RESOLUTION OF BOARD OF NATIONAL BANK OF THE KYRGYZ REPUBLIC

of September 25, 2013 No. 35/13

About approval "Regulations on the minimum requirements on credit risk management when implementing transactions according to the Islamic principles of banking and financing"

According to articles 7 and 43 of the Law of the Kyrgyz Republic "About National Bank of the Kyrgyz Republic", the Board of National Bank of the Kyrgyz Republic decides:

1. Approve "Regulations on the minimum requirements on credit risk management when implementing transactions according to the Islamic principles of banking and financing" it (is applied).

2. Determine that operation of this resolution extends to Ekoislamikbank Ltd when implementing of transactions by it according to the Islamic principles of banking and financing within pilot project.

4. This resolution becomes effective after thirty days after official publication.

5. To legal management:

- publish this resolution on the official site of National Bank of the Kyrgyz Republic;

- after official publication to send this resolution to the Ministry of Justice of the Kyrgyz Republic for entering into the State register of regulatory legal acts of the Kyrgyz Republic.

6. To management of methodology of supervision and licensing to bring this resolution to the attention of commercial banks.

7. To impose control of execution of this resolution on the vice-chairman of National Bank of the Kyrgyz Republic Chokoyev Z. L.

Approved by the Resolution of Board of National Bank of the Kyrgyz Republic of September 25, 2013 No. 35/13

Regulations on the minimum requirements on credit risk management when implementing transactions according to the Islamic principles of banking and financing

Chapter 1. General provisions

1. This Provision extends to commercial banks, including the banks having "Islamic window", and the microfinance companies attracting term deposits and performing transactions according to the Islamic principles of banking and financing (further - banks).

2. The purpose of this provision is forming in banks of adequate management system credit risk when implementing transactions according to the Islamic principles of banking and financing.

2-1. This Provision also extends to other assets bearing in themselves credit risk (including correspondent accounts, securities, interbank placements, etc.).

3. The credit risk is risk of non-execution by clients/suppliers/partners (further - the client) the obligations according to terms and terms of the contract that can exert negative impact on the capital of bank or its profit.

The credit risk is present at all types of activity of bank where the positive result depends on accomplishment by the client of the obligations to bank provided by agreements and/or agreements.

The purpose of credit risk management consists in determination of degree of exposure of bank to credit risk, identification of the reasons of its origin and determination of internal and external factors of increase in risk based on which it is possible to predict credit risk and to perform necessary measures for its minimization to acceptable level.

3-1. Refinancing is the conclusion of the relevant new agreement for complete or partial repayment of the operating asset.

3-2. Blank assets are the assets bearing in itself credit risk on which providing is not real estate, personal estate, guarantees or the guarantee and other tools considered in case of classification of assets as providing, except for overdrafts on payment cards within salary projects and are issued only to the solvent customer / partner based on its reputation and assessment of level of its income.

4. For the purpose of this provision the assets bearing in themselves credit risk are understood as the assets placed by the Islamic principles of financing. The cross-border assets bearing in themselves credit risk - the assets issued to residents/nonresidents for activities financing only outside the Kyrgyz Republic, at the same time concept of the resident/nonresident corresponds to the concept determined in the legislation of the Kyrgyz Republic.

Because of the unique characteristics of each asset type bearing in themselves credit risk, optional nature of some agreements, the credit risk shall be estimated separately on each asset type for implementation of the corresponding internal control and risk management.

Contractual financing represents the asset bearing in itself credit risk in the form of short-term financing (up to one year) working capital for obligation fulfillment of the client/contractual partner with partners.

5. Requirements of this provision, and also other regulatory legal acts of National Bank of the Kyrgyz Republic (further - National Bank) shall be completely reflected in the internal documents of bank regulating credit risk management.

Chapter 2. Policy of bank on implementation of transactions on the Islamic principles of financing and strategy of financing of bank

6. All types of products and standard agreements by the Islamic principles of financing which the bank intends to perform shall be originally approved by Sharia council of the bank from the point of view of their compliance to standards of Sharia.

7. Transactions of bank by the Islamic principles of financing are performed according to its domestic policy approved by the Board of directors of bank.

The strategy of financing can be included in the business plan of bank by the separate/additional Section.

