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.
