Resolution No. 2020-П-12/67-3-(НПА)
of the National Bank
of the Kyrgyz Republic Board
as of November 25, 2020
for the Distribution of Profits/Losses on Bank Accounts,
Bank Deposit Accounts in Accordance
With the Principles of Islamic Banking and Finance
Chapter 1. General Provisions
1. This Regulation applies to commercial banks that carry out transactions in accordance with the Principles of Islamic Banking and Finance, including banks that have an “Islamic Window” (hereinafter referred to as the banks).
2. This Regulation defines the procedure for calculating and distributing profits/losses, as well as payment of remuneration (Hibah) on bank accounts, bank deposit accounts (hereinafter referred to as the deposits) of individuals, individual entrepreneurs and legal entities (hereinafter referred to as the depositors), as well as methods of managing funding pools formed on the basis of depositors’ contributions.
3. The terms and definitions used in this Regulation are understood in accordance with their generally accepted meanings in the legislation of the Kyrgyz Republic.
The following terms and definitions are also applied within the framework of this Regulation:
Profit Equalization Reserve is a reserve created by the decision of the bank’s Board of Directors at the expense of the amounts allocated from the net profit before the distribution of the bank’s share (Mudarib) in order to maintain a certain level of profitability on Mudarabah deposits.
In this case, the Board of Directors may authorize the responsible body of the bank to carry out the following actions on managing the profit equalization reserve:
- determine and approve the size of the profit equalization reserve;
- make decisions on the use of the profit equalization reserve.
Investment Risk Reserve (if any) is the amount allocated from the profits of investment account holders after the distribution of the bank’s profit share (Mudarib) in order to mitigate the risks of future investment losses of depositors (investment account holders). The procedure for using this reserve must be approved by the bank’s Board of Directors.
Funding Portfolio Pool is an integral part of a bank’s funding portfolio, which includes funding with similar characteristics and features, such as:
- types of products (contracts) of financing (Murabaha, Ijarah, etc.);
- rates of return, industries and other characteristics and features;
- other customer’s property accepted in repayment of the financing provided;
- assets for subsequent transfer to customers, including under contracts of Murabaha, Istisna', etc.
Remuneration (Hibah) is a type of material incentives paid to the bank’s customers who have placed funds under Qard-Hasan, Wadi'ah Yad Dhamanah contracts, as well as for other permitted types of deposits.
Chapter 2. Creation of Funding Portfolio Pools
4. The bank shall define a transparent and clear structure for the distribution of profits/losses and management of funding portfolio pools when creating one or more funding portfolio pools as part of assets that will be financed by different types of bank accounts, bank deposit accounts.
This structure shall indicate the objectives of placement, the investment strategy and the inherent risk for each pool, the period, the specifics of distributing the remuneration, the profit sharing ratio, additional payments. In this case, the bank must keep records of the profits/expenses of the pools.
5. The funding portfolio pools should be created by the bank in accordance with the above structure on the basis of the documents submitted by decision of the responsible body of the bank, appointed by the decision of the bank’s management. Until the development of the structure is completed, the funding portfolio pools can be created with the approval of the chairman of the bank or another authorized manager appointed by the decision of the bank’s management based on the documents submitted.
6. The specified structure must be approved by the Shariah Council of the bank and the document must be sent to the National Bank of the Kyrgyz Republic (hereinafter referred to as the National Bank) within 30 days from the date of approval. All subsequent changes in the structure of distributing profits/losses must also be approved by the Shariah Council and must be sent to the National Bank for notification within 30 days from the date, on which the changes made were approved.
7. The bank must have a functioning automated information system that will allow distributing:
2) funding, investments and other placement of funds;
3) profits and expenses;
8. Mudarabah deposits should be directed to funding, investment and placement in accordance with the internal policy of the bank.
The deposits should not be invested in the acquisition of the bank’s fixed assets (land, construction, furniture, computers, intangible assets) that are used for the functioning of the bank and which must be acquired by the bank from its own sources/equity capital.
9. Banks can create treasury operation pools for interbank transactions in accordance with the organizational structure of asset pool management, having received the appropriate permission from the authorized body of the bank appointed by the decision of the bank’s management.
10. When signing a contract on investment accounts of Mudarabah, the bank must disclose to the depositor the funding portfolio pool, where the deposit funds will be directed to.
11. Banks are recommended to create separate funding portfolio pools for deposits in foreign currency. The deposits in foreign currency must be managed in accordance with this Regulation.
12. The bank may consolidate the bank’s capital (available in the form of liquid assets/cash), funds on Mudarabah deposits (in unlimited Mudarabah accounts), Qard Hasan and Wadi'ah Yad Dhamanah in a funding portfolio pool. At the same time, the bank assumes all the risks of current deposits on the basis of Qard Hasan and Wadi'ah Yad Dhamanah contracts. Therefore, to calculate and distribute profits/losses, the bank can combine the current deposits of Qard Hasan and Wadi’ah Yad Dhamah with the bank’s allocated capital.
13. Each funding portfolio pool financing created and managed in the bank is considered a “separate entity” with its own assets, liabilities, profits and expenses that can be identified, quantified and verified at any time.
Chapter 3. Distribution of Profits and Expenses
14. Profits and expenses are accounted for by the various funding portfolio pools in accordance with accounting and reporting principles.
15. Direct expenses are covered by the corresponding funding portfolio pool, while indirect expenses, including the cost of creating the funding portfolio pool (salaries, depreciation of fixed assets, etc.), are covered by the bank.
16. Direct expenses to be covered by the funds of the funding portfolio pool may include depreciation of fixed assets under Ijarah/Ijarah Muntahia Bittamlik contracts, the cost of selling tangibles and goods, insurance/takaful costs of assets of the funding portfolio pool, commissions or expenses for documentation (government fees and charges, taxes paid in favor of the state budget), impairment/losses due to physical damage, as a result of force majeure, caused to specific assets in the funding portfolio pools.
