Regulation on the Classification of Assets and Corresponding Provisions for Potential Losses and Losses in Islamic Banking and Finance Operations

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Creation date: 2026-04-09

Appendix to the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 28, 2009 No. 51/6

REGULATION

on the classification of assets and corresponding provisions for potential losses and losses in operations in accordance with Islamic principles of banking and finance

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of October 23, 2013 No. 39/8, October 14, 2015 No. 62/3, November 2, 2015 No. 65/1, December 23, 2015 No. 78/23, April 27, 2016 No. 19/6, June 15, 2016 No. 25/2, February 22, 2017 No. 6/4, June 15, 2017 No. 2017-P-12/25-1, March 24, 2020 No. 2020-P-12/15-5, December 28, 2020 No. 2020-P-33/75-5, June 30, 2021 No. 2021-P-12/36-3, November 16, 2022 No. 2022-P-12/70-1, December 20, 2023 No. 2023-P-12/80-3, July 5, 2024 No. 2024-P-12/28-3, January 22, 2025 No. 2025-P-12/2-2-(NPA), June 18, 2025 No. 2025-P-12/28-1-(NPA), July 30, 2025 No. 2025-P-12/38-3-(NPA), September 12, 2025 No. 2025-P-12/46-1-(NPA), October 23, 2025 No. 2025-P-12/55-4-(NPA), April 2, 2026 No. 2026-P-12/20-5-(NPA))

1. General Provisions

2. This Regulation applies to banks conducting activities in accordance with Islamic principles of banking and finance, including banks having an "Islamic window" (hereinafter referred to as the "Bank").

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 28, 2020 No. 2020-P-33/75-5)

2. The purpose of this Regulation is to establish minimum requirements for the classification of assets and off-balance sheet obligations placed/accepted in accordance with Islamic principles of banking and finance (hereinafter referred to as "Assets"), as well as for the creation of corresponding provisions for potential losses and losses (hereinafter referred to as "PPL") for the purposes of regulation and supervision.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of October 23, 2013 No. 39/8)

3. To timely cover potential losses and losses, as well as to determine the real financial condition and efficiency of operations, the Bank is obliged to continuously assess the quality of assets (classify) and create PPL at a level sufficient to cover possible losses and losses on assets.

4. Assets subject to classification are claims against individuals and legal entities, including banks, with the exception of claims against the Cabinet of Ministers of the Kyrgyz Republic and the National Bank of the Kyrgyz Republic (hereinafter referred to as the "National Bank").

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 20, 2023 No. 2023-P-12/80-3)

5. PPL is created upon impairment of assets, that is, upon a decrease in their value due to non-performance or improper performance by the client/partner/supplier (hereinafter referred to as "Client") of the Bank's obligations under the asset, as stipulated by the contract terms, or the existence of a real threat of non-performance (improper performance) of these obligations.

The amount of the decrease in the value of the asset is determined as the difference between the book value of the asset (balance of debt on the asset) at the time of asset quality assessment, and its real (current) value at the time of assessment, carried out in accordance with the norms of this Regulation.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of October 23, 2013 No. 39/8)

6. The basis for an adequate assessment of the size of PPL is the asset classification system, which must be developed by the Bank in accordance with this Regulation. At the same time, the required amount of contributions to PPL is calculated from the sum of funds invested by the Bank, both own and attracted (subject to return to the client in accordance with the terms of the contract between the Bank and the client).

The Bank's activity, which does not ensure an adequate level of PPL, will be considered by the National Bank as unreliable and unhealthy banking practice.

7. Asset classification is an expression of varying degrees of loss risk, which varies depending on various factors.

8. The Bank is obliged to periodically classify its assets, which include:

• assets carrying the risk of loss as a result of the Client's non-performance or improper performance of the contract terms;
• investments in securities issued in accordance with Islamic principles of banking and finance and/or in the capital of a company (in the form of shares, financial participation in the capital of the invested company);
• interbank placements;
• off-balance sheet obligations (letters of credit, guarantees, etc.);
• other property of the Bank accepted in repayment of an asset and/or as compensation for the Bank's losses;
• any other assets not listed above, but which carry the risk of non-repayment.

Taking into account the specifics of some types of assets and off-balance sheet obligations placed in accordance with Islamic principles of banking and finance, this Regulation defines special requirements for their classification for interbank placements, restructured assets, investments in securities issued in accordance with Islamic principles of banking and finance and/or company capital, other property of the Bank, as well as for off-balance sheet obligations.

