Region

Jurisdiction

Regulator

2003-11-03

Classification Policy for Investment and Finance Transactions with Customers

The Central Bank of Kuwait mandates Islamic banks to classify customer investment and finance transactions into regular or irregular categories based on payment defaults, equity declines, and specific customer financial conditions. Irregular transactions are assigned to Monitor, Sub-standard, Doubtful, or Bad tiers according to default duration or risk indicators, triggering specific provision rates ranging from management discretion up to 100 percent. Banks must establish internal committees to evaluate customer portfolios, compute both specific and general provisions (set at a minimum of two percent), and apply the Bank of England Matrix for sovereign risk assessments.

Kuwait

Central Bank of Kuwait

A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. B) Circular No. (2/IBS/199/2007) concerning the unification of concepts for preparing investment and finance transactions classification tables in accordance to the instructions issued on 3/11/2003 with regard to the rules and regulations for classifying finance and investment transactions and computing their provisions. C) Circular No. (2/IBS/204/2007) concerning the amendment of the ratio of general provision for investment and finance transactions for which no specific provisions have been made. D) Circular No.(2/BS,IBS,IS,IIS/221/2008) concerning the preparation of consolidated financial statements. E) Circular concerning the manner of classifying customers’ irregular credit facilities in table No.(5) by secret Number, complementing the Central Bank of Kuwait rules and regulations for classification of investment and finance transactions accorded to customers in accordance with Islamic finance formulas, computation of their provisions, and the manner of the accounting treatment of income generated therefrom. 5- CLASSIFICATION POLICY FOR INVESTMENT AND FINANCE TRANSACTIONS WITH CUSTOMERS

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 1 Instructions No.(2/IBS/148/2003)* The Rules and Regulations For Classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. Section One: Rules & Regulations Concerning The Classification of Investment and Finance Transactions: For the purpose of implementing these instructions, Islamic banks shall observe the following: 1- Investment transactions with and finance extended to customers are meant to be the cash and non-cash investment and finance transactions banks conclude with their customers. Cash investment and finance transactions mean the transactions in which the bank provides to the customer monies for their execution, whether directly (such as Musharaka and Mudaraba, which are among the formulas of funds investment with customers), or in the form of assets (such as Murabaha and lease financing). On the other hand, non-cash transactions mean those transactions which create contingent liabilities on the part of the bank, including letters of guarantee, documentary letters of credit, acceptances and other types of these transactions. 2- For the purpose of classifying investment and finance transactions, the types of transactions shall be differentiated as follows: First: Investment and finance transactions with customers (Resident & NonResident). Second: Consumer finance transactions and other types of personal installment finance. Third: Sovereign risk transactions . Specific rules and regulations must be followed for classifying each type of the aforesaid types, in the following manner:

Instructions issued by Central Bank of Kuwait Board of Directors at its meeting of 3/11/2003, and must be complied with from the date of notification.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 2 First: Investment and Finance Transactions with customers (Resident & Non-Resident): Investment and finance transactions with customers are classified into “Regular” and “Irregular”. 1- Regular Transactions: Balances of utilized investment and finance transactions shall be regarded as “Regular” as long as no event rendering them “Irregular” has materialized, in the manner to be mentioned in detail hereinafter. 2- Irregular Transactions: Balances of utilized investment and finance transactions shall be regarded as “Irregular” in the event any of the conditions rendering them “Irregular” materializes and/or in view of other considerations associated with the customer’s conditions as follows: 2/1 Conditions of Irregularity: (A)Investment and finance transactions which create debts include Total balances of sales transactions (Murabah – Musawama…), Istisna’a transactions installments; lease financing due payments; the amount of Mudaraba and share of the bank in the profit, of the Mudaraba transactions, if any, after the end of their term; the share of the bank in the value of Musharaka transactions as well as its share in the profit thereof which should be paid, if any, according to the terms of the contract, any other debts that result from other investment and finance transactions (such as liquidated letters of guarantee). The irregularity of these transactions materializes in the event the customer does not honor his commitment to pay the balance due or any of the periodic installments that fall due. (B) For Musharaka and Mudaraba transactions which tenor has not expired, irregularity materializes in case the value of net equity in the transaction – which represent the realizable value – decline permanently below its book cost by 10% or more.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 3 2/2 Other considerations associated with the customer’s conditions: The board of directors of each bank shall form an internal committee comprising experienced and professional staff, with the responsibility of reviewing and evaluating the existing investment and finance transactions of each customer separately, for the purpose of identifying any exceptional matters related to the customer’s conditions and the difficulties the customer may encounter and which may render the transactions conducted with him “Irregular”, even if the irregularity conditions do not exist for some of these transactions. Then, the Committee shall determine the size of the provisions required. The board of directors shall approve the bases and criteria which the Committee shall rely upon in the classification process, as well as the outcome of the Committee’s activities. The Committee shall discharge its duties while observing the following points in relation to the customer’s conditions: A) Deterioration of the customer’s financial position. B) The customer is placed under liquidation. C) The customer’s bankruptcy. D) Legal actions have been taken against the customer by any other creditor party, claiming the repayment of the debt. E) Existence of explicit evidences of the customer’s inability to repay his debts on maturity date . The Committee’s activities shall be regular and constant. The Committee shall conduct an evaluation of all the customers at least once before the end of each fiscal year, in such a manner that the bank’s closing accounts will reflect the effects of the said Committee’s decisions. The banks shall provide the Central Bank, upon request, with the bases and criteria which the said Committee relied upon in the classification process, as well as with the outcome of their application . The transactions for which any of the conditions of irregularity, or any of the other considerations associated with the customer’s conditions, materializes, shall be classified into four categories, as follows:

