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2005-01-01

Controls for Finance Concentration

The Central Bank of Kuwait establishes maximum finance concentration limits for Islamic banks, capping single customer liabilities at 15% of the bank's capital base and total large concentrations at four times that base. The regulations define calculation methodologies for cash and non-cash liabilities, specify related-party exposure limits, and outline exemption procedures for strategically important projects upon prior approval. Islamic banks must implement robust accounting controls and submit quarterly compliance reports using designated forms to ensure ongoing adherence to these concentration guidelines.

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A) Maximum limit for anyone single customer’s liabilities towards an Islamic bank. B) Circular No. (2/IBS/173/2005) concerning the guidelines applied by the Central Bank of Kuwait in considering banks applications for exempting any customer from the maximum limit established for finance concentration. C) Circular No. (2/IBS/IIS/251/2009) requesting to provide the Central Bank of Kuwait with the form detailing finance facilities exempted from the maximum limits for finance concentration (A.M 28), and the form on compliance with the maximum limits for total large financer concentrations (A.M 29). 4- CONTROLS FOR FINANCE CONCENTRATION

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION A) Maximum limit for anyone single customer’s liabilities towards an Islamic bank. 1 Instructions No.(2/IBS/147/2003) Concerning the Maximum Limit for Anyone Single Customer’s Liabilities Towards an Islamic Bank Based on the rules of Article (98) of Law No. 32 of the year 1968 Concerning Currency, The Central Bank of Kuwait and The Organization of Banking Business, the Central Bank of Kuwait Board of Directors decided at its meeting of 3.11.2003 to issue the following regulations concerning the maximum limit for anyone single customer’s liabilities to a bank, and which Islamic banks have to comply with. These regulations aim at distributing finance risks in their broad concept on a wide customers base, so as to mitigate the risks that Islamic banks may encounter as a result of investment and finance concentration with a limited number of customers These regulations rely on determining a ratio for anyone customer’s total financing liabilities of all forms to the capital base of the bank. The capital base means the capital of the bank in its comprehensive concept as explained in the instructions issued in regard to capital adequacy ratio for Islamic banks. First: Definition of total Finance Liabilities : Total Finance liabilities, on which basis finance concentration ratio is calculated, mean all customer’s liabilities towards a bank including the bank’s head office, local and foreign branches and subsidiaries of a similar activity. These liabilities include: A- Investment and Finance Transactions :

  1. Cash investment and finance transactions : These mean the transactions through which the bank extends funds for the execution of such transactions, either directly to the customer (such as Musharaka and Mudaraba, which are some forms of investment with customers), or in the form of assets (such as Murabaha or Ijara (lease financing). They comprise the following:

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION A) Maximum limit for anyone single customer’s liabilities towards an Islamic bank. 2 a) Utilized cash limits These represent the balances of investment transactions with and finance extended to the customer according to the Islamic finance formulas, in the manner set out in the financial position statement designed by the Central Bank (Musharaka – Mudaraba-Murabaha – Musawama – Ijara – Istisna’a – Other), whether these transactions are secured or unsecured. b) Unutilized cash limits: Unutilized limits of granted cash finance. 2) Non-cash finance liabilities: These are the transactions which create contingent liabilities on the part of bank, including : • Documentary Letters of credit • Letters of guarantee. • Bank acceptances. • Other liabilities of a similar nature. B- Financial Investment Instruments : Finance Sukuk and other financial investment instruments issued by the customer and reported within the bank’s assets. Second: Definition of anyone customer: For the purpose of calculating finance concentration ratio, debtors who are economically or legally interrelated shall be considered as one customer, whether such interrelation is by way of common ownership or common director. Such debtor parties include :

  1. Customer in his personal capacity, and as the natural guardian of his minor children.
  2. Joint accounts in which the customer is a party,
  3. Sole proprietorships of the customer.
  4. Joint companies in which the customer is a joint partner .
  5. Simple partnerships in commendam, in which the customer is a joint partner.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION A) Maximum limit for anyone single customer’s liabilities towards an Islamic bank. 3 6. Financial companies (Shareholding companies, companies with limited liabilities, companies limited by shares, etc....), in which the customer owns more than 50% of the capital, or has control thereof. Control means the power to control the financial and operating policies of the company invested in, for the purpose of making benefits out of its activities. 7. Customers of any legal constitution, personally guaranteed by the customer toward the bank. 8. Any other parties indebted to the bank and having economic or legal relationships with the customer, in the sense that if any of them faces financial difficulties, the customer’s ability to repay its debts to the bank or shall be affected. Third: Maximum Limit for Anyone Single Customer’s Liabilities: Anyone single customer’s total liabilities to a bank, whether in the form of investment and finance deals, or financial investment instruments issued by the customer, may not exceed 15% of such bank’s capital base. The collaterals excluded from such liabilities are confined to the following :