9. To carry out asset classification, the Bank must monitor and analyze data on cash flows and assess the Client's ability to obtain a sufficient volume of cash to fulfill the contract terms. Taking into account the features of Islamic banking and finance principles, the contract must provide for the periodic provision by the Client of financial and other reporting that allows the Bank to assess the Client's compliance with the contract terms.

At the same time, the absence of reliable financial information (for example, audited balance sheet and income statements of clients) and its proper analysis is a serious deficiency. In accordance with the legislation of the Kyrgyz Republic, the Client bears responsibility for the completeness and reliability of the reporting and information provided to the Bank. The Bank, assuming risks associated with concluding contracts, must verify the reliability of the provided reports, both before the provision of the asset and subsequently - until the full repayment of the Bank's funds.

2. Basic Concepts Used in This Regulation

3. Credit risk is the risk of loss resulting from a decrease in the value of the Bank's asset due to the Client's non-performance or improper performance of its obligations in accordance with the contract terms.

4. Overdue assets are Bank assets for which:

• the Client has violated the schedule for fulfilling contract terms for a period of 30 days or more;
• the schedule of planned payments has been violated for a period of 30 days or more;
• the delivery deadlines for goods according to the contract have been violated for a period of 30 days or more;
• the project implementation schedule, financial flows have been violated for a period of 30 days or more;
• the deadlines for the performance of contracts by third parties have been violated for a period of 30 days or more.

12. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic of February 22, 2017 No. 6/4)

13. Bank investments in securities and/or in capital - the Bank's investments in securities issued according to Islamic principles of banking and finance and/or the acquisition of shares or financial investment in the capital of companies whose goals and activities correspond to Sharia standards.

Investment of Bank funds into the working capital of other companies and participation in joint projects are considered assets carrying credit risk.

Non-market investments in securities are investments in such securities that are not quoted on the securities market, or the market of these securities is not developed, efficient, transparent, and does not allow determining the fair value of these securities. At the same time, transactions with securities may be episodic in nature, and there is also no extensive, reliable, and easily accessible information about the security for all persons.

All other investments in securities are market investments.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 30, 2021 No. 2021-P-12/36-3)

3. General Requirements for Asset Classification

4. Asset classification is carried out based on an analysis of the Bank client's financial condition (hereinafter referred to as the "Client"), the quality of collateral, the type of client by ownership form, industry affiliation, the presence and types of guarantees on assets and the reliability of the guarantors themselves, the assessment of the fulfillment of previously given obligations on bank assets, the prospects for further development of the Client's business, and other factors.

5. When classifying assets, it is necessary to be guided by common sense and judgment to assign an asset to a particular classification category, observing, but not limited to, the provisions provided for in this Regulation.

6. To avoid possible various interpretations of the definitions of classification categories, quantitative and qualitative characteristics of assets are introduced. The combination of two or more characteristics determines the classification category, unless otherwise established by this Regulation.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of October 23, 2013 No. 39/8, October 14, 2015 No. 62/3)

17. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 30, 2021 No. 2021-P-12/36-3)

17-1. When classifying assets provided by the Bank to the same Client or a group of related Clients, it is necessary to take into account the classification carried out for each asset of the Client or group of related Clients, and classify these assets into the classification category assigned to the asset with the largest debt, if this classification is the worst.

A similar approach to classification must be applied by banks that are participants in a banking group, that is, assets of a Client or a group of related Clients who are residents of the Kyrgyz Republic must be classified into the classification category assigned to the asset with the largest debt, if this classification is the worst.

In the event that a Client (individual or legal entity) has several assets in one Bank or within a banking group, the Bank has the right not to apply the worst classification category to all assets if the worst category is assigned to the Client's asset due to a deterioration in cash flows and the current financial condition of the Client due to introduced emergency regimes and/or other force majeure circumstances (circumstances beyond control) and restrictions associated with them, upon documentary confirmation of their influence.

In this case, the Bank may apply the classification category for each asset separately in accordance with the characteristic features of the category.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of July 5, 2024 No. 2024-P-12/28-3)

17-2. When classifying assets by the Bank, it must be taken into account whether the Client complies with the contract terms for any other asset carrying credit risk, in the event that the Client has an outstanding debt to other financial and credit organizations. In this regard, it is necessary to monitor the presence of other assets carried by the Client carrying credit risk in other financial and credit organizations at the time of consideration of the application, using information obtained from the Client, through the credit information bureau, or by any other available means within the framework of the legislation of the Kyrgyz Republic. Further, in the process of asset monitoring, it is necessary to take into account information obtained from the Client about the presence of assets carrying credit risk obtained in other financial and credit organizations, as well as information about his compliance with the contract terms for these assets. The financing contract must provide for the obligation of the Client to provide the specified information no less than once every six months during the term of the contract. At the same time, all financial and credit organizations are obliged to provide, no later than the next working day upon the Client's request, information about the receipt of an asset carrying credit risk and about the Client's compliance with the contract terms for its provision to another financial and credit organization.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 15, 2017 No. 2017-P-12/25-1)

