• 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 that Islamic bank licensees deal with their stakeholders in a fair and open manner, and address their stakeholders' information needs.

            Amended: July 2015
            October 07

          • BC-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 with customers. Principle 3 (Due skill, care and diligence) requires Islamic bank licensees to act with due skill, care and diligence when acting on behalf of their customers. Principle 7 (Client Interests) requires Islamic bank licensees to pay due regard to the legitimate interests and information needs of their customers, and to communicate with them in a fair and transparent manner.

            October 07

          • 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).

            October 07

          • Legal 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 all Islamic bank licensees.

              Amended January 2011
              October 07

            • BC-A.1.5

              For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

              October 07

        • BC-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 07

          • BC-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 2007

          • BC-A.2.3

            For overseas Islamic bank licensees, these requirements only apply to the business and customers of the Bahrain branch.

            Added: July 2015

          • BC-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 the Islamic bank licensee that may arise through adverse reputational or other consequences.

            Added: July 2015

          • BC-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 2015

        • BC-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 07

          • BC-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 07

          • BC-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-10.7.3 
            04/2020 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.

          • 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 07

      • BC-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 2015

          • BC-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 2015

          • BC-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 2015

          • BC-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 2015

          • BC-B.1.5

            An Islamic bank licensee must not mislead clients or the market through the withholding of material information.

            Added: July 2015

          • BC-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, an Islamic bank licensee must follow best practice in establishing procedures for handling complaints from clients. See Chapter BC-10.

            Added: July 2015

          • BC-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, an Islamic 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. An Islamic 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 from customers or investors, and with whistle-blowers and any problems to which they draw attention. Refer to Paragraph HC-3.3.3.

            Added: July 2015

          • BC-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 its customers inclusive of stakeholders. It is an assurance by the Islamic 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 2015

          • BC-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 the Islamic 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 between Islamic bank licensee that offer similar services; and
            (e) Allows the public to be more aware of the conduct commitment of each Islamic bank licensee.

            Benefits to the Islamic bank licensee:

            (a) Acts as a performance indicator, which will enable the Islamic bank licensee to evaluate its conduct practices; and
            (b) Upgrades the discipline, responsibility and accountability of the Islamic bank licensee, which in turn will contribute to a more transparent Islamic finance industry.
            Added: July 2015

          • BC-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 the Islamic bank licensee to take measures to prevent future breaches.
            Added: July 2015

          • BC-B.1.11

            Islamic bank licensees must apply the requirements of Module PD pertaining to enhancing corporate governance and financial transparency in order to protect customers and facilitate market discipline through better practice in public disclosure.

            Added: July 2015

        • BC-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 2015

          • BC-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 2015

          • BC-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 2015

          • BC-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 an Islamic bank licensee to be lax in applying criteria of creditworthiness, or relying only on collateral to mitigate credit losses, especially in cases where the Islamic bank licensee exercising its rights over the collateral would inflict hardship on the debtor.

            Added: July 2015

          • BC-B.2.5

            An Islamic bank licensee should endeavour to take all reasonable steps to assist the debtor.

            Added: July 2015

          • BC-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 2015

          • BC-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 2015

          • BC-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 2015

        • BC-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 2015

          • BC-B.3.2

            This principle requires that the board of directors, senior management, staff and representatives (such as agents) of an Islamic 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 the Islamic bank licensee.

            Added: July 2015

          • BC-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 2015

          • BC-B.3.4

            An Islamic bank licensee must ensure that the persons entrusted to deal on behalf of the Islamic bank licensee are equipped with an appropriate level of knowledge of the Shari'a-compliant characteristics of the financial products and services offered by the Islamic bank licensee. Having staff with the necessary capabilities is key to avoiding excessive levels of operational risk in banking.

            Added: July 2015

          • BC-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 2015

        • BC-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 2015

          • BC-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 2015

          • BC-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 to customers is aimed at the customers' interests and based on adequate standards of research and analysis.

            Added: July 2015

          • BC-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 2015

          • BC-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 2015

          • BC-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 2015

        • BC-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 2015

          • BC-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 2015

          • BC-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 2015

          • BC-B.5.4

            An Islamic bank licensee must maintain fair treatment of customers through the lifetime of the customer relationships, and ensure that customers are kept informed of important events.

            Added: July 2015

          • BC-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 2015

          • BC-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 2015

          • BC-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 2015

          • BC-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 provide customers 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 each customer. Such notice is to enable the customer to decide whether to accept the new terms or terminate the agreement.

            Added: July 2015

          • BC-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 2015

          • BC-B.5.10

            Negative selling occurs when a bank provides unordered services/products to a customer and then bills the customer. Often, the supply is accompanied by a form of notice instructing the customer 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 2015

          • BC-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 2015

          • BC-B.5.12

            Given the complexity of many financial products, Islamic bank licensees should give their customers 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 2015

          • BC-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 the customer that he/she wishes to waive his/her right to the 'cooling off period'.

            Added: October 2015

          • BC-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 the customer has not indicated otherwise.

            Added: July 2015

        • BC-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 as shareholders. See Section BC-9.12.

            Added: July 2015

          • BC-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 2015

          • BC-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 the Islamic bank licensee. In this connection, the fiduciary duties of an Islamic bank licensee to stakeholders, including IAH, are crucial.

            Added: July 2015

          • BC-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 2015

          • BC-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 2015

        • BC-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 2015

          • BC-B.7.2

            An Islamic bank licensee must comply with all applicable legal and regulatory requirements and Shari'a requirements.

            Added: July 2015

          • BC-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 2015

      • BC-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 2020

      • 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 Means of Incentives etc.

          • Introduction

            • BC-1.1.1

              The purpose of the content of this Section is to set out requirements pertaining to the promotion of banking/financial products offered in/from Bahrain by means of incentives etc. (herein referred to as 'promotional schemes').

              October 07

            • BC-1.1.2

              The CBB has no objection to the use of promotional schemes in general and, unless it otherwise specifically directs in any particular case, the CBB does not expect to be actively consulted/have its approval sought about the idea and/or substance of any promotional schemes. Any advertising of promotional schemes are subject to the requirements of Section BC-1.2. The CBB should also be sent copies of documentation relating to promotional schemes at least ten days prior to their launch for information purposes.

              Amended October 2012
              Amended January 2011
              October 2007

            • BC-1.1.3

              The CBB 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 CBB at any time regarding any matters referred to in the explanatory note set out in this Section.

              Amended January 2011
              October 2007

            • BC-1.1.4

              Banks undertaking investment business activities should refer to Chapter BC-9 for additional requirements.

              October 07
              Amended: April 08

          • General Requirements

            • BC-1.1.5

              Retail Islamic bank licensees must take care to ensure that promotional schemes do not involve a breach of Bahrain law or any other relevant applicable law and regulation or Shari'a principles. In addition, promotional schemes must not in any way be detrimental to the public good or public morals.

              Amended: July 2015
              Amended April 2011
              Added April 2008

            • BC-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 07

            • BC-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 07

            • BC-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 07

            • BC-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 07

            • BC-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 07

            • BC-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 2007

            • BC-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 07

            • BC-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 2007

            • BC-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 07

            • BC-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 2007

        • BC-1.2 BC-1.2 Advertisements for Retail Banking Products and Services

          • BC-1.2.1

            [This Paragraph was deleted in July 2021].

            Deleted: July 2021
            Added: July 2012

          • BC-1.2.2

            [This Paragraph was deleted in July 2021].

            Deleted: July 2021
            Amended: April 2013
            Added: July 2012

      • 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.

            October 07

          • 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 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 07

          • 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.

            Amended January 2011
            October 2007

        • 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.

            October 07

          • 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 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 2007

        • 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.

            October 07

          • 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) In deposit 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 potential counterparty 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 his deposit rates are being checked by a potential counterparty. 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 or deposit 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 2007

        • 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 should be prepared to receive them, normally within a few minutes after deals have been concluded.

            Amended January 2011
            October 2007

          • 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.

            October 07

        • 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.

            October 07

          • 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.

            October 07

          • 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.

            October 07

        • 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.

            October 07

          • 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.

            October 07

          • 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.

            October 07

          • BC-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 07

        • BC-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 07

          • 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.

              October 07

            • 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.

              October 07

          • Bets

            • BC-2.7.4

              The making or arranging of bets between brokers and banks dealers is totally unacceptable.

              October 07

          • 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.

              October 07

        • 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 CBB is notified of any changes in broking staff, in accordance with CBB requirements.
            Amended January 2011
            October 2007

          • 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 CBB is notified of any changes in dealing staff, in accordance with CBB 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.
            Amended January 2011
            October 2007

        • 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.

              October 07

            • 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.

              October 07

          • 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 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 07

            • BC-2.9.4

              Put-through deals may be net of brokerage.

              October 07

            • BC-2.9.5

              Brokerage should be expressed in US dollars.

              October 07

        • 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-4.5) 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 07

            • 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.

              October 07

            • 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).

              October 07

            • BC-2.10.4

              Put-through deals may be net of brokerage.

              October 07

        • 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 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 2007

        • 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; 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, 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 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 2007

          • BC-2.12.2

            Deposits:

            (a) Maturing on unexpected closing day(s): Extending deposit 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 2007

          • 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); 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 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;
            •   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 2007

      • BC-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 2007

      • BC-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 07

          • BC-4.1.2

            [This paragraph was deleted in April 2018].

            Deleted: April 2018
            October 07

        • BC-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 and branches), a list of all applicable charges.

            Amended: July 2015
            Added: October 2012

          • BC-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 2012

          • Credit 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 2012

            • BC-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 to customers;
              (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 and branches), and via means such as websites, newspapers and other press notices;
              (d) Nominal annual rate — Means the profit rate charged to the customer, calculated by dividing the amount of the total profit by the amount of the funds provided to the customer 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 the customer and any other charges that are included as part of the principal amount to be repaid by the customer 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 2012

          • General Rules

            • BC-4.2.5

              Where a customer has a credit agreement with a retail bank, retail banks must:

              (a) Duly inform their customers 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, their customers 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, to customers' 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 a customer 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 to customers;
              (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 2012

            • BC-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 2012

            • BC-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 2012

          • Minimum Disclosure Requirements

            • BC-4.2.8

              Retail banks must make:

              (a) Public disclosure regarding credit agreements; and
              (b) Disclosures to customer(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 2012

          • Public 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 2012

          • Additional 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 2012

            • BC-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 2012

            • BC-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 2012

            • BC-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 2012

          • Additional 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 the customer exceeds contractual credit lines, the terms and any relevant charges.
              Amended: July 2015
              Amended: April 2014
              Added: October 2012

            • BC-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 2012

            • BC-4.2.16

              For credit agreements other than instalment financing facilities, banks are prohibited from using the term APR in any advertising.

              Added: October 2012

          • Disclosure 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 2012

            • BC-4.2.18

              This Paragraph was deleted in July 2015.

              Deleted: July 2015
              Added: October 2012

            • BC-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 2012

            • BC-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 2012

            • BC-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 2012

            • BC-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) The principal amount and profit per month of the financing facility and the maturity of the credit/financing agreement;
              (ii) The net amount provided to the customer after deducting or applying any upfront or other charges;
              (iii) The total profit payments and principal 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 whether principal 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 2012

            • BC-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 2012

          • Disclosure 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 2012

            • BC-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 2012

            • BC-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 2019

          • Variation 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 and principal 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 2012

            • BC-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 2012

            • BC-4.2.28

              Any deferral of profit or principal announced by the retail bank must also take account of the APR methodology as shown in Paragraphs BC-4.2.31 to BC-4.2.33, and the new APR must be given to the client or made public in advertisements.

              Added: October 2012

          • Early 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 2012

            • BC-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 2012

            • BC-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 2012

            • BC-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 2012

            • BC-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 2012

        • BC-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 2007

          • 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.

            October 07

        • BC-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 07

          • BC-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 07

          • BC-4.5.3

            For the list of brokerage fee, see Appendix BC-6.

            October 07

        • BC-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 2007

          • BC-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 2007

          • BC-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 2016

          • BC-4.6.3

            [This Paragraph was deleted in October 2011].

            Deleted: October 2011

        • BC-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 2007

          • BC-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 2007

        • BC-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 a customer.

            Amended: July 2015
            Added: April 08

          • BC-4.8.2

            Islamic bank licensees must take responsibility for compliance with the above requirements by all persons carrying out regulated 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 08

        • BC-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 2011

          • BC-4.9.2

            This Paragraph was deleted in July 2015.

            Deleted: July 2015
            Added: October 2011

        • BC-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 2014

          • BC-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 2014

          • BC-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 2014

          • BC-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 2014

          • BC-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 2014

          • BC-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 2014

        • BC-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 2015

        • BC-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 2019

        • BC-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 2018

          • BC-4.14.2

            Islamic retail bank licensees must not charge any setup fees for opening bank accounts for companies under formation.

            Added: October 2018

        • BC-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 2019

        • BC-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 2019

        • BC-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 2020

        • BC-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 2021

      • BC-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 2007

          • Procedures 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 07

            • BC-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 2007

            • BC-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 2007

            • BC-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 2007

            • BC-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 2007

            • BC-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 2007

            • BC-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 2007

            • BC-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 2007

            • BC-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 2007

        • BC-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 2007

          • BC-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 07

          • BC-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 07

          • BC-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 2007

        • BC-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 2007

          • BC-5.3.2

            [This paragraph was deleted in April 2018].

            Deleted: April 2018
            Amended: October 2013
            October 07

      • BC-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 2017

      • BC-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 07

          • BC-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 2007

            • BC-6.1.4

              [This Paragraph was deleted in October 2019].

              Deleted: October 2019
              Amended January 2011
              October 2007

            • BC-6.1.5

              [This Paragraph was deleted in October 2019].

