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Nur-Sultan, Kazakhstan
CONTENTS
1. GENERAL.
1.1. Introduction.
1.2. Commencement
1.3. Effect of definitions, notes, examples and references.
1.4. Islamic Banking Business.
1.5. Islamic Bank.
1.6. Islamic Broker Dealer
1.7. Islamic Financing Company (IFC)
1.8. Application of these rules—general
1.9. Application of these rules—branches.
1.10. Stress-testing.
2. PRINCIPLES RELATING TO AN ISLAMIC BANKING BUSINESS.
2.1. Principle 1—Capital Adequacy.
2.2. Principle 2—Credit Risk and problem assets.
2.3. Principle 3—Transactions with related parties.
2.4. Principle 4—Concentration risk.
2.5. Principle 5—Market Risk.
2.6. Principle 6—Operational risk.
2.7. Principle 7—Liquidity Risk.
2.8. Principle 8—Group risk.
2.9. Principle 9—Equity participation risk.
2.10. Principle 10—Rate of return risk.
2.11. Principle 11—Shari’ah governance and compliance.
3. PRUDENTIAL REPORTING REQUIREMENTS.
3.1. Introduction.
3.2. Information about Financial Group.
3.3. Financial Group and risks.
3.4. Reporting to the AFSA.
3.5. Giving information.
3.6. Accounts and statements to use international standards.
3.7. Signing returns.
3.8. Notification to the AFSA.
4. CAPITAL ADEQUACY.
4.1. General
4.2. Application to branches.
4.3. Governing Body’s responsibilities.
4.4. Systems and controls.
4.5. [omitted intentionally].
