Approved by
Resolution No. 40/1 of the National
Bank of the Kyrgyz Republic Board
as of October 12, 2012
Instruction on the Financing Limits provided under
the Principles of Islamic Banking and Finance
(Amendments and addenda are approved by Resolution No. 2017-П-12/25-5-(RLA) of the NBKR Board as of June 15, 2017
No.2021-П-12/70-2-(RLA) dated December 15, 2021)
1. GENERAL PROVISIONS
1. This Instruction shall apply to Islamic banks and banks having an “Islamic window”.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
2. The purpose of this Instruction is to set the financing limits provided under the Principles of Islamic Banking and Finance as well as the requirements and the procedures mandatory to be fulfilled by the Islamic banks and the banks having the “Islamic window”.
3. The financing limits are limitation of the exposure per one client/supplier or the group of related clients/suppliers (hereinafter referred to as one client/supplier) set by the National Bank of the Kyrgyz Republic (hereinafter referred to as the National Bank) through the economic ratio “Maximum level of the exposure per one client/supplier or the group of related clients/suppliers”.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
2. THE PROCEDURE FOR CALCULATING THE RATIO OF THE MAXIMUM LEVEL OF THE EXPOSURE PER ONE CLIENT/SUPPLIER
4. The ratio of the maximum level of the exposure per one client/supplier (К1) is calculated according to the following formula:
К1 = TD / NTC * 100 %,
where the total debt or the claims – TD – stands for the total debt of one client/supplier in:
- the financing provided in accordance with the Principles of Islamic Banking and Finance (irrespective of the maturity date),
- the factoring,
- interbank placements,
- investments in the form of the debt liabilities,
- a markup and other forms of compensation in the financing provided in accordance with the Principles of Islamic Banking and Finance,
- any other type of direct or indirect disbursement of the funds to the clients/suppliers that are essentially the financing,
- the amount of the off-balance sheet liabilities (guarantees, letters of credit, financing commitments), provided to this client/supplier,
- any risk of the Islamic bank with regard to the third party that is unconditionally guaranteed by this client;
- the previously written off financing provided in accordance with the Principles of Islamic Banking and Finance, including the markup and other types of compensation. The file of each client/supplier shall have the information on the previously written off financing, the markup and other types of the compensation of this client/supplier and his related parties that shall contain the following information: name of the client/supplier and his related parties, the amount of the written off financing, the markup and other types of the compensation on the provided financing, the date of writing off and the reason for which this debt has been written off. If there are no such information, the file shall have a conclusion of an authorized person from the Islamic bank that this client/supplier and his related parties do not have previously written off amounts on the provided financing.
NTC is the net total capital of the Islamic bank.
5. The maximum level of the exposure per one client/supplier not related to the Islamic bank shall not exceed the following values:
for the clients/suppliers, save for the banks (К1.1) – no more than 20%;
for the banks (К1.3) – no more than 30%;
6. The financing limits and procedures of the parties related to the Islamic bank are determined in accordance with the Instruction on the requirements to the operations of the bank with affiliated and related parties to the bank approved by the Resolution of the National Bank Board.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
7. In order to observe the economic ratios and the requirements specified in this Instruction, and to mitigate additionally the risks, the Islamic banks are recommended to set the internal financing limits that shall be lower than the limits set in cl.5 hereof.