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 4 A) Monitor Category (Watch-list accounts): Investment and finance shall be classified in the “Monitor Category “, in the event any of the irregularity conditions has been existing for a period not exceeding 90 days, or if any of the considerations related to the customer’s conditions materializes. Specific provisions shall be made for the debts classified under this category at the management’s discretion. B) Sub - standard: Investment and finance shall be classified in “Sub-standard” category, in the event any of the irregularity conditions has been existing for a period exceeding 90 days but not exceeding 180 days, or if any of the considerations related to the customer’s conditions materializes, upto the management’s discretion in this respect. C) Doubtful: Investment and finance shall be classified as “Doubtful” in the event any of the irregularity conditions has been existing for a period exceeding 180 days but not exceeding 365 days, or if any of the considerations related to the customer’s conditions materializes , upto the management’s discretion in this respect. D) Bad: Investment and finance shall be classified as “Bad” in the event any of the irregularity conditions has been existing for a period exceeding 365 days, or if any of the considerations related to the customer’s conditions materializes, upto to management’s discretion in this respect. Second: The Consumer Finance & Other Personal Installment Finance Transactions: These transactions are classified in the following manner: A- Monitor Category (Watch-list accounts): In the event the debtor defaults on repayment of any of the due installments for a period not exceeding 90 days.

Monitor Category (Watch-list accounts) Upto management’s discretion
Substandard 20%
Doubtful Debts 50%
Bad Debts 100% The required provision shall be computed for the total debt balance, excluding the following:
Value of the collaterals computed on the basis of their current market value, provided that such collaterals are mortgaged / pledged in favour of the bank, and there is no obstacle whatsoever which could impede execution thereon. The value of such collaterals should be computed at rates lower than their actual market value, by reasonable percentages, in coordination with the external auditors, in order to cover the market risks, exchange rates risks and any other risks, depending on the type of each collateral separately.
Transactions revenues and profits which have not been treated as income, in the manner to be mentioned under the Third Section.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 7 2- For Musharaka and Mudaraba transactions which tenor has not expired, the provision will be calculated by the amount of the difference between he book cost and net equity which represents the realizable value. 3- For transactions in which the bank reserves the ownership of the subject properties, as in the case of lease financing, the value of these assets will not be considered as collaterals deducted from the value on which basis the provision is calculated, and which basically lie in the amount of Ijara due payments. 4-If balances of the irregular transactions exceed 25% of the total investment and finance deals extended by the same bank, this customer’s debt shall be referred to the Committee formed by the board of directors, in order to evaluate the customer’s conditions in general and to resolve whether to increase the existing provisions or not. In the event balances of the irregular transactions exceed 50% of the customer’s total investment and finance transactions with the customer, the provision shall be computed on the total of investment and finance transactions, as well as Musharaka and Mudaraba transactions which tenor has not expired, in addition to non-cash finance and investment transactions, as per the maximum ratio determined for any of the irregular transactions of the customer. 5- For international trade transactions (i.e. investment and finance transactions extended to non-residents but other than sovereign risk transactions), in the event the provision computed in the above manner exceeds the difference between the market value of the transactions in the international financial markets, if any, and their book-value, the case shall be referred to the said Committee to assess the required provision, which should not be below the amount of difference between the market value and book-value of the transactions. The market value of the transactions shall be computed at the rates prevailing in the international financial markets, at least twice in one fiscal year (at the end of June and December of each year). 6- No provisions shall be made against the irregular transactions with institutions and companies fully owned by the Government of Kuwait. But this will be the case only if the Government guarantees such transactions, or if the borrowing parties articles of associations explicitly provides that the Government shall guarantee any losses such a borrowing party may incur.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 8 B) The Provisions Required for The Sovereign Risk Transactions: 1-Banks are committed to determine the size of risks associated with each country, as per the rules of Bank of England Matrix, and to seek guidance in the data published by specialized international bodies and institutions, as well as in bulletins of international rating agencies (in the manner described under Item “Third” of the Section One of these instructions), all in coordination with their external auditors. 2-Irregularity conditions applicable to the customers investment and finance transactions, shall also be applied to the sovereign risk transactions, i.e. they shall be classified into regular and irregular (in the manner described under Item “First” of the “Section One” of these instructions). 3- As for the irregular Sovereign Risk Transactions, the necessary specific provision shall be made at the ratios of provisions commensurate with the size of the country risk, as detailed in the attached Appendix, or the ratios of the provisions required for each category of the irregular transactions with those customers, as detailed under the Item “First /A” of the “Section Two” of these instructions. The regular Sovereign Risk transactions shall be presented to the Committee formed by the board to assess and resolve, in coordination with the external auditors and guided by the rules of item (1) above, whether relevants provisions are needed for such transactions or not, in the light of the risks associated with each country separately . C) Rescheduled Debts: This item addresses customers debts resulting from their investment and finance transactions. The following rules must be observed in this respect: 1- The previously made provision shall be retained against the rescheduled debts. As regards the debts which have a market value in the international financial markets, the retained provision should not be less than the amount of the difference between the debt’s market value and its book-value. 2- The provision shall gradually be decreased by the amounts collected under the reschedulement programme. Upon settlement of 25% of balance of the rescheduled debt, the Committee shall study the status of such a debt and determine the ratio of the provision required to be retained, provided it should not be less than 20% of the debt balance as minimum, after excluding the value of collaterals, returns and profits which have not been treated as income according to the rules of section two (Item First/A).

