CM-4.4.1

A 'large exposure' is any exposure 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.

CM-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 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.

CM-4.4.1B

'Acquisition' means 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 this Module). 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 Section BR-5-2.

CM-4.4.1C

'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.

CM-4.4.1D

A bank has "close links" with:

CM-4.4.1E

A "major investment" is defined as any acquisition or investment in the capital instruments of another entity by a Bahraini Islamic bank licensee which is equivalent to or more than 10% of the Bahraini Islamic bank licensees consolidated total capital.

CM-4.4.1F

[This Paragraph was deleted in January 2015.]

CM-4.4.2

Total Capital has the same meaning as when used in Section CA-1.1.

CM-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.

CM-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.

CM-4.4.4

[This Paragraph was deleted in January 2015.]

CM-4.4.5

A bank may not incur an exposure to an individual counterparty or group of closely related counterparties (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 single exposure limit applies:

Direct exposures (i.e. funded, unfunded on and off balance sheet): 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 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).

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), 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-4.4.6A

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.

CM-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.

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 large exposures policy statement agreed with the CBB.

CM-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.

CM-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.

CM-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.

CM-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 of controlled 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.

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.

CM-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.

CM-4.4.11

Lending to senior management is covered under Chapter CM-5. All credit facilities to senior management are included under the limits given in the table under Paragraph CM-4.4.13.

CM-4.4.12

Banks must not undertake exposures to controllers as defined in Chapter GR-5 or to subsidiaries of such (i.e. there is a 0% limit for such exposures), however smaller shareholders will be subject to the normal exposure limits outlined in CM-4.4.5. Directors who are also controllers (or the appointed board representatives of such controllers) are subject to the 0% limit.

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

CM-4.4.13A

Where limits mentioned under Paragraphs CM-4.4.5 and CM-4.4.13 have been exceeded whether with or without the prior approval of the CBB (see Paragraph CM-4.4.8A), the excess amount must be risk-weighted at 800%.

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 capital investment, or provision of long-term working capital, or are made on particularly concessionary terms.

CM-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 to acquisitions or takeovers must be deducted from the concerned bank's Total Capital (see also CA-2.4.15).

CM-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.

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 such exposures must be made to the CBB and then retrospectively on a quarterly basis using the Form PIR provided in Appendix BR-5.

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 CBB:

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 related exposures 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.

CM-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 such exposures per counterparty that the CBB may approve must not exceed 30% of the concerned bank's consolidated Total Capital during the three-month period.

CM-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.

CM-4.5.2D

A bank may not incur any temporary large exposure arising from investment 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 temporary exposures that the CBB may approve per individual exposure must not exceed 25% of the concerned bank's consolidated Total Capital for a maximum six-month period. Any such exposures held for more than six months from the originating date of the exposure 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 such exposures, 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.

CM-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 existing exposures to the concerned counterparties in its consideration of any application for such temporary large exposures limits.

CM-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.

CM-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.

CM-4.5.3

Exposures to subsidiaries 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 large exposure limits in CM-4.4.13 on a solo basis and the CBB's solo capital adequacy requirements in Module CA.

CM-4.5.4

Exposures to unconsolidated subsidiaries (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 for exposures to associates, related parties and unconsolidated subsidiaries.

CM-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. Such exposures must be approved by the CBB before they may be exempted.

CM-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.

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 an exposure to its parent bank.

CM-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 large exposures if the CBB is satisfied that:

CM-4.5.9

In the case of a Bahrain incorporated bank's subsidiary inside 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.

CM-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.

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 risk exposure to a bank through the acquisition of capital is arguably greater than that acquired by providing credit facilities in four ways:

CM-4.9.2

In view of the above, the supervisory treatment of major investments requires special consideration which goes further than the monitoring of large exposures of banks as outlined earlier in Chapter CM-4.

CM-4.9.2A

[This Paragraph was moved to Section CM-4.10 in October 2016]

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].

CM-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 existing major investments in excess of 5% of such exposure.

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.

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.

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.

CM-4.9.4

Any major investments by a Bahraini Islamic bank licensee in the capital instruments of another entity must be included in the measure of an "exposure" for the purposes of Module CM, i.e. such major investments must be aggregated with all other facilities to a client for the purpose of calculating the level of "large exposures".

CM-4.9.5

The CBB reserves the right to require Bahraini Islamic bank licensees to dispose of any major 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).

CM-4.9.6

[This Paragraph was moved to Section CM-4.10 in October 2016]

CM-4.9.7

[This Paragraph was moved to Section CM-4.10 in October 2016]

CM-4.9.8

[This Paragraph was moved to Section CM-4.10 in October 2016]

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.

CM-4.9.10

In assessing any proposed major investment mentioned above, the CBB will take into account the following points: