• IBANK Chapter 3 IBANK Chapter 3 Capital Adequacy

    • IBANK Part 3.1 IBANK Part 3.1 General

      • IBANK 3.1.1 Introduction

        (1) This Chapter sets out capital adequacy requirements.
        (2) An Islamic banking business firm's total regulatory capital is the sum of its tier 1 capital and tier 2 capital. The categories and elements of regulatory capital, and the limits, restrictions and adjustments to which they are subject are set out in this Chapter.
        (3) Capital supports the firm's operation by providing a buffer to absorb losses from its activities and, in the event of problems, it enables the firm to continue to operate in a sound and viable manner while the problems are resolved. Capital management must be an integral part of the firm's credit risk management process and must align the firm's risk tolerance and risk profile with its capacity to absorb losses.

        Note For the governing body's responsibilities in relation to capital management and capital adequacy, see rule 3.1.3.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.1.2 Chapter 3 and its Application to Branches

        (1) This Chapter does not apply to an Islamic banking business firm that is a branch insofar as this Chapter would require the branch to hold capital.
        (2) A branch is required to comply with the reporting requirements under this Chapter. In relation to the branch's ICAAP, the branch may rely on the head office's ICAAP (if available) to demonstrate compliance.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.1.3 IBANK 3.1.3 Governing Body's Responsibilities

        (1) An Islamic banking business firm's governing body must consider whether the minimum financial resources required by these rules are adequate to ensure that there is no significant risk that the firm's liabilities cannot be met as they fall due. The firm must obtain additional financial resources if its governing body considers that the minimum required does not adequately reflect the risks of its business.
        (2) The governing body is also responsible for:
        (a) ensuring that capital management is part of the firm's overall risk management and is aligned with its risk tolerance and risk profile;
        (b) ensuring that the firm has, at all times, financial resources of the kinds and amounts required by these rules;

        Note Financial resources is a broader concept than capital resources. Financial resources could include liquid assets (such as cash in hand), irrevocable lines of credit and irrevocable guarantees.
        (c) ensuring that the firm has capital, of adequate amount and appropriate quality, for the nature, scale and complexity of its business and for its risk profile;
        (d) ensuring that the amount of capital it has exceeds its minimum capital requirement;
        (e) approving the firm's ICAAP and any significant changes to it; and
        (f) monitoring the adequacy and appropriateness of the firm's systems and controls and the firm's compliance with them.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.1.3 Guidance

          1 An Islamic banking business firm's risk management strategy will usually refer to risk tolerance although risk appetite may also be used. The terms 'risk tolerance' and 'risk appetite' embrace all relevant definitions used by different institutions and supervisory authorities. These 2 terms are used interchangeably to describe both the absolute risks a firm is open to take (which some may call risk appetite) and the actual limits within its risk appetite that a firm pursues (which some call risk tolerance).
          2 If the firm is a member of a financial group, the authority expects the capital of the financial group to be apportioned among the group's members, based
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.1.4 Systems and Controls

        (1) An Islamic banking business firm must have adequate systems and controls to allow it to calculate and monitor its minimum capital requirement.
        (2) The systems and controls must be in writing and must be appropriate for the nature, scale and complexity of its business and for its risk profile.
        (3) The systems and controls must enable the firm to show, at all times, whether it complies with this Chapter.
        (4) The systems and controls must enable the firm to manage available capital in anticipation of events or changes in market conditions.
        (5) The systems and controls must include ICAAP, and the firm must have contingency arrangements to maintain or increase its capital in times of stress.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.1.5 Internal Capital Adequacy Assessment

        (1) An Islamic banking business firm's internal capital adequacy assessment process or ICAAP is the process by which the firm continuously demonstrates that it has implemented methods and procedures to ensure that it has adequate capital resources to support the nature and level of its risks.
        (2) A firm's ICAAP (and any significant changes to it) must be in writing and must have been approved by the firm's governing body. A copy of the ICAAP must be given to the Regulatory Authority on request.
        (3) An ICAAP must reflect the nature, scale and complexity of the firm's operations and must include:x
        (a) adequate policies and staff to continuously identify, measure, evaluate, manage and control or mitigate the risks arising from its activities, and monitor the capital held against such risks;
        (b) a strategy for ensuring that adequate capital is maintained over time, including specific capital targets set out in the context of its risk tolerance, risk profile and capital requirements;
        (c) plans for how capital targets are to be met and the means available for obtaining additional capital, if required;
        (d) procedures for monitoring its compliance with its capital requirements and capital targets;
        (e) triggers to senior management to, and specified actions to avert and rectify, possible breaches of capital requirements;
        (f) procedures for reporting on the ICAAP and its outcomes to the firm's governing body and senior management, and for ensuring that the ICAAP is taken into account in making business decisions;
        (g) policies about the effect on capital of significant risks not covered by explicit capital requirements;
        (h) triggers, scope and procedures for reviewing the ICAAP under rule 1.1.14(3) and in the light of changed conditions and factors affecting the firm's risk tolerance, risk profile and capital;
        (i) procedures for reporting the results of reviews;
        (j) an adequate recovery plan for restoring the firm's financial situation after a significant deterioration; and
        (k) procedures for stress-testing and the review of stress scenarios.

        Note For stress-testing and stress scenarios, see rule 1.1.17.
        (4) In addition to the periodic review under rule 1.1.14(3), a firm's ICAAP must be reviewed by an appropriately qualified person at least once every 3 years. The person must be independent of the conduct of the firm's capital management.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.1.6 Use of Internal Models

        (1) The Regulatory Authority's requirements for Islamic banking business firms to maintain adequate capital and manage risk are based on the approaches set out by the IFSB in its standards and guidelines on capital adequacy and the Basel Committee on Banking Supervision in the Basel Accords. The standards, guidelines and Accords allow firms to use internal models to assess capital adequacy and risk, and this rule governs the use of such models.
        (2) A firm must not use its own model to assess capital adequacy or risk unless the Regulatory Authority has approved the model. The authority may approve a model subject to 1 or more conditions.
        (3) In making its decision, the authority will take into account:
        (a) the nature, scale and complexity of the firm's business;
        (b) the standards proposed by the firm, the rigour of its compliance with them, and the ease with which the authority can assess that compliance;
        (c) whether the model can be relied on as a reasonable reflection of the risks undertaken by the firm; and
        (d) anything else the authority considers relevant.
        (4) The authority may revoke the approval if it is satisfied that the firm has failed to comply with any condition specified by the authority or any standard proposed by the firm.
        (5) The firm must not stop using an approved model, or make significant changes to it, without the authority's approval.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.1.7 References to Particular Currencies and Ratings [Deleted]

        Deleted by QFCRA RM/2019-7 (as from 1st January 2020).

