-6.2.5 07/2015 Corrected the treatment of the depreciation of Ijarah assets in the definition of gross income. CA-4.2.4, CA-4.2.4A and CA-4.2.4B 04/2016 Updated risk weightings for claims on non-central government public sector entities (PSEs). CA-9.1.4 04/2016 Corrected cross reference. CA-2.4.25 10/2016 Updated reference to CM Module. CA-B.1.5 and CA-B.1.6 07/2017 Deleted the term 'financial entity'. CA-3.2.18, CA-3.3.9 & CA-3.4.16 07/2017 Amended wording for consistency purposes. CA-10 08/2018 Added new Section on Leverage Ratio Requirements. CA-4.2.19B 07/2019 Added a new Paragraph on exposures to Social Housing Schemes CA-9.1.6 (e) 07/2019 Amended sub-paragraph to allow real estate taken as collateral to be insured under another insurance arrangement. CA-1.1.6 01/2022 Amended Paragraph. CA-1.1.6A 01/2022 Added new Paragraph on reverting from standardised approach to basic indicator approach. CA-4.2.19B 10/2022 Amended Paragraph on the implementation of social housing schemes. CA-4.7.14A 01/2023 Added a new Paragraph on recognition of credit default guarantees provided by Tamkeen. CA-10.6 07/2023 Added a new Section on Gearing. Evolution of Module
CA-A.2.2
The contents retained from the previous Module (Capital Adequacy — Islamic Banks) are effective from the dates depicted above.
January 2015CA-A.3 – CA-A.4
[Sections CA-A.3 to CA-A.4 were deleted in January 2015.]
Deleted: January 2015CA-B CA-B Scope of Application and Transitional Rules
CA-B.1 CA-B.1 Scope
CA-B.1.1
All
Bahraini Islamic bank licensees are required to measure and apply capital charges with respect to theircredit risk ,operational risk andmarket risks capital requirements.January 2015CA-B.1.2
Rules in this Module are applicable to
Bahraini Islamic bank licensees on both a solo (i.e. including their foreign branches) and on a consolidated group basis as described below. The applicable ratios and methodology are described in this Chapter and Chapters CA-1 and CA-2 for solo and consolidated CAR calculation.January 2015CA-B.1.2A
The scope of this Module includes the
parent bank and all its bankingsubsidiaries and any other financial entities such as Special Purpose Vehicles (SPVs) which are required to be consolidated for regulatory purposes by the CBB. The assets and liabilities of all suchsubsidiaries must be fully consolidated on a line-by-line basis. In some cases, the assets of foreign bankingsubsidiaries will be allowed to be included by way of aggregation (see CA-B.1.4 onward). All other financial activities (both regulated and unregulated) must be captured through consolidation. Generally, majority-owned or controlled banking and otherfinancial entities must be fully consolidated according to the methodologies outlined in this Module. If any majority-owned financial entities are not consolidated for capital purposes, all equity and other regulatory capital investments in those entities must be deducted and the assets and liabilities as well as third-party capital investments in the entity must be removed from theIslamic bank licensee's balance sheet.January 2015CA-B.1.2B
In addition, this Module applies to
Islamic bank licensees on a solo basis (also including their foreign branches). This means that the assets and liabilities ofsubsidiaries referred to in Paragraph CA-B.1.2A must not be included in the balance sheet of theparent bank for the solo capital calculation and all equity and other regulatory capital investments in those entities must be deducted from the applicable components of Total Capital of theparent bank .January 2015CA-B.1.2C
Where an
Islamic bank licensee has nosubsidiaries as referred to in Paragraph CA-B.1.2A, then the consolidated CAR requirements of this Module apply to theIslamic bank licensee on a stand-alone basis.January 2015CA-B.1.2D
Although consolidation rules outlined in this Module are prescribed only for computing regulatory minimum capital, the procedures applied for such consolidation are performed in accordance with applicable accounting standards and best practices which may be subject to change from time to time.
January 2015CA-B.1.3
If
Islamic bank licensees have investments in orcontrol over banking orfinancial entities , including SPVs, they will also need to apply rules set out in Section CA-2.4 of this Module for the calculation of their solo and consolidated Capital Adequacy Ratios (CAR).January 2015Full Consolidation Versus Aggregation
CA-B.1.4
Generally, wherever possible, the assets and liabilities of banking
subsidiaries must be consolidated on a line-by-line basis using the risk-weighting and other rules and guidance in this Module. In some cases, foreign bankingsubsidiaries are subject to slightly differing rules by their host regulator. In such cases it may be more convenient to add in the risk-weighted assets of thesubsidiary as calculated by host rules rather than by adding in the assets of thesubsidiary and subjecting them to CBB requirements and risk weights. This process of using host risk-weights instead of CBB risk-weights is termed 'aggregation'. Also host rules may treat some capital items differently to CBB rules. For example, T2 instruments may have different rules in host countries. There may therefore need to be a 'haircut' to such capital instruments, if the amount allowed by the host regulator is different to the amount of the investment by theparent bank .January 2015CA-B.1.5
For the reasons outlined in CA-B.1.2A to CA-B.1.4, banks must agree the proposed regulatory consolidation or aggregation approach for banking
subsidiaries with the CBB and their external auditor.Amended: July 2017
January 2015CA-B.1.6
If a banking
subsidiary is to be consolidated by way of aggregation, the capital and risk weighted assets (RWAs) of the non-resident entity must be shown separately. Theparent bank will be required to aggregate thesubsidiary's eligible capital and RWAs (based on the risk weighting of assets reported by thesubsidiary to its host central bank) with its own eligible capital and RWAs respectively.Amended: July 2017
January 2015CA-B.1.7
Appropriate adjustments must be made to eliminate intra-group exposures.
January 2015CA-B.1.8
If a bank in Bahrain is a
subsidiary of a non-residentparent bank , the capital adequacy of such bank must be determined on a standalone basis.January 2015CA-B.1.9
Majority-owned or controlled
financial entity subsidiaries must be adequately capitalised to reduce the possibility of future potential losses to theparent bank . Theparent bank must monitor actions taken by thesubsidiary to correct any capital shortfall and, if it is not corrected in a timely manner, the shortfall must also be deducted from theparent bank's solo and consolidated capital for regulatory capital purposes.January 2015CA-B.2 CA-B.2 Transitional Arrangements
CA-B.2.1
The transitional arrangements for implementing the new standards help to ensure that the banking sector can meet the higher capital standards through reasonable earnings retention and capital raising, while still supporting lending to the economy. The transitional arrangements are as follows:
(a) Implementation of this Module begins on 1 January 2015. As of 1 January 2015,Islamic bank licensees are required to meet each of the following new minimum CAR requirements taking each component of capital as defined in Chapters CA-2 and CA-2A divided by total risk-weighted assets (RWAs) as defined in Paragraph CA-1.1.3:
Components of Consolidated CARs Optional Minimum Ratio Required Core Equity Tier 1 (CET1) 6.5% Additional Tier 1 (AT1) 1.5% Tier 1 (T1) 8% Tier 2 (T2) 2% Total Capital 10% Capital Conservation Buffer (CCB) (see below) 2.5% CARs including CCB CET 1 plus CCB 9% Tier 1 plus CCB 10.5% Total Capital plus CCB 12.5%
Components of Solo CARs Optional Minimum Ratio Required Core Equity Tier 1 (CET1) 4.5% Additional Tier 1 (AT1) 1.5% Tier 1 (T1) 6.0% Tier 2 (T2) 2% Total Capital 8.0% Capital Conservation Buffer (CCB) (see below) 0% CARs including CCB CET 1 plus CCB N/A Tier 1 plus CCB N/A Total Capital plus CCB N/A (b) The difference between the Total Capital plus the CCB (Capital Conservation Buffer — for further explanation see Chapter CA-2A.) of 12.5% and the T1 plus CCB requirement of 10.5% for the consolidated CAR can be met with T2 and higher forms of capital;(c) The regulatory adjustments (i.e. deductions), including amounts above the aggregate 15% limit for significant investments in financial institutions, mortgage servicing rights, and deferred tax assets from temporary differences, are fully deducted from CET1 by 1 January 2019;(d) The regulatory adjustments (refer to Section CA-2.4) begin at 20% of the required adjustments to CET 1 on 1 January 2015, 40% on 1 January 2016, 60% on 1 January 2017, 80% on 1 January 2018, and reach 100% on 1 January 2019. The same transition approach applies to deductions from AT1 and T2 capital. Specifically, the regulatory adjustments to AT1 and T2 capital begin at 20% of the required deductions on 1 January 2015, 40% on 1 January 2016, 60% on 1 January 2017, 80% on 1 January 2018, and reach 100% on 1 January 2019. During this transition period, the remainder ofexposures held prior to 1st January 2015 not deducted from capital is subject to the risk weights outlined in the October 2014 version of Chapter CA-3;(e) The treatment of capital issued out ofsubsidiaries and held by third parties (e.g.minority interest ) is also phased in. Where such capital is eligible for inclusion in one of the three components of capital according to Paragraphs CA-2.3.1 to CA-2.3.5, it can be included from 1 January 2015. Where such capital is not eligible for inclusion in one of the three components of capital but is included under the existing treatment, 20% of this amount must be excluded from the relevant component of capital on 1 January 2015, 40% on 1 January 2016, 60% on 1 January 2017, 80% on 1 January 2018, and reach 100% on 1 January 2019;(f) Capital instruments that no longer qualify as non-common equity T1 capital or T2 capital are phased out beginning 1 January 2015. Fixing the base at the nominal amount of such instruments outstanding on 1 January 2015, their recognition is capped at 90% from 1 January 2015, with the cap reducing by 10 percentage points in each subsequent year. This cap is applied to AT1 and T2 separately and refers to the total amount of instruments outstanding that no longer meet the relevant entry criteria. To the extent an instrument is redeemed, or its recognition in capital is amortised, after 1 January 2015, the nominal amount serving as the base is not reduced. In addition, instruments with an incentive to be redeemed are treated as follows:(i) For an instrument that has a call prior to 1 January 2015 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward-looking basis will meet the new criteria for inclusion in T1 or T2, it continues to be recognised in that tier of capital;(ii) For an instrument that has a call on or after 1 January 2015 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward looking basis meets the new criteria for inclusion in T1 or T2, it continues to be recognised in that tier of capital. Prior to the effective maturity date, the instrument would be considered an "instrument that no longer qualifies as AT1 or T2" and is therefore phased out from 1 January 2015;(iii) For an instrument that has a call between 12 September 2012 and 1 January 2015 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward looking basis does not meet the new criteria for inclusion in T1 or T2, it is fully derecognised in that tier of regulatory capital from 1 January 2015;(iv) For an instrument that has a call on or after 1 January 2015 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward looking basis does not meet the new criteria for inclusion in T1 or T2, it is derecognised in that tier of regulatory capital from the effective maturity date. Prior to the effective maturity date, the instrument would be considered an "instrument that no longer qualifies as AT1 or T2" and is therefore phased out from 1 January 2015; and(v) For an instrument that had a call on or prior to 12 September 2012 (or another incentive to be redeemed), if the instrument was not called at its effective maturity date and on a forward looking basis does not meet the new criteria for inclusion in T1 or T2, it is considered an "instrument that no longer qualifies as AT1 or T2" and is therefore phased out from 1 January 2015.Amended: July 2015
January 2015CA-B.2.2
Capital instruments that do not meet the criteria for inclusion in CET1 are excluded from CET1 as of 1 January 2015.
January 2015CA-B.2.3
Only those instruments issued before 12 September 2012 qualify for the transition arrangements outlined in Paragraph CA-B.2.1.
January 2015CA-1 CA-1 General Requirements
CA-1.1 CA-1.1 Capital Adequacy Ratio (Definition and Methodology)
CA-1.1.1
An
Islamic bank licensee's consolidated capital adequacy ratio is calculated by dividing its consolidated Total Capital by its consolidated risk-weighted assets (RWAs). These items are defined and described in Paragraphs CA-1.1.2 and CA-1.1.3. A full explanation of the formula used to calculate the consolidated CAR is given below.January 2015Consolidated Total Capital
Consolidated Risk-weighted Assets
CA-1.1.3
Consolidated Total risk-weighted assets are determined by:
(a) Multiplying the capital requirements formarket risk (see CA-1.1.7) andoperational risk (see CA-1.1.6) by 12.5 for theIslamic bank licensee and all its consolidatedsubsidiaries ; and(b) Adding the resulting figures to the sum of risk-weighted assets forcredit risk (see CA-1.1.4) andsecuritisation risk for theIslamic bank licensee and all itssubsidiaries (see CA-1.1.5).January 2015CA-1.1.4
For the measurement of their
credit risks ,Islamic bank licensees measure the risks in the standardised approach, applying the measurement framework described in Chapters CA-3, CA-4, and CA-9 (real estate) and subject to the credit mitigation techniques outlined in Section CA-4.7 of this Module and subject to any adjustments described in Paragraphs CA-1.1.9 onward in relation to assets funded by Profit Sharing Investment Accounts (PSIAs).January 2015CA-1.1.5
The Sukuk and
securitisation framework is set out in Chapter CA-8.Islamic bank licensees must apply this framework for determining regulatory capital requirements on exposures arising from traditionalsecuritisations or sukuks.January 2015CA-1.1.6
For the measurement of their
operational risks ,Islamic bank licensees have a choice, subject to notification to the CBB, between two broad methodologies:(a) The basic indicator approach, by applying the measurement framework described in Chapter CA-6 of this Module; and(b) The standardised approach (also in Chapter CA-6). This approach is subject to certain conditions (outlined in Chapter OM-8) and requires the explicit approval of the CBB.Amended: January 2022
January 2015CA-1.1.6A
For the purpose of Sub-paragraph CA-1.1.6 (b), a
licensee must provide appropriate justification and seek CBB’s prior approval, if it wishes to revert from the standardised approach to the basic indicator approach.Added: January 2022CA-1.1.7
For the measurement of
market risk in the trading book,Islamic bank licensees must measure the risks in a standardised approach, applying the measurement frameworks described in Chapter CA-5 of this Module.Market risk inherent in certain Shari'a compliant products is outlined in detail in Chapter CA-3. The treatment ofmarket risk positions funded by PSIAs is given in Paragraphs CA-1.1.9 onward.January 2015CA-1.1.8
In light of Paragraphs CA-1.1.3 to CA-1.1.7, each
Islamic bank licensee's overall capital requirement consists of:(a) Thecredit risk requirements laid down in Chapters CA-3, CA-4, and CA-9 (subject to any PSIA adjustment below) and the charges in respect of sukuk andsecuritisations in Chapter CA-8 and including the credit counterparty risk on all over-the-counter Shari'a compliant hedging contracts whether in the trading or the banking books (see CA-4.5.15-16 and Appendix CA-2);(b) The capital charges foroperational risk described in Chapter CA-6; and(c) The capital charges formarket risks described in Chapters CA-3 and CA-5 summed arithmetically subject to any PSIA adjustment below.January 2015Adjustment to the Capital Ratio Denominator
CA-1.1.9
The capital amount of PSIAs is not guaranteed by the
Islamic bank licensee due to the profit-sharing nature of the underlying Mudarabah contract. Therefore, any losses arising from investments or assets financed by PSIA are to be borne by the Investment Account Holders. Nevertheless, IAH are not liable for any losses arising from theIslamic bank licensee's negligence, misconduct, fraud or breach of its investment mandate, which is characterised as a fiduciary risk and considered part of theIslamic bank licensee's operational risk .January 2015CA-1.1.10
An
Islamic bank licensee may be constructively obliged to smooth the profits payout to Unrestricted PSIAs (UPSIAs). A necessary consequence of some of these smoothing practices adopted byIslamic bank licensees is that a portion of risk (i.e. volatility of the stream of profits) arising from assets financed by UPSIAs is effectively transferred to theIslamic bank licensee's own capital, a phenomenon known as "displaced commercial risk" (DCR).January 2015CA-1.1.11
The CBB requires regulatory capital to be held to cater for DCR and the
operational risk mentioned in Paragraph CA-6.1.1 in view of the residual risk to theIslamic bank licensee and its shareholders. To be prudent, the CBB requiresIslamic bank licensees to provide regulatory capital to cover a minimum requirement arising from 30% of the risk weighted assets and contingencies financed by the UPSIAs. Therefore, for the purpose of calculating its Capital Adequacy Ratio (CAR), the risk-weighted assets of anIslamic bank licensee consist of the sum of the risk-weighted assets financed by theIslamic bank licensee's own capital and liabilities, plus 30% (shown below as α) of the risk-weighted assets financed by theIslamic bank licensee's UPSIAs as outlined in Paragraph CA-1.1.12.January 2015CA-1.1.12
For the purpose of this Module the consolidated CAR is calculated by applying the Total Capital (as defined in Paragraph CA-1.1.2) to the numerator and risk-weighted assets (RWAs) as defined in Paragraph CA-1.1.3) to the denominator as shown below.
Total Capital
{Self-financed RWAs (Credit + Market Risks) + Operational RisksPlus
α [RWAs funded by UPSIAsa (Credit + Market Risks) -
PER and IRR of UPSIAs]}(a) Where the funds are commingled, the RWA funded by UPSIA are calculated based on their pro-rata share of the relevant assets.(b) α refers to the proportion assets funded by UPSIA which, as determined by the CBB, is 30%; and(c) The UPSIAs' share of PER and by IRR is deducted from the total RWAs funded by the UPSIAs. The PER has the effect of reducing the displaced commercial risk and the IRR has the effect of reducing any future losses on the investment financed by the PSIA.
This formula is applicable as theIslamic bank licensees may smooth income to the UPSIAs as a mechanism to minimise withdrawal risk.January 2015CA-1.1.13
All transactions, including forward sales and purchases, must be included in the calculation of capital requirements as from the date on which they were entered into. Although regular reporting takes place quarterly,
Islamic bank licensees must manage their risks in such a way that the capital and leverage requirements are being met on a continuous basis, i.e. at the close of each business day.Islamic bank licensees must not "window-dress" by showing significantly lower credit ormarket risk positions on reporting dates.Islamic bank licensees must maintain strict risk management systems to ensure that intra-day exposures are not excessive. If anIslamic bank licensee fails to meet the capital requirements of this Module, theIslamic bank licensee must take immediate measures to rectify the situation as detailed in Section CA-1.2.January 2015Solo Capital Adequacy Ratio
CA-1.1.14
An
Islamic bank licensee 's solo capital adequacy ratio is calculated by dividing its Solo Total Capital by its Solo risk-weighted assets as described in Paragraph CA-1.1.15 and CA-1.1.16 without consolidating the assets and liabilities ofsubsidiaries referred to Paragraph CA-B.1.2A into the balance sheet of theparent bank .January 2015Solo Total Capital
CA-1.1.15
Solo Total Capital consists of the sum of the following elements:
(a) T1 (Going-concern):(i) CET1 for theparent bank only (as defined in Paragraph CA-2.1.2 but deducting item (c) before applying regulatory adjustments in item (d);(ii) AT1 for theparent bank only (as defined in Paragraph CA-2.1.4 but deducting item (c) before applying regulatory adjustments in item (d); and(b) T2 (Gone-concern) for theparent bank only as defined in Paragraph CA-2.1.8 but deducting item (c) before applying regulatory adjustments in item (d).January 2015Solo Risk-weighted Assets
CA-1.1.16
Solo Total risk-weighted assets are determined by:
(a) Multiplying the capital requirements formarket risk (see CA-1.1.7) andoperational risk (see CA-1.1.6) by 12.5 for theparent bank alone; and(b) Adding the resulting figures to the sum of risk-weighted assets forcredit risk (see CA-1.1.4) andsecuritisation risk for theparent bank alone (see CA-1.1.5).January 2015CA-1.1.17
For the purpose of this Module the solo CAR is calculated by applying the Solo Total Capital (as defined in Paragraph CA-1.1.15) to the numerator and solo risk-weighted assets (RWAs) as defined in Paragraph CA-1.1.16) to the denominator as shown below.
Total Capital
{Self-financed RWAs (Credit + Market Risks) + Operational Risks
Plus
α [RWAs funded by UPSIAsa (Credit+ MarketRisks) -
PER and IRR of UPSIAs]}(a) Where the funds are commingled, the RWA funded by UPSIA are calculated based on their pro-rata share of the relevant assets.(b) α refers to the proportion assets funded by UPSIA which, as determined by the CBB, is 30%; and(c) The UPSIAs' share of PER and by IRR is deducted from the total RWAs funded by the UPSIAs. The PER has the effect of reducing the displaced commercial risk and the IRR has the effect of reducing any future losses on the investment financed by the PSIA.
This formula is applicable as theIslamic bank licensees may smooth income to the UPSIAs as a mechanism to minimise withdrawal risk.January 2015CA-1.2 CA-1.2 Reporting
CA-1.2.1
Formal reporting to the CBB of capital adequacy must be made in accordance with the requirements set out under Section BR-3.1.
January 2015CA-1.2.2
All
Bahraini Islamic bank licensees must provide the CBB, with immediate written notification (i.e. by no later than the following business day) of any actual breach of the minimum ratios outlined in Subparagraph CA-B.2.1(a). Where such notification is given, theIslamic bank licensee must also provide the CBB:(a) No later than one calendar week after the notification, with a written action plan setting out how theIslamic bank licensee proposes to restore the relevant ratios to the required minimum level(s), further, describing how theIslamic bank licensee will ensure that a breach of such ratios will not occur again in the future;(b) Weekly reports thereafter on theIslamic bank licensee 's relevant ratios until such ratios have reached the required minimum level(s) described in Subparagraph CA-B.2.1(a); and(c) TheIslamic bank licensee must take additional note of the Capital Conservation Plan requirements in Chapter CA-2A where additional action is required when the Capital Conservation buffer has been breached.January 2015CA-1.2.3
The
Islamic bank licensee is required to submit form PIRI to the CBB on a weekly basis, until the concerned CARs identified in Paragraph CA-1.2.2 exceed the required minimum ratios.January 2015CA-1.2.4
The CBB will notify
Islamic bank licensees in writing of any action required of them with regard to the corrective and preventive action (as appropriate) proposed by theIslamic bank licensee pursuant to the above, as well as of any other requirement of the CBB in any particular case.January 2015CA-1.2.5
Islamic bank licensees should note that the CBB considers the breach of regulatory CARs to be a very serious matter. Consequently, the CBB may (at its discretion) subject anIslamic bank licensee which breaches its CAR(s) to a formal licensing reappraisal. Such reappraisal may be effected either through the CBB's own inspection function or through the use ofappointed experts , as appropriate. Following such appraisal, the CBB will notify theIslamic bank licensee concerned in writing of its conclusions with regard to the continued licensing of theIslamic bank licensee .January 2015CA-1.2.6
The CBB recommends that the
Islamic bank licensee's compliance officer support and cooperate with the CBB in the monitoring and reporting of the CARs and other regulatory reporting matters. Compliance officers should ensure that the concernedIslamic bank licensees and theirsubsidiaries and other group companies have adequate internal systems and controls to comply with these rules.January 2015CA-1.3 CA-1.3 Review of Prudential Information Returns
CA-1.3.1
The CBB requires all
Islamic bank licensees to request their external auditor to conduct a review of the prudential returns on a quarterly basis in accordance with the requirements set out under Section BR 3.1.January 2015CA-1.3.2
If an
Islamic bank licensee provides prudential returns without any reservation from auditors for two consecutive quarters, it can apply for exemption from such review for a period to be decided by CBB.January 2015CA-1.3.3
For
Bahraini Islamic bank licensees all existing exemptions in respect of PIRI review as at 31st December 2014 will cease.Amended: April 2015
January 2015CA-1.3.4
Islamic bank licensees' daily compliance with the capital requirements for credit andmarket risk must be verified by the independent risk management department and the internal auditor.January 2015CA-2 CA-2 Regulatory Capital
CA-2.1 CA-2.1 Regulatory Capital
Tier 1 (T1)
CA-2.1.1
The predominant form of T1 capital must be common shares and retained earnings (hereafter referred to as CET1). Deductions from capital and prudential filters are applied at the level of CET1 (see CA-2.1 to CA-2.4 for a more detailed explanation). The remainder of the T1 capital must be comprised of instruments that are subordinated, have fully discretionary non-cumulative dividends or coupons and have neither a maturity date nor an incentive to redeem.
January 2015Common Equity Tier 1 (CET1)
CA-2.1.2
CET1 capital consists of the sum of:
(a) Issued and fully paid common shares that meet the criteria for classification as common shares for regulatory purposes (see CA-2.1.3);(b) Disclosed reserves including:(i) General reserves;(ii) Legal / statutory reserves;(iii) Share premium;(iv) Fair value reserves arising from fair valuingfinancial instruments ; and(v) Retained earnings or losses (including net profit and loss for the reporting period, whether reviewed or audited);(c) Common shares issued by consolidated bankingsubsidiaries of theIslamic bank licensee and held by third parties (i.e.minority interest ) that meet the criteria for inclusion in CET1. See Section CA-2.3 for the relevant criteria; and(d) Regulatory adjustments (including unrealised losses) applied in the calculation of CET1 (see Section CA-2.4).Amended: April 2015
January 2015CA-2.1.2A
For unrealised fair value reserves relating to financial instruments to be included in CET1 Capital,
Islamic bank licensees and their auditor must only recognise such gains or losses that are prudently valued and independently verifiable (e.g. by reference to market prices). The CBB will closely review the components and extent of unrealised gains and losses and will exclude any that do not have reference to independent valuations (i.e. those made by bank management alone will not be included) or which are not deemed to be made on a prudent basis. As such, the prudent valuations, and the independent verification thereof, are mandatory. Unrealised gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank's owncredit risk must be derecognised in the calculation of CET1 .January 2015CA-2.1.3
For a common share to be included in CET1, it must meet the following criteria:
(a) It is directly issued to shareholders and fully paid in;(b) It is non-cumulative;(c) It is able to absorb losses within theIslamic bank licensee on a going-concern basis;(d) It is neither secured nor covered by a guarantee of the issuer or a related entity or any other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors;(e) It represents the most subordinated claim in liquidation of theIslamic bank licensee (i.e. it is junior to depositors, general creditors, and subordinated capital instruments of the bank);(f) It is entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been repaid in liquidation (i.e. it has an unlimited and variable claim, not a fixed or capped claim);(g) Its principal is perpetual and never repaid outside of liquidation;(h) TheIslamic bank licensee does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled nor do the statutory or contractual terms provide any feature which might give rise to such an expectation;(i) Distributions are paid out of distributable items (retained earnings included). The level of distributions is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items);(j) There are no circumstances under which the distributions are obligatory. Non-payment is therefore not an event of default;(k) Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions;(l) It is the issued capital that takes the first and proportionately greatest share of any losses as they occur;(m) The paid in amount is recognised as equity capital (i.e. it is not recognised as a liability) for determining balance sheet insolvency;(n) The paid in amount is classified as equity under AAOIFI standards and disclosed separately in the financial statements;(o) TheIslamic bank licensee cannot directly or indirectly have funded the purchase of the instrument (i.e. treasury shares and shares purchased or funded by theIslamic bank licensee for employee share purchase schemes must be deducted from CET1, and are subject to the 10% limit under the Commercial Companies' Law. Any of theIslamic bank licensee's own shares used as collateral for the advance of funds to its customers must be deducted from CET1 and are also subject to the above 10% limit); and(p) It is only issued with the approval of the shareholders of the issuingIslamic bank licensee ;January 2015Additional Tier 1 (AT1) Capital
CA-2.1.4
AT1 capital consists of the sum of:
(a) Instruments issued by theIslamic bank licensee that meet the criteria for inclusion in AT1 outlined in Paragraph CA-2.1.6;(b) Stock surplus (share premium) resulting from the issue of instruments included in AT1;(c) Instruments issued by consolidated bankingsubsidiaries of theIslamic bank licensee and held by third parties that meet the criteria for inclusion in AT1 and are not included in CET1. See Section CA-2.3 for the relevant criteria; and(d) Regulatory adjustments applied in the calculation of AT1 (see Section CA-2.4).January 2015CA-2.1.5
[This Paragraph has been left blank.]
January 2015CA-2.1.6
For an instrument to be included in AT1, it must meet or exceed all the criteria below:
(a) It is issued and paid-in;(b) It is subordinated to depositors and general creditors of theIslamic bank licensee ;(c) It is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-visIslamic bank licensee creditors;(d) It is perpetual, i.e. there is no maturity date and there are no step-ups or other incentives to redeem;(e) It may be callable at the initiative of the issuer only after a minimum of five years and anIslamic bank licensee must not do anything which creates an expectation that the call will be exercised. AnIslamic bank licensee may not exercise such a call option without receiving prior written approval of the CBB and the called instrument is replaced with capital of the same or better quality; or theIslamic bank licensee demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised(f) In all early call situations, replacement of existing capital must be done at conditions which are sustainable for the income capacity of theIslamic bank licensee ;(g) Any repayment of principal (e.g. through repurchase or redemption) must be with prior written approval of the CBB andIslamic bank licensees must not assume or create market expectations that supervisory approval will be given;(h) TheIslamic bank licensee must have full discretion at all times to cancel distributions/payments. This means that 'dividend pushers' are prohibited. A dividend pusher obliges a bank to make a dividend or coupon payment on an instrument if it has made a payment on another capital instrument or share. Also features that require theIslamic bank licensee to make distributions in kind are not permitted;(i) Cancellation of discretionary payments must not be an event of default;(j)Islamic bank licensees must have full access to cancelled payments to meet obligations as they fall due;(k) Cancellation of distributions/payments must not impose restrictions on theIslamic bank licensees except in relation to distributions to common stockholders;(l) Dividends/coupons must be paid out of distributable items;(m) The instrument cannot have a credit sensitive dividend feature (this might serve to increase the dividend payable if a bank's credit rating falls from A to BBB, for example) which may lead to the dividend/coupon being reset periodically based in whole or in part on theIslamic bank licensee 's credit standing;(n) The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms part of national insolvency law. This means that instruments accounted for as liabilities must be able to be written down in some way as described in subparagraph (o);(o) Instruments classified as liabilities for accounting purposes must have principal loss absorption through either (i) conversion to common shares at an objective pre-specifiedtrigger event ; or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specifiedtrigger event . The write-down will reduce the claim of the instrument in liquidation and reduce the amount that will be re-paid when a call is exercised and partially or fully reduce coupon/dividend payments on the instrument;(p) Neither theIslamic bank licensee nor a related party over which it exercisescontrol or significant influence can have purchased the instrument, nor can theIslamic bank licensee directly or indirectly have funded the purchase of the instrument. This also means that own holdings of AT1 instruments and AT1 instruments purchased or funded by the bank for employee share purchase schemes must be deducted from AT1. Any of theIslamic bank licensee 's AT1 instruments used as collateral for the advance of funds to its customers must be deducted from AT1;(q) The instrument cannot have any features that hinder recapitalisation, such as provisions that require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame; and(r) If the instrument is not issued out of a fully consolidatedsubsidiary bank or the parentIslamic bank licensee in the consolidated group (e.g. a special purpose vehicle — "SPV"), proceeds must be immediately available without limitation to theparent bank in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in AT1.January 2015CA-2.1.7
[This paragraph has been left blank.]
January 2015CA-2.1.7A
The issuance of any new shares as a result of a
trigger event must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted.January 2015CA-2.1.7B
Where an issuing bank or SPV is part of a
banking group and the issuer wishes the instrument to be included in the total capital of the group (in addition to its solo capital where applicable), the terms and conditions must specify an additionaltrigger event .January 2015CA-2.1.7C
Any common stock paid as compensation to the holders of the instrument must be common stock of either the issuing bank or the
parent bank of the group (including any successor in resolution).January 2015Write Down or Conversion of Additional Tier 1 Instruments
CA-2.1.7D
For the purposes of Subparagraph CA-2.1.6(o), the following provisions apply to AT1 instruments accounted for as liabilities:
(a) Atrigger event occurs when the CET1 capital ratio of theIslamic bank licensee referred to in Subparagraph CA-B.2.1(a) falls below either of the following:(i) 7.0%; or(ii) A level higher than 7.0 %, where determined by theIslamic bank licensee and specified in the provisions governing the instrument; and(b)Islamic bank licensees may specify in the provisions governing the instrument one or moretrigger events in addition to that referred to in Subparagraph (a).January 2015CA-2.1.7E
Where the provisions governing AT1 instruments require them to be converted into CET1 instruments upon the occurrence of a
trigger event , those provisions must specify either of the following:(a) The rate of such conversion and a limit on the permitted amount of conversion; or(b) A range within which the instruments will convert into CET1 instruments.January 2015CA-2.1.7F
Where the provisions governing AT1 instruments require their principal amount to be written down upon the occurrence of a
trigger event , the write down must reduce all the following:(a) The claim of the holder of the instrument in the insolvency or liquidation of theIslamic bank licensee ;(b) The amount required to be paid in the event of the call or redemption of the instrument; and(c) The distributions made on the instrument.January 2015CA-2.1.7G
Write down or conversion of an AT1 instrument must, under the applicable accounting framework, generate items that qualify as CET1 items.
January 2015CA-2.1.7H
The amount of AT1 instruments recognised in AT1 items is limited to the minimum amount of CET1 items that would be generated if the principal amount of the AT1 instruments were fully written down or converted into CET1 instruments.
January 2015CA-2.1.7I
The aggregate amount of AT1 instruments that is required to be written down or converted upon the occurrence of a
trigger event must be no less than the lower of the following:(a) The amount required to restore fully the CET1 ratio of theIslamic bank licensee to 7.0 %; and(b) The full principal amount of the instrument.January 2015CA-2.1.7J
When a
trigger event occursIslamic bank licensees must do the following:(a) Immediately inform the CBB;(b) Inform the holders of the AT1 instruments; and(c) Write down the principal amount of the instruments, or convert the instruments into CET1 instruments without delay, but no later than within one month, in accordance with the requirement laid down in this Section.January 2015CA-2.1.7K
A
Islamic bank licensee issuing AT1 instruments that convert to CET1 on the occurrence of atrigger event must ensure that its authorised share capital is at all times sufficient, for converting all such convertible AT1 instruments into shares if atrigger event occurs.January 2015CA-2.1.7L
All necessary authorisations must be obtained at the date of issuance of such convertible AT1 instruments. The
Islamic bank licensee must maintain at all times the necessary prior authorisation from the CBB to issue the CET1 instruments into which such AT1 instruments would convert upon occurrence of atrigger event .January 2015CA-2.1.7M
An
Islamic bank licensee issuing AT1 instruments that convert to CET1 on the occurrence of atrigger event must ensure that there are no procedural impediments to that conversion by virtue of its incorporation or statutes or contractual arrangements.January 2015Consequences of the Conditions for AT1 Instruments Ceasing to Be Met
CA-2.1.7N
The following must apply where, in the case of an AT1 instrument, the conditions laid down in Paragraph CA-2.1.6 cease to be met:
(a) That instrument must immediately cease to qualify as an AT1 instrument; and(b) The part of the share premium accounts that relates to that instrument must immediately cease to qualify as an AT1 item.January 2015Tier 2 Capital(T2)
CA-2.1.8
T2 capital consists of the sum of the following items
(a) Instruments issued by theIslamic bank licensee that meet the criteria for inclusion in T2 capital outlined in Paragraph CA-2.1.10;(b) Stock surplus (share premium) resulting from the issue of instruments included in T2 capital;(c) Instruments issued by consolidated bankingsubsidiaries of theIslamic bank licensee and held by third parties that meet the criteria for inclusion in T2 capital and are not included in T1. See Section CA-2.3 for the relevant criteria;(d) General provisions held against future, presently unidentified losses on financing which are freely available to meet losses which subsequently materialise and qualify for inclusion within T2. Such general provisions which are eligible for inclusion in T2 are limited to a maximum of 1.25 percentage points of credit risk-weighted risk assets. Provisions ascribed to identified deterioration of particular financing assets or known liabilities, whether individual or grouped, must be excluded from T2 Capital;(e) Regulatory adjustments applied in the calculation of T2 Capital (see CA-2.4); and(f)Asset revaluation reserves which arise from the revaluation of fixed assets from time to time in line with the change in market values, and are reflected on the face of the balance sheet as a revaluation reserve. Similarly, gains may also arise from revaluation of Investment Properties (real estate). These reserves (including the net gains on investment properties) may be included in T2 capital, with the concurrence of the external auditor, provided that the assets are prudently valued, fully reflecting the possibility of price fluctuation and forced sale.January 2015CA-2.1.9
The treatment of instruments issued out of consolidated
subsidiaries of theIslamic bank licensee and the regulatory adjustments applied in the calculation of T2 Capital are addressed in Section CA-2.3.January 2015CA-2.1.10
For an instrument to be included in T2 capital (see CA-2.1.8(a)), it must meet all the criteria below:
(a) It is issued and paid-in;(b) It is subordinated to depositors and general creditors of theIslamic bank licensee ;(c) It is neither secured nor covered by a guarantee of the issuingIslamic bank licensee or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis depositors and general creditors of theIslamic bank licensee ;(d) It must have a minimum maturity of at least 5 years and it will be amortised on a straight line basis in the remaining five years before maturity and there are no step-ups or other incentives to redeem;(e) It may be callable at the initiative of theIslamic bank licensee only after a minimum of five years and theIslamic bank licensee must not do anything which creates an expectation that the call will be exercised. TheIslamic bank licensee may not exercise such a call option without receiving written prior approval of the CBB and the called instrument must be replaced with capital of the same or better quality; or theIslamic bank licensee demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised. In all early call situations, any replacement of existing capital must be done at conditions which are sustainable for the income capacity of theIslamic bank licensee ;(f) The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal), except in bankruptcy and liquidation;(g) The instrument cannot have a credit sensitive dividend/coupon that is reset periodically based in whole or in part on theIslamic bank licensee's credit standing;(h) Neither the issuing bank nor a related party over which theIslamic bank licensee exercisescontrol or significant influence can have purchased the instrument, nor can theIslamic bank licensee directly or indirectly have funded the purchase of the instrument. This means own holdings of T2 instruments and T2 purchased or funded by theIslamic bank licensee for employee share purchase schemes must be deducted from T2. Any of theIslamic bank licensee's own T2 instruments used as collateral for the advance of funds to its customers must be deducted from T2;(i) If the instrument is not issued out of a fully consolidatedsubsidiary bank or the parentIslamic bank licensee in the consolidated group (e.g. a special purpose vehicle — "SPV"), proceeds must be immediately available without limitation to the parentIslamic bank licensee in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in T2 capital; and(j) Subject to Shari'a compliance, anIslamic bank licensee can issue T2 capital instruments in the form of Mudarabah or Wakalah Sukuk, which would be convertible (as specified in the contract) into shares of common equity at the point of non-viability or insolvency. It is essential that the terms of conversion, notably thetrigger event and the conversion ratio, are clearly specified in the Sukuk contract so as to avoid gharar. Prior to conversion, the underlying assets of such Sukuk would not be available to meet the claims of theIslamic bank licensee's current account holders or other creditors. After conversion of the Sukuk in case of theIslamic bank licensee's non-viability or insolvency, the resulting CET1 capital would rank pari passu with other CET1 shareholders.January 2015CA-2.1.10A
[This paragraph has been left blank.]
January 2015CA-2.1.10B
The issuance of any new shares as a result of a
trigger event must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted.January 2015CA-2.1.10C
Where an issuing bank or SPV is part of a
banking group and the issuer wishes the instrument to be included in the total capital of the group (in addition to its solo capital where applicable), the terms and conditions must specify an additionaltrigger event .January 2015CA-2.1.10D
Any common stock paid as compensation to the holders of the instrument must be common stock of either the issuing bank or the
parent bank of the group (including any successor in resolution).January 2015Write Down or Conversion of Tier 2 Instruments
CA-2.1.10E
For the purposes of Subparagraph CA-2.1.10(j), the following provisions apply to T2 Sukuk instruments:
(a) Atrigger event occurs when the CET1 capital ratio of theIslamic bank licensee referred to in Subparagraph CA-B.2.1(a) falls below either of the following:(i) 7.0%; or(ii) A level higher than 7.0 %, where determined by theIslamic bank licensee and specified in the provisions governing the instrument; and(b)Islamic bank licensees may specify in the provisions governing the instrument one or moretrigger events in addition to that referred to in Subparagraph (a).January 2015CA-2.1.10F
Where the provisions governing T2 instruments require them to be converted into CET1 instruments upon the occurrence of a
trigger event , those provisions must specify either of the following:(a) The rate of such conversion and a limit on the permitted amount of conversion; or(b) A range within which the instruments will convert into CET1 instruments.January 2015CA-2.1.10G
Where the provisions governing T2 instruments require their principal amount to be written down upon the occurrence of a
trigger event , the write down must reduce all the following:(a) The claim of the holder of the instrument in the insolvency or liquidation of theIslamic bank licensee ;(b) The amount required to be paid in the event of the call or redemption of the instrument; and(c) The distributions made on the instrument.January 2015CA-2.1.10H
Write down or conversion of a T2 instrument must, under the applicable accounting framework, generate items that qualify as CET1 items.
January 2015CA-2.1.10I
The amount of T2 instruments recognised in T2 items is limited to the minimum amount of CET1 items that would be generated if the principal amount of the T2 instruments were fully written down or converted into CET1 instruments.
January 2015CA-2.1.10J
The aggregate amount of T2 instruments that is required to be written down or converted upon the occurrence of a
trigger event must be no less than the lower of the following:(a) The amount required to restore fully the CET1 ratio of theIslamic bank licensee to 7.0 %; and(b) The full principal amount of the instrument.January 2015CA-2.1.10K
When a
trigger event occursIslamic bank licensees must do the following:(a) Immediately inform the CBB;(b) Inform the holders of the T2 instruments; and(c) Write down the principal amount of the instruments, or convert the instruments into CET1 instruments without delay, but no later than within one month, in accordance with the requirement laid down in this Section.January 2015CA-2.1.10L
An
Islamic bank licensee issuing T2 instruments that convert to CET1 on the occurrence of atrigger event must ensure that its authorised share capital is at all times sufficient, for converting all such convertible T2 instruments into shares if atrigger event occurs.January 2015CA-2.1.10M
All necessary authorisations must be obtained at the date of issuance of such convertible T2 instruments. The
Islamic bank licensee must maintain at all times the necessary prior authorisation from the CBB to issue the CET1 instruments into which such T2 instruments would convert upon occurrence of atrigger event .January 2015CA-2.1.10N
An
Islamic bank licensee issuing T2 instruments that convert to CET1 on the occurrence of atrigger event must ensure that there are no procedural impediments to that conversion by virtue of its incorporation or statutes or contractual arrangements.January 2015Consequences of the Conditions for T2 Instruments Ceasing to Be Met
CA-2.1.10O
The following must apply where, in the case of a T2 instrument, the conditions laid down in Paragraph CA-2.1.10 cease to be met:
(a) That instrument must immediately cease to qualify as a T2 instrument; and(b) The part of the share premium accounts that relates to that instrument must immediately cease to qualify as a T2 item.January 2015Treatment of PSIA, PER and IRR
CA-2.1.11
Profit-sharing investment accounts of an
Islamic bank licensee are not classified as part of theIslamic bank licensee's capital because they do not meet the above-mentioned criteria of T1 or T2 Capital. Furthermore, all the investment risk reserve (IRR) and a portion of the profit equalisation reserve (PER) belong to the equity of investment account holders, and thus are not part of the capital of theIslamic bank licensee . As the purpose of a PER is to smooth the profit payouts and not to cover losses, any portion of a PER that is part of theIslamic bank licensee's reserves should also not be treated as part of the regulatory capital of theIslamic bank licensee . The impact of PER and IRR has already been incorporated in the alpha component of the denominator of the formula for the calculation of the CAR, as outlined in Paragraph CA-1.1.12.January 2015CA-2.2 CA-2.2 Limits and Minima on the Use of Different Forms of Capital
Consolidated T1 Capital and Total Capital
CA-2.2.1
CAR components and CARs outlined in Paragraph CA-B.2.1 must meet or exceed the following minimum ratios on a consolidated basis relative to total risk-weighted assets:
(a) CET1 must be at least 6.5% of risk-weighted assets at all times;(b) T1 Capital must be at least 8% of risk-weighted assets at all times;(c) Total Capital (T1 Capital plus T2 Capital) must be at least 10% of risk-weighted assets at all times;(d) In addition,Islamic bank licensees must meet the minimum Capital Conservation Buffer (CCB) requirement of 2.5% of risk-weighted assets. The CCB must be composed of CET1 and so this gives an aggregate 9% CET1 including the CCB minimum capital requirement;(e) A minimum 10.5% T1 Capital Adequacy Ratio including the above CCB requirement; and(f) A 12.5% minimum Total Capital Adequacy Ratio including the above CCB requirement.January 2015Solo Tier 1 Capital and Total Capital
CA-2.2.1A
CAR components and CARs outlined in Paragraph CA-B.2.1 must meet or exceed the following minimum ratios on a solo basis relative to total risk-weighted assets:
(a) CET1 must be at least 4.5% of risk-weighted assets at all times;(b) T1 Capital must be at least 6% of risk-weighted assets at all times;(c) Total Capital (T1 Capital plus T2 Capital) must be at least 8% of risk-weighted assets at all times; and(d) The minimum Capital Conservation Buffer (CCB) requirement of 2.5% of risk-weighted assets does not apply on a solo basis.January 2015CA-2.2.2
CET1 must be the predominant form of capital. Accordingly, the contribution of AT1 instruments towards the Minimum T1 Capital Ratios mentioned in Paragraphs CA-2.2.1 and CA-2.2.1A is limited to 1.5%.
January 2015CA-2.2.3
The limits on AT1 instruments and T2 instruments are based on the amount of CET1 after deductions pursuant to CA-2.4 (see Appendices CA-11 and CA-12 for examples of the threshold deduction effects and the caps).
January 2015Tier 2: Supplementary Capital
CA-2.2.4
The contribution of T2 capital towards the Minimum Total Capital Ratios and Minimum Total Capital plus Capital Conservation Buffer Ratios mentioned in Paragraphs CA-2.2.1 (consolidated) and CA-2.2.1A (solo) is limited to 2.0%.
January 2015CA-2.2.5
To explain the limits outlined in Paragraph CA-2.2.4 on the contributions of AT1 and T2 Capital to T1 and Total Capital, a simple example is given below where an
Islamic bank licensee on a consolidated basis has BD650mn of Core Equity Tier One Capital and BD200mn of AT1 and BD300mn of T1 Capital and BD10,000 mn of total risk-weighted assets:(a) 6.5% CET1 = BD650mn;(b) 8.0% T1 = BD800mn (i.e. only BD150mn of the AT1 may be included in the T1 minimum requirement;(c) 10% Total Capital = BD1,000 mn (i.e. only BD200mn of the T2 Capital may be included in the Total Capital requirement.This means that if the
Islamic bank licensee only has BD650mn of CET1, it cannot comply with the additional Capital Conservation Buffer Requirement of 2.5% nor can it use excess AT1 or T2 Capital to meet this requirement. Although it would appear that theIslamic bank licensee has BD1,150mn of total capital, only BD1,000mn can be used to meet the minimum ratios. This example serves to underline the importance of CET1. Unless anIslamic bank licensee can meet the CET1 minimum CARs of 6.5% and 9.0% mentioned above, it may not be able to meet any of the other minimum capital adequacy ratios outlined in Paragraph CA-2.2.1. A separate example of the effect of the T2 cap is given in Appendix CA-12.January 2015CA-2.3 CA-2.3 Minority Interest Held by Third Parties in Consolidated Banking Subsidiaries
Common Shares Issued by Consolidated Banking Subsidiaries
CA-2.3.1
In order for
minority interest arising from the issue of common shares by a fully consolidatedsubsidiary of theIslamic bank licensee to be recognised in CET1 for the consolidated CAR calculation, it must meet the following conditions:(a) The instrument giving rise to theminority interest would, if issued by theIslamic bank licensee , meet all of the criteria for classification as common shares for regulatory capital purposes;(b) Thesubsidiary that issued the instrument is itself a bank1,2; and(c) Thesubsidiary meets the limits outlined in Paragraph CA-2.3.2.
1 For the purposes of this paragraph, any institution that is subject to the same minimum prudential standards and level of supervision as a bank may be considered to be a bank.
2 Minority interest in a
subsidiary that is a bank is strictly excluded from theparent bank's common equity if theparent bank oraffiliate has entered into any arrangements to fund directly or indirectly minority investment in thesubsidiary whether through an SPV or through another vehicle or arrangement. The treatment outlined above, thus, is strictly available where all minority investments in the banksubsidiary solely represent genuine third party common equity contributions to thesubsidiary .January 2015CA-2.3.2
The amount of
minority interest meeting the criteria above that will be recognised in consolidated CET1 will be calculated as follows:(a) Totalminority interest meeting the criteria in Paragraph CA-2.3.1 minus the amount of the surplus CET1 of thesubsidiary attributable to the minority shareholders;(b) Surplus CET1 of thesubsidiary is calculated as the CET1 of thesubsidiary minus the lower of:(i) The minimum CET1 requirement of thesubsidiary plus the capital conservation buffer (CCB) (i.e. 7.0% of risk weighted assets or more as required by the concerned supervisor); and(ii) The portion of the consolidated minimum CET1 requirement plus the CCB (i.e. 9.0% of consolidated risk weighted assets) that relates to thesubsidiary ; and(c) The amount of the surplus CET1 that is attributable to the minority shareholders is calculated by multiplying the surplus CET1 by the percentage of CET1 that is held by minority shareholders.January 2015CA-2.3.2A
Appendix CA-1 outlines an example of the effect of the allocation of
minority interest between theparent bank and minority shareholders in the fully consolidatedsubsidiary .January 2015AT1 Qualifying Capital Issued by Consolidated Banking Subsidiaries
CA-2.3.3
AT1 capital instruments issued by a fully consolidated banking
subsidiary of theIslamic bank licensee to third party investors (including amounts under Paragraph CA-2.3.2) may receive recognition in consolidated T1 capital only if the instruments would, if issued by theIslamic bank licensee , meet all of the criteria for classification as T1 capital. The amount of this AT1 capital that will be recognised in consolidated AT1 will exclude amounts recognised in consolidated CET1 under Paragraph CA-2.3.2 and will be calculated as follows:(a) T1 of thesubsidiary issued to third parties minus the amount of the surplus T1 of thesubsidiary attributable to the third party investors;(b) Surplus T1 of thesubsidiary is calculated as the T1 of thesubsidiary minus the lower of: (1) the minimum T1 requirement of thesubsidiary plus the CCB and (2) the portion of the consolidated minimum T1 requirement plus the CCB that relates to thesubsidiary ; and(c) The amount of the surplus T1 that is attributable to the third party investors is calculated by multiplying the surplus T1 by the percentage of T1 that is held by third party investors.January 2015T2 Qualifying Capital Issued by Consolidated Subsidiaries
CA-2.3.4
T2 capital instruments issued by a fully consolidated banking
subsidiary of theIslamic bank licensee to third party investors (including amounts under Paragraphs CA-2.3.2 and CA-2.3.3) may receive recognition in consolidated Total Capital only if the instruments would, if issued by theIslamic bank licensee , meet all of the criteria for classification as T2 capital. The amount of this T2 capital that will be recognised in theparent bank's T2 will exclude amounts recognised in CET1 under Paragraph CA-2.3.2 and amounts recognised in AT1 under Paragraph CA-2.3.3 and will be calculated as follows:(a) Total capital instruments of thesubsidiary issued to third parties minus the amount of the surplus Total Capital of thesubsidiary attributable to the third party investors;(b) Surplus Total Capital of thesubsidiary is calculated as the Total Capital of thesubsidiary minus the lower of:(i) The minimum Total Capital requirement of thesubsidiary plus the capital conservation buffer; and(ii) The portion of the consolidated minimum Total Capital requirement plus the capital conservation buffer that relates to thesubsidiary ; and(c) The amount of the surplus Total Capital that is attributable to the third party investors is calculated by multiplying the surplus Total Capital by the percentage of Total Capital that is held by third party investors.January 2015CA-2.3.5
Where capital has been issued to third parties out of a special purpose vehicle (SPV), none of this capital can be included in consolidated CET1. However, such capital can be included in consolidated AT1 or T2 and treated as if the
Islamic bank licensee itself had issued the capital directly to the third parties only if it meets all the relevant entry criteria and the only asset of the SPV is its investment in the capital of theIslamic bank licensee in a form that meets or exceeds all the relevant entry criteria3 (as required by CA-2.1.5(r) for AT1 and CA-2.1.8(i) for T2). In cases where the capital has been issued to third parties through an SPV via a fully consolidatedsubsidiary of theIslamic bank licensee , such capital may, subject to the requirements of this Paragraph, be treated as if thesubsidiary itself had issued it directly to the third parties and may be included in theIslamic bank licensee 's consolidated AT1 or T2 in accordance with the treatment outlined in Paragraphs CA-2.3.3 and CA-2.3.4.
3 Assets that relate to the operation of the SPV may be excluded from this assessment if they are de minimis.
January 2015CA-2.4 CA-2.4 Regulatory Adjustments (Solo and Consolidated)
CA-2.4.1
This section sets out the regulatory adjustments to be applied to Regulatory Capital. There are four stages of adjustments for CET1. In most cases these adjustments are applied in the calculation of CET1. The first set of adjustments is applied in Paragraphs CA-2.4.2 to CA-2.4.15. A subtotal for CET1 is obtained (this can be called CET1a). A second regulatory adjustment described in Paragraphs CA-2.4.16 to CA-2.4.19 is then applied to CET1a (this adjustment results in CET1b). A third regulatory adjustment described in Paragraphs CA-2.4.20 to CA-2.4.21 is then applied to CET1b (this adjustment results in CET1c). Then a final regulatory adjustment described in Paragraph CA-2.4.23 is then applied to CET1c (this adjustment results in CET1d). This is the amount of CET1 that can be used for the calculation of the CAR and determining all other applicable caps on T1 and T2. An example of the effects of the regulatory deductions is given in Appendix CA-11.
January 2015Goodwill and Other Intangibles (Except Mortgage Servicing Rights)
CA-2.4.2
Goodwill must be deducted in the calculation of CET1, including any goodwill included in the valuation of significant investments in the capital of banking, financial and Takaful entities that are outside the scope of regulatory consolidation. The full amount is to be deducted net of any associated deferred tax liability which would be extinguished if the goodwill becomes impaired or derecognised under IFRS or AAOIFI. The amount to be deducted in respect of mortgage servicing rights is set out in Paragraph CA-2.4.23A. Intangible assets other than goodwill and mortgage service rights are subject to transitional arrangements and are phased out as regulatory adjustments as outlined in Subparagraph CA-B.2.1(d).
Amended: April 2015
January 2015CA-2.4.3
Islamic bank licensees must use the IFRS or AAOIFI definitions (as applicable) of intangible assets to determine which assets are classified as intangible and are thus required to be deducted.January 2015Deferred Tax Assets
CA-2.4.4
Deferred tax assets (DTAs) that rely on future profitability of the
Islamic bank licensee to be realised are to be deducted in the calculation of CET1. Deferred tax assets may be netted with associated deferred tax liabilities (DTLs) only if the DTAs and DTLs relate to taxes levied by the same taxation authority and offsetting is permitted by the relevant taxation authority. Where these DTAs relate to temporary differences (e.g. allowance for credit losses) the amount to be deducted is set out in Paragraph CA-2.4.23. All other such assets, e.g. those relating to operating losses, such as the carry forward of unused tax losses, or unused tax credits, are to be deducted in full net of deferred tax liabilities as described above. The DTLs permitted to be netted against DTAs must exclude amounts that have been netted against the deduction of goodwill, intangibles and defined benefit pension assets, and must be allocated on a pro rata basis between DTAs subject to the threshold deduction treatment and DTAs that are to be deducted in full.January 2015CA-2.4.5
An over instalment of tax or, in some jurisdictions, current year tax losses carried back to prior years may give rise to a claim or receivable from the government or local tax authority. Such amounts are typically classified as current tax assets for accounting purposes. The recovery of such a claim or receivable would not rely on the future profitability of the
Islamic bank licensee and must be assigned the relevant sovereign risk weighting.January 2015Cash Flow Hedge Reserve
CA-2.4.6
The amount of the cash flow hedge reserve that relates to the hedging of items that are not fair valued on the balance sheet (including projected cash flows) must be derecognised in the calculation of CET1. This means that positive amounts must be deducted and negative amounts must be added back.
January 2015CA-2.4.7
This treatment specifically identifies the element of the cash flow hedge reserve that is to be derecognised for prudential purposes. It removes the element that gives rise to artificial volatility in common equity, as in this case the reserve only reflects one half of the picture (the fair value of the Shari'a compliant hedging contracts, but not the changes in fair value of the hedged future cash flow).
January 2015Gain on Sale Related to Securitisation Transactions
CA-2.4.8
Any increase in equity capital resulting from a
securitisation transaction (see Chapter CA-8) must be deducted from the calculation of CET1.January 2015CA-2.4.9
[This paragraph has been left blank.]
January 2015Defined Benefit Pension Fund Assets and Liabilities
CA-2.4.10
Defined benefit pension fund liabilities, as included on the balance sheet, must be fully recognised in the calculation of CET1 (i.e. CET1 cannot be increased through derecognising these liabilities). For each defined benefit pension fund that is an asset on the balance sheet, the asset must be deducted in the calculation of CET1 net of any associated deferred tax liability which would be extinguished if the asset should become impaired or derecognised under the relevant accounting standards. Assets in the fund to which the
Islamic bank licensee has unrestricted and unfettered access can, with supervisory approval, offset the deduction. Such offsetting assets must be given the risk weight they would receive if they were owned directly by theIslamic bank licensee .January 2015CA-2.4.11
Paragraph CA-2.4.10 only applies to
Islamic bank licensees which havesubsidiaries which are located in jurisdictions where there are defined benefit pension schemes and addresses the concern that assets arising from pension funds may not be capable of being withdrawn and used for the protection of depositors and other creditors of a bank. The concern is that their only value stems from a reduction in future payments into the fund. The treatment allows for banks to reduce the deduction of the asset if they can address these concerns and show that the assets can be easily and promptly withdrawn from the fund.January 2015Investments in Own Shares
CA-2.4.12
All of an
Islamic bank licensee's investments in its own common shares, whether held directly or indirectly must be deducted in the calculation of CET1. In addition, any own stock which theIslamic bank licensee could be contractually obliged to purchase must be deducted in the calculation of CET1. The treatment described applies irrespective of the location of the exposure in the banking book or the trading book. In addition:(a) Gross long positions may be deducted net of short positions in the same underlying exposure only if the short positions involve no counterparty risk (i.e. this would normally mean that the long and short positions are with the same counterparty and a valid close-out netting agreement is in place);(b)Islamic bank licensees must look through holdings of index securities to deduct exposures to own shares. However, gross long positions in own shares resulting from holdings of index securities may be netted against short positions in own shares resulting from short positions in the same underlying index where they are undertaken with the same counterparty. In such cases the short positions may still involve counterparty risk (which is subject to the relevant counterpartycredit risk charge); and(c) Any shares of theIslamic bank licensee held as collateral against exposures to customers are considered to be held indirectly and are subject to deduction.Amended: April 2015
January 2015CA-2.4.13
The deduction under Paragraph CA-2.4.12 is necessary to avoid the double counting of an
Islamic bank licensee's own capital. The treatment seeks to remove the double counting that arises from direct holdings, indirect holdings via index funds and potential future holdings as a result of contractual obligations to purchase own shares.January 2015CA-2.4.14
Islamic bank licensees must deduct investments in their own AT1 in the calculation of their AT1 capital and must deduct investments in their own T2 in the calculation of their T2 capital.January 2015Reciprocal Cross Holdings in the Capital of Banking and Financial Entities
CA-2.4.15
Reciprocal cross holdings of capital that are designed to artificially inflate the capital position of
Islamic bank licensees will be deducted in full.Islamic bank licensees must apply a "corresponding deduction approach" to such investments in the capital of other banks and otherfinancial entities . This means the deduction must be applied to the same component of capital for which the capital would qualify if it was issued by theIslamic bank licensee itself. The above adjustments (CA-2.4.2 to CA-2.4.15) must now be aggregated and applied to CET1 to obtain a subtotal (CET1a). This new adjusted CET1a is used for the purpose of calculating the next adjustment.January 2015Investments in the Capital of Banking and Financial Entities that are Outside the Scope of Regulatory Consolidation and Where the Bank Does not Own More than 10% of the Issued Common Share Capital of the Entity
CA-2.4.16
The regulatory adjustment described in Paragraph CA-2.4.17 applies to investments in the capital of banking and
financial entities that are outside the scope of regulatory consolidation and where theIslamic bank licensee does not own more than 10% of the issued common share capital of the entity. In addition:(a) Investments include direct and indirect4 holdings of capital instruments. For example,Islamic bank licensees must look through holdings of index securities to determine their underlying holdings of capital;5(b) Holdings in both the banking book and trading book must be included. Capital includes common stock and all other types of capital instruments. It is the net long position that is to be included (i.e. the gross long position net of short positions in the same underlying exposure where the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least one year);(c) Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included; and(d) If the capital instrument of the entity in which theIslamic bank licensee has invested does not meet the criteria for CET1, AT1, or T2 (see CA-2.1.2(f)) of the concerned bank, the capital is to be considered common shares for the purposes of this regulatory adjustment. However, if the investment is issued out of a regulatedfinancial entity and not included in regulatory capital in the relevant jurisdiction of thefinancial entity , it is not required to be deducted.
4 Indirect holdings are exposures or parts of exposures that, if a direct holding loses its value, will result in a loss to the bank substantially equivalent to the loss in value of the direct holding.
5 If banks find it operationally burdensome to look through and monitor their exact exposure to the capital of other financial institutions as a result of their holdings of index securities, banks must risk weight all such holdings in funds at 1,250% as per the 'fall-back approach' outlined in the Basel Committee document "Capital requirements for banks' equity investments in funds - final standard" dated December 2013.
January 2015CA-2.4.17
If the total of all holdings listed in Paragraph CA-2.4.16 in aggregate exceed 10% of the
Islamic bank licensee's CET1a (i.e. after applying all other regulatory adjustments from Paragraph CA-2.4.2 to Paragraph CA-2.4.15) then the amount above 10% is required to be deducted, applying a corresponding deduction approach. This means the deduction must be applied to the same component of capital for which the capital would qualify if it was issued by theIslamic bank licensee itself. Accordingly, the amount to be deducted from CET1a must be calculated as the total of all holdings which in aggregate exceed 10% of theIslamic bank licensee's CET1a (as per above) multiplied by the common equity holdings as a percentage of the total capital holdings. This would result in a CET1a deduction which corresponds to the proportion of total capital holdings held in CET1a. Similarly, the amount to be deducted from AT1 capital must be calculated as the total of all holdings which in aggregate exceed 10% of theIslamic bank licensee's CET1a (as per above) multiplied by the AT1 capital holdings as a percentage of the total capital holdings. The amount to be deducted from T2 capital must be calculated as the total of all holdings which in aggregate exceed 10% of theIslamic bank licensee's CET1a (as per above) multiplied by the T2 capital holdings as a percentage of the total capital holdings.January 2015CA-2.4.18
See Paragraph CA-2.4.21 for further details on what to do if, under the corresponding deduction approach, an
Islamic bank licensee is required to make a deduction from a particular tier of capital and it does not have enough of that tier of capital to satisfy that deduction.January 2015CA-2.4.19
Amounts below the threshold, which are not deducted, will continue to be risk weighted. Thus, instruments in the trading book will be treated as per the
market risk rules and instruments in the banking book must be treated as per Chapter CA-5. For the application of risk weighting the amount of the holdings must be allocated on a pro rata basis between those below and those above the threshold. The above adjustments (CA-2.4.16 to CA-2.4.18) must now be aggregated and applied to CET1a to obtain a new subtotal (CET1b). This new adjusted CET1b is used for the purpose of calculating the next adjustment.January 2015Significant Investments in the Capital of Banking and Financial Entities that are Outside the Scope of Regulatory Consolidation6
CA-2.4.20
The regulatory adjustment described in Paragraph CA-2.4.21 applies to investments in the capital of banking and
financial entities that are outside the scope of regulatory consolidation where theIslamic bank licensee owns more than 10% of the issued common share capital of the issuing entity or where the entity is anaffiliate of theIslamic bank licensee . In addition:(a) Investments include direct and indirect holdings of capital instruments. For example,Islamic bank licensees must look through holdings of index securities to determine their underlying holdings of capital;7(b) Holdings in both the banking book and trading book are to be included. Capital includes common stock and all other types of capital instruments. It is the net long position that is to be included (i.e. the gross long position net of short positions in the same underlying exposure where the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least one year);(c) Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included; and(d) If the capital instrument of the entity in which theIslamic bank licensee has invested does not meet the criteria for CET1, AT1, or T2 capital (see CA-2.1.2(f)) of the concerned bank, the capital is to be considered common shares for the purposes of this regulatory adjustment. However, if the investment is issued out of a regulatedfinancial entity and not included in regulatory capital of thefinancial entity , it is not required to be deducted.
6 Investments in entities that are outside the scope of regulatory consolidation refers to investments in entities that have not been consolidated at all or have not been consolidated in such a way as to result in their assets being included in the calculation of consolidated risk-weighted assets of the group.
7 If banks find it operationally burdensome to look through and monitor their exact exposure to the capital of other financial institutions as a result of their holdings of index securities, the CBB may permit banks, subject to prior CBB approval, to use a conservative estimate.
January 2015CA-2.4.21
All investments in Paragraph CA-2.4.20 that are not common shares must be fully deducted following a corresponding deduction approach. This means the deduction must be applied to the same tier of capital for which the capital would qualify if it was issued by the
Islamic bank licensee itself. If theIslamic bank licensee is required to make a deduction from a particular tier of capital and it does not have enough of that tier of capital to satisfy that deduction, the shortfall will be deducted from the next higher tier of capital (e.g. if anIslamic bank licensee does not have enough AT1 capital to satisfy a particular deduction, the shortfall will be deducted from CET1c).January 2015CA-2.4.22
Investments in Paragraph CA-2.4.20 that are common shares are subject to the threshold treatment described in Paragraph CA-2.4.23. The above adjustments (CA-2.4.20 to CA-2.4.21) must be aggregated and applied to CET1b to obtain a new subtotal (CET1c). This new adjusted CET1c is used for the purpose of calculating the next adjustment.
January 2015Threshold Deductions
CA-2.4.23
If the total of all common equity holdings listed in Paragraph CA-2.4.20 in aggregate exceeds 10% of the
Islamic bank licensee's CET1c, then the amount above 10% is required to be deducted from CET1c (see Appendices CA-11 and CA-12 for examples). After this deduction, theIslamic bank licensee must deduct the amount by which each of items b) and c) in Paragraph CA-2.4.23A individually exceeds 10% of its CET1c. After these individual deductions, the aggregate of the three items below which exceeds 15% of its CET1c (calculated prior to the deduction of these items but after application of all other regulatory adjustments to CET1 applied in Paragraphs CA-2.4.2 to CA-2.4.21) must be deducted from CET1c. The adjustments in this Paragraph are applied to CET1c to obtain a new subtotal (CET1d). This new adjusted CET1d is used for calculating the consolidated CAR and the applicable caps on AT1 and T2. The items included in the 15% aggregate limit are subject to full disclosure.January 2015CA-2.4.23A
As of 1 January 2020, the calculation of the 15% limit will be subject to the following treatment: the sum of the three items below that remains recognised after the application of all regulatory adjustments must not exceed 15% of CET1d (See Appendix CA-3 for an example):
(a) Significant investments in the common shares of unconsolidated banks and other financial entities) as referred to in Paragraph CA-2.4.20;(b) Mortgage servicing rights (MSRs); and(c) Deferred Tax Assets (DTAs) that arise from temporary differences.January 2015CA-2.4.24
The amount of the three above items that are not deducted in the calculation of CET1d is risk weighted at 250% (see Paragraph CA-3.2.26).
January 2015Former Deductions from Capital
CA-2.4.25
The following items receive the following risk weights:
(b) Non-payment/delivery on non-DvP and non-PvP transactions (see Appendix CA-4): 1,250%;(c) The amount of any significant investments in commercial entities, as defined in Paragraph CM-4.10.5, which exceed the materiality is risk weighted at 800%. The materiality thresholds for these investments are: 15% of Total Capital for individual significant investments; and 60% of Total Capital for the aggregate of such investments; and(d) Anyexposures above the largeexposures limits set by the CBB in Chapter CM-4 of the CBB Rulebook: 800%.Amended: October 2016
Amended: July 2015
Amended: April 2015
January 2015CA-2.4.26
For Subparagraphs CA-2.4.25 (c) and (d), amounts below the materiality thresholds and large
exposure limits continue to be risk weighted in accordance with Chapter CA-3. Where the remaining holdings are made up of holdings carrying different risk weights, the application of the risk weighting must be allocated on a pro rata basis for thoseexposures that are not subject to the 800% risk weight. Appendix CA-10 gives an example of the way to calculate the risk weighted assets and the effect of the limits outlined in Subparagraphs CA-2.4.25 (c) and (d).Added: July 2015CA-2A CA-2A Capital Conservation Buffer
CA-2A.1 CA-2A.1 Capital Conservation Best Practice
CA-2A.1.1
This section outlines the operation of the capital conservation buffer, which is designed to ensure that banks build up capital buffers outside periods of stress which can be drawn down as losses are incurred. The requirement is based on simple capital conservation rules designed to avoid breaches of minimum capital requirements.
January 2015CA-2A.1.2
Outside of periods of stress,
Islamic bank licensees must hold buffers of capital above the regulatory minimum.January 2015CA-2A.2 CA-2A.2 The Capital Conservation Buffer Requirement
CA-2A.2.1
Islamic bank licensees are required to hold a capital conservation buffer of 2.5%, comprised of CET1 above the regulatory minimum Total Capital ratio of 10%.8 Any capital raised through the issuance of Sukuk cannot be considered a part of the buffer as Sukuk do not qualify for inclusion in CET1. Capital distribution constraints will be imposed on anIslamic bank licensee when the CCB falls below 2.5%. The constraints imposed only relate to distributions, not the operation of theIslamic bank licensee .
8 Common Equity Tier 1 must first be used to meet the minimum capital requirements (including the 8% T1 and 10% Total Capital requirements if necessary), before the remainder can contribute to the capital conservation buffer.
January 2015CA-2A.2.2
Islamic bank licensees must note that they are required to maintain a minimum consolidated Total Capital Ratio of 12.5% and a solo Total Capital Ratio of 8% regardless of whether they do or do not have AT1 or T2 Capital and thereforeIslamic bank licensees will be required to retain 100% of the annual net profit unless their consolidated Total Capital Ratio is above 12.5% and their solo Total Capital Ratio is above 8%.January 2015CA-2A.2.3
Elements subject to the restriction on distributions: Items considered to be distributions include dividends and share buybacks, discretionary profit distributions on other T1 capital instruments and discretionary bonus payments to staff. Payments that do not result in a depletion of CET1, which may for example include certain scrip dividends, are not considered distributions;
January 2015Capital Conservation Plan
CA-2A.2.4
Where an
Islamic bank licensee fails to meet the required level of capital conservation buffer, it must prepare a Capital Conservation Plan (hereinafter referred to as "Plan") clearly outlining the information mentioned in this Paragraph. TheIslamic bank licensee must submit this Plan to the CBB within one week of becoming aware of the shortfall (see also CA-1.2.2). TheIslamic bank licensee must already have prepared such a Plan on a contingency basis. The Plan must include the following:(a) Estimates of income and expenditure and a forecasted balance sheet;(b) Measures to be taken to increase theIslamic bank licensee 's capital ratios;(c) A plan and time frame for the increase of capital with the objective of meeting fully the buffer requirement; and(d) Any other information the CBB deems necessary to carry out the assessment required, as indicated in Paragraph CA-2A.2.5.January 2015CA-2A.2.5
The CBB shall review the Plan submitted by the
Islamic bank licensee and shall approve it provided it considers that the Plan provides a reasonable basis for conserving or raising sufficient capital that will enable theIslamic bank licensee to meet the buffer requirements within a period acceptable to the CBB. While reviewing the Plan, the CBB will also evaluate whether theIslamic bank licensee has deliberately reduced its CET1 so as to operate in the buffer range (i.e. below the capital conservation buffer requirement) in order to reduce its cost of capital for competitive purposes.January 2015CA-2A.2.6
If the Plan is not approved by the CBB, it may take one or more of the following steps, inter alia, as deemed necessary:
(a) Ask theIslamic bank licensee to revise the Plan and resubmit it within a specified time period;(b) Require theIslamic bank licensee to raise new capital from private sources to specified levels within specified periods; or(c) Impose more stringent restrictions on distributions than those required by Paragraph CA-2A.2.3.January 2015CA-2A.3 CA-2A.3 Implementation Date
CA-2A.3.1
The capital conservation buffer will be implemented on 1 January 2015. It will be set at 2.5% of RWAs.
January 2015CA-2A.3.2
Islamic bank licensees must maintain prudent earnings retention policies with a view to meeting the conservation buffer at all times.January 2015CA-2A.3.3
[This Paragraph was deleted in April 2015.]
Deleted: April 2015
January 2015CA-2A.3.4
The CBB will issue rules and guidance on the countercyclical buffer in due course. The CBB reserves the right to use its discretion on the timing and amount of the countercyclical buffer, depending on economic conditions in the region and globally.
January 2015PART 2: PART 2: Credit Risk
CA-3 CA-3 The Banking Book — Minimum Capital Requirements for Islamic Financing & Investment Assets
CA-3.1 CA-3.1 Background
CA-3.1.1
Due to the nature of Islamic banking transactions, Islamic banks, as opposed to their conventional counterparts, are additionally exposed to price risk in their banking book. The CBB recognises that such risks need to be identified and measured for regulatory capital purposes.
January 2015CA-3.2 CA-3.2 Murabahah and Murabahah to the Purchase Orderer
Introduction
CA-3.2.1
This section sets out the minimum capital adequacy requirements to cover the transactions that are based on the Sharia rules and principles of Murabaha and Murabaha to the Purchase Orderer (MPO).
January 2015CA-3.2.2
In Murabaha and MPO, the capital requirement for
credit risk refers to the risk of a counterparty not paying the purchase price of an asset to theIslamic bank licensee . In the case of market (price) risk, the capital requirement is applicable with respect to: (a) assets in theIslamic bank licensee's possession which are available for sale either on the basis of Murabaha or MPO; and (b) assets which are in its possession due to the customer's non-performance of a promise to purchase (PP) in either non-binding or binding MPO.January 2015CA-3.2.2A
The CBB has discretion to apply to
Islamic bank licensee the relevant provisions of this section for other forms of sale contract, namely Musawamah and Bay` Bithaman Ajil.January 2015Murabahah and Non-binding MPO
CA-3.2.3
This section is broadly divided into (a) Murabahah and non-binding MPO and (b) binding MPO, as the types of risk faced by the
Islamic bank licensee are different at the various stages of the contract for the two categories.January 2015CA-3.2.4
This classification and the distinctions between a non-binding MPO and a binding MPO are subject to the criteria and opinions set by the respective SSB of the
Islamic bank licensee .January 2015CA-3.2.5
A Murabahah contract refers to an agreement whereby the
Islamic bank licensee sells to a customer at acquisition cost (purchase price plus other direct costs) plus an agreed profit margin, a specified kind of asset that is already in its possession. An MPO contract refers to an agreement whereby theIslamic bank licensee sells to a customer at cost (as above) plus an agreed profit margin, a specified kind of asset that has been purchased and acquired by theIslamic bank licensee based on a Promise to Purchase (PP) by the customer which can be a binding or non-binding PP.January 2015CA-3.2.6
In a Murabahah transaction, the
Islamic bank licensee sells an asset that is already available in its possession, whereas in a MPO transaction theIslamic bank licensee acquires an asset in anticipation that the asset will be purchased by the orderer/customer .January 2015CA-3.2.7
The price risk in Murabahah contracts ceases and is replaced by
credit risk for the amount receivable from the customer following delivery of the asset. Likewise, in a non-binding MPO transaction, theIslamic bank licensee is exposed tocredit risk on the amount receivable from thecustomer when the latter accepts delivery and assumes ownership of the asset.January 2015Binding MPO
CA-3.2.8
In a binding MPO, the
Islamic bank licensee has no "long" position in the asset that is the subject of the transaction, as there is a binding obligation on the customer to take delivery of the asset at a pre-determined price. TheIslamic bank licensee is exposed to counterparty risk in the event that the orderer in a binding MPO does not honour his/her obligations under the PP, resulting in theIslamic bank licensee having to dispose of the asset to a third party at a selling price which may be lower than the cost to theIslamic bank licensee . Depending on the Shari'a rulings that are applicable, the risk of selling at a loss may be mitigated by requiring the customer to deposit a Hamish Jiddiyah (HJ) upon executing the PP, as commonly practised in the case of a binding MPO. TheIslamic bank licensee would have recourse to the customer for any shortfall in the HJ to compensate for the loss, and would be obliged to refund to the customer any amount of the HJ in excess of the loss. The HJ may be treated, after the conclusion of Murabahah, as part of the payment of the agreed selling price under the Murabahah contract. Alternatively, theIslamic bank licensee may take a down-payment (Urbun) from the purchase orderer when signing the contract. This payment is retained by theIslamic bank licensee if the purchase orderer fails to execute the contract, whereas on the execution of the contract the Urbun is treated as a payment in advance.January 2015Collateralisation
CA-3.2.9
The
Islamic bank licensee can secure a pledge of the sold asset/underlying asset or another tangible asset ("collateralised Murabahah"). The collateralisation is not automatically provided in a Murabahah contract but must be explicitly stated or must be documented in a separate security agreement at or before the time of signing of the Murabahah contract. TheIslamic bank licensee may employ other techniques such as pledge of deposits or a third party financial guarantee. The Risk Weight (RW) of a financial guarantor can be substituted for the RW of the purchaser provided that the guarantor has a better credit rating than the purchaser and that the guarantee is legally enforceable (see Section CA-4.7).January 2015CA-3.2.10
In financing transactions that are collateralised, the CRM would take into account of any 'haircut' applicable to the any eligible financial collateral listed in Paragraph CA-4.7.25). Murabahah and binding MPO collateralised by real estate is covered in Paragraphs CA-4.2.19–20.
January 2015Credit Risk
Murabahah and Non-binding MPO
CA-3.2.11
The credit exposure must be measured based on accounts receivable in Murabahah (the term used herein includes MPO), which is recorded at their cash equivalent value i.e. amount due from the customers at the end of the reporting quarter less any provision for doubtful debts.
January 2015CA-3.2.12
The accounts receivable (net of specific provisions) amount arising from the selling of a Murabahah asset must be assigned a RW based on the credit standing of the obligor (purchaser or guarantor) as rated by an ECAI that is approved by the CBB. In case the obligor is unrated, a RW of 100% shall apply. (See Section CA-4.2).
January 2015Binding MPO
CA-3.2.13
In a binding MPO, the
Islamic bank licensee is exposed to default on the purchase orderer's obligation to pay fully for the asset at the agreed price. In the event of the orderer defaulting on its PP, theIslamic bank licensee will dispose of the asset to a third party. TheIslamic bank licensee will have recourse to any HJ9 paid by the orderer, and (a) may have a right to recoup from the orderer any loss on disposing of the asset, after taking account of the HJ or (b) may have no such legal rights. In both cases, this risk is mitigated by the asset in possession as well as any HJ paid by the purchase orderer.
9 The bank's recourse to HJ should be within the limits of the actual loss, which is the difference between the actual cost and the sale price of the asset.
January 2015CA-3.2.14
In case (a) of Paragraph CA-3.2.13, the
Islamic bank licensee has the right to recoup any loss (as indicated in the previous paragraph) from the orderer, that right constitutes a claim receivable which is exposed tocredit risk , and the exposure shall be measured as the amount of the asset's total acquisition cost to theIslamic bank licensee , (less the value of any eligible financial collateral (see Paragraph CA-4.7.25) subject to any haircut, and less the amount of any HJ). The applicable RW must be based on the standing of the obligor as rated by an ECAI that is approved by the CBB, and in the case the obligor is unrated, a RW of 100% shall apply (See Section CA-4.2).January 2015CA-3.2.15
In case (b) of Paragraph CA-3.2.13, the
Islamic bank licensee has no legal right, and the cost of the asset to theIslamic bank licensee constitutes amarket risk (as in the case on a non-binding MPO), but themarket risk exposure is reduced by the amount of any HJ that theIslamic bank licensee has the right to retain.January 2015CA-3.2.16
In applying the treatment as set out in the Paragraph CA-3.2.15, the
Islamic bank licensee must ensure that the PP is properly documented and legally enforceable. In the absence of proper documentation and legal enforceability, the asset is to be treated as similar to a non-binding MPO which is exposed to price risk, where the measurement approach is as set out in Paragraphs CA-3.2.20 and CA-3.2.21.January 2015CA-3.2.17
Upon selling the asset, the accounts receivable (net of specific provisions) amount must be assigned a RW based on the credit standing of the obligor as rated by an ECAI that is approved by the CBB. In case the obligor is unrated, a RW of 100% applies. (See Section CA-4.2).
January 2015Exclusions
CA-3.2.18
The capital requirement is to be calculated on the receivable amount, net of (i) specific provisions, (ii) any amount that is secured by eligible financial collateral (as defined in Paragraph CA-4.7.25) and/or (iii) any amount that is past due 90 days or more (see Section CA-4.2).
Amended: July 2017
January 2015Assignment of Risk Weights
CA-3.2.19
The assets of collateralised Murabaha may be categorised as per the claim categories detailed in Section CA-4.2, and risk weighted accordingly.
Islamic bank licensees should ensure that the appropriate risk weight is used based on the claim category for each transaction.January 2015Market Risk
Murabahah and Non-binding MPO
CA-3.2.20
In the case of an asset in possession in a Murabahah transaction and an asset acquired specifically for resale to a customer in a non-binding MPO transaction, the asset must be treated as inventory of the
Islamic bank licensee and, using the simplified approach, the capital charge for such amarket risk exposure is 15% of the amount of the position (carrying value). The 15% capital charge is also applicable to assets held by anIslamic bank licensee in respect of incomplete non-binding MPO transactions at the end of a financial period.January 2015CA-3.2.21
Assets in possession on a 'sale or return' basis (with such an option included in the contract) are treated as accounts receivable from the vendor and as such would be offset against the related accounts payable to the vendor. If these accounts payable have been settled, the assets must attract a RW based on rating of the vendor (100% in case of unrated), subject to (a) the availability of documentation evidencing such an arrangement with the vendor, and (b) the period for returning the assets to the vendor not having been exceeded. If the above conditions are not satisfied, capital charge will be provided as per Paragraph CA-3.2.20.
January 2015Binding MPO
CA-3.2.22
In a binding MPO the orderer has the obligation to purchase the asset at the agreed price, and the
Islamic bank licensee as the seller is not exposed tomarket risk in respect of the asset, but only tocredit risk as indicated in Paragraph CA-3.2.13.January 2015Foreign Exchange Risk
CA-3.2.23
If the funding of an asset purchase or the selling of an asset opens an
Islamic bank licensee to foreign exchange exposures, the relevant positions must be included in the measurement of foreign exchange risk described in Section CA-5.5.January 2015Summary of Capital Requirement at Various Stages of the Contract
CA-3.2.24
The following table sets out the applicable stages of the contract that attracts capital charges:
(a) Murabahah and Non-binding MPO
Applicable Stage of the Contract Credit RW Market Risk Capital Charge Asset available for sale (asset on balance sheet)* Not applicable Price risk (15% Capital Charge) Asset is sold and title is transferred to a customer and the selling price (accounts receivable) is due from the customer. Based on customer's rating or 100% RW for unrated customer (see Paragraphs CA-3.2.11 and CA-3.2.12) NA Upon full settlement of the purchase price. NA NA
* Also includes an asset which is in possession due to cancellation of PP by a non-binding MPO customer. Any HJ taken, if any, is not considered as eligible collateral and must not be offset against the value of the asset.(b) Binding MPO
Applicable Stage of the Contract Credit RW*** Market Risk Capital Charge Asset available for sale (asset on balance sheet)* — If the bank has legal right to recoup from the customer any loss on disposing of the asset Asset acquisition cost less [market value of asset if eligible as collateral (net of any haircut**) less any HJ] x applicable RW (see chapter CA-4) NA Asset is sold and delivered to a customer (accounts receivable is due from the customer). Based on customer's rating or 100% RW for unrated customer (see section CA-4.2) NA Upon full settlement of the purchase price. NA NA
* Also includes an asset which is in possession due to cancellation of PP by a customer.
** Please refer to CRM Section CA-4.7 for eligibility of collateral and application of haircuts.
***This credit RW is applicable only when the bank will have recourse to any HJ or Urbun paid by the customer, and (depending on the legal situation) in the case of HJ may have a right to recoup from the customer any loss on disposing of the asset, after taking account of the HJ. (This right does not exist in the case of Urbun.)
If the bank has no such right, the cost of the asset to the bank constitutes amarket risk (as in the case of a non-binding MPO), but thismarket risk exposure is reduced by the amount of any HJ that the bank has the right to retain.January 2015CA-3.3 CA-3.3 Salam and Parallel Salam
Introduction
CA-3.3.1
This section sets out the minimum capital requirement to cover credit and market (price) risks arising from entering into contracts or transactions that are based on the Shari'a rules and principles of Salam. The
Islamic bank licensee is exposed to the (a) credit (counterparty) risk of not receiving the purchased commodity after disbursing the purchase price to the seller, and (b) price risk that theIslamic bank licensee incurs from the date of execution of a Salam contract, which is applicable throughout the period of the contract and beyond the maturity date of the contract as long as the commodity remains on the balance sheet of theIslamic bank licensee , in the absence of a hedge in the form of a parallel Salam contract covering the subject matter (A parallel contract may also be used to hedge part of the exposure).January 2015CA-3.3.2
This section is applicable to (a) Salam contracts that are executed without any Parallel Salam contracts and (b) Salam contracts that are backed by independently executed Parallel Salam contracts.
January 2015CA-3.3.3
A Salam contract refers to an agreement to purchase, at a predetermined price, a specified kind of commodity10 which is to be delivered on a specified future date in a specified quantity and quality. The
Islamic bank licensee as the buyer makes full payment of the purchase price upon execution of a Salam contract or within a subsequent period not exceeding two or three days as deemed permissible by its Sharia Supervisory Board (SSB).
10 A commodity is defined as a physical product which is and can be traded on a secondary market, e.g. agricultural products, minerals (including oil) and precious metals. The commodity may or may not be traded on an organised exchange.
January 2015CA-3.3.4
In certain cases the
Islamic bank licensee may enter into a back-to-back contract (Parallel Salam) to sell a commodity with the same specification as the purchased commodity under a Salam contract to a party other than the original seller. The Parallel Salam allows theIslamic bank licensee to sell the commodity for future delivery at a predetermined price (thus hedging the price risk on the original Salam contract) and protects theIslamic bank licensee from having to take delivery of the commodity and warehousing it. As noted above, such a parallel contract may also be used as a partial hedge.January 2015CA-3.3.5
The non-delivery of the commodity by a Salam seller (i.e. counterparty risk) does not discharge the
Islamic bank licensee's obligations to deliver the commodity under a Parallel Salam contract, and thus exposes theIslamic bank licensee to potential loss in obtaining the supply elsewhere.January 2015CA-3.3.6
The obligations of an
Islamic bank licensee under Salam and Parallel Salam are not inter-conditional or interdependent, which implies that there is no legal basis for offsetting credit exposures between the contracts.January 2015CA-3.3.7
In the absence of a Parallel Salam contract, an
Islamic bank licensee may sell the subject-matter of the original Salam contract in the spot market upon receipt, or, alternatively, theIslamic bank licensee may hold the commodity in anticipation of selling it at a higher price. In the latter case, theIslamic bank licensee is exposed to price risk on its position in the commodity until the latter is sold.January 2015Credit Risk
CA-3.3.8
The receivable amount generated from the purchase of a commodity based on a Salam contract must, in appropriate cases, be assigned a RW based on the credit standing of a supplier/counterparty as rated by an ECAI that is approved by the CBB. If the supplier/counterparty is unrated (which will normally be the case), a RW of 100% applies (See Section CA-4.2).
January 2015Exclusions
CA-3.3.9
The capital requirement is to be calculated on the receivable amount, net of specific provisions. Amounts that are secured by eligible collateral as defined are covered in Section CA-4.7 and amounts that are past due 90 days or more are covered in Paragraph CA-4.2.21.
Amended: July 2017
January 2015Applicable Period
CA-3.3.10
The credit RW will be applied from the date of the contract made between both parties until the maturity of the Salam contract, which is upon receipt of the purchased commodity. However, between the date of contract and disbursement of funds to the customer the exposure is a commitment (off-balance sheet) and a credit conversion factor (CCF) of 20% will be applied before applying the relevant RW.
January 2015No Offsetting Arrangement between Credit Exposures of Salam and Parallel Salam
CA-3.3.11
The credit exposure amount of a Salam contract is not to be offset against the exposure amount of a Parallel Salam contract, as an obligation under one contract does not discharge an obligation to perform under the other contract.
January 2015Market Risk
CA-3.3.12
The price risk on the commodity exposure in Salam is measured using either: (a) the maturity ladder approach; or (b) the simplified approach (see section CA-5.6). Under the simplified approach, the capital charge will be equal to 15% of the net position in each commodity, plus an additional charge equivalent to 3% of the gross positions, long plus short, to cover basis risk and forward gap risk. The 3% capital charge is also intended to cater for potential losses in parallel Salam when the seller in the original Salam contract fails to deliver and the
Islamic bank licensee has to purchase an appropriate commodity in the spot market to honour its obligation.January 2015CA-3.3.13
The long and short positions in a commodity, which are positions of Salam and Parallel Salam, may be offset under either approach for the purpose of calculating the net open positions provided that the positions are in the same group of commodities.
January 2015Foreign Exchange Risk
CA-3.3.14
If the funding of a commodity purchase or selling of a commodity leaves an
Islamic bank licensee open to foreign exchange exposures, the relevant positions must be included in the measures of foreign exchange risk described in Section CA-5.5.January 2015Summary of Capital Requirement at Various Stages of the Contract
CA-3.3.15
The following table sets out the applicable stage of the contract that attracts capital charges:
(a) Salam with Parallel Salam
Applicable Stage of Contract Credit RW Market Risk Capital Charge Payment of purchase price by the bank to a Salam customer Based on customer's rating or 100% RW for unrated customer.
No Netting of Salam exposures against parallel Salam exposures.
(See Section CA-4.2)Two approaches are applicable:
Maturity Ladder Approach (see CA-5.6.)Simplified approach 15% capital charge on net position (i.e. netting of Salam exposures against parallel Salam exposures) Plus:
3% capital charge on gross positions (i.e. Salam exposures plus parallel
Salam exposures) See Paragraphs CA-3.3.12 to CA-3.3.14.Receipt of the purchased commodity by the bank. Asset available for delivery to the customer. NA The purchased commodity is sold and delivered to the buyer. NA NA (b) Salam without Parallel Salam
Applicable Stage of Contract Credit RW Market Risk Capital Charge Payment of purchase price by the bank to a Salam customer (seller) Based on customer's rating or 100% RW for unrated customer.
(See Section CA-4.2)Simplified approach 15% capital charge on long position of Salam exposures. See Section CA-3.3.12 to CA-3.3.14. Receipt of the purchased commodity by the bank. Asset available for delivery to the customer. NA The purchased commodity is sold and delivered to the buyer. NA NA January 2015CA-3.4 CA-3.4 Istisna'a and Parallel Istisna'a
Introduction
CA-3.4.1
This Section sets out the minimum capital adequacy requirement to cover credit and market (price) risks arising from entering into contracts or transactions that are based on the Sharia rules and principles of Istisna'a.
January 2015Principles of Istisna'a
CA-3.4.2
Istisna'a and parallel Istisna'a contracts would attract a risk weighting as per the credit standing of the respective counterparties (See Section CA-4.2).
January 2015CA-3.4.3
An Istisna'a contract refers to an agreement to sell to or buy from a customer, a non-existent asset which is to be manufactured or built according to the ultimate buyer's specifications and is to be delivered on a specified future date at a predetermined selling price.
January 2015CA-3.4.3A
In an Istisna'a contract, price and other necessary specifications must also be fixed and fully settled between the buyer and manufacturer/builder. The payments by the buyer in Istisna'a may be made in advance, during the period of construction reflecting stages of completion, or deferred to a specified future date. The contract of Istisna'a is a binding contract that cannot be cancelled unilaterally by either party once the manufacturing work starts. If the subject matter does not conform to the specification agreed upon, the buyer has the option to accept or to refuse the subject matter.
January 2015CA-3.4.3B
The subject matter on which transaction of Istisna'a is based is always an item which needs to be manufactured or constructed, such as a ship, an aircraft or a building, and it cannot be an existing and designated asset. Istisna'a may also be used for similar projects such as installation of an air-conditioner plant in the customer's factory, or building a bridge or a highway.
January 2015CA-3.4.3C
The price of an asset under this contract is agreed or determined on the contractual date, and such a contract is binding. The price cannot be increased or decreased on account of an increase or decrease in commodity prices or labour cost. The price can be changed subject to the mutual consent of the contracting parties, which is a matter for the commercial decision of the
Islamic bank licensee and can result in a lower profit margin and a capital charge as outlined in Paragraph CA-3.4.24.January 2015Roles and Exposure of a Bank in an Istisna'a Contract
CA-3.4.4
In practice, an
Islamic bank licensee can play different roles while engaging in the contract of Istisna'a, as follows:(a)Islamic bank licensee as a seller (al-sani') in Istisna'a contract:(i) In many cases, anIslamic bank licensee acts as a "seller" in the Istisna'a contract and engages the services of a contractor (other than the client) by entering into another Istisna'a contract as buyer11 or using some other Shari'a compliant contract such as Murabahah; or.(ii) If a parallel Istisna'a contract is used for manufacturing the asset, theIslamic bank licensee acts as a buyer in the parallel contract. TheIslamic bank licensee as an intermediary calculates its cost in the parallel contract and fixes the price of Istisna'a with its client that allows it to make a reasonable profit over his cost. The two contracts, however, need to be totally independent of each other. In order to secure the payment from the ultimate buyer (i.e. the customer), the title deeds of the underlying asset, or any other collateral, may be required by theIslamic bank licensee as a security until the complete payment is made by the ultimate buyer; and(b)Islamic bank licensee as a buyer (al-mustasni') in Istisna'a contract:(i) In some cases, anIslamic bank licensee can act as a "buyer" in an Istisna'a contract where it can have an asset constructed by a contractor: (i) for its own account (which can be, for example, subsequently sold or leased on a Murabahah or Ijara basis, respectively); or (ii) on the basis of the ultimate customer's specifications; or(ii) If the parallel Istisna'a contract is used in this scenario with the ultimate customer, theIslamic bank licensee acts as seller in the parallel contract.
11 Where two such parallel Istisna'a contracts exist, it is customary to refer to one of the contracts as a "parallel Istisna'a". Typically, it is the contract which is entered into second which is referred to as the "parallel Istisna'a".
January 2015CA-3.4.5
This Section makes distinctions between two types of exposures in Istisna'a financing, as follows:
(a) Exposure to customer:
The receipt of the selling price by theIslamic bank licensee is dependent on the financial strength or payment capability of the ultimatecustomer or the contractor (cases (a) and (b) of Paragraph CA-3.4.4 respectively), where the source of payment is derived from the various other activities of the ultimate customer or contactor and is not solely dependent on the cash flows from the underlying asset/project; and(b) Exposure to asset (i.e. exposure to the cash flows from the completed asset): The receipt of the selling price by theIslamic bank licensee is dependent partially or primarily on the amount of revenue generated by the asset being manufactured or constructed by selling its output or services to contractual or potential third-party buyers. This form of Istisna'a faces "revenue risk" arising from the asset's ability to generate cash flows, instead of the creditworthiness of the ultimatecustomer or project sponsor (cases (a) and (b) of Paragraph CA-3.4.4 respectively). Such exposure normally arises when an Istisna'a contract is used in project finance and BOT (build, operate, transfer) transactions.January 2015CA-3.4.6
In the Istisna'a contract, the
Islamic bank licensee assumes the completion risk12 that is associated with the failure to complete the project at all, delay in completion, cost overruns, occurrence of a force majeure event, and unavailability of qualified personnel and reliable seller(s) or sub-contractors, including any late completion penalty13 payable to the ultimatecustomer due to non-fulfilment of required specifications.
12 In conventional project financing, the completion risk is normally borne by the project sponsor/contractor, and not by the bank, because the project sponsor/contractor has most often been asked to provide an undertaking to cover cost overruns.
13 Normally, the contract between the bank and the contractor will specify in a penalty clause the latter's liability for penalties in case of delays for which it is responsible.
January 2015Capital Adequacy Requirements
CA-3.4.7
The exposures under Istisna'a involve credit and
market risks , as described below. Credit exposures arise once the work is billed to the customer, while market (price) exposures arise on unbilled work-in-process (WIP).January 2015CA-3.4.8
There is a capital requirement to cater for the credit (counterparty) risk of the
Islamic bank licensee not receiving the selling price of the asset from the ultimate customer or contractor, either in pre-agreed stages of completion and/or upon full completion of the manufacturing or construction process. (The risk of a customer failing to complete such a transaction in project finance is referred to as "off-take risk" — see Appendix CA-5.)January 2015CA-3.4.9
This Section also sets out the capital adequacy requirement to cater for the
market risk that anIslamic bank licensee incurs from the date of manufacturing or construction, which is applicable throughout the period of the contract on unbilled WIP inventory.January 2015CA-3.4.10
This Section is applicable to both (a) Istisna'a contracts that are executed without any parallel Istisna'a contracts, and (b) Istisna'a contracts that are backed by independently executed parallel Istisna'a contracts.
January 2015Bank as a Seller (al sani') in an Istisna'a Contract
Istisna'a with Parallel Istisna'a
CA-3.4.11
In cases where an
Islamic bank licensee enters into a parallel Istisna'a contract to procure an asset from a party other than the original Istisna'a customer (buyer), the price risk relating to input materials is mitigated. TheIslamic bank licensee remains exposed to the counterparty risk of the parallel Istisna'a seller in delivering the asset on time and in accordance with the Istisna'a ultimate buyer's specifications. This is the risk of not being able to recover damages from the parallel Istisna'a seller for the losses resulting from the breach of contract.January 2015CA-3.4.12
The failure of the parallel Istisna'a seller to deliver a completed asset which meets the ultimate buyer's specifications does not discharge the
Islamic bank licensee's obligations to deliver the asset ordered under an Istisna'a contract, and thus exposes theIslamic bank licensee to potential loss in making good the shortcomings or obtaining the supply elsewhere.January 2015Credit Risk
Exposure to Customer
CA-3.4.13
The receivable amount generated from selling of an asset based on an Istisna'a contract with full exposure to the
customer (ultimate buyer) must be assigned a RW based on the credit standing of the customer as rated by an ECAI that is approved by the CBB. Refer to Section CA-4.2 for the RW. In cases where the ultimate buyer is unrated, a RW of 100% applies.January 2015Exposure to Asset
CA-3.4.14
When the project is rated by an ECAI, the RW based on the credit rating of the ultimate buyer is applied to calculate the capital adequacy requirement. Otherwise, the RW must be based on the "supervisory slotting criteria" approach for specialised financing (project finance), as set out in Appendix CA-5, which carries RWs as given below:
Supervisory Categories Strong Good Satisfactory Weak External credit assessments BBB- or better BB+ or BB BB- to B+ B to C- Risk weights 70% 90% 115% 250% January 2015CA-3.4.15
Istisna'a financing with an "Exposure to Asset" structure is required to meet the characteristics as set out below in order to qualify for the above RW:
(a) The segregation of the project's liabilities from the balance sheet of the Istisna'a ultimate buyer or project sponsor from a commercial and accounting perspective which is generally achieved by having the Istisna'a contract made with a special-purpose entity set up to acquire and operate the asset/project concerned;(b) The ultimate buyer is dependent on the income received from the assets acquired/projects to pay the purchase price;(c) The contractual obligations give the manufacturer/ constructor/ bank a substantial degree ofcontrol over the asset and the income it generates — for example, under the BOT arrangement where the manufacturer builds a highway and collects tolls for a specified period as a consideration for the selling price; and(d) The primary source of repayment is the income generated by the asset/project rather than relying on the capacity of the ultimate buyer.January 2015Exclusions
CA-3.4.16
The capital requirement is to be calculated on the receivable amount, net of:
(a) Specific provisions;(b) Any amount that is secured by eligible collateral (as defined in Section CA-4.7); andAmended: July 2017
January 2015CA-3.4.17
Any portion of an Istisna'a contract that is covered by an advanced payment must carry a RW of 0%, or the amount of the advanced payment must be offset against the total amount receivable or amounts owing from progress billings.
January 2015Applicable Period
CA-3.4.18
The credit RW is to be applied from the date when the manufacturing or construction process commences and until the selling price is fully settled by the
Islamic bank licensee , either in stages and/or on the maturity of the Istisna'a contract, which is upon delivery of the manufactured asset to the Istisna'a ultimate buyer.January 2015Offsetting Arrangement between Credit Exposures of Istisna'a and Parallel Istisna'a
CA-3.4.19
The credit exposure amount of an Istisna'a contract is not to be offset against the credit exposure amount of a Parallel Istisna'a contract because an obligation under one contract does not discharge an obligation to perform under the other contract.
January 2015Market Risk
Exposure to Customer
(a) Istisna'a with Parallel Istisna'a
CA-3.4.20
There is no capital charge for
market risk to be applied in addition to provisions in Paragraphs CA-3.4.13 to CA-3.4.19, subject to there being no provisions in the Parallel Istisna'a contract that allow the seller to increase or vary its selling price to theIslamic bank licensee , under unusual circumstances. Any variations in a Parallel Istisna'a contract that are reflected in the corresponding Istisna'a contract which effectively transfers the whole of the price risk to an Istisna'acustomer (buyer), are also eligible for this treatment.January 2015CA-3.4.21
If the seller is allowed to vary the selling price of the asset, then the price risk must be calculated in accordance with Paragraph CA-5.2.2.
January 2015(b) Istisna'a without Parallel Istisna'a
CA-3.4.22
A capital charge of 1.6% is to be applied to the balance of unbilled WIP inventory to cater for
market risk , in addition to the credit RW stated in Paragraphs CA-3.4.13 to CA-3.4.19.January 2015CA-3.4.23
The unbilled WIP inventory is held subject to the binding order of the Istisna' ultimate buyer and is thus not subject to inventory price as described in Section CA-5.6.
January 2015Foreign Exchange Risk
CA-3.4.24
Any foreign exchange exposures arising from the purchasing of input materials, or from Parallel Istisna'a contracts made, or the selling of a completed asset in foreign currency must be included in the measures of foreign exchange risk described in section CA-5.5.
January 2015Bank as a Buyer (al mustasni') in an Istisna'a Contract
Istisna'a with Parallel Istisna'a
CA-3.4.25
In cases where an
Islamic bank licensee enters into Parallel Istisna'a to sell an asset to an ultimate customer, its price risk relating to input materials is mitigated. TheIslamic bank licensee remains exposed to the counterparty risk of the Istisna'a supplier in delivering the asset on time and in accordance with the parallel Istisna'a ultimate buyer's specifications. This is the risk of not being able to recover damages from the Istisna'a supplier for the losses resulting from the breach of contract.January 2015CA-3.4.26
The failure of the Istisna'a supplier to deliver a completed asset which meets the ultimate buyer's specifications does not discharge the
Islamic bank licensee's obligations to deliver the asset ordered under a parallel Istisna'a contract, and thus exposes theIslamic bank licensee to potential loss in making good the shortcomings or obtaining the supply elsewhere.January 2015Credit Risk
Exposure to Customer
CA-3.4.27
The receivable amount generated from selling of an asset based on a parallel Istisna'a` contract with full exposure to the ultimate
customer must be assigned a RW based on the credit standing of thecustomer as rated by an ECAI that is approved by the CBB. Refer to Section CA-4.6 for the RW. In cases where the ultimate buyer is unrated, a RW of 100% applies.January 2015Exposure to Asset
CA-3.4.28
When the project is rated by an ECAI, the RW based on the credit rating of the "off-taker" (third-party buyer) is applied to calculate the capital adequacy requirement. Otherwise, the RW must be based on the "supervisory slotting criteria" approach for specialised financing (project finance) as set out in Appendix CA-5, which carries RWs as given below:
Supervisory Categories Strong Good Satisfactory Weak External credit assessments BBB- or better BB+ or BB BB- to B+ B to C- Risk weights 70% 90% 115% 250% January 2015CA-3.4.29
The "Exposure to Asset" Istisna'a structure is required to meet the characteristics as set out in Paragraph CA-3.4.22.
January 2015Exclusions
CA-3.4.30
The capital requirement is to be calculated on the receivable amount, net of: a) specific provisions; b) any amount that is secured by eligible collateral as defined in Section CA-4.7; and c) any amount which is past due by more than 90 days as set out in Section CA-4.2. These other amounts are to be risk weighted as described in the concerned Sections.
January 2015CA-3.4.31
Any portion of a parallel Istisna'a contract covered by an advance payment carries a RW of 0%, or the amount of the advanced payment is offset against the total amount receivable from the ultimate
customer or amounts owing from progress billings.January 2015Applicable Period
CA-3.4.32
The credit RW is to be applied from the date when the manufacturing or construction process commences and until the selling price is fully settled by the
Islamic bank licensee , either in stages and/or on the maturity of the Istisna'a contract, which is upon delivery of the manufactured asset to the parallel Istisna'a ultimate buyer.January 2015Offsetting Arrangement between Credit Exposures of Istisna'a and Parallel Istisna'a
CA-3.4.33
The credit exposure amount of a parallel Istisna'a contract is not to be offset against the credit exposure amount of an Istisna'a contract (or vice versa) because an obligation under one contract does not discharge an obligation to perform under the other contract.
January 2015Market Risk
Exposure to Customer
Istisna'a with Parallel Istisna'a
CA-3.4.34
There is no capital charge for
market risk to be applied in addition to provisions oncredit risk , subject to there being no provisions in the Istisna'a contract that allow the supplier to increase or vary its selling price to theIslamic bank licensee , under unusual circumstances. Any variations in a parallel Istisna'a contract that are reflected in the corresponding Istisna'a contract which effectively transfers the whole of the price risk to a parallel Istisna'acustomer (ultimate buyer) are also eligible for this treatment.January 2015Istisna'a without Parallel Istisna'a
CA-3.4.35
In Istisna'a without Parallel Istisna'a, the
Islamic bank licensee is making progress payments to the Istisna'a supplier, thereby acquiring title to WIP inventory. The WIP inventory is exposed to price risk. As there is no parallel Istisna'a sale to an ultimatecustomer , there is nocredit risk .January 2015CA-3.4.36
The WIP receives a capital charge appropriate to inventory — 15%.
January 2015Foreign Exchange Risk
CA-3.4.37
Any foreign exchange exposures arising from the purchasing of input materials, or from parallel Istisna'a contracts made, or the selling of a completed asset in foreign currency must be included in the measures of foreign exchange risk described in Section CA-5.5.
January 2015Summary of Capital Requirement at Various Stages of the Contract
CA-3.4.38
The following tables set out the applicable period of the contract that attracts capital charges where the
Islamic bank licensee is the seller.(a) Exposure to customer(i) Istisna'a with Parallel Istisna'a
Applicable Stage of the Contract Credit RW Market Risk Capital Charge Unbilled WIP inventory
Amount receivable after contract billingsBased on ultimate buyer's rating or 100% RW for unrated buyer.
No netting of Istisna'a exposures against Parallel Istisna'a exposures.
(See Paragraphs CA-3.4.13 to CA-3.4.19)
(See Section CA-4.2)Nil provided that there is no provision in the Parallel Istisna'a contract that allows the seller to increase or vary the selling price. See Paragraphs CA-3.4.20 and CA-3.2.21.
If the seller is allowed to vary the selling price of the asset, then under themarket risk treatment 15% capital charge on net long or short position plus 3% capital charge on gross positions (see CA-5.2.2).Upon full settlement of the purchased price by an Istisna'a buyer. NA NA (ii) Istisna'a without Parallel Istisna'a
Applicable Stage of the Contract Credit RW Market Risk Capital Charge Unbilled WIP inventory Based on ultimate buyer's rating or 100% RW for unrated buyer. 1.6% capital charge (equivalent to 20% RW) on work in progress inventory.
See relevant Paragraphs under CA-3.4.22 to CA-3.4.23Progress billing to customer. Based on ultimate buyer's rating or 100% RW for unrated buyer.
(See Paragraphs CA-3.4.14 to CA-3.4.22) (See Section CA-4.2)NA Upon full settlement of the purchased price by an Istisna'a buyer. NA NA (b) Exposure to asset
Istisna'a with Parallel Istisna'a (for project finance)
Applicable Stage of the Contract Credit RW Market Risk Capital Charge Unbilled WIP inventory Based on buyer's ECAI rating if available or supervisory slotting criteria that ranges from 70% to 250% RW.
No netting of Istisna'a exposures against Parallel Istisna'a exposures.
(See Sections CA-4.2 and CA-4.3)NA Amount receivable after contract billings NA Upon full settlement of the purchased price by an Istisna'a buyer. NA NA January 2015CA-3.4.39
The following tables set out the applicable period of the contract that attracts capital charges where the
Islamic bank licensee is acting as buyer.(a) Exposure to customer(i) Istisna'a with Parallel Istisna'a
Applicable Stage of the Contract Credit RW Market Risk Capital Charge Unbilled WIP inventory Based on ultimate buyer's rating or 100% RW for unrated buyer.
No netting of Istisna'a exposures against Parallel Istisna'a exposures.
(See Paragraphs CA-3.4.13 to CA-3.4.19)
(See Section CA-4.2)Nil provided that there is no provision in the Parallel Istisna'a contract that allows the seller to increase or vary the selling price. See Paragraph CA-3.4.20.
If the seller is allowed to vary the selling price of the asset, then under themarket risk treatment 15% capital charge on net long or short position plus 3% capital charge on gross positions.Amount receivable after contract billings Upon full settlement of the purchased price by an Istisna'a buyer. NA NA (ii) Istisna'a without Parallel Istisna'a
Applicable Stage of the Contract Credit RW Market Risk Capital Charge Amounts of progress payments to suppliers for WIP inventory. None (no ultimate Istisna'a customer)
Seecredit risk under Section CA-3.415% for WIP inventory See Market risk under Section CA-3.4.20 onward(b) Exposure to asset
Istisna'a with Parallel Istisna'a (for project finance)
Applicable Stage of the Contract Credit RW Market Risk Capital Charge Unbilled WIP inventory Based on buyer's ECAI rating if available or supervisory slotting criteria that ranges from 70% to 250% RW.
No netting of Istisna'a exposures against Parallel Istisna'a exposures.
(See Sections CA-4.2 and CA-4.3)NA Amount receivable after contract billings NA Upon full settlement of the purchased price by an Istisna'a buyer. NA NA January 2015CA-3.5 CA-3.5 Ijarah and Ijarah Muntahia Bittamleek
Introduction
CA-3.5.1
This Section sets out the minimum capital requirement to cover counterparty risk and residual value risk of leased assets, arising from an
Islamic bank licensee entering into contracts or transactions that are based on the Sharia rules and principles of Ijarah and Ijarah Muntahia Bittamleek (IMB), also known as Ijarah wa Iqtinā. The Section also covers the market (price) risk of assets acquired for Ijarah and IMB.January 2015CA-3.5.2
In an Ijarah contract (either operating or IMB), the
Islamic bank licensee as the lessor maintains its ownership in the leased asset whilst transferring the right to use the asset, or usufruct, to an enterprise as the lessee, for an agreed period at an agreed consideration. All liabilities and risks pertaining to the leased asset are to be borne by theIslamic bank licensee including obligations to restore any impairment and damage to the leased asset arising from wear and tear and natural causes which are not due to the lessee's misconduct or negligence.January 2015CA-3.5.3
Thus, in both Ijarah and IMB, the risks and rewards remain with the lessor, except for the residual value risk at the term of an IMB which is borne by the lessee. The lessor is exposed to price risk on the asset while it is in the lessor's possession prior to the signature of the lease contract, except where the asset is acquired following a binding promise to lease as described in Paragraph CA-3.5.12.
January 2015CA-3.5.4
In an IMB contract, the lessor promises to transfer its ownership of the leased asset to the lessee at the end of the contract as a gift or as a sale at a specified consideration, provided that (a) the promise is separately expressed and independent of the underlying Ijarah; or (b) a gift contract is entered into conditional upon fulfilment of all the Ijarah obligations, and thereby ownership shall be automatically transferred to the lessee.
January 2015CA-3.5.5
In both operating Ijarah and IMB, the
Islamic bank licensee either possesses the asset before entering into a leased contract or enters into the contract based on specific description of an asset to be leased and acquired in the future before it is delivered to the lessee. The agreement to lease may be considered as binding (binding Promise to Lease (PL)) or as non-binding (non-binding PL) depending on the applicable terms and conditions.January 2015CA-3.5.6
This Section sets out the minimum capital requirements to cater for the lessor's exposures to (a) the
credit risk of the lessee as counterparty in servicing the lease rentals, and (b) the market (price) risk attaching to the residual value of the leased assets either at the end of the Ijarah contract or at the time of repossession upon default, i.e. the risk of losing money on the resale of the leased asset.January 2015IMB
CA-3.5.7
In IMB, once the lease contract is signed, the lessor is exposed to
credit risk for the lease payments receivable from the lessee (acredit risk mitigated by the asset's value as collateral14 in most cases) and to a type ofoperational risk in respect of the need to compensate the lessee if the asset is permanently impaired through no fault of the latter. If the leased asset is permanently impaired and is uninsured, theIslamic bank licensee suffers a loss equal to the carrying value of the leased asset, just as it would if any of its fixed assets were permanently impaired. In the event that the lessee exercises its right to cancel the lease, the lessor is exposed to the residual value of the leased asset being less than the refund of payments due to the lessee. In such case, the price risk, if any, is already reflected in a 'haircut' to be applied to the value of the leased asset as collateral. Therefore, the price risk, if any, is not applicable in the context of the IMB.
14 The collateral used in the context of IMB is of the usufruct or use value of the asset, as the bank is the owner of the asset.
January 2015CA-3.5.8
The
credit risk exposure in respect of the lease rentals is mitigated by the collateral represented by the value of the leased asset on repossession, provided that theIslamic bank licensee is able to repossess the asset, which may be subject to doubt, especially in the case of movable assets. Insofar as there is doubt as to the lessor's ability to repossess the asset, the residual value of the asset that was assumed in fixing the lease rentals is also exposed tocredit risk .January 2015CA-3.5.9
The
Islamic bank licensee may be exposed to losses in case a lessee acquiring an asset under IMB decides not to continue with the contract. The lease contract may give the lessee this right subject to certain conditions (such as a minimum period of notice). In such a case, the lessor is required to refund to the lessee the capital payments (instalments of the purchase price) that were included in the periodic lease rentals (subject to deduction of any amounts due for unpaid rentals). If the value of the repossessed asset is less than the amount to be refunded (before any such deduction), the difference constitutes a loss to the lessor. This exposes theIslamic bank licensee as lessor to a form ofmarket risk 15.
15 The contract should include clauses that cover the treatment of destruction or loss of the property without any fault of the tenant. The contract should also elaborate how the bank as a lessor will cover itself in the absence of any Takaful.
January 2015CA-3.5.10
In theory, a situation could arise in which, when an IMB contract arrives at its term, the lessee decides not to exercise its option to complete the purchase by making the contractually agreed final payment (The option to purchase places no obligation on the lessee to do so.). The
Islamic bank licensee may thus be exposed tomarket risk , in respect of a potential loss from disposing of the asset for an amount lower than its residual value.January 2015CA-3.5.11
In the case of IMB, the lessor's exposure in such a case described in Paragraph CA-3.5.10 would not be significant, as the option to purchase can be exercised by making a payment of a token amount and the lessee would have no reason to refrain from exercising it. Moreover, the residual value of the asset in the lessor's book at the term of a full payout of the IMB (i.e. its residual value as assumed in fixing the lease rentals) would be zero or close to zero.
January 2015Credit Risk — Ijarah and IMB
CA-3.5.12
In a binding PL, when an
Islamic bank licensee is exposed to default on the lease orderer's obligation to execute the lease contract, the exposure is measured as the amount of the asset's total acquisition cost to theIslamic bank licensee , less the market value of the asset where it is eligible collateral subject to any haircut (see Paragraph CA-4.7.25), and less the amount of any urbun received from the lease orderer. The applicable RW must be based on the standing of the obligor as rated by an ECAI that is approved by the CBB (refer to section CA-4.6), and in the case the obligor is unrated, a RW of 100% applies. TheIslamic bank licensee may or may not have the right to recoup from thecustomer any loss on leasing or disposing of the asset after taking account of the HJ, depending on the terms of the contract.January 2015CA-3.5.13
In applying the treatment as set out in Paragraph CA-3.5.12, the
Islamic bank licensee must ensure that the PL is properly documented and is legally enforceable. In the absence of proper documentation and legal enforceability, the asset is to be treated similarly to one in a non-binding PL which is exposed to market (price) risk, using the measurement approach as set out in Subparagraph CA-3.5.18(a).January 2015Credit Risk — Operating Ijarah
CA-3.5.14
In addition to the
credit risk mentioned in Paragraph CA-3.5.12, when the lessee gets the right to use the asset, the lessor is exposed tocredit risk for the estimated value of the lease payments in respect of the remaining period of the Ijarah. This exposure is mitigated by the market value of the leased asset where it is eligible collateral (subject to the applicable haircut) if it can be repossessed. The netcredit risk exposure is assigned a RW based on the credit standing of the lessee/counterparty as rated by an ECAI that is approved by the CBB. In the case that the lessee is unrated, a RW of 100% applies. See Paragraph CA-4.7.25 for eligible collateral.January 2015Credit Risk — IMB
CA-3.5.15
In addition to
credit risk mentioned in Paragraphs CA-3.5.12 and CA-3.5.13, the capital requirement for IMB is based on the following two components:(a) Total estimated future Ijara receivable amount over the duration of the lease contract: This exposure is mitigated by the market value of the leased asset (subject to any haircut if it is eligible collateral) if it may be repossessed. The netcredit risk exposure must be assigned a RW based on the credit standing of the lessee/counterparty as rated by an ECAI that is approved by the CBB. In cases where the lessee is unrated, a RW of 100% applies. See Paragraph CA-4.7.25 for eligible collateral; and(b) Price risk attached to the expected residual value of a leased asset: This exposure is treated under Paragraph CA-3.5.20.January 2015Exclusions from Credit Risk for Ijarah and IMB
Market Risk — Ijarah and IMB
CA-3.5.17
In the case of an asset acquired and held for the purpose of either operating Ijara or IMB, the capital charge to cater for market (price) risk in respect of the leased asset from its acquisition date until its disposal can be categorised as follows:
(a) Non-binding PL
The asset for leasing will be treated as inventory of theIslamic bank licensee and, using the simplified approach, the capital charge applicable to such amarket risk exposure is 15% of the amount of the asset's market value); and(b) Binding PL
In a binding PL, anIslamic bank licensee is exposed to default on the lease orderer's obligation to lease the asset in its possession. In the event of the lease orderer defaulting on its PL, theIslamic bank licensee will either lease or dispose of the asset to a third party. TheIslamic bank licensee will have recourse to any HJ paid by thecustomer 16, and (i) may have a right to recoup from thecustomer any loss on leasing or disposing of the asset after taking account of the HJ, or (ii) may have no such right, depending on the legal situation. In both cases, this risk is mitigated by the asset in possession as well as any HJ paid by the lease orderer.
16 In the case of HJ, the amount can only be deducted for damages — that is, the difference between the asset acquisition cost and the total of lease rentals (when the asset is leased to a third party) or selling price (when the asset is sold to a third party), whichever is applicable.
January 2015CA-3.5.18
In case CA-3.5.17(b)(i), if the down-payment was made as HJ, the
Islamic bank licensee has the right to recoup any loss (as indicated in the previous paragraph) from thecustomer ; that right constitutes a claim receivable which is exposed tocredit risk , and the exposure must be measured as the amount of the asset's total acquisition cost to theIslamic bank licensee , less the market value of the asset if it may be repossessed and where it is eligible collateral (see Paragraph CA-4.7.25) subject to any haircut, and less the amount of any HJ. The applicable RW must be based on the standing of thecustomer as rated by an ECAI that is approved by the CBB. In cases where the obligor is unrated, a RW of 100% applies.January 2015CA-3.5.19
In case CA-3.5.17(b)(ii), the
Islamic bank licensee has no right to recoup any losses, and the cost of the asset to theIslamic bank licensee constitutes amarket risk (as in the case on a non-binding PL), but thismarket risk exposure is reduced by the amount of any HJ that theIslamic bank licensee has the right to retain.January 2015Market Risk — Operating Ijarah
CA-3.5.20
The residual value of the asset is risk-weighted at 100%. Upon expiry of the lease contract, the carrying value of the leased asset must carry a capital charge of 15% until the asset is re-leased or disposed of.
January 2015Market Risk — IMB
CA-3.5.21
In the event that the lessee exercises its right to cancel the lease, the lessor is exposed to the residual value of the leased asset being less than the refund of payments due to the lessee. In such a case, the price risk, if any, is already reflected in a 'haircut' to be applied to the value of the leased asset as collateral in
credit risk . Therefore, the price risk, if any, is not applicable in the context of the IMB.January 2015Summary of Capital Requirement at Various Stages of the Contract
CA-3.5.22
The following tables set out the applicable stage of the contract that attracts capital charges:
Operating IjaraApplicable Stage of the Contract Credit RW Market Risk Capital Charge Asset available for lease (prior to signing a lease contract) Binding PL*
Asset acquisition cost less (a) market value of asset fulfilling function of collateral (net of any haircuts), and (b) any HJ multiply by the customer's rating or 100% RW for unrated customerNon-binding PL 15% capital charge until lessee takes possession Asset available for lease and the lease rental payments are due from the lessee Total estimated value of lease receivables for the whole duration of leasing contract is risk-weighted according to the lessee's rating.
100% RW for an unrated lessee less residual value of the leased assetThe residual value is risk-weighted at 100% Maturity of contract term and the leased asset is returned to the bank Not applicable 15% capital charge of the carrying value of the asset * This credit RW is applicable only when the bank has recourse to any HJ paid by the customer, and (depending on the legal situation) may have a right to recoup from the customer any loss on leasing or disposing of the asset to a third party, after taking account of the HJ. If the bank has no such right, the cost of the asset to the bank constitutes a
market risk (as in the case of a non-binding PL), but thismarket risk exposure is reduced by the amount of any HJ that the bank has the right to retain.January 2015CA-3.5.23
IMB
Applicable Stage of the Contract Credit RW Market Risk Capital Charge Asset available for lease (prior to signing a lease contract) Binding PL*
Asset acquisition cost less (a) market value of asset fulfilling function of collateral (net of any haircuts), and (b) any HJ multiplied by customer's rating or 100% RW for unrated customerNon-binding PL 15% capital charge until lessee takes possession When the lessee has the right to use the asset and the lease rental payments are due from the lessee Total estimated value of lease receivables for the whole duration of leasing contract is risk-weighted according to the lessee's credit rating. 100% RW for an unrated lessee less residual value of the leased asset Not applicable Maturity of contract term and the leased asset is sold and theasset ownership is transferred to the lessee Not applicable Not applicable * This credit RW is applicable only when the bank has recourse to any HJ paid by the customer. In the case of HJ (depending on the legal situation), the bank may have a right to recoup from the customer any loss on leasing or disposing of the asset to a third party, after taking account of the HJ, while any excess HJ must be refunded. If the bank has no such right, the cost of the asset to the bank constitutes a
market risk (as in the case of a non-binding PL), but thismarket risk exposure is reduced by the amount of any HJ that the bank has the right to retain.January 2015CA-3.6 CA-3.6 Musharakah and Diminishing Musharakah
Introduction
CA-3.6.1
This Section sets out the minimum capital adequacy requirement to cover the risk of loss on invested capital arising from entering into contracts or transactions that are based on the Sharia rules and principles of Musharakah and Diminishing Musharakah where the
Islamic bank licensee and theircustomers /partner(s) contribute to the capital of the partnership and shares its profit or loss.January 2015CA-3.6.2
This Section is applicable to both (a) Musharakah in which all the partners' share remains constant throughout the contract period; and (b) Diminishing Musharakah in which the share of the
Islamic bank licensee is gradually reduced during the tenure of the contract until it is fully sold to the other partner(s).January 2015CA-3.6.3
Musharakah contracts refer to partnerships in specific transactions or projects. These exclude participation in the share capital (equity) of other enterprises which is covered in Section CA-4.8.
January 2015CA-3.6.4
A Musharakah is an agreement between the
Islamic bank licensee and acustomer to contribute capital in various proportions to an enterprise, whether existing or new, or to ownership of a real estate or moveable asset, either on a permanent basis, or on a diminishing basis where thecustomer progressively buys out the share of the bank ("Diminishing Musharakah"). Profits generated by that enterprise or real estate/asset are shared in accordance with the terms of Musharakah agreement whilst losses are shared in proportion to the respective contributor's share of capital.January 2015CA-3.6.5
An
Islamic bank licensee may enter into a Musharakah contract with acustomer as a means of providing a financing to the latter on a profit sharing and loss bearing basis. In this case, the Musharakah is normally of the diminishing type, in which thecustomer gradually purchases theIslamic bank licensee's partnership share over the life of the contract. This type of financing is one of the Sharia compliant alternatives to avoid a conventional term loan repayable by instalments, and as such it is exposed tocredit risk for thecustomer's purchase payments as well as to the risk attached to theIslamic bank licensee 's share of the underlying assets.January 2015Musharakah
CA-3.6.6
This Section sets out the minimum capital adequacy requirement to cater for "capital impairment risk", the risk of losing the amount contributed to an enterprise or ownership of an asset. The
Islamic bank licensee acts as a partner in a Musharakah contract and is exposed to the risk of losing its capital upon making payment of its share of capital in a Musharakah contract. A Musharakah can expose theIslamic bank licensee either to capital impairment risk or to'credit risk' , depending on the structure and purpose of the Musharakah and the types of asset in which the funds are invested. The invested capital is redeemable either by liquidation of the Musharakah assets at the end of the contract which has a fixed tenure or as mutually agreed by the partners, or upon divestment of partnership in an on-going Musharakah subject to giving a notice to other partners. The amount of capital redemption is represented by the value of a share of capital, which is dependent on the quality of the underlying investments or assets, and ability to generate profits and cash flows from the Musharakah.January 2015CA-3.6.7
As a partner to a Musharakah contract, the
Islamic bank licensee is not entitled to a fixed rate of return and is thus exposed to variable profits generated by the partnership which are shared on a basis as agreed in the Musharakah contract, whereas losses are to be borne by theIslamic bank licensee and its partners according to their respective ratio of invested capital. Therefore, theIslamic bank licensee is exposed to entrepreneurial risk of an active partner that manages the partnership and business risks associated with the underlying activities and types of investments or assets of the partnership.January 2015CA-3.6.7A
For the purpose of determining the minimum capital adequacy requirement, this Section makes distinctions between the four main categories of Musharakah as set out below:
(a) Private commercial enterprise to undertake trading activities in foreign exchange, shares and/or commodities This type of Musharakah exposes theIslamic bank licensee to the risk of underlying activities, namely foreign exchange, equities or commodities;(b) Private commercial enterprise to undertake a business venture (other than (a)) This type of Musharakah exposes theIslamic bank licensee to the risk as an equity holder, which is similar to the risk assumed by a partner in venture capital or a joint venture, but not tomarket risk . As an equity investor, theIslamic bank licensee serves as the first loss position and its rights and entitlements are subordinated to the claims of secured and unsecured creditors. For further explanation of the nature of risk in such ventures, see Paragraphs CA-4.8.4 to CA-4.8.6; and(c) Joint ownership of real estate or movable assets (such as cars) is divided into two sub-categories:(i) Musharakah in Ijara contract
Ownership of such assets can produce rental income for the partnership, through leasing the assets to third parties by means of Ijara contracts. In this case, the risk of the Musharakah investment is essentially that of the underlying Ijara contracts — that is,credit risk mitigated by the collateral represented by the leased assets.
However, in some cases the lessee is not a third party but theIslamic bank licensee's partner as customer. The existence of such an Ijara sub-contract in addition to a Musharakah exposes theIslamic bank licensee tocredit risk in respect of the partner's obligation to service the lease rentals and(ii) Musharakah in Murabahah contract
TheIslamic bank licensee is entitled to its share of revenue generated from selling the assets to third parties by means of Murabahah contracts that expose theIslamic bank licensee tocredit risk in respect of the Murabahah receivables from the buyer/counterparty.January 2015Diminishing Musharakah
Equity Position Risk — Musharakah
CA-3.6.9
For Musharakah, the equity exposure is measured based on the nature of the underlying investments as follows:
(a) For investments held in the trading book, exposure is equal to the fair value; and(b) For investments held to maturity, exposure is equal to the carrying value, which may be the fair value or the historical cost less any provisions for impairment.January 2015CA-3.6.10
For private commercial enterprises undertaking trading activities in foreign exchange, shares or commodities, the Musharakah exposures, net of provisions is measured as follows:
(a) The RW is based on the applicable underlying assets as set out in themarket risk section in Chapter CA-5.
The investment in foreign exchange and trading in gold/silver is measured according to the treatment as set out in Section CA-5.5, which requires 8% capital charge on the greater of either net long or net short positions in foreign exchange and 8% capital charge on the net long position of gold/silver;(b) The RW of a Musharakah that invests in quoted shares is measured according to the equity position risk approach, where positions in assets tradable in markets qualify for treatment as equity position risk in the trading book, which incur a total capital charge of 16% as set out in Section CA-5.3; and(c) Investment in commodities is measured according to either the maturity ladder approach or the simplified approach as set out in Section CA-5.6.January 2015CA-3.6.11
For private commercial enterprise undertaking a business venture other than in Paragraph CA-3.6.12), there are two possible methods used to calculate the equity exposures:
(a) Simple risk-weight method: The RW must be applied to the exposures (net of specific provisions) based on equity exposures in the banking book. The RW under the simple RW method for equity position risk in respect of an equity exposure in a business venture must entail a 400% RW for shares that are not publicly traded less any specific provisions for impairment. If there is a third-party guarantee to make good impairment losses, the RW of the guarantor must be substituted for that of the assets for the amount of any such guarantee; or(b) Supervisory slotting method: AnIslamic bank licensee is required to map its RW into four supervisory categories as described in Appendix CA-5 (specialised financing) where the RW of each category is as follows:
Supervisory Categories Strong Good Satisfactory Weak Risk weights 90% 110% 135% 270%
The above RWs under the slotting method for specialised financing include an additional fixed factor of 20% RW to cater for potential decline in the Musharakah's net asset value.
For further explanation, also see Paragraphs CA-4.8.7–4.8.11.January 2015Joint Ownership of Real Estate and Movable Assets (such as cars)
CA-3.6.12
Musharakah in Ijara contract:
Income-producing Musharakah through leasing to third parties by means of Ijara contracts exposes the capital contributor to the risk of that underlying Ijara contract — that is, counterparty risk mitigated by the value of leased assets. This Musharakah investment is assigned a RW based on the credit standing of the counterparty/lessee, as rated by an ECAI that is approved by the CBB, and a 100% RW on the residual value of an Ijara asset (operating lease). In cases where the counterparty is unrated, a RW of 100% applies. (Please refer to the treatment for Ijara as set out in Paragraph CA-3.5.22.)
January 2015CA-3.6.13
Musharakah in Murabahah contract:
Income-producing Musharakah through selling to third parties by means of Murabahah contracts exposes the capital contributor to the risk of that counterparty/buyer. This Musharakah investment is assigned a RW based on the credit standing of the counterparty /buyer, as rated by an ECAI that is approved by the CBB. In cases where the counterparty is unrated, a RW of 100% applies. (Please refer to the treatment for Murabahah as set out in Section CA-3.2.
January 2015Equity Position Risk — Diminishing Musharakah
CA-3.6.14
The equity exposure in a Diminishing Musharakah contract, where the
Islamic bank licensee has provided funds for the working capital of the partnership and intends to transfer its full ownership in movable assets and working capital to the other partner over the life of the contract, is calculated based on the remaining balance of the amount invested (measured at historical cost including any share of undistributed profits) less any specific provision for impairment. The exposure must be risk weighted according to the nature of the underlying assets as set out in Paragraphs CA-3.6.11 to CA-3.6.14. If a third party guarantee exists, to make good impairment losses, the RW of the guarantor is substituted for that of the assets (if lower) for the amount of any such guarantee. TheIslamic bank licensee can use the risk weights under the slotting method (see Paragraph CA-3.6.11) after the required CBB approval, based on the criteria set out in Appendix CA-6.January 2015Summary of Capital Requirement at Various Stages of the Contract
CA-3.6.15
The following table sets out the Musharakah categories that attract capital charges:
Musharakah Category Credit RW Market Risk Capital Charge Private commercial enterprise to undertake trading activities in the foreign exchange, share and/or commodity Not applicable. Depends on the underlying asset as set out in the applicable market risk sectionPrivate commercial enterprise to undertake business venture other than trading activities in the foreign exchange, share and/ or commodity (a) Simple RW method 400% RW of the contributed amount* to the business venture less any specific provisions. (If there is a third-party guarantee, the RW of the guarantor is substituted for that of the assets for the amount of any such guarantee)
Or(b) Slotting method Between 90–270% RW of the contributed amount* to the business venture based on the four categoriesNot applicable Joint ownership of real estate and movable assets (Musharakah with Ijara subcontract,
Musharakah with Murabahah subcontract)Based on lessee's (for Ijara sub-contract) or customer's (for Murabahah subcontract) rating or 100% RW for unrated lessee or customer Please refer to the market risk capital charge requirements as set out under the sub-contracts* In the case of Diminishing Musharakah, the contributed amount is based on the remaining balance of the invested amount.
January 2015CA-3.7 CA-3.7 Mudarabah
Introduction
CA-3.7.1
This Section sets out the minimum capital adequacy requirement to cover the risk of losing invested capital arising from entering into contracts or transactions that are based on the Shari'a rules and principles of Mudarabah where the
Islamic bank licensee assumes the role of capital provider ('rab al mal'). This Section is applicable to both restricted and unrestricted Mudarabah financing.January 2015CA-3.7.2
A Mudarabah is an agreement between the
Islamic bank licensee and acustomer whereby theIslamic bank licensee would contribute capital to an enterprise or activity which is to be managed by thecustomer as the (labour provider or) Mudarib.January 2015CA-3.7.3
Profits generated by that enterprise or activity are shared in accordance with the terms of the Mudarabah agreement whilst losses are to be borne solely by the
Islamic bank licensee unless the losses are due to the Mudarib's misconduct, negligence or breach of contracted terms.January 2015CA-3.7.4
A Mudarabah financing can be carried out on either:
(a) A restricted basis, where the capital provider allows the Mudarib to make investments subject to specified investment criteria or certain restrictions such as types of instrument, sector or country exposures, etc.; or(b) An unrestricted basis, where the capital provider allows the Mudarib to invest funds freely based on the latter's skills and expertise.January 2015CA-3.7.5
As the capital provider, the
Islamic bank licensee is exposed to the risk of losing its capital investment ('capital impairment risk') upon making payment of the capital to the Mudarib. Any loss on the investment is to be borne solely by the capital provider, but is limited to the amount of his capital. Losses that are due to misconduct, negligence or breach of contractual terms, are to be borne by the Mudarib.January 2015CA-3.7.6
While it is not permissible for a Mudarib to give a guarantee against losses outlined in Paragraph CA-3.7.5, a guarantee may be given by a third party on the basis of tabarru (donation). In such a case, the amount of the Mudarabah capital so guaranteed may be considered as subject to
credit risk with a risk weighting equal to that of the guarantor.January 2015CA-3.7.7
Guarantees referred to in Paragraph CA-3.7.6 may be given when liquid funds are placed in an Islamic interbank market under a Mudarabah contract.
January 2015Equity Position Risk
CA-3.7.8
Apart from placements identified in Paragraph CA-3.7.7, Mudarabah contracts are commonly used for the investment purposes mentioned in Paragraph CA-3.7.10.
January 2015CA-3.7.9
In assigning the RW, consideration is given to the intent of the Mudarabah investment, and to the nature of the underlying assets. The intent may be:
(a) The purchase of assets for trading;(b) Investing on an equity basis in an ongoing business venture with the intention of holding the investment for an indefinite period, perhaps with a view to eventual sale (e.g. venture capital investments); or(c) Project finance. The underlying assets may be tradable assets such as commodities, foreign exchange or securities, or business assets such as real property, plant and equipment, and working capital. Real property and movable property may also be purchased with a view to generating rental income by means of Ijara contracts.January 2015Private Commercial Enterprise to Undertake Trading Activities in Foreign Exchange, Shares or Commodities.
CA-3.7.11
This type of Mudarabah exposes the
Islamic bank licensee to the risk of the underlying activities, namely foreign exchange, equity or commodities.January 2015Private Commercial Enterprise to Undertake a Business Venture (other than outlined in Paragraph CA-3.7.11.)
CA-3.7.12
This type of Mudarabah exposes the
Islamic bank licensee to risk as an equity holder, which is similar to the risk assumed by a partner in venture capital or a joint venture, but not tomarket risk . As an equity investor, theIslamic bank licensee serves as the first loss position and its rights and entitlements are subordinated to the claims of secured and unsecured creditors. For further explanation of the nature of risk in such ventures, see Paragraphs CA-4.8.4 to CA-4.8.6.January 2015Mudarabah Investments in Project Finance
CA-3.7.13
An
Islamic bank licensee advances funds to a customer who acts as Mudarib in a construction contract for a third-party customer (ultimate customer). The ultimate customer will make progress payments to the Mudarib who, in turn, makes payments to theIslamic bank licensee . The essential role of theIslamic bank licensee in this structure is to provide bridging finance to the Mudarib pending its receipt of the progress payments. In this type of construction contract Mudarabah investment structure:(a) TheIslamic bank licensee has no direct or contractual relationship with the ultimate customer (but theIslamic bank licensee may stipulate that payments by the ultimate customer to the Mudarib be made to an account ("repayment account") with theIslamic bank licensee which has been opened for the purpose of the Mudarabah and from which the Mudarib may not make withdrawals without theIslamic bank licensee's permission); and(b) TheIslamic bank licensee as investor advances funds to the construction company as Mudarib for the construction project and is entitled to a share of the profit of the project but must bear 100% of any loss.January 2015CA-3.7.14
The
Islamic bank licensee is exposed to the risk on the amounts paid to the Mudarib, and as these amounts are made on a profit-sharing and loss-bearing basis they are treated undercredit risk as equity positions in the banking book. In principle, theIslamic bank licensee's credit exposure is to the Mudarib, not to the ultimatecustomer ; however, as described below, a structure may involve the use of a "repayment account" to receive progress payments from the ultimatecustomer , which transfers much of thecredit risk to the latter.January 2015CA-3.7.15
In addition to
credit risk (i.e. that the Mudarib has received payment from the ultimatecustomer but fails to pay theIslamic bank licensee , or that the ultimatecustomer fails to pay), theIslamic bank licensee is exposed to capital impairment in case the project results in a loss.January 2015Direct Payment by Ultimate Customer into a "Repayment Account" Opened with the Bank and Effectively Pledged to the Bank
CA-3.7.16
Much of the
Islamic bank licensee's credit exposure to the Mudarib may be transferred to the ultimatecustomer under this structure involving the "repayment account". If the ultimatecustomer is a sovereign or otherwise has a very low risk-weighting, this may affect the RW to be applied to the exposure, and othercredit risk mitigants may be applied, as described below.January 2015CA-3.7.17
In a construction related transaction, provided the construction work proceeds normally and to the ultimate
customer's satisfaction, the risk attaching to the progress payments due from the ultimatecustomer to the Mudarib will be thecredit risk of the ultimatecustomer . However, this does not per se constitute a mitigation of thecredit risk of theIslamic bank licensee's exposure to the Mudarib. In such a case, if an independent engineer employed to certify that the work has reached a certain stage of completion has issued a certificate to that effect, so that a progress payment is due from the ultimatecustomer , from the point of view of theIslamic bank licensee the amount of that progress payment due is no longer exposed to the risk of unsatisfactory performance by the Mudarib, but only to the latter's failure to pay theIslamic bank licensee (the Mudarib being exposed to possible default by the ultimatecustomer ). Such an amount might thus arguably bear a RW based entirely on the credit standing of the Mudarib — that is, say 100%, rather than 400%. However, if a binding agreement exists between theIslamic bank licensee and the ultimatecustomer whereby the latter will make the payment into a "repayment account" with theIslamic bank licensee , the latter's credit exposure in respect of the amount due is transferred from the Mudarib to the ultimatecustomer .January 2015CA-3.7.18
Other structures may be used which have the effect of modifying the risk exposures of the investors in a Mudarabah. The determination of the risk exposure (nature and amount) must take into account the structure which must be reflected in the application of RW.
January 2015Equity Position Risk
CA-3.7.19
The equity exposure must be measured based on the nature of the underlying investments:
(a) For investments held in the trading book, the exposure is equal to the fair value; or(b) For investments held to maturity, the exposure is equal to the carrying value — that is, either the fair value or the historical cost less any provisions for impairment.January 2015CA-3.7.20
The Mudarabah exposures, must be measured net of specific provisions.
January 2015Private Commercial Enterprise to Undertake Trading Activities in Foreign Exchange, Shares or Commodities
CA-3.7.21
The RW must be based on the applicable underlying assets as set out in the
market risk section in Chapter CA-5. An investment in foreign exchange and trading in gold/silver must be measured according to the treatment set out in Section CA-5.5, which requires an 8% capital charge on the greater of either net long or net short positions and an 8% capital charge on the net position of gold/silver.The RW of a Mudarabah that invests in quoted shares must be measured according to the equity position risk approach where positions in assets tradable in markets qualifies for treatment as equity position risk in the trading book, which incurs a total capital charge of 16% (equivalent to 200% RW) as set out in Section CA-5.3.
Investment in commodities must be measured according to either the maturity ladder approach or the simplified approach, as set out in Section CA-5.6.
January 2015Private Commercial Enterprise to Undertake a Business Venture (other than Paragraph CA-3.7.21)
Mudarabah Investment in Project Finance
CA-3.7.23
The
Islamic bank licensee's overall credit exposure in respect of the Mudarabah in such a case is divided into three parts:(a) The amount receivable by theIslamic bank licensee from the Mudarib in respect of progress payments due to the Mudarib from the ultimatecustomer for work certified as having reached a certain stage of completion: If a binding agreement exists as described in Paragraph CA-3.7.13, whereby the amount will be paid by the ultimatecustomer into a "repayment account" with theIslamic bank licensee , the RW reflects the credit standing of the ultimatecustomer . In the absence of such an agreement, the RW reflects the credit standing of the Mudarib (or 100% RW for unratedcustomer );(b) The amount held in the "repayment account" with theIslamic bank licensee , which has a risk weighting of 0%; and(c) For any remaining balance of the funds advanced by theIslamic bank licensee to the Mudarib, which incurs a RW of between 300% and 400% under the simple RW method, or between 90% and 270% under the slotting method, unless otherwise rated, the treatment as set out in Paragraph CA-3.7.12 applies.January 2015Summary of Capital Requirements for Mudarabah Categories
CA-3.7.24
The Mudarabah categories that attract capital charges of Paragraphs CA-3.7.11 and CA-3.7.12 are:
Mudarabah Category Credit RW Market Risk Capital Charge Private commercial enterprise to undertake trading activities in the foreign exchange, share and/or commodity Not applicable Depends on the underlying asset as set out in the applicable market risk sectionPrivate commercial enterprise to undertake business venture other than trading activities in the foreign exchange, share and/or commodity (a) Simple risk-weight method: 400% RW* of the contributed amount to the business venture less any specific provisions or:(b) Slotting method: Between 90% and 270% RW of the contributed amount to the business venture based on the four categoriesNot applicable * 300% RW may be applied if the funds are subject to withdrawal by the investor at short notice.
January 2015CA-3.7.25
The applicable stages in a Mudarabah contract in project finance that attract capital charges of Paragraph CA-3.7.13 are:
Applicable Stages in a Contract Credit RW Market Risk Capital Charge Prior to certification, where funds are already advanced by the bank to the Mudarib Risk weight is based on the rating of either the ultimate customer or the Mudarib (see Paragraph CA-3.7.13). Otherwise, 400% RW is applied to an unrated Mudarib. Not applicable After certification, where the amount is receivable by the bank from the Mudarib in respect of progress payment to the Mudarib from the ultimate customer If a "repayment account" or similar mitigation structure is used, RW is based on the credit standing of the ultimate customer on the amounts receivable by the bank from the Mudarib (or 100% RW for unrated customer). Not applicable January 2015CA-3.8
Sukuk [This Section was moved to Chapter CA-8 in January 2015].
January 2015CA-3.9 CA-3.9 Qard Hasan
Introduction
CA-3.9.1
This Section sets out the minimum capital requirement to cover the risk of losing capital arising from entering into contracts or transactions that are based on the Shari'a rules and principles of Qard.
January 2015CA-3.9.2
Qard is a loan given by an
Islamic bank licensee , where the borrower is contractually obliged to repay only the principal amount borrowed.17 In the contract of Qard, no payment in addition to the principal amount lent may be required, as that would be a form of Riba.
17 As a business entity, banks provide financing to their customers to perform their role as financial intermediary and seek an opportunity to earn profits for their enterprise and for distribution to their shareholders and fund providers. Therefore, most banks will not be providing any significant amount of lending on the basis of Qard, as Shari'a rules and principles require the borrower to pay only the principal amount in that case. Nonetheless, a bank survey has shown that, in several jurisdictions, some banks do provide Qard-based lending for different reasons. These vary widely among banks and may include: (a) lending to some specific type of clients such as the poor, needy or widows, etc. as a part of Corporate Social Responsibility practice; (b) lending out of their Charity Account (built out of their non-permissible income) to small entrepreneurs and new businesses that do not have access to sufficient assets that can be used as collateral; (c) lending as a part of their business product — that is, not out of the Charity Account; (d) providing funding to various microfinance institutions or customers; and (e) lending mainly for marketing or public acceptance purposes, where a small portion of the overall financing portfolio is allocated to support certain activities of underprivileged sections of the population, etc.
January 2015CA-3.9.3
If a fixed period of repayment is stipulated in the contract, the borrower is liable to pay back the principal amount to the
Islamic bank licensee on or before the agreed date of payment. On the other hand, if no period is stipulated in the contract, it is binding upon the borrower to make a repayment of the loaned amount to the lender on demand.January 2015Collateralisation
CA-3.9.4
As one of the CRM techniques,
Islamic bank licensees can secure a pledge of a tangible asset. The collateralisation is not automatically provided in a Qard contract but must be explicitly stated or must be documented in a separate security agreement at or before the time of signing of the Qard contract. TheIslamic bank licensee may employ other techniques such as pledge of deposits/PSIA or a third-party financial guarantee.January 2015Credit Risk
CA-3.9.5
Islamic bank licensees are exposed tocredit risk in the event that the borrower fails to repay the principal amount in accordance with the agreed terms of the contract. In a fixed-period Qard contract,credit risk exposure commences upon the execution of the contract until the full repayment by the borrower.January 2015CA-3.9.6
The credit exposure is measured based on account receivable in Qard — that is, the amount due from the
customer at the end of the financial period less any provision for doubtful debts.January 2015CA-3.9.7
The account receivable amount (net of specific provisions) arising from the Qard contract must be assigned a RW based on the credit standing of the borrower, as rated by an ECAI that is approved by the CBB (see Section CA-4.6). In cases where the borrower is unrated, a RW of 100% applies. The RW of a financial guarantor can be substituted for the RW of the borrower provided that the guarantor has a better credit rating than the borrower and that the guarantee is legally enforceable. If an exposure is covered by multiple CRM techniques, the exposure must be segregated into segments covered by each type of CRM technique as specified in Section CA-4.7. For any uncovered exposure, the RW of the underlying counterparty applies.
January 2015Market Risk
CA-3.9.8
In the case where a cash loan is provided by the
Islamic bank licensee , there is no element ofmarket risk . If, however, a loan is provided in a currency other than the local currency or in the form of a commodity, the relatedmarket risk is applicable, as outlined in Section CA-5.6.January 2015Summary of Capital Requirement for Qard-based Lending
CA-3.9.9
The following table sets out capital charges for lending on the basis of Qard:
Exposure Credit RW Market Risk Capital Charge Accounts receivable from customer Exposure is equal to the amount of loan (less specific provisions) X customer's rating (or 100% RW for unrated customer). Not applicable* * Applicable only if Qard-based lending is made in the foreign currency or in commodities.
January 2015CA-3.10 CA-3.10 Wakalah
Introduction
CA-3.10.1
This Section sets out the minimum capital adequacy requirement to cover the risk of losing invested capital arising from an
Islamic bank licensee entering into asset-side financing contracts or transactions that are based on the Shari'a rules and principles of Wakalah.January 2015CA-3.10.2
An
Islamic bank licensee assumes the role of a principal (Muwakkil) and appoints thecustomer as agent (Wakil) to carry out a specified set of services or act on its behalf. This Section is applicable to both restricted and unrestricted Wakalah financing.January 2015CA-3.10.3
Wakalah is a contract of agency whereby one person contracts to perform any work or provide any service on behalf of another person. Businesses rely on a range of individuals to act on their behalf; these include employees, directors, partners, and a range of professional agents. An action performed by an agent on behalf of the principal will be deemed to be an action by the principal. An agent will obtain fees for services rendered according to the contractual reward structure offered by the principal which may incorporate a performance-related element.
January 2015CA-3.10.4
Profits generated are distributed to the Muwakkil less the Wakil fee, in accordance with the terms of the Wakalah agreement. In case the contract includes some "indicative" or "expected" profit rate on the investment, the Wakalah contract can include a clause stipulating that the Wakil's remuneration may be:
(a) A pre-agreed flat fee; or(b) A certain share of profit added to a pre-agreed flat fee, subject to the terms and conditions.January 2015CA-3.10.5
A Wakalah financing can be carried out on either:
(a) A restricted basis, where the capital provider allows the Wakil to make investments subject to specified investment criteria or certain restrictions such as types of instrument, sector or country exposures etc.; or(b) An unrestricted basis, where the capital provider allows the Wakil to invest funds freely based on the latter's skills and expertise. For interbank Wakalah, the Wakil is permitted by the Muwakkil to invest the investment amount on a discretionary basis, but only in Shari'a-compliant transactions.January 2015CA-3.10.6
As the Muwakkil, the
Islamic bank licensee is exposed to the risk of losing its invested capital — that is, capital impairment risk. Any loss on the investment is to be borne solely by the Muwakkil, but is limited to the amount of its capital. Losses that are due to fraud, misconduct, negligence or breach of contractual terms are to be borne by the Wakil. The Wakil shall be entitled to any pre-agreed flat Wakil fee irrespective of whether the actual profit is less than, equal to or greater than any expected profit, and also in the event of a loss.January 2015CA-3.10.7
However, while it is not permissible for a Wakil to give a guarantee against losses or for any indicative or expected profits, such a guarantee may be given by a third party on the basis of tabarru' (donation). In such a case, the amount of the Wakalah capital so guaranteed may be considered as subject to
credit risk with a risk-weighting equal to that of the guarantor. In particular, such guarantees may be given when liquid funds are placed in an Islamic interbank market under a Wakalah contract.January 2015CA-3.10.8
In the absence of any fraud, misconduct, negligence or breach of contractual terms on the part of Wakil, all the risk of loss on the investment is to be borne by the Muwakkil. Therefore, the
Islamic bank licensee is exposed to the skills of the Wakil that manages the investments on behalf of theIslamic bank licensee , as well as to business risks associated with the underlying activities and types of investments or assets of the Wakalah agreement.January 2015Capital Requirements
CA-3.10.9
For the purpose of determining the minimum capital requirements, this section makes distinctions between the following main categories of Wakalah:
(a) Wakalah investments to undertake trading activities in foreign exchange, shares and/or commodities, including Commodity Murabaha Transactions (CMTs);(b) Wakalah investments with a private commercial enterprise to undertake business activities (other than (a) above); and(c) Wakalah placement in the interbank market.January 2015CA-3.10.10
The Wakalah exposures, are measured net of specific provisions as set out below.
January 2015Wakalah Investments to Undertake Trading Activities in Foreign Exchange, Shares and/or Commodities, including CMT
CA-3.10.11
The RW is based on the applicable underlying assets as set out in the
market risk section in Chapter CA-5. An investment in foreign exchange and trading in gold or silver must be measured according to the treatment as set out in Section CA-5.5, which requires an 8% capital charge on the greater of either net long or net short positions and an 8% capital charge on the net position of gold/silver.January 2015CA-3.10.12
The RW of a Wakalah for funds that are invested in quoted shares must be measured according to the equity position risk approach, where positions in assets tradable in markets qualify for treatment as equity position risk in the trading book, which incur a total capital charge of 16% (equivalent to 200% RW) as set out in Section CA-5.3.
January 2015CA-3.10.13
Investment in commodities must be measured according to either the maturity ladder approach or the simplified approach as set out in Section CA-5.6.
January 2015CA-3.10.14
If the Wakalah investment is to be utilised by the Wakil (another
Islamic bank licensee ) for conducting CMT to earn a (fixed rate of) profit, the investingIslamic bank licensee is primarily exposed to the counterparty risk. In that case, the invested amount (net of specific provisions) must be assigned a RW based on the credit standing of the counterparty as rated by an approved ECAI. In cases where the counterparty is unrated, a RW of 100% applies (see Section CA-4.2).January 2015Wakalah Investments with Private Commercial Enterprise to Undertake Business Activities (other than in Paragraph CA-3.10.11)
CA-3.10.15
This type of Wakalah investment exposes the
Islamic bank licensee to capital impairment risk. Due to this downside risk, the RW is measured according to equity position in the banking book approach. The RW must be applied to the exposures net of specific provision, if any.January 2015CA-3.10.16
As explained in Sections CA-3.6 and 3.7, there are two possible methods used to calculate the equity exposures, that is:
(a) The simple risk-weight method; and(b) The slotting method.January 2015CA-3.10.17
The RW under the simple risk-weighting method (a) entails a RW of 300–400%. Under the slotting method (b), an
Islamic bank licensee must map its RW into four supervisory categories as described in Appendix CA-5 (specialised financing) where the RWs of each category are as follows:Supervisory Categories Strong Good Satisfactory Weak Risk weights 90% 110% 135% 270% The above RWs under the slotting method for specialised financing include an additional fixed factor of 20% RW to cater for potential decline in the Wakalah net asset value.
For further explanation, also see Paragraphs CA-4.8.7 to 4.8.11.January 2015Wakalah Placement in the Interbank Market
CA-3.10.18
An
Islamic bank licensee may place liquid funds with a central bank or anotherIslamic bank licensee on a Wakalah basis in order to obtain a return on those funds. Such placements are considered to be more secure than those identified in Paragraphs CA-3.10.11 to CA-3.10.14, owing to the available credit standing of, and the established relationship with, the counterparty in the interbank market.January 2015CA-3.10.19
A placement of funds made by an
Islamic bank licensee with anotherIslamic bank licensee under a Wakalah agreement (whether on a restricted or unrestricted basis) may be subject to a Shari'a-compliant guarantee from a third party. Such a guarantee can be related to the amount of principal invested, as well as the expected return. In such cases, the capital must be treated as subject tocredit risk , with a risk weighting equal to that of the guarantor provided that the RW of that guarantor is lower than the RW of the Wakil as counterparty. Otherwise, the RW of the Wakil applies. As explained in Section CA-3.11 related to Mudarabah interbank placement, interbank placement received on a Wakalah basis can also be effectively treated as a liability by theIslamic bank licensee receiving the funds. In the absence of any guarantee mentioned earlier, the risk-weighting must be applied based on the credit standing of the counterparty as rated by an approved ECAI, or a RW of 100% for an unrated counterparty.January 2015CA-3.10.20
If the funds placed under a Wakalah arrangement are placed in a foreign currency, in addition to the above treatment, capital charge related to foreign exchange risk is applicable as outlined in Section CA-5.5.
January 2015Summary of Capital Requirements for Wakalah Categories
CA-3.10.21
The following table sets out the Wakalah categories that attract capital charges.
Wakalah Category Credit RW Market Risk Capital Charge Wakalah investments to undertake trading activities in foreign exchange, shares and/ or commodities, including CMT Not applicable Depends on the underlying asset as set out in the applicable market risk section.
See Section CA-5.5 for Wakalah investments in FX.
See Section CA-5.3 for Wakalah Investments in shares.
See Section CA-5.6 for Wakalah Investments in commodities.
See Section CA-3.11 for Wakalah investments in CMT.Wakalah investments with private commercial enterprise to undertake business activities, other than above categories (a) Simple risk-weight method 300–400% RW of the placed amount less any specific provisions
Or:(b) Slotting method Between 90% and 270% RW of the contributed amount to the business venture based on the four categoriesNot applicable Wakalah placement in the interbank market Risk-weighting can be applied based on the credit standing of the counterparty* as rated by the approved ECAI, or a RW of 100% for an unrated counterparty. Not applicable** * In the case of a third-party guarantee, the capital must be treated as subject to
credit risk with a risk weighting equal to that of the guarantor provided that the RW of that guarantor is lower than the RW of the Wakil as counterparty. Otherwise, the RW of the Wakil applies.** If funds are invested in foreign exchange, foreign exchange risk will also be applicable as per Section CA-5.5.
January 2015CA-3.11 CA-3.11 Commodity Murabahah Transactions (CMT)
CA-3.11.1
This Section sets out the minimum capital requirements to cover the credit and
market risks arising from financing contracts that are based on the Shari'a rules and principles of CMTs, either in the interbank market or to other customers.January 2015CA-3.11.2
Islamic bank licensees can be involved in CMT-based financing in the following forms:18(a) CMT for interbank operations for managing short-term liquidity surplus (i.e. selling and buying of Shari'a-compliant commodities through Murabahah transactions, which is commonly termed "placement" in conventional institutions) or where the counterparty is the central bank or monetary authority offering a Shari'a-compliant lender of last resort and/or a standing facility for effective liquidity management. Such placement/financing is referred to as "commodity Murabahah for liquid funds (CMLF)"; or19(b) CMT for providing financing to a counterparty by a longer-term commodity Murabahah where the counterparty immediately sells the commodities on the spot market is referred to as "commodity Murabahah financing (CMF)".
18 Please see IFSB GN-2 (Guidance Note on CMT, issued in December 2010) for details on various risk management and capital adequacy aspects of CMT that can be conducted on both sides of the balance sheet.
19 CMLF is also referred to as "commodity Murabahah investment" by some banks in the industry. Strictly speaking, Murabahah should not be classified as an investment, since in fact it is a type of receivable.
January 2015CA-3.11.3
CMLF is a tool for liquidity management for
Islamic bank licensees in order for them to invest their surplus liquid funds on a short-term basis with other market players, within or outside the jurisdiction. In this type of transaction, the RW will be influenced by the credit standing of the counterparty receiving the funds and the duration of the placement.January 2015Capital Requirements
CA-3.11.4
It is crucial for
Islamic bank licensees to recognise and evaluate the overlapping nature and transformation of risks that exist between various types of risk. Since the dynamism of risk exposure through the phases of CMT is unique,Islamic bank licensees should break down the contractual timeline for CMT while managing the risks in each phase.January 2015CA-3.11.5
An
Islamic bank licensee may be exposed tomarket risk through any fluctuation in the price of the underlying commodity that comes into its possession for a longer duration than normal — for example, when a customer refuses to honour his commitment to buy or when the agreement is non-binding. With CMLF and CMF on the asset side,market risk transforms intocredit risk ; that is,market risk is applicable before selling the commodities to the counterparty, while upon their being sold to the counterparty on deferred payment terms themarket risk converts intocredit risk . In view of the market practice relating to CMT whereby the commodities are sold instantaneously after being bought on the basis of a binding promise, there would be nomarket risk . On the other hand, if anIslamic bank licensee holds title to the commodities for any length of time in the CMT transaction, amarket risk exposure will be present. Placement of funds in currencies other than the local currency will also expose theIslamic bank licensee to foreign exchange risk.January 2015Credit Risk
CA-3.11.6
As in both CMLF and CMF, a binding promise from the
customer exists to purchase the commodity; anIslamic bank licensee is exposed to default on thecustomer's obligation to purchase. In the event of default by thecustomer , theIslamic bank licensee disposes of the asset to a third party; that is, thecredit risk is mitigated by the asset in possession as collateral, net of any haircut. The exposure must be measured as the amount of the total acquisition cost to theIslamic bank licensee for the purchase of commodities, less the market value of the commodities as collateral, subject to any haircut and specific provisions, if any. The RW of the counterparty must be applicable to the resultant receivables,20 and would be based on credit ratings issued by a recognised ECAI.21 In the case of an unrated counterparty, the applicable RW will be 100%.
20 In CMLF and CMF on the asset side, the bank is exposed to market risk in the interval before it sells the commodities to the counterparty, and subsequently to credit risk (accounts receivable risk), which is applicable after the bank sells those commodities to the counterparty.
21 If the credit exposure is funded and denominated in local currency and the counterparty is a domestic sovereign, a 0% risk weight shall be applied. Otherwise, a higher risk weight as suggested by the credit rating of the foreign sovereign is applicable.
January 2015CA-3.11.7
In applying the RWs outlined above, an
Islamic bank licensee must ensure that the contracts for the transactions are properly documented and legally enforceable in a court of law. In the absence of these features, the commodities are exposed tomarket risk .January 2015Market Risk
CA-3.11.8
In the presence of a binding promise to purchase from the counterparty (Paragraph CA-3.2.6) and legally enforceable contract documentation, no capital charge is applicable for
market risk . Otherwise, a capital charge for commodities risk is applicable, and must be measured by using either the maturity ladder approach or the simplified approach as set out in Section CA-5.6.January 2015CA-3.11.9
In case the exposure is denominated in a foreign currency, a capital charge on the foreign currency exposure must be calculated as outlined in Section CA-5.5.
January 2015Summary of Capital Requirements
CA-3.11.10
The following table delineates the applicable stage of the CMLF and CMF on the asset side and associated capital charges.
Applicable Stage of the Contract Credit RW Market Risk Capital Charge 1 Commodities on banks' balance sheet for sale Total acquisition cost to the banks for the purchase of commodities, less the market value of the commodities as collateral, subject to any haircut and specific provisions. Not applicable* 2 Commodities sold and delivered to the customer Based on counterparty's rating or 100% RW for unrated customer. Not applicable * In the presence of a binding promise from the counterparty to purchase, and legally enforceable contract documentation, there will be no capital charge.
January 2015CA-4 CA-4 Credit Risk — The Standardised Approach
CA-4.1 CA-4.1 Introduction
CA-4.1.1
Credit risk exposures in Islamic financing arise in connection with accounts receivable in Murabaha contracts, counterparty risk in Salam contracts, accounts receivable and counterparty risk in Istisn'a contracts and lease payments receivable in Ijarah contracts, and Sukuk held to maturity in the banking book.Credit risk is measured according to the Standardised Approach as outlined in this Module, except for certain exposures arising from investments by means of Musharaka or Mudaraba contracts in assets in the banking book. The latter are to be treated as giving rise tocredit risk (in the form of capital impairment risk), and are to be risk-weighted applying the supervisory slotting criteria for exposures in the nature of specialised financing and the risk weights applicable to equities for other equity exposures as detailed in the Musharaka and Mudaraba sections of Chapter CA-3.January 2015CA-4.1.2
Broadly, the assignment of Risk Weights (RWs) takes into consideration the following:
(a) Thecredit risk rating of an obligor or other counterparty, or a security, based on external credit assessment institutions (ECAI) ratings22. In determining the risk weights in the standardised approach,Islamic bank licensees must use assessments by only those external credit assessment institutions which are recognised as eligible for capital purposes by CBB in accordance with the criteria defined in Section CA-4.6;(b)Credit risk mitigation techniques adopted by theIslamic bank licensees ;(c) Types of the underlying assets that are sold and collateralised or leased by theIslamic bank licensees ; and(d) The amount of specific provisions made for the overdue portion of accounts receivable or lease payments receivable.
22 The notations follow the methodology used by one institution, Standard & Poor's. The use of Standard & Poor's credit ratings is an example only; those of some other external credit assessment institutions could equally well be used. The ratings used throughout this document, therefore, do not express any preferences or determinations on external assessment institutions by the CBB.
January 2015CA-4.1.3
Exposures must be risk-weighted net of specific provisions and may take eligible collateral into account where the risk weight of the collateral is lower than that of the counterparty or obligor.
January 2015CA-4.2 CA-4.2 Segregation of Claims
Claims on Sovereigns
CA-4.2.1
Claims on governments of GCC member states (hereinafter referred to as GCC) and their central banks are normally risk weighted at 0%. Claims on other sovereigns and their central banks are given a preferential risk weighting of 0% where such claims are denominated and funded in the relevant domestic currency of that sovereign/central bank (e.g. if a Bahraini bank has a claim on government of Australia and the loan is denominated and funded in Australian dollar, it will be risk weighted at 0%). Such preferential risk weight for claims on GCC/other sovereigns and their central banks are allowed only if the relevant supervisor also allows 0% risk weighting to claims on its sovereign and central bank.
January 2015CA-4.2.2
Claims on sovereigns other than those referred to in Paragraph CA-4.2.1 must be assigned risk weights as follows:
Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Risk Weight 0% 20% 50% 100% 150% 100% January 2015Claims on International Organisations
CA-4.2.3
Claims on the Bank for International Settlements, the International Monetary Fund and the European Central Bank receive a 0% risk weight.
January 2015Claims on Non-central Government Public Sectors Entities (PSEs)
CA-4.2.4
Any claims on the Bahraini PSEs listed in Appendix CA-8 are treated as claims on the government of Bahrain and are eligible for 0% risk weighting.
Amended: April 2016
Added: January 2015CA-4.2.4A
In addition to the Bahraini PSEs listed in Appendix CA-8, existing exposures to the following entities which have been removed from the list of PSEs as of 1st March 2016, will be grandfathered and will remain eligible for 0% risk weighting until the final maturity or sale of such exposure:
(a) Durrat Khaleej Al Bahrain Company;(b) Hawar Island Development Company;(c) Lulu Tourism Company; and(d) Al Awali Real Estate Company.Added: April 2016CA-4.2.4B
Any new claims to the entities listed under Paragraph CA-4.2.4A are subject to the normal risk weights as outlined in this Section.
Added: April 2016CA-4.2.5
Where other supervisors also treat claims on named PSEs as claims on their sovereigns, claims to those PSEs are treated as claims on the respective sovereigns as outlined in Paragraphs CA-4.2.1 and CA-4.2.2. These PSEs must be shown on a list maintained by the concerned central bank or financial regulator. Where PSE's are not on such a list, they must be subject to the treatment outlined in Paragraph CA-4.2.6.
January 2015CA-4.2.6
Claims on all other (foreign) PSEs (i.e. not having sovereign treatment) denominated and funded in the home currency of the sovereign must be risk weighted as allowed by their home country supervisors, provided the sovereign carries rating BBB- or above. Claims on PSEs with no explicit home country weighting or to PSEs in countries of BB+ sovereign rating and below are subject to ECAI ratings as per the following table:
Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Risk Weight 20% 50% 100% 100% 150% 100% January 2015CA-4.2.7
Claims on commercial companies owned by governments must be risk weighted as normal commercial entities unless they are in the domestic currency and covered by a government guarantee in the domestic currency that satisfies the conditions in Section CA-4.7 in which case they may take the risk weight of the concerned government.
January 2015Claims on Multilateral Development Banks (MDBs)
CA-4.2.8
MDBs currently eligible for a 0% risk weight are: the World Bank Group comprised of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), the Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), the European Investment Bank (EIB), the European Investment Fund (EIF), the Nordic Investment Bank (NIB), the Caribbean Development Bank (CDB), the Islamic Development Bank (IDB) and the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), Arab Monetary Fund (AMF), the Council of Europe Development Bank (CEDB), the Arab Bank for Economic Development in Africa (ABEDA), Council of European Resettlement Fund (CERF) and the Kuwait Fund for Arab Economic Development (KFAED).
January 2015CA-4.2.9
The claims on MDBs, which do not qualify for the 0% risk weighting above, must be assigned risk weights as follows:
Banks Credit Quality Grades AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Risk weights 20% 50% 50% 100% 150% 50% January 2015Claims on Islamic Banks and Conventional Banks
CA-4.2.10
Claims on banks must be risk weighted as given in the following table. No claim on an unrated bank may receive a risk weight lower than that applied to claims on its sovereign of incorporation (see guidance in Paragraph CA-4.2.11A for self-liquidating letters of credit).
Banks Credit Quality Grades AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Standard risk weights 20% 50% 50% 100% 150% 50% Preferential risk weight 20% 20% 20% 50% 150% 20% January 2015CA-4.2.11
Short-term claims on locally incorporated banks must be assigned a risk weighting of 20% where such claims on the banks are of an original maturity of 3 months or less denominated and funded in either BD or US$. A preferential risk weight that is one category more favourable than the standard risk weighting must be assigned to claims on foreign banks licensed in Bahrain of an original maturity of 3 months or less denominated and funded in the relevant domestic currency (other than claims on banks that are rated below B-). Such preferential risk weight for short-term claims on banks licensed in other jurisdictions will be allowed only if the relevant supervisor also allows this preferential risk weighting to short-term claims on its banks.
January 2015CA-4.2.11A
Self-liquidating letters of credit issued or confirmed by an unrated bank are allowed a risk weighting of 20% without reference to the risk weight of the sovereign of incorporation. All other claims will be subject to the 'sovereign floor' of the country of incorporation of the concerned issuing or confirming bank. See also Paragraph CA-4.5.5.
January 2015CA-4.2.12
Claims with an (contractual) original maturity under 3 months that are expected to be rolled over (i.e. where the effective maturity is longer than 3 months) do not qualify for a preferential treatment for capital adequacy purposes.
January 2015Claims on Investment Firms
CA-4.2.13
Claims on category one and category two investment firms which are licensed by the CBB are treated as claims on banks for risk weighting purposes but without the use of preferential risk weight for short-term claims. Claims on category three investment firms licensed by the CBB must be treated as claims on corporates for risk weighting purposes. Claims on investment firms in other jurisdictions will be treated as claims on corporates for risk weighting purposes. However, if the bank can demonstrate that the concerned investment firm is subject to an equivalent capital adequacy regime to this Module and is treated as a bank for risk weighting purposes by its home regulator, then claims on such investment firms must be treated as claims on banks.
January 2015Claims on Corporates, including Insurance Companies
CA-4.2.14
Risk weighting for corporates including insurance companies is as follows:
Credit assessment AAA to AA- A+ to A- BBB+ to BB- Below BB- Unrated Risk weight 20% 50% 100% 150% 100% January 2015CA-4.2.15
Risk weighting for unrated (corporate) claims will not be given a preferential RW to the concerned sovereign. Credit facilities to small/medium enterprises may be placed in the regulatory retail portfolio in limited cases described below.
January 2015Risk Weights Based on Underlying Assets
Claims Included in the Regulatory Retail Portfolios
CA-4.2.17
Retail claims that are included in the regulatory retail portfolio must be risk weighted at 75%, except as provided in Paragraph CA-4.2.21 for the past due receivables.
January 2015CA-4.2.18
To be included in the regulatory retail portfolio, claims must meet the following criteria:
(a) Orientation ─ the exposure is to an individual person or persons or to a small business. A small business is a Bahrain-based business with annual turnover below BD 2mn;(b) Product ─ The exposure takes the form of any of the following: revolving credits and lines of credit (including credit cards and running finance), personal term finance and leases (e.g. instalment finance, auto finance and leases, student and educational finance, personal finance) and small business facilities and commitments. Islamic products which involve securities (such as Musharakah, Mudarabah, Sukuks and equities), whether listed or not, are specifically excluded from this category. Mortgage finance will be excluded if they qualify for treatment as claims secured by residential property (see below). Finance for purchase of shares are also excluded from the regulatory retail portfolios;(c) Granularity ─ The regulatory retail portfolio is sufficiently diversified to a degree that it reduces the risks in the portfolio, warranting a 75% risk weight. No aggregate exposure to one counterpart23 can exceed 0.2% of the overall regulatory retail portfolio; and(d) The aggregate receivables (accounts receivable in Murabaha and Istisna, lease payments receivable in IMB, and share purchase plus lease receivables in diminishing Musharakah) due from a single counterparty or person(s) must not exceed BD250,000.
23 Aggregated exposure means gross amount (i.e. not taking any credit risk mitigation into account) of all forms of debt exposures (e.g. finances or commitments) that individually satisfy the three other criteria. In addition, "to one counterpart" means one or several entities that may be considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the limit would apply to the bank's aggregated exposure on both businesses).
January 2015Claims Secured by Residential Real Estate (RRE)
CA-4.2.19
Financing facilities fully secured by first mortgages on RRE that is or will be occupied by the borrower, or that is leased, carry a risk weighting of 75%.
January 2015CA-4.2.19A
The RW for RRE may be reduced to 35% subject to meeting all of the criteria below:
(a) The RRE is to be utilised for residential purposes only;(b) The subject matter of RRE must be pledged as collateral (or serve as quasi-collateral) to theIslamic bank licensee in the case of Murabaha, IMB or diminishing Musharakah;(c) There exists a legal infrastructure in the jurisdiction whereby theIslamic bank licensee can enforce the repossession and liquidation of the RRE; and(d) TheIslamic bank licensee must obtain a satisfactory legal opinion that foreclosure or repossession as mentioned in (c) above is possible without any impediment.January 2015CA-4.2.19B
The RW for residential mortgage exposure granted under the Social Housing Schemes of the Kingdom of Bahrain may be reduced to 25% subject to meeting conditions, (a) and (b) in CA-4.2.19A. The reduced risk weight is subject to ensuring the compliance with the requirements for timely recognition of expected credit loss (ECL) as per the Credit Risk Management Module (Module CM).
Amended: October 2022
Added: July 2019Claims Secured by Commercial Real Estate
CA-4.2.20
Financing facilities secured by mortgages on commercial real estate are subject to a minimum of 100% risk weight but may be subject to higher risk weights depending on the financing structure (see CA-3). If the borrower is rated below BB-, the risk-weight corresponding to the rating must be applied.
January 2015Past Due Receivables
CA-4.2.21
In the event that accounts receivable or lease payments receivable become past due, the exposure must be risk-weighted in accordance with the following table. The exposures should be risk weighted net of specific provisions (see Paragraph CA-4.3.5 for exposures risk-weighted under Supervisory Slotting Criteria).
Type RW % of Specific Provisions for Past Due Receivables Unsecured exposure (other than a qualifying residential mortgage finance facility) that is 90 days or more past due, net of specific provisions 150%
100%Less than 20% of the outstanding receivables.
At least 20% of the outstanding receivables.Exposure secured by RRE 100% For receivables that are 90 days or more past due. January 2015CA-4.2.22
For the purposes of defining the secured portion of a past due receivable, eligible collateral and guarantees will be the same as for
credit risk mitigation purposes.January 2015CA-4.2.23
Past due retail receivables are to be excluded from the overall regulatory retail portfolio when assessing the granularity criterion, for risk-weighting purposes.
January 2015Investments in Equities and Funds (not including Real Estate)
CA-4.2.24
Investments in listed equities below the thresholds mentioned in Chapter CA-2 must be risk weighted at 100% while unlisted equities must be risk weighted at 150% provided they are not subject to other treatments described in this paragraph and in CA-4.2.25–26 below. The amount of any significant investments in commercial entities above the 15% and 60% Total Capital materiality thresholds (see Paragraph CA-2.4.25) must be weighted at 800%. Significant investments in the common shares of unconsolidated financial institutions and Mortgage Servicing Rights and Deferred Tax Assets arising from temporary differences must be risk weighted at 250% if they have not already been deducted from CET1 as required by Paragraphs CA-2.4.15 to CA-2.4.24. For risk-weighting of Sukuk, refer to Chapter CA-8.
January 2015CA-4.2.25
Investments in funds (e.g. mutual funds, Collective Investment Undertakings etc.) must be risk weighted as follows:
(a) If the instrument (e.g. units) is rated, it should be risk-weighted according to its external rating (for risk-weighting, it must be treated as a "claim on corporate");(b) If not rated, such investment should be treated as an equity investment and risk weighted accordingly (i.e. 100% for listed and 150% for unlisted);(c) TheIslamic bank licensee can apply to CBB for using the look-through approach for such investments if it can demonstrate that the look-through approach is more appropriate to the circumstances of theIslamic bank licensee ;(d) If there are no voting rights attached to investment in funds, the investment will not be subjected to consolidation, deduction or additional risk-weighting requirements (in respect of large exposure and significant investment limits);(e) For the purpose of determining "large exposure limit" for investment in funds, the look-through approach should be used (even if the look-through approach is not used to risk weight the investment).January 2015CA-4.2.26
CBB may require an
Islamic bank licensee to adopt the 'Simple Risk Weight Method' for equities (Section CA-4.4) if the CBB considers thatIslamic bank licensee's equity portfolio is significant.January 2015Large Exposures over the Limits in Module CM
CA-4.2.26A
The amount of any large exposures exceeding the limits set in Chapter CM-4 must be weighted at 800%.
January 2015Holdings of Real Estate
CA-4.2.27
See Chapter CA-9 for full details. All direct holdings of real estate by
Islamic bank licensees (i.e. owned directly by theIslamic bank licensee on balance sheet) must be risk-weighted at 200%. Premises occupied by theIslamic bank licensee must be risk-weighted at 100%. Investments in Real Estate Companies (by way of investments insubsidiaries or associates or other arrangements such as trusts, funds or REITs) must be risk-weighted at 300% or 400% as outlined in Chapter 9 of this Module. Such equity investments will be subject to the materiality thresholds for commercial companies described in Paragraph CA-2.4.25 and therefore any holdings which amount to 15% or more of Total Capital will be subject to a 800% risk weight.January 2015Other Assets
CA-4.2.28
Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities must be treated as cash and therefore risk-weighted at 0%. In addition, cash items in the process of collection must be risk-weighted at 20%. The standard risk weight for all other assets will be 100%. Investments in regulatory capital instruments issued by banks or investment firms must be risk weighted at a minimum of 100%, unless they are deducted from the regulatory capital according to the corresponding deduction approach in Section CA-2.4 of this Module.
January 2015Underwriting of Non-trading Book Items
CA-4.2.29
Underwritings of capital instruments issued by other banking, financial or insurance entities are covered in Subparagraph CA-2.4.16(c) and CA-2.4.20(c). The large exposures limits of Chapter CM-4 apply for underwritings. This means the 800% risk weights apply for underwritings in excess of the limits set in Chapter CM-4. The risk weights below apply for exposures within the limits of Chapter CM-4. Where an
Islamic bank licensee has acquired assets on its balance sheet in the banking book which it is intending to place with third parties under a formal arrangement, the following risk weightings apply for no more than 90 days. Once the underwriting period has expired, the usual risk weights must apply.(a) For holdings of private equity (within large exposures limits), a risk weighting of 100% applies instead of the usual 150% (see Paragraph CA-4.2.24); and(b) For holdings of real estate (within large exposures limits), a risk weight of 200% applies instead of the usual 300% or 400% risk weight (see Paragraph CA-4.2.27).January 2015CA-4.2.30
Netting arrangements between financing assets and deposits will be permitted subject to the satisfaction of conditions in this Paragraph. The net exposure can be used for capital adequacy purposes if the
Islamic bank licensee has a legally enforceable arrangement for netting or offsetting the financing assets and the deposits, irrespective of whether the counterparty is insolvent or bankrupt. TheIslamic bank licensee must have a robust system of monitoring those financing assets and deposits with the counterparty that is subject to the netting arrangements. In using the net exposure for the calculation of capital adequacy, financing assets must be treated as exposures and deposits as collateral in the comprehensive approach (as per the formula provided in Paragraph CA-4.7.23). A zero haircut is applicable, except in the case of a currency mismatch.January 2015CA-4.3 Supervisory Slotting Criteria
[This section was deleted in January 2015.]
January 2015CA-4.4 CA-4.4 Simple Risk Weight Method
CA-4.4.1
As stated in Paragraph CA-4.2.26, the CBB may require an
Islamic bank licensee to adopt the simple risk weight method for equities if the CBB considers that theIslamic bank licensee's equity portfolio is significant.January 2015CA-4.4.2
The RW under the simple risk weight method for equity position risk in respect of an equity exposure must be 300% for listed and 400% for unlisted less any specific provisions for impairment. If there is a third party guarantee to make good impairment losses, the RW of the guarantor must be substituted for that of the assets for the amount of any such guarantee.
January 2015CA-4.5 CA-4.5 Risk Weighting — Off-balance Sheet Items
CA-4.5.1
Off-balance sheet items must be converted into credit exposure equivalents using credit conversion factors (CCFs).
January 2015CA-4.5.2
Commitments with an original maturity of up to one year and commitments with an original maturity of over one year will receive a CCF of 20% and 50%, respectively.
January 2015CA-4.5.3
Any commitments that are unconditionally cancellable at any time by the
Islamic bank licensee without prior notice, or that are subject to automatic cancellation due to deterioration in a borrowers' creditworthiness, must receive a 0% CCF.January 2015CA-4.5.4
A CCF of 100% must be applied to the lending of other banks' securities or the posting of securities as collateral by banks.
January 2015CA-4.5.5
For short-term self-liquidating trade letters of credit arising from the movement of goods a 20% CCF must be applied to both issuing or confirming banks. See also Paragraph CA-4.2.11A.
January 2015CA-4.5.6
An import or export financing, which is based on Murabahah where the underlying goods/shipment are collateralised and insured, must attract a 20% credit conversion factor to the
Islamic bank licensees that issues or confirms the letter of credit. This treatment of collateral assumes there are no obstacles to the exercise of rights over it by the issuer or confirmer (see Pledge of assets as collateral as detailed below under Credit Risk Mitigation).January 2015CA-4.5.7
Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for finance and securities) and acceptances (including endorsements with the character of acceptances) must be applied a CCF of 100%.
January 2015CA-4.5.8
Shari'a compliant sale and repurchase agreements, securitised lending/borrowing and asset sales with recourse, where the
credit risk remains with theIslamic bank licensee , must be applied a CCF of 100%.January 2015CA-4.5.9
Forward asset purchases, forward deposits and partly-paid shares and securities, which represent commitments with certain drawdown must be applied a CCF of 100%.
January 2015CA-4.5.10
Certain transaction-related contingent items (e.g. performance bonds, bid bonds, and warranties) must be applied a CCF of 50%.
January 2015CA-4.5.11
Note issuance facilities and revolving underwriting facilities must be applied a CCF of 50%.
January 2015CA-4.5.12
Islamic bank licensees must closely monitor securities, commodities, and foreign exchange transactions that have failed, starting the first day they fail. A capital charge to failed transactions must be calculated in accordance with CBB guidelines set forth in Appendix CA-4 — 'Capital treatment for failed trades and non DvP transactions'.January 2015CA-4.5.13
With regard to unsettled securities, commodities, and foreign exchange transactions,
Islamic bank licensees are encouraged to develop, implement and improve systems for tracking and monitoring thecredit risk exposure arising from unsettled transactions as appropriate for producing management information that facilitates action on a timely basis.January 2015CA-4.5.14
When transactions mentioned in Paragraph CA-4.5.12 are not processed through a delivery-versus-payment (DvP) or payment-versus-payment (PvP) mechanism,
Islamic bank licensees must calculate a capital charge as set forth in Appendix CA-4.January 2015CA-4.5.15
Shari'a-compliant over-the-counter (OTC) hedging contracts expose an
Islamic bank licensee to counterparty credit risk (CCR). CCR refers to the risk that the counterparty to a transaction could default before the final settlement of the transaction's cash flows. An economic loss would occur if the transactions, or portfolio of transactions, with the counterparty had a positive economic value at the time of default. Unlike anIslamic bank licensee's exposure tocredit risk through a financing arrangement, where the exposure tocredit risk is unilateral and only theIslamic bank licensee financing the transaction faces the risk of loss, CCR involves a bilateral risk of loss; that is, the market value of the transaction can be positive or negative o either counterparty to the transaction, depending on the movements in the market prices of the underlying variables.January 2015CA-4.5.16
A credit equivalent for Shari'a-compliant hedging techniques can be derived using the Current Exposure Method.24 The credit equivalent exposure is based on the positive mark-to-market replacement cost of the contract. An add-on factor must be added to cover for potential future credit exposure. (See Appendix CA-2 for full details. Also see Paragraph CA-4.7.20 for conditions for applying 0% RW to such contracts.)
24 Current exposure is the larger of zero or the market value of a transaction, or portfolio of transactions with a counterparty that would be lost upon the default of the counterparty, assuming no recovery on the value of those transactions in bankruptcy. Current exposure is often also called replacement cost (see Appendix CA-2 for details).
January 2015CA-4.6 CA-4.6 External Credit Assessments
The Recognition Process and Eligibility Criteria
CA-4.6.1
CBB will assess all External Credit Assessment Institutions (ECAI) according to the six criteria below. Any failings, in whole or in part, to satisfy these to the fullest extent will result in the respective ECAI's methodology and associated resultant rating not being accepted by the CBB:
(a) Objectivity: The methodology for assigning credit assessments must be rigorous, systematic, and subject to some form of validation based on historical experience. Moreover, assessments must be subject to ongoing review and responsive to changes in financial condition. Before being recognized by the CBB, an assessment methodology for each market segment, including rigorous back testing, must have been established for an absolute minimum of one year and with a preference of three years;(b) Independence: An ECAI must show independence and should not be subject to political or economic pressures that may influence the rating. The assessment process should be as free as possible from any constraints that could arise in situations where the composition of the board of directors, political pressure, the shareholder structure of the assessment institution or any other aspect could be seen as creating a conflict of interest;(c) International access/Transparency: The individual assessments, the key elements underlining the assessments and whether the issuer participated in the assessment process should be publicly available on a non-selective basis, unless they are private assessments. In addition, the general procedures, methodologies and assumptions for arriving at assessments used by the ECAI should be publicly available;(d) Disclosure: An ECAI should disclose the following information: its code of conduct; the general nature of its compensation arrangements with assessed entities; its assessment methodologies, including the definition of default, the time horizon, and the meaning of each rating; the actual default rates experienced in each assessment category; and the transitions of the assessments, e.g. the likelihood of AA ratings becoming A over time;(e) Resources: An ECAI must have sufficient resources to carry out high quality credit assessments. These resources should allow for substantial ongoing contact with senior and operational levels within the entities assessed in order to add value to the credit assessments. Such assessments will be based on methodologies combining qualitative and quantitative approaches; and(f) Credibility: Credibility, to a certain extent, can derive from the criteria above. In addition, the reliance on an ECAI's external credit assessments by independent parties (investors, insurers, trading partners) may be evidence of the credibility of the assessments of an ECAI. The credibility of an ECAI will also be based on the existence of internal procedures to prevent the misuse of confidential information. In order to be eligible for recognition, an ECAI does not have to assess firms in more than one country.January 2015CA-4.6.2
The CBB recognises Standard and Poor's, Moody's, Fitch IBCA, Capital Intelligence and the Islamic International Rating Agency as eligible ECAIs. With respect to the possible recognition of other rating agencies as eligible ECAIs, CBB will update this paragraph subject to the rating agencies satisfying the eligibility requirements. (See Appendix CA-7 for mapping of eligible ECAIs).
January 2015CA-4.6.3
Islamic bank licensees must use the chosen ECAIs and their ratings consistently for each type of claim, for both risk weighting and risk management purposes.Islamic bank licensees will not be allowed to "cherry-pick" the assessments provided by different eligible ECAIs and to arbitrarily change the use of ECAIs.January 2015CA-4.6.4
Islamic bank licensees must disclose in their annual reports the ECAIs that they use for the risk weighting of their assets by type of claims, the risk weights associated with the particular rating grades as determined by the CBB through the mapping process as well as the aggregated risk-weighted assets for each risk weight based on the assessments of each eligible ECAI.January 2015Multiple Assessments
CA-4.6.5
If there are two assessments by eligible ECAIs chosen by an
Islamic bank licensee which map into different risk weights, the higher risk weight must be applied.January 2015CA-4.6.6
If there are three or more assessments by eligible ECAIs chosen by an
Islamic bank licensee which map into different risk weights, the assessments corresponding to the two lowest risk weights must be referred to and the higher of those two risk weights must be applied.January 2015Issuer Versus Issues Assessment
CA-4.6.7
Where a bank invests in a particular issue that has an issue-specific assessment, the risk weight of the claim will be based on this assessment. Where the bank's claim is not an investment in a specific assessed issue, the following general principles apply:
(a) In circumstances where the borrower has a specific assessment for an issued debt — but the bank's claim is not an investment in this particular debt — a high quality credit assessment (one which maps into a risk weight lower than that which applies to an unrated claim) on that specific debt may only be applied to the bank's un-assessed claim if this claim ranks pari passu or senior to the claim with an assessment in all respects. If not, the credit assessment cannot be used and the un-assessed claim will receive the risk weight for unrated claims; and(b) In circumstances where the borrower has an issuer assessment, this assessment typically applies to senior unsecured claims on that issuer. Consequently, only senior claims on that issuer will benefit from a high quality issuer assessment. Other un-assessed claims of a highly assessed issuer will be treated as unrated. If either the issuer or a single issue has a low quality assessment (mapping into a risk weight equal to or higher than that which applies to unrated claims), an un-assessed claim on the same counterparty will be assigned the same risk weight as is applicable to the low quality assessment.January 2015CA-4.6.8
Whether the
Islamic bank licensees intends to rely on an issuer- or an issue-specific assessment, the assessment must take into account and reflect the entire amount ofcredit risk exposure theIslamic bank licensees has with regard to all payments owed to it.25
25 For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with repayment of both principal and interest.
January 2015CA-4.6.9
In order to avoid any double counting of credit enhancement factors, no recognition of
credit risk mitigation techniques will be taken into account if the credit enhancement is already reflected in the issue specific rating (see Paragraph CA-4.7.3).January 2015Domestic Currency and Foreign Currency Assessments
CA-4.6.10
Where unrated exposures are risk weighted based on the rating of an equivalent exposure to that borrower, the general rule is that foreign currency ratings must be used for exposures in foreign currency. Domestic currency ratings, if separate, must only be used to risk weight claims denominated in the domestic currency.
January 2015CA-4.6.11
However, when an exposure arises through an
Islamic bank licensee' s participation in a credit facility that has been extended, or has been guaranteed against convertibility and transfer risk, by certain MDBs, its convertibility and transfer risk can be considered by CBB, on a case by case basis, to be effectively mitigated. To qualify, MDBs must have preferred creditor status recognised in the market and be included in MDB's qualifying for 0% risk rate under Paragraph CA-4.2.8. In such cases, for risk weighting purposes, the borrower's domestic currency rating may be used instead of its foreign currency rating. In the case of a guarantee against convertibility and transfer risk, the local currency rating can be used only for the portion that has been guaranteed. The portion of the loan not benefiting from such a guarantee will be risk-weighted based on the foreign currency rating.January 2015Short-term/Long-term Assessments
CA-4.6.12
For risk-weighting purposes, short-term assessments are deemed to be issue-specific. They can only be used to derive risk weights for claims arising from the rated facility. They cannot be generalised to other short-term claims, except under the conditions of Paragraph CA-4.6.14. In no event can a short-term rating be used to support a risk weight for an unrated long-term claim. Short-term assessments may only be used for short-term claims against banks and corporates. The table below provides a framework for banks' exposures to specific short-term facilities, such as a particular issuance of commercial paper: For any Sharia contract with an original maturity of up to three months that is not rolled over, the short-term RW as set out in the following table must be applied.
Credit assessment A-1/P-126 A-2/P-2 A-3/P-3 Others27 Risk weight 20% 50% 100% 150%
26 The notations follow the methodology used by Standard & Poor's and by Moody's Investors Service. The A-1 rating of Standard & Poor's includes both A-1+ and A-1-.
27 This category includes all non-prime and B or C ratings.
January 2015CA-4.6.13
If a short-term rated facility attracts a 50% risk-weight, unrated short-term claims cannot attract a risk weight lower than 100%. If an issuer has a short-term facility with an assessment that warrants a risk weight of 150%, all unrated claims, whether long-term or short-term, must also receive a 150% risk weight, unless the
Islamic bank licensee uses recognisedcredit risk mitigation techniques for such claims.January 2015CA-4.6.14
For short-term claims on
Islamic bank licensees , the interaction with specific short-term assessments is expected to be the following:(a) The general preferential treatment for short-term claims, as defined under Paragraphs CA-4.2.11 and CA-4.2.12, applies to all claims onIslamic bank licensee s of up to three months original maturity when there is no specific short-term claim assessment;(b) When there is a short-term assessment and such an assessment maps into a risk weight that is more favourable (i.e. lower) or identical to that derived from the general preferential treatment, the short-term assessment should be used for the specific claim only. Other short-term claims would benefit from the general preferential treatment; and(c) When a specific short-term assessment for a short term claim on anIslamic bank licensee maps into a less favourable (higher) risk weight, the general short-term preferential treatment for inter-bank claims cannot be used. All unrated short-term claims should receive the same risk weighting as that implied by the specific short-term assessment.January 2015CA-4.6.15
When a short-term assessment is to be used, the institution making the assessment needs to meet all of the eligibility criteria for recognising ECAIs as presented in Paragraph CA-4.6.1 in terms of its short-term assessment.
January 2015Level of Application of the Assessment
CA-4.6.16
External assessments for one entity within a corporate group must not be used to risk weight other entities within the same group.
January 2015Unsolicited Ratings
CA-4.6.17
Unsolicited ratings should be treated as unrated exposures.
January 2015CA-4.7 CA-4.7 Credit Risk Mitigation
Overarching Issues
CA-4.7.1
The exposure in respect of an obligor or other, counterparty can be further adjusted or reduced by taking into account the
credit risk mitigation (CRM) techniques employed by Islamic banks (off-balance sheet items will first be converted into on-balance sheet equivalents prior to the CRM being applied).January 2015CA-4.7.2
The effects of CRM will not be double counted. Therefore, no additional recognition of CRM for regulatory capital purposes is applicable on claims for which an issue-specific rating is used that already reflects that CRM.
January 2015CA-4.7.3
While the use of CRM techniques reduces or transfers
credit risk , it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity andmarket risks . Therefore, it is imperative thatIslamic bank licensees employ robust procedures and processes to control these risks, including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from theIslamic bank licensee's use of CRM techniques and its interaction with theIslamic bank licensee's overallcredit risk profile. Where these risks are not adequately controlled, the CBB may impose additional capital charges or take supervisory actions.January 2015CA-4.7.4
The collateral used as a part of CRM must be compliant with Shari'a requirements. The collateralisation28 must be properly documented in a security agreement or in the body of a contract to the extent permissible by Shari'a, and must be binding on all parties and legally enforceable in the relevant jurisdictions. The
Islamic bank licensee must ensure that the CRM documentation is legally enforceable and must carry out periodic reviews to confirm its enforceability at all times. TheIslamic bank licensee cannot recognise a commitment to provide collateral or a guarantee as an eligible CRM unless such a commitment is actually executed.
28 Generally, in banks such collateralisation takes place under the concept of "Rahn" or "Kafalah".
January 2015CA-4.7.5
There should be a negligible positive correlation, if any, between the value of collateral and the credit quality of a counterparty. Consequently, securities issued by a counterparty or its related entities are not eligible as collateral.
January 2015CA-4.7.6
For a collateralised transaction — such as Shari'a-compliant alternatives to repo/reverse repo or borrowing/lending of Sukuk and Islamic securities — capital requirements must be applicable on either side of the transaction.
January 2015Guarantees
CA-4.7.7
Capital relief for the use of a guarantee is given when the following conditions are satisfied:
(a) The guarantee represents theIslamic bank licensee 's direct claim on the guarantor and it must be explicitly referenced to specific exposures or a pool of exposures so that the extent of the cover is clearly defined and incontrovertible;(b) The guarantee is irrevocable and does not allow the guarantor to unilaterally cancel the guarantee after creation of the receivables;(c) The guarantee is unconditional and provides no protection clause that prevents the guarantor from being obliged to pay out in a timely manner in the event that the original counterparty fails to make payments due;(d) TheIslamic bank licensee has the right to pursue, in a timely manner, the guarantor for monies outstanding, rather than having to pursue the original counterparty to recover its exposure;(e) The guarantee is an explicitly documented and legally enforceable obligation assumed by the guarantor in all relevant jurisdictions. There must be a well-founded legal basis to reach this conclusion; and(f) The guarantee covers all types of expected payments made under the contract in the event that the original counterparty defaults.January 2015CA-4.7.8
It is permitted to have a range of guarantors to cover the exposure. Guarantees issued by parties with a lower RW than the counterparty will result in a reduction of the capital charge because the credit exposure covered by the guarantee is assigned the RW of guarantor. The RW applicable to the uncovered portion remains that of the underlying counterparty.
January 2015CA-4.7.9
Takaful is not allowed as a
credit risk mitigation technique.January 2015Leased Assets Used as Collateral
CA-4.7.10
Assets leased under Ijarah or IMB contracts fulfil a function similar to that of collateral, in that they may be repossessed by the lessor in the event of default by the lessee.
January 2015Pledge of Assets as Collateral
CA-4.7.11
The pledged asset must be a Shari'a-compliant asset of monetary value that can be lawfully owned, and is saleable, specifiable, deliverable and free of encumbrance. The pledge must be legally enforceable. The asset pledged may either be the underlying asset or any other eligible financial collateral owned by the
customer (see Paragraph CA-4.7.25). The pledge of an asset owned by a third party is subject to the owner's consent to the pledge. Murabaha facilities secured by real estate are covered separately in Paragraphs CA-4.2.19 to CA-4.2.20.January 2015CA-4.7.12
The pledger can authorise the
Islamic bank licensee , as the pledgee, to sell the asset and to offset the amount due against the sales proceeds without recourse to the courts. Alternatively, theIslamic bank licensee can demand the sale of the pledged asset in order to recover the amount due. Any surplus from the sale proceeds is to be returned to the pledger, and any shortfall must be treated as an unsecured exposure that ranks pari passu with other unsecured creditors when the debtor is declared insolvent.January 2015CA-4.7.13
In case an
Islamic bank licensee takes collateral of an asset pledged more than once, the collateral of theIslamic bank licensee must be ranked either pari passu to the collaterals of other earlier pledgees with their consent, or junior to the earlier pledgees, in which case theIslamic bank licensee's claim is limited to the residual value of the pledged asset after payment is made to earlier pledgees. TheIslamic bank licensee must take the residual value after deducting a haircut under the simple approach or the comprehensive approach (the standard supervisory haircuts or the internal haircuts) to offset its credit exposure but must first ascertain the recoverable value of the asset after taking into consideration theIslamic bank licensee's position as a pledgee as to whether it ranks pari passu with the other pledgee(s) or ranks junior to a pledgee that is registered earlier than theIslamic bank licensee .January 2015Types of Eligible Collateral and Credit Risk Mitigants
CA-4.7.14
The types of collateral are eligible for relief in respect of the CRM techniques outlined in Paragraphs CA-4.7.7 to CA-4.7.13 include:
(a) Cash on deposit29 with theIslamic bank licensee which is incurring the exposure;(b) Sukuk rated by an external rating agency which is issued by:(i) Sovereigns and PSEs (treated as sovereigns) with a minimum rating of BB-; or(ii) Issuers other than the above and other than the concernedIslamic bank licensee , with a minimum rating of BBB- or A-3/ P-3;(c) Unrated Sukuk but which fulfil each of the following criteria:(i) Issued by a bank other than the concerned Islamic bank licensee or a sovereign;(ii) Listed on a recognised exchange;(iii) All other rated issues by the issuing Islamic bank or conventional bank must be rated at least BBB — or A-3/P-3 by a recognised ECAI, as determined by the CBB;(iv) The Islamic bank which incurs the exposure or is holding the collateral has no information to suggest that the issue would justify a rating below BBB- or A-3/P-3; and(v) TheIslamic bank licensee must show that these Sukuk are liquid in a two-way market;(d) Shari'a compliant equities and units in Islamic collective investment undertakings that are listed in a main index excluding those issued by the concerned bank (which are subject to the treatments for holdings of own instruments outlined in Paragraph CA-2.4.12);(e) Shari'a compliant guarantees issued by third parties that fall within the following categories:(i) Sovereigns and central banks;(ii) PSEs;(iii) MDBs;(iv) International organisations/official entities with 0% RW(v) Islamic banks or conventional banks; and(vi) Corporate entities (including Takaful and Shari'a compliant securities firms) either by the parent,subsidiary and/oraffiliate s, of a minimum rating of A-; and(f) Certain physical assets fulfilling the function of collateral, as stated in Paragraph CA-4.7.10 (See also section CA-3.5).
29 Must be supported by an agreement or documentation that gives the bank the right of set-off against the amount of receivables due. The treatment of netting of such deposits are outlined in Paragraph CA-4.2.30.
January 2015CA-4.7.14A
Credit default guarantee provided by Tamkeen is recognised as an eligible credit risk mitigant.
Added: January 2023CA-4.7.15
Any portion of the exposure which is not collateralised must be assigned the RW of the counterparty.
January 2015CA-4.7.16
Capital relief against the collateral can be granted based on either the simple or the comprehensive approach as described below in reducing the risk exposures in the banking book.
Islamic bank licensees must approach the CBB for approval before using the comprehensive approach.Islamic bank licensees can use partial collateralisation in both approaches. Maturity mismatches between exposure and collateral will only be allowed under the comprehensive approach.January 2015The Simple Approach
CA-4.7.17
The
Islamic bank licensee can substitute the RW of the collateral for the RW of the counterparty for the collateralised portion of the exposure, subject to the collateral being pledged for at least the duration of the contract. The minimum RW of the collateralised portion is not lower than 20% (with a limited exception in Paragraph CA-4.7.19B).January 2015CA-4.7.18
The uncollateralised portion of the exposure continues to be assigned the RW of the counterparty.
January 2015CA-4.7.19
A 0% RW is applied to the collateralised portion under the simplified method where the exposure and the collateral are denominated in the same currency, and the collateral consists of any of the following:
(a) Cash or cash equivalents;(b) A deposit with theIslamic bank licensee ; or(c) Sovereign/ PSE securities eligible for a 0% RW, and the market value of such securities has been discounted by 20%.January 2015Shari'a Compliant Hedging Instruments
CA-4.7.20
Shari'a-compliant hedging instruments which are normally traded OTC can be given a RW of 0% provided the conditions set out in the following are met. (In case these conditions are not fulfilled, see Paragraphs CA-4.5.10 and CA-4.5.11 for calculating the credit equivalent using the Current Exposure Method).
(a) The OTC Shari'a-compliant hedging instruments are subject to daily mark-to-market;(b) There is no currency mismatch; and(c) The collateral is cash. In case the collateral is not cash, but consists of Sukuk issued by sovereigns/PSE that qualify for a 0% RW in the standardised approach, a minimum RW of 10% applies.January 2015The Comprehensive Approach
CA-4.7.21
In the comprehensive approach, the exposure to a counterparty is adjusted based on the collateral used without the 20% floor of the simple approach. The
Islamic bank licensee must adjust both the amount of the exposure to the counterparty and the value of the collateral shown in Paragraph CA-4.7.25, using haircuts and add-ons in order to reflect variations in the value of both the exposure and the collateral due to market movements. The resultant volatility-adjusted amount of exposure and collateral is used for the calculation of capital requirements for the underlying risk exposure. In most cases, the adjusted exposure is higher than the unadjusted exposure after application of the add-on and adjusted collateral is lower than the unadjusted collateral after application of the haircut, unless either of them is cash. An additional downward adjustment for collateral must be made if the underlying currencies of exposure and collateral are not denominated in the same currency, so as to take account of foreign exchange fluctuations in the future.January 2015CA-4.7.22
Risk-weighted assets must be calculated by calculating the difference between the volatility adjusted exposure and the volatility-adjusted collateral and multiplying this adjusted exposure by the RW of the counterparty.30
30 This calculation will be carried out when the volatility-adjusted exposure amount is greater than the volatility-adjusted collateral amount, including any additional adjustment for foreign exchange risk.
January 2015CA-4.7.23
The formula for calculation of the adjusted exposure after incorporating risk mitigation using the comprehensive approach is as follows:
E* = max {0, [E x (1 + He) — C x (1 - Hc - Hfx)]}, where:
E* = Adjusted exposure amount after risk mitigation
E = Exposure amount
He = Applicable add-on for exposure
C = The current value of underlying collateral
Hc = Applicable haircut for collateral
Hfx = Applicable haircut for foreign exchange exposure, in case exposure and collateral have dissimilar currenciesJanuary 2015CA-4.7.24
If more than one asset is involved in a collateralised transaction, the haircut on the basket (H) will be a weighted sum of applicable haircuts to each asset (Hi), with asset weights (ai) measured by units of currency — that is, H = Σ ai Hi.
January 2015The Standard Supervisory Haircuts and Add-Ons
CA-4.7.25
Both the amount of exposure to counterparty and the value of collateral received are adjusted by using standard supervisory add-ons and haircuts as set out below with the exception of any exposures collateralised by own securities which are subject to treatment under Subparagraph CA-4.7.14(d) (and Chapter CA-2 as applicable):
Types of Collateral* Residual Maturity (yrs) Haircuts (%) Sovereigns31 Others Cash on deposit All 0 0 Sukuk ≦1 0.5 1 Long-term: AAA to AA- and > 1 to ≦ 5 2 4 Short-term: A-1 > 5 4 8 Sukuk ≦1 1 2 Long-term: A+ to BBB- and > 1 to ≦ 5 3 6 Short-term: A-2 to A-3 > 5 6 12 Sukuk All 15 15 Long-term: BB+ to BB- Sukuk (unrated) All 25 25 Equities (listed and included in main index) All 15 15 Equities (listed but not included in main index) All 25 25 Units in collective investment schemes All Depending on the underlying assets as above Depending on the underlying assets as above Certain physical assets fulfilling the role of collateral in accordance with CA-4.7.10 (except real estate — see CA-4.2.19 to CA-4.2.20) All >=30 >=30 * Collateral denominated in a different currency will also be subject to an additional 8% haircut to cater for foreign exchange risk (see Paragraph CA-4.7.26.
31 Includes PSEs and MDBs
January 2015CA-4.7.26
The standard haircut for currency risk where exposure and collateral are denominated in different currencies is 8% (also based on a 10-business day holding period and daily mark-to-market). For transactions in which the
Islamic bank licensee lends non-eligible instruments (e.g. non- investment grade securities), the haircut to be applied on the exposure must be the same as the one for equity traded on a recognised exchange that is not part of a main index.January 2015Maturity Mismatch
CA-4.7.27
A maturity mismatch is a situation where the residual maturity of the CRM is less than that of the underlying credit exposure. In the case of a maturity mismatch with the CRM having a maturity of less than one year, the CRM is not recognised. This means that a CRM with a maturity mismatch is only permitted where its original maturity is at least one year. The simple approach must not be used for CRM with maturity mismatches.
January 2015CA-4.7.28
The following adjustment must be applied for a CRM with a maturity mismatch:
Pa = P x (t -0.25) / (T – 0.25), where:
Pa = adjusted value of risk mitigation
P = value of risk mitigation used (e.g. collateral or guarantee amount)
T = min (5, residual maturity of the exposure) in years
t = min (T, residual maturity of the risk mitigation) in yearsJanuary 2015Credit Risk Mitigation for Mudarabah Classified as Equity Exposures
CA-4.7.29
A placement of funds made under a Mudarabah contract may be subject to a Shari'a-compliant guarantee from a third party. Such a guarantee relates only to the Mudarabah capital, not to the return. In such cases, the capital must be treated as subject to
credit risk with a risk-weighting equal to that of the guarantor provided that the RW of that guarantor is lower than the RW of the Mudarib as a counterparty. Otherwise, the RW of the Mudarib must apply; that is, a RW for "equity exposure in banking book" applies, as per Paragraphs CA-4.8.16 to 4.8.18.January 2015CA-4.7.30
In a Mudarabah investment in project finance, collateralisation of the progress payments made by the ultimate customers (e.g. by means of a "repayment account" — see Paragraph CA-4.8.18) can be used to mitigate the exposure to unsatisfactory performance by the Mudarib.
January 2015CA-4.7.31
An
Islamic bank licensee may also place liquid funds with a central bank or anotherIslamic bank licensee on a short-term Mudarabah basis in order to obtain a return on those funds. Such placements serve as an interbank market transaction with maturities ranging from overnight up to three months, but the funds may be withdrawn on demand before the maturity date, in which case the return is calculated proportionately on the basis of duration and amount. Although from a juristic point of view the amounts so placed do not constitute debts, since (in the absence of misconduct or negligence) Mudarabah capital does not constitute a liability for the Mudarib, in practice the operation of this interbank market requires that the Mudarib should effectively treat them as liabilities. Hence, anIslamic bank licensee placing funds on this basis may treat them as cash equivalents and, for risk-weighting purposes, apply the RW applicable to the Mudarib as counterparty.January 2015Treatment of an Exposure Covered by Multiple CRM Techniques
CA-4.7.32
If an exposure is covered by multiple CRM techniques (e.g. an exposure partially covered by both collateral and a guarantee), the
Islamic bank licensee must segregate the exposure into segments covered by each type of CRM technique. The calculation of risk-weighted assets must be made separately for each segment. Similarly, if a single CRM has differing maturities, they must also be segregated into separate segments.January 2015CA-4.8 CA-4.8 Exposures in Investments Made Under Profit-Sharing Modes
CA-4.8.1
An
Islamic bank licensee may provide financing and hold investments made under profit- and loss-sharing modes (Musharakah) or profit-sharing and loss-bearing modes (Mudarabah) which may be used, inter alia, to invest in the following:(a) A commercial enterprise to undertake a business venture (with the intention of holding the investment for an indefinite period or with a view to eventual sale, such as venture capital investments or privately held equity);(b) Diminishing Musharakah in which the share of theIslamic bank licensee can be gradually reduced during the tenure of the contact until the asset is fully sold to the partner(s);(c) An equity investment in a company or an Islamic collective investment scheme not held for short-term resale or trading purposes32;(d) A specific project; or(e) A joint ownership of real assets or movable assets (such as cars) on a Musharakah basis for onward lease or sale on an Ijara or a Mudarabah basis, respectively (i.e. Musharakah with an Ijara or Mudarabah sub-contract).
32 Banking book investments would not normally include investments in listed common shares or listed Islamic collective investment schemes, which would instead be held in the trading book.
January 2015CA-4.8.2
This Section covers exposures of the
Islamic bank licensees mentioned in Paragraph CA-4.8.1 that are held not for trading but for the purpose of earning investment returns from medium- to long-term financing (i.e. held in the "banking book"). Such investments are:(a) Not held with the intent of trading or short-term resale benefiting from actual or expected price movements (as in Subparagraph CA-4.8.1(a));(b) Not marked-to-market on a daily basis;(c) Not actively monitored with reference to market sources; and(d) Exposed tocredit risk in the form of capital impairment risk.January 2015Commercial Enterprise to Undertake a Business Venture
CA-4.8.3
In assigning the RW, consideration is given to the intent of the profit-sharing investment, and to the nature of the underlying assets. For the purpose of determining minimum capital requirements, the RW is applied based on Paragraphs CA-4.8.4 to CA-4.8.22.
January 2015CA-4.8.4
Financing on a Musharakah or Mudarabah basis of a commercial enterprise to undertake a business venture can expose an
Islamic bank licensee to capital impairment risk as well ascredit risk , to an extent that depends on the structure and purpose of the financing and the types of assets in which the funds are invested. Commonly, anIslamic bank licensee would invest in a commercial enterprise with the intention of holding the investment for an indefinite period or with a view to eventual sale (as in the case of venture capital or private equity investments). As an equity investor, theIslamic bank licensee's rights and entitlements are subordinated to the claims of secured and unsecured creditors.January 2015CA-4.8.5
Capital impairment risk is the risk of losing the amount invested in an enterprise or in the ownership of an asset. Such impairments may arise for two kinds of reasons:
(a) The investee may be unprofitable, so that theIslamic bank licensee as investor fails to recover its investment; and(b) The Musharakah partner or Mudarib may fail either:(i) To pay theIslamic bank licensee's share in the profit on a periodical basis, as contractually agreed; or(ii) To settle theIslamic bank licensee's entitlement to its share of the capital and the profits at the time of redemption. The former kind of reason is an impairment of capital without any credit default being involved; whereas the latter, being a failure of the partner to meet its contractual obligations, is a type of credit default.January 2015CA-4.8.6
Bearing in mind the relatively risky nature of financing based on profit-sharing modes, the CBB sets out some prudential conditions on
Islamic bank licensees that invest IAH funds in such financing either directly or by commingling the funds of IAH with those of shareholders in such financing (see module CM). Unrestricted investment account holders (UIAH) typically have a small risk appetite and are content with an investment which has a relatively low risk and low returns.January 2015CA-4.8.7
The RW for investments in commercial enterprises is calculated according to either of the following methods:
(a) Simple risk-weight method (see also Section CA-4.4), treating the investment as an equity exposure held in the banking book; or(b) Supervisory slotting method, considering the investment as a type of specialised financing.January 2015Simple Risk Weight Method
CA-4.8.8
For Musharakah or Mudarabah investments in commercial enterprises whose common shares are listed on a recognised security exchange, a 300% RW must be applied. For Musharakah or Mudarabah investments in all other enterprises, a 400% RW is applicable.
January 2015CA-4.8.9
[This Paragraph has been left blank.]
January 2015CA-4.8.10
[This Paragraph has been left blank.]
January 2015Supervisory Slotting Method
CA-4.8.11
In project finance, the CBB may permit an
Islamic bank licensee to employ an alternative approach, namely the supervisory slotting criteria. Under this method, anIslamic bank licensee is required to map its internal risk grades into four supervisory categories for specialised financing, as described in Appendix CA-5. Each of these categories is associated with a specific RW, as given in the following. These RWs include an additional fixed factor of 20% RW to cater for the potential decline in the Mudarabah's or Musharakah's net asset value.Supervisory Categories Strong Good Satisfactory Weak Risk weights 90% 110% 135% 270% January 2015CA-4.8.12
The
Islamic bank licensee's position in a diminishing Musharakah entails two kinds of exposures:(a) The amounts due from the partner to buy out the agreed shares of the investment on the agreed dates are subject tocredit risk in respect of the partner's ability and willingness to pay.33 TheIslamic bank licensee's selling price for each share of ownership being transferred is based either on the fair value of that share at the date of the partial transfer of ownership (which exposes theIslamic bank licensee to capital gains or losses and hence to capital impairment risk) or at a price agreed upon at the time of entering into the contract. TheIslamic bank licensee's credit risk exposure in respect of the Musharakah investment is calculated based on the remaining balance of the amount invested (measured at historical cost, including any share of undistributed profits) less any specific provision for impairment. If there is a third-party guarantee to make good impairment losses, the RW of the guarantor is substituted for that of the outstanding balance of the Musharakah investment for the amount of any such guarantee; and(b) As a joint-owner, theIslamic bank licensee is entitled to its share of income generated from its share of the underlying assets of the Musharakah, such as Ijara lease rentals (e.g. when a home purchase plan is provided by anIslamic bank licensee on the basis of diminishing Musharakah). The rental payable by the partner/customer as Ijara lessee is adjusted periodically to reflect theIslamic bank licensee's remaining ownership share in the asset. TheIslamic bank licensee is exposed tocredit risk in respect of non-payment of the rentals receivable from the partner/customer.
33 Diminishing Musharakah contracts typically contain a clause whereby, in the event of a default by the partner in making a due payment, the bank has the right to terminate the contract and to exercise a put option requiring the partner to buy out the whole of the bank's remaining share of the investment. However, a financially distressed partner will most likely be unable to do so.
January 2015CA-4.8.13
Based on Paragraph CA-4.8.13, when a diminishing Musharakah contract is related to a specific fixed asset/real estate leased to a customer under an Ijara contract, the
Islamic bank licensee's credit exposure is similar to an exposure under a Musharakah with an Ijara sub-contract. In this case, the Musharakah investment is assigned a RW based on the credit standing of the counterparty/lessee, as rated by an ECAI that is approved by the CBB, and 100% RW on residual value of an asset. In case the counterparty is unrated, a RW of 100% applies.January 2015CA-4.8.14
If the exposure under the diminishing Musharakah contract consists of working capital finance in the
customer's business venture, theIslamic bank licensee must measure itscredit risk similarly to an equity exposure held in the banking book, as set out in Paragraphs CA-4.8.4 to CA-4.8.11 (Commercial enterprise to undertake a business venture). This treatment is, however, subject to the consideration of any third-party guarantee to make good impairment losses. In that case, the RW of the guarantor is substituted for that of the outstanding balance of the Musharakah investment for the amount of any such guarantee. Moreover, subject to obtaining prior approval from the CBB, anIslamic bank licensee can use the supervisory slotting method, based on the criteria set out in Appendix CA-6 (diminishing Musharakah).January 2015Equity Investments in a Company or an Islamic Collective Investment Scheme Not Held for Short-term Resale or Trading Purposes
CA-4.8.15
Such a holding is not a trading book exposure, and thus the "look-through" principle, whereby the RW of the exposure would be that of the underlying assets, does not apply and the exposure is that of an equity position in the banking book. Banking book investments would not normally include investments in common shares or Islamic collective investment schemes that are publicly listed. However, if such an investment is in an entity or Islamic collective investment scheme (consisting predominantly of equity instruments/stocks) that is publicly listed on a recognised securities exchange, the holding being not for short-term resale or trading purposes, a 300% RW must be applied, consistent with the simple RW method. Likewise, a 400% RW is applied to all other equity holdings. The exposure in such investments must be measured at the carrying values of the investments, according to IFRS or AAOIFI as applicable.
January 2015A Specified Project
CA-4.8.16
An
Islamic bank licensee can advance funds to a construction company which acts as Mudarib in a construction contract for a third-partycustomer (ultimate customer). The ultimatecustomer will make progress payments to the Mudarib, who in turn makes payments to theIslamic bank licensee . The essential role of theIslamic bank licensee in this structure is to provide bridging finance to the Mudarib pending its receipt of the progress payments. In this Mudarabah structure, theIslamic bank licensee as investor advances funds as Rabb-al-Mal to the construction company as Mudarib for the construction project, and is thus entitled to a share of the profit of the project but must bear 100% of any loss. In most cases, the Islamicbank licensee has no direct or contractual relationship with the ultimatecustomer , but in such a structure theIslamic bank licensee stipulates that payments by the ultimatecustomer to the Mudarib be made to an account ("repayment account") with theIslamic bank licensee which has been opened for the purpose of the Mudarabah and from which the Mudarib may not make withdrawals without theIslamic bank licensee's permission.January 2015CA-4.8.17
Where Paragraph CA-4.8.17 applies, the
Islamic bank licensee is exposed to the risk on the amounts advanced to the Mudarib under the Mudarabah contract, but this risk would be mitigated by the amounts received from the ultimate customer into the "repayment account" which are effectively collateralised. Under the Mudarabah contract the amounts advanced by theIslamic bank licensee to the Mudarib would normally be treated undercredit risk as "equity positions in the banking book", the use of the structure involving a "repayment account", whereby the ultimatecustomer makes payments into such an account with theIslamic bank licensee instead of making payments directly to the Mudarib, has the effect of substituting thecredit risk of the ultimatecustomer for that of the Mudarib to the extent of the collateralised balance of the "repayment account".January 2015CA-4.8.18
In addition to
credit risk (i.e. in the absence of a repayment account, the risk that the Mudarib has received payment from the ultimate customer but fails to pay theIslamic bank licensee , or, if the repayment account is used, that the ultimate customer fails to pay), theIslamic bank licensee is exposed to capital impairment in the event that the project results in a loss. The proposed RW and impact ofcredit risk mitigation are explained in Section CA-4.7.January 2015Musharakah with Ijara or Murabaha Sub-contract
CA-4.8.19
An
Islamic bank licensee can establish joint ownership of tangible fixed assets (such as cars, machinery, etc.) with acustomer on a Musharakah basis, the assets being leased or sold on an Ijara or a Murabaha basis, respectively. In these cases, the "look-through" principle (whereby the RW is that of the underlying contract) applies.January 2015CA-4.8.20
In the case of Ijara, ownership of such assets can produce rental income for the partnership, through leasing the assets to third parties by means of Ijara contracts. In this case, the risk of the Musharakah investment is that of the underlying Ijara contracts — that is,
credit risk mitigated by the "quasi-collateral"34 represented by the leased assets. In the event the asset is leased to theIslamic bank licensee's partner as acustomer instead of to a third party, thecredit risk relates to the partner's obligation to pay the lease rentals. This Musharakah investment is assigned a RW based on the credit standing of the counterparty/lessee, as rated by a CBB-approved ECAI, plus a 100% RW on the residual value of the Ijara asset. In the event the counterparty is unrated, a RW of 100% applies.
34 Strictly speaking, Ijara assets do not provide collateral to the lessor, as the latter owns the assets, but can repossess them in the event of default by the lessee. This provides what may be called "quasi-collateral".
January 2015CA-4.8.21
In the case of Murabaha, the
Islamic bank licensee is entitled to its share of income (mark-up) generated from selling the assets to third parties. TheIslamic bank licensee as a capital contributor is exposed tocredit risk in respect of the Murabaha receivables from the buyer/counterparty. This Musharakah investment must be assigned a RW based on the credit standing of the counterparty/buyer, as rated by a CBB-approved ECAI. In the event the counterparty is unrated, a RW of 100% applies.January 2015PART 3: PART 3: Other Risks
CA-5 CA-5 Market Risk
CA-5.1 CA-5.1 Trading Book
Definition of the Trading Book and Introduction
CA-5.1.1
"
Market risk " is defined as the risk of losses in on- and off-balance sheet positions arising from movements in market prices. The risks that are subject to themarket risk capital requirement are:(a) Equity position risk in the trading book;35(b) Benchmark risk in trading positions in Sukuk (see Chapter CA-8);(c) Foreign exchange risk; and(d) Commodities and inventory risk.
35 An equity position treated under "equity exposures in the banking book" is dealt with under the credit risk, as set out in Paragraphs CA-4.8.7 to CA-4.8.15.
January 2015CA-5.1.2
A trading book consists of positions in
financial instruments , foreign exchange and commodities and inventories held either with trading intent or in order to hedge other elements of the trading book. To be eligible for trading book capital treatment, financial instruments must be free of any restrictions on their tradability. In addition, positions must be frequently and accurately valued, and the portfolio must be actively managed. Open equity stakes in Shari'a compliant hedge funds, private equity investments and real estate holdings do not meet the definition of the trading book, owing to significant constraints on the ability of banks to liquidate these positions and value them reliably on a daily basis. Such holdings must therefore be held in theIslamic bank licensee's banking book and treated as equity holding in corporates, except real estate which must be treated as per Paragraph CA-4.2.27 and Chapter CA-9 of this Module.January 2015CA-5.1.3
A
financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.Financial instruments include both primaryfinancial instruments (or cash instruments) and forwardfinancial instruments .January 2015CA-5.1.4
A financial asset is any asset that is cash, the right to receive cash or another financial asset; or the contractual right to exchange financial assets on potentially favourable terms, or an equity instrument. A financial liability is the contractual obligation to deliver cash or another financial asset or to exchange financial liabilities under conditions that are potentially unfavourable.
January 2015CA-5.1.5
Trading positions are defined as those positions of a bank that are held for short -term resale and/or with the intent of benefiting from actual or expected short-term price movements or to lock in arbitrage profits, and may include for example proprietary positions, positions arising from client servicing (e.g. matched principal broking) and market making.
Islamic bank licensees must have clearly outlined policies and procedures for including or not including any position in the trading book for purposes of calculating their regulatory capital requirement, to ensure compliance with the criteria for trading book set forth in this section and taking into account theIslamic bank licensee 's risk management capabilities and practices. Such policies must be commensurate with theIslamic bank licensee 's capabilities and capacities for risk management. TheIslamic bank licensee must have well-documented procedures to comply with stated policies, which must be fully documented and subject to periodic internal audit.January 2015Policies and Procedures
CA-5.1.6
Policies and procedures must, at a minimum, address the following:
(a) The activities theIslamic bank licensee considers to be trading and as constituting part of the trading book for regulatory capital purposes;(b) The extent to which an exposure can be marked-to-market daily by reference to an active, liquid two-way market;(c) For exposures that are marked-to-model, the extent to which theIslamic bank licensee can:(i) Identify the material risks of the exposure;(ii) Hedge (Sharia compliant hedging) the material risks of the exposure and the extent to which hedging instruments would have an active, liquid two-way market; and(iii) Derive reliable estimates for the key assumptions and parameters used in the model;(d) The extent to which theIslamic bank licensee can and is required to generate valuations for the exposure that can be validated by external parties in a consistent manner;(e) The extent to which legal restrictions or other operational requirements would impede theIslamic bank licensee's ability to effect an immediate liquidation of the exposure;(f) The extent to which theIslamic bank licensee is required to, and can, actively risk manage the exposure within its trading operations; and(g) The criteria for and the extent to which theIslamic bank licensee may transfer risk or exposures between the banking and the trading books.The list above is not intended to provide a series of tests that a product or group of related products must pass to be eligible for inclusion in the trading book. Rather, the list provides a minimum set of key points that must be addressed by the policies and procedures for overall management of an
Islamic bank licensee's trading book.January 2015CA-5.1.7
The basic requirements for positions eligible to receive trading book capital treatment are:
(a) Clearly documented trading strategy for the position/instrument or portfolios, approved by senior management (which would include expected holding horizon);(b) Clearly defined policies and procedures for the active management of the position, which must include the following points:(i) Positions are managed on a trading desk;(ii) Position limits are set and monitored for appropriateness;(iii) Dealers have the autonomy to enter into/manage the position within agreed limits and according to the agreed strategy;(iv) Positions are marked to market at least daily and when marking to model the parameters must be assessed on a daily basis;(v) Positions are reported to senior management as an integral part of theIslamic bank licensee's risk management process; and(vi) Positions are actively monitored with reference to market information sources (assessment must be made of the market liquidity or the ability to hedge positions or the portfolio risk profiles). This includes assessing the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market, etc.; and(c) Clearly defined policy and procedures to monitor the positions against theIslamic bank licensee's trading strategy including the monitoring of turnover and stale positions in theIslamic bank licensee's trading book.January 2015Prudent Valuation Guidance for the Trading book and the Banking Book
CA-5.1.8
This Section provides
Islamic bank licensees with guidance on prudent valuation for positions that are accounted for at fair value, whether they are in the trading book or in the banking book. This guidance is especially important for positions without actual market prices or observable inputs to valuation, as well as less liquid positions which, although they will not be excluded from the trading book solely on grounds of lesser liquidity, raise CBB's concerns about prudent valuation.January 2015CA-5.1.8.A
Positions in the
Islamic bank licensee's own eligible regulatory capital instruments are deducted from capital. Positions in other banks', securities firms', and other financial entities' eligible regulatory capital instruments, as well as intangible assets, are subject to the same treatment as that set down by the CBB for such assets held in the banking book (see Chapter CA-2 of this Module).January 2015CA-5.1.9
The valuation guidance set forth below is not intended to require
Islamic bank licensees to change valuation procedures for financial reporting purposes. The CBB will assess anIslamic bank licensee's valuation procedures for consistency with this guidance. One factor in the CBB's assessment of whether anIslamic bank licensee must take a valuation adjustment for regulatory purposes under Paragraphs CA-5.1.18.A to CA-5.1.20 is the degree of consistency between theIslamic bank licensee's valuation procedures and these guidelines.January 2015CA-5.1.9A
A framework for prudent valuation practices must at a minimum include the requirements outlined in this Section.
January 2015Systems and Controls
CA-5.1.10
Islamic bank licensees must have robust systems and controls, with documented policies and procedures for the valuation process. These systems must be integrated with theIslamic bank licensees' enterprise risk management processes and must have the ability to give confidence to the CBB and management regarding the reliability of the valuations. These policies and procedures must include: (a) clearly defined responsibilities of the personnel and departments involved in the valuation; (b) sources of market information, and review of their reliability; (c) frequency of independent valuations; (d) timing of closing prices; (e) procedures for adjusting valuations between periods; (f) ad-hoc verification procedures; and (g) reporting lines for the valuation department that must be independent of the front office. Such policies and procedures must also take into consideration compliance with IFRS or AAOIFI accounting standards as applicable and CBB requirements.January 2015Valuation Methodologies
Marking to Market
CA-5.1.11
Marking-to-market is at least the daily valuation of positions at readily available close out prices that are sourced independently. Examples of readily available close out prices include exchange prices, screen prices, or quotes from several independent reputable brokers.
January 2015CA-5.1.12
Islamic bank licensees must mark-to-market as much as possible. The more prudent side of bid/offer must be used unless the bank is a significant market maker in a particular position type and it can close out at mid-market.Islamic bank licensees must maximise the use of relevant observable inputs and minimise the use of unobservable inputs when estimating fair value using a valuation technique. However, observable inputs or transactions may not be relevant, such as in a forced liquidation or distressed sale, or transactions may not be observable, such as when markets are inactive. In such cases, the observable data must be considered, but may not be determinative.January 2015Marking to Model
CA-5.1.13
Only where marking-to-market is not possible must
Islamic bank licensees mark-to-model, but this must be demonstrated to be prudent. Marking-to-model is defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input.January 2015CA-5.1.14
When marking to model, an extra degree of conservatism is appropriate. The CBB will consider the following in assessing whether a mark-to-model valuation is prudent:
(a) Senior management should be aware of the elements of the trading book or of other fair-valued positions which are subject to mark to model and should understand the materiality of the uncertainty this creates in the reporting of the risk/performance of the business;(b) Market inputs should be sourced, to the extent possible, in line with market prices (as discussed above). The appropriateness of the market inputs for the particular position being valued should be reviewed regularly;(c) Where available, generally accepted valuation methodologies for particular products should be used as far as possible;(d) Where the model is developed by the licensee itself, it should be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process. The model should be developed or approved independently of the front office. It should be independently tested. This includes validating the mathematics, the assumptions and the software implementation;(e) There should be formal change control procedures in place and a secure copy of the model should be held and periodically used to check valuations;(f) Risk management should be aware of the weaknesses of the models used and how best to reflect those in the valuation output;(g) The model should be subject to periodic review to determine the accuracy of its performance (e.g. assessing continued appropriateness of the assumptions, analysis of P&L versus risk factors, comparison of actual close out values to model outputs); and(h) Valuation adjustments should be made as appropriate, for example, to cover the uncertainty of the model valuation (see also valuation adjustments in Paragraphs CA-5.1.7 to CA-5.1.20).January 2015Independent Price Verification
CA-5.1.15
Independent price verification is distinct from daily mark-to-market. It is the process by which market prices or model inputs are regularly verified for accuracy. While daily marking-to-market may be performed by dealers, verification of market prices or model inputs must be performed by a unit independent of the dealing room, at least monthly (or, depending on the nature of the market/trading activity, more frequently). It need not be performed as frequently as daily mark-to-market, since the objective, i.e. independent, marking of positions, should reveal any error or bias in pricing, which should result in the elimination of inaccurate daily marks.
January 2015CA-5.1.16
Independent price verification entails a higher standard of accuracy in that the market prices or model inputs are used to determine profit and loss figures, whereas daily marks are used primarily for management reporting in between reporting dates. For independent price verification, where pricing sources are more subjective, e.g. only one available broker quote, prudent measures such as valuation adjustments may be appropriate.
January 2015Valuation Adjustments
CA-5.1.17
As part of their procedures for marking to market,
Islamic bank licensees must establish and maintain procedures for considering valuation adjustments.Islamic bank licensees using third-party valuations must consider whether valuation adjustments are necessary. Such considerations are also necessary when marking to model.January 2015CA-5.1.18
Islamic bank licensees must consider the following valuation adjustments/reserves at a minimum: unearned profit, close-out costs,operational risks , early termination, investing and funding costs, and future administrative costs and, where appropriate, model risk.January 2015Adjustment to the Current Valuation of Less Liquid Positions for Regulatory Capital Purposes
CA-5.1.18.A
Islamic bank licensees must establish and maintain procedures for judging the necessity of and calculating an adjustment to the current valuation of less liquid positions for regulatory capital purposes. This adjustment may be in addition to any changes to the value of the position required for financial reporting purposes and must be designed to reflect the illiquidity of the position.Islamic bank licensees must consider the need for an adjustment to a position's valuation to reflect current illiquidity whether the position is marked to market using market prices or observable inputs, third-party valuations or marked to model.January 2015CA-5.1.19
Bearing in mind that the underlying 10-day assumptions made about liquidity in the
market risk capital charge may not be consistent with theIslamic bank licensee's ability to sell or hedge out less liquid positions, where appropriate,Islamic bank licensees must take an adjustment to the current valuation of these positions, and review their continued appropriateness on an on-going basis. Reduced liquidity may have arisen from market events. Additionally, close-out prices for concentrated positions and/or stale positions must be considered in establishing the adjustments.Islamic bank licensees must consider all relevant factors when determining the appropriateness of the adjustments for less liquid positions. These factors may include, but are not limited to, the amount of time it would take to hedge out the position/risks within the position, the average volatility of bid/offer spreads, the availability of independent market quotes (number and identity of market makers), the average and volatility of trading volumes (including trading volumes during periods of market stress), market concentrations, the aging of positions, the extent to which valuation relies on marking-to-model, and the impact of other model risks not included in Paragraph CA-5.1.18.A.January 2015CA-5.2 CA-5.2 Price Risk
CA-5.2.1
The capital charge for price risk is 15% of the amount of the position (carrying value).
January 2015CA-5.2.2
For commodities exposure in Salam, the capital charge is computed at 15% of the net position in each commodity, plus an additional charge equivalent to 3% of the gross positions, long plus short, to cover basis risk and forward gap risk. The 3% capital charge is also intended to cater for potential losses in Parallel Salam when the seller in the original Salam contract fails to deliver and the
Islamic bank licensee has to purchase an appropriate commodity in the spot market to honour its obligation. Net positions in commodities are calculated as explained in Section CA-5.6. In case of Istisna'a (see Paragraph CA-3.4.24) 15% capital charge on net long or short position plus 3% capital charge on gross positions must apply.January 2015CA-5.3 CA-5.3 Equity Position Risk
Introduction
CA-5.3.1
The minimum capital requirement for equities is expressed in terms of two separately calculated charges, one relating to the "specific risk" of holding a long position in an individual equity, and the other to the "general
market risk " of holding a long position in the market as a whole. Where the bank has invested in shares/units of equity funds on Mudaraba financing and the bank has direct exposures in the equities which are traded in a recognised stock exchange, the shares/units are considered to be subject to equity risk. The equity position would be considered to be the net asset value as at the reporting date.January 2015Specific Risk Calculation
CA-5.3.2
Specific risk is defined as the
Islamic bank licensee's gross equity positions (i.e. the sum of all equity positions) and is calculated for each country or equity market. For each national market in which theIslamic bank licensee holds equities, it must sum the market values of its individual net positions irrespective of whether they are long or short positions, to produce the overall gross equity position for that market.January 2015CA-5.3.3
The capital charge for specific risk is 8%.
January 2015CA-5.3.4
[This Paragraph was deleted in January 2012]
January 2015General Risk Calculation
CA-5.3.5
The general
market risk is calculated by first determining the difference between the sum of the long positions and the sum of the short positions (i.e. the overall net position) in each national equity market. In other words, to calculate the generalmarket risk , theIslamic bank licensee must sum the market value of its individual net positions for each national market, taking into account whether the positions are long or short.January 2015CA-5.3.6
The general market equity risk measure is 8% of the overall net position in each national market.
January 2015CA-5.4 CA-5.4 Sukuk
CA-5.4.1
The minimum capital requirement for Sukuk positions in the trading book is expressed in terms of two separately calculated charges, one applying to the "specific risk" of each security, and the other to the profit rate risk in the portfolio (termed "general
market risk ").January 2015Specific Risk for Sukuk (or Other Equivalent Shari'a Compliant Financial Instruments)
CA-5.4.2
The capital charge for specific risk covers the possibility of an adverse movement in the price of a Sukūk held for trading due to factors related to an individual issuer. Offsetting is restricted only to matched positions in the identical issues. No offsetting will be permitted between different issues even if the issuer is the same, since differences in features of Sukūk with respect to profit rates, liquidity and call features, etc. would imply that prices may diverge in the short run. In the case of Sukuk in the trading book, the specific risk charge must be provided on the RW of the issue and the term to maturity of the Sukuk, as follows:
Categories External credit assessment Specific risk capital charge Government (including GCC governments) AAA to AA-A+ to BBB-
BB+ to B-Below B-Unrated0%
0.25% (residual term to final maturity 6 months or less)
1.00% (residual term to final maturity greater than 6 and up to and including 24 months)
8 00%
12.00%
8.00%Investment Grade 0.25% (residual term to final maturity 6 months or less)
1.00% (residual term to final maturity greater than 6 and up to and including 24 months)
1.60% (residual term to final maturity exceeding 24 months)Other BB+ to BB-Below BB-Unrated 8.00%
12.00%
12.00%January 2015General Market Risk for Sukuk — Maturity Method
CA-5.4.3
The general
market risk must be provided on the residual term to maturity or to the next repricing date, using either a simplified form of the Maturity Method on the net positions in each time-band in accordance with the table below or the Duration Method shown in Paragraph CA-5.4.3A:Residual term to maturity RW 1 month or less 0.00% 1–3 months 0.20% 3–6 months 0.40% 6–12 months 0.70% 1–2 years 1.25% 2–3 years 1.75% 3–4 years 2.25% 4–5 years 2.75% 5–7 years 3.25% 7–10 years 3.75% 10–15 years 4.50% 15–20 years 5.25% >20 years 6.00% January 2015General Market Risk for Sukuk — Duration Method
CA-5.4.3A
With the CBB's prior written approval, an
Islamic bank licensee with the necessary capability may use the more accurate "duration" method. This method calculates the price sensitivity of each position of Sukuk held separately. This method must be used consistently by anIslamic bank licensee , unless a change is approved by the CBB. The steps involved in the calculation using this method are outlined in Paragraphs CA-5.4.3B to CA-5.4.3D.January 2015CA-5.4.3B
Calculate the price sensitivity of each Sukuk position (called "weighted positions") in terms of a change in profit rates between 0.6 and 1 percentage points depending on the maturity of the Sukuk and subject to supervisory guidance. Slot the resulting sensitivity measures into a duration-based ladder with 13 time bands as set out in Table 1 below. Subject long positions in each time band to a 5% vertical disallowance on the smaller of offsetting positions (i.e. a matched position) in each time band.
Table 1 Duration Method: Time Bands and Assumed Changes in Yield
Zone Time Band (Expected profit rate >=3%) Time Band (Expected profit rate <3%) Assumed Change in Expected Yield (%) Zone 1 1 month or less 1 month or less 1.00 >11–3 months >1–3 months 1.00 >3–6 months >3–6 months 1.00 >6–12 months >6–12 months 1.00 Zone 2 >1–2 years >1.0–1.9 years 0.90 >2–3 years >1.9–2.8 years 0.80 >3–4 years >2.8–3.6 years 0.75 Zone 3 >4–5 years >3.6–4.3 years 0.75 >5–7 years >4.3–5.7 years 0.70 >7–10 years >5.7–7.3 years 0.65 >10–15 years >7.3–9.3 years 0.60 >15–20 years >9.3–10.6 years 0.60 >20 years >10.6–12 years 0.60 >12–20 years 0.60 >20 years 0.60 January 2015CA-5.4.3C
From the results of the above calculations, two sets of weighted positions — the net long position in each time band — are produced. The maturity ladder is then divided into three zones, as follows: zone 1, 0–1 year; zone 2, >1–4 years; and zone 3, >4 years.
Islamic bank licensees are required to conduct two further rounds of offsetting: (i) between the net time band positions in each of the three zones; and (ii) between the net positions across the three different zones (i.e. between adjacent zones and non-adjacent zones). The residual net positions are then carried forward and offset against opposite positions in other zones when calculating net positions between zones 2 and 3, and 1 and 3. The offsetting is subject to a scale of disallowances (horizontal disallowances) expressed as a fraction of matched position, subject to a second set of disallowance factors (Table 2).Table 2 Duration Method: Horizontal Disallowances
Zone Time Band Within the Zone Between Adjacent Zones Between Zones 1 and 3 Zone 1 <=1 month 40% 40% 100% >1–3 months >3–6 months >6–12 months Zone 2 >1–2 years 30% >2–3 years 40% >3–4 years Zone 3 >4–5 years 30% >5–7 years >7–10 years >10–15 years >15–20 years >20 years January 2015CA-5.4.3D
The general
market risk capital charge is the aggregation of three charges: net position, vertical disallowances and horizontal disallowances (Table 3 below).Table 3 General Risk Capital Charge Calculation
The sum of: Net position Net long weighted position x100% Vertical disallowances Matched weighted positions (i.e. the smaller of the absolute value of the short and long positions with each time band) in all maturity bands x 10% Horizontal disallowances Matched weighted positions within Zone 1 x 40% Matched weighted positions within Zone 2 x 30% Matched weighted positions within Zone 3 x 30% Matched weighted positions between Zones 1 & 2 x 40% Matched weighted positions between Zones 2 & 3 x 40% Matched weighted positions between Zones 1 & 3 x100% January 2015CA-5.5 CA-5.5 Foreign Exchange Risk
Introduction
CA-5.5.1
This Section describes the standardised method for calculation of the
Islamic bank licensee's foreign exchange risk, and the capital required against that risk. An Islamicbank licensee which holds net open positions (whether long or short) in foreign currencies is exposed to the risk that exchange rates may move against it.January 2015CA-5.5.2
The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold and silver using the closing mid-market spot rate and as a second step, the measurement of the risks inherent in the bank's mix of assets and liabilities positions in different currencies.
January 2015CA-5.5.3
An
Islamic bank licensee that holds net open positions (whether assets or liabilities) in foreign currencies is exposed to the risk that exchange rates may move against it. The open positions may be either trading positions or, simply, exposures caused by theIslamic bank licensee's overall assets and liabilities.January 2015CA-5.5.4
The open positions and the capital requirements are calculated at the closing mid-market spot rate with reference to the entire business (i.e. the banking and trading books).
January 2015CA-5.5.5
The open positions are calculated with reference to the
Islamic bank licensee's base currency, which will be either Bahraini Dinars (BD) or United States dollars (USD).January 2015CA-5.5.6
In addition to foreign exchange risk, positions in foreign currencies may be subject to counterparty credit risk which must be treated separately as shown in Appendix CA-2. For the purposes of calculating "Foreign Exchange Risk" only, positions in those GCC currencies which are pegged to US$, is treated as positions in US$.
January 2015De Minimis Exemptions
CA-5.5.7
An
Islamic bank licensee doing negligible business in foreign currencies and which does not take foreign exchange positions for its own account may, at the discretion of the CBB and as evidenced by the CBB's prior written approval, be exempted from calculating the capital requirements on these positions. The CBB is likely to be guided by the following criteria in deciding to grant exemption to anyIslamic bank licensee :(a) TheIslamic bank licensee's holdings or taking of positions in foreign currencies, including gold and/or silver, defined as the greater of the sum of the gross asset positions and the sum of the gross liability position in all foreign positions and gold and/or silver, does not exceed 100% of its Total Capital as defined in CA-1.1.2 and subject to any limits described in section CA-2.2; and(b) TheIslamic bank licensee's overall net open position, as defined in Paragraph CA-5.5.15 does not exceed 2% of its Total Capital described in Subparagraph CA-5.5.7(a).January 2015CA-5.5.8
The criteria listed above are only intended to be guidelines, and a bank will not automatically qualify for exemptions upon meeting them.
Islamic bank licensees doing negligible foreign currency business, which do not take foreign exchange positions for theIslamic bank licensee's own account, and wish to seek exemption from foreign exchange risk capital requirements, should submit an application to the CBB, in writing. The CBB will have the discretion to grant such exemptions. The CBB may also, at its discretion, fix a minimum capital requirement for anIslamic bank licensee that is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.January 2015CA-5.5.9
The CBB may, at a future date, revoke an exemption granted to an
Islamic bank licensee , if the CBB is convinced that the conditions on which the exemption was granted no longer exist.January 2015Calculation of the Net Open Position in a Single Currency
CA-5.5.10
An
Islamic bank licensee's exposure to foreign exchange risk in any currency is its net open position in that currency, which is calculated by summing the following items:(a) The net spot position in the concerned currency (i.e. all assets items less all liability items, including accrued profit, other income and expenses, denominated in the currency in question; assets are included gross of provisions for bad and doubtful debts, except in cases where the provisions are maintained in the same currency as the underlying assets);(b) The net position of a binding unilateral promise by theIslamic bank licensee to buy and/or sell the concerned currency on a specified future date (that are not included in the spot open position);(c) Guarantees and similar off-balance sheet contingent items that are certain to be called and are likely to be irrecoverable where the provisions, if any, are not maintained in the same currency;(d) Profits (i.e. the net value of income and expense accounts) held in the currency in question; and(e) Specific provisions held in the currency in question where the underlying asset is in a different currency, net of assets held in the currency in question where a specific provision is held in a different currency.January 2015CA-5.5.11
For calculating the net open position in gold or silver, the
Islamic bank licensee must first express the net position (spot plus forward) in terms of the standard unit of measurement (i.e. ounces or grams) and then convert it at the current spot rate into the reporting or base currency.January 2015CA-5.5.12
Where gold or silver are part of a forward contract (i.e. quantity of gold or silver to be received or to be delivered), any foreign currency exposure from the other leg of the contract must be reported.
January 2015Structural Positions
CA-5.5.13
Positions of a structural nature (i.e. non-trading), may be excluded from the calculation of the net open currency positions. These may include:
(a) Positions taken deliberately in order to hedge, partially or totally, against the adverse effects of exchange rate movements on theIslamic bank licensee's CAR;(b) Positions related to items that are deducted from theIslamic bank licensee 's regulatory capital when calculating its Total Capital in accordance with the rules and guidelines in this Module, such as investments in non-consolidatedsubsidiaries or long-term participations denominated in foreign currencies which are reported at historical cost; and(c) Retained profits held for payout to parent, where the profits are held in the currency concerned.January 2015CA-5.5.14
The CBB will consider approving the exclusion of the above positions for the purpose of calculating the capital requirement, only if each of the following conditions is met:
(a) The concernedIslamic bank licensee provides adequate documentary evidence to the CBB which establishes the fact that the positions proposed to be excluded are, indeed, of a structural nature (i.e. non-dealing) and are merely intended to protect theIslamic bank licensee's CAR. For this purpose, the CBB may ask written representations from theIslamic bank licensee's management or directors; and(b) Any exclusion of a position is consistently applied, with the treatment of the structural positions remaining the same for the life of the associated assets or other items.January 2015Calculation of the Overall Net Open Position
CA-5.5.15
The net position in each currency is converted at the spot rate, into the reporting currency. The overall net open position must be measured by aggregating the following:
(a) The sum of the net liabilities positions or the sum of the net asset positions whichever is greater; and(b) The net position (liabilities and assets) in gold and/or silver, regardless of sign.January 2015CA-5.5.16
Where the
parent bank is assessing its foreign exchange on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch orsubsidiary of the concerned bank. In such cases, the internal limit for that branch/subsidiary , in each currency, may be used as a proxy for the positions. The branch/subsidiary limits should be added, without regard to sign, to the net open position in each currency involved. When this simplified approach to the treatment of currencies with marginal operations is adopted, theIslamic bank licensee should adequately monitor the actual positions of the branch/subsidiary against the limits, and revise the limits, if necessary, based on the results of the ex-post monitoring.January 2015Calculation of the Capital Charge
CA-5.5.17
The capital charge is 8% of the overall net open foreign currency position as calculated in Paragraph CA-5.5.15.
January 2015CA-5.5.18
The table below illustrates the calculation of the overall net open foreign currency position and the capital charge:
Example of the calculation of the foreign exchange overall net open position and the capital charge
GBP EUR SAR US$ JPY GOLD and silver +200 +100 +70 -190 -40 -50 +370 -230 50 The capital charge is 8% of the higher of either the sum of the net long currency positions or the sum of the net short positions (i.e. 370) and of the net position in gold and/or silver (i.e. 50) = 420 @ 8% = 33.6
January 2015CA-5.6 CA-5.6 Commodities and Inventory Risks
Introduction
CA-5.6.1
This Section sets out the minimum capital requirements to cover the risk of holding or taking positions in commodities, including precious metals, but excluding gold and silver (which is treated as a foreign currency according to the methodology explained in section CA-5.5) as well as the inventory risk which results from a bank holding assets with a view to reselling or leasing them. A commodity is defined as a physical product which is and can be traded on a secondary market — for example, agricultural products, minerals (including oil) and precious metals. Inventory risk is defined as arising from holding items in inventory either for resale under a Murabahah contract, or with a view to leasing under an Ijara contract. In the case of inventory risk, the simplified approach described in Paragraph CA-5.6.13 is applied.
January 2015CA-5.6.2
The commodities position risk and the capital charges are calculated with reference to the entire business of a bank (i.e. the banking and trading books combined). Furthermore, the funding of
commodities positions may well open anIslamic bank licensee to foreign exchange risk which should be captured within the measurement framework set out in Section CA-5.5.January 2015CA-5.6.3
The price risk in commodities is often more complex and volatile than that associated with currencies. Banks need to guard against the risk that arises when a liability (i.e. in a Parallel Salam transaction) position falls due before the asset position (i.e. a failure associated with or delay in the Salam contract). Owing to a shortage of liquidity in some markets, it might be difficult to close the Parallel Salam position and the bank might be "squeezed by the market". All these commodity market characteristics can result in price transparency and the effective management of risk.
January 2015CA-5.6.4
All contracts (Salam, Musharakah, Mudarabah or Commodity Murabahah) involving commodities as defined in Sections CA-3.3, CA-3.6, CA-3.7 and CA-3.11 are subject to commodities risk and a capital charge as per the relevant provisions must be computed.
January 2015CA-5.6.5
Commodities risk can be measured using either the maturity ladder approach or the simplified approach for the purpose of calculating the capital charge for commodities risk.
Islamic bank licensees must notify the CBB of which approach they propose to follow. This is for reporting purposes on the form PIR. AnIslamic bank licensee which proposes to use the maturity ladder approach will not be allowed to revert to the simplified approach without the prior approval of the CBB.January 2015Calculation of Commodities Positions
CA-5.6.6
Under both approaches,
Islamic bank licensees must first express each commodity position (e.g. Salam and Parallel Salam) in terms of the standard unit of measurement (i.e. barrels, kilograms, grams, etc.). Assets and liabilities positions in a commodity are reported on a net basis for the purpose of calculating the net open position in that commodity. For markets which have daily delivery dates, any contracts maturing within ten days of one another may be offset. The net position in each commodity is then converted, at spot rates, into theIslamic bank licensee's reporting currency.January 2015CA-5.6.7
Positions in different commodities36 cannot be offset for the purpose of calculating the open-positions as described in Paragraph CA-5.6.6 except in the following instances:
(a) The sub-categories of commodities are deliverable against each other;(b) The commodities represent close substitutes for each other; and(c) A minimum correlation of 0.9 between the price movements of the commodities can be clearly established over a minimum period of one year to the satisfaction of the CBB. Netting of positions for different commodities is subject to the CBB's approval. Under the maturity ladder approach, the net positions are entered into seven time bands as set out in Paragraph CA-5.6.10.
36 Commodities can be grouped into clans, families, sub-groups and individual commodities; for example, a clan might be Energy Commodities, within which Hydro-carbons is a family, with Crude Oil being a subgroup, and West Texas Intermediate, Arabian Light and Brent being individual commodities.
January 2015CA-5.6.8
Islamic bank licensees , which wish to net positions based on correlation (in the manner discussed in Subparagraph CA-5.6.7(c)), must satisfy the CBB of the accuracy of the method which they propose to adopt.January 2015Maturity Ladder Approach
CA-5.6.9
A worked example of the maturity ladder approach is set out in Appendix CA-13 and the table in Paragraph CA-5.6.10 illustrates the maturity time-bands of the maturity ladder for each commodity.
January 2015CA-5.6.10
The steps in the calculation of the commodities risk by the maturity ladder approach are:
(a) The net positions in individual commodities, expressed in terms of the standard unit of measurement, are first slotted into the maturity ladder. Physical stocks are allocated to the first-time band. A separate maturity ladder is used for each commodity; and(b) The sum of short and long positions in the same time-band that are matched is multiplied first by the spot price of the commodity, and then by the spread rate of 1.5% for each time-band as set out in the table below. This represents the capital charge in order to capture all risks within a time-band (which, together, are sometimes referred to as curvature risk).
Time band37 0–1 months 1–3 months 3–6 months 6–12 months 1–2 years 2–3 years over 3 years
37 Instruments, where the maturity is on the boundary of two maturity time-bands, should be placed into the earlier maturity band. For example, instruments with a maturity of exactly one-year are placed into the 6 to 12 months time-band.
January 2015CA-5.6.11
After the two steps in Paragraph CA-5.6.10 are completed, the residual (or unmatched) net positions from nearer time-bands are then carried forward to offset opposite positions (i.e. asset against liability and vice versa) in time bands that are further out. However, a surcharge of 0.6% of the net position carried forward is added in respect of each time-band that the net position is carried forward, to recognise that such management of positions between different time-bands is imprecise. This surcharge is in addition to the capital charge calculated in Paragraph CA-5.6.10 for each matched amount created by carrying net positions forward.
January 2015CA-5.6.12
Any net position at the end of the carrying forward and offsetting processes described in Paragraphs CA-5.6.10 and CA-5.6.11 attract a capital charge of 15%.
January 2015CA-5.6.12A
Although there are differences in volatility between different commodities, only one uniform capital charge for open positions in all commodities applies in the interest of simplicity.
January 2015Simplified Approach
CA-5.6.13
Under the simplified approach as applied to commodities, the net position, long or short, in each commodity requires a capital charge of 15% to cater for directional risk plus an additional capital charge of 3% of the gross positions — that is, long plus short positions — to cater for basis risk. The capital charge of 15% applies to assets held by
Islamic bank licensees in inventory with a view to resale or lease.January 2015Other Capital Charges
CA-5.6.14
For Istisna work-in-process (WIP), WIP inventory belonging to the
Islamic bank licensee must attract a capital charge of 8% (equivalent to a 100% RW). In the case of the balance of unbilled WIP inventory under Istisna` without parallel Istisna`, in addition to the RW forcredit risk a capital charge of 1.6% is applied (equivalent to a 20% RW) to cater formarket risk exposure.January 2015CA-5.6.15
The funding of a commodities position that exposes the
Islamic bank licensee to foreign exchange exposure is also subject to a capital charge as measured under foreign exchange risk (refer to Section CA-5.5).January 2015CA-6 CA-6 Operational Risk
CA-6.1 CA-6.1 Definition of Operational Risk
CA-6.1.1
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events which includes but is not limited to, legal risk and Sharia compliance risk. This definition excludes strategic and reputational risk.January 2015CA-6.1.2
Sharia compliance risk is an
operational risk facing Islamic banks which can lead to non-recognition of income and resultant losses.January 2015CA-6.1.3
Operational risk inIslamic bank licensees can be broadly divided into three categories:(a) General risks: Such risks are consequential upon various kinds of banking operations conducted byIslamic bank licensees that are common to all financial intermediaries.38 Nevertheless, the asset-based nature of financing products in banks such as Murabahah, Salam, Istisna' and Ijara may give rise to additional forms ofoperational risk in contract drafting and execution that are specific to such products;(b) Shari'a non-compliance risk: This is the risk of non-compliance resulting from the failure of anIslamic bank licensee's Shari'a governance mechanism (systems and personnel) to ensure its compliance with Shari'a rules and principles as determined by its Shari'a board or other relevant body in the related jurisdiction. This risk can lead to non-recognition of anIslamic bank licensee 's income and resultant losses. The risk can take two broad forms in banks: (i) risks relating to potential non-compliance with Shari'a rules and principles in theIslamic bank licensees ' operations, including the risk of non-permissible income being recognised, when there is a failure in Shari'a compliance; and (ii) the risk associated with theIslamic bank licensee's fiduciary responsibilities as Mudarib towards fund providers under the Mudarabah form of contract, according to which, in the case of misconduct or negligence by the Mudarib, the funds provided by the fund providers become a liability of the Mudarib. Sukuk structures may also be exposed to Shari'a non-compliance risk which may adversely affect the marketability, and hence the value, of the Sukuk; and(c) Legal risks: Legal risk includes, but is not limited to, exposures to fines, penalties or punitive damages resulting from supervisory actions as well as private settlements. Such risk can arise from either: (i) theIslamic bank licensee's operations — that is, from legal risks common to all financial intermediaries; or (ii) problems of legal uncertainty in interpreting and enforcing contracts based on Shari'a rules and principles. Legal risks also include the risk that a Sukuk structure in which anIslamic bank licensee is originator, sponsor, manager or investor fails to perform as intended because of some legal deficiency. The current section is concerned, not with exposures to legal risk as a Sukuk investor, but with potential losses due to exposures to legal risk as originator, sponsor or manager.
38 Though operational risk related to the banking operations of banks can be considered similar to that of conventional banks in many respects, the characteristics of such risk may be different in banks in certain cases — for example: (i) Shari'a-compliant products may involve processing steps distinct from those of their conventional counterparts; (ii) banks typically hold different types of assets on their balance sheets compared to conventional banks — for example, physical assets or real estate; and (iii) banks may encounter varied risk related to information technology products and systems due to the requirements of Shari'a compliance.
January 2015CA-6.2 CA-6.2 The Measurement Methodologies
CA-6.2.1
The framework outlined below presents two methods for calculating
operational risk capital charges in a continuum of increasing sophistication and risk sensitivity:(a) The Basic Indicator Approach; and(b) The Standardised Approach.January 2015CA-6.2.2
An
Islamic bank licensee will not be allowed to choose to revert to basic indicator approach once it has been approved for standardised approach without CBB's approval. However, if the CBB determines that anIslamic bank licensee using the standardised approach no longer meets the qualifying criteria for the standardised approach, it may require theIslamic bank licensee to revert to the basic indicator approach for some or all of its operations, until it meets the conditions specified by the CBB for returning to the standardised approach.January 2015Basic Indicator Approach
CA-6.2.3
Islamic bank licensees using the Basic Indicator Approach must hold capital foroperational risk equal to the average over the previous three years of a fixed percentage (denoted alpha) of positive annual gross income. Figures for any year in which annual gross income is negative or zero must be excluded from both the numerator and denominator when calculating the average. See Paragraph CA-6.2.6 for approaches to be used where negative gross income distorts anIslamic bank licensee's Pillar 1 capital charge. The charge may be expressed as follows:
KBIA = [∑(GI1..nα)]/n
where:
KBIA = the capital charge under the Basic Indicator Approach
GI = annual gross income, where positive, over the previous three years (audited financial years)
n = number of the previous three years for which gross income is positive
α = 15%, relating the industry wide level of required capital to the industry wide level of the indicator.January 2015CA-6.2.4
The extent of losses arising from non-compliance with Sharia rules and principles cannot be ascertained owing to the lack of data. Therefore,
Islamic bank licensees are not required to set aside any additional amount over and above the 15% of average annual gross income over the preceding three years foroperational risk .January 2015CA-6.2.5
Gross income is defined as:
(a) Net income from financing activities which is gross of any provisions (e.g. for unpaid profit or non-performing facilities), operating expenses (including outsourcing service providers), depreciation of Ijarah assets and excludes realised profits/losses from the sale of securities (e.g. sukuk) in the banking book;(b) Net income from investment activities. This includes theIslamic bank licensee's share of profit from musharakah and mudarabah financing activities; and(c) Fee income (e.g. commission and agency fee)Less:
(d) Share of above income attributable to investment account holders and other account holders; and(e) Extraordinary or exceptional income and income from Takaful activities.Amended: July 2015
January 2015CA-6.2.6
In case of an
Islamic bank licensee with negative gross income for the previous three years, a newly licensed bank with less than 3 years of operations, or a merger, acquisition or material restructuring, the CBB shall discuss with the concernedIslamic bank licensee an alternative method for calculating theoperational risk capital charge. For example, a newly licensed bank may be required to use the projected gross income in its 3-year business plan. Another approach that the CBB may consider is to require such licensed banks to observe a higher CAR.January 2015CA-6.2.7
Banks applying both approaches are required to refer to the principles set in Section OM-8.2 of Operational Risk Management Module.
January 2015The Standardised Approach
CA-6.2.8
In the Standardised Approach, banks' activities are divided into eight business lines: corporate finance, trading & sales, retail banking, commercial banking, payment & settlement, agency services, asset management, and retail brokerage. The business lines are defined in detail in Appendix CA-14. The
Islamic bank licensee must meet the requirements detailed in Section OM-8.3 to qualify for the use of standardised approach.January 2015CA-6.2.9
Within each business line, gross income is a broad indicator that serves as a proxy for the scale of business operations and thus the likely scale of
operational risk exposure within each of these business lines. The capital charge for each business line is calculated by multiplying gross income by a factor (denoted beta) assigned to that business line. Beta serves as a proxy for the industry-wide relationship between theoperational risk loss experience for a given business line and the aggregate level of gross income for that business line. It should be noted that in the Standardised Approach, gross income is measured for each business line, not the whole bank, i.e. in corporate finance, the indicator is the gross income generated in the corporate finance business line.January 2015CA-6.2.10
The total capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, negative capital charges (resulting from negative gross income) in any business line cannot offset positive capital charges in other business lines. Where the aggregate capital charge across all business lines within a given year is negative, then the input to the numerator for that year will be zero. If negative gross income distorts an
Islamic bank licensee's Pillar 1 capital charge, the CBB will follow the approaches outlined in Paragraph CA-6.2.5. The total capital charge may be expressed as:
KTSA = {∑ years 1-3 max[(GI1-8 Xβ1-8, 0]}/3
where:
KTSA = the capital charge under the Standardised Approach
GI 1-8 = annual gross income in a given year, as defined above in the Basic Indicator Approach, for each of the eight business lines
β1-8 = a fixed percentage, relating the level of required capital to the level of the gross income for each of the eight business lines.
The values of the betas are detailed below.Business Lines Beta Factors (%) Corporate Finance (β1) 18 Trading and Sales (β2) 18 Retail Banking (β3) 12 Commercial Banking (β4) 15 Payment and Settlement (β5) 18 Agency Services (β6) 15 Asset Management (β7) 12 Retail Brokerage (β8) 12 January 2015CA-7 Profit Sharing Investment Accounts
[This chapter was deleted in January 2015.]
January 2015CA-8 CA-8 Sukuk and Securitisation
CA-8.1 CA-8.1 Introduction
CA-8.1.1
This Section deals with minimum capital adequacy requirements in relation to (i)
Islamic bank licensees holdings of Sukuk; and (ii) the exposures of anIslamic bank licensee where it is, or acts in a capacity such that it is considered to be, (a) the originator of a Sukuk issue, (b) an issuer of Sukuk, (c) a servicer of a Sukuk issuance, or (d) a provider of credit enhancement to a Sukuk issuance.January 2015CA-8.1.2
Sukuk (plural of Sakk) are certificates, with each Sakk representing a proportional undivided ownership right in tangible and intangible assets, monetary assets, usufructs, services, debts or a pool of these assets, or a business venture (such as a Mudarabah or Musharakah). These assets, which must be clearly identifiable, may be in a specific project or investment activity in accordance with Shari'a rules and principles. The ownership right on Sukuk assets may be either a right of legal ownership (commonly referred to in the market as "asset-backed Sukuk") or a right of beneficial ownership through a trust which holds the assets for the benefit of the Sukuk holders (commonly referred to in the market as "asset-based Sukuk").
January 2015CA-8.2 CA-8.2 Features of Securitisation in Sukuk
Parties in a Securitisation Structure
CA-8.2.1
From a capital adequacy perspective, the parties in a
securitisation structure include the originator, the issuer and the investors, in addition to which the following may be involved: an institution that acts as manager of the issuance, a servicer to service the underlying assets,39 one or more credit rating agencies to rate the Sukuk, an investment banker to act as an adviser or to place the securities with investors, and (in some Sukuksecuritisations ) an institution that acts as a provider of credit enhancement.40
39 Depending on the structure of the Sukuk securitisation, a servicer may perform different functions for management of the underlying assets in the Sukuk — for example, to collect payment, handle related taxes, manage escrow accounts and/or remit payments.
40 See Paragraphs CA-8.2.22 to 27 for details.
January 2015CA-8.2.2
An
Islamic bank licensee may act as originator of Sukuk issues where the ownership of assets held by theIslamic bank licensee is transferred to holders of Sukuk by means of asecuritisation . Such asecuritisation may offer theIslamic bank licensee one or more of the following benefits:(a) Increased liquidity, since a relatively illiquid asset (such as an asset held as lessor in an Ijara or Ijara Muntahia Bittamlīk) is converted into cash paid by the investors in the Sukuk subscription; and/ or(b) Reduced capital requirements, insofar as thesecuritisation may permit the issuingIslamic bank licensee to exclude the assets from the calculation of its RWAs.January 2015CA-8.2.3
The achievement of the second of these benefits will depend on the way in which the
securitisation is structured. For this, theIslamic bank licensee must be able to derecognise all or most of the exposures relating to the assets from its balance sheet, according to the criteria for de-recognition set out in Paragraphs CA-8.2.20 to 22.January 2015CA-8.2.4
An
Islamic bank licensee may act as sponsor of a Sukuk issuance or similar programme involving assets of acustomer in which theIslamic bank licensee manages or acts as adviser to the programme, places the Sukuk into the market, or provides liquidity and/or credit enhancements. In this case, the benefit to theIslamic bank licensee would be the earning of fees for the services provided, but theIslamic bank licensee will incur capital charges if it offers credit enhancement (as outlined in Section CA-8.4).January 2015Collateral Security Structure
CA-8.2.5
Consideration of the collateral security structure41 is a critical factor; it needs to be the subject of legal opinions and is subject to Shari'a permissibility (in the case of perfectibility42). Those security interests must be the first priority (there can be no prior or subsequent claims) and be perfected (or perfectible).
41 Collateral security structure is mainly used in Sukuk based on Shari'a-compliant project financing.
42 In legal terminology, perfection relates to the additional steps required to be taken in relation to a security interest in order to make it effective against third parties and/or to retain its effectiveness in the event of default by the grantor of the security interest.
January 2015CA-8.2.6
The legal opinions must address the nature of the security interest, the enforceability of the security interest against third parties, and perfection requirements (such as notices and registration). The effects of bankruptcy (see also Paragraph CA-8.3.22) on perfection must also be considered and opined upon. Major issues related to Sukuk based on collateral security interest and related perfection include the following:
(a) Rahn (mortgage or other pledge of assets) concepts in certain jurisdictions are possessory in nature. This makes perfection a particularly difficult opinion issue in these jurisdictions;(b) In many jurisdictions, and without regard to rahn concepts, perfection and priority regimes are not well developed; and(c) Bankruptcy laws and regimes may also not be well developed in some jurisdictions.January 2015Characteristics of True Sale and Repurchase of Assets
CA-8.2.8
Sukuk are issued based on
securitisation of assets where the originator "transfers" the assets via an SPV to Sukuk investors and the latter have a legally recognised asset ownership interest. For such transfer of assets to hold legally, there must be an agreement that is evidence of a binding sale transaction from the originator to the Sukuk investors; that is, such a contract must be valid, binding and legally enforceable on all parties involved. With this sale transaction, the investors will become legal owner of the assets underlying the Sukuk transaction, with all of the rights and obligations that accompany actual ownership. The SPV must be "bankruptcy remote" from the originator. Thus, upon the insolvency of a Sukuk originator, the underlying assets cannot be clawed back into the bankruptcy estate of the originator. In such Sukuk, Sukuk holders have no recourse to the originator; their only recourse is to the underlying assets.January 2015CA-8.2.9
There are four key criteria for a transaction to be considered as a "true sale" that transfers legal title to the SPV for the benefit of the Sukuk investors:
(a) The transfer must be such that it cannot be re-characterised by a court or other body as a secured loan, or otherwise be avoided in a bankruptcy or insolvency proceeding involving the originator of the assets (such as pursuant to a fraudulent transfer in anticipation of bankruptcy or a preference payment);(b) The bankruptcy or insolvency of the originator must not affect the assets that have been transferred to the issuer/SPV. This, in turn, means that the issuer will be able to enforce collection and other rights against the source of the income (the payer) without hindrances resulting from the bankruptcy or insolvency of the originator;(c) The transfer must then be perfectible at the election of the issuer; and(d) The sale must be free and clear of all prior overriding liens.January 2015CA-8.2.10
According to Shari'a rules, it is not permissible for the Mudarib (investment manager), Sharik (partner) or Wakil (agent) to undertake in advance to repurchase the assets at maturity from Sukuk holders or from one who holds them, for their nominal or par value. It is, however, permissible for a third party credit enhancement provider to undertake the purchase on the basis of the net value of assets, their market value, fair value or a price to be agreed at the time of purchase. In such cases, the risks of the assets are retained and are subject to the requirements of section CA-8.4. In the event of negligence or misconduct by the Sukuk manager (i.e. Mudarib, Sharik or Wakil), it is required that the Sukuk manager be liable to guarantee the payment of capital to Sukuk holders, at the nominal or par value (again subject to the requirements of CA-8.4). It is also permissible for a lessee (i.e. the originator) in an Ijara Sukuk to undertake to purchase the leased assets at maturity for their nominal value, provided the lessee is not also a Sharik, Mudarib or Wakil. If the lessee is an
Islamic bank licensee , such an undertaking would be treated as a 'clean-up call' (see CA-8.2.21) if it satisfies certain conditions or it is subject to section CA-8.4 if it is of a more general nature.January 2015CA-8.2.11
The SPV must be formed as a company or trust or other legal entity having no other business. In a Sukuk
securitisation , the SPV must be organised, for example, as a Musharakah, Mudarabah or Wakalah, where the requirement of SPV having no other business applies. In the case of a Musharakah, there is a partnership contract with financial participation by the Sukuk investors. In the case of a Mudarabah structure, only the Sukuk investors participate with money as Rabb al-Mal, while the other party (i.e. the SPV) acts as the manager (as Mudarib) of the securitised assets. In the case of Wakalah, the SPV as an agent (Wakil) acts as the manager of assets on behalf of the Sukuk investors.January 2015CA-8.2.12
Islamic bank licensees must not use a general-purpose or operating company (as opposed to an SPV) for holding the securitised assets, as such a company might have other assets and other liabilities, each of which would be likely to interfere with the exclusivity of the Sukuk investors' rights over the securitised assets. By its very nature, it is a legal shell with only the specific assets transferred by the originator, and those assets are effectively owned by the Sukuk investors, legally or via a trust, there being nothing else in the vehicle in which any other party could have an interest. Such an SPV cannot be consolidated with the originator for tax, accounting or legal purposes, as that would affect its bankruptcy-remote position.January 2015Credit Enhancement
CA-8.2.13
Sukuk can be "credit enhanced" to raise their credit quality above that of the underlying asset pool. Credit enhancement is therefore intended to reduce the
credit risk to the Sukuk investors and reduce the funding cost of the originator. It also results in the Sukuk having an enhanced credit rating by ECAIs recognised by the CBB in section 4.6 of this Module. Subject to Shari'a permissibility, the mechanisms used in credit enhancement may include, inter alia, those discussed in Paragraphs CA-8.2.14 to CA-8.2.17.January 2015Over-Collateralisation
CA-8.2.14
Subject to Shari'a approval of the structure, an originator may retain a small equity share in a pool of securitised assets in order to provide over-collateralisation. For example, the originator of a
securitisation of a pool of Ijara lease assets might securitise 90% of the pool and retain 10% as an equity position (first loss position) — that is, a residual claim. The Sukuk holders would be entitled to income based on 90%, and the originator, based on the remaining 10%, of the rental income from the pool. The treatment of retained holdings is outlined in Section CA-8.3.January 2015Excess Spread
CA-8.2.16
Excess spread is the difference between (a) the expected periodic net income from the securitised assets (i.e. the income after expenses such as servicing fees and operating fees have been paid) and (b) the periodic amounts payable to the Sukuk investors. Subject to Shari'a approval, excess spread may be built into a Sukuk structure such that the issuer/SPV retains a certain percentage of the periodic net income if this is in excess of the target level of the periodic payments to the Sukuk holders, and holds this amount in an excess spread reserve. If the net income falls below the level required to meet the target level of the payments to the Sukuk holders, the issuer/SPV may release an amount from the excess spread reserve in order to make good the shortfall in whole or in part.43
43 This mechanism is comparable to the "profit equalisation reserve" commonly used by a bank to "smooth" the profit payouts to investment account holders.
January 2015Cash Collateral
CA-8.2.17
Cash collateral is a segregated trust account, funded at the time when a new series of Sukuk is issued, that can be used to cover shortfalls in payment of coupons, principal or servicing expenses if the excess spread falls below zero. The account can be funded by the issuer, but is most often generated by a Qard from the originator or another third party. Commonly, the pooling and servicing agreements dictate the amount of the cash collateral, which is typically based on a specified percentage of the Sukuk issued. The amount in the cash collateral account is subject to risk-weighting as outlined in this Module, depending upon the use of funds.
January 2015Classification of Credit Enhancement
CA-8.2.18
The credit enhancement in a Sukuk structure can be provided by an "internal" mechanism such as by the issuer of the Sukuk structure or by an "external" arrangement such as a third-party guarantee. These credit enhancement structures are explained in the following:
(a) Issuer-provided credit enhancement structure (the SPE)
This structure comprises credit support where a part of thecredit risk of the asset pool is assumed by the issuer.(b) Third-party guarantee credit enhancement structure
This structure comprises the assumption ofcredit risk by parties other than the issuer. The guarantor does not have the right of recourse to the originator, and the guarantee can be for a fixed period and for a limited amount, without any consideration being received by the guarantor. However, a claim should first be made against the underlying assets, and then against the guarantor, unless an option is provided to make the claim otherwise.January 2015Assets in Securitisations
CA-8.2.19
The assets in a Sukuk
securitisation have to be in compliance with Shari'a rules and principles.January 2015CA-8.2.20
In order to comply with Shari'a rules and principles, the structure must transfer all ownership rights in the assets from the originator via the issuer to the investors. Depending on the applicable legal system, these ownership rights do not necessarily include registered title. The transfer could be a simple collection of ownership attributes that allow the investor (a) to assume the role of the originator and (b) to perform (sometimes via a servicer) duties related to ownership. The transfer could also include rights granting access to the assets, subject to notice, and, in the case of default, the right to take possession of the assets.
January 2015Recognition of Risk Transference (Asset De-recognition Criteria)
CA-8.2.21
An originating
Islamic bank licensee may exclude securitised exposures from the calculation of its assets for capital adequacy purposes only if all of the following conditions have been met.Islamic bank licensees meeting these conditions must still hold regulatory capital against any exposures that they retain in respect of thesecuritisation (such as credit enhancements — see Section CA-8.4).(a) In substance, allcredit risks (and price risk, where applicable) associated with the securitised assets have been transferred to third parties;(b) The transferor (i.e. originator) does not maintain effective or indirectcontrol over the transferred assets. The assets are legally isolated from the transferor in such a way that the exposures are put beyond the reach of the transferor and its creditors, even in bankruptcy or receivership. See Paragraphs CA-8.2.5 to CA-8.2.12 for full details;(c) Holders of the Sukuk (investors) have a claim only to the underlying pool of assets, and have no claim against the transferor;(d) The immediate transferee is an SPV, and the holders of the legal and beneficial interests in that entity have the right to pledge or exchange such interests without restriction; and(e) Clean-up calls44 must be at the discretion of only the issuer (SPV). They must not be structured to provide credit enhancement and must be exercisable only when 10% or less of the purchase consideration for the underlying assets (e.g. in an IMB) remains to be paid. The issuer's rights to make clean-up calls, and the terms on which they are made, must have prior written Shari'a approval.
44 A clean-up call is an option that permits the
securitisation exposures to be called before all of the underlying exposures orsecuritisation exposures have been repaid. It is generally accomplished by repurchasing the remainingsecuritisation exposures once the pool balance or outstanding securities have fallen below some specified level.January 2015CA-8.2.22
The conditions for bankruptcy remoteness include the following:
(a) If there were a bankruptcy of the issuer, the assets of the issuer will be distributed in accordance with the law or a court order, rather than in accordance with the contractual arrangements involving the issuer;(b) Separateness covenants are required to ensure bankruptcy remoteness (as well as non-consolidation); and(c) Another provision to ensure bankruptcy remoteness relates to noncompetition and bankruptcy declarations. The originator, investors, credit enhancers and others agree in the transaction documents not to initiate involuntary bankruptcy proceedings against the issuer. The issuer also provides, in both its constitutive documents and the transaction documents, not to initiate voluntary bankruptcy proceedings. The parties must seek a legal opinion from jurists in the jurisdiction concerned and ensure that these types of agreements and warranties are legally valid and enforceable.January 2015Operational Requirements for Credit Analysis
CA-8.2.23
Islamic bank licensees must carry out the credit analysis of theirsecuritisation exposure based on the following criteria, in order to be allowed to use the risk weights in Section CA-8.3. If anIslamic bank licensee is unable to perform the due diligence and maintain the information specified in this paragraph, it will be required to risk weight thesecuritisation exposure at 1,250%. The criteria are applicable tosecuritisation exposures ofIslamic bank licensees both in the banking and trading book:(a) AnIslamic bank licensee must have a clear understanding of the nature and features of its individualsecuritisation exposures, including the risk characteristics of the pools underlying such exposure on an ongoing basis. This requirement applies to both on-and off-balance sheetsecuritisation exposures;(b) As the payments to Sukuk holders are dependent on the performance of underlying assets, anIslamic bank licensee must be able to assess the performance information on an ongoing basis; and(c) AnIslamic bank licensee must be able to thoroughly understand all the structural features of a Sukuk that can materially impact the performance of its exposures to the transaction. Such exposures may include credit enhancements, liquidity enhancements, triggers, and deal-specific default definitions.January 2015CA-8.2.24
The capital treatment of a securitisation exposure must be determined on the basis of the economic substance rather than the legal form of the securitisation structure.
Islamic bank licensees must consult with the CBB when there is uncertainty about whether a given transaction should be considered a securitisation.January 2015CA-8.3 CA-8.3 Capital Requirements for Holdings of Sukuk
CA-8.3.1
The following sets out the minimum capital requirements to cover the
credit risk andmarket risk arising from the holding of a Sukuk in the "banking book" by anIslamic bank licensee . The CBB will use its discretion to specify measurement approaches as it thinks appropriate for other types of Sukuk which are not listed in this sub-section, provided they are approved by anIslamic bank licensee 's Shari'a board. For unrated Sukuk that use a combination of more than one of the Shari'a-compliant contracts outlined below, the capital requirement will be calculated taking into account the risk implications of the overall structure.January 2015CA-8.3.2
Where Sukuk are externally rated,
Islamic bank licensee s must apply the relevant risk weight given in Paragraph CA-8.4.3 based on the ECAI ratings from recognised agencies listed in Section CA-4.6. Where there are no acceptable ECAI ratings, the RWs will be 1,250% (as shown on table CA-8.4.3) or determined on the basis of the underlying assets as shown in the remainder of this Section for the different types of Sukuk (which may involvemarket risk as well ascredit risk ).January 2015CA-8.3.3
An
Islamic bank licensee must have methodologies that enable it to assess thecredit risk involved in securitisation exposures at individual and portfolio levels. Islamic bank licensees must refer to Paragraph CA-8.2.23 for details of the suggested criteria to be used in credit analysis. AnIslamic bank licensee must assess exposures, regardless of whether they are rated or unrated, and determine whether the RWs applied to such exposures, under the standardised approach, are appropriate for their inherent risk. In those instances where anIslamic bank licensee determines that the inherent risk of such an exposure, particularly if it is unrated, is significantly higher than that implied by the RW to which it is assigned, theIslamic bank licensee must consider the higher degree ofcredit risk in the evaluation of its overall capital adequacy.January 2015CA-8.3.4
For Sukuk classified in the trading book, the
market risk capital requirement as mentioned in Section CA-5.4 onmarket risk is applicable.January 2015Salam Sukuk
CA-8.3.5
The
credit risk in Salam Sukuk is similar to that of the underlying Salam contract, where thecredit risk exists upon the subscription of the Sukuk until the delivery and sale of the subject matter. The RW is based on the counterparty (Salam supplier) unless the Salam capital is guaranteed by a third party, in which case the RW is that of the guarantor if lower than that of the supplier.January 2015CA-8.3.6
The
market risk in Salam Sukuk (in the absence of a parallel Salam contract or other hedge) is likewise the same as that of the underlying contract, namely a long position in the underlying commodity. This risk can be measured according to either the maturity ladder approach or the simplified approach as set out in Section CA-5.6 (commodities and inventory risk).January 2015CA-8.3.7
A Salam Sukuk issuance which is structured with an undertaking from the issuer that the underlying commodity will be sold to a third party at a specified selling price (by means of a parallel Salam contract) must carry the RW of the buyer of that underlying commodity in the parallel Salam contract.
January 2015CA-8.3.8
For the type of Salam Sukuk described in Paragraph CA-8.3.7, there is no capital charge for
market risk that consists of basis and forward gap risks (namely, the risk that the hedge may be impaired because the underlying commodity delivered may be of inferior quality or may be delivered later than the contractual date) as the underlying commodity is normally traded on an exchange that eliminates the risk of late/non-delivery or delivery of a commodity of inferior quality.January 2015Istisna Sukuk
CA-8.3.9
The asset may be constructed on behalf of an ultimate
customer or off-taker with whom theIslamic bank licensee enters into a parallel Istisna contract. In this case, there is acredit risk exposure to the ultimatecustomer for the payment due under the parallel contract. Thiscredit risk occurs upon commencement of the construction work by construction firm, until the whole amount or all the instalments (progress billings) are paid by the ultimatecustomer . The RW for this credit exposure is that of the ultimatecustomer , unless there is a guarantee, in which case the RW is that of the guarantor if lower.January 2015CA-8.3.10
The RW for Istisna Sukuk where there is no parallel Istisna is based on that of the issuer, unless a third party provides a guarantee, in which case the third party's RW (if lower than that of the issuer) will be applicable. In addition, a RW of 20% will be added to cater for the price risk to which the underlying Istisna is exposed.
January 2015CA-8.3.11
In the event the returns to the Sukuk holder are from the cash flow of the underlying assets, which fall under the category of "Exposure to Assets" Istisna, the RW must be based on the "supervisory slotting criteria" approach which carries RW of 70–250%.
January 2015CA-8.3.12
Refer to Section CA-3.4 on Istisna for detailed treatment.
January 2015Ijara and IMB Sukuk
CA-8.3.13
The RW for IMB rentals is based on the lessee's counterparty
credit risk , since the bearer of the residual value risk of the underlying asset is not borne by the Sukuk holders. Refer to Section CA-3.5 on Ijara and IMB for detailed treatment.January 2015Musharakah Sukuk
CA-8.3.14
The capital treatment of Musharakah Sukuk is based on the intent of the underlying investments in Musharakah that can be categorised as follows:
(a) For private commercial enterprise to undertake trading activities in, for example, commodities, the RW must be based on the applicable underlying assets as set out in themarket risk section of Section CA-5.1;(b) For private commercial enterprise to undertake business venture or project (other than Subparagraph CA-8.3.14(a)), the RW is measured according to either the simple RW method or the supervisory slotting criteria approach;(c) Income-producing Musharakah investments through leasing of jointly-owned real estate or movable assets such as cars to third parties by means of Ijara must carry the RW of the counterparty — that is, the lessee; and(d) Income-producing Musharakah investments with Murabahah subcontracts carry the RW of the Murabahah.January 2015CA-8.3.15
Refer to Section CA-3.6 on Musharakah for detailed treatment.
January 2015Mudarabah Sukuk
CA-8.3.16
The treatment of Mudarabah Sukuk is based on the intent of the underlying investments in Mudarabah, as follows:
(a) For private commercial enterprise to undertake trading activities in, for example, commodities, the RW must be based on the applicable underlying assets as set out in themarket risk section in Section CA-5.1(b) For private commercial enterprise to undertake business venture or project (other than Subparagraph CA-8.3.16(a)), the RW in respect of an equity exposure is measured according to either the simple RW method or the supervisory slotting criteria approach.January 2015CA-8.3.17
Refer to Section CA-3.7 on Mudarabah for detailed treatment.
January 2015Wakalah Sukuk
CA-8.3.18
The treatment of Wakalah Sukuk is based on the intent of the underlying investments in Wakalah, which can be categorised as follows:
(a) To undertake trading activities in foreign exchange, shares or commodities, the RW must be based on the applicable underlying assets as set out in themarket risk section in Section CA-5.1;(b) Income-producing Wakalah investments through leasing to third parties by means of Ijara must carry the RW of the counterparty — that is, the lessee;(c) Income-producing Wakalah investments with Murabahah subcontracts carry the RW of the Murabahah; and(d) To invest in a combination of assets comprising shares, leasable assets, receivables from Murabahah or Salam, etc. the RW is measured according to the percentage of assets allocated in the investment portfolio of Wakalah Sukuk based on Subparagraphs CA-8.3.18(a) and CA-8.3.18 (b).January 2015CA-8.3.19
Refer to Section CA-3.10 on Wakalah for detailed treatment.
January 2015Murabahah Sukuk
CA-8.3.20
The applicable RW must be based on the standing of the obligor or issuer as shown in the table in CA-8.4.3. If the Sukuk structure involves funding of an asset purchase in foreign currency, the relevant exposure must be calculated based on measures of foreign exchange risk described in Section CA-5.5 (foreign exchange risk).
January 2015CA-8.3.21
Refer to Section CA-3.2 on Murabahah for detailed treatment.
January 2015Exclusions
CA-8.3.22
For all those Sukuk structures where legal transfer of assets has not taken place due to the reasons outlined in Section CA-8.2, the applicable RW must be the credit RW as shown in table CA-8.4.3, subject to any Shari'a-compliant credit enhancement by the issuer (see Paragraphs CA-8.4.23 and CA-8.4.24). In some cases, a number of originators may form a pool to contribute assets in an asset-based structure (e.g. multiple sovereigns). In such cases, the rating of the Sukuk is that of the pool, subject to any Shari'a-compliant credit enhancement.
January 2015Treatment of Holdings of Sukuk Where Credit Enhancement Is Provided by an Issuer or Originator
Treatment of Credit Enhancement Provided by a Structure
CA-8.3.24
Exposures in a Shari'a-compliant credit enhancement structure (described in section CA-8.2) must be risk-weighted as shown in the following table.
Risk Weights Rating AAA to AA- A+ to A- BBB+ to BBB- BB+ to BB- B+ and below or Unrated Risk weight 20% 50% 100% 350% 1250% January 2015Treatment of Credit Risk Mitigation Received for Holdings of Securitisation Exposures
CA-8.3.25
The treatment in Paragraphs CA-8.3.26 to CA-8.2.30 applies to an
Islamic bank licensee that has obtained acredit risk mitigant to a securitisation exposure.Credit risk mitigants include guarantees, collateral and on-balance sheet netting or any other Shari'a-compliantcredit risk mitigation as recognised in Paragraph CA-4.7.21. Collateral in this context is that used to mitigate thecredit risk of a securitisation exposure, rather than the underlying exposures of the securitisation transaction, subject to fulfilling criteria in Paragraphs CA-8.2.5 and CA-8.2.6.January 2015Collateral
CA-8.3.26
Eligible collateral is limited to that recognised under Section CA-4.7. Collateral pledged by SPVs may be recognised.
January 2015Guarantees
CA-8.3.27
Credit protection provided by the entities listed in Paragraph CA-4.7.21 may be recognised. SPVs cannot be recognised as eligible guarantors. An
Islamic bank licensee must not recognise any support provided by itself.January 2015CA-8.3.28
Where guarantees fulfil the minimum operational conditions as specified in Paragraph CA-4.7.12,
Islamic bank licensees can take account of such credit protection in calculating capital requirements for securitisation exposures.January 2015Maturity Mismatches
CA-8.4 CA-8.4 Capital Requirements Where the Bank is the Originator, Issuer or Credit Enhancement Provider
Retained Securitisation Exposures
CA-8.4.1
An
Islamic bank licensee taking the role of an originator is required to hold regulatory capital against all of its retained securitisation exposures. Repurchased securitisation exposures must be treated as retained securitisation exposures.January 2015CA-8.4.2
The risk-weighted asset amount of a retained securitisation exposure is computed by multiplying the amount of the exposure by the appropriate risk weight in accordance with the table in CA-8.4.3.
January 2015CA-8.4.3
The following
credit risk weights are applied for retained securitisation exposures where theIslamic bank licensee is the originator.Long term rating45 Securitisation Exposure Re-securitisation Exposure AAA to AA- 20% 40% A+ to A- 50% 100% BBB+ to BBB- 100% 225% BB+ to BB- 350% 650% B+ and below or unrated 1,250% 1,250%
Short term rating Securitisation Exposure Re-securitisation Exposure A-1/P-1 20% 40% A-2/P-2 50% 100% A-3/P-3 100% 225% All other ratings or unrated 1,250% 1,250%
45 The rating designations used in the following tables are for illustrative purposes only and do not indicate any preference for, or endorsement of, any particular external assessment system.
January 2015Treatment of Off-Balance Sheet Exposures Where the Bank is the Credit Enhancer
CA-8.4.3A
When the
Islamic bank licensee provides credit protection to a securitisation exposure, it must calculate a capital requirement on the covered exposure as if it were an investor in that securitisation. If theIslamic bank licensee provides protection to a Sukuk issuance, it must treat the credit protection provided based on the risk of the underlying assets of the Sukuk as shown in Paragraph CA-8.4.3. If theIslamic bank licensee provides protection to a Sukuk issuance that has no legal transfer of assets, it must treat the credit protection provided based on the ECAI rating of the originator (as shown in the table in Paragraph CA-8.4.3).January 2015Treatment of Off-Balance Sheet Exposures — Liquidity Facilities and Credit Risk Mitigants Provided to Securitisations
CA-8.4.4
For off-balance sheet exposures arising from the provision of a liquidity facility,
Islamic bank licensees must apply a 100% credit conversion factor (CCF) and then risk-weight the resultant credit-equivalent amount as shown in table CA-8.4.3. For risk-based capital purposes,Islamic bank licensees must determine whether, subject to the criteria in Paragraph CA-8.4.4A, an off-balance sheet securitisation exposure qualifies as an 'eligible liquidity facility' or an 'eligible servicer cash advance facility', in which case a lower CCF may apply (see CA-8.4.4B and CA-8.4.5).January 2015CA-8.4.4A
Islamic bank licensees are permitted to treat off-balance sheet securitisation exposures as 'eligible liquidity facilities' if the following minimum requirements are satisfied:(a) The facility documentation must clearly identify and limit the circumstances under which it may be drawn. Draws under the facility must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements. In addition, the facility must not cover any losses incurred in the underlying pool of exposures prior to a draw, or be structured such that draw-down is certain (as indicated by regular or continuous draws);(b) The facility must be subject to an asset quality test that precludes it from being drawn to covercredit risk exposures that are past due by more than 90 days. In addition, if the exposures that a liquidity facility is required to fund are externally rated securities, the facility can only be used to fund securities that are externally rated investment grade at the time of funding; and(c) The facility cannot be drawn after all applicable (e.g. transaction-specific and programme-wide) credit enhancements from which the liquidity facility would benefit have been exhausted.January 2015CA-8.4.4B
Where the conditions in Paragraph CA8.4.4A are met, the
Islamic bank licensee may apply a 50% CCF to the eligible facility regardless of the maturity of the facility. However, if an external rating of the facility itself is used for risk-weighting the facility, a 100% CCF must be applied.January 2015CA-8.4.4C
Liquidity facilities in certain types of Sukuk structures are commitments from the facility provider to provide liquid funds if these are needed to meet contractual payments to Sukuk holders and there is a delay between the date of their collection and the date on which the payment to the Sukuk holders is due. The need for such facilities may result from a timing mismatch between cash collections from the underlying Sukuk assets (such as Ijara rentals) and the scheduled payments due under the programme to the Sukuk holders.
January 2015Treatment of Eligible Servicer Cash Advance Facility Provided to Securitisations
CA-8.4.5
An eligible servicer cash advance facility, based on Qard, is an advance granted by the servicer to the SPV to ensure timely payment to the investors46 — for instance, in cases of timing differences between collection and payments. However, it is a Shari'a requirement that such facilities remain essentially separate from the Sukuk undertaking and that this separation be properly documented. In the case of servicer cash advances, a risk weight of 50% is applied to such facilities.
46 It is, however, not permissible for the manager of Sukuk, whether the manager acts as Mudarib (investment manager), or Shank (partner) or Wakil (agent) for investment, to undertake to offer loans to Sukuk holders when actual earnings fall short of expected earnings. It is permissible, however, to establish a reserve account for the purpose of covering such shortfalls to the extent possible, provided the same is mentioned in the prospectus. It is not objectionable to distribute expected earnings, on account, or to obtain project financing on account of the Sukuk holders.
January 2015CA-9 CA-9 Real Estate Activities
CA-9.1 CA-9.1 Current Regulatory Environment of Real Estate Activities
CA-9.1.1
Islamic bank licensees often invest in real estate directly on their balance sheets, or as part of off-balance sheet asset management activities, or indirectly through a wholly or majority-owned subsidiary. Real estate lends itself as a permissible asset class, as Shari'a rules and principles allow such investment. However, there is a general concern that such investments may expose theIslamic bank licensees to the effects of cyclical real estate markets.January 2015CA-9.1.2
Owing to the risks outlined in Paragraph CA-9.1.1, real estate investment activities are suitable for an
Islamic bank licensee only on a very limited scale and under restrictive conditions designed to control the various risks posed to theIslamic bank licensee and its UPSIAs.Islamic bank licensees must demarcate clearly their real estate exposures into financing and investment categories. The CBB requires licensees to report real estate exposures to the CBB.January 2015Indirect Exposure in Real Estate
CA-9.1.3
Islamic bank licensees can engage in indirect real estate activities where real estate business is conducted by separate entities. Such exposure can take a number of forms. For example, anIslamic bank licensee can: (a) be involved in real estate activities through a joint venture or equity participation with a property development company; (b) establish a real estate subsidiary to carry out related commercial activities; or (c) accept real estate as collateral against its financing to thecustomers .January 2015Treatment of Real Estate Investment Exposures through Joint Venture or Equity Participation
CA-9.1.4
As mentioned in Subparagraph CA-3.6.11, an
Islamic bank licensee can enter into a private commercial enterprise to undertake a business venture (which can include real estate). There are two possible methods used to calculate equity exposures in this type of investment. According to the simple risk-weight method, the RW must be applied to the exposures (net of specific provisions) based on the treatment of equity exposures in the banking book. The applicable RW for such exposures must entail a 400% RW for investments in shares that are not publicly traded less any specific provisions for impairment. Alternatively, a 300% RW is applicable for investments in shares that are publicly traded less any specific provisions for impairment. If there is a third-party guarantee to make good impairment losses, the RW of the guarantor may be substituted for that of the assets for the amount of any such guarantee where the risk weight of the guarantor is lower, subject to the conditions for guarantees in Section CA-4.7 being fulfilled. In order to use the alternative slotting method for calculation of RWs, anIslamic bank licensee must seek the CBB's prior written approval and map its RWs into four supervisory categories as set out in Appendix CA-6.Amended: April 2016
Added: January 2015Treatment of Investment Exposures in Real Estate Subsidiaries of Banks
CA-9.1.5
From a capital adequacy perspective, where an
Islamic bank licensee has a subsidiary through which it carries out real estate investment, its investments in the capital of such a subsidiary must be treated in the same way as an investment in a non-banking commercial entity — that is, by application of a 800% RW for the investment if this amount is greater than 15% of its Total Capital. This RW will be applicable on the portion of the investment that exceeds the 15% threshold. The investment in real estate entities below the 15% level will be risk-weighted not lower than in Paragraph CA-9.1.4.January 2015Treatment of Real Estate Taken as Collateral
CA-9.1.6
If an
Islamic bank licensee accepts real estate as collateral, whether residential or commercial, from customers against its financing activities, the eligibility of such real estate as acredit risk mitigant will be subject to the provisions of Section CA-4.7 and subject to the risk-weighting of the concerned contract (see CA-3 for differing contract types). Moreover, anIslamic bank licensee is required to take the following steps when the collateral is in the form of real estate:(a) Any claim on collateral must be properly filed on a timely basis. Collateral interests must reflect a perfected lien; that is, appropriate steps are taken in relation to the real estate so that security interest of theIslamic bank licensee is effective against customer's default and/or third parties;(b) The collateral agreement and the underlying legal process must enable theIslamic bank licensee to have access to and to dispose of the collateral within a reasonable time frame;(c) The realisable value of the collateral (after deducting any haircuts) must be able adequately to cover the amount of financing;(d) The valuation must be performed at a minimum once every year, or more frequently if needed;(e) The real estate must be insured under a Takaful scheme, or another insurance arrangement subject to the Shari'a Supervisory Board's approval, against damage and deterioration;(f) Ongoing claims on property (such as tax) must be regularly monitored; and(g) Any risk of environmental liability arising from the property such as contamination in the soil, or of ground water, etc., must be taken into account.Amended: July 2019
January 2015Risk-Weighting of Real Estate Exposures
CA-9.1.7
The calculation of RWs for real estate financing and investment exposures is summarised below.
January 2015Real Estate Financing
CA-9.1.8
An
Islamic bank licensee can provide real estate financing on the basis of Ijara, IMB, diminishing Musharakah, Murabahah and Istisna. Except for operating Ijara, use of other contracts to provide real estate finance to customers will commonly fall in the category of financing. The RWs for these exposures must be calculated based on the Rules provided in the relevant Sections, as set out below:(a) IMB: Section CA-3.5;(b) Diminishing Musharakah: Sections CA-4.8;(c) Murabahah: Section CA-3.2;(d) Istisna: Section CA-3.4; and(e) For all the above contracts used to provide real estate financing, the RW of a debtor, counterparty or other obligor can be reduced and given preferential treatment if criteria mentioned in Section CA-4.2 are applicable.January 2015Real Estate Investment
CA-9.1.10
Islamic bank licensees are required to hold regulatory capital against all of their real estate investment exposures. The risk-weighted amount of a real estate investment exposure is computed by multiplying the amount of the carrying value by the appropriate risk weight.January 2015CA-9.1.11
The applicable risk weights of a single investment exposure for Murabahah, IMB and operating Ijarah are as follows:
(a) The treatment for a single investment exposure is a 200% RW;(b) The treatment for an exposure due to a holding for financing purposes during the non-binding stage of the transaction is a 200% RW; and(c) The treatment of an exposure resulting from operating Ijara is the risk weights as mentioned in Paragraph CA-3.5.21.January 2015CA-9.1.12
When
Islamic bank licensees are involved extensively in real estate investment activities, the CBB may impose a higher capital charge on a solo basis to cushion unexpected losses. Further, the CBB may increase the level of CCF in caseIslamic bank licensees are engaged in real estate as part of off-balance sheet asset management activities.January 2015Valuation of Real Estate Activities
CA-9.1.13
The measurement of risk exposures in real estate activities is dependent on sound and proper valuations as outlined in Chapter CM-2 of this Rulebook. The risks inherent in the real estate activities depend on a number of factors, including the type of property and the independent parties who will assess these activities.
Islamic bank licensees must have in place adequate valuation rules and proper valuation methodologies.January 2015CA-9.1.14
Islamic bank licensees must value their property activities on a consistent basis. Otherwise, there can be no level playing field for capital adequacy treatment. In the case of assets under Murabahah or Ijara/IMB transactions, theIslamic bank licensee must employ appropriate valuation to estimate the amount for which a property switches from investment to financing, or vice versa.January 2015CA-9.1.15
The valuation of an
Islamic bank licensee's real estate investments is subject to the rules in Module CM.Islamic bank licensees must have robust procedures to substantiate the results of valuations while comparing them with some independent information source such as property market reports or reliable publications.Islamic bank licensees should scrutinise any significant variations in these valuations and make any necessary rectifications.January 2015CA-10 CA-10 Leverage Ratio and Gearing Requirements
CA-10.1 CA-10.1 Rationale and Objective
Scope and Factors Leading to Leverage
CA-10.1.1
The requirements in this Chapter are applicable to
Bahraini Islamic bank licensees .Amended: October 2018
January 2015CA-10.1.2
The use of non-equity funds to fund assets is referred to as financial leverage. It allows a financial institution to increase the potential returns on its equity capital, with a concomitant increase in the riskiness of the equity capital and its exposure to losses since the non-equity funds are either not, or only partially risk-absorbent. Consequently, leverage is commonly accomplished through the use of borrowed funds, debt capital or Sharia compliant hedging instruments, etc. It is common for banks to engage in leverage by borrowing to acquire more assets, with the aim of increasing their return on equity. Similarly, the contingent exposure of the banks can expose them to risk of losses much greater than is observable on the balance sheet.
Added: October 2018CA-10.1.3
The leverage ratio serves as a supplementary measure to the risk-based capital requirements of the rest of this Module. The leverage ratio is a simple, transparent ratio and is intended to achieve the following objectives:
(a) To constrain the build-up of leverage in the banking sector, helping avoid destabilising deleveraging processes which can damage the broader financial system and the economy; and(b) To reinforce the risk based requirements with a simple, non-risk based "backstop" measure; and(c) To serve as a broad measure of both the on- and off-balance sheet sources of bank leverage and, thus its risk profile.Added: October 2018CA-10.2 CA-10.2 Definition, Calculation and Scope of the Leverage Ratio
Leverage Ratio Requirement and Computational Details
CA-10.2.1
Bahraini Islamic bank licensees must meet a 3% leverage ratio minimum requirement at all times, calculated on a consolidated basis.Added: October 2018CA-10.2.2
The leverage ratio is defined as follows: The Numerator of the leverage ratio is Tier 1 capital as defined in Paragraph CA-1.1.2. The Denominator is composed of self-financed exposures and adjusted exposures funded by URIAs (see Section CA-10.3). The leverage ratio is expressed as a percentage as follows:
Tier 1 Capital
{Self-financed exposures adjusted in CA-10.3
Plus
a [exposures funded by URIAs adjusted in CA-10.3
Less
PER and IRR of URIAs]}Added: October 2018CA-10.2.3
A proportion of assets financed by URIA must be included in the exposure calculation, whether considered on- or off-balance sheet by the
Bahraini Islamic bank licensee . The proportion of such assets is calculated by multiplying the relevant assets by the alpha parameter (30%) for capital adequacy purposes. Assets financed by restricted investment accounts are not included in the denominator of the leverage ratio.Added: October 2018CA-10.2.4
The leverage ratio framework follows the same scope of regulatory consolidation for Tier One Capital and Total Exposures as is used in CA-B.1.2A, except where a banking, financial, insurance or commercial entity is outside the scope of regulatory consolidation, only the investment in the capital of such entities (i.e. only the carrying value of the investment, as opposed to the underlying assets and other exposures of the investee) is to be included in the total exposures measure. However, investments in the capital of such entities that are deducted from Tier One Capital must also be deducted from the exposures measure for the purpose of the leverage ratio calculation.
Added: October 2018CA-10.2.5
Bahraini Islamic bank licensees identified as DSIBs must also meet a leverage ratio buffer requirement of 50% of HLA buffer (currently set at 1.5%), consistent with the capital measure required to meet the requirements of Module DS.Added: October 2018CA-10.3 CA-10.3 Exposure Measure
General Measurement Principles
CA-10.3.1
The calculation of total exposure for the leverage ratio must generally follow the accounting measures of exposures (i.e. as reported in the financial statements of the
Bahraini Islamic bank licensees ). All the on-balance sheet, non-derivative exposures must be included net of specific provisions and valuation adjustments (e.g. credit valuation adjustments). The impact of credit risk mitigation (including physical or financial collateral, guarantees, Urbun, Hamish Jiddiyah, etc.) must not be considered, and on-balance sheet exposures must not be adjusted for the purpose of calculating the total exposure (i.e. they must be unweighted). Netting of financing exposures against investment accounts/deposits is not allowed. Specific details on the treatment of on and off-balance sheet items in the calculation of total exposure are provided in this Section.Added: October 2018On-balance Sheet Items
CA-10.3.2
All the on-balance sheet items on the assets side of the
Bahraini Islamic bank licensee's balance sheet must be included. This includes all the Shari'a-compliant alternatives to repurchase transactions and securities financing transactions. AAOIFI accounting measures forBahraini Islamic bank licensees must be used for taking account of such transactions.13 For Shari'a-compliant hedging instruments, the accounting measure of the exposure must be used (i.e. unweighted and 100% C.C.F.). In addition, potential future exposures must be computed on an unweighted basis according to the Current Exposure Method, as delineated in Paragraph CA-4.5.16.
13 Unless there are no applicable AAOIFI accounting standards, in which case IFRS must be used.
Added: October 2018CA-10.3.3
Items (such as goodwill) that are deducted completely from Tier One Capital must be deducted from Total Exposures.
Added: October 2018CA-10.3.4
According to the treatment outlined in Paragraphs CA-2.4.20 to CA-2.4.24, where a financial entity is not included in the regulatory scope of consolidation in CA-B.1.2A, the amount of any investment in the capital of that entity that is totally or partially deducted from CET1 or from AT1 capital of the
Bahraini Islamic bank licensees following the corresponding deduction approach in Paragraphs CA-2.4.20 to CA-2.4.26 must be deducted from Total Exposures.Added: October 2018Off-balance Sheet Items (OBS)
CA-10.3.5
For the purpose of the leverage ratio, OBS items must be converted into credit exposure equivalents through the use of credit conversion factors (CCFs).
Added: October 2018CA-10.3.6
For the purpose of Paragraph CA-10.3.5, commitments include any contractual arrangement that has been offered by the bank and accepted by the client to extend credit, purchase assets or issue credit substitutes.
Added: October 2018CA-10.3.7
Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for financing and securities) and acceptances (including endorsements with the character of acceptances) receive a CCF of 100%.
Added: October 2018CA-10.3.8
The exposure amount associated with unsettled financial asset purchases where regular-way unsettled trades are accounted for at settlement date, a 100% CCF applies.
Added: October 2018CA-10.3.9
Forward asset purchases and partly paid shares and securities, which represent commitments with certain drawdown, will receive a CCF of 100%.
Added: October 2018CA-10.3.10
The following transaction-related contingent items — performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions, receive a CCF of 50%.
Added: October 2018CA-10.3.11
Note issuance facilities (NIFs), and revolving underwriting facilities (RUFs) receive a CCF of 50%.
Added: October 2018CA-10.3.12
A 40% CCF will be applied to commitments, regardless of the maturity of the underlying facility, unless they qualify for a lower CCF.
Added: October 2018CA-10.3.13
A 20% CCF will be applied to both the issuing and confirming banks of short-term14 self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralised by the underlying shipment).
14 That is, with a maturity below one year. For further details see Basel Committee on Banking Supervision, Treatment of trade finance under the Basel capital framework, October 2011, www.bis.org/publ/bcbs205.pdf.
Added: October 2018CA-10.3.14
A 10% CCF will be applied to commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness.
Added: October 2018CA-10.3.15
The CBB shall evaluate various factors in the jurisdiction, which may constrain banks' ability to cancel the commitment in practice, and consider applying a higher CCF to certain commitments as appropriate.
Added: October 2018CA-10.3.16
Where there is an undertaking to provide a commitment on an off-balance sheet item, banks are to apply the lower of the two applicable CCFs.15
15 For example, if a bank has a commitment to open short-term self-liquidating trade letters of credit arising from the movement of goods, a 20% CCF will be applied (instead of a 40% CCF); and if a bank has an unconditionally cancellable commitment to issue direct credit substitutes, a 10% CCF will be applied (instead of a 100% CCF).
Added: October 2018CA-10.3.17
All off-balance sheet securitisation exposures, except an eligible liquidity facility or an eligible servicer cash advance facility receive a CCF of 100% conversion factor. All eligible liquidity facilities receive a CCF of 50%. Undrawn servicer cash advances or facilities that are unconditionally cancellable without prior notice are eligible for a 10% CCF.
Added: October 2018CA-10.4 CA-10.4 Additional Supervisory Guidance
CA-10.4.1
A higher ratio may be required for any
Bahraini Islamic bank licensees if warranted by its risk profile or circumstances. The CBB may use stress testing as a complementing tool to adjust the leverage ratio requirement at the macro- and/or individualBahraini Islamic bank licensee -level.Added: October 2018CA-10.4.2
The leverage ratio can be used for both micro- and macro prudential surveillance; for example, as a macro prudential tool, a consistent leverage ratio can be applied for all
Bahraini Islamic bank licensees as an indicator for monitoring vulnerability. As a micro prudential tool, it can be used as a trigger for increased surveillance or capital requirements for specific licensees under the supervisory review process.Added: October 2018CA-10.5 CA-10.5 Transitional Arrangements
CA-10.5.1
Bahraini Islamic bank Licensees shall implement the requirements of this Module with effect from 30th June 2019. Quarterly reporting of leverage ratio to the CBB and in public disclosures shall commence with reference to the quarter ending on 30th June 2019.Added: October 2018CA-10.6 Gearing
CA-10.6.1
The content of this Section is applicable to all retail branches of foreign banks.
Added: July 2023Measurement
CA-10.6.2
The gearing ratio is measured as the ratio of deposit liabilities against the bank’s capital and reserves. Deposit liabilities includes ‘balances of banks and similar institutions’ (excluding deposits from head office), ‘current accounts for non-banks’ and ‘total unrestricted investment accounts’ as reported in Section A Balance Sheet of the PIRI. Capital and reserves refers to the aggregate amount of the capital items reported in Section A Balance Sheet of the PIRI i.e. ‘total capital liabilities’.
Added: July 2023Gearing Limit
CA-10.6.3
Deposit liabilities must not exceed 20 times the respective bank’s capital and reserves at all times (i.e. capital and reserves must be 5% or above of the deposit liabilities).
Added: July 2023RM RM Risk Management
RM-A RM-A Introduction
RM-A.1 RM-A.1 Purpose
Executive Summary
RM-A.1.1
This Module sets out principles of risk management for
Islamic bank licensees . Apart from a general requirement in RM-1.1.1 below, all other principles are grouped into six categories of risks, and are to be used as the basis forIslamic bank licensees ' risk management processes.January 2013Introduction
RM-A.1.2
This Module provides a set of guidelines of best practice for establishing and implementing effective risk management in
Islamic bank licensees . This Module follows the Guiding Principles included in the Islamic Financial Services Board (IFSB) (Risk Management Standard issued in December 2005) and risk management principles issued by the Basel committee.January 2013RM-A.1.3
This Module sets out fifteen principles of risk management that give practical effect to managing the risks underlying the business objectives that
Islamic bank licensees may adopt. The Module provides some examples of current practices, recognising that these practices may change as markets change and as technology, financial engineering and improved coordination between regulatory authorities makes other strategies available. However, the Module does not detail every possible control procedure.January 2013RM-A.1.4
The Module provides specific guidance and outlines a set of principles applicable to six categories of risk:
(a) Credit risk;(b) Equity investment risk;(c) Market risk;(d) Liquidity risk;(e) Rate of return risk; and(f) Operational risk .January 2013RM-A.1.5
The Central Bank of Bahrain ('the CBB') recognises that the specific risk management practices of each
Islamic bank licensee will vary in scope and content depending on its activities. AllIslamic bank licensees are expected to make meaningful risk assessments based on the principles described in this Module.January 2013RM-A.1.6
It is crucial for
Islamic bank licensees to recognise and evaluate the overlapping nature and transformation of risks that exist between and among the categories of the risks noted in Paragraph RM-A.1.4. In addition,Islamic bank licensees may face consequential business risks relating to developments in the external marketplace. Adverse changes inIslamic bank licensees markets, counterparties, or products as well as changes in the economic and political environments in whichIslamic bank licensees operate and the effects of different Shari a rulings are examples of business risk. These changes may affectIslamic bank licensees business plans, supporting systems and their financial position. In this regard,Islamic bank licensees are expected to view the management of these risks from a holistic perspective.January 2013RM-A.1.7
Islamic bank licensees are also exposed to reputational risk arising from failures in governance, business strategy and processes. Negative publicity about the concernedIslamic bank licensees business practices, particularly relating to Shari a non-compliance in products and services, could have an impact upon market position, profitability and liquidity.January 2013Legal Basis
RM-A.1.8
This Module contains the CBB s Directive (as amended from time to time) relating to risk management and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ( CBB Law ). The Directive in this Module is applicable to all
Islamic bank licensees (including theirapproved persons ).January 2013RM-A.1.9
For an explanation of the CBB s rule-making powers and different regulatory instruments, see section UG-1.1.
January 2013RM-A.2 RM-A.2 Module History
Evolution of the Module
RM-A.2.1
This Module was first issued in January 2013. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
January 2013RM-A.2.2
The most recent changes made to this Module are detailed in the table below:
January 2013Summary of Changes
Module Ref. Change Date Description of Changes RM-2.1.2,
RM-2.1.13,
RM-2.2.15,
RM-3.3.4, and
RM-7.2.404/2013 Minor corrections. RM-1.1.3 01/2020 Amended Paragraph on approval of the banks policies and procedures. RM-6.2.2. 01/2020 Amended Paragraph on approval of the banks policies and procedures. Amended: January 2020
Amended: April 2013
January 2013Superseded Requirements
RM-A.2.3
This Module does not replace any regulations or circulars in force prior to January 2013.
January 2013RM-B RM-B Scope of Application
RM-B.1 RM-B.1 License Categories
RM-B.1.1
This Module applies in full to all locally incorporated banks. Branches of foreign banks which are licensed in Bahrain must ensure that their policies and procedures are consistent with these requirements.
January 2013RM-1 RM-1 General Requirements
RM-1.1 RM-1.1 Risk Management
RM-1.1.1
Islamic bank licensees must have in place a comprehensive risk management and reporting process, including appropriate board and senior management oversight to identify, measure, monitor, report and control the categories of risk relevant to their business, and where appropriate, to hold adequate capital against these risks. The risk management function must have an appropriate standing and authority within the bank and must be actively involved at an early stage in elaborating the bank's risk strategy and in all material risk management decisions.January 2013RM-1.1.2
The above process should take into account appropriate steps to comply with Shari'a rules and principles, to ensure the adequacy of relevant risk reporting to the CBB.
January 2013RM-1.1.3
The Board must approve the risk management objectives, strategies and policies that are consistent with the
Islamic bank licensee's financial condition, risk profile and risk tolerance. The risk management objectives, strategies, policies and procedures must be stated in a set of formal risk management documents. The risk management documents must be communicated at all levels within theIslamic bank licensee involved in the implementation of risk management policies (see Sections HC-1.2, HC-9.2, CM-2.1 and CM-4.7 for more detailed rules and guidance).Amended: January 2020
January 2013RM-1.1.4
Islamic bank licensees must implement sound processes of risk identification, measurement, mitigation, monitoring, reporting and control. This process requires the implementation of appropriate policies, limits, procedures and effective management information system (MIS) for internal risk reporting and decision-making that are commensurate with the scope, complexity and nature of theIslamic bank licensee's activities.January 2013RM-1.1.5
Islamic bank licensees must implement an adequate control framework with effective checks and balances in compliance with CBB Rulebook requirements identified in this and other Modules and with the requirements of the CBB Law.January 2013RM-1.1.6
The Board must ensure that risk reporting to the CBB is made within the required deadlines and of high quality. In addition, to formal reporting requirements, the Board and senior management must be prepared to provide additional information to the CBB and stakeholders of the
Islamic bank licensee to identify emerging problems, including those giving rise to systemic risk issues.January 2013RM-1.1.7
The
Islamic bank licensee must make appropriate and timely disclosure of information to investment account holders (IAHs) to enable assessment of risks and rewards of investments, using AAOIFI auditing standards (see Paragraphs PD-1.3.32 — PD-1.3.35 for detailed disclosure requirements).January 2013RM-2 RM-2 Credit Risk
RM-2.1 RM-2.1 Definition and Profiles of Credit Risk
RM-2.1.1
Credit risk is generally defined as the potential that a counterparty fails to meet its obligations in accordance with agreed terms. This definition is applicable to
Islamic bank licensees managing the financing exposures of receivables and leases (for example, Murabahah, Diminishing Musharakah and Ijarah) and working capital financing transactions/projects (for example, Salam, Istisna` or Mudarabah1).Islamic bank licensees manage credit risks inherent in their financings and investment portfolios relating to default, downgrading and concentration. Credit risk includes the risk arising in the settlement and clearing of transactions.
1 In cases where Mudarabah is used in project finance, a licensee advances funds to a customer who acts as Mudarib in a construction contract for a third-party customer (ultimate customer). The ultimate customer, who has no direct or contractual relationship with the licensee, will make progress payments to the Mudarib who in turn makes payment to the licensee. The role of the licensee is to provide bridging finance on a profit-sharing basis to the Mudarib pending its receipt of the progress payments from the ultimate customer. The licensee is exposed to credit risk on the amounts advanced to the Mudarib.
January 2013RM-2.1.2
The following premises relate to the sound processes of credit risk management in an
Islamic bank licensee :(a) The role of banks can embrace those of financiers, suppliers, Mudarib and Musharakah partners.Islamic bank licensees should concern themselves with the risk of a counterparty's failure to meet his obligations in terms of receiving deferred payment and making or taking delivery of an asset. A failure could relate to a delay or default in payment, or in delivery of the subject matter of Salam or Parallel Istisna', entailing a potential loss of income and even capital for theIslamic bank licensee; (b) Due to the unique characteristics of each financing instrument, such as the non-binding nature of some contracts, the commencement stage involving credit risk varies. Therefore, credit risk should be assessed separately for each financing instrument to facilitate appropriate internal controls and risk management systems; and(c)Islamic bank licensees should consider other types of risks that give rise to credit risk. For example, during the contract life, the risk inherent in a Murabahah contract is transformed from market risk to credit risk. In another example, the invested capital in a Mudarabah or Musharakah contract will be transformed to debt in case of proven negligence or misconduct of the Mudarib or the Musharakah's managing partner.Amended: April 2013
January 2013RM-2.2 RM-2.2 Credit Strategy
RM-2.2.1
Islamic bank licensees must have in place a framework for credit risk management that includes identification, measurement, monitoring, reporting and control of credit risks. Adequate capital must be held against credit risks assumed.Islamic bank licensees must also comply with CBB rulebook requirements, regulations, resolutions and parts of the CBB Law applicable to their financing activities.January 2013RM-2.2.2
Islamic bank licensees must assess credit risk in a holistic manner and ensure that credit risk management forms a part of an integrated approach to the management of all financial risks.January 2013RM-2.2.3
Given the nature of Islamic financing instruments, the sources of credit risk may be the same as that of market or operational risks. For example, in a Salam contract, changes in market risk factors such as commodity prices, as well as the external environment (for example, bad weather) become key determinants affecting the likelihood of default.
January 2013RM-2.2.4
Islamic bank licensees must have in place:(a) An appropriate credit strategy document which includes pricing and tolerance for undertaking various credit risks;(b) A risk management structure with effective oversight of credit risk management: This includes credit policies and operational procedures including credit criteria and credit review processes, acceptable forms of risk mitigation, and limit setting;(c) An appropriate measurement and careful analysis of exposures, including market- and liquidity-sensitive exposures; and(d) A system:(i) To monitor the condition of ongoing individual credits to ensure the financings are made in accordance with theIslamic bank licensees ' policies and procedures;(ii) To manage problem credit situations according to an established remedial process; and(iii) To ensure adequate provisions are allocated in accordance with CBB requirements.January 2013RM-2.2.5
Islamic bank licensees must implement a credit strategy using various instruments in compliance with Shari a, whereby the credit strategy recognizes the potential credit exposures that may arise at different stages of the various financing agreements.January 2013RM-2.2.6
The Board must define and set the bank's overall levels of risk appetite, risk diversification and asset allocation strategies applicable to each Islamic financing instrument, economic activity, geographical spread, season, currency and tenor in the credit strategy document. The Board must be mindful of and take into account the permissible types of financing instruments available in different locations wherever the
Islamic bank licensee undertakes cross-border transactions. The Board must take into account seasonal aspects resulting from a shifting or termination of use of certain financing instruments, thus affecting the overall concentration exposures of theIslamic bank licensee's financing portfolio.January 2013RM-2.2.7
For example, the
Islamic bank licensee may offer Salam contracts during a certain season where a product can most likely be delivered and sold at maturity.January 2013RM-2.2.8
An
Islamic bank licensee's credit strategies must include a list of all types of applicable and approved transactions and financings that the bank is allowed to undertake. The approved list must include formal exclusions from any engagement by theIslamic bank licensee in certain prohibited industries, such as pork meat, alcohol, gambling, pornography etc. The approved list must be kept up to date and communicated to the relevant personnel within theIslamic bank licensee , and an internal compliance function must be organised and empowered to ensure that such rules are applied.January 2013RM-2.2.9
The Board should ensure that it is aware of the commencement of exposure to credit risk inherent in different financing instruments and in various jurisdictions when developing the strategy. The non-binding promise and legal enforcement aspects vary among market counterparties and customers or from one jurisdiction to another, which may give rise to operational risks and other risk management problems relating to Shari a compliance.
January 2013RM-2.2.10
When setting the level of risk appetite relating to counterparties, the Board must ensure that:
(a) The expected rate of return on a transaction is commensurate with the risks incurred;(b) Measures have been put in place to prevent excessive credit risk (at both individual and portfolio levels) and risk concentration (for example financing instruments, economic activity, geographical and sectoral spread); and(c) It considers the CBB's exposure limits for counterparties.January 2013RM-2.2.11
The risk management function must carry out a due diligence review in respect of counterparties prior to deciding on the choice of an appropriate Islamic financing instrument.
January 2013RM-2.2.12
Islamic bank licensees must establish policies and procedures defining eligible counterparties (retail/consumer, corporate or sovereign), the nature of approved financings and types of appropriate financing instruments. The risk management function must obtain sufficient information to permit a comprehensive assessment of the risk profile of the counterparty prior to the financing being granted.January 2013RM-2.2.13
Islamic bank licensees must have a policy for carrying out a due diligence process2 in evaluating counterparties, in particular, for transactions involving:(a) New ventures with multiple financing modes:Islamic bank licensees must carry out due diligence processes on customers or sovereigns using multiple financing modes to meet specific financial objectives designed to address Shari a, legal or tax issues of customers: and(b) Creditworthiness that may be influenced by external factors: Where significant investment risks are present in participatory instruments, especially in the case of Mudarabah financings, additional counterparty reviews and evaluations will focus on the business purpose, operational capability, enforcement and economic substance of the proposed project including the assessment of realistic forecasts of estimated future cash flows3. Risk mitigating structures must be put in place byIslamic bank licensees as far as possible.
2 The process may include Value at Risk, stress testing and sensitivity analysis, amongst others.
3 Please refer to Chapter RM-3 on Equity Investment Risk.
Amended: April 2013
January 2013RM-2.2.14
Islamic bank licensees must receive their Shari'a Supervisory Board Fatwa on all new financing proposals that have not been proposed before or amendments to existing contracts.Islamic bank licensees may also engage appropriate technical expert (for example an engineer) to evaluate the feasibility of a proposed new project and to assess and approve progress billings to be made under the contract.January 2013RM-2.2.15
In a financing involving several related agreements,
Islamic bank licensees need to be aware of the binding obligations arising in connection with credit risks associated with the underlying assets for each agreement. To be Shari a compliant, subject to the interpretation of its Shari a scholars, anIslamic bank licensee should ensure that all components of the financial structure are contractually independent, although these may be executed in a parallel manner despite their interrelated nature.January 2013RM-2.2.16
Islamic bank licensees must have in place appropriate methodologies for measuring and reporting the credit risk exposures arising under each Islamic financing instrument.January 2013RM-2.2.17
Islamic bank licensees must develop and implement appropriate risk measurement and reporting methodologies relevant to each Islamic financing instrument in respect of managing their counterparty risks, which may arise at different contract stages (including counterparty performance risk in Salam and Istisna' contracts). Depending on the Islamic financing instrument, theIslamic bank licensees must employ an appropriate methodology that takes into account the price volatilities of the underlying assets. The selected methodology must be appropriate given the nature, size and complexity of theIslamic bank licensee's credit related activities.Islamic bank licensees must ensure that adequate systems and resources are available to implement this methodology.January 2013RM-2.2.18
Islamic bank licensees must have in place Shari'a-compliant credit risk mitigating techniques appropriate for each Islamic financing instrument.January 2013RM-2.2.19
Islamic bank licensees must clearly define their credit risk-mitigating techniques including, but not limited to, having in place:(a) A methodology for setting mark-up rates according to the risk rating of the counterparties, where expected risks should have been taken into account in the pricing decisions;(b) Permissible and enforceable collateral4 and guarantees;(c) Clear documentation as to whether or not purchase orders are cancellable;5 and(d) Clear procedures for taking account of governing laws for contracts relating to financing transactions.
4
Islamic bank licensees are expected to include in their processes, an ongoing monitoring of quality and valuation of any collateral.5 In some jurisdictions, a purchase order backed by a promise to purchase would constitute a binding contract according to contract law and would be legally enforceable if adequately evidenced.
January 2013RM-2.2.20
Islamic bank licensees must establish limits on the degree of reliance and the enforceability of collateral and guarantees. They must protect themselves against legal impediments that may restrict the accessibility of collateral when they need to enforce their rights in respect of a debt.Islamic bank licensees must formally agree with the counterparty at the time of signing the contract on the usage, redemption and utilisation of collateral if the counterparty defaults in payment, and avoid over concentration on certain classes of collateral, such as real estate.January 2013RM-2.2.21
Islamic bank licensees must have policies to define adequately the action to be taken by theIslamic bank licensee when a customer cancels a non-binding purchase order. The policies must describe how theIslamic bank licensee :(a) Will monitor and control its exposures to suppliers, and especially during delivery between suppliers to theIslamic bank licensee where a customer is acting as an agent; and(b) Identify whether the risks associated with the assets will be borne by the supplier or the customer (which acts as agent and accepts the assets from the supplier)6.
6
Islamic bank licensees shall be mindful that the counterparty risk will not commence prior to execution of other contracts or before certain events take place. In the case of certain Murabahah transactions, the long period preceding the delivery of imported goods from abroad gives rise to other risks which may not all be covered by takaful or insurance.January 2013RM-2.2.22
With respect to Subparagraph RM-2.2.21, the
Islamic bank licensee may enter into a purchase contract with a supplier on a "sale or return" basis, with an option to return the purchased item within a specified period.January 2013RM-2.2.23
The risk management function must implement appropriate credit management systems and administrative procedures to undertake early remedial action in the case of financial distress of a counterparty or, in particular, for managing problem credits, potential and defaulting counterparties7. This system must be reviewed on a regular basis. Remedial actions must include both administrative and financial measures.
7 In certain jurisdictions, the Shari'a may differentiate between two kinds of defaulter; (a) the affluent or able (wilful defaulter or procrastinator); and (b) the insolvent defaulter who is unable to pay his debts due to reasons permitted by Shari'a, to determine whether a penalty can be imposed which should be disposed of.
January 2013RM-2.2.24
Administrative measures may inter alia include:
(a) Negotiating and following-up pro-actively with the counterparty through maintaining frequent contact with the counterparty;(b) Setting an allowable timeframe for payment or to offer debt-rescheduling or restructuring arrangements (without an increase in the amount of the debt);(c) Using a debt-collection agency;(d) Resorting to legal action, including the attachment of any credit balance belongs to defaulters according to the agreement between them; and(e) Making a claim under Shari'a-compliant insurance.January 2013RM-2.2.25
Financial measures may include, among others:
(a) Imposing penalties, the proceeds of which should be disposed of in charitable causes in compliance with Shari a decided by the bank s Shari a Supervisory Board; and(b) Establishing the enforceability of collateral or third party guarantees.January 2013RM-2.2.26
Islamic bank licensees must set appropriate measures for early settlements, which are permissible under Shari'a rules and principles for each Islamic financing instrument. These arrangements must be in line with CBB Rulebook requirements in Section CM-7.6.January 2013RM-2.2.27
With respect to early settlements referred to in Paragraph RM-2.2.26,
Islamic bank licensees may grant discretionary rebate, to their customers by reducing the amount of receivables in subsequent transactions, if they so wish.January 2013RM-2.2.28
Islamic bank licensees must assess and establish appropriate policies and procedures pertaining to the risks associated with their own exposures in parallel transactions.January 2013RM-2.2.29
For instance, in the case of an Istisna transaction, the
Islamic bank licensee enters into an Istisna contract as seller to provide manufactured goods or a building to a customer. TheIslamic bank licensee will then enter into another (parallel) Istisna contract as buyer with a supplier (manufacturer or builder), using the specifications drawn up for the original contract. If the supplier fails to deliver the manufactured goods or the building according to the agreed specifications, theIslamic bank licensee would equally be in default of its obligation. If necessary, a separate engineering department might be established or an outside expert should be engaged to evaluate, approve and monitor the technical aspects.Islamic bank licensees may also stipulate that the party to the first contract must inspect the manufactured goods or building from time to time during the production or construction process to satisfy themselves that the specifications are being met.January 2013RM-2.2.30
Islamic bank licensees must establish appropriate policies and procedures that require them to honour their commitment to the parallel contract counterparty. In certain countries, where parallel contract is necessary to be transacted with the first Salam contract in order to mitigate market risk exposures, there must be no legal linkages between the two contracts.January 2013RM-2.2.31
Islamic bank licensees must implement a system to ascertain and fulfil their obligations in respect of leased assets, which are permanently impaired through no default of the lessee. In case of such impairment,Islamic bank licensees must provide the lessee with a replacement asset with similar specifications, if such specifications were agreed upon, or if the contract was renewed, or to refund the additional amounts (capital payments) included in the Ijarah Muntahia Bittamleek (IMB) lease rentals as compared with those in an operating Ijarah.Islamic bank licensees must establish appropriate risk management policies to mitigate losses arising from such damage during the term of the lease.January 2013RM-2.2.32
Islamic bank licensees must ensure, whenever possible, that there is sufficient Shari'a-compliant insurance coverage of the value of the assets, subject to availability. If necessary,Islamic bank licensees must engage an insurance advisor at an early stage to review the insurance coverage of the leased assets.January 2013RM-2.2.33
If a loss arises from negligence by the lessee,
Islamic bank licensees are permitted to claim compensation from the lessee. TheIslamic bank licensee (as lessor) bears the risks associated with the leased assets and cannot use a lessee's guarantees to recover the amount of the losses on the leased assets (unless these are due to misconduct, negligence or breach of contract on the part of the lessee).January 2013RM-2.2.34
Islamic bank licensees must implement an appropriate policy for determining and allocating provisions for non-performing credit facilities including counterparty exposures (See CM-3 for more details).January 2013RM-3 RM-3 Equity Investment Risk
RM-3.1 RM-3.1 Background
RM-3.1.1
This Chapter sets out the principles and rules pertaining to the management of risks inherent in the holding of equity instruments for investment purposes. In particular, for
Islamic bank licensees , the relevant instruments are typically those based on the Mudarabah and Musharakah contracts. This Chapter focuses on such instruments. The risks entailed by holding equity instruments for trading or liquidity purposes are dealt with under market risk in Chapter RM-4. While investments made via Mudarabah and Musharakah instruments may contribute substantially toIslamic bank licensees ' earnings, they entail significant market, liquidity, credit8 and other risks, potentially giving rise to volatility in earnings and capital.
8 One example of credit risk exposure arises from the Mudarib's obligation to pay the agreed share of profit to the
Islamic bank licensee as Rabb al-mal when such payment falls due. Failure to meet this obligation constitutes a case of misconduct and negligence in the part of the Mudarib.January 2013RM-3.1.2
The capital invested through Mudarabah and Musharakah may be used to purchase shares in a publicly traded company or privately held equity or invested in a specific project, portfolio or through a pooled investment vehicle. In the case of a specific project,
Islamic bank licensees may invest at different investment stages.January 2013RM-3.1.3
One distinct difference between Mudarabah and Musharakah financings is in terms of
Islamic bank licensee's involvement in the investments during the contract period. In Mudarabah, theIslamic bank licensee invests its money as a silent partner and, the management is the exclusive responsibility of the other party, namely the Mudarib. In contrast, in Musharakah financing theIslamic bank licensee invests funds with partners, and theIslamic bank licensee may be a silent partner, or may participate in management. Regardless of the authority under which the profit sharing instruments are used, both Musharakah and Mudarabah are profit-sharing financings, under which the capital invested by the provider of finance does not constitute a fixed return, but is explicitly exposed to impairment in the event of losses (capital impairment risk).January 2013RM-3.2 RM-3.2 Definition and Profiles of Equity Investment Risk
RM-3.2.1
The type of equity investment risk dealt with in this Chapter may be broadly defined as the risk arising from entering into a partnership for the purpose of undertaking or participating in a particular financing or general business activity as described in the contract, and in which the provider of finance shares in the business risk.
January 2013RM-3.2.2
The characteristics of such equity investments include considerations as to the quality of the partner, underlying business activities and ongoing operational matters. By nature, this type of equity investment is exposed to a confluence of risks associated with Mudarib or Musharakah partner, business activity and operations.
January 2013RM-3.2.3
In evaluating the risk of an investment using the profit sharing instruments of Mudarabah or Musharakah, the risk profiles of potential partners (Mudarib or Musharakah partner) are crucial considerations for the undertaking of due diligence. Such due diligence is essential to the fulfilment of an
Islamic bank licensee's fiduciary responsibilities as an investor of IAH funds on a profit-sharing and loss-bearing basis (Mudarabah) or a profit and loss sharing basis (Musharakah). These risk profiles include the past record of the management team and quality of the business plan of, and human resources involved in, the proposed Mudarabah or Musharakah activity.January 2013RM-3.2.4
Factors relating to the legal and regulatory environment affect equity investment performance, and need to be considered in the risk evaluation. These factors include policies pertaining to tariffs, quotas, taxation or subsidies and any sudden policy changes affecting the quality and viability of an investment.
January 2013RM-3.2.5
Islamic bank licensees are exposed to the risks attaching to a lack of reliable information on which to base their investment appraisals, such as an inadequate financial control system. The mitigation of these risks may require the investor to take an active role in monitoring the investment, or the use of specific risk mitigating structures.January 2013RM-3.2.6
Although timely allocation of profit can be agreed upfront,
Islamic bank licensees should be prepared for delays and variations in cash flow patterns and possible difficulties in executing a successful exit strategy.January 2013RM-3.2.7
The risks arising from the use of profit sharing instruments for financing purposes do not include credit risk in the conventional sense, but share a crucial characteristic of credit risk because of the risk of capital impairment.
January 2013RM-3.3 RM-3.3 Operational Considerations
RM-3.3.1
Islamic bank licensees must implement appropriate strategies, risk management and reporting processes in respect of the risk characteristics of equity investments, including Mudarabah and Musharakah investments.January 2013RM-3.3.2
Islamic bank licensees must define and set the objectives of, and criteria for, investments using profit sharing instruments, including the types of investment, tolerance for risk, expected returns and desired holding periods.Islamic bank licensees must define their investments exit strategy (see paragraphs RM-3.3.14–16 for more details).January 2013RM-3.3.3
For purposes of Paragraph RM-3.3.2, a Musharakah structure may contain an option for redemption whereby the
Islamic bank licensee as financier has a contractual right to require its partner periodically to purchase, under a separate contract, a proportion of theIslamic bank licensee's share in the investment at net asset value or, if the contract so specifies on some agreed basis (Diminishing Musharakah).January 2013RM-3.3.4
Islamic bank licensees must implement and keep under review, policies, procedures and an appropriate management structure for evaluating and managing the risks involved in the acquisition of, holding and exiting from profit sharing investments.Islamic bank licensees must ensure proper infrastructure and capacity are in place to monitor continuously the performance and operations of the entity in which anIslamic bank licensee invests as partner. These must include evaluation of Shari'a compliance, adequate financial reporting by, and periodical meetings with, partners and proper recordkeeping of these meetings.Amended: April 2013
January 2013RM-3.3.5
Islamic bank licensees must identify and monitor the transformation of risks at various stages of investment lifecycles, for example, where the investee's business involves innovative or new products and services in the marketplace.Islamic bank licensees that employ different financing instruments (where one of which include Musharakah) at different contract stages must have appropriate procedures and controls in place, as different stages may give rise to different risks.January 2013RM-3.3.6
Islamic bank licensees must analyse and determine possible factors affecting the expected volume and timing of cash flows for both returns and capital gains arising from equity investments.January 2013RM-3.3.7
Islamic bank licensees should use, if applicable, Shari'a compliant risk-mitigating techniques, both financial and non-financial in nature, to reduce the impact of possible capital impairment of an investment.January 2013RM-3.3.8
Islamic bank licensees must ensure that their valuation methodologies are appropriate and consistent, and assess the potential impacts of their methods on profit calculations and allocations. The methods must be mutually agreed between theIslamic bank licensees and the Mudarib and/or Musharakah partners.January 2013RM-3.3.9
Islamic bank licensees must agree with the Mudarib and/or Musharakah partners before entering into any agreement, on the appropriate valuation methods and periods for which the profit is to be calculated and allocated taking into account market practices and liquidity features.January 2013RM-3.3.10
Valuation and accounting play an important role in measuring the quality of an equity investment, especially in a privately held entity, for which independent price quotations are not always available nor sufficient in volume to provide a basis for meaningful liquidity or market valuation. An appropriate and agreed method to be applied to determine the profit of the investment can be in the form of a certain percentage of either gross or net profit earned by the Mudarabah or Musharakah business, or any other mutually agreed terms.
January 2013RM-3.3.11
In the case of a change of the partnership's shares in a Musharakah (for example in a Diminishing Musharakah), the shares changing hands must be valued at fair value.
January 2013RM-3.3.12
Islamic bank licensees must assess and take measures to deal with the risks associated with potential manipulation of reported results leading to overstatements or understatements of partnership earnings. Reported earnings can be either gross or net. If for some reason the practices of smoothing profits over accounting periods and the establishment of escrow accounts to hold certain profit portions during the life of an equity investment are recognised and agreed by all the investing parties, theIslamic bank licensee must incorporate their potential impact in theIslamic bank licensee's overall earnings.January 2013RM-3.3.13
Islamic bank licensees may agree with the Mudarib and/or Musharakah partners to engage independent parties where necessary to carry out audits and valuations of the investments. Provided these are properly executed and completed, these measures will help to ensure transparency and objectivity in valuation and in the distribution of profits and the determination of amounts to be redeemed.January 2013RM-3.3.14
Islamic bank licensees must define and establish the exit strategies in respect of their equity investment activities prior to commitment, including extension and redemption conditions for Mudarabah and Musharakah investments, subject to the approval of theIslamic bank licensee's Shari'a Board.January 2013RM-3.3.15
Islamic bank licensees must establish the criteria for exit strategies, including the redemption of equity investments and the divestiture of under-performing investments.January 2013RM-3.3.16
The criteria may include alternative exit routes and the timing of exit. In case of losses where improved business prospects exist,
Islamic bank licensees may indicate an investment extension period.Islamic bank licensees ' expectations should be based on their assessment that there are plausible grounds for believing that there will be a business turnaround during the period resulting in the view that the investment will, in a defined time period, recover and yield profits.January 2013RM-3.3.17
Islamic bank licensees must recognise that, as a going concern, an investee may not always have the liquidity necessary to enable making profit distributions. Hence,Islamic bank licensees must agree with the investment partner the methods for the treatment of retained profits by the investee.January 2013RM-4 RM-4 Market Risk
RM-4.1 RM-4.1 Market Risk
RM-4.1.1
This Chapter sets out principles in respect of market risk, which refer to the potential impact of adverse price movements such as benchmark rates, foreign exchange (FX) rates, equity prices and commodity prices, on the economic value of an asset. Market risk exposures may occur at certain times or throughout the contract.
January 2013RM-4.2 RM-4.2 Definition and Profiles of Market Risk
RM-4.2.1
For the purpose of this Module, market risk is defined as the risk of losses in on-and off-balance sheet positions arising from movements in market prices i.e. fluctuations in values in tradable, marketable or leaseable assets (including sukuk) and in off-balance sheet individual portfolios (for example Collective Investment Undertakings). The risks relate to the current and future volatility of market values of specific assets (for example, the commodity price of a Salam asset, the market value of a sukuk, the market value of Murabaha assets purchased to be delivered over a specific period) and of foreign exchange rates. Market risk capital requirements are outlined in paragraph CA-1.1.4.
January 2013RM-4.2.2
In operating Ijarah, a lessor is exposed to market risk on the residual value of the leased asset at the maturity of the lease or if the lessee defaults or exercises early termination rights during the contract. In IMB, a lessor is exposed to market risk on the carrying value of the leased asset (as collateral) in the event that the lessee defaults on the lease obligations.
January 2013RM-4.2.3
In Salam,
Islamic bank licensees are exposed to commodity price fluctuations on a long position after entering into a contract and while holding the subject matter until it is disposed of. In the case of parallel Salam, there is also the risk that a failure of delivery of the subject matter would leave theIslamic bank licensee exposed to commodity price risk as a result of the need to purchase a similar asset in the spot market in order to honour the parallel Salam contract.January 2013RM-4.2.4
When
Islamic bank licensees are involved in buying assets that are not actively traded with the intention of selling them, it is important to analyse and assess the factors attributable to changes in liquidity of the markets in which the assets are traded and which give rise to greater market risk. Assets traded in illiquid markets may not be realisable at prices quoted in other more active markets.January 2013RM-4.2.5
Islamic bank licensees are also exposed to foreign exchange fluctuations arising from general FX spot rate changes in both cross-border transactions and the resultant foreign currency receivables and payables. These exposures may be hedged using Shari a compliant methods.January 2013RM-4.3 RM-4.3 Operational Considerations
RM-4.3.1
Islamic bank licensees must implement an appropriate framework for market risk management (including reporting) in respect of all related assets held, including those that do not have a ready market and/or are exposed to high price volatility.January 2013RM-4.3.2
The Board must develop a market risk strategy including the level of acceptable market risk appetite taking into account contractual agreements with fund providers, types of risk-taking activities and target markets in order to maximise returns while keeping exposures at or below the pre-determined levels. The strategy must be reviewed periodically by the Board, communicated to relevant staff and disclosed to fund providers.
January 2013RM-4.3.3
Islamic bank licensees must establish an appropriate sound and comprehensive market risk management process and information system, which (among others) comprise:(a) A conceptual framework to assist in identifying underlying market risks;(b) Guidelines governing risk taking activities in different portfolios of assets financed by investments accounts and portfolios of Collective Investment Undertakings and their market risk limits;(c) Appropriate frameworks for pricing, valuation and income recognition; and(d) A strong MIS for controlling, monitoring and reporting market risk exposure and performance to appropriate levels of senior management.Given that all the required measures are in place (e.g. pricing, valuation and income recognition frameworks, strong MIS for managing exposures, etc.), the applicability of any market risk management framework that has been developed must be assessed taking into account consequential business and reputation risks.
January 2013RM-4.3.4
Islamic bank licensees must be able to quantify market risk exposures and assess exposure to the probability of future losses in their net open asset positions.January 2013RM-4.3.5
The risk exposures in investment securities are similar to the risks faced by conventional financial intermediaries, namely market price, liquidity, foreign exchange rates and credit risk. In this regard,
Islamic bank licensees must ensure that their strategy includes the definition of their risk appetite for these tradable assets and that this risk appetite is adequately supported by capital held for that purpose.January 2013RM-4.3.6
In the valuation of assets where no direct market prices are available,
Islamic bank licensees must incorporate in their own product programme a detailed approach to valuing their market risk positions.January 2013RM-4.3.7
Islamic bank licensees may employ appropriate forecasting techniques agreed with their external auditor to assess the potential value of these assets.January 2013RM-4.3.8
Where available valuation methodologies are deficient,
Islamic bank licensees must assess the need to:(a) Allocate funds to cover risks resulting from illiquidity, new assets and uncertainty in assumptions underlying valuation and realisation; and(b) Establish a contractual agreement with the counterparty specifying the methods to be used in valuing the assets.9
9 It should be noted that similar arrangements are suggested to mitigate contract cancellation, which is explained under RM-2 Credit Risk.
January 2013Collective Investment Undertakings (CIUs)
RM-4.3.9
Islamic bank licensees have a fiduciary duty to apply the same risk management policies and procedures to assets held on behalf of investors in CIUs as they do for assets held on behalf of shareholders and unrestricted IAH.January 2013RM-4.3.10
Where
Islamic bank licensees play the role of market maker to CIUs, this gives rise to liquidity risk, which should be managed according to appropriate procedures as set out in Chapter RM-5January 2013RM-5 RM-5 Liquidity Risk
RM-5.1 RM-5.1 Liquidity Risk
RM-5.1.1
This Chapter sets out guidance pertaining to liquidity risks, which highlights the key elements for effective liquidity management within the scope of
Islamic bank licensees' exposures.Islamic bank licensees solicit and attract various sources of funds to channel to their financing and investment activities.Islamic bank licensees may have various kinds of obligations, such as requirements to repay current account holders on demand, to provide committed funds in Musharakah transactions, and to make available cash flows for expenses or profit payments.January 2013RM-5.2 RM-5.2 Definition and Profiles of Liquidity Risk
RM-5.2.1
Liquidity risk is the potential loss to
Islamic bank licensees arising from their inability either to meet their obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses.January 2013Profiles of Fund Providers
RM-5.2.2
There are two major types of fund providers:
(a) Current account holders; and(b) Unrestricted IAH.These account holders require a degree of liquidity to be maintained by the
Islamic bank licensees to meet their requirements for withdrawals. Subject to contractual conditions, investors in CIUs (while not on-balance sheet fund providers) may also give rise to liquidity management considerations, in so far asIslamic bank licensees may need to replace funds withdrawn by an investor pending realisation of the related assets.January 2013RM-5.2.3
As current account holders do not participate in the profits of the
Islamic bank licensees ' business activities, a sound repayment capacity is required to meet fully cash withdrawal requests as and when they arise.January 2013RM-5.2.4
Some
Islamic bank licensees may rely heavily on funds provided by current account holders. Repayment by theIslamic bank licensees of the principal amounts deposited by current account holders is guaranteed without any rights to share in profits, as the current account holders do not share in the risks of theIslamic bank licensees .January 2013RM-5.2.5
Unrestricted IAH are investors who participate in the uncertainties of an
Islamic bank licensee's business; therefore, they share in profits and bear losses arising from investments made on their behalf, to the extent of their share. Apart from general withdrawal needs, the withdrawals made by IAH may be the result of:(a) Lower than expected or acceptable rates of return;(b) Concerns about the financial condition of theIslamic bank licensees ; and(c) Non-compliance by theIslamic bank licensees with Shari'a rules and principles in various contracts and activities.January 2013RM-5.2.6
Where the principle of Mudarabah is employed to source the funds, from an asset-liability management perspective,
Islamic bank licensees may be viewed as being hedged to the extent that the IAH bears the risks of the assets in which its funds are invested. This statement is true only if the Mudarib has acted in accordance with its fiduciary duties under the Mudarabah contracts and without misconduct or negligence.January 2013RM-5.2.7
IAH do not share in the risks on assets financed by current accounts, which are borne by shareholders alone.
January 2013RM-5.2.8
As fiduciary agents,
Islamic bank licensees are concerned with matching their investment policies with IAH and shareholders' risk appetites. If these investment policies are not consistent with the expectations and risk appetites of IAH, the latter may withdraw their funds leading to a liquidity crisis for theIslamic bank licensees .January 2013RM-5.3 RM-5.3 Operational Considerations
RM-5.3.1
Islamic bank licensees must implement a liquidity management framework (including reporting) taking into account both separately and on an overall basis their liquidity exposures in respect of each category of current accounts, unrestricted and restricted investment accounts.January 2013Liquidity Management Policy
RM-5.3.2
Islamic bank licensees must maintain adequate liquidity to meet their obligations at all times. In this regard and taking into consideration the nature of theIslamic bank licensees , its business activities and its capital market environment, theIslamic bank licensees must have in place liquidity management policies, which must be reviewed periodically by the Board, covering:(a) Strategy for managing liquidity involving effective board of directors (BOD) and senior management oversight;(b) A framework for developing and implementing sound processes for measuring and monitoring liquidity;(c) Adequate systems in place for monitoring and reporting liquidity exposures on a periodic basis;(d) Adequate funding capacity, with particular reference to the board s assessment of the willingness, ability and likely support of shareholders to provide additional capital when necessary;(e) Access to liquidity through fixed asset realizations and arrangements such as sale and lease-back; and(f) Liquidity crisis management.January 2013RM-5.3.3
The policies should incorporate both quantitative and qualitative factors. Quantitative factors include the extent of diversity and sources of funds, mismatches of liabilities and assets concentration of the funding base, reliance on marketable assets, or availability of standby lines of external funding. Qualitative factors include assessing the general ability of the management, the particular skills in treasury management and public relations, the quality of MIS,
Islamic bank licensees' reputation in the market, the willingness and ability of shareholders to provide additional capital and, in the case of a branch or subsidiary the willingness and ability of the head office or parent to provide liquidity.January 2013RM-5.3.4
Since liquidity infrastructures vary from country to country, the
Islamic bank licensees operating across jurisdictions are expected to adhere to local requirements for liquidity management. In this regard,Islamic bank licensees which are part of a group should normally be expected to be able to stand alone, and thus, to monitor and manage their own liquidity separately. However, with the agreement of the CBB, branches of foreign banks operating in Bahrain may take into account the assurance of liquidity provision by head office to the Bahrain branch.January 2013Measuring and Monitoring Liquidity
RM-5.3.5
Islamic bank licensees must identify any future shortfalls in liquidity by constructing maturity ladders based on appropriate time bands, including those specified by the CBB in Module LM. TheIslamic bank licensees may have their own criteria for classifying cash flows, including behavioral methods, and may consider differentiating the types of cash flows as indicated below:(a) Known cash flows — the maturities and the amounts are known in advance. This category includes contractual receivables from Murabaha, Ijara, IMB receivables and Diminishing Musharakah;(b) Conditional but predictable cash flows (Salam and Istisna') — conditionality is defined in terms of the type of contract or performance of work based on the agreed terms and conditions over an agreed period; or(c) Conditional and unpredictable cash flows — in some cases, an investment in a Musharakah is for an open-ended period and an exit strategy may be assessed periodically. The redemption of invested capital and possible levels of return on investment is conditional upon the performance of the activities.January 2013RM-5.3.6
When calculating net funding requirements (NFR), a substantial influence on the liquidity situation of an
Islamic bank licensee relates to the management of IAHs' expectations. While the basis of an NFR calculation is to assume that the funds are repaid at the contractual maturity date, it may not be realistic to assume that all IAHs will maintain their funds at theIslamic bank licensee until maturity. Therefore, an internal assessment of their expectations and incentives will be part of an NFR calculation.January 2013RM-5.3.7
Due to
Islamic bank licensees' dual role in meeting their obligations to current account holders and managing the expectations of their IAHs,Islamic bank licensees must make periodical cash flow analyses under various market scenarios and conditions.January 2013RM-5.3.8
The scenarios may vary, depending on local market conditions, and may be based on:
(a) A "normal" operating environment (for example a steady state condition); and(b) Scenarios of adverse (stressed) circumstances (for example non-linear events and chaotic conditions). For example:(i) The analysis should include assumptions about the repayment of invested capital to the IAH. In the event of investment losses, the extent to which the losses will be mitigated by the use of the IRR needs to be considered;(ii) The scenarios should be based on relevant assumptions based on factors affecting theIslamic bank licensee's on- and off-balance sheet exposures. Liquidity levels and early withdrawal profiles computed under these scenarios will be back-tested periodically to validate the underlying assumptions of the measurement process; and(iii) In analyses based on behavioral assumptions and scenarios, Islamic bank licensees should assess and apply the liquidity measures that reflect the specificities of each portfolio. In the case of certain market practices,Islamic bank licensees may have different types of portfolios (i.e. CIUs that are treated as off-balance sheet items). The size and characteristics of the assets, whichIslamic bank licensees hold in relation to the investment portfolios financing CIUs, will determine their specific liquidity profiles.January 2013RM-5.3.9
Islamic bank licensees must establish the maximum amounts of cumulative liquidity mismatches which they consider acceptable (subject to the requirements of Module LM) and manageable for different time bands, as a percentage of total funds available. Assets must be clearly segregated according to sources of funds, andIslamic bank licensees must monitor their liquidity exposures separately according to the nature and mix of their fund providers — current account holder and unrestricted IAH, which can be expected to vary substantially. The effects of liquidity shortages may vary according to the fund providers' liquidity preferences; hence, separate limits on liquidity mismatches must be set up accordingly. These limits must be regularly reviewed, taking into account theIslamic bank licensee's liquidity situation, economic climate and market conditions.January 2013Liquidity Risk Mitigation
RM-5.3.10
Islamic bank licensees may only assume liquidity risk commensurate with their ability to have sufficient recourse to Shari'a-compliant funds to mitigate such risk.January 2013RM-5.3.11
Islamic bank licensees must assess the necessity and extent of their access to available funding sources. In managing their liquidity,Islamic bank licensees have the following possible funding sources — natural cash flows arising from their usual banking activities, the realization of tradable invested assets, asset securitization, and their capacity to access shareholders' and/or head office funds.January 2013RM-5.3.12
Islamic bank licensees ' liquidity management policies must include some form of orderly liquidation procedures, to avoid having to liquidate assets at unfavorable prices, resulting in the erosion of the IAH capital and damage to theIslamic bank licensees ' reputation and viability.January 2013RM-5.3.13
Islamic bank licensees must have a liquidity contingency plan addressing various stages of a liquidity crisis.Islamic bank licensees must define the classification of the various stages of a liquidity crisis.January 2013RM-5.3.14
For purposes of Paragraph RM-5.3.13,
Islamic bank licensees may consider differentiating the stages of a liquidity crisis as follows:(a) Identification of a liquidity gap or a situation which acts as a triggering event where withdrawals do not follow predictable patterns when, for example, theIslamic bank licensees suffers an institutional rating downgrade;(b) A need to liquidate assets or investments in an orderly manner to meet such a liquidity gap or situation; and(c) Emergency measures to be taken in the event that the previous steps fail to meet the liquidity gap adequately.January 2013RM-5.3.15
Where appropriate,
Islamic bank licensees should include in their contingency plans the following factors and define appropriate action points at each stage:(a) Holdings of tradable high quality liquid assets, which may be readily disposed of in sizeable amounts in deep markets taking into account the likelihood that it will not be possible to realize full book value;(b) Profile of other assets and the degree of liquidity of these assets;(c) Assessment of Shari'a-compliant and available funding products in the market including possible cooperation agreements with either otherIslamic bank licensees or conventional institutions on an interest-free basis for accessing temporary funding, or sale and leaseback arrangements for longer term funding;(d) Establishment of a crisis management team or personnel responsible for taking actions at different stages of the liquidity crisis; and(e) Notification procedures for communication withIslamic bank licensees ' head office and/or supervisory authorities.January 2013RM-5.3.16
However, to the extent that
Islamic bank licensees intend to rely on the types of cooperation agreements mentioned above, they need to ensure that willing and committed counterparties will exist for such arrangements.January 2013RM-6 RM-6 Rate of Return Risk
RM-6.1 RM-6.1 Rate of Return Risk
RM-6.1.1
This Chapter sets out principles in respect of rate of return risks. The rate of return risk is generally associated with overall balance sheet exposures where mismatches arise between assets and balances from fund providers.
January 2013RM-6.1.2
Since
Islamic bank licensees ' responsibility is to manage their IAHs' expectations and their liabilities to current account holders, the rate of return risk is a strategic risk issue forming part ofIslamic bank licensees ' balance sheet risk management.January 2013RM-6.2 RM-6.2 Definition and Profiles of Rate of Return Risk
RM-6.2.1
Islamic bank licensees are exposed to rate of return risk in the context of their overall balance sheet exposures. An increase in benchmark rates may result in IAHs' having expectations of a higher rate of return. Rate of return risk differs from interest rate risk in thatIslamic bank licensees managing Shari'a-compliant products are concerned with the result of their investment activities at the end of the investment-holding period. Such results cannot be pre-determined exactly.January 2013RM-6.2.2
A consequence of rate of return risk may be displaced commercial risk.
Islamic bank licensees may be under market pressure to pay a return that exceeds the rate that has been earned on assets financed by IAHs when the return on assets is under-performing as compared with competitors' rates.Islamic bank licensees may decide to waive their rights to part or their entire Mudarib share of profits in order to satisfy and retain their fund providers and dissuade them from withdrawing their funds. Displaced commercial risk derives from competitive pressures onIslamic bank licensees to attract and retain investors (fund providers). The decision ofIslamic bank licensees to waive their rights to part or all of their Mudarib share in profits in favour of IAHs is a commercial decision, the basis for which needs to be subject to clear and well defined policies approved by theIslamic bank licensee's BOD.Amended: January 2020
January 2013RM-6.2.3
A Profit Equalisation Reserve (PER) is the amount appropriated by
Islamic bank licensees out of their gross income, before allocating the Mudarib share, in order to maintain a certain level of return on investment for IAHs and increase owners' equity. The basis for computing the amounts to be so appropriated should be predefined and applied in accordance with the contractual conditions accepted by the IAH and after formal review and approval by theIslamic bank licensees ' BOD.January 2013RM-6.2.4
An Investment Risk Reserve (IRR) is the amount appropriated by
Islamic bank licensees out of income of IAHs, after allocating the Mudarib share, in order to cushion the effects of the risk of future investment losses on IAHs. The terms and conditions whereby IRR can be set aside and utilised should be determined and approved by the BOD.January 2013RM-6.2.5
The CBB does not set any required minimum levels of appropriation or balances of PER and IRR relative to IAHs funds. It recommends that
Islamic bank licensees pay due regard to relevant IFSB Guidance Notes and Standards in relation to PER and IRR with particular reference to the IFSB Guidance Note GN-3 dated December 2010 (Practice of Income Smoothing the Profits Payout to Investment Account Holders).January 2013RM-6.3 RM-6.3 Operational Considerations
RM-6.3.1
Islamic bank licensees must establish a comprehensive risk management and reporting process to assess the potential impacts of market factors affecting rates of return on assets in comparison with the expected rates of return for IAHs.January 2013RM-6.3.2
Islamic bank licensees must take necessary steps to ensure that the management processes relating to the identification, measurement, monitoring, reporting and control of the rate of return risk (including appropriate structure) are in place. Since the rate of return risks are emanating from various balance sheet positions,Islamic bank licensees must recruit competent staff to undertake the analysis of risk exposures arising from their consolidated balance sheet activities.January 2013RM-6.3.3
Islamic bank licensees must be aware of the factors that give rise to rate of return risk. The primary form of rate of return risk to which theIslamic bank licensees are exposed comprises increasing long-term fixed rates in the market. In general, profit rates earned on assets reflect the benchmark of the previous period and do not correspond immediately to changes in increased benchmark rates.January 2013RM-6.3.4
Islamic bank licensees must assess the effect of the level of their dependency on current account holders' funds. Although no returns are expected by current account holders, the sudden withdrawal of these funds would have an adverse impact on the overall potential rate of return forIslamic bank licensees .January 2013Rate of Return Risk Management
RM-6.3.5
Islamic bank licensees must implement appropriate systems for identifying and measuring the factors which give rise to rate of return risk.January 2013RM-6.3.6
When calculating a rate of return,
Islamic bank licensees must employ a gapping method for allocating positions into time bands with remaining maturities or re-pricing dates, whichever is earlier. Fixed and floating rate assets ofIslamic bank licensees must be classified according to their receivable dates because the returns on these receivables represent the fund providers' direct and beneficial ownership of the assets.January 2013RM-6.3.7
Actual cash flows may indicate a gap for a given time band, affecting the rate of return for that period. Depending on the complexity and the nature of their business operations,
Islamic bank licensees may employ techniques ranging from simple gap to advance simulation or dynamic approaches to assess future cash flow variability and net income. The estimates derived from selected approaches may provide acceptable approximations of periodic future earnings' variability; hence, the outcomes will yield different levels of expected returns to IAHs.January 2013RM-6.3.8
The measurement of rate of return risk highlights the importance of cash flow forecasting for instruments and contracts where
Islamic bank licensees are required to simulate and assess their behavioral maturity, underlying assumptions and parameters, which must be reviewed periodically for reliability. The materiality of potential threats to future earnings and the usefulness of the resulting information must be considered in determining the type and extent of forecasted behavior forIslamic bank licensees .January 2013RM-6.3.9
In assessing whether a potential threat is likely to have a material, likely and imminent impact on a balance sheet position,
Islamic bank licensees must ensure that they understand the different characteristics of their balance sheet positions in the different currencies and jurisdictions within which they operate.January 2013RM-6.3.10
In assessing exposure to rate of return risks,
Islamic bank licensees must take into account the non-contractual behavioral maturity of the transactions in the context of the environment in which they operate and changing market conditions.January 2013RM-6.3.11
With reference to Paragraph RM-6.3.10, in case of early repayment made by the customer (in Murabaha or Ijara transactions),
Islamic bank licensees may accept full settlement but give rebates on subsequent transactions, while in other cases, theIslamic bank licensees may give rebates immediately at their discretion without any reference to this in the contract.January 2013RM-6.3.12
Islamic bank licensees are encouraged to employ balance sheet techniques to minimize their exposures using the following strategies, among others:(a) Determining and varying future profit ratios according to expectations of market conditions;(b) Developing new Shari'a-compliant instruments; and(c) Issuing secuntisation tranches of Shari'a permissible assets.January 2013Displaced Commercial Risk Management
RM-6.3.13
Islamic bank licensees must have in place an appropriate framework for managing displaced commercial risk, where applicable.January 2013RM-6.3.14
Islamic bank licensees must have in place a policy and framework for managing the expectations of their shareholders and IAHs. Where market rates of returns of competitors' IAHs are higher than those ofIslamic bank licensees ' IAHs, theIslamic bank licensees must evaluate the nature and extent of the expectations of its IAHs and assess the amount of the gap between competitors' rates and their own IAHs' expected rates.January 2013RM-6.3.15
Islamic bank licensees must develop and maintain an informed judgment about an appropriate level of the balances of PER, bearing in mind that its essential function is to provide mitigation of displaced commercial risk. SomeIslamic bank licensees must maintain the proportion relating to IAHs in this reserve within the IAHs equity, with the purpose of smoothing returns to IAHs, and in particular, to enhance their returns if these are below those of competitors. This implies that there will be years in which the balance of this reserve will be increased, and others in which it will be depleted.January 2013RM-7 RM-7 Operational Risk
RM-7.1 RM-7.1 Operational Risk
RM-7.1.1
This Chapter sets out principles pertaining to appropriate systems and controls to address
Islamic bank licensees' operational risks.Islamic bank licensees are exposed to operational risk through failures in their internal controls involving processes, people and systems. The internal controls should provide reasonable assurance of the soundness of operations and reliability of reporting.January 2013RM-7.2 RM-7.2 Types of Operational Risk relevant to Islamic Banks
RM-7.2.1
Islamic bank licensees must consider the full range of material operational risks affecting their operations, including the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.Islamic bank licensees must also incorporate possible causes of loss resulting from Shari'a non-compliance and the failure in their fiduciary responsibilities.January 2013RM-7.2.2
Islamic bank licensees are exposed to risks relating to Shari'a non-compliance and risks associated with the IIFSs' fiduciary responsibilities towards different fund providers. These risks exposeIslamic bank licensees to fund providers' withdrawals, loss of income or voiding of contracts leading to a diminished reputation or the limitation of business opportunities.January 2013RM-7.2.3
Shari'a non-compliance risk is the risk that arises from
Islamic bank licensees ' failure to comply with the Shari'a rules and principles determined by the Shari'a Board of theIslamic bank licensees and the CBB.January 2013RM-7.2.4
Shari'a compliance is critical to
Islamic bank licensees ' operations and such compliance requirements should permeate throughout the organisation and their products and activities. As a majority of the fund providers use Shari'a-compliant banking services as a matter of principle, their perception regardingIslamic bank licensees ' compliance with Shari'a rules and principles is of great importance to their sustainability. In this regard, Shari'a compliance is considered as falling within a higher priority category in relation to other identified risks.Amended: April 2013
January 2013RM-7.2.5
The bank's Shari'a Supervisory Board is responsible for establishing policies to deal with any Shari'a non-compliant transaction, taking into account its reputational risk and it must also follow existing AAOIFI disclosure requirements.
January 2013RM-7.2.6
Fiduciary risk is the risk that arises from
Islamic bank licensees ' failure to perform in accordance with explicit and implicit standards applicable to their fiduciary responsibilities. As a result of losses in investments,Islamic bank licensees may become insolvent and therefore unable to:(a) Meet the demands of current account holders for repayment of their funds; and(b) Safeguard the interests of their IAHs.Islamic bank licensees may fail to act with due care when managing investments resulting in the risk of possible forgone profits to IAH.January 2013RM-7.3 RM-7.3 Operational Considerations
RM-7.3.1
Islamic bank licensees must implement a comprehensive and sound framework for developing and implementing a prudent control environment for the management of operational risks arising from their activities.January 2013RM-7.3.2
The framework referred to in Paragraph RM-7.3.1 should be consistently implemented throughout an
Islamic bank licensee's organisation and understood by all relevant staff.January 2013RM-7.3.3
Islamic bank licensees should conduct periodic reviews to detect and address operational deficiencies. The reviews and evaluation of internal controls should include independent audit coverage and assessment by internal and/or external auditors.January 2013CM Credit Risk Management (Effective June 2022)
CM-A CM-A Introduction
CM-A.1 CM-A.1 Purpose
Executive Summary
CM-A.1.1
The purpose of this Module is to provide the Central Bank of Bahrain’s (CBB’s) Directive concerning requirements relevant to the key elements of a sound
credit risk management system which it expectsIslamic bank licensees to observe.Added: June 2022CM-A.1.2
This Module must be read in conjunction with other parts of the Rulebook, mainly:
(a) High-level Controls;(b) Capital Adequacy;(c) Liquidity Risk;(d) Operational Risk;(f) Reputational Risk;(g) Credit Risk;(h) Stress Testing; and(i) Internal Capital Adequacy Assessment Process (‘ICAAP’).Added: June 2022Legal Basis
CM-A.1.3
This Module contains the CBB’s Directive (as amended from time-to-time) relating to credit risk management in
Islamic bank licensees and is issued under powers available to the CBB under Article 38 of the of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006) (“CBB Law”). This Module is applicable to allIslamic bank licensees .Branches of foreign bank licensees shall comply with the requirements in this Module unless stated otherwise under relevant paragraphs of the Module.Added: June 2022CM-A.1.4
For an explanation of the CBB’s rule-making powers and different regulatory instruments, see Section UG-1.1.
Added: June 2022CM-A.2 CM-A.2 Module History
CM-A.2.1
This Module was first issued in July 2004. Changes made subsequently to this Module are annotated with the calendar quarter date in which the change was made as detailed in the table below. Chapter UG 3 provides further details on Rulebook maintenance and version control.
Added: June 2022CM-A.2.2
Summary of Changes
Module Ref. Change Date Description of Changes CM 8 1/1/2005 Revised Consumer Finance Limits. CMA-2 1/1/2005 Revised Key Requirements to reflect CM 8 above. CM 8.3 1/7/2005 Revised definition of ‘consumer financing’. CM 3.2 1/10/2005 Role of internal audit becomes a rule. CM 8.4 1/10/2005 Clarifications re non-compliant facilities. CM-A.1 10/2007 New Rule CM-A.1.3 introduced, categorising this Module as a Directive. CM-5 10/2007 New Requirement to follow the ‘Code of Best practice on Consumer Credit and Charging’. CM-1.2 10/2007 Membership of CRB. CM-3.1 04/2008 Guidance concerning material interest as shareholder for write-offs. CM-5.6 04/2008 New Refund and prepayment requirements. CM-2.7 10/2009 New reporting arrangements for exposure s of connectedcounterparties .CM-2.7 01/2010 Revised reference for LE reporting. CM-A.1.3 01/2011 Clarified legal basis. CM-5 01/2011 Changes made to incorporate Basel Core Principle 5 and new large exposure requirements along with a consistency alignment of Volume One and Volume Two.CM-A.1.1, CM-A.2.4 04/2011 Corrected typo. CM-2.3.1(c), CM-2.6.1 04/2011 Corrected cross reference. CM 07/2011 Various minor amendments to clarify Rules and have consistent language. CM-2.5.9 07/2011 Amended the definition of connected counterparties .CM-5.5.9 and CM-5.5.10 10/2011 Corrected elements of APR formula. CM-5.5.12 10/2011 Paragraph deleted as it does not reflect current practice on residual interest. CM-2.5.1.E 01/2012 Amended definition of qualifying holdings. CM-2.6 01/2012 Clarified and amended the Rules on temporary exposures. CM-2.10.3 01/2012 Clarified the Rule on future increases in qualifying holdings. CM-5.4.9 01/2012 Changed Rule to Guidance. CM-2.6.2 04/2012 Clarified Rules on temporary exposures. CM-A.2.8 07/2012 Updated reference to Bahrain Association of Banks. CM-2.5.6 07/2012 Clarified the definition of ‘controlling interest’. CM-2.5.7A 07/2011 CBB prior approval required for excess over limits to connected counterparties .CM-2.5.9 07/2012 Minor correction. CM-2.10.3 07/2012 Amendment made to be in line with updated definition of qualifying holdings. CM-5.5.4 07/2012 Minor typo corrected. CM-5.5 10/2012 This Section was deleted and requirements are now included in Section BC-4.3. CM-A.2.10 01/2013 Clarified Rule related to the write-off of a credit facility. CM-2.5.11 07/2013 Clarified Rule on the amount that must be deducted from the capital base where exposure exceeds the limit stipulated. CM-5.6.2 07/2013 Clarified the type of mortgages on which the CBB imposes a ceiling on early repayment fees and/or charges. CM-1.2.4 10/2013 Amended to reflect the expanded scope of activities of the Credit Reference Bureau and the membership requirements. CM-5.4.4 10/2013 Updated reference to Eskan Bank to reflect new name. CM-1.2.4 01/2014 Clarified Rule to apply to credit facilities to residents in Bahrain. CM-A.2, CM-4.3 and CM-5 04/2014 Added cross references and corrected terminology to link to Glossary terms. CM-6.1 04/2014 Clarified Rules on staff financing s. CM-5.2.4 04/2014 Reference updated for the code of best practice on consumer credit and charging. CM-2.10.2A 07/2014 Added a guidance Paragraph to clarify the treatment of investments in commercial entities which are otherwise not connected to the bank. CM-A.2 and CM-5 01/2015 Corrected to be aligned with updated requirements under Module CA. CM-2.3.2 01/2015 Added reference to transactions subject to the Regulation on close-out netting under a market contract. CM-2.5.1B 01/2015 Corrected cross reference. CM-2.5.1E 04/2015 Deleted cross reference as not applicable. CM-2.6.2B and CM-2.10.10 04/2015 Corrected reference to consolidated total capital to be in line with Module CA. CM-2.7.1 04/2015 Added reference to Appendix BR-19 for reporting the financial details of each large exposure. CM-2.10.3 04/2015 Clarified language on the treatment of significant investments over the thresholds outlined in Paragraph CA-2.4.25. CM-2.7.1, CM-2.7.1A and CM-2.7.1B 07/2015 Clarified the reporting requirements of exposures. CM-2.5.11 10/2015 Clarified limits on large exposures. CM-3.1 10/2015 Amended Rules on write-offs. CM-2.5.1E 10/2016 Amended definition of major investment. CM-2.5.3 10/2016 Added ‘Limits to Significant Investments’ new Section reference. CM-2.10.2 10/2016 Major investments defined. CM-2.10.2A 10/2016 Paragraph moved to CM-2.11.4. CM-2.10.3 10/2016 Amended and split into CM-2.10.3 A, B, C and D. CM-2.10.3D 10/2016 Amended Rule. CM-2.10.6 10/2016 Moved to new section 5.11. CM-2.10.7 10/2016 Moved to new section 5.11. CM-2.10.8 10/2016 Moved to new section 5.11. CM-2.10.10 10/2016 Amended ‘Acquisitions’ to be ‘Investments’. CM-2.11 10/2016 New Section ‘Limits on Significant Investments’. CM-3.1.1 10/2016 Amended the Write-offs Section. CM-5.4.5 10/2016 Amendments to clarify the Rule. CM-A2.2A CM-2.5.3A 01/2017 Added a new requirement on Large Exposures. CM-2.5.5A CM-2.5.9B 01/2017 Added Paragraphs on closely related counterparties and connected counterparties .CM-3.6 07/2017 Added new Section on ‘Country and Transfer Risks’. CM-7.6.2 04/2018 Deleted Paragraph on “Early Repayment Fees/Charges”. CM-7.4.10 10/2019 Amended Paragraph on non-compliant facilities. CM-4.5.2D 01/2020 Amended Paragraph on approval of the banks policies and procedures. CM-1.2.6 07/2020 Added a new Paragraph on CRB members requirements. CM-1.2.7 07/2020 Added a new Paragraph on compliance with CBB Law. Full Module CM 07/2021 Revised CM Module to incorporate various changes in qualitative requirements in line with Basel Committee on Banking Supervision standards and best practices. CM-5.4.9 01/2022 Amended Paragraph on submission of technically non-compliant facilities report. CM-6.1.1 01/2022 Deleted Paragraph. CM-6.1.2 01/2022 Amended Paragraph. CM-6.1.3 01/2022 Deleted Paragraph. CM-6.1.4 01/2022 Deleted Paragraph. CM-A.2.3 10/2022 Deleted typo. CM-1.2.29 10/2022 Amended Paragraph on CBB’s prior approval of country and transfer risks policy. CM-1.8.5 10/2022 Amended Paragraph on submission and CBB review of ECL recognition policy statement. CM-2.5.9 10/2022 Amended Paragraph on large exposure policy statement. CM-2.6.2 >10/2022 Amended Paragraph on exempt exposures to parties not connected to the Bank. CM-2.7.2 10/2022 Amended Paragraph reference. CM-2.8.1 10/2022 Amended Paragraph on submission of large exposure policy statement to CBB for approval. CM-1.8.22A 01/2023 Added a new Paragraph on the recognition of credit default guarantees provided by Tamkeen. CM-1.10 01/2023 Deleted Section on Provisions against Sovereign Debt. CM-4.1.3(d) 01/2023 Amended reference. CM-5.3.1 01/2023 Added a new Sub-paragraph on the excluded credit facilities from consumer finance requirements. CM-1.8.10 04/2023 Amended Paragraph on the identification of Non-performing Exposures. CM-1.8.15 04/2023 Added a new Paragraph on re-categorisation of non-performing exposures as performing. CM-1.8.15A 04/2023 Added a new Paragraph on re-categorisation. CM-1.8.18A 04/2023 Added a new Paragraph on Re-categorisation of Non-performing Exposures as Performing requirements. CM-1.8.27 04/2023 Amended Paragraph on restructured accounts. CM-6 04/2023 Added a new Appendix CM-6 on re-categorisation of exposures. Effective Date
CM-A.2.3
The requirements in this amended Module are effective from 30th June 2022 on which date the existing Module CM will become redundant and any exemptions allowed under the existing Module will be subject to grandfathering requirements with the approval of CBB.
Amended: October 2022
Added: June 2022CM-1 CM-1 Credit Risk Management Requirements
CM-1.1 CM-1.1 Overview
CM-1.1.1
Credit risk is the likelihood that acounterparty of thelicensee will not meet its obligations in accordance with the agreed terms. The magnitude of thecredit risk depends on the likelihood ofdefault by thecounterparty , and on the potential value of thelicensee's contracts with thecustomer at the time ofdefault .Credit risk largely arises in assets shown on the balance sheet, but it can also show-up off the balance sheet in a variety of contingent obligations.Added: June 2022CM-1.1.2
The effective management of
credit risk is a critical component of a comprehensive approach to risk management and is essential to the long-term success of any banking organisation.Added: June 2022CM-1.1.3
The lack of continuous credit exposure supervision and effective internal controls, or the failure to identify abuse and fraud are also sources of risk. The overall financing policy of the
licensee should be monitored by a Credit Committee, composed of officers with adequate seniority and experience.Added: June 2022CM-1.1.4
Although specific
credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities, a comprehensivecredit risk management program shall specifically address the following areas (i) establishing an appropriatecredit risk environment; (ii) operating under a sound credit granting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (iv) ensuring adequate controls overcredit risk . These practices should also be applied in conjunction with sound practices related to the assessment of asset quality, the adequacy of provisions and reserves, and the disclosure ofcredit risk .Added: June 2022CM-1.2 CM-1.2 Credit Risk Management Framework
CM-1.2.1
Islamic bank licensees must establish a credit risk management unit (CRMU) within their organisational structure which will be responsible for identification, assessment, measurement, monitoring and controlling of credit risk inherent in the entire credit portfolios, as well as credit risk in individual credit exposures. The credit risk management framework must consider the relationship between credit risk and other risks.Added: June 2022CM-1.2.2
The CRMU must be independent and must ensure that it undertakes the credit risk management activities with no influence from business functions responsible for credit underwriting.
Added: June 2022CM-1.2.3
The CRMU should not have management or financial responsibility related to credit operational business line or revenue generating functions.
Added: June 2022The Role of the Board of Directors
CM-1.2.4
The Board of Directors of the
Islamic bank licensee is responsible for ensuring that thelicensee has an effective CRMU and for approving and regularly reviewing, at least every two years, itscredit risk policies,credit risk appetite and limits framework. Amendments made to such documents must also be approved by the Board. The Board may delegate some of its functions, such as approval of policies, amendments to policies and periodic reviews to a designated Board committee.Added: June 2022CM-1.2.5
Effective credit risk management is imperative to optimise the
licensee’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. A risk appetite statement is a written articulation of the aggregated level and types of risk exposures that thelicensee will accept, or avoid, in order to achieve its business objectives.Added: June 2022CM-1.2.6
The Board must ensure that the
credit risk policies cover all activities of theIslamic bank licensee in which it incurscredit risk . The Board must also determine that thelicensee’s capital level is adequate for the risks assumed throughout the entire organisation or group.Added: June 2022CM-1.2.7
The
credit risk policy must document thelicensee’s willingness to grant credit based on exposure type (commercial, consumer, real estate etc.), economic sector, geographical location, product, currency, maturity and anticipated profitability. This might also include the identification of target markets and the overall characteristics that theIslamic bank licensee would want to achieve in its credit portfolio (including levels of diversification and concentration tolerances).Added: June 2022CM-1.2.8
The Board must ensure that the
credit risk appetite framework delineates the delegated powers, lines of responsibility and accountability overcredit risk management decisions, and must clearly define authorised instruments,hedging strategies and risk-taking opportunities.Added: June 2022CM-1.2.9
The Board must assess whether the
Islamic bank licensee is operating within the boundaries of thecredit risk appetite and limits framework approved by the Board.Added: June 2022CM-1.2.10
The Board must ensure that it receives adequate management information reports and exception reports to meet its oversight requirements to monitor adherence to the
licensee’s risk tolerance/appetite/limits. The Board must regularly evaluate whether it is receiving the right balance of detail and quantitative versus qualitative information.Added: June 2022CM-1.2.11
The Board must approve the structure in which the
licensee will organise its credit-granting functions, including independent review of the credit granting process and the overall portfolio.Added: June 2022CM-1.2.12
For
branches of foreign bank licensees where no Board/Audit Committee exists, all references to the Board/Audit Committee should be interpreted as the Group Chief Risk Officer or equivalent person who has direct access or reports to the Board or Audit Committee of the parent bank, unless alternative structures that satisfy the primary objectives of such oversight are in place.Added: June 2022The Role of the Senior Management
CM-1.2.13
Senior management of the
Islamic bank licensee is responsible for developing, implementing and approving sound credit risk procedures in accordance with credit risk policies approved by the Board.Added: June 2022CM-1.2.14
Senior management must determine that the staff involved in any credit relationship, whether established or new, basic or complex, have the necessary knowledge, skill sets, experience and are fully capable of ensuring the relationship meets the highest standards and in compliance with thelicensee’s policies and procedures.Added: June 2022CM-1.2.15
Senior management must ensure that risk monitoring systems are in place for effectively undertaking the activities ofcredit risk management.Added: June 2022Credit Risk Policy and Procedures
CM-1.2.16
A properly documented
credit risk policy is an essential element of, and a prerequisite for, thecredit risk management process. Consistent with the Board's objectives, it assistslicensee’s management in the maintenance of proper credit standards and the avoidance of unnecessary risks. Additionally, periodic internal assessment should be undertaken by the internal audit. In the case ofbranches of foreign bank licensees , the credit policy, limits and the procedures are normally those that are approved by the Head Office/Regional Office.Added: June 2022CM-1.2.17
Senior management , based on the approvedcredit risk policy, must developcredit risk procedures for identifying, measuring, monitoring and controllingcredit risk . The procedures must addresscredit risk in all of theIslamic bank licensee ’s activities, and at both the individual credit and portfolio levels.Added: June 2022CM-1.2.18
Explicit guidelines in the
credit risk policy provide the basis for effectivecredit risk management. A soundcredit risk policy should consider which types of credit products and obligors thelicensee is looking for, and the underwriting standards thelicensee will utilize.Added: June 2022CM-1.2.19
Islamic bank licensee ’s credit risk framework must address all credit and credit risk related activities throughout the credit lifecycle covering matters of significance including, but not limited to:(a) Organisation and reporting structure of the credit risk function/activities;(b) Delegation of authority;(c) Role of credit committee and Board risk committee;(d) Designated markets and products;(e) Credit limit framework;(f) Desirable pricing levels and criteria;(g) Policy on country and transfer risks;(h) Credit granting criteria and authorisation procedures for the advancement of credit, including exceptions to set criteria and limits;(i) Credit risk analysis, reviews and credit risk ratings;(j) Assessment of concentration;(k) Large exposure policy;(l) Financing to connectedcounterparties ;(m) Problem credit identification, remediation and administration;(n) Policies and procedures on write-offs and recoveries;(o) Monitoring and reporting.Added: June 2022CM-1.2.20
Islamic bank licensees must operate within sound, well-defined credit-granting criteria. These criteria must include a clear indication of thelicensee’s target market and a thorough understanding of the obligor orcounterparty , as well as the purpose and structure of the credit and its source of repayment. In addition, the criteria must set out who is eligible for credit and for how much, what types of credit are available, and under what terms and conditions the financing may be granted.Added: June 2022CM-1.2.21
In the case of
branches of foreign bank licensees , the credit policies, credit limits and the procedures are those that are approved by the Head Office/Regional office.Added: June 2022Effectiveness of Internal Control System
CM-1.2.22
An effective internal control system for
credit risk assessment and measurement is essential to enable senior management to carry out its duties. An effective internal control system must include:(a) Measures to comply with applicable laws, regulations and internal policies and procedures;(b) Measures to provide oversight of the integrity of information used and to reasonably ensure that the allowances reflected in thelicensee’s financial statements and its supervisory reports are prepared in accordance with the applicable accounting framework and relevant supervisory guidance;(c) Well-definedcredit risk assessment and measurement processes that are independent from (while taking appropriate account of) the financing function and include:(i) An effectivecredit risk rating/ scoring system that is consistently applied, accurately grades differingcredit risk characteristics, identifies changes incredit risk on a timely basis, and prompts appropriate action;(ii) An effective process which ensures that all relevant/ reasonable and supportable information, including forward-looking information, is appropriately considered in assessing and measuring expected credit loss (‘ECL’). This includes maintaining appropriate reports, details of reviews performed and identification and descriptions of the roles and responsibilities of the personnel involved;(iii) An assessment policy that ensures ECL measurement occurs not just at the individual credit exposure level, but also when necessary to appropriately measure ECL at the collective portfolio level by grouping exposures based on identified sharedcredit risk characteristics;(iv) An effective model validation process to ensure that thecredit risk assessment and measurement models, including ECL models, are able to generate accurate, consistent and unbiased predictive estimates on an ongoing basis. This includes establishing policies and procedures which set out the accountability and reporting structure of the model validation process, internal standards for assessing and approving changes to the models and reporting of the outcome of the model validation (see also Paragraph CM-1.4.10);(v) Clear formal communication and coordination among thelicensee’s credit risk staff, financial reporting staff, senior management, the Board and others who are involved in thecredit risk assessment and measurement process for an ECL accounting framework, as applicable (e.g. evidenced by written policies and procedures, management reports and committee minutes); and(d) An internal audit function that independently evaluates the effectiveness of thelicensee’s credit risk management framework, and in particular, assessment and measurement systems, models and processes, including thecredit risk rating system. Refer to HC-6.5.Added: June 2022CM-1.2.23
Islamic bank licensees must ensure that thecredit risk policy establishes the objectives that guide thelicensee’s credit-granting activities.Added: June 2022CM-1.2.24
The
credit risk policy must give recognition to the goals of credit quality, earnings quality and sustainability and growth.Islamic bank licensees , regardless of their size, must determine the acceptable risk/reward trade-off for their activities, factoring in the cost of capital.Added: June 2022CM-1.2.25
The
credit risk appetite/limits framework ofIslamic bank licensees must take into consideration the cyclical aspects of the economy and the resulting shifts in the composition and quality of the overall credit portfolio. The credit granting criteria must be periodically assessed and amended and it must be viable in the long-run and through various economic cycles. The credit risk procedures must be reviewed at least once every three years or more frequently as may be necessary if there are changes in internal or regulatory requirements.Added: June 2022CM-1.2.26
The credit granting criteria must be designed and implemented within the context of internal and external factors, such as the
licensee’s market position, trade area, staff capabilities and technology.Added: June 2022CM-1.2.27
Islamic bank licensees must have a clearly definedcredit risk appetite statement which is implemented through comprehensive policies and procedures for limiting and controllingcredit risk .Islamic bank licensees must also establish credit limits in a meaningful manner for different types of exposures, both on and off-balance sheet.Added: June 2022CM-1.2.28
Bahraini Islamic bank licensees must consider the results of stress testing in the overall limit setting and monitoring process. Such stress testing must take into consideration economic cycles, profit rates and other market movements and liquidity conditions.Added: June 2022Country and Transfer Risks
CM-1.2.29
Islamic bank licensees must set out their policy on country and transfer risks within their Board approved credit risk policy. Such policy must include:a) the risk appetite/tolerance levels for country and transfer risks;b) country exposure limits;c) basis and frequency for periodic reviews and assessments;d) the criteria for downgrading a country exposure from Stage 1 to Stages 2 or 3, and related provisioning policy; ande) the policy for recategorization of exposure to a higher grade.Amended: October 2022
Added: June 2022CM-1.2.30
Country risk is the exposure to a loss in cross-border financing, caused by events in the country to which the
licensee has exposure and includes all forms of financing whether to the government, alicensee , a private enterprise or an individual. Country risk is therefore a broader concept than sovereign risk, which is restricted to the risk of financing to the government of a sovereign nation. Transfer risk, on the other hand, represents the risk of loss due to repatriation or remittance restrictions imposed by a foreign government that make it impossible to remit, fully or partially, the proceeds of obligation owed to thelicensee .Added: June 2022CM-1.2.31
In the case of exposure to obligors,
Islamic bank licensees must examine any associated country and transfer risks keeping in view factors such as domicile of thecounterparty , the legal structure of thecounterparty , the existence of special purpose vehicles, conduits and/ or other related factors that may affect the transferability of proceeds of repayment.Added: June 2022CM-1.2.32
Branches of foreign bank licensees must satisfy the CBB that equivalent arrangements are in place at the parent entity level, otherwise a policy is required in line with Paragraph CM-1.2.28.Added: June 2022CM-1.2.33
Branches of foreign bank licensees are normally subject to country limits that are set at a global level by the head office or by the regional office. Thebranch should be able to demonstrate that it is subject to limits imposed on it by the head office or regional office as appropriate.Added: June 2022CM-1.3 CM-1.3 Credit Granting
CM-1.3.1
The limits framework must ensure that the granting of credit exceeding certain predetermined levels receives prompt management attention. An appropriate limit system must assist the management in initiating discussion about opportunities and risks, in controlling
credit risk exposures and monitoring actual risk taking against predeterminedcredit risk tolerances.Added: June 2022CM-1.3.2
Islamic bank licensees must receive sufficient information to enable a comprehensive assessment of the true risk profile of the obligor or counterparty. Depending on the type of credit exposure and the nature of the credit relationship to date, the factors to be considered and documented in approving credits must include:(a) The purpose of the credit and sources of repayment;(b) The current risk profile (including the nature and aggregate amounts of risks) of the obligor orcounterparty andcollateral and its sensitivity to economic and market developments;(c) The obligor’s repayment history and current capacity to repay, based on historical financial trends and future cash flow projections, under various scenarios;(d) For commercial credits, the obligor’s business expertise and the status of the obligor’s economic sector and its position within that sector;(e) The proposed terms and conditions of the credit, including covenants designed to limit changes in the future risk profile of the obligor;(f) The legal structure of the entity to which credit is granted and any associated implications; and(g) Where applicable, the adequacy and enforceability ofcollateral or guarantees, including under various scenarios.Added: June 2022CM-1.3.3
Islamic bank licensees need to understand to whom they are granting credit. As such, prior to entering into any new credit relationship, thelicensee must become familiar with the obligor orcounterparty and be confident that they are dealing with an individual or organisation of sound repute and creditworthiness. In particular, strict policies must be in place to avoid association with individuals involved in fraudulent activities and other crimes.Added: June 2022CM-1.3.4
Islamic bank licensees must perform their due diligence at the solo entity level to which there is a credit exposure. In evaluating the repayment capacity of the solo entity,licensees can take into account the support of the group and also the potential for the solo entity to be adversely impacted by problems in the group.Added: June 2022CM-1.3.5
In considering potential credit,
Islamic bank licensees must recognise the necessity of establishing provisions for identified and expected losses and hold adequate capital to absorb unexpected losses. Thelicensee must factor these considerations into credit-granting decisions, as well as into the overall portfolio risk management process.Added: June 2022CM-1.3.6
Where actual or potential conflicts of interest exist within the
Islamic bank licensee , internal confidentiality arrangements (e.g. ‘Chinese walls’) must be established and maintained to ensure that there is no hindrance to thelicensee in obtaining all relevant information from the obligor.Added: June 2022CM-1.3.7
In order to maintain a sound credit portfolio,
Islamic bank licensee must have an established formal transaction evaluation and approval process for the granting of credit. Approvals must be made in accordance with thelicensee’s written guidelines and granted by the appropriate level of management. There must be a clear audit trail documenting that the approval process was complied with and identifying the individual(s) and/or committee(s) providing input, as well as making the credit decision.Islamic bank licensees must invest in appropriate credit decision making tools and resources so that they are able to make sound credit decisions consistent with theircredit risk strategy and meet competitive time, pricing and structuring pressures.Added: June 2022CM-1.3.8
Each credit proposal must be subject to careful analysis by an experienced credit analyst with expertise commensurate with the size and complexity of the transaction. An effective evaluation process establishes minimum requirements for the information on which the analysis is to be based.
Added: June 2022CM-1.3.9
Islamic bank licensees must have in place a Board approved policy regarding the information and documentation needed to approve new credits, renew existing credits and/or change the terms and conditions of previously approved credits. The information received will be the basis for any internal evaluation or rating assigned to the credit, and its accuracy and adequacy is critical to the management making appropriate judgments about the acceptability of the credit.Added: June 2022CM-1.3.10
Credit risk officers must have the experience, knowledge and background to exercise prudent judgment in assessing, approving and managingcredit risk s. The licensee’s credit-granting approval process must establish accountability for decisions taken and designate who has the final or ultimate authority to approve credits or changes in credit terms.Added: June 2022CM-1.3.11
All extensions of credit must be made on an arm’s-length basis. In particular, credits to connected
counterparties must be authorised only under exceptional circumstances. Such credits must be monitored with particular care and other appropriate steps taken to control or mitigate the risks of non-arm’s length financing.Added: June 2022CM-1.3.12
Transactions with connected
counterparties must be subject to the approval of the Board of Directors (excluding Board members with conflict of interest).Added: June 2022Credit Reference Requirements
CM-1.3.13
Islamic bank licensees which provide credit facilities to natural and legal persons in Bahrain must become members of the Bahrain Credit Reference Bureau (‘BCRB’). All enquiries for new or additional credit facilities in Bahrain must be submitted to the BCRB. BCRB members must meet the following requirements and incorporate them into their policies and procedures:(a) Establish an electronic monitoring system to detect, monitor and maintain records and a log of all access to BCRB data by the BCRB member’s employees;(b) Conduct a monthly internal audit on the access logs to identify unauthorised access to BCRB data by any employee without securing customer consent and report to the CBB any observed violation of Article 68 (bis (2)) of CBB Law;(c) Require the sign off of a BCRB member’s designated employee on their legal obligations concerning the confidentiality of BCRB data and that any violation of Article 68 (bis (2)) of CBB Law would subject them to an enforcement action in accordance with CBB Law; and(d) Cover compliance with the above requirements in the performance appraisal of relevant employees.Added: June 2022CM-1.3.14
Failure to comply with Article 68 (bis (2)) of the CBB Law and Paragraph CM-1.3.13 may result in an enforcement action taken against the CRB member, as well as the relevant employee in accordance with CBB Law. Additionally, all BCRB members must abide by the agreed Code of Practice of the BCRB (see Appendix CM-3). Any breaches to the code will be subject to enforcement action by the CBB.
Added: June 2022Name-financing
CM-1.3.15
Islamic bank licensees must avoid providing finance to counterparties without collateral or without adequate credit risk analysis performed on the basis of reliable audited financial statements to properly analyse the obligor’s ability to repay.Added: June 2022CM-1.3.16
Some
licensees indulge in ‘name-financing’ which refers to the practice of financing to businesses and individuals merely on the basis of their ‘name’ or ‘reputation’ in the market. In such instances, thelicensee , typically, does not receive audited financial statements and other relevant information to conduct a proper credit risk analysis, nor does it receive collateral to support the credit granting decision. The CBB prohibitslicensees from engaging in such activities in order to minimise theircredit risk and reputational risk.Added: June 2022CM-1.4 CM-1.4 Credit Risk Measurement and Monitoring
CM-1.4.1
Islamic bank licensees must have methodologies that enable them to quantify the risk involved in exposures to individual obligors orcounterparties .Islamic bank licensees must also be able to analysecredit risk at the product and portfolio level, in order to identify any particular sensitivities or concentrations. The measurement ofcredit risk must take account of the following:(a) The specific nature of the credit and its contractual and financial conditions (maturity, reference rate, etc.);(b) The exposure profile until maturity in relation to potential market movements;(c) The existence ofcollateral or guarantees; and(d) The potential fordefault based on the internal risk rating.The analysis of
credit risk data must be undertaken at an appropriate frequency, with the results reviewed against relevant limits.Added: June 2022CM-1.4.2
Islamic bank licensees must use measurement techniques that are appropriate to the complexity and level of the risks involved in their activities, based on robust data and subject to periodic validation.Added: June 2022CM-1.4.3
Islamic bank licensees must monitor actual exposures against established limits. It is important thatlicensees have an MIS in place to ensure that exposures approaching risk limits are brought to the attention of senior management. All exposures must be included in a risk limit measurement system.Islamic bank licensee’s information system must be able to aggregate credit exposures to individual obligors andcounterparties and report on exceptions tocredit risk limits in a meaningful way and on a timely basis.Added: June 2022CM-1.4.4
Islamic bank licensees must take into consideration potential future changes in economic conditions when assessing individual credits and their credit portfolios and must assess theircredit risk exposures under stressful conditions.Added: June 2022CM-1.4.5
An important element of sound
credit risk management involves discussing what could potentially go wrong with individual credits and within the various credit portfolios and factoring this information into the analysis of the adequacy of capital and provisions. The supervisory guidance on accounting for expected credit losses has been provided in Section CM-1.8.Added: June 2022Credit Rating /Scoring
CM-1.4.6
Islamic bank licensees must have in place a Board approved policy to develop, review and implement an internal risk rating system. Such a system must be able to assign acredit risk rating or scoring to obligors that accurately reflects the obligors’ risk profile and likelihood of loss.Added: June 2022CM-1.4.7
Islamic bank licensees must assign risk ratings or scoring in a consistent manner to enable thelicensee to classify obligors by risk ratings or scoring and have a clearer understanding of the overall risk profile of its portfolio. Thelicensee’s credit risk policy must define the various risk grades of its rating system. Criteria for assigning risk grades and the circumstances under which deviations from the criteria are permitted must be set. Thecredit risk policy must also define the roles of different parties involved in the rating process.Added: June 2022CM-1.4.8
The
credit risk rating/scoring process must appropriately group credit exposures on the basis of sharedcredit risk characteristics.Added: June 2022CM-1.4.9
Islamic bank licensees’ credit exposures must be grouped according to sharedcredit risk characteristics, so that changes in the level ofcredit risk respond to the impact of changing conditions on a common range ofcredit risk drivers. This includes considering the effect on the group’scredit risk in response to changes in forward-looking information, including macroeconomic factors. The licensee must review the appropriateness of the grouping implemented upon initial recognition based on similar credit risk characteristics, at regular intervals, at least annually, to ensure that the relevant characteristics and their impact on the level ofcredit risk of the different groupings have not changed over time.Added: June 2022CM-1.4.10
Islamic bank licensees must validate their risk rating or scoring system and ascertain its applicability to their portfolio prior to implementation. An external independent party, other than the external auditor, with necessary expertise in model validation, must conduct the validation of the risk rating/scoring and ECL models every three years and upon development of the model, and also when there are material changes to the portfolio, rating/scoring model or model parameters (See also Paragraph CM-1.2.22 (c)).Added: June 2022CM-1.4.11
Islamic bank licensees that use a judgmental rating or scoring system must ensure that each rating is unique, well-defined and distinct from other ratings in the rating scale. The relevant risk factors and weights employed in the rating/scoring methodology must be appropriate for the risk profile of the obligors in different market segments, such as corporations, small and medium-sized enterprises (‘SMEs’), and financial institutions.Added: June 2022CM-1.4.12
Risk ratings must be assigned at the inception of financing and updated at least on an annual basis. Additionally,
Islamic bank licensee must review the ratings or scoring as and when adverse events occur. Risk ratings or risk scores assigned to various obligors must be reviewed by thelicensee’s personnel that are independent of those involved in financing origination. As part of its portfolio monitoring, thelicensee must generate reports on credit exposures by risk rating/scores. Trend and migration analysis between risk ratings /scores must also be conducted to detect changes in the credit quality of the portfolio.Added: June 2022CM-1.4.13
The
licensee may establish target limits for risk grades to highlight concentration in particular rating bands. The analysis of the portfolio by risk ratings is meaningful only when the licensee’s rating or scoring system is able to consistently assign similar ratings or scores to obligors with similar risk profiles.Added: June 2022CM-1.4.14
After the credit facility has been granted, its performance must be monitored at regular intervals. This includes an appropriate periodic review of financial statements, a reassessment of
collateral and update of appraisals, and attentive monitoring of conditions in the obligor's industry. Credit supervision constitutes the first line of detection of difficulties and provides thelicensee with an opportunity to address problems before losses are sustained. The credit review must ensure that the credit files are complete and that all credit approvals and other necessary documents relating to the obligor are available.Added: June 2022CM-1.4.15
Islamic bank licensees must perform regular credit reviews. The purpose of a credit review is to verify that credits are granted in accordance with thelicensee’s credit risk policy and to provide an independent judgment of asset quality.Islamic bank licensees must conduct credit reviews with updated information on the obligor’s financial and business conditions, as well as the conduct of the account. Exceptions noted must be evaluated for impact on the obligor’s creditworthiness.Added: June 2022CM-1.4.16
Credit reviews must also be conducted on a consolidated group basis to factor in the business connections among connected entities. The performance of the underlying assets in the case of securitisation exposures must also be included in the credit reviews.
Added: June 2022CM-1.4.17
Credit reviews must be performed and documented at least once a year other than for facilities subject to collective assessments. For Stage 2 and 3 accounts (See Paragraph CM-1.8.23), however, more frequent reviews must be conducted. Procedures must also be instituted to ensure that reviews are conducted at the appropriate frequency. A process to approve deferment of credit reviews must also be put in place. For consumer credits, annual credit reviews of individual obligors are only needed if significant and a portfolio analysis does not identify
credit risk related issues or problems. However, credit exceptions and deterioration must be monitored and reported.Added: June 2022Credit risk stress testing
CM-1.4.18
Stress testing must involve identifying possible events or future changes in economic and other conditions that could have unfavourable effects on the
Islamic bank licensee's credit exposures and assessing its ability to withstand such changes. Three areas that thelicensee could usefully examine are: (i) economic or industry downturns; (ii) market risk events; and (iii) liquidity conditions. Stress testing can range from relatively simple alterations in assumptions about one or more financial, structural or economic variables, to the use of highly sophisticated financial models.Added: June 2022CM-1.4.19
Stress tests are to be performed by adjusting the parameters and then recalculating credit losses, for example:
(a) Unfavourable changes (increases/decreases, depending on portfolio composition) in the underlying profit rate by a certain number of basis points; and(b) Unfavourable changes (increases/decreases, depending on portfolio composition) in crucial exchange rates by a certain percentage.Added: June 2022CM-1.4.20
In undertaking
credit risk stress tests,licensees should considercounterparty -based and credit facility-based risk factors and scenarios that help estimate credit losses after modelling a change in probability of default (‘PD’) and/or loss given default (‘LGD’) or exposure at default (‘EAD’). Stress testing programmes should consider:(a) The inclusion of thelicensee’s individual credit portfolio composition and compile a list of the credit products in use;(b) Identify the decisive risk factors for each individual credit product and develop a basis for prioritising the factors by relevance and to group those risk factors which influence each other strongly under normal conditions or in crisis situations for the development of stress tests;(c) Analyse the prevailing social, economic, and political conditions and filter as many potential crisis situations as possible and relevant;(d) Use of in-house as well as external expertise, as appropriate, and ensure that the stress tests attain the necessary level acceptance.Added: June 2022CM-1.4.21
The approaches towards modelling stress tests include the following elements considered individually and on a combined basis as appropriate and with varying severity:
(a) Downgrading all obligors by one rating class;(b) Increasing default probabilities by a certain percentage;(c) Increasing LGD by a certain percentage;(d) Increasing EAD by a certain percentage for variable credit products (justification:customer s are likely to utilize credit lines more heavily in crisis situations, for example);(e) Assumption of negative credit spread developments forSukuk s;(f) Modelling of input factors (e.g. balance sheet indicators).Added: June 2022CM-1.4.22
Additionally, the impact of macroeconomic risk factors such as fluctuations in profit rates and/or exchange rates etc. on the following illustrative general conditions may be considered:
(a) Stress tests for specific industries or regions;(b) Downgrading all obligors in one or more crisis-affected industries; and(c) Downgrading all obligors in one or more crisis-affected regions.Added: June 2022CM-1.4.23
If the
licensee uses risk models (such as credit portfolio models or credit pricing models), it is necessary to perform stress tests which show whether the assumptions underlying the risk models will also be fulfilled in crisis situations. Only then will the models be able to provide the appropriate guidance in crisis situations.Added: June 2022CM-1.4.24
Islamic bank licensees should also examine political risk factors when significant parts of the credit portfolio consist of obligors from politically unstable countries. Due to the complex interrelationships involved, however, developing plausible stress tests for political risk factors involves far more effort than designing tests for macroeconomic risk factors. It is, therefore, advisable to call in specialists to develop stress tests for political risk factors in order to assess the relevant effects on financial and macroeconomic conditions.Added: June 2022CM-1.4.25
The output of the stress tests must be reviewed periodically by
senior management and appropriate action taken in cases where the results exceed agreed tolerances. The output must also be incorporated into the process for assigning and updating policy and limits.Added: June 2022CM-1.4.26
Islamic bank licensees must attempt to identify the types of situations, such as economic downturns, both in the whole economy or in particular sectors, higher than expected levels of delinquencies and defaults, or the combinations of credit and market events that could produce substantial losses or liquidity problems.Added: June 2022CM-1.5 CM-1.5 Credit Administration and Collateral Management
CM-1.5.1
Islamic bank licensees must have in place a system for the ongoing administration of their variouscredit risk exposures.Added: June 2022CM-1.5.2
In developing their credit administration areas,
Islamic bank licensees must ensure:(a) The efficiency and effectiveness of credit administration operations, including monitoring documentation, contractual requirements, legal covenants,collateral etc.;(b) The accuracy and timeliness of information provided in management information systems (‘MIS’);(c) Adequate segregation of duties;(d) The adequacy of controls over all ‘back office’ procedures; and(e) Compliance with prescribed policy and procedures, as well as applicable laws and regulations.Added: June 2022CM-1.5.3
For the various components of credit administration to function appropriately,
senior management must understand and demonstrate that it recognises the importance of this element of monitoring and controllingcredit risk .Added: June 2022CM-1.5.4
The credit files must include all information necessary to ascertain the current financial condition of the obligor or
counterparty , as well as sufficient information to track the decisions made and the history of the credit. For example, the credit files must include current financial statements, financial analyses and internal rating documentation, internal memoranda, reference letters and appraisals.Added: June 2022CM-1.5.5
Islamic bank licensees must develop and implement comprehensive procedures and information systems to monitor the condition of individual credits and single obligors across thelicensee’s various portfolios. These procedures need to define the criteria for identifying and reporting potential problem credits and other transactions to ensure that they are subject to more frequent monitoring, as well as possible corrective action, classification and/or provisioning.Added: June 2022Collateral Requirements
CM-1.5.6
When the credit decision is primarily based on
collateral value, independent and timely appraisals of thecollateral by a third party valuation expert must be undertaken, and thelicensee must ensure that the collateral value is sufficiently higher than the exposure amount.Added: June 2022CM-1.5.7
The requirement in Paragraph CM-1.5.6 shall not apply to publicly traded instruments that are provided as collateral for which daily fair value is available from independent sources.
Added: June 2022CM-1.5.8
Islamic bank licensees can utilise the transaction structure,collateral and guarantees to help mitigate risks (both identified and inherent) in individual credits, but transactions must be entered into primarily on the strength of the obligor’s repayment capacity.Collateral cannot be a substitute for a comprehensive assessment of the obligor orcounterparty , nor can it compensate for insufficient information. It must be recognised that any credit enforcement action (e.g. foreclosure proceedings) can eliminate the profit margin on the transaction. In addition,Islamic bank licensees need to be mindful that the value ofcollateral may well be impaired by the factors that have led to the diminished recoverability of the credit.Islamic bank licensees must have a policy covering the acceptability of various forms ofcollateral , procedures for the ongoing valuation of suchcollateral , and a process to ensure that thecollateral is, and continues to be, enforceable and realisable. With regard to guarantees,Islamic bank licensees must evaluate the level of coverage being provided in relation to the credit-quality and legal capacity of the guarantor.Licensees must be careful when making assumptions about implied support from third parties, such as the government.Added: June 2022CM-1.5.9
The value of the collateral must be updated periodically. In adverse market conditions and in the case of collateral that support Stage 2 and 3 credit exposures, the valuations must be conducted at least annually. If the exposure is backed by inventory or goods located in the obligor’s premises, additional measures must be in place to physically inspect and verify the existence and valuation of the collateral.
Added: June 2022CM-1.5.10
Since expected credit loss (ECL) provisions are dependent on the recoverable value of
collateral held,Islamic bank licensees must obtain appropriate valuations of thecollateral . Thelicensee must have a reliable and timelycollateral valuation system which must include factors such as the legal enforceability of claims oncollateral , ease of realisation ofcollateral , effects of currency and maturity mismatches, and be based on current market conditions.Added: June 2022CM-1.6 CM-1.6 Non-Performing Exposure Management
CM-1.6.1
Islamic bank licensees must ensure that their credit policy contains policy on Non-performing exposures (‘NPEs’). Such policy must outline the approach they would take to deal with NPEs in line with the Board approved risk appetite framework including tolerance levels for NPE for different portfolios. Responsibility for such credit must be assigned to a specialised workout section.Added: June 2022CM-1.6.2
To formulate and execute a fit-for-purpose policy on NPEs,
Islamic bank licensees must complete an assessment of the following elements as a minimum:(a) The internal capabilities to effectively manage, i.e. maximise recoveries and reduce NPEs over a defined time horizon;(b) The external conditions and operating environment; and(c) The capital implications of NPEsAdded: June 2022CM-1.6.3
Islamic bank licensees must include, at a minimum, clearly defined quantitative targets for NPEs (where relevant, including targets for foreclosed assets), which must be approved by thesenior management . The combination of these targets must lead to a concrete reduction, gross and net (of provisions), of NPE exposures, at least in the medium-term.Added: June 2022CM-1.6.4
While expectations about changes in macroeconomic conditions can play a role in determining target levels (if based on reliable external forecasts), they should not be the sole driver for the established NPE reduction targets. Targets should be established at least along the following dimensions:
(a) By time horizons, i.e. short-term (indicative 1 year), medium-term (indicative 3 years) and possibly long-term;(b) By main portfolios (e.g. retail mortgage, retail consumer, retail small businesses and professionals, SMEs, large corporates and commercial real estate);(c) By implementation option chosen to drive the projected reduction, e.g. cash recoveries from hold strategy,collateral repossessions, recoveries from legal proceedings or write-offs.Added: June 2022CM-1.6.5
When the NPE levels exceed the thresholds under the Board approved Risk Appetite Framework, the
Islamic bank licensee must develop an NPE operational plan which clearly defines how thelicensee will effectively reduce the level of NPEs over a time horizon of at least 1 to 3 years (depending on the type of operational measures required).Added: June 2022CM-1.6.6
Islamic bank licensees must fully understand and examine:(a) Scale and drivers of the NPE problem:(i) The size and evolution of NPE portfolio on an appropriate level of granularity, which requires appropriate portfolio classification as outlined in Section 1.8;(ii) The drivers of NPE in-flows and out-flows, by portfolio where relevant; and(iii) Other potential correlations and causations.(b) Outcomes of NPE actions taken in the past:(i) Types and nature of actions implemented, including forbearance measures; and(ii) The success of the implementation of those activities and related drivers, including the effectiveness of forbearance treatments.(c) Operational capacities (processes, tools, data quality, IT/automation, staff/expertise, decision-making, internal policies, and any other relevant areas for the implementation of the strategy) for the different process steps involved, including, but not limited to:(i) Early warning and detection/recognition of NPEs;(ii) Forbearance;(iii) Provisioning;(iv)Collateral valuations;(v) Recovery/legal process/foreclosure;(vi) Management of foreclosed assets (if relevant); and(vii) Reporting and monitoring of NPEs and effectiveness of NPE workout solutions.Added: June 2022Capital Implications of NPEs Capital Implications of NPEs
CM-1.6.7
Capital levels and their projected trends are important inputs towards determining the scope of NPE reduction actions available to
licensees .Islamic bank licensees should dynamically model the capital implications of the different elements of their policy on NPEs, ideally under different economic scenarios. Those implications should also be considered in conjunction with the risk appetite framework as well as the internal capital adequacy assessment process (‘ICAAP’).Added: June 2022CM-1.6.8
Where capital buffers are slim and profitability low,
Islamic bank licensees must include suitable actions in their capital planning, ICAAP and recovery plans which will enable effective management and sustainable clean-up of NPEs.Added: June 2022CM-1.6.9
Islamic bank licensees should also identify medium and long-term options for NPE reductions.Added: June 2022CM-1.6.10
A strong level of monitoring and oversight by risk management function in respect of the formulation and implementation of the NPE strategy (including the NPE operational plan) must also be ensured.
Added: June 2022CM-1.6.11
Islamic bank licensees must write-off financings which are deemed to be uncollectable in a timely manner.Added: June 2022CM-1.7 CM-1.7 Credit Risk Reporting
CM-1.7.1
Islamic bank licensees must have an effective MIS that captures all on and off-balance sheet credit exposures.Added: June 2022CM-1.7.2
The MIS must enable the
senior management to identify any concentrations of risk within the credit portfolio.Added: June 2022CM-1.7.3
The MIS must comprehensively cover reporting of NPEs, including but not limited to the following:
(a) NPE related KPIs and performance against the KPIs;(b) Forbearance activity levels;(c) Early warning indicators;(d) Liquidation, foreclosure, provisions for impairment and write offs; and(e) Risk adjusted returns and capital implications.Added: June 2022CM-1.7.4
The MIS must be able to aggregate all such credit exposures to a single obligor and also aggregate exposures to groups of accounts under common ownership or control. This data must be aggregated in an accurate and timely manner and monitored as part of the
licensee’s credit risk management process.Added: June 2022CM-1.7.5
The MIS must provide the Board and
senior management with timely and forward-looking information oncredit risk management to support them in identifying emerging concerns oncredit risk as well as in managing credit stress events. The MIS must be fit for the purpose of supporting thelicensee’s day-to-day monitoring of compliance with established policies, procedures and limits.Added: June 2022CM-1.7.6
Risk management reports must be accurate and precise to ensure that
Islamic bank licensees' Board andsenior management can rely, with confidence, on the aggregated information to make critical decisions about risk.Added: June 2022CM-1.7.7
To ensure the accuracy of the reports,
Islamic bank licensees must maintain, at a minimum, the following:(a) Defined requirements and processes to reconcile reports to risk data;(b) Automated and manual edit and reasonableness checks, including an inventory of the validation rules that are applied to quantitative information. The inventory must include explanations of the conventions used to describe any mathematical or logical relationships that must be verified through these validations or checks; and(c) Integrated procedures for identifying, reporting and explaining data errors or weaknesses in data integrity via exception reports.Added: June 2022CM-1.7.8
Risk management reports to the Board and
senior management must provide a forward-looking assessment of risk and must not just rely on current and past data. The reports must contain forecasts or scenarios for key market variables and the effects on thelicensee , so as to inform the Board and senior management of the likely trajectory of thelicensee’s capital and risk profile in the future.Added: June 2022CM-1.7.9
Islamic bank licensees must develop an inventory and classification of risk data items which includes a reference to the concepts used to elaborate the reports.Added: June 2022CM-1.7.10
The
credit risk reports must be clear and useful. Reports must reflect an appropriate balance between detailed data, qualitative discussion, explanation and recommended conclusions. Interpretation and explanations of the data, including observed trends, must be clear.Added: June 2022CM-1.7.11
Islamic bank licensees must confirm periodically with the recipients that the information aggregated and reported is relevant and appropriate, in terms of both quantity and quality, to the governance and decision-making process.Added: June 2022CM-1.7.12
Islamic bank licensees must assess, periodically, the purpose of each report, adequacy of the scope of the information in the reporting and MIS and set requirements for how quickly the reports need to be produced in both normal and stress/crisis situations. Thelicensee must routinely test its ability to produce accurate reports within established timeframes, particularly in stress/crisis situations.Added: June 2022CM-1.8 CM-1.8 Classification and Provisioning
CM-1.8.1
The objective of this section is to set out the requirements and supervisory guidance on the assessment and measurement of expected credit losses and allowances (together referred to as ‘ECL’). The supervisory guidance is intended to supplement the guidance under the applicable accounting framework and, where relevant, ensure consistency in application of definitions and other areas of estimates and judgment that are expected to be common across the banking sector. The term ‘allowances’ includes allowances/provisions on financings, financing commitments, financial guarantees and similar contracts.
Added: June 2022CM-1.8.2
In applying these instructions,
Islamic bank licensees must make sure that consistent accounting policies are applied at group level including subsidiaries andbranches outside Bahrain. If the supervisory and accounting standards applied at thelicensee’s outsidebranches or subsidiaries (such as NPE norms) are in conflict with these instructions, thelicensee must notify CBB accordingly.Added: June 2022Governance
CM-1.8.3
Islamic bank licensees’ Board of Directors (or equivalent) andsenior management are responsible for ensuring that thelicensee has appropriatecredit risk practices, including an effective system of internal control, to consistently determine adequate ECL in accordance with thelicensee’s stated policies and procedures, the applicable accounting framework and relevant supervisory guidance.Added: June 2022CM-1.8.4
Islamic bank licensees must adopt, document and adhere to sound policies, procedures and controls for assessing and measuringECL on all financing exposures. The measurement of allowances must build upon those robust methodologies and result in the appropriate and timely recognition of ECL in accordance with the applicable accounting framework.Added: June 2022CM-1.8.5
Islamic bank licensees must have in place a detailed and clear policy statement pertaining to ECL recognition. The policy statement must be approved by the Board of Directors, including at the time of any periodic changes. The policy statement must be comprehensive and must include, but not be limited to, the following components:(a) Definition of default (including consideration of cross defaults and restructured/renegotiated/rescheduled facilities in such assessment);(b) Portfolio segmentation, detailing the level at which PD and LGD will be measured;(c) For collectively evaluated exposures, a description of the basis for creating groups of portfolios with sharedcredit risk characteristics;(d) Qualitative and quantitative staging criteria, including criteria for qualifying as lowcredit risk assets and triggers for both forward and backward transition between Stages 1 to 3 (CM-1.8.24);(e) Source of internal data sets, minimum period of internal data repository and when external data sets will be used as reliable proxies in assessment of required impairment allowances;(f) Identify and document the ECL assessment and measurement methods (such as a loss rate method, PD/LGD modelling methods, prepayment and cure rate models or any another method) to be applied to each exposure, segment or portfolio;(g) Methodology for conversion from through-the-cycle (‘TTC’) to point-in-time (‘PIT’) PDs and variables considered for making forward-looking adjustments to PIT PDs, including use of macroeconomic factors;(h) Determine the extent to which the value ofcollateral and othercredit risk mitigants will be used for LGD calculations (including the use of liquidation haircuts and, where available, forecasting ofcollateral values);(i) Policy for specific cash shortfall assessment for Stage 3 accounts (NPE provisions);(j) Document the methods and frequency used to validate models for ECL measurement (e.g. back tests, quantitative and qualitative validation tests). Models, input data and systems used to develop PD, LGD and other components of ECL must be subject to internal and external validation as required under CM-1.4.10; and(k) Include a process for evaluating the appropriateness of significant inputs and assumptions in the ECL assessment and measurement method chosen. It is expected that the basis for inputs and assumptions used in the estimation process will generally be consistent from period-to-period. Where the basis of use of inputs and assumptions changes, the rationale must be documented.Amended: October 2022
Added: June 2022Definition of Default / Impairment
CM-1.8.6
Default for the purpose of this Module and
impairment in the context ofcredit risk exposure of an obligor as per IFRS 9 is considered to have occurred with regard to a particular obligor when either or both of the following events have taken place:(a) Thelicensee considers that the obligor is unlikely to pay its credit obligations in full (i.e. principal, profit, fees or any other amount), without taking actions such as realising security (if held).(b) The obligor is past due for 90 days or more on any credit obligation to thelicensee . In case of overdrafts, thecustomer will be considered as being past due once an advised limit has been breached or thecustomer has been advised of a limit smaller than the current outstanding amount.Added: June 2022CM-1.8.7
The elements to be taken as indications of unlikeliness to pay must include, but not be limited to, the following:
(a) Thelicensee puts the profit on the credit obligation on non-accrual status;(b) Thelicensee makes a charge-off or account-specific provision resulting from a significant perceived decline in credit quality subsequent to thelicensee taking on the exposure;(c) Thelicensee transfers the credit obligation at less than the cash equivalent value;(d) Thelicensee consents to a distressed restructuring of the credit obligation where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of repayment instalments;(e) Thelicensee has filed for the obligor’s bankruptcy or a similar order in respect of the obligor’s credit obligation to thelicensee ; or(f) The obligor has sought or has been placed in bankruptcy or similar protection where this would avoid, or delay, repayment of the credit obligation to thelicensee .Added: June 2022CM-1.8.8
For the purpose of CM-1.8.7, distressed restructuring refers to situations when a
licensee grants a concession that it would not otherwise consider, irrespective of whether the concession is at the discretion of thelicensee or otherwise. Forgiveness means reduction in repayment amount or profit. Postponement could include grace periods or changes in instalments leading to delayed maturity.Added: June 2022Identification of Non-performing Exposures
CM-1.8.9
Non-performing exposures must always be categorised for the whole exposure, including when non-performance relates to only a part of the exposure, for instance, unpaid profit. For off-balance sheet exposures, such as financing commitments or financial guarantees, the whole exposure is the entire uncancellable nominal amount. All non-performing exposures will be classified as Stage 3 for the purpose of ECL calculations.
Added: June 2022CM-1.8.10
The following exposures are considered as non-performing:
(a) All exposures, including purchased or originated credit impaired (POCI), that are in default or impaired under Paragraph CM-1.8.6, where applicable;(b) All exposures that have experienced a downward adjustment to their valuation due to deterioration of their creditworthiness and classified as Stage 3 according to the applicable accounting framework;(c) [This Subparagraph was deleted in April 2023]; and(d) All other exposures that are not in default or impaired but nevertheless:(i) Relate to acounterparty that has other exposures that are past due for 90 days or more; and(ii) Where there is evidence that full repayment based on the contractual terms, original or, when applicable, modified (e.g. repayment of principal and profit) is unlikely without thelicensee’s realisation ofcollateral , whether or not the exposure is current and regardless of the number of days the exposure is past due.Amended: April 2023
Added: June 2022CM-1.8.11
The existence of collateral or guarantees must have no direct influence on the categorisation of an exposure as non-performing or its past due status, including the counting of past-due days and the determination of the exposure as non-performing, once the overdue days threshold has been met. However,
Islamic bank licensees may consider thecollateral when assessing an obligor’s economic incentive (both positive and negative) to repay under the unlikeliness to repay criteria. Any recourse by thelicensee must not be considered in this judgment. When the relevant criteria are met, the exposure must be categorised as non-performing even if thecollateral value exceeds the amount of the past-due exposure.Added: June 2022CM-1.8.12
The classification of an exposure as non-performing must be applied as follows:
(a) When any one of the material exposures to a non-retailcounterparty is categorised as non-performing, all exposures to thatcounterparty must be categorised as non-performing (i.e. cross-default across obligors);(b) In the case of exposures to a retailcounterparty , the definition ofdefault may be applied at the level of a particular facility rather than at the level of the obligor. This would be appropriate when thelicensee considers the risk of each product and source of repayments having different characteristics for each transaction. In the case of a retailcounterparty with more than one exposure from thelicensee , it must consider the non-performing or performing status of the other exposures when deciding about the status of a given exposure; and(c) In the case of exposures to a group, non-performing status can be applied at thecounterparty level. This assumes that thelicensee has a separate credit review and rating assigned for eachcounterparty within the group. At the same time, thelicensee must consider the non-performing or performing status of the other group entities when deciding about the status of any of the group entities.Added: June 2022CM-1.8.13
For the purpose of CM-1.8.12 (a), where a single facility which represents 25% or more of the aggregate exposure to the obligor is non-performing a cross default is deemed to have occurred and, accordingly, all exposures to that obligor will be considered non-performing.
Added: June 2022CM-1.8.14
With reference to Sub-Paragraph CM-1.8.12 (b), however, a
default by an obligor on one retail obligation may not require thelicensee to treat all other obligations to thelicensee as defaulted and non-performing. In these cases,Islamic bank licensees must carefully consider the categorisation and staging status of other exposures to the samecounterparty (i.e. cross-product default). For example, if acustomer has a retail personal financing and an auto financing with thelicensee , adefault on the personal financing must be considered when assessing the stage classification of the auto financing.Added: June 2022Re-categorisation of Non-performing Exposures as Performing
CM-1.8.15
A Stage 3 exposure can be moved to Stage 2 or Stage 1 when all the following criteria are met simultaneously:
(a) Thecounterparty does not have any exposures that are past due for 90 days or more (see also Paragraph CM-1.8.6);(b) Repayments have been made when due in accordance with Appendix CM-6.
However, if the repayments are not clearly reflective of improvement in thecounterparty ’s financial position, a longer re-payment history or higher number of instalments must be assessed by thelicensee before re-categorisation of the exposure to a ‘performing’ status;(c) Thecounterparty ’s financial situation has improved so that the full repayment of the exposure is likely, according to the original or, when applicable, modified conditions. This must usually require a credit review process that evaluates the obligor’s current capacity to repay, clarity on the source of cash flow available for repayments, improvements in the level of indebtedness and compliance with various financing covenants imposed by thelicensee . Repayments through liquidation or enforcement ofcollateral is generally not considered as an improvement in the financial health of the obligor; and(d) The exposure is not considered to be in ‘default’ or ‘impaired’ according to the applicable accounting and risk management frameworks.Amended: April 2023
Added: June 2022CM-1.8.15A
Stage 2 exposures can be moved to Stage 1 after the cooling-off period, specified in Appendix CM-6, has passed and the
counterparty’s financial situation indicates it to be equivalent to that of a ‘very lowcredit risk ’ exposure.Added: April 2023CM-1.8.16
Islamic bank licensee must clearly articulate and document policies in respect of the counting of days past due, in particular in respect of the re-ageing of the facilities and the granting of extensions, deferrals, renewals and rewrites to existing accounts. At a minimum, the re-ageing policy must include:(a) Approval authorities and reporting requirements;(b) Minimum age of a facility before it is eligible for re-ageing;(c) Delinquency levels of facilities that are eligible for re-ageing;(d) Maximum number of re-ageing allowed per facility; and(e) A reassessment of the obligor’s capacity to repay.Added: June 2022CM-1.8.17
For the purpose of CM-1.8.16, re-aging occurs when the
licensee changes the tenor or due dates of the credit when rescheduling or restructuring a facility.Added: June 2022CM-1.8.18
Non-performing exposures in the following situations must not be re-categorised as performing without meeting the conditions set forth in CM-1.8.15:
(a) Partial write-off of an existing non-performing exposure (i.e. when thelicensee writes-off part of a non-performing exposure that it deems to be uncollectible);(b) Repossession ofcollateral on a non-performing exposure; or(c) Extension or granting of forbearance measures to an exposure that is already identified as non-performing.The re-categorisation of a non-performing exposure as performing must be made on the same level (i.e. obligor or transaction approach) as when the exposure was originally categorised as non-performing.
Added: June 2022CM-1.8.18A
Non-performing POCI exposures may be re-categorised as performing subject to meeting the conditions stipulated in Paragraphs CM-1.8.15 to CM-1.8.18.
Added: April 2023CM-1.8.19
Islamic bank licensees must have the necessary tools to ensure a robust estimate and timely recognition of ECL. Information on historical loss experience or the impact of current conditions may not fully reflect thecredit risk in financing exposures. In this context, thelicensee must use its experienced credit judgment to thoroughly incorporate the expected impact of all reasonable and supportable forward-looking information, including macroeconomic factors, on its estimate of ECL. Thelicensee’s use of its experienced credit judgment must be documented in thelicensee’s credit risk methodology and subject to appropriate oversight.Added: June 2022CM-1.8.20
Applying the concepts of ECL could vary for each
licensee depending on its underwriting criteria, loss history, terms ofcollateral and a number of other variables, both entity-specific and external. Reasonable and supportable information will not present itself, but would rather require management to determine what is relevant and practical, without undue costs or efforts, to actively gather, analyse and process to make requiredcredit risk assessments to support the ECL process.Licensees will need to adopt an appropriate risk assessment methodology which is commensurate with the size, complexity, structure, economic significance and risk profile of their portfolio. This means that, in general, the larger and more complex a portfolio or institution, the more its risk infrastructure should capture relevant and reliable information and trends that would support the development of a sophisticated approach to determine a risk based ECL. Conversely, for smaller and simpler portfolios or institutions, a less sophisticated approach may be adopted to align with the risk management infrastructure and processes within thelicensee .Added: June 2022CM-1.8.21
Regardless of the size of the
licensee or prominence of the portfolio, the approach adopted by thelicensee should comply with the specific requirements of this section and applicable accounting standards. It is not necessary that everylicensee or every portfolio within thelicensee would apply the same level of sophistication. However,licensees will need to periodically assess whether their approach continues to be appropriate and relevant in light of changing circumstances with the aim of improving its level of estimation over time.Added: June 2022Measurement Requirements
CM-1.8.22
The credit impairment assessment under FAS 30 is based on an expected loss approach, i.e. it is not necessary for a loss event to occur before an ECL is recognised. As a result, all financial assets are generally expected to attract an ECL. For the purpose of Section CM 1.8, any direct credit exposures to the government of Bahrain (or exposures explicitly guaranteed by the government of Bahrain) are exempted from the application of the expected credit loss model.
Added: June 2022CM-1.8.22A
For the purpose of Section CM-1.8, the portion of the exposure that is explicitly guaranteed by Tamkeen is exempted from the application of the expected credit loss model.
Added: January 2023CM-1.8.23
FAS 30 requires a three-stage approach to recognise and measure ECL at each reporting date, which is based on changes observed in credit quality of financial assets since origination. The standards prescribe two measures of ECL to be carried by
licensees :(a) Twelve-month ECL: The expected credit losses that result from default events that are possible within 12 months after the reporting date. It is not the expected cash shortfalls over the 12-month period, but the entire credit loss on an asset weighted by the probability that the loss will occur in the next 12 months; and(b) Life-time ECL: The expected credit losses that result from all possible default events over the life of the financial instrument.Added: June 2022CM-1.8.24
The below staging classification must represent migration in credit quality and dictates the level of ECL to be recognised. The following must be followed:
Staging Description ECL measure Stage 1 Performing assets with no significant deterioration in credit risk since origination or with very lowcredit risk .12-month ECL Stage 2 Performing assets that have exhibited significant increase in credit risk since origination.Life-time ECL Stage 3 Non-performing exposures that are considered credit impaired. Life-time ECL Added: June 2022CM-1.8.25
The staging classification should normally apply to the entire balance of an outstanding facility because if a problem exists with one credit, it normally applies to the whole facility and not just the payment or individual credit which may be overdue. This is a conservative approach, which will alert
licensee management and the Board to the full extent of a potential problem.Added: June 2022Regulatory Treatment of Accounting Provisions
Restructured Accounts, Forbearance and Modifications
CM-1.8.27
Islamic bank licensees must report restructured accounts to the CBB on a quarterly basis until the satisfactory performance of the account, under revised terms, and thecounterparty has resolved its financial difficulty. All NPE accounts restructured must be classified as non-performing and must be subject to the requirements of the Paragraph CM-1.8.15 to CM-1.8.18. A Stage 3 or Stage 2 exposure that is restructured must be re-categorised in accordance with Appendix CM-6.Amended: April 2023
Added: June 2022CM-1.8.28
Forbearance, including synonyms such as ‘restructuring’ occurs when (a) a counterparty is experiencing financial difficulty in meeting its financial commitments; and (b) the
licensee grants a concession that it would not otherwise consider, irrespective of whether the concession is at the discretion of thelicensee and/or the counterparty. A concession is at the discretion of the counterparty (debtor) when the initial contract allows the counterparty (debtor) to change the terms of the contract in its own favour (embedded forbearance clauses) due to financial difficulty. When such concessions are granted, the facility is ‘restructured’.Added: June 2022CM-1.8.29
The following list provides examples of possible indicators of financial difficulty. In particular, financial difficulty can be identified even in the absence of arrears on an exposure:
(a) Acounterparty is currently past due on any of its material exposures.(b) Acounterparty is not currently past due, but it is probable that thecounterparty will be past due on any of its material exposures in the foreseeable future without the concession, for instance, when there has been a pattern of delinquency in payments on its material exposures.(c) Acounterparty ’s outstanding securities have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange due to noncompliance with the listing requirements or for financial reasons.(d) On the basis of actual performance, estimates and projections that encompass thecounterparty ’s current capabilities, thelicensee forecasts that all thecounterparty ’s committed/available cash flows will be insufficient to service all of its financings or Sukuk in accordance with the contractual terms of the existing agreement for the foreseeable future.(e) Acounterparty ’s existing exposures are categorised as exposures that have already evidenced difficulty in thecounterparty ’s ability to repay in accordance with the supervisory categorisation scheme in force or the credit categorisation scheme within thelicensee’s internal credit rating system.(f) Acounterparty is in non-performing status or would be categorised as nonperforming without the concessions.(g) Thecounterparty cannot obtain funds from sources other than the existing banks at an effective profit rate equal to the current market rates for similar financings or Sukuk for a non-troubledcounterparty .Added: June 2022CM-1.8.30
Concessions are special contractual terms and conditions that a financier would not extend or consider under normal market conditions.
Added: June 2022CM-1.8.31
Licensees should distinguish between restructured financings and rescheduled financings where no concessions have been granted to a performingcustomer in response to changes in market conditions provided that at the time of rescheduling the financings have been serviced normally, the ability of the obligor to service is not in doubt and where there is reasonable assurance that the obligor will be able to service all future payments on the financings in accordance with the revised repayment terms.Added: June 2022CM-1.8.32
Islamic bank licensees must disclose in their public disclosures their policies and definitions that are integral to the estimation of ECL. Quantitative and qualitative disclosures, taken together, must communicate to users the main assumptions/inputs used to develop ECL estimates.Added: June 2022CM-1.9 CM-1.9 Provisioning Policies of Branches of Foreign Bank Licensees
CM-1.9.1
Specific provisions for impaired assets (i.e. Stage 3 accounts) and, where applicable, collective provisions (i.e. Stage 1 and Stage 2) representing ECL on performing exposures of
branches of foreign bank licensees must be maintained in the books of the Bahrainbranch .Added: June 2022CM-1.9.2
If a
branch of foreign bank licensee which is awholesale bank licensee is not able to meet the requirement in Paragraph CM-1.9.1, thebranch's head office must advise the CBB, on an annual basis and in writing, whether an equivalent or higher amount of specific and collective provisions related to the exposures of its Bahrainbranch are being maintained by the head office. In all cases, thebranch must maintain and make available all underlying details of such provision calculations at the request of its external auditors and the CBB. The provisions maintained at the head office in relation to exposures of thebranch must be disclosed in the financial statements of thebranch submitted to the CBB.Added: June 2022CM-1.9.3
In addition, the CBB may contact the
licensee’s home supervisor , on a regular or ad hoc basis, in order to obtain information about the adequacy of the provisioning for such assets or may require thelicensee to provide additional comfort or assurance, e.g. through external auditors, that such provisions are indeed set aside properly.Added: June 2022CM-1.10 CM-1.10 [This Section was deleted in January 2023]
CM-1.10.1
[This Paragraph was deleted in January 2023].
Deleted: January 2023
Added: June 2022CM-1.10.2
[This Paragraph was deleted in January 2023].
Deleted: January 2023
Added: June 2022CM-1.10.3
[This Paragraph was deleted in January 2023].
Deleted: January 2023
Added: June 2022CM-1.10.4
[This Paragraph was deleted in January 2023].
Deleted: January 2023
Added: June 2022CM-2 CM-2 The Monitoring and Control of Large Exposures
CM-2.1 CM-2.1 Overview
CM-2.1.1
The CBB’s directives on large
exposures forlicensees in Bahrain are issued as part of the CBB’s measures to encouragelicensees to mitigate risk concentrations and to design thelicensees’ large exposure framework so that the maximum possible loss thelicensee could incur, if a singlecounterparty or group of connectedcounterparties were to suddenly fail, would not endanger thelicensee’s survival as a going concern.Added: June 2022CM-2.1.2
The contents of this Chapter apply in full to all
Bahraini Islamic bank licensees on a consolidated basis.Added: June 2022CM-2.1.3
The application of the large exposures framework at the consolidated level implies that the
licensee must consider all exposures to third parties across the relevant regulatory consolidation group and compare the aggregate of those exposures with the group’s consolidated total capital.Added: June 2022CM-2.1.4
Bahraini Islamic bank licensees must report large exposures through the PIRI forms (see Module CA).Added: June 2022CM-2.2 CM-2.2 Exposures Undertaken by Overseas Islamic bank licensees
CM-2.2.1
The CBB may, if circumstances so require and on a case-by-case basis, apply the full or part of the requirements of this Chapter to
branches of foreign bank licensees .Added: June 2022CM-2.3 CM-2.3 Measure of Exposure
CM-2.3.1
For the purpose of the banking book and the trading book, the measure of
exposure , net of specific provisions, reflects the maximum loss that will arise should acounterparty fail, or the loss that may arise due to exposures relating to concentration per product, asset classes,collateral , segments, country, region, currencies, market, etc. In certain cases (particularly Shari’a complianthedging instruments), the measure of anexposure may be larger than that used in published financial statements. Consistent with this, anexposure encompasses the amount at risk arising from thelicensee’s :(a) Claims on acounterparty , including actual and potential claims which would arise from the drawing down in full of undrawn advised facilities (whether revocable/irrevocable, conditional or unconditional) which thelicensee has committed itself to provide, and claims which thelicensee has committed itself to purchase or guarantee/underwrite. In the case of undrawn facilities (including overdrafts), the advised limit must be included in the measure ofexposure (after deduction of any provisions). In the case of financing/credit exposures, the net outstanding balance to be repaid, as shown in the books of thelicensee , must be included in the measure ofexposure after deduction of any provisions. These claims would include, but are not limited to:(i) Financings and other credit facilities (including overdrafts) whether or not drawn;(ii)Exposures arising through lease agreements;(iii) Margin held with exchanges orcounterparties ;(iv) Claims under Shari'a complianthedging contracts;(v) Claims arising in the course of settlement of securities transactions;(vi) Receivables, such as fees or commissions;(vii) Claims arising in the case of Shari'a compliant forward sales and purchases of financial instruments in the trading or banking books;(viii) Amounts outstanding under Shari'a compliant sale and repurchase agreements, Shari'a compliant forward asset purchase agreements, stock borrowing/ financing or similar transactions;(ix) Sukuks or other non-equity financial instruments; and(x)Underwriting exposures for debt type Sukuks or other non-equity financial instruments.(b)Contingent liabilities arising in the normal course of business, and thosecontingent liabilities which would arise from the drawing-down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which thelicensee has committed itself to provide. In the case of an undrawn overdraft, letter of credit (‘L/C’) or similar facility, the advised limit must be included in the measure ofexposure . Such liabilities may include:(i) Direct credit substitutes (including guarantees, standby letters of credit, bills accepted but not held by the reporting bank, and endorsements creating payable obligations);(ii) Claims sold with recourse (i.e. where thecredit risk remains with the reporting bank);(iii) Transaction-related contingents not having the character of direct credit substitutes (e.g. performance bonds, bid bonds, transaction-related L/Cs etc.);(iv) Undrawn documentary letters of credit issued or confirmed;(v) Shari’a complianthedging instruments where thelicensee is providing credit protection; and(vi) Asset value guarantees (where thelicensee provides protection on exit price or realisable value of a non-financial asset).(c) Any other assets or transactions whose value depends wholly or mainly on acounterparty performing its obligations, or whose value depends upon thatcounterparty ’s financial soundness, but which do not represent a claim on thecounterparty . Such assets or transactions include:(i) Equities and othercapital instruments ;(ii) Equity warrants, Shari'a complianthedging instruments etc. where the reporting bank is obtaining credit protection; and(iii)Underwriting or purchase commitments for equities.(d)Investments transactions in trading book (e.g. Shari’a compliant index positions, securitisations or exposure toinvestment funds) must be calculated by applying the same rules as for similar instruments in the banking book (see Paragraph CM-2.3.27 to CM-2.3.41). The amount invested in a particular structure may be assigned to the structure itself, defined as a distinctcounterparty to the counterparties corresponding to the underlying assets, or to the unknown client.Added: June 2022CM-2.3.2
Where the
licensee has a legally enforceable Shari’a compliant netting arrangement in place for financings and deposits, it may calculate the exposure values for large exposures in accordance with Section CA-4.2.Added: June 2022Eligible Credit Risk Mitigation (‘CRM’) Techniques
CM-2.3.3
Bahraini Islamic bank licensee must recognise an eligible CRM technique in the calculation of an exposure whenever it has used this technique to calculate the risk-based capital requirements under Chapter CA-4. Eligiblecredit risk mitigation techniques for large exposures are those that meet the minimum requirements and eligibility criteria for the recognition of unfunded credit protection and financialcollateral that qualify under Chapter CA-4. Other forms of collaterals, e.g. receivables, commercial and residential real estate are not eligible to reduce exposure values for large exposure purposes unless the title deeds, in the case of real estate, are held in the name of thelicensee and it is able to demonstrate that it has the ability to realise the value of the collateral.Added: June 2022CM-2.3.4
In accordance with Paragraph CA-4.7.27, hedges with maturity mismatches are recognised only when their original maturities are equal to or greater than 1 year and the residual maturity of a hedge is not less than 3 months.
Added: June 2022CM-2.3.5
If there is a maturity mismatch in respect of
credit risk mitigants (collateral, on balance sheet netting, guarantees and Shari’a complianthedging instruments for credit protection) recognised under Paragraph CA-4.7.27, the adjustment of the credit protection for the purpose of calculating large exposures must be calculated according to CA-4.7.28.Added: June 2022CM-2.3.6
Bahraini Islamic bank licensee must reduce the value of the exposure to the originalcounterparty by the amount of eligible CRM technique recognised under Chapter CA-4. The recognised amount is:(a) The value of the protected portion in the case of unfunded credit protection;(b) The value of the portion of the claim collateralised by the market value of the recognised financialcollateral when thelicensee uses the simple approach under Section CA-4.7; and(c) The value of thecollateral adjusted after applying the required haircuts, in the case of financialcollateral when thelicensee applies the comprehensive approach (see Section CA-4.7).Added: June 2022CM-2.3.7
The exposure value for instruments that give rise to
counterparty credit risk and are not securities financing transactions, must be the exposure at default according to the standardised approach for the purpose of computing capital adequacy (See Module CA).Added: June 2022CM-2.3.8
Off-balance sheet items must be converted into credit exposure equivalents through the use of credit conversion factors (‘CCFs’) by applying the CCFs set-out in Section CA-4.5, with a floor of 10 percent.
Added: June 2022CM-2.3.9
Shari’a compliant
hedging instruments including those used for credit protection must be converted into positions following Section CA-4.5. These instruments are decomposed into their individual legs.Added: June 2022CM-2.3.10
For Shari’a compliant
hedging instruments for credit protection that represent sold protection, the exposure to the referenced name must be the amount due in cases where the referenced name triggers the instrument, minus the absolute value of the credit protection.Added: June 2022CM-2.3.11
In case of syndicated facilities initially underwritten by the
licensee , the nominal amount would include only thelicensee’s share of the syndication and any amounts for which binding commitments from other financial institutions are not available or have not been sold down. Where a binding commitment is available, that amount would be excluded in calculation of the large exposures. See Section CM-2.6 for exemptions.Added: June 2022Offsetting Long and Short Positions in the Trading Book
CM-2.3.12
Bahraini Islamic bank licensee's exposure arising fromsecurities ’ trading operations is calculated as its net long position in a particularsecurity . Thelicensee’s ‘net long position’ in asecurity refers to its commitment to buy thatsecurity together with its current holdings of the samesecurity , less its commitment to sell thesesecurities .Added: June 2022CM-2.3.13
Positions in the same issue (two issues are defined as the same if the issuer, return, currency and maturity are identical) may only be offset for the purpose of calculating large exposure.
Added: June 2022CM-2.3.14
Positions in different issues from the same
counterparty may be offset only when the short position is junior to the long position, or if the positions are of the same seniority, if applicable.Added: June 2022CM-2.3.15
Bahraini Islamic bank licensee must add any exposure to any singlecounterparty arising in the trading book to any other exposures to thatcounterparty that lie in the banking book to calculate its total exposure to thatcounterparty .Added: June 2022CM-2.3.16
Netting across the banking and the trading books is not permitted.
Added: June 2022Covered Sukuks
CM-2.3.17
Covered Sukuks are Sukuks issued by a bank or mortgage institutions and are subject by law to special public supervision designed to protect Sukuk-holders. Proceeds deriving from the issue of these Sukuks must be invested in conformity with the law in assets which, during the whole period of the validity of the Sukuks, are capable of covering claims attached to the Sukuks and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued profit.Added: June 2022CM-2.3.18
A covered Sukuk satisfying the conditions set out in Paragraph CM-2.3.19, may be assigned an exposure value of no less than 20 percent of the nominal value of the
licensee’s covered Sukuk holding. Other covered Sukuks must be assigned an exposure equal to 100 percent of the nominal value of thelicensee’s covered Sukuk holding. Thecounterparty to which the exposure value is assigned is the issuing bank.Added: June 2022CM-2.3.19
To be eligible to be assigned an exposure value of less than 100 percent, a covered Sukuk must satisfy all the following conditions:
(a) It must meet the general definition set out in CM-2.3.17.(b) The pool of underlying assets must exclusively consist of one or more of the following:(i) Claims on, or guaranteed by, sovereigns, their central banks, public sector entities or multilateral development banks;(ii) Claims secured by mortgages on residential real estate that would qualify for a 35 percent or lower risk-weight under Section CA-4.2 and have a financing -to-value ratio of 80 percent or lower;(iii) Claims secured by commercial real estate that would qualify for the 100 percent or lower risk-weight under Section CA-4.2 and with a financing-to-value ratio of 60 percent or lower; and/or(iv) Claims on, or guaranteed by banks that qualify for a 30 percent or lower risk weight. However, such assets cannot exceed 15 percent of covered Sukuk issuances; and(c) The nominal value of the pool of assets assigned to the covered Sukuk instrument(s) by its issuer must exceed its nominal outstanding value by at least 10 percent. The value of the pool of assets for this purpose does not need to be that outlined by the legislative framework. However, if the legislative framework does not stipulate a requirement of at least 10 percent, the issuing bank needs to publicly disclose on a regular basis that their cover pool meets the 10 percent requirement in practice. In addition to the primary assets listed under this Sub-paragraph, the additionalcollateral may include substitution assets (cash or short-term liquid and secure assets held in substitution of the primary assets to top up the cover pool for management purposes) and Shari’a complianthedging instruments entered into for the purposes ofhedging the risks arising in the covered Sukuk program.Added: June 2022CM-2.3.20
In order to calculate the required maximum financing-to-value for residential real estate and commercial real estate referred to in Paragraph CM-2.3.19, the following requirements must be met:
(a) Legal Enforceability: Any claim on acollateral taken must be legally enforceable in all relevant jurisdictions, and any claim oncollateral must be properly filed on a timely basis.Collateral interests must reflect a perfected lien (i.e. all legal requirements for establishing the claim have been fulfilled). In addition to this, thecollateral agreement and the legal process underpinning it must be such that they allow thelicensee to realise the value of thecollateral within a reasonable timeframe; and(b) Frequent Revaluation: Thelicensee must monitor the value of thecollateral on a frequent basis and, at a minimum, once a year. More frequent monitoring is suggested where the market is subject to significant changes in conditions. Statistical methods of evaluation (e.g. reference to house price indices, sampling) may be used to update estimates or to identifycollateral that may have declined in value and that may need reappraisal. A qualified professional must evaluate the property when information indicates that the value of thecollateral may have declined materially relative to general market prices, or when a credit event, such as a default, occurs.Added: June 2022CM-2.3.21
The conditions set out in Paragraph CM-2.3.19 must be satisfied at the inception of the covered Sukuk and throughout its remaining maturity.
Added: June 2022Collective Investment Undertakings, Securitisation Vehicles and Other Structures
CM-2.3.22
Bahraini Islamic bank licensees must consider exposures even when a structure lies between thelicensee and the exposures, that is, even when thelicensee invests in structures through an entity which itself has exposures to assets (‘underlying assets’).Bahraini Islamic bank licensees must assign the exposure amount, i.e. the amount invested in a particular structure, to specificcounterparties following the approach described in Paragraphs CM-2.3.23 to CM-2.3.30. The structures include funds, securitisations and other structures with underlying assets.Added: June 2022CM-2.3.23
Bahraini Islamic bank licensee may assign the exposure amount to the structure itself, defined as a distinctcounterparty , if it can demonstrate that thelicensee’s exposure amount to each underlying asset of the structure is smaller than 1 percent of total consolidated capital, considering only those exposures to underlying assets that result from theinvestment in the structure itself, and using the exposure value calculated according to Paragraphs CM-2.3.29 and CM-2.3.30. In this case, thelicensee is not required to look through the structure to identify the underlying assets.Added: June 2022CM-2.3.24
Bahraini Islamic bank licensees must look through the structure to identify those underlying assets for which the underlying exposure value is equal to or above 1 percent of total consolidated capital. In this case, thecounterparty corresponding to each of the underlying assets must be identified so that these underlying exposures can be added to any other direct or indirect exposure to the samecounterparty . Thelicensee’s exposure amount to the underlying assets that are below 1 percent of thelicensee’s total consolidated capital may be assigned to the structure itself (i.e. partial Look-Through-Approach (‘LTA’) is permitted).Added: June 2022CM-2.3.25
If a
Bahraini Islamic bank licensee is unable to identify the underlying assets of a structure where the total amount of its exposure does not exceed 1 percent of its Total consolidated capital, thelicensee must:(a) Assign the total exposure amount of itsinvestment to the structure; or(b) Assign this total exposure amount to the unknown client.Added: June 2022CM-2.3.26
Bahraini Islamic bank licensees must aggregate all ‘unknown exposures’ as if they are related to a singlecounterparty (the unknown client), to which the large exposure limit would apply.Added: June 2022CM-2.3.27
When a LTA is not required, according to Paragraph CM-2.3.23, a
Bahraini Islamic bank licensee must, nevertheless, be able to demonstrate that regulatory arbitrage considerations have not influenced the decision whether to look through or not – e.g. that thelicensee has not circumvented the large exposure limit by investing in several individually immaterial transactions with identical underlying assets.Added: June 2022CM-2.3.28
If the LTA need not be applied,
Bahraini Islamic bank licensee ’s exposure to the structure must be the nominal amount it invests in the structure.Added: June 2022CM-2.3.29
When the LTA is required, the exposure value assigned to a
counterparty is equal to the pro rata share that thelicensee holds in the structure multiplied by the value of the underlying asset in the structure. Thus, thelicensee holding a 1 percent share of a structure that invests in 20 assets each with a value of 5, must assign an exposure of 0.05 to each of thecounterparties . An exposure to acounterparty must be added to any other direct or indirect exposures thelicensee has to thatcounterparty .Added: June 2022CM-2.3.30
When the LTA is required, the exposure value to a
counterparty is measured for each tranche within the structure, assuming a pro rata distribution of losses amongst investors in a single tranche. To compute the exposure value to the underlying asset, thelicensee must:(a) Consider the lower of the value of the tranche in which thelicensee invests and the nominal value of each underlying asset included in the underlying portfolio of assets; and(b) Apply the pro rata share of thelicensee’s investment in the tranche to the value determined in the first step above.Added: June 2022Identification of Additional Risks
CM-2.3.31
Bahraini Islamic bank licensees must identify third parties that may constitute an additional risk factor inherent in a structure itself rather than in the underlying assets. This third party could be a risk factor for more than one structure that thelicensee invests in. Examples of roles played by third parties include originator, fund manager, liquidity provider and credit protection provider.Added: June 2022CM-2.3.32
Bahraini Islamic bank licensees should connect theirinvestments in those structures with a common risk factor, to form a group of connectedcounterparties . In such cases, the manager would be regarded as a distinctcounterparty so that the sum of thelicensee’s investments in all of the funds managed by this manager would be subject to the large exposure limit, with the exposure value being the total value of the differentinvestments . In other cases, the identity of the manager may not comprise of an additional risk factor – for example, if the legal framework governing the regulation of particular funds requires separation between the legal entity that manages the fund, and the legal entity that has custody of the fund’s assets.Added: June 2022CM-2.3.33
In the case of structured finance products, the liquidity provider or sponsor of short-term programmes (asset-backed commercial paper – ‘ABCP’, or conduits and structured
investment vehicles – ‘SIVs’) may warrant consideration as an additional risk factor (with the exposure value being the amount invested).Added: June 2022CM-2.3.34
Bahraini Islamic bank licensees may add theirinvestments in a set of structures associated with a third party that constitutes a common risk factor to other exposures (such as a financing) it has to that third party. Whether the exposures to such structures must be added to any other exposures to the third party, would again depend on a case-by-case consideration of the specific features of the structure and on the role of the third party. In the example of the fund manager, adding together the exposures may not be necessary because potentially fraudulent behaviour may not necessarily affect the repayment of a financing exposure.Added: June 2022Identification of Additional Risks
CM-2.3.35
It is conceivable that the
licensee may consider multiple third parties to be potential drivers of additional risk. In this case, thelicensee should assign the exposure resulting from theinvestment in the relevant structures to each of the third parties.Added: June 2022CM-2.3.36
The requirement set out in Paragraph CM-2.3.31 to recognise a structural risk inherent in the structure instead of the risk stemming from the underlying exposures is independent of whatever the general assessment of additional risks concludes.
Added: June 2022Exposures to Central Counterparties
CM-2.3.37
Exposures to
qualified central counterparties (‘QCCPs’) related to clearing activities are exempted from the requirements of this Chapter.Added: June 2022CM-2.3.38
In the case of non-QCCPs,
Bahraini Islamic bank licensees must measure their exposure as a sum of both the clearing exposures described in Paragraph CM-2.3.40 and the non-clearing exposures described in Paragraph CM-2.3.43 and must respect the general large exposure limit of 15 percent of Total consolidated capital.Added: June 2022CM-2.3.39
The concept of closely related
counterparties referred to in CM-2.5.4 does not apply in the context of exposures to centralisedcounterparties (‘CCPs’) that are specifically related to clearing activities.Added: June 2022Identification of Additional Risks
CM-2.3.40
Bahraini Islamic bank licensees must identify exposures to a CCP related to clearing activities and sum together these exposures. Exposures related to clearing activities are listed in the table below, together with the exposure value to be used:Trade Exposures The exposure value of trade exposures must be calculated using the exposure measures prescribed in this Chapter for the respective type of exposures. Segregated Initial Margin The exposure value is 0. Non-segregated Initial Margin The exposure value is the nominal amount of initial margin posted. Pre-funded Default Fund Contributions Nominal amount of the funded contribution. Unfunded Default Fund Contributions The exposure value is 0. Equity Stakes The exposure value is the nominal amount. Added: June 2022CM-2.3.41
Regarding exposures subject to clearing services (the
licensee acting as a clearing member or being a client of a clearing member), thelicensee must determine thecounterparty to which exposures must be assigned by applying the provisions of Module CA.Added: June 2022CM-2.3.42
Bahraini Islamic bank licensees must apply a risk weight of 2 percent to their trade exposure to the CCP in respect of OTC Shari’a complianthedging instruments, exchange-traded Shari’a complianthedging instrument transactions, Shari’a compliant securities financing transactions (SFTs) and long-settlement transactions, where thelicensee acts as a clearing member of a CCP for its own purposes. Where the clearing member offers clearing services to clients, the 2 percent risk weight also applies to the clearing member’s trade exposure to the CCP that arises when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults.Added: June 2022CM-2.3.43
Other types of exposures that are not directly related to clearing services provided by the CCP, such as funding facilities, credit facilities, guarantees, etc. must be measured according to the rules set out in this Chapter as for any other type of
counterparty . These exposures will be added together and be subjected to the large exposure limit.Added: June 2022CM-2.4 CM-2.4 Identity of Counterparty
CM-2.4.1
For the purposes of measuring
exposures , thecounterparty will generally be the person from whom the concerned funds are receivable (in the case of fees and commissions etc.), the obligor (customer) in the case of credit facilities; the person guaranteed; the issuer of asecurity in the case of asecurity held; or the party with whom a contract was made in the case of a Shari’a complianthedging instrument contract.Added: June 2022CM-2.4.2
Where a third party has provided an eligible guarantee, and subject to the guaranteed
licensee’s policy statement not stating otherwise, the guaranteedlicensees must recognise an exposure to the third party guarantor, rather than the person guaranteed (see Chapter CA-4 for full conditions relating to the recognition of guarantees for regulatory purposes).Added: June 2022CM-2.5 CM-2.5 Limits for Large Exposures
Definitions and Aggregate Limit on Large Exposures
CM-2.5.1
A ‘large
exposure ’ is anyexposure to acounterparty or a group of closely relatedcounterparties which is greater than, or equal to, 10 percent of the reportingBahraini Islamic bank licensee ’s Total Consolidated capital but excluding intragroup exposures.Added: June 2022CM-2.5.2
CBB requires that any large exposure, as defined in Paragraph CM-2.5.1, must have a prior approval by the
Bahraini Islamic bank licensee 's Board of Directors unless the exposure was incurred within the specific obligor limits for which thelicensee has prior Board approval.Added: June 2022Single Exposure Limit to a counterparty – 15 Percent
CM-2.5.3
A
Bahraini Islamic bank licensee may not incur anexposure to an individualcounterparty or a group of closely relatedcounterparties (not connected to the reportinglicensee ) which is 15 percent or more of the reportinglicensee’s Total consolidated capital without the prior written approval of the CBB. Where this limit has been exceeded, the excess amount must be risk-weighted at 800 percent.Added: June 2022Closely related counterparties – Criteria
CM-2.5.4
In order for the
licensee to establish the existence of a group of closely relatedcounterparties , it must assess the relationship amongstcounterparties by referring to one or more of the following criteria:(a) Control relationship: One of thecounterparties , directly or indirectly, has control over the other(s) based on the following:(i) Where one entity owns 50% or more of the voting rights of another entity.(ii) Where one entity is deemed to have control by virtue of voting agreements (e.g. control of a majority of voting rights pursuant to an agreement with other shareholders).(iii) Where one entity exercises significant influence on the appointment or dismissal of an entity’s board and/or senior management, such as the right to appoint or remove a majority of such persons, or the fact that a majority of such persons have been appointed solely as a result of the exercise of an individual entity’s voting rights.(iv) Where one entity has significant influence on the board or senior management, e.g. an entity has the power, pursuant to a contract or otherwise, to exercise a controlling influence over the management or policies of another entity (e.g. through consent rights over key decisions).; or(b) Economic interdependence: If one of thecounterparties were to experience financial problems, in particular funding or repayment difficulties, the other(s), as a result, would also be likely to encounter funding or repayment difficulties.Added: June 2022CM-2.5.5
Bahraini Islamic bank licensees are also expected to refer to criteria specified in IFRS for further qualitative guidance when determining control.Added: June 2022CM-2.5.6
Bahraini Islamic bank licensees must assess the control relationship using the following criteria:(a) Voting agreements (e.g. control of a majority of voting rights pursuant to an agreement with other shareholders);(b) Significant influence on the appointment or dismissal of an entity’s administrative, management or supervisory body, such as the right to appoint or remove a majority of members in those bodies, or the fact that a majority of members have been appointed solely as a result of the exercise of an individual entity’s voting rights;(c) Significant influence on senior management, e.g. an entity has the power, pursuant to a contract or otherwise, to exercise a controlling influence over the management or policies of another entity (e.g. through consent rights over key decisions).Added: June 2022CM-2.5.7
The CBB will exercise its discretion in applying the definition of closely related
counterparties on a case-by-case basis if it finds, during its onsite or offsite supervisory review, any linkage of suchcounterparties .Added: June 2022CM-2.5.8
In establishing closely related
counterparty relationships based on economic interdependence (CM-2.5.4 (b)),licensees must consider, at a minimum, the following qualitative criteria:(a) Where 50 percent or more of onecounterparty ’s gross receipts or gross expenditures (on an annual basis) are derived from transactions with the othercounterparty (e.g. the owner of a residential/commercial property and the tenant who pays a significant part of the rent);(b) Where onecounterparty has fully or partly guaranteed the exposure of the othercounterparty , or is liable by other means, and the exposure is so significant that the guarantor is likely todefault if a claim occurs;(c) Where a significant part of onecounterparty ’s production/output is sold to anothercounterparty , which cannot easily be replaced by othercustomer s;(d) When the expected source of funds to repay each exposure onecounterparty makes to another is the same and thecounterparty does not have another source of income from which the exposure may be fully repaid;(e) Where it is likely that the financial problems of onecounterparty would cause difficulties for the othercounterparties in terms of full and timely repayment of liabilities;(f) Where the insolvency ordefault of onecounterparty is likely to be associated with the insolvency ordefault of the other(s); and(g) When two or morecounterparties rely on the same source for the majority of their funding and, in the event of the common provider’sdefault , an alternative provider cannot be found. In this case, the funding problems of onecounterparty are likely to spread to another due to a one-way or two-way dependence on the same main funding source.Added: June 2022Limit on Exposures to connected counterparties – 25 Percent Aggregate
CM-2.5.9
Exposures to connectedcounterparties ofBahraini Islamic bank licensees may be justified only when undertaken for the clear commercial advantage of thelicensee , when negotiated and agreed on an arm’s-length basis, and when included in the LargeExposures Policy statement.Amended: October 2022
Added: June 2022CM-2.5.10
A
Bahraini Islamic bank licensee may not exceed the individual or aggregate limits for exposures to connectedcounterparties shown in Paragraph CM-2.5.15, without the prior written approval of the CBB.Added: June 2022CM-2.5.11
The
licensee may not undertakeexposures to its own external auditor. In this context, ‘external auditor’ refers to the firm/partnership, the partners, the directors and the managers of the audit firm.Added: June 2022CM-2.5.12
For the purpose of this Module, ‘connected
counterparties ’ include legal and natural persons connected with theBahraini Islamic bank licensee , including, in particular;controllers of thelicensee (and Board members, senior management and key staff of thecontroller , thecontroller’ s appointed Board representatives, subsidiaries and associated companies ofcontrollers including their Board members, senior management and key staff), approved persons of thelicensee , as defined by Module LR-1A, and their close family members (as defined by IFRS – IAS 24); associated companies not mentioned hereinabove, unconsolidated subsidiaries and members of the Shari’a Supervisory Board (‘SSB’), if any.Added: June 2022CM-2.5.13
Equity participations in, and credit exposures to, consolidated banking and financial subsidiaries (see CA-2.3.1(c)) need not be included in exposures to connected
counterparties for the sake of the table in CM-2.5.15. Equity participations in, and credit or financing exposures to, unconsolidated subsidiaries are included in the definition of exposure in order to understand the degree of support the parent is supplying to its unconsolidated subsidiaries on a day-to-day basis.Added: June 2022CM-2.5.14
The CBB will exercise its discretion in applying the definition of connected
counterparties of thelicensee on a case-by-case basis, if it finds during its onsite or offsite supervisory review any linkage of suchcounterparties .Added: June 2022CM-2.5.15
Exposures (both on and off-balance sheet) to all connectedcounterparties ofBahraini Islamic bank licensees listed below, when taken together, may not exceed 25 percent of the Total consolidated capital. Where any of these limits have been exceeded, the excess amount must be risk-weighted at 800 percent.Connected Counterparties Individual Limit Aggregate Limit Controllers and their close family members as defined in IFRS, and Board members, senior management and key staff of thecontroller , thecontroller ’s appointed Board representatives,subsidiaries and associated companies ofcontrollers including their Board members, senior management and key staff0% 0% Approved persons (and their close family members as defined in IFRS) and members of the SSB10% 25% Associated companies not mentioned hereinabove, other connected counterparties not mentioned above, and unconsolidated subsidiaries15% Total (including senior management and others) 25% Added: June 2022Deductions from Total Capital
CM-2.5.16
The CBB will closely examine all exposures to ‘connected
counterparties ’ and will deduct them from thelicensee’s consolidated total capital if they are, in the CBB's opinion, of the nature of a capitalinvestment , or provision of long-term working capital, or are made on particularly concessionary terms.Added: June 2022CM-2.5.17
Reciprocal cross-holdings of capital between the
licensee and itscontrollers (see GR-5) which artificially inflate the capital of licensee concerned are not permitted. Any cross-holdings that occur, due toacquisitions or takeovers, must be deducted from the concernedlicensee’s total capital (see also CA-2).Added: June 2022CM-2.5.18
Any other form of financing to connected
counterparties outside the scope of the above will be dealt with by the CBB on a case-by-case basis.Added: June 2022CM-2.5.19
Bahraini Islamic bank licensees must perform valuations ofcollaterals covering large exposures to ensure thatcollaterals are, and continue to be, enforceable and realisable at least on an annual basis when market conditions are adverse.Added: June 2022CM-2.6 CM-2.6 Exempt Exposures
Exempt Exposures to Parties not Connected to the Licensee
CM-2.6.1
Certain types of
exposure are exempt from the 15 percentexposure limit set out in CM-2.5.3, but commitment to suchexposures must be reported to the CBB on a quarterly basis using the Form PIRI provided in Appendix BR-5.Added: June 2022CM-2.6.2
These exemptions fall into the following categories and are subject, in each case, to the policy statement:
(a) Short term interbank exposures, with original maturities of 3 months or less to parties not connected to the reportinglicensee ;(b)Exposures to GCC governments and their public sector entities that are not connected to the reportinglicensee and do not operate on a commercial basis, as set out in the guidelines to the PIRI (see Module CA).(c)Exposures secured by cash or GCC government securities or guarantees;(d)Exposures to central governments who are members of the Organisation for Economic Cooperation and Development (‘OECD’) orexposures secured by OECD central governmentsecurities /guarantees;(e) Pre-notified exposures which are covered by a guarantee from thelicensee’s parent (see Paragraphs CM-2.6.9 to CM-2.6.12); and(f) Sukuk or other Shari’a compliant securities issued or exposure to / exposure guaranteed by the Islamic Development Bank or any of its subsidiaries and other multilateral development banks, such as IMF, World Bank, Arab Monetary Fund, Asian Development Bank, African Development Bank, European Bank of Reconstruction and Development.Amended: October 2022
Added: June 2022CM-2.6.3
Where two or more entities that are outside the scope of sovereign exemption are controlled by or are economically dependent on an entity that falls within the scope of the sovereign exemption referred to in paragraph CM-2.6.2, and are closely related, those entities need not be deemed to constitute a group of closely related
counterparties pursuant to paragraph CM-2.5.4. Additionally, consistent with Module CA, where other supervisors also treat claims on named PSEs as claims on their sovereigns, claims to those PSEs are treated as claims on the respective sovereigns.Added: June 2022CM-2.6.4
If a
Bahraini Islamic bank licensee has an exposure to any entity noted in Paragraph CM-2.6.2 which is hedged by a Shari’a complianthedging instruments for credit protection, thelicensee will have to recognise an exposure to thecounterparty providing the credit protection, as prescribed in Paragraphs CM-2.4.2 and CM-2.3.16, notwithstanding the fact that the original exposure is exempted.Added: June 2022Exempt Exposures to Connected Counterparties
CM-2.6.5
Exposures to subsidiaries which are always fully consolidated on a line-by-line basis for all supervisory purposes are exempt from the limits in this Module on a consolidated basis. However,
licensees must observe the CBB's solo capital adequacy requirements in Module CA.Added: June 2022CM-2.6.6
Exposures to unconsolidated subsidiaries (normally non-financial and outside the scope of regulatory consolidation) are not exempt from the limits in this Module and are included under the limits for exposures to associates, related parties and unconsolidated subsidiaries (See Paragraph CM-2.5.14).
Added: June 2022CM-2.6.7
Bahraini Islamic bank licensees may apply to the CBB to take on a treasury role on behalf of the group as a whole (provided that the group is subject to consolidated supervision by its home supervisor). The CBB's policy regarding the taking on of a treasury role includes exposures arising from a central risk management function. Such exposures must be approved by the CBB before they may be exempted.Added: June 2022CM-2.6.8
In the above scenario (Paragraph CM-2.6.7), for example, exposures of more than 15% of Total Consolidated Capital to a parent bank from a subsidiary bank may be permitted where they constitute short term financing of excess liquid funds.
Added: June 2022Exposures Undertaken by a Subsidiary Bank
CM-2.6.9
Where exposures undertaken by a Bahrain subsidiary of an overseas bank are guaranteed by its parent bank, the Bahrain subsidiary bank may be deemed to have an exposure to its parent bank.
Added: June 2022CM-2.6.10
Under the terms of this Module (see Sub-Paragraph CM-2.6.2(f)), such indirect exposures to a parent bank may be exempted from the limits on large exposures if the CBB is satisfied that:
(a) Such exposures have been pre-notified to the CBB for the CBB's approval and are entered into within the terms of a policy agreed by the parent bank;(b) There are guarantees in place from the parent bank to protect the subsidiary should the exposure become impaired or require to be written off; and(c) In the case oflicensees which are the Bahrain subsidiaries of overseas banks, the supervisory authority of the parent bank has approved the exposures that can be undertaken by the Bahrain subsidiary.Added: June 2022CM-2.6.11
In the case of a Bahrain incorporated bank’s subsidiary in Bahrain, in order for an exposure exceeding 15% of Total Capital to be acceptable in the subsidiary, the Bahrain parent bank must at all times have the capacity to take on the exposure to the third party, without itself exceeding the limit of 15% of its own Total Capital. Also, the total exposure of the banking group to the
customer must be within 15% of the parent bank’s consolidated Total Capital.Added: June 2022CM-2.6.12
The CBB will need to be satisfied that adequate control systems are in place to ensure that risks taken in the group as a whole are properly monitored and controlled.
Added: June 2022CM-2.7 CM-2.7 Reporting of Exposures
CM-2.7.1
Islamic bank licensees are required to report their 25 largestexposures to banks as well as their 25 largestexposures to non-banks to the CBB on a quarterly basis using the Form PIRI provided in Appendix BR-5.Added: June 2022CM-2.7.2
Bahraini Islamic bank licensees must report the financial details of each largeexposure , as defined under Paragraph CM-2.5.1 in Appendix BR-19, as required under Paragraph BR-3.1.7A.Amended: October 2022
Added: June 2022CM-2.7.3
Bahraini Islamic bank licensees must report all theirexposures to connectedcounterparties on a monthly basis using the form provided in Appendix BR-11, as required under Paragraph BR-4.3.4.Added: June 2022CM-2.7.4
Bahraini Islamic bank licensees are required to adopt policies and set internal limits, which will not lead to theexposure limit(s) referred to above being exceeded as a matter of course.Added: June 2022CM-2.7.5
For some
licensees , the CBB may determine it prudent to set lower largeexposure limits than the ones given in this Module.Added: June 2022CM-2.7.6
Should any
licensee incur or plans to incur anexposure to an individualcounterparty (other than an exemptexposure ) which results in or may result in it exceeding any of the limits set out above, this must be reported immediately to the CBB for its consideration. Where theexposure orcounterparty is not exempt, action must be taken to immediately bring theexposure back within applicable limits as soon as possible.Added: June 2022CM-2.8 CM-2.8 Policy Statements
CM-2.8.1
The CBB requires each
Bahraini Islamic bank licensee to set out its policy and internal limits on largeexposures , including limits for differing types ofexposures , to individualcustomer s, banks, corporates, countries, regions, products, asset classes,collateral , currencies, markets, commodities, connectedcounterparties and economic sectors, in a policy statement which must be formally approved by the Board of Directors. Furthermore,licensees must not implement significant changes to this policy without the prior approval of the Board.Amended: October 2022
Added: June 2022CM-2.8.2
The necessary control systems to give effect to the
licensee’s policy on largeexposures must be clearly specified and monitored by its Board.Added: June 2022CM-2.8.3
Bahraini Islamic bank licensees are required to implement appropriate internal systems and controls to monitor the size of their total consolidated capital on a daily basis to ensure that the limits detailed in this Module are not exceeded.Added: June 2022CM-2.9 CM-2.9 Concentrations in Geographic, Economic and Market Sectors
CM-2.9.1
The extent to which a
licensee may be prudently exposed to a particular geographic, economic and market sectors will vary considerably, depending upon the characteristics and strategy of thelicensees , and the sector concerned.Added: June 2022CM-2.9.2
Concentrations should also be recognised in not just geographic and economic sectors but also in markets (e.g. individual stock exchanges). The CBB will not apply common maximum percentages to
licensee’s sectoral or marketexposures but, instead, will continue to monitor suchexposures on an individual and general basis.Added: June 2022CM-2.9.3
Bahraini Islamic bank licensees must specify in their policy statements how they define geographic, economic and market sectors, and what limits apply to different sectors.Added: June 2022CM-2.9.4
Exposures and limits for sectors must be reviewed at least quarterly by the Board of Directors.Added: June 2022CM-2.9.5
Bahraini Islamic bank licensees which have over 10 percent of their risk-adjusted assets in market risk (i.e. the trading book) must also set market risk concentration limits.Added: June 2022CM-2.10 CM-2.10 Major Investments
Prior approval for Major Investments
CM-2.10.1
Bahraini Islamic bank licensees must obtain the CBB’s prior written approval before making aninvestment in another commercial or financial entity (whether incorporated inside or outside of Bahrain) which falls within the definition of amajor investment . Additionally, the CBB’s prior approval must be obtained for any subsequent increases in thelicensee’s ownership in excess of 5% of similar exposure. Where the increase is due to a revaluation or change in capital of thelicensee , a written notification outlining the percentage increase and reasons for the increase must be provided to the CBB.Added: June 2022CM-2.10.2
In assessing a proposed
major investment , the CBB will take into account the impact of suchinvestment on the risk profile of thelicensee . See Appendix CM-5 for criteria for assessment.Added: June 2022CM-2.10.3
A
major investment is defined as either of the following:(a) Aninvestment in thecapital instruments of another entity (whether financial or commercial) by aBahraini Islamic bank licensee which is equivalent to or more than 10% of the Bahraini Islamic bank licensee's consolidated Tier 1 capital; or(b) Aninvestment in the capital instruments of a non-financial entity (commercial entity) which is equivalent to or more than 10 percent of the issued common share capital of the commercial entity.Added: June 2022CM-2.10.4
Any
major investments by aBahraini Islamic bank licensee in the capital instruments of another entity must be included in the measure of an ‘exposure’ for the purposes of this Chapter, i.e. suchmajor investments must be aggregated with all other facilities to a client for the purpose of calculating the level of ‘largeexposures ’. Where a percentage ownership increase results in thelicensee exceeding the single large exposure limit, the 800 percent risk-weight rule must be applied (see CM-2.5).Added: June 2022CM-2.10.5
The CBB reserves the right to require
Bahraini Islamic bank licensees to dispose of anymajor investments acquired without its prior approval. Where a ‘major investment’ is acquired without the approval of the CBB, the entire value of the holding must be deducted from the consolidated total capital of the concernedlicensee . Approval will not be given for ‘major investments’ in entities incorporated in jurisdictions where secrecy constraints exist, or there are restrictions on the passage of information to thelicensee (other thancustomer confidentiality requirements imposed by financial regulators).Added: June 2022CM-2.10.6
If the
licensee’s close links with another entity prevent effective supervision of thelicensee (orlicensee group), the CBB may refuse or revoke a license, or require thelicensee to sell or otherwise dispose of entities within its corporate group, or to restructure thelicensee .Added: June 2022Limits of major investments
CM-2.10.7
The total amount of the
licensee’s investments in commercial entities, other than associated companies considered under CM-2.5.14, may not exceed the limits set forth below:Limits on major investments in commercial entities* Individual Limit** Aggregate Limit** Major investments by retail Islamic bank licensees 15% 30% Major investments by wholesale Islamic bank licensees undertaking commercial banking business 40% Major investments by wholesale Islamic bank licensees undertaking investment banking business 70% *Exposure for this purpose includes
investment incapital instruments and any otherexposure to the subject entity
** Limits expressed as a percentage of Total Tier 1 Capital.Added: June 2022CM-3 CM-3 Financings to Employees
CM-3.1 CM-3.1 Financings to Employees
CM-3.1.1
The CBB’s prior written consent must be obtained for any financing to an employee where the amount of this financing exposure, either singly or when added to an existing financing exposure(s) outstanding to that employee at that date, would be equal to or in excess of BD 100,000, or its equivalent in foreign currency.
Islamic bank licensees must notify the CBB in writing of any senior employee who fails to discharge his repayment obligations.Added: June 2022CM-3.1.2
Where an
Islamic bank licensee seeks the CBB’s prior approval, as required under Paragraph CM-3.1.1, in its request it must confirm that the employee financing is in line with thelicensee’s Board-approved policy. The request must also confirm that thelicensee has made an internal assessment and evaluation when reaching the decision to grant the employee financing and that all necessary internal approvals have been obtained. Thelicensee must also obtain the necessary credit reference information from the Bahrain Credit Reference Bureau.Added: June 2022CM-3.1.3
Islamic bank licensees must ensure that the provisions of relevant laws (including, specifically, the Bahrain Labour Law) are observed at all times in this regard.Added: June 2022CM-4 CM-4 Write-off – Credit Facility
CM-4.1 CM-4.1 Write-offs
CM-4.1.1
Bahraini Islamic bank licensees must notify the CBB of any write-off of an exposure of an amount in excess of BD 100,000, or its equivalent in foreign currency.Added: June 2022CM-4.1.2
Such notification should be accompanied by documentary evidence showing, beyond reasonable doubt, that the
customer does not possess the resources to fulfil the outstanding obligation.Added: June 2022CM-4.1.3
Bahraini Islamic bank licensees must obtain the CBB’s written no-objection before writing-off any of the following:(a)Exposures to, orexposures guaranteed by, anyapproved person of thelicensee or any other CBBlicensee ;(b)Exposures tocontrollers , subsidiaries, associates and SSB members of thelicensee ;(c)Exposures to any business entity for which thelicensee , or any of itsapproved persons , is a related party, such as a Board member, a shareholder owning 5 percent or more, a person assuming a managerial role, a guarantor, a SSB member, etc.; and(d)Exposures to anycontroller of another CBBlicensee (as defined in Resolution No. (16) of 2021 with respect to promulgating the Regulation Pertaining to Control in Banks).Amended: January 2023
Added: June 2022CM-4.1.4
Branches of foreign bank licensees must obtain the CBB’s written no-objection before writing off the exposures listed in CM-4.1.3 from (a) to (d) except for (b).Added: June 2022CM-4.1.5
Bahraini Islamic bank licensees must notify the CBB of any applicableexposures outlined in Paragraph CM-4.1.3 that are classified as NPEs.Added: June 2022CM-4.1.6
In order to comply with Sub-paragraphs CM-4.1.3 (a) and (d),
Islamic bank licensees should refer to the CBB register on the CBB website, which contains a list ofapproved persons andcontrollers of all CBBlicensees .Added: June 2022CM-5 CM-5 Consumer Finance
CM-5.1 CM-5.1 Overview
CM-5.1.1
This Chapter sets out various requirements regarding the provision of consumer finance within the Kingdom of Bahrain by the CBB
licensees . The aim of these requirements is to encourage:(a) Prudent financing bylicensees providing consumer finance; and(b) The transparent disclosure of the full costs and terms on whichlicensees offer consumer finance.Added: June 2022CM-5.2 CM-5.2 The CBB’s Approach to Consumer Finance
CM-5.2.1
Islamic bank licensees are reminded of their obligation to implement a sound internal controls framework, including an effective credit culture (as outlined in Section CM-1.2).Added: June 2022CM-5.2.2
Islamic bank licensees which offer consumer finance facilities to residents of Bahrain must follow the Code of Best Practice on Consumer Credit attached as Appendix CM-2 in Part B of the Rulebook. Failure to adhere to the Code may result in enforcement action as outlined in Module EN.Added: June 2022CM-5.2.3
Islamic bank licensees are also reminded of their obligations to display and communicate charges and APRs clearly (as outlined in Section BC-4.3).Added: June 2022CM-5.2.4
The measures presented in this Chapter should be viewed as minimum standards, rather than best practice. They are aimed at encouraging prudent financing and full, frank and fair disclosures. These measures should be read in conjunction with the ‘Code of Best Practice on Consumer Credit and Charging’ which was agreed jointly between the CBB and the Bahrain Association of Banks (see Appendix CM-2).
Added: June 2022Ongoing Effort by the CBB
CM-5.2.5
The CBB supervisors and examiners will also focus on
licensees' implementation of the ‘Code of Best Practice on Consumer Credit and Charging’ in their ongoing supervision oflicensees , to monitor and encourage sound financing practices and disclosure standards.Added: June 2022CM-5.3 CM-5.3 Definition of Consumer Finance
CM-5.3.1
Consumer finance is the provision of any form of credit facility to an individual excluding:
(a) Any financing secured by a first charge on residential property to an individual, where the obligor lives in, or intends to live in the property;(b) Any credit facility secured by cash orinvestment s, where the security provided more than covers the principal of the credit facility;(c) The provision of any form of credit to an individual for business purposes where the facility is to be repaid from the business activities of the obligor; and(d) Any credit facility awarded based on eligibility as per the Social Insurance Organisation’s Pension Commutation Scheme.Amended: January 2023
Added: June 2022CM-5.3.2
For the purposes of the Rulebook, ‘credit facility’ includes personal overdraft facilities, credit cards, consumer financings or other financing facilities. ‘Consumer finance’ is defined as financing for a fixed period to individuals for non-business purposes.
Added: June 2022CM-5.4 CM-5.4 Maximum Limits
Total Repayments Ratio
CM-5.4.1
Licensees may only provide a new consumer facility (or renew, extend or otherwise modify an existing consumer facility) for an amount so that the obligor’s total monthly repayments on all their consumer finance commitments do not exceed 50 percent of their monthly gross income. This limit may only be exceeded in the circumstances described in Paragraphs CM-5.4.6 and CM-5.4.9.Added: June 2022CM-5.4.2
When reviewing an applicant for a consumer facility,
licensees may only take into consideration regular income. A spouse’s income may only be taken into consideration when the credit facility would be in joint names, so that the spouse would also be legally liable for the obligation incurred.Added: June 2022CM-5.4.3
Notwithstanding the above limit,
licensees must review, in detail, an applicant’s personal financial standing and ability to service their obligations. Where a spouse’s income is being taken into consideration, their individual circumstances must also be similarly assessed. In many cases, these reviews may require consumer finance repayments to be kept significantly below 50 percent of monthly gross income.Added: June 2022CM-5.4.4
Licensees must enquire as to applicants’ sources of income, their credit history, their regular outgoings and other financial commitments, including potential liabilities such as guarantees. Particular attention must be paid to housing costs (such as payments for social housing schemes). A person’s regular income, net of consumer finance repayments and other financial obligations, must remain sufficient for that person to support himself and any dependents.Licensees must also take into account likely future trends in income and outgoings, and the impact this may have on the 50 percent ratio.Added: June 2022CM-5.4.5
When factoring in credit cards into the repayment limit in Paragraph CM-5.4.1 above,
licensees must include 5 percent of the credit limits available on these facilities. If the amounts outstanding (including profit) under such facilities exceed their limit, then the full amount outstanding must be included in the repayments ratio calculation. Charge cards are not included under this definition.Added: June 2022CM-5.4.6
In the case of high earners – defined for these purposes as persons earning more than BHD 3,000 per month – the 50 percent limit may be relaxed, provided that the licensee has undertaken the review required in Paragraph CM-5.4.4 and is satisfied that the obligor can comfortably support a higher facility service ratio.
Added: June 2022CM-5.4.7
The review undertaken to satisfy requirements, as outlined in Paragraph CM-5.4.4, must be documented and made available to the CBB’s examiners upon request. The documentation must include all relevant information used to support the decision to extend credit facilities. In the case of high earners who are granted a facility in excess of the 50 percent limit, the documentation must also include a written statement, signed by an appropriate member of management, explaining the justification for relaxing the limit.
Added: June 2022Maximum Tenor Limit
CM-5.4.8
The maximum tenor for instalment consumer finance is 7 years. In the case of any restructuring of a consumer finance facility repayable in instalments, the stated final maturity must be within 7 years from the date of the original facility. The tenor may not be extended more than twice during the period of the agreement and in any case not extended beyond the 7-year duration.
Added: June 2022Non-compliant Facilities
CM-5.4.9
Where a
customer ’s monthly gross income falls (e.g. due to redundancy, disability or a similar event outside the control of thecustomer ), thelicensee must identify such accounts as ‘technically non-compliant’. If acustomer requests an extension to the tenor of the facility due to reduced income, then thelicensee may increase the term to assist thecustomer . Thelicensee must take account of the 50 percent limit outlined in Paragraph CM-5.4.1. Such facilities must also be identified as ‘technically non-compliant’.Added: June 2022CM-5.5 CM-5.5 Refunds and Prepayments
Refund/Adjustment of Insurance Premium on Financing Prepayments and Top-Ups
CM-5.5.1
Islamic bank licensees must refund/adjust proportionately the insurance premium charged on individual credit facilities when thecustomer either requests for a top up or prepayment of the credit facility as per the prescribed formula below:Added: June 2022CM-6 CM-6 Independent Assessments
CM-6.1 CM-6.1 Independent assessments
CM-6.1.1
[This Paragraph was deleted in January 2022].
Added: June 2022CM-6.1.2
The independent reviews of the credit risk management framework and compliance with Module CM undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34 must cover the following:
(a) The adequacy of internal systems and procedures for identifying, measuring, monitoring and mitigating credit risk;(b) The appropriateness of the procedures, processes, systems and tools for controlling credit risk;(c) The credit risk rating and scoring model governance;(d) The integrity and usefulness of management information reports on credit risk; and(e) The adherence to credit risk appetite and limits framework, credit risk policies and procedures and compliance with this Module.Added: June 2022CM-6.1.3
[This Paragraph was deleted in January 2022].
Added: June 2022CM-6.1.4
[This Paragraph was deleted in January 2022].
Added: June 2022CM-5 CM-5 APPENDIX
Appendix CM-5 CBB Illustrative Criteria for Assessment of Major Investments by Bahraini Islamic bank licensees
In assessing any proposed
major investments mentioned above, the CBB will take into account the following points:(a) The amount of the proposedmajor investment relative to the existing consolidated total capital of thelicensee ;(b) Existing capital adequacy ratios on a consolidated basis and forecast ratios after themajor investment has gone ahead;(c) The adequacy of information flows from the investee company to the concerned bank;(d) Experience, and fit and proper matters relating to the senior personnel associated with the proposedmajor investment ;(e) Risks associated with the proposedmajor investment ;(f) Disclosure and exchange of (supervisory) information (in the case of a foreignmajor investment );(g) Adequacy of host supervision (in the case of a foreignmajor investment );(h) Currentinvestments and concentrations inexposures of the concerned bank.(i) The compliance of the concerned bank with the CBB’s rules and regulations (e.g. reporting issues), and the adequacy of internal systems and controls;(j) The extent of holdings by any other shareholders (holding 5 percent or more of the capital of the concerned entity) orcontrollers of the concerned entity;(k) Whether the proposed activities are in line with the memorandum and articles of association (‘MOA’ and ‘AOA’) of thelicensee ;(l) The accounting treatment of the proposedmajor investment ;(m) Whether themajor investment relates to a closely-linked party, connected party, orcontroller in any way;n) The existence of secrecy laws or constraints over supervisory access to the premises, assets, books and records of the concerned entity in which a ‘major investment’ is being acquired;(o) The impact and extent of goodwill and intangibles upon the capital adequacy and balance sheet of thelicensee on a consolidated basis; and(p) Thelicensee’s existing and forecast liquidity position (as a result of themajor investment ) and how themajor investment is to be funded (e.g. by the issuance of new capital or sale of otherinvestments ).Added: June 2022CM-6 Appendix
CM-6 Appendix - Re-categorisation of Exposures
Retail Exposures (natural persons and micro, small and medium enterprises (MSMEs)
Repayment frequency Performance terms No. of continuous repayments done (cooling-off period) Stage 3 to Stage 2 Stage 3 to Stage 1 Stage 2 to Stage 1 Monthly Original 3 instalments/ months 3 instalments/ months Restructured 3 instalments/ months 3 instalments/ months Quarterly Original 2 instalments/ 6 months 2 instalments/ 6 months Restructured 2 instalments/ 6 months 2 instalments/ 6 months Semi-annual Original 2 instalment/ 12 months 2 instalment/ 12 months Restructured 2 instalment/ 12 months 2 instalment/ 12 months Annual Original 1 instalment/ 12 months 1 instalment/ 12 months Restructured 1 instalment/ 12 months 1 instalment/ 12 months Corporate Exposures (legal persons excluding MSMEs)
Repayment frequency Performance terms No. of continuous repayments done (cooling-off period) Stage 3 to Stage 2 Stage 3 to Stage 1 Stage 2 to Stage 1 Monthly Original 6 instalments/ months 6 instalments/ months Restructured 6 instalments/ months 6 instalments/ months Quarterly Original 2 instalments/ 6 months 2 instalments/ 6 months Restructured 2 instalments/ 6 months 2 instalments/ 6 months Semi-annual Original 2 instalment/ 12 months 2 instalment/ 12 months Restructured 2 instalment/ 12 months 2 instalment/ 12 months Annual Original 1 instalment/ 12 months 1 instalment/ 12 months Restructured 1 instalment/ 12 months 1 instalment/ 12 months Note: The above re-categorisation assumes that a corporate re-rating exercise prior to the upgrade also confirms a satisfactory credit rating and no other SICR triggers or conditions exist that prevent the upward transition.
Added: April 2023OM Operational Risk Management
OM-A OM-A Introduction
OM-A.1 OM-A.1 Purpose
Executive Summary
OM-A.1.1
The Operational Risk Management Module sets out the Central Bank of Bahrain's ('CBB's') rules and guidance to
Islamic Bank licensees operating in Bahrain on establishing parameters and control procedures to monitor and mitigate operational risks. The contents of this Module apply to all Islamic banks, except where noted in individual Chapters.Added: January 2020OM-A.1.2
This Module provides support for certain other parts of the Rulebook, mainly:
(a) Principles of Business;(b) High-level Controls;(c) Reputational Risk;(d) Internal Capital Adequacy Assessment Process ('ICAAP');(e) Stress Testing; and(f) Shari'a Governance.Added: January 2020Legal Basis
OM-A.1.3
This Module contains the CBB's Directive, as amended from time to time, relating to Operational Risk Management and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all
Islamic bank licensees (including theirapproved persons ).Added: January 2020OM-A.1.4
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
Added: January 2020OM-A.2 OM-A.2 Module History
OM-A.2.1
This Module was first issued in July 2004 as part of Volume two of the CBB Rulebook. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made; Chapter UG-3 provides further details on Rulebook maintenance and version control.
Added: January 2020OM-A.2.2
The changes made to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes OM-5.1 01/04/05 Physical security measures. OM-4.2 01/10/05 Succession planning for locally incorporated banks. OM-5.1 01/10/05 Clarification of security manager role for smaller banks and deletion of requirement for cash trays. OM-B & OM-1.2 01/04/06 Minor amendments concerning roles of Board and management and editing of OM B. OM-5.1.15-OM-5.1.24 01/04/06 New security requirements for ATM security arrangements and reporting of security related complaints. OM-A.2.1-OM-A.2.6 01/10/07 Purpose (expanded) OM-A.2.1-OM-A.2.6 01/10/07 Key Requirements (deleted) OM-5.1-OM-5.9 01/10/07 Business Continuity Planning (expanded) OM-7 01/10/07 New Books and Records Chapter transferred from Module GR OM-8 01/04/08 Basel II Qualitative Operational Risk Requirements OM 01/2011 Various minor amendments to ensure consistency in CBB Rulebook. OM-A.1.3 and OM-A.1.4 01/2011 Clarified legal basis. OM-7.1.4 04/2011 This paragraph was deleted as Ministerial Order 23 does not apply to CBB licensees. OM-7.3.4 04/2011 Clarified retention period of records for promotional schemes. OM 07/2011 Various minor amendments to clarify Rules and have consistent language. OM-2.4 07/2011 Amended CBB reporting requirements regarding succession planning. OM-3.1.7 07/2011 Paragraph deleted as no longer applicable since standard conditions and licensing criteria document has now been incorporated as part of Volume 2. OM-6.2 10/2011 Added new Section on internet security. OM-7.1.7 10/2011 Corrected typo. OM-A.1.3 01/2012 Updated legal basis. OM-2.1.4 01/2012 Corrected cross reference. OM-3.2.2 04/2012 Deleted last sentence of Paragraph as it repeats the requirement under Paragraph OM-3.3.1 OM-6.2.2 04/2012 Clarified penetration testing interval for internet security. OM-1.1.4 10/2012 Amended to reflect updated version of Basel Committee document. OM-3.2.6, OM-5.2.1, OM-5.4.8, OM-8 10/2012 Amended to reflect the Basel June 2011 paper on Principles for the Sound Management of Operational Risk. OM-6.2 07/2013 Amended reporting requirements related to internet security measures. OM-6.2.1 10/2013 Amended Rule to apply to all banks. OM-3.7.2 10/2015 Clarified Rule on internal audit outsourcing. OM-6 04/2016 Updated ATM security measures for banks. OM-3.9 07/2016 Added new Section dealing with outsourcing of functions containing customer information. OM-5.10 10/2016 Added new Section on Cyber Security Risk Management OM-6.1.1 10/2016 Added implementation deadline date OM-6.4.3 10/2016 Corrected cross references OM-6.4.4 10/2016 Corrected cross references OM-6.4.5 10/2016 Corrected cross references OM-6.6 10/2016 Added new Section on Cyber Security Measures OM-3.9.2 01/2017 Amended Paragraph on customer information OM-3.9.6 01/2017 Added new guidance paragraph on customer information OM-6.4.22 04/2017 ATM requirement on Solid Wall deleted. OM-6.4.23 04/2017 ATM requirement on Solid Wall deleted. OM-6.3.1 07/2017 Clarified requirements on compliance date. OM-6.3.2A 07/2017 Added new paragraph on Prohibition of Double Swiping. OM-6.3.2B 07/2017 Added new paragraph on Prohibition of Double Swiping. OM-6.3.2C 07/2017 Added new paragraph on Prohibition of Double Swiping. OM-6.3.2D 07/2017 Added new paragraph on Prohibition of Double Swiping. OM-6.3.2E 07/2017 Added new paragraph on Prohibition of Double Swiping. OM-6.4.21 07/2017 Deleted paragraph. OM-7.2.1 07/2017 Amended paragraph according to the Legislative Decree No. (28) of 2002. OM-7.2.2 07/2017 Deleted paragraph. OM-3.1.2 10/2017 Amended paragraph to allow the utilization of cloud services. OM-3.1.5A 10/2017 Added a new paragraph on outsourcing requirements. OM-3.2.3 10/2017 Amended paragraph. OM-3.3.1 10/2017 Amended paragraph. OM-3.3.2 10/2017 Amended paragraph. OM-3.3.3 10/2017 Amended paragraph. OM-3.3.4 10/2017 Amended paragraph. OM-3.3.5 10/2017 Added a new paragraph on outsourcing. OM-3.4.1 10/2017 Amended paragraph. OM-3.4.2(b) 10/2017 Amended sub-paragraph. OM-3.4.3 10/2017 Deleted paragraph. OM-3.4.5 10/2017 Amended paragraph. OM-3.5.1(a) 10/2017 Amended sub-sub-paragraph no. (5). OM-3.5.1(c) 10/2017 Amended sub-sub-paragraphs no. (2) and (3). OM-3.5.1(e) 10/2017 Amended sub-sub-paragraph no. (3). OM-3.8.3 10/2017 Amended paragraph. OM-3.9.1 10/2017 Amended paragraph. OM-3.9.2 10/2017 Amended paragraph on third party outsourcing of functions. OM-3.9.3 10/2017 Amended paragraph. OM-3.9.4) 10/2017 Amended paragraph. OM-3.9.4(b) 10/2017 Amended sub-paragraph. OM-3.9.4(d) 10/2017 Deleted sub-paragraph. OM-3.9.5 10/2017 Deleted paragraph. OM-3.9.7 10/2017 Added a new paragraph for security measures related to cloud services. OM-6.4.6 10/2017 Amended paragraph to include ancillary service providers. OM-6.3.1A 04/2018 Added a new Paragraph on card (EMV) compliance. OM-6.3.1B 04/2018 Added a new Paragraph on "provision of cash withdrawal and payment services through various channels". OM-6.3.2 04/2018 Amended Paragraph to mention "Islamic bank licensees". OM-3.9.2 07/2018 Amended Paragraph to include call centres. OM-3.9.2A 07/2018 Added new Paragraph on customer notification. OM-6.4.15A 10/2018 Added a new Paragraph on drive-thru ATMs. OM-6.4.20A 10/2018 Added a new Paragraph on drive-thru ATMs. OM Module 01/2020 Entire Module revised for better alignment with the principles and guidance from Basel Committee on Banking Supervision OM-5.2.1A 07/2020 Added a new Paragraph on contactless payments. OM-5.1.2A & OM-5.1.2B 10/2020 Added new Paragraphs on fraudulent phishing attempts measures. OM-2.8.5 01/2021 Deleted Subparagraph (a). OM-3.1.2(f) 01/2021 Amended Subparagraph on electronic fraud. OM-3.3.11 01/2021 Added a new Paragraph on electronic fraud awareness. OM-5.1.5 04/2021 Amended Paragraph. OM-5.5 07/2021 New enhanced Section. Appendix C 07/2021 Added a new Appendix - Cyber security Control Guidelines. OM-1.6.1 01/2022 Deleted Paragraph. OM-1.6.2 01/2022 Deleted Paragraph. OM-1.6.3 01/2022 Amended Paragraph. OM-1.6.4 – OM-1.6.6 01/2022 Deleted Paragraph. OM-5.3.2 01/2022 Amended Paragraph. OM-5.3.3 – OM-5.3.11 01/2022 Deleted Paragraphs. OM-1.3.17(g) 04/2022 Amended Subparagraph on vacation policy. OM-5.5.57 04/2022 Amended Paragraph on cyber security incident reporting. OM-5.5.58 04/2022 Amended Paragraph on submission period of the cyber security incident report. OM-5.5.61 04/2022 Deleted reference to BR. OM-2 07/2022 Replaced Chapter OM-2 with new Outsourcing Requirements. OM-5.3.25 10/2022 Added a new Paragraph on compliance with the physical security requirements for ATM installations. OM-5.5.21 10/2022 Amended Paragraph on email domains requirements. OM-5.5.21A 10/2022 Added a new Paragraph on additional domains requirements. OM-2.1.7(v) 04/2023 Amended Subparagraph on the outsourcing coordinator. OM-2.1.7(viii) 04/2023 Added a new Subparagraph on outsourcing the internal audit function. OM-5.2.1 – OM-5.2.1A 04/2023 Amended contactless payment amount permitted where no pin or authentication is required. OM-B OM-B Scope of Application
OM-B.1 OM-B.1 Scope of Application
Bahraini Islamic Bank Licensees
OM-B.1.1
Bahraini Islamic bank licensees must comply with all requirements included in this Module.Added: January 2020OM-B.1.2
The Framework for operational risk management and the structure of governance process for operational risk management chosen by an individual bank will depend on a range of factors, including its nature, size, complexity and risk profile.
Added: January 2020Branches of foreign bank licensees
OM-B.1.3
In the case of
branches of foreign bank licensees , while the requirements of this Module apply, it is recognised that certain activities and tasks relating to operational risk management function or unit might be conducted at the head office or a regional office. Additionally, in the case of branches, it is likely that oversight of the branch, from an operational risk perspective, is also exercised at the head office/regional office.Added: January 2020OM-B.1.4
Branches of foreign bank licensees must document the risk assessments which, at a minimum, include the identified risk events by risk type or category, the key risk indicators (KRIs) and key control indicators (KCIs). In addition, the branch must record losses arising from failures of people, processes, systems, internal and external frauds.Added: January 2020OM-B.1.5
Branches of foreign bank licensees must seek the CBB's approval for the operational risk management activities undertaken by their head/regional office and demonstrate to the CBB that there are effective high-level controls for management of operational risk for activities undertaken out of the Bahrain branch.Added: January 2020OM-B.1.6
For the purposes of such CBB approval, the branch must perform a mapping or a gap analysis of the requirements in this Module with practices undertaken at the head office or regional office, whichever applicable, and at the branch as appropriate.
Added: January 2020OM-1 OM-1 General Requirements
OM-1.1 OM-1.1 Operational Risk Management Framework
Overview
OM-1.1.1
This chapter contains the requirements relating to operational risk management. It sets out the requirements for an appropriate risk management environment. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems including internal frauds, or from external events including external frauds. This definition includes legal and Shari'a non-compliance risks, but excludes strategic and
reputational risk . Legal risk is the risk arising from the potential that unenforceable contracts, lawsuits or adverse judgments may disrupt or otherwise negatively affect the operations or financial condition of a bank. As legal risk is one type of operational risk, banks should ensure that all requirements included in this Module are also applied to the management of legal risks requirement.Added: January 2020OM-1.1.2
Operational risk is inherent in all types of bank activities, and can result in substantial losses. Sound operational risk governance, therefore, relies upon three lines of defence:
(a) Business line management;(b) An independent operational risk management unit; and(c) Internal Audit and functions that provide independent assurance.Added: January 2020OM-1.1.3
All new products and services must be reviewed for operational risks prior to their implementation. A bank's internal auditors play an important role in controlling operational risks and should include operational risk in the scope of internal audits.
Added: January 2020OM-1.1.4
Shari'a non-compliance is a unique risk for Islamic banks resulting from non-compliance with the rules and principles of Shari'a. It is crucial to identify the Shari'a non-compliance risk inherent in different kinds of Shari'a-compliant contracts, and to outline a set of variables that help to estimate the likelihood and severity of Shari'a non-compliance risk. Refer to Appendix B for Shari'a requirements on financing contracts.
Added: January 2020Establishing a Strong Risk Culture
OM-1.1.5
The Board of Directors must take the lead in establishing a strong operational risk management culture in the bank that supports and provides appropriate standards and incentives for effectively managing operational risk and for promoting professional and responsible behaviour.
Added: January 2020OM-1.1.6
For
branches of foreign bank licensees , all references in this Module to the board of directors should be interpreted as the Head Office/Regional Office unless such responsibility is formally delegated to a committee at the branch level.Added: January 2020Operational Risk Management Framework
OM-1.1.7
Islamic bank licensees must develop, implement and maintain an Operational Risk Management Framework (ORMF) that is fully integrated into the bank's overall risk management processes. The ORMF must consider a range of factors, including the nature, size, complexity and risk profile of the bank.Added: January 2020OM-1.1.8
The Board of Directors and senior management should understand the nature and complexity of the risks inherent in the portfolio of bank products, services and activities. This is particularly important for operational risk, given that operational risk is inherent in all business products, activities, processes and systems.
Added: January 2020OM-1.1.9
A bank must ensure that its ORMF is appropriate at inception and that it keeps pace with the rate of growth of, or changes to, products, activities, processes and systems. The ORMF must be comprehensively and appropriately documented.
Added: January 2020OM-1.1.10
At minimum, the ORMF documentation must:
(a) Identify the governance structures used to manage operational risk, including roles, responsibilities, reporting lines and accountabilities;(b) Identify policy for approval of policies by the Board;(c) Describe the risk assessment processes and tools and how they are used;(d) Describe the bank's accepted operational risk appetite and tolerance (see Paragraphs OM-1.2.2 to OM-1.2.4), and the approach to setting thresholds or limits for inherent and residual risk, and approved risk mitigation strategies;(e) Establish risk reporting and Management Information Systems ('MIS');(f) Provide a common taxonomy of operational risk terms to ensure consistency of risk identification, exposure rating and risk management objectives; and(g) Provide for appropriate independent review and assessment of operational risk.Added: January 2020OM-1.2 OM-1.2 Operational Risk Governance
OM-1.2.1
The Board of Directors must:
(a) Establish, approve and regularly review the operational risk management policy;(b) Ensure that senior management establish, approve and regularly review supporting policies, procedures, systems and processes in line with the nature and scope of the operational risks inherent in the bank's products, services and activities, and implement comprehensive, dynamic oversight and control environments that are fully integrated into, or coordinated with, the overall ORMF for managing all risks across the bank; and(c) Ensure that the bank's ORMF is subject to effective independent review (See Paragraph OM-1.6.1).Added: January 2020Risk appetite
OM-1.2.2
The Board of Directors must approve and review the risk appetite and tolerance statement for operational risk that articulates the nature, the types and levels of operational risk that the bank is willing to assume.
Added: January 2020OM-1.2.3
When approving and reviewing the risk appetite and tolerance statement, the Board of Directors should consider all relevant risks, the bank's level of risk aversion, its current financial condition and the bank's strategic direction. The Board of Directors should approve appropriate thresholds or limits for specific operational risks.
Added: January 2020OM-1.2.4
In addition to the review of material operational risks and limits, the Board should also consider changes in the external environment, material increases in business or activity volumes, the quality of the control environment, the effectiveness of risk management and mitigation strategies, loss experience, and the frequency, volume and nature of limit breaches.
Added: January 2020OM-1.2.5
The board must monitor management adherence to the risk appetite and tolerance statement and provide for timely detection and remediation of breaches.
Added: January 2020OM-1.2.6
Senior management is responsible for consistently implementing and maintaining throughout the organisation, the policy, procedures, processes and systems for managing operational risk in all of the bank's products, activities, processes and systems.Added: January 2020OM-1.2.7
Banks must establish, commensurate with its nature, size and complexity, an Operational Risk Management Unit (ORMU), independent of the risk generating business lines, which is responsible for the design, maintenance and ongoing development of the ORMF within the bank. The ORMU must be adequately staffed with skilled resources.
Added: January 2020OM-1.2.8
Senior management is responsible for establishing and maintaining effective channels for internal review of operational risk issues, as well as ensuring adequate resolution processes. These should include systems to report, track and, when necessary, escalate issues to ensure resolution. Banks should be able to demonstrate that the three lines of defence (as highlighted in Paragraph OM-1.1.2) approach is operating satisfactorily and to explain how the Board andsenior management ensure that this approach is implemented and operating in an appropriate and acceptable manner.Added: January 2020OM-1.2.9
Senior management must translate the ORMF into specific processes and procedures that can be implemented and verified within the different business units.Senior management must clearly assign authority, responsibility and reporting relationships to encourage and maintain this accountability, and ensure that the necessary resources are available to manage operational risk in-line with the bank's risk appetite and tolerance statement. Furthermore,senior management must ensure that the management oversight process is appropriate for the risks inherent in a business unit's activity.Added: January 2020OM-1.2.10
Senior management should ensure that staff responsible for managing operational risk, coordinate and communicate effectively with staff responsible for managing credit, market, liquidity and other risks, as well as with those in the bank who are responsible for the procurement of external services, such as insurance risk transfer and outsourcing arrangements. Failure to do so could result in significant gaps or overlaps in a bank's overall risk management programme.Added: January 2020OM-1.2.11
The Head of the ORMU must be of sufficient stature within the bank to perform his duties effectively, ideally evidenced by a title commensurate with other risk management units, such as credit, market and liquidity risk.
Added: January 2020OM-1.2.12
Senior management must ensure that bank activities are conducted by staff with the necessary experience, qualifications, technical capabilities and access to resources. Staff responsible for monitoring and enforcing compliance with the bank's risk policies must be independent from the units they oversee.Added: January 2020OM-1.2.13
Senior management must ensure that an appropriate level of operational risk training is available at all levels throughout the organisation. The training that is provided must reflect the seniority, role and responsibilities of the individuals for whom it is intended.Added: January 2020OM-1.2.14
A bank's risk governance structure should be commensurate with the nature, size, operational complexity and risk profile of its activities. When designing the operational risk governance structure, a bank should take the following into consideration:
(a) Committee structure;(b) Committee composition; and(c) Committee operation.Added: January 2020OM-1.2.15
Sound industry practice is for Operational Risk Committees (or the Risk Committee) to include a combination of members with expertise in business activities and financial, as well as risk managers.
Added: January 2020OM-1.2.16
Committee meetings should be held at appropriate frequencies, with adequate time and resources to permit productive discussion and decision-making. Records of committee meetings should be adequate to permit review and evaluation of committee effectiveness.
Added: January 2020OM-1.3 OM-1.3 Identification, Measurement, Monitoring and Control
OM-1.3.1
As part of an effective ORMF, banks must have policies, procedures and system for the identification, measurement, monitoring, mitigating and controlling of the operational risk inherent in all products, services, activities, processes and systems.
Added: January 2020OM-1.3.2
Risk identification and assessment are fundamental characteristics of an effective ORMF. Effective risk identification considers both internal factors (such as the bank's structure, the nature of the bank's activities, the quality of the bank's human resources, organisational changes and employee turnover) and external factors (such as changes in the broader environment and the industry and advances in technology). Sound risk assessment allows the bank to better understand its risk profile and allocate risk management resources and strategies most effectively. Banks may use the classification categories contained in Appendix A for determining and classifying operational risk events.
Added: January 2020OM-1.3.3
Examples of tools that may be used for identifying and assessing operational risk include:
(a) Audit Findings: While audit findings primarily focus on control weaknesses and vulnerabilities, they can also provide insight into inherent risk due to internal or external factors;(b) Internal Loss Data Collection and Analysis: Internal operational loss data provides meaningful information for assessing a bank's exposure to operational risk and the effectiveness of internal controls. Analysis of loss events can provide insight into the causes of large losses and information on whether control failures are isolated or systematic. Banks may also find it useful to capture and monitor operational risk contributions to credit and market risk related losses in order to obtain a more complete view of their operational risk exposure;(c) External Data Collection and Analysis: External data elements consist of gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at organisations other than the bank. External loss data can be compared with internal loss data, or used to explore possible weaknesses in the control environment or consider previously unidentified risk exposures;(d) Risk Assessments: In a risk assessment, often referred to as a Risk Self-Assessment ('RSA'), a bank assesses the processes underlying its operations against a library of potential threats and vulnerabilities and considers their potential impact. A similar approach, Risk Control Self-Assessments ('RCSA'), typically evaluates inherent risk (the risk before controls are considered), the effectiveness of the control environment, and residual risk (the risk exposure after controls are considered). Scorecards build on RCSAs by weighting residual risks to provide a means of translating the RCSA output into metrics that give a relative ranking of the control environment;(e) Business Process Mapping: Business process mappings identify the key steps in business processes, activities and organisational functions. They also identify the key risk points in the overall business process. Process maps can reveal individual risks, risk interdependencies, and areas of control or risk management weakness. They also can help prioritise subsequent management action;(f) Risk and Performance Indicators: Risk and performance indicators are risk metrics and/or statistics that provide insight into a bank's risk exposure. Risk indicators, often referred to as Key Risk Indicators ('KRIs'), are used to monitor the main drivers of exposure associated with key risks. Performance indicators, often referred to as Key Performance Indicators ('KPIs'), provide insight into the status of operational processes, which may in turn provide insight into operational weaknesses, failures, and potential loss. Risk and performance indicators are often paired with escalation triggers to warn when risk levels approach or exceed thresholds or limits and prompt mitigation plans;(g) Scenario Analysis: Scenario analysis is a process of obtaining expert opinion of business line and risk managers to identify potential operational risk events and assess their potential outcome. Scenario analysis is an effective tool to consider potential sources of significant operational risk and the need for additional risk management controls or mitigation solutions. Given the subjectivity of the scenario process, a robust governance ORMF is essential to ensure the integrity and consistency of the process;(h) Measurement: Banks may find it useful to quantify their exposure to operational risk by using the output of the risk assessment tools as inputs into a model that estimates operational risk exposure. The results of the model can be used in an economic capital process and can be allocated to business lines to link risk and return; and(i) Comparative Analysis: Comparative analysis consists of comparing the results of the various assessment tools to provide a more comprehensive view of the bank's operational risk profile. For example, comparison of the frequency and severity of internal data with RCSAs can help the bank determine whether self-assessment processes are functioning effectively. Scenario data can be compared to internal and external data to gain a better understanding of the severity of the bank's exposure to potential risk events.Added: January 2020OM-1.3.4
Banks should ensure that the internal pricing and performance measurement mechanisms appropriately take into account operational risk measures commensurate with the nature, size and complexity of its business operations.
Added: January 2020New Products, Process and Change Management
OM-1.3.5
In general, a bank's operational risk exposure is increased when a bank engages in new activities or develops new products; enters unfamiliar markets; implements new business processes or technology systems; and/or engages in businesses that are geographically distant from the head office. Moreover, the level of risk may escalate when new products, activities, procedures, processes, or systems transition from an introductory level to a level that represents material sources of revenue or business-critical operations.
Added: January 2020OM-1.3.6
A bank must have a policy and procedures for review and approval of new products, services, activities, procedures, processes and systems. The review and approval process must consider, as appropriate, the following:
(a) Inherent and residual risks;(b) Changes to the bank's operational risk profile and appetite and tolerance;(c) The necessary controls, risk management processes and risk mitigation strategies;(d) Changes to relevant risk thresholds or limits; and(e) The procedures and metrics to measure, monitor, and manage the risk.Added: January 2020OM-1.3.7
The approval process must also ensure that adequate and well trained human resources and appropriate technology infrastructure are in place before new products, services, activities, procedures, processes or systems are introduced. The implementation of new products, activities, procedures, processes and systems must be monitored in order to identify any material differences to the expected operational risk profile, and to manage any unexpected risks.
Added: January 2020OM-1.3.8
The use of technology-related products, services, activities, processes and delivery channels exposes a bank to strategic, operational and reputational risks, and the possibility of material financial loss. Consequently, a bank should have an integrated approach to identifying, measuring, monitoring and managing technology risks. Sound technology risk management uses the same precepts as operational risk management and includes:
(a) Governance and oversight controls that ensure technology, including outsourcing arrangements, is aligned with, and supportive of, the bank's business objectives;(b) Policy and procedures that facilitate identification and assessment of risk;(c) Establishment of a risk appetite and tolerance statement, as well as performance expectations to assist in controlling and managing risk;(d) Implementation of an effective control environment and the use of risk transfer strategies that mitigate risk; and(e) Monitoring processes that test for compliance with policy thresholds or limitsAdded: January 2020Monitoring and Reporting
OM-1.3.9
Senior management must implement a process to regularly monitor operational risk profiles and material exposures to losses. Appropriate reporting mechanisms must be in place at the board,senior management , and business line levels that support proactive management of operational risk.Added: January 2020OM-1.3.10
Banks must ensure that the operational risk reports are comprehensive, accurate, consistent and actionable across business lines and products.
Added: January 2020OM-1.3.11
Reporting should be timely, and the bank must be able to produce reports in both normal and stressed market conditions. The frequency of reporting must reflect the risks involved and the pace and nature of changes in the operating environment. The results of these monitoring activities must be included in regular management and Board reports. Reports generated by (and/or for) supervisory authorities must also be reported internally to
senior management and the Board, where appropriate.Added: January 2020OM-1.3.12
Operational risk reports may contain internal financial, operational, and compliance indicators, as well as external market or environmental information about events and conditions that are relevant to decision-making. Operational risk reports should include:
(a) Breaches of the bank's risk appetite and tolerance statement, as well as thresholds or limits;(b) Details of recent significant internal operational risk events and losses; and(c) Relevant external events and any potential impact on the bank and operational risk capital.Added: January 2020OM-1.3.13
Data capture and risk reporting processes should be analysed periodically with a view to continuously enhancing risk management performance, as well as advancing risk management policy, procedures and practices.
Added: January 2020Controls and mitigation
OM-1.3.14
Banks must have a strong control environment that utilises policies, procedures, processes and systems; appropriate internal controls; and appropriate risk mitigation and/or transfer strategies.
Added: January 2020OM-1.3.15
Strong internal controls are a critical aspect of operational risk management, and the banks should establish clear lines of management responsibility and accountability for implementing a strong control environment. The control environment should provide appropriate independence/separation of duties between the operational risk management unit, business lines and support functions.
Added: January 2020OM-1.3.16
An effective internal control environment also requires appropriate segregation of duties. Assignments that establish conflicting duties for individuals, or a team without dual controls or other countermeasures may enable concealment of losses, errors or inappropriate actions. Therefore, areas of potential conflicts of interest must be identified, minimised, and subject to careful independent monitoring and review.
Added: January 2020OM-1.3.17
In addition to segregation of duties and dual controls, banks should ensure that other traditional internal controls are in place, as appropriate, to address operational risk. Examples of these controls include:
(a) Clearly established authorities and/or processes for approval;(b) Close monitoring of adherence to assigned risk limits or thresholds;(c) Safeguards for access to, and use of, bank assets and records;(d) Appropriate staffing level and training to maintain expertise;(e) Ongoing processes to identify business lines or products where returns appear to be out of line with reasonable expectations;(f) Regular verification and reconciliation of transactions and accounts; and(g) A vacation policy in line with Bahrain Labour Law.Amended: April 2022
Added: January 2020OM-1.3.18
Internal control consists of five interrelated components:
(a) Control environment: The Board of Directors andsenior management are responsible for promoting high ethical and integrity standards, and for establishing a culture within the organisation that emphasises and demonstrates to all levels of personnel the importance of internal controls. All personnel at a banking organisation need to understand their role in the internal controls process and be fully engaged in the process;(b) Risk assessment: An effective internal control system requires that the material risks that could adversely affect the achievement of the bank's goals are being recognised and continually assessed. This assessment should cover all risks facing the bank and the consolidated banking organisation (that is, credit risk, country and transfer risk, market risk, profit rate risk, liquidity risk, operational risk, legal risk and reputational risk). Internal controls may need to be revised to appropriately address any new or previously uncontrolled risks;(c) Control activities: Control activities should be an integral part of the daily activities of a bank. An effective internal control system requires that an appropriate control structure is set up, with control activities defined at every business level. These should include: Top level reviews; appropriate activity controls for different departments or divisions; physical controls; checking for compliance with exposure limits and follow-up on non-compliance; a system of approvals and authorisations; and a system of verification and reconciliation;(d) Information and communication: An effective internal control system requires that there are adequate and comprehensive internal financial, operational and compliance data, as well as external market information about events and conditions that are relevant to decision-making. Information should be reliable, timely, accessible, and provided in a consistent format. It requires that there are reliable information systems in place that cover all significant activities of the bank. These systems, including those that hold and use data in an electronic form, must be secure, monitored independently and supported by adequate contingency arrangements. It also requires effective channels of communication to ensure that all staff fully understand and adhere to policy and procedures affecting their duties and responsibilities and that other relevant information is reaching the appropriate personnel; and(e) Monitoring activities: The overall effectiveness of the bank's internal controls should be monitored on an ongoing basis. Monitoring of key risks should be part of the daily activities of the bank, as well as periodic evaluations by the business lines and internal audit. There should be an effective and comprehensive internal audit of the internal control system carried out by operationally independent, appropriately-trained and competent staff. The Internal Audit function, as part of the monitoring of the system of internal controls, should report directly to the Board of Directors or its Audit Committee, and tosenior management . Internal control deficiencies, whether identified by business line, Internal Audit, or other control personnel, should be reported in a timely manner to the appropriate management level and addressed promptly. Material internal control deficiencies should be reported tosenior management and the Board of Directors.Added: January 2020OM-1.3.19
Control processes and procedures should be established and banks should have a system in place for ensuring compliance with a documented set of internal policies concerning the risk management system. Principal elements of this could include, for example:
(a) Top-level reviews of the bank's progress towards the stated objectives;(b) Verifying compliance with management controls;(c) Review of the treatment and resolution of instances of non-compliance;(d) Evaluation of required approvals and authorisations to ensure accountability to an appropriate level of management; and(e) Tracking reports for approved exceptions to thresholds or limits, management overrides and other deviations from policy.Added: January 2020OM-1.3.20
Effective use and sound implementation of technology can contribute to the control environment. For example, automated processes are less prone to error than manual processes. However, automated processes introduce risks that should be addressed through sound technology governance and infrastructure risk management programmes.
Added: January 2020OM-1.3.21
Management must ensure the bank has a sound technology infrastructure that:
(a) Meets current and long-term business requirements by providing sufficient capacity for normal activity levels, as well as peaks during periods of market stress;(b) Ensures data and system integrity, security, and availability; and(c) Supports integrated and comprehensive risk management.Added: January 2020OM-1.3.22
Mergers and acquisitions resulting in fragmented and disconnected infrastructure, cost-cutting measures or inadequate investment can undermine a bank's ability to aggregate and analyse information across risk dimensions or the consolidated enterprise, manage and report risk on a business line or legal entity basis, or oversee and manage risk in periods of high growth. Management should make appropriate capital investment or otherwise provide for a robust infrastructure at all times, particularly before mergers are consummated, high growth strategies are initiated, or new products are introduced.
Added: January 2020OM-1.3.23
In those circumstances where internal controls do not adequately address risk and exiting the risk is not a reasonable option, management can complement controls by seeking to transfer the risk to another party such as through insurance. The Board of directors should determine the maximum loss exposure the bank is willing, and has the financial capacity to assume, and should perform a regular review of the bank's risk and insurance management programme.
Added: January 2020OM-1.3.24
Because risk transfer is an imperfect substitute for sound controls and risk management programmes, banks should view risk transfer tools as complementary to, rather than a replacement for, thorough internal operational risk control. Having mechanisms in place to quickly identify, recognise and rectify distinct operational risk errors can greatly reduce exposures. Careful consideration also needs to be given to the extent to which risk mitigation tools such as insurance truly reduce risk, transfer the risk to another business sector or area, or create a new risk (e.g. counterparty risk).
Added: January 2020OM-1.4 OM-1.4 Succession Planning
OM-1.4.1
Succession planning is an essential precautionary measure for a bank if its leadership stability, and hence ultimately its financial stability, is to be protected. Succession planning is especially critical for smaller institutions, where management teams tend to be smaller and possibly reliant on a few key individuals.
Added: January 2020OM-1.4.2
The CBB requires
Islamic bank licensees to document their Board-approvedsuccession plans for their senior management team and have these ready at any time for onsite inspection by CBB.Added: January 2020OM-1.5 OM-1.5 Public Disclosure
OM-1.5.1
A bank must have a formal disclosure policy approved by the Board of Directors that addresses the bank's approach for determining what operational risks disclosures it will make and the internal controls over the disclosure process. In addition, banks must implement a process for assessing the appropriateness of their disclosures, including the verification and frequency of them.
Added: January 2020OM-1.5.2
A bank's public disclosure of relevant operational risk management information can lead to transparency and the development of better industry practice through market discipline. The amount and type of disclosure should be commensurate with the size, risk profile and complexity of a bank's operations, and evolving industry practice. See also Chapter HC-8 and Chapter PD-1 on disclosure requirements.
Added: January 2020OM-1.5.3
A bank must disclose its ORMF in a manner that will allow stakeholders to determine whether the bank identifies, assesses, monitors and controls/mitigates operational risk effectively.
Added: January 2020OM-1.5.4
A bank's disclosures must be consistent with how
senior management and the Board of Directors assess and manage the operational risks of the bank.Added: January 2020OM-1.6 OM-1.6 Independent Review
OM-1.6.1
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-1.6.2
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-1.6.3
The independent review of the operational risk management framework undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34, must cover the following:
(i) Governance, the role of the board and senior management and ORMU in operational risk management;(ii) The existence of operational risk appetite/tolerances or thresholds and approved documented policies, procedures and processes including tools for risk identification and assessment;(iii) Register of risks covering risk events, KRIs, KRDs, KCIs and risk mitigation techniques;(iv) Policies to ensure the bank are in compliance with the requirements under this Module for outsourcing arrangements including cloud outsourcing, electronic banking, security arrangements and business continuity management.Amended: January 2022
Added: January 2020OM-1.6.4
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-1.6.5
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-1.6.6
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-2 OM-2 Outsourcing Requirements
OM-2.1 OM-2.1 Outsourcing Arrangements
OM-2.1.1
This Chapter sets out the CBB’s approach to outsourcing by licensees. It also sets out various requirements that licensees must address when considering outsourcing an activity or function.
Amended: July 2022
Added: January 2020OM-2.1.2
In the context of this Chapter, ‘outsourcing’ means an arrangement whereby a third party performs on behalf of a licensee an activity which commonly would have been performed internally by the licensee. Examples of services that are typically outsourced include data processing, cloud services, customer call centres and back-office related activities.
Amended: July 2022
Added: January 2020OM-2.1.3
In the case of branches of foreign entities, the CBB may consider a third-party outsourcing arrangement entered into by the licensee’s head office/regional office or other offices of the foreign entity as an intragroup outsourcing, provided that the head office/regional office submits to the CBB a letter of comfort which includes, but is not limited to, the following conditions:
i. The head office/regional office declares its ultimate responsibility of ensuring that adequate control measures are in place; andii. The head office/regional office is responsible to take adequate rectification measures, including compensation to the affected customers, in cases where customers suffer any loss due to inadequate controls applied by the third-party service provider.Amended: July 2022
Added: January 2020OM-2.1.4
The
licensee must not outsource the following functions:(i) Compliance;(ii) AML/CFT;(iii) Financial control;(iv) Risk management; and(v) Business line functions offering regulated services directly to the customers (refer to Regulation No. (1) of 2007 and its amendments for the list of CBB regulated services).Amended: July 2022
Added: January 2020OM-2.1.5
For the purposes of Paragraph OM-2.1.4, certain support activities, processes and systems under these functions may be outsourced (e.g. call centres, data processing, credit recoveries, cyber security, e-KYC solutions) subject to compliance with Paragraph OM-2.1.7. However, strategic decision-making and managing and bearing the principal risks related to these functions must remain with the
licensee .Amended: July 2022
Added: January 2020OM-2.1.6
Branches of foreign entities may be allowed to outsource to their head office, the risk management function stipulated in Subparagraph OM-2.1.4 (iv), subject to CBB’s prior approval.
Amended: July 2022
Added: January 2020OM-2.1.7
Licensees must comply with the following requirements:(i) Prior CBB approval is required on any outsourcing to a third-party outside Bahrain (excluding cloud data services). The request application must:a. include information on the legal and technical due diligence, risk assessment and detailed compliance assessment; andb. be made at least 30 calendar days before the licensee intends to commit to the arrangement.(ii) Post notification to the CBB, within 5 working days from the date of signing the outsourcing agreement, is required on any outsourcing to an intragroup entity within or outside Bahrain or to a third-party within Bahrain, provided that the outsourced service does not require a license, or to a third-party cloud data services provider inside or outside Bahrain.(iii)Licensees must have in place sufficient written requirements in their internal policies and procedures addressing all strategic, operational, logistical, business continuity and contingency planning, legal and risks issues in relation to outsourcing.(iv)Licensees must sign a service level agreement (SLA) or equivalent with every outsourcing service provider. The SLA must clearly address the scope, rights, confidentiality and encryption requirements, reporting and allocation of responsibilities. The SLA must also stipulate that the CBB, external auditors, internal audit function, compliance function and where relevant the Shari’a coordination and implementation and internal Shari’a audit functions of thelicensee have unrestricted access to all relevant information and documents maintained by the outsourcing service provider in relation to the outsourced activity.(v)Licensees must designate an approved person to act as coordinator for monitoring and assessing the outsourced arrangement to ensure compliance with thelicensee’s internal policies and applicable laws and regulations.(vi)Licensee must submit to the CBB any report by any other regulatory authority on the quality of controls of an outsourcing service provider immediately after its receipt or after coming to know about it.(vii)Licensee must inform its normal supervisory point of contact at the CBB of any material problems encountered with the outsourcing service provider if they remain unresolved for a period of three months from its identification date.(viii) Where the internal audit function is fully or partially outsourced,licensees must ensure that:i. The use of external experts does not compromise the independence and objectivity of the internal audit function;ii. The outsourcing service provider has not been previously engaged in a consulting or external audit engagement with thelicensee unless a one year “cooling-off” period has elapsed;iii. The outsourcing service provider must not provide consulting services to thelicensee during the engagement period; andiv. Adequate oversight is maintained over the outsourcing service provider to ensure that it complies with thelicensee’s internal audit charter, policy and applicable laws and regulations.Amended: April 2023
Amended: July 2022
Added: January 2020OM-2.1.8
For the purpose of Subparagraph OM-2.1.7 (iv),
licensees as part of their assessments may use the following:a) Independent third-party certifications on the outsourcing service provider’s security and other controls;b) Third-party or internal audit reports of the outsourcing service provider; andc) Pooled audits organized by the outsourcing service provider, jointly with its other clients.When conducting on-site examinations,
licensees should ensure that the data of the outsourcing service provider’s other clients is not negatively impacted, including impact on service levels, availability of data and confidentiality.Added: July 2022OM-2.1.9
For the purpose of Subparagraph OM-2.1.7 (i), the CBB will provide a definitive response to any prior approval request for outsourcing within 10 working days of receiving the request complete with all the required information and documents.
Added: July 2022OM-2.2 [This Section was deleted in July 2022]
OM-2.3 [This Section was deleted in July 2022]
OM-2.4 [This Section was deleted in July 2022]
OM-2.5 [This Section was deleted in July 2022]
OM-2.6 [This Section was deleted in July 2022]
OM-2.7 [This Section was deleted in July 2022]
OM-2.8 [This Section was deleted in July 2022]
OM-3 OM-3 Electronic Money and Electronic Banking Activities
OM-3.1 OM-3.1 Board and Management Oversight
OM-3.1.1
This section sets out the requirements related to systems risk management and controls relevant to services offered through electronic banking activities and electronic funds transfer. Such services are prone to technical complexity, operational and security issues.
Added: January 2020OM-3.1.2
The Board of Directors, or a designated Board Committee and
senior management must establish effective management oversight over the risks associated with activities involving e-banking and electronic funds transfer. Thelicensee must establish policies and procedures to manage these risks which include but are not be limited to the following:(a) The development and/or acquisition of the technology solutions;(b) Testing of application program interfaces;(c) Standards of communication and access and security of communication sessions, such as PCI-DSS compliance for cards;(d) Authentication of the users;(e) Processes and measures that protectcustomer data confidentiality consistent with Law No. 30 of 2018, Personal Data Protection Law (PDPL) issued on 12 July 2018;(f) The use of enhanced fraud monitoring of movements in customers’ accounts to guard against electronic frauds using various tools and measures, such as limits on value, volume and velocity; and(g) Security policy and risk management controls.Amended: January 2021
Added: January 2020OM-3.1.3
The Board of Directors and
senior management must ensure they possess the required competence, experience and skills to oversee, review and approve the key aspects of the licensee's security control process.Added: January 2020OM-3.1.4
The Board of Directors and
senior management must establish a comprehensive and ongoing due diligence and oversight process for managing the licensee's outsourcing relationships and other third-party dependencies supporting e-banking.Added: January 2020OM-3.2 OM-3.2 Secure Authentication
OM-3.2.1
Licensees must take appropriate measures to authenticate the identity and authorisation of customers with whom it conducts business.
Added: January 2020OM-3.2.2
Licensees must use predefined transaction authentication methods that promote non-repudiation and establish accountability for the transactions.
Licensees must establish detailed procedures to effectively identify the person originating electronic funds transfer transactions and for 'call backs' when appropriate to avoid frauds in electronic fund transfers.Added: January 2020OM-3.2.3
The term 'authentication' as used in this Module refers to the techniques, procedures and processes used to verify the identity and authorisation of prospective and established customers.
a) Identification refers to the procedures, techniques and processes used to establish the identity of a customer;b) Authorisation refers to the procedures, techniques and processes used to determine that a customer or an employee has legitimate access to the bank account or the authority to conduct associated transactions on that account.Added: January 2020OM-3.2.4
Licensees must have in place a strong
customer authentication process for its e-banking activities which ensure the following:(a) no information on any of the elements of the strongcustomer authentication process can be derived from the disclosure of the authentication code;(b) it is not possible to generate a new authentication code based on the knowledge of any other code previously generated; and(c) the authentication code cannot be forged.Added: January 2020OM-3.2.5
The CBB will consider application of quantitative thresholds below which the strong
customer authentication requirements may be simplified on a case-to-case basis.Added: January 2020OM-3.2.6
Licensees must establish adequate security features for
customer authentication including the use of the following three elements:(a) an element categorised as knowledge (something only the user knows), such as length or complexity of the pin or password;(b) an element categorised as possession (something only the user possesses) such as algorithm specifications, key length and information entropy, and(c) for the devices and software that read, elements categorised as inherence (something the user is), i.e. algorithm specifications, biometric sensor and template protection features.Added: January 2020OM-3.3 OM-3.3 Other Systems and Controls
OM-3.3.1
Licensees must ensure that appropriate measures are in place to promote adequate segregation of duties within electronic funds transfer and e-banking systems, databases and applications.
Added: January 2020OM-3.3.2
Licensees must ensure that proper authorisation controls and access privileges are in place for electronic funds transfer and e-banking systems, databases and applications.
Added: January 2020OM-3.3.3
Licensees must ensure that appropriate measures are in place to protect the data integrity of all transactions, records and information.
Added: January 2020OM-3.3.4
Licensees must ensure that clear audit trails exist for all electronic funds transfer and e-banking transactions.
Added: January 2020OM-3.3.5
Licensees must establish and document the log retention requirements, including the identification of the source of each request, time synchronization of all related systems and all meta-data related to each request
. Added: January 2020OM-3.3.6
Licensees must take appropriate measures to preserve the confidentiality of information. Measures taken to preserve confidentiality must be commensurate with the sensitivity of the information being transmitted and/or stored in databases.
Added: January 2020OM-3.3.7
Licensees must ensure that adequate information is provided on their websites to allow potential customers to make an informed conclusion about the licensee's identity and regulatory status of the licensee prior to entering into e-banking transactions.
Added: January 2020OM-3.3.8
Licensees must take appropriate measures to ensure adherence to customer privacy requirements applicable to the jurisdictions to which the licensee is providing e-banking products and services.
Added: January 2020OM-3.3.9
Licensees must have effective capacity, business continuity and contingency planning processes to help ensure the availability of e-banking systems and services.
Added: January 2020OM-3.3.10
Licensees must develop appropriate incident response plans to manage, contain and minimise problems arising from unexpected events, including internal and external attacks, that may hamper the provision of e-banking systems and services.
Added: January 2020OM-3.3.11
Licensees must have in place customer awareness communications, pre and post onboarding process, using video calls, short videos or pop-up messages, to alert and warn natural persons applying to open current or saving accounts, credit, debit or prepaid cards or digital wallets about the risk of electronic frauds, and emphasise the need to secure their personal account details and not share them with anyone, online or offline.Added: January 2021OM-4 OM-4 Business Continuity Management
OM-4.1 OM-4.1 Introduction
OM-4.1.1
All businesses may experience serious disruptions to their business operations. These disruptions may be caused by external events such as flooding, power failure or terrorism, or by internal factors such as human error or a serious computer breakdown. The probability of some events may be small, but the potential consequences may be massive, whereas other events may be more frequent and with shorter time horizons.
Added: January 2020OM-4.1.2
The purpose of a Business Continuity Plan ('BCP') is to minimize the operational, financial, legal, reputational, and other material consequences arising from a disruption. The objectives of a good BCP are:
(a) To minimise financial loss to the licensee;(b) To continue to serve customers and counterparties in the financial markets; and(c) To mitigate the negative effects that disruptions can have on a licensee's reputation, operations, liquidity, credit quality, its market position, and its ability to remain in compliance with applicable laws and regulations.Added: January 2020Scope and Key Elements of a Business Continuity Management (BCM)
OM-4.1.3
The requirements of this Chapter apply to all licensees.
Added: January 2020OM-4.1.4
Branches of foreign banks may apply alternative arrangements to those specified in this module, where they are subject to comprehensive BCM arrangements implemented by their head office or other member of their group, provided that:
(a) They have notified the CBB in writing what alternative arrangements will apply;(b) They have satisfied the CBB that these alternative arrangements are equivalent to the measures contained in this chapter, or are otherwise suitable; and(c) The CBB has agreed in writing to these alternative arrangements being used.Added: January 2020OM-4.2 OM-4.2 General Requirements
OM-4.2.1
To ensure an ability to operate on an ongoing basis and limit losses in the event of severe business disruption all
Islamic bank licensees must establish a comprehensive framework for business continuity management (BCM) and must maintain a business continuity plan (BCP) appropriate to the scale and complexity of their operations. A BCP must address the following key areas:(a) Data back up and recovery (hard copy and electronic);(b) Continuation of all critical systems, activities, and counterparty impact;(c) Financial and operational assessments;(d) Alternate communication arrangements between the licensee and its customers and its employees;(e) Alternate physical location of employees;(f) Communications with and reporting to the CBB and any other relevant regulators; and(g) Ensuring customers' prompt access to their funds in the event of a disruption.Added: January 2020OM-4.2.2
Effective BCM framework must incorporate policy, procedures and tools required to manage the risk of major operational disruptions. The BCP must be comprehensive, limited not just to disruption of business premises and information technology facilities, but covering all other critical areas, which affect the continuity of critical business operations or services (e.g. liquidity, human resources and others).
Added: January 2020OM-4.2.3
Licensees must notify the CBB promptly if there are events that lead to activating their BCP. They must also provide regular progress reports, as agreed with the CBB, until the BCP is deactivated.
Added: January 2020OM-4.2.4
The CBB expects licensees to plan for how they may cope with the complete destruction of buildings and surrounding infrastructure in which their key offices, installations, counterparties or service providers are located. The loss of key personnel, and a situation where back-up facilities might need to be used for an extended period of time are important factors in effective BCPs.
Added: January 2020OM-4.2.5
Licensees may find it useful to consider two-tier plans: one to deal with near-term problems; this should be fully developed and able to be put into immediate effect. The other, which might be in paper form; should deal with a longer-term scenario (e.g. how to accommodate processes that might not be critical immediately but would become so over time).
Added: January 2020OM-4.3 OM-4.3 Board and Senior Management Responsibilities
Establishment of a Policy, Processes & Responsibilities
OM-4.3.1
A licensee's Board of Directors and Senior Management are collectively responsible for a bank's business continuity. The Board must approve the policies, while senior management must approve procedures and processes for a licensee's BCP.
Added: January 2020OM-4.3.2
Licensees must establish a Crisis Management Team (CMT) to develop, maintain and test their BCP, as well as to respond to and manage the various stages of a crisis. The CMT must comprise members of
senior management and heads of major support functions (e.g. building facilities, IT, corporate communications and human resources).Added: January 2020OM-4.3.3
Licensees must establish (and document as part of the BCP) individuals' responsibilities in helping prepare for and manage a crisis; and the process by which a disaster is declared and the BCP initiated (and later terminated).
Added: January 2020Monitoring and Reporting
OM-4.3.4
The CMT must submit regular reports to the Board and senior management on recovery and response activities in the event of major operational disruptions and also on the results of the testing of the BCP (refer to section OM-4.9). Major changes must be developed by CMT, reported to
senior management , and endorsed by the Board.Added: January 2020OM-4.3.5
The Chief Executive of a licensee must sign a formal annual statement submitted to the Board on whether the response and recovery strategies adopted are still valid and whether the documented BCP is properly tested and maintained. The annual statement must be included in the BCM documentation and will be reviewed as part of the CBB's on-site examinations.
Added: January 2020OM-4.4 OM-4.4 Developing a Business Continuity Plan
Impact Analysis
OM-4.4.1
Licensees' BCPs must be based on (i) a business impact analysis (ii) an operational impact analysis, and (iii) a financial impact analysis. These analyses must be comprehensive, including all business functions and departments, not just IT or data processing.
Added: January 2020OM-4.4.2
The key objective of a Business Impact Analysis is to identify the different kinds of risk to business continuity and to quantify the operational and financial impact of disruptions on a licensee's ability to conduct its critical business processes.
Added: January 2020OM-4.4.3
A typical business impact analysis is normally comprised of two stages. The first is to identify and prioritise the critical business processes that must be continued in the event of a disaster. The first stage should take account of the impact on customers and reputation, the legal implications and the financial cost associated with downtime. The second stage is a time-frame assessment. This aims to determine how quickly the licensee needs to resume critical business processes identified in stage one.
Added: January 2020OM-4.4.4
Operational impact analysis focuses on the firm's ability to maintain communications with customers and to retrieve key activity records. It identifies the organizational implications associated with the loss of access, loss of utility, or loss of a facility. It highlights which functions may be interrupted by an outage, and the consequences to the public and customer of such interruptions.
Added: January 2020OM-4.4.5
A Financial Impact Analysis identifies the financial losses that (both immediate and also consequent to the event) arise out of an operational disruption.
Added: January 2020Risk Assessment
OM-4.4.6
In developing a BCP, licensees must consider realistic threat scenarios that may (potentially) cause disruptions to their business processes.
Added: January 2020OM-4.4.7
Licensees should analyse a threat by focusing on its impact on the business processes, rather than on the source of a threat. Certain scenarios can be viewed purely in terms of business disruption in specific work areas, systems or facilities. The scenarios should be sufficiently comprehensive to avoid the BCPs becoming too basic and thereby avoiding steps that could improve the resiliency of the licensee to disruptions.
Added: January 2020OM-4.4.8
BCPs must take into account different types of likely or plausible scenarios to which the bank may be vulnerable considering both the control (pre-event) measures and response (post-event) measures. In particular, the following specific scenarios must at a minimum, be considered in the BCP:
(a) Utilities are not available (power, telecommunications);(b) Critical buildings are not available or specific facilities are not accessible;(c) Software and live data are not available or are corrupted;(d) Vendor assistance or (outsourced) service providers are not available;(e) Critical documents or records are not available;(f) Critical personnel are not available; and(g) Significant equipment malfunctions (hardware or telecom).Added: January 2020OM-4.4.9
Licensees must distinguish between threats with a higher probability of occurrence and a lower impact to the business process (e.g. brief power interruptions) to those with a lower probability and higher impact (e.g. a terrorist bomb).
Added: January 2020OM-4.4.10
As a starting point, licensees must perform a "gap analysis". This gap analysis is a methodical comparison of what types of plans the licensee requires in order to maintain, resume or recover critical business operations or services in the event of a disruption, versus what the existing BCP provides. Management and the Board can address the areas that need development in the BCP, using the gap analysis.
Added: January 2020OM-4.5 OM-4.5 Recovery Levels & Objectives
OM-4.5.1
The BCM framework must include strategies and procedures to maintain, resume and recover critical business operations or services. The plan must differentiate between critical and non-critical functions. The BCM policy must clearly describe the types of events that would lead up to the formal declaration of a business disruption and the process for activating the BCP.
Added: January 2020OM-4.5.2
The BCM policy must clearly identify alternate sites for different operations, the total number of recovery personnel, workspace requirements, and applications and technology requirements. Office facilities and records requirements must also be identified.
Added: January 2020OM-4.5.3
Licensees should take note that they might need to cater for processing volumes that exceed those under normal circumstances. The interdependency among critical services is another major consideration in determining the recovery strategies and priority. For example, the resumption of the front office operations is highly dependent on the recovery of the middle office and back office support functions.
Added: January 2020OM-4.5.4
Individual critical business and support functions must establish Recovery Time Objectives (RTO), Recovery Point Objectives (RPO) and Maximum Tolerable Period of Disruption (MTPD) with respect to the bank's recovery programme. RTOs, RPOs and MTPDs must be approved by the senior management prior to proceeding to the development of the BCP.
Added: January 2020List of Contacts and Responsibilities
OM-4.5.5
The BCM framework must consider a communication strategy, established procedures for communication, methodology for transmitting, writing and reading of relevant information designed for each business unit where appropriate, the nature of information a list of all key resources charged with the tasks and the full listing of employees and relevant stakeholders. The list must include personal contact information on each key employee such as their home address, home telephone number, and cell phone or pager number so they may be contacted in case of a disaster or other emergency.
Added: January 2020OM-4.5.6
The BCM policy must contain all the necessary process steps to complete each critical business operation or service. Each process must be explained in sufficient detail to allow another employee to perform the job in case of a disaster.
Added: January 2020Alternate Sites for Business and Technology Recovery
OM-4.5.7
Most business continuity efforts are dependent on the availability of an alternate site (i.e. recovery site) for successful execution. The alternate site may be either an external site available through an agreement with a commercial vendor or a site within the Licensee's real estate portfolio. A useable, functional alternate site is an integral component of BCP.
Added: January 2020OM-4.5.8
Licensees must examine the extent to which key business functions are concentrated in the same or adjacent locations and the proximity of the alternate sites to primary sites. Alternate sites must be sufficiently remote from, and do not depend upon the same physical infrastructure components as a licensee's primary business location. This minimises the risk of both sites being affected by the same disaster (e.g. they must be on separate or alternative power grids and telecommunication circuits).
Added: January 2020OM-4.5.9
Licensees' alternate sites must be readily accessible and available for occupancy (i.e. 24 hours a day, 7 days a week) within the time requirement specified in their BCP. Should the BCP so require, the alternate sites must have pre-installed workstations, power, telephones and ventilation, and sufficient space. Appropriate physical access controls such as access control systems and security guards must be implemented in accordance with Licensee's security policy.
Added: January 2020OM-4.5.10
Other than the establishment of alternate sites,
licensees should also pay particular attention to the transportation logistics for relocation of operations to alternate sites. Consideration should be given to the impact a disaster may have on the transportation system (e.g. closures of roads). Some staff may have difficulty in commuting from their homes to the alternate sites. Other logistics, such as how to re-route internal and external mail to alternate sites should also be considered. Moreover, pre-arrangement with telecommunication companies for automated telephone call diversion from the primary work locations to the alternate sites should be considered.Added: January 2020OM-4.5.11
Alternate sites for technology recovery (i.e. back-up data centres), which may be separate from the primary business site, should have sufficient technical equipment (e.g. workstations, servers, printers, etc.) of appropriate model, size and capacity to meet recovery requirements as specified by
licensees' BCPs. The sites should also have adequate telecommunication (including bandwidth) facilities and pre-installed network connections as specified by their BCP to handle the expected voice and data traffic volume.Added: January 2020OM-4.5.12
Licensees should avoid placing excessive reliance on external vendors in providing BCP support, particularly where a number of institutions are using the services of the same vendor (e.g. to provide back-up facilities or additional hardware).Licensees should satisfy themselves that such vendors do actually have the capacity to provide the services when needed and the contractual responsibilities of the vendors should be clearly specified.Licensees should recognise that outsourcing a business operation does not transfer the associated business continuity management responsibilities.Added: January 2020OM-4.5.13
The contractual terms should include the lead-time and capacity that vendors are committed to deliver in terms of back-up facilities, technical support or hardware. The vendor should be able to demonstrate its own recoverability including the specification of another recovery site in the event that the contracted site becomes unavailable.
Added: January 2020OM-4.5.14
Certain
licensees may rely on a reciprocal recovery arrangement with other institutions to provide recovery capability (e.g. Cheque sorting and cash handling).Licensees should, however, note that such arrangements are often not appropriate for prolonged disruptions or an extended period of time. This arrangement could also make it difficult forLicensees to adequately test their BCP. Any reciprocal recovery agreement should therefore be subject to proper risk assessment and documentation bylicensees , and formal approval by the Board.Added: January 2020OM-4.6 OM-4.6 Detailed Procedures for the BCP
OM-4.6.1
Once the recovery levels and recovery objectives for individual business lines and support functions are determined, the development of the detailed BCP should commence. The objective of the detailed BCP is to provide detailed guidance and procedures in a crisis situation, of how to recover critical business operations or services identified in the Business Impact Analysis stage, and to ultimately return to operations as usual.
Added: January 2020Crisis Management Process
OM-4.6.2
A BCM framework must include a Crisis Management Plan (CMP) that serves as a documented guidance to assist the CMT in dealing with a crisis situation to avoid spill over effects to the business as a whole. The overall CMP, at a minimum, must contain the following:
(a) A process for ensuring early detection of an emergency or a disaster situation and prompt notification to the CMT about the incident;(b) A process for the CMT to assess the overall impact of the crisis situation on the licensee and to make quick decisions on the appropriate responses for action (i.e. staff safety, incident containment and specific crisis management procedures);(c) Arrangements for safe evacuation from business locations (e.g. directing staff to a pre-arranged emergency assembly area, taking attendance of all employees and visitors at the time and tracking missing people through different means immediately after the disaster);(d) Clear criteria for activation of the BCP and/or alternate sites;(e) A process for gathering updated status information for the CMT (e.g. ensuring that regular conference calls are held among key staff from relevant business and support functions to report on the status of the recovery process);(f) A process for timely internal and external communications; and(g) A process for overseeing the recovery and restoration efforts of the affected facilities and the business services.Added: January 2020OM-4.6.3
If CMT members need to be evacuated from their primary business locations, the licensee should set up a command centre to provide the necessary workspace and facilities for the CMT. Command centres should be sufficiently distanced from the licensee's primary business locations to avoid being affected by the same disaster.
Added: January 2020Business Resumption
OM-4.6.4
Each relevant business and support function must assign at least one member to be a part of the CMT to carry out the business resumption process for the relevant business and supported function. Appropriate recovery personnel with the required knowledge and skills must be assigned to the team.
Added: January 2020OM-4.6.5
Generally, the business resumption process consists of three major phases:
(a) The mobilisation phase — This phase aims to notify the recovery teams (e.g. via a call-out tree) and to secure the resources (e.g. recovery services provided by vendors) required to resume business services.(b) The alternate processing phase — This phase emphasizes the resumption of the business and service delivery at the alternate site and/or in a different way than the normal process. This may entail record reconstruction and verification, establishment of new controls, alternate manual processes, and different ways of dealing with customers and counterparties; and(c) The full recovery phase — This phase refers to the process for moving back to a permanent site after a disaster. This phase may be as difficult and critical to the business as the process to activate the business resumption process.Added: January 2020OM-4.6.6
For the first two phases above, clear responsibilities should be established and activities prioritised. A recovery tasks checklist should be developed and included in the BCM framework.
Added: January 2020Technology Recovery
OM-4.6.7
Business resumption very often relies on the recovery of technology resources that include applications, hardware equipment and network infrastructure as well as electronic records. The technology requirements that are needed during recovery for individual business and support functions should be specified when the recovery strategies for the functions are determined.
Added: January 2020OM-4.6.8
Licensees should pay attention to Heat, Ventilation and Air Conditioning (HVAC) requirements and resilience of critical technology equipment and facilities such as the uninterruptible power supply (UPS) and the computer cooling systems. Such equipment and facilities should be subject to continuous monitoring and periodic maintenance and testing.Added: January 2020OM-4.6.9
Appropriate personnel must be assigned with the responsibility for technology recovery. Alternative personnel need to be identified as back up for key technology recovery personnel in the case of the latter unavailability to perform the recovery process.
Added: January 2020Disaster Recovery Models
OM-4.6.10
There are various disaster recovery models that can be adopted by
licensees to handle prolonged disruptions. The traditional model is an "active/back-up" model, which is widely used by many organizations. This traditional model is based on an "active" operating site with a corresponding alternate site (back-up site), both for data processing and for business operations.Added: January 2020OM-4.6.11
A split operations model, which is increasingly being used by major institutions, operates with two or more widely separated active sites for the same critical operations, providing inherent back up for each other (e.g. branches). Each site has the capacity to take up some or all of the work of another site for an extended period of time. This strategy can provide nearly immediate resumption capacity and is normally able to handle the issue of prolonged disruptions.
Added: January 2020OM-4.6.12
The split operations model may incur higher operating costs, in terms of maintaining excess capacity at each site and added operating complexity. It may also be difficult to maintain appropriately trained staff and the split operations model can pose technological issues at multiple sites.
Added: January 2020OM-4.6.13
The question of what disaster recovery model to adopt is for individual
licensees' judgment based on the risk assessment of their business environment and the characteristics of their own operations.Added: January 2020OM-4.7 OM-4.7 Vital Records Management
OM-4.7.1
Each BCM framework must clearly identify information deemed vital for the recovery of critical business and support functions in the event of a disaster as well as the relevant protection measures to be taken for protecting vital information.
Licensees must refer to Chapter OM-6 when identifying vital information for business continuity. Vital information includes information stored on both electronic and non-electronic media.Added: January 2020OM-4.7.2
Copies of vital records must be stored off-site as soon as possible after creation. Back-up vital records must be readily accessible for emergency retrieval. Access to back-up vital records must be adequately controlled to ensure that they are reliable for business resumption purposes. For certain critical business operations or services,
licensees must consider the need for instantaneous data back up to ensure prompt system and data recovery. There must be clear procedures indicating how and in what priority vital records are to be retrieved or recreated in the event that they are lost, damaged or destroyed.Added: January 2020OM-4.8 OM-4.8 Other Policies Standards, and Processes
Employee Awareness and Training Plan
OM-4.8.1
Licensees must implement an awareness plan and business continuity training for employees to ensure that all employees are continually aware of their responsibilities and know how to remain in contact and what to do in the event of a crisis.Added: January 2020OM-4.8.2
Key employees should be involved in the business continuity development process, as well as periodic training exercises. Cross training should be utilised to anticipate restoring operations in the absence of key employees. Employee training should be regularly scheduled and updated to address changes to the BCP.
Added: January 2020Public Relations & Communication Planning
OM-4.8.3
Licensees must develop an awareness program and formulate a formal strategy for communication with key external parties (e.g. CBB and other regulators, investors, customers, counterparties, business partners, service providers, the media and other stakeholders) and provide for the type of information to be communicated. The strategy needs to set out all the parties the licensee must communicate to in the event of a disaster. This will ensure that consistent and up-to-date messages are conveyed to the relevant parties. During a disaster, ongoing and clear communication is likely to assist in maintaining the confidence of customers and counterparties as well as the public in general.Added: January 2020OM-4.8.4
The BCM framework must clearly indicate who may speak to the media and other key external parties, and have pre-arrangements for redirecting external communications to designated staff during a disaster. Important contact numbers and e-mail addresses of key external parties must be kept in a readily accessible manner (e.g. in wallet cards or
licensees' intranet).Added: January 2020OM-4.8.5
Licensees may find it helpful to prepare draft press releases as part of their BCP. This will save the CMT time in determining the main messages to convey in a chaotic situation. Important conversations with external parties should be properly logged for future reference.Added: January 2020OM-4.8.6
With reference to internal communication, the BCP should set out how the status of recovery can be promptly and consistently communicated to all staff, parent bank, head office, branches and subsidiaries (where appropriate). This may entail the use of various communication channels (e.g. broadcasting of messages to mobile phones of staff,
Licensees websites, e-mails, intranet and instant messaging).Added: January 2020Insurance and other Risk Mitigating Measures
OM-4.8.7
Licensees must have proper insurance coverage to reduce the financial losses that they may face during a disaster.Licensees must regularly review the adequacy and coverage of their insurance policies in reducing any foreseeable risks caused by disasters (e.g. loss of offices, critical IT facilities and equipment).Added: January 2020Government and Community
OM-4.8.8
Licensees may need to coordinate with community and government officials and the media to ensure the successful implementation of the BCP. This establishes proper protocol in case a city- wide or region- wide event impacts the licensee's operations. During the recovery phase, facilities access, power, and telecommunications systems should be coordinated with various entities to ensure timely resumption of operations. Facilities access should be coordinated with the police and fire department and, depending on the nature and extent of the disaster.Added: January 2020Disclosure Requirements
OM-4.8.9
Licensees must disclose how their BCP addresses the possibility of a future significant business disruption and how the licensee will respond to events of varying scope.Licensees must also state whether they plan to continue business during disruptions and the planned recovery time. In all cases, BCP disclosures must be reviewed and updated to address changes to the BCP.Added: January 2020OM-4.8.10
The
licensees might make these disclosures on their websites, or through mailing to key external parties upon request.Added: January 2020OM-4.9 OM-4.9 Maintenance, Testing and Review
Testing & Rehearsal
OM-4.9.1
A BCP is not complete if it has not been subject to proper testing. Testing is needed to ensure that the BCP is operable. Testing verifies the awareness of staff and the preparedness of differing departments/functions of the bank.
Added: January 2020OM-4.9.2
Licensees must test their BCPs at least annually.Senior management must participate in the annual testing and demonstrate their awareness of what they are required to do in the event of the BCP being involved. Also, the recovery and alternate personnel must participate in testing rehearsals to familiarise themselves with their responsibilities and the back-up facilities and remote sites (where applicable).Added: January 2020OM-4.9.3
All of the BCP's related risks and assumptions must be reviewed for relevancy and appropriateness as part of the annual planning of testing. The scope of testing must be comprehensive enough to cover the major components of the BCP as well as coordination and interfaces among important parties. A testing of particular components of the BCP or a fully integrated testing must be decided or depending on the situation. The following points must be included in the annual testing:
(a) Staff evacuation and communication arrangements (e.g. call-out trees) must be validated;(b) The alternate sites for business and technology recovery must be activated;(c) Important recovery services provided by vendors or counterparties must form part of the testing scope;(d)Licensees must consider testing the linkage of their back up IT systems with the primary and backup systems of service providers;(e) If back up facilities are shared with other parties (e.g. subsidiaries of the licensee), the licensee needs to verify whether all parties can be accommodated concurrently; and(f) Recovery of vital records must be performed as part of the testing.Added: January 2020OM-4.9.4
Formal testing reviews of the BCP must be performed to assess the thoroughness and effectiveness of the testing. Specifically, a post-mortem review report must be prepared at the completion of the testing stage for formal sign-off by
Licensees' senior management . If the testing results indicate weaknesses or gaps in the BCP, the plan and recovery strategies must be updated to remedy the situation.Added: January 2020Periodic Maintenance and Updating of a BCP
OM-4.9.5
Licensees must have formal procedures to keep their BCP updated with respect to any changes to their business. In the event of a plan having been activated, an assessment process must be carried out once normal operations are restored to identify areas for improvement. If vendors are needed to provide vital recovery services, there must be formal processes for regular annual assessment of the appropriateness of the relevant service level agreements.Added: January 2020OM-4.9.6
Individual business and support functions, with the assistance of the CMT, must review their business impact analysis and recovery strategy on an annual basis. This aims to confirm the validity of, or whether updates are needed to, the BCP requirements (including the technical specifications of equipment of the alternate sites) for the changing business and operating environment.
Added: January 2020OM-4.9.7
The contact information for key staff, counterparties, customers and service providers must be updated as soon as possible when notification of changes is received.
Added: January 2020OM-4.9.8
Significant internal changes (e.g. merger or acquisitions, business re-organisation or departure of key personnel) must be reflected in the plan immediately and reported to
senior management .Added: January 2020OM-4.9.9
Copies of the BCP document must be stored at locations separate from the primary site. A summary of key steps to be taken in an emergency situation must be made available to
senior management and other key personnel.Added: January 2020Audit and Independent Review
OM-4.9.10
The internal audit function of a licensee or its external auditors must conduct periodic reviews of the BCP to determine whether the plan remains realistic and relevant, and whether it adheres to the policies and standards of the licensee. This review must include assessing the adequacy of business process identification, threat scenario development, business impact analysis and risk assessments, the written plan, testing scenarios and schedules.
Added: January 2020OM-4.9.11
Significant findings and recommendations must be brought to the attention of the Board and Senior Management within three months of the completion of the review. Furthermore, Senior Management and the Board must ensure that any gaps or shortcomings reported to them are addressed in an appropriate and timely manner.
Added: January 2020OM-5 OM-5 Security Measures for Banks
OM-5.1 OM-5.1 Security Measures for Retail Banks
General Requirement
OM-5.1.1
Retail banks must maintain up to date Payment Card Industry Data Security Standards (PCI-DSS) certification. Failure to comply with this requirement will trigger a supervisory response, which may include formal enforcement measures, as set out in Module EN (Enforcement).
Added: January 2020OM-5.1.2
In order to maintain up to date PCI-DSS certification, retail banks will be periodically audited by PCI authorised companies for compliance.
Licensees are asked to make certified copies of such documents available if requested by the CBB.Added: January 2020OM-5.1.2A
Islamic retail bank licensees must take appropriate measures to counter fraudulent phishing attempts (such as through telephone or WhatsApp calls, SMS or WhatsApp messages, emails and other media) that request customers to provide sensitive personal information that can lead to frauds. The licensees must also enhance their surveillance and monitoring systems to detect suspicious account activity caused by such fraudulent attempts on a timely basis.Added: October 2020OM-5.1.2B
Islamic retail bank licensees must raise customer awareness about fraudulent phishing messages by launching extensive customer alert campaigns through media and social media channels. Customers must be warned of such attempts and advised to only use the licensee’s official website, telephone or other channels for communication with it.Added: October 2020External Measures
OM-5.1.3
All head offices/main offices are required to maintain Ministry of Interior ("MOI") guards on a 24 hours basis. For branches that satisfy the criteria mentioned in Paragraphs OM-5.1.4 to OM-5.1.16 below, they may maintain MOI guards during opening hours only. Furthermore, banks will be allowed to replace MOI armed guards with private security guards subject to the approval of the MOI. Training and approval of private security guards will be given by the MOI.
Added: January 2020OM-5.1.4
Public entrances to head offices/main offices and branches must be protected by steel rolling shutters, or the external doors must be of solid steel or a similar solid material of equivalent strength and resistance to fire. Other external entrances must have steel doors or be protected by steel rolling shutters. Preferably, all other external entrances must have the following security measures:
(a) Magic eye;(b) Locking device (key externally and handle internally);(c) Door closing mechanism;(d) Contact sensor with alarm for prolonged opening time; and(e) Multifactor or combination access control system (e.g. access card and key slot or swipe card and password).Added: January 2020OM-5.1.5
External windows must have security measures such as anti-blast films and movement detectors. For ground floor windows, banks must add steel grills fastened into the wall.
Amended: April 2021
Added: January 2020OM-5.1.6
Branch alarm systems must have the following features:
(a) PIR motion detectors(b) Door sensors(c) Anti vibration/movement sensors on vaults(d) External siren(e) The intrusion detection system must be linked to the bank's (i.e. head office) monitoring unit and also the MOI Central Monitoring Unit.Added: January 2020Internal Measures
OM-5.1.7
Teller counters must be screened off from customers by a glass screen of no less than 1 meter in height from the counter work surface or 1.4 meters from the floor.
Added: January 2020OM-5.1.8
All areas where cash is handled must be screened off from customers and other staff areas.
Added: January 2020OM-5.1.9
Access to teller areas must be restricted to authorised staff only. The design of the teller area must not allow customers to pass through it.
Added: January 2020OM-5.1.10
Panic alarm systems for teller staff must be installed. The choice between silent or audible panic alarms is left to individual banks. Kick bars and/or hold up buttons must be spread throughout the teller and customer service areas and the branch manager's office. The panic alarm must be linked to the MOI Central Monitoring Unit.
Added: January 2020Cash Safety
OM-5.1.11
Cash, precious metals and bearer instruments must be kept in fireproof cabinets/safes. These cabinets/safes must be located in strong rooms.
Added: January 2020OM-5.1.12
Strong rooms must be made of reinforced solid concrete, or reinforced block work. Doors to strong rooms must be steel and have a steel shutter fitted. Dual locking devices must be installed in strong room doors. Strong room doors must be located out of the sight of customers.
Added: January 2020OM-5.1.13
Strong rooms must not contain any other openings except the entry door and where necessary, an air conditioning outlet. The air conditioning outlet must be protected with a steel grill.
Added: January 2020CCTV Network Systems
OM-5.1.14
All head offices/main offices and branches must have a CCTV network and alarm system which are connected to a central monitoring unit located in the head office/main office, along with a Video Monitoring System (VMS) and to the MOI Central Monitoring Unit.
Added: January 2020OM-5.1.15
At a minimum, CCTV cameras must cover the following areas:
(a) Main entrance;(b) Other external doors;(c) Any other access points (e.g. ground floor windows);(d) The banking hall;(e) Tellers' area;(f) Strong room entrance; and(g) ATMs (by way of internal or external cameras) Refer to Section OM-5.3 for specific CCTV requirements related to ATMs.Added: January 2020OM-5.1.16
Notices of CCTV cameras in operation must be put up for the attention of the public. CCTV records must be maintained for a minimum 45-day period. The transmission rate (in terms of the number of frames per second) must be high enough to make for effective monitoring. Delayed transmission of pictures to the Central Monitoring Unit is not acceptable. The CCTV system must be operational 24 hours per day.
Added: January 2020Training and Other Measures
OM-5.1.17
Banks must establish the formal position of security manager. This person will be responsible for ensuring all bank staff are given annual, comprehensive security training. Banks must produce a security manual or procedures for staff, especially those dealing directly with customers. For banks with three or more branches, this position must be a formally identified position. For banks with one or two branches, the responsibilities of this position may be added to the duties of a member of management.
Added: January 2020OM-5.1.18
The security manager must maintain records on documented security related complaints by customers and take corrective action or make recommendations for action on a timely basis. Actions and recommendations must also be documented.
Added: January 2020OM-5.1.19
Banks must consider safety and security issues when selecting premises for new branches. Key security issues include prominence of location (i.e. Is the branch on a main street or a back street?), accessibility for emergency services, and assessment of surrounding premises (in terms of their safety or vulnerability), and the number of entrances to the branch. All banks are required to hold an Insurance Blanket Bond (which includes theft of cash in its cover).
Added: January 2020OM-5.2 OM-5.2 Payment and ATM cards, Wallets and Point of Sale infrastructure
Europay, MasterCard and Visa (EMV) Compliance
OM-5.2.1
All cards (debit, credit, charge, prepaid, etc.) issued by licensees in the Kingdom of Bahrain must be EMV compliant. Moreover, all ATMs, CDMs, POS, etc. must be EMV compliant for accepting cards issued in the Kingdom of Bahrain. In this context, EMV compliant means using chip and online PIN authentication. However, contactless card payment transactions, where no PIN verification is required, are permitted for small amounts i.e. up to BD50 per transaction, provided that
Islamic bank licensees bear full responsibility in case of fraud occurrence.Amended: April 2023
Added: January 2020OM-5.2.1A
Where contactless payments use Consumer Device Cardholder Verification Method (CDCVM) for payment authentication and approval, then the authentication required for transactions above BD50 limit mentioned in Paragraph OM-5.2.1 is not applicable given that the customer has already been authenticated by his device using PIN, biometric or other authentication methods. This is only applicable where debit/credit card of the customer has already been tokenized in the payment application.
Amended: April 2023
Added: July 2020Provision of Cash Withdrawal and Payment Services through Various Channels
OM-5.2.2
Islamic bank licensees are allowed to provide cash withdrawal and payment services using various channels, including but not limited to, contactless, cardless, QR code, e-wallets, biometrics (iris recognition, facial recognition, fingerprint, voiceprint, etc.), subject to explicit consent from the customers using established methods described in OM-3.2 and enrolling them through a registration process for each channel and service, wherein customers' acceptance of products/services terms and conditions are documented and customers are properly authenticated. Such enrolment process must allow an opt-out option if the customer does not want to use a channel for which he has enrolled.Added: January 2020Geolocation Limitations
OM-5.2.3
All
Islamic bank licensees issuing debit, prepaid and/or credit cards must ensure that all Bahrain issued cards enable each customer to maintain a list of 'approved' countries for card ATM/Point of Sale (POS) transactions. Customers must be allowed to determine those countries in which their cards must not be accepted as well as countries or merchant categories in which a card transaction would require a further level of authorisation, (for example, 2-way SMS).Added: January 2020Prohibition of Double Swiping
OM-5.2.4
Double swiping of cards by merchants is not allowed, and all card acquirer
licensees must ensure that the merchants concerned must comply with this requirement.Added: January 2020OM-5.2.5
For the purpose of Paragraph OM-5.2.4, card acquirer licensee means a CBB licensee that enters into a contractual relationship with a merchant and the payment card issuer, under a card payment scheme, for accepting and processing payment card transactions. Card acquirers include three-party payment card network operators, who have outsourced their acquiring services to third party service providers.
Added: January 2020OM-5.2.6
For the purpose of Paragraph OM-5.2.4, double swiping means swiping of a payment card by a merchant at the POS terminal/ECR for the second time, resulting in capturing and storing of payment cardholder data and sensitive authentication data encoded on the magnetic stripe of a customer's payment card, after the merchant received the required card payment authorisation response.
Added: January 2020OM-5.2.7
All card acquirer
licensees must include the following clause into the merchant agreements entered into with all their merchants: "Pursuant to the CBB directions and instructions, the merchant shall stop double swiping of a payment card at a merchant's point-of-sale (POS) terminal/electronic cash register (ECR) to capture or store cardholder and sensitive authentication data encoded on the magnetic stripe of a customer's payment card, after the merchant received the required card payment authorisation response. The merchant asserts its full compliance with the obligation contained in this clause and understands that any breach of this clause will expose the merchant to mandatory contractual and/or legal disciplinary actions by the relevant regulator and/or concerned Ministry."Added: January 2020OM-5.2.8
All card acquirer
licensees must:(i) Educate the concerned merchants on the regulatory requirement and monitor the implementation of this requirement; and(ii) Educate and facilitate, where necessary, any merchant that has a valid business need to have cardholder data or non-sensitive information, to transmit such data/information through an integration option.Added: January 2020Integration of Hardware Components
OM-5.2.9
If the Automated Teller Machines (ATM) environment permits access to internal areas where account data is processed and/or stored (e.g., for service or maintenance), these areas must be effectively protected from access by unauthorised persons to mitigate the risk associated with attaching/inserting malicious additional components, especially those which may be designed to capture sensitive data. Banks must encrypt account data or secure access to such data by effective physical barriers such as strong walls, doors, and mechanical locks.
Added: January 2020OM-5.2.10
All entry to sensitive areas must be recorded, including the name of the persons accessing the area; the date; and the time of access to and exit from the area. CCTV cameras must be installed, and used to record all activities within the ATM environment.
Added: January 2020OM-5.2.11
Banks are required to implement best industry practice in respect of hardware and software development and integration, including but not limited to formal specification, test plans, and documentation. Hardware and software should only be introduced to the environment following a successful programme of testing.
Added: January 2020OM-5.2.12
All test plans and the outcomes of these plans must be retained by the bank for a minimum of five years from the date of testing and be available on request to the CBB or their authorised representatives. Examples of instances in which a detailed testing process must be undertaken prior to installation and integration of components include, but are not limited to, secure card readers or EPPs. In all instances the applicable standards relating to Payment Card Industry (PCI), PIN Transaction Security (PTS), and Point of Interaction (POI) requirements must be fully complied with.
Added: January 2020OM-5.2.13
Banks must ensure that the integration of Secure Card Readers, (SCRs) and, if applicable, any mechanism protecting the SCRs and any anti skimming devices are properly implemented and fully comply with the guidelines provided by the device vendor. SCRs must be PCI Security Standards Council approved and fully comply with all PCI standards at all times.
Added: January 2020OM-5.2.14
Banks must ensure that all ATMs, including offsite ATMs, are equipped with mechanisms which prevent skimming attacks. There must be no known or demonstrable way to disable or defeat the above-mentioned mechanisms, or to install an external or internal skimming device.
Added: January 2020ATM Software
OM-5.2.15
Banks must ensure that their ATM software security measures comply with the following:
(a) Access to sensitive services is controlled by requiring authentication. Entering or exiting sensitive services must not reveal or otherwise compromise the security of sensitive information;(b) ATM software must include controls which are designed to prevent unauthorised modification of the software configuration, including the operating system, drivers, libraries, and individual applications. Software configuration includes the software platform, configuration data, applications loaded to and executed by the platform, and the associated data. The mechanisms must also ensure the integrity of third-party applications, using a controlled process to install such controls;(c) Access to all elements of the ATM environment must be strictly controlled to ensure an effective segregation of functions and an effective segregation of responsibilities exists for all personnel;(d) The logging data must be stored in a way that data cannot be changed under any circumstances, and deleted only after authorisation by a member of bank staff who has specific responsibility delegated by the CEO;(e) Software is protected and stored in a manner which precludes unauthorised modification; and(f) Loading of software into ATMs is performed by a person who has the requisite knowledge and skills, and who has been nominated and authorised by a senior manager in the bank to undertake these tasks.Added: January 2020OM-5.2.16
ATMs must incorporate dedicated tampering protection capabilities.
Added: January 2020ATM Application Management
OM-5.2.17
Banks must ensure that their ATM application management complies with the following:
(a) The display of a cardholder PIN must be obfuscated on the ATM display and must not be in 'clear' mode;(b) Sensitive information must not be present any longer or used more often than strictly necessary. The ATM must automatically clear its internal buffers when either the transaction is completed, or the ATM has timed out whilst awaiting a response from the cardholder or host; and(c) Prevent the display or disclosure of cardholder account information such as the account number, ID number, address and other personal details etc. on the ATM screen, printed on receipts, or audio transcripts for visually impaired cardholders.Added: January 2020OM-5.3 OM-5.3 ATM Security Measures: Physical Security for Retail Banks
Record Keeping
OM-5.3.1
Banks must record the details of the site risk assessments and retain such records for a period of five years from the date of the ATM installation, or whatever other period required by the Ministry of the Interior or the CBB from time to time, whichever is the longer.
Added: January 2020Installation of an Off-site ATM in Bahrain
OM-5.3.2
Banks must notify the CBB in writing if they install a new
off-site ATM or remove/terminate any of itsoff-site ATMs .Amended: January 2022
Added: January 2020OM-5.3.3
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020General Criteria
OM-5.3.4
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-5.3.5
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-5.3.6
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-5.3.7
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-5.3.8
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-5.3.9
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-5.3.10
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-5.3.11
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2020OM-5.3.12
The CBB may, at its sole discretion, require an
off-site ATM to be removed/terminated and decommissioned at any time.Added: January 2020ATM Alarms
OM-5.3.13
In addition to alarming the premises, banks must alarm the ATM itself, in a way which activates audibly when the ATM is under attack. The system must be monitored by remote signaling to an appropriate local police response designated by the Ministry of Interior. In doing so, banks must consider the following:
(a) The design of the system must ensure that the ATM has a panic alarm installed;(b) The design of the system must give an immediate, system controlled warning of an attack on the ATM, and all ATMs must be fitted with fully operational fraud detection and inhibiting devices;(c) A maintenance record must be kept for the alarm detection system and routine maintenance must be conducted in accordance with at least the manufacturer's recommendations. The minimum must be two planned maintenance visits and tests every 6 months; and(d) The alarm system must be monitored from an Alarm Receiving Centre 24 hours daily. It must automatically generate an alarm signal if the telephone/internet line fails or is cut.Added: January 2020Closed-circuit Television (CCTV)
OM-5.3.14
Banks must ensure that ATMs are equipped with Closed-circuit television (CCTV). The location of camera installation must be carefully chosen to ensure that images of the ATM are recorded, however keypad entries must not be recorded. The camera must support the detection of the attachment of alien devices to the fascia (external body) and possess the ability to generate an alarm for remote monitoring if the camera is blocked or otherwise disabled. There must be sensors to detect and alert the bank if the camera has been blocked or tampered with.
Added: January 2020OM-5.3.15
For the purposes of Paragraph OM-5.3.14, the location of camera installation in drive-thru ATMs must be carefully chosen to ensure that the images of the vehicle number plates are clearly captured during both daytime and nighttime.
Added: January 2020OM-5.3.16
As a minimum, CCTV activity must be recorded (preferably in digital format) and, where risk dictates, remotely monitored by a third party Alarm Receiving Centre.
Added: January 2020OM-5.3.17
When an ATM is located in an area where a public CCTV system operates, the deployer or agent must liaise with the agency responsible for the CCTV system to include the ATM site in any preset automatic camera settings or to request regular sweeps of the site. The CCTV system must not be able to view the ATM keypad thereby preventing observation of PIN entry.
Added: January 2020OM-5.3.18
Banks must ensure that the specifications of CCTV cameras meet the following minimum requirements:
(a) Analogue Cameras:Resolution — Minimum 700 TVL
Lens — Vari-focal lenses from 2.8 to 12mm
Sensitivity — Minimum 0.5 Luminance (Lux) without Infrared (IR), 0 Lux with IR
IR — At least 10 to 20 meters (Camera that detects motion)(b) IP Cameras:Resolution — 2 MP — 1080 p
Lens — Vari-focal lenses from 2.8 to 12mm
Sensitivity — Minimum 0.5 Lux without IR, 0 Lux with IR
IR — At least 10 to 20 metersAdded: January 2020OM-5.3.19
Banks must ensure that the following network requirements are met for connecting the Banks CCTV system to MOI Control room:
(a) The minimum speed of the upload should be 2 Mbps for each node (ATM's and branches);(b) Speed/storage limit threshold must not be applied in a manner which permits a network delay; and(c) Access must be restricted to authorised personnel.Added: January 2020ATM Lighting
OM-5.3.20
Banks must ensure that adequate and effective lighting is operational at all times within the ATM environment. The standard of the proposed lighting must be agreed with the Ministry of the Interior and other relevant authorities, and tested at least once every three months to ensure that the lighting is in good working order.
Added: January 2020OM-5.3.21
Banks must ensure that adequate and effective lighting is operational within drive-thru ATMs to enable the CCTV cameras to capture the vehicle number plates during both daytime and nighttime.
Added: January 2020Fire Alarm
OM-5.3.22
Banks must ensure that effective fire alarm and fire defense measures, such as a sprinkler, are installed and functioning for all ATMs. These alarms must be linked to the "General Directorate of Civil Defense" in Bahrain.
Added: January 2020Cash Replenishment
OM-5.3.23
All cash movements between branches, to and from the CBB and to
off-site ATMs must be performed by specialised service providers.Added: January 2020ATM Service/Maintenance
OM-5.3.24
Banks must maintain a list of all maintenance, replenishment and inspection visits by staff or other authorised parties.
Added: January 2020OM-5.3.25
The CBB shall conduct inspections of ATM installations and any non-compliance with the physical security requirements stipulated in this Chapter may lead to suspension of the subject ATMs and trigger other enforcement measures set out in Module EN.
Added: October 2022OM-5.4 OM-5.4 ATM Security Measures: Additional Measures for Retail Banks
OM-5.4.1
Banks may ensure the adequacy and effectiveness of external security measures throughout the ATM environment through the additional security measures outlined in this Section.
Added: January 2020Sounders and Flashing Warning Lights
OM-5.4.2
Banks should ensure that street-based ATMs are installed with an audible alarm sounder, and a visual flashing warning light, to indicate when the ATM is under attack.
Added: January 2020Armored Anti-Bandit Shroud
OM-5.4.3
Banks should obtain and act upon advice provided by the Ministry of Interior in respect of protecting the ATM installation with an armored anti-bandit shroud which is placed around the ATM to prevent any bombing or other physical attempts to damage the ATM.
Added: January 2020OM-5.5 OM-5.5 Cyber Security Risk Management
Role of the Board
OM-5.5.1
The Board of
Islamic bank licensees must ensure that thelicensee has a robust cyber security risk management policy to comprehensively manage thelicensee ’s cyber security risk and vulnerabilities. The Board must approve the policy and establish clear ownership, decision-making and management accountability for risks associated with cyber-attacks and related risk management and recovery processes. Cyber security must be an item for discussion at Board or Board sub-committee meetings.Amended: July 2021
Added: January 2020OM-5.5.2
The Board of
Islamic bank licensees must ensure that the cyber security risk management framework encompasses, at a minimum, the following components:a) Cyber security strategy;b) Cyber security policy; andc) Cyber security risk management approach, tools and methodology and, an organization-wide security awareness program.Amended: July 2021
Added: January 2020OM-5.5.3
The cyber security risk management framework must be developed in accordance with the National Institute of Standards and Technology (NIST) Cyber security framework which is summarized in Appendix C – Cyber security Control Guidelines. At the broader level, the Cyber security framework should be consistent with the
licensee ’s risk management framework.Amended: July 2021
Added: January 2020OM-5.5.4
Boards should receive comprehensive reports, in every Board meeting, covering cyber security issues such as the following:
a. Key Risk Indicators/ Key Performance Indicators;b. Status reports on overall cyber security control maturity levels;c. Status of staff Information Security awareness;d. Updates on latest internal or relevant external cyber security incidents; ande. Results from penetration testing exercises.Amended: July 2021
Added: January 2020OM-5.5.5
The Board must evaluate and approve the cyber security risk management framework for scope coverage, adequacy and effectiveness every three years or when there are significant changes to the risk environment, taking into account emerging cyber threats and cyber security controls.
Amended: July 2021
Added: January 2020OM-5.5.6
Islamic bank licensees must establish a cyber security risk function, independent of the information technology (IT) department, which must report to an independent risk management function or an equivalent function within thelicensee . The cyber security risk management function must monitor and report on the status and maturity of relevant cyber security controls.Branches of foreign bank licensees must be governed under a framework of cyber security risk management policies which ensure that an adequate level of oversight is exercised by the regional office or head office.Amended: July 2021
Added: January 2020OM-5.5.7
The Board should ensure that appropriate resources are allocated to the cyber security risk management function for implementing the cyber security framework.
Added: July 2021OM-5.5.8
The Board must ensure that the cyber security risk management function is headed by suitably qualified Chief Information Security Officer (CISO), with appropriate authority to implement the Cyber Security strategy.
Added: July 2021OM-5.5.9
The Board should establish a cyber security committee that is headed by an independent senior manager from a control function (like CFO / CRO), with appropriate authority to approve policies and frameworks needed to implement the cyber security strategy, and act as a governance committee for the cyber security function. Membership of this committee should include senior management members from business functions, IT, Risk and Compliance.
Added: July 2021Role of Senior Management
OM-5.5.10 OM-5.5.10
The
senior management must be responsible for the following activities:(a) Create the overall cyber security risk management framework and adequately oversee its implementation;(b) Formulate a bank-wide cyber security strategy and cyber security policy;(c) Implement and consistently maintain an integrated, bank-wide, cyber security risk management framework, and ensure sufficient resource allocation;(d) Monitor the effectiveness of the implementation of cyber security risk management practices and coordinate cyber security activities with internal and external risk management entities;(e) Provide quarterly or more frequent reports to the Board on the current situation with respect to cyber threats and cyber security risk treatment;(f) Prepare quarterly or more frequent reports on all cyber incidents (internal and external) and their implications on thelicensee ; and(g) Ensure that processes for identifying the cyber security risk levels across the organisation are in place and annually evaluated.Added: July 2021OM-5.5.11 OM-5.5.11
The
senior management must ensure that:(a) Thelicensee has identified clear internal ownership and classification for all information assets and data;(b) Thelicensee has maintained an inventory of the information assets and data which is reviewed and updated regularly;(c) The cyber security staff are adequate to manage thelicensee ’s cyber security risks and facilitate the performance and continuous improvement of all relevant cyber security controls;(d) It provides and requires cyber security staff to attend regular cyber security update and training sessions (for example Security+, CEH, CISSP, CISA, CISM) to stay abreast of changing cyber security threats and countermeasures.Added: July 2021OM-5.5.12
With respect to Subparagraph OM-5.5.11(a), data classification entails analyzing the data the
licensee retains, determining its importance and value, and then assigning it to a category. When classifying data, the following aspects of the policy should be determined:a) Who has access to the data;b) How the data is secured;c) How long the data is retained (this includes backups);d) What method should be used to dispose of the data;e) Whether the data needs to be encrypted; andf) What use of the data is appropriate.The general guideline for data classification is that the definition of the classification should be clear enough so that it is easy to determine how to classify the data. In other words, there should be little (if any) overlap in the classification definitions. The owner of data (i.e. the relevant business function) should be involved in such classification.
Added: July 2021Cyber Security Strategy
OM-5.5.13 OM-5.5.13
A bank-wide cyber security strategy must be defined and documented to include:
a) The position and importance of cyber security at thelicensee ;b) The primary cyber security threats and challenges facing thelicensee ;c) Thelicensee ’s approach to cyber security risk management;d) The key elements of the cyber security strategy including objectives, principles of operation and implementation approach;e) Scope of risk identification and assessment, which must include the dependencies on third party service providers;f) Approach to planning response and recovery activities; andg) Approach to communication with internal and external stakeholders including sharing of information on identified threats and other intelligence among industry participants.Added: July 2021OM-5.5.14
The cyber security strategy should be communicated to the relevant stakeholders and it should be revised as necessary and, at least, once every three years. Appendix C provides cyber security control guidelines that can be used as reference to support the
licensee ’s cyber security strategy and cyber security policy.Added: July 2021Cyber Security Policy
OM-5.5.15
Islamic bank licensees must implement a written cyber security policy setting forth its policies for the protection of its electronic systems and client data stored on those systems, which must be reviewed and approved by thelicensee ’s board of directors or senior management, as appropriate, at least annually. The cyber security policy areas including but not limited to the following must be addressed:(a) Definition of the key cyber security activities within thelicensee , the roles, responsibilities, delegated powers and accountability for these activities;(b) A statement of thelicensee ’s overall cyber risk tolerance as aligned with thelicensee ’s business strategy. The cyber risk tolerance statement should be developed through consideration of the various impacts of cyber threats including customer impact, service downtime, potential negative media publicity, potential regulatory penalties, financial loss, and others;(c) Definition of main cyber security processes and measures and the approach to control and assessment;(d) Policies and procedures (including process flow diagrams) for all relevant cyber security functions and controls including the following:(a) Asset management (Hardware and software);(b) Incident management (Detection and response);(c) Vulnerability management;(d) Configuration management;(e) Access management;(f) Third party management;(g) Secure application development;(h) Secure change management;(i) Cyber training and awareness;(j) Cyber resilience (business continuity and disaster planning); and(k) Secure network architecture.Added: July 2021Approach, Tools and Methodology
OM-5.5.16 OM-5.5.16
Islamic bank licensees must ensure that the cyber security policy is effectively implemented through a consistent risk-based approach using tools and methodologies that are commensurate with the size and risk profile of thelicensee . The approach, tools and methodologies must cover all cyber security functions and controls defined in the cyber security policy.Added: July 2021OM-5.5.17
Licensees should establish and maintain plans, policies, procedures, process and tools (“playbooks”) that provide well-defined, organised approaches for cyber incident response and recovery activities, including criteria for activating the measures set out in the plans and playbooks to expedite the organisation’s response time. Plans and playbooks should be developed in consultation with business lines to ensure business recovery objectives are met, and are approved by senior management before broadly shared across thelicensee . They should be reviewed and updated regularly to incorporate improvements and/or changes in the organisation.Licensees may enlist external subject matter experts to review complex and technical content in the playbook, where appropriate. A number of plans and playbooks should be developed for specific purposes (e.g. response, recovery, contingency, communication) that align with the overall cyber security strategy.Added: July 2021Prevention Controls
OM-5.5.18
A
Islamic bank licensee must develop and implement preventive measures across all relevant technologies to minimise the licensee’s exposure to cyber security risk. Such preventive measures must include, at a minimum, the following:(a) Deployment of End Point Protection (EPP) and Endpoint Detection and Response including anti-virus software and anti-malware programs to detect, prevent, and isolate malicious code;(b) Data leakage prevention solutions to detect and prevent confidential data from leaving thelicensee ’s technology environment;(c) Use of firewalls for network segmentation including use of Web Application Firewalls (WAF) for filtering and monitoring HTTP traffic between a web application and the Internet, and access control lists to limit unauthorized system access between network segments;(d) Rigorous security testing at software development stage as well as after deployment to limit the number of vulnerabilities;(e) Use of Privileged Access Management (PAM) to secure, control, manage and monitor privileged access to critical assets;(f) Use of a secure email gateway to limit email based cyber attacks such as malware attachments, malicious links, and phishing scams (for example use of Microsoft Office 365 Advanced Threat Protection tools for emails);(g) Use of a Secure Web Gateway to limit browser based cyber-attacks, malicious websites and enforce organization policies;(h) Creating a list of whitelisted applications and application components (libraries, configuration files, etc.) that are authorized to be present or active on the organization’s systems;(i) Use of mobile device management solutions including implementing Bring Your Own Device “BYOD” security policies to secure all mobile devices with any access to bank systems, applications, and networks through security measures such as encryption, remote wipe capabilities, and password enforcement; and(j) Network access control to secure physical network ports against connection to computers which are unauthorised to connect to thelicensee ’s network or which do not meet the minimum security requirements defined forlicensee computer systems; and(k) Identity and access management solutions to limit the exploitation and monitor the use of privileged and non-privileged accounts.Added: July 2021OM-5.5.19
Islamic bank licensees must set up anti-spam and anti-spoofing measures to authenticate thelicensee ’s mail server and to prove to ISPs, mail services and other receiving mail servers that senders are truly authorized to send the email. Examples of such measures include:• SPF “Sender Policy Framework”;• DKIM “Domain Keys Identified Mail”; and• DMARC “Domain-based Message Authentication, Reporting and Conformance”.Added: July 2021OM-5.5.20
Islamic bank licensees should subscribe to one of the Cyber Threat Intelligence services in order to stay abreast of emerging cyber threats, cybercrime actors and state of the art tools and security measures.Added: July 2021OM-5.5.21
Islamic bank licensees must use a single unified private email domain or its subdomains for communication with customers to prevent abuse by third parties.Licensees must not utilise third-party email provider domains for communication with customers. The email domains must comply with the requirements with respect to SPF, DKIM and DMARC in this Module. With respect to URLs or other clickable links in communications with customers,licensees must comply with the following requirements:(a) Limit the use of links in SMS and other short messages (such as WhatsApp) to messages sent as a result of customer request or action. Examples of such customer actions include verification links for customer onboarding, payment links for customer-initiated transactions etc;(b) Refrain from using shortened links in communication with customers;(c) Implement one or more of the following measures for links sent to customers:i. ensure customers receive clear instructions in communications sent with the links;ii. prior notification to the customer such as through a phone call informing the customer to expect a link from thelicensee ;iii. provision of transaction details such as the transaction amount and merchant name in the message sent to the customer with the link;iv. use of other verification measures like password or biometric authentication; and(d) Create customer awareness campaigns to educate their customers on the risk of fraud related to links they receive in SMS, short messages and emails with clear instructions to customers thatlicensees will not send clickable links in SMS, emails and other short messages to request information or payments unless it is as a result of customer request or action.Amended: October 2022
Added: July 2021OM-5.5.21A
For the purpose of Paragraph OM-5.5.21, subject to CBB’s approval,
licensees may be allowed to use additional domains for email communications with customers under certain circumstances. Examples of such circumstances include emails sent to customers by:(a) Head/regional office of alicensee ; and(b) Third-party service providers subject to prior arrangements being made with customers. Examples of such third-party services include informational subscription services (e.g. Bloomberg) and document management services (e.g. DocuSign).Added: October 2022Cyber Risk Identification and Assessments
OM-5.5.22 OM-5.5.22
Islamic bank licensees must conduct periodic assessments of cyber threats. For the purpose of analysing and assessing current cyber threats relevant to thelicensee , it should take into account the factors detailed below:(a) Cyber threat entities including cyber criminals, cyber activists, insider threats;(b) Methodologies and attack vectors across various technologies including cloud, email, websites, third parties, physical access, or others as relevant;(c) Changes in the frequency, variety, and severity of cyber threats relevant to the region;(d) Dark web surveillance to identify any plot for cyber attacks;(e) Examples of cyber threats from past cyber attacks on thelicensee if available; and(f) Examples of cyber threats from recent cyber attacks on other organisations.Added: July 2021OM-5.5.23 OM-5.5.23
Islamic bank licensees must conduct periodic assessments of the maturity, coverage, and effectiveness of all cyber security controls. Cyber security control assessment must include an analysis of the controls’ effectiveness in reducing the likelihood and probability of a successful attack.Added: July 2021OM-5.5.24 OM-5.5.24
Licensees should ensure that the periodic assessments of cyber threats and cyber security controls cover all critical technology systems. A risk treatment plan should be developed for all residual risks which are considered to be above thelicensee ’s risk tolerance levels.Added: July 2021OM-5.5.25 OM-5.5.25
Islamic bank licensees must conduct regular technical assessments to identify potential security vulnerabilities for systems, applications, and network devices. The vulnerability assessments must be comprehensive and cover internal technology, external technology, and connections with third parties. Preferably monthly assessments are conducted for internal technology and weekly or more frequent assessments for external public facing services and systems.Added: July 2021OM-5.5.26 OM-5.5.26
With respect to Paragraph OM-5.5.25, external technology refers to the licensee’s public facing technology such as websites, apps and external servers. Connections with third parties includes any API or other connections with fintech companies, technology providers, outsourcing service providers etc.
Added: July 2021OM-5.5.27 OM-5.5.27
Islamic bank licensees must have in place vulnerability and patch management processes which include remediation processes to ensure that the vulnerabilities identified are addressed and that security patches are applied where relevant within a timeframe that is commensurate with the risks posed by each vulnerability.Added: July 2021OM-5.5.28 OM-5.5.28
All
licensees must perform penetration testing of their systems, applications, and network devices to verify the robustness of the security controls in place at least twice a year. These tests must be used to simulate real world cyber-attacks on the technology environment and must:(a) Follow a risk-based approach based on an internationally recognized methodology, such as National Institute of Standards and Technology “NIST” and Open Web Application Security Project “OWASP”;(b) Include both Grey Box and Black Box testing in its scope;(c) Be conducted by qualified and experienced security professionals who are certified in providing penetration testing services;(d) Be performed by internal and external independent third parties which should be changed at least every two years; and(e) Be performed on either the production environment or on non-production exact replicas of the production environment.Added: July 2021OM-5.5.29 OM-5.5.29
CBB may require additional red teaming exercises to be performed as needed. A red team is a group of ethical hackers with varying backgrounds, that would test the organization's blue team's threat response activity. The red team may attack 3 fronts: cyber, social (attack on people's behavior) and physical (attack on an organization's physical facility and or 3rd party premises). A red teaming exercise is like a penetration test in many ways but more targeted. The goal is not to find as many vulnerabilities as possible. The goal is to test the organization's detection and response capabilities. The red team will try to get in and access sensitive information in any way possible, as quietly as possible.
Added: July 2021OM-5.5.30
Where
licensees have been required to conduct a red teaming exercise the results of such an exercise must be provided to CBB within one month of the completion of the exercise together with a comprehensive plan to address any observed weaknesses.Added: July 2021Cyber Incident Detection and Management
OM-5.5.31
Islamic bank licensees must implement cyber security incident management processes to ensure timely detection, response and recovery for cyber security incidents. This includes implementing a Security Information & Event Management “SIEM” system.Added: July 2021OM-5.5.32
Licensees should consider the adequacy of the SIEM, keeping in view it should receive data on a real time basis from all relevant systems, applications, and network devices including operational and business systems. The monitoring system should be capable of identifying indicators of cyber incidents and initiate alerts, reports, and response activities based on the defined cyber security incident management process.Added: July 2021OM-5.5.33
Licensees should retain the logs and other information from the SIEM for detecting cyber incidents, including "low-and-slow" attacks, in order to facilitate incident investigations, for 5 years or longer.Added: July 2021OM-5.5.34
Once a cyber incident is detected,
licensees should activate their containment measures, processes and technologies best suited to each type of cyber incident to prevent a cyber incident from inflicting further damage. This may involve, after considering the costs, business impact and operational risks, shutting down or isolating all or affected parts of their systems and networks as deemed necessary for containment and diagnosis.Added: July 2021OM-5.5.35
Islamic bank licensees must establish a Security Operations Centre (SOC) that is tailored to the needs of thelicensee to detect, identify, investigate and respond to cyber incidents that could impact the licensee’s infrastructure, services and customers. Capabilities for log collection and monitoring SIEM must be built into the SOC. The SOC must maintain thelicensee ’s asset inventory and network diagrams.Added: July 2021OM-5.5.36
Islamic bank licensees must regularly identify, test, review and update current cyber security risk scenarios and the corresponding response plan. This is to ensure that the scenarios and response plan remain relevant and effective, taking into account changes in the operating environment, systems or the emergence of new cyber security threats. If any gaps are identified, the SIEM system must be updated with new use cases and rule sets which are capable of detecting the current cyber incident scenarios.Added: July 2021OM-5.5.37
The cyber incident scenario tests should include high-impact-low-probability events and scenarios that may result in failure. Common cyber incident scenarios include distributed denial of service (DDoS) attacks, system intrusion, data exfiltration and system disruption.
Licensees should regularly use threat intelligence to update the scenarios so that they remain current and relevant.Licensees should periodically review current cyber incident scenarios for the purpose of assessing the licensee’s ability to detect and respond to these scenarios if they were to occur.Added: July 2021OM-5.5.38
Islamic bank licensees must ensure that critical cyber security incidents detected are escalated to an incident response team, management and the Board, in accordance with thelicensee ’s business continuity plan and crisis management plan, and that an appropriate response is implemented promptly. See also Paragraph OM-5.5.57 for the requirement to report to CBB.Added: July 2021OM-5.5.39
Islamic bank licensees should clearly define the roles, responsibilities and accountabilities for cyber incident detection and response activities to one or more named individuals that meet the pre-requisite role requirements. Potential conflicts of interest are minimised by ensuring a separation of implementation and oversight roles where possible. The roles should include:• Incident Owner: An individual that is responsible for handling the overall cyber incident detection and response activities according to the incident type and services affected. The Incident Owner is delegated appropriate authority to manage the mitigation or preferably, removal of all impacts due to the incident.• Spokesperson: An individual, from External Communications Unit or another suitable department, that is responsible for managing the communications strategy by consolidating relevant information and views from subject matter experts and the organisation’s management to update the internal and external stakeholders with consistent information.• Record Keeper: An individual that is responsible for maintaining an accurate record of the cyber incident throughout its different phases, as well as documenting actions and decisions taken during and after a cyber incident. The record serves as an accurate source of reference for after-action reviews to improve future cyber incident detection and response activities.Added: July 2021OM-5.5.40
For the purpose of managing a critical cyber incident, the licensee should operate a situation room, and should include in the incident management procedure a definition of the authorities and responsibilities of staff members, internal and external reporting lines, communication channels, tools and detailed working procedures. The situation room or a war room is a physical room or a virtual room where relevant members of the management gather to handle a crisis in the most efficient manner possible.
Added: July 2021OM-5.5.42 OM-5.5.42
Licensees should utilise pre-defined taxonomy for classifying cyber incidents according to, for example, the type of incident, threat actors, threat vectors and repercussions; and a pre-established severity assessment framework to help gauge the severity of the cyber incident. For example, taxonomies that can be used when describing cyber incidents:(a) Describe the cause of the cyber incident (e.g. process failure, system failure, human error, external event, malicious action);(b) Describe whether the cyber incident due to a third-party service provider;(c) Describe the attack vector (e.g. malware, virus, worm, malicious hyperlink);(d) Describe the delivery channel used (e.g. e-mail, web browser, removable storage media);(e) Describe the impact (e.g. service degradation/disruption, service downtime, potential impact to customers, data leakage, unavailability of data, data destruction/corruption, tarnishing of reputation);(f) Describe the type of incident (e.g. zero-day attack, exploiting a known vulnerability, isolated incident);(g) Describe the intent (e.g. malicious, theft, monetary gain, fraud, political, espionage, opportunistic);(h) Describe the threat actor (e.g. script kiddies, amateur, criminal syndicate, hacktivist, nation state).The cyber incident severity may be classified as:
(a) Severity 1 incident has or will cause a serious disruption or degradation of critical service(s) and there is potentially high impact on public confidence in thelicensee .(b) Severity 2 incident has or will cause some degradation of critical services and there is medium impact on public confidence in thelicensee .(c) Severity 3 incident has little or no impact to critical services and there is no visible impact on public confidence in thelicensee .Added: July 2021OM-5.5.41
Licensees should record and document in an orderly manner the incidents that have been handled and the actions that were taken by the relevant functions. In particular, thelicensee should maintain an "incident log" in which all the notifications, decisions and actions taken, in relation to cyber incidents, are documented, as close as possible to the time of their occurrence. It should also include the status of the issue whether it is open or has been resolved and person in charge of resolving the issue/incident. The logs should be stored and preserved in a secure and legally admissible manner.Added: July 2021OM-5.5.43
Licensees should determine the effects of the cyber incident on customers and to the wider banking system as a whole and report the results of such an assessment to CBB if it is determined that the cyber incident may have a systemic impact.Licensees may also share non-sensitive information on cyber incidents, effective cyber security strategies and risk management practices through malware information sharing platforms (MISP). Technical information, such as Indicators of Compromise (IoCs) or vulnerabilities exploited can be shared through MISP.Added: July 2021OM-5.5.44
Licensees should establish metrics to measure the impact of a cyber incident and to report to management the performance of response activities. Examples include:1. Metrics to measure impact of a cyber incident:(a) Duration of unavailability of critical functions and services;(b) Number of stolen records or affected accounts;(c) Volume of customers impacted;(d) Amount of lost revenue due to business downtime, including both existing and future business opportunities;(e) Percentage of service level agreements breached.2. Performance metrics for incident management:(a) Volume of incidents detected and responded via automation;(b) Dwell time (i.e. the duration a threat actor has undetected access until completely removed);(c) Recovery Point objectives (RPO) and recovery time objectives (RTO) satisfied.Added: July 2021Recovery
OM-5.5.45
Islamic bank licensees must identify the critical systems and services within its operating environment that must be recovered on a priority basis in order to provide certain minimum level of services during the downtime and determine how much time thelicensee will require to return to full service and operations.Added: July 2021OM-5.5.46
Critical incidents are defined as incidents that trigger the BCP and the crisis management plan. Critical systems and services are those whose failure can have material impact on any of the following elements:
(a) Financial situation;(b) Reputation;(c) Regulatory, legal and contractual obligations; and(d) Operational aspects and delivery of key products and services.Added: July 2021OM-5.5.47
Islamic bank licensees must define a program for recovery activities for timely restoration of any capabilities or services that were impaired due to a cyber security incident.Licensees must establish recovery time objectives (“RTOs”), i.e. the time in which the intended process is to be covered, and recovery point objectives (“RPOs”), i.e. point to which information used must be restored to enable the activity to operate on resumption”.Licensees must also consider the need for communication with third party service providers, customers and other relevant external stakeholders as may be necessary.Added: July 2021OM-5.5.48
Islamic bank licensees must ensure that all critical systems are able to recover from a cyber security breach within thelicensee ’s defined RTO in order to provide important services or some level of minimum services for a temporary period of time.Added: July 2021OM-5.5.49
Licensees should validate that recovered assets are free of compromise, fully functional and meet the security requirements before returning the systems to normal business operations. This includes performing checks on data to ensure data integrity. In some caseslicensees may need to use backup data kept in a disaster recovery site or plan for the reconstruction of data from external stakeholders such as business partners and customers.Added: July 2021OM-5.5.50
Islamic bank licensees must define a program for exercising the various response mechanisms, taking into account the various types of exercises such as attack simulations, "war games" and "table top" exercises, and with reference to the relevant stakeholders such as technical staff, crisis management team, decision-makers and spokespersons.Added: July 2021OM-5.5.51
Islamic bank licensees must define the mechanisms for ensuring accurate, timely and actionable communication of cyber incident response and recovery activities with the internal stakeholders, including to the board or designated committee of the board.Added: July 2021OM-5.5.52
A
Islamic bank licensee must ensure its business continuity plan is comprehensive and includes a recovery plan for its systems, operations and services arising from a cyber security incident.Added: July 2021Cyber Security Insurance
OM-5.5.53
Islamic bank licensees must arrange to seek cyber risk insurance cover from a suitable insurer, following a risk-based assessment of cyber security risk is undertaken by the respectivelicensee and independently verified by the insurance company. The insurance policy may include some or all of the following types of coverage, depending on the risk assessment outcomes:(a) Crisis management expenses, such as costs of notifying affected parties, costs of forensic investigation, costs incurred to determine the existence or cause of a breach, regulatory compliance costs, costs to analyse the insured’s legal response obligations;(b) Claim expenses such as costs of defending lawsuits, judgments and settlements, and costs of responding to regulatory investigations; and(c) Policy also provides coverage for a variety of torts, including invasion of privacy or copyright infringement. First-party coverages may include lost revenue due to interruption of data systems resulting from a cyber or denial of service attack and other costs associated with the loss of data collected by the insured.Added: July 2021Training and Awareness
OM-5.5.54 OM-5.5.54
Islamic bank licensees must evaluate improvement in the level of awareness and preparedness to deal with cyber security risk to ensure the effectiveness of the training programmes implemented.Added: July 2021OM-5.5.55 OM-5.5.55
The
licensee must ensure that all employees receive adequate training on a regular basis, in relation to cyber security and the threats they could encounter, such as through testing employee reactions to simulated cyber attack scenarios. All relevant employees must be informed on the current cyber security breaches and threats. Additional training should be provided to ‘higher risk staff’.Added: July 2021OM-5.5.56
The
Islamic bank licensees must ensure that role specific cyber security training is provided on a regular basis to relevant staff including:(a) Executive board and senior management;(b) Cyber security roles;(c) IT staff; and(d) Any high-risk staff as determined by thelicensee .Added: July 2021Reporting to CBB
OM-5.5.57 OM-5.5.57
Upon occurrence or detection of any cyber security incident, whether internal or external, that compromises customer information or disrupts critical services that affect operations,
Islamic bank licensees must contact the CBB, immediately (within one hour), on 17547477 and submit Section A of the Cyber Security Incident Report (Appendix OM-1) to CBB’s cyber incident reporting email, incident.islamic@cbb.gov.bh, within two hours.Amended: April 2022
Added: July 2021OM-5.5.58 OM-5.5.58
Following the submission referred to in Paragraph OM-5.5.57, the
licensee must submit to CBB Section B of the Cyber Security Incident Report (Appendix OM-1) within 10 calendar days of the occurrence of the cyber security incident.Licensees must include all relevant details in the report, including the full root cause analysis of the cyber security incident, its impact on the business operations and customers, and all measures taken by the licensee to stop the attack, mitigate its impact and to ensure that similar events do not recur. In addition, a weekly progress update must be submitted to CBB until the incident is fully resolved.Amended: April 2022
Added: July 2021OM-5.5.59 OM-5.5.59
With regards to the submission requirement mentioned in Paragraph OM-5.5.58, the licensee should submit the report with as much information as possible even if all the details have not been obtained yet.
Added: July 2021OM-5.5.60 OM-5.5.60
The comprehensive cyber security incident report referred to in Paragraph OM-5.5.58 should include the following details:
(a) Date and time of discovery of the incident;(b) Time elapsed from detection to restoration of critical services;(c) Who discovered the incident (e.g. third-party service provider, customer, employee);(d) Type of cyber incident (e.g. DDoS, malware, intrusion/unauthorised access, hardware/firmware failure, system software bugs;)(e) Impact of the incident (e.g. impact to availability of services, loss of confidential information) including financial, legal and reputational impact and to which group of stakeholders (e.g. retail and corporate customers, settlement institutions, service providers);(f) Affected systems and technical details of the incident (e.g. source IP address and post, IOCs, tactics, techniques, procedures (TTPs));(g) Root cause analysis; and(h) Actions taken• Escalation steps taken.• Stakeholders informed.• Response and recovery activities.• Lessons learnt.Added: July 2021OM-5.5.61
The penetration testing report as per Paragraph OM-5.5.28, along with the steps taken to mitigate the risks must be maintained by the
licensee for a five year period from the date of the report and must be provided to CBB within two months following the end of the month where the testing took place, i.e. for a June test, the report must be submitted at the latest by 31st August and for a December test, by 28th February.Amended: April 2022
Added: July 2021OM-6 OM-6 Books and Records
OM-6.1 OM-6.1 General Requirements
OM-6.1.1
The requirements in Section OM-6.1 apply to
Bahraini Islamic bank licensees , with respect to the business activities of the whole bank (whether booked in Bahrain or in a foreign branch). The requirements in Section OM-6.1 also apply tooverseas Islamic bank licensees , but only with respect to the business booked in their branch in Bahrain.Added: January 2020OM-6.1.2
With reference to Articles 59 and 60 of the CBB Law, all
Islamic bank licensees must maintain books and records (whether in electronic or hard copy form) sufficient to produce financial statements and show a complete record of the business undertaken by a licensee. These records must be retained for at least 10 years according to Article 60 of the CBB Law.Added: January 2020OM-6.1.3
OM-6.1.2 includes accounts, books, files and other records (e.g. trial balance, general ledger, nostro/vostro statements, reconciliations and list of counterparties). It also includes records that substantiate the value of the assets, liabilities and off-balance sheet activities of the licensee (e.g. client activity files and valuation documentation).
Added: January 2020OM-6.1.4
Unless otherwise agreed with the CBB in writing, records must be kept in either English or Arabic; or else accompanied by a certified English or Arabic translation. Records must be kept current. The records must be sufficient to allow an audit of the licensee's business or an on-site examination of the licensee by the CBB.
Added: January 2020OM-6.1.5
If a licensee wishes to retain certain records in a language other than English or Arabic without translation, the licensee should write to the CBB, explaining which types of records it wishes to keep in a foreign language, and why systematically translating these may be unreasonable. Generally, only loan contracts or similar original transaction documents may be kept without translation. Where exemptions are granted by CBB, the licensee is nonetheless asked to confirm that it will make available certified translations of such documents, if requested by CBB for an inspection or other supervisory purpose.
Added: January 2020OM-6.1.6
Translations produced in compliance with Rule OM-6.1.5 may be undertaken in-house, by an employee or contractor of the licensee, provided they are certified by an appropriate officer of the licensee.
Added: January 2020OM-6.1.7
Records must be accessible at any time from within the Kingdom of Bahrain, or as otherwise agreed with the CBB in writing.
Added: January 2020OM-6.1.8
Where older records have been archived, or in the case of records relating to overseas branches of
Bahraini Islamic banks , the CBB may accept that records be accessible within a reasonably short time frame (e.g. within 5 business days), instead of immediately. The CBB may also agree similar arrangements foroverseas Islamic banks , as well asBahraini Islamic banks , where elements of record retention and management have been centralised in another group company, whether inside or outside of Bahrain.Added: January 2020OM-6.1.9
All original account opening documentation, due diligence and transaction documentation should normally be kept in Bahrain, if the business is booked in Bahrain. However, where a licensee books a transaction in Bahrain, but the transaction documentation is handled entirely by another (overseas) branch or affiliate of the licensee, the relevant transaction documentation may be held in the foreign office, provided electronic or hard copies are retained in Bahrain; the foreign office is located in a FATF member state; and the foreign office undertakes to provide the original documents should they be required.
Added: January 2020OM-6.1.10
Licensees should also note that to perform effective consolidated supervision of a group (or sub-group), the CBB needs to have access to financial information from foreign operations of a licensee, in order to gain a full picture of the financial condition of the group: see Module BR (CBB Reporting), regarding the submission of consolidated financial data. If a licensee is not able to provide to the CBB full financial information on the activities of its branches and subsidiaries, it should notify the CBB of the fact, to agree alternative arrangements: these may include requiring the group to restructure or limit its operations in the jurisdiction concerned.Added: January 2020OM-6.1.11
In the case of
Bahraini Islamic banks with branch operations overseas, where local record-keeping requirements are different, the higher of the local requirements or those contained in this Chapter must be followed.Added: January 2020OM-6.2 OM-6.2 Transaction Records
OM-6.2.1
Islamic bank licensees must keep completed transaction records for as long as they are relevant for the purposes for which they were made (with a minimum period in all cases of five years from the date when the transaction was completed — see Module Section FC-7.1). Records of completed transactions must be kept whether in hard copy or electronic format, for at least five years from the date of the transaction as per the Legislative Decree No. (54) of 2018 with respect to Electronic Transactions "The Electronic Communications and Transactions Law" and its amendments.Added: January 2020OM-6.2.2
Rule OM-6.2.1 applies to all transactions entered into by a
Bahraini Islamic bank licensee , whether booked in Bahrain or in an overseas branch. With respect tooverseas Islamic bank licensees , it applies only to transactions booked in the Bahrain branch.Added: January 2020OM-6.2.3
In the case of
overseas Islamic bank licensees , Rule OM-6.2.1 therefore only applies to business booked in the Bahrain branch, not in the rest of the company.Added: January 2020OM-6.3 OM-6.3 Other Records
Corporate Records
OM-6.3.1
Islamic bank licensees must maintain the following records in original form or in hard copy at their premises in Bahrain:(a) Internal policies, procedures and operating manuals;(b) Corporate records, including minutes ofshareholders ',Directors ' and management meetings;(c) Correspondence with the CBB and records relevant to monitoring compliance with CBB requirements;(d) Reports prepared by theIslamic bank licensee's internal and external auditors; and(e) Employee training manuals and records.Added: January 2020OM-6.3.2
In the case of
Bahrain Islamic bank licensees , these requirements apply to the licensee as a whole, including any overseas branches. In the case ofoverseas Islamic bank licensees , all the requirements of Chapter OM-6 are limited to the business booked in their branch in Bahrain and the records of that branch (see Rule OM-6.1.1). They are thus not required to hold copies of shareholders' and Directors' meetings, except where relevant to the branch's operations.Added: January 2020Customer Records
OM-6.3.3
Record-keeping requirements with respect to customer records, including customer identification and due diligence records, are contained in Module FC (Financial Crime). These requirements address specific requirements under the Amiri Decree Law No. 4 of 2001, the standards promulgated by the Financial Action Task Force, as well as to the best practice requirements of the Basel Committee Core Principles methodology, and its paper on "Customer due diligence for banks".
Added: January 2020Promotional Schemes
OM-6.3.4
Islamic bank licensees must maintain all material related to promotional schemes as outlined in Section BC-1.1 for a minimum period of 5 years.Added: January 2020Appendix A Loss Event Type Classification
Appendix A
Event-Type Category (Level 1) Definition Categories (Level 2) Activity Examples (Level 3) Internal Fraud Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/discrimination events, which involves at least one internal party. Unauthorised Activity • Transactions not reported (intentional)• Transaction type unauthorised (w/monetary loss)• Mismarking of position (intentional)Theft and Fraud • Fraud/credit fraud/worthless deposits• Theft/extortion/embezzlement/robbery• Misappropriation of assets• Malicious destruction of assets, forgery, check kiting and smuggling• Account take-over/impersonation/etc.• Tax non-compliance/evasion (wilful)• Bribes/kickbacks• Insider trading (not onExternal fraud Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party. Theft and Fraud • Theft/robbery• Forgery and check kitingSystems Security • Hacking damage• Theft of information (w/monetary loss)Employment Practices and Workplace Safety Losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims, or from diversity/discrimination events. Employee Relations • Compensation, benefit, termination issues• Organised labour activitySafe Environment • General liability (slip and fall, etc.)• Employee health & safety rules events• Workers compensationDiversity and Discrimination • All discrimination typesClients, Products and Business Practices Losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product. Suitability, Disclosure and Fiduciary • Fiduciary breaches/guideline violations• Suitability/disclosure issues (KYC, etc.)• Retail customer disclosure violations• Breach of privacy• Aggressive sales• Account churning• Misuse of confidential information• Lender liabilityImproper Business or Market Practices • Antitrust• Improper trade/market practices• Market manipulation• Insider trading (on firm's account)• Unlicensed activity• Money launderingProduct Flaws • Product defects (unauthorised, etc.)• Model errorsSelection, Sponsorship and Exposure • Failure to investigate client per guidelines• Exceeding client exposure limitsAdvisory Activities • Disputes over performance of advisory activitiesDamage to Physical Assets Losses arising from loss or damage to physical assets from natural disaster or other events. Disasters and other events • Natural disaster losses• Human losses from external sources (terrorism, vandalism)Business disruption and system failures Losses arising from disruption of business or system failures. Systems • Hardware• Software• Telecommunications• Utility outage/disruptionsExecution, Delivery and Process Management Losses from failed transaction processing or process management, from relations with trade counterparties and vendors. Transaction Capture, Execution and Maintenance • Miscommunication• Data entry, maintenance or loading error• Missed deadline or responsibility• Model/system misoperation• Accounting error/entity attribution error• Other task misperformance• Delivery failure• Collateral management failure• Reference dataMonitoring and Reporting • Failed mandatory reporting obligation• Inaccurate external report (loss incurred)Customer Intake and Documentation • Client permissions/disclaimers missing• Legal documentsCustomer/Client Account Management • Unapproved access given to accounts• Incorrect client records (loss incurred)• Negligent loss or damage of client assetsTrade Counterparties • Non-client counterparty misperformance• Misc. non-client counterparty disputesVendors and suppliers • Outsourcing• Vendor disputesAppendix B
Set out below are examples of Shariah requirements that are to be complied with by the banks in respect of the financing contracts. The list is for guidance purposes and not conclusive and may vary according to the views of the various Shariah Supervisory Board (SSB):
(a) Murabahah and Ijarah contracts• The asset is in existence at the time of sale or lease or, in case of Ijarah, the lease contract should be preceded by acquisition of the usufruct of the asset except if the asset was agreed upon based on a general specification.• The asset is legally owned by the bank when it is offered for sale.• The asset is intended to be used by the buyer/lessee for activities or businesses permissible by Shariah; if the asset is leased back to its owner in the first lease period, it should not lead to contract of 'inah, by varying the rent or the duration.• There is no late payment, penalty fee or increase in price in exchange for extending or rescheduling the date of payment of accounts receivable or lease receivable, irrespective of whether the debtor is solvent or insolvent.(b) Salam and Istisna' contracts• A sale and purchase contract cannot be inter-dependent and inter-conditional on each other, such as Salam and Parallel Salam; Istisna' and Parallel Istisna'.• It is not allowed to stipulate a penalty clause in respect of delay in delivery of a commodity that is purchased under Salam contract, however it is allowed under Istisna' or Parallel Istisna'.• The subject-matter of an Istisna' contract may not physically exist upon entering into the contract.(c) Musharakah and Mudarabah contracts• The capital of the bank is to be invested in Shariah compliant investments or business activities.• A partner in Musharakah cannot guarantee the capital of another partner or a Midrib guarantees the capital of the Mudarabah.• The purchase price of other partner's share in a Musharakah with a binding promise to purchase can only be set as per the market value or as per the agreement at the date of buying. It is not permissible, however, to stipulate that the share be acquired at its face value.Added: January 2020Appendix C – Cyber Security Control Guidelines
The Control Guidelines consists of five Core tasks which are defined below. These Functions are not intended to form a serial path or lead to a static desired end state. Rather, the Functions should be performed concurrently and continuously to form an operational culture that addresses the dynamic cyber security risk.
Identify – Develop a bank-wide understanding to manage cyber security risk to systems, people, assets, data, and capabilities. The activities in the Identify Function are foundational for effective use of the Cyber Security Risk Management Framework. Understanding the business context, the resources that support critical functions, and the related cyber security risks enables a bank to focus and prioritize its efforts, consistent with its risk management strategy and business needs.
Protect – Develop and implement appropriate safeguards to ensure delivery of critical services. The Protect Function supports the ability to limit or contain the impact of a potential cyber security incident.
Detect – Develop and implement appropriate activities to identify the occurrence of a cyber security incident. The Detect Function enables timely discovery of cyber security events.
Respond – Develop and implement appropriate activities to take action regarding a detected cyber security incident. The Respond Function supports the ability to contain the impact of a potential cyber security incident.
Recover – Develop and implement appropriate activities to maintain plans for resilience and to restore any capabilities or services that were impaired due to a cyber security incident. The Recover Function supports timely recovery to normal operations to reduce the impact from a cyber security incident.
Below is a listing of the specific cyber security activities that are common across all critical infrastructure sectors:
IDENTIFY
Asset Management: The data, personnel, devices, systems, and facilities that enable the bank to achieve business purposes are identified and managed consistent with their relative importance to organizational objectives and the bank’s risk strategy.
1. Physical devices and systems within the bank are inventoried.2. Software platforms and applications within the bank are inventoried.3. Communication and data flows are mapped.4. External information systems are catalogued.5. Resources (e.g., hardware, devices, data, time, personnel, and software) are prioritized based on their classification, criticality, and business value.6. Cyber security roles and responsibilities for the entire workforce and third-party stakeholders (e.g., suppliers, customers, partners) are established.Business Environment: The bank’s mission, objectives, stakeholders, and activities are understood and prioritized; this information is used to inform cyber security roles, responsibilities, and risk management decisions.
1. Priorities for the bank’s mission, objectives, and activities are established and communicated.2. Dependencies and critical functions for delivery of critical services are established.3. Resilience requirements to support delivery of critical services are established for all operating states (e.g. under duress/attack, during recovery, normal operations).Governance: The policies, procedures, and processes to manage and monitor the bank’s regulatory, legal, risk, environmental, and operational requirements are understood and inform the management of cyber security risk.
1. Bank’s cyber security policy is established and communicated.2. Cyber security roles and responsibilities are coordinated and aligned with internal roles and external partners.3. Legal and regulatory requirements regarding cyber security, including privacy and civil liberties obligations, are understood and managed.4. Governance and risk management processes address cyber security risks.Risk Assessment: The bank understands the cyber security risk to bank’s operations (including mission, functions, image, or reputation), bank’s assets, and individuals.
1. Asset vulnerabilities are identified and documented.2. Cyber threat intelligence is received from information sharing forums and sources.3. Threats, both internal and external, are identified and documented.4. Potential business impacts and likelihoods are identified.5. Threats, vulnerabilities, likelihoods, and impacts are used to determine risk.6. Risk responses are identified and prioritized.Risk Management Strategy: The bank’s priorities, constraints, risk tolerances, and assumptions are established and used to support operational risk decisions.
1. Risk management processes are established, managed, and agreed to by bank’s stakeholders.2. The bank’s risk tolerance is determined and clearly expressed.3. The bank’s determination of risk tolerance is informed by its role in critical infrastructure and sector specific risk analysis.Third Party Risk Management: The bank’s priorities, constraints, risk tolerances, and assumptions are established and used to support risk decisions associated with managing third party risk. The bank has established and implemented the processes to identify, assess and manage supply chain risks.