4.6. Initial and ongoing capital requirements.
4.7. Base capital requirement
4.8. Required Tier 1 Capital on authorisation.
4.9. Required ongoing capital
4.10. Risk Capital Requirement
4.11. Capital adequacy ratios.
4.12. Elements of Regulatory Capital
4.13. Common Equity Tier 1 Capital
4.14. Criteria for classification as common shares.
4.15. Additional Tier 1 Capital
4.16. Criteria for inclusion in Additional Tier 1 Capital
4.17. Tier 2 Capital
4.18. Criteria for inclusion in Tier 2 Capital
4.19. Sukuk as Tier 2 Capital
4.20. Requirements—loss absorption at point of non-viability.
4.21. Requirements for writing-off
4.22. Inclusion of third parties’ interests.
4.23. Criteria for third party interests—Common Equity Tier 1 Capital
4.24. Criteria for third party interests—Additional Tier 1 Capital
4.25. Criteria for third party interests—Tier 2 Capital
4.26. Treatment of third party interests from SPVs.
4.27. Regulatory adjustments.
4.28. Approaches to valuation and adjustment
4.29. Definitions.
4.30. Adjustments to Common Equity Tier 1 Capital
4.31. Goodwill and intangible assets.
4.32. Deferred tax assets.
4.33. Cash flow hedge reserve.
4.34. Cumulative gains and losses from changes to own Credit Risk.
4.35. Defined benefit pension fund assets.
4.36. Securitisation gains on sale.
4.37. Assets lodged or pledged to secure liabilities.
4.38. Acknowledgments of debt
4.39. Accumulated losses.
4.40. Deductions from categories of Regulatory Capital
4.41. Investments in own shares and Capital instruments.
4.42. Reciprocal cross holdings.
4.43. Non-significant investments—aggregate is less than 10% of firm’s Common Equity Tier 1 Capital
4.44. Non-significant investments—aggregate is 10% or more of firm’s Common Equity Tier 1 Capital
4.45. Significant investments.
4.46. Deductions from Common Equity Tier 1 Capital
5. CAPITAL BUFFERS AND OTHER REQUIREMENTS.
5.1. Introduction.
5.2. Capital Conservation Buffer
5.3. Capital Conservation Ratio.
5.4. Powers of the AFSA.
5.5. Capital reductions.
5.6. AFSA can require other matters.
5.7. Leverage Ratio.
6. CREDIT RISK.
6.1. General
6.2. Credit Risk.
6.3. Requirements—management of Credit Risk and problem assets.
6.4. Role of Governing Body—Credit Risk.
6.5. Credit Risk management policy.
6.6. Policies—general Credit Risk environment
6.7. Credit Risk Management Policy.
6.8. Credit Risk assessment
6.9. Categories of financings.
6.10. Policy on Non-performing assets.
6.11. Impaired financings.
6.12. Restructuring, refinancing and re-provisioning of credits.
6.13. Using external credit rating agencies (ECRA)
6.14. Multiple assessments.
6.15. Choosing between issuer and issue ratings.
6.16. Ratings within Financial Group.
6.17. Using foreign currency and domestic currency ratings.
6.18. Using short-term ratings.
6.19. Risk-Weighted Assets (RWA) approach.
6.20. Relation to CRM techniques.
6.21. Risk-weight to be applied.
6.22. Commitments included in calculation.
6.23. AFSA can determine risk-weights and impose requirements.
6.24. Risk-Weighted Assets approach—on-balance-sheet items.
6.25. Specialised financing.
6.26. Risk-weights for unsecured part of claim that is past due for more than 90 days.
6.27. Risk-Weighted Assets approach—off-balance-sheet items.
6.28. Conversion of notional amounts—market-related items.
6.29. Credit Conversion Factors for items with terms subject to reset
6.30. Credit Conversion Factors for single-name swaps.
6.31. Policies for foreign exchange rollovers.
6.32. Conversion of contracted amounts—non-market-related items.
6.33. Credit Equivalent Amount of undrawn commitments.
6.34. Irrevocable commitment—off-balance-sheet facilities.
6.35. Risk-weightings for Islamic Financial Contracts.
6.36. Treatment of murabahah and related contracts.
6.37. Treatment of bai bithaman ajil
6.38. Treatment of salam and related contracts.
6.39. Treatment of istisna and related contracts.
6.40. Treatment of ijarah and related contracts.
6.41. Treatment of musharakah (non-diminishing)
6.42. Treatment of diminishing musharakah.
6.43. Treatment of mudarabah and related contracts.
6.44. Treatment of qardh.
6.45. Treatment of wakalah.
6.46. Credit Risk Mitigation.
6.47. Requirements—CRM techniques.
6.48. Obtaining capital relief
6.49. Standard haircuts to be applied.
6.50. Capital relief from collateral
6.51. Valuing collateral
6.52. Eligible collateral for Islamic banks.
6.53. When physical assets may be eligible collateral
6.54. Forms of cash collateral
6.55. Holding eligible collateral
6.56. Risk-weight for cash collateral
6.57. Risk-weight for claims.
6.58. Risk-weights less than 20%.
6.59. Capital relief from guarantees.
6.60. Eligible guarantors.
6.61. Capital relief from hedging instruments.
6.62. Capital relief from netting agreements.
6.63. Criteria for eligible netting agreements.
6.64. Legal opinion must cover transaction.
6.65. Conclusion about enforceability.
6.66. Requirements—legal opinion.
6.67. Relying on general legal opinions.
