Appendix to
Resolution No. 51/4 of
the National Bank of the
Kyrgyz Republic Board
as of December 28, 2009
INSTRUCTION
on Establishment of Capital Adequacy Standards
for the Banks Operating under the Principles of Islamic Banking and Finance
(Amendments and addenda are approved by the Resolutions of the NBKR Board No. 67/8 as of November 30, 2011, No. 18/9 as of April 25, 2012, No. 32/6 as of July 16, 2014, No. 78/23 as of December 23, 2015, No.19/6 as of April 27, 2016, No. 17/13 as of April 26, 2017, No. 21/11 as of May 31, 2017, No.2019-П-12\19-3- (RLA) dated April 10, 2019, No.2021-П-12/51-2-(RLA) dated September 15, 2021 , No.2021-П-12/70-3-(RLA) dated December 15, 2021)
1. General Provisions
1. (Became invalid as per Resolution No. 21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017).
2. The purpose of this Instruction is to establish the capital adequacy standards for an Islamic bank, as well as peculiarities of calculating the capital adequacy ratios for the bank having an “Islamic window”.
(As amended by Resolution No. 21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017).
3. Capital of the bank is a provision of profitable and sustainable growth, guarantee of customer confidence in the bank and is used to cover potential losses typical of banking activities.
4. Capital is used to protect against the consequences of excessive risk situations and financial insolvency of the bank. The bank needs to have adequate capital, capable of covering possible losses without the threat of insolvency. The amount of capital shall be adequate to increasing volume of banking operations carried out under the Principles of Islamic banking and finance with a high risk involved.
2. Capital Adequacy Standards of the Islamic Banks
5. Minimum amount of the capital:
a) The minimum amount of the authorized capital for newly opened Islamic banks in the Kyrgyz Republic (including branches of foreign banks);
b) Shareholders’ (regulatory) capital is the Tier I Capital.
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021).
6. Capital sufficiency (adequacy) ratios of an Islamic bank, based on risk weighting of balance sheet assets placed in accordance with the Principles of Islamic Banking and Finance (hereinafter referred to as assets), and off-balance sheet liabilities assumed by the bank in accordance with the Principles of Islamic Banking and Finance ( hereinafter referred to as off-balance sheet liabilities):
а) Total capital (K2.1) sufficiency (adequacy) ratio is determined by the formula:
К2.1 = (ЧСК / ((ЧРА- ЧРАм) + П * Кор)) *100%, where:
ЧСК (NTC) |
– |
is Net Total Capital, which is defined as the sum of Tier 1 Capital and Tier 2 Capital. |
ЧРА |
– |
The amount of balance sheet assets and off-balance sheet liabilities, weighted by the degree of risk, minus special loan loss provision. |
ЧРА |
– |
The amount of balance sheet assets and off-balance sheet liabilities financed from funds raised under the Limited Mudarabah contract, weighted by risk degree minus special loan loss provision. |
П |
– |
The established indicator (the reciprocal of the total capital adequacy ratio) for commercial banks - 8.33 (100%:12%), for systemically important banks - 7.14 (100%:14%); |
Кор |
– |
is the amount of capital reserved to cover operational risks. Calculation of the capital reserved to cover operational risks using the Basic Indicative Method is carried out in accordance with the Procedure for determining the level of capital required to cover the operational risks of banks, approved by the Resolution of the National Bank of the Kyrgyz Republic Board. |
b) The Tier I Capital (K2.2) sufficiency (adequacy) ratio is determined by the formula:
К2.2 = (КПУ / (ЧРА- ЧРАм)) *100%, where:
TIC |
– |
Tier I Capital, which is determined according to 15 of this Instruction. |
c) The Tier I Core Capital sufficiency (adequacy) ratio (K2.3) is determined by the formula:
К2.3 = (БКПУ / (ЧРА- ЧРАм)) *100%, где:
TICC |
– |
Tier I Core Capital |
The National Bank, based on the assessment of risks and the systemic importance of banks, has the right to increase the minimum amount of capital adequacy ratios.
(As amended by Resolution No.2021-П-12/70-3-(RLA) of the National Bank of the Kyrgyz Republic Board dated December 15, 2021).
7. The capital sufficiency (adequacy) ratio of a bank having an “Islamic Window” is calculated in accordance with the Instruction for Determining Capital Sufficiency (Adequacy) Standards for Commercial Banks of the Kyrgyz Republic, approved by Resolution No.18/2 of the National Bank Board dated July 21, 2004 (hereinafter referred to as the Instruction for Commercial Banks). At the same time, when calculating the capital sufficiency (adequacy) ratio, assets placed in accordance with the Principles of Islamic Banking and Finance are weighted according to the degree of risk under this Instruction.
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021).
8. When calculating the capital adequacy ratios of the bank having an “Islamic window”, its individual components are included in calculation, taking into account the transactions conducted under the Principles of Islamic banking and finance. For example, when calculating Tier II capital, general loan loss provisions shall be included for assets placed under the Principles of Islamic banking and finance.