17. The structure of managing the funding portfolio pool in the bank and in the corresponding decision of the bank’s management to create the pool may indicate other direct expenses, as well as any other similar expenses that must be covered by the funds of the funding portfolio pool.
18. Expenses incurred for the building up of general reserves in accordance with the Regulation “On the Classification of Assets and the Corresponding Deductions to the Reserve to Cover Potential Damages and Losses When Carrying out Operations in Accordance with the Principles of Islamic Banking and Finance”, approved by Resolution No. 51/6 of the National Bank Board as of December 28, 2009 (hereinafter referred to as the Resolution), must not be deducted from the pool’s gross profits. At the same time, special reserves should be deducted from the calculation of the pool’s gross profits according to the Regulation, since these expenses are related to profits generation, with the exception of expenses for building up reserves as a result of operational risks (damage, malfunction, theft, etc.).
19. Losses from financing and/or investments due to misconduct/negligence/breach of contracts should not be repaid by the bank at the expense of the funding portfolio pool. The bank, acting as a Mudarib, is responsible for reimbursing such losses to the depositor from its own capital.
§ 1. Distribution of Profits/Losses Between the Depositors’ Funds and Equity Capital
20. In case of consolidating the bank’s capital with the depositors’ funds in the funding portfolio pool, the net profit/loss of the funding portfolio pool is distributed between the bank’s equity capital and the depositors’ funds in proportion to their respective share in the funding portfolio pool.
21. Profits and losses under Mudarabah contracts are calculated and allocated based on the average daily balance on the depositor’s account during the period of calculating profits/losses. Considering that the degree of risk inherent in the bank deposit contract is directly proportional to the term of the contract, the bank may apply the borrowed funds’ weighting coefficient when calculating the average monthly balance.
At the same time, the bank independently develops the procedure for calculating the borrowed funds’ weighting coefficient.
§ 2. Profit Sharing Ratio
22. Information on the Profit Sharing Ratio (hereinafter referred to as the PSR) on the Mudarabah investment account must be posted on the official website of the bank and the bulletin board of the head office, branch(-s)/savings banks within 3 (three) business days from the date, on which the PSR was approved by the responsible body of the bank.
23. During the validity of bank deposits contracts, the PSR agreed with the depositors (in particular, with the depositors of the Mudarabah investment account) at the time the deposit was accepted, cannot be revised downward by the bank, except the cases, when the downward of the PSR was provided for by the contract. In case of revising the PSR, the bank should conclude an additional contract with the depositor.
24. The share of the bank (Mudarib) is determined as a part of the profit from the use of depositors’ funds in the total profits of the pool in accordance with Appendix 1 hereto.
25. The profitability of different categories of bank accounts and bank deposits accounts placed in the funding portfolio pool should be determined based on the characteristics and features defined in the pool management structure.
26. The bank should indicate in its structure of profit distribution and management of funding portfolio pools the main principles of remuneration payment in case of early termination of the contract and/or withdrawal of funds on deposits.
Chapter 4. Reserves
§1. Profit Equalization Reserve
27. The bank can maintain the volume of Profit Equalization Reserves (hereinafter referred to as PER) at the expense of the net profits of the funding portfolio pool, i.e. the gross profits of the funding portfolio pool less direct expenses and losses, if any.
28. The PER balance is reflected in the accounting books as reserves in the bank’s capital.
29. The PER funds can be placed in highly liquid assets that comply with Shariah requirements, and the profits received from these funds must also be credited to the PER account.
30. The bank may use the PER amount fully or partially to increase the profits of depositors in the period when the pool’s profits are lower than market expectations (market rates of return).
31. If the bank has a PER, the corresponding requirements must be specified in the bank’s standard deposit contract.
§ 2. Investment Risk Reserve
32. The portfolio pool may suffer investment losses under the Mudarabah contract. In this regard, the bank’s Board of Directors can decide to create Investment Risk Reserve (hereinafter referred to as the IRR) to reimburse future investment losses.
33. The losses incurred in the funding portfolio pool, if any, are covered from the balance available in the IRR.
34. If the bank has a IRR, the corresponding requirements must be specified in the bank’s standard deposit contract.
Chapter 5. Check and Audit
35. The distribution of profits/losses on deposits is subject to verification by the Shariah Council and the external independent auditor of the bank.
36. The bank’s internal audit should conduct a random check of compliance with the requirements of this Regulation on a semi-annual basis. In case of non-compliance/violations, the internal audit service is obliged to notify the bank’s management and the Shariah Council of the bank.
Chapter 6. Information Disclosure
37. The Bank should disclose the following information in its financial statements:
1) the number and nature of the funding portfolio pools with an indication of their profitability;
2) the direction or sector of the economy and business in which the Mudarabah deposits are placed;
3) the procedure used for the distribution of profits, recognition of expenses and the building up of reserves, as well as a brief description of their main components;
4) the bank’s share as Mudarib (amount and percentage of the distributed profits);
5) the amount and percentage of the Mudarib share of the net profits transferred to depositors as a Qiba (if any);
6) the rate of profit (rate of return) received in comparison with the rate of profit distributed among the depositors during the year.
38. Disclosure of information on the official website of the bank and the bulletin board of the head office, branch(-s)/savings banks:
1) the percentage of the bank’s share (Mudarib) for the corresponding period and two previous periods in each category of bank deposit accounts);
2) additional payments on bank deposits for the corresponding period and two previous periods;
3) actual monthly profits/losses, distributed by bank deposits for the last two years;
4) sizes of PER and IRR (if any).