  • Cash deposits and securities.
  • Sukuk and financial instruments issued by the Kuwaiti Government maturing during a period not exceeding one year. The excluded collaterals must meet the following conditions :
  1. The cash deposits, sukuk and financial instruments should be pledged in favour of the bank.
  2. The bank must reserve all its legal rights enabling it, under any circumstances whatsoever, to make a setoff between financing obligations and the deposits accounts, and the Sukuk and financial instruments pledged against them.
  3. Deposits accounts, Sukuk and financial instruments pledged against the finance liabilities, must be kept with the bank providing the investment or the finance.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION A) Maximum limit for anyone single customer’s liabilities towards an Islamic bank. 4 4. Risks arising from exchange rates fluctuations should be taken into consideration, in the event the deposits accounts currency is not the same as currency of the granted finance liability. Deposits accounts in foreign currencies are to be confined to the main convertible currencies . Only 80% of the Fixed Deposit’s value shall be excluded from the finance liabilities when calculating the maximum limit for anyone single customer’s liabilities towards an Islamic bank. Such deposits must be revaluated on a weekly basis. Government and semi-Government agencies, departments and institutions operating on a non-commercial or non-profit basis in GCC countries, shall be exempted from these limits. Fourth: Related Parties: Parties shall be considered related if one of them has the power to control the other party or to exercise significant influence thereon when making financial and operating decisions. Within the scope of these instructions, the following parties are considered related: a) Board members of a bank. b) Major owners and shareholders in a bank .i.e. those who individually own 5% or more of the capital. c) Holders of key managerial positions in a bank, namely, the Chief Executive Officer, his deputies and assistants, executive officers and other staff members whose positions influence the finance extension decisions. d) Subsidiaries in which the bank owns more than 50% of the capital, or has control thereof. e) Sister companies, which are meant to be those companies in which the bank holds 20% or more of the capital, and exercises a significant influence thereon. Significant influence is meant to be the power enabling participation in making the decisions related to the financial or operating policies of the company invested in, but does not represent a control over those policies. f) External auditors of the bank .

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION A) Maximum limit for anyone single customer’s liabilities towards an Islamic bank. 5 The following rules apply to the maximum limit for anyone single customer’s liabilities towards an Islamic Bank in respect of related parties:

