CM-A.1.1

The purpose of this Module is to provide the Central Bank of Bahrain’s (CBB’s) Directive concerning requirements relevant to the key elements of a sound credit risk management system which it expects Islamic bank licensees to observe.

CM-A.1.2

This Module must be read in conjunction with other parts of the Rulebook, mainly:

CM-A.1.3

This Module contains the CBB’s Directive (as amended from time-to-time) relating to credit risk management in Islamic bank licensees and is issued under powers available to the CBB under Article 38 of the of the Central Bank of Bahrain and Financial Institutions Law (Decree No. 64 of 2006) (“CBB Law”). This Module is applicable to all Islamic bank licensees. Branches of foreign bank licensees shall comply with the requirements in this Module unless stated otherwise under relevant paragraphs of the Module.

CM-A.1.4

For an explanation of the CBB’s rule-making powers and different regulatory instruments, see Section UG-1.1.

CM-A.2.3

The requirements in this amended Module are effective from 30^th June 2022 on which date the existing Module CM will become redundant and any exemptions allowed under the existing Module will be subject to grandfathering requirements with the approval of CBB.

CM-1.2.4

The Board of Directors of the Islamic bank licensee is responsible for ensuring that the licensee has an effective CRMU and for approving and regularly reviewing, at least every two years, its credit risk policies, credit risk appetite and limits framework. Amendments made to such documents must also be approved by the Board. The Board may delegate some of its functions, such as approval of policies, amendments to policies and periodic reviews to a designated Board committee.

CM-1.2.5

Effective credit risk management is imperative to optimise the licensee’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. A risk appetite statement is a written articulation of the aggregated level and types of risk exposures that the licensee will accept, or avoid, in order to achieve its business objectives.

CM-1.2.6

The Board must ensure that the credit risk policies cover all activities of the Islamic bank licensee in which it incurs credit risk. The Board must also determine that the licensee’s capital level is adequate for the risks assumed throughout the entire organisation or group.

CM-1.2.7

The credit risk policy must document the licensee’s willingness to grant credit based on exposure type (commercial, consumer, real estate etc.), economic sector, geographical location, product, currency, maturity and anticipated profitability. This might also include the identification of target markets and the overall characteristics that the Islamic bank licensee would want to achieve in its credit portfolio (including levels of diversification and concentration tolerances).

CM-1.2.8

The Board must ensure that the credit risk appetite framework delineates the delegated powers, lines of responsibility and accountability over credit risk management decisions, and must clearly define authorised instruments, hedging strategies and risk-taking opportunities.

CM-1.2.9

The Board must assess whether the Islamic bank licensee is operating within the boundaries of the credit risk appetite and limits framework approved by the Board.

CM-1.2.10

The Board must ensure that it receives adequate management information reports and exception reports to meet its oversight requirements to monitor adherence to the licensee’s risk tolerance/appetite/limits. The Board must regularly evaluate whether it is receiving the right balance of detail and quantitative versus qualitative information.

CM-1.2.11

The Board must approve the structure in which the licensee will organise its credit-granting functions, including independent review of the credit granting process and the overall portfolio.

CM-1.2.12

For branches of foreign bank licensees where no Board/Audit Committee exists, all references to the Board/Audit Committee should be interpreted as the Group Chief Risk Officer or equivalent person who has direct access or reports to the Board or Audit Committee of the parent bank, unless alternative structures that satisfy the primary objectives of such oversight are in place.

CM-1.2.13

Senior management of the Islamic bank licensee is responsible for developing, implementing and approving sound credit risk procedures in accordance with credit risk policies approved by the Board.

CM-1.2.14

Senior management must determine that the staff involved in any credit relationship, whether established or new, basic or complex, have the necessary knowledge, skill sets, experience and are fully capable of ensuring the relationship meets the highest standards and in compliance with the licensee’s policies and procedures.

CM-1.2.15

Senior management must ensure that risk monitoring systems are in place for effectively undertaking the activities of credit risk management.

CM-1.2.16

A properly documented credit risk policy is an essential element of, and a prerequisite for, the credit risk management process. Consistent with the Board's objectives, it assists licensee’s management in the maintenance of proper credit standards and the avoidance of unnecessary risks. Additionally, periodic internal assessment should be undertaken by the internal audit. In the case of branches of foreign bank licensees, the credit policy, limits and the procedures are normally those that are approved by the Head Office/Regional Office.

CM-1.2.17

Senior management, based on the approved credit risk policy, must develop credit risk procedures for identifying, measuring, monitoring and controlling credit risk. The procedures must address credit risk in all of the Islamic bank licensee’s activities, and at both the individual credit and portfolio levels.

CM-1.2.18

Explicit guidelines in the credit risk policy provide the basis for effective credit risk management. A sound credit risk policy should consider which types of credit products and obligors the licensee is looking for, and the underwriting standards the licensee will utilize.

CM-1.2.19

Islamic bank licensee’s credit risk framework must address all credit and credit risk related activities throughout the credit lifecycle covering matters of significance including, but not limited to:

CM-1.2.20

Islamic bank licensees must operate within sound, well-defined credit-granting criteria. These criteria must include a clear indication of the licensee’s target market and a thorough understanding of the obligor or counterparty, as well as the purpose and structure of the credit and its source of repayment. In addition, the criteria must set out who is eligible for credit and for how much, what types of credit are available, and under what terms and conditions the financing may be granted.

CM-1.2.21

In the case of branches of foreign bank licensees, the credit policies, credit limits and the procedures are those that are approved by the Head Office/Regional office.

CM-1.2.22

An effective internal control system for credit risk assessment and measurement is essential to enable senior management to carry out its duties. An effective internal control system must include:

CM-1.2.23

Islamic bank licensees must ensure that the credit risk policy establishes the objectives that guide the licensee’s credit-granting activities.

CM-1.2.24

The credit risk policy must give recognition to the goals of credit quality, earnings quality and sustainability and growth. Islamic bank licensees, regardless of their size, must determine the acceptable risk/reward trade-off for their activities, factoring in the cost of capital.

CM-1.2.25

The credit risk appetite/limits framework of Islamic bank licensees must take into consideration the cyclical aspects of the economy and the resulting shifts in the composition and quality of the overall credit portfolio. The credit granting criteria must be periodically assessed and amended and it must be viable in the long-run and through various economic cycles. The credit risk procedures must be reviewed at least once every three years or more frequently as may be necessary if there are changes in internal or regulatory requirements.

CM-1.2.26

The credit granting criteria must be designed and implemented within the context of internal and external factors, such as the licensee’s market position, trade area, staff capabilities and technology.

CM-1.2.27

Islamic bank licensees must have a clearly defined credit risk appetite statement which is implemented through comprehensive policies and procedures for limiting and controlling credit risk. Islamic bank licensees must also establish credit limits in a meaningful manner for different types of exposures, both on and off-balance sheet.

CM-1.2.28

Bahraini Islamic bank licensees must consider the results of stress testing in the overall limit setting and monitoring process. Such stress testing must take into consideration economic cycles, profit rates and other market movements and liquidity conditions.

CM-1.2.29

Islamic bank licensees must set out their policy on country and transfer risks within their Board approved credit risk policy. Such policy must include:

CM-1.2.30

Country risk is the exposure to a loss in cross-border financing, caused by events in the country to which the licensee has exposure and includes all forms of financing whether to the government, a licensee, a private enterprise or an individual. Country risk is therefore a broader concept than sovereign risk, which is restricted to the risk of financing to the government of a sovereign nation. Transfer risk, on the other hand, represents the risk of loss due to repatriation or remittance restrictions imposed by a foreign government that make it impossible to remit, fully or partially, the proceeds of obligation owed to the licensee.

CM-1.2.31

In the case of exposure to obligors, Islamic bank licensees must examine any associated country and transfer risks keeping in view factors such as domicile of the counterparty, the legal structure of the counterparty, the existence of special purpose vehicles, conduits and/ or other related factors that may affect the transferability of proceeds of repayment.

CM-1.2.32

Branches of foreign bank licensees must satisfy the CBB that equivalent arrangements are in place at the parent entity level, otherwise a policy is required in line with Paragraph CM-1.2.28.

CM-1.2.33

Branches of foreign bank licensees are normally subject to country limits that are set at a global level by the head office or by the regional office. The branch should be able to demonstrate that it is subject to limits imposed on it by the head office or regional office as appropriate.

CM-1.3.13

Islamic bank licensees which provide credit facilities to natural and legal persons in Bahrain must become members of the Bahrain Credit Reference Bureau (‘BCRB’). All enquiries for new or additional credit facilities in Bahrain must be submitted to the BCRB. BCRB members must meet the following requirements and incorporate them into their policies and procedures:

CM-1.3.14

Failure to comply with Article 68 (bis (2)) of the CBB Law and Paragraph CM-1.3.13 may result in an enforcement action taken against the CRB member, as well as the relevant employee in accordance with CBB Law. Additionally, all BCRB members must abide by the agreed Code of Practice of the BCRB (see Appendix CM-3). Any breaches to the code will be subject to enforcement action by the CBB.

CM-1.3.15

Islamic bank licensees must avoid providing finance to counterparties without collateral or without adequate credit risk analysis performed on the basis of reliable audited financial statements to properly analyse the obligor’s ability to repay.

CM-1.3.16

Some licensees indulge in ‘name-financing’ which refers to the practice of financing to businesses and individuals merely on the basis of their ‘name’ or ‘reputation’ in the market. In such instances, the licensee, typically, does not receive audited financial statements and other relevant information to conduct a proper credit risk analysis, nor does it receive collateral to support the credit granting decision. The CBB prohibits licensees from engaging in such activities in order to minimise their credit risk and reputational risk.

CM-1.4.6

Islamic bank licensees must have in place a Board approved policy to develop, review and implement an internal risk rating system. Such a system must be able to assign a credit risk rating or scoring to obligors that accurately reflects the obligors’ risk profile and likelihood of loss.

CM-1.4.7

Islamic bank licensees must assign risk ratings or scoring in a consistent manner to enable the licensee to classify obligors by risk ratings or scoring and have a clearer understanding of the overall risk profile of its portfolio. The licensee’s credit risk policy must define the various risk grades of its rating system. Criteria for assigning risk grades and the circumstances under which deviations from the criteria are permitted must be set. The credit risk policy must also define the roles of different parties involved in the rating process.

CM-1.4.8

The credit risk rating/scoring process must appropriately group credit exposures on the basis of shared credit risk characteristics.

CM-1.4.9

Islamic bank licensees’ credit exposures must be grouped according to shared credit risk characteristics, so that changes in the level of credit risk respond to the impact of changing conditions on a common range of credit risk drivers. This includes considering the effect on the group’s credit risk in response to changes in forward-looking information, including macroeconomic factors. The licensee must review the appropriateness of the grouping implemented upon initial recognition based on similar credit risk characteristics, at regular intervals, at least annually, to ensure that the relevant characteristics and their impact on the level of credit risk of the different groupings have not changed over time.

CM-1.4.10

Islamic bank licensees must validate their risk rating or scoring system and ascertain its applicability to their portfolio prior to implementation. An external independent party, other than the external auditor, with necessary expertise in model validation, must conduct the validation of the risk rating/scoring and ECL models every three years and upon development of the model, and also when there are material changes to the portfolio, rating/scoring model or model parameters (See also Paragraph CM-1.2.22 (c)).

CM-1.4.11

Islamic bank licensees that use a judgmental rating or scoring system must ensure that each rating is unique, well-defined and distinct from other ratings in the rating scale. The relevant risk factors and weights employed in the rating/scoring methodology must be appropriate for the risk profile of the obligors in different market segments, such as corporations, small and medium-sized enterprises (‘SMEs’), and financial institutions.

CM-1.4.12

Risk ratings must be assigned at the inception of financing and updated at least on an annual basis. Additionally, Islamic bank licensee must review the ratings or scoring as and when adverse events occur. Risk ratings or risk scores assigned to various obligors must be reviewed by the licensee’s personnel that are independent of those involved in financing origination. As part of its portfolio monitoring, the licensee must generate reports on credit exposures by risk rating/scores. Trend and migration analysis between risk ratings /scores must also be conducted to detect changes in the credit quality of the portfolio.

CM-1.4.13

The licensee may establish target limits for risk grades to highlight concentration in particular rating bands. The analysis of the portfolio by risk ratings is meaningful only when the licensee’s rating or scoring system is able to consistently assign similar ratings or scores to obligors with similar risk profiles.

CM-1.4.14

After the credit facility has been granted, its performance must be monitored at regular intervals. This includes an appropriate periodic review of financial statements, a reassessment of collateral and update of appraisals, and attentive monitoring of conditions in the obligor's industry. Credit supervision constitutes the first line of detection of difficulties and provides the licensee with an opportunity to address problems before losses are sustained. The credit review must ensure that the credit files are complete and that all credit approvals and other necessary documents relating to the obligor are available.

CM-1.4.15

Islamic bank licensees must perform regular credit reviews. The purpose of a credit review is to verify that credits are granted in accordance with the licensee’s credit risk policy and to provide an independent judgment of asset quality. Islamic bank licensees must conduct credit reviews with updated information on the obligor’s financial and business conditions, as well as the conduct of the account. Exceptions noted must be evaluated for impact on the obligor’s creditworthiness.

CM-1.4.16

Credit reviews must also be conducted on a consolidated group basis to factor in the business connections among connected entities. The performance of the underlying assets in the case of securitisation exposures must also be included in the credit reviews.

CM-1.4.17

Credit reviews must be performed and documented at least once a year other than for facilities subject to collective assessments. For Stage 2 and 3 accounts (See Paragraph CM-1.8.23), however, more frequent reviews must be conducted. Procedures must also be instituted to ensure that reviews are conducted at the appropriate frequency. A process to approve deferment of credit reviews must also be put in place. For consumer credits, annual credit reviews of individual obligors are only needed if significant and a portfolio analysis does not identify credit risk related issues or problems. However, credit exceptions and deterioration must be monitored and reported.

CM-1.4.18

Stress testing must involve identifying possible events or future changes in economic and other conditions that could have unfavourable effects on the Islamic bank licensee's credit exposures and assessing its ability to withstand such changes. Three areas that the licensee could usefully examine are: (i) economic or industry downturns; (ii) market risk events; and (iii) liquidity conditions. Stress testing can range from relatively simple alterations in assumptions about one or more financial, structural or economic variables, to the use of highly sophisticated financial models.

CM-1.4.19

Stress tests are to be performed by adjusting the parameters and then recalculating credit losses, for example:

CM-1.4.20

In undertaking credit risk stress tests, licensees should consider counterparty-based and credit facility-based risk factors and scenarios that help estimate credit losses after modelling a change in probability of default (‘PD’) and/or loss given default (‘LGD’) or exposure at default (‘EAD’). Stress testing programmes should consider:

CM-1.4.21

The approaches towards modelling stress tests include the following elements considered individually and on a combined basis as appropriate and with varying severity:

CM-1.4.22

Additionally, the impact of macroeconomic risk factors such as fluctuations in profit rates and/or exchange rates etc. on the following illustrative general conditions may be considered:

CM-1.4.23

If the licensee uses risk models (such as credit portfolio models or credit pricing models), it is necessary to perform stress tests which show whether the assumptions underlying the risk models will also be fulfilled in crisis situations. Only then will the models be able to provide the appropriate guidance in crisis situations.

CM-1.4.24

Islamic bank licensees should also examine political risk factors when significant parts of the credit portfolio consist of obligors from politically unstable countries. Due to the complex interrelationships involved, however, developing plausible stress tests for political risk factors involves far more effort than designing tests for macroeconomic risk factors. It is, therefore, advisable to call in specialists to develop stress tests for political risk factors in order to assess the relevant effects on financial and macroeconomic conditions.

CM-1.4.25

The output of the stress tests must be reviewed periodically by senior management and appropriate action taken in cases where the results exceed agreed tolerances. The output must also be incorporated into the process for assigning and updating policy and limits.

CM-1.4.26

Islamic bank licensees must attempt to identify the types of situations, such as economic downturns, both in the whole economy or in particular sectors, higher than expected levels of delinquencies and defaults, or the combinations of credit and market events that could produce substantial losses or liquidity problems.

CM-1.5.6

When the credit decision is primarily based on collateral value, independent and timely appraisals of the collateral by a third party valuation expert must be undertaken, and the licensee must ensure that the collateral value is sufficiently higher than the exposure amount.

CM-1.5.7

The requirement in Paragraph CM-1.5.6 shall not apply to publicly traded instruments that are provided as collateral for which daily fair value is available from independent sources.

CM-1.5.8

Islamic bank licensees can utilise the transaction structure, collateral and guarantees to help mitigate risks (both identified and inherent) in individual credits, but transactions must be entered into primarily on the strength of the obligor’s repayment capacity. Collateral cannot be a substitute for a comprehensive assessment of the obligor or counterparty, nor can it compensate for insufficient information. It must be recognised that any credit enforcement action (e.g. foreclosure proceedings) can eliminate the profit margin on the transaction. In addition, Islamic bank licensees need to be mindful that the value of collateral may well be impaired by the factors that have led to the diminished recoverability of the credit. Islamic bank licensees must have a policy covering the acceptability of various forms of collateral, procedures for the ongoing valuation of such collateral, and a process to ensure that the collateral is, and continues to be, enforceable and realisable. With regard to guarantees, Islamic bank licensees must evaluate the level of coverage being provided in relation to the credit-quality and legal capacity of the guarantor. Licensees must be careful when making assumptions about implied support from third parties, such as the government.

CM-1.5.9

The value of the collateral must be updated periodically. In adverse market conditions and in the case of collateral that support Stage 2 and 3 credit exposures, the valuations must be conducted at least annually. If the exposure is backed by inventory or goods located in the obligor’s premises, additional measures must be in place to physically inspect and verify the existence and valuation of the collateral.

CM-1.5.10

Since expected credit loss (ECL) provisions are dependent on the recoverable value of collateral held, Islamic bank licensees must obtain appropriate valuations of the collateral. The licensee must have a reliable and timely collateral valuation system which must include factors such as the legal enforceability of claims on collateral, ease of realisation of collateral, effects of currency and maturity mismatches, and be based on current market conditions.

CM-1.6.7

Capital levels and their projected trends are important inputs towards determining the scope of NPE reduction actions available to licensees. Islamic bank licensees should dynamically model the capital implications of the different elements of their policy on NPEs, ideally under different economic scenarios. Those implications should also be considered in conjunction with the risk appetite framework as well as the internal capital adequacy assessment process (‘ICAAP’).

CM-1.6.8

Where capital buffers are slim and profitability low, Islamic bank licensees must include suitable actions in their capital planning, ICAAP and recovery plans which will enable effective management and sustainable clean-up of NPEs.

CM-1.6.9

Islamic bank licensees should also identify medium and long-term options for NPE reductions.

CM-1.6.10

A strong level of monitoring and oversight by risk management function in respect of the formulation and implementation of the NPE strategy (including the NPE operational plan) must also be ensured.

CM-1.6.11

Islamic bank licensees must write-off financings which are deemed to be uncollectable in a timely manner.

CM-1.8.3

Islamic bank licensees’ Board of Directors (or equivalent) and senior management are responsible for ensuring that the licensee has appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate ECL in accordance with the licensee’s stated policies and procedures, the applicable accounting framework and relevant supervisory guidance.

CM-1.8.4

Islamic bank licensees must adopt, document and adhere to sound policies, procedures and controls for assessing and measuring ECL on all financing exposures. The measurement of allowances must build upon those robust methodologies and result in the appropriate and timely recognition of ECL in accordance with the applicable accounting framework.

CM-1.8.5

Islamic bank licensees must have in place a detailed and clear policy statement pertaining to ECL recognition. The policy statement must be approved by the Board of Directors, including at the time of any periodic changes. The policy statement must be comprehensive and must include, but not be limited to, the following components:

CM-1.8.6

Default for the purpose of this Module and impairment in the context of credit risk exposure of an obligor as per IFRS 9 is considered to have occurred with regard to a particular obligor when either or both of the following events have taken place:

CM-1.8.7

The elements to be taken as indications of unlikeliness to pay must include, but not be limited to, the following:

CM-1.8.8

For the purpose of CM-1.8.7, distressed restructuring refers to situations when a licensee grants a concession that it would not otherwise consider, irrespective of whether the concession is at the discretion of the licensee or otherwise. Forgiveness means reduction in repayment amount or profit. Postponement could include grace periods or changes in instalments leading to delayed maturity.

CM-1.8.9

Non-performing exposures must always be categorised for the whole exposure, including when non-performance relates to only a part of the exposure, for instance, unpaid profit. For off-balance sheet exposures, such as financing commitments or financial guarantees, the whole exposure is the entire uncancellable nominal amount. All non-performing exposures will be classified as Stage 3 for the purpose of ECL calculations.

CM-1.8.10

The following exposures are considered as non-performing:

CM-1.8.11

The existence of collateral or guarantees must have no direct influence on the categorisation of an exposure as non-performing or its past due status, including the counting of past-due days and the determination of the exposure as non-performing, once the overdue days threshold has been met. However, Islamic bank licensees may consider the collateral when assessing an obligor’s economic incentive (both positive and negative) to repay under the unlikeliness to repay criteria. Any recourse by the licensee must not be considered in this judgment. When the relevant criteria are met, the exposure must be categorised as non-performing even if the collateral value exceeds the amount of the past-due exposure.

CM-1.8.12

The classification of an exposure as non-performing must be applied as follows:

CM-1.8.13

For the purpose of CM-1.8.12 (a), where a single facility which represents 25% or more of the aggregate exposure to the obligor is non-performing a cross default is deemed to have occurred and, accordingly, all exposures to that obligor will be considered non-performing.

CM-1.8.14

With reference to Sub-Paragraph CM-1.8.12 (b), however, a default by an obligor on one retail obligation may not require the licensee to treat all other obligations to the licensee as defaulted and non-performing. In these cases, Islamic bank licensees must carefully consider the categorisation and staging status of other exposures to the same counterparty (i.e. cross-product default). For example, if a customer has a retail personal financing and an auto financing with the licensee, a default on the personal financing must be considered when assessing the stage classification of the auto financing.

CM-1.8.15

A Stage 3 exposure can be moved to Stage 2 or Stage 1 when all the following criteria are met simultaneously:

CM-1.8.15A

Stage 2 exposures can be moved to Stage 1 after the cooling-off period, specified in Appendix CM-6, has passed and the counterparty’s financial situation indicates it to be equivalent to that of a ‘very low credit risk’ exposure.

CM-1.8.16

Islamic bank licensee must clearly articulate and document policies in respect of the counting of days past due, in particular in respect of the re-ageing of the facilities and the granting of extensions, deferrals, renewals and rewrites to existing accounts. At a minimum, the re-ageing policy must include:

CM-1.8.17

For the purpose of CM-1.8.16, re-aging occurs when the licensee changes the tenor or due dates of the credit when rescheduling or restructuring a facility.

CM-1.8.18

Non-performing exposures in the following situations must not be re-categorised as performing without meeting the conditions set forth in CM-1.8.15:

The re-categorisation of a non-performing exposure as performing must be made on the same level (i.e. obligor or transaction approach) as when the exposure was originally categorised as non-performing.

CM-1.8.18A

Non-performing POCI exposures may be re-categorised as performing subject to meeting the conditions stipulated in Paragraphs CM-1.8.15 to CM-1.8.18.

CM-1.8.19

Islamic bank licensees must have the necessary tools to ensure a robust estimate and timely recognition of ECL. Information on historical loss experience or the impact of current conditions may not fully reflect the credit risk in financing exposures. In this context, the licensee must use its experienced credit judgment to thoroughly incorporate the expected impact of all reasonable and supportable forward-looking information, including macroeconomic factors, on its estimate of ECL. The licensee’s use of its experienced credit judgment must be documented in the licensee’s credit risk methodology and subject to appropriate oversight.

CM-1.8.20

Applying the concepts of ECL could vary for each licensee depending on its underwriting criteria, loss history, terms of collateral and a number of other variables, both entity-specific and external. Reasonable and supportable information will not present itself, but would rather require management to determine what is relevant and practical, without undue costs or efforts, to actively gather, analyse and process to make required credit risk assessments to support the ECL process. Licensees will need to adopt an appropriate risk assessment methodology which is commensurate with the size, complexity, structure, economic significance and risk profile of their portfolio. This means that, in general, the larger and more complex a portfolio or institution, the more its risk infrastructure should capture relevant and reliable information and trends that would support the development of a sophisticated approach to determine a risk based ECL. Conversely, for smaller and simpler portfolios or institutions, a less sophisticated approach may be adopted to align with the risk management infrastructure and processes within the licensee.

CM-1.8.21

Regardless of the size of the licensee or prominence of the portfolio, the approach adopted by the licensee should comply with the specific requirements of this section and applicable accounting standards. It is not necessary that every licensee or every portfolio within the licensee would apply the same level of sophistication. However, licensees will need to periodically assess whether their approach continues to be appropriate and relevant in light of changing circumstances with the aim of improving its level of estimation over time.

CM-1.8.22

The credit impairment assessment under FAS 30 is based on an expected loss approach, i.e. it is not necessary for a loss event to occur before an ECL is recognised. As a result, all financial assets are generally expected to attract an ECL. For the purpose of Section CM 1.8, any direct credit exposures to the government of Bahrain (or exposures explicitly guaranteed by the government of Bahrain) are exempted from the application of the expected credit loss model.

CM-1.8.22A

For the purpose of Section CM-1.8, the portion of the exposure that is explicitly guaranteed by Tamkeen is exempted from the application of the expected credit loss model.

CM-1.8.23

FAS 30 requires a three-stage approach to recognise and measure ECL at each reporting date, which is based on changes observed in credit quality of financial assets since origination. The standards prescribe two measures of ECL to be carried by licensees:

CM-1.8.24

The below staging classification must represent migration in credit quality and dictates the level of ECL to be recognised. The following must be followed:

CM-1.8.25

The staging classification should normally apply to the entire balance of an outstanding facility because if a problem exists with one credit, it normally applies to the whole facility and not just the payment or individual credit which may be overdue. This is a conservative approach, which will alert licensee management and the Board to the full extent of a potential problem.

