Circular on Islamic Banks Regarding Investment Risk Fund and Profit Smoothing Reserve

In the Name of Allah, the Most Gracious, the Most Merciful

[Logo of the Central Bank of Jordan]

Number: 9173 / 1 / 10
Date: 27 / 8 / 1440 AH
Corresponding to: 27 / 4 / 2019 AD

Circular to Islamic Banks Operating in the Kingdom

Peace be upon you,

In light of the amendment to Banking Law No. (28) of 2000 and its amendments, and the abolition of the Investment Risk Fund for Islamic Banks, where Article No. (55) of the aforementioned law stipulates that "An Islamic bank may, by special orders issued by the Central Bank:
a. Establish a profit smoothing reserve. b. Cede its share of all profits or part thereof to support the profits of investment account holders.
c. Bear all losses of investment account holders or part thereof."

The following has been decided:

1. Work on distributing the balance of the Investment Risk Fund by setting aside provisions against deferred receivables, lease receivables, other receivables, non-performing financings, and under-monitoring financings in accordance with our instructions No. (2009/47) and No. (2014/60) and our instruction No. (2018/13), whichever is stricter, and the decline in assets and contingent liabilities and any other liabilities financed by investment account holders as of 2019/4/30.
2. As of the date 2019/5/1, provisions against assets financed by investment account holders shall be charged against the profits of the common investment pool, and against the income statement if the provisions are against assets financed by the bank's own funds.
3. Retain the fund's surplus (if any) as an expected credit loss provision to face any future risks.
4. Modify the policy regulating the relationship between the bank and investment account holders to be consistent with the provisions of Article No. (55) of Banking Law No. (28) of 2000 and its amendments, and that it be approved by the bank's board of directors after review by the bank's Shariah Supervisory Board, and to provide us with the modified policy within two months from its date and obtain our prior approval upon making any amendments to it.

CENTRAL BANK OF JORDAN
البنك المركزي الأردني

It is noted that the policy must include, in addition to what was mentioned in our circular No. (7626/1/10) dated 2013/6/19, the following:

a. The mechanism for forming and maintaining the profit smoothing reserve at the bank at an acceptable level according to the bank's specific risk policy and contractual arrangements, with work on adopting a specific plan to raise this reserve to the acceptable level according to the accounting policy approved by the bank, and working on periodic evaluation of the adequacy of this reserve, such that it is sufficient to absorb the monetary impact under Financial Accounting Standard No. (35) issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). b. The principles followed when the bank cedes its share of all profits or part thereof to support the profits of investment account holders.
c. The principles for the bank bearing all losses of investment account holders or part thereof.

Noting the necessity that the bank's cession of its share of all profits or part thereof to support the profits of investment account holders be in categories and not on a per-client basis, and on the condition that this cession is not resorted to unless the balance of the profit smoothing reserve is insufficient.

Work shall be done in accordance with the above as of 2019/5/1, and the provisions related to the Investment Risk Fund are repealed from the following instructions and circulars:

• Capital Adequacy Instructions according to the revised Standard No. (15) issued by the Islamic Financial Services Board (IFSB) No. (72) dated 2018/2/4.
• Item sixth of the Credit Facilities Classification Instructions No. (2009/47) dated 2009/12/10.
• Circular on the Policy Regulating the Relationship Between the Bank and Investment Account Holders No. (7626/1/10) dated 2013/6/19.
• Circular on Financial Statements of Islamic Banks No. (371/1/10) dated 2008/1/9.

Please accept our highest regards,

The Governor
Dr. Ziad Fries

Form (09/01/1/1)