              Deleted: October 2019
              October 07

            • BC-6.1.6

              [This Paragraph was deleted in October 2019].

              Deleted: October 2019
              Amended: July 2016
              Amended April 2012
              Amended January 2011
              October 2007

            • BC-6.1.7

              [This Paragraph was deleted in October 2019].

              Deleted: October 2019
              Amended January 2011
              October 2007

            • BC-6.1.8

              [This Paragraph was deleted in October 2019].

              Deleted: October 2019
              Amended January 2011
              October 2007

            • BC-6.1.9

              [This Paragraph was deleted in October 2019].

              Deleted: October 2019
              Amended January 2011
              October 2007

            • BC-6.1.10

              [This Paragraph was deleted in October 2019].

              Deleted: October 2019
              Amended April 2012
              Amended January 2011
              October 2007

            • BC-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 07

          • BC-6.2.2

            [This paragraph was deleted in April 2018].

            Deleted: April 2018
            October 07

          • BC-6.2.3

            [This paragraph was deleted in April 2018].

            Deleted: April 2018
            Amended January 2011
            October 2007

        • BC-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 2014

          • BC-6.3.2

            [This Paragraph was deleted in April 2016.]

            Deleted: April 2016
            Added: January 2014

          • BC-6.3.3

            [This Paragraph was deleted in April 2016.]

            Deleted: April 2016
            Added: January 2014

      • BC-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 2007

          • BC-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 2007

          • 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 CBB.

            Amended January 2011
            October 2007

      • BC-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 07

          • BC-8.1.2

            Investors purchasing securities listed on any licensed 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 the licensed exchange, any rules and regulations issued pursuant to such Law, Rulebook and this Module. The System applies to equities in companies listed on any licensed 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 2007

          • BC-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 2007

          • General 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 2007

            • BC-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 2007

        • BC-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 07

          • BC-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 2007

          • 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.

            October 07

          • 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 CBB at its discretion from time to time.

            October 07

          • BC-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 2007

          • SRO Members

            • BC-8.2.6

              Only licensed SRO members who meet the requirements to participate in the System and are authorised as such by the licensed exhange and the CBB will be permitted to act as brokers for the System.

              Amended January 2011
              October 2007

          • 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 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 the SRO 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) The SRO member 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 SRO member 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; 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 of securities
              Amended: January 2011
              October 2009
              October 2007

          • 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.

              Amended January 2011
              October 2007

            • 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.

              Amended January 2011
              October 2007

          • Margin 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 the licensed exchange shall coordinate in making any change to the margin percentages set for the System.

              Amended: July 2015
              Amended January 2011
              October 2007

          • 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.

              Amended January 2011
              October 2007

          • 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.

              October 07

      • BC-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 08

          • BC-9.1.2

            [This Paragraph was deleted in July 2015]

            Deleted: July 2015
            Added: April 08

          • Overseas 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 08

            • BC-9.1.4

              [This Paragraph was deleted in July 2015]

              Deleted: July 2015
              Amended: January 2011
              Added: April 2008

            • BC-9.1.5

              [This Paragraph was deleted in July 2015]

              Deleted: July 2015
              Amended: January 2011
              Added: April 2008

        • BC-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 all Islamic bank licensees, except where otherwise indicated.

            Amended: July 2015
            Amended: April 2011
            Amended: January 2011
            Added: April 2008

          • BC-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 2015

          • BC-9.2.2

            This Module aims to encourage high standards of business conduct, which are broadly applicable to all Islamic bank licensees, all regulated banking services referred to in Paragraph BC-9.2.1, and all types of customers.

            Amended: July 2015
            Amended: January 2011
            Added: April 2008

          • BC-9.2.3

            This Paragraph was deleted in July 2015.

            Deleted: July 2015
            Added: April 08

          • BC-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 08

          • BC-9.2.5

            This Paragraph was deleted in July 2015.

            Deleted: July 2015
            Added: April 08

        • BC-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 2008

          • BC-9.3.2

            [This Paragraph was deleted in July 2015]

            Deleted: July 2015
            Added: April 08

        • BC-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 2008

          • BC-9.4.2

            [This Paragraph was deleted in July 2015]

            Deleted: July 2015
            Added: April 08

          • BC-9.4.3

            [This Paragraph was deleted in July 2015]

            Deleted: July 2015
            Amended: January 2011
            Added: April 2008

          • BC-9.4.4

            [This Paragraph was deleted in July 2015]

            Deleted: July 2015
            Added: April 08

          • BC-9.4.5

            [This Paragraph was deleted in July 2015]

            Deleted: July 2015
            Added: April 08

          • Accredited 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 2008

            • BC-9.4.7

              [This Paragraph was deleted in July 2015]

              Deleted: July 2015
              Amended: January 2011
              Added: April 2008

            • BC-9.4.8

              [This Paragraph was deleted in July 2015]

              Deleted: July 2015
              Amended: January 2011
              Added: April 2008

            • BC-9.4.9

              [This Paragraph was deleted in July 2015]

              Deleted: July 2015
              Amended: January 2011
              Added: April 2008

          • Retail 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 2008

          • Records

            [This heading was deleted in July 2015]

            • BC-9.4.11

              [This Paragraph was deleted in July 2015]

              Deleted: July 2015
              Added: April 08

        • BC-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 08

          • BC-9.5.2

            Islamic bank licensees must ensure that all advertising and promotional material for specific products that is sent to any class of customer is fair, clear and not misleading.

            Added: April 08

          • BC-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, the Islamic 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 08

          • BC-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 a customer or potential customer.

            Amended: July 2015
            Added: April 08

          • BC-9.5.5

            In ensuring that the description of the product or the service in relation to promotional material directed at customers is adequate, the Islamic 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 08

          • BC-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 2015

          • BC-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 the customer may be required to pay to exercise that right; and state if the communication relates to a financial instrument or service of a person other than the Islamic bank licensee, the name of the person.

            Added: July 2015

          • BC-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 08

          • BC-9.5.7

            Islamic bank licensees must not, in any form of communication with an individual customer or any class of customer, unreasonably attempt to limit or avoid any duty or liability it may have to that individual customer or class of customer in relation to regulated banking services, unless otherwise agreed in writing by both parties.

            Added: April 08

          • BC-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 08

          • BC-9.5.9

            Islamic bank licensees that underwrite or market public offerings must ensure that their promotional material complies with the relevant capital markets disclosure standards of the CBB.

            Added: April 08

          • BC-9.5.10

            Capital markets disclosure standards are currently contained in the Disclosure Standards Regulation of 3 December 2003.

            Added: April 08

          • Content of Promotions

            • BC-9.5.11

              Before an Islamic bank licensee communicates any promotional material on a specific product or service to a customer or a potential customer it must ensure that the promotional material at the very least contains the information laid out in Paragraph BC-9.13.1.

              Added: April 08

            • BC-9.5.12

              Islamic bank licensees must not make use of the name of the CBB in any promotion in such a way that would indicate endorsement or approval of its products or services.

              Added: April 08

            • BC-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 2012

          • Records

            • BC-9.5.13

              Islamic bank licensees must maintain a record of all promotional materials issued by them or on their behalf.

              Added: April 08

          • Real Time Promotions

            • BC-9.5.14

              Islamic bank licensees must not make a real time promotion to customers unless the concerned customer has been notified of the fact in advance and has agreed in writing to receive real time promotions.

              Amended: July 2015
              Added: April 08

            • BC-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 08

            • BC-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 08

            • BC-9.5.17

              A representative of the Islamic bank licensee must, on making contact for the first time with a customer, and again at any time when asked to do so by the customer:

              (a) Identify himself as being a representative of the Islamic bank licensee;
              (b) State the name of the Islamic 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 08

            • BC-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 08

            • BC-9.5.19

              In oral communications with a customer, whether in person or by telephone, the representative of the Islamic bank licensee must:

              (i) Conduct himself in a polite manner and respect the wishes of the customer;
              (ii) State the genuine purpose of the call at the commencement of the conversation;
              (iii) Ascertain whether or not the customer wishes him to proceed with the conversation if the time of the conversation was not previously agreed by the customer;
              (iv) Explain clearly the financial products or other services which he is authorised to arrange;
              (v) Recognise and respect the right of the customer to terminate the call at any time; and
              (vi) If he requests another appointment and the customer refuses, shall accept that refusal courteously and in such a manner as to cause no embarrassment to the customer.
              Amended: July 2015
              Amended: January 2011
              Added: April 2008

          • Records

            • BC-9.5.20

              Islamic bank licensees must keep sufficient records of real time promotions made by them, or on their behalf by other persons, for CBB’s supervision purposes.

              Added: April 08

            • BC-9.5.21

              These records should include evidence that customers have been notified in advance and agreed to receive real time promotions, as required under Rule BC-9.5.14.

              Added: April 08

        • BC-9.6 BC-9.6 Accepting Customers

          • Applicability

            • BC-9.6.1

              This Paragraph was deleted in July 2015.

              Deleted: July 2015
              Added: April 08

          • Terms of Business

            • BC-9.6.2

              Islamic bank licensees must provide their customers with their terms of business, setting out the basis on which the regulated banking services are to be conducted (see also Paragraph BC-9.8.13).

              Amended: July 2015
              Amended: January 2011
              Amended: October 2009
              Added: April 2008

            • BC-9.6.3

              The terms of business in relation to providing regulated banking services as defined in Paragraph BC-9.2.1 to a customer must take the form of a customer agreement.

              Amended: July 2015
              Amended: January 2011
              Amended: October 2009
              Added: April 2008

            • BC-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 08

            • BC-9.6.5

              An application form in relation to regulated banking services will be deemed to be a customer agreement, provided the form includes the principal terms and conditions of the service, such that the customer is provided sufficient information to allow him to understand the basis on which the service is to be conducted.

              Added: April 08

            • BC-9.6.6

              The customer agreement must be provided in good time prior to providing the regulated banking service.

              Added: April 08

            • BC-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 08

          • Customer 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 their customer has had a proper opportunity to consider the terms.

              Amended: July 2015
              Added: April 08

            • BC-9.6.9

              Islamic bank licensees must obtain their customer's consent to the terms of the customer agreement as evidenced by a signature or an equivalent mechanism.

              Amended: July 2015
              Added: April 08

            • BC-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 2008

            • BC-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 the Islamic bank licensee to the customer.

              Amended: October 2009
              Added: April 2008

          • Records

            • 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 2008

            • BC-9.6.13

              Detailed record-keeping requirements are contained in Module OM (Operational Risk Management) and Module FC (Financial Crime).

              Amended: July 2015
              Added: April 08

        • BC-9.7 BC-9.7 Suitability

          • Applicability

            • BC-9.7.1

              This Paragraph was deleted in July 2015.

              Deleted: July 2015
              Added: April 08

          • Information and Communication

            • BC-9.7.2

              Islamic bank licensees must seek information from their customers (and potential customers) 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 2008

            • BC-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 the customer or potential customer 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 the customer. The evaluation of the customer's needs, circumstances and objectives (including risk appetite) can be done through a structured questionnaire.

              Amended: July 2015
              Added: April 08

            • BC-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 their customers are accurate, complete and up to date.

              Added: April 08

            • BC-9.7.5

              In case of investment activities, where an Islamic bank licensee is managing financial instruments for a customer, it must periodically assess whether the customer's portfolio or account remains suitable over the lifetime of the customer relationship and advise the customer if it is no longer suitable.

              Amended: July 2015
              Added: April 08

            • BC-9.7.6

              In case of investment activities, where an Islamic bank licensee has pooled a customer's assets with those of others, with a view to taking common discretionary management decisions, the Islamic bank licensee must take reasonable steps to ensure that the transaction is suitable for the related customers having regard to their stated investment objectives.

              Amended: July 2015
              Added: April 08

          • Records

            • BC-9.7.7

              Islamic bank licensees must keep a record of each recommendation made to customers, and be able to demonstrate to the CBB compliance with this Section.

              Amended: July 2015
              Added: April 08

        • BC-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 08

          • Initial Disclosure Requirement

            • BC-9.8.2

              An Islamic bank licensee must provide (with respect to regulated banking services), comprehensible information to customers or potential customers 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 the customer 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 that regulated 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 2008

            • BC-9.8.3

              This Paragraph was deleted in July 2015.

              Amended: July 2015
              Amended: January 2011
              Added: April 2008

          • Risks

            • BC-9.8.4

              Islamic bank licensees must disclose adequate information to all classes of customers about risks underlying the financial products or services that are not readily apparent and which relate to the regulated Islamic banking service being provided.

              Amended: July 2015
              Added: April 08

          • Disclosure of Information for Investment Activities

            • BC-9.8.5

              In case of investment activities, Islamic bank licensees must provide customers with appropriate guidance on, and warnings of, relevant risks when providing regulated banking services, in relation to:

              (a) Transactions in illiquid financial 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) Islamic financial instruments.
              Amended: July 2015
              Added: April 08

            • BC-9.8.6

              In relation to transactions involving derivatives, Islamic bank licensees must provide customers with a written statement that includes explanations of their characteristics, in particular their leverage effect, liquidity and price volatility.

              Amended: July 2015
              Added: April 08

            • BC-9.8.7

              This Paragraph was deleted in July 2015.

              Deleted: July 2015
              Added: April 08

            • BC-9.8.8

              This Paragraph was deleted in July 2015.

              Deleted: July 2015
              Added: April 08

            • BC-9.8.9

              This Paragraph was deleted in July 2015.