6.68. Netting of positions across books.
6.69. Monitoring and reporting of netting agreements.
6.70. Collateral and guarantees in netting.
6.71. Provisioning.
6.72. Making provisions.
6.73. Review of levels.
6.74. Prohibition on evergreening.
6.75. AFSA can reclassify assets.
6.76. Reporting to Governing Body.
6.77. Transactions with related parties.
6.78. Concept of related parties.
6.79. Role of Governing Body—related parties.
6.80. Policies—transactions with related parties.
6.81. Transactions must be arm’s length.
6.82. Limits on financing to related parties.
6.83. Powers of the AFSA.
7. CONCENTRATION RISK AND LARGE EXPOSURES.
7.1. General
7.2. Concept of connected parties.
7.3. Connected parties.
7.4. Role of Governing Body—concentration risk.
7.5. Concentration risk.
7.6. Policies—concentration risk sources and limits.
7.7. Relation to stress-testing.
7.8. Large Exposures.
7.9. Policies —Large Exposures.
7.10. Limits on exposures—general
7.11. Limits on exposure—Islamic Bank.
7.12. Obligation to measure.
7.13. Powers of AFSA.
8. MARKET RISK.
8.1. General
8.2. Role of Governing Body—Market Risk.
8.3. Relation to stress-testing.
8.4. Requirements—Capital and management of Market Risk.
8.5. Trading Book.
8.6. No switching of instruments between books.
8.7. Market Risk management policy.
8.8. Trading Book policies.
8.9. Measurement of Market Risk - Standard method.
8.10. Valuing positions—mark-to-market
8.11. Valuing positions—mark-to-model
8.12. Independent price verification.
8.13. Valuation adjustments.
8.14. Foreign exchange risk.
8.15. What to include in foreign exchange risk.
8.16. Foreign exchange risk on consolidated basis.
8.17. Capital charge—foreign exchange risk.
8.18. Valuing positions—binding unilateral promises.
8.19. Options risk.
8.20. Measuring options risk.
8.21. Using simplified approach.
8.22. Capital charges—‘long cash and long put’ or ‘short cash and long call’
8.23. Capital charges—‘long put’ or ‘long call’
8.24. Using delta-plus method.
8.25. Relation to mark-to-market method.
8.26. Capital charges—options.
8.27. Gamma Capital charges.
8.28. Vega capital charges.
8.29. Commodities risk and inventory risk.
8.30. Measuring commodities risk.
8.31. Measuring net positions.
8.32. What to include in commodities risk.
8.33. Assigning notional positions to maturities.
8.34. Capital charges—simplified approach.
8.35. Relation to Market Risk.
8.36. Measuring inventory risk.
8.37. Equity position risk.
8.38. Measuring equity position risk.
8.39. What to include in equity position risk.
8.40. Charges for specific and general risks.
8.41. Offsetting positions.
8.42. Charges for index contracts.
8.43. Profit rate risk in the Trading Book.
8.44. What to include in profit rate risk.
8.45. Capital charge—profit rate risk.
8.46. Calculating specific risk capital charge.
8.47. Instruments that have no specific risk capital charge.
8.48. Measuring general risk.
8.49. Maturity method.
8.50. Steps in calculating general risk capital charge.
8.51. Positions in currencies.
8.52. Binding unilateral promises.
8.53. Swaps.
8.54. Shari’ah-compliant hedging instruments.
8.55. Criteria for matching Shari’ah-compliant hedging instrument positions.
8.56. Criteria for offsetting Shari’ah-compliant hedging instrument positions.
8.57. Market Risk capital charges for Islamic financial contracts.
8.58. Treatment of murabahah and related contracts.
8.59. Treatment of bai bithaman ajil
8.60. Treatment of salam and related contracts.
8.61. Treatment of istisna without parallel istisna.
8.62. Treatment of istisna with parallel istisna.
8.63. Treatment of ijarah and related contracts.
8.64. Treatment of diminishing musharakah.
8.65. Treatment of mudarabah.
8.66. Treatment of qardh.
8.67. Treatment of wakalah.
9. OPERATIONAL RISK.
9.1. General
9.2. Operational Risk—Shari’ah non-compliance.
9.3. Operational Risk—legal
9.4. Role of Governing Body—Operational Risk.
9.5. Powers of the AFSA.
9.6. Policies—compliance with Shari’ah.
9.7. Policies—business continuity.
9.8. Policies—information infrastructure.
9.9. Policies—outsourcing.
9.10. Operational Risk Capital `Requirement - Basic indicator approach.
9.11. Operational Risks relating to Islamic financial contracts.
9.12. Requirements for murabahah and ijarah contracts.
9.13. Requirements for salam and istisna contracts.
9.14. Requirements for mudarabah and musharakah contracts.
9.15. Operational Risks—murabahah.
9.16. Operational Risks—salam.
9.17. Operational Risks—istisna.
9.18. Operational Risks—ijarah and IMB contracts.
9.19. Operational Risks—musharakah.
9.20. Operational Risks—mudarabah.
10. LIQUIDITY RISK.
10.1. General
10.2. Funding Liquidity Risk.
10.3. Market Liquidity Risk.
10.4. Liquidity Risk tolerance.
10.5. Requirements—managing liquidity and withstanding liquidity stress.
10.6. Future shortfalls in liquidity.
10.7. Notification about liquidity concerns.
10.8. Role of governing body— Liquidity Risk.
10.9. Policies— Liquidity Risk environment
10.10.Funding strategy.
10.11.Contingency funding plan.
10.12.Stress-testing and Liquidity Risk tolerance.
10.13.Firms that conduct foreign currency business.
10.14.Management of encumbered assets.
10.15.Consequences of breaches and changes.
10.16.Guidance on Liquidity Risks arising from Islamic Financial Contracts.
10.17.Liquidity Risks—murabahah.
10.18.Liquidity Risks—commodity murabahah.
10.19.Liquidity Risks—salam.
10.20.Liquidity Risks—ijarah.
10.21.Liquidity Risks—mudarabah and musharakah.
10.22.Liquidity Risks—PSIA.
10.23.Liquidity Risks—qardh.
10.24.Liquidity Requirements.
10.25.Liquidity Coverage Ratio (LCR)
10.26.Liquidation of assets during periods of stress.
10.27.Notification if LCR requirement not met
10.28.Net Stable Funding Ratio (NSFR)
10.29.Notification of breach of NSFR requirement
10.30.Maturity mismatch approach.
10.31.Recognition of funding facility from parent entity.
11. GROUP RISK.
11.1. Overview.
11.2. Financial Group.
11.3. Systems and Controls.
11.4. Role of Governing Body.
11.5. Financial Group Capital Requirement and resources.
11.6. Financial Group Capital Requirement and Regulatory Capital
11.7. Financial Group Concentration Risk limits.
12. TREATMENT OF SUKUK.
12.1. General
12.2. Securitisation.
12.3. Risk-weights for rated sukuk.
12.4. Risk-weights for unrated sukuk.
12.5. Sukuk issued by Government or National bank of Kazakhstan.
12.6. Sukuk issued by IILMC.
12.7. Sukuk awaiting transfer of assets.
12.8. Sukuk with combination of assets.
12.9. Salam sukuk.
12.10.Treatment of salam sukuk without parallel salam.
12.11.Treatment of salam sukuk with parallel salam.
12.12.Istisna sukuk.
12.13.Treatment of istisna sukuk without parallel istisna.
12.14.Treatment of istisna sukuk with parallel istisna.
12.15.Murabahah sukuk.
12.16.Treatment of murabahah sukuk.
12.17.Ijarah and IMB sukuk.
12.18.Treatment of ijarah and IMB sukuk.
12.19.Musharakah sukuk.
12.20.Treatment of musharakah sukuk.
12.21.Mudarabah sukuk.
12.22.Treatment of mudarabah sukuk.
12.23.Wakalah sukuk.
12.24.Treatment of wakalah sukuk.
13. TREATMENT OF PSIAS AND ASSOCIATED RISKS.
13.1. General
13.2. PSIAs.
13.3. Powers of AFSA.
13.4. Role of Governing Body—PSIAs.
13.5. Policies for managing PSIAs.
13.6. Warnings to investment account holders.
13.7. Terms of business.
13.8. Form of contracts for PSIAs.
13.9. Financial statements—specific disclosures.
13.10.Periodic statements.
13.11.PSIA accounts to be kept separate.
13.12.Rate of return and other risks.
13.13.Withdrawal risk and displaced commercial risk.
13.14.Role of Governing Body—rate of return risk.
13.15.Policies—rate of return risk.
13.16.Smoothing techniques.
13.17.Calculating rate of return.
13.18.Relation to stress-testing.
13.19.Calculation of capital adequacy ratio—no smoothing.
13.20.Calculation of capital adequacy ratio—smoothing.
14. SUPERVISORY REVIEW AND EVALUATION PROCESS.
14.1. Application to a Financial Group.
14.2. Internal Capital Adequacy Assessment Process (ICAAP)
14.3. Imposition of an Individual Capital Requirement
15. PUBLIC DISCLOSURE REQUIREMENTS.
15.1. Disclosure requirement
15.2. Application to a Financial Group.
15.3. Disclosure policy.
15.4. Disclosure frequency, locations and omissions.
APPENDIX 1:LIQUIDITY RISK.
APPENDIX 2:GROUP RISK.