1. Cyber third party risk management processes are identified, established, assessed, managed, and agreed to by the bank’s stakeholders.2. Suppliers and third party partners of information systems, components, and services are identified, prioritized, and assessed using a cyber third party risk assessment process.3. Contracts with suppliers and third-party partners are used to implement appropriate measures designed to meet the objectives of an bank’s cyber security program.4. Suppliers and third-party partners are routinely assessed using audits, test results, or other forms of evaluations to confirm they are meeting their contractual obligations.5. Response and recovery planning and testing are conducted with suppliers and third-party providers.PROTECT
Identity Management, Authentication and Access Control: Access to physical and logical assets and associated facilities is limited to authorized users, processes, and devices, and is managed consistent with the assessed risk of unauthorized access to authorized activities and transactions.
1. Identities and credentials are issued, managed, verified, revoked, and audited for authorized devices, users and processes.2. Physical access to assets is managed and protected.3. Remote access is managed.4. Access permissions and authorizations are managed, incorporating the principles of least privilege and separation of duties5. Network integrity is protected (e.g., network segregation, network segmentation).6. Identities are proofed and bound to credentials and asserted in interactions7. Users, devices, and other assets are authenticated (e.g., single-factor, multi-factor) commensurate with the risk of the transaction (e.g., individuals’ security and privacy risks and other organizational risks).Awareness and Training: The bank’s personnel and partners are provided cyber security awareness education and are trained to perform their cyber security-related duties and responsibilities consistent with related policies, procedures, and agreements.
1. All users are informed and trained on a regular basis.2. Bank’s security awareness programs are updated at least annually to address new technologies, threats, standards, and business requirements.3. Privileged users understand their roles and responsibilities.4. Third-party stakeholders (e.g., suppliers, customers, partners) understand their roles and responsibilities.5. The Board and senior management understand their roles and responsibilities.6. Physical and cyber security personnel understand their roles and responsibilities.7. Software development personnel receive training in writing secure code for their specific development environment and responsibilities.Data Security: Information and records (data) are managed consistent with the bank’s risk strategy to protect the confidentiality, integrity, and availability of information.
1. Data-at-rest classified as critical or confidential is protected through strong encryption.2. Data-in-transit classified as critical or confidential is protected through strong encryption.3. Assets are formally managed throughout removal, transfers, and disposition4. Adequate capacity to ensure availability is maintained.5. Protections against data leaks are implemented.6. Integrity checking mechanisms are used to verify software, firmware, and information integrity.7. The development and testing environment(s) are separate from the production environment.8. Integrity checking mechanisms are used to verify hardware integrity.Information Protection Processes and Procedures: Security policies (that address purpose, scope, roles, responsibilities, management commitment, and coordination among organizational units), processes, and procedures are maintained and used to manage protection of information systems and assets.
1. A baseline configuration of information technology/industrial control systems is created and maintained incorporating security principles (e.g. concept of least functionality).2. A System Development Life Cycle to manage systems is implemented3. Configuration change control processes are in place.4. Backups of information are conducted, maintained, and tested.5. Policy and regulations regarding the physical operating environment for bank’s assets are met.6. Data is destroyed according to policy.7. Protection processes are improved.8. Effectiveness of protection technologies is shared.9. Response plans (Incident Response and Business Continuity) and recovery plans (Incident Recovery and Disaster Recovery) are in place and managed.10. Response and recovery plans are tested.11. Cyber security is included in human resources practices (e.g., deprovisioning, personnel screening).12. A vulnerability management plan is developed and implemented.Maintenance: Maintenance and repairs of information system components are performed consistent with policies and procedures.
1. Maintenance and repair of bank’s assets are performed and logged, with approved and controlled tools.2. Remote maintenance of bank’s assets is approved, logged, and performed in a manner that prevents unauthorized access.Protective Technology: Technical security solutions are managed to ensure the security and resilience of systems and assets, consistent with related policies, procedures, and agreements.
1. Audit/log records are determined, documented, implemented, and reviewed in accordance with policy.2. Removable media is protected and its use restricted according to policy.3. The principle of least functionality is incorporated by configuring systems to provide only essential capabilities.4. Communications and control networks are protected.5. Mechanisms (e.g., failsafe, load balancing, hot swap) are implemented to achieve resilience requirements in normal and adverse situations.DETECT
Anomalies and Events: Anomalous activity is detected and the potential impact of events is understood.
1. A baseline of network operations and expected data flows for users and systems is established and managed.2. Detected events are analyzed to understand attack targets and methods.3. Event data are collected and correlated from multiple sources and sensors4. Impact of events is determined.5. Incident alert thresholds are established.Security Continuous Monitoring: The information system and assets are monitored to identify cyber security events and verify the effectiveness of protective measures.
1. The network is monitored to detect potential cyber security events.2. The physical environment is monitored to detect potential cyber security events3. Personnel activity is monitored to detect potential cyber security events.4. Malicious code is detected.5. Unauthorized mobile code is detected.6. External service provider activity is monitored to detect potential cyber security events.7. Monitoring for unauthorized personnel, connections, devices, and software is performed.8. Vulnerability scans are performed at least quarterly.Detection Processes: Detection processes and procedures are maintained and tested to ensure awareness of anomalous events.
1. Roles and responsibilities for detection are well defined to ensure accountability.2. Detection activities comply with all applicable requirements.3. Detection processes are tested.4. Event detection information is communicated.5. Detection processes are continuously improved.RESPOND
Response Planning: Response processes and procedures are executed and maintained, to ensure response to detected cyber security incidents. Response plan is executed during or after an incident.
Communications: Response activities are coordinated with internal and external stakeholders.
1. Personnel know their roles and order of operations when a response is needed.2. Incidents are reported consistent with established criteria.3. Information is shared consistent with response plans.4. Coordination with internal and external stakeholders occurs consistent with response plans.5. Voluntary information sharing occurs with external stakeholders to achieve broader cyber security situational awareness.6. Incident response exercises and scenarios across departments are conducted at least annually.Analysis: Analysis is conducted to ensure effective response and support recovery activities.
1. Notifications from detection systems are investigated.2. The impact of the incident is understood.3. Forensics are performed.4. Incidents are categorized consistent with response plans.5. Processes are established to receive, analyze and respond to vulnerabilities disclosed to the bank from internal and external sources (e.g. internal testing, security bulletins, or security researchers).Mitigation: Activities are performed to prevent expansion of an event, mitigate its effects, and resolve the incident.
1. Incidents are contained.2. Incidents are mitigated.3. Newly identified vulnerabilities are mitigated or documented as accepted risks.Improvements: The response activities are improved by incorporating lessons learned from current and previous detection/response activities.
1. Response plans incorporate lessons learned.2. Response strategies are updated.RECOVER
Recovery Planning: Recovery processes and procedures are executed and maintained to ensure restoration of systems or assets affected by cyber security incidents. Recovery plan is executed during or after a cyber security incident.
Improvements: Recovery planning and processes are improved by incorporating lessons learned into future activities.
1. Recovery plans incorporate lessons learned.2. Recovery strategies are updated.Communications: Restoration activities are coordinated with internal and external parties (e.g. coordinating centers, Internet Service Providers, owners of attacking systems, victims, other CSIRTs, and vendors).
1. Public relations are managed.2. Reputation is repaired after an incident.3. Recovery activities are communicated to internal and external stakeholders as well as executive and management teams.Added: July 2021LM LM Liquidity Risk Management
LM-A LM-A Introduction
LM-A.1 LM-A.1 Purpose
Executive Summary
LM-A.1.1
This Module sets out the CBB's requirements with regards to management of liquidity risk by banks.
August 2018LM-A.1.2
Liquidity is the ability of a bank to fund increases in assets and meet obligations as they fall due, without incurring unacceptable losses. Virtually every financial transaction or commitment has implications for a bank's liquidity. Effective liquidity risk management helps ensure a bank's ability to meet cash flow obligations. Liquidity risk management is of paramount importance because a liquidity shortfall at a single institution can have system-wide repercussions.
August 2018LM-A.1.3
This Module outlines a set of principles covering the following topics:
(a) Governance of liquidity risk management;(b) Liquidity risk identification, measurement, monitoring and control;(c) Foreign currency liquidity management;(d) Funding diversification and market access;(e) Maintenance of liquidity cushion;(f) Intragroup liquidity management;(g) Intraday liquidity risk management;(h) Collateral management;(i) Stress testing and scenario analysis; and(j) Contingency Funding Plan.August 2018Legal Basis
LM-A.1.4
This Module contains the Central Bank of Bahrain's ('CBB's') Directive (as amended from time-to-time) on the liquidity risk management requirements for Islamic banks, and is issued under the powers available to the CBB under Article 38 of the CBB and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all Islamic banks.
August 2018LM-A.1.5
For an explanation of the CBB's rule-making powers and different regulatory instruments, see UG module (Section UG-1.1).
August 2018LM-A.1.6
The requirements included in chapters LM-1 to LM-11 must be fully met by 30th June 2019, and the requirements in Chapter LM-12 must fully be met by 31st December 2019.
August 2018LM-A.1.7
Branches of foreign bank licensees must apply the requirements under Chapters LM-1 to LM-10 of this Module to the extent appropriate. Ifbranches of foreign bank licensees do not have established policies, procedures, processes and systems at a branch level, they must satisfy the CBB that there are equivalent arrangements at their head office or regional office.Added: October 2019LM-A.2 LM-A.2 Module History
LM-A.2.1
This Module was first issued in January 2005 as part of Volume 2 of the CBB Rulebook, and subsequently replaced in August 2018. All Directives in this Module have been effective since this date. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made; Chapter UG-3 provides further details on Rulebook maintenance and version control.
August 2018LM-A.2.2
The changes made to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes LM 08/2018 Entire Module Enhancement. LM-11.1.9 07/2019 Added reference to BR regarding LCR reporting. LM-11.3.3 07/2019 Amended Paragraph changing "Murabaha" with "Mudaraba". LM-11.3.4 07/2019 Amended Paragraph changing "Murabaha" with "Mudaraba". Appendix A 07/2019 Changed "Murabaha" with "Mudaraba". LM-A.1.7 10/2019 Added a new Paragraph on branches of foreign banks. LM-12.4 01/2020 Amended table on components of ASF Category. LM-12.5 01/2020 Amended Section on General Disclosure Requirements. LM-1.3.7 01/2022 Deleted Paragraph. LM-1.3.8 01/2022 Amended Paragraph. LM-1.3.9 01/2022 Deleted Paragraph. Amended: January 2022
Amended: January 2020
Amended: October 2019
Amended: July 2019
August 2018LM-1 LM-1 Governance of Liquidity Risk Management
LM-1.1 LM-1.1 Liquidity Risk Management Framework
LM-1.1.1
Banks must establish a robust liquidity risk management framework, which includes an asset and liability management committee (ALCO). The framework must describe the role of ALCO and its relationship with the risk management function, and articulate the delineation of powers, responsibilities and reporting lines for different departments and levels of management, so that the liquidity risk management strategy, policies and procedures are implemented effectively.
August 2018LM-1.1.2
A bank's liquidity risk management structure must be commensurate with the nature, scale and complexity of the bank's business activities.
August 2018LM-1.2 LM-1.2 Responsibilities of Board of Directors
LM-1.2.1
The Board must be ultimately responsible for determining the types and magnitude of liquidity risk that the bank can tolerate according to the liquidity risk management strategy, and for ensuring that there is an appropriate organisation structure for managing liquidity risk.
August 2018Liquidity Risk Tolerance
LM-1.2.2
The Board of Directors must articulate the bank's liquidity risk appetite and tolerance that is appropriate for its business strategy and ensure that it is communicated to all levels of management.
August 2018LM-1.2.3
The risk tolerance level must be adequately documented and articulated, preferably with a combination of qualitative and quantitative factors1 .
1 For example, the specification of a minimum survival period under a range of sufficiently severe, but plausible, stress scenarios. Other quantitative measures may, for example, relate to controls over areas such as liquid asset holdings, maturity or currency mismatches, concentration of funding and contingent liquidity obligations, and other limits on liquidity indicators used for controlling different aspects of liquidity risk.
August 2018LM-1.2.4
The risk tolerance must be set in a way that:
(a) Defines clearly the level of liquidity risk that the bank is willing to assume, under normal and stressed conditions2 ;(b) Can be easily communicated, understood and monitored by relevant personnel of the bank involved in the liquidity risk management process; and(c) Reflects the bank's assessment of the sources of liquidity risk it faces, as well as the trade-off between risks and profits.
2 For example, a bank may quantify its liquidity risk tolerance in terms of the level of unmitigated funding liquidity risk the bank decides to take under normal and stressed business conditions.
August 2018LM-1.2.5
Banks must also constantly monitor its risk profile for adherence to the risk appetite and tolerance, ensuring that any significant changes in market circumstances or the validity of assumptions used are accounted for.
August 2018Liquidity Risk Management Structure Oversight
LM-1.2.6
The Board of Directors must ensure that any authority that is delegated to the bank's ALCO to carry out some of its responsibilities for liquidity risk management is adequately executed. However, such delegation of authority does not absolve the Board and its members from their risk management responsibilities and the need to oversee the work of any such committee(s) exercising delegated authority.
August 2018LM-1.2.7
For the ALCO, or any similar committee, to perform a liquidity risk governance function on behalf of the Board effectively, its membership should be extended to comprise personnel from the treasury function, the risk management function, the financial control function and other principal business areas that affect the bank's liquidity risk profile. It should also be supported by competent risk managers with a dedicated responsibility for liquidity risk management.
August 2018LM-1.2.8
In the case of a local banking group with overseas operations (whether in the form of a branch or subsidiary), the Board must determine the appropriate liquidity risk management framework for overseeing all such overseas operations, taking into account the differences in their liquidity risk characteristics and the transferability of funds between them in the light of any potential legal, regulatory or operational restrictions.
August 2018LM-1.2.9
In the case of foreign bank branches in Bahrain, the head office of the bank may, where appropriate, delegate certain tasks for liquidity risk management to the local branch management, provided that adequate oversight is exercised by the bank's Board (or a delegated risk governance function at the head office or regional level) in approving the branch policies and monitoring the branch's compliance with such policies.
August 2018LM-1.2.10
The Board of Directors is also responsible for:
(a) Ensuring the competence of senior management and appropriate personnel in measuring, monitoring and controlling liquidity risk in terms of expertise, systems and resources, and in taking appropriate and prompt remedial actions to address concerns when necessary;(b) Reviewing and approving, on an annual basis at least, the liquidity risk strategy and other significant liquidity risk management policies and procedures (e.g. contingency funding planning and liquidity stress testing framework), and ensuring that senior management translates the Board's decisions into clear guidance and operating processes (e.g. in the form of controls) for effective implementation;(c) Reviewing regular reports and stress testing results on the bank's liquidity positions and becoming fully aware of the bank's performance and overall liquidity risk profile; and(d) Understanding, supported bysenior management of the bank, how other risks (e.g. credit, market, operational and reputation risks) interact with liquidity risk and affect the overall Liquidity Risk Management Strategy, ensuring that the interaction of these risks is considered and taken into account by the relevant Board-level committees and Risk Management function within the bank.August 2018LM-1.3 LM-1.3 Responsibilities of Senior Management
Liquidity Risk Management, Strategies and Procedures
LM-1.3.1
Senior management must be responsible for developing and implementing the bank's liquidity risk management strategy, policies and procedures, properly documented in the form of a policy statement, in accordance with the risk tolerance established by the Board. The policy statement must be approved by the Board.August 2018LM-1.3.2
A bank must develop its liquidity policy statement taking into account of the nature of its business activities and liquidity needs under both normal and stressed conditions. A bank's liquidity policy statement must cover, at a minimum, the following key aspects:
(a) Liquidity risk appetite and tolerance established by the Board;(b) Liquidity risk management strategy, including the goals and objectives underlying the strategy; the composition and maturity of assets and liabilities; the level of diversity and stability of funding targeted by the bank; the approach to managing liquidity in different currencies, across borders, and across business lines, products and legal entities, where applicable, taking into consideration the home and host regulatory requirements in the jurisdictions in which the bank operates; the approach to intraday liquidity management; the assumptions on the liquidity and marketability of assets;(c) Liquidity risk management responsibilities, with clearly defined lines of authority, responsibilities and reporting structure;(d) Liquidity risk management systems and tools for measuring, monitoring, controlling and reporting liquidity risk, including the setting of various liquidity limits and ratios; the framework for conducting cash-flow projections and liquidity stress testing, including the techniques, scenarios and assumptions used; and the management reporting system for liquidity risk; and(e) Contingency funding plan, which must describe the approaches and strategies for dealing with various types of liquidity stress.August 2018Allocation of Liquidity Costs, Benefits and Risks
LM-1.3.3
Senior management must appropriately incorporate liquidity costs, benefits and risks in the internal pricing, performance measurement and new product approval processes, thereby aligning the risk-taking incentives of individual business lines with the liquidity risk tolerance established by the Board.August 2018LM-1.3.4
Senior management must ensure that the liquidity pricing framework involves the charging of a liquidity premium to activities that consume liquidity (e.g. granting new advances) and the assignment of a liquidity value to those that generate liquidity (e.g. obtaining new deposits), based on a predetermined mechanism for attributing liquidity costs, benefits and risks to these activities. The following considerations, at a minimum, must be factored into the framework:(a) The framework must reflect the level of liquidity risk inherent in a business activity;(b) The framework must cover all significant business activities, including those involving the creation of contingent exposures which may not immediately have a direct balance sheet impact;(c) The framework must incorporate the measurement and allocation process factors related to the anticipated holding periods of assets and liabilities, their market liquidity risk characteristics and any other relevant factors, including the benefits from having access to relatively stable sources of funding, such as some types of retail deposits;(d) The framework must take account of both contractual maturity, as well as behavioural patterns in estimating the length of tenor of any relevant asset or liability item for the determination of the liquidity value or premium to be allocated;(e) The framework must provide an explicit and transparent process, at the line management level for quantifying and attributing liquidity costs, benefits and risks; and(f) The framework must include consideration on how liquidity would be affected under stressed conditions.August 2018LM-1.3.5
Senior management must review periodically the liquidity pricing framework, taking into account changes in business and financial market conditions.August 2018LM-1.3.6
Senior management is also responsible for:(a) Communicating the liquidity risk management strategy, key policies and procedures, liquidity pricing framework and liquidity risk management structure to all relevant business units and personnel throughout the organisation, that conduct activities with an impact on liquidity;(b) Ensuring that there are close communication links between treasury, liquidity risk managers and other business and risk managers having access to critical information that affects liquidity;(c) Ensuring that liquidity risk managers have sufficient authority and independence from risk-taking units to discharge their function effectively;(d) Ensuring that adequate internal controls are executed by independent personnel with the necessary skills and competence to safeguard the integrity of the bank's liquidity risk management process;(e) Closely monitoring the current trends and potential market developments that may require timely changes or updates to the liquidity risk management strategy, systems and internal controls to address any significant challenges;(f) Defining the specific process for handling exceptions to policies and limits, including the procedures for escalation, reporting and consideration of follow-up actions;(g) Ensuring the effectiveness of stress tests and contingency funding plans, as well as the appropriateness of the liquidity cushion maintained; and(h) Informing the Board of any new and emerging liquidity concerns, through regular and ad hoc submission of risk management reports and risk analysis, in a timely manner.August 2018Independent Reviews
LM-1.3.7
[This Paragraph was deleted in January 2022].
Deleted: January 2022
August 2018LM-1.3.8
The independent reviews of the liquidity risk management framework undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34, must cover the following:
(a) The adequacy of internal systems and procedures for identifying, measuring, monitoring and mitigating liquidity risk;(b) The appropriateness of various internal limits on liquidity metrics for controlling liquidity risk;(c) The suitability of the underlying scenarios and assumptions for conducting cash flow analysis;(d) The integrity and usefulness of management information reports on liquidity risk; and(e) The adherence to established liquidity risk strategy, policies and procedures.Amended: January 2022
August 2018LM-1.3.9
[This Paragraph was deleted in January 2022].
Amended: January 2022
August 2018LM-2 LM-2 Liquidity Risk Identification, Measurement, Monitoring and Control
LM-2.1 LM-2.1 Liquidity Metrics and Measurement Tools
LM-2.1.1
A bank should have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process should include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons.
August 2018LM-2.1.2
Banks must use a range of liquidity metrics for identifying, measuring and analysing liquidity risk. These metrics must enable the management to understand its day-to-day liquidity positions and structural liquidity mismatches, as well as its resilience under stressed conditions. In particular, these metrics must perform the functions of:
(a) Ensuring compliance with statutory liquidity requirements;(b) Projecting the bank's future cash flows and identifying potential funding gaps and mismatches under both normal and stressed conditions over different time horizons;(c) Evaluating potential liquidity risks inherent in the bank's balance sheet structure and business activities, including the liquidity risks that may arise from any embedded options and other contingent exposures or events;(d) Assessing the bank's capability to generate funding, as well as its vulnerability to, or concentration on, any major source of funding;(e) Identifying the bank's vulnerabilities to foreign currency movements; and(f) Identifying market related information.August 2018LM-2.1.3
The above must take into account all assets, liabilities, off—balance sheet ('OBS') positions and activities of the bank, across business lines, legal entities and overseas operations in a timely and effective manner.
August 2018LM-2.1.4
Banks must use metrics and tools that are appropriate for their business mix, complexity and risk profile. In addition to liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'), the following liquidity indicators must be monitored:
(a) Maturity mismatch analysis, based on contractual maturities, as well as behavioural assumptions of cash inflows and outflows. Such metrics provide insight into the extent to which a bank engages in maturity transformation and identify potential funding needs that may need to be bridged;(b) Information on the level of concentration of funding from major counterparties (including retail and wholesale fund providers);(c) Major funding instruments (e.g. by issuing various types of securities);(d) Information on the size, composition and characteristics of unencumbered assets included in a bank's liquidity cushion for assessing the bank's potential capacity to obtain liquidity, through sale or secured borrowing, at short notice from private markets or CBB in times of stress; and(e) LCR in individual currencies.August 2018LM-2.1.5
In addition to the above, banks should adopt other metrics, as considered prudent or necessary to supplement their liquidity risk management, such as:
(a) Medium-term funding ratio3, stable or core deposit ratio, or any similar ratio that reflects the stability of a bank's funding;(b) Financing-to-deposit ratio, or any similar ratio that reflects the extent to which a major category of asset is funded by a major category of funding4; and(c) Metrics tracking intragroup lending and borrowing.
3 A medium-term funding ratio is a ratio of liabilities to assets, both with a contractual maturity of, say, more than 1 year. This ratio focuses on the medium-term liquidity profile of a bank and is intended to highlight the extent to which medium-term assets are being financed by the roll-over of short-term liabilities.
4 A bank, depending on its business profile, may decide to adopt different breakdowns of the financing-to-deposit ratio such as, by way of example: financing to retail customers / retail customer deposits; financing to corporate customers / corporate customer deposits; financing / retail (or corporate) customer deposits. To complement the analysis provided by these indicators, the bank may consider assessing other funding risk indicators such as customer deposits / total liabilities or deposits from credit institutions / total liabilities to provide a notion of the bank's funding profile and take a closer look at the share of wholesale funding. Depending on its foreign activities and the related relevance, the bank may decide to assess the share of deposits in non-domestic markets.
August 2018LM-2.1.6
Banks must regularly analyse information or trends revealed from liquidity metrics (e.g. a persistent decline in stable deposits) to identify any material liquidity concerns.
August 2018LM-2.2 LM-2.2 Risk Control Limits
LM-2.2.1
Banks must, where appropriate, set limits for the liquidity metrics they employ in monitoring and controlling their liquidity risk exposures. The limits set must be relevant to a bank's business activities and consistent with its liquidity risk tolerance.
August 2018LM-2.2.2
The limits must be used for managing day-to-day liquidity within and across business lines and entities. A typical example is the setting of maturity mismatch limits over different time horizons in order to ensure that a bank can continue to operate in a period of market stress.
August 2018LM-2.2.3
Banks must ensure compliance with the established limits, and define the procedures for escalation and reporting of exceptions or breaches which can be early indicators of excessive risk or inadequate liquidity risk management. The limits set, and the corresponding escalation and reporting procedures, must be regularly reviewed.
August 2018LM-2.2.4
Banks must consider setting stricter internal limits on intrabank funding denominated in foreign currencies where the convertibility and transferability of such funding is not certain, particularly in stressed situations.
August 2018LM-2.3 LM-2.3 Early Warning Indicators
LM-2.3.1
To complement liquidity metrics, banks must adopt a set of indicators that are more readily available, either internally or from the market, to help in identifying at an early stage emerging risks in their liquidity risk positions or potential funding needs, so that management review and where necessary, mitigating measures can be undertaken promptly.
August 2018LM-2.3.2
Such early warning indicators can be qualitative or quantitative in nature and may include, but are not limited to, the following:
(a) Rapid asset growth, especially when funded with potentially volatile liabilities;(b) Growing concentrations on certain assets or liabilities or funding sources;(c) Increasing currency mismatches;(d) Increasing overall funding costs;(e) Worsening cash-flow or structural liquidity positions as evidenced by widening negative maturity mismatches, especially in the short-term time bands (e.g. up to 1 month);(f) A decrease in weighted average maturity of liabilities;(g) Repeated incidents of positions approaching or breaching internal or regulatory limits;(h) Negative trends or heightened risk, such as rising delinquencies or losses, associated with a particular business, product or activity;(i) Significant deterioration in earnings, asset quality, and overall financial condition;(j) Negative publicity;(k) A credit rating downgrade;(l) Stock price declines;(m) Widening spreads on credit default Shari'a compliant hedging instrument or senior and subordinated Sukuk;(n) Counterparties beginning to request additional collateral for credit exposures or to resist entering into new transactions to provide unsecured or longer dated funding;(o) Reduction in available credit lines from correspondent banks;(p) Increasing trends of retail deposit withdrawals;(q) Increasing redemptions of certificates of deposit before maturity; and(r) Difficulty in accessing longer-term funding or placing short-term liabilities (e.g. Murabaha Sukuk).August 2018LM-2.4 LM-2.4 Management Information Systems
LM-2.4.1
A bank must have reliable management information systems ('MIS') that provide the Board,
senior management and other appropriate personnel with timely and forward-looking information on its liquidity positions. The MIS must be appropriate for the purpose of supporting the bank's day-to-day liquidity risk management and continuous monitoring of compliance with established policies, procedures and limits. The MIS reports must be capable of supporting the Board andsenior management in identifying emerging concerns on liquidity, as well as in managing liquidity stress events.August 2018LM-2.4.2
A bank's MIS must encompass information in respect of the bank's liquidity cushion, major sources of funding and all significant sources of liquidity risk, including contingent risks and the related triggers and those arising from new activities. Moreover, a bank's MIS must have the ability to calculate risk measures to monitor liquidity positions:
(a) In all currencies, both individually and on an aggregate basis;(b) Under normal business conditions and during stress events, with the ability to deliver more granular and time-sensitive information for the latter;(c) For different time horizons (e.g. on an intraday basis, on a day-to-day basis for shorter time horizons (of, say, 5 to 7 days ahead), and over a series of more distant time periods thereafter); and(d) At appropriate intervals (in times of stress, the MIS reports must be capable of being produced at more frequent intervals such as daily, or even intraday if necessary).August 2018LM-2.4.3
To facilitate liquidity risk monitoring, there must be reporting criteria specifying the scope, manner and frequency of reporting liquidity information for various recipients (e.g. daily/weekly & monthly for those responsible for managing liquidity risk, and at each meeting convened by the Board or its relevant delegated committee(s) during normal times, with increased reporting frequency in times of stress) and the parties responsible for preparing the reports.
August 2018LM-2.4.4
In particular, the reporting must compare current liquidity exposures to established limits (both for internal liquidity risk management and statutory compliance purposes) to identify any limit breaches. Breaches in liquidity risk limits must be reported to the appropriate level of management. Thresholds and reporting guidelines must be specified for escalation of the reporting of breaches to higher levels of management and the Board.
August 2018LM-2.5 LM-2.5 Cash-flow Approach to Managing Liquidity Risk
LM-2.5.1
Banks must adopt a cash-flow approach to managing liquidity risk, under which they must have in place a robust framework for projecting comprehensively future cash flows arising from assets, liabilities and OBS items over an appropriate set of time horizons. The framework must be used for:
(a) monitoring on a daily basis their net funding gaps under normal business conditions; and(b) Conducting regular cash-flow analysis based on a range of stress scenarios.August 2018LM-2.5.2
Unless otherwise specified, the cash-flow management requirements in this chapter apply generally to banks under both normal and stressed situations.
August 2018Scope, Coverage and Frequency of Cash-flow Projection
LM-2.5.3
Cash-flow projections involve the estimation of a bank's cash inflows against its outflows and the liquidity value of its assets to identify the potential for future net funding shortfalls. The projections must be forward-looking and based on reasonable assumptions and techniques, covering liquidity risks stemming from:
(a) On-balance sheet assets and liabilities;(b) OBS positions and Shari'a-compliant hedging transactions (including sources of contingent liquidity demand and related triggering events associated with such positions);(c) Special Purpose Vehicles; a bank must have a detailed understanding of its contingent liquidity risk exposure and event triggers arising from any contractual and non-contractual relationships with special purpose vehicles; and(d) Core business lines and activities (for example, correspondent, custodian and settlement activities).August 2018LM-2.5.4
Cash-flow projections must address a variety of factors over different time horizons, including:
(a) Vulnerabilities to changes in liquidity needs and funding capacity on an intraday basis;(b) Day-to-day liquidity needs in, say, 5 to 7 days ahead;(c) Funding capacity over short and medium-term horizons (e.g. 14 day, 1, 2, 3, 6 and 9 months) of up to 1 year;(d) Longer-term liquidity needs over 1, 2, 3, 4 and beyond 5 years; and(e) Vulnerabilities to events, activities and strategies that can put a significant strain on a bank's capacity for generating liquidity.August 2018LM-2.5.5
Cash-flow projections must cover positions in Bahraini Dinar (BHD/USD), where appropriate and in all significant currencies in aggregate. Separate cash-flow projections must also be performed for individual foreign currencies in which a bank has significant positions. Please refer to LM-3: Foreign currency liquidity management for the identification of significant positions in other currencies.
August 2018Net Funding Gaps
LM-2.5.6
In order to meet their obligations as they fall due and thereby stay in business, banks need to ensure:
(a) Positive cash-flow position is maintained; or(b) Sufficient cash can be generated from their assets; or(c) Adequate funding sources to cover their funding gaps promptly.August 2018LM-2.5.7
Net funding gaps can be assessed through the construction of a maturity profile, supplemented where relevant with additional analysis of the funding capacity of specific on- or off-balance sheet items.
August 2018LM-2.5.8
A bank's maturity profile should encompass adequate time bands so that the bank can monitor its liquidity needs for various time horizons. It is generally expected to have daily time bands in the very short term (say for a period of 5 to 7 days ahead), which may be followed by wider and less granular time bands for other periods;
August 2018LM-2.5.9
Banks must set internal limits to control the size of their cumulative net mismatch positions (i.e. where cumulative cash inflows are exceeded by cumulative cash outflows), at least for the shorter-term time bands (e.g. next day, 5 to 7 days ahead, 14 days, 1, 2, 3, 6 and 9 months). Such limits must be in line with the established liquidity risk tolerance, and must take into account the potential impact of adverse market conditions on the bank's funding capacity. Maturity mismatch limits must also be imposed for individual foreign currencies in which a bank has significant positions.
August 2018LM-2.5.10
The maturity mismatch limits must be properly documented in the Liquidity Risk Management Policy statement. Banks must regularly review the suitability of such limits.
August 2018Cash Flow Projection Assumptions and Techniques
LM-2.5.11
While certain cash flows can be projected based on contractual maturities, some may need to be estimated based on certain assumptions. In these circumstances, banks should make realistic assumptions (with a reasonable degree of prudence) to reflect the characteristics of their businesses and products, as well as economic and market conditions. For example, banks may take into account the following factors in setting the assumptions for cash flow projection:
(a) Expected future growth or contractions in the balance sheet;(b) The proportion of maturing assets and liabilities that banks reasonably expect to roll-over or renew;(c) The quality and proportion of liquid assets or other marketable sukuk that can be used as collateral to obtain secured funding;(d) The behaviour of assets and liabilities with no clearly specified maturity dates, such as repayment of overdrafts and demand deposits as well as sticky deposits;(e) The potential cash flows arising from off-balance sheet activities, e.g., drawdown under financing commitments and contingent liabilities (including all potential draws from contractual or non-contractual commitments);(f) The behaviour of cash flows under different service delivery channels (e.g. branches vs e-banking channels);(g) The convertibility of foreign currencies;(h) The lead time required for the monetization of marketable sukuk; and(i) Access to wholesale markets, standby facilities and intragroup funding.August 2018LM-2.5.12
Techniques employed by banks for designing cash flow assumptions must be commensurate with the nature and complexity of their business activities.
August 2018LM-2.5.13
In deriving behavioural cash flow assumptions, banks may analyse historical observations on cash flow patterns. While there is no standard methodology for making such assumptions, it is important that the assumptions used are consistent and reasonable and they should be supported by sufficient historical or empirical evidence.
August 2018LM-2.5.14
Banks must document in their liquidity risk management policy statement, the underlying assumptions used for estimating cash flow projections and the rationale behind them. The assumptions and their justifications must be approved, and subject to regular review, by the ALCO to take account of available statistical evidence and changing business environment.
August 2018LM-3 LM-3 Foreign Currency Liquidity Management
LM-3.1 LM-3.1 Foreign Currency Liquidity Management
LM-3.1.1
A currency must be considered 'significant' if the aggregate liabilities of the bank (both on and off-balance sheet) denominated in that currency, amount to 5 percent or more of its total liabilities (both on and off-balance sheet).
August 2018LM-3.1.2
Banks must formulate, and review regularly, strategies and policies for the management of liquidity risks with respect to BHD/USD, if relevant, and each significant foreign currency respectively, taking into account the potential market conditions and potential constraints in times of stress. If a bank has assets or liabilities denominated in a significant foreign currency, and that currency is not freely convertible, more prudent management of liquidity risk must be adopted, such as more conservative limits on funding gaps in respect of that currency vis-à-vis other currencies, as liquidity may not be easily transferred into or out of that currency, particularly in times of stress.
August 2018LM-3.1.3
Banks must assess their foreign currency liquidity funding gaps under both normal and stressed conditions, and control currency mismatches within acceptable levels.
August 2018LM-3.1.4
As with the management of its overall maturity mismatch position, a bank must set, and regularly review, internal limits to control the size of cumulative net maturity mismatches arising from assets and liabilities denominated in significant foreign currencies.
August 2018LM-3.1.5
Such limits must cover the bank's maturity mismatch position in BHD, if relevant, and each significant foreign currency over various specific time-bands (e.g. next day, 5 to 7 days ahead, 14 days, 1, 2, 3, 6, 9 months and 1, 2, 3, 5 and beyond 5 years).
August 2018LM-4 LM-4 Funding Diversification and Market Access
LM-4.1 LM-4.1 Overview
LM-4.1.1
To ensure a reliable supply of funds, both in normal times and during stressed conditions, banks must, to the most practicable extent, maintain a range of diversified and stable funding sources (including liquid assets held) to meet liquidity needs for various time horizons, supported by their ready access to the relevant markets. Banks must also take appropriate measures to foster relationships with fund providers and strengthen their presence in funding markets.
August 2018LM-4.2 LM-4.2 Funding Diversification
LM-4.2.1
Banks must establish an effective funding strategy to achieve sufficient diversification, both of their funding sources and in the composition of their liquid assets. A bank's funding strategy must consider correlations between sources of funds and market conditions.
August 2018LM-4.2.2
Banks must put in place concentration limits on liquid assets and funding sources, as appropriate, with reference to such characteristics as the type of asset, product, market or instrument; nature of issuer, counterparty or fund provider; maturity; currency; geographical location and economic sector.
August 2018LM-4.2.3
Banks must maintain an appropriate mix of liquid assets (including the type and quality of assets, and level of such holdings) as a source of liquidity for day-to-day operational needs (e.g. for settlement and clearing purposes), as well as for meeting emergency funding needs.
August 2018Other Funding Sources
LM-4.2.4
Banks must assess their exposure to significant funding providers (or depositors) on an ongoing basis. For this purpose, banks must have in place, as part of their MIS, regular reports on the funding received from significant funding providers to facilitate monitoring. Such reports must consolidate all funding that a bank obtains from each significant funding provider (including a group of related funding providers which, when aggregated, amount to a significant funding provider). The historical amount of funds provided by these funding providers, e.g. in terms of the maximum, minimum and average balances over the previous 12 months, must also be monitored. Trigger ratios must be established to identify any funding concentration for management review. In the case of a retail bank, a funding concentration may exist if a significant percentage of its total deposit base is from a limited number of the top-ranking depositors or a single depositor (or group of related depositors). Banks must consider appropriate actions to diversify the deposit base.
August 2018LM-4.2.5
Banks must avoid any potential concentration in their reliance on particular funding markets and sources. Banks must take into account the following major factors in assessing the degree of funding concentration:
(a) The maturity profile and credit-sensitivity of the liabilities;(b) The mix of secured funding and unsecured funding;(c) The extent of reliance on a single fund provider or a group of related fund providers; particular markets, instruments or products (e.g. interbank transactions and retail versus wholesale deposits); and intragroup funding;(d) Geographical location, industry or economic sector of fund providers; and(e) The currency of funding sources.August 2018LM-4.2.6
Banks with a large deposit base must, in particular, conduct more granular analysis on the stability of different types of deposits taking into account the relevant contractual and behavioural characteristics of such deposits (e.g. in terms of deposit insurance coverage, currency denomination, nature of depositors, such as retail, wholesale or private banking customers, etc.). They must monitor the trends and levels of their stable deposits regularly.
August 2018LM-4.2.7
Banks must identify alternative sources of funding (e.g. intragroup funding, new sukuk issues, asset sales, etc.) that may be used to generate liquidity in case of need, and review the effectiveness of using such sources in different situations. However, they must be aware that not all fund-raising options are available in all circumstances and some may be available only with a substantial time delay.
August 2018LM-4.3 LM-4.3 Market Access
Market Presence
LM-4.3.1
Banks must maintain an active presence in markets relevant to their funding strategy. This requires an ongoing commitment and investment in adequate and appropriate infrastructures, processes and information systems. To ensure their access to funding markets in a timely manner, banks must periodically utilise the established systems, documentation and arrangements for accessing those markets to confirm whether willing counterparties are readily available.
August 2018LM-4.3.2
The ability to obtain funds in the interbank market is an important source of liquidity for banks. Banks should be in a position to estimate their 'normal' borrowing capacity, based on past experience, and aim to limit their wholesale funding needs for both local and foreign currencies.
August 2018Relationship with Market Providers
LM-4.3.3
Banks must identify and build strong relationships with funding providers. In particular, banks must maintain a solid and close relationship with its 25 largest depositors on an ongoing basis, to ensure that the bank has the ability to obtain funds in case of need (e.g. during events of stress), to prevent and/or limit a bank run-off and to safeguard its major sources of funding. Nevertheless, banks must take a prudent view of how such relationships may be strained in times of stress. In the formulation of stress scenarios and contingency funding plans, banks must take into account possible situations where funding sources, including its 10 largest depositors, may dry up and markets may close, and where market perceptions of a bank's financial position may change.
August 2018LM-5 LM-5 Maintenance of Liquidity Cushion
LM-5.1 LM-5.1 Overview
LM-5.1.1
Banks must maintain an adequate cushion of unencumbered liquid assets that can be readily sold or used as collateral in private markets by a bank to obtain funds to meet the liquidity needs at all times, even in periods of severe idiosyncratic and market stress.
August 2018LM-5.1.2
The size of the liquidity cushion should reflect a bank's established risk tolerance, and should be sufficient to meet the bank's liquidity needs in the initial phase of liquidity stress, which is most critical to the bank's survival, taking into account the monetization or borrowing values of the assets included in the cushion under the relevant stressed conditions.
August 2018LM-5.1.3
The liquidity cushion should be sized to enable a bank to continue to meet its daily payment and settlement obligations on a timely basis for the period of stress. In doing so, the bank should take into account other available tools and resources to manage intraday liquidity risks.
August 2018LM-5.1.4
In addition, the liquidity cushion must at least be sufficient to enable a bank to reach its regulatory LCR.
August 2018LM-5.2 LM-5.2 Composition of Liquidity Cushion
LM-5.2.1
The liquidity cushion must be largely made up of high quality liquid assets (the most liquid, unencumbered and readily marketable assets such as cash, other high quality government sukuk, etc.) or similar instruments, that can be easily or immediately monetised with little or no loss or discount at all times, irrespective of the bank's own condition.
August 2018LM-5.2.2
To cater for any extension or deterioration of any stress situation, a bank may widen the composition of its liquidity cushion by holding other liquid and marketable assets which can be used to cater for the longer end of the stress period (e.g. 1 month or beyond) without resulting in excessive losses or discounts.
August 2018LM-5.2.3
A bank must document its policies and criteria for defining the liquid assets to be included in its liquidity cushion and distinguishing their relative levels of quality in terms of their ability to generate liquidity swiftly, with little loss or discount. MIS reports must be in place to facilitate continuous management of a bank's liquidity cushion.
August 2018LM-6 LM-6 Intragroup Liquidity Management
LM-6.1 LM-6.1 Overview
LM-6.1.1
Where a bank is part of a banking group (local or foreign), the bank must be able to monitor and control liquidity risks arising from intragroup transactions (including cross-border transactions where applicable) with other legal entities in the group, taking into account any legal, regulatory, operational or other constraints on the transferability of liquidity and collateral to and from those entities.
August 2018LM-6.1.2
In managing intragroup liquidity risks, banks should understand how their liquidity positions may be affected by liquidity problems faced by other group entities.
August 2018LM-6.2 LM-6.2 Treatment of Intragroup Transactions
LM-6.2.1
Banks must specify in their liquidity risk management strategy the treatment of intragroup liquidity, and assumptions on intragroup dependencies for the purposes of making cash flow projections.
August 2018LM-6.2.2
In assessing funding needs (especially under stressed situations), banks should account for any funding or liquidity commitment provided to group entities (e.g. in the form of explicit guarantees or funding lines to be drawn in times of need) and prepare for any withdrawal of funding provided by group entities. Banks should also analyse how the liquidity positions of group entities may affect their own liquidity, either through direct financial impact or through contagion when those entities encounter liquidity strain. Where there is reliance on funding support from group entities, banks should take steps to identify the existence of and take into account any legal, regulatory or other limitations that may restrict their access to liquidity from those entities in case of need.
August 2018LM-6.2.3
A bank that has entered into 'back-to-back' transactions5 with its group entities must exclude such transactions from cash flow or liquidity calculations, as such transactions usually involve no actual movement of funds and, as such, cannot effectively improve the bank's liquidity.
5 These transactions refer to interoffice or intragroup transactions which typically involve two legs, one borrowing long (say, with maturity of more than 1 month) and the other lending short (say, with maturity of 1 month or less). Both legs are for the same or similar amount and at the same or similar rate of interest, and are, in most cases, rolled forward continuously.
August 2018LM-6.3 LM-6.3 Intragroup Liquidity Limits
LM-6.3.1
Banks must establish internal limits on intragroup liquidity risk to mitigate the risk of contagion from other group entities when those entities are under liquidity stress. Moreover, banks must consider setting stricter internal limits on intragroup funding denominated in foreign currencies where the convertibility and transferability of such funding is not certain, particularly in stressed situations.
August 2018LM-6.4 LM-6.4 Constraints on Intragroup Liquidity Transfers
LM-6.4.1
Banks should understand potential constraints that may affect intragroup liquidity movements, and specify their assumptions regarding the transferability of funds and collateral in liquidity risk management policies. These assumptions should fully consider regulatory, legal, accounting, credit, tax and internal constraints on the effective movement of liquidity and collateral.
August 2018LM-6.4.2
Banks should also consider the operational arrangements needed to transfer funds and collateral across entities and the time required to complete such transfers under these arrangements.
August 2018LM-7 LM-7 Intraday Liquidity Risk Management
LM-7.1 LM-7.1 Overview
LM-7.1.1
Intraday liquidity risk management is an important component of a bank's broader liquidity risk management strategy. Banks must actively manage their intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions, and, as such, contribute to the smooth functioning of payment and settlement systems.
August 2018LM-7.1.2
Aside from direct participation in payment and settlement systems, banks may incur intraday liquidity risk through their provision of correspondent and custodian banking services. Where a bank relies on other correspondent or custodian banks to conduct payment and settlement activities, operational or financial disruptions at those banks will also affect the bank's own liquidity position and should have alternate arrangements in place to ensure it is able to meet its obligations.
August 2018LM-7.1.3
A primary objective in intraday liquidity risk management is for banks to identify, prioritise and meet time-specific and other critical obligations when they become due, and to settle other, less critical obligations as soon as possible. In satisfying this objective, banks must be aware of, and be able to address, various challenges associated with intraday liquidity risk management.
August 2018LM-7.1.4
A key challenge in intraday liquidity risk management lies in the uncertainty in both the amount and timing of a bank's gross cash inflows and outflows during the day, in part because such cash flows may reflect the activities of its customers or counterparties which are beyond the bank's control, especially where the bank provides correspondent or custodian services. Moreover, the timing of the cash flows may be dictated by the rules governing payment and settlement systems (e.g. payment obligations may be due by specific times during the day). Because a bank's daily gross cash outflows can often far exceed the bank's gross cash inflows at different points of time during a day, or its net overnight balances even under normal circumstances, differences in the timing of its inflows and outflows could result in significant intraday liquidity shortfalls. These shortfalls may necessitate the bank borrowing funds on an intraday basis, prioritizing its outflows to meet critical payments, or borrowing additional overnight funds (if certain expected cash inflows are not received before the end of the working day).
August 2018LM-7.2 LM-7.2 Risk Management Controls
LM-7.2.1
Banks must have effective policies, procedures, systems and controls for managing their intraday liquidity risks in all of the financial markets and currencies in which they have significant payment and settlement activities. Such systems and controls must, among other things, ensure a bank's capacity, to:
(a) Measure expected daily gross cash inflows and outflows, anticipate the intraday timing of these cash flows where possible, and, as such, forecast the range of potential net funding shortfalls at different time points during the day;(b) Monitor intraday liquidity positions against expected activities and available resources (including liquidity balances, remaining intraday credit capacity, and available collateral) and prioritise payments, if necessary; and(c) Manage intraday liquidity positions so that there is always sufficient intraday funding to meet the bank's intraday liquidity needs.(d) Manage and mobilise collateral as necessary to obtain intraday funds. A bank must have sufficient collateral available to acquire the level of intraday liquidity needed to meet its intraday objectives.(e) Manage the timing of its liquidity outflows in line with its intraday objectives. A bank must have the ability to manage the payment outflows of key customers and, if customers are provided with intraday credit that credit procedures must be capable of supporting timely decisions.(f) Manage unexpected disruptions to its intraday liquidity flows. A bank's stress testing and contingency funding plans must reflect intraday considerations. A bank also must understand the level and timing of liquidity needs that may arise as a result of the failure-to settle procedures of payment and settlement systems in which it is a direct participant. Robust operational risk management and business continuity arrangements are also critical to the effectiveness of a bank's intraday liquidity management.August 2018LM-7.2.2
Intraday liquidity risk management demands cooperation between the front and back offices, as it typically requires close monitoring of expected payments and direct contacts with customers, where necessary, to quickly verify the reasons for delayed payments. A clear assignment of tasks and responsibilities to personnel involved is, therefore, important, particularly as time-critical decisions need to be made, for instance, to meet the settlement cut-off times.
August 2018LM-7.2.3
The tools and resources applied by a bank in managing intraday liquidity risks must be tailored to the bank's business model and role in the financial system. This relates to, for example, whether the bank participates in a payment or settlement system directly or through correspondent or custodian banks, and whether it provides correspondent or custodian services and intraday credit facilities to other banks, firms or systems. If a bank relies heavily on secured funding markets, the bank must have adequate systems and procedures in place to monitor positions in securities settlement systems.
August 2018LM-8 LM-8 Collateral management
LM-8.1 LM-8.1 Overview
LM-8.1.1
The ready availability of assets that banks can use as collateral to obtain funding by means of secured borrowing (e.g. repo) mitigates liquidity risk. Therefore, banks must allocate sufficient resources to ensure efficient and effective management of collateral in their liquidity risk management process.
August 2018LM-8.1.2
Collateral management must aim at optimising the allocation of collateral available for different operational needs, across products, business units, locations and currencies. It must be based on a prioritisation of needs and an awareness of the opportunity cost of its use, in both normal and stressed times.
August 2018LM-8.2 LM-8.2 Management of Collateral Positions
LM-8.2.1
Banks must have the ability to calculate all of their collateral positions, including assets currently deployed for use as collateral relative to amount of collateral required, and unencumbered assets available to be used as collateral.
August 2018LM-8.2.2
Bank's level of available collateral must be monitored by legal entity, jurisdiction and currency exposure. Banks must be able to track precisely the legal entity and the physical location (i.e. the custodian or securities settlement system) at which each of the assets is held, and monitor how such assets may be mobilised in a timely manner in case of need.
August 2018LM-8.2.3
Banks must have sufficient collateral to meet expected, and accommodate unexpected borrowing needs, as well as potential increases in margin requirements for pledged assets over different timeframes, including intraday, short-term and longer-term structural liquidity requirements, and have adequate systems for monitoring the shifts between intraday, overnight and term collateral usage. In determining the required collateral to be allocated for intraday liquidity needs, banks must consider the potential for significant uncertainty around the timing of payment flows during the day, as well as the potential for operational and liquidity disruptions that could necessitate the pledging or delivery of additional intraday collateral.
August 2018LM-8.2.4
Banks must assess the eligibility of each major asset class for pledging as collateral with relevant central banks (for intraday, overnight and term credit or secured borrowing under standing facilities, as the case may be), as well as the acceptability of assets to major counterparties and fund providers in secured funding markets. They must also ensure that there is proper legal documentation for each asset class to be effectively pledged for liquidity.
August 2018LM-8.2.5
Banks must diversify their sources of collateral to avoid excessive concentration on any particular funding provider or market, taking into consideration capacity constraints, sensitivity of prices, haircuts and collateral requirements under conditions of institution-specific and market-wide stress, and the availability of funds from private sector counterparties in various market stress scenarios.
August 2018LM-8.3 LM-8.3 Operational Issues
LM-8.3.1
Banks must address various operational issues relating to the use of collateral for obtaining liquidity. These include, but are not limited to:
a) Awareness of the operational and timing requirements associated with accessing the collateral given its physical location;b) Understanding the liquidity risks associated with different types of payment and settlement systems (e.g. 'net' systems versus 'gross' systems) and their implications for collateral management; andc) Taking into account the implications of obligations embedded in the contractual terms of certain transactions which, when triggered, may reduce the availability of collateral for liquidity risk management. These refer to, for example, margin requirements and triggering events that require a bank to: 1) provide additional collateral as a result of changes in the market valuation of the transactions or in the bank's credit rating or financial position (in the case of Shari'a compliant hedging transactions), or; 2) hypothecate or deliver additional assets to the pool of underlying assets when the embedded triggering events occur (in the case of securitisation transactions).August 2018LM-8.3.2
Banks must test on a regular basis, and at least annually, the ability to use its source of collateral in repo operations, to ensure its capability of using the securities to obtain the required liquidity, if needed, and assess the market appetite for a particular security, including the related haircut applied to put the operation in place. Banks must also ensure that there are no operational issues that could have an impact on the timing and the feasibility of the operation (e.g. limits to the transferability of the security, in case this is held in a local and foreign branch portfolio).
August 2018LM-8.3.3
For collateralised borrowing, banks must maintain all documentation related to the agreement with the counterparties.
August 2018LM-9 LM-9 Stress Testing and Scenario Analysis
LM-9.1 LM-9.1 Overview
LM-9.1.1
In addition to conducting cash flow projections to monitor its liquidity positions under normal business conditions, a bank must regularly perform stress tests based on sufficiently severe but plausible scenarios to identify potential sources of liquidity strain under stressed conditions.
August 2018LM-9.1.2
Banks must conduct stress tests based on sufficiently severe, but plausible scenarios and assumptions that are commensurate with the bank's business nature, size and complexity. The stress testing scenarios and assumptions adopted by a bank must reflect the current market conditions and address the bank's actual experiences in stressed situations. Such scenarios and assumptions must be reviewed regularly by the
senior management , with any major changes endorsed by the bank's Board or its relevant delegated committee(s). The active involvement of senior management is vital to the stress testing process. During their regular reviews, senior management must consistently require consideration of sufficiently severe stress scenarios.August 2018LM-9.1.3
Stress tests must enable a bank to analyse the impact of stress scenarios on its consolidated group-wide liquidity position, as well as on the liquidity position of individual entities and business lines in order to understand where risks could arise. For the purposes of consolidated liquidity positions, the licensees may use a proportionate or component approach
August 2018LM-9.1.4
Stress tests must be performed for all significant currencies in aggregate and, separately, for positions in BHD or USD in wholesale banks functioning on the basis of a US Dollar based operating model, if relevant, and individual foreign currencies in which banks have significant positions.
August 2018LM-9.1.5
The design and frequency of stress testing must be commensurate with the size and complexity of a bank and its liquidity risk exposures.
August 2018LM-9.1.6
When conducting stress tests on their liquidity position, banks must also consider the insights and results of stress tests performed for other risks, including possible interaction with these other risks.
August 2018LM-9.2 LM-9.2 Scenarios and Assumptions
LM-9.2.1
It is important for banks to construct sufficiently severe, but plausible stress scenarios and examine the resultant cash flow needs. While banks should aim to cover different stress events and levels of adversity, they must, at a minimum, include the following types of scenarios in their stress testing exercise:
(a) An institution-specific stress scenario;(b) A general market stress scenario; and(c) A combination of both, including possible interaction with other risks.August 2018LM-9.2.2
A bank will need to assign the timing of cash flows for each type of asset and liability, as well as off-balance sheet and contingent items, by assessing the probability of the behaviour of those cash flows under the scenario being examined. The timing of cash inflows and outflows on the maturity ladder can vary among scenarios and the assumptions may differ quite sharply. In estimating liquidity needs, both contractual and non-contractual cash flows should be considered.
August 2018LM-9.2.3
In designing stress scenarios, a bank must take into account, specific risks associated with its business activities, products or funding sources. These include, for example, heavy reliance on specific funding markets or significant exposures to complex financial instruments. The stress scenarios must be able to evaluate the potential adverse impact of these factors on the bank's liquidity position.
August 2018LM-9.2.4
A bank should take a reasonably conservative approach when setting stress assumptions. There are a number of possible areas that the assumptions should cover. For illustrative purposes, these areas include, but are not limited to, the following:
(a) The run-off for retail funding;(b) Asset market illiquidity and erosion in the value of liquid assets;(c) The loss or impairment of secured and unsecured wholesale funding sources;(d) The correlation between funding markets and effectiveness of diversification across available sources of funding;(e) The availability of contingent lines extended to the banks;(f) The availability of funding in different tenors;(g) Contingent claims, including potential draws on committed lines extended to third parties or the bank's connected parties (such as its overseas branches, associated entities in its consolidated group, controller or head office);(h) Liquidity drains associated with contractual obligations or non-contractual obligations involving off-balance sheet vehicles and activities, as well as complex products or transactions;(i) Additional margin calls and collateral requirements (e.g. in Shari'a-compliant hedging contract or other contracts with embedded trigger clauses);(j) Estimates of future balance sheet growth;(k) Currency convertibility and access to foreign exchange markets;(l) The transferability of liquidity across entities, sectors and jurisdictions, taking into account legal, regulatory, operational and time zone restrictions and constraints;(m) Access to the payment and settlement systems which are imperative to a bank.(n) The impact of credit rating triggers;(o) The access to central bank facilities;(p) The operational ability of the bank to monetise assets; and(q) The bank's remedial actions and the availability of the necessary documentation and operational expertise and experience to execute them, taking into account the potential reputational impact when executing these actions.August 2018LM-9.2.5
All stress scenarios and their underlying assumptions must be properly defined and documented in the bank's Liquidity Risk Management Policy statement.
August 2018Institution-specific Stress Scenarios
LM-9.2.6
An institution-specific stress scenario must cover situations that could arise from a bank experiencing either real or perceived problems (e.g. asset quality problems, solvency concerns, credit rating downgrade, rumours relating to the bank's credibility or management fraud, etc.) which affect public confidence in the bank and its firm-wide or group-wide operations. It must represent the bank's view of the behaviour of its cash flows in a sufficiently severe stress scenario. A key assumption is that many of the bank's liabilities cannot be rolled-over or replaced, resulting in the need to utilise its liquidity cushion.
August 2018LM-9.2.7
This scenario will likely entail an acute deposit run. Such a scenario would typically include the following characteristics:
(a) Significant daily run-off rates for deposits particularly at the initial stage of the stress scenario, with increasing requests from customers to redeem their time deposits before maturity;(b) Interbank deposits repaid at maturity;(c) No new unsecured or secured funding obtainable from the market; and(d) Forced sale of marketable securities at discounted prices.August 2018General Market Stress Scenarios
LM-9.2.8
A general market stress scenario is one where liquidity, at a large number of financial institutions in one or more markets, is affected. Characteristics of this scenario may include:
(a) A market-wide liquidity squeeze, with severe contraction in the availability of secured and unsecured funding sources, and a simultaneous drying up of market liquidity in some previously high liquidity markets;(b) Substantial discounts needed to sell or repo assets and wide differences in funding access among banks, due to the occurrence of a severe tearing of their perceived credit quality (i.e. flight to quality);(c) Restrictions on currency convertibility; and(d) Severe operational or settlement disruptions affecting one or more payment or settlement systemsAugust 2018Combined Stress Scenarios
LM-9.2.9
Banks must incorporate a stress scenario into their stress test framework that has the key characteristics of both an institution-specific stress scenario and a general market stress scenario combined ('combined stress scenario'), with appropriate modulations of the underlying assumptions, as necessary, to reflect a set of adverse circumstances that could plausibly happen.
August 2018LM-9.2.10
The following are some relevant factors that could be considered in formulating a bank's 'combined stress scenario':
(a) As a greater number of financial institutions in the market will be affected under a combined stress scenario, this may change the way in which some institution-specific stress elements are to be structured. For example, instead of a quick but severe bank run, there may be a less acute, but more persistent and protracted run-off of customer deposits; and(b) Even lower realizable values of assets may result as the bank concerned seeks to sell or repo large quantities of assets when the relevant asset markets become less liquid and market participants are generally in need of liquidity.August 2018Minimum Stress Period
LM-9.2.11
Banks must assume the minimum stress period for an institution-specific stress scenario to last for no less than 5 working days, and that for a general market stress scenario and a combined stress scenario to last for no less than one calendar month. However, a bank must adopt a longer minimum stress period for the purposes of liquidity stress-testing if its liquidity risk profile warrants this. To gauge a bank's survival period under stress, it is also generally expected that, in addition to the minimum stress period, the bank's stress test must also include sufficiently granular time-bands to assess the bank's ability to meet its obligations in the near to medium-term.
August 2018LM-9.3 LM-9.3 Utilisation of Stress Test Results
LM-9.3.1
The stress testing results must be linked to the overall liquidity risk management process of a bank, including the setting of the liquidity risk tolerance and the internal liquidity risk limits). To this end, senior management must:
(a) Ensure proper documentation of the stress scenarios and related assumptions, and review the scenarios and assumptions periodically;(b) Evaluate the stress testing results and consider any possible need for remedial or mitigating actions. Remedial or mitigating actions may include actions to limit the bank's liquidity risk exposures, obtain more long-term funding, restructure the composition of assets, and increase the size of the bank's liquidity cushion or the adoption of any other measures to adjust the bank's liquidity profile to fit its risk tolerance. Where such actions are not considered necessary to address stress test results indicating potential liquidity strains or shortfalls, senior management must document the justifications for their view;(c) Report the stress testing results and vulnerabilities identified to the Board (or its relevant delegated committee(s)), with recommendations for any resulting actions. Where appropriate, the CBB must be informed of the results and anticipated actions if they are material to the bank (i.e. in addition to normal stress testing reporting arrangements); and(d) Integrate the stress-testing results into the bank's strategic business planning and Contingency Funding Plan ('CFP').August 2018LM-10 LM-10 Contingency Funding Plan
LM-10.1 LM-10.1 Overview
LM-10.1.1
A bank must have a CFP that clearly sets out its strategies for addressing liquidity and funding shortfalls to the extent beyond the level estimated from the stress tests performed by the bank under institution-specific, market-wide and combined stress scenarios and beyond the level covered by the bank's liquidity cushion. The CFP must contain a set of policies, procedures and action plans that prepare a bank to deal with relevant liquidity stress events in a timely and cost-effective manner, with clearly established lines of responsibility and invocation and escalation procedures. The CFP must be approved by the Board and regularly tested and updated to ensure that it is operationally robust.
August 2018LM-10.1.2
The CFP must be commensurate with the bank's complexity, risk profile, scope of operations and role in the financial system. The design of a CFP, including its action plans and procedures, must be closely integrated with the bank's ongoing analysis of liquidity risk. The CFP must address liquidity issues over a range of different time horizons.
August 2018LM-10.2 LM-10.2 Strategy, Plans and Procedures
Contingency Funding Measures and Sources
LM-10.2.1
The CFP must provide a bank's management with a diversified set of viable, readily deployable potential contingency funding measures for preserving and making up liquidity shortfalls in emergency situations. All available potential sources of funding must be outlined, along with the estimated amount of funds that can be derived from these sources, their expected degree of reliability, under what conditions these sources must be used, and the lead time needed to access additional funds from each of the sources.
August 2018LM-10.2.2
Banks must analyse the viability and likely impact on market perception of adopting different contingency funding measures. Some of the factors that must be considered include:
(a) The impact of stressed market conditions on a bank's ability to raise funding through different sources;(b) The interaction between asset markets and funding liquidity, especially in situations where there is an extensive or complete loss of typically available market funding options;(c) Any second-round effects, as well as reputation, legal, regulatory and operational constraints, related to the execution of such measures; and(d) Any peculiarities (including special terms and conditions) associated with particular funding sources. For example, banks must generally refrain from excessive reliance on back-up credit lines (even if committed) and need to understand various conditions, such as notice periods, that could affect a bank's ability to access such lines quickly.August 2018LM-10.2.3
In developing contingency funding measures, banks should also be aware of the operational procedures needed to transfer liquidity and collateral across group entities, borders and business lines, taking into account legal, regulatory, operational and time zone restrictions and controls governing such transfers. The CFP should incorporate relevant operational procedures and realistic timelines for such transfers. Assets intended to be pledged as collateral in the event that back-up funding sources are utilised, should be held by a legal entity and in a location consistent with management's funding plans.
August 2018Early Warning Signals and Triggering Events
LM-10.2.4
The CFP must clearly mention a set of triggering events that will activate the plan, as well as the mechanisms for identification, monitoring and reporting of such events at an early stage. Banks may consider the various early warning indicators highlighted in Section LM-2.3 in relation to this.
August 2018Roles and Responsibilities
LM-10.2.5
The CFP must contain clear policies and procedures enabling a bank's management to make timely and well-informed decisions, communicate the decisions effectively, and execute contingency measures swiftly and proficiently. To achieve this, the roles and responsibilities, and internal procedures for liquidity stress management must be clearly delineated. These must cover:
(a) The authority to invoke the CFP and the establishment of a formal 'crisis management team' to facilitate internal coordination and communication across different business lines and locations and decision-making by senior management in a stress situation;(b) Clear escalation and prioritisation procedures detailing what actions to take, who can take them, and when and how each of the actions can and must be activated;(c) Names and contact details of members of the team responsible for implementing the CFP and the locations of team members; and(d) The designation of alternates for key roles.August 2018Intraday Liquidity Considerations
LM-10.2.6
The CFP must include potential steps to meet intraday critical payments. In situations where intraday liquidity resources become scarce, a bank must have the ability to identify critical payments and to sequence or schedule payments based on priority.
August 2018Communications and Public Disclosure
LM-10.2.7
As part of the CFP, a bank must develop a communication plan to deliver, on a timely basis, clear and consistent communication to internal and external parties, in a time of stress, to support general confidence in the bank. Internal communication must cover employees and encompass different business lines and locations of the bank. External parties must include the CBB, other relevant local or overseas public authorities, clients and creditors. The plan must, in particular, address communication with shareholders and other external stakeholders, such as market participants, correspondents, custodians and major counterparties and customers to whom assurance about the bank is extremely important, as their actions could significantly affect the bank's reputation and liquidity position.
August 2018LM-10.3 LM-10.3 Testing, Update and Maintenance
LM-10.3.1
The CFP must be subject to regular testing to ensure its effectiveness and operational feasibility, particularly in respect of the availability of the contingency sources of funding listed in it.
August 2018LM-10.3.2
The testing of the CFP must cover:
(a) Verifying key assumptions, such as the ability to sell or repo certain assets or periodically draw down credit lines;(b) Ensuring that roles and responsibilities are appropriate and understood;(c) Confirming that contact information is up-to-date, with reporting lines clearly stated and synchronised with the latest organisation chart;(d) Proving the transferability of cash and collateral (especially across borders and entities); and(e) Reviewing that the necessary legal and operational documentation is in place to execute the plan at short notice.August 2018LM-10.3.3
The ALCO must review all aspects of the CFP following each testing exercise and ensure that follow-up actions are delivered.
August 2018LM-10.3.4
The ALCO must review and update the CFP on an annual basis at least, or more often, as warranted by changes in business or market circumstances, to ensure that the CFP remains robust over time. Any changes to the CFP must be properly documented and approved by the Board (or its relevant delegated committee).
August 2018LM-10.3.5
The CFP must be consistent with the bank's business continuity plans and should be operational under situations where business continuity arrangements have been invoked. As such, a bank should ensure effective coordination between teams managing issues surrounding liquidity crisis and business continuity.
August 2018LM-11 LM-11 Liquidity Coverage Ratio
LM-11.1 LM-11.1 General Requirements
LM-11.1.1
The requirements of this section is applicable to all Bahraini Islamic bank licensees.
August 2018LM-11.1.2
Liquidity Coverage Ratio (LCR) has been developed to promote short-term resilience of a bank's liquidity risk profile. The LCR requirements aim to ensure that a bank has an adequate stock of unencumbered high quality liquidity assets (HQLA) that consists of assets that can be converted into cash immediately to meet its liquidity needs for a 30-calendar day stressed liquidity period. The stock of unencumbered HQLA should enable the bank to survive until day 30 of the stress scenario, by which time appropriate corrective actions would have been taken by management to find the necessary solutions to the liquidity crisis.
August 2018LM-11.1.3
Bahraini Islamic bank licensees must calculate LCR on a consolidated and on a "solo" basis by using the following formula:Stock of HQLA/Net cash outflows over the next 30 calendar days
August 2018LM-11.1.4
Bahraini Islamic bank licensees must meet the minimum LCR of not less than 100 percent on a daily basis.August 2018LM-11.1.5
When applying these requirements on a consolidated basis, the computations of LCR for branches and subsidiaries outside Bahrain must be as per the Rulebook requirements applied to all legal entities being consolidated except for the treatment of retail/small business deposits that should follow the relevant parameters adopted in host jurisdictions in which the bank operates.
August 2018LM-11.1.6
In cases of restrictions or reasonable doubt about the capability of
Bahraini Islamic bank licensees with foreign branches and subsidiaries to transfer surplus liquidity from these branches and subsidiaries to the parent entity, the banks must exclude this surplus liquidity from the calculation of the LCR on a consolidated basis.August 2018LM-11.1.7
No excess liquidity should be recognized by a bank with overseas operations in its consolidated LCR. Thus, the eligible HQLA held by a legal entity being consolidated to meet its local LCR requirements (where applicable) can be included in the consolidated LCR to the extent that such HQLA are used to cover the total net cash outflows of that entity. Any surplus at the legal entity level can only be included in the consolidated stock if the assets would also be freely available to the consolidated (parent) entity in times of stress.
August 2018LM-11.1.8
LCR in significant currencies: A currency is considered significant if the aggregate liabilities (both on and off-balance sheet) in that currency amount to 5 percent or more of the bank's aggregate liabilities (both on and off-balance sheet) in all currencies.
Bahraini Islamic bank licensees must monitor the LCR for each significant currency for the bank and its branches/subsidiaries, inside and outside Bahrain.August 2018Frequency of Reporting
LM-11.1.9
Bahraini Islamic bank licensees are required to submit their "solo" LCR to the CBB within 7 calendar days following the month end, and their consolidated LCR within 14 calendar days following the month end (as required under Section BR-4.3).Amended: July 2019
August 2018LM-11.1.10
In cases where the LCR falls, or is expected to fall, below 100 percent,
Bahraini Islamic bank licensees must immediately notify the CBB, report the reasons for the breach or potential breach and present a plan showing the measures they intend to take to restore the LCR ratio.August 2018LM-11.1.11
The stress scenarios assumed in these requirements must be viewed as a minimum supervisory requirement for
Bahraini Islamic bank licensees . Banks must construct their own scenarios proportionate to their size, business model and complexity of operations, to assess the level of liquidity they must hold over and above this minimum level. These Internal stress scenarios must incorporate time horizons longer than the one mandated by the requirements mentioned in this section.August 2018LM-11.1.12
Bahraini Islamic bank licensees must disclose the information on the LCR concurrently with the publication of their quarterly and year-end financial statements. The LCR must be presented as simple averages of daily LCRs over the current and previous period.August 2018LM-11.2 LM-11.2 High Quality Liquid Assets (HQLA)
The LCR Components and Operational Requirements
LM-11.2.1
Bahraini Islamic bank licensees must hold a stock of unencumbered HQLA to cover the total net cash outflows over a 30-day period under prescribed stress scenario outlined in the LCR requirements.August 2018LM-11.2.2
Assets qualify as HQLA if they can be easily and immediately converted into cash at little or no loss of value under stress circumstances.
August 2018LM-11.2.3
Bahraini Islamic bank licensees must ensure that no operational impediments exist that can prevent timely monetisation of HQLA during a stress period. Banks also have to demonstrate that they can immediately use the stock of HQLA as a source of available liquidity that can be converted into cash (either through outright sale or repo) to fill funding gaps between cash inflows and outflows at any time during stress periods.August 2018LM-11.2.4
The stock of HQLA must be well diversified within the asset classes themselves (except for sovereign sukuk of Bahrain, central bank reserves, central bank sukuk securities and cash).
Bahraini Islamic bank licensees must have policies and limits in place in order to avoid concentration with respect to asset types, issue and issuer types, and currency (consistent with the distribution of net cash outflows by currency) within asset classes.August 2018LM-11.2.5
Bahraini Islamic bank licensees must ensure that they have internal policies and measures in place, in line with the following operational requirements:(a) Banks must periodically monetise a representative proportion of the assets in its stock of HQLA through outright sale or repos, in order to test access to the market, the effectiveness of its process of monetisation, and to minimise the risk of negative signalling during a period of actual stress;(b) All assets in the stock must be unencumbered, meaning free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell or transfer these assets;(c) Assets received in Shari'a compliant reverse repurchase agreements and securities financing transactions that are held at the bank, which have not been re-hypothecated, and which are legally available for the bank's use, can be considered as part of the stock of HQLA;(d) Assets which qualify for HQLA that have been deposited with the central bank but have not been used to generate liquidity may also be included in the stock of HQLA; and(e) A bank must exclude from the stock those assets that, although meeting with the definition of 'unencumbered', the bank would not have the operational capability to monetise them for whatever reasons;(f) The bank must have a policy in place that identifies legal entities, geographical locations, currencies and specific custodial or bank accounts where HQLA are held;(g) The bank must identify whether there are any regulatory, legal or accounting impediments to the transfer of these assets to the banking group level, and only include within its stock of HQLA the assets that are freely transferable;(h) The bank must exclude from the stock of HQLA, those assets where there are impediments to sale, such as large fire-sale discounts;(i) Banks must not include, in the stock of HQLA, any assets, or liquidity generated from assets, they have received under right of hypothecation, if the beneficial owner has the contractual right to withdraw those assets during the 30-day stress period;(j) Banks must include within the stock of HQLA the assets held during the reporting period, irrespective of the residual maturity of these assets. The two categories of assets that can be included in the stock of HQLA are 'Level 1' and 'Level 2'. Level 1 assets can be included without any limit, whereas Level 2 assets can only comprise up to 40 percent of total HQLA;(k) Level 2 assets are divided into two categories; level 2A and level 2B, according to the qualifying conditions identified in these requirements;(l) As part of level 2, banks may include level 2B assets up to 15 percent of total HQLA. However, level 2 assets must not exceed a cap of 40 percent of total HQLA assets;(m) The cap on level 2 and level 2B assets must be determined after the application of required haircuts and after taking into account the unwinding of short-term securities financing transactions maturing within 30 calendar days that involve the exchange of HQLA; and(n)Bahraini Islamic bank licensees must ensure that they maintain appropriate systems and policies to control and monitor potential risks, such as market and credit risk which the banks may face while maintaining these assets.August 2018LM-11.2.6
The composition of HQLA is as follows:
Level 1 Assets
Level 1 assets comprise of an unlimited share of the total pool and are not subject to haircuts.
Level 1 assets are limited to:
(i) Coins and banknotes;(ii) Assets with central banks in countries in which the LCR is being calculated, including cash reserves, to the extent that the CBB allows banks to draw-down these assets in times of stress;(iii) Sukuk issued by Government of Bahrain or Gulf Cooperation Council (GCC) countries;(iv) Sukuk issued or guaranteed by sovereigns, central banks, PSEs, the International Monetary Fund ('IMF'), the Bank for International Settlements ('BIS'), the Islamic Development Bank ('IDB') or its subsidiaries, the European Central Bank ('ECB') and European Commission ('EC'), or Multilateral Development Banks ('MDB') satisfying the following conditions:a) Assigned a 0 percent risk weight as shown in Appendix A;b) Traded in large, deep and active repo or cash markets and characterized by a low level of concentration;c) Have a proven track record of reliable liquidity in the cash or repo market even during stressed market conditions;d) Not an obligation of a financial institution or any of its subsidiaries.(v) Where the sovereign has a non-0 percent risk weight, Sukuk issued in domestic currency by the sovereign or central bank of the country in which the liquidity risk is being taken, or in the bank's home country; and(vi) Where the sovereign has a non-0 percent risk weight, Sukuk in foreign currencies issued by the sovereign or central bank up to the amount of the bank's stressed net cash outflows in that specific foreign currency arising from the bank's operations in that jurisdiction.Level 2 Assets
Level 2 assets are subject to a 40 percent cap of the overall stock of HQLA assets after haircuts have been applied.
A.Level 2A assets
A 15 % haircut is applied to the current market value of each level 2A asset held in the stock of HQLA.
Level 2A assets are limited to the following;(i) Sukuk issued or guaranteed by sovereigns, central banks, PSEs or multilateral development banks that satisfy all the following conditions:a. Assigned a 20 percent risk weight, as per Appendix A;b. Traded in large deep and active repo or cash markets and characterised by low level of concentration;c. Have a proven track record of reliable source of liquidity in the markets (sale or repo) even during stressed market conditions (i.e. maximum price decline not exceeding 10 percent or the increase in haircut not exceeding 10 percent over a 30-day period during a relevant significant stress period); andd. Not an obligation of a financial institution, or any of its affiliated entities.(ii) Sukuk that can be monetised, and covered bonds that satisfy all of the following conditions:a. Not issued by a financial institution or any of its affiliated entities;b. In the case of covered bonds, not issued by the bank itself or any of its affiliated entities;c. Either have a long-term credit rating from a recognized external credit assessment institution ('ECAI') of at least AA-or, in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating;d. Traded in large, deep and active cash or repo markets and characterized by a low level of concentration; ande. Have a proven track record of reliable liquidity in the markets, even during stressed market conditions (i.e. maximum price decline not exceeding 10 percent, or the increase in haircut not exceeding 10 percent over a 30-day period during a relevant period of significant liquidity stress).B.Level 2B assets
Level 2B assets are limited to the following;(i) Sukuk issued by non-financial institutions, subject to a 50 percent haircut, that satisfy all of the following conditions:a. Sukuk issued by non-financial institutions, or one of their subsidiaries, and have a long-term credit rating between A+ and BBB- or equivalent, or in the absence of a long-term rating, a short-term rating equivalent to the long-term rating;b. Traded in large deep and active repo, or cash markets characterized by a low level of concentration; andc. Have a proven track record as a reliable source of liquidity in the markets even during stressed market conditions (i.e. maximum price decline not exceeding 20 percent. or the increase in haircut not exceeding 20 percent over a 30-day period during a relevant period of significant liquidity stress);(ii) Common equity shares subject to a 50 percent haircut that satisfy all of the following conditions:a. Not issued by a financial institution or any of its affiliated entities;b. Exchange traded and centrally cleared;c. A constituent of the major stock index in the home jurisdiction or where the liquidity risk is being taken;d. Denominated in BHD, USD or in the currency of the jurisdiction where the liquidity risk is being taken;e. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; andf. Have a proven track record as a reliable source of liquidity in the markets, even during stressed market conditions (i.e. maximum price decline of not exceeding 40 percent, or increase in haircut not exceeding 40 percent over a 30-day period during a relevant period of significant liquidity stress).Appendix A provides the calculation of the caps and haircuts.
August 2018LM-11.2.7
If a bank wishes to include other assets under level 2B assets, prior approval must be obtained from the CBB.
August 2018LM-11.2.8
Bahraini Islamic bank licensees must demonstrate their ability to monitor the concentration of the assets in their stock of HQLA, and they must have adequate policies in place for monitoring asset concentration and granular distribution.August 2018LM-11.3 LM-11.3 Cash Outflows
LM-11.3.1
Net cash outflow is defined as the total expected cash outflows, minus total expected cash inflows in the stress scenario for the subsequent 30 calendar days. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and Off-Balance Sheet commitments with the run-off rates, as shown in these requirements. Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in, up to an aggregate cap of 75 percent of total expected cash outflows. (See Appendix A)
August 2018LM-11.3.2
If an asset is included as part of the stock of HQLA (i.e. the numerator), the associated cash inflows cannot also be counted as cash inflows (i.e. the denominator).
August 2018Retail Mudaraba, Wakala and Reverse Murabaha Deposits
LM-11.3.3
Mudaraba, Wakala and Reverse Murbaha deposits placed with a bank by a natural person. Deposits from legal entities, sole proprietorships or partnerships are captured in wholesale deposit categories. Retail deposits include demand deposits, saving accounts and term deposits.
Amended: July 2019
August 2018LM-11.3.4
Mudaraba, Wakala and Reverse Murbaha deposits are divided into 'stable' and 'less stable' categories as described below:
A. Stable Deposits
Stable deposits are subject to a run-off rate of 3%. Stable deposits must meet the following conditions:i. Fully insured6 under a deposit insurance scheme; andii. Meets either of the following 2 conditions (a) or (b):a) The depositors have other established relationships with the bank that make deposit withdrawal highly unlikely.
An established relationship is deemed to exist between the depositor and the bank, if:• The bank has an active contractual relationship with the depositor of at least 12 months duration;• The depositor has a borrowing relationship with the bank for residential financing or other long term financing; or• The depositor has a minimum number of active products, other than financing/investments, with the bank;Orb) The deposits are in transactional accounts (e.g. accounts where salaries are automatically deposited).B. Less Stable Deposits(i) Cash outflows related to retail term deposits with a residual maturity or withdrawal notice period greater than 30 days will be excluded from the total expected cash outflows if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR, or if early withdrawal results in a significant penalty greater than the loss of profits payable on the deposit;(ii) The CBB may, at its discretion, apply run-off rates on these deposits if there are concerns that depositors might withdraw their deposits in the same manner as demand deposits during either normal or stress times, or if there are concerns that banks may have to repay such deposits early in stressed times for reputational reasons;(iii) If a bank is unable to readily identify which retail deposits would qualify as 'stable' according to the definition provided above, it must place the full amount in the 'less stable' category; and(iv) Run-off rates shall be applied to less stable deposits as outlined in Appendix A.
6 6 'Fully insured' means that 100 percent of the deposit amount is covered by an effective deposit insurance scheme. Deposit balances up to the deposit insurance limit can be treated as "fully insured". However, any amount in excess of the deposit insurance limit is to be treated as less stable'. For example, if a depositor has a deposit of BD 150,000 that is covered by a deposit insurance scheme, which has a limit of BD 100,000, where the depositor would receive at least BD 100,000 from the deposit insurance scheme if the bank were unable to pay, then BD 100,000 would be considered "fully insured" and treated as stable deposits, while BD 50,000 would be treated as less stable deposits.
6 An established relationship is deemed to exist between the depositor and the bank, if:
• The bank has an active contractual relationship with the depositor of at least 12 months duration; or• The depositor has a borrowing relationship with the bank for residential financing or other long term financing; orThe depositor has a minimum number of active products, other than financing, with the bank
Amended: July 2019
August 2018Unsecured Wholesale Funding
LM-11.3.5
Unsecured wholesale funding is defined as those liabilities due to non-naturalised persons (i.e. legal entities, including sole proprietorships) and are not collateralized by legal rights to specifically designated assets owned by the bank in the case of bankruptcy, insolvency, liquidation or resolution. Obligations related to Shari'a compliant hedging transactions are excluded from this definition.
August 2018LM-11.3.6
Bahraini Islamic bank licensees must include all funding which is callable within the LCR's horizon of 30 days or that has its earliest possible contractual maturity date situated within this horizon (such as maturing term deposits and unsecured Sukuk), as well as funding with an undetermined maturity. This must also include funding with options that are exercisable at the investor's discretion within the 30-day calendar day horizon. For funding with options exercisable at the bank's discretion where there is a possibility of not exercising the option (e.g. for reputational reasons), banks must include these liabilities as outflows.August 2018LM-11.3.7
Wholesale funding that is callable by the funds provider subject to a contractually defined and binding notice period exceeding 30 days must not be included in the calculation of the LCR.
August 2018LM-11.3.8
For the purpose of the LCR, deposits and unsecured wholesale funding are to be categorized as below (please see Appendix A).
A. Unsecured Wholesale Funding Provided by Small Business Customers(i) This category includes deposits and other funds provided by small business customers (other than financial institutions). For the purpose of these requirements, small business customer deposits are defined as deposits which have the same characteristics of retail accounts, provided that total aggregate funding raised from one small business customer is less than BHD 500,000 (on a consolidated basis where applicable); and(ii) Term deposits provided by small business customers are treated the same way as retail deposits.B. Operational Deposits Generated by Clearing, Custody and Cash Management Activities(i) Certain banking activities that lead to financial and non- financial customers needing to place, or leave deposits with a bank in order to facilitate their access and ability to use payment and settlement systems and otherwise make payments. These funds may receive a 25 percent run-off factor, only if the customer has a substantive dependency with the bank and the deposit is required for such activities. Banks must seek the CBB's prior approval on such accounts and the CBB may choose not to allow the banks to use operational deposit run-off rates in certain cases;(ii) Qualifying activities in this context refer to clearing, custody or cash management activities that meet the following criteria;a. The customer is reliant on the bank to perform these services as an independent third-party intermediary over the next 30 days. For example, this condition would not be met if the customer has alternative back-up arrangements;b. These services must be provided under a legally binding agreement; andc. The termination of such arrangements shall be subject either to a notice period of at least 30 days, or significant switching costs to be borne by the customer if the operational deposits are moved before 30 days.(iii) Qualifying operational deposits generated by such activities are ones where:a. The deposits are held in specifically designated accounts and priced without giving an economic incentive to the customer for maintaining such deposits; andb. The deposits are by-products of the underlying services and not solicited in bulk in the wholesale market.(iv) Any excess balances that could be withdrawn, leaving enough funds to fulfil the clearing, custody and cash management activities, do not qualify for the 25 percent run-off rate. Only that portion of the deposit which is proven to meet the customer's needs can qualify as stable. Excess balances must be treated in the category for non-operational deposits;(v) Banks must determine methodology for identifying excess balances in operational accounts;(vi) If the deposit arises out of correspondent banking, or from the provision of prime brokerage services, it will be treated as if there were no operational activities for the purpose of determining run-off factors; and(vii) That portion of the operational deposits generated by clearing, custody and cash management activities that is fully covered by deposit insurance can receive the same treatment as 'stable' retail deposits and, as such, can be subject to the 5 percent run-off rate factor.C. Unsecured Wholesale Funding Provided by Non-financial Corporates and Sovereigns, Central Banks, Multilateral Development Banks and PSEs
This category comprises all deposits and other extensions of unsecured funding from non-financial corporate customers (that are not categorized as small business customers) and both domestic and foreign sovereign, central bank, multilateral development bank and PSE, Bahrain's Social Insurance Organization and GCC, Public Investment Funds (PIFs)7 that are not held for operational purposes. The run-off factor for these funds is 40 percent and, in cases where the deposit is fully insured, the run-off factor shall be 20 percent.D. Unsecured Wholesale Funding Provided by Other Legal Entity Customers(i) This category comprise all deposits and other funding from other institutions (including banks, securities firms, insurance companies, etc.), fiduciaries, beneficiaries, special purpose vehicles, affiliated entities of the bank and other entities that are not specifically held for operational purposes and included in the prior categories. The run-off factor for these funds is 100 percent:(ii) All notes and sukuk issued by the bank are included in this category regardless of the holder, unless the bond is sold exclusively in the retail market and held in retail accounts (including small business customer accounts treated as retail, as per LM-11.3.8A) in which the instruments can be treated in the appropriate retail or small business customer deposit category. To be treated as such, it is not sufficient that the sukuk instruments are specifically designed and marketed to retail or small business customers, but rather there must be limitations placed such that those instruments cannot be bought and held by parties other than retail or small business customers; and(iii) Customer cash balances arising from the provision of prime brokerage services must be considered separate from any balances related to client protection regimes imposed by the regulatory authorities, and must not be netted against other customer exposures included in this Module.
7 Only deposits from GCC PIFs where the PIF is a controller of the bank must be included under this classification.
August 2018Secured Funding
LM-11.3.9
Secured funding is defined as those liabilities and general obligations that are collateralised by legal rights to specifically designated assets owned by the bank in the case of bankruptcy, insolvency, liquidation or resolution. The amount of outflow is calculated based on the amount of funds raised through the transaction, and not the value of the underlying collateral. The table below summarises the applicable factors:
Categories for outstanding maturing secured Amount to add to cash flows % Backed by Level 1 assets or with central banks 0% Bank by Level 2A assets 15% • Secured funding transactions with domestic sovereign, PSE or multilateral development bank that are not backed by Level 1 or 2 assets• Backed by RMBS eligible for inclusion in Level 2B25% Backed by other Level 2B assets 50% All other transactions 100% August 2018Other Cash Outflows
LM-11.3.10
Additional items and their runoff rates as follows:
A. Shari'a Compliant Hedging Instruments:(i) The sum of all net cash outflows will receive a 100 percent factor. Banks must calculate, in accordance with their existing valuation methodologies, expected cash inflows and outflows from Shari'a compliant hedging instruments. Cash flows must be calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. The banks must exclude from such calculations, those liquidity requirements that would result from increased collateral needs due to market value movements or falls in value of collateral posted. Options must be assumed to be exercised when they are in the money to the option buyer;(ii) Where payments for Shari'a compliant hedging instruments are collateralized by HQLA, cash outflows must be calculated net of any corresponding cash inflows from collateral received for Shari'a compliant hedging transactions, or that would result from contractual obligations for cash or collateral to be provided to the bank, if the bank is entitled to re-use the collateral in new transactions; and(iii) Below run-off rates apply in the following cases:a. Increased liquidity needs related to downgrade triggers embedded in financing transactions, Shari'a-compliant hedging transactions and other contracts. Banks must review those contracts in detail and identify the clauses that require the posting of additional collateral or early repayment upon the ratings downgrades, by and up to three notches. A 100 percent run-off rate will be applied to the amount of collateral that would be posted for, or contractual cash outflows associated with, the credit rating downgrades;b. Increased liquidity needs related to the changes in the market value of the bank's posted collateral. A run-off rate of 20 percent must apply to cover the possibility of changes in value of the collateral posted by the bank in the Shari'a-compliant hedging contract, as well as other transactions. This rate must apply to all collateral, excluding level 1 assets after offsetting the collateral posted by the same counterparty, which can be used again without any restrictions. This rate will be calculated based on the notional amount of the asset after any other applicable haircuts;c. A run-off rate of 100 percent will apply to non-segregated collateral that could contractually be recalled by the counterparty because the collateral is in excess of the counterparty's current collateral requirements;d. A run-off rate of 100 percent will apply to the collateral that is contractually due, but where the counterparty has not yet demanded the posting of such collateral;e. A run-off rate of 100 percent will apply to the amount of HQLA collateral that can be substituted for non-HQLA assets without the bank's consent; andf. Banks must calculate the liquidity needs to face potentially substantial liquidity risk exposures, to valuation changes of Shari'a-compliant hedging contracts. This must be calculated by identifying the largest absolute net 30-day collateral flow realized during the preceding 24 months. The net flows of collateral must be calculated by offsetting the collateral inflows and outflows. This must be executed using the same Master Netting Agreement ('MNA')B. Asset Backed Sukuk and Other Financing Instruments
Such transactions are subject to a run-off rate of 100 percent of the funding transaction maturing within the 30-day period, when these instruments are issued by the bank itself (assuming that the refinancing market will not exist).C. Asset-backed Sukuk, Securities Investment Vehicles and Other Financing Facilities
A run-off rate of 100 percent must apply to the payments due within a 30-day period. In cases where assets are returnable, a run-off rate of 100 percent must apply to the returned assets when there are Shari'a-compliant hedging transactions, or Shari'a-compliant hedging transactions-like components, contractually mentioned in the agreements for the structure, allowing the 'return' of assets in a financing arrangement (assuming that the refinancing market will not exist).D. Asset-backed Commercial Paper, Securities Investment Vehicles and Other Financing Facilities
A run-off rate of 100 percent must apply to the payments due within a 30-day period. In cases where assets are returnable, a run-off rate of 100 percent must apply to the returned assets when there are Shari'a-compliant hedging transactions, or Shari'a-compliant hedging transactions-like components, contractually mentioned in the agreements for the structure, allowing the 'return' of assets in a financing arrangement (assuming that the refinancing market will not exist).E. Drawdowns on Committed Credit and Liquidity Facilities
These facilities include contractually irrevocable ('committed') or conditionally revocable agreements to extend funds. Unconditionally revocable facilities that are unconditionally cancellable are excluded from this section and included in 'Other Contingent Funding Liabilities' section for the purpose of the following requirements:(i) When calculating the facilities mentioned in the preceding paragraph, the currently undrawn portion of these facilities is the calculated net of any HQLA if the HQLA have already been posted as collateral by the counterparty to secure the facilities, or are contractually obliged to be posted when the counterparty will draw down the facility if the bank is entitled to re-use the collateral and there is no undue correlation between the probability of drawing the facility and the market value of the collateral. In such cases, the assets posted as collateral can be netted to the extent that this collateral is not already counted in the stock of HQLA, as per these requirements;(ii) For the purpose of these requirements, a liquidity facility is defined as any committed, undrawn (unused) backup facility that would be utilized to refinance the financing/sukuk obligations of a customer in situations where such a customer is unable to rollover that financing/sukuk in financial markets. To calculate the LCR, an amount equivalent to the currently outstanding financing/sukuk issued by the customer maturing within a 30-day period is taken, while excluding the portion of the backing financing/sukuk within this period. General working capital facilities for corporate entities will not be classified as liquidity facilities, but as credit facilities. Any other undrawn facilities will be classified as credit facilities; and(iii) Any facilities provided to hedge funds and special purpose funding vehicles or other vehicles used to finance the banks own assets, must be captured in their entirety as a liquidity facility, to other legal entities.F. Contractual Obligations To Extend Funds Within a 30-day Period
Any contractual lending obligations to financial institutions not captured elsewhere in the requirements must be captured here at a 100 percent run-off rate.
If the total of all contractual obligations to extend funds to retail and non-financial corporate clients within the next 30 calendar days (not captured in the prior categories) exceeds 50 percent of the total contractual inflows due in the next 30 calendar days from these clients, the difference must be reported as a 100 percent outflow (i.e. the excess above 50 percent of the total inflow of these clients within a period of 30 days).G. Other Contingent Funding Obligations
The table below shows the cash outflow run-off rates for other contingent funding obligations:
Table: Run-off rates for Other Contingent Funding Obligations
Type of Contingent Funding Run-off Rates (%) Revocable and unconditional financing and liquidity facilities 'uncommitted'. 5% Non-contractual contingent funding obligations related to potential liquidity draws from joint venture or minority investments in entities. 5% Obligations related to trade financing (including letters of guarantee and letters of credit). 5% Guarantees and letters of credit unrelated to trade finance obligations. 5% Non-contractual commitments related to customers' short positions covered by other customers' collateral. 50% Outstanding Sukuk (more than 30 days maturity). 5% Any other non-contractual obligations not captured above. 5% (i) Lending commitments, such as direct import or export financing for non-financial corporate firms are excluded from this treatment and banks will apply the run-off rates specified in Appendix A; and(ii) A 100 percent run-off rate must apply for any other contractual cash outflows within the next 30 calendar days, not captured above, other than operational expenses (which are not covered by this Module).August 2018LM-11.4 LM-11.4 Cash Inflows
LM-11.4.1
When considering its available cash inflows, the bank must only include contractual inflows from outstanding exposures that are fully performing and for which the bank has no reason to expect a default within the 30-day time horizon. Contingent inflows are not included in total net cash inflows.
August 2018LM-11.4.2
Bahraini Islamic bank licensees need to monitor the concentration of expected inflows across wholesale counterparties in the context of the banks' liquidity risk management, in order to ensure that liquidity position is not overly dependent on the arrival of expected inflows from one or a limited number of wholesale counterparties.August 2018LM-11.4.3
The amount of inflows that can offset outflows is capped at 75 percent of the total expected cash outflows, as calculated in the Module for the purpose of calculating the net cash outflows.
August 2018A. Secured Financing, Including Shari'a Compliant Reverse Repurchase Agreements and Securities Borrowing
LM-11.4.4
A bank must assume that maturing financing transactions secured by level 1 assets will be rolled-over and will not give rise to any cash inflows; as a result, an inflow factor of 0 percent will be applied to this kind of transaction. While maturing financing transactions secured by Level 2 HQLA will lead to cash inflows equivalent to the relevant haircut for the specific assets. A bank is assumed not to roll-over maturing secured financing transactions which have been secured by non-HQLA assets, and can assume receiving back 100 percent of the cash related to those agreements (i.e. an inflow factor of 100 percent).
August 2018LM-11.4.5
Maturing secured lending transactions backed by different asset categories will receive different factors provided that the collateral obtained through Shari'a compliant reverse repurchase agreements, or securities borrowing which matures within the 30-day horizon, is not used to cover short positions.
August 2018LM-11.4.6
If the collateral obtained through Shari'a compliant reverse repurchase or securities borrowing matures within the 30-day horizon, and is re-used to cover short positions that could be extended beyond 30 days, a bank must assume that the Shari'a compliant reverse repurchase agreements or securities borrowing arrangements will be rolled-over and will not give rise to any cash inflow (0 percent).
August 2018LM-11.4.7
In the case of a bank's short positions, if the short position is being covered by an unsecured security borrowing, the bank must assign a 100 percent outflow of either cash or HQLA to secure the borrowing, or cash to close out the short position by buying back the security. This must be assigned a 100% run-off rate under the other contractual cash outflows described in LM-11.3.10(F). However, if the bank's short position is being covered by a collateralized securities financing transaction, the bank must assume the short position will be maintained throughout the 30-day period and receive a 0 percent outflow.
August 2018B. Committed Facilities
LM-11.4.8
No cash inflows are assumed from credit facilities or liquidity facilities that the bank holds at other institutions for its own purposes. As such, these transactions must receive a 0 percent cash inflow rate, meaning that this scenario does not consider inflows from committed credit or liquidity facilities.
August 2018C. Other Inflows by Counterparty
LM-11.4.9
For all other types of transactions, either secured or unsecured, the bank must apply inflow rates according to the counterparty category, as explained in the following paragraphs.
August 2018LM-11.4.10
When considering financing payments, the bank must only include inflows from fully performing financing. For revolving credit facilities, this assumes that the existing financing are rolled-over and that any remaining balances (undrawn) are treated in the same way as a committed facility according to LM-11.3.10(E).
August 2018LM-11.4.11
Inflows from financing that have no specific maturity (i.e. have non-defined or open maturity) must not be included; therefore, no assumptions must be applied as to when maturity of such financing would occur. An exception to this would be minimum payments of principal, commission or interest associated with an open maturity financing transactions, provided that such payments are contractually due within 30 days. These minimum payment amounts must be captured as inflows at the rates prescribed in the paragraphs below (articles a. and b.).
August 2018LM-11.4.12
Bahraini Islamic bank licensees must apply the below rates to the cash inflows maturing within 30 calendar days by counterparty:a. Cash inflows from retail customers and small business customers: 50 percent of the contractual amount.b. Other wholesale inflows:i. 100 percent for financial institutions and central bank counterparties; andii. 50 percent for non-financial wholesale counterparties.c. Operational deposits: Deposits held at other financial institutions for operational purposes will receive a 0 percent inflow rate.August 2018LM-11.4.13
Inflows from securities maturing within 30 days not included in the stock of HQLA must be treated in the same category as inflows from financial institutions (i.e. 100 percent inflow).
Bahraini Islamic bank licensees may also recognize in this category inflows from the release of balances held in segregated accounts in accordance with regulatory requirements for the protection of customer trading assets, provided that these segregated balances are maintained in HQLA. Liquid assets from level 1 and level 2 securities maturing within 30 days must be included as HQLA, provided that they meet all operational and definitional requirements, as laid out in LM-11.2.August 2018D. Other Cash Inflows
LM-11.4.14
Shari'a-compliant hedging contracts cash inflows: The sum of all net cash inflows must receive a 100 percent inflows factor. The amounts of Shari'a-compliant hedging contract cash inflows and outflows must be calculated in accordance with the methodology described in LM-11.3.10(A) Sub Paragraph.(i).
August 2018LM-11.4.15
Where Shari'a-compliant hedging contracts are collateralized by HQLA, cash inflows must be calculated net of any corresponding cash or contractual outflows that would result, all other things being equal, from contractual obligations for cash or collateral to be posed by the bank, given these contractual obligations would reduce the stock of HQLA. This is in accordance with the principle that banks must not double-count liquidity inflows or outflows.
August 2018LM-11.4.16
Other contractual cash inflows: Other contractual cash inflows must be captured here, with an explanation given as to what this bucket comprises of; they must receive a 100 percent inflow rate. Cash inflows related to cash flows which are not pertinent to the bank's primary activities are not taken into account in the calculation of the net cash outflows for the purposes of calculating the LCR.
August 2018LM-12 LM-12 Net Stable Funding Ratio
LM-12.1 LM-12.1 Introduction
LM-12.1.1
The content of this section is applicable to all locally incorporated Islamic banks licensed by the Central Bank of Bahrain.
August 2018LM-12.1.2
The objective of the Net Stable Funding Ratio (NSFR) is to promote the resilience of banks' liquidity risk profiles and to incentivise a more resilient banking sector over a longer time horizon. The NSFR will require banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. A sustainable funding structure is intended to reduce the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on-balance sheet and off-balance sheet items, and promotes funding stability.
August 2018LM-12.2 LM-12.2 Scope of Application
LM-12.2.1
Bahraini Islamic bank licensees shall calculate the NSFR separately for each of the following levels:(a) Level (A): The NSFR for the bank on solo basis; and(b) Level (B): The NSFR for the bank on a consolidated basis.August 2018LM-12.2.2
When applying these requirements on a consolidated basis, the available stable funding ('ASF') factors applied for branches and subsidiaries outside Bahrain must be as per the requirements in this Module.
August 2018LM-12.3 LM-12.3 Requirements and Calculation Methodology
LM-12.3.1
The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. This ratio must be equal to at least 100 percent on an ongoing basis. 'Available stable funding' is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to 1 year. 'Required stable funding' is defined as the portion of assets and OBS exposures expected to be funded on an ongoing basis over a 1-year horizon. The amount of such stable funding required of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution, as well as those of its OBS exposures.
August 2018LM-12.3.2
The NSFR (as a percentage) must be calculated as follows:
Available stable funding ≥ 100 Required stable funding August 2018LM-12.3.3
The NSFR definitions mirror those outlined in the section LM-11 'Liquidity Coverage Ratio unless otherwise specified.
August 2018LM-12.4 LM-12.4 NSFR Components
A) Available Stable Funding
LM-12.4.1
The amount of ASF is measured based on the broad characteristics of the relative stability of an institution's funding sources, including the contractual maturity of its liabilities and the differences in the propensity of different types of funding providers to withdraw their funding. The amount of ASF is calculated by first assigning the carrying value of a bank's capital and liabilities to one of five categories, as presented below in Table (1), before the application of any regulatory deductions, filters or other adjustments. The amount assigned to each category is then multiplied by an ASF factor, and the total ASF is the sum of the weighted amounts.
August 2018LM-12.4.2
When determining the maturity of an equity or liability instrument, investors are assumed to redeem a call option at the earliest possible date. In particular, where the market expects certain liabilities to be redeemed before their legal final maturity date, banks must assume such behaviour for the purpose of the NSFR and include these liabilities in the corresponding ASF category. For long-dated liabilities, only the portion of cash flows falling at or beyond the 6-month and 1-year time horizons must be treated as having an effective residual maturity of 6 months or more, and 1 year or more, respectively.
August 2018Calculation of Shari'a-compliant Hedging Contract Liability Amounts
LM-12.4.3
Shari'a-compliant hedging contract liabilities are calculated first based on the replacement cost for Shari'a-compliant hedging contracts (obtained by marking to market) where the contract has a negative value. When an eligible bilateral netting contract is in place that meets the conditions as specified in the 'bilateral netting agreements' conditions specified in Appendix F, the replacement cost for the set of Shari'a-compliant hedging contracts exposures covered by the contract will be the net replacement cost.
August 2018LM-12.4.4
In calculating NSFR Shari'a-compliant hedging contract liabilities, collateral posted in the form of variation margin in connection with Shari'a-compliant hedging contracts, regardless of the asset type, must be deducted from the negative replacement cost amount.8,2
8 NSFR Shari'a-compliant hedging contract liabilities = (Shari'a-compliant hedging contracts liabilities) - (total collateral posted as variation margin on Shari'a-compliant hedging contract liabilities).
2 To the extent that the bank's accounting framework reflects on the balance sheet, in connection with a Shari'a-compliant hedging contract, an asset associated with collateral posted as variation margin that is deducted from the replacement cost amount for purposes of the NSFR, that asset should not be included in the calculation of a bank's required stable funding ('RSF') to avoid any double-counting.
August 2018Liabilities and Capital Receiving a 100 Percent ASF Factor
LM-12.4.5
Liabilities and capital instruments receiving a 100 percent ASF factor comprise:
(a) The total amount of regulatory capital, before the application of capital deductions9 , including general provisions calculated under the regulatory capital and excluding the proportion of Tier 2 instruments with residual maturity of less than 1 year. With regards to branches of foreign banks, this category includes the actual value of funds designated for the branch/branches;(b) The total amount of any capital instrument not included in (a) that has an effective residual maturity of 1 year or more, but excluding any instruments with explicit or embedded options that, if exercised, would reduce the expected maturity to less than 1 year; and(c)The total amount of secured and unsecured borrowings and liabilities (including term deposits) with effective residual maturities of 1 year or more. Cash flows falling below the 1-year horizon, but arising from liabilities with a final maturity greater than 1 year do not qualify for the 100 percent ASF factor.
9 Capital instruments reported here should meet all requirements outlined in CBB Capital Adequacy Ratio—Basel III Guidelines.
August 2018Liabilities Receiving a 95 Percent ASF Factor
LM-12.4.6
Liabilities receiving a 95 percent ASF factor comprise of 'stable' non-maturing deposits (demand) deposits, saving deposits and/or term deposits with residual maturities of less than 1 year provided by retail customers.
August 2018LM-12.4.7
Stable deposits for this purpose are the amount of the deposits that are fully insured10 by a Shari'a-compliant deposit insurance scheme, and where:
(a) The depositors have other established relationships with the bank that make deposit withdrawal highly unlikely; or(b) The deposits are in transactional accounts (e.g. accounts where salaries are automatically deposited).All other deposits and accounts that do not satisfy these criteria shall be treated as less stable deposits.
10 'Fully insured' means that 100 percent of the deposit amount is covered by an effective deposit insurance scheme. Deposit balances up to the deposit insurance limit can be treated as "fully insured". However, any amount in excess of the deposit insurance limit is to be treated as 'less stable'. For example, if a depositor has a deposit of BD 150,000 that is covered by a deposit insurance scheme, which has a limit of BD 100,000, where the depositor would receive at least BD 100,000 from the deposit insurance scheme if the bank were unable to pay, then BD 100,000 would be considered "fully insured" and treated as stable deposits, while BD 50,000 would be treated as less stable deposits.
August 2018LM-12.4.8
The presence of deposit insurance alone is not sufficient to consider a deposit 'stable' if it does not satisfy all of the conditions previously outlined.
August 2018Liabilities Receiving a 90 Percent ASF Factor
LM-12.4.9
Liabilities receiving a 90 percent ASF factor comprise of 'less stable' demand deposits, saving deposits and/or term deposits with residual maturities of less than 1 year provided by retail and small business customers.
August 2018Liabilities Receiving a 50 Percent ASF Factor
LM-12.4.10
Liabilities receiving a 50 percent ASF factor comprise:
(a) Funding (secured and unsecured) with a residual maturity of less than 1 year provided by non-financial corporate customers;(b) Operational deposits (as defined in Appendix E);(c) Funding with residual maturity of less than 1 year from sovereigns, public sector entities (PSEs), and multilateral and national development banks; and(d) Other funding (secured and unsecured) not included in the categories above with a residual maturity of between 6 months to less than 1 year, including funding from central banks and financial institutions.'Funding' refers to all sources of funding including deposits, financing and others.
August 20185) Liabilities Receiving a 0 Percent ASF Factor
LM-12.4.11
Liabilities receiving a 0 percent ASF factor comprise:
(a) All other liability categories not included in the above categories, including other funding with residual maturity of less than 6 months from the central bank and financial institutions;(b) Other liabilities without a stated maturity. This category may include short positions and open maturity positions. Two exceptions can be recognized for liabilities without a stated maturity:i. First, deferred tax liabilities, which must be treated according to the nearest possible date on which such liabilities could be realized; andii. Second, minority interest, which must be treated according to the term of the instrument, usually in perpetuity.
These exceptions would then be assigned either a 100 percent ASF factor if the effective maturity is 1 year or greater, or 50 percent, if the effective maturity is between 6 months and less than 1 year.(c) NSFR Shari'a-compliant hedging contract liabilities, as calculated according to LM-12.4.3 and LM-12.4.4, and NSFR Shari'a-compliant hedging contract assets, as calculated according to LM-12.4.21 and LM-12.4.22, if the NSFR Shari'a-compliant hedging contract liabilities are greater than NSFR Shari'a-compliant hedging contract assets; 11 and(d) 'Trade date' payables arising from purchases of financial instruments, foreign currencies and commodities that (i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction, or (ii) have failed to, but are still expected to, settle.
11 In this case, ASF = 0% x MAX ((NSFR Shari'a-compliant hedging contract Shari'a-compliant hedging contract liabilities—NSFR Shari'a-compliant hedging contract assets), 0).
August 2018LM-12.4.12
Table (1) below summarizes the components of each of the ASF categories and the associated maximum ASF factor to be applied in calculating a bank's total amount of available stable funding.
Table 1: Summary of Liability Categories and Associated ASF Factors
ASF Factor Components of ASF Category 100% • Total regulatory capital (excluding Tier 2 instruments with a residual maturity of less than 1 year);• Other capital instruments and liabilities with an effective residual maturity of 1 year or more;• Deferred tax liabilities with a residual maturity of 1 year or greater; and• Minority interest with a residual maturity of 1 year or more.95% Stable demand deposits, saving deposits and term deposits with a residual maturity of less than 1 year provided by retail customers. 90% Less stable demand deposits, saving deposits and term deposits with a residual maturity of less than 1 year provided by retail and small business customers. 50% • Funding with a residual maturity of less than 1 year provided by non-financial corporate customers;• Operational deposits;• Funding with a residual maturity of less than 1 year from sovereigns, PSEs, and multilateral and national development banks, Bahrain's Social Insurance Organization and GCC PIFs (where the PIF is a controller of the bank);• Other secured or unsecured funding with a residual maturity between 6 months and less than 1 year not included in the above categories, including funding provided by central banks and financial institutions;• Deferred tax liabilities with a residual maturity of between 6 months and less than 1 year; and• Minority interest with residual maturity between 6 months and less than 1 year.ASF Factor Components of ASF Category 0% • All other liabilities and equity not included in the above categories, including liabilities without a stated maturity (with a specific treatment for deferred tax liabilities and minority interests);• NSFR Shari'a-compliant hedging contract liabilities net of NSFR Shari'a-compliant hedging contract assets if NSFR Shari'a-compliant hedging contract liabilities are greater than NSFR Shari'a-compliant hedging contract assets; and• 'Trade date' payables arising from purchases of financial instruments, foreign currencies and commodities.Amended: January 2020
August 2018Required Stable Funding (RSF)
LM-12.4.13
The amount of RSF funding is measured based on the broad characteristics of the liquidity risk profile of an institution's assets and OBS exposures. The amount of required stable funding is calculated by first assigning the carrying value of an institution's assets to the categories listed in Table 2 below. The amount assigned to each category is then multiplied by its associated RSF factor, and the total RSF is the sum of the weighted amounts added to the amount of OBS activity (or potential liquidity exposure) multiplied by its associated RSF factor.
August 2018LM-12.4.14
Definitions mirror those outlined in the LCR, unless otherwise specified12 .
12 For the purposes of calculating the NSFR, HQLA are defined as all HQLA without regard to LCR operational requirements and LCR caps on Level 2 and Level 2B assets that may otherwise limit the ability of some HQLA to be included as eligible HQLA in calculation of the LCR.
August 2018LM-12.4.15
The RSF factors assigned to various types of assets are intended to approximate the amount of a particular asset that would have to be funded, either because it will be rolled-over, or because it could not be monetised through sale or used as collateral in a secured borrowing transaction over the course of 1 year without significant expense. Such amounts are expected to be supported by stable funding.
August 2018LM-12.4.16
Assets must be allocated to the appropriate RSF factor based on their residual maturity or liquidity value. When determining the maturity of an instrument, investors must be assumed to exercise any option to extend maturity. In particular, where the market expects certain assets to be extended in their maturity, banks must assume such behaviour for the purpose of the NSFR and include these assets in the corresponding RSF category. For amortizing financing, the portion that comes due within the 1-year horizon can be treated in the less-than-1-year residual maturity category.
August 2018LM-12.4.17
For the purposes of determining its required stable funding, a bank must; (i) include financial instruments, foreign currencies and commodities for which a purchase order has been executed, and (ii) exclude financial instruments, foreign currencies and commodities for which a sales order has been executed, even if such transactions have not been reflected in the balance sheet under a settlement-date accounting model, provided that; (i) such transactions are not reflected as Shari'a-compliant hedging contracts or secured financing transactions in the bank's balance sheet, and (ii) the effects of such transactions will be reflected in the institution's balance sheet when settled.
August 2018Encumbered Assets
LM-12.4.18
Encumbered assets receive RSF factors as follows:
(a) Assets on the balance sheet that are encumbered for 1 year or more receive a 100 percent RSF factor;(b) Assets encumbered for a period of between 6 months and less than 1 year receive the following RSF factors:i. 50 percent RSF factor if these assets would receive an RSF factor lower than or equal to 50 percent if unencumbered; andii. If these assets receive an RSF factor higher than 50 percent if unencumbered, the higher RSF factor is applied.(c) Where assets have less than 6 months remaining in the encumbrance period, those assets may receive the same RSF factor as an equivalent asset that is unencumbered.Assets that are encumbered for exceptional 13 central bank liquidity operations receive 0 percent RSF factor.
13 In general, exceptional central bank liquidity operations are considered to be non-standard, temporary operations conducted by the central bank in a period of market-wide financial stress and/or exceptional macroeconomic challenges.
August 2018Shari'a-Compliant Alternative's to Repo-Style Transactions and Compliant Securities Financing
LM-12.4.19
For secured funding arrangements, including securities financing transactions, the following applies:
(a)Islamic bank licensees must include securities that have been borrowed in securities financing transactions (such as reverse repos and collateral swaps), that appear on the banks' balance sheets and where the banks retain beneficial ownership. Otherwise, banks must not include the securities; and(b) Where banks have encumbered securities in repos or other securities financing transactions, but have retained beneficial ownership and those assets remain on the bank's balance sheet, the bank must allocate such securities to the appropriate RSF category.August 2018LM-12.4.20
Securities financing transactions with a single counterparty may be measured net when calculating the NSFR, provided that the netting conditions are as set out below:
(a) Transactions have the same final settlement date;(b) The right to net the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable both currently in the normal course of business and in the event of; (i) default; (ii) insolvency; and (iii) bankruptcy; and(c) Transactions are settled net, settled simultaneously, or are subject to a settlement mechanism that results in a single net amount on the settlement date.August 2018Calculation of Shari'a Compliant Hedging Contract Asset Amounts
LM-12.4.21
Shari'a-compliant hedging contract assets are calculated first based on the replacement cost for Shari'a-compliant hedging contracts (obtained by marking to market) where the contract has a positive value. When an eligible bilateral netting contract is in place that meets the conditions as specified, as per the 'bilateral netting agreements' conditions specified in Appendix F, the replacement cost for the set of Shari'a-compliant hedging exposures covered by the contract will be the net replacement cost.
August 2018LM-12.4.22
In calculating NSFR Shari'a-compliant hedging contract assets, collateral received in connection with Shari'a-compliant hedging contracts may not offset the positive replacement cost amount, regardless of whether or not netting is permitted under the bank's operative accounting or risk-based framework, unless it is received in the form of a cash variation margin and meets the conditions as specified in Appendix G14 . Any remaining balance sheet liability associated with; (a) variation margin received that does not meet the criteria above, or (b) initial margin received, may not offset Shari'a-compliant hedging contract assets and must be assigned a 0 percent ASF factor.
14 NSFR Shari'a-compliant hedging contract assets = (Shari'a-compliant hedging contract assets)—(cash collateral received as variation margin on Shari'a-compliant hedging contract assets).
August 20181) Assets Assigned a 0 Percent RSF Factor
LM-12.4.23
Assets assigned a 0 percent RSF factor comprise:
(a) Coins and banknotes immediately available to meet obligations;(b) All central bank reserves (including required reserves and excess reserves);(c) All claims on central banks with residual maturities of less than 6 months; and(d) 'Trade date' receivables arising from the sales of financial instruments, foreign currencies and commodities that; (i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction, or (ii) have failed to, but are still expected to, settle.August 20182) Assets Assigned a 5 Percent RSF Factor
LM-12.4.24
Assets assigned a 5 percent RSF factor comprise Shari'a-compliant unencumbered level 1 HQLA, as defined in Appendix H, excluding assets receiving a 0 percent RSF factor as specified above, and including:
(a) Sukuk and other Shari'a-compliant Marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs and MDBs that are assigned a 0 percent risk weight under Appendix I, Government of Bahrain, the CBB, the BIS, the IMG, the ECB and the EC; and(b) Sukuk and other Shari'a-compliant Marketable securities representing claims on, or guaranteed by, certain non-0 percent risk-weighted sovereign or central banksukuk, as specified in Appendix I.August 20183) Assets Assigned a 10 Percent RSF Factor
LM-12.4.25
Unencumbered financing and deposits with financial institutions with residual maturities of less than 6 months, where the financing is secured against level 1 HQLA as defined in Appendix H, and where the bank has the ability to freely re-hypothecate the received collateral for the life of the financing.
August 20184) Assets Assigned a 15 Percent RSF Factor
LM-12.4.26
Assets assigned a 15 percent RSF factor comprise of:
(a) Unencumbered level 2A HQLA, as defined in Appendix H, including:(i) Sukuk and other Shari'a-compliant marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs or MDBs that are assigned a 20 percent risk weight under Appendix I; and(ii) Sukuk and other Shari'a-compliant securities with a credit rating equal or equivalent to at least AA—.(b) Other unencumbered financing and deposits with financial institutions with residual maturities of less than 6 months, not included in LM-12.4.25.August 20185) Assets Assigned a 50 Percent RSF Factor
LM-12.4.27
Assets assigned a 50 percent RSF factor comprise:
(a) Unencumbered level 2B HQLA, as defined and subject to the conditions set forth in Appendix H, including:(i) Sukuk and other Shari'a compliant corporate securities (including commercial paper) with a credit rating of between A+ and BBB-;(ii) Exchange-traded common Shari'a-compliant equity shares not issued by financial institutions or their affiliates.(b) Any Shari'a-compliant HQLA, as defined in Appendix H, that are encumbered for a period of between 6 months and less than 1 year;(c) All financing and deposits with financial institutions and central banks with residual maturity of between 6 months and less than 1 year;(d) Deposits held at other deposit-taking financial institutions for operational purposes that are subject to the 50 percent ASF factor in LM-12.4.10; and(e) All other non-HQLA not included in the above categories that have a residual maturity of less than 1 year, including financing to non-financial corporate clients, financing to retail customers (i.e. natural persons) and small business customers, and financing to sovereigns and PSEs.August 20186) Assets Assigned a 65 Percent RSF Factor
LM-12.4.28
Assets assigned a 65 percent RSF factor comprise of:
(a) Unencumbered residential mortgages with a residual maturity of 1 year or more that would qualify for a 35 percent or lower risk weight under the Capital Adequacy Ratio Guidelines; and(b) Other unencumbered financing and deposits not included in the above categories, excluding financing and deposits with financial institutions, with a residual maturity of 1 year or more that would qualify for a 35 percent or lower risk weight under the CBB Capital Adequacy Ratio Guidelines.August 20187) Assets Assigned a 85 Percent RSF Factor
LM-12.4.29
Assets assigned an 85 percent RSF factor comprise:
(a) Cash, securities or other assets posted as initial margin for Shari'a-compliant hedging contracts15 and cash or other assets provided to contribute to the default fund of a central counterparty ('CCP'). Where securities or other assets, posted as initial margin for Shari'a-compliant hedging contracts, would otherwise receive a higher RSF factor, they must retain that higher factor.(b) Other unencumbered performing financing16 that do not qualify for the 35 percent or lower risk weight under the CBB Capital Adequacy Ratio Guidelines and have residual maturities of 1 year or more, excluding financing and deposits with financial institutions;(c) Unencumbered securities with a remaining maturity of 1 year or more and exchange-traded equities, in cases where the issuer is not in default and where the securities do not qualify as HQLA according to the LCR; and(d) Physical traded commodities, including gold.
15 Initial margin posted on behalf of a customer, where the bank does not guarantee performance of the third party, would be exempt from this requirement.
16 Performing financings are considered to be those that are not past due for more than 90 days. Conversely, non-performing financings are considered to be financings that are more than 90 days past due.
August 20188) Assets Assigned a 100 Percent RSF Factor
LM-12.4.30
Assets assigned a 100 percent RSF factor comprise:
(a) All assets that are encumbered for a period of 1 year or more;(b) NSFR Shari'a-compliant hedging contract assets, as calculated according to LM-12.4.21 and LM-12.4.22, and NSFR Shari'a-compliant hedging contract liabilities, as calculated according to LM-12.4.3 and LM-12.4.4, if NSFR Shari'a-compliant hedging contract assets are greater than NSFR Shari'a-compliant hedging contract liabilities;17(c) All other assets not included in the above categories, including non-performing financing (net of specific provisions), financing and deposits with financial institutions with a residual maturity of 1 year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, insurance assets and defaulted securities; and(d) 20 percent of Shari'a-compliant hedging contract liabilities (i.e. negative replacement cost amounts), as calculated according to LM-12.4.3 (before deducting variation margin posted). The CBB has the discretion to lower the value of this factor, with a floor of 5%.
17 RSF = 100% x MAX ((NSFR Shari'a-compliant hedging contract assets—NSFR Shari'a-compliant hedging contract liabilities), 0).
August 2018LM-12.4.31
Table 2 summarizes the specific types of assets to be assigned to each asset category and their associated RSF factor.
Table 2: Summary of Asset Categories and Associated RSF Factors
RSF Factor Components of RSF Factor 0% • Coins and banknotes;• All central bank reserves;• All claims on central banks with residual maturities of less than 6 months; and• 'Trade date' receivables arising from the sales of financial instruments, foreign currencies and commodities.5% Unencumbered level 1 HQLA, excluding coins, banknotes and central bank reserves. 10% Unencumbered financing and deposits with financial institutions with residual maturities of less than 6 months, where the financing is secured against level 1 HQLA and where the bank has the ability to freely re-hypothecate the received collateral for the life of the financing. 15% • Unencumbered level 2A HQLA;• All other unencumbered financing and deposits with financial institutions with residual maturities of less than 6 months not included in the above categories.50% • Unencumbered level 2B HQLA;• HQLA encumbered for a period of 6 months or more, and less than 1 year;• Financing and deposits with financial institutions and central banks with residual maturities between 6 months and less than 1 year;• Deposits held at other financial institutions for operational purposes; and• All other assets not included in the above categories with residual maturity of less than 1 year, including financing to non-financial corporate clients, financing to retail and small business customers, and financing to sovereigns and PSEs.65% • Unencumbered residential mortgages with a residual maturity of 1 year or more, and with a risk weight of less than or equal to 35 percent, as per the CBB Capital Adequacy Ratio Guidelines; and• Other unencumbered financing and deposits not included in the above categories, excluding financing and deposits with financial institutions, with a residual maturity of 1 year or more, and with a risk weight of less than or equal to 35 percent, as per the CBB Capital Adequacy Ratio Guidelines.85% • Cash, securities or other assets posted as initial margin for Shari'a-compliant hedging contracts and cash or other assets provided to contribute to the default fund of a CCP;• Other unencumbered performing financing with risk weights greater than 35 percent, as per the CBB Capital Adequacy Ratio Guidelines and residual maturities of 1 year or more, excluding financing and deposits with financial institutions;
Unencumbered securities that are not in default and do not qualify as HQLA with a remaining maturity of 1 year or more, and exchange-traded equities in cases where the issuer is not in default and where the securities do not qualify as HQLA according to the LCR; and• Physical traded commodities, including gold.100% • All assets that are encumbered for a period of 1 year or more;• NSFR Shari'a-compliant hedging contract assets net of NSFR Shari'a-compliant hedging contract liabilities, if NSFR Shari'a-compliant hedging contract assets are greater than NSFR Shari'a-compliant hedging contract liabilities;• 20 percent of Shari'a-compliant hedging contract liabilities (net of eligible cash variation margin); The CBB has discretion to lower the value of this factor, with a floor of 5%; and• All other assets not included in the above categories, including non-performing financing (net of specific provisions), financing and deposits with financial institutions with a residual maturity of 1 year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, insurance assets and defaulted securities.August 2018Off-balance Sheet Exposures
LM-12.4.32
Many potential OBS liquidity exposures require little direct or immediate funding, but can lead to significant liquidity drains over a longer time horizon. The NSFR assigns an RSF factor to various OBS activities in order to ensure that institutions hold stable funding for the portion of OBS exposures that may be expected to require funding within a 1-year horizon.
August 2018LM-12.4.33
Consistent with the LCR, the NSFR identifies OBS exposure categories based broadly on whether the commitment is a credit or liquidity facility, or some other contingent funding obligation. Table 3 identifies the specific types of OBS exposures to be assigned to each OBS category and their associated RSF factor.
Table 3: Summary of OBS Categories and Associated RSF Factors
RSF Factor RSF Category 5% of the currently undrawn portion • Irrevocable and conditionally revocable credit and liquidity facilities;• Other contingent funding obligations, including products and instruments such as:• Unconditionally revocable credit and liquidity facilities;• Trade finance-related obligations (including guarantees and letters of credit);• Guarantees and letters of credit unrelated to trade finance obligations;• Non-contractual obligations such as:• Potential requests for sukuk repurchases of the bank's own sukuks, or that of related conduits, securities investment vehicles and other such financing facilities;• Structured products where customers anticipate ready marketability, such as adjustable rate notes and variable rate demand notes ('VRDNs').• Managed funds that are marketed with the objective of maintaining a stable value.August 2018LM-12.5 LM-12.5 General Disclosure Requirements
LM-12.5.1
Bahraini Islamic bank licensees must report their NSFR ratios to the CBB on a quarterly basis within 14 calendar days of the quarter end as per Appendix BR-24.Amended: January 2020
August 2018LM-12.5.2
Bahraini Islamic bank licensees must disclose the NSFR on a consolidated basis in their quarterly and year-end financial statements as per Appendix C. Banks must also make previous NSFR reports available on their websites.Amended: January 2020
August 2018LM-12.5.3
Bahraini Islamic bank licensees must provide sufficient qualitative disclosures relevant to the NSFR, in their quarterly and year-end financial statements, to facilitate understanding of the results and data disclosed. This may include analysis of the main drivers of the NSFR results, changes during the period for which the data is prepared or compared to the date of the last disclosure (such as changes to the bank's strategy, funding structure or any other circumstances).Amended: January 2020
August 2018Appendix A Illustrative Summary of the LCR
Item Factor Stock of HQLA A. Level 1 Assets• Coins and banknotes;• Qualified balances with the CBB (including placements and reserves);• Sukuk issued by the CBB or the Government of Bahrain;• Sukuk issued governments of GCC member states and their central banks;• Sukuk that can be monetised and issued or guaranteed by sovereigns, central banks, PSEs, IMF, BIS, ECB, EC, or MDBs;• Sukuk issued in local currency by sovereign or the country's central bank, where the liquidity risk arises or the banks home country—given a non-0 percent Risk-weight (RW); and• Sukuk issued in foreign currency by sovereign or central bank that does not exceed the value of the net cash outflow in the foreign currency caused by a stress scenario based on the bank's operations in the country where the liquidity risk arises from—given a non-0 percent RW.100% Total level 1 Assets B. Level 2 assets (maximum of 40 percent Of HQLA)1) Level 2A assets• Sukuk that can be issued and liquidated or guaranteed by sovereigns, central banks, PSEs, and qualified MDBs;• Sukuk qualified for liquidation (including commercial paper); and• Qualified covered bonds.85% 2) Level 2B assets (maximum of 15 percent of HQLA)• Sukuk (including commercial paper) issued by qualified non-financial institutions; and• Qualified common equity shares50% Total level 2 Assets (1+2) Total value of stock of HQLA Cash Outflows Retail Mudaraba, Wakala and Reverse Murabaha Deposits Demand deposits and term deposits (maturity within 30 days): • Stable deposits; and3% • Less stable—retail deposits10% B. Unsecured Wholesale FundingSmall Business Customer deposits 10% Operational deposits generated by clearing, custody, and cash management: 25% Deposits from non-financial institutions, sovereign, central banks, multilateral development banks, PSEs, and Bahrain's Social Insurance Organization and GCC PIFs where PIF is a controller of the bank. 40% Deposits from other legal entity corporations. 100% C. Secured Funding• Backed by level 1 assets or with central banks;0% • Backed by level 2A assets;15% • Secured funding transactions with domestic sovereign, PSE's or multilateral development banks that are not baked by level 1 or 2A assets;25% • Backed by other level 2B assets;50% • All others.100% D. Other Cash OutflowNet Shari'a-compliant hedging contract cash outflow 100% Asset-backed securities, covered sukuks, and other structured financing instruments 100% Asset-backed commercial sukuk, securities investment vehicles, and other similar financing tool 100% Committed: credit and liquidity facilities given by bank to: • Retail (including credit cards) and small business customers (from amount not used);5% • Non-financial corporates, sovereigns and central banks, PSEs and multilateral development banks (from amount not used);10% credit 30% Liquidity • Banks subject to prudential supervision (from amount not used);40% • Other financial institutions (including securities firms and insurance firms) (from amount not used);40% credit 100% liquidity • Other legal entities (from amount not used).100% Other Contingent Funding Obligations • Guarantees, LCs, revocable credit and liquidity facilities, non-contractual commitments;5% • Customer short positions that are covered by other customers' collateral.50% Increased liquidity needs related to the potential for valuations changes on posted collateral 20% Other contractual cash outflows 100% Total Cash Outflow Cash Inflows Inflow rates A. Secured lending transactions backed by the following asset category:Level 1 assets; 0% Level 2A assets; and 15% Level 2B assets. 50% Margin lending backed by all other collateral: 50% Other collateral. 100% B. Committed facilities—credit and liquidity facilities given to banks;0% C. Other inflows by:• Retail and small business customer;50% • Non-retail customers:1. Financial institutions and central banks; and2. Non-financial institutions.100%
50%• Operational deposits held at other financial institutions.0% D. Other net Shari'a-compliant hedging contract cash inflows; and100% E. Other contractual cash inflows.100% Total Cash Inflows Net cash outflow = total cash outflow—total cash inflow or lowest value (75 percent of total cash outflow). Liquidity coverage ratio—HQLA / Net cash outflow. Amended: July 2019
August 2018Appendix B LCR Common Disclosure Template
Appendix B: LCR Common Disclosure Template
Total unweighted value (average) Total weighted value (average) High-quality liquid assets 1 Total HQLA Cash outflows 2 Retail deposits and deposits from small business customers, of which: 3 Stable deposits 4 Less stable deposits 5 Unsecured wholesale funding, of which: 6 Operational deposits (all counterparties) and deposits in networks of cooperative banks 7 Non-operational deposits (all counterparties) 8 Unsecured sukuk 9 Secured wholesale funding 10 Additional requirements, of which: 11 Outflows related to Shari'a-compliant hedging instruments exposures and other collateral requirements 12 Outflows related to loss of funding on financing products 13 Credit and liquidity facilities 14 Other contractual funding obligations 15 Other contingent funding obligations 16 Total Cash Outflows Cash inflows 17 Secured lending (e.g. reverse repos) 18 Inflows from fully performing exposures 19 Other cash inflows 20 Total Cash Outflows Total adjusted value 21 Total HQLA 22 Total net cash outflows 23 Liquidity Coverage Ratio (%) August 2018Appendix C NSFR Common Disclosure Template
Appendix C: NSFR Common Disclosure Template18
For the Period Ending on.../.../...... "Value in BHD 000"
No. Item Unweighted Values (i.e. before applying relevant factors) No specified maturity Less than 6 months More than 6 months and less than one year Over one year Total weighted value Available Stable Funding (ASF): 1 Capital: 2 Regulatory Capital 3 Other Capital Instruments 4 Retail deposits and deposits from small business customers: 5 Stable deposits 6 Less stable deposits 7 Wholesale funding: 8 Operational deposits 9 Other wholesale funding 10 Other liabilities: 11 NSFR Shari'a-compliant hedging contract liabilities 12 All other liabilities not included in the above categories 13 Total ASF Required Stable Funding (RSF): 14 Total NSFR high-quality liquid assets (HQLA) 15 Deposits held at other financial institutions for operational purposes 16 Performing financing and sukuk/securities: 17 Performing financing to financial institutions secured by Level 1 HQLA 18 Performing financing to financial institutions secured by non-level 1 HQLA and unsecured performing financing to financial institutions 19 Performing financing to non-financial corporate clients, financing to retail and small business customers, and financing to sovereigns, central banks and PSEs, of which: 20 With a risk weight of less than or equal to 35% as per the CBB Capital Adequacy Ratio guidelines 21 Performing residential mortgages, of which: 22 With a risk weight of less than or equal to 35% under the CBB Capital Adequacy Ratio Guidelines 23 Securities/sukuk that are not in default and do not qualify as HQLA, including exchange-traded equities 24 Other assets: 25 Physical traded commodities, including gold 26 Assets posted as initial margin for Shari'a-compliant hedging contracts contracts and contributions to default funds of CCPs 27 NSFR Shari'a-compliant hedging assets 28 NSFR Shari'a-compliant hedging contract liabilities before deduction of variation margin posted 29 All other assets not included in the above categories 30 OBS items 31 Total RSF 32 NSFR (%)
18 Quarterly statement
12 Quarterly statement
August 2018Appendix D Definitions
Appendix D: Definitions19
In the context of these Guidelines, the following terminologies take the meanings corresponding to each of them:
1. 'Bank' means any bank fully recognized as such by the relevant regulator of the country in which it is registered, except such a bank which:a. In the opinion of the central bank, is not adequately supervised by the relevant banking supervisory authority;b. The license or other authorization of which to carry on banking business is, for the time being, suspended.2. 'Banking groups' are groups that engage predominantly in banking activities and are registered as banks in the relevant jurisdiction.3. 'PSE' means a public sector entity which is specified as such either by the central bank ('domestic PSE') or by an overseas banking supervisory authority ('foreign PSE'). Domestic PSEs include those entities owned by the government, excluding the subsidiaries of such institutions undertaking commercial activities.4. 'Financial Institutions' are institutions defined as financial institutions by the CBB (local financial institutions) or by foreign banking regulators (foreign financial institutions); examples of financial institutions include investment companies, insurance companies and currency exchange companies.5. 'MDB' means a multilateral development bank, which refers to any bank or lending or development body established by agreement between, or guaranteed by, two or more countries, territories or international organizations, other than for purely commercial purposes.6. 'Off-balance Sheet ('OBS') Activities" refers to a banks' business that does not generally involve booking assets or liabilities. Examples include the granting of standby commitments, letters of credit and guarantees.7. 'Repo-style Transactions' means transactions involving the sale and repurchase ('repo') of assets, purchase and resale ('reverse repo') of assets, as well as securities lending and securities borrowing. The term 'repo-style transactions' is generally taken to refer to any of the following transactions of a bank:i Sale and repurchase ('repo') of securities—the bank agrees to sell securities to a third party for cash with a commitment to repurchase the securities at an agreed price on an agreed future date.ii Securities lending—the bank lends securities to a third party and receives either cash or other securities from that party in exchange as collateral.iii Purchase and resale ('reverse repo') of securities—the bank agrees to acquire securities from a third party for cash, with a commitment to resell the securities at an agreed price on an agreed future date (i.e. the reverse of repo transactions).iv Securities borrowing—the bank borrows securities from a third party and gives cash or other securities to that party in exchange as collateral.8. 'Secured Obligations' means obligations that are secured by legal rights on specifically designated assets owned by the bank which are used in the case of bankruptcy, insolvency or liquidation.9. 'High-Quality Liquid Asset ('HQLA')' an asset is considered to be HQLA if it can be easily and immediately converted into cash at little or no loss of value under stress scenarios.10. 'Operational Deposits' are the deposits generated by clearing, custody and cash management activities.11. 'Stable Deposits' are the amounts of the deposits that are fully insured by a deposit insurance scheme which represents a portion from the deposits in the transactional accounts (e.g. accounts where salaries are automatically deposited), as per the provisions of those regulations.12. 'Transactional Accounts' are defined as the accounts used to settle transactions pertaining to salaries and customer income.13. 'Unencumbered Assets' means assets free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell or transfer these assets. Liquid assets should not be used to cover trading positions or to secure, collateralize or credit-enhance any transaction, nor be designated to cover operational costs (such as rents and salaries).14. 'Retail Deposits' are defined as deposits placed with a bank by a natural person. Deposits from legal entities, sole proprietorships or partnerships are captured in wholesale deposit categories.15. 'Wholesale Funding' is defined as those deposits and obligations that are raised from non-natural persons (i.e. legal entities, including sole proprietorships and partnerships).16. 'Small Business Deposits' are the deposits that are considered as having similar characteristics to retail accounts, provided the total aggregated funding raised from one small business customer is less than BHD 500,000 (on a consolidated basis where applicable).17. 'Default Funds', also known as clearing deposits or guarantee fund contributions (or any other names), are clearing members' funded or unfunded contributions towards, or underwriting of, a CCP's mutualized loss-sharing arrangements.18. 'Central Counterparty (CCP)' is the party that intermediates in the settlement process between counterparties to contracts related to financial instruments, becoming the buyer to every seller, and the seller to every buyer in the market.19. 'Principal Amount' means the amount of any outstanding claim (excluding any interest and other expenses) on, or contingent liability in respect of, the relevant counterparty.20. 'Variation Margin' means a clearing member's or client's funded collateral posted on a daily or intraday basis, to a CCP based upon price movements of their transactions.21. 'Initial Margin' means a clearing member's or client's funded collateral posted to the CCP to mitigate the potential future exposure of the CCP to the clearing member, arising from the possible future change in the value of the transactions.22. 'Fiduciary' is a legal entity that is authorised to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles.
19 Definitions mirror those in the Capital Adequacy Ratio—Basel III and the LCR guidelines.
August 2018Appendix E Operational Deposits20
1. Certain banking activities related to payments and settlement systems lead to customers needing to place, or leave, deposits with a bank in order to cover such transactions. This is conditional on the fact that the activities have a substantive dependency with the bank and the deposit is required for such activities;2. Qualifying activities in this context refer to clearing, custody or cash-management activities that meet the following criteria:a. The customer is reliant on the bank to perform these services as an independent third party intermediary in order to fulfil its normal banking activities over the next 30 days. For example, this condition would not be met if the bank is aware that the customer has adequate back-up arrangements;b. These services must be provided under a legally-binding agreement to customers; andc. The termination of such agreements shall be subject either to a notice period of at least 30 days or significant switching costs (such as those related to transaction, information technology, early termination or legal costs) to be borne by the customer if the operational deposits are moved before 30 days.3. Qualifying operational deposits generated by such activities are ones where:a. The deposits are by-products of the underlying services provided by the bank and are not sought out in the wholesale market; andb. The deposits are held in specifically designated accounts and priced without giving an economic incentive to the customer.4. Only that part of the deposit balance with the service provider that is proven to serve a customer's operational needs can qualify as stable. Excess balances should be treated in the appropriate category for (non-operational) deposits. If the bank is unable to determine the amount of the excess balance, the entire deposit should be considered non-operational;5. Banks must determine the methodology for identifying excess balances in operational accounts. The methodology should be conducted at a sufficiently granular level to adequately assess the risk of withdrawal in an idiosyncratic stress. The methodology should take into account relevant factors, such as the average balances in advance of specific payment needs;6. If the deposit arises out of correspondent banking, or from the provision of prime brokerage services, it will be treated as if it was a non-operational activity for the purpose of determining run-off factors21 .7. The portion of the operational deposits generated by clearing, custody and cash management activities that is fully covered by deposit insurance can receive the same treatment as 'stable' retail deposits;8. A clearing relationship, in this context, refers to a service arrangement, granted by the bank as a direct participant in settlement systems that enables customers to transfer funds (or securities) indirectly through participants in domestic settlements systems to final recipients. Such services are limited to the following activities; transmission, overdraft and settlement;9. A custody relationship refers to the provision of safekeeping, reporting, processing of assets or the facilitation of the operational and administrative elements of related activities on behalf of customers in the process of their transacting and retaining financial assets. Such services are limited to the settlement of securities transactions, the transfer of contractual payments, the processing of collateral, and the receipt of dividends and other income, transfer of funds and stocks and agency services, including payment and settlement services (excluding correspondent banking);10. A cash management relationship refers to the provision of cash management and related services to customers. Cash management services refers to those products and services provided to a customer to manage its cash flows, assets and liabilities, and conduct financial transactions necessary to the customer's operational activities. Such services are limited to payment remittance, collection and aggregation of funds, payroll administration, and control over the disbursement of funds.
20 Based on the definition of operational deposits in the LCR guidelines.
21 Correspondent banking refers to arrangements under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services in order to settle foreign currency transactions (e.g. so called 'nostro' and 'vostro' accounts used to settle transactions in a currency other than the domestic currency of the respondent bank, for the provision of clearing and settlement of payments). Prime brokerage is a package of services offered to large active investors, particularly institutional hedge funds. These services usually include: clearing, settlement and custody; consolidated reporting; financing (margin, repo or synthetic); securities lending; capital introduction, and risk analytics.
22 Based on the definition of operational deposits in the LCR guidelines.
August 2018Appendix F Bilateral Netting Agreements23
1. Exposures to the same counterparties arising out of a range of Shari'a-compliant hedging contracts, could be subject to a netting treatment according to the following requirements.2. Accordingly, for the NSFR purposes:a. Banks may net transactions subject to novation under which any obligation between a bank and its counterparty to deliver a given currency, on a given value date, is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations;b. Banks may also net transactions subject to any legally valid form of bilateral netting not covered in (a), including other forms of novation; andc. In both cases (a) and (b), a bank will need to satisfy the CBB that it has:i. A netting contract or agreement with the counterparty which creates a single legal obligation, covering all included transactions, so that the bank would have either a claim to receive, or an obligation to pay, only the net sum of the positive and negative mark-to-market values of included individual transactions in the event a counterparty fails to perform due to any of the following; default, bankruptcy, liquidation or similar circumstances;ii. Written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and administrative authorities would find the bank's exposure to be such a net amount under:a) The law of the jurisdiction in which the counterparty is chartered and the branch that conducted the netting;b) The law that governs the individual transactions;c) The law that governs any contract or agreement necessary to effect the netting;iii. In this context, the banks may use the following applicable market accepted standard agreements:• International Swaps and Derivatives Association ('ISDA') Master Agreement (English law or New York law, as applicable);• International Foreign Exchange Master Agreement('IFEMA') for FX transactions• FX Net Agreements for FX transactions;• Worldwide Foreign Exchange Netting and Close-Out Agreement for FX transactions;• Global Foreign Exchange Netting and Close-Out Agreement ('FXNET "Non-User" Agreement') for FX transactions;• International Currency Option Master Agreement ('ICOM');iv. Banks are only permitted to avail the benefit of Master Netting Agreements in jurisdictions where such agreements are legally enforceable (i.e. where legal precedence exists). The use of such netting should also be supported by the positive opinion of the licensed bank's Legal department; andv. Banks intending to use any Master Netting Agreements other than those listed in previous paragraph should seek the explicit approval of the CBB to do so.3. Procedures are in place to ensure that the legal characteristics of netting arrangements are kept under review, in the light of possible changes that may be applicable to these type of agreements at a later stage;4. In certain arrangements (such as contracts including 'walk away clauses') where the counterparty terminates the contract, this event is not taken into consideration for the purposes of calculating the NSFR. Thus, the exposure is calculated without taking into account the Netting Agreement;5. Exposure on bilaterally-netted Shari'a-compliant hedging contract transactions will be calculated as the sum of the net mark-to-market replacement cost, if positive, plus an add-on based on the notional underlying principal. The add-on for netted transactions ('ANet') will equal the weighted average of the gross add-on ('AGross')24 and the gross add-on adjusted by the ratio of net current replacement cost to gross current replacement cost ('NGR'). This is expressed through the following formula:
ANet=0.4*AGross+0.6*NGR*AGross
Where:
NGR=level of net replacement cost/level of gross replacement cost for transactions subject to legally enforceable netting agreements.256. The scale of the gross add-ons to apply in this formula will be the same as those for non-netted transactions, as set out in the CBB's Capital Adequacy Ratio Guidelines. The CBB will continue to review the scale of add-ons to make sure they are appropriate; and7. For purposes of calculating potential future credit exposure to a netting counterparty for forward foreign exchange contracts and other similar contracts, in which notional principal is equivalent to cash flows, notional principal is defined as the net receipts falling due on each value date in each currency.
23 Based on the Capital Adequacy Ratio—Basel III Guidelines
24 AGross equals the sum of individual add-on amounts (calculated by multiplying the notional principal amount by the appropriate add-on factors set out in the CBB Capital Adequacy Ratio Guidelines) of all transactions subject to legally-enforceable netting agreements with one counterparty
25 The CBB permits a choice of calculating the NGR on a counterparty by counterparty or on an aggregate basis level for all transactions subject to legally enforceable netting agreements. However, the method chosen by a licensed bank is to be used consistently. Under the aggregate approach, net negative current exposures to individual counterparties cannot be used to offset net positive current exposures of another counterparty, i.e. for each counterparty the net current exposure used in calculating the NGR is the maximum of the net replacement cost or zero. Note that under the aggregate approach, the NGR is to be applied individually to each legally enforceable netting agreement.
August 2018Appendix G Utilising the Cash Portion of Variation Margin Received to Reduce the Replacement Cost
Appendix G: Utilising the Cash Portion of Variation Margin Received to Reduce the Replacement Cost26
Banks may use the cash portion of variation margin received to reduce the replacement cost portion (but not the potential future exposure) of the leverage ratio exposure measure, and may deduct the receivables assets from the cash variation margin provided from the leverage ratio exposure measure (if the cash variation margin provided has been recognized as an asset under the bank's accounting framework) subject to the following conditions being met:
a. For trades not cleared through a qualifying central counterparty ('QCCP') the cash received by the recipient counterparty is not segregated from the cash portion of the variation margin;b. Variation margin is calculated and exchanged on a daily basis based on mark-to-market valuation of Shari'a-compliant hedging contracts positions;c. The cash variation margin is received in the same currency as the currency of settlement of the Shari'a-compliant hedging contract;d. Variation margin exchanged is enough to cover the mark-to-market exposure of the Shari'a-compliant hedging contract; ande. Shari'a-compliant hedging contracts transactions and variation margins are covered by a single MNA between the counterparties, and the MNA must be legally enforceable.
26 Based on the Leverage Ratio for Islamic Banks guidelines.
August 2018Appendix H High Quality Liquid Assets as per the LCR
Appendix H: High Quality Liquid Assets as per the LCR
1. Assets are generally qualified as HQLA if they can be easily and immediately converted into cash at little, or no, loss of value under stress circumstances; and2. The conditions identified in the following paragraphs must be satisfied by levels 1 and 2 assets.1) Level 1 Assets3. Level 1 assets are included in their applicable market value, can comprise of an unlimited share of the pool and are not subject to haircuts.4. Level 1 assets are limited to:a. Coins and banknotes;b. Assets with central banks in the countries in which the liquidity risk is being taken (including cash reserves27 and Tawarruq transactions with the CBB) to the extent that allows banks to draw down these assets in times of stress;c. Sukuk issued by the CBB or the Government of the Kingdom of Bahrain;d. Sukuk and Shari'a-compliant securities issued or guaranteed by sovereigns, central banks, PSEs, the IMF, the BIS, the ECB and EC, or development banks and satisfying all of the following conditions:i. Assigned a 0 percent risk-weight as shown in Appendix I;ii. Traded in large, deep and active repo or cash markets, characterized by a low level of concentration;iii. Have a proven record as a reliable source of liquidity in the markets (repo or sale), even during stressed market conditions;iv. Not an obligation of a financial institution or any of its subsidiary entities28 ;e. Where the sovereign has a non-0 percent risk weight, Sukuk and other Shari'a compliant securities issued in domestic currency by the sovereign or central bank in the country in which the liquidity risk is being taken or in the bank's home country; andf. Where the sovereign has a non-0 percent risk weight, Sukuk and other Shari'a compliant securities in foreign currencies issued by the sovereign or central bank up to the amount of the bank's stressed net cash outflows in that specific foreign currency stemming from the bank's operations in the jurisdiction where the bank's liquidity risk is being taken.2) Level 2 AssetsA. Level 2A Assets5. Level 2A assets are limited to the following:a. Sukuk and Shari'a-compliant securities and that can be monetized, issued or guaranteed by sovereigns, central banks, PSEs or MDBs that satisfy all of the following conditions:i. Assigned a 20 percent risk weight as per Annexure (F);ii. Traded in large, deep and active repo or cash markets as characterized by a low level of concentration;iii. Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (i.e. maximum decline of price not exceeding 10 percent, or the increase in haircut not exceeding 10 percent over a 30-day period during a relevant period of significant liquidity stress); and iv. Not an obligation of a financial institution or any of its affiliated entities.b. Sukuk and Shari'a-compliant securities and that can be monetised (including commercial paper)29 and covered bonds30 that satisfy all of the following conditions:i. Not issued by a financial institution or any of its affiliated entities;ii. In the case of covered bonds: not issued by the bank itself or any of its affiliated entities;iii. Either have a long-term credit rating from a recognized ECAI of at least (AA-) or in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating;iv. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; andv. Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (i.e. maximum decline of price not exceeding 10 percent, or the increase in haircut not exceeding 10 percent, over a 30-day period during a relevant period of significant liquidity stress).B. Level 2B Assets6. Level 2B assets are limited to the following:a. Sukuk and Shari'a-compliant securities (including commercial paper) issued by nonfinancial institutions, that satisfy all of the following conditions:i. Sukuk and Shari'a-compliant securities issued by non-financial institutions or one of their subsidiaries and have a long-term credit rating between A+ and BBB- or the equivalent, or in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating;ii. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; andiii. Have a proven record as a reliable source of liquidity in the markets even during stressed market conditions (i.e. maximum decline of price not exceeding 20 percent or the increase in haircut not exceeding 20 percent over a 30-day period during a relevant period of significant liquidity stress).b. Shari'a-compliant common equity shares that satisfy all of the following conditions, subject to a 50 percent haircut:i. Not issued by a financial institution or any of its affiliated entities.ii. Exchange traded and centrally cleared;iii. A constituent of the major stock index in Bahrain or where the liquidity risk is taken;iv. Denominated in Bahraini Dinar or in the currency of the jurisdiction where the liquidity risk is taken;v. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; andvi. Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, (i.e. a maximum decline of share price not exceeding 40 percent, or increase in haircut not exceeding 40 percent, over a 30-day period during a relevant period of significant liquidity).7. If a bank wishes to include other Shari'a-compliant assets under Level 2B assets, prior approval must be obtained from the CBB.
27 In this context, the central bank reserves would include demand deposits and the mentioned Tawarruq transactions, and overnight deposits and term deposits with the central bank that: (i) are repayable within 30 day or are explicitly and contractually repayable on notice from the depositing bank; or (ii) that the bank can use to obtain financing on a term basis or on an overnight basis. Other term deposits with central banks are not eligible for the stock of HQLA.
28 This requires that the holder of the security must not have recourse to the financial institution or any of the financial institution's affiliated entities. In practice, this means that securities, such as government-guaranteed issuance during the financial crisis, which remain liabilities of the financial institution, would not qualify for the stock of HQLA. The only exception is when the bank also qualifies as a PSE under the CBB Capital Adequacy Ratio—Basel III Guidelines where securities issued by the bank could qualify for level 1 assets if all necessary conditions are satisfied.
29 Corporate sukuk (including commercial papers) do not include complex structured products or subordinated sukuk.
30 Covered bonds are bonds issued and owned by a bank or mortgage institution and are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued profit.
August 2018Appendix I Mapping Notations Used by Individual ECAIs for Sovereigns, Central Banks, PSEs and MDBs
Credit Quality31 Risk Weight Claims on sovereigns/central banks (AAA to AA-) or Equivalent 0% (A+ to A-) or Equivalent 20% Claims on PSEs Claims on local (Bahraini) PSEs 0% (AAA to AA-) or Equivalent 20% Claims on MDBs As per the Capital Adequacy Ratio Guidelines 0% As per the Capital Adequacy Ratio Guidelines 20%
31 Based on rating by Standard and Poor's.
August 2018Appendix J Illustrative NSFR Computation Template
August 2018FC FC Financial Crime
FC-A FC-A Introduction
FC-A.1 FC-A.1 Purpose
Executive Summary
FC-A.1.1
This Module applies, to all
Islamic bank licensees , a comprehensive framework of Rules and Guidance aimed at combating money laundering and terrorist financing. In so doing, it helps implement the FATF Recommendations on combating money laundering and financing of terrorism and proliferation, issued by the Financial Action Task Force (FATF), and the requirements of the Basel Committee 'Customer Due Diligence for Banks' paper, that are relevant toIslamic bank licensees . (Further information on these can be found in Chapter FC-10.)Amended: October 2014
October 07FC-A.1.2
The Module requires
Islamic bank licensees to have effective anti-money laundering ('AML') policies and procedures, in addition to measures for combating the financing of terrorism ('CFT'). The Module contains detailed requirements relating to customer due diligence, reporting and the role and duties of the Money Laundering Reporting Officer (MLRO). Furthermore, examples of suspicious activity are provided, to assistIslamic bank licensees monitor transactions and fulfill their reporting obligations under Bahrain law.October 07Legal Basis
FC-A.1.3
This Module contains the Central Bank of Bahrain's ('CBB') Directive (as amended from time to time) regarding the combating money laundering and terrorism financing and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all
Islamic bank licensees .Amended: January 2022
Amended: January 2011
October 07FC-A.1.4
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 07FC-A.2 FC-A.2 Module History
Changes to the Module
FC-A.2.1
This Module was first issued on 1st January 2005 by the BMA as part of the Islamic principles volume. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 07FC-A.2.2
When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 2 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.
October 07FC-A.2.3
A list of recent changes made to this Module is detailed in the table below:
Module Ref. Change Date Description of Changes FC-1.11.1 01/01/06 New text for syndicated business. FC-1.1.3, FC-1.2.8, FC-1.2.11, FC-3.1.4 01/01/06 Correction of minor typos. FC-A.1 10/2007 Updated to reflect new CBB Law: new Rule FC-A.1.3 introduced Categorising this Module as a Directive. FC-5.3.1 10/2007 Updated new e-mail address for the Compliance Directorate. FC-7.1.1 10/2007 Guidance on customer instructions moved from OM-7.1 FC-1.11.1 & FC-4.3.5 04/2008 Minor guidance enhancements FC-1.6.5–6 07/2009 New authorization requirement in respect of transfers of funds to and from foreign countries on behalf of charities. FC-4.1.5 10/2009 Appointment of Deputy MLRO to require CBB prior approval. FC-A.1.3 01/2011 Clarified legal basis. FC-1.10A 01/2011 Added Section on Enhanced due diligence: cross border cash transactions equal to an above BD 6,000 by courier. FC-4.3.5 and FC-4.3.6 01/2011 Corrected minor typo. FC-4.1.7 10/2011 Clarified requirements for MLRO. FC-4.3 10/2011 Amended Section to allow for CBB-approved consultancy firm to do required sample testing and report under Paragraph FC-4.3.1. FC-4.3.5 and FC-4.3.6 01/2012 Amended to reflect the addition of approved consultancy firm. FC-4.1.2 07/2012 Corrected cross reference. FC-1.6 01/2013 Added requirement dealing with sport associations registered with the Bahrain Olympic Committee (BOC). FC-1.11.1 01/2013 Updated reference to Bahrain Bourse ('BHB'). FC-1.1.10 to FC-1.1.16, and FC-1.3.4 10/2013 Amended and updated due diligence requirements, including requirements in dealing with non-resident accounts. FC-1.1.13 to FC-1.1.13C 04/2014 Added requirements regarding the opening of accounts for non-residents or companies under formation. FC 10/2014 Updated to reflect February 2012 update to FATF Recommendations. FC-1.5 07/2016 Aligned definition of PEPs with FATF and moved to Glossary. FC-4.1.1 07/2016 Deleted reference for Appendix FC-4 as requirements are covered under Form 3. FC-5.2.3 07/2016 Updated instructions for STR. FC-B.2.4 10/2016 Deleted reference to Module PCD FC-1.2.9A 01/2017 Added guidance paragraph on CR printing FC-8.2.1AA 04/2017 Implementing and complying with the United Nations Security Council resolutions requirement. FC-1.1.2B 10/2017 Amended paragraph on CDD requirements. FC-1.1.13D — FC-1.1.13H 10/2017 Added guidance paragraphs on opening accounts for companies under formation. FC-1.2.7 10/2017 Amended paragraph. FC-1.2.8A 10/2017 Added new paragraph on legal entities or legal arrangements CDD. FC-1.12 10/2017 Added new Section on Simplified CDD: For entities Operating Under Regulatory Sandbox. FC-2.2.10 — FC-2.2.11 10/2017 Amended paragraphs on On-going CDD and Transaction Monitoring. FC-4.1.4A 10/2017 Added new paragraph on combining the MLRO or DMLRO position with any other position within the licensee. FC-B.2.4 01/2018 Amended paragraph. FC-1.8.1 01/2018 Amended paragraph. FC-1.9.1 01/2018 Amended paragraph. FC-1.11.1 01/2018 Deleted sub-paragraph (g). FC-5.2.6 01/2018 Amended paragraph. FC-8.1.4 01/2018 Amended paragraph. FC-8.2.2 01/2018 Deleted paragraph. FC-1.1.2 07/2018 Deleted sub-paragraph (g). FC-1.10A 07/2018 Amended Section title deleting the threshold. FC-1.10A.2 07/2018 Amended Paragraph deleting the threshold. FC-1.11.3 07/2018 Deleted Paragraph. FC-1.11.8 07/2018 Deleted Paragraph. FC-1.12.10 07/2018 Amended Paragraph number (f). FC-4.3.2C 10/2018 Amended Paragraph and changed from Guidance to Rule. FC-1.11.1 01/2019 Amended references. FC-4.3.2 — FC-4.3.5 01/2019 Amended references. FC-7.1.2 01/2019 Amended references. FC-1.6.1A 07/2019 Amended Paragraph (GOYS changed to Ministry of Youth & Sport Affairs). FC-1.6.2 07/2019 Amended Paragraph (GOYS changed to Ministry of Youth & Sport Affairs). FC-1.6.2A 07/2019 Added a new Paragraph on opening additional bank accounts for Clubs and Youth Centres. FC-1.6.5 07/2019 Amended Paragraph on Fund Transfers. FC-3.1.11 07/2019 Amended Paragraph. FC-1.3.4 10/2019 Amended Paragraph on enhanced due diligence measures for non-GCC account holders. FC-3.2.4 10/2019 Amended authority name. FC-4.2.1 10/2019 Amended authority name. FC-5.2.3 10/2019 Amended authority name. FC-5.3.2 10/2019 Amended authority address. FC-8.2.1AA 10/2019 Defined 'without delay'. FC-1.1.1 01/2020 Amended Paragraph on procedures approval. FC-1.2.1 01/2020 Added a new sub-Paragraph. FC-3.2.4 01/2020 Amended Paragraph. FC-4.2.1(d) 01/2020 Amended sub-Paragraph. FC-4.3.5 01/2020 Amended Paragraph on report submission date. FC-2.1.3 & FC-2.1.4 04/2020 Added new Paragraphs on KPIs compliance with AML/CFT requirements. FC-1.1.14 01/2021 Amended Paragraph on account opening for non-residents. FC-3.1.10A 01/2021 Added a new Paragraph on rejecting payment transactions. FC-6.1.6A 01/2021 Added a new Paragraph on requirements to hire new employees. FC-1.1.14 04/2021 Amended Paragraph. FC-A.1.3 01/2022 Amended Paragraph to replace financial crime with money laundering and terrorism financing FC-C 01/2022 New chapter on risk-based approach (RBA) FC-1.1 01/2022 Amendments to general requirements to introduce additional rules for non-resident customers, amendments to customers onboarded prior to full completion of customer due diligence, digital onboarding etc. FC-1.2 01/2022 Amendments to recognise E-KYC and electronic documents law. FC-1.3 01/2022 Amendments to introduce additional guidance in enhanced due diligence requirements. FC-1.4 01/2022 Amendments to introduce detailed requirements for digital onboarding and related requirements. FC-1.5 01/2022 Amendments relating to digital onboarding of Bahraini PEPs. FC-1.11.7A 01/2022 Added a new Paragraph on not applying simplified CDD in situations where the licensee has identified high ML/TF/PF risks. FC-1.12 01/2022 Deleted Section on simplified due diligence requirements relating to Regulatory Sandbox since they will be covered separately in the Regulatory Sandbox Framework. FC-4.3.1B 01/2022 Amended Paragraph. FC-4.3.2 01/2022 Amended Paragraph. FC-4.3.5 01/2022 Amended Paragraph. FC-4.3.6 01/2022 Deleted Paragraph. FC-6.1.6A 01/2022 Deleted Paragraph. FC-1.1.14A 07/2022 Added a new Paragraph on opening accounts for Bahraini national not physically present in Bahrain through a digital onboarding process. FC-C.2.3 01/2023 Minor amendment to Paragraph. FC-1.1.14 01/2023 Amended Paragraph on opening accounts for non-residents. FC-1.1.14B 01/2023 Added a new Paragraph on opening accounts for non-residents with golden visa. FC-8.2.4(c) 01/2023 Added a new Sub-paragraph on reporting any frozen assets or actions taken. FC-1.1.12A 10/2023 Amended Sub-Paragraph on the enhanced diligence for the non-resident accounts. FC-1.1.12E 10/2023 Deleted Paragraph. FC-1.1.14 10/2023 Deleted Paragraph. FC-1.1.14A 10/2023 Deleted Paragraph. FC-1.1.14B 10/2023 Deleted Paragraph. FC-1.1.17 10/2023 Added a new Paragraph on CDD and Customer onboarding requirements. FC-1.13 10/2023 Added a new Section on reliance on third parties for customer due diligence. FC-1.1 01/2024 Amended Section on the general requirements for companies under formation and new arrivals. FC-1.2.1 01/2024 Amended Paragraph on customer due diligence. Evolution of the Module
FC-A.2.4
Prior to the introduction of Volume 2 (Islamic Banks) of the CBB Rulebook, the BMA had issued various circulars containing requirements covering different aspects of financial crime. These requirements were consolidated into this Module.
Amended: October 2014
Amended: April 2008
October 07FC-B FC-B Scope of Application
FC-B.1 FC-B.1 License Categories
FC-B.1.1
This Module applies to all
Islamic bank licensees , including branches of banks incorporated outside of Bahrain, and Bahrain-incorporated subsidiaries of overseas groups.October 07FC-B.1.2
The requirements of this Module are in addition to and supplement the requirements contained in Decree Law No. (4) of 2001 with respect to the prevention and prohibition of the laundering of money; this Law was subsequently updated, with the issuance of Decree Law No. 54 of 2006 with respect to amending certain provisions of Decree No. 4 of 2001 (collectively, 'the AML Law'). The AML Law imposes obligations generally in relation to the prevention of money laundering and the combating of the financing of terrorism, to all persons resident in Bahrain. All
Islamic bank licensees are therefore under the statutory obligations of that Law, in addition to the more specific requirements contained in this Module. Nothing in this Module is intended to restrict the application of the AML Law (a copy of which is contained in Part B of Volume 2 (Islamic banks), under 'Supplementary Information'). Also included in Part B is a copy of Decree Law No. 58 of 2006 with respect to the protection of society from terrorism activities ('the anti-terrorism law').October 07FC-B.2 FC-B.2 Overseas Subsidiaries and Branches
FC-B.2.1
Islamic bank licensees must apply the requirements in this Module to all their branches and subsidiaries operating both in the Kingdom of Bahrain and in foreign jurisdictions. Where local standards differ, the higher standard must be followed.Islamic bank licensees must pay particular attention to procedures in branches or subsidiaries in countries that do not or insufficiently apply the FATF Recommendations and do not have adequate AML/CFT procedures, systems and controls (see also Section FC-8.1).Amended: October 2014
October 07FC-B.2.2
Where another jurisdiction's laws or regulations prevent an
Islamic bank licensee (or any of its foreign branches or subsidiaries) from applying the same standards contained in this Module or higher, thelicensee must immediately inform the CBB in writing.October 07FC-B.2.3
In such instances, the CBB will review alternatives with the
Islamic bank licensee. Should the CBB and thelicensee be unable to reach agreement on the satisfactory implementation of this Module in a foreign subsidiary or branch, theIslamic bank licensee may be required by CBB to cease the operations of the subsidiary or branch in the foreign jurisdiction in question.October 07FC-B.2.4
Financial groups (e.g. a bank with at least one financial entity as a subsidiary) must implement groupwide programmes against money laundering and terrorist financing, including policies and procedures for sharing information within the group for AML/CFT purposes, which must also be applicable, and appropriate to, all branches owned subsidiaries of the financial group. These must include:
(a) The development of internal policies, procedures and controls, including appropriate compliance management arrangements, and adequate screening procedures to ensure high standards when hiring employees;(b) An ongoing employee training programme;(c) An independent audit function to test the system;(d) Policies and procedures for sharing information required for the purposes of CDD and money laundering and terrorist financing risk management;(e) The provision at group-level compliance, audit, and/or AML/CFT functions of customer, account and transaction information from branches and subsidiaries when necessary for AML/CFT purposes; and(f) Adequate safeguards on the confidentiality and use of information exchanged.Amended: January 2018
Amended: October 2016
Added: October 2014FC-C FC-C Risk Based Approach
FC-C.1 FC-C.1 Risk Based Approach
FC-C.1.1
An
Islamic bank licensee must implement Risk Based Approach (RBA) in establishing an AML/CFT/CPF program and conduct ML/TF/PF risk assessments prior to and during the establishment of a business relationship and, on an ongoing basis, throughout the course of its relationship with the customer. Thelicensee must establish and implement policies, procedures, tools and systems commensurate with the size, nature and complexity of its business operations to support its RBA.Added: January 2022FC-C.1.2
An
Islamic bank licensee must perform enhanced measures where higher ML/TF/PF risks are identified to effectively manage and mitigate those higher risks.Added: January 2022FC-C.1.3
An
Islamic bank licensee must maintain and regularly review and update the documented risk assessment. The risk management and mitigation measures implemented by alicensee must be commensurate with the identified ML/TF/PF risks.Added: January 2022FC-C.1.4
Islamic bank licensees must allocate adequate financial, human and technical resources and expertise to effectively implement and take appropriate preventive measures to mitigate ML/TF/PF risks.Added: January 2022FC-C.2 FC-C.2 Risk Assessment
FC-C.2.1
An
Islamic bank licensee must ensure that it takes measures to identify, assess, monitor, manage and mitigate ML/TF/PF risks to which it is exposed and that the measures taken are commensurate with the nature, scale and complexities of its activities. The risk assessment must enable the licensee to understand how, and to what extent, it is vulnerable to ML/TF/PF.Added: January 2022FC-C.2.2
In the context of the risk assessment, “proliferation financing risk” refers to the potential breach, non-implementation or evasion of the targeted financial sanctions obligations referred to in FATF Recommendation 7.
Added: January 2022FC-C.2.3
The risk assessment must be properly documented, regularly updated and communicated to the
Islamic bank licensee ’s senior management.Licensees must have in place policies, controls and procedures, which are approved by senior management, to enable them to manage and mitigate the risks that have been identified. In conducting its risk assessments, thelicensee must consider quantitative and qualitative information obtained from the relevant internal and external sources to identify, manage and mitigate these risks. This must include consideration of the risk and threat assessments using, national risk assessments, sectorial risk assessments, crime statistics, typologies, risk indicators, red flags, guidance and advisories issued by inter-governmental organisations, national competent authorities and the FATF, and AML/CFT/CPF mutual evaluation and follow-up reports by the FATF or associated assessment bodies.Amended: January 2023
Added: January 2022FC-C.2.4
An
Islamic bank licensee must assess country/geographic risk, customer/investor risk, product/ service/ transactions risk and distribution channel risk taking into consideration the appropriate factors in identifying and assessing the ML/TF/PF risks, including the following:(a) The nature, scale, diversity and complexity of its business, products and target markets;(b) Products, services and transactions that inherently provide more anonymity, ability to pool underlying customers/funds, cash-based, face-to-face, non face-to-face, domestic or cross-border;(c) The volume and size of its transactions, nature of activity and the profile of its customers;(d) The proportion of customers identified as high risk;(e) Its target markets and the jurisdictions it is exposed to, either through its own activities or the activities of customers, especially jurisdictions with relatively higher levels of corruption or organised crime, and/or deficient AML/CFT/CPF controls and listed by FATF;(f) The complexity of the transaction chain (e.g. complex layers of intermediaries and sub intermediaries or distribution channels that may anonymise or obscure the chain of transactions) and types of distributors or intermediaries;(g) The distribution channels, including the extent to which the licensee deals directly with the customer and the extent to which it relies (or is allowed to rely) on third parties to conduct CDD and the use of technology; and(h) Internal audit, external audit or regulatory inspection findings.Added: January 2022Country/Geographic risk
FC-C.2.5
Country/geographic area risk, in conjunction with other risk factors, provides useful information as to potential ML/TF/PF risks. Factors that may be considered as indicators of higher risk include:
(a) Countries identified by credible sources, such as mutual evaluation or detailed assessment reports or published follow-up reports, as not having adequate AML/CFT/CPF systems;(b) Countries or geographic areas identified by credible sources as providing funding or support for terrorist activities, or that have designated terrorist organisations operating within their country;(c) Countries identified by credible sources as having significant levels of corruption or organized crime or other criminal activity, including source or transit countries for illegal drugs, human trafficking and smuggling and illegal gambling;(d) Countries subject to sanctions, embargoes or similar measures issued by international organisations such as the United Nations Organisation; and(e) Countries identified by credible sources as having weak governance, law enforcement, and regulatory regimes, including countries identified by the FATF statements as having weak AML/CFT/CPF regimes, and for which financial institutions should give special attention to business relationships and transactions.Added: January 2022Customer/Investor risk
FC-C.2.6
Categories of customers which may indicate a higher risk include:
(a) The business relationship is conducted in unusual circumstances (e.g. significant unexplained geographic distance between the financial institution and the customer).(b) Non-resident customers;(c) Legal persons or arrangements that are personal asset-holding vehicles;(d) Companies that have nominee shareholders or shares in bearer form;(e) Businesses that are cash-intensive;(f) The ownership structure of the company appears unusual or excessively complex given the nature of the company’s business;(g) Customer is sanctioned by the relevant national competent authority for non-compliance with the applicable AML/CFT/CPF regime and is not engaging in remediation to improve its compliance;(h) Customer is a PEP or customer’s family members, or close associates are PEPs (including where a beneficial owner of a customer is a PEP);(i) Customer resides in or whose primary source of income originates from high-risk jurisdictions;(j) Customer resides in countries considered to be uncooperative in providing beneficial ownership information; customer has been mentioned in negative news reports from credible media, particularly those related to predicate offences for AML/CFT/CPF or to financial crimes;(k) Customer’s transactions indicate a potential connection with criminal involvement, typologies or red flags provided in reports produced by the FATF or national competent authorities;(l) Customer is engaged in, or derives wealth or revenues from, a high-risk cash-intensive business;(m) The number of STRs and their potential concentration on particular client groups;(n) Customers who have sanction exposure; and(o) Customer has a non-transparent ownership structure.Added: January 2022Product/Service/Transactions risk
FC-C.2.7
An overall risk assessment should include determining the potential risks presented by product, service, transaction or the delivery channel of the
Islamic bank licensee . Alicensee should assess, using a RBA, the extent to which the offering of its product, service, transaction or the delivery channel presents potential vulnerabilities to placement, layering or integration of criminal proceeds into the financial system.Added: January 2022FC-C.2.8
Determining the risks of product, service, transaction or the delivery channel offered to customers may include a consideration of their attributes, as well as any associated risk mitigation measures. Products and services that may indicate a higher risk include:
(a) Private banking;(b) Anonymous transactions (which may include cash);(c) Non-face-to-face business relationships or transactions;(d) Payment received from unknown or un-associated third parties;(e) Products or services that may inherently favour anonymity or obscure information about underlying customer transactions;(f) The geographical reach of the product or service offered, such as those emanating from higher risk jurisdictions;(g) Products with unusual complexity or structure and with no obvious economic purpose;(h) Products or services that permit the unrestricted or anonymous transfer of value (by payment or change of asset ownership) to an unrelated third party, particularly those residing in a higher risk jurisdiction; and(i) Use of new technologies or payment methods not used in the normal course of business by theIslamic bank licensee .Added: January 2022Distribution Channel Risk
FC-C.2.9
A customer may request transactions that pose an inherently higher risk to the
Islamic bank licensee . Factors that may be considered as indicators of higher risk include:(a) A request is made to transfer funds to a higher risk jurisdiction/country/region without a reasonable business purpose provided; and(b) A transaction is requested to be executed, where thelicensee is made aware that the transaction will be cleared/settled through an unregulated entity.Added: January 2022FC-C.2.10
An
Islamic bank licensee should analyse the specific risk factors, which arise from the use of intermediaries and their services. Intermediaries’ involvement may vary with respect to the activity they undertake and their relationship with thelicensees .Licensee should understand who the intermediary is and perform a risk assessment on the intermediary prior to establishing a business relationship.Licensees and intermediaries should establish clearly their respective responsibilities for compliance with applicable regulation.Added: January 2022FC-1 FC-1 Customer Due Diligence Requirements
FC-1.1 FC-1.1 General Requirements
Verification of Identity and Source of Funds
FC-1.1.1
Islamic bank licensees must establish effective systematic internal procedures for establishing and verifying the identity of their customers and the source of their funds. Such procedures must be set out in writing and approved by thelicensee's senior management and must be strictly adhered to.Amended: January 2020
Amended: October 2014
October 07FC-1.1.2
Islamic bank licensees must implement the customer due diligence measures outlined in Chapters 1, 2 and 3 when:(a) Establishing business relations with a new or existing customer;(b) A change to the signatory or beneficiary of an existing account or business relationship is made;(c) A significant transaction takes place;(d) There is a material change in the way that the bank account is operated or in the manner in which the business relationship is conducted;(e)Customer documentation standards change substantially;(f) TheIslamic bank licensee has doubts about the veracity or adequacy of previously obtained customer due diligence information;(g) [This Sub-paragraph was deleted in July 2018];(h) Carrying out wire transfers irrespective of amount; or(i) There is a suspicion of money laundering or terrorist financing.Amended: July 2018
October 07FC-1.1.2A
Islamic bank licensees must understand, and as appropriate, obtain information on the purpose and intended nature of the business relationship.Added: October 2014FC-1.1.2B
Islamic bank licensees must conduct ongoing due diligence on the business relationship, including:(a) Scrutinizing transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution's knowledge of the customer, their business and risk profile, including, where necessary, the source of funds; and(b) Ensuring that documents, data or information collected under the CDD process is kept up-to-date and relevant, by undertaking reviews of existing records, particularly for higher risk categories of customers.Amended: October 2017
Added: October 2014FC-1.1.2C
An
Islamic bank licensee must also review and update the customers’ risk profile based on their level of ML/TF/PF risk upon onboarding and regularly throughout the life of the relationship. The risk management and mitigation measures implemented by alicensee must be commensurate with the risk profile of the customer or type of customer.Added: January 2022FC-1.1.3
For the purposes of this Module, 'customer' includes counterparties such as financial markets counterparties, except where financial institutions are acting as principals where simplified due diligence measures may sometimes apply. These simplified measures are set out in Section FC 1.11.
October 07FC-1.1.4
The CBB's specific minimum standards to be followed with respect to verifying customer identity and source of funds are contained in Section FC-1.2. Enhanced requirements apply under certain high-risk situations: these requirements are contained in Sections FC-1.3 to FC-1.8 inclusive. Additional requirements apply where an
Islamic bank licensee is relying on a professional intermediary to perform certain parts of the customer due diligence process: these are detailed in Section FC-1.10. Simplified customer due diligence measures may apply in defined circumstances: these are set out in Section FC-1.11.October 07Verification of Third Parties
FC-1.1.5
Islamic bank licensees must obtain a signed statement in hard copy or through digital means from all new customers confirming whether or not the customer is acting on his own behalf or not. This undertaking must be obtained prior to conducting any transactions with the customer concerned.Amended: January 2022
October 07FC-1.1.6
Where a customer is acting on behalf of a third party, the
Islamic bank licensee must also obtain a signed statement from the third party, confirming they have given authority to the customer to act on their behalf. Where the third party is a legal person, theIslamic bank licensee must have sight of the original Board resolution (or other applicable document) authorising the customer to act on the third party's behalf, and retain a certified copy.October 07FC-1.1.7
Islamic bank licensees must establish and verify the identity of the customer and (where applicable) the party/parties on whose behalf the customer is acting, including the Beneficial Owner of the funds. Verification must take place in accordance with the requirements specified in this Chapter.October 07FC-1.1.8
Where financial services are provided to a minor or other person lacking full legal capacity, the normal identification procedures as set out in this Chapter must be followed. In the case of minors,
licensee s must additionally verify the identity of the parent(s) or legal guardian(s). Where a third party on behalf of a person lacking full legal capacity wishes to open an account, thelicensee must establish the identity of that third party as well as the intended account holder.October 07Anonymous and Nominee Accounts
FC-1.1.9
Islamic bank licensees must not establish or keep anonymous accounts or accounts in fictitious names. WhereIslamic bank licensees maintain a nominee account, which is controlled by or held for the benefit of another person, the identity of that person must be disclosed to theIslamic bank licensee and verified by it in accordance with the requirements specified in this Chapter.October 07Timing of Verification
FC-1.1.10
Islamic bank licensees must not commence a business relationship or undertake a transaction with a customer before completion of the relevant customer due diligence measures specified in Chapters 1, 2 and 3. However, verification may be completed after receipt of funds in the case of: Bahrain companies under formation which are being registered with the Ministry of Industry and Commerce; or newly arrived persons in Bahrain who are taking up employment or residence.Amended: January 2024
Amended: January 2022
Amended: October 2013
Added: October 07FC-1.1.10A
Islamic bank licensees must ensure they adopt adequate risk management procedures and perform risk assessments with respect to the conditions under which a customer may utilise the business relationship prior to verification.Added: January 2024Companies under Formation
FC-1.1.10B
Islamic bank licensees may open a bank account for the purpose of injection of initial capital (bank account for depositing capital) for a company under formation. No transfers or disbursement of funds must take place from such bank account until all the CDD requirements have been fully met.Added: January 2024FC-1.1.10C
Islamic bank licensees should only deny a request for opening accounts due to serious reasons or in case of suspicions arising from AML/CFT risk assessments. An example of a serious reason includes the detection of the fact that one of the shareholders of the company under formation appears in local, regional or international sanction lists.Added: January 2024FC-1.1.10D
Islamic bank licensees may open a separate bank account for the purpose of payment of formation expenses under conditions to be agreed with the customer.Added: January 2024FC-1.1.10E
All bank accounts of the company under formation must be closed or suspended and funds returned (see Paragraph FC-1.1.11) if the final CR is not received and the customer has not completed the customer due diligence requirements within a period of six months from the date of opening the account. The six-month period may be extended subject to a bilateral arrangement between the
licensee and the customer.Added: January 2024FC-1.1.10F
For the purposes of account mentioned in Paragraph FC-1.1.10D,
Islamic bank licensees should follow the guidance below:(a)Licensees should receive from the customer, information regarding the nature of transactions, volume and prospective vendors during the formation stages;(b)Licensees may agree with the customer a limit for maximum payments to be made out of this account;(c)Licensees should ensure that payments from such accounts are only through EFTS; and(d)Licensees should integrate their systems with Sijilat system of the Ministry of Industry and Commerce for real-time access to allow opening of accounts in a timely and efficient manner.Added: January 2024New Arrivals
FC-1.1.10G
In the case of newly arrived persons in Bahrain who are taking up employment or residence, an account may be opened after undertaking initial customer due diligence and obtaining and verifying the identity information of the customer. However, no transfers or disbursement of funds must take place from such bank account until all the CDD requirements have been fully met.
Added: January 2024FC-1.1.10H
In complying with the requirements of Paragraph FC-1.1.10G, examples of serious reasons for denying the request for opening an account may include failure to provide a valid passport. It may also include instances where a potential customer’s conduct or activity appears suspicious, or the customer’s name appears in one of the local, regional or international sanction lists.
Added: January 2024Incomplete Customer Due Diligence
FC-1.1.11
Where an
Islamic bank licensee is unable to comply with the requirements specified in Chapters 1, 2 and 3, it must consider whether: it should freeze any funds received and file a suspicious transaction report; or to terminate the relationship; or not proceed with the transaction; or to return the funds to the counterparty in the same method as received.Amended: October 2013
October 07FC-1.1.12
See also Chapter FC-5, which covers the filing of suspicious transaction reports. Regarding the return of funds to the counterparty, if funds are received in cash, funds should be returned in cash. If funds are received by wire transfer, they should be returned by wire transfer.
Amended: October 2013
October 07Non-Resident Accounts
FC-1.1.12A
Islamic retail bank licensees that open bank accounts or otherwise transact or deal with non-resident customers who are natural persons must have documented criteria for acceptance of business from such persons. For non-resident customers,Islamic bank licensees must ensure the following:(a) Ensure there is a viable economic reason for the business relationship;(b) Perform enhanced due diligence where required in accordance with Paragraph FC-1.1.17;(c) Obtain and document the country of residence for tax purposes where relevant;(d) Obtain evidence of banking relationships in the country of residence;(e) Obtain the reasons for dealing with licensee in Bahrain;(f) Obtain an indicative transaction volume and/or value of incoming funds; and(g) Test that the persons are contactable without unreasonable delays.Amended: October 2023
Added: January 2022FC-1.1.12B
Islamic retail bank licensees that open bank accounts or otherwise transact or deal with non-resident customers who are natural persons must have documented approved policies in place setting out the products and services which will be offered to non-resident customers. Such policy document must take into account a comprehensive risk assessment covering all risks associated with the products and services offered to non-residents. Thelicensee must also have detailed procedures to address the risks associated with the dealings with non-resident customers including procedures and processes relating to authentication, genuineness of transactions and their purpose.Added: January 2022FC-1.1.12C
Islamic retail bank licensees must not accept non-residents customers from high risk jurisdictions subject to a call for action by FATF.Added: January 2022FC-1.1.12D
Islamic retail bank licensees must take adequate precautions and risk mitigation measures before onboarding non-resident customers from high risk jurisdictions. Thelicensees must establish detailed assessments and criteria that take into consideration FATF mutual evaluations, FATF guidance, the country national risk assessments (NRAs) and other available guidance on onboarding and retaining non-resident customers from the following high risk jurisdictions:(a) Jurisdictions under increased monitoring by FATF;(b) Countries upon which United Nations sanctions have been imposed except those referred to in Paragraph FC-1.1.12C; and(c) Countries that are the subject of any other sanctions.Added: January 2022FC-1.1.12E
[This Paragraph was deleted in October 2023].
Deleted: October 2023
Added: January 2022FC-1.1.12F
All
Islamic bank licensees must establish systems and measures that are proportional to the risk relevant to each jurisdiction and this must be documented. Such a document must show the risks, mitigation measures for each jurisdiction and for each non-resident customer.Added: January 2022FC-1.1.12G
All
Islamic bank licensees must establish a comprehensive documented policy and procedures describing also the tools, methodology and systems that support the licensee’s processes for:(a) The application of RBA;(b) Customer due diligence;(c) Ongoing transaction monitoring; and(d) Reporting in relation to their transactions or dealings with non-resident customers.Added: January 2022FC-1.1.12H
Islamic bank licensees must ensure that only the official/government documents are accepted for the purpose of information in Subparagraphs FC-1.2.1 (a) to (f) in the case of non-resident customers.Added: January 2022FC-1.1.13
[This Paragraph was deleted in January 2024].
Deleted: January 2024
Amended: January 2022
Amended: April 2014
Added: October 2013FC-1.1.13A
[This Paragraph was deleted in January 2024].
Deleted: January 2024
Added: April 2014FC-1.1.13B
[This Paragraph was deleted in January 2024].
Deleted: January 2024
Added: April 2014FC-1.1.13C
[This Paragraph was deleted in January 2024].
Deleted: January 2024
Added: April 2014FC-1.1.13D
[This Paragraph was deleted in January 2024].
Deleted: January 2024
Added: October 2017FC-1.1.13E
[This Paragraph was deleted in January 2024].
Deleted: January 2024
Added: October 2017FC-1.1.13F
[This Paragraph was deleted in January 2024].
Deleted: January 2024
Added: October 2017FC-1.1.13G
[This Paragraph was deleted in January 2024].
Deleted: January 2024
Added: October 2017FC-1.1.13H
[This Paragraph was deleted in January 2024].
Deleted: January 2024
Added: October 2017FC-1.1.14
[This Paragraph was deleted in October 2023].
Deleted: October 2023
Amended: January 2023
Amended: April 2021
Amended: January 2021
Added: October 2013FC-1.1.14A
[This Paragraph was deleted in October 2023].
Deleted: October 2023
Added: July 2022FC-1.1.14B
[This Paragraph was deleted in October 2023].
Deleted: October 2023
Added: January 2023FC-1.1.15
Where a non-resident account is opened, the customer must be informed by the
Islamic bank licensee of any services which may be restricted or otherwise limited, as a result of their non-resident status.Added: October 2013FC-1.1.16
For purposes of Paragraph FC-1.1.15, examples of limitations or restrictions for non-resident accounts may include limitations on banking services being offered including the granting of credit or other facilities, including credit cards or cheque books.
Added: October 2013FC-1.1.17
Islamic bank licensees must follow the below CDD and customer onboarding requirements:Enhanced Due Diligence Digital Onboarding Bahrainis and GCC nationals (wherever they reside) and expatriates resident in Bahrain No Yes Others Yes Yes Added: October 2023FC-1.2 FC-1.2 Face-to-face Business
Natural Persons
FC-1.2.1
If the customer is a natural person,
Islamic bank licensees must identify the person’s identity and obtain the following information before providing financial services of any kind:(a) Full legal name and any other names used;(b) Full permanent address (i.e. the residential address of the customer; a post office box is insufficient);(c) Date of birth;(d) Nationality;(e) Passport number (if the customer is a passport holder);(f) Current CPR or Iqama number (for residents of Bahrain or GCC states) or government issued national identification proof;(g) Telephone/fax number and email address (where applicable);(h) Occupation or public position held (where applicable);(i) Employer's name and address (if self-employed, the nature of the self-employment);(j) Type of account, and nature and volume of anticipated business dealings with theIslamic bank licensee ;(k) Signature of thecustomer(s) ;(l) Source of funds;(m) Reason for opening the account; and(n) Place of Birth.Amended: January 2024
Amended: January 2022
Amended: January 2020
October 07FC-1.2.1A
Islamic bank licensees obtaining the information and customer signature electronically using digital applications must comply with the applicable laws governing the onboarding/business relationship including but not limited to the Electronic Transactions Law (Law No. 54 of 2018) for the purposes of obtaining signatures as required in Subparagraph FC-1.2.1 (k) above.Added: January 2022FC-1.2.2
See Part B, Volume 2 (Islamic Banks), for Guidance Notes on source of funds (FC-1.2.1(1)) and requirements for residents of Bahrain (FC-1.2.1 (c)&(f)).
October 07FC-1.2.2A
Islamic retail bank licensees must verify the information in Paragraph FC-1.2.1 (a) to (f) by the following methods; at least one of the copies of the identification documents mentioned in (a) and (b) below must include a clear photograph of the customer:(a) Confirmation of the date of birth and legal name, by use of the national E-KYC application and if this is not practical, obtaining a copy of a current valid official original identification document (e.g. birth certificate, passport, national identity card, CPR or Iqama); and(b) Confirmation of the permanent residential address by use of the national E-KYC application and if this is not practical, obtaining a copy of a recent utility bill, bank statement or similar statement from anotherlicensee or financial institution, or some form of official correspondence or official documentation card, such as national identity card or CPR, from a public/governmental authority, or a tenancy agreement or record of home visit by an official of theIslamic bank licensee .Added: January 2022FC-1.2.3
Islamic wholesale bank licensees must verify the information in Paragraph FC-1.2.1 (a) to (f), by the following methods below; at least one of the copies of the identification documents mentioned in (a) and (b) below must include a clear photograph of the customer:(a) Confirmation of the date of birth and legal name, by taking a copy of a current valid official original identification document (e.g. birth certificate, passport, national identity card, CPR or Iqama);(b) Confirmation of the permanent residential address by taking a copy of a recent utility bill, bank statement or similar statement from anotherlicensee or financial institution, or some form of official correspondence or official identification card, such as CPR (see Part B Guidance Notes) from a public or government authority, or a tenancy agreement or record of home visit by an official of theIslamic bank licensee ; and(c) Where appropriate, direct contact with the customer by phone, letter or email to confirm relevant information, such as residential address information.Amended: January 2022
October 07FC-1.2.4
Any document copied or obtained for the purpose of identification verification in a face-to-face customer due diligence process must be an original. An authorised official of the
licensee must certify the copy, by writing on it the words 'original sighted', together with the date and his signature. Equivalent measures must be taken for electronic copies.Amended: January 2022
October 07FC-1.2.5
Identity documents which are not obtained by an authorised official of the
licensee in original form (e.g. due to a customer sending a copy by post following an initial meeting) must instead be certified (as per FC-1.2.4) by one of the following from a GCC or FATF member state:(a) A lawyer;(b) A notary;(c) A chartered/certified accountant;(d) An official of a government ministry;(e) An official of an embassy or consulate; or(f) An official of another licensed financial institution or of an associate company of thelicensee .October 07FC-1.2.6
The individual making the certification under FC-1.2.5 must give clear contact details (e.g. by attaching a business card or company stamp). The
Islamic bank licensee must verify the identity of the person providing the certification through checking membership of a professional organisation (for lawyers or accountants), or through checking against databases/websites, or by direct phone or email contact.October 07Legal Entities or Legal Arrangements (such as trusts)
FC-1.2.7
If the customer is a legal entity or a legal arrangement such as a trust, the
Islamic bank licensee must obtain and record the following information from original identification documents, databases or websites, in hard copy or electronic form, to identify the customer and to take reasonable measures to verify its identity, legal existence and structure:(a) The entity's full name and other trading names used;(b) Registration number (or equivalent);(c) Legal form and proof of existence;(d) Registered address and trading address (where applicable);(e) Type of business activity;(f) Date and place of incorporation or establishment;(g) Telephone, fax number and email address;(h) Regulatory body or listing body (for regulated activities such as financial services and listed companies);(hh) The names of the relevant persons having a senior management position in the legal entity or legal arrangement;(i) Name of external auditor (where applicable);(j) Type of account, and nature and volume of anticipated business dealings with theIslamic bank licensee ; and(k) Source of funds.Amended: October 2017
October 07FC-1.2.8
The information provided under FC-1.2.7 must be verified by obtaining certified copies of the following documents, as applicable (depending on the legal form of the entity):
(a) Certificate of incorporation and/or certificate of commercial registration or trust deed;(b) Memorandum of association;(c) Articles of association;(d) Partnership agreement;(e) Board resolution seeking the banking services (only necessary in the case of private or unlisted companies);(f) Identification documentation of the authorised signatories of the account (certification not necessary for companies listed in a GCC/FATF state);(g) Copy of the latest financial report and accounts, audited where possible (audited copies do not need to be certified); and(h) List of authorised signatories of the company for the account and a Board resolution (or other applicable document) authorising the named signatories or their agent to operate the account (resolution only necessary for private or unlisted companies).October 07FC-1.2.9
Documents obtained to satisfy the requirements in FC-1.2.8 above must be certified in the manner specified in FC-1.2.4 to FC-1.2.6.
October 07FC-1.2.9A
For the purpose of Paragraph FC-1.2.8(a), the requirement to obtain a certified copy of the commercial registration, may be satisfied by obtaining a commercial registration abstract printed directly from the Ministry of Industry, Commerce and Tourism's website, through "SIJILAT Commercial Registration Portal".
Added: January 2017FC-1.2.10
The documentary requirements in FC-1.2.8 above do not apply in the case of FATF/GCC listed companies: see Section FC-1.11 below. Also, the documents listed in FC-1.2.8 above are not exhaustive: for customers from overseas jurisdictions, documents of an equivalent nature may be produced as satisfactory evidence of a customer's identity.
October 07FC-1.2.11
Licensees must also obtain and document the following due diligence information. These due diligence requirements must be incorporated in thelicensee 's new business procedures:(a) Enquire as to the structure of the legal entity or trust sufficient to determine and verify the identity of the ultimate beneficial owner of the funds, the ultimate provider of funds (if different), and ultimate controller of the funds (if different);(b) Ascertain whether the legal entity has been or is in the process of being wound up, dissolved, struck off or terminated;(c) Obtain the names, country of residence and nationality ofDirector s or partners (only necessary for private or unlisted companies);(d) Require, through new customer documentation or other transparent means, updates on significant changes to corporate ownership and/or legal structure;(e) Obtain and verify the identity ofshareholder s holding 20% or more of the issued capital (where applicable). The requirement to verify the identity of theseshareholder s does not apply in the case of FATF/GCC listed companies;(f) In the case of trusts or similar arrangements, establish the identity of the settlor(s), trustee(s), and beneficiaries (including making such reasonable enquiries as to ascertain the identity of any other potential beneficiary, in addition to the named beneficiaries of the trust); and(g) Where alicensee has reasonable grounds for questioning the authenticity of the information supplied by a customer, conduct additional due diligence to confirm the above information.October 07FC-1.2.12
For the purposes of Paragraph FC-1.2.11, acceptable means of undertaking such due diligence might include taking bank references; visiting or contacting the company by telephone; undertaking a company search or other commercial enquiries; accessing public and private databases (such as stock exchange lists); making enquiries through a business information service or credit bureau; confirming a company's status with an appropriate legal or accounting firm; or undertaking other enquiries that are commercially reasonable.
October 07FC-1.2.13
Where a
licensee is providing investment management services to a regulated mutual fund, and is not receiving investors' funds being paid into the fund, it may limit its CDD to confirming that the administrator of the fund is subject to FATF-equivalent customer due diligence measures (see FC-1.9 for applicable measures). Where there are reasonable grounds for believing that investors' funds being paid into the fund are not being adequately verified by the administrator, then thelicensee should consider terminating its relationship with the fund.October 07FC-1.2.8A
For customers that are legal persons,
Islamic bank licensees must identify and take reasonable measures to verify the identity of beneficial owners through the following information:(a) The identity of the natural person(s) who ultimately have a controlling ownership interest in a legal person, and(b) To the extent that there is doubt under (a) as to whether the person(s) with the controlling ownership interest is the beneficial owner(s), or where no natural person exerts control of the legal person or arrangement through other means; and(c) Where no natural person is identified under (a) or (b) above, the identity of the relevant natural person who holds the position of senior managing official.Added: October 2017FC-1.3 FC-1.3 Enhanced Customer Due Diligence: General Requirements
FC-1.3.1
Enhanced customer due diligence must be performed on those customers identified as having a higher risk profile, and additional inquiries made or information obtained in respect of those customers.
October 07FC-1.3.2
Licensees should examine, as far as reasonably possible, the background and purpose of all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or lawful purpose. Where the risks of money laundering or terrorist financing are higher,licensees should conduct enhanced CDD measures, consistent with the risks identified. In particular, they should increase the degree and nature of monitoring of the business relationship, in order to determine whether those transactions or activities appear unusual or suspicious. The additional inquiries or information referred to in Paragraph FC-1.3.1 include:(a) Obtaining additional information on the customer (e.g. occupation, volume of assets, information available through public databases, internet, etc.), and updating more regularly the identification data of customer and beneficial owner;(b) Obtaining additional information on the intended nature of the business relationship;(c) Obtaining information on the source of funds or source of wealth of the customer;(d) Obtaining information on the reasons for intended or performed transactions;(e) Obtaining the approval of senior management to commence or continue the business relationship;(f) Conducting enhanced monitoring of the business relationship, by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination;(g) Taking specific measures to identify the source of the first payment in this account and applying RBA to ensure that there is a plausible explanation in any case where the first payment was not received from the same customer’s account;(h) Obtaining evidence of a person's permanent address through the use of a credit reference agency search, or through independent governmental database or by home visit;(i) Obtaining a personal reference (e.g. by an existing customer of theIslamic bank licensee );(j) Obtaining another licensed entity's reference and contact with the concernedlicensee regarding the customer;(k) Obtaining documentation outlining the customer's source of wealth;(l) Obtaining additional documentation outlining the customer's source of income; and(m) Obtaining additional independent verification of employment or public position held.Amended: January 2022
October 07FC-1.3.3
In addition to the general rule contained in Paragraph FC-1.3.1 above, special care is required in the circumstances specified in Sections FC-1.4 to FC-1.9 inclusive.
October 07FC-1.3.4
Additional enhanced due diligence measures for non-resident account holders may include the following:
(a) References provided by a regulated bank from a FATF country;(b) Certified copies of bank statements for a recent 3-month period; or(c) References provided by a known customer of theIslamic bank licensee .Amended: January 2022
Amended: October 2019
Added: October 2013FC-1.4 FC-1.4 Enhanced Customer Due Diligence: Non face-to-face Business and New Technologies
FC-1.4.1
Islamic bank licensees must establish specific procedures for verifying customer identity where no face-to-face contact takes place.October 07FC-1.4.2
Where no face-to-face contact takes place,
Islamic bank licensees must take additional measures (to those specified in Section FC-1.2), in order to mitigate the potentially higher risk associated with such business. In particular,Islamic bank licensees must take measures:(a) To ensure that the customer is the person they claim to be; and(b) To ensure that the address provided is genuinely the customer's.October 07FC-1.4.3
There are a number of checks that can provide an
Islamic bank licensee with a reasonable degree of assurance as to the authenticity of the applicant. They include:(a) Telephone contact with the applicant on an independently verified home or business number;(b) With the customer's consent, contacting an employer to confirm employment, via phone through a listed number or in writing;(c) Salary details appearing on recent bank statements;(d) Independent verification of employment (e.g.: through the use of a national E-KYC application, or public position held;(e) Carrying out additional searches (e.g. internet searches using independent and open sources) to better inform the customer risk profile;(f) Carrying out additional searches focused on financial crime risk indicator (i.e. negative news);(g) Evaluating the information provided with regard to the destination of fund and the reasons for the transaction;(h) Seeking and verifying additional information from the customer about the purpose and intended nature of the transaction or the business relationship; and(i) Increasing the frequency and intensity of transaction monitoring.Amended: January 2022
October 07FC-1.4.4
Financial services provided using digital channels or internet pose greater challenges for customer identification and AML/CFT purposes.
Islamic bank licensees must identify and assess the money laundering or terrorist financing risks relevant to any new technology or channel and establish procedures to prevent the misuse of technological developments in money laundering or terrorist financing schemes. Specifically,licensees which provide significant electronic and internet banking services to their customers must establish systems or programmes to monitor, detect and highlight unusual transactions. The risk assessments must be consistent with the requirements in Section FC-C.2.Amended: January 2022
October 07FC-1.4.5
Islamic bank licensees must identify and assess the money laundering or terrorist financing risks that may arise in relation to:(a) The development of new products and new business practices, including new delivery mechanisms; and(b) The use of new or developing technologies for both new and pre-existing products.Added: October 2014FC-1.4.6
For purposes of Paragraph FC-1.4.5, such a risk assessment consistent with the requirements in Section FC-C.2 and must take place prior to the launch of the new products, business practices or the use of new or developing technologies.
Islamic bank licensees must take appropriate measures to manage and mitigate those risks.Amended: January 2022
Added: October 2014Enhanced Monitoring
FC-1.4.7
Customers onboarded digitally must be subject to enhanced on-going account monitoring measures.
Added: January 2022FC-1.4.8
The CBB may require a
licensee to share the details of the enhanced monitoring and the on-going monitoring process for non face-to-face customer relationships.Added: January 2022Licensee’s digital ID applications
FC-1.4.9
Islamic bank licensees may use its digital ID applications that use secure audio-visual real time (live video conferencing/live photo selfies) communication means to identify the natural person.Added: January 2022FC-1.4.10
Islamic bank licensees must maintain a document available upon request for the use of its digital ID applications that includes all the following information:(a) A description of the nature of products and services for which the proprietary digital ID application is planned to be used with specific references to the rules in this Module for which it will be used;(b) A description of the systems and IT infrastructure that are planned to be used;(c) A description of the technology and applications that have the features for facial recognition or biometric recognition to authenticate independently and match the face and the customer identification information available with the licensee. The process and the features used in conjunction with video conferencing include, among others, face recognition, three-dimensional face matching techniques etc.;(d) “Liveness” checks created in the course of the identification process;(e) A description of the governance arrangements related to this activity including the availability of specially trained personnel with sufficient level of seniority; and(f) Record keeping arrangements for electronic records to be maintained and the relative audit.Added: January 2022FC-1.4.11
Islamic bank licensees that intends to use its digital ID application to identify the customer and verify identity information must meet the following additional requirements:(a) The digital ID application must make use of secure audio visual real time (live video conferencing/live photo selfies) technology to (i) identify the customer, (ii) verify his/her identity, and also (iii) ensure the data and documents provided are authentic;(b) The picture/sound quality must be adequate to facilitate unambiguous identification;(c) The digital ID application must include or be combined with capability to read and decrypt the information stored in the identification document’s machine readable zone (MRZ) for authenticity checks from independent and reliable sources;(d) Where the MRZ reader is with an outsourced provider, thelicensee must ensure that such party is authorized to carry out such services and the information is current and up to date and readily available such that thelicensee can check that the decrypted information matches the other information in the identification document;(e) The digital ID application has the features for allowing facial recognition or biometric recognition that can authenticate and match the face and the customer identification documents independently;(f) The digital ID solution has been tested by an independent expert covering the governance and control processes to ensure the integrity of the solution and underlying methodologies, technology and processes and risk mitigation. The report of the expert’s findings must be retained and available upon request;(g) The digital ID application must enable an ongoing process of retrieving and updating the digital files, identity attributes, or data fields which are subject to documented access rights and authorities for updating and changes; and(h) The digital ID application must have the geo-location features which must be used by thelicensee to ensure that it is able to identify any suspicious locations and to make additional inquiries if the location from which a customer is completing the onboarding process does not match the location of the customer based on the information and documentation submitted.Added: January 2022FC-1.4.12
Islamic bank licensees using its digital ID application must establish and implement an approved policy which lays down the governance, control mechanisms, systems and procedures for the CDD which include:(a) A description of the nature of products and services for which customer due diligence may be conducted through video conferencing or equivalent electronic means;(b) A description of the systems, controls and IT infrastructure planned to be used;(c) Governance mechanism related to this activity;(d) Specially trained personnel with sufficient level of seniority; and(e) Record keeping arrangements for electronic records to be maintained and the relative audit trail.Added: January 2022FC-1.4.13
Islamic bank licensees must ensure that the information referred to in Paragraph FC-1.2.1 is collected in adherence to privacy laws and other applicable laws of the country of residence of the customer.Added: January 2022FC-1.4.14
Islamic bank licensees must ensure that the information referred to in Subparagraphs FC-1.2.1 (a) to (f) is obtained prior to commencing the digital verification such that:(a) Thelicensee can perform its due diligence prior to the digital interaction/communication and can raise targeted questions at such interaction/communication session; and(b) Thelicensee can verify the authenticity, validity and accuracy of such information through digital means (See Paragraph FC.1.4.16 below) or by use of the methods mentioned in Paragraph FC-1.2.3 and /or FC-1.4.3 as appropriate.Added: January 2022FC-1.4.15
The
licensee must also obtain the customer’s explicit consent to record the session and capture images as may be needed.Added: January 2022FC-1.4.16
Islamic bank licensees must verify the information in Paragraph FC-1.2.1 (a) to (f) by the following methods below:(a) Confirmation of the date of birth and legal name by digital reading and authenticating current valid passport or other official original identification using machine readable zone (MRZ) or other technology which has been approved under paragraph FC-1.4.9, unless the information was verified using national E-KYC application;(b) Performing real time video calls with the applicant to identify the person and match the person’s face and /other features through facial recognition or bio-metric means with the office documentation, (e.g. passport, CPR);(c) Matching the official identification document, (e.g. passport, CPR) and related information provided with the document captured/displayed on the live video call; and(d) Confirmation of the permanent residential address by, unless the information was verified using national E-KYC application capturing live, the recent utility bill, bank statement or similar statement from anotherlicensee or financial institution, or some form of official correspondence or official documentation card, such as national identity card or CPR, from a public/governmental authority, or a tenancy agreement or record of home visit by an official of theIslamic bank licensee .Added: January 2022FC-1.4.17
For the purposes of Paragraph FC-1.4.16, actions taken for obtaining and verifying customer identity could include:
(a) Collection: Present and collect identity attributes and evidence, either in person and/or online (e.g., by filling out an online form, sending a selfie photo, uploading photos of documents such as passport or driver’s license, etc.);(b) Certification: Digital or physical inspection to ensure the document is authentic and its data or information is accurate (for example, checking physical security features, expiration dates, and verifying attributes via other services);(c) De-duplication: Establish that the identity attributes and evidence relate to a unique person in the ID system (e.g., via duplicate record searches, biometric recognition and/or deduplication algorithms);(d) Verification: Link the individual to the identity evidence provided (e.g., using biometric solutions like facial recognition and liveness detection); and(e) Enrolment in identity account and binding: Create the identity account and issue and link one or more authenticators with the identity account (e.g., passwords, one-time code (OTC) generator on a smartphone, etc.). This process enables authentication.Added: January 2022FC-1.4.18
Not all elements of a digital ID system are necessarily digital. Some elements of identity proofing and enrolment can be either digital or physical (documentary), or a combination, but binding and authentication must be digital.
Added: January 2022FC-1.4.19
Sufficient controls must be put in place to safeguard the data relating to customer information collected through the video conference and due regard must be paid to the requirements of the Personal Data Protection Law (PDPL). Additionally, controls must be put in place to minimize the increased impersonation fraud risk in such non face-to-face relationship where there is a chance that customer may not be who he claims he is.
Added: January 2022Overseas branches
FC-1.4.20
Where
Islamic bank licensees intend to use a digital ID application in a foreign jurisdiction in which it operates, it must ensure that the digital ID application meets with the requirements under Paragraph FC-B.2.1.Added: January 2022FC-1.5 FC-1.5 Enhanced Customer Due Diligence: Politically Exposed Persons ('PEPs')
FC-1.5.1
Islamic bank licensees must have appropriate risk management systems to determine whether a customer or beneficial owner is aPolitically Exposed Person ('PEP') , both at the time of establishing business relations and thereafter on a periodic basis.Islamic bank licensees must utilise publicly available databases and information to establish whether a customer is aPEP .Amended: July 2016
Amended: October 2014
October 07FC-1.5.2
Islamic bank licensees must establish a client acceptance policy with regard toPEPs , taking into account the reputational and other risks involved. Senior management approval must be obtained before aPEP is accepted as a customer.Licensees must not accept a non-Bahraini PEP as a customer based on customer due diligence undertaken using digital ID applications.Amended: January 2022
October 07FC-1.5.3
Where an existing customer is a
PEP , or subsequently becomes aPEP , enhanced monitoring and customer due diligence measures must include:(a) Analysis of complex financial structures, including trusts, foundations or international business corporations;(b) A written record in the customer file to establish that reasonable measures have been taken to establish both the source of wealth and the source of funds;(c) Development of a profile of anticipated customer activity, to be used in on-going monitoring;(d) Approval of senior management for allowing the customer relationship to continue; and(e) On-going account monitoring of thePEP's account by senior management (such as the MLRO).October 07FC-1.5.3A
In cases of higher risk business relationships with such persons, mentioned in Paragraph FC-1.5.1,
Islamic bank licensees must apply, at a minimum, the measures referred to in (b), (d) and (e) of Paragraph FC-1.5.3.Added: October 2014FC-1.5.3B
The requirements for all types of
PEP must also apply to family or close associates of suchPEPs .Added: October 2014FC-1.5.3C
For the purpose of Paragraph FC-1.5.3B, 'family' means spouse, father, mother, sons, daughters, sisters and brothers. 'Associates' are persons associated with a
PEP whether such association is due to the person being an employee or partner of thePEP or of a firm represented or owned by thePEP , or family links or otherwiseAdded: October 2014FC-1.5.4
[This Paragraph was deleted in July 2016 and the definition moved to the Glossary under Part B.]
Deleted: July 2016
Amended: October 2014
October 07FC-1.6 FC-1.6 Enhanced Due Diligence: Charities, Clubs and Other Societies
FC-1.6.1
Financial services must not be provided to charitable funds and religious, sporting, social, cooperative and professional and other societies, before an original certificate authenticated by the relevant Ministry confirming the identities of those purporting to act on their behalf (and authorising them to obtain the said service) has been obtained.
Amended: October 2014
Amended: January 2013
October 07FC-1.6.1A
For the purpose of Paragraph FC-1.6.1, for clubs and societies registered with the Ministry of Youth and Sport Affairs,
Islamic bank licensees must contact the Ministry to clarify whether the account may be opened in accordance with the rules of the Ministry. In addition, in the case of sport associations registered with the Bahrain Olympic Committee (BOC),Islamic bank licensees must contact BOC to clarify whether the account may be opened in accordance with the rules of BOC.Amended: July 2019
Added: January 2013FC-1.6.2
Islamic bank licensees are reminded that clubs and societies registered with the Ministry of Youth and Sport Affairs may only have one account with banks in Bahrain.Amended: July 2019
October 07FC-1.6.2A
Pursuant to Article (20) of the Consolidated Financial Regulations for Sports Clubs issued in 2005,
Islamic bank licensees must not change or open additional bank accounts for Clubs and Youth Centres without obtaining the prior approval of the Ministry of Youth and Sport Affairs.Added: July 2019FC-1.6.3
Charities should be subject to enhanced transaction monitoring by banks.
Islamic bank licensees should develop a profile of anticipated account activity (in terms of payee countries and recipient organisations in particular).October 07FC-1.6.4
Islamic bank licensee s must provide a monthly report of all payments and transfers of BD3,000 (or equivalent in foreign currencies) and above, from accounts held by charities registered in Bahrain. The report must be submitted to the CBB's Compliance Directorate (see FC-5.3 for contact address), giving details of the amount transferred, account name, number and beneficiary name account and bank details.Islamic bank licensee s must ensure that such transfers are in accordance with the spending plans of the charity (in terms of amount, recipient and country).October 07FC-1.6.5
Article 20 of Decree Law No. 21 of 1989 (issuing the Law of Social and Cultural Societies and Clubs and Private Organizations Operating in the Area of Youth and Sport and Private Institutions) provides that
Islamic bank licensees must not accept or process any incoming or outgoing fund transfers in any form (wire transfer, cheques, etc.) from or to any foreign association on behalf of charity and non-profit organisations, societies and clubs licensed by the Ministry of Labour and Social Development or the Ministry of Youth and Sport Affairs without the prior approval of the relevant Ministry.Amended: July 2019
Added July 09FC-1.6.6
The receipt of a Ministry letter mentioned in FC-1.6.5 above does not exempt the concerned bank from conducting normal CDD measures as outlined in other parts of this Module.
Added July 09FC-1.7 FC-1.7 Enhanced Due Diligence: 'Pooled Funds'
FC-1.7.1
Where
Islamic bank licensees receive pooled funds managed by professional intermediaries (such as investment and pension fund managers, stockbrokers and lawyers or authorised money transferors), they must apply CDD measures contained in Section FC-1.9 to the professional intermediary. In addition,Islamic bank licensees must verify the identity of the beneficial owners of the funds where required as detailed in Paragraphs FC-1.7.2 or FC-1.7.3 below.October 07FC-1.7.2
Where funds pooled in an account are not co-mingled (i.e. where there are 'sub-accounts' attributable to each beneficiary) all beneficial owners must be identified by the
Islamic bank licensee , and their identity verified in accordance with the requirements in Section FC-1.2.October 07FC-1.7.3
For accounts held by intermediaries resident in Bahrain, where such funds are co-mingled, the
Islamic bank licensee must make a reasonable effort (in the context of the nature and amount of the funds received) to look beyond the intermediary and determine the identity of the beneficial owners or underlying clients, particularly where funds are banked and then transferred onward to other financial institutions (e.g. in the case of accounts held on behalf of authorised money transferors). Where, however, the intermediary is subject to equivalent regulatory and money laundering regulation and procedures (and, in particular, is subject to the same due diligence standards in respect of its client base) the CBB will not insist upon all beneficial owners being identified provided theIslamic bank licensee has undertaken reasonable measures to determine that the intermediary has engaged in a sound customer due diligence process, consistent with the requirements in Section FC-1.8.October 07FC-1.7.4
For accounts held by intermediaries from foreign jurisdictions, the intermediary must be subject to requirements to combat money laundering and terrorist financing consistent with the FATF 49 Recommendations and the intermediary must be supervised for compliance with those requirements. The bank must obtain documentary evidence to support the case for not carrying out customer due diligence measures beyond identifying the intermediary. The bank must satisfy itself that the intermediary has identified the underlying beneficiaries and has the systems and controls to allocate the assets in the pooled accounts to the relevant beneficiaries. The due diligence process contained in Section FC-1.8 must be followed.
October 07FC-1.7.5
Where the intermediary is not empowered to provide the required information on beneficial owners (e.g. lawyers bound by professional confidentiality rules) or where the intermediary is not subject to the same due diligence standards referred to above, a bank must not permit the intermediary to open an account or allow the account to continue to operate, unless specific permission has been obtained in writing from the CBB.
Amended: October 2014
October 07FC-1.8 FC-1.8 Enhanced Due Diligence for Correspondent Banking Relationships
FC-1.8.1
Islamic bank licensees which intend to act as correspondent banks must gather sufficient additional information (e.g. through a questionnaire) about their respondent banks to understand the nature of the respondent's business. Factors to consider to provide assurance that satisfactory measures are in place at the respondent bank include:(a) Information about the respondent bank's ownership structure and management;(b) Major business activities of the respondent and its location (i.e. whether it is located in a FATF compliant jurisdiction) as well as the location of its parent (where applicable);(c) Where the customers of the respondent bank are located;(d) The respondent's AML/CFT controls;(e) The purpose for which the account will be opened;(f) Confirmation that the respondent bank has verified the identity of any third party entities that will have direct access to the correspondent banking services without reference to the respondent bank (e.g. in the case of 'payable through' accounts);(g) The extent to which the respondent bank performs on-going due diligence on customers with direct access to the account, and the condition of bank regulation and supervision in the respondent's country (e.g. from published FATF reports). Banks should take into account the country where the respondent bank is located and whether that country abides by the FATF Recommendations when establishing correspondent relationships with foreign banks. Banks should obtain where possible copies of the relevant laws and regulations concerning AML/CFT and satisfy themselves that respondent banks have effective customer due diligence measures consistent with the FATF Recommendations;(h) Confirmation that the respondent bank is able to provide relevant customer identification data on request to the correspondent bank; and(i) Whether the respondent bank been subject to a money laundering or terrorist financing investigation.Amended: January 2018
Amended: October 2014
Amended: April 2011
October 2007FC-1.8.2
Islamic bank licensees must implement the following additional measures, prior to opening a correspondent banking relationship:(a) Complete a signed statement that outlines the respective responsibilities of each institution in relation to money laundering detection and monitoring responsibilities; and(b) Ensure that the correspondent banking relationship has the approval of senior management.Amended April 2011
October 07FC-1.8.3
Islamic bank licensees must refuse to enter into or continue a correspondent banking relationship with a bank incorporated in a jurisdiction in which it has no physical presence and which is unaffiliated with a regulated financial group (i.e. 'shell banks', see Section FC-1.10). Banks must pay particular attention when entering into or continuing relationships with respondent banks located in jurisdictions that have poor KYC standards or have been identified by the FATF as being 'non-cooperative' in the fight against money laundering/terrorist financing.October 07FC-1.9 FC-1.9 Introduced Business from Professional Intermediaries
FC-1.9.1
An
Islamic bank licensee may only accept customers introduced to it by other financial institutions or intermediaries, if it has satisfied itself that the financial institution or intermediary concerned is subject to FATF-equivalent measures and customer due diligence measures. WhereIslamic bank licensees delegate part of the customer due diligence measures to another financial institution or intermediary, the responsibility for meeting the requirements of Chapters 1 and 2 remains with theIslamic bank licensee , not the third party.Amended: January 2018
October 07FC-1.9.2
Islamic bank licensees may only accept introduced business if all of the following conditions are satisfied:(a) The customer due diligence measures applied by the introducer are consistent with those required by the FATF Recommendations;(b) A formal agreement is in place defining the respective roles of thelicensee and the introducer in relation to customer due diligence measures. The agreement must specify that the customer due diligence measures of the introducer will comply with the FATF Recommendations;(c) The introducer immediately provides all necessary information required in Paragraphs FC-1.2.1 or FC-1.2.7 and FC-1.1.2A pertaining to the customer's identity, the identity of the customer and beneficial owner of the funds (where different), the purpose of the relationship and, where applicable, the party/parties on whose behalf the customer is acting; also, the introducer has confirmed that theIslamic bank licensee will be allowed to verify the customer due diligence measures undertaken by the introducer at any stage; and(d) Written confirmation is provided by the introducer confirming that all customer due diligence measures required by the FATF 40 + 9 Recommendations have been followed and the customer's identity established and verified. In addition, the confirmation must state that any identification documents or other customer due diligence material can be accessed by theIslamic bank licensee and that these documents will be kept for at least five years after the business relationship has ended.Amended: October 2014
October 07FC-1.9.3
The
Islamic bank licensee must perform periodic reviews ensuring that any introducer on which it relies is in compliance with the FATF Recommendations. Where the introducer is resident in another jurisdiction, theIslamic bank licensee must also perform periodic reviews to verify whether the jurisdiction is in compliance with the FATF Recommendations.Amended: October 2014
October 07FC-1.9.4
Should the
Islamic bank licensee not be satisfied that the introducer is in compliance with the requirements of the FATF Recommendations, thelicensee must conduct its own customer due diligence on introduced business, or not accept further introductions, or discontinue the business relationship with the introducer.Amended: October 2014
October 07FC-1.10 FC-1.10 Shell Banks
FC-1.10.1
Islamic bank licensees must not establish business relations with banks, which have no physical presence or 'mind and management' in the jurisdiction in which they are licensed and which is unaffiliated with a regulated financial group ('shell banks'). Banks must not knowingly establish relations with banks that have relations with shell banks.October 07FC-1.10.2
Islamic bank licensees must make a suspicious transaction report to the Anti-Money Laundering Unit and the Compliance Directorate if they are approached by a shell bank or an institution they suspect of being a shell bank.October 07FC-1.10A FC-1.10A Enhanced Due Diligence: Cross Border Cash Transactions by Courier
FC-1.10A.1
The cross-border movement of cash funds warrants special attention under the FATF Recommendations where transactions are large in value (Recommendation 12), in addition to the general requirement under Recommendation 32 to verify monitor, declare and keep records of all cross-border transfers of cash. Cash shipments are therefore subject to inspection and investigation procedures by the Customs Directorate of the Kingdom of Bahrain. There are also certain specific legal measures mentioned below which are relevant to cross-border cash shipments. Under Article 4 of Decree Law No. 4 of 2001,
licensees of the CBB are required to comply with the CBB's Rules and Regulations concerning the prevention and prohibition of money laundering, which include regulations concerning the cross-border movement of cash. Also,licensees' attention is drawn to the disclosure provisions of Decree Law No 54 of 2006 and Ministerial Order No 6 of 2008 with respect to cross-border transportation of funds (see Part B of the Rulebook for Decree Law No 54).Licensees are also reminded of the rules of the unified customs arrangements of the Gulf Cooperation Council as laid out in Decree Law No 10 of 2002. With respect to the above Law No. 4 of 2001 and the concerned parts of other legislation mentioned above, all money changers must implement the enhanced measures below in respect of all cash received from foreign countries or sold/transferred to foreign countries.Amended: October 2014
Adopted: January 2011FC-1.10A.2
Cash coming into Bahrain via courier (whether a representative of a Bahrain money changer or a foreign institution) must be accompanied by original documentation stating the source of funds and identity of the originator of the funds. Furthermore, the documentation must state the full name and address of the beneficiary of the funds. This documentation must be signed in original by (a representative) of the originator of the cash. This means that where a courier is importing cash via any customs point of entry (e.g. via the Causeway or the Airport), the aforementioned courier must carry original documentation which clearly shows the source of funds and identity of the originator of the funds and the intended beneficiaries' names and address.
Amended: July 2018
Adopted: January 2011FC-1.10A.3
In the case of incoming cash, the courier must carry original documentation signed by the originator stating whether the cash shipment is for local use or for onward transmission.
Adopted: January 2011FC-1.10A.4
If the imported cash is for onward transmission, the original documentation must provide the full name and address of the final beneficiaries, as well as the local recipient (e.g. the bank).
Adopted: January 2011FC-1.10A.5
Failure to provide complete and detailed original signed documentation by the originator of the funds referred to in Paragraph FC-1.10A.2 may cause the cash shipment to be blocked, whereupon the blocking costs will be borne by the concerned money changer in Bahrain. Licensees are also reminded of the penalties and enforcement measures in Law No. 4 of 2001, Decree Law No. 54 of 2006, Ministerial Order No. 7 of 2001 issued by the Minister of Finance and National Economy, the rules of the unified customs arrangements of the Gulf Cooperation Council as laid out in Decree Law No. 10 of 2002 and the CBB Law No. 64 of 2006.
Adopted: January 2011FC-1.11 FC-1.11 Simplified Customer Due Diligence
FC-1.11.1
Islamic bank licensees may apply simplified customer due diligence measures, as described in Paragraphs FC-1.11.2 to FC-1.11.7, if:(a) The customer is the Central Bank of Bahrain ('CBB'), the Bahrain Bourse ('BHB') or alicensee of the CBB;(b) The customer is a Ministry of a Gulf Cooperation Council ('GCC') or Financial Action Task Force ('FATF') member state government, a company in which a GCC or a FATF government is a majorityshareholder , or a company established by decree in the GCC;(c) The customer is a company listed on a GCC or FATF member state stock exchange (where the FATF state stock exchange has equivalent disclosure standards to those of the BHB);(d) The customer is a financial institution whose entire operations are subject to AML/CFT requirements consistent with the FATF Recommendations and it is supervised by a financial services supervisor in a FATF or GCC member state for compliance with those requirements;(e) The customer is a financial institution which is a subsidiary of a financial institution located in a FATF or GCC member state, and the AML/CFT requirements applied to its parent also apply to the subsidiary;(f) The customer is a borrower in a syndicated transaction where the agent bank is a financial institution whose entire operations are subject to AML/CFT requirements consistent with the FATF Recommendations and it is supervised by a financial services supervisor in a FATF or GCC member state for compliance with those requirements; or(g) [This sub-paragraph was deleted in January 2018].Amended: January 2019
Amended: January 2018
Amended: October 2014
Amended: April 2013
Amended: January 2013
Amended: April 2008
October 07
FC-1.11.2
For customers falling under categories a-f specified in Paragraph FC-1.11.1, the information required under Paragraph FC-1.2.1 (for natural persons) or FC-1.2.7 (for legal entities or legal arrangements such as trusts) must be obtained. However, the verification and certification requirements in Paragraphs FC-1.2.3 and FC-1.2.8, and the due diligence requirements in Paragraph FC-1.2.11, may be dispensed with. Where the account is a correspondent banking relationship, enhanced due diligence applies. Refer to Section FC-1.8.
October 07FC-1.11.3
[This Paragraph was deleted in July 2018].
Deleted: July 2018
FC-1.11.4
Islamic bank licensees wishing to apply simplified due diligence measures as allowed for under Paragraph FC-1.11.1 must retain documentary evidence supporting their categorisation of the customer.October 07FC-1.11.5
Examples of such documentary evidence may include a printout from a regulator's website, confirming the licensed status of an institution, and internal papers attesting to a review of the AML/CFT measures applied in a jurisdiction.
October 07FC-1.11.6
Islamic bank licensees may use authenticated SWIFT messages as a basis for confirmation of the identity of a financial institution under FC-1.11.1 (d) and (e) where it is dealing as principal. For customers coming under Paragraph FC-1.11.1 (d) and (e),Islamic bank licensees must also obtain and retain a written statement from the parent institution of the subsidiary concerned, confirming that the subsidiary is subject to the same AML/CFT measures as its parent.October 07FC-1.11.7
Simplified customer due diligence measures must not be applied where an
Islamic bank licensee knows, suspects, or has reason to suspect, that the applicant is engaged in money laundering or terrorism financing or that the transaction is carried out on behalf of another person engaged in money laundering or terrorism financing.October 07FC-1.11.7A
Simplified customer due diligence measures must not be applied in situations where the licensee has identified high ML/TF/PF risks.
Added: January 2022FC-1.11.8
[This Paragraph was deleted in July 2018].
Deleted: July 2018
FC-1.12 FC-1.12 [This Section has been deleted and moved to the CBB Regulatory Sandbox Framework in January 2022]
General Requirements
FC-1.12.1
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.12.2
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.12.3
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.12.4
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017Face to Face Business
FC-1.12.5
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.12.6
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.12.7
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.12.8
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.12.9
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.12.10
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Amended: July 2018
Added: October 2017FC-1.12.11
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017Non Face To Face Business and Technologies
FC-1.12.12
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.12.13
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.12.14
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: October 2017FC-1.13 Reliance on Third Parties for Customer Due Diligence
FC-1.13.1
Licensees are permitted to rely on third parties to perform elements of CDD measures and recordkeeping requirements stipulated in Chapter FC-1 related to customer and beneficial owner identity, verification of their identity and information on the purpose and intended nature of the business relationship with thelicensee , subject to complying with the below:(a)Licensees remain ultimately responsible for CDD measures;(b)Licensees immediately obtain the relevant CDD information from the third party upon onboarding clients;(c) There is an agreement with the third party for the arrangement with clear contractual terms on the obligations of the third party;(d) The third party without delay makes available the relevant documentation relating to the CDD requirements upon request;(e)Licensees ensure that the third party is a financial institution that is regulated and supervised for, and has measures in place for compliance with, CDD and recordkeeping requirements in line with FATF Recommendations 10 and 11; and(f) For third parties based abroad,licensees must consider the information available on the level of country risk.Added: October 2023FC-1.13.2
Where a
licensee relies on a third-party that is part of the same financial group, thelicensee can consider that:(a) The requirements under Subparagraphs FC-1.13.1 (d) and (e) are complied with through its group programme, provided the group satisfies the following conditions:(i) The group applies CDD and record keeping requirements consistent with FATF Recommendations 10, 11 and 12 and has in place internal controls in accordance with FATF Recommendation 18; and(ii) The implementation of CDD, record keeping and AML/CFT measures are supervised at a group level by a financial services regulatory authority for compliance with AML/CFT requirements consistent with standards set by the FATF.(b) The requirement under Subparagraph FC-1.13.1 (f) is complied with if the country risk is adequately mitigated by the group’s AML/CFT policies.Added: October 2023FC-1.13.3
This Section does not apply to outsourcing or agency arrangements in which the outsourced entity applies the CDD measures on behalf of the delegating
licensee , in accordance with its procedures.Added: October 2023FC-2 FC-2 AML / CFT Systems and Controls
FC-2.1 FC-2.1 General Requirements
FC-2.1.1
Islamic bank licensees must implement programmes against money laundering and terrorist financing which establish and maintain appropriate systems and controls for compliance with the requirements of this Module and which limit their vulnerability to financial crime. These systems and controls must be documented, and approved and reviewed annually by the Board of thelicensee . The documentation, and the Board's review and approval, must be made available upon request to the CBB.Amended: October 2014
October 07FC-2.1.2
The above systems and controls, and associated documented policies and procedures, should cover standards for customer acceptance, on-going monitoring of high-risk accounts, staff training and adequate screening procedures to ensure high standards when hiring
employee s.October 07FC-2.14
In implementing the policies, procedures and monitoring tools for ensuring compliance with Paragraph FC-2.1.3, Islamic bank licensees should consider the following:
(a) The business policies and practices should be designed to reduce incentives for staff to expose theIslamic bank licensee to AML/CFT compliance risk;(b) The performance measures of departments/divisions/units and personnel should include measures to address AML/CFT compliance obligations;(c) AML/CFT compliance breaches and deficiencies should be attributed to the relevant departments/divisions/units and personnel within the organisation as appropriate;(d) Remuneration and bonuses should be adjusted for AML/CFT compliance breaches and deficiencies; and(e) Both quantitative measures and human judgement should play a role in determining any adjustments to the remuneration and bonuses resulting from the above.Added: April 2020FC-2.2 FC-2.2 On-going Customer Due Diligence and Transaction Monitoring
Risk Based Monitoring
FC-2.2.1
Islamic bank licensees must develop risk-based monitoring systems appropriate to the complexity of their business, their number of clients and types of transactions. These systems must be configured to identify significant or abnormal transactions or patterns of activity. Such systems must include limits on the number, types or size of transactions undertaken outside expected norms; and must include limits for cash and non-cash transactions.October 07FC-2.2.2
Islamic bank licensees' risk-based monitoring systems should therefore be configured to help identify:(a) Transactions which do not appear to have a clear purpose or which make no obvious economic sense;(b) Significant or large transactions not consistent with the normal or expected behaviour of a customer; and(c) Unusual patterns of activity (relative to other customers of the same profile or of similar types of transactions, for instance because of differences in terms of volumes, transaction type, or flows to or from certain countries), or activity outside the expected or regular pattern of a customer's account activity.October 07Automated Transaction Monitoring
FC-2.2.3
Islamic bank licensees must consider the need to include automated transaction monitoring as part of their risk-based monitoring systems to spot abnormal or unusual flows of funds. In the absence of automated transaction monitoring systems, all transactions above BD 6,000 must be viewed as 'significant' and be captured in a daily transactions report for monitoring by the MLRO or a relevant delegated official, and records retained by theIslamic bank licensee for five years after the date of the transaction.October 07FC-2.2.4
CBB would expect larger
Islamic bank licensees to include automated transaction monitoring as part of their risk-based monitoring systems. See also Chapters FC-4 and FC-7, regarding the responsibilities of the MLRO and record-keeping requirements.October 07Unusual Transactions or Customer Behaviour
FC-2.2.5
Where an
Islamic bank licensee's risk-based monitoring systems identify significant or abnormal transactions (as defined in FC-2.2.2 and FC-2.2.3), it must verify the source of funds for those transactions, particularly where the transactions are above the transactions threshold of BD 6,000. Furthermore,Islamic bank licensees must examine the background and purpose to those transactions and document their findings.Amended: January 2022
Added: October 07FC-2.2.6
The investigations required under FC-2.2.5 must be carried out by the MLRO (or relevant delegated official). The documents relating to these findings must be maintained for five years from the date when the transaction was completed (see also FC-7.1.1 (b)).
October 07FC-2.2.7
Islamic bank licensees must consider instances where there is a significant, unexpected or unexplained change in customer activity.October 07FC-2.2.8
When an existing customer closes one account and opens another, the
Islamic bank licensee must review its customer identity information and update its records accordingly. Where the information available falls short of the requirements contained in Chapter FC-1, the missing or out of date information must be obtained and re-verified with the customer.October 07FC-2.2.9
Once identification procedures have been satisfactorily completed and, as long as records concerning the customer are maintained in line with Chapters FC-1 and FC-7, no further evidence of identity is needed when transactions are subsequently undertaken within the expected level and type of activity for that customer, provided reasonably regular contact has been maintained between the parties and no doubts have arisen as to the customer's identity.
October 07On-going Monitoring
FC-2.2.10
Islamic bank licensees must take reasonable steps to:(a) Scrutinize transactions undertaken throughout the course of that relationship to ensure that transactions being conducted are consistent with theIslamic bank licensee's knowledge of the customer, their business risk and risk profile; and(b) Ensure that they receive and maintain up-to-date and relevant copies of the identification documents specified in Chapter FC-1, by undertaking reviews of existing records, particularly for higher risk categories of customers.Islamic bank licensees must require all customers to provide up-to-date identification documents in their standard terms and conditions of business.Amended: October 2017
October 07FC-2.2.11
Islamic bank licensees must review and update their customer due diligence information at least every three years, particularly for higher risk categories of customers. If, upon performing such a review, copies of identification documents are more than 12 months out of date, theIslamic bank licensee must take steps to obtain updated copies as soon as possible.Amended: October 2017
October 07FC-3 FC-3 Money Transfers and Alternative Remittances
FC-3.1 FC-3.1 Electronic Transfers
Outward Transfers
FC-3.1.1
Islamic bank licensees must include all required originator information and required beneficiary information details with the accompanying electronic transfers of funds they make on behalf of their customers. Non-routine transfers must not be batched, if batching increases the risks of money laundering or terrorist financing. This obligation does not apply where the transfer is made by a bank acting as principal or acting on behalf of another bank as principal such as in the case of payment of spot FX transactions.Amended: October 2014
October 07FC-3.1.2
[This Paragraph has been deleted in October 2014 and its contents moved to Paragraph FC-3.1.5.]
Deleted: October 2014FC-3.1.3
[This Paragraph has been deleted in October 2014 and its contents moved to Paragraph FC-3.1.10.]
Deleted: October 2014Inward Transfers
FC-3.1.4
Banks must:
(a) Maintain records (in accordance with Chapter FC-7 of this Module) of all originator information received with an inward transfer; and(b) Carefully scrutinise inward transfers which do not contain originator information (i.e. full name, address and account number or a unique customer identification number).Licensees must presume that such transfers are 'suspicious transactions' and pass them to the MLRO for review for determination as to possible filing of an STR,unless (a), the originating institution is able to promptly (i.e. within two business days) advise thelicensee in writing of the originator information upon thelicensee's request; or (b) the originating institution and thelicensee are acting on their own behalf (as principals).Amended: October 2014
Amended April 2011
October 2007Cross-Border Wire Transfers
FC-3.1.5
Information accompanying all wire transfers must always contain:
(a) The name of the originator;(b) The originator account number or IBAN where such an account is used to process the transaction;(c) The originator's address, or national identity number, or customer identification number, or date and place of birth;(d) The name of the beneficiary; and(e) The beneficiary account number where such an account is used to process the transaction.Added: October 2014FC-3.1.6
In the absence of an account, a unique transaction reference number should be included which permits traceability of the transaction.
Added: October 2014FC-3.1.7
Where several individual cross-border wire transfers from a single originator are bundled in a batch file for transmission to beneficiaries, they may be exempted from the requirements of Paragraph FC-3.1.5 in respect of originator information, provided that they include the originator's account number or unique transaction reference number (as described in Paragraph FC-3.1.6), and the batch file contains required and accurate originator information, and full beneficiary information, that is fully traceable within the beneficiary country.
Added: October 2014Domestic Wire Transfers
FC-3.1.8
Information accompanying domestic wire transfers must also include originator information as indicated for cross-border wire transfers, unless this information can be made available to the beneficiary financial institution and the CBB by other means. In this latter case, the originating financial institution need only include the account number or a unique transaction reference number, provided that this number or identifier will permit the transaction to be traced back to the originator or the beneficiary.
Added: October 2014FC-3.1.9
For purposes of Paragraph FC-3.1.8, the information should be made available by the originating financial institution within three business days of receiving the request either from the beneficiary financial institution or from the CBB.
Added: October 2014FC-3.1.10
It is not necessary for the recipient institution to pass the originator information on to the beneficiary. The obligation is discharged simply by notifying the beneficiary financial institution of the originator information at the time the transfer is made.
Added: October 2014Rejecting Payment Transactions
FC-3.1.10A
Licensees have the right to reject (i.e. reverse) any payment transaction where it has come to their knowledge that the relevant customer did not actually initiate the transaction instruction. The fund-transmitting licensees must file a Suspicious Transactions Report for such cases.Added: January 2021Responsibilities of Originating, Intermediary and Beneficiary Banks
Originating Bank
FC-3.1.11
The originating bank must ensure that wire transfers contain required and accurate originator information, and required beneficiary information.
Amended: July 2019
Added: October 2014FC-3.1.12
The originating bank must maintain all originator and beneficiary information collected in accordance with Paragraph FC-7.1.1.
Added: October 2014Intermediary Bank
FC-3.1.14
For cross-border wire transfers, banks processing an intermediary element of such chains of wire transfers must ensure that all originator and beneficiary information that accompanies a wire transfer is retained with it.
Added: October 2014FC-3.1.15
Where technical limitations prevent the required originator or beneficiary information accompanying a cross-border wire transfer from remaining with a related domestic wire transfer, a record must be kept, for at least five years, by the receiving intermediary bank of all the information received from the originating bank or another intermediary bank.
Added: October 2014FC-3.1.16
An intermediary bank must take reasonable measures to identify cross-border wire transfers that lack required originator information or required beneficiary information. Such measures must be consistent with straight-through processing.
Added: October 2014FC-3.1.17
An intermediary bank must have effective risk-based policies and procedures for determining:
(a) When to execute, reject, or suspend a wire transfer lacking required originator or required beneficiary information; and(b) The appropriate follow-up action.Added: October 2014Beneficiary Bank
FC-3.1.18
A beneficiary bank must take reasonable measures to identify cross-border wire transfers that lack required originator or required beneficiary information. Such measures may include post-event monitoring or real-time monitoring where feasible.
Added: October 2014FC-3.1.19
For wire transfers, a beneficiary bank must verify the identity of the beneficiary, if the identity has not been previously verified, and maintain this information in accordance with Paragraph FC-7.1.1.
Added: October 2014FC-3.1.20
A beneficiary bank must have effective risk-based policies and procedures for determining:
(a) When to execute, reject, or suspend a wire transfer lacking required originator or required beneficiary information; and(b) The appropriate follow-up action.Added: October 2014FC-3.2 FC-3.2 Remittances on behalf of Money or Value Transfer Service (MVTS) Providers
FC-3.2.1
Whenever an
Islamic bank licensee uses the services ofAuthorised Money or Value Transfer Service Providers to effect the transfer of funds for a customer to a person or organisation in another country, thatlicensee must, in respect of the amount so transferred, maintain records of:(b) The exact amount transferred for each such customer (particularly where a single transfer is effected for more than one customer).Amended: January 2022
Amended: October 2014
Amended April 2011
Added: October 2007FC-3.2.1A
For purposes of this Section, money or value transfer service (MVTS) refers to financial services that involve the acceptance of cash, cheques, other monetary instruments or other stores of value and the payment of a corresponding sum in cash or other form to a beneficiary by means of a communication, message, transfer, or through a clearing network to which the MVTS provider belongs. Transactions performed by such services can involve one or more intermediaries and a final payment to a third party, and may include new payment methods.
Added: October 2014FC-3.2.2
Islamic bank licensees must be able to produce this information for inspection immediately upon request by the CBB.October 07FC-3.2.3
Islamic bank licensees mustnot transfer funds for customers to a person or organisation in another country by any means other than through anauthorised MVTS provider . Where alicensee is found to be in contravention of this rule, the Central Bank will not hesitate to impose sanctions upon thatlicensee (and in serious cases may revoke thatlicensee's license).Amended: October 2014
October 07FC-3.2.4
In the case of an
authorised MVTS provider that controls both the ordering and the beneficiary side of a wire transfer, theauthorised MVTS provider :(a) Must take into account all the information from both the ordering and beneficiary sides in order to determine whether an STR has to be filed; and(b) Must file an STR in any country affected by the suspicious wire transfer, and make relevant transaction information available to the Financial Intelligence Directorate.Amended: January 2020
Amended: October 2019
Added: October 2014FC-4 FC-4 Money Laundering Reporting Officer (MLRO)
FC-4.1 FC-4.1 Appointment of MLRO
FC-4.1.1
Islamic bank licensees must appoint a Money Laundering Reporting Officer ('MLRO') who is anapproved person . The MLRO must be approved by CBB prior to his appointment. The licensee must submit to the CBB a completed Form 3, in accordance with Chapter LR-1A.Amended: July 2016
October 07FC-4.1.2
For details of CBB's requirements regarding controlled functions and approved persons, see Chapter LR-1A. Amongst other things, approved persons require CBB approval before being appointed, which is granted only if they are assessed as 'fit and proper' for the function in question. A completed Form 3 must accompany any request for CBB approval.
Amended: July 2012
Amended: October 2009
October 07FC-4.1.3
The position of MLRO must not be combined with functions that create potential conflicts of interest, such as an internal auditor or business line head. The position of MLRO may not be outsourced.
October 07FC-4.1.4
Subject to Paragraph FC-4.1.2, however, the position of MLRO may otherwise be combined with other functions in the
Islamic bank licensee , such as that of Compliance Officer, in cases where the volume and geographical spread of the business is limited and, therefore, the demands of the function are not likely to require a full time resource. Paragraph FC-4.1.7 requires that the MLRO is aDirector oremployee of thelicensee , so the function may not be outsourced to a third partyemployee .Amended: October 2009
October 07FC-4.1.4A
For purposes of Paragraphs FC-4.1.3 and FC-4.1.4 above,
Islamic bank licensees must clearly state in the Application for Approved Person Status — Form 3 — when combining the MLRO or DMLRO position with any other position within theIslamic bank licensees .Added: October 2017FC-4.1.5
Islamic bank licensees must appoint at least one deputy MLRO (or more depending on the scale and complexity of the licensee's operations) to act for the MLRO in his absence. The position of Deputy MLRO is acontrolled function and the DMLRO is anapproved person . The DMLRO must be approved by CBB prior to his appointment. The DMLRO must satisfy the conditions outlined in Subparagraphs FC-4.1.7(d) to (g).Amended: July 2016
Amended: October 2009
October 07FC-4.1.6
Islamic bank licensees should note that although the MLRO may delegate some of his functions, either within thelicensee or even possibly (in the case of larger groups) to individuals performing similar functions for other group entities, that the responsibility for compliance with the requirements of this Module remains with thelicensee and the designated MLRO.October 07FC-4.1.7
So that he can carry out his functions effectively,
Islamic bank licensees must ensure that their MLRO:(a) Is a member of senior management of thelicensee ;(b) Has a sufficient level of seniority within theIslamic bank licensee , has the authority to act without interference from business line management and has direct access to the Board and senior management (where necessary);(c) Has sufficient resources, including sufficient time and (if necessary) support staff, and has designated a replacement to carry out the function should the MLRO be unable to perform his duties;(d) Has unrestricted access to all transactional information relating to any financial services provided by theIslamic bank licensee to a customer, or any transactions conducted by theIslamic bank licensee on behalf of that customer;(e) Is provided with timely information needed to identify, analyse and effectively monitor customer accounts;(f) Has access to all customer due diligence information obtained by theIslamic bank licensee ; and(g) Is resident in Bahrain.Amended: October 2011
October 07FC-4.1.8
In addition,
Islamic bank licensees must ensure that their MLRO is able to:(a) Monitor the day-to-day operation of its policies and procedures relevant to this Module; and(b) Respond promptly to any reasonable request for information made by the Anti-Money Laundering Unitor the CBB.October 07FC-4.1.9
If the position of MLRO falls vacant, the
Islamic bank licensee must appoint a permanent replacement (after obtaining CBB approval), within 120 calendar days of the vacancy occurring. Pending the appointment of a permanent replacement, thelicensee must make immediate interim arrangements (including the appointment of an acting MLRO) to ensure continuity in the MLRO function's performance. These interim arrangements must be approved by the CBB.October 07FC-4.2 FC-4.2 Responsibilities of the MLRO
FC-4.2.1
The MLRO is responsible for:
(a) Establishing and maintaining theIslamic bank licensee's AML/CFT policies and procedures;(b) Ensuring that thelicensee complies with the AML Law and any other applicable AML/CFT legislation and regulations;(c) Ensuring day-to-day compliance with thelicensee's own internal AML/CFT policies and procedures;(d) Acting as theIslamic bank licensee's main point of contact in respect of handling internal suspicious transactions reports from thelicensee's staff (refer to Section FC-5.1) and as the main contact for the Financial Intelligence Directorate, the CBB and other concerned bodies regarding AML/CFT;(e) Making external suspicious transactions reports to the Financial Intelligenc Directorate and the Compliance Directorate (refer to Section FC-5.2);(f) Taking reasonable steps to establish and maintain adequate arrangements for staff awareness and training on AML/CFT matters (whether internal or external), as per Chapter FC-5;(g) Producing annual reports on the effectiveness of thelicensee's AML / CFT controls, for consideration by senior management, as per Paragraph FC-4.3.3;(h) On-going monitoring of what may, in his opinion, constitute high-risk customer accounts; and(i) Ensuring that theIslamic bank licensee maintains all necessary CDD, transactions, STR and staff training records for the required periods (refer to Section FC-7.1).Amended: January 2020
Amended: October 2019
Amended: October 2014
October 07FC-4.3 FC-4.3 Compliance Monitoring
Annual Compliance Review
FC-4.3.1
Islamic bank licensees must take appropriate steps to identify and assess their money laundering and terrorist financing risks (for customers, countries or geographic areas; and products, services, transactions or delivery channels). They must document those assessments in order to be able to demonstrate their basis, keep these assessments up to date, and have appropriate mechanisms to provide risk assessment information to the CBB. The nature and extent of any assessment of money laundering and terrorist financing risks must be appropriate to the nature and size of the business.Added: October 2014FC-4.3.1A
Islamic bank licensees should always understand their money laundering and terrorist financing risks, but the CBB may determine that individual documented risk assessments are not required, if the specific risks inherent to the sector are clearly identified and understood.Added: October 2014FC-4.3.1B
An
Islamic bank licensee must review the effectiveness of its AML/CFT procedures, systems and controls at least once each calendar year. The review must cover theIslamic bank licensee and its branches and subsidiaries both inside and outside the Kingdom of Bahrain. AnIslamic bank licensee must monitor the implementation of those controls and enhance them if necessary. The scope of the review must include:(a) A report, containing the number of internal reports made in accordance with Section FC-5.1, a breakdown of all the results of those internal reports and their outcomes for each segment of thelicensee's business, and an analysis of whether controls or training need to be enhanced;(b) A report, indicating the number of external reports made in accordance with Section FC-5.2 and, where anIslamic bank licensee has made an internal report but not made an external report, noting why no external report was made;(c) A sample test of compliance with this Module's customer due diligence requirements; and(d) A report as to the quality of theIslamic bank licensee's anti-money laundering procedures, systems and controls, and compliance with the AML Law and this Module.Amended: January 2022
Amended: October 2014
Added: October 07FC-4.3.2
The reports listed under Paragraph FC-4.3.1B (a) and (b) must be made by the MLRO. The sample testing and report required under Paragraph FC-4.3.1B (c) and (d) must be made by the
licensee 's external auditor or a consultancy firm approved by the CBB.Amended: January 2022
Amended: January 2019
Amended: October 2011
Added: October 07FC-4.3.2A
In order for a consultancy firm to be approved by the CBB for the purposes of Paragraph FC-4.3.2, such firm should provide the CBB's Compliance Directorate with:
(a) A sample AML/CFT report prepared for a financial institution;(b) A list of other AML/CFT related work undertaken by the firm;(c) A list of other audit/review assignments undertaken, specifying the nature of the work done, date and name of the licensee; and(d) An outline of any assignment conducted for or in cooperation with an international audit firm.October 2011FC-4.3.2B
The firm should indicate which personnel (by name) will work on the report (including, where appropriate, which individual will be the team leader) and demonstrate that all such persons have appropriate qualifications in one of the following areas:
(a) Audit;(b) Accounting;(c) Law; or(d) Banking/Finance.October 2011FC-4.3.2C
Islamic bank licensees must ensure that the personnel conducting the review are qualified, skilled and have adequate experience to conduct such a review. At least two persons working on the report (one of whom should be the team leader) should have:(a) A minimum of 5 years professional experience dealing with AML/CFT issues; and(b) Formal AML/CFT training.Amended: October 2018
October 2011FC-4.3.2D
Submission of a curriculum vitae for all personnel to be engaged on the report is encouraged for the purposes of evidencing the above requirements.
October 2011FC-4.3.2E
Upon receipt of the above required information, the CBB Compliance Directorate will assess the firm and communicate to it whether it meets the criteria required to be approved by the CBB for this purpose. The CBB may also request any other information it considers necessary in order to conduct the assessment.
October 2011FC-4.3.3
The reports listed under Paragraph FC-4.3.1B must be submitted to the
licensee's Board, for it to review and commission any required remedial measures, and copied to thelicensee's senior management .Amended: January 2019
Amended: October 2014
October 07FC-4.3.4
The purpose of the annual compliance review is to assist a
licensee 's Board and senior management to assess, amongst other things, whether internal and external reports are being made (as required under Chapter FC-5), and whether the overall number of such reports (which may otherwise appear satisfactory) does not conceal inadequate reporting in a particular segment of thelicensee 's business (or, where relevant, in particular branches or subsidiaries).Islamic bank licensees should use their judgement as to how the reports listed under Paragraph FC-4.3.1B (a) and (b) should be broken down in order to achieve this aim (e.g. by branches, departments, product lines, etc).Amended: January 2019
October 07FC-4.3.5
Islamic bank licensees must instruct their appointed firm to produce the report referred to in Paragraph FC-4.3.1B (c) and (d). The report must be submitted to the Compliance Directorate at the CBB by the 30th of June of the following year. The findings of this review must be received and acted upon by thelicensee .Amended: January 2022
Amended: January 2020
Amended: January 2019
Amended: January 2012
Amended: January 2011
Amended: April 2008
Added: October 07FC-4.3.6
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Amended: January 2012
Amended: January 2011
Added: October 07FC-5 FC-5 Suspicious Transaction Reporting
FC-5.1 FC-5.1 Internal Reporting
FC-5.1.1
Islamic bank licensees must implement procedures to ensure that staff who handle customer business (or are managerially responsible for such staff) make a report promptly to the MLRO if they know or suspect that a customer (or a person on whose behalf a customer may be acting) is engaged in money laundering or terrorism financing, or if the transaction or the customer's conduct otherwise appears unusual or suspicious. These procedures must include arrangements for disciplining any member of staff who fails, without reasonable excuse, to make such a report.October 07FC-5.1.2
Where
Islamic bank licensees ' internal processes provide for staff to consult with their line managers before sending a report to the MLRO, such processes must not be used to prevent reports reaching the MLRO, where staff have stated that they have knowledge or suspicion that a transaction may involve money laundering or terrorist financing.October 07FC-5.2 FC-5.2 External Reporting
FC-5.2.1
Islamic bank licensees must take reasonable steps to ensure that all reports made under Section FC-5.1 are considered by the MLRO (or his duly authorised delegate). Having considered the report and any other relevant information the MLRO (or his duly authorised delegate), if he still suspects that a person has been engaged in money laundering or terrorism financing, or the activity concerned is otherwise still regarded as suspicious, must report the fact promptly to therelevant authorities . Where no report is made, the MLRO must document the reasons why.October 07FC-5.2.2
To take reasonable steps, as required under Paragraph FC-5.2.1,
Islamic bank licensees must:(a) Require the MLRO to consider reports made under Section FC-5.1.1 in the light of all relevant information accessible to or reasonably obtainable by the MLRO;(b) Permit the MLRO to have access to any information, including know your customer information, in theIslamic bank licensee 's possession which could be relevant; and(c) Ensure that where the MLRO, or his duly authorised delegate, suspects that a person has been engaged in money laundering or terrorist financing, a report is made by the MLRO which is not subject to the consent or approval of any other person.October 07FC-5.2.3
Reports to the
relevant authorities made under Paragraph FC-5.2.1 must be sent to the Financial Intelligence Directorate at the Ministry of Interior and the CBB's Compliance Directorate using the Suspicious Transaction Reporting Online System (Online STR system). STRs in paper format will not be accepted.Amended: October 2019
Amended: July 2016
Amended: October 2014
October 07FC-5.2.4
Islamic bank licensees must report all suspicious transactions or attempted transactions. This reporting requirement applies regardless of whether the transaction involves tax matters.October 07FC-5.2.5
Islamic bank licensees must retain all relevant details of STRs submitted to therelevant authorities , for at least five years.Amended: October 2014
October 07FC-5.2.6
In accordance with the AML Law,
Islamic bank licensees , theirDirectors , officers and employees:(a) Must not warn or inform ('tipping off') their customers, the beneficial owner or other subjects of the STR when information relating to them is being reported to therelevant authorities ; and(b) In cases whereIslamic bank licensees form a suspicion that transactions relate to money laundering or terrorist financing, they must take into account the risk of tipping-off when performing the CDD process. If theIslamic bank licensee reasonably believes that performing the CDD process will tip-off the customer or potential customer, it may choose not to pursue that process, and must file an STR.Amended: January 2018
Amended: October 2014
October 07FC-5.3 FC-5.3 Contacting the Relevant Authorities
FC-5.3.1
Reports made by the MLRO or his duly authorised delegate under Section FC-5.2 must be sent electronically using the Suspicious Transaction Reporting Online System (Online STR system).
Amended: October 2014
October 07FC-5.3.2
The
relevant authorities are:Financial Intelligence Directorate (FID)
Ministry of Interior
P.O. Box 26698
Manama, Kingdom of Bahrain
Telephone: + 973 17 749397
Fax: + 973 17 715502
E-mail: bahrainfid@moipolice.bhDirector of Compliance Directorate
Central Bank of Bahrain
P.O. Box 27
Manama, Kingdom of Bahrain
Telephone: 17 547107
Fax: 17 535673
E-mail: Compliance@cbb.gov.bhAmended: October 2019
Added: October 2014FC-6 FC-6 Staff Training and Recruitment
FC-6.1 FC-6.1 General Requirements
FC-6.1.1
An
Islamic bank licensee must take reasonable steps to provide periodic training and information to ensure that staff who handle customer transactions, or are managerially responsible for such transactions, are made aware of:(a) Their responsibilities under the AML Law, this Module, and any other relevant AML / CFT laws and regulations;(b) The identity and responsibilities of the MLRO and his deputy;(c) The potential consequences, both individual and corporate, of any breach of the AML Law, this Module and any other relevant AML / CFT laws or regulations;(d) TheIslamic bank licensee's current AML/CFT policies and procedures;(e) Money laundering and terrorist financing typologies and trends;(f) The type of customer activity or transaction that may justify an internal STR;(g) TheIslamic bank licensee's procedures for making internal STRs; and(h) Customer due diligence measures with respect to establishing business relations with customers.October 07FC-6.1.2
The information referred to in Paragraph FC-6.1.1 must be brought to the attention of relevant new
employee s ofIslamic bank licensees , and must remain available for reference by staff during their period of employment.October 07FC-6.1.3
Relevant new
employee s must be given AML/CFT training within three months of joining anIslamic bank licensee .October 07FC-6.1.4
Islamic bank licensees must ensure that their AML/CFT training for relevant staff remains up-to-date, and is appropriate given thelicensee 's activities and customer base.October 07FC-6.1.5
The CBB would normally expect AML/CFT training to be provided to relevant staff at least once a year.
October 07FC-6.1.6
Islamic bank licensees must develop adequate screening procedures to ensure high standards when hiring employees. These procedures must include controls to prevent criminals or their associates from being employed bylicensees .Amended: October 2014
October 07FC-6.1.6A
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: January 2021FC-7 FC-7 Record Keeping
FC-7.1 FC-7.1 General Requirements
CDD and Transaction Records
FC-7.1.1
Islamic bank licensees must comply with the record keeping requirements contained in the AML Law.Islamic bank licensees must therefore retain adequate records (including accounting and identification records), for the following minimum periods:(a) For customers, in relation to evidence of identity and business relationship records (such as application forms, account files and business correspondence, including the results of any analysis undertaken (e.g. enquiries to establish the background and purpose of complex, unusual large transactions)), for at least five years after the customer relationship has ceased; and(b) For transactions, in relation to documents (including customer instructions in the form of letters, faxes or emails) enabling a reconstitution of the transaction concerned, for at least five years after the transaction was completed.Amended: October 2014
October 07Compliance Records
FC-7.1.2
Islamic bank licensees must retain copies of the reports produced for their annual compliance review, as specified in Paragraph FC-4.3.1B, for at least five years.Licensee s must also maintain for 5 years reports made to, or by, the MLRO made in accordance with Sections FC-5.1 and FC-5.2, and records showing how these reports were dealt with and what action, if any, was taken as a consequence of those reports.Amended: January 2019
October 07Training Records
FC-7.1.3
Islamic bank licensees must maintain for at least five years, records showing the dates when AML/CFT training was given, the nature of the training, and the names of the staff that received the training.October 07Access
FC-7.1.4
All records required to be kept under this Section must be made available for prompt and swift access by the relevant authorities or other authorised persons.
October 07FC-7.1.5
Islamic bank licensees are also reminded of the requirements contained in Chapter OM-7 (Books and Records).October 07FC-8 FC-8 NCCT Measures and Terrorist Financing
FC-8.1 FC-8.1 Special Measures for Non-Cooperative Countries or Territories ("NCCTs")
FC-8.1.1
Islamic bank licensees must give special attention to any dealings they may have with entities or persons domiciled in countries or territories which are:(a) Identified by the FATF as being 'non-cooperative'; or(b) Notified toIslamic bank licensees from time to time by the CBB.October 07FC-8.1.2
Whenever transactions with such parties have no apparent economic or visible lawful purpose, their background and purpose must be re-examined and the findings documented. If suspicions remain about the transaction, these must be reported to the
relevant authorities in accordance with Section FC-5.2.October 07FC-8.1.3
Islamic bank licensees must apply enhanced due diligence measures to business relationships and transactions with natural and legal persons, and financial institutions, from countries where such measures are called for by the FATF. The type of enhanced due diligence measures applied must be effective and proportionate to the risks.Added: October 2014FC-8.1.4
With regard to jurisdictions identified as NCCTs or those which in the opinion of the CBB, do not have adequate AML/CFT systems, the CBB reserves the right to:
(a) Refuse the establishment of subsidiaries or branches or representative offices of financial institutions from such jurisdictions;(b) Limit business relationships or financial transactions with such jurisdictions or persons in those jurisdictions;(c) Prohibit financial institutions from relying on third parties located in such jurisdictions to conduct elements of the CDD process;(d) Require financial institutions to review and amend, or if necessary terminate, correspondent relationships with financial institutions in such jurisdictions;(e) Require increased supervisory examination and/or external audit requirements for branches and subsidiaries of financial institutions based in such jurisdictions; or(f) Require increased external audit requirements for financial groups with respect to any of their branches and subsidiaries located in such jurisdictions.Amended: January 2018
Added: October 2014FC-8.2 FC-8.2 Terrorist Financing
FC-8.2.1AA
Islamic bank licensees must implement and comply with United Nations Security Council resolutions relating to the prevention and suppression of terrorism and terrorist financing.Islamic bank licensees must freeze,without delay , the funds or other assets of, and to ensure that no funds or other assets are made available, directly or indirectly, to or for the benefit of, any person or entity either (i) designated by, or under the authority of, the United Nations Security Council under Chapter VII of the Charter of the United Nations, including in accordance with resolution 1267(1999) and its successor resolutions as well as Resolution 2178(2014) or (ii) designated as pursuant to Resolution 1373(2001).Amended: October 2019
Added: April 2017FC-8.2.1
Islamic bank licensees must comply in full with any rules or regulations issued by the CBB in connection with the provisions of the UN Security Council Anti-terrorism Resolution No. 1373 of 2001 ('UNSCR 1373'), including the rules in this Chapter.October 07FC-8.2.2
[This Paragraph was deleted in January 2018].
Deleted: January 2018
October 07FC-8.2.3
A copy of UNSCR 1373 is included in Part B of Volume 2 (Islamic Banks), under 'Supplementary Information'.
October 07FC-8.2.4
Islamic bank licensees must report to the CBB details of:(a) Funds or other financial assets or economic resources held with them which may be the subject of Article 1, paragraphs c) and d) of UNSCR 1373;(b) All claims, whether actual or contingent, which theIslamic bank licensee has on persons and entities which may be the subject of Article 1, paragraphs c) and d) of UNSCR 1373; and(c) All assets frozen or actions taken in compliance with the prohibition requirements of the relevant UNSCRs, including attempted transactions.Amended: January 2023
October 07FC-8.2.5
For the purposes of Paragraph FC-8.2.4, 'funds or other financial resources' includes (but is not limited to) shares in any undertaking owned or controlled by the persons and entities referred to in Article 1, paragraph c) and d) of UNSCR 1373, and any associated dividends received by the
licensee .October 07FC-8.2.6
All reports or notifications under this Section must be made to the CBB's Compliance Directorate.
October 07FC-8.2.7
See Section FC-5.3 for the Compliance Directorate's contact details.
October 07FC-8.3 FC-8.3 Designated Persons and Entities
FC-8.3.1
Without prejudice to the general duty of all
Islamic bank licensees to exercise the utmost care when dealing with persons or entities who might come under Article 1, paragraphs (c) and (d) of UNSCR 1373,Islamic bank licensees must not deal with any persons or entities designated by the CBB as potentially linked to terrorist activity.Amended: October 2014
October 07FC-8.3.2
The CBB from time to time issues to
licensee s lists of designated persons and entities believed linked to terrorism.Licensee s are required to verify that they have no dealings with these designated persons and entities, and report back their findings to the CBB. Names designated by CBB include persons and entities designated by the United Nations, under UN Security Council Resolution 1267 ('UNSCR 1267').October 07FC-8.3.3
Islamic bank licensees must report to therelevant authorities , using the procedures contained in Section FC-5.2, details of any accounts or other dealings with designated persons and entities, and comply with any subsequent directions issued by therelevant authorities .October 07FC-9 FC-9 Enforcement Measures
FC-9.1 FC-9.1 Regulatory Penalties
FC-9.1.1
Without prejudice to any other penalty imposed by the CBB Law, the AML Law No. 4 or the Penal Code of the Kingdom of Bahrain, failure by a
licensee to comply with this Module or any direction given hereunder shall result in the levying by the CBB, without need of a court order and at the CBB's discretion, of a fine of up to BD 20,000.October 07FC-9.1.2
Module EN provides further information on the assessment of financial penalties and the criteria taken into account prior to imposing such fines (reference to Paragraph EN-5.1.4). Other enforcement measures may also be applied by CBB in response to a failure by a
licensee to comply with this Module; these other measures are also set out in Module EN.October 07FC-9.1.3
The CBB will endeavour to assist
Islamic bank licensees to interpret and apply the rules and guidance in this Module.Islamic bank licensees may seek clarification on any issue by contacting the Compliance Directorate (see Section FC-5.3 for contact details).October 07FC-9.1.4
Without prejudice to the CBB's general powers under the law, the CBB may amend, clarify or issue further directions on any provision of this Module from time to time, by notice to its
licensee s.October 07FC-10 FC-10 AML / CFT Guidance and Best Practice
FC-10.1 FC-10.1 Guidance Provided by International Bodies
FATF Recommendations
FC-10.1.1
The Forty Recommendations (see www.fatf-gafi.org) together with their associated interpretative notes and best practices papers issued by the Financial Action Task Force (FATF), provide the basic framework for combating money laundering activities and the financing of terrorism. FATF Recommendations 2, 8–12, 14–21, 26–27, 32–35, 37 and 40 as well as Special Recommendations IV-IX, and the AML/CFT Methodology are specifically relevant to the banking sector.
Amended: October 2014
October 07FC-10.1.2
The
relevant authorities in Bahrain believe that the principles established by these Recommendations should be followed bylicensees in all material respects, as representing best practice and prudence in this area.Amended: October 2014
October 07Basel Committee: Statement on Money Laundering and Customer Due Diligence for Banks
FC-10.1.3
In December 1988, the
Basel Committee on Banking Supervision issued a 'Statement of Principles' followed by the Customer Due Diligence for Banks paper in October 2001 (with attachment dated February 2003 – see www.bis.org/publ/) with which internationally active banks of member states are expected to comply. These papers cover identifying customers, avoiding suspicious transactions, and co-operating with law enforcement agencies.October 07FC-10.1.4
The CBB supports the above papers and the desirability of all
Islamic bank licensees adhering to their requirements and guidance.October 07Other Website References Relevant to AML/CFT
FC-10.1.5
The following lists a selection of other websites relevant to AML/CFT:
(a) The Middle East North Africa Financial Action Task Force: www.menafatf.org ;(b) The Egmont Group: www.egmontgroup.org ;(c) The United Nations: www.un.org/terrorism ;(d) The UN Counter-Terrorism Committee: www.un.org/Docs/sc/committees/1373/ ;(e) The UN list of designated individuals: www.un.org/Docs/sc/committees/1267/1267ListEng.htm ;(f) The Wolfsberg Group: www.wolfsberg-principles.com ; and(g) The Association of Certified Anti-Money Laundering Specialists: www.acams.org .Amended: October 2014
Amended April 2011
October 2007TC Training and Competency
TC-A TC-A Introduction
TC-A.1 TC-A.1 Purpose
Executive Summary
TC-A.1.1
This Module presents requirements that have to be met by
Islamic bank licensees with respect to training and competency of individuals undertakingcontrolled functions (as defined in Paragraph LR-1A.1.2)October 2013TC-A.1.2
Module TC provides Rules and Guidance to
Islamic bank licensees to ensure satisfactory levels of competence, in terms of an individual's knowledge, skills, experience and professional qualifications.Islamic bank licensees , are required to demonstrate that individuals undertakingcontrolled functions are sufficiently competent, and are able to undertake their respective roles and responsibilities.October 2013TC-A.1.3
The Rules build upon Principles 3 and 9 of the Principles of Business (see Module PB (Principles of Business)). Principle 3 (Due Skill, Care and Diligence) requires
Islamic bank licensees andapproved persons to observe high standards of integrity and fair dealing, and to be honest and straightforward in its dealings with clients. Principle 9 (Adequate Resources) requiresIslamic bank licensees to maintain adequate human, financial and other resources sufficient to run its business in an orderly manner.October 2013TC-A.1.4
Condition 4 of the Central Bank of Bahrain's ('CBB') Licensing Conditions (Chapter LR-2.4) and Chapter LR-1A (Approved Persons) of Module LR impose further requirements. To satisfy Condition 4 of the CBB's Licensing Conditions, an
Islamic bank licensee's staff, taken together, must collectively provide a sufficient range of skills and experience to manage the affairs of thelicensee in a sound and prudent manner (LR-2.4). This condition specifies thatIslamic bank licensees must ensure their employees meet any training and competency requirements specified by the CBB. Chapter LR-1A (Approved Persons) of Module LR sets forth the 'fit and proper' requirements in relation to competence, experience and expertise required byapproved persons ; this Chapter specifies various factors that the CBB takes into account when reaching such a decision.October 2013Legal Basis
TC-A.1.5
This Module contains the CBB's Directive (as amended from time to time) relating to training and competency and is issued under the powers available to the CBB under Articles 38 and 65(b) of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all
Islamic bank licensees (including theirapproved persons ).October 2013TC-A.1.6
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 2013TC-A.2 TC-A.2 Module History
Evolution of the Module
TC-A.2.1
This Module was first issued in October 2013. Any material changes that are subsequently made to this Module are annotated with the calendar quarter date in which the change is made; Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 2013TC-A.2.2
A list of recent changes made to this Module is provided below:
Module Ref. Change Date Description of Changes Appendix TC-1 01/2014 Added Chartered Financial Analyst as possible qualification for heads of other functions. TC-B.1.4 07/2014 Clarified scope of application. Appendix TC-1 10/2015 Added securities market regulation certification as other relevant certification for heads of other functions. Appendix TC-1 10/2016 Added BIBF Advanced Diploma in Islamic Finance and Advanced Diploma in Commercial Jurisprudence from BIBF. TC-2.3.3 04/2017 Amended Paragraph on exception to the grandfathering rule. TC-1.1.1 10/2018 Amended Individuals occupying controlled functions. TC-1.1.10 10/2018 Amended title to be Shari'a Officer and amended responsibilities. TC-1.1.12A 10/2018 Added new Paragraph on Head of Internal Shari'a Audit. Appendix-TC-1 10/2018 Amended qualifications and core competencies of Shari'a Officer. Appendix-TC-1 10/2018 Added Head of Internal Shari'a Audit function qualifications and competencies. TC-2.3.5 01/2019 Added a new Paragraph on grandfathering requirement to CFO. Appendix-TC-1 01/2019 Amended Appendix. TC-2.3.5 04/2020 Amended CIPA naming. Appendix-TC-1 04/2020 Amended CIPA naming. TC-B TC-B Scope of Application
TC-B.1 TC-B.1 Scope
TC-B.1.1
This Module applies to all CBB
Islamic bank licensees authorised in the Kingdom. It covers the training and competency requirements for staff occupyingcontrolled functions (See Chapter TC-1).October 2013TC-B.1.2
Module TC, unless otherwise stated, applies in full to both retail and wholesale
Islamic bank licensees licensed in Bahrain. In the case of anoverseas Islamic bank licensee , the application of this Module is restricted to its Bahrain operations.October 2013TC-B.1.3
Persons authorised by the CBB as
approved persons prior to the issuance of Module TC need not reapply for authorisation.October 2013TC-B.1.4
The requirements of this Module apply to
approved persons holdingcontrolled functions , including board members, in connection with theIslamic bank licensee's regulated banking services , or under a contract of service.Amended: July 2014
October 2013TC-B.1.5
In the case of outsourcing arrangements, the
Islamic bank licensee should refer to the competency requirements, outlined in Appendix TC-1 forcontrolled functions , for assessing the suitability of theoutsourcing provider .October 2013TC-B.1.6
Islamic bank licensees must satisfy the CBB that individuals performing acontrolled function for it or on its behalf are suitable and competent to carry on thatcontrolled function .October 2013TC-B.1.7
In implementing this Module,
Islamic bank licensees must ensure that individuals recruited to performcontrolled functions :(a) Hold suitable qualifications and experience appropriate to the nature of the business;(b) Remain competent for the work they do; and(c) Are appropriately supervised.October 2013TC-1 TC-1 Requirements for Controlled Functions
TC-1.1 TC-1.1 Controlled Functions
TC-1.1.1
Individuals occupying
controlled functions (refer to Paragraphs LR-1A.1.5 to 1A.1.16) in anIslamic bank licensee must be qualified and suitably experienced for their specific roles and responsibilities. Thecontrolled functions are those of:(a) Board Member;(b)Chief Executive orGeneral Manager and their Deputies;(c) Chief Financial Officer and/or Financial Controller(d) Head of Risk Management;(e) Head of Internal Audit;(f) Shari'a Officer;(g) Compliance Officer;(h) Money Laundering Reporting Officer;(i) Deputy Money Laundering Reporting Officer; and(j) Head of Internal Shari'a Audit; and(k) Heads of other Functions.Amended: October 2018
October 2013TC-1.1.2
An
Islamic bank licensee must take reasonable steps to ensure that individuals holdingcontrolled functions are sufficiently knowledgeable about their respective fields of work to be able to guide and supervise operations that fall under their responsibilities.October 2013TC-1.1.3
Competence must be assessed on the basis of experience and relevant qualifications described in Appendix TC-1 as a minimum. However, the CBB reserves the right to impose a higher level of qualifications as it deems necessary.
October 2013Board Member
TC-1.1.4
Board members collectively are responsible for the business performance and strategy of the
Islamic bank licensee , as outlined in more details in Section HC-1.2.October 2013TC-1.1.5
When taken as a whole, the board of
directors of anIslamic bank licensee must be able to demonstrate that it has the necessary skills and expertise, as outlined in Paragraph HC-1.2.10.October 2013Chief Executive or General Manager
TC-1.1.6
The
chief executive orgeneral manager and their deputies (as appropriate) are responsible for the executive management and performance of theIslamic bank licensee within the framework or delegated authorities set by the Board. The scope of authority of theCEO and deputies is outlined in more detail in Subparagraph HC-6.3.2(a).October 2013Chief Financial Officer/ Head of Financial Control
TC-1.1.7
The chief financial officer/head of financial control is responsible for directing the bank's financial function, including ensuring that the relevant accounting treatment is applied to all of the activities of the bank in a timely manner. The scope of authority of the CFO/ Head of Financial Control is outlined in more detail in Subparagraph HC-6.3.2(b).
October 2013Head of Risk Management
TC-1.1.8
Heads of risk management are responsible for the management and control of all risk exposures arising from the activities of the
Islamic bank licensee .October 2013Head of Internal Audit
TC-1.1.9
Heads of internal audit are responsible for providing independent and objective review on the adequacy and effectiveness of the holistic internal control environment within the
Islamic bank licensee . The duties of the head of internal audit are outlined in more detail in Subparagraph HC-6.3.2(d).October 2013Shari'a Officer
TC-1.1.10
The Shari'a Officer in an
Islamic bank licensee is responsible for the product design / development stage to assist the Shari'a Supervisory Board (SSB) in the issuance of Shari'a pronouncements / resolutions, Fatawas, guidelines and instructions about the products and services offered. He is also responsible for assisting the management in implementing the Fatawa and rulings of the SSB in the day to day functioning of the licensee. The Shari'a Officer must also assist the Human Resources Department in arranging for Shari'a training of the licensee's employees. Refer to SG-3.1 and SG-3.2 for a detailed description of his responsibilities.Amended: October 2018
October 2013Compliance Officer
TC-1.1.11
In accordance with Paragraph LR-1A.1.12, an employee of appropriate standing must be designated by the
Islamic bank licensee for the position of compliance officer. The duties of the compliance officer, include:(a) Having responsibility for oversight of theIslamic bank licensee's compliance with the requirements of the CBB and other applicable laws and regulations;(b) Raising awareness and providing training for theIslamic bank licensee's staff on compliance issues; and(c) Reporting to theIslamic bank licensee's Board in respect of that responsibility.October 2013Money Laundering Reporting Officer (MLRO) or Deputy Money Laundering Reporting Officer (DMLRO)
Head of Internal Shari'a Audit
TC-1.1.12A
The Head of Internal Shari'a Audit function is responsible for examining and evaluating the extent of the licensee's compliance with the following:
(a) Shari'a principles;(b) The SSB's Fatawa, guidelines, pronouncements and instructions/recommendations;(c) Shari'a related regulations, resolutions and directives issued by the CBB;(d) Shari'a standards issued by AAOIFI; and(e) Shari'a related policies and procedures of theBahraini Islamic bank licensee .Added: October 2018
Heads of other Functions
TC-1.1.13
Heads of other functions, where risk acquisition or control is involved, are responsible for tracking specific functional performance goals in addition to identifying, managing, and reporting critical organisational issues upstream. Certain functions require dealing directly with clients while others do not. Both categories of functions, however, require specific qualifications and experience to meet the objectives as well as compliance requirements of the
Islamic bank licensee .October 2013TC-1.1.14
For purposes of Paragraph TC-1.1.13, Islamic bank licensees should contact the CBB should they require further clarification on whether a specific position falls under the definition of "Heads of other Functions".
October 2013TC-1.2 TC-1.2 Continuous Professional Development Training ("CPD")
CPD
TC-1.2.1
All individuals holding
controlled functions in anIslamic bank licensee must undergo a minimum of 15 hours of CPD per annum.October 2013TC-1.2.2
An
Islamic bank licensee must ensure that anapproved person undertaking acontrolled function undergoes appropriate annual review and assessment of performance.October 2013TC-1.2.3
The level of supervision should be proportionate to the level of competence demonstrated by the
approved person . Supervision will include, as appropriate:(a) Reviewing and assessing work on a regular basis; and(b) Coaching and assessing performance against the competencies necessary for the role.October 2013TC-1.2.4
Supervisors of
approved persons should have technical knowledge and relevant managerial skills.October 2013Record Keeping
TC-1.2.5
An
Islamic bank licensee should, for a minimum period of five years, retain records of:(a) The annual training plan for eachcontrolled function ;(b) Materials used to conduct in-house training courses;(c) List of participants attending such in-house training courses; and(d) Results of evaluations conducted at the end of such training courses.October 2013TC-2 TC-2 General Requirements
TC-2.1 TC-2.1 Recruitment and Assessing Competence
Recruitment and Appointment
TC-2.1.1
If an
Islamic bank licensee recruits or promotes an individual to undertake acontrolled function , it must first file Form 3 (Approved Persons) with the CBB and obtain the express written approval of the CBB for that person to occupy the desired position. In its application, theIslamic bank licensee must demonstrate to the CBB that full consideration has been given to the qualifications and core competencies forcontrolled functions in Appendix TC-1. (See Article 65(b) of the CBB Law and Paragraph LR-2.3.1).October 2013TC-2.1.2
Islamic bank licensees should refer to Module LR (Licensing Requirements) providing detailed requirements on the appointment of individuals occupyingcontrolled functions (approved persons ).October 2013TC-2.1.3
An
Islamic bank licensee proposing to recruit an individual has to satisfy itself, of his/her relevant qualifications and experience. TheIslamic bank licensee should:(a) Take into account the knowledge and skills required for the role, in addition to the nature and the level of complexity of thecontrolled function ; and(b) Take reasonable steps to obtain sufficient information about the individual's background, experience, training and qualifications.October 2013Record Keeping
TC-2.1.4
An
Islamic bank licensee must make and retain records of its recruitment procedures for a minimum period of five years. Such procedures should be designed to adequately take into account proof of the candidates' knowledge and skills and their previous activities and training.October 2013TC-2.1.5
In addition to recruitment procedures in Paragraph TC-2.1.4, the
Islamic bank licensee must retain the recruitment records ofapproved persons for a minimum period of five years following termination of their services or employment with the bank. Such records must include, but are not limited to, the following:(a) Results of the initial screening;(b) Results of any employment tests;(c) Results and details of any interviews conducted;(d) Background and references checks; and(e) Details of any professional qualifications.October 2013Assessing Competence
TC-2.1.6
Islamic bank licensees must not allow an individual to undertake or supervisecontrolled functions unless that individual has been assessed by theIslamic bank licensee as competent in accordance with this Section.October 2013TC-2.1.7
In determining an individual's competence,
Islamic bank licensees may assess if the person is fit and proper in accordance with Chapter LR-1A.October 2013TC-2.1.8
Islamic bank licensees must assess individuals as competent when they have demonstrated the ability to apply the knowledge and skills required to perform a specificcontrolled function .October 2013TC-2.1.9
The assessment of competence will be dependent on the nature and the level of complexity of the
controlled function . Such assessment of competence of new personnel may take into account the fact that an individual has been previously assessed as competent in a similarcontrolled function with anotherIslamic bank licensee .October 2013TC-2.1.10
If an
Islamic bank licensee assesses an individual as competent in accordance with Paragraph TC-2.1.8 to perform a specificcontrolled function , it does not necessarily mean that the individual is competent to undertake othercontrolled functions .October 2013TC-2.1.11
An
Islamic bank licensee should use methods of assessment that are appropriate to thecontrolled function and to the individual's role.October 2013Record Keeping
TC-2.1.12
An
Islamic bank licensee must, for a minimum period of five years, make and retain updated records of:(a) The criteria applied in assessing the ongoing and continuing competence; and(b) How and when the competence decision was arrived at.October 2013TC-2.1.13
For purposes of Paragraph TC-2.1.12, the record keeping requirements apply to both current employees as well as to employees following termination of their services or employment with the bank, for a minimum period of five years.
October 2013TC-2.2 TC-2.2 Training and Maintaining Competence
TC-2.2.1
An
Islamic bank licensee must annually determine the training needs of individuals undertakingcontrolled functions . It must develop a training plan to address these needs and ensure that training is planned, appropriately structured and evaluated.October 2013TC-2.2.2
The assessment and training plan described in Paragraph TC-2.2.1 should be aimed at ensuring that the relevant
approved person maintains competence in thecontrolled function . An individual can develop skills and gain experience in a variety of ways. These could include on-the-job learning, individual study, and other methods. In almost every situation, and for most individuals, it is likely that competence will be developed most effectively by a mixture of training methods.October 2013TC-2.2.3
The training plan of
Islamic bank licensees must include a programme for continuous professional development training ('CPD') for theirapproved persons .October 2013TC-2.2.4
Approved persons may choose to fulfil their CPD requirements by attending courses, workshops, conferences and seminars at local or foreign training institutions.October 2013TC-2.2.5
The annual training required under Paragraph TC-2.2.1 must also include the quarterly updates, if any, to the CBB Volume 2 (Islamic Banks) Rulebook, in areas relevant to each
controlled function .October 2013TC-2.2.6
Islamic bank licensees should maintain appropriate training records for each individual.Licensees should note how the relevant training relates to and supports the individual's role. Training records may be reviewed during supervisory visits to assess theIslamic bank licensee's systems and to review how theIslamic bank licensee ensures that its staff are competent and remain competent for their roles.October 2013Maintaining Competence
TC-2.2.7
An
Islamic bank licensee must make appropriate arrangements to ensure thatapproved persons maintain competence.October 2013TC-2.2.8
An
Islamic bank licensee should ensure that maintaining competence for anapproved person takes into account:(a) Application of technical knowledge;(b) Application and development of skills; and(c) Any market changes and changes to products, legislation and regulation.October 2013TC-2.2.9
An
Islamic bank licensee may utilise the CPD schemes of relevant professional bodies to demonstrate compliance with Paragraph TC-2.2.1. In-house training, seminars, conferences, further qualifications, product presentations, computer-based training and one-to-one tuition may also be considered to demonstrate compliance with Paragraph TC-2.2.1.October 2013Record Keeping
TC-2.2.10
An
Islamic bank licensee must, for a minimum period of five years, make and retain records of:(a) The criteria applied in assessing continuing competence;(b) The annual assessment of competence; and(c) Record of CPD hours undertaken by eachapproved person .October 2013TC-2.3 TC-2.3 Transitional Period
TC-2.3.1
The requirements of this Module for
Islamic bank licensees are effective from the issuance date of this Module.October 2013TC-2.3.2
New applications for
approved persons are subject to the requirements of this Module (See Paragraph TC-B.1.4).October 2013TC-2.3.3
Approved persons occupyingcontrolled functions at the time this Module is issued will be grandfathered and not subject to the requirements of this Module, with the exception of CPD requirements in Paragraph TC-1.2.1 and Paragraphs BR-1.1.4(m) and BR-1.2.3(g). However, should theapproved person move to anothercontrolled function , Paragraph TC-2.3.4 will apply.Amended: April 2017
October 2013TC-2.3.4
In instances, where an
approved person in oneIslamic bank licensee moves to anotherIslamic bank licensee and occupies the same function, the CBB will exercise its discretion on whether to grandfather suchapproved person from the required qualifications and competencies outlined in Appendix TC-1 into the newIslamic bank licensee . The grandfathering criteria used by the CBB will include a comparison of the scope and size of both positions. This will also apply in instances where anapproved person in oneIslamic bank licensee moves from one department to another within the sameIslamic bank licensee .October 2013TC-2.3.5
Approved persons holding the Chief Financial Officer/ Head of Financial Control position up until 31st January 2019 are exempted from the requirement of holding Certified Islamic Professional Accountant Certificate (CIPA) from AAOIFI in Appendix TC-1. However, appointments to such a role from 1st February 2019 onwards will be required to meet all the qualification requirements for such position in Appendix TC-1.Amended: April 2020
Added: January 2019Appendix TC-1 Qualifications and Core Competencies
Role Core Competencies How can competence be demonstrated? Board Member Board members should have: (a) Sufficient experience to demonstrate sound business decision-making; and(b) A good understanding of the industry and its regulatory environment.Competence is demonstrated by: (a)(i) Holding a Bachelor's Degree; and(ii) A minimum experience of 7 years in business and/or government/quasi government of which at least 4 years at a senior management level; OR(b) A minimum experience of 10 years in business.Chief Executive or General Manager and their Deputies The Chief Executive or General Manager and their Deputies should have: (a) A clear understanding of the role and responsibilities associated with this position;(b) A good understanding of banking business and the wider industry and its regulatory environment; together with;(c) Relevant experience and qualifications associated with such executive responsibilities; and(d) The necessary professional and leadership capabilities which qualify him for this position.This person should have a minimum experience of 15 years in the banking sector of which at least 7 years at a senior management level in an Islamic bank. He/she should hold a relevant academic/professional qualification, preferably MBA, Masters in finance/accounting/economics or masters in any other subject, or preferably other qualification related to banking, accounting or finance, including AAOIFI's certified Islamic Professional Accountant (CIPA) or BIBF's Advanced Diploma in Islamic Finance (ADIF). Chief Financial Officer/ Head of Financial Control The Chief Financial Officer/ Head of Financial Control should have: (a) A clear understanding of the role and responsibilities associated with the position;(b) A good understanding of banking business and the wider industry and its regulatory environment;(c) The relevant experience and qualifications to fulfill his responsibilities; and(d) A good knowledge and understanding of international accounting standards and how they are applied in a business context, including IFRS, and where appropriate AAOIFI.The Chief Financial Officer/ Head of Financial Control should have a minimum of 10 years of practical experience in a bank and of which at least 7 years in a finance function of a bank. Experience of external audit on banks will also be counted as part of the minimum experience requirements.
He/she should:(a) Hold a relevant academic/professional qualification, preferably MBA, Masters in finance/accounting/economics or masters in any other subject, or preferably other qualification related to banking, accounting or finance, including BIBF Advanced Diploma in Islamic Finance; and(b) Have relevant certification(s) specific to this role. Such certifications may include but are not limited to:(i) The Association of Chartered Certified Accountants (ACCA); or(ii) Certified Public Accountant (CPA); or(iii) Similar designation with a valid current practicing certificate.(c) Hold Certified Islamic Professional Accountant (CIPA) from AAOIFI.Chief Risk Officer/Head of Risk Management The Chief Risk Officer/ Head of Risk Management should have: (a) An appropriate level of experience and standing to demonstrate suitable independence from other functions within the bank;(b) A clear understanding of the role and responsibilities associated with the position;(c) A good understanding of banking business and the wider industry and its regulatory environment; and(d) The relevant experience and qualifications to fulfill his responsibilities.The Chief Risk Officer/ Head of Risk Management should have a minimum of 7 years of practical experience in a bank and of which at least 5 years in a risk management position.
He/she should:(a) Hold a degree from a university at bachelor level or higher or a relevant professional qualification, including AAOIFI's CIPA qualification or BIBF's Advanced Diploma in Islamic Finance; and(b) Have relevant certification(s) specific to this role. Such certifications may include but are not limited to:(i) Institute of Risk Management qualifications (IRM); or(ii) Financial Risk Manager (FRM); or(iii) Professional Risk Manager (PRM); or(iv) Other relevant qualifications.Head of Internal Audit The Head of Internal Audit should have: (a) An appropriate level of experience and standing to demonstrate suitable independence from other functions within the bank;(b) A clear understanding of the role and responsibilities associated with the Internal Audit function;(c) A good understanding of banking business and the wider industry and its regulatory environment;(d) The relevant accounting and auditing experience and qualifications to fulfill his responsibilities; and(e) A demonstrable knowledge and understanding of the Standards for the Professional Practice of Internal Audit.The Head of Internal audit should have a minimum experience of 7 years in a bank of which at least 5 years of that experience should have been in an internal audit role. He/she should: (a) Hold a university degree preferably in accounting, banking or finance including AAOIFI's CIPA or BIBF's Advanced Diploma in Islamic Finance or a relevant professional qualification; and(b) Have relevant certification(s) specific to this role. Such certifications may include but are not limited to Chartered Internal Auditor (CIA) by the Institute of Internal Auditors.Shari'a Officer The Shari'a Officer should: (a) Have appropriate level of knowledge in Islamic Finance and Shari'a principles; and(b) Have a good understanding of the banking industry and the regulatory environment; and(c) Possess reasonable understanding of economics and finance.Competence is demonstrated by: (a) Having at least a bachelor degree (or its equivalent) in Islamic Shari'a including the study of Usul Fiqh (the origin of Islamic law) and/or Fiqh Muamalat (Islamic jurisprudence);(b) Having adequate understanding of banking, Islamic finance, accounting and economics (as demonstrated by, for example, obtaining BIBF's Advanced Diploma in Islamic Finance qualification; or Advanced Diploma in Islamic Commercial Jurisprudence (ADICJ)).(c) Holding the relevant professional qualification specific to this role, which may include but is not limited to AAOIFI's Certified Shari'a Advisor & Auditor (CSAA) qualification;(d) Having strong proficiency in Arabic; and(e) Having a minimum overall relevant experience of at least 5 years with an Islamic bank or financial institution dealing with Islamic products and services.Compliance Officer A Compliance Officer should have: (a) An appropriate level of experience and standing to demonstrate suitable independence from other functions within the bank; and(b) A thorough understanding of the industry and its applicable regulatory requirements.The Compliance Officer should have a minimum of 5 years relevant experience in a bank, financial institution or financial regulator He/she should: (a) Hold a degree from a university at bachelor level or higher or a relevant professional qualification, including BIBF Advanced Diploma in Islamic Finance; and(b) Have relevant certification(s) specific to this role. Such certifications may include but are not limited to:(i) International Diploma in Compliance offered by the International Compliance Association; and/or(ii) International Advanced Certificate in Compliance and Financial Crime offered by the International Compliance Association; and/or(iii) Any other relevant professional qualification deemed suitable by the CBB. These may include qualifications in areas related to the license.Head of Internal Shari'a Audit Function A Head of Internal Shari'a Audit Function must: (a) Have the relevant accounting and auditing experience and qualifications to fulfill his responsibilities; and(b) Have appropriate level of knowledge in Shari'a rules and principles, AAOIFI Shari'a standards and Islamic finance.Competence is demonstrated by: (a) Having at least a bachelor degree in accounting, banking, finance, business, economics or any other relevant discipline;(b) Holding the relevant professional qualification specific to this role, which may include but is not limited to:(i) Chartered Certified Accountant (ACCA); or(ii) Certified Public Accountant (CPA); or(iii) Certified Islamic Professional Accountant (CIPA); or(iv) Chartered Internal Auditor (CIA); or(v) Certified Shari'a Advisor & Auditor (CSAA); or(vi) Similar qualification with a valid current practicing certificate.(c) Having familiarity with and reasonable understanding of Shari'a rules and principles, AAOIFI Shari'a standards, etc. as demonstrated by the relevant qualification / certification such as Advance Diploma in Islamic Finance or Advanced Diploma in Islamic Commercial Jurisprudence from BIBF, other Islamic Shari'a studies or by any other means;(d) Having a minimum 5 years in the Internal Shari'a audit function with an Islamic bank or financial institution dealing with Islamic products and services.Money Laundering Reporting Officer (MLRO)/ Deputy Money Laundering Reporting Officer (DMLRO) The MLRO and DMLRO should: (a) Understand the business of the bank and how the Anti Money Laundering framework applies to it;(b) Demonstrate independence from bank staff who deal directly with customers; and(c) Have a thorough knowledge of the financial industry and be familiar with relevant FATF and applicable domestic regulatory requirements.An MLRO should have a minimum experience of 5 years in the banking industry of which at least 3 years of experience in anti-money laundering or anti-money laundering related role. The DMLRO should have a minimum of 2 years experience in the banking industry of which at least 1 year experience in an anti-money laundering or anti- money laundering related role. The MLRO/ DMLRO should: (a) Hold a degree from a university at bachelor level or higher or a relevant professional qualification, including BIBF Advanced Diploma in Islamic Finance; and(b) Have relevant certification(s) specific to this role. Such certifications may include but are not limited to:(i) Certified Anti-Money Laundering Specialist Examination (ACAMS); and/ or(ii) Diploma in Anti-Money Laundering offered by the International Compliance Association; and/ or(iii) International Diploma in Financial Crime Prevention offered by International Compliance Association; and/or(iv) International Advanced Certificate in Compliance and Financial Crime offered by the International Compliance Association.Heads of Other Functions Heads of Other Functions should have: (a) A clear understanding of the role and responsibilities associated with the function;(b) A good understanding of banking business and the wider industry and its regulatory environment; and(c) The relevant experience and qualifications to fulfill his responsibilities.A senior manager responsible for a specialist function should have a minimum experience of 7 years in the banking/financial industry of which at least 5 years of experience in the same function that he/she will be heading. He/she should: (a) Hold a relevant academic/professional qualification, preferably MBA, Masters in finance/accounting/economics or masters in any other subject, and preferably other qualification related to banking/accounting; and(b) Have other relevant certification(s) specific to this role. Such certifications may, depending on the function being fulfilled, include but are not limited to:(i) Chartered Financial Analyst (CFA);(ii) Certificate in Securities and Financial Derivatives;(iii) Certificate in Investment Management;(iv) Professional Certification in Accounting e.g. CA, CPA, ACCA, CIPA; ;(v) Equivalent certificates orqualifications;(vi) Advanced Diploma in Banking/ Islamic Finance or Financial Advisory Program from the BIBF or other institutions; and/or(vii) Securities Market Regulation Certification.Amended: April 2020
Amended: January 2019
Amended: October 2018
Amended: October 2016
Amended: October 2015
Amended: January 2014
October 2013ICCAP ICCAP Internal Capital Adequacy Assessment Process
IC-A IC-A Introduction
IC-A.1 IC-A.1 Purpose
Executive Summary
IC-A.1.1
The Internal Capital Adequacy Assessment Process ('ICAAP') Module sets out the CBB's requirements relating to banks' obligations under Pillar 2 with respect to ICAAP for assessing their overall capital adequacy in relation to their risk profile. It seeks to encourage banks to develop and use better risk management techniques in identifying, monitoring and managing their risks, and to ensure that a licensee has a rigorous process in place for determining the adequacy of its capital to support all risks to which it is exposed.
July 2018IC-A.1.2
ThisModule must be read in conjunction with other parts of the Rulebook, mainly:
(a) Principles of Business;(b) High-level Controls;(c) Credit Risk;(d) Market Risk;(e) Operational Risk;(f) Liquidity Risk;(g) Reputational Risk;(h) Rate of Return Risk in the Banking Book ('RRRBB');(i) Capital Adequacy; and(j) Stress Testing.July 2018Legal Basis
IC-A.1.3
This Module contains the Central Bank of Bahrain's ('CBB') Directive (as amended from time-to-time) relating to ICAAP and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is an important component of the CBB's Supervisory Review Process and is applicable to all
Bahraini Islamic bank licensees (including theirapproved persons ).July 2018IC-A.1.4
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
July 2018IC-A.2 IC-A.2
Evolution of the Module
IC-A.2.1
This Module is first issued in July 2018 as part of Volume Two of the CBB Rulebook. All requirements in this Module are effective from the date of issuance. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.
July 2018IC-A.2.2
The most recent changes made to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes IC-1.5.14 07/2021 Added a new Paragraph on submission of the recovery plan annually. IC-1.2.2 01/2022 Amended Paragraph. IC-1.5.10 01/2022 Amended Paragraph. IC-1.6.1 01/2022 Amended Paragraph. IC-1.6.1 04/2022 Amended reference to HC module. IC-1 IC-1 General Requirements
IC-1.1 IC-1.1 Overview
IC-1.1.1
A thorough and comprehensive ICAAP is a vital component of a strong risk management framework. The ICAAP should assist in determining the optimum level of capital that is needed to adequately support the nature and level of the bank's risk profile. Nevertheless, if the required economic capital determined under the requirements of this Module falls below risk based regulatory capital determined under Module CA, the latter shall be maintained.
July 2018IC-1.1.2
While the CBB recognises that increased capital is not a substitute for proper controls and risk management processes, higher regulatory capital requirements may be required to buffer banks against the higher risk of unexpected losses resulting from inadequate controls or risk management weaknesses.
July 2018IC-1.1.3
The CBB may intervene at an early stage, to prevent capital levels of banks from falling below the appropriate levels required to support the risk characteristics of the bank, and to require swift remedial action by the bank if the appropriate level of capital is not maintained or restored by the bank.
July 2018IC-1.1.4
Further to the requirements in CA-A.1.5 of Module CA, the CBB may set a target capital adequacy ratio ('CAR') for each bank, subject to its specific risk profile rating as determined, based on the CBB's supervisory risk assessment methodology.
July 2018IC-1.2 IC-1.2 General Requirements
ICAAP Framework
IC-1.2.1
Bahraini Islamic bank licensees must develop an ICAAP Framework commensurate with the nature, size, complexity and scale of the bank's activities that includes, but is not limited to:(a) An appropriate ICAAP policy, procedures and limits for risk management;(b) A description of the process and governance arrangements, including the roles and responsibilities for the Board and senior management, with respect to the design and implementation of the ICAAP Framework;(c) The bank's risk appetite statement and capital adequacy objectives;(d) Comprehensive and timely identification, measurement, mitigation, controlling, monitoring and reporting of risks;(e) A process to relate the bank's capital to its risk profile and for allocation of appropriate capital charges for material risks;(f) A process to reconcile, where relevant, the historical amounts used to prudential and financial reporting sources; and(g) A process of internal controls and independent review.July 2018IC-1.2.2
The ICAAP Framework, and amendments on it, must be submitted to the CBB.
Amended: January 2022
Added: July 2018ICAAP Report /Document
IC-1.2.3
Bahraini Islamic bank licensees must develop an ICAAP Report and maintain capital levels that are commensurate with their risk profiles and control environments.July 2018IC-1.2.4
The ICAAP Report must be prepared on an annual basis and submitted to the CBB on 31st May of each year.
July 2018IC-1.2.5
Bahraini Islamic bank licensees must ensure that the outcome of the ICAAP is forward looking (i.e. considers a minimum of 3-years projections) and not a static capital target. Banks must ensure that the ICAAP covers the following:(a) All material risks and potential vulnerability to its business and operational environment;(b) Capital requirements, benign and adverse forward-looking environment; and considers capital buffers during benign conditions to help meet any surge in capital demand under adverse conditions;(c) A business plan and evaluation of short-term and long-term capital needs;(d) Rigorous stress-testing and scenario analysis that identifies possible events or changes in market conditions that could adversely impact the bank; and(e) Results of stress tests and analyses are incorporated, where applicable, into the capital adequacy assessment.July 2018IC-1.3 IC-1.3 Board and Senior Management Oversight
IC-1.3.1
The ultimate responsibility for ensuring that there is a robust ICAAP and a sound risk management framework; setting capital targets that are commensurate with the banks' risk profile and control environment; and ensuring that banks set aside adequate capital to support the risks beyond the regulatory minimum requirements rests with the Board and senior management of the licensees.
July 2018IC-1.3.2
Responsibilities of the Board include:
(a) Ensuring adequate capital management policies are in place; the Board must also review and approve these policies on an annual basis;(b) Understanding the material risks that are impacting the business, and also having an awareness of emerging risks and vulnerabilities;(c) Reviewing and approving the capital plan and corresponding capital actions;(d) Defining the risk appetite/risk tolerance of the bank;(e) Ensuring that the bank has a sound risk management framework in place;(f) Ensuring that the accountability and lines of authority are clearly delineated and effectively communicated throughout the organization;(g) Ensuring that the bank implements adequate infrastructure and controls to measure, monitor and mitigate risk effectively; and(h) Ensuring that the bank has adequate capital proportionate to its risk profile under normal and adverse conditions.July 2018IC-1.3.3
Responsibilities of the senior management include:
(a) Ensuring that bank personnel involved in ICAAP activities have the adequate skills, including complex financial risk management skills, and that employees are adequately enabled through training.(b) Ensuring that they have adequate understanding of the material risks that are impacting the business, as well as an awareness of emerging risks and vulnerabilities;(c) Ensuring effective implementation of relevant policies, procedures, systems and controls;(d) Communicating the internal controls and written policies and procedures throughout the bank; and(e) Monitoring risk exposures in accordance with the risk appetite and limits approved by the Board.(f) Ensuring that the Board receives adequate information pertaining to risk management and capital management, under both normal and stressed business conditions; and(g) Monitoring and reporting of status against ICAAP to the Board.July 2018IC-1.3.4
The roles and responsibilities of Risk Management, Financial Control and Compliance in relation to ICAAP must be clearly documented in the related policies and procedures.
July 2018IC-1.4 IC-1.4 Comprehensive Assessment of Risk
IC-1.4.1
Bahraini Islamic bank licensees must ensure that their ICAAP identifies and assesses all material risks and addresses the following:(a) Credit risk, market risk and operational risk, captured under Pillarl;(b) Risks that are not taken into account by Pillar 1 (e.g. rate of return risk in the banking book, liquidity risk, reputational risk, strategic risk and concentration risk); and(c) External factors outside the direct control of the licensees, including changes in regulations, accounting rules and the economic environment (e.g. business cycle effects).IC-1.4.2
For each of the material risks identified in the ICAAP, banks must ensure that the risk management framework (in HC-6.6.2) is comprehensively addressed.
July 2018IC-1.4.3
Bahraini Islamic bank licensees must ensure that their risk management infrastructure allows for aggregation of exposures and risk measures across business lines.July 2018IC-1.5 IC-1.5 Capital Planning
IC-1.5.1
Bahraini Islamic bank licensees must develop a comprehensive Capital Planning Policy which clearly articulates the guidelines for capital planning, capital usage, capital distribution (i.e. issuing dividends, share buy-back, etc.), determining capital composition and capital-raising mechanisms under different conditions.July 2018IC-1.5.2
Bahraini Islamic bank licensees must state their objectives in deciding how much capital to hold. Banks must ensure that the capital objectives go beyond the regulatory minimum to support risks and to take into account the following considerations:(a) Level of creditworthiness of the bank to be achieved in markets, that is higher than that indicated by the minimum regulatory capital requirements;(b) Fluctuations in capital adequacy ratios, as a result of changes in type and volume of activities and risk exposures in the normal course of business;(c) Cost of capital-raising, especially in situations where capital injections need to be carried out quickly or at a time when market conditions are unfavourable;(d) Potential breach of the minimum regulatory capital requirements and regulatory actions in such an event;(e) Risks arising from the features of the jurisdictions and markets in which the bank operates; and(f) Limitations in risk assessment infrastructure, and methodologies.July 2018IC-1.5.3
Bahraini Islamic bank licensees must develop their ICAAP on a consolidated and solo basis. Banks must ensure that their consolidated capital is adequate to:(a) Support the volume and risk characteristics of all parent and subsidiary activities; and(b) Provides a sufficient cushion to absorb potential losses arising from such activities.July 2018IC-1.5.4
Bahraini Islamic bank licensees must ensure that their consolidated ICAAP addresses the following:(a) That the total capital estimated as appropriate for the group has been allocated to each group member, according to their respective risk profiles; and(b) That the group risks they face (including reputation risk arising from the failure of another group member, and the risks they face due to exposure to, or dependence on, other group members) are fully evaluated.July 2018Capital Adequacy Objectives
IC-1.5.5
The CBB may impose specific capital charge, and / or limits, on all material risk exposures, if warranted. This may include risks that the CBB considers not have been adequately transferred, or mitigated, through transactions entered into by the Bank (e.g. securitization transactions)
July 2018IC-1.5.6
In stating their capital adequacy, banks must:
(a) Use formal economic capital models for setting capital objectives and targets and assessing its capital adequacy. The CBB will determine which banks may be exempted from establishing formal economic capital model on a case to case basis;(b) Assess whether their long-run capital objectives differ significantly from their short-run capital objectives. As it may take time for a bank to raise new capital, the bank must make allowances for unexpected events, including putting contingency plans in place for raising additional capital;(c) State the time horizon for achieving their capital adequacy objectives, and set out in broad terms the capital planning process and the responsibilities for that process. The capital plan should recognise that accommodating additional capital needs requires significant lead time, and take into account the potential difficulties of raising additional capital during downturns or other times of stress. It must also set out how the bank will comply with regulatory capital requirements, any relevant limits related to capital, and a general contingency plan for dealing with divergences and unexpected events;(d) Develop an internal strategy for maintaining capital levels which must not only reflect the desired level of risk coverage but also incorporate factors such as portfolio growth expectations, future sources and uses of funds, and dividend policy. There may be other considerations that the banks consider relevant or important in determining how much capital it must hold (e.g. external rating goals, market image, strategic goals, etc.). If these other considerations are included in the ICAAP, the bank must show how the considerations have influenced its decisions concerning the amount of capital to be held; and(e) Ensure that capital objectives and targets are reviewed and approved by the Board, on an annual basis at least, to ensure their appropriateness.July 2018IC-1.5.7
Bahraini Islamic bank licensees must ensure that adequate capital is held against all material risks not just at a point in time, but over time, to account for changes in their strategic direction, evolving economic conditions and volatility in the financial environment.July 2018Risk Modelling
IC-1.5.8
Bahraini Islamic bank licensees using risk-modelling techniques to assess capital adequacy must comprehensively identify their capital needs on the basis of both quantifiable and non-quantifiable risks. Banks must not rely on quantitative methods alone to assess capital adequacy. Non-quantifiable risks, if material, must also be included using qualitative assessment and management judgment.July 2018Design of ICAAP
IC-1.5.9
Bahraini Islamic bank licensees must present in their ICAAP report and how risks relate to capital levels under both normal and stressed conditions.July 2018Recovery Plan
IC-1.5.10
Bahraini Islamic bank licensees must develop, commensurate with the nature, size, complexity and scale of its activities, a recovery plan in line with Chapter 2 of Module DS. Recovery plans must be approved, and reviewed regularly, by the Board. The recovery plan must include information and analysis to reflect the appropriate coverage and granularity of the recovery plan, as well as key elements including:(a) Governance arrangements and escalation process following a triggering event;(b) Quantitative and qualitative triggers and early warning indicators; and(c) Recovery options based on the appropriate number of market-wide (systemic) stress scenarios and bank-specific (idiosyncratic) stress scenarios to assess which recovery options would be effective in a range of stress situations.Amended: January 2022
Added: July 2018IC-1.5.11
Bahraini Islamic bank licensees must develop and maintain a recovery plan trigger framework (which must be embedded within the bank's risk management framework), to prompt recovery action in a timely manner.July 2018IC-1.5.12
Recovery triggers must be well defined and tailored to the full range of risks faced by banks. Notwithstanding other triggers that might be considered, the capital ratio trigger must not be less than 13%. The threshold level for triggers must be calibrated with impact on the bank's capital and set out clearly in the bank's recovery plan.
July 2018IC-1.5.13
Bahraini Islamic bank licensees must establish an adequate monitoring process to support the operation of the trigger framework in their recovery plan.July 2018IC-1.5.14
Bahraini Islamic bank licensees must submit to the CBB annually their recovery plans by the 31st of August.Added: July 2021ST ST Stress Testing
ST-A ST-A Introduction
ST-A.1 ST-A.1 Purpose
Executive Summary
ST-A.1.1
This Module sets out the Central bank of Bahrain's ('CBB's') directives and guidance to Islamic bank licensees operating in Bahrain on the key requirements of an effective stress testing programme, and describes the CBB's approach to assessing the adequacy of banks stress testing practices. The contents of this Module apply to all Islamic banks, except where noted in individual Chapters.
July 2018ST-A.1.2
This Module should be read in conjunction with other parts of the Rulebook, mainly:
(a) Principles of Business;(b) High-level Controls;(c) Risk Management (credit risk, market risk, operational risk, reputational risk, liquidity risk and rate of return risk in banking book);(d) Internal Capital Adequacy Assessment Process (ICAAP); and(e) Capital Adequacy.July 2018Legal Basis
ST-A.1.3
This Module contains the CBB's Directive (as amended from time to time) relating to Stress Testing and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all
Islamic bank licensees (including their approved persons).July 2018ST-A.1.4
The requirements for stress-testing covered in this Module for the purpose of capital adequacy, ICAAP, recovery planning and reverse stress testing apply to
Bahraini Islamic bank licensees only.Amended: October 2019
July 2018ST-A.1.4A
Branches of foreign bank licensees must apply the requirements included in this Module for risks that are material and to the extent appropriate. Ifbranches of foreign bank licensees do not have established policies, procedures, processes and systems at a branch level, they must satisfy the CBB that there are equivalent arrangements at their head office or regional office.Added: October 2019ST-A.1.5
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
July 2018ST-A.2 ST-A.2 Module History
Evolution of the Module
ST-A.2.1
This Module is issued in July 2018 as part of Volume Two of the CBB Rulebook. The requirements in this Module become effective from the date of issuance. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made; Chapter UG-3 provides further details on Rulebook maintenance and version control.
July 2018ST-A.2.2
The changes made to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes ST-A.1.4 10/2019 Amended Paragraph on branches of foreign bank licensees. ST-A.1.4A 10/2019 Added a new Paragraph on branches of foreign bank licensees. ST-1.8.1 01/2022 Deleted Paragraph. ST-1.8.2 01/2022 Amended Paragraph. ST-1 ST-1 General Guidance on Stress Testing
ST-1.1 ST-1.1 Overview
ST-1.1.1
This Chapter provides guidance and directives for stress testing and sets out the CBB's expectations and requirements with regards to the governance, coverage of risks, design and implementation of banks' stress testing programmes. The document provides input for supervisory assessment to ensure comprehensive and sound stress testing practice at banks.
July 2018ST-1.1.2
Stress testing is an essential risk management tool used to assess a bank's potential vulnerabilities to stressed business conditions. Stress testing involves the use of various techniques to assess a bank's existing and potential vulnerability (typically in terms of its profitability, liquidity and capital adequacy) to 'stressed' business and economic conditions and plays an important role in the management of risk by banks. Effective stress testing enables a bank to quantify adverse unexpected outcomes related to a variety of risks and facilitate the decision to put in place risk mitigation plans to safeguard its safety and soundness. This includes providing a sufficient amount of financial resources (including capital and liquidity) and implementing other risk mitigation strategies that are required to withstand losses arising from a particular stressed scenario.
July 2018ST-1.1.3
Stress testing can be used for multiple purposes within the bank. While this Directive is focused on the integrated firm-wide stress testing which serves to identify weaknesses and vulnerabilities in a bank's risk profile and in turn evaluate its capital adequacy and liquidity position under adverse scenarios, stress testing should also be conducted for recovery planning and ICAAP. However, the underlying methodologies for scenario development and stress testing should be consistent regardless of whether they are used for firm-wide stress testing, ICAAP or recovery planning.
July 2018ST-1.2 ST-1.2 Developing an Appropriate Stress Testing Framework
General Requirements
ST-1.2.1
Islamic bank licensees must establish a rigorous and forward looking (i.e. considers a minimum of 3-years projections) stress testing programme that is commensurate with the nature, size and complexity of its business operations, markets it operates in and its risk profile.July 2018ST-1.2.2
The coverage of the stress testing programme must be comprehensive and include on- and off-balance sheet exposures, commitments, guarantees and contingent liabilities.
Islamic bank licensees must factor in existing material risks and emerging risks relevant to its business and operating environment.July 2018ST-1.2.3
Stress testing must form an integral part of an
Islamic bank licensee's internal capital adequacy assessment and risk management process. Banks must be able to demonstrate the robustness of the stress testing methodologies used, the quality and comprehensiveness of the data underpinning the stress testing, involvement of relevant stakeholders across Board, senior management, business line, risk and finance control and oversight functions in the design and implementation of the stress test programme, and the use of stress test results by risk management.July 2018ST-1.2.4
Stress testing must also feed into the
Islamic bank licensee's strategic and business plan.July 2018The Board of Directors and Senior Management Oversight
ST-1.2.5
The Board and senior management must ensure that a strong risk culture and governance policy underpins the effective use of stress testing.