              Deleted: July 2015
              Added: April 08

            • BC-9.8.10

              In relation to a transaction in a financial instrument that is not readily realisable, Islamic bank licensees must:

              (a) Warn the customer that there is a restricted market for such financial instruments, and that it may therefore be difficult to deal in the financial instrument or to obtain reliable information about its value; and
              (b) Disclose any position knowingly held by the Islamic bank licensee or any of its associates in the financial instrument or in a related financial instrument.
              Amended: July 2015
              Amended: January 2011
              Added: April 2008

            • BC-9.8.11

              The risk warning given to a customer or potential customer 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 08

            • BC-9.8.12

              Risk warnings provided to a customer or potential customer about Shari'a compliant derivatives must make clear that the instrument can be subject to sudden and sharp falls in value. Where the customer 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 08

          • Cancellation 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 08

            • BC-9.8.14

              Islamic bank licensees must pay due regard to the interests of their customers and treat them fairly.

              Added: April 08

          • Records

            • 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 their customers, and be able to demonstrate to the CBB compliance with this Chapter.

              Amended: July 2015
              Added: April 08

        • BC-9.9 BC-9.9 Dealing and Managing

          • BC-9.9.1

            This Paragraph was deleted in July 2015.

            Deleted: July 2015
            Added: April 08

          • Best and Timely Execution

            • BC-9.9.2

              Islamic bank licensees must take all reasonable steps to obtain, when executing orders, the best possible result for customers 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 2008

            • BC-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 of financial instrument;
              b) Maintenance of and disclosure to customers of information regarding execution venues and arrangements for disclosure to customers 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; and
              d) Maintenance of audit trails to demonstrate to their customers that orders were executed in accordance with the relevant execution policy.
              Added: April 08

            • BC-9.9.4

              This Paragraph was deleted in July 2015.

              Deleted: July 2015
              Amended: January 2011
              Added: April 2008

            • BC-9.9.5

              In determining whether an Islamic bank licensee has taken reasonable care to provide the best overall price for a customer in accordance with Rules BC-9.9.2 to BC-9.9.4, the CBB will take into account whether an Islamic bank licensee has:

              (a) Executed orders promptly and sequentially;
              (b) Discounted any fees and charges previously disclosed to the customer;
              (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 its customers' transactions. In the case where the Islamic 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 08

            • BC-9.9.6

              Islamic bank licensees may only postpone the execution of a transaction if it is in the best interests of the customer, and the prior consent of the customer has been given, or when circumstances are beyond its control. The Islamic bank licensee must maintain a record of all postponements together with the reasons for the postponement.

              Added: April 08

            • BC-9.9.7

              Factors relevant to whether the postponement of an existing customer order may be in the best interests of the customer include where:

              (a) The customer order is received outside of normal trading hours;
              (b) A foreseeable improvement in the level of liquidity in the financial instrument is likely to enhance the terms on which the Islamic 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 08

          • Non-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 a customer, if it has reasonable grounds to suspect that the customer is entering into the transaction for an illegal or improper purpose.

              Added: April 08

            • BC-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 its customer, differs from the prevailing market price. With respect to transactions in financial instruments traded on a licensed exchange, licensees are reminded that in Bahrain the law prohibits off-market transactions.

              Amended: January 2011
              Added: April 2008

            • BC-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 08

            • BC-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 08

          • Aggregation and Allocation

            • BC-9.9.12

              Islamic bank licensees may only aggregate an order for a customer with an order for other customers, or with an order for its own account, where:

              (a) It is unlikely that the aggregation will disadvantage the customers whose orders have been aggregated; and
              (b) It has disclosed to each customer concerned in writing that it may aggregate orders, where these work to the customer's advantage.
              Added: April 08

            • BC-9.9.13

              If an Islamic bank licensee has aggregated orders of customers, it must make a record of the intended basis of allocation and the identity of each customer before the order is effected (subject to the “best execution” provisions of Paragraph BC-9.9.2).

              Amended: January 2011
              Added: April 2008

            • BC-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 08

            • BC-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 08

            • BC-9.9.16

              Where an Islamic bank licensee has aggregated a customer order with an order for other customers or with an order for its own account, and part or all of the aggregated order has been filled, it must:

              (a) Promptly allocate the financial instruments concerned;
              (b) Allocate the financial 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 satisfying customer orders where the aggregation order combines a customer 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 relevant financial instruments;
              (iii) The identity of each customer concerned;
              (iv) The amount allocated to each customer and to the Islamic bank licensee; and
              (v) The price of each financial instrument and allocation.
              Amended: April 2013
              Added: April 08

          • Excessive Dealing

            • BC-9.9.17

              Islamic bank licensees must not advise any customer 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 2008

          • Right to Realise a Customer's Assets

            • BC-9.9.18

              Islamic bank licensees must not realise a customer'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 the customer;
              (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 the customer written or oral notice of its intention to exercise its rights before it does so.
              Amended: July 2015
              Added: April 08

          • Margin Requirements

            • BC-9.9.19

              Before conducting a transaction with or for a customer, Islamic bank licensees must notify the customer of:

              (a) The circumstances in which the customer may be required to provide any margin;
              (b) The form in which the margin may be provided;
              (c) The steps the Islamic bank licensee may be required or entitled to take if the customer fails to provide the required margin, including:
              (i) The fact that the customer's failure to provide margin may lead to the Islamic bank licensee closing out his position after a time limit specified by the firm;
              (ii) The circumstances in which the Islamic bank licensee will have the right or duty to close out the customer's position; and
              (iii) The circumstances, other than failure to provide the required margin, that may lead to the Islamic bank licensee closing out the customer's position without prior reference to him.
              Amended: July 2015
              Added: April 08

            • BC-9.9.20

              Islamic bank licensees must close out a customer's open position if that customer 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) The Islamic bank licensee has received confirmation from a relevant third party (such as a clearing firm) that the customer has given instructions to pay in full; or
              (b) The Islamic bank licensee has taken reasonable care to establish that the delay is owing to circumstances beyond the customer's control.
              Amended: July 2015
              Amended: January 2011
              Added: April 2008

            • BC-9.9.21

              For the purposes of Rule BC-9.9.20, Islamic bank licensees may require the closing of a customer's open position in less than five business days, for their own risk management purposes.

              Amended: July 2015
              Added: April 08

            • BC-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 2008

          • Programme Trading

            • BC-9.9.23

              Before an Islamic bank licensee executes a programme trade, it must disclose to its customer whether it will be acting as a principal or agent. An Islamic bank licensee must not subsequently act in a different capacity from that which is disclosed without the prior consent of the customer.

              Added: April 08

            • BC-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 of financial instruments.

              Added: April 08

            • BC-9.9.25

              Islamic bank licensees must ensure that neither they, nor an associate, execute an own account transaction in any financial instrument included in a programme trade, unless they have notified the customer in advance that they may do this, or can otherwise demonstrate that they have provided fair treatment to the customer concerned.

              Added: April 08

          • Records

            • 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 08

        • BC-9.10 BC-9.10 Reporting to Customers

          • BC-9.10.1

            This Paragraph was deleted in July 2015.

            Deleted: July 2015
            Added: April 08

          • Confirmation of Transactions

            • BC-9.10.2

              When an Islamic bank licensee provides regulated Islamic banking services, it must establish procedures to keep the customer informed of the essential details of the financial product or service.

              Amended: July 2015
              Added: April 08

            • BC-9.10.3

              For the purposes of Rule BC-9.10.2, reference should be made to Chapter BC-4 and to Chapter CM-7.

              Amended: July 2015
              Added: April 08

            • BC-9.10.4

              For the purposes of Rule BC-9.10.2, in case of investment activities, Islamic bank licensees must include at the very least in their confirmation notes, the information included in Paragraph BC-9.13.7.

              Amended: July 2015
              Added: April 08

          • Periodic Statements

            • BC-9.10.5

              Islamic bank licensees must promptly and at suitable intervals provide their customers with periodic statements on regulated Islamic banking services provided, throughout the duration of the contractual relationship between the bank and the customer.

              Added: July 2015

            • BC-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 2015

            • BC-9.10.6B

              In case of investment activities, Islamic bank licensees must promptly and at suitable intervals provide their customers with a written statement when they:

              (a) Undertake the activity of managing financial instruments; or
              (b) Operate a customer's account containing financial instruments.
              Amended: July 2015
              Added: April 08

            • BC-9.10.6C

              For the purposes of Rule BC-9.10.6B suitable intervals means:

              (a) Monthly, if the customer'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 2015

            • BC-9.10.6

              Islamic bank licensees must provide a periodic statement:

              (a) Monthly, if the customer is a retail customer and the retail customer'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: April 08

            • BC-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 2008

            • BC-9.10.8

              Where an Islamic bank licensee undertakes the activity of managing financial 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 2008

            • BC-9.10.9

              In addition to Rules BC-9.10.7 and BC-9.10.8, where the customer may not only lose his entire investment but may also be required to pay more later, Islamic bank licensees must also include the additional information included in Paragraph BC-9.13.9.

              Amended: July 2015
              Added: April 08

          • Records

            • BC-9.10.10

              Islamic bank licensees must immediately record the essential elements of all orders that are received.

              Added: April 08

            • BC-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 08

            • BC-9.10.12

              Islamic bank licensees must immediately record the essential elements of individual orders received, including:

              (a) Particulars of the customer and order;
              (b) Time of execution;
              (c) Price of execution; and
              (d) Number of instruments.
              Amended: July 2015
              Added: April 08

            • BC-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 08

            • BC-9.10.14

              Islamic bank licensees must make a copy of any confirmation of a transaction or periodic statement provided to a customer, and retain it for at least five years from the date on which it was provided.

              Added: April 08

        • BC-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 2011

          • BC-9.11.2

            [This paragraph was deleted in October 2011].

            Deleted: October 2011

          • BC-9.11.3

            [This paragraph was deleted in October 2011].

            Deleted: October 2011

          • [Deleted]

            Deleted: October 2011

            • BC-9.11.4

              [This paragraph was deleted in October 2011].

              Deleted: October 2011

            • BC-9.11.5

              [This paragraph was deleted in October 2011].

              Deleted: October 2011

        • BC-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 their customers, which may arise in the course of providing a regulated Islamic banking service.

            Amended: July 2015
            Added: April 08

          • BC-9.12.2

            Where conflicts arise, Islamic bank licensees must:

            (a) Disclose any material interest or conflict of interest to the customer in writing (which may include a disclosure in the Islamic bank licensee's terms of business) either generally or in relation to a specific transaction, and take reasonable steps to ensure that the customer 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 a customer or exercising discretion.
            Added: April 08

          • BC-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 the customer.

            Added: April 08

          • Personal 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 a personal account transaction unless:
              (i) The Islamic 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) The Islamic bank licensee has given its written permission to that employee for that transaction or to transactions generally in financial instruments of that kind; and
              (iii) The transaction will not conflict with the Islamic bank licensee's duties to its customers;
              (b) It receives prompt notification or is otherwise aware of each employee's personal account transactions; and
              (c) If an employee's personal account transactions are conducted with the Islamic bank licensee, each employee's account must be clearly identified and distinguishable from other customers' accounts.
              Added: April 08

            • BC-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 08

            • BC-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, the Islamic bank licensee's investment business, then the conditions or restrictions on personal account transactions, in Rule BC-9.12.4, need not be applied to that employee.

              Added: April 08

            • BC-9.12.7

              Islamic bank licensees must establish and maintain procedures and controls so as to ensure that an investment analyst does not undertake a personal account transaction in a financial instrument if the investment analyst is preparing investment research:

              (a) On that investment or its issuer; or
              (b) On a related investment, or its issuer;

              until the investment research is published or made available to the Islamic bank licensee's customers.

              Added: April 08

          • Investment Research

            • BC-9.12.8

              Where an Islamic bank licensee issues investment research, its conflicts policy must specify the types of investment research issued by it. An Islamic bank licensee that prepares and publishes investment research must have adequate procedures and controls to ensure:

              (a) The effective supervision of investment 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 to customers is not biased.
              Added: April 08

            • BC-9.12.9

              Islamic bank licensees that publish investment research must take reasonable steps to ensure that the investment research:

              (a) Identifies the types of customers 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 all financial instruments in respect of which the Islamic bank licensee publishes investment research; and
              (ii) For financial instruments, if any, where the Islamic bank licensee has undertaken corporate finance business with or for the issuer over the past 12 months.
              Added: April 08

            • BC-9.12.10

              An Islamic bank licensee must take reasonable steps to ensure that when it publishes investment research, disclosure is made of the following matters:

              (a) Any financial interest or material interest that the investment analyst or a close relative has, which relates to the financial instrument;
              (b) Any shareholding by the Islamic bank licensee or its associate of 1% or more of the total issued share capital of the issuer;
              (c) Whether the Islamic bank licensee or its associate acts as corporate broker for the issuer;
              (d) Any material shareholding by the issuer in the Islamic bank licensee;
              (e) Any corporate finance business undertaken by the Islamic bank licensee with or for the issuer over the past 12 months, and any future relevant corporate finance business initiatives; and
              (f) Whether the Islamic bank licensee is a market maker in the financial instrument.
              Amended: January 2011
              Added: April 2008

            • BC-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 the financial instrument during the period beginning on the day of publication of the listing particulars or a prospectus relating to the offering of that financial instrument and ending on the 30th calendar day after the day on which the financial instrument is admitted to trading.

              Amended: January 2011
              Added: April 2008

            • BC-9.12.12

              An Islamic bank licensee and its associates must not knowingly execute an own account transaction in a financial instrument, which is the subject of investment research, prepared either by the Islamic bank licensee or its associate, until the customers for whom the investment research was principally intended have had a reasonable opportunity to act upon it.

              Amended: January 2011
              Added: April 2008

            • BC-9.12.13

              The restriction in Rule BC-9.12.11 does not apply if:

              (a) The Islamic bank licensee or its associate is a market maker in the relevant financial instrument;
              (b) The Islamic bank licensee or its associate executes an unsolicited transaction for a customer; or
              (c) It is not expected to materially affect the price of the financial instrument.
              Added: April 08

          • Inducements

            • 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 their customers.

              Added: April 08

            • BC-9.12.15

              An Islamic bank licensee may only accept goods and services under a soft 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 the Islamic 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) The Islamic bank licensee makes adequate disclosures regarding the use of soft dollar agreements.
              Amended: October 2015
              Added: April 08

            • BC-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 08

            • BC-9.12.17

              A soft dollar agreement is 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: April 08

            • BC-9.12.18

              Before an Islamic bank licensee enters into a transaction for a customer, either directly or indirectly, with or through the agency of another person, under a soft dollar agreement which the Islamic bank licensee has, or knows that another member of its group has, with that other person, it must disclose to its customer:

              (a) The existence of the soft dollar agreement; and
              (b) The Islamic bank licensee's or its group’s policy relating to soft dollar agreements.
              Added: April 08

            • BC-9.12.19

              If an Islamic bank licensee has a soft dollar agreement under which the Islamic bank licensee deals for a customer, the Islamic bank licensee must provide that customer with information as set out in Paragraph BC-9.13.12.

              Added: April 08

        • BC-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 the Islamic bank licensee communicating the promotional material;
            (b) The licensing status of the Islamic bank licensee;
            (c) The Islamic 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 a customer (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 the Islamic bank licensee.
            Amended: July 2015
            Added: April 08

          • BC-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 the Islamic 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 the customer to the Islamic bank licensee for its services, or, where an exact price cannot be indicated, the basis for the calculation of the price enabling the customer 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, the customer's investment objectives;
            (h) Where appropriate, the extent to which the Islamic bank licensee will consider the customers' 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;
            (j) Where appropriate, any disclosure of soft dollar agreements under Section BC-9.12;
            (k) A statement that clearly indicates the following:
            (i) The customer's right to obtain copies of records relating to his business with the licensee;
            (ii) The customer'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 the Islamic bank licensee to whom any complaint should be addressed (in writing) by the customer.
            Amended: July 2015
            Added: April 08

          • BC-9.13.3

            This Paragraph was deleted in July 2015.

            Deleted: July 2015
            Added: April 08

          • BC-9.13.4

            This Paragraph was deleted in July 2015.

            Deleted: July 2015
            Added: April 08

          • BC-9.13.5

            This Paragraph was deleted in July 2015.

            Deleted: July 2015
            Added: April 08

          • BC-9.13.6

            This Paragraph was deleted in July 2015.

            Deleted: July 2015
            Added: April 08

          • BC-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) The Islamic bank licensee's name and address;
            (b) Whether the Islamic bank licensee executed the transaction as principal or agent;
            (c) The customer's name, account number or other identifier;
            (d) Where relevant, a description of the collective 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 the Islamic 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) For collective 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 the customer's counterparty was the Islamic bank licensee itself or any other person in the Islamic bank group.
            Amended: July 2015
            Amended: January 2013
            Added: April 08

          • BC-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 each financial 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 each financial instrument was calculated.
            Amended: July 2015
            Added: April 08

          • BC-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 the customers 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 all financial 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 the Islamic bank licensee from the portfolio for its own account during that period;
            (j) A statement of the aggregate charges of the Islamic bank licensee and its associates; and
            (k) A statement of the amount of any remuneration received by the Islamic bank licensee or its associates or both from a third party.
            Amended: October 2015
            Amended: July 2015
            Added: April 08

          • BC-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 the customer (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 a customer's position, the resulting profit or loss to the customer after deducting or adding any commission; and
            (d) The aggregate of each of the following in, or relating to, the customer'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 08

          • BC-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 publishes investment 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 2008

          • BC-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 a soft dollar agreement under which it deals with customers include:

            (a) The percentage paid under soft dollar agreements of the total commission paid by or at the direction of:
            (i) The Islamic bank licensee; and
            (ii) Any other member of the Islamic 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 the Islamic bank licensee under soft dollar agreements, expressed as a percentage of the total commission paid by or at the direction of:
            (i) The Islamic bank licensee; or
            (ii) Other members of the Islamic bank licensee's group;
            (c) A summary of the nature of the goods and services received by the Islamic bank licensee under the soft dollar agreements; and
            (d) The total commission paid from the portfolio of that customer.
            Amended: July 2015
            Amended: April 2011
            Added: April 2008

      • BC-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 2011

          • BC-10.1.2

            Customer complaints procedures must be documented appropriately and their customers must be informed of their availability.

            Added: October 2011

          • BC-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 2011

          • BC-10.1.3A

            The position of customer complaints officer may be combined with that of compliance officer.

            Added: July 2012

          • BC-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 2011

        • BC-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 2011

          • BC-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 2011

          • BC-10.2.3

            Islamic bank licensees are required to ensure that all financial services related documentation (such as financing documentation) provided to the customer includes a statement informing the customer of the availability of a simple and easy-to-use guide on customer complaints procedures in the event the customer is not satisfied with the services provided.

            Amended: July 2015
            Amended: January 2012
            Added: October 2011

        • BC-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 2011

          • Visibility

            • 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 2011

          • Accessibility

            • BC-10.3.3

              A complaints handling process must be easily accessible to all customers and must be free of charge.

              Added: October 2011

            • BC-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 2011

            • BC-10.3.5

              Process information must be readily accessible and must include flexibility in the method of making complaints.

              Added: October 2011

            • BC-10.3.6

              Support for customers in interpreting the complaints procedures must be provided, upon request.

              Added: October 2011

            • BC-10.3.7

              Information and assistance must be available on details of making and resolving a complaint.

              Added: October 2011

            • BC-10.3.8

              Supporting information must be easy to understand and use.

              Added: October 2011

            • BC-10.3.9

              [This Paragraph was deleted in January 2012].

              Deleted: January 2012

          • Responsiveness

            • BC-10.3.10

              Receipt of complaints must be acknowledged in accordance with Section BC-10.5 "Response to Complaints".

              Added: October 2011

            • BC-10.3.11

              Complaints must be addressed promptly in accordance with their urgency.

              Added: October 2011

            • BC-10.3.12

              Customers must be treated with courtesy.

              Added: October 2011

            • BC-10.3.13

              Customers must be kept informed of the progress of their complaint, in accordance with Section BC-10.5.

              Added: October 2011

            • BC-10.3.14

              If a customer is not satisfied with an Islamic bank licensee's response, the Islamic bank licensee must advise the customer on how to take the complaint further within the organisation.

              Added: October 2011

            • BC-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 2011

          • Objectivity and Efficiency

            • BC-10.3.16

              Complaints must be addressed in an equitable, objective, unbiased and efficient manner.

              Amended: January 2012
              Added: October 2011

            • BC-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 the Islamic bank licensee.
              Amended: January 2012
              Added: October 2011

        • BC-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 2011

          • BC-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 the Islamic 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 2011

        • BC-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 2011

          • BC-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 2011

          • Redress

            • 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, the Islamic bank licensee must explain the options open to the customer and the procedures necessary to obtain the redress.

              Added: October 2011

            • BC-10.5.4

              Where an Islamic bank licensee decides that redress in the form of compensation is appropriate, the Islamic 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 2011

            • BC-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 2011

            • BC-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 2011

        • BC-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 the Islamic bank licensees for a period of 5 years from the date of receipt of the complaint.
            Added: October 2011

        • BC-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 the Islamic 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 2011

          • BC-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 2013

          • BC-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 2013

        • BC-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 2011

      • BC-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 2017

          • BC-11.1.1

            Bahraini Islamic retail banks must develop special measures and procedures when providing financial and banking services and transactions for disabled 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 2016

          • BC-11.1.2

            Bahraini Islamic retail banks are encouraged to enhance the disabled customers' access to their ranges of banking services by:

            (a) Liaising with organisations representing disabled customers to provide assistance; and
            (b) Keeping pace with changing technologies involving ATMs, electronic and internet banking.
            Amended: April 2017
            Added: April 2016

          • BC-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 2016

          • BC-11.1.4

            Bahraini Islamic retail banks must ensure that all legal requirements/documentations are taken into consideration when entering into contracts with disabled customers with the aim of protecting the disabled customers and themselves in court cases.

            Amended: April 2017
            Added: April 2016

          • BC-11.1.5

            Bahraini Islamic retail banks must ensure that disabled 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 2016

          • BC-11.1.6

            Bahraini Islamic retail banks must provide fast track and/or priority services for disabled customers to address their banking needs.

            Amended: April 2017
            Added: April 2016

          • Fees and Charges

            • BC-11.1.7

              Fees and charges on withdrawals, done through bank counters must be waived for all disabled customers.

              Added: April 2016

            • BC-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 2016

          • Branch and ATM Requirements

            • BC-11.1.9

              Bahraini Islamic retail banks must provide at least one branch for serving the disabled 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 the disabled customers.

              Amended: April 2017
              Added: April 2016

            • BC-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 2016

            • BC-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 2016

          • Customer 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 the disabled 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 2016

          • In Branch Services

            • BC-11.1.13

              Bahraini Islamic retail banks must provide a special priority desk for disabled customers, clearly designated with a special logo. In addition parking facilities and easy access entrances must also be provided.

              Amended: April 2017
              Added: April 2016

            • BC-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 2016

          • Training for Bank Staff

            • BC-11.1.15

              Bahraini Islamic retail banks must ensure that their staff dealing with disabled 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 2016

          • Personal Banking

            • BC-11.1.16

              Bahraini Islamic retail banks must provide special door step non-cash financial services to disabled customers.

              Amended: April 2017
              Added: April 2016

        • BC-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 2016

          • BC-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 the disabled 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 the disabled customers.

            Amended: January 2020
            Amended: April 2017
            Added: April 2016

          • BC-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 2016

          • BC-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 2016

        • BC-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 2016

          • BC-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 2016

      • BC-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. 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.

          Added: October 2018

        • BC-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 2018

        • BC-12.1.3

          The related reporting requirement to the CBB is included in Section BR-1.1.4 and BR-1.2.3.

          Added: October 2018

    • CA 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 by Bahraini 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 2015

              • CA-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) requires Islamic bank licensees to maintain financial resources in excess of the minimum requirements specified in Module CA (Capital Adequacy).

                January 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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, all Bahraini 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 2015

              • CA-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 2015

              • CA-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 2015

            • Legal 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 all Bahraini Islamic bank licensees.

                January 2015

              • CA-A.1.8

                For an explanation of the CBB's rule-making powers and different regulatory instruments, see Section UG-1.1.

                January 2015

          • CA-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 2015

            • CA-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.

            • 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 2015

          • CA-A.3 – CA-A.4

            [Sections CA-A.3 to CA-A.4 were deleted in January 2015.]

            Deleted: January 2015

        • CA-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 their credit risk, operational risk and market risks capital requirements.

              January 2015

            • CA-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 2015

            • CA-B.1.2A

              The scope of this Module includes the parent bank and all its banking subsidiaries 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 such subsidiaries must be fully consolidated on a line-by-line basis. In some cases, the assets of foreign banking subsidiaries 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 other financial 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 the Islamic bank licensee's balance sheet.

              January 2015

            • CA-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 of subsidiaries referred to in Paragraph CA-B.1.2A must not be included in the balance sheet of the parent 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 the parent bank.

              January 2015

            • CA-B.1.2C

              Where an Islamic bank licensee has no subsidiaries as referred to in Paragraph CA-B.1.2A, then the consolidated CAR requirements of this Module apply to the Islamic bank licensee on a stand-alone basis.

              January 2015

            • CA-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 2015

            • CA-B.1.3

              If Islamic bank licensees have investments in or control over banking or financial 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 2015

            • Full 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 banking subsidiaries 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 the subsidiary as calculated by host rules rather than by adding in the assets of the subsidiary 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 the parent bank.

                January 2015

              • CA-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 2015

              • CA-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. 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.

                Amended: July 2017
                January 2015

              • CA-B.1.7

                Appropriate adjustments must be made to eliminate intra-group exposures.

                January 2015

              • CA-B.1.8

                If a bank in Bahrain is a subsidiary of a non-resident parent bank, the capital adequacy of such bank must be determined on a standalone basis.

                January 2015

              • CA-B.1.9

                Majority-owned or controlled financial entity subsidiaries must be adequately capitalised to reduce the possibility of future potential losses to the parent bank. The parent bank must monitor actions taken by the subsidiary to correct any capital shortfall and, if it is not corrected in a timely manner, the shortfall must also be deducted from the parent bank's solo and consolidated capital for regulatory capital purposes.

                January 2015

          • CA-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 of exposures 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 of subsidiaries 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 2015

            • CA-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 2015

            • CA-B.2.3

              Only those instruments issued before 12 September 2012 qualify for the transition arrangements outlined in Paragraph CA-B.2.1.

              January 2015

        • CA-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 2015

            • Consolidated Total Capital

              • CA-1.1.2

                Consolidated Total Capital consists of the sum of the following elements:

                (a) T1 (Going-concern):
                (i) CET1 (as defined in Paragraph CA-2.1.2);
                (ii) AT1 (as defined in Paragraph CA-2.1.4); and
                (b) T2 (Gone-concern) as defined in Paragraph CA-2.1.8.
                January 2015

            • Consolidated Risk-weighted Assets

              • CA-1.1.3

                Consolidated Total risk-weighted assets are determined by:

                (a) Multiplying the capital requirements for market risk (see CA-1.1.7) and operational risk (see CA-1.1.6) by 12.5 for the Islamic bank licensee and all its consolidated subsidiaries; and
                (b) Adding the resulting figures to the sum of risk-weighted assets for credit risk (see CA-1.1.4) and securitisation risk for the Islamic bank licensee and all its subsidiaries (see CA-1.1.5).
                January 2015

              • CA-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 2015

              • CA-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 traditional securitisations or sukuks.