    • IBANK Part 3.2 IBANK Part 3.2 Initial and Ongoing Capital Requirements

      • IBANK Division 3.2.A IBANK Division 3.2.A Required Capital and Ratios

        • IBANK 3.2.1 Introduction

          (1) An Islamic banking business firm is expected to meet minimum risk-based capital requirements for exposure to credit risk, market risk and operational risk. The firm's capital adequacy ratios (consisting of CET 1 ratio, total tier 1 ratio and total capital ratio) are calculated by dividing its regulatory capital by total risk-weighted assets.
          (2) Total risk-weighted assets of an Islamic banking business firm is the sum of:
          (a) the firm's risk-weighted on-balance-sheet and off-balance-sheet items calculated in accordance with Part 4.4; and
          (b) 12.5 times the sum of the firm's market and operational risk capital requirements (to the extent that each of those requirements applies to the firm).

          Note For how to calculate the firm’s market risk and operational risk capital requirements, see rule 6.1.1 (3) and Part 7.4, respectively.
          (3) In this Part:

          consolidated subsidiary, of an Islamic banking business firm, means:
          (a) a subsidiary of the firm; or
          (b) a subsidiary of a subsidiary of the firm.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016)
          Amended by QFCRA RM/2020-3 (as from 1st January 2021)

        • IBANK 3.2.2 Required Tier 1 Capital on Authorisation

          (1) An entity must have, at the time it is authorised, tier 1 capital at least equal to:
          (a) for an Islamic bank — QR 35 million;
          (b) for an Islamic investment dealer — QR 7 million.
          (2) The Regulatory Authority will not grant an authorisation unless it is satisfied that the entity complies with this requirement.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.3 Required Ongoing Capital

          (1) An Islamic banking business firm must have, at all times, capital at least equal to the higher of:
          (a) its base capital requirement; and
          (b) its risk-based capital requirement.

          Note A firm whose minimum capital requirement is its risk-based capital requirement is subject to the additional requirement to maintain a capital conservation buffer — see rule 3.3.2.
          (2) The amount of capital that a firm must have is its minimum capital requirement.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.4 Base Capital Requirement

          The base capital requirement is:

          (a) QR 35 million for an Islamic bank; and
          (b) QR 7 million for an Islamic investment dealer.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.5 Risk-Based Capital Requirement

          The risk-based capital requirement for an Islamic banking business firm is the sum of:

          (a) its credit risk capital requirement;
          (b) its market risk capital requirement; and
          (c) its operational risk capital requirement.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.6 Capital Adequacy Ratios

          (1) An Islamic banking business firm's capital adequacy is measured against 3 capital ratios expressed as percentages of its total risk-weighted assets.
          (2) A firm's minimum capital adequacy ratios are:
          (a) a CET 1 capital ratio of 4.5%;
          (b) a tier 1 capital ratio of 6%; and
          (c) a regulatory capital ratio of 8%.

          Note Under rule 3.3.2, at least 2.5% (by way of a capital conservation buffer) must be held by an Islamic banking business firm in addition to the minimum capital adequacy ratios. The firm's CET 1 capital plus capital conservation buffer must therefore be no less than 7% of its total risk-weighted assets.
          (3) The Regulatory Authority may, if it believes it is prudent to do so, increase any or all of a firm's minimum capital adequacy ratios. The authority will notify the firm in writing about a new capital adequacy ratio and the timeframe for meeting it.
          (4) A firm must maintain, at all times, capital adequacy ratios higher than the required minimum so that adequate capital is maintained in the context of the firm's risk tolerance, risk profile and capital requirements, and as an additional buffer to absorb losses and problems from market volatility. These higher ratios are the firm's risk-based capital adequacy ratios.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 3.2.B IBANK Division 3.2.B Elements of Regulatory Capital

        • IBANK 3.2.7 Regulatory Capital

          (1) The regulatory capital of an Islamic banking business firm is the sum of its tier 1 capital and tier 2 capital.
          (2) Tier 1 capital is the sum of a firm's CET 1 capital and additional tier 1 capital. Tier 1 capital is also known as going-concern capital because it is meant to absorb losses while the firm is viable.

          Note For the elements of CET 1 capital and additional tier 1 capital, see rules 3.2.8 and 3.2.10.
          (3) Tier 2 capital is the sum of the elements set out in rule 3.2.12. Tier 2 capital is also known as gone-concern capital because it is meant to absorb losses after the firm ceases to be viable.
          (4) For these rules, the 3 categories of regulatory capital are CET 1 capital, additional tier 1 capital and tier 2 capital.

          Note PSIAs of an Islamic banking business firm do not form part of regulatory capital, because they do not satisfy the criteria for inclusion as either CET 1, additional tier 1 or tier 2 capital. Neither are the PER and IRR part of the regulatory capital of the firm.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.8 Common Equity Tier 1 Capital

          Common equity tier 1 capital (or CET 1 capital) is the sum of the following elements:

          (a) common shares, issued by an Islamic banking business firm, that satisfy the criteria in rule 3.2.9 for classification as common shares (or the equivalent for non-joint stock companies);
          (b) share premium (also known as stock surplus) resulting from the issue of instruments included in CET 1 capital;
          (c) retained earnings;
          (d) accumulated other comprehensive income and other disclosed reserves;
          (e) common shares, issued by a consolidated subsidiary of the firm and held by third parties, that satisfy the criteria in rule 3.2.18 for inclusion in CET 1 capital;
          (f) regulatory adjustments applied in the calculation of CET 1 capital in accordance with Division 3.2.D.

          Note 1 Retained earnings and other comprehensive income include appropriated profit or loss.

          Note 2 Even though they are called reserves, the PER and IRR are not part of tier 1 capital of an Islamic banking business firm. They are part of the equity of IAHs and, as such, do not have the requisite loss absorbency.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.9 Criteria for Classification as Common Shares

          (1) An instrument issued by an Islamic banking business firm is classified as a common share and included in CET 1 capital if all of the criteria in subrules (2) to (15) are satisfied.
          (2) The instrument is the most subordinated claim in case of the liquidation of the firm.
          (3) The holder of the instrument is entitled to a claim on the residual assets that is proportional to its share of issued capital, after all senior claims have been repaid in liquidation. The claim must be unlimited and variable and must be neither fixed nor capped.
          (4) The principal amount of the instrument is perpetual and never repayable except in liquidation. Discretionary repurchases and other discretionary means of reducing capital allowed by law do not constitute repayment.

