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  • CA-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 07

      • 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.
        October 07

      • CA-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 07

    • 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 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 07

    • 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 equity securities held as available-for-sale (on an aggregate net-basis).
        October 07

    • 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.
        October 07