Rules for Regulating the Activities of Credit Unions Carrying Out Operations Based on Islamic Principles of Banking and Finance

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Date of creation: 2023-01-11

Appendix to the Resolution of the Board of the National Bank of the Kyrgyz Republic of July 16, 2014 No. 32/5

RULES

regulating the activities of credit unions carrying out operations based on Islamic principles of banking and finance

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic dated January 20, 2016 No. 4/6, August 15, 2018 No. 2018-P-33/33-8, December 21, 2022 No. 2022-P-12/81-7-(NFKU))

Chapter 1. General Provisions

1. These Rules are developed in accordance with the Law of the Kyrgyz Republic "On Credit Unions" and other regulatory legal acts of the National Bank of the Kyrgyz Republic (hereinafter referred to as the National Bank).

2. These Rules establish mandatory economic standards, requirements, and restrictions for credit unions to perform operations in accordance with Islamic principles of banking and finance, aimed at protecting the interests of credit union participants and reducing risks in the activities of credit unions.

3. Credit unions may establish higher economic standards and restrictions for additional risk reduction, without violating the values of standards and restrictions established by these Rules and other regulatory legal acts of the National Bank.

Chapter 2. Concepts and Definitions

4. The following concepts and their definitions are used in these Rules:

1. savings share (share contribution) - the amount of funds contributed by a participant of the credit union to the capital and under the disposal of the credit union;

2. equity capital - the sum of savings shares contributed by participants of the credit union for a period of one year or more and possessing a special withdrawal period. The withdrawal period for such shares occurs after the end of the financial year, provided that the participant submits an application no later than six months before the end of the financial year (by July 1 of the current year);

3. institutional capital is the part of total capital used to calculate the economic standards established by the National Bank. The following indicators are used in the calculation of institutional capital: reserve for future needs, undistributed profit/losses of previous years, current year losses. Current year profit is not included in the calculation of institutional capital;

4. total capital - the sum of institutional and equity capital of the credit union;

5. operating credit union - a credit union established and functioning for more than two years and having at least two annual balance sheets at the time of calculating economic standards;

6. newly created credit union - a credit union established and functioning for less than two years and not having two annual balance sheets at the time of calculating economic standards.

Chapter 3. Requirements and Restrictions Imposed on Credit Unions

5. The following requirements and restrictions are imposed on credit unions:

1. the minimum size of the savings share contributed by a participant upon joining the credit union must be at least one thousand som;

2. the maximum permissible size of the savings share of one participant may not exceed 10% of the sum of all paid savings shares of the credit union;

3. the minimum size of the capital of the credit union must be:

• for credit unions not having a license to attract funds, - at least thirty thousand som;

• for credit unions having a license to attract funds from participants of the credit union, - at least two million som;

4. for credit unions having a license to attract funds from participants of the credit union, the maximum size of the deposit base must not exceed 450% of the size of institutional capital;

5. for credit unions having a license to attract funds from participants of the credit union, the ratio of the total debt on the principal amount of assets carrying credit risk, overdue on the principal and/or markup, to the financing portfolio must not exceed 5%.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated January 20, 2016 No. 4/6)

Chapter 4. Economic Standards and Order of Their Calculation

§ 1. General Provisions

6. The economic standards mandatory for compliance by credit unions include:

1. the standard of the maximum size of attracting external financing (N1): N1.1 - for newly created credit unions; N1.2 - for operating credit unions;

2. the standard of the maximum size of risk for one client/supplier/partner (hereinafter - client) (N2): N2.1 - for newly created credit unions; N2.2 - for operating credit unions;

3. the standard of the maximum size of investments in the capital of financial and credit organizations (N3);

4. the standard of the maximum size of investments in fixed assets (N4);

5. liquidity standard (N5): N5.1 - for credit unions not having a license to attract funds; N5.2 - for credit unions having a license to attract funds;

6. capital adequacy standard (N6): N6.1 - institutional capital adequacy standard; N6.2 - total capital adequacy standard.