(As amended by Resolution No. 21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017).
9. Leverage (К2.4) is determined by the formula:
К2.4 = (КПУ / (СА+ЗО) *100%, where:
СА (TA) |
– |
- the total assets of the bank minus intangible assets and special loan loss provision; |
ЗО (OBSL) |
– |
the off-balance sheet liabilities subject to credit conversion factors defined by this Instruction, as well as those liabilities on which the bank has the right to unconditional withdrawal/cancellation at any time without prior notice to a customer, and to which a credit conversion factor of 10% of the total amount of such off-balance sheet liabilities can be applied. At the same time, the amount of loan loss provision is deducted from off-balance sheet liabilities (after applying credit conversion factors) within the amount of weighted off-balance sheet liabilities. |
As amended by Resolution No.2021-П-12/70-3-(RLA) of the National Bank of the Kyrgyz Republic Board dated December 15, 2021).
9-1. In order to maintain the financial strength of the bank and the stability of its activities, it is established a requirement to support the “Additional Capital Stock of the Bank” (“Capital Buffer” index) for the payment of dividends. The “Capital Buffer” index is defined as the ratio of net total capital to the sum of balance sheet assets and off-balance sheet liabilities, financed for the account of funds raised under the Limited Mudarabah Contact, and weighted by the degree of risk minus special loan loss provision. The value of the “Capital Buffer” index of banks is set by the Supervisory Committee of the National Bank.
(As amended by Resolutions No.21/11 dated May 31, 2017, No.2019-П-12\19-3- (RLA) dated April 10, 2019, No.2021-П-12/70-3-(RLA) dated December 15, 2021 of the National Bank of the Kyrgyz Republic Board).
9-2. The Bank does not have the right to make a decision on the payment of dividends if the “Capital Buffer” index, calculated with account of the deduction of the amount of dividends planned for payment, is lower than the value set by the National Bank.
After the dividends are paid, the “Capital Buffer” index must be at least the value set by the National Bank.
If the value of the “Capital Buffer” index, calculated with account of the deduction of the amount of dividends planned for payment, is observed, the bank shall obtain permission from the National Bank for payment, except for cases when the bank increases its authorized capital at the expense of retained earnings.
(As amended by Resolutions No.19/6 of the National Bank of the KR Board dated April 27, 2016, No.2019-П-12\19-3- (RLA) dated April 10, 2019).
9-3. Became null and void in accordance with Resolution No.2019-П-12\19-3-(RLA) of the National Bank of the Kyrgyz Republic Board dated April 10, 2019).
3. Capital Structure
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021).
10. The basis of the capital is the fully paid authorized capital of the bank. According to the standards of the Basel Committee on Banking Supervision, authorized capital is a key element of capital common to banking systems in all countries; it is clearly visible in the financial statements published by banks on which the market assessment of capital adequacy is based; it is crucial for the determination of indicators of profitability and competitiveness of the bank.
11. The capital includes only such authorized capital (ordinary and preferred shares), which does not entail any obligations to return the funds invested by the bank’s shareholders. These funds can only be obtained by shareholders through the transfer or sale of shares to third parties.
12. The Bank is not entitled to accept its own shares as collateral.
13. For the purposes of banking supervision, the distinguishing feature of capital components is their ability to cover losses that may arise in the course of the bank’s activities. For this reason, when assessing capital sufficiency (adequacy), certain “non-capital” accounting records (for example, “General Loan Loss Provision” or “Subordinated Bonds and Other Debt Obligations”) are included in the capital.
14. For the purposes of calculating capital sufficiency (adequacy) ratios, bank capital is divided into Tier 1 Capital and Tier 2 Capital.
15. Tier 1 Capital is required to absorb losses in the course of the bank’s day-to-day operations.
Tier 1 Capital consists of the following elements:
- Tier 1 Core Capital;
- Additional Tier 1 Capital.
16. The structure of the Tier 1 Core Capital consists of the following elements:
1) “Ordinary shares” - issued and fully paid ordinary shares of the bank that meet the conditions established by the legislation;
2) “Preferred non-cumulative shares” - issued and fully paid preferred shares of the bank that meet the conditions established by the legislation and do not require the bank to distribute dividends.
Where there are circumstances/conditions requiring the distribution of dividends, such preferred shares and capital contributed in excess of par value on those shares should be accounted for in Additional Tier 1 Capital or Tier 2 Capital;
3) “Capital contributed in excess of par value” - the difference between the selling price of ordinary and preferred shares included in the Tier 1 Core Capital and their par value as a result of the issue.
Capital contributed in excess of par value is not subject to distribution to shareholders in the form of dividends and remains in the bank.
Upon the written consent of the National Bank, the capital contributed in excess of par value may be used to increase the authorized capital only in order to comply with the minimum authorized capital requirement;
4) “Reserves for the future needs of the bank” - reserves created from profit after taxation for future and/or unforeseen events;
5) “Retained earnings (losses) of previous years” - the balance of net profit (losses) after taxation of previous years after deduction of declared dividends and distribution to other capital accounts.