                January 2015

              • CA-1.1.6

                For the measurement of their operational risks, Islamic bank licensees have a choice, subject to the written approval of 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.
                January 2015

              • CA-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 of market risk positions funded by PSIAs is given in Paragraphs CA-1.1.9 onward.

                January 2015

              • CA-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) The credit 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 and securitisations 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 for operational risk described in Chapter CA-6; and
                (c) The capital charges for market risks described in Chapters CA-3 and CA-5 summed arithmetically subject to any PSIA adjustment below.
                January 2015

            • Adjustment 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 the Islamic bank licensee's negligence, misconduct, fraud or breach of its investment mandate, which is characterised as a fiduciary risk and considered part of the Islamic bank licensee's operational risk.

                January 2015

              • CA-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 by Islamic 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 the Islamic bank licensee's own capital, a phenomenon known as "displaced commercial risk" (DCR).

                January 2015

              • CA-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 the Islamic bank licensee and its shareholders. To be prudent, the CBB requires Islamic 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 an Islamic bank licensee consist of the sum of the risk-weighted assets financed by the Islamic bank licensee's own capital and liabilities, plus 30% (shown below as α) of the risk-weighted assets financed by the Islamic bank licensee's UPSIAs as outlined in Paragraph CA-1.1.12.

                January 2015

              • CA-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 Risks

                Plus

                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 the Islamic bank licensees may smooth income to the UPSIAs as a mechanism to minimise withdrawal risk.
                January 2015

              • CA-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 or market risk positions on reporting dates. Islamic bank licensees must maintain strict risk management systems to ensure that intra-day exposures are not excessive. If an Islamic bank licensee fails to meet the capital requirements of this Module, the Islamic bank licensee must take immediate measures to rectify the situation as detailed in Section CA-1.2.

                January 2015

            • Solo 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 of subsidiaries referred to Paragraph CA-B.1.2A into the balance sheet of the parent bank.

                January 2015

            • Solo Total Capital

              • CA-1.1.15

                Solo Total Capital consists of the sum of the following elements:

                (a) T1 (Going-concern):
                (i) CET1 for the parent bank only (as defined in Paragraph CA-2.1.2 but deducting item (c) before applying regulatory adjustments in item (d);
                (ii) AT1 for the parent 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 the parent bank only as defined in Paragraph CA-2.1.8 but deducting item (c) before applying regulatory adjustments in item (d).
                January 2015

            • Solo Risk-weighted Assets

              • CA-1.1.16

                Solo Total risk-weighted assets are determined by:

                (a) Multiplying the capital requirements for market risk (see CA-1.1.7) and operational risk (see CA-1.1.6) by 12.5 for the parent bank alone; and
                (b) Adding the resulting figures to the sum of risk-weighted assets for credit risk (see CA-1.1.4) and securitisation risk for the parent bank alone (see CA-1.1.5).
                January 2015

              • CA-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 the Islamic bank licensees may smooth income to the UPSIAs as a mechanism to minimise withdrawal risk.
                January 2015

          • CA-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 2015

            • CA-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, the Islamic 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 the Islamic bank licensee proposes to restore the relevant ratios to the required minimum level(s), further, describing how the Islamic bank licensee will ensure that a breach of such ratios will not occur again in the future;
              (b) Weekly reports thereafter on the Islamic 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) The Islamic 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 2015

            • CA-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 2015

            • CA-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 the Islamic bank licensee pursuant to the above, as well as of any other requirement of the CBB in any particular case.

              January 2015

            • CA-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 an Islamic 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 of appointed experts, as appropriate. Following such appraisal, the CBB will notify the Islamic bank licensee concerned in writing of its conclusions with regard to the continued licensing of the Islamic bank licensee.

              January 2015

            • CA-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 concerned Islamic bank licensees and their subsidiaries and other group companies have adequate internal systems and controls to comply with these rules.

              January 2015

          • CA-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 2015

            • CA-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 2015

            • CA-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 2015

            • CA-1.3.4

              Islamic bank licensees' daily compliance with the capital requirements for credit and market risk must be verified by the independent risk management department and the internal auditor.

              January 2015

        • CA-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 2015

            • Common 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 valuing financial 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 banking subsidiaries of the Islamic 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 2015

              • CA-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 own credit risk must be derecognised in the calculation of CET1 .

                January 2015

              • CA-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 the Islamic 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 the Islamic 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) The Islamic 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) The Islamic bank licensee cannot directly or indirectly have funded the purchase of the instrument (i.e. treasury shares and shares purchased or funded by the Islamic 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 the Islamic 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 issuing Islamic bank licensee;
                January 2015

            • Additional Tier 1 (AT1) Capital

              • CA-2.1.4

                AT1 capital consists of the sum of:

                (a) Instruments issued by the Islamic 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 banking subsidiaries of the Islamic 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 2015

              • CA-2.1.5

                [This Paragraph has been left blank.]

                January 2015

              • CA-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 the Islamic 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-vis Islamic 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 an Islamic bank licensee must not do anything which creates an expectation that the call will be exercised. An Islamic 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 the Islamic 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 the Islamic bank licensee;
                (g) Any repayment of principal (e.g. through repurchase or redemption) must be with prior written approval of the CBB and Islamic bank licensees must not assume or create market expectations that supervisory approval will be given;
                (h) The Islamic 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 the Islamic 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 the Islamic 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 the Islamic 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-specified trigger event; or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger 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 the Islamic bank licensee nor a related party over which it exercises control or significant influence can have purchased the instrument, nor can the Islamic 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 the Islamic 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 consolidated subsidiary bank or the parent Islamic bank licensee in the consolidated group (e.g. a special purpose vehicle — "SPV"), proceeds must be immediately available without limitation to the parent bank in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in AT1.
                January 2015

              • CA-2.1.7

                [This paragraph has been left blank.]

                January 2015

              • CA-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 2015

              • CA-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 additional trigger event.

                January 2015

              • CA-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 2015

            • Write 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) A trigger event occurs when the CET1 capital ratio of the Islamic 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 the Islamic 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 more trigger events in addition to that referred to in Subparagraph (a).
                January 2015

              • CA-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 2015

              • CA-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 the Islamic 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 the Islamic bank licensee to 7.0 %; and
                (b) The full principal amount of the instrument.
                January 2015

              • CA-2.1.7J

                When a trigger event occurs Islamic 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 2015

              • CA-2.1.7K

                A Islamic bank licensee issuing AT1 instruments that convert to CET1 on the occurrence of a trigger event must ensure that its authorised share capital is at all times sufficient, for converting all such convertible AT1 instruments into shares if a trigger event occurs.

                January 2015

              • CA-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 a trigger event.

                January 2015

              • CA-2.1.7M

                An Islamic bank licensee issuing AT1 instruments that convert to CET1 on the occurrence of a trigger event must ensure that there are no procedural impediments to that conversion by virtue of its incorporation or statutes or contractual arrangements.

                January 2015

            • Consequences 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 2015

            • Tier 2 Capital(T2)

              • CA-2.1.8

                T2 capital consists of the sum of the following items

                (a) Instruments issued by the Islamic 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 banking subsidiaries of the Islamic 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 2015

              • CA-2.1.9

                The treatment of instruments issued out of consolidated subsidiaries of the Islamic bank licensee and the regulatory adjustments applied in the calculation of T2 Capital are addressed in Section CA-2.3.

                January 2015

              • CA-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 the Islamic bank licensee;
                (c) It is neither secured nor covered by a guarantee of the issuing Islamic 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 the Islamic 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 the Islamic bank licensee only after a minimum of five years and the Islamic bank licensee must not do anything which creates an expectation that the call will be exercised. The Islamic 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 the Islamic 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 the Islamic 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 the Islamic bank licensee's credit standing;
                (h) Neither the issuing bank nor a related party over which the Islamic bank licensee exercises control or significant influence can have purchased the instrument, nor can the Islamic 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 the Islamic bank licensee for employee share purchase schemes must be deducted from T2. Any of the Islamic 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 consolidated subsidiary bank or the parent Islamic bank licensee in the consolidated group (e.g. a special purpose vehicle — "SPV"), proceeds must be immediately available without limitation to the parent Islamic 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, an Islamic 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 the trigger 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 the Islamic bank licensee's current account holders or other creditors. After conversion of the Sukuk in case of the Islamic bank licensee's non-viability or insolvency, the resulting CET1 capital would rank pari passu with other CET1 shareholders.
                January 2015

              • CA-2.1.10A

                [This paragraph has been left blank.]

                January 2015

              • CA-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 2015

              • CA-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 additional trigger event.

                January 2015

              • CA-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 2015

            • Write 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) A trigger event occurs when the CET1 capital ratio of the Islamic 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 the Islamic 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 more trigger events in addition to that referred to in Subparagraph (a).
                January 2015

              • CA-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 2015

              • CA-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 the Islamic 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 the Islamic bank licensee to 7.0 %; and
                (b) The full principal amount of the instrument.
                January 2015

              • CA-2.1.10K

                When a trigger event occurs Islamic 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 2015

              • CA-2.1.10L

                An Islamic bank licensee issuing T2 instruments that convert to CET1 on the occurrence of a trigger event must ensure that its authorised share capital is at all times sufficient, for converting all such convertible T2 instruments into shares if a trigger event occurs.

                January 2015

              • CA-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 a trigger event.

                January 2015

              • CA-2.1.10N

                An Islamic bank licensee issuing T2 instruments that convert to CET1 on the occurrence of a trigger event must ensure that there are no procedural impediments to that conversion by virtue of its incorporation or statutes or contractual arrangements.

                January 2015

            • Consequences 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 2015

            • Treatment of PSIA, PER and IRR

              • CA-2.1.11

                Profit-sharing investment accounts of an Islamic bank licensee are not classified as part of the Islamic 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 the Islamic 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 the Islamic bank licensee's reserves should also not be treated as part of the regulatory capital of the Islamic 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 2015

          • CA-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 2015

            • Solo 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 2015

              • CA-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 2015

              • CA-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 2015

            • Tier 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 2015

              • CA-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 the Islamic 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 an Islamic 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 2015

          • CA-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 consolidated subsidiary of the Islamic bank licensee to be recognised in CET1 for the consolidated CAR calculation, it must meet the following conditions:

                (a) The instrument giving rise to the minority interest would, if issued by the Islamic bank licensee, meet all of the criteria for classification as common shares for regulatory capital purposes;
                (b) The subsidiary that issued the instrument is itself a bank1,2; and
                (c) The subsidiary 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 the parent bank's common equity if the parent bank or affiliate has entered into any arrangements to fund directly or indirectly minority investment in the subsidiary whether through an SPV or through another vehicle or arrangement. The treatment outlined above, thus, is strictly available where all minority investments in the bank subsidiary solely represent genuine third party common equity contributions to the subsidiary.

                January 2015

              • CA-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) Total minority interest meeting the criteria in Paragraph CA-2.3.1 minus the amount of the surplus CET1 of the subsidiary attributable to the minority shareholders;
                (b) Surplus CET1 of the subsidiary is calculated as the CET1 of the subsidiary minus the lower of:
                (i) The minimum CET1 requirement of the subsidiary 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 the subsidiary; 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 2015

              • CA-2.3.2A

                Appendix CA-1 outlines an example of the effect of the allocation of minority interest between the parent bank and minority shareholders in the fully consolidated subsidiary.

                January 2015

            • AT1 Qualifying Capital Issued by Consolidated Banking Subsidiaries

              • CA-2.3.3

                AT1 capital instruments issued by a fully consolidated banking subsidiary of the Islamic 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 the Islamic 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 the subsidiary issued to third parties minus the amount of the surplus T1 of the subsidiary attributable to the third party investors;
                (b) Surplus T1 of the subsidiary is calculated as the T1 of the subsidiary minus the lower of: (1) the minimum T1 requirement of the subsidiary plus the CCB and (2) the portion of the consolidated minimum T1 requirement plus the CCB that relates to the subsidiary; 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 2015

            • T2 Qualifying Capital Issued by Consolidated Subsidiaries

              • CA-2.3.4

                T2 capital instruments issued by a fully consolidated banking subsidiary of the Islamic 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 the Islamic bank licensee, meet all of the criteria for classification as T2 capital. The amount of this T2 capital that will be recognised in the parent 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 the subsidiary issued to third parties minus the amount of the surplus Total Capital of the subsidiary attributable to the third party investors;
                (b) Surplus Total Capital of the subsidiary is calculated as the Total Capital of the subsidiary minus the lower of:
                (i) The minimum Total Capital requirement of the subsidiary plus the capital conservation buffer; and
                (ii) The portion of the consolidated minimum Total Capital requirement plus the capital conservation buffer that relates to the subsidiary; 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 2015

              • CA-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 the Islamic 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 consolidated subsidiary of the Islamic bank licensee, such capital may, subject to the requirements of this Paragraph, be treated as if the subsidiary itself had issued it directly to the third parties and may be included in the Islamic 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 2015

          • CA-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 2015

            • Goodwill 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 2015

              • CA-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 2015

            • Deferred 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 2015

              • CA-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 2015

            • Cash 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 2015

              • CA-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 2015

            • Gain 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 2015

              • CA-2.4.9

                [This paragraph has been left blank.]

                January 2015

            • Defined 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 the Islamic bank licensee.

                January 2015

              • CA-2.4.11

                Paragraph CA-2.4.10 only applies to Islamic bank licensees which have subsidiaries 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 2015

            • Investments 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 the Islamic 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 counterparty credit risk charge); and
                (c) Any shares of the Islamic bank licensee held as collateral against exposures to customers are considered to be held indirectly and are subject to deduction.
                Amended: April 2015
                January 2015

              • CA-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 2015

              • CA-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 2015

            • Reciprocal 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 other financial 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 the Islamic 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 2015

            • Investments 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 the Islamic 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 the Islamic 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 regulated financial entity and not included in regulatory capital in the relevant jurisdiction of the financial 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 2015

              • CA-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 the Islamic 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 the Islamic 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 the Islamic 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 the Islamic bank licensee's CET1a (as per above) multiplied by the T2 capital holdings as a percentage of the total capital holdings.