3. EXCEPTIONS FROM CALCULATION OF THE MAXIMUM LEVEL OF THE EXPOSURE PER ONE CLIENT/SUPPLIER
8. The exceptions not connected with the pledge:
1) the amounts on the correspondent account with the National Bank;
2) the amounts placed with the commercial banks, the rating of which is equal or higher than the long-term credit rating Ваа, assigned by the rating agency “Standard & Poor's” or the equivalent rating assigned by one of the rating agencies “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service”, and the amounts of the financing guaranteed by these banks. In order to fall under this exception, the Islamic bank shall have relevant documentation confirming the assigned rating, in particular: the name of the rating agency, the date of the initial rating assignment and the last confirmation of the assigned rating, the acceptable source of the information on the rating and the last annual report of the correspondent bank;
3) the investments of the Islamic bank through purchase of the securities of the Government of the Kyrgyz Republic, the National Bank, complying with the Principles of Islamic Banking and Finance, or the securities complying with the Principles of Islamic Banking and Finance, which have unconditional guarantees of the Government of the Kyrgyz Republic or the National Bank;
4) the claims on the Governments or the Central banks having the long-term sovereign credit rating no lower than “A” assigned by the rating agency “Standard & Poor's” or the equivalent rating assigned by one of the rating agencies “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service”.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
9. The exceptions connected with the pledge:
1) when calculating the ratio of the maximum level of the exposure per one client/supplier, only the claims shall be excluded that are secured by the following:
- the securities of the Government of the Kyrgyz Republic and the National Bank complying with the Principles of Islamic Banking and Finance;
- the amounts placed on a separate bank account with this Islamic bank;
2) the claims on the government authorities of the Kyrgyz Republic, or the off-balance sheet liabilities assumed by the Islamic bank that have a government guarantee;
3) the claims secured by the securities of the Government of the Kyrgyz Republic and the National Bank complying with the Principles of Islamic Banking and Finance or the securities complying with the Principles of Islamic Banking and Finance, which have unconditional guarantees of the Government of the Kyrgyz Republic or the National Bank. At that, the market value of these securities shall exceed the principal amount of the provided financing by at least 20%;
The amounts of the financing specified in sub-clause 3), clause 8, sub-clauses 2) and 3), clause 9 of this Instruction that are provided to the government authorities of the Kyrgyz Republic and the guarantees that are issued by the Government of the Kyrgyz Republic shall be executed in a relevant manner, including confirmation of their reflection in the republican budget of the Kyrgyz Republic in accordance with the legislation of the Kyrgyz Republic. At that, the guarantees issued by the Government of the Kyrgyz Republic shall not exceed 60% of the net total capital of the Islamic bank;
4) the claims secured by the funds placed on a separate bank account with the Islamic bank. The separate bank account stands for a segregated account of an individual or a legal entity. A settlement account of the clients and the correspondent account of the bank cannot be used as a security;
In addition, the following terms shall be observed:
- the documents certifying the amount of the deposited funds shall be kept in the Islamic bank;
- a financing agreement and a pledge agreement shall stipulate that the Islamic bank is entitled to foreclose without acceptance the funds placed on a separate bank account of the client/supplier, if the latter fails to fulfill its liabilities;
- in any event, relevant procedures shall be developed and internal control shall be exercised in the Islamic bank that ensure safety of the funds on the bank account until expiry of the period envisaged in the agreement;
- the amounts on a bank account securing the claims shall be in the national currency of the Kyrgyz Republic or in the currency freely convertible into the Kyrgyz som based on publicly available and reliable currency quotations. In addition, if the bank account is in the same currency as the claim is, it shall cover the amount of the claim for at least 100% and the bank account in the currency other than the currency of the claim – for at least 120% in the KGS equivalent;
- binding weekly reassessment of the bank account if the funds in the currency other than the currency of the disbursed financing are provided as the security;
5) the claims guaranteed by the Governments or the Central banks that have the long-term sovereign credit rating no lower than “A” assigned by the rating agency “Standard & Poor's” or the equivalent rating assigned by one of the rating agencies “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service” or the international financial institutions (EBRD, ADB, etc.);
6) the off-balance sheet liabilities assumed by the Islamic bank, on which the beneficiaries are the Central banks or the Government that have the long-term sovereign credit rating no lower than “A” assigned by the rating agency “Standard & Poor's” or the equivalent rating assigned by one of the rating agencies “Japan Credit Rating Agency (JCR)”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service”;
7) the amount of the participation in the provided financing sold by the Islamic bank to another bank without the right to recourse. It means that the purchasing bank completely takes the risk of the provided financing non-return under the same terms, which the purchasing bank usually uses to disburse financing. An agreement for participation in the financing shall envisage that in the event of default, the risk of losses of each bank depends on the percentage of their participation in the financing. When purchasing the share in the financing, the standards of the National Bank on restriction of the maximum level of the exposure per one client/supplier shall be observed.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
4. REQUIREMENTS TO THE PLEDGE PROVIDING THE EXCEPTION FROM CALCULATION OF THE MAXIMUM LEVEL OF THE EXPOSURE PER ONE CLIENT/SUPPLIER
10. If the securities and/or the funds act as the subject of the pledge, the pledge shall be made in the form of the pawn in accordance with the legislation of the Kyrgyz Republic.
11. If the uncertificated securities act as the subject of the pledge, the Islamic bank shall have documentation supporting registration of this pledge in accordance with the legislation of the Kyrgyz Republic. At that, the Islamic bank shall envisage that the claims of the Islamic bank on foreclosure of the subject of the pledge are the first in priority.
12. The pledge shall be executed in accordance with the Civil code of the Kyrgyz Republic, the Law of the Kyrgyz Republic “On the pledge” and other regulatory legal acts of the Kyrgyz Republic.
13. The pledge agreement shall envisage prevention of further repledge in accordance with the legislation of the Kyrgyz Republic.
14. If the market value of the subject of the pledge decreases, the Islamic bank is obliged to demand immediately the increase of its value in accordance with the requirements of this Instruction and to ensure fulfillment of this demand within 10 business days.
