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  • Basic Indicator Approach

    • CA-6.2.3

      Islamic bank licensees 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 must be excluded from both the numerator and denominator when calculating the average. See Paragraph CA-6.2.6 for approaches to be used where negative gross income distorts an Islamic bank licensee's Pillar 1 capital charge. The charge may be expressed as follows:

      KBIA = [∑(GI1..nα)]/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.

      January 2015

    • 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, Islamic bank licensees 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.

      January 2015

    • CA-6.2.5

      Gross income is defined as:

      (a) Net income from financing activities which is gross of any provisions (e.g. for unpaid profit or non-performing facilities), operating expenses (including outsourcing service providers), depreciation of Ijarah assets and excludes realised profits/losses from the sale of securities (e.g. sukuk) in the banking book;
      (b) Net income from investment activities. This includes the Islamic bank licensee's share of profit from musharakah and mudarabah financing activities; and
      (c) Fee income (e.g. commission and agency fee)

      Less:

      (d) Share of above income attributable to investment account holders and other account holders; and
      (e) Extraordinary or exceptional income and income from Takaful activities.
      Amended: July 2015
      January 2015

    • CA-6.2.6

      In case of an Islamic bank licensee 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 Islamic bank licensee 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.

      January 2015

    • CA-6.2.7

      Banks applying both approaches are required to refer to the principles set in Section OM-8.2 of Operational Risk Management Module.

      January 2015