APPENDIX 3:SUPERVISORY REVIEW AND EVALUATION PROCESS.
APPENDIX 4:PUBLIC DISCLOSURES REQUIREMENTS.
1. GENERAL
1.1. Introduction
The purpose of this IBB Module is to establish the prudential framework for Authorised Firms carrying out Islamic Banking Business, Providing Islamic Financing or carrying out other Regulated Activities which involve assuming prudential risks by way of employing Islamic Financial Contracts. These rules are based on:
(a) the standards and guidelines issued by the Islamic Financial Services Board on Capital adequacy;
(b) the Basel Accords; and
(c) the Basel Core Principles for Effective Banking Supervision issued by the Basel Committee on Banking Supervision.
1.2. Commencement
These rules commence on 1 January 2018.
1.3. Effect of definitions, notes, examples and references
(a) A definition in the Glossary also applies to any instructions or document made under these rules.
(b) A note in or to these rules is explanatory and is not part of these rules. However, examples and guidance are part of these rules.
(c) An example is not exhaustive, and may extend, but does not limit, the meaning of these rules or the particular provision of these rules to which it relates.
(d) Unless the contrary intention appears, a reference in these rules to an accord, principle, standard or other similar instrument is a reference to that instrument as amended from time to time.
1.4. Islamic Banking Business
Islamic Banking Business is defined in Schedule 1 of GEN as a Regulated Activity, which means carrying out the following activities, in a Shari’ah-compliant manner:
(a) Raising, accepting and managing funds or money placements; and/or
(b) Managing Unrestricted Profit Sharing Investment Accounts (UPSIAs); and
(c) Providing financing or making Investments by entering as principal or agent into any Islamic Financial Contract.
Guidance
A firm that conducts any of the activities that make up Islamic Banking Business, or a combination of Islamic banking with other Shari’ah-compliant activities, will need to consider the extent to which its business model is subject to the prudential requirements set out in these rules. These rules are designed to address the different risks that could arise from the broad range of business models, risk appetites and risk profiles of Islamic Banks.
For example, a firm that solely conducts the activity of dealing in investments as principal in a Shari’ah-compliant manner, (that is, an Islamic Broker Dealer) will need to consider the extent to which its activities in buying, selling, subscribing to or underwriting investments attract risks that are subject to the requirements of these rules. In contrast, a firm that is an Islamic bank and that also deals in investments as principal would be subject to a broader range of prudential requirements. In both examples, these rules apply in accordance with the nature, scale and complexity of an Islamic business.
1.5. Islamic Bank
(1) An Authorised Firm is an Islamic Bank if it is an Islamic Financial Institution or an Islamic Window as defined in IFR Rules, which is authorised to conduct Islamic Banking Business, as defined in GEN Rules.
(2) An Islamic Financial Institution is an Islamic Bank even if it is also authorised to conduct any other Regulated Activity. An Authorised Firm does not cease to be an Islamic Bank only because it conducts other Regulated Activities included in its authorisation (provided an Islamic Bank conducts them in accordance with Shari’ah).
1.6. Islamic Broker Dealer
(1) An Authorised Firm is an Islamic Broker Dealer if it is an Islamic Financial Institution or an Islamic Window, that is authorised to conduct the Regulated Activity of Dealing in Investments as principal in a Shari’ah-compliant manner and it is not an Islamic bank.
(2) An Islamic Broker Dealer may raise funds using Islamic Financial Contracts but must not manage UPSIAs.
(3) An Authorised Firm is an Islamic Broker Dealer even if it is also authorised to conduct any other activity that is not Islamic Banking Business. An Authorised Firm does not cease to be an Islamic Broker Dealer only because it conducts other activities included in its authorisation.
(4) An Islamic Broker Dealer may provide financing using Islamic Financial Contracts, if it receives the necessary authorisation from the AFSA.
1.7. Islamic Financing Company (IFC)
(1) An Authorised Firm is an Islamic Financing Company (IFC) if it is an Islamic Financial Institution or an Islamic Window, that is authorised to conduct the Regulated Activity of Providing Islamic Financing and it is neither an Islamic Bank nor an Islamic Broker Dealer.