7. The economic standards specified in paragraph 6 apply to all credit unions. By the time of submitting an application for a license to attract funds from their participants, credit unions must meet the requirements specified in the Regulation on Licensing of Credit Unions, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic No. 14/3 dated May 4, 2005.

§ 2. Standard of the Maximum Size of Attracting External Financing of the Credit Union (N1)

8. The standard of the maximum size of attracting external financing of the credit union (N1) represents the established maximum possible volume of attracting external financing that the credit union can obtain.

9. When calculating the standard of the maximum size of attracting external financing of the credit union, the sum of attracting external financing includes funds obtained by the credit union that meet the requirements of the Law of the Kyrgyz Republic "On Credit Unions" and correspond to Sharia standards.

10. The standard of the maximum size of attracting external financing for newly created credit unions (N1.1) is determined in accordance with Appendix 1 to these Rules.

11. During the first year of activity of a newly created credit union, the size of its attracted external financing must not exceed the size of equity capital.

During the second year of activity of a newly created credit union, the size of its attracted external financing must not exceed the size of total capital, or four times the size of institutional capital in cases where the size of total capital is lower than four times the size of institutional capital.

12. The standard of the maximum size of attracting external financing for operating credit unions (N1.2) is determined by the formula:

N1.2 (<=) IC x 4, where:

IC - institutional capital.

The value of the standard of the maximum size of attracting external financing for operating credit unions (N1.2) must not exceed four times the size of institutional capital.

13. The standard of the maximum size of attracting external financing does not apply to credit unions operating for more than eight years and/or having a license to attract funds from participants.

§ 3. Standard of the Maximum Size of Risk for One Client (N2)

14. Within the framework of this paragraph, a client is understood as a participant of the credit union or participants of the credit union related to each other, having debt on assets carrying credit risk before the credit union.

15. The standard of the maximum size of risk for one client for newly created credit unions (N2.1) is determined in accordance with Appendix 2 to these Rules.

16. During the first year of activity of a newly created credit union, the standard of the maximum size of risk for one client for newly created credit unions (N2.1) is determined by the ratio of 3:1 of the total debt on assets carrying credit risk issued to one client, to the savings share.

During the second year of activity of a newly created credit union, the value of the standard of the maximum size of risk for one client for newly created credit unions (N2.1) must not exceed 20% of the sum of institutional and equity capital of the credit union.

17. The standard of the maximum size of risk for one client for operating credit unions (N2.2) is determined by the formula:

N2.2 = MC / (IC + EC) x 100 (<=) 20%, where:

MC - maximum size of total debt on the asset carrying credit risk issued to one client;

IC - institutional capital of the credit union;

EC - equity capital of the credit union.

18. The value of the standard of maximum risk for one client for operating credit unions (N2.2) must not exceed 20% of the sum of institutional and equity capitals.

19. A credit union is prohibited from repaying debt on assets carrying credit risk at the expense of the savings share of a participant of the credit union, except in cases provided for by the Law of the Kyrgyz Republic "On Credit Unions".

20. All debt of individual clients when calculating the standard of the maximum size of risk for one client (N2) must be summed up and considered as risk for one client if the non-repayment of debt by one client inevitably leads to problems with the repayment of debt by another client. In this regard, when considering the debt of various clients for the purpose of summing them up as a single risk, the degree of interconnection of clients should be taken into account:

1. by the type of economic activity of participants of the credit union (for example, the business of one participant is linked by common interests or controlled by another participant of the credit union);

2. by the source of repayment of the asset carrying credit risk (for example, several clients are linked by one business or jointly manage the household);

3. by the collateral of the asset carrying credit risk (for example, as collateral for the asset carrying credit risk of several participants of the credit union, one pledge is provided).

§ 4. Standard of the Maximum Size of Investments in the Capital of Financial and Credit Organizations Licensed by the National Bank (N3)

21. A credit union may make investments in the capital of financial and credit organizations licensed by the National Bank.