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 9 If any bank finds that the size of specific provisions for the customers investment and finance portfolio, calculated in accordance with the bases and rules of these instructions, will exceed the size of risks associated with this portfolio according to adopted accounting standards, such a bank must obtain the Central Bank’s prior approval for this case before declaring any surplus in the provisions made for the finance portfolio in the financial statements. In order for the Central Bank approve such surplus, the respective bank must assess the size of provisions required for all the components of the finance portfolio in reliance on a study of the conditions for each finance transaction apart, regardless of the outcome of classifying and assessing the size of provisions required for that transactions according to Central Bank’s instructions. The mentioned study must clarify the objective evidences relied on in deeming a finance transaction as doubtful debt or not., as well as the bases and rules applied in assessing future cash flows expected from the transaction, the timings of these cash flows, the manner of estimating the collaterals, the opinion of the external auditor on th4e soundness of the bank’s estimates in this respect. Detailed statements must be prepared for comparing estimate provisions with provisions required under the Central Bank’s instructions. It is to be observed in this regard that the comparison will be between the estimate provisions and the required provisions plus profits and returns in suspense. Second: General Provisions: A general provision of 2% (1) shall be made for the investment and finance transactions (cash and non-cash) for which no specific provisions have been made * according to these instructions, but excluding investment transactions (Musharaka – Mudaraba) which tenor has not expired. (1) The percentage of the general provisions for investment and finance transactions was reduced to a minimum of 1% for cash facilities and a minimum of 0.5% for non-cash facilities, pursuant to circular No. (2/BS/204/2007) issued on 12/3/2007.

These are the investment and finance transactions (cash and non-cash) classified as Regular, and those classified under Monitor Category (Watch-List), which do not require specific provisions according to management’s discretion, as well as the irregular investment and finance transactions with the KuwaitiGovernment owned institutions and companies, for which no specific provisions are required pursuant to the instructions, and also investment transactions with customers (Musharaka-Mudaraba) which tenor has expired but are not settled, and which do not require specific provisions to be taken according to management’s discretion.

The part of the finance transactions covered by collaterals in the form of deposit accounts or cash securities, or sukuk and financial instruments issued by the GCC governments. These collaterals must satisfy the conditions provided for in the instructions issued with regard to “ the maximum limit for the liabilities of anyone single customer to an Islamic bank”.
The portion of the investment and finance transactions secured by letters of guarantee issued by any of the reputable banks having an “A” rating from international rating agencies such as Moody’s and Standard & Poor.
Bills of exchange endorsed and accepted by the banks mentioned in Item (2) above.
Investment transactions with and finance to GCC governments or those guaranteed by them, or those extended to the institutions or companies 50% or more owned by them, provided that there is an express guarantee from those governments of such guarantees, or otherwise the articles of association of the financed institution or company include an express statement that any of the governments of those countries guarantee the losses the financed institution or company may incur. Banks existing at the time of starting the implementation of these instructions and which have generated a surplus (1) in the total general and specific provisions of investment and finance transactions, are required to report such a surplus as exceptional income in their operating results for the fiscal year to which these instructions shall apply, provided that Other Reserves (General Reserves or Voluntary Reserves), are increased by the amount of such a surplus. (1) Banks are required not to dispose of the surplus of the general provisions existing in their records as at 31/12/2006 and resulting from reducing the general provision percentage, except with the prior approval of the Central Bank of Kuwait, as per circular No. (2/IBS/204/2007) issued on 12/3/2007.

Investment and finance transactions yields and profits shall be considered as actual profit, in the event they are paid by the customers, or they are not classified as Irregular. This includes transactions classified under “Monitor Category” (Watch-list), and for which no specific provision has been made according to the management’s discretion.
The yields and profits of the fully secured irregular transactions, shall be considered as actual profit, in the event such yields and profits are settled.
In the event the yield and profits of investment and finance transactions are not settled according to the rules mentioned in the preceding two items, they shall be blocked in a suspense account and shall not be treated as income for investment and finance transactions classified as “ bad debt”, the returns and profits calculated for these transactions from the date of their classification in this category, plus the existing balance of the returns and profits in suspense for these transactions, shall be reported in separate regular accounts off-the-balance sheet.
Quarterly review shall be carried out for the yields and profits which have not been treated as income, to determine whether any protion thereof has become actual profit. Section Four: The Periodic Data Banks shall provide the Central Bank with quarterly data (at end of March, June, September and December) on the classification of the investment and finance transactions and the provisions required therefore, using the enclosed forms (1,2,3,4 and 5), latest by tenth day of the month following the end of the subject period.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 12 Guidelines Concerning Filling Up The Detailed Statement on the Classification Of the Irregular Investment and Finance Transactions for Each Customer (Attached Statement No. 5) The following points shall be taken into consideration upon preparing the attached statement No.(5): − This statement should not include data on the classification of consumer investment and finance transactions and other personal installment finance. − Data related to investment and finance transactions below KD 10,000, including those which may not have secret numbers, shall be reported aggregately for each of the various categories of classification, noting that sufficient details about the number of customers of each category should be reported in the remarks column. − All accounts of one customer should be listed under his secret number. − The concept of “Customer’s Unity” in the manner provided for in the rules and regulations of classification, (Based on First/4 from the Section Two of these Instructions), so that all balances of the customer’s accounts (Regular & Irregular) shall be included in the event balances of the customer’s irregular accounts exceed 50% of the customer’s total investment and finance transactions, or in case the committee formed by the bank decides to make specific provisions for total debt of the customer and his other investment and finance transactions. Sufficient explanations shall be mentioned in the remarks column. [Code No.(001) should be entered in the remarks code column in case the balances of irregular accounts exceed 50% of total investment and finance transactions, and Code No.(002) in case the committee decides to form specific provisions for the total investment and finance transactions]. − The reported market value of the collaterals must be reduced by appropriate ratios to cover the market and exchange rates risks, or any other risks, depending on the type of each collateral. − Sufficient clarifications should be mentioned in the remarks column in respect of the following cases:

The country deferes the payment .
The country has rescheduled the loan (after suspension of settlement) at any time during the previous five years, or is in the process of rescheduling the loan, or has suspended the settlement without arrangements with the creditors to this effect.
Reschedulement for the second time or more (for rescheduled loans) during the previous 5 years. Second Group: This group aims at identifying the nature of the difficulties and problems existing in the debtor countries. This group consists of four elements, namely :
The country suspends the payment of the principal loan or the interest to international finance institutions (International Monetary Fund, World Bank, regional development banks)
The country suspends the payment of the principal loan or rescheduled loans to other creditors (other than international finance institutions).

