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  • 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 notification to 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.
          Amended: January 2022
          January 2015

        • CA-1.1.6A

          For the purpose of Sub-paragraph CA-1.1.6 (b), a licensee must provide appropriate justification and seek CBB’s prior approval, if it wishes to revert from the standardised approach to the basic indicator approach.

          Added: January 2022

        • 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