CM-1.8.26

With reference to CM-1.8.24, the ECL provisions assessed on a collective basis (‘CP’) relating to Stage 1 and Stage 2 exposures are used for the purposes of regulatory adjustments under Paragraph CA-2.1.8.

CM-1.8.27

Islamic bank licensees must report restructured accounts to the CBB on a quarterly basis until the satisfactory performance of the account, under revised terms, and the counterparty has resolved its financial difficulty. All NPE accounts restructured must be classified as non-performing and must be subject to the requirements of the Paragraph CM-1.8.15 to CM-1.8.18. A Stage 3 or Stage 2 exposure that is restructured must be re-categorised in accordance with Appendix CM-6.

CM-1.8.28

Forbearance, including synonyms such as ‘restructuring’ occurs when (a) a counterparty is experiencing financial difficulty in meeting its financial commitments; and (b) the licensee grants a concession that it would not otherwise consider, irrespective of whether the concession is at the discretion of the licensee and/or the counterparty. A concession is at the discretion of the counterparty (debtor) when the initial contract allows the counterparty (debtor) to change the terms of the contract in its own favour (embedded forbearance clauses) due to financial difficulty. When such concessions are granted, the facility is ‘restructured’.

CM-1.8.29

The following list provides examples of possible indicators of financial difficulty. In particular, financial difficulty can be identified even in the absence of arrears on an exposure:

CM-1.8.30

Concessions are special contractual terms and conditions that a financier would not extend or consider under normal market conditions.

CM-1.8.31

Licensees should distinguish between restructured financings and rescheduled financings where no concessions have been granted to a performing customer in response to changes in market conditions provided that at the time of rescheduling the financings have been serviced normally, the ability of the obligor to service is not in doubt and where there is reasonable assurance that the obligor will be able to service all future payments on the financings in accordance with the revised repayment terms.

CM-1.8.32

Islamic bank licensees must disclose in their public disclosures their policies and definitions that are integral to the estimation of ECL. Quantitative and qualitative disclosures, taken together, must communicate to users the main assumptions/inputs used to develop ECL estimates.

CM-2.3.3

Bahraini Islamic bank licensee must recognise an eligible CRM technique in the calculation of an exposure whenever it has used this technique to calculate the risk-based capital requirements under Chapter CA-4. Eligible credit risk mitigation techniques for large exposures are those that meet the minimum requirements and eligibility criteria for the recognition of unfunded credit protection and financial collateral that qualify under Chapter CA-4. Other forms of collaterals, e.g. receivables, commercial and residential real estate are not eligible to reduce exposure values for large exposure purposes unless the title deeds, in the case of real estate, are held in the name of the licensee and it is able to demonstrate that it has the ability to realise the value of the collateral.

CM-2.3.4

In accordance with Paragraph CA-4.7.27, hedges with maturity mismatches are recognised only when their original maturities are equal to or greater than 1 year and the residual maturity of a hedge is not less than 3 months.

CM-2.3.5

If there is a maturity mismatch in respect of credit risk mitigants (collateral, on balance sheet netting, guarantees and Shari’a compliant hedging instruments for credit protection) recognised under Paragraph CA-4.7.27, the adjustment of the credit protection for the purpose of calculating large exposures must be calculated according to CA-4.7.28.

CM-2.3.6

Bahraini Islamic bank licensee must reduce the value of the exposure to the original counterparty by the amount of eligible CRM technique recognised under Chapter CA-4. The recognised amount is:

CM-2.3.7

The exposure value for instruments that give rise to counterparty credit risk and are not securities financing transactions, must be the exposure at default according to the standardised approach for the purpose of computing capital adequacy (See Module CA).

CM-2.3.8

Off-balance sheet items must be converted into credit exposure equivalents through the use of credit conversion factors (‘CCFs’) by applying the CCFs set-out in Section CA-4.5, with a floor of 10 percent.

CM-2.3.9

Shari’a compliant hedging instruments including those used for credit protection must be converted into positions following Section CA-4.5. These instruments are decomposed into their individual legs.

CM-2.3.10

For Shari’a compliant hedging instruments for credit protection that represent sold protection, the exposure to the referenced name must be the amount due in cases where the referenced name triggers the instrument, minus the absolute value of the credit protection.

CM-2.3.11

In case of syndicated facilities initially underwritten by the licensee, the nominal amount would include only the licensee’s share of the syndication and any amounts for which binding commitments from other financial institutions are not available or have not been sold down. Where a binding commitment is available, that amount would be excluded in calculation of the large exposures. See Section CM-2.6 for exemptions.

CM-2.3.12

Bahraini Islamic bank licensee's exposure arising from securities’ trading operations is calculated as its net long position in a particular security. The licensee’s ‘net long position’ in a security refers to its commitment to buy that security together with its current holdings of the same security, less its commitment to sell these securities.

CM-2.3.13

Positions in the same issue (two issues are defined as the same if the issuer, return, currency and maturity are identical) may only be offset for the purpose of calculating large exposure.

CM-2.3.14

Positions in different issues from the same counterparty may be offset only when the short position is junior to the long position, or if the positions are of the same seniority, if applicable.

CM-2.3.15

Bahraini Islamic bank licensee must add any exposure to any single counterparty arising in the trading book to any other exposures to that counterparty that lie in the banking book to calculate its total exposure to that counterparty.

CM-2.3.16

Netting across the banking and the trading books is not permitted.

CM-2.3.17

Covered Sukuks are Sukuks issued by a bank or mortgage institutions and are subject by law to special public supervision designed to protect Sukuk-holders. Proceeds deriving from the issue of these Sukuks must be invested in conformity with the law in assets which, during the whole period of the validity of the Sukuks, are capable of covering claims attached to the Sukuks and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued profit.

CM-2.3.18

A covered Sukuk satisfying the conditions set out in Paragraph CM-2.3.19, may be assigned an exposure value of no less than 20 percent of the nominal value of the licensee’s covered Sukuk holding. Other covered Sukuks must be assigned an exposure equal to 100 percent of the nominal value of the licensee’s covered Sukuk holding. The counterparty to which the exposure value is assigned is the issuing bank.

CM-2.3.19

To be eligible to be assigned an exposure value of less than 100 percent, a covered Sukuk must satisfy all the following conditions:

CM-2.3.20

In order to calculate the required maximum financing-to-value for residential real estate and commercial real estate referred to in Paragraph CM-2.3.19, the following requirements must be met:

CM-2.3.21

The conditions set out in Paragraph CM-2.3.19 must be satisfied at the inception of the covered Sukuk and throughout its remaining maturity.