The country suspends the payment of the interest accrued on the principal loan or the rescheduled loans.
Reschedulement of the existing loans into new loans, or capitalization of the interest or reschedulement in accordance with the regulations of Paris Club. Third Group: This group aims at determining the rate of the risk which may result from the country’s inability to repay its debt . This group consists of nine elements, namely:
Ratio of payable interest to total exports (based on the data available for the twelve months period preceding the date of computing the provision).
The level of country’s reserves coverage of the average monthly imports.
Ratio of the debts to gross domestic product.
Ratio of the foreign debts to total commodities and services exports .
The country’s non-satisfaction of or response to the International Monetary Fund’s requirements in the sense of the country’s non-adherence to the agreements concluded therewith.
The country is unable to bridge the financing gap representing the difference between the potential cash inflows and outflows, for a period exceeding 12 months.
Ratio of market value of the country’s foreign debt, to the debt’s face value.
Reliance basically on only one source of income, in the sense of relying on the income generated from the export of a specific commodity or service.
Any other elements deemed necessary by the banks and finance institutions and approved by the Central Bank, whether economic or political, and which affect the ability of the respective country to repay its foreign debts at present or in the future. The attached tables (A and B) show the detailed elements of each group and the number of scores required for each element.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks T a ble (A) M a n n e r o f E v alu atin g I nte r n atio n al S o v e r eig n Ris k Fin a n c e T r a n s a ctio n s A s P e r B a n k o f E n gla n d M atrix First Group Second Group Description (1) (2) (3) (4) (5) (6) (7) Name of the element The country defers repayment The country rescheduled the Loan (after suspension of repayment) at any time during the previous five years, or is in the reschedulement process, or has suspended repayment without arrangements with the creditors . Reschedulement for the second time or more (for rescheduled Loans) during the previous five years. The country suspends repayment of principal Loan or the interest to the Int’l financial institutions:

IMF
World Bank -Regional development Banks The country suspends repayment of the principal Loan or rescheduled Loans to other creditors (other than international finance institutions) The country suspends repayment of the interest accrued on the principal Loan or the rscheduled Loans Reschedulement of the existing Loans into new Loans, or capitalization of the Interest, or reschedulement in accordance with the Paris club. Points Months From to Points
3 2

3 12 4 12 36 8 36 - 12 Years From to Points 3 5 6 <2 3 8 < 2 12 Years From to Points 2 5 6 <1 1 8 < 12months 12 Years Period Points < 2 10 2 15 Months From to Points

3 8 12 10 Months From to Points

3 8 12 10 Years From to Points 3 5 4 <2 3 8 < 2 10 Minimum & Maximum weights 2-12 6-12 6-12 10-15 4-10 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 17

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks T a ble (B) M a n n e r o f E v alu atin g T h e I nte r n atio n al S o v e r eig n Ris k Fin a n c e T r a n s a ctio n s a s p e r B a n k o f E n gla n d M atrix Description Third Group (8) (9) (10) (11) (12) (13) (14) (15) (16) Name of the element Ratio of The payable interest to total exports Ratio of the country’s reserves coverage of the average monthly imports Ratio of the foreign Loans to Gross Domestic Product Ratio of the foreign Loans to total exports of com modities & Services The country is unable to meet or to be responsive to I.M.F.’s requirements The financing Gap is not covered for a period exceeding 12 months Ratio of the market price of the country’s foreign debt to the debt’s face value Basic reliance upon one source of income Any other economic or political elements deemed necessary by the Banks or financial institutions, and which are approved by Central Bank of Kuwait and affect the concerned country’s present or future ability to settle its foreign Loans . Points Ratio Points

15% 3 25% 5 35% 7 45% 10 Ratio Points Months <4 3 <2 5 <1 7 <0.5 10 Ratio Points 50% 3 75% 5 100% 7 150% 10 Ratio Points 200% 3 300% 5 400% 7 600% 10 Points 3 Points 2 Ratio Points <70% 2 <50% 4 <30% 8 <10% 12 Points 2 Points from 0 to 5 Minimum & Maximum Weights 3-10 3 2 2-12 2 0-5 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 18

Investment & Finance Transactions for Customers
Sovereign Risks Transactions
Consumer Finance & Other Personal Installment Finance Transactions Total of (A) B) Irregular:
Investment & Finance Transactions for Customers
Sovereign Risks Transactions
Consumer Finance & Other Personal Installment Finance Transactions Total of (B) Total Investment and Finance Transactions (A+B) ** Second: Required Specific Provisions
Investment & Finance Transactions for Customers
Sovereign Risks Transactions
Consumer Finance & Other Personal Installment Finance Transactions Total Required Specific Provisions (Second) Third: General Provisions Required for Investment and Finance Transactions for Which no Specific Provisions Were Made * (1)
1% for cash Investment & Finance Transactions
0.5% for Non-Cash Investment & Finance Transactions Fourth: Total Required General & Specific Provisions (Second+Third)*** Fifth: Value of Yields and Profits in Suspense in the Bank’s Records and Reported Within the Above Finance Balances (2) Sixth: Provisions Available in the Bank’s Records***

