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  • CA-2.1 CA-2.1 Regulatory Capital

    • CA-2.1.1

      Islamic banks are allowed two types of own funds to meet their capital requirements for credit risk, market risk and operational 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

    • CA-2.1.2

      For the purpose of defining Tier capital, the CBB has broadly adopted the recommendations contained in IFSB's guidelines. However, some restrictions have been placed on the inclusion of profit equalisation and investment risk reserve as Tier 2 capital. For components of Tier 1 and Tier 2 capital refer to paragraphs CA-2.1.3 to CA-2.1.4.

      Apr 08

    • Tier 1: Core Capital

      • CA-2.1.3

        Tier 1 capital shall consist of the sum of items (a) to (e) below, less the sum of items (f) through (j) below:

        (a) Issued and fully paid ordinary shares;

        For Islamic funds with participation and / or "B" class shares (not carrying voting rights), the treatment for the purpose of these regulations must be agreed with the CBB. The CBB will consider each case on its merit.
        (b) Disclosed reserves
        •  General reserves
        •  Legal / statutory reserves
        •  Share premium
        •  Capital redemption reserves
        •  Excluding fair value reserves1
        (c) Retained profit brought forward;
        (d) Unrealized net gains arising from fair valuing equities2; and
        (e) Minority interests in subsidiaries Tier 1 equity, arising on consolidation, in the equity of subsidiaries that are less than wholly owned. Further guidance on minority interests is provided in the Prudential Consolidation and Deduction Requirements Module.

        LESS:

        (f) Goodwill;
        (g) Current interim cumulative net losses;
        (h) Unrealized gross losses arising from fair valuing equity securities3;
        (i) Other deductions made on a pro-rata basis between Tier 1 and Tier 2;
        (j) Reciprocal cross holdings of other banks' capital.

        1 This refers to unrealised fair value gains reported directly in equity (such gross gains are included in Tier 2).

        2This refers to unrealised net fair value gains taken through P&L (which have been audited). Please note that the unrealised net gains related to unlisted equities taken through P&L arising on or after January 1, 2008 will be subject to 55% discount as stated in CA-2.1.4(c)ii.

        3 This refers to both 'net losses taken through P&L' and 'gross losses reported directly in equity'.

        Apr 08

    • Tier 2: Supplementary Capital

      • CA-2.1.4

        Tier 2 capital shall consist of the following items:

        (a) Current interim retained profits that have been reviewed as per the ISA by the external auditors;
        (b) Asset revaluation reserves, which arise from the revaluation of fixed assets and real estate 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 Tier 2 capital, with the concurrence of the external auditors, provided that the assets are prudently valued, fully reflecting the possibility of price and forced sale. A discount of 55% will be applied to the difference between the historical cost book value and the market value to reflect the potential volatility of this form of unrealised capital;
        (c) Unrealised gains arising from fair valuing equities:
        (i) For unrealized gross gains reported directly in equity, a discount factor of 55% will be applied before inclusion in Tier 2 capital. Note for gross losses, the whole amount of such unrealised loss should be deducted from the Tier 1 capital;
        (ii) For unrealized net gains reported in income, a discount factor of 55% will apply on any such unrealized net gains from unlisted equity instruments before inclusion in Tier 1 capital (for audited gains) or Tier 2 capital (for reviewed gains) as appropriate. This discount factor will be applied to the incremental net gains related to unlisted equities arising on or after January 1, 2008;
        (d) Banks should note that the Central bank will discuss the applicability of the discount factor under paragraph (c) above with individual banks. This discount factor relating to CA-2.1.4(c)ii may be reassessed by the CBB if the bank arranges an independent review (which has been performed for the bank's systems and controls relating to FV gains on financial instruments) and meets all the requirements of the paper 'Supervisory guidance on the use of the fair value option for financial instruments by banks' issued by Basel Committee on Banking Supervision in June 2006;
        (e) Profit equalisation reserve and investment risk reserve, up to a maximum amount equal to the capital charge pertaining to 30% of the risk weighted assets financed by unrestricted investment account holders;
        (f) Subordinated term capital instruments, which comprise all unsecured term instruments subordinated (with respect to both profit and principal) to all other liabilities of the bank except the share capital. To be eligible for inclusion in Tier 2 capital, subordinated term capital instruments should have a minimum original fixed term to maturity of over five years. During the last five years to maturity, a cumulative discount (or amortisation) factor of 20% per year will be applied to reflect the diminishing value of these instruments as a continuing source of strength. These instruments are not normally available to participate in the losses of a bank which continues trading. For this reason, these instruments will be limited to a maximum of 50% of Tier 1 capital. Subordinated term capital instruments must also satisfy the conditions outlined in the paragraphs below; and
        (g) Credit facilities loss provisions held against future, presently unidentified losses and are freely available to meet such losses which subsequently materialise. Such general provisions/general credit facilities-loss reserves eligible for inclusion in Tier 2 will be limited to a maximum of 1.25 percentage points of credit risk-weighted risk assets. Provisions ascribed to identified deterioration of particular assets or known liabilities, whether individual or grouped, must be excluded.
        Amended: October 2013
        Amended: April 2011
        April 2008

      • CA-2.1.4A

        Subordinated term capital instruments agreed to on a case by case basis by CBB, must meet the following conditions. They must be:

        (a) Issued and fully paid;
        (b) Neither be 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 bank creditors;
        (c) The main features of such instruments must be easily understood and publicly disclosed;
        (d) Proceeds must be immediately available without limitation to the issuing bank; and
        (e) The bank must have discretion over the amount and timing of distributions, subject only to prior waiver of distributions on the bank's common stock, and banks must have full access to waived payments.
        Added: October 2013

      • CA-2.1.4B

        A bank may not exercise a call on a subordinated term capital instrument, partially or in full, prior to the end of its term, unless it has received the CBB's prior written approval, and there is a clear statement in support of the call in the original documentation.

        Added: October 2013

      • CA-2.1.4C

        Where Paragraph CA-2.1.4B applies, the CBB will take into consideration whether the bank has received confirmation from its external auditor that the bank will continue to satisfy the CBB's capital adequacy requirements after such early call and the bank has sufficient liquidity to repay the subordinated term capital instrument. This can be done by assessing the impact of such redemption on the capital adequacy ratio of the bank.

        Added: October 2013