17. The structure of the Additional Tier I Capital includes the following elements:
1) “Additional capital contributed by individuals and legal entities” – monetary funds contributed by individuals and legal entities in excess of the paid-in authorized capital. The need to deposit these funds arises if the bank fails to comply with the requirements of the National Bank for the minimum amount of shareholders’(regulatory) capital (Tier 1 Capital) and/or economic standards, and/or if there is a risk of non-compliance, including at the request of the National Bank, and/ or the need to increase the authorized capital by the date determined by the National Bank. These monetary funds are credited only if the bank has an agreement with individuals and legal entities on depositing funds on account of the acquisition of bank shares by them on the condition of irrevocableness (under no circumstances), the perpetuity of the deposited funds, and also on the condition that in the event of the bank’s bankruptcy, claims according to these funds will be satisfied in the same order as the requirements of the bank’s shareholders. The amount of additional capital must be sufficient for the bank to meet the minimum values for these requirements and standards. Subsequently, funds additionally contributed by individuals and legal entities must be converted into ordinary and/or preferred shares, and these persons themselves should be endowed with an indisputable right to purchase issued shares for the amount of these monetary funds provided;
2) “Preferred shares that meet the criteria for Additional Tier 1 Capital but are not eligible for Tier 1 Core Capital”. Preferred shares in this article are indicated considering the amount paid in excess of their par value;
3) “Other capital instruments” – the instruments that have features of both capital and debt, which includes perpetual subordinated debt.
Subordinated debt is understood as a non-collateralized liability that must not be repaid ahead of schedule at the request of creditors and the requirements for which, in the event of the bank’s liquidation, are repaid last after all claims from creditors and depositors are satisfied, but before settlements with the bank’s shareholders.
Additional Tier 1 Capital Instruments issued by the bank must comply with the criteria established for them.
18. Additional Tier 1 Capital shall meet the following criteria for capital elements:
1) Must be issued and paid for;
2) Must be subordinated, that is, the claims on these instruments are subject to satisfaction as a last resort after the satisfaction of all claims from depositors, major creditors and the bank’s subordinated debt;
3) The instrument must not be a collateral or guarantee for the obligations of the bank/bank-related parties, and also must not be subject to any requirements/conditions that may legally or economically oblige the bank to first call;
4) Must be perpetual, i.e. have no maturity dates;
5) May be redeemed by the issuer or repaid at his/her initiative only after a minimum period of at least five years. Wherein:
a) The bank should not take any action when issuing the instrument, expecting that the instrument will be repurchased;
b) Redemption/repayment is allowed only in the following cases:
- Replacing the instrument with an instrument of the same kind or of the highest quality, if the replacement of the specified instrument is carried out on terms that are reliable for the bank’s capital;
- The minimum requirements of the National Bank for capital are not violated;
- Obtaining prior permission from the National Bank;
6) Any payment of the principal (for example, by redemption or payment) shall be made with the prior consent of the National Bank, and banks should not assume or expect that the consent of the National Bank will be obtained;
7) The right to choose in relation to the distribution of dividends/payment of interest:
a) The bank must have the full right to cancel the distribution of dividends/payments under any circumstances;
b) The adoption of a decision to cancel the distribution of dividends and payments should not be considered as a default or insolvency of the bank;
c) The possibility of fulfilling other obligations as they become due for account of unpaid dividends;
d) Cancellation of the distribution of dividends/payments should not impose restrictions on the bank. At the same time, restrictions on the payment of dividends on ordinary shares may also be established;
8) The instrument cannot be included in liabilities to the extent that it exceeds assets, if such an excess is a sign of insolvency under the legislation;
9) If the Bank’s Tier 1 Core Capital Ratio falls to 5.125%, the bank shall have the right to convert these instruments into ordinary shares or write off these instruments by distributing losses on them.
In this case, the write-off should lead to the following results:
a) Reducing the requirements for the instrument upon liquidation of the bank;
b) A reduction in the amount payable upon redemption of the instrument;
c) Partial or complete reduction of the amount of interest/dividend payments;
10) Neither the bank nor a related party over which the bank exercises control or has significant influence is entitled to repurchase the instrument, including the bank is not entitled to participate directly or indirectly (including by allocating funds in the form of loans, prepayments and etc. and/or provision of other services) in the purchase of an instrument.
19. Tier 2 Capital is required to absorb losses in the bank’s liquidation
The Tier 2 Capital structure consists of the following elements:
1) “Profit of the current year” - profit after taxation received in the current year;
2) “General reserves”:
a) “General” Loan Loss Provision;
b) General Loan Loss Provision from the other assets except for credit risk assets.