CM-2.3.22

Bahraini Islamic bank licensees must consider exposures even when a structure lies between the licensee and the exposures, that is, even when the licensee invests in structures through an entity which itself has exposures to assets (‘underlying assets’). Bahraini Islamic bank licensees must assign the exposure amount, i.e. the amount invested in a particular structure, to specific counterparties following the approach described in Paragraphs CM-2.3.23 to CM-2.3.30. The structures include funds, securitisations and other structures with underlying assets.

CM-2.3.23

Bahraini Islamic bank licensee may assign the exposure amount to the structure itself, defined as a distinct counterparty, if it can demonstrate that the licensee’s exposure amount to each underlying asset of the structure is smaller than 1 percent of total consolidated capital, considering only those exposures to underlying assets that result from the investment in the structure itself, and using the exposure value calculated according to Paragraphs CM-2.3.29 and CM-2.3.30. In this case, the licensee is not required to look through the structure to identify the underlying assets.

CM-2.3.24

Bahraini Islamic bank licensees must look through the structure to identify those underlying assets for which the underlying exposure value is equal to or above 1 percent of total consolidated capital. In this case, the counterparty corresponding to each of the underlying assets must be identified so that these underlying exposures can be added to any other direct or indirect exposure to the same counterparty. The licensee’s exposure amount to the underlying assets that are below 1 percent of the licensee’s total consolidated capital may be assigned to the structure itself (i.e. partial Look-Through-Approach (‘LTA’) is permitted).

CM-2.3.25

If a Bahraini Islamic bank licensee is unable to identify the underlying assets of a structure where the total amount of its exposure does not exceed 1 percent of its Total consolidated capital, the licensee must:

CM-2.3.26

Bahraini Islamic bank licensees must aggregate all ‘unknown exposures’ as if they are related to a single counterparty (the unknown client), to which the large exposure limit would apply.

CM-2.3.27

When a LTA is not required, according to Paragraph CM-2.3.23, a Bahraini Islamic bank licensee must, nevertheless, be able to demonstrate that regulatory arbitrage considerations have not influenced the decision whether to look through or not – e.g. that the licensee has not circumvented the large exposure limit by investing in several individually immaterial transactions with identical underlying assets.

CM-2.3.28

If the LTA need not be applied, Bahraini Islamic bank licensee’s exposure to the structure must be the nominal amount it invests in the structure.

CM-2.3.29

When the LTA is required, the exposure value assigned to a counterparty is equal to the pro rata share that the licensee holds in the structure multiplied by the value of the underlying asset in the structure. Thus, the licensee holding a 1 percent share of a structure that invests in 20 assets each with a value of 5, must assign an exposure of 0.05 to each of the counterparties. An exposure to a counterparty must be added to any other direct or indirect exposures the licensee has to that counterparty.

CM-2.3.30

When the LTA is required, the exposure value to a counterparty is measured for each tranche within the structure, assuming a pro rata distribution of losses amongst investors in a single tranche. To compute the exposure value to the underlying asset, the licensee must:

CM-2.3.31

Bahraini Islamic bank licensees must identify third parties that may constitute an additional risk factor inherent in a structure itself rather than in the underlying assets. This third party could be a risk factor for more than one structure that the licensee invests in. Examples of roles played by third parties include originator, fund manager, liquidity provider and credit protection provider.

CM-2.3.32

Bahraini Islamic bank licensees should connect their investments in those structures with a common risk factor, to form a group of connected counterparties. In such cases, the manager would be regarded as a distinct counterparty so that the sum of the licensee’s investments in all of the funds managed by this manager would be subject to the large exposure limit, with the exposure value being the total value of the different investments. In other cases, the identity of the manager may not comprise of an additional risk factor – for example, if the legal framework governing the regulation of particular funds requires separation between the legal entity that manages the fund, and the legal entity that has custody of the fund’s assets.

CM-2.3.33

In the case of structured finance products, the liquidity provider or sponsor of short-term programmes (asset-backed commercial paper – ‘ABCP’, or conduits and structured investment vehicles – ‘SIVs’) may warrant consideration as an additional risk factor (with the exposure value being the amount invested).

CM-2.3.34

Bahraini Islamic bank licensees may add their investments in a set of structures associated with a third party that constitutes a common risk factor to other exposures (such as a financing) it has to that third party. Whether the exposures to such structures must be added to any other exposures to the third party, would again depend on a case-by-case consideration of the specific features of the structure and on the role of the third party. In the example of the fund manager, adding together the exposures may not be necessary because potentially fraudulent behaviour may not necessarily affect the repayment of a financing exposure.

CM-2.3.35

It is conceivable that the licensee may consider multiple third parties to be potential drivers of additional risk. In this case, the licensee should assign the exposure resulting from the investment in the relevant structures to each of the third parties.

CM-2.3.36

The requirement set out in Paragraph CM-2.3.31 to recognise a structural risk inherent in the structure instead of the risk stemming from the underlying exposures is independent of whatever the general assessment of additional risks concludes.

CM-2.3.37

Exposures to qualified central counterparties (‘QCCPs’) related to clearing activities are exempted from the requirements of this Chapter.

CM-2.3.38

In the case of non-QCCPs, Bahraini Islamic bank licensees must measure their exposure as a sum of both the clearing exposures described in Paragraph CM-2.3.40 and the non-clearing exposures described in Paragraph CM-2.3.43 and must respect the general large exposure limit of 15 percent of Total consolidated capital.

CM-2.3.39

The concept of closely related counterparties referred to in CM-2.5.4 does not apply in the context of exposures to centralised counterparties (‘CCPs’) that are specifically related to clearing activities.

CM-2.3.40

Bahraini Islamic bank licensees must identify exposures to a CCP related to clearing activities and sum together these exposures. Exposures related to clearing activities are listed in the table below, together with the exposure value to be used:

CM-2.3.41

Regarding exposures subject to clearing services (the licensee acting as a clearing member or being a client of a clearing member), the licensee must determine the counterparty to which exposures must be assigned by applying the provisions of Module CA.

CM-2.3.42

Bahraini Islamic bank licensees must apply a risk weight of 2 percent to their trade exposure to the CCP in respect of OTC Shari’a compliant hedging instruments, exchange-traded Shari’a compliant hedging instrument transactions, Shari’a compliant securities financing transactions (SFTs) and long-settlement transactions, where the licensee acts as a clearing member of a CCP for its own purposes. Where the clearing member offers clearing services to clients, the 2 percent risk weight also applies to the clearing member’s trade exposure to the CCP that arises when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults.

CM-2.3.43

Other types of exposures that are not directly related to clearing services provided by the CCP, such as funding facilities, credit facilities, guarantees, etc. must be measured according to the rules set out in this Chapter as for any other type of counterparty. These exposures will be added together and be subjected to the large exposure limit.