July 2018ST-1.2.6
Responsibilities of the Board include:
(a) Approving the policies and procedures governing the stress testing programme, and ensuring sufficient resources and expertise to effectively implement the programme;(b) Ensuring that the design of the stress testing programme is consistent with the bank's risk appetite and is appropriate to the nature, scale, complexity of its risk-taking activities and overall business strategy;(c) Ensuring that views and inputs from relevant functions and departments are considered in the stress testing programme;(d) Providing constructive challenge on the results of stress tests, scenarios, key assumptions and methodologies used in the stress tests;(e) Reviewing the appropriateness of management actions proposed by senior management to mitigate potential vulnerabilities, taking into consideration the factors set out in Section ST-1.6;(f) Approve management actions;(g) Board level committee must be responsible for reviewing and challenging the scenarios for Shari'a products; and(h) Commissioning regular stress testing programme in accordance with Section ST-1.7.July 2018Senior Management
ST-1.2.7
Responsibilities of the senior management must include:
(a) Ensuring implementation and monitoring of the stress testing programme;(b) Developing stress testing policies and procedures in accordance with Section ST-1.4;(c) Participating in the review and identification of appropriate stressed scenarios;(d) Ensuring that scenarios are coherent with the risk profile of the bank's business and the market it operates in;(e) Ensuring that stress testing methodology is proportional to the scale and complexity of the bank;(f) Providing the Board and where relevant, Shari'a Supervisory Board with key information which has a bearing on stress testing exercise. This includes information on assumptions, extent of judgement used and limitations of the stress tests including the quantitative models used;(g) Communicating the stress test results in a clear, concise and comprehensive manner for the Board to consider the impact on the bank's strategy, performance and financial condition;(h) Developing and recommending appropriate management action plans to the Board to address potential vulnerabilities identified during the stress test exercise; and(i) Ensuring there is timely and effective implementation of Board-approved management action plans.July 2018ST-1.2.8
For
branches of foreign bank licensees , where no local board of directors exists, all references in this Module to the board of directors should be interpreted as the authorized person(s) at the Head Office/ Regional Office.July 2018ST-1.3 ST-1.3 Uses of Stress Testing
ST-1.3.1
In order to ensure effectiveness of stress testing,
Islamic bank licensees should leverage it for the following purposes:(a) Provide a forward-looking assessment of risk exposures under stressed conditions, enabling banks to develop appropriate risk-mitigating strategies (e.g. restructuring positions) and contingency plans across a range of stressed conditions;(b) Improve the bank's understanding of its own risk profile and facilitate the monitoring of changes in this profile over time;(c) Inform the Board and senior management on the setting of the bank's risk appetite or tolerance and the determination of whether its risk exposures are commensurate with the stated risk appetite or tolerance;(d) Supplement the use of statistical risk measures (e.g. value-at-risk or economic capital models) which are based mainly on historical data and assumptions, and contribute to the modelling of the risks associated with new products or activities where there is a lack of sufficient historical data. Stress-testing helps quantify "tail" risk (i.e. the risk of losses under extreme market conditions) and re-assessment of modelling assumptions (e.g. those in relation to volatility and correlation);(e) Evaluate the bank's existing and potential vulnerabilities on a firm-wide basis (e.g. emerging risk concentrations) and its capacity to withstand stressed situations in terms of profitability, liquidity and capital adequacy;(f) Improve the bank's strategic, annual business plan, capital plan, liquidity plan and funding plan; and(g) Support internal and external communication regarding the bank's risk appetite or tolerance, risk exposures, and risk-mitigating strategies.July 2018ST-1.4 ST-1.4 Policies, Procedures and Documentation
ST-1.4.1
Islamic bank licensees must establish comprehensive policies and procedures governing its stress testing programme which address the following:(a) Principal objectives of the stress testing programme;(b) Governance including the roles and responsibilities of the Board, senior management, relevant business heads, risk management, operations, financial control, treasury, compliance and internal audit;(c) Articulate the risk drivers (external and internal) in testing scenarios;(d) Pre-defined frequency for periodic stress testing. In case of ad hoc stress testing, establish criteria or trigger points.(e) Methodologies used for stress testing of each risk category and development of relevant scenarios;(f) Range of triggers and remedial management actions envisaged vis-à-vis different adverse events;(g) Frequency of review and update of the stress testing programme to reflect changing market conditions;(h) Reporting procedures; and(i) Guidelines on use of stress testing for broader risk management.July 2018ST-1.4.2
Where a third-party model is used in stress testing,
Islamic bank licensees must demonstrate a thorough understanding of:(a) Methodology underpinning the external model;(b) The third-party's approach to validating the model;(c) Approach to implementing the model;(d) Rationale behind any adjustments made to the external model's input data sets and output; and(e) Limitations of the external modelJuly 2018ST-1.5 ST-1.5 Stress Testing Approaches and Methodologies
General Requirements
ST-1.5.1
Islamic bank licensees must adopt an integrated approach to stress-testing and conduct stress tests on a firm-wide basis and on a consolidated basis where applicable, providing a spectrum of perspectives at product-, business- and entity-specific levels. Where the bank is part of a larger banking group, its stress tests must also take into account the potential spillover effects and inter-dependence among members of the group.July 2018ST-1.5.2
Stress tests must be regularly conducted at least on a biannual basis. Tests must consider the nature of the risks involved and the purpose of the stress tests. Stress scenarios must be coherently developed so that risks that are inherently linked (e.g. market risk and credit risk) can be assessed together across portfolios and across time. The bank may refer to Section ST-2.2 for any available guidance on stress-testing for specific risks.
July 2018ST-1.5.3
The
Islamic bank licensee may also conduct ad hoc stress tests on specific areas whenever this is warranted. The situations which warrant ad hoc stress testing may include market volatility, changes to the risk profile of large counterparties, deteriorating economic conditions domestically or globally, political events, new product development or new market entry, significant changes in business operations and changes in applicable laws and regulations.July 2018ST-1.5.4
The scope of a stress test exercise must reflect the significant activities undertaken by the
Islamic bank licensee and consider all material risks affecting the bank. The assessment of material risks must include the following major risk categories or activities:(a) Credit risk(b) Market risk(c) Rate of return risk in the banking book(d) Liquidity Risk, including funding liquidity risk;(e) Operational risk; and(f) Other material risks.July 2018ST-1.5.5
Islamic bank licensees must also take into consideration the specifications of Shari'a contracts in the identification and assessment of material risks.July 2018Methodologies and Techniques
ST-1.5.6
Islamic bank licensees must use a range of quantitative and qualitative stress testing techniques and perspectives, depending on the complexity of risk and adequacy of data.July 2018ST-1.5.7
A quantitative measurement approach must provide the foundation of the stress testing framework. In measuring risks, an
Islamic bank licensee must establish quantitative approaches that appropriately reflect methodologies and standards that are well accepted in the industry. Quantification of risks and losses must be estimated based on credible data. However, quantitative techniques must be adequately enhanced with qualitative techniques and expert judgement to overcome limitations in data and systems. Meaningful qualitative techniques must be developed for stress testing risk factors that are not easily quantifiable.July 2018ST-1.5.8
Islamic bank licensees must ensure that the data used for stress testing is representative of, and bears similar risk characteristics to, the specific products or risk profile of the bank. In cases where there are data limitations, proxy estimates can be used. However, banks must apply a margin of conservatism to proxy estimates.July 2018ST-1.5.9
Islamic bank licensees must use, based on its risk profile, a suitable range of stress testing methodologies to ensure that its stress testing programme is comprehensive. In conducting scenario analysis, banks must assume a dynamic balance sheet rather than a static balance sheet. Banks must project growth (or decline) in balance sheet size under the chosen stressed conditions.July 2018ST-1.5.10
A sensitivity analysis estimates the impact of a single risk factor or a small number of closely related risk factors (e.g. rates of return, FX rates, real estate price, equity price etc.) on asset value, asset quality, earnings, capital or liquidity ratios. In most cases, sensitivity tests involve changing inputs or parameters without relating those changes to an underlying event or real-world outcome. While it is helpful to draw on extreme values from historical periods of stress, sensitivity tests should also include hypothetical extreme values to ensure that a wide range of possibilities are included.
July 2018ST-1.5.11
A scenario analysis simulates the impact of a combination of risk factors on the bank's profitability, capital adequacy and liquidity. The adverse movements of risk factors is usually driven by macroeconomic or political events, financial market movements, deterioration in industry fundamentals or a bank specific event. These stress scenarios can be based on historical or hypothetical events (see Section ST-2.3).
July 2018ST-1.5.12
Stress tests should also account for interactions between credit, funding and asset market conditions in a stressed scenario. The following interactions may be considered:
(a) Deterioration of return on financing assets leading to a reduction in cash inflows;(b) Price shocks for specific asset categories (for example, fire sales and significant mark-to-market losses) resulting in the drying up of liquidity for such assets;(c) Reduction of eligible high quality liquid assets ('HQLA') due to issuer downgrades;(d) Increase in bank's liquidity needs as a consequence of higher drawdown of committed financing facilities (for example, higher crystallisation of undrawn financing facilities);(e) Additional posting of collateral or margin due to a downgrade of the bank's rating or adverse price movements; and(f) Restricted access to secured or unsecured funding markets due to a deterioration in the bank's financial strength and rating.July 2018Reverse Stress Testing
ST-1.5.13
Apart from assessing and being prepared to respond to stressed conditions,
Bahraini Islamic bank licensees must also be aware of the scenarios that can render its business non-viable, due to severe financial or reputational damage. Banks must, therefore, implement a reverse stress testing program to identify the scenarios or events that can threaten the viability or solvency of the bank.July 2018ST-1.5.14
Reverse stress tests start from a known stress testing outcome such as a breach of regulatory capital ratios, illiquidity, insolvency, or the cancellation of banking license and then work backwards to identify the events that could lead to such an outcome for the bank.
July 2018ST-1.5.15
Reverse stress testing must serve as a starting point for determining the scenarios for recovery planning. Given that stress testing helps in understanding the quantum and the direction of impact of various scenarios on the
Bahraini Islamic bank licensee's critical risk metrics, the process of defining the recovery triggers must also be informed by stress testing.July 2018Expert Judgment
ST-1.5.16
Islamic bank licensees must ensure qualitative judgement and perspective from relevant experts such as risk controllers, economists, business managers and traders within the bank are incorporated into the stress-testing programme to help supplement the mechanical analysis performed by models, assess the impact of extreme events which are difficult to model statistically because by definition they occur very rarely, and analyse and respond to fast changing market conditions.July 2018ST-1.5.17
The designated unit responsible for managing and coordinating the stress-testing programme should facilitate internal dialogue and debate among the relevant experts and take into account their opinions as appropriate in the design, implementation, and use of the stress tests.
July 2018Alignment with Recovery Planning Program
ST-1.5.18
Bahraini Islamic bank licensees must test their recovery plan against three types of scenario at a minimum:(a) Idiosyncratic scenario;(b) Market-wide scenario; and(c) Scenario with a combination of both components.July 2018ST-1.5.19
Bahraini Islamic bank licensees must adopt more than one scenario within each of the three scenario types.July 2018ST-1.6 ST-1.6 Stress Testing Results and Management Actions
ST-1.6.1
Islamic bank licensees must evaluate the impact of stress tests against accounting profit and loss, impairment provisions, risk weighted assets ('RWA'), regulatory capital, liquidity and funding gaps.July 2018ST-1.6.2
Islamic bank licensees may also use other measures to gauge the impact of stress tests depending on the purpose of the stress test as well as the risks and portfolios being analysed including:(a) Asset values;(b) Economic or risk-adjusted profit and loss; and(c) Economic capital requirements.July 2018ST-1.6.3
In response to the stress tests results,
Islamic bank licensees must formulate realistic management actions considering:(a) Type of actions and specific circumstances, including external conditions, under which the management actions are unlikely to be feasible. This includes a consideration of factors listed in Paragraph ST-1.6.6;(b) Whether the actions would be consistent with the risk appetite or tolerance level set by the Board;(c) Whether the bank has adequate financial resources and operational capabilities to undertake such management actions; and(d) Constraints by supervisory or regulatory requirements, or market restrictions.July 2018ST-1.6.4
Management actions should be based on careful analysis and deliberation by the Board and senior management. The range of management actions may vary depending on the magnitude of impact and likelihood of stressed scenarios. Actions pursued should be proportionate to the severity of the impact of the stress tests and may include:
(a) Reviewing the risk appetite or limits and business strategies;(b) Restructuring, liquidating, unwinding or hedging (using shari'a compliant methods) exposures;(c) Seeking additional collateral or reducing risk exposures to specific sectors, countries and regions;(d) Tightening underwriting standards;(e) Adjusting the asset and liability composition;(f) Building additional capital or liquidity buffers;(g) Implementing recovery or contingency plans; and(h) Recourse to central bank funding facilities.July 2018ST-1.6.5
Management actions must be approved by the Board and senior management and clearly documented. Senior management must ensure effective monitoring mechanisms are in place to promptly activate management actions based on established triggers. Clear roles and responsibilities must be assigned to ensure prompt escalation to the Board and senior management upon the occurrence of any trigger event. Reviews must be periodically conducted to ensure that such management actions are executed in a timely and orderly manner.
July 2018ST-1.6.6
The following are examples of factors that may be considered in formulating the management actions during stressed conditions:
(a) Time required for full implementation, considering expected time for the management action to take effect such as improvement of asset quality due to tightening of underwriting standards;(b) Legal restrictions and impediments that may affect financial resources to be relied upon such as cross border transfers of capital to entities within the group;(c) Elevated cost associated with additional borrowings and risk of undersubscription when issuing debt or raising capital;(d) Limited access to funding markets and reduced market liquidity for assets to be disposed of as well as increased volatility which may further depress the price of these assets;(e) Loss of revenue and market share arising from any proposed reduction in lending activities;(f) Reputational risk and potential negative market reaction caused by ceasing discretionary coupons or exercising convertibility provisions of capital instruments; and(g) The potential response of other banks and market participants to a given scenario and the consequential impact on asset and funding markets.July 2018ST-1.7 ST-1.7 Interpretation and Communication of Stress Testing Results
ST-1.7.1
Stress testing provides a more comprehensive view of risks and vulnerabilities that an
Islamic bank licensee is exposed to. To ensure that the stakeholders within the bank and the CBB can interpret the results accurately, the bank should provide supporting information which includes scenario assumptions, model methodologies, model assumptions and limitations.July 2018ST-1.7.2
Stress-testing estimates the exposure to a specified stress event or scenario but does not give the probability of such an event or scenario occurring. Moreover, stress-testing is influenced by the judgement and experience of the experts designing the stress tests. The effectiveness of stress testing therefore depends in particular on whether the bank has chosen the 'right' scenarios for stress-testing, interpreted the results properly and taken the necessary steps to address the results.
July 2018ST-1.7.3
Islamic bank licensees must be aware of the limitations when interpreting the results of stress tests.July 2018ST-1.7.4
Islamic bank licensees must submit the stress test results to the CBB biannually on 31st May and 30th November. The submission must include:(a) Description of the risks, exposures and entities covered;(b) Description of the scenarios and the rationale for it;(c) Prevailing and projected macro-economic conditions as well as justifications for assumptions used;(d) Description of the methodologies used including justifications for any material changes to the previous methodologies adopted;(e) Impact on the profitability, capital adequacy, and liquidity as well as on all material risk indicators; both absolute amounts and key financial ratios must be reported;(f) Description of management actions that have been considered and an assessment of their reasonableness;(g) Assessment on areas of vulnerability and the associated risk factors. The assessment must be at a sufficient level of granularity to provide a meaningful understanding of the vulnerable areas (for instance, business line, geographical sectors, economic sectors or sub-sectors, market segments, borrower groups) and the causes of stressed losses;(h) Extract of minutes of the Board and/or any other related subcommittee meetings on the deliberation on the stress tests and reverse stress test results; and(i) Assessment and results of independent reviews, where such review has been conducted.July 2018ST-1.7.5
The reporting of stress test results by
Islamic bank licensees , must, at minimum, cover a 3-year horizon based on the following scenarios:(a) One market-wide (systemic) stress scenarios;(b) One bank-specific (idiosyncratic) stress scenarios; and(c) A combination of systemic and idiosyncratic stress scenarios.July 2018ST-1.7.6
In order to arrive at a comprehensive assessment of an
Islamic bank licensee's stress testing programme, the CBB will, where necessary, engage in discussion with the Board or senior management on the programme, particularly in respect of the following:(a) Their views on major macroeconomic and financial market vulnerabilities and relevant threats specific to the bank's operation and business model; and(b) Their justifications for various aspects of the stress testing programme and the methodology employed, such as the key assumptions driving the stress-testing results, the scope and severity of the firm-wide scenarios used, and how the stress-testing results are in practice being used.July 2018ST-1.7.7
The CBB may also require the
Islamic bank licensees to conduct additional sensitivity analysis in respect of specific business lines, portfolios or positions which pose significant risk to the bank. Furthermore, the banks may be required to evaluate scenarios under which their viability is compromised (e.g. reverse stress-testing scenarios), or to assess the plausibility of events that lead to significant strategic or reputational risk, particularly for significant business lines or products.July 2018ST-1.7.8
Islamic bank licensees must provide a detailed plan of corrective actions and follow-up on its implementation, in the event that the CBB assessment reveals material shortcomings in the bank's stress testing programme (or that the results generated from the programme are not adequately attended to or acted upon).July 2018ST-1.8 ST-1.8 Independent Review
ST-1.8.1
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: July 2018ST-1.8.2
The independent reviews of the stress testing framework undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34, must cover the following:
(a) Effectiveness of the stress testing programme in meeting its intended purposes, and the requirements of this Module;(b) Adequacy of management oversight and approval process;(c) Adequacy of documentation for the programme;(d) Comprehensiveness of risk exposures captured by the programme, and the methodologies, scenarios and assumptions used;(e) Verification of the quality of data sources used to run the stress tests (e.g. in terms of accuracy, consistency, timeliness, completeness and reliability);(f) Implementation of the programme, as well as subsequent authorization for, and implementation of, significant changes or development work (e.g. to take account of changes in bank's business strategies, risk characteristics or external environment);(g) Integration of stress testing into risk management and decision-making processes at appropriate management levels, including capital and liquidity planning;(h) Integrity of management information and reporting systems for the stress tests; and(i) Validation of stress testing results, such as through backtesting historical scenarios (e.g. the 2008/09 Global Financial Crisis and the 1997 Asian Financial Crisis) and their impact on a bank's portfolio, or benchmarking with other stress tests conducted within and outside the bank.Amended: January 2022
Added: July 2018ST-2 ST-2 Major Risks and Stress Scenarios
ST-2.1 ST-2.1 Risks and Stress Scenarios
ST-2.1.1
This chapter outlines various risk factors and stress scenarios which
Islamic bank licensees should take into account in their stress-testing programme.July 2018ST-2.1.2
Islamic bank licensees must identify stress scenarios and risk factors which are aligned to the nature and complexity of the business and markets they operate in. They must ensure that important risk factors or relationships between these factors are not omitted from the stress-testing analysis. The risk factors identified will form the basis for developing stress scenarios. Banks must ensure that they have the capacity to conduct integrated stress tests by using a combination of the stress scenarios most relevant to their risk profiles and activities, covering the major types of risk to which they are exposed.July 2018ST-2.2 ST-2.2 Risk Factors
ST-2.2.1
A key step in the stress -testing process is the identification of major risk factors that should be stressed. In drawing up the list of risk factors,
Islamic bank licensees must understand the risk characteristics of their exposures and analyse the relevant risk factors, as well as the correlation (and potential for change in correlation) between these factors.July 2018ST-2.2.2
Highlighted below are some examples of risk factors that may be relevant to the
Islamic bank licensees :(a) Credit risk characterised by an increase in default probabilities (e.g. the rise in delinquencies and charge-offs); a decline in recovery rates or in the value of supporting collateral; a rating migration of counterparties, issuers or credit protection providers; and worsening of credit spreads. Banks should be aware of the major drivers of repayment ability (such as economic downturns and significant market shocks) that will affect all classes of counterparties or credits;(b) Concentration risk in terms of the large chunks of exposures to individual counterparties, products / instruments, industries, market sectors, countries or regions which are driven by the same risk factors. Banks should also assess the contagion effects and possible linkages (and the potential changes in such interrelationships, both over time and in times of stress) which may lead to disproportionate increase in risk exposure;(c) Rate of return risk arising from parallel shifts or twists in the yield curve and the increase in basis risk (i.e. changes in relationships between key market rates);(d) Market or price risk arising from adverse changes in the price or fair value of assets (e.g. currencies, equities, commodities or other financial instruments) and their impact on relevant portfolios and markets;(e) Liquidity risk as a result of the tightening of financing lines, tightening of secured or unsecured funding markets, market liquidity for certain asset classes, the triggering of obligations to provide additional collateral or margin under financing agreements or unexpected increase in drawdown of financing facilities and redemption of investment accounts;(f) Operational risk (including legal risk) caused by various factors such as internal or external fraud, system failure and security risks (e.g. in respect of transactional e-banking services), and litigation cases that may lead to material monetary loss or reputational impact on the bank concerned if the outcome is not in its favour;(g) Strategic risk resulting from events or changes in the environment that could adversely alter the original assumptions made in the strategic plan and any potential threats to bank's business, both financially and non-financially;(h) Reputational risk stress testing in terms of identifying scenarios (may be due to misconduct, financial crime, market view about the stability of the bank) which will have a negative reputational impact and in turn result in increased credit risk (e.g. run on the bank), liquidity risk (tightened access to funding markets) or market risk ( drop in equity value).(i) Product-specific risks such as prepayment risk. Other potential risks may also arise from abnormal market movements and their impact on contingent credit exposures and complex products (e.g. structured products with embedded multiple risks);(j) System-wide interactions and feedback effects that reflect the impact of likely behavioural responses of other market participants and their counterparties on the broader market in times of stress, and how that impact will feed back to the bank's own positions;(k) Macroeconomic factors (e.g. gross domestic product ('GDP') growth, change in property prices, unemployment rate and inflation or deflation rate) and their impact on other risk factors; and(l) Political and economic factors pertaining to industries, regions and markets.July 2018ST-2.3 ST-2.3 Stress Scenarios
Credit and Counterparty Credit Risk
ST-2.3.1
The following are examples of stress scenarios relating to credit risk and counterparty credit risk:
(a)Domestic economic downturn — this estimates the impact on bank's asset quality, impairment provisions, profitability and capital adequacy of adverse changes in selected macroeconomic variables (e.g. GDP growth, unemployment rate, rates of return, bankruptcy rates and asset prices etc.) that are relevant to the bank's exposures;(b)Economic downturn in major economies affecting Bahrain (e.g. U.S., Saudi Arabia, UAE etc.) — this estimates the impact on a bank's counterparty exposures (e.g. corporate financing, holdings in securities, interbank exposures etc.) as a result of economic downturn in major economies that have significant financial / commercial / trading links with Bahrain;(c)Decline in the real estate market - this estimates the impact of a decline in property prices on collateral coverage, default risk and provisioning needs for financing assets secured by properties;(d)Decline in the value and market liquidity of financial collateral — this estimates the impact of a decline in the valuation and market liquidity of financial collateral, which reduces the quality and quantity of the collateral, leading to lower collateral coverage and recovery rates and higher provisioning needs and capital charges;(e)Increases in non-performing facilities ('NPF') and provisioning levels — this assesses the resilience of a bank's financing portfolios in terms of the impact of such increases on its profitability and capital adequacy. In designing the scenario, banks may apply different percentages of increase in classified financing facilities and provisioning levels to its financing portfolios;(f)Rating migration of counterparties — a test based on the internal or external ratings of bank's credit exposures, by migrating a certain percentage of the credit exposures of a specific rating grade (by one or more notches) to a lower rating grade, and assessing the resultant impact on a bank's profitability and capital adequacy. The capital impact may include the effects of increases in credit losses and provisioning needs as well as the application of higher risk-weights due to rating downgrades in the calculation of regulatory capital; and(g)Default of major counterparties — this estimates the impact of default of a bank's major counterparties, including corporate, sovereign and bank counterparties, on its profitability as well as liquidity and capital adequacy. The test can be extended to cover aggregate exposures to major industries, market sectors, countries and regions (e.g. by assuming that a significant number of defaults occur within such aggregate exposures).July 2018ST-2.3.2
For the purpose of stressed expected loss, default probabiltiies should be point in time estimates. For a three year stress testing time horizon the bank should estimate the metric for 12th, 24th and the 36th month from the reporting date. This PDs should be cumulative.
July 2018Rate of Return Risk in Banking Book
ST-2.3.3
The following are examples of stress scenarios relating to rate of return risk in the banking book:
(a) 'gap risk' arises from the term structure of banking book instruments, and describes the risk arising from the timing of instruments' rate changes. The extent of gap risk depends on whether changes to the term structure of rates of return occur consistently across the yield curve (parallel risk) or differentially by period (non-parallel risk);(b) 'basis risk 'describes the impact of relative changes in rates of return for financial instruments that have similar tenors but are priced using different rate of return indices; and(c) 'option risk' arises from hedge positions or from optional elements embedded in the bank's assets, liabilities and off-balance sheet items, where the bank or its customer can alter the level and timing of their cash flows.July 2018Liquidity Risks
ST-2.3.4
The following are examples of stress scenarios relating to liquidity risk:
(a)Tightening of financing lines — the potential impact of liquidity stress on the solvency position arising from a higher cost of funding due to tightening of funding markets and loss in the value of marketable securities due to market illiquidity;(b)Funding concentration — this assesses the liquidity risk of significant business activities and concentration to a particular source of funding such as large investment account holders, wholesale market funding or holdings of a particular asset class; and(c)Withdrawal risk of investment account holders ('IAH') — this assesses the liquidity risk arising from honouring redemptions by investment account holders of unrestricted investment accounts at the level of individual funds in case of Islamic Windows.July 2018Market Risks
ST-2.3.5
The following are examples of stress scenarios relating to market risk:
(a)Increased volatility in key financial markets assesses the effects of increased volatility and adverse movements of market risk factors (i.e. rates of return, foreign exchange rates and equity or commodity prices) on a bank's market risk exposures;(b)Effect of key monetary decisions by the CBB, which might impact stock prices, FX rates and rates of return;(c)Effect on the bank arising from a rating downgrade of sovereign, leading to widening of credit spreads, and a fall in equity prices; and(d)Structural changes to the economy of the main countries in which the bank operates.July 2018Other Risks
ST-2.3.6
The following are examples of stress scenarios relating to other risks:
(a)Decline in net profit margin — this estimates the impact on the bank's net profit margin due to negative financing growth or displaced commercial risk;(b)Risk concentrations — this estimates the impact from changes in market conditions which could give rise to risk concentrations. Banks may identify and assess the impact of heightened correlations or hidden inter-dependencies within and across risk types / risk factors, and possible second-round effects under severe market shocks that may lead to an increase in bank's exposures; and(c)Operational risk events — this assesses the effects, on a bank's capital requirement for operational risk or its ability to maintain critical operations and earning capabilities, of external events (e.g. external fraud, vendor failure, utility outage and service disruption) or internal events (e.g. internal fraud, business disruption or system failures, telecommunication problems and loss of key personnel).July 2018DS DS Domestic Systemically Important Banks
DS-A DS-A Introduction
DS-A.1 DS-A.1 Purpose
Executive Summary
DS-A.1.1
The Domestic Systemically Important Banks (D-SIBs) Module sets out the Central Bank of Bahrain's ('CBB's) framework applicable to
Bahraini Islamic bank licensees identified as D-SIBs. This module provides guidance on the CBB's assessment methodology for identifying D-SIBs, and the Higher Loss Absorbency ('HLA') capital requirements to which such banks will be subject. The Module also sets out the supervisory measures and requirements to be applied by banks identified as being systemically important. This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law') (Decree No. 64 of 2006).July 2018DS-A.1.2
This Module shall be read in conjunction with other parts of the Rulebook, mainly:
(a) Principles of Business;(b) High-level Controls;(c) Capital Adequacy;(d) Stress Testing; and(e) Internal Capital Adequacy Assessment Process ('ICAAP').July 2018Legal Basis
DS-A.1.3
This Module contains the CBB's Directive relating to D-SIBs and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to all
Bahraini Islamic bank licensees .July 2018DS-A.1.4
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
July 2018DS-A.2 DS-A.2 Module History
Evolution of the Module
DS-A.2.1
This Module was first issued in July 2018 as part of Volume Two of the CBB Rulebook. The requirements in this Module are effective from the date of issuance. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.
Amended: April 2019
July 2018DS-A.2.2
The most recent changes made to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes DS-A.2.1 04/2019 Amended Paragraph. DS-2.1.2 07/2021 Amended Paragraph on RRPs submission annually. DS-3.1.1 01/2022 Deleted Paragraph. DS-3.1.2 01/2022 Amended Paragraph. DS-1 DS-1 General Requirements
DS-1.1 DS-1.1 Overview
DS-1.1.1
The objective of the D-SIBs framework is to identify banks that could cause significant disruption to the domestic financial system and economic activity locally in the event of distress or failure. To address the negative externalities posed by such banks, regulatory and supervisory measures will be undertaken with the aim of:
(a) Reducing the probability of failure of D-SIBs, by increasing their going-concern loss absorbency through additional capital requirements, requiring early recovery planning and increasing the intensity of their supervision; and(b) Reducing the extent or impact of any failure, by improving the resolvability of these banks.July 2018DS-1.2 DS-1.2 General Requirements
DS-1.2.1
Bahraini Islamic bank licensees designated as D-SIBs must hold designated HLA expressed as Common Equity Tier 1 ('CET1') capital at 1.5 percent of the total Risk-Weighted Assets ('RWA'), as calculated for the purposes of capital adequacy.July 2018DS-1.2.2
The HLA requirement must be fully met by the CET1 capital. This is to ensure that the capital held for HLA purposes must be available to absorb losses on a going-concern basis and, as such, enhance the resilience of the relevant D-SIB.
July 2018DS-1.2.3
Bahraini Islamic bank licensees designated as D-SIBs will be subject to an annual inspection by the CBB and two prudential meetings per year.July 2018DS-1.2.4
The HLA requirement and the Pillar 2 capital add-on address the external and internal risks associated with banks from different, but complementary perspectives.
July 2018Disclosure Requirement for D-SIBs
DS-1.2.5
Bahraini Islamic bank licensees designated as D-SIBs must disclose their D-SIB HLA requirement in their capital disclosures for the purpose of disclosures of the composition of the bank's capital base.July 2018Recovery and Resolution Plans
DS-1.2.6
Bahraini Islamic bank licensees designated as D-SIBs must develop and maintain Recovery and Resolution Plans (RRPs) specific to their circumstances and reflect the nature, complexity, interconnectedness, level of substitutability and size of the bank in question. The RRPs must be approved by the CBB.July 2018DS-1.3 DS-1.3 D-SIBs Assessment Framework
DS-1.3.1
The D-SIBs Assessment Framework aims to assess the degree to which banks are systemically important to the local financial system and domestic economy. Accordingly, the assessment focuses on the impact of a bank's failure within the financial system.
July 2018DS-1.3.2
D-SIBs are identified using a two-step approach. The first step is to draw up a preliminary indicative list of D-SIBs based on the quantitative scores calculated using a set of factors/indicators. The second step involves the exercise of supervisory judgment that may serve as a complement to the quantitative assessment process, i.e. to refine the preliminary indicative list by either (i) removing banks from the list; or (ii) including other banks onto the list.
July 2018DS-1.3.3
The D-SIBs assessment is based on the following four factors:
(a) Sizei. Size is a key measure of systemic importance. The larger the bank, the more widespread the effect of a sudden withdrawal of its services and, therefore, the greater the chance that its distress or failure would cause disruption to the financial markets and systems in which it operates, and to the broader functioning of the economy. The size factor broadly measures the volume of a D-SIB's banking activities within the local banking system and economy and, therefore, provides a good measure of the potential systemic impact in case a bank should fail.ii. The quantitative indicator used in the D-SIBs framework to measure a bank's size is its total assets, as disclosed in the balance sheet.(b) Interconnectednessi. This measure captures the extent of a bank's interconnections with other financial institutions, which could give rise to externalities affecting the financial system and domestic economy.ii. The quantitative indicators used to capture interconnectedness are interbank activities (represented by intra-financial system assets, and intra-financial system liabilities) and securities outstanding.iii. Intra-financial system assets comprise lending to financial institutions (including undrawn committed lines), holding of securities issued by other financial institutions, gross positive current exposure of Securities Financing Transactions and exposure value of those Shari'a compliant Over the Counter ('OTC') derivatives which have positive current market value. Intra-financial system liabilities comprise deposits by other financial institutions (including undrawn committed lines), gross negative current exposure of Securities Financing Transactions and exposure value of those Shari'a compliant OTC derivatives which have negative current market value. The total marketable securities issued by the bank comprise Shari'a compliant fixed income securities and equity issued by the bank. The total marketable securities issued by the bank with the data on maturity structure of these securities will give an indication of the reliance of the bank on wholesale funding markets.(c) Substitutabilityi. The concept underlying substitutability as a factor for assessing systemic importance is the recognition that the greater the role of a bank in a particular business line, or in acting as a service provider in relation to market infrastructure, the more difficult it will be to swiftly replace that bank and the extent of the products and services it offers, and, therefore, the more significant the risk of disruption in the event that the bank becomes distressed.ii. The quantitative indicators used to capture substitutability are assets under custody (i.e. the value of assets that a bank holds as a custodian), payment activity (i.e. the value of a bank's payments sent through all of the main payments systems of which it is a member) and values of underwritten transactions in Shari'a compliant fixed income and equity markets (i.e. the annual value of Shari'a compliant fixed income and equity instruments underwritten by the bank). This is based on the logic that the higher the market share of a bank, the more difficult it will be to substitute the extent and level of service it provides.(d) Complexityi. The degree of complexity of a bank is generally expected to be proportionately related to the systemic impact of the bank's distress, as the less complex a bank is, the more 'resolvable' it will likely be, and, in turn, the more likely the impact of its failure could be contained.ii. The quantitative indicators used to capture complexity are the notional value of Shari'a compliant OTC derivatives (i.e. the ratio of the notional amount outstanding for the bank), Level 3 assets and ratio of the total value of the bank's holding of securities for trading and available for sale category.July 2018Qualitative Indicators
DS-1.3.4
The CBB will apply a supervisory judgmental overlay to the quantitative assessment process recognising that some of the most effective indicators for assessing systemic importance tend not to be of a quantitative nature and, as such, not captured by a quantitative indicator-based measurement approach.
July 2018DS-1.3.5
The CBB's indicative list of qualitative indicators that will typically be considered are:
(a) Anticipated business expansion/contraction;(b) Anticipated mergers and acquisitions;(c) Analysis of exposures to a particular banking group;(d) Settlement institution for any payment or clearing system;(e) Extent of retail banking network;(f) Number of local and overseas branches;(g) Analysis of non-banking business exposure and income;(h) Analysis of non-plain vanilla products /portfolios held;(i) Analysis of off-balance sheet exposures;(j) Complexity of the group structure; and(k) Reputational risk.July 2018Assessment Approach
DS-1.3.6
A weight is assigned to each of the 'size', 'interconnectedness', 'substitutability' and 'complexity' factors. The CBB applies 25 percent equally to all factors towards the final aggregate score.
Category (and weighting) Individual indicator Indicator weighting Size Total assets 25% Interconnectedness Intra-financial system assets 8.33% Intra-financial system liabilities 8.33% Securities outstanding 8.33% Substitutability Assets under custody 8.33% Payments activity 8.33% Underwritten transactions in Shari'a compliant fixed income and equity markets 8.33% Complexity Shari'a compliant OTC derivatives notional value 8.33% Level 3 assets 8.33% Trading and available-for-sale securities 8.33% July 2018DS-1.3.7
Bahraini conventional bank licensees that have a minimal amount of exposure to clients in Bahrain, and a low percentage of their deposits base are from clients in Bahrain, will be excluded from the D-SIB assessment.July 2018DS-1.3.8
The CBB shall conduct the D-SIB assessment every two years and shall inform the banks, the relevant thresholds or cut off, and shall provide the DSIBs the guidance for implementation.
July 2018DS-2 DS-2 Recovery and Resolution Planning
DS-2.1 DS-2.1 Recovery and Resolution Plans
DS-2.1.1
Recovery and Resolution Plans (RRPs) developed by DSIBs must be specific to their circumstances reflecting the nature, complexity, interconnectedness, level of substitutability and size of the bank in question. RRPs must include:
(a) High-level substantive summary of the key recovery and resolution strategies and an operational plan for implementation;(b) Strategic analysis that underlies the recovery and resolution strategies;(c) Conditions for intervention, describing necessary and sufficient prerequisites for triggering the implementation of recovery or resolution actions;(d) Concrete and practical options for recovery and resolution measures;(e) Preparatory actions to ensure that the measures can be implemented effectively and in a timely manner;(f) Details of any potential material impediments (Shari'a, legal, strategic or technical) to an effective and timely execution of the plans; and(g) Responsibilities for executing preparatory actions, triggering the implementation of the plans and the actual measures.July 2018DS-2.1.2
Bahraini Islamic bank licensees must engage in an annual simulation and scenario exercise to assess whether the RRPs are feasible and credible. The Board must approve any changes to RRPs resulting from such exercise. The results of such annual exercise and the RRPs must be submitted to the CBB annually by the 31st of August.Amended: July 2021
Added: July 2018DS-2.1.3
Underlying assumptions of the RRPs and stress scenarios must be sufficiently severe, but plausible. Both "solo" specific and "consolidated" stress scenarios, as appropriate, must be considered taking into account the potential impact of cross-border contagion in crisis scenarios, as well as simultaneous stress situations in several significant markets. RRPs must not make the assumption that the CBB or government support can be relied upon to recover the bank.
July 2018DS-2.1.4
Bahraini Islamic bank licensees must develop a robust governance structure and sufficient resources to support the recovery and resolution planning process. This includes clear responsibilities of business units, senior management up to, and including, board members. A senior level executive must be made responsible for the overall RRPs. This person must be responsible for ensuring the bank is, and remains, in compliance with the requirements of the RRPs and for ensuring that recovery and resolution planning is integrated into the bank's overall governance processes.July 2018DS-2.1.5
Bahraini Islamic bank licensees must have systems in place that are able to generate on a timely basis, the information required to support the recovery and resolution planning process to enable both the bank and the CBB to carry out recovery and resolution planning effectively, and, where necessary, implement the RRPs.July 2018DS-2.1.6
RRPs should serve as guidance to banks and the CBB in a recovery or resolution scenario. The CBB may implement a different strategy should the bank need to be resolved.
July 2018Recovery Plan
DS-2.1.7
The Recovery Plan must identify possible recovery measures, recovery options and the necessary steps and time needed to implement such measures, as well as assess the associated risks. An effective Recovery Plan must at least consider the following:
(a) Governance arrangements and escalation process following a trigger event;(b) Recovery triggers must be well-defined and tailored to the full range of risks faced by the bank. The threshold level for triggers must be calibrated with impact on the bank's economic capital and set out clearly in the bank's recovery plan;(c) Actions or responses that should occur when triggers are breached; there should be an expectation that breach of a trigger causes a predetermined escalation and information process up to Board and Senior Management level;(d) A detailed explanation and analysis, illustrating how the triggers were calibrated, as well as highlighting the effectiveness of the triggers;(e) Incorporating qualitative triggers in their consideration of whether a recovery response is necessary and, if so, what kind of response would be appropriate;(f) Incorporating the triggers for recovery planning into the bank's overall risk management framework. Recovery triggers must be aligned with (but not limited to) existing triggers for liquidity or capital contingency plans, early warning indicators and the bank's risk appetite;(g) Triggers for recovery planning must be complemented by early warning indicators that alert the bank to emerging signs of stress, but that do not yet give rise to a triggering event;(h) Use at least one market-wide (systemic) stress scenario and one bank-specific (idiosyncratic) stress scenario, as well as a combination of systemic and idiosyncratic stress scenarios to assess the robustness of their Recovery Plans and to assess which recovery options would be effective in a range of stress situations; and(i) Allocation of losses to shareholders and unsecured and uninsured creditors in a manner that respects the hierarchy of claims.July 2018DS-2.1.8
Bahraini Islamic bank licensees must notify the CBB when high levels of stress are experienced and/or recovery plan triggers are breached. Banks must also notify the CBB on the Recovery Plan actions or responses that would be taken by the Bank when the plan is activated.July 2018DS-2.1.9
Bahraini Islamic bank licensees must use quantitative and, if relevant, qualitative triggers in their recovery plans. The quantitative triggers focused on firm-specific liquidity and capital measures are critical. The quantitative triggers may include different elements such as:(a) withdrawal of deposits and other funding;(b) revenue performance (or components of these);(c) ratings downgrades;(d) credit risk limits;(e) equity ratios;(f) renewal of wholesale financing;(g) increased collateral requirements;(h) market rate of return environment; and(i) senior debt spreads.July 2018DS-2.1.10
Bahraini Islamic bank licensees must use three stress scenarios at a minimum, i.e. systemic, idiosyncratic and a combination of both for the purpose of recovery planning.July 2018DS-2.1.11
The following elements are illustrative in nature for stress scenarios to be considered in Recovery planning:
a) significant deposit withdrawal or runoff;b) collapse of global financial markets;c) significant capital and liquidity impacts;d) severe losses through a rogue trader;e) rating downgrades;f) US Dollar or a Euro crisis;g) GDP growth rates;h) loss of goodwill;i) exodus of talent;j) currency or commodity prices volatility;k) increased collateral requirements;l) bank failures;m) fraud; andn) reputational; crisis.July 2018DS-2.1.12
Bahraini Islamic bank licensees must consider a variety of feasible recovery options that could play a critical role towards improving resilience and viability ultimately. Such options may include for instance the following illustrative options:(a) Issuance of capital instruments at short notice;(b) Seeking additional liquidity from existing or new sources;(c) Sale or disposal of a part of the business and assets;(d) Restricting new business activities;(e) Lowering dividend pay outs; and(f) Restructuring.July 2018Resolution Plan
DS-2.1.13
Bahraini Islamic bank licensees must establish Resolution Plan intended to facilitate smooth resolution making it feasible without severe market disruption. It must include a substantive resolution strategy approved by the Board and agreed with the CBB, and an operational plan for its implementation. It must identify, in particular:(a) Financial and economic functions for which continuity during the resolution process is critical and suitable resolution options to preserve those functions, or wind them down in an orderly manner;(b) Data requirements on the bank's business operations, structures and systemically important functions;(c) Potential legal, Shari'a, strategic or technical barriers to effective resolution and actions to mitigate those barriers; and(d) Actions to protect insured depositors and ensure the rapid return of segregated client assets.July 2018DS-2.1.14
Bahraini Islamic bank licensees must consider the following important elements in their analysis leading to the development of the resolution plan:(a) The corporate and group structure(b) Relevant entities and the identification of material entities;(c) Balance sheet profile including on and off balance sheet;(d) Funding, liquidity and capital needs;(e) Business model of the parent and material entities;(f) Core business lines;(g) Operational, financial, legal, Shari'a and structural dependencies;(h) External dependencies;(i) Financial functions mapping each material entity and business lines;(j) Resolution strategies and options.July 2018DS-2.1.15
For the purpose of DS-2.1.13(a), banks shall consider in their recovery and resolution planning processes for identification and the development of suitable resolution options for 'critical functions' and 'critical shared services. The resolution strategy and operational plan should encompass appropriate actions which help maintain continuity of these functions while avoiding unnecessary loss of value and minimising, where possible, the costs of resolution.
July 2018DS-2.1.16
Critical functions are activities performed for third parties not affiliated to the bank, the failure of which would lead to a disruption of services that are vital for the functioning of the real economy and for financial stability due to the bank/banking group's size or market share, interconnectedness, complexity and cross-border activities.
July 2018DS-2.1.17
The designation of a function as critical does not imply that the function and all related liabilities will be protected in a resolution. Rather, the designation is meant to assist the CBB and relevant authorities in developing resolution strategies that minimise systemic disruption and preserve value. It is important to note that the institution specific lists of critical functions will an important input into the resolution planning process and the resolvability assessments.
July 2018DS-2.1.18
The criticality of a function can be assessed in a three-step process: —
a) Impact assessment: It will include understanding the nature and extent of the activity and assessing the impact of the failure of the function on the market and infrastructure, on customers, on other market participants and finally the interdependencies of the market;b) Evaluating the market for that function: This will encompass understanding how quickly the market is able to substitute the service providers of the failed function. Such an assessment will include supply side analysis of service providers covering market concentration;c) Firm-specific test: The analysis will determine whether the bank's failure would have a material impact on third parties, on the potential for contagion and on the general confidence of market participants which will be based on understanding of the overall market share of the firm for that specific function etc.July 2018DS-2.1.19
These critical functions are assessed in the following five broad categories with distinct economic objectives and characteristics: (a) Deposit Taking, (b) lending and loan servicing; (c) payments, clearing custody and settlement, (d) lending and borrowing to and from financial institutions; and (e) Capital markets and investment activities.
July 2018DS-2.1.20
Critical shared services are activities performed within the bank or by another unit within the group or outsourced to third parties and their failure would lead to the inability to perform critical functions and, therefore, to the disruption of functions vital for the functioning of the real economy or for financial stability.
July 2018DS-2.1.21
Critical shared services are related to the critical functions a bank performs. They provide the internal and essential infrastructure the bank needs to continue operating. Their designation should therefore follow from the identification of the critical functions. The prioritising of the critical shared services, starts with answering the following questions first:
a) How severe are the consequences of the failure of a particular service on one or more critical functions?b) How quickly will the failure of a particular shared service lead to a collapse of one or more critical functions?July 2018DS-2.1.22
For the purposes of this analysis, there should be a clear understanding of the following aspects of the shared services at legal entity level:
i. the provider and the recipient of the services;ii. the nature of the services being provided;iii. the financial terms on which those services are offered;iv. the existence of service level agreements and the validity of such agreements in the event of failure; andv. the impact of default on the ability of the bank to maintain these services.vi. the substitutability of the services being provided (see above).July 2018DS-2.1.23
Bahraini Islamic bank licensees must ensure that key Service Level Agreements (SLAs) can be maintained in crisis situations and in resolution, and that the underlying contracts include provisions that prevent termination triggered by recovery or resolution events, and facilitate transfer of the contract to a bridge institution or a third party acquirer.July 2018DS-2.1.24
Nothing in this Module will preclude CBB from devising other resolution strategies, options or plans recognised under the CBB Law should it believe it is necessary under the circumstances.
July 2018DS- 3 DS- 3 Independent Review
DS-3.1 DS-3.1 Independent Review
DS-3.1.1
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Added: July 2018DS-3.1.2
The independent reviews of recovery and resolution planning framework undertaken in accordance with Paragraphs HC-6.6.33 and HC-6.6.34, must cover the following:
(a) Adequacy of management oversight and approval of the RRPs;(b) Adequacy of documentation supporting the RRPs;(c) Integration of ICAAP and stress testing into RRP process;(d) Sufficiency of the trigger framework and the process for implementing and monitoring them;(e) Escalation process and the integrity of the planned actions against the triggers;(f) Authorisation for, and implementation of, significant changes to the RRPs;(g) Alignment of the RRPs to the bank's business strategies, group and organisational structure;(h) Due consideration of the legal and external environment;(i) Verification of the quality of data sources used to run the stress tests (e.g. in terms of accuracy, consistency, timeliness, completeness and reliability).Amended: January 2022
Added: July 2018RR RR Reputational Risk Management
RR-A RR-A Introduction
RR-A.1 RR-A.1 Purpose
Executive Summary
RR-A.1.1
The Reputational Risk Management Module sets out the Central Bank of Bahrain's ('CBB's') rules and guidance to
Islamic Bank licensees operating in Bahrain on establishing parameters and control procedures to monitor and mitigate reputational risks. The content of this Module applies to allIslamic Bank licensees , except where noted in individual Chapters.July 2018RR-A.1.2
This Module should be read in conjunction with other parts of the Rulebook, mainly:
(a) Principles of Business;(b) High-level Controls;(c) Credit Risk;(d) Market Risk;(e) Operational Risk;(f) Liquidity Risk;(g) Rate of Return Risk in the Banking Book ('RRRBB');(h) Internal Capital Adequacy Assessment Process ('ICAAP'); and(i) Stress Testing.July 2018Legal Basis
RR-A.1.3
This Module contains the CBB's Directive (as amended from time-to-time) relating to reputational risk management and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all
Islamic Bank licensees (including theirapproved persons ).July 2018RR-A.1.4
Requirements of Section 3.3—Management of Step-in Risk are applicable to
Bahraini Islamic bank licensees only.July 2018RR-A.1.5
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
July 2018RR-A.2 RR-A.2 Module History
Evolution of the Module
RR-A.2.1
This Module is issued in July 2018 as part of Volume Two of the CBB Rulebook. The requirements in this Module are effective from the date of issuance. Any material changes that are subsequently made to this Module are annotated with the calendar quarter date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.
July 2018RR-A.2.2
The most recent changes made to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes July 2018RR-1 RR-1 Reputational Risk
RR-1.1 RR-1.1 Introduction and Scope
RR-1.1.1
This Chapter provides CBB's requirements and guidance with respect to an effective reputational risk management and sets out the approach for
Islamic bank licensees to manage reputational risk.July 2018RR-1.1.2
Reputational risk can be defined as the risk arising from negative perception on the part of customers, counterparties, shareholders, investors, debt-holders, market analysts, other relevant parties or regulators that can adversely affect a bank's ability to maintain existing, or establish new, business relationships and continued access to sources of funding (e.g. through the interbank or securitisation markets). Reputational risk is multidimensional and reflects the perception of other market participants. Furthermore, it exists throughout the organisation and exposure to reputational risk is essentially a function of the adequacy of the bank's internal risk management processes, as well as the manner and efficiency with which management responds to external influences on bank-related transactions.
July 2018RR-1.1.3
Reputational risk also may affect a bank's liabilities, since market confidence and a bank's ability to fund its business are closely related to its reputation. For instance, to avoid damaging its reputation, a bank may call its liabilities even though this might negatively affect its liquidity profile. This is particularly true for liabilities that are components of regulatory capital, such as hybrid/subordinated debt. In such cases, a bank's capital position is likely to suffer.
July 2018RR-1.1.4
Once a bank identifies potential exposures arising from reputational concerns, it should measure the amount of support it might have to provide (including implicit support of securitisations) or losses it might experience under adverse market conditions. In particular, in order to avoid reputational damages and to maintain market confidence, a bank should develop methodologies to measure as precisely as possible the effect of reputational risk in terms of other risk types (e.g. credit, liquidity, market or operational risk) to which it may be exposed. This could be accomplished by including reputational risk scenarios in regular stress tests. For instance, non-contractual off-balance sheet exposures could be included in the stress tests to determine the effect on a bank's credit, market and liquidity risk profiles. Methodologies also could include comparing the actual amount of exposure carried on the balance sheet versus the maximum exposure amount held off-balance sheet, that is, the potential amount to which the bank could be exposed.
July 2018RR-1.1.5
An
Islamic bank licensee should pay particular attention to the effects of reputational risk on its overall liquidity position, taking into account both possible increases in the asset side of the balance sheet and possible restrictions on funding, should the loss of reputation result in various counterparties' loss of confidence. (See Liquidity Risk Management Module.)July 2018RR-1.1.6
Islamic bank licensees must establish an effective process for managing reputational risk that is appropriate for the size and complexity of their operations.July 2018RR-1.1.7
This Module focuses mainly on:
(a) The approach to identifying and managing reputational risk;(b) Drawing attention to various sources of reputational risk;(c) Providing guidance on the key elements of reputational risk management; and(d) Promoting adoption of a formalized and structured approach to managing reputational risk.July 2018RR-2 RR-2 Sources of Reputational Risk
RR-2.1 RR-2.1 Key Drivers
RR-2.1.1
It is vital for banks to understand how different sources of reputational risk can impact their business operations, to set up appropriate systems and controls which can be used to manage these risks. It should be noted that many of the reputational drivers are inter-related, representing common factors applicable to banks, and relate to how well a bank has managed its business and controlled its material risks.
July 2018RR-2.1.2
The key drivers of reputational risk that could assist banks in identifying and categorising the major sources of reputational risk applicable to them, amongst others, are outlined below:
(a) Corporate governance—good corporate governance is vital to a bank's reputation. The leadership of the Board and senior management will directly affect stakeholders' perception of the bank;(b) Board and management integrity—the personal ethics and behaviour of directors and senior management are important determinants of stakeholder confidence;(c) Staff competence/support—staff competence and support is essential for business success. Any deficiencies in employment and staff management practices could lead to various problems, which include high staff turnover, insufficient staffing, poor service quality, staff incompetence/misconduct, customer complaints and employee disputes. Some of these issues may result in damaging headlines and adverse publicity;(d) Corporate culture—it is crucial for banks to promote a corporate culture where the adoption of ethical and responsible behaviour, that can protect and enhance their reputation, is encouraged. Inadequate corporate culture may result in a loss of confidence;(e) Risk management and control environment—a sound risk management and control environment is essential for banks to safeguard their assets and capital, and to mitigate reputational risk. Banks should seek independent assurance that existing risk management and control systems are appropriate via internal audits, and take remedial actions for any deterioration in risk management and control standards;(f) Financial soundness/business viability—a bank's reputation is likely to suffer if its financial soundness, or business viability, is questioned. To safeguard and strengthen their reputation, banks should build-up stakeholder trust in their financial reporting systems, manage stakeholder expectations by providing relevant factual information to facilitate their assessment of the banks' financial performance and future prospects;(g) Business conduct and practices—banks are required to run their businesses in a responsible, honest and prudent manner. Business practices which deviate from this basic standard could erode stakeholder confidence and damage their reputation, and any resultant breach of laws and regulations may lead to investigations, disciplinary action and criminal charges. In dealing with customers and other counterparties, banks should be guided by, and adhere to, all relevant ethical standards and codes of conduct;(h) Stakeholder satisfaction—a banks' ability to satisfy stakeholder needs and expectations on a continuing basis is of utmost importance in sustaining their business in a highly competitive banking environment. Failure to do so, may result in loss of stakeholder confidence, falling business, adverse publicity or, in some cases, legal sanctions;(i) Legal/regulatory compliance—banks should adequately appraise legal and regulatory risks, and put in place robust systems to ensure compliance, including enhancing staff awareness of compliance issues and identifying areas of potential threat and vulnerability. Breaching the law or any relevant regulatory standards and guidelines can lead to serious consequences, including regulatory investigations, costly and high profile litigation, public censure, civil and criminal sanctions, harmful publicity, claims for damages, or even the loss of authorization. There may be significant damage to a bank's reputation even if the bank is ultimately acquitted of any illegal conduct;(j) Contagion risk/rumours—banks operating as part of a group will be susceptible to reputational events affecting their parent bank, non-bank holding company, or other members of the group (e.g. subsidiaries and affiliates). Such contagion effects on a banks' reputation may also result from other problematic relationships, such as any close association with major customers, counterparties or service providers that are revealed to be engaged in unethical, unlawful or corrupt activities. Rumours may have a damaging impact on the bank's reputation and the level of public confidence. Therefore, adequate contingency procedures should be developed by banks;(k) Crisis management—a bank's inadequate response to a crisis, or even a minor incident, that attracts media attention could arouse stakeholder concerns about management competence, thereby jeopardising the bank's reputation. On the other hand, effective crisis management arrangements (including communications with stakeholders and the media) could quickly allay stakeholder fears, restore their confidence and even enhance reputation. Therefore, banks should ensure that they are ready to deal with possible crises (which may be unprecedented and totally unexpected), with detailed and well-rehearsed crisis management plans in place. Close attention should also be paid to managing media communications;(l) Transparency/accountability—a banks' ability to be responsive to and satisfy stakeholders' information needs (e.g. by disclosing information in respect of material issues of interest to stakeholders in a transparent, honest and prompt manner) has become a key determinant of business competence. Such information will help stakeholders in understanding a banks' values, strategies, performance and future prospects. Stakeholder confidence, as well as the banks' credibility and reputation, will be weakened if information disclosed is found to be misleading, inaccurate or incomplete. There should be adequate accountability for the integrity of information disclosures, which should be backed by robust management monitoring and reporting systems;(m) Branding and cross-selling—this refers to the potential harm to a bank's reputation when an entity has clients in common with the bank and also carries the bank's brand (e.g. corporate name, logo/symbol). Different brand strategies create different risk profiles. Banks should consider the degree to which cross-selling is part of their overall strategy, as a greater degree of cross-selling increases reputational risk. This is particularly the case if a bank or banking group has stand-alone deposit-taking institution(s), broker-dealer(s) and asset management unit(s) that cross-sell products;(n) Outsourcing—a bank's reputation could also be damaged by sub-standard service quality, improper acts, or lax controls of some key service providers (e.g. outsourced telephone banking operations, IT support, debt collection services etc.). Banks should closely monitor the performance of the outsourcing providers and the on-going impact of the agreement on their risk profile, systems and controls framework; and(o) Shari'a non-compliance risk—Shari'a non-compliance is a unique operational risk in Islamic finance products resulting from non-compliance of the bank with the rules and principles of Shari'a in its products and services. It is crucial to set up key risk indicators for identifying the Shari'a non-compliance risk inherent in different kinds of Shari'a-compliant contracts, and to outline a set of variables that help to estimate the likelihood and severity of Shari'a non-compliance risk. It is possible for banks to become insolvent because of the reputational risk that is triggered by the Shari'a non-compliance risk. It is important to consider Shari'a non-compliance risk as one of the main risks that banks should take into account as part of their enterprise-level risk evaluation. Banks should be aware of the implications of Shari'a non-compliance risk for the overall enterprise when Shari'a requirements and rulings are not effectively communicated, translated into internal policy, or observed by banks across different businesses and functional units; and(p) Step-in risk—refers to the level of risk that is associated with a bank's decision to provide financial support to an unconsolidated entity that is facing stress, in the absence of, or in excess of, any contractual obligations to provide such support. The main reason for step-in risk is to avoid the reputational risk that a bank might suffer if it did not support an entity facing a stress situation. The financial crisis provided evidence that a bank might have incentives beyond contractual obligation or equity ties to 'step in' to support unconsolidated entities to which it is connected (refer to Section RR-3.3).July 2018RR-3 RR-3 Reputational Risk Management
RR-3.1 RR-3.1 Reputational Risk Management Framework
RR-3.1.1
Islamic bank licensees must adopt an approach to reputational risk management that fits the banks' profile of activities and level of sophistication, and that enables the risks affecting reputation to be consistently and comprehensively identified, assessed, controlled, monitored and reported.July 2018RR-3.1.2
The key elements of reputational risk management are good corporate governance, the existence of highly skilled, sincere and honest resources, effective reputational risk management processes; and adequate management of reputational events.
July 2018Good Corporate Governance
RR-3.1.3
Good corporate governance forms the foundation of effective reputational risk management and provides a framework for:
(a) Guiding banks' conduct and actions in achieving their vision, values, goals and strategies, as well as meeting stakeholder requirements and expectations; and(b) Ensuring robust oversight of their conduct and actions.July 2018RR-3.1.4
Good corporate governance can be achieved by implementing a governance infrastructure and adopting governance practices in compliance with Module HC (High-level Controls).
July 2018RR-3.1.5
The Board must be responsible for overseeing the overall reputational risk management processes.
July 2018RR-3.1.6
A sound governance infrastructure should have the following general attributes:
(a) Having the right people, with the right balance of skills and experience on the Board, with suitable checks in place to ensure that no single individual can influence Board decisions;(b) Including a robust framework for succession planning to ensure that the business can continue to function effectively, even when there is a major management or staff turnover; and(c) Enabling business and management performance to be closely overseen by independent directors.July 2018RR-3.1.7
Islamic bank licensees should adopt a governance approach that sets out clear governance objectives and expectations on reputational risk management, as well as the authorities and responsibilities of all parties engaged in the risk management process.July 2018RR-3.1.8
The following elements must be included in the banks' governance practice framework:
(a) Setting a clear and unambiguous vision, values, goals and strategies, and ensuring that they are transparent;(b) Developing appropriate policy, codes of conduct, guidelines and procedures to support the implementation of the bank's vision, values, goals and strategies;(c) Creating an open and empowering corporate culture to encourage responsible and ethical behaviour, and to support the achievement of business objectives and effective risk management;(d) Building up a strong, stable management team that are honest, competent, responsible, accountable and responsive to stakeholders;(e) Raising the risk awareness of employees and providing employees with adequate training;(f) Setting up effective systems and controls to manage and control all material risks (including reputational risks) faced by the bank and to monitor compliance with all applicable laws, regulatory standards, best practices and internal guidelines; and(g) Having adequate policy and procedures in place to ensure that all disclosures to stakeholders are clear, accurate, complete, relevant, consistent and timely, and guided by the principles of ethics, integrity and transparency.July 2018Effective Reputational Risk Management Process
RR-3.1.9
Islamic bank licensees must have adequate arrangements, strategies, policy, processes and mechanisms in place to manage reputational risk. An effective reputational risk management process must include:(a) Policy, definition of roles, codes of conduct, guidelines and procedures which guide staff behaviour and conduct, and set boundaries for staff actions, in particular the boundaries for unacceptable practices;(b) Consideration of the potential impact of its strategy and business plans and, more generally, of its behaviour on its reputation;(c) Addressing reputational risk in a precautionary manner, for example by setting limits or requiring approval for allocating capital to specific countries, sectors or persons and/or whether its contingency plans address the need to deal proactively with reputational issues in the event of a crisis;(d) Risk identification, assessment and control which provides a systematic process for identifying and assessing the risks affecting reputation, including the setting of appropriate response actions to control the risks;(e) Risk monitoring and reporting which ensures that the progress of carrying out agreed response plans is adequately monitored, any changes to the status of the risks concerned is regularly reviewed, and early warning systems are in place for identifying emerging threats, to ensure that prompt corrective actions are taken to address those threats;(f) Communications and disclosures which enable meaningful, transparent and timely information to be provided to stakeholders to better their understanding of the bank's performance and future prospects, and to retain their confidence; and(g) Independent reviews and audits which give assurance that the risks affecting reputation have been adequately understood and properly controlled throughout the bank.July 2018Adequate Management of Reputational Events
RR-3.1.10
Reputational events may still occur despite stringent risk control measures. As such, banks must develop a systematic and comprehensive approach for managing reputational events. This will allow bank management to be prepared to take proper measures to restore the institution's reputation and minimize any damage caused. The effectiveness of this approach would help reduce the chance of having to deal with a full-blown crisis.
July 2018RR-3.1.11
The
Islamic bank licensee's approach to manage reputational events must include:(a) Crisis management adoption of the key elements of effective crisis management, which includes a crisis management manual, crisis management structure, invocation of crisis management, crisis management process, internal and external communications, and pre-planning for crisis management;(b) Adoption of an embedded risk mitigation approach that refers to shaping products, business transactions, special investments, outsourcing arrangements, new product process, restructurings etc., which will assist in mitigating some of the potential concerns of key stakeholders by design;(c) Post-event reviews—the Board and senior management must conduct a post-event review to identify any lessons learnt, or problems and weaknesses revealed, from the event in order to take appropriate actions to improve the bank's approach for managing reputational risk; and(d) Early warning systems—a banks' implementation of early warning systems will enable them to plan actions in advance for addressing potential threats that are likely to develop into reputational events. Early recognition of impending reputational problems also means that valuable time has been won to facilitate pre-planning for future action.July 2018RR-3.1.12
The early warning systems must also involve developing and monitoring:
(a) Performance indicators and other indicators reflecting stakeholder confidence, which can provide an estimate of the bank's reputation and keep track of the progress in managing associated risks; and(b) Early warning indicators (e.g. a sudden increase in customer complaints, breaches of internal controls, operational errors, system outages, fraudulent incidents and any significant deterioration in other performance indicators) and other triggers or thresholds for management actions, or provide signals to invoke response or contingency plans.July 2018RR-3.2 RR-3.2 Assessment of Reputational Risk
RR-3.2.1
Islamic bank licensees must conduct a regular assessment of the reputational risk to which they are exposed, leveraging their understanding of governance, business model, products and the environment in which they operate.July 2018RR-3.2.2
Islamic bank licensees must consider both internal and external factors or events that might give rise to reputational concerns (refer to Section RR-2.1). Banks must consider the following qualitative indicators, amongst others, in their assessment of reputational risk:(a) The number of sanctions from official bodies during the year;(b) Media campaigns and consumer-association initiatives that contribute to a deterioration in the public perception and reputation of the institution;(c) The number of and changes in customer complaints;(d) Malpractices and irregularities;(e) Negative events affecting the institution's peers;(f) Dealing with sectors that are not well perceived by the public (e.g. weapons industry, embargoed countries etc.) or people and countries on sanctions lists; and(g) Other 'market' indicators, for example, rating downgrades or changes in the share price throughout the year.July 2018RR-3.2.3
Islamic bank licensees must assess the significance of its reputational risk and how it is connected with other risks (i.e. credit, market, operational, liquidity and profit rate risks) by leveraging other risk assessments to identify any possible secondary effects in either direction (from reputation to other risks and vice versa).July 2018Stress Testing
RR-3.2.4
Islamic bank licensees must enhance their stress testing methodologies to capture the effect of reputational risk. Banks must also conduct stress testing or scenario analysis to assess any secondary effects of reputational risk (e.g. liquidity, funding costs, etc.).July 2018RR-3.2.5
The stress testing technique is useful for identifying events or changes that pose threats to banks, and can help develop different sets of circumstances which could potentially cause a crisis. Banks can make use of this technique to assess the likelihood of the risk materialising and the potential impact of the risk on their business and reputation under different stress scenarios (refer to Module ST on Stress Testing for guidance).
July 2018RR-3.2.6
Islamic bank licensees should be guided by the following supplementary guidance on use of stress testing for reputational risk:(a) Banks employing stress testing techniques for assessing reputational risk should seek to incorporate stress scenarios for reputational risk into their institution-wide stress testing procedures and assess the impact of reputational risk on other major risks (e.g. business or liquidity risk);(b) In developing stress scenarios for reputational risk, banks should identify the major sources of reputational risk to which they are potentially exposed, key stakeholders that will most likely increase reputational risks in stress scenarios or an appropriate range of circumstances and events. Banks should also consider how those sources, circumstances and events may adversely affect their business prospects and financial position (including earnings, capital and liquidity), as well as generate other second round effects;(c) Banks may face reputational risk in other aspects, such as those arising from material weaknesses in their internal risk management processes (e.g. resulting in substantial fraudulent losses) or management's failure to respond swiftly and effectively to external threats or influences (e.g. resulting in poor strategic decisions). Banks should exercise their best judgment and apply stress scenarios and parameters that suit their own circumstances and risk profile;(d) Once the potential exposures arising from reputational concerns are identified, banks should estimate the amount of support (capital or liquidity) they may have to provide, as well as estimate potential loss under adverse market conditions. Banks should also assess the impact of reputational risk on other risks to which they may be exposed. This could be accomplished by including reputational risk scenarios in regular stress tests;(e) Banks should assess whether there is any longer term impact on their business and operations due to reputational risk (e.g. loss of market share, customer base or business revenue). Banks should also pay particular attention to the effects of reputational risk on their overall liquidity position, taking into account both possible changes in the asset side of the balance sheet and possible restrictions on funding, should the damage in reputation result in a general loss of confidence on the part of their counterparties and customers; and(f) Senior management should actively participate in conducting stress testing and scenario analyses for reputational risk (including the development of stress scenarios and assumptions), and review the stress testing results.July 2018RR-3.3 RR-3.3 Management of Step-in Risk
Bahraini Islamic bank licensees' Policy and Procedures for Identifying and Managing Step-in RiskRR-3.3.1
Bahraini Islamic bank licensees must establish and maintain, as part of their risk management framework, policy and procedures that describe the processes used to identify entities that are unconsolidated for regulatory purposes and the associated step-in risks. The policy and procedures must:(a) Clearly describe the identification criteria that banks use to identify the step-in risk;(b) Not be prescriptive or geared towards any particular type of entity. Given the case-by-case nature of the evaluation, the guidelines are envisaged as flexible enough to capture all entities that are unconsolidated for regulatory purposes and which pose significant step-in risk;(c) Clearly describe the specific provisions of the laws or regulations and list the types of entity covered by those laws or regulations;(d) Describe the internal function responsible for identifying, monitoring, assessing, mitigating and managing the potential step-in risk;(e) Clearly describe the bank's own definition and criteria of 'materiality', as used to exclude immaterial entities in the bank's step-in risk assessment, and their rationale;(f) Document the process to obtain the necessary information to conduct the regular self-assessments;(g) Be reviewed regularly, and whenever there is any material change in the types of entity or in the risk profile of entities; and(h) Require the 'Step-in Risk Self-assessment' to be included in the internal risk management processes, subject to independent controls.July 2018Regular Step-in Risk Identification and Assessment
RR-3.3.2
Bahraini Islamic bank licensees must regularly identify all entities giving rise to step-in risk. For all these entities, they must estimate the potential impact on their liquidity and capital that step-in risk could entail. The bank must use the estimation method it believes to be most appropriate. Banks must describe the method used to estimate the financial impact of step-in risk in each case.July 2018Step-in Risk Reporting
RR-3.3.3
Bahraini Islamic bank licensees must annually report the results of their self-assessment of step-in risk to the CBB on 30th September of each year. The report must contain the following information:(a) Per groups of similar entities, the number and types of entity that were initially identified;(b) The entities must be grouped under three categories: entities deemed immaterial (for which no step-in risk assessment process conducted); entities which are material, but for which step-in risk is insignificant; and entities which are material and for which step-in risk is significant; and(c) The nature of the step-in risk and the action taken by the bank to limit, mitigate or recognise this risk, must be reported for entities which are material and for which step-in risk is significant.July 2018DA DA Digital Financial Advice
DA-A DA-A Introduction
DA-A.1 DA-A.1 Purpose
DA-A.1.1
This Module sets out the Central Bank of Bahrain's (CBB's) Directive relevant to licensees providing
digital financial advice or 'robo-advice' as defined in Module LR, Licensing Requirements Module of the CBB Rulebook Volume 1 in the Kingdom of Bahrain.Added: April 2019DA-A.1.2
This Module should be read in conjunction with the requirements in other parts of the CBB Rulebook, Volume 1, applicable to
licensees particularly:(a) Principles of Business Module(b) High level Controls Module;(c) General Requirements Module;(d) Business and Market Conduct Module(e) Operational Risk Management Module(f) Financial Crime Module; and(g) Enforcement Module.Added: April 2019Legal Basis
DA-A.1.3
This Module contains the CBB's Directive (as amended from time to time) applicable to
licensees providingdigital financial advice and is issued under the powers available to the CBB under Article 38 of the CBB Law.Added: April 2019DA-A.1.4
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
Added: April 2019DA-A.2 DA-A.2 Module History
DA-A.2.1
This Module was first issued in March 2019. It is numbered as version 01. All subsequent changes to this Module are annotated with a sequential version number: UG-3 provides further details on Rulebook maintenance and version control.
Added: April 2019DA-A.2.2
A list of recent changes made to this Module is provided below:
Module Ref. Change Date Description of Changes DA-B DA-B Scope of Application
DA-B.1 DA-B.1 Introduction
DA-B.1.1
Digital financial advice , otherwise also referred to in common jargon as 'robo advice' or 'automated advice' has gained much popularity globally following advancements in technology. The provision of financial advice is a regulated activity under this Rulebook and the use of technology for providingdigital financial advice needs to be governed within the context of sound prudential and conduct regulations in order to safeguard the interests of clients. This Module sets forth the key requirements applicable tolicensees who wish to use adigital financial advice tool.Added: April 2019DA-B.1.2
The core of
digital financial advice tools is the algorithms embedded in the software. The algorithms use a variety of financial modelling techniques and assumptions to translate data inputs into suggested actions at each step of the financial advice value chain. For this reason, it is essential that the entire process is subject to a comprehensive governance and controls framework.Added: April 2019DA-B.1.3
Additionally, there are confidentiality and data privacy implications if the
digital financial advice tool uses the cloud for the analytics. If client data is processed by the tool using the cloud there must be safeguards to avoid noncompliance with applicable laws.Added: April 2019DA-1 DA-1 Systems and Controls
DA-1.1 DA-1.1 Oversight and Internal Controls
Board and Senior Management Involvement
DA-1.1.1
Board and senior management of the
licensees providingdigital financial advice must maintain effective oversight and governance of thedigital financial advice process and the client-facing tool. The board and senior management must establish sound policies, procedures, systems, methodologies and tools in relation to the provision ofdigital financial advice . Such policies must be comprehensive and cover the following:(a) System design and system design documentation;(b) Construction of the algorithms, changes and their maintenance;(c) Suspension of the use ofdigital financial advice tool should there be errors;(d) Security and access controls;(e) Updating input parameters on a timely basis, for example, factors such as market changes or changes in law;(f) End to end processes for the advisory service using thedigital financial advice tool;(g) Oversight over the management of the client-facing tool; and(h) Documentation of test strategy explaining scope of testing the algorithms.Added: April 2019Internal Controls and Risks
DA-1.1.2
Licensees must establish adequate internal controls to safeguard their clients from unsuitable advice and effectively manage the operational and other relevant risks arising therefrom.Added: April 2019DA-1.1.3
Licensees must ensure that there are documented measures to protect confidentiality of client data consistent with Law No. 30 of 2018, Personal Data Protection Law (PDPL) issued on 12 July 2018.Added: April 2019DA-1.1.4
Licensees providingdigital financial advice must ensure that their overall control framework and the algorithm functionality is evaluated and independently tested by an independent external consultant other than the external auditor:a) initially upon implementation of this Module and prior to launching the digital financial advice to clients;b) when there are any material changes to the systems and controls; andc) at least once every 3 years.Added: April 2019DA-1.1.5
The evaluation requirements referred to in Paragraph DA-1.1.4 should cover at a minimum:
a) the internal control infrastructure, given the nature, scope and complexity of the digital financial advice business operation;b) the appropriateness of third-party systems or tools used;c) validation of the underlying models;d) the algorithm's functionality;e) the cyber security policies and controls;f) the completeness and accuracy of client profiling process including the relevant KYC requirements;g) controls on client data protection and confidentiality.Added: April 2019DA-1.1.6
Licensees must ensure that reports of the evaluation referred to in paragraph DA-1.1.4 is provided to the CBB within 2 weeks of completion of the reports, provided however, that the report required under DA-1.1.4 (a) should be submitted for the CBB's review and no-objection prior to launching the digital financial advice to clients.Added: April 2019DA-1.1.7
Licensees must ensure that the requirements relating to enhanced due diligence as required under Module FC are met when the client is assessed as higher risk and also where the client relationship (whether at the time of on-boarding or otherwise) is on a non-face-to-face basis.Added: April 2019DA-1.1.8
Licensees offeringdigital financial advice involving overseas funds must ensure that they comply with the requirements for obtaining authorization, registration and/ or acknowledgement of filing from the CBB under Module ARR of the CBB Rulebook 7: Collective Investment Undertakings).Added: April 2019DA-1.2 DA-1.2 Technology
DA-1.2.1
Licensees providingdigital financial advice must ensure that they maintain an up to date security policy document containing the following information:a) a description of the business IT systems supporting thedigital financial advice tool;b) the logical security measures and mechanisms in place, specifying the control the licensee will have over such access as well as the nature and frequency of such control;c) policies and processes for system monitoring, authentication, confidentiality of communication, intrusion detection, antivirus systems and logs;d) the physical security measures and mechanisms of the premises and the data centre of thelicensee , such as access controls and environmental security; ande) the type of authorised connections from outside, such as with technology partners, service providers and employees working remotely, including the rationale for such connections where applicable.Added: April 2019DA-1.3 DA-1.3 Client On boarding and Profiling
Client Agreements and On boarding
DA-1.3.1
Further to the requirements under BC-2.4 relevant to retail clients, the
licensees providingdigital financial advice must agree in writing theterms of business with their clients and ensure that the following are stipulated:a) the full scope of thedigital financial advice ;b) the basis for providingdigital financial advice including but not limited to methodologies used for the algorithm,c) the fees, charges or commissions relevant to the advice being offered;d) the specific conditions or triggers and the processes relating to suspension or discontinuation of the use of thedigital financial advice client facing tool and possible use or replacement of human judgement;e) changes to the algorithm, the key input parameter, assumptions underlying thedigital financial advice client facing tool;f) the dispute resolution processes are available to the clients if they wish to make a complaint; andg) terms on how clients can withdraw from the arrangement and any associated costs.Added: April 2019DA-1.3.2
The terms of business referred to in Paragraph DA-1.3.1 may be presented in a digital format and customer consent may be obtained in digital format subject to complying with relevant law/s.
Added: April 2019DA-1.3.3
At the time of on boarding clients and prior to the signing of client agreements, the
licensees must:(a) explain the scope of the advice (i.e. what advice is being offered, any restrictions or limitations, and any relevant matters not forming part of the advice);(b) actively demonstrate to the clients that the advice they are seeking is within the scope of what is being offered;(c) explain the methodological approaches to the strategy and the algorithms underlying it;(d) inform clients if the licensee believes that thedigital financial advice is not appropriate to him based on the understanding of the client profile and objectives;(e) inform the clients on the likely benefits and risk resulting from thedigital financial advice ; and(f) ensure that the client understands that any performance numbers presented are hypothetical projections of return and that actual performance of the portfolio may vary from initial projectionsAdded: April 2019DA-1.3.4
Licensees are not required to disclose the detailed methodology itself, but rather the approach utilised in designing the algorithm should be described.
Added: April 2019Client Profiling
DA-1.3.5
Licensees providingdigital financial advice to clients must record the client profile accurately and comprehensively if they are critical and to the extended needed for the algorithms underlying the client facing tool. The licensees must at a minimum:(a) obtain information to understand the clients overall financial situation, including sources of regular income, financial returns objective, time horizon, liquidity, legal issues, taxes and any unique constraints;(b) obtain information to make assessment of both the customers' risk tolerance, capacity and willingness;(c) have a process in place for resolving contradictory or inconsistent responses or advice in a client profiling tool or questionnaire, if any;(d) have a process for assessing whether investing (as opposed to saving or paying off debt) is appropriate for the client individual;(e) establish a process for contacting customers to update changes to their profile, at least annually; and(f) establish appropriate governance and supervisory mechanisms for the client profiling tool.Added: April 2019DA-1.3.6
Due to the nature of digital financial advice tools, much information referred to in the Paragraph DA-1.3.5 will be obtained using questionnaires, which should be comprehensive and fuzzy logic enabled.
Added: April 2019DA-1.3.7
Licensees must obtain a declaration from the client to ensure that he understands the scope and nature of digital financial advice and the associated risks and limitations.Added: April 2019DA-1.3.8
Licensees must disclose in writing any actual or potential conflicts of interest arising from any connection or association with product provider, including any material information or facts that may compromise its objectivity or independence.Added: April 2019DA-1.3.9
Licensees must disclose in writing the full particulates of any arrangement, including basis for commissions, charges or fees, involving related parties including parent, associates, fellow subsidiaries and other connected parties.Added: April 2019DA-1.3.10
Any disclosure of information that requires acceptance by the client should be tracked for an acknowledgement or response from the client confirming receipt thereof.
Added: April 2019DA-2 DA-2 Algorithm Governance
DA-2.1 DA-2.1 Design of Algorithm
DA-2.1.1
Licensees providingdigital financial advice must ensure that the algorithm embedded within the client facing tool is sufficiently robust and that the algorithm is designed to sufficiently analyse the information in order to make a suitable recommendation. The algorithms must be able to identify and determine clients who are unsuitable for investing in products.Added: April 2019DA-2.1.2
Licensees providingdigital financial advice must:(a) have appropriate system design documentation that clearly sets out the purpose, scope and design of the algorithms;(b) establish decision trees or decision rules as part of the documentation, where relevant;(c) establish controls to detect any error or bias in the algorithms;(d) have appropriate processes for managing any changes to an algorithm which must include security arrangements to monitor and prevent unauthorised access to the algorithm;(e) be able to control, monitor and keep records describing any changes made to algorithms (one way of doing this may be to store different versions of the algorithm electronically);(f) review and update algorithms whenever there are factors that may affect their relevance (e.g. market changes and changes in the law);(g) have in place controls and processes to suspend the provision of advice either when there are two or more conflicting answers to the risk profiling questions or when an error within an algorithm is detected and that error is likely to result in client loss and/or a breach of client agreement or laws and regulations;(h) have in place an appropriate internal sign-off process to ensure that the steps above have been followed; and(i) perform compliance checks on the quality of advice provided by the client-facing tool. This must include post-transaction sample testing.Added: April 2019DA-2.1.3
Licensees offeringdigital financial advice may base their algorithms on different methodological approaches (e.g. Modern Portfolio Theory). Each algorithm would have different assumptions, underlying rules and limitations. In addition, some digital advisers may override the automated algorithm or temporarily halt the digital advisory service in extreme market conditions.Added: April 2019DA-2.2 DA-2.2 Testing and Updating Algorithms
DA-2.2.1
Licensees providingdigital financial advice must perform back-test to ensure that the methodology reliably produces an output that is consistent with the intended investment recommendation. Such back-testing must be performed at periodic intervals and when changes are made to the tool.Added: April 2019DA-2.2.2
Back-testing in Paragraph DA-2.2.1 refers to testing the digital financial advice tool that seeks to estimate the performance of a strategy or model if it had been employed during a past period. This requires simulating past conditions with sufficient detail.
Added: April 2019DA-2.2.3
Licensees providingdigital financial advice must maintain and document the policies, procedures and controls to monitor and test their algorithm. They must ensure that, at a minimum, the following process are in place:(a) have a documented test strategy that explains the scope of the licensee's testing of algorithms which should includei. test plans,ii. test cases,iii. test results,iv. defect resolution (if relevant), andv. final test results.(b) establish robust testing of algorithms to occur beforedigital financial advice is first provided to a client, and on a regular basis after that; and(c) conduct stress tests at least once a year under various scenarios including extreme adverse and unpredictable market conditions.Added: April 2019DA-2.2.4
Licensees providingdigital financial advice must ensure that they have adequate human resources with the competency and expertise to develop and review the methodology of the algorithms.Added: April 2019DA-2.2.5
Licensees providingdigital financial advice must not outsource the key processes and management of the client facing tool.Added: April 2019DA-2.2.6
Licensees providingdigital financial advice may choose to outsource the development (based on the approach, methodology and design input provided by thelicensee ) and the day to day maintenance of client-facing tools to a third party. However, thelicensee remains responsible for the underlying approach to financial advice, the methodology, design input and also the quality of the advice provided. In order to be able to assume this responsibility, thelicensee must understand and control the rationale, risks and decision rules behind the algorithm.Licensees should, nonetheless, subject the outsourcing service provider to appropriate due diligence processes as required by the relevant rules on outsourcing in Module OM.Added: April 2019DA-3 DA-3 Dealing and Rebalancing Portfolio
DA-3.1 DA-3.1 Dealing Incidental to Offering Digital Financial Advice
DA-3.1.1
Licensees dealing in securities as agents or brokers as part of thedigital financial advice offering must comply with the requirements related to conflicts of interest under Module BC and rules incidental to it.Added: April 2019DA-4 DA-4 Disclosures
DA-4.1 DA-4.1 Ongoing Disclosure
DA-4.1.1
Further to the requirements under BC-2.6 of Module BC of the Rulebook,
licensees providingdigital financial advice must ensure that the following are disclosed to their clients:(a) adequate explanations about the functioning of any client facing tool including whether there are affirmations or confirmations that the client would provide as the tool is being populated;(b) at key points in the advice process, inform the client about the limitations and potential consequences of the scope of advice in plain and simple language(c) throughout the advice process, inform the client about key concepts and the relevant risks and benefits associated with the advice being provided; and(d) disclose separately the fees, costs and charges.Added: April 2019DA-4.1.2
Licensees must disclose to their clients in writing the following with respect to the algorithms used:(a) assumptions, limitations and risks of the algorithms;(b) circumstances under which thelicensees may override the algorithms or temporarily halt the digital advisory service; and(c) any material adjustments to the algorithms.Added: April 2019DA-4.1.3
Licensees that provide general financial advice to non-retail clients must provide a warning that such advice does not take into account the client's profile and personal circumstances.Added: April 2019DA-4.1.4
For the purpose of Paragraph DA-4.1.3, general financial advice is defined as financial advice that does not take into account the particular personal circumstances, such as the objectives, financial situation and needs of the client. For example, if an adviser gives information about a product but does not consider the financial goals of the client and the adviser does not actually recommend the client to specifically take up the said product, it is considered general advice.
Added: April 2019
Reporting Requirements
BR BR CBB Reporting Requirements
BR-A BR-A Introduction
BR-A-1 BR-A-1 Purpose
Executive Summary
BR-A.1.1
The purpose of this Module is to set out the Central Bank of Bahrain's ('CBB') reporting requirements applicable to the banks as part of the CBB's ongoing supervision activities.
Amended: January 2011
October 2010
October 07BR-A.1.2
This Module provides support for certain other parts of the Rulebook, mainly:
(a) Principles of Business;(b) Public Disclosure;(c) Credit Risk Management;(d) Operational Risk Management;(e) Financial Crime;(f)Capital Adequacy ;(g) High-level Controls;(h) Business and Market Conduct;(i) Enforcement; and(j) Audit Firms.October 2010
October 07BR-A.1.3
Unless otherwise stated, all reports referred to in this Module should be addressed to Islamic Financial Institutions Supervision Directorate of the CBB.
Amended: January 2011
October 07Legal Basis
BR-A.1.4
This Module contains the CBB's Directive (as amended from time to time) relating to reporting requirements of the CBB and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to
Islamic bank licensees .Amended: January 2011
October 07BR-A.1.5
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 07BR-A.2 BR-A.2 Key Requirements
Regular Reporting – Annual Requirements
BR-A.2.1
All locally incorporated banks in the Kingdom of Bahrain are required to submit to the CBB their annual audited financial statements (in compliance with the provisions set out under Section BR-1.1) no later than 3 months from the end of the bank's financial year. In addition, these banks are also required to submit supplementary information (as listed under Section BR-1.1) to the CBB.
October 2010
October 07BR-A.2.2
All Bahrain
branches of foreign banks are required to submit to the CBB their annual audited financial statements (in compliance with the provisions set out under Section BR-1.2) no later than 3 months from the financial year end. In addition, these banks are also required to submit supplementary information (as listed under Section BR-1.2) to the CBB.Amended: April 2016
October 2010
April 2008
October 07Regular Reporting – Semi-annual Requirements
BR-A.2.3
All Bahrain retail
branches of foreign banks are required to submit to the CBB their Balance Sheet and Profit and Loss Accounts (in compliance with the provisions set out under Section BR-2.1) no later than the end of 2 months from the reporting period end.Amended: April 2016
Amended: April 2011
October 2010
October 07Regular Reporting – Quarterly Requirements
BR-A.2.4
All
Bahraini Islamic Bank Licensees in the Kingdom of Bahrain are required to submit to the CBB the following information on a quarterly basis:(a) PIR Forms and auditors reviews thereon (in accordance with the provisions set out under Section BR-3.1); and(b) Reviewed (unaudited) quarterly financial statements (in accordance with the provisions set out under Section BR-3.1).Amended: April 2019
Amended: October 2011
Amended: October 2010
Amended: April 2008
October 07BR-A.2.5
All Bahrain
branches of foreign banks are required to submit to the CBB PIR Forms (in accordance with the provisions set out under Section BR-3.2).October 2010
January 2009
October 07BR-A.2.6
[This Paragraph was deleted July 2011].
Regular Reporting – Monthly Requirements
BR-A.2.7
All banks licensed by the CBB in the Kingdom of Bahrain are required to submit to the CBB monthly statistical returns as required under Section BR-4.1).
October 2010
October 07BR-A.2.7A
All banks licensed by the CBB in the Kingdom of Bahrain are required to report monthly to the CBB of all payments and transfers of funds amounting to BD 3,000 or above from accounts held by the bank for charitable organisations registered in the Kingdom of Bahrain (as required under Paragraphs BR-4.1.5 and FC-1.6.4).
Added: October 2011BR-A.2.8
All
Bahraini Islamic Bank Licensees listed on the Bahrain Stock Exchange are required to report to the Capital Markets Supervision Directorate of the CBB, on a monthly basis, information relating to theirDirectors' interests in the shares ofBahraini Islamic Bank Licensees listed on the Bahrain Stock Exchange and submit exposures to connected counterparties to Banking Supervision Directorate (in accordance with the provisions set out under Section BR-4.3).Amended: April 2019
Amended: October 2010
Amended: October 2009
October 2007IIS Reporting Requirements
BR-A.2.8A
All banks licensed by the CBB are required to complete online non-financial information related to their institution by accessing the CBB's institutional information system (IIS) (as required under Section BR-4A.1).
Amended: October 2020
Amended: April 2012
Adopted: January 2011Ad-hoc Reporting and Notification
BR-A.2.9
All banks licensed by the CBB in the Kingdom of Bahrain are required to notify and report to the CBB on the following matters in Section BR-5.1:
(a) Largeexposures ;(b) Changes in strategy and/or corporate plan;(c) Changes in management;(d) [This Sub-paragraph was deleted in October 2023];(e) Appointment of a Compliance Manager/Officer;(f)Money laundering and suspicious transactions;(g) [This sub-paragraph was deleted in October 2022];(h) Authorised signatories;(i) Material losses through write-offs, fraud or other events;(j) Material transfers of assets or liabilities; and(k) Enforcement actions imposed by host regulators on overseas subsidiaries and branches.Amended: October 2023
Amended: October 2022
Amended: October 2020
October 2010
April 2010
October 2007BR-A.2.10
All
Bahraini Islamic Bank Licensees are required to give the CBB immediate written notification of any actual breach by such bank of the minimum Risk Asset Ratio(s) (RAR) and to consult with the CBB prior to entering into any term borrowing arrangements (Section BR-5.2).Amended: April 2019
Amended: April 2012
Amended: October 2010
October 07BR-A.2.11
All retail banks licensed by the CBB in the Kingdom of Bahrain are required to notify the CBB on the following matters:
(a) Introduction of new and expanded customers and products (Section BR-5.3); and(b) Accounts for charity organisations (Section BR-5.3).Amended: October 2011
October 2010
October 07BR-A.2.12
Islamic bank licensees must clearly indicate the purpose of any communication addressed to the CBB. In cases of lack of response to such communication by the CBB, the licensee must not infer or assume implied acceptance, approval or acknowledgment of the contents of such communication.Added: October 2019BR-A.3 BR-A.3 Module History
BR-A.3.1
This Module was first issued in January 2005 by the BMA as part of the initial launch of the CBB Rulebook Volume for Islamic banks. All regulations in this volume have been effective since this date. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change is made: UG-3 provides further details on Rulebook maintenance and version control.
October 07BR-A.3.2
When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 2 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.
October 07BR-A.3.3
The most recent changes made to this Module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes BR-4.2 01/07/06 Deletion of reserve requirements material (moved to BR 4.1). BR-3.1.3 01/07/06 Hard copies of PIRI no longer required. BR-4.1.3 01/07/06 Revised submission date for statistical returns. BR-5.1.9 01/07/06 Minor changes reflecting change of Compliance Unit to Directorate. BR-5.3.3 01/07/06 Deleted since duplicated BR-5.1.15. BR-A.1 10/2007 New Rule BR-A.1.4 introduced categorising this Module as a Directive. BR-6 10/2007 New Rule allowing access to premises per the provisions of the CBB Law. BR-A.2, BR-1.1, BR-3.1, BR-4.1, BR-5.2 04/08 New reporting deadlines, new 7% reserves ratio, new requirement for checking of PIRs by external auditors, new guidance on reporting of write-offs. BR-3.1.4 01/2009 New Agreed Upon Procedures report for PIR BR-1.1 01/2009 Revised guidance concerning annual reports and annual audited financial statements BR-4.1.4b 07/2009 The minimum daily cash reserve balance with the CBB brought back to 5% from 7% BR-A.2.8 and BR-4.3.4 10/2009 New reporting arrangements for exposures to connected counterparties. BR-A.2.9 and BR-5.1.16 04/2010 Approval for material transfers of assets or liabilities BR-A.2.2 10/2010 Due date changed to 3 months to be consistent in the Rulebook. BR-1.1.4 and BR-1.2.3 10/2010 Required information updated to be consistent in the Rulebook. BR-1.2.5 10/2010 Changed to a Rule and wording amended to be consistent in the Rulebook. BR-3.1.2 10/2010 Reference to legal entity deleted. BR-3.1.3 10/2010 Wording changed to be consistent in the Rulebook. BR-A.2.3 and 2.1.2 10/2010 Due date changed to 2 months to be consistent in the Rulebook. BR-3.2 10/2010 New Section added to be consistent in the Rulebook. BR-5.1 10/2010 Reference corrected. BR 10/2010 Minor changes to formatting and spelling to be consistent in the Rulebook. BR-A.1.4 01/2011 Clarified legal basis. BR-A.2.9A 01/2011 Added reference to IIS Reporting Requirements BR-4A 01/2011 Added new Chapter on other reporting requirements and refer to IIS reporting requirements. BR-A.2.3 04/2011 Corrected order of wording. BR-1.2.3 04/2011 Clarified due date. BR-4.3.2 04/2011 Reference changed to licensed exchange. BR-4.3.3 04/2011 Clarified reference to calendar days. BR-5.1.1 and BR-5.12 04/2011 Clarified to whom Rules apply. BR-5.1.7 04/2011 Clarified due date for notification. BR-5.1.10 04/2011 Clarified reference to calendar days. BR-A.2.6, BR-3.2 and BR-4.1 07/2011 Clarified that all statistical returns must be filed monthly. BR-1.1.4(i) 07/2011 Deleted incorrect cross reference. BR-3.1A.2 07/2011 Corrected reference for quarterly reporting by branches of foreign banks. BR-5.1.16 07/2011 Regulation under consultation. BR-5.1.17 07/2011 Added additional notification requirements. BR-A.2.4 and BR-A.2.7A 10/2011 Key requirement amended to reflect current reporting requirement. BR-A.2.11 10/2011 Clarified language to be in line with references in BR-5.3 and BC-4.7. BR-1.1.3 and BR-2.2 10/2011 Clarification of existing requirement for the Agreed Upon Procedures Report and setting a deadline for the submission of the report. BR-3.1.8 and BR-3.1A.6 10/2011 New requirements for reporting of complaints in accordance with BC-10.7.1. BR-4.1.5 and BR-5.1.15 10/2011 Updated to reflect change in reporting requirement from ad-hoc to monthly. BR-6 10/2011 Updated Chapter to be consistent with other Volumes of the Rulebook. BR-6.1 and BR-6.4 01/2012 Added Sections to be consistent with other Volumes of the CBB Rulebook. BR-6.5.21 01/2012 Corrected cross reference. BR-A.2.9A 04/2012 Corrected cross reference. BR-1.1.4 and BR-1.1.6 04/2012 Minor amendments. BR-1.2.3(d) and BR-1.2.3A 04/2012 Amended due date of head office's annual audited financial statements. BR-2.1.2 04/2012 Clarified what interim semi-annual statements are to be submitted by retail branches of foreign banks. BR-A.2.10 and BR-5.2.5 04/2012 Requirement for locally incorporated banks to consult with CBB prior to entering into any term borrowing arrangements. BR-5.1.4 and BR-5.1.5 04/2012 Paragraph BR-5.1.4 deleted and BR-5.1.5 amended as any changes to approved persons must receive CBB prior approval as per Paragraph LR-1A.1.23. BR-5.3.4 04/2012 Added cross reference to Section BC-6.1 on installation or removal of off-site ATM in Bahrain. BR-3.1.5 07/2012 Clarified the exemption status for requirements under Paragraph BR-3.1.4 BR-5.1.11 07/2012 Added requirement to provide details of what authorised signatories are authorised to sign for. BR-4A.1.1 01/2013 Clarified deadline to update IIS. BR-1.1.4(g) and BR-1.1.4A 04/2013 Clarified due date for report on board meetings to be in line with Paragraph HC-1.3.8. BR-1.1.4(k) 04/2013 Added Subparagraph to include report on controllers as required under Paragraph GR-5.1.9. BR-5.1.3 04/2013 Amended to clarify that CBB prior approval is required and also added requests for capital increases. BR-4A.2 07/2013 Added new Section on reporting requirements for internet security measures. BR-1.1.4(l), BR-1.2.3(f), BR-1.3, BR-4A.3 and BR-4A.4 01/2014 New reporting requirements added related to sound remuneration practices for banks. BR-5.1.7 01/2014 Added notification for any changes in financial instrument traders. BR-1.4 04/2014 Added requirement for all retail banks to submit the eligible accounts report for the deposits/unrestricted investment accounts protection scheme. BR-2.2 04/2014 Added requirement for semi-annual report on private placements issued or promoted by banks. BR-5.1 04/2014 Amended notification requirements. BR-5.2 04/2014 Clarified Rules applicable to Bahraini Islamic bank licensees pertaining to SPVs. BR-5.3.5 04/2014 Added notification requirement where retail banks receive funds from an NGO where no valid fund collection license was submitted. BR-1.3.1 07/2014 Changed due date for Details of remuneration paid report. BR-3.1.6A 07/2014 Added quarterly reporting requirements regarding interim financial statements as per 22 January 2014 ad hoc communication letter. BR-3.1.7A to BR-3.1.7C 07/2014 New quarterly reporting requirements added for details of large exposures and overseas subsidiaries and branches. BR-4A.3.1 07/2014 Noted exception to requirement to submit report on the bank's compliance with the remuneration rules. BR-1.1.4(e) 10/2014 Corrected terminology for reporting of restructured facilities. BR-1.2.3 10/2014 Reference added to new reporting form Appendix BR-21 for non-performing and restructured facilities. BR-2.3 10/2014 New Section added on semi-annual disclosure requirements for all branches of foreign banks. BR-3.1.6A 10/2014 Reference added to new form Appendix BR-20 for quarterly financial review. BR-3.1.7B 10/2014 Corrected the reporting requirements dealing with overseas banking subsidiaries. BR-2.1.3 01/2015 Corrected wording of Rule. BR-4A.2.1 01/2015 Clarified that Rule is applicable to all banks to be consistent with Section OM-6.2. BR-5.2.2 01/2015 Corrected cross reference and terminology. BR-5.2.9 to BR-5.2.18 01/2015 Rules and guidance transferred from Module PCD. BR-2.2.4 04/2015 Amended deadline for submission of report on private placements to within three months of the reporting period. BR-3.1.5A 04/2015 Existing exemptions in respect of PIRI review will cease as at 31st December 2014 for all Bahraini Islamic bank licensees. BR-4A.3 07/2015 Amended Section to allow for CBB-approved consultancy firm to prepare report on the bank's compliance with the remuneration Rules outlined in Chapter HC-5. BR-A.2.2, BR-A.2.3, BR-1.1.2 and BR-1.2.2 04/2016 Clarified due date for financial statements. BR-1.1 04/2016 Added Rule regarding submission of draft year-end financial statements and attendance at CBB meeting with supervisory point of contact and external auditor. BR-1.1.4A and BR-1.1.4B 07/2016 Added guidance for subsidiaries of banks and renumbered Paragraph. BR-1.1.6 07/2016 Requirements aligned with PD-1.2.6. BR-3.1.4 10/2016 Deleted repetition to BR-3.1.7 BR-1.1.4 04/2017 Added sub-paragraph (m) on CPD requirements. BR-1.2.3 04/2017 Added sub-paragraph (g) on CPD requirements. BR-4A.5 04/2017 Added new Section on On-site Inspection Reporting BR-1.1.4(j) 07/2017 Deleted sub paragraph (j) & relocated to BR-1.1.4C. BR-1.1.4B 07/2017 Amended wording of paragraph. BR-1.1.4C 07/2017 Added new paragraph to amend submission deadline of agreed upon procedures report. BR-4A.4.1 07/2017 Amended submission deadline. BR-3.1.7AA 10/2017 Added a new paragraph on submission of Largest Country Exposures. BR-1.2.3 07/2018 Amended Paragraph to clarify submission deadline. BR-4A.2.2 07/2018 Amended cross reference. BR-5.1.7 07/2018 Deleted Paragraph. BR-1.1.4 10/2018 Added a new sub-paragraph (n) on the Financial Advice Programme/course. BR-1.2.3 10/2018 Added a new sub-paragraph (h) on the Financial Advice Programme/course. BR-1.1.4 01/2019 Amended Paragraph to include IESCA communication. BR-1.1.4(a) 04/2019 Added IESCA's assurance report to the requirements. BR-1.1.4(e) 04/2019 Deleted sub-paragraph. BR-1.2.3(b) 04/2019 Deleted sub-paragraph. BR-2.3 04/2019 Deleted Section. BR-3.1.5B 04/2019 Added a new Paragraph on Information required for Annual and Interim Financial Review. BR-3.1A.5A 04/2019 Added a new Paragraph on Information required for Annual and Interim Financial Review. BR 04/2019 Changed all Locally incorporated to Bahraini Islamic Bank Licensees. BR-4.3.5 07/2019 Added a new Paragraph on new form Appendix BR-23 for Liquidity Coverage Ratio (LCR) Reporting BR-A.2.12 10/2019 Added a new Paragraph on licensees communications. BR-5.2.11(e) 01/2020 Amended sub-paragraph on SPVs. BR-5.2.12 01/2020 Amended Paragraph on SPVs. BR-5.2.12 04/2020 Amended Paragraph on SPV Reporting. BR-5.2.12 07/2020 Added a new sub-paragraph (d) on credit facilities granted to SPVs. BR-A.2.9 10/2020 Added a new sub-paragraph (k) on ad-hoc reporting and notification. BR-A.2.9A 10/2020 Amended Paragraph number to BR-A.2.8A. BR-2.1.2A 07/2021 Added a new Paragraph on submission of documents to the CBB prior publishing. BR-3.1.5B 07/2021 Deleted Paragraph. BR-3.1.6A 07/2021 Amended Paragraph on submission of reporting forms. BR-3.1A.5A 07/2021 Amended Paragraph on submission of reporting forms for retail branches of foreign banks BR-3.1A.5B 07/2021 New Paragraph on submission of reporting form for wholesale branches of foreign banks. BR-4A.6 07/2021 Added a new Section on Reporting of API Performance. BR-5.2.8 07/2021 Amended Paragraph on CBB’s prior approval for any proposed capital increase in a subsidiary and for any major changes. BR-1.1.4 01/2022 Deleted Sub-paragraph (n). BR-1.1.4B 01/2022 Amended Paragraph on the submission of the Board and Committee annual meetings report. BR-1.2.3 01/2022 Deleted Sub-paragraph (h). BR-3.1.3 01/2022 Amended Paragraph on the submission of the reporting forms. BR-3.1A.3 01/2022 Amended Paragraph on the submission of the quarterly reports. BR-3.1A.5A 01/2022 Amended Paragraph on the submission of the Information Required for Annual and Interim Financial Review and the PIR forms for retail banks. BR-3.1A.5B 01/2022 Amended Paragraph on the submission of the Information Required for Annual and Interim Financial Review and the PIR forms for wholesale banks. BR-4.1.3 01/2022 Amended Paragraph removing the submission of a printed copy of the Appendix BR-2. BR-4A.5.2 01/2022 Amended Paragraph on the submission of the written assessment of the observations/issues raised in the Inspection draft report. BR-5.1.11 01/2022 Deleted Paragraph. BR-3.1.8 04/2022 Amended Paragraph on reporting of complaints. BR-3.1A.6 04/2022 Amended Paragraph on submission of complaint reports. BR-4A.2 04/2022 Deleted Section. BR-5.1.10 04/2022 Deleted Paragraph. BR-5.3.4 04/2022 Amended Paragraph on ATMs installation. BR-A.2.9(g) 10/2022 Deleted sub-paragraph. BR-5.1.17 01/2023 Amended Paragraph removing reference to OM. BR-1.1.4B 04/2023 Deleted Paragraph. BR-4A.7 04/2023 Added a new Section on Prudential Meeting requirements. BR-A.2.9(d) 10/2023 Deleted sub-paragraph. BR-4A-3.1 01/2024 Amended reference to HC Module. Effective Date
BR-A.3.4
The contents in this Module are effective from the date shown at the foot of the page or from the date of changes shown in BR-A.3.3.
October 07BR-1 BR-1 Regular Reporting – Annual Requirements
BR-1.1 BR-1.1 Bahraini Islamic Bank Licensees
BR-1.1.1
[This Paragraph was deleted in April 2016.]
Deleted: April 2016
October 2010
October 07Annual Audited Financial Statements
BR-1.1.2
All
Bahraini Islamic Bank Licensees are required to submit to the CBB their annual audited financial statements within 3 months from the financial year end.Amended: April 2019
Amended: April 2016
October 2010
January 2009
April 2008
October 07BR-1.1.2A
All
Bahraini Islamic Bank Licensees are required to submit to the CBB their draft year-end financial statements and must attend a meeting at the CBB with their supervisory point of contact (SPOC) and their external auditor. The bank must obtain their audit committee's prior approval of the draft financial statements before submitting these to the CBB. Subsequent to the meeting with the CBB, the financial statements (subject to any adjustments) must be submitted to the Board for its approval and to the shareholders at the annual general meeting for ratification.Amended: April 2019
Amended: April 2016BR-1.1.3
[This Paragraph was deleted in October 2010].
October 2010
January 2009
October 07Supplementary Information
BR-1.1.4
In addition to the statements required in Paragraph BR-1.1.2, banks are also required to submit to the Central Bank the following information within 3 months of their financial year end:
(a) The external auditor's management letter and Independent External Shari'a Compliance Auditor's (IESCA) communication to the board of directors and Shari'a supervisory board along with IESCA's assurance report;(b) The audited accounts for the bank's ultimate holding company;(c) Audited financial statements of all subsidiaries (whether or not consolidated) and all overseasbranches (including their accounting policies where these policies differ from those of the parent bank), along with their management letters;(d) The bank's group structure and the Bahrain's office internal organisation chart;(e) [This sub-paragraph was deleted in April 2019];(f) A list of subsidiaries, associated companies and affiliates of the bank, together with details of their locations and the amount of participation by the bank in these entities;(g) A reconciliation statement between the audited financial statements and the relevant prudential returns and monthly statistical returns;(h) Any other supplementary information required by the CBB;(i) [This Subparagraph was deleted in April 2013 and replaced with Paragraph BR-1.1.4B];(j) [This Subparagraph was deleted in July 2017 and replaced with Paragraph BR-1.1.4C];(k) Report oncontrollers as required under Paragraph GR-5.1.9; and(l) The remuneration agreed upon procedures as required under Paragraph BR-4A.3.1.(m) Report on the number of hours completed during the previous year in Continuous Professional Development (CPD) via CPD Form in Appendix BR-22 by the approved persons specifically board of directors and management as required under Paragraph TC-1.2.1.(n) [This Sub-Paragraph was deleted in January 2022].Deleted: January 2022
Amended: April 2019
Amended: January 2019
Amended: October 2018
Amended: July 2017
Amended: April 2017
Amended: July 2016
Amended: October 2014
Amended: January 2014
Amended: April 2013
Amended: April 2012
Amended: October 2011
July 2011
October 2010
January 2009
October 07BR-1.1.4A
In instances where a bank has non-operational subsidiaries, the bank should contact its supervisory point of contact to establish whether the requirements of Subparagraph BR-1.1.4(c) are applicable.
Added: July 2016BR 1.1.4B
[This Paragraph was deleted in April 2023].
Deleted: April 2023
Amended: January 2022
Amended: July 2017
Amended: July 2016
Added: April 2013Compliance
BR-1.1.5
In addition to the provisions of Section AU-3.4, the audited financial statements or the annual report of these banks should be in full compliance with the disclosure requirements set out under Sections PD-1.3 and PD-1.4 (as applicable).
October 2010
October 2009
October 2007Annual Report
BR-1.1.6
Banks are reminded that they must submit a soft copy (electronic) of their full annual report to the CBB within 4 months of the end of their financial year (See PD-1.2.6).
Amended: July 2016
Amended: April 2012
October 2010
October 2009
January 2009BR-1.2 BR-1.2 Branches of Foreign Banks
BR-1.2.1
The content of this Section is applicable to
branches (licensed by the CBB) of foreign banks.October 2010
October 07Annual Audited Financial Statements
BR-1.2.2
All
branches , referred to under Paragraph BR-1.2.1, are required to submit to the CBB their annual audited financial statements of their Bahrain operations within 3 months from the financial year end.Amended: April 2016
October 2010
October 07Supplementary Information
BR-1.2.3
In addition to the statements required in Paragraph BR-1.2.2,
branches are also required to submit to the CBB within 3 months from their financial year end the following information:(a) The external auditor's management letter;(b) [This sub-paragraph was deleted in April 2019];(c) A reconciliation statement between the audited financial statements and the relevant prudential returns and monthly statistical returns;(d) [This Subparagraph was replaced by Paragraph BR-1.2.3A in April 2012];(e) A statement of provisions as set out in Paragraph BR-1.2.4, below; and(f) The remuneration agreed upon procedures as required under Paragraph BR-4A.3.1.(g) Report on the number of hours completed during the previous year in Continuous Professional Development (CPD) via CPD Form in Appendix BR-22 by the approved persons as required under Paragraph TC-1.2.1.(h) [This Sub-paragraph was deleted in January 2022].Deleted: January 2022
Amended: April 2019
Amended: October 2018
Amended: July 2018
Amended: April 2017
Amended: October 2014
Amended: January 2014
Amended: April 2012
Amended: April 2011
October 2010
October 07BR-1.2.3A
Branches of foreign banks are also required to submit to the CBB the head office's Annual Report within 1 month of the date of publication and distribution by the head office.Added: April 2012
Provisions against Branch Assets in Head Office Books
BR-1.2.4
If specific provisions against the assets of a
branch are maintained in the books of its head office, the CBB should be advised on an annual basis and in writing (along with the information listed under Paragraph BR-1.2.3) of the amount of provisions set aside for the Bahrainbranch 's bad debts (and any other non-performing assets). For detailed guidance related to this subject, see Section CM-3.3.October 2010
April 2008
October 07Compliance
BR-1.2.5
The annual accounts must be in full compliance with the Financial Accounting Standards issued by AAOIFI or where AAOIFI standards do not cover a subject, International Financial Reporting Standards (IFRS) must be used.
October 2010
October 07BR-1.3 BR-1.3 All Banks
BR-1.3.1
Banks must provide to the CBB details of total remuneration including the mix of fixed and variable remuneration as per Appendix BR-14. The report must be submitted annually and must be provided within 3 months of the financial year end.
Amended: July 2014
Added: January 2014BR-1.4 BR-1.4 All Retail Banks
BR-1.4.1
All Islamic retail banks must submit to the CBB within two months of the financial year end, the
eligible accounts report for the deposits protection scheme (Appendix BR-16) in accordance with the requirements of Paragraph CP-2.3.4B. Instructions for the completion of the report are included under Appendix BR-17.Added: April 2014BR-2 BR-2 Regular Reporting – Semi-annual (Interim) Requirements
BR-2.1 BR-2.1 Retail Branches of Foreign Banks
BR-2.1.1
The content of this Section is applicable only to retail
branches (licensed by the CBB) of foreign banks.October 2010
October 07Financial Information
BR-2.1.2
Branches (referred to under Paragraph BR-2.1.1) are required to submit to the CBB their reviewed semi-annual (interim) financial statements (in the same format as their Annual Audited Accounts) for their Bahrain operations within 2 months of the date of these statements.Amended: April 2012
October 2010
October 07BR-2.1.2A
All retail
branches of foreign banks must submit to the CBB at least 5 working days prior to the intended publication date, the following documents:(a) Draft interim financial statements; and(b) Completed Form: Information Required for Annual and Interim Financial Review (Appendix BR-21) prepared in accordance with Appendix BR-20.Added: July 2021BR-2.2 BR-2.2 Bahraini Islamic Bank Licensees
BR-2.2.1
The content of this Section is applicable to all
Bahraini Islamic Bank Licensees licensed by the CBB in the Kingdom of Bahrain.Amended: April 2019
Added: October 2011Compliance with Module PD
BR-2.2.2
The financial statements mentioned under Paragraph BR-3.1.6 should be in compliance with the requirements set out under Section PD-3.1.
Added: October 2011BR-2.2.3
In addition to the financial statements required in Paragraph BR-3.1.6, banks are also required to submit to the CBB the following information within two months of the end of the half-year:
(a) A copy of the disclosures required by Paragraph PD-3.1.6; and(b) An agreed-upon procedures report concerning the completeness of disclosures required by Paragraph PD-3.1.6 (see also AU-3.1.4).Added: October 2011Report on Private Placements
BR-2.2.4
When acting as an issuer, promoter or manager of a private placement of securities,
Bahraini Islamic bank licensees must provide on a semi-annual basis to investors and the CBB a progress report on the private placement. The semi-annual reports are to be provided as of 30th June and 31st December and must be submitted to the investors and the CBB within three months of the reporting period.Amended: April 2015
Added: April 2014BR-2.2.5
The reports referred to in Paragraph BR-2.2.4 are to be issued following the issuance or distribution of a PPM for the solicitation of funds from investors.
Added: April 2014BR-2.2.6
The requirements for the report on private placements are in addition to any requirements outlined in Module OFS (Offering of Securities) under Volume 6 (Capital Markets).
Added: April 2014BR-2.2.7
Bahraini Islamic bank licensees may opt to issue the required report on a more frequent basis.Added: April 2014BR-2.2.8
The report required under Paragraph BR-2.2.4 must be issued for private equity purchases of existing companies as well as for real estate and other projects under development and must follow the requirements of Appendix BR-18 under Part B of Volume 2.
Added: April 2014BR-2.3 BR-2.3 [This Section was deleted in April 2019]
BR-2.3.1
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Added: October 2014[This sub-heading was deleted in April 2019]
BR-2.3.2
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Added: October 2014BR-3 BR-3 Regular Reporting – Quarterly Requirements
BR-3.1 BR-3.1 Bahraini Islamic Bank Licensees
BR-3.1.1
The content of this Section is applicable to all
Bahraini Islamic Bank Licensees licensed by the CBB in the Kingdom of Bahrain.Amended: April 2019
Amended: October 2010
October 07Prudential Information Returns for Islamic Banks (PIRI)
BR-3.1.2
All banks, referred to under Paragraph BR-3.1.1, must complete PIRI forms (see Appendix BR-5), on a quarterly basis. This form is intended to be a financial report of the bank. Banks should therefore include on it all assets and liabilities of their head office and their
branches in Bahrain and abroad and subsidiaries where applicable. Separate figures in respect of the head office or 'Bahrain operations' are not required.October 2010
January 2009
October 07BR-3.1.3
The forms referred to under Paragraph BR-3.1.2 must be submitted to the CBB on a quarterly basis within 30 calendar days of the end of the reporting date.
Amended: January 2022
Amended: October 2010
Amended: January 2009
Added: October 07BR-3.1.4
The CBB requires all banks to request their external auditor to conduct a review of the prudential returns on a quarterly basis (see also Sections CA-1.5 and AU-3.6 for fuller details). The results of such review (in the form of an Agreed Upon Procedures report as shown in Appendix BR-9) must be submitted to the CBB no later than 2 months from the end of the subject quarter.
Amended: October 2016
October 2010
January 2009
April 2008
October 07BR-3.1.5
Banks which demonstrate to the satisfaction of the CBB that they have fulfilled all of the CBB's requirements with regard to Prudential Returns for at least two consecutive quarters may apply (in writing) to the Central Bank for an exemption from the review procedure set out in Paragraph BR-3.1.4 above. Such exemption may be withdrawn by the CBB at any time, should errors be detected.
Amended: July 2012
Amended: October 2011
April 2008
October 07BR-3.1.5A
For
Bahraini Islamic bank licensees , all existing exemptions in respect of PIRI review as at 31st December 2014 will cease.Added: April 2015Information required for Annual and Interim Financial Review
BR-3.1.5B
[This Paragraph was deleted in July 2021].
Deleted: July 2021
Added: April 2019Financial Information
BR-3.1.6
All banks, referred to under Paragraph BR-3.1.1, should submit their reviewed (unaudited) quarterly financial statements to the CBB within 2 months from the statement date.
October 2010
October 07BR-3.1.6A
All
Bahraini Islamic bank licensees must submit to the CBB at least 5 working days prior to the intended publication date and before their board of directors' meeting to discuss the interim financial statements, the following documents:(a) Draft interim financial statements; and(b) Completed Form: Information Required for Annual and Interim Financial Review (Appendix BR-21) prepared in accordance with Appendix BR-20.Amended: July 2021
Amended: October 2014
Added: July 2014Compliance
Largest Country Exposures
BR-3.1.7AA
All
Bahraini Islamic bank licensees must submit to the CBB details of their largest country exposures on a consolidated basis through Electronic Submission of Returns and Analysis of Data (ESRAD). This report must be submitted to the CBB within 20 calendar days of the end of the relevant quarter.Added: October 2017Large Exposures
BR-3.1.7A
All
Bahraini Islamic bank licensees must submit to the CBB details of their large exposures in accordance with Appendix BR-19. This report must be submitted to the CBB within 20 calendar days of the end of the reporting date.Added: July 2014Overseas Banking Subsidiaries and Branches
BR-3.1.7B
All
Bahraini Islamic bank licensees must submit to the CBB details of their overseas banking subsidiaries and branches in accordance with Appendix BR-7. This report must be submitted to the CBB within one month of the end of the relevant quarter.Amended: October 2014
Added: July 2014Non-Banking Subsidiaries
BR-3.1.7C
All
Bahraini Islamic bank licensees must submit to the CBB reviewed statement of financial position and income statement of their non-banking subsidiaries. If reviewed statements are unavailable, management accounts will be accepted by the CBB. These statements are to be submitted within one month of the end of the relevant quarter.Added: July 2014Reporting of Complaints
BR-3.1.8
In accordance with Paragraph BC-10.7.1, all banks must submit to the CBB Consumer Protection Unit, 20 days after the end of the quarter, a report on complaints.
Amended: April 2022
Added: October 2011BR-3.1A BR-3.1A Branches of Foreign Banks
BR-3.1A.1
The content of this Section is applicable to
branches (licensed by the CBB) of foreign banks.October 2010Prudential Information Returns
BR-3.1A.2
All
branches , referred to under Paragraph BR-3.1A.1, are required by the CBB to complete PIR forms (see Appendix BR-5).July 2011
October 2010BR-3.1A.3
These should be submitted to the CBB no later than 30 calendar days from the end of the said quarter.
Amended: January 2022
Added: October 2010BR-3.1A.4
The CBB requires all banks to request their external auditor to conduct a review of the prudential returns on a quarterly basis. The results of such review (in the form of a return review report) should be submitted to the CBB no later than 2 months from the end of the subject quarter. A bank may apply for exemption from this requirement provided that it meets the criteria set out under Paragraph BR-3.1A.5 below.
October 2010BR-3.1A.5
Banks which demonstrate to the satisfaction of the CBB that they have fulfilled all of the CBB's requirements with regard to Prudential Returns for at least two consecutive quarters may apply (in writing) to the CBB for an exemption from the review procedure set out in Paragraph BR-3.1A.4 above.
October 2010Additional Information required for CBB's Financial Review
BR-3.1A.5A
All retail
branches of foreign banks must submit the completed Form: Information Required for Annual and Interim Financial Review (Appendix BR-21) prepared in accordance with Appendix BR-20 together with the PIRI forms within 30 calendar days (See Paragraph BR-3.1.3) or together with any draft financial statement submissions (See Paragraph BR-2.1.2A).Amended: January 2022
Amended: July 2021
Added: April 2019BR-3.1A.5B
All wholesale
branches of foreign banks must submit the completed Form: Information Required for Annual and Interim Financial Review (Appendix BR-21) prepared in accordance with Appendix BR-20, together with the PIRI forms within 30 calendar days of each quarter end (See Paragraph BR-3.1.3).Amended: January 2022
Added: July 2021Reporting of Complaints
BR-3.1A.6
In accordance with Paragraph BC-10.7.1, all banks must submit to the CBB Consumer Protection Unit, 20 days after the end of the quarter, a report on complaints.
Amended: April 2022
Added: October 2011BR-3.2 BR-3.2 [deleted]
[This Section was deleted in July 2011].
BR-3.2.1 [deleted]
Deleted: July 2011
[deleted]
Deleted: July 2011
BR-3.2.2 [deleted]
Deleted: July 2011
BR-3.2.3 [deleted]
Deleted: July 2011
BR-4 BR-4 Regular Reporting – Monthly Requirements
BR-4.1 BR-4.1 All Licensed Banks
BR-4.1.1
The content of this Section is applicable to all banks (or as stated otherwise) licensed by the CBB in the Kingdom of Bahrain.
October 2010
October 07Statistical Returns
BR-4.1.2
All banks, referred to under Paragraph BR-4.1.1, are required to submit to the CBB (Financial Stability Directorate) the following monthly statistical returns:
(a) Form SR-1 – 'Monthly Balance Sheet';(b) Form SR-2 – 'Monthly Classification ofDeposits and Other Liabilities to Banks and Non-banks';(c) Form SR-3 – 'Monthly Balance Sheet by Country and Class of Customer';(d) Form SR-4 – 'Monthly Balance Sheet by Currency';(e) Form SR-5 – 'Monthly Classification of Loans and Advances to Domestic Non-banks'; and(f) Form SR-7 – 'Monthly Classification of Assets'.(For instructions relating to the completion of the above mentioned returns, refer to Appendix BR-1 and for returns forms refer to Appendix BR-2).
July 2011
October 2010
October 07BR-4.1.3
The returns included in Appendix BR-2 should be submitted to the CBB in electronic form (Excel spreadsheet) via email to erdsr@cbb.gov.bh no later than the 10th of the month following the end of the relevant month.
Amended: January 2022
Amended: October 2010
Added: October 07Precious Metals and Commodities Returns
BR-4.1.4
[This Paragraph deleted with effect from 1 July 2006].
October 2010
October 07Reserve Requirements
BR-4.1.4A
The Banking Services Directorate will calculate the reserve requirement of each
Islamic bank licensee bank on a monthly basis using the figures reported in the monthly statistical report, Form SR-2 (see Rule BR-4.1.2 above) and will notify each bank of its required reserve (if any).July 2011
October 2007BR-4.1.4B
The monthly reserve requirements will be calculated as 5% of the total of an
Islamic bank licensee's BD non-bank funds (whether call or unrestricted investment accounts – see LR-2.5.10).July 2011
July 2009
April 2008
October 07Accounts for Charity Organisations
BR-4.1.5
All banks, referred to under Paragraph BR-4.1.1, must report to the CBB all payments and transfers of funds amounting to BD 3,000 or above (or equivalent in other currencies) from accounts held by the bank for charitable organisations registered in the Kingdom of Bahrain (also see Paragraph FC-1.6.4). Such report must include details of amount transferred, account name and number, and beneficiary (name and location).
Added: October 2011BR-4.2 Full Commercial Banks [This Section deleted 07/2006]
BR-4.3 BR-4.3 Bahraini Islamic Bank Licensees
BR-4.3.1
The content of this Section is only applicable to locally incorporated banks.
October 07Directors' Interests in the Shares of Locally Incorporated Banks Listed on the Bahrain Stock Exchange
BR-4.3.2
All locally incorporated banks listed on a
licensed exchange are required to report to the Capital Markets Supervision Directorate of the CBB the following information, on a monthly basis, relating to theirDirectors :(a) The number and type of interests of eachDirector in the shares (i.e. whether by shareholding,options etc.) of all such banks in which the respectiveDirectors have interests in and the rights associated with such interests;(b) The date on which, and manner in which, such interests were acquired or disposed of (as the case may be);(c) The acquisition price paid, or disposal price received, for such interests; and(d) The person(s) from, or to, whom the interests in such shares were acquired or disposed (as the case may be).Amended: April 2011
October 2010
October 07BR-4.3.3
The information required in Paragraph BR-4.3.2 above should be submitted to the CBB no later than 15 calendar days following the end of the relevant month.
Amended: April 2011
October 2010
October 2009
October 2007Exposures to Connected Counterparties
BR-4.3.4
All banks, referred to under Paragraph BR-4.3.1, are required to submit to the CBB their exposures to connected parties on a monthly basis on the fourth working day of the month.
(For instructions relating to the reporting of the above mentioned exposures, refer to Appendix BR-11 and for the concerned reporting forms refer to Appendix BR-10).
October 2010
October 2009Liquidity Coverage Ratio
BR-4.3.5
Bahraini Islamic bank licensees must submit their "solo" LCR to the CBB within 7 calendar days following the month end, and their consolidated LCR within 14 calendar days following the month end (see Appendix BR-23) through Electronic Submission of Returns and Analysis of Data (ESRAD).Added: July 2019BR-4A BR-4A Other Reporting Requirements
BR-4A.1 BR-4A.1 IIS Reporting Requirements
Institutional Information System (IIS)
BR-4A.1.1
All banks licensed by the CBB are required to complete online non-financial information related to their institution by accessing the CBB's institutional information system (IIS). Banks must update the required information at least on a quarterly basis or when a significant change occurs in the non-financial information included in the IIS. If no information has changed during the quarter, the bank must still access the IIS quarterly and confirm the information contained in the IIS. Licensees must ensure that they access the IIS within 20 calendar days from the end of the related quarter and either confirm or update the information contained in the IIS.
Amended: January 2013
Adopted: January 2011BR-4A.1.2
Banks failing to comply with the requirements of Paragraph BR-4A.1.1 or reporting inaccurate information are subject to financial penalties or other enforcement actions as outlined in Module (EN) Enforcement.
Adopted: January 2011BR-4A.2 BR-4A.2 [This Section was deleted in 04/2022]
BR-4A.2.1
[This Paragraph was deleted in April 2022].
Deleted: April 2022
Amended: January 2015
Amended: July 2014
Added: July 2013BR-4A.2.2
[This Paragraph was deleted in April 2022].
Deleted: April 2022
Amended: July 2018
Added: July 2013BR-4A.3 BR-4A.3 Compliance with Remuneration Rules under Module HC
BR-4A.3.1
Unless specifically excluded in accordance with Paragraph AU-3.7.3, every
Islamic bank licensee must submit to the CBB within three months from the financial year-end, a report as to the bank's compliance with the remuneration Rules outlined in Chapter HC-6.Amended: January 2024
Amended: July 2014
Added: January 2014BR-4A.3.1A
Where a
Islamic bank licensee is not required to provide a report under Paragraph BR-4A.3.1, it must submit a notification to the CBB once it has been determined that it is excluded to file such report as per Paragraph AU-3.7.3.Added: July 2014BR-4A.3.2
The report required under Paragraph BR-4A.3.1 must be prepared by the bank's external
auditor or a consultancy firm approved by the CBB.Amended: July 2015
Added: January 2014BR-4A.3.2A
For a consultancy firm to be approved by the CBB for purposes of this Section, the
conventional bank licensee should communicate with the CBB's supervisory point of contact for seeking the CBB's prior written approval.Added: July 2015BR-4A.3.3
The format of the Report required under Paragraph BR-4A.3.1 is included in Part B of the Rulebook as Appendix HC-(i), as part of the Supplementary Information.
Amended: July 2015
Added: January 2014BR-4A.4 BR-4A.4 Remuneration of Top 12 Employees
BR-4A.4.1
Banks must complete Appendix BR-15, details of their top 12 highly remunerated employees annually for each financial year. This report is to be completed by the bank within three months from the end of the period covered and kept at the bank's premises and provided to the CBB, upon request.
Amended: July 2017
Added: January 2014BR-4A.5 BR-4A.5 Onsite Inspection Reporting
BR-4A.5.1
For the purpose of onsite inspection by the CBB,
Islamic bank licensees must submit requested documents and completed questionnaires to the Inspection Directorate at the CBB three working days ahead of inspection team entry date.Added: April 2017BR-4A.5.2
Islamic bank licensees must review the contents of the draft Inspection Report and submit to the Inspection Directorate at the CBB a written assessment of the observations/issues raised within fifteen working days of receipt of such report. Evidentiary documents supporting management's comments must also be included in the response package.Amended: January 2022
Added: April 2017BR-4A.5.3
Islamic bank licensees' board are required to review the contents of the Inspection Report and submit within one month, of the report issue date, a final response to such report along with an action plan addressing the issues raised within the stipulated timeline.Added: April 2017BR-4A.6 BR-4A.6 Reporting of API performance
BR-4A.6.1
Islamic retail bank licensees must report to CBB statistics on the availability and performance of APIs on a monthly basis as per the requirements included in the Operational Guidelines in the Bahrain Open Banking Framework. The reports must be submitted within 5 working days of the month end.Added: July 2021BR-4A.7 BR-4A.7 Prudential Meeting
BR-4A.7.1
Islamic bank licensees must submit to the CBB at least three weeks prior to the prudential meeting date, all compliance and internal audit reports issued since the last prudential meeting along with status updates on resolved and pending issues.Added: April 2023BR-5 BR-5 Ad-hoc Reporting and Notification
BR-5.1 BR-5.1 All Licensed Banks
BR-5.1.1
The content of this Section is applicable to all banks, except as otherwise mentioned, (licensed by the CBB) in the Kingdom of Bahrain.
Amended: April 2011
October 2010
October 07Large Exposures
BR-5.1.2
Should any locally incorporated bank find that, for reasons outside its control or otherwise, it has an
exposure to an individualcounterparty (other than an exemptexposure ) which results in it exceeding any of the limits set out under Chapter CM-4, this should be reported immediately to the CBB for its consideration, and action should be taken immediately to bring theexposure back within applicable limits as soon as possible.Amended: April 2011
October 2010
October 2009
October 2007Capital Increases, Changes in Strategy and Establishment of Subsidiaries/SPVs
BR-5.1.3
[This Paragraph was moved to Section BR-5.2].
Amended: April 2014
Amended: April 2013
Amended: October 2010
October 2007Current Management and Changes thereto
BR-5.1.4
[This Paragraph was deleted in April 2012].
Deleted: April 2012BR 5.1.5
The CBB must be notified of any changes to the positions mentioned under Paragraph LR-1A.1.2 that may occur from time to time subject to observing the requirements set out in Section LR-1A.1. (See also Paragraph LR-1A.1.22)
Amended: April 2014
Amended: April 2012
Amended: October 2010
Amended: October 2009
October 2007Changes in Dealing Staff
BR-5.1.7
[This Paragraph was deleted in July 2018].
Deleted: July 2018
Amended: April 2014
Amended: January 2014
Amended: April 2011
October 2010
October 07Appointment of a Compliance Manager/Officer
BR-5.1.8
All banks must notify the CBB of the appointment of a compliance manager/officer (refer to Section LR-1A.1), and must submit the appointee's Curriculum Vitae to the CBB. The CBB's approval must be received by the bank before the appointment becomes final. The bank must outline how the compliance function fits into the bank's senior management reporting structure, and must give details of relevant reporting lines within the bank.
Amended: April 2014
October 2010
October 07Money Laundering and Suspicious Transactions
BR-5.1.9
The Money Laundering Reporting Officer (or his/her duly authorised delegate) must send a report to the Compliance Directorate of the CBB where he/she knows or has suspicions that a transaction might involve
money laundering or terrorist financing, either due to the customer's economic standing or because it meets one of the examples of suspicious transactions described in Appendix FC-3.October 07Promotion of Financial Products and Services Offered in/from Bahrain by Mean of Incentives etc.
BR-5.1.10
[This Paragraph was deleted in April 2022].
Deleted: April 2022
Amended: April 2011
October 2010
October 07BR-5.1.11
[This Paragraph was deleted in January 2022].
Deleted: January 2022
Amended: July 2012
Amended: October 2010
Added: October 07UN SCR 1373 (2001)
BR-5.1.12
The CBB requires all banks to notify it immediately of any act that might contravene the provisions of UN Security Council Resolution 1373 (2001). Banks should refer to Chapter FC-8 for full details of this requirement.
October 2010
October 07Notification of Fraud or other Material Concerns
BR-5.1.13
All banks must report immediately to the CBB any frauds, either attempted or realised, or any well-founded concerns about the integrity of individual
Directors or members of management. This obligation to disclose extends to individual Board members and members of management: i.e. if aDirector or member of management has reasonable grounds to believe that information that should have been reported to the CBB has not, then they have a duty to report the matter personally to the CBB. All such cases shall be treated in the strictest confidence by the CBB.October 2010
October 07BR-5.1.14
All banks must report immediately to the CBB any material losses as soon as the bank becomes aware of them. This notification requirement is separate from notifications for loan write-offs (see BR 5.2.3) or frauds (see above), but refers to losses caused by external events (e.g. falls in stock markets) or internal control failures. In this context 'material' would mean: a loss which exceeds 5% of net earnings in a given quarter; or a loss which reduces the bank's capital adequacy by more than 1%; or a loss which reduces total assets by more than 1%.
October 2010
October 07Accounts for Charity Organisations
BR-5.1.15
[This requirement was moved in October 2011 to Paragraph BR-4.1.5 as it is a monthly requirement].
October 2011
October 2010
October 07Business Transfers
BR-5.1.16
All banks must refer to Section GR-4.1 on business transfer requirements.
Amended: April 2014
Amended: July 2011
Added: April 2010Other Notifications
BR-5.1.17
Banks must inform the CBB, in writing, of the following:
(a) Any material problems or changes encountered with an outsourcing provider;(b) Any proposed ownership changes (whether in terms of structure or identity ofcontrollers ) prior to the change taking place and any change incontrollers as a result of circumstances outside the bank's knowledge and/or control (ref GR-5.1.7); and(c) Any dismissal or suspension of any staff in internal audit, risk management, AML, compliance function or internal Shari'a review of the bank. The notification must include the reason for the dismissal or suspension of such individual.Amended: January 2023
Amended: April 2014
Added: July 2011BR-5.1.17A
Should the CBB have a cause for concern following its review of the notification referred to under Subparagraph BR-5.1.17(c), it may investigate the matter and should it establish the existence of any irregularity, misconduct or unfair decisions, it may take enforcement action on the bank, including an adverse action on the fit and proper status of the person(s) responsible.
Added: April 2014BR-5.2 BR-5.2 Bahraini Islamic Banks
BR-5.2.1
The content of this Section is applicable to all
Bahraini Islamic bank licensees licensed by the CBB in the Kingdom of Bahrain.Amended: April 2014
October 2010
October 07Capital Adequacy
BR-5.2.2
All banks, referred to under Paragraph BR-5.2.1, must give the CBB immediate written notification of any actual breach by such banks of the minimum capital adequacy ratio (CAR) in accordance with Section CA-1.2. Where such notification is given, the bank must also adhere to the additional notification and reporting requirements as set out under Section CA-1.2.
Amended: January 2015
October 2010
April 2008
October 07Write-off of Credit Facility
BR-5.2.3
All banks, referred to under Paragraph BR-5.2.1, must notify the CBB of any write-off of a credit facility in excess of BD 100,000 (Bahraini Dinars One Hundred Thousand), or its equivalent in foreign currency and must obtain the CBB's prior approval for write-offs concerning certain parties connected to the concerned bank. See Section CM-6.1 for further details.
Amended: April 2014
April 2008
October 07Use of Behavioural Adjustments to Data Provided under Section E of PIRI
BR-5.2.4
Banks may in certain circumstances apply to the CBB to use behavioural adjustments (Estimates) to their contractual data provided under Section E of PIRI Forms (also see Section AU-3.5). Such application must be supported by data for a minimum period of two years and verified by the external auditor.
October 2010
October 07Term Borrowing Commitments
BR-5.2.5
All banks must consult with the CBB before they enter into any term borrowing facilities or programs which have any restrictive covenants in relation to the capital or activities of the bank (such as the capital adequacy ratio, capital amount, leveraging, compliance with certain regulatory requirements, etc). For the sake of expediting the CBB's reaction to such consultations, banks must submit the draft term sheet of the facility to the Banking Supervision director at the CBB responsible for the supervision of the concerned bank, before committing themselves to the concerned facility (or renewing it).
Added: April 2012Facilities Transferred to Qard Hassan
BR-5.2.6
All banks, referred to under Paragraph BR-5.2.1, must obtain the CBB's prior approval of any transfer of any exposures to Qard Hassan in excess of BD100,000 or its equivalent in foreign currency (see Paragraph CM-8.1.19). The prior approval requirement applies to both on-balance sheet and restricted investment account related exposures.
Added: April 2014Capital Increases, Changes in Strategy and Establishment of Subsidiaries/SPVs
BR-5.2.7
All
Bahraini Islamic bank licensees must obtain the CBB's prior written approval for the opening of any new place of business either in the Kingdom of Bahrain or abroad (this would include the establishment or acquisition of a subsidiary, new branches or representative offices).Bahraini Islamic bank licensees should refer to Article 51 of the CBB Law 2006 for full details.Added: April 2014BR-5.2.8
All
Bahraini Islamic bank licensees must obtain the CBB's prior written approval for any proposed capital increase in a subsidiary and for any major changes (regardless of type and/or effect) to the bank's strategy or corporate plan prior to implementation (See also Paragraph HC-1.2.6).Amended: July 2021
Added: April 2014BR-5.2.9
All
Bahraini Islamic bank licensees must obtain the CBB's prior specific written approval if they intend to act as originator, sponsor or manager of a special purpose vehicle ('SPV'), or if they intend to participate in the creation of an SPV, or if they intend to acquire a holding of 20% or more of the equity capital of an SPV. AllBahraini Islamic bank licensees must seek prior specific written CBB approval if they are appointed as nominee shareholders of SPVs or hold votes by proxy arrangement in SPVs on behalf of other investors.Amended: January 2015
Added: April 2014BR-5.2.10
For purposes of Paragraph BR-5.2.9, in order to avoid any delays and/or disruption in implementation of a
Bahraini Islamic bank licensee's plans in this context, the CBB should be approached as soon as possible, even at a very preliminary stage.Added: January 2015BR-5.2.11
The CBB requires any
Bahraini Islamic bank licensee associated with an SPV to confirm the following points in any request for approval under Paragraph BR-5.2.9:(a) The purpose of the SPV;(b) The nature of the relationship between theBahraini Islamic bank licensee and the SPV (i.e. originator, sponsor, manager, investor, controller etc.);(c) The proposed consolidation/accounting treatment of the SPV in relation to theBahraini Islamic bank licensee both for the PIR and the audited financial statements' purposes as agreed with its external auditor;(d) The availability of financial and other information relevant to the SPV and access to its business premises and records;(e) TheBahraini Islamic bank licensee is not providing any guarantees, warranties or financial/liquidity support of any kind to the SPV or its Rab Al Mal, the Muwakil or investor in the SPV; and(f) A copy of theBahraini Islamic bank licensee's Shari'a Supervisory Board approval of the initial investment or financing structure involving the use of the concerned SPV(s).Amended: January 2020
Added: January 2015BR-5.2.12
In addition to the points noted in BR-5.2.11,
Bahraini Islamic bank licensees which are involved with SPVs in any of the relationships described in Paragraph BR-5.2.9 must:(a) Not allow such SPVs to obtain any conventional financing to fund themselves or any transactions that they enter into;(b) Not allow the SPVs to give any type of financial guarantee, warranty or indemnity to the Rab Al Mal, the Muwakil or investors in the SPVs or any other counterparty either directly or on behalf of the bank; and(c) Ensure that there are no legal or other restrictions on the availability of financial and other information relevant to the SPV and access to its business premises and records.(d) Not provide any credit facilities to the SPVs and/or extend any financial/liquidity support and/or guarantees.Amended: July 2020
Amended: April 2020
Amended: January 2020
Added: January 2015BR-5.2.13
For purposes of Paragraph BR-5.2.12, in case of new acquisition or investment after the date of issuance of these rules, when conventional borrowing exists, it should be replaced by Islamic financing as soon as possible and in no case later than 12 months from the date of investment. In case of existing investments before the date of issuance of these rules, where conventional borrowing exists, it should be replaced by Islamic financing as soon as possible and in no case later than 12 months from the date of issuance of these rules. Both cases are extendable subject to SSB approval.
Added: January 2015BR-5.2.14
Bahraini Islamic bank licensees which are involved with SPVs in any of the relationships described in Paragraph BR-5.2.9 must not allow such SPVs to give any type of financial guarantee, warranty or indemnity to the Rab Al Maal, the Muwakil or investors in the SPV or any other counterparty, customer or stakeholder either directly or on behalf of theBahraini Islamic bank licensee .Added: January 2015BR-5.2.15
The Shari'a Supervisory Board of the
Bahraini Islamic bank licensee must monitor on an ongoing basis the Shari'a compliance of the SPVs and must oversee the conduct of the annual Shari'a compliance review of transactions, assets, liabilities and other commitments and relationships entered into by all SPVs with which theBahraini Islamic bank licensee is involved (by way of the relationships described in Paragraph BR-5.2.9). The Shari'a compliance function of theBahraini Islamic bank licensee must perform such reviews.Added: January 2015BR-5.2.16
Bahraini Islamic bank licensees which are involved with SPVs in any of the relationships described in Paragraph BR-5.2.9 must not transfer non-performing or impaired assets from their own balance sheets to such SPVs or vice versa.Added: January 2015BR-5.2.17
Where the SPV is consolidated into the accounts of a locally incorporated bank, the bank must provide separate accounting information on the SPV to the CBB on a quarterly basis. Furthermore, the annual audited financial statements of all consolidated SPVs must be submitted to the CBB within 3 months of the year end of the concerned SPV.
Added: January 2015BR-5.2.18
Where a locally incorporated bank has a controller or majority ownership relationship with an SPV, or acts as sponsor, the bank must obtain the prior written approval of the CBB for any changes to the capital, ownership, management or control of the SPV. All
Bahraini Islamic Bank Licensees must also notify the CBB of any material events in relation to the SPV. If necessary, the CBB may require that formal information exchange arrangements are put in place (e.g. a memorandum of understanding) if the SPV is located in a foreign jurisdiction and its activities are not supervised locally.Amended: April 2019
Added: January 2015BR-5.3 BR-5.3 Retail Banks
BR-5.3.1
The content of this Section is only applicable to retail banks licensed by the CBB in the Kingdom of Bahrain.
October 2010
October 07Introduction of New or Expanded Customer Products and Facilities
BR-5.3.2
All banks, referred to under Paragraph BR-5.3.1, should notify the CBB of information relating to any new or expanded customer products and facilities in accordance with the requirements set out under Section BC-4.6.
October 2010
October 07BR-5.3.3
[This Paragraph deleted July 2006.]
October 07Installation or Removal of ATM in Bahrain
Funds Received from NGO where no Valid Funds Collection License
BR-5.3.5
In accordance with Paragraph BC-4.11.3, retail banks must notify the CBB in instances where donated funds have been received by an NGO and no valid funds collection license was submitted.
Added: April 2014BR-6 BR-6 Information Gathering by the CBB
BR-6.1 BR-6.1 Power to Request Information
BR-6.1.1
In accordance with Article 111 of the CBB Law, banks must provide all information that the CBB may reasonably request in order to discharge its regulatory obligations.
Added: January 2012BR-6.1.2
Banks must provide all relevant information and assistance to the CBB inspectors and
appointed experts on demand as required by Articles 111 and 114 of the CBB Law. Failure by banks to cooperate fully with the CBB's inspectors orappointed experts , or to respond to their examination reports within the time limits specified, will be treated as demonstrating a material lack of cooperation with the CBB which will result in other enforcement measures being considered, as described elsewhere in Module EN. This rule is supported by Article 114(a) of the CBB Law.Added: January 2012BR-6.1.3
Article 163 of the CBB Law provides for criminal sanctions where false or misleading statements are made to the CBB or any person /
appointed expert appointed by the CBB to conduct an inspection or investigation on the business of the licensee or the listed licensee.Added: January 2012Information Requested on Behalf of other Supervisors
BR-6.1.4
The CBB may ask banks to provide it with information at the request of or on behalf of other supervisors to enable them to discharge their functions properly. Those supervisors may include overseas supervisors or government agencies in Bahrain. The CBB may also, without notifying a bank, pass on to those supervisors or agencies information that it already has in its possession.
Added: January 2012BR-6.2 BR-6.2 Access to Premises
BR-6.2.1
In accordance with Article 114 of the CBB Law, all licensed banks must permit representatives of the CBB, or
appointed experts , access, with or without notice, to any of its business premises in relation to the discharge of the CBB's functions under the relevant law.Amended: October 2011
October 07BR-6.2.2
A bank must take reasonable steps to ensure that its agents and providers under outsourcing arrangements permit such access to their business premises, to the CBB.
Added: October 2011BR-6.2.3
A bank must take reasonable steps to ensure that each of its providers under material outsourcing arrangements deals in an open and cooperative way with the CBB in the discharge of its functions in relation to the bank.
Added: October 2011BR-6.2.4
The cooperation that banks are expected to procure from such providers is similar to that expected of banks themselves.
Added: October 2011BR-6.3 BR-6.3 Accuracy of Information
BR-6.3.1
Banks must take reasonable steps to ensure that all information they give the CBB is:
(a) Factually accurate or, in the case of estimates and judgements, fairly and properly based after appropriate enquiries have been made by the bank; and(b) Complete, in that it should include anything of which the CBB would reasonably expect notice.Added: October 2011BR-6.3.2
If a bank becomes aware, or has information that reasonably suggests that it has or may have provided the CBB with information that was or may have been false, misleading, incomplete or inaccurate, or has or may have changed in a material way, it must notify the CBB immediately. The notification must include:
(a) Details of the information which is or may be false, misleading, incomplete or inaccurate, or has or may have changed;(b) An explanation why such information was or may have been provided; and(c) The correct information.Added: October 2011BR-6.3.3
If the information in Paragraph BR-6.3.2 cannot be submitted with the notification (because it is not immediately available), it must instead be submitted as soon as possible afterwards.
Added: October 2011BR-6.4 BR-6.4 Methods of Information Gathering
BR-6.4.1
The CBB uses various methods of information gathering on its own initiative which require the cooperation of banks:
(a) Representatives of the CBB may make onsite visits at the premises of the bank. These visits may be made on a regular basis, on a sample basis, for special purposes such as theme visits (looking at a particular issue across a range of banks), or when the CBB has a particular reason for visiting a bank;(b) Appointees of the CBB may also make onsite visits at the premises of the bank. Appointees of the CBB may include persons who are not CBB staff, but who have been appointed to undertake particular monitoring activities for the CBB, such as in the case ofappointed experts (refer to Section BR-6.5).(c) The CBB may request the bank to attend meetings at the CBB's premises or elsewhere;(d) The CBB may seek information or request documents by telephone, at meetings or in writing, including electronic communication;(e) The CBB may require banks to submit various documents or notifications, as per Chapter BR-5, in the ordinary course of their business such as financial reports or on the happening of a particular event in relation to the bank such as a change in control.Added: January 2012BR-6.4.2
When seeking meetings with a bank or access to the bank's premises, the CBB or the CBB appointee needs to have access to a bank's documents and personnel. Such requests will be made during reasonable business hours and with proper notice. There may be instances where the CBB may seek access to the bank's premises without prior notice. While such visits are not customary, the prospect of unannounced visits is intended to encourage banks to comply at all times with the requirements and standards imposed by the CBB as per legislation and Volume 1 of the CBB Rulebook.
Added: January 2012BR-6.4.3
The CBB considers that a bank should:
(a) Make itself readily available for meetings with representatives or appointees of the CBB;(b) Give representatives or appointees of the CBB reasonable access to any records, files, tapes or computer systems, which are within the bank's possession or control, and provide any facilities which the representatives or appointees may reasonably request;(c) Produce to representatives or appointees of the CBB specified documents, files, tapes, computer data or other material in the bank's possession or control as reasonably requested;(d) Print information in the bank's possession or control which is held on computer or otherwise convert it into a readily legible document or any other record which the CBB may reasonably request;(e) Permit representatives or appointees of the CBB to copy documents of other material on the premises of the bank at the bank's expense and to remove copies and hold them elsewhere, or provide any copies, as may be reasonably requested; and(f) Answer truthfully, fully and promptly all questions which representatives or appointees of the CBB reasonably put to it.Amended: July 2012
Added: January 2012BR-6.4.4
The CBB considers that a bank should take reasonable steps to ensure that the following persons act in the manner set out in Paragraph BR-6.4.3:
(a) Its employees; and(b) Any other members of its group and their employees.Amended: July 2012
Added: January 2012BR-6.4.5
In gathering information to fulfill its supervisory duties, the CBB acts in a professional manner and with due regard to maintaining confidential information obtained during the course of its information gathering activities.
Added: January 2012BR-6.5 BR-6.5 Role of the Appointed Expert
Introduction
BR-6.5.1
The content of this Chapter is applicable to all banks and
appointed experts .Added: October 2011BR-6.5.2
The purpose of the contents of this Chapter is to set out the roles and responsibilities of
appointed experts when appointed pursuant to Article 114 or 121 of the CBB Law (see EN-7.1.1). These Articles empower the CBB to assign some of its officials or others to inspect or conduct investigations of banks.Added: October 2011BR-6.5.3
The CBB uses its own inspectors to undertake on-site examinations of licensees as an integral part of its regular supervisory efforts. In addition, the CBB may commission reports on matters relating to the business of licensees in order to help it assess their compliance with CBB requirements. Inspections may be carried out either by the CBB's own officials, by duly qualified
appointed experts appointed for the purpose by the CBB, or a combination of the two.Added: October 2011BR-6.5.4
The CBB will not, as a matter of general policy, publicise the appointment of an
appointed expert , although it reserves the right to do so where this would help achieve its supervisory objectives.Added: October 2011BR-6.5.5
Unless the CBB otherwise permits,
appointed experts should not be the same firm appointed as external auditor of the bank.Added: October 2011BR-6.5.6
Appointed experts will be appointed in writing, through an appointment letter, by the CBB. In each case, the CBB will decide on the range, scope and frequency of work to be carried out byappointed experts .Added: October 2011BR-6.5.7
All proposals to appoint
appointed experts require approval by an Executive Director or more senior official of the CBB. The appointment will be made in writing, and made directly with theappointed experts concerned. A separate letter is sent to the licensee, notifying them of the appointment. At the CBB's discretion, atrilateral meeting may be held at any point, involving the CBB and representatives of the licensee and theappointed experts , to discuss any aspect of the investigation.Added: October 2011BR-6.5.8
Following the completion of the investigation, the CBB will normally provide feedback on the findings of the investigation to the bank.
Added: October 2011BR-6.5.9
Appointed experts will report directly to and be responsible to the CBB in this context and will specify in their report any limitations placed on them in completing their work (for example due to the bank's group structure). The report produced by theappointed experts is the property of the CBB (but is usually shared by the CBB with the firm concerned).Added: October 2011BR-6.5.10
Compliance by
appointed experts with the contents of this Chapter will not, of itself, constitute a breach of any other duty owed by them to a bank (i.e. create aconflict of interest ).Added: October 2011BR-6.5.11
The CBB may appoint one or more of its officials to work on the
appointed experts' team for a bank.Added: October 2011The Required Report
BR-6.5.12
The scope of the required report will be determined and detailed by the CBB in the appointment letter. Commissioned
appointed experts would normally be required to report on one or more of the following aspects of a bank's business:(a) Accounting and other records;(b) Internal control systems;(c) Returns of information provided to the CBB;(d) Operations of certain departments; and/or(e) Other matters specified by the CBB.Added: October 2011BR-6.5.13
Appointed experts will be required to form an opinion on whether, during the period examined, the bank is in compliance with the relevant provisions of the CBB Law and the CBB's relevant requirements, as well as other requirements of Bahrain Law and, where relevant, industry best practice locally and/or internationally.Added: October 2011BR-6.5.14
The
appointed experts' report should follow the format set out in Appendix BR-12, in part B of the CBB Rulebook.Added: October 2011BR-6.5.15
Unless otherwise directed by the CBB or unless the circumstances described in Section BR-6.5.19 apply, the report must be discussed with the Board of directors and/or
senior management in advance of its being sent to the CBB.Added: October 2011BR-6.5.16
Where the report is
qualified by exception , the report must clearly set out the risks which the bank runs by not correcting the weakness, with an indication of the severity of the weakness should it not be corrected.Appointed experts will be expected to report on the type, nature and extent of any weaknesses found during their work, as well as the implications of a failure to address and resolve such weaknesses.Added: October 2011BR-6.5.17
If the
appointed experts conclude, after discussing the matter with the bank, that they will give a negative opinion (as opposed to onequalified by exception ) or that the issue of the report will be delayed, they must immediately inform the CBB in writing giving an explanation in this regard.Added: October 2011BR-6.5.18
The report must be completed, dated and submitted, together with any comments by directors or management (including any proposed timeframe within which the bank has committed to resolving any issues highlighted by the report), to the CBB within the timeframe applicable.
Added: October 2011Other Notifications to the CBB
BR-6.5.19
Appointed experts must communicate to the CBB, during the conduct of their duties, any reasonable belief or concern they may have that any of the requirements of the CBB, including the criteria for licensing a bank (see Module LR), are not or have not been fulfilled, or that there has been a material loss or there exists a significant risk of material loss in the concerned bank, or that the interests of customers are at risk because of adverse changes in the financial position or in the management or other resources of a bank. Notwithstanding the above, it is primarily the bank's responsibility to report such matters to the CBB.Added: October 2011BR-6.5.20
The CBB recognises that
appointed experts cannot be expected to be aware of all circumstances which, had they known of them, would have led them to make a communication to the CBB as outlined above. It is only whenappointed experts , in carrying out their duties, become aware of such a circumstance that they should make detailed inquiries with the above specific duty in mind.Added: October 2011BR-6.5.21
If
appointed experts decide to communicate directly with the CBB in the circumstances set out in Paragraph BR-6.5.19, they may wish to consider whether the matter should be reported at an appropriate senior level in the bank at the same time and whether an appropriate senior representative of the bank should be invited to attend the meeting with the CBB.Amended: January 2012
Added: October 2011Permitted Disclosure by the CBB
BR-6.5.22
Information which is confidential and has been obtained under, or for the purposes of, this chapter or the CBB Law may only be disclosed by the CBB in the circumstances permitted under the Law. This will allow the CBB to disclose information to
appointed experts to fulfil their duties. It should be noted, however, thatappointed experts must keep this information confidential and not divulge it to a third party except with the CBB's permission and/or unless required by Bahrain Law.Added: October 2011Trilateral Meeting
BR-6.5.23
The CBB may, at its discretion, call for a
trilateral meeting(s) to be held between the CBB and representatives of the relevant bank and theappointed experts . This meeting will provide an opportunity to discuss theappointed experts' examination of, and report on, the bank.Added: October 2011PD PD Public Disclosure Requirements
PD-A PD-A Introduction
PD-A.1 PD-A.1 Purpose
PD-A.1.1
The purpose of this Module is to set out the detailed qualitative and quantitative public disclosure requirements and disclosure to shareholders that banks should adhere to in order to enhance corporate governance and financial transparency through better practice in public disclosure. Such disclosures also help to protect customers and facilitate market discipline.
Amended October 2010
April 2008PD-A.1.2
This module provides support for certain other parts of the Rulebook, namely:
(a) Principles of Business;(b) High-level Controls;(c) Audit Firms;(d) CBB Reporting Requirements;(e) Capital Adequacy(f) Business and Market Conduct; and(g) Risk Management (i.e. market, credit, liquidity and operational).April 2008PD-A.1.3
This Module also provides support for certain aspects relating to disclosure requirements stipulated in the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006) and the Bahrain Commercial Companies Law (as amended).
April 2008PD-A.1.4
The Central Bank of Bahrain's ('CBB') disclosure requirements (in this Module) vary according to whether the concerned bank is a
Bahraini Islamic bank licensee (PD-1 and PD-3) or is anoverseas Islamic retail bank licensee (PD-2).Amended: April 2016
Amended January 2011
April 2008Legal Basis
PD-A.1.5
This Module contains the CBB's Directive (as amended from time to time) relating to public disclosure and disclosure to shareholders and is issued pursuant to the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). It also incorporates the requirements of Article 62 of the CBB Law with respect to the publication of financial statements. The Directive in this Module is applicable to all
Bahraini Islamic bank licensees (andoverseas Islamic retail bank licensees where applicable).Amended: April 2016
Amended: July 2012
Amended January 2011
Amended October 2010
April 2008PD-A.1.6
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
April 2008PD-A.2 PD-A.2 General Requirements
PD-A.2.1
All
Bahraini Islamic bank licensees must have a formal disclosure policy, inclusive of Shari'a issues, as part of their overall communications strategy approved by the Board of Directors (and supported by documented procedures) that addresses the disclosures that the bank makes and the internal controls over the disclosure process. In addition, allBahraini Islamic bank licensees must carry out an annual review of the validity of their disclosures (in terms of scope and accuracy) as outlined in Sections BR-5.2 and AU-3.2.Amended: July 2017
Amended: April 2016
April 2008PD-A.2.2
All
Bahraini Islamic bank licensees are required to publish their annual audited and reviewed quarterly financial statements per the rules set out in this Module and the CBB Law, Bahrain Commercial Companies Law (as amended), the Rulebook of thelicensed exchange and Volume 6 (Capital Markets), where applicable. Such financial statements must be prepared in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). When there are no specific accounting standards under AAOIFI, Islamic banks must use International Financial Reporting Standards (IFRS). Listed banks must refer to Paragraph PD-A.2.6.Amended: April 2016
Amended October 2011
Amended January 2011
Amended October 2010
April 2008PD-A.2.3
The CBB requires that each bank maintain an up-to-date checklist of all applicable AAOIFI standards and IFRS (where applicable) and also the disclosure requirements set out in this Module for full compliance purposes. Such checklists should be part of the bank's public disclosure procedures.
Amended October 2010
April 2008PD-A.2.4
The disclosure requirements specified in Chapters 1, 3 and 6 of this Module, which are in addition to those required by applicable accounting standards, must be reviewed by the bank's external auditor based upon agreed upon procedures (unless AAOIFI Standards or IFRS require that the concerned disclosures are audited). See also BR-1.1, BR-2.2 and AU-3.1 for more details.
Amended October 2011
Amended October 2010
April 2008PD-A.2.4A
The disclosure requirements mentioned in Paragraph PD-A.2.4 must be presented as an accompanying document or appendices to the Annual Report or in the Notes to the Financial Statements.
Amended: April 2016
October 2010PD-A.2.5
The external auditor must also review other statements in the Annual Report (such as the Chairman's report) to ensure that such statements are consistent with the audited financial statements and the disclosures required by this Module. All qualitative or descriptive disclosures in the Annual Report must be based upon, and be reflective of, the facts and actual practice employed by the bank (and be subject to the above review by the bank's external auditor).
Amended October 2010
April 2008PD-A.2.6
If situations arise where disclosures required in this Module are in conflict with those required under AAOIFI Standards and IFRS and/or any listing requirements issued by the CBB or a
licensed exchange , listed banks should first follow the CBB's requirements as contained in Volume 6 (Capital Markets). Unlisted banks should first follow AAOIFI standards. In such situations, banks should explain any material differences between the accounting or other disclosures and the disclosure required in this Module. This explanation does not have to take the form of a line by line reconciliation, but should provide stakeholders with sufficient detail to make an objective assessment of the bank's financial and operational health. Moreover, a formal notification to the CBB is required in such a situation.Amended: July 2012
Amended October 2011
Amended January 2011
Amended October 2010
April 2008PD-A.2.7
The bank should decide which disclosures are relevant for it based on the materiality concept and subject to the concurrence of the bank's external auditor. For the bank's guidance, information would be regarded as material if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions.
Amended October 2010
April 2008PD-A.2.8
Non-compliance with these disclosure requirements could lead to enforcement actions as outlined in Module EN (Enforcement).
Amended: April 2016
Amended October 2010
April 2008PD-A.2.9
The disclosures referred to in this Module must be made at the top consolidated level of a
banking group (i.e. at the level of the parent bank in Bahrain). Disclosures related to individual banks within abanking group will be required where listing requirements or differing accounting requirements necessitate such separate disclosure.Amended: April 2016
April 2008PD-A.2.10
With effect from 31st December 2016,
Bahraini Islamic bank licensees must follow a 3-step approach to provide a full reconciliation of all regulatory capital elements back to the published financial statements.Added: April 2016PD-A.2.10A
The 3-step approach is not based on a common template because the starting point for reconciliation, the bank's reported balance sheet, may vary slightly in composition from bank to bank. Full details of the reconciliation process and associated disclosures are provided in Appendix PD-2.
Added: April 2016PD-A.2.11
With effect from 31st December 2016,
Bahraini Islamic bank licensees must use a common template to provide a description of the main features of regulatory capital instruments issued. Full details are provided in Appendix PD-3.Added: April 2016PD-A.2.12
With effect from 31st December 2016,
Bahraini Islamic bank licensees must disclose the full terms and conditions of all outstanding regulatory capital instruments on their website.Added: April 2016PD-A.2.13
With effect from 31st December 2016,
Bahraini Islamic bank licensees must use a modified version of the post 1 January 2019 template mentioned in Paragraph PD-A.2.15 until 31 December 2018. This template is established to disclose the components of capital that are benefiting from the transitional arrangements. The template and accompanying notes are provided in Appendix PD-4.Added: April 2016PD-A.2.14
[This Paragraph has been left blank].
Added: April 2016PD-A.2.15
With effect from 1 January 2019,
Bahraini Islamic bank licensees must use a common template (set out in Appendix PD-1) to report the breakdown of their regulatory capital when the transition period for the phasing-in of deductions ends. The template is designed to disclose all regulatory adjustments, including amounts falling below thresholds for deduction, and thus enhance consistency and comparability in the disclosure of the elements of capital between banks and across jurisdictions.Added: April 2016PD-A.3 PD-A.3 Proprietary and Confidential Information
PD-A.3.1
Proprietary information encompasses information (for example on products or systems), that if shared with competitors would render a licensed bank's investment in these products/systems less valuable, and hence would undermine its competitive position. Information about customers is often confidential, in that it is provided under the terms of a legal agreement or counterparty relationship. This has an impact on what banks should reveal in terms of information about their customer base, as well as details on their internal arrangements, for instance methodologies used, parameter estimates, data etc.
April 2008PD-A.3.2
[This Paragraph was deleted in April 2016.]
Deleted: April 2016
Amended October 2010
April 2008PD-A.4 PD-A.4 Module History
PD-A.4.1
This module was first issued in January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 2010PD-A.4.2
The most recent changes made to this Module are detailed in the table below:
Module Ref. Change Date Description of Changes PD 2.1.5 & 3.1.7 Jan 2006 Revised notification for submission of accounts to the Agency PD 4.3 July 2006 Amendment to disclosure of charges requirements PD-A, PD-B, PD-1 & PD-3 Apr 2008 New Disclosures required by Basel II and IFSB PD-1.2.6 Apr 2010 Clarification of text re annual report submission PD 10/2010 Various minor amendments to ensure consistency in CBB Rulebook. PD-1.3.10 10/2010 Additional items for disclosure added to be in line with Corporate Governance Code. PD-6 10/2010 New Chapter added to deal with corporate governance disclosure to shareholders. PD-A.1.5 01/2011 Clarified legal basis. PD-A.2.2, PD-A.2.6, PD-1.3.43 and PD-1.4.1 01/2011 Changes made to reflect new reference to licensed exchange. PD-1.2, PD-2.1.4, PD-2.1.5, PD-3.1.4 , and PD-5.1.1 04/2011 Clarified requirements for due date. PD-1.1.1 04/2011 Corrected reference to the Rulebook of the licensed exchange. PD-A.2.2, PD-A.2.6 and PD-1.3.43 (c). 10/2011 Reference added to Volume 6 (Capital Markets). PD-A.2.4 10/2011 Clarification of existing requirement for the Agreed Upon Procedures Report and setting a deadline for the submission of the report. PD-1.5 10/2011 Added a Section on Press Release on Annual Results. PD-1.3.23 (j) and PD-3.1.3 10/2011 Amended Subparagraph to be consistent with other Volumes of the Rulebook. PD-1.3.10 01/2012 Amended corporate governance disclosure in annual report. PD-6.1.1 01/2012 Amended disclosure requirements to shareholders. PD-1.1.1 04/2012 Expanded the scope of this Chapter to also apply to retail branches of foreign banks. PD-1.2.3 04/2012 Clarified financial statements that must be disclosed by locally incorporated banks. PD-1.2A 04/2012 Added requirements for annual audited financial statements of retail branches of foreign banks. PD-1.3.10 (x) 04/2012 Clarified nature of disclosure in relation to Module HC. PD-2.1.2 04/2012 Clarified what interim semi-annual statements are to be disclosed by retail branches of foreign banks. PD-3.1.4 04/2012 Clarified quarterly disclosure requirements. PD-3.1.6 04/2012 Clarified deadline for disclosing additional semi-annual disclosures. PD-5.1.1 04/2012 Paragraph deleted as it repeats contents of Paragraph PD-3.1.4. PD-A.1.5 07/2012 Added reference to Article 62 of the CBB Law. PD-A.2.6 07/2012 Clarified priority of Rule to follow where there is a conflict. PD-1.3.10 07/2012 Clarified content of disclosure on corporate governance. PD-4.5 07/2012 New Section added on press release concerning financial statements. PD-1.3.10 10/2012 Amended the requirement for banks to maintain a website under (bb). PD-4.2 10/2012 This Section was deleted and requirements are now included in Section BC-4.2. PD-4.3 10/2012 Clarified title of this Section. PD-1.3.10 to PD-1.3.10F 01/2014 Additional disclosure requirements related to sound remuneration practices. PD-1.3.10C, PD-1.3.10F and PD-1.3.10G 07/2014 Amended disclosure requirements pertaining to remuneration. PD-2.1 10/2014 Clarified that this Section only applies to retail branches of foreign banks. PD-1.3.10B(o) 04/2015 Clarified that disclosure rule under this Subparagraph only applies for approved persons and material risk takers. PD-A.2, PD-A.3, PD-B, PD-1.1, PD-1.2, PD-1.3, PD-1.4 , PD-3.1, PD-4.2, PD-4.3 04/2016 New Disclosures required by Basel III and alignment related changes for Deposit and URIA Protection scheme and disclosures relating to approved persons. PD-1.2.6 04/2016 The annual report must be submitted as a soft copy to the CBB. PD-1.3.10 04/2016 Paragraph restructured and clarified to eliminate certain redundancies. PD-3.1.6 04/2016 Due date changed to 2 months to be aligned with requirements under Paragraph BR-2.2.3. PD-5.1.3 04/2015 Paragraph deleted as requirements included under Paragraph PD-5.1.2. PD-A.2.1 07/2017 Amended the general requirements to include the term 'inclusive of Shari'a issues'. PD-1.2.1 07/2017 Amended wording of the paragraph. PD-1.3.1 07/2017 Amended paragraph cross-reference. PD-1.2A.2 07/2018 Amended Paragraph on 'Publication of Annual Audited Financial Statements' publication time frame. PD-1.3.44 10/2019 Amended Paragraph on disclosure of financial penalties of Bahraini Islamic banks. PD-1.3A 10/2019 Added a new Section on disclosures requirements pertaining to branches of foreign banks. PD-3.1.6 (g) 10/2020 Amended reference. PD-3.1.6 (h) 10/2020 Deleted reference. PD-1.3.10(x) 04/2023 Deleted Subparagraph. PD-6.1.2 04/2023 Added a new Paragraph on disclosure in the annual report. PD-6.1.3 04/2023 Added a new Paragraph on publishing internal corporate governance policies. PD-1.2.5, PD-2.1.5 & PD-3.1.5 07/2023 Amended Paragraphs on submission of newspaper extracts of financial statements. Effective Date
PD-A.4.3
The contents in this Module are effective January 2005 or from the effective date of the summary of changes as shown above in the above table. Changes to Chapter PD-6 are effective 1st January 2011.
Amended October 2010
April 2008PD-B PD-B General Guidance and Best Practice
PD-B.1 PD-B.1 Guidance Provided by International Bodies
PD-B.1.1
[This Section was deleted in April 2016.]
Deleted: April 2016
April 2008PD-1 PD-1 Annual Disclosure Requirements
PD-1.1 PD-1.1 Introduction
PD-1.1.1
The purpose of this Chapter is to set out the CBB's requirements relating to the disclosure of information in the annual audited financial statements ('Annual Report') of
Bahraini Islamic bank licensees as well as foroverseas Islamic retail bank licensees . This Chapter also refers to the Bahrain Commercial Companies Law (as amended) and the Rulebook of thelicensed exchange relating to public disclosure and reporting requirements.Amended: April 2016
Amended April 2012
Amended April 2011
Amended October 2010
April 2008PD-1.1.2
For the purpose of this Chapter, the following definitions apply:
(a)Approved person means any person occupying acontrolled function as outlined in Section LR-1A.1;(b) 'Interest in the shares' shall include, but not be limited to, direct and/or indirect ownership of such shares, the right of voting associated with such shares, the right to receive dividends payable on such shares, and/or any right, regardless of the form thereof, to purchase (or otherwise acquire an interest in) such shares at any time;(c) 'Audited financial statements' refers to the financial statements required under AAOIFI or International Financial Reporting Standards; and(d) 'Annual Report' refers to the document which contains the full audited financial statements and accompanying notes as well as any accompanying commentary by the senior officials of the bank.Amended: April 2016
Amended October 2010
April 2008PD-1.2 PD-1.2 Requirements for Annual Audited Financial Statements and Annual Report for Bahraini Islamic Banks
Submission of Annual Audited Financial Statements
PD-1.2.1
All
Bahraini Islamic bank licensees must submit their annual audited financial statements to the CBB within 3 months of the end of the bank's financial year (as required by Article 62 of the CBB Law). Banks' annual audited financial statements must be audited by their external auditor.Amended: July 2017
Amended: April 2016
Amended April 2011
Amended October 2010
April 2008PD-1.2.2
Banks are also required to place the full annual audited financial statements reports on their website (see also PD-1.3.10 (h)) within one week of submission to the CBB.
Amended April 2011
April 2008Publication of Annual Audited Financial Statements
PD-1.2.3
Banks must publish extracts from their annual audited financial statements in one Arabic and one English daily newspaper within 2 months of the end of the financial year. The newspaper disclosures may be edited so that notes are not included, but must include at a minimum the statement of financial position (balance sheet), the statements of income, cash flow and changes in equity and where applicable, the statement of comprehensive income. The newspaper disclosures must be placed on the bank's website within one week of publication.
Amended: April 2016
Amended April 2012
Amended April 2011
Amended October 2010
April 2008PD-1.2.4
The newspaper disclosures should include a reference to the fact that the published figures "have been extracted from financial statements audited by XYZ auditor, who expressed an unqualified opinion on (dated report)". Banks must disclose in full any audit qualifications or matter of emphasis paragraphs contained within the auditor's opinion. The auditor's opinion must be made in accordance with AAOIFI's Standards on Auditing and the International Standards on Auditing as established by the International Federation of Accountants (as appropriate).
Amended October 2010
April 2008PD-1.2.5
Banks must submit a newspaper copy of the published annual audited financial statements to the CBB within two business days of publication in the concerned newspapers clearly showing on which date and in which publications the statements were published.
Amended July 2023
Amended April 2011
April 2008Submission of Annual Report
PD-1.2.6
All
Bahraini Islamic bank licensees must submit a soft copy (electronic) of their annual report to the CBB, including the full disclosures and appendices prescribed in this Chapter within 4 months of the end of the bank's financial year.Amended: April 2016
Amended April 2011
Amended October 2010
Amended April 2010
April 2008PD-1.2.7
Banks are also required to place the annual report with full disclosures and appendices on their website (see also PD-1.3.10(h)) within one week of submission to the CBB.
Amended: April 2016
Amended April 2011
Amended October 2010
April 2008PD-1.2A PD-1.2A Requirements for Annual Audited Financial Statements for Overseas Islamic Retail Banks
Submission of Annual Audited Financial Statements
PD-1.2A.1
All
overseas Islamic retail bank licensees must submit their annual audited financial statements to the CBB within 3 months of the end of the bank's financial year (as required by Article 62 of the CBB Law).Amended: April 2016
Added April 2012Publication of Annual Audited Financial Statements
PD-1.2A.2
Banks must publish extracts from their audited annual financial statements in one Arabic and one English daily newspaper within 3 months of the end of the financial year. The newspaper disclosures may be edited, but must include at a minimum the statement of financial position (balance sheet), the statements of income and cash flow and where applicable, of comprehensive income.
Amended: July 2018
Amended: April 2016
Added April 2012PD-1.3 PD-1.3 Disclosures in the Annual Report for Bahraini Islamic Banks
Introduction
PD-1.3.1
Banks (referred to under Paragraph PD-1.2.6 — hereafter referred to as "banks") should provide timely information which facilitates market participants' assessment of them. The disclosure requirements set out in this Section must be included in the Annual Report either as an Appendix or in the notes to the Audited Financial Statements at the discretion of the concerned bank. The disclosures should be addressed in clear terms and with appropriate details to help achieve a satisfactory level of bank transparency.
Amended: July 2017
April 2008PD-1.3.2
The disclosure requirements listed in Paragraphs PD-1.3.4 to PD-1.3.31 below follow the requirements of Basel II Pillar 3 and are in addition to, or in some cases, serve to clarify the disclosure requirements of AAOIFI and/or IFRS as appropriate.
Amended: April 2016
Amended October 2010
April 2008PD-1.3.3
If a bank is not able to achieve full compliance with the requirements stated in this Chapter, a meeting should be held with the Director of Islamic Financial Institutions Directorate at the CBB in the presence of the concerned external auditor to discuss the reasons for such non-compliance prior to the finalisation of the annual report. It is the responsibility of the bank to call for such meetings.
Amended October 2010
April 2008Investment Accounts
PD-1.3.4
Restricted investment accounts are to be reported off-balance sheet in the financial statements.
April 2008PD-1.3.5
Unrestricted investment accounts are to be reported on-balance sheet in the financial statements.
April 2008Scope of Application — Qualitative Disclosures
PD-1.3.6
The following information must be disclosed in relation to the parent bank (in Bahrain) and its banking and financial institution
subsidiaries :(a) The full legal name of the top corporate entity in the group to which the disclosure requirements apply;(b) [This Subparagraph was deleted in April 2016 and replaced with Paragraph PD-1.3.14]; and(c) Any restrictions on the transfer of funds or regulatory capital within the group (e.g. large exposure or exchange control regulations or covenants over the repayment of capital or the payment of dividends).Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Scope of Application — Quantitative Disclosures
PD-1.3.7
The aggregate amounts (current book value) of the bank's total interests in insurance entities, which are risk-weighted rather than deducted from capital or subjected to an alternate group-wide methodology, as well as their name, their country of incorporation or residence, and the proportion of voting power in these entities must be disclosed (in relation to the parent bank). In addition, banks must disclose the quantitative impact on regulatory capital of using this method versus the deduction or alternate group-wide method.
Amended: April 2016
Amended April 2011
Amended October 2010
April 2008PD-1.3.8
[This Paragraph was deleted in April 2016].
Deleted: April 2016
Amended October 2010
April 2008Financial Performance and Position
PD-1.3.9
The following information relating to the financial performance and position of the bank should be included:
(a) Discussion of the main factors that influenced the bank's financial performance for the year, explaining any differences in performance between the current year and previous years and the reasons for such differences, and discussing factors that will have a significant influence on the bank's future financial performance;(b) Basic quantitative indicators of financial performance including, but not restricted to,ROAE ,ROAA , cost-to-income ratios etc. for the past 5 years;(c) A discussion of the impact of acquisitions of new businesses and discontinued business and unusual items; and(d) A discussion of the impact of changes in the capital structure and their possible impact on earnings and dividends.Amended April 2011
April 2008Corporate Governance and Transparency
PD-1.3.10
The following information relating to corporate governance must be disclosed in the annual report:
(a) Information about the Board structure (e.g. the size of the Board, Board committees, function of committees and membership showing executive, non-executive and independent members, number and names of independent board members), and the basic organisational structure (lines of business structure and legal entity structure);(b) Information about the profession, business title, and experience in years of each Board member and the qualifications and experience in years of allsenior managers ;(c) Descriptive information on the managerial structure, including:(i) Committees (see below for detailed disclosure requirements relating to various types of committees);(ii) Segregation of duties;(iii) Reporting lines; and(iv) Responsibilities;(d) Descriptive information on the performance-linked incentive structure forapproved persons (including but not limited to remuneration policies, executive compensation and stockoptions );(e) Nature and extent of transactions with related parties (as defined by AAOIFI and IFRS as appropriate see also PD-1.3.23(d));(f) Approval process for related party transactions;(g) Information about any changes in the structures (as mentioned in Subparagraphs PD-1.3.10(a) to PD-1.3.10(c) above) from prior periods;(h) The communications strategy approved by the Board (including the use of the bank's website) which should perform at least the following:(i) The disclosure of all relevant information to stakeholders on a timely basis in a timely manner; and(ii) The provision of at least the last three years of financial data on the bank's website;(i) Distribution of ownership of shares by nationality;(j) Directors' andsenior managers' trading of the bank's shares during the year, on an individual basis;(k) Distribution of ownership of shares by directors andsenior managers , on an individual basis;(l) Distribution of ownership of shares by size of shareholder;(m) Ownership of shares by government;(n) The Board's functions — rather than a general statement (which could be disclosed simply as the Board's legal obligations under various laws) the 'mandate' of the Board should be set out;(o) The types of material transactions that require Board approval;(p) [This Subparagraph was deleted in April 2016 and requirements are now included in Subparagraph (a)];(q) Board terms and start date for each term for each director;(r) What the board does to induct, educate and orient new directors;(s) Election system of directors and any termination arrangements;(t) [This Subparagraph was deleted in April 2016 and requirements moved to Subparagraph (w)];(u) [This Subparagraph was deleted in April 2016 and requirements moved to Subparagraph (w)];(v) Whether the board has adopted a written code of ethical business conduct, and if so the text of that code and a statement of how the board monitors compliance;(w) Minimum number of Board committee meetings compared with the actual dates and number of board and committee meetings, individual attendance of each director and the work of committees and any significant issues arising during the period;(x) [This Subparagraph was deleted in April 2013];(y) Review of internal control processes and procedures;(z) Directors responsibility with regard to the preparation of financial statements;(aa) Board of Directors — whether or not the board, its committees and individual directors are regularly assessed with respect to their effectiveness and contribution;(bb)Bahraini Islamic bank licensees must maintain a website.Overseas Islamic retail bank licensees must provide a link on their website in Bahrain to the website of their parent bank;(cc) Descriptive information on any investor/ consumer awareness programmes for information on new products and services;(dd) Information on any mediation and advice bureaus for investors and customers set up by the bank, including clearly written procedures for logging of complaints;(ee) Social functions and charitable contributions of the bank;(ff) Descriptive information on the governance arrangements, systems and controls employed by the bank to ensure Shari'a compliance and on how these meet applicable AAOIFI standards, and if there is less than full compliance, an explanation of the reasons for non-compliance;(gg) How non-Shari'a-compliant earnings and expenditure occur and the manner in which they are disposed of; and(hh) The annual zakah contributions of the bank, where relevant;(ii) Aggregate remuneration paid to board members;(jj) Key features and objectives of the remuneration policy of the bank for board members, Shari'a Board andsenior management as well as the frequency of review of the remuneration structure and the extent to which the policy is applicable to foreignsubsidiaries and branches; and(kk) Aggregate remuneration paid tosenior management .Amended: April 2023
Amended: April 2016
Amended: January 2014
Amended: October 2012
Amended: July 2012
Amended April 2012
Amended January 2012
Amended April 2011
Amended October 2010
April 2008PD-1.3.10A
With regards to corporate governance, banks are subject to additional disclosure requirements on corporate governance, whereby such disclosures are for the benefit of shareholders (See Chapter PD-6)
Amended: April 2016
October 2010Additional Disclosure Requirements Pertaining to Remuneration
PD-1.3.10B
In addition to the remuneration related disclosure included under Paragraph PD-1.3.10, the following qualitative and quantitative information pertaining to remuneration practices and policies covering the following areas must be disclosed in the annual report:
(a) The name, composition and mandate of the main body overseeing remuneration;(b) Whether external consultants' advice has been sought and by whom in the bank and in what areas of the remuneration process the consultants have been involved;(c) The independence of remuneration for staff in risk management, internal audit, operations, financial controls, AML, internal shari'a review/audit and compliance functions;(d) The risk adjustment methodologies;(e) The link between remuneration and performance;(f) The long-term performance measures (deferral,malus ,clawback );(g) The types of remuneration (cash/equity, fixed/variable);(h) Whether the remuneration committee reviewed the bank's remuneration policy during the past year, and if so, an overview of any changes that were made;(i) A discussion of how the bank ensures thatapproved persons engaged in risk management, internal audit, operations, financial controls, AML, internal shari'a review/audit and compliance functions are remunerated independently of the business units they oversee;(j) Description of the ways in which the current and future risks are taken into account in the remuneration processes. Disclosures must include:(i) An overview of the key risks that the bank takes into account when implementing remuneration measures;(ii) An overview of the nature and type of the key measures used to take account of these risks, including risks difficult to measure;(iii) A discussion on the ways in which these measures affect remuneration; and(iv) A discussion of how the nature and type of these measures have changed over the past year and reasons for the change, as well as the impact of changes on remuneration;(k) Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration. Disclosures must include:(i) An overview of main performance metrics for bank, top-level business lines and individuals;(ii) A discussion of how amounts of individual remuneration are linked to bank-wide and individual performance; and(iii) A discussion of the measures the bank will in general implement to adjust remuneration in the event that performance metrics are weak1;(l) Description of the ways in which the bank seeks to adjust remuneration to take account of longer term performance. Disclosures must include:(i) A discussion of the bank's policy on deferral and vesting of variable remuneration and, if the fraction of variable remuneration that is deferred differs across employees or groups of employees, a description of the factors that determine the fraction and their relative importance; and(ii) A discussion of the bank's policy and criteria for adjusting deferred remuneration before vesting and after vesting throughclawback arrangements;(m) Description of the different forms of variable remuneration that the bank utilises and the rationale for using these different forms. Disclosures must include:(i) An overview of the forms of variable remuneration offered (i.e. cash, shares and share-linked instruments and other forms2); and(ii) A discussion of the use of the different forms of variable remuneration and, if the mix of different forms of variable remuneration differs across employees or group of employees, a description of the factors that determine the mix and their relative importance;(n) Number of meetings held by the main body overseeing remuneration during the financial year and aggregate remuneration paid to its members;(o) Number and total amount of remuneration forapproved persons andmaterial risk takers for the financial year split into fixed and variable remuneration;(p) Number and total amount of variable remuneration awarded during the financial year, split into cash, shares and share-linked instruments and other;(q) Number and total amount of guaranteed bonuses awarded during the financial year;(r) Number and total amount of sign-on awards made during the financial year;(s) Number and total amount of severance payments made during the financial year, and highest such award to a single person;(t) Total amount of outstanding deferred remuneration, split into cash, shares and share-linked instruments and other forms; and(u) Total amount of deferred remuneration awarded during the financial year, paid out and reduced through performance adjustments.
1 This should include the bank's criteria for determining weak performance metrics.
2 A description of the elements corresponding to other forms of variable remuneration must be provided.
Amended: April 2016
Amended: April 2015
Amended: July 2014
Added: January 2014PD-1.3.10C
The disclosure of remuneration practices must cover
approved persons andmaterial risk-takers and must be broken down as follows:(a) Members of the board of directors;(b)Approved persons in business lines;(c)Approved persons in risk management, internal audit, operations, financial controls, internal Shari'a review/audit, AML and compliance functions; and(d) Material risk-takers not falling under categories (a) to (c).Amended: July 2014
Added: January 2014PD-1.3.10D
Disclosure requirements for items under Subparagraph PD-1.3.10B (n) to (u) must be provided for the current as well as for the previous financial year.
Added: January 2014PD-1.3.10E
Disclosure requirements for items under Subparagraph PD-1.3.10B (o) and (p) may be presented in a table format split between members of the Board and other
approved persons , as well asmaterial risk-takers .Added: January 2014PD-1.3.10F
For purposes of Paragraph PD-1.3.10E, the table referred to should be completed separately for:
(a) Members of the board of directors;
Total value of remuneration awards
for the current fiscal yearUnrestricted Fixed remuneration • Sitting Fees X • Other (please specify) X (b)Approved persons in business lines;(c)Approved persons in risk management, internal audit, operation, financial controls, internal Shari'a review/audit, AML and compliance functions; and(d)Material risk-takers not falling under categories (a) to (c).
Total value of remuneration awards
for the current fiscal yearUnrestricted Deferred Fixed remuneration • Cash-based X X • Shares and share-linked instruments X X • Other X X Variable remuneration • Cash-based X X • Shares and share-linked instruments X X • Other X X
Amended: July 2014
Added: January 2014PD-1.3.10G
In instances where a bank has no
approved persons ormaterial risk-takers whose remuneration is in excess of BD100,000 as per Paragraph HC-5.4.2, the disclosure requirements under Subparagraphs PD-1.3.10B(f), (g), (l), (m), (t) and (u) are not required.Amended: July 2014
Added: January 2014Capital Structure — Qualitative Disclosures
PD-1.3.11
All banks must disclose on their website summary descriptive information on the types, forms, terms and conditions of the main features of all capital- and equity-related instruments and unrestricted investment accounts listed below in PD-1.3.12, PD-1.3.13 and PD-1.3.15, especially in the case of innovative, complex or hybrid capital instruments. Full details of the required disclosures are given in Appendix PD-3.
Amended: April 2016
April 2008Capital Structure — Quantitative Disclosures
PD-1.3.12
From 31st December 2016 until 31st December 2018, all banks must disclose with separate disclosures of individual items as detailed in Appendix PD-4 the following items:
(a) The amount of Tier One Capital;(b) The amount of Tier Two Capital; and(c) Required capital ratios and buffers.Amended: April 2016
Amended April 2011
April 2008PD-1.3.13
From 1st January 2019, the disclosures referred to under Paragraph PD-1.3.12, must be made in accordance with Appendix PD-1.
Amended: April 2016
Amended April 2011
April 2008PD-1.3.14
From 31st December 2016, all banks must disclose a full reconciliation of all regulatory capital elements back to the balance sheet in the audited financial statements as required under Appendix PD-2.
Amended: April 2016
Amended October 2010
April 2008PD-1.3.15
[This Paragraph was deleted in April 2016.]
Deleted: April 2016
April 2008Capital Adequacy
PD-1.3.16
All banks must present a summary discussion of the bank's approach to assessing the adequacy of capital to support current and future activities both on a risk-based capital basis (i.e. as in Chapters CA-1 and CA-2). All banks must also disclose a description of the policy on identifying assets suitable for funding by unrestricted investment accounts.
Amended: April 2016
April 2008PD-1.3.17
All banks must disclose the regulatory capital requirements for
credit risk by each type of Islamic financing contract and for securitisation exposures (usually sukuk).Amended: April 2016
April 2008PD-1.3.18
All banks must disclose their capital requirements for
market risk using the standardised approach.Amended: April 2016
April 2008PD-1.3.19
All banks must disclose their capital requirements for
operational risk under:(a) The basic indicator approach; or(b) The standardised approach (as applicable).Amended: April 2016
Amended April 2011
April 2008PD-1.3.20
All banks must disclose their total and Tier One Capital Ratios on the following basis:
(a) For the top consolidated group in Bahrain; and(b) For all significant banksubsidiaries (whose regulatory capital amounts to over 5% of group consolidated regulatory capital whether on a stand-alone or sub-consolidated basis).Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Risk: General Qualitative Disclosure Requirements
PD-1.3.21
All banks must describe their risk management objectives and policies for each separate risk area below and provide information on whether or not strategies used have been effective throughout the reporting period. The strategies, processes and internal controls (including internal audit) must be described for each area below along with the structure and organisation of the relevant risk management function, and the scope and nature of risk reporting systems and policies for hedging/mitigating risk and strategies for monitoring the continuing effectiveness of hedges/mitigants. There are also certain specific disclosures for each of these areas in addition to the general qualitative disclosures required by this paragraph.
(b) Market Risk (see also PD-1.3.27);(d) Equity Risk in the Banking Book (see also PD-1.3.31);(f) Displaced Commercial Risk (see also PD-1.3.41).Amended April 2011
Amended October 2010
April 2008Credit Risk — Qualitative Disclosures
PD-1.3.22
All banks must make the general qualitative disclosures outlined in PD-1.3.21 above, as well as those below:
(a) Definition of past due and impaired Islamic financing contracts;(b) Description of the approaches for specific and general impairment provisions and the associated statistical methods used (where applicable);(c) The name of External Credit Assessment Institutions (ECAIs) used for assigning risk weights to assets;(d) The types of exposure for which each ECAI is used; and(e) The process used to transfer ECAI public issue ratings onto comparable (financing) assets in the banking book.Amended April 2011
Amended October 2010
April 2008Credit Risk — Quantitative Disclosures
PD-1.3.23
All banks must disclose the following, giving, where applicable, the percentages funded by the banks own capital and current accounts, and by Profit Sharing Investment Accounts (PSIA) respectively:
(a) Total gross credit exposures (gross outstanding before any risk mitigation) plus average gross exposures over the period broken down by major types of credit exposure (as outlined under IFRS) into funded and unfunded exposures. Where the period end position is representative of the risk positions of the bank during the period, average gross exposures need not be disclosed. Banks must state that average gross exposures have not been disclosed for this reason. Where average amounts are disclosed in accordance with an accounting standard or other requirement which specifies the calculation method to be used, that method should be followed. Otherwise, the average exposures should be calculated using the most frequent interval that an entity's systems generate for management, regulatory or other reasons, provided that the resulting averages are representative of the licensed bank's operations. The basis used for calculating averages needs to be stated;(b) Geographic distribution of exposures, broken down into significant areas by major types of credit exposure. Geographical areas may be individual countries, or groups of countries. Banks may define the geographical area according to how they manage the concerned areas internally. The criteria used to allocate exposures to particular geographical areas should be specified;(c) Distribution of exposures by industry or counterparty type, broken down by major types of credit exposure, broken down by funded and unfunded exposure;(d) Intra-group transactions including exposures to related parties as required by accounting standards (relevant AAOIFI or IFRS), and whether such transactions have been made on an arm's length basis;(e) Credit or financing facilities to highly leveraged and other high risk counterparties (as defined in PD-1.3.24) must be separately disclosed as an individual category;(f) Banks must disclose concentrations of risk to individual counterparties where the exposure is in excess of the 15% individual obligor limit. These do not require the disclosure of the name of the counterparty;(g) Residual contractual maturity breakdown (see PD-1.3.24(a) of the whole portfolio, broken down by major types of credit exposure;(h) By major industry or counterparty type:(i) Amount of non-performing and impaired Islamic financing contracts and past due Islamic financing contracts (see PD-1.3.24);(ii) Amount and changes in specific and collective impairment provisions during the financial year (see PD-1.3.24);(iii) Charges for specific provisions and charge-offs (write-offs) during the period; and(iv) Reconciliation of changes in provisions for Islamic financing contracts impairment.(i) Amount of past due Islamic financing contracts, provided separately broken down by significant geographic areas including the amounts of specific and collective impairment provisions related to each geographical area (see PD-1.3.24 for definition of geographical area);(j) Aggregate quantitative information about all outstanding Islamic financing contracts at year end not included in (h) above that have been restructured (according to the PIR instructions) during the period including:(i) The balance of any restructured Islamic financing contracts;(ii) The magnitude of any restructuring activity;(iii) The impact of restructured Islamic financing contracts on provisions and present and future earnings; and(iv) The basic nature of concessions on all credit relationships that are restructured.If full repayment is expected, the restructured credit need not be disclosed in this section after satisfactory performance for a period of six months in accordance with the modified terms;(k) Quantitative information concerning obligations with respect to recourse transactions (i.e. where the asset has been sold, but the bank retains responsibility for repayment if the original counterparty defaults or fails to fulfil obligations). Information must include the amount of assets sold and any expected losses; and(l) Any penalties imposed on customers for default and the disposition of any monies received as penalties.Amended: April 2016
Amended October 2011
Amended April 2011
Amended October 2010
April 2008PD-1.3.24
For Paragraph PD-1.3.23, the following notes are provided:
(a) Banks must follow the residual maturity groupings currently followed under IFRS 7 (Guidance Note B 11 & B 12), but they must also extend the periods to include 5-10 years, 10-20 years, and 20 years and over (where the banks have exposures or liabilities of such maturity);(b) In PD-1.3.23(h), banks must provide an ageing of past due, non-performing or impaired Islamic financing contracts on the following basis:(i) Ageing schedule (over 3 months, over 1 year and over 3 years) of past due Islamic financing contracts and other assets; and(ii) Breakdown by relevant counterparty type or major industry;(c) For specific, collective, general and other impairment provisions, the portion of provisions not allocated to specific geographical areas should be shown separately;(d) The reconciliation of changes in provisions should show such provisions separately;(e) "Highly leveraged and other high risk counterparties" follow the categorisation given in the Basel Committee Paper of March 2001, entitled "Review of issues relating to Highly Leveraged Institutions (HLIs)" which described HLIs as having the following characteristics:(i) They are subject to little or no regulatory oversight;(ii) They are generally subject to very limited disclosure requirements and are not subject to rating by credit reference agencies; and(iii) HLIs often take on significant leverage, where leverage is the ratio between risk, expressed in some common denominator, and capital.Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Credit Risk Mitigation: Disclosure Requirements
PD-1.3.25
(a) For Credit Risk Mitigation, banks must make the qualitative disclosures of PD-1.3.21 and PD-1.3.22, and also the following disclosures (with regard to credit risk mitigation):(i) Policies and processes for, and an indication of the extent to which the bank makes use of on- and off-balance sheet netting, if at all;(ii) Policies and processes for collateral valuation and management;(iii) A description of the main types of collateral or other Shari'a Compliant risk mitigation techniques employed by the bank;(iv) The main types of guarantor and their credit worthiness;(v) Information about (market or credit) risk concentrations within the credit risk mitigation taken;(vi) Policies and the carrying amounts for assets owned and leased under Ijarah Muntahia Bittamleek;(vii) Where a third party guarantee is taken as a risk mitigant, the risk weight applicable to the guarantor should be disclosed and the Shari'a compliance of the guarantee confirmed; and(viii) The nature and carrying amount of any assets held by the bank as collateral (including any haircuts) and the terms and conditions relating to the pledges. When the assets are not readily convertible into cash by the bank, the policies for disposing of the assets, or for using them in the bank's operations, should be disclosed;(b) AllBahraini Islamic bank licensees must disclose by type of Islamic financing contract , the total exposure (after on- or off-balance sheet netting, where applicable) that is covered by eligible collateral after the application of haircuts; and(c) AllBahraini Islamic bank licensees must disclose the total exposure (after on- or off-balance sheet netting where applicable) that is covered by guarantees by type of Islamic financing contract.Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Disclosures Related to Counterparty Credit Risk (CCR)
PD-1.3.26
All
Bahraini Islamic bank licensees must make the following disclosures regarding counterparty credit risk:(a) The general qualitative disclosures (PD-1.3.21 and PD-1.3.22) with respect to CCR including:(i) Discussion of methodology used to assign capital and credit limits for counterparty credit exposures;(ii) Discussion of policies for securing collateral and establishing credit provisions; and(iii) Discussion of the impact of the amount of collateral the bank would have to provide if given a credit rating downgrade; and(b) Gross positive fair value of contracts, netting benefits, netted current credit exposures and collateral held (including type: e.g. cash, government securities, etc.). Also measures for exposure at default. The distribution of current credit exposure by type of credit exposure (e.g. FX contracts, equity contracts, commodity contracts, etc.).Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Market Risk Disclosures for Banks
PD-1.3.27
Banks must disclose the following items:
(a) The general qualitative disclosure requirements formarket risk (PD-1.3.21), identifying the concerned portfolios (special mention must be made of assets that do not have a ready market and/or which are exposed to high price volatility); and(b) The capital requirements for each category of themarket risk items:(i) Equity position risk;(ii) Market risk on trading positions in sukuk;(iii) Foreign exchange risk (i.e. net open position); and(iv) Commodity risk (i.e. price risk).on an end period basis, as well as showing the maximum and minimum values during the period for each category ofmarket risk shown above; and(c) The disclosures under Subparagraph PD-1.3.27 (b) must be followed by detailed quantitative information about the nature and extent of profit-rate sensitive assets and liabilities and off-balance sheet exposures (e.g. breakdown of fixed and floating rate items and the net profit rate margin earned, and the duration and effective profit rate of assets and liabilities). These disclosures should be by each portfolio identified in Subparagraph PD-1.3.27 (a), showing their related gains and losses. Also, the effect on the value of assets, liabilities and capital for a 200bp change in profit rates should be disclosed.Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Operational Risk Disclosures
PD-1.3.28
All banks must disclose the general qualitative disclosures (PD-1.3.21) and also the approach(es) for
operational risk which the bank employs to control such risk, and disclosures of any issues considered to be individually significant.Amended: April 2016
April 2008Operational Risk Qualitative Disclosures
PD-1.3.29
The following additional qualitative disclosures (to Paragraph PD-1.3.21) should be made for operational risk:
(a) Policies to incorporate operational risk measures into the management framework — for example budgeting, target-setting, and performance review and compliance;(b) Policies and processes:(i) To help track loss events and potential exposures;(ii) To report to these losses, indicators and scenarios on a regular basis; and(iii) To review the reports jointly by risk and line managers;(c) Policies on the loss mitigation process via contingency planning, business continuity planning, staff training and enhancement of internal controls, as well as business processes and infrastructures; and(d) A statement of how banks manage and control operational risks arising from pending legal actions.Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Operational Risk Quantitative Disclosures
PD-1.3.30
The following quantitative disclosures should be made for operational risk:
(a) The calculation of the capital charge or RWA equivalent for operational risk;(b) Indicators of operational risk exposures, such as:(i) Gross income;(ii) Amount of non-Shari'a-compliant income; and(iii) Number of Shari'a violations that were identified and reported during the financial year; and(c) Material legal contingencies including pending legal actions and a discussion and estimate of the potential liabilities.Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Disclosure Requirements for Equity Positions in the Banking Book
PD-1.3.31
All banks must make the following disclosures for any equities held in the Banking Book:
(a) The general qualitative disclosure requirement (PD-1.3.21) with respect to equity risk, including:(i) Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons; and(ii) Discussion of important policies covering the valuation and accounting of equity holdings in the banking book. This includes the accounting policies and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices;(b) Total gross exposure and average gross exposure to equity-based financing structures by type of financing contract;(c) The types and nature of investments, including the amount that can be classified as quoted on an active market or privately held;(d) The cumulative realised gains (or losses) arising from sales or liquidations in the reporting period;(e) Total unrealised gains and losses recognised in the balance sheet but not through the P&L;(f) Any unrealised gains and losses included in Tier One and Tier Two capital; and(g) Capital requirements broken down by appropriate equity groupings, consistent with the methodology, as well as the aggregate amounts and type of equity investments subject to any supervisory transition or grandfathering provisions regarding regulatory capital requirement.Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Unrestricted Investment Accounts: Qualitative Disclosures
PD-1.3.32
The following qualitative disclosures should be made when the concerned Islamic bank has unrestricted investment accounts:
(a) Written procedures and policies applicable to the investment accounts, including a synopsis of the following:(i) General applicable investment objectives;(ii) Range of investment products available;(iii) Characteristics of investors for whom various investment accounts may be appropriate;(iv) Purchase, redemption and distribution procedures, including IAH's rights to withdraw funds during the term of the Mudarabah contract, and any penalties, such as forfeited shares of profits, that will be incurred by doing so;(v) Experience of portfolio managers, investment advisors and trustees;(vi) Governance arrangements for the IAH funds; and(vii) Strategy for trading and organization of assets.(b) Disclosure that IAH funds are invested and managed in accordance with Shari'a requirements;(c) Product information and the manner in which the products are made available to investors;(d) Basis and method of allocation of assets, expenses and profit in relation to IAH funds, including, with particular reference to unrestricted IAH, the co-mingling of their funds with other funds managed by the bank, the balance between shareholders' and IAH's interests in terms of allocating investment funds and the risk-return characteristics of investments;(e) Disclosures on the policies governing the management of IAH funds, which covers the approaches to the management of investment portfolio, establishment of prudential reserves, and the calculation, allocation and distribution of profits, including the extent of management's right to appropriate IAH's share of investment profit in order to build up PER and or IRR, to use these reserves to smooth profit payouts to IAH, the rules governing the transfer of funds to or from PER and IRR, including contractual or regulatory limits on management's discretion in the matter and the disposition of unused balances on these accounts at the end of the relevant Mudarabah contract;(f) The availability of "personal banking" and investment advisory and financial planning services for the benefit of IAH, and the degree of independence of such advisors in recommending products offered by other banks;(g) Complaints procedures available to dissatisfied IAH;(h) The extent of any sharing of profits from the bank's provision of fee-based banking;(i) The extent to which the bank is committed to paying a competitive rate of return by accepting DCR;(j) The major changes in the investment strategies that affect the investment accounts (including commingling of funds);(k) Bases applied for charging expenses to unrestricted IAH; and(l) Description of total administrative expenses charged to unrestricted IAH.Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Unrestricted Investment Accounts: Quantitative Disclosure Requirements
PD-1.3.33
The following quantitative disclosures should be made when the concerned Islamic bank has unrestricted investment accounts:
(a) Amount of IAH funds;(b) The ratio of Profit Equalization Reserves (PER) to the total amount of PSIA by type of IAH;(c) The ratio of Investment Risk Reserves (IRR) to the total of PSIA by type of IAH;(d) ROAA and ROAE;(e) Ratio of profit distributed to PSIA by type of IAH. The bank must disclose the profit sharing formula used for the calculation and distribution of profits;(f) The management fee (Mudarib share) as a percentage of the total investment profit, and the extent to which it is subject to partial or total waiver in order to pay a competitive rate of return to IAH;(g) Ratio of financing to PSIA by type of IAH;(h) Percentage of financing for each type of Shari'a-compliant contract to total financing;(i) Percentage of financing for each category of counterparty to total financing — that is, Amount of Shari'a-compliant financing extended to a category of counterparties (outstanding) / Amount of total financing (outstanding) x 100;(j) The carrying amount of any assets that the bank has pledged as collateral and the terms and conditions relating to the pledge;(k) The amount of any guarantees or pledges given by the bank and the conditions attaching to those guarantees or pledges;(l) Share of profits earned by IAH, before transfers to or from reserves (amount and as a percentage of funds invested);(m) Share of profits paid out to IAH, after transfers to or from reserves (amount and as a percentage of funds invested);(n) Share of profits paid out to the bank as Mudarib;(o) Movement on PER and IRR during the year;(p) The utilization and computation of PER and/or IRR during the period;(q) Average declared rate of return or profit rate on PSIA by maturity (3-month, 6-month, 12-month, 36-month);(r) Types of assets in which the funds are invested and the actual allocation among various types of assets;(s) Changes in asset allocation in the last six months;(t) Off-balance sheet exposures arising from investment decisions, such as commitment and contingencies;(u) Limits imposed on the amount that can be invested in any one asset;(v) The treatment of assets financed by IAH in the calculation of RWA for capital adequacy purposes;(w) Profits earned and profits paid out over the past five years (amount and as a percentage of funds invested); and(x) Amount of total administrative expenses charged to unrestricted IAH.Amended April 2011
Amended October 2010
April 2008Restricted Investment Accounts: Qualitative Disclosure Requirements
PD-1.3.34
The following qualitative disclosures should be made in addition to PD-1.3.32 (a) to (g) when the concerned Islamic bank has restricted investment accounts:
(a) Written policies on the bank's fiduciary duties in managing IAH funds, and the policies and procedures for monitoring these duties; and(b) The duties and obligations of investment account managers in managing the IAH funds, and the policies and procedures for monitoring these duties and obligations.Amended April 2011
Amended October 2010
April 2008Restricted Investment Accounts: Quantitative Disclosure Requirements
PD-1.3.35
The following quantitative disclosures should be made in addition to PD-1.3.33 (a) to (w) — excluding (p) when the concerned Islamic bank has restricted investment account:
(a) Current period returns;(b) Historical returns over the past five years;(c) The use of off-balance sheet transactions for investment management, where relevant; and(d) Disclosure of the range and measures of risks facing each restricted IAH fund, based on its specific investment policies.Amended April 2011
Amended October 2010
April 2008Liquidity Risk Qualitative Disclosures
PD-1.3.36
All banks must disclose a summary of the liquidity risk management framework used for assessing the risk exposure for each category of funding as well as on an aggregate basis:
(a) Current accounts;(b) Unrestricted investment accounts; and(c) Restricted investment account.Banks must also disclose the policy on diversity of funding sources to allow sufficient resources to Shari'a-compliant funds to mitigate liquidity risk.
Amended: April 2016
Amended October 2010
April 2008Liquidity Risk Quantitative Disclosures
PD-1.3.37
All banks must disclose the indicators of exposures to liquidity risk such as short-term assets to short-term liabilities, liquid asset ratios or funding volatility.
April 2008PD-1.3.38
Banks must disclose a maturity analysis of financing and various categories of funding (current account, unrestricted investment account and restricted investment account) by different maturity buckets.
April 2008Rate of Return Risk Qualitative Disclosures
PD-1.3.39
The following qualitative disclosures should be made for rate of return risk.
(a) Discussion of factors affecting rates of return and benchmark rates, and the effects thereof on the pricing of contracts; and(b) Processes and systems to monitor and measure the factors that give rise to rate of return risk.Amended April 2011
Amended October 2010
April 2008Rate of Return Risk Quantitative Disclosures
PD-1.3.40
The following quantitative disclosures should be made for rate of return risk.
(a) Indicators of exposures to rate of return risk- for example, data on expected payments/ receipts on financing and funding and the cost of funding at different maturity buckets according to time of maturity or time of re-pricing for floating rate assets or funding; and(b) Sensitivity analysis of bank's profits and the rate of returns to price or profit rate movements in the market, including detailed quantitative information about the nature and extent of profit-rate sensitive assets and liabilities and off-balance sheet exposures (e.g. breakdown of fixed and floating profit items and the profit margin earned, and the duration and effective profit rate of assets and liabilities). These disclosures should be by each portfolio identified in PD-1.3.23 a), showing their related gains and losses. Also, the effect on the value of assets, liabilities and economic capital for a benchmark change of 200bp in profit rates should be disclosed.Amended April 2011
Amended October 2010
April 2008Displaced Commercial Risk (DCR) Disclosures
PD-1.3.41
All banks must disclose the following regarding DCR:
(a) The bank's policy on DCR, including the framework for managing the expectations of its shareholders and unrestricted IAH, the sharing of risks among the various stakeholders, and the range and measures of risk facing unrestricted IAH based on the bank's general business strategies and investment policies;(b) The historical data over the past five years for the following:(i) Total Mudarabah profits available for sharing between unrestricted IAH and shareholders as Mudarib (as a percentage of Mudarabah assets);(ii) Mudarabah profits earned for unrestricted IAH (as a percentage of assets) before any smoothing;(iii) Mudarabah profits paid out to unrestricted IAH (as a percentage of assets) after any smoothing;(iv) Balances of PER and IRR, and movement of these in determining unrestricted IAH payout excluding PD-1.3.33(p);(v) Variations in Mudarib's agreed profit-sharing ratio from the contractually agreed ratio; and(vi) Market benchmark rates selected by the bank;(c) Five year comparison of historical rate of return of unrestricted IAH in relation to the market benchmark rate selected by the bank;(d) Five year comparison between the percentage rate of returns to IAH and the percentage returns to shareholders from Mudarabah profits;(e) Amount and percentage of profits appropriated to PER and IRR;(f) Analysis of the difference between aggregate Mudarabah-earned profit and profit distributed to IAH as a function of movement in PER, IRR and the Mudarib's share; and(g) Analysis of the proportion of the RWA funded by IAH that should be considered in arriving at the total RWA together with an explanation of the underlying rationale.Amended: April 2016
Amended April 2011
Amended October 2010
April 2008Disclosures Concerning other Risks
PD-1.3.42
The following quantitative information about investments in foreign subsidiaries (as included in the Financial Statements Section and representing foreign currency translation risk) must be included in the Annual Report, supplemented by a discussion about:
(a) The nature of the related currency exposure;(b) How that exposure has changed from year to year;(c) Foreign exchange translation effects thereon;(d) The earnings impact of foreign exchange transactions; and(e) The effectiveness of risk management (hedging) strategies.Amended April 2011
Amended October 2010
April 2008Compliance Disclosures
PD-1.3.43
The annual report must include a declaration by the external auditor that it did not come across any violations of the requirements below during the course of its audit work that would have any material negative impact on the financial position of the bank:
(a) The Bahrain Commercial Companies Law (as amended);(b) The CBB Law where a violation might have had a material negative effect on the business of the bank or on its financial position;(c) The Regulations and Directives issued by the CBB, including Volume 6 (Capital Markets); and(d) The Rulebook of thelicensed exchange and associated Resolutions, Rules and Procedures (where applicable).Amended: April 2016
Amended October 2011
Amended April 2011
Amended January 2011
Amended October 2010
April 2008PD-1.3.44
The Annual Report must disclose the amount of any penalties paid to the CBB during the period of the report together with a factual description of the reason(s) given by the CBB for the penalty (see Section EN-1.3).
Bahraini Islamic bank licensees which fail to comply with this requirement will be required to make the disclosure in the annual report of the subsequent year and will be subject to an enforcement action for non-disclosure.Amended: October 2019
Amended October 2010
April 2008PD-1.3A PD-1.3A Disclosures in the Annual Audited Financial Report for Branches of Foreign Banks
PD-1.3A.1
All
branches of foreign bank licensees must disclose in their annual audited financial statements the amount of any penalties paid to the CBB during the period of the report together with a factual description of the reason(s) given by the CBB for the penalty (see Section EN-1.3). Branches which fail to comply with this requirement will be required to make the disclosure in the annual audited financial statements of the subsequent year and will be subject to an enforcement action for non-disclosure.Added: October 2019PD-1.4 PD-1.4 Additional Disclosure in the Annual Audited Financial Statements of Banks Listed on a Licensed Exchange
PD-1.4.1
The content of this Section is applicable only to
Bahraini Islamic bank licensees listed on alicensed exchange .Amended: April 2016
Amended January 2011
April 2008PD-1.4.2
The disclosure requirements set out in this Section for banks referred to under Paragraph PD-1.4.1 are in addition to those set out in Section PD-1.3.
April 2008Interests of Approved Persons
PD-1.4.3
Without prejudice to any other requirement of Bahrain law (or any other direction of the Central Bank), the Directors' Report Section of the annual report of banks should contain details of the interests of
approved persons in the shares of such banks. Such details should include:(a) Total interests in the shares of such banks by individual persons mentioned above; and(b) Changes in such interests from the previous financial year to the current financial year.Amended: April 2016
Amended April 2011
April 2008PD-1.4.4
For the purpose of the disclosure required under Paragraph PD-1.4.3, any interests in the shares of a bank held by the spouse(s) or children of an
approved person , or any other person the control of whose interests in such shares lies ultimately with theapproved person , shall be deemed to be the interests of the relevantapproved person . For a definition of 'interest in the shares', see Paragraph PD-1.1.2(d).Amended: April 2016
April 2008PD-1.5 PD-1.5 Press Release on Annual Results
PD-1.5.1
Where a bank chooses to issue a narrative press release in conjunction with or in relation to the publication of its audited annual financial statements as required under Paragraph PD-1.2.3, the press release must indicate the net income for the last quarter.
October 2011PD-2 PD-2 Semi-Annual (Interim) Disclosure Requirements
PD-2.1 PD-2.1 Disclosure by Overseas Islamic Retail Banks
PD-2.1.1
[This Paragraph was deleted in April 2016].
Deleted: April 2016
Amended October 2014
Amended October 2010
April 2008PD-2.1.2
Overseas Islamic retail bank licensees are required by the CBB to prepare and disclose to the public the following reviewed information (in the same format as their Annual Audited Accounts) for their Bahrain operations on a semi-annual (interim) basis:(a) A statement of financial position (balance sheet);(b) A statement of income;(c) A statement of cash flow; and(d) A statement of comprehensive income, where applicable.Amended: April 2016
Amended April 2012
Amended April 2011
Amended October 2010
April 2008PD-2.1.3
The statements referred to under Paragraph PD-2.1.2 must be reviewed by the bank's external auditor, in accordance with International Standards on Auditing (ISA) applicable to Review engagements.
Amended October 2010
April 2008PD-2.1.4
The statements referred to under Paragraph PD-2.1.2 must be published in one local newspaper within 2 months from the statements' date.
Amended April 2011
Amended October 2010
April 2008PD-2.1.5
Banks must submit a newspaper copy of the statements (referred to under Paragraph PD-2.1.2) to the CBB within two business days of publication from the statements' date clearly showing on which date and in which publication(s) the statements were published.
Amended: July 2023
Amended: April 2016
Amended April 2011
Amended October 2010
April 2008PD-3 PD-3 Quarterly Disclosure Requirements
PD-3.1 PD-3.1 Publication of Reviewed (Unaudited) Quarterly Financial Statements for Bahraini Islamic banks
PD-3.1.1
[This Paragraph was deleted in April 2016].
Deleted: April 2016
Amended October 2010
April 2008PD-3.1.2
Bahraini Islamic bank licensees must prepare reviewed (unaudited) quarterly financial statements in accordance with AAOIFI Standards (and IFRS where applicable) for the first three quarters of their financial year.Amended: April 2016
April 2008PD-3.1.3
Banks' unaudited quarterly financial statements must be reviewed by their external auditor who must also make a statement regarding the results of such review. Such review and statement must be made in accordance with the applicable AAOIFI standards and/or International Standards on Review Engagements.
Amended: April 2016
Amended October 2011
Amended October 2010
April 2008PD-3.1.4
Extracts from the reviewed quarterly financial statements (including at least the statement of financial position (balance sheet), the statements of income, cash flows and changes in shareholders' equity as required by AAOIFI Standards must be published in one Arabic and one English daily newspaper widely available in Bahrain and on the bank's website within 45 calendar days of the end of the quarter to which such statements relate. (See Paragraph PD-5.1.2 for non-listed
Bahraini Islamic wholesale bank licensees ).Amended: April 2016
Amended April 2012
Amended April 2011
April 2008PD-3.1.5
Banks must submit a newspaper copy of the statements (referred to under Paragraph PD-3.1.4) to the CBB within two business days of publication clearly showing on which date and in which publication(s) the statements were published.
Amended: July 2023
Amended: April 2016
Amended October 2010
April 2008PD 3.1.5A
Banks must publish the disclosures required by Appendices PD-1 to PD-4 (as mentioned in Section PD-A.2) on their website in accordance with the deadline required under Paragraph PD-3.1.4.
Added: April 2016Additional Requirements for Semi Annual Disclosures
PD-3.1.6
In addition to the requirements of Paragraphs PD-3.1.1 to PD-3.1.5, the following requirements apply to the Semi-Annual financial statements posted on banks' websites. Banks must make all the quantitative disclosures required by section PD-1.3 in the half-yearly financial statements on their website, within 2 months of the end of the half-yearly financial statements, but the qualitative disclosure requirements of the Paragraphs listed below may be dispensed with at the option of the bank in their half-yearly statements:
(a) PD-1.3.9 (a) and (b);(c) PD-1.3.16;(d) PD-1.3.21-22;(e) PD-1.3.25 (a);(f) PD-1.3.26 (a);(g) PD-1.3.27 (a) to (c);(h) [This sub-paragraph was deleted in October 2020];(i) PD-1.3.29;(j) PD-1.3.31 (a);(k) PD-1.3.32;(l) PD-1.3.34;(m) PD-1.3.36;(n) PD-1.3.39.Amended: October 2020
Amended: April 2016
Amended April 2012
Amended April 2011
Amended October 2010
April 2008PD 3.1.7
Banks must retain an ongoing archive of all applicable public disclosures required by Sections PD-1 and PD-3, including the required appendices on their website. This archive must contain historical data (as required depending upon implementation date) for a minimum period of five years.
Added: April 2016PD-3.2 PD-3.2 Special Arrangements for Newly-Established Banks
PD-3.2.1
Newly-established banks are not required to follow the publication requirements of sections PD-3.1 for the first three quarters of their operation or until the commencement of their second financial year of operation (whichever period is the longer).
April 2008PD-3.2.2
After the above period has expired, all newly-established
Bahraini Islamic bank licensees must follow the publication requirements of Section PD-3.1. Newly-established banks must follow the requirements for annual reporting.Amended: April 2016
April 2008PD-4 PD-4 Other Public Disclosure Requirements
PD-4.1 PD-4.1 Introduction
PD-4.2 PD-4.2 Disclosure of Key Terms Relating to a Consumer Finance Agreement [This Section was deleted in October 2012 and requirements are now included in Section BC-4.2]
PD-4.2.1
[This Paragraph was deleted in October 2012]
Deleted: October 2012PD-4.2.2
[This Paragraph was deleted in October 2012]
Deleted: October 2012PD-4.3 PD-4.3 Disclosure to Commercial Customers of Charges on Short-term Financing Facilities
PD-4.3.1
The content of this Section is applicable to all retail banks licensed by the CBB.
Amended October 2010
April 2008PD-4.3.2
The CBB requires all retail banks to display, by a
conspicuous notice , their scale of charges on BD short-term revolving facilities to commercial customers.Amended: April 2016
Amended October 2010
April 2008PD-4.3.3
[This Paragraph was deleted in April 2016.]
Deleted: April 2016
April 2008PD-4.3.4
Retail banks are left free to decide their own basis of charging and to make changes to it as they consider appropriate.
April 2008PD-4.3.5
Retail banks must display a list of current charges including any standard charges and commissions that will be applied by the bank to individual services and transactions. See Section BC-4.2 for further details.
April 2008PD-4.4 PD-4.4 Disclosure Relating to Deposit and Unrestricted Investment Accounts Protection Scheme
PD-4.4.1
The content of this Section is applicable to all retail banks licensed by the CBB.
Amended October 2010
April 2008PD-4.4.2
The CBB requires all retail banks referring (directly or indirectly) to the protection of
deposits in related marketing materials and in general notices featured within banking halls and in account documentation, including the Annual Report, to prominently disclose the following statement:• 'Deposits andUnrestricted Investment Accounts held with [name of Islamic retail bank licensee] in the Kingdom are covered by the Regulation Protecting Deposits andUnrestricted Investment Accounts issued by the Central Bank of Bahrain in accordance with Resolution No.(34) of 2010.'Amended: April 2016
Amended October 2010
April 2008PD-4.4.3
Retail banks must, in discussions and/or correspondence with new and prospective customers, bring the Deposit and
Unrestricted Investment Accounts Protection Scheme and the protection afforded by it to the customer's notice.Amended: April 2016
April 2008PD-4.4.4
The CBB welcomes the introduction by the banks, at their discretion, of other appropriate means to promote the Deposit and
Unrestricted Investment Accounts Protection Scheme as prominently as possible.Amended: April 2016
Amended October 2010
April 2008PD-4.4.5
For detailed guidance on the Deposit and
Unrestricted Investment Accounts Protection Scheme's documentation requirements, see Chapter CP-2.Amended: April 2016
April 2008PD-4.5 PD-4.5 Press Releases Concerning Financial Statements
PD-4.5.1
The content of this Section is applicable to all
Bahraini Islamic bank licensees .Amended: April 2016
Added: July 2012PD-4.5.2
Bahraini Islamic bank licensees must obtain the CBB's prior approval before issuing any press releases regarding interim or annual financial statements.Bahraini Islamic bank licensees must not publish or cause to be published, any media statements until such times as CBB approval has been granted.Amended: April 2016
Added: July 2012PD-4.5.3
In implementing Rule PD-4.5.2, the CBB will provide the
Bahraini Islamic bank licensee with a written decision within two business days of the receipt of request for approval.Amended: April 2016
Added: July 2012PD-5 PD-5 Public Disclosure via the Internet
PD-5.1 PD-5.1 Publication and Disclosure of Financial Results
Existing Requirements
PD-5.1.1
[This Paragraph was deleted in April 2012].
Deleted April 2012Criteria for Application for Disclosure via the Internet
PD-5.1.2
Non-listed
Bahraini Islamic wholesale bank licensees may apply to the CBB to disclose their quarterly financial statements via the internet. If a bank wishes to cease disclosure of quarterly financial statements via the local press, it must satisfy the following criteria:(a) The bank has no shareholders resident in Bahrain;(b) The bank has no customers resident in Bahrain. Customers include borrowers, depositors, investment account holders or persons from whom the bank earns fees or commissions. 'Customers' in this context would not include other banks, but would include Bahraini corporations, the Government of Bahrain and its agencies, and private individuals (whether high net worth or not); and(c) The bank does not market itself in any way to residents of Bahrain. In particular, the bank must not market funds or other financial products to residents, even if the bank has no on balance sheet assets or liabilities arising from Bahraini residents.Amended: April 2016
Amended October 2010
April 2008PD-5.1.3
[This Paragraph was deleted in April 2016.]
Deleted: April 2016
Amended October 2010
April 2008PD-6 PD-6 Corporate Governance Disclosure to Shareholders
PD-6.1 PD-6.1 General Requirements
PD-6.1.1
In addition to the corporate governance disclosure required under Paragraph PD-1.3.10, banks must also disclose to their shareholders the following information:
(a) Names of shareholders owning 5% or more and, if they act in concert, a description of the voting, shareholders' or other agreements among them relating to acting in concert, and of any other direct and indirect relationships among them or with the bank licensee or other shareholders;(b) Information on the directorships held by the directors on other boards;(c) Director's trading of the bank's shares during the year;(d) [This Subparagraph was deleted in January 2012];(e) [This Subparagraph was deleted in January 2012];(f) [This Subparagraph was deleted in January 2012];(g) Audit fees charged by the external auditor;(h) Non-audit services provided by the external auditor and fees;(i) Reasons for any switching of auditor and reappointing of auditor; and(j) Conflict of Interest — any issues arising must be reported, in addition describe any steps the board takes to ensure directors exercise independent judgment in considering transactions and agreements in respect of which a director or executive officer has a material interest.Amended January 2012
Amended January 2011
October 2010PD-6.1.2
Islamic bank licensees must disclose in the annual report any abstention from voting motivated by a conflict of interest and must disclose to its shareholders any authorisation of a conflict of interest contract or transaction in accordance with the Company Law.Added: April 2023PD-6.1.3
Islamic bank licensees must publish a summary of their internal corporate governance policies on their website.Added: April 2023
Enforcement & Redress
CP CP Compensation
CP-A CP-A Introduction
CP-A.1 CP-A.1 Purpose
Executive Summary
CP-A.1.1
The purpose of this Module is to set out a summary of rules and regulations establishing a Deposits and Unrestricted Investment Accounts Protection Scheme (the 'Scheme') for compensating
Eligible account holders when the banks (referred to under Section CP-2.1) are unable, or are likely to be unable, to satisfy claims against them. For the purpose of this Module,Eligible account holders refer toEligible Depositor and/or Investor as defined under Paragraph CM-2.1.5.October 2012CP-A.1.2
The body established to operate and administer the compensation scheme is the Deposits and Unrestricted Investment Accounts Protection Board (the 'Board'). This Module describes the rules that would allow the Board to:
(a) Administer and implement the scheme; and(b) Establish rules of operation.October 2012CP-A.1.3
This Module also describes:
(a) Who is eligible for receiving compensation;(b) How the scheme will be funded;(c) Who the contributing banks are; and(d) What are contributing banks' responsibilities regarding the implementation of the scheme.October 2012Legal Basis
CP-A.1.4
The legal basis for this Module is the Regulation issued pursuant to CBB Resolution No.(34) for the year 2010 with respect to promulgating a Regulation protecting deposits and unrestricted investment accounts, which in turn was issued pursuant to Article 188 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Regulation is applicable to all retail banks, conventional and Islamic.
October 2012CP-A.1.5
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 2012CP-A.2 CP-A.2 Key Requirements
CP-A.2.1
The Board is, subject to and in accordance with the terms and conditions of the Regulation, responsible for the activities set out under Paragraph CP-1.1.4.
October 2012CP-A.2.2
The Board will convene and be ready to carry out its duties if either of the events set out in Section CP-1.2 arise.
October 2012CP-A.2.3
The Scheme will apply to
Eligible Accounts (as defined in Paragraph CP-2.1.2) held with the Bahrain offices of retail banks which are licensed by the CBB.October 2012CP-A.2.4
Upon the convening of the Board in accordance with Section CP-1.2, the Board calculates the total amount of compensation to be paid under the Scheme in the case of the relevant bank, as well as the amount of compensation payable under the Scheme to each Eligible Depositor and/or Investor of such relevant bank.
October 2012CP-A.2.5
Upon receipt by the Board of confirmation from the (Lead) Mandated bank that the actions referred to in Section CP-2.4 have been completed, each Eligible Depositor and/or Investor is sent a certificate in duplicate (included under Part B, Supplementary Information as Appendix CP-1A) by the Board informing such Eligible Depositor and/or Investor of the amount of compensation payable to him/her under the Scheme in respect of his/her
Eligible Account(s) with the relevant bank.October 2012CP-A.2.6
The CBB requires all Islamic retail bank licensees referring (directly or indirectly) to the protection of
Deposits and unrestricted investment accounts in related marketing materials and in general notices featured within banking halls and in account documentation, including Annual Reports, to prominently disclose the statement set out under Paragraph CP-2.5.1.October 2012CP-A.3 CP-A.3 Module History
CP-A.3.1
This Module was first issued in July 2004 by the BMA and updated in October 2007 to reflect the transfers of responsibilities to the CBB. Following the issuance of the Resolution No.(34) in respect of protecting Deposits and Unrestricted Investment Accounts in December 2010, the Module was amended in October 2012 to be in line with the new Regulation and to include previous requirements that were in place in the originally issued Module CP. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 2012CP-A.3.2 CP-A.3.2
The most recent changes made to this Module are detailed in the table below:
October 2012Summary of Changes
Module Ref. Change Date Description of Changes CP-A to CP-2 10/2012 Amendments due to the introduction of Resolution No.(34) of 2010. CP-2.3 04/2014 Added requirement for eligible accounts report for the deposits/unrestricted investment accounts protection scheme. CP-2.1.4 10/2014 Corrected sentence structure. Evolution of the Module
CP-A.3.3
Prior to the development of the Rulebook, the CBB had issued various circulars representing regulations covering the operations and establishment of the Deposit Protection Scheme and the Deposit Protection Board. These circulars have now been consolidated into the Compensation Module. These circulars and their evolution into this Module are listed below:
Circular Ref. Date of Issue Module Ref. Circular Subject OG/423/93 28 Nov 1993 CP-1–CP-2 Deposit Protection Scheme (the "Scheme") OG/425/94 21 Dec 1994 CP-2.4 Deposit Protection October 2012Effective Date
CP-A.3.4
The contents of this Module were effective from their date of issuance.
October 2012CP-A.3.5
Capitalised terms used in this Module shall, save as the context requires otherwise, have the meanings ascribed to them in the Regulation.
October 2012CP-A.3.6
In the event of an inconsistency between the rules of this Module and the rules of the Regulation, the rules of the Regulation shall prevail.
October 2012CP-B CP-B Scope of Application
CP-B.1 CP-B.1 Scope of Application
CP-B.1.1
The contents of this Module — unless otherwise stated — apply to all Islamic retail bank licensees and their retail operations in Bahrain.
October 2012CP-1 CP-1 Deposits and Unrestricted Investment Accounts Protection Board
CP-1.1 CP-1.1 Constitution of the Board
CP-1.1.1
The contents of this Chapter set out the details of the constitution, authority and administration of the Board.
October 2012CP-1.1.2
The Board is, subject to and in accordance with the terms and conditions of the Regulation, responsible for the protection of
Eligible Accounts , including determining:(a) What contributions Islamic retail bank licensees should make to the Islamic Fund;(b) The amount of compensation to be paid out toEligible account holders ; and(d) Any additional rules under which the Board will operate.October 2012CP-1.1.3
The Board consists of eleven persons appointed by the Governor of the CBB, whose period of membership must be for a three-year renewable period:
(a) Two representatives of the CBB, one of whom should be Chairman and the other the Deputy Chairman of the Board;(b) Four representatives of retail banks in Bahrain, who should be appointed by the Governor;(c) Two representatives of Government, the first representing the Ministry of Finance, the second representing the Ministry of Industry and Commerce, both should be nominated by their respective Ministers; and(d) Three independent persons, not from the above categories, appointed by the Governor.October 2012CP-1.1.4
The Board administers the two Funds established in accordance with Article 13 of the Regulation, and is responsible for all decision-making and accounting treatment in respect of the two Funds. No liability attaches to the CBB as a result of the Board managing the two Funds.
October 2012CP-1.2 CP-1.2 Convening of the Board
CP-1.2.1
The Board must be convened and must commence its responsibilities by following the compensation process for the
Eligible account holders upon:(a) Any Islamic retail bank licensee being put under administration by the CBB; or(b) Any Islamic retail bank licensee being put into liquidation.In each case, such bank hereinafter referred to as a "defaulting bank".
October 2012CP-1.3 CP-1.3 Voting by the Board
CP-1.3.1
The Board meets as often as is necessary to carry out its duties under the Regulation referred to in this Module and takes decisions by a simple majority vote of those present at any meeting thereof provided that, in the event of a tie, the Chairman will have the casting vote.
October 2012CP-1.3.2
Decisions of the Board are binding and are not subject to appeal.
October 2012CP-2 CP-2 Deposits and Unrestricted Investment Accounts Protection Scheme
CP-2.1 CP-2.1 Application of the Scheme
CP-2.1.1
The Scheme will apply to Eligible Accounts (as defined in Paragraph CP-2.1.2 below) held with the Bahrain offices of Islamic retail bank licensees which are licensed by the CBB.
October 2012CP-2.1.2
For Islamic retail bank licensees,
Eligible Accounts means anyDeposit Account (as defined in Paragraph CP-2.1.3) and Unrestricted Investment Account, and any other deposits or accounts similar in nature and which have similar characteristics which are approved by the CBB, regardless of currency, with the exception of bearer certificates of deposit.October 2012CP-2.1.3
For the purpose of Paragraph CP-2.1.2,
Deposit Account means the account that is defined being a deposit in accordance with the CBB Resolution No.(23) of 2009 in respect of Definition of Deposit.October 2012CP-2.1.4
Without prejudice to Paragraph CP-2.1.1 above, the Board may, at its discretion, exclude (in whole or in part) from compensation payments any
Eligible account holder of the defaulting bank in Bahrain who is entitled to claim in a similar scheme established in another jurisdiction, where such scheme covers thedeposit liabilities and unrestricted investment accounts of the Bahrain offices of such relevant bank.Amended: October 2014
October 2012CP-2.1.5
For Islamic retail bank licensees, Eligible Depositor and/or Investor means any natural person, (resident or non-resident), holding an
Eligible Account(s) with an Islamic retail bank in the Kingdom. It does not includeDeposits and Unrestricted Investments Accounts held with an Islamic retail bank's foreign branches operating outside the Kingdom.October 2012CP-2.1.6
Without prejudice to Paragraph CP-2.1.1, the Board may, at its discretion, exclude (in whole or in part) from the requirement to contribute to the Islamic Fund, any Islamic retail bank licensee in Bahrain whose
Eligible Accounts (in whole or in part) are covered by a similar scheme established in another jurisdiction provided that evidence of such coverage is provided to the Board to its satisfaction.October 2012CP-2.1.7
Without prejudice to the provisions of Paragraph CP-2.1.2, the Scheme will not apply to
Deposits and unrestricted investment accounts which have, in the opinion of the Board, been illegally gained and/or relate to illicit or illegal matters. The Scheme will also not apply to:(a) Accounts of shareholders with 10% or more shareholding (ordinary or preference), board members and senior managers of the defaulting bank; and/ or(b) Accounts of persons whose identity cannot be ascertained.October 2012CP-2.2 CP-2.2 Coverage of the Scheme
CP-2.2.1
Each
Eligible account holder shall be entitled under the Regulation to claim an amount equivalent to the amount deposited and/or invested by him in anEligible Account save that noEligible account holder shall be entitled to receive more than BD20,000 (Twenty Thousand Bahraini Dinars) from the total amount of hisEligible Account held with the defaulting bank regardless of the number and currency ofDeposits and unrestricted investment accounts. Other currencies shall be converted into Bahraini Dinars at the exchange rate on the date on which the CBB determines that the Islamic retail bank licensee is a defaulting bank.October 2012CP-2.2.2
In calculating the amount payable to an
Eligible account holder , the Board shall have the right to set-off the debts of theEligible account holder with the defaulting bank and deduct any expenses incurred by the Board in paying out such amounts.October 2012CP-2.2.3
A joint
Eligible Account should be treated as a singleEligible Account .October 2012CP-2.2.4
If the Board is satisfied that a person is a trustee of an
Eligible Account with a defaulting bank, and that the beneficial owner of any such Account has no other Eligible Account with the defaulting bank, the Board shall deem such beneficial owner as a separateEligible account holder . However, in the event that a beneficial owner of any of suchEligible Account held in the name of the trustee is the same owner of otherEligible Account at the defaulting bank, such accounts, including the account(s) registered in the name of trustee, shall be treated as a singleEligible Account .October 2012CP-2.2.5
No transfer of any part of an
Eligible Account shall be considered valid if, in the opinion of the Board, the purpose of such transfer is to enable any person, including anEligible account holder , to gain an advantage that is not permitted or intended by this Module.October 2012CP-2.3 CP-2.3 The Deposits and Unrestricted Investment Accounts Protection Funds
CP-2.3.1
For the purpose of the Scheme, the Board administers two separate funds referred to as the "Conventional Banks Fund" and the "Islamic Banks Fund" as defined under Article 1 of the Regulation. Each Fund shall constitute a separate legal entity and shall have an independent balance sheet from the CBB.
October 2012CP-2.3.2
Islamic retail bank licensees collectively contribute an initial aggregate amount of BD20 million (Twenty Million Bahraini Dinars) over a period of fifteen years and title to such monies once contributed shall legally belong to the Islamic banks Fund.
October 2012CP-2.3.3
The Board periodically assesses the size of the Islamic Fund in relation to liabilities to be covered and, where appropriate, makes recommendations to the CBB for increasing or decreasing the amount of the Islamic Fund. No such adjustments to the aggregate amount BD80 million (Eighty Million Bahraini Dinars) for both Funds shall be made without the express approval of the CBB.
October 2012CP-2.3.4
The contribution of each Islamic retail bank licensee in the total amount of the Fund is determined on an annual pro-rata basis of the total
Eligible Accounts of all Islamic retail bank licensees in Bahrain.Amended: April 2014
October 2012CP-2.3.4A
The CBB provides the Board with the necessary data to allow it to determine the amounts of contributions each Islamic retail bank licensee must make. The Board may allow the Islamic retail bank licensees to make its contribution in the form of quarterly installments which shall be charged against the profit & loss account of the banks.
Added: April 2014CP-2.3.4B
Each Islamic retail bank licensee must submit to the CBB within 2 months of the financial year end a report on all
eligible accounts in accordance with Section BR-1.4.Added: April 2014CP-2.3.5
No contribution (or part thereof) is refundable to an Islamic retail bank licensee in any circumstance.
October 2012CP-2.3.6
Islamic retail bank licensees pay the contributions referred to in Paragraph CP-2.3.4 within the periods specified by the Board. Each Islamic retail bank licensee is notified of the amount of its calculated contribution as well as the date of payment thereof.
October 2012CP-2.3.7
In the event of failure of any Islamic retail bank licensee in the payment of the full contribution during the periods specified by the Board, the CBB may take enforcement action against that bank, including the imposition of administrative fines in accordance with Article 129 of the CBB Law and, in cases of repeated violation, withdrawal of the licence granted by the CBB.
October 2012CP-2.3.8
In the event that a new Islamic retail bank licensee joins the Islamic Fund during any year, the Board determines the contribution of that bank to the Fund on the basis of the minimum payment made by other participating banks during that year for the remaining period of the year after dividing the full contribution amount over the number of months of a year. At the beginning of the following year, there will be an assessment of that bank's contribution based on the size of its
Eligible Accounts base.October 2012CP-2.3.9
The Board determines the investment policy of the Funds and the CBB is responsible for implementing such policy without receiving any commission or charges in return. Investments made from the Islamic Fund must comply with Islamic Shari'a principles and be under the supervision of the CBB's Shari'a Board.
October 2012CP-2.4 CP-2.4 Procedures for Making Claims Under the Scheme
CP-2.4.1
Upon the Board following the compensation process in accordance with Article 4 of the Regulation, the Board calculates the total amount of compensation payable thereunder to each
Eligible account holder of the defaulting bank. The total amount of compensation payable shall be remitted to the Bank(s) designated by the Board to act as a Lead Mandated Bank and/or Mandated Bank(s) for processing compensation payments toEligible account holders of the defaulting bank.October 2012CP-2.4.2
For the purposes of this Module, Lead Mandated Bank means the bank appointed by the Deposits and Unrestricted Investment Accounts Protection Board to administer the procedures to make compensation payments.
October 2012CP-2.4.3
For the purposes of this Module, Mandated Bank(s) means such other banks mandated by the Lead Mandated Bank to assist and/or participate in the processing of compensation payments.
October 2012CP-2.4.4
In the event of the amounts of the Islamic Fund being insufficient to cover the total compensation payable in accordance with the Regulation, the Board may cover the shortfall by borrowing (upon such terms and conditions as it considers appropriate) and such borrowings shall be reimbursed by future contributions from the Islamic retail bank licensees as the case may be.
October 2012CP-2.4.5
Following the completion of the calculation referred to in Paragraph CP-2.4.1, the Lead Mandated Bank and/or Mandated Bank(s) pays, into a special account to be held by it/them, the total amount allocated to compensate the
Eligible account holders with the defaulting bank.October 2012CP-2.4.6
Upon receipt by the Board of confirmation from the Lead Mandated Bank that the requirements of Paragraphs CP-2.4.1 to CP-2.4.3 have been satisfied, the Board sends to each
Eligible account holder a certificate in the form set out in Appendix CP-1A, informing eachEligible account holder of the amount of compensation due to him/her hereunder in respect of his/herEligible Account(s) with the defaulting bank.October 2012CP-2.4.7
Appendix CP-1A contains instructions as to the method by which, and time within which, the compensatory amount referred to therein may be collected by the
Eligible account holder from the Lead Mandated Bank or Mandated Bank(s). No amounts of compensation shall be payable hereunder after the expiry of the period referred to in such certificate, which period shall not be more than 12 months.October 2012CP-2.4.8
Appendix CP-1B, "Customer Acknowledgment and Waiver" form is signed by an
Eligible account holder , and constitutes a waiver of any claims he (or his successors or assigns) may wish to make against the Lead Mandated Bank and/or the Mandated Bank(s) and/or the Board in the future in respect of the amount being paid to him, and, a waiver to the Board of all his rights and interests related to that proportion of his claim against the defaulting bank.October 2012CP-2.4.9
Upon receipt of the signed Customer Acknowledgment and Waiver from an
Eligible account holder , the Lead Mandated Bank and/or the Mandated Bank(s) shall pay the amount referred to in the certificate to suchEligible account holder .October 2012CP-2.4.10
Once an
Eligible account holder has waived his right to claim against the defaulting bank to the Board (pursuant to the Customer Acknowledgment and Waiver referred to above), no bank may deny the rights of the Board to recover the debt so waived by way of action against the bank in liquidation.October 2012CP-2.4.11
The Lead Mandated Bank must reimburse the Islamic Fund for any excess monies it has received during the mandate period.
October 2012CP-2.4.12
The liquidator of the defaulting bank must, in making any payments to
Eligible account holders thereof in liquidation of such bank, be responsible for ensuring thatEligible account holders shall not receive any payments in liquidation for any amount that constitutes a duplicate reimbursement that they have been compensated in accordance with the terms of the Regulation.October 2012CP-2.5 CP-2.5 Disclosure of Scheme's Applicability
CP-2.5.1
All advertisements or other promotional publications issued by Islamic retail bank licensees in the Kingdom which contain an invitation to make deposits and unrestricted investment account with such banks and refer, directly or indirectly, to the Regulation Protecting Deposits and Unrestricted Investment Accounts hereunder, shall contain the following statement:
"Deposits and unrestricted investment accounts held with [name of Islamic retail bank licensee] in the Kingdom are covered by the Regulation Protecting Deposits and Unrestricted Investment Accounts issued by the Central Bank of Bahrain in accordance with Resolution No.(34) of 2010."
October 2012CP-2.6 CP-2.6 Other Provisions
CP-2.6.1
Save as otherwise set out above, nothing in this Module shall affect the rights of
Eligible account holders of a defaulting bank to claim the remaining proportion of their total claims as creditors in the liquidation of the defaulting bank, regardless of the basis on which such claim is made.October 2012CP-2.6.2
The provisions of Article 119 of the CBB Law relating to confidential information shall apply to all matters discussed, decisions reached and records kept by the Board in accordance with the terms of Regulation.
October 2012CP-2.6.3
The Board is entitled to make subsidiary rules for the proper and regular enforcement of the Regulation and must be empowered to hear any dispute in relation to the application of the Regulation, without prejudicing the right of the person concerned to take judicial proceedings.
October 2012CP-2.6.4
The Regulation does not apply retrospectively to banks operating in the Kingdom which are already under administration or are being liquidated prior to the effective date of the Regulation.
October 2012EN EN Enforcement
EN-A EN-A Introduction
EN-A.1 EN-A.1 Application
Executive Summary
EN-A.1.1
This Module sets out the Central Bank of Bahrain's ('CBB') approach to enforcement, and the mechanisms used by the CBB to address failures by licensees to comply with its regulatory requirements. The purpose of such measures is to encourage a high standard of compliance by the CBB licensees, thus reducing risk to their customers and the rest of the financial system.
Amended: January 2011
Amended: October 2010
Added: October 2007EN-A.1.2
This Module provides support for all other Modules of the Rulebook.
Added: October 2007Legal Basis
EN-A.1.3
This Module contains the CBB's Directive (as amended from time to time) relating to enforcement and penalties and administrative provisions under Articles 125 to 132 of the Central Bank of Bahrain and Financial Institutions Law 2006 and its amendments ('CBB Law'). It is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable as follows. Chapters EN-1 to EN-4 and EN-6 to EN-9 inclusive apply to all
Islamic bank licensees . Chapters EN-2 to EN-5 and EN-10 apply to the Directors and employees of allIslamic bank licensees . Chapter EN-6 is applicable toIslamic bank licensees and as well as to persons referred to in paragraph (b) or Article (68 bis 1) of the CBB law.Amended: April 2016
Amended: January 2011
Amended: October 2010
Added: October 2007EN-A.1.4
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
Added: October 2007EN-A.2 EN-A.2 Module History
EN-A.2.1
This Module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
Added: October 2007EN-A.2.2
A list of the most recent changes made to this Module are detailed in the table below:
Module Ref. Change Date Description of Changes EN-7 07/2006 Addition of procedures for "Appointed Experts" (relocated from AU 4). EN-A 10/2007 New references to the CBB Law and new Rule categorising this Module as a Directive. EN-1, 3, 4, 6-10 10/2007 Administrative changes to sections as a result of the new CBB Law EN-7.1 and 7.2 01/2009 Minor amendments due to new Role of Reporting Accountants chapter in Module AU EN 10/2010 Various minor amendments to ensure consistency in CBB Rulebook. EN-A.1.3 and EN-A.2.4 10/2010 Correction of typo(s) EN-6.2A 10/2010 Added new Section on financial penalties for date sensitive requirements EN-A.1.3 01/2011 Clarified legal basis. EN-6.2A.7 04/2011 Clarified guidance on payment of annual fees. EN-6.2A.7(a) 07/2011 Clarified due date when a weekend is involved. EN-7 10/2011 Chapter has been streamlined and repetitive information has been eliminated and reference is now made to Section BR-6.5. The term "appointed experts" has been substituted for the previously used "investigators". EN-10.3.1A 01/2013 Paragraph added to refer to Article 161 of the CBB Law. EN-6.2A.2(c) 10/2013 Corrected cross reference. EN-A.1.3 04/2016 Reference added to amendments to the CBB Law and to the broader scope of financial penalties also applicable to persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law. EN-6 04/2016 Amended to be in line with amendments to Article 129 of the CBB Law. EN-6.3.5 04/2016 Added Rule regarding anticipated late submission of date sensitive requirements. EN-6.2A.3 04/2017 Adjustment of financial penalties for Date of Sensitive Requirements. EN-6.2A.3 04/2017 Adjustment of financial penalties for Date of Sensitive Requirements. EN-6.2A.1 and 6.2A.2 07/2017 Added the requirement of HC-7.2 as part of date sensitive requirements. EN-4.1 07/2018 Amended Section title. EN-5.2.2 07/2018 Amended Paragraph. EN-5.2.4 07/2018 Added new Paragraph on re-assessment tests. EN-6.1.1 07/2018 Amended Paragraph EN-6.1.2 07/2018 Amended Paragraph EN-6.1.2A 07/2018 Added new Paragraph on maximum financial penalty. EN-6.1.5 07/2018 Added reference to new Appendix A. EN-6.2.1 07/2018 Deleted Paragraph. EN-6.2.2 07/2018 Deleted Paragraph. EN-6.2.3 07/2018 Deleted Paragraph. EN-6.2A.5 07/2018 Deleted Paragraph. EN-6.3.4 07/2018 Amended Paragraph Appendix A 07/2018 Added new Appendix. EN-3.2.3 04/2019 Moved guideline to Section EN-1.1. EN-8 04/2019 Deleted Chapter. EN-6.1.3 10/2019 Amended Paragraph to refer to Bahraini banks. EN-6.1.3A 10/2019 Added a new Paragraph on disclosure of financial penalties of branches of foreign banks. EN-6.2A.4 04/2020 Amended Paragraph. EN-6.2B 04/2021 Added a new Section on ‘Financial Penalties for Non-compliance with Blocking/Unblocking Requirements’. EN-6.2B 10/2022 Section moved to EN-6.5. EN-6.5 10/2022 Added a new Section on Other Financial Penalties. Evolution of the Module
EN-A.2.3
The Module incorporates the requirements set out under Circular No. ODG/249/2004 dated 22 July 2004 relating to the CBB's approach to enforcement.
Amended: October 2010
Added: October 2007Effective Date
EN-A.2.4
The contents in this Module are effective from 1st Janary 2005 or from the date given at the footer of the page where changes to Enforcement have occurred as a result of the issuance of Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006). However, the contents of other Modules referred to herein are effective from the dates specified in those respective Modules.
Amended: October 2010
Added: October 2007EN-1 EN-1 General Procedures
EN-1.1 EN-1.1 The CBB's Approach to Enforcement
EN-1.1.1
The CBB favours an open, pragmatic and collaborative relationship with its licensees, within the boundaries set by the CBB Law and Rulebook. Whilst the CBB wishes to avoid a legalistic and confrontational style of supervision, it believes that effective supervision requires effective enforcement of its requirements. Should licensees fail to cooperate, then the CBB will use the means described in this Module to achieve compliance.
Amended: October 2010
Added: October 2007EN-1.1.2
In the CBB's view, it is generally neither practical nor effective to prescribe in detail the exact regulatory response for each and every potential contravention. There are a large number of potential contraventions. Moreover, individual circumstances are unlikely to be identical in all cases, and may warrant different responses.
Amended: October 2010
Added: October 2007EN-1.1.3
In deciding any given regulatory response, the CBB will nonetheless consistently assess the individual circumstance of each contravention against the principles described in this Module. The CBB's overall approach is to take into account:
(a) the seriousness of the contravention concerned (including the risks posed to the licensee's customers and other market participants);(b) the compliance track record of the licensee concerned (including the extent to which the contravention reflects systemic weaknesses or reckless behaviour); and(c) which measures are most likely to achieve the desired result of remedying the contravention.Amended: October 2010
Added: October 2007EN-1.1.4
Such an approach reduces the risk of inappropriate enforcement actions, by allowing regulatory measures to be tailored to individual circumstances. By taking into account a licensee's compliance record and attitude, it also creates positive incentives and encourages an open and collaborative approach. By assessing individual cases against the same broad principles, the CBB also aims to achieve an overall consistency in its regulatory actions.
Amended: October 2010
Added: October 2007EN-1.1.5
Underlying the CBB's approach outlined in Paragraph EN-1.1.3 is the fundamental principle of proportionality. The enforcement measures contained in this Module are of varying severity, and will be used accordingly in keeping with the CBB's assessment of the contravention. Thus, the CBB will reserve its most serious enforcement measures – such as cancellation of license or withdrawal of "fit and proper" status – for the most serious contraventions.
Amended: October 2010
Added: October 2007EN-1.1.6
In keeping with the proportionality principle, and to the extent consistent with the CBB's enforcement approach in Paragraph EN-1.1.3, the CBB will usually opt for the least severe of appropriate enforcement measures. In most cases, the CBB expects to use a Formal Notice before resorting to more severe measures; the need for further measures will then usually be dependent on the response of the licensee or individual concerned.
Amended: October 2010
Added: October 2007EN-1.1.7
Where a significant element of judgement is required to assess compliance with a requirement, then the CBB will usually discuss the matter with the licensee or individual concerned, before using one of this Module's enforcement mechanisms. This is likely to be the case, for example, with respect to requirements for adequate systems and controls. Conversely, where there are clear-cut contraventions of CBB requirements, then the CBB will usually move immediately to one or more of the enforcement mechanisms outlined in this Module. This is more likely to occur in cases where quantitative requirements - such as those relating to capital and/or large exposures – are concerned. In most such cases, though, the CBB also expects to continue an active dialogue with the licensee or individual concerned, aimed at remedying the contravention.
Amended: October 2010
Added: October 2007EN-1.1.8
Except in the limited circumstances outlined below, the CBB will usually only apply an enforcement measure after the licensee or person concerned has been given a suitable opportunity to make representations. In the case of measures described in Chapters EN-8 to EN-10, certain procedures are set out in the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).
Amended: October 2010
Added: October 2007EN-1.1.9
In extreme circumstances, where the CBB believes that immediate action is required to prevent real damage to Bahrain's financial markets, its users or to customers of the licensee concerned, it may cancel or amend a license, as specified in Article 48(g) of the CBB Law, or place a licensee under administration according to Article 130(2) of the CBB Law, or suspend a license according to Article 131 of the pre-mentioned Law.
Added: April 2019EN-1.2 EN-1.2 Prohibition on Insurance
EN-1.2.1
To help the CBB achieve the purpose of this Module, licensees may not enter into or make a claim under a contract of insurance that is intended to, or has the effect of, indemnifying them from the fines provided for in this Module.
Amended: October 2010
Added: October 2007EN-1.3 EN-1.3 Publicity
EN-1.3.1
The CBB will not as a matter of general policy publicise individual cases when it uses the measures set out in Chapters EN-2 to EN-7. However, in such cases the CBB may inform the licensee's external auditor and – in the case of licensees with overseas operations – relevant overseas regulators.
Amended: October 2010
Added: October 2007EN-1.3.2
In exceptional circumstances, as allowed by Article 132 of the CBB Law, the CBB may decide to publicise individual cases when the measures set out in Chapters EN-2 to EN-7 are used, where there is a strong case that doing so would help achieve the CBB's supervisory objectives. In such instances, the CBB will usually allow the licensee or individual concerned the opportunity to make representations to the CBB before a public statement is issued.
Amended: October 2010
Added: October 2007EN-1.3.3
With respect to the financial penalties provided for in Chapter EN-6, licensees are required to disclose in their annual report the amount of any such penalties paid to the CBB, together with a factual description of the reason(s) given by the CBB for the penalty.
Amended: October 2010
Added: October 2007EN-1.3.4
Without prejudice to the above policy, the CBB may from time to time publish aggregate information on its use of measures set out in Chapters EN-2 to EN-7, without identifying the licensees or individuals concerned, unless their identities have previously been disclosed as provided for in Paragraphs EN-1.3.2 or EN-1.3.3.
Amended: October 2010
Added: October 2007EN-2 EN-2 Formal Warnings
EN-2.1 EN-2.1 CBB Policy
EN-2.1.1
Formal warnings are clearly identified as such and represent the CBB's first level formal enforcement measure. They are intended to clearly set out the CBB's concerns to a licensee or an individual regarding an issue, and should be viewed by the recipient with the appropriate degree of seriousness.
Amended: October 2010
Added: October 2007EN-2.1.2
As indicated in Section EN-1.1, the CBB will usually discuss concerns prior to resorting to a formal enforcement measure, especially where a significant element of judgement is required in assessing compliance with a regulatory requirement.
Amended: October 2010
Added: October 2007EN-2.1.3
Where such discussions fail to resolve matters to the CBB's satisfaction, then it may issue a formal warning. Failure to respond adequately to a formal warning will lead the CBB to consider more severe enforcement measures. However, more severe measures do not require the prior issuance of a formal warning – depending on its assessment of the circumstances, the CBB may decide to have immediate recourse to other measures. Similarly, there may be circumstances where the CBB issues a formal warning without prior discussion with the licensee or person concerned: this would usually be the case where a clear-cut compliance failing has occurred.
Amended: October 2010
Added: October 2007EN-2.1.4
When considering whether to issue a formal warning, the criteria taken into consideration by the CBB therefore include the following:
(a) the seriousness of the actual or potential contravention, in relation to the requirement(s) concerned and the risks posed to the licensee's customers, market participants and other stakeholders;(b) in the case of an actual contravention, its duration and/or frequency of the contravention; the extent to which it reflects more widespread weaknesses in controls and/or management; and the extent to which it was attributable to deliberate or reckless behaviour; and(c) the extent to which the CBB's supervisory objectives would be better served by issuance of a formal warning as opposed to another type of regulatory action.Amended: October 2010
Added: October 2007EN-2.2 EN-2.2 Procedure for Issuing Formal Warnings
EN-2.2.1
Proposals to issue formal warnings are carefully considered against the criteria listed in Section EN-2.1. They require approval of a Director or more senior CBB official, and include the statement "This is a formal warning as defined in Chapter EN-2 of the CBB Rulebook".
Amended: October 2010
Added: October 2007EN-2.2.2
Depending on the issue in question, recipients of a formal warning may be required to respond to the contents of the warning. In any case, recipient have the right to object to or challenge a formal warning as specified under Articles 125(c) and 126 of the CBB Law.
Amended: October 2010
Added: October 2007EN-3 EN-3 Directions
EN-3.1 EN-3.1 CBB Policy
EN-3.1.1
The CBB may issue Directions to licensees or individuals under supervisory powers granted to it by the CBB Law. These powers are broad in nature, and effectively allow the CBB to issue whatever Directions it reasonably believes are required to achieve its statutory objectives.
Amended: October 2010
Added: October 2007EN-3.1.2
The types of Directions that the CBB may issue in practice vary and will depend on the individual circumstances of a case. Generally, however, Directions require a licensee or individual to undertake specific actions in order to address or mitigate certain perceived risks. They may also include restrictions on a licensee's activities until those risks have been addressed – for instance, a ban on the acceptance of new customers.
Amended: October 2010
Added: October 2007EN-3.1.3
The CBB is conscious of the powerful nature of a Direction and, in the case of a licensee, the fact that it subordinates the role of its Board and management on a specific issue. The CBB will carefully consider the need for a Direction, and whether alternative measures may not achieve the same end. Where feasible, the CBB will try to achieve the desired outcome through persuasion, rather than recourse to a Direction.
Amended: October 2010
Added: October 2007EN-3.1.4
In considering whether to issue a Direction, the criteria taken into consideration by the CBB include the following:
(a) the seriousness of the actual or potential contravention, in relation to the requirement(s) concerned and the risks posed to the licensee's customers, market participants and other stakeholders;(b) in the case of an actual contravention, its duration and/or frequency of the contravention; the extent to which it reflects more widespread weaknesses in controls and/or management; and the extent to which it was attributable to deliberate or reckless behaviour; and(c) the extent to which the CBB's supervisory objectives would be better served by issuance of a Direction as opposed to another type of regulatory action.Amended: October 2010
Added: October 2007EN-3.2 EN-3.2 Procedure for Issuing Directions
EN-3.2.1
Proposals to issue Directions are carefully considered against the criteria listed in Section EN-3.1. They require approval of an Executive Director or more senior official of the CBB, and include the statement "This is a formal Direction as defined in Chapter EN-3 of the CBB Rulebook".
Amended: October 2010
Added: October 2007EN-3.2.2
The subject of the Direction will normally be given 30 days from the Direction's date of issuance in which to make objections to the CBB concerning the actions required. This must be done in writing, and addressed to the issuer of the original notification. Should an objection be made, the CBB will make a final determination, within 30 days of the date of the objection, as specified in Articles 125(c) and 126 of the CBB Law.
Amended: October 2010
Added: October 2007EN-3.2.3
[This Paragraph was moved to Section EN-1.1 in April 2019].
Deleted: April 2019
Amended: October 2010
Added: October 2007EN-4 EN-4 Formal Requests for Information
EN-4.1 EN-4.1 Procedure for requests of information
EN-4.1.1
As part of its on-going supervision, under Articles 111 and 123 of the CBB Law, the CBB may specifically request information or temporary reporting from a licensee or individual. Recipients of such requests are bound to respond to such requests under the terms of their license. Such requests are in effect a type of Direction.
Amended: October 2010
Added: October 2007EN-4.1.2
Henceforward, to clearly identify such requests, they will always be made in writing, under signature of a Director or more senior official of the CBB; will include the statement "This is a formal request for information as defined in Chapter EN-4 of the CBB Rulebook"; and will state the deadline by which the information is to be communicated to the CBB.
Amended: October 2010
Added: October 2007EN-4.1.3
Failure to respond to such formal requests within the deadline set will be viewed as a significant breach of regulatory requirements and will incur a formal warning or other enforcement measure, specified under Articles 163 and 170 of the CBB Law, as decided by the CBB depending on the circumstances of the case.
Amended: October 2010
Added: October 2007EN-4.1.4
The deadline set in the request will vary depending on individual circumstances, but will in all cases be reasonable. A recipient may submit a case for an extension to the deadline, providing the request is made before the original deadline has passed. The CBB will respond before the original deadline has passed; if it fails to do so, then the requested extension will apply. Whilst waiting for a reply, the recipient must assume that the original deadline will apply.
Amended: October 2010
Added: October 2007EN-4.1.5
The above procedures do not prevent individual CBB supervisors making oral requests for information as part of their day-to-day interaction with licensees. The CBB expects licensees to maintain their cooperative response to such requests; however, in the interests of clarity, the CBB will not view failures to respond to oral requests as a breach of regulatory requirements.
Amended: October 2010
Added: October 2007EN-5 EN-5 Adverse "Fit and Proper" Findings
EN-5.1 EN-5.1 Requirements for Individuals
EN-5.1.1
Article 65 of the CBB Law, allows the CBB to determine the level of qualifications, experience, and training of a bank's board, officers or employees.
Added: October 2007EN-5.1.2
In addition, Chapter LR-1A specifies that all persons wishing to hold or holding the position of Director, Chief Executive/General Manager or Manager in a licensee must be assessed by the CBB as "fit and proper" to hold such a position. The Chapter specifies various factors that the CBB takes into account when reaching such a decision.
Amended: October 2010
Added: October 2007EN-5.1.3
Any Director, manager or official responsible for the direction or management of a licensee, is to be considered removed from office should he be convicted by a court for a crime affecting his honesty; is declared bankrupt by a court; or if a court rules that his legal capacity is totally or partially impaired.
Added: October 2007EN-5.1.4
In interpreting the term "manager", the CBB uses the definition given in Chapter LR-1A. The same definition applies when the term "manager" is used in other Modules, unless a different definition is explicitly provided for in the Module concerned.
Amended: October 2010
Added: October 2007EN-5.2 EN-5.2 CBB Policy
EN-5.2.1
The CBB is conscious of the impact that assessing someone as not "fit and proper" may have on an individual. Such assessments are carefully reviewed in the light of all relevant facts. The criteria used in reaching a decision include the following:
(a) the extent to which the factors set out in Chapter LR-1A have not been met;(b) the extent to which the person has deliberately or recklessly breached requirements of the CBB Law or Volume 2 (Islamic Banks);(c) the person's past compliance record and conduct following any such contravention;(d) the length of time since factors indicating a lack of fitness or propriety occurred; and(e) the risk the person poses to licensees and their customers.Amended: October 2010
Added: October 2007EN-5.2.2
In assessing evidence, the CBB applies a lower threshold than is applied in a criminal court of law, reflecting generally, the administrative nature of the sanction. The CBB may also take into account the cumulative effect of factors which, when considered individually, may not in themselves be sufficient to justify an adverse "fit and proper" finding.
Amended: July 2018
Amended: October 2010
Added: October 2007EN-5.2.3
The CBB may also take into account the particular function being undertaken in the licensee by the individual concerned, and the size and nature of the licensee itself, particularly when assessing the suitability of a person's experience or qualifications. Thus, the fact that a person was deemed "fit and proper" for a particular position in a particular firm does not necessarily mean he would be suitable in a different position or in a different firm.
Amended: October 2010
Added: October 2007EN-5.2.4
The CBB may carry out re-assessment tests in case of individuals deemed to be responsible for serious or repeated violations. See Appendix A.
Added: July 2018EN-5.3 EN-5.3 Procedure for Issuing an Adverse Finding
EN-5.3.1
All proposals for issuing an adverse "fit and proper" finding are subject to a thorough review by the CBB of all relevant facts, assessed against the criteria outlined in Section EN-5.2. In some instances, it may be appropriate for the CBB to request the licensee or person concerned to provide further information, in order to help reach a decision.
Amended: October 2010
Added: October 2007EN-5.3.2
All adverse findings have to be approved by an Executive Director of the CBB. A notice of intent is issued to the person concerned, and copied to the Board/senior management of the licensee as appropriate, setting out the circumstances and the basis for the CBB's proposed adverse finding. The person has 30 calendar days from the date of the notice in which to make written representations, addressed to the Executive Director concerned, failing which a final notice is issued by the CBB.
Amended: October 2010
Added: October 2007EN-5.3.3
If representations are made, then the CBB has 30 calendar days from the date of the representation in which to consider any mitigating evidence submitted and make a final determination.
Amended: October 2010
Added: October 2007EN-6 EN-6 Financial Penalties
EN-6.1 EN-6.1 CBB Policy
EN-6.1.1
Under Chapter 2 "Procedures to be taken before penalties or administrative proceedings are applied" and Chapter 3 "Penalties and administrative proceedings" of Part 9 of the CBB Law, the CBB may impose financial penalties on licensees or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law and its amendments (in particular Article 129). The CBB shall use judgement and will take into account relevant facts in determining the need to impose financial penalties. Financial penalties are thus normally preceded by the issuance of a written formal notice and/or Direction.
Amended: July 2018
Amended: April 2016
Amended: October 2010
Added: October 2007EN-6.1.2
The level of financial penalty applied is determined by the nature of the contravention and the amount of additional supervisory attention and resources taken up by a licensee's or persons' referred to in paragraph (b) of Article (68 bis 1) of the CBB Law behaviour and by limits set in the CBB Law. The CBB will apply the methodology set out in Appendix A to determine the size of the penalty. The CBB intends that the impact of a penalty should derive more from its signaling effect than from the actual amount of money involved.
Amended: July 2018
Amended: April 2016
Amended: October 2010
Added: October 2007EN-6.1.2A
In accordance with Article 129 of the amendment to the CBB Law, the maximum financial penalty levied for failing to comply with CBB Law, Regulations, Directives and other requirements is BD 100,000 per violation. The CBB may opt to limit the amount of the financial penalty and use other enforcement measures as outlined in this Module, such as imposing restrictions on an
Islamic bank licensee limiting the scope of operations.Added: July 2018EN-6.1.3
As indicated in Paragraph EN-1.3.3, the CBB requires disclosure by
Bahraini Islamic bank licensees in their annual report of any financial penalties served on them, together with a factual description of the reasons given by the Central Bank for applying the penalty. In addition, the CBB may publicise the issuance of a financial penalty notice, where there is a strong case that doing so would help achieve the CBB's supervisory objectives, as mentioned in Article 132 of the pre-mentioned Law.Amended: October 2019
Amended: October 2010
Added: October 2007EN-6.1.3A
As indicated in Paragraph EN-1.3.3, the CBB requires disclosure by
branches of foreign bank licensees in their annual audited financial statements of any financial penalties served on them, together with a factual description of the reasons given by the Central Bank for applying the penalty. In addition, the CBB may publicise the issuance of a financial penalty notice, where there is a strong case that doing so would help achieve the CBB's supervisory objectives, as mentioned in Article 132 of the pre-mentioned Law.Added: October 2019EN-6.1.4
Examples of the types of compliance failings that may lead to the serving of a financial penalty notice are outlined in Part 11 of the CBB Law and may include (but are not limited to):
(a) Failures to address persistent delays and/or significant inaccuracies in regulatory reporting to the CBB;(b) Repeated failures to respond to formal requests for information from the CBB, within the deadlines set;(c) The submission of information to the CBB known to be false or misleading; and(d) Major failures in maintaining adequate systems and controls in accordance with the CBB's requirements, subjecting depositors and other customers to significant risk of financial loss.Amended: October 2010
Added: October 2007EN-6.1.5
In assessing whether to serve a financial written penalty notice, the CBB takes into account the following criteria:
(a) the seriousness of the contravention, in relation to the requirement(s) concerned;(b) the duration and/or frequency of the contravention, and the extent to which it reflects more widespread weaknesses in controls and/or management;the extent to which the contravention was deliberate or reckless;(c) the licensee's past compliance record and conduct following the contravention; and(d) the scope of any other action taken by the CBB or other regulators against the licensee, in response to the compliance failures in question.Additional criteria are set out in Appendix A.Amended: July 2018
Amended: October 2010
Added: October 2007EN-6.1.6
The imposition of a financial penalty does not preclude the CBB from also using other enforcement measures to remedy the same violation (for instance, a Direction).
Added: October 2007EN-6.1.7
A written notice of a financial penalty must be issued before imposing any financial penalty. The written notice must contain the following information:
(a) the violations committed by the licensee with respect to CBB Law; or the prudential Rulebook; or any Directions, warnings or formal requests for information; or violations of the terms and conditions of the license issued to the licensee;(b) evidence or proof to support the above;(c) the level of financial penalty to be imposed;(d) the grace period to be allowed to the licensee for challenging the intended penalty (which will not be less than 30 days).Amended: October 2010
Added: October 2007EN-6.1.8
The licensee may either pay the penalty or object within the above period. The CBB will consider any objection and make a formal resolution within 30 days of receiving the objection. Thereafter, the formal resolution and any accompanying penalties are final and must be paid within 30 days.
Amended: October 2010
Added: October 2007EN-6.2 EN-6.2 Module FC (Financial Crime)
EN-6.2.1
[This Paragraph was deleted in July 2018].
Deleted: July 2018EN-6.2.2
[This Paragraph was deleted in July 2018].
Deleted: July 2018EN-6.2.3
[This Paragraph was deleted in July 2018].
Deleted: July 2018EN-6.2.4
Any financial penalties applied by the CBB as regards the implementation of its requirements set out under Module FC, are without prejudice to the criminal sanctions available to the Bahraini courts under the Decree – Law No. 4 of 2001, with respect to the prevention and prohibition of the laundering of money. As with other financial penalties, the imposition of a financial penalty with regards to breaches of the requirements in Module FC does not prevent the CBB from also using other enforcement measures to remedy the same violation (for instance, a Direction).
Amended: October 2010
Added: October 2007EN-6.2A EN-6.2A Financial Penalties for Date Sensitive Requirements
EN-6.2A.1
Modules LR, FC, BR, HC and PD contain specific requirements where
Islamic bank licensees must comply with, by a precise date. Where a specific due date is involved, the CBB's financial penalties are based on a per diem basis.Amended: July 2017
Added: October 2010EN-6.2A.2
This Section applies to date sensitive requirements for:
(a) Reporting requirements included in Module BR;(b) Public disclosure requirements included in Module PD;(c) The report of the external auditor or a consultancy firm approved by the CBB required as per Paragraph FC-4.3.1B (d);(d) Annual licensing fees required as per Section LR-4.2, and(e) Conduct of Shareholders' Meetings requirements included in Section HC-7.2.Amended: July 2017
Amended: October 2013
Added: October 2010EN-6.2A.3
Financial penalties related to late filing or other date sensitive requirements are calculated as per the following per diem basis:
(a) Where theIslamic bank licensee's total consolidated assets are less than or equal to BD 50 million, the financial penalty for late filing is BD 100 per day;(b) Where theIslamic bank licensee's total consolidated assets are greater than BD 50 million but less than BD 250 million, the financial penalty for late filing is BD 200 per day;(c) Where theIslamic bank licensee's total consolidated assets are greater than BD 250 million but less than or equal to BD 5 billion, the financial penalty is BD 400 per day;(d) Where theIslamic bank licensee's total consolidated assets are greater than BD 5 billion, the financial penalty is BD 800 per day; and(e) For new licensees who have yet to provide audited financial statements, the financial penalty is BD 100 per day.Amended: April 2017
Added: October 2010EN-6.2A.4
For
branches of foreign bank licensees , only those assets reported as part of the filing for their Bahraini operations, shall be considered in determining the per diem financial penalty.Amended: April 2020
Added: October 2010EN-6.2A.5
[This Paragraph was deleted in July 2018].
Deleted: July 2018EN-6.2A.6
The various deadlines for submission of reports and annual fees referred to in Modules BR, FC, PD and LR are defined:(a) In terms of a specified number of days or months following a given date, such as the last date of a calendar quarter;(b) A specified number of days or months after the occurrence of a specific event; or(c) A specific date.Amended: April 2011
Added: October 2010EN-6.2A.7
In imposing financial penalties for date sensitive requirements, the following criteria apply:(a) Where the due date falls on a weekend or a holiday as designated by the CBB, the first business day following the weekend or holiday will be considered as being the due date;(b) Where a due date is not complied with by the end of the day on which it is due, holidays and weekend days are included in the number of days the item is considered late;(c) For returns and other filings, the date received is the date recorded by the CBB's systems in case of returns filed electronically;(d) In the case of returns filed in hard copy, the CBB stamp is the date received;(e) All returns are to be sent to the respective Supervision Directorate and the annual fees to the Accounts Directorate, on or before the due date, to be considered filed on time;(f) A day ends at midnight in the case of returns that must be filed electronically, or at the close of CBB business day, in the case returns are filed in hard copy; and(g) An incomplete return, where completeness is determined in relation to the requirements of the relevant instructions and Module BR, is considered "not filed" until the CBB receives all necessary elements of the return.Amended: July 2011
Amended: April 2011
Added: October 2010EN-6.2A.8
The CBB does not require any particular method of delivery for returns and filings that are filed in hard copy. The use of the Bahrain postal services, private courier services or other methods of delivery is entirely at the discretion and risk of the licensee. For the payment of annual fees, licensees must follow the requirements of Form ALF, included under Part B of Volume 2.
Amended: April 2011
Added: October 2010EN-6.2A.9
A decision to impose a financial penalty for date sensitive requirements is unrelated to whether the CBB issues a reminder; it is the licensee's responsibility to file and disclose on time as per the requirements of Volume 2 (Islamic Banks) Rulebook.
Amended: April 2011
Added: October 2010EN-6.2B EN-6.2B [This Section was moved to EN-6.5 in October 2022]
EN-6.2B.1
[This Paragraph was moved to EN-6.5.1].
Deleted: October 2022
Added: April 2021EN-6.3 EN-6.3 Procedures for Financial Penalties
EN-6.3.1
A written financial penalty notice will be addressed to the Chief Executive Officer or General Manager of the licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law concerned. This written notification will describe the contravention concerned, the CBB's evidence supporting a financial penalty, and the factors justifying the level of penalty proposed. Only an Executive Director or more senior member of the CBB's management may sign the notification.
Amended: April 2016
Amended: October 2010
Added: October 2007EN-6.3.2
The licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law has 30 days from the notification's date of issuance to submit any objections it wishes to make to the CBB, in writing and addressed to the issuer of the original notification. If the licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law decides not to submit objections, it has 30 calendar days from the notification's date of issuance in which to pay the penalty.
Amended: April 2016
Amended: October 2010
Added: October 2007EN-6.3.3
Should the licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law make representations challenging the proposed penalty, the CBB has 30 days from the issuance of those representations in which to re-examine the facts of the case and its conclusions. If the CBB confirms application of a penalty, payment is required within 30 calendar days of a final notice being issued.
Amended: April 2016
Amended: October 2010
Added: October 2007EN-6.3.4
Failure to pay penalties within the required deadlines will be considered a breach of the CBB's regulatory requirements, and will also result in other measures being considered, as described elsewhere in this Module.
Amended: July 2018
Amended: October 2010
Added: October 2007EN-6.3.5
In instances where a bank anticipates that it will be unable to meet any date sensitive requirements prescribed by the Rulebook, it must provide a written notification to the CBB at least one week prior to the prescribed due date outlining the date sensitive requirements which it will be unable to comply with, along with a well justified reason for the non-compliance.
Added: April 2016EN-6.4 EN-6.4 Remedying a Compliance Failure
EN-6.4.1
Payment of a financial penalty does not by itself absolve a licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law from remedying the compliance failure concerned. The CBB will expect the licensee or persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law to address the contravention within a reasonable timescale, to be agreed on a case-by-case basis. Failure to do so will result in other measures being considered.
Amended: April 2016
Amended: October 2010
Added: October 2007EN-6.5 Other Financial Penalties
Financial Penalties for Non-compliance with Blocking / UnBlocking Requirements
EN-6.5.1
The financial penalty for late execution of blocking/unblocking orders issued by the Court/Public Prosecution is BD 100 per day per customer account. Such financial penalties will be deducted directly from the
Islamic bank licensee's clearing account at the CBB or charged through billing on a weekly basis.Added: October 2022ATM Physical Security Measures
EN-6.5.2
The financial penalty for non-compliance with the ATM physical security measures stipulated in Module OM is BD 5,000 on each violation.
Added: October 2022EN-7 EN-7 Investigations
EN-7.1 EN-7.1 Legal Source
EN-7.1.1
Articles 121 to 123 of the CBB Law empower the CBB to order investigations of licensees, in order to help it assess a licensee's compliance with the provisions of the CBB Law. Such investigations may be carried out either by its own officials or by
appointed experts . Articles 111 and 124 require licensees to make available to the CBB's inspectors andappointed experts their books and other records, and to provide all relevant information within the time limits deemed reasonable by the inspectors and/orappointed experts .Amended October 2011
Amended October 2010
Amended January 2009
Added October 2007EN-7.2 EN-7.2 CBB Policy
EN-7.2.1
The CBB uses its own inspectors to undertake on-site examinations of licensees as an integral part of its regular supervisory efforts. In addition, the CBB may commission special investigations of licensees in order to help it assess their compliance with CBB requirements, as contained in Article 121 of the CBB Law. Such investigations may be carried out either by the CBB's own officials, by duly qualified experts appointed for the purpose by the CBB (
appointed experts ), or a combination of the two.Amended: October 2011
Added: October 2007EN-7.2.2
Failure by licensees to cooperate fully with the CBB's inspectors or
appointed experts , or to respond to their examination reports within the time limits specified, will be treated as demonstrating a material lack of cooperation with the CBB which will result in other enforcement measures being considered, as described elsewhere in this Module. This Rule is supported by Article 124(a) of the CBB Law.Amended October 2011
Amended October 2010
Amended January 2009
Added October 2007EN-7.2.3
The CBB may appoint an individual or a firm as an
appointed expert . Examples ofappointed experts are lawyers, audit firms and expert witnesses. The appointment ofappointed experts is not necessarily indicative of a contravention of CBB requirements or suspicion of such a contravention. For instance, anappointed expert may be commissioned to provide an expert opinion on a technical matter.Amended October 2011
Amended January 2009
Added October 2007EN-7.2.4
Appointed experts report in a form and within a scope defined by the CBB, and are solely responsible to the CBB for the work they undertake in relation to the investigation concerned. The report produced by theappointed experts is the property of the CBB (but is usually shared by the CBB with the firm concerned). The cost of theappointed experts' work must be borne by the licensee concerned.Amended: October 2011
Added: October 2007EN-7.2.5
In selecting an
appointed expert , the CBB will take into account the level of fees proposed and aim to limit these to the lowest level consistent with an adequate review of the matters at hand, given the qualifications, track record and independence of the persons concerned. Because the cost of such investigations are met by the licensee, the CBB makes only selective use ofappointed experts , when essential to supplement CBB's other supervisory tools and resources.Amended: October 2011
Added: October 2007EN-7.2.6
The CBB may commission reports, which require
appointed experts to review information from another company within the reporting bank's group even where that other company is not itself subject to any CBB requirements.Amended: October 2011
Added: October 2007[Deleted]
[This Paragraph was deleted in October 2011]
Deleted October 2011
EN-7.2.7
Banks must provide all relevant information and assistance to
appointed experts on demand. This rule is based on Article 123 of the CBB Law.Amended October 2011
Amended January 2009
Added October 2007EN-7.2.8
Further details on the required report and other aspects related to the role of the
appointed expert are contained in Section BR-6.5.Amended: October 2011
Added: October 2007EN-7.2.9
[This Paragraph was deleted in October 2011]
Deleted: October 2011
Amended: October 2010
Added: October 2007EN-7.2.11
[This Paragraph was moved to Section BR-6.5 in October 2011].
EN-7.3 EN-7.3 The Required Report
[The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].
EN-7.3.1
The scope of the required report will be determined and detailed by the CBB in the appointment letter. Commissioned
Investigators will normally be required to report on one or more of the following aspects of a bank's business:(a) Accounting and other records;(b) Internal control systems;(c) Returns of information provided to the CBB;(d) Operations of certain departments; and/or(e) Other matters specified by the CBB.Amended: October 2010
Added: October 2007EN-7.3.2
Investigators will be required to form an opinion on whether, during the period examined, the bank is in compliance with the relevant provisions of the CBB Law and the CBB's relevant requirements, as well as other requirements of Bahrain Law and, where relevant, industry best practice locally and/or internationally.
Amended: October 2010
Added: October 2007EN-7.3.3
The
Investigators report should follow the format set out in Appendix EN-1.Added: October 2007EN-7.3.4
Unless otherwise directed by the CBB or unless the circumstances described in Section EN-7.3 apply, the report should be discussed with the Board of Directors and/or senior management in advance of it being sent to the CBB.
Amended: October 2010
Added: October 2007EN-7.3.5
Where the report is
qualified by exception , the report must clearly set out the risks which the bank runs by not correcting the weakness, with an indication of the severity of the weakness should it not be corrected.Investigators will be expected to report on the type, nature and extent of any weaknesses found during their work, as well as the implications of a failure to address and resolve such weaknesses.Added: October 2007EN-7.3.6
If the
Investigators conclude, after discussing the matter with the bank, that they will give a negative opinion (as opposed to onequalified by exception ) or that the issue of the report will be delayed, they must immediately inform the CBB in writing giving an explanation in this regard.Amended: October 2010
Added: October 2007EN-7.3.7
The report must be completed, dated and submitted, together with any comments by Directors or management (including any proposed timeframe within which the bank has committed to resolving any issues highlighted by the report), to the CBB within the timeframe applicable.
Amended: October 2010
Added: October 2007EN-7.4 EN-7.4 Other Notifications to the CBB
[The Rules and Guidance in this Section were moved to Section BR-6.5 in October 2011].
EN-7.4.1
Investigators must communicate to the CBB, during the conduct of their duties, any reasonable belief or concern they may have that any of the requirements of the CBB, including the criteria for licensing a bank (see Module LR), are not or have not been fulfilled, or that there has been a material loss or there exists a significant risk of material loss in the concerned bank, or that the interests of customers are at risk because of adverse changes in the financial position or in the management or other resources of a bank. Notwithstanding the above, it is primarily the bank's responsibility to report such matters to the CBB.Amended: October 2010
Added: October 2007EN-7.4.2
The CBB recognises that
Investigators cannot be expected to be aware of all circumstances which, had they known of them, would have led them to make a communication to the CBB as outlined above. It is only whenInvestigators , in carrying out their duties, become aware of such a circumstance that they should make detailed inquiries with the above specific duty in mind.Amended: October 2010
Added: October 2007EN-7.4.3
If
Investigators decide to communicate directly with the CBB in the circumstances set out in Paragraph EN-7.4.1 above, they may wish to consider whether the matter should be reported at an appropriate senior level in the bank at the same time and whether an appropriate senior representative of the bank should be invited to attend the meeting with the CBB.Amended: October 2010
Added: October 2007EN-8 EN-8 [This Chapter was deleted in April 2019]
EN-8.1 EN-8.1 [This Section was deleted in April 2019]
EN-8.1.1
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Amended: October 2010
Added: October 2007EN-8.1.2
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Amended: October 2010
Added: October 2007EN-8.1.3
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Added: October 2007EN-8.2 EN-8.2 [This Section was deleted in April 2019]
EN-8.2.1
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Amended: October 2010
Added: October 2007EN-8.2.2
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Amended: October 2010
Added: October 2007EN-8.2.3
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Amended: October 2010
Added: October 2007EN-8.3 EN-8.3 [This Section was deleted in April 2019]
EN-8.3.1
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Amended: October 2010
Added: October 2007EN-8.3.2
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Added: October 2007EN-8.3.3
[This Paragraph was deleted in April 2019].
Deleted: April 2019
Amended: October 2010
Added: October 2007EN-9 EN-9 Cancellation or Amendment of License
EN-9.1 EN-9.1 Legal Source
EN-9.1.1
Article 48 of the CBB Law empowers the CBB to cancel or amend a license under certain circumstances. These include cases where a licensee has:
(a) Failed to satisfy its license conditions;(b) Violated the terms of the CBB Law, or CBB Regulations or Volume 2 (Islamic Banks) Rulebook; or(c) Failed to start business within six months from the date of the license;(d) Ceased to carry out the licensed activities permitted; or(e) Not acted in the legitimate interest of its customers or creditors.Amended: October 2010
Added: October 2007EN-9.1.2
Article 48(d) of the CBB Law also requires the CBB to give the licensee concerned reasonable time to object to any proposed cancellation or amendment of its license.
Amended: October 2010
Added: October 2007EN-9.2 EN-9.2 CBB Policy
EN-9.2.1
The CBB generally views canceling a license as appropriate only in extreme circumstances, when faced with the gravest of contraventions or when left with no other reasonable means of successfully addressing the regulatory failings in question. Cancellation or amendment of a license, however, may also be required in circumstances outside of an enforcement context, for instance because of a change in the business profile of a licensee.
Amended: October 2010
Added: October 2007EN-9.2.2
The criteria used by the CBB in assessing whether to seek cancellation or amendment of a license include:
(a) The extent to which the interests of the market, its users and those who have a claim on the licensee would be best served by the cancellation or amendment of the license;(b) The extent to which other regulatory penalties could reasonably be expected to achieve the CBB's desired supervisory objectives;(c) The extent to which the licensee has contravened the conditions of its license and/or the CBB Law, including the seriousness, duration and/or frequency of the contravention(s) concerned, and the extent to which the contraventions reflect more widespread or systemic weaknesses in controls and/or management;(d) The extent to which the licensee has been involved in financial crime or other criminal conduct; and(e) The licensee's past compliance record and conduct following the contravention(s).Amended: October 2010
Added: October 2007EN-9.2.3
When the CBB issues a notice of cancellation or amendment as an enforcement tool, it will only implement the actual change once it is satisfied that there are no longer any regulated activities for which it is necessary to keep the current authorisation in force. Until such time as these activities have been run off or moved to another licensee, the CBB will control these activities through other means (such as taking the licensee into administration or through issuing Directions).
Added: October 2007EN-9.3 EN-9.3 Procedure for Cancellation or Amendment of License
EN-9.3.1
All proposals for canceling or amending a license are subject to a thorough review by the CBB of all relevant facts, assessed against cases and the criteria outlined in Sections EN-9.1 and EN-9.2. After being assessed at the Executive Director level, proposals are submitted to H.E. the Governor for approval.
Amended: October 2010
Added: October 2007EN-9.3.2
Once approved within the CBB, a formal notice of cancellation or amendment is issued to the licensee concerned. The notice of cancellation or amendment will describe the factual circumstances of the contraventions concerned, and the CBB's rationale for the proposed cancellation, as measured against the criteria outlined in Sections EN-9.1 and EN-9.2.
Amended: October 2010
Added: October 2007EN-9.3.3
The licensee has 30 calendar days from the date of the notice in which to lodge an appeal. The appeal should be addressed to the Board of the CBB, and copied to H.E. the Governor of the CBB.
Added: October 2007EN-9.3.4
If an appeal is lodged, the Board of the CBB will make a final ruling within 60 calendar days of its date of issuance.
Added: October 2007EN-9.3.5
A Licensee may appeal to a competent court within 60 calendar days of the above final ruling for a decision. The court's decision will then be final.
Added: October 2007EN-10 EN-10 Criminal Sanctions
EN-10.1 EN-10.1 Overview
EN-10.1.1
The CBB Law provides for a number of criminal sanctions in cases where certain of its provisions are contravened. This Section provides a summary of those sanctions most relevant to licensees, their Directors and employees. What follows is not a complete list of all sanctions provided for in the CBB Law, nor is it a substitute for reading the Law and being fully aware of its provisions.
Amended: October 2010
Added: October 2007EN-10.1.2
Licensees, their Directors and employees should also be aware of the criminal sanctions provided for under other relevant Bahraini laws, such as the Decree – Law No. 4 of 2001, with respect to the prevention and prohibition of the laundering of money.
Added: October 2007EN-10.1.3
In all cases to do with criminal sanctions, the CBB can only refer the matter to the Office of Public Prosecutor. The CBB has no authority to apply such sanctions directly without recourse to the courts.
Amended: October 2010
Added: October 2007EN-10.2 EN-10.2 CBB Policy
EN-10.2.1
Because of their criminal status, and their provision for custodial sentences, the sanctions provided for under the CBB Law are viewed by the CBB as very powerful measures, to be pursued sparingly. In most situations, the CBB will seek to address regulatory failures through administrative sanctions, as outlined in preceding Chapters, rather than by pursuing the criminal sanctions outlined here.
Amended: October 2010
Added: October 2007EN-10.2.2
Where, however, the nature of the offence is such that there is strong evidence of a reckless or intentional breach of the CBB Law relevant to the following Articles, then the CBB will usually refer the matter to the Office of Public Prosecutor.
Amended: October 2010
Added: October 2007EN-10.3 EN-10.3 Articles of CBB Law
Article 161
EN-10.3.1A
Article 161 of the CBB Law provides for a penalty of up to BD 1 million, without prejudice to any other penalty prescribed in any other law, in case of any person who breaches the provisions of Resolution No.(16) for the year 2012 issued pursuant to Article 42 of the CBB Law. The Court may also confiscate the proceeds resulting from breaching the Resolution.
Added: January 2013Article 163
EN-10.3.1
Article 163 of the CBB Law provides for a term of imprisonment and/or a fine of up to BD 20,000, without prejudice to any other penalty prescribed in any other law, in case of conviction of a Director, manager, official, agent or representative of any licensee who:
(a) Conceals any records, information or documents requested by the CBB (or any person appointed by the CBB to conduct an investigation or inspection);(b) Provides statements or information in bad faith which do not reflect the actual financial position of the licensee;(c) Conceals from an external auditor any records, information or documents necessary for auditing the accounts of the licensee; and(d) Provides in bad faith any misleading or inaccurate statements to an external auditor which do not reflect the actual financial position of the licensee.Amended: October 2010
Added: October 2007Article 169
EN-10.3.2
Article 169 provides for a term of imprisonment, and/or a fine of up to BD 20,000 for any Director, manager, official or employee, who acts or permits an act in violation of Article 134 of the CBB Law where he knows (or should have known) that the licensee is insolvent.
Amended: October 2010
Added: October 2007Article 170
EN-10.3.3
Part 2 of Article 170 of the CBB Law provides for term of imprisonment and/or a fine not exceeding BD3,000 if any Director, manager, official or employee intentionally obstructs an investigation by the CBB or an investigator appointed by the CBB.
Added: October 2007Article 171
EN-10.3.4
Article 171 of the CBB Law provides for a term of imprisonment and/or a fine not exceeding BD10,000, if any Director, manager, official or employee discloses in bad faith any confidential information relating to a customer of the concerned bank.
Amended: October 2010
Added: October 2007EN-10.4 [This Section was deleted on October 06]
Appendix
Appendix A Methodology for calculating financial penalties
I. Introduction
This appendix sets out the Central Bank of Bahrain's ("CBB") approach on assessing and calculating/determining financial penalties.
The purpose of the financial penalties is to encourage a high standard of conduct and compliance by CBB licensees, thereby reducing risk to their customers and the rest of the financial sector.
The imposition of a financial penalty does not preclude the CBB from also using other enforcement measures to remedy the same violation.
II. The Scope of application
In assessing whether to serve a financial penalty upon a licensee the CBB shall consider the following additional criteria:
(a) The assessment of gain/benefit made or cost avoided and/or the level of risks posed to customers, financial position of the licensee, shareholders, stability of the financial sector and/or the reputation of the Kingdom.(b) If the licensee made any gain/benefit or avoided any costs by violating the CBB rules then the gain/benefit and/or the cost avoided will be used as a benchmark for calculating the fine amount subject to BD 100,000 cap for each violation. In addition, the customers impacted must be compensated in full. The scope of this section does not cover penalties for non-compliance with date sensitive requirements of Section EN-6.2A.(c) Fit and proper reassessment tests would take place for the approved persons deemed to be responsible for serious or repeated violations at the discretion and judgment of the CBB. The relevant approved person/(s) will be identified based on a review of relevant information including but not limited to the bank's records before the final decision is made.(d) Each incident of breaching a rule (CBB Law, regulations, resolutions, and Rulebook directives) will be considered a stand-alone violation. For e.g. if a large exposure limit of 15% is breached by a licensee multiple times for a single customer each of these breaches will be considered a separate violation.(e) If the CBB discovers that one or more breaches had been committed by the licensee in the past and had gone un-detected, then the CBB has the right, at the point of detection, to impose penalties for each of these past breaches.(f) If the gain/benefit made and/or cost avoided cannot be quantified then the table below will be used to determine the penalty amount based on the seriousness of violations as determined by the CBB.(g) The factors used to determine the seriousness of the violation include, but are not limited to, the level of risks posed to the licensee's customers, financial position of the licensee, shareholders, stability of the financial sector and/or the reputation of the Kingdom. The CBB may consider other factors or circumstances as well.Table 1: Risk Rating of Violation and Related Penalty
Risk Rating Fine Amount (BD) 1 Low 1,000 to 10,000 2 Moderate 10,001 to 50,000 3 Serious 50,001 to 100,000 III. Internal Assessment by the CBB
In deciding which level of risk is most appropriate (which will then determine the size of the penalty amount in relation to the violation), various factors will undergo comprehensive assessment including but not limited to the following:
1) Impact of the violation;
2) Nature of the violation;
3) Factors showing whether the violation was deliberate; and
4) Mitigating and aggravating factors.1) Impact of the violation
Factors relating to assessment of the impact of a violation licensee include:
(a) The level of benefit gained or loss avoided, or intended to be gained or avoided, by the licensee as a result of the violation, either directly or indirectly;(b) The loss or risk of loss, as a whole, caused to customers, investors or other market users in general;(c) The loss or risk of loss caused to individual customers, investors or other market users;(d) Whether the violation had an effect on particularly vulnerable people, whether intentionally or otherwise;(e) The inconvenience or distress caused to customers; and(f) Whether the violation had an adverse effect on the financial sector and, if so, how serious that effect was. This may include its impact on the confidence in or damage caused to the financial sector. A violation is generally more serious when it causes or may cause extensive financial damage, or when it is likely to be particularly detrimental to investor or customer confidence.2) Nature of the violation
Factors relating to assessment of the nature of the violation include:
(a) Whether the violation revealed serious or systemic weaknesses in the licensee's procedures or in the management systems or internal controls relating to all or part of the licensee's business;(b) Whether the licensee's senior management was aware of the violation;(c) The nature and extent of any financial crime facilitated, occasioned or otherwise attributable to the violation;(d) The scope for any potential financial crime to be facilitated, occasioned or otherwise occurred as a result of the violation;(e) Whether the licensee failed to conduct its business with integrity; and(f) Whether the licensee, in committing the violation, took any steps to comply with CBB Law, regulations, resolutions, Rulebook directives, and the adequacy of such steps.3) Factors showing whether the violation was deliberate
Factors relating to assessment of whether the violation was deliberate include:
(a) The violation was intentional, in that the licensee's approved person(s), intended or foresaw that the likely or actual consequences of their actions or inaction would result in a violation and they failed to adequately mitigate that risk;(b) The licensee's approved person(s) knew that their actions were not in accordance with the licensee's internal policies and procedures;(c) The licensee's approved person(s) sought to conceal their misconduct;(d) The licensee's approved person(s) committed the violation in such a way as to avoid or reduce the risk that the violation would be discovered;(e) The licensee's approved person(s) were influenced to commit the violation by the belief that it would be difficult to detect;(f) The violation was repeated; and(g) In the context of a contravention of any rule or requirement imposed by or under CBB law, regulations, resolutions, Rulebook directives, the licensee obtained reasonable professional advice before the contravention occurred and failed to follow that advice. Obtaining professional advice does not remove a person's responsibility for compliance with applicable rules and requirements.4) Mitigating and aggravating factors
Mitigation and aggravating factors include:
(a) the conduct of the licensee in bringing (or failing to bring) quickly, effectively and completely the violation to the CBB's attention;(b) the degree of cooperation the licensee showed during the investigation of the violation. Correspondingly, if the licensee takes a passive stance towards the matter or avoids investigating the matter properly with the CBB, it is likely to increase the penalty payment and/or imposing other enforcement measures.(c) where the licensee's approved person(s) were aware of the violation or of the potential for a violation, whether they took any steps to stop the violation, and when these steps were taken;(d) any remedial steps taken by the licensee prior to the discovering of such violation by the CBB; for example, identifying whether customers or investors or other market users suffered loss and compensating them where they have; correcting any misleading statement or impression; taking disciplinary action against staff involved (if appropriate); and taking steps to ensure that similar problems do not arise in the future;(e) whether the licensee had previously been told about the CBB's concerns in relation to the issue, either by means of a written formal warning/notice and/or Direction;(f) whether the licensee had previously undertaken not to perform a particular act or engage in a particular behavior;(g) the previous disciplinary record and general compliance history of the licensee;(h) action taken against the licensee by other domestic or international regulatory authorities that is relevant to the violation in question.Added: July 2018
Part B
Glossary of Defined Terms
Glossary History
Version Date Description of Changes July 2004 Initial Launch Version. July 2006 Updated version, including new defined terms of retail bank and wholesale bank license sub-categories, and definitions of regulated Islamic banking services. April 2010 Updated Definition of Deposit in accordance with Resolution No. (23) of 2009 in respect of Definition of Deposit. October 2010 Amended definition for Chief Executive Officer; added definition of Executive director, Independent director; Non-executive director; Remuneration, and; senior manager/management. January 2011 Minor corrections and amendments for consistency purposes; Amended definition for approved person(s), collective investment undertaking, exposure(s), security(ies);
Added definition for accredited investor(s), acquisition(s), bond(s); capital instrument(s), close links, connected person(s), future(s), investment(s), investment analyst, investment research, licensed exchange(s); market, option(s), participant(s), personal account transaction, public offering(s), qualifying holding(s), real time promotion, retail customer(s), self-regulatory organisation(s) or SROs, soft dollar agreement, swap(s), warrants;
Deleted definition of independent non-executive director.April 2011 Amended definition of derivative, executive director, insurance licensee(s).
Corrected cross reference for Bahraini Islamic bank licensee definition.
Added definition of conventional bank licensee(s) and specialised licensee(s).October 2011 Clarified definition of independent director;
Added definition for appointed expert(s), qualified by exception.
Amended the definition of trilateral meeting.January 2012 Amended the definition of independent director.
Added definition for underwriting.April 2012 Corrected reference to cross reference for the definition of director;
Corrected typo in the definition of conflict of interest;
Updated definition of qualifying holdings to be in line with Module CM.July 2012 Added definition for Bahrain domiciled CIU(s);
Amended definition of controller to be in line with module GR.October 2012 Added definition for base rate, conspicuous notice, eligible account(s), eligible account holder(s), framework, principal, transferee and transferor.
Amended definition of Basel Committee and deposit(s) or deposit account(s).January 2013 Amended definition of financial services, public offering(s). October 2013 Updated definition of controllers to be in line with Module GR. January 2014 Added definition for clawback, malus, material risk-takers.
Amended definition of remuneration.July 2014 Amended definition for clawback. October 2014 Amended definition of Authorised money or value transfer service provider(s).
Amended definition for financial instruments trader.
Corrected cross reference for relevant authorities.January 2015 Added definition of affiliate, banking group, credit risk, financial entity, market risk, minority interest, operational risk, securitisation, subsidiary and trigger event.
Amended definition for control and price risk.
Corrected cross reference for acquisition(s).April 2015 Amended the definition of subsidiary(ies).
Deleted the definitions of head of function and qualifying holding(s).January 2016 Amended the definition of approved person(s). April 2016 Added definition for disabled customer(s).
Amended the definition of controlled function(s).July 2016 Amended definition of Politically Exposed Persons (PEPs). October 2016 Added definition of Major Investments July 2017 Deleted definition of Bahraini Islamic retail bank licensee(s). July 2017 Deleted definition of Bahraini Islamic wholesale bank licensees. July 2017 Added definition of Branches of foreign bank licensees. July 2017 Added definition of Country Risk. July 2017 Added definition of Islamic retail bank licensee(s). July 2017 Amended definition of Islamic wholesale bank licensee(s). July 2017 Deleted definition of Overseas Islamic bank licensees. July 2017 Deleted definition of Overseas Islamic retail bank licensee(s). July 2017 Deleted definition of Overseas Islamic wholesale bank licensee(s). July 2017 Added definition of Transfer Risk. October 2017 Added definition of Beneficial Owner. October 2018 Added definitions of LM Module. December 2018 Added definition of Account Information Service, Account Information Service Provider (AISPs), Originator Information, Payment Initiation Service, Payment Initiation Service Provider (PISPs). December 2018 Amended definition of Ancillary Service Provider. April 2019 Addition of definition of Digital Financial Advice. October 2019 Add definition of without delay as per FATF Requirements. July 2020 Amended definition of Independent Director. October 2020 Amended definition of Accredited investor(s). October 2020 Added point (f) to the definition of Independent Director. January 2021 Deleted definition of Framework (as used in Module OM). July 2022 Amended definition of Accredited investor(s). January 2023 Deleted definition of Exposures. [ A ]
Accepting Shari'a money placements
The acceptance of sums of money for safe-keeping ('al-wadia') in a Shari'a compliant framework, under which it will be repaid, either on demand or in circumstances agreed by the parties involved, and which is not referable to the giving of security.
Account Information Service
An 'account information service' is an online service which provides consolidated information to a payment service user on one or more payment accounts held by that payment service user with other account servicing payment service provider.
Added: December 2018Account Information Service Provider or AISP (s)
A person licensed by the CBB to undertake the activity of providing account information services online.
Added: December 2018Accredited investor(s)
Accredited investors are defined as investors meeting the following criteria:(a) Individuals who have a minimum net worth (or joint net worth with their spouse) of USD 1,000,000, excluding that person’s principal place of residence;(b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 1,000,000; or(c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).Individuals and commercial undertakings may elect in writing to be treated as accredited investors subject to meeting at least two of the following conditions:(a) The investor has carried out trading/investing transactions, in significant size (i.e. value of transactions aggregating USD 200,000) over the last 12-month period;(b) The size of the investor's financial assets portfolio including cash deposits and financial instruments is USD 500,000 or more; and/or(c) The investor works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged (i.e. the position was professional in nature and held in a field that allowed the client to acquire knowledge of transactions or services that have comparable features and a comparable level of complexity to the transactions or services envisaged).Amended: July 2022
Amended: October 2020
Added: January 2011Acquisition(s)
The acquiring by a bank of beneficial or legal ownership of capital instruments issued by another entity. This would not include securities underwriting until the expiry of the underwriting period (where separate arrangements apply elsewhere in Module CM). Acquisition may also be in the form of exercising of rights to take control of capital instruments pledged as collateral. The pledging of capital instruments by a customer to a bank as collateral (e.g. for the purpose of obtaining credit) does not in itself mean that an "acquisition" has taken place. Acquisition also does not include the establishment of new subsidiaries by the bank. Regulatory requirements for the establishment of SPVs and subsidiaries are contained in Chapter CA-5.2.
Amended: January 2015
Added: January 2011Administrators
Persons who administer
financial instruments and related services such as cash/collateral management. Such persons need to be registered by the BMA (cf. Volume 4, AU-1.3.2).Affiliate
An affiliate of a bank is defined as a company that controls, or is controlled by, or is under common control with, the bank. Control has the same meaning as when used in IFRS.
Added: January 2015Agency based contract for investments
Holders of investment accounts appoint the Islamic bank to invest their funds on the basis of an agency contract in return for a specified fee or a specified fee and share of the profit if the realised profit exceeds a certain level, the latter being an incentive for the Islamic bank to achieve a return higher than expected.
Al-Muslam fihi (see Salam)
The commodity to be delivered in a Salam transaction.
Al-Muslam ileihi (see Salam)
The seller in a Salam transaction.
Al-Muslam (see Salam)
The purchaser in a Salam transaction.
AML
Anti-Money Laundering
Ancillary service provider
A person licensed under Volume 5 of the CBB Rulebook to undertake regulated ancillary services. These licensees are referred to as 'financial sector support institutions' under Article 1 of the CBB Law.
Amended: December 2018Appointed expert(s)
A duly qualified individual or firm appointed by the CBB to carry out inspections in accordance with Article 114 of the CBB Law or special investigations of licensees in accordance with Article 121 of the CBB Law. Appointed experts may be appointed in addition to the CBB's own officials. Examples of appointed experts include reporting accountants, lawyers, private investigators, expert witnesses and independent actuaries.
Added: October 2011Approved person(s)
Persons undertaking certain functions in relation to CBB licensees require prior CBB approval. These functions (called controlled functions) include board members and those occupying executive positions. The controlled functions regime supplements the licensing regime by ensuring that key persons involved in the running of licensees are fit and proper. Those authorised by the CBB to undertake controlled functions are called approved persons (see Paragraph LR-1A.1.2).
Amended: January 2016
Amended: January 2011Articles of association
Legal document establishing a corporation, outlining its structure and purpose.
Asset revaluation reserves
An asset revaluation reserve is an accounting concept and represents a reassessment of the value of a capital asset as at a particular date.
Associate(d)
A company or other enterprise, which is not a subsidiary or joint venture, over which the bank licensee has significant influence. Significant influence means the power to participate in financial and operating policy decisions. Such influence is presumed to exist if the bank licensee owns more than 20 percent of the associate.
Auditor
The firm/partnership charged with carrying out the audit of a licensee and its partners, directors and managers (see Module AU).
Authorised Money or Value Transfer Service (MVTS) Provider(s)
Any Bank or other licensee (such as a money changer) specifically authorised to effect money or value transfers.
Amended: October 2014[ B ]
Bahrain domiciled CIU(s)
Bahrain domiciled CIUs are undertakings where:
(a) The legal form of the CIU is established under the laws of the Kingdom of Bahrain; and(b) The CIU documents and contractual agreements are governed by the Laws of the Kingdom of Bahrain.Added: July 2012Bahraini Islamic bank licensee(s)
As defined in LR-A.1.8.
Amended: April 2011Bahraini Islamic retail bank licensee
Deleted [07/2017].
Deleted: July 2017Bahraini Islamic wholesale bank licensee
Deleted [07/2017].
Deleted: July 2017Bank licensee(s)
Any bank fully recognized as such by the relevant regulator of the country in which it is registered, except such a bank which:
a. In the opinion of the central bank, is not adequately supervised by the relevant banking supervisory authority;b. The license or other authorization of which to carry on banking business is, for the time being, suspended.Amended: October 2018Banking group
Groups that engage predominantly in banking activities and are registered as banks in the relevant jurisdiction.
Amended: October 2018
Added: January 2015Base rate
The rate/cost of credit that underpins lending to bank customers. Credit institutions lend to customers at basis points over base rates. Not to be confused with prime rate which is the rate/cost of credit at which a credit institution will grant a credit facility to its most creditworthy customers.
Added: October 2012Basel Capital Accord
Issued initially in July 1988 by the Basel Committee on Banking Supervision, the Basel Capital Adequacy Accord is a risk based capital adequacy methodology that defines the components of capital and applies a series of risk weights and capital charges to banks' assets and holdings of financial instruments. The Accord aims to increase the stability of the international financial system through having a single internationally acknowledged measurement of a bank's capital expressed as a percentage of its financial risks. It also serves to put internationally active banks on an equal competitive footing in respect of the measurement of their capital adequacy.
Basel Committee
The Basel Committee was founded in 1974 by the Bank for International Settlements (BIS). It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promote common understanding.
Amended: October 2012Beneficial Owner
Refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement. This definition should also apply to "Ultimate beneficial ownership".
Added: October 2017Bonds
An instrument creating or acknowledging a present or future indebtedness (i.e. debentures, debenture stock, loan stock, bonds, certificates of deposit and any other instruments creating or acknowledging a present or future indebtedness), but excluding:
(a) An instrument creating or acknowledging indebtedness for, or for money borrowed to defray, the consideration payable under a contract for the supply of goods and services;(b) A cheque or other bill of exchange, a bankers draft or a letter of credit (but not a bill of exchange accepted by a banker);(c) A banknote, a statement showing a balance on a bank account, or a lease or other disposition of property; and(d) A contract of insurance.Added: January 2011Branch
A place of business which forms a legally dependent part of a bank and which carries out directly all or some of the transactions inherent in the business of the relevant bank. Islamic bank licensees operating as a branch are called overseas Islamic bank licensees for the purposes of Volume 2 (see LR-A.1.8).
Branches of foreign bank licensees
Foreign banks branches operating in the Kingdom of Bahrain.
Added: July 2017[ C ]
Capital adequacy
A measure of the financial strength of a bank or securities firm, usually expressed as a percentage ratio of its capital to its assets.
Capital instrument(s)
This includes all components of equity capital including ordinary equity, both voting and non-voting, and preference shares. It also includes convertible or hybrid financial instruments which are debt-like in character and which may be converted into equity. Also for financial institutions and insurance companies, any other financial instruments (such as subordinated debt) which are eligible as regulatory capital should also be included as capital instruments. Sukuk or senior debt instruments would not normally be regarded as "capital instruments" unless they have convertibility features. Equity-like contracts such as joint venture musharaka contracts (investments but not financing) are also included in this definition. The musharaka stake is classified as a capital instrument at onset. Shari'a compliant investment notes would be considered capital instruments if convertibility option/clause is available.
Added: January 2011Capital redemption reserves
Where shares of a company are redeemed or purchased wholly out of the company's profits, or by a fresh issue, the amount by which the company's issued share capital is diminished on cancellation of the shares shall be transferred to this reserve.
Central Counterparty (CCP)
The party that intermediates in the settlement process between counterparties to contracts related to financial instruments, becoming the buyer to every seller, and the seller to every buyer in the market.
Added: October 2018Certificate of commercial registration
Certificate issued by the Ministry of Commerce to businesses for carrying out specified activities as legal entities in the Kingdom of Bahrain.
Certificate of incorporation
A document granted by the Ministry of Commerce giving an entity its legal existence and right to function as an entity.
Certificates representing certain securities
Certificates or other instruments which confer contractual or property rights:
(a) in respect of any investment held by someone other than the person on whom the rights are conferred by the certificate or other instrument; and(b) the transfer of which may be effected without requiring the consent of that person.CFT
Combating the financing of terrorism.
Chief Executive, Chief Executive Officer or CEO
Chief executive, chief executive officer or CEO. The board shall determine that person's actual title, which may be 'CEO', 'Chief Executive Officer', 'President', 'Managing Director', or another title.
Clawback
A clawback requires that an employee (or ex-employee) return to the bank the variable remuneration that was previously paid out to him/her.
Amended: July 2014
Added: January 2014Close links
A bank is defined as "closely linked" with:
(a) Any person/entity which qualifies as a "controller" of the concerned bank as defined in Module GR-5 of the Rulebook;(b) Any entity which is a subsidiary of the bank;(c) Any entity which is an associate company of the bank.Added: January 2011Collateral
Any form of property, security, guarantee or indemnity provided as security for a borrower.
Collective Investment Undertaking
As defined in LR-1.3.34.
Amended: January 2011Commodity(ies)
Raw materials or primary products, usually sold in bulk on an exchange (other than a financial instrument or cash), which are capable of delivery.
Amended: January 2015Compliance Directorate
The unit within the Agency responsible for verifying licensees' compliance with the requirements of the BMA Law, the AML Law, this Module and other BMA Regulations relating to terrorist financing and money laundering, and for collating and monitoring suspicious transaction reports from licensees.
Conflict of interest
A situation when a person or an entity has competing professional or personal obligations to other parties in a financial transaction (e.g. underwriting a securities transaction and simultaneously advising clients whether to buy the security or not) or in ongoing financial relationships (e.g. when a bank has a director of one of its major borrowers on its board), or personal or financial interests that would make it difficult to fulfil his duties fairly.
Amended: April 2012Connected person(s)
(a) The individual's spouse and his/her son, adopted son, stepson, daughter, adopted daughter, step-daughter, father, step-father, mother, step-mother, brother, step-brother, sister or step-sister, under his/her guardianship or control; or(b) A firm or corporation in which the individual or any persons mentioned in (a) has control of not less than 10% of the voting power in the firm or corporation, whether such control is exercised individually or jointly; or(c) Connected persons in relation to a firm or corporation means another firm or corporation in which the first-mentioned firm or corporation has control of not less than 10% of the voting power in that other firm or corporation.Amended: October 2012
Added: January 2011Conspicuous notice
Means a written statement in both Arabic and English languages which is easily visible and legible and displayed in all credit institutions' premises open to the public, such as websites, newspapers and other press notices.
Added: October 2012Constant Musharaka (see Musharaka)
A musharaka in which the partners' shares in the capital remain constant, throughout the period as specified in the contract.
Contingency plans
A plan maintained to ensure the availability of critical resources and to facilitate the continuity of operations in an emergency situation
Contingent liabilities
In context of liabilities, those liabilities that do not yet appear on the balance sheet (ie. guarantees, supports, lawsuit settlements). For support or recourse, the trigger may occur at any time in the future, and the loss or expenditure is highly uncertain. Once timing and the quantification of expenditure becomes clearer, provisions should be raised in respect of the contingent liability. When the amount or the timing of the contingent item becomes certain, then it ceases to be a contingent item and should be entered into the balance sheet.
Control
Has the same meaning as when used in IFRS.
Amended: January 2015Control environment
The control environment means the overall attitude, awareness and actions of directors and management regarding the internal control system and its importance in the entity.
Controlled function(s)
Functions of board members and those persons undertaking executive positions at CBB Islamic bank licensees (see LR-1A.1.2).