  1. Maximum limit for financing liabilities, whether in the form of investment and finance transactions or financial investment instruments, for related parties referred to under (a,b, and c above), shall not jointly exceed 50% of the capital base of the bank, without prejudice to the maximum lending limit for anyone single customer. The maximum limit for financing liabilities to key officers referred to under item (c) above jointly, shall not exceed 15%, excluding consumer financing transactions accorded in accordance with the bank’s bylaws.
  2. Deposits with and investment and financing deals to subsidiaries or sister companies, referred to under item (d) and (e) above, shall not exceed for each company apart 20% of the capital base of the bank, or 60% for all such companies jointly. Deposits made and investment with and finance extended by subsidiaries or sister companies to other subsidiaries or sister companies of the same bank , shall be added to the Numerator of the ratio.
  3. The Bank may not conduct investment with or extend finance to its external auditors. Fifth: Total Limits for Large Finance Concentrations Total large finance concentrations (defined as those which exceed 10% of the capital base), inclusive of the cases which exemption from the maximum limits has been approved by the Central Bank according to Item Sixth – paragraph 3 below, may not exceed four times the capital base. Sixth: Other Rules :
  4. Finance liabilities granted to banks are exempted from these regulations. The bank should be precise and careful in this connection, particularly while determining maximum finance concentration limit for each bank apart. (1)
  5. The bank shall develop accounting and control systems that ensure strict compliance with maximum finance concentration limit for each customer apart or for related parties, in accordance with the regulations of these instructions. (1) Article (Sixth /1) was amended by the resolution of the Central Bank of Kuwait Board of Directors at its meeting of 11/1/2004.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION A) Maximum limit for anyone single customer’s liabilities towards an Islamic bank. 6 3. The Central Bank Board of Directors may, whenever deemed necessary, exempt (2) any customer from the established maximum limit upon the respective bank’s request prior to conducting the investment or extending the finance. Such a request should be accompanied by a feasibility study of the subject investment or finance and the reasons justifying the request for exemption. Such cases, however, should be strictly limited to the narrowest limits and to instances of absolute need. It is understood that the bank bears all risks associated with the investment made with or the finance extended to customers, including those exempted by Central Bank of Kuwait prior approval from maximum finance concentration limit. Seventh: Periodic Data The bank must provide the Central Bank with quarterly data using the attached forms, including the following : 1- Statement of finance liabilities representing 5% or more of the capital base. 2- Statement of finance liabilities of interrelated parties. 3- Statement of total finance liabilities including financial investment instruments issued by the customer and his interrelated parties and which represent 5% or more of the capital base. Eighth: These instructions shall be in effect from the date of notification. April 1995. (2) Amending circular issued on 17/11/2008, categorized Item (L) in section(9) of this guide, and implementation of the investment companies remedial program, banks should follow the procedures prescribed under the instructions which stipulated that it is essential to obtain the prior approval of Central Bank of Kuwait of the excess cases, as these will be considered on a case-by-case basis.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks C e ntr al B a n k o f K u w ait 1) C a pital B ase: _ __ __ S u p e r visio n S e cto r 2) Fin a n c e C o n c e ntr atio n R atio : _ __ __ _ % O ff-Site S u p e r visio n D e pt. C r e dit S e ctio n State m e nt o f E xistin g Fin a n c e Lia bilities r e p r ese ntin g 5 % o r m o r e o f th e C a pital B ase a c c o r din g to th e p ositio n as o n / / F o r m N o. A M. (1 8) N a m e of th e B a n k (Isla mic B a n ks) K D .0’s No. Secret No. of The (1) Cash Finance Liabilities** (2) Non-Cash Finance Liabilities (3) Total (4) Collaterals submitted against Finance Liabilities (5) Net Liabilities (6) Total Liabilities (7) Remarks Debtor & Related parties utilized Unutilized Total L/Cs L/Gs Acceptances others total Existing Liabilities (1+2) Cash deposits and securities Kuwaiti Government Sukuk & Financial instruments with up to one year maturity Total of the customer toward subsidiaries

of the customer (3-4) +5

I: Debtor (A) II: Related parties (B) 1 2 3 4 5 6 7 8 9 10 Total (B) Grand Total (A+B)

  • This statement is prepared quarterly. ** Including financial investment instruments issued by the customer according to the concept explained in these transactions. *** Net Liabilities of the customer toward subsidiaries, are computed in the same manner in which the customer’s net liabilities toward the bank is computed. **** Total Finance Facilities extended to one single customer should not exceed 15% of the capital & total large concentrations (which exceed 10% of the capital) should not exceed four times the capital base. Sig n ature : ................................... 4- CONTROLS FOR FINANCE CONCENTRATION A) Maximum limit for anyone single customer’s liabilities towards an Islamic bank. 7

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks C e ntr al B a n k o f K u w ait 1) C a pital B ase: _ _ __ __ S u p e r visio n S e cto r 2) T otal C o n c e ntr atio ns o f th e r elate d p a rties: _ __ __ O ff-Site S u p e r visio n D e pt. 3) C o n c e ntr atio n R atio (2:1) : _ __ % C r e dit S e ctio n State m e nt o f th e Fin a n c e Lia bilities o f th e R elate d P a rties, * a c c o r din g to th e p ositio n as o n / / F o r m N o. A.M. (1 9) N a m e of th e B a n k (Isla mic B a n ks) K D .0’s Secret No. Debtor’s Capacity ** (1) Cash Finance Liabilities*** (2) Non-Cash Finance Liabilities (3) Total Existing Liabilities (1+2) (4) Collaterals

(5) Net Finance Liabilities Toward subsidiaries

(6) Customer’s total Liabilities (3-4) + 5 Utilized Unutilized Total L/Cs L/Gs Acceptances Others Total I : Debtor (A) II : Related Parties(B) Total (B) Grand Total (A+B)