          Note Under rule 3.3.6, the Regulatory Authority's approval is required for a reduction in capital.
          (5) The firm does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled. The statutory or contractual terms do not provide anything that might give rise to such an expectation.
          (6) Distributions are paid out of distributable items of the firm (including retained earnings) and the amount of distributions:
          (a) is not tied or linked to the amount paid in at issuance; and
          (b) is not subject to a contractual cap (except to the extent that a firm may not pay distributions that exceed the amount of its distributable items).
          (7) There are no circumstances under which the distributions are obligatory. Non-payment of distributions does not constitute default.
          (8) Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. There are no preferential distributions and in particular none for any other elements classified as the highest quality issued capital.
          (9) It is the issued capital that takes the first and proportionately greatest share of any losses as they occur. Within the highest quality capital, each instrument absorbs losses on a going-concern basis proportionately and equally with all the others.

          Note This criterion is taken to be satisfied even if the instrument includes a permanent write-down mechanism.
          (10) The paid-in amount is recognised as equity capital (rather than as a liability) for determining balance-sheet insolvency.
          (11) The paid-in amount is classified as equity in accordance with the relevant accounting standards.
          (12) The instrument is directly issued and paid-in, and the firm has not directly or indirectly funded the purchase of the instrument.
          (13) The paid-in amount is neither secured nor covered by a guarantee of the firm or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder's claim in relation to the claims of the firm's creditors.
          (14) The instrument is issued only with the approval of the owners of the firm, either given directly by the owners or, if permitted by the applicable law, given by its governing body or by other persons authorised by the owners.
          (15) The instrument is clearly and separately disclosed on the firm's balance sheet.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.10 Additional Tier 1 Capital

          Additional tier 1 capital is the sum of the following elements:

          (a) instruments, issued by an Islamic banking business firm, that satisfy the criteria in rule 3.2.11 for inclusion in additional tier 1 capital (and are not included in CET 1 capital);
          (b) share premium (also known as stock surplus) resulting from the issue of instruments included in additional tier 1 capital;
          (c) instruments, issued by consolidated subsidiaries of the firm and held by third parties, that satisfy the criteria in rule 3.2.19 for inclusion in additional tier 1 capital (and are not included in CET 1 capital);
          (d) regulatory adjustments applied in the calculation of additional tier 1 capital in accordance with Division 3.2.D.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.11 Criteria for Inclusion in Additional Tier 1 Capital

          (1) An instrument is included in additional tier 1 capital if all of the criteria in subrules (2) to (15) are satisfied.
          (2) The instrument is paid-in.
          (3) The instrument is the most subordinated claim after those of depositors, general creditors and holders of the subordinated debt of the firm.
          (4) The paid-in amount is neither secured nor covered by a guarantee of the firm or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder's claim in relation to the claims of the firm's creditors.
          (5) The instrument is perpetual. It has no maturity date and there are no step-ups or other incentives to redeem.
          (6) If the instrument is callable by the firm, it can only be called 5 years or more after the instrument is paid-in and only with the approval of the Regulatory Authority. The firm must not do anything to create an expectation that the exercise of the option will be approved, and, if the exercise is approved, the firm:
          (a) must replace the called instrument with capital of the same or better quality and at conditions sustainable for the income capacity of the firm; or
          (b) must demonstrate to the authority that its capital will exceed the firm's minimum capital requirement after the option is exercised.
          (7) A repayment of principal through repurchase, redemption or other means must be approved by the Regulatory Authority. The firm must not assume, or create a market expectation, that such approval will be given.
          (8) The instrument must provide for the firm to have, at all times, discretion not to make a distribution or pay a dividend or profit. The exercise of the discretion must not impose restrictions on the firm (except in relation to distributions to common shareholders) and must not constitute default.
          (9) Dividends and profits must be paid out of distributable items.
          (10) The instrument must not have a credit-sensitive-dividend feature under which a dividend or profit is periodically reset based (wholly or partly) on the firm's credit standing.
          (11) The instrument must not contribute to the firm's liabilities exceeding its assets if such a balance-sheet test forms part of any insolvency law applying in the jurisdiction where the instrument was issued.
          (12) An instrument classified as a liability for accounting purposes must have principal loss absorption through conversion to common shares, or a write-down mechanism that allocates losses to the instrument, at a pre-specified trigger point. The conversion must be made in accordance with rule 3.2.15.
          (13) Neither the firm nor a related party over which the firm exercises control has purchased the instrument, nor has the firm directly or indirectly funded the purchase of the instrument.
          (14) The instrument has no features that hinder recapitalisation. For example, it must not require the firm to compensate investors if a new instrument is issued at a lower price during a specified period.
          (15) If the instrument is issued by an SPE, the proceeds are immediately available without limitation to the firm through an instrument that satisfies the other criteria for additional tier 1 capital.

          Note For the treatment of instruments issued by an SPE, see rule 3.2.21.
          Amended by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 3.2.12 Tier 2 Capital

          Tier 2 capital is the sum of the following elements:

          (a) instruments, issued by the firm, that satisfy the criteria in rule 3.2.13 for inclusion in tier 2 capital (and are not included in tier 1 capital);
          (b) share premium (also known as stock surplus) resulting from the issue of instruments included in tier 2 capital;
          (c) instruments, issued by consolidated subsidiaries of the firm and held by third parties, that satisfy the criteria in rule 3.2.20 for inclusion in tier 2 capital (and are not included in tier 1 capital);
          (d) regulatory adjustments applied in the calculation of tier 2 capital in accordance with Division 3.2.D;
          (e) general provisions or general reserves held against future, presently unidentified losses (but only up to a maximum of 1.25% of risk-weighted assets for credit risk, calculated using the standardised approach in Part 4.3).

          Note 1 General provisions and reserves are freely available to meet losses that subsequently materialise and therefore qualify for inclusion in tier 2 capital. In contrast, provisions for identified deterioration of particular assets or known liabilities, whether individual or grouped, should be excluded because they would not be available to meet losses.

          Note 2 Even though they are called reserves, the PER and IRR are not part of tier 2 capital of an Islamic banking business firm. They are part of the equity of IAHs and, as such, do not have the requisite loss absorbency.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.13 Criteria for Inclusion in Tier 2 Capital

          (1) An instrument is included in tier 2 capital if all the criteria in subrules (2) to (11) are satisfied.
          (2) The instrument is paid-in.
          (3) The instrument is the most subordinated claim after those of depositors, general creditors and holders of the subordinated debt of the firm.
          (4) The paid-in amount is neither secured nor covered by a guarantee of the firm or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder's claim in relation to the claims of the firm's depositors and general creditors.
          (5) The original maturity of the instrument is at least 5 years.
          (6) The recognition in regulatory capital in the remaining 5 years before maturity is amortised on a straight line basis and there are no step-ups or other incentives to redeem.
          (7) If the instrument is callable by the firm, it can only be called 5 years or more after the instrument is paid-in and only with the approval of the Regulatory Authority. The firm must not do anything to create an expectation that the exercise of the option will be approved, and, if the exercise is approved, the firm:
          (a) must replace the called instrument with capital of the same or better quality and at conditions sustainable for the income capacity of the firm; or
          (b) must demonstrate to the authority that its capital will exceed the firm's minimum capital requirement after the option is exercised.
          (8) The holder has no right to accelerate future scheduled payments of profit or principal, except in bankruptcy or liquidation.
          (9) The instrument does not have a credit-sensitive-dividend feature under which a dividend or profit is periodically reset based (wholly or partly) on the firm's credit standing.
          (10) Neither the firm nor a related party over which the firm exercises control has purchased the instrument, nor has the firm directly or indirectly funded the purchase of the instrument.
          (11) If the instrument is issued by an SPE, the proceeds are immediately available without limitation to the firm through an instrument that satisfies the other criteria for tier 2 capital.