Amended: April 2016
Amended: January 2011Controller
A
controller is a natural or legal person who either alone, or with his associates:(a) Holds 10% or more of the shares in thelicensee ("L"), or is able to exercise (or control the exercise) of 10% or more of the voting power in L; or(b) Holds 10% or more of the shares in a parent undertaking ("P") of L, or is able to exercise (or control the exercise) of 10% or more of the voting power in P; or(c) Is able to exercise significant influence over the management of L or P.Amended: October 2013
Amended: July 2012
Amended: January 2011Conventional bank licensee(s)
A bank licensed by CBB under Volume 1 of the CBB Rulebook, and generally operating according to conventional finance principles (as opposed to operating in accordance with Islamic finance principles).
Amended: April 2011Correspondent Bank
A bank which offers another bank (the respondent bank) an account through which the respondent bank may make payments for its own account and that of its clients. In brief, the correspondent bank acts as agent for the respondent bank. Correspondent relationships do not include transactions between banks as principals (e.g. in the wholesale market).
Counterparty
A counterparty is the other person in a contract. Therefore, if bank A buys a security issued by company B from broker C, bank A has counterparty risk to broker C and Issuer Risk in respect of company B. A counterparty may include any legal person or arrangement, but generally would mean the following:
(a) Any individual;(b) Any unincorporated body of persons;(c) Any company which is not a member of a group;(d) Any group of companies; or(e) Any government of a State or any public bodies, local authorities or nationalised industries of a State.Amended: January 2011Country Risk
The risk of exposure to loss caused by events in a foreign country. The concept is broader than sovereign risk as all forms of lending or investment activity whether to/with individuals, corporates, banks or governments are covered.
Added: July 2017Credit risk
Is defined as the potential that a bank's borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk exists throughout the activities of a bank in the banking book and in the trading book and includes on- and off-balance sheet exposures.
Added: January 2015Custody
In relation to clients' assets, this refers to the safeguarding and administering of a client's investments.
Customer
A customer is:
Groups or individuals who have a business relationship with the organization — those who receive and use or are directly affected by the products and services of the organization.[ D ]
Dealing in Shari'a compliant financial instruments as agent
Dealing in Shari'a compliant financial instruments as agent means buying, selling, subscribing for or underwriting any Islamic financial instrument on behalf of a client (see LR-1.3.25 ff).
Dealing in Shari'a compliant financial instruments as principal
Dealing in Shari'a compliant financial instruments as principal means buying, selling, subscribing for or underwriting any Islamic financial instrument on one's own account (see LR-1.3.22 ff).
Default
Failure to service a credit in accordance with agreed terms, e.g. late or incomplete payments, or infringement of any other material provision of the credit documentation.
Default Funds'
Also known as clearing deposits or guarantee fund contributions (or any other names), are clearing members' funded or unfunded contributions towards, or underwriting of, a CCP's mutualized loss-sharing arrangements.
Added: October 2018Deposit(s) or Deposit account(s)
For the purposes of the CBB Law, refer to Resolution No. (23) of 2009 in respect of Definition of Deposit (see Appendix CP-2).
Amended: October 2012Derivative(s)
A generic term for a financial instrument whose value is dependent on, or derived from, the changes in the absolute or relative value of some underlying asset or market index or rate. Often used for futures, options and swaps.
Amended: January 2015Designated market
Any of the following investment exchanges:
— American Stock Exchange— Australian Stock Exchange— Bolsa Mexicana de Valores— Bourse de Montreal Inc— Channel Islands Stock Exchange— Chicago Board of Trade— Chicago Board Options Exchange— Chicago Stock Exchange— Coffee, Sugar and Cocoa Exchange, Inc— Euronext Amsterdam Commodities Market— Hong Kong Exchanges and Clearing Limited— International Securities Market Association— Johannesburg Stock Exchange— Kansas City Board of Trade— Korea Stock Exchange— MidAmerica Commodity Exchange— Minneapolis Grain Exchange— New York Cotton Exchange— New York Futures Exchange— New York Stock Exchange— New Zealand Stock Exchange— Osaka Securities Exchange— Pacific Exchange— Philadelphia Stock Exchange— Singapore Exchange— South African Futures Exchange— Tokyo International Financial Futures Exchange— Tokyo Stock Exchange— Toronto Stock ExchangeDigital Financial Advice
Digital financial advice, also commonly known as robo-advice or automated advice is the advising on financial instruments as defined under LR-1.3.45 using algorithms and technology and with limited or no human financial advisor involvement.
Added: April 2019Diminishing Musharaka (see Musharaka)
A musharaka in which the Islamic bank agrees to transfer gradually to the other partner its (the Islamic bank's) share in the Musharaka, so that the Islamic bank's share declines and the other partner's share increases until the latter becomes the sole proprietor of the venture.
Director
A person who acts in the capacity of director of a firm (whether appointed or not, or whether titled director or not). In the case of a sole trader, unincorporated body or partnership, a person directing its affairs, or a partner (of a partnership). Directors are a controlled function (cf. LR-1A.1.2).
Amended: April 2012Disabled customer(s)
For the purpose of Module BC 'disabled' means: all those who suffer from permanent total or partial physical or sensory impairments as a result of illness, accident, congenital or hereditary factor that may prevent them from accessing banking and financial services on an equal basis with others. These are the customers who have the ability to make their own decisions but need assistance to do so, due to their circumstances. The term 'disabled' includes visual impairments and hearing impairments and physical impairments.
People who have limited ability to take their own decisions (mental impairment) do not fall within this definition.Added: April 2016[ E ]
Electronic banking
Electronic banking or 'e-banking' refers to the provision of retail and small value banking products and services through electronic channels. Such products and services can include deposit-taking, lending, account management, the provision of financial advice, electronic bill payment, and the provision of other electronic payment products and services such as electronic money.
Electronic money
The investment, which is monetary value, as represented by a claim on the issuer, which is:
(a) Stored on an electronic device;(b) Issued on receipt of funds; and(c) Accepted as a means of payment by persons other than the issuer.Amended: January 2011Eligible Account(s)
Means any Deposit Account (being a deposit in accordance with the Central Bank of Bahrain Resolution No. (23) of 2009 in respect of Definition of Deposit) and Unrestricted Investment Account, and any other deposits or accounts similar in nature and which have similar characteristics which are approved by the CBB, regardless of currency, with the exception of bearer certificates of deposit.
Added: October 2012Eligible account holder(s)
Means eligible depositor and/or investor that is a natural person (resident or non-resident), holding an
eligible account(s) with an Islamic retail bank in the Kingdom. It does not include deposits and unrestricted investment accounts held with an Islamic retail bank's foreign branches operating outside the Kingdom.Added: October 2012Executive director
Means a director who is an officer or employee, or is otherwise involved in day-to-day management, of either:
(a) The bank;(b) Another company which is acontroller of the bank;(c) Another company of which the bank is acontroller ; or(d) Another company which is controlled by acontroller of the bank.In this definition, the word "company" which is a controller of the bank excludes sovereigns such as government owned entities and government ministries.
Amended: January 2011Exposure(s)
[Deleted in January 2023].
Deleted: January 2023
Amended: January 2011[ F ]
Face value (see Murabaha)
The amount of a Murabaha receivable based on the price agreed between the client and the Islamic bank including the latter's profit on the transaction.
Family
The term family refers to father, mother, husband, wife, grandfather, grandmother, grandson or granddaughter.
FATF Member State
A country which is a current member of the FATF, and which is not subject to NCCT listing or to any advisories by the FATF.
Fiduciary
A legal entity that is authorised to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles.
Added: October 2018Financial Action Task Force (FATF)
The inter-governmental body responsible for developing and promoting policies, both nationally and internationally, to combat money laundering.
Financial contracts for differences
Comprise rights under a contract for differences, or any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in:
(a) The value or price of investment or property of any description;(b) Any currency;(c) The rate of interest in any currency or any index of such rates including interest rate options;(d) The level of any index which is derived for the prices of an investment or physical commodity (including index options) or;(e) Any combination of the above.Amended: January 2011Financial entity(ies)
An entity which conducts banking activities or other financial activities such as insurance, finance leasing, issuing credit cards, portfolio management, investment advice, money changing, factoring, forfaiting, custodial and safekeeping services, investment management or other similar activities that are ancillary to the business of banking, whether or not the entity is regulated. For the sake of clarification, special purpose vehicles are included in the definition of financial entity if such SPVs conduct any of the activities outlined above.
Added: January 2015Financial Institutions
Institutions that are defined as financial institutions by the CBB (local financial institutions) or by foreign banking regulators (foreign financial institutions); examples of financial institutions include investment companies, insurance companies and currency exchange companies.
Added: October 2018Financial instruments
Any of the following instruments:
(a) Transferable securities;(b) Islamicfinancial instruments ;(c) Money market instruments;(d) Units incollective investment undertakings ;(e) Derivative contracts other than commodity derivatives;(f) Derivative contracts relating to commodities settled in cash;(g) Derivative contracts relating to commodities;(h) Credit derivatives;(i) Financial contracts for differences;(j) Other derivative contracts;(k) Interests in real estate property;(l) Certificates representing certain securities; and(m) Rights or Interests in Financial Instruments.Amended: January 2011Financial Instruments Trader
A person who is engaged in buying or selling
financial instruments .Amended: October 2014
Amended: January 2011Financial services (as used in Module LR)
For the purpose of Module LR, financial services means:
(a) Any dealings in any instrument defined as a financial instrument in any Volume of the CBB Rulebook;(b) Any arrangement where money, goods or services are made available to a person in exchange for his promise to pay at a later date and that arrangement is of a type habitually provided by another person for commercial gain;(c) Any arrangement in which money is solicited from the public in return for a promise of financial gain on, or safekeeping of, that money; or(d) Any product or other financial services in the area of regulated services (regulated by the CBB) marketed in the Kingdom of Bahrain.Amended: January 2013Framework (as used in Module OM)
Deleted in January 2021.
Amended: January 2021
Added: October 2012Future(s)
Rights under a contract for the sale of a commodity or property of any other description under which delivery is to be made at a future date and at a price agreed on when the contract is made.
Added: January 2011[ G ]
General Manager
The General Manager (of a firm whether incorporated in Bahrain or not) means a person who (regardless of actual title) is responsible, alone or jointly, for the conduct of the whole of the firm, or in the case of an overseas
licensee , for all the activities of the branch. Equivalent toChief Executive in the case of firms incorporated in Bahrain (cf. HC-2).Going concern
The idea that a company will continue to operate indefinitely, and will not go out of business and liquidate its assets.
[ H ]
Head of function
[Deleted in April 2015.]
Deleted: April 2015Hedging
A strategy designed to reduce investment risk. A hedge can help lock in profits. Its purpose is to reduce the volatility of a portfolio by reducing the risk of loss.
High-Quality Liquid Asset ('HQLA')
An asset is considered to be HQLA if it can be easily and immediately converted into cash at little or no loss of value under stress scenarios.
Added: October 2018Home Supervisor
The competent regulatory authority in which the parent of a
conventional bank licensee is incorporated, or in which the head office of a branch is incorporated.Host Regulator/Supervisor
The competent authority in which a branch of a foreign bank licensee is located or in which a subsidiary or joint venture of a foreign parent bank licensee is incorporated.
Hybrid instruments
A package of two or more different kinds of risk management instruments that are usually interactive.
[ I ]
Ijarah
The transfer of ownership of a service for an agreed upon consideration. According to fuqaha, it has three major elements: a form, which includes an offer and a consent; two parties (a lessor (the owner of the leased asset), and a lessee (the party who reaps the services of the leased asset)); and the object of the (Ijarah) contract, which includes the rental amount and the service (transferred to the lessee).
Ijarah Muntahia Bittamleek (see also Ijarah term)
Ijarah contracts that end up with the transfer of ownership of leased assets to the lessee.
Ijarah sukuk
Sukuks that represent ownership of equal shares in a rented real estate or the usufruct of the real estate. These sukuk give their owners the right to own the real estate, receive the rent and dispose of their sukuk in a manner that does not affect the right of the lessee, i.e. they are tradable. The holders of such sukuk bear all cost of maintenance of and damage to the real estate.
Independent director
Determination by the Board. Under Module HC an 'independent director' is a director whom the board has specifically determined has no material relationship which could affect his independence of judgment, taking into account all known facts. The board should consider that, although a particular director meets the formal requirements, he may not be independent owing to specific circumstances of the person or the bank, ownership structure of the bank, or for any other reason. The board's determination should be a good faith finding after diligent review and full discussion.
Formal Requirements. 'Independent director' means a director of the bank who, or whose family shareholders either separately or together with him or each other, does not have any material pecuniary relationships or transactions with the bank (not counting director's remuneration for this purpose) and in particular who, during the one year preceding the time in question met all the following conditions:
(a) Was not an employee of the company;(b) Did not:(i) Make to, or receive from, the bank payments of more than 31,000 BD or equivalent (not counting director's remuneration);(ii) Own more than a 10% share or other ownership interest, directly or indirectly, in an entity that made to or received from the bank payments of more than such amount;(iii) Act as a general partner, manager, director or officer of a partnership or company that made to or received from the bank payments of more than such amount;(iv) Have any significant contractual or business relationship with thebank which could be seen to materially interfere with the person's capacity to act in an independent manner,(c) Did not own directly or indirectly (including for this purpose ownership by any family member or related person) 5% or more of the shares of any type or class of the bank;(d) Was not engaged directly or indirectly as an auditor or professional advisor for the bank;(e) Was not an associate of a Director or a member of senior management of the bank; and(f) Was not an associate of a Director, member of senior management or board member of the Bank’s controller.For purposes of this definition, the 'payments' referred to in paragraph (b)(i), (b)(ii) and (b)(iii) do not include monies received from dividends, deposits, investments and credit facilities arising from the bank's normal business activities, but instead ordinarily refer to monies received (and/or payable during the period in question) for services rendered to the bank by the director or company concerned, or paid (or payable) by the concerned director or company to the bank for services provided by the bank. The CBB may in its absolute discretion vary any such requirement (and /or restrictive effect thereof) in writing on a case-by-case basis.
Dividends, deposits, investment accounts and credit facilities are to be considered under item (b)(iv) of this definition.
For the purpose of the definition of "independent director":
(a) Where the term "family" or "family member or related persons" is used reference is made to: spouse, father, mother, son(s) or daughter(s); and(b) Where the term "associate" is used reference is made to:(i) Spouse, father, mother, son(s) or daughter(s); or(ii) A person who is an employee or partner of the Director or of the firm represented or owned by the Director.Amended: October 2020
Amended: July 2020
Amended: January 2012
Amended: October 2011
Added: January 2011Independent non-executive director
[deleted 01/2011]
Initial Margin
Clearing members or clients funded collateral posted to the CCP to mitigate the potential future exposure of the CCP to the clearing member, arising from the possible future change in the value of the transactions.
Added: October 2018Insider trading
The activity which is in summary:
(a) The offence of which an individual is guilty if he has information as an insider and:
(i) In the circumstances described in (b), he deals in securities that are price-affected securities in relation to the information; or(ii) (A) he encourages another person to deal in securities that are (whether or not that other knows it) price affected securities in relation to the information, knowing or having reasonable cause to believe that the dealing would take place in the circumstances mentioned in (b); or (B) he discloses the information, otherwise than in the proper performance of the functions of his employment, office or profession, to another person; and(b) The circumstances referred to in (a) are that the acquisition or disposal in question occurs on a regulated market, or that the person dealing relies on a professional intermediary or is himself acting as a professional intermediary.Amended: January 2011Insurance licensee(s)
An insurance firm, insurance broker, insurance consultant, insurance manager or an insurance exchange operator who has been granted a licence by the CBB to undertake regulated insurance services as defined in Section AU-1.4 of Volume 3 (Insurance).
Amended: April 2011Interests in real estate property
Any financial instrument giving right to or interests in real estate property other than owner occupied properties.
Amended: January 2011Intermediary
A person who in the course of any business or profession invites other persons to make offers or proposals or to take other steps with a view to entering into contracts of insurance, but not a person who publishes such invitations only on behalf of, or to the order of, some other person.
Intra-group outsourcing
Intra-group outsourcing is an arrangement in which one company within a group of companies provides services for another company within the same group that could also be or usually have been provided in-house.
Investigator
An Investigator is a person appointed by the CBB under the authority of Article 121 of the CBB Law to carry out an investigation of the business of a licensee or listed company.
Added January 2009Investment(s) (as referred to in Module CM)
An investment is any holding by a bank of capital instruments issued by a third party that is not a subsidiary of the bank. Therefore holdings of subordinated debt eligible as regulatory capital issued by another financial institution would be regarded as an "investment". In this case "holding" means legal or beneficial ownership of capital instruments.
Added: January 2011Investment analyst (as referred to in Module BC)
An employee of an
Islamic bank licensee who preparesinvestment research .Added: January 2011Investment firm licensee
A person licensed under Volume 4 of the CBB Rulebook.
Amended: January 2011Investment research (as referred to in Module BC)
A document (other than a recommendation made to an individual
customer ), distributed outside anIslamic bank licensee , which contains one or more of the following:(a) The results of research into an individualfinancial instrument ;(b) Analysis of factors likely to influence the future performance of an individualfinancial instrument or its issuer; and(c) Advice or recommendations based on those results or that analysis.Added: January 2011Investment fund managers
A commercial organisation that manages investors' money for a fee.
Investment risk reserve
Investment risk reserve is the amount appropriated by the Islamic bank out of the income of investment account holders, after allocating the mudarib share, in order to cater against future losses for investment account holders.
Islamic bank licensee
A bank licensed by BMA under Volume 2 of the BMA Rulebook, and generally operating according to Islamic finance principals (as opposed to operating in accordance with conventional finance principles).
Islamic retail bank licensee
A bank licensed by CBB under Volume 2 (i.e. a bank operating wholly under Islamic finance principles), that is able to undertake regulated Islamic banking services without restriction with residents of Bahrain or in Dinars.
Islamic retail banks licensee(s)
Banks which undertake the regulated banking services of (a) to (n) in Paragraph LR-1.3.1 for both residents and non-residents of the Kingdom of Bahrain.
Amended: October 2018
Added: July 2017
Islamic wholesale bank licensee(s)
Banks which undertake the regulated banking services of (a) to (m) in Paragraph LR-1.3.1 for both residents and non-residents of the Kingdom of Bahrain, with certain restrictions for residents as defined under Paragraphs LR-1.2.13, LR-1.2.16 and LR-1.2.19.
Amended: July 2017
Amended: January 2011Issued share capital
Total amount of shares that have been issued.
Istisna'a
A contract whereby the purchaser (al-mustasni') asks the seller (al-sani') to manufacture a specifically defined product (al-masnoo') using the seller's raw materials at a given price. The contractual agreement of Istisna'a has a characteristic similar to that of Salam in that it provides for the sale of a product not available at the time of sale. It also has a characteristic similar to the ordinary sale in that the price may be paid on credit; however, unlike Salam, the price in the Istisna'a contract is not paid when the deal is concluded. A third characteristic of the contractual agreement of Istisna'a is similar to Ijarah (employment) in that labour is required in both.
[ J ]
Joint accounts
An agreement between two or more firms to share risk and financing responsibility in purchasing or underwriting securities, or an account owned jointly by two or more persons at a bank or brokerage house.
[ L ]
Licensed exchange(s)
"Licensed exchange" means an exchange licensed in respect of the operation of its
market in and from the Kingdom of Bahrain.Added: January 2011Licensees
Any person licensed by the BMA under any of the Volumes of the BMA Rulebook.
Liquidation
The process of terminating a bank's activities whereby all creditors are discharged either in full (a solvent liquidation), or in part (an insolvent liquidation) and any remaining funds are returned to the shareholders. This process normally takes place in accordance with the requirements of specific legislation in the country of incorporation. In Bahrain this includes the Bankruptcy and Preventative Settlements Act.
[ M ]
MDB
A multilateral development bank, which refers to any bank or lending or development body established by agreement between, or guaranteed by, two or more countries, territories or international organizations, other than for purely commercial purposes.
Added: October 2018Major investment
A major investment is defined as any
acquisition orinvestment in thecapital instruments of another entity by aBahraini Islamic bank licensee which is equivalent to or more than 10% of the Bahraini Islamic bank licensee's consolidated total capital.Added: October 2016Malus
A malus is a feature of a remuneration arrangement that reduces the amount of a deferred bonus, so that the amount of the payout is less than the amount of the bonus award.
Added: January 2014Managing Shari'a compliant financial instruments
Managing Shari'a compliant financial instruments means managing on a discretionary basis Shari'a compliant financial instruments on behalf of another person (see LR-1.3.27).
Managing Shari'a profit sharing investment accounts
Managing a Shari'a profit sharing investment account means managing an account, portfolio or fund, whereby a sum of money is placed with the service provider on terms that a return will be made according to an agreed Shari'a compliant profit-sharing arrangement, based either on a mudaraba or musharaka partnership (see LR-1.3.21).
Market (as referred to in the definition of licensed exchange)
"Market" means a place at which, or a facility (whether electronic or otherwise) by means of which, offers or invitations to sell, purchase or exchange
securities or futures contracts (including options and derivatives) regularly made on a centralised basis, being offers or invitations that are intended or may reasonably be expected to result, whether directly or indirectly, in the acceptance or making, respectively, of offers to sell, purchase or exchangesecurities or futures contracts (whether through that place or facility or otherwise).Added: January 2011Market risk
The risk of loss in on- or off-balance-sheet positions arising from movements in market prices. The risks subject to the market risk capital requirement of Module CA are:
(a) The risks pertaining to benchmark profit rate related instruments & equities in the trading book; and(b) Foreign exchange, commodities and inventory risks throughout the bank.Added: January 2015Material Risk-Takers
The following table provides a non-exhaustive list of examples of key positions that should be considered as material risk-takers:
High-level category Suggested business lines Heads of significant business lines and any individuals within their control who have a material impact of the bank's risk profile Fixed income
Foreign exchange
Commodities
Securitisation
Sales areas
Investment banking
Commercial banking
Equities
Structured finance
Lending
Trading areasBanks should consider how the examples in the above table apply in relation to their own organisational structure.
Added: January 2014Memorandum of association
The Memorandum of Association is the first constitutional document of a company containing fundamentals such as the name, the company's objects and powers, and its original share capital.
Mind and Management
The presence of persons with executive authority to act on behalf of the bank and who have knowledge of the customers of the bank and their business, and the business of the bank where it acts as principal.
Minority interest
Has the same meaning as used in IFRS.
Added: January 2015MLRO
Money Laundering Reporting Officer of each bank as more particularly described in Chapter FC-4.
Money Laundering
Means the activity constituting a criminal offence pursuant to Article 2 of the AML Decree Law No. 4 dated 29th January 2001 (see Appendix FC 1). More generally, money laundering refers to the process of hiding or disguising the true origin or ownership of the proceeds of criminal activities.
Money-market instruments
Those classes of instruments which are normally dealt in on the money market.
Mudaraba
A partnership in profit between capital and work. It may be conducted between investment account holders as providers of funds and the Islamic bank as a mudarib. The Islamic bank announces its willingness to accept the funds of investment amount holders, the sharing of profits being as agreed between the two parties, and the losses being borne by the provider of funds except if they were due to misconduct, negligence or violation of the conditions agreed upon by the Islamic bank. In the latter cases, such losses would be borne by the Islamic bank. A Mudaraba contract may also be concluded between the Islamic bank, as a provider of funds, on behalf of itself or on behalf of investment account holders, and business owners and other craftsmen, including farmers, traders etc. Mudaraba differs from what is known as speculation which includes an element of gambling in buying and selling transactions.
Mudaraba (Muqaradah) sukuk (bonds)
These are investment sukuk that represent ownership of units of equal value in the Mudaraba equity and are registered in the names of holders on the basis of undivided ownership of shares in the Mudaraba equity and its returns according to the percentage of ownership of share. The owners of such sukuk are the rabbul-mal.
Murabaha
Sale of goods with an agreed upon profit mark up on the cost. Murabaha sale is of two types. In the first type, the Islamic bank purchases the goods and makes them available for sale without any prior promise from a customer to purchase them. In the second type, the Islamic bank purchases the goods ordered by a customer from a third party and then sells these goods to the same customer. In the latter case, the Islamic bank purchases the goods only after a customer has made a promise to purchase them from the bank.
Musharaka
A form of partnership between the Islamic bank and its clients whereby each party contributes to the capital of partnership in equal or varying degrees to establish a new project or share in an existing one, and whereby each of the parties becomes an owner of the capital on a permanent or declining basis and shall have his due share of profits. However, losses are shared in proportion to the contributed capital. It is not permissible to stipulate otherwise.
Musharaka sukuk
These are investment sukuk that represent ownership of Musharaka equity. It does not differ from the Mudaraba sukuk except in the organization of the relationship between the party issuing such sukuk and holders of these sukuk, whereby the party issuing sukuk forms a committee from the holders of the sukuk who can be referred to in investment decisions.
[ N ]
Name financing
Financing on the basis of personal relationships rather than financial fundamentals.
Non-executive director
Means any director who is not an
executive director .[ O ]
Offering Shari'a Financing Contracts
Entering into, or making arrangement for another person to enter into, a contract to provide finance in accordance with Shari'a principles, such as murabaha, bay muajjal, bay salam, ijara wa iktina and istisna'a contracts.
Off-balance Sheet ('OBS') Activities
A banks' business that does not generally involve booking assets or liabilities. Examples include the granting of standby commitments, letters of credit and guarantees.
Added: October 2018Off-site ATM
Automated Teller Machine. An unattended electronic machine in a public place (other than the premises of the owning bank), connected to a data system and related equipment and activated by a bank customer to obtain cash withdrawals and other banking services.
Operational Deposits
The deposits generated by clearing, custody and cash management activities.
Added: October 2018Operational risk
The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk1 and Shari'a Compliance risk, but excludes strategic and reputational risk.
1 Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.
Added: January 2015Operating a Shari'a compliant collective investment undertaking
Operating a Shari'a compliant collective investment undertaking means operating, establishing or winding up a Shari'a compliant CIU.
Operating Ijarah (see Ijarah)
Ijarah contracts that do not end up with the transfer of ownership of leased assets to the lessee.
Option(s)
An option is a contract giving the buyer the right, but not the obligation, to buy or sell any of the following at a specific price on or before a certain date:
(a) Currency of the Kingdom of Bahrain or any other country or territory;(b) Palladium, platinum, gold or silver; or other commodity;(c) Option to acquire or dispose of a financial instrument of the kind specified by this definition by virtue of the above.Amended: January 2011Originator Information
a) The name of the payer;b) The address of the payer; andc) The account number of the payer (where funds are being remitted from an account with your bank).Added: December 2018Outsourcing
The use of a person to provide customised services to a licensee other than (a) a member of a licensee's board acting in his capacity as such (b) an individual employed by a licensee under a contract of service or (c) a licensed insurance manager providing services to a captive insurance firm.
Outsourcing Provider
The person providing the customised services as described in the definition of "outsourcing".
Overseas Islamic bank licensees
Deleted [07/2017].
Deleted: July 2017Overseas Islamic retail bank licensee
Deleted [07/2017].
Deleted: July 2017Overseas Islamic wholesale bank licensee
Deleted [07/2017].
Deleted: July 2017Over the counter (OTC)
A decentralised market (as opposed to an exchange market) where geographically dispersed dealers are linked by telephones and computer screens. OTC trades are more often than not denominated in non-standard amounts and on non-standard terms (e.g. maturity outside IMM dates). The term may also refer to trading in securities not listed on a stock or bond exchange.
[ P ]
Payment Initiation Service
A 'payment initiation service' is an online service to initiate a payment order at the request of a payment service user from a payment account held at another account servicing payment service provider with the user's consent and authentication.
Added: December 2018Payment Initiation Service Provider (s) or PISP(s)
A person licensed by the CBB to undertake payment initiation services.
Added: December 2018Parallel Salam (see Salam)
A Salam contract whereby al-muslam ileihi depends, for executing his obligation, on receiving what is due to him — in his capacity as al-muslam — from a sale in a previous Salam contract, without making the execution of the second Salam contract dependent on the execution of the first one.
Parent or Parent Undertaking
An undertaking or individual ("P"), which has the following relationship to another undertaking ("S"):
(i) P holds (alone or under an agreement with other shareholders) a majority of the voting rights in S;(ii) P (alone or in conjunction with its other subsidiary undertakings), has the right to appoint or remove a majority of its board of directors;(iii) P has the right to exercise a dominant influence over S, either through provisions contained in S's memorandum or articles, or a control contract; or(iv) P is a parent undertaking of a parent undertaking of S.Participant(s)
A (CIU) participant is a person with one or more
holdings in a CIU.Added: January 2011Participation (see Musharaka)
A Musharaka in which the Islamic bank owns shares or units representing an equity stake in another firm's capital.
Person
Unless the context requires otherwise, a natural or corporate person.
Personal account transaction
A transaction undertaken by an employee of an
Islamic bank licensee in afinancial instrument , for his own account.Added: January 2011Politically Exposed Persons or 'PEPs'
'Politically Exposed Persons' or 'PEPs' means individuals who are, or have been entrusted with prominent public functions in Bahrain or a foreign country, for example Heads of State or government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations or important political party officials or persons who are or have been entrusted with a prominent function by an international organisation. Business relationships with family members or close associates of PEPs involve reputational risks similar to PEPs themselves. The definition is not intended to cover middle-ranking or more junior officials in the foregoing categories. Bahraini PEPs would include all Ministers, all MPs, and all Ministry officials with the rank of Undersecretary or above.
Amended: July 2016Pooled funds
In investments, the combination of funds for the benefit of a common project, or a group of investors who use their combined influence to manipulate prices.
Price risk
The narrow definition of price risk as applied to securities is as follows: The risk that the value of a security (or a portfolio) will decline in the future. Price risk can apply to any financial instrument, commodity, or foreign exchange position. Therefore a wider definition used by hedge funds is: The risk that the value of position in financial instruments, commodities or foreign exchange will decline due to moves in market factors.
Amended: January 2015Principal
Means the amount of credit received plus any other potential other charges, the total of which is subject to profit.
Added: October 2012Principal Amount
The amount of any outstanding claim (excluding any interest and other expenses) on, or contingent liability in respect of, the relevant counterparty.
Added: October 2018Profit equalization reserve
Profit equalisation reserve is the amount appropriated by the Islamic bank out of the mudaraba income, before allocating the mudarib share, in order to maintain a certain return level of return on investment for investment account holders and increase owners' equity.
PSE
A public sector entity which is specified as such either by the central bank ('domestic PSE') or by an overseas banking supervisory authority ('foreign PSE'). Domestic PSEs include those entities owned by the government, excluding the subsidiaries of such institutions undertaking commercial activities.
Added: October 2018Public Offering(s)
An offer of securities to the general public. (See Rule BC-9.5.9).
Amended: January 2013
Added: January 2011[ Q ]
Qualified by Exception
A report issued by an appointed expert that is qualified and indicates that certain areas or issues remain unresolved or are unverifiable due to certain limitations imposed on the appointed expert's work. The report will clearly indicate the type and reason for exception and the action that would have been taken by the appointed experts had the mentioned limitation not been placed on their work.
Added: October 2011Qualifying Holding(s) (as referred to in Module CM)
[Deleted in April 2015.]
Deleted: April 2015
[ R ]
Ras-almal (see Salam)
Capital (cost) paid (in cash, kind or benefit) in a Salam contract, i.e. price.
Real time promotion
A real time promotion is a promotion made in the course of a personal visit, telephone conversation or other interactive dialogue.
Added: January 2011Regulated banking services
Any of the regulated activities permitted to be undertaken by a
conventional bank licensee (see Volume 1, LR-1.3).Regulated insurance services
As defined under Volume 3, Section AU-1.4.
Regulated Islamic banking services
Any of the regulated activities permitted to be undertaken by an
Islamic bank licensee (see LR-1.3).Relevant Authorities
For the purposes of Module FC, relevant authority refers to the authorities listed in Rule FC-5.3.2.
Amended: October 2014Remuneration
Means all types of compensation including but not limited to salary (fixed and variable bonus), fee and non-cash benefits such as health insurance, car housing, education, grants of stock, stock options or pension benefits.
Amended: January 2014Reporting Accountant
A Reporting Accountant is a person appointed by the CBB under the authority of Article 114 of the CBB Law as an Inspector of the business of a licensee or listed company.
Added January 2009Representative office
A person who is licensed by the CBB as per Volume 5 (Specialised Licensee/Representative Office) Module AU to undertake only representative office functions:
(i) Gather financial, economic and commercial information;(ii) Carry out general promotional activities; and/or(iii) Provide general assistance of a non specific nature to resident and non residentcustomers of the overseas entity/group the office is representing.Amended: January 2011ROAA
Return on Average Assets.
ROAE
Return on Average Equity.
Repo
(a) An agreement between a seller and buyer for the sale of securities, under which the seller agrees to repurchase the securities, or equivalent securities, at an agreed date and, usually, at a stated price;(b) An agreement between a buyer and seller for the purchase of securities, under which the buyer agrees to resell the securities, or equivalent securities, at an agreed date and, usually, at a stated price.Amended: January 2011Repo-style Transactions
Transactions involving the sale and repurchase ('repo') of assets, purchase and resale ('reverse repo') of assets, as well as securities lending and securities borrowing. The term 'repo-style transaction' is generally taken to refer to any of the following transactions of a bank:
i Sale and repurchase ('repo') of securities — the bank agrees to sell securities to a third party for cash with a commitment to repurchase the securities at an agreed price on an agreed future date.ii Securities lending — the bank lends securities to a third party and receives either cash or other securities from that party in exchange as collateral.iii Purchase and resale ('reverse repo') of securities — the bank agrees to acquire securities from a third party for cash, with a commitment to resell the securities at an agreed price on an agreed future date (i.e. the reverse of repo transactions).iv Securities borrowing — the bank borrows securities from a third party and gives cash or other securities to that party in exchange as collateral.Added: October 2018Reputational risk
Reputational risk is the potential that negative publicity regarding an institution's business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions.
Resident
This term includes:
(a) Persons of whatever nationality whose normal place of residence or business is in Bahrain at the relevant time or whose main source of income is earned from Bahrain.(b) Persons who have been granted permanent resident permits in Bahrain.(c) Corporate and other institutions who have a permanent registered address in Bahrain and/or a commercial registration number including branches or subsidiaries located in Bahrain of overseas registered corporate or other institutions (excluding offshore companies). However, dealings with the offices of such corporations outside Bahrain in respect of non-Bahrain business is permitted.(d) Staff of Bahrain Embassies and Consulates living outside Bahrain.(e) Agents or Agencies located abroad but acting on behalf of or for the account of Bahrain residents.Restricted Investment Accounts
With this type of account, the investment account holder imposes certain restrictions as to where, how and for what purpose his funds are to be invested. Further, the Islamic bank may be restricted from commingling its own funds with the restricted investment account funds for purposes of investment. In addition, there may be other restrictions which investment account holders may impose. For example, investment account holders may require the Islamic bank not to invest their funds in instalment sales transactions or without guarantor or collateral or require that the Islamic bank itself should carry out the investment itself rather than through a third party. Restricted participating investment bonds and restricted participating investment units (investment funds) and any other accounts of a similar nature are equivalent to the restricted investment accounts.
Retail customer(s)
Defined in Rule BC-9.4.10. A retail customer means a
customer who is not classified as anaccredited investor under Rules BC-9.4.6.Added: January 2011Retail Deposits
Deposits placed with a bank by a natural person. Deposits from legal entities, sole proprietorships or partnerships are captured in wholesale deposit categories.
Added: October 2018Rights or interests in Financial instruments
Rights to or interests in all financial instruments.
[ S ]
Safeguarding Shari'a compliant financial instruments
Safeguarding Shari'a compliant financial instruments means the safeguarding and administration of Shari'a compliant financial instruments belonging to another person (see LR-1.3.29 ff).
Salam
Purchase of a commodity for deferred delivery in exchange for immediate payment according to specified conditions or sale of a commodity for deferred delivery in exchange for immediate payment.
Salam or Istisna'a sukuk
These are sukuk that represent a sale of a commodity on the basis of deferred delivery against immediate payment. The deferred commodity is a debt in-kind against the supplier because it refers to a commodity which is accepted based on the description of the seller.
Secured Obligations
Obligations that are secured by legal rights on specifically designated assets owned by the bank which are used in the case of bankruptcy, insolvency or liquidation.
Added: October 2018Security(ies) (as referred to in Chapter BC-8 and in the definition of market)
"Securities" means shares or bonds issued by shareholding companies, government debt instruments and the following financial instruments:
(a)Shares in companies and othersecurities equivalent to shares in companies or other entities, and depositary receipts in respect of shares;(b)Bonds or other forms of debt, including depositary receipts in respect of suchsecurities ;(c)Warrants ;(d) Units, rights or interests (however described) of theparticipants in a collective investment scheme;(e)Options ,futures and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event);(f)Options ,futures and any other derivative contract relating to commodities that can be physically settled;(g) Units to Real Estate Investment Trusts (REITs);(h) Index tracking products including Islamic indices;(i) Any other financial instrument approved as a financial instrument by the CBB for the purpose of trading such instrument on an exchange; and(j) Islamicsecurities , being those financial instruments that are Shari'a compliant.Amended: January 2011Securitisation
The financial engineering process for the creation and issuance of Sukuk, where:
(a) Payment of face value and income is derived from the cash flows generated by the securitised assets, or by the pool of assets that underlie the issuance of the Sukuk; and(b) Legal or beneficial ownership of the underlying assets is transferred to the investors in the form of Sukuk.Added: January 2015Self-Regulatory Organisation(s) or (SROs)
"Self-Regulatory Organizations (
SROs )" means any organisation licensed by the CBB under Volume 6 of the Markets and Exchanges (MAE) Module, or the Clearing, Settlement and Central Depository (CSD) Module, or any other organisation recognised as anSRO by the CBB.Added: January 2011Senior Manager/Management
Refers to individuals occupying the position of CEO or head of function.
Service level agreement
An agreement forming part of the Outsourcing Agreement between the outsourcing service provider and the bank that outlines the standards of service to be provided by the outsourcing service provider.
Shareholders
a) In relation to a share which is represented by a bearer certificate, the person who holds the certificate; b) in relation to a share that is not represented by a bearer certificate, the person whose name is entered on the register in relation to the share.
Shares
A share or stock in the share capital of an enterprise, whether incorporated or unincorporated, but excluding units in
collective investment undertakings .Shari'a board or shari'a supervisory board
An independent body of specialized jurists who, collectively, are entrusted with the duty of directing, reviewing and supervising the activities of an Islamic financial institution in order to ensure that they are in compliance with Islamic Shari'a rules and principles.
Shari'a compliant financial instruments
Any of the following instruments, that are Shari'a compliant:
(a) Transferable securities;(b) Money market instruments;(c) Units incollective investment undertakings ;(d) Interests in real estate property;(e) Certificates representing certain Shari'a compliant securities; and(f) Rights or interests in financial instruments.Amended: January 2011Shari'a compliant financial Instruments Trader
A person who is engaged in buying or selling Shari'a compliant
financial instruments .Shari'a compliant money-market instruments
Those classes of instruments which are normally dealt in on the money market, that are endorsed as compliant with Shari'a principles.
Shari'a Supervisory Board
A Board of Shari'a experts appointed to review a bank's compliance with the Shari'a, with respect to its operations.
Small Business Deposits
Deposits that are considered as having similar characteristics to retail accounts, provided the total aggregated funding raised from one small business customer is less than BHD 500,000 (on a consolidated basis where applicable).
Added: October 2018Soft dollar agreement (as referred to in Chapter BC-9)
An agreement in any form under which an
Islamic bank licensee receives goods or services in return for investment business put through or in the way of another person.Added: January 2011Specialised licensee(s)
A person licensed under Volume 5 of the CBB Rulebook.
Added: April 2011Spot transactions
A foreign exchange transaction in which each party promises to settle the transaction two days after the transaction date.
Stable Deposits
Amounts of the deposits that are fully insured by a deposit insurance scheme which represents a portion from the deposits in the transactional accounts (e.g. accounts where salaries are automatically deposited), as per the provisions of those regulations.
Added: October 2018Subsidiary(ies)
An entity, including an unincorporated entity such as a partnership that is controlled by another entity (known as the parent entity).
Amended: April 2015
Added: January 2015Subsidiary undertaking
A company or other enterprise controlled by another company or enterprise (the parent or the holding company).
Succession plan
A plan developed by a bank that would lay down the bank's strategy with respect to succession of various senior management or board positions within the bank.
Suspicious Transaction
Any transaction or dealing which raises in the mind of a person involved, any concerns or indicators that such a transaction or dealing may be related to money laundering or terrorist financing or other unlawful activity. Examples of suspicious transactions are set out in Appendix FC 3.
Swap(s)
A financial contractual agreement between two parties to exchange (swap) a set of payments that one party owns for a set of payments owned by the other party.
Added: January 2011[ T ]
Tranche
One of several related securities offered at the same time. Tranches from the same issuer usually have different risk, reward, and/or maturity characteristics.
Transactional Accounts
Accounts used to settle transactions pertaining to salaries and customer income.
Added: October 2018Transfer Risk
The risk that a borrower will not be able to convert local currency into foreign exchange and so will be unable to make debt service payments in foreign currency. The risk normally arises from exchange restrictions imposed by the government in the borrower's country.
Added: July 2017Transferable securities
Those classes of securities which are negotiable, with the exception of instruments of payment. Transferable securities include:
(a) shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares;(b) bonds or other forms of securitized debt, including depositary receipts in respect of such securities;(c) warrants;(d) any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.Transferee
For purpose of Chapter GR-4, means any person licensed to carry out the transferred banking business.
Added: October 2012Transferor
For the purpose of Chapter GR-4, means the bank wishing to transfer any part of its banking business according to the provisions of Resolution No.(33) for the year 2012.
Added: October 2012Trigger event(s) (as used in Section CA-2.1)
A trigger event is the earlier of:
(a) A decision that a write-off (without which theIslamic bank licensee would be unviable) is necessary, as determined by the CBB; or(b) The decision to make a public sector injection of capital (or equivalent support) without which theIslamic bank licensee would have become unviable (as determined by the CBB).Added: January 2015Trilateral meeting
A meeting between a bank, an appointed expert and the CBB.
Amended: October 2011[ U ]
Underwriting (as defined in Paragraph CM-4.2.7)
A binding commitment by the reporting bank to purchase securities issued by, or provide syndicated credit facilities to (as the case may be) an unconnected party ("the issuer" or "the borrower") at a mutually agreed price.
Added: January 2012Unencumbered Assets
Assets free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell or transfer these assets. Liquid assets should not be used to cover trading positions or to secure, collateralize or credit-enhance any transaction, nor be designated to cover operational costs (such as rents and salaries).
Added: October 2018Units in Shari'a compliant collective investment undertakings
Rights or interests (however described) of the participants in a collective investment scheme.
Unrestricted Investment Accounts
With this type of account, the investment account holder authorizes the Islamic bank to invest the account holder's funds in a manner which the Islamic bank deems appropriate without laying down any restrictions as to where, how and for what purpose the funds should be invested. Under this arrangement the Islamic bank can commingle the investment account holder's funds with its own funds or with other funds the Islamic bank has the right to use (e.g., current accounts). The investment account holders and the Islamic bank generally participate in the returns on the invested funds. Unrestricted participating investment bonds and any other accounts that are of a similar nature are equivalent to unrestricted investment accounts.
[ V ]
VaR
An estimate expressed as a monetary value of the probability of losses on a portfolio of financial instruments based on a statistical analysis of historical market price trends, correlations, and volatilities.
Variation Margin
Clearing members or clients funded collateral posted on a daily or intraday basis, to a CCP based upon price movements of their transactions.
Added: October 2018[ W ]
Warrants
Warrants are instruments that confer an entitlement to subscribe for shares, debenture and government and public securities. The rights conferred must be rights to 'subscribe' for the relevant investments. This means that they are rights to acquire the investments directly form the issuer of the investments and by way of the issue of new investments.
Added: January 2011Wholesale Funding
Deposits and obligations that are raised from non-natural persons (i.e. legal entities, including sole proprietorships and partnerships).
Added: October 2018Without delay
The phrase 'without delay' means, ideally, within a matter of hours of a designation by the United Nations Security Council or its relevant Sanctions Committee (e.g. the 1267 Committee, the 1988 Committee, the 1718 Sanctions Committee or the 1737 Sanctions Committee). For the purposes of S/RES/1373(2001), the phrase 'without delay' means upon having reasonable grounds, or a reasonable basis, to suspect or believe that a person or entity is a terrorist, one who finances terrorism or a terrorist organisation. In both cases, the phrase 'without delay' should be interpreted in the context of the need to prevent the flight or dissipation of funds or other assets which are linked to terrorists, terrorist organisations, those who finance terrorism, and to the financing of proliferation of weapons of mass destruction, and the need for global, concerted action to interdict and disrupt their flow swiftly.
Added: October 2019List of Circulars
List of Circulars included in Respective Modules
Business and Market Conduct (BC)
Circular Ref. Date of Issue Module Ref. Circular Subject EDBC/73/96 1 May 1996 BC 1.1 Explanatory note on the promotion of Banking andFinancial Products offered in/from Bahrain by Means of Incentives etc. BS.C7/91/442 10 Sep 1991 BC 1.1 Promotion of Banking Services 85/25 2 May 1985 BC 2 Code of Conduct for Foreign Exchange Dealers and Brokers 83/5 10 Apr 1983 BC 3 Disclosure of Information about Individual Accounts BS/11/2004 10 Aug 2004 BC 4.1 Savings Accounts EDBO/51/02 2 Apr 2002 BC 4.2 Charges to Customers BC/5/00 8 Mar 2000 BC 4.3 Accounts held for Clubs and Societies in Bahrain BS.D(111)/94/1507 24 Sep 1994 BC 4.4 Fees on Current Accounts BC/2/01 3 Mar 2001 BC 4.5 Brokerage Fees in Bahrain ODG/145/92 18 Aug 1992 BC 4.6 New or expanded products and facilities in the Retail Banking Field EDBO/46/03 8 Apr 2003 BC 4.7 Inheritance — Financial Procedures EDBO/27/96 25 Sep 1996 BC 5.1 Regulation Relating to a Penalty System for "Dishonored Cheques" OG/399/94 28 Nov 1994 BC 5.2 Returned Cheques EDBO/49/01 6 May 2001 BC 5.3 Penalty Charges on Returned Cheques BC/8/98 24 May 1998 BC 6.1 Off-site ATMs EDBO/45/02 13 Mar 2002 BC 6.2 GCC ATM Network Charges EDBC/105/96 19 May 1996 BC 7.1 Minimum Terms for Mudaraba Contracts Capital Adequacy (CA)
Circular Ref. Date of Issue Module Ref. Circular Subject BC/09/2001 26 Nov 2001 CA 1 — CA 9 PIRI Regulations BC/01/98 10 Jan 1998 CA 2.5 Risk Assets Ratio OG/78/01 20 Feb 2001 CA 2.5 Monitoring of Capital Adequacy High Level Controls (HC)
Circular Ref. Date of Issue Module Ref. Circular Subject EDBS/... /04
(Consultative Paper)24 Feb 2004 HC 1 High Level Controls Requirements for Banks - Enhancing Corporate Governance BC/23/99 8 Nov 1999 HC 1 'Enhancing Corporate Governance in Banking Organisations' BC/904/95 24 Jul 1995 HC 1.6 Notification to, and approval from the Agency for certain matters BC/11/98 27 Jul 1998 HC 2 Terms and Definitions Applying to the Management of Banks and Financial Institutions BC/8/00 24 May 2000 HC 2 Controllers of, and holdings and transfers of significant ownership or controlling interests in, Agency licensees BC/13/99 15 Jun 1999 HC 3 Compliance, Risk Management and Internal Controls BMA/1287/94 6 Nov 1994 HC 4 Foreign Exchange, Securities and Other Dealers BC/09/2001 26 Nov 2001 HC PIRI Regulations Licensing and Authorisation Requirements (LR)
Circular Ref. Date of Issue Module Ref. Circular Subject 5/77 8 Mar 1977 LR B-1.1, LR 3.3 Permitted Business Transactions with Residents OG/16/90 10 Jan 1990 LR 2.3, LR 3.3 'no subject' OG/192/98 16 Jun 1998 LR 4 Financial Trust Regulation no reference Apr 1981 LR 5 Precious Metals and Commodities BS/07/04 6 May 2004 LR 5 Record Keeping Arrangements Audit Firms (AU)
Circular Ref. Date of Issue Module Ref. Circular Subject BC/5/82 5 Aug 1982 AU 1.1 Approval of Appointment of Auditors ODG/59/99 15 Jul 1999 AU 1.1 — AU 1.2 Audit Partners of External Auditors and Reporting Accountants of Locally Incorporated Banks ODG/162/03 21 May 2003 AU 1.4, AU 2.2 Outsourcing BS/9/03 14 Sep 2003 AU 1.5 Operational Risk Management BC/1/97 12 Feb 1997 AU 1.6 Request for Approval for Dividend Distribution 14/86 19 Jun 1986 AU 2.1 Auditors' Relationship with Supervisors BMA/751/93 8 Jul 1993 AU 3.2.2 Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange. BC/1/99 22 Feb 1999 AU 3.3 Enhancing Bank Transparency EDBC/6/01 14 Oct 2001 AU 3.4 Money Laundering Regulation BC/4/99 17 Mar 1999 AU 3.7 Accounts for the Year Ending 31 December 1999 BC/6/97 21 Apr 1999 AU 4 Reporting Accountants Credit Risk Management (CM)
Circular Ref. Date of Issue Module Ref. Circular Subject BC/117/95 1 Feb 1995 CM 1 — CM 2 Risk Management OG/127/01 18 Mar 2001 CM 2.3 Developing a Sound Credit Culture EDBC/1/95 26 Aug 1995 CM 3 Provisioning Policies of Branches of Foreign Banks in Bahrain OGD/27/88 9 Feb 1988 CM 3.4 Provisions Against Country Debt EDBC/178/96 5 Oct 1996 CM 5 Islamic Facilities BC/09/2001 26 Nov 2001 CM 4, CM 8 PIRI Framework EDBC/128/96 4 Aug 1996 CM 5 Staff Loans OG/45/88 13 Mar 1988 CM 1, CM 6 Write-Off — Credit Facility ODG/247/2004 25 Jul 2004 CM 7 Consumer Finance EDBC/105/96 26 Jun 1996 CM 8 Mudaraba Contracts — Minimum terms and Conditions BC/3/98 21 Feb 1998 CM B-2 Basel Committee on Banking Supervision Framework for the Evaluation of Internal Controls Systems Financial Crimes (FC)
Circular Ref. Date of Issue Module Ref. Circular Subject BC/17/97 10 Nov 1997 FC B-1 Money Laundering OG/308/89 14 Oct 1989 FC B-1 Money Laundering EDBC/6/01 14 Oct 2001 FC 1, FC 4, FC 7 Re:Money Laundering Regulation BC/1/02 27 Jan 2002 FC 3 FATF Special Recommendations on Terrorism Financing BC/3/00 5 Mar 2000 FC 5 Re: Accounts for Charity Organisations OG/423/01 1 Oct 2001 FC 8 UN Security Council Resolution 1373 (2001) Operational Risk Management (OM)
Circular Ref. Date of Issue Module Ref. Circular Subject BS/9/03 14 Sep 2003 OM 1 Operational Risk Management ODG/162/03 21 May 2003 OM 2 Outsourcing BC/9/98 16 Jun 1998 OM 3 Electronic Money and Electronic Banking Activities BC/6/02 24 Jun 2002 OM 3 Risk Management Principles for Electronic Banking ODG/347/03 28 Sep 2003 OM 4.2 Succession Planning Public Disclosure Requirements (PD)
Circular Ref. Date of Issue Module Ref. Circular Subject BC/10/97 3 Aug 1997 PD 1.3 Accounting and Auditing Standards for Islamic institutions BC/4/99 17 Mar 1999 PD 1.3. Public Disclosure no reference (partial) Apr 1981 PD 1.5 Precious Metals and Commodities BMA/751/93 8 Jul 1993 PD 1.1, PD 1.3,
PD 1.4, PD 3.2Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange. EDBC/782/93 17 Jul 1993 PD 1.1 The Interests of Directors, Chief Executive and Senior Managers in the Shares of Locally Incorporated Banks Quoted on the Bahrain Stock Exchange. BC/1/99 22 Feb 1999 PD 2.2 Enhancing Bank Transparency OG/73/02 17 Feb 2002 PD 4.2 Duty to Display Current Effective Rate of Interest ODG/247/2004 25 Jul 2004 PD 4.2 Consumer Finance OG/107/01 3 Mar 2001 PD 4.3 Disclosure of BD Interest Rates OG/425/94 21 Dec 1994 PD 4.4 Deposit Protection OG/423/93 28 Nov 1993 PD 4.4.2 Deposit Protection Scheme (the "Scheme") BS/10/2004 3 Aug 2004 PD 5 Public Disclosure via the Internet BC/20/1999 28 Sep 1999 PD 2.2 Enhancing Islamic Banks'Transparency Compensation (CP)
Circular Ref. Date of Issue Module Ref. Circular Subject OG/423/93 28 Nov 1993 CP 1 — CP 2 Deposit Protection Scheme (the "Scheme") OG/425/94 21 Dec 1994 CP 2.4 Deposit Protection BMA Reporting Requirements (BR)
Circular Ref Date ofIssue Module Re Circular Subject BC/4/99 (partial) 17 Mar 1999 BR 1.1, BR 3.1 Annual Accounts for Islamic Banks for the Year Ending 31 December 1999 no reference Apr 1981 BR 1.1.4 Precious Metals and Commodities BC/12/98 28 Sep 1998 BR 1.1 Accounting and Auditing Standards for Islamic Banks ODG/329/03 10 Sep 2003 BR 1.1 Corporate Governance Reporting EDBC/1/95 26 Aug 1995 BR 1.2 Provisioning Policies of Branches of Foreign Banks in Bahrain BC/1/99 22 Feb 1999 BR 2.1 Enhancing Banks' Transparency BC/ 20/1999 20 Sep 1999 BR 3.1 Enhancing Islamic Banks' Transparency BMA/751/93 (partial) 8 Jul 1993 BR 4.3 Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange. BC/12/01 (partial) 26 Nov 2001 BR 3.1.10, BR 5.1.2 The Monitoring and Control of Large Exposures of Banks Licensed by the Agency ER/118/98 2 Feb 1998 BR 3.2, BR 4.1 Revised Statistical Returns ER/247/98 22 Mar 1998 BR 3.2, BR 4.1 Revised Statistical Returns OG/89/88 30 Jun 1988 BR 4.2 Reserve Balances BC/904/95 partial) 24 Jul 1995 BR 5.1 Notification to, and approval from the Agency for certain matters BC/309/94 28 Mar 1994 BR 5.1 Management Personnel BMA/1287/94 6 Nov 1994 BR 5.1 Foreign Exchange, Securities and Other Dealers BC/13/99 15 Jun 1999 BR 5.1 Compliance, Risk Management and Internal Controls EDBC/6/01 14 Oct 2001 BR 5.1 Re: Money Laundering Regulation EDBC/73/96 (partial) 1 May 1996 BR 5.1 Explanatory note on the promotion of Banking and Financial Products offered in/from Bahrain by Means of Incentives etc. BMA(4)/91/832 22 Oct 1991 BR 5.1.10 Specimen Signatures ODG/145/92 18 Aug 1992 BR 5.3 New or expanded products and facilities in the Retail Banking Field BC/3/00 5 Mar 2000 BR 5.3.3 Re: Accounts for Charity Organisations BC/09/2001 26 Nov 2001 BR1.1, BR 3.1, BR 5.2 New Prudential Regulations for Islamic Banks CBB Reporting Forms
LR LR Licensing Requirements
Appendix LR 1: Annual License Fee Form (ALF)
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Appendix LR-2: Direct Debit Authorisation Form
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[Deleted]
Deleted: October 2011[Deleted]
Deleted: October 2011BC BC Business and Market Conduct
Appendix BC 1: List of Dishonoured Cheques
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FC FC Financial Crime
Appendix FC 2: Suspicious Transaction Report (STR)
[Deleted in July 2016]
Deleted: July 2016Appendix FC 4: MLRO Form
[Deleted in July 2016]
Deleted: July 2016BR BR CBB Reporting Requirements
Appendix BR 2: Statistical Returns
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Appendix BR 5: Returns — PIRI
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Appendix BR 5A: Capital Adequacy Form
[Deleted in August 2016]
Deleted: August 2016Appendix BR 6: Board and Committee Meetings
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Appendix BR 7: Quarterly Report on Overseas Banking Subsidiaries and Branches
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Appendix BR 9: External Auditor's PIR review letter
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Appendix BR 10: Connected Counterparty Exposures
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Appendix BR 12: Appointed Experts Report
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Appendix BR-14: Details of Remuneration Paid
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Appendix BR-15: Details of Remuneration for Top 12 Employees
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Appendix BR-16: Eligible Accounts Report for the Deposits/Unrestricted Investment Accounts Protection Scheme
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Appendix BR-19 Large Exposures Report
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Appendix BR-20 Guidelines for Completion of Supplementary Information Form by Banks
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Appendix BR-21: Information Required for Annual and Interim Financial Review
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Appendix BR-23 Liquidity Coverage Ratio (LCR)
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Appendix BR-24 Net Stable Funding Ratio (NSFR)
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EN EN Enforcement
Appendix EN 1: Enforcement
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OM Operational Risk Management
Appendix OM-1 Cyber Security Incident Report
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ALF Annual Licence Fee
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CBB Authorization Forms
LR LR Licensing and Authorisation Requirements
Form 1: Application for a License
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[Deleted]
Deleted: April 2011Form 2: Application for Authorisation of Controller
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Form 3: Application for Approved Person Status
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[Deleted]
Deleted: April 2011Supplementary Information
HC: HC: High-level Controls
Appendix HC-(i) Agreed-upon Procedures re Compliance with HC-5 (Remuneration)
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GR GR General Requirements
Appendix GR-1: Application for Transfer of Business
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BC BC Business and Market Conduct
Appendix BC 2: CBB Control List for Dishonoured Cheques
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Appendix BC 3: CBB List of abusers of cheques — active
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Appendix BC 4: CBB List of abusers of cheques — inactive
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Appendix BC 5: Market Terminology and definitions
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Appendix BC 6: Proposed Scale of Brokerage Fees
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Appendix BC 7: Note on the Minimum Terms and Conditions for Mudaraba Contracts and Other Fiduciary Relationships
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Appendix BC 8: Caps on Fees and Charges for Standard Services Provided to Individuals Applicable to Retail Banks From 01/May/2018
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CA CA Capital Adequacy
Appendix CA 1: Minority Interest Illustrative Example
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Appendix CA 2: Treatment of Counterparty Credit Risk and Cross-product Netting
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Appendix CA 3: The 15% of Common Equity Limit on Specified Items
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Appendix CA 4: Capital Treatment For Failed Trades and Non-DvP Transactions
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Appendix CA 5: Supervisory Slotting Criteria For Istisna in Project Finance and Musharakah in a Business Venture
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Appendix CA 6: Supervisory Slotting Criteria For Diminishing Musharakah in Real Estate
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Appendix CA 7: Table for Mapping Notations of ECAIs
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Appendix CA 8: Bahrain Sovereign and Public Sector Entities Eligible for Zero Risk Weighting
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Appendix CA 9 Supplementary Schedules to Calculate Capital Charges under Standardised Approach (moved from BR-5A)
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Appendix CA 10: Investments in Commercial Entities
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Appendix CA 11: Comprehensive Example of Deductions
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Appendix CA 12: Comprehensive Example of Deductions of T2 2% Cap
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Appendix CA 13: Worked Example of Maturity Ladder Approach For Calculating Commodities Risk
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Appendix CA 14: Mapping of Business Lines
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CM CM Credit Risk Management
Appendix CM 1: Sovereign Debt Provisioning Matrix
[Deleted in January 2023]
Deleted: January 2023Appendix CM 2: Code of Best Practice on Consumer Credit and Charging
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Appendix CM 3: Credit Reference Bureau Code of Best Practice
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Appendix CM-4: Regulation in respect of Close-Out Netting under a Market Contract
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FC FC Financial Crime
Appendix FC 1: Amiri Decree Law No. 4
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Appendix FC-2A: Decree Law No. 54 (2006)
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Appendix FC-2B: Decree Law No. 58 (2006)
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Appendix FC 3: Guidelines for Detecting Suspicious Transactions
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Appendix FC 5: UN Security Council Resolution 1373 (2001)
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Appendix FC 6: Guidance Notes
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Appendix FC 7: UN Security Council Resolution 1267
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Appendix FC 8: Agreed-upon Procedures for testing Compliance with Module FC
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SG SG Shari'a Governance
Appendix SG-1 Independent Assurance Report and Management's Report on Control Procedures Relating to Shari'a Compliance and Governance Structure
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BR BR CBB Reporting Requirements
Appendix BR 1: Instructions for Completion of Statistical Returns
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Appendix BR 4: Guidelines for Completion of PIRI Bahraini Islamic Banks
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Appendix BR 11: Guidelines for Completion of Exposures to Connected Counterparties
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Appendix BR-17: Instructions for the Completion of the Eligible Accounts Report for the Deposits/Unrestricted Investment Accounts Protection Scheme
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Appendix BR-18: Requirements for Report on Private Placements
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Appendix BR-22: Continuous Professional Development Form (CPD)
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PD PD Public Disclosure
Appendices PD-1 to PD-4 Composition of Capital Disclosure Requirements
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Please download the Common disclosure template to be used from 1 January 2019' in Word format.
Please download the 'Common disclosure template to be used during the transition of regulatory adjustments' in Word format.
Please download the 'Template for main features of regulatory capital instruments' in Word format.
Appendix PD-5 Instructions for Publication of Press Releases
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CP CP Compensation
Appendix CP 1A: Certificate of Compensation
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Appendix CP 1B: Customer Acknowledgement and Waiver
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Appendix CP 2: Resolution No. [23] of 2009 in respect of Definition of Deposit
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Quarterly Updates
January 2024
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October 2023
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July 2023
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April 2023
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January 2023
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October 2022
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July 2022
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April 2022
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January 2022
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July 2021
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April 2021
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January 2021
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October 2020
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July 2020
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April 2020
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January 2020
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October 2019
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July 2019
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April 2019
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January 2019
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October 2018
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July 2018
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April 2018
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January 2018
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October 2017
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July 2017
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April 2017
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January 2017
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October 2016
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July 2016
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April 2016
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January 2016
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October 2015
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July 2015
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April 2015
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January 2015
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October 2014
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July 2014
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April 2014
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January 2014
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October 2013
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July 2013
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April 2013
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January 2013
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October 2012
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July 2012
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April 2012
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January 2012
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October 2011
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July 2011
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April 2011
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January 2011
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October 2010
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April 2010
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January 2010
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October 2009
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July 2009
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January 2009
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April 2008
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October 2007
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July 2006
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April 2006
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January 2006
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Ad-hoc Communications
Amendments to the Dividends and Profit Repatriation Requirements_24 January 2024
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Click here to download the Volume 2 GR Module in PDF format.
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Exposure Drafts_15 January 2024
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Click here to download the Appendix A in PDF format.
Climate-related Financial Risks_7 January 2024
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Click here to download the Disclosure of climate-related financial risks.
Click here to download the Frequently asked questions on climate-related financial risks.
Click here to download the Principles for the effective management and supervision of climate-related financial risks.
Amendments to Customer Due Diligence (CDD) Requirements_7 January 2024
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Click here to download the Volume 2 FC Module in PDF format.
Amendments to the Financial Crime Module (Module FC)_26 December 2023
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New Requirements on Insurance Cover on Loans/Financing_24 December 2023
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Click here to download the Volume 2 BC Module in PDF format.
Restructuring the High-Level Controls Module (Module HC)_19 November 2023
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Environmental, Social and Governance Requirements Module_5 November 2023
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Click here to download the Common Volume ESG Module in PDF format.
Resolution No. (54) of 2023 with Respect to issuing a Regulation on the Rules and Procedures of Mergers and Acquisitions of Shares of Companies Listed on Exchanges Licensed by the Central Bank of Bahrain_1 November 2023
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Click here to download the Arabic version of Resolution No. (54) for the year 2023 in PDF format.
Reliance on Third Parties for Customer Due Diligence_16 October 2023
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Financing to Small and Medium Sized Enterprises (SMEs)_5 October 2023
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Amendments to Customer Due Dillgence (CDD) and Customer Onboarding Requirements_14 September 2023
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Dividends and Profit Repatriation_3 August 2023
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Click here to download the Volume 1 GR Module in PDF format.
Click here to download the Volume 2 CA Module in PDF format.
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Sub: Submission of CIUs Application_22 June 2023
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Employee Salary Transfers by Banks' Corporate Customers_29 May 2023
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Doctors' Education Loans Scheme supported by Tamkeen_19 April 2023
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Government Employee Certificates issued through the National Electronic Portal_30 March 2023
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Click here to download the User Guide in Arabic.
Revised High-Level Controls (HC) Module_5 March 2023
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Click here to download the Volume 1 BR Module in PDF format.
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Click here to download the Volume 1 HC Module in PDF format.
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Click here to download the Volume 1 OM Module in PDF format.
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Click here to download the Volume 1 PD Module in PDF format.
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Amendments to the Credit Risk Management (CM) Module_23 February 2023
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Click here to download the Volume 1 CM Module in PDF format.
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Trade based Money Laundering – Guidance for all Financial Institutions_16 February 2023
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Credit Protection Guarantees Provided by Tamkeen_30 January 2023
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Amendments to the Credit Risk Management Module (Module CM)_18 January 2023
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Amendments to the Financial Crime Module (Module FC) and Anti-Money Laundering and Combating Financial Crime Module (Module AML)_17 January 2023
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Pension Commutation Scheme_15 December 2022
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Amendments to the Financial Crime Module (Module FC)_1 December 2022
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Social Housing Loans Through Participating Banks_29 September 2022
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Re: Judicial Banking Orders System (JBOS)_28 September 2022
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Subject: ATM Physical Security Measures_20 September 2022
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Amendments to Cybersecurity Requirements_18 August 2022
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Amendments to Outsourcing Requirements
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Click here to download the Outsourcing Requirements July 25, 2022 Letter in PDF format.
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Re: Directive with Regards to Execution Orders Against Banks_21 July 2022
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Arab International Cybersecurity Summit_3 July 2022
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Certificates Issued through SIO Electronic Portal_27 June 2022
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Amendments to Financial Crime Module (Module FC)_15 June 2022
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Bahrain Open Banking Framework Developer Portal_18 May 2022
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Reporting of Financial Impact of Covid-19_9 May 2022
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Subject: Discrepancies in BCRB Reporting_11 April 2022
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Subject: Replacement of the Traditional Hard-Copy Residency Permits with Digital Residency Permits_31 March 2022
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Amendments to Requirements on Reporting Cyber Security Incidents Islamic Banks_28 March 2022
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Issuance of the new Collective Investment Undertakings Module_24 March 2022
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Click here to download the CIU Module.
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Re: Climate-Related Risks_14 March 2022
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Click here to download the Guidance Note for CBB Licensees.
Amendments to Module GR of the CBB Rulebook Volumes 1 and 2_9 Feb 2022
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Click here to download the Amendments to Volume 1 GR Module.
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Amendments to Take-overs, Mergers and Acquisitions (TMA) Module_19 January 2022
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Amendments to Requirements on Promotion of Financial Products and Services_16 January 2022
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Issuance of Final Amendments to the Requirements on Promotion of Financial Products and Services_25 November 2021
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Subject: Climate-Related Risks_8 November 2021
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Re: Amendments to Caps on Fees and Charges for Standard Services Provided to Individuals applicable to Retail Banks_28 September 2021
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Click here to download the Appendix BC-8 in PDF format.
Amendments to the Financial Crime Module (Module FC)_14 September 2021
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Requirements on Dormant Accounts and Unclaimed Balances_2 September 2021
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Subject: Cooperating with the Ministry of Housing_22 August 2021
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Click here to download the Customer Consent in PDF format.
Issuance of Amendments to Open Banking Regulations_7 July 2021
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Click here to download the Module BR.
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Click here to download the Module LR.
Re: Application of the recently issued Resolution No. (16) of 2021 promulgating the Regulation on Control in Banks on Branches of Foreign Banks_6 July 2021
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Subject: New Section OM-5.5: Cyber Security Risk Management_1 July 2021
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WPS Project Implementation_17 June 2021
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Resolution No. (16) of 2021 with respect to promulgating the Regulation Pertaining to Control in Banks_13 June 2021
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Subject: Extension of Credit Instalments Deferral_27 May 2021
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Amendments to Domestic Systemically Important Banks (DS) Module and Internal Capital Adequacy Assessment Process (ICAAP) Module_26 May 2021
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Revised Credit Risk Management Module (Module CM)_26 May 2021
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Re: Requirements to Incorporate Merchant Category Codes for Internal Fund Transfers_25 May 2021
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Amendments to Caps on Fees and Charges for Individual Customers, including Non-Bahraini Individuals_10 May 2021
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Draft Executive Resolutions issued by the Personal Data Protection Authority_26 April 2021
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Merchant Fees_20 April 2021
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Information Required for Annual and Interim Financial Review_13 April 2021
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Click here to download the Appendix (BR-20) Guidelines.
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Merchant Fees on Payments to Zakat and Charity Fund_6 April 2021
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Independent Review by Third Party Consultants_22 March 2021
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Mandating the Use of Purpose Codes for SWIFT Cross-Border Payments_17 March 2021
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Click here to download the Purpose Codes in Arabic in PDF format.
Agreed-Upon Procedures of the Financial Crime ("FC") Module_3 March 2021
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Upcoming Annual General Meetings_14 February 2021
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Prepaid Cards_12 January 2021
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Mandating the Use of Purpose Codes for SWIFT Cross-Border Payments_4 January 2021
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Click here to download the Purpose Code Logic - Internal Use in PDF format.
Click here to download the Purpose codes - Disclosure Document in PDF format.
Click here to download the Purpose Codes, Explanatory Notes and Examples - Internal Use in PDF format.
Click here to download the Subscription steps for a participant to BHD service in PDF format.
Re: CBB Rules on Blocking/Unblocking of Customer Accounts_23 December 2020
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Re: Virtual Assets - Red Flags and Indicators_30 November 2020
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Re: Combating the Financing of Terrorism - Guidance for All Financial Institutions_17 November 2020
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Subject: Cyber Security Risks and Threats Workshop by Visa_3 November 2020
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Subject: Off-Plan Sale Projects Escrow Account Manager_5 October 2020
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Re: Proof of Residency Permit__29 September 2020
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Resolution No. (123) with respect to the Regulations and Implenting Procedures for Selling Mortgaged Properties in Public Auction_29 September 2020
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Re: Fraudulent Phishing Attempts_23 September 2020
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Re: Issuance of Contactless Payment Cards_8 Sept 2020
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Re: Provision of Financial Services on a Non-discriminatory Basis_26 Aug 2020
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Re: Exemptions from Submission of Agreed upon Procedures on PIR/PIRI/PIRFM_24 August 2020
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Transition from LIBOR_29 July 2020
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Reporting of Financial Impact of COVID-19_14 July 2020
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Re: Money Laundering & Terrorist Financing Risks & Practices during Covid-19_27 May 2020
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Click here to download the Guidance Paper for Money Laundering & Terrorist Financing Risks & Practices during Covid-19 in PDF format.
Amendments to Operational Risk Management (OM) Modules - Volumes 1 and 2_18 May 2020
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Amendments to the Financial Crime (FC) and High-Level Controls (HC) Modules_7 May 2020
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Financial Impact Assessment of the Six Months Instalment Deferral_26 April 2020
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Directive Automatic Exchange of Information ("AEOI") - Common Reporting Standard ("CRS") and Foreign Account Tax Compliance Act ("FATCA") Reporting Window_16 April 2020
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Webinar on Principles and Practices of Real Estate Valuation in the Financial Services Sector_13 April 2020
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Directive on Use of Salary Transfers to Bahrainis by the Government_12 April 2020
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Additional COVID-19 Precautionary Measures_8 April 2020
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Date Sensitive Reporting Requirements Extensions/ Exemptions Under Rulebooks (Volume 1 and 2)_2 April 2020
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Agreed Upon Procedures for Financial Crime Module_1 April 2020
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Exemption for first Quarter Financial Results Preparation and Publication_30 March 2020
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Deferral of Implementation of Announced Regulatory Policy Requirements_30 March 2020
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Implementation Guidelines Regarding the 6 Months Deferral_24 March 2020
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Implementation Guidelines Regarding the 6 Months Deferral_23 March 2020
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Real Estate Valuation Requirements_19 March 2020
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Upcoming General Meetings_19 March 2020
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Regulatory Measures to Contain the Financial Repercussions of the Covid-19_17 March 2020
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Real Estate Valuation Requirements_16 March 2020
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EDBS_Services Continuity Measures_12 March 2020
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Disinfection Instructions_11 March 2020
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Click here to download the Disinfection of Public Places Guidelines in PDF format.
Click here to download the Guidelines for Quarantine Facilities and Disinfection in PDF format.
Click here to download the Home Quarantine and Disinfection Guidelines in PDF format.
Directive: Prohibiting the Practice of Blocking Accounts upon Loss of Employment_8 March 2020
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Sharing of Data on Financing to Small and Medium Enterprises_8 March 2020
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Concessionary Measures To Mitigate The Impact of Coronavirus_5 March 2020
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Account Balance Feature in BenefitPav_4 March 2020
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Caps on Fees for Credit Facilities Provided to Individuals_27 February 2020
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Removal of Prior Approval Requirement in Business and Market Conduct Module (Module BC) for Advertisements on Financial Products and Services_26 February 2020
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Wage Protection Scheme_13 February 2020
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Monthly Escrow Account Data_27 January 2020
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Instructions for Publication of Press Releases Concerning Financial Results_14 January 2020
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Transition from LIBOR_14 January 2020
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Financial Reporting for VAT purposes_13 January 2020
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Appendix BR-24 Net Stable Funding Ratio (NSFR) — Volume 2_13 January 2020
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EDBS_e-KYC Project Implementation_12 January 2020
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Certificate of Capital Deposits for Companies_2 January 2020
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Revised Operational Risk Management Module (Module OM)_31 December 2019
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EDBS_KH_New Requirements in Module HC_29 December 2019
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CBB Regulatory Policy Initiatives for the banking industry for the year 2020_25 December 2019
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Re: Fund Transfers Within the Banks_28 November 2019
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Click here to download the Appendix BC-7 of Retail Banks Standard Service Charges in PDF format.
Local Tokenization Project for Local Debit Cards_24 October 2019
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Click here to download the Spreadsheet in Excel format.
Issuance of the Amended Module TMA -Volume 6_2 October 2019
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Use of Monthly Flat Rate of Interest/Profit for Credit Facilities_24 September 2019
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SMS on Failed ATM/Point of Sale ("POS") Transactions_24 September 2019
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Contactless Payment Transactions_18 August 2019
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Proposed Requirements on Point of Sale (POS) Infrastructure_8 August 2019
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Wage Protection Scheme ("WPS")_22 July 2019
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Unclaimed Account Balances_10 July 2019
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Appendix BR-23 Liquidity Coverage Ratio Report (LCR)_ 7 July 2019
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Deleted
This communication letter has been deleted as of 27th August 2019.
Local Tokenization Project for Local Debit Cards_26 June 2019
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Agreed Upon Procedures for Module FC_19 June 2019
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Click here to download the Supplementary Information Appendix FC-8 in PDF format.
Practices for charging profit on credit cards_13 June 2019
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Account Opening, Acceptance and Deposit of funds — Clubs and Youth Centres_23 May 2019
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Re: Open Banking - Additional Implementation Guidance_24 April 2019
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New Procedures for Opening Bank Accounts for Owner's Association_24 April 2019
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Exposures to Social Housing Schemes_23 April 2019
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Issuance of the Digital Financial Advice Rules_26 March 2019
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Click here to download the Volume 2 Digital Financial Advice Module in PDF format.
Click here to download the Volume 2 Licensing Requirements Module in PDF format.
Click here to download the Volume 2 Glossary Module in PDF format.
e-KYC Project Implementation_7 March 2019
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Regulations relating to 'Crypto-Assets'_21 February 2019
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Click here to download the Crypto-Assets Module in PDF format.
Click here to download the Definitions Module in PDF format.
Brokerage Fees in Bahrain_31 January 2019
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Clarification regarding treatment of Fixed Deposits_20 January 2019
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Deleted
This communication letter has been deleted as of 11th February 2019.
Compliance Chapter in Module HC — High-Level Controls_15 January 2019
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Agreed Upon Procedures for Module FC_13 January 2019
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Amendment to Appendices BR-20 and BR-21 under CBB Rulebook_9 January 2019
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Failed ATM/POS Terminal Transactions Resulting in Un-claimed Cash Resting with Licensees_30 December 2018
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VAT and Financial Services_25 December 2018
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Disclosure of information in credit card statements_24 December 2018
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CBB Regulatory Policy Initiatives for the banking industry for the year 2019_18 December 2018
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Regulations relating to 'Open Banking'_6 December 2018
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Circular Card Rounding off Transactions_22 November 2018
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Issuance of the Leverage Ratio Requirements_4 November 2018
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Amazon Web Services "AWS" Cloud Session_11 October 2018
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Drive-Thru ATMs_16 September 2018
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Fees on letter certifying the receipt of capital amount for companies under formation_13 September 2018
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BD-USD Exchange Rate on Cards_30 August 2018
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Account opening and funds collected by way of donations_29 August 2018
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Use of Rule 78 on Early Repayment of Installment Financing Facilities_29 August 2018
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Liquidity Risk Management Module_16 August 2018
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ATM Alert_15 August 2018
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Interest/profit charges on credit cards_15 August 2018
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Amendments to Module TC for Volume 2_14 August 2018
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Amendments to LR Module_12 August 2018
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Risk Management Related Modules_5 August 2018
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Customer and public awareness about Islamic finance concepts and products and training of client facing employees_15 July 2018
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Failed ATM/POS Terminal Transactions Resulting in Un-Claimed Cash Resting with Licensees_31 May 2018
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Failed ATM/PoS Terminal Transactions Resulting in Un-claimed Cash Resting with Licensees_7 May 2018
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Amendments to the Operational Risk Management Module_29_April_2018
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Failed ATM/PoS Terminal Transactions Resulting in Un-claimed Cash Resting with Licensees_23 April 2018
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Re: Financial Penalties_15 April 2018
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Revised Form "Prudential Information Returns for Islamic Banks" (PIRI)_3 April 2018
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Implementation of Wage Protection System (WPS)_15 March 2018
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Compliance with the CBB Rules Applicable to Controllers_6 March 2018
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Compliance with the CBB Rules Applicable to Controllers_28 February 2018
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Issuance of new Internal Audit Requirements under the High Level Controls Module (Module HC)_13 February 2018
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New Requirements in the Operational Risk Management Module (OM)_13 February 2018
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CBB Regulatory Policy Initiatives for the Banking Industry for the Year 2018_31 January 2018
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Failed ATM/POS Terminal Transactions Resulting in Un-claimed Cash Resting with Licensees_11 January 2018
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Investing in Fintech_3 December 2017
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Implementation of FAS 30 — Impairment, credit losses and onerous commitments_29 November 2017
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Wage Protection System Solution — Request for Proposal_25 September 2017
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Industry Feedback Open Bank Account for CUF_13 September 2017
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Amendments to Financial Crime Module (FC)_12 September 2017
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Amendments to Financial Crime Module (FC)_10 September 2017
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Amendments to Operational Risk Management Module_7 September 2017
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Amendment to the Regulatory Sandbox Framework_28 August 2017
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Amendments to CBB Reporting Requirements Module (BR)_28 August 2017
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Issuance of the new Shari'a Governance Module_9 August 2017
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Registration of Expatriate Staff with the Labour Market Regulatory Authority_27 July 2017
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Proposed Procedures for Opening bank accounts for Companies Under Formation_27 July 2017
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Protected Cell Companies_22 June 2017
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Investment Limited Partnerships_22 June 2017
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Trust Registration and Amendment Form_22 June 2017
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Country & Transfer Risks - Additional Section to Module CM_4 June 2017
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"Bahrain Trade" Initiative_30 May 2017
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Provision of data on Commodity Murabaha and Interbank Wakala_22 May 2017
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Attachments Data Worksheet - Commodity Murabaha and Wakala View Document Insurance Charges and Costs for Credit Facilities and Debit/Credit Cards_21 May 2017
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Cyber Security Forum & Expo_25 April 2017
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Directive Common Reporting Standards (CRS)_30 January 2017
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Implementation of Resolution No. (59) of 2011 — Registration of Pledges and Liens on Securities — and its amendment Resolution No. (30) of 2015_11 January 2017
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Onsite Inspection Process_10 January 2017
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CBB Regulatory Policy Initiatives for the banking industry for the year 2017_29 December 2016
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Guidelines for IFRS9 ECL Implementation by Banks and Financing Companies_28 December 2016
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Qualifications and Core Competencies for Controlled functions_14 December 2016
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Electronic System for Commercial Licenses launched by the Ministry of Industry Commerce & Tourism ("MOICT")_16 November 2016
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Newly Issued Laws — Protected Cell Companies and Investment Limited Partnerships_6 November 2016
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Trust Law_6 November 2016
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Latest Version of Prudential Information Returns (PIR & PIRI)_30 October 2016
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Specialized Workshop on Cyber Security in Banks & Fintech_25 October 2016
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Serving the Disabled Customers_5 October 2016
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Third Annual Information Security Conference for the Financial Sector_3 October 2016
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New Appointment Notification_7 September 2016
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Transaction Advice_31 August 2016
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Implementation of Bahrain Credit Reference Bureau Code of Practice and Rules_22 August 2016
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Transaction Advice — Corporate Customer Accounts_21 August 2016
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Transaction Advice_28 July 2016
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US Dollar Parity Rate_4 July 2016
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Issuance of CRB Code of Practice_9 June 2016
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Outsourcing of Functions Containing Customer Information_9 June 2016
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Cyber Security Risk Management_1 June 2016
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Cyber Attacks on Critical IT Systems and Infrastructure_11 May 2016
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SMS Transaction Advice_28 April 2016
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Update of Appendix CA-18 and Amendments to Module CA: Bahrain Sovereign and Government Entities Eligible for Zero Risk Weighting_1 March 2016
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Reminder on Submission of Eligible Accounts Report_7 January 2016
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Amendments to the Central Bank and Financial Institutions Law No. (64) of the year 2006_27 December 2015
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Paid-up Capital Bank Certificates for the Establishment of Commercial Companies_27 December 2015
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New Electronic System for Commercial Licenses launched by the Ministry of Industry & Commerce ("MOIC")_27 December 2015
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Update of Appendix CA-8: Bahrain Sovereign and Government Entities Eligible for Zero Risk Weighting_16 November 2015
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IFRS 9: Quantitative Impact Assessment (QIA)_15 November 2015
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BIBF's Securities Market Regulation Certification Programme_30 September 2015
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Credit Check Reports Requested by Pensioners_27 August 2015
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Amendment of Rule in Module CA_24 May 2015
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Adoption of an Electronic Establishment of Registration Certificate By the Ministry of Industry & Commerce_6 May 2015
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Microsoft 'End of Lifecycle & Support for Windows Server 2003'_22 April 2015
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ATMs — Precautions During Formula One Period_9 April 2015
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Women in the Financial and Banking Sector 2015_31 March 2015
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Submission of the Quarterly Capital Adequacy Form_26 March 2015
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Specialized Workshop on Stress Testing & Capital Planning_24 March 2015
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Women in the Financial and Banking Sector_15 March 2015
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Clarification of Remuneration Rule and Guidance_19 February 2015
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Court Actions Taken Against Customers_16 February 2015
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Basel Committee Consultative Document: Revisions to the Standardised Approach for Credit Risk_10 February 2015
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Publication of Close-Out Netting Regulation_30 December 2014
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Reminder on Submission of Eligible Accounts Report_25 December 2014
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Changes in the Current Smart ID Cards_20 November 2014
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Monthly Progress Reports on Implementation of Basel III — Pillar I_18 September 2014
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Financial Advice Programme_24 July 2014
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Upgrade of ATMs and application software that run on Windows XP_28 April 2014
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Training Course — Islamic Financing Instruments_22 April 2014
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Treatment of Interest or Profit in Suspense in the PIR and Published Financial Statements_17 April 2014
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Islamic Banks Contributions - Deposit & URIA Protection Scheme_26 March 2014
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Microsoft announces end of Lifecycle & Custom Support for its Windows XP operating systems_25 March 2014
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Private Placements of Securities Issued by or Promoted by Banks Licensed in Bahrain_24 March 2014
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Attachments Private Placement Progress Report Letter for Real Estate and other Projects Under Development View PDF Private Placement Progress Report Letter for Private Equity purchases of existing companies View PDF ATM During Formula One_17 March 2014
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Discriminatory Service Treatment Not Allowed_11 March 2014
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Questionnaire for significant IT Outsourcing_9 March 2014
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Compliance with AAOIFI, Accounting, Governance, Ethics and Shari'a Standards_19 February 2014
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Obtaining a Rating_26 December 2013
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Compliance with Resolution No. (16) 2012_25 December 2013
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Skimming Frauds at ATMs_11 December 2013
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Module TC Volumes 1 and 2 Amendment_9 December 2013
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Sound remuneration practices for Licensed Banks_26 November 2013
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Attachments Glossary terms View PDF Module BR Remuneration Changes View PDF Details of Remuneration Paid App BR-14 View PDF Module AU Remuneration Changes View PDF Module HC Remuneration Changes View PDF Module PD Remuneration Changes View PDF Remuneration Top 12 App BR-15 View PDF BIS Consultative Document — "Fundamental review of the trading book — second consultative document"_18 November 2013
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Nomination of bank's representatives to participate in the Eleventh Banking Conference (Abu Dhabi 4–5 November 2013)_6 October 2013
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Non-Resident Accounts_9 September 2013
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Deposits from Private Security Firms Operating in the Kingdom of Bahrain_5 September 2013
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Foreign Account Tax Compliance Act (FATCA)_29 August 2013
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Automated Teller Machines_21 August 2013
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Recent cases of fraud in auto finance_24 July 2013
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Treasury Master Agreements and IIFM Interbank Unrestricted Master Investment Wakalah Agreement_10 July 2013
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Promotion of and participation in educational scholarships and bursaries by licensees of the CBB_3 July 2013
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Suspicious Transactions Online System (STRs)_25 June 2013
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Extension of Bahrain Credit Reference Bureau ("BCRB") Services to Cover Corporates_13 June 2013
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Basel 3 Implementation Plan_12 June 2013
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Written Communications with the Banking Supervision Staff at the Central Bank of Bahrain — Use of Electronic Files_30 May 2013
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Electronic Submission of Returns and Analysis of Data (ESRAD)_20 May 2013
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Outsourcing of Card Business and Electronic/Internet Banking Services_19 May 2013
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Internet Security Measures_16 May 2013
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The official adoption of the GCC States Identity Card_24 March 2013
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Foreign Account Tax Compliance Act (FATCA)_19 February 2013
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Restricted Investment Accounts_3 January 2013
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Change in Due Date and Payment for CBB Annual License Fees_4 December 2012
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Basel 3 Proforma Reporting_27 November 2012
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Sale of Insurance Products_16 September 2012
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New Basel Committee Consultative Document: Margin requirements for non-centrally cleared derivatives_30 July 2012
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Secured Lending Baseline Survey for the AMF_11 July 2012
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Click here to download the Annex in Word format.
Press Releases Concerning Financial Statements 5 July 2012
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Benefits received by Approved Persons 5 July 2012
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Advertisements for retail Banking Products and Services 4 July 2012
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Foreign Account Tax Compliance Act ("FATCA")_21 May 2012
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Public Disclosure of Quarterly Financial Statements — Module PD-3
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Islamic Financial Services Board (IFSB) Standards and Guidance
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Circular - Early Repayment Fees and Charges for Consumer and Mortgage Credit Facilities
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Request for Information on Disclosures related to Corporate Governance
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Transaction Advice and Internet Security
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Arrangements for Retired Customers' Financing Facilities
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Interest/Profit Rates, Commissions, Fees & Other Charges on Products & Services
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Delivery of Date Sensitive Documents at the CBB
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Appointment of Independent Director
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Appointment of Independent Director
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Financial Advice Programme_22 June 2011
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Financial Advice Programme
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Publication of Financial Statements
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Disbursement of BD1000 Grant to Bahraini Families
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Disbursement of BD1000 Grant to Bahraini Families
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BCRB's Retention of Adverse Customer Data
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Implementation of the Corporate Governance requirements in the High Level Controls Module (HC) and Public Disclosure Module (PD)
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"Basel 3" - Quantitative Impact Assessment
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Circular - Business Card Requirements - Islamic Banks
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Circular - FCB Working Week
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Archived Part A
Introduction
UG UG Users' Guide
UG-A UG-A Introduction
UG-A.1 UG-A.1 Purpose
UG-A.1.1
The Bahrain Monetary Agency ("BMA"), in its capacity as the regulatory and supervisory authority for all financial institutions in Bahrain, issues regulations that licensees are legally obliged to comply with. These regulations are contained in the BMA Rulebook.
UG-A.1.2
The Rulebook is divided into 5 Volumes, covering different areas of financial services activity. Volume 2 (Islamic Banks) covers all Islamic banks licensed by the Agency. Conventional banks are covered in Volume 1, and representative offices of banks are covered in Volume 5, which will be issued in 2007.
UG-A.1.3
This Users' Guide provides guidance on:
(a) the status and application of the Rulebook, with specific reference to Volume 2 (Islamic Banks);(b) the structure and design of the Rulebook; and(c) its maintenance and version control.UG-A.2 UG-A.2 Regulation history
UG-A.2.1
This User's Guide — Module UG — was first issued in January 2005 together with the rest of Volume 2 (Islamic Banks). All subsequent changes to this Module are dated with the month and year at the base of the relevant page and in the Table of Contents: Chapter UG-3 of this Module provides further details on Rulebook maintenance and version control.
UG-1 UG-1 Rulebook status and application
UG-1.1 UG-1.1 Legal basis
UG-1.1.1
Volume 2 (Islamic Banks) of the BMA Rulebook is issued by BMA pursuant to Amiri Decree Law No. 23 of 1973 (the "BMA Law").
UG-1.2 UG-1.2 Status of provisions
UG-1.2.1
The contents of the Rulebook have the formal status either of Rules or Guidance.
UG-1.2.2
Rules have a binding effect. If a licensee breaches a Rule to which it is subject, it is liable to enforcement action by BMA and, in certain cases, criminal proceedings by the Office of the Public Prosecutor.
UG-1.2.3
Guidance is not binding. It is material that helps inform a particular Rule or set of Rules, or provides other general information. Where relevant, compliance with Guidance will generally lead the BMA to assess that the business has complied with the rule(s) to which the Guidance relates. Conversely, failure to comply with Guidance will generally be viewed by the BMA as tending to suggest breach of a Rule.
UG-1.2.4
The status of each paragraph within the Rulebook can be identified by its text format, as follows:
(a) Rules are in bold, font size 12. The paragraph reference number is also highlighted in a coloured box.(b) Guidance is in normal type, font size 11.UG-1.2.5
The Agency's interpretation of all Rules and Guidance in this Volume is final.
UG-1.3 UG-1.3 Application
UG-1.3.1
Rules and Guidance contained in Volume 2 of the BMA Rulebook apply to all Islamic licensed banks subject to the provisions of the BMA Law, except for representative offices of banks which are subject to the relevant requirements contained in Volume 5 (Specialised Firms) and conventional banks which are covered in Volume 1.
UG-1.3.2
Where relevant, individual sections of Volume 2 may identify which specific Rules and Guidance apply to particular types of banking licensee.
UG-1.4 UG-1.4 Effective date
UG-1.4.1
Version 1 of Volume 2 (Islamic Banks) of the BMA Rulebook was first issued in January 2005. It replaces all regulations previously issued with respect to Islamic banks.
UG-1.4.2
For reference, these superseded regulations are listed in the Rulebook, under the 'Regulation history' section of the appropriate Module in each Volume. The list includes the reference number of the previously superseded circular or regulation, its date and subject heading.
UG-2 UG-2 Rulebook structure and format
UG-2.1 UG-2.1 Rulebook structure
Rulebook Volumes
UG-2.1.1
The Rulebook is divided into 5 Volumes, covering different areas of financial services activity, as follows:
Volume 1 Conventional Banks Volume 2 Islamic Banks Volume 3 Insurance Volume 4 Investment Business Volume 5 Specialised Activities UG-2.1.2
Volume 5 (Specialised Activities), covers money changers; leasing firms; factoring firms; representative offices; and providers of ancillary services to the financial sector.
Rulebook contents (overview)
UG-2.1.3
Except for Volume 5, the basic structure of each Rulebook is the same. Each Volume starts with a contents page and User's Guide. Subsequent material is organised underneath the following headings:
(a) High Level Standards(b) Business Standards(c) Regulatory Reporting and(d) Enforcement and RedressUG-2.1.4
Volume 5 is organised by the category of specialised firm concerned.
UG-2.1.5
The material in Volumes 1–4 is contained in Modules, each covering a specific area of requirements (e.g. High-level Controls). In turn, each Module is divided into Chapters, Sections and Paragraphs, as detailed below.
UG-2.1.6
Each Volume has its own appendix Volume containing relevant reporting forms and a glossary.
UG-2.2 UG-2.2 Volume structure
Modules
UG-2.2.1
Rulebook Volumes are subdivided into Modules, arranged in groups according to their subject matter, underneath the headings listed in paragraph UG-2.1.3 above.
UG-2.2.2
Each Module in a Volume is referenced using a two-letter code which is usually a contraction or abbreviation of its title. These codes are used for cross-referencing within the text.
Chapters
UG-2.2.3
Each Module consists of chapters, categorised into two types:
(a) A standard introductory chapter (referenced with a letter: e.g. UG-A); andUG-2.2.4
The introductory chapter summarises the purpose of the Module, its history (in terms of changes made to its contents) and, where applicable, lists previously issued circulars and regulations that were replaced by the Rulebook Module.
Sections and paragraphs
UG-2.2.5
Chapters are further sub-divided into Sections (numbered consecutively after the Chapter number: e.g. FC-1.1, FC-1.2, FC-1.3 etc). In turn, Sections are sub-divided into Paragraphs (numbered consecutively after the Chapter and Section numbers: e.g. FC-1.1.1, FC-1.1.2, FC-1.1.3 etc.). Where appropriate, sub-section headings may be used, to guide the reader through a Section: sub-section headings are italicised and unnumbered, and act purely as an indicator (without limitation as to the status of the paragraphs that follow.
Table of contents
UG-2.2.6
Each Volume's contents page lists all the Modules contained within it (Part A), and the information contained in the relevant appendix Volume (Part B).
UG-2.2.7
The contents page of each Module lists the chapters, section and, in some Modules, sub-sections it contains, and the latest version number of each section in issue.
UG-2.3 UG-2.3 Format and page layout
Headers
UG-2.3.1
The top of each page in the Rulebook identifies the Volume, Module and Chapter in question. Each Module is a separate document. New Chapters start on a fresh page.
Footers
UG-2.3.2
The bottom of each page in the Rulebook (on the left hand side) identifies the Module in question, its section and page number. Page numbering starts afresh for each Section: the total number of pages in each respective Section is shown as well as the individual page number. The bottom right hand side shows an issue date. The Contents Page for each Module is given its own separate version number. In addition, the Contents page lists the latest issue date for each Section in that Module. The Contents page thus acts as a summary checklist of the current version in force for each section. Further explanation is provided in Section UG-3.1 below.
Defined terms
UG-2.3.3
Defined terms used in the Rulebook are underlined. Each Volume has its own glossary listing defined terms and giving their meaning. Definitions of terms used apply only to the Volume in question. It is possible for the same term to be used in a different Volume with a different meaning.
Cross-references
UG-2.3.4
Cross-references are highlighted in yellow. Two active cross-references are shown in Paragraph UG-2.3.5 below. Any cross-references given in a text state the Module code, followed by the numbering convention for the chapter and section being referred to. For example, the cross-reference FC-1.2.3 refers to the third Paragraph in the second Section of the first Chapter of the Financial Crimes Module. Many references will be quite general, referring to a Module or Chapter rather than a specific Paragraph.
Text format
UG-2.3.5
Each paragraph is assigned a complete reference to the Module, Chapter, and Section, as well as its own paragraph number, as explained in UG-2.3.4 above. The format of the paragraph reference and paragraph text indicates their status as either a Rule or Guidance, as explained in UG-1.2.4 above.
UG-3 UG-3 Rulebook maintenance and availability
UG-3.1 UG-3.1 Maintenance
Quarterly Updates
UG-3.1.1
Changes to the Rulebook are made quarterly. After the end of each calendar quarter, the BMA automatically reissues the contents page of each Module. Users can thus determine whether they have access to the latest version of these pages, by checking that they have those marked with the most recent date.
UG-3.1.2
The contents page of each Module lists the current version number of each Section. The Module contents pages thus act as a checklist for users to verify that they have the current requirements.
UG-3.1.3
Where changes to the regulations are required, then the affected pages are re-issued, alongside the contents pages for each Module. Where possible, only the relevant Section or Chapter is re-issued, rather than the whole Module.
UG-3.1.4
A summary of any changes made to a Module is included in the 'Regulation history' section of each Module. The table summarises the nature of the change made, the date of the change and the Module components affected.
UG-3.1.5
The updates are posted to the BMA website, together with a summary of changes for that quarter. Licensees are in addition e-mailed the summary of each quarter's changes. Hard-copy users are required to print off the updated pages from the website to incorporate in their Rulebook in order to keep it current. The website version of the Rulebook acts at all times as the definitive version of the Rulebook.
UG-3.2 UG-3.2 Rulebook availability and ordering details
UG-3.2.1
The Rulebook is available on the BMA website, on CD-ROM and in hard copy.
Ordering details
UG-3.2.2
Order forms for CD-ROMs and hard copies are included in an annexure to the Users' Guide (please refer to the end of this module).
UG-3.2.3
Please complete all relevant boxes on the order form, taking particular care to provide full contact and address details. The completed form should be sent (accompanied with the appropriate payment) to:
Rulebook Section
Rulebook Section — Licensing & Policy Directorate
Bahrain Monetary Agency
PO Box 27
Manama
Kingdom of Bahrain
Tel: + 973 - 17 54 7413
Fax: + 973 - 17 53 0228
E-mail: rulebook@bma.gov.bh.
Web: www.bma.gov.bhBMA Rulebook Order Form
INSTRUCTIONS Please complete all relevant boxes, taking particular care to provide full contact and address details. The completed form should be sent (accompanied with the appropriate payment) to:
Bahrain Monetary Agency
(Rulebook Section, Licensing & Policy Directorate)
PO Box 27
Manama
Kingdom of Bahrain
For enquiries, please contact:
Phone: +973 - 17 547 413
E-mail: rulebook@bma.gov.bhORDER REQUIREMENT Rulebook Volume Number Hard-Copy1:
number required (at BD 110 each)CD-ROM2:
number required (at BD 5 each)Cost: 1 — Parts A & B Conventional Banks 2 — Parts A & B Islamic Banks 3 — Parts A & B Insurance Licensees
(Due Oct 2004)4 — Parts A & B Investment Business Licensees (Due 2006) 5 — Parts A & B Specialised Licensees (Due 2006) POSTAGE The above prices include postage for delivery within the Kingdom of Bahrain. Postage for international orders will be charged at cost: please contact BMA (see above) for details of rates and delivery options. 1: Hard copy subscribers are provided the latest version of the Rulebook Volume(s) ordered, which they can keep up to date by printing off new or amended pages from the BMA website (www.bma.gov.bh).
2: CD-ROM subscribers are sent the latest available version of the complete Rulebook (i.e. the CDROM contains all Volumes that have been issued).Total Cost:
ADDRESS / PAYMENT DETAILS Name Institution (if applicable) Full Postal Address
Contact e-mail / telephone / fax E-mail:
Telephone:
Fax:Please remember to enclose your payment with the order Payment should be by cheque drawn on a Bahraini-licensed bank, payable in Bahraini Dinars. Cheques should be made out to "Bahrain Monetary Agency". Persons ordering from outside Bahrain should contact the BMA (see above) for postage rates and payment options. High Level Standards
LR LR Licensing Requirements
LR-A LR-A Introduction
LR-A.1 LR-A.1 Purpose
LR-A.1.1
The Licensing Requirements Module sets out the BMA's approach to licensing
Islamic bank licensees .LR-A.1.2
The Module builds on the legal requirements contained in Decree Law No. (23) of 1973 (the BMA Law 1973). The Module is issued under legal powers granted to the BMA under the BMA Law 1973, notably Articles 56 to 69.
Licensing Requirement
LR-A.1.3
Persons wishing to undertake
regulated Islamic banking services are required to be licensed by BMA as anIslamic bank licensee .Regulated Islamic banking services consist of three determinant activities — the acceptance of Shari'a money placements/deposits, the managing of Shari'a profit sharing investment accounts, and the offering of Shari'a financing contracts. In addition, various supplementary activities may also be undertaken. All these activities are defined in Rule LR-1.3.1.Islamic bank licensees must operate all their operations in compliance with Shari'a economic principles; and onlyIslamic bank licensees may hold themselves out to be a fully Shari'a compliant institution.LR-A.1.4
In other words, to be licensed as an
Islamic bank licensee , a person must undertake the activity of accepting Shari'a money placements/deposits, and/or managing Shari'a profit sharing investment accounts. In addition, the activity of offering Shari'a financing contracts must also be undertaken. In addition, they may undertake any of the other activities falling within the definition ofregulated Islamic banking services , providing these are in conformity with Shari'a economic principles.License Categories
LR-A.1.5
Islamic bank licensees are divided into two sub-categories:Islamic retail bank licensees andIslamic wholesale bank licensees . Certain specific regulatory requirements may differ between these two sub-categories, where appropriate to address their different risk profiles.LR-A.1.6
Islamic retail bank licensees may undertake transactions in any currency, with both Bahraini residents and non-residents. To qualify as anIslamic retail bank licensee , the activity of offering Shari'a financing contracts must account for a significant portion of the institution's business (defined, broadly, as accounting for over 20% of an institution's assets).LR-A.1.7
Islamic wholesale bank licensees may also undertake transactions without restriction, when dealing with the Government of Bahrain and its agencies; BMA bank licensees; and non-residents. However, they may only undertake transactions denominated in Bahraini Dinar and/or with a resident of the Kingdom of Bahrain, if these are wholesale in nature. Wholesale transactions are defined in terms of transaction size (in summary, BD 7 million or more for the activities of taking Shari'a money placements/deposits, and offering Shari'a financing contracts, and US$ 250,000 or more for any of the other activities falling within the definition ofregulated Islamic banking services ).LR-A.1.8
Collectively, licensed providers of
regulated Islamic banking services are calledIslamic bank licensees . Bahrain-incorporatedIslamic bank licensees are calledBahraini Islamic bank licensees .Islamic bank licensees that are incorporated in an overseas jurisdiction and operate via a branch presence in the Kingdom of Bahrain are calledoverseas Islamic bank licensees . The same naming convention applies to the two sub-categories of Islamic bank license: thus,Bahraini Islamic retail bank licensees andBahraini Islamic wholesale bank licensees are those incorporated in Bahrain, whilstoverseas Islamic retail bank licensees andoverseas Islamic wholesale bank licensees are those incorporated in an overseas jurisdiction and operating in Bahrain via a branch presence.Licensing Conditions
LR-A.1.9
Islamic bank licensees are subject to 8 licensing conditions, mostly specified at a high level in Module LR, and further expanded in underlying subject Modules (such as Module CA). These licensing conditions are broadly equivalent to the standards applied in other Volumes of the BMA Rulebook, to other license categories, and are consistent with international good practice, such as relevant Basel Committee and IFSB (Islamic Financial Services Board) standards.Retaining Licensed Status
LR-A.1.10
The requirements contained in Chapter LR-2 represent the minimum conditions that have to be met in each case, both at the point of licensing and on an on-going basis thereafter, in order for licensed status to be retained.
Information Requirements and Processes
LR-A.1.11
Chapter LR-3 specifies the processes and information requirements that have to be followed for applicants seeking an
Islamic bank license , as well as existing licensees seeking to vary the scope of their license, by adding new regulated activities. It also covers the voluntary surrender of a license, or its cancellation by BMA.Representative Offices and Ancillary Services Providers
LR-A.1.12
Representative offices ofoverseas Islamic bank licensees are not covered in Volume 2 (Islamic Banks) of the Rulebook. Requirements covering Representative Offices (for all financial services firms) will instead be included in Volume 5, to be issued in 2007.LR-A.1.13
Until such time as Volume 5 (Specialised Activities) of the BMA Rulebook is issued,
representative offices ofoverseas Islamic bank licensees remain subject to the requirements contained in the BMA's "Standard Conditions and Licensing Criteria" applicable to representative offices of foreign banks, and relevant existing Circulars.LR-A.1.14
Providers of ancillary services to the financial sector are not covered in Volume 2 (Islamic Banks) of the Rulebook. Requirements covering
ancillary services providers will instead be included in Volume 5, to be issued in 2007.LR-A.1.15
Until such time as Volume 5 (Specialised Activities) of the BMA Rulebook is issued,
ancillary services providers remain subject to the requirements contained in the BMA's "Standard Conditions and Licensing Criteria" applicable to providers of ancillary services to the financial sector, and relevant existing Circulars.Updating the BMA Rulebook
LR-A.1.16
Unless the context suggests otherwise, references elsewhere in Volume 2 to Full Commercial Bank should be taken as referring to
Islamic retail bank licensees , and references to Offshore Banking Units and Investment Bank Licensees should be taken as referring toIslamic wholesale bank licensees . References to the previous bank license categories that applied prior to 1 July 2006 will be gradually updated over time, across the rest of Volume 2.LR-A.2 LR-A.2 Module History
Evolution of Module
LR-A.2.1
This Module (Module LR — "Licensing and Authorisation Requirements") was first issued in January 2005, as part of the initial release of Volume 2 of the BMA Rulebook. It was subsequently reissued in full in July 2006 (and renamed "Licensing Requirements").
LR-A.2.2
The reissued Module was one of several Modules modified to reflect the introduction of the BMA's new integrated license framework. Module LR was amended to reflect the new Islamic bank licenses introduced by the framework, and to more closely align its presentation with that found in other BMA Rulebook volumes.
LR-A.2.3
The reissued Module is dated July 2006. All subsequent changes were dated with the month and year when the change was made, at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
LR-A.2.4
A list of recent changes made to this Module is provided below:
Module Reference Change Date Description of Changes Whole Module 07/2006 Whole Module reissued to reflect integrated license framework: new license categories and updated licensing conditions introduced. Superseded Requirements
LR-A.2.5
The initial January 2005 version of this Module superseded various circulars and other requirements relating to licensing. Some of these circulars were combined in 1997 into a licensing folder ("Part 1: Licensing", which formed part of the three volume information pack, "The Establishment, regulations and supervision of banks and other financial institutions in Bahrain"). The requirements contained in these circulars were transposed into the initial January 2005 version of this Module unchanged, as follows:
Circular Reference Date of Issue Module Ref.
(July 2004 version)Circular Subject 5/77 08/03/77 LR-B.1.1, LR-3.3 Permitted Business Transactions with residents OG/16/90 10/01/90 LR-2.3, LR-3.3 Dealing with Residents OG/192/98 16/06/98 LR-4 Financial Trust Regulation No reference 04/81 LR-5 Precious Metals and Commodities BS/07/04 06/05/04 LR-6 Record Keeping Requirements LR-B LR-B Scope of Application
LR-B.1 LR-B.1 General Prohibitions
LR-B.1.1
The licensing requirements in Chapter LR-1 have general applicability, in that they prevent any person from providing (or seeking to provide)
regulated banking services within or from the Kingdom of Bahrain, unless they have been licensed as aIslamic bank licensee by the BMA (see Rule LR-1.1.1).LR-B.1.2
In addition, no one may use the term 'bank' in their trading or corporate name, or otherwise hold themselves out to be a bank in Bahrain, unless they hold the appropriate license from BMA (see Rule LR-1.1.2).
LR-B.1.3
The Rules referred to above are supported by statutory restrictions contained in the BMA Law 1973 (cf. Articles 60 and 61).
LR-B.2 LR-B.2 Licensed Persons
LR-B.2.1
The remaining requirements in Chapters LR-1 to LR-3 (besides those mentioned in Section LR-B.1 above) apply to all those licensed by BMA as an
Islamic bank licensee , or which are in the process of seeking such a license. They apply regardless of whether the person concerned is incorporated in the Kingdom of Bahrain, or in an overseas jurisdiction, unless otherwise specified.LR-B.2.2
These remaining requirements prescribe the types of license offered; their associated operating conditions; the licensing conditions that have to be satisfied in order to secure and retain a license; and the processes to be followed when applying or varying a license, or when a license is withdrawn.
LR-1 LR-1 Requirement to Hold a License
LR-1.1 LR-1.1 Islamic Bank Licensees
General Prohibitions
LR-1.1.1
No person may:
(a) undertake (or hold themselves out to undertake)regulated Islamic banking services within or from the Kingdom of Bahrain unless duly licensed by the BMA; or(b) hold themselves out to be licensed by the BMA unless they have as a matter of fact been so licensed.LR-1.1.2
Only persons licensed to undertake
regulated Islamic banking services (orregulated banking services ), may use the term 'bank' in their corporate or trading names, or otherwise hold themselves out to be a bank.LR-1.1.3
Licensees are not obliged to include the word 'bank' in their corporate or trading names; however, they may be required to make clear their regulatory status in their letter heads, customer communications, website and so on.
LR-1.1.4
For the purposes of Rule LR-1.1.2, persons will be considered in breach of this requirement if they attempt to operate as, or incorporate a bank in Bahrain with a name containing the word "bank" (or the equivalents in any language), without holding the appropriate BMA license or obtaining the prior approval of the BMA.
Licensing
LR-1.1.5
Persons wishing to be licensed to undertake
regulated Islamic banking services within or from the Kingdom of Bahrain must apply in writing to the BMA.LR-1.1.6
An application for a license must be in the form prescribed by the BMA and must contain:
(a) a business plan specifying the type of business to be conducted;(b) application forms for allcontrollers ; and(c) application forms for allcontrolled functions .LR-1.1.7
The BMA will review the application and duly advise the applicant in writing when it has:
(a) granted the application without conditions;(b) granted the application subject to conditions specified by the BMA; or(c) refused the application, stating the grounds on which the application has been refused and the process for appealing against that decision.LR-1.1.8
Detailed rules and guidance regarding information requirements and processes for license applications can be found in Section LR-3.1. As specified in Paragraph LR-3.1.14, BMA will provide a formal decision on a Phase 1 license application within 60 calendar days of all required documentation having been submitted in a form acceptable to BMA.
LR-1.1.9
In granting new licenses, BMA will specify the specific types of
regulated Islamic banking service for which a license has been granted, and on what basis (i.e.Islamic retail bank licensee orIslamic wholesale bank licensee ).LR-1.1.10
All applicants for an
Islamic bank license must satisfy the BMA that they meet, by the date of their license, the minimum conditions for licensing, as specified in Chapter LR-2. Once licensed,Islamic bank licensees must maintain these criteria on an ongoing basis.LR-1.1.11
Islamic bank licensees must not carry on any commercial business in the Kingdom of Bahrain or elsewhere other than banking business and activities directly arising from or incidental to that business.LR-1.1.12
Rule LR-1.1.11 is intended to restrict bank licensees from undertaking any material non-financial business activities. The Rule does not prevent a bank undertaking commercial activities if these directly arise from their financial business: for instance, in the context of Islamic contracts, such as murabaha, ijara and musharaka, where the bank may hold the physical assets being financed or leased. Nor does it restrict a bank from undertaking commercial activities if, in the judgment of the BMA, they are incidental and do not detract from the financial nature of the bank's operations: for example, a bank may rent out spare office space in its own office building, and provide services associated with the rental (e.g. office security or cleaning).
LR-1.1.13
Rule LR-1.1.11 applies to the legal entity holding the bank license. A bank may thus own subsidiaries that undertake non-financial activities, although the BMA generally does not support the development of significant commercial activities within a banking group. Capital invested in such subsidiaries by a bank would be deducted from the bank's capital base under the BMA's capital rules (see Module CA). In addition, the BMA may impose restrictions — such as dealings between the bank and its commercial subsidiaries — if it was felt necessary to limit the bank's exposure to non-financial risks.
LR-1.2 LR-1.2 License Sub-Categories
Retail vs. Wholesale
LR-1.2.1
Depending on the nature of activities undertaken,
Islamic bank licensees must be licensed either as anIslamic retail bank licensee or as anIslamic wholesale bank licensee . The same legal entity may not hold both types of license.LR-1.2.2
The nature of activities allowed under each license sub-category is specified below (cf. Rule LR-1.2.4ff). The
Islamic retail bank licensee category replaces the Full Commercial Bank (Islamic principles) category that existed prior to July 2006; theIslamic wholesale bank licensee category replaces the Offshore Banking Unit and Investment Bank License (Islamic principles) categories.LR-1.2.3
Banks licensed prior to the introduction of these new license categories in July 2006 are not required to reapply for their license. Rather, their new license category is to be confirmed by an exchange of letters with BMA, and the issuance of a new license certificate. Where (prior to July 2006), the same legal entity holds multiple licenses, BMA will agree transitional measures aimed at rationalizing the number of licenses held.
Islamic Retail Bank Licensees
LR-1.2.4
Islamic retail bank licensees are allowed to transact with both residents and non-residents of the Kingdom of Bahrain, and in both Bahraini Dinar and foreign currencies.LR-1.2.5
To qualify as an
Islamic retail bank licensee , the person concerned must undertake (as a minimum), the activity of accepting Shari'a money placements/deposits, and/or managing Shari'a profit sharing investment accounts, as well as the activity of offering Shari'a financing contracts (as defined in Rules LR-1.3.16, LR-1.3.17 and LR-1.3.18). The activity of offering Shari'a financing contracts must be a significant part of the bank's business, relative to other activities.LR-1.2.6
When assessing the significance of Shari'a financing contracts, in the context of Rule LR-1.2.5, the BMA would normally expect to see such contracts constitute at least 20% of the total assets of the institution. Other activities and criteria may also be taken into account, if the BMA believes they are of a financing-related nature, and that such activities constitute a significant share of the bank's overall business.
LR-1.2.7
In the case of new applicants, the above assessment is made based on the financial projections and business plan provided as part of the license application. Where existing licensees cease to satisfy the condition contained in Rule LR-1.2.5, the BMA will initiate discussion with the licensee as to the appropriateness of their license category; this may result in the licensee being required to change its license category.
LR-1.2.8
The purpose of Rule LR-1.2.5 is to ensure that, besides the activity of accepting Shari'a money placements/deposits, and managing Shari'a profit sharing investment accounts, that the core banking activity of providing finance also forms part of the definition of
Islamic retail bank licensees , and accounts for a significant share of their business, in keeping with their intermediation function.Islamic Wholesale Bank Licensees
LR-1.2.9
Islamic wholesale bank licensees are allowed to transact with residents of the Kingdom of Bahrain (irrespective of currency), and in Bahraini Dinar (irrespective of the location of the counterparty), subject to the conditions and exemptions specified in Rules LR-1.2.13, LR-1.2.15, LR-1.2.17 and LR-1.2.19. Foreign currency transactions with non-residents are not subject to these conditions.LR-1.2.10
The effect of Rule LR-1.2.9 is to limit the on-shore/Bahraini Dinar customer business of
Islamic wholesale bank licensees to larger transactions. By definition, their on-shore client base is therefore wholesale in nature (i.e. other banks, large corporates and high net-worth individuals).LR-1.2.11
To qualify as an
Islamic wholesale bank licensee , the person concerned must undertake (as a minimum), the activity of accepting Shari'a money placements/deposits and/or managing Shari'a profit sharing investment accounts (as defined in Rules LR-1.3.16 and LR-1.3.17), together with the activity of offering Shari'a financing contracts (as defined in Rule LR-1.3.18).LR-1.2.12
The purpose of Rule LR-1.2.11 is to ensure that the core Islamic banking activities of accepting Shari'a money placements/deposits, and managing Shari'a profit sharing investment accounts, form part of the definition of
Islamic wholesale bank licensees . However, unlikeIslamic retail bank licensees , there is no requirement that the activity of providing Shari'a financing contracts must be a significant part of the bank's business, relative to other activities. This is to allowIslamic wholesale bank licensees greater flexibility as to the nature of their activities; it also recognises that, because of the wholesale nature of their client base, there is less need to limit the scale of non-credit related risks to which their depositors and profit sharing investors may be exposed. Rule LR-1.2.11 does not in any way preventIslamic wholesale bank licensees from providing Shari'a-compliant finance as a major activity, should they wish to.LR-1.2.13
Islamic wholesale bank licensees may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (a) and (b) listed in Rule LR-1.3.1, only where the individual transaction is BD 7 million or above (or its foreign currency equivalent).LR-1.2.14
To comply with Rule LR-1.2.13, the initial amount taken as a placement/deposit must be BD 7 million or above (or its equivalent in foreign currency); however, subsequent additions and withdrawals from the account may be for any amount. The initial amount taken as deposit may be split between different types of accounts (e.g. call, 3-month and 6-month accounts) — providing at least BD 7 million is taken from the customer on the same day and the bank's records can demonstrate this. Where subsequent withdrawals lead to a zero balance on an account (or the aggregate of accounts where more than one was originally opened), then a further BD 7 million must be deposited to re-start the 'wholesale' relationship, before additional deposits for smaller amounts may be made.
LR-1.2.15
Similarly, with respect to Shari'a-compliant financing transactions, the initial facility amount advised must be BD 7 million or above (or its equivalent); but drawdowns (and repayments) under the facility may be for any amount, as may any subsequent changes to the facility amount. If the facility is fully repaid, then a further BD 7 million transaction must be agreed in order to re-start the 'wholesale' relationship.
LR-1.2.16
Islamic wholesale bank licensees may transact with residents of Bahrain and/or in Bahrain Dinar, with respect to the activities (c) to (j) listed in Rule LR-1.3.1, only where the initial transaction is US$ 250,000 or above (or its foreign currency equivalent), and where the financial instruments concerned are Shari'a compliant.LR-1.2.17
With respect to activity (c) (managing Shari'a profit sharing investment accounts), the threshold refers to the initial amount placed as an investment. With respect to activities (d) and (e) (dealing in financial instruments as principal / agent), the threshold refers to the individual transaction size. With respect to activities (f) and (g) (managing / safeguarding
financial instruments ), the threshold refers to the initial investment amount. With respect to activity (h), (operating aCollective Investment Undertaking ), the threshold refers to the minimum investment required for participation in the scheme. With respect to activities (i) and (j) (arranging / advising on deals infinancial instruments ) the threshold refers to the size of the deal arranged or of the investment on which advice is being given.LR-1.2.18
Note that the threshold with respect to activities (c), (d) and (e) applies to the initial investment amount: where a subsequent distribution to a client, or a reduction in the mark to market value of the investment, reduces the initial investment amount below US$ 250,000, it is still considered a wholesale transaction. The threshold in Rule LR-1.2.16 applies to a client even if the same client satisfies the BD 7m threshold in Rule LR-1.2.13, with respect to money placement /financing activities. Finally, the initial amount taken as an investment may be split between two or more investment products — providing at least US$ 250,000 is taken from the customer on the same day and the bank's records can demonstrate this.
LR-1.2.19
Islamic wholesale bank licensees may only undertake activities (k) and (l) listed in Rule LR-1.3.1, on behalf of residents of Bahrain and/or in Bahrain Dinar, where the customer concerned meets either of the thresholds specified in LR-1.2.13 or LR-1.2.16 (in which case, activities (k) and (l) may be undertaken for any amount).LR-1.2.20
Notwithstanding Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19,
Islamic wholesale bank licensees are allowed to transact in Bahraini Dinar (or any other currency) for any amount with the Government of Bahrain, Bahrain public sector entities (as defined in the guidelines for completion of the PIRI Form), and BMA bank licensees.Islamic wholesale bank licensees may also transact in Bahraini Dinar for any amount, where required to fund their normal operating expenses; when investing for their own account in securities listed on the Bahrain Stock Exchange.LR-1.2.21
Any transactions entered into prior to 1 July 2006, which may be in breach of the conditions specified in Rules LR-1.2.13, LR-1.2.16 and LR-1.2.19, must be notified to the BMA. These transactions will be allowed to mature.
LR-1.2.22
Since the
Islamic wholesale bank licensee regime represents an easing of the restrictions on on-shore business that previously applied to offshore bank licensees (i.e. OBUs and IBLs), there should be few transactions of the type specified in Rule LR-1.2.21 — they are likely to exist only where individual ad-hoc exemptions may have been previously granted by BMA, and these exemptions went further than those now being applied across the board to allIslamic wholesale bank licensees .LR-1.2.23
Islamic wholesale bank licensees wishing to undertake transactions of the type specified in Rules LR-1.2.13, LR-1.2.16 or LR-1.2.19 must seek prior written BMA approval.LR-1.2.24
The approval requirement in Rule LR-1.2.23 only has to be made once, prior to the licensee starting to undertake such transactions. Its purpose is to allow BMA to monitor the initiation of such business by
Islamic wholesale bank licensees , and to check that adequate systems and controls have been in place, so that such transactions are likely to be well managed. In addition, it is to allow, where relevant, for the necessary arrangements to be made to ensure thatIslamic wholesale bank licensees comply with the BMA's reserve requirements (which apply to deposit liabilities denominated in Bahraini Dinars — see LR-2.5.10).LR-1.3 LR-1.3 Definition of Regulated Islamic Banking Services
LR-1.3.1
Regulated Islamic banking services are any of the following activities, carried on by way of business:(a) Accepting Shari'a money placements/deposits(b) Offering Shari'a Financing Contracts(c) Managing Shari'a profit sharing investment accounts(d) Dealing in Shari'a compliantfinancial instruments as principal(e) Dealing in Shari'a compliantfinancial instruments as agent(f) Managing Shari'a compliantfinancial instruments (g) Safeguarding Shari'a compliantfinancial instruments (h) Operating a Shari'a compliantCollective Investment Undertaking (i) Arranging deals in Shari'a compliantfinancial instruments (j) Advising on Shari'a compliantfinancial instruments (k) Providing money exchange/remittance services(l) Issuing/ administering means of payment.LR-1.3.2
Upon application, the BMA may exclude specific transactions from the definition of
regulated Islamic banking services .LR-1.3.3
The BMA will normally only consider granting such an exemption when a Bahrain resident is unable to obtain a specific product in Bahrain and it would be unreasonable to require the overseas provider of that product to be licensed for that specific transaction, and the provider has no intention of regularly soliciting such business in Bahrain.
LR-1.3.4
For the purposes of Rule LR-1.3.1, carrying on a
regulated Islamic banking service by way of business means:(a) undertaking for commercial gain, at a minimum, either or both of the activities of accepting Shari'a money placements/deposits and managing Shari'a profit sharing investment accounts, together with the activity of offering Shari'a financing contracts; in addition, any of the remaining activities specified in Rule LR-1.3.1 may also be undertaken;(b) holding oneself out as willing and able to engage in such activities; or(c) regularly soliciting other persons to engage in transactions constituting such activities.LR-1.3.5
Licensees should note that they may still undertake activities falling outside the definition of
regulated Islamic banking services , such as investing in physical commodities — subject to Rule LR-1.1.11. The fact that an activity is not included in the definition ofregulated Islamic banking services does not mean that it is prohibited. In transitioning to the new licensing framework, BMA will be closely liaising with licensees to ensure that no disruption occurs to their legitimate business activities.LR-1.3.6
Licensees should note that the same legal entity cannot combine
regulated Islamic banking services with other regulated services, such asregulated insurance services . However, different legal entities within the same group may of course each hold a different license (e.g. banking and insurance).General exclusions
LR-1.3.7
A person does not carry on an activity constituting a
regulated Islamic banking service if the activity:(a) is carried on in the course of a business which does not ordinarily constitute the carrying on of financial services;(b) may reasonably be regarded as a necessary part of any other services provided in the course of that business; and(c) is not remunerated separately from the other services.LR-1.3.8
For example, the holding of money as a rent-guarantee in connection with the rental of a property would not be considered a regulated Islamic banking service, since it satisfies the exemptions in Rule LR-1.3.7.
LR-1.3.9
A person does not carry on an activity constituting a
regulated Islamic banking service if the person is a body corporate and carries on that activity solely with or for other bodies corporate that are members of the same group.LR-1.3.10
A person does not carry on an activity constituting a
regulated Islamic banking service if such person carries on an activity with or for another person, and they are both members of the samefamily .LR-1.3.11
A person does not carry on an activity constituting a
regulated Islamic banking service if the sole or main purpose for which the person enters into the transaction is to limit any identifiable risks arising in the conduct of his business, providing the business conducted does not itself constitute a regulated activity.LR-1.3.12
For example, commercial companies entering into bay salam or istisna transactions in order to protect themselves against future fluctuations in the price of their products, would not be considered to be dealing in financial instruments as principal, and would not therefore require to be licensed as an
Islamic bank licensee .LR-1.3.13
A person does not carry on an activity constituting a
regulated Islamic banking service if that person enters into that transaction solely as a nominee for another person, and acts under instruction from that other person.LR-1.3.14
A person does not carry on an activity constituting a
regulated Islamic banking service if that person is a government body charged with the management offinancial instruments on behalf of a government or public body.LR-1.3.15
A person does not carry on an activity constituting a
regulated Islamic banking service if that person is an exempt person, as specified by Royal decree.Accepting Shari'a money placements/deposits
LR-1.3.16
Accepting Shari'a money placements is defined as the acceptance of sums of money for safe-keeping ('al-wadia', 'q'ard') in a Shari'a compliant framework, under which it will be repaid, either on demand or in circumstances agreed by the parties involved, and which is not referable to the giving of security.
Managing Shari'a profit sharing investment accounts
LR-1.3.17
Managing a Shari'a profit sharing investment account is defined as managing an account, portfolio or fund, whereby a sum of money is placed with the service provider on terms that a return will be made according to an agreed Shari'a compliant profit-sharing arrangement, such as a mudaraba or musharaka partnership.
Offering Shari'a Financing Contracts
LR-1.3.18
Offering Shari'a financing contracts is defined as entering into, or making arrangement for another person to enter into, a contract to provide finance in accordance with Shari'a principles, such as murabaha, bay muajjal, bay salam, ijara wa iktina and istisna'a contracts.
Dealing in Shari'a compliant financial instruments as principal
LR-1.3.19
Dealing in Shari'a compliant
financial instruments as principal means buying, selling, subscribing for or underwriting any Shari'a compliantfinancial instrument on own account.LR-1.3.20
Rule LR-1.3.22 includes the underwriting of equity and other
financial instruments . It also includes the temporary sale of afinancial instrument through a repo transaction.LR-1.3.21
A person does not carry on an activity specified in Rule LR-1.3.19 if the activity relates to the person issuing his own
financial instrument .Dealing in Shari'a compliant financial instruments as agent
LR-1.3.22
Dealing in Shari'a compliant
financial instruments as agent means buying, selling, subscribing for or underwriting Shari'a compliantfinancial instruments on behalf of a client.LR-1.3.23
A licensee that carries on an activity of the kind specified by Rule LR-1.3.22 does not determine the terms of the transaction and does not use its own financial resources for the purpose of funding the transaction. Such a licensee may however receive or hold assets in connection with the transaction, in its capacity as agent of its client.
Managing Shari'a Compliant Financial Instruments
LR-1.3.24
Managing Shari'a compliant
financial instruments means managing on a discretionary basis Shari'a compliantfinancial instruments on behalf of another person.LR-1.3.25
The activities included under the definition of Rule LR-1.3.24 include activities such as asset management.
Safeguarding Shari'a Compliant Financial Instruments (i.e. Custodian)
LR-1.3.26
Safeguarding Shari'a compliant
financial instruments means the safeguarding of Shari'a compliantfinancial instruments for the account of clients.LR-1.3.27
A person does not carry on an activity specified in Rule LR-1.3.26 if the person receives documents relating to a
financial instrument for the purpose of onward transmission to, from or at the direction of the person to whom thefinancial instrument belongs; or else is simply providing a physical safekeeping service such as a deed box.LR-1.3.28
A person does not carry on an activity specified in Rule LR-1.3.26 if a third person, namely a qualifying custodian, accepts responsibility with regard to the
financial instrument .LR-1.3.29
A "qualifying custodian" means a person who is:
(a) a licensee who has permission to carry on an activity of the kind specified in Rule LR-1.3.26; or(b) an exempt person in relation to activities of that kind.LR-1.3.30
A person does not carry on an activity specified in Rule LR-1.3.26 if they are managing a central depository, which is part of an exchange recognised by BMA.
LR-1.3.31
The following are examples of activities, when taken in isolation, are unlikely to be regarded an activity of the kind specified under Rule LR-1.3.26:
(a) providing information as to the number of units or the value of any assets safeguarded; and(b) converting currency.LR-1.3.32
A person undertaking an activity of the kind specified under Rule LR-1.3.26 may also be engaged in the administration of the
financial instruments , including related services such as cash/ collateral management.Operating a collective investment undertaking
LR-1.3.33
Operating a
collective investment undertaking means operating, establishing or winding up acollective investment undertaking .LR-1.3.34
For the purposes of LR-1.3.33, a
collective investment undertaking means any arrangements, authorised by or registered with the BMA, with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements to participate in or receive profits or income arising from the acquisition, holding or disposal of the property or sums paid out of such profits or income.LR-1.3.35
A person does not carry on an activity specified in Rule LR-1.3.33 if the activity relates to the person establishing or winding up a
collective investment undertaking , and that activity may be reasonably regarded as necessary in the course of providing legal services or providing accounting services.LR-1.3.36
Collective investment undertakings of the kind specified in Rule LR-1.3.33 may be open-ended (i.e. with shares continuously issued and redeemed to meet investor demand) or closed-ended (where there is a single issue of shares and investors can only realise their investments on the winding-up of the fund).Arranging deals in Shari'a compliant financial instruments
LR-1.3.37
Arranging deals in Shari'a compliant
financial instruments means making arrangements with a view to another person, whether as principal or agent, buying, selling, subscribing for or underwriting deals in Shari'a compliantfinancial instruments .LR-1.3.38
A person does not carry on an activity specified in Rule LR-1.3.37 if the arrangement does not bring about the transaction to which the arrangement relates.
LR-1.3.39
A person does not carry on an activity specified in Rule LR-1.3.37 if a person's activities are limited solely to introducing clients to
licensees .LR-1.3.40
The exclusion in Rule LR-1.3.39 does not apply if the agent receives from any person, other than the client, any pecuniary reward or other advantage, for which he does not account to the client, arising out of his entering into the transaction. Thus, if A receives a commission from B for arranging credit or deals in investment for C, the exclusion in Rule LR-1.3.42 does not apply.
LR-1.3.41
A person does not carry on an activity specified in Rule LR-1.3.37 merely by providing the means of communication between two parties to a transaction.
LR-1.3.42
A person does not carry on an activity specified in Rule LR-1.3.37 if they operate an exchange, duly recognised and authorised by the BMA.
LR-1.3.43
Negotiating terms for an investment on behalf of a client is an example of an activity which maybe regarded as activities of the kind specified in Rule LR-1.3.37.
LR-1.3.44
The following are examples of activities, when taken in isolation, are unlikely to be regarded as an activity of the kind specified in Rule LR-1.3.37:
(a) appointing professional advisers;(b) preparing a prospectus/business plan;(c) identifying potential sources of funding;(d) assisting investors/subscribers/borrowers to complete and submit application forms; or(e) receiving application forms for processing/checking and/or onward transmission.Advising on deals in Shari'a compliant financial instruments
LR-1.3.45
Advising on Shari'a compliant
financial instruments means giving advice to an investor or potential investor (or a person in his capacity as an agent for an investor or potential investor) on the merits of buying, selling, subscribing for or underwriting a particular Shari'a compliantfinancial instrument or exercising any right conferred by such afinancial instrument .LR-1.3.46
The following are examples of activities, which may be regarded as an activity as defined by Rule LR-1.3.45:
(a) a person may offer to tell a client when shares reach a certain value on the basis that when the price reaches that value it would be a good time to buy or sell them;(b) recommendation on the size or timing of transactions; and(c) advice on the suitability of thefinancial instrument , or on the characteristics or performance of thefinancial instrument or credit facility concerned.LR-1.3.47
A person does not carry on an activity specified in Rule LR-1.3.45 by giving advice in any newspaper, journal, magazine, broadcast services or similar service in any medium if the principal purpose of the publication or service, taken as a whole, is neither:
(a) that of giving advice of the kind mentioned in Rule LR-1.3.45; nor(b) that of leading or enabling persons to buy, sell, subscribe for or underwrite afinancial instrument .LR-1.3.48
The following are examples of activities, when taken in isolation, are unlikely to be regarded as an activity as defined by Rule LR-1.3.45:
(a) explaining the structure, or the terms and conditions of afinancial instrument or credit facility;(b) valuingfinancial instruments for which there is no ready market;(c) circulating company news or announcements;(d) comparing the benefits and risks of onefinancial instrument to another; and(e) advising on the likely meaning of uncertain provisions in an agreement relating to, or the terms of, afinancial instrument or on the effect of contractual terms and their commercial consequences or on terms that are commonly accepted in the market.Providing money exchange / remittance services
LR-1.3.49
Means providing exchange facilities between currencies, and the provision of wire transfer or other remittance services.
Issuing / administering means of payment
LR-1.3.50
Means the selling or issuing of payment instruments, or the selling or issuing of stored value (e.g. credit cards, travellers' cheques, electronic purses).
LR-2 LR-2 Licensing Conditions
LR-2.1 LR-2.1 Condition 1: Legal Status
LR-2.1.1
The legal status of an
Islamic bank licensee must be:(i) a Bahraini joint stock company (BSC); or(ii) a branch resident in Bahrain of an Islamic bank incorporated under the laws of its territory of incorporation and authorized as a bank in that territory.LR-2.1.2
Where the
Islamic bank licensee is a branch of an overseas bank, in deciding whether to grant a license, the BMA will pay close regard to its activities elsewhere and how these activities are regulated. If theIslamic bank licensee is not regulated elsewhere or in a jurisdiction not substantially compliant with Basel Core Principles or FATF standards, then an application for licensing can only be considered after exhaustive enquiries into the bank's shareholders, management structure and financial position.LR-2.2 LR-2.2 Condition 2: Mind and Management
LR-2.2.1
Islamic bank licensees with their Registered Office in the Kingdom of Bahrain must maintain their Head Office in the Kingdom.Overseas Islamic bank licensees must maintain a local management presence and premises in the Kingdom appropriate to the nature and scale of their activities.LR-2.2.2
In assessing the location of an
Islamic bank licensee's Head Office, the BMA will take into account the residency of its Directors and senior management. The BMA requires the majority of key decision makers in executive management — including theChief Executive — to be resident in Bahrain. In the case ofoverseas Islamic bank licensees , the BMA requires the branch of a foreign company to have a substantive presence, demonstrated by a level of staff and other resources sufficient to ensure adequate local scrutiny and control over business booked in the Bahrain branch, as well as the General Manager of the branch to be resident in Bahrain.LR-2.3 LR-2.3 Condition 3: Controllers
LR-2.3.1
Islamic bank licensees must satisfy the BMA that theircontrollers are suitable and pose no undue risks to the licensee.Islamic bank licensees must also satisfy the BMA that their group structures do not prevent the effective supervision of theIslamic bank licensee by the BMA and otherwise pose no undue risks to the licensee.LR-2.3.2
Chapter GR-5 contains the BMA's requirements and definitions regarding
controllers .LR-2.3.3
In summary,
controllers are persons who directly or indirectly are significant shareholders in anIslamic bank licensee , or who are otherwise able to exert significant influence on theIslamic bank licensee . The BMA seeks to ensure thatcontrollers pose no significant risks to the licensee. In general terms,controllers are assessed in terms of their financial standing, their judicial and regulatory record, and standards of business and (where relevant) personal probity.LR-2.3.4
As regards group structures, the BMA seeks to ensure that these do not prevent adequate consolidated supervision being applied to financial entities within the group, and that other group entities do not pose any material financial, reputational or other risks to the licensee.
LR-2.3.5
In all cases, when judging applications from existing groups, the BMA will have regard to the reputation and financial standing of the group as a whole. Where relevant, the BMA will also take into account the extent and quality of supervision applied to overseas members of the group and take into account any information provided by other supervisors in relation to any member of the group.
LR-2.4 LR-2.4 Condition 4: Board and Employees
LR-2.4.1
Those nominated to carry out
controlled functions must satisfy BMA's approved persons requirements.LR-2.4.2
The definition of
controlled functions is contained in HC-2.1, whilst HC-2.2 sets out BMA'sapproved persons requirements.LR-2.4.3
The
Islamic bank licensee's staff, taken together, must collectively provide a sufficient range of skills and experience to manage the affairs of the licensee in a sound and prudent manner.Islamic bank licensees must ensure their employees meet any training and competency requirements specified by the BMA.LR-2.5 LR-2.5 Condition 5: Financial Resources
Capital Adequacy
LR-2.5.1
Islamic bank licensees must maintain a level of financial resources, as agreed with the BMA, adequate for the level of business proposed. The level of financial resources held must at all times meet the minimum risk-based requirements contained in Module CA (Capital Adequacy), as specified for the category of banking license held.LR-2.5.2
Islamic bank licensees must maintain a minimum level of paid-up capital of BD 20,000,000 (or its equivalent in foreign currency, where legally permitted and agreed with BMA).LR-2.5.3
Persons seeking a license as an
Islamic bank licensee must submit a 3-year business plan, with financial projections. Their proposed level of paid-up capital must be sufficient to cover expected regulatory capital requirements over that period, based on projected activities.LR-2.5.4
In practice, applicants seeking an
Islamic bank license are likely to be required to hold significantly more capital than the minimum paid-up capital specified in Rule LR-2.5.2.LR-2.5.5
Overseas banking applicants are required to provide written confirmation from their head office that the head office will provide financial support to the branch sufficient to enable it to meet its obligations as and when they fall due. Overseas banking applicants must also demonstrate that the bank as a whole is adequately resourced for the amount of risks underwritten, and that it and its group meet capital adequacy standards applied by its
home supervisor .LR-2.5.6
For Bahraini
Islamic bank licensees , funds placed with the bank by way of call and/or unrestricted investment accounts (or similar) must not exceed 20 times their capital and reserves. Foroverseas Islamic wholesale bank licensees , endowment capital may be required.LR-2.5.7
Factors taken into account in setting endowment capital for branches includes the financial strength of the parent company, the quality of its risk management, and the nature and scale of the Bahrain operations of the branch.
Liquidity
LR-2.5.8
Islamic bank licensees must maintain sufficient liquid assets to meet their obligations as they fall due in the normal course of their business.Islamic bank licensees must agree a liquidity management policy with the BMA.LR-2.5.9
The BMA would normally expect the mark-to-market value of assets that could be readily realized at short-notice, to exceed 25% of deposit liabilities at all times. Liquidity arrangements may vary, however, particularly for overseas conventional banks, as agreed with BMA and documented in the liquidity management policy.
Reserve Requirements
LR-2.5.10
Islamic bank licensees must maintain a minimum daily cash reserve balance with the BMA, equivalent to 5% of its total non-bank Bahraini Dinar funds, whether placed by way of call or unrestricted investment accounts (or similar), as well as taken through the issuance of Bahraini Dinar denominated Islamic investment certificates.LR-2.6 LR-2.6 Condition 6: Systems and Controls
LR-2.6.1
Islamic bank licensees must maintain systems and controls that are, in the opinion of the BMA, adequate for the scale and complexity of their activities. These systems and controls must meet the minimum requirements contained in Modules HC and OM.LR-2.6.2
Islamic bank licensees must maintain systems and controls that are, in the opinion of the BMA, adequate to address the risks of financial crime occurring in the licensee. These systems and controls must meet the minimum requirements contained in Module FC, as specified for the category of license held.LR-2.6.3
Applicants will be required to demonstrate in their business plan (together with any supporting documentation) what risks their business would be subject to and how they would manage those risks. Applicants may be asked to provide an independent assessment of the appropriateness of their systems and controls to the BMA, as part of the license approval process.
LR-2.7 LR-2.7 Condition 7: External Auditors
LR-2.7.1
Islamic bank licensees must appoint external auditors, subject to BMA's prior approval. The minimum requirements regarding auditors contained in Module AU (Auditors and Accounting Standards) must be met.LR-2.7.2
Applicants must submit details of their proposed external auditors to the BMA as part of their license application.
LR-2.8 LR-2.8 Condition 8: Other Requirements
Books and Records
LR-2.8.1
Islamic bank licensees must maintain comprehensive books of accounts and other records, and satisfy the minimum record keeping requirements contained in Module GR. Books of accounts must comply with the Financial Accounting Standards issued by the accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), or with International Financial Reporting Standards (IFRS) / International Accounting Standards (IAS), where no relevant AAOIFI standard exists. Audited accounts must be submitted to the BMA within 3 months of the licensee's financial year-end.Provision of Information
General Conduct
LR-2.8.3
Islamic bank licensees must conduct their activities in a professional and orderly manner, in keeping with good market practice.Islamic bank licensees must comply with the general standards of business conduct contained in Module PB, as well as the standards relating to treatment of customers contained in Modules BC and CM.License fees
LR-2.8.4
Islamic bank licensees must comply with any license fee requirements applied by the BMA.LR-2.8.5
The BMA's license fees are set out in Chapter GR-8.
Additional Conditions
LR-2.8.6
Islamic bank licensees must comply with any other specific requirements or restrictions imposed by the BMA on the scope of their license.LR-2.8.7
Bank licensees are subject to the provisions of the BMA Law 1973. These include the right of the BMA to impose such terms and conditions, as it may deem necessary when issuing a license. Thus, when granting a license, the BMA specifies the regulated banking services that the licensee may undertake. Licensees must respect the scope of their license. LR-3.2 sets out the process for varying the scope of an authorisation, should a licensee wish to undertake new activities.
LR-2.8.8
In addition, the BMA may impose additional restrictions or requirements, beyond those already specified in Volume 2, to address specific risks. For instance, a license may be granted subject to strict limitations on intra-group transactions.
LR-2.8.9
Islamic retail bank licensees are subject to the deposit protection scheme of eligible deposits held with the Bahrain offices of the licensee, with respect to certain of their liabilities (see Chapter CP-2).LR-3 LR-3 Information Requirements and Processes
LR-3.1 LR-3.1 Licensing
LR-3.1.1
The application process for an
Islamic bank license consists of two parts: Phase 1 and Phase 2. For Phase 1, applicants for a license must submit a duly completed Form 1 (Phase 1) (Application for a License), under cover of a letter signed by an authorized signatory of the applicant marked for the attention of the Director, Licensing and Policy Directorate. The application must be accompanied by the documents listed in Paragraph LR-3.1.5, unless otherwise directed by the BMA.LR-3.1.2
If, after submission of a duly completed Form 1 (Phase 1) and associated documents, an applicant is granted a conditional (in principle) approval for a license, the applicant must submit Form 1 (Phase 2), together with the documents referred to in Paragraph LR-3.1.10.
LR-3.1.3
When referring to the applicant, reference is made to the proposed licensee seeking an Islamic bank license. The applicant may choose to have an authorized representative, acting on its behalf. In instances where the applicant uses an authorized representative, the application form should provide all details regarding the authorized representative and is to be signed by both the applicant and authorized representative.
LR-3.1.4
Islamic bank licensees , who were licensed prior to the publication of the new LR Module of Volume 2, do not need to resubmit an application for a license. Their license category, and the scope of their authorization, will be confirmed in an exchange of letters, and by re-issuing their license certificate.LR-3.1.5
Unless otherwise directed by the BMA, the following documents must be provided as Part of Phase 1 in support of a license application:
(a) a duly completed Form 2 (Application for Authorisation of Controller) for each controller of the proposed licensee;(b) a duly completed Form 3 (Application for Approved Person status), for each proposed Director of the proposed licensee;(c) a comprehensive business plan for the application, addressing the matters described in LR-3.1.6;(d) for overseas banks, a copy of the bank's current commercial registration or equivalent documentation;(e) where the applicant is a registered institution, a copy of the applicant's commercial registration;(f) where the applicant is a corporate body, a certified copy of a Board resolution of the applicant, confirming its decision to seek a BMA Islamic bank license;(g) in the case of applicants that are part of a regulated group, a letter of non-objection to the proposed license application from the applicant'shome supervisor , together with confirmation that the group is in good regulatory standing and is in compliance with applicable supervisory requirements, including those relating to capital adequacy and solvency requirements;(h) in the case of overseas branch applicants, a letter of non-objection to the proposed license application from the applicant's home supervisor, together with confirmation that the applicant is in good regulatory standing and is in compliance with applicable supervisory requirements, including those relating to capital adequacy requirements;(i) in the case of branch applicants, copies of the audited financial statements of the applicant (head office) for the three years immediately prior to the date of application; and(j) in the case of other applicants, copies of the audited financial statements of the applicant's major shareholder and/or group (as directed by the BMA), for the three years immediately prior to the date of application.LR-3.1.6
The business plan submitted in support of an application should explain:
(a) an outline of the history of the applicant and its shareholders;(b) the reasons for applying for a license, including the applicant's strategy and market objectives;(c) the proposed type of activities to be carried on by the applicant in/from the Kingdom of Bahrain;(d) the proposed Board and senior management of the applicant and the proposed organisational structure of the applicant;(e) an assessment of the risks that may be faced by the applicant, together with the proposed systems and controls framework to be put in place for addressing those risks and to be used for the main business functions; and(f) an opening balance sheet for the applicant, together with a three-year financial projection, with all assumptions clearly outlined, demonstrating that the applicant will be able to meet applicable capital adequacy and liquidity requirements.LR-3.1.7
The applicant's memorandum and articles of association must explicitly provide for it to undertake the activities proposed in the licensed application, and must preclude the applicant from undertaking other commercial activities, unless these arise out of its banking activities or are incidental to those.
LR-3.1.8
In the case of a new bank's capital being financed by a private placement, the Private Placement Memorandum must also be submitted to BMA for its approval as part of the Phase 2 documentation.
LR-3.1.9
The purpose of Rule LR-3.1.8 is to allow BMA to verify that the contents of the Private Placement Memorandum are consistent with other information supplied to BMA, notably in the business plan, and otherwise meets any applicable regulatory requirements with respect to PPM documents. The BMA's review of the PPM does not in any way constitute an approval or endorsement as to any claims it may contain as to the future value of the proposed bank.
LR-3.1.10
As part of Phase 2 of the licensing application process, unless otherwise directed by the BMA, the following documents and information must be provided:
(a) a duly completed Form 3 (Application for Approved Person status), for each individual, (other than for Directors, submitted as part of Phase 1) applying to undertake controlled functions in the applicant;(b) a draft copy of the applicant's memorandum and articles of association, addressing the matters described in LR-3.1.7;(c) a letter of guarantee from the applicant's major shareholder, confirming its willingness to support the proposed licensee in case of need; and(d) in the case of overseas branch applicants, a letter of guarantee from the applicant's head office, confirming responsibility for all of the liabilities of the proposed branch, together with evidence of the power to give such a guarantee.LR-3.1.11
All documentation provided to the BMA as part of an application for a license must be in either the Arabic or English languages. Any documentation in a language other than English or Arabic must be accompanied by a certified English or Arabic translation thereof.
LR-3.1.12
Any material changes or proposed changes to the information provided to the BMA in support of an authorisation application that occurs prior to authorisation must be reported to the BMA.
LR-3.1.13
Failure to inform BMA of the changes specified in LR-3.1.12 is likely to be viewed as a failure to provide full and open disclosure of information, and thus a failure to meet licensing condition LR-2.8.2.
LR-3.1.14
As part of the Phase 1 review of application process, the BMA will provide a formal decision on a license application within 60 calendar days of all required documentation having been submitted in a form acceptable to the BMA. Once an "in principal" approval has been granted for Phase 1, the applicant must submit within 6 months of the "in principal" approval, all requirements for Phase 2 as outlined in Paragraph LR-3.1.10. The BMA will provide a final decision within 30 calendar days of all Phase 2 documentation having been submitted in a form acceptable to the BMA. Applicants are encouraged to approach the BMA to discuss their application at an early stage, so that any specific questions can be dealt with prior to the finalisation of the application.
LR-3.1.15
Within 6 months of the license being issued, the new licensee must provide to the BMA:
(a) a detailed action plan for establishing the operations and supporting infrastructure of the bank, such as the completion of written policies and procedures, and recruitment of remaining employees (having regard to the time limit set by Article 66 of the BMA Law 1973);(b) the registered office address and details of premises to be used to carry out the business of the proposed licensee;(c) the address in the Kingdom of Bahrain where full business records will be kept;(d) the licensee's contact details including telephone and fax number, e-mail address and website;(e) a description of the business continuity plan;(f) a description of the IT system that will be used, including details of how IT systems and other records will be backed up;(g) a copy of the auditor's acceptance to act as auditor for the applicant;(h) a copy of the Ministry of Industry & Commerce commercial registration certificate; and(i) other information as may be specified by the BMA.LR-3.1.16
Applicants issued new licenses by the BMA must start operations within 6 months of the license being issued, as per Article 66 of the BMA Law 1973.
LR-3.1.17
Applicants who are refused a license have a right of appeal under the provisions contained in Article 68 of the BMA Law 1973.
LR-3.2 LR-3.2 Variations to a License
LR-3.2.1
Islamic bank licensees must seek prior BMA approval before undertaking newregulated Islamic banking services .LR-3.2.2
Failure to secure BMA approval prior to undertaking a new regulated activity may lead to enforcement action being taken against the licensee concerned.
LR-3.2.3
In addition to any other information requested by the BMA, and unless otherwise directed by the BMA, an
Islamic bank licensee requesting BMA approval to undertake a newregulated Islamic banking service must provide the following information:(a) a summary of the rationale for undertaking the proposed new activities;(b) a description of how the new business will be managed and controlled;(c) an analysis of the financial impact of the new activities; and(d) a summary of the due diligence undertaken by the Board and management of theIslamic bank licensee on the proposed new activities.LR-3.3 LR-3.3 Withdrawal of a License
Voluntary Surrender
LR-3.3.1
All requests for the voluntary surrender of a license are subject to BMA approval. Such requests must be made in writing to the Executive Director of Banking Supervision, setting out in full the reasons for the request and how the voluntary surrender is to be carried out.
LR-3.3.2
Islamic bank licensees must satisfy BMA that theircustomers' interests are to be safeguarded during and after the proposed voluntary surrender.LR-3.3.3
The BMA will only approve a voluntary surrender where it has no outstanding regulatory concerns and any relevant
customers' interests would not be prejudiced. A voluntary surrender will not be accepted where it is aimed at pre-empting supervisory actions by the BMA. Also, a voluntary surrender will only take effect once the licensee, in the opinion of the BMA, has discharged all its regulatory responsibilities tocustomers .Cancellation
LR-3.3.4
Cancellation of a license requires BMA to issue a formal notice of cancellation to the person concerned. The notice of cancellation must describe the BMA's rationale for the proposed cancellation.
LR-3.3.5
Failure to meet the relevant conditions contained in Chapter LR-2 can lead to cancellation of a license. The BMA generally views cancellation of a license as appropriate only in the most serious of circumstances, and generally tries to address supervisory concerns through other means beforehand. Further guidance is contained in Module EN (Enforcement), regarding BMA's approach to enforcement and on the process for issuing a notice of cancellation and the recipient's right to appeal the notice.
LR-3.3.6
Normally, where cancellation of a license has been confirmed by BMA, BMA will only effect the cancellation once a licensee has discharged all its regulatory responsibilities to
customers . Until such time, BMA will retain all its regulatory powers with regards to the licensee, and will direct the licensee such that no new regulated banking activity may be undertaken whilst the licensee discharges its obligations tocustomers .PB PB Principles of Business
PB-A PB-A Introduction
PB-A.1 PB-A.1 Purpose
PB-A.1.1
The principles are a general statement of the fundamental obligations of all banks.
PB-A.1.2
This module requires banks to establish an adequate system and procedures to ensure:
(a) compliance with the guidance set forth in this module, and(b) that the personnel responsible for maintaining such systems and controls are adequately qualified and competent in discharging their duties.PB-A.1.3
This module provides support to all regulations provided in this Rulebook.
PB-A.2 PB-A.2 Module history
PB-A.2.1
This module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
PB-A.2.2
A list of most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes PB-B PB-B Non-compliance with the principles
PB-B.1 PB-B.1 Non-compliance
PB-B.1.1
A breach of the principles outlined in this module may call into question whether the Board and management of a licensee with a BMA license are still fit and proper, and whether the licensee may continue to be licensed.
PB-B.1.2
Breaching a principle makes a licensee liable to disciplinary sanctions. In determining whether a principle has been breached it is necessary to look to the standard of conduct required by the principle in question. The BMA will determine, after collating all the relevant information required (through its regulatory reporting authority), whether a licensee is in breach of these principles.
PB-1 PB-1 Principles
PB-1.1 PB-1.1 Integrity
PB-1.1.1
All relevant persons should be straightforward and honest in their services and conduct. Integrity is not just limited to honesty but also includes fair dealing and full disclosure of all relevant information. Banks' management must safeguard not only the interests of shareholders of the bank, but also those of the Profit Sharing Investment Account (PSIA) holders.
PB-1.2 PB-1.2 Objectivity
PB-1.2.1
All relevant persons should be fair and should not allow prejudice, bias,
conflict of interest or influence to override their objectivity. Again the bank's management must bear in mind the interests of shareholders and PSIA holders.PB-1.3 PB-1.3 Competence, skill care and due diligence
PB-1.3.1
All relevant persons should perform services with competence, due care and diligence and have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional services based on up-to-date developments in practice, legislation and techniques.
PB-1.4 PB-1.4 Confidentiality
PB-1.4.1
All relevant persons should treat client information with the strictest of confidentiality unless disclosure is warranted under specific authority or there is a legal or professional duty to disclose.
PB-1.5 PB-1.5 Management and control
PB-1.5.1
The Board of Directors and Shari'a Board (where applicable) and management must take reasonable care to organise and control the affairs of the licensee responsibly and effectively with adequate risk management systems. The organisational structure should be clearly delineated and reporting lines completely transparent to promote full disclosure.
PB-1.6 PB-1.6 Market conduct
PB-1.6.1
All relevant persons should observe proper standards of market conduct. In particular, the Agency requires that banks comply with all AAOIFI issued accounting standards as well as the Shari'a pronouncements issued by the Shari'a Board of AAOIFI.
PB-1.7 PB-1.7 Communications with client
PB-1.7.1
All relevant persons must pay due regard to the information needs of their clients and communicate information to them in a manner which is clear, fair and not misleading.
PB-1.8 PB-1.8 Relationship of trust
PB-1.8.1
All relevant persons must take reasonable care to ensure the suitability of their advice and discretionary decisions for any customer who is entitled to rely upon their judgment.
HC HC High Level Controls
HC-A HC-A Introduction
HC-A.1 HC-A.1 Purpose
HC-A.1.1
This Module presents requirements that have to be met by
Islamic bank licensees with respect to:(a) the role and composition of their Boards and Board Committees; and(b) related high-level controls and policies.HC-A.1.2
In addition, this Module contains requirements for the notification and pre-approval of individuals, undertaking certain designated functions with respect to
Islamic bank licensees . These functions (called "controlled functions "), include Directors and members of senior management. Thecontrolled functions regime supplements the BMA's corporate governance requirements by ensuring that key persons involved in the running ofIslamic bank licensees are fit and proper. Those approved by the BMA to undertakecontrolled functions are calledapproved persons .HC-A.1.3
Finally, this Module contains certain notification and approval requirements regarding the use of Special Purpose Vehicles ("SPVs"; see Section HC-1.5).
HC-A.1.4
This Module supplements various provisions relating to corporate governance contained in Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law ("Commercial Companies Law 2001"). In case of conflict, the Commercial Companies Law shall prevail. The Module also supplements (for companies listed on the Bahrain Stock Exchange), Stock Exchange regulations that are relevant to corporate governance and high-level controls. Compliance with this Module does not guarantee compliance with either the Commercial Companies Law 2001 or the BSE regulations.
HC-A.2 HC-A.2 Key requirements
Corporate governance
HC-A.2.1
The Chairman of the Board must be non-executive and independent. The role of Chairman and Chief Executive may not be exercised by the same person. (See Rule HC-1.3.9.)
HC-A.2.2
The Board must approve a code of conduct for itself, senior management and employees, and define the responsibilities of itself and senior management. This should include procedures for dealing with
conflicts of interest , and a prohibition oninsider trading . (See Paragraphs HC-1.2.9 to HC-1.2.13.)HC-A.2.3
The Board must meet at least four times per year (see Rule HC-1.3.3).
HC-A.2.4
Boards must have an adequate number of members that are "independent" and "non-executive" to serve the interests of minority shareholders and other stakeholders. (See Paragraphs HC-1.3.5 and HC-1.3.6.)
HC-A.2.5
The Board should consider the setting up of committees to assist it in fulfilling its responsibilities. The setting up of an Audit Committee and a Shari'a Committee is mandatory. (See Paragraphs HC-1.3.10 to HC-1.3.13.)
HC-A.2.6
All licensees must submit their organisational structure as approved by the Board of Directors. All licensees must establish independent functions for Internal Audit and Risk Management.
HC-A.2.7
Islamic bank licensees are required to notify the BMA, in writing, of all major changes (regardless of type and/or effect) proposed to the strategy and/or corporate plan of the bank prior to implementation, as well as of any Special Purpose Vehicle they intend to establish as a subsidiary, or with respect to which they intend to act as sponsor or manager (see Section HC-1.5).Approved Persons
HC-A.2.8
Islamic bank licensees are required to secure prior BMA approval for those persons wishing to undertake acontrolled function . Such persons are assessed against BMA's "fit and proper" requirements.Islamic bank licensees must also notify the BMA of any changes in theirapproved persons . (See Chapter HC-2)Compliance officer/manager
HC-A.2.9
Islamic bank licensees must appoint a senior member of staff with responsibility for compliance. The Compliance Officer is acontrolled function . (See Chapter HC-3.1.)HC-A.3 HC-A.3 Module history
Evolution of the Module
HC-A.3.1
This Module was first issued in January 2005, as part of the initial release of Volume 2 of the BMA Rulebook. It was dated January 2005. All subsequent changes to this Module are shown with the month and year in which the change was made, at the base of the relevant page and in the Table of Contents. Chapter UG-3 provides further details on Rulebook maintenance and version control.
HC-A.3.2
A list of recent changes made to this Module is shown below:
Module Ref. Change Date Description of Changes HC-1.5 01/07/05 Transparency requirements formalised HC-1.6 01/07/05 Notification concerning senior positions/ controllers HC-1.1, HC-1.2 & HC-1.4 01/10/05 High level controls HC-1.5 01/10/05 New SPV requirements HC-3.1 – HC-3.2 01/10/05 Revised compliance function requirements HC-1.5.3, HC-1.5.5, & HC-4.1 01/01/06 Revised notification requirements for SPVs and dealing staff HC-2, HC-3 and HC-4 01/07/06 Requirements relating to controllers moved to Module GR; Remaining requirements relating to 'fit and proper' re-drafted to ensure consistent terminology and procedures with other Rulebook Volumes (without changing the substance of the previous 'fit and proper' requirements); Requirements relating to dealers incorporated into the 'fit and proper' requirements. Superseded Requirements
HC-A.3.3
Prior to the development of this Rulebook, the BMA issued various circulars covering different aspects of corporate governance. These circulars were consolidated into the first version of this Module as shown below:
Circular Ref. Date of Issue Module Ref.
(July 2004 version)Circular Subject BC/23/99 8 Nov 1999 HC-1 'Enhancing Corporate Governance in Banking Organisations' BC/904/95 24 Jul 1995 HC-1.6 Notification to, and approval from the Agency for certain matters ODG/329/03 10 Sep 2003 HC-1.6 Corporate Governance Reporting BC/11/98 27 Jul 1998 HC-2 Terms and Definitions Applying to the Management of Banks and Financial Institutions BC/8/00 24 May 2000 HC-2 Controllers of, and holdings and transfers of significant ownership or controlling interests in, Agency licensees BC/13/99 15 Jun 1999 HC-3 Compliance, Risk Management and Internal Controls BMA/1287/94 6 Nov 1994 HC-4 Foreign Exchange, Securities and Other Dealers HC-B HC-B General guidance and best practice
HC-B.1 HC-B.1 Guidance provided by other international bodies
Basel Committee: Enhancing Corporate Governance in Banking Organisations and High Level Controls for Banks
HC-B.1.1
These papers (see www.bis.org/publ/bcbs56.pdf) issued in September 1998 and September 1999 provide guidance on corporate governance and high-level controls in banks. These papers form part of an ongoing effort by the Committee to strengthen procedures for risk management and disclosure in banks.
HC-B.1.2
The papers draw on supervisory experience with corporate governance problems at banking organisations and suggest the types of practices that could help to avoid such problems. They identify a number of practices as critical elements of any financial institution's corporate governance process.
HC-B.1.3
The Agency draws banks' attention to the Basel papers as benchmarks of best practice for corporate governance standards and high-level controls to be followed by banks operating in the Kingdom of Bahrain.
HC-B.2 HC-B.2 Enforceability
HC-B.2.1
The requirements of Chapter 1, Sections HC-1.1–HC-1.4 are binding requirements which banks and their Boards should follow on an "apply or explain" basis. If a Board or a bank elects not to follow these requirements, they must explain why to the Agency and document the reasons for not applying the concerned requirements in the Minutes of the Board. The remaining chapters are binding requirements except where shown as guidance.
HC-B.2.2
This Module and Chapter 1 in particular supplements various provisions relating to Corporate Governance contained in Legislative Decree No. 21 of 2001 with respect to promulgating the Commercial Companies Law. In any cases of potential conflict, the Commercial Companies Law shall prevail. Compliance with this Module does not guarantee compliance with the Commercial Companies Law.
HC-1 HC-1 Corporate governance
HC-1.1 HC-1.1 Scope
HC-1.1.1
The contents of this Chapter are applicable to locally incorporated banks. Bahrain branches of foreign banks must satisfy the Agency that equivalent arrangements are in place at the parent level and that these arrangements provide for effective high-level controls over activities conducted under the Bahrain license.
HC-1.1.2
This Chapter covers the high-level controls aspects of corporate governance of banks, and therefore focuses on the functions of the constituent parts of high-level controls, starting with the respective roles and responsibilities of the Board and senior management.
HC-1.1.3
This Chapter therefore does not cover matters of corporate governance relating to the Commercial Companies Law (e.g. General Meetings, the role of shareholders and other administrative matters) or Listing Requirements.
HC-1.1.4
The BMA has historically pursued a "best practice" guidance approach to high-level controls and corporate governance, rather than a prescriptive rules-based approach. The Agency has chosen to notify licensees of international best practice standards, and allowed banks to interpret these, according to the scope of operations of the concerned bank. This Chapter blends a best practice-based approach with minimum requirements.
HC-1.1.5
Banks must satisfy the BMA that financial services activities conducted in subsidiaries and other group members including foreign branches are subject to the same or equivalent arrangements for ensuring effective high-level controls over their activities. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.
HC-1.1.6
Where a bank is unable to satisfy the BMA that its subsidiaries and other group members or foreign branches are subject to the same or equivalent arrangements, the BMA will assess the potential impact of risks — both financial and reputational — to the bank arising from inadequate high-level controls in the rest of the group of which it is a member. In such instances, the BMA may impose restrictions on dealings between the bank and other group members. Where weaknesses in controls are assessed by the BMA to pose a major threat to the stability of the bank, then its authorisation may be called into question.
HC-1.2 HC-1.2 The Board of Directors — Its Functions and Responsibilities
Strategy
HC-1.2.1
In most banks, shareholders, creditors, employees, depositors and investment account holders ("stakeholders") are unable to closely monitor management, its strategies and the bank's performance due to a lack of information and resources. A key responsibility of the Board is to fill the gap between uninformed stakeholders to whom it owes a duty of care, and the more fully informed executive management by monitoring management closely on behalf of stakeholders.
HC-1.2.2
The Board is ultimately accountable and responsible for the affairs and performance of the bank. The Board must establish the objectives of the bank and develop the strategies that direct the ongoing activities of the bank to achieve these objectives. The strategies should be communicated throughout the bank, and be disclosed publicly (e.g. via the website or in the annual report in an abbreviated form as applicable). In its strategy document, the Board must demonstrate that it is able to proactively identify and understand the significant risks that the bank faces in achieving its business objectives through its business strategies and plans.
HC-1.2.3
The precise functions reserved for the Board, and those delegated to management and committees will vary, dependent upon the business of the institution, its size and ownership structure. However, at a minimum, the Board must establish and maintain a statement of its responsibilities for:
(a) The adoption and annual review of strategy;(b) The adoption and review of management structure and responsibilities;(c) The adoption and review of the systems and controls framework; and(d) Monitoring the implementation of strategy by management.HC-1.2.4
In its strategy review process, the Board should:
(a) Review the bank's business plans and the inherent level of risk in these plans;(b) Assess the adequacy of capital to support the business risks of the bank.(c) Set performance objectives;(d) Review the performance of executive management; and(e) Oversee major capital expenditures, divestitures and acquisitions.HC-1.2.5
The BMA expects the Board to have effective policies and processes in place for:
(a) Ensuring a formal and transparent Board nomination process;(b) Appointing senior managers, and ensuring that they have the necessary integrity, technical and managerial competence, and experience;(c) Overseeing succession planning and replacing key executives when necessary, and ensuring appropriate resources are available, and minimising reliance on key individuals;(d) Reviewing the remuneration and incentive packages of the executive management and members of the Board of Directors and ensuring that such packages are consistent with the corporate values and strategy of the bank;(e) Effectively monitoring and making formal (annual) evaluations of senior management's performance in implementing agreed strategy and business plans;(f) Approving budgets and reviewing performance against those budgets and key performance indicators; and(g) The management of the bank's compliance risk.Risk Recognition and Assessment
HC-1.2.6
The Board is responsible for ensuring that the systems and controls framework, including the Board structure and organisational structure of the bank is appropriate for the bank's business and associated risks (see HC-1.2.3 (c)). The Board must ensure that collectively it has sufficient expertise to identify, understand and measure the significant risks to which the bank is exposed in its business activities.
In assessing the systems and controls framework, the BMA expects the Board to demonstrate that the bank's operations, individually and collectively:
(a) Are measured, monitored and controlled by appropriate, effective and prudent risk management systems commensurate with the scope of the bank's activities. The Board should ensure that senior management have put in place appropriate systems of control for the business of the bank and the information needs of the Board; in particular, there should be appropriate systems and functions for identifying as well as for monitoring risk, the financial position of the bank, and compliance with applicable laws, regulations and best practice standards. The systems should produce information on a timely basis; and(b) Are supported by an appropriate control environment. The compliance, risk management and financial reporting functions must be adequately resourced, independent of business lines and must be run by individuals not involved with the day-to-day running of the various business areas. The Board must additionally ensure that management develops, implements and oversees the effectiveness of comprehensive know your customer standards, as well as ongoing monitoring of accounts and transactions, in keeping with the requirements of relevant law, regulations and best practice (with particular regard to anti-money laundering measures). The control environment should maintain necessary client confidentiality and ensure that the privacy of the bank is not violated, and ensure that clients rights and assets are properly safeguarded.HC-1.2.7
In its review of the systems and controls framework, the Board should:
(a) Effectively make use of the work of internal and external auditors. The Board should ensure the integrity of the bank's accounting and financial reporting systems through regular independent review (by internal and external audit). Audit findings should be used as an independent check on the information received from management about the bank's operations and performance and the effectiveness of internal controls; and(b) Identify any significant issues related to the bank's adopted governance framework, processes and practices and ensure that appropriate and timely action is taken to address identified adverse deviations from the requirements of this Module.The determinations under HC-1.2.6 and this paragraph might be made through the use of self-assessments, stress/scenario tests, and/or independent judgments made by external advisors. The Board may appoint supporting committees, and engage senior management to assist it in the oversight of risk management, but the Board may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance process is in place.
Corporate Ethics, Conflicts of Interest and Code of Conduct
HC-1.2.8
Banks are subject to a wide variety of laws, regulations and codes of best practice that directly affect the conduct of business. Such laws involve the Bahraini Stock Exchange Law, the Labour Law, the Commercial Companies Law, occupational health and safety, even environment and pollution laws, as well as codes of conduct and regulations of the Agency. The Board sets the "tone at the top" of a bank, and has a responsibility to oversee compliance with these various requirements. The Board should ensure that the staff conduct their affairs with a high degree of integrity, taking note of applicable laws, codes and regulations.
HC-1.2.9
The Board should establish corporate standards for itself, senior management, and employees. This requirement should be met by way of a documented and published code of conduct or similar document. These values should be communicated throughout the bank, so that the Board and senior management and staff understand the importance of conducting business based on good corporate governance values and understand their accountabilities to the various stakeholders of the licensee. Banks' Boards, senior management and staff must be informed of and be required to fulfil their fiduciary responsibilities to the bank's stakeholders.
HC-1.2.10
An internal code of conduct is separate from the business strategy of a bank. A code of conduct should outline the practices that Directors, senior management and staff should follow in performing their duties. Banks may wish to use procedures and policies to complement their codes of conduct. The suggested contents of a code of conduct are covered below:
(a) Commitment by the Board and management to the code. The code of conduct should be linked to the objectives of the bank, and its responsibilities and undertakings to customers, shareholders, staff and the wider community (see HC-1.2.8 and HC-1.2.9). The code should give examples or expectations of honesty, integrity, leadership and professionalism;(b) Commitment to the law and best practice standards. This commitment would include commitments to following accounting standards, industry best practice (such as ensuring that information to clients is clear, fair, and not misleading), transparency, and rules concerning potential conflicts of interest (see HC-1.2.11);(c) Employment practices. This would include rules concerning health and safety of employees, training, policies on the acceptance and giving of business courtesies, prohibition on the offering and acceptance of bribes, and potential misuse of company assets;(d) How the company deals with disputes and complaints from clients and monitors compliance with the code; and(e) Confidentiality. Disclosure of client or bank information should be prohibited, except where disclosure is required by law (see HC-1.2.6 (b)).HC-1.2.11
The Board must establish and disseminate to its members and management, policies and procedures for the identification, reporting, disclosure, prevention, or strict limitation of potential conflicts of interest. It is senior management's responsibility to implement these policies. Rules concerning connected party transactions and potential conflicts of interest may be dealt with in the Code of Conduct (see HC-1.2.9). In particular, the Agency requires that any decisions to enter into transactions, under which Board members or any member of management would have conflicts of interest that are material, should be formally and unanimously approved by the full Board. Best practice would dictate that a Board member or member of senior management should:
(a) Not enter into competition with the bank;(b) Not demand or accept substantial gifts from the bank for himself or his associates;(c) Not misuse the banks' assets;(d) Not use company privileged information or take advantage of business opportunities to which the company is entitled for himself or his associates;(e) Report to the Board any (potential) conflict of interest in their activities with, and commitments to other organisations. In any case, all Board members and members of senior management must declare in writing all of their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager, or other form of significant participation) to the Board (or the Nominations or Audit Committees) on an annual basis; and(f) Absent themselves from any discussions or decision-making that involves a subject where they are incapable of providing objective advice, or which involves a subject or (proposed) transaction where a conflict of interest exists.HC-1.2.12
The Agency expects that the Board and its members individually and collectively:
(a) Act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the bank and its shareholders and other stakeholders (see paragraphs HC-1.2.8 to HC-1.2.11);(b) Act within the scope of their responsibilities (which should be clearly defined — see HC-1.3.7 and HC-1.3.8 below) and not participate in the day-to-day management of the bank;(c) Have a proper understanding of, and competence to deal with the affairs and products of the bank and devote sufficient time to their responsibilities;(d) To independently assess and question the policies, processes and procedures of the bank, with the intent to identify and initiate management action on issues requiring improvement. (i.e. to act as checks and balances on management).HC-1.2.13
All Directors whether non-executive or executive should exercise independence in their decision-making. To facilitate independence, the Board should agree procedures whereby the Board or its individual members (or committees) may take independent professional advice at the bank's expense.
HC-1.3 HC-1.3 Board Composition and the Role of Committees
Board Composition & Frequency of Meetings
HC-1.3.1
To fulfil its responsibility for the review of the systems and controls framework (HC-1.2.3 (c)), the Board must periodically assess its composition and size and, where appropriate, reconstitute itself and its committees by selecting new Directors to replace long-standing members or those members whose contribution to the bank or its committees (such as the audit committee) is not adequate.
HC-1.3.2
No Board member may have more than one directorship of a Full Commercial Bank and an Offshore Banking Unit or Investment Bank. This would mean an effective cap of a maximum of two directorships of financial institutions inside Bahrain. Two directorships of licensees within the same category (e.g. "OBU") would not be permitted. Banks may approach the Agency for exemption from this limit where the directorships concern banks or financial institutions within the same group.
HC-1.3.3
The Board must meet sufficiently often to enable it to discharge its responsibilities effectively, taking into account the bank's scale and complexity. The full Board should meet preferably no less than four times per year. The Agency recommends that meetings should take place once every quarter to address the Board's responsibilities for management oversight and performance monitoring.
HC-1.3.4
Board rules should require members to step down if they are not actively participating in Board meetings.
Independent and Non-Executive Directors
HC-1.3.5
Where there is the potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent non-executive Board members capable of exercising independent judgment. The Board should outline its criteria and materiality thresholds in the annual report for the definition of "independence". The Directors should be identified in the annual report as executive, non-executive, and independent non-executive, as follows:
(a) Executive Director (or "Managing Director" under the Commercial Companies Law "CCL") — A person who is involved in the day-to-day management and/or is in full-time employment of the bank and/or any of its affiliates or subsidiaries or parent companies. An executive Director may not occupy the post of "Chairman";(b) Non-Executive Director — A person not involved in the day-to-day management and/or is not a full-time salaried employee of the bank and/or any of its affiliates, or subsidiaries or parent companies; and(c) Independent Non-Executive Director — A non-executive Director (as defined above), who also:• Is not a "controller" of the bank (see Section HC-2.1).• Is not an Associate (see paragraph HC-2.1.4(g)) of a Director or a member of senior management of the bank.• Is not a professional advisor to the bank or group (A partner or member of senior management of an accountancy or law firm that provides services to the bank would not be perceived by the Agency as an independent non-executive Director).• Is not a large depositor with, or large borrower from the bank (i.e. whose deposits or credit facilities exceed 10% of the capital base of the bank).• Has no significant contractual, or business relationship with the bank or group which could be seen to materially interfere with the person's capacity to act in an independent manner.HC-1.3.6
Independent non-executive Directors should be permitted to meet periodically (for example at separate meetings from the main Board) without executive management present.
Checks and Balances
HC-1.3.7
To ensure a clear segregation of duties, the Board should clearly define, document and enforce its own responsibilities, including those of its Chairman, as well as the delegated authorities, responsibilities and accountabilities of the Board and management committees, the bank's Chief Executive and senior management to the stakeholders of the bank.
HC-1.3.8
In particular, the Board should issue formal letters of appointment both to senior management and Board members, outlining their specific responsibilities and accountabilities. Wherever possible, these documents or a summary of responsibilities should be disclosed publicly, for example in the annual report. Letters of appointment facilitate better understanding of the respective accountabilities of the Board and management.
Responsibilities of the Chairman
HC-1.3.9
The Chairman is responsible for the leadership of the Board, and for the efficient functioning of the Board. The Chairman is responsible for ensuring that Board members are adequately briefed in sufficient time for issues arising at Board meetings; therefore it is vital that the Chairman commit sufficient time to perform his role effectively, taking into account the points below:
(a) First, the Chairman of the Board preferably should be non-executive and independent (see HC-1.3.6 for the definitions of "non-executive" and "independent");(b) Also, the role of Chairman and Chief Executive may not be exercised by the same person; and(c) Furthermore, there needs to be a clear division of responsibility between these two positions (see also HC-1.3.8 in this regard).The benefits and functions of committees
HC-1.3.10
In order to perform its duties more efficiently, the Board may set up committees where it feels appropriate with specific responsibilities, which must be documented. Where committees are set up, they should keep full minutes of their activities and meet regularly to fulfil their mandates. In particular, there are three areas where there is a need for checks and balances within the Board itself:
(a) The nomination of Directors;(b) The remuneration of Directors; and(c) The audit of the bank's financial performance.In these areas, executive Directors have clear potential conflicts of interest. Nomination is all about the continuation of their own jobs and the jobs of their colleagues and potential new colleagues. Remuneration is all about the rewards that executive Directors and/or senior management receive for their services to the bank. Audit concerns the probity of the financial and non-financial reporting of the performance of the company by the very same persons who are responsible for its performance.
For larger banks that deal with the general public, committees can be a more efficient mechanism to assist the main Board in its monitoring and control of the activities of the bank. The establishment of committees should not mean that the role of the Board is diminished, or that the Board becomes fragmented. Each Committee must have a clear written mandate outlining its purpose, objectives and responsibilities, including composition, frequency of meetings and reporting relationships.
Audit Committee
HC-1.3.11
The Agency requires all banks to establish an Audit Committee. The committee members must have sufficient technical expertise to enable the committee to perform its functions effectively. Preferably, there should be at least one qualified and appropriately experienced accountant in the committee. All members of the committee must be financially literate. The CEO may not be a member of this committee.
HC-1.3.12
Responsibilities of the Audit Committee are as follows:
(a) To review the integrity of the bank's financial reporting (particularly with reference to information passed to the Board — see HC-1.2.6 (a). This review should include the choice of accounting policies. The information needs of the Board to perform its monitoring responsibilities must be defined in writing, and regularly monitored by the Audit Committee;
To oversee the selection and compensation of the external auditor for appointment and approval at the shareholders' meeting. The audit committee should oversee relations with the external auditors, including ensuring the external auditor's independence (in particular, making sure that the external audit firm and its partners have no other financial or business relationship without the Board's knowledge), the terms and conditions of the auditor's appointment and remuneration arrangements. The committee should monitor rotation arrangements for audit engagement partners. The audit committee should monitor the performance of the external auditor and the non-audit services provided by the external auditor. The committee should meet with the external auditor at least twice per year, and at least once per year in the absence of any members of executive management;(b) To regularly review the activities and performance of the internal audit function;(c) To review whether the bank complies with all relevant laws, regulations, codes and business practices, and ensure that the bank communicates with shareholders and relevant stakeholders (internal and external) openly and promptly, and with substance of compliance prevailing over form; and(d) To review and supervise the implementation of, enforcement of and adherence to the bank's code of conduct.HC-1.3.13
Below the Audit Committee, the bank must set up an internal audit function, which reports directly to the Audit Committee (with a parallel reporting line to senior management for day-to-day matters as appropriate).
Shari'a Supervision Committee
HC-1.3.14
The Agency requires all banks to establish an independent Shari'a Supervision Committee complying with AAOIFI's governance standards for Islamic Financial Institutions No. 1 and No. 2.
HC-1.3.15
All banks must comply with all AAOIFI issued accounting standards as well as the Shari'a pronouncement issued by the Shari'a Board of AAOIFI. The bank must have a separate function of Shari'a review to verify compliance with the above. This internal Shari'a review must be carried out in accordance with AAOIFI's governance standard No. 3. The Shari'a review function may be located in the Internal Audit function of the bank.
HC-1.4 HC-1.4 Transparency of Structure and Strategy
Board's Responsibility for Disclosure
HC-1.4.1
The Board should oversee the process of disclosure and communications with internal and external stakeholders. The Board should ensure that disclosures made by the bank are fair, transparent, comprehensive and timely and reflect the character of the bank and the nature, complexity and risks inherent in the bank's business activities. Disclosure policies must be reviewed for compliance with the Agency's disclosure requirements (see Rulebook Chapter PD-1).
HC-1.4.2
To promote sound corporate governance, the bank must submit its organizational structure approved by the Board of Directors, which notes the designations and responsibilities of its key management personnel, highlighting their qualifications and relevant industry experience. The organizational structure should be clearly delineated and reporting lines completely transparent to promote full disclosure. It is the General Manager's responsibility to ensure that this occurs.
HC-1.4.3
The bank must submit a statement of its strategy and objectives to the Agency at the time of licensing. This statement should cover a minimum period of three years. The Agency may request a formal review by the Board of the bank's statement from time to time.
HC-1.5 HC-1.5 Notification, reporting, and approval requirements for changes to activities, personnel and ownership, strategy, board meetings and special purpose vehicles ("SPVs")
HC-1.5.1
Banks must notify the Agency in writing of all major proposed changes to the strategy and/or corporate plan of the bank prior to implementation.
HC-1.5.2
Banks must notify the Agency in writing of any proposed changes to senior positions or ownership changes mentioned in sections HC-2.1, HC-3.2 and HC-4.1 (whether in terms of structure or identity of personnel) prior to the change. The communication should include the reason for the departure of the personnel and the Curriculum Vitae of any new persons taking up the relevant positions in the bank. See also section BR-5.1 for notification requirements concerning contact details of senior staff.
HC-1.5.3
All locally incorporated banks, in addition to the requirements in paragraphs HC-1.5.1 and HC-1.5.2, should obtain the Agency's prior specific written approval before establishing any subsidiaries (including SPVs where the bank exercises a majority shareholding or has majority voting control by virtue of direct ownership or by proxy/nominee arrangements),
branches and/or representative offices, either inside or outside of Bahrain. In order to avoid any delays and/or disruption in implementation of banks' plans in this context, the Agency should be approached as soon as possible, even at a very preliminary stage.HC-1.5.4
All locally incorporated banks are required to submit, on an annual basis, as an attachment to the year-end quarterly PIR, a report recording the meetings during the year by their Board of Directors. For a sample report, refer to Appendix BR-10.
HC-1.5.5
All locally incorporated banks must notify the Agency if they intend to act as sponsor or manager of a special purpose vehicle ("SPV"), or if they intend to participate in the creation of an SPV, or if they intend to acquire shares in an SPV. All locally incorporated banks must notify the Agency if they are appointed as nominee shareholders of SPVs or hold votes by proxy arrangement in SPVs on behalf of other investors. In all cases listed above, the concerned bank must notify the Agency quarterly of any new commitments to, or engagements in business arrangements with SPVs. These reporting and notification arrangements apply in addition to arrangements under HC-1.5.3 where the SPV is a subsidiary.
HC-1.5.6
The Agency requires any locally incorporated bank associated with an SPV to give the background to the following points in any notification under HC-1.5.5 above:
(a) the purpose of the SPV;(b) the nature of the relationship between the bank and the SPV (i.e. sponsor, manager, investor, controller etc.);(c) the external auditor's proposed consolidation/accounting treatment of the SPV;(d) the availability of financial and other information relevant to the SPV and access to its business premises and records;(e) whether the bank is providing any guarantees, warranties or financial/liquidity support of any kind to the SPV.HC-1.5.7
Where the SPV is consolidated into the accounts of a locally incorporated bank, the bank must provide separate accounting information on the SPV to the Agency on a quarterly basis. Furthermore, the annual audited financial statements of all consolidated SPVs must be submitted to the Agency within 3 months of the year end of the concerned SPV.
HC-1.5.8
Where a locally incorporated bank has a controller or majority ownership relationship with an SPV, or acts as sponsor, the bank must obtain the prior approval of the Agency for any changes to the capital, ownership, management or control of the SPV. All locally incorporated banks must also notify the Agency of any significant events in relation to the SPV. If necessary, the Agency may require that formal information exchange arrangements are put in place (e.g. a memorandum of understanding) if the SPV is located in a foreign jurisdiction and its activities are not supervised locally.
HC-2 HC-2 Approved Persons
HC-2.1 HC-2.1 BMA Notification and Approval
General Requirement
HC-2.1.1
All persons wishing to undertake a
controlled function in anIslamic bank licensee must be notified to the BMA prior to their appointment and, where required, approved by the BMA (see Rule HC-2.1.3).
HC-2.1.2
Controlled functions are those of:(a)Director ;(b) Member ofShari'a Supervisory Board (c)Chief Executive orGeneral Manager ;(d) Senior Manager;(e) Compliance officer;(f) Money Laundering Reporting Officer; and(g)Financial Instruments Trader .
HC-2.1.3
Prior approval is required for
controlled functions (a), (b), (c), (d), (e) and (f).Controlled functions (e) and (f) may be combined, however.Controlled function (g) does not require prior approval: instead, notification only is required, once the person concerned has accepted to undertake that function.Basis for Approval
HC-2.1.4
Approval under Rule HC-2.1.1 is only granted by the BMA, if it is satisfied that the person is fit and proper to hold the particular position in the licensee concerned. "Fit and proper" is determined by the BMA on a case-by-case basis. The definition of "fit and proper" and associated guidance is provided in Sections HC-2.2 and HC-2.3 respectively.
Definitions
HC-2.1.5
Director is any person who occupies the position of a Director, as defined in Article 173 of the Commercial Companies Law (Legislative Decree No. 21 of 2001).HC-2.1.6
The fact that a person may have "
Director " in their job title does not of itself make them aDirector within the meaning of the definition noted in Rule HC-2.1.5. For example, a 'Director of Marketing', is not necessarily a member of the Board of Directors and therefore may not fall under the definition of Rule HC-2.1.5.HC-2.1.7
The
Chief Executive orGeneral Manager means a person who is responsible for the conduct of the licensee (regardless of actual title). TheChief Executive orGeneral Manager must be resident in Bahrain. This person is responsible, alone or jointly, for the conduct of the whole of the firm, or, in the case of anoverseas Islamic bank licensee , for all of the activities of the branch (in which case, he may hold the title of "Branch Manager").HC-2.1.8
Senior Manager means a person who, under the immediate authority of aDirector or theChief Executive /General Manager , exercises major managerial responsibilities, is responsible for a significant business or operating unit, or has major managerial responsibility for maintaining accounts or other records of the licensee.HC-2.1.9
Whether a person is a
Senior Manager will depend on the facts in each case and is not determined by the presence or absence of the word in their job title. Examples ofSenior Managers might include, depending on the scale, nature and complexity of the business, a deputyChief Executive ; and heads of departments such as Risk Management, or Internal Audit; or the Chief Financial Officer.HC-2.1.10
Financial Instruments Trader means a person who is engaged in buying or sellingfinancial instruments .HC-2.1.11
Where a firm is in doubt as to whether a function should be considered a
controlled function it must discuss the case with the BMA.Notification Requirements and Process
HC-2.1.12
Islamic bank licensees must obtain BMA approval before a person is formally appointed to acontrolled function ; the request for BMA approval must be made by submitting to BMA a duly completed Form 3 (Application for Approved Person status). In the case of a financial instruments trader, notification only is required (see Rule HC-2.1.3): this notification must also be made by submitting a Form 3.HC-2.1.13
In the case of license applications, the Form 3 must be marked for the attention of the Director, Licensing and Policy Directorate. When made by an
Islamic bank licensee , the Form 3 must be marked for the attention of the Director, Islamic Financial Institutions.HC-2.1.14
Licensees should give the BMA a reasonable amount of notice in order for an application for approval to be reviewed. The BMA aims to respond within 2 weeks of receipt of an application, although in some cases, where referral to an overseas supervisor is required, the response time is likely to be longer.
HC-2.1.15
Licensees seeking to appoint Board Directors should seek BMA approval for all the candidates to be put forward for election at a shareholder meeting, in advance of the agenda being issued to shareholders. BMA approval of the candidates does not in any way limit shareholders' rights to refuse those put forward for election.
HC-2.1.16
All refusals by the BMA to grant a person approved person status have to be reviewed and approved by an Executive Director of the BMA. A notice of intent is issued to the person concerned, setting out the basis for the decision. The person has 30 calendar days from the date of the notice in which to appeal the decision. The BMA then has 30 calendar days from the date of the representation in which to make a final determination. See also Chapter EN-5.
HC-2.1.17
Islamic bank licensees must immediately notify BMA when anapproved person ceases to hold thecontrolled function , for which they have been approved, and for whatever reason.HC-2.1.18
Thus, licensees are required to notify BMA should an
approved person transfer to another function within the licensee, or to another group entity; or else resign, be suspended or dismissed. BMA may require further clarification as to the reasons for the person's transfer or departure. BMA will automatically withdraw the individual'sapproved person status: should the person wish to undertake anothercontrolled function , whether within the same licensee or in another licensee, then a new application should be resubmitted.HC-2.1.19
Islamic bank licensees must immediately notify BMA should they become aware of information that could reasonably be viewed as calling into question anapproved person's compliance with BMA's "fit and proper" requirement (see HC-2.2).HC-2.2 HC-2.2 "Fit and proper" requirement
HC-2.2.1
Licensees seeking an
approved person authorisation for an individual, must satisfy the BMA that the individual concerned is "fit and proper" to undertake thecontrolled function in question.HC-2.2.2
To be considered "fit and proper", those nominated must demonstrate:
(a) personal integrity, honesty and good reputation;(b) professional competence, experience and expertise, sufficient for thecontrolled function for which authorisation is being applied for, and given the scale, complexity and nature of theIslamic bank licensee concerned; and(c) financial soundness.HC-2.2.3
In assessing the conditions prescribed in Rule HC-2.2.2, the BMA will take into account the criteria contained in Section HC-2.3. The BMA reviews each application on a case-by-case basis, taking into account all relevant circumstances. A person may be considered "fit and proper" to undertake one type of
controlled function but not another, depending on the function's job size and required levels of experience and expertise. Similarly, a person approved to undertake acontrolled function in oneIslamic bank licensee may not be considered to have sufficient expertise and experience to undertake nominally the samecontrolled function but in a much bigger licensee.HC-2.2.4
Approved persons undertaking acontrolled function must act prudently, and with honesty, integrity, care, skill and due diligence in the performance of their duties. They must avoid conflicts of interest arising whilst undertaking acontrolled function .HC-2.2.5
In determining whether a conflict of interest may arise, factors that may be considered include whether:
(a) a person has breached any fiduciary obligations to the company or terms of employment;(b) a person has undertaken actions that would be difficult to defend, when looked at objectively, as being in the interest of the licensee; and(c) a person has failed to declare a personal interest that has a material impact in terms of the person's relationship with the licensee.HC-2.3 HC-2.3 Interpretative Guidance on "Fit and Proper" Requirement
HC-2.3.1
In assessing a person's fitness and propriety, the BMA will consider previous professional and personal conduct (in Bahrain or elsewhere) including, but not limited to, the following:
(a) the propriety of a person's conduct, whether or not such conduct resulted in a criminal offence being committed, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;(b) a conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;(c) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;(d) whether the person has been the subject of any disciplinary proceeding by any government authority, regulatory agency or professional body or association;(e) the contravention of any financial services legislation or regulation;(f) whether the person has ever been refused a license, authorisation, registration or other authority;(g) dismissal or a request to resign from any office or employment;(h) disqualification by a court, regulator or other competent body, as a Director or as a manager of a corporation;(i) whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;(j) the extent to which the person has been truthful and open with supervisors;(k) the extent to which the person has appropriate professional and other qualifications for the controlled function in question;(l) the extent to which the person has sufficient experience, or is otherwise able to perform the functions of the controlled function in question;(m) whether the person has ever been adjudged bankrupt, entered into any arrangement with creditors in relation to the inability to pay due debts, or failed to satisfy a judgment debt under a court order.HC-2.3.2
With respect to HC-2.3.1(b), (c), (d) and (e), the BMA will take into account the length of time since any such event occurred, as well as the seriousness of the matter in question.
HC-2.4 [deleted]
[This Section was deleted in 07/2006: it has been left blank.]
HC-3 HC-3 Compliance officer/manager
HC-3.1 HC-3.1 Introduction
HC-3.1.1
In order to promote best practice with respect to banks' internal systems and controls and international banking supervision, the Agency, in this chapter, outlines its requirements for the compliance function of banks. The expression "Compliance Function" in this Chapter is used to describe staff carrying out compliance duties.
HC-3.1.2
The expression 'Compliance Risk', in this chapter refers to the risk of legal or regulatory sanctions, material or financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, reporting requirements, standards and codes of conduct applicable to its activities, rather than purely compliance with a bank's internal limits or procedures.
HC-3.1.3
For further information and guidance on compliance risk and the compliance function, the Agency recommends that banks refer to the
Basel Committee publication, "Compliance and the compliance function in banks" (see www.bis.org/publ published April 2005). The Agency expects banks to carry out a review of their compliance with the principles in this paper on a regular basis (either by way of a self-assessment or by way of a review by the internal or external audit function).HC-3.2 HC-3.2 Requirement for and approval of a compliance officer/manager
HC-3.2.1
All banks must appoint a senior member of staff with responsibility for the management of compliance risk as their Compliance Officer/Manager.
HC-3.2.2
The compliance function must be independent (i.e. it must not be placed in a position where its other duties or responsibilities may cause a conflict of interest with its compliance risk management responsibilities). Therefore the compliance function must be separate from the internal audit function. The compliance officer or manager may perform other limited related compliance roles (e.g. MLRO or legal advisor), subject to the Agency's prior approval.
HC-3.2.3
The compliance officer/manager must be appropriately qualified and experienced and the compliance function must have adequate resources to carry out its functions effectively.
HC-3.2.4
The appointment of a compliance manager/officer requires the Agency's prior approval and the submission of the appointee's Personal Questionnaire (Appendix LR 2) and Curriculum Vitae to the Agency. The bank must also outline how the compliance function fits into the bank's senior management reporting structure, and must give details of relevant reporting lines within the bank.
HC-3.2.5
In the case of locally incorporated banks, the compliance officer/manager must have access to the Board of Directors in addition to the senior management.
HC-4 [deleted]
[This chapter deleted 07/2006 — left blank.]
HC HC High-level Controls[versions up to October 2010]
HC-A HC-A Introduction[versions up to October 2010]
HC-A.1 HC-A.1 Purpose[versions up to October 2010]
HC-A.1.1 [versions up to October 2010]
This Module presents requirements that have to be met by
Islamic bank licensees with respect to:a) the role and composition of their Boards and Board Committees; andb) related high-level controls and policies.October 07HC-A.1.2 [versions up to October 2010]
In addition, this Module contains requirements for the notification and pre-approval of individuals, undertaking certain designated functions with respect to
Islamic bank licensees . These functions (called 'controlled functions '), include Directors and members of senior management. Thecontrolled functions regime supplements the CBB's corporate governance requirements by ensuring that key persons involved in the running ofIslamic bank licensees are fit and proper. Those approved by the CBB to undertakecontrolled functions are calledapproved persons .October 07HC-A.1.3 [versions up to October 2010]
Finally, this Module contains certain notification and approval requirements regarding the use of Special Purpose Vehicles ('SPVs'; see Section HC-1.5).
October 07HC-A.1.4 [versions up to October 2010]
This Module supplements various provisions relating to corporate governance contained in Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law ('Commercial Companies Law 2001'). In case of conflict, the Commercial Companies Law shall prevail. The Module also supplements (for companies listed on the Bahrain Stock Exchange), Stock Exchange regulations that are relevant to corporate governance and high-level controls. Compliance with this Module does not guarantee compliance with either the Commercial Companies Law 2001 or the BSE regulations.
October 07Legal Basis[versions up to October 2010]
HC-A.1.5 [versions up to October 2010]
This Module contains the CBB's Directive relating to the credit risk management of
Islamic bank licensees , and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to allIslamic bank licensees .October 07HC-A.1.6 [versions up to October 2010]
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 07HC-A.2 HC-A.2 Key requirements[versions up to October 2010]
Corporate governance[versions up to October 2010]
HC-A.2.1 [versions up to October 2010]
The Chairman of the Board should preferably be non-executive and independent. The role of Chairman and Chief Executive may not be exercised by the same person. (See Rule HC-1.3.9.)
Amended: October 2009
October 2007HC-A.2.2 [versions up to October 2010]
The Board must approve a code of conduct for itself, senior management and employees, and define the responsibilities of itself and senior management. This should include procedures for dealing with
conflicts of interest , and a prohibition oninsider trading . (See Paragraphs HC-1.2.9 to HC-1.2.11.)October 07HC-A.2.3 [versions up to October 2010]
The Board should meet at least four times per year (see Rule HC-1.3.3).
Amended: October 2009
October 2007HC-A.2.4 [versions up to October 2010]
Boards must have an adequate number of members that are 'independent' and 'non-executive' to serve the interests of minority shareholders and other stakeholders. (See Paragraphs HC-1.3.5 and HC-1.3.6.)
October 07HC-A.2.5 [versions up to October 2010]
The Board should consider the setting up of committees to assist it in fulfilling its responsibilities. The setting up of an Audit Committee and a Shari'a Committee is mandatory. (See Paragraphs HC-1.3.11 to HC-1.3.16.)
October 07HC-A.2.6 [versions up to October 2010]
All licensees must submit their organisational structure as approved by the Board of Directors. All licensees must establish independent functions for Internal Audit and Risk Management.
October 07HC-A.2.7 [versions up to October 2010]
Islamic bank licensees are required to notify the CBB, in writing, of all major changes (regardless of type and/or effect) proposed to the strategy and/or corporate plan of the bank prior to implementation, as well as of any Special Purpose Vehicle they intend to establish as a subsidiary, or with respect to which they intend to act as sponsor or manager (see Section HC-1.5).October 07Approved Persons[versions up to October 2010]
HC-A.2.8 [versions up to October 2010]
Islamic bank licensees are required to secure prior CBB approval for those persons wishing to undertake acontrolled function . Such persons are assessed against CBB's 'fit and proper' requirements. Islamic bank licensees must also notify the CBB of any changes in theirapproved persons . (See Chapter HC-2)October 07Compliance officer/manager[versions up to October 2010]
HC-A.2.9 [versions up to October 2010]
Islamic bank licensees must appoint a senior member of staff with responsibility for compliance. The Compliance Officer is acontrolled function . (See Chapter HC-3.1.)October 07HC-A.3 HC-A.3 Module History[versions up to October 2010]
Evolution of the Module[versions up to October 2010]
HC-A.3.1 [versions up to October 2010]
This Module was first issued in January 2005, as part of the initial release of Volume 2 of the CBB Rulebook. It was dated January 2005. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG 3 provides further details on Rulebook maintenance and version control.
October 07HC-A.3.2 [versions up to October 2010]
When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 2 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.
October 07HC-A.3.3 [versions up to October 2010]
A list of recent changes made to this Module is shown below:
Module Ref. Change Date Description of Changes HC-1.5 01/07/05 Transparency requirements formalised HC-1.6 01/07/05 Notification requirements formalised HC-1.1, 1.2 & 1.4 01/10/05 High-level controls HC-1.5 01/10/05 New SPV requirements HC-3.1 – HC-3.2 01/10/05 Revised compliance function requirements HC-1.5.3, 1.5.5 & 4.1 01/01/06 Revised notification requirements for SPVs and dealing staff HC-2, HC-3 and HC-4 01/07/06 Requirements relating to controllers moved to Module GR; Remaining requirements relating to 'fit and proper' re-drafted to ensure consistency with other Rulebook Volumes (without changing the substance of the previous 'fit and proper' requirements); Requirements relating to dealers incorporated into the 'fit and proper' requirements. HC-1.2 & HC-1.3 01/10/07 Reordering of Paragraphs to separate Rules and Guidance HC-A.1 10/2007 New Rule HC-A.1.5 introduced, categorising this Module as a Directive. HC-1.3.5 04/2008 Mandatory requirement for at least one independent non-executive director HC-2.1.16 01/2009 Amendment to notification process for "approved person" status HC-1.5.3 01/2009 Requirement to appoint a permanent replacement within 120 days when a controlled function falls vacant. HC-2.1.2 10/2009 CBB prior approval requirement for appointment of Deputy MLRO. HC-B HC-B General guidance and best practice[versions up to October 2010]
HC-B.1 HC-B.1 Guidance provided by other international bodies[versions up to October 2010]
Basel Committee: Enhancing Corporate Governance in Banking Organisations and High-level Controls for Banks[versions up to October 2010]
HC-B.1.1 [versions up to October 2010]
These papers (see www.bis.org/publ/bcbs56.pdf) issued in September 1998 and September 1999 provide guidance on corporate governance and high-level controls in banks. These papers form part of an on-going effort by the Committee to strengthen procedures for risk management and disclosure in banks.
October 07HC-B.1.2 [versions up to October 2010]
The papers draw on supervisory experience with corporate governance problems at banking organisations and suggest the types of practices that could help to avoid such problems. They identify a number of practices as critical elements of any financial institution's corporate governance process.
October 07HC-B.1.3 [versions up to October 2010]
The CBB draws banks' attention to the Basel papers as benchmarks of best practice for corporate governance standards and high-level controls to be followed by banks operating in the Kingdom of Bahrain.
October 07HC-B.2 HC-B.2 Enforceability[versions up to October 2010]
HC-B.2.1 [versions up to October 2010]
The requirements of Chapter 1, Sections HC-1.1–HC-1.4 are binding requirements, which banks and their Boards should follow on an 'apply or explain' basis. If a Board or a bank elects not to follow these requirements, they must explain why to the Central Bank and document the reasons for not applying the concerned requirements in the Minutes of the Board. The remaining Chapters are binding requirements except where shown as guidance.
October 07HC-1 HC-1 Corporate Governance[versions up to October 2010]
HC-1.1 HC-1.1 Scope[versions up to October 2010]
HC-1.1.1 [versions up to October 2010]
The contents of this Chapter are applicable to locally incorporated banks. Bahrain branches of foreign banks must satisfy the Central Bank that equivalent arrangements are in place at the parent level and that these arrangements provide for effective high-level controls over activities conducted under the Bahrain license.
October 07HC-1.1.2 [versions up to October 2010]
This Chapter covers the high-level controls aspects of corporate governance of banks, and therefore focuses on the functions of the constituent parts of high-level controls, starting with the respective roles and responsibilities of the Board and senior management.
October 07HC-1.1.3 [versions up to October 2010]
This Chapter therefore does not cover matters of corporate governance relating to the Commercial Companies Law (e.g. General Meetings, the role of shareholders and other administrative matters) or Listing Requirements.
October 07HC-1.1.4 [versions up to October 2010]
The CBB has historically pursued a 'best practice' guidance approach to high-level controls and corporate governance, rather than a prescriptive rules-based approach. The Central Bank has chosen to notify licensees of international best practice standards, and allowed banks to interpret these, according to the scope of operations of the concerned bank. This Chapter blends a best practice-based approach with minimum requirements.
October 07HC-1.1.5 [versions up to October 2010]
Banks must satisfy the CBB that financial services activities conducted in subsidiaries and other group members including foreign branches are subject to the same or equivalent arrangements for ensuring effective high-level controls over their activities. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.
October 07HC-1.1.6 [versions up to October 2010]
Where a bank is unable to satisfy the CBB that its subsidiaries and other group members or foreign branches are subject to the same or equivalent arrangements, the CBB will assess the potential impact of risks – both financial and reputational – to the bank arising from inadequate high-level controls in the rest of the group of which it is a member. In such instances, the CBB may impose restrictions on dealings between the bank and other group members. Where weaknesses in controls are assessed by the CBB to pose a major threat to the stability of the bank, then its authorisation may be called into question.
October 07HC-1.2 HC-1.2 The Board of Directors – Its Functions and Responsibilities[versions up to October 2010]
Strategy[versions up to October 2010]
HC-1.2.1 [versions up to October 2010]
In most banks, shareholders, creditors, employees, depositors and investment account holders ('stakeholders') are unable to closely monitor management, its strategies and the bank's performance due to a lack of information and resources. A key responsibility of the Board is to fill the gap between uninformed stakeholders to whom it owes a duty of care, and the more fully informed executive management by monitoring management closely on behalf of stakeholders.
October 07HC-1.2.2 [versions up to October 2010]
The Board is ultimately accountable and responsible for the affairs and performance of the bank. The Board must establish the objectives of the bank and develop the strategies that direct the on-going activities of the bank to achieve these objectives. The strategies must be communicated throughout the bank, and be disclosed publicly (e.g. via the website or in the annual report in an abbreviated form as applicable). In its strategy document, the Board must demonstrate that it is able to proactively identify and understand the significant risks that the bank faces in achieving its business objectives through its business strategies and plans.
October 07HC-1.2.3 [versions up to October 2010]
The precise functions reserved for the Board, and those delegated to management and committees will vary, dependent upon the business of the institution, its size and ownership structure. However, as a minimum, the Board must establish and maintain a statement of its responsibilities for:
a) The adoption and annual review of strategy;b) The adoption and review of management structure and responsibilities;c) The adoption and review of the systems and controls framework; andd) Monitoring the implementation of strategy by management.The Board may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance process is in place.
October 07HC-1.2.4 [versions up to October 2010]
In its strategy review process under Paragraphs HC-1.2.3 a) and d), the Board must:
a) Review the bank's business plans and the inherent level of risk in these plans;b) Assess the adequacy of capital to support the business risks of the bank.c) Set performance objectives;d) Review the performance of executive management; ande) Oversee major capital expenditures, divestitures and acquisitions.October 07HC-1.2.5 [versions up to October 2010]
The CBB expects the Board to have effective policies and processes in place for:
a) Ensuring a formal and transparent Board nomination process;b) Appointing senior managers, and ensuring that they have the necessary integrity, technical and managerial competence, and experience;c) Overseeing succession planning and replacing key executives when necessary, and ensuring appropriate resources are available, and minimising reliance on key individuals;d) Reviewing the remuneration and incentive packages of the executive management and members of the Board of Directors and ensuring that such packages are consistent with the corporate values and strategy of the bank;e) Effectively monitoring and making formal (annual) evaluations of senior management's performance in implementing agreed strategy and business plans;f) Approving budgets and reviewing performance against those budgets and key performance indicators; andg) The management of the bank's compliance risk.October 07Risk Recognition and Assessment[versions up to October 2010]
HC-1.2.6 [versions up to October 2010]
The Board is responsible for ensuring that the systems and controls framework, including the Board structure and organisational structure of the bank, is appropriate for the bank's business and associated risks (see HC-1.2.3 c)). The Board must ensure that collectively it has sufficient expertise to identify, understand and measure the significant risks to which the bank is exposed in its business activities.
The Board must regularly assess the systems and controls framework of the bank. In its assessments, the Board must demonstrate to the CBB that:
a) The bank's operations, individually and collectively are measured, monitored and controlled by appropriate, effective and prudent risk management systems commensurate with the scope of the bank's activities; andb) The bank's operations are supported by an appropriate control environment. The compliance, risk management and financial reporting functions must be adequately resourced, independent of business lines and must be run by individuals not involved with the day-to-day running of the various business areas. The Board must additionally ensure that management develops, implements and oversees the effectiveness of comprehensive know your customer standards, as well as on-going monitoring of accounts and transactions, in keeping with the requirements of relevant law, regulations and best practice (with particular regard to anti-money laundering measures). The control environment should maintain necessary client confidentiality and ensure that the privacy of the bank is not violated, and ensure that clients rights and assets are properly safeguarded.c) Where the Board has identified any significant issues related to the bank's adopted governance framework, appropriate and timely action is taken to address any identified adverse deviations from the requirements of this Module.October 07HC-1.2.7 [versions up to October 2010]
In its review of the systems and controls framework in Paragraph HC-1.2.6, the Board must:
a) Make effective use of the work of external and internal auditors. The Board must ensure the integrity of the bank's accounting and financial reporting systems through regular independent review (by internal and external audit). Audit findings must be used as an independent check on the information received from management about the bank's operations and performance and the effectiveness of internal controls; andb) Make use of self-assessments, stress/scenario tests, and/or independent judgments made by external advisors. The Board may appoint supporting committees, and engage senior management to assist it in the oversight of risk management; andc) Ensure that senior management have put in place appropriate systems of control for the business of the bank and the information needs of the Board; in particular, there must be appropriate systems and functions for identifying as well as for monitoring risk, the financial position of the bank, and compliance with applicable laws, regulations and best practice standards. The systems must produce information on a timely basis.October 07Corporate Ethics, Conflicts of Interest and Code of Conduct[versions up to October 2010]
HC-1.2.8 [versions up to October 2010]
Banks are subject to a wide variety of laws, regulations and codes of best practice that directly affect the conduct of business. Such laws involve the Bahraini Stock Exchange Law, the Labour Law, the Commercial Companies Law, occupational health and safety, even environment and pollution laws, as well as codes of conduct and regulations of the Central Bank. The Board sets the 'tone at the top' of a bank, and has a responsibility to oversee compliance with these various requirements. The Board should ensure that the staff conduct their affairs with a high degree of integrity, taking note of applicable laws, codes and regulations.
October 07HC-1.2.9 [versions up to October 2010]
The Board must establish corporate standards for itself, senior management, and employees. This requirement should be met by way of a documented and published code of conduct or similar document. These values must be communicated throughout the bank, so that the Board and senior management and staff understand the importance of conducting business based on good corporate governance values and understand their accountabilities to the various stakeholders of the licensee. Banks' Boards, senior management and staff must be informed of and be required to fulfill their fiduciary responsibilities to the bank's stakeholders.
October 07HC-1.2.10 [versions up to October 2010]
An internal code of conduct is separate from the business strategy of a bank. A code of conduct should outline the practices that Directors, senior management and staff should follow in performing their duties. Banks may wish to use procedures and policies to complement their codes of conduct. The suggested contents of a code of conduct are covered below:
a) Commitment by the Board and management to the code. The code of conduct should be linked to the objectives of the bank, and its responsibilities and undertakings to customers, shareholders, staff and the wider community (see HC-1.2.8 and HC-1.2.9). The code should give examples or expectations of honesty, integrity, leadership and professionalism;b) Commitment to the law and best practice standards. This commitment would include commitments to following accounting standards, industry best practice (such as ensuring that information to clients is clear, fair, and not misleading), transparency, and rules concerning potential conflicts of interest (see HC-1.2.11);c) Employment practices. This would include rules concerning health and safety of employees, training, policies on the acceptance and giving of business courtesies, prohibition on the offering and acceptance of bribes, and potential misuse of company assets;d) How the company deals with disputes and complaints from clients and monitors compliance with the code; ande) Confidentiality. Disclosure of client or bank information should be prohibited, except where disclosure is required by law (see HC-1.2.6 b).October 07HC-1.2.11 [versions up to October 2010]
The Board must establish and disseminate to its members and management, policies and procedures for the identification, reporting, disclosure, prevention, or strict limitation of potential conflicts of interest. It is senior management's responsibility to implement these policies. Rules concerning connected party transactions and potential conflicts of interest may be dealt with in the Code of Conduct (see HC-1.2.9). In particular, the Central Bank requires that any decisions to enter into transactions, under which Board members or any member of management would have conflicts of interest that are material, should be formally and unanimously approved by the full Board. Best practice would dictate that a Board member or member of senior management must:
a) Not enter into competition with the bank;b) Not demand or accept substantial gifts from the bank for himself or his associates;c) Not misuse the banks' assets;d) Not use company privileged information or take advantage of business opportunities to which the company is entitled for himself or his associates;e) Report to the Board any (potential) conflict of interest in their activities with, and commitments to other organisations. In any case, all Board members and members of senior management must declare in writing all of their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager, or other form of significant participation) to the Board (or the Nominations or Audit Committees) on an annual basis; andf) Absent themselves from any discussions or decision-making that involves a subject where they are incapable of providing objective advice, or which involves a subject or (proposed) transaction where a conflict of interest exists.October 07HC-1.2.12 [versions up to October 2010]
The Central Bank expects that the Board and its members individually and collectively:
a) Act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the bank and its shareholders and other stakeholders (see Paragraphs HC-2.8 to HC-1.2.11);b) Act within the scope of their responsibilities (which should be clearly defined – see HC-1.3.7 and HC-1.3.8 below) and not participate in the day-to-day management of the bank;c) Have a proper understanding of, and competence to deal with the affairs and products of the bank and devote sufficient time to their responsibilities;d) To independently assess and question the policies, processes and procedures of the bank, with the intent to identify and initiate management action on issues requiring improvement. (i.e. to act as checks and balances on management).October 07HC-1.2.13 [versions up to October 2010]
All Directors whether non-executive or executive should exercise independence in their decision-making. To facilitate independence, the Board should agree procedures whereby the Board or its individual members (or committees) may take independent professional advice at the bank's expense.
October 07HC-1.3 HC-1.3 Board Composition and the Role of Committee[versions up to October 2010]
Board Composition & Frequency of Meetings[versions up to October 2010]
HC-1.3.1 [versions up to October 2010]
To fulfil its responsibility for the review of the systems and controls framework (HC-1.2.3 c), the Board must periodically assess its composition and size and, where appropriate, reconstitute itself and its committees by selecting new Directors to replace long-standing members or those members whose contribution to the bank or its committees (such as the audit committee) is not adequate.
October 07HC-1.3.2 [versions up to October 2010]
No Board member may have more than one Directorship of a Retail Bank and a Wholesale Bank. This would mean an effective cap of a maximum of two Directorships of licensees inside Bahrain. Two Directorships of licensees within the same Category (e.g. 'Retail Bank') would not be permitted. Banks may approach the Central Bank for exemption from this limit where the Directorships concern banks or financial institutions within the same group.
Amended January 2009
October 07HC-1.3.3 [versions up to October 2010]
The Board must meet sufficiently often to enable it to discharge its responsibilities effectively, taking into account the bank's scale and complexity.
October 07HC-1.3.4 [versions up to October 2010]
To meet its obligations under Rule HC-1.3.3 above, the full Board should meet preferably no less than four times per year. The Central Bank recommends that meetings should take place once every quarter to address the Board's responsibilities for management oversight and performance monitoring. Furthermore, Board rules should require members to step down if they are not actively participating in Board meetings.
October 07Independent and Non-Executive Directors[versions up to October 2010]
HC-1.3.5 [versions up to October 2010]
Where there is the potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent non-executive Board members capable of exercising independent judgment. At a minimum, all locally incorporated banks must appoint one independent non-executive director. The Board must outline its criteria and materiality thresholds in the annual report for the definition of 'independence'. The Directors must be identified in the annual report as executive, non-executive, and independent non-executive, as follows:
a) Executive Director (or 'Managing Director' under the Commercial Companies Law 'CCL') - A person who is involved in the day-to-day management and/or is in full-time employment of the bank and/or any of its affiliates or subsidiaries or parent companies. An executive Director may not occupy the post of 'Chairman';b) Non-Executive Director - A person not involved in the day-to-day management and/or is not a full-time salaried employee of the bank and/or any of its affiliates, or subsidiaries or parent companies; andc) Independent Non-Executive Director - A non-executive Director (as defined above), who also:• Is not a 'controller' of the bank (see Section GR-5.2).• Is not an Associate (see Section GR-5.2) of a Director or a member of senior management of the bank.• Is not a professional advisor to the bank or group (A partner or member of senior management of an accountancy or law firm that provides services to the bank would not be perceived by the Central Bank as an independent non-executive Director).• Is not a large depositor with, or large borrower from the bank (i.e. whose deposits or credit facilities exceed 10% of the capital base of the bank).• Has no significant contractual, or business relationship with the bank or group which could be seen to materially interfere with the person's capacity to act in an independent manner.October 07
Amended: April 2008HC-1.3.6 [versions up to October 2010]
Independent non-executive Directors should be permitted to meet periodically (e.g. at separate meetings from the main Board) without executive management present.
October 07Checks and Balances[versions up to October 2010]
HC-1.3.7 [versions up to October 2010]
To ensure a clear segregation of duties, the Board must clearly define, document and enforce its own responsibilities, including those of its Chairman, as well as the delegated authorities, responsibilities and accountabilities of the Board and management committees, the bank's Chief Executive and senior management to the stakeholders of the bank.
October 07HC-1.3.8 [versions up to October 2010]
In particular, the Board must issue formal letters of appointment both to senior management and Board members, outlining their specific responsibilities and accountabilities. Wherever possible, these documents or a summary of responsibilities should be disclosed publicly, for example in the annual report. Letters of appointment facilitate better understanding of the respective accountabilities of the Board and management.
October 07Responsibilities of the Chairman[versions up to October 2010]
HC-1.3.9 [versions up to October 2010]
The Chairman is responsible for the leadership of the Board, and for the efficient functioning of the Board. The Chairman is responsible for ensuring that Board members are adequately briefed in sufficient time for issues arising at Board meetings; therefore it is vital that the Chairman commit sufficient time to perform his role effectively, taking into account the points below:
a) The role of Chairman and Chief Executive may not be exercised by the same person; andb) Furthermore, there needs to be a clear division of responsibility between these two positions (see also HC-1.3.8 in this regard).October 07HC-1.3.10 [versions up to October 2010]
The Chairman of the Board should preferably be non-executive and independent (see HC-1.3.5 for the definitions of 'non-executive' and 'independent').
October 07The benefits and functions of committees[versions up to October 2010]
HC-1.3.11 [versions up to October 2010]
In order to perform its duties more efficiently, the Board may set up committees where it feels appropriate with specific responsibilities, which must be documented. Where committees are set up, they should keep full minutes of their activities and meet regularly to fulfil their mandates. In particular, there are three areas where there is a need for checks and balances within the Board itself:
a) The nomination of Directors;b) The remuneration of Directors; andc) The audit of the bank's financial performance.In these areas, executive Directors have clear potential conflicts of interest. Nomination is all about the continuation of their own jobs and the jobs of their colleagues and potential new colleagues. Remuneration is all about the rewards that executive Directors and/or senior management receive for their services to the bank. Audit concerns the probity of the financial and non-financial reporting of the performance of the company by the very same persons who are responsible for its performance.
For larger banks that deal with the general public, committees can be a more efficient mechanism to assist the main Board in its monitoring and control of the activities of the bank. The establishment of committees should not mean that the role of the Board is diminished, or that the Board becomes fragmented. Each Committee must have a clear written mandate outlining its purpose, objectives and responsibilities, including composition, frequency of meetings and reporting relationships.
October 07Audit Committee[versions up to October 2010]
HC-1.3.12 [versions up to October 2010]
The Central Bank requires all banks to establish an Audit Committee. The committee members must have sufficient technical expertise to enable the committee to perform its functions effectively. There must be at least one qualified and appropriately experienced accountant in the committee. All members of the committee must be financially literate. The Audit Committee must be composed of non-executive Directors only. The CEO may not be a member of this committee.
October 07HC-1.3.13 [versions up to October 2010]
Responsibilities of the Audit Committee are as follows:
a) To review the integrity of the bank's financial reporting (particularly with reference to information passed to the Board - see HC-1.2.6 a). This review must include the choice of accounting policies. The information needs of the Board to perform its monitoring responsibilities must be defined in writing, and regularly monitored by the Audit Committee;b) To oversee the selection and compensation of the external auditor for appointment and approval at the shareholders' meeting. The audit committee must oversee relations with the external auditors, including ensuring the external auditor's independence (in particular, making sure that the external audit firm and its partners have no other financial or business relationship without the Board's knowledge), the terms and conditions of the auditor's appointment and remuneration arrangements. The committee must monitor rotation arrangements for audit engagement partners. The audit committee must monitor the performance of the external auditor and the non-audit services provided by the external auditor. The committee must meet with the external auditor at least twice per year, and at least once per year in the absence of any members of executive management.c) To regularly review the activities and performance of the internal audit function;d) To review whether the bank complies with all relevant laws, regulations, codes and business practices, and ensure that the bank communicates with shareholders and relevant stakeholders (internal and external) openly and promptly, and with substance of compliance prevailing over form; ande) To review and supervise the implementation of, enforcement of and adherence to the bank's code of conduct.October 07HC-1.3.14 [versions up to October 2010]
Below the Audit Committee, the bank must set up an internal audit function, which reports directly to the Audit Committee (with a parallel reporting line to senior management for day-to-day matters as appropriate).
October 07Sharia Supervision Committee[versions up to October 2010]
HC-1.3.15 [versions up to October 2010]
The Central Bank requires all banks to establish an independent Shari'a Supervision Committee complying with AAOIFI's governance standards for Islamic Financial Institutions No. 1 and No.2
October 07HC-1.3.16 [versions up to October 2010]
All banks must comply with all AAOIFI issued accounting standards as well as the Shari'a pronouncement issued by the Shari'a Board of AAOIFI. The bank must have a separate function of Shari'a review to verify compliance with the above. This internal Shari'a review must be carried out in accordance with AAOIFI's governance standards No. 3. The Shari'a review function may be located in the Internal Audit function of the bank.
October 07HC-1.4 HC-1.4 Transparency and Disclosure[versions up to October 2010]
Board's Responsibility for Disclosure
October 07HC-1.4.1 [versions up to October 2010]
The Board should oversee the process of disclosure and communications with internal and external stakeholders. The Board should ensure that disclosures made by the bank are fair, transparent, comprehensive and timely and reflect the character of the bank and the nature, complexity and risks inherent in the bank's business activities. Disclosure policies must be reviewed for compliance with the Central Bank's disclosure requirements (see Rulebook Chapter PD-1).
October 07HC-1.4.2 [versions up to October 2010]
To promote sound corporate governance, the bank must submit its organisational structure approved by the Board of Directors, which notes the designations and responsibilities of its key management personnel, highlighting their qualifications and relevant industry experience. The organisational structure should be clearly delineated and reporting lines completely transparent to promote full disclosure. It is the General Manager's responsibility to ensure that this occurs.
October 07HC-1.4.3 [versions up to October 2010]
The bank must submit a statement of its strategy and objectives to the Central Bank at the time of licensing. This statement should cover a minimum period of three years. The Central Bank may request a formal review by the Board of the bank's statement from time to time.
October 07HC-1.5 HC-1.5 Notification, reporting, and approval requirements for changes to activities, personnel and ownership, strategy, Board meetings and special purpose vehicles ('SPVs')[versions up to October 2010]
HC-1.5.1 [versions up to October 2010]
Banks must notify the Central Bank in writing of all major proposed changes to the strategy and/or corporate plan of the bank prior to implementation.
October 07HC-1.5.2 [versions up to October 2010]
Banks must notify the Central Bank in writing of any proposed changes to senior positions or ownership changes mentioned in Sections HC-2.1 and HC-3.2 (whether in terms of structure or identity of personnel) prior to the change. The communication should include the reason for the departure of the personnel and the Curriculum Vitae of any new persons taking up the relevant positions in the bank (see also HC-2.1.17). See also Section BR-5.1 for notification requirements concerning contact details of senior staff.
Amended: October 2009
Amended: January 2009
October 2007HC-1.5.3 [versions up to October 2010]
If a
controlled function falls vacant, all banks must appoint a permanent replacement (after obtaining CBB approval), within 120 calendar days of the vacancy occurring. Pending the appointment of a permanent replacement, the bank must make immediate interim arrangements to ensure continuity of the duties and responsibilities of thecontrolled function affected. These interim arrangements must be approved by the CBB.Added January 2009HC-1.5.4 [versions up to October 2010]
All locally incorporated banks, in addition to the requirements in Paragraphs HC-1.5.1 and HC-1.5.2, should obtain the Central Bank's prior specific written approval before establishing any subsidiaries (including SPVs where the bank exercises a majority shareholding or has majority voting control by virtue of direct ownership or by proxy/nominee arrangements),
branches and/or representative offices, either inside or outside of Bahrain. In order to avoid any delays and/or disruption in implementation of banks' plans in this context, the Central Bank should be approached as soon as possible, even at a very preliminary stage.Renumbered January 2009
October 07HC-1.5.5 [versions up to October 2010]
All locally incorporated banks are required to submit, on an annual basis, as an attachment to the year-end quarterly PIR, a report recording the meetings during the year by their Board of Directors. For a sample report, refer to Appendix BR-10.
Renumbered January 2009
October 07HC-1.5.6 [versions up to October 2010]
All locally incorporated banks must notify the Central Bank if they intend to act as sponsor or manager of a special purpose vehicle ('SPV'), or if they intend to participate in the creation of an SPV, or if they intend to acquire shares in an SPV. All locally incorporated banks must notify the Central Bank if they are appointed as nominee shareholders of SPVs or hold votes by proxy arrangement in SPVs on behalf of other investors. In all cases listed above, the concerned bank must notify the Central Bank quarterly of any new commitments to, or engagements in business arrangements with SPVs. These reporting and notification arrangements apply in addition to arrangements under HC-1.5.4 where the SPV is a subsidiary.
Renumbered January 2009
October 07HC-1.5.7 [versions up to October 2010]
The Central Bank requires any locally incorporated bank associated with an SPV to give the background to the following points in any notification under HC-1.5.6 above:
a) the purpose of the SPV;b) the nature of the relationship between the bank and the SPV (i.e. sponsor, manager, investor, controller etc.);c) the external auditor's proposed consolidation/accounting treatment of the SPV;d) the availability of financial and other information relevant to the SPV and access to its business premises and records;e) whether the bank is providing any guarantees, warranties or financial/liquidity support of any kind to the SPV.Renumbered January 2009
October 07HC-1.5.8 [versions up to October 2010]
Where the SPV is consolidated into the accounts of a locally incorporated bank, the bank must provide separate accounting information on the SPV to the Central Bank on a quarterly basis. Furthermore, the annual audited financial statements of all consolidated SPVs must be submitted to the Central Bank within 3 months of the year end of the concerned SPV.
Renumbered January 2009
October 07HC-1.5.9 [versions up to October 2010]
Where a locally incorporated bank has a controller or majority ownership relationship with an SPV, or acts as sponsor, the bank must obtain the prior approval of the Central Bank for any changes to the capital, ownership, management or control of the SPV. All locally incorporated banks must also notify the Central Bank of any significant events in relation to the SPV. If necessary, the Central Bank may require that formal information exchange arrangements are put in place (e.g. a memorandum of understanding) if the SPV is located in a foreign jurisdiction and its activities are not supervised locally.
Renumbered January 2009
October 07HC-2 HC-2 Approved Persons[versions up to October 2010]
HC-2.1 HC-2.1 CBB Notification and Approval[versions up to October 2010]
General Requirement[versions up to October 2010]
HC-2.1.1 [versions up to October 2010]
All persons wishing to undertake a
controlled function in anIslamic bank licensee must be notified to the CBB prior to their appointment and, where required, approved by the CBB (see Rule HC-2.1.3).October 07HC-2.1.2 [versions up to October 2010]
Controlled functions are those of:(a)Director ;(b) Member ofShari'a Supervisory Board (c)Chief Executive orGeneral Manager ;(d)Senior Manager ;(e) Compliance officer;(f) Money Laundering Reporting Officer;(g) Deputy Money Laundering Reporting Officer; and(h)Financial Instruments Trader .Amended: October 2009
October 2007HC-2.1.3 [versions up to October 2010]
Prior approval is required for
controlled functions (a), (b), (c), (d), (e), (f) and (g). Controlled functions (e) and (f) may be combined, however (see also FC-4.1, regarding the MLRO function).Controlled function (h) does not require prior approval: instead, notification only is required, once the person concerned has accepted to undertake that function.Amended: October 2009
October 2007Basis for Approval[versions up to October 2010]
HC-2.1.4 [versions up to October 2010]
Approval under Rule HC-2.1.1 is only granted by the CBB, if it is satisfied that the person is fit and proper to hold the particular position in the licensee concerned. 'Fit and proper' is determined by the CBB on a case-by-case basis. The definition of 'fit and proper' and associated guidance is provided in Sections HC-2.2 and HC-2.3 respectively.
October 07Definitions[versions up to October 2010]
HC-2.1.5 [versions up to October 2010]
Director is any person who occupies the position of a Director, as defined in Article 173 of the Commercial Companies Law (Legislative Decree No. 21 of 2001).October 07HC-2.1.6 [versions up to October 2010]
The fact that a person may have '
Director ' in their job title does not of itself make them aDirector within the meaning of the definition noted in Rule HC-2.1.5. For example, a 'Director of Marketing', is not necessarily a member of the Board of Directors and therefore may not fall under the definition of Rule HC-2.1.5.October 07HC-2.1.7 [versions up to October 2010]
The
Chief Executive orGeneral Manager means a person who is responsible for the conduct of the licensee (regardless of actual title). TheChief Executive orGeneral Manager must be resident in Bahrain. This person is responsible, alone or jointly, for the conduct of the whole of the firm, or, in the case of anoverseas Islamic bank licensee , for all of the activities of the branch (in which case, he may hold the title of 'Branch Manager').October 07HC-2.1.8 [versions up to October 2010]
Senior Manager means a person who, under the immediate authority of aDirector or theChief Executive /General Manager , exercises major managerial responsibilities, is responsible for a significant business or operating unit, or has major managerial responsibility for maintaining accounts or other records of the licensee.October 07HC-2.1.9 [versions up to October 2010]
Whether a person is a
Senior Manager will depend on the facts in each case and is not determined by the presence or absence of the word in their job title. Examples ofSenior Managers might include, depending on the scale, nature and complexity of the business, a deputyChief Executive ; and heads of departments such as Risk Management, or Internal Audit; or the Chief Financial Officer.October 07HC-2.1.10 [versions up to October 2010]
Financial Instruments Trader means a person who is engaged in buying or sellingfinancial instruments .October 07HC-2.1.11 [versions up to October 2010]
Where a firm is in doubt as to whether a function should be considered a
controlled function it must discuss the case with the CBB.October 07Notification Requirements and Process[versions up to October 2010]
HC-2.1.12 [versions up to October 2010]
Islamic bank licensees must obtain CBB approval before a person is formally appointed to acontrolled function ; the request for CBB approval must be made by submitting to CBB a duly completed Form 3 (Application for Approved Person status). In the case of a financial instruments trader, notification only is required (see Rule HC-2.1.3): this notification must also be made by submitting a Form 3.October 07HC-2.1.13 [versions up to October 2010]
In the case of license applications, the Form 3 must be marked for the attention of the Director, Licensing and Policy Directorate. When made by an
Islamic bank licensee , the Form 3 must be marked for the attention of the Director, Islamic Financial Institutions.October 07HC-2.1.14 [versions up to October 2010]
Licensees should give the CBB a reasonable amount of notice in order for an application for approval to be reviewed. The CBB aims to respond within 2 weeks of receipt of an application, although in some cases, where referral to an overseas supervisor is required, the response time is likely to be longer.
October 07HC-2.1.15 [versions up to October 2010]
Licensees seeking to appoint Board Directors should seek CBB approval for all the candidates to be put forward for election at a shareholder meeting, in advance of the agenda being issued to shareholders. CBB approval of the candidates does not in any way limit shareholders' rights to refuse those put forward for election.
October 07HC-2.1.16 [versions up to October 2010]
All refusals by the CBB to grant a person approved person status have to be reviewed and approved by an Executive Director of the CBB. A notice of intent is issued to the licensee concerned, setting out the basis for the decision. The licensee has 30 calendar days from the date of the notice in which to appeal the decision. The CBB then has 30 calendar days from the date of the representation in which to make a final determination. See also Chapter EN-5.
Amended January 2009
Added October 2007HC-2.1.17 [versions up to October 2010]
Islamic bank licensees must immediately notify CBB when anapproved person ceases to hold thecontrolled function , for which they have been approved, and for whatever reason (see also HC-1.5.2).Amended January 2009
October 07HC-2.1.18 [versions up to October 2010]
Thus, licensees are required to notify CBB should an
approved person transfer to another function within the licensee, or to another group entity; or else resign, be suspended or dismissed. CBB may require further clarification as to the reasons for the person's transfer or departure. CBB will automatically withdraw the individual'sapproved person status: should the person wish to undertake anothercontrolled function , whether within the same licensee or in another licensee, then a new application should be resubmitted.October 07HC-2.1.19 [versions up to October 2010]
Islamic bank licensees must immediately notify CBB should they become aware of information that could reasonably be viewed as calling into question anapproved person's compliance with CBB's 'fit and proper' requirement (see HC-2.2).October 07HC-2.2 HC-2.2 "Fit and proper" requirement[versions up to October 2010]
HC-2.2.1 [versions up to October 2010]
Licensees seeking an
approved person authorisation for an individual, must satisfy the CBB that the individual concerned is 'fit and proper' to undertake thecontrolled function in question.October 07HC-2.2.2 [versions up to October 2010]
To be considered 'fit and proper', those nominated must demonstrate:
(a) personal integrity, honesty and good reputation;(b) professional competence, experience and expertise, sufficient for thecontrolled function for which authorisation is being applied for, and given the scale, complexity and nature of theIslamic bank licensee concerned; and(c) financial soundness.October 07HC-2.2.3 [versions up to October 2010]
In assessing the conditions prescribed in Rule HC-2.2.2, the CBB will take into account the criteria contained in Section HC-2.3. The CBB reviews each application on a case-by-case basis, taking into account all relevant circumstances. A person may be considered 'fit and proper' to undertake one type of
controlled function but not another, depending on the function's job size and required levels of experience and expertise. Similarly, a person approved to undertake acontrolled function in oneIslamic bank licensee may not be considered to have sufficient expertise and experience to undertake nominally the samecontrolled function but in a much bigger licensee.October 07HC-2.2.4 [versions up to October 2010]
Approved persons undertaking acontrolled function must act prudently, and with honesty, integrity, care, skill and due diligence in the performance of their duties. They must avoid conflicts of interest arising whilst undertaking acontrolled function .October 07HC-2.2.5 [versions up to October 2010]
In determining whether a conflict of interest may arise, factors that may be considered include whether:
(a) a person has breached any fiduciary obligations to the company or terms of employment;(b) a person has undertaken actions that would be difficult to defend, when looked at objectively, as being in the interest of the licensee; and(c) a person has failed to declare a personal interest that has a material impact in terms of the person's relationship with the licensee.October 07HC-2.3 HC-2.3 Interpretative Guidance on 'Fit and Proper' Requirement[versions up to October 2010]
HC-2.3.1 [versions up to October 2010]
In assessing a person's fitness and propriety, the CBB will consider previous professional and personal conduct (in Bahrain or elsewhere) including, but not limited to, the following:
(a) the propriety of a person's conduct, whether or not such conduct resulted in a criminal offence being committed, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;(b) a conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;(c) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;(d) whether the person has been the subject of any disciplinary proceeding by any government authority, regulatory agency or professional body or association;(e) the contravention of any financial services legislation or regulation;(f) whether the person has ever been refused a license, authorisation, registration or other authority;(g) dismissal or a request to resign from any office or employment;(h) disqualification by a court, regulator or other competent body, as a Director or as a manager of a corporation;(i) whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;(j) the extent to which the person has been truthful and open with supervisors;(k) the extent to which the person has appropriate professional and other qualifications for the controlled function in question;(l) the extent to which the person has sufficient experience, or is otherwise able to perform the functions of the controlled function in question;(m) whether the person has ever been adjudged bankrupt, entered into any arrangement with creditors in relation to the inability to pay due debts, or failed to satisfy a judgement debt under a court order.October 07HC-2.3.2 [versions up to October 2010]
With respect to HC-2.3.1.(b), (c), (d) and (e), the CBB will take into account the length of time since any such event occurred, as well as the seriousness of the matter in question.
October 07HC-2.3.3 [versions up to October 2010]
Further guidance on the process for assessing a person's 'fit and proper' status is given in Module EN (Enforcement): see Chapter EN-8.
October 07HC-2.4 [This Section was deleted in 07/2006: it has been left blank.][versions up to October 2010]
HC-3 HC-3 Compliance officer/manager[versions up to October 2010]
HC-3.1 HC-3.1 Introduction[versions up to October 2010]
HC-3.1.1 [versions up to October 2010]
In order to promote best practice with respect to banks' internal systems and controls and international banking supervision, the Central Bank, in this Chapter, outlines its requirements for the compliance function of banks. The expression 'Compliance Function' in this Chapter is used to describe staff carrying out compliance duties.
October 07HC-3.1.2 [versions up to October 2010]
The expression 'Compliance Risk', in this Chapter refers to the risk of legal or regulatory sanctions, material or financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, reporting requirements, standards and codes of conduct applicable to its activities, rather than compliance with a bank's internal limits or procedures.
October 07HC-3.1.3 [versions up to October 2010]
For further information and guidance on compliance risk and the compliance function, banks should refer to the Basel Committee publication, 'Compliance and the compliance function in banks' (www.bis.org/publ April 2005). The Central Bank expects banks to carry out a review of their compliance with the principles in this paper on a regular basis (either by way of a self-assessment or by way of a review by the internal or external audit function).
October 07HC-3.2 HC-3.2 Requirement for and approval of a compliance officer/manager[versions up to October 2010]
HC-3.2.1 [versions up to October 2010]
All banks must appoint a senior member of staff with responsibility for the management of compliance risk as their Compliance Officer/Manager.
October 07HC-3.2.2 [versions up to October 2010]
The compliance function must be independent (i.e. it must not be placed in a position where its other duties or responsibilities may cause a conflict of interest with its compliance risk management responsibilities). Therefore the compliance function must be separate from the internal audit function. The compliance officer or manager may however, perform other limited related compliance roles (e.g. the MLRO or legal advisor), subject to the Central Bank's prior approval.
October 07HC-3.2.3 [versions up to October 2010]
The compliance officer/manager must be appropriately qualified and experienced and the compliance function must have adequate resources to carry out its functions effectively.
October 07HC-3.2.4 [versions up to October 2010]
The appointment of a compliance manager/officer requires the Central Bank's prior approval and the submission of the appointee's Personal Questionnaire (Appendix LR 2) and Curriculum Vitae to the Central Bank. The bank must also outline how the compliance function fits into the bank's senior management reporting structure, and must give details of relevant reporting lines within the bank.
October 07HC-3.2.5 [versions up to October 2010]
In the case of locally incorporated banks, the compliance officer/manager must have access to the Board of Directors in addition to the senior management.
October 07HC-4 [This Chapter deleted 07/2006 – left blank.][versions up to October 2010]
HC HC High-Level Controls [Versions Up To April 2023]
HC-A HC-A Introduction
HC-A.1 HC-A.1 Purpose
Executive Summary
HC-A.1.1
This Module presents requirements that have to be met by
Islamic bank licensees with respect to:(a) Corporate governance principles issued by the Ministry of Industry and Commerce as "The Corporate Governance Code"; and(b) International best practice corporate governance standards set by bodies such as the Basel Committee for Banking Supervision; and(c) Related high-level controls and policies.Amended: April 2011
October 2010HC-A.1.2
The Principles referred to in this Module are in line with the Principles relating to the Corporate Governance Code issued by the Ministry of Industry and Commerce.
October 2010HC-A.1.3
The purpose of the Module is to establish best practice corporate principles in Bahrain, and to provide protection for investors and other
Islamic bank licensee's stakeholders through compliance with those principles.October 2010HC-A.1.4
Whilst the Module follows best practice, it is nevertheless considered as the minimum standard to be applied. This Module also includes additional rules and guidance issued by the CBB prior to the publication of the Code and previously contained in Module HC.
October 2010Structure of this Module
HC-A.1.5
This Module follows the structure of the Corporate Governance Code and each Chapter deals with one of the nine Principles of corporate governance. The numbered directives included in the Code are Rules for purposes of this Module. Recommendations under the Code have been included as guidance. However, where the previous version of Module HC had a similar recommendation as a Rule, the Module retains this Paragraph as a Rule.
October 2010HC-A.1.6
The Module also incorporates other high-level controls and policies that apply in particular to
Islamic bank licensees .October 2010HC-A.1.7
All references in this Module to 'he' or 'his' shall, unless the context otherwise requires, be construed as also being references to 'she' and 'her'.
October 2010The Comply or Explain Principle
HC-A.1.8
This Module is issued as a Directive (as amended from time to time) in accordance with Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). In common with other Rulebook Modules, this Module contains a mixture of Rules and Guidance (See Module UG-1.2 for detailed explanation of Rules and Guidance). All Rulebook content that is categorised as a Rule must be complied with by those to whom the content is addressed. Other parts of this Module are Guidance; nonetheless every
Islamic bank licensee to whom Module HC applies, is expected to comply with recommendations made as Guidance in Module HC or explain its noncompliance in the Annual Report in accordance with Subparagraph PD-1.3.10(x) and to the CBB (see Chapter HC-8).Amended: April 2012
Amended: January 2011
October 2010Monitoring and Enforcement of Module HC
HC-A.1.9
Disclosure and transparency are underlying principles of Module HC. Disclosure is crucial to allow outside monitoring to function effectively. This Module looks to a combined monitoring system relying on the Board, the
Islamic bank licensee 's shareholders and the CBB.October 2010HC-A.1.10
It is the Board's responsibility to see to the accuracy and completeness of the
Islamic bank licensee 's corporate governance guidelines and compliance with Module HC. Failure to comply with this Module is subject to enforcement measures as outlined in Module EN (Enforcement).October 2010Legal Basis
HC-A.1.11
This Module contains the CBB's Directive (as amended from time to time) relating to high-level controls and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to
Islamic bank licensees (including theirapproved persons ).Amended: January 2011
October 2010HC-A.1.12
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 2010Effective Date
HC-A.1.13
The previous version of Module HC is applicable until 31st December 2010. This updated Module issued in October 2010, is effective on 1st January 2011. All
Islamic bank licensees to which Module HC applies should be in full compliance by the financial year end 2011. At everyIslamic bank licensee's annual shareholder meeting held after 1st January 2011, corporate governance should be an item on the agenda for information and any questions from shareholders regarding theIslamic bank licensee's governance. Where possible, theIslamic bank licensee should also have corporate governance guidelines in place at that time and should have a "comply or explain" report as described in Paragraph HC-A.1.8.October 2010HC-A.2 HC-A.2 Module History
HC-A.2.1
This Module was first issued in June 2004 by the BMA and updated in October 2007 to reflect the switch to the CBB. Following the issuance of the Corporate Governance Code by the Ministry of Industry and Commerce in March 2010, the Module was amended in October 2010 to be in line with the new Corporate Governance Code and to include previous requirements that were in place in the originally issued Module HC. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 2010HC-A.2.2
A list of recent changes made to this Module is detailed in the table below:
Module Ref. Change Date Description of Changes HC-1 to HC-8 10/2010 Amendments due to introduction of new MOIC Corporate Governance Code. HC-1.3 10/2010 Prohibition of proxies and requirement to attend 75% of Board meetings in a financial year. HC-A.1.8 and HC-A.1.11 01/2011 Clarified legal basis. HC-1.3.8 01/2011 Corrected cross reference. HC-2.2.4, 2.2.5 and 3.2.1 01/2011 Corrected cross references. HC-2.3.2 01/2011 Corrected cross reference; reference changed to connected persons. Appendix C 01/2011 Corrected cross reference. Appendix A 04/2011 Clarified membership of audit committee to be in line with Rule HC-3.2.1. HC-6.2.1 10/2011 Clarified management structure. HC-B.2.2 01/2012 Clarified language related to corporate governance. HC-1.2.8 and HC-1.5.3 01/2012 Clarified that the Chairman of the Board may delegate specific duties dealt with in these Paragraphs. HC-1.3.12 01/2012 Amended Rule on Directorships. HC-1.9.1 01/2012 Deleted last sentence to be in line with other Volumes of the CBB Rulebook. HC-3.2.1(a) and HC-5.6.6 01/2012 Amended to be in line with other Volumes of the CBB Rulebook. HC-6.3.1 01/2012 Clarified Rule by following corporate governance code wording. Appendix A 01/2012 Amended criteria for audit committee member. HC-A.1.8 04/2012 Clarified the reporting of noncompliance with Module HC in the Annual Report. HC-7.2.5 04/2012 Clarified Guidance on election of board members. Appendices A, B and C 04/2012 Amended requirement for written report on performance evaluation for various Board committees. Appendix A 04/2012 Included reference to compliance under Committee Duties and Responsibilities. HC-2.2.6A and HC-2.2.6B 07/2012 Added Rule and guidance dealing with benefits received from approved persons from projects and investments. Appendices A, B and C 07/2012 Clarified requirement for written report on performance evaluation for various Board committees. HC-1.3.7A 10/2012 Added requirement on minimum number of Board meetings to take place in the Kingdom of Bahrain to be consistent with other Volumes of the CBB Rulebook. HC-2.2.6A 10/2012 Clarified Rule dealing with benefits received from approved persons from projects and investments. Appendix A 10/2012 Corrected minor typo. HC-2.2.2 and HC-2.4.1 01/2013 Clarified scope of application for Rules. HC-2.2.6A, HC-5 and Appendix C 01/2014 Amendments due to new rules on sound remuneration practices. HC-1.2.6 04/2014 Clarified CBB's requirements for proposed changes to strategy and/or corporate plans. HC-5.2, HC-5.4 and HC-5.5 07/2014 Updated Rules on remuneration. HC-1.2.11 10/2014 Corrected cross reference. HC-1.3.10 10/2014 Corrected typo. HC-6.4.3 10/2014 Clarified self assessment of compliance function. HC-5.4.2 01/2015 Clarified application of remuneration rules for Bahrain operations. HC-5.4.5 01/2015 Paragraph deleted. HC-5.5.2 04/2015 Clarified cap on board of directors' remuneration as per Article 188 of the Company Law. HC-5.4.3A 07/2015 Amended to allow for CBB-approved consultancy firm to prepare report on the bank's compliance with the remuneration Rules outlined in Chapter HC-5. HC-2.3.3 04/2016 Added a requirement for the Islamic bank licensee to have in place a board approved policy on the employment of relatives of approved persons. HC-2.4.1A 04/2016 Added the requirement to disclose to the board on annual basis relatives of any approved persons occupying controlled functions. HC-7.2 04/2016 Added requirements dealing with shareholders' meetings. HC-2.3 and HC-2.4 07/2016 Clarified application of rules to overseas conventional bank licensees HC-5.4.30(a) and HC-5.4.30A 10/2016 Amended Standard for all Remuneration HC-5.2.1 01/2017 Amendment in sub-paragraph (b) HC-7.2.4 04/2017 Amended paragraph on website requirement. HC-8.2.1 04/2017 Amended sub-paragraph (b) on website requirement. HC-7.2.3A 07/2017 Amended paragraph to be in line with Article (199) of the Commercial Companies Law. HC-6.5 04/2018 Added new Section on Internal Audit HC-1.8.1 07/2018 Amended paragraph to be consistent with HC-6.6. HC-6.6 07/2018 Added new Section on Risk Management HC-6.4 01/2019 Amended Section and added new requirements on compliance. HC-B.1.2 04/2019 Amended Paragraph. HC-2.3.4 04/2019 Amended Paragraph. HC-2.4.1B 04/2019 Amended Paragraph. HC-5.4.4 04/2019 Amended Paragraph. HC-6.6.2A 10/2019 Added a new Paragraph on branches of foreign bank licensees. HC-6.6.6 10/2019 Deleted Paragraph. HC-6.6.7 10/2019 Amended Paragraph on branches of foreign bank licensees. HC-1.4.11 01/2020 Added a new Paragraph on independent directors. HC-1.4.12 01/2020 Added a new Paragraph on termination of Board membership of a retired, terminated CEO. HC-6.4.7 & HC-6.4.10 01/2020 Amended Paragraphs on policy and procedures approval. HC-5.4.9A 04/2020 Added a new Paragraph on KPIs compliance with AML/CFT requirements. HC-6.2.1 04/2020 Amended Paragraph on reporting line. HC-5.4.4 01/2021 Amended reference in Paragraph. HC-6.6.33 01/2022 Amended Paragraph. HC-6.6.34 01/2022 Amended Paragraph. HC-6.6.35 01/2022 Added a new Paragraph on the independent third-party review. HC-6.6.36 01/2022 Added a new Paragraph on the independent review reports. HC-B HC-B Scope of Application
HC-B.1 HC-B.1 Scope of Application
HC-B.1.1
The contents of this Module — unless otherwise stated — apply to all
Islamic bank licensees , incorporated under the Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law ('Company Law').October 2010HC-B.1.2
Branches of foreign bank licensees must satisfy the CBB that equivalent arrangements are in place at theparent entity level, and that these arrangements provide for effective high-level controls over activities conducted under the Bahrain license.Amended: April 2019
October 2010HC-B.2 HC-B.2 Subsidiaries and Foreign Branches
HC-B.2.1
Bahraini Islamic bank licensees must ensure that, as a minimum, the same or equivalent provisions of this Module apply to their foreignbranches , located outside the Kingdom of Bahrain, such that these are also subject to effective high-level controls. In instances where local jurisdictional requirements are more stringent than those applicable in this Module, the local requirements are to be applied.October 2010HC-B.2.2
Bahraini Islamic bank licensees must satisfy the CBB that financial services activities conducted insubsidiaries and other group members are subject to the same or equivalent arrangements for ensuring effective corporate governance over their activities.Amended: January 2012
October 2010HC-B.2.3
Where an
Islamic bank licensee is unable to satisfy the CBB that itssubsidiaries and other group members are subject to the same or equivalent arrangements, the CBB will assess the potential impact of risks — both financial and reputational — to the licensee arising from inadequate high-level controls in the rest of the group of which it is a member. In such instances, the CBB may impose restrictions on dealings between the licensee and other group members. Where weaknesses in controls are assessed by the CBB to pose a major threat to the stability of the licensee, then its authorisation may be called into question.October 2010HC-1 HC-1 The Board
HC-1.1 HC-1.1 Principle
HC-1.1.1
All
Bahraini Islamic bank licensees must be headed by an effective, collegial and informed Board of Directors ('the Board').October 2010HC-1.2 HC-1.2 Role and Responsibilities
HC-1.2.1
All directors must understand the Board's role and responsibilities under the Commercial Companies Law and any other laws or regulations that may govern their responsibilities from time to time. In particular:
(a) The Board's role as distinct from the role of the shareholders (who elect the Board and whose interests the Board serves) and the role of officers (whom the Board appoints and oversees); and(b) The Board's fiduciary duties of care and loyalty to theIslamic bank licensee and the shareholders (see HC-2.1).October 2010HC-1.2.2
The Board's role and responsibilities include but are not limited to:
(a) The overall business performance and strategy for theIslamic bank licensee ;(b) Causing financial statements to be prepared which accurately disclose theIslamic bank licensee's financial position;(c) Monitoring management performance;(d) Convening and preparing the agenda for shareholder meetings;(e) Monitoring conflicts of interest and preventing abusive related party transactions;(f) Assuring equitable treatment of shareholders including minority shareholders; and(g) Establishing the objectives of the bank.October 2010HC-1.2.3
The precise functions reserved for the Board, and those delegated to management and committees will vary, dependent upon the business of the institution, its size and ownership structure. However, as a minimum, the Board must establish and maintain a statement of its responsibilities for:
(a) The adoption and annual review of strategy;(b) The adoption and review of management structure and responsibilities;(c) The adoption and review of the systems and controls framework; and(d) Monitoring the implementation of strategy by management.Amended: April 2011
October 2010HC-1.2.4
The directors are responsible both individually and collectively for performing the responsibilities outlined in HC-1.2.1 to HC-1.2.3. Although the Board may delegate certain functions to committees or management, it may not delegate its ultimate responsibility to ensure that an adequate, effective, comprehensive and transparent corporate governance framework is in place.
October 2010HC-1.2.5
In its strategy review process under Paragraphs HC-1.2.3 a) and d), the Board must:
(a) Review the bank's business plans and the inherent level of risk in these plans;(b) Assess the adequacy of capital to support the business risks of the bank;(c) Set performance objectives; and(d) Oversee major capital expenditures, divestitures and acquisitions.Amended: April 2011
October 2010HC-1.2.6
Bahraini Islamic bank licensees must obtain the CBB's prior written approval for all major proposed changes to the strategy and/or corporate plan of theBahraini Islamic bank licensee prior to implementation (see also Paragraph BR-5.2.8).Amended: April 2014
October 2010HC-1.2.7
The Board is expected to have effective policies and processes in place for:
(a) Approving budgets and reviewing performance against those budgets and key performance indicators; and(b) The management of the bank's compliance risk.Amended: April 2011
October 2010HC-1.2.8
When a new director is inducted, the chairman of the Board, or the
Islamic bank licensee's legal counsel or compliance officer, or other individual delegated by the chairman of the board, should review the Board's role and duties with that person, particularly covering legal and regulatory requirements and Module HC (see also HC-4.5.1).Amended: January 2012
October 2010HC-1.2.9
The
Islamic bank licensee must have a written appointment agreement with each director which recites the directors' powers, duties, responsibilities and accountabilities and other matters relating to his appointment including his term, the time commitment envisaged, the committee assignment if any, hisremuneration and expense reimbursement entitlement, and his access to independent professional advice when that is needed.October 2010Risk Recognition and Assessment
HC-1.2.10
The Board is responsible for ensuring that the systems and controls framework, including the Board structure and organisational structure of the bank, is appropriate for the bank's business and associated risks (see HC-1.2.3 c). The Board must ensure that collectively it has sufficient expertise to identify, understand and measure the significant risks to which the bank is exposed in its business activities.
The Board must regularly assess the systems and controls framework of the bank. In its assessments, the Board must demonstrate to the CBB that:
a) The bank's operations, individually and collectively are measured, monitored and controlled by appropriate, effective and prudent risk management systems commensurate with the scope of the bank's activities;b) The bank's operations are supported by an appropriate control environment. The compliance, risk management and financial reporting functions must be adequately resourced, independent of business lines and must be run by individuals not involved with the day-to-day running of the various business areas. The Board must additionally ensure that management develops, implements and oversees the effectiveness of comprehensive know your customer standards, as well as on-going monitoring of accounts and transactions, in keeping with the requirements of relevant law, regulations and best practice (with particular regard to anti-money laundering measures). The control environment must maintain necessary client confidentiality and ensure that the privacy of the bank is not violated, and ensure that clients' rights and assets are properly safeguarded; andc) Where the Board has identified any significant issues related to the bank's adopted governance framework, appropriate and timely action is taken to address any identified adverse deviations from the requirements of this Module.October 2010HC-1.2.11
The Board must adopt a formal Board charter or other statement specifying matters which are reserved to it, which should include but need not be limited to the specific requirements and responsibilities of directors. This charter must cover the points in HC-1.2.1 to HC-1.2.10. Wherever possible, the documents referred to in HC-1.2.3 to HC-1.2.10 or a summary of responsibilities should be disclosed publicly, for example in the annual report, which must be submitted to the CBB in line with the requirements of Module BR.
Amended: October 2014
October 2010HC-1.3 HC-1.3 Decision Making Process
HC-1.3.1
The Board must be collegial and deliberative, to gain the benefit of each individual director's judgment and experience.
October 2010HC-1.3.2
The chairman must take an active lead in promoting mutual trust, open discussion, constructive dissent and support for decisions after they have been made.
October 2010HC-1.3.3
The Board must meet frequently to enable it to discharge its responsibilities effectively but in no event less than four times a year. All directors must attend the meetings whenever possible and the directors must maintain informal communication between meetings.
October 2010HC-1.3.4
Individual Board members must attend at least 75% of all Board meetings in a given financial year to enable the Board to discharge its responsibilities effectively (see table below). Voting and attendance proxies for Board meetings are prohibited at all times.
Meetings per year 75% Attendance requirement 4 3 5 4 6 5 7 5 8 6 9 7 10 8 October 2010HC-1.3.5
The absence of Board members at Board and committee meetings must be noted in the meeting minutes. In addition, Board attendance percentage must be reported during any general assembly meeting when Board members stand for re-election (e.g. Board member XYZ attended 95% of scheduled meetings this year).
October 2010HC-1.3.6
In the event that a Board member has not attended at least 75% of Board meetings in any given financial year, the bank must immediately notify the CBB indicating which member has failed to satisfy this requirement, his level of attendance and any mitigating circumstances affecting his non-attendance. The CBB shall then consider the matter and determine whether disciplinary action, including disqualification of that Board member pursuant to Article 65 of the CBB Law, is appropriate. Unless there are exceptional circumstances, it is likely that the CBB will take disciplinary action.
October 2010HC-1.3.7
To meet its obligations under Rule HC-1.3.3 above, the full Board should meet once every quarter to address the Board's responsibilities for management oversight and performance monitoring. Furthermore, Board rules should require members to step down if they are not actively participating in Board meetings. Board members are reminded that non attendance at Board meetings does not absolve them of their responsibilities as directors. It is important that each individual director should allocate adequate time and effort to discharge his responsibilities. All Directors are expected to contribute actively to the work of the Board in order to discharge their responsibilities and should make every effort to attend Board meetings where major issues are to be discussed. Banks are encouraged to amend their Articles of Association to provide for telephonic and videoconference meetings. Participation in Board meetings by means of video or telephone conferencing is regarded as attendance and may be recorded as such.
October 2010HC-1.3.7A
At least half the Board meetings of
Bahraini Islamic bank licensees in any twelve-month period must be held in the Kingdom of Bahrain.Added: October 2012HC-1.3.8
All locally incorporated banks are required to submit, on an annual basis, as an attachment to the year-end quarterly PIR, a report recording the meetings during the year by their Board of Directors. For a sample report, refer to Appendix BR-6, under Part B/CBB Reporting Forms of Volume 2.
Amended: January 2011
October 2010HC-1.3.9
The Chairman is responsible for the leadership of the Board, and for the efficient functioning of the Board. The chairman must ensure that all directors receive an agenda, minutes of prior meetings, and adequate background information in writing before each Board meeting and when necessary between meetings. Therefore it is vital that the Chairman commit sufficient time to perform his role effectively. All directors must receive the same Board information. At the same time, directors have a legal duty to inform themselves and they must ensure that they receive adequate and timely information and must study it carefully (See also HC-7 for other duties of the Chairman).
October 2010HC-1.3.10
The Board should have no more than 15 members, and should regularly review its size and composition to ensure that it is small enough for efficient decision making yet large enough to have members who can contribute from different specialties and viewpoints. The Board should recommend changes in Board size to the shareholders when a needed change requires amendment of the
Islamic bank licensee's Memorandum of Association.Amended: October 2014
October 2010HC-1.3.11
Potential
non-executive directors should be made aware of their duties before their nomination, particularly as to the time commitment required. The Nominating Committee should regularly review the time commitment required from eachnon-executive director and should require eachnon-executive director to inform the Committee before he accepts any Board appointments to another company.October 2010HC-1.3.12
No Board member may have more than one Directorship of a Retail Bank or a Wholesale Bank. This means an effective cap of a maximum of two Directorships of banks inside Bahrain. Two Directorships of licensees within the same Category (e.g. 'Retail Bank') are not permitted. Banks may approach the CBB for exemption from this limit where the Directorships concern banks or financial institutions within the same group.
Amended: January 2012
October 2010HC-1.3.13
One person should not hold more than three directorships in public companies in Bahrain with the provision that no conflict of interest may exist, and the Board should not propose the election or reelection of any director who does.
October 2010HC-1.4 HC-1.4 Independence of Judgment
HC-1.4.1
Every director must bring independent judgment to bear in decision-making. No individual or group of directors must dominate the Board's decision-making and no one individual should have unfettered powers of decision.
October 2010HC-1.4.2
Executive directors must provide the Board with all relevant business and financial information within their cognizance, and must recognise that their role as a director is different from their role as a member of management (see HC-2.3.2).October 2010HC-1.4.3
Non-executive directors must be fully independent of management and must constructively scrutinise and challenge management including the management performance ofexecutive directors .October 2010HC-1.4.4
Where there is the potential for conflict of interest, or there is a need for impartiality, the Board must assign a sufficient number of independent Board members capable of exercising independent judgement. At a minimum, all locally incorporated banks must appoint one independent director.
October 2010HC-1.4.5
At least half of an
Islamic bank licensee's Board should benon-executive directors and at least three of those persons should beindependent directors . (Note the exception for controlled companies in Paragraph HC-1.5.2.)October 2010HC-1.4.6
The chairman of the Board should be an
independent director , so that there will be an appropriate balance of power and greater capacity of the Board for independent decision making.October 2010HC-1.4.7
The Chairman and/or Deputy Chairman must not be the same person as the Chief Executive Officer.
October 2010HC-1.4.8
The Chairman must not be an Executive Director.
October 2010HC-1.4.9
The Board should review the independence of each director at least annually in light of interests disclosed by them, and their conduct. Each
independent director shall provide the Board with all necessary and updated information for this purpose.October 2010HC-1.4.10
To facilitate free and open communication among
independent directors , each Board meeting should be preceded or followed with a session at which onlyindependent directors are present, except as may otherwise be determined by theindependent directors themselves.October 2010HC-1.4.11
Where an
independent director has served three consecutive terms on the board, such director will lose his/her independence status and must not be classified as anindependent director if reappointed.Added: January 2020HC-1.4.12
Where a Chief Executive Officer of a Bank, who is also a Board member, no longer occupies the CEO position, whether due to resignation, retirement or termination, his/her Board Membership must also be immediately terminated.
Added: January 2020HC-1.5 HC-1.5 Representation of all Shareholders
HC-1.5.1
Each director must consider himself as representing all shareholders and must act accordingly. The Board must avoid having representatives of specific groups or interests within its membership and must not allow itself to become a battleground of vested interests. If the
Islamic bank licensee hascontrollers (as defined by Module GR-5.2) (or a group of controllers acting in concert), the latter must recognise its or their specific responsibility to the other shareholders, which is direct and is separate from that of the Board of directors.October 2010HC-1.5.2
In
Islamic bank licensees with acontroller , at least one-third of the Board must beindependent directors . Minority shareholders must generally look toindependent directors' diligent regard for their interests, in preference to seeking specific representation on the Board.October 2010HC-1.5.3
In
Islamic bank licensees withcontrollers , both controllers and other shareholders should be aware ofcontrollers' specific responsibilities regarding their duty of loyalty to theIslamic bank licensee and conflicts of interest (see Chapter HC-2) and also of rights that minority shareholders may have to elect specific directors under the Company Law or if theIslamic bank licensee has adopted cumulative voting for directors. The chairman of the board or other individual delegated by the chairman of the board should take the lead in explaining this with the help of theIslamic bank licensee's lawyers.Amended: January 2012
October 2010HC-1.6 HC-1.6 Directors' Access to Independent Advice
HC-1.6.1
The Board must ensure by way of formal procedures that individual directors have access to independent legal or other professional advice at the
Islamic bank licensee's expense whenever they judge this necessary to discharge their responsibilities as directors and this must be in accordance with theIslamic bank licensee's policy approved by the Board.October 2010HC-1.6.2
Individual directors must also have access to the
Islamic bank licensee's corporate secretary, who must have responsibility for reporting to the Board on Board procedures. Both the appointment and removal of the corporate secretary must be a matter for the Board as a whole, not for the CEO or any other officer.October 2010HC-1.6.3
Whenever a director has serious concerns which cannot be resolved concerning the running of the
Islamic bank licensee or a proposed action, he should consider seeking independent advice and should ensure that the concerns are recorded in the Board minutes and that any dissent from a Board action is noted or delivered in writing.October 2010HC-1.6.4
Upon resignation, a
non-executive director should provide a written statement to the chairman, for circulation to the Board, if he has any concerns such as those in Paragraph HC-1.6.3.October 2010HC-1.7 HC-1.7 Directors' Communication with Management
HC-1.7.1
The Board must encourage participation by management regarding matters the Board is considering, and also by management members who by reason of responsibilities or succession, the CEO believes should have exposure to the directors.
October 2010HC-1.7.2
Non-executive directors should have free access to theIslamic bank licensee's management beyond that provided in Board meetings. Such access should be through the Chairman of the Audit Committee or CEO. The Board should make this policy known to management to alleviate any management concerns about a director's authority in this regard.October 2010HC-1.8 HC-1.8 Committees of the Board
HC-1.8.1
The Board must establish Audit, Remuneration, Nominating and Risk Committees described elsewhere in this Module.
Amended: July 2018
October 2010HC-1.8.2
The Board should establish a corporate governance committee of at least three independent members which should be responsible for developing and recommending changes from time to time in the
Islamic bank licensee's corporate governance policy framework.Amended: January 2012
October 2010HC-1.8.3
The Board or a committee may invite non-directors to participate in, but not vote at, a committee's meetings so that the committee may gain the benefit of their advice and expertise in financial or other areas.
October 2010HC-1.8.4
Committees must act only within their mandates and therefore the Board must not allow any committee to dominate or effectively replace the whole Board in its decision-making responsibility.
October 2010HC-1.8.5
Committees may be combined provided that no conflict of interest might arise between the duties of such committees, subject to CBB prior approval.
October 2010HC-1.8.6
Every committee must have a formal written charter similar in form to the model charters which are set forth in Appendices A, B and C of this Module for the Audit, Nominating and Remuneration Committees.
October 2010HC-1.8.7
Where committees are set up, they should keep full minutes of their activities and meet regularly to fulfil their mandates. For larger banks that deal with the general public, committees can be a more efficient mechanism to assist the main Board in its monitoring and control of the activities of the bank. The establishment of committees should not mean that the role of the Board is diminished, or that the Board becomes fragmented.
October 2010HC-1.9 HC-1.9 Evaluation of the Board and Each Committee
HC-1.9.1
At least annually the Board must conduct an evaluation of its performance and the performance of each committee and each individual director.
Amended: January 2012
October 2010HC-1.9.2
The evaluation process must include:
(a) Assessing how the Board operates, especially in light of Chapter HC-1;(b) Evaluating the performance of each committee in light of its specific purposes and responsibilities, which shall include review of the self-evaluations undertaken by each committee;(c) Reviewing each director's work, his attendance at Board and committee meetings, and his constructive involvement in discussions and decision making;(d) Reviewing the Board's current composition against its desired composition with a view toward maintaining an appropriate balance of skills and experience and a view toward planned and progressive refreshing of the Board; and(e) Recommendations for new Directors to replace long-standing members or those members whose contribution to the bank or its committees (such as the audit committee) is not adequate.October 2010HC-1.9.3
While the evaluation is a responsibility of the entire Board, it should be organised and assisted by an internal Board committee and, when appropriate, with the help of external experts.
October 2010HC-1.9.4
The Board should report to the shareholders, at each annual shareholder meeting, that evaluations have been done and report its findings.
October 2010HC-2 HC-2 Approved Persons Loyalty
HC-2.1 HC-2.1 Principle
HC-2.1.1
The
approved persons must have full loyalty to theIslamic bank licensee .October 2010HC-2.2 HC-2.2 Personal Accountability
HC-2.2.1
Banks are subject to a wide variety of laws, regulations and codes of best practice that directly affect the conduct of business. Such laws involve the Bahraini Stock Exchange Law, the Labour Law, the Commercial Companies Law, occupational health and safety, even environment and pollution laws, as well as the Law, codes of conduct and regulations of the Central Bank. The Board sets the 'tone at the top' of a bank, and has a responsibility to oversee compliance with these various requirements. The Board should ensure that the staff conduct their affairs with a high degree of integrity, taking note of applicable laws, codes and regulations.
October 2010Corporate Ethics, Conflicts of Interest and Code of Conduct
HC-2.2.2
Each member of the board must understand that under the Company Law he is personally accountable to the
Islamic bank licensee and the shareholders if he violates his legal duty of loyalty to theIslamic bank licensee , and that he can be personally sued by theIslamic bank licensee or the shareholders for such violations.Amended: January 2013
October 2010HC-2.2.3
The Board must establish corporate standards for
approved persons and employees. This requirement should be met by way of a documented and published code of conduct or similar document. These standards must be communicated throughout the bank, so that theapproved persons and staff understand the importance of conducting business based on good corporate governance values and understand their accountabilities to the various stakeholders of the licensee. Banks'approved persons and staff must be informed of and be required to fulfil their fiduciary responsibilities to the bank's stakeholders.October 2010HC-2.2.4
An internal code of conduct is separate from the business strategy of a bank. A code of conduct should outline the practices that
approved persons and staff should follow in performing their duties. Banks may wish to use procedures and policies to complement their codes of conduct. The suggested contents of a code of conduct are covered below:(a) Commitment by the Board and management to the code. The code of conduct should be linked to the objectives of the bank, and its responsibilities and undertakings to customers, shareholders, staff and the wider community (see HC-2.2.3 and HC-2.2.4). The code should give examples or expectations of honesty, integrity, leadership and professionalism;(b) Commitment to the law and best practice standards. This commitment would include commitments to following accounting standards, industry best practice (such as ensuring that information to clients is clear, fair, and not misleading), transparency, and rules concerning potential conflicts of interest (see HC-2.3);(c) Employment practices. This would include rules concerning health and safety of employees, training, policies on the acceptance and giving of business courtesies, prohibition on the offering and acceptance of bribes, and potential misuse ofIslamic bank licensee's assets;(d) How theIslamic bank licensee deals with disputes and complaints from clients and monitors compliance with the code; and(e) Confidentiality. Disclosure of client or bank information should be prohibited, except where disclosure is required by law (see HC-1.2.10 b).Amended: April 2011
Amended: January 2011
October 2010HC-2.2.5
The Central Bank expects that the Board and its members individually and collectively:
(a) Act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the bank and its shareholders and other stakeholders (see Paragraphs HC-2.2.2 to HC-2.2.4);(b) Act within the scope of their responsibilities (which should be clearly defined — see HC-1.2.9 and HC-1.2.11 and not participate in the day-to-day management of the bank;(c) Have a proper understanding of, and competence to deal with the affairs and products of the bank and devote sufficient time to their responsibilities; and(d) To independently assess and question the policies, processes and procedures of the bank, with the intent to identify and initiate management action on issues requiring improvement. (i.e. to act as checks and balances on management).Amended: April 2011
Amended: January 2011
October 2010HC-2.2.6
The duty of loyalty (mentioned in Paragraph HC-2.2.2 above) includes a duty not to use property of the
Islamic bank licensee for his personal needs as though it was his own property, not to disclose confidential information of theIslamic bank licensee or use it for his personal profit, not to take business opportunities of theIslamic bank licensee for himself, not to compete in business with theIslamic bank licensee , and to serve theIslamic bank licensee's interest in any transactions with a company in which he has a personal interest.October 2010HC-2.2.6A
[This Paragraph was moved to Paragraph HC-5.4.39].
Amended: January 2014
Amended: October 2012
Added: July 2012HC-2.2.6B
[This Paragraph was moved to Paragraph HC-5.4.40].
Amended: January 2014
Added: July 2012HC-2.2.7
For purposes of Paragraph HC-2.2.6, an
approved person should be considered to have a "personal interest" in a transaction with a company if:(a) He himself; or(b) A member of his family (i.e. spouse, father, mother, sons, daughters, brothers or sisters); or(c) Another company of which he is a director or controller,is a party to the transaction or has a material financial interest in the transaction. (Transactions and interests which are de minimis in value should not be included.)
October 2010HC-2.3 HC-2.3 Avoidance of Conflicts of Interest
HC-2.3.1
Each
approved person must make every practicable effort to arrange his personal and business affairs to avoid a conflict of interest with theIslamic bank licensee .October 2010HC-2.3.2
The Board must establish and disseminate to its members and management, policies and procedures for the identification, reporting, disclosure, prevention, or strict limitation of potential conflicts of interest. It is
senior management's responsibility to implement these policies. Rules concerning connected party transactions and potential conflicts of interest may be dealt with in the Code of Conduct (see HC-2.2.4). In particular, the CBB requires that any decisions to enter into transactions, under whichapproved persons would have conflicts of interest that are material, should be formally and unanimously approved by the full Board. Best practice would dictate that anapproved person must:(a) Not enter into competition with the bank;(b) Not demand or accept substantial gifts from the bank for himself orconnected persons ;(c) Not misuse the bank's' assets;(d) Not use theIslamic bank licensee's privileged information or take advantage of business opportunities to which theIslamic bank licensee is entitled, for himself or his associates; and(e) Absent themselves from any discussions or decision-making that involves a subject where they are incapable of providing objective advice, or which involves a subject or (proposed) transaction where a conflict of interest exists.Amended: April 2011
Amended: January 2011
October 2010HC-2.3.3
Bahraini Islamic bank licensees must have in place a board approved policy on the employment of relatives ofapproved persons and a summary of such policy must be disclosed in the annual report of theBahraini Islamic bank licensee .Amended: July 2016
Added: April 2016HC-2.3.4
Branches of foreign bank licensees must have in place a policy on the employment of relatives ofapproved persons pertaining to their Bahrain operations.Amended: April 2019
Added: July 2016HC-2.4 HC-2.4 Disclosure of Conflicts of Interest
HC-2.4.1
Each
approved person must inform the entire Board of (potential) conflicts of interest in their activities with, and commitments to other organisations as they arise. Board members must abstain from voting on the matter in accordance with the relevant provisions of the Company Law. This disclosure must include all material facts in the case of a contract or transaction involving theapproved person . Theapproved persons must understand that any approval of a conflicted transaction is effective only if all material facts are known to the authorising persons and the conflicted person did not participate in the decision. In any case, allapproved persons must declare in writing all of their other interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager, or other form of significant participation) to the Board (or the Nominations or Audit Committees) on an annual basis.Amended: January 2013
Amended: January 2011
October 2010HC-2.4.1A
The chief executive/general manager of the
Bahraini Islamic bank licensees must disclose to the board of directors on an annual basis those individuals who are occupyingcontrolled functions and who are relatives of anyapproved persons within theBahraini Islamic bank licensee .Amended: July 2016
Added: April 2016HC-2.4.1B
The chief executive/general manager of the
branch of foreign bank licensee must disclose to a designated officer at its head office or regional manager on an annual basis those individuals who are occupyingcontrolled functions and who are relatives of anyapproved persons within thebranch of foreign bank licensee .Amended: April 2019
Added: July 2016HC-2.4.2
The Board of a
Bahraini Islamic bank licensee should establish formal procedures for:(a) Periodic disclosure and updating of information by eachapproved person on his actual and potential conflicts of interest; and(b) Advance approval by directors or shareholders who do not have an interest in the transactions in which anIslamic bank licensee's approved person has a personal interest. The Board should require such advance approval in every case.Amended: July 2016
October 2010HC-2.5 HC-2.5 Disclosure of Conflicts of Interest to Shareholders
HC-2.5.1
The
Islamic bank licensee must disclose to its shareholders in the Annual Report any abstention from voting motivated by a conflict of interest and must disclose to its shareholders any authorisation of a conflict of interest contract or transaction in accordance with the Company Law.October 2010HC-3 HC-3 Audit Committee and Financial Statements Certification
HC-3.1 HC-3.1 Principle
HC-3.1.1
The Board must have rigorous controls for financial audit and reporting, internal control, and compliance with law.
October 2010HC-3.2 HC-3.2 Audit Committee
HC-3.2.1
The Board must establish an audit committee of at least three directors of which the majority must be independent including the Chairman. The committee must:
(a) Review theIslamic bank licensee's accounting and financial practices;(b) Review the integrity of theIslamic bank licensee's financial and internal controls and financial statements (particularly with reference to information passed to the Board — see HC-1.2.10). The information needs of the Board to perform its monitoring responsibilities must be defined in writing, and regularly monitored by the Audit Committee;(c) Review theIslamic bank licensee's compliance with legal requirements;(d) Recommend the appointment, compensation and oversight of theIslamic bank licensee's external auditor; and(e) Recommend the appointment of the internal auditor.Amended: January 2012
Amended: January 2011
October 2010HC-3.2.2
In its review of the systems and controls framework in Paragraph HC-3.2.1, the audit committee must:
(a) Make effective use of the work of external and internal auditors. The audit committee must ensure the integrity of the bank's accounting and financial reporting systems through regular independent review (by internal and external audit). Audit findings must be used as an independent check on the information received from management about the bank's operations and performance and the effectiveness of internal controls; and(b) Make use of self-assessments, stress/scenario tests, and/or independent judgements made by external advisors. The Board should appoint supporting committees, and engage senior management to assist the audit committee in the oversight of risk management; and(c) Ensure that senior management have put in place appropriate systems of control for the business of the bank and the information needs of the Board; in particular, there must be appropriate systems and functions for identifying as well as for monitoring risk, the financial position of the bank, and compliance with applicable laws, regulations and best practice standards. The systems must produce information on a timely basis.October 2010HC-3.2.3
The
Islamic bank licensee must set up an internal audit function, which reports directly to the Audit Committee and administratively to theCEO .October 2010HC-3.2.4
The
CEO must not be a member of the audit committee.October 2010HC-3.3 HC-3.3 Audit Committee Charter
HC-3.3.1
The audit committee must adopt a written charter which shall, at a minimum, state the duties outlined in Paragraph HC-3.2.1 and the other matters included in Appendix A to this Module.
October 2010HC-3.3.2
A majority of the audit committee must have the financial literacy qualifications stated in Appendix A.
October 2010HC-3.3.3
The Board should adopt a "whistleblower" program under which employees can confidentially raise concerns about possible improprieties in financial or legal matters. Under the program, concerns may be communicated directly to any audit committee member or, alternatively, to an identified officer or employee who will report directly to the Audit Committee on this point.
October 2010HC-3.4 HC-3.4 CEO and CFO Certification of Financial Statements
HC-3.4.1
To encourage management accountability for the financial statements required by the directors, the
Islamic bank licensee's CEO and chief financial officer must state in writing to the audit committee and the Board as a whole that theIslamic bank licensee's interim and annual financial statements present a true and fair view, in all material respects, of theIslamic bank licensee's financial condition and results of operations in accordance with applicable accounting standards.October 2010HC-4 HC-4 Appointment, Training and Evaluation of the Board
HC-4.1 HC-4.1 Principle
HC-4.1.1
The
Islamic bank licensee must have rigorous and transparent procedures for appointment, training and evaluation of the Board.October 2010HC-4.2 HC-4.2 Nominating Committee
HC-4.2.1
The Board must establish a Nominating Committee of at least three directors which must:
(a) Identify persons qualified to become members of the Board of directors or Chief Executive Officer, Chief Financial Officer, Corporate Secretary and any other officers of theIslamic bank licensee considered appropriate by the Board, with the exception of the appointment of the internal auditor which shall be the responsibility of the Audit Committee in accordance with Paragraph HC-3.2.1 above; and(b) Make recommendations to the whole Board of directors including recommendations of candidates for Board membership to be included by the Board of directors on the agenda for the next annual shareholder meeting.October 2010HC-4.2.2
The committee must include only
independent directors or, alternatively, onlynon-executive directors of whom a majority must beindependent directors and the chairman must be anindependent director . This is consistent with international best practice and it recognises that the Nominating Committee must exercise judgment free from personal career conflicts of interest.October 2010HC-4.3 HC-4.3 Nominating Committee Charter
HC-4.3.1
The Nominating Committee must adopt a formal written charter which must, at a minimum, state the duties outlined in Paragraph HC-4.2.1 and the other matters included in Appendix B to this Module.
October 2010HC-4.4 HC-4.4 Board Nominations to Shareholders
HC-4.4.1
Each proposal by the Board to the shareholders for election or reelection of a director must be accompanied by a recommendation from the Board, a summary of the advice of the Nominating Committee, and the following specific information:
(a) The term to be served, which may not exceed three years (but there need not be a limit on reelection for further terms);(b) Biographical details and professional qualifications;(c) In the case of anindependent director , a statement that the Board has determined that the criteria ofindependent director have been met;(d) Any other directorships held;(e) Particulars of other positions which involve significant time commitments, and(f) Details of relationships between:(i) The candidate and theIslamic bank licensee , and(ii) The candidate and other directors of theIslamic bank licensee. October 2010HC-4.4.2
The chairman of the Board should confirm to shareholders when proposing re-election of a director that, following a formal performance evaluation, the person's performance continues to be effective and continues to demonstrate commitment to the role. Any term beyond six years (e.g. two three-year terms) for a director should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the Board. Serving more than six years is relevant to the determination of a non-executive director's independence.
October 2010HC-4.5 HC-4.5 Induction and Training of Directors
HC-4.5.1
The chairman of the Board must ensure that each new director receives a formal and tailored induction to ensure his contribution to the Board from the beginning of his term. The induction must include meetings with senior management, visits to the
Islamic bank licensee's facilities, presentations regarding strategic plans, significant financial, accounting and risk management issues, compliance programs, its internal and external auditors and legal counsel.October 2010HC-4.5.2
All continuing directors must be invited to attend orientation meetings and all directors must continually educate themselves as to the
Islamic bank licensee's business and corporate governance.October 2010HC-4.5.3
Management, in consultation with the chairman of the Board, should hold programs and presentations to directors respecting the
Islamic bank licensee's business and industry, which may include periodic attendance at conferences and management meetings. The Nominating Committee shall oversee directors' corporate governance educational activities.October 2010HC-5 HC-5 Remuneration of Approved Persons and Material Risk-Takers
HC-5.1 HC-5.1 Principle
HC-5.1.1
The
Islamic bank licensee must remunerateapproved persons andmaterial risk-takers fairly and responsibly.Amended: January 2014
October 2010HC-5.2 HC-5.2 Role of the Board of Directors and Remuneration Committee
HC-5.2.1AA
The board of directors must actively oversee the remuneration system s design and operation for
approved persons as well as formaterial risk-takers . The CEO andsenior management must not primarily control the remuneration system.Added: January 2014HC-5.2.1
The Board must establish a remuneration committee of at least three directors which must:
(a) Review theIslamic bank licensee's remuneration policies for theapproved persons andmaterial risk-takers , which must be approved by the shareholders and be consistent with the corporate values and strategy of the bank;(b) Approve theremuneration package and amounts for eachapproved person andmaterial risk-taker , as well as the total variable remuneration to be distributed, taking account of totalremuneration including salaries, fees, expenses, bonuses and other employee benefits;(c) Approve, monitor and review the remuneration system to ensure the system operates as intended; and(d) Recommend Board member remuneration based on their attendance and performance and in compliance with Article 188 of the Company Law.Amended: January 2017
Amended: July 2014
Amended: January 2014
October 2010HC-5.2.1A
In reviewing the remuneration system (see Subparagraph HC-5.2.1(c)), the remuneration committee should ensure that the system includes effective controls, including back testing and stress testing of the remuneration policy. The practical operation of the system should be regularly reviewed for compliance with regulations, internal policies and bank procedures. In addition, remuneration outcomes, risk measurements, and risk outcomes should be regularly reviewed by the Board for consistency with Board's approved risk appetite.
Added: January 2014HC-5.2.1B
Stress testing or stressed measures might be used by banks to help ex-ante risk adjustments take into account severe but plausible scenarios, based on possible expected loss on loans, as an example. Due to the uncertainty of payoffs, there will always be a need for ex-post adjustments so as to back-test actual performance against risk assumptions.
Added: January 2014HC-5.2.1C
As part of the duties noted under Paragraph HC-5.2.1, the remuneration committee must carefully evaluate practices by which remuneration is paid for potential future revenues whose timing and likelihood remain uncertain. It must demonstrate that its decisions are consistent with an assessment of the bank's financial condition and future prospects.
Added: January 2014HC-5.2.2
The committee may be merged with the nominating committee.
October 2010HC-5.3 HC-5.3 Remuneration Committee Charter
HC-5.3.1
The committee must adopt a written charter which must, at a minimum, state the duties in Paragraph HC-5.2.1 and other matters in Appendix C of this Module.
October 2010HC-5.3.1A
Members of the remuneration committee must have independence of any risk taking function or committees.
Added: January 2014HC-5.3.2
The committee should include only
independent directors or, alternatively, onlynon-executive directors of whom a majority areindependent directors and the chairman is anindependent director . This is consistent with international best practice and it recognises that the remuneration committee must exercise judgment free from personal career conflicts of interest.October 2010HC-5.4 HC-5.4 Standard for all Remuneration
HC-5.4.1
Remuneration ofapproved persons andmaterial risk-takers must be sufficient enough to attract, retain and motivate persons of the quality needed to run theIslamic bank licensee successfully, but theIslamic bank licensee must avoid paying more than is necessary for that purpose.Amended: January 2014
October 2010HC-5.4.2
While this Section applies to all
approved persons andmaterial risk-takers for the Bahrain operations, the rules on the proportion of fixed and variableremuneration (Paragraph HC-5.4.30) as well as those rules related to the deferral of variableremuneration (Paragraphs HC-5.4.31 and HC-5.4.32) and the obligation to have part of the variableremuneration in shares (Paragraphs HC-5.4.33 and HC-5.4.34) apply only to:(a)Approved persons ; or(b)Material risk-takers whose total annual
remuneration (including all benefits) is in excess of BD100,000, unless the board of directors requires the application of these Rules to all staff.Amended: January 2015
Amended: July 2014
Added: January 2014
HC-5.4.3
All policies for performance-based incentives should be approved by the shareholders, but the approval should be only of the plan itself and not of the grant to specific individuals of benefits under the plan.
Added: January 2014
HC-5.4.3A
As noted in Sections AU-3.7 and BR-4A.3, the external auditor or a CBB approved consultancy firm must undertake an annual review of the bank's compliance with the remuneration Rules outlined in this Chapter. The results of this review are to be submitted to the CBB within 3 months from the financial year end.
Amended: July 2015
Moved from HC-5.4.6 to HC-5.4.3A: January 2015
Amended: October 2014
Added: January 2014
Application to Branches of Foreign Banks
HC-5.4.4
Banks operating as
branches of foreign bank licensee in Bahrain must apply the most stringent set of remuneration rules to which they may be subject to. Such rules are:(a) The requirements imposed in Bahrain with respect to remuneration as outlined in Volume 2 CBB Rulebook; and(b) The requirements imposed by their home supervisor and head office.Amended: January 2021
Amended: April 2019
Added: January 2014HC-5.4.5
[This Paragraph was deleted in January 2015.]
Deleted: January 2015
Added: January 2014
HC-5.4.6
[Moved to Paragraph HC-5.4.3A in January 2015.]
Amended: January 2015
Amended: October 2014
Added: January 2014
Approved Persons in Risk Management, Internal Audit, Operations, Financial Controls, Internal Shari'a Review/Audit, AML and Compliance Functions
HC-5.4.7
The bank's
approved persons engaged in risk management, internal audit, operations, financial controls, internal Shari'a review/audit, AML and compliance functions must be independent, have appropriate authority, and be remunerated in a manner that is independent of the business areas they oversee and commensurate with their key role in the bank. Effective independence and appropriate authority of such staff are necessary to preserve the integrity of financial risk and management's influence on incentive remuneration.Amended: July 2014
Added: January 2014
HC-5.4.8
The performance measures of
approved persons referred to in Paragraph HC-5.4.7 must be based principally on the achievement of the objectives and targets of their functions.Added: January 2014
HC-5.4.9
The mix of fixed and variable remuneration for risk management, internal audit, operations, financial controls, internal Shari'a review/audit, AML and compliance functions personnel must be weighted in favour of fixed remuneration.
Amended: July 2014
Added: January 2014
Effective Alignment of Remuneration with Prudent Risk-Taking
Alignment of All Staff Remuneration with Compliance with AML/CFT Requirements
HC-5.4.9A
The performance evaluation and remuneration of senior management and staff of the
Islamic bank licensee must be based on the achievement of the Key Performance Indicators (KPIs) relevant to ensuring compliance with AML/CFT requirements as specified in Paragraphs FC-2.1.3 and FC-2.1.4.Added: April 2020HC-5.4.10
Remuneration must be adjusted for all types of risks.
Added: January 2014
HC-5.4.11
In relation to Paragraph HC-5.4.10, two employees who generate the same short-run profit but take different amounts of risk on behalf of their bank should not be treated the same by the remuneration system.
Added: January 2014
HC-5.4.12
Both quantitative measures and human judgement must play a role in determining risk adjustments.
Added: January 2014
HC-5.4.13
Risk adjustments must account for all types of risk, including intangible and other risks such as reputation risk, liquidity risk and the cost of capital.
Added: January 2014
HC-5.4.14
Banks' remuneration policies and practices must be designed to reduce employees' incentives to take excessive and undue risk.
Added: January 2014
HC-5.4.15
Remuneration outcomes must be symmetric with risk outcomes.
Added: January 2014
HC-5.4.16
The mix of cash, equity and other forms of remuneration must be consistent with risk alignment. The mix will vary depending on the employee's position and role and the bank must be able to explain the rationale for its mix to the CBB.
Added: January 2014
HC-5.4.17
Existing contractual payments related to a termination of employment must be re-examined, and kept in place only if there is a clear basis for concluding that they are aligned with long-term value creation and prudent risk-taking. Prospectively, any such payments must be related to performance achieved over time and designed in a way that does not reward failure.
Added: January 2014
HC-5.4.18
Banks must ensure that their employees commit themselves not to use personal hedging strategies or remuneration- and liability-related insurance to undermine the risk alignment effects embedded in their remuneration arrangements. Banks must ensure that appropriate compliance mechanisms are in place to monitor their employees commitment in this regard such as signed adherence by staff to the bank's code of ethics which should include the conditions outlined in this Paragraph.
Added: January 2014
Variable Remuneration
HC-5.4.19
Remuneration systems must link the size of the bonus pool to the overall performance of the bank.
Added: January 2014
HC-5.4.20
Employees' incentive payments must be linked to the contribution of the individual and business to such performance.
Added: January 2014
HC-5.4.21
As profits and losses of different activities of a bank are realised over different periods of time, remuneration payout schedules must be sensitive to the time horizon of risks and variable remuneration must therefore be deferred accordingly. Variable remuneration must not be finalised over short periods where risks are realised over long periods.
Added: January 2014
HC-5.4.22
The remuneration committee of the bank must question payouts for income that cannot be realised or whose likelihood of realisation remains uncertain at the time of payout.
Amended: July 2014
Added: January 2014
HC-5.4.23
Banks must ensure that total variable remuneration does not limit their ability to strengthen their capital base. The extent to which capital needs to be built up must be a function of a bank's current capital position and its ICAAP.
Added: January 2014
HC-5.4.24
The size of the variable remuneration pool and its allocation within the bank must take into account the full range of current and potential risks, including:
(a) The cost and quantity of capital required to support the risks taken;(b) The cost and quantity of the liquidity risk assumed in the conduct of business; and(c) Consistency with the timing and likelihood of potential future revenues incorporated into current earnings.Amended: July 2014
Added: January 2014
HC-5.4.25
Paragraph HC-5.4.24 focuses on the overall size of the variable remuneration, at the overall bank level, in order to ensure that the recognition and accrual of variable remuneration will not compromise the financial soundness of the bank.
Added: January 2014
HC-5.4.26
Bonuses must diminish or be deferred in the event of poor bank, divisional or business unit performance.
Added: January 2014
HC-5.4.27
Subdued or negative financial performance of the bank should generally lead to a considerable contraction of the bank's total variable remuneration, taking into account both current remuneration and reductions in payouts of amounts previously earned, including through malus and clawback arrangements. Recognition of staff who have achieved their targets or better, may take place by way of deferred compensation, which may be paid once the bank's performance improves.
Added: January 2014
HC-5.4.28
If the bank and/or relevant line of business is incurring losses in any year during the vesting period, any unvested portions must be subject to
malus .Amended: July 2014
Added: January 2014
HC-5.4.29
Accrual and deferral of variable remuneration does not oblige the bank to pay the variable remuneration, particularly when the anticipated outcome has not materialised or the bank's financial position does not support such payments.
Added: January 2014
HC-5.4.30
For
approved persons andmaterial risk-takers , other than those covered under Paragraphs HC-5.4.9 and Section HC-5.5, as their actions have a material impact on the risk exposure of the bank:(a) An appropriate ratio between the fixed and variable components of total remuneration must be set to ensure that fixed and variable components of total remuneration are appropriately balanced and paid on the basis of individual, business-unit and bank-wide measures that adequately measure performance; and(b) The variable proportion of remuneration must increase significantly along with the level of seniority and/or responsibility.Amended: October 2016
Amended: July 2014
Added: January 2014
HC-5.4.30A
The level of the fixed component referred to in Subparagraph HC-5.4.30(a) should represent a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable component.
Amended: October 2016
Added: July 2014
HC-5.4.31
For purposes of Paragraph HC-5.4.30:
(a) At least 40% of the variable remuneration must be payable under deferral arrangements over a period of at least 3 years; and(b) For the CEO, his deputies and the other 5 most highly paid business line employees, at least 60% of the variable remuneration must be payable under deferral arrangements over a period of at least 3 years.Amended: July 2014
Added: January 2014
HC-5.4.32
The deferral period referred to under Subparagraph HC-5.4.31(a) must be aligned with the nature of the business, its risks and the activities of the employee in question. Remuneration payable under deferral arrangements should generally vest no faster than on a pro rata basis.
Added: January 2014
HC-5.4.33
As a minimum, 50% of variable remuneration (including both the deferred and undeferred portions of the variable remuneration) must be awarded in shares or share-linked instruments or where appropriate, other non-cash instruments.
Added: January 2014
HC-5.4.34
The remaining portion (other than that mentioned under Paragraph HC-5.4.33) of the deferred remuneration can be paid as cash remuneration vested over a minimum 3-year period.
Added: January 2014
HC-5.4.34A
The only instance where deferred
remuneration can be paid out before the end of the vesting period is in the case of the death of the employee where the beneficiaries would receive any unpaid deferredremuneration .Added: July 2014HC-5.4.35
Banks must not provide any form of guaranteed variable remuneration as part of the overall remuneration package. Exceptional minimum variable remuneration must only occur in the context of hiring new staff and limited to the first year.
Amended: July 2014
Added: January 2014
Remuneration in the Form of Shares or Share-Linked Instruments
HC-5.4.36
Awards in shares or share-linked instruments must be subject to a minimum share retention policy of 6 months from the time the shares are awarded, unless the bank's policy requires a longer period.
Amended: July 2014
Added: January 2014
HC-5.4.37
For
Bahraini Islamic bank licensees , where fixed or variable remuneration include common shares, banks must limit the shares awarded to an annual aggregate limit of 10% of the total issued shares outstanding of the bank, at all times.Amended: July 2014
Added: January 2014
HC-5.4.38
For
Bahraini Islamic bank licensees , all share incentive plans must be approved by the shareholders.Amended: July 2014
Added: January 2014
Remuneration from Projects and Investments
HC-5.4.39
In reference to Paragraph HC-2.2.6, for greater certainty,
approved persons are not allowed to take any benefits from any projects or investments which are managed by theIslamic bank licensee or promoted to its customers or potential customers except for board related remuneration (declared as per Paragraph HC-2.4.1) linked to their fiduciary duties to the investors of the project/investment. This Rule applies to allapproved persons including those appointed as members of the board of special purpose vehicles or other operating companies set up by theIslamic bank licensee for projects or investments.Added: January 2014
HC-5.4.40
The reference to benefits in Paragraph HC-5.4.39 includes commission, fees, shares, consideration in kind, or other remuneration or incentives in respect of the performance of the project or investment
Added: January 2014
HC-5.5 HC-5.5 Board of Directors' Remuneration
HC-5.5.1
Remuneration ofnon-executive directors must not include performance-related elements such as grants of shares, share options or other deferred stock-related incentive schemes, bonuses, or pension benefits.October 2010HC-5.5.2
The Board of Directors' remuneration must be capped so that total remuneration is in line with Article 188 of the Company Law, in any financial year and has been approved by the shareholders.
Amended: April 2015
Amended: July 2014
Added: January 2014
HC-5.5.3
If a
senior manager is also a director, hisremuneration as asenior manager must take into account compensation received in his capacity as a director.Added: January 2014
HC-5.5.4
In the years where the bank has not generated any profits it must comply with the approval requirements of Article 188 of the Company Law.
Added: January 2014
HC-5.5.5
In addition to the requirements of Article 188 of the Company Law, the articles of association regarding remuneration of the board of directors must be in line with the Rules outlined in this Chapter.
Added: January 2014
HC-5.6 HC-5.6 [This Section was deleted and is replaced with requirements contained under Section HC-5.4]
Deleted: January 2014
HC-5.6.1
[This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]
Deleted: January 2014
October 2010HC-5.6.2
[This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]
Deleted: January 2014
October 2010HC-5.6.3
[This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]
Deleted: January 2014
October 2010HC-5.6.4
[This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]
Deleted: January 2014
October 2010HC-5.6.5
[This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]
Deleted: January 2014
October 2010HC-5.6.6
[This paragraph was deleted and is replaced with requirements contained under Section HC-5.4]
Deleted: January 2014
Amended: January 2012
October 2010HC-6 HC-6 Management Structure
HC-6.1 HC-6.1 Principle
HC-6.1.1
The Board must establish a clear and efficient management structure.
October 2010HC-6.2 HC-6.2 Establishment of Management Structure
HC-6.2.1
The Board must appoint senior management whose authority must include management and operation of current activities of the
Islamic bank licensee under the direction and oversight of the Board. The senior management must include at a minimum:(a) ACEO ;(b) A chief financial officer;(c) A corporate secretary; and(d) An internal auditor,and must also include such other
approved persons as the Board considers appropriate.Amended: April 2020
Amended: October 2011
Added: October 2010HC-6.3 HC-6.3 Titles, Authorities, Duties and Reporting Responsibilities
HC-6.3.1
The Board must adopt by-laws prescribing each
senior manager's title, authorities, duties, accountabilities and internal reporting responsibilities. This must be done with the advice of the Nominating Committee and in consultation with theCEO , to whom the other senior managers should normally report.Amended: January 2012
October 2010HC-6.3.2
These provisions must include but should not be limited to the following:
(a) TheCEO must have authority to act generally in theIslamic bank licensee's name, representing theIslamic bank licensee's interests in concluding transactions on theIslamic bank licensee's behalf and giving instructions to other senior managers andIslamic bank licensee employees;(b) The chief financial officer must be responsible and accountable for:(i) The complete, timely, reliable and accurate preparation of theIslamic bank licensee's financial statements, in accordance with the accounting standards and policies of the Islamic bank licensee (see also HC-3.4.1); and(ii) Presenting the Board with a balanced and understandable assessment of theIslamic bank licensee's financial situation;(c) The corporate secretary's duties must include arranging, recording and following up on the actions, decisions and meetings of the Board and of the shareholders (both at annual and extraordinary meetings) in books to be kept for that purpose; and(d) The internal auditor's duties must include providing an independent and objective review of the efficiency of theIslamic bank licensee's operations. This would include a review of the accuracy and reliability of theIslamic bank licensee's accounting records and financial reports as well as a review of the adequacy and effectiveness of theIslamic bank licensee's risk management, control, and governance processes.October 2010HC-6.3.3
The Board should also specify any limits which it wishes to set on the authority of the
CEO or other senior managers, such as monetary maximums for transactions which they may authorise without separate Board approval.October 2010HC-6.3.4
The corporate secretary should be given general responsibility for reviewing the
Islamic bank licensee's procedures and advising the Board directly on such matters (see Rule HC-6.3.2(c)). Whenever practical, the corporate secretary should be a person with legal or similar professional experience and trainingOctober 2010HC-6.3.5
At least annually the Board shall review and concur in a succession plan addressing the policies and principles for selecting a successor to the
CEO , both in emergencies and in the normal course of business. The succession plan should include an assessment of the experience, performance, skills and planned career paths for possible successors to theCEO .October 2010HC-6.4 HC-6.4 Compliance
HC-6.4.1
Compliance starts at the top. It will be most effective in a corporate culture that emphasises standards of honesty and integrity and in which the board of directors and senior management lead by example. It concerns everyone within the bank and should be viewed as an integral part of the bank's business activities. A bank should hold itself to high standards when carrying on business, and at all times strive to observe the spirit as well as the letter of the law. Failure to consider the impact of its actions on its shareholders, customers, employees and the markets may result in significant adverse publicity and reputational damage, even if no law has been broken.
Amended: January 2019
October 2010HC-6.4.2
Islamic bank licensees must establish an effective compliance framework, which is appropriate for the size and complexity of their operations, for managing their compliance risks.Amended: January 2019
October 2010HC-6.4.3
The term "Compliance risk" refers to the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, directives, directions, reporting requirements and codes of conduct, including internal code of conduct.
Amended: January 2019
Amended: October 2014
October 2010HC-6.4.4
Compliance laws, rules and standards generally cover matters such as observing proper prudential standards, standards of market conduct, managing conflicts of interest, treating customers fairly and ensuring suitability of customer advice, as well as matters specified in HC-6.4.3 above. They typically include specific areas such as the prevention of money laundering and terrorist financing, and may extend to tax laws that are relevant to the structuring of banking products or customer advice.
Added: January 2019
HC-6.4.5
It is important that banks do not consider compliance function as a cost center rather it is an activity that enhances the reputation of the bank and promotes the right environment for better financial performance.
Added: January 2019
HC-6.4.6
The relationship between a bank's business units, the support functions and the compliance function can be explained using the three lines of defence model.
a) The business units are the first line of defence. They undertake the management of risks within assigned limits of risk exposure and are responsible and accountable for identifying, assessing and controlling the risks of their business.b) The second line of defence includes the support functions, such as risk management, compliance, legal, human resources, finance, operations, and technology. Each of these functions, in close relationship with the business units, ensures that risks in the business units have been appropriately identified and managed. The business support functions work closely to help define strategy, implement bank policies and procedures, and collect information to create a bank-wide view of risks.c) The third line of defence is the internal audit function that independently assesses the effectiveness of the controls over the processes created in the first and second lines of defence and provides assurance on these processes. The responsibility for internal control does not transfer from one line of defence to the next line.Added: January 2019
Responsibilities of the Board of Directors
HC-6.4.7
The board of directors of an
Islamic bank licensee is responsible for overseeing the management of the bank's compliance risk. The board must establish a permanent and effective compliance function and approve the bank's compliance policies for identifying, assessing, monitoring, reporting and advising on compliance risk. At least once a year, the board or a designated board committee must assess the extent to which the bank is managing its compliance risk effectively. The board must also ensure that the agenda for the meetings of the board or the designated board committee include compliance as a topic at least every quarter.Amended: January 2020
Added: January 2019
HC-6.4.8
The board designated committee referred to in HC-6.4.7 may be the audit committee, the governance committee, the risk committee, or other committee which does not have a role in the business or executive roles, such as those relevant to executive committees and investment committees. For
branches of foreign bank licensees , all references in this Section to the Board/the designated board committee should be interpreted as the Group Compliance Officer or a sufficiently senior level Regional Compliance Committee or Officer.Added: January 2019
Responsibilities of the Senior Management
HC-6.4.9
Senior management is responsible for effective management of bank's compliance risk.Added: January 2019
HC-6.4.10
Senior management is responsible for establishing the operating framework and the processes to support a permanent and an effective compliance function. It is responsible for establishing and communicating a written compliance policy through all levels of the organisation for ensuring that it is adhered to in practice. It is responsible also for approving the bank's compliance procedures for identifying, assessing, monitoring, reporting and advising on compliance risk.Amended: January 2020
Added: January 2019
HC-6.4.11
The compliance policy must be approved by the Board/the designated board committee and must address the following:
(a) The role and responsibilities of the compliance function;(b) Measures to ensure its independence;(c) Its relationship with other risk management functions within the bank and with the internal audit function;(d) In cases where compliance responsibilities are carried out by staff in different departments, how these responsibilities are to be allocated among the departments;(e) Its right to obtain access to information necessary to carry out its responsibilities, and the corresponding duty of bank staff to cooperate in supplying this information;(f) Its right to conduct investigations of possible breaches of the relevant laws and regulations and the compliance policy and to appoint outside experts to perform this task if appropriate; and(g) Its right to be able freely to express and disclose its findings to the board of directors or to the designated board committee, e.g. the audit committee or the governance committee of the board.(h) The basic principles to be followed by management and staff describing the main processes by which compliance risks are to be identified and managed through all levels of the organization.Added: January 2019
HC-6.4.12
The Board and the designated Board committee must ensure that all compliance findings and recommendations are resolved within six months for high risk/critical issues and 9 months for any other issues from the issue date of the subject compliance report unless otherwise agreed with the CBB taking into consideration time required for specific issues that may require substantive changes to technology, systems and/or processes.
Added: January 2019
HC-6.4.13
Senior management must assess the training needs of staff taking into account the existing skills and competencies, the nature of changes to laws and regulations in developing a training plan for compliance across all levels throughout the organisation. Training must be provided by competent and skilled personnel, whether available internally or externally. Training that is provided must reflect the seniority, role and responsibilities of the individuals for whom it is intended.Added: January 2019
Compliance Function
HC-6.4.14
Islamic bank licensees must organise their compliance function and set priorities for the management of their compliance risk in a way that is consistent with their own risk management strategy and structures.Added: January 2019
HC-6.4.15
The compliance function must be independent and effective. It must be headed by an executive or senior staff member with overall responsibility for co-ordinating the identification and management of the bank's compliance risk and for supervising the activities of other compliance function staff.
Added: January 2019
HC-6.4.16
The Head of Compliance, with the assistance of
senior management must:(a) report to the board of directors or the designated committee of the board on a quarterly basis, even if there are no issues to highlight,(b) report to the board or the designated committee of the board on the bank's management of its compliance risk, in such a manner as to assist board members to make an informed judgment on whether the bank is managing its compliance risk effectively;(c) report promptly to the board or the designated committee of the board on any material compliance failures as they arise (e.g. failures that may attract a significant risk of legal or regulatory sanctions, material financial loss, or loss to reputation); and(d) ensure that senior management develop remedial action plans to address compliance breaches.Added: January 2019
HC-6.4.17
The role of head of compliance may be combined with those of the head of risk if the size and nature of the bank justifies a single function for both roles. Banks which carry out limited operations or are small branches of foreign banks would qualify for such a practice.
Added: January 2019
HC-6.4.18
The compliance function should assist senior management, the board and the designated committee of the board in their compliance obligations and help promote the right culture within the bank. While the board and management are accountable for the bank's compliance, the compliance function has an important role in supporting corporate values, policies and processes that help ensure that the bank acts responsibly and fulfils all applicable obligations.
Added: January 2019
HC-6.4.19
The independence and effectiveness of the function must be based on the following related elements:
(a) The compliance function must have a formal status with sufficient authority within the bank;(b) There must be a group compliance officer or head of compliance with overall responsibility for co-ordinating the management of the bank's compliance risk;(c) Compliance function staff, and in particular, the head of compliance, must not be placed in a position where there is a possible conflict of interest between their compliance responsibilities and any other responsibilities they have;(d) Compliance function staff must have access to the information and personnel necessary to carry out their responsibilities; and(e) The compliance function must directly report to the board or a designated board committee in the case ofBahraini Islamic bank licensees ) and administratively to the CEO; and(f) In the case ofbranches of foreign bank licensees , the reporting must be to the Group Compliance Officer or Regional Compliance Officer and may report administratively to the CEO/GM.Added: January 2019
HC-6.4.20
The concept of independence does not mean that the compliance function cannot work closely with management and staff in the various business units. Indeed, a co-operative working relationship between compliance function and business units should help to identify and manage compliance risks at an early stage. Rather, the various elements described above should be viewed as safeguards to help ensure the effectiveness of the compliance function, notwithstanding the close working relationship between the compliance function and the business units. The way in which the safeguards are implemented will depend to some extent on the specific responsibilities of individual compliance function staff.
Added: January 2019
HC-6.4.21
The compliance function should be free to highlight to senior management on any irregularities or possible breaches disclosed by its investigations, without fear of retaliation or disfavour from management or other staff members.
Added: January 2019
HC-6.4.22
Appointment, dismissal and other changes to the head of compliance must be approved by the board or the designated board committee. Appointments of head of compliance must be approved by the CBB in accordance with paragraph LR-1A.1.17. If the head of compliance is removed from his or her position for any reason, this must be notified to the CBB, describing fully the reasons as required under paragraph LR-1A.1.22.
Added: January 2019
HC-6.4.23
Islamic bank licensees must ensure that the compliance risk management framework is subject to an independent review by a third party consultant, other than the external auditor, every three years and when there are material changes to the business. The results of the independent review and action must be provided to the CBB by 30th September of the relevant year.Added: January 2019
HC-6.4.24
The responsibilities of the compliance function must be carried out under a compliance programme that sets out its planned activities, such as the implementation and review of specific policies and procedures, compliance risk assessment, compliance testing, and educating staff on compliance matters. The compliance programme must be risk based and subject to oversight by the head of compliance to ensure appropriate coverage across businesses and co-ordination among risk management functions.
Added: January 2019
HC-6.4.25
The Compliance function must on a pro-active basis, identify, measure, document and assess the compliance risks associated with the bank's business activities including the development of new products and business practices; the proposed establishment of new types of business or customer relationships, or material changes in the nature of such relationships. If the bank has a new products committee, the compliance function staff should be represented on the committee.
Added: January 2019
HC-6.4.26
While the Compliance function is responsible for oversight and compliance checks across the full spectrum of compliance risk areas, it is recognised that many areas of compliance require specialist skills which can be found in different parts of the organisation, example, the skill sets for compliance with ICAAP can be found either with financial control or with risk management, for compliance with labour laws, the specialist skills are with human resources departments etc. In such cases, the compliance function ensures that the right levels of checks and balances and compliance reporting are available to get comfort that the licensee has adhered to the relevant requirements. In certain instances, it may use external experts with the approval of the relevant authority within the bank.
Added: January 2019
HC-6.4.27
The compliance function should consider ways to measure compliance risk (e.g. by using performance indicators) and use such measurements to enhance compliance risk assessment.
Added: January 2019
HC-6.4.28
In case of new regulations, the compliance function must assess the appropriateness of the bank's compliance procedures and guidelines, promptly follow up any identified deficiencies, and, where necessary, formulate proposals for amendments.
Added: January 2019
Monitoring, testing and reporting
HC-6.4.29
The compliance function must monitor and test compliance by performing sufficient and representative compliance testing. The results of the compliance testing must be reported to the board or designated committee of the board.
Added: January 2019
HC-6.4.30
The compliance function must advise
senior management and the designated committee of the board on all relevant laws, rules and standards, in all jurisdictions in which the bank conducts its business, and inform them on developments in the subject.Added: January 2019
Guidance and education
HC-6.4.31
The compliance function must assist senior management in:
a) Educating staff on compliance issues, and acting as a contact point within the bank for compliance queries from staff members; andb) Establishing written guidance to staff on the appropriate implementation of laws, rules and standards through policies and procedures and other documents such as manuals, internal codes of conduct and practice guidelines.Added: January 2019
Statutory responsibilities and liaison
HC-6.4.32
The compliance function must have specific statutory responsibilities (e.g. fulfilling the role of anti-money laundering officer). It may also liaise with relevant external bodies, including regulators, standard setters and external experts.
Added: January 2019
Right of access
HC-6.4.33
The compliance function must have access across the entire organisation to carry out its responsibilities on its own initiative where compliance risk exists. It must, additionally, have the right to communicate with any staff member and to obtain access to any records or files necessary to conduct its responsibilities and to conduct investigations of possible breaches of the compliance policy and to request assistance from specialists within the bank (e.g. legal or internal audit) or engage outside specialists' subject to appropriate internal approval to perform this task if appropriate.
Added: January 2019
Competent Resources
HC-6.4.34
The compliance function must have adequate resources to carry out its functions effectively commensurate with the size and complexity of the organisation. The resources to be provided for the compliance function must be both sufficient and appropriate to ensure that compliance risk within the bank is managed effectively.
Added: January 2019
HC-6.4.35
The compliance function staff must have the necessary qualifications, experience and professional and personal qualities to enable them to carry out their specific duties. Compliance function staff must have a sound understanding of laws, rules and standards and their practical impact on the bank's operations.