22. A credit union is prohibited from making investments in securities and capital of legal entities, except for investments in the capital of financial and credit organizations licensed by the National Bank, as well as investments in treasury bills and other highly liquid securities issued by the Cabinet of Ministers of the Kyrgyz Republic and the National Bank.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 21, 2022 No. 2022-P-12/81-7-(NFKU))

23. The sum of investments of the credit union in the capital of financial and credit organizations licensed by the National Bank must not exceed 15% of the sum of institutional and equity capitals.

24. The standard of the maximum size of investments in the capital of financial and credit organizations (N3) is determined by the formula:

N3 = SI / (IC + EC) x 100 (<=) 15%, where:

SI - total sum of investments in the capital of financial and credit organizations licensed by the National Bank, excluding investments in the capital of the Specialized Financial and Credit Organization JSC "Financial Company of Credit Unions" (hereinafter - SFKU JSC "FKKS");

IC - institutional capital of the credit union;

EC - equity capital of the credit union.

25. The sum of investments of the credit union or credit unions related to each other in the capital of SFKU JSC "FKKS" must not exceed 10% of the authorized capital of SFKU JSC "FKKS".

26. Credit unions related to each other are understood as credit unions that are under common direct or indirect control.

27. Common direct or indirect control is understood as the ability of a physical or legal person to exercise determining influence on the management or policy of the credit union either individually or jointly with other persons, regardless of participation in the equity capital of the credit union.

§ 5. Standard of the Maximum Size of Investments in Fixed Assets (N4)

28. A credit union may invest free funds not used for financing into fixed assets intended to ensure the statutory activities of the credit union.

29. The standard of the maximum size of investments in fixed assets (N4) is determined by the formula:

N4 = FA / (IC + EC) x 100 (<=) 20%, where:

FA - sum of investments in fixed assets (excluding fixed assets received as grants and donations);

IC - institutional capital of the credit union;

EC - equity capital of the credit union.

30. The total investments of the credit union in fixed assets, such as buildings, land, furniture, and equipment (excluding fixed assets received as grants and donations), which are necessary for the credit union to conduct its economic activity, cannot exceed 20% of the sum of institutional and equity capital.

§ 6. Liquidity Standard (N5)

31. The liquidity standard for credit unions not having a license to attract funds from their participants (N5.1) is determined by the following formula:

N5.1 = LA / OB x 100 (>=) 5%, where:

LA - liquid assets of the credit union, including:

• cash in the cash office of the credit union;

• funds in current and deposit accounts in banks;

• treasury bills and other highly liquid securities issued by the Cabinet of Ministers of the Kyrgyz Republic and the National Bank, net of pledged;

OB - all obligations of the credit union, excluding reserves for dividends of the current and previous years and income of future periods.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 21, 2022 No. 2022-P-12/81-7-(NFKU))

32. The value of the liquidity standard for credit unions not having a license to attract funds from their participants (N5.1) must be at least 5%.

33. The liquidity standard for credit unions having a license to attract funds from their participants (N5.2) is determined by the following formula:

N5.2 = (LA - SOB) / (PS + SP) x 100 (>=) 15%, where:

LA - liquid assets of the credit union, including:

• cash in the cash office of the credit union;

• funds in current and deposit accounts in banks;

• treasury bills and other highly liquid securities issued by the Cabinet of Ministers of the Kyrgyz Republic and the National Bank, net of pledged;

SOB - short-term obligations of the credit union, settlement of which will be carried out within thirty days after the reporting date;

PS - attracted funds of the credit union, the term of payment of which is more than thirty days;

SP - savings shares, with a withdrawal period of up to twelve months and provided for withdrawal, net of attracted funds with a payment term within thirty days after the reporting date.

For credit unions having a license to attract funds from participants, the value of the liquidity standard (N5.2) must be at least 15%.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 21, 2022 No. 2022-P-12/81-7-(NFKU))

34. For the purpose of managing liquidity risk, credit unions attracting funds from their participants must calculate the liquidity standard on a weekly basis.