15. The Islamic bank is obliged to develop relevant procedures and to exercise the internal control to maintain the pledge in accordance with the requirements of sections 3 and 4 hereof.
16. If the requirements of the legislation of the Kyrgyz Republic and of this Instruction regarding the pledge (that include the procedure for registration of the pledge, presence of relevant documentation, regulatory powers with regard to the pledge properly certified, etc.) are not observed, then the claim secured by this pledge will not fall under the exception from the calculation of the maximum level of the exposure per one client/supplier.
17. The part of the amount from the disbursed financing that does not fall under the requirements of sections 3 and 4 shall be considered in accordance with the general rules of this Instruction when calculating the maximum level of the exposure per one client/supplier.
5. REQUIREMENTS TO RESTRICT THE CONCENTRATION RISK
18. The total debt per one client/supplier exceeding 10% of the net total capital of the Islamic bank is considered as the large risk.
19. The total amount of all large risks in the Islamic bank shall not exceed the five-fold size of the net total capital.
20. Each claim constituting the large risk shall be approved by the Board of directors of the Islamic bank. The minutes of the Board meeting shall clearly specify approval to disburse it as well as the voting results of each member of the Board of directors.
21. The provision of cl.20 hereof relates to any additional claim on the existing client/supplier, if it falls or continues to fall under the definition of the large risk.
22. The total amount of the contracts for provision of the financing unsecured by the pledge shall not exceed 50% of the net total capital of the Islamic bank.
6. PROCEDURE FOR CALCULATION OF THE MAXIMUM LEVEL OF THE EXPOSURE PER ONCE CLIENT/SUPPLIER FOR THE BANK HAVING AN “ISLAMIC WINDOW” AND CALCULATION OF THE LARGE RISK OF THE BANK HAVING AN “ISLAMIC WINDOW”
23. For the bank having the “Islamic window”, the maximum level of the exposure per one client/supplier (К1) is calculated in accordance with the Instruction on restriction of lending approved by the Resolution of the National Bank Board and is defined as the ratio of the total debt in the traditional banking and the Principles of Islamic Banking and Finance per one client/supplier to the net total capital of the bank.
24. When the bank having the “Islamic window” calculates the large risk, it shall account the whole debt placed according to both the traditional banking and the Principles of Islamic Banking and Finance.
7. RELATED PARTIES
25. For purposes of this Instruction the notion “the client/supplier” stands for a person/a group of persons, whom the bank has provided the financing/or has provided the credit risk bearing assets (in the form of investments, prepayment for goods/services and so on).
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
25-1. When calculating the maximum level of the exposure per one client/supplier, the debt of various clients/suppliers shall be added and considered as one related total debt, if the financial difficulties of one client/supplier can lead to the problems with payments also of other persons.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
25-2. The bank can make investments (and disburse the financing, place the credit risk bearing assets) observing the requirement that the parties related between each other are considered as one party.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
25-3. Management of the concentration risk in the financing shall be connected with detection of the potential relations between individual clients/suppliers as the events can occur when two (and more) clients/suppliers separately interacting with the bank when obtaining the financing represent one risk due to legal and economic interrelatedness.
When determining the related clients/suppliers, it is not enough just to consider the group of companies, to which the consolidated reporting is submitted and/or supposed to be submitted. The relatedness/interrelatedness of the clients/suppliers can include, for example, joint possession, control or management. The cross guarantees can also serve as the indicator of the interrelatedness of the clients/suppliers.
The bank in practice shall use proper caution and make every possible effort in order to detect distortion of any information and/or non-submission of the information (in order to conceal the relations between the clients/suppliers) by the clients/suppliers to reveal the risks related to them.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
26. In particular, the contract amounts of various clients/suppliers, under which the financing is provided shall be added, if:
- one client/supplier controls the other;
- the financing is provided to both the legal entity and a participant/a founder of this legal entity;
- they have, at least, one controlling person or a significant participant, save for the events, when the controlling person or the significant participant is the government authorities of the Kyrgyz Republic;
- the risks with regard to two and more persons that together have, at least, one controlling person, partner or participant with the unrestricted liability (a full partner) in each of them (irrespective of the fact whether this person is also a person with regard to which the Islamic bank has also a separate risk);
- there is significant financial interdependence between several clients/suppliers. The significant financial interdependence, including the agreement of mutual cooperation, takes place, as a rule, if 50 or over percent of the annual gross income/expenses or other proceeds and payments of one client/supplier results from the transactions with another client/supplier;
- the same source is used to repay the received financing, including the situation, when the clients/suppliers use the funds received due to the financing to participate in a common enterprise or a common activity or when both use the same secondary repayment source (the pledge);
- one of the clients/suppliers has guaranteed the liabilities of the other (cross guarantees) or when the same third party is a guarantor of both clients/suppliers;
- the funds received by one or several clients/suppliers are used for the direct benefit of the third party, save for the government authorities of the Kyrgyz Republic (irrespective of the fact, whether the bank has had the claim against this third party or not) or when the funds or the assets purchased on these received funds are provided to the third party, save for the events, when the goods or the services are purchased from it in the usual course of business;
- they have the same pledgegiver, save for the events, when the pledgegiver is a government authority of the Kyrgyz Republic.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
8. THE PROCEDURE FOR APPLICATION OF THIS INSTRUCTION IN THE EVENTS OF INCOMPLIANCE WITH THE SET RESTRICTIONS
27. The risk management system of the Islamic bank shall enable to detect the risks related to violation of the requirements of this Instruction. The Islamic bank cannot take new risks with regard to the clients/suppliers, if the increase of the existing overall risk with regard to these clients/suppliers or the groups of interrelated parties does not meet the requirements of this Instruction.