          Note For the treatment of instruments issued by an SPE, see rule 3.2.21.
          Amended by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 3.2.14 Mudarabah Sukuk or Wakalah Sukuk as Tier 2 Capital

          (1) Subject to compliance with Shari'a, an Islamic banking business firm may issue mudarabah sukuk or wakalah sukuk that qualify for inclusion in tier 2 capital under rule 3.2.13. For the sukuk, the receivables from the underlying assets are convertible to common equity at the point of non-viability.
          (2) The sukuk contract must state the terms of conversion, trigger point and conversion ratio. The conversion must be made in accordance with rule 3.2.15.

          Note For mudarabah sukuk, see rule 10.3.19. For wakalah sukuk, see rule 10.3.21.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.15 IBANK 3.2.15 Requirements — Loss Absorption at Point of Non-Viability

          (1) This rule applies to an additional tier 1 or tier 2 instrument issued by an Islamic banking business firm. It sets out additional requirements to ensure loss absorption at the point of non-viability.
          (2) The terms and conditions of an instrument must give the Regulatory Authority the discretion to direct that the instrument be written-off or converted to common equity on the happening of a trigger event.
          (3) The firm must be able to issue the required number of shares specified in the instrument if a trigger event happens. The issuance of any new shares because of a trigger event must happen before any public sector injection of capital so that capital provided by the public sector is not diluted.
          (4) Trigger event, in relation to the firm that issued the instrument, is the earliest of:
          (a) a decision of the Regulatory Authority that a write-off (without which the firm would become non-viable) is necessary; and
          (b) a decision by the relevant authority in Qatar to make a public sector injection of capital, or give equivalent support (without which injection or support the firm would become non-viable, as determined by that authority).
          (5) If the firm is a member of a financial group and the firm wishes the instrument to be included in the group's capital in addition to its solo capital, the trigger event must be the earliest of:
          (a) the decision in subrule (4) (a);
          (b) the decision in subrule (4) (b);
          (c) a decision, by the relevant authority in the firm's home jurisdiction, that a write-off (without which the firm would become non-viable) is necessary; and
          (d) a decision, by the relevant authority in the jurisdiction of the financial regulator that regulates the parent entity of the firm, to make a public sector injection of capital, or give equivalent support, in that jurisdiction (without which injection or support the firm would become non-viable, as determined by that authority).
          (6) Any compensation paid to the holder of an instrument because of a write-off must be paid immediately in the form of common shares (or the equivalent for non-joint-stock companies).
          (7) If the firm is a member of a financial group, any common shares paid as compensation to the holder of the instrument must be common shares of the firm or of the parent entity of the group.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.15 Guidance

            Conversion or write-off under this rule would be limited to the extent necessary to enable the Regulatory Authority to conclude that the firm is viable without further conversion or write-off.

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.16 Requirements for Writing-Off

          (1) The write-off of an instrument using a murabahah contract must be through the investor (as creditor):
          (a) making a promise (wa'ad) to waive rights on debts at the point of non-viability; or
          (b) agreeing, in the relevant legal documents, to waive rights on debts at the point of non-viability.
          (2) The write-off of an instrument using an ijarah contract must be through the investor (as lessor):
          (a) making a promise (wa'ad) to transfer ownership of the underlying asset (beneficial or otherwise) to the firm without consideration; or
          (b) agreeing, in the relevant legal documents, to waive rights on accrued rental at the point of non-viability.
          (3) An Islamic banking business firm may apply to the Regulatory Authority for approval to use a write-off mechanism other than those in subrules (1) and (2).
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK Division 3.2.C IBANK Division 3.2.C Inclusion of Third Parties' Interests

        • IBANK 3.2.17 Introduction

          This Division sets out the criteria and formulae for the inclusion, in an Islamic banking business firm's regulatory capital, of interests held by third parties.

          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.18 Criteria for Third Party Interests — Common Equity Tier 1 Capital

          (1) For rule 3.2.8(e), a common share, issued by a consolidated subsidiary of an Islamic banking business firm and held by a third party as a non-controlling interest, may be included in the firm's CET 1 capital if:
          (a) the share would be included in the firm's CET 1 capital had it been issued by the firm; and
          (b) the subsidiary that issued the share is itself an Islamic bank or Islamic investment dealer (or an equivalent entity in its home jurisdiction).
          (2) The amount to be included in the consolidated CET 1 capital of an Islamic banking business firm is calculated in accordance with the following formula:

          NCI — ((CET1sMin) × SS)

          where:

          NCI is the total of the non-controlling interests of third parties in a consolidated subsidiary of the firm.

          CET1s is the amount of CET 1 capital of the subsidiary.

          Min is the lower of:
          (a) 1.07 × (minimum CET 1 capital requirement of the subsidiary); and
          (b) 1.07 × (the part of the consolidated minimum CET 1 capital requirement that relates to the subsidiary).
          SS means the percentage of the shares in the subsidiary (being shares included in CET 1 capital) held by those third parties.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.19 Criteria for Third Party Interests — Additional Tier 1 Capital

          (1) For rule 3.2.10(c), an instrument (including a common share) issued by a consolidated subsidiary of an Islamic banking business firm and held by a third party as a non-controlling interest may be included in the firm's additional tier 1 capital if the instrument would be included in the firm's additional tier 1 capital had it been issued by the firm.

          Note Any amount al included in CET 1 capital must not be included in additional tier 1 capital — see rule 3.2.10(c).
          (2) The amount to be included in the consolidated additional tier 1 capital of an Islamic banking business firm is calculated in accordance with the following formula:

          NCI — ((T1sMin) × SS)

          where:

          NCI is the total of the non-controlling interests of third parties in a consolidated subsidiary of the firm.

          T1s is the amount of additional tier 1 capital of the subsidiary.

