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  • CA-A CA-A Introduction

    • CA-A.1 CA-A.1 Application

      • CA-A.1.1

        Rules in this Module are applicable to locally incorporated banks on both a stand-alone basis (i.e. including their foreign branches), and on a consolidated group basis (i.e. including their subsidiaries and any other investments which are included or consolidated into the group accounts or are required to be consolidated for regulatory purposes by the Central Bank of Bahrain ('CBB')).

        Amended: January 2011
        Apr 08

      • CA-A.1.2

        In addition to licensees mentioned in Paragraph CA-A.1.1, certain of these Rules (in particular gearing and market risk requirements) are also applicable to Bahrain branches of foreign retail bank licensees.

        Amended: January 2011
        Apr 08

      • CA-A.1.3

        Rules in this Module are applicable to locally incorporated Islamic banks (hereinafter referred to as "the banks") on both a stand-alone and consolidated group basis.

        Amended: January 2011
        Apr 08

      • CA-A.1.4

        If the banks have investments in other entities, the banks must also apply the Rules set out in the Prudential Consolidation and Deduction Requirements Module (Module PCD) for the calculation of their solo and consolidated Capital Adequacy Ratio (CAR).

        Amended: January 2011
        Apr 08

    • CA-A.2 CA-A.2 Purpose

      • Executive Summary

        • CA-A.2.1

          The purpose of this Module is to set out the CBB's capital adequacy Rules and provide guidance on the risk measurement for the calculation of capital requirements by banks referred to under Paragraph CA-A.1.1. This requirement is supported by Article 44(c) of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006).

          Amended: January 2011
          Apr 08

        • CA-A.2.2

          The Module also sets out the minimum gearing requirements which relevant banks (referred to in Section CA-A.1) must meet as a condition of their licensing.

          Apr 08

        • CA-A.2.3

          Principle 9 of the Principles of Business requires that Islamic bank licensees maintain adequate human, financial and other resources, sufficient to run their business in an orderly manner (see Section PB-1.1.9). In addition, Condition 5 of CBB's Licensing Conditions (Section LR-2.5) requires Islamic bank licensees to maintain financial resources in excess of the minimum requirements specified in Module CA (Capital Adequacy).

          Apr 08

        • CA-A.2.4

          The requirements specified in this Module vary according to the Category of Islamic bank licensee concerned, their inherent risk profile, and the volume and type of business undertaken. The purpose of such requirements is to ensure that Islamic bank licensees hold sufficient capital to provide some protection against unexpected losses, and otherwise allow conventional banks to effect an orderly wind-down of their operations, without loss to their depositors. The minimum capital requirements specified here may not be sufficient to absorb all unexpected losses.

          Apr 08

      • Legal Basis

        • CA-A.2.5

          This Module contains the CBB's Directive (as amended from time to time) relating to the capital adequacy of Islamic bank licensees, and is issued under the powers available to the CBB under Article 38 of the CBB Law. The Directive in this Module is applicable to all Islamic bank licensees.

          Amended: January 2011
          Apr 08

        • CA-A.2.6

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

          Apr 08

        • CA-A.2.7

          The CBB requires in particular that the banks maintain adequate capital, in accordance with the Rules in this Module, against their risks as capital provides banks with a cushion to absorb losses without endangering customer accounts. As such, the CBB also requires the relevant banks to maintain adequate liquidity and identify and control their large exposures which might otherwise be a source of loss to a licensee on a scale that might threaten its solvency.

          Amended: January 2011
          Apr 08

        • CA-A.2.8

          These Rules are consistent in all substantial respects with the approach recommended by the Basel Committee on Banking Supervision and Islamic Financial Services Board (IFSB) for capital adequacy.

          Amended: January 2011
          Apr 08

        • CA-A.2.9

          The CBB recognises that the Basel Committee guidelines may not address specific characteristics of the various products and services offered by Islamic banks. Therefore, the CBB has adopted a risk-based approach and has tailored the Rules to address the specific risk characteristics of Islamic banks. The structure of these Rules is explained on the next page.

          Amended: January 2011
          Apr 08

        • CA-A.2.10

          This Module provides support for certain other parts of the Rulebook, mainly:

          (a) Prudential Consolidation and Deduction Requirements;
          (b) Licensing and Authorisation Requirements;
          (c) CBB Reporting Requirements;
          (d) Credit Risk Management;
          (e) Market Risk Management;
          (f) Operational Risk Management;
          (g) Liquidity Risk Management;
          (h) High Level Controls;
          (i) Relationship with Audit Firms; and
          (j) Penalties and Fines.

          Amended: January 2011
          Apr 08

    • CA-A.3 CA-A.3 Capital Adequacy Ratio

      • CA-A.3.1

        Historically, on a consolidated basis, the CBB has set a minimum Capital Adequacy Ratio ("CAR") of 12.0% for all locally incorporated banks. Furthermore, on a solo basis, the parent bank has been required to maintain a minimum CAR of 8.0% (i.e. unconsolidated). The arrangements outlined below will apply once banks have been subject to a Pillar 2 risk profile assessment by the CBB or an acceptable audit firm. Until such an assessment has been completed, the existing 12% and 8% minimum capital ratio requirements (as outlined in Module CA-2.5 October 2006 edition) will remain in place.

        Apr 08

      • CA-A.3.2

        CAR will be calculated by applying the regulatory capital to the numerator and risk-weighted assets (RWAs) to the denominator.

        Eligible Capital

        { Total Risk-weighted Assets (Creditb + Marketb Risks) Plus Operational Risks

        Less

        Risk-weighted Assets funded by Restricted PSIAc (Creditb + Marketb Risks)

        Less

        (1 - α) [Risk-weighted Assets funded by Unrestricted PSIAc (Creditb + Marketb Risks)]

        Less

        α [Risk-weighted Assets funded by PER and IRR of Unrestricted PSIAe (Creditb +

        Marketb Risks)]}

        (a) Total RWA include those financed by both restricted and unrestricted Profit Sharing Investment Accounts (PSIA);
        (b) Credit and market risks for on- and off-balance sheet exposures;
        (c) Where the funds are commingled, the RWA funded by PSIA are calculated based on their pro-rata share of the relevant assets. PSIA balances include PER and Investment risk reserve (IRR) or equivalent reserves;
        (d) — α refers to the proportion assets funded by unrestricted PSIA which, as determined by the CBB, is 30%; and
        (e) The relevant proportion of risk-weighted assets funded by the PSIA's share of PER and by IRR is deducted from the denominator. The PER has the effect of reducing the displaced commercial risk and the IRR has the effect of reducing any future losses on the investment financed by the PSIA.

        The above formula is applicable as the Islamic banks may smooth income to the Investment Account Holders (IAHs) as part of a mechanism to minimise withdrawal risk and is concerned with systemic risk.
        Amended: April 2011
        April 2008

      • CA-A.3.3

        All locally incorporated banks are required to maintain a capital ratio both on a solo (and a consolidated basis where applicable) above the minimum "trigger" CAR of 8%. Failure to remain above the trigger ratio will result in Enforcement and other measures as outlined in Section CA-1.4.

        Apr 08

      • CA-A.3.4

        All locally incorporated banks will be required to maintain capital ratios above individually set "target" CARs on a solo and on a consolidated basis. These target CARs will be set at an initial minimum of 8.5% and may in the case of high risk banks be set at levels above the 12.5% target ratio set prior to January 2008. Failure to remain above the target ratio will result in Enforcement and other measures as outlined in Section CA-1.4.

        Apr 08

      • Eligible Capital

        • CA-A.3.5

          Banks are allowed two classes of capital (see section CA-2.2) to meet their capital requirements for credit risk, operational risk and market risk, as set out below:

          Tier 1: Core capital — Supports the calculation of credit risk weighted assets, operational risk and market risk.

          Tier 2: Supplementary capital — Supports credit risk, operational risk and market risk subject to limitations.

          Apr 08

      • Risk-weighted Assets

        • CA-A.3.6

          Total risk-weighted assets are determined by:

          (i) Multiplying the capital requirements for market risk and operational risk by 12.5; and
          (ii) Adding the resulting figures to the sum of risk-weighted assets for credit risk.
          Amended: January 2011
          Apr 08

        • CA-A.3.7

          Islamic banks are not contractually obliged to make good losses arising from Islamic financing assets funded by the investment accounts, unless these losses arise from the negligence on the part of the Islamic bank as manager (Mudarib) or as agent (Wakeel). However to be prudent, the CBB requires Islamic banks to provide regulatory capital to cover minimum requirement arising from 30% of the risk weighted assets and contingencies financed by the unrestricted investment accounts. Therefore, for the purpose of calculating its Capital Adequacy Ratio (CAR), the risk-weighted assets of an Islamic bank consist of the sum of the risk-weighted assets financed by the Islamic bank's own capital and liabilities, plus 30% of the risk-weighted assets financed by the Islamic bank's unrestricted PSIAs.

          Amended: January 2011
          Apr 08

        • CA-A.3.8

          In measuring credit risk for the purpose of capital adequacy, banks must apply the standardised approach through which claims of different categories of counterparties are assigned risk weights (RWs) according to broad categories of relative riskiness.

          Apr 08

        • CA-A.3.9

          For the measurement of their operational risks, banks have a choice, subject to the written approval of the CBB, between two broad methodologies:

          (a) One alternative is to measure the risks using a basic indicator approach, applying the measurement framework described in Chapter CA-6 of this Module; and
          (b) The second methodology (i.e. the standardised approach) is set out in detail in Chapter CA-6 including the procedure for obtaining the CBB's approval. This methodology is subject to the fulfillment of certain conditions. The use of this methodology is, therefore, conditional upon the explicit approval of the CBB.
          Amended: January 2011
          Apr 08

        • CA-A.3.10

          In measuring market risk for the purpose of capital adequacy, banks must apply the approach set out in relevant sections.

          Apr 08

        • CA-A.3.11

          If an Islamic bank wants to adopt an advanced approach (IRB for credit risk and/or IMA for market risk), it will need to apply to the CBB for prior approval.

          Apr 08

    • CA-A.4 CA-A.4 Module History

      • CA-A.4.1

        This Module was first issued in January 2005 as part of the Islamic principles volume. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.

        Apr 08

      • CA-A.4.2

        A list of most recent changes made to this Module are detailed in the table below:

        Summary of Changes

        Module Ref. Change Date Description of Changes
        CA-A.2 10/2007 New Rule CA-A.2.5 introduced, categorising this Module as a Directive.
        CA-1 to CA-6 01/2008 Basel II implementation.
        CA-1.5 01/2008 Review of PIR by external auditors
        CA-4.6 04/2008 Recognition of IIRA as ECAI and mapping of ratings
        CA-4.2.15–18 01/2009 New guidance and rules on SMEs
        CA-A 01/2011 Various minor amendments to ensure consistency in CBB Rulebook.
        CA-A.2.5 01/2011 Clarified legal basis.
        CA-5.1 & CA-5.3 01/2012 Changes in respect of July 2009 and February 2011 amendments to Basel II.
        CA-4.2.10 and CA-4.2.11A 04/2012 Amendment made for claims on banks dealing with self-liquidating letters of credit.
        CA-2.1.4(g) 10/2013 Added Rule to include limited general provision against unidentified future losses as part of Tier 2.
        CA-2.1.4(f), CA-2.1.4A to CA-2.1.4C and CA-2.2.1 10/2013 Added Rules to deal with subordinated issued for Tier 2 capital.
        CA-5.5.13 10/2013 Clarified Rules on structural positions for foreign exchange risk.

      • Evolution of the Module

        • CA-A.4.3

          Prior to the development of this Rulebook, the CBB issued various circulars representing regulations relating to capital adequacy requirements. These circulars were consolidated into this Module and are listed below:

          Circular Ref. Date of Issue Module Ref. Circular Subject
          OG/78/01 20 Feb 2001 CA-A.3 and CA-1.4 Monitoring of Capital Adequacy
          BC/01/98 10 Jan 1998 CA-A.3 and CA-1.4 Capital Adequacy Ratio
          Apr 08

      • Effective Date

        • CA-A.4.4

          The contents retained from the previous module (Capital Adequacy-Islamic banks) are effective from the date depicted in the above circulars from which the requirements are compiled. The updated module is effective from January 01, 2008.

          Apr 08