                January 2015

              • CA-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 2015

              • CA-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 2015

            • Significant 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 the Islamic bank licensee owns more than 10% of the issued common share capital of the issuing entity or where the entity is an affiliate of the Islamic 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 the Islamic 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 regulated financial entity and not included in regulatory capital of the financial 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 2015

              • CA-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 the 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, the shortfall will be deducted from the next higher tier of capital (e.g. if an Islamic bank licensee does not have enough AT1 capital to satisfy a particular deduction, the shortfall will be deducted from CET1c).

                January 2015

              • CA-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 2015

            • Threshold 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, the Islamic 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 2015

              • CA-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 2015

              • CA-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 2015

            • Former Deductions from Capital

              • CA-2.4.25

                The following items receive the following risk weights:

                (a) Certain securitisation and Sukuk exposures outlined in Chapter CA-8: 1,250%;
                (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) Any exposures above the large exposures limits set by the CBB in Chapter CM-4 of the CBB Rulebook: 800%.
                Amended: October 2016
                Amended: July 2015
                Amended: April 2015
                January 2015

              • CA-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 those exposures 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 2015

        • CA-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 2015

            • CA-2A.1.2

              Outside of periods of stress, Islamic bank licensees must hold buffers of capital above the regulatory minimum.

              January 2015

          • CA-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 an Islamic bank licensee when the CCB falls below 2.5%. The constraints imposed only relate to distributions, not the operation of the Islamic 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 2015

            • CA-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 therefore Islamic 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 2015

            • CA-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 2015

            • Capital 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. The Islamic bank licensee must submit this Plan to the CBB within one week of becoming aware of the shortfall (see also CA-1.2.2). The Islamic 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 the Islamic 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 2015

              • CA-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 the Islamic bank licensee to meet the buffer requirements within a period acceptable to the CBB. While reviewing the Plan, the CBB will also evaluate whether the Islamic 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 2015

              • CA-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 the Islamic bank licensee to revise the Plan and resubmit it within a specified time period;
                (b) Require the Islamic 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 2015

          • CA-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 2015

            • CA-2A.3.2

              Islamic bank licensees must maintain prudent earnings retention policies with a view to meeting the conservation buffer at all times.

              January 2015

            • CA-2A.3.3

              [This Paragraph was deleted in April 2015.]

              Deleted: April 2015
              January 2015

            • CA-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 2015

      • PART 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 2015

            • CA-3.1.2

              Sections CA-3.2 to CA-3.11 describe the minimum capital requirements for the treatment of exposures, taking into account both credit and market risks including price risk within the banking book for each of the nine classes of Islamic financing assets.

              January 2015

          • CA-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 2015

              • CA-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 the Islamic bank licensee. In the case of market (price) risk, the capital requirement is applicable with respect to: (a) assets in the Islamic 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 2015

              • CA-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 2015

            • Murabahah 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 2015

              • CA-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 2015

              • CA-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 the Islamic 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 the Islamic bank licensee based on a Promise to Purchase (PP) by the customer which can be a binding or non-binding PP.

                January 2015

              • CA-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 the Islamic bank licensee acquires an asset in anticipation that the asset will be purchased by the orderer/customer.

                January 2015

              • CA-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, the Islamic bank licensee is exposed to credit risk on the amount receivable from the customer when the latter accepts delivery and assumes ownership of the asset.

                January 2015

            • Binding 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. The Islamic 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 the Islamic bank licensee having to dispose of the asset to a third party at a selling price which may be lower than the cost to the Islamic 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. The Islamic 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, the Islamic bank licensee may take a down-payment (Urbun) from the purchase orderer when signing the contract. This payment is retained by the Islamic 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 2015

            • Collateralisation

              • 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. The Islamic 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 2015

              • CA-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-4.2.1920.

                January 2015

            • Credit 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 2015

                • CA-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 2015

            • Binding 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, the Islamic bank licensee will dispose of the asset to a third party. The Islamic 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 2015

              • CA-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 to credit risk, and the exposure shall be measured as the amount of the asset's total acquisition cost to the Islamic 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 2015

              • CA-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 the Islamic bank licensee constitutes a market risk (as in the case on a non-binding MPO), but the market risk exposure is reduced by the amount of any HJ that the Islamic bank licensee has the right to retain.

                January 2015

              • CA-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 2015

              • CA-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 2015

            • Exclusions

              • 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 2015

            • Assignment 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 2015

            • Market 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 a market risk exposure is 15% of the amount of the position (carrying value). The 15% capital charge is also applicable to assets held by an Islamic bank licensee in respect of incomplete non-binding MPO transactions at the end of a financial period.

                  January 2015

                • CA-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 2015

            • Binding 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 to market risk in respect of the asset, but only to credit risk as indicated in Paragraph CA-3.2.13.

                January 2015

            • Foreign 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 2015

            • Summary 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 a market risk (as in the case of 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.
                January 2015

          • CA-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 the Islamic 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 the Islamic 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 the Islamic 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 the Islamic 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 2015

              • CA-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 the Islamic bank licensee to potential loss in obtaining the supply elsewhere.

                January 2015

              • CA-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 2015

              • CA-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, the Islamic bank licensee may hold the commodity in anticipation of selling it at a higher price. In the latter case, the Islamic bank licensee is exposed to price risk on its position in the commodity until the latter is sold.

                January 2015

            • Credit 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 2015

            • Exclusions

              • 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 2015

            • Applicable 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 2015

            • No 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 2015

            • Market 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 2015

              • CA-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 2015

            • Foreign 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 2015

            • Summary 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 2015

          • CA-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 2015

            • Principles 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

            • Roles 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, an Islamic 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, the Islamic bank licensee acts as a buyer in the parallel contract. The Islamic 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 the Islamic 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, an Islamic 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, the Islamic 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 2015

              • CA-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 the Islamic bank licensee is dependent on the financial strength or payment capability of the ultimate customer 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 the Islamic 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 ultimate customer 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 2015

              • CA-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 ultimate customer 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 2015

            • Capital 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 2015

              • CA-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 2015

              • CA-3.4.9

                This Section also sets out the capital adequacy requirement to cater for the market risk that an Islamic bank licensee incurs from the date of manufacturing or construction, which is applicable throughout the period of the contract on unbilled WIP inventory.

                January 2015

              • CA-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 2015

            • Bank 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. The Islamic 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 2015

                • CA-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 the Islamic bank licensee to potential loss in making good the shortcomings or obtaining the supply elsewhere.

                  January 2015

              • Credit Risk

                • Exposure to Customer

                  • CA-3.4.13 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 2015

                    • Exposure to Asset

                      • CA-3.4.14 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 2015

                        • CA-3.4.15 CA-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 of control 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 2015

                          • Exclusions

                            • CA-3.4.16 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); and
                              (c) Any amount which is past due 90 days or more (see CA-4.2).
                              Amended: July 2017
                              January 2015

                              • CA-3.4.17 CA-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 2015

                                • Applicable Period

                                  • CA-3.4.18 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 2015

                                    • Offsetting Arrangement between Credit Exposures of Istisna'a and Parallel Istisna'a

                                      • CA-3.4.19 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 2015

                                        • Market Risk

                                          • Exposure to Customer

                                            • (a) Istisna'a with Parallel Istisna'a

                                              • CA-3.4.20 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 the Islamic 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'a customer (buyer), are also eligible for this treatment.

                                                January 2015

                                                • CA-3.4.21 CA-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 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 2015

                                                      • CA-3.4.23 CA-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 2015

                                                        • Foreign 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 2015

            • Bank 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. The Islamic 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 2015

                • CA-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 the Islamic bank licensee to potential loss in making good the shortcomings or obtaining the supply elsewhere.

                  January 2015

              • Credit Risk

                • Exposure to Customer

                  • CA-3.4.27 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 the customer 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 2015

                    • Exposure to Asset

                      • CA-3.4.28 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 2015

                        • CA-3.4.29 CA-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 2015

                          • Exclusions

                            • CA-3.4.30 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 2015

                              • CA-3.4.31 CA-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 2015

                                • Applicable Period

                                  • CA-3.4.32 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 2015

                                    • Offsetting Arrangement between Credit Exposures of Istisna'a and Parallel Istisna'a

                                      • CA-3.4.33 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 2015

                                        • Market Risk

                                          • Exposure to Customer

                                            • Istisna'a with Parallel Istisna'a

                                              • CA-3.4.34 CA-3.4.34

                                                There is no capital charge for market risk to be applied in addition to provisions on credit risk, subject to there being no provisions in the Istisna'a contract that allow the supplier to increase or vary its selling price to the Islamic 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'a customer (ultimate buyer) are also eligible for this treatment.

                                                January 2015

                                                • Istisna'a without Parallel Istisna'a

                                                  • CA-3.4.35 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 ultimate customer, there is no credit risk.

                                                    January 2015

                                                    • CA-3.4.36 CA-3.4.36

                                                      The WIP receives a capital charge appropriate to inventory — 15%.

                                                      January 2015

                                                      • Foreign 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 2015

            • Summary 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 billings
                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 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 the market 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-3.4.23
                Progress 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 2015

              • CA-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 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 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)

                See credit risk under Section CA-3.4
                15% 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 2015

          • CA-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 2015

              • CA-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 the Islamic 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • 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.

                January 2015

            • IMB

              • 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 collateral14 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 Islamic 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 2015

              • CA-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 the Islamic 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 to credit risk.

                January 2015

              • CA-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 the Islamic bank licensee as lessor to a form of market risk15.


                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 2015

              • CA-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 to market risk, in respect of a potential loss from disposing of the asset for an amount lower than its residual value.

                January 2015

              • CA-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 2015

            • Credit 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 the Islamic 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. The Islamic bank licensee 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, depending on the terms of the contract.

                January 2015

              • CA-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 2015

            • Credit 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 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 where it is eligible collateral (subject to the applicable haircut) if it can be repossessed. The net credit 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 2015

            • Credit 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 net credit 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 2015

            • Exclusions from Credit Risk for Ijarah and IMB

              • CA-3.5.16

                The capital requirement must be calculated on the receivable amount, net of:

                (a) Specific provisions;
                (b) Any amount that is secured by eligible collateral (as defined in Paragraph CA-4.7.25); and
                (c) Any amount which is past due by more than 90 days (see Section CA-4.2).
                January 2015

            • 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 the Islamic bank licensee and, using the simplified approach, the capital charge applicable to such a market risk exposure is 15% of the amount of the asset's market value); and
                (b) Binding PL

                In a binding PL, an Islamic 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, the Islamic bank licensee will either lease or dispose of the asset to a third party. The Islamic bank licensee will have recourse to any HJ paid by the customer16, 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 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 2015

              • CA-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 the customer; that right constitutes a claim receivable which is exposed to credit risk, and the exposure must be measured as the amount of the asset's total acquisition cost to the Islamic 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 the customer as rated by an ECAI that is approved by the CBB. In cases where the obligor is unrated, a RW of 100% applies.

                January 2015

              • CA-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 the Islamic bank licensee 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 Islamic bank licensee has the right to retain.

                January 2015

            • Market 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 2015

            • Market 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 2015

            • Summary 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 Ijara

                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 multiply by the customer's rating or 100% RW for unrated customer
                Non-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 asset
                The 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 this market risk exposure is reduced by the amount of any HJ that the bank has the right to retain.

                January 2015

              • CA-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 customer
                Non-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 this market risk exposure is reduced by the amount of any HJ that the bank has the right to retain.

                January 2015

          • CA-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 their customers/partner(s) contribute to the capital of the partnership and shares its profit or loss.

                January 2015

              • CA-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 2015

              • CA-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 2015

              • CA-3.6.4

                A Musharakah is an agreement between the Islamic bank licensee 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.

                January 2015

              • CA-3.6.5

                An Islamic bank licensee 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 Islamic 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 to credit risk for the customer's purchase payments as well as to the risk attached to the Islamic bank licensee's share of the underlying assets.

                January 2015

            • Musharakah

              • 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 the Islamic 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 2015

              • CA-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 the Islamic bank licensee and its partners according to their respective ratio of invested capital. Therefore, the Islamic 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 2015

              • CA-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 the Islamic 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 the Islamic 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 to market risk. As an equity investor, the Islamic 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 the Islamic bank licensee's partner as customer. The existence of such an Ijara sub-contract in addition to a Musharakah exposes the Islamic bank licensee to credit risk in respect of the partner's obligation to service the lease rentals and
                (ii) Musharakah in Murabahah contract
                The Islamic bank licensee is entitled to its share of revenue generated from selling the assets to third parties by means of Murabahah contracts that expose the Islamic bank licensee to credit risk in respect of the Murabahah receivables from the buyer/counterparty.
                January 2015

            • Diminishing Musharakah

              • CA-3.6.8

                The Islamic bank licensee's position in a diminishing Musharakah is set out in Paragraphs CA-4.8.12 to CA-4.8.15.

                January 2015

            • 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 2015

              • CA-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 the market 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 2015

              • CA-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: An Islamic 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-4.8.74.8.11.
                January 2015

            • Joint 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 2015

              • CA-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 2015

            • Equity 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. The Islamic 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 2015

            • Summary 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 section
                Private 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 categories
                Not 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 2015

          • CA-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 2015

              • CA-3.7.2

                A Mudarabah is an agreement between the Islamic bank licensee and a customer whereby the Islamic bank licensee would contribute capital to an enterprise or activity which is to be managed by the customer as the (labour provider or) Mudarib.