CM-2.5.1

A ‘large exposure’ is any exposure to a counterparty or a group of closely related counterparties which is greater than, or equal to, 10 percent of the reporting Bahraini Islamic bank licensee’s Total Consolidated capital but excluding intragroup exposures.

CM-2.5.2

CBB requires that any large exposure, as defined in Paragraph CM-2.5.1, must have a prior approval by the Bahraini Islamic bank licensee's Board of Directors unless the exposure was incurred within the specific obligor limits for which the licensee has prior Board approval.

CM-2.5.3

A Bahraini Islamic bank licensee may not incur an exposure to an individual counterparty or a group of closely related counterparties (not connected to the reporting licensee) which is 15 percent or more of the reporting licensee’s Total consolidated capital without the prior written approval of the CBB. Where this limit has been exceeded, the excess amount must be risk-weighted at 800 percent.

CM-2.5.4

In order for the licensee to establish the existence of a group of closely related counterparties, it must assess the relationship amongst counterparties by referring to one or more of the following criteria:

CM-2.5.5

Bahraini Islamic bank licensees are also expected to refer to criteria specified in IFRS for further qualitative guidance when determining control.

CM-2.5.6

Bahraini Islamic bank licensees must assess the control relationship using the following criteria:

CM-2.5.7

The CBB will exercise its discretion in applying the definition of closely related counterparties on a case-by-case basis if it finds, during its onsite or offsite supervisory review, any linkage of such counterparties.

CM-2.5.8

In establishing closely related counterparty relationships based on economic interdependence (CM-2.5.4 (b)), licensees must consider, at a minimum, the following qualitative criteria:

CM-2.5.9

Exposures to connected counterparties of Bahraini Islamic bank licensees may be justified only when undertaken for the clear commercial advantage of the licensee, when negotiated and agreed on an arm’s-length basis, and when included in the Large Exposures Policy statement.

CM-2.5.10

A Bahraini Islamic bank licensee may not exceed the individual or aggregate limits for exposures to connected counterparties shown in Paragraph CM-2.5.15, without the prior written approval of the CBB.

CM-2.5.11

The licensee may not undertake exposures to its own external auditor. In this context, ‘external auditor’ refers to the firm/partnership, the partners, the directors and the managers of the audit firm.

CM-2.5.12

For the purpose of this Module, ‘connected counterparties’ include legal and natural persons connected with the Bahraini Islamic bank licensee, including, in particular; controllers of the licensee (and Board members, senior management and key staff of the controller, the controller’s appointed Board representatives, subsidiaries and associated companies of controllers including their Board members, senior management and key staff), approved persons of the licensee, as defined by Module LR-1A, and their close family members (as defined by IFRS – IAS 24); associated companies not mentioned hereinabove, unconsolidated subsidiaries and members of the Shari’a Supervisory Board (‘SSB’), if any.

CM-2.5.13

Equity participations in, and credit exposures to, consolidated banking and financial subsidiaries (see CA-2.3.1(c)) need not be included in exposures to connected counterparties for the sake of the table in CM-2.5.15. Equity participations in, and credit or financing exposures to, unconsolidated subsidiaries are included in the definition of exposure in order to understand the degree of support the parent is supplying to its unconsolidated subsidiaries on a day-to-day basis.

CM-2.5.14

The CBB will exercise its discretion in applying the definition of connected counterparties of the licensee on a case-by-case basis, if it finds during its onsite or offsite supervisory review any linkage of such counterparties.

CM-2.5.15

Exposures (both on and off-balance sheet) to all connected counterparties of Bahraini Islamic bank licensees listed below, when taken together, may not exceed 25 percent of the Total consolidated capital. Where any of these limits have been exceeded, the excess amount must be risk-weighted at 800 percent.

CM-2.5.16

The CBB will closely examine all exposures to ‘connected counterparties’ and will deduct them from the licensee’s consolidated total capital if they are, in the CBB's opinion, of the nature of a capital investment, or provision of long-term working capital, or are made on particularly concessionary terms.

CM-2.5.17

Reciprocal cross-holdings of capital between the licensee and its controllers (see GR-5) which artificially inflate the capital of licensee concerned are not permitted. Any cross-holdings that occur, due to acquisitions or takeovers, must be deducted from the concerned licensee’s total capital (see also CA-2).

CM-2.5.18

Any other form of financing to connected counterparties outside the scope of the above will be dealt with by the CBB on a case-by-case basis.

CM-2.5.19

Bahraini Islamic bank licensees must perform valuations of collaterals covering large exposures to ensure that collaterals are, and continue to be, enforceable and realisable at least on an annual basis when market conditions are adverse.

CM-2.6.1

Certain types of exposure are exempt from the 15 percent exposure limit set out in CM-2.5.3, but commitment to such exposures must be reported to the CBB on a quarterly basis using the Form PIRI provided in Appendix BR-5.

CM-2.6.2

These exemptions fall into the following categories and are subject, in each case, to the policy statement:

CM-2.6.3

Where two or more entities that are outside the scope of sovereign exemption are controlled by or are economically dependent on an entity that falls within the scope of the sovereign exemption referred to in paragraph CM-2.6.2, and are closely related, those entities need not be deemed to constitute a group of closely related counterparties pursuant to paragraph CM-2.5.4. Additionally, consistent with Module CA, where other supervisors also treat claims on named PSEs as claims on their sovereigns, claims to those PSEs are treated as claims on the respective sovereigns.

CM-2.6.4

If a Bahraini Islamic bank licensee has an exposure to any entity noted in Paragraph CM-2.6.2 which is hedged by a Shari’a compliant hedging instruments for credit protection, the licensee will have to recognise an exposure to the counterparty providing the credit protection, as prescribed in Paragraphs CM-2.4.2 and CM-2.3.16, notwithstanding the fact that the original exposure is exempted.

CM-2.6.5

Exposures to subsidiaries which are always fully consolidated on a line-by-line basis for all supervisory purposes are exempt from the limits in this Module on a consolidated basis. However, licensees must observe the CBB's solo capital adequacy requirements in Module CA.

CM-2.6.6

Exposures to unconsolidated subsidiaries (normally non-financial and outside the scope of regulatory consolidation) are not exempt from the limits in this Module and are included under the limits for exposures to associates, related parties and unconsolidated subsidiaries (See Paragraph CM-2.5.14).

CM-2.6.7

Bahraini Islamic bank licensees may apply to the CBB to take on a treasury role on behalf of the group as a whole (provided that the group is subject to consolidated supervision by its home supervisor). The CBB's policy regarding the taking on of a treasury role includes exposures arising from a central risk management function. Such exposures must be approved by the CBB before they may be exempted.

CM-2.6.8

In the above scenario (Paragraph CM-2.6.7), for example, exposures of more than 15% of Total Consolidated Capital to a parent bank from a subsidiary bank may be permitted where they constitute short term financing of excess liquid funds.