          Min is the lower of:
          (a) 1.07 × (minimum additional tier 1 capital requirement of the subsidiary); and
          (b) 1.07 × (the part of the consolidated minimum additional tier 1 capital requirement that relates to the subsidiary).
          SS means the percentage of the shares in the subsidiary (being shares included in additional tier 1 capital) held by those third parties.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.20 Criteria for Third Party Interests — Tier 2 Capital

          (1) For rule 3.2.12(c), an instrument (including a common share and any other tier 1 capital instrument) issued by a consolidated subsidiary of an Islamic banking business firm and held by a third party as a non-controlling interest may be included in the firm's tier 2 capital if the instrument would be included in the firm's tier 2 capital had it been issued by the firm.

          Note Any amount al included in CET 1 capital or additional tier 1 capital must not be included in tier 2 capital — see rule 3.2.12(c).
          (2) The amount to be included in the consolidated tier 2 capital of an Islamic banking business firm is calculated in accordance with the following formula:

          NCI — ((T2sMin) × SS)

          where:

          NCI is the total of the non-controlling interests of third parties in a consolidated subsidiary of the firm.

          T2s is the amount of tier 2 capital of the subsidiary.

          Min is the lower of:
          (a) 1.07 × (minimum tier 2 capital requirement of the subsidiary); and
          (b) 1.07 × (the part of the consolidated minimum tier 2 capital requirement that relates to the subsidiary).
          SS means the percentage of the shares in the subsidiary (being shares included in tier 2 capital) held by those third parties.
          Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK 3.2.21 Treatment of third party interests from SPEs

          (1) An instrument issued out of an SPE and held by a third party must not be included in an Islamic banking business firm's CET 1 capital. Such an instrument may be included in the firm's additional tier 1 or tier 2 capital (and treated as if it had been issued by the firm itself directly to the third party) if:
          (a) the instrument satisfies the criteria for inclusion in the relevant category of regulatory capital; and
          (b) the only asset of the SPE is its investment in the capital of the firm and that investment satisfies the criterion in rule 3.2.11(15) or 3.2.13(11) for the immediate availability of the proceeds.
          (2) An instrument described in subrule (1) that is issued out of an SPE through a consolidated subsidiary of an Islamic banking business firm may be included in the firm's consolidated additional tier 1 or tier 2 capital if the instrument satisfies the criteria in rule 3.2.19 or 3.2.20, as the case requires. Such an instrument is treated as if it had been issued by the subsidiary itself directly to the third party.
          Amended by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK Division 3.2.D IBANK Division 3.2.D Regulatory Adjustments

        • IBANK Subdivision 3.2.D.1 IBANK Subdivision 3.2.D.1 General

          • IBANK 3.2.22 Introduction

            (1) Regulatory adjustments to an Islamic banking business firm's capital may be required to avoid double-counting, or artificial inflation, of its capital. They may also be required in relation to assets that cannot readily be converted into cash.
            (2) Adjustments can be made to all 3 categories of regulatory capital, but most of them are to CET 1 capital.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.23 Approaches to Valuation and Adjustment

            (1) An Islamic banking business firm must use the same approach for valuing regulatory adjustments to its capital as it does for balance-sheet valuations. An item that is deducted from capital must be valued in the same way as it would be for inclusion in the firm's balance sheet.
            (2) The firm must use the corresponding deduction approach and the threshold deduction rule in making adjustments to its capital.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.24 Definitions for Division 3.2.D

            In this Division:

            entity concerned means:

            (a) a financial entity (including an Islamic banking business firm and a takaful entity); or
            (b) any other entity over which, under the relevant accounting standards, an Islamic banking business firm can exercise control.

            Guidance
            1 The notion of exercising control in this Division is different from that in the definition of exercise control in the glossary. The term as defined in the glossary is used in relation to related parties and connected parties as they relate to credit risk, concentration risk and large exposures.
            2 The relevant accounting standards referred to (primarily AAOIFI and IFRS) use control in a much broader sense, so that an investor should consider all relevant facts and circumstances in assessing whether it controls an investee.
            3 Under IFRS 10, for example, an investor controls an investee if the investor has all of the following:
            •   power over the investee (that is, the investor has existing rights that give it the ability to direct the activities that significantly affect the investee's returns)
            •   exposure, or rights, to variable returns from its involvement with the investee
            •   ability to use its power over the investee to affect the amount of the investor's returns.
            4 Another example would be control through agreement with the entity's other shareholders or with the entity itself. The agreement could result in control even if the investor holds less than majority voting rights, so long as those rights are substantive (that is, exercisable by the investor who has the practical ability to exercise them when relevant decisions are required to be made).
            significant investment, by an Islamic banking business firm in an entity concerned, means an investment of 10% or more in the common shares, or other instruments that qualify as capital, of the entity concerned. Investment includes a direct, indirect and synthetic holding of capital instruments.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK Subdivision 3.2.D.2 IBANK Subdivision 3.2.D.2 Adjustments to Common Equity Tier 1 Capital

          • IBANK 3.2.25 Form of Adjustments

            Adjustments to CET 1 capital must be made in accordance with this Subdivision. Regulatory adjustments are generally in the form of deductions, but they may also be in the form of recognition or derecognition of items in the calculation of a firm's capital.

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.26 Goodwill and Intangible Assets

            An Islamic banking business firm must deduct from CET 1 capital the amount of its goodwill and other intangible assets (except mortgage servicing rights). The amount must be net of any related deferred tax liability that would be extinguished if the goodwill or assets become impaired or derecognised under the relevant accounting standards.

            Note For the treatment of mortgage servicing rights, see rule 3.2.43 (Deductions from common equity tier 1 capital).

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.27 Deferred Tax Assets

            (1) An Islamic banking business firm must deduct from CET 1 capital the amount of deferred tax assets (except those that relate to temporary differences) that depend on the future profitability of the firm.
            (2) A deferred tax asset may be netted with a deferred tax liability only if the asset and liability relate to taxes levied by the same taxation authority and offsetting is explicitly permitted by that authority. A deferred tax liability must not be used for netting if it has al been netted against a deduction of goodwill, other intangible assets or defined benefit pension assets.

            Note Any deferred tax liability that may be netted must be allocated pro rata between deferred tax assets under this rule and those under the threshold deduction rule. For the treatment of deferred tax assets that relate to temporary differences (for example, allowance for credit losses), see rule 3.2.43 (Deductions from common equity tier 1 capital).
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.28 Cash Flow Hedge Reserve

            In the calculation of CET 1 capital, an Islamic banking business firm must derecognise the amount of the cash flow hedge reserve that relates to the hedging of items that are not fair-valued on the balance sheet (including projected cash flows).

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.29 Cumulative Gains and Losses from Changes to Own Credit Risk

            In the calculation of CET 1 capital, an Islamic banking business firm must derecognise all unrealised gains and unrealised losses that have resulted from changes in the fair value of liabilities that are due to changes in the firm's own credit risk.

