Circular on the Abolition of the Investment Risk Countermeasure Fund for Islamic Banks

10/1/9173 23/10/1440 AH 27/6/2019 AD Circular to Islamic Banks Operating in the Kingdom

Greetings,

In light of the amendment to Banking Law No. (28) of 2000 and its amendments, and the abolition of the Investment Risk Countermeasure Fund for Islamic Banks, Article No. (55) of the aforementioned law stipulates that "An Islamic bank may, pursuant to special orders issued by the Central Bank:

1. Establish a profit rate reserve.
2. Waive its share of all or part of the profits to support the profits of joint investment account holders.
3. Bear all or part of the losses of joint investment account holders."

Therefore, the following has been decided:

1. Work on distributing the balance of the Investment Risk Countermeasure Fund by allocating provisions against deferred sales receivables, lease receivables, other receivables, and non-performing and monitored financings, in accordance with our instructions No. (47/2009) and No. (60/2014) and our instruction No. (13/2018), whichever is stricter, and the impairment of assets and contingent liabilities and any other liabilities funded by joint investment account holders as of 30/4/2019.

2. Effective from 1/5/2019, provisions against assets funded by joint investment account holders shall be charged against the returns of the joint investment pool and to the income statement if the provisions are against assets funded by the bank's own funds.

3. Maintain the fund's surplus (if any) as an expected credit loss provision to face any future risks.

4. Modify the policy governing the relationship between the bank and joint 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 provide us with the modified policy within two months from the date thereof and obtain our prior approval for it and upon making any modifications to it, noting that the policy must include, in addition to what was mentioned in our circular No. (10/1/7626) dated 19/6/2013, the following:

   a. The mechanism for establishing and maintaining a profit rate 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 adopted by the bank, and work on periodic evaluation of the adequacy of this reserve, such that it is sufficient to absorb the combined monetary impact of interest rate risk and transferred commercial risk, with the necessity to comply with Financial Accounting Standard No. (35) issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

   b. The principles followed when the bank waives its share of all or part of the profits to support the profits of joint investment account holders.

   c. The principles for the bank bearing all or part of the losses of joint investment account holders.

   Indicating the necessity that the bank's waiver of its share of all or part of the profits to support the profits of joint investment account holders be in tranches and not on a per-client basis, and on the condition that this waiver is not resorted to unless the balance of the profit rate reserve is insufficient.

Work shall be done in accordance with the above effective from 1/5/2019, and the clauses related to the Investment Risk Countermeasure 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. (72/2018) dated 4/2/2018.
• Clause sixth of the Credit Facilities Classification Instructions No. (47/2009) dated 10/12/2009.
• Circular on the policy governing the relationship between the bank and joint investment account holders No. (10/1/7626) dated 19/6/2013.
• Circular on the financial data of Islamic banks No. (10/1/371) dated 9/1/2008.

Please accept our highest respect,

The Governor Dr. Ziad Friz