Added: January 2019
HC-6.4.36
The professional skills of compliance function staff, especially with respect to keeping up-to-date with developments in compliance laws, rules and standards, must be maintained through regular and systematic education and training.
Added: January 2019
Relationship with Internal Audit
HC-6.4.37
The scope and breadth of the activities of the compliance function must be subject to periodic review by the internal audit function.
Added: January 2019
HC-6.4.38
Compliance risk must be included in the risk assessment methodology of the internal audit function, and an audit programme that covers the adequacy and effectiveness of the bank's compliance function should be established, including testing of controls commensurate with the perceived level of risk.
Added: January 2019
HC-6.4.39
The compliance function and the internal audit function must be separate, to ensure that the activities of the compliance function are subject to independent review. It is important, therefore, that there is a clear understanding within the bank as to how risk assessment and testing activities are divided between the two functions, and that this is documented (e.g. in the bank's compliance policy or in a related document such as a protocol). The internal audit function must, of course, keep the head of compliance informed of any audit findings relating to compliance.
Added: January 2019
Cross-border Issues
HC-6.4.40
Islamic bank licensees that conduct business through a branch or subsidiary in other jurisdictions must through the Group Compliance Function:(a) comply with local laws and regulations;(b) have Group Compliance policy and procedures; and(c) conduct annual compliance testing on overseas operations whose total revenue represents 20% or more of the Group's total revenue and on every two years' basis for other overseas operations.Added: January 2019
HC-6.4.41
Islamic bank licensees must have procedures in place to identify and assess the possible increased reputational risk to the bank if it offers products or carries out activities in certain jurisdictions.Added: January 2019
HC-6.4.42
Islamic bank licensees with overseas operations must establish a Group Compliance Function which must oversee the compliance activities on a group-wide basis. The Group Compliance Officer must ensure that compliance reviews and checks are carried out at branches and subsidiaries. As legal and regulatory requirements may differ from jurisdiction to jurisdiction, compliance issues specific to each jurisdiction must be coordinated within the structure of the bank's group-wide compliance policy.Added: January 2019
HC-6.4.43
The
senior management with assistance of Group Compliance Officer must ensure that adequate resources, commensurate with the scale and complexity of the operations, are assigned for compliance activities at, the head office, branches and subsidiaries.Added: January 2019
HC-6.4.44
The Group Compliance Officer must ensure that adequate reports and information is received from overseas branches and subsidiaries on compliance related issues.
Added: January 2019
Outsourcing
HC-6.4.45
Compliance function or its activities must not be outsourced.
Added: January 2019
Other requirements
HC-6.4.46
Every application/request for approval to the CBB must be accompanied by a compliance assessment report confirming that all related requirements pertaining to the request have been thoroughly checked by the compliance function including the impact of such a request on the licensee's financial position and compliance status. In addition, reference must be made to any previously approved arrangements by the CBB.
Added: January 2019
HC-6.4.47
In cases where the requests have a potential financial impact on the
licensee a report from the financial control function in consultation with external auditors must also be submitted as part of the compliance assessment report, whereas in case of any legal implication of such a request a legal opinion on the matter must be submitted.Added: January 2019
HC-6.4.48
Where breaches or deficiencies have occurred due to failures by approved persons, the CBB may consider re-assessing the fitness and propriety of such persons.
Added: January 2019
HC-6.5 HC-6.5 Internal Audit
Introduction
Added: April 2018HC-6.5.1
Islamic bank licensee's must establish and implement an effective internal audit function which provides an independent and objective assurance to the board of directors andsenior management on the quality and effectiveness of a bank's internal control, risk management and governance systems and processes, to protect the bank and its reputation.Added: April 2018HC-6.5.2
The internal audit function must develop an independent and informed view of the risks faced by the bank based on its access to all bank records and data, its enquiries, and its professional competence. The internal audit function must discuss its views, findings and conclusions directly with the audit committee and, if necessary with the board of directors at their routine quarterly meetings, thereby helping the board to oversee
senior management .Added: April 2018HC-6.5.3
In this Section, all references to the board of directors may also be taken as referring to the bank's audit committee where the audit committee is mandated to carry out such functions on the board's behalf.
Added: April 2018HC-6.5.4
For
branches of foreign bank licensee's , and where no local board of directors exists, all references in this Module to the board of directors should be interpreted as the Head Office/ Regional Office.Added: April 2018HC-6.5.5
This Section applies in its entirety to all locally incorporated banks, including those within a banking group, and to holding companies whose subsidiaries are predominantly banks. While Module LR requires that all banks including branches must have an internal auditor as a controlled function in the Kingdom, only Paragraphs HC-6.5.7 to HC-6.5.23, HC-6.5.28 to HC-6.5.42 and HC-6.5.69 to HC-6.5.70 would be directly applicable to
branches of foreign bank licensee's in Bahrain in terms of the internal audit function located here. Branches should ensure that equivalent arrangements are in place at the parent level for other requirements in this Section and these arrangements provide for an effective internal audit function over activities conducted under the Bahrain license.Added: April 2018HC-6.5.6
The extent of application of this Section must be commensurate with the significance, complexity and international presence of the bank (principle of proportionality).
Added: April 2018HC-6.5.7
The key features for the effective operation of an internal audit function are:
(a) Independence and objectivity;(b) Professional competence and due professional care; and(c) Professional ethicsAdded: April 2018Independence and Objectivity
HC-6.5.8
Islamic bank licensees internal audit function must be independent of the audited activities. This means that the internal audit is independent of all functions including compliance, risk management and financial control functions. The internal audit function must also have sufficient standing and authority within the bank and must operate according to sound principles.Added: April 2018HC-6.5.9
The internal audit function must report directly to the audit committee and administratively to the CEO, thereby providing a framework for internal auditors to carry out their assignments with objectivity.
Added: April 2018HC-6.5.10
The internal audit function must be able to perform its assignments on its own initiative in all areas and functions of the bank based on the audit plan established by the head of the internal audit function and approved by the board of directors or audit committee. It must be free to report its findings and assessments internally through clear reporting lines. The head of internal audit must demonstrate appropriate leadership and have the necessary personal characteristics and professional skills to fulfill his or her responsibility for maintaining the function's independence and objectivity.
Added: April 2018HC-6.5.11
The internal audit function must not be involved in designing, selecting, implementing or operating specific internal control measures. However, the independence of the internal audit function must not prevent
senior management from requesting input from internal audit on matters related to risk and internal controls. Nevertheless, the development and implementation of internal controls must remain the responsibility of management.Added: April 2018HC-6.5.12
Islamic bank licensees should, whenever practicable and without jeopardising competence and expertise, periodically rotate internal audit staff within the internal audit function.Added: April 2018Professional Competence and Due Professional Care
HC-6.5.13
The head of internal audit must have the responsibility for acquiring human resources with sufficient qualifications and skills to effectively deliver on the mandate for professional competence and to audit to the required level. He/she must continually assess and monitor the skills necessary to do so. The skills required for senior internal auditors must include the abilities to judge outcomes and make an impact at the highest level of the organisation.
Added: April 2018HC-6.5.14
For purposes of Paragraph HC-6.5.13, professional competence depends on the auditor's capacity to collect and understand information, to examine and evaluate audit evidence and to communicate with the stakeholders of the internal audit function.
Added: April 2018HC-6.5.15
The head of internal audit must ensure that internal audit staff acquire appropriate ongoing training in order to meet the growing technical complexity of the
Islamic Bank licensee's activities and the increasing diversity of tasks that need to be undertaken as a result of the introduction of new products and processes within theIslamic Bank licensee and other developments in the financial sector.Added: April 2018HC-6.5.16
The internal audit function collectively must be competent to examine all areas in which the bank operates. When internal audit is outsourced, the head of internal audit/coordinator must ensure that the use of those experts does not compromise the independence and objectivity of the internal audit function.
Added: April 2018HC-6.5.17
For purposes of Paragraph HC-6.5.16, the coordinator must be an approved person within the
Islamic Bank licensee .Added: April 2018HC-6.5.18
The head of internal audit/coordinator should ensure that, whenever practical, the relevant knowledge input from an expert is assimilated into the organisation. This may be possible by having one or more members of the bank's internal audit staff participate in the external expert's work.
Added: April 2018HC-6.5.19
Internal auditors must apply the care and skills expected of a reasonably prudent and competent professional. Due professional care does not imply infallibility; however, internal auditors having limited competence and experience in a particular area must be appropriately supervised by more experienced internal auditors.
Added: April 2018Professional Ethics
HC-6.5.20
Internal auditors must act with integrity. Integrity includes, being straightforward, honest and truthful.
Added: April 2018HC-6.5.21
Internal auditors must respect the confidentiality of information acquired in the course of their duties. They must not use that information (particularly 'confidential information' as defined in Article 116 of the CBB Law) for personal gain or malicious action and must be diligent in the protection of information acquired.
Added: April 2018HC-6.5.22
The head of the internal audit function and all internal auditors must avoid conflicts of interest (see Section HC-2.3). Internally recruited internal auditors must not engage in auditing activities for which they have had previous responsibility before a one year "cooling off" period has elapsed.
Added: April 2018HC-6.5.23
Internal auditors must adhere to the code of ethics of both the bank and The Institute of Internal Auditors (see Section HC-2.2).
Added: April 2018Internal Audit Charter
HC-6.5.24
All
Bahraini Islamic bank licensee's must have an internal audit charter that articulates the purpose, standing and authority of the internal audit function within the bank in a manner that promotes an effective internal audit function as described in Paragraph HC-6.5.1.Added: April 2018HC-6.5.25
The charter must be drawn up and reviewed annually by the head of internal audit and approved by the board of directors or audit committee. It must be available to all internal stakeholders and, in certain circumstances, such as listed entities, to external stakeholders.
Added: April 2018HC-6.5.26
At a minimum, the internal audit charter must establish:
(a) The internal audit function's standing within the bank, its authority, its responsibilities and its relations with other control functions in a manner that promotes the effectiveness of the function as described in Paragraphs HC-6.5.1 and HC-6.5.2;(b) The purpose and scope of the internal audit function;(d) The obligation of the internal auditors to communicate the results of their engagements and a description of how and to whom this must be done (reporting line);(e) The criteria for when and how the internal audit function may outsource some of its engagements to external experts;(f) The terms and conditions according to which the internal audit function can be called upon to provide consulting or advisory services or to carry out other special tasks;(g) The responsibility and accountability of the head of internal audit;(h) A requirement to comply with sound internal auditing standards; and(i) Procedures for the coordination of the internal audit function with the external auditor.Added: April 2018HC-6.5.27
The charter must empower the internal audit function, whenever relevant to the performance of its assignments and discharge of its duties, to initiate direct communication with any member of staff, to examine any activity or entity of the bank, and to have full and unconditional access to any records, files, data and physical properties of the bank. This includes access to management information systems and records and the minutes of board and sub-board committee meetings and all consultative and decision-making committees.
Added: April 2018Scope of Activity
HC-6.5.28
The scope of internal audit activities must include the examination and evaluation of the effectiveness of the internal control, risk management and governance systems and processes of the entire bank, including the bank's outsourced activities and its subsidiaries (including SPVs) and branches.
Added: April 2018HC-6.5.29
The internal audit function must independently evaluate the:
(a) Effectiveness and efficiency of internal control, risk management and governance systems and processes created by the business units and support functions in the context of both current and potential or actual emerging risks and provide assurance on these systems and processes;(b) Reliability, effectiveness and integrity of management information systems and processes (including relevance, accuracy, completeness, availability, confidentiality and comprehensiveness of data);(c) Monitoring of compliance with laws and regulations, including any requirements from the CBB; and(d) Safeguarding of assets.Added: April 2018HC-6.5.30
The head of internal audit must establish, prior to year-end an annual internal audit plan. It must be based on a robust risk assessment (including direct or indirect input from
senior management and the board).Added: April 2018HC-6.5.31
The audit committee's approval of the audit plan also requires that an appropriate budget will be available to support the internal audit function's activities.
Added: April 2018HC-6.5.32
The scope of the internal audit function's activities must ensure adequate coverage of matters of regulatory interest within the audit plan.
Added: April 2018Risk Management
HC-6.5.33
Internal audit must include in its scope the following aspects of risk management:
(a) The organisation and mandates of the risk management function including market, credit, liquidity, interest rate and operational risks;(b) Evaluation of risk appetite, escalation and reporting of issues and decisions taken by the risk management function;(c) The adequacy of risk management systems and processes for identifying, measuring, assessing, controlling, responding to, and reporting on all the risks resulting from the bank's activities;(d) The integrity of the risk management information systems, including the accuracy, reliability and completeness of the data used;(e) The approval and maintenance of risk models including verification of the consistency, timeliness, independence and reliability of data sources used in such models;(f) Information technology and information security;(g) The bank's system for identifying and measuring its regulatory capital and assessing the adequacy of its capital resources in relation to the bank's risk exposures and established minimum ratios; and(h) The review of management's process for stress testing its capital levels, taking into account the frequency of such exercises, their purpose (e.g., internal monitoring vs. regulator imposed), the reasonableness of scenarios and the underlying assumptions employed, and the reliability of the processes used.Added: April 2018HC-6.5.34
When the risk management function has not informed the board of directors about the existence of a significant divergence of views between
senior management and the risk management function regarding the level of risk faced by the bank, the head of internal audit must inform the audit committee about this divergence.Added: April 2018Capital Adequacy and Liquidity
HC-6.5.35
The internal audit must review the bank's system for identifying and measuring its regulatory capital and assessing the adequacy of its capital resources in relation to the bank's risk exposures and established minimum ratios.
Added: April 2018HC-6.5.36
Internal audit must review management's process for stress testing its capital levels.
Added: April 2018HC-6.5.37
Internal audit must review the effectiveness of the bank's systems and processes for measuring and monitoring its liquidity positions in relation to its risk profile, external environment, and minimum regulatory requirements including the requirement set out in Paragraph CA-1.3.4.
Added: April 2018Regulatory and Internal Reporting
HC-6.5.38
The internal audit function must regularly evaluate the effectiveness of the process by which the risk and reporting functions interact to produce timely, accurate, reliable and relevant reports for both internal management and the CBB. Such reports include, but not limited to, the PIR and public disclosure requirements included in the CBB Rulebook, Module PD.
Added: April 2018Compliance
HC-6.5.39
The internal audit function must periodically review the scope of the activities of the compliance function using the risk-based approach. The audit of the compliance function must include an assessment of how effectively it fulfils its responsibilities.
Added: April 2018Finance
HC-6.5.40
The internal audit function must periodically review the controls over the bank's finance function using the risk-based approach.
Added: April 2018HC-6.5.41
The internal audit function must devote sufficient resources to evaluate the valuation control environment, availability and reliability of information or evidence used in the valuation process and the reliability of estimated fair values. This is achieved through reviewing the independent price verification processes and testing valuations of significant transactions.
Added: April 2018HC-6.5.42
The internal audit function must, as a minimum, also include the following aspects in its scope:
(a) The organisation and mandate of the finance function;(b) The adequacy and integrity of underlying financial data and finance systems and processes for completely identifying, capturing, measuring and reporting key data such as profit or loss, valuations of financial instruments and impairment allowances;(c) The approval and maintenance of pricing models including verification of the consistency, timeliness, independence and reliability of data sources used in such models;(d) Controls in place to prevent and detect trading irregularities; and(e) Balance sheet controls including key reconciliations performed and actions taken (e.g. adjustments).Added: April 2018Permanency of the Internal Audit Function
HC-6.5.43
The internal audit function must be structured consistent with Paragraphs HC-6.5.61 to HC-6.5.65.
Senior management and the board must ensure that the internal audit function is permanent and commensurate with the size, the nature and complexity of the bank's operations.Added: April 2018HC-6.5.44
Where the head of internal audit function ceases to act in this capacity, the CBB will meet with him/her to discuss the reasons.
Added: April 2018Responsibilities of the Board of Directors and Senior Management
HC-6.5.45
Islamic bank licensees board of directors must ensure thatsenior management establishes and maintains an adequate, effective and efficient internal control system (see HC-1.2.3(c)) and accordingly, the board must support the internal audit function in discharging its duties effectively.Added: April 2018HC-6.5.46
The board of directors must review at least annually, the effectiveness and efficiency of the internal control system based, in part, on information provided by the internal audit function (see HC-1.2.10).
Added: April 2018HC-6.5.47
The board of directors, its audit committee and
senior management must promote a strong internal control environment supported and assessed by a sound internal audit function.Added: April 2018HC-6.5.48
As part of their oversight responsibilities, the audit committee must review the performance of the internal audit function.
Added: April 2018HC-6.5.49
Every five years, the audit committee must commission an independent external quality assurance review of the internal audit function.
Added: April 2018HC-6.5.50
Senior management must inform the internal audit function of new developments, initiatives, projects, products and operational changes.Added: April 2018HC-6.5.51
Senior management must ensure that all internal audit findings and recommendations are resolved within six months for high risk/critical issues and 12 months for any other issues from the issue date of the subject internal audit report.Added: April 2018HC-6.5.52
Senior management must ensure that the head of internal audit has the necessary resources, financial and otherwise, available to carry out his or her duties commensurate with the annual internal audit plan, scope and budget approved by the audit committee.Added: April 2018Responsibilities of the Audit Committee in relation to the Internal Audit Function
HC-6.5.53
The audit committee must oversee the bank's internal audit function (see also Paragraph HC-3.2.3).
Added: April 2018HC-6.5.54
The bank's audit committee and the internal audit function must develop and maintain their own tools to assess the quality of the internal audit function.
Added: April 2018HC-6.5.55
The audit committee must ensure that the internal audit function is able to discharge its responsibilities in an independent manner, consistent with Paragraph HC-6.5.8. It must review and approve the audit plan, its scope, and the budget of the internal audit function. It must also review audit reports and ensure that
senior management is taking necessary and timely corrective actions to address control weaknesses, compliance issues with policies, laws and regulations, and other concerns identified and reported by the internal audit function.Added: April 2018Management of the Internal Audit Function
HC-6.5.56
The head of the internal audit function must ensure that the function complies with The Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing.
Added: April 2018HC-6.5.57
The audit committee must ensure that the head of the internal audit function is a person of integrity. This means that he or she will be able to perform his or her work with honesty, diligence and responsibility. It also implies that this person observes the law and has not been a party to any illegal activity. The head of internal audit must also ensure that the members of internal audit staff are persons of integrity.
Added: April 2018Reporting Lines of the Internal Audit Function
HC-6.5.58
The internal audit function must be accountable to the audit committee, on all matters related to the performance of its mandate as described in the internal audit charter. It must also promptly inform the CEO and other related Heads of Functions about its findings.
Added: April 2018HC-6.5.59
The internal audit function must inform
senior management of all significant findings so that timely corrective actions can be taken. Subsequently, the internal audit function must follow up withsenior management on the outcome of these corrective measures. The head of the internal audit function must quarterly report to the audit committee, the status of pending findings.Added: April 2018The Relationship between the Internal Audit, Compliance and Risk Management Functions
HC-6.5.60
The relationship between a bank's business units, the support functions and the internal audit function can be explained using the three lines of defence model. The business units are the first line of defence. They undertake the management of risks within assigned limits of risk exposure and are responsible and accountable for identifying, assessing and controlling the risks of their business. The second line of defence includes the support functions, such as risk management, compliance, legal, human resources, finance, operations, and technology. Each of these functions, in close relationship with the business units, ensures that risks in the business units have been appropriately identified and managed. The business support functions work closely to help define strategy, implement bank policies and procedures, and collect information to create a bank-wide view of risks. The third line of defence is the internal audit function that independently assesses the effectiveness of the controls over the processes created in the first and second lines of defence and provides assurance on these processes. The responsibility for internal control does not transfer from one line of defence to the next line.
Added: April 2018Internal Audit within a Group or Holding Company Structure
HC-6.5.61
The internal auditors who perform the internal audit work at the bank must report to the bank's audit committee, or its equivalent, and to the group or holding company's head of internal audit.
Added: April 2018HC-6.5.62
To facilitate a consistent approach to internal audit across all the banks within a banking organisation, the board of directors of each bank within a banking group or holding company structure should ensure that either:
(a) The bank has its own internal audit function, which should be accountable to the bank's board and should report to the banking group or holding company's head of internal audit; or(b) The banking group or holding company's internal audit function performs internal audit activities of sufficient scope at the bank to enable the board to satisfy its fiduciary and legal responsibilities.Added: April 2018HC-6.5.63
The board of directors and
senior management of the parent bank in a banking group must ensure that an adequate and effective internal audit function is established across the banking organisation and must ensure that internal audit policies and practices are appropriate to the structure, business activities and risks of all of the components of the group or holding company.Added: April 2018HC-6.5.64
The head of internal audit at the level of the parent bank must define the group or holding company's internal audit strategy, determine the organisation of the internal audit function both at the parent and subsidiary bank levels (in consultation with these entities' respective audit committees and in accordance with local laws) and formulate the internal audit principles, which include the audit methodology and quality assurance measures.
Added: April 2018HC-6.5.65
The group or holding company's internal audit function must determine the audit scope for the banking organisation. In doing so, it must comply with local legal and regulatory provisions and incorporate local knowledge and experience.
Added: April 2018Outsourcing of Internal Audit Activities
HC-6.5.66
Regardless of whether internal audit activities are outsourced, the board of directors remains ultimately responsible for the internal audit function.
Added: April 2018HC-6.5.67
The head of internal audit/coordinator must maintain adequate oversight and ensure that any outsourcing providers comply with the principles of the bank's internal audit charter.
Added: April 2018HC-6.5.68
To preserve independence, the head of internal audit/coordinator must ensure that the outsourcing provider has not been previously engaged in a consulting engagement in the same area within the bank unless a one year "cooling-off" period has elapsed. Subsequently, those experts who participated in an internal audit engagement must not provide consulting services to a function of the bank they have audited within the previous 12 months. Additionally, banks must not outsource internal audit activities to their own external audit firm (see OM-3).
Added: April 2018Communication between the CBB and the Internal Audit Function
HC-6.5.69
The bank's internal auditor must have formal regular communication with the CBB to (i) discuss the risk areas identified, (ii) understand the risk mitigation measures taken by the bank, and (iii) monitor the bank's response to weaknesses identified.
Added: April 2018HC-6.5.70
At least two weeks prior to the prudential meeting date, all internal audit reports issued since the last prudential meeting must be submitted to the CBB supervisory point of contact.
Added: April 2018HC-6.6 HC-6.6 Risk Management
Bank-wide Risk Management Framework
HC-6.6.1
Islamic bank licensees must establish a sound risk management framework commensurate with the bank's size, complexity and risk profile. A risk management framework must have the following key features:(a) active Board andsenior management oversight;(b) independent risk management function;(c) a Board driven sound risk management culture that is established throughout the bank;(d) appropriate policy, procedures and limits;(e) comprehensive and timely identification, measurement, mitigation, controlling, monitoring and reporting of risks;(f) appropriate management information systems ('MIS') at a business and bank-wide level; and(g) comprehensive internal controls.Added: July 2018HC-6.6.2AA
Further to the requirement in Paragraph HC-B.1.2,
branches of foreign bank licensees must demonstrate that the activities of the Bahrain branch are subject to appropriate risk management oversight commensurate with the size, complexity, nature and the risk profile of the branch.Added: October 2019HC-6.6.2
More specifically, the risk management framework generally encompasses the process of:
(a) developing and implementing the enterprise-wide risk governance framework, Subject to the review and approval of the board, which includes the bank's risk culture, risk appetite and risk limits;(b) identifying key risks to the bank including material individual, aggregate and emerging risks;(c) assessing the key risks and measuring the bank's exposures to them;(d) ongoing monitoring and assessing of the risk taking activities, decisions and risk exposures in line with the board-approved risk strategy, risk appetite, risk limits and determining the corresponding capital or liquidity needs (i.e. capital planning) on an ongoing basis;(e) reporting to senior management, and the board or risk committee as appropriate, on all the items noted in this Paragraph including but not limited to proposing appropriate risk-mitigating actions;(f) establishing an early warning or trigger system for breaches of the bank's risk appetite or limits; and(g) influencing and, when necessary, challenging decisions that give rise to material risk.Added: July 2018HC-6.6.3
Senior management must establish a risk management process that is not limited to credit, market, rate of return risk in the banking book (RRRBB), liquidity and operational risks, but which incorporates all material risks. This includes reputational and strategic risks, as well as risks that do not appear to be significant in isolation, but when combined with other risks, could lead to material losses.Added: July 2018Independent Risk Management Function and Chief Risk Officer
HC-6.6.4
All
Islamic bank licensees must establish an independent Risk Management function and appoint a head of risk management function, referred to as Chief Risk Officer ('CRO') or any equivalent title. The function must be independent of the individual business lines and report directly to the Board of Directors or its Audit or Risk Committees and administratively to the Chief Executive Officer ('CEO'). The role of the CRO must be independent and distinct from other executive functions and business line responsibilities, and there must be no 'dual hatting' (i.e. the chief operating officer, CFO, chief auditor or other senior management personnel must not also serve as the CRO).Added: July 2018HC-6.6.5
For
branches of foreign bank licensees , and where no local board of directors exists, all references in this Module to the board of directors should be interpreted as the Head Office/ Regional Office.Added: July 2018HC-6.6.6
[This Paragraph was deleted in October 2019].
Deleted: October 2019
Added: July 2018HC-6.6.7
Branches of foreign bank licensees operating in Bahrain have the choice of having an in-house risk management function in Bahrain or to outsource such role to their regional or Head offices.Amended: October 2019
Added: July 2018HC-6.6.8
The CRO should have the ability to interpret and articulate risk in a clear and understandable manner and to effectively engage the board and management in constructive dialogue on key risk issues. The CRO should also not have any management or financial responsibility in respect of any operational business lines or revenue-generating functions. Interaction between the CRO and the board should occur regularly and be documented adequately. Non-executive board members should have the right to meet regularly — in the absence of
senior management — with the CRO.Added: July 2018HC-6.6.9
The CRO has primary responsibility for overseeing the development and implementation of the bank's risk management framework. This includes the ongoing strengthening of risk management staff skills and enhancements to risk management systems, policies, processes, quantitative models and reports as necessary to ensure that the bank's risk management capabilities are sufficiently robust and effective to fully support its strategic objectives and all of its risk-taking activities. The CRO is responsible for supporting the board and the Risk Committee, as appropriate, in its engagement with and oversight of the development of the bank's risk strategy, risk appetite statement ('RAS') and for translating the risk appetite into a risk limits structure.
Added: July 2018HC-6.6.10
The risk management function must have access to all business lines that have the potential to generate material risk to the
Islamic bank licensee as well as to relevant risk-bearing subsidiaries.Added: July 2018HC-6.6.11
The CRO, together with management, must be actively engaged in monitoring performance relative to risk-taking and risk limit adherence. The CRO's responsibilities also include participating in key decision-making processes (e.g. strategic planning, capital and liquidity planning, new products and services development and compensation design and operation).
Added: July 2018HC-6.6.12
The CRO must have sufficient organisational stature, authority, seniority within the organisation and necessary skills to oversee the bank's risk management activities.
Added: July 2018HC-6.6.13
Appointment, dismissal and other changes to the CRO position must be approved by the board or its Risk/ Audit Committee. If the CRO is removed from his or her position for any reason, this must be disclosed publicly. The bank must also discuss the reasons for such removal with the CBB. The CRO's performance, compensation and budget must be reviewed and approved by the board Remuneration Committee.
Added: July 2018Board Risk Committee
HC-6.6.14
Further to HC-1.8.1, all
Bahraini Islamic bank licensees must establish a board risk committee composed of at least three independent directors. Such board risk committee must be responsible for supporting the board in its oversight and decisions related to the bank's risk management framework.Added: July 2018HC-6.6.15
The risk committee must meet the following requirements:
(a) must be chaired by an independent director;(b) include a majority of members who are independent of day to day risk taking activities;(c) include members who have experience in risk management issues and practices;(d) develop a committee charter which among other matters include its role in the discussions of risk strategies, both at an aggregated basis and by type of risk and make recommendations to the board thereon, and on the risk appetite and risk limits;(e) review and revise as may be required, the bank's policies from a risk management perspective, at least every three years, unless there are material changes in the relevant Rulebook requirements or to the business conducted by the bank and / or its risk profile;(f) review and recommend the appointment or removal of Chief Risk Officer; and(g) oversee that the bank has in place processes to promote the bank's adherence to the approved risk policies.Added: July 2018Role of Board and Senior Management
HC-6.6.16
The Board must define the
Islamic bank licensee's risk appetite and ensure that the bank's risk management framework is aligned with the bank's strategic, capital strategies and financial plans and compensation practices and includes detailed policy that sets specific bank-wide prudential limits on the bank's activities. The bank's risk appetite must be clearly conveyed through an RAS that can be easily understood by all relevant parties, the board itself,senior management and bank employees.Added: July 2018HC-6.6.17
The
Islamic bank licensee's RAS must:(a) include both quantitative and qualitative considerations;(b) establish the individual and aggregate level and types of risk that the bank is willing to assume in advance of and in order to achieve its business activities within its risk capacity;(c) define the boundaries and business considerations in accordance with which the bank is expected to operate when pursuing the business strategy; and(d) be communicated effectively throughout the bank, linking it to daily operational decision-making and establishing the means to raise risk issues and strategic concerns across the bank.Added: July 2018HC-6.6.18
Developing and conveying the bank's risk appetite is essential to reinforcing a strong risk culture. The risk governance framework should outline actions to be taken when stated risk limits are breached, including disciplinary actions for excessive risk-taking, escalation procedures and board of director notification.
Added: July 2018HC-6.6.19
The development of an effective RAS should be driven by both top-down board leadership and bottom-up management involvement. While the definition of risk appetite may be initiated by senior management, successful implementation depends upon effective interactions between the board, senior management, risk management and operating businesses, including the chief financial officer (CFO).
Added: July 2018HC-6.6.20
The Board must ensure that:
(a) a sound risk management culture is established throughout the bank;(b) appropriate limits are established that are consistent with the bank's risk appetite, risk profile and capital strength, and that are understood by, and regularly communicated to, relevant staff;(c) policy and processes are developed for risk-taking, that are consistent with the Risk Management Strategy and the established risk appetite;(d) uncertainties attached to risk measurement are recognised; and(e)senior management is taking all necessary steps to monitor and control all material risks consistent with the approved strategies and risk appetite.Added: July 2018HC-6.6.21
The Board of Directors and
senior management must possess sufficient knowledge of all major business lines to ensure that appropriate policy, controls and risk monitoring systems are implemented effectively. They must have the necessary expertise to understand the activities in which the bank is involved — such as securitisation and off-balance sheet activities — and the associated risks. The Board andsenior management must remain informed, on an on-going basis, about these risks as financial markets, risk management practices and the bank's activities evolve. In addition, the Board andsenior management must ensure that accountability and lines of authority are clearly delineated.Added: July 2018HC-6.6.22
Before embarking on new lines of business or activities, the Board and
senior management must identify and review the changes in risk profile arising from these potential new activities and ensure that the infrastructure and the internal controls necessary to manage any related risks, are in place.Added: July 2018HC-6.6.23
Before embarking on new or complex products,
senior management must identify and review the changes in risk profile arising from these potential new products and ensure that the infrastructure and internal controls necessary to manage any related risks, are in place.Added: July 2018HC-6.6.24
For purposes of paragraphs HC-6.6.22 and HC-6.6.23,
senior management must understand the underlying assumptions regarding accounting treatment, business models, valuation and risk management practices. In addition,senior management must evaluate the potential risk exposure if those assumptions fail.Added: July 2018HC-6.6.25
As part of the Board members annual training program,
Islamic bank licensees must include training to enable Board members to better analyse risk and question strategic decisions, policy and transactions. Banks must also provide adequate training for all staff across the business units on risk management related matters.Added: July 2018Policy, Procedures, Limits and Controls
HC-6.6.26
An
Islamic bank licensee's policy and procedures must provide specific guidance for the implementation of broad risk management strategies and must establish, where appropriate, internal limits for the various types of risk to which the bank may be exposed. These limits must consider the bank's role in the financial system and be defined in relation to the bank's capital, total assets, earnings or where adequate measures exist, its overall risk level.Added: July 2018HC-6.6.27
An
Islamic bank licensee's policy, procedures and limits must:(a) Provide for adequate and timely identification, measurement, monitoring, control and mitigation of all risks, including the risks posed by its lending, investing, trading, securitisation, off-balance sheet, fiduciary and other significant activities at the business line and bank-wide levels;(b) Ensure that the economic substance of a bank's risk exposures, including reputational risk and valuation uncertainty, are fully recognised and incorporated into the bank's risk management processes;(c) Be consistent with the bank's stated goals and objectives, as well as its overall financial strength;(d) Clearly delineate accountability and lines of authority across the bank's various business activities, and ensure there is a clear separation between business lines and the Risk Management function;(e) Escalate and address breaches of internal position limits;(f) Provide for the review of new businesses and products by bringing together all relevant risk management, control and business lines, to ensure that the bank is able to manage and control the activity, prior to it being initiated; and(g) Include a schedule and process for reviewing the policy, procedures and limits, and for updating them as appropriate.Added: July 2018Monitoring and Reporting of Risk
HC-6.6.28
An
Islamic bank licensee's MIS must provide the Board andsenior management with timely and relevant information concerning their risk profile, in a clear and concise manner. This information must include all risk exposures, including those that are off-balance sheet.Senior management must understand the assumptions behind, and limitations inherent in, specific risk measuresAdded: July 2018HC-6.6.29
Islamic bank licensees must establish appropriate risk management methodologies, tools and models and systems commensurate with the nature and complexity of their business.Added: July 2018HC-6.6.30
Where
Islamic bank licensees use models to measure components of risk, they must establish model governance frameworks including regulatory validation and testing.Added: July 2018HC-6.6.31
Islamic bank licensees must have information systems that are adequate (both under normal circumstances and in periods of stress) for measuring, assessing and reporting on the size, composition and quality of exposures on a bank-wide basis across all risk types, products, countries, region, etc. and counterparties. These reports must reflect the bank's risk profile, capital and liquidity needs, and are provided on a timely basis to the bank's Board andsenior management . A bank's MIS must be capable of capturing limit breaches, and there must be procedures in place to promptly report such breaches tosenior management , as well as to ensure that the appropriate follow-up actions are taken.Added: July 2018HC-6.6.32
The CRO must consistently remind staff, through a regular process under the sponsorship of the CEO, of the risk management requirements and enhance a common understanding of these requirements across the bank in order to create a culture of risk awareness.
Added: July 2018Independent Review
HC-6.6.33
Islamic bank licensees must ensure that their risk management frameworks are subject to a comprehensive independent review by a third-party consultant, other than their external auditors:(a) Upon first implementation of a new or revised module on specific risk management requirements;(b) When there are material changes to certain Rulebook requirements and the CBB requires such a review;(c) When there are material changes to the business conducted by the bank or its risk profile and the CBB requires such a review; or(d) In case of a major failure of controls or major adverse changes in relevant business environment and the CBB requires such a review.Amended: January 2022
Added: July 2018HC-6.6.34
With regards to HC-6.6.33(a), the relevant modules are the following:
(a) Module IC;(b) Module CA;(c) Module DS;(d) Module CM;(e) Module OM;(f) Module ST;(g) Module LM; and(h) Module RR.Amended: January 2022
Added: July 2018HC-6.6.35
Resources involved in the independent third-party review must be competent and appropriately trained. The independent third party must not have been previously involved in the development, implementation and operation of the bank’s risk management framework.
Added: January 2022HC-6.6.36
The independent review reports must be presented to the Board or a designated committee of the Board. The agreed action planning steps to remedy any material weaknesses must be documented. The independent report together with the action plan must be provided to the CBB within one month of the date of the report.
Added: January 2022HC-7 HC-7 Communication between Board and Shareholders
HC-7.1 HC-7.1 Principle
HC-7.1.1
The
Islamic bank licensee must communicate with shareholders, encourage their participation, and respect their rights.October 2010HC-7.2 HC-7.2 Conduct of Shareholders' Meetings
HC-7.2.1
The Board must observe both the letter and the intent of the Company Law's requirements for shareholder meetings. Among other things:
(a) Notices of meetings must be honest, accurate and not misleading. They must clearly state and, where necessary, explain the nature of the business of the meeting;(b) Meetings must be held during normal business hours and at a place convenient for the greatest number of shareholders to attend;(c) Notices of meetings must encourage shareholders to attend shareholder meetings and, if not possible, to participate by proxy and must refer to procedures for appointing a proxy and for directing the proxy how to vote on a particular resolution. The proxy agreement must list the agenda items and must specify the vote (such as "yes," "no" or "abstain");(d) Notices must ensure that all material information and documentation is provided to shareholders on each agenda item for any shareholder meeting, including but not limited to any recommendations or dissents of directors;(e) The Board must propose a separate resolution at any meeting on each substantially separate issue, so that unrelated issues are not "bundled" together;(f) In meetings where directors are to be elected or removed the Board must ensure that each person is voted on separately, so that the shareholders can evaluate each person individually;(g) The chairman of the meeting must encourage questions from shareholders, including questions regarding theIslamic bank licensee's corporate governance guidelines;(h) The minutes of the meeting must be made available to shareholders upon their request as soon as possible but not later than 30 days after the meeting; and(i) Disclosure of all material facts must be made to the shareholders by the Chairman prior to any vote by the shareholders.Amended: April 2011
October 2010HC-7.2.2
The
Bahraini Islamic bank licensee should require all directors to attend and be available to answer questions from shareholders at any shareholder meeting and, in particular, ensure that the chairs of the audit, remuneration and nominating committees are ready to answer appropriate questions regarding matters within their committee's responsibility (it being understood that confidential and proprietary business information may be kept confidential).Amended: April 2016
October 2010HC-7.2.3
The
Bahraini Islamic bank licensee should require its external auditor to attend the annual shareholders' meeting and be available to answer shareholders' questions concerning the conduct and conclusions of the audit.Amended: April 2016
October 2010HC-7.2.3A
Bahraini Islamic bank licensees must provide to the CBB, for its review and comment, at least 5 business days prior to communicating with the shareholders or publishing in the press, the draft agenda for any shareholders' meetings referred to in Paragraph HC-7.2.3C.Amended: July 2017
April 2016HC-7.2.3B
Bahraini Islamic bank licensees must ensure that any agenda items to be discussed or presented during the course of meetings which require the CBB's prior approval, have received the necessary approval, prior to the meeting taking place.Added: April 2016HC-7.2.3C
The
Bahraini Islamic bank licensee must invite a representative of the CBB to attend any shareholders' meetings (i.e. ordinary and extraordinary general assembly) taking place. The invitation must be provided to the CBB at least 5 business days prior to the meeting taking place.Added: April 2016HC-7.2.3D
Within a maximum of 15 calendar days of any shareholders' meetings referred to in Paragraph HC-7.2.3C, the
Bahraini Islamic bank licensee must provide to the CBB a copy of the minutes of the meeting.Added: April 2016HC-7.2.4
The
Islamic bank licensee should maintain a website. TheIslamic bank licensee should dedicate a specific section of its website to describing shareholders' rights to participate and vote at each shareholders' meeting, and should post significant documents relating to meetings including the full text of notices and minutes. TheIslamic bank licensee may also consider establishing an electronic means for shareholders' communications including appointment of proxies. For confidential information, theIslamic bank licensee should grant a controlled access to such information to its shareholders.Amended: April 2017
October 2010HC-7.2.5
In notices of meetings at which directors are to be elected or removed the
Islamic bank licensee should ensure that:(a) Where the number of candidates exceeds the number of available seats, the notice of the meeting should explain the voting method by which the successful candidates will be selected and the method to be used for counting of votes; and(b) The notice of the meeting should present a factual and objective view of the candidates so that shareholders may make an informed decision on any appointment to the board.Amended: April 2012
October 2010HC-7.3 HC-7.3 Direct Shareholder Communication
HC-7.3.1
The chairman of the Board (and other directors as appropriate) must maintain continuing personal contact with
controllers to solicit their views and understand their concerns. The chairman must ensure that the views of shareholders are communicated to the Board as a whole. The chairman must discuss governance and strategy withcontrollers . Given the importance of market monitoring to enforce the "comply or explain" approach of this Module, the Board should encourage investors, particularly institutional investors, to help in evaluating theIslamic bank licensee's corporate governance (see also HC-1.2 and 1.3 for other duties of the Chairman).October 2010HC-7.4 HC-7.4 Controllers
HC-7.4.1
In
Islamic bank licensees with one or morecontrollers , the chairman and other directors must actively encourage thecontrollers to make a considered use of their position and to fully respect the rights of minority shareholders (see also HC-1.2 and 1.3 for other duties of the Chairman).October 2010HC-8 HC-8 Corporate Governance Disclosure
HC-8.1 HC-8.1 Principle
HC-8.1.1
The
Islamic bank licensee must disclose its corporate governance.October 2010HC-8.2 HC-8.2 Disclosure Under the Company Law and CBB Requirements
HC-8.2.1
In each
Islamic bank licensee :(a) The Board must adopt written corporate governance guidelines covering the matters stated in this Module and Module PD and other corporate governance matters deemed appropriate by the Board. Such guidelines must include or refer to the principles and rules of Module HC;(b) TheIslamic bank licensee must publish the guidelines on its website;(c) At each annual shareholders' meeting the Board must report on theIslamic bank licensee's compliance with its guidelines and Module HC, and explain the extent if any to which it has varied them or believes that any variance or noncompliance was justified; and(d) At each annual shareholders' meeting the Board must also report on further items listed in Module PD. Such information should be maintained on theIslamic bank licensee's website or held at theIslamic bank licensee's premises on behalf of the shareholders.Amended: April 2017
October 2010HC-8.2.2
The CBB may issue a template as a guide for an
Islamic bank licensee's annual meeting corporate governance discussion.October 2010Board's Responsibility for Disclosure
HC-8.2.3
The Board must oversee the process of disclosure and communications with internal and external stakeholders. The Board must ensure that disclosures made by the bank are fair, transparent, comprehensive and timely and reflect the character of the bank and the nature, complexity and risks inherent in the bank's business activities. Disclosure policies must be reviewed for compliance with the Central Bank's disclosure requirements (see Chapter PD-1).
October 2010HC-9 HC-9 The Principles of Islamic Shari'a
HC-9.1 HC-9.1 Principle
HC-9.1.1
Banks which refer to themselves as "Islamic" must follow the principles of Islamic Shari'a.
October 2010HC-9.2 HC-9.2 Governance and Disclosure Per Shari'a Principles
HC-9.2.1
Islamic bank licensees which are guided by the principles of Islamic Shari'a have additional responsibilities to their stakeholders.Islamic bank licensees which refer to themselves as "Islamic" are subject to additional governance requirements and disclosures to provide assurance to stakeholders that they are following Shari'a Principles. In ensuring compliance with Shari'a principles, eachIslamic bank licensee must establish an independent Shari'a Supervisory Board consisting of at least three Shari'a scholars and complying with AAOIFI's Governance Standards for Islamic Financial Institutions No.1 and No.2.October 2010HC-9.2.2
The Board shall set up a Corporate Governance Committee (see also Chapter HC-8). In this case, the Committee shall comprise at least three members to co-ordinate and integrate the implementation of the governance policy framework.
October 2010HC-9.2.3
In addition to its duties outlined in Chapter HC-3 and Appendix A, the Audit Committee shall communicate and co-ordinate with the
Islamic bank licensee's Corporate Governance Committee and the Shari'a Supervisory Board ("SSB") (where applicable) to ensure that information on compliance with Islamic Shari'a rules and principles is reported in a timely manner.October 2010HC-9.2.4
The Corporate Governance Committee established under Chapter HC-9 shall comprise at a minimum of:
(a) Anindependent director to chair the Corporate Governance Committee. The Chairman of the Corporate Governance Committee should not only possess the relevant skills, such as the ability to read and understand financial statements, but should also be able to coordinate and link the complementary roles and functions of the Corporate Governance Committee and the Audit Committee;(b) A Shari'a scholar who is an SSB member for the purpose of leading the Corporate Governance Committee on Shari'a-related governance issues (if any), and also to coordinate and link the complementary roles and functions of the Corporate Governance Committee and the SSB; and(c) Anindependent director who can offer different skills to the committee, such as legal expertise and business proficiency, which are considered particularly relevant by the Board of directors for cultivating a good corporate governance culture, and deemed "fit and proper" by the CBB.October 2010HC-9.2.5
The Corporate Governance Committee shall be empowered to:
(a) Oversee and monitor the implementation of the governance policy framework by working together with the management, the Audit Committee and the SSB; and(b) Provide the Board of directors with reports and recommendations based on its findings in the exercise of its functions.October 2010HC-9.2.6
All Islamic Bank Licensees must comply with all AAOIFI issued accounting standards as well as applicable Shari'a pronouncements issued by the Shari'a Board of AAOIFI. The Islamic Bank Licensee must have a separate function of Shari'a review to verify compliance with the above. The internal Shari'a review must be carried out in accordance with AAOIFI governance standard No.3. The Shari'a review function may be located in the Internal audit function of the Islamic Bank Licensee.
October 2010Appendix A Appendix A Audit Committee
Committee Duties
The Committee's duties shall include those stated in Paragraph HC-3.2.1.
October 2010Committee Membership and Qualifications
The Committee shall have at least three members. Such members must have no conflict of interest with any other duties they have for the
Islamic bank licensee .A majority of the members of the committee including the Chairman shall be
independent directors .The CEO must not be a member of this committee.
The committee members must have sufficient technical expertise to enable the committee to perform its functions effectively. Technical expertise means that members must have recent and relevant financial ability and experience, which includes:
(a) An ability to read and understand corporate financial statements including anIslamic bank licensee's balance sheet, income statement and cash flow statement and changes in shareholders' equity;(b) An understanding of the accounting principles which are applicable to theIslamic bank licensee's financial statements;(c) Experience in evaluating financial statements that have a level of accounting complexity comparable to that which can be expected in theIslamic bank licensee's business;(d) An understanding of internal controls and procedures for financial reporting; and(e) An understanding of the audit committee's controls and procedures for financial reporting.Amended: January 2012
Amended: April 2011
October 2010Committee Duties and Responsibilities
In serving those duties, the Committee shall:
(a) Be responsible for the selection, appointment, remuneration, oversight and termination where appropriate of the external auditor, subject to ratification by theIslamic bank licensee's Board and shareholders. The external auditor shall report directly to the committee;(b) Make a determination at least once each year of the external auditor's independence, including:(i) Determining whether its performance of any non-audit services compromised its independence (the committee may establish a formal policy specifying the types of non-audit services which are permissible) and;(ii) Obtaining from the external auditor a written report listing any relationships between the external auditor and theIslamic bank licensee or with any other person or entity that may compromise the auditor's independence;(c) Review and discuss with the external auditor the scope and results of its audit, any difficulties the auditor encountered including any restrictions on its access to requested information and any disagreements or difficulties encountered with management;(d) Review and discuss with management and the external auditor each annual and each quarterly financial statements of theIslamic bank licensee including judgments made in connection with the financial statements;(e) Review and discuss and make recommendations regarding the selection, appointment and termination where appropriate of the head of internal audit and head of compliance and the budget allocated to the internal audit and compliance function, and monitor the responsiveness of management to the committee's recommendations and findings;(f) Review and discuss the activities, performance and adequacy of theIslamic bank licensee's internal auditing and compliance personnel and procedures and its internal controls and compliance procedures, risk management systems, and any changes in those;(g) Oversee theIslamic bank licensee's compliance with legal and regulatory requirements, codes and business practices, and ensure that the bank communicates with shareholders and relevant stakeholders (internal and external) openly and promptly, and with substance of compliance prevailing over form; and(h) Review and discuss possible improprieties in financial reporting or other matters, and ensure that arrangements are in place for independent investigation and follow-up regarding such matters;(i) The committee must monitor rotation arrangements for audit engagement partners. The audit committee must monitor the performance of the external auditor and the non-audit services provided by the external auditor; and(j) The review and supervision of the implementation of, enforcement of and adherence to the bank's code of conduct.Amended: October 2012
Amended: April 2012
Amended: April 2011
October 2010Committee Structure and Operations
The committee shall elect one member as its chair.
The committee shall meet at least four times a year. Its meetings may be scheduled in conjunction with regularly-scheduled meetings of the entire Board.
The committee may meet without any other director or any officer of the
Islamic bank licensee present. Only the committee may decide if a non-member of the committee should attend a particular meeting or a particular agenda item. Non-members who are not directors of theIslamic bank licensee may attend to provide their expertise, but may not vote. It is expected that the external auditor's lead representative will be invited to attend regularly but that this shall always be subject to the committee's decision.The committee must meet with the external auditor at least twice per year, and at least once per year in the absence of any members of executive management.
The committee shall report regularly to the full Board on its activities.
October 2010Committee Resources and Authority
The committee shall have the resources and authority necessary for its duties and responsibilities, including the authority to select, retain, terminate and approve the fees of outside legal, accounting or other advisors as it deems necessary or appropriate, without seeking the approval of the Board or management. The
Islamic bank licensee shall provide appropriate funding for the compensation of any such persons.October 2010Committee Performance Evaluation
The committee shall prepare and review with the Board an annual performance evaluation of the committee, which shall compare the committee's performance with the above requirements and shall recommend to the Board any improvements deemed necessary or desirable to the committee's charter. The report must be in the form of a written report provided at any regularly scheduled Board meeting.
Amended: July 2012
Amended: April 2012
October 2010Appendix B Appendix B Nominating Committee
Committee Duties
The committee's duties shall include those stated in Paragraph HC-4.2.1.
October 2010Committee Duties and Responsibilities
In serving those duties with respect to Board membership:
(a) The committee shall make recommendations to the Board from time to time as to changes the committee believes to be desirable to the size of the Board or any committee of the Board;(b) Whenever a vacancy arises (including a vacancy resulting from an increase in Board size), the committee shall recommend to the Board a person to fill the vacancy either through appointment by the Board or through shareholder election;(c) In performing the above responsibilities, the committee shall consider any criteria approved by the Board and such other factors as it deems appropriate. These may include judgment, specific skills, experience with other comparable businesses, the relation of a candidate's experience with that of other Board members, and other factors;(d) The committee shall also consider all candidates for Board membership recommended by the shareholders and any candidates proposed by management;(e) The committee shall identify Board members qualified to fill vacancies on any committee of the Board and recommend to the Board that such person appoint the identified person(s) to such committee; and(f) Assuring that plans are in place for orderly succession of senior management.In serving those purposes with respect to officers the committee shall:
(a) Make recommendations to the Board from time to time as to changes the committee believes to be desirable in the structure and job descriptions of the officers including the CEO, and prepare terms of reference for each vacancy stating the job responsibilities, qualifications needed and other relevant matters including integrity, technical and managerial competence, and experience;(b) Overseeing succession planning and replacing key executives when necessary, and ensuring appropriate resources are available, and minimising reliance on key individuals;(c) Design a plan for succession and replacement of officers including replacement in the event of an emergency or other unforeseeable vacancy; and(d) If charged with responsibility with respect toIslamic bank licensee's corporate governance guidelines, the committee shall develop and recommend to the Board corporate governance guidelines, and review those guidelines at least once a year.Amended: April 2011
October 2010Committee Structure and Operations
The committee shall elect one member as its chair.
The committee shall meet at least twice a year. Its meetings may be scheduled in conjunction with regularly-scheduled meetings of the entire Board.
October 2010Committee Resources and Authority
The committee shall have the resources and authority necessary for its duties and responsibilities, including the authority to select, retain, terminate and approve the fees of outside legal, consulting or search firms used to identify candidates, without seeking the approval of the Board or management. The
Islamic bank licensee shall provide appropriate funding for the compensation of any such persons.October 2010Performance Evaluation
The committee shall preview and review with the Board an annual performance evaluation of the committee, which shall compare the committee's performance with the above requirements and shall recommend to the Board any improvements deemed necessary or desirable to the committee's charter. The report must be in the form of a written report provided at any regularly scheduled Board meeting.
Amended: July 2012
Amended: April 2012
October 2010Appendix C Appendix C Remuneration Committee
Committee Duties
The committee's duties shall include those stated in Paragraph HC-5.2.1.
Amended: January 2011
October 2010Committee Duties and Responsibilities
In serving those duties the committee shall consider, and make specific recommendations to the Board on, both
remuneration policy and individualremuneration packages for theapproved persons and othermaterial risk-takers as well as the total variableremuneration to be distributed. Thisremuneration policy should cover at least:(a) The following components:(i) Salary;(ii) The specific terms of performance-related plans including any stock compensation, stock options, or other deferred-benefit compensation;(iii) Pension plans;(iv) Fringe benefits such as non-salary perks; and(v) Termination policies including any severance payment policies; and(b) Policy guidelines to be used for determiningremuneration in individual cases, including on:(i) The relative importance of each component noted in a) above;(ii) Specific criteria to be used in evaluating a senior manager's performance.The committee shall evaluate the
approved persons andmaterial risk-takers' performance in light of the bank's corporate goals, agreed strategy, objectives and business plans and may consider theIslamic bank licensee's performance and shareholder return relative to comparableIslamic bank licensees , the value of awards toCEOs at comparableIslamic bank licensees , and awards to theCEO in past years.The committee should also be responsible for retaining and overseeing outside consultants or firms for the purpose of determining
approved persons andmaterial risk-takers' remuneration, administering remuneration plans, or related matters.Amended: January 2014
Amended: April 2011
October 2010Committee Structure and Operations
The committee shall elect one member as its chair.
The committee shall meet at least twice a year. Its meetings may be scheduled in conjunction with regularly-scheduled meetings of the entire Board.
October 2010Committee Resources and Authority
The committee shall have the resources and authority necessary for its duties and responsibilities, including the authority to select, retain, terminate and approve the fees of outside legal, consulting or compensation firms used to evaluate the compensation of directors, the
CEO or other approved persons, without seeking the approval of the Board or management. TheIslamic bank licensee shall provide appropriate funding for the compensation of any such persons.October 2010Performance Evaluation
The committee shall preview and review with the Board an annual performance evaluation of the committee, which shall compare the committee's performance with the above requirements and shall recommend to the Board any improvements deemed necessary or desirable to the committee's charter. The report must be in the form of a written report provided at any regularly scheduled Board meeting.
Amended: July 2012
Amended: April 2012
October 2010AU AU Auditors and Accounting Standards
AU-A AU-A Introduction
AU-A.1 AU-A.1 Purpose
AU-A.1.1
This Module presents requirements that have to be met by
Islamic bank licensees with respect to the appointment of external auditors. This Module also sets out certain obligations that external auditors have to comply with, as a condition of their appointment byIslamic bank licensees .AU-A.1.2
This Module is issued under the powers given the BMA under Article 41 of the BMA Law 1973. It supplements Article 79 of the BMA Law, which requires licensees to appoint an external auditor acceptable to the BMA.
AU-A.2 AU-A.2 Module History
Evolution of Module
AU-A.2.1
This Module was first issued as Module AU (Audit Firms) in January 2005, as part of the first release of Volume 2 (Islamic banks) of the BMA Rulebook. It was subsequently reissued in full in July 2006 (and renamed "Auditors and Accounting Standards").
AU-A.2.2
The reissued Module was one of several Modules modified to reflect the introduction of the BMA's new integrated license framework. Although the new framework did not change the substance of the requirements contained in this Module, the Module was re-issued in order to simplify its drafting and layout and align it with equivalent Modules in other Volumes of the BMA Rulebook.
AU-A.2.3
This Module is dated July 2006. Pages that are subsequently changed in this Module are updated with the end-calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
AU-A.2.4
A list of changes made to this Module is provided below:
Module Reference Change Date Description of Changes Whole module July 2006 Module renamed as Module AU (Auditors and Accounting Standards). Text redrafted but substance of requirements left unchanged. Superseded Requirements
AU-A.2.5
Circular Ref Date of Issue Module Ref.
(July 2004 version)Circular Subject BC/5/82 5 Aug 1982 AU 1.1 Approval of Appointment of Auditors ODG/59/99 15 Jul 1999 AU 1.1–AU 1.2 Audit Partners of External Auditors and Reporting Accountants of Locally Incorporated Banks PIRI Pack - - - - - AU 1.4, AU 3.7 Prudential Information Returns for Islamic Financial Institutions ODG/162/03 (partial) 21 May 2003 AU 1.4–AU 1.4, AU 2.2 Outsourcing BS/9/03 (partial) 14 Sep 2003 AU 1.5 Operational Risk Management BC/1/97 12 Feb 1997 AU 1.6 Request for Approval for Dividend Distribution BC/4/99 (partial) 17 Mar 1999 AU 1.6, AU 3.7 Annual Accounts for the Year Ending 31 December 1999 14/86 19 Jun 1986 AU 2.1 Auditors' Relationship with Supervisors BMA/751/93 (partial) 8 Jul 1993 AU 3.2 Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange. BC/1/99 22 Feb 1999 AU 3.3 Enhancing Bank Transparency EDBC/6/01 (partial) 14 Oct 2001 AU 3.4 Money laundering RegulationBC/6/97 21 Apr 1997 AU 4 Reporting Accountants AU-B AU-B Scope of Application
AU-B.1 AU-B.1 Islamic bank Licensees
AU-B.1.1
The contents of this Module — unless otherwise stated — apply to all
Islamic bank licensees .AU-B.2 AU-B.2 Auditors
AU-B.2.1
Certain requirements in this Module extend to auditors, by virtue of their appointment by
Islamic bank licensees . Auditors appointed byIslamic bank licensees must be independent (cf. Sections AU-1.4 and AU-1.5). Auditors who resign or are otherwise removed from office must inform the BMA in writing of the reasons for the termination of their appointment (cf. Section AU-1.2). Other requirements are contained in Sections AU-1.3 (Audit partner rotation) and AU-3 (Auditor reports).AU-1 AU-1 Auditor Requirements
AU-1.1 AU-1.1 Appointment of Auditors
AU-1.1.1
Islamic bank licensees must obtain prior written approval from the BMA before appointing or re-appointing their auditors.AU-1.1.2
As the appointment of auditors normally takes place during the course of the firm's annual general meeting,
Islamic bank licensees should notify the BMA of the proposed agenda for the annual general meeting in advance of it being circulated to shareholders. The BMA's approval of the proposed auditors does not limit in any way shareholders' rights to subsequently reject the Board's choice.AU-1.1.3
The BMA, in considering the proposed (re-)appointment of an auditor, takes into account the expertise, resources and reputation of the audit firm, relative to the size and complexity of the licensee. The BMA will also take into account the track record of the audit firm in auditing
Islamic bank licensees within Bahrain; the degree to which it has generally demonstrated independence from management in its audits; and the extent to which it has identified and alerted relevant persons of significant matters. Finally, the BMA will also consider the audit firm's compliance with applicable laws and regulations (including legislative Decree No. 26 of 1996; the Ministry of Industry and Commerce's Ministerial Resolution No. 6 of 1998; and relevant Bahrain Stock Exchange regulations).AU-1.1.4
In the case of
overseas Islamic bank licensees , the BMA will also take into account who act as the auditors of the parent firm. As a general rule, the BMA does not favour different parts of a banking firm or group having different auditors.AU-1.2 AU-1.2 Removal or Resignation of Auditors
AU-1.2.1
Islamic bank licensees must notify the BMA as soon as they intend to remove their auditors, with an explanation of their decision, or as soon as their auditors resign.AU-1.2.2
Islamic bank licensees must ensure that a replacement auditor is appointed (subject to BMA approval as per Section AU-1.1), as soon as reasonably practicable after a vacancy occurs, but no later than three months.AU-1.2.3
An auditor who resigns or is otherwise removed from the office of auditor must, within 30 days of the resignation or removal, write to the BMA setting out the reasons for the resignation or removal.
AU-1.3 AU-1.3 Audit Partner Rotation
AU-1.3.1
Unless otherwise exempted by the BMA,
Islamic bank licensees must ensure that the audit partner responsible for their audit does not undertake that function more than five years in succession.AU-1.3.2
Islamic bank licensees must notify the BMA of any change in audit partner.AU-1.4 AU-1.4 Auditor Independence
AU-1.4.1
Before an
Islamic bank licensee appoints an auditor, it must take reasonable steps to ensure that the auditor has the required skill, resources and experience to carry out the audit properly, and is independent of the licensee.AU-1.4.2
For an auditor to be considered independent, it must, among things, comply with the restrictions in Section AU-1.5.
AU-1.4.3
If an
Islamic bank licensee becomes aware at any time that its auditor is not independent, it must take reasonable steps to remedy the matter and notify the BMA of the fact.AU-1.4.4
If in the opinion of the BMA, independence has not been achieved within a reasonable timeframe, then the BMA may require the appointment of a new auditor.
AU-1.5 AU-1.5 Licensee/Auditor Restrictions
Financial Transactions with Auditors
AU-1.5.1
Islamic bank licensees must not lend to their auditors, nor enter into any contracts of professional indemnity insurance with their auditors.Outsourcing to Auditors
AU-1.5.2
Section OM-2.7 generally prohibits
Islamic bank licensees from outsourcing their internal audit function to the same firm that acts as their external auditors. However, the BMA may allow short-term outsourcing of internal audit operations to anIslamic bank licensee's external auditor, to meet unexpected urgent or short-term needs (for instance, on account of staff resignation or illness). Any such arrangement will normally be limited to a maximum period of one year and is subject to BMA prior approval.Other Relationships
AU-1.5.3
Islamic bank licensees and their auditors must comply with the restrictions contained in Article 217 (c) of the Commercial Companies Law (Legislative Decree No. (21) of 2001).AU-1.5.4
Article 217(c) prohibits an auditor from (i) being the chairman or a member of the Board of Directors of the company he/she audits; (ii) holding any managerial position in the company he/she audits; and (iii) acquiring any shares in the company he/she audits, or selling any such shares he/she may already own, during the period of his audit. Furthermore, the auditor must not be a relative (up to the second degree) of a person assuming management or accounting duties in the company.
AU-1.5.5
The restriction in Paragraph AU-1.5.3 applies to
overseas Islamic bank licensees as well asBahraini Islamic bank licensees .AU-1.5.6
A partner, Director or manager on the engagement team of auditing an
Islamic bank licensee may not serve on the Board or in acontrolled function of the licensee, for two years following the end of their involvement in the audit, without prior authorisation of the BMA.AU-1.5.7
Chapter HC-2 sets out the BMA's "controlled functions" requirements.
Definition of "Auditor"
AU-1.5.8
For the purposes of Section AU-1.5, "auditor" means the partners, Directors and managers on the engagement team responsible for the audit of the
Islamic bank licensee .AU-2 AU-2 Access
AU-2.1 AU-2.1 BMA Access to Auditors
AU-2.1.1
Islamic bank licensees must waive any duty of confidentiality on the part of their auditors, such that their auditors may report to the BMA any concerns held regarding material failures by theIslamic bank licensee to comply with BMA requirements.AU-2.1.2
The BMA may, as part of its on-going supervision of
Islamic bank licensees , request meetings with a licensee's auditors. If necessary, BMA may direct that the meeting be held without the presence of the licensee's management or Directors.AU-2.2 AU-2.2 Auditor Access to Outsourcing Providers
AU-2.2.1
Rule OM-2.5.1 (c) on
outsourcing agreements betweenIslamic bank licensees andoutsourcing providers requireslicensees to ensure that their internal and external auditors have timely access to any relevant information they may require to fulfil their responsibilities. Such access must allow them to conduct on-site examinations of theoutsourcing provider , if required.AU-3 AU-3 Auditor Reports
AU-3.1 AU-3.1 Review of Financial Disclosures
AU-3.1.1
Islamic bank licensees that are required to publish financial disclosures in accordance with Chapters PD-2 and PD-3 must arrange for their external auditors to review these prior to their publication, unless otherwise exempted in writing by BMA.AU-3.1.2
Chapter PD-2 requires
overseas Islamic bank licensees operating as retail banks to publish on semi-annual basis summary information on their balance sheet and profit and loss account, in the same format as their annual audited accounts. Chapter PD-3 requires all locally incorporated Islamic bank licensees to publish quarterly financial statements, in accordance with Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). For products and activities not covered by AAOIFI, International Accounting Standards (IAS) should be followed.AU-3.2 AU-3.2 Report on Compliance with Financial Crime Rules
AU-3.2.1
Islamic bank licensees must arrange for their external auditors to report on the licensee's compliance with the requirements contained in Module FC (Financial Crime), at least once a year.AU-3.2.2
The report specified in Rule AU-3.2.1 must be in the form agreed by BMA, and must be submitted to the BMA within four months of the licensee's financial year-end.
AU-3.2.3
The context to the above requirement can be found in Section FC-4.3.
AU-3.3 AU-3.3 Review of Compliance with relevant laws
AU-3.3.1
Islamic bank licensees must arrange for their external auditors to review the bank's compliance with applicable laws and declare, in the auditors report, that no material violations of the following laws and regulations have taken place:(a) The Bahrain Commercial Companies Law of 2001;(b) The BMA Law 1973; and(c) The BMA's licensing conditions, and other rules contained in Volume 2 of the BMA Rulebook.AU-3.3.2
For the purposes of Rule AU-3.3.1, material violations are violations that have any material impact on the financial statements of the bank.
AU-3.4 AU-3.4 Report on material differences
AU-3.4.1
Islamic bank licensees must arrange for their external auditors to provide to the BMA explanations for any material differences in data reported in the bank's audited accounts and in the following reports provided to the BMA:(a) Prudential Information Returns for Islamic Banks (PIRI); and(b) Monthly Statements of Assets and Liabilities.AU-3.5 AU-3.5 Report on behavioural adjustments
AU-3.5.1
Islamic bank licensees that have been given BMA approval to apply behavioural adjustments to the liquidity data provided in Section E of the PIRI Form, must arrange for their external auditors to verify the supporting data used to support the behavioural adjustments made.AU-4 AU-4 Accounting Standards
AU-4.1 AU-4.1 General Requirements
AU-4.1.1
Islamic bank licensees must comply with Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). For products and activities not covered by AAOIFI, International Financial Reporting Standards (IFRS) / International Accounting Standards (IAS) must be followed.GR GR General Requirements
GR-A GR-A Introduction
GR-A.1 GR-A.1 Purpose
GR-A.1.1
The General Requirements Module presents a variety of different requirements that are not extensive enough to warrant their own stand-alone Module, but for the most part are generally applicable. These include general requirements on books and records; on the use of corporate and trade names; and on
controllers . Each set of requirements is contained in its own Chapter: a table listing these and their application to licensees is given in Chapter GR-B.GR-A.2 GR-A.2 Module History
Evolution of Module
GR-A.2.1
This Module was first issued in July 2006, with immediate effect, as a new Module aimed at aligning the structure and contents of Volume 2 with other Volumes of the BMA Rulebook. It is dated July 2006. All subsequent changes to this Module are annotated with the end-calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
GR-A.2.2
The July 2006 version of Module GR does not introduce new requirements. Rather, it incorporates the record keeping requirements previously contained in Chapter LR-6 of the Licensing and Authorisation Requirement Module (reissued, in July 2006, as the Licensing Module). It also incorporates the requirements relating to
controllers , previously contained in Chapter HC-2 of the High-Level Controls Module. Finally, Module GR expands on certain requirements that were previously contained only in the BMA Law 1973, such as the requirement to seek BMA approval for use of a corporate or trading name.GR-A.2.3
A list of recent changes made to this Module is detailed in the table below:
Module Ref. Change Date Description of Changes Superseded Requirements
GR-A.2.4
This Module supersedes:
Circular / other reference Provision Subject Module LR (April 2006 version) LR-6: Record Keeping Record keeping requirements were moved to GR-1, and edited down to simplify and avoid duplication of record keeping requirements contained in Module FC. Module HC (April 2006 version) HC-2: 'Fit and Proper Requirement' Requirements relating to controllers were moved to GR-5. Remaining 'fit and proper' elements regarding Directors and key employees of licensees were retained in HC-2, in a re-drafted form. GR-B GR-B Scope of Application
GR-B.1 GR-B.1 Islamic Bank Licensees
License categories
GR-B.1.1
The requirements in Module GR (General Requirements) apply to both retail and wholesale
Islamic bank licensees .Bahraini and overseas Islamic bank licensees
GR-B.1.2
The scope of application of Module GR (General Requirements) is as follows:
Chapter Bahraini Islamic bank licensees Overseas bank licensees GR-1 GR-1.1 and GR-1.3 apply to the whole bank; GR-1.2 applies to business booked in Bahrain only. Applies to the Bahrain branch only. GR-2 Applies to the whole bank. Applies to the Bahrain branch only. GR-3 Applies to the whole bank. Doesn't apply. GR-4 Applies to the whole bank. Applies to the Bahrain branch only. GR-5 Applies to the whole bank. Applies to the whole bank. GR-6 [This chapter has been left blank.] [This chapter has been left blank.] GR-7 Applies to the whole bank. Applies to the Bahrain branch only. GR-B.1.3
In the case of
Bahraini Islamic bank licensees , certain requirements apply to the whole bank, irrespective of the location of its business; other requirements apply only in respect to business booked in Bahrain. In the case ofoverseas Islamic bank licensees , the requirements of Module GR mostly only apply to business booked in the Bahrain branch.GR-1 GR-1 Books and Records
GR-1.1 GR-1.1 General Requirements
GR-1.1.1
The requirements in Section GR-1.1 apply to
Bahraini Islamic bank licensees , with respect to the business activities of the whole bank (whether booked in Bahrain or in a foreign branch). The requirements in Section GR-1.1 also apply tooverseas Islamic bank licensees , but only with respect to the business booked in their branch in Bahrain.GR-1.1.2
All
Islamic bank licensees must maintain books and records (whether in electronic or hard copy form) sufficient to produce financial statements and show a complete record of the business undertaken by a licensee. These records must be retained for at least the minimum period specified under Bahrain law.GR-1.1.3
GR-1.1.2 includes accounts, books, files and other records (e.g. trial balance, general ledger, nostro/vostro statements, reconciliations and lists of counterparties). It also includes records that substantiate the value of the assets, liabilities and off balance sheet activities of the licensee (e.g. client activity files and valuation documentation). Finally, it includes any email records that are directly related to transactions (such as payment instructions from customers or other third parties).
GR-1.1.4
Bahrain law currently requires corporate records to be retained for at least 5 years (see Ministerial Order No. 23 of 2002, made pursuant to the Amiri Decree Law No. 4 of 2001).
GR-1.1.5
Unless otherwise agreed with the BMA in writing, records must be kept in either English or Arabic; or else accompanied by a certified English or Arabic translation. Records must be kept current. The records must be sufficient to allow an audit of the licensee's business or an on-site examination of the licensee by the BMA.
GR-1.1.6
If a licensee wishes to retain certain records in a language other than English or Arabic without translation, the licensee should write to the BMA, explaining which types of records it wishes to keep in a foreign language, and why systematically translating these may be unreasonable. Generally, only financing contracts or similar original transaction documents may be kept without translation. Where exemptions are granted by BMA, the licensee is nonetheless asked to confirm that it will make available certified translations of such documents, if requested by BMA for an inspection or other supervisory purpose.
GR-1.1.7
Translations produced in compliance with Rule GR-1.1.5 may be undertaken in-house, by an employee or contractor of the licensee, providing they are certified by an appropriate officer of the licensee.
GR-1.1.8
Records must be accessible at any time from within the Kingdom of Bahrain, or as otherwise agreed with the BMA in writing.
GR-1.1.9
Where older records have been archived, or in the case of records relating to overseas branches of
Bahraini Islamic bank licensees , the BMA may accept that records be accessible within a reasonably short time frame (e.g. within 5 business days), instead of immediately. The BMA may also agree similar arrangements foroverseas Islamic bank licensees , as well asBahraini Islamic bank licensees , where elements of record retention and management have been centralised in another group company, whether inside or outside of Bahrain.GR-1.1.10
All original account opening documentation, due diligence and transaction documentation should normally be kept in Bahrain, if the business is booked in Bahrain. However, where a licensee books a transaction in Bahrain, but the transaction documentation is handled entirely by another (overseas) branch or affiliate of the licensee, the relevant transaction documentation may be held in the foreign office, provided electronic or hard copies are retained in Bahrain; the foreign office is located in a FATF member state; and the foreign office undertakes to provide the original documents should they be required.
GR-1.1.11
Licensees should also note that to perform effective consolidated supervision of a group (or sub-group), the BMA needs to have access to financial information from foreign operations of a licensee, in order to gain a full picture of the financial condition of the group: see Module BR (BMA Reporting), regarding the submission of consolidated financial data. If a licensee is not able to provide to the BMA full financial information on the activities of its branches and subsidiaries, it should notify the BMA of the fact, to agree alternative arrangements: these may include requiring the group to restructure or limit its operations in the jurisdiction concerned.
GR-1.1.12
In the case of
Bahraini Islamic bank licensees with branch operations overseas, where local record keeping requirements are different, the higher of the local requirements or those contained in this Chapter must be followed.GR-1.2 GR-1.2 Transaction Records
GR-1.2.1
Islamic bank licensees must keep completed transaction records for as long as they are relevant for the purposes for which they were made (with a minimum period in all cases of five years from the date when the transaction was completed). Records of completed transactions must be kept in their original form (whether in hard copy and / or electronic format), for at least five years from the date of the transaction.GR-1.2.2
For example, if the original documents are paper, they must be kept in their original form. Electronic payments and receipts may be kept electronically without the need for hard copies. The record format selected must be capable of producing complete and accurate financial, management and regulatory reports, and allow monitoring and review of all transactions.
GR-1.2.3
Rule GR-1.2.1 applies to all transactions entered into by a
Bahraini Islamic bank licensee , whether booked in Bahrain or in an overseas branch. With respect to overseas Islamic bank licensees, it applies only to transactions booked in the Bahrain branch.GR-1.2.4
In the case of
overseas Islamic bank licensees , Rule GR-1.2.1 therefore only applies to business booked in the Bahrain branch, not in the rest of the company.GR-1.3 GR-1.3 Other Records
Corporate Records
GR-1.3.1
Islamic bank licensees must maintain the following records in original form or in hard copy at their premises in Bahrain:(a) internal policies, procedures and operating manuals;(b) corporate records, including minutes ofshareholders' ,Directors' and management meetings, and Shari'a board meetings;(c) correspondence with the BMA and records relevant to monitoring compliance with BMA requirements;(d) reports prepared by theIslamic bank licensee's internal and external auditors; and(e) employee training manuals and records.GR-1.3.2
In the case of
Bahraini Islamic bank licensees , these requirements apply to the licensee as a whole, including any overseas branches. In the case ofoverseas Islamic bank licensees , all the requirements of Chapter GR-1 are limited to the business booked in their branch in Bahrain and the records of that branch (see Rule GR-1.1.1). They are thus not required to hold copies of shareholders' and Directors' meetings, and Shari'a board meetings, except where relevant to the branch's operations.Customer Records
GR-1.3.3
Record keeping requirements with respect to customer records, including customer identification and due diligence records, are contained in Module FC (Financial Crime). These requirements address specific requirements under the Amiri Decree Law No. 4 of 2001, the standards promulgated by the Financial Action Task Force, as well as to the best practice requirements of the Basel Committee Core Principles methodology, and its paper on "Customer due diligence for banks".
GR-2 GR-2 Corporate and Trade Names
GR-2.1 GR-2.1 Vetting of Names
GR-2.1.1
Islamic bank licensees must seek prior written approval from the BMA for their corporate name and any trade names, and those of their subsidiaries located in Bahrain.GR-2.1.2
GR-2.1.1 applies to
overseas Islamic bank licensees only with respect to their Bahrain branch.GR-2.1.3
Rules GR-2.1.1 and GR-2.1.2 implement the requirements contained in Article 62 of the BMA Law 1973.
GR-2.1.4
In approving a corporate or trade name, the BMA seeks to ensure that it is sufficiently distinct as to reduce possible confusion with other unconnected businesses, particularly those operating in the financial services sector. The BMA also seeks to ensure that names used by unregulated subsidiaries do not suggest those subsidiaries are in fact regulated.
GR-3 GR-3 Dividends
GR-3.1 GR-3.1 BMA Non-Objection
GR-3.1.1
Bahraini Islamic bank licensees must obtain a letter of no-objection from the BMA to any dividend proposed, before submitting a proposal for a distribution of profits to ashareholder vote.GR-3.1.2
The BMA will grant a no-objection letter where it is satisfied that the level of dividend proposed is unlikely to leave the licensee vulnerable — for the foreseeable future — to breaching the BMA's capital requirements, taking into account (as appropriate) trends in the licensee's business volumes, expenses, overall performance and the adequacy of provisions against impaired loans or other assets.
GR-3.1.3
To facilitate the prior approval required under Paragraph GR-3.1.1,
Islamic bank licensees subject to GR-3.1.1 should provide the BMA with a copy of the proposed agenda for the annual general meeting or other special meeting, noting the licensee's intended declared dividends for the coming year.GR-3.1.4
Islamic bank licensees must also comply with the provisions contained in Articles 72 to 75 of the BMA Law 1973.GR-4 GR-4 Asset / Liability Transfers
GR-4.1 GR-4.1 BMA Approval
GR-4.1.1
Islamic bank licensees must seek prior written approval from the BMA before transferring assets or liabilities of a material nature to a third party, except where such transfers are effected within the normal scope of the bank's operations.GR-4.1.2
Rule GR-4.1.1 is intended to apply to circumstances where a bank wishes to sell part of its business or a portfolio to a third party, or is undertaking winding up proceedings. It implements the provisions contained in Article 65(A)(2) of the BMA Law 1973.
GR-4.1.3
For the purposes of Rule GR-4.1.1, assets or liabilities of a material nature would be assets or liabilities that comprise 5% or more of the total assets or liabilities of the bank concerned, and any amounts placed with the banks through investment accounts and safe-keeping accounts.
GR-4.1.4
In the case of a
Bahraini Islamic bank licensee , Chapter GR-4 applies to its assets and liabilities booked in Bahrain and in the bank's overseas branches. In the case of anoverseas Islamic bank licensee , Chapter GR-4 applies only to assets and liabilities booked in the bank's Bahrain branch.GR-4.1.5
Islamic banks intending to apply to transfer assets or liabilities are advised to contact the BMA at the earliest possible opportunity, in order that the BMA may determine the nature and level of any documentation to be provided and the need for an auditor or other expert opinion to be provided. The BMA will grant its permission where the transfer will have no negative impact on the financial soundness of the bank, and does not otherwise compromise the interests of the bank's investment accounts holders, depositors and creditors. In all cases, the BMA will only grant its permission where the institution acquiring the assets or investment account/deposit liabilities holds the appropriate regulatory approvals and is in good regulatory standing.
GR-5 GR-5 Controllers
GR-5.1 GR-5.1 Key Provisions
GR-5.1.1
Condition 3 of BMA's licensing conditions specifies, amongst other things, that
Islamic bank licensees must satisfy the BMA that theircontrollers are suitable and pose no undue risks to the licensee. (See Paragraph LR-2.3.1.)GR-5.1.2
Applicants for an
Islamic bank license must provide details of theircontrollers , by submitting a duly completed Form 2 (Application for authorisation of controller). (See sub-paragraph LR-3.1.5(a).)GR-5.1.3
Islamic bank licensees must obtain prior approval from the BMA for any of the following changes to itscontrollers (as defined in Section GR-5.2):(a) a newcontroller ;(b) an existingcontroller increasing its holding from below 20% to above 20%;(c) an existingcontroller increasing its holding from below 33% to above 33%;(d) an existingcontroller increasing its holding from below 50% to above 50%; and(e) an existingcontroller increasing its holding from below 75% to above 75%.GR-5.1.4
For approval under Paragraph GR-5.1.3 to be granted, the BMA must be satisfied that the proposed increase in control poses no undue risks to the licensee. A duly completed Form 2 (Controllers) must be submitted as part of the request for a change in
controllers .GR-5.1.5
If, as a result of circumstances outside the
Islamic bank licensee's knowledge and/or control, one of the changes specified in Paragraph GR-5.1.3 is triggered prior to BMA approval being sought or obtained, theIslamic bank licensee must notify the BMA as soon as it becomes aware of the fact and no later than 7 days.GR-5.1.6
Islamic bank licensees are encouraged to notify the BMA as soon as they become aware of events that are likely to lead to changes in theircontrollers . The criteria by which the BMA assesses the suitability ofcontrollers are set out in Section GR-5.3. The BMA aims to respond to requests for approval within 30 calendar days. The BMA may contact references and supervisory bodies in connection with any information provided to support an application forcontroller . The BMA may also ask for further information, in addition to that provided in Form 2, if required to satisfy itself as to the suitability of the applicant.GR-5.1.7
Islamic bank licensees must submit, within 3 months of their financial year-end, a report on theircontrollers . This report must identify allcontrollers of the licensee, as defined in Section GR-5.2.GR-5.2 GR-5.2 Definition of Controller
GR-5.2.1
A
controller of anIslamic bank licensee is a natural or legal person who:(a) holds 10% or more of the shares in the licensee ("L"), or is able to exercise (or control the exercise) of more than 10% of the voting power in L; or(b) holds 10% or more of the shares in aparent undertaking ("P") of L, or is able to exercise (or control the exercise) of more than 10% of the voting power in P; or(c) is able to exercise significant influence over the management of L or P.GR-5.2.2
For the purposes of Paragraph GR-5.2.1, "person" means the person ("H") or any of the person's associates, where associate includes:
(a) the spouse, child or stepchild of H;(b) an undertaking of which H is a Director;(c) a person who is an employee or partner of H;(d) if H is a corporate entity, a Director of H, a subsidiary of H, or a Director of any subsidiary undertaking of H.GR-5.2.3
Associate also includes any other person or undertaking with which the person H has entered into an agreement or arrangement as to the acquisition, holding or disposal of shares or other interests in the
Islamic bank licensee , or under which they undertake to act together in exercising their voting power in relation to theIslamic bank licensee .GR-5.3 GR-5.3 Suitability of Controllers
GR-5.3.1
A
controller of anIslamic bank licensee must satisfy the BMA of his suitability.GR-5.3.2
In assessing the suitability of
controllers who are natural persons, BMA has regard to their professional and personal conduct, including, but not limited to, the following:(a) the propriety of a person's conduct, whether or not such conduct resulted in conviction for a criminal offence, the contravention of a law or regulation, or the institution of legal or disciplinary proceedings;(b) a conviction or finding of guilt in respect of any offence, other than a minor traffic offence, by any court or competent jurisdiction;(c) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct in connection with the formation or management of a corporation or partnership;(d) whether the person has been the subject of any disciplinary proceeding by any government authority, regulatory agency or professional body or association;(e) the contravention of any financial services legislation or regulation;(f) whether the person has ever been refused a license, authorisation, registration or other authority;(g) dismissal or a request to resign from any office or employment;(h) disqualification by a court, regulator or other competent body, as a Director or as a manager of a corporation;(i) whether the person has been a Director, partner or manager of a corporation or partnership which has gone into liquidation or administration or where one or more partners have been declared bankrupt whilst the person was connected with that partnership;(j) the extent to which the person has been truthful and open with regulators; and(k) whether the person has ever been adjudged bankrupt, entered into any arrangement with creditors in relation to the inability to pay due debts, or failed to satisfy a judgement debt under a court order.GR-5.3.3
In addition, the following criteria are also taken into consideration:
(a) the financial resources of the person and the likely stability of their shareholding;(b) existing directorships or ownership of more than 20% of the capital or voting rights of any financial institution in the Kingdom of Bahrain or elsewhere, and the potential for conflicts of interest that such directorships or ownership may imply;(c) the interests of depositors, creditors and shareholders of the licensee; and(d) the interests of Bahrain's banking and financial sector.GR-5.3.4
In assessing the suitability of corporate
controllers , BMA has regard to their financial standing, judicial and regulatory record, and standards of business practice and reputation, including, but not limited to, the following:(a) the financial strength of the controller, its parent(s) and other members of its group, its implications for theIslamic bank licensee and the likely stability of thecontroller's shareholding;(b) whether thecontroller or members of its group have ever entered into any arrangement with creditors in relation to the inability to pay due debts;(c) thecontroller's jurisdiction of incorporation, location of Head Office, group structure and close links, and the implications for theIslamic bank licensee as regards effective supervision of theIslamic bank licensee and potential conflicts of interest;(d) thecontroller's (and other group members') propriety and general standards of business conduct, including the contravention of any laws or regulations, or the institution of disciplinary proceedings by a government authority, regulatory agency or professional body;(e) any adverse finding in a civil action by any court or competent jurisdiction, relating to fraud, misfeasance or other misconduct;(f) any criminal actions instigated against thecontroller or other members of its group, whether or not this resulted in an adverse finding; and(g) the extent to which thecontroller or other members of its group have been truthful and open with regulators and supervisors.GR-5.3.5
In addition, the following criteria are also taken into consideration:
(a) the interests of investment account holders, depositors, creditors and shareholders of the licensee; and(b) the interests of Bahrain's banking and financial sector.GR-5.4 GR-5.4 Approval Process
GR-5.4.1
Following receipt of an approval request under Paragraph GR-5.1.3, the BMA will issue a written notice of objection if it is not satisfied that the person concerned is suitable to become a
controller of theIslamic bank licensee . The notice of objection will specify the reasons for the objection and specify the applicant's right of appeal.GR-5.4.2
Notices of objection have to be approved by an Executive Director of the BMA. The applicant has 30 calendar days from the date of the notice in which to make written representations. The BMA then has 30 calendar days from the date of the representation in which to consider any mitigating evidence submitted and make a final determination. See Module EN (Enforcement).
GR-5.4.3
Where a person has become a
controller by virtue of his shareholding in contravention of Paragraph GR-5.1.3, or a notice of objection has been served to him under Paragraph GR-5.4.1 and the period of appeal has expired, the BMA may, by notice in writing served on the person concerned, direct that his shareholding shall, until further notice, be subject to all or any of the following restrictions:(a) no voting right shall be exercisable in respect of those shares; and(b) except in a liquidation, no payment shall be made of any sum due on the shares from theIslamic bank licensee , whether in respect of capital, dividend or otherwise.GR-6 [This Chapter has been left blank.]
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GR-7 GR-7 Suspension of Business
GR-7.1 GR-7.1 BMA Approval
GR-7.1.1
An
Islamic bank licensee wishing to suspend its operations and liquidate its business must notify the BMA in writing at least six months in advance of its intended suspension, setting out how it proposes to do so and, in particular, how it will treat any Shari'a money placements/deposits, and investment accounts, that it holds.GR-7.1.2
The notice period under Rule GR-7.1.1 is a statutory requirement, specified in Article 91 of the BMA Law 1973. Article 91, however, also provides for the notice period to be reduced, by prior agreement with the BMA, if in the BMA's view the rights of depositors are safeguarded.
GR-7.1.3
If the
Islamic bank licensee wishes to transfer assets or liabilities to a third party, it must comply with the requirements contained in Chapter GR-4.GR-7.1.4
If the
Islamic bank licensee wishes to liquidate its business, the BMA will revise its license to restrict the firm from entering into new business. The licensee must continue to comply with all applicable BMA requirements until such time as it is formally notified by the BMA that its obligations have been discharged and that it may surrender its license.GR-7.1.5
An
Islamic bank licensee in liquidation must continue to meet its contractual and regulatory obligations to depositors, other clients and creditors.GR-7.1.6
Once the
Islamic bank licensee believes that it has discharged all its remaining contractual obligations to investment account holders, depositors, clients and creditors, it must publish a notice in two national newspapers in Bahrain approved by the BMA (one being in English and one in Arabic), stating that is has settled all its dues and wishes to leave the market.GR-7.1.7
The notice referred to in Paragraph GR-7.1.6 must include a statement that written representations concerning the liquidation may be sent to the BMA before a specified day, which shall not be earlier than sixty days after the day of the first publication of the notice. The BMA will not decide on the application until after considering any representations made to the BMA before the specified day.
GR-7.1.8
If no objections to the liquidation are upheld by the BMA, then the BMA may issue a written notice of approval for the surrender of the license.
GR-8 GR-8 BMA Fees
GR-8.1 GR-8.1 Annual License Fees
GR-8.1.1
Islamic bank licensees must pay the relevant annual license fee to the BMA, upon the issuance of their license and thereafter on 1 January each year. The annual license fee charged upon issuance of a license is charged on a pro-rata basis, proportionate to the period remaining between the issuance of the license and the end of the calendar year in question (subject to a minimum charge of BD 1,000).Business Standards
BC BC Business and Market Conduct
BC-A BC-A Introduction
BC-A.1 BC-A.1 Purpose
BC-A.1.1
The purpose of this module is to lay down rules and guidelines that lay down the regulations and provide guidance on best practices that the banks should adhere to in relation to business and market conduct.
BC-A.1.2
This module provides support for certain other parts of the Rulebook, mainly:
(a) Principles of Business;(b) Audit Firms;(c) Public Disclosure;(d) High Level Controls;(e) Enforcement; and(f) BMA Reporting Requirements.BC-A.1.3
This module also provides support for certain aspects relating to business and market conduct in the Bahrain Commercial Companies Law of 2001 (as amended).
BC-A.2 BC-A.2 Key requirements
Promotion of financial products and services
BC-A.2.1
The Agency should be sent copies of documentation relating to promotional schemes at least ten days prior to their launch for information purposes.
BC-A.2.2
All documentation concerning promotional schemes should be in Arabic and English and, if relevant, any other language necessary for customers to fully understand and appreciate their terms and conditions. Such terms and conditions, including any related advertising, need to be clear, concise, truthful, unambiguous and complete so as to enable customers to make a fully informed decision.
Code of conduct for bank dealers and foreign exchange and money brokers in the interbank market
BC-A.2.3
Management of banks and money brokers are responsible for ensuring that their institutions are in full compliance with the Code.
BC-A.2.4
Brokers should pass details verbally, and principals be prepared to receive them, normally within a few minutes after deals have been concluded.
Disclosure of information about individual accounts
BC-A.2.5
Banks should not publish or release information to third parties concerning the accounts or activities of their individual customers, unless:
(a) such information is requested by an authorised official from the BMA or by an order from the Courts; or(b) the release of such information is approved be the customer concerned.Minimum balance and charges on saving investment accounts
BC-A.2.6
Banks may impose no more than a monthly charge of BD 1 when the monthly weighted average balance for saving investment accounts for individuals falls below BD 20 (or equivalent in other currencies).
BC-A.2.7
Orphans, widows, pensioners, individuals receiving social subsidies from the Ministry of Labour & Social Affairs, students and Bahraini nationals with a monthly salary below BD 250 should be exempted from maintaining the above minimum balance requirement for saving investment accounts.
Disclosure of charges
BC-A.2.8
Banks should also ensure that each customer is in receipt of its current list of charges. The list should specify standard charges and commissions that will be applied by the bank to individual services and transactions and to specific areas of business.
Accounts held for clubs and societies in Bahrain
BC-A.2.9
The FCB is requested to notify GOYS when any club or society registered with GOYS requests the opening of an account with the bank.
Current accounts
BC-A.2.10
FCBs levying fees on their low-balance customer current accounts, are required by the Agency to apply such fees to average balances when these fall below a prescribed level during a specified period.
Notification to the Agency on introduction of new or expanded customer products and facilities
BC-A.2.11
All full commercial banks are required to consult the Agency before the introduction of any new or expanded customer products and facilities.
Penalty system for dishonoured cheques
BC-A.2.12
On the first working day of each calendar month, each FCB will provide to the Agency a list of the names, supported with I.D. numbers (CPR or CR numbers (as applicable) for Bahrain
residents , Passport or CR-equivalent numbers (as applicable) for non-Bahrain residents) of those customers to whom one (or more) written warning(s) has been sent in accordance with section BC-5.1 during the immediately preceding calendar month.BC-A.2.13
Concerned FCB(s) will be required not to provide current account facilities to the abuser of cheques for the twelve calendar month period immediately following the date of issue of the relevant list (as mentioned in section BC-5.1) by the Agency. All other FCBs should, within a maximum period of one month after the issue of the relevant list, also withdraw current account facilities from that abuser of cheques for the same twelve calendar month period.
General guidance on administration of dishonoured cheques
BC-A.2.14
FCBs which wish to issue cheque guarantee cards for an amount not exceeding BD 200 may do so – subject to informing the Director of Banking Services at the Agency of their intention and the arrangements governing the issue of such cards.
Penalty charges on dishonoured cheques
BC-A.2.15
The Agency will impose penalty charges of BD 5 (five Bahraini Dinars) on each returned cheque for the reasons of 'Refer to Drawer', 'Not Arranged For', 'Re-present', and 'Account Closed'.
BC-A.2.16
FCBs will be entitled to charge customers no more than BD 10 (ten Bahraini Dinars) in respect of each dishonoured cheque.
Installation of an off-site ATM in Bahrain
BC-A.2.17
FCBs wishing to install an off-site ATM must submit an application (in writing) for the BMA's (Executive Director of Financial Institutions Supervision) approval. This application must be accompanied by a copy of a feasibility study for that particular ATM, as well as such other information as the BMA may request. In particular, a copy of the written permission (for installation of that off-site ATM) of the legal owner of the proposed location must be provided to the Agency, as well as a copy of the written permission of any other relevant authorities in this context (e.g. the Traffic & Licensing and Civil Defence & Fire Service Directorates of the Ministry of Interior).
GCC ATM network charges
BC-A.2.18
The Agency requires that the charges on such customer withdrawals and other ATM services should not exceed BD 1 (one Bahraini Dinar) per transaction.
Minimum terms and conditions
BC-A.2.19
All Mudaraba contracts entered into by a bank (whether new or renewed contracts) should meet the standards referred to under paragraph BC-7.1.1.
BC-A.2.20
Banks must have a policy statement as to the policies and procedures in place to safeguard the interest of the PSIA holders. The banks must agree the Policy Statement with the Agency before 20 January 2002.
Margin Trading System
BC-A.2.21
FCBs may write to the Agency to obtain approval to provide margin trading facilities to their customers. FCBs must follow the rules and guidance in Chapter BC-8.
BC-A.3 BC-A.3 Regulation history
BC-A.3.1
This module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
BC-A.3.2
The most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes BC-4.6 01/10/05 Streamlined requirements for new products BC-8 01/04/06 Margin trading rules and guidance Effective date and evolution of the Module
BC-A.3.3
Prior to the Rulebook, the Agency had issued various circulars covering different aspects of Business and Market Conduct. These circulars have now been consolidated into this module. The contents of this module are effective from the date depicted in the original circulars listed below or from the dates indicated in paragraph BC-A.3.2 above:
Circular Ref. Date of Issue Module Ref. Circular Subject EDBC/73/96 1 May 1996 BC-1.1 Explanatory note on the promotion of Banking and Financial Products offered in/from Bahrain by Means of Incentives etc. BS.C7/91/442 10 Sep 1991 BC-1.1 Promotion of Banking Services 85/25 2 May 1985 BC-2 Code of Conduct for Foreign Exchange Dealers and Brokers 83/5 10 Apr 1983 BC-3 Disclosure of Information about Individual Accounts BS.C7/90/34 31 Jan 1990 BC-4.2 Dinar Certificates of Deposits EDBO/51/02 2 Apr 2002 BC-4.2 Charges to Customers BC/5/00 8 Mar 2000 BC-4.3 Accounts held for Clubs and Societies in Bahrain BSD(111)/94/1507 24 Sep 1994 BC-4.4 Fees on Current Accounts BC/2/01 3 Mar 2001 BC-4.5 Brokerage Fees in Bahrain ODG/145/92 18 Aug 1992 BC-4.6 New or expanded products and facilities in the Retail Banking Field EDBO/46/03 8 Apr 2003 BC-4.7 Inheritance — Financial Procedures EDBO/27/96 25 Sep 1996 BC-5.1 Regulation Relating to a Penalty System for "Dishonoured Cheques" OG/399/94 28 Nov 1994 BC-5.2 Returned Cheques EDBO/49/01 6 May 2001 BC-5.3 Penalty Charges on Returned Cheques BC/8/98 24 May 1998 BC-6.1 Off-site ATMs EDBO/45/02 13 Mar 2002 BC-6.2 GCC ATM Network Charges EDBC/105/96 26 June 1996 BC-7 Mudaraba Contracts — Minimum Terms and Conditions BS/11/2004 10 August 2004 BC-4 Bank Charges on Savings Accounts
BC-1 BC-1 Promotion of financial products and services
BC-1.1 BC-1.1 Promotion of financial products and services offered in/from Bahrain by mean of incentives etc.
Introduction
BC-1.1.1
The purpose of the content of this section is to set out regulations pertaining to the promotion of banking/financial products offered in/from Bahrain by means of incentives etc. (herein referred to as 'promotional schemes').
BC-1.1.2
The Agency has no objection to the use of promotional schemes in general and, unless it otherwise specifically directs in any particular case, the Agency does not expect to be actively consulted/have its approval sought about the idea and/or substance of any promotional schemes. The Agency should, however, be sent copies of documentation relating to promotional schemes at least ten days prior to their launch for information purposes.
BC-1.1.3
The Agency will monitor promotional schemes and, if thought appropriate in the interests of a bank or other financial institution (together herein referred to as 'institutions') and its customers in particular and/or the financial sector in general, may issue specific guidance in certain cases. Institutions should feel free to consult the Agency at any time regarding any matters referred to in the explanatory note set out in this section.
General requirements
BC-1.1.4
Institutions should take care to ensure that promotional schemes do not involve a breach of Bahrain law or any other relevant applicable law, regulation or international practice. In addition, promotional schemes should not in any way be detrimental to the public good or public morals.
BC-1.1.5
While there is to be no formal restriction on the types of incentive which may be used by institutions, care should be taken to ensure that promotional schemes do not negatively affect the integrity, reputation, good image and standing of Bahrain and/or its financial sector, and do not detrimentally affect Bahrain's economy.
BC-1.1.6
Bearing in mind the reputation of, and the requirement to develop, the financial sector in Bahrain, as well as the need to act at all times in the best interests of the customer, institutions need to take adequate care to ensure that promotional schemes do not unreasonably divert the attention of the public from other important considerations in choosing an institution or a banking/financial product.
BC-1.1.7
All documentation concerning promotional schemes should be in Arabic and English and, if relevant, any other language necessary for customers to fully understand and appreciate their terms and conditions. Such terms and conditions, including any related advertising, need to be clear, concise, truthful, unambiguous and complete so as to enable customers to make a fully informed decision.
BC-1.1.8
Customers to whom promotional schemes are directed should enjoy equal opportunity in terms of access to, and treatment within, such schemes.
BC-1.1.9
No costs (including funding costs), charges or levies associated with promotional schemes should be concealed from prospective customers.
BC-1.1.10
Full and complete records should be maintained for promotional schemes, particularly where raffles/lotteries etc. are concerned.
BC-1.1.11
Any raffles/lotteries etc. held as part of promotional schemes should be independently monitored (e.g. by the institution's external auditor) and adequate systems put in place to ensure fair play and impartiality.
BC-1.1.12
An appropriate system should also exist for informing participants of the results of a raffle/lottery without delay. Institutions should note that raffles/lotteries etc. may be subject to rules and requirements (including prior authorisation/approval) laid down by the Ministry of Commerce.
BC-1.1.13
Institutions may use small 'gifts' as an inducement to members of the public to use banks' services, provided such gifts are offered on a general basis and have a low monetary value.
BC-1.1.14
Finally, due note should be taken of the overriding provisions of Bahrain (and any other relevant) law in relation to institutions' duties to customers to the extent (if any) that promotional schemes might impact on such duties.
BC-2 BC-2 Code of conduct for bank dealers and foreign exchange and money brokers in the interbank market
BC-2.1 BC-2.1 Introduction
BC-2.1.1
The Code of Conduct which is prepared in cooperation with the Bankers' Society of Bahrain and the foreign exchange brokers, provide rules in respect of certain kinds of practice which experience has shown may cause difficulty and may jeopardise the good standing of the Bahrain market. Management of banks and money brokers are responsible for ensuring that their institutions are in full compliance with the Code.
BC-2.1.2
Every broker and dealer shall at all times comply with the criteria in respect to market practice, integrity and conduct. Failure to comply with such criteria will be regarded as a serious offence by the BMA, which reserves the right to investigate any complaints brought to its attention. All participants should adhere to the spirit as well as to the letter of the Code.
BC-2.1.3
The code is shown in full, although many paragraphs are not strictly relevant for Islamic banks. Treasury staff should refer to the relevant paragraphs as appropriate.
BC-2.2 BC-2.2 Market terminology and definitions
BC-2.2.1
The use of generally accepted precise terminology should reduce misunderstandings and frustration, and to this end Appendix BC 5 sets out, without claiming to be exhaustive, accepted market terminology and definitions.
BC-2.2.2
For the purpose of this chapter, the following definitions apply:
(a) 'Broker' means a money and foreign exchange broker who is authorised by the BMA to operate in Bahrain.(b) 'Principal' means a party undertaking a transaction through a broker.(c) 'Bank' means any institution, holding a banking license.BC-2.3 BC-2.3 Confidentiality and market practice
BC-2.3.1
Confidentiality is vital for the preservation of a reputable and efficient market. Accordingly, the exchange of confidential information in respect of third parties is forbidden.
BC-2.3.2
The rules which follow are not intended to define exhaustively the obligations of dealers and brokers but set down specific ways in which confidentiality should be safeguarded and operations should be conducted.
(a) Use of phrases and terms likely to identify the name of the principal should be avoided at all times.(b) In foreign exchange transactions brokers should not disclose the name of the principal until the deal is being closed.
A broker asking for a specific support price should be prepared to qualify the principal in terms of geographical location, by country or by region when the broker genuinely believes it will enable business to be concluded satisfactorily to the benefit of both broker and principal.(c) Indeposit transactions, brokers should not disclose the name of the borrower until the broker is satisfied that the potential lender seriously intends to do business. Once a lender has asked for the identity of the borrower ('Who pays?'), the lender is committed to do business at the rate quoted with an acceptable name, until the lending bank takes the broker 'off' or puts himself under reference. In the event of the first disclosed name being unacceptable to the lender, the lender will be prepared to check other acceptable names provided that such names are shown to the lender by the broker within a reasonable amount of time, which should be stipulated if necessary.(d) In the deposit market, banks should whenever possible give brokers prior indication of those categories of principals and of any centers and areas with which they would be unwilling to do business, in order that the smooth operation of markets be facilitated and frustration be minimized. Lenders should indicate the amounts they are prepared to place with particular categories of borrower. Brokers should classify bids with an indication of the type and quality of names they are in a position to pass.(e) Practices whereby banks reject a succession of names in order to assess the market and brokers offer banks deals which have no chance of being concluded, merely in order to establish their interest, are totally unacceptable.(f) A principal is urged whenever possible to specify to a broker the rate, the amount, the currency, and the period of his requirements. The principal shall be willing to deal in a marketable amount with acceptable names and shall remain bound so to deal at the quoted rate unless either the broker is:(i) informed otherwise at the time of acceptance, or(ii) a time limit was placed (for example, 'Firm for one minute only').A broker who quotes a firm rate without qualification shall be prepared to deal at the rate, in a marketable amount. A broker, if quoting only the basis of one or two names shall qualify his quotation, e.g., 'one small offeror — only two names paying'. The broker should indicate whether prices are firm or simply for guidance and, if requested by the principal, should be willing to indicate the amount involved. Further he should confirm with banks at reasonable intervals that their interest is still firm.
It is the responsibility of the principal to ensure the broker is made aware of any circumstances which materially affect the validity of the order placed with the broker.(g) A principal, by selecting to 'put a broker on' is deemed to have a serious intention of completing business, and should allow the broker sufficient time to quote the principal's interest to a potentialcounterparty with a view to doing business. In quantifying a 'sufficient time' factors such as the currency, market conditions and communication systems employed, should be taken into account.(h) A broker is held responsible for advising a principal on every occasion that hisdeposit rates are being checked by a potentialcounterparty . This action should help minimise the occasional difficulties that arise when a principal 'takes a broker off' simultaneously to having his prices checked.
Whenever possible and subject to market conditions, a bank in the deposit market should, before he 'takes a broker off' either a single order or several orders, check whether the broker is already committed to deal on his behalf.(i) 'Under reference' orders placed by banks with brokers without having first being placed as 'firm', are to be discouraged. Firm orders which are later qualified by a request to 'put me under reference' indicate a principal's weakening desire to conclude business with that broker. 'Under reference' orders should not be left with a broker for more than a few minutes. A principal must ensure that the broker has the opportunity frequently to check the validity of an 'under reference' order.(j) No person may visit the dealing room of any broker or any bank except with the consent of a Manager or Director of that institution. A broker shall not in any circumstances permit any visitors from a bank to deal for his bank in the dealing room of that broker.(k) Management of banks should issue clear directions to staff on the monitoring, control and recording of 'after hours' dealing from premises other than bank dealing rooms. All deals of this kind must be properly authorised and confirmed.(l) A bank dealer shall not apply unfair pressure upon a broker to pass information which it would be improper for the broker to pass. Unfair pressure would for example include a statement made in any form that a failure to co-operate would lead to reduction in the business given by the principal or by other principals to the broker.(m) A principal should not place an order with a broker solely with the intention of finding out the name of a counterparty, who can be contacted directly with a view to concluding further deals.(n) Management of banks and brokers should lay down clear directions to staff on the extent to which dealing in foreign exchange ordeposit for personal account is permitted. Any such dealing must be strictly controlled.(o) Care should be taken over the positioning of 2-way loudspeakers in dealing rooms.(p) Brokers and dealers should inform each other if conversations are being recorded. The use of such equipment is encouraged as a sensible means of enabling any subsequent disputes and differences to be settled.BC-2.4 BC-2.4 Passing of details
BC-2.4.1
The passing and recording of details form an essential part of the transaction and the possibility of errors and misunderstanding is increased by delay and by the passing of details in batches. Brokers should pass details verbally, and principals be prepared to receive them, normally within a few minutes after deals have been concluded.
BC-2.4.2
When arranging and passing details on forward contracts in foreign exchange, banks and brokers must ensure that the rate applied to the spot end of the transaction bears a close relationship to the spot rate at the time the deal was concluded.
BC-2.5 BC-2.5 Confirmations
BC-2.5.1
Written confirmation by a broker is the final check on the details of the transaction. The handling of confirmations must take account of the desire of brokers to have a realistic time-limit placed on their liability for differences. There is an obligation on recipients to check such confirmations. Initial confirmations should be sent out by telex without delay, and at the latest by close of business on the same working day. They should be followed up by written confirmation, normally hand-delivered and receipted before close of business on the following working day.
BC-2.5.2
Banks must check all confirmations carefully upon receipt so that discrepancies shall be quickly revealed and differences minimised. Principals shall also make enquiries of brokers about particular confirmations which have not been received within an appropriate time (as above) or about any changes in contract terms.
BC-2.5.3
In the case of deals where a bank pays against telex confirmation, the broker remains liable for differences until receipt of written confirmation is provided by the bank.
BC-2.6 BC-2.6 Differences and disputes
BC-2.6.1
The majority of differences payable by brokers arise from errors occurring in payment or repayment instructions. They also arise from a broker, having in good faith indicated a firm rate, being unable to substantiate his quotation.
BC-2.6.2
Any differences deemed payable by a broker to a bank (or by a bank to a broker) should be settled as soon as possible. The parties should provide each other with documents, setting out the exact details of and circumstances surrounding the deal.
BC-2.6.3
It is acknowledged that differences are sometimes paid by 'points'. The management of broking firms should always ensure that this practice is strictly controlled and monitored.
BC-2.6.4
All differences settled by direct payment should be advised in writing by the broker to the Director of Reserve Management, BMA, (copied to the Bank) indicating the amount paid and the other party's name. The BMA reserves the right to ask for further information at its discretion.
BC-2.7 BC-2.7 Conduct
BC-2.7.1
The BMA will regard any breaches of the rules stated below regarding gifts, favours, betting and entertainment unacceptable.
Gifts and favours
BC-2.7.2
No broker, including management, employees and other persons acting on their behalf, shall offer or give inducements to dealing room personnel of a bank. No gifts or favours whatsoever shall be so given unless the broker is satisfied that the person responsible for dealing operations in the bank concerned has been informed of the nature of the gift or favour.
BC-2.7.3
Employees of banks shall not solicit inducements from brokers, nor shall they receive unsolicited gifts or favours from brokers without informing the person responsible for dealing operations in the bank concerned of the nature of such gifts or favours.
Bets
BC-2.7.4
The making or arranging of bets between brokers and banks dealers is totally unacceptable.
Entertaining
BC-2.7.5
It shall be the responsibility of management in both banks and brokers to ensure that entertainment offered in the course of business does not exceed reasonable limits and does not infringe standards of propriety and decency.
BC-2.8 BC-2.8 Responsibility
BC-2.8.1
Brokers shall be responsible for ensuring that:
(a) their principals understand fully the limitations of the brokers' responsibilities for business and market conducted;(b) all their principals understand that they are required to conform, where appropriate, to the Code of Conduct;(c) their staff carrying out transactions on behalf of principals are adequately trained both in the practices of the market-place and in the firm's responsibilities to principals; and(d) the BMA is notified of any changes in broking staff, in accordance with BMA requirements.BC-2.8.2
Bankers shall be responsible for ensuring that:
(a) their dealing staff are adequately trained and supervised in the practices of the market (the requirement of this Code of Conduct should be fully understood by all staff involved in foreign exchange and currency deposit operations);(b) the BMA is notified of any changes in dealing staff, in accordance with BMA requirements;(c) their staff understand that the ultimate responsibility for assessing the creditworthiness of a borrower or lender lies with the bank and not the broker;(d) brokerage is normally payable at the end of the month in which the money passes, or otherwise by special arrangement; and(e) there is no pressure on brokers to reduce charges below the approved minimum rates.BC-2.9 BC-2.9 Market regulations — Foreign exchange
Currencies
BC-2.9.1
A broker will, in response to an enquiry from any bank, make known the currencies which it elects to quote and to make a service in.
BC-2.9.2
Each broker shall provide, on request by a bank taking a service, general market information on all currencies handled (whether for the time being active or not) by that broker.
Brokerage
BC-2.9.3
Brokers shall comply with the minimum scales of brokerage charges (see section BC-4.6) agreed in consultation with the Bankers' Society Council from time to time, or laid down by the BMA.
In cases where there is no established minimum scale of brokerage charges, no deals shall be transacted until a rate has been agreed. Rates of brokerage in these cases should be agreed in advance, and only by Directors or senior managers on each side, and in no event by the dealers themselves.
BC-2.9.4
Put-through deals may be net of brokerage.
BC-2.9.5
Brokerage should be expressed in US dollars.
BC-2.10 BC-2.10 Market regulations — Currency deposits
Brokerage
BC-2.10.1
Brokers shall comply with the minimum scales of brokerage charges (see section BC-4.6) agreed in consultation with the Bankers' Society Council from time to time, or laid down by the BMA. In cases where there is no established minimum scale of brokerage charges, no deals shall be transacted until a rate has been agreed. Rates of brokerage in these cases should be agreed in advance, and only by Directors or senior managers on each side, and in no event by the dealers themselves.
BC-2.10.2
Calculation of brokerage on all currency deposits shall be worked out on a 360-day year, or a 365-day year, according to normally accepted market practice. For example, Sterling and Kuwaiti Dinars are on a 365-day year basis, and US dollars and Saudi Riyals are on a 360-day year basis.
Brokers' confirmations and statements should express brokerage in US dollars.
BC-2.10.3
In a forward-forward
deposit (e.g. one month against six months) the brokerage to be charged shall be on the actual intervening period (i.e. in the above example — five months).BC-2.10.4
Put-through deals may be net of brokerage.
BC-2.11 BC-2.11 Market discipline
BC-2.11.1
As part of its responsibility for supervising the conduct of brokers and dealers in the foreign exchange and currency markets, the Agency may, at its discretion:
(a) investigate any complains concerning the conduct of brokers and dealers;(b) investigate possible breaches of this Code by brokers and banks; and/or(c) take such further action as it considers appropriate, in the light of all the relevant facts.BC-2.12 BC-2.12 Adjustment of value dates in case of unexpected banking closing dates
BC-2.12.1
Spot transactions and outrights:(a) Original agreed upon value date for identical currency sold and purchased: extension of value date to next possible value date for both currencies.(b) Original agreed upon value date for non-identical currency sold and purchased (for instance, Friday for US Dollars and Saturday for Gulf Currencies): as unexpected banking closing days for non-Middle Eastern currencies are unlikely — value of non-Gulf currencies unchanged and value of Gulf currency on the next working day, adjusting spot or outright rate taking into account interest rate difference between the two currencies.For pure outrights it would be advisable to adapt the same system as for swaps; however, implied swap difference is not visible or identical for both parties.
— It can be assumed that, if the above rule would cause substantial losses for one party, dealers will re-negotiate a new rate, on a case-by case basis; if no agreement can be reached, the BMA, — as final Arbitrator — will fix the interest rates, prevailing at that time, which will be used to calculate the points difference, with which the outright rate will be adjusted.It is possible that payment instructions for counter-currency are already sent out and cannot be cancelled; in that case the paying party should be entitled to the proceeds of the unexpected use of funds by the receiving party.
BC-2.12.2
Deposits :(a) Maturing on unexpected closing day(s): Extendingdeposit to next possible value date; interest to be calculated in the extended period at original agreed upon interest rate.(b) Starting on unexpected closing day(s) and maturing after unexpected closing day(s): Starting date will be extended to next possible value date without altering maturing date; interest to be calculated on the shortened period at the originally agreed upon interest rate.(c) Starting on unexpected closing day(s) and maturing before or on next possible value date: Cancellation of deal.1. If payment instructions are already sent out by lender and can only be executed on next possible value date, and cannot be cancelled, borrower ensures repayment will be done on the same next possible value date. If in that case borrower cannot repay-because of deadline of receiving instructions by correspondent on same next possible value day, parties negotiate a new deal starting at value date of payment by lender and maturing according to new deal.2. If payment instructions are already sent out by lender for capital and by borrower for capital and interest both payments will be executed at same next possible value date, lender should refund to borrower unearned interest.BC-2.12.3
Swaps:
(a) Maturing on unexpected closing day(s): Extending swap to next possible value date for both currencies, adjusting swap difference according to formula — swap difference divided by original number of days and multiplied by new number of days.(b) Starting on unexpected closing day(s) and maturing after unexpected closing day(s): Starting date for both currencies would be extended to next possible value date for both currencies without altering maturing date, adjusting swap difference according to Formula under paragraph BC-2.12.3(a).(c) Starting on unexpected closing day(s) and maturing before or on next possible value date: Deals are cancelled.If starting or maturing date of original swap under paragraph BC-2.12.1 or paragraph BC-2.12.2 are substantially different, per currency swap difference has to be recalculated in mutual agreement between the dealers;
— It is possible that payment instructions for counter currency are already sent out and cannot be cancelled — in that case paying party should be entitled to the proceeds of the unexpected use of funds by the receiving party;BC-3 BC-3 Client confidentiality
BC-3.1 BC-3.1 Disclosure of information about individual accounts
BC-3.3.1
Banks should not publish or release information to third parties concerning the accounts or activities of their individual customers, unless:
(a) such information is requested by an authorised official from the BMA or by an order from the Courts; or(b) the release of such information is approved by the customer concerned.BC-4 BC-4 Customer account services and charges
BC-4.1 BC-4.1 Minimum balance and charges on accounts
BC-4.1.1
Banks may impose no more than a monthly charge of BD 1 when the monthly weighted average balance for saving investment accounts for individuals falls below BD 20 (or equivalent in other currencies).
BC-4.1.2
Orphans, widows, pensioners, individuals receiving social subsidies from the Ministry of Labour & Social Affairs, students and Bahraini nationals with a monthly salary below BD 250 should be exempted from maintaining the above minimum balance requirement for saving investment accounts.
Banks should establish criteria for determining the eligibility of a person for exemption from the above charges and should notify their concerned customers accordingly.
BC-4.2 BC-4.2 Disclosure of Charges
BC-4.2.1
In order to improve customer awareness and enhance transparency of bank charging structures, retail banks should display in Arabic and in English, by notice in their banking halls (both head offices and
branches ), a list of all current charges.Amended April 2011
October 2007BC-4.2.2
Banks should also ensure that each customer is in receipt of its current list of charges. The list should specify standard charges and commissions that will be applied by the bank to individual services and transactions and to specific areas of business.
October 07BC-4.2.3
[This Paragraph was deleted in July 2012].
Deleted: July 2012BC-4.2 BC-4.2 Disclosure of charges
BC-4.2.1
In order to improve customer awareness and enhance transparency of bank charging structures, full commercial banks should display, by notice in their banking halls (both head offices and
branches ), a list of current charges.BC-4.2.2
Banks should also ensure that each customer is in receipt of its current list of charges. The list should specify standard charges and commissions that will be applied by the bank to individual services and transactions and to specific areas of business.
BC-4.3 BC-4.3 Accounts held for clubs and societies in Bahrain
BC-4.3.1
All clubs and societies registered with the General Organisation for Youth and Sports (GOYS), are permitted under GOYS rule to only have one account with FCBs in Bahrain.
BC-4.3.2
The FCB is requested to notify GOYS when any club or society registered with GOYS requests the opening of an account with the bank. The purpose of the notification is to obtain clarification whether or not the account in question can be opened in accordance with the rules of GOYS.
BC-4.3.3
For accounts already held with the FCBs for clubs and societies registered with GOYS (i.e. before the application of the regulation in this section), the bank is requested to provide details of such accounts to GOYS (by reference to account name, relevant society, date opened and type of account) as soon as possible. If appropriate, GOYS will contact the relevant club or society in writing (with a copy to the bank) with instructions (e.g. to close the account) regarding such account.
BC-4.4 BC-4.4 Current accounts
BC-4.4.1
FCBs levying fees on their low-balance customer current accounts, are required by the Agency to apply such fees to average balances when these fall below a prescribed level during a specified period.
BC-4.4.2
In order to prevent incidences of returned cheques due to maintenance of low-balance current accounts, the banks may convert some low-balance and/or inactive current accounts to savings accounts.
BC-4.5 BC-4.5 Brokerage fee
BC-4.5.1
The purpose of the contents of this section is to set out the new scale of brokerage fees effective for all banks in Bahrain.
BC-4.5.2
The new scale of fees is the result of discussion and consultation between The Bankers' Society and the Bahrain Money Brokers.
BC-4.5.3
For the list of brokerage fee, see Appendix BC 6.
BC-4.6 BC-4.6 Notification to the Agency on introduction of new or expanded customer products and facilities
BC-4.6.1
The content of this section is applicable only to full commercial banks licensed by the Agency.
BC-4.6.2
All institutions referred to under paragraph BC-4.6.1 are required to consult the Agency before the introduction of any new or expanded customer products and facilities. The Agency will respond to the concerned bank within one week of receipt of the notification if it has any observations on the new product.
BC-4.6.3
Further, institutions should also advise the Agency, on a six-monthly basis, on the status of new or expanded products and facilities. The advise should cover the following aspects:
(a) response to,(b) success of, and(c) difficulties in,the introduction of new or expanded products and facilities. The institution should also advise the Agency on any variances which are introduced to the terms and conditions applying to these products and facilities.
BC-4.7 BC-4.7 Procedures for inheritance of financial assets
BC-4.7.1
The content of this section is applicable to all full commercial banks licensed by the Agency in the Kingdom of Bahrain.
BC-4.7.2
The Agency requires all commercial banks to follow the undermentioned procedures regarding the distribution of the financial assets of a deceased customer.
(a) Legal ownership of financial assets should only pass after sight of, and in accordance with, the relevant documentation issued by the Ministry of Justice (known as the "statutory portion").(b) Distribution of assets should be made to the order of an individual named in, and in accordance with, a mandate, duly certified by the Ministry of Justice, that reflects the permission of all inheritors that the named individual may act on their collective behalf.(c) Where minors are inheritors, the Ministry of Justice documentation must specifically refer to their inheritance and the instruction followed absolutely.BC-4.17 BC-4.17 Blocking Customer Accounts
BC-4.17.1
Islamic retail bank licensees must not block the accounts of a customer (who has a financing arrangement with it) due to customer’s termination from his or her employment or retirement regardless of the bank’s contractual rights to take such action. Banks instead must agree on other arrangements with the customer for the repayment of the financing.Added: April 2020BC-5 BC-5 Dishonoured cheques
BC-5.1 BC-5.1 Penalty system for dishonoured cheques
BC-5.1.1
The purpose of the contents of this section is to set out regulations relating to the system of penalising any person, whether natural or corporate in form, (referred to as a 'customer' in this chapter) whose cheque is
(a) presented for payment, but is returned due to insufficient funds being available on his current account, where,(b) in the opinion of the FCB on whom the cheque is drawn, such cheque has been issued by the customer in bad faith.Cheques falling within this system are referred to as 'dishonoured cheques'. Due regard must be given by FCBs to the general provisions of Bahrain Law regarding
joint accounts , partnership accounts and accounts in the name of corporate entities, as well as to the customer mandate in each case, to determine how such accounts may be dealt with for purposes of the Regulation in this chapter.Procedures to be followed
BC-5.1.2
On each occasion that an FCB becomes aware of a dishonoured cheque of one of its customers, that FCB will send a written warning to the relevant customer informing him/her of the existence of the dishonoured cheque, requesting him/her to immediately make good the insufficiency in his current account in order to clear the cheque. This written warning will also inform the customer of the provisions of this system with regard to dishonoured cheques and abusers of cheques.
BC-5.1.3
On the first working day of each calendar month, each FCB should provide to the Agency a list of the names, supported with I.D. numbers (CPR or CR numbers (as applicable) for Bahrain
residents , Passport or CR-equivalent numbers (as applicable) for non-Bahrain residents) of those customers to whom one (or more) written warning(s) has been sent in accordance with paragraph BC-5.1.2 above during the immediately preceding calendar month. This list should specify the number of written warnings relating to dishonoured cheques for each customer of the relevant FCB for the month in question and shall be in the form set out in Appendix BC 1. FCBs will be responsible for ensuring the accuracy of all details on their respective lists.BC-5.1.4
Using the lists referred to in paragraph BC-5.1.3 above, the Agency will prepare a further list (the 'Control List') of those customers to whom two or more written warnings were sent by any one or more FCB at any time within a maximum period of three consecutive calendar months. The Control List, which will be in the form set out in Appendix BC 2, will specify the name and I.D. numbers of each such customer, the total number of dishonoured cheques for that customer included in the lists referred to in paragraph BC-5.1.3 above, the name of the relevant FCB(s) on whose list(s) the customer's name has been included, and other relevant details for FCBs' information and checking in accordance with paragraph BC-5.1.5 below. Any customer to whom more than two written warnings relating to dishonoured cheques were sent by any one or more FCB at any time within a maximum period of three consecutive calendar months will be automatically deemed an abuser of cheques for the purposes of paragraph BC-5.1.7 below.
BC-5.1.5
On the second working day of each calendar month, the Agency will circulate a draft copy of the Control List to FCBs. FCBs will be requested to check the accuracy of the Control List by reference to the information they have sent to the Agency in accordance with paragraph BC-5.1.3 above, and to notify the Agency within a maximum period of one week of receiving the list of any inaccuracies on the Control List. The Control List, as amended if appropriate, will be circulated to FCBs by the Agency on the second working day after it receives all responses from FCBs. FCBs will be required to monitor the customers on this Control List to establish whether any one or more of them issued another dishonoured cheque in the instant calendar month. Any FCB becoming aware of a dishonoured cheque of one or more of its customers on the Control List during this month should notify the Agency of this fact, using the relevant section in Appendix BC 1, on the first working day of each calendar month.
BC-5.1.6
If the Agency does not receive any notification as contemplated in paragraph BC-5.1.5 above for a particular customer on the Control List, that customer's name shall be withdrawn from the next issue of the Control List. However, the Agency will monitor the names of customers appearing on the Control List during the three consecutive calendar months falling immediately after the calendar month in which a customer's name is taken off the Control List. If any such customer's name is again reported to the Agency pursuant to paragraph BC-5.1.3 above at any time during this three month period,
(a) his name will be returned to the Control List on the date of its next issue if there is only one dishonoured cheque reported in this context, or(b) he will be automatically deemed an abuser of cheques for the purposes of paragraph BC-5.1.7 below if there is more than one dishonoured cheque reported in this context.If, however, his name is not reported to the Agency in this regard, the Agency will cease its monitoring thereof.
BC-5.1.7
If the Agency does receive notification as contemplated in paragraph BC-5.1.5 above for a particular customer on the Control List, or if a customer is deemed to be an abuser of cheques within paragraph BC-5.1.4 or paragraph BC-5.1.6 above, such customer (herein referred to as an 'abuser of cheques') will be penalised as follows. Using Appendix BC 3, on the second working day of the calendar month following the receipt of the information referred to above, the Agency will circulate a draft list to FCBs. FCBs will be requested to check the accuracy of this list by reference to the information they have sent to the Agency in accordance with paragraph BC-5.1.5 above, and to notify the Agency within a maximum period of one week of receiving the list of any inaccuracies on that list. The list, as amended if appropriate, will be circulated to FCBs by the Agency on the second working day after it receives all responses from FCBs, and will direct the FCB(s) which has/have reported an abuser of cheques to withdraw all cheque books held by that abuser of cheques, and to close such person's current account(s) by transferring any balances therein to saving and/or any other accounts held with that/those FCB(s). Furthermore, those FCB(s) will be required not to provide current account facilities to that abuser of cheques for the twelve calendar month period immediately following the date of issue of the relevant list. All other FCBs should, within a maximum period of one month after the issue of the relevant list, also withdraw current account facilities from that abuser of cheques for the same twelve calendar month period. FCBs will be entitled to recover any amounts due to them from abusers of cheques as a result of compliance with this system by availing of their set-off rights under Bahrain Law.
BC-5.1.8
On Appendix BC 4, the Agency will notify FCBs of those abusers of cheques in respect of whom the twelve calendar month period referred to in paragraph BC-5.1.7 above has ended, and to whom FCBs may reinstate/offer current account facilities at their discretion.
BC-5.1.9
Nothing in this Regulation shall prejudice the rights of banks against customers otherwise existing under Bahrain Law and/or under any particular bank/customer agreement. Furthermore, FCBs will be entitled to the same immunity from prosecution as the Agency for any harm suffered, or alleged to be suffered, by customers as a result of FCBs complying with the Regulation in this chapter.
BC-5.1.10
The Regulation in this chapter may be amended, in whole or in part, from time to time by the Agency. In addition, the Agency may, at its discretion and as it so deems appropriate, issue specific directions to all or any FCBs regarding abusers of cheques or any particular abuser of cheques.
BC-5.2 BC-5.2 General guidance on administration of dishonoured cheques
BC-5.2.1
FCBs which wish to issue cheque guarantee cards for an amount not exceeding BD 200 may do so — subject to informing the Director of Banking Services at the Agency of their intention and the arrangements governing the issue of such cards.
BC-5.2.2
FCBs, generally, should take steps to extend their administrative supervision and control over current account customers (in particular those who are in repeated breach of normally-accepted behaviour), and to stress to account holders the need for an appropriate level of discipline in the usage of cheques.
BC-5.2.3
FCBs should exercise greater vigilance over borrowers, especially in the area of consumer finance, where such borrowers maintain their current accounts at a bank or banks other than at the lending bank.
BC-5.2.4
The Agency will monitor the incidence of returned cheques on a monthly basis (as stipulated in section BC-5.1) in order to determine the extent to which such incidence is being reduced or otherwise.
BC-5.3 BC-5.3 Penalty charges on dishonoured cheques
BC-5.3.1
The Agency will impose penalty charges of BD 5 (five Bahraini Dinars) on each returned cheque for the reasons of 'Refer to Drawer', 'Not Arranged For', 'Re-present', and 'Account Closed'. Individual banks will continue to be informed daily of any charges accruing to their accounts. The respective accounts will be debited on the same day.
BC-5.3.2
FCBs will be entitled to charge customers no more than BD 10 (ten Bahraini Dinars) in respect of each dishonoured cheque.
BC-6 BC-6 Automated Teller Machine (ATM)
BC-6.1 BC-6.1 Installation of an off-site ATM in Bahrain
BC-6.1.1
The purpose of the content of this section is to set out the criteria to be followed by banks for the installation and usage of
off-site ATMs in the Kingdom of Bahrain.BC-6.1.2
Applications for the installation of
off-site ATMs should be sent in writing, and in accordance with the requirements set out in paragraphs BC-6.1.3 to paragraphs BC-6.1.10, to the Executive Director of Banking Supervision at the Agency.General criteria
BC-6.1.3
Subject to the prior written approval of the Agency,
off-site ATMs may be owned individually or jointly by licensed FCBs which are members of the BENEFIT Switch. Each relevant owning FCB must already have linked its bank's ATM capability to the BENEFIT Switch prior to requesting the BMA's permission to install an off-site ATM and, furthermore, must conform to the general standards set by the Benefit company.BC-6.1.4
Subject to the prior written approval of the Agency,
off-site ATMs may, at each relevant owning FCB's discretion, be fully functioning or operate as cash dispensers only. In addition, off-site ATMs may, at each relevant owning FCB's discretion (and subject to the prior written approval of the Agency), be 'walk-up' or 'drive-in' machines.BC-6.1.5
Owning FCBs will bear full legal responsibility for their respective
off-site ATMs , as well as all costs associated with such ATMs (including, but not limited to, cash replenishment, installation, security etc.).BC-6.1.6
FCBs wishing to install an off-site ATM must submit an application (in writing) for the BMA's approval. This application must be accompanied by a copy of a feasibility study for that particular ATM, as well as such other information as the BMA may request. In particular, a copy of the written permission (for installation of that off-site ATM) of the legal owner of the proposed location must be provided to the Agency, as well as a copy of the written permission of any other relevant authorities in this context (e.g. the Traffic & Licensing and Civil Defence & Fire Service Directorates of the Ministry of Interior).
BC-6.1.7
Applications will generally be considered on a 'first come, first served' basis for a particular location. If more than one application is received to install an off-site ATM in the same location, the number of such applications which are approved will depend upon whether the location appears to the Agency to be capable of sustaining multiple
off-site ATMs (subject, in addition, to the exact details of each individual application regarding security etc. being acceptable to the Agency).BC-6.1.8
Each application will be assessed on its individual merits, and at the Agency's discretion, taking into account factors which the Agency considers relevant including, but not limited to:
(a) the suitability of the location in question,(b) the level of overall activities of the applicant in the market as well as the size and make-up of its customer base, and(c) the type and range of facilities which the applicant proposes offering through the off-site ATM at the location in question.BC-6.1.9
In addition to the information required by the Agency under paragraph BC-6.1.6, the Agency may require further information/clarification to be provided to it before it takes a decision regarding the application. The Agency's decision in this regard will be notified to each relevant applicant FCB in writing and will be final.
BC-6.1.10
The Agency may, at its discretion, require an off-site ATM to be closed at any time. In addition, an owning FCB may request the Agency in writing for permission to close any of its
off-site ATMs .BC-6.2 BC-6.2 GCC ATM network charges
BC-6.2.1
The purpose of this section is to set a limit on ATM service charges imposed by full commercial banks in the Kingdom of Bahrain for customer withdrawals and other ATM services transactions relating to other banks in the GCC (i.e. linking to GCC ATM networks).
BC-6.2.2
The limits in this section do not apply to ATM service charges on local ATM networks.
BC-6.2.3
The Agency requires that the charges on such customer withdrawals and other ATM services should not exceed BD 1 (one Bahraini Dinar) per transaction.
BC-7 BC-7 Mudaraba contracts
BC-7.1 BC-7.1 Minimum terms and conditions
BC-7.1.1
As part of its ongoing supervision of Islamic banks, the Agency has set out in Appendix BC 7 details of the type of terms and conditions which it believes Islamic banks should include, as a minimum, in such Mudaraba contracts.
BC-7.1.2
All such Mudaraba contracts entered into by a bank (whether new or renewed contracts) should meet the standards referred to under paragraph BC-7.1.1.
BC-7.1.3
Banks must have a policy statement as to the policies and procedures in place to safeguard the interest of the PSIA holders. The statement must, as a minimum, cover the following areas:
(a) Basis for allocation of profit or loss to the PSIA;(b) Policy for making provisions and reserves against assets and equity for PSIA (refer to FAS 11, issued by AAOIFI, for recognition and measurement of provisions and reserves) and to whom these provisions and reserves revert to in case of write-back or recovery;(c) Policy on the priority for investment of own funds and those of unrestricted investment account holders; and(d) Basis for allocating expenses to the PSIA.Banks must agree their Policy Statements with the Agency.
BC-8 BC-8 Margin Trading System
BC-8.1 BC-8.1 Introduction
BC-8.1.1
This Chapter applies to all full commercial banks in Bahrain.
BC-8.1.2
Investors purchasing securities (as defined from time to time by the Bahrain Stock Exchange ("BSE") listed on the BSE may pay for them under the Margin Trading System ("The System") by borrowing a portion of the purchase price from a participating bank. The System is subject to relevant provisions of the BMA Law, the BSE Law, any rules and regulations issued pursuant to such Laws and this Module. The System applies to equities in companies listed on the BSE. Unless restrictions apply under Bahrain law in this regard, the System shall be available to Bahraini or non-Bahraini investors, whether resident or non-resident in Bahrain.
BC-8.1.3
The main objective of introducing the System is to enhance the overall activity on the BSE, allowing investors to leverage their investments, in a controlled manner.
General criteria
BC-8.1.4
Only Full Commercial Banks will be permitted as participating banks for the System. Participating banks must each receive the prior general written approval of the BMA in order to take part in the System. The BMA will notify the BSE of the identity of participating banks. The BMA's approval may be withdrawn at its discretion.
BC-8.1.5
BSE Brokers will not be permitted to act as lenders for the System.
BC-8.2 BC-8.2 Limits and Trading Rules
BC-8.2.1
An investor may, through his relationship with any one individual participating bank under the System, invest a maximum of BD200,000 in securities (i.e. BD200,000 per investor/per individual participating bank, made up of BD100,000 by way of the investor's own initial margin and BD100,000 by way of financing from the relevant participating bank to that investor).
BC-8.2.2
An investor may, through approaching more than one bank under the System, invest a maximum of BD500,000 in securities (i.e. BD500,000 per investor/from all participating banks, made up of BD250,000 by way of the investor's own initial margin with all participating banks and BD250,000 by way of total financing from all participating banks to that investor.
BC-8.2.3
The amount of the margin facility made to an investor under the System shall be included as an exposure to that customer, and contribute towards the large exposures limit and the consumer finance limit for that person.
BC-8.2.4
The total amount of financing granted by an individual participating bank to all investors under the System shall not, at any time exceed 15% of that participating bank's capital base, such percentage to be reviewed by the BMA at its discretion from time to time.
BC-8.2.5
In relation to the aggregate limit under paragraph BC-8.2.2 above, the Agency will require participating banks to inform the Credit Risk Bureau of all facility limits approved to investors under the System from time to time. Participating banks must check with the CRB on the amount of facility limits outstanding under the System at any time to a particular investor.
Brokers
BC-8.2.6
Only those brokers approved by the BSE will be permitted to act as brokers for the System. Generally, brokers will only be approved if they (a) hold a "Class A" license from the BSE, and (b) meet the requirements set for the System from time to time by the BSE and the BMA.
Documentation
BC-8.2.7
Only standard-form documents (application forms and agreements) will be used for the System. Standard-form agreements, drafted and approved in advance by the BSE, will be entered into between the participating bank and the investor (in respect of financing), and between the participating bank and the investor and the broker (in respect of trading) and, as relevant, these agreements shall (amongst other things) confirm that:
a. The investor is borrowing or financing a stated amount from the participating bank for the purpose of taking part in the System;b. The investor will repay such stated amount, together with any interest or charges thereon, when due and in accordance with the agreement;c. The investor understands the risks involved in margin trading as well as the implications of the undertakings given by him;d. The participating bank can sell the securities bought through the System if the relevant margin is called and not met, without further formalities being required;e. The broker is liable for marking the securities to market on a daily (or more frequent) basis and for keeping the participating bank updated as to the participating bank's exposure to the investor;f. The investor can place orders with the broker for the purchase of securities up to the limit permitted by the agreement;g. Each party to the agreement in question shall abide by the duty of confidentiality imposed on him in relation to the matters set out in the agreement; andh. There is an overriding obligation on the parties thereto to comply with Bahrain law in general and, in particular, with the share-ownership restrictions applying to certain types of securities.Owner of the Securities bought using the System
BC-8.2.8
For ease of transfer and sale of the securities in the event that a margin is called by the participating bank but not met by the investor, the securities will be registered in the participating bank's name (for the account of the investor) and held by a custodian.
BC-8.2.9
Under paragraph BC-8.2.8 above; (a) the securities should not be considered as part of the bank's own assets for the purposes of determining ownership/control under Bahrain law, and (b) if the investor has discharged his obligations to the participating bank under the System and the securities have not been sold, the securities shall be transferred into the legal ownership of the investor.
Margin Percentage
BC-8.2.10
For equities listed on the BSE, an investor shall have the right to borrow a loan the value of which shall not exceed 50% of the total value of the funds being invested (i.e. 1:1). The BMA and the BSE shall coordinate in making any change to the margin percentages set for the System.
Margin Call Top-up
BC-8.2.11
The margin call top-up shall be 30% of the total value of the funds invested by an investor through a margin account with a participating bank. An investor shall settle a margin call on the settlement date (as determined by the BSE) by making a cash payment of such amount to the participating bank. Such cash payment may, at the investor's discretion and in whole or part, come from the sale of the securities bought through the System, or otherwise. Failure to meet such margin call will, however, give the participating bank the right to sell the securities bought through the System.
Margin Charges
BC-8.2.12
The participating bank shall impose charges on the financing amount granted to the investor at a rate or on a basis to be determined by the participating bank. In the event that investor's margin account is in credit in excess of the margin applicable thereto, profit shall be paid on the excess at a rate to be determined by the participating bank.
CA CA Capital Adequacy
CA-A CA-A Introduction
CA-A.1 CA-A.1 Application
CA-A.1.1
Regulations in this module are applicable to locally incorporated banks on both a stand-alone, including their foreign
branches , and on a consolidated group basis.CA-A.1.2
In addition to licensees mentioned in paragraph CA-A.1.1, certain of these regulations (in particular gearing requirements) are also applicable to full commercial
branches of foreign banks in the Kingdom.CA-A.2 CA-A.2 Purpose
CA-A.2.1
The purpose of this module is to set out the Agency's
capital adequacy regulations and provide guidance on the risk measurement for the calculation of capital requirements by banks referred to under CA-A.1.1.CA-A.2.2
The module also sets out the minimum gearing requirements which relevant banks (referred to in section CA-A.1) must meet as a condition of their licensing.
CA-A.2.3
The Agency requires in particular that the relevant banks maintain adequate capital, in accordance with the Regulation in this module, against their risks as capital provides banks with a cushion to absorb losses without endangering customer accounts. Due to this, the Agency also requires the relevant banks to maintain adequate liquidity and identify and control their large credit
exposures that might otherwise be a source of loss to a licensee on a scale that might threaten its solvency.CA-A.2.4
The regulations contained in this section are consistent in all substantial respects with the approach recommended by the Basel Committee on Banking Supervision and the Statement on the Purpose and Calculation of the Capital Adequacy Ratio for Islamic Banks issued by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
CA-A.2.5
The Agency recognises that the Basel Committee guidelines may not address specific characteristics of the various products and services offered by Islamic banks. Therefore, the Agency has adopted a risk-based approach and has tailored the regulations to address the specific risk characteristics for Islamic banks.
CA-A.2.6
This module provides support for certain other parts of the Rulebook, mainly:
(a) Licensing and Authorisation Requirements;(b) BMA Reporting Requirements;(c) Credit Risk Management;(d) Market Risk Management;(e) Operational Risk Management;(f) Liquidity Risk Management;(g) High Level Controls:(h) Relationship with Audit Firms;(i) Enforcement; and(j) Penalties and Fines.CA-A.3 CA-A.3 Key requirements
CA-A.3.1
All locally incorporated banks are required to measure and apply capital charges in respect of their credit and market risk capital requirements.
The capital requirement
CA-A.3.2
Banks are allowed two classes of capital instruments (see section CA-2.2) to meet their capital requirements for credit risk and market risk, as set out below:
Tier 1: Core capital — Supports the calculation of credit risk weighted assets and at least 28.57% of market risk.
Tier 2: Supplementary capital — Supports credit risk and market risk subject to limitations.
Measuring credit risks
CA-A.3.3
In measuring credit risk for the purpose of
capital adequacy , banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative riskiness.Measuring market risks
CA-A.3.4
The minimum capital requirement for equities is expressed in terms of two separately calculated charges, one relating to the "specific risk" of holding a long position in an individual equity, and the other to the "general market risk" of holding a long position in the market as a whole.
Measuring foreign exchange risk
CA-A.3.5
The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold and as a second step, the measurement of the risks inherent in the bank's mix of assets and liabilities positions in different currencies.
Measuring commodities risk
CA-A.3.6
Banks should adopt either the simplified approach to calculate their commodities risk and the resultant capital charges or the maturity ladder approach. Where banks have Salam and Parallel Salam contracts, the maturity ladder approach must be used.
Minimum capital ratio requirement
CA-A.3.7
On a consolidated basis, the Agency has set a minimum Risk Asset Ratio ("RAR") of 12.0% for all locally incorporated banks. Furthermore, on a solo basis, the parent bank is required to maintain a minimum RAR of 8.0% (i.e. unconsolidated).
Maintaining minimum RAR
CA-A.3.8
All locally incorporated banks must give the Agency immediate written notification of any actual breach by such banks of either or both of the above RARs. Where such notification is given, the bank must also provide the Agency; no later than one calendar week after the notification, with a written action plan setting out how the bank proposes to restore the relevant RAR(s) and report on a weekly basis thereafter on the bank's relevant RAR(s) until such RAR(s) have reached the required target level(s).
CA-A.3.9
The Agency considers it a matter of basic prudential practice that, in order to ensure that these RARs are constantly met, banks set up internal "targets" of 12.5% (on a consolidated basis) and 8.5% (on a solo basis) to warn them of a potential fall by the bank below the Agency's required minimum RARs. Where a bank's capital ratio falls below its target ratio, the General Manager should notify the Agency immediately, however, no formal action plan will be necessary. The General Manager should explain what measures are being implemented to ensure that the bank will remain above its minimum RAR(s).
CA-A.3.10
The bank will be required to submit the PIRI forms to the Agency on a monthly basis, until the RAR(s) exceeds its target ratio(s).
Gearing requirements
CA-A.3.11
For Full Commercial Bank and Offshore Banking Unit licensees,
deposit liabilities should not exceed 20 times the respective bank's capital and reserves.CA-A.3.12
For Investment Bank licensees,
deposit liabilities should not exceed 10 times the respective bank's capital and reserves.CA-A.4 CA-A.4 Regulation history
CA-A.4.1
This module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
CA-A.4.2
A list of most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes Evolution of the Module
CA-A.4.3
Prior to the development of Rulebook, the Agency had issued various circulars representing regulations relating to
capital adequacy requirements. These circulars have now been consolidated into this module covering thecapital adequacy regulation. These circulars and their evolution into this module are listed below:Circular Ref. Date of Issue Module Ref. Circular Subject PIRI
BC/09/0126 Nov 2001 CA Prudential Information Returns for Islamic Financial Institutions OG/78/01 20 Feb 2001 CA-2.5 Monitoring of Capital Adequacy BC/01/98 10 Jan 1998 CA-2.5 Risk Asset Ratio Effective date
CA-A.4.4
The contents in this module are effective from the date depicted in the original circulars (see paragraph CA-A.4.3) from which the requirements are compiled.
CA-B CA-B General guidance and best practice
CA-B.1 CA-B.1 Introduction
CA-B.1.1
This chapter provides general guidance on
Capital adequacy requirements, unless otherwise stated.CA-B.1.2
It sets best practice standards and should generally be applied by all licensees to their activities.
CA-B.2 CA-B.2 Guidance provided by other international bodies
Basel Committee: The management of banks' off balance sheet exposures — a supervisory perspective
CA-B.2.1
In March 1986, the
Basel Committee on Banking Supervision issued a paper titled "The management of banks' off-balance-sheet exposures — a supervisory perspective" (see www.bis.org/publ/bcbsc134.pdf).CA-B.2.2
This paper examines off balance sheet risks from three angles — market/position risk, credit risk and operational/control risk. Part III of this paper examines credit risk (including control of large exposures, settlement risk and country risk), with particular emphasis given to the assessment of the relative risks of the different types of off balance sheet activity.
CA-B.3 CA-B.3 Enforceability
CA-B.3.1
These guidance should not be taken as legally binding requirements, unless otherwise embodied in Bahrain law or by regulation.
CA-B.3.2
It should be noted that the provisions in this chapter are to be taken as guidance, unless otherwise stated, supplementing the Regulations set out in this module.
CA-1 CA-1 Scope and coverage of capital charges
CA-1.1 CA-1.1 Introduction
CA-1.1.1
All locally incorporated banks are required to measure and apply capital charges in respect of their fiduciary and displacement risk, credit and market risk capital requirements.
CA-1.1.2
Fiduciary and displacement risk is defined as [ref IFSB].
CA-1.1.3
Credit risk is defined as the potential that a bank's
counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk exists throughout the activities of a bank in the banking book and in the trading book including both on and off balance sheetexposures .CA-1.1.4
Market risk is defined as the risk of losses in on or off balance sheet positions arising from movements in market prices. The risks subject to the capital requirement of this module are:
(a) the risks pertaining to equities in the trading book;(b) foreign exchange risk throughout the bank; and(c) commodity risk throughout the bank.CA-1.2 CA-1.2 Measuring fiduciary and displacement risks
CA-1.2.1
Islamic banks mobilise funds on a profit and loss sharing basis (PLS). However, certain risks are associated with such PLS accounts. These risks are referred to as fiduciary and displaced commercial risk.
CA-1.2.2
To cater for these risks the Agency has accepted the recommendations contained in the AAOIFI's statements and requires the inclusion of 50% of the risk weighted assets of the Profit Sharing Investment Accounts (PSIA) in the denominator of the capital adequacy ratio.
CA-1.3 CA-1.3 Measuring credit risks
CA-1.3.1
In measuring credit risk for the purpose of
capital adequacy , banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative riskiness.CA-1.3.2
The Agency has adopted the risk weightings recommended by the Basel Committee on Banking Supervision, where applicable. However, the Basel Committee does not define the risk weightings for some of the specific Islamic contracts.
CA-1.3.3
In Islamic banking, the legal form is as important as the substance of the transaction otherwise the transaction would not be permissible under Shari'a. Therefore, when assigning risk weights to the various Islamic contracts, banks should consider the legal form of the transactions as well as the substance.
CA-1.3.4
The framework of weights consists of four weights — 0%, 20%, 50% and 100% for on and off balance sheet items, which based on a broad-brush judgment, are applied to the different types of assets and off balance sheet
exposures within the banking book.CA-1.3.5
The resultant different weighted assets and off balance sheet
exposures are then added together to calculate the total credit-risk-weighted assets of the bank.CA-1.3.6
The Agency has addressed the issue of the risk weightings for some of the commonly used Islamic contracts. If banks are involved in contracts not covered below they should contact the Agency and agree on an appropriate risk-weighting category.
Murabaha and Murabaha to the purchase orderer
CA-1.3.7
The Agency as a policy requires that all Murabaha contracts be based on binding promises. The Murabaha receivables should be assigned a risk weight based on the credit standing of the obligor as recommended by the Basel Committee.
Mudaraba contracts
CA-1.3.8
Mudaraba contracts should be assigned a risk weighting according to the underlying investments. Where Mudaraba funds are invested in securities listed on recognised exchanges and the price volatility is based on market movements, these should be removed from credit risk weightings and subject to market risk regulations. Examples would be equity Mudarabas where banks may have direct exposure in the value of the underlying equities or commodity Mudarabas.
CA-1.3.9
Investments in other Mudarabas such as real estate or leasing should be assigned risk weightings according to the standing of the underlying investment as per the Basel Capital Accord.
CA-1.3.10
Where a Mudaraba fund invests in another Mudaraba contract, which in turn makes investments at its own discretion, the risk weight would be based on the credit standing of the counterparty (investee Mudarib) as recommended by the Basel Committee. Investments in particular asset classes made at the discretion of the (investor) Mudaraba fund should be assigned risk weighting according to the underlying investments, where possible.
Musharaka contracts
CA-1.3.11
Musharaka contracts refer to partnerships in specific transactions or projects. These exclude participation in the share capital (equity) of other enterprises. Risk weights should be assigned in accordance with the standings of the underlying investment as per the guidelines of the Basel Committee. Musharaka in real estate, plant and machinery or other similar assets attract a 100% risk weighting.
CA-1.3.12
Musharakas in trading transactions will attract risk weighting as per the standing of the underlying investment, which in all cases would attract a 100% risk weighting. Where the transaction involves trading in commodities which may be traded in secondary markets, these should be removed from credit risk weighting and subjected to market risk regulations.
CA-1.3.13
In cases where it is difficult to ascertain the composition of the underlying asset, risk weight would be assigned based on the credit standing of the counterparty.
Ijarah / Ijarah Muntahia Bittamleek assets
CA-1.3.14
Under Shari'a, substantial risks and rewards of ownership of assets may not be transferred to lessees. Therefore, assets acquired for the purpose of leasing under Ijarah or Ijarah Muntahia Bittamleek contracts should be carried on the balance sheet of the lessor and assigned a risk weighting of 100%.
CA-1.3.15
However, where these are residential properties, leased under Ijarah Muntahia Bittamleek with the lessee's option to buy at the end of the lease term and to use the properties for residential purposes, a 50% risk weighting is assigned, where the lessor has a first enforceable charge on the assets.
Istisna'a and parallel Istisna'a contracts
CA-1.3.16
The accounting for these contracts should be in accordance with Financial Accounting Standard (FAS) No. 10: Istisna'a and Parallel Istisna'a, issued by AAOIFI.
CA-1.3.17
Istisna'a and parallel Istisna'a contracts would attract risk weighting as per the credit standing of the respective counterparties in accordance with the Basel Committee.
Salam and parallel Salam
CA-1.3.18
Amounts paid in respect of Salam contracts (for which there exists a parallel Salam contract) should normally be assigned a risk weight as per the credit standing of the customer in accordance with the Basel Committee.
CA-1.3.19
Salam and parallel Salam contracts would attract risk weighting as per the credit standing of the respective counterparties in accordance with the Basel Committee.
Participations and equity investments
CA-1.3.20
The supervision of banks for capital adequacy purposes is carried out on a consolidated basis, taking into account all holdings of the capital of other entities by the concerned bank. For subsidiaries, the preferred mode of consolidation is to add the assets and liabilities into the accounts of the parent on a line-by-line basis. For associate companies (i.e. where the parent bank owns 20% or more of the voting stock, and/or has voting control of the concerned company), the assets and liabilities should also be consolidated on a line-by-line basis. If banks do not wish to consolidate subsidiaries or associates (that meet the above criteria), they must contact the Agency to agree on the accounting treatment to be used. Participations and investments which amount to below 20% of the voting capital of the concerned company should be accounted for at fair value and weighted at 100%.
CA-1.3.21
Banks which have subsidiary and associate companies must also be supervised for capital adequacy on a solo basis (i.e. after deducting all holdings of the share capital of all subsidiaries and associates (that meet the criteria in paragraph CA-1.3.20 above) and excluding all their assets and liabilities from the accounts of the parent bank). Holdings of other participations and equity investments need not be deducted on a solo basis, but should be accounted for at fair value and weighted at 100%. Banks should note paragraph CA-2.2.6 in respect of the treatment described in this paragraph and in paragraph CA-1.3.20.
Intra fund balances
CA-1.3.22
Transactions between the corporate book (i.e. self-financed and financed by unrestricted investment accounts) and restricted investment accounts are not allowed, unless approved by the Agency on a temporary basis.
CA-1.3.23
If permitted by the Agency, on a temporary basis, the following weightings will be applied:
(a) Corporate or unrestricted investment funds invested in Restricted Investment Accounts.
Risk weighting would be assigned on the underlying asset as per the Basel Committee Guidelines and in accordance with the guidance set out under chapters CA-1 to CA-6.(b) Restricted investment account funds invested in corporate books.(i) In the corporate books, the assets financed by restricted investment accounts would be included as part of the corporate assets and risk weighting assigned in accordance with the guidelines.(ii) 0% risk weighting should be assigned to the funds invested by the restricted investment accounts in the corporate books in order to avoid double counting as the resultant assets are already risk weighted in the Bank's books.(iii) Banks must agree with the Agency on the treatment of investments by restricted investment accounts in the corporate book. The Agency will consider each case on its merit.CA-1.4 CA-1.4 Measuring market risks
Trading book
CA-1.4.1
The trading book means the bank's positions in financial instruments (including off balance sheet instruments that are intentionally held for short-term resale and/or which are taken on by the bank with the intention of benefiting in the short-term from actual and/or expected differences between their buying and selling prices, or from other price variations, and positions in financial instruments arising from matched principal brokering and market making). Treatment of risks associated with any option transactions should be agreed in advance with the Agency, who will consider the issue on a case by case basis.
CA-1.4.2
Each bank should agree to a written policy statement with the Agency as to which activities are normally considered trading and constitute part of the trading book. Trading book's definition should be consistently applied by the bank from year to year.
CA-1.4.3
It is expected that the trading activities will be managed and monitored by a separate unit and that such activities should be identifiable because of their intent, as defined in paragraph CA-1.4.1 above.
Equity risk
CA-1.4.4
The capital charges for equities will apply based on the current market values of items in a bank's trading book.
Foreign exchange and commodities risk
CA-1.4.5
The capital charges for foreign exchange risk and for commodity risk will apply to a bank's total currency and commodity positions, with the exception of structural foreign exchange positions in accordance with section CA-5.3 of these regulations.
Exemptions
CA-1.4.6
Banks will be allowed certain de minimis exemptions from the capital requirements for foreign exchange risk, as described in section CA-5.2 of these regulations. For the time being, there shall be no exemptions from the trading requirements, or from the capital requirements for commodity risk.
Bank's own fund and Profit and Loss Sharing Investment Accounts (PSIA)
CA-1.4.7
Banks must compute capital charges for own funds subject to market risk, as well as those of the PSIA. For the purpose of computing the capital adequacy ratio, 50% of the bank's market risk weighted assets relating to the PSIA (restricted and unrestricted) must be included in accordance with AAOIFI's Statement on Purpose and Calculation of the Capital Adequacy Ratio for Islamic Banks.
Consolidation
CA-1.4.8
As with the credit risk capital requirements, the market risk capital requirements apply on a worldwide consolidated basis. Only a bank, which is running a global consolidated book, may apply the offsetting rules contained in the remainder of these regulations, on a consolidated basis with the prior written agreement of the Agency. However, where it would not be prudent to offset or net positions within the group, for example where there are obstacles to the quick repatriation of profits from a foreign subsidiary or where there are legal and procedural difficulties in carrying out the timely management of risks on a consolidated basis, the Agency will require the bank to take individual positions into account without any offsetting.
CA-1.4.9
Notwithstanding that the market risk capital requirements apply on a worldwide consolidated basis, the Agency also monitors the market risks of banks on a non-consolidated basis to ensure that significant imbalances within a group do not escape supervision. The Agency is particularly vigilant to ensure that banks do not pass positions on reporting dates in such a way as to escape measurement.
Approach to measurement
CA-1.4.10
For the measurement of their market risks, banks will measure the risks in a standardised manner, using the measurement framework described in chapters CA-4 to CA-6.
CA-1.4.11
The standardised methodology uses a "building block" in which the capital charge for each risk category is determined separately. For equity positions risk, separate capital charge for specific risk and the general market risk arising from these positions are calculated. The specific market risk is defined as the risk of loss caused by an adverse price movement of a security/ units due principally to factors related to the issuer. The general market risk is defined as the risk of loss arising from adverse changes in aggregate market prices. For commodities and foreign exchange, there is only one general market risk capital requirement.
CA-1.4.12
All transactions, including forward sales and purchases, shall be included in the calculation of capital requirements as from the date on which they were entered into.
Monitoring
CA-1.4.13
Formal reporting, to the Agency, of the market risk exposure and capital adequacy shall take place as at the end of each calendar quarter. The returns relating to any quarter should be submitted to the Agency by the 20th day of the first month of the following quarter. Furthermore, banks are expected to manage their market risk in such a way that the capital requirements for market risk are being met on a continuous basis (i.e. at the close of each business day and not merely at the end of each calendar quarter). Banks are also expected to maintain strict risk management systems to ensure that their intra-day exposures are not excessive.
CA-1.4.14
Banks' daily compliance with the capital requirements for market risk will be verified by the independent risk management department and the internal auditor. It is expected that the external auditors will perform appropriate tests of the bank's daily compliance with the capital requirements for market risk. Where a bank fails to meet the minimum capital requirements for market risk on any business day, the Agency must be informed in writing. The Agency will then seek to ensure that the bank takes immediate measures to rectify the situation.
CA-1.4.15
Besides what is stated in paragraph CA-1.4.14 above, the Agency will consider a number of other appropriate and effective measures to ensure that banks do not "window dress" by showing significantly lower market risk positions on reporting dates.
CA-1.5 CA-1.5 Reporting
CA-1.5.1
Formal reporting, to the Agency, of
capital adequacy shall be made in accordance with the requirements set out under section BR-3.1.CA-1.6 CA-1.6 Summary of overall capital adequacy requirements
CA-1.6.1
Each bank is expected to monitor and report the level of risk against which a capital requirement is to be applied, in accordance with section CA-1.4. The bank's overall minimum capital requirement will be:
(a) the credit risk requirements laid down in these regulations; PLUSCA-2 CA-2 The capital requirement
CA-2.1 CA-2.1 Introduction
CA-2.1.1
Islamic banks are allowed two types of own funds to meet their capital requirements for credit risk and market risk, as set out below:
— Tier 1: Supports the calculation of credit risk weighted assets and at least 28.57% of market risk.— Tier 2: Supports credit risk and market risk subject to limitations.CA-2.1.2
For the purpose of calculating its Capital Adequacy Ratio (CAR), the risk-weighted assets of an Islamic bank consist of the sum of the risk-weighted assets financed by the Islamic bank's own capital and liabilities, plus 50% of the risk-weighted assets financed by the Islamic bank's PSIA. This applies to both unrestricted PSIA that are accounted for on the Islamic bank's balance sheet and restricted PSIA that are accounted for off the balance sheet.
CA-2.2 CA-2.2 Definition of capital
Tier capital
CA-2.2.1
Tier Capital forms the numerator of the Capital Adequacy Ratio. It is defined as the cornerstone of a bank's strength.
CA-2.2.2
The essential characteristics of capital are that it should:
(a) Represent a permanent and unrestricted commitment of funds;(b) Be freely available to absorb losses and thereby enable a bank to keep operating whilst any problems are resolved;(c) Not impose any unavoidable charge on the earnings of the bank.CA-2.2.3
For the purpose of defining Tier capital, the Agency has broadly adopted the recommendations contained in AAOIFI's Statement on the Purpose and Calculation of Capital Adequacy for Islamic Banks. However, some restrictions have been placed on the inclusion of profit equalisation and investment risk reserve as Tier 2 capital. For components of Tier 1 and Tier 2 capital refer to paragraphs CA-2.2.4 to CA-2.2.5.
Tier 1: Core capital
CA-2.2.4
Tier 1 capital shall consist of the sum of items (a) to (b) below, less the sum of items (c) to (d) below:
(a) Bank's permanent share capital and disclosed reserves in the form of legal, general and other reserves created by appropriations of retained earnings, share premium, capital redemption reserves and other surplus (as shown in its balance sheet), but excluding revaluation reserves and prudential reserves (profit equalisation reserves and investment risk reserve as defined in the AAOIFI's Financial Accounting Standard No: 11 Provisions and Reserves).
In case of an Islamic fund having participation and / or "B" class shares (not carrying voting rights), their treatment as capital or unrestricted investment accounts (for the purpose these regulations) must be agreed with the Agency. The Agency will consider each case on its merit.(b) Minority interests, arising on consolidation, in the equity of subsidiaries that are less than wholly owned.LESS:
(c) Goodwill(d) Current year's cumulative net losses which have been reviewed as per the International Standards on Auditing (ISA) by the external auditors.Tier 2: Supplementary capital
CA-2.2.5
Tier 2 capital shall consist of the following items:
(a) Interim retained profits that have been reviewed as per the ISA by the external auditors.(b)Asset revaluation reserves , which arise in two ways. Firstly, these reserves can arise from the revaluation of fixed assets from time to time in line with the change in market values, and are reflected on the face of the balance sheet as a revaluation reserve. Secondly, hidden values or "latent" revaluation reserves may be present as a result of long-term holdings of equity securities valued in the balance sheet at the historical cost of acquisition. Both types of revaluation reserve may be included in Tier 2 capital, with the concurrence of the external auditors, provided that the assets are prudently valued, fully reflecting the possibility of price and forced sale. In the case of "latent" revaluation reserves, a discount of 55% will be applied to the difference between the historical cost book value and the market value to reflect the potential volatility of this form of unrealised capital.(c) General provisions held against the future, presently unidentified, losses are freely available to meet losses that subsequently materialise and therefore, qualify for inclusion within supplementary elements of capital, subject to a maximum of 1.25% of total risk-weighted assets (both credit and market risk weighted). Prescriptions ascribed to impairment of particular assets or known liabilities should be excluded.(d) Profit equalisation reserve and investment risk reserve as defined in FAS No. 11: Provisions and Reserves, issued by AAOIFI, up to a maximum amount equal to the capital charge pertaining to the 50% the risk weighted assets financed by unrestricted and restricted investment account holders.(e) 45% of unrealised gains on equitysecurities held as available-for-sale (on an aggregate net-basis).Deductions from Tier 1 and Tier 2 capital
CA-2.2.6
For the calculation of capital adequacy on a solo basis, the following item shall be deducted from the sum of Tier 1 and Tier 2 capital (goodwill will have been already deducted from Tier 1 capital):
(a) Investments in and financing of a capital nature to unconsolidated subsidiaries and associates. The assets representing the investments in subsidiary companies whose capital is deducted from that of the parent would not be included in total assets for the purpose of computing the capital adequacy ratio.(b) Holdings of own shares and any financing facility provided to the parent company to finance the shares of the subsidiary.CA-2.3 CA-2.3 Limits on the use of different forms of capital
CA-2.3.1
The following constraints apply to the CAR calculations:
Constraint 1: Tier 2 capital allocated to credit risk (see section A20.7 of guidelines in Appendix BR 3)
should be less than or equal to
50% of the Tier 1 capital allocated to credit risk (see section A20.6 of guidelines in Appendix BR 3)Constraint 2: Tier 2 capital allocated to market risk (see section A20.13 of guidelines in Appendix BR 3) plus Tier 2 capital allocated to credit risk (see section A20.7 of guidelines in Appendix BR 3)
should be less than or equal to
Total Tier 1 capital available (see section A20.1 of guidelines in Appendix BR 3)CA-2.4 CA-2.4 Calculation of the CAR for Islamic banks
CA-2.4.1
Firstly, the banks should calculate minimum capital required (section A20.4 or A9.14 of guidelines in Appendix BR 3) by reference to credit risk in accordance with these regulations, excluding equity securities in the trading book and all positions in commodities. This figure will constitute minimum capital required to cover credit risk (section A20.5 of guidelines in Appendix BR 3).
CA-2.4.2
Secondly, the banks should calculate minimum capital required (section A20.9 or A17.14 of guidelines in Appendix BR 3) by reference to the measure of market risk (i.e. specific risk plus general market risk) in accordance with the regulations contained in section CA-1.4. This figure will constitute minimum capital required to cover market risk (section A21.10 of guidelines in Appendix BR 3).
CA-2.4.3
Thirdly, the amount resulting from the above requirement (section A20.10 of guidelines in Appendix BR 3) should be multiplied by 28.57%. This is the minimum capital charge which should be supported by Tier 1 capital allocated to market risk weighted exposures (section A20.12 of guidelines in Appendix BR 3); therefore, the balance amount in Tier 1 capital should be the amount allocated to support credit risk weighted assets (section A20.6 of guidelines in Appendix BR 3).
CA-2.4.4
The balance of the credit risk weighted assets may be supported by Tier 2 capital amount in section A20.7 of guidelines in Appendix BR 3 (subject to constraint stated in section CA-2.3).
CA-2.4.5
Further, the residual amount in Tier 2 capital (section A20.13 of guidelines in Appendix BR 3) may be used to support the balance subject to the condition stated in paragraph CA-2.4.3.
CA-2.5 CA-2.5 Minimum capital ratio requirement
CA-2.5.1
The Agency has established that the minimum capital ratio required for all Islamic banks incorporated in Bahrain is 12%. Furthermore, on a solo basis, the parent bank of a group is required to maintain a minimum RAR of 8.0% (i.e. unconsolidated).
Maintaining minimum RAR
CA-2.5.2
All locally incorporated banks must give the Agency immediate written notification of any actual breach by such banks of either or both of the above RARs. Where such notification is given, the bank must also provide the Agency:
(a) no later than one calendar week after the notification, with a written action plan setting out how the bank proposes to restore the relevant RAR(s) to the required minimum level(s) set out above and, further, describing how the bank will ensure that a breach of such RAR(s) will not occur again in the future; and(b) with a weekly report thereafter on the bank's relevant RAR(s) until such RAR(s) have reached the required target level(s) set out below.CA-2.5.3
In addition, the Agency considers it a matter of best practice that, in order to ensure that these RARs are constantly met, that banks set up internal "targets" of 12.5% (on a consolidated basis) and 8.5% (on a solo basis) to warn them of a potential fall by the bank below the Agency's required minimum RARs as set out above.
CA-2.5.4
Where a bank's capital ratio falls below its target ratio, the General Manager should notify the Director of Banking Supervision at the Agency immediately. No formal action plan will be necessary, however the General Manager should explain what measures are being implemented to ensure that the bank will remain above its minimum RAR(s).
CA-2.5.5
The bank will be required to submit the PIRI forms to the Agency on a monthly basis, until the RAR(s) exceeds its target ratio(s).
CA-2.5.6
The Agency will notify banks in writing of any action required of them with regard to the corrective and preventive action (as appropriate) proposed by the bank pursuant to the above, as well as of any other requirement of the Agency in any particular case.
CA-2.5.7
Banks should note that the Agency considers the breach of RARs to be a very serious matter. Consequently, the Agency may (at its discretion) subject a bank which breaches its RAR(s) to a formal licensing reappraisal. Such reappraisal may be effected either through the Agency's own inspection function or through the use of Reporting Accountants, as appropriate. Following such appraisal, the Agency will notify the bank concerned in writing of its conclusions with regard to the continued licensing of the bank.
CA-2.5.8
The Agency recommends that the bank's compliance officer supports and cooperates with the Agency in the monitoring and reporting of the capital ratios and other regulatory reporting matters. Compliance officers should ensure that their banks have adequate internal systems and controls to comply with these regulations.
CA-3 CA-3 Credit risk
CA-3.1 CA-3.1 Introduction
CA-3.1.1
This chapter describes the standardised approach for the measurement of the credit risk
exposure in the bank's banking book.CA-3.2 CA-3.2 Risk weighting — On balance sheet asset category
CA-3.2.1
Risk weights by category of on balance sheet asset are illustrated in the table below:
Risk weights Category of on balance sheet assets/claims 0% (a) Cash;
(b) Holdings of Gold bullion and coins;
(c) The government of Bahrain & Bahrain public sector entities;
(d) Government-owned GCC companies incorporated in Bahrain;
(e) Central governments and central banks of GCC and OECD countries; and
(f) Central governments and central banks of classified countries where denominated and funded in local currency.20% (a) Cash items in process of collection;
(b) Multilateral development banks;
(c) Banks and securities firms incorporated in Bahrain, other GCC and OECD countries;
(d) Banks incorporated in classified countries with a residual maturity less than 1 year;
(e) Public sector entities in GCC and OECD countries; and
(f) Government-owned GCC companies incorporated outside Bahrain.50% Mortgages backed by residential property 100% (a) Related parties
(b) Holdings of other banks' and securities firms' capital instruments
(c) Banks incorporated in classified countries with a residual maturity of over 1 year
(d) Central governments and central banks of classified countries (not included above)
(e) Public sector entities of classified countries
(f) Government-owned companies in non-GCC countries
(g) Private sector persons and entities in and outside Bahrain
(h) Istisna'a assets*
(i) Ijarah / Ijarah Muntahia Bittamleek assets
(j) Real estate investments
(k) Other assets not reported elsewhere*** This represents balance in Work in Progress/ cost account less billings. However, Istisna'a receivables should be reported against the risk weighting category of the counterparty.
** Salam Contracts are subject to market risk and should not be included here.
CA-3.3 CA-3.3 Risk weighting — Off balance sheet items
CA-3.3.1
The framework takes account of the credit risk on off balance sheet
exposures by applying credit conversion factors to the different types of off balance sheet instruments or transactions.CA-3.3.2
The conversion factors are derived from the estimated size and likely occurrence of the credit
exposure , as well as the relative degree of credit risk as identified in theBasel Committee's paper on "The management of banks' off-balance-sheet exposures: a supervisory perspective" (see www.bis.org/publ/bcbsc134.pdf) issued in March 1986.CA-3.3.3
The credit conversion factors applicable to the off balance sheet items are set out in the table below:
Credit Conversion factors Off balance sheet items 100% Direct credit substitutes 50% Transaction-related contingent 20% Trade-related contingencies 100% Sale and repurchase agreements 100% Forward asset purchases 50% Underwriting commitments 50% Commitments with an original maturity of over 1 year, not unconditionally cancellable at anytime 0% Commitments with an original maturity of less than 1 year, unconditionally cancellable at anytime CA-3.3.4
The applicable credit conversion factors should be multiplied by the weights applicable to the category of the counterparty as set out below:
Risk weights Counterparty 0% Type (a)
— The Government of Bahrain.— Bahrain public sector entities.— Government-owned (non-banking) GCC companies incorporated in Bahrain.— Central government and central banks of GCC and OECD member countries.20% Type (b)
— Banks incorporated in Bahrain or GCC and OECD countries andsecurities firms.— Banks incorporated in classified countries (if the commitment has a residual life of 1 year or less).— Public sector entities in GCC and OECD countries.— Government-owned (non-banking) GCC companies incorporated outside Bahrain.100% Type (c)
— Banks incorporated in classified countries (if the commitment has a residual life of more than 1 year).— Central governments, central banks and public sector entities in classified countries.— Government-owned companies incorporated in non-GCC countries.— Private sector persons and entities in Bahrain and abroad.CA-4 CA-4 Equity risk
CA-4.1 CA-4.1 Introduction
CA-4.1.1
This chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in equities in the bank's trading book.
CA-4.1.2
The minimum capital requirement for equities is expressed in terms of two separately calculated charges, one relating to the "specific risk" of holding a long position in an individual equity, and the other to the "general market risk" of holding a long position in the market as a whole.
CA-4.1.3
Where the bank has invested in shares/units of equity funds on Mudaraba financing and the bank has direct exposures in the equities which are traded in a recognised stock exchange, the shares/units are considered to be subject to equity risk. The equity position would be considered to be the net asset value as at the reporting date.
CA-4.2 CA-4.2 Specific risk calculation
CA-4.2.1
Specific risk is defined as the bank's gross equity positions (i.e. the sum of all equity positions and is calculated for each country or equity market).
CA-4.2.2
The capital charge for specific risk is 8%, unless the portfolio is both liquid and well-diversified, in which case the capital charge will be 4%. To qualify for the reduced 4% capital charge, the following requirements need to be met:
(a) The portfolio should be listed on a recognised stock exchange;(b) No individual equity position shall comprise more than 10% of the gross value of the country portfolio; and(c) The total value of the equity positions which individually comprise between 5% and 10% of the gross value of the country portfolio, shall not exceed 50% of the gross value of the country portfolio.CA-4.2.3
To qualify for reduced 4% capital charge on equity funds, the bank should acquire prior written approval from the Agency.
CA-4.3 CA-4.3 General risk calculation
CA-4.3.1
The general market risk is the difference between the sum of the long positions and the sum of the short positions (i.e. the overall net position) in each national equity market. In other words, to calculate the general market risk, the bank should sum the market value of its individual net positions for each national market, taking into account whether the positions are long or short.
CA-4.3.2
The general market equity risk measure is 8% of the overall net position in each national market.
CA-5 CA-5 Foreign exchange risk
CA-5.1 CA-5.1 Introduction
CA-5.1.1
This section describes the standardised method for calculation of the bank's foreign exchange risk, and the capital required against that risk.
CA-5.1.2
The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold1 and as a second step, the measurement of the risks inherent in the bank's mix of assets and liabilities positions in different currencies.
1 Positions in gold should be treated as if they were foreign currency positions, rather than commodity positions, because the volatility of gold is more in line with that of foreign currencies and most banks manage it in a similar manner.
CA-5.1.3
A bank that holds net open positions (whether assets or liabilities) in foreign currencies is exposed to the risk that exchange rates may move against it. The open positions may be either trading positions or, simply, exposures caused by the bank's overall assets and liabilities. Where the bank is involved in option transactions, these should be agreed in advance with the Agency. The Agency will consider the appropriate treatment on a case by case basis.
CA-5.1.4
The open positions and the capital requirements are calculated with reference to the entire business (i.e. the banking and trading books).
CA-5.1.5
The open positions are calculated with reference to the bank's base currency, which will be either Bahraini Dinars (BD) or United States dollars (USD).
CA-5.1.6
In addition to foreign exchange risk, positions in foreign currencies may be subject to credit risk which should be treated separately.
CA-5.2 CA-5.2 De Minimis exemptions
CA-5.2.1
A bank doing negligible business in foreign currencies and which does not take foreign exchange positions for its own account may, at the discretion of the Agency and as evidenced by the Agency's prior written approval, be exempted from calculating the capital requirements on these positions. The Agency is likely to be guided by the following criteria in deciding to grant exemption to any bank:
(a) The bank's holdings or taking of positions in foreign currencies, including gold, defined as the greater of the sum of the gross asset positions and the sum of the gross liability position in all foreign positions and gold, does not exceed 100% of its eligible capital; and(b) The bank's overall net open position, as defined in section CA-5.3, does not exceed 2% of its eligible capital.CA-5.2.2
The criteria listed in paragraph CA-5.2.1 above are only intended to be guidelines, and a bank will not automatically qualify for exemptions upon meeting them. Banks doing negligible foreign currency business, which do not take foreign exchange positions for the bank's own account, and wish to seek exemption from foreign exchange risk capital requirements, should submit an application to the Agency, in writing. The Agency will have the discretion to grant such exemptions. The Agency may also, at its discretion, fix a minimum capital requirement for a bank that is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.
CA-5.2.3
The Agency may, at a future date, revoke an exemption granted to a bank, if the Agency is convinced that the conditions on which the exemption was granted no longer exist.
CA-5.3 CA-5.3 Calculation of net open positions
CA-5.3.1
A bank's exposure to foreign exchange risk in any currency is its net open position in that currency, which is calculated by summing the following items:
(a) The net spot position in the currency (i.e. all asset items less all liability items, including accrued profit, other income and expenses, denominated in the currency in question; assets are included gross of provisions for bad and doubtful debts, except in cases where the provisions are maintained in the same currency as the underlying assets);(b) The net forward position in the currency (i.e. all amounts to be received less all amounts to be paid under forward foreign exchange contracts, in the concerned currency);(c) Guarantees and similar off balance sheet contingent items that are certain to be called and are likely to be irrecoverable where the provisions, if any, are not maintained in the same currency;(d) Profits (i.e. the net value of income and expense accounts) held in the currency in question; and(e) Specific provisions held in the currency in question where the underlying asset is in a different currency, net of assets held in the currency in question where a specific provision is held in a different currency.CA-5.3.2
For calculating the net open position in gold, the bank will first express the net position (spot plus forward) in terms of the standard unit of measurement (i.e. ounces or grams) and then convert it at the current spot rate into the base currency.
CA-5.3.3
Where gold is part of a forward contract (i.e. quantity of gold to be received or to be delivered), any foreign currency exposure from the other leg of the contract should be reported.
Structural positions
CA-5.3.4
Positions of a structural nature (i.e. non-dealing), may be excluded from the calculation of the net open currency positions, these include positions related to items that are deducted from the bank's capital when calculating its capital base in accordance with the rules and guidelines issued by the Agency, such as investments denominated in foreign currencies in non-consolidated subsidiaries.
CA-5.3.5
The Agency will consider approving the exclusion of the above positions for the purpose of calculating the capital requirement, only if each of the following conditions is met:
(a) The concerned bank provides adequate documentary evidence to the Agency which establishes the fact that the positions proposed to be excluded are, indeed, of a structural nature (i.e. non-dealing) and are merely intended to protect the bank's capital adequacy ratio. For this purpose, the Agency may ask written representations from the bank's management or Directors.(b) Any exclusion of a position is consistently applied, with the treatment of the structural positions remaining the same for the life of the associated assets or other items.Calculation of the overall net open position
CA-5.3.6
The net position in each currency is converted at the spot rate, into the reporting currency. The overall net open position is measured by aggregating the following:
(a) The sum of the net liabilities positions or the sum of the net asset positions whichever is greater(b) The net position (liabilities and assets) in gold, regardless of signCA-5.3.7
Where the bank is assessing its foreign exchange on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the bank. In such cases, the internal limit for that branch/subsidiary, in each currency, may be used as a proxy for the positions. The branch/subsidiary limits should be added, without regard to sign, to the net open position in each currency involved. When this simplified approach to the treatment of currencies with marginal operations is adopted, the bank should adequately monitor the actual positions of the branch/subsidiary against the limits, and revise the limits, if necessary, based on the results of the ex-post monitoring.
CA-5.4 CA-5.4 Calculation of the capital charge
CA-5.4.1
The capital charge is 8% of the overall net open foreign currency position.
CA-5.4.2
The table below illustrates the calculation of the overall net open foreign currency position and the capital charge:
Example of the calculation of the foreign exchange overall net open position and the capital charge
GBP DEM SAR US$ JPY GOLD +200 +100 +70 −190 −40 −50 +370−23050 The capital charge is 8% of the higher of either the sum of the net long currency positions or the sum of the net short positions (i.e. 370) and of the net position in gold (i.e. 50) = 420 @ 8% = 33.6
CA-5.4.3
For illustration and calculation of the overall net open position and the capital charge for unrestricted / restricted investment account and corporate book, refer to section CA-5.3.
CA-6 CA-6 Commodities risk
CA-6.1 CA-6.1 Introduction
CA-6.1.1
This section sets out the minimum capital requirements to cover the risk of holding or taking positions in commodities, including precious metals, but excluding gold (which is treated as a foreign currency according to the methodology explained in chapter CA-5).
CA-6.1.2
The commodities position risk and the capital charges are calculated with reference to the entire business of a bank (i.e. the banking and trading books combined).
CA-6.1.3
The price risk in commodities is often more complex and volatile than that associated with currencies. Banks need to guard against the risk that arises when a liability (i.e. in a Parallel Salam transaction) position falls due before the asset position (i.e. a failure associated with or delay in the Salam contract). Owing to a shortage of liquidity in some markets, it might be difficult to close the Parallel Salam position and the bank might be "squeezed by the market". All these commodity market characteristics can result in price transparency and the effective management of risk.
CA-6.1.4
All contracts (Salam, Musharaka or Mudaraba) involving commodities as defined in section CA-1.3 are subject to commodities risk and a capital charge as per the provisions outlined in sections CA-6.2 to CA-6.4 should be computed.
CA-6.1.5
Banks should adopt either the simplified approach to calculate their commodities risk and the resultant capital charges or the maturity ladder approach. Where banks have Salam and Parallel Salam contracts, the maturity ladder approach must be used.
CA-6.2 CA-6.2 Calculation of commodities positions
CA-6.2.1
Banks will first express each commodity position (i.e. Salam and Parallel Salam) in terms of the standard unit of measurement (i.e. barrels, kilograms, grams, etc). Asset and liability positions in a commodity are reported on a net basis for the purpose of calculating the net open position in that commodity. For markets which have daily delivery dates, any contracts maturing within ten days of one another may be offset. The net position in each commodity is then converted, at spot rates, into the bank's reporting currency.
CA-6.2.2
Positions in different commodities cannot be offset for the purpose of calculating the open-positions as described in paragraph CA-6.2.1 above. However, where one or more sub-categories2 of the same category is in effect and are directly deliverable against each other, netting between those sub-categories is permitted. Furthermore, if two or more sub-categories of the same category is considered as close substitutes for each other, and minimum correlation of 0.9 between their price movements is clearly established over a minimum period of one year, the bank may, with the prior written approval of the Agency, net positions in those sub-categories.
2 Commodities can be grouped into clan, families, sub-groups and individual commodities. For example, a clan might be Energy Commodities, within which Hydro-Carbons is a family with Crude Oil being a sub-group and West Texas Intermediate, Arabian Light and Brent being individual commodities.
CA-6.2.3
Banks, which wish to net positions based on correlation (in the manner discussed in paragraph CA-6.2.2 above), will need to satisfy the Agency of the accuracy of the method which it proposes to adopt.
CA-6.3 CA-6.3 Maturity Ladder Approach
CA-6.3.1
A worked example of the maturity ladder approach is set out in Appendix CA 1 and the table below illustrates the maturity time-bands of the maturity ladder for each commodity. As stated in section CA-6.1, banks having Salam and Parallel Salam transactions must use the maturity ladder approach.
CA-6.3.2
The steps in the calculation of the commodities risk by the maturity ladder approach are:
(a) The net positions in individual commodities, expressed in terms of the standard unit of measurement, are first slotted into the maturity ladder. Physical stocks are allocated to the first-time band. A separate maturity ladder is used for each commodity as defined in section CA-6.2. The net positions in commodities are calculated as explained in section CA-6.2.(b) Asset and liability positions in the same time-band are matched. The sum of the matched asset and liability positions is multiplied first by the spot price of the commodity, and then by a spread of 1.5% for each time-band as set out in the table below. This represents the capital charge in order to capture all risks within a time-band (which, together, are sometimes referred to as curvature risk).
Time band3 0–1 months 1–3 months 3–6 months 6–12 months 1–2 years 2–3 years over 3 years (c) The residual (unmatched) net positions from nearer time-bands are then carried forward to offset opposite positions (i.e. asset against liability and vice versa) in time bands that are further out. However, a surcharge of 0.6% of the net position carried forward is added in respect of each time-band that the net position is carried forward, to recognise that such management of positions between different time-bands is imprecise. The surcharge is in addition to the capital charge for each matched amount created by carrying net positions forward, and is calculated as explained in step (b) above.(d) At the end of step (c), there will be either asset or liability positions, to which a capital charge of 15% will apply. The Agency recognises that there are differences in volatility between different commodities, but has, nevertheless, decided that one uniform capital charge for open positions in all commodities shall apply in the interest of simplicity of the measurement, and given the fact that banks normally run rather small open positions in commodities. Banks will be required to submit in writing, details of their commodities business in order to capture the market risk on this business and to enable the Agency to evaluate whether the models approach should be adopted by the bank.
3 Instruments, where the maturity is on the boundary of two maturity time-bands, should be placed into the earlier maturity band. For example, instruments with a maturity of exactly one-year are placed into the 6 to 12 months time-band.
CA-6.4 CA-6.4 Simplified Approach
CA-6.4.1
Banks who do not enter into Salam and Parallel Salam transactions and do not have any short positions in commodities may use the simplified approach to compute the capital charge. In the simplified approach, the capital charge is computed at 15% of the net position. Net positions in commodities are calculated as explained in section CA-6.2. For the time being the Agency is not requiring additional 3% capital charge for basis risk.
CA-7 CA-7 Gearing requirements
CA-7.1 CA-7.1 Gearing
CA-7.1.1
The content of this chapter is applicable to locally incorporated banks and FCB
branches (licensed by the Agency) of foreign banks.Measurement
CA-7.1.2
The Gearing ratio is measured with reference to the ratio of
deposit liabilities against the bank's capital and reserves as reported in its PIRI.Gearing limit
CA-7.1.3
For Full Commercial Bank and Offshore Banking Unit licensees,
deposit liabilities should not exceed 20 times the respective bank's capital and reserves.CA-7.1.4
For Investment Bank licensees,
deposit liabilities should not exceed 10 times the respective bank's capital and reserves.CA CA Capital Adequacy (October 2007)
CA-A CA-A Introduction
CA-A.1 CA-A.1 Application
CA-A.1.1
Regulations in this Module are applicable to locally incorporated banks on both a stand-alone basis (i.e. including their foreign
branches ), and on a consolidated group basis (i.e. including their subsidiaries and any other investments which are included or consolidated into the group accounts or are required to be consolidated for regulatory purposes by the CBB).October 07CA-A.1.2
In addition to licensees mentioned in Paragraph CA-A.1.1, certain of these regulations (in particular gearing and market risk requirements) are also applicable to Bahrain
branches of foreign retail bank licensees.October 07CA-A.2 CA-A.2 Purpose
CA-A.2.1
The purpose of this Module is to set out the Central Bank's
capital adequacy regulations and provide guidance on the risk measurement for the calculation of capital requirements by banks referred to under CA-A.1.1. This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).October 07CA-A.2.2
The Module also sets out the minimum gearing requirements which relevant banks (referred to in Section CA-A.1) must meet as a condition of their licensing.
October 07CA-A.2.3
The Central Bank requires in particular that the relevant banks maintain adequate capital, in accordance with the Regulation in this Module, against their risks.
October 07CA-A.2.4
Principle 9 of the Principles of Business requires that
conventional bank licensees maintain adequate human, financial and other resources, sufficient to run their business in an orderly manner (see Section PB-1.9). In addition, Condition 5 of CBB's Licensing Conditions (Section LR-2.5) requiresconventional bank licensees to maintain financial resources in excess of the minimum requirements specified in Module CA (Capital Adequacy).October 07CA-A.2.5
The requirements specified in this Module vary according to the Category of
Islamic bank licensee concerned, their inherent risk profile, and the volume and type of business undertaken. The purpose of such requirements is to ensure thatIslamic bank licensees hold sufficient capital to provide some protection against unexpected losses, and otherwise allow conventional banks to effect an orderly wind-down of their operations, without loss to their depositors. The minimum capital requirements specified here may not be sufficient to absorb all unexpected losses.October 07Legal Basis
CA-A.2.6
This Module contains the CBB's Directive relating to the capital adequacy of
Islamic bank licensees , and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to allIslamic bank licensees .October 07CA-A.2.7
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 07CA-A.3 CA-A.3 Module History
CA-A.3.1
This Module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date . Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG 3 provides further details on Rulebook maintenance and version control.
October 07CA-A.3.2
A list of most recent changes made to this Module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes CA-A.1 10/2007 New Rule CA-A.1.4 introduced, categorising this Module as a Directive. CA-1.1 10/2007 Minor change to notification period in Rule CA-1.1.4. October 07Evolution of the Module
CA-A.3.3
Prior to the development of Rulebook, the Central Bank had issued various circulars relating to
capital adequacy requirements. These circulars were consolidated into this Module. These circulars are listed below:Circular Ref. Date of Issue Module Ref. Circular Subject PIRI BC/09/01 26 Nov 2001 CA Prudential Information Returns for Islamic Financial Institutions OG/78/01 20 Feb 2001 CA 2.5 Monitoring of Capital Adequacy BC/01/98 10 Jan 1998 CA 2.5 Risk Asset Ratio October 07Effective date
CA-A.3.4
The contents in this Module are effective from the date depicted in the original circulars (see Paragraph CA-A.3.3) or from the dates mentioned in the Summary of Changes.
October 07CA-B CA-B General guidance and best practice
CA-B.1 CA-B.1 Guidance provided by other international bodies
Basel Committee : The management of banks' off-balance-sheetexposures – a supervisory perspectiveOctober 07CA-B.1.1
In March 1986, the
Basel Committee on Banking Supervision issued a paper titled 'The management of banks' off-balance-sheet exposures – a supervisory perspective' (see www.bis.org/publ/bcbsc134.pdf).October 07CA-B.1.2
This paper examines off-balance-sheet risks from three angles - market/position risk, credit risk and operational/control risk. Part III of this paper examines credit risk (including control of large exposures, settlement risk and country risk), with particular emphasis given to the assessment of the relative risks of the different types of off-balance-sheet activity.
October 07CA-1 CA-1 Scope and coverage of capital charges
CA-1.1 CA-1.1 Introduction
CA-1.1.1
All locally incorporated banks are required to measure and apply capital charges in respect of their fiduciary and displaced commercial risk, credit and market risk capital requirements.
October 07CA-1.1.2
Fiduciary Risk is outlined in the IFSB Guiding Principles on Corporate Governance (Principle 2.1, Paragraphs 22 onward). Displaced Commercial Risk is defined in the IFSB Exposure Draft No4 (Paragraphs 83 onward). Both papers are available at the IFSB website (www.ifsb.org).
October 07CA-1.1.3
Credit risk is defined as the potential that a bank's
counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk exists throughout the activities of a bank in the banking book and in the trading book including both on- and off-balance-sheetexposures .October 07CA-1.1.4
Market risk is defined as the risk of losses in on- or off-balance-sheet positions arising from movements in market prices. The risks subject to the capital requirement of this Module are:
(a) The risks pertaining to equities in the trading book;(b) Foreign exchange risk throughout the bank; and(c) Commodity risk throughout the bank.October 07CA-1.2 CA-1.2 Measuring fiduciary and displacement risks
CA-1.2.1
Islamic banks mobilise funds on a profit and loss sharing basis (PLS). However, certain risks are associated with such PLS accounts. These risks are referred to as fiduciary and displaced commercial risk.
October 07CA-1.2.2
To cater for these risks the Central Bank has accepted the recommendations contained in the AAOIFI's statements and requires the inclusion of 50% of the risk weighted assets of the Profit Sharing Investment Accounts (PSIA) in the denominator of the capital adequacy ratio.
October 07CA-1.3 CA-1.3 Measuring credit risks
CA-1.3.1
In measuring credit risk for the purpose of
capital adequacy , banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative riskiness.October 07CA-1.3.2
The Central Bank has adopted the risk weightings recommended by the Basel Committee on Banking Supervision, where applicable. However, the Basel Committee does not define the risk weightings for some of the specific Islamic contracts.
October 07CA-1.3.3
In Islamic banking, the legal form is as important as the substance of the transaction otherwise the transaction would not be permissible under Shari'a. Therefore, when assigning risk weights to the various Islamic contracts, banks should consider the legal form of the transactions as well as the substance.
October 07CA-1.3.4
The framework of weights consists of four weights – 0%, 20%, 50% and 100% for on- and off-balance-sheet items, which based on a broad-brush judgement, are applied to the different types of assets and off-balance-sheet
exposures within the banking book.October 07CA-1.3.5
The resultant different weighted assets and off-balance-sheet
exposures are then added together to calculate the total credit-risk-weighted assets of the bank.October 07CA-1.3.6
The Central Bank has addressed the issue of the risk weightings for some of the commonly used Islamic contracts. If banks are involved in contracts not covered below they should contact the Central Bank and agree on an appropriate risk-weighting Category.
October 07Murabaha and Murabaha to the purchase orderer
CA-1.3.7
The Central Bank as a policy requires that all Murabaha contracts be based on binding promises. The Murabaha receivables should be assigned a risk weight based on the credit standing of the obligor as recommended by the Basel Committee.
October 07Mudaraba contracts
CA-1.3.8
Mudaraba contracts should be assigned a risk weighting according to the underlying investments. Where Mudaraba funds are invested in securities listed on recognised exchanges and the price volatility is based on market movements, these should be removed from credit risk weightings and subject to market risk regulations. Examples would be equity Mudarabas where banks may have direct exposure in the value of the underlying equities or commodity Mudarabas.
October 07CA-1.3.9
Investments in other Mudarabas such as real estate or leasing should be assigned risk weightings according to the standing of the underlying investment as per the Basel Capital Accord.
October 07CA-1.3.10
Where a Mudaraba fund invests in another Mudaraba contract, which in turn makes investments at its own discretion, the risk weight would be based on the credit standing of the counterparty (investee Mudarib) as recommended by the Basel Committee. Investments in particular asset classes made at the discretion of the (investor) Mudaraba fund should be assigned risk weighting according to the underlying investments, where possible.
October 07Musharaka contracts
CA-1.3.11
Musharaka contracts refer to partnerships in specific transactions or projects. These exclude participation in the share capital (equity) of other enterprises. Risk weights should be assigned in accordance with the standings of the underlying investment as per the guidelines of the Basel Committee. Musharaka in real estate, plant and machinery or other similar assets attract a 100% risk weighting.
October 07CA-1.3.12
Musharakas in trading transactions will attract risk weighting as per the standing of the underlying investment, which in all cases would attract a 100% risk weighting. Where the transaction involves trading in commodities which may be traded in secondary markets, these should be removed from credit risk weighting and subjected to market risk regulations.
October 07CA-1.3.13
In cases where it is difficult to ascertain the composition of the underlying asset, risk weight would be assigned based on the credit standing of the counterparty.
October 07Ijarah / Ijarah Muntahia Bittamleek assets
CA-1.3.14
Under Shari'a, substantial risks and rewards of ownership of assets may not be transferred to lessees. Therefore, assets acquired for the purpose of leasing under Ijarah or Ijarah Muntahia Bittamleek contracts should be carried on the balance sheet of the lessor and assigned a risk weighting of 100%.
October 07CA-1.3.15
However, where these are residential properties, leased under Ijarah Muntahia Bittamleek with the lessee's option to buy at the end of the lease term and to use the properties for residential purposes, a 50% risk weighting is assigned, where the lessor has a first enforceable charge on the assets.
October 07Istisna'a and parallel Istisna'a contracts
CA-1.3.16
The accounting for these contracts should be in accordance with Financial Accounting Standard (FAS) No. 10: Istisna'a and Parallel Istisna'a, issued by AAOIFI.
October 07CA-1.3.17
Istisna'a and parallel Istisna'a contracts would attract risk weighting as per the credit standing of the respective counterparties in accordance with the Basel Committee.
October 07Salam and parallel Salam
CA-1.3.18
Amounts paid in respect of Salam contracts (for which there exists a parallel Salam contract) should normally be assigned a risk weight as per the credit standing of the customer in accordance with the Basel Committee.
October 07CA-1.3.19
Salam and parallel Salam contracts would attract risk weighting as per the credit standing of the respective counterparties in accordance with the Basel Committee.
October 07Participations and equity investments
CA-1.3.20
The supervision of banks for capital adequacy purposes is carried out on a consolidated basis, taking into account all holdings of the capital of other entities by the concerned bank. For subsidiaries, the preferred mode of consolidation is to add the assets and liabilities into the accounts of the parent on a line-by-line basis. For associate companies (i.e. where the parent bank owns 20% or more of the voting stock, and/or has voting control of the concerned company), the assets and liabilities should also be consolidated on a line-by-line basis. If banks do not wish to consolidate subsidiaries or associates (that meet the above criteria), they must contact the Central Bank to agree on the accounting treatment to be used. Participations and investments which amount to below 20% of the voting capital of the concerned company should be accounted for at fair value and weighted at 100%.
October 07CA-1.3.21
Banks which have subsidiary and associate companies must also be supervised for capital adequacy on a solo basis (i.e. after deducting all holdings of the share capital of all subsidiaries and associates (that meet the criteria in Paragraph CA-1.3.20 above) and excluding all their assets and liabilities from the accounts of the parent bank). Holdings of other participations and equity investments need not be deducted on a solo basis, but should be accounted for at fair value and weighted at 100%. Banks should note Paragraph CA-2.2.6 in respect of the treatment described in this Paragraph and in Paragraph CA-1.3.20.
October 07Intra fund balances
CA-1.3.22
Transactions between the corporate book (i.e. self-financed and financed by unrestricted investment accounts) and restricted investment accounts are not allowed, unless approved by the Central Bank on a temporary basis.
October 07CA-1.3.23
If permitted by the Central Bank, on a temporary basis, the following weightings will be applied:
(a) Corporate or unrestricted investment funds invested in Restricted Investment Accounts.
Risk weighting would be assigned on the underlying asset as per the Basel Committee Guidelines and in accordance with the guidance set out under Chapters CA-1 to CA-6.(b) Restricted investment account funds invested in corporate books.(i) In the corporate books, the assets financed by restricted investment accounts would be included as part of the corporate assets and risk weighting assigned in accordance with the guidelines.(ii) 0% risk weighting should be assigned to the funds invested by the restricted investment accounts in the corporate books in order to avoid double counting as the resultant assets are already risk weighted in the Bank's books.(iii) Banks must agree with the Central Bank on the treatment of investments by restricted investment accounts in the corporate book. The Central Bank will consider each case on its merit.October 07CA-1.4 CA-1.4 Measuring market risks
Trading book
CA-1.4.1
The trading book means the bank's positions in financial instruments (including off-balance sheet instruments that are intentionally held for short-term resale and/or which are taken on by the bank with the intention of benefiting in the short-term from actual and/or expected differences between their buying and selling prices, or from other price variations, and positions in financial instruments arising from matched principal brokering and market making). Treatment of risks associated with any option transactions should be agreed in advance with the Central Bank, who will consider the issue on a case by case basis.
October 07CA-1.4.2
Each bank should agree to a written policy statement with the Central Bank as to which activities are normally considered trading and constitute part of the trading book. Trading book's definition should be consistently applied by the bank from year to year.
October 07CA-1.4.3
It is expected that the trading activities will be managed and monitored by a separate unit and that such activities should be identifiable because of their intent, as defined in Paragraph CA-1.4.1 above.
October 07Equity risk
CA-1.4.4
The capital charges for equities will apply based on the current market values of items in a bank's trading book.
October 07Foreign exchange and commodities risk
CA-1.4.5
The capital charges for foreign exchange risk and for commodity risk will apply to a bank's total currency and commodity positions, with the exception of structural foreign exchange positions in accordance with Section CA-5.3 of these regulations.
October 07Exemptions
CA-1.4.6
Banks will be allowed certain de minimis exemptions from the capital requirements for foreign exchange risk, as described in Section CA-5.2 of these regulations. For the time being, there shall be no exemptions from the trading requirements, or from the capital requirements for commodity risk.
October 07Bank's own fund and Profit and Loss Sharing Investment Accounts (PSIA)
CA-1.4.7
Banks must compute capital charges for own funds subject to market risk, as well as those of the PSIA. For the purpose of computing the capital adequacy ratio, 50% of the bank's market risk weighted assets relating to the PSIA (restricted and unrestricted) must be included in accordance with AAOIFI's Statement on Purpose and Calculation of the Capital Adequacy Ratio for Islamic Banks.
October 07Consolidation
CA-1.4.8
As with the credit risk capital requirements, the market risk capital requirements apply on a worldwide consolidated basis. Only a bank, which is running a global consolidated book, may apply the offsetting rules contained in the remainder of these regulations, on a consolidated basis with the prior written agreement of the Central Bank. However, where it would not be prudent to offset or net positions within the group, for example where there are obstacles to the quick repatriation of profits from a foreign subsidiary or where there are legal and procedural difficulties in carrying out the timely management of risks on a consolidated basis, the Central Bank will require the bank to take individual positions into account without any offsetting.
October 07CA-1.4.9
Notwithstanding that the market risk capital requirements apply on a worldwide consolidated basis, the Central Bank also monitors the market risks of banks on a non-consolidated basis to ensure that significant imbalances within a group do not escape supervision. The Central Bank is particularly vigilant to ensure that banks do not pass positions on reporting dates in such a way as to escape measurement.
October 07Approach to measurement
CA-1.4.10
For the measurement of their market risks, banks will measure the risks in a standardised manner, using the measurement framework described in Chapters CA-4 to CA-6.
October 07CA-1.4.11
The standardised methodology uses a 'building block' in which the capital charge for each risk Category is determined separately. For equity positions risk, separate capital charge for specific risk and the general market risk arising from these positions are calculated. The specific market risk is defined as the risk of loss caused by an adverse price movement of a security/ units due principally to factors related to the issuer. The general market risk is defined as the risk of loss arising from adverse changes in aggregate market prices. For commodities and foreign exchange, there is only one general market risk capital requirement.
October 07CA-1.4.12
All transactions, including forward sales and purchases, shall be included in the calculation of capital requirements as from the date on which they were entered into.
October 07Monitoring
CA-1.4.13
Formal reporting, to the Central Bank, of the market risk exposure and capital adequacy shall take place as at the end of each calendar quarter. The returns relating to any quarter should be submitted to the Central Bank by the 20th day of the first month of the following quarter. Furthermore, banks are expected to manage their market risk in such a way that the capital requirements for market risk are being met on a continuous basis (i.e. at the close of each business day and not merely at the end of each calendar quarter). Banks are also expected to maintain strict risk management systems to ensure that their intra-day exposures are not excessive.
October 07CA-1.4.14
Banks' daily compliance with the capital requirements for market risk will be verified by the independent risk management department and the internal auditor. It is expected that the external auditors will perform appropriate tests of the bank's daily compliance with the capital requirements for market risk. Where a bank fails to meet the minimum capital requirements for market risk on any business day, the Central Bank must be informed in writing. The Central Bank will then seek to ensure that the bank takes immediate measures to rectify the situation.
October 07CA-1.4.15
Besides what is stated in Paragraph CA-1.4.14 above, the Central Bank will consider a number of other appropriate and effective measures to ensure that banks do not 'window dress' by showing significantly lower market risk positions on reporting dates.
October 07CA-1.5 CA-1.5 Reporting
CA-1.5.1
Formal reporting, to the Central Bank, of
capital adequacy shall be made in accordance with the requirements set out under Section BR-3.1.October 07CA-1.6 CA-1.6 Summary of overall capital adequacy requirements
CA-1.6.1
Each bank is expected to monitor and report the level of risk against which a capital requirement is to be applied, in accordance with Section CA-1.4. The bank's overall minimum capital requirement will be:
(a) The credit risk requirements laid down in these regulations; PLUS(b) The capital charges for market risks calculated according to the measurement frameworks described in Chapters CA-4 to CA-6, summed arithmetically.October 07CA-2 CA-2 The capital requirement
CA-2.1 CA-2.1 Introduction
CA-2.1.1
Regulatory Capital is the sum of the following components (as defined in Rules CA-2.2.1 to CA-2.2.6), subject to the restrictions set out in Section CA-2.3:• Tier 1: Supports the calculation of credit risk weighted assets and at least 28.57% of market risk.• Tier 2: Supports credit risk and market risk subject to limitations.October 07CA-2.1.2
For the purpose of calculating its Capital Adequacy Ratio (CAR), the risk-weighted assets of an Islamic bank consist of the sum of the risk-weighted assets financed by the Islamic bank's own capital and liabilities, plus 50% of the risk-weighted assets financed by the Islamic bank's PSIA. This applies to both unrestricted PSIA that are accounted for on the Islamic bank's balance sheet and restricted PSIA that are accounted for off the balance sheet.
October 07CA-2.2 CA-2.2 Definition of capital
Tier 1 capital
CA-2.2.1
Tier Capital forms the numerator of the Capital Adequacy Ratio. It is defined as the cornerstone of a bank's strength.
October 07CA-2.2.2
The essential characteristics of capital are that it should:
(a) Represent a permanent and unrestricted commitment of funds;(b) Be freely available to absorb losses and thereby enable a bank to keep operating whilst any problems are resolved;(c) Not impose any unavoidable charge on the earnings of the bank.October 07CA-2.2.3
For the purpose of defining Tier capital, the Central Bank has broadly adopted the recommendations contained in AAOIFI's Statement on the Purpose and Calculation of Capital Adequacy for Islamic Banks. However, some restrictions have been placed on the inclusion of profit equalisation and investment risk reserve as Tier 2 capital. For components of Tier 1 and Tier 2 capital refer to Paragraphs CA-2.2.1 to CA-2.2.6.
October 07Tier 1: Core capital
CA-2.2.4
Tier 1 capital shall consist of the sum of items (a) to (b) below, less the sum of items (c) to (d) below:
(a) Bank's permanent share capital and disclosed reserves in the form of legal, general and other reserves created by appropriations of retained earnings, share premium, capital redemption reserves and other surplus (as shown in its balance sheet), but excluding revaluation reserves and prudential reserves (profit equalisation reserves and investment risk reserve as defined in the AAOIFI's Financial Accounting Standard No: 11 Provisions and Reserves).
In case of an Islamic fund having participation and / or 'B' class shares (not carrying voting rights), their treatment as capital or unrestricted investment accounts (for the purpose these regulations) must be agreed with the Central Bank. The Central Bank will consider each case on its merit.(b) Minority interests, arising on consolidation, in the equity of subsidiaries that are less than wholly owned.
LESS:(c) Goodwill(d) Current year's cumulative net losses which have been reviewed as per the International Standards on Auditing (ISA) by the external auditors.October 07Tier 2: Supplementary capital
CA-2.2.5
Tier 2 capital shall consist of the following items:
(a) Interim retained profits that have been reviewed as per the ISA by the external auditors.(b)Asset revaluation reserves , which arise in two ways. Firstly, these reserves can arise from the revaluation of fixed assets from time to time in line with the change in market values, and are reflected on the face of the balance sheet as a revaluation reserve. Secondly, hidden values or 'latent' revaluation reserves may be present as a result of long-term holdings of equity securities valued in the balance sheet at the historical cost of acquisition. Both types of revaluation reserve may be included in Tier 2 capital, with the concurrence of the external auditors, provided that the assets are prudently valued, fully reflecting the possibility of price and forced sale. In the case of 'latent' revaluation reserves, a discount of 55% will be applied to the difference between the historical cost book value and the market value to reflect the potential volatility of this form of unrealised capital.(c) General provisions held against the future, presently unidentified, losses are freely available to meet losses that subsequently materialise and therefore, qualify for inclusion within supplementary elements of capital, subject to a maximum of 1.25% of total risk-weighted assets (both credit and market risk weighted). Prescriptions ascribed to impairment of particular assets or known liabilities should be excluded.(d) Profit equalisation reserve and investment risk reserve as defined in FAS No. 11: Provisions and Reserves, issued by AAOIFI, up to a maximum amount equal to the capital charge pertaining to the 50% the risk weighted assets financed by unrestricted and restricted investment account holders.(e) 45% of unrealised gains on equitysecurities held as available-for-sale (on an aggregate net-basis).October 07Deductions from Tier 1 and Tier 2 capital
CA-2.2.6
For the calculation of capital adequacy on a solo basis, the following item shall be deducted from the sum of Tier 1 and Tier 2 capital (goodwill will have been already deducted from Tier 1 capital):
(a) Investments in and financing of a capital nature to unconsolidated subsidiaries and associates. The assets representing the investments in subsidiary companies whose capital is deducted from that of the parent would not be included in total assets for the purpose of computing the capital adequacy ratio.(b) Holdings of own shares and any financing facility provided to the parent company to finance the shares of the subsidiary.October 07CA-2.3 CA-2.3 Limits on the use of different forms of capital
CA-2.3.1
The following constraints apply to the CAR calculations:
Constraint 1: Tier 2 capital allocated to credit risk (see Section A20.7 of guidelines in Appendix BR-3)
should be less than or equal to
50% of the Tier 1 capital allocated to credit risk (see Section A20.6 of guidelines in Appendix BR-3)Constraint 2: Tier 2 capital allocated to market risk (see Section A20.13 of guidelines in Appendix BR-3) plus Tier 2 capital allocated to credit risk (see Section A20.7 of guidelines in Appendix BR-3)
should be less than or equal to
Total Tier 1 capital available (see Section A20.1 of guidelines in Appendix BR-3)October 07CA-2.4 CA-2.4 Calculation of the CAR for Islamic banks
CA-2.4.1
Firstly, the banks should calculate minimum capital required (Section A20.4 or A9.14 of guidelines in Appendix BR-3) by reference to credit risk in accordance with these regulations, excluding equity securities in the trading book and all positions in commodities. This figure will constitute minimum capital required to cover credit risk (Section A20.5 of guidelines in Appendix BR-3).
October 07CA-2.4.2
Secondly, the banks should calculate minimum capital required (Section A20.9 or A17.14 of guidelines in Appendix BR-3) by reference to the measure of market risk (i.e. specific risk plus general market risk) in accordance with the regulations contained in Section CA-1.4. This figure will constitute minimum capital required to cover market risk (Section A21.10 of guidelines in Appendix BR-3).
October 07CA-2.4.3
Thirdly, the amount resulting from the above requirement (Section A20.10 of guidelines in Appendix BR-3) should be multiplied by 28.57%. This is the minimum capital charge which should be supported by Tier 1 capital allocated to market risk weighted exposures (Section A20.12 of guidelines in Appendix BR-3); therefore, the balance amount in Tier 1 capital should be the amount allocated to support credit risk weighted assets (Section A20.6 of guidelines in Appendix BR-3).
October 07CA-2.4.4
The balance of the credit risk weighted assets may be supported by Tier 2 capital amount in Section A-20.7 of guidelines in Appendix BR-3 (subject to constraint stated in Section CA-2.3).
October 07CA-2.4.5
Further, the residual amount in Tier 2 capital (Section A-20.13 of guidelines in Appendix BR-3) may be used to support the balance subject to the condition stated in Paragraph CA-2.4.3.
October 07CA-2.5 CA-2.5 Minimum capital ratio requirement
CA-2.5.1
The Central Bank has established that the minimum capital ratio required for all Islamic banks incorporated in Bahrain is 12%. Furthermore, on a solo basis, the parent bank of a group is required to maintain a minimum RAR of 8.0% (i.e. unconsolidated).
October 07Maintaining minimum RAR
CA-2.5.2
All locally incorporated banks must give the Central Bank immediate written notification of any actual breach by such banks of either or both of the above RARs. Where such notification is given, the bank must also provide the Central Bank:
(a) No later than one calendar week after the notification, with a written action plan setting out how the bank proposes to restore the relevant RAR(s) to the required minimum level(s) set out above and, further, describing how the bank will ensure that a breach of such RAR(s) will not occur again in the future; and(b) With a weekly report thereafter on the bank's relevant RAR(s) until such RAR(s) have reached the required target level(s) set out below.October 07CA-2.5.3
In addition, the Central Bank considers it a matter of best practice that, in order to ensure that these RARs are constantly met, that banks set up internal 'targets' of 12.5% (on a consolidated basis) and 8.5% (on a solo basis) to warn them of a potential fall by the bank below the Central Bank's required minimum RARs as set out above.
October 07CA-2.5.4
Where a bank's capital ratio falls below its target ratio, the General Manager should notify the Director of Banking Supervision at the Central Bank immediately. No formal action plan will be necessary, however the General Manager should explain what measures are being implemented to ensure that the bank will remain above its minimum RAR(s).
October 07CA-2.5.5
The bank will be required to submit the PIRI forms to the Central Bank on a monthly basis, until the RAR(s) exceeds its target ratio(s).
October 07CA-2.5.6
The Central Bank will notify banks in writing of any action required of them with regard to the corrective and preventive action (as appropriate) proposed by the bank pursuant to the above, as well as of any other requirement of the Central Bank in any particular case.
October 07CA-2.5.7
Banks should note that the Central Bank considers the breach of RARs to be a very serious matter. Consequently, the Central Bank may (at its discretion) subject a bank which breaches its RAR(s) to a formal licensing reappraisal. Such reappraisal may be effected either through the Central Bank's own inspection function or through the use of Reporting Accountants, as appropriate. Following such appraisal, the Central Bank will notify the bank concerned in writing of its conclusions with regard to the continued licensing of the bank.
October 07CA-2.5.8
The Central Bank recommends that the bank's compliance officer supports and cooperates with the Central Bank in the monitoring and reporting of the capital ratios and other regulatory reporting matters. Compliance officers should ensure that their banks have adequate internal systems and controls to comply with these regulations.
October 07CA-3 CA-3 Credit risk
CA-3.1 CA-3.1 Introduction
CA-3.1.1
This Chapter describes the standardised approach for the measurement of the credit risk
exposure in the bank's banking book.October 07CA-3.2 CA-3.2 Risk weighting – On-balance-sheet asset Category
CA-3.2.1
Risk weights by Category of on-balance-sheet asset are illustrated in the table below:
Risk weights Category of on-balance-sheet assets/claims 0% (a) Cash;(b) Holdings of Gold bullion and coins;(c) The government of Bahrain & Bahrain public sector entities;(d) Government-owned GCC companies incorporated in Bahrain;(e) Central governments and central banks of GCC and OECD countries; and(f) Central governments and central banks of classified countries where denominated and funded in local currency.20% (a) Cash items in process of collection;(b) Multilateral development banks;(c) Banks and securities firms incorporated in Bahrain, other GCC and OECD countries;(d) Banks incorporated in classified countries with a residual maturity less than 1 year;(e) Public sector entities in GCC and OECD countries; and(f) Government-owned GCC companies incorporated outside Bahrain.50% Mortgages backed by residential property 100% (a) Related parties(b) Holdings of other banks' and securities firms' capital instruments(c) Banks incorporated in classified countries with a residual maturity of over 1 year(d) Central governments and central banks of classified countries (not included above)(e) Public sector entities of classified countries(f) Government-owned companies in non-GCC countries(g) Private sector persons and entities in and outside Bahrain(h) Istisna'a assets*(i) Ijarah / Ijarah Muntahia Bittamleek assets(j) Real estate investments(k) Other assets not reported elsewhere**
* This represents balance in Work in Progress/ cost account less billings. However, Istisna'a receivables should be reported against the risk weighting Category of the counterparty.
** Salam Contracts are subject to market risk and should not be included here.
October 07CA-3.3 CA-3.3 Risk weighting – Off-balance-sheet items
CA-3.3.1
The framework takes account of the credit risk on off-balance-sheet
exposures by applying credit conversion factors to the different types of off-balance-sheet instruments or transactions.October 07CA-3.3.2
The conversion factors are derived from the estimated size and likely occurrence of the credit
exposure , as well as the relative degree of credit risk as identified in theBasel Committee 's paper on 'The management of banks' off-balance-sheet exposures: a supervisory perspective' (see www.bis.org/publ/bcbsc134.pdf) issued in March 1986.October 07CA-3.3.3
The credit conversion factors applicable to the off-balance-sheet items are set out in the table below:
Credit Conversion factors Off-balance-sheet items 100% Direct credit substitutes 50% Transaction-related contingent 20% Trade-related contingencies 100% Sale and repurchase agreements 100% Forward asset purchases 50% Underwriting commitments 50% Commitments with an original maturity of over 1 year, not unconditionally cancellable at anytime 0% Commitments with an original maturity of less than 1 year, unconditionally cancellable at anytime October 07CA-3.3.4
The applicable credit conversion factors should be multiplied by the weights applicable to the Category of the
counterparty as set out below:Risk weights Counterparty 0% Type (a) • The Government of Bahrain.• Bahrain public sector entities.• Government-owned (non-banking) GCC companies incorporated in Bahrain.• Central government and central banks of GCC and OECD member countries.20% Type (b) • Banks incorporated in Bahrain or GCC and OECD countries andsecurities firms.• Banks incorporated in classified countries (if the commitment has a residual life of 1 year or less).• Public sector entities in GCC and OECD countries.• Government-owned (non-banking) GCC companies incorporated outside Bahrain.100% Type (c) • Banks incorporated in classified countries (if the commitment has a residual life of more than 1 year).• Central governments, central banks and public sector entities in classified countries.• Government-owned companies incorporated in non-GCC countries.• Private sector persons and entities in Bahrain and abroad.October 07CA-4 CA-4 Equity risk
CA-4.1 CA-4.1 Introduction
CA-4.1.1
This Chapter sets out the minimum capital requirements to cover the risk of holding or taking positions in equities in the bank's trading book.
October 07CA-4.1.2
The minimum capital requirement for equities is expressed in terms of two separately calculated charges, one relating to the 'specific risk' of holding a long position in an individual equity, and the other to the 'general market risk' of holding a long position in the market as a whole.
October 07CA-4.1.3
Where the bank has invested in shares/units of equity funds on Mudaraba financing and the bank has direct exposures in the equities which are traded in a recognised stock exchange, the shares/units are considered to be subject to equity risk. The equity position would be considered to be the net asset value as at the reporting date.
October 07CA-4.2 CA-4.2 Specific risk calculation
CA-4.2.1
Specific risk is defined as the bank's gross equity positions (i.e. the sum of all equity positions and is calculated for each country or equity market).
October 07CA-4.2.2
The capital charge for specific risk is 8%, unless the portfolio is both liquid and well-diversified, in which case the capital charge will be 4%. To qualify for the reduced 4% capital charge, the following requirements need to be met:
(a) The portfolio should be listed on a recognised stock exchange;(b) No individual equity position shall comprise more than 10% of the gross value of the country portfolio; and(c) The total value of the equity positions which individually comprise between 5% and 10% of the gross value of the country portfolio, shall not exceed 50% of the gross value of the country portfolio.October 07CA-4.2.3
To qualify for reduced 4% capital charge on equity funds, the bank should acquire prior written approval from the Central Bank.
October 07CA-4.3 CA-4.3 General risk calculation
CA-4.3.1
The general market risk is the difference between the sum of the long positions and the sum of the short positions (i.e. the overall net position) in each national equity market. In other words, to calculate the general market risk, the bank should sum the market value of its individual net positions for each national market, taking into account whether the positions are long or short.
October 07CA-4.3.2
The general market equity risk measure is 8% of the overall net position in each national market.
October 07CA-5 CA-5 Foreign exchange risk
CA-5.1 CA-5.1 Introduction
CA-5.1.1
This Section describes the standardised method for calculation of the bank's foreign exchange risk, and the capital required against that risk.
October 07CA-5.1.2
The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold1 and as a second step, the measurement of the risks inherent in the bank's mix of assets and liabilities positions in different currencies.
1 Positions in gold should be treated as if they were foreign currency positions, rather than commodity positions, because the volatility of gold is more in line with that of foreign currencies and most banks manage it in a similar manner.
October 07CA-5.1.3
A bank that holds net open positions (whether assets or liabilities) in foreign currencies is exposed to the risk that exchange rates may move against it. The open positions may be either trading positions or, simply, exposures caused by the bank's overall assets and liabilities. Where the bank is involved in option transactions, these should be agreed in advance with the Central Bank. The Central Bank will consider the appropriate treatment on a case by case basis.
October 07CA-5.1.4
The open positions and the capital requirements are calculated with reference to the entire business (i.e. the banking and trading books).
October 07CA-5.1.5
The open positions are calculated with reference to the bank's base currency, which will be either Bahrain Dinars (BD) or United States dollars (USD).
October 07CA-5.1.6
In addition to foreign exchange risk, positions in foreign currencies may be subject to credit risk which should be treated separately.
October 07CA-5.2 CA-5.2 De Minimis exemptions
CA-5.2.1
A bank doing negligible business in foreign currencies and which does not take foreign exchange positions for its own account may, at the discretion of the Central Bank and as evidenced by the Central Bank's prior written approval, be exempted from calculating the capital requirements on these positions. The Central Bank is likely to be guided by the following criteria in deciding to grant exemption to any bank:
(a) The bank's holdings or taking of positions in foreign currencies, including gold, defined as the greater of the sum of the gross asset positions and the sum of the gross liability position in all foreign positions and gold, does not exceed 100% of its eligible capital; and(b) The bank's overall net open position, as defined in Section CA-5.3, does not exceed 2% of its eligible capital.October 07CA-5.2.2
The criteria listed in Paragraph CA-5.2.1 above are only intended to be guidelines, and a bank will not automatically qualify for exemptions upon meeting them. Banks doing negligible foreign currency business, which do not take foreign exchange positions for the bank's own account, and wish to seek exemption from foreign exchange risk capital requirements, should submit an application to the Central Bank, in writing. The Central Bank will have the discretion to grant such exemptions. The Central Bank may also, at its discretion, fix a minimum capital requirement for a bank that is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.
October 07CA-5.2.3
The Central Bank may, at a future date, revoke an exemption granted to a bank, if the Central Bank is convinced that the conditions on which the exemption was granted no longer exist.
October 07CA-5.3 CA-5.3 Calculation of net open positions
CA-5.3.1
A bank's exposure to foreign exchange risk in any currency is its net open position in that currency, which is calculated by summing the following items:
(a) The net spot position in the currency (i.e. all asset items less all liability items, including accrued profit, other income and expenses, denominated in the currency in question; assets are included gross of provisions for bad and doubtful debts, except in cases where the provisions are maintained in the same currency as the underlying assets);(b) The net forward position in the currency (i.e. all amounts to be received less all amounts to be paid under forward foreign exchange contracts, in the concerned currency);(c) Guarantees and similar off-balance sheet contingent items that are certain to be called and are likely to be irrecoverable where the provisions, if any, are not maintained in the same currency;(d) Profits (i.e. the net value of income and expense accounts) held in the currency in question; and(e) Specific provisions held in the currency in question where the underlying asset is in a different currency, net of assets held in the currency in question where a specific provision is held in a different currency.October 07CA-5.3.2
For calculating the net open position in gold, the bank will first express the net position (spot plus forward) in terms of the standard unit of measurement (i.e. ounces or grams) and then convert it at the current spot rate into the base currency.
October 07CA-5.3.3
Where gold is part of a forward contract (i.e. quantity of gold to be received or to be delivered), any foreign currency exposure from the other leg of the contract should be reported.
October 07Structural positions
CA-5.3.4
Positions of a structural nature (i.e. non-dealing), may be excluded from the calculation of the net open currency positions, these include positions related to items that are deducted from the bank's capital when calculating its capital base in accordance with the rules and guidelines issued by the Central Bank, such as investments denominated in foreign currencies in non-consolidated subsidiaries.
October 07CA-5.3.5
The Central Bank will consider approving the exclusion of the above positions for the purpose of calculating the capital requirement, only if each of the following conditions is met:
(a) The concerned bank provides adequate documentary evidence to the Central Bank which establishes the fact that the positions proposed to be excluded are, indeed, of a structural nature (i.e. non-dealing) and are merely intended to protect the bank's capital adequacy ratio. For this purpose, the Central Bank may ask written representations from the bank's management or Directors.(b) Any exclusion of a position is consistently applied, with the treatment of the structural positions remaining the same for the life of the associated assets or other items.October 07Calculation of the overall net open position
CA-5.3.6
The net position in each currency is converted at the spot rate, into the reporting currency. The overall net open position is measured by aggregating the following:
(a) The sum of the net liabilities positions or the sum of the net asset positions whichever is greater(b) The net position (liabilities and assets) in gold, regardless of signOctober 07CA-5.3.7
Where the bank is assessing its foreign exchange on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the bank. In such cases, the internal limit for that branch/subsidiary, in each currency, may be used as a proxy for the positions. The branch/subsidiary limits should be added, without regard to sign, to the net open position in each currency involved. When this simplified approach to the treatment of currencies with marginal operations is adopted, the bank should adequately monitor the actual positions of the branch/subsidiary against the limits, and revise the limits, if necessary, based on the results of the ex-post monitoring.
October 07CA-5.4 CA-5.4 Calculation of the capital charge
CA-5.4.1
The capital charge is 8% of the overall net open foreign currency position.
October 07CA-5.4.2
The table below illustrates the calculation of the overall net open foreign currency position and the capital charge:
October 07Example of the calculation of the foreign exchange overall net open position and the capital charge
GBP DEM SAR US$ JPY GOLD +200 +100 +70 -190 -40 -50 +370 -230 50 The capital charge is 8% of the higher of either the sum of the net long currency positions or the sum of the net short positions (i.e. 370) and of the net position in gold (i.e. 50) = 420 @ 8% = 33.6
October 07CA-5.4.3
For illustration and calculation of the overall net open position and the capital charge for unrestricted / restricted investment account and corporate book, refer to Section CA-5.3.
October 07CA-6 CA-6 Commodities risk
CA-6.1 CA-6.1 Introduction
CA-6.1.1
This Section sets out the minimum capital requirements to cover the risk of holding or taking positions in commodities, including precious metals, but excluding gold (which is treated as a foreign currency according to the methodology explained in Chapter CA-5).
October 07CA-6.1.2
The commodities position risk and the capital charges are calculated with reference to the entire business of a bank (i.e. the banking and trading books combined).
October 07CA-6.1.3
The price risk in commodities is often more complex and volatile than that associated with currencies. Banks need to guard against the risk that arises when a liability (i.e. in a Parallel Salam transaction) position falls due before the asset position (i.e. a failure associated with or delay in the Salam contract). Owing to a shortage of liquidity in some markets, it might be difficult to close the Parallel Salam position and the bank might be 'squeezed by the market'. All these commodity market characteristics can result in price transparency and the effective management of risk.
October 07CA-6.1.4
All contracts (salam, musharaka or mudaraba) involving commodities as defined in Section CA-1.3 are subject to commodities risk and a capital charge as per the provisions outlined in Sections CA-6.2 to CA-6.4 should be computed.
October 07CA-6.1.5
Banks should adopt either the simplified approach to calculate their commodities risk and the resultant capital charges or the maturity ladder approach. Where banks have Salam and Parallel Salam contracts, the maturity ladder approach must be used.
October 07CA-6.2 CA-6.2 Calculation of commodities positions
CA-6.2.1
Banks will first express each commodity position (i.e. Salam and Parallel Salam) in terms of the standard unit of measurement (i.e. barrels, kilograms, grams, etc). Asset and liability positions in a commodity are reported on a net basis for the purpose of calculating the net open position in that commodity. For markets which have daily delivery dates, any contracts maturing within ten days of one another may be offset. The net position in each commodity is then converted, at spot rates, into the bank's reporting currency.
October 07CA-6.2.2
Positions in different commodities cannot be offset for the purpose of calculating the open-positions as described in Paragraph CA-6.2.1 above. However, where one or more sub-categories2 of the same Category are in effect and are directly deliverable against each other, netting between those sub-categories is permitted. Furthermore, if two or more sub-categories of the same Category are considered as close substitutes for each other, and minimum correlation of 0.9 between their price movements is clearly established over a minimum period of one year, the bank may, with the prior written approval of the Central Bank, net positions in those sub-categories.
2 Commodities can be grouped into clan, families, sub-groups and individual commodities. For example, a clan might be Energy Commodities, within which Hydro-Carbons is a family with Crude Oil being a sub-group and West Texas Intermediate, Arabian Light and Brent being individual commodities.
October 07CA-6.2.3
Banks, which wish to net positions based on correlation (in the manner discussed in Paragraph CA-6.2.2 above), will need to satisfy the Central Bank of the accuracy of the method which it proposes to adopt.
October 07CA-6.3 CA-6.3 Maturity Ladder Approach
CA-6.3.1
A worked example of the maturity ladder approach is set out in Appendix CA-1 and the table below illustrates the maturity time-bands of the maturity ladder for each commodity. As stated in Section CA-6.1, banks having Salam and Parallel Salam transactions must use the maturity ladder approach.
October 07CA-6.3.2
The steps in the calculation of the commodities risk by the maturity ladder approach are:
(a) The net positions in individual commodities, expressed in terms of the standard unit of measurement, are first slotted into the maturity ladder. Physical stocks are allocated to the first-time band. A separate maturity ladder is used for each commodity as defined in Section CA-6.2. The net positions in commodities are calculated as explained in Section CA-6.2.(b) Asset and liability positions in the same time-band are matched. The sum of the matched asset and liability positions is multiplied first by the spot price of the commodity, and then by a spread of 1.5% for each time-band as set out in the table below. This represents the capital charge in order to capture all risks within a time-band (which, together, are sometimes referred to as curvature risk).Time band3 0-1 months 1-3 months 3-6 months 6-12 months 1-2 years 2-3 years over 3 years (c) The residual (unmatched) net positions from nearer time-bands are then carried forward to offset opposite positions (i.e. asset against liability and vice versa) in time bands that are further out. However, a surcharge of 0.6% of the net position carried forward is added in respect of each time-band that the net position is carried forward, to recognise that such management of positions between different time-bands is imprecise. The surcharge is in addition to the capital charge for each matched amount created by carrying net positions forward, and is calculated as explained in step (b) above.(d) At the end of step (c), there will be either asset or liability positions, to which a capital charge of 15% will apply. The Central Bank recognises that there are differences in volatility between different commodities, but has, nevertheless, decided that one uniform capital charge for open positions in all commodities shall apply in the interest of simplicity of the measurement, and given the fact that banks normally run rather small open positions in commodities. Banks will be required to submit in writing, details of their commodities business in order to capture the market risk on this business and to enable the Central Bank to evaluate whether the models approach should be adopted by the bank.
3 Instruments, where the maturity is on the boundary of two maturity time-bands, should be placed into the earlier maturity band. For example, instruments with a maturity of exactly one-year are placed into the 6 to 12 months time-band.
October 07CA-6.4 CA-6.4 Simplified Approach
CA-6.4.1
Banks who do not enter into Salam and Parallel Salam transactions and do not have any short positions in commodities may use the simplified approach to compute the capital charge. In the simplified approach, the capital charge is computed at 15% of the net position. Net positions in commodities are calculated as explained in Section CA-6.2. For the time being the Central Bank is not requiring additional 3% capital charge for basis risk.
October 07CA-7 CA-7 Gearing requirements
CA-7.1 CA-7.1 Gearing
CA-7.1.1
The content of this Chapter is applicable to locally incorporated banks and Bahrain retail bank branches of foreign banks.
October 07Measurement
CA-7.1.2
The Gearing ratio is measured with reference to the ratio of
deposit liabilities against the bank's capital and reserves as reported in its PIRI.October 07Gearing limit
CA-7.1.3
For Retail Bank and Wholesale bank licensees,
deposit liabilities should not exceed 20 times the respective bank's capital and reserves.October 07CA CA Capital Adequacy (April 2008)
PART 1: PART 1: Definition of Capital
CA-A CA-A Introduction
CA-A.1 CA-A.1 Application
CA-A.1.1
Rules in this Module are applicable to locally incorporated banks on both a stand-alone basis (i.e. including their foreign
branches ), and on a consolidated group basis (i.e. including their subsidiaries and any other investments which are included or consolidated into the group accounts or are required to be consolidated for regulatory purposes by the Central Bank of Bahrain ('CBB')).Amended: January 2011
Apr 08CA-A.1.2
In addition to licensees mentioned in Paragraph CA-A.1.1, certain of these Rules (in particular gearing and market risk requirements) are also applicable to Bahrain
branches of foreign retail bank licensees.Amended: January 2011
Apr 08CA-A.1.3
Rules in this Module are applicable to locally incorporated Islamic banks (hereinafter referred to as "the banks") on both a stand-alone and consolidated group basis.
Amended: January 2011
Apr 08CA-A.1.4
If the banks have investments in other entities, the banks must also apply the Rules set out in the Prudential Consolidation and Deduction Requirements Module (Module PCD) for the calculation of their solo and consolidated Capital Adequacy Ratio (CAR).
Amended: January 2011
Apr 08CA-A.2 CA-A.2 Purpose
Executive Summary
CA-A.2.1
The purpose of this Module is to set out the CBB's
capital adequacy Rules and provide guidance on the risk measurement for the calculation of capital requirements by banks referred to under Paragraph CA-A.1.1. This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).Amended: January 2011
Apr 08CA-A.2.2
The Module also sets out the minimum gearing requirements which relevant banks (referred to in Section CA-A.1) must meet as a condition of their licensing.
Apr 08CA-A.2.3
Principle 9 of the Principles of Business requires that
Islamic bank licensees maintain adequate human, financial and other resources, sufficient to run their business in an orderly manner (see Section PB-1.1.9). In addition, Condition 5 of CBB's Licensing Conditions (Section LR-2.5) requiresIslamic bank licensees to maintain financial resources in excess of the minimum requirements specified in Module CA (Capital Adequacy).Apr 08CA-A.2.4
The requirements specified in this Module vary according to the Category of
Islamic bank licensee concerned, their inherent risk profile, and the volume and type of business undertaken. The purpose of such requirements is to ensure thatIslamic bank licensees hold sufficient capital to provide some protection against unexpected losses, and otherwise allow conventional banks to effect an orderly wind-down of their operations, without loss to their depositors. The minimum capital requirements specified here may not be sufficient to absorb all unexpected losses.Apr 08Legal Basis
CA-A.2.5
This Module contains the CBB's Directive (as amended from time to time) relating to the capital adequacy of
Islamic bank licensees , and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to allIslamic bank licensees .Amended: January 2011
Apr 08CA-A.2.6
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
Apr 08CA-A.2.7
The CBB requires in particular that the banks maintain adequate capital, in accordance with the Rules in this Module, against their risks as capital provides banks with a cushion to absorb losses without endangering customer accounts. As such, the CBB also requires the relevant banks to maintain adequate liquidity and identify and control their large
exposures which might otherwise be a source of loss to a licensee on a scale that might threaten its solvency.Amended: January 2011
Apr 08CA-A.2.8
These Rules are consistent in all substantial respects with the approach recommended by the Basel Committee on Banking Supervision and Islamic Financial Services Board (IFSB) for capital adequacy.
Amended: January 2011
Apr 08CA-A.2.9
The CBB recognises that the Basel Committee guidelines may not address specific characteristics of the various products and services offered by Islamic banks. Therefore, the CBB has adopted a risk-based approach and has tailored the Rules to address the specific risk characteristics of Islamic banks. The structure of these Rules is explained on the next page.
Amended: January 2011
Apr 08CA-A.2.10
This Module provides support for certain other parts of the Rulebook, mainly:
(a) Prudential Consolidation and Deduction Requirements;(b) Licensing and Authorisation Requirements;(c) CBB Reporting Requirements;(d) Credit Risk Management;(e) Market Risk Management;(f) Operational Risk Management;(g) Liquidity Risk Management;(h) High Level Controls;(i) Relationship with Audit Firms; and(j) Penalties and Fines.
Amended: January 2011
Apr 08CA-A.3 CA-A.3 Capital Adequacy Ratio
CA-A.3.1
Historically, on a consolidated basis, the CBB has set a minimum Capital Adequacy Ratio ("CAR") of 12.0% for all locally incorporated banks. Furthermore, on a solo basis, the parent bank has been required to maintain a minimum CAR of 8.0% (i.e. unconsolidated). The arrangements outlined below will apply once banks have been subject to a Pillar 2 risk profile assessment by the CBB or an acceptable audit firm. Until such an assessment has been completed, the existing 12% and 8% minimum capital ratio requirements (as outlined in Module CA-2.5 October 2006 edition) will remain in place.
Apr 08CA-A.3.2
CAR will be calculated by applying the regulatory capital to the numerator and risk-weighted assets (RWAs) to the denominator.
Eligible Capital
{ Total Risk-weighted Assets (Creditb + Marketb Risks) Plus Operational Risks
Less
Risk-weighted Assets funded by Restricted PSIAc (Creditb + Marketb Risks)
Less
(1 - α) [Risk-weighted Assets funded by Unrestricted PSIAc (Creditb + Marketb Risks)]
Less
α [Risk-weighted Assets funded by PER and IRR of Unrestricted PSIAe (Creditb +
Marketb Risks)]}(a) Total RWA include those financed by both restricted and unrestricted Profit Sharing Investment Accounts (PSIA);(b) Credit and market risks for on- and off-balance sheet exposures;(c) Where the funds are commingled, the RWA funded by PSIA are calculated based on their pro-rata share of the relevant assets. PSIA balances include PER and Investment risk reserve (IRR) or equivalent reserves;(d) — α refers to the proportion assets funded by unrestricted PSIA which, as determined by the CBB, is 30%; and(e) The relevant proportion of risk-weighted assets funded by the PSIA's share of PER and by IRR is deducted from the denominator. The PER has the effect of reducing the displaced commercial risk and the IRR has the effect of reducing any future losses on the investment financed by the PSIA.
The above formula is applicable as the Islamic banks may smooth income to the Investment Account Holders (IAHs) as part of a mechanism to minimise withdrawal risk and is concerned with systemic risk.Amended: April 2011
April 2008CA-A.3.3
All locally incorporated banks are required to maintain a capital ratio both on a solo (and a consolidated basis where applicable) above the minimum "trigger" CAR of 8%. Failure to remain above the trigger ratio will result in Enforcement and other measures as outlined in Section CA-1.4.
Apr 08CA-A.3.4
All locally incorporated banks will be required to maintain capital ratios above individually set "target" CARs on a solo and on a consolidated basis. These target CARs will be set at an initial minimum of 8.5% and may in the case of high risk banks be set at levels above the 12.5% target ratio set prior to January 2008. Failure to remain above the target ratio will result in Enforcement and other measures as outlined in Section CA-1.4.
Apr 08Eligible Capital
CA-A.3.5
Banks are allowed two classes of capital (see section CA-2.2) to meet their capital requirements for credit risk, operational risk and market risk, as set out below:
Tier 1: Core capital — Supports the calculation of credit risk weighted assets, operational risk and market risk.
Tier 2: Supplementary capital — Supports credit risk, operational risk and market risk subject to limitations.
Apr 08Risk-weighted Assets
CA-A.3.6
Total risk-weighted assets are determined by:
(i) Multiplying the capital requirements for market risk and operational risk by 12.5; and(ii) Adding the resulting figures to the sum of risk-weighted assets for credit risk.Amended: January 2011
Apr 08CA-A.3.7
Islamic banks are not contractually obliged to make good losses arising from Islamic financing assets funded by the investment accounts, unless these losses arise from the negligence on the part of the Islamic bank as manager (Mudarib) or as agent (Wakeel). However to be prudent, the CBB requires Islamic banks to provide regulatory capital to cover minimum requirement arising from 30% of the risk weighted assets and contingencies financed by the unrestricted investment accounts. Therefore, for the purpose of calculating its Capital Adequacy Ratio (CAR), the risk-weighted assets of an Islamic bank consist of the sum of the risk-weighted assets financed by the Islamic bank's own capital and liabilities, plus 30% of the risk-weighted assets financed by the Islamic bank's unrestricted PSIAs.
Amended: January 2011
Apr 08CA-A.3.8
In measuring credit risk for the purpose of
capital adequacy , banks must apply the standardised approach through which claims of different categories of counterparties are assigned risk weights (RWs) according to broad categories of relative riskiness.Apr 08CA-A.3.9
For the measurement of their operational risks, banks have a choice, subject to the written approval of the CBB, between two broad methodologies:
(a) One alternative is to measure the risks using a basic indicator approach, applying the measurement framework described in Chapter CA-6 of this Module; and(b) The second methodology (i.e. the standardised approach) is set out in detail in Chapter CA-6 including the procedure for obtaining the CBB's approval. This methodology is subject to the fulfillment of certain conditions. The use of this methodology is, therefore, conditional upon the explicit approval of the CBB.Amended: January 2011
Apr 08CA-A.3.10
In measuring market risk for the purpose of
capital adequacy , banks must apply the approach set out in relevant sections.Apr 08CA-A.3.11
If an Islamic bank wants to adopt an advanced approach (IRB for credit risk and/or IMA for market risk), it will need to apply to the CBB for prior approval.
Apr 08CA-A.4 CA-A.4 Module History
CA-A.4.1
This Module was first issued in January 2005 as part of the Islamic principles volume. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.
Apr 08CA-A.4.2
A list of most recent changes made to this Module are detailed in the table below:
Summary of ChangesModule Ref. Change Date Description of Changes CA-A.2 10/2007 New Rule CA-A.2.5 introduced, categorising this Module as a Directive. CA-1 to CA-6 01/2008 Basel II implementation. CA-1.5 01/2008 Review of PIR by external auditors CA-4.6 04/2008 Recognition of IIRA as ECAI and mapping of ratings CA-4.2.15–18 01/2009 New guidance and rules on SMEs CA-A 01/2011 Various minor amendments to ensure consistency in CBB Rulebook. CA-A.2.5 01/2011 Clarified legal basis. CA-5.1 & CA-5.3 01/2012 Changes in respect of July 2009 and February 2011 amendments to Basel II. CA-4.2.10 and CA-4.2.11A 04/2012 Amendment made for claims on banks dealing with self-liquidating letters of credit. CA-2.1.4(g) 10/2013 Added Rule to include limited general provision against unidentified future losses as part of Tier 2. CA-2.1.4(f), CA-2.1.4A to CA-2.1.4C and CA-2.2.1 10/2013 Added Rules to deal with subordinated issued for Tier 2 capital. CA-5.5.13 10/2013 Clarified Rules on structural positions for foreign exchange risk. Evolution of the Module
CA-A.4.3
Prior to the development of this Rulebook, the CBB issued various circulars representing regulations relating to
capital adequacy requirements. These circulars were consolidated into this Module and are listed below:Circular Ref. Date of Issue Module Ref. Circular Subject OG/78/01 20 Feb 2001 CA-A.3 and CA-1.4 Monitoring of Capital Adequacy BC/01/98 10 Jan 1998 CA-A.3 and CA-1.4 Capital Adequacy Ratio Apr 08Effective Date
CA-A.4.4
The contents retained from the previous module (Capital Adequacy-Islamic banks) are effective from the date depicted in the above circulars from which the requirements are compiled. The updated module is effective from January 01, 2008.
Apr 08CA-1 CA-1 Scope and Coverage of Capital Charges
CA-1.1 CA-1.1 Application
CA-1.1.1
All locally incorporated banks are required to measure and apply capital charges with respect to their credit, operational, market risk fiduciary and displacement risk, capital requirements.
Apr 08CA-1.1.2
Credit risk is defined as the potential that a bank's
counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk exists throughout the activities of a bank in the banking book and in the trading book including both on-and off-balance-sheetexposures .Apr 08CA-1.1.3
Operational risk is defined as the risk of losses resulting from inadequate or failed internal processes, people and systems or from external events, which includes but is not limited to, legal risk and Sharia compliance risk. This definition excludes strategic and reputational risks.
Apr 08CA-1.1.4
Market risk is defined as the risk of losses in on- or off-balance-sheet positions arising from movements in market prices. The risks subject to the capital requirement of this module are:
(a) The risks pertaining to equities in the trading book;(b) Foreign exchange risk throughout the bank; and(c) Commodity risk throughout the bank.Amended: April 2011
April 2008CA-1.1.5
The CBB has adopted the IFSB definitions of fiduciary and displacement risk for the purpose of this volume.
Apr 08CA-1.1.6
Banks must compute capital charges for own funds as well as those of the unrestricted PSIAs. For the purpose of computing the Capital Adequacy Ratio, 30% of the bank's risk weighted assets relating to the unrestricted PSIAs must be included in accordance with the IFSB guidelines.
Apr 08CA-1.2 CA-1.2 Monitoring of Risks
CA-1.2.1
Banks are required to manage their risks, especially market risks, in such a way that the capital requirements are being met on a continuous basis i.e. at the close of each business day and not merely at the end of each calendar quarter. Banks are also required to maintain strict risk management systems to ensure that their intra-day
exposures are not excessive.Apr 08CA-1.2.2
Banks' daily compliance with the capital requirements for credit and market risks must be verified by an independent risk management department and internal audit. It is expected that external auditors will perform appropriate tests of the bank's daily compliance with the capital requirements for credit and market risks. Where a bank fails to meet the minimum capital requirements for credit and market risk on any business day, the CBB must be informed in writing by no later than the following business day. The CBB will then seek to ensure that the bank takes immediate measures to rectify the situation.
Apr 08CA-1.3 CA-1.3 Investments in other Entities and Consolidation
CA-1.3.1
The banks must also apply the rules set in the Prudential Consolidation and Deduction Requirements Module where the bank has investments in other entities.
Apr 08CA-1.3.2
These capital adequacy regulations must be applied on a worldwide consolidated basis as well as on a solo basis. Guidance on consolidation and related matters is provided in the Prudential Consolidation and Deduction Requirements Module.
Apr 08CA-1.4 CA-1.4 Reporting
CA-1.4.1
Formal reporting, to the CBB, of capital adequacy must be made in accordance with the requirements set out under section BR 3.1.
Apr 08CA-1.4.2
Where a bank's CAR falls below its individual target ratio either on a solo basis (or on a consolidated basis), the General Manager of the bank must notify the CBB by the following business day, however no formal action plan will be necessary. The General Manager must explain what measures are being implemented to ensure that the bank will remain above its minimum target CAR(s).
Apr 08CA-1.4.3
The bank will be required to submit form PIRI to the CBB on a monthly basis, until the concerned CAR exceeds its target ratio.
Apr 08CA-1.4.4
The CBB will notify banks in writing of any action required of them with regard to the corrective and preventive action (as appropriate) proposed by the bank pursuant to the above, as well as of any other requirement of the CBB in any particular case.
Apr 08CA-1.4.5
All locally incorporated banks must provide the CBB, with immediate written notification (i.e. by no later than the following business day) of any actual breach of the minimum trigger CAR of 8%. Where such notification is given, the bank must also provide the CBB:
(a) No later than one calendar week after the notification, with a written action plan setting out how the bank proposes to restore the relevant CAR(s) to the required minimum level(s) set out above and, further, describing how the bank will ensure that a breach of such CAR(s) will not occur again in the future; and(b) Report on a weekly basis thereafter on the bank's relevant CAR(s) until such CAR(s) have reached the required target level(s) described above.Amended: April 2011
April 2008CA-1.4.6
Banks must note that the CBB considers the breach of CARs to be a very serious matter. Consequently, the CBB may (at its discretion) subject a bank which breaches its CAR(s) to a formal licensing reappraisal. Such reappraisal may be effected either through the CBB's own inspection function or through the use of Reporting Accountants, as appropriate. Following such appraisal, the CBB will notify the bank concerned in writing of its conclusions with regard to the continued licensing of the bank.
Apr 08CA-1.4.7
The CBB recommends that the bank's compliance officer support and cooperate with the CBB in the monitoring and reporting of the CARs and other regulatory reporting matters. Compliance officers should ensure that their banks have adequate internal systems and controls to comply with these regulations.
Apr 08CA-1.5 CA-1.5 Review of Prudential Information Returns by External Auditors
CA-1.5.1
The CBB requires all relevant banks to request their external auditors to conduct a review of the prudential returns on a quarterly basis in accordance with the requirements set out under section BR . However, if a bank provides prudential returns without any reservation from auditors for two consecutive quarters, it can apply for exemption from such review for a period to be decided by CBB.
Apr 08CA-2 CA-2 Regulatory Capital
CA-2.1 CA-2.1 Regulatory Capital
CA-2.1.1
Islamic banks are allowed two types of own funds to meet their capital requirements for credit risk, market risk and operational risk as set out below:
Tier 1: Core capital — Supports the calculation of credit risk weighted assets, operational risk and market risk.
Tier 2: Supplementary capital — Supports credit risk, operational risk and market risk subject to limitations.
Apr 08CA-2.1.2
For the purpose of defining Tier capital, the CBB has broadly adopted the recommendations contained in IFSB's guidelines. However, some restrictions have been placed on the inclusion of profit equalisation and investment risk reserve as Tier 2 capital. For components of Tier 1 and Tier 2 capital refer to paragraphs CA-2.1.3 to CA-2.1.4.
Apr 08Tier 1: Core Capital
CA-2.1.3
Tier 1 capital shall consist of the sum of items (a) to (e) below, less the sum of items (f) through (j) below:
(a) Issued and fully paid ordinary shares;
For Islamic funds with participation and / or "B" class shares (not carrying voting rights), the treatment for the purpose of these regulations must be agreed with the CBB. The CBB will consider each case on its merit.(b) Disclosed reserves• General reserves• Legal / statutory reserves• Share premium• Capital redemption reserves• Excluding fair value reserves1(c) Retained profit brought forward;(d) Unrealized net gains arising from fair valuing equities2; and(e) Minority interests in subsidiaries Tier 1 equity, arising on consolidation, in the equity of subsidiaries that are less than wholly owned. Further guidance on minority interests is provided in the Prudential Consolidation and Deduction Requirements Module.LESS:
(f) Goodwill;(g) Current interim cumulative net losses;(h) Unrealized gross losses arising from fair valuing equity securities3;(i) Other deductions made on a pro-rata basis between Tier 1 and Tier 2;(j) Reciprocal cross holdings of other banks' capital.
1 This refers to unrealised fair value gains reported directly in equity (such gross gains are included in Tier 2).
2This refers to unrealised net fair value gains taken through P&L (which have been audited). Please note that the unrealised net gains related to unlisted equities taken through P&L arising on or after January 1, 2008 will be subject to 55% discount as stated in CA-2.1.4(c)ii.
3 This refers to both 'net losses taken through P&L' and 'gross losses reported directly in equity'.
Apr 08Tier 2: Supplementary Capital
CA-2.1.4
Tier 2 capital shall consist of the following items:
(a) Current interim retained profits that have been reviewed as per the ISA by the external auditors;(b)Asset revaluation reserves , which arise from the revaluation of fixed assets and real estate from time to time in line with the change in market values, and are reflected on the face of the balance sheet as a revaluation reserve. Similarly, gains may also arise from revaluation of Investment Properties (real estate). These reserves (including the net gains on investment properties) may be included in Tier 2 capital, with the concurrence of the external auditors, provided that the assets are prudently valued, fully reflecting the possibility of price and forced sale. A discount of 55% will be applied to the difference between the historical cost book value and the market value to reflect the potential volatility of this form of unrealised capital;(c) Unrealised gains arising from fair valuing equities:(i) For unrealized gross gains reported directly in equity, a discount factor of 55% will be applied before inclusion in Tier 2 capital. Note for gross losses, the whole amount of such unrealised loss should be deducted from the Tier 1 capital;(ii) For unrealized net gains reported in income, a discount factor of 55% will apply on any such unrealized net gains from unlisted equity instruments before inclusion in Tier 1 capital (for audited gains) or Tier 2 capital (for reviewed gains) as appropriate. This discount factor will be applied to the incremental net gains related to unlisted equities arising on or after January 1, 2008;(d) Banks should note that the Central bank will discuss the applicability of the discount factor under paragraph (c) above with individual banks. This discount factor relating to CA-2.1.4(c)ii may be reassessed by the CBB if the bank arranges an independent review (which has been performed for the bank's systems and controls relating to FV gains on financial instruments) and meets all the requirements of the paper 'Supervisory guidance on the use of the fair value option for financial instruments by banks' issued by Basel Committee on Banking Supervision in June 2006;(e) Profit equalisation reserve and investment risk reserve, up to a maximum amount equal to the capital charge pertaining to 30% of the risk weighted assets financed by unrestricted investment account holders;(f) Subordinated term capital instruments, which comprise all unsecured term instruments subordinated (with respect to both profit and principal) to all other liabilities of the bank except the share capital. To be eligible for inclusion in Tier 2 capital, subordinated term capital instruments should have a minimum original fixed term to maturity of over five years. During the last five years to maturity, a cumulative discount (or amortisation) factor of 20% per year will be applied to reflect the diminishing value of these instruments as a continuing source of strength. These instruments are not normally available to participate in the losses of a bank which continues trading. For this reason, these instruments will be limited to a maximum of 50% of Tier 1 capital. Subordinated term capital instruments must also satisfy the conditions outlined in the paragraphs below; and(g) Credit facilities loss provisions held against future, presently unidentified losses and are freely available to meet such losses which subsequently materialise. Such general provisions/general credit facilities-loss reserves eligible for inclusion in Tier 2 will be limited to a maximum of 1.25 percentage points of credit risk-weighted risk assets. Provisions ascribed to identified deterioration of particular assets or known liabilities, whether individual or grouped, must be excluded.Amended: October 2013
Amended: April 2011
April 2008CA-2.1.4A
Subordinated term capital instruments agreed to on a case by case basis by CBB, must meet the following conditions. They must be:
(a) Issued and fully paid;(b) Neither be secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors;(c) The main features of such instruments must be easily understood and publicly disclosed;(d) Proceeds must be immediately available without limitation to the issuing bank; and(e) The bank must have discretion over the amount and timing of distributions, subject only to prior waiver of distributions on the bank's common stock, and banks must have full access to waived payments.Added: October 2013
CA-2.1.4B
A bank may not exercise a call on a subordinated term capital instrument, partially or in full, prior to the end of its term, unless it has received the CBB's prior written approval, and there is a clear statement in support of the call in the original documentation.
Added: October 2013
CA-2.1.4C
Where Paragraph CA-2.1.4B applies, the CBB will take into consideration whether the bank has received confirmation from its external auditor that the bank will continue to satisfy the CBB's capital adequacy requirements after such early call and the bank has sufficient liquidity to repay the subordinated term capital instrument. This can be done by assessing the impact of such redemption on the capital adequacy ratio of the bank.
Added: October 2013
CA-2.2 CA-2.2 Limits on the use of Different Forms of Capital
CA-2.2.1
Tier 1 capital should represent at least half of the total eligible capital, i.e., Tier 2 capital is limited to the 100% of Tier 1 capital. Subordinated term capital instruments are limited to a maximum of 50% of Tier 1 capital.
Amended: October 2013
Apr 08CA-2.2.2
The limit on Tier 2 capital is based on the amount of Tier 1 capital after all deductions of investments pursuant to Prudential Consolidation and Deduction Requirements Module (see Appendix PCD-2 of PCD module for an example of the deduction effects and the caps).
Apr 08PART 2: PART 2: Credit Risk
CA-3 CA-3 The Banking Book — Minimum Capital Requirements for Islamic Financing Assets
CA-3.1 CA-3.1 Background
CA-3.1.1
Due to the nature of Islamic banking transactions, Islamic banks, as opposed to their conventional counterparts, are additionally exposed to price risk in their banking book. CBB recognizes that such risks need to be identified and measured for regulatory capital purposes.
Apr 08CA-3.2 CA-3.2 Murabahah and Murabahah to the Purchase Orderer
Introduction
CA-3.2.1
This section sets out the minimum capital adequacy requirements to cover the transactions that are based on the Sharia rules and principles of Murabahah and Murabahah to the Purchase Orderer (MPO).
Apr 08CA-3.2.2
In Murabahah and MPO, the capital adequacy requirement for credit risk refers to the risk of a counterparty not paying the agreed price of an asset to the bank. In the case of binding MPOs, the risks faced by the Islamic banks are different at the various stages of the contract.
Apr 08CA-3.2.3
This section is broadly divided into (a) Murabahah and non-binding MPO and (b) binding MPO, as the types of risk faced by the bank are different at the various stages of the contract for the two categories.
Apr 08CA-3.2.4
This classification and the distinctions between a non-binding MPO and a binding MPO are subject to the criteria and opinions set by the respective SSB of the bank or any other SSB as specified by the CBB.
Apr 08CA-3.2.5
A Murabahah contract refers to an agreement whereby the bank sells to a customer at acquisition cost (purchase price plus other direct costs) plus an agreed profit margin, a specified kind of asset that is already in its possession. An MPO contract refers to an agreement whereby the bank sells to a customer at cost (as above) plus an agreed profit margin, a specified kind of asset that has been purchased and acquired by the bank based on a Promise to Purchase (PP) by the customer which can be a binding or non-binding PP.
Apr 08Murabahah and Non-binding MPO
CA-3.2.6
In a Murabahah transaction, the bank sells an asset that is already available in its possession, whereas in a MPO transaction the bank acquires an asset in anticipation that the asset will be purchased by the orderer/customer.
Apr 08CA-3.2.7
This price risk in Murabahah contracts ceases and is replaced by credit risk for the amount receivable from the customer following delivery of the asset. Likewise, in a non-binding MPO transaction, the bank is exposed to credit risk on the amount receivable from the customer when the latter accepts delivery and assumes ownership of the asset.
Apr 08Binding MPO
CA-3.2.8
In a binding MPO, the bank has no 'long' position in the asset that is the subject of the transaction, as there is a binding obligation on the customer to take delivery of the asset at a pre-determined price. The bank is exposed to counterparty risk in the event that the orderer in a binding MPO does not honour his/her obligations under the PP, resulting in the bank selling the asset to a third party at a selling price which may be lower than the cost to the bank. The risk of selling at a loss is mitigated by securing a Hamish Jiddiyyah (HJ) (a security deposit held as collateral upon entering into agreement to purchase or agreement to lease) upon executing the PP with the customer, as commonly practised in the case of binding MPO.
Apr 08Collateralisation
CA-3.2.9
As one of the CRM techniques, the bank can secure a pledge of the sold asset/underlying asset or another tangible asset ("collateralised Murabahah"). The collateralisation is not automatically provided in a Murabahah contract but must be explicitly stated or must be documented in a separate security agreement at or before the time of signing of the Murabahah contract. The bank may employ other techniques such as pledge of deposits or a third party financial guarantee. The RW of a financial guarantor can be substituted for the RW of the purchaser provided that the guarantor has a better credit rating than the purchaser and that the guarantee is legally enforceable.
Apr 08CA-3.2.10
In financing transactions that are collateralised, the pricing of the Murabahah assets and determination of the required amount of HJ would normally take into consideration the market value and forced-sale value of the assets; and the CRM would take into account of any 'haircut' applicable to the collateralised assets (if these assets are eligible collateral or acceptable to the Central Bank). Thus, fluctuations in the market value and forced sale value of the collateralised assets are dealt with under credit risk assessment. For full details of CRM techniques, and the eligibility of collateral, refer to Section CA-4.7.
Apr 08Credit Risk
Murabahah and Non-binding MPO
CA-3.2.11
The credit exposure must be measured based on accounts receivable in Murabahah (the term used herein includes MPO), which is recorded at their cash equivalent value i.e. amount due from the customers at the end of the reporting quarter less any provision for doubtful debts.
Apr 08CA-3.2.12
The accounts receivable (net of specific provisions) amount arising from the selling of a Murabahah asset must be assigned a RW based on the credit standing of the obligor (purchaser or guarantor) as rated by an ECAI that is approved by the CBB. In case the obligor is unrated, a RW of 100% shall apply. (See Section CA-4.2).
Apr 08Binding MPO
CA-3.2.13
In a binding MPO, the bank is exposed to default on the purchase orderer's obligation to pay fully for the asset at the agreed price. In the event of the orderer defaulting on its PP, the bank will dispose of the asset to a third party. The bank will have recourse to any HJ paid by the orderer, and (a) may have a right to recoup from the orderer any loss on disposing of the asset, after taking account of the HJ or (b) may have no such legal rights. In both cases, this risk is mitigated by the asset in possession as well as any HJ paid by the purchase orderer.
Apr 08CA-3.2.14
In case (a) the bank has the right to recoup any loss (as indicated in the previous paragraph) from the orderer, that right constitutes a claim receivable which is exposed to credit risk, and the exposure shall be measured as the amount of the asset's total acquisition cost to the bank, (less the market value of the asset as collateral subject to any haircut, and less the amount of any HJ, provided that the collateral is an eligible collateral or has been agreed as acceptable to the CBB). The applicable RW must be based on the standing of the obligor as rated by an ECAI that is approved by the CBB, and in the case the obligor is unrated, a RW of 100% shall apply. (See Section CA-4.2).
Apr 08CA-3.2.15
In case (b) the bank has no such right, and the cost of the asset to the bank constitutes a market risk (as in the case on a non-binding MPO), but this market risk exposure is reduced by the amount of any HJ that the bank has the right to retain.
Apr 08CA-3.2.16
In applying the treatment as set out in paragraph CA-3.2.14, the bank should ensure that the PP is properly documented and is legally enforceable.
Apr 08CA-3.2.17
Upon selling the asset, the accounts receivable (net of specific provisions) amount must be assigned a RW based on the credit standing of the obligor as rated by an ECAI that is approved by the CBB. In case the obligor is unrated, a RW of 100% shall apply. (See Section CA-4.2).
Apr 08Exclusions
CA-3.2.18
The capital requirement is to be calculated on the receivable amount, net of (i) specific provisions, (ii) any amount that is secured by eligible collateral (as defined in section CA-4.7) and/or (iii) any amount that is past due by more than 90 days. The portions that are collateralised and past due are subject to the treatment as set out in chapter CA-4.
Apr 08Assignment of Risk Weights
CA-3.2.19
Islamic financing assets are to be categorized as per the claim categories detailed in section CA-4.2, and risk weighted accordingly. Banks should ensure that the appropriate risk weight is used based on the claim category for each transaction.
Apr 08Market Risk
Murabahah and Non-binding MPO
CA-3.2.20
In the case of an asset in possession for a Murabahah transaction and an asset acquired specifically for resale to a customer in a non-binding MPO transaction, the asset would be treated as inventory of the bank and will be subject to price risk as per section CA-5.2. This capital charge is also applicable to assets held by a bank for incomplete non-binding MPO transactions at the end of a financial period.
Apr 08CA-3.2.21
Assets in possession on a 'sale or return' basis (with such an option included in the contract) are treated as accounts receivable from the vendor and as such would be offset against the related accounts payable to the vendor. If these accounts payable have been settled, the assets shall attract a RW based on rating of the vendor (100% in case of unrated), subject to (a) the availability of documentation evidencing such an arrangement with the vendor, and (b) the period for returning the assets to the vendor not having been exceeded. If the above conditions are not satisfied, capital charge will be provided as per paragraph CA-3.2.20.
Apr 08Binding MPO
CA-3.2.22
In a binding MPO the orderer has the obligation to purchase the asset at the agreed price, and the bank as the seller is only exposed to credit risk as indicated in paragraph CA-3.1.13 above.
Apr 08Foreign Exchange Risk
CA-3.2.23
If the funding of an asset purchase or the selling of an asset opens a bank to foreign exchange exposures, the relevant positions should be included in the measurement of foreign exchange risk described in section CA-5.5.
Apr 08Summary of Capital Requirement at Various Stages of the Contract
CA-3.2.24
The following table sets out the applicable period of the contract that attracts capital charges:
(a) Murabahah and Non-binding MPOApplicable Stage of the Contract Credit RW Market Risk Capital Charge Asset available for sale (asset on balance sheet)* Not applicable Price risk (15% Capital charge) Asset is sold and delivered to a customer and the selling price (accounts receivable) is due from the customer. Based on customer's rating or 100% RW for unrated customer (see paragraphs CA-3.2.11 and CA-3.2.12) NA Upon full settlement of the purchase price. NA NA * Also includes an asset which is in possession due to cancellation of PP by a non-binding MPO customer. Any HJ taken, if any, is not considered as eligible collateral and shall not be offset against the value of the asset.
(b) Binding MPOApplicable Stage of the Contract Credit RW Market Risk Capital Charge Asset available for sale (asset on balance sheet)* - If the bank has legal right to recoup from the customer any loss on disposing of the asset Asset acquisition cost less [market value of asset if eligible as collateral (net of any haircut**) plus any HJ] x applicable RW (see chapter CA-4) NA Asset available for sale (asset on balance sheet)* - If the bank has no legal right to recoup from the customer any loss on disposing of the asset NA Price risk 15% Capital charge minus HJ(if the bank has legal right to the HJ) Asset is sold and delivered to a customer and the selling price (accounts receivable) is due from the customer. Based on customer's rating or 100% RW for unrated customer (see section CA-4.2) NA Upon full settlement of the purchase price. NA NA * Also includes an asset which is in possession due to cancellation of PP by a customer.
** Please refer to CRM section CA-4.7 for eligibility of collateral and application of haircuts.
Amended: April 2011
April 2008CA-3.3 CA-3.3 Salam and Parallel Salam
Introduction
CA-3.3.1
This section sets out the minimum capital requirement to cover credit and market (price) risks arising from entering into contracts or transactions that are based on the Sharia rules and principles of Salam. The bank is exposed to the (a) credit (counterparty) risk of not receiving the purchased commodity after disbursing the purchase price to the seller, and (b) price risk that the bank incurs from the date of execution of a Salam contract, which is applicable throughout the period of the contract and beyond the maturity date of the contract as long as the commodity remains on the balance sheet of the bank.
Apr 08CA-3.3.2
This section is applicable to (a) Salam contracts that are executed without any Parallel Salam contracts and (b) Salam contracts that are backed by independently executed Parallel Salam contracts.
Apr 08CA-3.3.3
A Salam contract refers to an agreement to purchase, at a predetermined price, a specified kind of commodity4 which is to be delivered on a specified future date in a specified quantity and quality. The bank as the buyer makes full payment of the purchase price upon execution of a Salam contract or within a subsequent period not exceeding two or three days as deemed permissible by its Sharia Supervisory Board (SSB).
4 A commodity is defined as a physical product which is and can be traded on a secondary market, e.g. agricultural products, minerals (including oil) and precious metals. The commodity may or may not be traded on an organised exchange.
Apr 08CA-3.3.4
In certain cases the bank may enter into a back-to-back contract (Parallel Salam) to sell a commodity with the same specification as the purchased commodity under a Salam contract to a party other than the original seller. The Parallel Salam allows the bank to sell the commodity for future delivery at a predetermined price (thus hedging the price risk on the original Salam contract) and protects the bank from having to take delivery of the commodity and warehousing it.
Apr 08CA-3.3.5
The non-delivery of the commodity by a Salam seller (i.e. counterparty risk) does not discharge the bank's obligations to deliver the commodity under a Parallel Salam contract, and thus exposes the bank to potential loss in obtaining the supply elsewhere.
Apr 08CA-3.3.6
The obligations of a bank under Salam and Parallel Salam are not inter-conditional or interdependent, which implies that there is no legal basis for offsetting credit exposures between the contracts.
Apr 08CA-3.3.7
In the absence of a Parallel Salam contract, a bank may sell the subject-matter of the original Salam contract in the spot market upon receipt, or, alternatively, the bank may hold the commodity in anticipation of selling it at a higher price. In the latter case, the bank is exposed to price risk on its position in the commodity until the latter is sold.
Apr 08Credit Risk
CA-3.3.8
The amount paid for the purchase of a commodity based on a Salam contract shall be assigned a RW based on the credit standing of the counterparties involved in the contracts as rated by an ECAI that is approved by the CBB. If a counterparty is unrated, a RW of 100% will apply. (See Section CA-4.2).
Apr 08Exclusions
CA-3.3.9
The capital requirement is to be calculated on the amount paid, net of (i) specific provisions, (ii) any amount that is secured by eligible collateral (as defined in section CA-4.7) and/or (iii) any amount which is past due by more than 90 days. The portions that are collateralised and past due are subject to the treatment as set out in chapter CA-4.
Apr 08Applicable Period
CA-3.3.10
The credit RW will be applied from the date of the contract made between both parties until the maturity of the Salam contract, which is upon receipt of the purchased commodity. However, between the date of contract and disbursement of funds to the customer the exposure is a commitment (off-balance sheet) and a credit conversion factor (CCF) of 20% will be applied before applying the relevant RW.
Apr 08Offsetting Arrangement between Credit Exposures of Salam and Parallel Salam
CA-3.3.11
The credit exposure amount of a Salam contract is not to be offset against the exposure amount of a Parallel Salam contract, as an obligation under one contract does not discharge an obligation to perform under the other contract.
Apr 08Market Risk
CA-3.3.12
The price risk on the commodity exposure in Salam can be measured in two ways, either the maturity ladder approach in accordance with paragraphs CA-5.6.9 to CA-5.6.12 or price risk in accordance with paragraph CA-5.2.2.
Apr 08CA-3.3.13
The long and short positions in a commodity, which are positions of Salam and Parallel Salam, may be offset under either approach for the purpose of calculating the net open positions provided that the positions are in the same group of commodities.
Apr 08Foreign Exchange Risk
CA-3.3.14
It the funding of a commodity purchase or selling of a commodity leaves a bank open to foreign exchange exposures, the relevant positions should be included in the measures of foreign exchange risk described in section CA-5.5.
Apr 08Summary of Capital Requirement at Various Stages of the Contract
CA-3.3.15
The following table sets out the applicable period of the contract that attracts capital charges:
(a) Salam with Parallel SalamApplicable Stage of Contract Credit RW Market Risk Capital Charge Payment of purchase price by the bank of a Salam customer Based on customer's rating or 100% RW for unrated customer.
No Netting of Salam exposures against parallel Salam exposures.
(See section CA-4.2)Two approaches are available.
Maturity Ladder Approach (see paragraphs CA-5.6.9 to CA-5.6.12 of chapter CA-5)
Price risk (see CA-5.2.2 of chapter CA-5)Receipt of the purchased commodity by the bank. Asset available for delivery to the customer. If the bank has legal right to recoup from the customer any loss on disposing of the asset Based on customer's rating or 100% RW for unrated customer.
No Netting of Salam exposures against parallel Salam exposures.
(See section CA-4.2)NA Receipt of the purchased commodity by the bank. Asset available for delivery to the customer - If the bank has no legal right to recoup from the customer any loss on disposing of the asset NA Two approaches are available.
Maturity Ladder Approach (see paragraphs CA-5.6.9 to CA-5.6.12 of chapter CA-5)
Price risk (see paragraph CA-5.2.2 of chapter CA-5)The purchased commodity is sold and delivered to the buyer and the amount is received. NA NA (b) Salam without Parallel SalamApplicable Stage of Contract Credit RW Market Risk Capital Charge Payment of purchase price by the bank of a Salam customer. At this stage of the contract, only one of credit or market risk is possible at the same time. To be prudent, higher of the two should be provided (not both). The higher of the following (credit or market) Based on customer's rating or 100% RW for unrated customer.
(See section CA-4.2)Price risk but without additional 3 %. (see paragraph 5.2.2 of chapter CA-5) Receipt of the purchased commodity by the bank NA Price risk but without additional 3 %. (see paragraph 5.2.2 of chapter CA-5) The purchased commodity is sold and delivered to the buyer. NA NA Amended: April 2011
April 2008CA-3.4 CA-3.4 Istisna'a and Parallel Istisna'a
Introduction
CA-3.4.1
This section sets out the minimum capital adequacy requirement to cover credit and market (price) risks arising from entering into contracts or transactions that are based on the Sharia rules and principles of Istisna'a.
Apr 08CA-3.4.2
Istisna'a and parallel Istisna'a contracts would attract a risk weighting as per the credit standing of the respective counterparties (See section CA-4.2).
Apr 08CA-3.4.3
An Istisna'a contract refers to an agreement to sell to or buy from a customer, a non-existent asset which is to be manufactured or built according to the ultimate buyer's specifications and is to be delivered on a specified future date at a predetermined selling price.
Apr 08CA-3.4.4
The bank, as the seller, has the option to manufacture or build the asset on its own or to engage the services of a party other than the Istisna'a ultimate buyer as supplier or subcontractor, by entering into a Parallel Istisna'a contract (please refer to paragraph CA-3.4.12).
Apr 08CA-3.4.5
The exposures under Istisna'a involve credit and market risks, as described below. Credit exposures arise once the work is billed to the customer, while market (price) exposures arise on unbilled work-in-process (WIP).
Apr 08CA-3.4.6
There is a capital requirement to cater for the credit (counterparty) risk of the bank not receiving the selling price of the asset from the customer or project sponsor either in pre-agreed stages of completion and/or upon full completion of the manufacturing or construction process.
Apr 08CA-3.4.7
This section also sets out the capital adequacy requirement to cater for the market risk that a bank incurs from the date of manufacturing or construction, which is applicable throughout the period of the contract on unbilled WIP inventory.
Apr 08CA-3.4.8
This section is applicable to both (a) Istisna'a contracts that are executed without a Parallel Istisna'a contract and (b) Istisna'a contracts that are backed by independently executed Parallel Istisna'a contracts.
Apr 08CA-3.4.9
This section makes distinctions between the two main categories of Istisna'a:
(a) Full Recourse Istisna'a
The receipt of the selling price by the bank is dependent on the financial strength or payment capability of the customer for the subject matter of Istisna'a, where the source of payment is derived from the various other commercial activities of the customer and is not solely dependent on the cash flows from the underlying asset/project; and(b) Limited and Non-recourse Istisna'a
The receipt of the selling price by the bank is dependent partially or primarily on the amount of revenue generated by the asset being manufactured or constructed by selling its output or services to contractual or potential third party buyers. This form of Istisna'a faces "revenue risk" arising from the asset's ability to generate cash flows, instead of the creditworthiness of the customer or project sponsor.Apr 08CA-3.4.10
In full, limited and non-recourse Istisna'a contracts, the bank assumes the completion risk that is associated with the failure to complete the project at all, delay in completion, cost overruns, occurrence of a force majeure event and unavailability of qualified personnel and reliable seller(s) or subcontractors in a Parallel Istisna'a.
Apr 08CA-3.4.11
The selling price of an asset sold based on Istisna'a is agreed or determined on the contractual date and such a contract is binding. The price cannot be increased or decreased on account of an increase or decrease in commodity prices or labour cost. The price can be changed subject to the mutual consent of the contracting parties due to alteration or modifications to the contract or unforeseen contingencies, which is a matter for the commercial decision of the bank and can result in a lower profit margin.
Apr 08CA-3.4.12
In cases where a bank enters into Parallel Istisna'a to procure an asset from a party other than the original Istisna'a customer (buyer), the price risk relating to input materials is mitigated. The bank remains exposed to the counterparty risk of the Parallel Istisna'a seller in delivering the asset on time and in accordance with the Istisna'a ultimate buyer's specifications. This is the risk of not being able to recover damages from the Parallel Istisna'a seller for the losses resulting from the breach of contract.
Apr 08CA-3.4.13
The failure of the Parallel Istisna'a seller to deliver a completed asset which meets the buyer's specifications does not discharge the bank's obligations to deliver the asset ordered under an Istisna'a contract, and thus exposes the bank to potential loss in making good the shortcomings or obtaining the supply elsewhere. The obligations of a bank under Istisna'a and Parallel Istisna'a contracts are not inter-conditional or interdependent, which implies that there is no legal basis for offsetting credit exposures between the contracts.
Apr 08Credit Risk
Full Recourse Istisna'a
CA-3.4.14
The receivable amount generated from the selling of an asset based on an Istisna'a contract with full recourse to the customer (buyer) shall be assigned a RW based on the credit standing of the customer as rated by an ECAI that is approved by the CBB. In case the buyer is unrated, a RW of 100% shall apply. (See section CA-4.2).
Apr 08Limited and Non-Recourse Istisna'a
CA-3.4.15
When the project is rated by an ECAI, the RW based on the credit rating of the project is applied to calculate the capital adequacy requirement. Otherwise, the RW shall be based on the 'Supervisory Slotting Criteria' approach for Specialised Financing (Project Finance) as set out in section CA-4.3.
Apr 08CA-3.4.16
In cases where a group of contractors are engaged in a particular project, the risk rating or weightage will follow the obligations of various contractors. If the risk is undertaken by a main contractor, the risk rating of the main contractor is to be used.
Apr 08CA-3.4.17
The limited and non-recourse Istisna'a financing structure is required to meet the characteristics as set out below in order to qualify for the treatment mentioned in paragraph CA-3.4.15 above:
(a) The segregation of the project's liabilities from the balance sheet of the Istisna'a ultimate buyer (or project sponsor) from a commercial and accounting perspective which is generally achieved by having the Istisna'a contract made with a special purpose entity set up to acquire and operate the asset/project concerned;(b) The ultimate buyer is dependent on the income received from the assets acquired/ projects to pay the purchase price;(c) The contractual obligations give the manufacturer/constructor/bank a substantial degree of control over the asset and the income it generates, for example under BOT (built, operate and transfer) arrangement where the manufacturer builds a highway and collects tolls for a specified period as a consideration for the selling price; and(d) The primary source of repayment is the income generated by the asset/project rather than relying on the capacity of the buyer.Amended: April 2011
April 2008CA-3.4.18
Please Note: Insurance is normally part and parcel of the project risk financing. However, it is not regarded as a credit risk mitigating technique.
Apr 08Exclusions
CA-3.4.19
The capital requirement is to be calculated on the receivable amount, net of (i) specific provisions, (ii) any amount that is secured by eligible collateral (as defined in section CA-4.7) and/or (iii) any amount which is past due by more than 90 days. The portions that are collateralised and past due are subject to the treatment as set out in chapter CA-4.
Apr 08CA-3.4.20
Any portion of an Istisna'a contract that is covered by an advanced payment shall carry a RW of 0%, or the amount of the advanced payment shall be offset against the total amount receivable or amounts owing from progress billings.
Apr 08Applicable Period
CA-3.4.21
The credit RW is to be applied from the date when the manufacturing or construction process commences and until the selling price is fully settled by the bank, either in stages and/or on the maturity of the Istisna'a contract, which is upon delivery of the manufactured asset to the Istisna'a ultimate buyer.
Apr 08Offsetting Arrangement between Credit Exposures of Istisna'a and Parallel Istisna'a
CA-3.4.22
The credit exposure amount of an Istisna'a contract is not to be offset against the credit exposure amount of a Parallel Istisna'a contract because an obligation under one contract does not discharge an obligation to perform under the other contract.
Apr 08Market Risk
Full Recourse Istisna'a
(a)Istisna'a with Parallel Istisna'a
CA-3.4.23
There is no capital charge for market risk to be applied in addition to provisions in paragraphs CA-3.4.14 to CA-3.4.22 above, subject to there being no provisions in the Parallel Istisna'a contract that allow the seller to increase or vary its selling price to the bank, under unusual circumstances. Any variations in a Parallel Istisna'a contract that are reflected in the corresponding Istisna'a contract which effectively transfers the whole of the price risk to an Istisna'a customer (buyer), is also eligible for this treatment.
Apr 08(b)Istisna'a without Parallel Istisna'a
CA-3.4.25
A capital charge of 1.6% (equivalent to a 20% RW) is to be applied to the balance of unbilled WIP inventory to cater for market risk, in addition to the credit RW stated in paragraphs CA-3.4.14 to CA-3.4.22 above.
Apr 08CA-3.4.26
This inventory is held subject to the binding order of the Istisna'a buyer and is exposed to the price risk as described in CA-3.4.11.
Apr 08Foreign Exchange Risk
CA-3.4.27
Any foreign exchange exposures arising from the purchasing of input materials, or from Parallel Istisna'a contracts made, or the selling of a completed asset in foreign currency should be included in the measures of foreign exchange risk described in section CA-5.5.
Apr 08Summary of Capital Requirement at Various Stages of the Contract
CA-3.4.28
The following tables set out the applicable period of the contract that attracts capital charges for (a) Full Recourse Istisna'a (b) Limited and Non-Recourse Istisna'a.
(a) Full Recourse Istisna'a(i) Istisna'a with Parallel Istisna'aApplicable Stage of the Contract Credit RW Market Risk Capital Charge Unbilled work-in-progress Based on ultimate buyer's rating or 100% RW for unrated buyer.
No netting of Istisna'a exposures against Parallel Istisna'a exposures.
(See paragraphs CA-3.4.14 to CA-3.4.22)
(See section CA-4.2)Nil provided that there is no provision in the Parallel Istisna'a contract that allows the seller to increase or vary the selling price. See paragraph CA-3.4.23 If the seller is allowed to vary the selling price of the asset, then under the market risk treatment 15% capital charge on net long or short position plus 3% capital charge on gross positions. Amount receivable after contract billings Upon full settlement price by an Istisna'a buyer. NA NA (ii) Istisna'a without Parallel Istisna'aApplicable Stage of the Contract Credit RW Market Risk Capital Charge Unbilled work-in-progress Based on ultimate buyer's rating or 100% RW for unrated buyer. 1.6% capital charge on work in progress inventory.
See relevant paragraphs under CA-3.4.25 to CA-3.4.26Progress billing to customer. Based on ultimate buyer's rating or 100% RW for unrated buyer.
(See paragraphs CA-3.4.14 to CA-3.4.22) (See section CA-4.2)NA Upon full settlement price by and Istisna'a buyer. NA NA (b) Limited and Non-Recourse Istisna'a
Istisna'a with Parallel Istisna'a (for project finance)Applicable Stage of the Contract Credit RW Market Risk Capital Charge Unbilled work-in-progress Based on project's ECAI rating if available or supervisory slotting criteria that ranges from 70% to 250% RW.
No netting of Istisna'a exposures against Parallel Istisna'a exposures.
(See sections CA-4.2 and CA -4.3)NA Amount receivable after contract billings NA Upon full settlement price by and Istisna'a buyer. NA NA Apr 08CA-3.5 CA-3.5 Ijarah and Ijarah Muntahia Bittamleek
Introduction
CA-3.5.1
This section sets out the minimum capital requirement to cover counterparty risk and residual value risk of leased assets, arising from a bank entering into contracts or transactions that are based on the Sharia rules and principles of Ijarah and Ijarah Muntahia Bittamleek (IMB), also known as Ijarah wa Iqtinā. The section also covers the market (price) risk of assets acquired for Ijarah and IMB.
Apr 08CA-3.5.2
In an Ijarah contract (either operating or IMB), the bank as the lessor maintains its ownership in the leased asset whilst transferring the right to use the asset, or usufruct, to an enterprise as the lessee, for an agreed period at an agreed consideration. All liabilities and risks pertaining to the leased asset are to be borne by the bank including obligations to restore any impairment and damage to the leased asset arising from wear and tear and natural causes which are not due to the lessee's misconduct or negligence.
Apr 08CA-3.5.3
Thus, in both Ijarah and IMB, the risks and rewards remain with the lessor, except for the residual value risk at the term of an IMB which is borne by the lessee. The lessor is exposed to price risk on the asset while it is in the lessor's possession prior to the signature of the lease contract, except where the asset is acquired following a binding promise to lease as described in paragraph CA-3.5.5 below.
Apr 08CA-3.5.4
In an IMB contract, the lessor promises to transfer its ownership of the leased asset to the lessee at the end of the contract as a gift or as a sale at a specified consideration, provided that (a) the promise is separately expressed and independent of the underlying Ijarah; or (b) a gift contract is entered into conditional upon fulfillment of all the Ijarah obligations, and thereby ownership shall be automatically transferred thereupon.
Apr 08CA-3.5.5
In both operating Ijarah and IMB, the Bank either possesses the asset before entering into a leased contract or enters into the contract based on specific description of an asset to be leased and acquired in the future before it is delivered to the lessee. This agreement to lease may be considered as binding (binding Promise to Lease (PL)) or as non-binding (non-binding PL) depending on the applicable Sharia interpretations.
Apr 08Operating Ijarah
CA-3.5.6
This section sets out the minimum capital requirements to cater for the lessor's exposures to (a) the credit risk of the lessee as counterparty in servicing the lease rentals, and (b) the market (price) risk attaching to the residual value of the leased assets either at the end of the Ijarah contract or at the time of repossession upon default, i.e. the risk of losing money on the resale of the leased asset.
Apr 08IMB
CA-3.5.7
In IMB, once the lease contract is signed, the lessor is exposed to credit risk for the lease payments receivable from the lessee (a credit risk mitigated by the asset's value as collateral5 in most cases) and to a type of operational risk in respect of the need to compensate the lessee if the asset is permanently impaired through no fault of the latter. If the leased asset is permanently impaired and is uninsured, the bank suffers a loss equal to the carrying value of the leased asset, just as it would if any of its fixed assets were permanently impaired. In the event that the lessee exercises its right to cancel the lease, the lessor is exposed to the residual value of the leased asset being less than the refund of payments due to the lessee. In such case, the price risk, if any, is already reflected in a 'haircut' to be applied to the value of the leased asset as collateral. Therefore, the price risk, if any, is not applicable in the context of the IMB.
5 The collateral used in the context of IMB is of the usufruct or use value of the asset, as the bank is the owner of the asset.
Apr 08CA-3.5.8
This section sets out the minimum capital adequacy requirement to cater for the credit risk of the lessee as counterparty with respect to servicing the lease rentals. The credit risk exposure in respect of the lease rentals is mitigated by the collateral represented by the value of the leased asset on repossession, provided that the bank is able to repossess the asset, which may be subject to doubt, especially in the case of movable assets or residential real estate. Insofar as there is doubt as to the lessor's ability to repossess the asset, the residual fair value of the asset that was assumed in fixing the lease rentals is also exposed to credit risk.
Apr 08CA-3.5.9
The bank may be exposed to losses in case a lessee acquiring an asset under IMB decides not to continue with the contract. In such a case, the lessor is required to refund to the lessee the capital payments (instalments of the purchase price) that were included in the periodic lease rentals (subject to deduction of any amounts due for unpaid rentals). If the value of the repossessed asset is less than the amount to be refunded (before any such deduction), the difference constitutes a loss to the lessor. This exposes the bank as lessor to a form of market risk.
Apr 08CA-3.5.10
In theory, a situation could arise in which, when an IMB contract arrives at its term, the lessee decides not to exercise its option to complete the purchase by making the contractually agreed final payment (The option to purchase places no obligation on the lessee to do so.). The bank may thus be exposed to market risk, in respect of a potential loss from disposing of the asset for an amount lower than its net book value. Generally, however, the lessor's exposure in such a case would not be significant, as the option to purchase can be exercised by making a payment of a token amount and the lessee would have no reason to refrain from exercising it.
Apr 08CA-3.5.11
Moreover, the net book value of the asset at the term of the IMB (i.e. its residual fair value as assumed in fixing the lease rentals) would be zero or close to zero.
Apr 08Credit Risk
CA-3.5.12
In a binding PL, when a bank is exposed to default on the lease orderer's obligation to execute the lease contract, the exposure shall be measured as the amount of the asset's total acquisition cost to the bank, less the market value of the asset as collateral subject to any haircut, and less the amount of any urbun received from the lease orderer. The applicable RW shall be based on the standing of the obligor as rated by an ECAI that is approved by the CBB, and in the case the obligor is unrated, a RW of 100% shall apply (refer to chapter CA-4). The bank may or may not have the right to recoup from the customer any loss on leasing or disposing of the asset after taking account of the HJ.
Apr 08CA-3.5.13
In applying the treatment as set out in paragraph CA-3.5.12, the bank must ensure that the PL is properly documented and is legally enforceable. In the absence of proper documentation and legal enforceability, the asset is to be treated similarly to one in a non-binding PL which is exposed to market (price) risk, using the measurement approach as set out in paragraph CA-3.5.18(a).
Apr 08Operating Ijarah
CA-3.5.14
When the lessee gets the right to use the asset, the lessor is exposed to credit risk for the estimated value of the lease payments in respect of the remaining period of the Ijarah. This exposure is mitigated by the market value of the leased asset (subject to the applicable haircut) which may be repossessed (except in the case of residential real estate). The net credit risk exposure shall be assigned a RW based on the credit standing of the lessee/counterparty as rated by an ECAI that is approved by the CBB. In the case that the lessee is unrated, a RW of 100% shall apply.
Apr 08IMB
CA-3.5.15
When the lessee gets the right to use the asset, the capital requirement for IMB is based on the total estimated future ijarah receivable amount over the duration of the lease contract. This exposure is mitigated by the market value of the leased asset which may be repossessed (except in the case of residential real estate). The net credit risk exposure shall be assigned a RW based on the credit standing of the lessee/counterparty as rated by an ECAI that is approved by the CBB. In the case that the lessee is unrated, a RW of 100% shall apply. (See section CA-4.2).
Apr 08CA-3.5.16
The estimated future ijarah receivable amount as indicated in paragraph CA-3.5.15 (a) above, shall be risk-weighted based on the credit standing of the lessee as rated by an ECAI or at 100%, after deduction of the value of the leased asset as collateral (subject to any haircut). (See chapter CA-4).
Apr 08Exclusions
CA-3.5.17
The capital requirement is to be calculated on the receivable amount, net of (i) specific provisions, (ii) any amount that is secured by eligible collateral (as defined in section CA-4.7) and/or (iii) any amount which is past due by more than 90 days. The portions that are collateralised and past due are subject to the treatment as set out in chapter CA-4.
Apr 08Market Risk
CA-3.5.18
In the case of an asset acquired and held for the purpose of either operating Ijarah or IMB, the capital charge to cater for market (price) risk in respect of the leased asset from its acquisition date until its disposal can be categorised into the following:
(a) Non-binding PL
The asset for leasing will be treated as inventory of the bank and capital charge will be provided for the price risk in accordance with section CA-5.2.(b) Binding PL
In a binding PL, a bank is exposed to default on the lease orderer's obligation to lease the asset in its possession. In the event of the lease orderer defaulting on its PL, the bank will either lease or dispose of the asset to a third party. The bank will have recourse to any HJ paid by the customer6, and (i) may have a right to recoup from the customer any loss on leasing or disposing of the asset after taking account of the HJ, or (ii) may have no such right, depending on the legal situation. In both cases, this risk is mitigated by the asset in possession (if eligible) as well as any HJ paid by the lease orderer.
6 The amount can only be deducted for damages, i.e. difference between the asset acquisition cost and the total of lease rentals (when the asset is leased to a third party) or selling price (when the asset is sold to a third party), whichever is applicable.
Apr 08CA-3.5.19
In case (i), the bank has the right to recoup any loss (as indicated in the previous paragraph) from the customer, that right constitutes a claim receivable which is exposed to credit risk, and the exposure shall be measured as the amount of the asset's total acquisition cost to the bank, less the market value of the asset as collateral subject to any haircut, and less the amount of any HJ. The applicable RW shall be based on the standing of the customer as rated by an ECAI that is approved by CBB, and in the case the obligor is unrated, a RW of 100% shall apply. (see section CA-4.2).
Apr 08CA-3.5.20
In case (ii) the bank has no such right, and the cost of the asset to the bank constitutes a market risk (as in the case on a non-binding PL), but this market risk exposure is reduced by the amount of any HJ that the bank has the right to retain.
Apr 08Operating Ijarah
CA-3.5.21
The residual value of the asset will be subject to capital charge of 8%. Upon expiry of the lease contract, the carrying value of the leased asset shall carry a capital charge for price risk in accordance with section CA-5.2 until the asset is re-leased or disposed of.
Apr 08IMB
CA-3.5.22
In the event that the lessee exercises its right to cancel the lease, the lessor is exposed to the residual value of the leased asset being less than the refund of payments due to the lessee. In such a case, the price risk, if any, is already reflected in a 'haircut' to be applied to the value of the leased asset as collateral in credit risk. Therefore, the price risk, if any, is not applicable in the context of the IMB.
Apr 08Summary of Capital Requirement at Various Stages of the Contract
CA-3.5.23
The following tables set out the applicable period of the contract that attracts capital charges:
Operating IjarahApplicable Stage of the Contract Credit RW Market Risk Capital Charge Asset available for lease (prior to signing a lease contract) - If the bank has legal right to recoup from the customer any loss on disposing of the asset Binding PL Asset acquisition cost less (a) market value of asset fulfilling function of collateral (net of any haircuts) and (b) any 'hamish jiddiyyah' multiply with the customer's rating or 100% RW for unrated customer. (See section CA-4). Non-binding PL 15% capital charge until lessee takes possession. Asset available for lease (prior to signing a lease contract) - If the bank has no legal right to recoup from the customer any loss on disposing of the asset NA 15% capital charge until lessee takes possession minus urbun (If the bank has legal right to it). When the lessee gets the right to use the asset and the lease rental payments are due from the lessee Total contractual obligation of the lease rental receivable over the duration of the lease contract less the recovery value* (if eligible) of the leased asset shall be risk-weighted according to the lessee's rating. (100% RW for an unrated lessee.). (See chapter CA-4). The residual value will be subject to capital charge of 8% Maturity of contract term and the leased asset is returned to the bank Not applicable 15% capital charge of the carrying value of the asset * Recovery value should be based on the entire Ijarah asset value.
IMBApplicable Stage of the Contract Credit RW Market Risk Capit Charge Asset available for lease (prior to signing a lease contract) - If the bank has legal right to recoup from the customer any loss on disposing of the asset Binding PL Asset acquisition cost less (a) market value of asset fulfilling function of collateral (net of any haircuts) and (b) any 'hamish jiddiyyah' multiply with the customer's rating or 100% RW for unrated customer. (See chapter CA-4). Non-binding PL 15% capital charge until lessee takes possession Asset available for lease (prior to signing a lease contract) - If the bank has no legal right to recoup from the customer any loss on disposing of the asset NA 15% capital charge until lessee takes possession minus urbun (If the bank has legal right to it). When the lessee gets the right to use the asset and the lease rental payments are due from the lessee Total contractual obligation of the lease rental receivable over the duration of the lease contract less recovery value of the asset* (if eligible) shall be risk-weighted according to the lessee's rating (100% RW for an unrated lessee. (See chapter CA-4). Not applicable Maturity of contract term and the leased asset is returned to the bank Not applicable Not applicable * Recovery value should be based on the entire Ijarah asset value.
Apr 08CA-3.6 CA-3.6 Musharakah and Diminishing Musharakah
Introduction
CA-3.6.1
This section sets out the minimum capital adequacy requirement to cover the risk of loss on invested capital arising from entering into contracts or transactions that are based on the Sharia rules and principles of Musharakah and Diminishing Musharakah where the bank and their customers/partner(s) contribute to the capital of the partnership and shares its profit or loss.
Apr 08CA-3.6.2
This section is applicable to both (a) Musharakah in which all the partners' share remain constant throughout the contract period; and (b) Diminishing Musharakah in which the share of the bank shall be gradually reduced during the tenure of the contract until it is fully sold to the other partner(s).
Apr 08CA-3.6.3
Musharakah contracts refer to partnerships in specific transactions or projects. These exclude participation in the share capital (equity) of other enterprises.
Apr 08CA-3.6.4
A Musharakah is an agreement between the bank and a customer to contribute capital in various proportions to an enterprise, whether existing or new, or to ownership of a real estate or moveable asset, either on a permanent basis, or on a diminishing basis where the customer progressively buys out the share of the bank ("Diminishing Musharakah"). Profits generated by that enterprise or real estate/asset are shared in accordance with the terms of Musharakah agreement whilst losses are shared in proportion to the respective contributor's share of capital.
Apr 08CA-3.6.5
A bank may enter into a Musharakah contract with a customer as a means of providing a financing to the latter on a profit sharing and loss bearing basis. In this case, the Musharakah is normally of the diminishing type, in which the customer gradually purchases the bank's partnership share over the life of the contract. This type of financing is one of the Sharia compliant alternatives to avoid a conventional term loan repayable by instalments, and as such it is exposed to credit risk for the customer's purchase payments as well as to the risk attached to the bank's share of the underlying assets.
Apr 08Musharakah
CA-3.6.6
This section sets out the minimum capital adequacy requirement to cater for "capital impairment risk", the risk of losing the amount contributed to an enterprise or ownership of an asset. The bank acts as a partner in a Musharakah contract and is exposed to the risk of losing its capital upon making payment of its share of capital in a Musharakah contract. A Musharakah can expose the bank either to capital impairment risk or to 'credit risk', depending on the structure and purpose of the Musharakah and the types of asset in which the funds are invested. The invested capital is redeemable either by liquidation of the Musharakah assets at the end of the contract which has a fixed tenure or as mutually agreed by the partners, or upon divestment of partnership in an on-going Musharakah subject to giving a notice to other partners. The amount of capital redemption is represented by the value of a share of capital, which is dependent on the quality of the underlying investments or assets, and ability to generate profits and cash flows from the Musharakah.
Apr 08CA-3.6.7
As a partner to a Musharakah contract, the bank is not entitled to a fixed rate of return and is thus exposed to variable profits generated by the partnership which are shared on a basis as agreed in the Musharakah contract, whereas losses are to be borne by the bank and its partners according to their respective ratio of invested capital. Therefore, the bank is exposed to entrepreneurial risk of an active partner that manages the partnership and business risks associated with the underlying activities and types of investments or assets of the partnership.
Apr 08Diminishing Musharakah
CA-3.6.8
This form of Musharakah is a means whereby a bank can provide term finance to a client on a profit and loss sharing basis. The bank enters into this type of Musharakah with the objective of transferring the ownership to the partner/customer, where the bank acts as a joint-owner of the asset with a promise by the partner to purchase the bank's share making a payment on one or more specified future dates. The bank's selling price is normally based on the fair value of the partnership share being transferred on the date of each purchase, which may expose the bank to the risk of selling its share of ownership below the acquisition price.
Apr 08CA-3.6.9
As a joint-owner, the bank is also entitled to its share of revenue generated from the assets of the Musharakah, such as Ijarah lease rentals in which the rental entitlements to the bank shall be adjusted periodically according to the bank's share of ownership in the asset.
Apr 08CA-3.6.10
The bank's position in a Diminishing Musharakah thus entails two kinds of exposure. The amounts due from the partner to purchase the agreed shares of the asset on the agreed dates are subject to credit risk in respect of the partner's ability and willingness to pay, with the shares of the partner in the asset providing credit risk mitigation as collateral. The capital invested by the bank is also subject to the risk that the amounts recoverable from the partner may be less than the amount invested because the value of the Musharakah assets has decreased (capital impairment risk).
Apr 08Equity Position Risk - Musharakah
CA-3.6.11
Musharakah exposures, unless deducted for regulatory capital purposes according to the Prudential Consolidation and Deduction Requirements, will be treated as stated in paragraphs CA-3.6.12 to CA-3.6.14.
Apr 08CA-3.6.12
Musharakah exposures in the nature of specialized financing will be risk-weighted as per the supervisory slotting criteria as detailed in section CA-4.3.
Apr 08CA-3.6.13
Other Musharakah exposures will be risk-weighted using the risk weights applicable to equities as explained in section CA-4.2.
Apr 08Equity Position Risk - Diminishing Musharakah
CA-3.6.15
The equity exposure in a Diminishing Musharakah contract, where the bank intends to transfer its full ownership in movable assets and working capital to the other partner over the life of the contract, is calculated based on the remaining balance of the amount invested (measured at historical cost including any share of undistributed profits) less any specific provision for impairment. The exposure shall be risk weighted according to the nature of the underlying assets as set out in paragraph CA-3.6.11 to CA-3.6.14 above. If a third party guarantee exists, to make good impairment losses, the RW of the guarantor shall be substituted for that of the assets (if lower) for the amount of any such guarantee.
Apr 08Summary of Capital Requirement at Various Stages of the Contract
CA-3.6.16
The following table sets out the Musharakah categories that attract capital charges:
Musharakah Category Credit RW Market Risk Capital Charge Specialized financing Supervisory slotting criteria should be applied.
Between 90-270% RW of the contributed amount* to the business venture based on the four categories.NA Other 150% RW** of the contributed amount to the business venture less any specific provisions (if there is a third party guarantee, the RW of the guarantor shall be substituted for that of the assets for the amount of any such guarantee, if lower). NA Musharakah meeting the definition of trading book As set out in the applicable market risk section (Chapter CA-5). * In the case of Diminishing Musharakah, the contributed amount is based on the remaining balance of the invested amount.
** 100% RW may be applied if the funds can be withdrawn by the bank at short notice of 5 working days.
Apr 08CA-3.7 CA-3.7 Mudarabah
Introduction
CA-3.7.1
This section sets out the minimum capital adequacy requirement to cover the risk of losing invested capital arising from entering into contracts or transactions that are based on the Sharia rules and principles of Mudarabah where the bank assumes the role of capital provider. This section is applicable to both restricted and unrestricted Mudarabah financing.
Apr 08CA-3.7.2
A Mudarabah is an agreement between the bank and a customer whereby the bank would contribute capital to an enterprise or activity which is to be managed by the customer as the (labour provider or) Mudarib.
Apr 08CA-3.7.3
Profits generated by that enterprise or activity are shared in accordance with the terms of the Mudarabah agreement whilst losses are to be borne solely by the bank unless the losses are due to the Mudarib's misconduct, negligence or breach of contracted terms.
Apr 08CA-3.7.4
A Mudarabah financing can be carried out on either:
(a) A restricted basis, where the capital provider allows the Mudarib to make investments subject to specified investment criteria or certain restrictions such as types of instrument, sector or country exposures; and(b) An unrestricted basis, where the capital provider allows the Mudarib to invest funds freely based on the latter's skills and expertise.Amended: April 2011
April 2008CA-3.7.5
As the fund provider, the bank is exposed to the risk of losing its capital investment or 'capital impairment risk' upon making payment of the capital to the Mudarib. Any loss on the investment is to be borne solely by the capital provider, but is limited to the amount of his capital. Losses that are due to misconduct, negligence or breach of contractual terms, are to be borne by the Mudarib.
Apr 08CA-3.7.6
However, while it is not permissible for a Mudarib to give a guarantee against such losses, such a guarantee may be given by a third party on the basis of tabarru (donation). In such a case, the amount of the Mudarabah capital so guaranteed may be considered as subject to credit risk with a risk weighting equal to that of the guarantor.
Apr 08CA-3.7.7
In particular, such guarantees may be given when liquid funds are placed in an Islamic interbank market under a Mudarabah contract.
Apr 08Equity Position Risk
CA-3.7.8
Mudarabah exposures, unless deducted for regulatory capital purposes according to the Prudential Consolidation and Deduction Requirements, will be treated as stated in paragraphs CA-3.7.9 to CA-3.7.11.
Apr 08CA-3.7.9
Mudarabah exposures in the nature of specialized financing will be risk-weighted as per the supervisory slotting criteria as detailed in section CA-4.3.
Apr 08CA-3.7.10
Other Mudarabah exposures will be risk-weighted using the risk weights applicable to equities as explained in section CA-4.2.
Apr 08Summary of Capital Requirements for Mudarabah Categories
CA-3.7.12
The following tables set out the Mudarabah categories that attract capital charges:
Mudarabah Category Credit RW Market Risk Capital Charge Specialized financing Supervisory slotting method will be applied.
Between 90-270% RW of the contributed amount to the business venture based on the four categories.NA Other 150% RW* of the contributed amount to the business venture less any specific provisions (if there is a third party guarantee, the RW of the guarantor shall be substituted for that of the assets for the amount of any such guarantee). NA Mudarabah meeting the definition of trading book As set out in the applicable market risk section (See chapter CA-5). * 100% RW may be applied if the funds can be withdrawn by the bank at short notice of 5 working days.
Apr 08CA-3.8 CA-3.8 Sukuk
Introduction
CA-3.8.1
This section sets out the minimum capital adequacy requirement to cover the credit risk and market risk arising from the holding of Sukuk.
Apr 08CA-3.8.2
This section is applicable only to Sukuk or certificates that represent the holder's proportionate ownership in an undivided part of an underlying asset where the holder assumes all rights and obligations to such asset. This section does not cover certificates that give the holders the entitlement to receive returns on an asset of which the ownership is not transferred to the Sukuk holders.
Apr 08CA-3.8.3
Sukuk can be broadly categorised into:
(a) Asset-based Sukuk, where the underlying assets offer fairly predictable returns to the Sukuk holders, such as in the case of Salam, Istisna'a and Ijarah (Note: the assets in question may be held by a Musharakah or Mudarabah which is securitised. This is not the same as the Musharakah or Mudarabah Sukuk mentioned below).(b) Equity-based Sukuk, where the returns are determined on a profit and loss sharing in the underlying investment which does not offer fairly predictable returns (e.g. Musharakah or Mudarabah for trading purposes).Amended: April 2011
April 2008CA-3.8.4
CBB has the discretion to specify measurement approaches as it thinks appropriate for other types of Sukuk which are not listed in this section, provided they are approved by a Sharia board.
Apr 08Salam Sukuk
CA-3.8.5
A Salam Sukuk represents fractional ownership of the capital of a Salam transaction, where the Salam capital is constituted by an advance payment to a counterparty as supplier of a commodity (the subject-matter) to be delivered at a future date. This type of Sukuk is non-tradable, since the subject-matter is considered to be a financial asset (a receivable). The gross return to the Sukuk holders consists of the margin or spread between the purchase price of the subject-matter and its selling price following delivery. In certain Sukuk issues, a third party gives an undertaking that the subject-matter will be sold at a price exceeding the purchase price by a specified margin. This may be achieved by means of a parallel Salam transaction in which a third party purchases the subject-matter for delivery on the same delivery date as in the original Salam contract.
Apr 08Istisna'a Sukuk
CA-3.8.6
An Istisna'a Sukuk represents a fractional share in the project financing of an undertaking to manufacture or construct an asset for a customer at a price to be paid in future instalments, the total of which equals the total face value of the Sukuk, in addition to mark-up. The Sukuk can be in the form of serial notes or certificates with different maturity dates that match the progress schedule of instalments as agreed between the buyer/customer of the asset and the manufacturer/bank. Istisna'a Sukuk are tradable as the subject-matter is considered to be a non-financial asset (work-in-process inventory).
Apr 08Ijarah Sukuk
CA-3.8.7
An Ijarah Sukuk represents the holder's proportionate ownership in a leased asset where the Sukuk holders will collectively assume the rights and obligations of the lessor. The Sukuk holder will enjoy a share of the lease rental in proportionate to the ownership share in the leased asset. An Ijarah Sukuk is tradable from the issuance date as the subject-matter is a non-financial asset owned by the Sukuk holders. As a part-owner, the Ijarah Sukuk holder assumes a proportionate share of any loss if the leased asset is destroyed or of the cost of meeting the obligation to provide an alternative asset, failing which, the lessee can terminate the lease without paying future rentals.
Apr 08Musharakah Sukuk
CA-3.8.8
A Musharakah Sukuk represents the direct pro-rata ownership of the holder in the assets of a private commercial enterprise or project where the subscription money is normally employed in purchasing non-liquid assets or such as real estate or moveable assets. A Musharakah Sukuk is a profit and loss sharing instrument where the exposure is of the nature of an equity position in the banking book, except in the case of investments (normally short-term) in assets for trading purposes. A Musharakah certificate can be tradable provided that non-cash and receivable assets are not less than 30% of market capitalisation.
Apr 08Mudarabah (Muqaradah) Sukuk
CA-3.8.9
Sukuk holders subscribe to the certificates issued by a Mudarib and share the profit and bear any losses arising from the Mudarabah operations. The returns to the holders are dependent on the revenue generated by the underlying investment. The rule regarding tradability of the certificates is the same as for Musharakah certificates.
Apr 08Calculation of Capital Charge
CA-3.8.10
If the Sukuk has the characteristics of a claim (or debt) then the Sukuk should be risk weighted using its issue specific rating according to the nature of the issuer (i.e. sovereign, bank or corporate etc). If the Sukuk is unrated and has the characteristics of a claim or debt, the risk weight applicable will be based on the risk weight applicable to the issuer.
Apr 08CA-3.8.11
If the Sukuk is equity in nature, such investment should be treated as an equity investment and risk weighted accordingly (i.e. 100 % for listed and 150 % for others).
Apr 08CA-3.8.12
The bank can apply to CBB for using look-through approach for such investment if it can demonstrate that look-through approach is more appropriate to the circumstances of the bank.
Apr 08CA-3.8.13
If there are no voting rights attached to investment in Sukuk, the investment will not be subjected to consolidation and deduction requirements (except large exposure limit).
Apr 08CA-3.8.14
For the purpose of determining "large exposure limit" for investment in Sukuk, look-through approach should be used (despite the fact that look-through approach is not used to risk weight the investment).
Apr 08Summary of Capital Requirements for Sukuk Exposures
CA-3.8.16
The following tables summarises the capital requirements for Sukuk exposures:
Sukuk Category Credit RW Market Risk Capital Charge In nature of claim or debt Risk-weighted according to the external rating of the Sukuk (where rated) or according to the risk weight applicable to the issuer (where unrated) NA In nature of equity -Listed 100% RW NA In nature of equity- Not listed 150% RW* NA If the bank gets approval to apply "look-through approach" RWs applicable to the underlying assets NA Sukuk meeting the definition of trading book NA As set out in the applicable market risk section (See chapter CA-5). * 100% RW may also be applied if the funds can be withdrawn by the bank at short notice of 5 working days.
Apr 08CA-4 CA-4 Credit Risk — The Standardized Approach
CA-4.1 CA-4.1 Introduction
CA-4.1.1
Credit risk exposures in Islamic financing arise in connection with accounts receivable in Murabaha contracts, counterparty risk in Salam contracts, accounts receivable and counterparty risk in Istisn'a contracts and lease payments receivable in Ijarah contracts, and Sukuk held to maturity in the banking book. Credit risk is measured according to the Standardised Approach as outlined in the Basel II guidelines, except for certain exposures arising from investments by means of Musharaka or Mudaraba contracts in assets in the banking book. The latter are to be treated as giving rise to credit risk (in the form of capital impairment risk), and are to be risk-weighted applying the supervisory slotting criteria for exposures in the nature of specialised financing and the risk weights applicable to equities for other equity exposures as detailed in the Musharaka and Mudaraba sections of this Rulebook.
Apr 08CA-4.1.2
Broadly, the assignment of Risk Weights (RW) under the standardised approach takes into consideration the following:
• The credit risk rating of an obligor or other counterparty, or a security, based on external credit assessment institutions (ECAI) ratings7. In determining the risk weights in the standardised approach, Islamic banks must use assessments by only those external credit assessment institutions which are recognised as eligible for capital purposes by CBB in accordance with the criteria defined in section CA-4.6.• Credit risk mitigation techniques adopted by the banks;• Types of the underlying assets that are sold and collateralised or leased by the banks; and• The amount of specific provisions made for the overdue portion of accounts receivable or lease payments receivable.
7 The notations follow the methodology used by one institution, Standard & Poor's. The use of Standard & Poor's credit ratings is an example only; those of some other external credit assessment institutions could equally well be used. The ratings used throughout this document, therefore, do not express any preferences or determinations on external assessment institutions by CBB.
Amended: April 2011
April 2008CA-4.1.3
Where a discount is applied on fair value of an asset (as explained in CA-2.1.4), the value of the asset will be adjusted to exclude that discount part. Refer to appendix CA-7.
Apr 08CA-4.2 CA-4.2 Segregation of Claims
Claims on Sovereigns
CA-4.2.1
Claims on governments of GCC member states (hereinafter referred to as GCC) and their central banks can be risk weighted at 0%. Claims on other sovereigns and their central banks are given a preferential risk weighting of 0% where such claims are denominated and funded in the relevant domestic currency of that sovereign/central bank (e.g. if a Bahraini bank has a claim on government of Australia and the loan is denominated and funded in Australian dollar, it will be risk weighted at 0%). Such preferential risk weight for claims on GCC/other sovereigns and their central banks will be allowed only if the relevant supervisor also allows 0% risk weighting to claims on its sovereign and central bank.
Apr 08CA-4.2.2
Claims on sovereigns other than those referred to in the previous paragraph must be assigned risk weights as follows:
Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Risk Weight 0% 20% 50% 100% 150% 100% Apr 08Claims on International Organizations
CA-4.2.3.
Claims on the Bank for International Settlements, the International Monetary Fund and the European Central Bank must receive a 0% risk weight.
Apr 08Claims on Non-central Government Public Sectors Entities (PSEs)
CA-4.2.4
Claims on the Bahraini PSEs listed in Appendix CA-8 will be treated as claims on the government of Bahrain.
Apr 08CA-4.2.5
Where other supervisors also treat claims on named PSEs as claims on their sovereigns, claims to those PSEs are treated as claims on the respective sovereigns as outlined in paragraphs CA-4.2.1 and CA-4.2.2 above. These PSE's must be shown on a list maintained by the concerned central bank or financial regulator. Where PSE's are not on such a list, they must be subject to the treatment outlined in paragraph CA-4.2.6 below.