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.30 Defined Benefit Pension Fund Assets

            (1) An Islamic banking business firm must deduct from CET 1 capital the amount of a defined benefit pension fund that is an asset on the firm's balance sheet. The amount must be net of any related deferred tax liability that would be extinguished if the asset becomes impaired or derecognised under the relevant accounting standards.
            (2) The firm may apply to the Regulatory Authority for approval to offset from the deduction any asset in the defined benefit pension fund to which the firm has unrestricted and unfettered access. Such an asset must be assigned the risk-weight that would be assigned if it were owned directly by the firm.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.31 Securitisation Gains on Sale

            In the calculation of CET 1 capital, an Islamic banking business firm must derecognise any increase in equity capital or CET 1 capital from a securitisation or resecuritisation transaction (for example, an increase associated with expected future margin income resulting in a gain-on-sale).

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.32 Higher Capital Imposed on Overseas Branch

            (1) If an Islamic banking business firm has an overseas branch, the firm must deduct from CET 1 capital whichever is the higher of any capital requirement imposed by the Regulatory Authority or the financial regulator in the jurisdiction in which the branch is located.
            (2) This rule does not apply if the overseas branch is a consolidated entity of the Islamic banking business firm. A branch is a consolidated entity if it is included in the firm's consolidated returns.
            (3) Despite subrule (2), if the financial regulator in the jurisdiction in which a branch is located imposes a capital requirement for the foreign branch, an Islamic firm must deduct from CET 1 capital the amount of any shortfall between the actual capital held by the foreign branch and that capital requirement.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.33 Assets Lodged or Pledged to Secure Liabilities

            (1) An Islamic banking business firm must deduct from CET 1 capital the amount of any assets lodged or pledged by the firm if:
            (a) the assets were lodged or pledged to secure liabilities incurred by the firm; and
            (b) the assets are not available to meet the liabilities of the firm.
            (2) The Regulatory Authority may determine that, in the circumstances, the amount of assets lodged or pledged need not be deducted from the firm's CET 1 capital. The determination must be in writing.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.34 Acknowledgments of Debt

            (1) An Islamic banking business firm must deduct from CET 1 capital the net present value of an acknowledgement of debt outstanding issued by it to directly or indirectly fund instruments that qualify as CET 1 capital.
            (2) This rule does not apply if the acknowledgement is subordinated in rank similar to that of instruments that qualify as CET 1 capital.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.35 Accumulated Losses

            An Islamic banking business firm must deduct from CET 1 capital the amount of any accumulated losses.

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK Subdivision 3.2.D.3 IBANK Subdivision 3.2.D.3 Deductions from Categories of Regulatory Capital

          • IBANK 3.2.36 Deductions using Corresponding Deduction Approach

            (1) The deductions that must be made from CET 1 capital, additional tier 1 capital or tier 2 capital under the corresponding deduction approach are set out in this Subdivision. An Islamic banking business firm must examine its holdings of index securities and any underlying holdings of capital to determine whether any deductions are required as a result of such indirect holdings.
            (2) Deductions must be made from the same category for which the capital would qualify if it were issued by the Islamic banking business firm itself or, if there is not enough capital at that category, from the next higher category.

            Example

            If the amount of tier 2 capital is insufficient to cover the amount of deductions from that category, the shortfall must be deducted from additional tier 1 capital and, if additional tier 1 capital is still insufficient, the remaining amount must be deducted from CET 1 capital.
            (3) The corresponding deduction approach applies regardless of whether the positions or exposures are held in the banking book or trading book.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.37 Investments in Own Shares and Capital Instruments

            (1) An Islamic banking business firm must deduct direct or indirect investments in its own common shares or own capital instruments (except those that have been derecognised under the relevant accounting standards). The firm must also deduct any of its own common shares or instruments that it is contractually obliged to purchase.
            (2) The gross long positions may be deducted net of short positions in the same underlying exposure only if the short positions involve no counterparty risk. However, gross long positions in its own shares resulting from holdings of index securities may be netted against short positions in its own shares resulting from short positions in the same underlying index, even if those short positions involve counterparty risk.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.38 Reciprocal Cross Holdings

            An Islamic banking business firm must deduct reciprocal cross holdings in shares, or other instruments that qualify as capital, of an entity concerned.

            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.39 Non-Significant Investments — Aggregate is Less than 10% of Firm's Common Equity Tier 1 Capital

            (1) This rule applies if:
            (a) an Islamic banking business firm makes a non-significant investment in an entity concerned;
            (b) the entity concerned is an unconsolidated entity (that is, the entity is not included in the firm's consolidated returns);
            (c) the firm does not own 10% or more of the common shares of the entity concerned; and
            (d) after applying all other regulatory adjustments, the total of the deductions required to be made under this rule is less than 10% of the firm's CET 1 capital.
            (2) An Islamic banking business firm must deduct any investments in common shares, or other instruments that qualify as capital, of an entity concerned.
            (3) The amount to be deducted is the net long position (that is, the gross long position net of short positions in the same underlying exposure if the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least 1 year).
            (4) Underwriting positions held for more than 5 business days must also be deducted.
            (5) If a capital instrument is required to be deducted and it is not possible to determine whether it should be deducted from CET 1 capital, additional tier 1 capital or tier 2 capital, the deduction must be made from CET 1 capital.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.40 Non-Significant Investments — Aggregate is 10% or More of Firm's Common Equity Tier 1 Capital

            (1) This rule applies if, after applying all other regulatory adjustments, the total of the deductions required to be made under rule 3.2.39 is 10% or more of the firm's CET 1 capital.
            (2) An Islamic banking business firm must deduct the amount by which the total of the deductions required to be made under rule 3.2.39 exceeds 10% of the firm's CET 1 capital. This amount to be deducted is referred to as the excess.
            (3) How much of the excess gets to be deducted from each category of regulatory capital under the corresponding deduction approach is calculated in accordance with the following formula:

            Excess x A/B

            where:

            A is the amount of CET 1 capital, additional tier 1 capital or tier 2 capital of the Islamic banking business firm, as the case requires.

            B is the total capital holdings of the firm.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.41 Significant Investments

            (1) This rule applies if:
            (a) an Islamic banking business firm makes a significant investment in an entity concerned;
            (b) the entity concerned is an unconsolidated entity (that is, the entity is not included in the firm's consolidated returns); and
            (c) the firm owns 10% or more of the common shares of the entity concerned.
            (2) An Islamic banking business firm must deduct the total amount of investments in the entity concerned (other than investments in common shares, or other instruments that qualify as CET 1 capital, of the entity).