These reserves, eligible for inclusion in the Tier 2 Capital, will be capped at a maximum of 1.25 percent of the credit risk-weighted value of assets and off-balance sheet liabilities;
3) Reserves for the revaluation of securities - unrealized profits (losses) on the results of the revaluation of securities held for sale;
4) Foreign currency translation reserves upon consolidation - unrealized income (losses) arising from changes in the exchange rate during the recalculation of the statements of foreign subsidiary financial institutions of the bank;
5) Profit Equalization Reserve (PER) is a reserve created by decision of the Board of Directors of an Islamic bank at the expense of the amounts allocated from the gross profit before the distribution of the Mudarib share, in order to maintain a certain level of return on investments of investment account holders. The conditions for calculating PER should be determined in advance and applied in accordance with the terms of the contract signed with the investment account holder;
6) Reserve for Investment Risks (if any) is the amount allocated from the profit of investment account holders after the distribution of the Mudarib profit share in order to mitigate the risks of future investment losses of investment account holders. The procedure for using this reserve should be approved by the Board of Directors of the Islamic bank;
7) Part of capital instruments and debt instruments, which may be included in the Tier II Capital with the permission of the National Bank upon a written application of the Board of Directors of the bank;
8) The difference between the sale price of shares included in Tier II Capital (not included in Tier 1 Capital) and their nominal value based on the results of the issue.
The instruments included in the Tier 2 Capital structure should meet the following criteria:
1) Be issued and paid for;
2) Must be subordinated, that is, the claims on these instruments are subject to satisfaction as a last resort after the satisfaction of all claims from depositors, major creditors and the bank’s subordinated debt;
3) The instrument must not be a collateral or guarantee for the obligations of the bank/bank-related parties, and also must not be subject to any requirements/conditions that may legally or economically oblige the bank to first call;
4) Maturity:
a) The minimum repayment period must be at least 5 (five) years;
b) Capital instruments are depreciated on a straight-line basis for the remaining 5 (five) years to maturity;
c) Should not provide any incentives for redemption;
5) May be redeemed by the issuer or repaid at its initiative only after a minimum period of 5 (five) years, and only after prior approval of the National Bank. Wherein:
a) The bank should not take any action when issuing the instrument, expecting that the instrument will be repurchased;
b) Redemption/repayment is allowed only in the following cases:
- Replacing an instrument with an instrument of the same kind or of the highest quality, if the replacement of the specified instrument is carried out on terms that are reliable for the bank’s capital;
- The minimum requirements of the National Bank for capital are not violated;
- Obtaining prior permission from the National Bank;
6) The investor/creditor does not have any rights for early repayment of future planned payments (income or the principal of the instrument), except in cases of bankruptcy and liquidation;
7) Neither the bank nor a related party over which the bank exercises control or has significant influence is entitled to repurchase the instrument, including the bank is not entitled to participate directly or indirectly (including by allocating funds in the form of loans, prepayments and etc. and/or provision of other services) in the purchase of an instrument.
19.1. Prior to calculating sufficiency (adequacy) ratios of the Net Total Capital, the Tier I Capital, the Tier I Core Capital and the Leverage ratio, the following elements are deducted from the Tier I Core Capital:
1) Losses for the current year;
2) Intangible assets, with the exception of assets related to technical and software products (for example, for biometric identification, smart contracts, etc.) aimed at increasing the number of customers and coverage of services that meet the following requirements:
- The decision shall be new or significantly different from existing market offerings, or it shall offer new opportunities for using existing technologies, as evidenced by market research and comparison of key technology characteristics;
- The decision should offer customers clear direct or indirect benefits (e.g., terms of reference showing increased security, quality of service, efficiency, product quality, lower prices, a combination of any of the above) and be supported by bank benchmarking with quantitative assessments, if necessary.
If there are the results of technical testing, they should be available to the National Bank. Alternatively, it is possible to provide confirmation of the technical reliability of this decision from an independent third party.
These technical and software products must be accounted for by the bank at their book value;
3) Investments (in the form of shares or equity participation) in other non-consolidated banks and financial and credit institutions, as well as non-financial institutions, with the exception of investments (in the form of shares or equity participation) made under Sharikah/Musharakah partnership contracts. If the bank invests additional Tier 1 or Tier 2 Capital in these entities, these investments should be deducted from the corresponding capital;
4) All deferred tax assets that depend on future returns calculated on the basis of International Financial Reporting Standards (IFRS) 12, except for deferred tax assets associated with temporary differences. Deferred tax assets can be offset against deferred tax liabilities if the conditions of IFRS 12 are met;
5) Direct or indirect investments in own shares. The bank has the right to buy back its own shares only for their subsequent sale at a higher price, provided that the bank has concluded a preliminary Share Sale Contract for their sale after the buyback and the bank’s activities have been break-even for the previous 5 (five) years until the date, on which the decision to buy back own shares is made. The bank will deduct these shares until they are sold.
Using an identical approach, banks shall deduct the investment in their own Additional Tier 1 Capital when calculating Additional Tier 1 Capital and shall deduct the investment in their own Tier 2 Capital when calculating their Tier 2 Capital.