Apr 08CA-4.2.6
Claims on all other (foreign) PSEs (i.e. not having sovereign treatment) denominated and funded in the home currency of the sovereign must be risk weighted as allowed by their home country supervisors, provided the sovereign carries rating BBB- or above. Claims on PSEs with no explicit home country weighting or to PSEs in countries of BB+ sovereign rating and below are subject to ECAI ratings as per the following table:
Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Risk Weight 20% 50% 100% 100% 150% 100% Apr 08CA-4.2.7
Claims on commercial companies owned by governments must be risk weighted as normal commercial entities unless they are covered by a government guarantee that satisfies the conditions in CA-4.7 below in which case they may take the risk weight of the concerned government.
Apr 08Claims on Multilateral Development Banks (MDB's)
CA-4.2.8
MDB's currently eligible for a 0% risk weight are: the World Bank Group comprised of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), the Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), the European Investment Bank (EIB), the European Investment Fund (EIF), the Nordic Investment Bank (NIB), the Caribbean Development Bank (CDB), the Islamic Development Bank (IDB), Arab Monetary Fund (AMF), the Council of Europe Development Bank (CEDB), the Arab Bank for Economic Development in Africa (ABEDA), Council of European Resettlement Fund (CERF) and the Kuwait Fund for Arab Economic Development (KFAED).
Apr 08CA-4.2.9
The claims on MDB's, which do not qualify for the 0% risk weighting, should be assigned risk weights as follows:
Banks Credit Quality Grades AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Un-rated Risk weights 20% 50% 50% 100% 150% 50% Apr 08Claims on Islamic Banks and Conventional Banks
CA-4.2.10
Claims on banks must be risk weighted as given in the following table. No claim on an unrated bank may receive a risk weight lower than that applied to claims on its sovereign of incorporation (see Guidance in Paragraph CA-4.2.11A for self-liquidating letters of credit).
Banks Credit Quality Grades AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Un-rated Standard risk weights 20% 50% 50% 100% 150% 50% Preferential risk weight 20% 20% 20% 50% 150% 20% Amended: April 2012
Apr 08CA-4.2.11
Short-term claims on locally incorporated banks may be assigned a risk weighting of 20% where such claims on the banks are of an original maturity of 3 months or less denominated and funded in either BD or US$. A preferential risk weight that is one category more favourable than the standard risk weighting may be assigned to claims on foreign banks licensed in Bahrain of an original maturity of 3 months or less denominated and funded in the relevant domestic currency (other than claims on banks that are rated below B-). Such preferential risk weight for short-term claims on banks licensed in other jurisdictions will be allowed only if the relevant supervisor also allows this preferential risk weighting to short-term claims on its banks.
Apr 08CA-4.2.11A
Self-liquidating letters of credit issued or confirmed by an unrated bank will be allowed a risk weighting of 50% or 20% without reference to the risk weight of the sovereign of incorporation. All other claims will be subject to the 'sovereign floor' of the country of incorporation of the concerned issuing or confirming bank.
Added: April 2012CA-4.2.12
Claims with an (contractual) original maturity under 3 months that are expected to be rolled over (i.e. where the effective maturity is longer than 3 months) will not qualify for a preferential treatment for capital adequacy purposes.
Apr 08Claims on Investment Firms
CA-4.2.13
Claims on category one and category two investment firms which are subject to direct supervisory and regulatory provisions from the CBB may be treated as claims on banks for risk weighting purposes but without the use of preferential risk weight for short-term claims. Claims on category three investment firms must be treated as claims on corporates for risk weighting purposes. Claims on investment firms in other jurisdictions will be treated as claims on corporates for risk weighting purposes. However, if the bank can demonstrate that the concerned investment firm is subject to a Basel II equivalent capital adequacy regime and is treated as a bank for risk weighting purposes by its home regulator, then claims on such investment firms may be treated as claims on banks.
Apr 08Claims on Corporates, including Insurance Companies
CA-4.2.14
Risk weighting for corporates including insurance companies is as follows:
Credit assessment AAA to AA- A+ to A- BBB+ to BB- Below BB- Unrated Risk weight 20% 50% 100% 150% 100% Apr 08CA-4.2.15
Risk weighting for unrated (corporate) claims will be reviewed and where appropriate, may be increased by the CBB. Credit facilities to small/medium enterprises may be placed in the regulatory retail portfolio in limited cases below.
Amended January 2009
Apr 08Claims included in the Regulatory Retail Portfolios
CA-4.2.16
No claim on any unrated corporate, where said corporate originates from a foreign jurisdiction, may be given a risk weight lower than that assigned to a corporate within its own jurisdiction, and in no case will it be below 100%.
Apr 08CA-4.2.17
Retail claims that are included in the regulatory retail portfolio must be risk weighted at 75%, except as provided in CA-4.2.21 for the past due receivables.
Apr 08CA-4.2.18
To be included in the regulatory retail portfolio, claims must meet the following criteria:
(a) Orientation — the exposure is to an individual person or persons or to a small business. A small business is a Bahrain-based business with annual turnover below BD 2mn.(b) Product — The exposure takes the form of any of the following: revolving credits and lines of credit (including credit cards and running finance), personal term finance and leases (e.g. instalment finance, auto finance and leases, student and educational finance, personal finance) and small business facilities and commitments. Islamic products which involve securities (such as Musharakah, Mudarabah, Sukuks and equities), whether listed or not, are specifically excluded from this category. Mortgage finance will be excluded if they qualify for treatment as claims secured by residential property (see below). Finance for purchase of shares are also excluded from the regulatory retail portfolios.(c) Granularity — The regulatory retail portfolio is sufficiently diversified to a degree that it reduces the risks in the portfolio, warranting a 75% risk weight. No aggregate exposure to one counterpart8 can exceed 0.2% of the overall regulatory retail portfolio.(d) The maximum aggregated retail exposure to one counterpart must not exceed an absolute limit of BD 250,000.
8 Aggregated exposure means gross amount (i.e. not taking any credit risk mitigation into account) of all forms of debt exposures (e.g. finances or commitments) that individually satisfy the three other criteria. In addition, "to one counterpart" means one or several entities that may be considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the limit would apply to the bank's aggregated exposure on both businesses).
Amended January 2009
Apr 08Claims Secured by Residential Property
CA-4.2.19
Lending fully secured by first mortgages on residential property that is or will be occupied by the borrower, or that is leased, must carry a risk weighting of 75%. However, if the bank can justify foreclosure or repossession for a claim, a 35% risk weight will be allowed. To get this lower risk weight the bank must obtain a satisfactory legal opinion that foreclosure or repossession is possible without any impediment.
Apr 08Claims Secured by Commercial Real Estate
CA-4.2.20
Claims secured by mortgages on commercial real estate are subject to a minimum of 100% risk weight. If the borrower is rated below BB-, the risk-weight corresponding to the rating must be applied.
Apr 08Past Due Receivables
CA-4.2.21
In the event that accounts receivable or lease payments receivable become past due, the exposure shall be risk-weighted in accordance with the following table. The exposures should be risk weighted net of specific provisions (see CA-4.3.5 for exposures risk-weighted under Supervisory Slotting Criteria).
Type RW % of Specific Provisions for Past Due Receivables Unsecured exposure (other than a qualifying residential mortgage loan) that is past due more than 90 days, net of specific provisions 150%
100%Less than 20% of the outstanding receivables.
At least 20% of the outstanding receivables.Exposure secured by RRE 100% For receivables that are past due for more than 90 days, net of specific provisions. Apr 08CA-4.2.22
For the purposes of defining the secured portion of a past due loan, eligible collateral and guarantees will be the same as for credit risk mitigation purposes.
Apr 08CA-4.2.23
Past due retail loans are to be excluded from the overall regulatory retail portfolio when assessing the granularity criterion, for risk-weighting purposes.
Apr 08Investments in Equities and Funds
CA-4.2.24
Investments in listed equities must be risk weighted at 100% while equities other than listed must be risk weighted at 150%. For risk-weighting of Sukuk, refer to Section CA-3.8.
Apr 08CA-4.2.25
Investments in funds (e.g. mutual funds, Collective Investment Undertakings etc.) must be risk weighted as follows:
• If the instrument (e.g. units) is rated, it should be risk-weighted according to its external rating (for risk-weighting, it must be treated as a "claim on corporate");• If not rated, such investment should be treated as an equity investment and risk weighted accordingly (i.e. 100% for listed and 150% for others);• The bank can apply to CBB for using the look-through approach for such investments if it can demonstrate that the look-through approach is more appropriate to the circumstances of the bank;• If there are no voting rights attached to investment in funds, the investment will not be subjected to consolidation and deduction requirements (except large exposure limits);• For the purpose of determining "large exposure limit" for investment in funds, the look-through approach should be used (even if the look-through approach is not used to risk weight the investment).Apr 08CA-4.2.26
CBB may enforce a bank to adopt the 'Simple Risk Weight Method' for equities (Section CA-4.4) if the CBB considers that bank's equity portfolio is significant.
Apr 08Holdings of Real Estate
CA-4.2.27
All holdings of real estate by banks (i.e. owned directly or by way of investments in Real Estate Companies, subsidiaries or associate companies or other arrangements such as trusts, funds or REITs) must be risk-weighted at 200%. Premises occupied by the bank may be weighted at 100%. Investments in Real Estate Companies will be subject to the materiality thresholds for commercial companies described in Module PCD and therefore any holdings which amount to 15% or more of regulatory capital will be subject to deduction. The holdings below the 15% threshold will be weighted at 200%.
Apr 08Other Assets
CA-4.2.28
Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities may be treated as cash and therefore risk-weighted at 0%. In addition, cash items in the process of collection must be risk-weighted at 20%. The standard risk weight for all other assets will be 100%. Investments in regulatory capital instruments issued by banks or investment firms must be risk weighted at a minimum of 100%, unless they are deducted from the capital base according to the Prudential Consolidation and Deduction Requirements Module.
Apr 08Underwriting of Non-trading Book items
CA-4.2.29
Where a bank has acquired assets on its balance sheet in the banking book which it is intending to place with third parties under a formal arrangement and is underwriting the placement, the following risk weightings apply during the underwriting period (which may not last for more than 90 days). Once the underwriting period has expired, the usual risk weights should apply.
1. For holdings of private equity, a risk weighting of 100% will apply instead of the usual 150% (see CA-4.2.24).2. For holdings of Real Estate, a risk weight of 100% will apply instead of the usual 200% risk weight (see CA-4.2.27).Apr 08CA-4.3 CA-4.3 Supervisory Slotting Criteria
CA-4.3.1
Equity exposures in the nature of specialized financing will be risk-weighted as per the supervisory slotting criteria as detailed below. Specialized lending is basically a typical kind of exposure in which some special underlying assets are both the source of repayment and security. This may include financing extended to:
• Power plants, chemical processing plants, mines, transportation infrastructure, environment, telecommunications infrastructure, ships, aircraft, satellites, railcars, fleets, crude oil, metals, crops, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, hotels, High volatility real estate etc.• Retail space;• Multifamily residential buildings;• Industrial or warehouse space;• Hotels.Amended: April 2011
April 2008CA-4.3.2
A bank is required to map its RW into four supervisory categories as set out in the Appendix CA-1 (specialised financing) for Limited and Non-Recourse Istisna'a exposures, Mudarabah exposures, Sukuk exposures and Musharakah in a business venture exposures, where the RW for each category is as follows:
Supervisory Categories Strong Good Satisfactory Weak External Credit Assessments BBB- or better BB+ or BB BB- to B+ B to C- Risk Weights 70% 90% 115% 250% Apr 08CA-4.3.3
A bank with Diminishing Musharaka exposures in real estate are required to map its RW into the four supervisory categories as set out in Appendix CA-2 (Diminishing Musharaka in real estate) where the RW of each category is as follows:
Supervisory Categories Strong Good Satisfactory Weak Risk Weights 90% 110% 135% 270% Apr 08CA-4.3.4
The above RW under the slotting criteria for specialised financing include an additional fixed factor, equal to a 20% RW, to cater for the potential decline in the Musharakah's net asset value.
Apr 08CA-4.3.5
If any exposure which is to be risk-weighted under this sub-section becomes past due, it will be risk-weighted at the higher of risk-weight applicable under CA-4.2.21 or the risk-weight applicable under this sub-section e.g. if an exposure getting 90% risk-weight under CA-4.3.2 above becomes past due, it will be risk-weighted under CA-4.2.21 (at 100% or 150% whichever is applicable). However if an exposure getting 250% risk-weight under CA-4.3.2 above becomes past due, it will continue to be risk-weighted at 250%.
Apr 08CA-4.4 CA-4.4 Simple Risk-weight Method
CA-4.4.1
As stated in CA-4.2.26, CBB may enforce a bank to adopt this treatment for equities if the CBB considers that bank's equity portfolio is significant.
Apr 08CA-4.4.2
The RW under simple risk weight method for equity position risk in respect of an equity exposure shall be 300% for listed and 400% for others less any specific provisions for impairment. If there is a third party guarantee to make good impairment losses, the RW of the guarantor shall be substituted for that of the assets for the amount of any such guarantee.
Apr 08CA-4.5 CA-4.5 Risk Weighting - Off-balance-sheet Items
CA-4.5.1
Off-balance-sheet items must be converted into credit exposure equivalents using credit conversion factors (CCFs).
Apr 08CA-4.5.2
Commitments with an original maturity of up to one year and commitments with an original maturity of over one year will receive a CCF of 20% and 50%, respectively.
Apr 08CA-4.5.3
Any commitments that are unconditionally cancellable at any time by the bank without prior notice, or that are subject to automatic cancellation due to deterioration in a borrowers' creditworthiness, will receive a 0% CCF.
Apr 08CA-4.5.4
A CCF of 100% must be applied to the lending of banks' securities or the posting of securities as collateral by banks.
Apr 08CA-4.5.5
For short-term self-liquidating trade letters of credit arising from the movement of goods a 20% CCF must be applied to both issuing and confirming banks.
Apr 08CA-4.5.6
Where there is an undertaking to provide a commitment on an off-balance sheet item, banks are to apply the lower of the two applicable CCF's.
Apr 08CA-4.5.7
Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for finance and securities) and acceptances (including endorsements with the character of acceptances) must be applied a CCF of 100%.
Apr 08CA-4.5.8
Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank, must be applied a CCF of 100%.
Apr 08CA-4.5.9
Forward asset purchases, forward deposits and partly-paid shares and securities, which represent commitments with certain drawdown must be applied a CCF of 100%.
Apr 08CA-4.5.10
Certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions) must be applied a CCF of 50%.
Apr 08CA-4.5.11
Note issuance facilities and revolving underwriting facilities must be applied a CCF of 50%.
Apr 08CA-4.5.12
Banks must closely monitor securities, commodities, and foreign exchange transactions that have failed, starting the first day they fail. A capital charge to failed transactions must be calculated in accordance with CBB guidelines set forth in Appendix CA-5 - 'Capital treatment for failed trades and non DvP transactions'.
Apr 08CA-4.5.13
With regard to unsettled securities, commodities, and foreign exchange transactions, banks are encouraged to develop, implement and improve systems for tracking and monitoring the credit risk exposure arising from unsettled transactions as appropriate for producing management information that facilitates action on a timely basis.
Apr 08CA-4.5.14
Furthermore, when such transactions are not processed through a delivery-versus-payment (DvP) or payment-versus-payment (PvP) mechanism, banks must calculate a capital charge as set forth in Appendix CA-5.
Please Note: An import or export financing, which is based on Murabahah where the underlying goods/shipment are collateralised and insured, shall attract a 20% credit conversion factor to the banks that issues or confirms the letter of credit. This treatment of collateral assumes there are no obstacles to the exercise of rights over it by the issuer or confirmer (see "Pledge of assets as collateral as detailed below under Credit Risk Mitigation).Apr 08CA-4.6 CA-4.6 External Credit Assessments
The Recognition Process and Eligibility Criteria
CA-4.6.1
CBB will assess all External Credit Assessment Institutions (ECAI) according to the six criteria below. Any failings, in whole or in part, to satisfy these to the fullest extent will result in the respective ECAI's methodology and associated resultant rating not being accepted by the CBB:
(a) Objectivity: The methodology for assigning credit assessments must be rigorous, systematic, and subject to some form of validation based on historical experience. Moreover, assessments must be subject to ongoing review and responsive to changes in financial condition. Before being recognized by the CBB, an assessment methodology for each market segment, including rigorous back testing, must have been established for an absolute minimum of one year and with a preference of three years;(b) Independence: An ECAI must show independence and should not be subject to political or economic pressures that may influence the rating. The assessment process should be as free as possible from any constraints that could arise in situations where the composition of the board of directors, political pressure, the shareholder structure of the assessment institution or any other aspect could be seen as creating a conflict of interest;(c) International access/Transparency: The individual assessments should be available to both domestic and foreign institutions with legitimate interests and at equivalent terms. The general methodology used by the ECAI has to be publicly available;(d) Disclosure: An ECAI is required to disclose the following information: its assessment methodologies, including the definition of default, the time horizon, and the meaning of each rating; the actual default rates experienced in each assessment category; and the transitions of the assessments, e.g. the likelihood of a slide in the ratings of an exposure from one class to another over time;(e) Resources: An ECAI must have sufficient resources to carry out high quality credit assessments. These resources should allow for substantial ongoing contact with senior and operational levels within the entities assessed in order to add value to the credit assessments. Such assessments will be based on methodologies combining qualitative and quantitative approaches; and(f) Credibility: Credibility, to a certain extent, can derive from the criteria above. In addition, the reliance on an ECAI's external credit assessments by independent parties (investors, insurers, trading partners) may be evidence of the credibility of the assessments of an ECAI. The credibility of an ECAI will also be based on the existence of internal procedures to prevent the misuse of confidential information. In order to be eligible for recognition, an ECAI does not have to assess firms in more than one country.Amended: April 2011
April 2008CA-4.6.2
The CBB recognizes Standard and Poor's, Moody's, Fitch IBCA, Capital Intelligence and the Islamic International Rating Agency as eligible ECAIs. With respect to the possible recognition of other rating agencies as eligible ECAIs, CBB will update this paragraph subject to the rating agencies satisfying the eligibility requirements. (See Appendix CA-6 for mapping of eligible ECAIs).
Apr 08CA-4.6.3
Banks must use the chosen ECAIs and their ratings consistently for each type of claim, for both risk weighting and risk management purposes. Banks will not be allowed to "cherry-pick" the assessments provided by different eligible ECAIs.
Apr 08CA-4.6.4
Banks must disclose ECAIs that they use for the risk weighting of their assets by type of claims, the risk weights associated with the particular rating grades as determined by CBB through the mapping process as well as the aggregated risk-weighted assets for each risk weight based on the assessments of each eligible ECAI.
Apr 08Multiple Assessments
CA-4.6.5
If there are two assessments by eligible ECAIs chosen by a bank which map into different risk weights, the higher risk weight must be applied.
Apr 08CA-4.6.6
If there are three or more assessments by eligible ECAIs chosen by a bank which map into different risk weights, the assessments corresponding to the two lowest risk weights should be referred to and the higher of those two risk weights must be applied.
Apr 08Issuer Versus Issues Assessment
CA-4.6.7
Where a bank invests in a particular issue that has an issue-specific assessment, the risk weight of the claim will be based on this assessment. Where the bank's claim is not an investment in a specific assessed issue, the following general principles apply:
(a) In circumstances where the borrower has a specific assessment for an issued debt — but the bank's claim is not an investment in this particular debt — a high quality credit assessment (one which maps into a risk weight lower than that which applies to an unrated claim) on that specific debt may only be applied to the bank's un-assessed claim if this claim ranks pari passu or senior to the claim with an assessment in all respects. If not, the credit assessment cannot be used and the un-assessed claim will receive the risk weight for unrated claims; and(b) In circumstances where the borrower has an issuer assessment, this assessment typically applies to senior unsecured claims on that issuer. Consequently, only senior claims on that issuer will benefit from a high quality issuer assessment. Other un-assessed claims of a highly assessed issuer will be treated as unrated. If either the issuer or a single issue has a low quality assessment (mapping into a risk weight equal to or higher than that which applies to unrated claims), an un-assessed claim on the same counterparty will be assigned the same risk weight as is applicable to the low quality assessment.Amended: April 2011
April 2008CA-4.6.8
Whether the bank intends to rely on an issuer- or an issue-specific assessment, the assessment must take into account and reflect the entire amount of credit risk exposure the bank has with regard to all payments owed to it.9
9 For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with repayment of both principal and interest.
Apr 08CA-4.6.9
In order to avoid any double counting of credit enhancement factors, no recognition of credit risk mitigation techniques will be taken into account if the credit enhancement is already reflected in the issue specific rating (see paragraph CA-4.7.3).
Apr 08Domestic Currency and Foreign Currency Assessments
CA-4.6.10
Where unrated exposures are risk weighted based on the rating of an equivalent exposure to that borrower, the general rule is that foreign currency ratings would be used for exposures in foreign currency. Domestic currency ratings, if separate, would only be used to risk weight claims denominated in the domestic currency.
Apr 08CA-4.6.11
However, when an exposure arises through a bank's participation in a loan that has been extended, or has been guaranteed against convertibility and transfer risk, by certain MDBs, its convertibility and transfer risk can be considered by CBB, on a case by case basis, to be effectively mitigated. To qualify, MDBs must have preferred creditor status recognised in the market and be included in MDB's qualifying for 0% risk rate under CA-4.2.8. In such cases, for risk weighting purposes, the borrower's domestic currency rating may be used instead of its foreign currency rating. In the case of a guarantee against convertibility and transfer risk, the local currency rating can be used only for the portion that has been guaranteed. The portion of the loan not benefiting from such a guarantee will be risk-weighted based on the foreign currency rating.
Apr 08Short-term/Long-term Assessments
CA-4.6.12
For risk-weighting purposes, short-term assessments are deemed to be issue-specific. They can only be used to derive risk weights for claims arising from the rated facility. They cannot be generalised to other short-term claims, except under the conditions of paragraph CA-4.6.14. In no event can a short-term rating be used to support a risk weight for an unrated long-term claim. Short-term assessments may only be used for short-term claims against banks and corporates. The table below provides a framework for banks' exposures to specific short-term facilities, such as a particular issuance of commercial paper: For any Sharia contract with an original maturity of up to three months that is not rolled over, the short-term RW as set out in the following table shall be applied.
Credit assessment A-1/P-110 A-2/P-2 A-3/P-3 Others11 Risk weight 20% 50% 100% 150%
10The notations follow the methodology used by Standard & Poor's and by Moody's Investors Service. The A-1 rating of Standard & Poor's includes both A-1+ and A-1-.
11This category includes all non-prime and B or C ratings.
Apr 08CA-4.6.13
If a short-term rated facility attracts a 50% risk-weight, unrated short-term claims cannot attract a risk weight lower than 100%. If an issuer has a short-term facility with an assessment that warrants a risk weight of 150%, all unrated claims, whether long-term or short-term, should also receive a 150% risk weight, unless the bank uses recognised credit risk mitigation techniques for such claims.
Apr 08CA-4.6.14
For short-tem claims on banks, the interaction with specific short-term assessments is expected to be the following:
(a) The general preferential treatment for short-term claims, as defined under paragraphs CA-4.2.11 and CA-4.2.12, applies to all claims on banks of up to three months original maturity when there is no specific short-term claim assessment.(b) When there is a short-term assessment and such an assessment maps into a risk weight that is more favourable (i.e. lower) or identical to that derived from the general preferential treatment, the short-term assessment should be used for the specific claim only. Other short-term claims would benefit from the general preferential treatment.(c) When a specific short-term assessment for a short term claim on a bank maps into a less favourable (higher) risk weight, the general short-term preferential treatment for inter-bank claims cannot be used. All unrated short-term claims should receive the same risk weighting as that implied by the specific short-term assessment.Apr 08CA-4.6.15
When a short-term assessment is to be used, the institution making the assessment needs to meet all of the eligibility criteria for recognising ECAIs as presented in paragraph CA-4.6.1 in terms of its short-term assessment.
Apr 08Level of Application of the Assessment
CA-4.6.16
External assessments for one entity within a corporate group must not be used to risk weight other entities within the same group.
Apr 08Unsolicited Ratings
CA-4.6.17
As a general rule, banks should use solicited ratings from eligible ECAIs but they are also allowed to use unsolicited ratings in the same way as solicited ratings. However, there may be the potential for ECAIs to use unsolicited ratings to put pressure on entities to obtain solicited ratings. If such behaviour is identified, CBB may disallow the use of unsolicited ratings.
Apr 08CA-4.7 CA-4.7 Credit Risk Mitigation
CA-4.7.1
The exposure in respect of an obligor or other, counterparty can be further adjusted or reduced by taking into account the credit risk mitigation (CRM) techniques employed by Islamic banks (off-balance sheet items will first be converted into on-balance sheet equivalents prior to the CRM being applied). Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralised by first priority claims, in whole or in part with cash or securities or an exposure may be guaranteed by a third party. Additionally banks may agree to net exposure amounts owed to them against deposits from the same counterparty.
Apr 08General Remarks
CA-4.7.2
No transaction in which CRM techniques are used should receive a higher capital requirement than an otherwise identical transaction where such techniques are not used.
Apr 08CA-4.7.3
The effects of CRM will not be double counted. Therefore, no additional recognition of CRM for regulatory capital purposes will be applicable on claims for which an issue-specific rating is used that already reflects that CRM. As stated in paragraph CA-4.6.8 of the section on the standardised approach, principal-only ratings will also not be allowed within the framework of CRM.
Apr 08CA-4.7.4
While the use of CRM techniques reduces or transfers credit risk, it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks. Therefore, it is imperative that banks employ robust procedures and processes to control these risks, including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from the bank's use of CRM techniques and its interaction with the bank's overall credit risk profile. Where these risks are not adequately controlled, the CBB may impose additional capital charges or take supervisory actions.
Apr 08CA-4.7.5
Market Discipline requirements must also be observed for banks to obtain capital relief in respect of any CRM techniques.
Apr 08Legal Certainty
CA-4.7.6
In order for banks to obtain capital relief for any use of CRM techniques, the following minimum standards for legal documentation must be met.
Apr 08CA-4.7.7
All documentation used in collateralised transactions and for documenting on- balance sheet netting and guarantees must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.
Apr 08CRM Techniques
The CRM techniques that are commonly employed by the bank are as follows:
Amended: April 2011
April 2008Hamish Jiddiyyah (Security Deposit held as Collateral)
CA-4.7.8
Hamish Jiddiyyah (HJ), a refundable security deposit taken by the bank prior to establishing a contract, carries a limited recourse to the extent of damages incurred by the bank when the purchase orderer fails to honour a binding promise to purchase (PP) or promise to lease (PL). The bank has recourse to the clients in the PP/PL if the HJ is insufficient to cover for the damages.
Apr 08CA-4.7.9
In the case of a non-binding PP/PL, the HJ shall be refunded in full to the clients, and hence is not considered as an eligible CRM.
Apr 08Urbun (Earnest Money held after a Contract is Established as Collateral to Guarantee Contract Performance)
CA-4.7.10
The urbun taken from a purchaser or lessee when a contract is established accrues to the benefit of the bank if the purchaser or lessee breaches the contract within the agreed upon term.
Apr 08Guarantee from a Third Party (Recourse or Non-recourse Guarantee)
CA-4.7.11
The guarantor may or may not have recourse to the debtor (i.e. purchaser or lessee) and the guarantee can be for a fixed period and for a limited amount, without any consideration being received by the guarantor. However, a claim should first be made against the debtor, and then against the guarantor, unless an option is provided to make the claim against either the debtor or the guarantor.
Apr 08CA-4.7.12
The guarantee can also be given in a 'blanket' form that covers an unknown amount or a future receivable. However, this type of guarantee (sometimes known as a "market/business guarantee" or "guarantee of contractual obligation") is revocable at any time prior to the existence of the future receivables and does not qualify as an eligible CRM.
Apr 08Leased Assets used as Collateral
CA-4.7.13
Assets leased under Ijarah or IMB contracts fulfill a function similar to that of collateral, in that they may normally be repossessed by the lessor in the event of default by the lessee (see residential real estate CA-4.2.19 and below).
Apr 08CA-4.7.14
The value of such assets may be offset against the exposure amount to the customer, subject to the regulatory haircuts under the Standard Supervisory Haircut 12 Approach (CA-4.7.32 onwards) for leased assets mentioned in the paragraph CA-4.7.39. Ijarah receivables which comprise Residential Real Estate do not generally satisfy the conditions laid out in Paragraph CA-4.7.23 and therefore such receivables will be weighted at 75% and the collateral will not be recognised for risk mitigation purposes. If the bank can show legal evidence that it may exercise foreclosure, a risk weighting of 35% may be applied to the lease receivable in the case of residential property occupied by the customer. Commercial real estate may be used as collateral for Ijarah transactions as long as it satisfies the criteria of paragraph CA-4.7.23 (and the supervisory haircut is then applied).
12 The term 'haircut' in this context refers to a discount on the depreciated value of an asset as collateral after taking into consideration some inherent risks that affect the volatility of the market price or value of the asset. It is commonly expressed in terms of a percentage by which an asset's value as collateral is reduced.
Apr 08CA-4.7.15
The leased asset to be used as collateral must be a Sharia compliant tangible asset of monetary value that can be lawfully owned, and is saleable, specifiable, deliverable and free of encumbrance.
Apr 08CA-4.7.16
The collateralisation under the concept of "rahn" or "kafālah" shall be properly documented in a security agreement or, in the body of a contract to the extent permissible by Sharia, and must be binding on all parties and legally enforceable in the relevant jurisdictions.
Apr 08CA-4.7.17
The banks must additionally document its procedures for the valuation of leased assets to be used as collateral as described above. This valuation would normally be the depreciated value of the asset as reported in the financial statement.
Apr 08Guarantees
CA-4.7.18
Capital relief for the use of a guarantee shall be given when the following conditions are satisfied:
(a) The guarantee represents the bank's direct claim on the guarantor;(b) The guarantee is irrevocable and does not allow the guarantor to unilaterally cancel the guarantee after creation of the receivables;(c) The guarantee is unconditional and provides no protection clause that prevents the guarantor from being obliged to pay out in a timely manner in the event that the original counterparty fails to make payments due;(d) The bank has the right to pursue, in a timely manner, the guarantor for monies outstanding, rather than having to pursue the original counterparty to recover its exposure;(e) The guarantee shall be an explicitly documented obligation assumed by the guarantor; and(f) The guarantee shall cover all types of expected payments made under the contract in the event that the original counterparty defaults.(g) Portions of claims guaranteed by the entities detailed in paragraph CA-4.2.1 above, where the guarantee is denominated in the domestic currency (and US$ in case of a guarantee provided by the Government of Bahrain and CBB) may get a 0% risk-weighting. A claim may be covered by a guarantee that is indirectly counter-guaranteed by such entities. Such a claim may be treated as covered by a sovereign guarantee provided that:• the sovereign counter-guarantee covers all credit risk elements of the claim;• both the original guarantee and the counter-guarantee meet all operational requirements for guarantees, except that the counter-guarantee need not be direct and explicit to the original claim; and• CBB is satisfied that the cover is robust and that no historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct sovereign guarantee.
Please Note: Though insurance is normally part and parcel of the project risk financing, it is not regarded by CBB as a credit risk mitigation technique.Amended: April 2011
April 2008Collateralised Transactions
CA-4.7.19
Where banks take eligible financial collateral as defined in paragraph CA.4.7.28, they are allowed to reduce their credit exposure to a counterparty when calculating their capital requirements to take account of the risk mitigating effect of the collateral (except residential real estate - see CA-4.7.14).
Apr 08Overall Framework and Minimum Conditions
CA-4.7.20
Banks may opt for either the simple approach, which substitutes the risk weighting of the collateral for the risk weighting of the counterparty for the collateralised portion of the exposure (generally subject to a 20% floor), or for the standard supervisory haircuts approach which allows fuller offset of collateral against exposures, by effectively reducing the exposure amount by the value ascribed to the collateral.
Apr 08CA-4.7.21
Banks may operate under either, but not both, approaches in the banking book, but only under the standard supervisory haircuts approach in the trading book. Partial collateralisation is recognised in both approaches. Mismatches in the maturity of the underlying exposure and the collateral will only be allowed under the standard supervisory haircuts approach.
Apr 08CA-4.7.22
However, before capital relief will be granted in respect of any form of collateral, the standards set out below in paragraphs CA-4.7.23 to CA-4.7.26 must be met under either approach.
Apr 08CA-4.7.23
In addition to the general requirements for legal certainty set out in paragraphs CA-4.7.6 and CA-4.7.7, the legal mechanism by which collateral is pledged or transferred must ensure that the bank has the right to liquidate or take legal possession of it, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the counterparty (and, where applicable, of the custodian holding the collateral). Furthermore banks must take all steps necessary to fulfill those requirements under the law applicable to the bank's interest in the collateral for obtaining and maintaining an enforceable security interest, e.g. by registering it with a registrar, or for exercising a right to net or set off in relation to title transfer collateral.
Apr 08CA-4.7.24
In order for collateral to provide protection, the credit quality of the counterparty and the value of the collateral must not have a material positive correlation. For example, securities issued by the counterparty — or by any related group entity — would provide little protection and so would be ineligible.
Apr 08CA-4.7.25
Banks must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed, and that collateral can be liquidated promptly.
Apr 08CA-4.7.26
Where the collateral is held by a custodian, banks must take reasonable steps to ensure that the custodian segregates the collateral from its own assets.
Apr 08Types of Collateral
CA-4.7.27
The types of collateral given in the next paragraph are eligible for relief in respect of the above CRM techniques.
Apr 08CA-4.7.28
(a) Hamish jiddiyyah (security deposit) only for agreements to purchase or lease preceded by a binding promise.(b) Urbun(c) Profit sharing investment account or cash on deposit13 with the bank which is incurring the exposure(d) Sukuk rated by an external rating agency which is issued by:(i) Sovereigns and PSEs (treated as sovereigns) with a minimum rating of BB-;or(ii) Issuers other than the above, with a minimum rating of BBB- or A-3 / P-3.(e) Sukuk that is unrated by an ECAI but fulfill each of the following criteria:(i) Issued by an Islamic bank or a conventional bank or a sovereign;(ii) Listed on a recognised exchange;(iii) All other rated issues by the Islamic bank or conventional bank of the same seniority of at least BBB - or A-3/P-3 by a recognised ECAI, as determined by the CBB;(iv) The Islamic bank which incurs the exposure or is holding the collateral has no information to suggest that the issue would justify a rating below BBB- or A-3/P-3; and(v) The CBB is sufficiently confident about the market liquidity of the securities.(f) Equities and units in collective investment schemes.(g) Guarantees issued by third parties that fall within the following categories:(i) Sovereigns and central banks;(ii) PSEs;(iii) MDBs;(iv) International organisations/official entities with 0% RW(v) Islamic banks or conventional banks; and(vi) Corporate entities (including insurance and securities firms) either by the parent, subsidiary and affiliates, of a minimum rating of A-.(h) Leased assets as stated under "Leased assets used as collateral" above.
13 Must be supported by an agreement or documentation that gives bank the right of set-off against the amount of receivables due.
Amended: April 2011
April 2008CA-4.7.29
Any portion of the exposure which is not collateralised shall be assigned the RW of the counterparty.
Apr 08CA-4.7.30
As stated earlier, banks may opt for either of the two approaches listed below:
Apr 08The Simple Approach
CA-4.7.31
In the simple approach the risk weighting of the collateral instrument collateralising or partially collateralising the exposure is substituted for the risk weighting of the counterparty.
Apr 08The Standard Supervisory Haircuts Approach
CA-4.7.32
In this approach, when taking collateral, banks must calculate their adjusted exposure to a counterparty for capital adequacy purposes in order to take account of the effects of that collateral. Using haircuts, banks are required to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either14, occasioned by market movements. This will produce volatility adjusted amounts for both exposure and collateral. Unless either side of the transaction is cash, the volatility adjusted amount for the exposure will be higher than the exposure and for the collateral it will be lower.
14 Exposure amounts may vary where, for example, securities are being lent.
Apr 08CA-4.7.33
Additionally where the exposure and collateral are held in different currencies an additional downwards adjustment must be made to the volatility adjusted collateral amount to take account of possible future fluctuations in exchange rates.
Apr 08CA-4.7.34
Where the volatility-adjusted exposure amount is greater than the volatility-adjusted collateral amount (including any further adjustment for foreign exchange risk), banks shall calculate their risk-weighted assets as the difference between the two multiplied by the risk weight of the counterparty. The framework for performing these calculations is set out in paragraphs CA-4.7.36 to CA-4.7.38.
Apr 08CA-4.7.35
Banks must use standard supervisory haircuts given in paragraph CA-4.7.39.
Apr 08Calculation of Capital Requirement Employing the Standard Supervisory Haircuts
CA-4.7.36
For a collateralised transaction, the exposure amount after risk mitigation is calculated as follows:
E* = max {0, [E x (1 + He) - C x (1 - Hc - Hfx)]}
where:
E* = the exposure value after risk mitigation
E = current value of the exposure
He = haircut appropriate to the exposure
C = the current value of the collateral received
Hc = haircut appropriate to the collateral
Hfx = haircut appropriate for currency mismatch between the collateral and exposureApr 08CA-4.7.37
The exposure amount after risk mitigation will be multiplied by the risk weight of the counterparty to obtain the risk-weighted asset amount for the collateralised transaction. The treatment for transactions where there is a mismatch between the maturity of the counterparty exposure and the collateral is given in paragraphs CA-4.7.47 to CA-4.7.50.
Apr 08CA-4.7.38
Where the collateral is a basket of assets, the haircut on the basket will be H = Σi ai Hi, where ai is the weight of the asset (as measured by units of currency) in the i basket and Hi the haircut applicable to that asset.
Apr 08The Standard Supervisory Haircuts
CA-4.7.39
Both the amount of exposure to counterparty and the value of collateral received are adjusted by using standard supervisory haircuts as set out below:
Types of Collateral* Residual Maturity (yrs) Haircuts (%) Sovereigns15 Others Cash All 0 0 Sukuk
Long-term: AAA to AA- and
Short-term: A-1
≤ 1
> 1 to ≤ 5
> 50.5
2
41
4
8Sukuk
Long-term: A+ to BBB- and
Short-term: A-2 to A-3≤ 1
> 1 to ≤ 5
> 51
3
62
6
12Sukuk
Long-term: BB+ to BB-All 15 15 Sukuk (unrated) All 25 25 Equities (included in main index)
Equities (not included in main index but listed)
Units in collective investment schemesAll
All
All15
25
Depending on the underlying assets as above15
25
Depending on the underlying assets as aboveLeased assets used as collateral (except residential real estate -see CA-4.2.19) and other assets All >=30 >=30 * Collateral denominated in different currency will also be subject to additional 8% haircut to cater for foreign exchange risk.
15 Includes PSEs and MDBs
Apr 08CA-4.7.40
The standard haircut for currency risk where exposure and collateral are denominated in different currencies is 8% (also based on a 10-business day holding period and daily mark-to-market). For transactions in which the bank lends non-eligible instruments (e.g. non- investment grade securities), the haircut to be applied on the exposure should be the same as the one for equity traded on a recognised exchange that is not part of a main index.
Apr 08The Simple Approach
The Minimum Conditions
CA-4.7.41
For collateral to be recognised in the simple approach, the collateral must be pledged for at least the life of the exposure and it must be marked to market and revalued with a minimum frequency of six months. Those portions of claims collateralised by the market value of recognised collateral receive the risk weight applicable to the collateral instrument. The risk weight on the collateralised portion will be subject to a floor of 20% except under the conditions specified in paragraphs CA-4.7.42. The remainder of the claim should be assigned to the risk weight appropriate to the counterparty.
Apr 08Exceptions to the Risk Weight Floor
CA-4.7.42
The 20% floor for the risk weight on a collateralised transaction will not be applied and a 0% risk weight can be applied where the exposure and the collateral are denominated in the same currency, and either:
(a) The collateral is cash on deposit; or(b) The collateral is in the form of sovereign/PSE securities eligible for a 0% risk weight, and its market value has been discounted by 20%Amended: April 2011
April 2008Treatment of Pools of CRM Techniques
CA-4.7.43
In the case where a bank has multiple CRM techniques covering a single exposure (e.g. a bank has both collateral and guarantee partially covering an exposure), the bank will be required to subdivide the exposure into portions covered by each type of CRM technique (e.g. portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately.
Apr 08Credit Risk Mitigation for Mudarabah Classified as Equity Exposures
CA-4.7.44
A placement of funds made under a Mudarabah contract may be subject to a Sharia compliant guarantee from a third party. Such a guarantee relates only to the Mudarabah capital, not to the return. In such cases, the capital should be treated as subject to credit risk with a risk-weighting equal to that of the guarantor provided that the RW of that guarantor is lower than the RW of the Mudarib as a counterparty. Otherwise, the RW of the Mudarib shall apply.
Apr 08CA-4.7.45
In Mudarabah investment in project finance, collateralisation of the progress payments made by the ultimate customers can be used to mitigate the exposures of unsatisfactory performance by the Mudarib.
Apr 08CA-4.7.46
The bank may also place liquid funds with a central bank or another bank on a short-term Mudarabah basis in order to obtain a return on those funds. Such placements serve as an interbank market with maturities ranging from an overnight market up to three months, but the funds may be withdrawn on demand before the maturity date in which case the return is calculated proportionately on the basis of duration and amount. Although from a juristic point of view the amounts so placed do not constitute debts, since (in the absence of misconduct or negligence) Mudarabah capital does not constitute a liability for the institution that acts as Mudarib, in practice the operation of this interbank market requires that the Mudarib should effectively treat them as liabilities. Hence a bank placing funds on this basis may treat them as cash equivalents and, for risk weighting purposes, apply the risk weight applicable to the Mudarib as counterparty.
Apr 08Maturity Mismatches
CA-4.7.47
For the purposes of calculating risk-weighted assets, a maturity mismatch occurs when the residual maturity of CRM is less than that of the underlying exposure.
Apr 08CA-4.7.48
The maturity of the underlying exposure and the maturity of the CRM should both be defined conservatively. The effective maturity of the underlying should be gauged as the longest possible remaining time before the counterparty is scheduled to fulfill its obligation, taking into account any applicable grace period.
Apr 08CA-4.7.49
CRM with maturity mismatches are only recognised when their original maturities are greater than or equal to one year. As a result, the maturity of CRM for exposures with original maturities of less than one year must be matched to be recognised. In all cases, CRM with maturity mismatches will no longer be recognised when they have a residual maturity of three months or less.
Apr 08CA-4.7.50
When there is a maturity mismatch with recognised credit risk mitigants, the following adjustment will be applied.
Pa = P x (t - 0.25) / (T - 0.25)
where:
Pa = value of the credit protection adjusted for maturity mismatch
P = credit protection (e.g. collateral amount, guarantee amount) adjusted for any haircuts
t = min (T, residual maturity of the credit protection arrangement) expressed in years
T = min (5, residual maturity of the exposure) expressed in years.Apr 08PART 3: PART 3: Other Risks
CA-5 CA-5 Market Risk
CA-5.1 CA-5.1 Trading Book
Definition of the Trading Book
CA-5.1.1
The following definition of the trading book replaces the previous definition.
Apr 08CA-5.1.2
A trading book consists of positions in financial instruments and commodities held either with trading intent or in order to hedge other elements of the trading book. To be eligible for trading book capital treatment, financial instruments must either be free of any restrictive covenants on their tradability or able to be hedged completely. In addition, positions should be frequently and accurately valued, and the portfolio should be actively managed (at the present time, open equity stakes in hedge funds, private equity investments and real estate holdings do not meet the definition of the trading book, owing to significant constraints on the ability of banks to liquidate these positions and value them reliably on a daily basis. Such holdings must therefore be held in the bank's banking book and treated as equity holding in corporates, except real estate which should be treated as per Paragraph CA-4.2.27).
Amended: January 2012
Apr 08CA-5.1.3
A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments include both primary financial instruments (or cash instruments) and forward financial instruments. A financial asset is any asset that is cash, the right to receive cash or another financial asset; or the contractual right to exchange financial assets on potentially favourable terms, or an equity instrument. A financial liability is the contractual obligation to deliver cash or another financial asset or to exchange financial liabilities under conditions that are potentially unfavourable.
Apr 08CA-5.1.4
Positions held with trading intent are those held intentionally for short-term resale and/or with the intent of hedging proprietary or client positions.
Apr 08CA-5.1.5
Banks must have clearly defined policies and procedures for determining which exposures to include in, and to exclude from, the trading book for purposes of calculating their regulatory capital, to ensure compliance with the criteria for trading book set forth in this section and taking into account the bank's risk management capabilities and practices. Compliance with these policies and procedures must be fully documented and subject to periodic internal audit.
Apr 08CA-5.1.6
These policies and procedures should, at a minimum, address the following general considerations:
(a) The activities the bank considers to be trading and as constituting part of the trading book for regulatory capital purposes;(b) The extent to which an exposure can be marked-to-market daily by reference to an active, liquid two-way market;(c) For exposures that are marked-to-model, the extent to which the bank can:• Identify the material risks of the exposure;• Hedge (Sharia compliant hedging) the material risks of the exposure and the extent to which hedging instruments would have an active, liquid two-way market;• Derive reliable estimates for the key assumptions and parameters used in the model.(d) The extent to which the bank can and is required to generate valuations for the exposure that can be validated externally in a consistent manner;(e) The extent to which legal restrictions or other operational requirements would impede the bank's ability to effect an immediate liquidation of the exposure;(f) The extent to which the bank is required to, and can, actively risk manage the exposure within its trading operations; and(g) The extent to which the bank may transfer risk or exposures between the banking and the trading books and criteria for such transfers.The list above is not intended to provide a series of tests that a product or group of related products must pass to be eligible for inclusion in the trading book. Rather, the list provides a minimum set of key points that must be addressed by the policies and procedures for overall management of a firm's trading book.Apr 08CA-5.1.7
The following will be the basic requirements for positions eligible to receive trading book capital treatment.
(a) Clearly documented trading strategy for the position/instrument or portfolios, approved by senior management (which would include expected holding horizon).(b) Clearly defined policies and procedures for the active management of the position, which must include:• Positions are managed on a trading desk;• Position limits are set and monitored for appropriateness;• Dealers have the autonomy to enter into/manage the position within agreed limits and according to the agreed strategy;• Positions are marked to market at least daily and when marking to model the parameters must be assessed on a daily basis;• Positions are reported to senior management as an integral part of the institution's risk management process; and• Positions are actively monitored with reference to market information sources (assessment should be made of the market liquidity or the ability to hedge positions or the portfolio risk profiles). This would include assessing the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market, etc.(c) Clearly defined policy and procedures to monitor the positions against the bank's trading strategy including the monitoring of turnover and stale positions in the bank's trading book.Apr 08Prudent Valuation Guidance
CA-5.1.8
This section provides banks with guidance on prudent valuation for positions in the trading book. This guidance is especially important for less liquid positions which, although they will not be excluded from the trading book solely on grounds of lesser liquidity, raise CBB's concerns about prudent valuation.
Apr 08CA-5.1.8.A
Positions in the bank's own eligible regulatory capital instruments are deducted from capital. Positions in other banks', securities firms', and other financial entities' eligible regulatory capital instruments, as well as intangible assets, are subject to the same treatment as that set down by the CBB for such assets held in the banking book (see Module PCD).
Added: January 2012CA-5.1.9
This section provides banks with guidance on prudent valuation for positions that are accounted for at fair value, whether they are in the trading book or in the banking book. This guidance is especially important for positions without actual market prices or observable inputs to valuation, as well as less liquid positions which, although they will not be excluded from the trading book solely on grounds of lesser liquidity, raise supervisory concerns about prudent valuation. The valuation guidance set forth below is not intended to require banks to change valuation procedures for financial reporting purposes. The CBB will assess a bank's valuation procedures for consistency with this guidance. One factor in the CBB's assessment of whether a bank must take a valuation adjustment for regulatory purposes under Paragraphs CA-5.1.18.A to CA-5.1.20 is the degree of consistency between the bank's valuation procedures and these guidelines.
Added: January 2012CA-5.1.9A
A framework for prudent valuation practices should at a minimum include the following:
Amended: January 2012
Apr 08Systems and Controls
CA-5.1.10
Banks must establish and maintain adequate systems and controls sufficient to give management and CBB the confidence that their valuation estimates are prudent and reliable. These systems must be integrated with other risk management systems within the organisation (such as credit analysis). Such systems must include:
(a) Documented policies and procedures for the process of valuation. This includes clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, guidelines for the use of unobservable inputs reflecting the bank's assumptions of what market participants would use in pricing position, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, end of the month and ad-hoc verification procedures; and(b) Clear and independent (i.e. independent of front office) reporting lines for the department accountable for the valuation process. The reporting line should ultimately be to a main board executive director.Amended: January 2012
Apr 08Valuation Methodologies
Marking to Market
CA-5.1.11
Marking-to-market is at least the daily valuation of positions at readily available close out prices that are sourced independently. Examples of readily available close out prices include exchange prices, screen prices, or quotes from several independent reputable brokers.
Apr 08CA-5.1.12
Banks must mark-to-market as much as possible. The more prudent side of bid/offer must be used unless the institution is a significant market maker in a particular position type and it can close out at mid-market. Banks should maximise the use of relevant observable inputs and minimise the use of unobservable inputs when estimating fair value using a valuation technique. However, observable inputs or transactions may not be relevant, such as in a forced liquidation or distressed sale, or transactions may not be observable, such as when markets are inactive. In such cases, the observable data should be considered, but may not be determinative.
Amended: January 2012
Apr 08Marking to Model
CA-5.1.13
Only where marking-to-market is not possible, should banks may mark-to-model, but this must be demonstrated to be prudent. Marking-to-model is defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input.
Amended: January 2012
Apr 08CA-5.1.14
When marking to model, an extra degree of conservatism is appropriate. The CBB will consider the following in assessing whether a mark-to-model valuation is prudent:
(a) Senior management should be aware of the elements of the trading book or of other fair-valued positions which are subject to mark to model and should understand the materiality of the uncertainty this creates in the reporting of the risk/performance of the business;(b) Market inputs should be sourced, to the extent possible, in line with market prices (as discussed above). The appropriateness of the market inputs for the particular position being valued should be reviewed regularly;(c) Where available, generally accepted valuation methodologies for particular products should be used as far as possible;(d) Where the model is developed by the institution itself, it should be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process. The model should be developed or approved independently of the front office. It should be independently tested. This includes validating the mathematics, the assumptions and the software implementation;(e) There should be formal change control procedures in place and a secure copy of the model should be held and periodically used to check valuations;(f) Risk management should be aware of the weaknesses of the models used and how best to reflect those in the valuation output;(g) The model should be subject to periodic review to determine the accuracy of its performance (e.g. assessing continued appropriateness of the assumptions, analysis of P&L versus risk factors, comparison of actual close out values to model outputs); and(h) Valuation adjustments should be made as appropriate, for example, to cover the uncertainty of the model valuation.Amended: January 2012
Apr 08Independent Price Verification
CA-5.1.15
Independent price verification is distinct from daily mark-to-market. It is the process by which market prices or model inputs are regularly verified for accuracy. While daily marking-to-market may be performed by dealers, verification of market prices or model inputs should be performed by a unit independent of the dealing room, at least monthly (or, depending on the nature of the market/trading activity, more frequently). It need not be performed as frequently as daily mark-to-market, since the objective, i.e. independent, marking of positions, should reveal any error or bias in pricing, which should result in the elimination of inaccurate daily marks.
Apr 08CA-5.1.16
Independent price verification entails a higher standard of accuracy in that the market prices or model inputs are used to determine profit and loss figures, whereas daily marks are used primarily for management reporting in between reporting dates. For independent price verification, where pricing sources are more subjective, e.g. only one available broker quote, prudent measures such as valuation adjustments may be appropriate.
Apr 08Valuation Adjustments
CA-5.1.17
As part of their procedures for marking to market, banks must establish and maintain procedures for considering valuation adjustments. The CBB expects banks using third-party valuations to consider whether valuation adjustments are necessary. Such considerations are also necessary when marking to model.
Amended: January 2012
Apr 08CA-5.1.18
The CBB expects the following valuation adjustments/reserves to be formally considered at a minimum: unearned profit, close-out costs, operational risks, early termination, investing and funding costs, and future administrative costs and, where appropriate, model risk.
Apr 08Adjustment to the Current Valuation of Less Liquid Positions for Regulatory Capital Purposes
CA-5.1.18.A
Banks must establish and maintain procedures for judging the necessity of and calculating an adjustment to the current valuation of less liquid positions for regulatory capital purposes. This adjustment may be in addition to any changes to the value of the position required for financial reporting purposes and should be designed to reflect the illiquidity of the position. The CBB expects banks to consider the need for an adjustment to a position's valuation to reflect current illiquidity whether the position is marked to market using market prices or observable inputs, third-party valuations or marked to model.
Added: January 2012CA-5.1.19
Bearing in mind that the underlying 10-day assumptions made about liquidity in the market risk capital charge may not be consistent with the bank's ability to sell or hedge out less liquid positions, where appropriate, banks must take an adjustment to the current valuation of these positions, and review their continued appropriateness on an on-going basis. Reduced liquidity may have arisen from market events. Additionally, close-out prices for concentrated positions and/or stale positions should be considered in establishing the adjustment. Banks must consider all relevant factors when determining the appropriateness of the adjustments for less liquid positions. These factors may include, but are not limited to, the amount of time it would take to hedge out the position/risks within the position, the average volatility of bid/offer spreads, the availability of independent market quotes (number and identity of market makers), the average and volatility of trading volumes (including trading volumes during periods of market stress), market concentrations, the aging of positions, the extent to which valuation relies on marking-to-model, and the impact of other model risks not included in Paragraph CA-5.1.18.A.
Amended: January 2012
Apr 08CA-5.1.20
[This Paragraph was deleted in January 2012]
Deleted: January 2012CA-5.2 CA-5.2 Price Risk
CA-5.2.1
The capital charge for price risk is 15% of the amount of the position (carrying value).
Apr 08CA-5.2.2
For commodities exposure in Salam, the capital charge is computed at 15% of the net position in each commodity, plus an additional charge equivalent to 3% of the gross positions, long plus short, to cover basis risk and forward gap risk. The 3% capital charge is also intended to cater for potential losses in Parallel Salam when the seller in the original Salam contract fails to deliver and the bank has to purchase an appropriate commodity in the spot market to honour its obligation. Net positions in commodities are calculated as explained in section CA-5.6. In case of Istisna'a (see paragraph CA-3.4.24) 15% capital charge on net long or short position plus 3% capital charge on gross positions must apply.
Apr 08CA-5.3 CA-5.3 Equity Position Risk
Introduction
CA-5.3.1
The minimum capital requirement for equities is expressed in terms of two separately calculated charges, one relating to the "specific risk" of holding a long position in an individual equity, and the other to the "general market risk" of holding a long position in the market as a whole. Where the bank has invested in shares/units of equity funds on Mudaraba financing and the bank has direct exposures in the equities which are traded in a recognised stock exchange, the shares/units are considered to be subject to equity risk. The equity position would be considered to be the net asset value as at the reporting date.
Apr 08Specific Risk Calculation
CA-5.3.2
Specific risk is defined as the bank's gross equity positions (i.e. the sum of all equity positions and is calculated for each country or equity market) and is calculated for each country or equity market. For each national market in which the bank holds equities, it should sum the market values of its individual net positions irrespective of whether they are long or short positions, to produce the overall gross equity position for that market.
Amended: January 2012
Apr 08CA-5.3.3
The capital charge for specific risk is 8%.
Amended: January 2012
Apr 08CA-5.3.4
[This Paragraph was deleted in January 2012]
Deleted: January 2012General Risk Calculation
CA-5.3.5
The general market risk is calculated by first determining the difference between the sum of the long positions and the sum of the short positions (i.e. the overall net position) in each national equity market. In other words, to calculate the general market risk, the bank should sum the market value of its individual net positions for each national market, taking into account whether the positions are long or short.
Amended: January 2012
Apr 08CA-5.3.6
The general market equity risk measure is 8% of the overall net position in each national market.
Amended: January 2012
Apr 08CA-5.4 CA-5.4 Sukuk
Specific Risk for Sukuk
CA-5.4.1
In the case of Sukuk in the trading book, the specific risk charge must be provided on the RW of the issue and the term to maturity of the Sukuk, as follows:
Categories External credit assessment Specific risk capital charge Government (including GCC governments)* AAA to AA- 0% A+ to BBB- 0.25% (residual term to final maturity 6 months or less)
1.00% (residual term to final maturity greater than 6 and up to and including 24 months)
1.60% (residual term to final maturity exceeding 24 months)BB+ to B- 8.00% Below B- 12.00% Unrated 8.00% Qualifying 0.25% (residual term to final maturity 6 months or less)
1.00% (residual term to final maturity greater than 6 and up to and including 24 months)
1.60% (residual term to final maturity exceeding 24 months)Other Similar to credit risk charges under the standardised approach, e.g.: BB+ to BB- 8.00% Below BB- 12.00% Unrated 8.00% * CBB has the discretion to apply a different specific risk weight to sukuk issued by certain foreign government.
Apr 08General Market Risk for Sukuk
CA-5.4.2
The general market risk16 must be provided on the residual term to maturity or to the next repricing date, using a simplified form of the Maturity Method on the net positions in each time-band in accordance with the table below:
Residual term to maturity RW 1 month or less 0.00% 1-3 months 0.20% 3-6 months 0.40% 6-12 months 0.70% 1-2 years 1.25% 2-3 years 1.75% 3-4 years 2.25% 4-5 years 2.75% 5-7 years 3.25% 7-10 years 3.75% 10-15 years 4.50%
16 At the CBB's discretion, the bank may alternatively use the duration method as set out in the Market risk section of the Basel II Accord (June 2006).
Apr 08CA-5.4.3
In the case of equity investments made by means of a Musharaka or a Mudaraba contract where the underlying assets are commodities, the market risk provisions for commodities, as described below, will be applicable.
Apr 08CA-5.5 CA-5.5 Foreign Exchange Risk
Introduction
CA-5.5.1
This section describes the standardised method for calculation of the bank's foreign exchange risk, and the capital required against that risk.
Apr 08CA-5.5.2
The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold and/or silver and as a second step, the measurement of the risks inherent in the bank's mix of assets and liabilities positions in different currencies.
Apr 08CA-5.5.3
A bank that holds net open positions (whether assets or liabilities) in foreign currencies is exposed to the risk that exchange rates may move against it. The open positions may be either trading positions or, simply, exposures caused by the bank's overall assets and liabilities. Where the bank is involved in option transactions, these must be agreed in advance with the CBB. The CBB will consider the appropriate treatment on a case by case basis.
Apr 08CA-5.5.4
The open positions and the capital requirements are calculated with reference to the entire business (i.e. the banking and trading books).
Apr 08CA-5.5.5
The open positions are calculated with reference to the bank's base currency, which will be either Bahraini Dinars (BD) or United States dollars (USD).
Apr 08CA-5.5.6
In addition to foreign exchange risk, positions in foreign currencies may be subject to credit risk which should be treated separately. For the purposes of calculating "Foreign Exchange Risk" only, positions in those GCC currencies which are pegged to US$, will be treated as positions in US$.
Apr 08De Minimis Exemptions
CA-5.5.7
A bank doing negligible business in foreign currencies and which does not take foreign exchange positions for its own account may, at the discretion of the CBB and as evidenced by the CBB's prior written approval, be exempted from calculating the capital requirements on these positions. The CBB is likely to be guided by the following criteria in deciding to grant exemption to any bank:
(a) The bank's holdings or taking of positions in foreign currencies, including gold and/or silver, defined as the greater of the sum of the gross asset positions and the sum of the gross liability position in all foreign positions and gold and/or silver, does not exceed 100% of its eligible capital; and(b) The bank's overall net open position, as defined in CA-5.5.15 does not exceed 2% of its eligible capital.Apr 08CA-5.5.8
The criteria listed above are only intended to be guidelines, and a bank will not automatically qualify for exemptions upon meeting them. Banks doing negligible foreign currency business, which do not take foreign exchange positions for the bank's own account, and wish to seek exemption from foreign exchange risk capital requirements, should submit an application to the CBB, in writing. The CBB will have the discretion to grant such exemptions. The CBB may also, at its discretion, fix a minimum capital requirement for a bank that is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.
Apr 08CA-5.5.9
The CBB may, at a future date, revoke an exemption granted to a bank, if the CBB is convinced that the conditions on which the exemption was granted no longer exist.
Apr 08Calculation of Net Open Positions
CA-5.5.10
A bank's exposure to foreign exchange risk in any currency is its net open position in that currency, which is calculated by summing the following items:
(a) The net spot position in the currency (i.e. all assets items less all liability items, including accrued profit, other income and expenses, denominated in the currency in question; assets are included gross of provisions for bad and doubtful debts, except in cases where the provisions are maintained in the same currency as the underlying assets);(b) The net forward position in the currency (i.e. all amounts to be received less all amounts to be paid under forward foreign exchange contracts, in the concerned currency);(c) Guarantees and similar off-balance sheet contingent items that are certain to be called and are likely to be irrecoverable where the provisions, if any, are not maintained in the same currency;(d) Profits (i.e. the net value of income and expense accounts) held in the currency in question; and(e) Specific provisions held in the currency in question where the underlying asset is in a different currency, net of assets held in the currency in question where a specific provision is held in a different currency.Apr 08CA-5.5.11
For calculating the net open position in gold and/or silver, the bank must first express the net position (spot plus forward) in terms of the standard unit of measurement (i.e. ounces or grams) and then convert it at the current spot rate into the base currency.
Apr 08CA-5.5.12
Where gold and/or silver are part of a forward contract (i.e. quantity of gold and/or silver to be received or to be delivered), any foreign currency exposure from the other leg of the contract should be reported.
Apr 08Structural Positions
CA-5.5.13
Positions of a structural nature (i.e. non-dealing), may be excluded from the calculation of the net open currency positions. These may include:
(a) Positions taken deliberately in order to hedge, partially or totally, against the adverse effects of exchange rate movements on the bank's CAR;(b) Positions related to items that are deducted from the bank's capital when calculating its capital base in accordance with the rules and guidelines in this Module, such as investments in non-consolidated subsidiaries; and(c) Retained profits held for payout to parent, where the profits are held in the currency concerned.Amended: October 2013
Apr 08CA-5.5.14
The CBB will consider approving the exclusion of the above positions for the purpose of calculating the capital requirement, only if each of the following conditions is met:
(a) The concerned bank provides adequate documentary evidence to the CBB which establishes the fact that the positions proposed to be excluded are, indeed, of a structural nature (i.e. non-dealing) and are merely intended to protect the bank's CAR. For this purpose, the CBB may ask written representations from the bank's management or directors.(b) Any exclusion of a position is consistently applied, with the treatment of the structural positions remaining the same for the life of the associated assets or other items.Apr 08Calculation of the Overall Net Open Position
CA-5.5.15
The net position in each currency is converted at the spot rate, into the reporting currency. The overall net open position must be measured by aggregating the following:
(a) The sum of the net liabilities positions or the sum of the net asset positions whichever is greater(b) The net position (liabilities and assets) in gold and/or silver, regardless of sign.Apr 08CA-5.5.16
Where the bank is assessing its foreign exchange on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the bank. In such cases, the internal limit for that branch/subsidiary, in each currency, may be used as a proxy for the positions. The branch/subsidiary limits should be added, without regard to sign, to the net open position in each currency involved. When this simplified approach to the treatment of currencies with marginal operations is adopted, the bank should adequately monitor the actual positions of the branch/subsidiary against the limits, and revise the limits, if necessary, based on the results of the ex-post monitoring.
Apr 08Calculation of the Capital Charge
CA-5.5.17
The capital charge is 8% of the overall net open foreign currency position.
Apr 08CA-5.5.18
The table below illustrates the calculation of the overall net open foreign currency position and the capital charge:
Example of the calculation of the foreign exchange overall net open position and the capital charge
GBP DEM SAR US$ JPY GOLD and/or silver +200 +100 +70 -190 -40 -50 +370 -230 50 The capital charge is 8% of the higher of either the sum of the net long currency positions or the sum of the net short positions (i.e. 370) and of the net position in gold and/or silver (i.e. 50) = 420 @ 8% = 33.6
Apr 08CA-5.6 CA-5.6 Commodities Risk
Introduction
CA-5.6.1
This section sets out the minimum capital requirements to cover the risk of holding or taking positions in commodities, including precious metals, but excluding gold and silver (which is treated as a foreign currency according to the methodology explained in section CA-5.5).
Apr 08CA-5.6.2
The commodities position risk and the capital charges are calculated with reference to the entire business of a bank (i.e. the banking and trading books combined).
Apr 08CA-5.6.3
The price risk in commodities is often more complex and volatile than that associated with currencies. Banks need to guard against the risk that arises when a liability (i.e. in a Parallel Salam transaction) position falls due before the asset position (i.e. a failure associated with or delay in the Salam contract). Owing to a shortage of liquidity in some markets, it might be difficult to close the Parallel Salam position and the bank might be "squeezed by the market". All these commodity market characteristics can result in price transparency and the effective management of risk.
Apr 08CA-5.6.4
All contracts (Salam, Musharakah or Mudarabah) involving commodities as defined in chapters CA-3.3, CA-3.6 and CA-3.7 are subject to commodities risk and a capital charge as per the relevant provisions must be computed.
Apr 08CA-5.6.5
Banks should adopt either the simplified approach to calculate their commodities risk and the resultant capital charges or the maturity ladder approach.
Apr 08Calculation of Commodities Positions
CA-5.6.6
Banks must first express each commodity position (i.e. Salam and Parallel Salam) in terms of the standard unit of measurement (i.e. barrels, kilograms, grams, etc). Assets and liabilities positions in a commodity are reported on a net basis for the purpose of calculating the net open position in that commodity. For markets which have daily delivery dates, any contracts maturing within ten days of one another may be offset. The net position in each commodity is then converted, at spot rates, into the bank's reporting currency.
Apr 08CA-5.6.7
Positions in different commodities cannot be offset for the purpose of calculating the open-positions as described above. However, where one or more sub-categories17 of the same category are in effect and are directly deliverable against each other, netting between those sub-categories is permitted. Furthermore, if two or more sub-categories of the same category is considered as close substitutes for each other, and minimum correlation of 0.9 between their price movements is clearly established over a minimum period of one year, the bank may, with the prior written approval of the CBB, net positions in those sub-categories.
17 Commodities can be grouped into clan, families, sub-groups and individual commodities. For example a clan might be Energy Commodities, within which Hydro-Carbons is a family with Crude Oil being a sub-group and West Texas Intermediate, Arabian light and Brent being individual commodities.
Apr 08CA-5.6.8
Banks, which wish to net positions based on correlation (in the manner discussed above), must satisfy the CBB of the accuracy of the method which it proposes to adopt.
Apr 08Maturity Ladder Approach
CA-5.6.9
A worked example of the maturity ladder approach is set out in Appendix CA-3 and the table below illustrates the maturity time-bands of the maturity ladder for each commodity.
Apr 08CA-5.6.10
The steps in the calculation of the commodities risk by the maturity ladder approach are:
(a) The net positions in individual commodities, expressed in terms of the standard unit of measurement, are first slotted into the maturity ladder. Physical stocks are allocated to the first-time band. A separate maturity ladder is used for each commodity.(b) Asset and liability positions in the same time-band are matched. The sum of the matched asset and liability positions is multiplied first by the spot price of the commodity, and then by a spread of 1.5% for each time-band as set out in the table below. This represents the capital charge in order to capture all risks within a time-band (which, together, are sometimes referred to as curvature risk).Time band18 0-1 months 1-3 months 3-6 months 6-12 months 1-2 years 2-3 years over 3 years
18 Instruments, where the maturity is on the boundary of two maturity time-bands, should be placed into the earlier maturity band. For example, instruments with a maturity of exactly one-year are placed into the 6 to 12 months time-band.
Apr 08CA-5.6.11
The residual (unmatched) net positions from nearer time-bands are then carried forward to offset opposite positions (i.e. asset against liability and vice versa) in time bands that are further out. However, a surcharge of 0.6% of the net position carried forward is added in respect of each time-band that the net position is carried forward, to recognise that such management of positions between different time-bands is imprecise. The surcharge is in addition to the capital charge for each matched amount created by carrying net positions forward, and is calculated as explained in step (b) above.
Apr 08CA-5.6.12
At the end of step (c), there will be either asset or liability positions, to which a capital charge of 15% will apply. The CBB recognises that there are differences in volatility between different commodities, but has, nevertheless, decided that one uniform capital charge for open positions in all commodities shall apply in the interest of simplicity of the measurement, and given the fact that banks normally run rather small open positions in commodities. Banks will be required to submit in writing, details of their commodities business in order to capture the market risk on this business and to enable the CBB to evaluate whether the models approach should be adopted by the bank.
Apr 08CA-6 CA-6 Operational Risk
CA-6.1 CA-6.1 Definition of Operational Risk
CA-6.1.1
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events which includes but is not limited to, legal risk and Sharia compliance risk. This definition excludes strategic and reputational risk.
Apr 08CA-6.1.2
Sharia compliance risk is an operational risk facing Islamic banks which can lead to non-recognition of income and resultant losses.
Apr 08CA-6.2 CA-6.2 The Measurement Methodologies
CA-6.2.1
The framework outlined below presents two methods for calculating operational risk capital charges in a continuum of increasing sophistication and risk sensitivity:
(a) The Basic Indicator Approach; and(b) The Standardised Approach.Amended: April 2011
April 2008CA-6.2.2
A bank will not be allowed to choose to revert to basic indicator approach once it has been approved for standardised approach without CBB's approval. However, if CBB determines that a bank using the standardised approach no longer meets the qualifying criteria for the standardised approach, it may require the bank to revert to the basic indicator approach for some or all of its operations, until it meets the conditions specified by the CBB for returning to the standardised approach.
Apr 08Basic Indicator Approach
CA-6.2.3
Banks using the Basic Indicator Approach must hold capital for operational risk equal to the average over the previous three years of a fixed percentage (denoted alpha) of positive annual gross income. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the average.19 The charge may be expressed as follows:
KBIA = [Σ (GI1..n α n)]/n
where:
KBIA = the capital charge under the Basic Indicator Approach
GI = annual gross income, where positive, over the previous three years (audited financial years)
N = number of the previous three years for which gross income is positive
α = 15%, relating the industry wide level of required capital to the industry wide level of the indicator.
19 If negative gross income distorts a bank's Pillar 1 capital charge, CBB will consider appropriate supervisory action.
Apr 08CA-6.2.4
The extent of losses arising from non-compliance with Sharia rules and principles cannot be ascertained owing to the lack of data. Therefore, banks are not required to set aside any additional amount over and above the 15% of average annual gross income over the preceding three years for operational risk.
Apr 08CA-6.2.5
Gross income is defined as:
(a) Net income from financing activities which is gross of any provisions, operating expenses, realised profits/losses from the sale of securities in the banking book, and depreciation of Ijarah assets;(b) Net income from investment activities; and(c) Fee income (e.g. commission and agency fee)
Less;(d) Investment account holders' share of income(e) Takaful incomeIn case of a bank with negative gross income for the previous three years, a newly licensed bank with less than 3 years of operations, or a merger, acquisition or material restructuring, the CBB shall discuss with the concerned licensed bank an alternative method for calculating the operational risk capital charge. For example, a newly licensed bank may be required to use the projected gross income in its 3-year business plan. Another approach that the CBB may consider is to require such licensed banks to observe a higher CAR.Apr 08CA-6.2.6
Gross income includes income attributable to restricted and unrestricted Profit Sharing Investment Accounts' funds, but excludes extraordinary or exceptional income. Net income from investment activities includes the bank's share of profit from Musharakah and Mudarabah financing activities.
Apr 08CA-6.2.7
Banks applying this approach are encouraged to comply with the principles set in section OM-1.2 of Operational Risk Management Module.
Apr 08The Standardised Approach
CA-6.2.8
In the Standardised Approach, banks' activities are divided into eight business lines: corporate finance, trading & sales, retail banking, commercial banking, payment & settlement, agency services, asset management, and retail brokerage. The business lines are defined in detail in Appendix CA-4. The bank must meet the requirements detailed in section OM-1.3 to qualify for the use of standardised approach.
Apr 08CA-6.2.9
Within each business line, gross income is a broad indicator that serves as a proxy for the scale of business operations and thus the likely scale of operational risk exposure within each of these business lines. The capital charge for each business line is calculated by multiplying gross income by a factor (denoted beta) assigned to that business line. Beta serves as a proxy for the industry-wide relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that business line. It should be noted that in the Standardised Approach, gross income is measured for each business line, not the whole institution, i.e. in corporate finance, the indicator is the gross income generated in the corporate finance business line.
Apr 08CA-6.2.10
The total capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, negative capital charges (resulting from negative gross income) in any business line can not off-set positive capital charges in other business lines. Where the aggregate capital charge across all business lines within a given year is negative, then the input to the numerator for that year will be zero.20 The total capital charge may be expressed as:
K TSA={Σ years 1-3 max[(GI1-8 xβ1-8, 0] }/3
where:
KTSA = the capital charge under the Standardised Approach
GI 1-8 = annual gross income in a given year, as defined above in the Basic Indicator Approach, for each of the eight business lines
β1-8 = a fixed percentage, relating the level of required capital to the level of the gross income for each of the eight business lines.
The values of the betas are detailed below.Business Lines Beta Factors (%) Corporate Finance (β1) 18 Trading and Sales (β2) 18 Retail Banking (β3) 12 Commercial Banking (β4) 15 Payment and Settlement (β5) 18 Agency Services (β6) 15 Asset Management (β7) 12 Retail Brokerage (β8) 12
20 As under the Basic Indicator Approach, if negative gross income distorts a bank's Pillar 1 capital charge under the Standardised Approach, CBB will consider appropriate supervisory action.
Apr 08CA-7 CA-7 Profit Sharing Investment Accounts
CA-7.1 CA-7.1 Profit Sharing Investment Accounts
CA-7.1.1
This chapter deals with the capital adequacy requirement for assets financed by Profit Sharing Investment Accounts (PSIA), a pool of investment funds placed with an Islamic bank on the basis of Mudarabah.
Apr 08CA-7.1.2
The PSIA (commonly referred to as "investment accounts" or "special investment accounts") can be further categorised into:
(a)Unrestricted PSIA; and(b)Restricted PSIA.Apr 08CA-7.1.3
The bank has full discretionary powers in making investment decisions for unrestricted PSIAs. However, the placement of funds in restricted PSIA's by the bank is subject to investment criteria specified by the bank, or by the customer, in the Mudarabah contract, or agreed between the investment account holders (IAH) and the bank at the time of contracting.
Apr 08CA-7.1.4
The bank assumes the role of an economic agent or Mudarib in placing such funds in income-producing assets or economic activities, and as such is entitled to a share (the Mudarib share) in the profits (but not losses) earned on funds managed by it on behalf of the IAH, according to a pre-agreed ratio specified in the Mudarabah contract.
Apr 08Reserves
CA-7.1.5
The bank can take precautionary steps by setting up prudential reserve accounts to minimise the adverse impact of income smoothing for PSIA on its shareholders' returns and to meet unexpected losses (UL) that would be borne by the IAH on investments financed by PSIA, namely:
• Profit equalisation reserve (PER)
PER comprises of allocations from the gross income21 of the Mudarabah to be available for smoothing returns paid to the investment account holders and the shareholders, and consists of a PSIA portion and a shareholder's portion; and/or• Investment risk reserve (IRR)
IRR comprises amounts appropriated out of the income of investment account holders after deduction of the Mudarib share of income, to meet any potential future losses on the investments financed by the PSIA.
21 In some countries, the appropriation of income is to be made out of after tax income.
Apr 08CA-8 CA-8 Gearing Requirements
CA-8.1 CA-8.1 Gearing
CA-8.1.1
The content of this Chapter is applicable to locally incorporated banks and Bahrain retail bank branches of foreign banks.
Apr 08Measurement
CA-8.1.2
The Gearing ratio is measured with reference to the ratio of
deposit liabilities against the bank's capital and reserves as reported in its PIRI.Apr 08Gearing Limit
CA-8.1.3
For Retail Bank and Wholesale bank licensees,
deposit liabilities should not exceed 20 times the respective bank's capital and reserves.Apr 08CM CM Credit Risk Management
CM-A CM-A Introduction
CM-A.1 CM-A.1 Purpose
CM-A.1.1
The purpose of this module is to provide a checklist of the key elements of a sound credit risk management system which supervisors can expect their banks to observe.
CM-A.1.2
This module provides support for certain other parts of the Rulebook, mainly:
(a) Principles of Business;(b) BMA Reporting Requirements;(c) Audit Firms;(d) Public Disclosure;(e) High Level Controls; and(f)Capital Adequacy .CM-A.2 CM-A.2 Key requirements
CM-A.2.1
Branches of foreign banks in Bahrain are expected to maintain provisions against potential credit losses on their books in Bahrain. Head offices of banks that do not wish to maintain provisions on books of theirbranch(es) in Bahrain should advise the Agency, on an annual basis and in writing, of the amount of provisions set aside for the bad debts of Bahrainbranch(es) .CM-A.2.2
The Agency requires all banks incorporated in Bahrain to set out their policy on large
exposures , including limits for differing types ofexposures to individual customers, banks, corporates, countries and economic and market sectors, in a policy statement which should be formally approved by the Board of Directors.CM-A.2.3
The aggregate of large exposures may not exceed 800% of the bank's (consolidated) capital base. A bank may not incur a combined
exposure (funded by unrestricted investment accounts, the bank's own funds and restricted investment accounts) to an individualcounterparty or group of closely relatedcounterparties which exceeds 35% of the reporting bank's (consolidated) capital base.CM-A.2.4
The aggregate
exposures to all connectedcounterparties when taken together, may not exceed 60% of (consolidated) capital base.CM-A.2.5
No Islamic financing provided by a bank to its own external auditors shall be permitted.
CM-A.2.6
All banks incorporated in Bahrain are required to report (for the attention of the Director of Financial Institutions Supervision Directorate) all large
exposures , (whether exempt or not) on a quarterly basis using the return provided in Appendix BR 3.CM-A.2.7
The Agency's prior written consent should be obtained for any credit facility to an employee where the amount of such facility, either singly or when added to an existing facility/existing facilities outstanding to that employee at that date, would be equal to or in excess of BD 100,000 (or its equivalent).
CM-A.2.8
Licensees may only provide a new consumer facility (or renew, extend or otherwise modify an existing consumer facility) for an amount such that the counterparty's total monthly repayments on all his consumer finance commitments do not exceed 50% of his monthly gross income.
CM-A.2.9
Licensees must make clear to potential counterparties, prior to entering into a consumer finance agreement, all relevant key terms of the agreement.
CM-A.2.10
The Agency's prior written consent should be obtained before writing off any credit facility provided to senior employee/officer/Director of the reporting bank or other bank(s) who fails to discharge his/her repayment obligations to the reporting bank.
CM-A.2.11
The bank should notify the Agency of any write-off of a credit facility, (i.e., Murabaha or any other credit facility) of an amount in excess of BD 100,000 (or its equivalent).
CM-A.3 CM-A.3 Regulation history
CM-A.3.1
This module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
CM-A.3.2
A list of most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes CM-2.2 1/10/05 Role of Internal audit becomes a rule CM-7.4 1/10/05 Clarification re non-compliant facilities Evolution of the Module
CM-A.3.3
Prior to the development of this Rulebook, the Agency had issued various circulars representing regulations covering different aspects of credit risk management. These circulars have now been consolidated into one module covering the credit risk management regulation. These circulars and their evolution into this module are listed below:
Circular Ref. Date of Issue Module Ref. Circular Subject BC/3/98 21 Feb 1998 CM-B.2 Basel Committee on Banking Supervision Framework for the Evaluation of Internal Controls Systems BC/117/95
(partial)1 Feb 1995 CM-1–CM-3 Risk Management OG/127/01 18 Mar 2001 CM-2 Developing a Sound Credit Culture OGD/27/88 9 Feb 1988 CM-3.4 Provisions Against Country Debt PIRI Pack - - - - - CM-4 Prudential Information Returns for Islamic Financial Institutions EDBC/178/96 5 Oct 1996 CM-5 Islamic Facilities OG/45/88 13 Mar 1988 CM-6.1 Write-Off–Credit Facility OG/50/92
(partial)4 Mar 1992 CM-7.1–CM-7.2 Consumer Finance PIRI Pack - - - - - CM-8 Prudential Regulations for Islamic Financial Institutions EDBC/105/96 26 June 1996 CM-8.3 Mudaraba Contracts — Minimum Terms and Conditions BC/4/99 17 Mar 1999 CM-9.1 Annual Accounts for the Year Ending 31 December 1999 Effective date
CM-A.3.4
The contents in this module are effective from the date depicted in the original circulars (see paragraph CM-A.3.3) from which the requirements are compiled.
CM-B CM-B General guidance and best practice
CM-B.1 CM-B.1 Introduction
CM-B.1.1
This chapter provides general guidance on the subject matter of this Module. These guidance could be in the form of papers / reports or other source of information issued by international bodies.
CM-B.1.2
These guidance promote best practice and could generally be applied by all licensees to their activities.
CM-B.1.3
Where applicable, the sources provided in this chapter should be used as an aid to reading the contents of this module.
CM-B.2 CM-B.2 Guidance provided by other international bodies
Basel Committee: Principles for the Management of Credit Risk
CM-B.2.1
The paper (see www.bis.org/publ/bcbs75.pdf) which contains 17 principles, encourages banking supervisors globally to promote sound practices for managing credit risks in banking activities.
CM-B.2.2
Throughout the module, references have been made to this paper and it is recommended that the regulations in this module be followed in conjunction with the guidelines presented in this paper.
Counterparty Risk Management Policy Group (CRMPG): Improving Counterparty Risk Management
CM-B.2.3
The objective of this report (see www.isda.org/educat/pdf/CRMPG-report6-99.pdf), which was developed by a committee of market practitioners in the wake of the 1998 market disruptions, discusses
counterparty credit risk and market risk management practices and how they can be enhanced.CM-B.2.4
The report covers four subject areas: transparency and
counterparty credit assessments; risk measurement, management, and reporting; market practices and conventions; and regulatory reporting.CM-B.2.5
Of particular interest to risk managers is guidance provided in two areas, one on liquidity risk and leverage, and the other on
counterparty creditexposure estimation.Basel Committee: Framework for Internal Controls Systems in Banking Organisations
CM-B.2.6
The paper (see www.bis.org/publ/bcbs40.pdf) issued in September 1998 presents the first internationally accepted framework for supervisors to use in evaluating the effectiveness of the internal controls over all on and off balance sheet activities of banking organizations.
CM-B.2.7
The paper describes elements that are essential to a sound internal control system, recommends principles that supervisors can apply in evaluating such systems, and discusses the role of bank supervisors and external auditors in this assessment process.
CM-B.3 CM-B.3 Enforceability
CM-B.3.1
This guidance should not be taken as legally binding requirements, unless otherwise embodied in Bahrain law or by regulation.
CM-B.3.2
It should be noted that the provisions in this chapter are to be taken as guidance by the licensees in order to promote sound credit risk management practices.
CM-1 CM-1 General procedures
CM-1.1 CM-1.1 Overview
CM-1.1.1
Credit risk is the likelihood that
counterparty of the bank will not meet its obligations in accordance with the agreed terms. The magnitude of the credit risk depends on the likelihood ofdefault by thecounterparty , and on the potential value of the bank's contracts with the customer at the time ofdefault . Credit risk largely arises in assets shown on the balance sheet, but it can also show up off the balance sheet in a variety of contingent obligations.CM-1.1.2
Exposure to credit risk, notably in the form of traditional bank financing, has historically been the most frequent source of bank problems. The assessment of credit risk is a challenging task where bankers are often faced with making decisions based on outdated or partial information.CM-1.1.3
The lack of continuous credit supervision and effective internal controls, or the failure to identify abuse and fraud are also sources of risk. The overall lending policy of the bank should be monitored by a Credit Committee composed of officers with adequate seniority and experience.
CM-1.2 CM-1.2 Credit analysis
CM-1.2.1
Proper credit risk management will help banks to discipline their lending activities and ensure that credit facilities are granted on a sound basis, and that bank funds are invested in a profitable manner. The process of managing credit risk starts at the origination of the credit facility. Standards for credit analysis should stress the borrower's ability to meet his future financial needs through analysis of his cash-flow generation capacity.
CM-1.2.2
Measurement of credit risk is complicated by the fact that both credit
exposures and the likelihood ofdefault can vary over time and may be interdependent. The creditworthiness of customers shifts, as reflected in credit rating upgrades and downgrades. Customers that originally are highly rated are more likely todefault later in a credit facilities' life than earlier.CM-1.2.3
Banks should properly assess the inherent risk factor of each credit facility; monitor the risks arising from any portfolio concentration; and ensure that appropriate precautions against losses have been taken in the form of
collateral and/or provisioning as described in chapter CM-2.CM-1.3 CM-1.3 Credit policy
CM-1.3.1
A properly documented credit policy is an essential element of and prerequisite for the credit risk management process. Consistent with the Board's objectives, it assists bank management in the maintenance of proper credit standards and the avoidance of unnecessary risks.
CM-1.3.2
It is prudent to review the credit policy regularly to ensure that once it is established, it remains flexible enough to be current and continues to accomplish its original purpose taking into consideration market developments.
CM-1.3.3
Explicit guidelines in credit policy provide the basis for effective credit portfolio management. A sound credit policy should consider which types of credit products and borrowers the bank is looking for and the underwriting standards the bank will utilize.
CM-1.3.4
A bank's credit policy should address all credit matters of significance including:
(a) objectives of credit monitoring;(b) organisation and reporting structure of the credit department;(c)designated markets and products;(d) establishment of a credit limit framework;(e) guidelines for assessment of concentration;(f) authorisation procedures for the advancement of credit;(g) establishment of credit committees;(h) establishment of desirable pricing levels and criteria; and(i) problem credit identification and administration.CM-1.3.5
After the credit facility has been granted, its performance should be monitored at regular intervals. This includes an appropriate periodic review of financial statements, a reassessment of
collateral and update of appraisals, and attentive monitoring of conditions in the borrower's industry. Credit supervision constitutes the first line of detection of difficulties and provides the bank with an opportunity to address problems before losses are sustained.CM-2 CM-2 Developing a sound credit culture
CM-2.1 CM-2.1 Overview
CM-2.1.1
Credit culture is defined as the sum total of a bank's approach to managing credit risk, including business strategy, credit policy, shared assumptions about credit, the effectiveness of communications, and the composition and quality of the resulting credit portfolio.
CM-2.1.2
As a matter of best practice, all banks should periodically review their credit cultures in order to reduce future credit losses and also to minimise
reputational risk and damage to their credit ratings.CM-2.1.3
The Agency draws all licensed banks' attention to the September 2000 document issued by the
Basel Committee entitled "Principles for the Management of Credit Risk". This document contains 17 principles which all banks should ensure are covered in their credit culture (i.e. policies, procedures, systems and controls) (see www.bis.org/publ/bcbs75.pdf).CM-2.1.4
Effective from the date of the original circular (see section CM-A.3), the Agency has used the Basel document mentioned above as a guideline in its evaluation of the credit cultures of banks operating in Bahrain. Evaluation is conducted through prudential meetings, inspection and reporting accountants' reviews.
CM-2.2 CM-2.2 Elements of a strong credit culture
CM-2.2.1
First, the regulation in this section is recommendatory in nature (except for the requirement in paragraph CM-2.2.2 (a) & (e) below), and the guidelines below under the five headings are indicative of best practice. Some of the guidelines may not be appropriate to all relevant licensees. However, if a bank is not following these guidelines, it should consider why it is not doing so.
CM-2.2.2
Secondly, the regulation in this section is intended as a complement to the September 2000 Paper by the
Basel Committee entitled "Principles for the Management of Credit Risk" (see section CM-B.2). This section does not summarise the Basel Paper, but is intended to be read in conjunction with the above Paper.(a) The Role of the Board of Directors
The Board of Directors must approve all the operating policies of a bank (see principle 1 ofBasel Committee paper "Framework for Internal Controls Systems in Banking Organisations" — section CM-B.2).
Given that credit risk is still the major risk that banks are exposed to in their business, particular scrutiny must be paid to credit policies, in terms of various limits as well as in terms of risk strategy. An essential function of the Board is to review and reassess the credit policies of the bank (includingcollateral , provisioning policies and concentration policies) on a periodic basis. The Board should also regularly review overdue and large facilities both in terms of performance, and also in relation to the capital (base) of the bank. The Board should insist upon periodic review/evaluation of internal systems and control weaknesses identified by external/internal auditors and management. Principle 1 of theBasel Committee paper "Principles for the Management of Credit Risk" (see section CM-B.2) also gives greater detail on the role of the Board in developing a sound credit culture.(b) The Role of the senior management
Senior Management should be involved in regular reviews of outstanding facilities and overdue accounts as well as reviewing changes in activity, turnover or balances in clients' accounts. The role of senior management is covered in depth in Principle 2 ofBasel Committee paper "Principles for the Management of Credit Risk" — section CM-B.2 (see also Principle 3 ofBasel Committee paper "Framework for Internal Controls Systems in Banking Organisations" — section CM-B.2). However, Senior Management should be involved in the credit review process of (larger) existing facilities, visiting clients, requesting up to date financial statements and verifyingcollateral . Too often, a lack of direct contact by senior management with a problem client has been an identified factor in significant credit losses by banks, whether by way of fraud, or corporate failure.(c) Role of an Independent Risk Management Function
Perhaps the key point to emphasise in Risk Management is that the function must be independent of the senior management and operational functions which are related to business acquisition. The Risk Management function should report to the Board or to senior management related to control functions. The Risk Management function must not only monitor risk, but also control it (i.e. review limits, excesses etc). It must also ensure that risk monitoring systems accurately measure risk in the first place, and that all risks where they occur are, correctly identified (see also Principle 6 ofBasel Committee paper "Framework for Internal Controls Systems in Banking Organisations" — section CM-B.2).(d) Effective Internal Systems and Controls
Well implemented sound policies and procedures maintain credit standards, enable monitoring and control of credit risk, and identify problem credits in a timely manner (see Principle 2 ofBasel Committee paper "Principles for the Management of Credit Risk" — section CM-B.2 for more detail). Sound policy and administrative requirements also apply equally strongly to existing facilities as well as new ones (see Principle 8 ofBasel Committee paper "Principles for the Management of Credit Risk" — section CM-B.2). Policies and procedures should allow a thorough understanding of thecounterparty , the purpose of the credit facility and the source of repayment (Principle 4 ofBasel Committee paper "Principles for the Management of Credit Risk" — section CM-B.2) to be gained by the Risk Management function in its assessment of thecounterparty for risk profiling purposes, (see also Principle 6 ofBasel Committee paper "Framework for Internal Controls Systems in Banking Organisations" — section CM-B.2 and section E of the paper issued by theCounterparty Risk Management Policy Group — "ImprovingCounterparty Risk Management" — see section CM-B.2). Banks should seek to utilise internal rating systems to manage credit risk and to set adequate provisions on a timely basis (see Principle 10 ofBasel Committee paper "Framework for Internal Controls Systems in Banking Organisations" — section CM-B.2).(e) The Role of Internal Audit
Internal audit function should, on an on-going basis, monitor the system of internal controls because it provides an independent assessment of the adequacy of, and compliance with, the established policies and procedures. Internal audit function must report directly to the highest levels of the banking organisation, typically the Board of Directors or its audit committee, and to senior management. This allows for the proper functioning of corporate governance by giving the Board information that is not biased in any way by the levels of management that the reports cover.CM-2.3 CM-2.3 Name-financing
CM-2.3.1
Banks are exposed to credit risk when they provide large credit facilities on a "clean" basis (i.e. without
collateral orsecurity ). This risk is amplified, specifically, when such clean name financing is made without adequate (up to date) financial information.CM-2.3.2
In many banks there is a tendency to indulge in "
name-financing " without any credit analysis or understanding of the concernedcounterparty's current outstanding facilities from other banks. The Agency strongly discourages the banks to engage in such activities in order to minimise their credit risk and reputation risk.CM-3 CM-3 Assessment of credit quality
CM-3.1 CM-3.1 Overview
CM-3.1.1
A realistic assessment of credit quality is an essential feature of effective credit risk management. The starting point for a systematic review of credit quality is a comprehensive review of the bank's written credit policies and practices. These include, but are not limited to:
(a) credit approval procedures;(b) credit underwriting criteria; and(c) credit administration process.CM-3.1.2
Credit quality is a relative concept based on performance prospects and external variables. Trends in the economy, and changes in markets and prices of goods affect the evaluation of credit facility repayment value. Assessing credit risk is a dynamic concept which needs to take into account the business cycle and the economic environment.
CM-3.1.3
The objectives of the credit assessment are to determine:
(a) whether the applicant / customer will have sufficient future liquid resources to honour credit obligations according to the agreed terms;(b) whether the applicant's / customer's present and future prospects indicate that they will continue as agoing concern in the foreseeable future;(c) is the applicant / customer of sufficient integrity; and(d) to what extent does anysecurity offered affect the risk inherent in the facility.CM-3.1.4
To help improve prudential oversight of credit quality, the Agency, in this Module, seeks to establish a set of broad rules that are useful in identifying and containing the impact of impaired assets within banks.
CM-3.2 CM-3.2 Credit grading system
CM-3.2.1
The banks should have in place appropriate credit grading systems (classification) to help assess asset quality and credit exposures including performing receivables.
CM-3.2.2
Credit grading systems offer a number of benefits. Analysis of a bank's entire book can reveal important insights to bank's management in the functioning and ultimately the health of the bank. Credit grading systems provide the means for a more systematic assessment of asset quality. They are particularly useful in assisting in the early detection of asset quality problems within a bank by highlighting credit with above normal risks.
CM-3.2.3
The Agency does not favour the imposition of a standard credit grading system for all banks. Instead, the Agency will rely, wherever possible, upon the credit grading system adopted by each bank. This preference reflects the fact that banks generally have devoted significant resources to developing grading systems that best fit their individual product mix.
CM-3.2.4
Each bank is hence required to provide to the Agency a statement of its current policy in respect of its credit grading system (including definitions used to classify exposures). Banks that do not intend to implement a credit grading system should indicate to the Agency their reason for not doing so. The Agency expects to have the endorsement of the Board of the bank concerned.
CM-3.2.5
Banks looking to implement a credit grading system, or to update their current system, should consider the following points:
(a) The system should cover a broad range of the bank's asset portfolio, including unrestricted investment accounts, restricted investment accounts and other off balance sheet exposures;(b) The system should cover both performing and impaired assets — it is common for grading systems to have sufficient range of grades, covering exposures with the lowest risk to those where losses are expected;(c) Banks should detail credit grading system in a credit policy statement, and should develop procedures for the determination and regular review of the credit risk grades;(d) Banks should establish formal forums in the form of committees to review the compliance with the credit policy parameters and the concentration of exposure attributable to various economic and industrial sectors in accordance with the credit policy;(e) Particular attention should be given to those facilities which involve a higher normal risk, or which are impaired;(f) It is imperative that the policies relating to the provisioning for Islamic banks should be clearly laid down, fully identifying provisions relating to assets financed by own funds and those by the investment account holders; and(g) Facilities should, at minimum, include four categories along the following lines:(i) "Standard credits" are those, which are performing, as the contract requires. There is no reason to suspect that the creditor's financial condition or collateral adequacy has depreciated in any way. The bank is very likely to extend additional funds to this borrower if requested (subject to internal or legal credit restrictions);(ii) "Substandard credits" are inadequately protected by the paying capacity of the obligor or by the collateral pledged. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard assets does not have to exist in individual assets classified Substandard;(iii) "Doubtful credits" have all the weaknesses inherent in a credit classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of Loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its rating as an estimated Loss is deferred until its more exact status may be determined;(iv) "Loss credits" are considered uncollectible and of such little value that their continuance as assets is not warranted. The rating does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.CM-3.3 CM-3.3 Impairment of assets and provisioning
Impairment of assets
CM-3.3.1
Banks are required to place on a non-accrual basis any facility where there is reasonable doubt about the collectability of the receivable irrespective of whether the customer concerned is currently in arrears or not. This acknowledges the reality that recognition of impaired assets will have a high degree of subjectivity attached to it.
CM-3.3.2
Impaired assets should be classified into one of the following categories:
(a) Non accrual items;(b) Restructured items; or(c) Other assets acquired through security enforcement, including "other real estate owned".CM-3.3.3
For the purpose of this Module, The following definition of non-accrual items applies:
(a) Financing facilities and investments where there is reasonable doubt about the ultimate collectability of principal within a time frame established by the bank. Non-accruals would include all facilities against which a specific provision has been established, or a write-off taken even if the facility is not in breach of contractual requirements. Refer to AAOIFI's FAS 11 on recognition of provisions and reserves.(b) Financing facilities and investments, not included in (a), where contractual payments of the principal are 90 or more consecutive days in arrears, and where the "fair value" of security is insufficient to cover repayment. In line with the principles outlined above, a facility should be classified as non-accruing earlier than 90 days where it is evident that full, or partial repayment of the amount is unlikely even though the full extent of the loss cannot be clearly determined.Provisioning
CM-3.3.4
Banks must maintain an adequate level of provisioning against the impairment of assets and problem exposures if their earnings and capital adequacy are to be measured correctly.
CM-3.3.5
As a general rule, where there is a doubt about the collectability of a receivable, and security exists, provisions should equal the carrying value of the receivable less the net current market value of security.
CM-3.3.6
Provisions of either type (specific or general) are made in relation to receivables, financing and investment assets in cases where there is doubt regarding collectability or an impairment of value. Refer to AAOIFI's FAS 11: Provisions and Reserves.
CM-3.3.7
Provisioning should be carried in the respective books including bank's own books, unrestricted investment account holders' books and restricted investment account holders' books.
CM-3.3.8
A general provision is an amount set aside to reflect a potential loss that may occur as a result of currently unidentifiable risks in relation to receivables, financing or investment assets. The amount reflects estimated losses affecting these assets attributable to events that have already occurred at the date of the statement of financial position, and not estimated losses attributable to future events.
CM-3.3.9
The policy for provisioning should clearly contain provisions for segregating provisions relating to assets financed by own funds and those financed by investment account holders. In devising the policy, reference should be made to the Mudaraba contract.
CM-3.3.10
A specific provision is an amount set aside to reflect an estimated impairment of value of a specific type of asset. In the cases of investment assets, it is the amount needed to write the assets down to cash equivalent value if this is lower than cost. Refer to AAOIFI's FAS 11: Provisions and Reserves.
CM-3.4 CM-3.4 Provisions against sovereign credit
CM-3.4.1
The Agency has consistently encouraged banks to maintain adequate provisions against credits to borrowers experiencing difficulties and against credits for countries with current or potential credit servicing difficulties.
CM-3.4.2
In all cases the assessment of credits — and decisions regarding adequate provisions — are assisted by the categorization of credits as defined by the Agency in section CM-3.2. In addition, with regard to "sovereign credit" it is particularly important that the size of the provisions made should be based on the identification and objective assessment of the nature and extent of difficulties being experienced by particular countries and reflect as near as possible deterioration in the prospects for recovering credits. With these objectives in mind, the Sovereign Credit Provisioning Matrix (see Appendix CM 1) contains a list of measurements which have been designed to help identify those borrowers and countries with payment difficulties and to decide what would constitute adequate provisions.
CM-3.4.3
It is emphasized that this section and the Sovereign Credit Provisioning Matrix (see Appendix CM 1) are merely a general framework for assessing degrees of provisions. They should not be regarded as an exhaustive or definitive framework. Nevertheless, the Agency does intend to include the results of banks' calculations in its discussions with them, and to establish that adequate provisions are being made.
Implications of International Accounting Standard (IAS) no. 39 on the provisions assessed through Sovereign Credit Provisioning Matrix
CM-3.4.4
The banks should continue to apply the Sovereign Credit Provisioning Matrix (see Appendix CM 1) as a benchmark for estimating future recoverable cash receipts. However, if a lower provisioning amount is determined, i.e. lower than the amount identified through the matrix, and the bank intends to book the lower amount, then a meeting must be arranged with the Agency to discuss the issues before booking such provisions.
CM-3.5 CM-3.5 Collateral
CM-3.5.1
The extension of credit is often supported by
collateral provided by the customer or third parties. When the credit decision is based oncollateral value, independent timely appraisals of thecollateral should be obligatory, including provision for sufficient security margins.CM-3.5.2
In principle,
collateral can improve the credit grading of a customer, but experience suggests that over-reliance oncollateral is unsound because very often when a credit facility goes sour thecollateral turns out to have less value than estimated or is, at worst, illusory.CM-3.5.3
Misjudgements about collectability are frequently the cause;
collateral is often illiquid, difficult to value during periods of financial distress and costly to realise through foreclosure or other legal means. Particular concern may be appropriate in the case ofcollateral in the form of real estate, as it involves additional uncertainties and the costs of maintaining the property.CM-3.5.4
As a matter of principle,
collateral should not replace a careful assessment of the borrower's ability to repay.CM-4 CM-4 The monitoring and control of large exposures of banks licensed by the Agency
CM-4.1 CM-4.1 Overview
CM-4.1.1
The Regulation on large
exposures for banks in Bahrain is issued as part of the Agency's measures to encourage banks to mitigate risk concentrations.CM-4.1.2
The contents of this chapter apply in full to all locally incorporated Islamic banks in the Kingdom of Bahrain.
CM-4.2 CM-4.2 The measure of exposure
CM-4.2.1
The measure of exposure reflects the maximum loss should a counterparty fail, or loss that may be experienced due to non-repayment of facilities granted. Consistent with this, an exposure encompasses the amount at risk arising from a bank's:
(a) Claims on a counterparty including actual claims, and potential claims which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide, and claims which the bank has committed itself to purchase or underwrite;(b) Contingent liabilities arising in the normal course of business, and those contingent liabilities which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide; and(c) Other assets (whether on balance sheet or restricted investment accounts), which constitute a claim for the bank and its customers and which are not included in (a) or (b) above. In particular, exposures where the bank itself is not exposed, but is committing client funds such as restricted investment accounts are included here.CM-4.2.2
As a general rule, exposures should be reported on a gross basis (i.e. no offset). However, debit balances on accounts may be offset against credit balances where they relate to the same customer or to corporate customers in the same business group if:
(a) a legally enforceable right of set off exists in all cases (as confirmed by an independent legal opinion addressed to the bank) in respect of the recognised amounts, and(b) the bank intends either to settle on a net basis, or to realise the debit balances and settle the credit balances simultaneously.For a group facility, a full cross guarantee structure must also exist (i.e. full multilateral guarantees must be in place between all the companies within the group).
CM-4.2.3
Large exposures are calculated using the sum of the nominal amounts before the application of the risk weighting and credit conversion factors for:
(a) on balance sheet claims;(b) guarantees and other contingent claims; and(c) potential claims in the case of undrawn facilities.CM-4.2.4
In case of syndicated facilities, the nominal amount would include only the bank's share of the syndication (financed by unrestricted investment accounts and bank's own funds) and any amounts for which binding commitments from other financial institutions are not available. Where a binding commitment is available, that amount would be excluded in calculation of the large exposures. See section CM-4.5 for exemptions.
CM-4.2.5
For the purpose of large exposures, balance sheet claims involving assets acquired to be leased under Ijarah Muntahia Bittamleek should be reflected as an exposure against the lessee. Further, Murabaha contracts where assets are held for resale, under a binding promise, such exposure should be reflected as an exposure to the counterparty which has signed the binding promise. Potential claims in the case of Istisna'a contracts should include the total amount expected to be paid to al-Sani (the seller) and shown as an exposure to al-Mustasni (ultimate buyer).
CM-4.2.6
A bank's exposure arising from securities' trading operations is calculated as its net long position in a particular security. A bank's "net position" in a security refers to its commitments to buy that security together with its current holding of the same security, less its commitments to sell such a security.
CM-4.3 CM-4.3 Identity of counterparty
CM-4.3.1
For the purposes of measuring
exposures , the counterparty will generally be the customer receiving the funds, the person guaranteed, and the issuer of a security in the case of a security held.CM-4.3.2
Where a third party has provided an explicit unconditional irrevocable guarantee, and subject to the guaranteed bank's policy statement not stating otherwise, the guaranteed bank may be permitted to report the exposure as being to the guarantor, rather than the person guaranteed.
CM-4.4 CM-4.4 Limits for large exposures
Aggregate limit on large exposures
CM-4.4.1
A "large
exposure " is any exposure whether direct, indirect or funded by restricted investment accounts to a counterparty or a group of closely related counterparties which is greater than, or equal to, 10% of the reporting bank's (consolidated) capital base.CM-4.4.2
"Capital base" is the adjusted capital base for the purpose of the risk asset ratio calculated in accordance with the PIRI return (see Module BR) (or owner's equity) using the most recent annual consolidated balance sheet, subject to any specific requirements by the Agency.
CM-4.4.3
The aggregate of large exposures (from both on balance sheet and restricted investment accounts) may not exceed 1200% of the bank's (consolidated) capital base whether funded or not funded, i.e. contingent commitments.
CM-4.4.4
However, the aggregate of large exposures from on balance sheet exposures should not exceed 800% of the bank's (consolidated) capital base whether funded or not funded.
Single exposure limit
CM-4.4.5
The following single exposure limits apply:
(a) Direct exposures (i.e. funded by a bank's own funds or unrestricted investment accounts): A bank may not incur an exposure to an individual counterparty or group of closely related counterparties which exceeds 15% of the reporting bank's (consolidated) capital base without the prior written approval of the Agency. For this purpose, companies/banks with variable capital should not include participation shares in calculating their capital base, since these are governed by Mudaraba contract (profit sharing).(b) Restricted investment accounts: A bank may not incur an exposure to an individual counterparty or group of closely related counterparties where the exposure is funded by restricted investment accounts, which exceeds 30% of the reporting bank's (consolidated) capital base.(c) The combined exposures: A combined exposure of (a) & (b) above (funded by unrestricted investment accounts, or a bank's own funds or restricted investment accounts) to an individual counterparty or group of closely related parties may not exceed 35% of the reporting bank's (consolidated) capital base.Closely related counterparties
CM-4.4.6
Closely related counterparties are two or more counterparties who constitute a single risk because one of them has, direct or indirect, "control" over the other(s) (see below) or counterparties connected in such a way that the financial soundness of any one of them may affect the financial soundness of the other(s), or the same factors may affect the financial soundness of both or all of them.
CM-4.4.7
"Control" means either significant ownership (i.e. ownership of 20% or more of voting equity) or any other interests (including, but not limited to, the ability to exercise or control the exercising of voting power of issued share capital in the licensee) which enable the holder, or which would enable a proposed transferee, thereof to exercise significant influence over the management and business of the licensee.
Limit on exposures to connected counterparties
CM-4.4.8
Exposures to connected counterparties may be justified only when undertaken for the clear commercial advantage of the bank, when negotiated and agreed on an arm's length basis, and when included in the policy statement agreed with the Agency.
CM-4.4.9
No Islamic facilities provided by a bank to its own external auditors shall be permitted. In addition, unless provided for in the contract, off balance sheet restricted investment accounts will not be permitted to participate in on balance sheet corporate funding and vice versa and movement within restricted investment accounts is not permitted without the Agency's prior written approval.
CM-4.4.10
For the purpose of this module, "Connected counterparties" includes companies or persons connected with the bank, including, in particular, subsidiaries and associated companies (whether such association is due to
control or shareholding or otherwise), Directors and their associates (whether such association is due tocontrol orfamily links or otherwise), members of the Shari'a Supervisory Board, management and other staff, andshareholders holding 10% or more of the voting power of the bank. In this context,family links means spouse, father, mother, sons, daughters, sisters and brothers.CM-4.4.11
The Agency will closely examine all exposures to companies or persons connected to a bank and will deduct them from the bank's (consolidated) capital base if they are, in the Agency's opinion, of the nature of a capital investment, or provision of long-term working capital, or are made on particularly concessionary terms.
CM-4.4.12
The limits for exposure to connected counterparties have been set as follows:
(a) Direct exposures: A bank may not incur an exposure (whether funded or not funded) to an individual connected counterparty (as defined above) which exceeds 15% of the reporting bank's (consolidated) capital base. The aggregate exposures to all counterparties within this category should not exceed 25% of the bank's consolidated capital base.(b) Restricted investment accounts: A bank may not incur an exposure (whether funded or not funded) to an individual connected counterparty where the exposure is funded by restricted investment accounts which exceeds 25% of the reporting bank's (consolidated) capital base. The aggregate exposures to all counterparties within this category should not exceed 35% of the bank's consolidated capital base.(c) The combined exposures: A combined exposure of (a) & (b) above (funded by unrestricted investment accounts and bank's own funds, and restricted investment accounts) whether funded or not funded, to an individual connected counterparty may not exceed 25% of the reporting bank's (consolidated) capital base.(d) The aggregate exposures to connected counterparties: (whether funded from on balance sheet or restricted investment accounts) may not exceed 60% of the bank's (consolidated) capital base, whether funded or not funded.CM-4.5 CM-4.5 Exempt exposures
CM-4.5.1
Certain types of exposure are exempt from the limits set out above, but notification of such exposures should be made to the Agency.
CM-4.5.2
These exemptions fall into the following categories and are subject, in each case, to the policy statement as agreed with the Agency:
(a) Islamic bonds/ Sukook issued or guaranteed by the Government of Bahrain or its Agencies;(b) Islamic bonds/ Sukook issued or guaranteed by the IDB;(c) Short term (one year or less) interbank exposures;(d) Exposures to GCC governments, their semi-government institutions and agencies that do not operate on commercial basis;(e) Exposures to OECD central governments;(f) Exposures secured on cash or GCC government securities/guarantees;(g) Exposures secured on OECD central government securities/guarantees;(h) Certain connected exposures, in particular those arising from a group treasury function;(i) Exposures which are covered by a guarantee from the bank's parent (see paragraph CM-4.5.8);(j) Exposures arising from underwriting activities, such exposures continuing for no more than 90 calendar days. Any residual holdings of securities for more than 90 days from the commitment date of underwriting would be subject to normal large exposure limits;(k) Exposures where the bank is acting as agent for an investor in a single purpose, non-discretionary capacity, and the bank has the full right to set-off losses and costs against any funds provided by the investor (examples might include real estate investments); and(l) Syndicated facilities being financed by restricted investment accounts where the investor is fully aware of the type of investment and the associated risks.Exempt exposures to connected counterparties
CM-4.5.3
In respect of exposures to other group companies, the Agency's policy allows a bank to take on a treasury role on behalf of the group as a whole (provided that the group is subject to consolidated supervision by its home supervisor). The Agency's policy regarding the taking on of a treasury role includes exposures arising from a central risk management function.
CM-4.5.4
In certain exceptional cases, exposures of more than 15% of (consolidated) capital base to a bank which controls the financing bank may be permitted for utilisation of surplus liquid funds for a short period not exceeding 90 days even where the financing bank does not perform a treasury role. Any other form of connected financing outside the scope of the above will be dealt with by the Agency on a case-by-case basis.
Exposures undertaken by a subsidiary bank or by a branch outside Bahrain
CM-4.5.5
In the case of banks, which are the Bahrain subsidiaries of overseas banks, the Agency will agree in writing with the supervisory authority of the parent bank, the size of exposures that can be undertaken by the subsidiary.
CM-4.5.6
Exposures undertaken by a branch of a foreign bank on the books in Bahrain should be within the policy statement of the parent bank (company) as agreed by the parent's regulatory authority.
CM-4.5.7
Overseas subsidiaries of Bahrain banks will be expected to comply with the regulatory requirements of the country in which they are located.
CM-4.5.8
Where exposures undertaken by a subsidiary bank are guaranteed by its parent, the subsidiary bank may be deemed to have an exposure to the parent.
CM-4.5.9
Under the terms of this Module, such indirect exposures to a parent bank may be exempt from the limits on large exposures if the Agency is satisfied that:
(a) such exposures are entered into within the terms of a policy agreed by the parent bank, and(b) there are guarantees in place from the parent bank to protect the subsidiary should the exposure become non-performing or require to be written off.CM-4.5.10
In the case of a Bahrain incorporated bank's subsidiary inside Bahrain, in order for an exposure exceeding 15% of capital base to be acceptable for the subsidiary, the Bahrain parent must at all times have room to take over the exposure, without itself exceeding the limit of 15% of capital base. Also, the combined (on and off balance sheet) exposure of the banking group to the customer must be within 35% of the parent bank's consolidated capital base.
CM-4.5.11
The Agency will need to be satisfied that adequate control systems are in place to ensure that credit risk taken in the group as a whole is properly monitored and controlled.
CM-4.6 CM-4.6 Reporting of exposures
CM-4.6.1
Bahrain incorporated banks are required to report all large
exposures on a quarterly basis using the PIRI return provided in Appendix BR 4.CM-4.6.2
Banks are required to adopt policies and set internal limits, which will not lead to the
exposure limit(s) referred to above being exceeded as a matter of course.CM-4.6.3
For some banks, the Agency may determine it prudent to set a lower percentage(s) than the ones given herein.
CM-4.6.4
Should any bank find that, for reasons outside its control or otherwise, it has an
exposure to an individualcounterparty (other than an exemptexposure ) which results in it exceeding any of the limits set out above, this should be reported immediately to the Agency for its consideration, and action should be taken to immediately bring theexposure back within applicable limits as soon as possible.CM-4.7 CM-4.7 Policy statements
CM-4.7.1
The Agency requires each bank incorporated in Bahrain to set out its policy and internal limits on large exposures, including exposures to individual customers, banks, institutions, countries and economic sectors, in a policy statement which should be formally adopted by the Board of Directors. The policy statement should be part of the risk management policy of the bank. The Agency expects banks not to implement significant changes in these policies without prior discussion with the Agency.
CM-4.7.2
Each bank should discuss their policy statement with the Agency. Each bank will be expected to justify to the Agency its policy on exposures to individual counterparties, including the maximum size of an exposure contemplated.
CM-4.7.3
Exposures to counterparties connected with the bank will continue to be particularly closely examined.
CM-4.7.4
The necessary control systems to give effect to a bank's policy on large exposures should be clearly specified and monitored by its Board.
CM-4.8 CM-4.8 Concentrations in economic and market sectors
CM-4.8.1
The extent to which a bank may be prudently exposed to a particular economic sector will vary considerably depending upon the characteristics and strategy of the bank, and the sector concerned.
CM-4.8.2
Concentrations should also be recognized in not just economic sectors, but also in markets (e.g. individual stock exchanges). The Agency will not apply common maximum percentages to banks' sectoral or market exposures but, instead, will continue to monitor such exposures on an individual and general basis.
CM-4.8.3
Banks must specify in their policy statements how they define economic and market sectors, and what limits apply to differing sectors.
CM-4.8.4
Exposures and limits for sectors should be reviewed at least quarterly by the Board of Directors.
CM-4.8.5
Banks which have over 10% of their risk adjusted assets in market risk (i.e. the trading book) must also set market risk concentration limits.
CM-5 CM-5 Staff credit facilities
CM-5.1 CM-5.1 Reporting and compliance
CM-5.1.1
The Agency's prior written consent should be obtained for any credit facilities provided to an employee where the amount of such facility, either singly or when added to an existing facility/existing facilities outstanding to that employee at that date, would be equal to or in excess of BD 100,000 (Bahraini Dinars One Hundred Thousand), or its equivalent in foreign currency. Banks must notify the Agency in writing of any senior employee who fails to discharge his repayment obligations.
CM-5.1.2
Banks must ensure that the provisions of relevant laws (including, specifically, the Bahrain Labour Law) are observed at all times in this area.
CM-6 CM-6 Write-off — Credit facility
CM-6.1 CM-6.1 Write-offs
CM-6.1.1
All locally incorporated banks, should notify the Agency of any write-off of a credit facility, (i.e., Murabaha or any other credit facility) of an amount in excess of BD 100,000 (Bahraini Dinars One Hundred Thousand), or its equivalent in foreign currency.
CM-6.1.2
Such notification should be accompanied with documentary evidence showing, beyond reasonable doubt, that the customer does not possess the resources to fulfil the outstanding obligation.
CM-6.1.3
Banks should also obtain the BMA's prior written approval before writing off any of their following claims:
(a) claims on present or former Directors of the bank;(b) claims which are guaranteed by a Director of the bank;(c) claims on any business entity for which the bank or any of its Directors is an agent;(d) claims on any officer or employee of the bank, or any other person who receives remuneration from the bank;(e) claims on any business entity in which the bank (or any of its Directors, officers or other persons receiving remuneration from the bank) has an interest as a shareholder, Director, manager, agent or guarantor; and(f) claims on any person who is a Director, manager or officer of another bank licensed by the Agency.CM-7 CM-7 Consumer finance
CM-7.1 CM-7.1 Overview
CM-7.1.1
This chapter sets out various requirements regarding the provision of consumer finance within the Kingdom of Bahrain by BMA licensees. The aim of these requirements is to encourage:
(a) prudent provision of credit facilities by licensees providing consumer finance; and(b) the transparent disclosure of the full costs and terms on which licensees offer consumer finance.Application date
CM-7.1.2
The contents of this chapter apply to all consumer finance facilities entered into or renewed after 1 January 2005.
CM-7.2 CM-7.2 The Agency's approach to consumer finance
CM-7.2.1
The Agency favours an open, market-based approach to the operations of licensees, to the extent consistent with its regulatory objectives of ensuring a stable financial system and the fair treatment of licensees' customers.
CM-7.2.2
Bank licensees are reminded of their obligation to implement a sound internal controls framework, including an effective credit culture (see, for instance, section CM-2.3). Bank licensees are also reminded of their obligations clearly to display and communicate charges and profit rates (see, for instance, section BC-4.3).
CM-7.2.3
The Agency has noted the growth in consumer finance as a proportion of outstanding credit facilities over the past few years. The Agency is concerned that this growth should not be at the cost of declining credit quality. Furthermore, the Agency wishes to see further improvements in licensees' transparency in their dealings with their customers, as regards the costs and terms of their lending. Strong competition in this segment of the market increases the need for licensees to be vigilant and to resist pressures to relax standards.
CM-7.2.4
The measures presented in this chapter should be viewed as minimum standards, rather than best practice. They are aimed to encouraging prudent extension of credit facilities and full, frank and fair disclosures, rather than dictate comprehensively how licensees should engage in consumer finance.
CM-7.2.5
These measures will be kept under review in the light of market developments and adjusted accordingly. If the Agency assesses that credit quality and effective transparency are being significantly undermined, then additional prescriptive measures will be considered.
On-going effort by the Agency
CM-7.2.6
These measures form part of a wider response by the Agency. The Agency recognizes that a key contributor to ensuring a sounder credit environment is the credit reference bureau.
CM-7.2.7
The Agency supervisors and examiners will also focus more on consumer finance, in their on-going supervision of licensees, to monitor and encourage sound financing practices.
CM-7.3 CM-7.3 Definition of Consumer Finance
CM-7.3.1
Consumer finance is the provision of any form of credit facility to an individual excluding:
(a) any credit facility secured by a first charge on residential property to an individual, where the counterparty lives in, or intends to live in the property;(b) any credit facility secured by cash or investments, where the security provided more than covers the principal of the credit facility; and(c) the provision of any form of credit to an individual for business purposes where the facility is to be repaid from the business activities of the counterparty.CM-7.3.2
For the purposes of the Rulebook, "credit facility" includes personal overdraft facilities, credit cards, ijara or other financing facility.
CM-7.4 CM-7.4 Maximum limits
Total repayments ratio
CM-7.4.1
Licensees may only provide a new consumer facility (or renew, extend or otherwise modify an existing consumer facility) for an amount such that the counterparty's total monthly repayments on all his consumer finance commitments do not exceed 50% of his monthly gross income. This limit may only be exceeded in the circumstances described in paragraph CM-7.4.6 and CM-7.4.10.
CM-7.4.2
When reviewing an applicant for a consumer facility, licensees may only take into consideration regular income. A spouse's income may only be taken into consideration when the credit facility would be in joint names, such that the spouse would also be legally liable for the obligation incurred.
CM-7.4.3
Notwithstanding the above limit, licensees must review in detail an applicant's personal financial standing and ability to service their obligations. Where a spouse's income is being taken into consideration, then their individual circumstances must also be similarly assessed. In many cases, these reviews may require consumer finance repayments to be kept significantly below 50% of monthly gross income.
CM-7.4.4
Licensees must enquire as to applicants' sources of income, their past credit history, their regular outgoings and other financial commitments, including potential liabilities such as guarantees. Particular attention should be paid to housing costs (such as payments to the Housing Bank). A person's regular income, net of consumer finance repayments and other financial obligations, must remain sufficient for that person to support himself and any dependents. Licensees should also take into account likely future trends in income and outgoings, and the impact this may have on the 50% ratio.
CM-7.4.5
When factoring in credit cards into the repayment limit in paragraph CM-7.4.1 above, licensees should include 5% of the total of credit limits available on these facilities. If the amounts outstanding (including profit) under such facilities exceed their limit, then this higher amount should be included in full in the repayments ratio calculation. Charge cards are not included under this definition.
CM-7.4.6
In the case of high earners — defined for these purposes as persons earning more than BD 3,000 / month — the 50% limit may be relaxed, providing that the licensee has undertaken the review required in paragraph CM-7.4.4 above and is satisfied that the counterparty can comfortably support a higher facility service ratio.
CM-7.4.7
The review undertaken to satisfy requirements in paragraph CM-7.4.4 above must be documented and made available to the Agency's examiners on request. The documentation must include all relevant information used to support the decision to extend credit facilities. In the case of high earners granted a facility in excess of the 50% limit, the documentation must also include a written statement, signed by an appropriate member of management, explaining the justification for relaxing the limit.
Maximum tenor limit
CM-7.4.8
The maximum tenor for instalment consumer finance facilities is seven years. The tenor may not be extended more than twice during the period of the agreement.
CM-7.4.9
The Agency does not believe it prudent for licensees to encourage the provision of credit facilities by offering long-term borrowing to fund short-term consumption. The Agency will review the development of market practices in this respect and will consider further measures if required.
Non-compliant facilities
CM-7.4.10
Where a customer's monthly gross income falls (e.g. due to redundancy or disability or a similar event outside the control of the customer), the bank must identify such accounts as "technically non compliant". If a customer requests an extension to the tenor of the facility due to reduced income, then the bank may increase the term to assist the customer. The bank must take account of the 50% limit outlined in paragraph CM-7.4.1. Such facilities must also be identified as "technically non compliant". Banks must report all "technically non-compliant facilities" to the Director of Islamic Financial Institutions Supervision Directorate on a quarterly basis.
CM-7.5 CM-7.5 Disclosure requirements
Disclosure of key terms
CM-7.5.1
Licensees must make clear to potential counterparties, prior to entering into a consumer finance agreement, all relevant key terms of the agreement.
CM-7.5.2
These terms should be summarised in plain English and Arabic in a short "key terms disclosure" document; this document must be signed and dated by counterparties (in duplicate) as having been read and understood, prior to signing a consumer finance agreement. One copy should be retained by the counterparty and the other must be retained by the licensee in their customer file.
CM-7.5.3
The "key terms disclosure" document must, amongst other things, make clear:
(a) the amount being received or the credit limit being offered, its maturity and repayment schedules;(b) the nominal amount of the cost of credit to be provided to the customer;(c) whether this cost of credit is fixed or can go up and / or down, and under what circumstances;(d) the basis on which the cost of credit is calculated and when capital repayments are taken into account in the calculation, together with an illustration of the calculation method;(e) a breakdown of all other costs not included in (b), (c) and (d) above and associated with the credit, such as arrangement fees, documentation fees, late payment fees (if permitted by the Shari'a Board), and obligatory payment protection insurance costs;(f) the full costs associated with top-ups of installment facilities or early repayments of amounts due (in full or in part if permitted by the Shari'a Board), including the treatment of remaining profit and the payment of premium for insurance; and(g) the Profit Rate, as defined in paragraph CM-7.5.5 below.CM-7.5.4
Licensees are free to design the layout and wording to be used in their "key terms disclosure" document, as they see fit, providing they contain the information specified in paragraph CM-7.5.3 above. BMA will monitor compliance with the spirit as well as the letter of the requirements in this chapter. If necessary, BMA will consider prescribing a standard template to be used by all licensees engaged in consumer finance.
Annual Profit Rate "APR"
CM-7.5.5
The APR is a standard measure that allows consumers to compare total charges for credit facilities to be compared on a like-for-like basis. The APR allows the consumer to compare the total charge for credit over differing periods (e.g. — two versus three years) with differing payment profiles and taking into account the payment of any other fees payable as a condition of the contract, such as documentation fees or insurance premium.
CM-7.5.6
The APR should be shown clearly on the facility document and "key terms disclosure" document (as set out in paragraphs CM-7.5.1 to CM-7.5.4 above).
CM-7.5.7
The APR methodology should also be utilised in advertisements for credit. Any deferral of profit or principal announced by the bank should also take account of the APR methodology, and the new APR should be given to the client or made public in advertisements.
CM-7.5.8
The total charge for credit payable by a consumer includes the following items:
(a) Effective rate of profit on the credit;(b) Documentation or administration fees;(c) In the case of ijara or deferred purchase contracts, any fees for purchasing the asset (e.g. an option to purchase fee payable at the end of the contract); and(d) Any fees or charges payable under any linked or mandatory contract entered into as a condition for the granting of the credit facility, such as payment protection insurance.CM-7.5.9
The APR must be calculated using the following methodology:
K=m
∑
K=1Ak
(1 + i) tk= K'=m'
∑
K'=1A'k'
(1 + i) tk'CM-7.5.10
The meaning of letters and symbols used in the above formula are:
K is the number identifying a particular advance of credit; K' is the number identifying a particular instalment; Ak is the amount of advance K; A'k' is the amount of instalment K; ∑ represents the sum of all the terms indicated; M is the number of advances of credit; M' is the total number of instalments; tk is the interval, expressed in years between the relevant date and the date of advance K; tk' is the interval expressed in years between the relevant date and the date of instalment K'; I is the APR, expressed as a decimal. CM-7.5.11
For the purpose of this chapter, the "relevant date" is the earliest identifiable date on which the customer is able to acquire anything which is the subject of the agreement (e.g. delivery of goods), or otherwise the "relevant date" is the date on which the credit agreement is made.
CM-7.5.12
In the case of instalment finance such as a credit facility, where there is no reimbursement of cost of credit in the event of early repayment, then the residual cost of credit in the old facility must be added to the cost of credit for the new facility, and the APR amended accordingly.
CM-8 CM-8 Islamic contracts
CM-8.1 CM-8.1 Overview
CM-8.1.1
The Agency recognises the unique risk characteristics of Islamic contracts, which may have implication on the asset quality of a bank.
CM-8.1.2
In order to monitor and identify any asset deterioration due to the Islamic contracts, the Agency requires additional disclosures (see Module BR) on the Islamic contracts undertaken by the bank during the period.
CM-8.1.3
Definitions, disclosure requirements and method(s) of accounting treatments for some of the Islamic contracts are outlined in the following sections of this chapter.
CM-8.2 CM-8.2 Murabaha
CM-8.2.1
Revenue for the purpose of Murabaha contracts must be recognised on an accrual basis.
CM-8.2.2
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 2: Murabaha and Murabaha to the Purchase Orderer.
CM-8.3 CM-8.3 Mudaraba
CM-8.3.1
Revenue on Mudaraba contracts may only be recognised to the extent it is being distributed.
CM-8.3.2
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 3: Mudaraba Financing.
CM-8.3.3
As part of its ongoing supervision of Islamic banks, the Agency has set out the type of terms and conditions (see Appendix BC 7) which it believes Islamic banks should include, as a minimum, in such contracts.
CM-8.4 CM-8.4 Musharaka
CM-8.4.1
Under a Musharaka contract, losses are shared in proportion to the contributed capital. It is not permissible to stipulate otherwise.
CM-8.4.2
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 4: Musharaka Financing.
CM-8.5 CM-8.5 Salam
CM-8.5.1
As a policy no Salam contracts should be entered into without covering the position through a Parallel Salam contract.
CM-8.5.2
Where the bank is not able to enter into a Parallel Salam contract it must agree a statement policy with the Agency.
CM-8.5.3
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 7: Salam and Parallel Salam.
CM-8.6 CM-8.6 Istisna'a
CM-8.6.1
As a policy no Istisna'a contracts should be entered without covering the position through a Parallel Istisna'a contract.
CM-8.6.2
In accordance with provisions contained in FAS 10: Istisna'a and Parallel Istisna'a, revenue and profit on such contracts should be recognised on a percentage of completion method.
CM-8.6.3
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 10: Istisna'a and Parallel Istisna'a.
CM-8.7 CM-8.7 Ijarah and Ijarah Muntahia Bittamleek
CM-8.7.1
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 8: Ijarah and Ijarah Muntahia Bittamleek.
CM-9 CM-9 Qard Hassan
CM-9.1 CM-9.1 Facilities transferred to Qard Hassan
CM-9.1.1
The Agency's approval should be obtained before any transfer of any exposures to Qard Hassan if the amount is more than BD 100,000 or its equivalent in foreign currency.
CM-9.1.2
The requirement stated in paragraph CM-9.1.1 above applies to both on balance sheet and restricted investment account related exposures.
CM CM Credit Risk Management (June 2022)
CM-A CM-A Introduction
CM-A.1 CM-A.1 Purpose
CM-A.1.1
The purpose of this Module is to provide a checklist of the key elements of a sound credit risk management system which supervisors can expect their banks to observe. This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).
October 07CM-A.1.2
This Module provides support for certain other parts of the Rulebook, mainly:
(a) Principles of Business;(b) CBB Reporting Requirements;(c) Audit Firms;(d) Public Disclosure;(e) High-level Controls; and(f)Capital Adequacy .October 07Legal Basis
CM-A.1.3
This Module contains the Central Bank of Bahrain's (CBB's) Directive (as amended from time to time) relating to the credit risk management of
Islamic bank licensees , and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to allIslamic bank licensees .Amended: January 2011
October 2007CM-A.1.4
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
October 07CM-A.2 CM-A.2 Key Requirements
CM-A.2.1
Overseas Islamic bank licensees are expected to maintain provisions against potential credit losses on their books in Bahrain. Head offices of banks that do not wish to maintain provisions on books of theirbranch (es) in Bahrain must advise the CBB, on an annual basis and in writing, of the amount of provisions set aside for the bad debts of Bahrainbranch (es).Amended: April 2014
Amended: July 2011
Amended: January 2011
October 2007CM-A.2.2
The CBB requires all
Bahraini Islamic bank licensees to set out their policy on largeexposures , including limits for differing types ofexposures to individual customers, banks, corporates, countries and economic and market sectors, in a policy statement which must be formally approved by the Board of Directors (see Section CM-4.7).Amended: April 2014
Amended: July 2011
Amended: January 2011
October 2007CM-A.2.2A
The CBB requires that any large
exposure , as defined in Paragraph CM-4.4.1, must be priorly approved by the bank's Board of Directors (see Paragraph CM-4.4.3A).Added: January 2017CM-A.2.3
The aggregate of large
exposures may not exceed 800% of the bank's consolidated Total Capital (see Paragraph CM-4.4.4). A bank may not incur a combinedexposure (funded by unrestricted investment accounts and the bank's own funds) to an individualcounterparty or group of closely relatedcounterparties which exceeds 15% of the reporting bank's consolidated Total Capital (see Paragraph CM-4.4.5).Amended: January 2015
Amended: April 2014
October 07CM-A.2.4
The aggregate
exposures to all connectedcounterparties when taken together, may not exceed the limit as stated in Paragraph CM-4.4.13 of consolidated Total Capital.Amended: January 2015
Amended: April 2011
October 2007CM-A.2.5
No Islamic financing provided by a bank to its own external auditors shall be permitted.
October 07CM-A.2.6
All
Bahraini Islamic bank licensees are required to report (for the attention of the Director of Islamic Financial Institutions Supervision Directorate) all largeexposures , (whether exempt or not) on a quarterly basis using the Form PIR provided in Appendix BR-5 (see Section CM-4.6).Amended: April 2014
Amended: October 2009
October 2007CM-A.2.7
The CBB's prior written consent must be obtained for any credit facility to an employee where the amount of such facility, either singly or when added to an existing facility/existing facilities outstanding to that employee at that date, would be equal to or in excess of BD 100,000 (or its equivalent) (see Section CM-5.1).
Amended: April 2014
Amended: July 2011
Amended: January 2011
October 2007CM-A.2.8
The CBB requires that banks only provide a new consumer facility (or renew, extend or otherwise modify an existing consumer facility) for an amount such that the counterparty's total monthly repayments on all his consumer finance commitments do not exceed 50% of his monthly gross income (see Section CM-7.4).
Amended: April 2014
Amended: July 2011
October 2007CM-A.2.9
[This Paragraph was deleted in April 2014 as this requirement has been moved to Module BC.]
Deleted: April 2014
CM-A.2.10
The CBB's prior written consent must be obtained before writing off any credit facility provided to senior employee/officer/Director of the reporting bank or other bank(s) who fails to discharge his/her repayment obligations to the reporting bank (See Section CM-7.1 for details).
Amended: July 2011
Amended: January 2011
October 2007CM-A.2.11
All
Bahraini Islamic bank licensees must notify the CBB of any write-off of a credit facility, (i.e. Murabaha or any other credit facility) of an amount in excess of BD 100,000 (or its equivalent). Chapter CM-6 contains Rules relating to the write-off of credit facilities.Amended: April 2014
Amended: January 2013
Amended: July 2011
Amended: January 2011
October 2007CM-A.2.12
All banks which provide credit to residents of Bahrain must become members of the Credit Reference bureau and follow the CRB Code of Practice (see Paragraph CM-1.2.4).
Amended: April 2014
October 07CM-A.2.13
All banks are required to follow the CBB’s requirements concerning refund of insurance on financing prepayments and top-ups and early repayment fees/charges as outlined in Section CM-7.6.
Added: April 2008CM-A.3 CM-A.3 Module History
CM-A.3.1
This Module was first issued on 1st January 2005 as part of the Islamic principles volume. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG 3 provides further details on Rulebook maintenance and version control.
October 07CM-A.3.2
A list of most recent changes made to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes CM-2.2 1/10/05 Role of Internal audit becomes a rule CM-7.4 1/10/05 Clarification re non-compliant facilities CM-A.1 10/2007 New Rule CA-A.1.4 introduced, categorising this Module as a Directive. CM-7 10/2007 New Requirement to follow the "Code of best Practice on Consumer Credit and Charging CM-1.2 10/2007 Membership of CRB CM-4.2 10/2007 Clarification of definition of exposure CM-8 10/2007 Re-organised the Chapter. CM-4.4 & 6.1 04/2008 New Limits for significant shareholders and guidance on write-offs CM-7.6 04/2008 New Insurance Refund and prepayment requirements CM-4.6 10/2009 New reporting arrangements for exposures of connected counterparties. CM-A.1.3 01/2011 Clarified legal basis. CM-4 01/2011 Changes made to incorporate CP-5 and large exposures requirements.CM-A.2.4 04/2011 Corrected cross reference in line with new limits introduced in January 2011. CM-4.2.1(c), CM-4.5.1 04/2011 Corrected cross reference. CM 07/2011 Various minor amendments to clarify Rules and have consistent language. CM-4.4.10 07/2011 Amended the definition of connected counterparties. CM-7.5.3 10/2011 Clarified reference to APR. CM-7.5.9 and CM-7.5.10 10/2011 Corrected elements of APR formula. CM-7.5.12 10/2011 Deleted Paragraph as it does not reflect current practice on residual interest. CM-4.4.1E 01/2012 Amended definition of qualifying holdings CM-4.5 01/2012 Clarified and amended the Rules on temporary exposures. CM-4.9.3 01/2012 Clarified the Rule on future increases in qualifying holdings. CM-7.4.9 01/2012 Changed Rule to Guidance. CM-4.5.2E and CM-4.5.2F 04/2012 Clarified Rule on temporary exposures. CM-A.2.9 07/2012 Updated reference to Bahrain Association of Banks. CM-4.4.7 07/2012 Clarified the definition of 'controlling interest'. CM-4.4.8A 07/2012 CBB prior approval required for excess over limits to connected counterparties. CM-4.4.10 07/2012 Minor corrections. CM-4.9.3 07/2012 Amendment made to be in line with updated definition of qualifying holdings. CM-7.5.4 07/2012 Minor typo corrected. CM-7.5 10/2012 This Section was deleted and requirements are now included in Section BC-4.2. CM-A.2.11 01/2013 Clarified Rule related to the write-off of a credit facility. CM-4.4.13A 07/2013 Clarified Rule on the amount that must be deducted from the capital base where exposure exceeds the limit stipulated. CM-7.6.2 07/2013 Clarified the type of mortgages on which the CBB imposes a ceiling on early repayment fees and/or charges. CM-1.2.4 10/2013 Amended to reflect the expanded scope of activities of the Credit Reference Bureau and the membership requirements. CM-7.4.4 10/2013 Updated reference to Eskan Bank to reflect new name. CM-1.2.4 01/2014 Clarified Rule to apply to credit facilities to residents in Bahrain. CM-A.2, CM-4 and CM-8.1.19 04/2014 Added cross references and corrected terminology to link to Glossary items. CM-5.1.1A 04/2014 Clarified Rules on staff loans. CM-7.2.4 04/2014 Reference updated for the code of best practice on consumer credit and charging. CM-4.9.2A 07/2014 Added a guidance Paragraph to clarify the treatment of investments in commercial entities which are otherwise not connected to the bank. CM-A.2 and CM-4 01/2015 Corrected to be aligned with updated requirements under module CA. CM-4.4.2 01/2015 Added reference to transactions subject to the regulation on close-out netting under a market contract. CM-4.4.1B 01/2015 Corrected cross reference. CM-4.4.1E 04/2015 Deleted cross reference as not applicable. CM-4.4.13 04/2015 Clarified that RIAs are excluded. CM-4.4.5, CM-4.5.2B, CM-4.5.9 and CM-4.9.10 04/2015 Corrected reference to consolidated Total Capital to be in line with Module CA. CM-4.6.1 04/2015 Added reference to Appendix BR-19 for reporting the financial details of each large exposure. CM-4.9.3 04/2015 Clarified language on the treatment of significant investments over the thresholds outlined in Paragraph CA-2.4.25. CM-4.6.1, CM-4.6.1A and CM-4.6.1B 07/2015 Clarified the reporting requirements of exposures. CM-6.1 10/2015 Amended Rules on write-offs. CM-4.4.1E 10/2016 Amended definition of 'Major investments'. CM-4.9 10/2016 Amended 'Acquisitions' to be 'Investments' CM-4.9.3 10/2016 Amended Major Investments approval CM-4.9.4 10/2016 Changed 'major acquisition' to 'major investment'. CM-4.9.5 10/2016 Changed 'significant investment' to 'major investment' CM-4.9.6 10/2016 Moved to new section CM-4.10 CM-4.9.7 10/2016 Moved to new section CM-4.10 CM-4.9.8 10/2016 Moved to new section CM-4.10 CM-4.9.10 10/2016 Changed 'acquisitions' to 'major investments'. CM-4.10 10/2016 New Section — 'Limits on Significant Investments' CM-6.1 10/2016 Amended the 'Write-offs' Section CM-7.4.5 10/2016 Amendments to clarify the Rule CM-A.2.2A
CM-4.4.3A01/2017 Added a new requirement on Large Exposures. CM-4.4.6A
CM-4.4.10B01/2017 Added Paragraphs on closely related counterparties and connected counterparties. CM-3.6 07/2017 Added new Section on 'Country and Transfer Risks'. CM-7.6.2 04/2018 Deleted Paragraph on "Early Repayment Fees/Charges". CM-7.4.10 10/2019 Amended Paragraph on non-compliant facilities. CM-4.5.2D 01/2020 Amended Paragraph on approval of the banks policies and procedures. CM-1.2.6 07/2020 Added a new Paragraph on CRB members requirements. CM-1.2.7 07/2020 Added a new Paragraph on compliance with CBB Law. CM-7.4.10 07/2021 Amended submission of technically non-compliant facilities report. CM-7.4.10 01/2022 Amended Paragraph on submission of technically non-compliant facilities report. Evolution of the Module
CM-A.3.3
Prior to the development of this Rulebook, the CBB had issued various circulars representing regulations covering different aspects of credit risk management. These circulars and their evolution into this Module are listed below:
Circular Ref. Date of Issue Module Ref. Circular Subject BC/3/98 21 Feb 1998 CM-B.2 Basel Committee on Banking Supervision Framework for the Evaluation of Internal Controls Systems BC/117/95 (partial) 1 Feb 1995 CM-1 - CM-3 Risk Management OG/127/01 18 Mar 2001 CM-2 Developing a Sound Credit Culture OGD/27/88 9 Feb 1988 CM-3.4 Provisions Against Country Debt PIRI Pack - - - - - CM-4 Prudential Information Returns for Islamic Financial Institutions EDBC/178/96 5 Oct 1996 CM-5 Islamic Facilities OG/45/88 13 Mar 1988 CM-6.1 Write-Off - Credit Facility OG/50/92 (partial) 4 Mar 1992 CM-07.1 - CM-7.2 Consumer Finance PIRI Pack - - - - - CM-8 Prudential Regulations for Islamic Financial Institutions EDBC/105/96 26 June 1996 CM-8.3 Mudaraba Contracts - Minimum Terms and Conditions BC/4/99 17 Mar 1999 CM-9.1 Annual Accounts for the Year Ending 31 December 1999 Amended: January 2011
October 2007Effective Date
CM-A.3.4
The contents in this Module are effective from the date depicted in the original circulars (see Paragraph CM-A-3.3) or the dates given in the summary of changes above.
October 07CM-B CM-B General Guidance and Best Practice
CM-B.1 CM-B.1 Guidance Provided by Other International Bodies
Basel Committee: Principles for the Management of Credit Risk
CM-B.1.1
The paper (see www.bis.org/publ/bcbs75.pdf) which contains 17 principles, encourages banking supervisors globally to promote sound practices for managing credit risks in banking activities.
October 07CM-B.1.2
Throughout the Module, references have been made to this paper and it is recommended that the regulations in this Module be followed in conjunction with the guidelines presented in this paper.
October 07Counterparty Risk Management Policy Group (CRMPG): Improving Counterparty Risk Management
CM-B.1.3
The objective of this report (see www.isda.org/educat/pdf/CRMPG-report6-99.pdf), which was developed by a committee of market practitioners in the wake of the 1998 market disruptions, discusses
counterparty credit risk and market risk management practices and how they can be enhanced.October 07CM-B.1.4
The report covers four subject areas: transparency and
counterparty credit assessments; risk measurement, management, and reporting; market practices and conventions; and regulatory reporting.October 07CM-B.1.5
Of particular interest to risk managers is guidance provided in two areas, one on liquidity risk and leverage, and the other on
counterparty creditexposure estimation.October 07Basel Committee: Framework for Internal Controls Systems in Banking Organisations
CM-B.1.6
The paper (see www.bis.org/publ/bcbs40.pdf) issued in September 1998 presents the first internationally accepted framework for supervisors to use in evaluating the effectiveness of the internal controls over all on- and off-balance-sheet activities of banking organisations.
October 07CM-B.1.7
The paper describes elements that are essential to a sound internal control system, recommends principles that supervisors can apply in evaluating such systems, and discusses the role of bank supervisors and external auditors in this assessment process.
October 07CM-1 CM-1 General Procedures
CM-1.1 CM-1.1 Overview
CM-1.1.1
Credit risk is the likelihood that
counterparty of the bank will not meet its obligations in accordance with the agreed terms. The magnitude of the credit risk depends on the likelihood ofdefault by thecounterparty , and on the potential value of the bank's contracts with the customer at the time ofdefault . Credit risk largely arises in assets shown on the balance sheet, but it can also show up off the balance sheet in a variety of contingent obligations.October 07CM-1.1.2
Exposure to credit risk, notably in the form of traditional bank financing, has historically been the most frequent source of bank problems. The assessment of credit risk is a challenging task where bankers are often faced with making decisions based on outdated or partial information.October 07CM-1.1.3
The lack of continuous credit supervision and effective internal controls, or the failure to identify abuse and fraud are also sources of risk. The overall lending policy of the bank should be monitored by a Credit Committee composed of officers with adequate seniority and experience.
October 07CM-1.2 CM-1.2 Credit Analysis
CM-1.2.1
Proper credit risk management will help banks to discipline their lending activities and ensure that credit facilities are granted on a sound basis, and that bank funds are invested in a profitable manner. The process of managing credit risk starts at the origination of the credit facility. Standards for credit analysis should stress the borrower's ability to meet his future financial needs through analysis of his cash-flow generation capacity.
October 07CM-1.2.2
Measurement of credit risk is complicated by the fact that both credit
exposures and the likelihood ofdefault can vary over time and may be interdependent. The creditworthiness of customers shifts, as reflected in credit rating upgrades and downgrades. Customers that originally are highly rated are more likely todefault later in a credit facilities' life than earlier.October 07CM-1.2.3
Banks should properly assess the inherent risk factor of each credit facility; monitor the risks arising from any portfolio concentration; and ensure that appropriate precautions against losses have been taken in the form of
collateral and/or provisioning as described in Chapter CM-2.October 07CM-1.2.4
Banks which provide credit facilities to residents in Bahrain must become members of the Credit Reference Bureau (CRB). All requests for new credit facilities in Bahrain must be submitted to the CRB.
Amended: January 2014
Amended: October 2013
October 07CM-1.2.5
All CRB members must fully abide by the agreed Code of Practice of the CRB (see Appendix CM-3), in matters such as the protection of confidential customer data and payment of enquiry fees. Any such breaches will be viewed as calling into question the "fit and proper status" of persons involved, potentially making the licensee and the person liable to enforcement action by the CBB.
October 07CM-1.2.6
All CRB members must meet the following requirements and incorporate them into their policies and procedures:
a) Establish an electronic monitoring system to detect, monitor and maintain records and a log of all access to CRB data by the CRB member’s employees;b) Conduct a monthly internal audit on the access logs to identify unauthorised access to CRB data by any employee without securing customer consent and report to the CBB any observed violation of Article 68(bis(2)) of CBB Law;c) Require the sign off of a CRB member’s designated employee on their legal obligations concerning the confidentiality of CRB data and that any violation of Article 68(bis(2)) of CBB Law would subject them to an enforcement action in accordance with CBB Law; andd) Cover compliance with the above requirements in the performance appraisal of relevant employees.Added: July 2020CM-1.2.7
Failure to comply with Article 68(bis(2)) of the CBB Law and Paragraph CM-1.2.6 may result in an enforcement action taken against the CRB member, as well as the relevant employee in accordance with CBB Law.
Added: July 2020CM-1.3 CM-1.3 Credit Policy
CM-1.3.1
A properly documented credit policy is an essential element of and prerequisite for the credit risk management process. Consistent with the Board's objectives, it assists bank management in the maintenance of proper credit standards and the avoidance of unnecessary risks.
October 07CM-1.3.2
It is prudent to review the credit policy regularly to ensure that once it is established, it remains flexible enough to be current and continues to accomplish its original purpose taking into consideration market developments.
October 07CM-1.3.3
Explicit guidelines in credit policy provide the basis for effective credit portfolio management. A sound credit policy should consider which types of credit products and borrowers the bank is looking for and the underwriting standards the bank will utilize.
October 07CM-1.3.4
A bank's credit policy should address all credit matters of significance including:
(a) Objectives of credit monitoring;(b) Organisation and reporting structure of the credit department;(c)Designated markets and products;(d) Establishment of a credit limit framework;(e) Guidelines for assessment of concentration;(f) Authorisation procedures for the advancement of credit;(g) Establishment of credit committees;(h) Establishment of desirable pricing levels and criteria; and(i) Problem credit identification and administration.Amended: January 2011
October 2007CM-1.3.5
After the credit facility has been granted, its performance should be monitored at regular intervals. This includes an appropriate periodic review of financial statements, a reassessment of
collateral and update of appraisals, and attentive monitoring of conditions in the borrower's industry. Credit supervision constitutes the first line of detection of difficulties and provides the bank with an opportunity to address problems before losses are sustained.October 07CM-2 CM-2 Developing a Sound Credit Culture
CM-2.1 CM-2.1 Overview
CM-2.1.1
Credit culture is defined as the sum total of a bank's approach to managing credit risk, including business strategy, credit policy, shared assumptions about credit, the effectiveness of communications, and the composition and quality of the resulting credit portfolio.
October 07CM-2.1.2
As a matter of best practice, all banks should periodically review their credit cultures in order to reduce future credit losses and also to minimise
reputational risk and damage to their credit ratings.October 07CM-2.1.3
The CBB draws all licensed banks' attention to the September 2000 document issued by the
Basel Committee entitled 'Principles for the Management of Credit Risk'. This document contains 17 principles which all banks should ensure are covered in their credit culture (i.e. policies, procedures, systems and controls) (see www.bis.org/publ/bcbs75.pdf).Amended: January 2011
October 2007CM-2.1.4
Effective from the date of the original circular (see Section CM-A-3), the CBB has used the Basel document mentioned above as a guideline in its evaluation of the credit cultures of banks operating in Bahrain. Evaluation is conducted through prudential meetings, inspection and reporting accountants' reviews.
Amended: January 2011
October 2007CM-2.2 CM-2.2 Elements of a Strong Credit Culture
CM-2.2.1
First, the regulation in this Section is recommendatory in nature (except for the requirements in Paragraph CM-2.2.2 (a)&(e) below), and the guidelines below under the five headings are indicative of best practice. Some of the guidelines may not be appropriate to all relevant licensees. However, if a bank is not following these guidelines, it should consider why it is not doing so.
October 07CM-2.2.2
Secondly, the regulation in this Section is intended as a complement to the September 2000 Paper by the
Basel Committee entitled 'Principles for the Management of Credit Risk' (see Section CM-B.2). This Section does not summarise the Basel Paper, but is intended to be read in conjunction with the above Paper.(a) The Role of the Board of Directors
The Board of Directors must approve all the operating policies of a bank (see principle 1 ofBasel Committee paper 'Framework for Internal Controls Systems in Banking Organisations' – Section CM-B.2).
Given that credit risk is still the major risk that banks are exposed to in their business, particular scrutiny must be paid to credit policies, in terms of various limits as well as in terms of risk strategy. An essential function of the Board is to review and reassess the credit policies of the bank (includingcollateral , provisioning policies and concentration policies) on a periodic basis. The Board should also regularly review overdue and large facilities both in terms of performance, and also in relation to the capital (base) of the bank. The Board should insist upon periodic review/evaluation of internal systems and control weaknesses identified by external/internal auditors and management. Principle 1 of theBasel Committee paper 'Principles for the Management of Credit Risk' (see Section CM B-2) also gives greater detail on the role of the Board in developing a sound credit culture.(b) The Role of the senior management
Senior Management should be involved in regular reviews of outstanding facilities and overdue accounts as well as reviewing changes in activity, turnover or balances in clients' accounts. The role of senior management is covered in depth in Principle 2 ofBasel Committee paper 'Principles for the Management of Credit Risk' – Section CM-B.2 (see also Principle 3 ofBasel Committee paper 'Framework for Internal Controls Systems in Banking Organisations' – Section CM-B.2). However, Senior Management should be involved in the credit review process of (larger) existing facilities, visiting clients, requesting up to date financial statements and verifyingcollateral . Too often, a lack of direct contact by senior management with a problem client has been an identified factor in significant credit losses by banks, whether by way of fraud, or corporate failure.(c) Role of an Independent Risk Management Function
Perhaps the key point to emphasise in Risk Management is that the function must be independent of the senior management and operational functions which are related to business acquisition. The Risk Management function should report to the Board or to senior management related to control functions. The Risk Management function must not only monitor risk, but also control it (i.e. review limits, excesses etc). It must also ensure that risk monitoring systems accurately measure risk in the first place, and that all risks where they occur are, correctly identified (see also Principle 6 ofBasel Committee paper 'Framework for Internal Controls Systems in Banking Organisations' – Section CM-B.2).(d) Effective Internal Systems and Controls
Well implemented sound policies and procedures maintain credit standards, enable monitoring and control of credit risk, and identify problem credits in a timely manner (see Principle 2 ofBasel Committee paper 'Principles for the Management of Credit Risk' – Section CM-B.2 for more detail). Sound policy and administrative requirements also apply equally strongly to existing facilities as well as new ones (see Principle 8 ofBasel Committee paper 'Principles for the Management of Credit Risk' – Section CM-B.2). Policies and procedures should allow a thorough understanding of thecounterparty , the purpose of the credit facility and the source of repayment (Principle 4 ofBasel Committee paper 'Principles for the Management of Credit Risk' – Section CM-B.2) to be gained by the Risk Management function in its assessment of thecounterparty for risk profiling purposes, (see also Principle 6 ofBasel Committee paper 'Framework for Internal Controls Systems in Banking Organisations' – Section CM-B.2 and Section E of the paper issued by theCounterparty Risk Management Policy Group - 'ImprovingCounterparty Risk Management' – see Section CM-B.2). Banks should seek to utilise internal rating systems to manage credit risk and to set adequate provisions on a timely basis (see Principle 10 ofBasel Committee paper 'Framework for Internal Controls Systems in Banking Organisations' – Section CM-B.2).(e) The Role of Internal Audit
Internal audit function must, on an on-going basis, monitor the system of internal controls because it provides an independent assessment of the adequacy of, and compliance with, the established policies and procedures. Internal audit function must report directly to the highest levels of the banking organisation, typically the Board of Directors or its audit committee, and to senior management. This allows for the proper functioning of corporate governance by giving the Board information that is not biased in any way by the levels of management that the reports cover.Amended: October 2011
October 2007CM-2.3 CM-2.3 Name-financing
CM-2.3.1
Banks are exposed to credit risk when they provide large credit facilities on a 'clean' basis (i.e. without
collateral orsecurity ). This risk is amplified, specifically, when such clean name financing is made without adequate (up to date) financial information.October 07CM-2.3.2
In many banks there is a tendency to indulge in '
name-financing ' without any credit analysis or understanding of the concernedcounterparty 's current outstanding facilities from other banks. The CBB strongly discourages the banks to engage in such activities in order to minimise their credit risk and reputation risk.Amended: January 2011
October 2007CM-3 CM-3 Assessment of Credit Quality
CM-3.1 CM-3.1 Overview
CM-3.1.1
A realistic assessment of credit quality is an essential feature of effective credit risk management. The starting point for a systematic review of credit quality is a comprehensive review of the bank's written credit policies and practices. These include, but are not limited to:
(a) Credit approval procedures;(b) Credit underwriting criteria; and(c) Credit administration process.Amended: January 2011
October 2007CM-3.1.2
Credit quality is a relative concept based on performance prospects and external variables. Trends in the economy, and changes in markets and prices of goods affect the evaluation of credit facility repayment value. Assessing credit risk is a dynamic concept which needs to take into account the business cycle and the economic environment.
October 07CM-3.1.3
The objectives of the credit assessment are to determine:
(a) Whether the applicant / customer will have sufficient future liquid resources to honour credit obligations according to the agreed terms;(b) Whether the applicant's / customer's present and future prospects indicate that they will continue as agoing concern in the foreseeable future;(c) Is the applicant / customer of sufficient integrity; and(d) To what extent does anysecurity offered affect the risk inherent in the facility.Amended: January 2011
October 2007CM-3.1.4
To help improve prudential oversight of credit quality, the CBB, in this Module, seeks to establish a set of broad rules that are useful in identifying and containing the impact of impaired assets within banks.
Amended: January 2011
October 2007CM-3.2 CM-3.2 Credit Grading System
CM-3.2.1
The banks should have in place appropriate credit grading systems (classification) to help assess asset quality and credit exposures including performing receivables.
October 07CM-3.2.2
Credit grading systems offer a number of benefits. Analysis of a bank's entire book can reveal important insights to bank's management in the functioning and ultimately the health of the bank. Credit grading systems provide the means for a more systematic assessment of asset quality. They are particularly useful in assisting in the early detection of asset quality problems within a bank by highlighting credit with above normal risks.
October 07CM-3.2.3
The CBB does not favour the imposition of a standard credit grading system for all banks. Instead, the CBB will rely, wherever possible, upon the credit grading system adopted by each bank. This preference reflects the fact that banks generally have devoted significant resources to developing grading systems that best fit their individual product mix.
Amended: January 2011
October 2007CM-3.2.4
Each bank is hence required to provide to the CBB a statement of its current policy in respect of its credit grading system (including definitions used to classify
exposures ). Banks that do not intend to implement a credit grading system should indicate to the CBB their reason for not doing so. The CBB expects to have the endorsement of the Board of the bank concerned.Amended: January 2011
October 2007CM-3.2.5
Banks looking to implement a credit grading system, or to update their current system, should consider the following points:
(a) The system should cover a broad range of the bank's asset portfolio, including unrestricted investment accounts, restricted investment accounts and other off-balance sheetexposures ;(b) The system should cover both performing and impaired assets - it is common for grading systems to have sufficient range of grades, coveringexposures with the lowest risk to those where losses are expected;(c) Banks should detail credit grading system in a credit policy statement, and should develop procedures for the determination and regular review of the credit risk grades;(d) Banks should establish formal forums in the form of committees to review the compliance with the credit policy parameters and the concentration ofexposure attributable to various economic and industrial sectors in accordance with the credit policy;(e) Particular attention should be given to those facilities which involve a higher than normal risk, or which are impaired;(f) It is imperative that the policies relating to the provisioning for Islamic banks should be clearly laid down, fully identifying provisions relating to assets financed by own funds and those by theinvestment account holders; and(g) Facilities should, at minimum, include four categories along the following lines:(i) 'Standard credits' are those, which are performing, as the contract requires. There is no reason to suspect that the creditor's financial condition or collateral adequacy has depreciated in any way. The bank is very likely to extend additional funds to this borrower if requested (subject to internal or legal credit restrictions);(ii) 'Substandard credits' are inadequately protected by the paying capacity of the obligor or by the collateral pledged. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard assets does not have to exist in individual assets classified Substandard;(iii) 'Doubtful credits' have all the weaknesses inherent in a credit classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of Loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its rating as an estimated Loss is deferred until its more exact status may be determined; and(iv) 'Loss credits' are considered uncollectible and of such little value that their continuance as assets is not warranted. The rating does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.Amended: April 2011
October 2007CM-3.3 CM-3.3 Impairment of Assets and Provisioning
Impairment of Assets
CM-3.3.1
Banks are required to place on a non-accrual basis any facility where there is reasonable doubt about the collectability of the receivable irrespective of whether the customer concerned is currently in arrears or not. This acknowledges the reality that recognition of impaired assets will have a high degree of subjectivity attached to it.
October 07CM-3.3.2
Impaired assets should be classified into one of the following categories:
(a) Non accrual items;(b) Restructured items; or(c) Other assets acquired through security enforcement, including 'other real estate owned'.October 07CM-3.3.3
For the purpose of this Module, the following definition of non-accrual items applies:
(a) Financing facilities andinvestments where there is reasonable doubt about the ultimate collectability of principal within a time frame established by the bank. Non-accruals would include all facilities against which a specific provision has been established, or a write-off taken even if the facility is not in breach of contractual requirements. Refer to AAOIFI's FAS 11 on recognition of provisions and reserves; and(b) Financing facilities andinvestments , not included in (a), where contractual payments of the principal are 90 or more consecutive days in arrears, and where the 'fair value' of security is insufficient to cover repayment. In line with the principles outlined above, a facility should be classified as non-accruing earlier than 90 days where it is evident that full, or partial repayment of the amount is unlikely even though the full extent of the loss cannot be clearly determined.Amended: April 2012
October 07Provisioning
CM-3.3.4
Banks must maintain an adequate level of provisioning against the impairment of assets and problem exposures if their earnings and capital adequacy are to be measured correctly.
October 07CM-3.3.5
As a general rule, where there is a doubt about the collectability of a receivable, and security exists, provisions should equal the carrying value of the receivable less the net current market value of security.
October 07CM-3.3.6
Provisions of either type (specific or general) are made in relation to receivables, financing and investment assets in cases where there is doubt regarding collectability or an impairment of value. Refer to AAOIFI's FAS 11: Provisions and Reserves.
October 07CM-3.3.7
Provisioning should be carried in the respective books including bank's own books, unrestricted investment account holders' books and restricted investment account holders' books.
October 07CM-3.3.8
A general provision is an amount set aside to reflect a potential loss that may occur as a result of currently unidentifiable risks in relation to receivables, financing or investment assets. The amount reflects estimated losses affecting these assets attributable to events that have already occurred at the date of the statement of financial position, and not estimated losses attributable to future events.
October 07CM-3.3.9
The policy for provisioning should clearly contain provisions for segregating provisions relating to assets financed by own funds and those financed by investment account holders. In devising the policy, reference should be made to the Mudaraba contract.
October 07CM-3.3.10
A specific provision is an amount set aside to reflect an estimated impairment of value of a specific type of asset. In the cases of investment assets, it is the amount needed to write the assets down to cash equivalent value if this is lower than cost. Refer to AAOIFI's FAS 11: Provisions and Reserves.
October 07CM-3.4 CM-3.4 Provisions Against Sovereign Credit
CM-3.4.1
The CBB has consistently encouraged banks to maintain adequate provisions against credits to borrowers experiencing difficulties and against credits for countries with current or potential credit servicing difficulties.
Amended: January 2011
October 2007CM-3.4.2
In all cases the assessment of credits - and decisions regarding adequate provisions - are assisted by the categorization of credits as defined by the CBB in Section CM-3.2. In addition, with regard to '
sovereign credit ' it is particularly important that the size of the provisions made should be based on the identification and objective assessment of the nature and extent of difficulties being experienced by particular countries and reflect as near as possible deterioration in the prospects for recovering credits. With these objectives in mind, the Sovereign Credit Provisioning Matrix (see Appendix CM-1) contains a list of measurements which have been designed to help identify those borrowers and countries with payment difficulties and to decide what would constitute adequate provisions.Amended: January 2011
October 2007CM-3.4.3
It is emphasized that this Section and the Sovereign Credit Provisioning Matrix (see Appendix CM-1) are merely a general framework for assessing degrees of provisions. They should not be regarded as an exhaustive or definitive framework. Nevertheless, the CBB does intend to include the results of banks' calculations in its discussions with them, and to establish that adequate provisions are being made.
Amended: January 2011
October 2007Implications of International Accounting Standard (IAS) no. 39 on the Provisions Assessed through Sovereign Credit Provisioning Matrix
CM-3.4.4
The banks must continue to apply the Sovereign Credit Provisioning Matrix (see Appendix CM-1) as a benchmark for estimating future recoverable cash receipts. However, if a lower provisioning amount is determined, i.e. lower than the amount identified through the matrix, and the bank intends to book the lower amount, then a meeting must be arranged with the CBB to discuss the issues before booking such provisions.
Amended: July 2011
Amended: January 2011
October 2007CM-3.5 CM-3.5 Collateral
CM-3.5.1
The extension of credit is often supported by
collateral provided by the customer or third parties. When the credit decision is based oncollateral value, independent timely appraisals of thecollateral should be obligatory, including provision for sufficient security margins.October 07CM-3.5.2
In principle,
collateral can improve the credit grading of a customer, but experience suggests that over-reliance oncollateral is unsound because very often when a credit facility goes sour thecollateral turns out to have less value than estimated or is, at worst, illusory.October 07CM-3.5.3
Misjudgements about collectability are frequently the cause;
collateral is often illiquid, difficult to value during periods of financial distress and costly to realise through foreclosure or other legal means. Particular concern may be appropriate in the case ofcollateral in the form of real estate, as it involves additional uncertainties and the costs of maintaining the property.October 07CM-3.5.4
As a matter of principle,
collateral should not replace a careful assessment of the borrower's ability to repay.October 07CM-3.6 CM-3.6 Country and Transfer Risks
CM-3.6.1
The CBB requires all
Islamic bank licensees to set out their policy on country and transfer risks, including the criteria on downgrading a country exposure from stage 1 to stages 2 or 3, and related provisioning requirements, in a policy statement which must be approved by the CBB.Added: July 2017
CM-3.6.2
For the purpose of Paragraph CM-3.6.1,
Islamic bank licensees , may consider the sovereign risk matrix factors, stipulated in Appendix CM-1 (Sovereign Debt Provision Matrix), and any other factors.Added: July 2017
CM-3.6.3
Branches of foreign Islamic bank licensees must satisfy the CBB that equivalent arrangements are in place at the parent entity level, otherwise a policy statement is required in line with paragraph CM-3.6.1.Added: July 2017
CM-3.6.4
The policy statement set in Paragraph CM-3.6.1 must be implemented with effect from 1st January 2018.
Added: July 2017
CM-4 CM-4 The Monitoring and Control of Large Exposures of Banks Licensed by the CBB
CM-4.1 CM-4.1 Overview
CM-4.1.1
The CBB's directives on large
exposures for banks in Bahrain is issued as part of the CBB's measures to encourage banks to mitigate risk concentrations.Amended: January 2011
October 2007CM-4.1.2
The contents of this Chapter apply in full to
Bahraini Islamic bank licensees on a consolidated basis.Amended: January 2015
Amended: April 2014
Amended: January 2011
October 2007CM-4.1.3
Islamic banks, through the PIR forms (see Module CA), must notify the CBB of the
subsidiaries to be consolidated for reporting purposes.Amended: January 2015
Added: January 2011CM-4.2 CM-4.2 The Measure of Exposure
CM-4.2.1
For large
exposure (s) purposes, the measure ofexposure reflects the maximum loss that will arise should a counterparty fail, or the loss that may arise due to the realisation of any financing assets, shareholdings or otherexposures or off-balance sheet positions, or losses experienced due to non-repayment of facilities granted. In the case of undrawn L/C or similar facilities, the advised limit must be included in the measure ofexposure . In particular for Islamic banks, the measure ofexposure also includes facilities or transactions or purchases of assets where the bank itself is not exposed, but is committing client funds through arrangements such as a wakala. In certain cases (particularly off-balance sheet items or derivatives), the measure of a largeexposure may be larger than that used in published financial statements. Consistent with this, anexposure encompasses the amount at risk arising from a bank's:(a) Claims on a counterparty including actual claims, and potential claims which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide, and claims which the bank has committed itself to purchase or underwrite. Such claims would include but are not limited to:(i) Financing and other credit facilities whether or not drawn;(ii)Exposures arising through lease agreements;(iii) Margin held with exchanges or counterparties;(iv) Claims under Shari'a compliant derivative contracts such as swaps and similar contracts on profit rates, foreign currencies, equities, securities, or commodities;(v) Claims arising in the course of settlement of securities transactions;(vi) Receivables such as fees or commissions;(vii) Claims arising in the case of forward sales and purchases of financial instruments in the trading or banking books;(viii) Amounts outstanding under sale and repurchase agreements, forward asset purchase agreements, buyback agreements, secured financing or similar transactions;(ix) Sukuk, bills or other non-equity financial instruments; and(x)Underwriting exposures for sukuk, bills, or other non-equity financial instruments.(b)Contingent liabilities arising in the normal course of business, and thosecontingent liabilities which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide. In the case of an undrawn L/C or similar facility, the advised limit must be included in the measure ofexposure . Such liabilities may include:(i) Direct credit substitutes (including guarantees, standby letters of credit, bills accepted but not held by the reporting bank, and endorsements creating payable obligations);(ii) Claims sold with recourse (i.e. where the credit risk remains with the reporting bank);(iii) Transaction related contingents not having the character of direct credit substitutes (e.g. performance bonds, bid bonds, transaction-related L/Cs etc); and(iv) Undrawn documentary letters of credit issued or confirmed;(c) Any other assets or transactions whose value depends wholly or mainly on a counterparty performing his obligations, or whose value depends upon that counterparty's financial soundness but which do not represent a claim on the counterparty. Such assets or transactions include:(i) Equities and othercapital instruments (including significant investments in commercial entities—see CM-4.4.1.E for definition);(ii) Convertible Murabahas or other similar instruments.(iii) Exposures arising from arrangements that have been entered into by the reporting bank for the purpose of providing credit protection;(iv)Underwriting or purchase commitments for equities; and(v) Claims on fund managers. Banks must regard assets placed with third parties under management asexposures . Under no circumstances may a bank place funds with fund managers (or mudaribs or trustees) that also act as custodian; and(d) Any other assets, receivables or transactions (whether on or off- balance sheet), which constitute a claim (or potential claim) for the customers of the bank which are not included in (a), (b) or (c) above. In particular, it includesexposures where the bank is committing client funds through arrangements such as a wakala.Amended: January 2015
Amended: April 2011
Amended: January 2011
October 2007CM-4.2.2
As a general rule,
exposures must be reported on a gross basis (i.e. no offset). However, debit balances on accounts may be offset against credit balances on other accounts with the bank if:(a) A legally enforceable right of set off exists in all cases (as confirmed by an independent legal opinion addressed to the bank) in respect of the recognised amounts;(b) The debit and credit balances relate to the same customer or to customers in the same group (for a group facility, a full cross guarantee structure must also exist before debit balances on accounts may be offset against credit balances i.e. full multilateral guarantees must be in place between all the companies within the group); and(c) The bank intends either to settle on a net basis, or to realise the debit balances and settle the credit balances simultaneously; and(d) The transactions are subject to the regulation in respect of close-out netting under market contract whenever it is applicable (see Appendix CM-4).Amended: January 2015
Amended: July 2011
Amended: April 2011
Amended: January 2011
October 2007CM-4.2.3
Large exposures are calculated using the sum of the nominal amounts before the application of the risk weighting and credit conversion factors for:
(a) On-balance sheet claims;(b) Guarantees and other contingent claims; and(c) Potential claims in the case of undrawn facilities.The amount at risk from Shari'a compliant
derivative contracts is taken to be the credit equivalent amount calculated based on the guidelines for the prudential returns (see module CA). In the case of equityexposures , the current fair value as shown in the books of the bank must be taken as the measure ofexposure .Amended: July 2011
Amended: January 2011
October 2007CM-4.2.4
In case of syndicated facilities, the nominal amount would include only the bank's share of the syndication (financed by unrestricted investment accounts, current accounts and bank's own funds) and any amounts for which binding commitments from other financial institutions are not available. Where a binding commitment is available, that amount would be excluded in calculation of the large
exposures . See Section CM-4.5 for exemptions.Amended: January 2011
October 2007CM-4.2.5
For the purpose of large
exposures , balance sheet claims involving assets acquired to be leased under Ijarah Muntahia Bittamleek should be reflected as anexposure against the lessee. Further, murabaha contracts where assets are held for resale, under a binding promise, suchexposure should be reflected as anexposure to the counterparty which has signed the binding promise. Potential claims in the case of Istisna'a contracts should include the total amount expected to be paid to al-Sani (the seller) and shown as anexposure to al-Mustasni (ultimate buyer).October 07CM-4.2.6
A bank's
exposure arising fromsecurities ' trading operations is calculated as its net long position in a particularsecurity (a short position in onesecurity issue may not be offset against a long position in another issue made by the same issuer). A bank's 'net long position' in asecurity refers to its commitments to buy thatsecurity together with its current holding of the samesecurity , less its commitments to sell suchsecurities .Amended: January 2011
October 2007CM-4.2.7
"Underwriting" is defined as "A binding commitment by the reporting bank to purchase securities issued by, or provide syndicated credit facilities to (as the case may be) an unconnected party ("the issuer" or "the borrower") at a mutually agreed price. Underwriting does not take place if a bank commits to purchase its own securities or securities issued by a party connected to it as there is no transfer of risk; therefore banks may not utilise the limits concerned with these definitions in connection with any commitments to any connected counterparties." Temporary
exposure limits for "underwriting" and otherinvestment business relatedexposures are covered in more detail in paragraphs CM-4.5.2A-F.Amended: July 2012
Added: January 2011CM-4.3 CM-4.3 Identity of Counterparty
CM-4.3.1
For the purposes of measuring
exposures , the counterparty will generally be: the person from whom the concerned funds are receivable (in the case of fees and commissions etc.); the counterparty (customer) in the case of credit facilities; the person guaranteed, and the issuer of a security in the case of a security held; or the party with whom a contract was made in the case of a Shari'a compliant derivative contract.Amended: January 2011
October 2007CM-4.3.2
Where a third party has provided an eligible guarantee, and subject to the guaranteed bank's policy statement not stating otherwise, the guaranteed bank may be permitted to report the
exposure as being to the third party guarantor, rather than the person guaranteed (see Chapter CA-4 for full conditions relating to the recognition of guarantees for regulatory purposes).Amended: January 2015
Amended: January 2011
October 2007CM-4.4 CM-4.4 Limits for Large Exposures
Definitions and Aggregate Limit on Large Exposures
CM-4.4.1
A 'large
exposure ' is anyexposure whether direct or indirect to a counterparty or a group of closely related counterparties which is greater than, or equal to, 10% of the reporting bank's consolidated Total Capital.Amended: January 2015
Amended: January 2011
October 2007CM-4.4.1A
'
Capital instrument ' includes all components of equity capital including ordinary equity, both voting and non-voting, and preference shares. It also includes convertible or hybrid financial instruments which are debt — like in character and which may be converted into equity (such as convertible murabaha). Also for financial institutions and insurance companies, any other financial instruments (such as subordinated debt) which are eligible as regulatory capital should also be included ascapital instruments . Sukuk or senior debt instruments would not normally be regarded as "capital instruments " unless they have convertibility features. Equity-like contracts such as joint venture musharaka contracts (investments but not financing) are also included in this definition. The musharaka stake is classified as acapital instrument at onset.Amended: January 2012
Added: January 2011CM-4.4.1B
'
Acquisition ' means the acquiring by a bank of beneficial or legal ownership ofcapital instruments issued by another entity. This would not include securities underwriting until the expiry of the underwriting period (where separate arrangements apply elsewhere in this Module).Acquisition may also be in the form of exercising of rights to take control ofcapital instruments pledged as collateral. The pledging ofcapital instruments by a customer to a bank as collateral (e.g. for the purpose of obtaining credit) does not in itself mean that an "acquisition " has taken place.Acquisition also does not include the establishment of newsubsidiaries by the bank. Regulatory requirements for the establishment of SPVs andsubsidiaries are contained in Section BR-5-2.Amended: January 2015
Amended: January 2012
Added: January 2011CM-4.4.1C
'
Investment ' is any holding by a bank ofcapital instruments issued by a third party that is not a subsidiary of the bank. Therefore holdings of subordinated debt eligible as regulatory capital issued by another financial institution would be regarded as an "investment ". In this case 'holding' means legal or beneficial ownership ofcapital instruments .Amended: January 2012
Added: January 2011CM-4.4.1D
A bank has "
close links " with:(a) Any person/entity which qualifies as acontroller of the concerned bank as defined in Chapter GR-5;(b) Any entity which is asubsidiary of the bank; and(c) Any entity which is an associate of the bank.Amended: January 2015
Amended: January 2012
Amended: April 2011
Added: January 2011CM-4.4.1E
A "
major investment " is defined as anyacquisition orinvestment in thecapital instruments of another entity by aBahraini Islamic bank licensee which is equivalent to or more than 10% of the Bahraini Islamic bank licensees consolidated total capital.Amended: October 2016
Amended: April 2015
Amended: January 2015
Amended: January 2012
Added: January 2011CM-4.4.1F
[This Paragraph was deleted in January 2015.]
Deleted: January 2015CM-4.4.2
Total Capital has the same meaning as when used in Section CA-1.1.
Amended: January 2015
Amended: January 2011
October 2007CM-4.4.3
The aggregate of large
exposures may not exceed 800% of the bank's consolidated Total Capital (there are separate sub-limits for "Significant investments" in Section CM-4.10),whether funded or not funded, i.e. contingent commitments.Amended: October 2016
Amended: January 2015
Amended: January 2011
October 2007CM-4.4.3A
The CBB requires that any large
exposure , as defined in Paragraph CM-4.4.1, must be priorly approved by the bank's Board of Directors.Added: January 2017CM-4.4.4
[This Paragraph was deleted in January 2015.]
Deleted: January 2015Single Exposure Limits to Unconnected Counterparties
CM-4.4.5
A bank may not incur an
exposure to an individual counterparty or group of closely relatedcounterparties (not connected to the reporting bank) which exceeds the limit below, in respect of the reporting bank's consolidated Total Capital without the prior written approval of the CBB. Where such limit has been exceeded whether with or without the prior approval of the CBB, the excess amount must be risk-weighted at 800%. The following singleexposure limit applies:Direct
exposures (i.e. funded, unfunded on and off balance sheet): A bank may not incur anexposure to an individual counterparty or group of closely related counterparties which exceeds 15% of the reporting bank's consolidated Total Capital without the prior written approval of the CBB. For this purpose, companies/banks with variable capital should not include participation shares in calculating their consolidated Total Capital, since there are governed by Mudaraba contract (profit sharing).Amended: April 2015
Amended: January 2015
Amended: January 2011
October 2007Closely Related Counterparties — Definitions
CM-4.4.6
'Closely related
counterparties ' are two or more counterparties who constitute a single risk because one of them has, directly or indirectly, a controlling interest in the other(s) (i.e. 20% or more voting rights), orcounterparties connected in such a way that the financial soundness of any one of them may affect the financial soundness of the other(s), or the same factors may affect the financial soundness of both or all of them.Amended: January 2015
Amended: January 2011
October 2007CM-4.4.6A
The CBB shall exercise its discretion in considering two or more
counterparties of a bank as closely related on a case by case basis if it finds during its onsite or offsite supervisory review any linkage of such counterparties.Added: January 2017CM-4.4.7
'Controlling interest' means either significant ownership (i.e. ownership of 20% or more of the voting rights) or any other interests (including, but not limited to, the ability to exercise or control the exercising of voting power in the other party) which enable the holder, or which would enable a proposed transferee, thereof to exercise significant influence over the management and business of the other party.
Amended: July 2012
Amended: January 2011
October 2007Limits on Exposures to Connected Counterparties
CM-4.4.8
Exposures to connected counterparties may be justified only when undertaken for the clear commercial advantage of the bank, when negotiated and agreed on an arm's length basis, and when included in the largeexposures policy statement agreed with the CBB.Amended: January 2011
October 2007CM-4.4.8A
A bank may not exceed the individual or aggregate connected counterparty limits shown in Paragraph CM-4.4.13 without the prior written approval of the CBB.
Added: July 2012CM-4.4.9
A bank may not undertake
exposures to its own external auditors. In this context, 'external auditors' refers to the firm/partnership, the partners, the directors and managers of the audit firm.Amended: January 2011
October 2007CM-4.4.9A
Any on-balance sheet utilisation of existing/outstanding restricted investment accounts (RIAs) or any movement of funds between RIAs is not permitted unless specifically permitted under a valid contract between the bank and the relevant
customer .Amended: January 2015
Amended: January 2012
Added: January 2011CM-4.4.10
For the purpose of this Module, 'Connected counterparties' includes companies or persons connected with the bank, including, in particular;
controllers of the bank (and their appointed board representatives) as defined in Chapter GR-5;subsidiaries , associates and related parties of the bank as defined by IFRS; holders ofcontrolled functions in the bank as defined by Module LR-1A and their close family members (as defined by IFRS–IAS 24); members of the Shari'a Supervisory Board.Amended: January 2015
Amended: July 2012
Amended: July 2011
Amended: January 2011
Amended: April 2008
October 2007
CM-4.4.10A
Equity participations in and credit exposures to consolidated banking and financial subsidiaries (see CM-4.2.1(c)) need not be included in exposures to connected counterparties for the sake of the table in CM-4.4.13. Equity participations in and credit or financing exposures to unconsolidated subsidiaries are included in the definition of exposure in order to understand the degree of support the parent is supplying to its unconsolidated subsidiaries on a day-to-day basis.
Added: January 2015CM-4.4.10B
The CBB shall exercise its discretion in applying the definition of connected
counterparties of a bank on a case by case basis if it finds during its onsite or offsite supervisory review any linkage of such counterparties.Added: January 20170% Limit on Exposures to Controllers
CM-4.4.12
Banks must not undertake
exposures tocontrollers as defined in Chapter GR-5 or tosubsidiaries of such (i.e. there is a 0% limit for suchexposures ), however smaller shareholders will be subject to the normalexposure limits outlined in CM-4.4.5. Directors who are alsocontrollers (or the appointed board representatives of suchcontrollers ) are subject to the 0% limit.Amended: January 2015
Amended: January 2011
Amended: April 2008
October 2007
CM-4.4.13
The limits for connected counterparties have been set as follows:
Exposures funded on and off balance sheet (excluding RIAs) as a percentage of consolidated Total Capital
Connected Counterparties Individual Limit Aggregate Limit Controllers and their subsidiaries 0% 0% Approved persons (and their close family members) and Shari'a Board Members10% 25% Associates, other related parties not mentioned above and unconsolidated subsidiaries 15% Total (including senior management and others) 25% Amended: April 2015
Amended: January 2015
Amended: April 2011
Amended: January 2011
Added: April 2008Deductions from Total Capital
CM-4.4.14
The CBB will closely examine all
exposures to companies or persons connected to a bank and will deduct them from the bank's consolidated Total Capital if they are, in the CBB's opinion, of the nature of a capitalinvestment , or provision of long-term working capital, or are made on particularly concessionary terms.Amended: January 2015
Amended: January 2011
Added: April 2008CM-4.4.15
Reciprocal cross-holdings of capital between a bank and its
controllers (see GR-5) which artificially inflate the capital of licensee concerned are not permitted. Any cross-holdings that occur due toacquisitions or takeovers must be deducted from the concerned bank's Total Capital (see also CA-2.4.15).Amended: January 2015
Added: January 2011CM-4.4.16
Any other form of connected lending outside the scope of the above will be dealt with by the CBB on a case-by-case basis.
Added: January 2011CM-4.5 CM-4.5 Exempt or Temporary Exposures
Exempt Exposures to Parties not Connected to the Bank
CM-4.5.1
Certain types of
exposure are exempt from the limits set out above in CM 4.4.5, but prior notification of commitment to suchexposures must be made to the CBB and then retrospectively on a quarterly basis using the Form PIR provided in Appendix BR-5.Amended: April 2011
Amended: January 2011
October 2007CM-4.5.2
These exemptions fall into the following categories and are subject, in each case, to the policy statement as agreed with the CBB:
(a) Short term (i.e. up to 3 months original maturity) interbankexposures to parties not connected to the reporting bank;(b)Exposures to GCC governments, and their Public Sector Entities that do not operate on a commercial basis, as set out in the guidelines to the PIR (see Module CA) where such bodies are not connected to the reporting bank;(c)Exposures to OECD central governments orExposures secured by OECD central government securities/guarantees);(d)Exposures secured by cash or GCC government securities/guarantees;(e) Specific connected short-termexposures agreed with and approved in advance with the CBB, in particular those arising from a group treasury function (see Paragraph CM-4.5.6);(f) Pre-notifiedexposures which are covered by a guarantee from the bank's parent (see Paragraph CM-4.5.7 to CM-4.5.10);(g) Sukuk or other securities issued or guaranteed by the Islamic Development Bank (IDB) and any of itssubsidiaries ;Amended: January 2015
Amended: January 2011
Added: April 2008Temporary Exposure Limits to Commercial Entities not Connected to the Bank
CM-4.5.2A
In certain circumstances outlined below, banks may apply on a case-by-case basis to the CBB for approval of certain underwriting or
investment business relatedexposures above the limits as stated in CM-4.4.5(a), (b), and (c) for periods of up to 3 months where the entity is a commercial entity.Amended: January 2015
Amended: January 2012
Added: January 2011CM-4.5.2B
A bank may not incur an
exposure which arises when a bank enters into a legally binding commitment to underwrite a securities issue or to provide a syndicated financing facility for another commercial entity not connected to the bank, which exceeds 15% of the bank's consolidated Total Capital without the prior written approval of the CBB. The maximum level of suchexposures per counterparty that the CBB may approve must not exceed 30% of the concerned bank's consolidated Total Capital during the three-month period.Amended: April 2015
Amended: January 2015
Amended: January 2012
Added: January 2011CM-4.5.2C
Such securities underwriting
exposures must be included in the trading book policy statement of a bank wishing to use this higher temporary limit. Any residual holdings of securities or syndicated financing commitments held for more than three months from the commitment date of underwriting must be risk-weighted at 800% where there are any excesses above the materiality thresholds outlined in Paragraph CA-2.4.25. Where the lead bank has obtained legally binding irrevocable (i.e. full) commitments from other institutions to participate in the concerned securities issue or to participate in providing the syndicated financing facilities, the lead underwriter or syndicate manager may show participations to the concerned sub-underwriting/ participating institution rather than to the issuer of the security or the obligor. The CBB will not allow any bank to include syndicated credit facilities to, or holdings of securities issued by any of the concerned bank or its connected counterparties (including SPVs connected through ownership, control or establishment) to be included in this temporary 30% limit.Amended: January 2015
Amended: January 2012
Added: January 2011CM-4.5.2D
A bank may not incur any temporary large
exposure arising frominvestment business (where the intention by the concerned bank is to securitize such assets or place them with investors), which exceeds 15% of the bank's consolidated Total Capital without the prior written approval of the CBB. The maximum level of such temporaryexposures that the CBB may approve per individualexposure must not exceed 25% of the concerned bank's consolidated Total Capital for a maximum six-month period. Any suchexposures held for more than six months from the originating date of theexposure must be risk-weighted at 800% where there is any excess above the materiality thresholds mentioned in Paragraph CA-2.4.25. In order for a bank to be allowed suchexposures , it must have in place a written detailed due diligence policy for such business which must be approved by the bank's board of directors and related procedures which must be approved by senior management.Amended: January 2020
Amended: January 2015
Amended: January 2012
Added: January 2011CM-4.5.2E
In order to qualify for these temporary limits, banks must submit a request for each individual
exposure to the CBB and the CBB shall respond within two weeks from the date of receiving a complete set of all required documents. The CBB will take into account any existingexposures to the concerned counterparties in its consideration of any application for such temporary largeexposures limits.Amended: April 2012
Amended: January 2012
Added: January 2011CM-4.5.2F
In the case of any subsequent proposed increment in the amount of
exposure (for example where a limit of 20% has been approved), the CBB's prior approval must be obtained (as outlined above). CBB approval for fair value changes to holdings/ underwritings of securities during the temporary approval period will not be required.Amended: April 2012
Amended: January 2012
Added: January 2011CM-4.5.2G
Temporary large
exposures arising from investment business (where the intention by the concerned bank is to securitize such assets or place them with investors) referred to in Paragraph CM-4.5.2D are not subject to the 'connected counterparty' and significant investments in commercial entities limits and treatments during the six-month period. After the expiry of this period, the limits and deduction treatments relating to significant investments in commercial entities and 'connected counterparties' apply.Amended: January 2015
Added: January 2012Exempt Exposures to Connected Counterparties
CM-4.5.3
Exposures tosubsidiaries which are always fully consolidated on a line-by-line basis for supervisory purposes are exempt from the limits in this Module on a consolidated basis, however banks must observe the largeexposure limits in CM-4.4.13 on a solo basis and the CBB's solo capital adequacy requirements in Module CA.Amended: January 2015
Added: January 2011
CM-4.5.4
Exposures to unconsolidatedsubsidiaries (normally non-financial and outside the scope of regulatory consolidation) are not exempt from the limits in this Module and will be included under the limits forexposures to associates, related parties and unconsolidatedsubsidiaries .Amended: January 2015
Amended: January 2011
October 2007CM-4.5.5
Banks may apply to the CBB to take on a treasury role on behalf of the group as a whole (provided that the group is subject to consolidated supervision by its home supervisor). The CBB's policy regarding the taking on of a treasury role includes
exposures arising from a central risk management function. Suchexposures must be approved by the CBB before they may be exempted.Amended: January 2011
October 2007CM-4.5.6
In the above scenario (Paragraph CM-4.5.5), for example,
exposures of more than 15% of the Total Capital to a parent bank from a subsidiary bank may be permitted where they constitute short term placements or financing of excess liquid funds.Amended: January 2015
Amended: January 2011
October 2007Exposures Undertaken by a Subsidiary Bank
CM-4.5.7
Where
exposures undertaken by a Bahrain subsidiary of an overseas bank are guaranteed by its parent bank, the Bahrain subsidiary bank may be deemed to have anexposure to its parent bank.Amended: January 2011
October 2007CM-4.5.8
Under the terms of this Module (See Paragraph CM-4.5.2(f)), such indirect
exposures to a parent bank may be exempt from the limits on largeexposures if the CBB is satisfied that:(a) Suchexposures have been pre-notified to the CBB for the CBB's approval and are entered into within the terms of a policy agreed by the parent bank;(b) There are guarantees in place from the parent bank to protect thesubsidiary should theexposure become impaired or require to be written off; and(c) In the case of banks, which are the Bahrainsubsidiaries of overseas banks, the supervisory authority of the parent bank has approved theexposures that can be undertaken by the Bahrainsubsidiary .Amended: January 2015
Amended: January 2011
October 2007CM-4.5.9
In the case of a Bahrain incorporated bank's
subsidiary inside Bahrain, in order for anexposure exceeding 15% of Total Capital to be acceptable in thesubsidiary , the Bahrain parent bank must at all times have the capacity to take on theexposure to the third party, without itself exceeding the limit of 15% of its own Total Capital. Also, the totalexposure of the banking group to the customer must be within 15% of the parent bank's consolidated Total Capital.Amended: April 2015
Amended: January 2015
Amended: January 2011
October 2007CM-4.5.10
The Central Bank will need to be satisfied that adequate control systems are in place to ensure that credit risks taken in the group as a whole are properly monitored and controlled.
Amended: January 2011
October 2007CM-4.6 CM-4.6 Reporting of Exposures
CM-4.6.1
All
Islamic bank licensees are required to report their 25 largestexposures to banks as well as their 25 largestexposures to the CBB on a quarterly basis using the Form PIRI provided in Appendix BR-5.Amended: July 2015
Amended: April 2015
Amended: April 2014
Amended: January 2011
Amended: October 2009
October 2007CM-4.6.1A
All
Bahraini Islamic bank licensees must report the financial details of each largeexposure , as defined under Paragraph CM-4.4.1, in Appendix BR-19, as required under Paragraph BR-3.1.7A.Added: July 2015CM-4.6.1B
All
Bahraini Islamic bank licensees must report all theirexposures to connected parties on a monthly basis using the form provided in Appendix BR-10, as required under Paragraph BR-4.3.4.Added: July 2015CM-4.6.2
Banks are required to adopt policies and set internal limits, which will not lead to the
exposure limit(s) referred to above being exceeded as a matter of course.October 07CM-4.6.3
For some banks, the CBB may determine it prudent to set a lower
exposure limits than the ones given in this Module.Amended: January 2011
October 2007CM-4.6.4
Should any bank incur, or may incur an
exposure to an individualcounterparty (other than an exemptexposure ) which results in or may result in it exceeding any of the limits set out above, this must be reported immediately to the CBB for its consideration. Where theexposure or counterparty is not exempt, and action must be taken to immediately bring theexposure back within applicable limits as soon as possible.Amended: July 2011
Amended: January 2011
October 2007CM-4.7 CM-4.7 Policy Statements
CM-4.7.1
The CBB requires each
Bahraini Islamic bank licensee to set out its policy and internal limits on largeexposures , including limits for differing types ofexposures to individual customers, banks, corporates, countries and economic and market sectors, in a policy statement which must be formally adopted by the Board of Directors and then submitted to the CBB. The policy statement must be part of the risk management policy of the bank. Furthermore, banks must not implement significant changes to these policies without prior discussion with the CBB.Amended: April 2014
Amended: July 2011
Amended: January 2011
October 2007CM-4.7.2
The policy statement must identify 'connected
counterparties ' and the bank's policies towards financing to and investing in thesecounterparties .Amended: July 2011
Added: January 2011CM-4.7.3
The bank must explain and justify any requests for exemptions for
exposures to /investments in connectedcounterparties .Amended: July 2011
Added: January 2011CM-4.7.4
Each bank will be expected to justify to the CBB its policy on
exposures to individual counterparties, including the maximum size of anexposure contemplated.Amended: January 2011
October 2007CM-4.7.5
Exposures to counterparties connected with the bank will continue to be particularly closely examined.Amended: January 2011
October 2007CM-4.7.6
The necessary control systems to give effect to a bank's policy on large
exposures must be clearly specified and monitored by its Board.Amended: July 2011
Amended: January 2011
October 2007CM-4.7.7
Banks are required to implement appropriate internal systems and controls to monitor the size of their Total Capital on a daily basis to ensure that the limits detailed in this Module are not exceeded.
Amended: January 2015
Added: January 2011CM-4.8 CM-4.8 Concentrations in Geographic, Economic and Market Sectors
CM-4.8.1
The extent to which a bank may be prudently exposed to a particular geographic, economic and market sector will vary considerably depending upon the characteristics and strategy of the bank, and the sector concerned.
Amended: January 2011
October 2007CM-4.8.2
Concentrations should also be recognized in not just geographic and economic sectors, but also in markets (e.g. individual stock exchanges). The CBB will not apply common maximum percentages to banks' sectoral or market
exposures but, instead, will continue to monitor suchexposures on an individual and general basis.Amended: January 2011
October 2007CM-4.8.3
Banks must specify in their policy statements how they define geographic, economic and market sectors, and what limits apply to differing sectors.
Amended: January 2011
October 2007CM-4.8.4
Exposures and limits for sectors must be reviewed at least quarterly by the Board of Directors.Amended: July 2011
Amended: January 2011
October 2007CM-4.8.5
Banks which have over 10% of their risk adjusted assets in market risk (i.e. the trading book) must also set market risk concentration limits.
October 07CM-4.9 CM-4.9 Major Investments
Credit Risk and Investment Risk
CM-4.9.1
Where a bank acquires a holding of the
capital instruments of another entity, the concerned bank acquires risk in that entity. The riskexposure to a bank through theacquisition of capital is arguably greater than that acquired by providing credit facilities in four ways:(a) The rights of a shareholder are subordinated to those of ordinary creditors in the event of liquidation of the concerned entity.(b) Term credit facilities have an explicit obligation on the borrower to repay the sum advanced or committed. Share capital has no such commitment (with the exception of some subordinated term instruments).Investments in the capital of an entity can only be realized by the sale of the concerned capital instruments to a third party, or by winding up the concerned entity.(c) A capitalinvestment in a third party entity (particularly where theinvestment is significant in size) is a pledge of capital to the concerned entity to fund its longer-term activities. The funds concerned are no longer available to be used by the investor bank to fund its activities.(d) There may be reputational and legal risk to the investing bank, particularly if the bank has a “control relationship” with the concerned entity.Added: January 2011CM-4.9.2
In view of the above, the supervisory treatment of
major investments requires special consideration which goes further than the monitoring of largeexposures of banks as outlined earlier in Chapter CM-4.Amended: October 2016
Added: January 2011CM-4.9.2A
[This Paragraph was moved to Section CM-4.10 in October 2016]
Amended: October 2016
Amended: January 2015
Added: July 2014
Initial Approval Requirement for "Major Investments"
CM-4.9.3
All
Bahraini Islamic bank licensees must obtain the CBB's prior written approval before making a "major investment " (as described in CM-4.4.1E). [This Paragraph was moved to CM-4.9.3A, CM-4.9.3B, CM-4.9.3C and CM-4.9.3D in October 2016].Amended: October 2016
Amended: April 2015
Amended: January 2015
Amended: July 2012
Amended: January 2012
Added: January 2011CM-4.9.3A
All
Bahraini Islamic bank licensees must obtain the CBB's prior written approval before any future increases in the bank's ownership of any of the existingmajor investments in excess of 5% of such exposure.Added: October 2016
CM-4.9.3B
Where the percentage ownership increase is due to revaluation or change in the capital of the bank, the bank must provide a written notification to the CBB, outlining the percentage increase and the reason for such increase.
Added: October 2016
CM-4.9.3C
Where a percentage ownership increase as described in Paragraph CM-4.9.3B occurs, the 800% risk weight rule will apply as it exceeds the single large exposure limit outlined in Section CM-4.4.
Added: October 2016
CM-4.9.3D
Any bank wishing to acquire a "major investment" in another entity must address the points outlined in Paragraph CM-4.9.10 of this Section so that the CBB may make an informed review of the request. Banks must submit such request to the CBB and the CBB shall respond within 2 weeks from the date of receiving a complete set of all the required documents.
Added: October 2016
CM-4.9.4
Any
major investments by aBahraini Islamic bank licensee in thecapital instruments of another entity must be included in the measure of an "exposure " for the purposes of Module CM, i.e. suchmajor investments must be aggregated with all other facilities to a client for the purpose of calculating the level of "largeexposures ".Amended: October 2016
Amended: January 2015
Amended: April 2014
Added: January 2011CM-4.9.5
The CBB reserves the right to require
Bahraini Islamic bank licensees to dispose of anymajor investment acquired without its prior approval. Where a "major investment " is acquired without approval of the CBB, then the entire value of the holding must be deducted from the consolidated Total Capital of the concerned bank. Approval will not be given for "major investments " in entities incorporated in jurisdictions where secrecy constraints exist or there are restrictions on the passage of information to the bank (other than customer confidentiality requirements imposed by financial regulators).Amended: October 2016
Amended: January 2015
Amended: April 2014
Added: January 2011[This Section was deleted in October 2016.]
Deleted: October 2016CM-4.9.6
[This Paragraph was moved to Section CM-4.10 in October 2016]
Amended: October 2016
Amended: January 2015
Amended: April 2014
Added: January 2011CM-4.9.7
[This Paragraph was moved to Section CM-4.10 in October 2016]
Amended: October 2016
Amended: January 2015
Amended: April 2014
Added: January 2011CM-4.9.8
[This Paragraph was moved to Section CM-4.10 in October 2016]
Amended: October 2016
Amended: January 2015
Amended: April 2014
Added: January 2011Other Requirements
CM-4.9.9
If a bank's
close links with another entity prevent effective supervision of the bank (or bank group), the CBB may refuse or revoke a license or require a bank to sell or otherwise dispose of entities within its corporate group, or to restructure the banking group.Added: January 2011CBB Criteria for Assessment of Major Investments by Bahraini Islamic Bank Licensees
CM-4.9.10
In assessing any proposed
major investment mentioned above, the CBB will take into account the following points:(a) The amount of the proposedmajor investment relative to the existing consolidated Total Capital of the bank.(b) Existing capital adequacy ratios on consolidated basis and forecast ratios after themajor investment has gone ahead.(c) The adequacy of information flows from the investee company to the concerned bank.(d) Experience and fit and proper matters relating to the senior personnel associated with the proposedmajor investment .(e) Risks associated with the proposedmajor investment .(f) Disclosure and exchange of (supervisory) information (in the case of a foreigninvestment ).(g) Adequacy of host supervision (in the case of a foreignmajor investment ).(h) Currentinvestments and concentrations inexposures of the concerned bank.(i) The compliance of the concerned bank with the CBB's rules and regulations (e.g. reporting issues), and the adequacy of internal systems and controls.(j) The extent of holdings by any other shareholders (holding 5% or more of the capital of the concerned entity) orcontrollers of the concerned entity.(k) Whether the proposed activities are in line with the Memorandum & Articles of Association of the bank.(l) The accounting treatment of the proposedmajor investment .(m) Whether themajor investment oracquisition relates to a closely-linked party, connected party, orcontroller in any way.(n) The existence of secrecy laws or constraints over supervisory access to the premises, assets, books and records of the concerned entity in which a "major investment " is being acquired.(o) The impact and extent of goodwill and intangibles upon the capital adequacy and balance sheet of the bank on a consolidated basis.(p) The bank's existing and forecast liquidity position (as a result of themajor investment ) and how themajor investment is to be funded (e.g. by the issuance of new capital or sale of otherinvestments ).Amended: October 2016
Amended: April 2015
Amended: January 2015
Added: January 2011CM-4.10 CM-4.10 Limits on 'Significant Investments'
CM-4.10.1
No
Bahraini Islamic bank licensee may have a significant investment in the capital instruments of a commercial entity where the significant investment amount and any otherexposure to the subject entity is more than 15% of the concerned bank's consolidated Total Capital.Added: October 2016
CM-4.10.2
The total amount of a bank's significant investments in unconnected commercial entities may not exceed 60% of the concerned bank's consolidated Total Capital.
Added: October 2016
CM-4.10.3
Any excesses above the limits in Paragraphs CM-4.10.1 and CM-4.10.2 must be risk-weighted according to Paragraph CA-2.4.25.
Added: October 2016
CM-4.10.4
For purposes of this Section, 'significant investments' in a commercial entity is defined as any
investment in thecapital instruments of a commercial entity by aBahraini Islamic bank licensee which is equivalent to or more than 10% of the issued common share capital of the issuing commercial entity.Added: October 2016
CM-4.10.5
This section refers to the treatment of investments in commercial entities which are otherwise not connected to the concerned bank (i.e. the bank's connection to the entity is by way of shareholding or holding of other capital instruments). If a bank is investing in a commercial company where there is a connection by way of mutual directors or mutual parent, or some other relationship that makes the investee a 'related party' as defined by IFRS, then the
major investment must be treated as anexposure to a connected counterparty and the concerned limits and rules forexposures to connected counterparties apply.Added: October 2016
CM-5 CM-5 Staff Credit Facilities
CM-5.1 CM-5.1 Reporting and Compliance
CM-5.1.1
The CBB's prior written consent must be obtained for any credit facilities provided to an employee where the amount of such facility, either singly or when added to an existing facility/existing facilities outstanding to that employee at that date, would be equal to or in excess of BD 100,000 (Bahrain Dinars One Hundred Thousand), or its equivalent in foreign currency. Banks must notify the CBB in writing of any senior employee who fails to discharge his repayment obligations.
Amended: July 2011
Amended: January 2011
October 2007CM-5.1.1A
Where a bank seeks the CBB's prior approval as required under Paragraph CM-5.1.1, in its request, the bank must confirm that the employee credit facility is in line with the bank's board approved policy. The request must also confirm that the bank has made an internal assessment and evaluation when reaching the decision to grant the employee credit facility and that all necessary internal approvals have been obtained.
Added: April 2014CM-5.1.2
Banks must ensure that the provisions of relevant laws (including, specifically, the Bahrain Labour Law) are observed at all times in this area.
October 07CM-6 CM-6 Write-off – Credit Facility
CM-6.1 CM-6.1 Write-offs
CM-6.1.1
All
Bahraini Islamic bank licensees must notify the CBB of any write-off of an exposure of an amount in excess of BD 100,000 (Bahrain Dinars One Hundred Thousand), or its equivalent in foreign currency.Amended: October 2016
Amended: October 2015
Amended: July 2011
Amended: January 2011
October 2007CM-6.1.2
Such notification should be accompanied with documentary evidence showing, beyond reasonable doubt, that the customer does not possess the resources to fulfil the outstanding obligation.
October 07CM-6.1.3
All
Bahraini Islamic bank licensees must obtain the CBB's written no-objection before writing off any of the following:(a)Exposures to or guaranteed by anyapproved persons of the bank or any other CBB licensee;(b) [This Subparagraph was deleted in October 2016];(c)Exposures to controllers, subsidiaries, associates and SSB members of the bank;(d) [This Subparagraph was deleted in October 2015];(e)Exposures to any business entity for which the bank or any of itsapproved persons is a related party such as a board member, a shareholder owning 5% or more, a person assuming a managerial role, a guarantor; and(f)Exposures to anycontroller of another CBBlicensee (as defined in Section GR-5.2 — definition of Controller).Amended: October 2016
Amended: October 2015
Amended: July 2011
Amended: January 2011
Amended: April 2008
October 2007CM-6.1.3A
All branches of foreign banks must obtain the CBB's written no-objection before writing off the exposures listed in CM-6.1.3 from (a) to (f) except for (c).
Added: October 2016CM-6.1.4
All
Islamic bank licensees must notify the CBB of any applicableexposures outlined in Paragraph CM-6.1.3 that are classified as non-performing loans.Amended: October 2016
Added: October 2015CM-6.1.5
In order to comply with Subparagraph CM-6.1.3 (a) and (f),
Islamic bank licensees should refer to the CBB register on the CBB Website which contains a list ofapproved persons andcontrollers of all CBB licensees.Amended: October 2016
Added: October 2015CM-7 CM-7 Consumer Finance
CM-7.1 CM-7.1 Overview
CM-7.1.1
This Chapter sets out various requirements regarding the provision of consumer finance within the Kingdom of Bahrain by CBB licensees. The aim of these requirements is to encourage:
(a) Prudent provision of credit facilities by licensees providing consumer finance; and(b) The transparent disclosure of the full costs and terms on which licensees offer consumer finance.Amended: January 2011
October 2007Application Date
CM-7.1.2
The contents of this Chapter apply to all consumer finance facilities entered into or renewed after 1 January 2005. The application date of the "Code of Best Practice on Consumer Credit and Charging" is 1 September 2007. All Islamic banks which offer consumer finace facilities to residents of Bahrain must follow the Code after 1 September 2007. Failure to observe the requirements of this Chapter or the Code may result in Enforcement Action under Module EN. The Code is attached as Appendix CM-2 in Part B of the Rulebook.
October 07CM-7.2 CM-7.2 The CBB's Approach to Consumer Finance
CM-7.2.1
The CBB favours an open, market-based approach to the operations of licensees, to the extent consistent with its regulatory objectives of ensuring a stable financial system and the fair treatment of licensees' customers.
Amended: January 2011
October 2007CM-7.2.2
Bank licensees are reminded of their obligation to implement a sound internal controls framework, including an effective credit culture (see, for instance, Section CM-2.3). Bank licensees are also reminded of their obligations clearly to display and communicate charges and profit rates (see, for instance, Section BC-4.3).
October 07CM-7.2.3
The CBB has noted the growth in consumer finance as a proportion of outstanding credit facilities over the past few years. The CBB is concerned that this growth should not be at the cost of declining credit quality. Furthermore, the CBB wishes to see further improvements in licensees' transparency in their dealings with their customers, as regards the costs and terms of their lending. Strong competition in this segment of the market increases the need for licensees to be vigilant and to resist pressures to relax standards.
Amended: January 2011
October 2007CM-7.2.4
The measures presented in this Chapter should be viewed as minimum standards, rather than best practice. They are aimed to encouraging prudent extension of credit facilities and full, frank and fair disclosures, rather than dictate comprehensively how licensees should engage in consumer finance. These measures should be read in conjunction with the "Code of Best Practice on Consumer Credit and Charging" which was agreed jointly between the CBB and the Bahrain Association of banks (see appendix CM-2).
Amended: April 2014
October 07CM-7.2.5
These measures will be kept under review in the light of market developments and adjusted accordingly. If the CBB assesses that credit quality and effective transparency are being significantly undermined, then additional prescriptive measures will be considered.
Amended: January 2011
October 2007On-going Effort by the CBB
CM-7.2.6
These measures form part of a wider response by the CBB. The CBB recognizes that a key contributor to ensuring a sounder credit environment is the credit reference bureau.
Amended: January 2011
October 2007CM-7.2.7
The CBB supervisors and examiners will also focus on banks' implementation of the "Code of Best Practice on Consumer Credit and Charging" in their on-going supervision of licensees, to monitor and encourage sound financing practices and disclosure standards.
Amended: January 2011
October 2007CM-7.3 CM-7.3 Definition of Consumer Finance
CM-7.3.1
Consumer finance is the provision of any form of credit facility to an individual excluding:
(a) Any credit facility secured by a first charge on residential property to an individual, where the counterparty lives in, or intends to live in the property;(b) Any credit facility secured by cash or investments, where the security provided more than covers the principal of the credit facility; and(c) The provision of any form of credit to an individual for business purposes where the facility is to be repaid from the business activities of the counterparty.Amended: January 2011
October 2007CM-7.3.2
For the purposes of the Rulebook, 'credit facility' includes personal overdraft facilities, credit cards, ijara or other financing facility.
October 07CM-7.4 CM-7.4 Maximum Limits
Total Repayments Ratio
CM-7.4.1
Licensees may only provide a new consumer facility (or renew, extend or otherwise modify an existing consumer facility) for an amount such that the counterparty's total monthly repayments on all his consumer finance commitments do not exceed 50% of his monthly gross income. This limit may only be exceeded in the circumstances described in Paragraphs CM-7.4.6 and CM-7.4.10.
Amended: July 2011
October 2007CM-7.4.2
When reviewing an applicant for a consumer facility, licensees may only take into consideration regular income. A spouse's income may only be taken into consideration when the credit facility would be in joint names, such that the spouse would also be legally liable for the obligation incurred.
October 07CM-7.4.3
Notwithstanding the above limit, licensees must review in detail an applicant's personal financial standing and ability to service their obligations. Where a spouse's income is being taken into consideration, then their individual circumstances must also be similarly assessed. In many cases, these reviews may require consumer finance repayments to be kept significantly below 50% of monthly gross income.
October 07CM-7.4.4
Licensees must enquire as to applicants' sources of income, their past credit history, their regular outgoings and other financial commitments, including potential liabilities such as guarantees. Particular attention must be paid to housing costs (such as payments to Eskan Bank). A person's regular income, net of consumer finance repayments and other financial obligations, must remain sufficient for that person to support himself and any dependents. Licensees must also take into account likely future trends in income and outgoings, and the impact this may have on the 50% ratio.
Amended: October 2013
Amended: July 2011
October 2007CM-7.4.5
When factoring in credit cards into the repayment limit in Paragraph CM-7.4.1 above, licensees must include 5% of the credit limits available on these facilities. If the amounts outstanding (including profit) under such facilities exceed their limit, then the full amount outstanding must be included in the repayments ratio calculation. Charge cards are not included under this definition.
Amended: October 2016
Amended: July 2011
October 2007CM-7.4.6
In the case of high earners – defined for these purposes as persons earning more than BD 3,000 / month - the 50% limit may be relaxed, providing that the licensee has undertaken the review required in Paragraph CM-7.4.4 above and is satisfied that the counterparty can comfortably support a higher facility service ratio.
October 07CM-7.4.7
The review undertaken to satisfy requirements in Paragraph CM-7.4.4 above must be documented and made available to the CBB's examiners on request. The documentation must include all relevant information used to support the decision to extend credit facilities. In the case of high earners granted a facility in excess of the 50% limit, the documentation must also include a written statement, signed by an appropriate member of management, explaining the justification for relaxing the limit.
Amended: January 2011
October 2007Maximum Tenor Limit
CM-7.4.8
The maximum tenor for instalment consumer finance facilities is seven years. The tenor may not be extended more than twice during the period of the agreement.
October 07CM-7.4.9
The CBB does not believe it prudent for licensees to encourage the provision of credit facilities by offering long-term borrowing to fund short-term consumption. The CBB will review the development of market practices in this respect and will consider further measures if required.
Amended: January 2012
Amended: January 2011
October 2007Non-compliant Facilities
CM-7.4.10
Where a customer's monthly gross income falls (e.g. due to redundancy or disability or a similar event outside the control of the customer), the bank must identify such accounts as 'technically non-compliant'. If a customer requests an extension to the tenor of the facility due to reduced income, then the bank may increase the term to assist the customer. The bank must take account of the 50% limit outlined in Paragraph CM-7.4.1. Such facilities must also be identified as 'technically non-compliant'.
Amended: January 2022
Amended: July 2021
Amended: October 2019
October 07CM-7.5 CM-7.5 [This Section was deleted in October 2012 and requirements are now included in Section BC-4.2
[Deleted]
CM-7.5.1
[This paragraph was deleted in October 2012]
Deleted: October 2012
October 07CM-7.5.2
[This paragraph was deleted in October 2012]
Deleted: October 2012
Amended: July 2011
October 2007CM-7.5.3
[This paragraph was deleted in October 2012]
Deleted: October 2012
Amended: October 2011
Amended: April 2011
Amended: January 2011
October 2007CM-7.5.4
[This paragraph was deleted in October 2012]
Deleted: October 2012
Amended: July 2012
October 07[Deleted]
CM-7.5.5
[This paragraph was deleted in October 2012]
Deleted: October 2012
Amended: July 2012
October 07CM-7.5.6
[This paragraph was deleted in October 2012]
Deleted: October 2012
Amended: July 2011
October 2007CM-7.5.7
[This paragraph was deleted in October 2012]
Deleted: October 2012
Amended: July 2011
October 2007CM-7.5.8
[This paragraph was deleted in October 2012]
Deleted: October 2012
October 07CM-7.5.9
[This paragraph was deleted in October 2012]
Deleted: October 2012CM-7.5.10
[This paragraph was deleted in October 2012]
Deleted: October 2012
Amended: October 2011
October 2007CM-7.5.11
[This paragraph was deleted in October 2012]
Deleted: October 2012
October 07CM-7.5.12
[This Paragraph was deleted in October 2011].
Deleted: October 2011CM-7.6 CM-7.6 Refunds and Prepayments
Refund / Adjustment of Insurance Premium on Financing Prepayments and Top-Ups
CM-7.6.1
Banks/financing companies must refund/adjust proportionately the insurance premium charged on individual credit facilities when the customer either requests for a top up or prepayment of the credit facility as per the prescribed formula below:
Refund/Adjustment Amount = Remaining period to Maturity
X Premium Paid Original Maturity Added: April 2008Early Repayment Fees / Charges
CM-7.6.2
[This paragraph was deleted in April 2018].
Deleted: April 2018
Amended: July 2013
Amended: October 2011
Amended: January 2011
Added: April 2008CM-8 CM-8 Islamic Contracts
CM-8.1 CM-8.1 Overview
CM-8.1.1
[This paragraph was deleted in April 2011].
CM-8.1.2
[This paragraph was deleted in April 2011].
CM-8.1.3
In order to monitor and identify any asset deterioration due to the Islamic contracts, the CBB requires additional disclosures (see Module BR) on the Islamic contracts undertaken by the bank during the period.
Amended: January 2011
October 2007CM-8.1.4
Definitions, disclosure requirements and method(s) of accounting treatments for some of the Islamic contracts are outlined below.
October 07Murabaha
CM-8.1.5
Revenue for the purpose of Murabaha contracts must be recognised on an accrual basis.
October 07CM-8.1.6
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 2: Murabaha and Murabaha to the Purchase Orderer.
October 07Mudaraba
CM-8.1.7
Revenue on Mudaraba contracts may only be recognised to the extent it is being distributed.
October 07CM-8.1.8
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 3: Mudaraba Financing.
October 07CM-8.1.9
As part of its on-going supervision of Islamic banks, the CBB has set out the type of terms and conditions (see Appendix BC-7) which it believes Islamic banks should include, as a minimum, in such contracts.
Amended: January 2011
October 2007Musharaka
CM-8.1.10
Under a Musharaka contract, losses are shared in proportion to the contributed capital. It is not permissible to stipulate otherwise.
October 07CM-8.1.11
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 4: Musharaka Financing.
October 07Salam
CM-8.1.12
As a policy no Salam contracts must be entered into without covering the position through a Parallel Salam contract.
Amended: July 2011
October 2007CM-8.1.13
Where the bank is not able to enter into a Parallel Salam contract it must agree a statement policy with the CBB.
Amended: January 2011
October 2007CM-8.1.14
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 7: Salam and Parallel Salam.
October 07Istisna'a
CM-8.1.15
As a policy no Istisna'a contracts must be entered without covering the position through a Parallel Istisna'a contract.
Amended: July 2011
October 2007CM-8.1.16
In accordance with provisions contained in FAS 10: Istisna'a and Parallel Istisna'a, revenue and profit on such contracts must be recognised on a percentage of completion method.
Amended: July 2011
October 2007CM-8.1.17
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 10: Istisna'a and Parallel Istisna'a.
October 07Ijarah and Ijarah Muntahia Bittamleek
CM-8.1.18
For a detailed definition, disclosure requirements and method(s) of accounting treatment, refer to AAOIFI's FAS 8: Ijarah and Ijarah Muntahia Bittamleek.
October 07Facilities Transferred to Qard Hassan
CM-8.1.19
The CBB's approval must be obtained before any transfer of any
exposures to Qard Hassan if the amount is more than BD 100,000 or its equivalent in foreign currency (see Paragraph BR-5.2.6).Amended: April 2014
Amended: July 2011
Amended: January 2011
October 2007CM-8.1.20
The requirement stated in Paragraph CM-8.1.19 above applies to both on-balance sheet and restricted investment account related
exposures .Amended: January 2011
October 2007OM OM Operational Risk Management [Versions from October 2007 to 31 December 2019]
OM-A OM-A Introduction
OM-A.1 OM-A.1 Purpose
Executive Summary
OM-A.1.1
The Operational Risk Management Module sets out the Central Bank of Bahrain's ('CBB's') rules and guidance to
Islamic Bank licensees operating in Bahrain on establishing parameters and control procedures to monitor and mitigate operational risks. The contents of this Module apply to all Islamic banks, except where noted in individual Chapters.October 07OM-A.1.2
This Module provides support for certain other parts of the Rulebook, mainly:
(a) Principles of Business; and(b) High-level Controls.October 07Legal Basis
OM-A.1.3
This Module contains the CBB's Directive (as amended from time to time) relating to Operational Risk Management and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all
Islamic bank licensees (including theirapproved persons ).Amended: January 2012
Amended: January 2011
October 2007OM-A.1.4
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
Added: January 2011OM-A.2 [This Chapter was deleted in October 2007]
October 07OM-A.3 OM-A.3 Module History
OM-A.3.1
This Module was first issued in July 2004 as part Volume one of the CBB Rulebook (Volume one). All directives in this Module have been effective since this date. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made; Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 07OM-A.3.2
When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 1 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.
October 07OM-A.3.3
The most recent changes made to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes OM-5.1 01/04/05 Physical security measures. OM-4.2 01/10/05 Succession planning for locally incorporated banks. OM-5.1 01/10/05 Clarification of security manager role for smaller banks. OM-B & OM-1.2 01/04/06 Minor amendments concerning roles of Board and management. OM-5.1.15-OM-5.1.24 01/04/06 New security requirements for ATM security arrangements and reporting of security related complaints. OM-A.2.1-OM-A.2.6 01/10/07 Purpose (expanded) OM-A.2.1-OM-A.2.6 01/10/07 Key Requirements (deleted) OM-2.1-2.2&2.4 01/10/07 Relocation of Succession Planning Requirements from OM-4 OM-5.1-OM-5.9 01/10/07 Business Continuity Planning (expanded) OM-7 01/10/07 New Books and Records Chapter transferred from Module GR OM-8 01/04/08 Basel II Qualitative Operational Risk Requirements OM 01/2011 Various minor amendments to ensure consistency in CBB Rulebook. OM-A.1.3 and OM-A.1.4 01/2011 Clarified legal basis. OM-7.1.4 04/2011 This paragraph was deleted as Ministerial Order 23 does not apply to CBB licensees. OM-7.3.4 04/2011 Clarified retention period of records for promotional schemes. OM 07/2011 Various minor amendments to clarify Rules and have consistent language. OM-2.4 07/2011 Amended CBB reporting requirements regarding succession planning. OM-3.1.7 07/2011 Paragraph deleted as no longer applicable since standard conditions and licensing criteria document has now been incorporated as part of Volume 1. OM-6.2 10/2011 Added new Section on internet security. OM-7.1.7 10/2011 Corrected typo. OM-A.1.3 01/2012 Updated legal basis. OM-2.1.4 01/2012 Corrected cross reference. OM-3.2.2 04/2012 Deleted last sentence of Paragraph as it repeats the requirement under Paragraph OM-3.3.1 OM-6.2.2 04/2012 Clarified penetration testing interval for internet security. OM-1.1.4 10/2012 Amended to reflect updated version of Basel Committee document. OM-3.2.6, OM-5.2.1, OM-5.4.8, OM-8 10/2012 Amended to reflect the Basel June 2011 paper on Principles for the Sound Management of Operational Risk. OM-6.2 07/2013 Amended reporting requirements related to internet security measures. OM-6.2.1 10/2013 Amended Rule to apply to all banks. OM-3.7.2 10/2015 Clarified Rule on internal audit outsourcing. OM-6 04/2016 Updated ATM security measures for banks. OM-3.9 07/2016 Added new Section dealing with outsourcing of functions containing customer information. OM-5.10 10/2016 Added new Section on Cyber Security Risk Management OM-6.4.3 10/2016 Corrected cross references OM-6.4.4 10/2016 Corrected cross references OM-6.4.5 10/2016 Corrected cross references OM-6.6 10/2016 Added new Section on Cyber Security Measures OM-3.9.2 01/2017 Amended Paragraph on customer information OM-3.9.6 01/2017 Added new guidance paragraph on customer information OM-6.4.22 04/2017 ATM requirement on Solid Wall deleted. OM-6.4.23 04/2017 ATM requirement on Solid Wall deleted. OM-6.3.1 07/2017 Clarified requirements on compliance date. OM-6.3.2A 07/2017 Added new paragraph on Prohibition of Double Swiping. OM-6.3.2B 07/2017 Added new paragraph on Prohibition of Double Swiping. OM-6.3.2C 07/2017 Added new paragraph on Prohibition of Double Swiping. OM-6.3.2D 07/2017 Added new paragraph on Prohibition of Double Swiping. OM-6.3.2E 07/2017 Added new paragraph on Prohibition of Double Swiping. OM-6.4.21 07/2017 Deleted paragraph. OM-7.2.1 07/2017 Amended paragraph according to the Legislative Decree No. (28) of 2002. OM-7.2.2 07/2017 Deleted paragraph. OM-3.1.2 10/2017 Amended paragraph to allow the utilization of cloud services. OM-3.1.5A 10/2017 Added a new paragraph on outsourcing requirements. OM-3.2.3 10/2017 Amended paragraph. OM-3.3.1 10/2017 Amended paragraph. OM-3.3.2 10/2017 Amended paragraph. OM-3.3.3 10/2017 Amended paragraph. OM-3.3.4 10/2017 Amended paragraph. OM-3.3.5 10/2017 Added a new paragraph on outsourcing. OM-3.4.1 10/2017 Amended paragraph. OM-3.4.2(b) 10/2017 Amended sub-paragraph. OM-3.4.3 10/2017 Deleted paragraph. OM-3.4.5 10/2017 Amended paragraph. OM-3.5.1(a) 10/2017 Amended sub-sub-paragraph no. (5). OM-3.5.1(c) 10/2017 Amended sub-sub-paragraphs no. (2) and (3). OM-3.5.1(e) 10/2017 Amended sub-sub-paragraph no. (3). OM-3.8.3 10/2017 Amended paragraph. OM-3.9.1 10/2017 Amended paragraph. OM-3.9.2 10/2017 Amended paragraph on third party outsourcing of functions. OM-3.9.3 10/2017 Amended paragraph. OM-3.9.4 10/2017 Amended sub-paragraph. OM-3.9.4(b) 10/2017 Amended sub-paragraph. OM-3.9.4(d) 10/2017 Deleted sub-paragraph. OM-3.9.5 10/2017 Deleted paragraph. OM-3.9.7 10/2017 Added a new paragraph for security measures related to cloud services. OM-6.4.6 10/2017 Amended paragraph to include ancillary service providers. OM-6.3.1A 04/2018 Added a new Paragraph on card (EMV) compliance. OM-6.3.1B 04/2018 Added a new Paragraph on "provision of cash withdrawal and payment services through various channels" OM-6.3.2 04/2018 Amended Paragraph to mention "Islamic bank licensees". OM-3.9.2 07/2018 Amended Paragraph to include call centres. OM-3.9.2A 07/2018 Added new Paragraph on customer notification. OM-6.4.15A 10/2018 Added a new Paragraph on drive-thru ATMs. OM-6.4.20A 10/2018 Added a new Paragraph on drive-thru ATMs. OM-6.1.2 07/2019 Amended Paragraph on deployment of Private Security Guards at Head Offices of Licensees. OM-6.3.1C, OM6.3.1D, OM-6.3.1E, OM-6.3.1F 10/2019 Added new Paragraphs on Near Field Communication "NFC". Evolution of the Module
OM-A.3.4
[Deleted in October 2007 updates]
October 07OM-B OM-B General Guidance and Best Practice
OM-B.1 This Section was moved to Chapter OM-1.
OM-1 OM-1 International Guidance and Best Practice
OM-1.1 OM-1.1 Guidance Provided by International Bodies
Guidance Provided by other International Bodies
OM-1.1.1
The papers below provide guidance which promotes best practice and can be generally applied by all licensees to their activities.
October 07Basel Committee: Framework for Internal Controls Systems in Banking Organisations
OM-1.1.2
The paper (see www.bis.org/publ/bcbs40.pdf) issued in September 1998 presents the first internationally accepted framework for supervisors to use in evaluating the effectiveness of the internal controls over all on- and off-balance-sheet activities of banking organisations.
October 07OM-1.1.3
The paper describes elements that are essential to a sound internal control system, recommends principles that supervisors can apply in evaluating such systems, and discusses the role of bank supervisors and external auditors in this assessment process.
October 07Basel Committee: Principles for the Sound Management of Operational Risk
OM-1.1.4
The paper (see www.bis.org/publ/bcbs195.pdf) issued in June 2011 by the
Basel Committee on Banking Supervision, outlines a set of principles that provide a framework for the effective management and supervision of operational risk, for use by banks and supervisory authorities when evaluating operational risk management policies and practices.Amended: October 2012
October 07OM-1.1.5
The paper also recognises that clear strategies and oversight by the Board of Directors and senior management, a strong operational risk culture and internal control culture (including, among other things, clear lines of responsibility and segregation of duties), effective internal reporting, and contingency planning are all crucial elements of an effective operational risk management framework for banks of any size and scope.
October 07Basel Committee: Risk Management for Electronic Banking and Electronic Money Activities
OM-1.1.6
The paper (see www.bis.org/publ) issued in March 1998 provides guidelines for supervisory authorities and banking organisations as they develop methods for identifying, assessing, managing and controlling the risks associated with
electronic banking andelectronic money .October 07OM-1.1.7
The paper indicates that, while providing new opportunities for banks,
electronic banking andelectronic money activities carry risks as well as benefits and it is important that these risks are recognised and managed in a prudent manner.October 07Basel Committee: Risk Management Principles for Electronic Banking
OM-1.1.8
The paper (see www.bis.org/publ) issued in July 2003 recognizes new risks associated with the increase in distribution of financial services through electronic channels, or e-banking. To emphasize the importance of these risks, the Committee has placed responsibility on the shoulders of the Board and senior management to ensure their institutions have analysed, identified and modified operations to mitigate these risks.
October 07OM-1.1.9
To facilitate these developments, the Committee has identified fourteen Risk Management Principles for
Electronic Banking to help banking institutions expand their existing risk oversight policies and processes to cover their e-banking activities.October 07OM-1.1.10
The Risk Management Principles fall into three broad, and often overlapping, categories of issues that are grouped to provide clarity: Board and Management Oversight; Security Controls; and Legal and
Reputational Risk Management.October 07Joint Forum: High Level Principles for Business Continuity
OM-1.1.11
This paper provides a broad framework for business continuity standards, and contains seven principles for regulators and industry participants to follow. It was published in August 2006 and is available in the "publications" section of the Basel Committee portion of the BIS website (www.bis.org).
October 07OM-2 OM-2 General Requirements
OM-2.1 OM-2.1 Overview
OM-2.1.1
This Chapter provides guidance and rules for operational risk and sets out requirements for an appropriate risk management environment, including business continuity, outsourcing and electronic banking. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and
reputational risk .October 07OM-2.1.2
Operational risk is inherent in all types of banks' activities, and therefore all new products and services should be reviewed for operational risks prior to their implementation. As these risks are important and can result in substantial losses, bank auditors should include operational audits in the scope of all audits.
October 07OM-2.1.3
The importance of operational risk has gained prominence as increasing reliance on sophisticated technology raises concerns of potential losses should unforeseen events cause technological failures. Banks have traditionally focused on controlling and mitigating credit and liquidity risks, however, enhanced levels of automation, while reducing costs and processing times, also pose potential risks. As such any one process or system failure may itself or through a series of systematic failures, cause financial or other losses to a bank. Therefore, it has become imperative that banks should establish policies and procedures to monitor and control operational risks.
October 07OM-2.1.4
The CBB will use the papers mentioned in Paragraphs OM-1.1.1 to OM-1.1.11 as guidelines in evaluation of the internal control systems of banks operating in Bahrain. Such evaluations will be made through the CBB's normal supervisory processes (e.g. meetings with management, on-site examinations (Module BR) and the use of
appointed experts (Section BR-6.5).Amended: January 2012
Amended: January 2011
October 2007OM-2.2 OM-2.2 Developing an Appropriate Risk Management Environment
OM-2.2.1
It must be standard practice for a bank's management to implement policies and procedures to manage risks arising out of a bank's activities. The bank must maintain written policies and procedures that identify the risk tolerances approved by the Board of Directors and must clearly delineate lines of authority and responsibility for managing the risks. Banks' employees and loan officers in particular must be fully aware of all policies and procedures that relate to their specific duties.
Amended: July 2011
October 07OM-2.2.2
The bank's strategy must define its tolerance for risk and lay out the Board's understanding of the specific characteristics of operational risk.
October 07The Board of Directors
OM-2.2.3
The Board of Directors must be aware of the major aspects of the bank's operational risk as a distinct and controllable risk Category.
Amended: July 2011
October 07OM-2.2.4
The responsibilities of the Board of Directors of the bank must include:
(a) Approving the bank's operational risk strategy;(b) Periodically reviewing the bank's operational risk strategy;(c) Approving the basic structure of the framework for managing operational risk; and(d) Ensuring that senior management is carrying out its risk management responsibilities.October 07Senior Management
OM-2.2.5
The responsibilities of the senior management of the bank must include:
(a) Implementing the operational risk strategy approved by the Board of Directors;(b) Ensuring that the strategy is implemented consistently throughout the whole banking organisation;(c) Ensuring that all levels of staff understand their responsibilities with respect to operational risk management;(d) Developing and implementing policies, processes and procedures for managing operational risk in all of the bank's products, activities, processes and systems;(e) Developing succession plans for senior staff; and(f) Developing Business Continuity Plans for the bank.October 07Management Information System
OM-2.2.6
The management information system of a banking organisation plays a key role in establishing and maintaining an effective operational risk management framework.
October 07OM-2.2.7
'Communication flow' serves the purpose of establishing a consistent operational risk management culture across the bank. 'Reporting flow' enables:
(a) Senior management to monitor the effectiveness of the risk management system for operational risk; and(b) The Board of Directors to oversee senior management performance.Amended: January 2012
October 07
OM-2.3 OM-2.3 Identification, Measurement, Monitoring and Control
OM-2.3.1
As part of an effective operational risk management system, banks must:
(a) Identify critical processes, resources and loss events;(b) Establish processes necessary for measuring operational risk;(c) Monitor operational risk exposures and loss events on an on-going basis; and(d) Develop policies, processes and procedures to control or mitigate operational risk.October 07OM-2.3.2
Banks should assess the costs and benefits of alternative risk limitation and control strategies and should adjust their operational risk exposure using appropriate strategies, in light of their overall risk profile.
Amended: January 2012
October 07OM-2.4 OM-2.4 Succession Planning
OM-2.4.1
Succession planning is an essential precautionary measure for a bank if its leadership stability — and hence ultimately its financial stability — is to be protected. Succession planning is especially critical for smaller institutions, where management teams tend to be smaller and possibly reliant on a few key individuals.
October 07OM-2.4.2
The CBB requires locally incorporated banks to document their Board-approved
succession plans for their senior management team and have these ready at any time for onsite inspection by CBB staff.Amended: July 2011
Amended: January 2011
October 2007OM-2.4.3
[This Paragraph was deleted in July 2011].
OM-3 OM-3 Outsourcing
OM-3.1 OM-3.1 Introduction
OM-3.1.1
This Chapter sets out the CBB's approach to outsourcing by licensees. It also sets out various requirements that licensees must address when considering outsourcing an activity or function.
Amended: January 2011
October 2007OM-3.1.2
In the context of this Chapter, 'outsourcing' means an arrangement whereby a third party performs on behalf of a licensee an activity which was previously undertaken by the licensee itself (or in the case of a new activity, one which commonly would have been performed internally by the licensee). Examples of services that are typically outsourced include data processing, cloud services, customer call centres and back-office related activities.
Amended: October 2017
October 07OM-3.1.3
Most of the Directives in this Chapter are concerned with situations where the third party provider is outside the licensee's group. Section OM-3.8, however, sets out the CBB's requirements when a service is outsourced to a company within the licensee's group.
Amended: January 2011
October 2007OM-3.1.4
The requirements in this Chapter only apply to 'material' outsourcing arrangements. These are arrangements that, if they failed in any way, would pose significant risks to the on-going operations of a licensee, its reputation and/or quality of service provided to its customers. For instance, the outsourcing of all or a substantial part of functions such as customer sales and relationship management, settlements and processing, IT and data processing and financial control, would normally be considered 'material'.
October 07OM-3.1.5
Management should carefully consider whether a proposed outsourcing arrangement falls under this Chapter's definition of 'material'. If in doubt, management should consult with the CBB.
Amended: January 2011
October 2007OM-3.1.5A
For outsourcing services that are not considered material outsourcing arrangements, licensees must submit a written notification to the CBB before committing to the new outsourcing arrangement.
Added: October 2017OM-3.1.6
The requirements in this Chapter only apply to outsourcing arrangements entered into after May 2003. In the case of pre-existing outsourcing agreements, the CBB requires licensees to apply the requirements of this Chapter to the fullest extent possible when these arrangements are subsequently renewed.
Amended: January 2011
October 2007Legal Source
OM-3.1.7
[This Paragraph was deleted in July 2011].
OM-3.2 OM-3.2 Supervisory Approach
OM-3.2.1
The CBB recognises the benefits that can potentially be achieved through outsourcing an activity to a third party provider. They can include reduced costs, enhanced service quality and a reduction in management time spent on non-core activities. However, outsourcing an activity also poses potential risks. These include the ability of the service provider to maintain service quality levels, reduced control over the activity and access to relevant information, and increased legal and client confidentiality risks.
Amended: January 2011
October 2007OM-3.2.2
The CBB's approach is to allow licensees the freedom to enter into outsourcing arrangements, providing these have been properly structured and associated risks addressed.
Amended: April 2012
Amended: January 2011
October 2007OM-3.2.3
The CBB expects licensees to have undertaken a thorough assessment of a proposal before formally submitting the request for prior approval to the CBB. However, the CBB is also willing to discuss ideas informally at an early stage of development, on a 'no-commitment' basis. It especially encourages an early approach when the proposed outsourcing is particularly material or innovative.
Amended: October 2017
Amended: January 2011
October 2007OM-3.2.4
Once an outsourcing arrangement has been implemented, the CBB requires a licensee to continue to monitor the associated risks and the effectiveness of its mitigating controls. It will verify this through the course of its normal on-site and off-site supervisory processes, such as prudential meetings and on-site examinations. The CBB also requires access to the outsourced activity, which it may occasionally want to examine itself, through management meetings or on-site examinations.
Amended: January 2011
October 2007OM-3.2.5
Fundamental to the CBB's supervisory approach to outsourcing is that the Board and management of the licensee may not abdicate their responsibility for a licensee's business and the way its customers are treated. The Board and management remain ultimately responsible for the effectiveness of systems and controls in outsourced activities.
Amended: January 2011
October 2007OM-3.2.6
The board and
senior management are responsible for understanding the operational risks associated with outsourcing arrangements and ensuring that effective risk management policies and practices are in place to manage the risk in outsourcing activities. Outsourcing policies and risk management activities should encompass:(a) Procedures for determining whether and how activities can be outsourced;(b) Processes for conducting due diligence in the selection of potential service providers;(c) Sound structuring of the outsourcing arrangement, including ownership and confidentiality of data, as well as termination rights;(d) Programmes for managing and monitoring the risks associated with the outsourcing arrangement, including the financial condition of the service provider;(e) Establishment of an effective control environment at the bank and the service provider;(f) Development of viable contingency plans; and(g) Execution of comprehensive contracts and/or service level agreements with a clear allocation of responsibilities between the outsourcing provider and the bank.Added: October 2012OM-3.3 OM-3.3 Prior Approval Requests
OM-3.3.1
A licensee must seek the CBB s prior written approval before committing to a new material outsourcing arrangement.
Amended: October 2017
Amended: January 2011
October 2007OM-3.3.2
The above request for prior approval must:
(a) Be made in writing to the licensee's normal supervisory contact;(b) Contain sufficient detail to demonstrate that relevant issues raised in Section OM-2.4 onward of this Chapter have been addressed; and(c) Be made at least 6 weeks before the licensee intends to commit to the arrangement.Amended: October 2017
October 07OM-3.3.3
The CBB will review the information provided and provide a definitive response within 6 weeks of receiving the request for prior approval. Where further information is requested from the licensee, however, the time taken to provide this further information will not be taken into account. The CBB may also contact home or host supervisors of the licensee or the service provider, to seek their comments — in such cases, the 6-week turnaround is also subject to the speed of their response.
Amended: October 2017
Amended: January 2011
October 2007OM-3.3.4
Once an activity has been outsourced, a licensee must immediately inform its normal supervisory contact at the CBB of any material problems encountered with the outsourcing provider. The CBB reserves the right to direct a licensee to make alternative arrangements for the outsourced activity.
Amended: October 2017
Amended: January 2011
October 2007OM-3.3.5
The CBB reserves the right to require a licensee to terminate or make alternative outsourcing arrangements if, among other reasons, the confidentiality of its customer information was, or is likely to be, breached or the ability of the CBB to carry out its supervisory functions in view of the outsourcing arrangement cannot be assured or executed.
Added: October 2017OM-3.4 OM-3.4 Risk Assessment
OM-3.4.1
Licensees must undertake a thorough risk assessment of an outsourcing proposal, before formally submitting the request for approval to CBB and committing itself to an agreement.
Amended: October 2017
Amended: January 2011
October 2007OM-3.4.2
The risk assessment must — amongst other things — include an analysis of:
(a) The business case;(b) The suitability of theoutsourcing provider ; including but not limited to the outsourcing provider's financial soundness, its technical competence, its commitment to the arrangement, its reputation, its adherence to international standards, and the associated country risk; a and(c) The impact of the outsourcing on the licensee's overall risk profile and its systems and controls framework.Amended: October 2017
Amended: July 2011
October 07OM-3.4.3
[This paragraph was deleted in October 2017].
Deleted: October 2017
October 07OM-3.4.4
Once an outsourcing agreement has been entered into, licensees must regularly review the suitability of the outsourcing provider and the on-going impact of the agreement on their risk profile and systems and controls framework. Such reviews must take place at least every year.
Amended: July 2011
October 07OM-3.4.5
A licensee must nominate a relevant approved person with day-to-day responsibility for handling the relationship with the outsourcing provider and ensuring that relevant risks are addressed. This person must be notified to the CBB as part of the request for prior approval required under Section OM-3.3 above. Any subsequent replacement of such person must also be notified to the CBB.
Amended: October 2017
Amended: July 2011
Amended: January 2011
October 2007OM-3.5 OM-3.5 Outsourcing Agreement
OM-3.5.1
The activities to be outsourced and respective contractual liabilities and obligations of the outsourcing provider and licensee must be clearly specified in an outsourcing agreement. This agreement must — amongst other things — address the following points:
(a) Control over outsourced activities1. The Board and management of licensees are held ultimately responsible by the CBB for the adequacy of systems and controls in outsourced activities. Licensees must therefore ensure that they have adequate mechanisms for monitoring the performance of, and managing the relationship with, the outsourcing provider.2. Aservice level agreement ("SLA") — setting out the standards of service to be provided — must form part of the outsourcing agreement. Where the outsourcing provider interacts directly with a licensee's customers, the SLA must — where relevant — reflect the licensee's own standards regarding customer care.3. Mechanisms for the regular monitoring by licensees of performance against the SLA and other targets, and for implementing remedies in case of any shortfalls, must also form part of the agreement.4. Clear reporting and escalation mechanisms must be specified in the agreement.5. Where an outsourcing provider in turn decides to sub-contract to other providers, CBB's prior written approval must be obtained, and the original provider must remain contractually liable to the licensee for the quality and level of service agreed, and its obligations to the licensee must remain unchanged.(b) Customer data confidentiality1. Licensees must ensure that outsourcing agreements comply with all applicable legal requirements regarding customer confidentiality.2. Licensees must ensure that the outsourcing provider implements adequate safeguards and procedures. Amongst other things, customer data must be properly segregated from those belonging to other clients the outsourcing provider may have. Outsourcing providers must give suitable undertakings that the company and its staff will comply with all applicable confidentiality rules. Licensees must have contractual rights to take action against the service provider in the event of a breach of confidentiality.3. Licensees must assess the impact of using an overseas-based outsourcing provider on their ability to maintain customer data confidentiality, for instance, because of the powers of local authorities to access such data.(c) Access to information1. Outsourcing agreements must ensure that the licensee's internal and external auditors have timely access to any relevant information they may require to fulfill their responsibilities. Such access must allow them to conduct on-site examinations of the outsourcing provider, if required.2. Licensees must also ensure that the CBB inspectors andappointed experts have timely access to any relevant information they may reasonably require under the law. Such access must allow the CBB to conduct on-site examinations of the outsourcing provider, if required.3. Where the outsourcing provider is based overseas, the outsourcing provider must confirm in the outsourcing agreement that there are no regulatory or legal impediments to either the licensee's internal and external auditors, or the CBB inspectors andappointed experts , having the access described above. Should such restrictions subsequently be imposed, the licensee must communicate this fact to the CBB as soon as it becomes aware of the matter.4. The outsourcing provider must commit itself, in the outsourcing agreement, to informing the licensee of any developments that may have a material impact on its ability to meet its obligations. These may include, for example, relevant control weaknesses identified by the outsourcing provider's internal or external auditors, and material adverse developments in the financial performance of the outsourcing provider.(d) Business continuity1. Licensees must ensure that service providers maintain, regularly review and test plans to ensure continuity in the provision of the outsourced service.2. Licensees must have an adequate understanding of the outsourcing provider's arrangements, to understand the implications for its own contingency arrangements (see Section OM-3.6).(e) Termination1. Licensees must have the right to terminate the agreement should the outsourcing provider undergo a change of ownership (whether direct or indirect) that poses a potentialconflict of interest ; becomes insolvent; or goes into liquidation or administration.2. Termination under any other circumstances allowed under the agreement must give licensees a sufficient notice period in which they can effect a smooth transfer of the service to another provider or bring it back in-house.3. In the event of termination, for whatever reason, the agreement must provide for the return of all customer data — where required by licensees — or destruction of the records.Amended: October 2017
Amended: July 2011
Amended: January 2011
October 2007OM-3.6 OM-3.6 Contingency Planning for Outsourcing Arrangements
OM-3.6.1
Licensees must maintain and regularly review
contingency plans to enable them to set up alternative arrangements — with minimum disruption to business — should the outsourcing contract be suddenly terminated or the outsourcing provider fails. This may involve the identification of alternative outsourcing providers or the provision of the service in-house. These plans must consider how long the transition would take and what interim arrangements would apply.Amended: July 2011
October 07OM-3.6.2
See Chapter OM-5 for further guidance on business continuity and contingency planning.
October 07OM-3.7 OM-3.7 Internal Audit Outsourcing
OM-3.7.1
Because of the critical importance of an effective internal audit function to a licensee's control framework, all proposals to outsource internal audit operations are to be considered material.
October 07OM-3.7.2
The CBB will not permit licensees to outsource their internal audit function to the same firm that acts as their external auditor.
Amended: October 2015
Amended: January 2011
October 2007OM-3.7.3
Licensees who have existing outsourcing arrangements in place with their external auditor relating to the provision of internal audit services are required to find suitable alternatives when the existing arrangements terminate or come up for renewal.
Amended: October 2015
October 07OM-3.7.4
In all circumstances, Board and management of licensees must retain responsibility for ensuring that an adequate internal audit programme is implemented, and will be held accountable in this respect by the CBB.
Amended: January 2011
October 2007OM-3.8 OM-3.8 Intragroup Outsourcing
OM-3.8.1
As with outsourcing to non-group companies, the Board and management of licensees are held ultimately responsible by the CBB for the adequacy of systems and controls in activities outsourced to group companies.
Amended: January 2011
October 2007OM-3.8.2
However, the degree of formality required — in terms of contractual agreements and control mechanisms — for outsourcing within a licensee's group is likely to be less, because of common management and enhanced knowledge of other group companies.
October 07OM-3.8.3
A licensee must seek the CBB's prior written approval at least 6 weeks before committing to a material
intragroup outsourcing . The request for approval must be made in writing to the licensee's normal supervisory contact, and must set out a summary of the proposed outsourcing, its rationale, and an analysis of its associated risks and proposed mitigating controls. The CBB will respond to the request for approval in the same manner and timescale as set in Section OM-3.3 above.Amended: October 2017
Amended: January 2011
October 2007OM-3.8.4
The CBB expects, as a minimum, an agreed statement of the standard of service to be provided by the group provider, including a clear statement of responsibilities allocated between the group provider and licensee.
Amended: January 2011
October 2007OM-3.8.5
The CBB also expects a licensee's management to have addressed the issues of customer confidentiality, access to information and business continuity covered above (Section OM-3.5).
Amended: January 2011
October 2007OM-3.9 OM-3.9 Outsourcing of Functions Containing Customer Information
OM-3.9.1
Licensees must seek the CBB's prior written approval for third party and intragroup outsourcing of functions/services containing customer information including but not limited to payment services, debt collection, card and data processing, IT function including cloud services, internal audit and electronic/internet banking services but excluding legal services.
Amended: October 2017
Added: July 2016OM-3.9.2
For a third party outsourcing of functions/services containing customer information, other than debt collection, IT function, internal audit, cards embossing, cheques personalization, data/documents storing and call centres, the service providers must be licensed by the CBB and located in Bahrain. If the outsourced service is not available in Bahrain after 30th June 2017, licensees must submit to the CBB a written request, at least within 30 days of the stated deadline. The request must provide details of the circumstances under which the extension of outsourcing activities is being requested.
Amended: July 2018
Amended: October 2017
Amended: January 2017
Added: July 2016OM-3.9.2A
In case of an outsourcing arrangement that involves transmission of customer information to the service provider, Licensees must make necessary changes to the terms of the customer agreements and send prior notices to the customer, who shall provide a consent in writing that his/her information would be transmitted to a service provider. Licensees may only effect the changes in the customer agreement following the receipt of customer consent.
Added: July 2018OM-3.9.3
Licensees must provide to the CBB quarterly progress reports on the steps and procedures taken in implementing the requirements of Paragraph OM-3.9.2. The progress report must be provided to the retail bank's supervisory point of contact at the CBB and the first report must be submitted by 31st July 2016.
Amended: October 2017
Added: July 2016OM-3.9.4
For intragroup outsourcing of functions/services containing customer information, the following conditions must also be met:
(a) Theoutsourcing providers must be annually audited by the group internal audit team and the audit findings must be reported to the CBB;(b) Theservice level agreement must clearly state that the CBB inspectors andappointed experts have the legal right to conduct onsite examinations of the outsourcing provider and such expenses are to be borne by thelicensee ; and(c) Any report by any other regulatory authority on the quality of controls of theoutsourcing provider must be submitted immediately by the licensee to the CBB.(d) [This sub-paragraph was deleted in October 2017].Amended: October 2017
Added: July 2016OM-3.9.5
[This Paragraph was deleted in October 2017].
Deleted: October 2017
Added: July 2016OM-3.9.6
In the case of overseas retail bank licensees, the CBB may consider a third party outsourcing arrangements entered by the licensee's head office as an intragroup outsourcing, provided that the head office submits to the CBB a letter of comfort which includes, but not limited to, the following conditions:
a. The head office declares its ultimate responsibility of ensuring that adequate controlling measures are in place; andb. The head office is responsible to take adequate rectification measures, including compensation to the affected customers, in cases where customers suffer any loss due to inadequate controls applied by the third party service provider.Added: January 2017Cloud Services
OM-3.9.7
For the purpose of outsourcing of cloud services, licensees must ensure that, at a minimum, the following security measures are in place:
(a)Customer information must be encrypted and licensees must ensure that all encryption keys or similar forms of authentication are kept secure within the licensee's control;(b) A secure audit trail must be maintained for all actions performed at the cloud servicesoutsourcing provider ;(c) A comprehensive change management procedure must be developed to account for future changes to technology with adequate testing of such changes;(d) The licensee's data must be logically segregated from other entities data at the outsourcing service provider's platform;(e) The cloud service provider must provide information on measures taken at its platform to ensure adequate information security, data security and confidentiality, including but not limited to forms of protection available against unauthorized access and incident management process in cases of data breach or data loss; and(f) The right to release customer information/data in case of foreign government/court orders must be the sole responsibility of the licensee, subject to the CBB Law.Added: October 2017OM-4 OM-4 Electronic Money and Electronic Banking Activities
OM-4.1 OM-4.1 Electronic Banking
OM-4.1.1
This Chapter refers to
Basel Committee papers that the CBB requires relevant licensees to use as guidance onelectronic banking activities.Amended: January 2011
October 2007OM-4.1.2
The CBB considers that the following papers represent best practice and provide guidelines for recognising, addressing and managing risk associated with this area. Banks should take appropriate steps for the implementation of relevant recommendations set out therein:
(a) 'Risk Management forElectronic Banking andElectronic Money Activities' issued in March 1998 (see OM-1.1 for further references to the paper);(b) 'Risk Management Principles forElectronic Banking ' issued in May 2001 (see OM-1.1 for further references to the paper).Amended: January 2011
October 2007OM-4.1.3
Licensees must use the 'Risk Management Principles and Sound Practices' in the Basel Committee paper in OM-1.1 as guidelines to recognise and prudently manage risks associated with e-banking.
October 07OM-5 OM-5 Business Continuity Planning
OM-5.1 OM-5.1 Introduction
Why Do Financial Institutions Need Business Continuity Plans?
OM-5.1.1
All businesses may experience serious disruptions to their business operations. These disruptions may be caused by external events such as flooding, power failure or terrorism, or by internal factors such as human error or a serious computer breakdown. The probability of some events may be small, but the potential consequences may be massive, whereas other events may be more frequent and with shorter time horizons. The Joint Forum (the Basel Committee on Banking Supervision (BCBS), the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS)) have given additional background and context to the need for business continuity in its paper of August 2006 titled "High Level Principles for Business Continuity" (
www.bis.org ).October 07OM-5.1.2
According to the Joint Forum, in its paper, Business Continuity is "a whole of business approach for insuring that specified operations can be maintained or recovered in a timely fashion in the event of disruption. Its purpose is to minimize the operational, financial, legal, reputational, and other material consequences arising from a disruption". The objectives of a good business continuity plan ("BCP") are:
(a) To minimise financial loss to the licensee;(b) To continue to serve customers and counterparties in the financial markets; and(c) To mitigate the negative effects that disruptions can have on a licensee's reputation, operations, liquidity, credit quality, its market position, and its ability to remain in compliance with applicable laws and regulations.October 07OM-5.1.3
Banks play a critical role in an economy, in providing payment services, as holders of people's savings, and as providers of finance. Hence, a BCP is especially critical for banks. It helps ensure that their business operations are resilient and the effects of disruptions in service are minimized and thus helps maintain confidence in the banking system.
October 07Scope and Key Elements of a BCP
OM-5.1.4
The requirements of this Chapter apply to all retail and wholesale banks (whether locally incorporated or a branch).
October 07OM-5.1.5
Branch Licensees of foreign banks may apply alternative arrangements to those specified in this module, where they are subject to comprehensive BCP arrangements implemented by their head office or other member of their group, provided that:
(a) They have notified the CBB in writing what alternative arrangements will apply;(b) They have satisfied the CBB that these alternative arrangements are equivalent to the measures contained in this chapter, or are otherwise suitable; and(c) The CBB has agreed in writing to these alternative arrangements being used.October 07Implementation
OM-5.1.6
The requirements in this Chapter must be complied with in full by 1 October 2007. Failure to comply with these requirements after that will trigger a supervisory response, which may include formal enforcement measures, as set out in Module EN (Enforcement).
October 07OM-5.1.7
For contingency planning relating to outsourcing activities, see Section OM-3.6.
October 07OM-5.2 OM-5.2 General Requirements
OM-5.2.1
To ensure an ability to operate on an ongoing basis and limit losses in the event of severe business disruption all
Islamic bank licensees must maintain a business continuity plan (BCP) appropriate to the scale and complexity of their operations. A BCP must address the following key areas:(a) Data back up and recovery (hard copy and electronic);(b) Continuation of all critical systems, activities, and counterparty impact;(c) Financial and operational assessments;(d) Alternate communication arrangements between the licensee and its customers and its employees;(e) Alternate physical location of employees;(f) Communications with and reporting to the CBB and any other relevant regulators; and(g) Ensuring customers' prompt access to their funds in the event of a disruption.Amended: October 2012
October 07OM-5.2.2
Effective BCPs must be comprehensive, limited not just to disruption of business premises and information technology facilities, but covering all other critical areas, which affect the continuity of critical business operations or services (e.g. liquidity, human resources and others).
October 07OM-5.2.3
Licensees must notify the CBB promptly if their BCP is activated. They must also provide regular progress reports — as agreed with the CBB — until the BCP is deactivated.
October 07OM-5.2.4
The CBB recognises that BCPs involve costs, and that it may not be cost effective to have a fully developed and implemented BCP for all conceivable worst-case scenarios. However, the CBB expects licensees to plan for how they may cope with the complete destruction of buildings and surrounding infrastructure in which their key offices, installations, counterparties or service providers are located. The loss of key personnel, and a situation where back-up facilities might need to be used for an extended period of time are important factors in effective BCPs.
October 07OM-5.2.5
Licensees may find it useful to consider two-tier plans: one to deal with near-term problems; this should be fully developed and able to be put into immediate effect. The other, which might be in paper form; should deal with a longer-term scenario (e.g. how to accommodate processes that might not be critical immediately but would become so over time).
October 07OM-5.3 OM-5.3 Board and Senior Management Responsibilities
Establishment of a Policy, Processes&Responsibilities
OM-5.3.1
A Bank's Board of Directors and Senior Management are collectively responsible for a bank's business continuity. The Board must endorse the policies, standards and processes for a licensee's BCP, as established by its senior management. The Board and senior management must delegate adequate resources to develop the BCP, and for its maintenance and periodic testing.
October 07OM-5.3.2
Licensees must establish a Crisis Management Team (CMT) to develop, maintain and test their BCP, as well as to respond to and manage the various stages of a crisis. The CMT must comprise members of
senior management and heads of major support functions (e.g. building facilities, IT, corporate communications and human resources).Amended: July 2011
October 07OM-5.3.3
Licensees must establish (and document as part of the BCP) individuals' responsibilities in helping prepare for and manage a crisis; and the process by which a disaster is declared and the BCP initiated (and later terminated).
October 07Monitoring and Reporting
OM-5.3.4
The CMT must submit regular reports to the Board and senior management on the results of the testing of the BCP (refer to section OM-5.9). Major changes must be developed by CMT, reported to
senior management , and endorsed by the Board.Amended: July 2011
October 07OM-5.3.5
The Chief Executive of a licensee must sign a formal annual statement submitted to the Board on whether the recovery strategies adopted are still valid and whether the documented BCP is properly tested and maintained. The annual statement must be included in the BCP documentation and will be reviewed as part of the CBB's on-site examinations.
October 07OM-5.4 OM-5.4 Developing a Business Continuity Plan
Impact Analysis
OM-5.4.1
Licensees' BCPs must be based on (i) a business impact analysis (ii) an operational impact analysis, and (iii) a financial impact analysis. These analyses must be comprehensive, including all business functions and departments, not just IT or data processing.
October 07OM-5.4.2
The key objective of a Business Impact Analysis is to identify the different kinds of risk to business continuity and to quantify the operational and financial impact of disruptions on a licensee's ability to conduct its critical business processes.
October 07OM-5.4.3
A typical business impact analysis is normally comprised of two stages. The first is to identify and prioritise the critical business processes that must be continued in the event of a disaster. The first stage should take account of the impact on customers and reputation, the legal implications and the financial cost associated with downtime. The second stage is a time-frame assessment. This aims to determine how quickly the licensee needs to resume critical business processes identified in stage one.
October 07OM-5.4.4
Operational impact analysis focuses on the firm's ability to maintain communications with customers and to retrieve key activity records. It identifies the organizational implications associated with the loss of access, loss of utility, or loss of a facility. It highlights which functions may be interrupted by an outage, and the consequences to the public and customer of such interruptions.
October 07OM-5.4.5
A Financial Impact Analysis identifies the financial losses that (both immediate and also consequent to the event) arise out of an operational disruption.
October 07Risk Assessment
OM-5.4.6
In developing a BCP, licensees must consider realistic threat scenarios that may (potentially) cause disruptions to their business processes.
October 07OM-5.4.7
Licensees should analyse a threat by focusing on its impact on the business processes, rather than on the source of a threat. Certain scenarios can be viewed purely in terms of business disruption in specific work areas, systems or facilities. The scenarios should be sufficiently comprehensive to avoid the BCPs becoming too basic and thereby avoiding steps that could improve the resiliency of the licensee to disruptions.
October 07OM-5.4.8
Business continuity plans must take into account different types of likely or plausible scenarios to which the bank may be vulnerable. In particular, the following specific scenarios must at a minimum, be considered in the BCP:
• Utilities are not available (power, telecommunications);• Critical buildings are not available or specific facilities are not accessible;• Software and live data are not available or are corrupted;• Vendor assistance or (outsourced) service providers are not available;• Critical documents or records are not available;• Critical personnel are not available; and• Significant equipment malfunctions (hardware or telecom).Amended: October 2012
October 07OM-5.4.9
Licensees must distinguish between threats with a higher probability of occurrence and a lower impact to the business process (e.g. brief power interruptions) to those with a lower probability and higher impact (e.g. a terrorist bomb).
October 07OM-5.4.10
As a starting point, licensees must perform a "gap analysis". This gap analysis is a methodical comparison of what types of plans the licensee requires in order to maintain, resume or recover critical business operations or services in the event of a disruption, versus what the existing BCP provides. Management and the Board can address the areas that need development in the BCP, using the gap analysis.
Amended: July 2011
October 07OM-5.5 OM-5.5 BCP – Recovery Levels&Objectives
OM-5.5.1
The BCP must document strategies and procedures to maintain, resume and recover critical business operations or services. The plan must differentiate between critical and non-critical functions. The BCP must clearly describe the types of events that would lead up to the formal declaration of a business disruption and the process for activating the BCP.
October 07OM-5.5.2
The BCP must clearly identify alternate sites for different operations, the total number of recovery personnel, workspace requirements, and applications and technology requirements. Office facilities and records requirements must also be identified.
October 07OM-5.5.3
Licensees should take note that they might need to cater for processing volumes that exceed those under normal circumstances. The interdependency among critical services is another major consideration in determining the recovery strategies and priority. For example, the resumption of the front office operations is highly dependent on the recovery of the middle office and back office support functions.
October 07OM-5.5.4
Individual critical business and support functions must establish the minimum BCP recovery objectives for recovering essential business operations and supporting systems to a specified level of service ("recovery level") within a defined period following a disruption ("recovery time"). These recovery levels and recovery times must be approved by the senior management prior to proceeding to the development of the BCP.
October 07List of Contacts and Responsibilities
OM-5.5.5
The BCP must contain a list of all key personnel. The list must include personal contact information on each key employee such as their home address, home telephone number, and cell phone or pager number so they may be contacted in case of a disaster or other emergency.
October 07OM-5.5.6
The BCP must contain all the necessary process steps to complete each critical business operation or service. Each process must be explained in sufficient detail to allow another employee to perform the job in case of a disaster.
Amended: July 2011
October 07Alternate Sites for Business and Technology Recovery
OM-5.5.7
Most business continuity efforts are dependent on the availability of an alternate site (i.e. recovery site) for successful execution. The alternate site may be either an external site available through an agreement with a commercial vendor or a site within the Licensee's real estate portfolio. A useable, functional alternate site is an integral component of BCP.
October 07OM-5.5.8
Licensees must examine the extent to which key business functions are concentrated in the same or adjacent locations and the proximity of the alternate sites to primary sites. Alternate sites must be sufficiently remote from, and do not depend upon the same physical infrastructure components as a licensee's primary business location. This minimises the risk of both sites being affected by the same disaster (e.g. they must be on separate or alternative power grids and telecommunication circuits).
Amended: July 2011
October 07OM-5.5.9
Licensees' alternate sites must be readily accessible and available for occupancy (i.e. 24 hours a day, 7 days a week) within the time requirement specified in their BCP. Should the BCP so require, the alternate sites must have pre-installed workstations, power, telephones and ventilation, and sufficient space. Appropriate physical access controls such as access control systems and security guards must be implemented in accordance with Licensee's security policy.
Amended: July 2011
October 07OM-5.5.10
Other than the establishment of alternate sites, licensees should also pay particular attention to the transportation logistics for relocation of operations to alternate sites. Consideration should be given to the impact a disaster may have on the transportation system (e.g. closures of roads). Some staff may have difficulty in commuting from their homes to the alternate sites. Other logistics, such as how to re-route internal and external mail to alternate sites should also be considered. Moreover, pre-arrangement with telecommunication companies for automated telephone call diversion from the primary work locations to the alternate sites should be considered.
October 07OM-5.5.11
Alternate sites for technology recovery (i.e. back-up data centres), which may be separate from the primary business site, should have sufficient technical equipment (e.g. workstations, servers, printers, etc.) of appropriate model, size and capacity to meet recovery requirements as specified by licensees' BCPs. The sites should also have adequate telecommunication (including bandwidth) facilities and pre-installed network connections as specified by their BCP to handle the expected voice and data traffic volume.
October 07OM-5.5.12
Licensees should avoid placing excessive reliance on external vendors in providing BCP support, particularly where a number of institutions are using the services of the same vendor (e.g. to provide back-up facilities or additional hardware). Licensees should satisfy themselves that such vendors do actually have the capacity to provide the services when needed and the contractual responsibilities of the vendors should be clearly specified. Licensees should recognise that outsourcing a business operation does not transfer the associated business continuity management responsibilities.
October 07OM-5.5.13
The contractual terms should include the lead-time and capacity that vendors are committed to deliver in terms of back-up facilities, technical support or hardware. The vendor should be able to demonstrate its own recoverability including the specification of another recovery site in the event that the contracted site becomes unavailable.
October 07OM-5.5.14
Certain licensees may rely on a reciprocal recovery arrangement with other institutions to provide recovery capability (e.g. Cheque sorting and cash handling). Licensees should, however, note that such arrangements are often not appropriate for prolonged disruptions or an extended period of time. This arrangement could also make it difficult for Licensees to adequately test their BCP. Any reciprocal recovery agreement should therefore be subject to proper risk assessment and documentation by licensees, and formal approval by the Board.
October 07OM-5.6 OM-5.6 Detailed Procedures for the BCP
OM-5.6.1
Once the recovery levels and recovery objectives for individual business lines and support functions are determined, the development of the detailed BCP should commence. The objective of the detailed BCP is to provide detailed guidance and procedures in a crisis situation, of how to recover critical business operations or services identified in the Business Impact Analysis stage, and to ultimately return to operations as usual.
October 07Crisis Management Process
OM-5.6.2
A BCP must set out a Crisis Management Plan (CMP) that serves as a documented guidance to assist the CMT in dealing with a crisis situation to avoid spill over effects to the business as a whole. The overall CMP, at a minimum, must contain the following:
(a) A process for ensuring early detection of an emergency or a disaster situation and prompt notification to the CMT about the incident;(b) A process for the CMT to assess the overall impact of the crisis situation on the licensee and to make quick decisions on the appropriate responses for action (i.e. staff safety, incident containment and specific crisis management procedures);(c) Arrangements for safe evacuation from business locations (e.g. directing staff to a pre-arranged emergency assembly area, taking attendance of all employees and visitors at the time and tracking missing people through different means immediately after the disaster);(d) Clear criteria for activation of the BCP and/or alternate sites;(e) A process for gathering updated status information for the CMT (e.g. ensuring that regular conference calls are held among key staff from relevant business and support functions to report on the status of the recovery process);(f) A process for timely internal and external communications; and(g) A process for overseeing the recovery and restoration efforts of the affected facilities and the business services.Amended: July 2011
October 07OM-5.6.3
If CMT members need to be evacuated from their primary business locations, the licensee should set up a command centre to provide the necessary workspace and facilities for the CMT. Command centres should be sufficiently distanced from the licensee's primary business locations to avoid being affected by the same disaster.
October 07Business Resumption
OM-5.6.4
Each relevant business and support function must assign at least one member to be a part of the CMT to carry out the business resumption process for the relevant business and supported function. Appropriate recovery personnel with the required knowledge and skills must be assigned to the team.
Amended: July 2011
October 07OM-5.6.5
Generally, the business resumption process consists of three major phases:
(a) The mobilisation phase — This phase aims to notify the recovery teams (e.g. via a call-out tree) and to secure the resources (e.g. recovery services provided by vendors) required to resume business services.(b) The alternate processing phase — This phase emphasizes the resumption of the business and service delivery at the alternate site and/or in a different way than the normal process. This may entail record reconstruction and verification, establishment of new controls, alternate manual processes, and different ways of dealing with customers and counterparties; and(c) The full recovery phase — This phase refers to the process for moving back to a permanent site after a disaster. This phase may be as difficult and critical to the business as the process to activate the BCP.October 07OM-5.6.6
For the first two phases above, clear responsibilities should be established and activities prioritised. A recovery tasks checklist should be developed and included in the BCP.
October 07Technology Recovery
OM-5.6.7
Business resumption very often relies on the recovery of technology resources that include applications, hardware equipment and network infrastructure as well as electronic records. The technology requirements that are needed during recovery for individual business and support functions should be specified when the recovery strategies for the functions are determined.
October 07OM-5.6.8
Licensees should pay attention to the resilience of critical technology equipment and facilities such as the uninterruptible power supply (UPS) and the computer cooling systems. Such equipment and facilities should be subject to continuous monitoring and periodic maintenance and testing.
October 07OM-5.6.9
Appropriate personnel must be assigned with the responsibility for technology recovery. Alternative personnel need to be identified as back up for key technology recovery personnel in the case of the latter unavailability to perform the recovery process.
October 07Disaster Recovery Models
OM-5.6.10
There are various disaster recovery models that can be adopted by licensees to handle prolonged disruptions. The traditional model is an "active/back-up" model, which is widely used by many organizations. This traditional model is based on an "active" operating site with a corresponding alternate site (back-up site), both for data processing and for business operations.
October 07OM-5.6.11
A split operations model, which is increasingly being used by major institutions, operates with two or more widely separated active sites for the same critical operations, providing inherent back up for each other (e.g. branches). Each site has the capacity to take up some or all of the work of another site for an extended period of time. This strategy can provide nearly immediate resumption capacity and is normally able to handle the issue of prolonged disruptions.
October 07OM-5.6.12
The split operations model may incur higher operating costs, in terms of maintaining excess capacity at each site and added operating complexity. It may also be difficult to maintain appropriately trained staff and the split operations model can pose technological issues at multiple sites.
October 07OM-5.6.13
The question of what disaster recovery model to adopt is for individual licensees' judgment based on the risk assessment of their business environment and the characteristics of their own operations.
October 07OM-5.7 OM-5.7 Vital Records Management
OM-5.7.1
Each BCP must clearly identify information deemed vital for the recovery of critical business and support functions in the event of a disaster as well as the relevant protection measures to be taken for protecting vital information. Licensees must refer to Chapter OM-7 of the Rulebook when identifying vital information for business continuity. Vital information includes information stored on both electronic and non-electronic media.
Amended: July 2011
Amended: October 2009
October 2007OM-5.7.2
Copies of vital records must be stored off-site as soon as possible after creation. Back-up vital records must be readily accessible for emergency retrieval. Access to back-up vital records must be adequately controlled to ensure that they are reliable for business resumption purposes. For certain critical business operations or services, licensees must consider the need for instantaneous data back up to ensure prompt system and data recovery. There must be clear procedures indicating how and in what priority vital records are to be retrieved or recreated in the event that they are lost, damaged or destroyed.
Amended: July 2011
October 07OM-5.8 OM-5.8 Other Policies Standards, and Processes
Employee Awareness and Training Plan
OM-5.8.1
Licensees must implement an awareness plan and business continuity training for employees to ensure that all employees are continually aware of their responsibilities and know how to remain in contact and what to do in the event of a crisis.
October 07OM-5.8.2
Key employees should be involved in the business continuity development process, as well as periodic training exercises. Cross training should be utilised to anticipate restoring operations in the absence of key employees. Employee training should be regularly scheduled and updated to address changes to the BCP.
October 07Public Relations & Communication Planning
OM-5.8.3
Licensees must develop an awareness program and formulate a formal strategy for communication with key external parties (e.g. CBB and other regulators, investors, customers, counterparties, business partners, service providers, the media and other stakeholders) and provide for the type of information to be communicated. The strategy needs to set out all the parties the licensee must communicate to in the event of a disaster. This will ensure that consistent and up-to-date messages are conveyed to the relevant parties. During a disaster, ongoing and clear communication is likely to assist in maintaining the confidence of customers and counterparties as well as the public in general.
Amended: July 2011
October 07OM-5.8.4
The BCP must clearly indicate who may speak to the media and other key external parties, and have pre-arrangements for redirecting external communications to designated staff during a disaster. Important contact numbers and e-mail addresses of key external parties must be kept in a readily accessible manner (e.g. in wallet cards or licensees' intranet).
Amended: July 2011
October 07OM-5.8.5
Licensees may find it helpful to prepare draft press releases as part of their BCP. This will save the CMT time in determining the main messages to convey in a chaotic situation. Important conversations with external parties should be properly logged for future reference.
October 07OM-5.8.6
As regards internal communication, the BCP should set out how the status of recovery can be promptly and consistently communicated to all staff, parent bank, head office, branches and subsidiaries (where appropriate). This may entail the use of various communication channels (e.g. broadcasting of messages to mobile phones of staff, Licensees websites, e-mails, intranet and instant messaging).
October 07Insurance and other Risk Mitigating Measures
OM-5.8.7
Licensees must have proper insurance coverage to reduce the financial losses that they may face during a disaster. Licensees must regularly review the adequacy and coverage of their insurance policies in reducing any foreseeable risks caused by disasters (e.g. loss of offices, critical IT facilities and equipment).
October 07Government and Community
OM-5.8.8
Licensees may need to coordinate with community and government officials and the media to ensure the successful implementation of the BCP. This establishes proper protocol in case a city- wide or region- wide event impacts the licensee's operations. During the recovery phase, facilities access, power, and telecommunications systems should be coordinated with various entities to ensure timely resumption of operations. Facilities access should be coordinated with the police and fire department and, depending on the nature and extent of the disaster.
October 07Disclosure Requirements
OM-5.8.9
Licensees must disclose how their BCP addresses the possibility of a future significant business disruption and how the licensee will respond to events of varying scope. Licensees must also state whether they plan to continue business during disruptions and the planned recovery time. The licensees might make these disclosures on their websites, or through mailing to key external parties upon request. In all cases, BCP disclosures must be reviewed and updated to address changes to the BCP.
Amended: July 2011
October 07OM-5.9 OM-5.9 Maintenance, Testing and Review
Testing & Rehearsal
OM-5.9.1
A BCP is not complete if it has not been subject to proper testing. Testing is needed to ensure that the BCP is operable. Testing verifies the awareness of staff and the preparedness of differing departments/functions of the bank.
October 07OM-5.9.2
Licensees must test their BCPs at least annually. Senior management must participate in the annual testing, and demonstrate their awareness of what they are required to do in the event of the BCP being involved. Also, the recovery and alternate personnel must participate in testing rehearsals to familiarise themselves with their responsibilities and the back-up facilities and remote sites (where applicable).
October 07OM-5.9.3
All of the BCP's related risks and assumptions must be reviewed for relevancy and appropriateness as part of the annual planning of testing. The scope of testing must be comprehensive enough to cover the major components of the BCP as well as coordination and interfaces among important parties. A testing of particular components of the BCP or a fully integrated testing must be decided or depending on the situation. The following points must be included in the annual testing:
(a) Staff evacuation and communication arrangements (e.g. call-out trees) must be validated;(b) The alternate sites for business and technology recovery must be activated;(c) Important recovery services provided by vendors or counterparties must form part of the testing scope;(d) Licensees must consider testing the linkage of their back up IT systems with the primary and back up systems of service providers;(e) If back up facilities are shared with other parties (e.g. subsidiaries of the licensee), the licensee needs to verify whether all parties can be accommodated concurrently; and(f) Recovery of vital records must be performed as part of the testing.Amended: July 2011
October 07OM-5.9.4
Formal testing reviews of the BCP must be performed to assess the thoroughness and effectiveness of the testing. Specifically, a post-mortem review report must be prepared at the completion of the testing stage for formal sign-off by Licensees' senior management. If the testing results indicate weaknesses or gaps in the BCP, the plan and recovery strategies must be updated to remedy the situation.
Amended: July 2011
October 07Periodic Maintenance and Updating of a BCP
OM-5.9.5
Licensees must have formal procedures to keep their BCP updated with respect to any changes to their business. In the event of a plan having been activated, a review process must be carried out once normal operations are restored to identify areas for improvement. If vendors are needed to provide vital recovery services, there must be formal processes for regular (say, annual) reviews of the appropriateness of the relevant service level agreements.
Amended: July 2011
October 07OM-5.9.6
Individual business and support functions, with the assistance of the CMT, must review their business impact analysis and recovery strategy on an annual basis. This aims to confirm the validity of, or whether updates are needed to, the BCP requirements (including the technical specifications of equipment of the alternate sites) for the changing business and operating environment.
Amended: July 2011
October 07OM-5.9.7
The contact information for key staff, counterparties, customers and service providers must be updated as soon as possible when notification of changes is received.
Amended: July 2011
October 07OM-5.9.8
Significant internal changes (e.g. merger or acquisitions, business re-organisation or departure of key personnel) must be reflected in the plan immediately and reported to senior management.
October 07OM-5.9.9
Copies of the BCP document must be stored at locations separate from the primary site. A summary of key steps to be taken in an emergency situation must be made available to
senior management and other key personnel.Amended: July 2011
October 07Audit and Independent Review
OM-5.9.10
The internal audit function of a licensee or its external auditors must conduct periodic reviews of the BCP to determine whether the plan remains realistic and relevant, and whether it adheres to the policies and standards of the licensee. This review must include assessing the adequacy of business process identification, threat scenario development, business impact analysis and risk assessments, the written plan, testing scenarios and schedules, and communication of test results and recommendations to the Board.
Amended: July 2011
October 07OM-5.9.11
Significant findings must be brought to the attention of the Board and Senior Management within three months of the completion of the review. Furthermore, Senior Management and the Board must ensure that any gaps or shortcomings reported to them are addressed in an appropriate and timely manner.
Amended: July 2011
October 07OM-5.10 OM-5.10 Cyber Security Risk Management
OM-5.10.1
To prepare for the eventuality of cyber attacks, licensees must have a cyber attack response mechanism in place. The BCP of the licensee must also be properly enhanced to account for all CBB requirements and must be regularly tested to assure that the licensee is capable of dealing with cyber attacks.
Added: October 2016OM-6 OM-6 Security Measures for Banks
OM-6.1 OM-6.1 Physical Security Measures for Retail Banks
General Requirement
OM-6.1.1
Retail banks must maintain up to date Payment Card Industry Data Security Standards (PCI-DSS) certification. This initial certification must be obtained by 30th April 2017. Failure to comply with this requirement will trigger a supervisory response, which may include formal enforcement measures, as set out in Module EN (Enforcement).
Amended: October 2016
Amended: April 2016
Amended: January 2011
October 2007OM-6.1.1.A
In order to maintain up to date PCI-DSS certification, retail banks will be periodically audited by PCI authorised companies for compliance.
Licensees are asked to make certified copies of such documents available if requested by the CBB.Added: April 2016External Measures
OM-6.1.2
All head offices are required to maintain Ministry of Interior ("MOI") guards or alternatively MOI trained and permanently licensed private security guards of licensed private security companies, on a 24 hours basis. All branches must also maintain a 24 hour MOI guard. However, if branches satisfy the criteria mentioned in Paragraphs OM-6.1.3 to OM-6.1.22 below, they may maintain MOI guards during opening hours only. Furthermore, branches will be allowed to replace MOI armed guards with private security guards subject to the approval of the MOI. Training and approval of private security guards will be given by the MOI. Head Offices must always have a 24 hour MOI.
Amended: July 2019
October 07OM-6.1.3
Public entrances to head offices and branches must be protected by measures such as steel rolling shutters, or the external doors must be of solid steel or a similar solid material of equivalent strength and resistance to fire.
October 07OM-6.1.4
Other external entrances must have steel doors or be protected by steel rolling shutters. Preferably, all other external entrances must have the following security measures:
(a) Magic eye;(b) Locking device (key externally and handle internally);(c) Door closing mechanism;(d) Contact sensor with alarm for prolonged opening time; and(e) Combination access control system (e.g. access card and key slot or swipe card and password).Amended: July 2011
Amended: April 2011
October 07OM-6.1.5
If additional security measures to those mentioned in OM-6.1.3 and OM-6.1.4 such as security cameras, motion detectors or intruder alarms are installed, the requirement for steel external doors or protection by steel rolling shutters is waived.
October 07OM-6.1.6
External windows must have security measures such as anti blast films and movement detectors. For ground floor windows, banks may also wish to add steel grills fastened into the wall.
Amended: July 2011
October 07OM-6.1.7
Branch alarm systems should have the following features:
(a) PIR motion detectors(b) Door sensors(c) Anti vibration/movement sensors on vaults(d) External siren(e) The intrusion detection system must be linked to the bank's (i.e. head office) monitoring unit and also the MOI Central Monitoring Unit.Amended: January 2011
October 2007Internal Measures
OM-6.1.8
Teller counters must be screened off from customers by a glass screen of no less than 1 meter in height from the counter work surface or 1.4 meters from the floor.
October 07OM-6.1.9
All areas where cash is handled must be screened off from customers and other staff areas.
October 07OM-6.1.10
Access to teller areas must be restricted to authorised staff only. The design of the teller area must not allow customers to pass through it.
Amended: July 2011
October 07OM-6.1.11
Panic alarm systems for teller staff must be installed. The choice between silent or audible panic alarms is left to individual banks. Kick bars and/or hold up buttons must be spread throughout the teller and customer service areas and the branch manager's office. The panic alarm must be linked to the MOI Central Monitoring Unit.
October 07Cash Safety
OM-6.1.12
Cash precious metals and bearer instruments must be kept in fireproof cabinets/safes. Preferably, these cabinets/safes must be located in strong rooms.
Amended: July 2011
October 07OM-6.1.13
Strong rooms must be made of reinforced solid concrete, or reinforced block work. Doors to strong rooms must be steel and preferably also have a steel shutter fitted. Dual locking devices must be installed in strong room doors. Strong room doors must be located out of the sight of customers.
Amended: July 2011
October 07OM-6.1.14
Strong rooms must not contain any other openings except the entry door and where necessary, an air conditioning outlet. The air conditioning outlet must be protected with a steel grill.
October 07OM-6.1.15
[This Paragraph was deleted in April 2016.]
Deleted: April 2016
Amended: July 2011
October 07OM-6.1.16
[This Paragraph was deleted in April 2016 and requirements were moved to Section OM-6.4.]
Deleted: April 2016
Amended: July 2011
October 07OM-6.1.17
[This Paragraph was deleted in April 2016.]
Amended: April 2016
October 07OM-6.1.18
[This Paragraph was deleted in April 2016 and requirements were moved to Section OM-6.4.]
Deleted: April 2016
October 07OM-6.1.19
[This Paragraph was deleted in April 2016 and requirements are now covered under Paragraph OM-6.4.14.]
Deleted: April 2016
October 07CCTV Network Systems
OM-6.1.20
All head offices and branches must have a CCTV network and alarm system which are connected to a central monitoring unit located in the head office, along with a Video Monitoring System (VMS) and to the MOI Central Monitoring Unit.
Amended: April 2016
October 07OM-6.1.21
At a minimum, CCTV cameras must cover the following areas:
(a) Main entrance;(b) Other external doors;(c) Any other access points (e.g. ground floor windows);(d) The banking hall;(e) Tellers' area;(f) Strongroom entrance; and(g) ATMs (by way of internal or external cameras) Refer to Section OM-6.3 for specific CCTV requirements related to ATMs.Amended: April 2016
Amended: July 2011
Amended: January 2011
October 2007OM-6.1.22
Notices of CCTV cameras in operation must be put up for the attention of the public. CCTV records must be maintained for a minimum 45-day period. The transmission rate (in terms of the number of frames per second) must be high enough to make for effective monitoring. Delayed transmission of pictures to the Central Monitoring Unit is not acceptable. The CCTV system must be operational 24 hours per day.
Amended: July 2011
October 07Training and Other Measures
OM-6.1.23
Banks must establish the formal position of security manager. This person will be responsible for ensuring all bank staff are given annual, comprehensive security training. Banks must produce a security manual or procedures for staff, especially those dealing directly with customers. For banks with three or more branches, this position must be a formally identified position. For banks with one or two branches, the responsibilities of this position may be added to the duties of a member of management.
Amended: July 2011
October 07OM-6.1.24
The security manager must maintain records on documented security related complaints by customers and take corrective action or make recommendations for action on a timely basis. Actions and recommendations must also be documented.
October 07OM-6.1.25
Banks must consider safety and security issues when selecting premises for new branches. Key security issues include prominence of location (i.e. Is the branch on a main street or a back street?), accessibility for emergency services, and assessment of surrounding premises (in terms of their safety or vulnerability), and the number of entrances to the branch. All banks are required to hold an Insurance Blanket Bond (which includes theft of cash in its cover).
Amended: July 2011
October 07OM-6.1.26
Further rules on ATM Physical Security Measures are contained in Section OM-6.4.
Added: April 2016OM-6.2 OM-6.2 Internet Security for all Banks
OM-6.2.1
All banks providing internet banking services must regularly test their systems against security breaches and verify the robustness of the security controls in place. These tests must be conducted by security professionals, such as ethical hackers, that provide penetration testing services and a vulnerability assessment of the system. The tests must be undertaken by external independent parties that are not employees of the bank nor associated with it.
Amended: April 2016
Amended: October 2013
Added: October 2011OM-6.2.2
The penetration testing referred to in Paragraph OM-6.2.1, must be conducted each year in June and December.
Amended: July 2013
Amended: April 2012
Added: October 2011OM-6.2.3
The vulnerability assessment report, along with the steps taken to mitigate the risks must be maintained by the bank for a 5-year period from the date of testing and must be provided to the CBB within two months following the end of the month where the testing took place, i.e. for the June test, the report must be submitted at the latest by 31st August and for the December test, by 28th February (see Section BR-4A.2).
Amended: July 2013
Added: October 2011OM-6.3 OM-6.3 ATM Security Measures: Hardware/Software for Retail Banks
Implementation
OM-6.3.1
The requirements in this Section must be complied with in full by 30th April 2017, or as specified otherwise. Failure to comply with these requirements will trigger a supervisory response, which may include formal enforcement measures, as set out in Module EN (Enforcement).
Amended: July 2017
Added: April 2016Europay, MasterCard and Visa (EMV) Compliance
OM-6.3.1A
All cards (debit, credit, charge, prepaid, etc.) issued by licensees in the Kingdom of Bahrain must be EMV compliant. Moreover, all ATMs, CDMs, POS, etc. must be EMV compliant for accepting cards issued in the Kingdom of Bahrain. In this context, EMV compliant means using chip and online PIN authentication. However, contactless card payment transactions, where no PIN verification is required, are permitted for small amounts i.e. up to BD 20 per transaction, provided that
Islamic bank licensees bear full responsibility in case of fraud occurrence.Added: April 2018Provision of Cash Withdrawal and Payment Services through Various Channels
OM-6.3.1B
Islamic bank licensees are allowed to provide cash withdrawal and payment services using various channels, including but not limited to, contactless, cardless, QR code, e-wallets, biometrics (iris recognition, facial recognition, fingerprint, voiceprint, etc.), subject to enrolling customers through registration process wherein customers' acceptance of products/services terms and conditions are documented and customers are properly authenticated.Added: April 2018Near Field Communication ("NFC")
OM-6.3.1C
Islamic retail bank licensees must ensure that all currently installed ATMs support contactless payment using Near Field Communication "NFC" technology. The changes necessary to the software/hardware to meet this requirement must be completed no later than 1st April 2020.Added: October 2019OM-6.3.1D
Islamic retail bank licensees must ensure, with effect from 18th August 2019, that all new installations of ATM machines support contactless payment using Near Filed Communication "NFC" technology.Added: October 2019OM-6.3.1E
Islamic retail bank licensees must ensure, with effect from 1st October 2019, that any new POS terminals or devices support contactless payment using Near Filed Communication "NFC" technology.Added: October 2019OM-6.3.1F
Islamic retail bank licensees must ensure, that any payment card issued or reissued (credit, debit, prepaid and charge cards) on or after 12th October 2019 supports contactless payment using Near Field Communications "NFC" technology.Added: October 2019Geolocation Limitations
OM-6.3.2
All
Islamic bank licensees issuing debit, prepaid and/or credit cards must ensure that all Bahrain issued cards enable each customer to maintain a list of 'approved' countries for card ATM/Point of Sale (POS) transactions. Customers must be allowed to determine those countries in which their card must not be accepted as well as countries or merchant categories in which a card transaction would require a further level of authorisation, (for example, 2-way SMS).Amended: April 2018
Added: April 2016Prohibition of Double Swiping
OM-6.3.2A
All card acquirer licensees must communicate to the concerned merchants that the CBB has directed to stop the practice of double swiping of payment cards by some merchants at the merchant's POS terminals/ECR, with effect from 15th June, 2017.
Added: July 2017OM-6.3.2B
For the purpose of Paragraph OM-6.3.2A, card acquirer licensee means a CBB licensee that enters into a contractual relationship with a merchant and the payment card issuer, under a card payment scheme, for accepting and processing payment card transactions. Card acquirers include three-party payment card network operators, who have outsourced their acquiring services to third party service providers.
Added: July 2017OM-6.3.2C
For the purpose of Paragraph OM-6.3.2A, double swiping means swiping of a payment card by a merchant at the POS terminal/ECR for the second time, resulting in capturing and storing of payment cardholder data and sensitive authentication data encoded on the magnetic stripe of a customer's payment card, after the merchant received the required card payment authorisation response.
Added: July 2017OM-6.3.2D
All card acquirer licensees must include the following clause into the merchant agreements entered into with all their merchants and bring into force the said clause on or before 15th June, 2017: "Pursuant to the CBB directions and instructions, the merchant shall stop double swiping of a payment card at a merchant's point-of-sale (POS) terminal/electronic cash register (ECR) to capture or store cardholder and sensitive authentication data encoded on the magnetic stripe of a customer's payment card, after the merchant received the required card payment authorisation response. The merchant asserts its full compliance with the obligation contained in this clause and understands that any breach of this clause will expose the merchant to mandatory contractual and/or legal disciplinary actions by the relevant regulator and/or concerned Ministry."
Added: July 2017OM-6.3.2E
All card acquirer licensees must:
(i) Educate the concerned merchants on the regulatory requirement and continue to follow up the progress of the implementation to comply within the period stipulated in Paragraph OM-6.3.2A; and(ii) Educate and facilitate, where necessary, any merchant that has a valid business need to have cardholder data or non-sensitive information, to transmit such data/information through an integration option.Added: July 2017Integration of Hardware Components
OM-6.3.3
If the Automated Teller Machines (ATM) environment permits access to internal areas where account data is processed and/or stored (e.g., for service or maintenance), these areas must be effectively protected from access by unauthorised persons to mitigate the risk associated with attaching/inserting malicious additional components, especially those which may be designed to capture sensitive data. Banks must encrypt account data or secure access to such data by effective physical barriers such as strong walls, doors, and mechanical locks.
Added: April 2016OM-6.3.4
All entry to sensitive areas must be recorded, including the name of the persons accessing the area; the date; and the time of access to and exit from the area. CCTV cameras must be installed, and used to record all activities within the ATM environment.
Added: April 2016OM-6.3.5
Banks are required to implement best industry practice in respect of hardware and software development and integration, including but not limited to formal specification, test plans, and documentation. Hardware and software should only be introduced to the environment following a successful programme of testing.
Added: April 2016OM-6.3.6
All test plans and the outcomes of these plans must be retained by the bank for a minimum of five years from the date of testing and be available on request to the CBB or their authorised representatives. Examples of instances in which a detailed testing process must be undertaken prior to installation and integration of components include, but are not limited to, secure card readers or EPPs. In all instances the applicable standards relating to Payment Card Industry (PCI), PIN Transaction Security (PTS), and Point of Interaction (POI) requirements must be fully complied with.
Added: April 2016OM-6.3.7
Banks must ensure that the integration of Secure Card Readers, (SCRs) and, if applicable, any mechanism protecting the SCRs are properly implemented and fully comply with the guidelines provided by the device vendor. SCRs must be approved by and fully comply with all Payment Card Industry standards at all times.
Added: April 2016OM-6.3.8
Banks must ensure that all ATMs, including offsite ATMs, are equipped with mechanisms which prevent skimming attacks. There must be no known or demonstrable way to disable or defeat the above-mentioned mechanisms, or to install an external or internal skimming device.
Added: April 2016ATM Software
OM-6.3.9
Banks must ensure that their ATM software security measures comply with the following:
(a) Access to sensitive services is controlled by requiring authentication. Entering or exiting sensitive services must not reveal or otherwise compromise the security of sensitive information;(b) ATM software must include controls which are designed to prevent unauthorised modification of the software configuration, including the operating system, drivers, libraries, and individual applications. Software configuration includes the software platform, configuration data, applications loaded to and executed by the platform, and the associated data. The mechanisms must also ensure the integrity of third-party applications, using a controlled process to install such controls;(c) Access to all elements of the ATM environment must be strictly controlled to ensure an effective segregation of functions and an effective segregation of responsibilities exists for all personnel; and(d) The logging data must be stored in a way that data cannot be changed under any circumstances, and deleted only after authorisation by a member of bank staff who has specific responsibility delegated by the CEO.Added: April 2016OM-6.3.10
ATMs should incorporate dedicated tampering protection capabilities.
Added: April 2016Device Management/Operation
OM-6.3.11
Banks must ensure that their device management/operation controls comply with the following:
(a) Software is protected and stored in a manner which precludes unauthorised modification; and(b) Loading of software into ATMs is performed by a person who has the requisite knowledge and skills, and who has been nominated and authorised by a senior manager in the bank to undertake these tasks.Added: April 2016ATM Application Management
OM-6.3.12
Banks must ensure that their ATM application management complies with the following:
(a) The display of a cardholder PIN on the ATM display must not be in 'clear' mode;(b) Sensitive information must not be present any longer or used more often than strictly necessary. The ATM must automatically clear its internal buffers when either the transaction is completed, or the ATM has timed out whilst awaiting a response from the cardholder or host; and(c) Prevent the display or disclosure of cardholder account information on the ATM screen, printed on receipts, or audio transcripts for visually impaired cardholders.Added: April 2016OM-6.4 OM-6.4 ATM Security Measures: Physical Security for Retail Banks
Implementation
OM-6.4.1
The requirements in this Section must be complied with in full by 31st March 2017. Failure to comply with any of these requirements will trigger a supervisory response, which may include formal enforcement measures, as set out in Module EN (Enforcement).
Added: April 2016Record Keeping
OM-6.4.2
Banks must record the details of the site risk assessments and retain such records for a period of five years from the date of the ATM installation, or whatever other period required by the Ministry of the Interior or the CBB from time to time, whichever is the longer.
Added: April 2016Installation of an Off-site ATM in Bahrain
General Criteria
OM-6.4.5
The ownership and operations of any off-site ATMs is subject to the prior written approval of the CBB and must comply with the Rules outlined in Paragraph OM-6.4.6.
Amended: October 2016
Added: April 2016OM-6.4.6
Off-site ATMs must be owned either individually or jointly by banks orancillary service providers which are members of the BENEFIT Switch. Each relevant owning bank must already have linked its ATM capability to the BENEFIT Switch prior to requesting the CBB's permission to install an off-site ATM and, furthermore, must conform to the general standards set by the Benefit Company from time to time or by the ancillary service provider licensed by the CBB.Amended: October 2017
Added: April 2016OM-6.4.7
Banks must bear full legal responsibility for their respective off-site ATMs, as well as all costs associated with such ATMs (including, but not limited to, cash replenishment, installation, security etc.).
Added: April 2016OM-6.4.8
Banks wishing to install an off-site ATM must submit an application (in writing) for the CBB's approval (see Paragraph BR-5.3.3). A copy of the written permission (for installation of that
off-site ATM ) of the legal owner of the proposed location must be provided to the CBB, as well as a copy of the written permission of any other relevant authorities in this context (e.g. the Ministry of Interior).Added: April 2016OM-6.4.9
The CBB will consider applications on a 'first come, first served' basis for a particular location. If more than one application is received to install an
off-site ATM in the same location, the number of such applications which are approved will depend upon whether the location appears to the CBB to be capable of sustaining multipleoff-site ATMs subject to the exact details of each individual application regarding security being acceptable to the CBB.Added: April 2016OM-6.4.10
Each application will be assessed on its individual merits, and at the CBB's sole discretion, taking into account factors which the CBB considers relevant including, but not limited to:
(a) The suitability of the location in question;(b) The level of overall activities of the applicant in the market as well as the size and make-up of its customer base; and(c) The type and range of facilities which the applicant proposes offering through theoff-site ATM at the location in question.Added: April 2016OM-6.4.11
In addition to the information required by the CBB under Paragraph OM-6.4.8, the CBB may require further information/clarification to be provided to it before it takes a decision regarding the application. The CBB's decision in this regard will be notified to each relevant applicant bank in writing.
Added: April 2016OM-6.4.12
A bank must request in writing the CBB's permission to close any of its
off-site ATMs .Added: April 2016OM-6.4.13
The CBB may, at its sole discretion, require an
off-site ATM to be closed and decommissioned at any time.Added: April 2016ATM Alarms
OM-6.4.14
In addition to alarming the premises, banks must alarm the ATM itself, in a way which activates audibly when the ATM is under attack. The system must be monitored by remote signaling to an appropriate local police response designated by the Ministry of the Interior. Banks must consider the following:
(a) The design of the system must ensure that the ATM has a panic alarm installed;(b) The design of the system must give an immediate, system controlled warning of an attack on the ATM, and all ATMs must be fitted with fully operational fraud detection and inhibiting devices;(c) A maintenance record must be kept for the alarm detection system and routine maintenance must be conducted in accordance with at least the manufacturer's recommendations. The minimum must be two planned maintenance visits and tests every 6 months; and(d) The alarm system must be monitored from an ARC 24 hours daily. It must automatically generate an alarm signal if the telephone/internet line fails or is cut.Added: April 2016Closed-circuit Television (CCTV)
OM-6.4.15
Banks must ensure that ATMs are equipped with Closed-circuit television (CCTV). The location of camera installation must be carefully chosen to ensure that images of the ATM are recorded, however keypad entry are not recorded. The camera must support the detection of the attachment of alien devices to the fascia (external body) and possess the ability to generate an alarm for remote monitoring if the camera is blocked or otherwise disabled.
Added: April 2016OM-6.4.15A
For the purposes of Paragraph OM-6.4.15, the location of camera installation in drive-thru ATMs must be carefully chosen to ensure that the images of the vehicle number plates are clearly captured at both daytime and nighttime.
Added: October 2018OM-6.4.16
As a minimum, CCTV activity must be recorded (preferably in digital format) and, where risk dictates, remotely monitored by a third party ARC.
Added: April 2016OM-6.4.17
When an ATM is located in an area where a public CCTV system operates, the deployer or agent must liaise with the agency responsible for the CCTV system to include the ATM site in any preset automatic camera settings or to request regular sweeps of the site. The CCTV system must not be able to view the ATM keypad thereby preventing observation of PIN entry.
Added: April 2016OM-6.4.18
Banks must ensure that the specifications of CCTV cameras meet the following minimum requirements:
(a) Analogue Cameras:
Resolution — Minimum 700 TVL
Lens — Vari-focal lenses from 2.8 to 12mm
Sensitivity — Minimum 0.5 Luminance (Lux) without Infrared (IR), 0 Lux with IR
IR — At least 10 to 20 meters (Camera that detects motion)(b) IP Cameras:
Resolution — 2 MP — 1080 p
Lens — Vari-focal lenses from 2.8 to 12mm
Sensitivity — Minimum 0.5 Lux without IR, 0 Lux with IR
IR — At least 10 to 20 metersAdded: April 2016OM-6.4.19
Banks must ensure that the following network requirements are met for connecting the Banks CCTV system to MOI Control room:
(a) The minimum speed of the upload should be 2 Mbps for each node (ATM's and branches);(b) Speed/storage limit threshold must not be applied in a manner which permits a network delay; and(c) Access must be restricted to authorised personnel.Added: April 2016ATM Lighting
OM-6.4.20
Banks must ensure that adequate and effective lighting is operational at all times within the ATM environment. The standard of the proposed lighting must be agreed with the Ministry of the Interior and other relevant authorities, and tested at least once every three months to ensure that the lighting is in good working order.
Added: April 2016OM-6.4.20A
Banks must ensure that adequate and effective lighting is operational within drive-thru ATMs to enable the CCTV cameras to capture the vehicle number plates at both daytime and nighttime.
Added: October 2018OM-6.4.21
This Paragraph was deleted in July 2017
Deleted: July 2017
Added: April 2016[Deleted]
Deleted: April 2017OM-6.4.22
This Paragraph was deleted in April 2017.
Deleted: April 2017
Added: April 2016OM-6.4.23
This Paragraph was deleted in April 2017.
Deleted: April 2017
Added: April 2016Fire Alarm
OM-6.4.24
Banks must ensure that effective fire alarm and fire defense measures, such as a sprinkler, are installed and functioning for all ATMs. These alarms must be linked to the "General Directorate of Civil Defense" in Bahrain.
Added: April 2016Cash Replenishment
OM-6.4.25
All cash movements between branches, to and from the CBB and to
off-site ATMs must be performed by specialised service providers.Added: April 2016ATM Service/ Maintenance
OM-6.4.26
Banks must maintain a list of all maintenance, replenishment and inspection visits by staff or other authorised parties.
Added: April 2016OM-6.5 OM-6.5 ATM Security Measures: Additional Measures for Retail Banks
OM-6.5.1
Banks may ensure the adequacy and effectiveness of external security measures throughout the ATM environment through the additional security measures outlined in this Section.
Added: April 2016Sounders and Flashing Warning Lights
OM-6.5.2
Banks should ensure that street-based ATMs are installed with an audible alarm sounder, and a visual flashing warning light, to indicate when the ATM is under attack.
Added: April 2016Armored Anti-Bandit Shroud
OM-6.5.3
Banks should obtain and act upon advice provided by the Ministry of the Interior in respect of protecting the ATM installation with an armored anti-bandit shroud which is placed around the ATM to prevent any bombing or other physical attempts to damage the ATM.
Added: April 2016OM-6.6 OM-6.6 Cyber Security Measures
OM-6.6.1
Clear ownership and management accountability of the risks associated with cyber attacks and related risk management must be established, which cover not only the IT function but also all relevant business lines. Cyber security must be made part of the
licensee IT security policy.Added: October 2016OM-6.6.2
The Board and
senior management must ensure that the cyber security controls are periodically evaluated for adequacy, taking into account emerging cyber threats and establishing a credible benchmark of cyber security controls endorsed by the Board andsenior management . Should material gaps be identified, the Board andsenior management must ensure that corrective action is taken immediately.Added: October 2016OM-6.6.3
Licensees must report to the CBB within one week any instances of cyber attacks, whether internal or external, that compromise customer information or disrupt critical services that affect their operations. When reporting such instances, licensees must provide the root cause analysis of the cyber attack and measures taken by them to ensure that similar events do not recur.
Added: October 2016OM-7 OM-7 Books and Records
OM-7.1 OM-7.1 General Requirements
OM-7.1.1
The requirements in Section OM-7.1 apply to
Bahraini Islamic bank licensees , with respect to the business activities of the whole bank (whether booked in Bahrain or in a foreign branch). The requirements in Section OM-7.1 also apply tooverseas Islamic bank licensees , but only with respect to the business booked in their branch in Bahrain.October 07OM-7.1.2
With reference to Articles 59 and 60 of the CBB Law, all
Islamic bank licensees must maintain books and records (whether in electronic or hard copy form) sufficient to produce financial statements and show a complete record of the business undertaken by a licensee. These records must be retained for at least 10 years according to Article 60 of the CBB Law.Amended: January 2011
October 2007OM-7.1.3
OM-7.1.2 includes accounts, books, files and other records (e.g. trial balance, general ledger, nostro/vostro statements, reconciliations and list of counterparties). It also includes records that substantiate the value of the assets, liabilities and off-balance sheet activities of the licensee (e.g. client activity files and valuation documentation).
October 07OM-7.1.4
[This Paragraph was deleted in April 2011]
OM-7.1.5
Unless otherwise agreed with the CBB in writing, records must be kept in either English or Arabic; or else accompanied by a certified English or Arabic translation. Records must be kept current. The records must be sufficient to allow an audit of the licensee's business or an on-site examination of the licensee by the CBB.
October 07OM-7.1.6
If a licensee wishes to retain certain records in a language other than English or Arabic without translation, the licensee should write to the CBB, explaining which types of records it wishes to keep in a foreign language, and why systematically translating these may be unreasonable. Generally, only loan contracts or similar original transaction documents may be kept without translation. Where exemptions are granted by CBB, the licensee is nonetheless asked to confirm that it will make available certified translations of such documents, if requested by CBB for an inspection or other supervisory purpose.
October 07OM-7.1.7
Translations produced in compliance with Rule OM-7.1.5 may be undertaken in-house, by an employee or contractor of the licensee, provided they are certified by an appropriate officer of the licensee.
Amended: October 2011
October 2007OM-7.1.8
Records must be accessible at any time from within the Kingdom of Bahrain, or as otherwise agreed with the CBB in writing.
October 07OM-7.1.9
Where older records have been archived, or in the case of records relating to overseas branches of
Bahraini Islamic banks , the CBB may accept that records be accessible within a reasonably short time frame (e.g. within 5 business days), instead of immediately. The CBB may also agree similar arrangements foroverseas Islamic banks , as well asBahraini Islamic banks , where elements of record retention and management have been centralised in another group company, whether inside or outside of Bahrain.October 07OM-7.1.10
All original account opening documentation, due diligence and transaction documentation should normally be kept in Bahrain, if the business is booked in Bahrain. However, where a licensee books a transaction in Bahrain, but the transaction documentation is handled entirely by another (overseas) branch or affiliate of the licensee, the relevant transaction documentation may be held in the foreign office, provided electronic or hard copies are retained in Bahrain; the foreign office is located in a FATF member state; and the foreign office undertakes to provide the original documents should they be required.
October 07OM-7.1.11
Licensees should also note that to perform effective consolidated supervision of a group (or sub-group), the CBB needs to have access to financial information from foreign operations of a licensee, in order to gain a full picture of the financial condition of the group: see Module BR (CBB Reporting), regarding the submission of consolidated financial data. If a licensee is not able to provide to the CBB full financial information on the activities of its branches and subsidiaries, it should notify the CBB of the fact, to agree alternative arrangements: these may include requiring the group to restructure or limit its operations in the jurisdiction concerned.
October 07OM-7.1.12
In the case of
Bahraini Islamic banks with branch operations overseas, where local record-keeping requirements are different, the higher of the local requirements or those contained in this Chapter must be followed.October 07OM-7.2 OM-7.2 Transaction Records
OM-7.2.1
Islamic bank licensees must keep completed transaction records for as long as they are relevant for the purposes for which they were made (with a minimum period in all cases of five years from the date when the transaction was completed — see Module Section FC-7.1). Records of completed transactions must be kept whether in hard copy or electronic format, for at least five years from the date of the transaction as per the Legislative Decree No. (28) of 2002 with respect to Electronic Transactions "The Electronic Transaction Law" and its amendments.Amended: July 2017
October 07OM-7.2.2
[This paragraph has been deleted in July 2017].
Deleted: July 2017
October 07OM-7.2.3
Rule OM-7.2.1 applies to all transactions entered into by a
Bahraini Islamic bank licensee , whether booked in Bahrain or in an overseas branch. With respect to overseas Islamic bank licensees, it applies only to transactions booked in the Bahrain branch.October 07OM-7.2.4
In the case of
overseas Islamic bank licensees , Rule OM-7.2.1 therefore only applies to business booked in the Bahrain branch, not in the rest of the company.October 07OM-7.3 OM-7.3 Other Records
Corporate Records
OM-7.3.1
Islamic bank licensees must maintain the following records in original form or in hard copy at their premises in Bahrain:(a) Internal policies, procedures and operating manuals;(b) Corporate records, including minutes ofshareholders ',Directors ' and management meetings;(c) Correspondence with the CBB and records relevant to monitoring compliance with CBB requirements;(d) Reports prepared by theIslamic bank licensee's internal and external auditors; and(e) Employee training manuals and records.October 07OM-7.3.2
In the case of
Bahrain Islamic bank licensees , these requirements apply to the licensee as a whole, including any overseas branches. In the case ofoverseas Islamic bank licensees , all the requirements of Chapter OM-7 are limited to the business booked in their branch in Bahrain and the records of that branch (see Rule OM-7.1.1). They are thus not required to hold copies of shareholders' and Directors' meetings, except where relevant to the branch's operations.October 07Customer Records
OM-7.3.3
Record-keeping requirements with respect to customer records, including customer identification and due diligence records, are contained in Module FC (Financial Crime). These requirements address specific requirements under the Amiri Decree Law No. 4 of 2001, the standards promulgated by the Financial Action Task Force, as well as to the best practice requirements of the Basel Committee Core Principles methodology, and its paper on "Customer due diligence for banks".
October 07Promotional Schemes
OM-7.3.4
Islamic bank licensees must maintain all material related to promotional schemes as outlined in Section BC-1.1 for a minimum period of 5 years.Added: April 2011OM-8 OM-8 Qualitative Aspects
OM-8.1 OM-8.1 Introduction
OM-8.1.1
The contents of this Chapter apply in full to all
Bahraini Islamic bank licensees both on a consolidated basis and on a solo basis.Added: October 2012OM-8.1.1A
This Chapter may be used as guidance for
overseas Islamic bank licensees .Added: October 2012OM-8.1.1.B
Section CA-6.2 of the Capital Adequacy Module allows banks to use either the basic indicator approach or standardised approach to compute capital charge for operational risk. This chapter sets out the qualitative aspect of these two approaches.
Added: October 2012OM-8.1.2
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events which includes but is not limited to, legal risk1 and Shariah compliance risk. This definition excludes strategic and reputational risk.
Added: October 2012
1 Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.
OM-8.1.3
Operational risk is inherent in all banking products, activities, processes and systems, and the effective management of operational risk must be a fundamental element of a bank's risk management programme. Sound operational risk governance relies upon three lines of defence:
(a) Business line management;(b) An independent operational risk management function; and(c) Independent review functions.Added: October 2012OM-8.1.4
In the context of this Chapter, 'independent' and 'independent review' have the following meanings. The review functions must be independent of the risk generating business lines or the process or system under review. An independent review would include the following components:
(a) Verification of theFramework is done on a periodic basis and would be typically performed by the bank's internal and/or external audit, but may involve other suitably qualified independent parties from external sources. Verification activities test the effectiveness of the overallFramework , consistent with policies approved by the board of directors, and also test validation processes to ensure that they are independent and implemented in a manner consistent with established bank policies; and(b) Validation ensures that the quantification systems used by the bank are sufficiently robust and provide assurance of the integrity of inputs, assumptions, processes and outputs. Specifically the independent validation process should provide enhanced assurance that the risk management methodology results in an operational risk capital charge that credibly reflects the operational risk profile of the bank. In addition to the quantitative aspects of internal validation, the validation of data inputs, methodology and outputs of operational risk models is important to the overall process.Added: October 2012OM-8.1.5
The operational risk management function must be functionally independent of the risk generating business lines and will be responsible for the design, maintenance and ongoing development of the operational risk Framework (
"Framework " – see also Paragraphs OM-8.2.12 and OM-8.2.13 for a description of the "Framework") within the bank.Added: October 2012OM-8.1.6
For the purpose of Paragraph OM-8.1.5, "functionally independent" means that the risk management function cannot report hierarchically and/or functionally to any person or function that is directly responsible for risk generation.
Added: October 2012OM-8.1.7
The operational risk management function should include the operational risk measurement and reporting processes, risk committees and responsibility for board reporting. A key function of the operational risk management function is to challenge the business lines' inputs to, and outputs from, the bank's risk management, risk measurement and reporting systems. The operational risk management function should have a sufficient number of personnel skilled in the management of operational risk to effectively address its many responsibilities.
Added: October 2012OM-8.1.8
The independent review functions are the audit and compliance functions and the staff occupying these functions must be competent and appropriately trained and not be involved in the development, implementation and operation of the operational risk
Framework (for example, internal audit and compliance must not be involved with the setting of risk appetite or risk tolerance, but internal audit should be reviewing the robustness of the process of how these limits are set and why and how they are adjusted in response to changing circumstances). Internal Audit should independently verify that theFramework has been implemented as intended and is functioning effectively. Internal audit coverage should include opining on the overall appropriateness and adequacy of theFramework and the associated governance processes across the bank. Internal audit should not simply be testing for compliance with board approved policies and procedures, but should be evaluating whether theFramework meets organisational needs and supervisory expectations. More details on the Internal Audit Function and the Role of the Audit Committee are to be found in Chapter HC-3.Added: October 2012OM-8.2 OM-8.2 Basic Indicator Approach
OM-8.2.1
Banks applying the basic indicator approach for capital adequacy purposes as detailed in Section CA-6.2 of Module CA (Capital Adequacy) are encouraged to comply with the principles set forth in this Section.
Added: October 2012Fundamental Principles of Operational Risk Management
OM-8.2.2
Principle 1: The board of directors must take the lead in establishing a strong risk management culture. The board of directors and senior management must establish a corporate culture that is guided by strong risk management and that supports and provides appropriate standards and incentives for professional and responsible behaviour. In this regard, it is the responsibility of the board of directors to ensure that a strong operational risk management culture exists throughout the whole organisation.
Added: October 2012OM-8.2.3
Banks with a strong culture of risk management and ethical business practices are less likely to experience potentially damaging operational risk events and are better placed to deal effectively with those events that do occur. The actions of the board and senior management, and policies, processes and systems provide the foundation for a sound risk management culture. More details on the role of the board and
senior management are to be found in Chapters HC-1, HC-2, and HC-6 as well as in Chapters CM-1 and OM-2.Added: October 2012OM-8.2.4
The board must establish a code of conduct or an ethics policy that sets clear expectations for integrity and ethical values of the highest standard and identify acceptable business practices and prohibited conflicts (see Section HC-2.2).