            Note For the treatment of investments in common shares, or other instruments that qualify as CET 1 capital, of an entity concerned, see rule 3.2.43 (Deductions from common equity tier 1 capital).
            (3) The amount to be deducted is the net long position (that is, the gross long position net of short positions in the same underlying exposure if the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least 1 year).
            (4) Underwriting positions held for more than 5 business days must also be deducted.
            (5) If a capital instrument is required to be deducted and it is not possible to determine whether it should be deducted from CET 1 capital, additional tier 1 capital or tier 2 capital, the deduction must be made from CET 1 capital.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

          • IBANK 3.2.42 Firms may use Estimates or Exclude Deductions

            (1) If it is impractical for an Islamic banking business firm to examine and monitor the firm's exposures to the capital of entities concerned (including through holdings of indexed securities), the firm may apply to the Regulatory Authority for approval to use an estimate of such exposures. The authority will grant such an approval only after the firm satisfies the authority that the estimate is conservative, well-founded and reasonable.
            (2) An Islamic banking business firm may also apply to the Regulatory Authority for approval not to deduct an investment made to resolve, or provide financial assistance to reorganise, a distressed entity.
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

        • IBANK Subdivision 3.2.D.4 IBANK Subdivision 3.2.D.4 Threshold Deduction Rule

          • IBANK 3.2.43 Deductions from Common Equity Tier 1 Capital

            (1) In addition to the other deductions to CET 1 capital under this Chapter, deductions may be required to CET 1 capital under the threshold deduction rule.
            (2) The threshold deduction rule provides recognition for particular assets that are considered to have some limited capacity to absorb losses. The following items come within the threshold deduction rule:
            (a) significant investments in the common shares, or other instruments that qualify as CET 1 capital, of an unconsolidated entity concerned;
            (b) mortgage servicing rights;
            (c) deferred tax assets that relate to temporary differences (for example, allowance for credit losses).
            (3) Instead of full deduction, the items that come within the threshold deduction rule receive limited recognition when calculating CET 1 capital. The total of each of the items in subrule (2) do not require adjustment from CET 1 capital and are risk-weighted at 300% (for items listed on a recognised exchange) or 400% (for items not so listed) provided that:
            (a) each item is no more than 10% of the firm's CET 1 capital (net of all regulatory adjustments except those under this Subdivision); or
            (b) in total, the 3 items are no more than 15% of the firm's CET 1 capital (net of all regulatory adjustments except those under this Subdivision).
            (4) An Islamic banking business firm must deduct from CET 1 capital any amount in excess of the threshold in subrule (3)(a) or (b).
            Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Part 3.3 IBANK Part 3.3 Capital Buffers and Other Requirements

      • IBANK 3.3.1 Introduction

        (1) The capital adequacy framework contains 2 additional measures for conserving capital through the capital conservation buffer and the counter-cyclical capital buffer.
        (2) The capital conservation buffer promotes the conservation of capital and the build-up of a buffer above the minimum in times of economic growth and credit expansion, so that the buffer can be drawn down in periods of stress. It imposes an obligation to restrict a firm's distributions when capital falls below the capital conservation buffer minimum.
        (3) The counter-cyclical capital buffer is a macroprudential tool that can be used to mitigate the build-up of a system-wide risk such as excess aggregate credit growth. It is intended to ensure that the banking system has a buffer of capital to protect it against future potential losses.
        (4) These 2 buffers and other requirements on capital are set out in this Part.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.3.2 Capital Conservation Buffer

        (1) An Islamic banking business firm whose risk-based capital requirement is higher than its base capital requirement must maintain a minimum capital conservation buffer of:
        (a) 2.5% of the firm's total risk-weighted assets; or
        (b) a higher amount that the Regulatory Authority may, by written notice, set from time to time.
        (2) A firm's capital conservation buffer must be made up of CET 1 capital above the amounts used to meet the firm's CET 1 capital ratio, tier 1 capital ratio and regulatory capital ratio in rule 3.2.6(2).

        Note Capital raised through the issuance of sukuk cannot form part of the capital conservation buffer because that capital does not qualify as CET 1 capital.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.3.3 Capital Conservation Ratios

        (1) If an Islamic banking business firm's capital conservation buffer falls below the required minimum, the firm must immediately conserve its capital by restricting its distributions.

        Note A payment made by a firm that does not reduce its CET 1 capital is not a distribution for the purposes of this Part. Distributions include, for example, dividends, share buybacks and discretionary bonus payments.
        (2) This rule sets out, in column 3 of table 3.3.3, the minimum capital conservation ratios for Islamic banking business firms that are required to maintain a capital conservation buffer. Capital conservation ratio is the percentage of earnings that a firm must not distribute if its CET 1 capital ratio falls within the corresponding ratio in column 2 of that table.
        (3) Earnings means distributable profits calculated before deducting elements subject to the restrictions on distributions. Earnings must be calculated after notionally deducting the tax that would have been payable had none of the distributable items been paid.

        Note The effect of calculating earnings after tax is that the tax consequence of the distribution is reversed out.
        (4) An Islamic banking business firm must have adequate systems and controls to ensure that the amount of distributable profits and maximum distributable amount are calculated accurately. The firm must be able to demonstrate that accuracy if directed by the Regulatory Authority.
        (5) If the firm is a member of a financial group, the capital conservation buffer applies at group level.

        Table 3.3.3 Minimum capital conservation ratios

        column 1 item column 2 CET 1 capital ratio column 3 minimum capital conservation ratio (% of earnings)
        1 4.5% to 5.125% 100
        2 > 5.125% to 5.75% 80
        3 > 5.75% to 6.375% 60
        4 > 6.375% to 7.0% 40
        5 > 7% 0

        Examples of application of table

        Assume that a firm's minimum CET 1 capital ratio is 4.5% and an additional 2.5% capital conservation buffer (which must be made up of CET 1 capital) is required for a total of 7% CET 1 capital ratio. Based on table 3.3.3:

        1 If a firm's CET 1 capital ratio is 4.5% or more but no more than 5.125%, the firm needs to conserve 100% of its earnings.
        2 If a firm's CET 1 capital ratio is more than 5.125% or more but no more than 5.75%, the firm needs to conserve 80% of its earnings and must not distribute more than 20% of those earnings by way of dividends, share buybacks and discretionary bonus payments.
        3 A firm with a CET 1 capital ratio of more than 7% can distribute 100% of its earnings.
        Amended by QFCRA RM/2018-2 (as from 1st May 2018).