17-3. When analyzing secondary sources of asset repayment, it should be taken into account that this usually entails a delay in payments associated with the difficulty of determining the value of collateral realization, court costs, and deferrals. These factors usually lead to the fact that the final payment amount on the debt obtained with the involvement of a secondary source does not meet expectations.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 30, 2021 No. 2021-P-12/36-3)

17-4. If the Bank relies entirely on a person acting as a surety or guarantor as a secondary source of repayment, the Bank must have complete information about the financial position of this person to assess their ability to repay the debt if necessary. If the specified person has become the only source of debt repayment, classification must take into account not only their solvency, but also the desire to repay the guaranteed asset, which must be documented in the appropriate document. If information about the guarantor is unreliable or completely absent, such a guarantee should not be taken into account when classifying the asset.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 30, 2021 No. 2021-P-12/36-3)

17-5. A significant deviation from the original source of repayment is a sufficient basis for classification, as well as vague repayment terms or asset overdue. However, not all overdue assets can be classified. An asset may be overdue, but if at the same time it has collateral in the form of cash pledged to the Bank or government securities that have not yet been repaid, such an asset may be recognized as unclassifiable.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 30, 2021 No. 2021-P-12/36-3)

17-6. The expressed in writing intention and ability of the Client to fulfill its obligations under the contract is the primary criterion for assessing asset risk. This implies that the Client must have income or liquid assets sufficient to reduce or repay the debt to the Bank in accordance with the agreement within reasonable and predictable timeframes.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 30, 2021 No. 2021-P-12/36-3)

18. Contractual relations between the Bank and its clients, reflected in the corresponding contracts, must be carried out on the basis of the legislation of the Kyrgyz Republic and must not violate the requirements of Sharia.

19. The requirements of this Regulation provide for a minimum list of criteria necessary for asset classification. The National Bank and the Bank itself have the right, taking the requirements of this Regulation as a basis, to introduce additional criteria for assessing asset quality.

20. Asset Classification

21. For the purposes of asset classification and the creation of PPL, the following categories are established:

Unclassified assets:

1. normal;
2. satisfactory;
3. assets under observation.

Classified assets:

4. substandard assets;
5. doubtful assets;
6. assets classified as losses.

§1. Unclassified Assets

21. Normal are those assets for which the collateral fully covers the principal amount of the asset and the amount of the yield rate on the markup, calculated as the product of the principal amount of the asset and the yield rate on the markup in annual, nominal terms according to the contract (for example, the principal amount of the asset is 100 thousand som, and the yield rate on the markup, brought to an annual nominal interest rate, is 10%, respectively, the coverage should be 110 thousand som). At the same time, this collateral consists of:

• government securities of the Cabinet of Ministers of the Kyrgyz Republic (hereinafter referred to as "GCS") and notes of the National Bank (hereinafter referred to as "notes") (if the maturity date of GCS and notes occurs before the maturity date of the asset, the Bank must accept as collateral the cash received from the redemption of GCS and notes, or accept additional similar GCS and notes as collateral);
• funds held in a separate deposit account in this Bank. A separate deposit account is understood as a segregated deposit account of an individual or legal entity. Settlement accounts of clients and the Bank's correspondent account cannot be used as collateral;
• Islamic securities included in the listings of stock exchanges of the Kyrgyz Republic in the highest and next highest listing categories in accordance with the legislation of the Kyrgyz Republic (hereinafter referred to as "Islamic securities"), subject to compliance with the minimum requirements established by Appendix 1 to this Regulation.

Normal are also those assets that are secured by at least 100% of the amount of the asset by collateral (in the form of a pledge), consisting of gold in the form of refined standard bars issued by the National Bank.

Note: Refined standard bars - manufactured and marked bars of precious metals issued (released) by the National Bank or an refining enterprise certified by the London Bullion Market Association/an enterprise certified by the authorized body for regulating transactions with precious metals and gemstones in the Kyrgyz Republic, weighing 1000 g or less, with a content of chemically pure base metal of not less than 99.95-99.99 percent of the alloy mass of the bar for gold and not less than 99.90 percent of the alloy mass of the bar for silver/platinum.