Include the irregular investment and finance transactions & those listed under the “monitor” category for which no specific provisions are required according to the management’s discretion, as well as those irregular finance transactions extended to the institutions & companies fully owned by the Kuwaiti Government & there is a guarantee from the Government for such debts or for the losses that may be encountered by such entities. ** To be matched with financial position data (IBS1) as follows: A) Cash Facilities:

Investment and finance transactions for customers (Item Q): ........................
Investment placements with financial institutions ((Item O/2/B and C) ………………
Investment placements with Banks (Irregular) (2)
Yields and Profits calculated on finance transactions classified ……………… as “bad” and reported off the balance sheet (2)
In addition to cash finance transactions at foreign branches. ........................ Total Cash finance transactions ........................ B) Non-Cash Finance Transactions (Item – M/1,2,3) ........................ In addition to non-cash transactions to foreign branches ........................ Total Non-Cash transactions ........................ *** To be matched with the attached forms (2,3,4)

The percentage of the general provision was amended pursuant to circular No.(2/IBS/204/2007) issued on 12/3/2007.
Amendments introduced pursuant to circular No. (2/IBS/198/2007) issued on 29/1/2007.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks Atta c h m e nt (2) Distrib utio n of R e q uir e d G e n e ral & Sp e cific Pro visio n s A c c o rdin g Cla s sific atio n Categ o rie s of th e In v e stm e nt a n d Fin a n c e Tra n s a ctio n s with c u sto m e rs * a s o n / / (1) B a n k N a m e: (Isla mic B a n ks): (K.D 0's) T he utilized b ala nce of the tra nsactio ns S.N T y pe of classificatio n N u m ber of C usto mers C ash (A) N o n-C ash (B) T otal (A + B) A m o u nt of Yields a n d Profits in S uspense ** Deferred Inco me V alue of exclu ded collateral

A m o u nt of the req uired pro visio ns

T he Pro visio n A v aila ble in the B a n k’s Records 1 Reg ular 2 M o nitor categ ory; d oes n ot need specific pro visio ns A T otal (1+ 2) 3 M o nitor categ ory; needs specifc pro visio ns 4 S u b Stan dard 5 D o u btfull 6 Bad B T otal (3+ 4 +5+ 6) T otal (A + B)*****

Inclu de international com mercial loans ** Inclu de the amou nts comp uted on debts classified as “bad” an d reported off the balance sheet according to the circular issued in this respect. *** Value of collaterals is comp uted on the basis of market value, after decreasing it b y the ratios necessary for coverage of market & exchange rates risks & an y other risks. **** Inclu de the req uired general provision for the transactions w hich do not req uire specific provisions (Items 1&2), an d the specific provisions req uired for the irregular transactions (Items 3,4,5 &6). ***** Inclu de loans granted to ban k staff according to internal policy : K D ------------- T housan d (1) This statement was amended according to circular No. (2/IBS/199/2007) dated 29/1/2007 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 20

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks Atta c h m e nt (3) Distrib utio n of th e R e q uir e d G e n e ral & Sp e cific Pr o visio n s, A c c o rdin g to Cla s sific atio n Categ o rie s of th e S o v e r eig n Ris ks Fin a n c e Tra n s a ctio n s a s o n / / (1) B a n k N a m e: (Isla mic B a n ks): (K.D 0's) T he Utilized B ala nce of Tra nsactio ns S.N T y pe of Classificatio n N u m ber of C usto mers C ash (A) N o n-C ash (B) T otal (A + B) A m o u nt of Yields a n d Profits in S uspense* Deferred Inco me* V alue of exclu ded collateral* A m o u nt of the req uired Pro visio ns ** T he Pro visio n A v aila ble in the B a n k’s Records A Reg ular Transactio ns: D o n ot req uire specific pro visio ns accordin g to management’s discretio n T he transactio ns w hich req uire specific pro visio ns 1- Reg ular 2- Irreg ular

M o nitor Categ ory
S u b Stan dard
D o u btful B
Bad *** T otal for (B) T otal (A

T his data is to be filled in, in case of ap plying the percentage of the provisions req uired for each category of the irregular transactions categories, according to the rule of Item First- paragrap h B/3 of the secon d section of these instructions. ** Inclu de the general provision req uired for the transactions w hich do not req uire specific provisions (Item-A), an d the specific provisions req uired for other transactions (Item - B), comp uted as per the rules of item First / B of the Section T wo of the instructions. *** Inclu de the amou nts comp uted on debts classified as “bad” an d reported off the balance sheet according to the circular issued in this respect. (1) This statement was amended according to circular No. (2/IBS/199/2007) dated 29/1/2007 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 21

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks Atta c h m e nt (4) Distrib utio n of Th e R e q uir e d G e n e ral & Sp e cific Pro visio n s, A c c o rdin g to Cla s sific atio n Categ o rie s of Th e Co n s u m e r Mu ra b a h a Tra n s a ctio n s & Oth e r Pe rs o n al In stallm e nt Fin a n c e Tra n s a ctio n s a s o n / / (1) B a n k N a m e: (Isla mic B a n ks): (K.D 0's) T y pe of Classificatio n N u m ber of C usto mers A m o u nt of Tra nsactio ns A m o u nt of Yields a n d Profits in suspense * Deferred Inco me A m o u nt of the req uired pro visio n** A m o u nt of the pro visio n a v aila ble in the B a n k’s records 1 Reg ular 2 M o nitor categ ory; d oes n ot req uire specific pro visio ns A T otal (1+ 2) 3 M o nitor Categ ory; req uires S pecific Pro visio ns 4 S u b-Stan dard 5 D o u btful 6 Bad B T otal (3+ 4 +5+ 6) T otal (A + B)