Mutual cross-ownerships that artificially increase the bank’s capital position should be deducted in full. Banks shall apply an “appropriate deduction approach” to such investments in the capital of other banks, other financial institutions and insurance companies. This means that the deduction should be applied to the same component of capital for which the capital would qualify in the same way as if it had been issued by the bank itself.
(As amended by Resolution No.2021-П-12/70-3-(RLA) of the National Bank of the Kyrgyz Republic Board dated December 15, 2021).
19.2. The values of Tier 1 Capital and Net Total Capital as of the 1st day of the month following the reporting period are used to calculate the capital sufficiency (adequacy) standards and other economic standards and requirements established by the National Bank. When calculating economic ratios, the values of which are determined on a daily or weekly basis during the reporting month, the total value of the Net Total capital of the bank as of the 1st day of the reporting month and additional capital is used, if it is paid by legal entities or individuals in the prescribed manner to the report date.
4. Risk-Related Assessment of Balance Sheet Assets Placed
according to the Principles of Islamic Banking and Finance
20. The assessment of capital sufficiency (adequacy) under this Instruction is carried out in relation to credit risk, i.e. risk relating to various types of assets and consisting in the customer’s failure to ensure full or partial recovery of the asset, as well as operational risk in terms of calculating the Total Capital Adequacy ratio in accordance with sub-paragraph “a” of Paragraph 6 hereof.
(As amended by Resolution No. 17/13 of the National Bank of the Kyrgyz Republic Board dated April 26, 2017, No.2021-П-12/70-3-(RLA) dated December 15, 2021).
21. The assets have varying degrees of credit risk inherent in certain contracts concluded under the Principles of Islamic Banking and Finance, including at various stages of transactions. For example, cash on hand in an Islamic bank is a risk-free type of asset compared to the assets placed in financing transactions conducted under the Principles of Islamic Banking and Finance or investments in fixed assets.
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021).
22. Depending on the degree of credit risk, all balance sheet assets are divided into seven categories in accordance with paragraph 24 hereof. At the same time, the main criteria for credit risk, which characterize balance sheet assets, are: type of counterparty, country of origin of the partner in terms of transfer risk, asset collateral, guarantees and duration of the asset.
(As amended by the Resolutions of the National Bank of the Kyrgyz Republic Board No.17/13 dated April 26, 2017, No.2019-П-12\19-3- (RLA) dated April 10, 2019).
23. (Became invalid as per Resolution No. 17/13 of the National Bank of the Kyrgyz Republic Board as of April 26, 2017).
24. Depending on the level of credit risk, as well as on the type of individual partners/counterparties, the balance sheet assets are divided into the following categories:
Category 1 (credit risk level - 0%):
а) notes and coins of the Kyrgyz Republic and the EAEU and OECD member-states, as well as the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service”;
Note: OECD – Organization for Economic Co-operation and Development. The list of OECD member- states is available on the official website www.oecd.org;
b) requirements to the National Bank of the Kyrgyz Republic;
c) Requirements to the Government of the Kyrgyz Republic (Islamic securities and securities issued by the Government of the Kyrgyz Republic and other requirements);
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021).
d) requirements to the Central (National) banks of the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service” or are the OECD member- states;
e) requirements to the governments of the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service” or are the OECD member-states (Islamic securities issued by the governments);
f) Assets (or part thereof) with collateral denominated in the national currency of the Kyrgyz Republic and held in a separate account.
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021).
Note: In accordance with the Regulation “On classification of assets and related loan loss provisions in conducting operations under the Principles of Islamic banking and finance” approved by the Resolution No. 51/6 of the Board of the National Bank of the Kyrgyz Republic as of December 28, 2009.
g) assets (or part thereof) secured by the currency of the EAEU and OECD member-states, as well as the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service”, and placed on a separate deposit account.
(As amended by Resolution No. 17/13 of the National Bank of the Kyrgyz Republic Board as of April 26, 2017).
h) Gold in the form of refined bullions issued by the National Bank.
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021).
Category 2 (credit risk level - 10%):
а) Assets (or part thereof) backed by securities issued by the Government of the Kyrgyz Republic;
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021).
b) assets (or part thereof) secured by the Islamic securities at the current market price, which are issued by the governments of the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service” or are the OECD member- states;
(As amended by Resolution No. 17/13 of the National Bank of the Kyrgyz Republic Board as of April 26, 2017).
Category 3 (credit risk level - 20%):
а) monetary assets in settlements with the banks and other financial institutions of the Kyrgyz Republic;
b) gold and other certified precious metals in the form of standard bars not prohibited by the Shari'ah Standards approved by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI);
c) cash assets in settlements with the banks and other financial institutions of the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service” or are the OECD member-states;
d) requirements to the banks and other financial institutions of the Kyrgyz Republic, and all assets based on guarantees of these institutions;
e) requirements to the banks and other financial institutions of the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service” or are the OECD member-states, which are not affiliated institutions relative to the reporting bank, and all assets based on guarantees of these institutions;
(As amended by Resolution No. 17/13 of the National Bank of the Kyrgyz Republic Board as of April 26, 2017).