7-1. The strategy of financing shall consider and include the following at least:

- the target markets of financing and their general characteristics which the bank plans to reach (including the diversification level, the planned indicators in case of financing portfolio quality evaluation, etc.);

- the main sources of financing (the bank needs to specify financing sources at the expense of what means it is planned to issue financing, to increase financing portfolio);

- requirement about carrying out the analysis of indirect currency risk;

- ratio of share of the assets bearing in themselves credit risk to assets of bank;

- market conditions and financial condition of bank, and also its risk appetite;

- the expected profit margin and the size of the capital of bank;

- the possible costs connected with return of the assets subject to credit risk;

- short-term/mid-term/long-term plans of bank;

- the requirement about carrying out portfolio analysis of financing which will be performed on the basis of the operating portfolio of financing of bank. In addition to it the bank shall have methodology of carrying out such analysis which will allow to estimate credit risk and indirect currency risk;

- urgent adequate economic indicators of bank;

- organizational structure of bank, technical capabilities and potential (qualifications, number of staff) of personnel and management of bank responsible for activities of financing of bank. The corresponding personnel shall be informed on the strategy of financing and provide clarity of strategy of financing of bank.

7-2. The board of directors periodically, but at least once a year, considers the financial and economic performance influencing or provided, pledged in the strategy of financing and if necessary makes necessary changes.

7-3. The board of directors of bank shall provide that the policy on appointments and remunerations in bank did not contradict strategy for credit risk management.

8. The policy of bank on implementation of transactions on the Islamic principles of financing (further - Policy) determines strategy, criteria, parameters and procedures by which bank employees in activities for implementation, execution of transactions, monitoring and risk management shall be guided.

The policy of bank including shall be based on the principles of responsible financing: conscientiousness, transparency, reliability, partnership in relation to clients/partners, accounting of their economic interests and financial opportunities.

9. The following provisions concerning issue of the assets bearing in themselves credit risk shall be reflected in Policy:

1) general provisions, including:

- the list of potential customers / partners, including restrictions on the number of investors;

- asset types, bearing in themselves credit risk, depending on the purposes of financing and other conditions;

- quantitative limits of financing;

- financing terms;

- criteria for evaluation of solvency of clients/partners;

- the markup/income on the assets bearing in themselves credit risk, and methods of their calculation;

- requirements to financial information of clients/partners;

- geographical restrictions;

- procedure for establishment of currency of issue and restriction;

- extreme concentration of the assets bearing in themselves credit risk (on groups of clients/partners, geographical sign, on industry, currency and other factors);

- restrictions on the assets bearing in themselves credit risk, provided to persons and affiliates connected with bank;

- criteria for evaluation of cost and the acceptability of pledge, including on risks assessment, connected with the fact that the subject of pledge is the single housing of the client/partner/pledger at the time of financing registration;

- procedure of control of observance of the procedure of preparation for provision of the assets bearing in themselves credit risk;

- requirements for issue of guaranty letters by bank (appendix 2);

- ratio of the maximum portfolio of financing to assets;

- limiting specific weight of each asset type in financing portfolio;

- another;

2) procedure for registration of the assets bearing in themselves credit risk including:

- document forms;

- procedure for provision of the assets bearing in themselves credit risk;

- procedure for approval of the assets bearing in themselves credit risk;

- requirements to financial analysis;

- requirements to pledge and documentation (pledge types, the pledge relation to the asset bearing in itself credit risk, assessment of market value and its location);

- procedure for control of correctness of registration of the assets bearing in themselves credit risk;

3) requirements for asset management, bearing in themselves credit risk, including:

- procedure for asset management, bearing in themselves credit risk;

- requirement to maintaining the adequate file of the client/partner;

- organization of control of execution of agreements;

- frequency of monitoring of pledge;

- conditions of prolongation or renewal of the overdue assets bearing in themselves credit risk;

- requirements to classification and forming of reserve on covering of potential losses and losses (RPPU);

- process of independent assessment of the assets bearing in themselves credit risk;

- requirements to information systems (reporting);

- requirements to the organization of control of the asset management bearing in itself credit risk;

- requirements to carrying out stress testing for assessment of the potential losses connected with credit risk (appendix 3);

4) separation of powers on provision of the assets bearing in themselves credit risk with indication of maximum amount and the asset type bearing in itself credit risk. The right of provision of the assets bearing in themselves credit risk and adoptions of off-balance obligations of bank shall be divided into several levels of officials who bear responsibility according to the legislation of the Kyrgyz Republic for the violations allowed when financing;

5) obligations on assignment of rights and exchange of information between the structural divisions participating in financing process;

6) the evaluation procedure is risk on new banking products. Risks on all new products shall be revealed, estimated and be under control before entry of bank into the market of such products;

7) procedure for identification, the analysis and permission of the situations connected with the "problem" assets bearing in themselves credit risk;

8) the principles of responsible financing containing the requirements for development and deployment of system of assessment and the reporting directed to prevention of perecreditovannost (when the client/partner has counterpart obligations, including in more than in one financial credit institution (further - FKO) in this connection the debt load of the client/partner can exceed possibilities of the client/partner to serve its obligations).

Within the requirements established by the legislation of the Kyrgyz Republic including regulatory legal acts of National Bank, bank independently determines circle of future clients, asset types bearing in themselves credit risk and establishes the markup/income on the assets bearing in themselves credit risk.

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