Inclu ding those comp uted on debts classified as “bad” an d reported off the balance sheet according to the instructions issued in this respect. ** Inclu ding the general provision for the transactions w hich do not req uire specific provisions (Items 1,2) & the specific provisions req uired for irregular transactions (Items 3,4,5,6) . (1) This statement was amended according to circular No. (2/IBS/199/2007) dated 29/1/2007 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 22

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks Atta c h m e nt (5) D etaile d State m e nt of Th e Cla s sific atio n of th e Irr eg ula r In v e stm e nt & Fin a n c e Tra n s a ctio n s fo r Ea c h C u sto m e r * a s o n / / (1) B a n k N a m e: (Isla mic B a n ks) (K.D 0's) The utilized balance of the transactions (3) Required Provision (9) Secret No. A/C

Cash Non-cash Total

(3a+3b) Value of Excluded collateral A mount of Yields & Profits in Suspense ** Deferred Income Balance of investment & Finance transactions Based on which the provision is computed (7) Classification of the transactions (8) % Value (7x9a) Remarks* (10) (1) (2) (3a) (3b) (3c) (4) (5) (6) 3c-(4+5+6) Classification category (9a) (9b) (10a) (10b) First: Facilities Granted to the Customers: ................. Total of First Second: International Com mercial Facilities : ................. Total of Second Third: Sovereign Risks Facilities: ................. Total of Third Fourth: Rescheduled Credit Facilities: ................. Total of Fourth Total (First+ ......+ Fourth)

Attached “G uidelines” sh o uld be o bserved u p o n preparin g this statement. ** Inclu din g th ose co mp uted o n debts classified as “bad” an d rep orted off the balance sheet accordin g to the instructio ns issued in this respect. (1) This statement was amended according to circular No. (2/IBS/199/2007) dated 29/1/2007 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS A) Rules and regulations for classifying investment transactions with and finance accorded to customers according to Islamic investment and finance formulas, the computation of their provisions and the manner of the accounting treatment of income generated therefrom. 23

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS B) Circular No. (2/IBS/199/2007) concerning the unification of concepts for preparing investment and finance transactions classification tables in accordance to the instructions issued on 3/11/2003 with regard to the rules and regulations for classifying finance and investment transactions and computing their provisions. 24 Executive Director Moharram 10, 1428 H January 29, 2007 THE GENERAL MANAGER, Circular No. (2/IBS/199/2007) to All Islamic Banks It has been noticed that there are differences in local banks’ interpretation of the concepts of preparing the tables for finance and investment transactions classification policy as attached to the Central Bank of Kuwait’s instructions. In this regard, some explanatory amendments have been introduced to some of those tables, addressing the following points: 1- Investment placements with banks classified as “irregular”, as well as the yields and profits in suspense for bad debts and which are reported off the balance sheet as per the subject instructions, must be reported in the margin of attachment No. (1) of the tables of the classification policy. 2- A note has been added to the margin of table No. (2) of the finance and investment transactions classification tables, indicating the size of finance granted to your bank staff according to your internal policy. 3- Item " Five ": Amount of Yields and Profits in Suspense in your records, has been added to table No. (1) of the classification tables. 4- A special column has been added for deferred income within tables No. (2,3,4 and 5), and another special column has been added for yields and profits in suspense in table No. (4) of the classification policy tables. Your bank has to observe these amendments with effect from the data for the period ending on 31/3/2007. Best Regards, Ibrahim A. Al-Qadhi Executive Director of the Supervision Sector

Investment & Finance Transactions for Customers
Sovereign Risks Transactions
Consumer Finance & Other Personal Installment Finance Transactions Total of (A) B) Irregular:
Investment & Finance Transactions for Customers
Sovereign Risks Transactions
Consumer Finance & Other Personal Installment Finance Transactions Total of (B) Total Investment and Finance Transactions (A+B) ** Second: Required Specific Provisions
Investment & Finance Transactions for Customers
Sovereign Risks Transactions
Consumer Finance & Other Personal Installment Finance Transactions Total Required Specific Provisions (Second) Third: General Provisions Required for Investment and Finance Transactions for Which no Specific Provisions Were Made * (1)
1% for cash Investment & Finance Transactions
0.5% for Non-Cash Investment & Finance Transactions Fourth: Total Required General & Specific Provisions (Second+Third)*** Fifth: Value of Yields and Profits in Suspense in the Bank’s Records and Reported Within the Above Finance Balances Sixth: Provisions Available in the Bank’s Records***

Include the irregular investment and finance transactions & those listed under the “monitor” category for which no specific provisions are required according to the management’s discretion, as well as those irregular finance transactions extended to the institutions & companies fully owned by the Kuwaiti Government & there is a guarantee from the Government for such debts or for the losses that may be encountered by such entities. ** To be matched with financial position data (IBS1) as follows: A) Cash Facilities

Investment and finance transactions for customers (Item Q): ........................
Investment placements with financial institutions ((Item O/2/B and C) ………………
Investment placements with Banks (Irregular)
Yields and Profits calculated on finance transactions classified as “bad” and reported off the balance sheet ………………
In addition to cash finance transactions at foreign branches. ........................ Total Cash finance transactions ........................ B) Non-Cash Finance Transactions (Item – M/1,2,3) ........................ In addition to non-cash transactions to foreign branches ........................ Total Non-Cash transactions ..................... *** To be matched with the attached forms (2,3,4)