Category 4 (credit risk level - 50%):
a) Financing provided to individuals for the purchase or construction of single-family housing. This category includes only such assets that are issued to persons intending to live in this house or apartment, i.e. this housing (or part of it) will not be used for other purposes (sale, rent, etc.).
If these assets are overdue by more than 30 (thirty) days and/or they are restructured, they are indicated in Category 5 with a credit risk of 100%;
(As amended by the Resolutions of the National Bank of the Kyrgyz Republic Board No.17/13 dated April 10, 2019, No.2019-П-12\19-3-(RLA) dated April 10, 2019, No.2021-П-12/51-2-(RLA) dated September 15, 2021).
b) Gold and other certified precious metals in bullions not prohibited by the Sharia’h standards approved by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), with the exception of refined gold bullions issued by the National Bank;
(As amended by the Resolutions of the National Bank of the Kyrgyz Republic Board No.17/13 dated April 26, 2017, No.2021-П-12/51-2-(RLA) dated September 15, 2021).
c) Loans issued by a commercial bank under state programs, including at the expense of banks’ own funds, related to the financing of agriculture and export-oriented and import-substituting enterprises, as well as other state programs aimed at assisting the development of the Republic’s economy.
If these loans are overdue for more than 90 days and/or restructured again, they are classified in Category 5 with a credit risk of 100%.
Note: government programs include programs partially/fully financed from the republican budget or implemented through subsidizing interest rates from the republican budget, including financing carried out in cooperation with organizations created by the state; programs within the implementation of interstate (intergovernmental) projects in accordance with international treaties and agreements.
(As amended by Resolution No.2019-П-12\19-3-(RLA) dated April 10, 2019).
Category 5 (credit risk level - 100%):
а) notes and coins not included in category 1;
b) requirements to the governments and the Central banks of the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service” or are the OECD non-member-states (securities issued by the governments of these states and other requirements);
c) cash assets in settlements with the banks and other financial institutions of the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service” or are the OECD non-member-states;
d) requirements to the banks and other financial institutions of the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service” or are the OECD non-member-states, which are not affiliated institutions relative to the reporting bank;
e) requirements to the banks and other financial institutions of the states that have a long-term sovereign credit rating of at least “A” level, assigned by the rating agency “Standard & Poor’s” or an equivalent rating assigned by one of the following rating agencies: “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service” or are the OECD non-member-states;
f) requirements to the private sector (assets placed under the Principles of Islamic banking and finance):
- assets placed under the Mudaraba, Musharaka agreements. At the same time, pledge (immovable and movable property), which shall be sold within the terms established by the regulatory legal acts of the National Bank of the Kyrgyz Republic, is used as collateral for such agreements. The value of the pledge when it is sold shall be sufficient to pay to the bank the principal amount of financing and possible costs associated with the sale of pledge.
The value of pledge shall be confirmed by the conclusion of an independent assessment officer in accordance with the property valuation standards mandatory for all entities of the assessment activity in the Kyrgyz Republic, approved by the Resolution of the Kyrgyz Government No. 217 as of April 3, 2006. Independent assessment of pledged assets on an annual basis is a mandatory requirement for assignment of these assets to this category. In the event of reduction in the cost of collateral, deterioration in its quality, which can cause difficulties in selling the pledge, the assets placed under the Mudaraba and Musharaka agreements are specified in category 6 with a risk level of 400%. Based on the practice of the bank’s operations under the Mudaraba, Musharaka agreements, the National Bank may establish additional requirements and restrictions on these operations conducted by the bank, including pledged collateral.
- other assets placed under the Principles of Islamic banking and finance, exclusive of the assets specified in categories 3, 4 and 6;
g) fixed assets and other property of the bank;
h) investments and financial participation net of deductions envisaged in subparagraph “b”, paragraph 18 herein;
i) Investments and financial participation minus the stipulated deductions provided for in sub-paragraph four of Paragraph 19-1 of this Instruction;
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021)
j) all other assets not included in the previous categories.
(As amended by Resolution No. 17/13 of the National Bank of the Kyrgyz Republic Board as of April 26, 2017).
k) All the other assets not included in the previous categories.
(As amended by the Resolutions of the National Bank of the Kyrgyz Republic Board No.17/13 dated April 26, 2017, No.2019-П-12\19-3-(RLA) dated April 10, 2019).
Category 6 (credit risk level – 150%):
- The assets placed in accordance with the Principles of Islamic Banking and Finance in a foreign currency, with the exception of assets in the currency of the EAEU member states, as well as other than those specified in Category 4.
(As amended by the Resolutions of the National Bank of the Kyrgyz Republic Board No.17/13 dated April 26, 2017, No.2019-П-12\19-3-(RLA) dated April 10, 2019).