(2) IFCs may raise funds using Islamic Financial Contracts but must not manage UPSIAs.
(3) An Authorised Firm is an IFC even if it is also authorised to conduct any Regulated Activity other than Providing Islamic Financing. An Authorised Firm does not cease to be an IFC only because it conducts other activities included in its authorisation.
(4) An IFC may conduct the Regulated Activity of dealing in Investments as principal using Islamic Financial Contracts, if it receives the necessary authorisation from the AFSA.
1.8. Application of these rules—general
(1) Except when expressly stated otherwise, these rules apply to a Person that has, or is applying for, an authorisation to conduct Islamic Banking Business, Providing Islamic Financing or to act as an Islamic Broker Dealer.
(2) Except when expressly stated otherwise, all references to Islamic Bank in this IBB Module include reference to Islamic Broker Dealers and Islamic Financing Companies (IFCs).
(3) Except when expressly stated otherwise, the rules in this IBB Module apply to entities licensed to carry out Islamic Banking Business, Providing Islamic Financing and Dealing in Investments as principal in a Shari’ah-compliant manner.
1.9. Application of these rules—branches
(1) Except when expressly stated otherwise, the rules in this IBB Module apply, mutatis mutandis, to an Authorised Firm carrying out Islamic Business in the form of a branch.
(2) Chapter 4 (Capital adequacy and Capital requirements) and Chapter 5 (Capital Buffers and Other Requirements) do not apply to an Authorised Firm carrying out Islamic Banking Business in the form of a branch in so far as that Chapter would require the branch to hold Capital and Capital Conservation Buffer.
(3) However, the AFSA may require a branch to have capital resources or to comply with any other Capital requirements if the AFSA considers it necessary or desirable to do so in the interest of effective supervision of the branch.
1.10. Stress-testing
In carrying out stress-testing and developing its stress-testing scenarios, an Islamic Bank must consider the IFSB’s guiding principles on stress-testing for institutions offering Islamic financial services and the Basel Committee’s recommended standards for stress-testing.
2. PRINCIPLES RELATING TO AN ISLAMIC BANKING BUSINESS
2.1. Principle 1—Capital Adequacy
An Islamic Bank must have capital, of adequate amount and appropriate quality, for the nature, scale and complexity of its business and for its risk profile.
2.2. Principle 2—Credit Risk and problem assets
(1) An Islamic Bank must have an adequate Credit Risk management policy that takes into account an Islamic Bank’s risk tolerance, its risk profile and the market and macroeconomic conditions.
(2) An Islamic Bank must have adequate policies for the early identification and management of problem assets, and the maintenance of adequate provisions and reserves.
2.3. Principle 3—Transactions with related parties
An Islamic Bank must enter into transactions with related parties on an arm’s-length basis in order to avoid conflicts of interest.
2.4. Principle 4—Concentration risk
An Islamic Bank must have adequate policies to identify, measure, evaluate, manage and control or mitigate concentrations of risk in a timely way.
2.5. Principle 5—Market Risk
(1) An Islamic Bank must have an adequate Market Risk management policy that takes into account an Islamic Bank’s risk tolerance, its risk profile, the market and macroeconomic conditions and the risk of a significant deterioration in market liquidity.
(2) An Islamic bank must have adequate policies to identify, measure, evaluate, manage and control or mitigate Market Risk in a timely way.
2.6. Principle 6—Operational risk
(1) An Islamic Bank must have an adequate Operational Risk management policy that takes into account an Islamic Bank’s risk tolerance, its risk profile and the market and macroeconomic conditions.
(2) An Islamic bank must have adequate policies to identify, measure, evaluate, manage and control or mitigate Operational Risk in a timely way.
2.7. Principle 7—Liquidity Risk
(1) An Islamic Bank must have prudent and appropriate quantitative and qualitative liquidity requirements. It must have policies that ensure compliance with those requirements and to manage Liquidity Risk prudently, in a manner that takes into account its risk tolerance, its risk profile and the market and macroeconomic conditions.
(2) An Islamic Bank must have adequate policies to identify, measure, evaluate, manage and control or mitigate Liquidity Risk in a timely way.
2.8. Principle 8—Group risk