§ 7. Capital Adequacy Standard (N6)

35. The capital adequacy standard (N6) is determined by two following coefficients:

• institutional capital adequacy standard (N6.1);

• total capital adequacy standard (N6.2).

36. The institutional capital adequacy standard (N6.1) is determined by the following formula:

N6.1 = IC / TA x 100, where:

IC - institutional capital of the credit union;

TA - total assets of the credit union.

37. The total capital adequacy standard (N6.2) is determined by the following formula:

N6.2 = (IC + EC) / TA x 100, where:

IC - institutional capital of the credit union;

EC - equity capital of the credit union;

TA - total assets of the credit union.

38. The value of the institutional capital adequacy standard (N6.1) and the total capital adequacy standard (N6.2) are determined in accordance with Appendix 3 to these Rules.

39. The institutional capital adequacy standard (N6.1) is established for credit unions having a license to attract funds from participants of the credit union at the level of 12%.

Chapter 5. Reporting of Credit Unions

40. Credit unions located in the Chuy Region and the city of Bishkek must submit reports to the authorized structural unit of the central apparatus of the National Bank for financial statistics and review in the manner established by the regulatory legal acts of the National Bank.

41. Credit unions located in the territory of other regions of the Kyrgyz Republic must submit reports to the corresponding regional administration or representation of the National Bank.

42. A credit union is obliged to ensure strict accounting and storage of documents used in accounting and when preparing reports.

Chapter 6. Supervision over Compliance with Economic Standards and Restrictions

43. Supervision over the activities of credit unions is carried out by the authorized structural unit of the National Bank for external supervision, regional administrations, and representations of the National Bank.

44. Verification of compliance by credit unions with economic standards and restrictions may be carried out on any date by studying and analyzing their activities based on submitted reports and information, as well as by conducting on-site inspections.

45. Upon discovery of facts of non-compliance by credit unions with economic standards and restrictions, submission of unreliable data, untimely submission or non-submission of reports and information, or violation of banking legislation, the National Bank takes preventive measures and sanctions provided for by the legislation of the Kyrgyz Republic.

Appendix 1 to the Rules for Regulating the Activities of Credit Unions Carrying Out Operations Based on Islamic Principles of Banking and Finance

TABLE

calculation of the standard of the maximum size of attracting external financing for newly created credit unions (N1.1)

Period of activity of the credit union

First year

Second year

Calculation of N1.1

N1.1 EC

N1.1 EC + IC or

N1.1 IC x 4

depending on which is greater

where:

EC - equity capital;

IC - institutional capital.

Appendix 2 to the Rules for Regulating the Activities of Credit Unions Carrying Out Operations Based on Islamic Principles of Banking and Finance

TABLE

calculation of the standard of the maximum size of risk for one client for newly created credit unions (N2.1)

Period of activity of the credit union

First year

Second year

Calculation of N2.1

N2.1 <= SP x 3

N2.1 = MC / (IC + EC) x 100 <= 20%

where:

SP - savings share of the client;

MC - maximum size of total debt on assets carrying credit risk issued to one client;

IC - institutional capital of the credit union;

EC - equity capital of the credit union.

Appendix 3 to the Rules for Regulating the Activities of Credit Unions Carrying Out Operations Based on Islamic Principles of Banking and Finance

TABLE

calculation of the capital adequacy standard (N6)

Period of activity of CU

First year

Second year

Third year

Fourth year

Fifth year

Sixth year

Seventh year

Eighth year and beyond

N6.1 = IC / TA x 100

= 1%

= 3%

= 6%

= 6%

= 9%

= 9%

= 12%

N6.2 = (IC + EC) / TA x 100

= 13%

= 13%

= 14%

= 14%

= 16%

= 16%

= 18%

where:

IC - institutional capital of the credit union;

EC - equity capital of the credit union;

TA - total assets of the credit union.

Note. During the first year of activity, the capital adequacy standard (N6) does not apply to a newly created credit union.

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