Category 7 (credit risk level – 400%):
- The assets placed under Mudarabah, Musharakah contracts, with the exception of the assets specified in Categories 1-6.
(As amended by the Resolutions of the National Bank of the Kyrgyz Republic Board No.17/13 dated April 26, 2017, No.2019-П-12\19-3-(RLA) dated April 10, 2019).
25. Investments in securities are weighted net of premium (discount) and unrealized profit (losses).
26. Incomes on assets are risk-weighted similar to the risk-weighted assets.
5. Risk-Related Assessment of Off-Balance Liabilities
27. Off-balance liabilities are also exposed to the credit risk under certain conditions (see paragraph 20 herein). For example, guarantees issued by the bank on behalf of a client may, upon the occurrence of the certain events, be transformed into an ordinary asset allocation.
28. Risk exposure value on off-balance liabilities is calculated by multiplying the nominal value of off-balance liabilities by the corresponding percentage value of the credit transformation factor. The values obtained are balance-sheet equivalents of the off-balance liabilities, which are further weighted according to the degree of credit risk as per Section 4 herein.
29. This instruction defines the following percentages of credit conversion factors for off-balance sheet liabilities:
Credit conversion factor 10%:
- Off-balance sheet liabilities for which the bank has the right to unconditional withdrawal/cancellation at any time without prior customer’s notification.
(As amended by Resolution No.2021-П-12/70-3-(RLA) of the National Bank of the Kyrgyz Republic Board dated December 15, 2021).
а) any liabilities that the bank can unconditionally cancel at any time without prior notice or in respect of which the right of automatic cancellation is provided in case of deterioration of the borrower’s financial condition.
Credit transformation factor - 20%:
а) a letter of credit issued or confirmed by the bank with the financing of imports or exports on the basis of the Murabaha agreement, where the pledge in the form of insured goods/cargo is used as collateral.
Credit transformation factor - 50%:
а) off-balance liabilities associated with the particular transaction (for example, letter of credit, ensuring the client compensation for damages in the event of failure by a contractor to fulfill its liabilities in the construction project and other similar liabilities);
b) short-term self-liquidating liabilities related to trade transactions (e.g., documentary letter of credit, secured by shipment of goods).
Credit transformation factor - 100%:
а) commitments to grant credits;
b) credit substitutes (for example, general credit guarantees, standby letters of credit, guarantees for acceptance), i.e. documents (regardless of its title) representing legal obligations of the bank to disburse the funds to a third party if a client, on whose/which behalf a guaranty or a letter of credit were issued, is unable to pay the funds issued in advance to a third party under the contract agreement or similarly;
c) repurchase agreements and sale of assets, with the right of a counterparty to return an asset in certain cases;
d) obligations on purchase of the assets;
e) other off-balance liabilities not included in the previous categories.
(As amended by Resolution No. 21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017).
30. The Bank shall assess off-balance liabilities related to exchange rates, since the bank is exposed to the credit risk to the potential value of cash flow replacement (under the contracts with positive value) in the event of failure to comply by the partners with their contractual obligations rather than to the full par value of such liabilities. The size of the balance equivalents depends on the term of the agreement and the exchange rates that form the basis of the financial instruments.
The banks can use a method, whereby a potential risk is calculated for each type of contract, regardless of its current market value, for all contracts related to exchange rates. In order to calculate the size of a balance-sheet equivalent it is necessary to multiply the base (nominal) value of each instrument by one of the transformation coefficients (credit transformation factor) set depending on the nature of the instrument and its validity.
30.1. For gold transactions, the credit conversion factors are similar to those applied to foreign exchange contracts.
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021).
31. This Instruction defines the following percentage values of the credit transformation factors for off-balance liabilities related to exchange rates:
Contracts duration |
Credit transformation factor |
Less than 1 year |
2% |
From 1 year to 2 years |
5% |
For each successive year |
+ 3% |
6. Risk-Related Assessment of Assets and Off-Balance Liabilities
of the Bank Having an “Islamic Window”
(As amended by Resolution No. 21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017).
32. When calculating the capital adequacy ratio of a bank having an “Islamic window”, the methodology of risk-related assessment of the bank’s assets and off-balance liabilities allocated/accepted under the Principles of Islamic banking and finance is used as defined herein.
33. Assets and off-balance liabilities allocated/accepted by the bank having an “Islamic window”, based on the “traditional” principles of banking and financing, are risk-weighted in accordance with the Instruction for the commercial banks.
7. Procedure of Filling in and Submitting the Reports
on Implementation of Capital Adequacy Standards
for the Bank Having an “Islamic Window”
34. Reporting on implementation of the capital adequacy standards, taking into account the operations carried out by the bank under the Principles of Islamic banking and finance, is composed according to the requirements of the Instruction for the commercial banks and as per the peculiarities specified herein.
