CA-1.1.2

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

CA-1.1.3

Consolidated Total risk-weighted assets are determined by:

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).

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.

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:

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.

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.

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:

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.

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).

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.

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.

Plus

α [RWAs funded by UPSIAs^a (Credit + Market Risks) -
PER and IRR of UPSIAs]}

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.

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.

CA-1.1.15

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

CA-1.1.16

Solo Total risk-weighted assets are determined by:

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.