  • Quarterly Statement: Please refer to Item Fourth of these instructions in respect of definition of the related parties and the maximum finance concentration limits which the said parties may obtain jointly or severally . ** This shows whether the debtor is a board member, a major shareholder or a key officer of the bank, or a subsidiary or sister company. *** Includes the investment in financial Investment instruments issued by the customer according to the concept explained in these instructions. In the event the debtor is a subsidiary or a sister company, the amounts deposited therewith by the bank , should be added. **** Collaterals that may be excluded according to the instructions. ***** Net liabilities of the customer toward the subsidiaries, should be computed in the same manner in which the customer’s liabilities toward the bank are computed. Sig n ature : ................................... 4- CONTROLS FOR FINANCE CONCENTRATION A) Maximum limit for anyone single customer’s liabilities towards an Islamic bank. 8

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION A) Maximum limit for anyone single customer’s liabilities towards an Islamic bank. 9 Central Bank of Kuwait Supervision Sector Off-Site Supervision Dept. Offsite Surveillance Section Statement of Total Financing Liabilities, Including the Financial Investment Instruments Issued by the Customer, Which Are 5% or More of the Capital Base* Capital Base: KD ………… thousands Name of the Bank (Islamic Banks) KD .000’s No Name of the customer and Related Parties Total Financing Liabilities ** (1) Book Value of Financial Investment Instrument s (2) Total (3) (2+1) Concentration Ratio (3 Capital Base) First: Customer (A) Second: Related Parties(B) Total (B) Total (A+B) _________%

  • Quarterly Statement. ** Equivalence to the total of column (6) in the From No. (18).

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION B) Circular No. (2/IBS/173/2005) concerning the guidelines applied by the Central Bank of Kuwait in considering banks applications for exempting any customer from the maximum limit established for finance concentration. 10 GOVERNOR Thul-Qei'da 30, 1425 H. January 11, 2005 THE CHAIRMAN, Circular to All Local Banks No. (2/IBS/173/2005) Please note that within the context of the Central Bank of Kuwait instructions issued on 19/4/1995 (1) regarding the maximum limit for credit concentration aimed on distributing the credit risks, in their board definition, over a large base of customers, and Article (Eighth/Item 4) (2) of these instructions allowing the exemption (3) of any customer from the maximum limit set for credit concentrations, pursuant to a request to be submitted from the concerned bank before granting the credit, along with a detailed study displaying the feasibility of the request and reasons underlying such exemption taking in consideration that these cases shall be limited and only in the event of extreme of necessity. Please note that the Central bank of Kuwait will take in consideration, in studying banks requests fro exemption of any customer from the maximum limit set for credit concentrations, Central Bank of Kuwait following set of guidelines:

  1. The Bank compliance will regulatory instruction.
  2. Central Bank of Kuwait remarks concerning the Bank's performance, e.g. capital adequacy, liquidity position, etc.
  3. The regularity of the credit position of the customer for which exemption is requested, whether to the requesting Bank or to the other banking for system units. (1) Instructions Islamic Banks No. (2/IBS/147/2003) issued on 3/11/2003 concerning the maximum limit for one single customer's liabilities towards an Islamic Bank. (2) Article (Sixth/3) in the instruction issued to the Islamic Banks. (3) Amending circular issued on 17/11/2008, categorized Item (L) in section(9) of this guide, and implementation of the investment companies remedial program, banks should follow the procedures prescribed under the instructions which stipulated that it is essential to obtain the prior approval of Central Bank of Kuwait of the excess cases, as these will be considered on a case-by-case basis.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION B) Circular No. (2/IBS/173/2005) concerning the guidelines applied by the Central Bank of Kuwait in considering banks applications for exempting any customer from the maximum limit established for finance concentration. 11 4) Whether the credit to be extended is intended to finance a projects of national or strategic importance, such as industrial projects, power generation and water supply plants, and infrastructure projects. 5) Whether the credit to be extended is intended to finance a housing or public service projects according to the following priorities: a- Real-Estate housing projects, in line with the country's directions regarding the housing facilitation. b- Health projects c- Public entertainment projects. 6) Any other considerations other than detailed above which may arise on where studying requests for exemption. If granting the customer the requested facility would results a significant percentage concentration of the bank's capital in it's broad definition, the concerned Bank shall market that facility to other banks. With my best wishes, SALEM ABDUL AZIZ AL SABAH