35. When composing the reports on implementation of capital adequacy standards:
- balance sheet assets of the bank having an “Islamic window”, allocated under the Principles of Islamic banking and finance, shall be reflected in Sections 15.A-15 of the Periodic Regulatory Bank Report;
- all off-balance liabilities (including short-term self-liquidating off-balance liabilities), attracted under the Principles of Islamic banking and finance, shall be reflected in Section 15.G of the Periodic Regulatory Bank Report.
36. Information about capital adequacy standards implementation and calculations thereof is submitted by the bank having an “Islamic window” in accordance with the requirements of the Instruction for the commercial banks and as a part the Periodic Regulatory Bank Report.
(As amended by Resolution No. 21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017).
8. Dividends
37. Dividend is a part of the bank’s net profit distributed among the shareholders under the laws.
38. The Management Board of the bank (an executive body) on the basis of the auditor’s opinion shall submit to the Board of Directors of the bank and the shareholders meeting the analysis of at least the following factors for consideration and appropriate assessment:
а) capital adequacy and its trends;
b) implementation of the economic standards established by the NBKR;
c) nominal and real income levels of the bank (taking into account inflation rate) and their trends;
d) growth prospects of the bank;
e) effect of economic conditions and inflation rate.
39. Dividends on shares are accrued and paid off at the end of the financial year.
Note: The financial year is the period from January 1 to December 31 inclusive.
(As amended by Resolution No.2021-П-12/51-2-(RLA) of the National Bank of the Kyrgyz Republic Board dated September 15, 2021).
40. The bank shall obtain permission from the National Bank to pay dividends to the bank’s shareholders. Documents for obtaining permission from the National Bank for the payment of dividends should be submitted to the National Bank not later than five working days before the general shareholders’ meeting of the bank. The documents should be accompanied by the bank’s plans for the dividend payment deadline and calculations for compliance with economic standards, as well as the “Capital Buffer” index, calculated with account of the planned payment of the dividend amount.
If there is a threat to the stability of the bank, as well as to the interests of creditors and depositors, the National Bank may prohibit or impose restrictions on the payment of dividends if:
a) This will lead to violation of economic standards established by the National Bank;
b) The values of the bank’s capital sufficiency (adequacy) ratios will be below the minimum limits established by the National Bank for this bank;
c) The “Capital Buffer” index, after the payment of dividends, will be below the minimum values established by the National Bank;
d) The Loan Loss Provision have not been created or have been created insufficiently in accordance with the requirements of the National Bank;
e) The bank has uncovered losses for previous years and/or for the reporting year;
f) This will lead to a deterioration in the financial condition of the bank;
g) In other cases stipulated by the laws of the Kyrgyz Republic.
The bank is not entitled to make a decision on the payment (announcement) of dividends on shares, if at the time of the decision and payment of dividends it meets the signs of insolvency in accordance with the legislation of the Kyrgyz Republic or these signs appear in the bank as a result of the payment of dividends.
The Bank is not entitled to make a decision on the payment (announcement) of dividends on ordinary shares, unless a decision on the payment of dividends on preferred shares has been made.
(As amended by the Resolutions of the National Bank of the Kyrgyz Republic Board No.21/11 dated May 31, 2017, No.2019-П-12\19-3-(RLA) dated April 10, 2019, No.2021-П-12/51-2-(RLA) dated September 15, 2021).
9. Procedure of Filling in Reporting on Implementation of Capital Adequacy Standards
41. Reporting on implementation of the capital adequacy standards is composed based on the balance sheet of the bank according to the Chart of accounts for accounting in the Islamic banks and financial institutions licensed by the NBKR.
(As amended by Resolution No. 21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017).
42. Reporting items are divided into integrated and detailed ones (for example, integrated item 20 is divided into two detailed items 20.1 and 20.2). The values of balance assets (off-balance liabilities) are specified in detailed items, depending on belonging thereof to any category of credit risk. The values specified in integrated items are the sums of values in the detailed items.
43The names of many reporting items fully correspond to the names of certain accounts or groups of accounts of the Chart of accounts for accounting in the Islamic banks and financial institutions licensed by the NBKR. However, the filling in of certain items has some peculiarities. Thus, the total balance-sheet value of the appropriate type of securities, irrespective of their classification is specified in every item in section “Securities portfolio” (items 130-230). For example, the amount of the balance-sheet value of the securities issued by the Government of the Kyrgyz Republic and/or the NBKR under the Principles of Islamic banking and finance, classified both as the securities held until maturity, and as trading securities and securities eligible for sale, is specified in item 130 “Securities issued by the Government of the Kyrgyz Republic and/or the NBKR”.
The amount of debt on the corresponding type of financing under the Principles of Islamic banking and finance net of the discount is specified in every item of section “Financing” (items 240-370).
44. Information on the fulfillment of capital sufficiency (adequacy) standards and their calculation are submitted by banks on a monthly basis as part of the Periodic Regulatory Banking Report of banks conducting transactions under the Principles of Islamic Banking and Finance.
(As amended by Resolution No.2021-П-12/70-3-(RLA) of the National Bank of the Kyrgyz Republic Board dated December 15, 2021).