                January 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

            • Equity 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 2015

              • CA-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 2015

              • CA-3.7.10

                For the purpose of calculating the minimum capital requirement, Islamic bank licensees must make distinctions between the three main categories of Mudarabah, as set out in Paragraphs CA-3.7.11 to 3.7.13.

                January 2015

            • Private 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 2015

            • Private 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 to market risk. As an equity investor, the Islamic 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 2015

            • Mudarabah 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 the Islamic bank licensee. The essential role of the Islamic 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) The Islamic bank licensee has no direct or contractual relationship with the ultimate customer (but the Islamic bank licensee may stipulate that payments by the ultimate customer to the Mudarib be made to an account ("repayment account") with the Islamic bank licensee which has been opened for the purpose of the Mudarabah and from which the Mudarib may not make withdrawals without the Islamic bank licensee's permission); and
                (b) The Islamic 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 2015

              • CA-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 under credit risk as equity positions in the banking book. In principle, the Islamic bank licensee's credit exposure is to the Mudarib, not to the ultimate customer; however, as described below, a structure may involve the use of a "repayment account" to receive progress payments from the ultimate customer, which transfers much of the credit risk to the latter.

                January 2015

              • CA-3.7.15

                In addition to credit risk (i.e. that the Mudarib has received payment from the ultimate customer but fails to pay the Islamic bank licensee, or that the ultimate customer fails to pay), the Islamic bank licensee is exposed to capital impairment in case the project results in a loss.

                January 2015

            • Direct 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 ultimate customer under this structure involving the "repayment account". If the ultimate customer is a sovereign or otherwise has a very low risk-weighting, this may affect the RW to be applied to the exposure, and other credit risk mitigants may be applied, as described below.

                January 2015

              • CA-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 ultimate customer to the Mudarib will be the credit risk of the ultimate customer. However, this does not per se constitute a mitigation of the credit risk of the Islamic 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 ultimate customer, from the point of view of the Islamic 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 the Islamic bank licensee (the Mudarib being exposed to possible default by the ultimate customer). 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 the Islamic bank licensee and the ultimate customer whereby the latter will make the payment into a "repayment account" with the Islamic bank licensee, the latter's credit exposure in respect of the amount due is transferred from the Mudarib to the ultimate customer.

                January 2015

              • CA-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 2015

            • Equity 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 2015

              • CA-3.7.20

                The Mudarabah exposures, must be measured net of specific provisions.

                January 2015

            • Private 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 2015

            • Private Commercial Enterprise to Undertake a Business Venture (other than Paragraph CA-3.7.21)

              • CA-3.7.22

                There are two possible methods used to calculate the equity exposures in this type of investment — that is:

                a) The simple risk-weight method; and
                (b) The slotting method.

                The calculation details are set out in Paragraphs CA-4.8.7 to 4.8.11.

                January 2015

            • 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 the Islamic bank licensee from the Mudarib in respect of progress payments due to the Mudarib from the ultimate customer 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 ultimate customer into a "repayment account" with the Islamic bank licensee, the RW reflects the credit standing of the ultimate customer. In the absence of such an agreement, the RW reflects the credit standing of the Mudarib (or 100% RW for unrated customer);
                (b) The amount held in the "repayment account" with the Islamic bank licensee, which has a risk weighting of 0%; and
                (c) For any remaining balance of the funds advanced by the Islamic 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 2015

            • Summary 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 section
                Private 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 categories
                Not applicable

                * 300% RW may be applied if the funds are subject to withdrawal by the investor at short notice.

                January 2015

              • CA-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 2015

          • CA-3.8

            Sukuk [This Section was moved to Chapter CA-8 in January 2015].

            January 2015

          • CA-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 2015

              • CA-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 2015

              • CA-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 2015

            • Collateralisation

              • 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. The Islamic bank licensee may employ other techniques such as pledge of deposits/PSIA or a third-party financial guarantee.

                January 2015

            • Credit Risk

              • CA-3.9.5

                Islamic bank licensees are exposed to credit 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 2015

              • CA-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 2015

              • CA-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 2015

            • Market Risk

              • CA-3.9.8

                In the case where a cash loan is provided by the Islamic bank licensee, there is no element of market risk. If, however, a loan is provided in a currency other than the local currency or in the form of a commodity, the related market risk is applicable, as outlined in Section CA-5.6.

                January 2015

            • Summary 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 2015

          • CA-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 2015

              • CA-3.10.2

                An Islamic bank licensee assumes the role of a principal (Muwakkil) and appoints the customer 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 the Islamic bank licensee, as well as to business risks associated with the underlying activities and types of investments or assets of the Wakalah agreement.

                January 2015

            • Capital 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 2015

              • CA-3.10.10

                The Wakalah exposures, are measured net of specific provisions as set out below.

                January 2015

            • Wakalah 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 investing Islamic 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 2015

            • Wakalah 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 2015

              • CA-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 2015

              • CA-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 2015

            • Wakalah Placement in the Interbank Market

              • CA-3.10.18

                An Islamic bank licensee may place liquid funds with a central bank or another Islamic 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 2015

              • CA-3.10.19

                A placement of funds made by an Islamic bank licensee with another Islamic 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 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. 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 the Islamic 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 2015

              • CA-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 2015

            • Summary 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 categories
                Not 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 2015

          • CA-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 2015

            • CA-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 2015

            • CA-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 2015

            • Capital 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 2015

              • CA-3.11.5

                An Islamic bank licensee may be exposed to market 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 into credit 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 the market risk converts into credit 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 no market risk. On the other hand, if an Islamic bank licensee holds title to the commodities for any length of time in the CMT transaction, a market risk exposure will be present. Placement of funds in currencies other than the local currency will also expose the Islamic bank licensee to foreign exchange risk.

                January 2015

            • Credit Risk

              • CA-3.11.6

                As in both CMLF and CMF, a binding promise from the customer exists to purchase the commodity; an Islamic bank licensee is exposed to default on the customer's obligation to purchase. In the event of default by the customer, the Islamic bank licensee disposes of the asset to a third party; that is, the credit 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 the Islamic 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 2015

              • CA-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 to market risk.

                January 2015

            • Market 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 2015

              • CA-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 2015

            • Summary 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 2015

        • CA-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 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 Chapter CA-3.

              January 2015

            • CA-4.1.2

              Broadly, the assignment of Risk Weights (RWs) takes into consideration the following:

              (a) The credit 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 the Islamic bank licensees;
              (c) Types of the underlying assets that are sold and collateralised or leased by the Islamic 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 2015

            • CA-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 2015

          • CA-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 2015

              • CA-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 2015

            • Claims 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 2015

            • Claims 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 2015

              • CA-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 2016

              • CA-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 2016

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

            • Claims 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 2015

              • CA-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 2015

            • Claims 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

            • Claims 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 2015

            • Claims 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 2015

              • CA-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 2015

            • Risk Weights Based on Underlying Assets

              • CA-4.2.16

                The RW of a debtor, counterparty or other obligor is adjusted if the underlying assets are retail or real estate financed under Murabaha, Ijara, IMB, Istisna' or diminishing Musharakah, as set out in Paragraphs CA-4.2.17 to CA-4.2.20.

                January 2015

            • 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 2015

              • CA-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 2015

            • Claims 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 2015

              • CA-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 the Islamic bank licensee in the case of Murabaha, IMB or diminishing Musharakah;
                (c) There exists a legal infrastructure in the jurisdiction whereby the Islamic bank licensee can enforce the repossession and liquidation of the RRE; and
                (d) The Islamic bank licensee must obtain a satisfactory legal opinion that foreclosure or repossession as mentioned in (c) above is possible without any impediment.
                January 2015

              • CA-4.2.19B

                Residential mortgage exposures granted under the Social Housing Schemes of the Kingdom of Bahrain must, at a minimum, meet conditions (a) and (b) in CA-4.2.19A to avail the 35% RW.

                Added: July 2019

            • Claims 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 2015

            • Past 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 2015

              • CA-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 2015

              • CA-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 2015

            • Investments 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-4.2.2526 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 2015

              • CA-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) The Islamic 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 the Islamic 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 2015

              • CA-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 that Islamic bank licensee's equity portfolio is significant.

                January 2015

            • Large 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 2015

            • Holdings 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 the Islamic bank licensee on balance sheet) must be risk-weighted at 200%. Premises occupied by the Islamic bank licensee must be risk-weighted at 100%. Investments in Real Estate Companies (by way of investments in subsidiaries 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 2015

            • Other 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 2015

            • Underwriting 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 2015

              • CA-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. The Islamic 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 2015

          • CA-4.3 Supervisory Slotting Criteria

            [This section was deleted in January 2015.]

            January 2015

          • CA-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 the Islamic bank licensee's equity portfolio is significant.

              January 2015

            • CA-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 2015

          • CA-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 2015

            • CA-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 2015

            • CA-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 2015

            • CA-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 2015

            • CA-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 2015

            • CA-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 2015

            • CA-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 2015

            • CA-4.5.8

              Shari'a compliant sale and repurchase agreements, securitised lending/borrowing and asset sales with recourse, where the credit risk remains with the Islamic bank licensee, must be applied a CCF of 100%.

              January 2015

            • CA-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 2015

            • CA-4.5.10

              Certain transaction-related contingent items (e.g. performance bonds, bid bonds, and warranties) must be applied a CCF of 50%.

              January 2015

            • CA-4.5.11

              Note issuance facilities and revolving underwriting facilities must be applied a CCF of 50%.

              January 2015

            • CA-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 2015

            • CA-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 the credit risk exposure arising from unsettled transactions as appropriate for producing management information that facilitates action on a timely basis.

              January 2015

            • CA-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 2015

            • CA-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 an Islamic bank licensee's exposure to credit risk through a financing arrangement, where the exposure to credit risk is unilateral and only the Islamic 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 2015

            • CA-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 2015

          • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

            • Multiple 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 2015

              • CA-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 2015

            • Issuer 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 2015

              • CA-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 of credit risk exposure the Islamic 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 2015

              • CA-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 2015

            • Domestic 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 2015

              • CA-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 2015

            • Short-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 2015

              • CA-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 recognised credit risk mitigation techniques for such claims.

                January 2015

              • CA-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 on Islamic bank licensees 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 an Islamic 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 2015

              • CA-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 2015

            • Level 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 2015

            • Unsolicited Ratings

              • CA-4.6.17

                Unsolicited ratings should be treated as unrated exposures.

                January 2015

          • CA-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 2015

              • CA-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 2015

              • CA-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 and market risks. Therefore, it is imperative that Islamic 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 the Islamic bank licensee's use of CRM techniques and its interaction with the Islamic bank licensee's overall credit risk profile. Where these risks are not adequately controlled, the CBB may impose additional capital charges or take supervisory actions.

                January 2015

              • CA-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. The Islamic 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 2015

              • CA-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 2015

              • CA-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 2015

            • Guarantees

              • CA-4.7.7

                Capital relief for the use of a guarantee is given when the following conditions are satisfied:

                (a) The guarantee represents the Islamic 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) The Islamic 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 2015

              • CA-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 2015

              • CA-4.7.9

                Takaful is not allowed as a credit risk mitigation technique.

                January 2015

            • Leased 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 2015

            • Pledge 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 2015

              • CA-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, the Islamic 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 2015

              • CA-4.7.13

                In case an Islamic bank licensee takes collateral of an asset pledged more than once, the collateral of the Islamic 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 the Islamic bank licensee's claim is limited to the residual value of the pledged asset after payment is made to earlier pledgees. The Islamic 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 the Islamic 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 the Islamic bank licensee.

                January 2015

            • Types 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 the Islamic 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 concerned Islamic 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) The Islamic 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/or affiliates, 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 2015

              • CA-4.7.15

                Any portion of the exposure which is not collateralised must be assigned the RW of the counterparty.

                January 2015

              • CA-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 2015

            • The 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 2015

              • CA-4.7.18

                The uncollateralised portion of the exposure continues to be assigned the RW of the counterparty.

                January 2015

              • CA-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 the Islamic 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 2015

            • Shari'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 2015

            • The 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 2015

              • CA-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 2015

              • CA-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 currencies

                January 2015

              • CA-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 2015

            • The 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 2015

              • CA-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 2015

            • Maturity 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 2015

              • CA-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 years

                January 2015

            • Credit 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 2015

              • CA-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 2015

              • CA-4.7.31

                An Islamic bank licensee may also place liquid funds with a central bank or another Islamic 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, an Islamic 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 2015

            • Treatment 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 2015

          • CA-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 the Islamic 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 2015

            • CA-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 to credit risk in the form of capital impairment risk.
              January 2015

            • Commercial 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 2015

              • CA-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 as credit 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, an Islamic 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, the Islamic bank licensee's rights and entitlements are subordinated to the claims of secured and unsecured creditors.

                January 2015

              • CA-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 the Islamic bank licensee as investor fails to recover its investment; and
                (b) The Musharakah partner or Mudarib may fail either:
                (i) To pay the Islamic bank licensee's share in the profit on a periodical basis, as contractually agreed; or
                (ii) To settle the Islamic 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 2015

              • CA-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 2015

              • CA-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 2015

            • Simple 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 2015

              • CA-4.8.9

                [This Paragraph has been left blank.]

                January 2015

              • CA-4.8.10

                [This Paragraph has been left blank.]

                January 2015

            • Supervisory 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, an Islamic 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 2015

              • CA-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 to credit risk in respect of the partner's ability and willingness to pay.33 The Islamic 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 the Islamic 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. The Islamic 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, the Islamic 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 an Islamic bank licensee on the basis of diminishing Musharakah). The rental payable by the partner/customer as Ijara lessee is adjusted periodically to reflect the Islamic bank licensee's remaining ownership share in the asset. The Islamic bank licensee is exposed to credit 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 2015

              • CA-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 2015

              • CA-4.8.14

                If the exposure under the diminishing Musharakah contract consists of working capital finance in the customer's business venture, the Islamic bank licensee must measure its credit 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, an Islamic bank licensee can use the supervisory slotting method, based on the criteria set out in Appendix CA-6 (diminishing Musharakah).