The percentage of the general provision was amended pursuant to circular No. (2/IBS/204/2007) issued on 12/3/2007.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks Atta c h m e nt N o. (2) Distrib utio n of R e q uir e d G e n e ral & Sp e cific Pro visio n s A c c o rdin g Cla s sific atio n Categ o rie s of th e In v e stm e nt a n d Fin a n c e Tra n s a ctio n s with c u sto m e rs * a s o n / / (1) B a n k N a m e: (Isla mic B a n ks) (K.D 0's) T he utilized b ala nce of the tra nsactions S.N T y pe of classification N u m ber Of C ustomers C ash (A) Non-C ash (B) Total (A + B) A mou nt of Yields a n d Profits in S uspense ** Deferred Income V alue of exclu ded collateral

A mou nt of the req uired provisions

T he Provision A v aila ble in the B a n k’s Records 1 Regular 2 Monitor category; does not need specific provisions A Total (1+2) 3 Monitor category; needs specifc provisions 4 Su bStan dard 5 Dou btfull 6 Bad B Total (3+ 4 +5+6) Total (A + B)*****

Inclu de international commercial loans ** Inclu de the amou nts comp uted on debts classified as “bad” an d reported off the balance sheet according to the circular issued in this respect. *** Value of collaterals is comp uted on the basis of market value, after decreasing it b y the ratios necessary for coverage of market & exchange rates risks & an y other risks. **** Inclu de the req uired general provision for the transactions w hich do not req uire specific provisions (Items 1&2), an d the specific provisions req uired for the irregular transactions (Items 3,4,5 &6). ***** Inclu de loans granted to ban k staff according to internal policy : K D ------------- T housan d) 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS B) Circular No. (2/IBS/199/2007) concerning the unification of concepts for preparing investment and finance transactions classification tables in accordance to the instructions issued on 3/11/2003 with regard to the rules and regulations for classifying finance and investment transactions and computing their provisions. 26

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks Atta c h m e nt N o. (3) Distrib utio n of th e R e q uir e d G e n e ral & Sp e cific Pr o visio n s, A c c o rdin g to Cla s sific atio n Categ o rie s of th e S o v e r eig n Ris ks Fin a n c e Tra n s a ctio n s a s o n / / B a n k N a m e: (Isla mic B a n ks) (K.D 0's) T he Utilized B ala nce of Tra nsactions A mou nt of Yields a n d S.N Profits in T y pe of Classification N u m ber of C ustomers C ash (A) Non-C ash (B) Total (A + B) S uspense * Deferred Income * V alue of exclu ded collateral * A mou nt of the req uired Provisions ** T he Provision A v aila ble in the B a n k’s Records A Regular Transactions do not req uire specific provisions according to management’s discretion T he transactions w hich req uire specific provisions : 1- Regular 2- Irregular:

Monitor Category
Su bStan dard
Dou btful B
Bad *** Total for (B) Total (A

T his data is to be filled in, in case of ap plyin g the percentage of the pro visio ns req uired for each categ ory of the irreg ular transactio ns categ ories, accordin g to the rule of Item First- paragrap h B/3 of the sectio n tw o of these instructio ns. ** Inclu de the general pro visio n req uired for the transactio ns w hich d o n ot req uire specific pro visio ns (Item-A), an d the specific pro visio ns req uired for other transactio ns (Item - B), co mp uted as per the rules of item First / B of the Sectio n tw o of the instructio ns. *** Inclu de the am o u nts co mp uted o n debts classified as “bad” an d rep orted off the balance sheet accordin g to the circular issued in this respect. 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS B) Circular No. (2/IBS/199/2007) concerning the unification of concepts for preparing investment and finance transactions classification tables in accordance to the instructions issued on 3/11/2003 with regard to the rules and regulations for classifying finance and investment transactions and computing their provisions. 27

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks Atta c h m e nt N o. (4) Distrib utio n of Th e R e q uir e d G e n e ral & Sp e cific Pro visio n s, A c c o rdin g to Cla s sific atio n Categ o rie s of Th e Co n s u m e r Mu ra b a h a Tra n s a ctio n s & Oth e r Pe rs o n al In stallm e nt Fin a n c e Tra n s a ctio n s a s o n / / B a n k N a m e: (Isla mic B a n ks) (K.D 0's) S.N T y pe of Classificatio n N u m ber of C usto mers A m o u nt of Tra nsactio ns A m o u nt of Yields a n d Profits in suspense * Deferred Inco me A m o u nt of the req uired pro visio n ** A m o u nt of the pro visio n a v aila ble in the B a n k’s records 1 Reg ular 2 M o nitor categ ory; d oes n ot req uire specific pro visio ns A T otal (1+ 2) 3 M o nitor Categ ory; req uires S pecific Pro visio ns 4 S u b Stan dard 5 D o u btful 6 Bad B T otal (3+ 4 +5+ 6) T otal (A + B)

Inclu din g th ose co mp uted o n debts classified as “bad” an d rep orted off the balance sheet accordin g to the instructio ns issued in this respect. ** Inclu din g the general pro visio n for the transactio ns w hich d o n ot req uire specific pro visio ns (Items 1,2) & the specific pro visio ns req uired for irreg ular transactio ns (Items 3,4,5,6) . 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS B) Circular No. (2/IBS/199/2007) concerning the unification of concepts for preparing investment and finance transactions classification tables in accordance to the instructions issued on 3/11/2003 with regard to the rules and regulations for classifying finance and investment transactions and computing their provisions. 28