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION C) Circular No. (2/IBS/IIS/251/2009) requesting to provide the Central Bank of Kuwait with the form detailing finance facilities exempted from the maximum limits for finance concentration (A.M 28), and the form on compliance with the maximum limits for total large financer concentrations (A.M 29). 12 EXECUTIVE DIRECTOR Thu Al-Hijja 1, 1430 H November 18, 2009 THE GENERAL MANAGER, CIRCULAR NO. (2/IBS/IIS/251/2009) TO ALL ISLAMIC BANKS AND ALL ISLAMIC INVESTMENT COMPANIES ALLOWED TO LEND This has reference to the instructions No. (2/IBS/147/2003) to Islamic banks, and No. (2/IIS/82/2001) to Islamic companies, regarding the maximum limit of one single customer’s liabilities towards Islamic banks and investment companies, and in line with the Central Bank of Kuwait’s follow-up of compliance by banks and companies with the maximum limits stated under such instructions, you are kindly requested to complete both attached forms, (A.M 28) detailing finance facilities exempted from the maximum limits of finance concentration, and (A.M 29) on compliance with the maximum limit of the total large finance concentrations. You should provide us with both forms on a quarterly basis, with effect from 31/12/2009, within a maximum of ten days from the end of each quarter. Both forms sent to us by the end of each year should be audited by the external auditors. You will be notified later of the date for providing us with both forms directly online. Best regards, Yousef Jassem AlObaid Manager, Off-Site Supervision Department

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks C e ntr al B a n k o f K u w ait S u p e r visio n S e cto r O ff-Site S u p e r visio n D e p a rtm e nt C r e dit S e ctio n C a pital B ase: K D ‘0 D etails o f Fin a n c e F a cilities E x e m pte d fr o m M a xim u m Limits o f Fin a n c e C o n c e ntr atio n * As at / / F o r m A.M (2 8) N a m e o f B a n k/C o m p a n y: (Isla mic B a n ks a n d In v estm e nt C o m p a nies) K D’s 0 No. Customer Secret No. Purpose of Exempted Financing Facilities Date of Approval of Exemption Date of Expiry of Exemption (1) Cash Facilities Granted ** (2) Non-Cash Facilities Utilized (3) Total (1+2) (4) Collaterals Submitted Against Exempted Facilities*** (5) Net Customer Facilities from Subsidiaries

(6) Total Customer Facilities (3-4)+5 (7) Actual Ratio of Finance Concen. Of Exempted Facilities % (8) Ratio of Finance Concen. Of Exempted Facilities as per Approval % (9) Ratio of Finance Concen. Of Facilities of Customer and Related Parties % (10) Ratio of Finance Concen. of Non – Exempted Facilities (9)-(7) Remarks Total

  • T his statement is prepared q uarterly. ** Inclu din g financial in vestment instru ments issued b y the custo mer accordin g to the co ncept inclu ded in these instructio ns. *** T hese collaterals are limited to dep osits, cash g uarantees, an d K u waiti treasury bills an d b o n ds of o ne-year maturity. **** Calculatio n of net custo mer facilities fro m su bsidiaries is made in the same way his net facilities fro m the ban k/co mpan y is calculated. 4- CONTROLS FOR FINANCE CONCENTRATION C) Circular No. (2/IBS/IIS/251/2009) requesting to provide the Central Bank of Kuwait with the form detailing finance facilities exempted from the maximum limits for finance concentration (A.M 28), and the form on compliance with the maximum limits for total large financer concentrations (A.M 29). 13

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 4- CONTROLS FOR FINANCE CONCENTRATION C) Circular No. (2/IBS/IIS/251/2009) requesting to provide the Central Bank of Kuwait with the form detailing finance facilities exempted from the maximum limits for finance concentration (A.M 28), and the form on compliance with the maximum limits for total large financer concentrations (A.M 29). 14 Central Bank of Kuwait Supervision Sector Off-Site Supervision Department Credit Section Bank’s/Company’s Compliance with Maximum Limit of Total Large Finance Concentrations* As at / / Form A.M (29) Name of Bank/Company: (Islamic Banks and Investment Companies) KD’s 000 No. Customer Secret Number Total Customer and Related Party Facilities** Ratio of Finance Concentration Total

  • This statement is prepared quarterly. Large finance concentrations are defined as those exceeding 10% of the capital base. Total of these concentrations (including the cases exempted from the maximum limits of finance concentration) should not exceed four times the capital base. ** Granted cash, and utilized non-cash facilities, including financial investment instruments issued by the customer according to the concept included in these instructions.
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