                January 2015

            • Equity 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 2015

            • A 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-party customer (ultimate customer). The ultimate customer will make progress payments to the Mudarib, who in turn makes payments to the Islamic bank licensee. The essential role of the Islamic bank licensee in this structure is to provide bridging finance to the Mudarib pending its receipt of the progress payments. In this Mudarabah structure, the Islamic 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 Islamic bank licensee has no direct or contractual relationship with the ultimate customer, but in such a structure the Islamic bank licensee stipulates that payments by the ultimate customer to the Mudarib be made to an account ("repayment account") with the Islamic bank licensee which has been opened for the purpose of the Mudarabah and from which the Mudarib may not make withdrawals without the Islamic bank licensee's permission.

                January 2015

              • CA-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 the Islamic bank licensee to the Mudarib would normally be treated under credit risk as "equity positions in the banking book", the use of the structure involving a "repayment account", whereby the ultimate customer makes payments into such an account with the Islamic bank licensee instead of making payments directly to the Mudarib, has the effect of substituting the credit risk of the ultimate customer for that of the Mudarib to the extent of the collateralised balance of the "repayment account".

                January 2015

              • CA-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 the Islamic bank licensee, or, if the repayment account is used, that the ultimate customer fails to pay), the Islamic bank licensee is exposed to capital impairment in the event that the project results in a loss. The proposed RW and impact of credit risk mitigation are explained in Section CA-4.7.

                January 2015

            • Musharakah 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 a customer 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 2015

              • CA-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 the Islamic bank licensee's partner as a customer instead of to a third party, the credit 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 2015

              • CA-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. The Islamic bank licensee as a capital contributor is exposed to credit 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 2015

      • PART 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 the market 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 2015

              • CA-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 the Islamic 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 2015

              • CA-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.

                January 2015

              • CA-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 2015

              • CA-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 the Islamic bank licensee's risk management capabilities and practices. Such policies must be commensurate with the Islamic bank licensee's capabilities and capacities for risk management. The Islamic bank licensee must have well-documented procedures to comply with stated policies, which must be fully documented and subject to periodic internal audit.

                January 2015

            • Policies and Procedures

              • CA-5.1.6

                Policies and procedures must, at a minimum, address the following:

                (a) The activities the Islamic 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 the Islamic 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 the Islamic 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 the Islamic bank licensee's ability to effect an immediate liquidation of the exposure;
                (f) The extent to which the Islamic 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 the Islamic 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 2015

              • CA-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 the Islamic 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 the Islamic bank licensee's trading strategy including the monitoring of turnover and stale positions in the Islamic bank licensee's trading book.
                January 2015

            • Prudent 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 2015

              • CA-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 2015

              • CA-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 an Islamic bank licensee's valuation procedures for consistency with this guidance. One factor in the CBB's assessment of whether an Islamic 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 the Islamic bank licensee's valuation procedures and these guidelines.

                January 2015

              • CA-5.1.9A

                A framework for prudent valuation practices must at a minimum include the requirements outlined in this Section.

                January 2015

            • Systems 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 the Islamic 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 2015

            • Valuation 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 2015

                • CA-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 2015

              • Marking 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 2015

                • CA-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 2015

            • Independent 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 2015

              • CA-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 2015

            • Valuation 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 2015

              • CA-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 2015

            • Adjustment 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 2015

              • CA-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 Islamic 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 2015

              • CA-5.1.20

                The adjustment to the current valuation of less liquid positions made under Paragraph CA-5.1.19 must impact Tier 1 regulatory capital and may exceed those valuation adjustments made under financial reporting standards and Paragraphs CA-5.1.17 and CA-5.1.18.

                January 2015

          • CA-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 2015

            • CA-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 2015

          • CA-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 2015

            • Specific 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 the Islamic 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 2015

              • CA-5.3.3

                The capital charge for specific risk is 8%.

                January 2015

              • CA-5.3.4

                [This Paragraph was deleted in January 2012]

                January 2015

            • General 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 Islamic 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 2015

              • CA-5.3.6

                The general market equity risk measure is 8% of the overall net position in each national market.

                January 2015

          • CA-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 2015

            • Specific 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-Unrated
                0%

                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 2015

            • General 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 2015

            • General 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 an Islamic 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-5.4.4

                In the case of equity investments made by means of a Musharakah or a Mudarabah contract where the underlying assets are commodities, the market risk provisions for commodities, as described in Sections CA-5.5, CA-3.6 (Musharakah) and CA-3.7 (Mudarabah) are applicable.

                January 2015

          • CA-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 Islamic bank 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 2015

              • CA-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 2015

              • CA-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 the Islamic bank licensee's overall assets and liabilities.

                January 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

            • De 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 any Islamic bank licensee:

                (a) The Islamic 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) The Islamic 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 2015

              • CA-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 the Islamic 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 an Islamic bank licensee that is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.

                January 2015

              • CA-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 2015

            • Calculation 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 the Islamic 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 2015

              • CA-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 2015

              • CA-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 2015

            • Structural 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 the Islamic bank licensee's CAR;
                (b) Positions related to items that are deducted from the Islamic 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-consolidated subsidiaries 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 2015

              • CA-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 Islamic 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 the Islamic bank licensee's CAR. For this purpose, the CBB may ask written representations from the Islamic 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 2015

            • Calculation 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 2015

              • CA-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 or subsidiary 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, the Islamic 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 2015

            • Calculation 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 2015

              • CA-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 2015

          • CA-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 2015

              • CA-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 an Islamic bank licensee to foreign exchange risk which should be captured within the measurement framework set out in Section CA-5.5.

                January 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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. An Islamic 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 2015

            • Calculation 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 the Islamic bank licensee's reporting currency.

                January 2015

              • CA-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 2015

              • CA-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 2015

            • Maturity 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

            • Simplified 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 2015

            • Other 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 for credit risk a capital charge of 1.6% is applied (equivalent to a 20% RW) to cater for market risk exposure.

                January 2015

              • CA-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 2015

        • CA-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 2015

            • CA-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 2015

            • CA-6.1.3

              Operational risk in Islamic bank licensees can be broadly divided into three categories:

              (a) General risks: Such risks are consequential upon various kinds of banking operations conducted by Islamic 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 of operational 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 an Islamic 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 an Islamic 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 the Islamic 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 the Islamic 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) the Islamic 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 an Islamic 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 2015

          • CA-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 2015

            • CA-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 an Islamic bank licensee using the standardised approach no longer meets the qualifying criteria for the standardised approach, it may require the Islamic 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 2015

            • Basic Indicator Approach

              • CA-6.2.3

                Islamic bank licensees 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 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 an Islamic 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 2015

              • CA-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 for operational risk.

                January 2015

              • CA-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 the Islamic 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 2015

              • CA-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 concerned Islamic bank licensee 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.

                January 2015

              • CA-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 2015

            • The 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 2015

              • CA-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 bank, i.e. in corporate finance, the indicator is the gross income generated in the corporate finance business line.

                January 2015

              • CA-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[(GI1-81-8, 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 2015

        • CA-7 Profit Sharing Investment Accounts

          [This chapter was deleted in January 2015.]

          January 2015

        • CA-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 an Islamic 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 2015

            • CA-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 2015

          • CA-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 Sukuk securitisations) 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 2015

              • CA-8.2.2

                An Islamic bank licensee may act as originator of Sukuk issues where the ownership of assets held by the Islamic bank licensee is transferred to holders of Sukuk by means of a securitisation. Such a securitisation may offer the Islamic 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 the securitisation may permit the issuing Islamic bank licensee to exclude the assets from the calculation of its RWAs.
                January 2015

              • CA-8.2.3

                The achievement of the second of these benefits will depend on the way in which the securitisation is structured. For this, the Islamic 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 2015

              • CA-8.2.4

                An Islamic bank licensee may act as sponsor of a Sukuk issuance or similar programme involving assets of a customer in which the Islamic 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 the Islamic bank licensee would be the earning of fees for the services provided, but the Islamic bank licensee will incur capital charges if it offers credit enhancement (as outlined in Section CA-8.4).

                January 2015

            • Collateral 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 2015

              • CA-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 2015

            • Characteristics 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

            • Credit 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 2015

            • Over-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 2015

            • Excess 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 2015

            • Cash 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 2015

            • Classification 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 the credit risk of the asset pool is assumed by the issuer.
                (b) Third-party guarantee credit enhancement structure

                This structure comprises the assumption of credit 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 2015

            • Assets in Securitisations

              • CA-8.2.19

                The assets in a Sukuk securitisation have to be in compliance with Shari'a rules and principles.

                January 2015

              • CA-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 2015

            • Recognition 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 the securitisation (such as credit enhancements — see Section CA-8.4).

                (a) In substance, all credit 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 indirect control 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 or securitisation exposures have been repaid. It is generally accomplished by repurchasing the remaining securitisation exposures once the pool balance or outstanding securities have fallen below some specified level.

                January 2015

              • CA-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 2015

            • Operational Requirements for Credit Analysis

              • CA-8.2.23

                Islamic bank licensees must carry out the credit analysis of their securitisation exposure based on the following criteria, in order to be allowed to use the risk weights in Section CA-8.3. If an Islamic bank licensee is unable to perform the due diligence and maintain the information specified in this paragraph, it will be required to risk weight the securitisation exposure at 1,250%. The criteria are applicable to securitisation exposures of Islamic bank licensees both in the banking and trading book:

                (a) An Islamic bank licensee must have a clear understanding of the nature and features of its individual securitisation exposures, including the risk characteristics of the pools underlying such exposure on an ongoing basis. This requirement applies to both on-and off-balance sheet securitisation exposures;
                (b) As the payments to Sukuk holders are dependent on the performance of underlying assets, an Islamic bank licensee must be able to assess the performance information on an ongoing basis; and
                (c) An Islamic 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 2015

              • CA-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 2015

          • CA-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 and market risk arising from the holding of a Sukuk in the "banking book" by an Islamic 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 an Islamic 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 2015

            • CA-8.3.2

              Where Sukuk are externally rated, Islamic bank licensees 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 involve market risk as well as credit risk).

              January 2015

            • CA-8.3.3

              An Islamic bank licensee must have methodologies that enable it to assess the credit 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. An Islamic 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 an Islamic 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, the Islamic bank licensee must consider the higher degree of credit risk in the evaluation of its overall capital adequacy.

              January 2015

            • CA-8.3.4

              For Sukuk classified in the trading book, the market risk capital requirement as mentioned in Section CA-5.4 on market risk is applicable.

              January 2015

            • Salam Sukuk

              • CA-8.3.5

                The credit risk in Salam Sukuk is similar to that of the underlying Salam contract, where the credit 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 2015

              • CA-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 2015

              • CA-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 2015

              • CA-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 2015

            • Istisna Sukuk

              • CA-8.3.9

                The asset may be constructed on behalf of an ultimate customer or off-taker with whom the Islamic bank licensee enters into a parallel Istisna contract. In this case, there is a credit risk exposure to the ultimate customer for the payment due under the parallel contract. This credit 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 ultimate customer. The RW for this credit exposure is that of the ultimate customer, unless there is a guarantee, in which case the RW is that of the guarantor if lower.

                January 2015

              • CA-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 2015

              • CA-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 2015

              • CA-8.3.12

                Refer to Section CA-3.4 on Istisna for detailed treatment.

                January 2015

            • Ijara 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 2015

            • Musharakah 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 the market 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 2015

              • CA-8.3.15

                Refer to Section CA-3.6 on Musharakah for detailed treatment.

                January 2015

            • Mudarabah 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 the market 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 2015

              • CA-8.3.17

                Refer to Section CA-3.7 on Mudarabah for detailed treatment.

                January 2015

            • Wakalah 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 the market 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 2015

              • CA-8.3.19

                Refer to Section CA-3.10 on Wakalah for detailed treatment.

                January 2015

            • Murabahah 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 2015

              • CA-8.3.21

                Refer to Section CA-3.2 on Murabahah for detailed treatment.

                January 2015

            • Exclusions

              • 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 2015

            • Treatment of Holdings of Sukuk Where Credit Enhancement Is Provided by an Issuer or Originator

              • CA-8.3.23

                For Sukuk with credit enhancement provided by the issuer or the originator, the RW is based on the credit rating of the credit enhancer (see table in CA-8.3.24 below). See Section CA-8.2 for details of various types of credit enhancements.

                January 2015

            • 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 2015

            • Treatment 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 a credit risk mitigant to a securitisation exposure. Credit risk mitigants include guarantees, collateral and on-balance sheet netting or any other Shari'a-compliant credit risk mitigation as recognised in Paragraph CA-4.7.21. Collateral in this context is that used to mitigate the credit 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 2015

            • Collateral

              • CA-8.3.26

                Eligible collateral is limited to that recognised under Section CA-4.7. Collateral pledged by SPVs may be recognised.

                January 2015

            • Guarantees

              • 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 2015

              • CA-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 2015

              • CA-8.3.29

                Capital requirements for the guaranteed/protected portion is calculated according to CRM as specified in Paragraphs CA-4.7.24 to CA-4.7.31.

                January 2015

            • Maturity Mismatches

              • CA-8.3.30

                For the purpose of setting regulatory capital against a maturity mismatch, the capital requirement is determined in accordance with Paragraphs CA-4.7.27 to CA-4.7.28. When the exposures being hedged have different maturities, the longest maturity must be used.

                January 2015

          • 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 2015

              • CA-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 2015

              • CA-8.4.3

                The following credit risk weights are applied for retained securitisation exposures where the Islamic bank licensee is the originator.