Added: October 2012OM-8.2.5
Clear expectations and accountabilities ensure that bank staff understand their roles and responsibilities for risk, as well as their authority to act. Strong and consistent
senior management support for risk management and ethical behaviour convincingly reinforces codes of conduct and ethics, compensation strategies, and training programmes.Added: October 2012OM-8.2.6
Compensation policies must be aligned to the bank's statement of risk appetite and tolerance, long-term strategic direction, financial goals and overall safety and soundness. They must also appropriately balance risk and reward (see Chapter HC-5 concerning remuneration).
Added: October 2012OM-8.2.7
Banks should refer to the Financial Stability Board's Principles for Sound Compensation Practices, published in September 2009 regarding compensation policies.
Added: October 2012OM-8.2.8
Senior management should ensure that an appropriate level of operational risk training is available at all levels throughout the organisation. Training that is provided should reflect the seniority, role and responsibilities of the individuals for whom it is intended.Added: October 2012OM-8.2.9
Principle 2: Banks must develop, implement and maintain a
Framework that is fully integrated into the bank's overall risk management processes. TheFramework for operational risk management chosen by an individual bank will depend on a range of factors, including its nature, size, complexity and risk profile.Added: October 2012OM-8.2.10
The fundamental premise of sound risk management is that the board of directors and bank management understand the nature and complexity of the risks inherent in the portfolio of bank products, services and activities. This is particularly important for operational risk, given that operational risk is inherent in all business products, activities, processes and systems.
Added: October 2012OM-8.2.11
A vital means of understanding the nature and complexity of operational risk is to have the components of the
Framework fully integrated into the overall risk management processes of the bank. TheFramework should be appropriately integrated into the risk management processes across all levels of the organisation including those at the group and business line levels, as well as into new business initiatives. products, activities, processes and systems. In addition, results of the bank's operational risk assessment should be incorporated into the overall bank business strategy development processes.Added: October 2012OM-8.2.12
The
Framework must be comprehensively and appropriately documented in board of directors approved policies and must include definitions of operational risk and operational loss. Banks that do not adequately describe and classify operational risk and loss exposure may significantly reduce the effectiveness of theirFramework .Added: October 2012OM-8.2.13
Framework documentation must clearly:(a) Identify the governance structures used to manage operational risk, including reporting lines and accountabilities;(b) Describe the risk assessment tools and how they are used;(c) Describe the bank's accepted operational risk appetite and tolerance (see Paragraphs OM-8.2.17 and OM-8.2.18), as well as thresholds or limits for inherent and residual risk, and approved risk mitigation strategies and instruments;(d) Describe the bank's approach to establishing and monitoring thresholds or limits for inherent and residual risk exposure;(e) Establish risk reporting and Management Information Systems (MIS);(f) Provide for a common taxonomy of operational risk terms to ensure consistency of risk identification, exposure rating and risk management objectives;(g) Provide for appropriate independent review and assessment of operational risk; and(h) Require the policies to be reviewed whenever a material change in the operational risk profile of the bank occurs, and revised as appropriate.Added: October 2012Governance: The Board of Directors
OM-8.2.14
Principle 3: The board of directors must establish, approve and periodically review the
Framework . The board of directors must overseesenior management to ensure that the policies, processes and systems are implemented effectively at all decision levels.Added: October 2012OM-8.2.15
The board of directors must:
(a) Establish a management culture, and supporting processes, to understand the nature and scope of the operational risk inherent in the bank's strategies and activities, and develop comprehensive, dynamic oversight and control environments that are fully integrated into or coordinated with the overallFramework for managing all risks across the enterprise;(b) Provide senior management with clear guidance and direction regarding the principles underlying theFramework and approve the corresponding policies developed by senior management;(c) Regularly review theFramework to ensure that the bank has identified and is managing the operational risk arising from external market changes and other environmental factors, as well as those operational risks associated with new products, activities, processes or systems, including changes in risk profiles and priorities (e.g. changing business volumes);(d) Ensure that the bank'sFramework is subject to effective independent review by audit or other appropriately trained parties such as the compliance function; and(e) Ensure that as best practice evolves, management is availing themselves of these advances.Added: October 2012OM-8.2.16
Strong internal controls are a critical aspect of operational risk management, and the board of directors must establish clear lines of management responsibility and accountability for implementing a strong control environment. The control environment must provide appropriate independence/separation of duties between operational risk management functions, business lines and support functions.
Added: October 2012OM-8.2.17
Principle 4: The board of directors must approve and review a risk appetite and tolerance statement for operational risk that articulates the nature, types and levels of operational risk that the bank is willing to assume.
Added: October 2012OM-8.2.18
When approving and reviewing the risk appetite and tolerance statement, the board of directors must consider all relevant risks, the bank's level of risk aversion, its current financial condition and the bank's strategic direction. The risk appetite and tolerance statement should encapsulate the various operational risk appetites within a bank and ensure that they are consistent. The board of directors must approve appropriate thresholds or limits for specific operational risks, and an overall operational risk appetite and tolerance.
Added: October 2012OM-8.2.19
The board of directors must regularly review the appropriateness of limits and the overall operational risk appetite and tolerance statement. This review must consider changes in the external environment, material increases in business or activity volumes, the quality of the control environment, the effectiveness of risk management or mitigation strategies, loss experience, and the frequency, volume or nature of limit breaches. The board must monitor management adherence to the risk appetite and tolerance statement and provide for timely detection and remediation of breaches.
Added: October 2012Senior Management
OM-8.2.20
Principle 5:
Senior management must develop for approval by the board of directors a clear, effective and robust governance structure with well defined, transparent and consistent lines of responsibility. Senior management is responsible for consistently implementing and maintaining throughout the organisation policies, processes and systems for managing operational risk in all of the bank's material products, activities, processes and systems consistent with the risk appetite and tolerance.Added: October 2012OM-8.2.21
Senior management is responsible for establishing and maintaining robust challenge mechanisms and effective issue-resolution processes. These must include systems to report, track and, when necessary, escalate issues to ensure resolution. Banks must be able to demonstrate that the three lines of defence (as highlighted in Paragraph OM-8.1.3) approach is operating satisfactorily and to explain how the board andsenior management ensure that this approach is implemented and operating in an appropriate and acceptable manner.Added: October 2012OM-8.2.22
Senior management must translate the operational risk managementFramework established by the board of directors into specific policies, processes and procedures that can be implemented and verified within the different business units.Senior management must clearly assign authority, responsibility and reporting relationships to encourage and maintain this accountability, and ensure that the necessary resources are available to manage operational risk in line with the bank's risk appetite and tolerance statement. Moreover,senior management must ensure that the management oversight process is appropriate for the risks inherent in a business unit's activity.Added: October 2012OM-8.2.23
Senior management must ensure that staff responsible for managing operational risk coordinate and communicate effectively with staff responsible for managing credit, market, and other risks, as well as with those in the bank who are responsible for the procurement of external services such as insurance risk transfer and outsourcing arrangements. Failure to do so could result in significant gaps or overlaps in a bank's overall risk management programme.Added: October 2012OM-8.2.24
A bank's risk management function should be commensurate with the nature, size, complexity and risk profile of the bank's activities. The managers of the corporate operational risk management function should be of sufficient stature within the bank to perform their duties effectively, ideally evidenced by title commensurate with other risk management functions such as credit, market and liquidity risk.
Added: October 2012OM-8.2.25
Senior management should ensure that bank activities are conducted by staff with the necessary experience, technical capabilities and access to resources. Staff responsible for monitoring and enforcing compliance with the institution's risk policy should have authority independent from the units they oversee.Added: October 2012OM-8.2.26
A bank's governance structure should be commensurate with the nature, size, complexity and risk profile of its activities. When designing the operational risk governance structure, a bank must take the following into consideration:
(a) Committee structure;(b) Committee composition; and(c) Committee operation.Added: October 2012OM-8.2.27
Sound industry practice for larger and more complex organisations with a central group function and separate business units is to utilise a board-created enterprise level risk committee for overseeing all risks, to which a management level operational risk committee reports. Depending on the nature, size and complexity of the bank, the enterprise level risk committee may receive input from operational risk committees by country, business or functional area. Smaller and less complex organisations may utilise a flatter organisational structure that oversees operational risk directly within the board's risk management committee.
Added: October 2012OM-8.2.28
Sound industry practice is for operational risk committees (or the risk committee in smaller banks) to include a combination of members with expertise in business activities and financial, as well as independent risk management (refer to Module HC for details on committee membership).
Added: October 2012OM-8.2.29
Committee meetings should be held at appropriate frequencies with adequate time and resources to permit productive discussion and decision-making. Records of committee operations should be adequate to permit review and evaluation of committee effectiveness.
Added: October 2012Risk Management Environment: Identification and Assessment
OM-8.2.30
Principle 6:
Senior management must ensure the identification and assessment of the operational risk inherent in all material products, activities, processes and systems to make sure the inherent risks and incentives are well understood.Added: October 2012OM-8.2.31
Risk identification and assessment are fundamental characteristics of an effective operational risk management system. Effective risk identification considers both internal factors (such as the bank's structure, the nature of the bank's activities, the quality of the bank's human resources, organisational changes and employee turnover) and external factors (such as changes in the broader environment and the industry and advances in technology). Sound risk assessment allows the bank to better understand its risk profile and allocate risk management resources and strategies most effectively.
Added: October 2012OM-8.2.32
Examples of tools that may be used for identifying and assessing operational risk include:
(a) Audit Findings: While audit findings primarily focus on control weaknesses and vulnerabilities, they can also provide insight into inherent risk due to internal or external factors;(b) Internal Loss Data Collection and Analysis: Internal operational loss data provides meaningful information for assessing a bank's exposure to operational risk and the effectiveness of internal controls. Analysis of loss events can provide insight into the causes of large losses and information on whether control failures are isolated or systematic. Banks may also find it useful to capture and monitor operational risk contributions to credit and market risk related losses in order to obtain a more complete view of their operational risk exposure;(c) External Data Collection and Analysis: External data elements consist of gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at organisations other than the bank. External loss data can be compared with internal loss data, or used to explore possible weaknesses in the control environment or consider previously unidentified risk exposures;(d) Risk Assessments: In a risk assessment, often referred to as a Risk Self Assessment (RSA), a bank assesses the processes underlying its operations against a library of potential threats and vulnerabilities and considers their potential impact. A similar approach, Risk Control Self Assessments (RCSA), typically evaluates inherent risk (the risk before controls are considered), the effectiveness of the control environment, and residual risk (the risk exposure after controls are considered). Scorecards build on RCSAs by weighting residual risks to provide a means of translating the RCSA output into metrics that give a relative ranking of the control environment;(e) Business Process Mapping: Business process mappings identify the key steps in business processes, activities and organisational functions. They also identify the key risk points in the overall business process. Process maps can reveal individual risks, risk interdependencies, and areas of control or risk management weakness. They also can help prioritise subsequent management action;(f) Risk and Performance Indicators: Risk and performance indicators are risk metrics and/or statistics that provide insight into a bank's risk exposure. Risk indicators, often referred to as Key Risk Indicators (KRIs), are used to monitor the main drivers of exposure associated with key risks. Performance indicators, often referred to as Key Performance Indicators (KPIs), provide insight into the status of operational processes, which may in turn provide insight into operational weaknesses, failures, and potential loss. Risk and performance indicators are often paired with escalation triggers to warn when risk levels approach or exceed thresholds or limits and prompt mitigation plans;(g) Scenario Analysis: Scenario analysis is a process of obtaining expert opinion of business line and risk managers to identify potential operational risk events and assess their potential outcome. Scenario analysis is an effective tool to consider potential sources of significant operational risk and the need for additional risk management controls or mitigation solutions. Given the subjectivity of the scenario process, a robust governanceFramework is essential to ensure the integrity and consistency of the process;(h) Measurement: Larger banks may find it useful to quantify their exposure to operational risk by using the output of the risk assessment tools as inputs into a model that estimates operational risk exposure. The results of the model can be used in an economic capital process and can be allocated to business lines to link risk and return; and(i) Comparative Analysis: Comparative analysis consists of comparing the results of the various assessment tools to provide a more comprehensive view of the bank.s operational risk profile. For example, comparison of the frequency and severity of internal data with RCSAs can help the bank determine whether self assessment processes are functioning effectively. Scenario data can be compared to internal and external data to gain a better understanding of the severity of the bank's exposure to potential risk events.Added: October 2012OM-8.2.33
The bank must ensure that the internal pricing and performance measurement mechanisms appropriately take into account operational risk. Where operational risk is not considered, risk-taking incentives might not be appropriately aligned with the risk appetite and tolerance.
Added: October 2012OM-8.2.34
Principle 7:
Senior management must ensure that there is an approval process for all new products, activities, processes and systems that fully assesses operational risk.Added: October 2012OM-8.2.35
In general, a bank's operational risk exposure is increased when a bank engages in new activities or develops new products; enters unfamiliar markets; implements new business processes or technology systems; and/or engages in businesses that are geographically distant from the head office. Moreover, the level of risk may escalate when new products activities, processes, or systems transition from an introductory level to a level that represents material sources of revenue or business-critical operations. A bank should ensure that its risk management control infrastructure is appropriate at inception and that it keeps pace with the rate of growth of, or changes to, products activities, processes and systems.
Added: October 2012OM-8.2.36
A bank must have policies and procedures that address the process for review and approval of new products, activities, processes and systems. The review and approval process should consider:
(a) Inherent risks in the new product, service, or activity;(b) Changes to the bank's operational risk profile and appetite and tolerance, including the risk of existing products or activities;(c) The necessary controls, risk management processes, and risk mitigation strategies;(d) The residual risk;(e) Changes to relevant risk thresholds or limits; and(f) The procedures and metrics to measure, monitor, and manage the risk of the new product or activity.Added: October 2012OM-8.2.37
The approval process should also include ensuring that appropriate investment has been made for human resources and technology infrastructure before new products are introduced. The implementation of new products, activities, processes and systems should be monitored in order to identify any material differences to the expected operational risk profile, and to manage any unexpected risks.
Added: October 2012Monitoring and Reporting
OM-8.2.38
Principle 8:
Senior management must implement a process to regularly monitor operational risk profiles and material exposures to losses. Appropriate reporting mechanisms must be in place at the board,senior management , and business line levels that support proactive management of operational risk.Added: October 2012OM-8.2.39
Banks are encouraged to continuously improve the quality of operational risk reporting. A bank should ensure that its reports are comprehensive, accurate, consistent and actionable across business lines and products. Reports should be manageable in scope and volume; effective decision-making is impeded by both excessive amounts and paucity of data.
Added: October 2012OM-8.2.40
Reporting should be timely and a bank should be able to produce reports in both normal and stressed market conditions. The frequency of reporting should reflect the risks involved and the pace and nature of changes in the operating environment. The results of these monitoring activities should be included in regular management and board reports, as should assessments of
Framework performed by the internal audit and/or risk management and compliance functions. Reports generated by (and/or for) supervisory authorities should also be reported internally tosenior management and the board, where appropriate.Added: October 2012OM-8.2.41
Operational risk reports may contain internal financial, operational, and compliance indicators, as well as external market or environmental information about events and conditions that are relevant to decision making. Operational risk reports should include:
(a) Breaches of the bank's risk appetite and tolerance statement, as well as thresholds or limits;(b) Details of recent significant internal operational risk events and losses; and(c) Relevant external events and any potential impact on the bank and operational risk capital.Added: October 2012OM-8.2.42
Data capture and risk reporting processes should be analysed periodically with a view to continuously enhancing risk management performance as well as advancing risk management policies, procedures and practices.
Added: October 2012Control and Mitigation
OM-8.2.43
Principle 9: Banks must have a strong control environment that utilises:
(a) Policies, processes and systems;(b) Appropriate internal controls; and(c) Appropriate risk mitigation and/or transfer strategies.Added: October 2012OM-8.2.44
Internal controls must be designed to provide assurance that a bank will:
(a) Have efficient and effective operations;(b) Safeguard its assets;(c) Produce reliable financial reports; and(d) Comply with applicable laws and regulations.Added: October 2012OM-8.2.45
A sound internal control programme consists of five components that are integral to the risk management process: control environment, risk assessment, control activities, information and communication, and monitoring activities. These components are outlined in more detail in the Basel Committee paper "Framework for Internal Control Systems in Banking Organisations".
Added: October 2012OM-8.2.46
Control processes and procedures should be established and banks should have a system in place for ensuring compliance with a documented set of internal policies concerning the risk management system. Principal elements of this could include, for example:
(a) Top-level reviews of the bank's progress towards the stated objectives;(b) Verifying compliance with management controls;(c) Review of the treatment and resolution of instances of non-compliance;(d) Evaluation of required approvals and authorisations to ensure accountability to an appropriate level of management; and(e) Tracking reports for approved exceptions to thresholds or limits, management overrides and other deviations from policy.Added: October 2012OM-8.2.47
An effective internal control environment also requires appropriate segregation of duties. Assignments that establish conflicting duties for individuals, or a team without dual controls or other countermeasures may enable concealment of losses, errors or inappropriate actions. Therefore, areas of potential conflicts of interest should be identified, minimised, and subject to careful independent monitoring and review.
Added: October 2012OM-8.2.48
In addition to segregation of duties and dual controls, banks should ensure that other traditional internal controls are in place as appropriate to address operational risk. Examples of these controls include:
(a) Clearly established authorities and/or processes for approval;(b) Close monitoring of adherence to assigned risk limits or thresholds;(c) Safeguards for access to, and use of, bank assets and records;(d) Appropriate staffing level and training to maintain expertise;(e) Ongoing processes to identify business lines or products where returns appear to be out of line with reasonable expectations;(f) Regular verification and reconciliation of transactions and accounts; and(g) A vacation policy that provides for officers and employees being absent from their duties for a period of not less than two consecutive weeks.Added: October 2012OM-8.2.49
Effective use and sound implementation of technology can contribute to the control environment. For example, automated processes are less prone to error than manual processes. However, automated processes introduce risks that must be addressed through sound technology governance and infrastructure risk management programmes.
Added: October 2012OM-8.2.50
The use of technology related products, activities, processes and delivery channels exposes a bank to strategic, operational, and reputational risks and the possibility of material financial loss. Consequently, a bank should have an integrated approach to identifying, measuring, monitoring and managing technology risks. Sound technology risk management uses the same precepts as operational risk management and includes:
(a) Governance and oversight controls that ensure technology, including outsourcing arrangements, is aligned with and supportive of the bank's business objectives;(b) Policies and procedures that facilitate identification and assessment of risk;(c) Establishment of a risk appetite and tolerance statement as well as performance expectations to assist in controlling and managing risk;(d) Implementation of an effective control environment and the use of risk transfer strategies that mitigate risk; and(e) Monitoring processes that test for compliance with policy thresholds or limits.Added: October 2012OM-8.2.51
Management should ensure the bank has a sound technology infrastructure that:
(a) Meets current and long-term business requirements by providing sufficient capacity for normal activity levels as well as peaks during periods of market stress;(b) Ensures data and system integrity, security, and availability; and(c) Supports integrated and comprehensive risk management.Added: October 2012OM-8.2.52
Mergers and acquisitions resulting in fragmented and disconnected infrastructure, cost-cutting measures or inadequate investment can undermine a bank's ability to aggregate and analyse information across risk dimensions or the consolidated enterprise, manage and report risk on a business line or legal entity basis, or oversee and manage risk in periods of high growth. Management should make appropriate capital investment or otherwise provide for a robust infrastructure at all times, particularly before mergers are consummated, high growth strategies are initiated, or new products are introduced.
Added: October 2012OM-8.2.53
In those circumstances where internal controls do not adequately address risk and exiting the risk is not a reasonable option, management can complement controls by seeking to transfer the risk to another party such as through insurance. The board of directors should determine the maximum loss exposure the bank is willing and has the financial capacity to assume, and should perform an annual review of the bank's risk and insurance management programme.
Added: October 2012OM-8.2.54
Because risk transfer is an imperfect substitute for sound controls and risk management programmes, banks should view risk transfer tools as complementary to, rather than a replacement for, thorough internal operational risk control. Having mechanisms in place to quickly identify, recognise and rectify distinct operational risk errors can greatly reduce exposures. Careful consideration also needs to be given to the extent to which risk mitigation tools such as insurance truly reduce risk, transfer the risk to another business sector or area, or create a new risk (e.g. counterparty risk).
Added: October 2012Role of Disclosure
OM-8.2.55
Principle 10: A bank's public disclosures must allow stakeholders to assess its approach to operational risk management.
Added: October 2012OM-8.2.56
A bank's public disclosure of relevant operational risk management information can lead to transparency and the development of better industry practice through market discipline. The amount and type of disclosure should be commensurate with the size, risk profile and complexity of a bank's operations, and evolving industry practice. See also Chapter HC-8 and Chapter PD-1 on disclosure requirements.
Added: October 2012OM-8.2.57
A bank should disclose its operational risk management
Framework in a manner that will allow stakeholders to determine whether the bank identifies, assesses, monitors and controls/mitigates operational risk effectively.Added: October 2012OM-8.2.58
A bank's disclosures should be consistent with how
senior management and the board of directors assess and manage the operational risk of the bank.Added: October 2012OM-8.2.59
A bank must have a formal disclosure policy approved by the board of directors that addresses the bank's approach for determining what operational risk disclosures it will make and the internal controls over the disclosure process. In addition, banks must implement a process for assessing the appropriateness of their disclosures, including the verification and frequency of them.
Added: October 2012OM-8.3 OM-8.3 Standardised Approach
OM-8.3.1
Banks applying standardised approach for capital adequacy purposes as detailed in section CA-6.2 of Capital Adequacy Module, must satisfy the principles set out in section OM-8.2 and in this Section. In order to qualify for use of the Standardised Approach, a bank must satisfy the CBB that, at a minimum:
(a) Its board of directors and senior management, as appropriate, are actively involved in the oversight of the operational risk management framework (see principles 1–3);(b) It has an operational risk management system that is conceptually sound and is implemented with integrity (see principles 4–7); and(c) It has sufficient resources in the use of the approach in the major business lines as well as the control and audit areas.Amended: October 2012
Added: April 08OM-8.3.2
The CBB will have the right to insist on a period of initial monitoring of a bank’s Standardised Approach before it is used for regulatory capital purposes.
Added: April 08OM-8.3.3
A bank must develop specific policies and have documented criteria for mapping gross income for current business lines and activities into the standardised framework. The criteria must be reviewed and adjusted for new or changing business activities as appropriate. Further guidance on business line mapping is set out in paragraph CA-6.2.8 of the Capital Adequacy Module.
Added: April 08OM-8.3.4
A bank using the standardised approach must meet the following additional criteria:
(a) The bank must have an operational risk management system with clear responsibilities assigned to an operational risk management function. The operational risk management function is responsible for developing strategies to identify, assess, monitor and control/mitigate operational risk; for codifying bank-level policies and procedures concerning operational risk management and controls; for the design and implementation of the bank's operational risk assessment methodology; and for the design and implementation of a risk-reporting system for operational risk;(b) As part of the bank's internal operational risk assessment system, the bank must systematically track relevant operational risk data including material losses by business line. Its operational risk assessment system must be closely integrated into the risk management processes of the bank. Its output must be an integral part of the process of monitoring and controlling the banks operational risk profile. For instance, this information must play a prominent role in risk reporting, management reporting, and risk analysis. The bank must have techniques for creating incentives to improve the management of operational risk throughout the bank;(c) There must be regular reporting of operational risk exposures, including material operational losses, to business unit management, senior management, and to the board of directors. The bank must have procedures for taking appropriate action according to the information within the management reports;(d) [This subparagraph was deleted in October 2012];(e) [This subparagraph was deleted in October 2012]; and(f) The bank's operational risk assessment system (including the internal validation processes) must be subject to regular review by external auditors and /or the CBB.Amended: October 2012
Added: April 08Appendix OM-1
Set out below are examples of Shariah requirements that are to be complied with by the banks in respect of the financing contracts. The list is for guidance purposes and not conclusive and may vary according to the views of the various Shariah Supervisory Board (SSB):
(a) Murabahah and Ijarah contracts• The asset is in existence at the time of sale or lease or, in case of Ijarah, the lease contract should be preceded by acquisition of the usufruct of the asset except if the asset was agreed upon based on a general specification.• The asset is legally owned by the bank when it is offered for sale.• The asset is intended to be used by the buyer/ lessee for activities or businesses permissible by Shariah; if the asset is leased back to its owner in the first lease period, it should not lead to contract of ‘inah, by varying the rent or the duration.• There is no late payment, penalty fee or increase in price in exchange for extending or rescheduling the date of payment of accounts receivable or lease receivable, irrespective of whether the debtor is solvent or insolvent.(b) Salam and Istisna’ contracts• A sale and purchase contract cannot be inter-dependent and inter-conditional on each other, such as Salam and Parallel Salam; Istisna’ and Parallel Istisna’.• It is not allowed to stipulate a penalty clause in respect of delay in delivery of a commodity that is purchased under Salam contract, however it is allowed under Istisna’ or Parallel Istisna’.• The subject-matter of an Istisna’ contract may not physically exist upon entering into the contract.(c) Musharakah and Mudarabah contracts• The capital of the bank is to be invested in Shariah compliant investments or business activities.• A partner in Musharakah cannot guarantee the capital of another partner or a Midrib guarantees the capital of the Mudarabah.• The purchase price of other partner’s share in a Musharakah with a binding promise to purchase can only be set as per the market value or as per the agreement at the date of buying. It is not permissible, however, to stipulate that the share be acquired at its face value.Added: April 08OM OM Operational Risk Management
OM-A OM-A Introduction
OM-A.1 OM-A.1 Purpose
OM-A.1.1
The purpose of this module is to provide rules and guidance to banks operating in Bahrain on establishing parameters and control procedures to monitor and mitigate operational risks.
OM-A.1.2
This module provides support for certain other parts of the Rulebook, mainly:
(a) Principles of Business; and(b) High Level Controls.OM-A.1.3
The contents of this Module apply to all banks, except where noted in individual chapters.
OM-A.2 OM-A.2 Key requirements
General procedures
OM-A.2.1
Banks' management must establish written policies and procedures to manage risks arising out of the banks' activities.
Outsourcing
OM-A.2.2
A licensee must formally notify the Agency and seek its prior approval before committing to a new material outsourcing arrangement. The notification must:
(a) be made in writing to the licensee's normal supervisory contact;(b) contain sufficient detail to demonstrate that relevant issues raised in section OM-2.4 onward of this chapter have been addressed; and(c) be made at least 6 weeks before the licensee intends to commit to the arrangement.OM-A.2.3
Once an outsourcing arrangement has been implemented, the Agency requires a licensee to continue to monitor the associated risks and the effectiveness of its mitigating controls.
Electronic money and electronic banking activities
OM-A.2.4
The Agency specifically urges the licensees to use the 'Fourteen Risk Management Principles and Sound Practices' set out in the Basel's Committee paper stated in section OM-3.1 below, as guidelines, in order to recognise, address and manage risks associated with e-banking in a prudent manner.
Business continuity, contingency planning and security
OM-A.2.5
Banks must submit their
succession plans for their senior management team to the Agency. Locally incorporated banks must confirm that the plan has been reviewed and endorsed at Board level. This information should be submitted to the Agency by the end of each calendar year.OM-A.2.6
All full commercial banks must implement security measures which satisfy the Agency's minimum requirements as laid out in Chapter OM-5. These measures include external physical security measures as well as internal measures for staff security and the handling of cash.
OM-A.3 OM-A.3 Regulation history
OM-A.3.1
This module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
OM-A.3.2
A list of most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes OM-5 01/04/05 New Securities Measures OM-4.2 01/10/05 Succession planning for locally incorporated banks OM-5.1 01/10/05 Clarification of security manager role for smaller banks and deletion of requirement for cash trays OM-B & OM-1.2 01/04/06 Minor amendments concerning roles of Board and management and editing of OM B. OM-5.1.15 –OM-5.1.24 01/04/06 New security requirements for ATM security arrangements and reporting of security related complaints Evolution of the Module
OM-A.3.3
Prior to the development of this Rulebook, the Agency had issued various circulars representing regulations covering different aspects of operational risk management. These circulars have now been consolidated into this module covering the operational risk management regulation. These circulars and their evolution into this module are listed below:
Circular Ref. Date of Issue Module Ref. Circular Subject BC/3/98 21 Feb 1998 OM-B Basel Committee on Banking Supervision Framework for the Evaluation of Internal Control Systems BS/9/03 14 Sep 2003 OM-1 Operational Risk Management ODG/162/03 21 May 2003 OM-2 Outsourcing BC/9/98 16 Jun 1998 OM-3 Electronic Money and Electronic Banking Activities BC/6/02 24 Jun 2002 OM-3 Risk Management Principles for Electronic Banking ODG/347/03 28 Sep 2003 OM-4.2 Succession Planning Effective date
OM-A.3.4
The contents in this module are effective from the date depicted in the original circulars (see paragraph OM-A.3.3) or from the date shown in the Module Footer.
OM-B OM-B General guidance and best practice
OM-B.1 OM-B.1 Guidance provided by other international bodies
OM-B.1.1
The papers below provide guidance which promotes best practice and can be generally applied by all licensees to their activities.
Basel Committee: Framework for Internal Controls Systems in Banking Organisations
OM-B.1.2
The paper (see www.bis.org/publ/bcbs40.pdf) issued in September 1998 presents the first internationally accepted framework for supervisors to use in evaluating the effectiveness of the internal controls over all on and off balance sheet activities of banking organizations.
OM-B.1.3
The paper describes elements that are essential to a sound internal control system, recommends principles that supervisors can apply in evaluating such systems, and discusses the role of bank supervisors and external auditors in this assessment process.
Basel Committee: Sound Practices for the Management and Supervision of Operational Risk
OM-B.1.4
The paper (see www.bis.org/publ/bcbs96.pdf) issued in February 2003 by the Risk Management Group of the
Basel Committee on Banking Supervision, outlines a set of principles that provide a framework for the effective management and supervision of operational risk, for use by banks and supervisory authorities when evaluating operational risk management policies and practices.OM-B.1.5
The paper also recognises that clear strategies and oversight by the Board of Directors and senior management, a strong operational risk culture and internal control culture (including, among other things, clear lines of responsibility and segregation of duties), effective internal reporting, and contingency planning are all crucial elements of an effective operational risk management framework for banks of any size and scope.
Basel Committee: Risk Management for Electronic Banking and Electronic Money Activities
OM-B.1.6
The paper (see www.bis.org/publ/bcbs35.pdf) issued in March 1998 provides guidelines for supervisory authorities and banking organisations as they develop methods for identifying, assessing, managing and controlling the risks associated with
electronic banking andelectronic money .OM-B.1.7
The paper indicates that, while providing new opportunities for banks,
electronic banking andelectronic money activities carry risks as well as benefits and it is important that these risks are recognised and managed in a prudent manner.Basel Committee: Risk Management Principles for Electronic Banking
OM-B.1.8
The paper (see www.bis.org/publ/bcbs98.pdf) issued in July 2003 recognizes new risks associated with the increase in distribution of financial services through electronic channels, or e-banking. To emphasize the importance of these risks, the Committee have placed responsibility on the shoulders of the Board and senior management to ensure their institutions have analysed, identified and modified operations to mitigate these risks.
OM-B.1.9
To facilitate these developments, the Committee has identified fourteen Risk Management Principles for
Electronic Banking to help banking institutions expand their existing risk oversight policies and processes to cover their e-banking activities.OM-B.1.10
The Risk Management Principles fall into three broad, and often overlapping, categories of issues that are grouped to provide clarity: Board and Management Oversight; Security Controls; and Legal and
Reputational Risk Management.OM-1 OM-1 General procedures
OM-1.1 OM-1.1 Overview
OM-1.1.1
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and
reputational risk .OM-1.1.2
Operational risk is inherent in all types of banks' activities, and therefore all new products and services should be reviewed for operational risks prior to their implementation. As these risks are important and can result in substantial losses, bank auditors should include operational audits in the scope of all audits.
OM-1.1.3
The importance of operational risk has gained prominence as increasing reliance on sophisticated technology raises concerns of potential losses should unforeseen events cause technological failures. Banks have traditionally focused on controlling and mitigating credit and liquidity risks, however, enhanced levels of automation, while reducing costs and processing times, also pose potential risks. As such any one process or system failure may itself or through a series of systematic failures, could possibly cause financial or other losses to a bank. Therefore, it has become imperative that banks should establish policies and procedures to monitor and control operational risks.
OM-1.1.4
For detailed guidance on the management of operational risk within a bank, refer to the
Basel Committee paper 'Sound Practices for the Management and Supervision of Operational Risk' (see www.bis.org/publ/bcbs_wp96.htm).OM-1.1.5
The Agency will use the paper mentioned in paragraph OM-1.1.4 as a guideline in evaluation of the internal control systems of banks operating in Bahrain. Such evaluations will be made through the Agency's normal supervisory processes (e.g. meetings with management, on-site examinations (Module BR) and the use of reporting accountants (Module AU)).
OM-1.2 OM-1.2 Developing an appropriate risk management environment
OM-1.2.1
It should be standard practice for a bank's management to establish policies and procedures to manage risks arising out of its activities. The bank should maintain written policies and procedures that identify the risk tolerances of the Board of Directors and should clearly delineate lines of authority and responsibility for managing the risks. Banks' employees should be fully aware of all policies and procedures that relate to their specific duties.
OM-1.2.2
The bank's strategy should define its tolerance for risk and lay out the Board's understanding of the specific characteristics of operational risk.
The Board of Directors
OM-1.2.3
The Board of Directors should be aware of the major aspects of the bank's operational risk as a distinct and controllable risk category.
OM-1.2.4
The responsibilities of the Board of Directors of the bank should include:
(a) approving the bank's operational risk strategy;(b) periodically reviewing the bank's operational risk strategy;(c) approving the basic structure of the framework for managing operational risk; and(d) ensuring that senior management is carrying out its risk management responsibilities.Senior management
OM-1.2.5
The responsibilities of the Senior management of the bank should include:
(a) implementing the operational risk strategy approved by the Board of Directors;(b) ensuring that the strategy is implemented consistently throughout the whole banking organisation;(c) ensuring that all levels of staff understand their responsibilities with respect to operational risk management;(d) developing policies, processes and procedures for managing operational risk in all of the bank's products, activities, processes and systems; and(e) Developing succession plans for senior staff.Management information system
OM-1.2.6
The management information system of a banking organisation plays a key role in establishing and maintaining an effective operational risk management framework. Two key aspects of management information system are:
(a) 'Communication flow' serves the purpose of establishing a consistent operational risk management culture across the bank.(b) 'Reporting flow' enables:1. senior management to monitor the effectiveness of the risk management system for operational risk; and2. the Board of Directors to oversee senior management performance.OM-1.3 OM-1.3 Identification, measurement, monitoring, and control
OM-1.3.1
As part of an effective operational risk management system, banks should:
(a) identify critical processes, resources and loss events;(b) establish processes necessary for measuring operational risk;(c) monitor operational risk exposures and loss events on an on-going basis; and(d) develop policies, processes and procedures to control or mitigate operational risk.OM-1.3.2
Banks should assess the costs and benefits of alternative risk limitation and control strategies and should adjust their operational risk
exposure using appropriate strategies, in light of their overall risk profile.OM-2 OM-2 Outsourcing
OM-2.1 OM-2.1 Introduction
OM-2.1.1
This chapter sets out the Agency's approach to outsourcing by licensees. It also sets out various requirements that licensees must address when considering outsourcing an activity or function.
OM-2.1.2
In the context of this chapter, 'outsourcing' means an arrangement whereby a third party performs on behalf of a licensee an activity which was previously undertaken by the licensee itself (or in the case of a new activity, one which commonly would have been performed internally by the licensee). Examples of services that are typically outsourced include data processing, customer call centres and back-office related activities.
OM-2.1.3
Most of the Regulations in this chapter are concerned with situations where the third party provider is outside the licensee's group. Section OM-2.8, however, sets out the Agency's requirements when a service is outsourced to a company within the licensee's group.
OM-2.1.4
The requirements in this chapter only apply to 'material' outsourcing arrangements. These are arrangements that, if they failed in any way, would pose significant risks to the on-going operations of a licensee, its reputation and/or quality of service provided to its customers. For instance, the outsourcing of all or a substantial part of functions such as customer sales and relationship management, settlements and processing, IT and data processing and financial control, would normally be considered 'material'.
OM-2.1.5
Management should carefully consider whether a proposed outsourcing arrangement falls under this chapter's definition of 'material'. If in doubt, management should consult with the Agency.
OM-2.1.6
The requirements in this chapter only apply to outsourcing arrangements entered into after the issuance of the original circular as depicted in paragraph OM-A.3.3. In the case of pre-existing outsourcing agreements, the Agency requires licensees to apply the requirements of this chapter to the fullest extent possible when these arrangements are subsequently renewed.
Legal source
OM-2.1.7
The BMA "Standard Conditions and Licensing Criteria" require a licensee's activities to be conducted in an orderly manner and subject to appropriate sound risk management systems, in accordance with the regulations, circulars, notices and directions of the Agency.
OM-2.2 OM-2.2 Supervisory approach
OM-2.2.1
The Agency recognises the benefits that can potentially be achieved through outsourcing an activity to a third party provider. They can include reduced costs, enhanced service quality and a reduction in management time spent on non-core activities. However, outsourcing an activity also poses potential risks. These include the ability of the service provider to maintain service quality levels, reduced control over the activity and access to relevant information, and increased legal and client confidentiality risks.
OM-2.2.2
The Agency's approach is to allow licensees the freedom to enter into outsourcing arrangements, providing these have been properly structured and associated risks addressed. The Agency requires prior approval to be sought by licensees wishing to outsource material activities, to give the Agency the opportunity to verify that the proposed arrangements are adequate.
OM-2.2.3
The Agency expects licensees to have undertaken a thorough assessment of a proposal before formally submitting a notification to the Agency. However, the Agency is also willing to discuss ideas informally at an early stage of development, on a 'no-commitment' basis. It especially encourages an early approach when the proposed outsourcing is particularly material or innovative.
OM-2.2.4
Once an outsourcing arrangement has been implemented, the Agency requires a licensee to continue to monitor the associated risks and the effectiveness of its mitigating controls. It will verify this through the course of its normal on-site and off-site supervisory processes, such as on-site examinations and prudential meetings. The Agency also requires access to the outsourced activity, which it may occasionally want to examine itself, through management meetings or on-site examinations.
OM-2.2.5
Fundamental to the Agency's supervisory approach to outsourcing is that the Board and management of the licensee may not abdicate their responsibility for a licensee's business and the way its customers are treated. The Board and management remain ultimately responsible for the effectiveness of systems and controls in outsourced activities.
OM-2.3 OM-2.3 Notifications and prior approval
OM-2.3.1
A licensee must formally notify the Agency and seek its prior approval before committing to a new material outsourcing arrangement.
OM-2.3.2
The above notification must:
(a) be made in writing to the licensee's normal supervisory contact;(b) contain sufficient detail to demonstrate that relevant issues raised in section OM-2.4 onward of this chapter have been addressed; and(c) be made at least 6 weeks before the licensee intends to commit to the arrangement.OM-2.3.3
The Agency will review the information provided and provide a definitive response within 6 weeks of receiving the notification. Where further information is requested from the licensee, however, the time taken to provide this further information will not be taken into account. The Agency may also contact home or host supervisors of the licensee or the service provider, to seek their comments — in such cases, the 6-week turnaround is also subject to the speed of their response.
OM-2.3.4
Once an activity has been outsourced, a licensee must immediately inform its normal supervisory contact at the Agency of any material problems encountered with the outsourcing provider. In exceptional cases, the Agency reserves the right to direct a licensee to make alternative arrangements for the outsourced activity.
OM-2.4 OM-2.4 Risk assessment
OM-2.4.1
Licensees must undertake a thorough risk assessment of an outsourcing proposal, before formally notifying the Agency and committing itself to an agreement.
OM-2.4.2
The risk assessment should — amongst other things — include an analysis of:
(a) the business case;(b) the suitability of the outsourcing provider; and(c) the impact of the outsourcing on the licensee's overall risk profile and its systems and controls framework.OM-2.4.3
In assessing the suitability of the outsourcing provider, the licensee should amongst other things consider its financial soundness, its technical competence, its commitment to the arrangement, and its reputation.
OM-2.4.4
Once an outsourcing agreement has been entered into, licensees must regularly review the suitability of the outsourcing provider and the on-going impact of the agreement on their risk profile and systems and controls framework. Such reviews should take place at least every year.
OM-2.4.5
A licensee must nominate a member of senior management with day-to-day responsibility for handling the relationship with the outsourcing provider and ensuring that relevant risks are addressed. This person should be notified to the Agency as part of the notification required under section OM-2.3 above.
OM-2.5 OM-2.5 Outsourcing agreement
OM-2.5.1
The activities to be outsourced and respective contractual liabilities and obligations of the outsourcing provider and licensee must be clearly specified in an outsourcing agreement. This agreement must — amongst other things — address the following points:
(a) Control over outsourced activities1. The Board and management of licensees are held ultimately responsible by the Agency for the adequacy of systems and controls in outsourced activities. Licensees must therefore ensure that they have adequate mechanisms for monitoring the performance of, and managing the relationship with, the outsourcing provider.2. Aservice level agreement ("SLA") — setting out the standards of service to be provided — must form part of the outsourcing agreement. Where the outsourcing provider interacts directly with a licensee's customers, the SLA should — where relevant — reflect the licensee's own standards regarding customer care.3. Mechanisms for the regular monitoring by licensees of performance against SLA and other targets, and for implementing remedies in case of any shortfalls, should also form part of the agreement.4. Clear reporting and escalation mechanisms should be specified in the agreement.5. Where an outsourcing provider in turn decides to sub-contract to other providers, the original provider must remain contractually liable to the licensee for the quality and level of service agreed, and its obligations to the licensee must remain unchanged.(b) Customer data confidentiality1. Licensees should ensure that outsourcing agreements comply with all applicable legal requirements regarding customer confidentiality.2. Licensees should ensure that the outsourcing provider implements adequate safeguards and procedures. Amongst other things, customer data should be properly segregated from those belonging to other clients the outsourcing provider may have. Outsourcing providers should give suitable undertakings that the company and its staff will comply with all applicable confidentiality rules. Licensees should have contractual rights to take action against the service provider in the event of a breach of confidentiality.3. Licensees should assess the impact of using an overseas-based outsourcing provider on their ability to maintain customer data confidentiality, for instance, because of the powers of local authorities to access such data.(c) Access to information1. Outsourcing agreements must ensure that the licensee's internal and external auditors have timely access to any relevant information they may require to fulfil their responsibilities. Such access must allow them to conduct on-site examinations of the outsourcing provider, if required.2. Licensees must also ensure that the Agency has timely access to any relevant information it may reasonably require under the law. Such access must allow the Agency to conduct on-site examinations of the outsourcing provider, if required.3. Where the outsourcing provider is based overseas, the outsourcing provider must confirm in the outsourcing agreement that there are no regulatory or legal impediments to either the licensee's internal and external auditors, or the Agency, having the access described above. Should such restrictions subsequently be imposed, the licensee must communicate this fact to the Agency as soon as it becomes aware of the matter.4. The outsourcing provider must commit itself, in the outsourcing agreement, to informing the licensee of any developments that may have a material impact on its ability to meet its obligations. These may include, for example, relevant control weaknesses identified by the outsourcing provider's internal or external auditors, and material adverse developments in the financial performance of the outsourcing provider.(d) Business continuity1. Licensees should ensure that service providers maintain, regularly review and test plans to ensure continuity in the provision of the outsourced service.2. Licensees should have an adequate understanding of the outsourcing provider's arrangements, to understand the implications for its own contingency arrangements (see section OM-2.6).(e) Termination1. Licensees must have the right to terminate the agreement should the outsourcing provider undergo a change of ownership (whether direct or indirect) that poses a potentialconflict of interest ; becomes insolvent; or goes into liquidation or administration.2. Termination under any other circumstances allowed under the agreement must give licensees a sufficient notice period in which they can effect a smooth transfer of the service to another provider or bring it back in-house.3. In the event of termination, for whatever reason, the agreement should provide for the return of all customer data — where required by licensees — or their destruction.OM-2.6 OM-2.6 Contingency planning
OM-2.6.1
Licensees should maintain and regularly review
contingency plans to enable them to set up alternative arrangements — with minimum disruption to business — should the outsourcing contract be suddenly terminated or the outsourcing provider fails. This may involve the identification of alternative outsourcing providers or the provision of the service in-house. These plans should consider how long the transition would take and what interim arrangements would apply.OM-2.6.2
See chapter OM-4 for further guidance on business continuity and contingency planning.
OM-2.7 OM-2.7 Internal audit outsourcing
OM-2.7.1
Because of the critical importance of an effective internal audit function to a licensee's control framework, all proposals to outsource internal audit operations are to be considered material.
OM-2.7.2
The Agency will generally not permit licensees to outsource their internal audit function to the same firm that acts as their external auditors. However, the Agency may allow short-term outsourcing of internal audit operations to a licensee's external auditor, to meet unexpected urgent or short-term needs (for instance, on account of staff resignation or illness). Any such arrangement will normally be limited to a maximum of one year.
OM-2.7.3
Licensees who have existing outsourcing arrangements in place with their external auditors relating to the provision of internal audit services are required to find suitable alternatives when the existing arrangements terminate or come up for renewal.
OM-2.7.4
In all circumstances, Board and management of licensees must retain responsibility for ensuring that an adequate internal audit programme is implemented, and will be held accountable in this respect by the Agency.
OM-2.8 OM-2.8 Intra-group outsourcing
OM-2.8.1
As with outsourcing to non-group companies, the Board and management of licensees are held ultimately responsible by the Agency for the adequacy of systems and controls in activities outsourced to group companies.
OM-2.8.2
However, the degree of formality required — in terms of contractual agreements and control mechanisms — for outsourcing within a licensee's group is likely to be less, because of common management and enhanced knowledge of other group companies.
OM-2.8.3
A licensee must formally notify the Agency at least 6 weeks before committing to a material
intra-group outsourcing . The request must be made in writing to the licensee's normal supervisory contact, and must set out a summary of the proposed outsourcing, its rationale, and an analysis of its associated risks and proposed mitigating controls. The Agency will respond to the notification in the same manner and timescale as set in section OM-2.3 above.OM-2.8.4
The Agency expects, as a minimum, an agreed statement of the standard of service to be provided by the group provider, including a clear statement of responsibilities allocated between the group provider and licensee.
OM-3 OM-3 Electronic money and electronic banking activities
OM-3.1 OM-3.1 Electronic banking
OM-3.1.1
This chapter provides information on the
Basel Committee papers that the Agency requires the relevant licensees to use as guidance onelectronic banking risk management principles and best practice.OM-3.1.2
The Agency considers that the provisions of the following papers represent best practice and provide guidelines for recognising, addressing and managing risk associated with this area. Banks should take appropriate steps for the implementation of relevant recommendations set out therein:
(a) 'Risk Management forElectronic Banking andElectronic Money Activities' issued in March 1998 (see section OM-B.1 for further references to the paper)(b) 'Risk Management Principles forElectronic Banking ' issued in May 2001 (see section OM-B.1 for further references to the paper)OM-3.1.3
The Agency specifically urges the licensees to use the 'Fourteen Risk Management Principles and Sound Practices' set out in the Basel's Committee paper stated in paragraph OM-3.1.2(b) above, as guidelines, in order to recognise, address and manage risks associated with e-banking in a prudent manner. The paper stated in paragraph OM-3.1.2(a) above, should be used as guidance for best practice in this area.
OM-4 OM-4 Business continuity and contingency planning
OM-4.1 OM-4.1 Contingency planning
OM-4.1.1
Although operations risks are difficult to quantify, they can often be evaluated by examining a series of "worst-case" or "what-if" scenarios (stress testing), such as a power loss, a doubling of transaction volume or a mistake found in the pricing software for
collateral management. They can also be assessed through periodic reviews of procedures, documentation requirements, data processing systems,contingency plans and other operational practices. Such reviews may help to reduce the likelihood of errors and breakdowns in controls, improve the control of risk and the effectiveness of the limit system and prevent unsound marketing practices and the premature adoption of new products or lines of business.OM-4.1.2
Such stress tests should not be limited to quantitative exercises that compute potential losses or gains. They should also include more qualitative analyses of the actions management might take under particular scenarios.
Contingency plans are important products of such qualitative analyses.OM-4.1.3
Since the delivery of corporate and customer services represent key strategic and reputational issues, such problems could cause serious difficulties for banks and even jeopardise their ability to conduct key business activities. This requires the bank to establish business continuity and
contingency plans outlining operating procedures and lines of communication, both formal and informal, in the event of an unexpected disaster (also seeBasel Committee paper 'Framework for Internal Control Systems in Banking Organizations' for further guidance).OM-4.1.4
For contingency planning relating to outsourcing activities, see section OM-2.6.
OM-4.2 OM-4.2 Succession planning
OM-4.2.1
Succession planning is an essential precautionary measure for a bank if its leadership stability — and hence ultimately its financial stability — is to be protected. Succession planning is especially critical for smaller institutions, where management teams tend to be smaller and possibly reliant on a few key individuals.
OM-4.2.2
The Agency will generally monitor banks'
succession plans through the work of its on-site examiners. In order to supplement these efforts, the Agency requires its locally incorporated banks to submit to the Agency a description of theirsuccession plans for their senior management team. Locally incorporated banks must summarise who is covered by theirsuccession plan , and confirm that the plan has been reviewed and endorsed at Board level.OM-4.2.3
The information required in paragraph OM-4.2.2 should be submitted to the Agency by the end of each calendar year. It should be addressed to the Executive Director, Banking Supervision.
OM-5 OM-5 Security Measures for Banks
OM-5.1 OM-5.1 Physical Security Measures
External Measures
OM-5.1.1
The content of this section is applicable to all full commercial banks licensed by the Agency in the Kingdom of Bahrain.
OM-5.1.2
All head offices are required to maintain Ministry of Interior ("MOI") guards on a 24 hours basis. All branches must maintain a 24 hour MOI guard. However, if branches satisfy the criteria mentioned in paragraphs OM-5.1.3 to OM-5.1.20 below, they may maintain MOI guards during opening hours only. Furthermore, banks will be allowed to replace MOI armed guards with private security guards subject to the approval of the MOI. Training and approval of private security guards will be given by the MOI. Head Offices must always have a 24 hour MOI guard.
OM-5.1.3
Public entrances to head offices and branches must be protected by measures such as steel rolling shutters, or the external doors must be of solid steel or a similar solid material of equivalent strength and resistance to fire.
OM-5.1.4
Other external entrances should have steel doors or be protected by steel rolling shutters. Preferably, all other external entrances should have the following security measures:
• Magic eye.• Locking device (key externally and handle internally).• Door closing mechanism.• Contact sensor with alarm for prolonged opening time.• Combination access control system (e.g. access card and key slot or swipe card and password).OM-5.1.5
If additional security measures to those mentioned in OM-5.1.3 and OM-5.1.4 such as security cameras, motion detectors or intruder alarms are installed, the requirement for steel external doors or protection by steel rolling shutters is waived.
OM-5.1.6
External windows should have security measures such as anti blast films and movement detectors. For ground floor windows, banks may also wish to add steel grills fastened into the wall.
OM-5.1.7
Branch alarm systems should have the following features:
(a) PIR motion detectors(b) Door sensors(c) Anti vibration/movement sensors on vaults(d) External siren(e) The intrusion detection system must be linked to the bank's (i.e. head office) monitoring unit and also the MOI Central Monitoring Unit.Internal Measures
OM-5.1.8
Teller counters must be screened off from customers by a glass screen of no less than 1 meter in height from the counter work surface or 1.4 meters from the floor.
OM-5.1.9
All areas where cash is handled must be screened off from customers and other staff areas.
OM-5.1.10
Access to teller areas must be restricted to authorised staff only. The design of the teller area should not allow customers to pass through it.
OM-5.1.11
Panic alarm systems for teller staff must be installed. The choice between silent or audible panic alarms is left to individual banks. Kick bars and/or hold up buttons must be spread throughout the teller and customer service areas and the branch manager's office. The panic alarm must be linked to the MOI Central Monitoring Unit.
Cash Safety
OM-5.1.12
Cash, precious metals and bearer instruments must be kept in fireproof cabinets/safes. Preferably, these cabinets/safes should be located in strong rooms.
OM-5.1.13
Strong rooms must be made of reinforced solid concrete, or reinforced block work. Doors to strong rooms must be steel and preferably also have a steel shutter fitted. Dual locking devices should be installed in strong room doors. Strong room doors should be located out of the sight of customers.
OM-5.1.14
Strong rooms must not contain any other openings except the entry door and where necessary, an air conditioning outlet. The air conditioning outlet must be protected with a steel grill.
OM-5.1.15
ATMs should not normally be replenished during customer opening hours. Replenishment of off-site ATMs should be performed by specialised service providers, comprising a crew of at least two persons. ATM replenishment staff must carry a mobile phone or communication device in case of emergency.
OM-5.1.16
All cash movements between branches, to and from the BMA and to offsite ATMs should be performed by specialised service providers.
OM-5.1.17
All ATMs must be properly maintained and covered by service or maintenance agreements. All ATMs must be inspected daily by bank staff to check that they are functioning properly and have not been tampered with.
OM-5.1.18
All banks must maintain a list of all maintenance, replenishment and inspection visits by staff or other authorised parties.
OM-5.1.19
All ATMs must be fitted with fraud detection and inhibiting devices (mandatory by year end 2006).
CCTV Network Systems
OM-5.1.20
All head offices and branches must have a CCTV network which is connected to a central monitoring unit located in the head office, and to the MOI Central Monitoring Unit.
OM-5.1.21
The location and type of CCTV cameras is left to the discretion of banks. At a minimum, CCTV cameras should cover the following areas:
(a) Main entrance(b) Other external doors(c) Any other access points (e.g. ground floor windows)(d) The banking hall(e) Tellers' area(f) Strongroom entrance(g) ATMs (by way of internal or external cameras)OM-5.1.22
Notices of CCTV cameras in operation should be put up for the attention of the public. CCTV records should be maintained for a minimum 45 day period. The transmission rate (in terms of the number of frames per second) should be high enough to make for effective monitoring. Delayed transmission of pictures to the Central Monitoring Unit is not acceptable. The CCTV system should be operational 24 hours per day.
Training and Other Measures
OM-5.1.23
Banks should establish the formal position of security manager. This person will be responsible for ensuring all bank staff are given annual, comprehensive security training. Banks should produce a security manual or procedures for staff, especially those dealing directly with customers. For banks dealing with three or more branches, this position should be a formally identified position. For banks with one or two branches, the responsibilities of this position may be added to the duties of a member of management.
OM-5.1.24
The security manager must maintain records on documented security related complaints by customers and take corrective action or make recommendations for action on a timely basis. Actions and recommendations must also be documented.
OM-5.1.25
Banks should consider safety and security issues when selecting premises for new branches. Key security issues include prominence of location (i.e. Is the branch on a main street or a back street?), accessibility for emergency services, and assessment of surrounding premises (in terms of their safety or vulnerability), and the number of entrances to the branch. All banks are required to hold an Insurance Blanket Bond (which includes theft of cash in its cover).
OM-8.1 OM-8.1 Introduction [1 April 2008 to 30 September 2012]
OM-8.1.1
Section CA-6.2 of the Capital Adequacy Module allows banks to use either the basic indicator approach or standardised approach to compute capital charge for operational risk. This chapter sets out the qualitative aspect of these two approaches.
Added: April 08OM-8.1.2
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events which includes but is not limited to, legal risk and Shariah compliance risk. This definition excludes strategic and reputational risk.
Added: April 08OM-8.1.3
Shariah compliance risk is a type of operational risk facing Islamic banks which can lead to non-recognition of income and resultant losses. See Appendix OM-1 for examples of Shariah requirements that must be complied with by the banks.
Added: April 08OM-8.2 OM-8.2 Basic Indicator Approach [1 April 2008 to 30 September 2012]
OM-8.2.1
Banks applying the basic indicator approach for capital adequacy purposes as detailed in section CA-6.2 of Capital Adequacy Module are encouraged to comply with the principles set forth in this section.
Added: April 08Developing an Appropriate Risk Management Environment
OM-8.2.2
Failure to understand and manage operational risk, which is present in virtually all bank transactions and activities, may greatly increase the likelihood that some risks will go unrecognised and uncontrolled. Both the board and senior management are responsible for creating an organisational culture that places high priority on effective operational risk management and adherence to sound operating controls. Operational risk management is most effective where a bank’s culture emphasises high standards of ethical behaviour at all levels of the bank. The board and senior management should promote an organisational culture which establishes through both actions and words the expectations of integrity for all employees in conducting the business of the bank.
Added: April 08OM-8.2.3
Principle 1: The board of directors must be aware of the major aspects of the bank's operational risks as a distinct risk category that must be managed, and it must approve and periodically review the bank's operational risk management framework. The framework must provide a bank-wide definition of operational risk and lay down the principles of how operational risk is to be identified, assessed, monitored, and controlled/mitigated.
Amended: July 2011
Added: April 08OM-8.2.4
The board of directors should approve the implementation of a bank-wide framework to explicitly manage operational risk as a distinct risk to the bank’s safety and soundness. The board should provide senior management with clear guidance and direction regarding the principles underlying the framework and approve the corresponding policies developed by senior management.
Added: April 08OM-8.2.5
An operational risk framework should be based on an appropriate definition of operational risk which clearly articulates what constitutes operational risk in that bank. The framework should cover the bank’s appetite and tolerance for operational risk, as specified through the policies for managing this risk and the bank’s prioritisation of operational risk management activities, including the extent of, and manner in which, operational risk is transferred outside the bank. It should also include policies outlining the bank’s approach to identifying, assessing, monitoring and controlling/mitigating the risk. The degree of formality and sophistication of the bank’s operational risk management framework should be commensurate with the bank’s risk profile.
Added: April 08OM-8.2.6
The board is responsible for establishing a management structure capable of implementing the bank’s operational risk management framework. Since a significant aspect of managing operational risk relates to the establishment of strong internal controls, it is particularly important that the board establishes clear lines of management responsibility, accountability and reporting. In addition, there should be separation of responsibilities and reporting lines between operational risk control functions, business lines and support functions in order to avoid conflicts of interest. The framework should also articulate the key processes the bank needs to have in place to manage operational risk.
Added: April 08OM-8.2.7
The board should review the framework regularly to ensure that the bank is managing the operational risks arising from external market changes and other environmental factors, as well as those operational risks associated with new products, activities or systems. This review process should also aim to assess industry best practice in operational risk management appropriate for the bank’s activities, systems and processes. If necessary, the board should ensure that the operational risk management framework is revised in light of this analysis, so that material operational risks are captured within the framework.
Added: April 08OM-8.2.8
Principle 2: The board of directors must ensure that the bank's operational risk management framework is subject to effective and comprehensive internal audit by operationally independent, appropriately trained and competent staff. The internal audit function must not be directly responsible for operational risk management.
Amended: July 2011
Added: April 08OM-8.2.9
Banks should have in place adequate internal audit coverage to verify that operating policies and procedures have been implemented effectively. The board (either directly or indirectly through its audit committee) should ensure that the scope and frequency of the audit programme is appropriate to the risk exposures. Audit should periodically validate that the bank’s operational risk management framework is being implemented effectively across the bank.
Added: April 08OM-8.2.10
To the extent that the audit function is involved in oversight of the operational risk management framework, the board should ensure that the independence of the audit function is maintained. This independence may be compromised if the audit function is directly involved in the operational risk management process. The audit function may provide valuable input to those responsible for operational risk management, but should not itself have direct operational risk management responsibilities. In practice, the CBB recognises that the audit function at some banks (particularly smaller banks) may have initial responsibility for developing an operational risk management programme. Where this is the case, banks should see that responsibility for day-to-day operational risk management is transferred elsewhere in a timely manner.
Added: April 08OM-8.2.11
Principle 3: Senior management must have responsibility for implementing the operational risk management framework approved by the board of directors. The framework must be consistently implemented throughout the whole banking organisation, and all levels of staff must understand their responsibilities with respect to operational risk management. Senior management must also have responsibility for developing policies, processes and procedures for managing operational risk in all of the bank's material products, activities, processes and systems.
Amended: July 2011
Added: April 08OM-8.2.12
Management should translate the operational risk management framework established by the board of directors into specific policies, processes and procedures that can be implemented and verified within the different business units. While each level of management is responsible for the appropriateness and effectiveness of policies, processes, procedures and controls within its purview, senior management should clearly assign authority, responsibility and reporting relationships to encourage and maintain this accountability, and ensure that the necessary resources are available to manage operational risk effectively. Moreover, senior management should assess the appropriateness of the management oversight process in light of the risks inherent in a business unit’s policy.
Added: April 08OM-8.2.13
Senior management should ensure that bank activities are conducted by qualified staff with the necessary experience, technical capabilities and access to resources, and that staff responsible for monitoring and enforcing compliance with the institution’s risk policy have authority independent from the units they oversee. Management should ensure that the bank’s operational risk management policy has been clearly communicated to staff at all levels in units that incur material operational risks.
Added: April 08OM-8.2.14
Senior management should ensure that staff responsible for managing operational risk communicate effectively with staff responsible for managing credit, market, and other risks, as well as with those in the bank who are responsible for the procurement of external services such as insurance purchasing and outsourcing agreements. Failure to do so could result in significant gaps or overlaps in a bank's overall risk management programme.
Added: April 08OM-8.2.15
Senior management should also ensure that the bank’s remuneration policies are consistent with its appetite for risk. Remuneration policies which reward staff that deviate from policies (e.g. by exceeding established limits) weaken the bank’s risk management processes.
Added: April 08OM-8.2.16
Particular attention should be given to the quality of documentation controls and to transaction-handling practices. Policies, processes and procedures related to advanced technologies supporting high transactions volumes, in particular, should be well documented and disseminated to all relevant personnel.
Added: April 08Risk Management: Identification, Assessment, Monitoring and Mitigation/Control
OM-8.2.17
Principle 4: Banks must identify and assess the operational risk inherent in all material products, activities, processes and systems. Banks must also ensure that before new products, activities, processes and systems are introduced or undertaken, the operational risk inherent in them is subject to adequate assessment procedures.
Amended: July 2011
Added: April 08OM-8.2.18
Risk identification is paramount for the subsequent development of a viable operational risk monitoring and control system. Effective risk identification considers both internal factors (such as the bank’s structure, the nature of the bank’s activities, the quality of the bank’s human resources, organisational changes and employee turnover) and external factors (such as changes in the industry and technological advances) that could adversely affect the achievement of the bank’s objectives.
Added: April 08OM-8.2.19
In addition to identifying the most potentially adverse risks, banks should assess their vulnerability to these risks. Effective risk assessment allows the bank to better understand its risk profile and most effectively target risk management resources.
Added: April 08OM-8.2.20
Amongst the possible tools used by banks for identifying and assessing operational risk are:
(a) Self- or Risk Assessment: a bank assesses its operations and activities against a menu of potential operational risk vulnerabilities. This process is internally driven and often incorporates checklists and/or workshops to identify the strengths and weaknesses of the operational risk environment. Scorecards, for example, provide a means of translating qualitative assessments into quantitative metrics that give a relative ranking of different types of operational risk exposures. Some scores may relate to risks unique to a specific business line while others may rank risks that cut across business lines. Scores may address inherent risks, as well as the controls to mitigate them. In addition, scorecards may be used by banks to allocate economic capital to business lines in relation to performance in managing and controlling various aspects of operational risk.(b) Risk Mapping: in this process, various business units, organisational functions or process flows are mapped by risk type. This exercise can reveal areas of weakness and help prioritise subsequent management action.(c) Risk Indicators: risk indicators are statistics and/or metrics, often financial, which can provide insight into a bank’s risk position. These indicators tend to be reviewed on a periodic basis (such as monthly or quarterly) to alert banks to changes that may be indicative of risk concerns. Such indicators may include the number of failed trades, staff turnover rates and the frequency and/or severity of errors and omissions.(d) Measurement: some banks have begun to quantify their exposure to operational risk using a variety of approaches. For example, data on a bank’s historical loss experience could provide meaningful information for assessing the bank’s exposure to operational risk and developing a policy to mitigate/control the risk. An effective way of making good use of this information is to establish a framework for systematically tracking and recording the frequency, severity and other relevant information on individual loss events. Some banks have also combined internal loss data with external loss data, scenario analyses, and risk assessment factors.Added: April 08OM-8.2.21
Principle 5: Banks must implement a process to regularly monitor operational risk profiles and material exposures to losses. There must be regular reporting of pertinent information to senior management and the board of directors that supports the proactive management of operational risk.
Amended: July 2011
Added: April 08OM-8.2.22
An effective monitoring process is essential for adequately managing operational risk. Regular monitoring activities can offer the advantage of quickly detecting and correcting deficiencies in the policies, processes and procedures for managing operational risk. Promptly detecting and addressing these deficiencies can substantially reduce the potential frequency and/or severity of a loss event.
Added: April 08OM-8.2.23
In addition to monitoring operational loss events, banks should identify appropriate indicators that provide early warning of an increased risk of future losses. Such indicators (often referred to as key risk indicators or early warning indicators) should be forward-looking and could reflect potential sources of operational risk such as rapid growth, the introduction of new products, employee turnover, transaction breaks, system downtime, and so on. When thresholds are directly linked to these indicators an effective monitoring process can help identify key material risks in a transparent manner and enable the bank to act upon these risks appropriately.
Added: April 08OM-8.2.24
The frequency of monitoring should reflect the risks involved and the frequency and nature of changes in the operating environment. Monitoring should be an integrated part of a bank's activities. The results of these monitoring activities should be included in regular management and board reports, as should compliance reviews performed by the internal audit and/or risk management functions. Reports generated by (and/or for) supervisory authorities may also inform this monitoring and should likewise be reported internally to senior management and the board, where appropriate.
Added: April 08OM-8.2.25
Senior management should receive regular reports from appropriate areas such as business units, group functions, the operational risk management office and internal audit. The operational risk reports should contain internal financial, operational, and compliance data, as well as external market information about events and conditions that are relevant to decision making. Reports should be distributed to appropriate levels of management and to areas of the bank on which areas of concern may have an impact. Reports should fully reflect any identified problem areas and should motivate timely corrective action on outstanding issues. To ensure the usefulness and reliability of these risk and audit reports, management should regularly verify the timeliness, accuracy, and relevance of reporting systems and internal controls in general. Management may also use reports prepared by external sources (auditors, supervisors) to assess the usefulness and reliability of internal reports. Reports should be analysed with a view to improving existing risk management performance as well as developing new risk management policies, procedures and practices.
Added: April 08OM-8.2.26
In general, the board of directors should receive sufficient higher-level information to enable them to understand the bank's overall operational risk profile and focus on the material and strategic implications for the business.
Added: April 08OM-8.2.27
Principle 6: Banks must have policies, processes and procedures to control and/or mitigate material operational risks. Banks must periodically review their risk limitation and control strategies and must adjust their operational risk profile accordingly using appropriate strategies, in light of their overall risk appetite and profile.
Amended: July 2011
Added: April 08OM-8.2.28
Control activities are designed to address the operational risks that a bank has identified. For all material operational risks that have been identified, the bank should decide whether to use appropriate procedures to control and/or mitigate the risks, or bear the risks. For those risks that cannot be controlled, the bank should decide whether to accept these risks, reduce the level of business activity involved, or withdraw from this activity completely. Control processes and procedures should be established and banks should have a system in place for ensuring compliance with a documented set of internal policies concerning the risk management system. Principle elements of this could include, for example:
(a) Top-level reviews of the bank's progress towards the stated objectives;(b) Checking for compliance with management controls;(c) Policies, processes and procedures concerning the review, treatment and resolution of non-compliance issues; and(d) A system of documented approvals and authorisations to ensure accountability to an appropriate level of management.Added: April 08OM-8.2.29
Although a framework of formal, written policies and procedures is critical, it needs to be reinforced through a strong control culture that promotes sound risk management practices. Both the board of directors and senior management are responsible for establishing a strong internal control culture in which control activities are an integral part of the regular activities of a bank. Controls that are an integral part of the regular activities enable quick responses to changing conditions and avoid unnecessary costs.
Added: April 08OM-8.2.30
An effective internal control system also requires that there be appropriate segregation of duties and that personnel are not assigned responsibilities which may create a conflict of interest. Assigning such conflicting duties to individuals, or a team, may enable them to conceal losses, errors or inappropriate actions. Therefore, areas of potential conflicts of interest should be identified, minimised, and subject to careful independent monitoring and review.
Added: April 08OM-8.2.31
In addition to segregation of duties, banks should ensure that other internal practices are in place as appropriate to control operational risk. Examples of these include:
(a) Close monitoring of adherence to assigned risk limits or thresholds;(b) Maintaining safeguards for access to, and use of, bank assets and records;(c) Ensuring that staff have appropriate expertise and training;(d) Identifying business lines or products where returns appear to be out of line with reasonable expectations (e.g., where a supposedly low risk, low margin trading activity generates high returns that could call into question whether such returns have been achieved as a result of an internal control breach); and(e) Regular verification and reconciliation of transactions and accounts.Failure to implement such practices has resulted in significant operational losses for some banks in recent years.Added: April 08OM-8.2.32
Operational risk can be more pronounced where banks engage in new activities or develop new products (particularly where these activities or products are not consistent with the bank's core business strategies), enter unfamiliar markets, and/or engage in businesses that are geographically distant from the head office. Moreover, in many such instances, banks do not ensure that the risk management control infrastructure keeps pace with the growth in the business activity. A number of the most sizeable and highest-profile losses in recent years have taken place where one or more of these conditions existed. Therefore, it is incumbent upon banks to ensure that special attention is paid to internal control activities where such conditions exist.
Added: April 08OM-8.2.33
Some significant operational risks have low probabilities but potentially very large financial impact. Moreover, not all risk events can be controlled (e.g., natural disasters). Risk mitigation tools or programmes can be used to reduce the exposure to, or frequency and/or severity of, such events. For example, insurance policies, particularly those with prompt and certain pay-out features, can be used to externalise the risk of "low frequency, high severity" losses which may occur as a result of events such as third-party claims resulting from errors and omissions, physical loss of securities, employee or third-party fraud, and natural disasters.
Added: April 08OM-8.2.34
However, banks should view risk mitigation tools as complementary to, rather than a replacement for, thorough internal operational risk control. Having mechanisms in place to quickly recognise and rectify legitimate operational risk errors can greatly reduce exposures. Careful consideration also needs to be given to the extent to which risk mitigation tools such as insurance truly reduce risk, or transfer the risk to another business sector or area, or even create a new risk (e.g. legal or counterparty risk).
Added: April 08OM-8.2.35
Investments in appropriate processing technology and information technology security are also important for risk mitigation. However, banks should be aware that increased automation could transform high-frequency, low-severity losses into low frequency, high-severity losses. The latter may be associated with loss or extended disruption of services caused by internal factors or by factors beyond the bank's immediate control (e.g., external events). Such problems may cause serious difficulties for banks and could jeopardise an institution's ability to conduct key business activities. As discussed below in Principle 7, banks should establish disaster recovery and business continuity plans that address this risk.
Added: April 08OM-8.2.36
Banks should also establish policies for managing the risks associated with outsourcing activities. Outsourcing of activities can reduce the institution's risk profile by transferring activities to others with greater expertise and scale to manage the risks associated with specialised business activities. However, a bank's use of third parties does not diminish the responsibility of the board of directors and management to ensure that the third-party activity is conducted in a safe and sound manner and in compliance with applicable laws. Outsourcing arrangements should be based on robust contracts and/or service level agreements that ensure a clear allocation of responsibilities between external service providers and the outsourcing bank. Furthermore, banks need to manage residual risks associated with outsourcing arrangements, including disruption of services.
Added: April 08OM-8.2.37
Depending on the scale and nature of the activity, banks should understand the potential impact on their operations and their customers of any potential deficiencies in services provided by vendors and other third-party or intra-group service providers, including both operational breakdowns and the potential business failure or default of the external parties. The board and management should ensure that the expectations and obligations of each party are clearly defined, understood and enforceable. The extent of the external party's liability and financial ability to compensate the bank for errors, negligence, and other operational failures should be explicitly considered as part of the risk assessment. Banks should carry out an initial due diligence test and monitor the activities of third party providers, especially those lacking experience of the banking industry's regulated environment, and review this process (including reevaluations of due diligence) on a regular basis. For critical activities, the bank may need to consider contingency plans, including the availability of alternative external parties and the costs and resources required to switch external parties, potentially on very short notice.
Added: April 08OM-8.2.38
In some instances, banks may decide to either retain a certain level of operational risk or self-insure against that risk. Where this is the case and the risk is material, the decision to retain or self-insure the risk should be transparent within the organisation and should be consistent with the bank's overall business strategy and appetite for risk.
Added: April 08OM-8.2.39
Principle 7: Banks must have in place contingency and business continuity plans to ensure their ability to operate on an ongoing basis and limit losses in the event of severe business disruption.
Amended: July 2011
Added: April 08OM-8.2.40
For reasons that may be beyond a bank's control, a severe event may result in the inability of the bank to fulfil some or all of its business obligations, particularly where the bank's physical, telecommunication, or information technology infrastructures have been damaged or made inaccessible. This can, in turn, result in significant financial losses to the bank, as well as broader disruptions to the financial system through channels such as the payments system. This potential requires that banks establish disaster recovery and business continuity plans that take into account different types of plausible scenarios to which the bank may be vulnerable, commensurate with the size and complexity of the bank's operations.
Added: April 08OM-8.2.41
Banks should identify critical business processes, including those where there is dependence on external vendors or other third parties, for which rapid resumption of service would be most essential. For these processes, banks should identify alternative mechanisms for resuming service in the event of an outage. Particular attention should be paid to the ability to restore electronic or physical records that are necessary for business resumption. Where such records are backed-up at an off-site facility, or where a bank's operations must be relocated to a new site, care should be taken that these sites are at an adequate distance from the impacted operations to minimise the risk that both primary and back-up records and facilities will be unavailable simultaneously.
Added: April 08OM-8.2.42
Banks should periodically review their disaster recovery and business continuity plans so that they are consistent with the bank's current operations and business strategies. Moreover, these plans should be tested periodically to ensure that the bank would be able to execute the plans in the unlikely event of a severe business disruption.
Added: April 08LM LM Liquidity Risk Management [Version up to 30 September 2007]
LM-A LM-A Introduction [Version up to 30 September 2007]
LM-A.1 LM-A.1 Purpose [Version up to 30 September 2007]
LM-A.1.1 [Version up to 30 September 2007]
The purpose of this module is to provide a checklist of the key elements of a sound Liquidity Risk Management system which supervisors can expect their banks to observe.
LM-A.1.2 [Version up to 30 September 2007]
This module provides support for certain other parts of the Rulebook, mainly:
(a) Licensing Requirements;(b) Principles of Business;(c) BMA Reporting Requirements;(d) Audit Firms; and(e) High Level Controls.LM-A.2 LM-A.2 Key requirements [Version up to 30 September 2007]
LM-A.2.1 [Version up to 30 September 2007]
It is the responsibility of the bank's Board of Directors and management to ensure that the bank has sufficient liquidity to meet its obligations as they fall due.
LM-A.2.1 [Version up to 30 September 2007]
A bank must inform the Agency of any concerns it has about its current or future liquidity profile, and of its plans to rectify/deal with any problems.
LM-A.2.2 [Version up to 30 September 2007]
The Agency has established certain limits for negative maturity mismatch positions. Positions within such periods should be reported on a monthly basis.
LM-A.2.3 [Version up to 30 September 2007]
Currencies should be translated into the reporting currency of the bank (which in any case would be either Bahraini Dinar or US Dollar) at the closing spot mid price on the reporting date and entered in the relevant time band. However, the Agency may also require institutions to provide management information on positions in individual currencies in the event of difficulties either in the individual institution or with the currency in question.
LM-A.3 LM-A.3 Regulation history [Version up to 30 September 2007]
LM-A.3.1 [Version up to 30 September 2007]
This module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
LM-A.3.2 [Version up to 30 September 2007]
A list of most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes LM Evolution of the Module [Version up to 30 September 2007]
LM-A.3.3 [Version up to 30 September 2007]
The module incorporates the requirements set out under Section E of the Prudential Information Returns for Islamic Banks (PIRI) pack.
Effective date [Version up to 30 September 2007]
LM-A.3.4 [Version up to 30 September 2007]
The contents in this module are effective from the date depicted in the original circulars/pack (see paragraph LM-A.3.3) from which the requirements are compiled.
LM-1 LM-1 Prudential information [Version up to 30 September 2007]
LM-1.1 LM-1.1 Introduction [Version up to 30 September 2007]
LM-1.1.1 [Version up to 30 September 2007]
An important element of banking is managing liquidity. Long-term financing contracts may be financed by amounts received from customers for short-term investments. As a result of this, a bank is exposed to the risk that investors' demands for repayment might outstrip its ability to transform assets into cash.
Liquidity risk management reporting under section E of the PIRI [Version up to 30 September 2007]
LM-1.1.2 [Version up to 30 September 2007]
The purpose of this chapter is to introduce the Agency's supervisory approach with respect to reporting requirements and bank's obligations in terms of its liquidity management practices.
LM-1.1.3 [Version up to 30 September 2007]
The contents of this chapter should be read in conjunction with the guidelines set out under Section E of the PIRI (in Appendix BR 3) and PIRI reporting forms (in Appendix BR 4).
LM-1.2 LM-1.2 The bank's prudential obligation [Version up to 30 September 2007]
LM-1.2.1 [Version up to 30 September 2007]
It is the responsibility of the bank's Board of Directors and management to ensure that the bank has sufficient liquidity to meet its obligations as they fall due.
LM-1.2.2 [Version up to 30 September 2007]
A bank must inform the Agency of any concerns it has about its current or future liquidity profile, and of its plans to rectify/deal with any problems.
LM-1.2.3 [Version up to 30 September 2007]
Banks will be expected to have formal written policies which limit liquidity risk to acceptable levels; appropriate liquidity measurement and information systems and clearly defined managerial responsibilities for managing liquidity. These policies, controls and systems are to be observed on a daily basis and reviewed to take account of changing circumstances.
LM-1.3 LM-1.3 The Agency's obligation [Version up to 30 September 2007]
LM-1.3.1 [Version up to 30 September 2007]
The Agency will review with banks their policies, systems and controls for managing their liquidity.
LM-1.3.2 [Version up to 30 September 2007]
Banks are expected to monitor and maintain adequate liquidity not only for meeting the requirements of the unrestricted investment account holders, but also that arising for the restricted investment account holders.
LM-1.3.3 [Version up to 30 September 2007]
The Agency has established the following limits for negative maturity mismatch positions. Positions within such periods should be reported on a monthly basis (see section BR-4):
(i)
Self Financed and Current Accounts Only Period Limit 0-8 days 10% 8 days —1 month 20% (ii)
Unrestricted Investment Period Limit 0-8 days 10% 8 days — 1 month 20% (iii)
Restricted Investment Accounts Only Period Limit 0-8 days 10% 8 days — 1 month 20% (iv)
Self Financed, Restricted/ Unrestricted Investment Accounts & Current Accounts Period Limit 0-8 days 15% 8 days — 1 month 25% LM-1.4 LM-1.4 Liquidity reporting in individual currencies [Version up to 30 September 2007]
LM-1.4.1 [Version up to 30 September 2007]
Section E of the PIRI (Appendix BR 4) should be completed on the basis of all currencies combined.
LM-1.4.2 [Version up to 30 September 2007]
Currencies should be translated into the reporting currency of the bank (which in any case would be either Bahraini Dinar or US Dollar) at the closing spot mid price on the reporting date and entered in the relevant time band. However, the Agency may require institutions to provide management information on positions in individual currencies in the event of difficulties either in the individual institution or with the currency in question.
LM LM Liquidity Risk Management [Version 1 October 2007 to 31 July 2018]
LM-A LM-A Introduction [Version 1 October 2007 to 31 July 2018]
LM-A.1 LM-A.1 Purpose [Version 1 October 2007 to 31 July 2018]
Executive Summary [Version 1 October 2007 to 31 July 2018]
LM-A.1.1 [Version 1 October 2007 to 31 July 2018]
The purpose of this Module is to provide a checklist of the key elements of a sound Liquidity Risk Management system which supervisors can expect their banks to observe.
October 07LM-A.1.2 [Version 1 October 2007 to 31 July 2018]
This module provides support for certain other parts of the Rulebook, mainly:
(a) Licensing Requirements;(b) Principles of Business;(c) CBB Reporting Requirements;(d) Audit Firms; and(e) High-Level Controls.October 07Legal Basis [Version up to 31 July 2018]
LM-A.1.3 [Version up to 31 July 2018]
This Module contains the Central Bank of Bahrain's ('CBB') Directive (as amended from time to time) on liquidity risk management requirements for
Islamic bank licensees , and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 (CBB Law). The directive in this Module is applicable to allIslamic bank licensees .Amended: April 2011
Added: January 2011
LM-A.1.4 [Version up to 31 July 2018]
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
Added: January 2011
LM-A.2 LM-A.2 Key Requirements [Version up to 31 July 2018]
LM-A.2.1 [Version up to 31 July 2018]
It is the responsibility of the bank's Board of Directors and management to ensure that the bank has sufficient liquidity to meet its obligations as they fall due.
October 07LM-A.2.2 [Version 31 July 2018]
A bank must inform the CBB of any concerns it has about its current or future liquidity profile, and of its plans to rectify/deal with any problems.
Amended: January 2011
October 2007LM-A.2.3 [Version to 31 July 2018]
The CBB has established certain limits for negative maturity mismatch positions. Positions within such periods should be reported on a quarterly basis.
Amended: April 2014
Amended: January 2011
October 2007LM-A.2.4 [Version up to 31 July 2018]
Currencies should be translated into the reporting currency of the bank (which in any case would be either Bahrain Dinar or US Dollar) at the closing spot mid price on the reporting date and entered in the relevant time band. However, the CBB may also require institutions to provide management information on positions in individual currencies in the event of difficulties either in the individual institution or with the currency in question.
Amended: January 2011
October 2007LM-A.3 LM-A.3 Regulation history [Version up to 31 July 2018]
LM-A.3.1 [Version up to 31 July 2018]
This Module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
October 07LM-A.3.2 [Version up to 31 July 2018]
A list of most recent changes made to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes LM 01/2011 Various minor amendments to ensure consistency in CBB Rulebook. LM-A.1.3 and LM-A.1.4 01/2011 Added legal basis LM-A.2.3 and LM-1.3.3 04/2014 Corrected frequency of reporting. LM-1.1.3 04/2014 Corrected cross reference. LM-1.1 and LM-1.4 04/2015 Corrected reference to PIRI. Evolution of the Module [Version up to 31 July 2018]
LM-A.3.3 [Version up to 31 July 2018]
The module incorporates the requirements set out under Section F of the Prudential Information Returns for Islamic Banks (PIRI) pack.
Amended July 09
October 07Effective Date [Version up to 31 July 2018]
LM-A.3.4 [Version up to 31 July 2018]
The contents in this Module are effective from the date depicted in the original circulars/pack (see Paragraph LM-A.3.3) from which the requirements are compiled.
October 07LM-1 LM-1 Prudential Information [Version up to 31 July 2018]
LM-1.1 LM-1.1 Introduction [Version up to 31 July 2018]
LM-1.1.1 [Version up to 31 July 2018]
An important element of banking is managing liquidity. Long-term financing contracts may be financed by amounts received from customers for short-term investments. As a result of this, a bank is exposed to the risk that investors' demands for repayment might outstrip its ability to transform assets into cash.
October 07Liquidity Risk Management Reporting under Section E of the PIRI [Version up to 31 July 2018]
LM-1.1.2 [Version up to 31 July 2018]
The purpose of this Chapter is to introduce the CBB's supervisory approach with respect to reporting requirements and bank's obligations in terms of its liquidity management practices.
Amended: January 2011
October 2007LM-1.1.3 [Version up to 31 July 2018]
The contents of this Chapter should be read in conjunction with the guidelines set out under Section E of the PIRI (in Appendix BR-4) and PIRI reporting forms (in Appendix BR-5).
Amended: April 2015
April 2014LM-1.2 LM-1.2 The Bank's Prudential Obligation [Version up to 31 July 2018]
LM-1.2.1 [Version up to 31 July 2018]
It is the responsibility of the bank's Board of Directors and management to ensure that the bank has sufficient liquidity to meet its obligations as they fall due.
October 07LM-1.2.2 [Version up to 31 July 2018]
A bank must inform the CBB of any concerns it has about its current or future liquidity profile, and of its plans to rectify/deal with any problems.
Amended: January 2011
October 2007LM-1.2.3 [Version up to 31 July 2018]
Banks will be expected to have formal written policies which limit liquidity risk to acceptable levels; appropriate liquidity measurement and information systems and clearly defined managerial responsibilities for managing liquidity. These policies, controls and systems are to be observed on a daily basis and reviewed to take account of changing circumstances.
October 07LM-1.3 LM-1.3 The CBB's Obligation [Version up to 31 July 2018]
LM-1.3.1 [Version up to 31 July 2018]
The CBB will review with banks their policies, systems and controls for managing their liquidity.
Amended: January 2011
October 2007LM-1.3.2 [Version up to 31 July 2018]
Banks are expected to monitor and maintain adequate liquidity not only for meeting the requirements of the unrestricted investment account holders, but also that arising for the restricted investment account holders.
October 07LM-1.3.3 [Version up to 31 July 2018]
The CBB has established the following limits for negative maturity mismatch positions. Positions within such periods should be reported on a quarterly basis as part of the PIRI (see Section BR-3):
(i) Self Financed and Current Accounts Only Period Limit* 0-8 days 10% 8 days - 1 month 20% (ii) Unrestricted Investment Period Limit* 0-8 days 10% 8 days - 1 month 20% (iii) Restricted Investment Accounts Only Period Limit* 0-8 days 10% 8 days - 1 month 20% (iv) Self Financed, Restricted/ Unrestricted Investment Accounts & Current Accounts Period Limit* 0-8 days 15% 8 days - 1 month 25% Amended: April 2014
Amended: January 2011
October 2007LM-1.4 LM-1.4 Liquidity Reporting in Individual Currencies [Version up to 31 July 2018]
LM-1.4.1 [Version up to 31 July 2018]
Section E of the PIRI (Appendix BR-5) should be completed on the basis of all currencies combined.
Amended: April 2015
July 09
October 07LM-1.4.2 [Version up to 31 July 2018]
Currencies should be translated into the reporting currency of the bank (which in any case would be either Bahrain Dinar or US Dollar) at the closing spot mid price on the reporting date and entered in the relevant time band. However, the CBB may require institutions to provide management information on positions in individual currencies in the event of difficulties either in the individual institution or with the currency in question.
Amended: January 2011
October 2007FC FC Financial Crimes
FC-A FC-A Introduction
FC-A.1 FC-A.1 Purpose
FC-A.1.1
This Module applies, to all
Islamic bank licensees , a comprehensive framework of Rules and Guidance aimed at combating money laundering and terrorist financing. In so doing, it helps implement the 40 Recommendations on money laundering and 9 Special Recommendations on terrorist financing, issued by the Financial Action Task Force (FATF), and the requirements of the Basel Committee "Customer Due Diligence for Banks" paper, that are relevant toIslamic bank licensees . (Further information on these can be found in Chapter FC-10.)FC-A.1.2
The Module requires
Islamic bank licensees to have effective anti-money laundering ('AML') policies and procedures, in addition to measures for combating the financing of terrorism ('CFT'). The Module contains detailed requirements relating to customer due diligence, reporting and the role and duties of the Money Laundering Reporting Officer (MLRO). Furthermore, examples of suspicious activity are provided, to assistIslamic bank licensees monitor transactions and fulfil their reporting obligations under Bahrain law.FC-A.2 FC-A.2 Module history
Changes to the Module
FC-A.2.1
This module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
FC-A.2.2
A list of recent changes made to this Module is detailed in the table below:
Module Ref. Change Date Description of Changes FC 01/04/05 Update to reflect revised FATF 40 + 9 recommendations FC-1.4 01/07/05 Technology abuse update FC-1.1 01/07/05 Nominee a/c clarification FC-1.3 FC-2.2 FC-5.2 01/07/05 Clarifications on risk-based approach, record keeping, and STRs FC-6.1 01/07/05 New references to "terrorist financing" FC-7.1 01/07/05 Prompt access to records is a rule FC-2.2 01/10/05 Up to date CDD documentation requirement FC-1.8 01/10/05 Location of correspondent FC-1.9 01/10/05 Location of introducer FC-4.2 , FC-4.3 01/10/05 Requirement to report to Board FC 01/10/05 Reordering of sections FC-1.11.1 01/01/06 New text for syndicated business FC-1.1.3, FC-1.2.8, FC-1.2.11, FC-3.1.4 01/01/06 Correction of minor typos Evolution of the Module
FC-A.2.3
Prior to the introduction of Volume 2 (Islamic Banks) of the BMA Rulebook, the BMA had issued various circulars containing requirements covering different aspects of financial crime. These requirements were consolidated into Version 01 of this Module. Some of these requirements remain in their original form; others have since been updated. These circulars and their original location in this Module are listed below:
Circular Ref. Date of Issue Module Ref. (Version 01) Circular Subject BC/17/97 10 Nov 1997 FC-B.1 Money Laundering OG/308/89 14 Oct 1989 FC-B.1 Money Laundering EDBC/6/01 14 Oct 2001 FC-1, FC-4–FC-7 Re: Money Laundering Regulation BC/1/02 27 Jan 2002 FC-3 FATF Special Recommendations on Terrorism Financing BC/3/00 5 Mar 2000 FC-1.5 Re: Accounts for Charity Organisations FC-B FC-B Scope of Application
FC-B.1 FC-B.1 License Categories
FC-B.1.1
This Module applies to all
Islamic bank licensees , including branches of banks incorporated outside of Bahrain, and Bahrain-incorporated subsidiaries of overseas groups.FC-B.1.2
The Rules and Guidance in this Module are in addition to and supplement the requirements contained in Decree Law No. (4) of 2001 with respect to the prevention and prohibition of the laundering of money ("The AML Law"). The AML Law imposes obligations on persons generally in relation to the prevention of money laundering. All
Islamic bank licensees are under the statutory obligations of that Law, a copy of which is contained in Part B of Volume 2, under 'Supplementary Information'. Nothing in this Module is intended to restrict the application of the AML Law.FC-B.2 FC-B.2 Overseas Subsidiaries and Branches
FC-B.2.1
Islamic bank licensees must apply the requirements in this Module to all their branches and subsidiaries operating both in the Kingdom of Bahrain and in foreign jurisdictions. Where local standards differ, the higher standard must be followed.Islamic bank licensees must pay particular attention to procedures in branches or subsidiaries in countries that do not or insufficiently apply the FATF Recommendations and Special Recommendations.FC-B.2.2
Where another jurisdiction's laws or regulations prevent a
Islamic bank licensee (or any of its foreign branches or subsidiaries) from applying the same standards contained in this Module or higher, the licensee must immediately inform the BMA in writing.FC-B.2.3
In such instances, the BMA will review alternatives with the
Islamic bank licensee . Should the BMA and the licensee be unable to reach agreement on the satisfactory implementation of this Module in a foreign subsidiary or branch, theIslamic bank licensee may be required by BMA to cease the operations of the subsidiary or branch in the foreign jurisdiction in question.FC-1 FC-1 Customer due diligence
FC-1.1 FC-1.1 General requirements
Verification of Identity and Source of Funds
FC-1.1.1
Islamic bank licensees must establish effective systematic internal procedures for establishing and verifying the identity of their customers and the source of their funds. Such procedures must be set out in writing and approved by the licensee's Board of Directors. They must be strictly adhered to.FC-1.1.2
Islamic bank licensees must implement the customer due diligence measures outlined in Chapters 1, 2 and 3 when:(a) establishing business relations with a new or existing customer;(b) a change to the signatory or beneficiary of an existing account or business relationship is made;(c) a significant transaction takes place;(d) there is a material change in the way that the bank account is operated or in the manner in which the business relationship is conducted;(e)customer documentation standards change substantially;(f) theIslamic bank licensee has doubts about the veracity or adequacy of previously obtained customer due diligence information;(g) carrying-out one-off or occasional transactions above BD 6,000, or where several smaller transactions that appear to be linked fall above this threshold; or(h) carrying out wire transfers irrespective of amount;(h) there is a suspicion of money laundering or terrorist financing.FC-1.1.3
For the purposes of this Module, "customer" includes counterparties such as financial markets counterparties, except where financial institutions are acting as principals where simplified due diligence measures may sometimes apply. These simplified measures are set out in Section FC-1.11.
FC-1.1.4
The BMA's specific minimum standards to be followed with respect to verifying customer identity and source of funds are contained in Section FC-1.2. Enhanced requirements apply under certain high-risk situations: these requirements are contained in Sections FC-1.3 to FC-1.8 inclusive. Additional requirements apply where an
Islamic bank licensee is relying on a professional intermediary to perform certain parts of the customer due diligence process: these are detailed in Section FC-1.10. Simplified customer due diligence measures may apply in defined circumstances: these are set out in Section FC-1.11 .Verification of Third Parties
FC-1.1.5
Islamic bank licensees must obtain a signed statement from all new customers confirming whether or not the customer is acting on their own behalf or not. This undertaking must be obtained prior to conducting any transactions with the customer concerned.FC-1.1.6
Where a customer is acting on behalf of a third party, the
Islamic bank licensee must also obtain a signed statement from the third party, confirming they have given authority to the customer to act on their behalf. Where the third party is a legal person, theIslamic bank licensee must have sight of the original Board resolution (or other applicable document) authorising the customer to act on the third party's behalf, and retain a certified copy.FC-1.1.7
Islamic bank licensee must establish and verify the identity of the customer and (where applicable) the party/parties on whose behalf the customer is acting, including the Beneficial Owner of the funds. Verification must take place in accordance with the requirements specified in this Chapter.FC-1.1.8
Where financial services are provided to a minor or other person lacking full legal capacity, the normal identification procedures as set out in this Chapter must be followed. In the case of minors, licensees must additionally verify the identity of the parent(s) or legal guardian(s). Where a third party on behalf of a person lacking full legal capacity wishes to open an account, the licensee must establish the identity of that third party as well as the intended account holder.
Anonymous and Nominee Accounts
FC-1.1.9
Islamic bank licensees must not establish or keep anonymous accounts or accounts in fictitious names. WhereIslamic bank licensees maintain a nominee account, which is controlled by or held for the benefit of another person, the identity of that person must be disclosed to theIslamic bank licensee and verified by it in accordance with the requirements specified in this Chapter.Timing of Verification
FC-1.1.10
Islamic bank licensees must not commence a business relationship or undertake a transaction with a customer before completion of the relevant customer due diligence measures specified in Chapters 1, 2 and 3. However, verification may be completed after receipt of funds in the case of non face-to-face business, or the subsequent submission of CDD documents by the customer after initial face-to face contact, providing that no disbursement of funds takes place until after the requirements of this Chapter have been fully met.Incomplete Customer Due Diligence
FC-1.1.11
Where an
Islamic bank licensee is unable to comply with the requirements specified in Chapters 1, 2 and 3, it must consider whether to terminate the relationship or not proceed with the transaction, and additionally, consider whether it should file a suspicious transaction report.FC-1.1.12
See also Chapter FC-5, which covers the filing of suspicious transaction reports.
FC-1.2 FC-1.2 Face-to-face Business
Natural persons
FC-1.2.1
If the customer is a natural person,
Islamic bank licensees must obtain and record the following information (in hard copy or electronic form), before providing financial services of any kind:(a) full legal name and any other names used;(b) full permanent address (i.e. the residential address of the customer; a post office box is not insufficient);(c) date and place of birth;*(d) nationality;(e) passport number (if customer is a passport holder);(f) CPR or Iqama number (for Bahraini or GCC residents only);(g) telephone/fax number and email address (where applicable);(h) occupation or public position held (where applicable);(i) employer's name and address (where applicable);(j) type of account, and nature and volume of anticipated business dealings with theIslamic bank licensee ;(k) Signature(s) of thecustomer(s) ; and(l) Source of funds.FC-1.2.2
See Part B, Volume 2 (Islamic Banks), for Guidance Notes on source of funds (FC-1.2.1(1)) and requirements for Bahraini residents (FC-1.2.1 (c) & (f)).
FC-1.2.3
Islamic bank licensees must verify the information in Paragraph FC-1.2.1 (a) to (f), by the following methods below; at least one of the copies of the identification documents mentioned in (a) and (b) below must include a clear photograph of the customer:(a) confirmation of the date of birth and legal name, by taking a copy of a current valid official original identification document (e.g. birth certificate, passport, CPR or Iqama);(b) confirmation of the permanent residential address by taking a copy of a recent utility bill, bank statement or similar statement from another licensee or financial institution, or some form of official correspondence or official documentation card, such as CPR, from a public/governmental authority, or a tenancy agreement or record of home visit by an official of theIslamic bank licensee ; and(c) where appropriate, direct contact with the customer by phone, letter or email to confirm relevant information, such as residential address information.FC-1.2.4
Any document copied for the purpose of identification verification must be an original. An authorised official of the licensee must certify the copy, by writing on it the words 'original sighted', together with the date and his signature. Equivalent measures must be taken for electronic copies.
FC-1.2.5
Identity documents which are not obtained by an authorised official of the licensee in original form (e.g. due to a customer sending a copy by post following an initial meeting) must instead be certified (as per FC-1.2.4) by one of the following from a GCC or FATF member state:
(a) a lawyer;(b) a notary;(c) a chartered/certified accountant;(d) an official of a government ministry;(e) an official of an embassy or consulate; or(f) an official of another licensed financial institution or of an associate company of the licensee.FC-1.2.6
The individual making the certification under FC-1.2.5 must give clear contact details (e.g. by attaching a business card or company stamp). The
Islamic bank licensee must verify the identity of the person providing the certification through checking membership of a professional organisation (for lawyers or accountants), or through checking against databases/websites, or by direct phone or email contact.Legal Entities or Legal Arrangements (such as trusts)
FC-1.2.7
If the customer is a legal entity or a legal arrangement such as a trust, the
Islamic bank licensee must obtain and record the following information from original identification documents, databases or websites, in hard copy or electronic form, to verify thecustomer's legal existence and structure:(a) the entity's full name and other trading names used;(b) registration number (or equivalent);(c) legal form;(d) registered address and trading address (where applicable);(e) type of business activity;(f) date and place of incorporation or establishment;(g) telephone, fax number and email address;(h) regulatory body or listing body (for regulated activities such as financial services and listed companies);(i) name of external auditor (where applicable);(j) type of account, and nature and volume of anticipated business dealings with theIslamic bank licensee ; and(k) source of funds.FC-1.2.8
The information provided under FC-1.2.7 must be verified by obtaining certified copies of the following documents, as applicable (depending on the legal form of the entity):
(a) certificate of incorporation and/or certificate of commercial registration or trust deed;(b) memorandum of association;(c) articles of association;(d) partnership agreement;(e) Board resolution seeking the banking services (only necessary in the case of private or unlisted companies);(f) identification documentation of the authorised signatories of the account;(g) copy of the latest financial report and accounts, audited where possible (audited copies do not need to be certified); and(h) list of authorised signatories of the company for the account and a Board resolution (or other applicable document) authorising the named signatories or their agent to operate the account (resolution only necessary for private or unlisted companies).FC-1.2.9
Documents obtained to satisfy the requirements in FC-1.2.8 above must be certified in the manner specified in FC-1.2.4 to FC-1.2.6.
FC-1.2.10
The documentary requirements in FC-1.2.8 above do not apply in the case of listed companies: see Section FC-1.11 below. Also, the documents listed in FC-1.2.8 above are not exhaustive: for customers from overseas jurisdictions, documents of an equivalent nature may be produced as satisfactory evidence of a customer's identity.
FC-1.2.11
Islamic bank licensees must also obtain and document the following due diligence information. These due diligence requirements must be incorporated in the licensee's new business procedures:(a) enquire as to the structure of the legal entity or trust sufficient to determine and verify the identity of the ultimate beneficial owner of the funds, the ultimate provider of funds (if different), and ultimate controller of the funds (if different);(b) ascertain whether the legal entity has been or is in the process of being wound up, dissolved, struck off or terminated;(c) obtain the names, country of residence and nationality of Directors or partners (only necessary for private or unlisted companies);(d) require, through new customer documentation or other transparent means, updates on significant changes to corporate ownership and/or legal structure;(e) obtain and verify the identity of shareholders holding 20% or more of the issued capital (where applicable). The requirement to verify the identity of these shareholders does not apply in the case of listed companies;(f) in the case of trusts or similar arrangements, establish the identity of the settlor(s), trustee(s), and beneficiaries (including making such reasonable enquiries as to ascertain the identity of any other potential beneficiary, in addition to the named beneficiaries of the trust); and(g) where a licensee has reasonable grounds for questioning the authenticity of the information supplied by a customer, conduct additional due diligence to confirm the above information.FC-1.2.12
For the purposes of Paragraph FC-1.2.11, acceptable means of undertaking such due diligence might include taking bank references; visiting or contacting the company by telephone; undertaking a company search or other commercial enquiries; accessing public and private databases (such as stock exchange lists); making enquiries through a business information service or credit bureau; confirming a company's status with an appropriate legal or accounting firm; or undertaking other enquiries that are commercially reasonable.
FC-1.3 FC-1.3 Enhanced Customer Due Diligence: General Requirements
FC-1.3.1
Enhanced customer due diligence must be performed on those customers identified as having a higher risk profile, and additional inquiries made or information obtained in respect of those customers.
FC-1.3.2
The additional information referred to in Paragraph FC-1.3.1 might include documents (either in hard copy or electronic format) relating to the following:
(a) evidence of a person's permanent address through the use of a credit reference agency search or through independent verification by home visit;(b) a personal reference (e.g. by an existing customer of theIslamic bank licensee );(c) another licensed entity's reference and contact with the concerned licensee regarding the customer;(d) documentation outlining the customer's source of wealth;(e) documentation outlining the customer's source of income; and(f) independent verification of employment, or public position held.FC-1.4 FC-1.4 Enhanced Customer Due Diligence: Non face-to-face Business and New Technologies
FC-1.4.1
Islamic bank licensees must establish specific procedures for verifying customer identity where no face-to-face contact takes place.FC-1.4.2
Where no face-to-face contact takes place,
Islamic bank licensees must take additional measures (to those specified in Section FC-1.2), in order to mitigate the potentially higher risk associated with such business. In particular,Islamic bank licensees must take measures:(a) to ensure that the customer is the person they claim to be; and(b) to ensure that the address provided is genuinely the customer's.FC-1.4.3
There are a number of checks that can provide a
Islamic bank licensee with a reasonable degree of assurance as to the authenticity of the applicant. They include:(a) telephone contact with the applicant on an independently verified home or business number;(b) with the customer's consent, contacting an employer to confirm employment, via phone through a listed number or in writing; and(c) salary details appearing on recent bank statements.FC-1.4.4
financial services provided via post, telephone or internet pose greater challenges for customer identification and AML/CFT purposes.
Islamic bank licensees must establish procedures to prevent the misuse of technological developments in money laundering or terrorist financing schemes. Specifically, banks which provide significant electronic and internet banking services to their customers, should connect a programme to such systems to highlight all unusual transactions so as to enable the concerned bank to report such transactions.Islamic bank licensees must also ensure that they comply with any e-commerce laws and/or BMA regulations issued from time to time.FC-1.5 FC-1.5 Enhanced Customer Due Diligence: Politically Exposed Persons ("PEPs")
FC-1.5.1
Islamic bank licensees must have appropriate risk management systems to determine whether a customer is aPolitically Exposed Person ('PEP') , both at the time of establishing business relations and thereafter on a periodic basis. Licensees must utilize publicly available databases and information to establish whether a customer is aPEP .FC-1.5.2
Islamic bank licensees must establish a client acceptance policy with regard toPEPs , taking into account the reputational and other risks involved. Senior management approval must be obtained before aPEP is accepted as a customer.FC-1.5.3
Where an existing customer is a
PEP , or subsequently becomes aPEP , enhanced monitoring and customer due diligence measures must include:(a) analysis of complex financial structures, including trusts, foundations or international business corporations;(b) a written record in the customer file to establish that reasonable measures have been taken to establish both the source of wealth and the source of funds;(c) development of a profile of anticipated customer activity, to be used in on-going monitoring;(d) approval of senior management for allowing the customer relationship to continue; and(e) ongoing account monitoring of thePEP's account by senior management (such as the MLRO).FC-1.5.4
"Politically Exposed Persons" mean individuals who are, or have been, entrusted with prominent public functions in Bahrain or a foreign country, such as Heads of State or government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations or important political party officials. Business relationships with family members or close associates of
PEPs involve reputational risks similar toPEPs themselves. The definition is not intended to cover middle-ranking or more junior officials in the foregoing categories. Bahraini PEPs would include all Ministers, all MPs, and all Ministry officials with the rank of Undersecretary or above.FC-1.6 FC-1.6 Enhanced Due Diligence: Charities, Clubs and Other Societies
FC-1.6.1
Financial services must not be provided to charitable funds and religious, sporting, social, cooperative and professional societies, before an original certificate authenticated by the relevant Ministry confirming the identities of those purporting to act on their behalf (and authorising them to obtain the said service) has been obtained. For Clubs and Societies registered with the General Organisation for Youth and Sports (GOYS), Islamic bank licensees must contact GOYS to clarify whether the account may be opened in accordance with the rules of GOYS.
FC-1.6.2
Islamic bank licensees are reminded that clubs and societies registered with GOYS may only have one account with banks in Bahrain.
FC-1.6.3
Charities should be subject to enhanced transaction monitoring by banks. Islamic bank licensees should develop a profile of anticipated account activity (in terms of payee countries and recipient organisations in particular).
FC-1.6.4
Islamic bank licensees must report all payments and transfers of BD3,000 (or equivalent in foreign currencies) and above, from accounts held by charities registered in Bahrain. The report must be submitted to the BMA's Compliance Unit (see FC-5.3 for contact address), giving details of the amount transferred, account name, number and beneficiary name account and bank details. Islamic bank licensees must ensure that such transfers are in accordance with the spending plans of the charity (in terms of amount, recipient and country).
FC-1.7 FC-1.7 Enhanced Due Diligence: "Pooled Funds"
FC-1.7.1
Where
Islamic bank licensees receive pooled funds managed by professional intermediaries (such as investment and pension fund managers, stockbrokers and lawyers or authorised money transferors), they must apply CDD measures contained in Section FC-1.9 to the professional intermediary. In addition,Islamic bank licensees must verify the identity of the beneficial owners of the funds where required as detailed in Paragraphs FC-1.7.2 or FC-1.7.3 below.FC-1.7.2
Where funds pooled in an account are not co-mingled (i.e. where there are "sub-accounts" attributable to each beneficiary) all beneficial owners must be identified by the Islamic bank licensee, and their identity verified in accordance with the requirements in Section FC-1.2.
FC-1.7.3
For accounts held by intermediaries resident in Bahrain, where such funds are co-mingled, the Islamic bank licensee must make a reasonable effort (in the context of the nature and amount of the funds received) to look beyond the intermediary and determine the identity of the beneficial owners or underlying clients, particularly where funds are banked and then transferred onward to other financial institutions (e.g. in the case of accounts held on behalf of authorised money transferors). Where, however, the intermediary is subject to equivalent regulatory and money laundering regulation and procedures (and, in particular, is subject to the same due diligence standards in respect of its client base) the BMA will not insist upon all beneficial owners being identified provided the Islamic bank licensee has undertaken reasonable measures to determine that the intermediary has engaged in a sound customer due diligence process, consistent with the requirements in Section FC-1.8.
FC-1.7.4
For accounts held by intermediaries from foreign jurisdictions, the intermediary must be subject to requirements to combat money laundering and terrorist financing consistent with the FATF 49 Recommendations and the intermediary must be supervised for compliance with those requirements. The bank must obtain documentary evidence to support the case for not carrying out customer due diligence measures beyond identifying the intermediary. The bank must satisfy itself that the intermediary has identified the underlying beneficiaries and has the systems and controls to allocate the assets in the pooled accounts to the relevant beneficiaries. The due diligence process contained in Section FC-1.8 must be followed.
FC-1.7.5
Where the intermediary is not empowered to provide the required information on beneficial owners (e.g. lawyers bound by professional confidentiality rules) or where the intermediary is not subject to the same due diligence standards referred to above, a bank must not permit the intermediary to open an account or allow the account to continue to operate, unless specific permission has been obtained in writing from the BMA.
FC-1.8 FC-1.8 Enhanced Due Diligence for Correspondent Banking Relationships
FC-1.8.1
The customer due diligence measures outlined under Section FC-1.2 must be carried out in the normal way on the respondent bank.
Islamic bank licensees which intend to act as correspondent banks must gather sufficient information (e.g. through a questionnaire) about their respondent banks to understand the nature of the respondent's business. Factors to consider to provide assurance that satisfactory measures are in place at the respondent bank include:(a) Information about the respondent bank's ownership structure and management;(b) Major business activities of the respondent and its location (i.e. whether it is located in a FATF compliant jurisdiction) as well as the location of its parent (where applicable);(c) Where the customers of the respondent bank are located;(d) The respondent's AML/CFT controls;(e) The purpose for which the account will be opened;(f) Confirmation that the respondent bank has verified the identity of any third party entities that will have direct access to the correspondent banking services without reference to the respondent bank (e.g. in the case of "payable through" accounts);(g) The extent to which the respondent bank performs ongoing due diligence on customers with direct access to the account, and the condition of bank regulation and supervision in the respondent's country (e.g. from published FATF reports). Banks should take into account the country where the respondent bank is located and whether that country abides by the FATF 40+ 9 Recommendations when establishing correspondent relationships with foreign banks. Banks should obtain where possible copies of the relevant laws and regulations concerning AML/CFT and satisfy themselves that respondent banks have effective customer due diligence measures consistent with the FATF 40+ 9 Recommendations;(h) Confirmation that the respondent bank is able to provide relevant customer identification data on request to the correspondent bank; and(i) Whether the respondent bank been subject to a money laundering or terrorist financing investigation.FC-1.8.2
Islamic bank licensees must implement the following additional measures, prior to opening a correspondent banking relationship:(a) Complete a signed statement that outlines the respective responsibilities of each institution in relation to money laundering detection and monitoring responsibilities; and(b) Ensure that the correspondent banking relationship has the approval of senior management.FC-1.8.3
Islamic bank licensees must refuse to enter into or continue a correspondent banking relationship with a bank incorporated in a jurisdiction in which it has no physical presence and which is unaffiliated with a regulated financial group (i.e. "shell banks", see Section FC-1.10). Banks must pay particular attention when entering into or continuing relationships with respondent banks located in jurisdictions that have poor KYC standards or have been identified by the FATF as being "non-cooperative" in the fight against money laundering/terrorist financing.FC-1.9 FC-1.9 Introduced Business from Professional Intermediaries
FC-1.9.1
An
Islamic bank licensee may only accept customers introduced to it by other financial institutions or intermediaries, if it has satisfied itself that the financial institution or intermediary concerned is subject to FATF-equivalent customer due diligence measures. WhereIslamic bank licensees delegate part of the customer due diligence measures to another financial institution or intermediary, the responsibility for meeting the requirements of Chapters 1 and 2 remains with theIslamic bank licensee , not the third party.FC-1.9.2
Islamic bank licensees may only accept introduced business if all of the following conditions are satisfied:(a) the customer due diligence measures applied by the introducer are consistent with those required by the FATF 40 + 9 Recommendations;(b) a formal agreement is in place defining the respective roles of the licensee and the introducer in relation to customer due diligence measures. The agreement must specify that the customer due diligence measures of the introducer will comply with the FATF 40 + 9 Recommendations;(c) the introducer is able to provide all relevant data pertaining to the customer's identity, the identity of the customer and beneficial owner of the funds (where different) and, where applicable, the party/parties on whose behalf the customer is acting; also, the introducer has confirmed that the licensee will be allowed to verify the customer due diligence measures undertaken by the introducer at any stage; and(d) written confirmation is provided by the introducer confirming that all customer due diligence measures required by the FATF 40 + 9 Recommendations have been followed and the customer's identity established and verified. In addition, the confirmation must state that any identification documents or other customer due diligence material can be accessed by theIslamic bank licensee and that these documents will be kept for at least five years after the business relationship has ended.FC-1.9.3
The
Islamic bank licensee must perform periodic reviews ensuring that any introducer on which it relies is in compliance with the FATF 40 + 9 Recommendations. Where the introducer is resident in another jurisdiction, the Islamic bank licensee must also perform periodic reviews to verify whether the jurisdiction is in compliance with the FATF 40 + 9 Recommendations.FC-1.9.4
Should the
Islamic bank licensee not be satisfied that the introducer is in compliance with the requirements of the FATF 40 + 9 Recommendations, the licensee must conduct its own customer due diligence on introduced business, or not accept further introductions, or discontinue the business relationship with the introducer.FC-1.10 FC-1.10 Shell Banks
FC-1.10.1
Islamic bank licensees must not establish business relations with banks, which have no physical presence or "mind and management" in the jurisdiction in which they are licensed ("shell banks"). Banks must not knowingly establish relations with banks that have relations with shell banks.FC-1.10.2
Islamic bank licensees must make a suspicious transaction report to the Anti-Money Laundering Unit and the Compliance Unit if they are approached by a shell bank or an institution they suspect of being a shell bank.FC-1.11 FC-1.11 Simplified Customer Due Diligence
FC-1.11.1
Islamic bank licensees may apply simplified customer due diligence measures, as described in Paragraphs FC-1.11.2 to FC-1.11.8, if:(a) the customer is the Bahrain Monetary Agency ('BMA'), the Bahrain Stock Exchange ('BSE') or a licensee of the BMA;(b) the customer is a Ministry of a Gulf Cooperation Council ('GCC') or Financial Action Task Force ('FATF') member state government, a company in which a GCC government is a majority shareholder, or a company established by decree in the GCC;(c) the customer is a company listed on a GCC or FATF member state stock exchange with equivalent disclosure standards to those of the BSE;(d) the customer is a financial institution whose entire operations are subject to AML/CFT requirements consistent with the FATF Recommendations / Special Recommendations and it is supervised by a financial services supervisor in a FATF or GCC member state for compliance with those requirements;(e) the customer is a financial institution which is a subsidiary of a financial institution located in a FATF or GCC member state, and the AML/CFT requirements applied to its parent also apply to the subsidiary; or(f) the customer is a borrower in a syndicated transaction where the agent bank is a financial institution whose entire operations are subject to AML/CFT requirements consistent with the FATF Recommendations / Special Recommendations and it is supervised by a financial services supervisor in a FATF or GCC member state for compliance with those requirements.(g) the transaction is a one-off or occasional transaction not exceeding BD 6,000 (or equivalent in other currencies), or one of a number of transactions which are related and, when taken together, do not exceed BD 6,000 per year (or equivalent in other currencies).FC-1.11.2
For customers falling under categories a–f specified in Paragraph FC-1.11.1, the information required under Paragraph FC-1.2.1 (for natural persons) or FC-1.2.7 (for legal entities or legal arrangements such as trusts) must be obtained. However, the verification and certification requirements in Paragraphs FC-1.2.3 and FC-1.2.8, and the due diligence requirements in Paragraph FC-1.2.11, may be dispensed with. Where the account is a correspondent banking relationship, enhanced due diligence applies. Refer to Section FC-1.8.
FC-1.11.3
For customers falling under category (g) in paragraph FC-1.11.1, the customer's name and contact information must be recorded. However, the verification, certification and due diligence requirements in Paragraphs FC-1.2.3, FC-1.2.8 and FC-1.2.11 may be dispensed with. As a matter of prudence, it is recommended that identification documentation is checked by the Islamic Bank Licensee.
Islamic bank licensees may, of course, continue to apply the verification, certification and due diligence requirements mentioned in Paragraph FC-1.11.2 for their own purposes.FC-1.11.4
Islamic bank licensees wishing to apply simplified due diligence measures as allowed for under Paragraph FC-1.11.1 must retain documentary evidence supporting their categorisation of the customer.FC-1.11.5
Examples of such documentary evidence may include a printout from a regulator's website, confirming the licensed status of an institution, and internal papers attesting to a review of the AML/CFT measures applied in a jurisdiction.
FC-1.11.6
Islamic bank licensees may use authenticated SWIFT messages as a basis for confirmation of the identity of a financial institution under FC-1.11.1 (d) and (e) where it is dealing as principal. For customers coming under Paragraph FC-1.11.1 (d) and (e),Islamic bank licensees must also obtain and retain a written statement from the parent institution of the subsidiary concerned, confirming that the subsidiary is subject to the same AML/CFT measures as its parent.FC-1.11.7
Simplified customer due diligence measures must not be applied where an
Islamic bank licensee knows, suspects, or has reason to suspect, that the applicant is engaged in money laundering or terrorism financing or that the transaction is carried out on behalf of another person engaged in money laundering or terrorism financing.FC-1.11.8
Simplified customer due diligence measures must not be applied where an
Islamic bank licensee knows, suspects, or has reason to suspect, that transactions are linked, such that they exceed the threshold specified in Paragraph FC-1.11.1 (g).FC-2 FC-2 AML / CFT Systems and Controls
FC-2.1 FC-2.1 General Requirements
FC-2.1.1
Islamic bank licensees must take reasonable care to establish and maintain appropriate systems and controls for compliance with the requirements of this Module and to limit their vulnerability to financial crime. These systems and controls must be documented, and approved and reviewed annually by the Board of the licensee. The documentation, and the Board's review and approval, must be made available upon request to the BMA.FC-2.1.2
The above systems and controls, and associated documented policies and procedures, should cover standards for customer acceptance, on-going monitoring of high-risk accounts, staff training and adequate screening procedures to ensure high standards when hiring employees.
FC-2.1.3
Islamic bank licensees must incorporate Key Performance Indicators (KPIs) to ensure compliance with AML/CFT requirements by all staff. The performance against the KPIs must be adequately reflected in their annual performance evaluation and in their remuneration (See also Paragraph HC-5.4.9A).Added: April 2020FC-2.2 FC-2.2 Ongoing Customer Due Diligence and Transaction Monitoring
Risk Based Monitoring
FC-2.2.1
Islamic bank licensees must develop risk-based monitoring systems appropriate to the complexity of their business, their number of clients and types of transactions. These systems must be configured to identify significant or abnormal transactions or patterns of activity. Such systems must include limits on the number, types or size of transactions undertaken outside expected norms; and must include limits for cash and non-cash transactions.FC-2.2.2
Islamic bank licensees' risk-based monitoring systems should therefore be configured to help identify:(a) transactions which do not appear to have a clear purpose or which make no obvious economic sense;(b) significant or large transactions not consistent with the normal or expected behaviour of a customer; and(c) unusual patterns of activity (relative to other customers of the same profile or of similar types of transactions, for instance because of differences in terms of volumes, transaction type, or flows to or from certain countries), or activity outside the expected or regular pattern of a customer's account activity.Automated Transaction Monitoring
FC-2.2.3
Islamic bank licensees must consider the need to include automated transaction monitoring as part of their risk-based monitoring systems to spot abnormal or unusual flows of funds. In the absence of automated transaction monitoring systems, all transactions above BD 6,000 must be viewed as "significant" and be captured in a daily transactions report for monitoring by the MLRO or a relevant delegated official, and records retained by theIslamic bank licensees for five years after the date of the transaction.Unusual Transactions or Customer Behaviour
FC-2.2.5
Where a
Islamic bank licensee's risk-based monitoring systems identify significant or abnormal transactions (as defined in FC-2.2.2 and FC-2.2.3), it must verify the source of funds for those transactions, particularly where the transactions are above the occasional transactions threshold of BD 6,000. Furthermore,Islamic bank licensees must examine the background and purpose to those transactions and document their findings.FC-2.2.6
The investigations required under FC-2.2.5 must be carried out by the MLRO (or relevant delegated official). The documents relating to these findings must be maintained for five years from the date when the transaction was completed (see also FC-7.1.1 (b)).
FC-2.2.7
Islamic bank licensees must consider instances where there is a significant, unexpected or unexplained change in customer activity.FC-2.2.8
When an existing customer closes one account and opens another, the
Islamic bank licensee must review its customer identity information and update its records accordingly. Where the information available falls short of the requirements contained in Chapter FC-1, the missing or out of date information must be obtained and re-verified with the customer.FC-2.2.9
Once identification procedures have been satisfactorily completed and, as long as records concerning the customer are maintained in line with Chapters FC-1 and FC-7, no further evidence of identity is needed when transactions are subsequently undertaken within the expected level and type of activity for that customer, provided reasonably regular contact has been maintained between the parties and no doubts have arisen as to the customer's identity.
Maintaining Documentation
FC-2.2.10
Islamic bank licensees must take reasonable steps to ensure that they receive and maintain up-to-date copies of the identification documents specified in Chapter FC-1.Islamic bank licensees must require all customers to provide up-to-date identification documents in their standard terms and conditions of business.FC-2.2.11
Islamic bank licensees must review and update their customer due diligence information at least every three years. If, upon performing such a review, copies of identification documents are more than 12 months out of date, theIslamic bank licensee must take steps to obtain updated copies as soon as possible.FC-3 FC-3 Money transfers and alternative remittances
FC-3.1 FC-3.1 Electronic transfers
Outward Transfers
FC-3.1.1
Islamic bank licensees must include all required originator information details with the accompanying electronic transfers of funds they make on behalf of their customers. Non-routine transfers must not be batched, if batching increases the risks of money laundering or terrorist financing. This obligation does not apply where the transfer is made by a bank acting as principal or acting on behalf of another bank as principal such as in the case of payment of spot FX transactions.FC-3.1.2
For the purposes of this Chapter, "Originator Information" means:
(a) The name of the payer;(b) The address of the payer; and(c) The account number of the payer (where funds are being remitted from an account with your bank).FC-3.1.3
It is not necessary for the recipient institution to pass the originator information on to the payee. The obligation is discharged simply by notifying the recipient institution of the originator information at the time the transfer is made.
Inward Transfers
FC-3.1.4
Banks must:
(a) Maintain records (in accordance with Chapter FC-7 of this Module) of all originator information received with an inward transfer; and(b) Carefully scrutinise inward transfers which do not contain originator information (i.e. full name, address and account number or a unique customer identification number). Licensees should presume that such transfers are "suspicious transactions" and pass them to the MLRO for review for determination as to possible filing of an STR, unless (a), the sending institution is able to promptly (i.e. within two business days) advise the licensee in writing of the originator information upon the licensee's request; or (b) the sending institution and the licensee are acting on their own behalf (as principals).FC-3.2 FC-3.2 Remittances on behalf of other Money Transferors
FC-3.2.1
Whenever a
Islamic bank licensee uses the services of Authorised Money Transferors to effect the transfer of funds for a customer to a person or organisation in another country, that licensee must, in respect of the amount so transferred, maintain records of:(a) The identity of its customer(s) in accordance with Chapters FC-1 and FC-7 of this Regulation; and(b) The exact amount transferred for each such customer (particularly where a single transfer is effected for more than one customer).FC-3.2.2
Islamic bank licensees must be able to produce this information for inspection immediately upon request by the BMA.FC-3.2.3
Islamic bank licensees must not transfer funds for customers to a person or organisation in another country by any means other than through an Authorised Money Transferor. Where a licensee is found to be in contravention of this rule, the Agency will not hesitate to impose sanctions upon that licensee (and in serious cases may revoke that licensee's license).FC-4 FC-4 Money Laundering Reporting Officer (MLRO)
FC-4.1 FC-4.1 Appointment of MLRO
FC-4.1.1
Islamic bank licensees must appoint a money laundering reporting officer ("MLRO"). The MLRO must be approved by BMA prior to his appointment. The Agency should be notified of the appointment of the MLRO, using the MLRO Form (Appendix FC-4).FC-4.1.2
The position of MLRO must not be combined with functions that create potential conflicts of interest, such as an internal auditor or business line head. The position of MLRO may not be outsourced.
FC-4.1.3
Subject to Paragraph FC-4.1.2, however, the position of MLRO may otherwise be combined with other functions in the
Islamic bank licensee , such as that of Compliance officer, in cases where the volume and geographical spread of the business is limited and, therefore, the demands of the function are not likely to require a full time resource. Paragraph FC-4.1.6 requires that the MLRO is a Director or employee of the licensee, so the function may not be outsourced to a third party employee.FC-4.1.4
Islamic bank licensees must appoint a deputy MLRO to act for the MLRO in his absence. The deputy MLRO must be resident in Bahrain unless otherwise agreed with the BMA.FC-4.1.5
Islamic bank licensees should note that although the MLRO may delegate some of his functions, either within the licensee or even possibly (in the case of larger groups) to individuals performing similar functions for other group entities, that the responsibility for compliance with the requirements of this Module remains with the licensee and the designated MLROFC-4.1.6
So that he can carry out his functions effectively,
Islamic bank licensees must ensure that their MLRO:(a) is a Director or a member of senior management of the licensee;(b) has a sufficient level of seniority within theIslamic bank licensee , has the authority to act without interference from business line management and has direct access to the Board and senior management (where necessary);(c) has sufficient resources, including sufficient time and (if necessary) support staff, and has designated a replacement to carry out the function should the MLRO be unable to perform his duties;(d) has unrestricted access to all transactional information relating to any financial services provided by theIslamic bank licensee to that customer, or any transactions conducted by theIslamic bank licensee on behalf of a customer;(e) is provided with timely information needed to identify, analyse and effectively monitor customer accounts;(f) has access to all customer due diligence information obtained by theIslamic bank licensee ; and(g) is resident in Bahrain.FC-4.1.7
In addition,
Islamic bank licensees must ensure that their MLRO is able to:(a) monitor the day-to-day operation of its policies and procedures relevant to this Module; and(b) respond promptly to any reasonable request for information made by the Anti-Money Laundering Unit or the BMA.FC-4.1.8
If the position of MLRO falls vacant, the
Islamic bank licensee must appoint a permanent replacement (after obtaining BMA approval), within 120 calendar days of the vacancy occurring. Pending the appointment of a permanent replacement, the licensee must make immediate interim arrangements (including the appointment of an acting MLRO) to ensure continuity in the MLRO function's performance. These interim arrangements must be approved by the BMA.FC-4.2 FC-4.2 Responsibilities of the MLRO
FC-4.2.1
The MLRO is responsible for:
(a) establishing and maintaining theIslamic bank licensee's AML/CFT policies and procedures;(b) ensuring that the licensee complies with the AML Law and any other applicable AML/CFT legislation and regulations;(c) ensuring day-to-day compliance with the licensee's own internal AML/CFT policies and procedures;(d) acting as theIslamic bank licensee's main point of contact in respect of handling internal suspicious transactions reports from the licensee's staff (refer to Section FC-5.1) and as the main contact for the Financial Intelligence Unit, the BMA and other concerned bodies regarding AML/CFT;(e) making external suspicious transactions reports to the Anti-Money Laundering Unit and Compliance Unit (refer to Section FC-5.2);(f) taking reasonable steps to establish and maintain adequate arrangements for staff awareness and training on AML/CFT matters (whether internal or external), as per Chapter FC-5;(g) producing annual reports on the effectiveness of the licensee's AML / CFT controls, for consideration by senior management, as per Paragraph FC-4.3.3;(h) on-going monitoring of what may, in his opinion, constitute high-risk customer accounts; and(i) maintaining all necessary CDD, transactions, STR and staff training records for the required periods (refer to Section FC-7.1).FC-4.3 FC-4.3 Compliance monitoring
Annual Compliance Review
FC-4.3.1
An
Islamic bank licensee must review the effectiveness of its AML/CFT procedures, systems and controls at least once each calendar year. The review must cover theIslamic bank licensee and its branches and subsidiaries both inside and outside the Kingdom of Bahrain. The scope of the review must include:(a) a report, containing the number of internal reports made in accordance with Section FC-5.1, a breakdown of all the results of those internal reports and their outcomes for each segment of the licensee's business, and an analysis of whether controls or training need to be enhanced;(b) a report, indicating the number of external reports made in accordance with Section FC-5.2 and, where aIslamic bank licensee has made an internal report but not made an external report, noting why no external report was made;(c) a sample test of compliance with this Module's customer due diligence requirements; and(d) a report as to the quality of theIslamic bank licensee's anti-money laundering procedures, systems and controls, and compliance with the AML Law and this Module.FC-4.3.2
The reports listed under Paragraph FC-4.3.1 (a) and (b) must be made by the MLRO. The sample testing required under Paragraph FC-4.3.1 (c) must be undertaken either by the licensee's internal audit function or its external auditors. The report required under Paragraph FC-4.3.1 (d) must be made by the licensee's external auditors.
FC-4.3.3
The reports listed under Paragraph FC-4.3.1 must be submitted to the licensee's Board, for it to review and commission any required remedial measures, and copied to the licensee's senior management.
FC-4.3.4
The purpose of the annual compliance review is to assist a licensee's Board and senior management to assess, amongst other things, whether internal and external reports are being made (as required under Chapter FC-5), and whether the overall number of such reports (which may otherwise appear satisfactory) does not conceal inadequate reporting in a particular segment of the licensee's business (or, where relevant, in particular branches or subsidiaries).
Islamic bank licensees should use their judgement as to how the reports listed under Paragraph FC-4.3.1 (a) and (b) should be broken down in order to achieve this aim (e.g. by branches, departments, product lines, etc).FC-4.3.5
Islamic bank licensees must instruct their external auditors to produce the report referred to in Paragraph FC-4.3.1 (d). The report must be submitted to the BMA by the 30th of April of the following year. The findings of this review must be received and acted upon by the licensee.FC-4.3.6
The external auditors may rely upon work performed by the licensee's internal audit function, as part of their procedures for producing the statement referred to in Paragraph FC-4.3.5.
FC-5 FC-5 Suspicious Transactions Reporting
FC-5.1 FC-5.1 Internal reporting
FC-5.1.1
Islamic bank licensees must implement procedures to ensure that staff who handle customer business (or are managerially responsible for such staff) make a report promptly to the MLRO if they know or suspect that a customer (or a person on whose behalf a customer may be acting) is engaged in money laundering or terrorism financing, or if the transaction or the customer's conduct otherwise appears unusual or suspicious. These procedures must include arrangements for disciplining any member of staff who fails, without reasonable excuse, to make such a report.FC-5.1.2
Where
Islamic bank licensees' internal processes provide for staff to consult with their line managers before sending a report to the MLRO, such processes must not be used to prevent reports reaching the MLRO, where staff have stated that they have knowledge or suspicion that a transaction may involve money laundering or terrorist financing.FC-5.2 FC-5.2 External reporting
FC-5.2.1
Islamic bank licensees must take reasonable steps to ensure that all reports made under Section FC-5.1 are considered by the MLRO (or his duly authorised delegate). Having considered the report and any other relevant information the MLRO (or his duly authorised delegate), if he still suspects that a person has been engaged in money laundering or terrorism financing, or the activity concerned is otherwise still regarded as suspicious, must report the fact promptly to therelevant authorities . Where no report is made, the MLRO must document the reasons why.FC-5.2.2
To take reasonable steps, as required under Paragraph FC-5.2.1,
Islamic bank licensees must:(a) require the MLRO to consider reports made under Section FC-5.1.3 in the light of all relevant information accessible to or reasonably obtainable by the MLRO;(b) permit the MLRO to have access to any information, including know your customer information, in theIslamic bank licensee's possession which could be relevant; and(c) ensure that where the MLRO, or his duly authorised delegate, suspects that a person has been engaged in money laundering or terrorist financing, a report is made by the MLRO which is not subject to the consent or approval of any other person.FC-5.2.3
Reports to the
relevant authorities made under Paragraph FC-5.2.1 must be sent to the Anti-Money Laundering Unit at the Ministry of the Interior, with a copy sent to the BMA's Compliance Directorate. Reports must be made using the Suspicious Transaction Report (STR) form and related instructions, included in Part B of Volume 2 (Islamic Banks).FC-5.2.4
Islamic bank licensees must report all suspicious transactions or attempted transactions. This reporting requirement applies regardless of whether the transaction involves tax matters.FC-5.2.5
Islamic bank licensees must retain all relevant details of STRs submitted to the relevant authorities, for at least five years.FC-5.2.6
In accordance with the AML Law,
Islamic bank licensees , their Directors, officers and employees must not warn or inform ("tipping off") their customers, the beneficial owner or other subjects of the STR when information relating to them is being reported to therelevant authorities .FC-5.3 FC-5.3 Contacting the Relevant Authorities
FC-5.3.1
Reports made by the MLRO or his duly authorised delegate under Section FC-5.2 must be sent to the Anti-Money Laundering Unit at the Ministry of the Interior and copied to the Compliance Unit at the Bahrain Monetary Agency at the following addresses:
Anti-Money Laundering Unit
General Directorate of Criminal Investigation
Ministry of Interior
P.O. Box 26698
Manama, Kingdom of Bahrain
Telephone: 17 718888
Fax: 17 715818
E-mail: aecd@batelco.com.bh or amlu@batelco.com.bhHead of Compliance Unit
Bahrain Monetary Agency
P.O. Box 27
Manama, Kingdom of Bahrain
Telephone: 17 547922
Fax: 17 535673
E-mail: cunit@bma.gov.bh;aljaber@bma.gov.bhFC-6 FC-6 Staff Training and Recruitment
FC-6.1 FC-6.1 General Requirements
FC-6.1.1
An
Islamic bank licensee must take reasonable steps to provide periodic training and information to ensure that staff who handle customer transactions, or are managerially responsible for such transactions, are made aware of:(a) their responsibilities under the AML Law, this Module, and any other relevant AML / CFT laws and regulations;(b) the identity and responsibilities of the MLRO and his deputy;(c) the potential consequences, both individual and corporate, of any breach of the AML Law, this Module and any other relevant AML / CFT laws or regulations;(d) theIslamic bank licensee's current AML/CFT policies and procedures;(e) money laundering and terrorist financing typologies and trends;(f) the type of customer activity or transaction that may justify an internal STR;(g) theIslamic bank licensee's procedures for making internal STRs; and(h) customer due diligence measures with respect to establishing business relations with customers.FC-6.1.2
The information referred to in Paragraph FC-6.1.1 must be brought to the attention of relevant new employees of
Islamic bank licensees , and must remain available for reference by staff during their period of employmentFC-6.1.3
Relevant new employees must be given AML/CFT training within three months of joining an
Islamic bank licensee .FC-6.1.4
Islamic bank licensees must ensure that their AML/CFT training for relevant staff remains up-to-date, and is appropriate given the licensee's activities and customer base.FC-6.1.5
The BMA would normally expect AML/CFT training to be provided to relevant staff at least once a year.
FC-6.1.6
Islamic bank licensees must develop adequate screening procedures to ensure high standards when hiring employees. These procedures must include controls to prevent criminals or their associates from being employed by licensees.FC-7 FC-7 Record Keeping
FC-7.1 FC-7.1 General Requirements
CDD and Transaction Records
FC-7.1.1
Islamic bank licensees must comply with the record keeping requirements contained in the AML Law.Islamic bank licensees must therefore retain adequate records (including accounting and identification records), for the following minimum periods:(a) for customers, in relation to evidence of identity and business relationship records (such as application forms and business correspondence), for at least five years after the customer relationship has ceased; and(b) for transactions, in relation to documents enabling a reconstitution of the transaction concerned, for at least five years after the transaction was completed.Compliance Records
FC-7.1.2
Islamic bank licensees must retain copies of the reports produced for their annual compliance review, as specified in Paragraph FC-4.3.1, for at least five years. Licensees must also maintain for 5 years reports made to, or by, the MLRO made in accordance with Sections FC-5.1 and FC-5.2, and records showing how these reports were dealt with and what action, if any, was taken as a consequence of those reports.Training Records
FC-7.1.3
Islamic bank licensees must maintain for at least five years, records showing the dates when AML/CFT training was given, the nature of the training, and the names of the staff that received the training.Access
FC-7.1.4
All records required to be kept under this Section must be made available for prompt and swift access by the relevant authorities or other authorised persons.
FC-7.1.5
Islamic bank licensees are also reminded of the requirements contained in Chapter LR-6 (Books and Records).FC-8 FC-8 NCCT Measures and Terrorist Financing
FC-8.1 FC-8.1 Special Measures for Non-Cooperative Countries or Territories ('NCCTs')
FC-8.1.1
Islamic bank licensees must give special attention to any dealings they may have with entities or persons domiciled in countries or territories which are:(a) identified by the FATF as being "non-cooperative"; or(b) notified toIslamic bank licensees from time to time by the BMA.FC-8.1.2
Whenever transactions with such parties have no apparent economic or visible lawful purpose, their background and purpose must be re-examined and the findings documented. If suspicions remain about the transaction, these must be reported to the
relevant authorities in accordance with Section FC-5.2.FC-8.2 FC-8.2 Terrorist Financing
FC-8.2.1
Islamic bank licensees must comply in full with the provisions of the UN Security Council Anti-terrorism Resolution No. 1373 of 2001 ('UNSCR 1373').FC-8.2.2
Any
Islamic bank licensee that wishes, intends or has been requested to do anything that might contravene, in its reasonable opinion, the provisions of UNSCR 1373 (and in particular Article 1, paragraphs c) and d) of UNSCR 1373) must seek, in writing, the prior written opinion of the BMA on the matter.FC-8.2.3
A copy of UNSCR 1373 is included in Part B of Volume 2 (Islamic Banks), under 'Supplementary Information'.
FC-8.2.4
Islamic bank licensees must report to the BMA details of:(a) funds or other financial assets or economic resources held with them which may be the subject of Article 1, paragraphs c) and d) of UNSCR 1373; and(b) all claims, whether actual or contingent, which theIslamic bank licensee has on persons and entities which may be the subject of Article 1, paragraphs c) and d) of UNSCR 1373.FC-8.2.5
For the purposes of Paragraph FC-8.2.4, 'funds or other financial resources' includes (but is not limited to) shares in any undertaking owned or controlled by the persons and entities referred to in Article 1, paragraph c) and d) of UNSCR 1373, and any associated dividends received by the licensee.
FC-8.2.6
All reports or notifications under this Section must be made to the BMA's Compliance Unit.
FC-8.2.7
See Section FC-5.3 for the Compliance Unit's contact details.
FC-8.3 FC-8.3 Designated Persons and Entities
FC-8.3.1
Without prejudice to the general duty of all
Islamic bank licensees to exercise the utmost care when dealing with persons or entities who might come under Article 1, paragraphs (c) and (d) of UNSCR 1373,Islamic bank licensees must not deal with any persons or entities designated by the BMA as potentially linked to terrorist activity.FC-8.3.2
The BMA from time to time issues to licensees lists of designated persons and entities believed linked to terrorism. Licensees are required to verify that they have no dealings with these designated persons and entities, and report back their findings to the BMA. Names designated by BMA include persons and entities designated by the United Nations, under UN Security Council Resolution 1267 ("UNSCR 1267").
FC-8.3.3
Islamic bank licensees must report to therelevant authorities , using the procedures contained in Section FC-5.2, details of any accounts or other dealings with designated persons and entities, and comply with any subsequent directions issued by therelevant authorities .FC-9 FC-9 Enforcement Measures
FC-9.1 FC-9.1 Regulatory Penalties
FC-9.1.1
Without prejudice to any other penalty imposed by the BMA Law or the AML Law or the Penal Code of the Kingdom of Bahrain, failure by a bank to comply with this Regulation or any direction given hereunder shall result in the levying by the Agency, without need of a court order and at the Agency's discretion, of a fine of up to BD 20,000.
FC-9.1.2
Module EN provides further information on the assessment of financial penalties and the criteria taken into account prior to imposing such fines (reference to Paragraph EN-5.1.4). Other enforcement measures may also be applied by BMA in response to a failure by a licensee to comply with this Module; these other measures are also set out in Module EN.
FC-9.1.3
The BMA will endeavour to assist
Islamic bank licensees to interpret and apply the rules and guidance in this Module.Islamic bank licensees may seek clarification on any issue by contacting the Compliance Unit (see Section FC-5.3 for contact details).FC-9.1.4
Without prejudice to the BMA's general powers under the law, the BMA may amend, clarify or issue further directions on any provision of this Module from time to time, by notice to its licensees.
FC-10 FC-10 AML / CFT Guidance and Best Practice
FC-10.1 FC-10.1 Guidance Provided by International Bodies
FATF: 40 Recommendations and 9 Special Recommendations
FC-10.1.1
The Forty Recommendations (see www.FATF-gafi.org) and Nine Special Recommendations (together with their associated interpretative notes and best practices papers) issued by the Financial Action Task Force (FATF), provide the basic framework for combating money laundering activities and the financing of terrorism. FATF Recommendations 4–6, 8–11, 13–15, 17, 21–23, 25, 29–32 and 40 as well as Special Recommendations IV–IX, and the AML/CFT Methodology are specifically relevant to the banking sector.
FC-10.1.2
The
relevant authorities in Bahrain believe that the principles established by these Recommendations and Special Recommendations should be followed by licensees in all material respects, as representing best practice and prudence in this area.Basel Committee: Statement on money laundering and Customer Due Diligence for banks
FC-10.1.3
In December 1988, the
Basel Committee on Banking Supervision issued a "Statement of Principles" followed by the Customer Due Diligence for Banks paper in October 2001 (with attachment dated February 2003 — see www.bis.org/publ/) with which internationally active banks of member states are expected to comply. These papers cover identifying customers, avoiding suspicious transactions, and co-operating with law enforcement agencies.FC-10.1.4
The BMA supports the above papers and the desirability of all
Islamic bank licensees adhering to their requirements and guidance.Other Website References Relevant to AML/CFT
FC-10.1.5
The following lists a selection of other websites relevant to AML/CFT:
(a) the Middle East North Africa Financial Action Task Force: www.menafatf.org;(b) the Egmont Group: www.egmontgroup.org;(c) the United Nations: www.un.org/terrorism;(d) the UN Counter-Terrorism Committee: www.un.org/Docs/sc/committees/1373/;(e) the UN list of designated individuals: www.un.org/Docs/sc/committees/1267/1267ListEng.htm;(f) the Wolfsberg Group: www.wolfsberg-principles.com; and(g) the Association of Certified Anti-money laundering Specialists: www.acams.org.Prudential Requirements
PCD PCD Prudential Consolidation and Deduction Requirements
PCD-A PCD-A Introduction
PCD-A.1 PCD-A.1 Purpose
PCD-A.1.1
This Module sets out the regulatory rules for prudential consolidation and pro-rata consolidation for banks where they own controlling or significant minority stakes in regulated financial entities (including qualifying holdings). It also sets out the framework for the prudential deductions from capital for (a) investments in regulated financial entities (below the significance threshold determined for consolidation and pro-rata consolidation), (b) significant investments in insurance entities (c) significant investments in commercial entities and (d) exposures to counterparties exceeding the large exposure limits as set out by CBB.
Amended: January 2011
Apr 08PCD-A.1.2
Consolidation and pro-rata consolidation, wherever referred to in this Module, denotes consolidation and pro-rata consolidation rules only for the purposes of computing regulatory minimum capital requirements and as such these do not impact on accounting consolidations and pro-rata consolidation of banks and banking groups, for which there are separate applicable standards and best practices.
PCD-A.1.3
For prudential purposes, CBB will supervise banks and banking groups on a consolidated basis, in accordance with consolidation and deduction rules outlined in this Module.
Apr 08PCD-A.1.4
The rules for prudential consolidation and pro-rata consolidation are set out in PCD-1.
Apr 08PCD-A.1.5
The rules for prudential deductions from capital are set out in PCD-2. The prudential framework is also applicable to banks on a standalone basis.
Apr 08PCD-A.1.6
This Module complements Modules CA and CM, which respectively set minimum capital requirements and large exposure requirements for licensed Islamic banks in Bahrain.
Amended: January 2011
Apr 08Legal Basis
PCD-A.1.7
This Module contains the CBB's Directive (as amended from time to time) on prudential consolidation and deduction requirements for
Islamic bank licensees , and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain of Bahrain and Financial Institutions Law 2006 (CBB Law). The directive in this Module is applicable to allIslamic bank licensees .Adopted: January 2011
PCD-A.1.8
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.
Adopted: January 2011PCD-A.2 PCD-A.2 Definitions
PCD-A.2.1
A
banking group is a parent bank and all its subsidiaries.Apr 08PCD-A.2.2
A
subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another bank (known as the parent bank).Apr 08PCD-A.2.3
A
parent bank is a bank which has one or more subsidiaries.Apr 08PCD-A.2.4
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.Apr 08PCD-A.2.5
Control is presumed to exist when the parent bank owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, the bank can clearly demonstrate that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is power:
(a) Over more than half of the voting rights by virtue of an agreement (whether revocable or not) with other investors;(b) To govern the financial and operating policies of the entity under a statute or an agreement;(c) To appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or(d) To cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.October 2010PCD-A.2.6
A bank may own share warrants, share call options, equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the bank voting power or reduce another party's voting power over the financial and operating policies of another entity (potential voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another entity, are considered when assessing whether the bank has the power to govern the financial and operating policies of another entity. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.
Apr 08PCD-A.2.7
In assessing whether potential voting rights contribute to control, the bank examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential voting rights, except the intention of management and the financial ability to exercise or convert.
Apr 08PCD-A.2.8
A parent bank loses control when it loses the power to govern the financial and operating policies of an investee so as to obtain benefit from its activities. The loss of control can occur with or without a change in absolute or relative ownership levels. It could occur, for example, when a subsidiary becomes subject to the control of a government, court, administrator or regulator. It could also occur as a result of a contractual agreement.
Apr 08PCD-A.2.9
Significant investments include investments in:(a) Licensed banking, securities or other financial entities from 20% to 50% of the investee's capital;(b) Insurance entities of 20% or more of the investee's capital; and(c) Commercial entities of 15% or more of the bank's capital.
1 Securities entities include category one and category two investment firms incorporated in Bahrain and equivalent entities incorporated outside Bahrain.
October 2010PCD-A.2.10
For the sake of clarity,
investment management entities must be treated as financial entities (for further information, see paragraph PCD-1.1.2).Apr 08PCD-A.2.11
Minority interest is that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent bank.Apr 08PCD-A.2.12
Although consolidation and pro-rata consolidation rules outlined in this module are prescribed only for computing regulatory minimum capital, the procedures applied for such consolidation and pro-rata consolidation are performed in accordance with
applicable accounting standards and best practices which may be subject to change from time to time.Apr 08PCD-A.2.13
A "
qualifying holding " is defined (see Section CM-4.4 for associated terms) as anyinvestment in thecapital instruments of another entity by alocally incorporated bank which is equivalent to or more than 10% of thelocally incorporated bank's capital base (as reported in the most recent PIR submitted to the CBB.Amended: April 2014
Amended: January 2014
Amended: October 2012
Adopted: January 2011PCD-A.3 PCD-A.3 Module History
PCD-A.3.1
This Module was first issued in January 2008. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control. The most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes PCD 1.1.1, 1.2.1, 2.1, 2.3.3 & 2.4 04/2010 Minor guidance changes PCD 2.1 01/2010 Clarification on risk weighting of listed and unlisted instruments PCD 10/2010 Various minor amendments to ensure consistency in CBB Rulebook. PCD-4 10/2010 New Chapter on SPV moved from Section HC-1.5 PCD-A.1.7 and A.1.8 01/2011 Added legal basis. PCD-A, PCD-2, PCD-3, PCD-4 01/2011 Changes made to incorporate Basel Core principle 5. PCD-A.2.13 10/2012 Amended definition of 'qualifying holding' to be in line with Paragraph CM-4.4.1E and Glossary. PCD-A.2.13 01/2014 Corrected typo. PCD-A.2.13 04/2014 Corrected cross reference. PCD-4.1 04/2014 Amended requirements for SPVs and Shari'a compliance for Islamic banks. PCD-1 PCD-1 Prudential Consolidation Framework
PCD-1.1 PCD-1.1 Banking, Securities and Other Financial Subsidiaries
PCD-1.1.1
To the greatest extent possible, all banking and other relevant financial entities which are subsidiaries of a licensee bank will be captured through consolidation (or aggregation) for regulatory capital purposes (or deducted in line with chapter PCD-2). Thus, majority-owned or - controlled banking entities, securities entities (where such activities are subject to broadly the similar set of regulations or where securities activities are deemed banking activities) and other financial entities should generally be fully consolidated or aggregated for regulatory capital purposes. (See PCD-2.1.3 for possible exceptions to this treatment). Banks must notify the CBB of their proposed regulatory aggregation or consolidation approaches and agree them with the CBB and their external auditors.
Apr 08PCD-1.1.2
For the purpose of this module, a financial entity is an entity which conducts banking activities or other financial activities such as finance leasing, issuing credit cards, portfolio management, investment advisory, money changers, factoring, forfaiting, custodial and safekeeping services and other similar activities that are ancillary to the business of banking, whether or not the entity is regulated. For the sake of further clarity, financial entities do not include insurance entities (for further guidance on banking activities and regulated banking services, please see "Licensing and Authorisation Requirements Module").
Apr 08PCD-1.1.3
When recognising consolidated capital for regulatory capital purposes, the CBB will assess the appropriateness of including
minority interest(s) arising from the consolidation of less than wholly owned banking, securities and other financial entities.Apr 08PCD-1.1.4
Such minority interests will be included subject to their ability to absorb losses. However, if the transfer of minority interest capital is legally restricted or if minority interest capital is not readily available then such capital will not be eligible for inclusion in the group's capital. In cases where minority interest capital exceeds 5% of a bank's consolidated capital for regulatory capital purposes, the bank is required to demonstrate to CBB that minority interests recognised as capital are readily available to other group companies e.g. by producing legal proof from the concerned supervisor of subsidiary that there is no restriction on transfer of funds to other group companies.
Amended October 2010
Apr 08PCD-1.1.5
For instances where it is not feasible or desirable to consolidate certain securities and other financial entities for regulatory capital purposes, banks are required to provide the CBB with sufficient evidence that such holdings are acquired through underwriting of the share issue and are held on a temporary basis in the ordinary course of business; or are subject to materially different regulation; or non-consolidation for regulatory capital purposes is otherwise required by law.
Amended October 2010
Apr 08PCD-1.1.6
With the exception of activities carried out in the ordinary course of business (like share underwriting), in cases where consolidation for regulatory capital purposes does not occur, the parent bank is required to report capital adequacy measures for the parent and subsidiary separately (see also chapter PCD-2).
Apr 08PCD-1.2 PCD-1.2 Significant Investments in Banking, Securities and Other Financial Entities
PCD-1.2.1
Significant investments (20% - 50%) in banking, securities and other financial entities, will be consolidated or aggregated on a pro-rata basis for regulatory capital purposes unless deducted in accordance with chapter PCD-2.
Apr 08PCD-1.2.2
However, the CBB must be satisfied that the parent bank with significant minority ownership is expected to support the entity to the extent of its proportionate ownership only. The parent bank will be required to demonstrate that other significant shareholders have the means and the willingness to proportionately support the financial entity. The bank should have joint control in the investee entity along with other parties. If there is no joint control and a single party can exercise control, prorata-consolidation for regulatory capital purposes can not applied.
Apr 08PCD-1.2.3
For instances where it is not feasible or desirable to prorata-consolidate/aggregate certain securities and other financial entities for regulatory capital purposes, banks are required to provide the CBB with sufficient evidence that such holdings are acquired through underwriting of the share issue and are held on a temporary basis in the ordinary course of business; or are subject to materially different regulation; or non-prorata-consolidation for regulatory capital purposes is otherwise required by law.
Apr 08PCD-1.2.4
With the exception of activities carried out in ordinary course of business (like share underwriting), in cases where prorata-consolidation for regulatory capital purposes does not occur, the bank is required to report capital adequacy measures for itself and the investee entity separately.
Apr 08PCD-2 PCD-2 Prudential Deductions Framework
PCD-2.1 PCD-2.1 Investments in Banking, Securities and Other Financial Entities
PCD-2.1.1
Equity investments in banking, securities and
other financial entities below 20% of the investee's capital must be risk-weighted at a minimum risk-weight of 100% for listed entities and 150% for unlisted entities (see CM-4.9 where aninvestment below 20% of the investee's capital may exceed 15% of the reporting bank's capital base — "Qualifying holdings" — the excess of such individual holdings must be deducted and there is an additional aggregate limit for such holdings).Amended: January 2011
Amended January 2009
Apr 08PCD-2.1.2
Investments in instruments of a banking, securities and financial entities, other than equity, which are allowed as regulatory capital for the investee must be risk weighted at a minimum risk-weight of 100% for listed instruments or 150% for unlisted instruments unless such investments (including any other equity investment in that entity) exceed 20% of the eligible capital of investee entity, in which case the investments in other regulatory capital instruments of that investee entity must be deducted from the bank's capital for capital adequacy purposes.
Amended January 2009
Apr 08PCD-2.1.3
If any majority-owned banking, securities and other financial subsidiaries are not consolidated or aggregated for regulatory capital purposes as stated in paragraph PCD-1.1.5 and section PCD-3.1 respectively, all equity and other regulatory capital investments in those entities attributable to the group will be
deducted , and the assets and liabilities, as well as third-party capital investments in the subsidiary will be removed from the bank's balance sheet for regulatory capital purposes.Apr 08PCD-2.1.4
If any significant investments in banking, securities and other financial entities are not prorata-consolidated or prorata-aggregated for regulatory capital purposes as stated in paragraph PCD-1.2.3 and section PCD-3.1 respectively, all equity and other regulatory capital investments in those entities attributable to the group will be deducted, and the assets and liabilities, as well as third-party capital investments in the investee will be removed from the bank's balance sheet for regulatory capital purposes.
Apr 08PCD-2.1.5
CBB will ensure these entities (referred to in paragraph PCD-2.1.3 and PCD-2.1.4) otherwise meet regulatory capital requirements and monitor steps taken by the bank to correct any capital shortfall, if it exists. If not corrected within the timeframe agreed with CBB, the shortfall will also be deducted from investor bank's capital for regulatory capital purposes. In case of PCD-2.1.4, this deduction will be on proportionate basis if other parties are also willing to support on proportionate basis.
Apr 08PCD-2.2 PCD-2.2 Significant Investments in Insurance Entities
PCD-2.2.1
When measuring regulatory capital for banks, the equity holdings in an insurance entity of 20% or more of the investee's capital shall be required to be deducted from bank's capital for regulatory capital purposes. Holdings less than 20% will be risk weighted under the applicable credit risk weighting rules (or subject to the
qualifying holdings requirements outlined in Module CM-4.9).Amended: January 2011
Apr 08PCD-2.2.2
Majority-owned or controlled insurance subsidiaries must be adequately capitalised to reduce the possibility of future potential losses to the parent bank. The parent bank will monitor actions taken by the subsidiary to correct any capital shortfall and, if it is not corrected in a timely manner, the shortfall will also be deducted from the parent bank's capital for regulatory capital purposes.
Apr 08PCD-2.3 PCD-2.3 Significant Investments in Commercial Entities
PCD-2.3.1
Investments in commercial entities include holding of equities of commercial entities acquired through underwriting activities which have been held for more than 90 days2.
2 Within the period of 90 days, CBB approved underwritten amounts are subject to treatment outlined in Section CM-4.5. See also Chapter CA-5 if such positions are to be included in the trading book.
Amended: January 2011PCD-2.3.2
"Qualifying holdings" in commercial entities which exceed certain materiality levels outlined in CM-4.9 must be deducted from the bank's capital for regulatory capital purposes. If the investments exceed a materiality level of 15% of the bank's capital on an individual basis, the concerned bank is required to deduct the excess amount from its capital. If the aggregate amount of
qualifying holdings exceeds a threshold of 60% of the bank's capital, then such excess amount is also to be deducted from the bank's capital. The application of the materiality levels will be undertaken in the order of deduction of amount in excess of 15% of bank's capital followed by 60% of capital. An illustrative example is provided in Appendix PCD-1.Amended: January 2011
Apr 08PCD-2.3.3
Investments in commercial entities below the level of a
qualifying holding will be risk-weighted under the applicable risk weighting rules (see chapter CA-5 for trading book and chapter CA-4 for banking book). The risk-weighting treatment will follow the accounting method in the concerned bank's audited financial statements. The effect of banks' existing significantqualifying holdings will be reviewed by the CBB. The CBB will then discuss any possible transitional arrangements with concerned banks.Amended: January 2011
Apr 08PCD-2.4 PCD-2.4 Common Deduction Principles
PCD-2.4.1
Reciprocal cross holdings of banks' capital artificially designed to inflate the capital position of banks must be deducted for regulatory capital purposes. In determining such reciprocal cross-holdings, the CBB will take into account any bilateral agreement, dates and timings of such transactions and the amount of the two transactions involved. This deduction must be made from the tier in which the reciprocal cross holding exists.
Apr 08PCD-2.4.2
In case of non-compliance3 with the large exposure limits (as set out in Chapter CM-4 of the Rulebook), the excess will be deducted from the capital of the bank for regulatory capital purposes. For off-balance sheet items, the excess is to be calculated after the application of credit conversion factors as detailed in chapter CA-4 of the Capital Adequacy Module for Islamic banks. These deduction requirements apply for direct exposures (i.e. funded by a bank's own funds or unrestricted investment accounts) and restricted investment accounts.
3 For the purpose of this rule, non-compliance means where a large exposure is taken without prior approval of CBB.
Amended: January 2011PCD-2.4.3
Deductions referred to in this module (except as stated otherwise, see paragraph PCD-2.4.1, PCD-2.4.4 and PCD-2.4.7) must be made 50% from Tier 1 and 50% from Tier 2 capital. If the amount deductible from Tier 2 exceeds the bank's actual Tier 2, the bank should deduct the shortfall amount from Tier 1 capital.
Apr 08PCD-2.4.4
Goodwill relating to consolidated subsidiaries and entities subject to a deduction approach pursuant to this chapter must be deducted from Tier 1, and the remainder of the investments must be deducted as provided for in this sub-section.
Apr 08PCD-2.4.5
The limits on Tier 2 capital will be based on the amount of Tier 1 capital after all deductions. Note that total eligible Tier 2 Capital may not exceed Tier One Capital. See Appendix PCD-2 for details of how these limits work in practice.
Apr 08PCD-2.4.6
Where the deduction requirement relates to an investment which is carried at fair value and the resultant unrealised fair value gain/loss has been included in Tier 2 capital as per paragraph CA-2.1.5 (e) of the Capital Adequacy Module, the unrealised fair value gain/loss will be removed from the Tier 2 capital. The remaining amount will be deducted as per the above paragraph PCD-2.4.3. If the deduction is not for the full amount of investment, then the related unrealised fair value gain/loss will also be eliminated proportionately from Tier 2 capital. An example is provided in Appendix PCD-2.
Apr 08PCD-2.4.7
Positions in the bank's own eligible regulatory capital instruments are deducted from capital. This deduction must be made from the Tier in which the investment exists.
Apr 08PCD-2.4.8
This prudential deductions framework (PCD-2.4) applies to investments irrespective of their classification in banking book or trading book. Where a bank demonstrates that it is an active market maker then the CBB may, on a case by case basis, establish a dealer exception for holdings of other designated banks', securities firms', and other financial entities' capital instruments in the trading book. In order to qualify for the dealer exception, the bank must demonstrate to the CBB that it has adequate systems and controls surrounding the trading of financial institutions' eligible regulatory capital instruments.
Apr 08PCD-3 PCD-3 Related Issues
PCD-3.1 PCD-3.1 Related Issues
PCD-3.1.1
If a parent bank either controls or holds a significant investment (20% - 50%) in a non-resident banking, securities or other financial entity which is filing its return with the respective supervisor under the Basel II capital adequacy rules, and the investment is not deducted, the investor bank will not automatically be required to consolidate or pro-rata consolidate on a line by line basis respectively for regulatory capital purposes. Under such circumstances, the aggregation rules outlined in paragraph PCD-3.1.2 will be applicable. However, a bank may opt to consolidate or pro-rata consolidate such entities instead of aggregation or pro-rata aggregation provided that it satisfies CBB that these entities are otherwise adequately capitalised on a stand-alone basis in their respective jurisdictions. CBB will liaise with the concerned host supervisors in this regard. In addition, if a foreign branch of a Bahraini bank is filing its return with the respective supervisor under the Basel II capital adequacy rules, the aggregation rules may also be applied to such branch.
Amended: January 2011
Apr 08PCD-3.1.2
The capital and risk weighted assets (RWAs) of the non-resident entity must be shown separately. The parent bank will be required to aggregate the subsidiary's eligible capital and RWAs (based on the risk weighting of assets reported by the subsidiary to its host central bank) with its own eligible capital and RWAs respectively. In cases where bank does not control the entity, such aggregation will be limited to the percentage of ownership by the bank in the financial entity (see Appendix PCD-3). In cases where the bank does control the entity, the bank will be required to undertake full aggregation (see Appendix PCD-4).
Amended October 2010
Apr 08PCD-3.1.3
Appropriate adjustments will be made to eliminate intra-group exposures.
Apr 08PCD-3.1.4
If a bank in Bahrain is a subsidiary of a non-resident parent bank, the capital adequacy of such bank will be determined on a standalone basis.
Apr 08PCD-4 PCD-4 Special Purpose Vehicles ('SPVs')
PCD-4.1 PCD-4.1 General Requirements
PCD-4.1.1
SPVs are subject to the consolidation, deduction, risk weighting and
qualifying holdings rules and regulations mentioned in this Module and Chapter CM-4.Amended: April 2014
Amended: January 2011
October 2010PCD-4.1.2
All
Bahraini Islamic bank licensees mustobtain the CBB's prior specific written approval if they intend to act as originator, sponsor or manager of a special purpose vehicle ('SPV'), or if they intend to participate in the creation of an SPV, or if they intend to acquire a holding of 20% or more of the equity capital of an SPV. AllBahraini Islamic bank licensees must seek prior specific written CBB approval if they are appointed as nominee shareholders of SPVs or hold votes by proxy arrangement in SPVs on behalf of other investors.Amended: April 2014
October 2010PCD-4.1.2A
For purposes of Paragraph PCD-4.1.2, in order to avoid any delays and/or disruption in implementation of a
Bahraini Islamic bank licensee's plans in this context, the CBB should be approached as soon as possible, even at a very preliminary stage.Added: April 2014PCD-4.1.3
The CBB requires any
Bahraini Islamic bank licensee associated with an SPV to confirm the following points in any request for approval under Paragraph PCD-4.1.2:(a) The purpose of the SPV;(b) The nature of the relationship between theBahraini Islamic bank licensee and the SPV (i.e. originator, sponsor, manager, investor, controller etc.);(c) The proposed consolidation/accounting treatment of the SPV in relation to theBahraini Islamic bank licensee both for the PIR and the audited financial statements' purposes as agreed with its external auditor;(d) The availability of financial and other information relevant to the SPV and access to its business premises and records;(e) Whether theBahraini Islamic bank licensee is providing any guarantees, warranties or financial/liquidity support of any kind to the SPV; and(f) A copy of the Bahraini Islamic bank licensee's Shari'a Supervisory Board approval of the initial investment or financing structure involving the use of the concerned SPV(s).Amended: April 2014
October 2010PCD-4.1.3A
In addition to the points noted in PCD-4.1.3,
Bahraini Islamic bank licensees which are involved with SPVs in any of the relationships described in Paragraph PCD-4.1.2 must not allow such SPVs to obtain any conventional financing to fund themselves or any transactions that they enter into.Added: April 2014PCD-4.1.3AA
For purposes of Paragraph PCD-4.1.3A, in case of new acquisition or investment after the date of issuance of these rules, when conventional borrowing exists, it should be replaced by Islamic financing as soon as possible and in no case later than 12 months from the date of investment. In case of existing investments before the date of issuance of these rules, where conventional borrowing exists, it should be replaced by Islamic financing as soon as possible and in no case later than 12 months from the date of issuance of these rules. Both cases are extendable subject to SSB approval.
Added: April 2014PCD-4.1.3B
Bahraini Islamic bank licensees which are involved with SPVs in any of the relationships described in Paragraph PCD-4.1.2 must not allow such SPVs to give any type of financial guarantee, warranty or indemnity to the Rab Al Maal, the Muwakil or investors in the SPV or any other counterparty, customer or stakeholder either directly or on behalf of theBahraini Islamic bank licensee .Added: April 2014PCD-4.1.3C
The Shari'a Supervisory Board of the
Bahraini Islamic bank licensee must monitor on an ongoing basis the Shari'a compliance of the SPVs and must oversee the conduct of the annual Shari'a compliance review of transactions, assets, liabilities and other commitments and relationships entered into by all SPVs with which theBahraini Islamic bank licensee is involved (by way of the relationships described in Paragraph PCD-4.1.2). The Shari'a compliance function of theBahraini Islamic bank licensee must perform such reviews.Added: April 2014PCD-4.1.3D
Bahraini Islamic bank licensees which are involved with SPVs in any of the relationships described in Paragraph PCD-4.1.2 must not transfer non-performing or impaired assets from their own balance sheets to such SPVs or vice versa.Added: April 2014PCD-4.1.4
Where the SPV is consolidated into the accounts of a locally incorporated bank, the bank must provide separate accounting information on the SPV to the CBB on a quarterly basis. Furthermore, the annual audited financial statements of all consolidated SPVs must be submitted to the CBB within 3 months of the year end of the concerned SPV.
October 2010PCD-4.1.5
Where a locally incorporated bank has a controller or majority ownership relationship with an SPV, or acts as sponsor, the bank must obtain the prior written approval of the CBB for any changes to the capital, ownership, management or control of the SPV. All locally incorporated banks must also notify the CBB of any material events in relation to the SPV. If necessary, the CBB may require that formal information exchange arrangements are put in place (e.g. a memorandum of understanding) if the SPV is located in a foreign jurisdiction and its activities are not supervised locally.
Amended: April 2014
October 2010Appendix PCD-1 Investments in Commercial Entities
Bank "x" with eligible capital of 1,000,000 before deductions has made investment in seven commercial entities listed below:
Investee Amount %age of bank's capital a 100,000 10% b 120,000 12% c 150,000 15% d 160,000 16% e 170,000 17% f 200,000 20% g 250,000 25% Total 1,150,000 115% The amount to be deducted from capital in respect of these investments will be based on the following calculation:
15% threshold (Individual basis)
Sr # Amount 15% of Bank's capital Excess over 15% of Bank's capital d 160,000 150,000 10,000 e 170,000 150,000 20,000 f 200,000 150,000 50,000 g 250,000 150,000 100,000 Total 180,000 Capital deduction on account of 15% threshold on individual basis is 180,000 (A).
60% Threshold (Aggregate basis)
Aggregate of investments after 15% deduction:
c 150,000 d 150,000 e 150,000 f 150,000 g 150,000 Total 750,000 (B)
60% of Bank's capital = 600,000 Aggregate (B) = 750,000 Deduction = 150,000 So the capital deduction based on the 60% threshold on aggregate basis is 150,000 (C).
Total deduction based on investments in commercial entities is 330,000 (A+C).
Net eligible capital after deductions is 670,000 (1,000,000 - 330,000).
Remaining amount of investments 820,000 (1,150,000-330,000) will be risk weighted under the applicable risk weighting rules.
Appendix PCD-2 Comprehensive Example of Deductions
Bank "x" with capital base of 10,000,000 before deductions (consisting of 5,000,000 Tier 1 and 5,000,000 Tier 2) has made four investments listed below along with the amount required to be deducted from the capital for capital adequacy purposes:
Investment Amount Deduction requirement
(For rules refer to chapter PCD-2)Bank "a" 1,000,000 1,000,000 Insurance entity "b" 3,000,000 3,000,000 4 Commercial entity "c" 2,000,000 500,000 5 Entity "d" 500,000 400,000 6 Total 6,500,000 4,900,000 Determination of eligible Tier 1 and Tier 2 capital:
These deductions include Goodwill of 100,000 & reciprocal cross holdings of 400,000 in Tier 1.
Determination of eligible capital:
Tier 1 capital Tier 2 capital Capital base 5,000,000 5,000,000 Goodwill 7 (100,000) - Reciprocal cross-holding 8 (400,000) - Other deductions (Equally from Tier 1 and Tier 2) (4,900,000 - 500,000=4,400,000/2) (2,200,000) (2,200,000) Resulting capital 2,300,000 2,800,000 Eligible capital 2,300,000 2,300,000 9 Calculation of CAR:
CAR = Eligible capital/Risk-Weighted Assets
= (2,300,000 + 2,300,000)/(Say) 40,000,000 = 4,600,000/40,000,000 = 11.5%
4 This investment is 30% of the insurance "b" capital.
5 This investment is 20% of the bank's capital. As such the amount exceeding 15% i.e. 500,000 will be deducted.
6 This investment is 2% of entity "d"s capital. Entity "d" has also made investment in Tier 1 capital of Bank "x" amounting to 400,000. This amount (400,000), being cross-holding, is required to be deducted from regulatory capital of the bank "x".
7 This represents goodwill arising at the time of acquisition of a consolidated subsidiary.
8 As this cross-holding exists in Tier 1 capital (see footnote 3), this amount must be deducted from the same tier.
9 Tier 2 can not exceed 100% of Tier 1 (after all subsequent deductions).
Appendix PCD-3 Pro-rata Aggregation
Bank "x" has made an investment in a non-resident financial entity "y" (30% shareholding) which is filing its return with the respective supervisor under the Basel II capital adequacy rules. The aggregation of capital and RWAs will be carried out as follows:
Bank:
Eligible regulatory capital = 3,000,00010
Risk weighted assets = 20,000,000
CAR = 3,000,000/20,000,000
= 15%
Investee:
Eligible regulatory capital = 1,000,000
Risk weighted assets = 10,000,000
CAR = 1,000,000/10,000,000
= 10%
Consolidated Capital Adequacy Ratio:
Eligible regulatory capital = 3,300,000 [(3,000,000 + (1,000,000*30%)]
Risk weighted assets = 23,000,000 (20,000,000 + (10,000,000*30%)]
CAR = 3,300,000/23,000,000
= 14.35%
10 This capital amount is after all necessary deductions, including investment in "y".
Appendix PCD-4 Full Aggregation
Bank "x" controls a non-resident financial entity "z" (80% shareholding) which is filing its return with the respective supervisor under the Basel II capital adequacy rules. The aggregation of capital and RWAs will be carried out as follows:
Parent Bank:
Eligible regulatory capital = 3,000,00011,
Risk weighted assets = 20,000,000
CAR = 3,000,000/20,000,000
= 15%
Non-resident subsidiary:
Eligible regulatory capital = 1,000,000
Risk weighted assets = 10,000,000
CAR = 1,000,000/10,000,000
= 10%
Consolidated Capital Adequacy Ratio:
Eligible regulatory capital = 4,000,000 (3,000,000+1,000,000)
Risk weighted assets = 30,000,000 (20,000,000+10,000,000)
CAR = 4,000,000/30,000,000
= 13.33%
11 This capital amount is after all necessary deductions, including investment in "z".
Appendix PCD-5 Calculation of the Investment Amount, based on its Fair Value that should be deducted from Capital Base
Bank "x" with eligible capital of 1,000 before deductions has made investment in a commercial entity (cost 160) which is carried at fair value (200). The amount to be deducted is as follows:
Regulatory capital (before deductions) = 1,000
Equity investment at cost = 160
Equity investment at fair value = 200
Fair value gain = 40
Amount to be subjected to deduction (see Appendix CA-17 of CA module) = 200 - (40*.55) = 178
Excess investment amount above the 15% level = 178 - (1,000 X 0.15) = 28
The deduction should be as follows:
1. The asset side should be reduced by 50 (28 see above + 22 see Appendix CA-17 of CA Module)2. The Capital Base shall be reduced as follows:Fair value to be removed from Tier 2 (18/178*28) 2.82 Deduction of 50% of remaining amount from Tier 1(28-2.83 = 25.17/2) 12.59 Deduction of 50% of the remaining amount from Tier 2(28-2.83 = 25.17/2) 12.59 Total deduction from capital base 28.00 Reporting Requirements
BR BR BMA Reporting Requirements
BR-A BR-A Introduction
BR-A.1 BR-A.1 Purpose
BR-A.1.1
The purpose of this module is to set out the Agency's reporting requirements applicable to the banks as part of the Agency's ongoing supervision activities.
BR-A.1.2
This module provides support for certain other parts of the Rulebook, mainly:
(a) Principles of Business;(b) Public Disclosure;(c) Credit Risk Management;(d) Operational Risk Management;(e) Financial Crimes;(f)Capital Adequacy ;(g) High Level Controls;(h) Business and Market Conduct;(i) Enforcement; and(j) Audit Firms.BR-A.1.3
Unless otherwise stated, all reports referred to in this module should be addressed to Islamic Financial Institutions Supervision Directorate of the Agency.
BR-A.2 BR-A.2 Key requirements
Regular reporting — Annual requirements
BR-A.2.1
All locally incorporated banks in the Kingdom of Bahrain are required to submit to the Agency their annual reports (in compliance with the provisions set out under section BR-1.1) no later than the end of 3 calendar months from the date of such reports. In addition, these banks are also required to submit supplementary information (as listed under section BR-1.1) to the Agency.
BR-A.2.2
All Bahrain
branches of foreign banks are required to submit to the Agency their annual audited financial statements (in compliance with the provisions set out under section BR-1.2) no later than the end of 3 calendar months from the date of such statements. In addition, these banks are also required to submit supplementary information (as listed under section BR-1.2) to the Agency.Regular reporting — Semi-annual requirements
BR-A.2.3
All FCB Bahrain
branches of foreign banks are required to submit to the Agency their Balance Sheet and Profit and Loss Accounts (in compliance with the provisions set out under section BR-2.1) no later than the end of 8 weeks from the date of such statements.Regular reporting — Quarterly requirements
BR-A.2.4
All locally incorporated banks in the Kingdom of Bahrain are required to submit to the Agency the following information on a quarterly basis:
(a) PIR Forms (in accordance with the provisions set out under section BR-3.1);(b) reviewed (unaudited) quarterly financial statements (in accordance with the provisions set out under section BR-3.1); and(c) largeexposure returns (in accordance with the provisions set out under section BR-3.1).BR-A.2.5
All Bahrain
branches of foreign banks are required to submit to the Agency PIRB Forms (in accordance with the provisions set out under section BR-3.2).BR-A.2.6
All banks licensed by the Agency in the Kingdom of Bahrain are required to submit to the Agency quarterly statistical returns as required under section BR-3.3).
Regular reporting — Monthly requirements
BR-A.2.7
All banks licensed by the Agency in the Kingdom of Bahrain are required to submit to the Agency monthly statistical returns as required under section BR-4.1).
BR-A.2.8
All locally incorporated banks listed on the Bahrain Stock Exchange are required to report to the Capital Markets Supervision Directorate of the Agency, on a monthly basis, information relating to their Directors' interests in the shares of locally incorporated banks listed on the Bahrain Stock Exchange (in accordance with the provisions set out under section BR-3.1).
Ad-hoc reporting and notification
BR-A.2.9
All banks licensed by the Agency in the Kingdom of Bahrain are required to notify and report to the Agency on the following matters:
(a) largeexposures (section BR-5.1);(b) changes in strategy and/or corporate plan (section BR-5.1);(c) changes in management (section BR-5.1);(d) changes in dealing staff (section BR-5.1);(e) appointment of a Compliance Manager/Officer (section BR-5.1);(f)money laundering and suspicious transactions (section BR-5.1);(g) promotion of financial products and services (section BR-5.1); and(h) authorised signatories (section BR-5.1).BR-A.2.10
All locally incorporated banks are required to give the Agency, immediate written notification of any actual breach by such bank of the minimum Risk Asset Ratio(s) (RAR) in accordance with section BR-5.2.
BR-A.3 BR-A.3 Regulation history
BR-A.3.1
This module was first issued in January 2005 as part of the initial launch of the BMA Rulebook Volume for Islamic banks. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter UG-3 of Module UG provides further details on Rulebook maintenance and control.
BR-A.3.2
The most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes BR-5.1.13 01/04/05 Notification of fraud BR-5.1 01/10/05 New threshold for reporting of transfers by charities and prior approval of the appointment of compliance officer/manager. BR-5.1.3 01/01/06 Addition to changes in strategy and or corporate plan BR-5.1.4 01/01/06 Addition of contact details to management information details BR-3.3, BR-4.1 & BR-5.1.14 01/04/06 Revised statistical returns instructions and new notification requirement for material losses BR-3.2 01/07/06 Deletion of requirement for Form SR6 BR-4.1 01/07/06 Deletion of references to precious metals and commodities returns. Transfer of reserve requirements material from BR-4.2 to BR-4.1. BR-4.2 01/07/06 Deletion of reserve requirements material (moved to BR-4.1). BR-3.1.3 01/07/06 Hard copies of PIRI no longer required BR-4.1.3 01/07/06 Revised submission date for statistical returns BR-5.1.9 01/07/06 Minor changes reflecting change of Compliance Unit to Directorate BR-5.3.3 01/07/06 Deleted since duplicated BR-5.1.15 Evolution of the Module
BR-A.3.3
Prior to the development of the Rulebook, the Agency had issued various circulars representing regulations covering different aspects of BMA reporting structure. These circulars were subsequently compiled into a folder "Part 2: Reports" which was part of the information pack ("The Establishment, regulations and supervision of banks and other financial institutions in Bahrain") issued in 1997. The contents of that information pack have now been incorporated in this module.
BR-A.3.4
In addition, certain circulars have been incorporated in this module that supplement the BMA reporting requirements set out in the information pack mentioned in paragraph BR-A.3.3. These circulars and their evolution into this module are listed below:
Circular Ref. Date of Issue Module Ref. Circular Subject BC/4/99
(partial)17 Mar 1999 BR-1.1, BR-3.1 Annual Accounts for the Year Ending 31 December 1999 BC/12/98 28 Sep 1998 BR-1.1 Accounting and Auditing Standards for Islamic Financial Institutions no reference
(partial)Apr 1981 BR-1.1 Precious Metals and Commodities ODG/329/03 10 Sep 2003 BR-1.1 Corporate Governance Reporting EDBC/1/95 26 Aug 1995 BR-1.2 Re: Provisioning Policies of Branches of Foreign Banks in Bahrain BC/1/99
(partial)22 Feb 1999 BR-2.1 Enhancing Bank Transparency BC/20/99
(partial)28 Sep 1999 BR-3.1 Enhancing Islamic Banks Transparency ER/118/98 2 Feb 1998 BR-3.3, BR-4.1 Revised Statistical Returns ER/247/98 22 Mar 1998 BR-3.3, BR-4.1 Revised Statistical Returns OG/89/88 30 Jun 1988 BR-4.2 Reserve Balances BMA/751/93
(partial)8 Jul 1993 BR-4.3 Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange. BC/904/95
(partial)24 Jul 1995 BR-5.1 Notification to, and approval from the Agency for certain matters BC/309/94 28 Mar 1994 BR-5.1 Management Personnel BMA/1287/94
(partial)6 Nov 1994 BR-5.1 Foreign Exchange, Securities and Other Dealers BC/13/99
(partial)15 Jun 1999 BR-5.1 Compliance, Risk Management and Internal Controls EDBC/6/01
(partial)14 Oct 2001 BR-5.1 Re: Money Laundering Regulation EDBC/73/96
(partial)1 May 1996 BR-5.1 Explanatory note on the promotion of Banking and Financial Products offered in/from Bahrain by Means of Incentives etc. BMA(4)/91/832 22 Oct 1991 BR-5.1 Specimen Signatures OG/45/88 13 Mar 1988 BR-5.2 Write-Off — Credit Facility ODG/145/92 18 Aug 1992 BR-5.3 New or expanded products and facilities in the Retail Banking Field BC/3/00 5 Mar 2000 BR-5.3 Re: Accounts for Charity Organisations BC/09/01 26 Nov 2001 BR-1.1, BR-3.1, BR-5.2 New Prudential Regulations for Islamic Banks BR-1 BR-1 Regular reporting — Annual requirements
BR-1.1 BR-1.1 Locally incorporated banks
BR-1.1.1
The content of this section is applicable to all locally incorporated banks licensed by the Agency in the Kingdom of Bahrain.
Annual reports
BR-1.1.2
All banks, referred to under paragraph BR-1.1.1, are required to submit to the Agency their audited annual reports within 3 calendar months of the date of such reports.
BR-1.1.3
The banks should ensure that the audited accounts reconcile with the following reports submitted to the Agency and that adequate explanations for any material differences between these accounts and reports are provided by the bank's external auditors (also see section AU-3.7):
(a) Prudential Information Returns for Islamic banks, and(b) Monthly Statements of Assets and Liabilities.Supplementary information
BR-1.1.4
In addition to the reports required in paragraph BR-1.1.2, banks are also required to submit to the Agency the following information:
(a) Copies of any report(s) submitted by the external auditors to the Management or Board of Directors including where applicable, the management letter/internal control report;(b) The audited accounts for the bank's ultimate holding company;(c) The audited accounts and management letters for subsidiaries and branches of the bank located outside Bahrain;(d) A list of subsidiaries, associated companies and affiliates of the bank, together with details of their locations and the amount of participation by the bank in these entities;(e) Any other supplementary information required by the Agency; and(f) Report on corporate governance framework attached to year-end PIRI (see Appendix BR 7 for sample report)BR-1.2 BR-1.2 Branches of foreign banks
BR-1.2.1
The content of this section is applicable to
branches (licensed by the Agency) of foreign banks.Annual audited financial statements
BR-1.2.2
All
branches , referred to under paragraph BR-1.2.1, are required to submit to the Agency their annual audited financial statements of their Bahrain operations within 3 calendar months of the date of such statements.Supplementary information
BR-1.2.3
In addition to the statements required in paragraph BR-1.2.2,
branches are also required to submit to the Agency the following information:(a) the external auditors' management letter;(b) a reconciliation statement between the audited financial statements and the relevant prudential returns and monthly statistical returns;(c) the head office's annual audited financial statements; and(d) a statement of provisions as set out in paragraph BR-1.2.4, below.Provisions against branch assets in head office books
BR-1.2.4
If specific provisions against the assets of a
branch are maintained in the books of its head office, the Agency should be advised on an annual basis and in writing (along with the information listed under paragraph BR-1.2.3) of the amount of provisions set aside for the Bahrainbranch's bad debts (and any other non-performing assets). For detailed guidance related to this subject, see section CM-4.3.Compliance
BR-1.2.5
The annual accounts should be in full compliance with the Financial Accounting Standards issued by AAOIFI or where AAOIFI standards do not cover a subject, International Financial Reporting Standards should be used.
BR-1.3 All licensed banks
[This Section deleted 07/2006]
BR-2 BR-2 Regular reporting — Semi-annual requirements
BR-2.1 BR-2.1 FCB branches of foreign banks
BR-2.1.1
The content of this section is applicable only to FCB
branches (licensed by the Agency) of foreign banks.Financial information
BR-2.1.2
Branches (referred to under paragraph BR-2.1.1) are required to submit to the Agency the following information (in the same format as their Annual Audited Accounts) for their Bahrain operation on a semi-annual basis (within eight weeks of the date of these statements):(a) Balance Sheet, and(b) Profit and Loss AccountsBR-3 BR-3 Regular reporting — Quarterly requirements
BR-3.1 BR-3.1 Locally incorporated banks
BR-3.1.1
The content of this section is applicable to all locally incorporated banks licensed by the Agency in the Kingdom of Bahrain.
Prudential Information Returns for Islamic Banks (PIRI)
BR-3.1.2
All banks, referred to under paragraph BR-3.1.1, must complete PIRI forms (see Appendix BR 4), on a quarterly basis. This form is intended to be a financial report of the bank as a separate legal entity. Banks should therefore include on it all assets and liabilities of their head office and their
branches in Bahrain and abroad. Separate figures in respect of the head office or "Bahrain operations" are not required.BR-3.1.3
The forms referred to under paragraph BR-3.1.2 must be submitted electronically online to the Agency on a quarterly basis within 20 calendar days of the end of the reporting date. Effective from 2nd quarter 2006, banks are not required to submit hard copies of the returns.
BR-3.1.4
These forms are divided into five sections. Each reporting section is supplemented with guidelines for completion under Appendix BR 3. Further requirements and guidance relating to the contents of these forms are also set out under various Modules of the Rulebook. Reporting sections and their corresponding requirements and guidance (where applicable) are set out as below:
(a) Section A — Capital Adequacy: see Module CA;(c) Section C — Management of Investment Accounts: see section HC-5.4;(d) Section D — Earnings Quality; and(e) Section E — Liquidity: see section LM-1.BR-3.1.5
The references made in paragraphs BR-3.1.4(a) to (e) should be read in conjunction with the guidelines set under Appendix BR 3 and referred to while completing the PIRI forms set under Appendix BR 4.
Financial information
BR-3.1.6
All banks, referred to under paragraph BR-3.1.1, should submit their reviewed (unaudited) quarterly financial statements to the Agency within 60 days from the statement date.
BR-3.2 BR-3.2 All licensed banks
BR-3.2.1
The content of this section is applicable to all banks (licensed by the Agency) in the Kingdom of Bahrain.
Statistical returns
BR-3.2.2
All banks, referred to under paragraph BR-3.2.1, are required to submit the following quarterly statistical returns to the Financial Stability Directorate of the Agency:
(a) Form SR-3 — 'Quarterly Balance Sheet by Country and Class of Customer';(b) Form SR-4 — 'Quarterly Balance Sheet by Currency';(c) Form SR-5 — 'Quarterly Classification of Loans and Advances to Domestic Non-banks'.(For instructions relating to the completion of the above mentioned returns, refer to Appendix BR 1 and for returns forms refer to Appendix BR 2)
BR-3.2.3
The returns included in Appendix BR 2 should be submitted to the Agency in electronic form (Excel spreadsheet) via email (to erdsr@bma.gov.bh ) no later than the 10th of the month following the end of the relevant quarter. One printed copy should also be delivered to the Financial Stability Directorate by the same date.
BR-4 BR-4 Regular reporting — Monthly requirements
BR-4.1 BR-4.1 All licensed banks
BR-4.1.1
The content of this section is applicable to all banks (or as stated otherwise) licensed by the Agency in the Kingdom of Bahrain.
Statistical returns
BR-4.1.2
All banks, referred to under paragraph BR-4.1.1, are required to submit to the Agency (Financial Stability Directorate) the following monthly statistical returns:
(a) Form SR-1 — 'Monthly Balance Sheet'; and(b) Form SR-2 — 'Monthly Classification ofDeposits and Other Liabilities to Banks and Non-banks'.(For instructions relating to the completion of the above mentioned returns, refer to Appendix BR 1 and for returns forms refer to Appendix BR 2)
BR-4.1.3
The returns included in Appendix BR 2 should be submitted to the Agency in electronic form (Excel spreadsheet) via email to erdsr@bma.gov.bh no later than the 10th of the month following the end of the relevant month. One printed copy should also be delivered to the Financial Stability Directorate by the same date.
Precious metals and commodities returns
BR-4.1.4
[This Paragraph deleted with effect from 1 July 2006].
Reserve requirements
BR-4.1.4a
The Banking Services Directorate will calculate the reserve requirement of each
Islamic bank licensee bank on a monthly basis using the figures reported in the monthly statistical report, Form SR-2 (see Rule BR-4.1.2 above) and will notify each bank of its required reserve (if any).BR-4.1.4b
The monthly reserve requirements will be calculated as 5% of the total of an
Islamic bank licensee's BDdeposits from non-banks and the BD Certificates of Deposit that it has issued to customers.BR-4.2 Full commercial banks
[This section deleted 07/2006]
BR-4.3 BR-4.3 Locally incorporated banks
BR-4.3.1
The content of this section is only applicable to locally incorporated banks.
Directors' interests in the shares of locally incorporated banks listed on the Bahrain Stock Exchange
BR-4.3.2
All locally incorporated banks listed on the Bahrain Stock Exchange are required to report to the Capital Markets Supervision Directorate of the Agency the following information, on a monthly basis, relating to their Directors:
(a) the number and type of interests of each Director in the shares (i.e. whether by shareholding,options etc.) of all such banks in which the respective Directors have interests in and the rights associated with such interests;(b) the date on which, and manner in which, such interests were acquired or disposed of (as the case may be);(c) the acquisition price paid, or disposal price received, for such interests; and(d) the person(s) from, or to, whom the interests in such shares were acquired or disposed (as the case may be).BR-4.3.3
The information required in paragraph BR-4.3.2 above should be submitted to the Agency no later than 15 days following the end of the relevant quarter.
BR-5 BR-5 Ad-hoc reporting and notification
BR-5.1 BR-5.1 All licensed banks
BR-5.1.1
The content of this section is applicable to all banks (licensed by the Agency) in the Kingdom of Bahrain.
Large exposures
BR-5.1.2
Should any bank find that, for reasons outside its control or otherwise, it has an
exposure to an individualcounterparty (other than an exemptexposure ) which results in it exceeding any of the limits set out under Chapter CM-5, this should be reported immediately to the Agency for its consideration, and action should be taken immediately to bring theexposure back within applicable limits as soon as possible.Changes in strategy and/or corporate plan
BR-5.1.3
All banks should notify the Agency, in writing, of all major changes (regardless of type and/or effect), including the establishment of branches, subsidiaries, SPVs and cross-border presences (see HC-1.5 for full text) to strategy or corporate plan prior to implementation.
Current management and changes thereto
BR-5.1.4
All banks should, on a continuous basis, keep the Agency informed, in writing, of the senior management positions held by relevant persons (including General Managers, Deputy General Managers and other senior persons). Such notification should include the following information:
(a) Full Name (and CPR for Bahrain resident management);(b) Contact details including address and emergency phone no;(c) Date of birth;(d) Place of birth (including town etc.);(e) Nationality;(f) Professional qualifications (by educational establishment and dates); and(g) Career details over the last ten years (with your institution or elsewhere).Changes in dealing staff
BR-5.1.7
All banks should notify the Agency of the following events, within 21 days of their occurrence:
(a) the appointment of a dealer, including promotion to Head of a Dealing function. The information provided should include details as set out under section HC-2.1.(b) the resignation, suspension, dismissal or departure from your institution for whatever reason of a dealer (including his/her transfer to other duties within your institution). The information provided should include details as set out under section HC-2.1.Appointment of a Compliance Manager/Officer
BR-5.1.8
All banks must notify the Agency of the appointment of a compliance manager/officer (refer to section HC-3.2), and must submit the appointee's Curriculum Vitae to the Agency. The Agency's approval must be received by the bank before the appointment becomes final. The bank should also outline how the compliance function fits into the bank's senior management reporting structure, and should give details of relevant reporting lines within the bank.
Money laundering and suspicious transactions
BR-5.1.9
The Money Laundering Reporting Officer (or his/her duly authorised delegate) must send a report to the Compliance Directorate of the BMA where he/she knows or has suspicions that a transaction might involve
money laundering or terrorist financing, either due to the customer's economic standing or because it meets one of the examples of suspicious transactions described in Appendix FC 3.Promotion of financial products and services offered in/from Bahrain by mean of incentives etc.
BR-5.1.10
The Agency should be sent copies of documentation relating to promotional schemes at least ten days prior to their launch for information purposes. Refer to chapter BC-1 for more details.
Authorised signatories
BR-5.1.11
In order to maintain an up-to-date record of authorised signatories of respective banks, the Agency requires all banks to submit to it a list of specimen signatures (and changes to it from time to time) of the officials authorised to sign on behalf of the concerned bank.
UN SCR 1373 (2001)
BR-5.1.12
The Agency requires all banks to notify it immediately of any act that might contravene the provisions of UN Security Council Resolution 1373 (2001). Banks should refer to chapter FC-8 for full details of this requirement.
Notification of fraud or other material concerns
BR-5.1.13
All banks must report immediately to the Agency any frauds, either attempted or realised, or any well-founded concerns about the integrity of individual Directors or members of management. This obligation to disclose extends to individual Board members and members of management: i.e. if a Director or member of management has reasonable grounds to believe that information that should have been reported to the Agency has not, then they have a duty to report the matter personally to the Agency. All such cases shall be treated in the strictest confidence by the Agency.
BR-5.1.14
All banks must report immediately to the Agency any material losses as soon as the bank becomes aware of them. This notification requirement is separate from notifications for loan write-offs (see BR-5.2.3) or frauds (see above), but refers to losses caused by external events (e.g. falls in stock markets) or internal control failures. In this context "material" would mean: a loss which exceeds 5% of net earnings in a given quarter; or a loss which reduces the bank's capital adequacy by more than 1%; or a loss which reduces total assets by more than 1%.
Accounts for charity organisations
BR-5.1.15
All banks, referred to under paragraph BR-5.1.1, should notify the Agency of any transfer of funds amounting to BD 3,000 or above (or equivalent in other currencies) from accounts held by the bank for charitable organisations registered in the Kingdom of Bahrain (also see section FC-1.6). Such notification should include details of amount transferred, account name and number, and beneficiary (name and location).
BR-5.2 BR-5.2 Locally incorporated banks
BR-5.2.1
The content of this section is applicable to all locally incorporated banks licensed by the Agency in the Kingdom of Bahrain.
Capital adequacy
BR-5.2.2
All banks, referred to under paragraph BR-5.2.1, must give the Agency immediate written notification of any actual breach by such banks of the minimum Risk Asset Ratio(s) (RAR) in accordance with section CA-2.5. Where such notification is given, the bank must also adhere to the additional notification and reporting requirements as set out under section CA-2.5.
Write-off of credit facility
BR-5.2.3
All banks, referred to under paragraph BR-5.2.1, should notify the Agency of any write-off of a credit facility, (i.e., loan, overdraft and any other credit facility) of an amount in excess of BD 100,000 (Bahraini Dinars One Hundred Thousand), or its equivalent in foreign currency. See section CM-7.1 for further details.
Use of behavioural adjustments to data provided under Section E of PIRI
BR-5.2.4
Banks may in certain circumstances apply to the Agency to use behavioural adjustments (Estimates) to their contractual data provided under Section E of PIRI Forms (also see section AU-3.7). Such application must be supported by data for a minimum period of two years and verified by external auditors.
BR-5.3 BR-5.3 Full commercial banks
BR-5.3.1
The content of this section is only applicable to full commercial banks licensed by the Agency in the Kingdom of Bahrain.
Introduction of new or expanded customer products and facilities
BR-5.3.2
All banks, referred to under paragraph BR-5.3.1, should notify the Agency of information relating to any new or expanded customer products and facilities in accordance with the requirements set out under section BC-4.7.
BR-5.3.3
[This Paragraph deleted July 2006.]
PD PD Public Disclosure Requirements
PD-A PD-A Introduction
PD-A.1 PD-A.1 Purpose
PD-A.1.1
The purpose of this module is to set out the rules and guidelines that banks should adhere to in order to enhance corporate and financial transparency through better public disclosure.
PD-A.1.2
This module provides support for certain other parts of the Rulebook, mainly:
(a) Principles of Business;(b) High Level Controls;(c) Audit Firms;(d) BMA Reporting Requirements;(e)Capital Adequacy ;(f) Business and Market Conduct; and(g) Risk Management (i.e. market, credit, liquidity and operational).PD-A.1.3
This module also provides support for certain aspects relating to disclosure requirements stipulated in the BMA Law (Amiri Decree Law No. 23 of 1973) and the Bahrain Commercial Companies Law of 2001 (as amended).
PD-A.2 PD-A.2 Key requirements
General guidance and best practice
PD-A.2.1
Section PD-B.2 lists the key guidance papers on disclosure as issued by the
Basel Committee on Banking Supervision and International Organization of Securities Commissions. These papers serve as international best practice in financial and other disclosures.Annual audited financial statements (annual reports)
PD-A.2.2
Locally incorporated banks are required to publish their audited financial statements per the rules set out in the BMA Law, Bahrain Commercial Companies Law of 2001 (as amended) and the Bahrain Stock Exchange regulations.
PD-A.2.3
Locally incorporated banks must, in their Annual Reports, provide timely information which facilitates market participants' assessment of them. There are seven broad categories of information (as set out in section PD-1.3 and section PD-1.4), each of which should be addressed in clear terms and with appropriate details to help achieve a satisfactory level of bank transparency.
Annual disclosure in the annual audited financial statements of banks listed on the Bahrain Stock Exchange (BSE)
PD-A.2.4
The Directors' Report attached to the annual financial statements of banks (referred to under section PD-1.4) should contain details of the interests of Directors, chief executive officers and managers (persons as defined under section HC-2.1, respectively) in the shares of such banks. Such details should include:
(a) total interests in the shares of such banks by individual persons mentioned above, and(b) changes in such interests from the previous financial year to the current financial year.Semi-annual disclosure by commercial branches of foreign banks
PD-A.2.5
Banks (referred to under section PD-2.2) are required by the Agency to prepare and disclose to the public the following information (in the same format as their Annual Audited Accounts) for their Bahrain operations on a semi-annual basis:
(a) Balance Sheet, and(b) Profit and Loss AccountsPublication of reviewed (unaudited) quarterly financial statements
PD-A.2.6
Banks should prepare reviewed (unaudited) quarterly financial statements on a quarterly basis in accordance with FAS 1 issued by AAOIFI. Such statements should be in the same form, and should be prepared on the same basis, as is required by FAS 1 for banks' annual published financial statements.
Disclosure of charges
PD-A.2.7
The Agency requires all FCBs to display, by a conspicuous notice, their current effective charges.
Disclosure relating to Deposit Protection Schemes (the 'Scheme')
PD-A.2.8
The Agency requires all FCBs to give prominence to the protection of
deposits afforded under the Deposit Protection Scheme (see chapter CP-2) — for example in related marketing materials and in general notices featured within banking halls and in account documentation, including audited financial statements.Public disclosure via the internet
PD-A.2.9
Non-listed locally incorporated OBUs and IBs may apply to the Agency to disclose their quarterly financial statements via the Internet. If a non-listed locally incorporated OBU or IB wishes to cease disclosure of quarterly financial statements via the local press and use the internet instead, it must satisfy the following criteria:
(a) The bank has no shareholders resident in Bahrain.(b) The bank has no customers resident in Bahrain. Customers include borrowers, depositors, investment account holders or persons from whom the bank earns fees or commissions. "Customers" in this context would not include other banks, but would include Bahraini corporations, the Government of Bahrain and its agencies, and private individuals (whether high net worth or not).(c) The bank does not market itself in any way to residents of Bahrain. In particular, the bank should not market funds or other financial products to residents, even if the bank has no on balance sheet assets or liabilities arising from Bahraini residents.PD-A.3 PD-A.3 Regulation history
PD-A.3.1
This module was first issued in January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter UG-3 of Module UG provides further details on Rulebook maintenance and control.
PD-A.3.2
A list of the most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes PD-2.1.5 & PD-3.1.7 Jan 2006 Revised notification for submission of accounts to the Agency PD-4.3 July 2006 Amendment to disclosure of charges requirements Evolution of the Module
PD-A.3.3
Prior to the development of this Rulebook, the Agency had issued various circulars representing regulations covering different aspects of public disclosure requirements. These circulars have now been consolidated into this module covering regulations relating to public disclosure requirements. These circulars and their evolution into this module are listed below:
Circular Ref. Date of Issue Module Ref. Circular Subject BC/4/99 17 Mar 1999 PD-1.3 Annual Accounts for the Year Ending 31 December 1999 BC/10/97 3 Aug 1997 PD-1.3 Accounting and Auditing Standards for Islamic Financial Institutions no reference
(partial)Apr 1981 PD-1.5 Precious Metals and Commodities BMA/751/93 8 Jul 1993 PD-1.1, PD-1.3, PD-1.4, PD-3.2 Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange. EDBC/782/93 17 Jul 1993 PD-1.1 The Interests of Directors, Chief Executive and Senior Managers in the Shares of Locally Incorporated Banks Quoted on the Bahrain Stock Exchange. BC/1/99 22 Feb 1999 PD-2.2 Enhancing Bank Transparency OG/73/02 17 Feb 2002 PD-4.2 Duty to Display Current Effective Rate of Interest ODG/248/2004 25 Jul 2004 PD-4.2 Consumer Finance BC/20/99 28 Sep 1999 PD-2.2 Enhancing Islamic Banks Transparency OG/107/01 3 Mar 2001 PD-4.3 Disclosure of BD Interest Rates OG/425/94 21 Dec 1994 PD-4.4 Deposit Protection OG/423/93 28 Nov 1993 PD-4.4 Deposit Protection Scheme (the "Scheme") Effective date
PD-A.3.4
The contents in this module are effective from the date depicted in the original circulars (see paragraph PD-A.3.3) from which the requirements complied.
PD-B PD-B General guidance and best practice
PD-B.1 PD-B.1 Guidance provided by international bodies
Basel Committee on Banking Supervision: Various papers
PD-B.1.2
The papers below set best practice standards and are to be taken as guidance by licensees in order to improve public disclosure practices:
• 'Enhancing Bank Transparency' — September 1998 (see www.bis.org/publ/bcbs41.pdf)• 'Sound Practices for Loan Accounting and Disclosure' — July 1999 (see www.bis.org/publ/bcbs55.pdf)• 'Best Practices for Credit Risk Disclosure' — September 2000 (see www.bis.org/publ/bcbs74.pdf)PD-B.1.3
In addition, the
Basel Committee , in conjunction with the International Organization of Securities Commissions (IOSCO) has issued the following papers that relate to the subject matter of this module:• 'Intra-group Transactions and Exposure Principles' — December 1999 (see www.bis.org/publ/bcbs62.pdf)• 'Risk Concentrations Principles' — December 1999 (see www.bis.org/publ/bcbs43.pdf)Basel Committee on Banking Supervision: Various papers [Deleted with Section PD-B.1.1 on April 2016]
PD-B.1.2 [Deleted with Section PD-B.1.1 on April 2016]
The papers below set best practice standards and are to be taken as guidance by licensees in order to improve public disclosure practices:
• 'Enhancing Bank Transparency' — September 1998 (see www.bis.org/publ/bcbs41.pdf)• 'Sound Practices for Loan Accounting and Disclosure' — July 1999 (see www.bis.org/publ/bcbs55.pdf)• 'Best Practices for Credit Risk Disclosure' — September 2000 (see www.bis.org/publ/bcbs74.pdf)• Basel II The Third Pillar — Market Discipline — June 2006.April 2008PD-B.1.3 [Deleted with Section PD-B.1.1 on April 2016]
In addition, the
Basel Committee , in conjunction with the International Organization of Securities Commissions (IOSCO) has issued the following papers that relate to the subject matter of this Module:• 'Recommendations for Public Disclosure of Trading and Derivatives Activities of Banks and Securities Firms' — October 1999 (see www.bis.org/publ/bcbs48.pdf)• 'Intra-group Transactions and Exposure Principles' — December 1999 (see www.bis.org/publ/bcbs62.pdf)• 'Risk Concentrations Principles' — December 1999 (see www.bis.org/publ/bcbs43.pdf)April 2008PD-B.1.4 [Deleted with Section PD-B.1.1 on April 2016]
The Islamic Financial Services Board has issued the following paper which makes recommended disclosures for Islamic banks:
• 'Disclosures to promote transparency and market discipline for institutions offering Islamic financial services — December 2006 (see www.ifsb.org/)April 2008PD-1 PD-1 Annual disclosure requirements
PD-1.1 PD-1.1 Introduction
PD-1.1.1
The purpose of the contents of this chapter is to set out the Agency's requirements relating to the disclosure of information in the bank's annual audited financial statements ('Annual Report'). This chapter also refers to the Bahrain Commercial Companies Law of 2001 (as amended) and the Bahrain Stock Exchange regulations relating to public disclosure and reporting requirements.
PD-1.1.2
For the purpose of this module, the following definitions apply:
(a) 'Director' includes any person who occupies the position of a Director and any person who appears to the Agency to be a Director (howsoever called) of the applicant/licensed locally incorporated banks and its subsidiaries;(b) 'Chief Executive/General Manager' means a person who is responsible under the immediate authority of the Directors for the conduct of the applicant/licensed locally incorporated bank, including its subsidiaries and overseasbranches , and Bahrainbranches of foreign banks;(c) 'Manager' means a person who, under the immediate authority of a Director or the chief executive/general manager, exercises major managerial function(s) or is responsible for maintaining accounts or other records of the applicant/licensed bank; and(d) 'Interest in the shares' shall include, but not be limited to, direct and/or indirect ownership of such shares, the right of voting associated with such shares, the right to receive dividends payable on such shares, and/or any right, regardless of the form thereof, to purchase (or otherwise acquire an interest in) such shares at any time.PD-1.2 PD-1.2 Publication of annual audited financial statements (Annual Reports)
PD-1.2.1
Locally incorporated banks are required to publish their audited financial statements per the rules set out in the BMA law, Bahrain Commercial Companies Law of 2001 (as amended) and the Bahrain Stock Exchange regulations (this latter obligation only applies to banks listed on the Bahrain Stock Exchange).
PD-1.2.2
The audited financial statements should be prepared in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). For products and activities not covered by AAOIFI, International Accounting Standards (IAS) should be followed.
PD-1.3 PD-1.3 Disclosure in the annual audited financial statements (Annual Reports)
General
PD-1.3.1
The audited financial statements should be prepared in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
PD-1.3.2
For products and activities not covered by the standards listed in paragraph PD-1.3.1, banks should follow the requirements of the International Accounting Standards (IAS) for preparation of audited financial statements.
Approval by the Board of Directors
PD-1.3.3
The accounts should be approved by the bank's Board of Directors, signed (normally by the Chairman and the Chief Executive Officer) and annotated as follows:
"These accounts were approved by the Board of Directors on [date] and signed on their behalf by [name/title] and [name/title]".
Investment accounts
PD-1.3.4
Restricted investment accounts are to be reported off balance sheet in the financial statements. Banks must provide disclosures as per the requirements of FAS 1: Presentation and Disclosure in the Financial Statements of Islamic Banks and Financial Institutions issued by AAOIFI.
PD-1.3.5
Unrestricted investment accounts are to be reported on balance sheet in the financial statements. The assets financed by the unrestricted investment accounts are to be included under the Assets section on the balance sheet (net of provisions). The equity of the unrestricted investment accounts should be shown between the liabilities and owners' equity sections. Disclosures and presentations must be in accordance with FAS 1 issued by AAOIFI.
Consolidation issues
PD-1.3.6
Where a parent or a group company operating in Bahrain receives funds on an unrestricted basis and these funds are invested with another group company on a restricted basis, these should be eliminated on consolidation. In the consolidated financial statements, investment of the PSIA outside the group should be reported as Unrestricted Investment Accounts. Disclosures and presentation should be in accordance with FAS 1 issued by AAOIFI.
Compliance
PD-1.3.7
The Annual Report should include a declaration by the external auditors that no violations have taken place of:
(a) the Bahrain Commercial Companies Law of 2001 (as amended);(b) the BMA Law that might have had a material effect on the business of the bank or on its financial position; and(c) the licensing and authorisation requirements and other rules and regulations issued by the Agency.In so far as the violations have any material impact on the financial statements of the bank.
PD-1.4 PD-1.4 Additional disclosure in the annual audited financial statements of banks listed on the Bahrain Stock Exchange (BSE)
PD-1.4.1
The content of this section is applicable only to locally incorporated banks listed on the Bahrain Stock Exchange (BSE).
PD-1.4.2
The disclosure requirements set out in this section for banks referred to under paragraph PD-1.4.1 are in addition to those set out in section PD-1.3.
Interests of Directors, chief executive officers and managers
PD-1.4.3
Without prejudice to any other requirement of Bahrain law (or any other direction of the Agency), the Directors' Report section of the annual audited financial statements of banks should contain details of the interests of Directors, chief executive officers and managers (persons as defined under section PD-1.1, respectively) in the shares of such banks. Such details should include:
(a) total interests in the shares of such banks by individual persons mentioned above, and(b) changes in such interests from the previous financial year to the current financial year.PD-1.4.4
For the purpose of the disclosure required under paragraph PD-1.4.3, any interests in the shares of a bank held by the spouse(s) or children of a Director, or any other person the control of whose interests in such shares lies ultimately with the Director, shall be deemed to be the interests of the relevant Director. For a definition of 'interest in the shares', see paragraph PD-1.1.2(d).
PD-1.5 PD-1.5 Disclosure relating to precious metals and commodities trading activities
PD-1.5.1
The content of this section is applicable to all licensed banks authorised to carry out activities related to trading in precious metals and
commodities in accordance with the requirements set out under chapter LR-5.Dealing authorisation
PD-1.5.2
All licensed banks authorized to carry out such dealing activities are required to show in their audited annual financial statements, as a note to or on the face of the balance sheet and profit and loss account, in addition to the disclosure requirements stated in this chapter, accounts detailing assets and liabilities related to precious metals and
commodities and their profit and loss account income attributable to such dealing.PD-2 PD-2 Semi-annual disclosure requirements
PD-2.1 PD-2.1 Disclosure by commercial branches of foreign banks
PD-2.1.1
The content of this section is applicable only to FCB
branches (licensed by the Agency) of foreign banks.PD-2.1.2
Banks (referred to under paragraph PD-2.1.1) are required by the Agency to prepare and disclose to the public the following information (in the same format as their Annual Audited Accounts) for their Bahrain operations on a semi-annual basis:
(a) Balance Sheet, and(b) Profit and Loss Accounts.PD-2.1.3
The statements referred to under paragraph PD-2.1.2 should be reviewed by the bank's external auditors, in accordance with International Standards on Auditing (ISA) applicable to Review engagements.
PD-2.1.4
These statements (referred to under paragraph PD-2.1.2) should be published in one local newspaper within eight weeks from the statements' date.
PD-2.1.5
Banks must submit a newspaper copy of the statements (referred to under paragraph PD-2.1.2) to the Agency within eight weeks from the statements' date. The copy should be accompanied by a letter clearly showing on which date and in which publication(s) the statements were published.
PD-3 PD-3 Quarterly disclosure requirements
PD-3.1 PD-3.1 Reviewed (unaudited) quarterly financial statements
PD-3.1.1
The content of this section is applicable only to locally incorporated banks licensed by the Agency.
PD-3.1.2
All banks referred to under paragraph PD-3.1.1 should prepare and disclose the following information to the public on a quarterly basis:
(a) A Statement of Financial Position (Balance Sheet)(b) An Income Statement(c) A Statement of Cash Flows(d) A Statement of Changes in Restricted Investment Accounts.(e) A Statement of Changes in Owners' Equity.(f) Changes to Accounting Policies.Presentation
PD-3.1.3
The presentation of the above statements should be in accordance with Financial Accounting Standards (FAS) No. 1 issued by the Accounting & Auditing Organization for Islamic Financial Institutions and the statements should be prepared on a consolidated basis.
PD-3.1.4
The statements should include comparative data for income related items to the identical period in, and the year to date for, the bank's previous financial year.
PD-3.1.5
The balance sheet should be compared with the balance sheet in the bank's previous audited annual accounts.
Review by External Auditors
PD-3.1.6
Such statements should be reviewed by banks' external auditors, in accordance with International Standards on Auditing and the Auditing Standards for Islamic Financial Institutions where applicable.
Publication
PD-3.1.7
The statements should be published in one of the local newspapers and a copy submitted to the Agency within eight weeks of the statements' date. The copy should be accompanied by a letter clearly showing on which date and in which publication(s) the statements were published.
Additional requirements
PD-3.1.8
The quarterly statements should include the following items:
(a) (as a minimum) each of the headings and subtotals included in the most recent annual financial statements as presented under FAS 1. Notes should be included if their omission would make the quarterly statement misleading.(b) Basic and diluted earnings per share in the earnings statement.(c) A statement to the effect that the same accounting policies and methods of computation are followed in the quarterly statements as compared with the most recent financial statements or, where these policies or methods have changed, a description of the nature and effect of the change.(d) Explanatory comments concerning the seasonality of the quarterly operations.(e) The nature and amount of any unusual items affecting assets, liabilities, income or cash flows.(f) Information on the nature and amount of changes in estimates of amounts reported in prior quarterly periods of the current financial year, or changes in estimates of amounts reported in prior financial years, if these changes have a material effect in the current quarterly period.(g) Issuances, repurchases, and repayments of securities.(h) Dividends paid (aggregate or per share) for shares.(i) Any material events subsequent to the end of the quarterly period that have not been reflected in the Financial Statements for the quarterly period should be outlined.(j) The effect of changes in the composition of the bank during the quarterly period, including business combinations, acquisitions or disposal of subsidiaries and long-term investments, restructurings and discontinuing operations should be stated.(k) Changes to contingent liabilities and contingent assets since the last annual balance sheet should be disclosed.PD-4 PD-4 Other public disclosure requirements
PD-4.1 PD-4.1 Introduction
PD-4.2 PD-4.2 Disclosure of key terms relating to a consumer finance agreement
PD-4.2.1
The content of this section is applicable to all FCBs licensed by the Agency.
PD-4.3 PD-4.3 Disclosure of charges on short-term financing facilities
PD-4.3.1
The content of this section is applicable to all FCBs licensed by the Agency.
PD-4.3.2
The Agency requires all FCBs to display, by a conspicuous notice, their scale of charges on BD short-term revolving facilities to commercial customers.
PD-4.3.3
'Conspicuous notice' means a written statement in both Arabic and English languages which is easily visible and legible and is displayed in all FCB premises open to the public.
PD-4.3.4
FCBs are left free to decide their own basis of charging and to make changes to it as they consider appropriate.
PD-4.3.5
FCBs must display a list of current charges including any standard charges and commissions that will be applied by the bank to individual services and transactions. See section BC-4.2 for further details.
PD-4.4 PD-4.4 Disclosure relating to Deposit Protection Scheme
PD-4.4.1
The content of this section is applicable to all FCBs licensed by the Agency.
PD-4.4.2
The Agency requires all FCBs referring (directly or indirectly) to the protection of
deposits in related marketing materials and in general notices featured within banking halls and in account documentation, including Annual Reports, to prominently disclose the following statement:"Subject to the provisions thereof,
deposits held with the Bahrain office of [name of the banking firm] are covered by the Deposit Protection Scheme established by the Bahrain Monetary Agency regulation concerning the establishment of a Deposit Protection Scheme and a Deposit Protection Board".PD-4.4.3
FCBs should, in discussions and/or correspondence with new and prospective customers, bring the Deposit Protection Scheme and the protection afforded by it to the customer's notice.
PD-4.4.4
The Agency welcomes the introduction by the banks, at their discretion, of other appropriate means to promote the Deposit Protection Scheme as prominently as possible.
PD-4.4.5
For detailed guidance on the Deposit Protection Scheme's documentation requirements, see chapter CP-2.
PD-5 PD-5 Public Disclosure via the Internet
PD-5.1 PD-5.1 Publication and disclosure of financial results
Existing requirements
PD-5.1.1
All locally incorporated banks are required to disclose their quarterly financial statements to the public within eight weeks of the end of each quarter. Disclosure to the public should be by way of an announcement in the local press of the balance sheet and profit and loss account (with certain other additional disclosures as outlined in chapters PD-1 to PD-4).
Criteria for application for disclosure via the internet
PD-5.1.2
Non-listed locally incorporated banks may apply to the Agency to disclose their quarterly financial statements via the internet. If a bank wishes to cease disclosure of quarterly financial statements via the local press, it must satisfy the following criteria:
(a) The bank has no shareholders resident in Bahrain.(b) The bank has no customers resident in Bahrain. Customers include borrowers, depositors, investment account holders or persons from whom the bank earns fees or commissions. "Customers" in this context would not include other banks, but would include Bahraini corporations, the Government of Bahrain and its agencies, and private individuals (whether high net worth or not).(c) The bank does not market itself in any way to residents of Bahrain. In particular, the bank should not market funds or other financial products to residents, even if the bank has no on balance sheet assets or liabilities arising from Bahraini residents.PD-5.1.3
Banks meeting all of the above criteria, may apply to the Agency to disclose their quarterly financial statements by way of their website instead of by way of the local press.
PD PD Public Disclosure Requirements [October 2007]
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PD-A PD-A Introduction
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PD-A.1 PD-A.1 Purpose
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PD-A.1.1
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The purpose of this Module is to set out the rules and guidelines that banks should adhere to in order to enhance corporate and financial transparency through better public disclosure.
October 07PD-A.1.2
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This Module provides support for certain other parts of the Rulebook, mainly:
(a) Principles of Business (Module PB);(b) High-level Controls (Module HC);(c) Audit Firms (Module AU);(d) CBB Reporting Requirements (Module BR);(e)Capital Adequacy (Module CA) ;(f) Business and Market Conduct (Module BC); and(g) Risk Management (i.e. market, credit, liquidity and operational) (Module OM).October 07PD-A.1.3
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This Module also provides support for certain aspects relating to disclosure requirements stipulated in the Decree No. 64 of 2006 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law') and the Bahrain Commercial Companies Law of 2001 (as amended).
October 07Legal Basis
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PD-A.1.4
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This Module contains the CBB's Directive relating to public disclosure and is issued under the powers available to the CBB under Article 38 of the Central Bank of Bahrain and Financial Institutions Law 2006 ('CBB Law'). The Directive in this Module is applicable to all
Islamic bank licensees .October 07PD-A.2 PD-A.2 Key requirements
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General guidance and best practice
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PD-A.2.1
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Section PD-B.2 lists the key guidance papers on disclosure as issued by the
Basel Committee on Banking Supervision and International Organisation of Securities Commissions. These papers serve as international best practice in financial and other disclosures.October 07Annual audited financial statements (annual reports)
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PD-A.2.2
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Locally incorporated banks are required to publish their audited financial statements per the rules set out in the CBB Law, Bahrain Commercial Companies Law of 2001 (as amended) and the Bahrain Stock Exchange regulations.
October 07PD-A.2.3
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Locally incorporated banks must, in their Annual Reports, provide timely information which facilitates market participants' assessment of them. There are seven broad categories of information (as set out in Section PD-1.3 and Section PD-1.4), each of which should be addressed in clear terms and with appropriate details to help achieve a satisfactory level of bank transparency.
October 07Annual disclosure in the annual audited financial statements of banks listed on the Bahrain Stock Exchange (BSE)
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PD-A.2.4
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The Directors' Report attached to the annual financial statements of banks (referred to under Section PD-1.4) should contain details of the interests of Directors, chief executive officers and managers (persons as defined under Section HC-2.1, respectively) in the shares of such banks. Such details should include:
(a) Total interests in the shares of such banks by individual persons mentioned above, and(b) Changes in such interests from the previous financial year to the current financial year.October 07Semi-annual disclosure by commercial branches of foreign banks
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PD-A.2.5
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Banks (referred to under Section PD-2.2) are required by the Central Bank to prepare and disclose to the public the following information (in the same format as their Annual Audited Accounts) for their Bahrain operations on a semi-annual basis:
(a) Balance Sheet, and(b) Profit and Loss AccountsOctober 07Publication of reviewed (unaudited) quarterly financial statements
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PD-A.2.6
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Banks should prepare reviewed (unaudited) quarterly financial statements on a quarterly basis in accordance with FAS 1 issued by AAOIFI. Such statements should be in the same form, and should be prepared on the same basis, as is required by FAS 1 for banks' annual published financial statements.
October 07Disclosure of charges
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PD-A.2.7
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The Central Bank requires all retail banks to display, by a conspicuous notice, their current effective charges.
October 07Disclosure relating to Deposit Protection Schemes (the "Scheme")
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PD-A.2.8
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The Central Bank requires all retail banks to give prominence to the protection of
deposits afforded under the Deposit Protection Scheme (see Chapter CP-2) - for example in related marketing materials and in general notices featured within banking halls and in account documentation, including audited financial statements.October 07Public disclosure via the internet
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PD-A.2.9
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Non-listed locally incorporated OBUs and IBs may apply to the Central Bank to disclose their quarterly financial statements via the Internet. If a non-listed locally incorporated OBU or IB wishes to cease disclosure of quarterly financial statements via the local press and use the internet instead, it must satisfy the following criteria:
(a) The bank has no shareholders resident in Bahrain.(b) The bank has no customers resident in Bahrain. Customers include borrowers, depositors, investment account holders or persons from whom the bank earns fees or commissions. 'Customers' in this context would not include other banks, but would include Bahraini corporations, the Government of Bahrain and its agencies, and private individuals (whether high net worth or not).(c) The bank does not market itself in any way to residents of Bahrain. In particular, the bank should not market funds or other financial products to residents, even if the bank has no on balance sheet assets or liabilities arising from Bahraini residents.October 07PD-A.3 PD-A.3 Module History
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PD-A.3.1
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This Module was first issued in January 2005 by the BMA as part of the Islamic principles volume. All regulations in this volume have been effective since this date. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.
October 07PD-A.3.2
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When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 2 was updated in October 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.
October 07PD-A.3.3
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A list of the most recent changes made to this Module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes PD-2.1.5 & 3.1.7 Jan 2006 Revised notification for submission of accounts to the Central Bank. PD-4.3 July 2006 Amendment to disclosure of charges requirements. PD-A.1.4 10/2007 New Rule PD-A.1.4 introduced categorising this Module as a Directive. PD-1.3 10/2007 New Rule PD-1.3.8 requiring disclosure of penalties paid October 07Evolution of the Module
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PD-A.3.4
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Prior to the development of this Rulebook, the Central Bank had issued various circulars representing regulations covering different aspects of public disclosure requirements. These circulars have now been consolidated into this Module covering regulations relating to public disclosure requirements. These circulars and their evolution into this Module are listed below:
Circular Ref. Date of Issue Module Ref. Circular Subject BC/4/99 17 Mar 1999 PD-1.3 Annual Accounts for the Year Ending 31 December 1999. BC/10/97 3 Aug 1997 PD-1.3 Accounting and Auditing Standards for Islamic Financial Institutions. no reference (partial) Apr 1981 PD-1.5 Precious Metals and Commodities. CBB/751/93 8 Jul 1993 PD-1.1, PD-1.3, PD-1.4, PD-3.2 Directors' Interest in the Shares of, and the Unaudited Quarterly Financial Statements of, Locally Incorporated Banks Quoted on the Bahrain Stock Exchange. EDBC/782/93 17 Jul 1993 PD-1.1 The Interests of Directors, Chief Executive and Senior Managers in the Shares of Locally Incorporated Banks Quoted on the Bahrain Stock Exchange. BC/1/99 22 Feb 1999 PD-2.2 Enhancing Bank Transparency. OG/73/02 17 Feb 2002 PD-4.2 Duty to Display Current Effective Rate of Interest. ODG/248/2004 25 Jul 2004 PD-4.2 Consumer Finance. BC/20/99 28 Sep 1999 PD-2.2 Enhancing Islamic Banks Transparency. OG/107/01 3 Mar 2001 PD 4.3 Disclosure of BD Interest Rates OG/425/94 21 Dec 1994 PD 4.4 Deposit Protection OG/423/93 28 Nov 1993 PD 4.4 Deposit Protection Scheme (the 'Scheme') October 07Effective date
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PD-A.3.5
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The contents in this Module are effective from the date depicted in the original circulars (see Paragraph PD-A-3.3) from which the requirements are compiled.
October 07PD-B PD-B General guidance and best practice
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PD-B.1 PD-B.1 Guidance provided by international bodies
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PD-B.1.1
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This Chapter provides general guidance on public disclosure requirements.
October 07Basel Committee on Banking Supervision: Various papers
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PD-B.1.2
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The papers below set best practice standards and are to be taken as guidance by licensees in order to improve public disclosure practices:
• 'Enhancing Bank Transparency' – September 1998 (seewww.bis.org/publ/bcbs41.pdf )• 'Sound Practices for Loan Accounting and Disclosure' – July 1999 (seewww.bis.org/publ/bcbs55.pdf )• 'Best Practices for Credit Risk Disclosure' – September 2000 (seewww.bis.org/publ/bcbs74.pdf )October 07PD-B.1.3
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In addition, the
Basel Committee , in conjunction with the International Organisation of Securities Commissions (IOSCO) has issued the following papers that relate to the subject matter of this Module:• 'Intra-group Transactions and Exposure Principles' – December 1999 (seewww.bis.org/publ/bcbs62.pdf )• 'Risk Concentrations Principles' – December 1999 (seewww.bis.org/publ/bcbs43.pdf )October 07PD-1 PD-1 Annual disclosure requirements
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PD-1.1 PD-1.1 Introduction
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PD-1.1.1
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The purpose of the contents of this Chapter is to set out the Central Bank's requirements relating to the disclosure of information in the bank's annual audited financial statements ('Annual Report'). This Chapter also refers to the Bahrain Commercial Companies Law of 2001 (as amended) and the Bahrain Stock Exchange regulations relating to public disclosure and reporting requirements.
October 07PD-1.1.2
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For the purpose of this Module, the following definitions apply:
(a) 'Director' includes any person who occupies the position of a Director and any person who appears to the Central Bank to be a Director (howsoever called) of the applicant/licensed locally incorporated banks and its subsidiaries;(b) 'Chief Executive/General Manager' means a person who is responsible under the immediate authority of the Directors for the conduct of the applicant/licensed locally incorporated bank, including its subsidiaries and overseasbranches , and Bahrainbranches of foreign banks;(c) 'Manager' means a person who, under the immediate authority of a Director or the chief executive/general manager, exercises major managerial function(s) or is responsible for maintaining accounts or other records of the applicant/licensed bank; and(d) 'Interest in the shares' shall include, but not be limited to, direct and/or indirect ownership of such shares, the right of voting associated with such shares, the right to receive dividends payable on such shares, and/or any right, regardless of the form thereof, to purchase (or otherwise acquire an interest in) such shares at any time.October 07PD-1.2 PD-1.2 Publication of annual audited financial statements (Annual Reports)
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PD-1.2.1
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Locally incorporated banks are required to publish their audited financial statements per the rules set out in the CBB law, Bahrain Commercial Companies Law of 2001 (as amended) and the Bahrain Stock Exchange regulations (this latter obligation only applies to banks listed on the Bahrain Stock Exchange).
October 07PD-1.2.2
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The audited financial statements should be prepared in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). For products and activities not covered by AAOIFI, International Accounting Standards (IAS) should be followed.
October 07PD-1.3 PD-1.3 Disclosure in the annual audited financial statements (Annual Reports)
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General
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PD-1.3.1
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The audited financial statements should be prepared in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
October 07PD-1.3.2
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For products and activities not covered by the standards listed in Paragraph PD 1.3.1, banks should follow the requirements of the International Accounting Standards (IAS) for preparation of audited financial statements.
October 07Approval by the Board of Directors
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PD-1.3.3
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The accounts should be approved by the bank's Board of Directors, signed (normally by the Chairman and the Chief Executive Officer) and annotated as follows:
'These accounts were approved by the Board of Directors on [date] and signed on their behalf by [name/title] and [name/title]'.
October 07Investment accounts
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PD-1.3.4
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Restricted investment accounts are to be reported off-balance sheet in the financial statements. Banks must provide disclosures as per the requirements of FAS 1: Presentation and Disclosure in the Financial Statements of Islamic Banks and Financial Institutions issued by AAOIFI.
October 07PD-1.3.5
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Unrestricted investment accounts are to be reported on-balance sheet in the financial statements. The assets financed by the unrestricted investment accounts are to be included under the Assets Section on the balance sheet (net of provisions). The equity of the unrestricted investment accounts should be shown between the liabilities and owners' equity Sections. Disclosures and presentations must be in accordance with FAS 1 issued by AAOIFI.
October 07Consolidation issues
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PD-1.3.6
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Where a parent or a group company operating in Bahrain receives funds on an unrestricted basis and these funds are invested with another group company on a restricted basis, these should be eliminated on consolidation. In the consolidated financial statements, investment of the PSIA outside the group should be reported as Unrestricted Investment Accounts. Disclosures and presentation should be in accordance with FAS 1 issued by AAOIFI.
October 07Compliance
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PD-1.3.7
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The Annual Report should include a declaration by the external auditors that no violations have taken place of:
(a) The Bahrain Commercial Companies Law of 2001 (as amended);(b) The CBB Law that might have had a material effect on the business of the bank or on its financial position; and(c) The licensing and authorisation requirements and other rules and regulations issued by the Central Bank.In so far as the violations have any material impact on the financial statements of the bank.
October 07PD-1.3.8
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The Annual Report must disclose the amount of any penalties paid to the Central Bank during the period of the report together with a factual description of the reason(s) given by the Central Bank for the penalty (see Section EN-1.3). Failure to comply with this requirement will mean that the concerned bank will be required to make the disclosure in the subsequent quarterly financial statement and in the subsequent annual financial statement. A financial penalty for non-disclosure will also be levied upon the concerned bank.
October 07PD-1.4 PD-1.4 Additional disclosure in the annual audited financial statements of banks listed on the Bahrain Stock Exchange (BSE)
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PD-1.4.1
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The content of this Section is applicable only to locally incorporated banks listed on the Bahrain Stock Exchange (BSE).
October 07PD-1.4.2
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The disclosure requirements set out in this Section for banks referred to under Paragraph PD-1.4.1 are in addition to those set out in Section PD-1.3.
October 07Interests of Directors, chief executive officers and managers
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PD-1.4.3
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Without prejudice to any other requirement of Bahrain law (or any other direction of the Central Bank), the Directors' Report Section of the annual audited financial statements of banks should contain details of the interests of Directors, chief executive officers and managers (persons as defined under Section PD-1.1, respectively) in the shares of such banks. Such details should include:
(a) Total interests in the shares of such banks by individual persons mentioned above, and(b) Changes in such interests from the previous financial year to the current financial year.October 07PD-1.4.4
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For the purpose of the disclosure required under Paragraph PD-1.4.3, any interests in the shares of a bank held by the spouse(s) or children of a Director, or any other person the control of whose interests in such shares lies ultimately with the Director, shall be deemed to be the interests of the relevant Director. For a definition of 'interest in the shares', see Paragraph PD-1.1.2(d).
October 07PD-1.5 PD-1.5 Disclosure relating to precious metals and commodities trading activities
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PD-1.5.1
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The content of this Section is applicable to all licensed banks authorised to carry out activities related to trading in precious metals and
commodities in accordance with the requirements set out under Chapter LR-5.October 07Dealing authorisation
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PD-1.5.2
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All licensed banks authorized to carry out such dealing activities are required to show in their audited annual financial statements, as a note to or on the face of the balance sheet and profit and loss account, in addition to the disclosure requirements stated in this Chapter, accounts detailing assets and liabilities related to precious metals and
commodities and their profit and loss account income attributable to such dealing.October 07PD-2 PD-2 Semi-annual disclosure requirements
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PD-2.1 PD-2.1 Disclosure by commercial branches of foreign banks
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PD-2.1.1
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The content of this Section is applicable only to retail bank
branches (licensed by the Central Bank) of foreign banks.October 07PD-2.1.2
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Banks (referred to under Paragraph PD-2.1.1) are required by the Central Bank to prepare and disclose to the public the following information (in the same format as their Annual Audited Accounts) for their Bahrain operations on a semi-annual basis:
(a) Balance Sheet, and(b) Profit and Loss Accounts.October 07PD-2.1.3
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The statements referred to under Paragraph PD-2.1.2 should be reviewed by the bank's external auditors, in accordance with International Standards on Auditing (ISA) applicable to Review engagements.
October 07PD-2.1.4
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These statements (referred to under Paragraph PD-2.1.2) should be published in one local newspaper within eight weeks from the statements' date.
October 07PD-2.1.5
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Banks must submit a newspaper copy of the statements (referred to under Paragraph PD-2.1.2) to the Central Bank within eight weeks from the statements' date. The copy should be accompanied by a letter clearly showing on which date and in which publication(s) the statements were published.
October 07PD-3 PD-3 Quarterly disclosure requirements
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PD-3.1 PD-3.1 Reviewed (unaudited) quarterly financial statements
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PD-3.1.1
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The content of this Section is applicable only to locally incorporated banks licensed by the Central Bank.
October 07PD-3.1.2
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All banks referred to under Paragraph PD-3.1.1 should prepare and disclose the following information to the public on a quarterly basis:
(a) A Statement of Financial Position (Balance Sheet)(b) An Income Statement(c) A Statement of Cash Flows(d) A Statement of Changes in Restricted Investment Accounts.(e) A Statement of Changes in Owners' Equity.(f) Changes to Accounting Policies.October 07Presentation
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PD-3.1.3
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The presentation of the above statements should be in accordance with Financial Accounting Standards (FAS) No. 1 issued by the Accounting & Auditing Organisation for Islamic Financial Institutions and the statements should be prepared on a consolidated basis.
October 07PD-3.1.4
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The statements should include comparative data for income related items to the identical period in, and the year to date for, the bank's previous financial year.
October 07PD-3.1.5
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The balance sheet should be compared with the balance sheet in the bank's previous audited annual accounts.
October 07Review by External Auditors
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PD-3.1.6
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Such statements should be reviewed by banks' external auditors, in accordance with International Standards on Auditing and the Auditing Standards for Islamic Financial Institutions where applicable.
October 07Publication
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PD-3.1.7
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The statements should be published in one of the local newspapers and a copy submitted to the Central Bank within eight weeks of the statements' date. The copy should be accompanied by a letter clearly showing on which date and in which publication(s) the statements were published.
October 07Additional requirements
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PD-3.1.8
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The quarterly statements should include the following items:
(a) (As a minimum) each of the headings and subtotals included in the most recent annual financial statements as presented under FAS 1. Notes should be included if their omission would make the quarterly statement misleading.(b) Basic and diluted earnings per share in the earnings statement.(c) A statement to the effect that the same accounting policies and methods of computation are followed in the quarterly statements as compared with the most recent financial statements or, where these policies or methods have changed, a description of the nature and effect of the change.(d) Explanatory comments concerning the seasonality of the quarterly operations.(e) The nature and amount of any unusual items affecting assets, liabilities, income or cash flows.(f) Information on the nature and amount of changes in estimates of amounts reported in prior quarterly periods of the current financial year, or changes in estimates of amounts reported in prior financial years, if these changes have a material effect in the current quarterly period.(g) Issuances, repurchases, and repayments of securities.(h) Dividends paid (aggregate or per share) for shares.(i) Any material events subsequent to the end of the quarterly period that have not been reflected in the Financial Statements for the quarterly period should be outlined.(j) The effect of changes in the composition of the bank during the quarterly period, including business combinations, acquisitions or disposal of subsidiaries and long-term investments, restructurings and discontinuing operations should be stated.(k) Changes to contingent liabilities and contingent assets since the last annual balance sheet should be disclosed.October 07PD-4 PD-4 Other public disclosure requirements
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PD-4.1 PD-4.1 Introduction
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PD-4.1.1
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The purpose of the contents of this Chapter is to set out the Central Bank's requirements relating to other public disclosure of information by the banks, not covered in Chapters PD-1 to PD-3.
October 07PD-4.2 PD-4.2 Disclosure of key terms relating to a consumer finance agreement
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PD-4.2.1
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The content of this Section is applicable to all retail banks licensed by the Central Bank.
October 07PD-4.3 PD-4.3 Disclosure of charges on short-term financing facilities
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PD-4.3.1
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The content of this Section is applicable to all retail banks licensed by the Central Bank.
October 07PD-4.3.2
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The Central Bank requires all retail banks to display, by a conspicuous notice, their scale of charges on BD short-term revolving facilities to commercial customers.
October 07PD-4.3.3
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'Conspicuous notice' means a written statement in both Arabic and English languages which is easily visible and legible and is displayed in all retail banks' premises open to the public.
October 07PD-4.3.4
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Retail banks are left free to decide their own basis of charging and to make changes to it as they consider appropriate.
October 07PD-4.3.5
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Retail banks must display a list of current charges including any standard charges and commissions that will be applied by the bank to individual services and transactions. See Section BC 4.2 for further details.
October 07PD-4.4 PD-4.4 Disclosure relating to Deposit Protection Scheme
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PD-4.4.1
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The content of this Section is applicable to all retail banks licensed by the Central Bank.
October 07PD-4.4.2
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The Central Bank requires all retail banks referring (directly or indirectly) to the protection of
deposits in related marketing materials and in general notices featured within banking halls and in account documentation, including Annual Reports, to prominently disclose the following statement:• 'Subject to the provisions thereof,deposits held with the Bahrain office of [name of the banking firm] are covered by the Deposit Protection Scheme established by the Central Bank of Bahrain regulation concerning the establishment of a Deposit Protection Scheme and a Deposit Protection Board'.October 07PD-4.4.3
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Retail banks should, in discussions and/or correspondence with new and prospective customers, bring the Deposit Protection Scheme and the protection afforded by it to the customer's notice.
October 07PD-4.4.4
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The Central Bank welcomes the introduction by the banks, at their discretion, of other appropriate means to promote the Deposit Protection Scheme as prominently as possible.
October 07PD-5 PD-5 Public Disclosure via the Internet
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PD-5.1 PD-5.1 Publication and disclosure of financial results
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Existing requirements
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PD-5.1.1
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All locally incorporated banks are required to disclose their quarterly financial statements to the public within eight weeks of the end of each quarter. Disclosure to the public should be by way of an announcement in the local press of the balance sheet and profit and loss account (with certain other additional disclosures as outlined in Chapters PD-1 to PD-3).
October 07Criteria for application for disclosure via the internet
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PD-5.1.2
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Non-listed locally incorporated banks may apply to the Central Bank to disclose their quarterly financial statements via the internet. If a bank wishes to cease disclosure of quarterly financial statements via the local press, it must satisfy the following criteria:
(a) The bank has no shareholders resident in Bahrain.(b) The bank has no customers resident in Bahrain. Customers include borrowers, depositors, investment account holders or persons from whom the bank earns fees or commissions. 'Customers' in this context would not include other banks, but would include Bahraini corporations, the Government of Bahrain and its agencies, and private individuals (whether high net worth or not).(c) The bank does not market itself in any way to residents of Bahrain. In particular, the bank should not market funds or other financial products to residents, even if the bank has no on balance sheet assets or liabilities arising from Bahraini residents.October 07PD-5.1.3
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Banks meeting all of the above criteria, may apply to the Central Bank to disclose their quarterly financial statements by way of their website instead of by way of the local press.
October 07Enforcement & Redress
CP CP Compensation [1 October 2007 to 30 September 2012]
CP-A CP-A Introduction
CP-A.1 CP-A.1 Purpose
CP-A.1.1
The purpose of this Module is to set out rules and regulations establishing a Deposit Protection Scheme (the 'Scheme') for compensating eligible depositors (as defined under Section CP-2.1) when the banks (referred to under Section CP-2.1) are unable, or likely to be unable, to satisfy claims against them.
October 07CP-A.1.2
The body established to operate and administer the compensation scheme is the Deposit Protection Board (the 'Board'). The Module sets out rules and regulations that would allow the Board to:
(a) Administer and implement the scheme;(b) Calculate compensation amount; and(c) Establish rules of operation.Amended: January 2011
October 07CP-A.1.3
The Module also specifies:
(a) Who is eligible for receiving compensation;(b) How the scheme will be funded;(c) Who the contributing banks are; and(d) What are contributing banks' responsibilities regarding the implementation of the scheme.Amended: January 2011
October 07Legal Basis
CP-A.1.4
This Module sets out how the CBB now applies Resolution No. 3 of His Highness the Prime Minister dated 1st November 1993 (the "Resolution") in light of certain legislative and regulatory changes that have taken place since that date. It also contains a modified version of a Regulation issued by the Bahrain Monetary Agency by way of circular (OG/423/93) on 28th November 1993 (the "Regulation") in order to implement the Resolution. The Regulation (as modified) is currently effective by virtue of Article 188 (and Article 4) of the Central Bank of Bahrain and Financial Institutions Law 2006 ("CBB Law"). The Regulation is applicable to all
Islamic bank licensees .Adopted: January 2011CP-A.1.5
For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1
Adopted: January 2011CP-A.2 CP-A.2 Key Requirements
CP-A.2.1
The Deposit Protection Board (the 'Board') should, subject to and in accordance with the terms and conditions of the regulations in this Module, be responsible for the activities set out under Section CP-1.1.
October 07CP-A.2.2
The Board should be convened and ready to carry out its duties in the case of any of the following events identified under Section CP-2.
October 07CP-A.2.3
The Scheme will apply to eligible
deposits (as defined in Section CP-2.1) held with the Bahrain offices of retail banks which are licensed by the CBB.Amended: January 2011
October 07CP-A.2.4
Each eligible depositor should be entitled to receive under the Scheme a maximum of the lesser of:
(a) Three quarters of the combined total amount of all of his eligibledeposits with the relevant bank; or(b) BD 15,000.Amended: January 2011
October 07CP-A.2.5
Notwithstanding the provisions of Section CP-2.2, the amount payable under the Scheme in any one calendar year (the 'current year') should not exceed BD 25,000,000.
October 07CP-A.2.6
Upon the convening of the Board in accordance with Section CP-1.2, the Board will calculate the total amount of compensation to be paid under the Scheme in the case of the relevant bank, as well as the amount of compensation payable under the Scheme to each eligible depositor of such relevant bank.
October 07CP-A.2.7
Upon receipt by the Board of confirmation from the (lead) mandated bank that the actions referred to in Section CP-2.3 have been completed, each eligible depositor should be sent a certificate in duplicate (attached in Appendix CP-1) by the Board informing such eligible depositor of the amount of compensation payable to him/her under the Scheme in respect of his/her eligible
deposit (s) with the relevant bank.October 07CP-A.2.8
The CBB requires all retail bank licensees referring (directly or indirectly) to the protection of
deposits in related marketing materials and in general notices featured within banking halls and in account documentation, including Annual Reports, to prominently disclose the statement set out under Section CP-2.4.Amended: January 2011
October 07CP-A.3 CP-A.3 Module History
CP-A.3.1
This Module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter 3 of Module UG provides further details on Rulebook maintenance and control.
October 07CP-A.3.2
A list of the most recent changes made to this Module are detailed in the table below:
Summary of Changes
Module Ref. Change Date Description of Changes CP-1.2 10/07 New reference to CBB Law CP-2.4 10/07 Renaming of Scheme Disclosure to "CBB" CP 01/2011 Various minor amendments to ensure consistency in formatting of CBB Rulebook. CP-A.1.4 01/2011 Added legal basis. Evolution of the Module
CP-A.3.3
Prior to the development of the Rulebook, the CBB had issued various circulars representing regulations covering the operations and establishment of the Deposit Protection Scheme and the Deposit Protection Board. These circulars have now been consolidated into the Compensation Module. These circulars and their evolution into this Module are listed below:
Circular Ref. Date of Issue Module Ref. Circular Subject OG/423/93 28 Nov 1993 CP-1 — CP-2 Deposit Protection Scheme (the "Scheme"). OG/425/94 21 Dec 1994 CP-2.4 Deposit Protection. Amended: January 2011
October 07Effective Date
CP-A.3.4
The contents in this Module are effective from the date depicted in the original circulars/information pack (see Paragraph CP-A.3.3) from which the requirements are compiled.
October 07CP-1 CP-1 Deposit Protection Board (the 'Board')
CP-1.1 CP-1.1 Constitution of the Board
CP-1.1.1
The contents of this chapter set out the details of the constitution, authority and administration of the Deposit Protection Board (the 'Board').
October 07CP-1.1.2
The Deposit Protection Board (the 'Board') should, subject to and in accordance with the terms and conditions of this Module, be responsible for:
(a) The administration and implementation of a Deposit Protection Scheme (the 'Scheme');(b) The determination of the amount of compensation which is to be paid out under the Scheme in the event of the liquidation of a relevant bank (as defined in Section CP-1.2 below); and(c) The establishment of the rules of operation of the Board.Amended: January 2011
October 07CP-1.1.3
The Board should consist of the following persons, whose period of membership of the Board (other than in the case of the person referred to in Paragraph CP-1.1.3(e) below) should be for a three year renewable period:
(a) Two representatives of the CBB, who shall be appointed by the Governor of the CBB, one of whom should be Chairman of the Board;(b) Four representatives of commercial banking firms in Bahrain, who should be appointed by the Governor of the CBB following consultation with the Bankers' Society of Bahrain;(c) One representative of each of the Ministries of Finance and National Economy, of Justice and Islamic Affairs, and of Commerce, who should be appointed by their Ministers;(d) One representative of the Bahrain Chamber of Commerce and Industry, who should be appointed by the President thereof; and(e) Upon a commercial banking firm becoming a relevant bank in accordance with Section CP-1.2, and for the purpose of the operation of the Scheme in the case of that relevant bank only, the liquidator of such relevant bank.Amended: January 2011
October 07CP-1.1.4
Upon the appointment of the members of the Board (other than the person referred to in Paragraph CP-1.1.3(e) above), the Board shall be formally constituted by a Resolution of the Minister of Finance.
October 07CP-1.2 CP-1.2 Convening of the Board
CP-1.2.1
The Board should be convened and ready to carry out its duties in the case of:
(a) A forced liquidation carried out pursuant to the CBB Law, no later than 7 calendar days after the CBB has applied to the Minister of Finance, under the provisions of Article 143 of the CBB Law, for his approval for an application to be made to the Bahrain courts for an insolvent banking firm (herein referred to as the 'relevant bank') in accordance with Article 144 and 145 of the pre-mentioned Law, or(b) The liquidation of a relevant bank in any other case, no later than 7 days after the CBB is informed that a relevant bank is to be wound up.Amended: January 2011
October 07CP-1.3 CP-1.3 Voting by the Board
CP-1.3.1
The Board should meet as often as is necessary to carry out its duties under the regulation set out in this Module and should take decisions by a simple majority vote of those present at any meeting thereof provided that, in the event of a tie, the Chairman will have the casting vote.
October 07CP-1.3.2
Decisions of the Board will be binding and will not be subject to appeal.
October 07CP-2 CP-2 Deposit Protection Scheme (the 'Scheme')
CP-2.1 CP-2.1 Application of the Scheme
CP-2.1.1
The Scheme will apply to eligible
deposits (as defined in Paragraph CP-2.1.5 below) held with the Bahrain offices of retail bank licensees which are licensed by the CBB. These retail banks (excluding the relevant bank as referred to under Section CP-1.2) are herein referred to as the 'contributing banks' which term will, unless otherwise stated herein, include the mandated bank(s) as defined in Section CP 2.3 below.Amended: January 2011
October 07CP-2.1.2
Without prejudice to Paragraph CP-2.1.1 above, the Board may, at its discretion, exclude (in whole or in part) from compensation under the Scheme, any depositors of a relevant bank in Bahrain who are entitled to claim in a similar scheme established in another jurisdiction, where such scheme covers the
deposit liabilities of the Bahrain offices of such relevant bank; andOctober 07CP-2.1.3
Without prejudice to Paragraph CP-2.1.1 above, the Board may, at its discretion, exclude (in whole or in part) from the requirement to contribute to the Scheme, any retail bank licensee in Bahrain whose Bahrain offices'
deposit liabilities are (in whole or in part) covered by a similar scheme established in another jurisdiction provided that evidence, in form and substance satisfactory to it, of such coverage is provided to the Board.October 07CP-2.1.4
Subject to the provision of Paragraph CP-2.1.6 below, the Scheme will apply to
deposits (each an 'eligibledeposit ') held with the Bahrain offices of retail bank licensees, in Bahrain Dinars and other currencies, by persons (each an 'eligible depositor') who are eitherresidents or non-residents of Bahrain.October 07CP-2.1.5
In accordance with the Prime Ministerial Resolution No. (3) of 1993 with respect to the Deposit Protection Scheme, '
deposit ' shall mean a current, call, saving and/or fixeddeposit in Bahrain Dinars or other currencies, as well as non-bearer Certificates of Deposit denominated in Bahrain Dinars or other currencies issued by the relevant bank.Amended: April 2010
October 2007CP-2.1.6
Without prejudice to the provisions of Paragraph CP-2.1.4 above, the Scheme will not apply to
deposits which have, in the opinion of the Board, been illegally gained and/or relate to illicit or illegal matters. The Scheme will also not apply todeposits of:(a) The Bahrain Government and Bahrain Government Agencies (which shall, for the purposes of this Regulation, mean entities in which the Bahrain Government holds 50% or more of the share capital);(b) Other banks including, for the sake of clarity, the CBB;(c) The parent, subsidiaries, associates or affiliates of the relevant bank;(d) Directors, shareholders with more than 5% shareholding (ordinary and/or preference), or managers of the relevant bank; and/or(e) Persons whose identity cannot be ascertained.Amended: January 2011
October 07CP-2.2 CP-2.2 Operation of the Scheme
CP-2.2.1
Each eligible depositor should be entitled to receive under the Scheme a maximum of the lesser of:
(a) Three quarters of the combined total amount of all of his eligibledeposits with the relevant bank, or(b) BD 15,000,irrespective of the number, type, value and currency of eligible
deposits held by such eligible depositor with the relevant bank at the time the Scheme is put into operation for such relevant bank.Amended: January 2011
October 07CP-2.2.2
The amount referred to in Paragraph CP-2.2.1 above may be amended from time to time by the CBB. In calculating the amount payable in each case hereunder, the Board will be entitled to take account of various matters including, but not limited to, any set off rights to which the relevant bank was entitled against an eligible depositor or an eligible
deposit at the proposed date for the making of such payment as well as any amounts paid out during the period of administration of the relevant bank by the CBB (if appropriate), and the amount payable hereunder shall be reduced accordingly.Amended: January 2011
October 07CP-2.2.3
Notwithstanding the provisions of Paragraph CP-2.2.1 above, the amount payable under the Scheme in any one calendar year (the 'current year') should not exceed BD 25,000,000 (regardless of the number of relevant banks in existence in the year), provided that if circumstances so demand (and subject to the prior approval of the Governor of the CBB being obtained) the Board (which term for this Paragraph, will not include the liquidator of a relevant bank) may make available to the Scheme for the current year:
(a) Any portion of the above amount for the calendar year immediately preceding the current year which has not been utilized in that calendar year; together with(b) Any portion of the above amount for the calendar year immediately following the current year.The Board may, from time to time and with the prior approval of the Governor of the CBB, amend the figure of BD 25,000,000 referred to in this Paragraph.
Amended: January 2011
October 07CP-2.2.4
In the event that the amount to be payable under the Scheme to eligible depositors of a relevant bank in accordance with Paragraph CP-2.2.1 above is greater than the maximum sum determined to be available in the Scheme for such relevant bank under Paragraph CP-2.2.3 above, the amounts determined to be payable to such eligible depositors under Paragraph CP-2.2.1 above should be made on a pro rata basis in accordance with a formula to be determined by the Board.
October 07CP-2.2.5
If, in the opinion of the Board, the amount which would be payable to eligible depositors in accordance with Paragraph CP-2.2.4 above would make the Scheme inappropriate (for administrative and/or other reasons) for a relevant bank, the Scheme may not be made available for such relevant bank.
October 07CP-2.2.6
If one or more eligible
deposits with the relevant bank are held in the name of more than one person, each such person will be deemed to be a separate eligible depositor for an amount ascertained by dividing the total amount of such eligibledeposit (s) by the number of such persons.October 07CP-2.2.7
An eligible
deposit to which two or more persons are entitled as members of a partnership (whether or not in equal shares) should be treated as a single eligibledeposit and the partners in such partnership should be treated as one eligible depositor.October 07CP-2.2.8
If a person establishes, to the satisfaction of the Board, that:
(a) He/she is a trustee for, or otherwise holds, one or more eligibledeposits with the relevant bank; and(b) The beneficial owner of each such eligibledeposit is a person separate and distinct from the beneficial owner of any other eligibledeposit with the relevant bank,such person should be treated as a different eligible depositor for each such eligible
deposit for the purposes of this Module. However, in the event that the beneficial owner of one or more eligibledeposits (regardless of in whose name such eligibledeposits are held) is the same person, such eligibledeposits should, for the purposes of this Module, be treated as being held by one eligible depositor.Amended: January 2011
October 07CP-2.2.9
No assignment or other transfer of the legal or beneficial ownership of an eligible
deposit (s), or any part thereof, should be considered valid if, in the opinion of the Board, the purpose of such assignment or transfer is to enable any person(s) (including an eligible depositor(s)) to gain an advantage in the Scheme which is not intended to be given by the Regulation in this module.October 07CP-2.3 CP-2.3 Procedures for Making Claims under the Scheme
CP-2.3.1
Upon the convening of the Board in accordance with Section CP-1.2 above, the Board will calculate the total amount of compensation to be paid under the Scheme in the case of the relevant bank, as well as the amount of compensation payable under the Scheme to each eligible depositor of such relevant bank. In addition, one or more of the contributing banks will be appointed by the Board to act as the mandated bank(s) (the 'mandated bank(s)') for the purpose of the operation of the Scheme for the relevant bank.
October 07CP-2.3.2
Following the completion of the calculations referred to in Paragraph CP-2.3.1 above, the total amount of compensation due to be paid under the Scheme in the case of the relevant bank should be paid by the mandated bank into a special account to be held by itself. In the event that there is more than one mandated bank, the total amount of compensation due to be paid should be paid by the mandated banks into a special account to be held by one of the mandated banks so designated by the Board (such bank being herein referred to as the 'lead mandated Bank'. In either case, such account should be entitled 'The Central Bank of Bahrain – Deposit Protection Board'.
October 07CP-2.3.3
At the same time as the mandated Bank(s) is/are carrying out the action referred to in Paragraph CP-2.3.2 above, each of the contributing banks (other than the (lead) mandated Bank) should execute in favour of such (lead) mandated bank an indemnity in form and substance to be agreed between the Board and the contributing banks.
October 07CP-2.3.4
The proportion of the total amounts referred to in Paragraph CP-2.3.2 above to be paid by each of the contributing banks should be calculated in accordance with a formula determined by the Board, which formula will take into account the relative size of each such bank's
deposit base.October 07CP-2.3.5
Upon receipt by the Board of confirmation, in form and substance satisfactory to it, from the (lead) mandated bank that the actions referred to in Paragraph CP-2.3.2 and Paragraph CP-2.3.3 above have been completed, each eligible depositor should be sent a certificate in duplicate (in the form, or substantially in the form, of the Schedule attached in Appendix CP-1) by the Board informing such eligible depositor of the amount of compensation payable to him/her under the Scheme in respect of his/her eligible
deposit (s) with the relevant bank.October 07CP-2.3.6
The certificate referred to in Paragraph CP-2.3.5 above should also contain instructions as to the method by which, and time within which, the compensatory amount referred to therein may be collected by the eligible depositor from the (lead) mandated bank. No amounts of compensation should be payable under the scheme after the expiry of the period referred to in such certificate, which period should not be less than 12 months.
October 07CP-2.3.7
When the duplicate copy of the certificate referred to in Paragraph CP-2.3.5 above is signed by an eligible depositor, it should constitute an assignment by such eligible depositor in favour of the (lead) mandated bank, of all rights and benefits in relation to that proportion of any claim which he/she would otherwise have in the liquidation of the relevant bank which is represented by the compensatory amount which he/she has received under the Scheme. Such assignment should be made to the (lead) mandated bank on its own behalf and as agent on behalf of the other contributing banks to the Scheme in the case of the relevant bank. Upon receipt of the signed duplicate copy of the certificate from an eligible depositor, the (lead) mandated bank should pay the amount referred to in the certificate to such eligible depositor.
October 07CP-2.3.8
At the end of such periods as will be determined between the Board and the (lead) mandated bank, each of the contributing banks (other than the mandated bank (s)) should pay to the (lead) mandated bank that portion of its contributory share of the total amount referred to in Paragraph CP-2.3.1 above (such contributory share being determined in accordance with the formula to be determined by the Board pursuant to Paragraph CP-2.3.4 above and being notified to each contributing bank by the Board) which the (lead) mandated bank has paid to eligible depositors under the Scheme in the case of the relevant bank in the immediately preceding period.
October 07CP-2.3.9
The (lead) mandated bank should be entitled to claim as an ordinary creditor, on its own behalf and as agent for and on behalf of the other contributing banks, in the liquidation of the relevant bank for that proportion of the total amounts referred to in Paragraph CP-2.3.1 above which has been paid out to eligible depositors under the Scheme at the end of the period referred to in Paragraph CP-2.3.6 above.
October 07CP-2.3.10
Any amount received by the (lead) mandated bank in the liquidation of the relevant bank should be reimbursed to the contributing banks pro-rata to such contributing banks' contributions to the amounts paid out under the Scheme in the case of the relevant bank.
October 07CP-2.3.11
The liquidator of the relevant bank should, in making any payments to eligible depositors thereof in the liquidation of such relevant bank, take such steps as are necessary to ensure that eligible depositors must not receive any payment in the liquidation of the relevant bank for amounts already paid out under the Scheme to such eligible depositors.
October 07CP-2.4 CP-2.4 Disclosure of Scheme's Applicability
CP-2.4.1
The Central Bank requires all retail bank licensees referring (directly or indirectly) to the protection of
deposits in related marketing materials and in general notices featured within banking halls and in account documentation, including Annual Reports, to prominently disclose the following statement:• "Subject to the provisions thereof,deposits held with the Bahrain office of [name of the banking firm] are covered by the Deposit Protection Scheme established by the Central Bank of Bahrain regulation concerning the establishment of a Deposit Protection Scheme and a Deposit Protection Board".October 07CP-2.4.2
Retail bank licensees should, in discussions and/or correspondence with new and prospective customers, bring the Deposit Protection Scheme and the protection afforded by it to such customers' notice.
October 07CP-2.5 CP-2.5 Other Provisions
CP-2.5.1
Save as otherwise set out above, nothing in this regulation shall affect the rights of depositors of a relevant bank to claim as creditors in the liquidation of the relevant bank, regardless of the basis on which such claim is made.
October 07CP-2.5.2
The provisions of Article 116 to 120 of the CBB Law relating to secrecy and confidentiality should apply to all matters discussed, decisions reached and records kept by the Board relating to the Scheme.
Amended: January 2011
October 07CP-2.5.3
The Board (which term, for the purpose of this Paragraph, should not include the liquidator of a relevant bank) should be entitled to make subsidiary rules for the proper and regular enforcement of this Module, and should be the final arbiter of any dispute in relation to this Module and/or the Scheme which may occur from time to time.
Amended: January 2011
October 07CP CP Compensation
CP-A CP-A Introduction
CP-A.1 CP-A.1 Purpose
CP-A.1.1
The purpose of this module is to set out rules and regulations establishing a Deposit Protection Scheme (the 'Scheme') for compensating eligible depositors (as defined under section CP-2.1) when the banks (referred to under section CP-2.1) are unable, or likely to be unable, to satisfy claims against them.
CP-A.1.2
The body established to operate and administer the compensation scheme is the Deposit Protection Board (the 'Board'). The module sets out rules and regulations that would allow the Board to:
(a) administer and implement the scheme;(b) calculate compensation amount; and(c) establish rules of operation.CP-A.1.3
The module also specifies:
(a) who is eligible for receiving compensation;(b) how the scheme will be funded;(c) who the contributing banks are; and(d) what are contributing banks' responsibilities regarding the implementation of the scheme.CP-A.2 CP-A.2 Key requirements
CP-A.2.1
The Deposit Protection Board (the 'Board') should, subject to and in accordance with the terms and conditions of the regulations in this module, be responsible for the activities set out under section CP-1.1.
CP-A.2.2
The Board should be convened and ready to carry out its duties in the case of any of the following events identified under section CP-1.2.
CP-A.2.3
The Scheme will apply to eligible
deposits (as defined in section CP-2.1) held with the Bahrain offices of full commercial banks which are licensed by the Agency.CP-A.2.4
Each eligible depositor should be entitled to receive under the Scheme a maximum of the lesser of:
(a) three quarters of the combined total amount of all of his eligibledeposits with the relevant bank, or(b) BD 15,000.CP-A.2.5
Notwithstanding the provisions of section CP-2.2, the amount payable under the Scheme in any one calendar year (the 'current year') should not exceed BD 25,000,000.
CP-A.2.6
Upon the convening of the Board in accordance with section CP-1.2, the Board will calculate the total amount of compensation to be paid under the Scheme in the case of the relevant bank, as well as the amount of compensation payable under the Scheme to each eligible depositor of such relevant bank.
CP-A.2.7
Upon receipt by the Board of confirmation from the (lead) mandated bank that the actions referred to in section CP-2.3 have been completed, each eligible depositor should be sent a certificate in duplicate (attached in Appendix CP 1) by the Board informing such eligible depositor of the amount of compensation payable to him/her under the Scheme in respect of his/her eligible
deposit(s) with the relevant bank.CP-A.2.8
The Agency requires all FCBs referring (directly or indirectly) to the protection of
deposits in related marketing materials and in general notices featured within banking halls and in account documentation, including Annual Reports, to prominently disclose the statement set out under section CP-2.4.CP-A.3 CP-A.3 Regulation history
CP-A.3.1
This module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter UG-3 of Module UG provides further details on Rulebook maintenance and control.
CP-A.3.2
A list of the most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes Evolution of the Module
CP-A.3.3
Prior to the development of the Rulebook, the Agency had issued various circulars representing regulations covering the operations and establishment of the Deposit Protection Scheme and the Deposit Protection Board. These circulars have now been consolidated into the Compensation Module. These circulars and their evolution into this module are listed below:
Circular Ref. Date of Issue Module Ref. Circular Subject OG/423/93 28 Nov 1993 CP-1–CP-2 Deposit Protection Scheme (the "Scheme") OG/425/94 21 Dec 1994 CP-2.4 Deposit Protection Effective date
CP-A.3.4
The contents in this module are effective from the date depicted in the original circulars/information pack (see paragraph CP-A.3.3) from which the requirements are compiled
CP-1 CP-1 Deposit Protection Board (the 'Board')
CP-1.1 CP-1.1 Constitution of the Board
CP-1.1.1
The contents of this chapter set out the details of the constitution, authority and administration of the Deposit Protection Board (the 'Board').
CP-1.1.2
The Deposit Protection Board (the 'Board') should, subject to and in accordance with the terms and conditions of the regulations in this module, be responsible for:
(a) the administration and implementation of a Deposit Protection Scheme (the 'Scheme');(b) the determination of the amount of compensation which is to be paid out under the Scheme in the event of the liquidation of a relevant bank (as defined in section CP-1.2 below); and(c) the establishment of the rules of operation of the Board.CP-1.1.3
The Board should consist of the following persons, whose period of membership of the Board (other than in the case of the person referred to in paragraph CP-1.1.3(e) below) should be for a three year renewable period:
(a) two representatives of the Agency, who shall be appointed by the Governor of the Agency, one of whom should be Chairman of the Board;(b) four representatives of commercial banking firms in Bahrain, who should be appointed by the Governor of the Agency following consultation with the Bankers' Society of Bahrain;(c) one representative of each of the Ministries of Finance and National Economy, of Justice and Islamic Affairs, and of Commerce, who should be appointed by their Ministers;(d) one representative of the Bahrain Chamber of Commerce and Industry, who should be appointed by the President thereof; and(e) upon a commercial banking firm becoming a relevant bank in accordance with section CP-1.2, and for the purpose of the operation of the Scheme in the case of that relevant bank only, the liquidator of such relevant bank.CP-1.1.4
Upon the appointment of the members of the Board (other than the person referred to in paragraph CP-1.1.3(e) above), the Board shall be formally constituted by a Resolution of the Minister of Finance & National Economy.
CP-1.2 CP-1.2 Convening of the Board
CP-1.2.1
The Board should be convened and ready to carry out its duties in the case of:
(a) a forced liquidation carried out pursuant to the BMA Law, no later than 7 days after the Agency has applied to the Minister of Finance and National Economy, under the provisions of Article 99 of the BMA Law, for his approval for an application to be made to the Bahrain courts for an insolvent banking firm (herein referred to as the 'relevant bank') in accordance with Article 100 of the pre-mentioned Law, or(b) the liquidation of a relevant bank in any other case, no later than 7 days after the Agency is informed that a relevant bank is to be wound up.CP-1.3 CP-1.3 Voting by the Board
CP-1.3.1
The Board should meet as often as is necessary to carry out its duties under the regulation set out in this module and should take decisions by a simple majority vote of those present at any meeting thereof provided that, in the event of a tie, the Chairman will have the casting vote.
CP-1.3.2
Decisions of the Board will be binding and will not be subject to appeal.
CP-2 CP-2 Deposit Protection Scheme (the 'Scheme')
CP-2.1 CP-2.1 Application of the Scheme
CP-2.1.1
The Scheme will apply to eligible
deposits (as defined in paragraph CP-2.1.5 below) held with the Bahrain offices of full commercial banks which are licensed by the Agency. These full commercial banks (excluding the relevant bank as referred to under section CP-1.2) are herein referred to as the 'contributing banks' which term will, unless otherwise stated herein, include the mandated bank(s) as defined in section CP-2.3 below.CP-2.1.2
Without prejudice to paragraph CP-2.1.1 above, the Board may, at its discretion, exclude (in whole or in part) from compensation under the Scheme, any depositors of a relevant bank in Bahrain who are entitled to claim in a similar scheme established in another jurisdiction, where such scheme covers the
deposit liabilities of the Bahrain offices of such relevant bank; andCP-2.1.3
Without prejudice to paragraph CP-2.1.1 above, the Board may, at its discretion, exclude (in whole or in part) from the requirement to contribute to the Scheme, any full commercial bank in Bahrain whose Bahrain offices'
deposit liabilities are (in whole or in part) covered by a similar scheme established in another jurisdiction provided that evidence, in form and substance satisfactory to it, of such coverage is provided to the Board.CP-2.1.4
Subject to the provision of paragraph CP-2.1.6 below, the Scheme will apply to
deposits (each an 'eligibledeposit ') held with the Bahrain offices of full commercial banks, in Bahraini Dinars and other currencies, by persons (each an 'eligible depositor') who are eitherresidents or non-residents of Bahrain.CP-2.1.5
For the purposes of this Regulation, '
deposit ' shall mean a current, call, saving and/or fixeddeposit or investment account in Bahraini Dinars or other currencies, as well as non-bearer Certificates of Deposit denominated in Bahraini Dinars or other currencies issued by the relevant bank.CP-2.1.6
Without prejudice to the provisions of paragraph CP-2.1.4 above, the Scheme will not apply to
deposits which have, in the opinion of the Board, been illegally gained and/or relate to illicit or illegal matters. The Scheme will also not apply todeposits of:(a) the Bahrain Government and Bahrain Government Agencies (which shall, for the purposes of this Regulation, mean entities in which the Bahrain Government holds 50% or more of the share capital);(b) other banks including, for the sake of clarity, the Agency;(c) the parent, subsidiaries, associates or affiliates of the relevant bank;(d) Directors, shareholders with more than 5% shareholding (ordinary and/or preference), or managers of the relevant bank; and/or(e) persons whose identity cannot be ascertained.CP-2.2 CP-2.2 Operation of the Scheme
CP-2.2.1
Each eligible depositor should be entitled to receive under the Scheme a maximum of the lesser of:
(a) three quarters of the combined total amount of all of his eligibledeposits with the relevant bank, or(b) BD 15,000,irrespective of the number, type, value and currency of eligible
deposits held by such eligible depositor with the relevant bank at the time the Scheme is put into operation for such relevant bank.CP-2.2.2
The amount referred to in paragraph CP-2.2.1 above may be amended from time to time by the Agency. In calculating the amount payable in each case hereunder, the Board will be entitled to take account of various matters including, but not limited to, any set off rights to which the relevant bank was entitled against an eligible depositor or an eligible
deposit at the proposed date for the making of such payment as well as any amounts paid out during the period of administration of the relevant bank by the Agency (if appropriate), and the amount payable hereunder shall be reduced accordingly.CP-2.2.3
Notwithstanding the provisions of paragraph CP-2.2.1 above, the amount payable under the Scheme in any one calendar year (the 'current year') should not exceed BD 25,000,000 (regardless of the number of relevant banks in existence in the year), provided that if circumstances so demand (and subject to the prior approval of the Governor of the Agency being obtained) the Board (which term for this paragraph, will not include the liquidator of a relevant bank) may make available to the Scheme for the current year:
(a) any portion of the above amount for the calendar year immediately preceding the current year which has not been utilized in that calendar year; together with(d) any portion of the above amount for the calendar year immediately following the current year.The Board may, from time to time and with the prior approval of the Governor of the Agency, amend the figure of BD 25,000,000 referred to in this paragraph.
CP-2.2.4
In the event that the amount to be payable under the Scheme to eligible depositors of a relevant bank in accordance with paragraph CP-2.2.1 above is greater than the maximum sum determined to be available in the Scheme for such relevant bank under paragraph CP-2.2.3 above, the amounts determined to be payable to such eligible depositors under paragraph CP-2.2.1 above should be made on a pro rata basis in accordance with a formula to be determined by the Board.
CP-2.2.5
If, in the opinion of the Board, the amount which would be payable to eligible depositors in accordance with paragraph CP-2.2.4 above would make the Scheme inappropriate (for administrative and/or other reasons) for a relevant bank, the Scheme may not be made available for such relevant bank.
CP-2.2.6
If one or more eligible
deposits with the relevant bank are held in the name of more than one person, each such person will be deemed to be a separate eligible depositor for an amount ascertained by dividing the total amount of such eligibledeposit(s) by the number of such persons.CP-2.2.7
An eligible
deposit to which two or more persons are entitled as members of a partnership (whether or not in equal shares) should be treated as a single eligibledeposit and the partners in such partnership should be treated as one eligible depositor.CP-2.2.8
If a person establishes, to the satisfaction of the Board, that:
(a) he/she is a trustee for, or otherwise holds, one or more eligibledeposits with the relevant bank; and(b) the beneficial owner of each such eligibledeposit is a person separate and distinct from the beneficial owner of any other eligibledeposit with the relevant bank,such person should be treated as a different eligible depositor for each such eligible
deposit for the purposes of this Regulation. However, in the event that the beneficial owner of one or more eligibledeposits (regardless of in whose name such eligibledeposits are held) is the same person, such eligibledeposits should, for the purposes of this Regulation, be treated as being held by one eligible depositor.CP-2.2.9
No assignment or other transfer of the legal or beneficial ownership of an eligible
deposit(s) , or any part thereof, should be considered valid if, in the opinion of the Board, the purpose of such assignment or transfer is to enable any person(s) (including an eligible depositor(s)) to gain an advantage in the Scheme which is not intended to be given by the Regulation in this module.CP-2.3 CP-2.3 Procedures for making claims under the Scheme
CP-2.3.1
Upon the convening of the Board in accordance with section CP-1.2 above, the Board will calculate the total amount of compensation to be paid under the Scheme in the case of the relevant bank, as well as the amount of compensation payable under the Scheme to each eligible depositor of such relevant bank. In addition, one or more of the contributing banks will be appointed by the Board to act as the mandated bank(s) (the 'mandated bank(s)') for the purpose of the operation of the Scheme for the relevant bank.
CP-2.3.2
Following the completion of the calculations referred to in paragraph CP-2.3.1 above, the total amount of compensation due to be paid under the Scheme in the case of the relevant bank should be paid by the mandated bank into a special account to be held by itself. In the event that there is more than one mandated bank, the total amount of compensation due to be paid should be paid by the mandated banks into a special account to be held by one of the mandated banks so designated by the Board (such bank being herein referred to as the 'lead mandated Bank'. In either case, such account should be entitled 'The Bahrain Monetary Agency — Deposit Protection Board'
CP-2.3.3
At the same time as the mandated Bank(s) is/are carrying out the action referred to in paragraph CP-2.3.2 above, each of the contributing banks (other than the (lead) mandated Bank) should execute in favour of such (lead) mandated bank an indemnity in form and substance to be agreed between the Board and the contributing banks.
CP-2.3.4
The proportion of the total amounts referred to in paragraph CP-2.3.2 above to be paid by each of the contributing banks should be calculated in accordance with a formula determined by the Board, which formula will take into account the relative size of each such bank's
deposit base.CP-2.3.5
Upon receipt by the Board of confirmation, in form and substance satisfactory to it, from the (lead) mandated bank that the actions referred to in paragraph CP-2.3.2 and paragraph CP-2.3.3 above have been completed, each eligible depositor should be sent a certificate in duplicate (in the form, or substantially in the form, of the Schedule attached in Appendix CP 1) by the Board informing such eligible depositor of the amount of compensation payable to him/her under the Scheme in respect of his/her eligible
deposit(s) with the relevant bank.CP-2.3.6
The certificate referred to in paragraph CP-2.3.5 above should also contain instructions as to the method by which, and time within which, the compensatory amount referred to therein may be collected by the eligible depositor from the (lead) mandated bank. No amounts of compensation should be payable under the scheme after the expiry of the period referred to in such certificate, which period should not be less than 12 months.
CP-2.3.7
When the duplicate copy of the certificate referred to in paragraph CP-2.3.5 above is signed by an eligible depositor, it should constitute an assignment by such eligible depositor in favour of the (lead) mandated bank, of all rights and benefits in relation to that proportion of any claim which he/she would otherwise have in the liquidation of the relevant bank which is represented by the compensatory amount which he/she has received under the Scheme. Such assignment should be made to the (lead) mandated bank on its own behalf and as agent on behalf of the other contributing banks to the Scheme in the case of the relevant bank. Upon receipt of the signed duplicate copy of the certificate from an eligible depositor, the (lead) mandated bank should pay the amount referred to in the certificate to such eligible depositor.
CP-2.3.8
At the end of such periods as will be determined between the Board and the (lead) mandated bank, each of the contributing banks (other than the mandated bank(s)) should pay to the (lead) mandated bank that portion of its contributory share of the total amount referred to in paragraph CP-2.3.1 above (such contributory share being determined in accordance with the formula to be determined by the Board pursuant to paragraph CP-2.3.4 above and being notified to each contributing bank by the Board) which the (lead) mandated bank has paid to eligible depositors under the Scheme in the case of the relevant bank in the immediately preceding period.
CP-2.3.9
The (lead) mandated bank should be entitled to claim as an ordinary creditor, on its own behalf and as agent for and on behalf of the other contributing banks, in the liquidation of the relevant bank for that proportion of the total amounts referred to in paragraph CP-2.3.1 above which has been paid out to eligible depositors under the Scheme at the end of the period referred to in paragraph CP-2.3.6 above.
CP-2.3.10
Any amount received by the (lead) mandated bank in the liquidation of the relevant bank should be reimbursed to the contributing banks pro-rata to such contributing banks' contributions to the amounts paid out under the Scheme in the case of the relevant bank.
CP-2.3.11
The liquidator of the relevant bank should, in making any payments to eligible depositors thereof in the liquidation of such relevant bank, take such steps as are necessary to ensure that eligible depositors must not receive any payment in the liquidation of the relevant bank for amounts already paid out under the Scheme to such eligible depositors.
CP-2.4 CP-2.4 Disclosure of Scheme's applicability
CP-2.4.1
The Agency requires all FCBs referring (directly or indirectly) to the protection of
deposits in related marketing materials and in general notices featured within banking halls and in account documentation, including Annual Reports, to prominently disclose the following statement:"Subject to the provisions thereof,
deposits held with the Bahrain office of [name of the banking firm] are covered by the Deposit Protection Scheme established by the Bahrain Monetary Agency regulation concerning the establishment of a Deposit Protection Scheme and a Deposit Protection Board".CP-2.4.2
FCBs should, in discussions and/or correspondence with new and prospective customers, bring the Deposit Protection Scheme and the protection afforded by it to such customers' notice.
CP-2.5 CP-2.5 Other provisions
CP-2.5.1
Save as otherwise set out above, nothing in this regulation shall affect the rights of depositors of a relevant bank to claim as creditors in the liquidation of the relevant bank, regardless of the basis on which such claim is made.
CP-2.5.2
The provisions of Article 16 of the BMA Law No. (23) of 1973 relating to secrecy and confidentiality should apply to all matters discussed, decisions reached and records kept by the Board relating to the Scheme.
CP-2.5.3
The Board (which term, for the purpose of this paragraph, should not include the liquidator of a relevant bank) should be entitled to make subsidiary rules for the proper and regular enforcement of this Regulation, and should be the final arbiter of any dispute in relation to this Regulation and/or the Scheme which may occur from time to time.
EN EN Enforcement
EN-A EN-A Introduction
EN-A.1 EN-A.1 Application
EN-A.2 EN-A.2 Purpose
EN-A.2.1
This module sets out the Agency's approach to enforcement, and the mechanisms used by the Agency to address failures by licensees to comply with its regulatory requirements. The purpose of such measures is to encourage a high standard of compliance by the Agency licensees, thus reducing risk to their customers and the rest of the financial system.
EN-A.2.2
This module provides support for all other modules of the Rulebook.
EN-A.3 EN-A.3 Regulation history
EN-A.3.1
This module was first issued on 1st January 2005 as part of the Islamic principles volume. All regulations in this volume have been effective since this date. All subsequent changes are dated with the month and year at the base of the relevant page and in the Table of Contents. Chapter UG-3 of Module UG provides further details on Rulebook maintenance and control.
EN-A.3.2
A list of the most recent changes made to this module are detailed in the table below:
Summary of changes
Module Ref. Change Date Description of Changes EN-7 01/07/06 Addition of procedures for "Appointed Experts" (relocated from AU-4) Evolution of the Module
EN-A.3.3
The module incorporates the requirements set out under Circular No. ODG/249/2004 dated 22 July 2004 relating to the Agency's approach to enforcement.
Effective date
EN-A.3.4
The contents in this module are effective from 1st September 2004. However, the contents of other modules referred to herein are effective from the dates specified in those respective modules.
EN-1 EN-1 General procedures
EN-1.1 EN-1.1 The Agency's approach to enforcement
EN-1.1.1
The Agency favours an open, pragmatic and collaborative relationship with its licensees, within the boundaries set by the law and BMA regulations. Whilst the Agency wishes to avoid a legalistic and confrontational style of supervision, it believes that effective supervision requires effective enforcement of its requirements. Should licensees fail to cooperate, then the Agency will use the means described in this module to achieve compliance.
EN-1.1.2
In the Agency's view, it is generally neither practical nor effective to prescribe in detail the exact regulatory response for each and every potential contravention. There are a large number of potential contraventions. Moreover, individual circumstances are unlikely to be identical in all cases, and may warrant different responses.
EN-1.1.3
In deciding any given regulatory response, the Agency will nonetheless consistently assess the individual circumstance of each contravention against the principles described in this module. The Agency's overall approach is to take into account:
(a) the seriousness of the contravention concerned (including the risks posed to the licensee's customers and other market participants);(b) the compliance track record of the licensee concerned (including the extent to which the contravention reflects systemic weaknesses or reckless behaviour); and(c) which measures are most likely to achieve the desired result of remedying the contravention.EN-1.1.4
Such an approach reduces the risk of inappropriate enforcement actions, by allowing regulatory measures to be tailored to individual circumstances. By taking into account a licensee's compliance record and attitude, it also creates positive incentives and encourages an open and collaborative approach. By assessing individual cases against the same broad principles, the Agency also aims to achieve an overall consistency in its regulatory actions.
EN-1.1.5
Underlying the Agency's approach outlined in paragraph EN-1.1.3 is the fundamental principle of proportionality. The enforcement measures contained in this module are of varying severity, and will be used accordingly in keeping with the Agency's assessment of the contravention. Thus, the Agency will reserve its most serious enforcement measures — such as cancellation of license or withdrawal of "fit and proper" status — for the most serious contraventions.
EN-1.1.6
In keeping with the proportionality principle, and to the extent consistent with the Agency's enforcement approach in paragraph EN-1.1.3, the Agency will usually opt for the least severe of appropriate enforcement measures. In most cases, the Agency expects to use a Formal Notice before resorting to more severe measures; the need for further measures will then usually be dependent on the response of the licensee or individual concerned.
EN-1.1.7
Where a significant element of judgment is required to assess compliance with a requirement, then the Agency will usually discuss the matter with the licensee or individual concerned, before using one of this module's enforcement mechanisms. This is likely to be the case, for example, with respect to requirements for adequate systems and controls. Conversely, where there are clear-cut contraventions of the BMA's requirements, then the Agency will usually move immediately to one or more of the enforcement mechanisms outlined in this module. This is more likely to occur in cases where quantitative requirements — such as those relating to capital and/or large exposures — are concerned. In most such cases, though, the Agency also expects to continue an active dialogue with the licensee or individual concerned, aimed at remedying the contravention.
EN-1.1.8
Except in the limited circumstances outlined below, the Agency will usually only apply an enforcement measure after the licensee or person concerned has been given a suitable opportunity to make representations. In the case of measures described in chapters EN-8 to EN-10, certain procedures are set out in the 1973 BMA Decree — Law No. (23) of 1973.
EN-1.2 EN-1.2 Prohibition on insurance
EN-1.2.1
To help the Agency achieve the purpose of this module, licensees may not enter into or make a claim under a contract of insurance that is intended to, or has the effect of, indemnifying them from the fines provided for in this module.
EN-1.3 EN-1.3 Publicity
EN-1.3.1
The Agency will not as a matter of general policy publicise individual cases when it uses the measures set out in chapters EN-2 to EN-7. However, in such cases the Agency may inform the licensee's external auditors and — in the case of licensees with overseas operations — relevant overseas regulators.
EN-1.3.2
In exceptional circumstances, the Agency may decide to publicise individual cases when the measures set out in chapters EN-2 to EN-7 are used, where there is a strong case that doing so would help achieve the Agency's supervisory objectives. In such instances, the Agency will usually allow the licensee or individual concerned the opportunity to make representations to the Agency before a public statement is issued.
EN-1.3.3
With respect to the financial penalties provided for in chapter EN-6, licensees are required to disclose in their annual reports the amount of any such penalties paid to the Agency, together with a factual description of the reason(s) given by the Agency for the penalty.
EN-1.3.4
Without prejudice to the above policy, the Agency may from time to time publish aggregate information on its use of measures set out in chapters EN-2 to EN-7, without identifying the licensees or individuals concerned, unless their identities have previously been disclosed as provided for in paragraphs EN-1.3.2 or EN-1.3.3.
EN-2 EN-2 Formal warnings
EN-2.1 EN-2.1 BMA policy
EN-2.1.1
Formal Warnings are clearly identified as such and represent the Agency's first level formal enforcement measure. They are intended to clearly set out the Agency's concerns to a licensee or an individual regarding an issue, and should be viewed by the recipient with the appropriate degree of seriousness.
EN-2.1.2
As indicated in section EN-1.1, the Agency will usually discuss concerns prior to resorting to a formal enforcement measure, especially where a significant element of judgment is required in assessing compliance with a regulatory requirement.
EN-2.1.3
Where such discussions fail to resolve matters to the Agency's satisfaction, then it may issue a Formal Warning. Failure to respond adequately to a Formal Warning will lead the Agency to consider more severe enforcement measures. However, more severe measures do not require the prior issuance of a Formal Warning — depending on its assessment of the circumstances, Agency may decide to have immediate recourse to other measures. Similarly, there may be circumstances where Agency issues a Formal Warning without prior discussion with the licensee or person concerned: this would usually be the case where a clear-cut compliance failing has occurred.
EN-2.1.4
When considering whether to issue a Formal Warning, the criteria taken into consideration by the Agency therefore include the following:
(a) the seriousness of the actual or potential contravention, in relation to the requirement(s) concerned and the risks posed to the licensee's customers, market participants and other stakeholders;(b) in the case of an actual contravention, its duration and/or frequency of the contravention; the extent to which it reflects more widespread weaknesses in controls and/or management; and the extent to which it was attributable to deliberate or reckless behaviour; and(c) the extent to which the Agency's supervisory objectives would be better served by issuance of a Formal Notice as opposed to another type of regulatory action.EN-2.2 EN-2.2 Procedure for issuing Formal Warnings
EN-2.2.1
Proposals to issue Formal Warnings are carefully considered against the criteria listed in Section EN-2.1. They require approval of a Director or more senior BMA official, and include the statement "This is a Formal Warning as defined in Chapter EN-2 of the BMA Rulebook".
EN-2.2.2
Depending on the issue in question, recipients of a Formal Warning may be required to respond to the contents of the Warning. (In other cases, recipients may also respond should they wish to.) Given its nature, there is no provision for recipients to challenge the issuance of a Warning.
EN-3 EN-3 Directions
EN-3.1 EN-3.1 BMA policy
EN-3.1.1
The Agency may issue Directions to licensees or individuals under supervisory powers granted to it by the BMA Decree — Law No. 23 of 1973 ("BMA Law"). These powers are broad in nature, and effectively allow the Agency to issue whatever Directions it reasonably believes are required to achieve its statutory objectives.
EN-3.1.2
The types of Directions that the Agency may issue in practice vary and will depend on the individual circumstances of a case. Generally, however, Directions require a licensee or individual to undertake specific actions in order to address or mitigate certain perceived risks. They may also include restrictions on a licensee's activities until those risks have been addressed — for instance, a ban on the acceptance of new customers.
EN-3.1.3
The Agency is conscious of the powerful nature of a Direction and, in the case of a licensee, the fact that it subordinates the role of its Board and management on a specific issue. The Agency will carefully consider the need for a Direction, and whether alternative measures may not achieve the same end. Where feasible, the Agency will try to achieve the desired outcome through persuasion, rather than recourse to a Direction.
EN-3.1.4
In considering whether to issue a Direction, the criteria taken into consideration by the Agency include the following:
(a) the seriousness of the actual or potential contravention, in relation to the requirement(s) concerned and the risks posed to the licensee's customers, market participants and other stakeholders;(b) in the case of an actual contravention, its duration and/or frequency of the contravention; the extent to which it reflects more widespread weaknesses in controls and/or management; and the extent to which it was attributable to deliberate or reckless behaviour; and(c) the extent to which the Agency's supervisory objectives would be better served by issuance of a Direction as opposed to another type of regulatory action.EN-3.2 EN-3.2 Procedure for issuing Directions
EN-3.2.1
Proposals to issue Directions are carefully considered against the criteria listed in section EN-3.1. They require approval of an Executive Director or more senior official of the Agency, and include the statement "This is a formal Direction as defined in Chapter EN-3 of the BMA Rulebook".
EN-3.2.2
The subject of the Direction will normally be given 10 business days from the Direction's date of issuance in which to make representations to the Agency concerning the actions required. This must be done in writing, and addressed to the issuer of the original notification. Should a representation be made, the Agency will make a final determination, again normally within 10 business days of the date of the representation. Where urgent action is required, the Agency may reduce the period allowed for representations.
EN-3.2.3
In extreme circumstances, where the Agency believes that immediate action is required to prevent real damage to Bahrain's financial markets, its users or to customers of the licensee concerned, it may not be practical to allow a right of representation. In such cases, the Agency must state a justification for the withdrawal of the right to make representations.
EN-4 EN-4 Formal requests for information
EN-4.1 EN-4.1 Procedure
EN-4.1.1
As part of its on-going supervision, the Agency may specifically request information or temporary reporting from a licensee or individual. Recipients of such requests are bound to respond to such requests under the terms of their license. Such requests are in effect a type of Direction.
EN-4.1.2
Henceforward, to clearly identify such requests, they will always be made in writing, under signature of a Director or more senior official of the Agency; will include the statement "This is a formal request for information as defined in Chapter EN-4 of the BMA Rulebook"; and will state the deadline by which the information is to be communicated to the Agency.
EN-4.1.3
Failure to respond to such formal requests within the deadline set will be viewed as a significant breach of regulatory requirements and will incur a Formal Warning or other enforcement measure, as decided by the Agency depending on the circumstances of the case.
EN-4.1.4
The deadline set in the request will vary depending on individual circumstances, but will in all cases be reasonable. A recipient may submit a case for an extension to the deadline, providing the request is made before the original deadline has passed. The Agency will respond before the original deadline has passed; if it fails to do so, then the requested extension will apply. Whilst waiting for a reply, the recipient must assume that the original deadline will apply.
EN-4.1.5
The above procedures do not prevent individual Agency supervisors making oral requests for information as part of their day-to-day interaction with licensees. The Agency expects licensees to maintain their cooperative response to such requests; however, in the interests of clarity, the Agency will not view failures to respond to oral requests as a breach of regulatory requirements.
EN-5 EN-5 Adverse "fit and proper" findings
EN-5.1 EN-5.1 Requirements for individuals
EN-5.1.1
Article 85 of the BMA Decree — Law No. 23 of 1973 ("BMA Law") provides that any Director, manager or official responsible for the direction or management of a licensee, is to be considered removed from office should he be convicted by a court for a crime affecting his honesty; is declared bankrupt by a court; or if a court rules that his legal capacity is totally or partially impaired.
EN-5.1.2
The Agency's standard conditions and licensing criteria, issued pursuant to Article 59 of the BMA Law, require that management and staff of a licensee should be adequately qualified and experienced.
EN-5.1.3
In addition, chapter HC-2 specifies that all persons wishing to hold or holding the position of Director, Chief Executive/General Manager or Manager in a licensee must be assessed by the Agency as "fit and proper" to hold such a position. The chapter specifies various factors that the Agency takes into account when reaching such a decision.
EN-5.1.4
In interpreting the term "manager" for the purposes of Article 85 of the BMA Decree — Law No. 23 of 1973, the Agency uses the definition given in chapter HC-2. The same definition applies when the term "manager" is used in other modules, unless a different definition is explicitly provided for in the module concerned.
EN-5.2 EN-5.2 BMA policy
EN-5.2.1
The Agency is conscious of the impact that assessing someone as not "fit and proper" may have on an individual. Such assessments are carefully reviewed in the light of all relevant facts. The criteria used in reaching a decision include the following:
(a) the extent to which the factors set out in the BMA Law and chapter HC-2 have not been met;(b) the extent to which the person has deliberately or recklessly breached requirements of the BMA Law or BMA regulations;(c) the person's past compliance record and conduct following any such contravention;(d) the length of time since factors indicating a lack of fitness or propriety occurred; and(e) the risk the person poses to licensees and their customers.EN-5.2.2
In assessing evidence, the Agency applies a lower threshold than is applied in a criminal court of law, reflecting the administrative nature of the sanction. The Agency may also take into account the cumulative effect of factors which, when considered individually, may not in themselves be sufficient to justify an adverse "fit and proper" finding.
EN-5.2.3
The Agency may also take into account the particular function being undertaken in the licensee by the individual concerned, and the size and nature of the licensee itself, particularly when assessing the suitability of a person's experience or qualifications. Thus, the fact that a person was deemed "fit and proper" for a particular position in a particular firm does not necessarily mean he would be suitable in a different position or in a different firm.
EN-5.3 EN-5.3 Procedure for issuing an adverse finding
EN-5.3.1
All proposals for issuing an adverse "fit and proper" finding are subject to a thorough review by the Agency of all relevant facts, assessed against the criteria outlined in section EN-5.2. In some instances, it may be appropriate for the Agency to request the licensee or person concerned to provide further information, in order to help reach a decision.
EN-5.3.2
All adverse findings have to be approved by an Executive Director of the Agency. A notice of intent is issued to the person concerned, and copied to the Board/senior management of the licensee as appropriate, setting out the circumstances and the basis for the Agency's proposed adverse finding. The person has 30 calendar days from the date of the notice in which to make written representations, addressed to the Executive Director concerned, failing which a final notice is issued by the Agency.
EN-5.3.3
If representations are made, then the Agency has 30 days from the date of the representation in which to consider any mitigating evidence submitted and make a final determination.
EN-6 EN-6 Financial penalties
EN-6.1 EN-6.1 BMA Policy
EN-6.1.1
The Agency may on a very selective basis impose financial penalties on licensees. Their use is generally limited to situations where major breaches of regulatory requirements have taken place and a licensee has failed to respond in an acceptable manner to the concerns expressed by the Agency. Financial penalties are thus normally preceded by the issuance of a Formal Notice and/or Direction.
EN-6.1.2
The level of financial penalty applied is determined by the nature of the contravention and the amount of additional supervisory attention and resources taken up by a licensee's behaviour. The maximum penalty, however, is capped at BD 20,000. The Agency intends that the impact of a penalty should derive more from its signaling effect than from the actual amount of money involved.
EN-6.1.3
As indicated in section EN-1.3, the Agency requires disclosure by licensees in their annual reports of any financial penalties served on them, together with a factual description of the reasons given by the Agency for applying the penalty. In addition, the Agency may publicise the issuance of a financial penalty notice, where there is a strong case that doing so would help achieve the Agency's supervisory objectives. In such instances, the Agency will usually allow the licensee concerned the opportunity to make representations to the Agency before a public statement is issued.
EN-6.1.4
Examples of the types of compliance failings that may lead to the serving of a financial penalty notice include (but are not limited to):
(a) Failures to address persistent delays and/or significant inaccuracies in regulatory reporting to the Agency;(b) Repeated failures to respond to formal requests for information from the Agency, within the deadlines set;(c) The submission of information to the Agency known to be false or misleading; and(d) Major failures in maintaining adequate systems and controls in accordance with the Agency's requirements, subjecting depositors and other customers to significant risk of financial loss.EN-6.1.5
In assessing whether to serve a financial penalty notice, the Agency takes into account the following criteria:
(a) the seriousness of the contravention, in relation to the requirement(s) concerned;(b) the duration and/or frequency of the contravention, and the extent to which it reflects more widespread weaknesses in controls and/or management;(c) the extent to which the contravention was deliberate or reckless;(d) the licensee's past compliance record and conduct following the contravention; and(e) the scope of any other action taken by the BMA or other regulators against the licensee, in response to the compliance failures in question.EN-6.1.6
The imposition of a financial penalty does not preclude the BMA from also using other enforcement measures to remedy the same violation (for instance, a Direction).
EN-6.2 EN-6.2 Money laundering regulation
EN-6.2.1
In addition to the circumstances set out in section EN-6.1, a financial penalty of up to BD 20,000 may be applied by the Agency in cases where a licensee fails to comply with any of the requirements in module FC.
EN-6.2.2
As with the imposition of financial penalties in response to breaches of other regulatory requirements, the Agency will apply financial penalties with respect to the regulations set out under module FC on a very selective basis only. The same criteria set out in section EN-6.1 will be taken into account by the Agency when considering imposing a financial penalty. Financial penalties applied under this Section are also subject to the same disclosure requirements as described in section EN-6.1.
EN-6.2.3
A failure to comply with the requirements in module FC that warrants a financial penalty would not trigger also a financial penalty under section EN-6.1.
EN-6.2.4
Any financial penalties applied by the Agency as regards the implementation of its regulations set out under module FC, are without prejudice to the criminal sanctions available to the Bahraini courts under the Decree — Law No. 4 of 2001, with respect to the prevention and prohibition of the laundering of money. As with other financial penalties, the imposition of a financial penalty with regards to breaches of the regulation in module FC does not prevent the Agency from also using other enforcement measures to remedy the same violation (for instance, a Direction).
EN-6.3 EN-6.3 Procedures for financial penalties
EN-6.3.1
A written financial penalty notice will be addressed to the Chief Executive Officer or General Manager of the licensee concerned. This written notification will describe the contravention concerned, the Agency's evidence supporting a financial penalty, and the factors justifying the level of penalty proposed. Only an Executive Director or more senior member of the Agency's management may sign the notification.
EN-6.3.2
The licensee has 15 business days from the notification's date of issuance to submit any representations it wishes to make to the Agency, in writing and addressed to the issuer of the original notification. If the licensee decides not to submit representations, it has 30 calendar days from the notification's date of issuance in which to pay the penalty.
EN-6.3.3
Should the licensee make representations challenging the proposed penalty, the Agency has 15 business days from the issuance of those representations in which to re-examine the facts of the case and its conclusions. If the Agency confirms application of a penalty, payment is required within 30 calendar days of a final notice being issued. However, the licensee has the right to lodge a further written appeal within those 30 days, addressed to H.E. the Governor. In such cases, H.E. the Governor makes a final determination within 15 business days of the date of the written appeal. If H.E. the Governor confirms application of a penalty, then payment is required within 30 calendar days of H.E. the Governor's written confirmation.
EN-6.3.4
Failure to pay a penalty within the required deadlines will be considered a breach of the Agency's regulatory requirements, and will also result in other measures being considered, as described elsewhere in this Module.
EN-6.4 EN-6.4 Remedying a compliance failure
EN-6.4.1
Payment of a financial penalty does not by itself absolve a licensee from remedying the compliance failure concerned. The Agency will expect the licensee to address the contravention within a reasonable timescale, to be agreed on a case-by-case basis. Failure to do so will result in other measures being considered.
EN-7 EN-7 Investigations
EN-7.1 EN-7.1 Legal source
EN-7.1.1
Article 82 of the BMA Decree — Law No. 23 of 1973 ("BMA Law") empowers the Agency to order investigations of licensees, in order to help it assess a licensee's compliance with the provisions of the BMA Law. Such investigations may be carried out either by its own officials or auditors appointed for such a purpose by the Agency. Article 83 requires licensees to make available to the Agency's inspectors its books and other records, and to provide all relevant information within the time limits deemed reasonable by the inspectors.
EN-7.1.2
Article 87 of the BMA Law provides for criminal sanctions where false or misleading statements are made to the Agency, or an investigation by the Agency is otherwise obstructed (see section EN-10.3).
EN-7.2 EN-7.2 BMA Policy
EN-7.2.1
The BMA uses its own inspectors to undertake on-site examinations of licensees as an integral part of its regular supervisory efforts. In addition, the BMA may commission special investigations of licensees in order to help it assess their compliance with BMA requirements. Such investigations may be carried out either by the BMA's own officials, by duly qualified experts appointed for the purpose by the BMA ("
Appointed Experts "), or a combination of the two.EN-7.2.2
Failure by licensees to cooperate fully with the BMA's inspectors, or to respond to their examination reports within the time limits specified, will be treated as demonstrating a material lack of cooperation with the Agency which will result in other enforcement measures being considered, as described elsewhere in this module.
EN-7.2.3
The BMA may appoint an individual or a firm as an
Appointed Expert . Examples ofAppointed Experts are reporting accountants, lawyers and expert witnesses. The appointment ofAppointed Experts is not necessarily indicative of a contravention of BMA requirements or suspicion of such a contravention. For instance, anAppointed Expert may be commissioned to provide an expert opinion on a technical matter.EN-7.2.4
Appointed Experts report in a form and within a scope defined by the BMA, and are solely responsible to the BMA for the work they undertake in relation to the investigation concerned. The report produced by theAppointed Experts is the property of the BMA (but is usually shared by the BMA with the firm concerned). The cost of theAppointed Experts' work must be borne by the licensee concerned.EN-7.2.5
In selecting an
Appointed Expert , the BMA will take into account the level of fees proposed and aim to limit these to the lowest level consistent with an adequate review of the matters at hand, given the qualifications, track record and independence of the persons concerned. Because the cost of such investigations are met by the licensee, the BMA makes only selective use ofAppointed Experts , when essential to supplement BMA's other supervisory tools and resources.EN-7.2.6
The BMA will not, as a matter of general policy, publicise the appointment of
Appointed Experts , although it reserves the right to do so where this would help achieve its supervisory objectives. Both theAppointed Experts and the BMA are bound to confidentiality provisions restricting the disclosure of confidential information with regards to any such information obtained in the course of the investigation.EN-7.2.7
Unless the Agency otherwise permits, Appointed Experts may not be the same firm appointed as external auditors of the bank.
EN-7.2.8
Compliance by Appointed Experts with the contents of this chapter will not, of itself, constitute a breach of any other duty owed by them to a particular bank (i.e. create a
conflict of interest ).EN-7.2.9
The Agency may commission reports, which require Appointed Experts to review information from another company within the reporting bank's group even where that other company is not itself subject to any Agency requirements.
EN-7.2.10
Banks must provide all relevant information and assistance to Appointed Experts on demand.
EN-7.2.11
The Agency may appoint one or more of its officials to work on the Appointed Experts' team for a particular bank.
EN-7.3 EN-7.3 The required report
EN-7.3.1
The scope of the required report will be determined and detailed by the Agency in the appointment letter. Commissioned Appointed Experts will normally be required to report on one or more of the following aspects of a bank's business:
(a) accounting and other records;(b) internal control systems;(c) returns of information provided to the Agency;(d) operations of certain departments; and/or(e) other matters specified by the Agency.EN-7.3.2
Appointed Experts will be required to form an opinion on whether, during the period examined, the bank is in compliance with the relevant provisions of the BMA Law and the Agency's relevant requirements, as well as other requirements of Bahrain Law and, where relevant, industry best practice locally and/or internationally.
EN-7.3.3
The Appointed Experts report must follow the format set out in Appendix EN 1.
EN-7.3.4
Unless otherwise directed by the Agency or unless the circumstances described in section EN-7.3 apply, the report should be discussed with Board of Directors and/or senior management in advance of it being sent to the Agency.
EN-7.3.5
Where the report is qualified by exception, the report must clearly set out the risks which the bank runs by not correcting the weakness, with an indication of the severity of the weakness should it not be corrected. Appointed Experts will be expected to report on the type, nature and extent of any weaknesses found during their work, as well as the implications of a failure to address and resolve such weaknesses.
EN-7.3.6
If the Appointed Experts conclude, after discussing the matter with the bank, that they will give a negative opinion (as opposed to one qualified by exception) or that the issue of the report will be delayed, they must immediately inform the Agency in writing giving an explanation in this regard.
EN-7.3.7
The report must be completed, dated and submitted, together with any comments by Directors or management (including any proposed timeframe within which the bank has committed to resolving any issues highlighted by the report), to the Agency within the timeframe applicable.
EN-7.4 EN-7.4 Other notifications to the Agency
EN-7.4.1
Appointed Experts must communicate to the Agency, during the conduct of their duties, any reasonable belief or concern they may have that any of the requirements of the Agency, including the criteria for licensing a bank (see Module LR), are not or have not been fulfilled, or that there has been a material loss or there exists a significant risk of material loss in the concerned bank, or that the interests of customers are at risk because of adverse changes in the financial position or in the management or other resources of a bank. Notwithstanding the above, it is primarily the bank's responsibility to report such matters to the Agency.
EN-7.4.2
The Agency recognises that Appointed Experts cannot be expected to be aware of all circumstances which, had they known of them, would have led them to make a communication to the Agency as outlined above. It is only when Appointed Experts, in carrying out their duties, become aware of such a circumstance that they should make detailed inquiries with the above specific duty in mind.
EN-7.4.3
If Appointed Experts decide to communicate directly with the Agency in the circumstances set out in paragraph EN-7.4.1 above, they may wish to consider whether the matter should be reported at an appropriate senior level in the bank at the same time and whether an appropriate senior representative of the bank should be invited to attend the meeting with the Agency.
EN-8 EN-8 Administration
EN-8.1 EN-8.1 Legal source
EN-8.1.1
Article 93 of the BMA Decree — Law No. 23 of 1973 ("BMA Law") empowers (but does not oblige) the Agency to assume the administration of a licensee in certain circumstances, subject to the approval of the Minister of Finance. These circumstances are where:
(a) the licensee has become insolvent;(b) its liquidity or solvency are in jeopardy;(c) its continued activity is detrimental to the rights of depositors; or(d) it commits serious contraventions of the provisions of the BMA Law.EN-8.1.2
Article 94 of the BMA Law provides that where the Agency assumes the administration of a licensee, the licensee concerned may appeal to the Minister of Finance and, subsequently, the courts, in order to challenge its administration by the Agency.
EN-8.1.3
Articles 95 to 99 of the BMA Law set down the operating parameters of an administration.
EN-8.2 EN-8.2 BMA Policy
EN-8.2.1
The Agency views the administration of a licensee as a very powerful sanction, and will generally only pursue this option if less severe measures are unlikely to achieve its supervisory objectives.
EN-8.2.2
Although Article 93 of the BMA Law specifies the circumstances in which the Agency may pursue an administration, it does not oblige the Agency to administer a licensee. Faced with the circumstances described, the Agency may pursue other courses of action, if it considers that these are more likely to achieve the supervisory outcomes sought. Because an administration is likely to send a negative signal to the markets about the status of a licensee, other supervisory actions may in fact be preferable in terms of protecting the interests of those with a claim on the licensee.
EN-8.2.3
The criteria used by the Agency in deciding whether to seek an administration of a licensee include the following:
(a) the extent to which the interests of the market, its users and those who have a claim on the licensee would be best served by the administration of the license, for instance because of the potential impact on asset values arising from an administration;(b) the extent to which other regulatory actions could reasonably be expected to achieve the Agency's desired supervisory objectives (such as restrictions on the licensee's operations, including limitations on new business and asset disposals);(c) the extent to which the liquidity or solvency of the licensee is in jeopardy; and(d) the extent to which the licensee has contravened the conditions of the BMA Law, including the extent to which the contraventions reflect more widespread or systemic weaknesses in controls and/or management.EN-8.3 EN-8.3 Procedure for implementing an administration
EN-8.3.1
All proposals for assuming the administration of a licensee are subject to a thorough review by the Agency of all relevant facts, assessed against the criteria outlined in section EN-8.1. After being assessed at Executive Director level, proposals are submitted to H.E. the Governor and subsequently the Minister of Finance and National Economy for their respective approvals.
EN-8.3.2
Once approved by the Minister of Finance and National Economy, a formal notice of administration is issued to the licensee concerned and copies posted in every place of business of the licensee. As soon as practicable thereafter, the notice is also published in the Official Gazette and in local newspapers. The term "in administration" should be clearly marked in all the bank's correspondence and on its website, next to the bank's name.
EN-8.3.3
Article 94 of the BMA Law allows a licensee 10 days following the administration taking effect in which to appeal to the Minister of Finance. If the Minister refuses the appeal, the licensee has a further 10 days from the date of the refusal in which to lodge an appeal at the courts. So as to reduce the potential damage of an administration order being applied and then withdrawn on appeal, where feasible the Agency will give advance notice to a licensee's Board of its intention to seek an administration, and allow the Board the right of appeal prior to an administration notice being formally served.
EN-9 EN-9 Cancellation of license
EN-9.1 EN-9.1 Legal source
EN-9.1.1
Article 66 of the BMA Decree — Law No. 23 of 1973 ("BMA Law") empowers the Agency to cancel a license under certain circumstances. These include cases where a licensee has:
(a) contravened the conditions of its license;(b) repeatedly violated the provisions of the BMA Law; or(c) failed to follow BMA regulations regarding the merger or other major restructurings of its operations.EN-9.1.2
Article 66 of the BMA Law also requires the Agency to give the licensee concerned reasonable time to object to any proposed cancellation of its license.
EN-9.2 EN-9.2 BMA policy
EN-9.2.1
The Agency generally views canceling a license as appropriate only in extreme circumstances, when faced with the gravest of contraventions or when left with no other reasonable means of successfully addressing the regulatory failings in question.
EN-9.2.2
The criteria used by the Agency in assessing whether to seek cancellation of a license include:
(a) the extent to which the interests of the market, its users and those who have a claim on the licensee would be best served by the cancellation of the license;(b) the extent to which other regulatory penalties could reasonably be expected to achieve the Agency's desired supervisory objectives;(c) the extent to which the licensee has contravened the conditions of its license and/or the BMA Law, including the seriousness, duration and/or frequency of the contravention(s) concerned, and the extent to which the contraventions reflect more widespread or systemic weaknesses in controls and/or management;(d) the extent to which the licensee has been involved in financial crime or other criminal conduct; and(e) the licensee's past compliance record and conduct following the contravention(s).EN-9.3 EN-9.3 Procedure for cancellation of license
EN-9.3.1
All proposals for canceling a license are subject to a thorough review by the Agency of all relevant facts, assessed against the criteria outlined in section EN-9.2. After being assessed at Executive Director level, proposals are submitted to H.E. the Governor for approval.
EN-9.3.2
Once approved within the BMA, a formal notice of cancellation is issued to the licensee concerned. The notice of cancellation will describe the factual circumstances of the contraventions concerned, and the Agency's rationale for the proposed cancellation, as measured against the criteria outlined in section EN-9.2.
EN-9.3.3
The licensee has 30 calendar days from the date of the notice in which to lodge an appeal. The appeal should be addressed to the Board of the BMA, and copied to H.E. the Governor of the BMA.
EN-9.3.4
If an appeal is lodged, the Board of the BMA will make a final ruling within 60 calendar days of its date of issuance.
EN-10 EN-10 Criminal sanctions
EN-10.1 EN-10.1 Overview
EN-10.1.1
The BMA Decree — Law No. 23 of 1973 ("BMA Law") provides for a number of criminal sanctions in cases where certain of its provisions are contravened. This section provides a summary of those sanctions most relevant to licensees, their Directors and employees. What follows is not a complete list of all sanctions provided for in the BMA Law, nor is it a substitute for reading the Law and being fully aware of its provisions.
EN-10.1.2
Licensees, their Directors and employees should also be aware of the criminal sanctions provided for under other relevant Bahraini laws, such as the Decree — Law No. 4 of 2001, with respect to the prevention and prohibition of the laundering of money.
EN-10.1.3
In all cases to do with criminal sanctions, the Agency can only refer the matter to the Office of Public Prosecutor. The Agency has no authority to apply such sanctions without recourse to the courts.
EN-10.2 EN-10.2 BMA policy
EN-10.2.1
Because of their criminal status, and their provision for custodial sentences, the sanctions provided for under the BMA Law are viewed by the Agency as very powerful measures, to be pursued sparingly. In most situations, the Agency will seek to address regulatory failures through administrative sanctions, as outlined in preceding sections, rather than by pursuing the criminal sanctions outlined here.
EN-10.2.2
Where, however, the nature of the offence is such that there is strong evidence of a reckless or intentional breach of the BMA Law relevant to the following Articles, then the Agency will usually refer the matter to the Office of Public Prosecutor.
EN-10.3 EN-10.3 Article 87
EN-10.3.1
Article 87 of the BMA Law provides for a term of imprisonment of up to two years, and/or a fine of up to BD 5,000, without prejudice to any other penalty prescribed in any other law, in case of conviction of a Director, manager, official, agent or representative of any licensee who:
(a) makes false or misleading statements with fraudulent intent;(b) omits, with fraudulent intent, to make any statement or any entry in the books or accounts of the banking firm;(c) obstructs the performance of the auditor's duties; and(d) obstructs an investigation conducted by inspectors appointed by the Agency.EN-10.4 EN-10.4 Article 88
EN-10.4.1
Article 88 provides for a term of imprisonment of up to six months, and/or a fine of up to BD 1,000, for any Director, manager or official responsible for the direction or management of a licensee, who deliberately neglects to ensure the implementation of the provisions of the BMA Law.
EN-10.5 EN-10.5 Article 92
EN-10.5.1
Article 92 C provides for a term of imprisonment of up to two years, and/or a fine of up to BD 5,000, for any Director, manager, official or employee, who receives or approves the acceptance of deposits although he is aware — or ought to be aware by reason of the nature of his duties — of the insolvency of his bank.
Archived Part B
CBB Reporting Forms
Supplementary Information
CA: CA: Capital Adequacy
Appendix CA 7: Example: showing the calculation of risk weighted amount of an investment subject to fair value treatment
Please download the Form in PDF format.