At the same time, the following conditions must be met:

1. the contract for the provision of the asset and the pledge contract must provide that funds placed in a separate account, GCS, notes, and Islamic securities are collateral for the funds issued by the Bank, and the Bank has the right to levy execution on them without account in case of non-performance by the Client of its obligations;
2. the pledge contract must provide for the prohibition of further re-pledging of funds placed in a separate account, GCS, notes, and Islamic securities;
3. the Bank must have corresponding procedures and carry out internal control ensuring the proper execution of all procedures related to the оформление of collateral and the safety of funds attracted according to Islamic principles of banking and finance, GCS, notes, and Islamic securities until the end of the term provided for in the contract;
4. funds placed in a separate account and serving as collateral for the asset must be in the national currency of the Kyrgyz Republic, or in a currency freely convertible into Kyrgyz som based on publicly available and reliable currency quotes. If funds attracted according to Islamic principles of banking and finance are presented in the same currency as the asset, they must cover the asset by at least 100 percent, and funds attracted according to Islamic principles of banking and finance in a currency different from the currency of the asset - by at least 120 percent in som equivalent;
5. it is necessary to conduct a weekly revaluation of funds attracted according to Islamic principles of banking and finance if funds in a currency different from the currency of the asset are provided as collateral for the asset;
6. if as a result of revaluation the value of the collateral has decreased, the Bank is obliged to immediately demand an increase in its value in accordance with the requirements of this Regulation and ensure the execution of this requirement within 10 (ten) working days;
7. in the event that the requirements specified in subparagraphs 1-6 are not met, such an asset will be considered not fully secured and it must be transferred to another classification category;
8. the deposit certificate or deposit book must be stored in the Bank.

Banks may classify assets carrying credit risk in the national currency as "normal assets" if they meet the requirements specified in paragraph 22 of this Regulation, as well as if they are issued within the framework of the implementation of state programs (housing, social, ensuring national and economic security) approved by the Decree of the President/Cabinet of Ministers of the Kyrgyz Republic.

Banks may classify assets as "normal assets" if they meet the requirements specified in paragraph 22 of this Regulation, as well as if they are secured by guarantees of international financial organizations, banks, and other financial and credit organizations having a long-term sovereign credit rating no lower than the "A" level, which is assigned by the international rating agency Standard & Poor's, or an equivalent rating assigned by one of the rating agencies Japan Credit Rating Agency (JCR), Fitch Ratings, Dominion Bond Rating Service (DBRS), Moody's Investors Service, and other rating agencies corresponding to the criteria established by paragraph 3 of the Regulation "On Economic Norms and Requirements Mandatory for Commercial Banks of the Kyrgyz Republic", approved by the Resolution of the Board of the National Bank of December 14, 2022 No. 2022-P-12/78-7-(NPA).

Banks may classify newly issued assets carrying credit risk in US dollars as "normal assets" if they meet the requirements specified in paragraph 22 of this Regulation, with the formation of PPL in the amount of 0 to 2 percent regardless of the income structure, in accordance with the Bank's internal policy. At the same time, these requirements apply to preferential assets according to Islamic financing principles issued by development funds created within the framework of interstate (intergovernmental) agreements (hereinafter referred to as the "Development Fund"), including for assets from funds attracted and guaranteed by the Development Fund from other foreign financial institutions, including previously issued assets, the repayment of which will be carried out from the financing of the Development Fund funds and provides for a change in the initial terms of the financing contract.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of December 20, 2023 No. 2023-P-12/80-3, January 22, 2025 No. 2025-P-12/2-2-(NPA), June 18, 2025 No. 2025-P-12/28-1-(NPA), October 23, 2025 No. 2025-P-12/55-4-(NPA))

21-1. The Bank may classify part of the asset secured by the guarantee of a guarantee fund, licensed and regulated in accordance with the legislation of the Kyrgyz Republic, as a "normal asset", subject to simultaneous compliance with all of the following conditions:

• more than 50% of the assets of the guarantee fund are risk-free assets on the day the guarantee is issued;
• the volume of assets secured by the guarantee of the guarantee fund should not exceed the amount of highly liquid assets of the guarantee fund by more than two times.

For the purposes of this paragraph, "risk-free assets" should be understood as securities of the Cabinet of Ministers of the Kyrgyz Republic and the National Bank, as well as term deposits placed in banks that meet the following conditions:

• the presence of a significant share of state participation and/or the share of participation of state authorities of the Kyrgyz Republic with a special status;
• the absence of restrictions in the list of permitted banking operations in national and/or foreign currencies;
• compliance with economic norms and requirements;
• the absence of introduced special regimes.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 20, 2023 No. 2023-P-12/80-3)

22. Satisfactory assets are assets for which the Client fulfills obligations under contracts with the Bank.

Characteristic signs, the manifestation of which an asset is considered satisfactory, are:

• the Client's financial condition is satisf...