CM-2.6.9

Where exposures undertaken by a Bahrain subsidiary of an overseas bank are guaranteed by its parent bank, the Bahrain subsidiary bank may be deemed to have an exposure to its parent bank.

CM-2.6.10

Under the terms of this Module (see Sub-Paragraph CM-2.6.2(f)), such indirect exposures to a parent bank may be exempted from the limits on large exposures if the CBB is satisfied that:

CM-2.6.11

In the case of a Bahrain incorporated bank’s subsidiary in Bahrain, in order for an exposure exceeding 15% of Total Capital to be acceptable in the subsidiary, the Bahrain parent bank must at all times have the capacity to take on the exposure to the third party, without itself exceeding the limit of 15% of its own Total Capital. Also, the total exposure of the banking group to the customer must be within 15% of the parent bank’s consolidated Total Capital.

CM-2.6.12

The CBB will need to be satisfied that adequate control systems are in place to ensure that risks taken in the group as a whole are properly monitored and controlled.

CM-2.10.1

Bahraini Islamic bank licensees must obtain the CBB’s prior written approval before making an investment in another commercial or financial entity (whether incorporated inside or outside of Bahrain) which falls within the definition of a major investment. Additionally, the CBB’s prior approval must be obtained for any subsequent increases in the licensee’s ownership in excess of 5% of similar exposure. Where the increase is due to a revaluation or change in capital of the licensee, a written notification outlining the percentage increase and reasons for the increase must be provided to the CBB.

CM-2.10.2

In assessing a proposed major investment, the CBB will take into account the impact of such investment on the risk profile of the licensee. See Appendix CM-5 for criteria for assessment.

CM-2.10.3

A major investment is defined as either of the following:

CM-2.10.4

Any major investments by a Bahraini Islamic bank licensee in the capital instruments of another entity must be included in the measure of an ‘exposure’ for the purposes of this Chapter, i.e. such major investments must be aggregated with all other facilities to a client for the purpose of calculating the level of ‘large exposures’. Where a percentage ownership increase results in the licensee exceeding the single large exposure limit, the 800 percent risk-weight rule must be applied (see CM-2.5).

CM-2.10.5

The CBB reserves the right to require Bahraini Islamic bank licensees to dispose of any major investments acquired without its prior approval. Where a ‘major investment’ is acquired without the approval of the CBB, the entire value of the holding must be deducted from the consolidated total capital of the concerned licensee. Approval will not be given for ‘major investments’ in entities incorporated in jurisdictions where secrecy constraints exist, or there are restrictions on the passage of information to the licensee (other than customer confidentiality requirements imposed by financial regulators).

CM-2.10.6

If the licensee’s close links with another entity prevent effective supervision of the licensee (or licensee group), the CBB may refuse or revoke a license, or require the licensee to sell or otherwise dispose of entities within its corporate group, or to restructure the licensee.

CM-2.10.7

The total amount of the licensee’s investments in commercial entities, other than associated companies considered under CM-2.5.14, may not exceed the limits set forth below:

*Exposure for this purpose includes investment in capital instruments and any other exposure to the subject entity
** Limits expressed as a percentage of Total Tier 1 Capital.

CM-5.2.5

The CBB supervisors and examiners will also focus on licensees' implementation of the ‘Code of Best Practice on Consumer Credit and Charging’ in their ongoing supervision of licensees, to monitor and encourage sound financing practices and disclosure standards.

CM-5.4.1

Licensees may only provide a new consumer facility (or renew, extend or otherwise modify an existing consumer facility) for an amount so that the obligor’s total monthly repayments on all their consumer finance commitments do not exceed 50 percent of their monthly gross income. This limit may only be exceeded in the circumstances described in Paragraphs CM-5.4.6 and CM-5.4.9.

CM-5.4.2

When reviewing an applicant for a consumer facility, licensees may only take into consideration regular income. A spouse’s income may only be taken into consideration when the credit facility would be in joint names, so that the spouse would also be legally liable for the obligation incurred.

CM-5.4.3

Notwithstanding the above limit, licensees must review, in detail, an applicant’s personal financial standing and ability to service their obligations. Where a spouse’s income is being taken into consideration, their individual circumstances must also be similarly assessed. In many cases, these reviews may require consumer finance repayments to be kept significantly below 50 percent of monthly gross income.

CM-5.4.4

Licensees must enquire as to applicants’ sources of income, their credit history, their regular outgoings and other financial commitments, including potential liabilities such as guarantees. Particular attention must be paid to housing costs (such as payments for social housing schemes). A person’s regular income, net of consumer finance repayments and other financial obligations, must remain sufficient for that person to support himself and any dependents. Licensees must also take into account likely future trends in income and outgoings, and the impact this may have on the 50 percent ratio.

CM-5.4.5

When factoring in credit cards into the repayment limit in Paragraph CM-5.4.1 above, licensees must include 5 percent of the credit limits available on these facilities. If the amounts outstanding (including profit) under such facilities exceed their limit, then the full amount outstanding must be included in the repayments ratio calculation. Charge cards are not included under this definition.

CM-5.4.6

In the case of high earners – defined for these purposes as persons earning more than BHD 3,000 per month – the 50 percent limit may be relaxed, provided that the licensee has undertaken the review required in Paragraph CM-5.4.4 and is satisfied that the obligor can comfortably support a higher facility service ratio.

CM-5.4.7

The review undertaken to satisfy requirements, as outlined in Paragraph CM-5.4.4, must be documented and made available to the CBB’s examiners upon request. The documentation must include all relevant information used to support the decision to extend credit facilities. In the case of high earners who are granted a facility in excess of the 50 percent limit, the documentation must also include a written statement, signed by an appropriate member of management, explaining the justification for relaxing the limit.

CM-5.4.8

The maximum tenor for instalment consumer finance is 7 years. In the case of any restructuring of a consumer finance facility repayable in instalments, the stated final maturity must be within 7 years from the date of the original facility. The tenor may not be extended more than twice during the period of the agreement and in any case not extended beyond the 7-year duration.

CM-5.4.9

Where a customer’s monthly gross income falls (e.g. due to redundancy, disability or a similar event outside the control of the customer), the licensee must identify such accounts as ‘technically non-compliant’. If a customer requests an extension to the tenor of the facility due to reduced income, then the licensee may increase the term to assist the customer. The licensee must take account of the 50 percent limit outlined in Paragraph CM-5.4.1. Such facilities must also be identified as ‘technically non-compliant’.

CM-5.5.1

Islamic bank licensees must refund/adjust proportionately the insurance premium charged on individual credit facilities when the customer either requests for a top up or prepayment of the credit facility as per the prescribed formula below: