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  • Basic Indicator Approach

    • CA-6.2.3

      Banks 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 should be excluded from both the numerator and denominator when calculating the average.19 The charge may be expressed as follows:

      KBIA = [Σ (GI1..n α n)]/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.

      19 If negative gross income distorts a bank's Pillar 1 capital charge, CBB will consider appropriate supervisory action.

      Apr 08

    • 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, banks 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.

      Apr 08

    • CA-6.2.5

      Gross income is defined as:

      (a) Net income from financing activities which is gross of any provisions, operating expenses, realised profits/losses from the sale of securities in the banking book, and depreciation of Ijarah assets;
      (b) Net income from investment activities; and
      (c) Fee income (e.g. commission and agency fee)

      Less;
      (d) Investment account holders' share of income
      (e) Takaful income
      In case of a bank 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 licensed bank 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.
      Apr 08

    • CA-6.2.6

      Gross income includes income attributable to restricted and unrestricted Profit Sharing Investment Accounts' funds, but excludes extraordinary or exceptional income. Net income from investment activities includes the bank's share of profit from Musharakah and Mudarabah financing activities.

      Apr 08

    • CA-6.2.7

      Banks applying this approach are encouraged to comply with the principles set in section OM-1.2 of Operational Risk Management Module.

      Apr 08