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks Atta c h m e nt N o. (5) D etaile d State m e nt of Th e Cla s sific atio n of th e Irr eg ula r In v e stm e nt & Fin a n c e Tra n s a ctio n s fo r Ea c h C u sto m e r * a s o n / / B a n k N a m e: (Isla mic B a n ks) (K.D 0's) The utilized balance of the transactions (3) Required Provision (9) Secret No. A/C # Cash Non-cash Total (3a+3b) Value of excluded collateral A mount of Yields & Profits in Suspense ** Deferred Income Balance of investment & Finance transactions based on which the provision is computed (7) Classificati on of the transaction s (8) % Value (7x9a) Remarks * (10) (1) (2) (3a) (3b) (3c) (4) (5) (6) 3c-(4+5+6) Classificati on category (9a) (9b) (10a) (10b) First: Facilities Granted to the Customers: ............. Total of First Second: International Com mercial Facilities: ............. Total of Second Third : Sovereign Risks Facilities: ............. Total of Third Fourth: Rescheduled Credit Facilities: .............. Total of Fourth Total (First+ ......+ Fourth)

Attached “G uidelines” sh o uld be o bserved u p o n preparin g this statement. ** Inclu din g th ose co mp uted o n debts classified as “bad” an d rep orted off the balance sheet accordin g to the instructio ns issued in this respect. 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS B) Circular No. (2/IBS/199/2007) concerning the unification of concepts for preparing investment and finance transactions classification tables in accordance to the instructions issued on 3/11/2003 with regard to the rules and regulations for classifying finance and investment transactions and computing their provisions. 29

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS C) Circular No. (2/IBS/204/2007) concerning the amendment of the ratio of general provision for investment and finance transactions for which no specific provisions have been made. 30 GOVERNOR Safar 22, 1428 H March 12,2007 THE CHAIRMAN, Circular No. (2/IBS/204/2007) To all local Shari’a – compliant banks concerning the amendment of the ratio of general provision on investment & finance transactions for which no specific provisions have been made We would like to advise you that the Central Bank Board of Directors, at its meeting of 11/3/2007, resolved to introduce the following amendment to Central Bank of Kuwait instructions of 3/11/2003 concerning the rules and regulations for classifying investment and finance transactions accorded to customers in accordance with Islamic investment and finance formulas, computing their provisions and treating the income generated therefrom. The amendment relates to the general provisions ratio, as follows: “The ratio of the general provision for the investment and finance transactions for which no specific provisions have been made, has been reduced to become a minimum of 1% for cash investment and finance transactions and a minimum of 0.5% for non-cash investment and finance transactions. Banks may not dispose of the surplus general provisions existing in their records as on 31/12/2006, and resulting from reducing the general provisions ratio in the mentioned manner, except with the prior approval of the Central Bank of Kuwait”. With my best wishes, SALEM ABDUL AZIZ AL-SABAH

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS D) Circular No.(2/BS,IBS,IS,IIS/221/2008) concerning the preparation of consolidated financial statements. 31 GOVERNOR Jumada Al-Aula 28, 1429 H June 2,2008 THE CHAIRMAN, Circular No.(2/BS,IBS,IS,IIS/221/2008) To all local banks and investment companies on preparation of consolidated financial statements We would like to advise you that it was noticed that some banks and investment companies failed to follow standard policies and treatments for all units of the group while preparing the consolidated financial statements. This is specifically the case with regard to failing to classify credit facilities/finance granted by subsidiaries, and making the provisions necessary therefore, as applicable with regard to credit facilities/finance granted by the mother bank/company. In light of the above, your bank/company should comply with the following, while preparing the consolidated financial statements:

Standardized accounting policies and treatments should be followed at the level of all group units, including the formation of provisions necessary for balances of credit facilities/finance granted by the mother bank/company – as a minimum – in accordance with Central Bank of Kuwait’s instructions on the rules and regulations for classifying credit facilities/investment and finance transactions, as well as calculating their provisions, manner treatment of the income from these transactions, and the amendments thereto.
Classification should be started for credit facilities/finance existing as of 30/6/2008 with the consolidated subsidiaries of your bank/company, and provisions required for them should be determined in accordance with the classification policy issued by Central Bank of Kuwait. You should provide us, no later than end of August 2008, with statement of classification of the balances of these facilities/finance transactions on the forms used for this purpose. In the future, it should be observed that this data, which is submitted to Central Bank of Kuwait quarterly, should be at the level of both mother bank/company, and consolidated level.

CHAPTER TWO: The law, supervisory & Regulatory Instructions & Control on Islamic Banks 5- CLASSIFICATION POLICY FOR INVESTMENT & FINANCE TRANSACTIONS WITH CUSTOMERS E) Circular concerning the manner of classifying customers’ irregular credit facilities in table No.(5) by secret Number, complementing the Central Bank of Kuwait rules and regulations for classification of investment and finance transactions accorded to customers in accordance with Islamic finance formulas, computation of their provisions, and the manner of the accounting treatment of income generated therefrom. 33 The Manager Rajab 14, 1429 H July 17, 2008 THE GENERAL MANAGER, Circular to all Islamic banks This is made further to the circular dated 3/11/2003 to all Islamic banks, regarding the rules and regulations for classification of investment and finance transactions accorded to customers in accordance with Islamic finance formulas, computation of the provisions thereof, and the manner of the accounting treatment of income generated therefrom. We would like to advise you that the irregular customers, classified in Table 4: Consumer Finance and Other Installment Finance, should be listed in Table 5: Classification of Irregular Investment and Finance Transactions, by customers secret numbers. Irregular consumer and installment finance customers having secret numbers in the table should be listed. Irregular finance transactions of customers without secret numbers should be gathered under a new item entitled “Irregular Finance Transactions of Customers without Secret Numbers”, in the same Table 5. Please consider conducting the necessary checking between the contents of Table 5, and the corresponding contents of Tables 2, 3 and 4 of the Finance and Investment Transactions Classification tables. Your bank/company should comply with the above with effect from September 2008 statements. Best regards, Manager, Off-Site Supervision Department Dr. Mohammad Yousuf Al-Hashel