28. If the maximum level of the exposure per one client/supplier at the moment of the risk occurrence in the Islamic bank has allowed fulfilling the restrictions set by this Instruction but further has exceeded them (for example, due to the changes in the exchange rate), the Islamic bank is obliged to inform immediately the National Bank about this fact. In these events, the National Bank can without applying the enforcement actions set a definite period, within which this incompliance shall be eliminated.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
9. REPORTING
29. The Islamic bank is obliged to maintain the database and to keep the logbook on the group of related clients/suppliers on a constant basis, which shall contain the information on all requirements to each client/supplier and his related parties.
(As amended by Resolution No. 2017-П-12/25-5-(RLA) of the National Bank of the Kyrgyz Republic Board as of June 15, 2017)
30. The Islamic bank shall submit the information on all large risks as of the last day of each month inclusive to the National Bank (Annex 1).
31. The Islamic bank shall submit the information on all correspondent banks that have the rating in accordance with sub-clause 2, clause 8 hereof as of the last day of each quarter inclusive to the National Bank (Annex 2).
32. When the events of incompliance with the requirements of this Instruction occur, the bank shall submit the information on them as of the last day of each month inclusive to the National Bank (Annex 3).
9. OTHER REQUIREMENTS
33. If the financing is provided or the operation is carried out in violation of the requirements of this Instruction, and as a result, the Islamic bank incurs the losses, each member of the Board of directors and the Management Board of the Islamic bank that is a part of the collegial body on provision of the financing that has approved the operation shall take the responsibility in accordance with the legislation of the Kyrgyz Republic.
Annex 1 to the Instruction on the financing limits,
provided under the Principles of
Islamic Banking and Finance
Information on the largest risks
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№ |
Information on clients/suppliers |
The share of the financial participation (shares) of the company that the bank owns |
The fraction of the bank’s shares that a company or an individual owns |
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Name of the client/supplier |
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Total debt/Total amount of the contracts |
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Group |
Provided financing |
Markup/other types of compensation |
Other assets |
Markup/other types of compensation |
Off-balance sheet liabilities |
Total |
Category of classification |
Overdue debt (in days) |
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1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
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11 |
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22 |
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33 |
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44 |
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55 |
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66 |
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77 |
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88 |
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99 |
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110 |
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111 |
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112 |
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113 |
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114 |
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115 |
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Total amount of all large risks |
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The largest debt per one client |
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For reference: total number of clients |
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*If there are no major risks in the Islamic bank or they account for less than 15, then the lines remaining after filling, indicate the largest total debt in descending order. If the Islamic bank accounts for more than 15 major risks, then it is necessary to submit their list separately in electronic format, signed by the electronic signature of the responsible official, in the same manner and form.
(As amended by Resolution No.2021-П-12/70-2-(RLA) of the National Bank of the KR Board dated December 15, 2021)
Annex 2 to the Instruction on the financing limits,
provided under the Principles of
Islamic Banking and Finance
Information on correspondent banks
№№ |
Correspondent bank |
Assigned rating |
Rating agency |
Date of the rating assignment |
11 |
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22 |
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33 |
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44 |
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55 |
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66 |
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77 |
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88 |
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99 9 |
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Annex 3 to the Instruction on the financing limits,
provided under the Principles of
Islamic Banking and Finance
Information on the events of incompliance with the requirements of this Instruction
№ |
Name of the client/supplier and his related parties |
Balance of the total debt (TD) as of the reporting date (KGS’000) |
Amount exceeding the ratio (KGS’000) |
Maturity date under the agreement |
Number of prolongations |
Classification |
1 1 |
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22 |
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Total aggregated debt |
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