      • IBANK 3.3.4 Powers of Regulatory Authority

        (1) The Regulatory Authority may impose a restriction on capital distributions by an Islamic banking business firm even if the amount of the firm's CET 1 capital is greater than its CET 1 capital ratio and required capital conservation buffer.
        (2) The Regulatory Authority may, by written notice, impose a limit on the period during which an Islamic banking business firm may operate within a specified capital conservation ratio.
        (3) An Islamic banking business firm may apply to the Regulatory Authority to make a distribution in excess of a limit imposed by this Part. The authority will grant approval only if it is satisfied that the firm has appropriate measures to raise capital equal to, or greater than, the amount the firm wishes to distribute above the limit.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.3.5 Counter-Cyclical Capital Buffer

        (1) If imposed by the Regulatory Authority, the counter-cyclical capital buffer would require a firm to have additional CET 1 capital against possible future losses from system-wide risks such as excess credit growth.
        (2) The Regulatory Authority may, by written notice, require Islamic banking business firms to have additional CET 1 capital as a countercyclical capital buffer. The buffer set by the authority will not exceed 2.5% of total risk-weighted assets.
        (3) The Regulatory Authority will notify firms of any decision to set, or increase, a counter-cyclical capital buffer within a reasonable period of not more than 1 year before the date when the decision takes effect. However, a decision to remove or decrease a counter-cyclical capital buffer will take effect immediately.
        (4) If a counter-cyclical capital buffer applies to a firm, the capital conservation ratios (and capital distribution restrictions) in rule 3.3.3 apply to the firm as if its minimum capital conservation buffer were increased by the amount of the counter-cyclical capital buffer.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.3.6 Capital Reductions

        (1) An Islamic banking business firm must not reduce its capital and reserves without the Regulatory Authority's written approval.

        Examples of ways to reduce capital
        •   a share buyback or the redemption, repurchase or repayment of capital instruments issued by the firm
        •   trading in the firm's own shares or capital instruments outside an arrangement agreed with the authority
        •   a special dividend.
        (2) An Islamic banking business firm planning a reduction must prepare a forecast (for at least 2 years) showing its projected capital after the reduction. The firm must satisfy the authority that the firm's capital will still comply with these rules after the reduction.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 3.3.7 Authority can Require Other Matters

        Despite anything in these rules, the Regulatory Authority may require an Islamic banking business firm to have capital resources, comply with any other capital requirement or use a different approach to, or method for, capital management. The authority may also require a firm to carry out stress-testing at any time.

        Note Under FSR, article 16, the Regulatory Authority may modify or waive the application of a prudential requirement to an authorised firm or firms.

        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Part 3.4 IBANK Part 3.4 Leverage Ratio

      Amended by QFCRA RM/2019-7 (as from 1st January 2020).

      • IBANK 3.4.1 Introduction

        The leverage ratio is a simple, transparent, non-risk-based measure to help restrict the build-up of leverage in the Islamic banking system. Excessive leverage can expose Islamic banking businesses to higher financial risk, with potential damage to the overall financial system, and to the economy if a de-leveraging process takes place.

        Inserted by QFCRA RM/2019-7 (as from 1st January 2020).

      • IBANK 3.4.2 Objectives of leverage ratio requirements

        The leverage ratio supplements the risk-based capital requirements of the rest of this Chapter. The objectives of limiting Islamic banking business firms' leverage ratios are as follows:

        (a) to constrain the build-up of leverage in the Islamic banking sector, to help avoid destabilising deleveraging that can damage the broader financial system and the economy;
        (b) to reinforce the risk-based requirements in Parts 3.1 to 3.3 with a simple, non-risk-based backstop measure;
        (c) to serve as a broad measure of the sources of leverage, both on and off the balance-sheet.
        Inserted by QFCRA RM/2019-7 (as from 1st January 2020).

      • IBANK 3.4.3 How to calculate leverage ratio

        An Islamic banking business firm's leverage ratio LR is calculated by means of the following formula:

        where:

        tier 1 capital has the meaning given by rule 3.2.7 (2).

        total exposure measure is the total amount of all the firm's exposures, calculated in accordance with rules 3.4.5 to 3.4.8.

        Inserted by QFCRA RM/2019-7 (as from 1st January 2020).

      • IBANK 3.4.4 Minimum leverage ratio

        (1) An Islamic banking business firm must maintain a leverage ratio of not less than 3%.
        (2) The Regulatory Authority may direct an Islamic banking business firm to maintain a leverage ratio higher than 3% if the Authority considers it necessary to do so because of the firm's risk profile or other particular circumstances.
        Inserted by QFCRA RM/2019-7 (as from 1st January 2020).

      • IBANK 3.4.5 How to calculate total exposure measure — general

        (1) When an Islamic banking business firm calculates its total exposure measure, it must treat each exposure in accordance with the normal accounting treatment of the exposure.
        (2) It must include all on-balance-sheet non-derivative exposures, net of specific provisions and valuation adjustments.
        (3) It must not take into account the effect of credit risk mitigation.
        (4) It must not weight on-balance-sheet exposures.
        (5) It must not net financing exposures against PSIAs or deposits.
        Inserted by QFCRA RM/2019-7 (as from 1st January 2020).

      • IBANK 3.4.6 Modification of calculation

        (1) The Regulatory Authority may, by written notice, modify the calculation of an Islamic banking business firm's total exposure measure by, for example:
        (a) allowing the firm not to take account of a particular exposure or class of exposures;
        (b) directing the firm to apply a different risk-weight to an exposure or class of exposures;
        (c) directing the firm to take account of an exposure or class of exposures that would not otherwise be taken account of.
        (2) The Authority may give a notice under subrule (1) on the application of the firm or on the Authority's own initiative.
        Inserted by QFCRA RM/2019-7 (as from 1st January 2020).

      • IBANK 3.4.9 How to calculate total exposure measure— assets financed by unrestricted PSIAs

        (1) When an Islamic banking business firm calculates its total exposure measure, it must include a proportion of assets (whether on or off the firm's balance-sheet) financed by unrestricted PSIAs.
        (2) The proportion is to be calculated by multiplying the carrying value of the assets by the alpha parameter (100%) for capital adequacy purposes.
        (3) Assets financed by restricted PSIAs are not to be included.
        Inserted by QFCRA RM/2019-7 (as from 1st January 2020).

      • IBANK 3.4.8 How to calculate total exposure measure — off-balance-sheet assets

        (1) When an Islamic banking business firm calculates its total exposure measure, it must include all off-balance-sheet items (for example, letters of credit, guarantees, unconditionally cancellable commitments, liquidity facilities, and Shara'a-compliant repo and securities financing transactions).
        (2) A 100% credit conversion factor applies to all off-balance-sheet items, except that a credit conversion factor of 10% applies to a commitment that can be unconditionally cancelled at any time without notice.
        (3) Securitised assets that are de-recognised from the balance-sheet of the sponsor or originator are not to be taken into account.
        Inserted by QFCRA RM/2019-7 (as from 1st January 2020).