Instruction on the Distribution of Profit/Loss for Bank Accounts and Bank Deposit (Deposit) Accounts in Accordance with Islamic Principles of Banking and Finance

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Date of creation: 2025-09-18

Approved

by the Resolution of the Board

of the National Bank

of the Kyrgyz Republic

dated November 25, 2020

No. 2020-P-12/67-3-(NPA)

INSTRUCTION

on the Distribution of Profit/Loss for Bank Accounts,

Bank Deposit (Deposit) Accounts in Accordance

with Islamic Principles of Banking and Finance

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 16, 2022 No. 2022-P-12/70-1-(NPA), and September 12, 2025 No. 2025-P-12/46-1-(NPA))

Chapter 1. General Provisions

1. This Instruction applies to commercial banks conducting operations in accordance with Islamic principles of banking and finance, including banks with an "Islamic window" (hereinafter – banks).

2. This Instruction defines the procedure for calculating and distributing profit/loss, as well as paying remuneration (hiba) for bank accounts, bank deposit (deposit) accounts (hereinafter – deposits) of individuals, individual entrepreneurs, and legal entities (hereinafter – depositors), as well as methods for managing financing pools formed based on depositors' deposits.

3. Terms and definitions used in this Instruction are understood in accordance with their generally accepted meanings in the legislation of the Kyrgyz Republic.

The following terms and definitions are also applied within this Instruction:

Profit Smoothing Reserve – a reserve created by the decision of the bank's board of directors from amounts allocated from net profit before distributing the bank's share (mudaraba), in order to maintain a certain level of yield on mudaraba deposits.

At the same time, the board of directors may authorize the bank's responsible body to carry out the following actions regarding the management of the profit smoothing reserve:

• determine and approve the amount of the profit smoothing reserve;
• make decisions on the use of the profit smoothing reserve.

Investment Risk Coverage Reserve (if any) – an amount allocated from the profit of investment account holders, after distributing the bank's share of profit (mudaraba), in order to mitigate risks of future investment losses for depositors (investment account holders). The procedure for using this reserve must be approved by the bank's board of directors.

Financing Portfolio Pool

– a component of the bank's financing portfolio, including financings with similar characteristics and features, such as:

• types of financing products (contracts) (murabaha, ijara, etc.);
• yield rates, industries, and other characteristics and features;
• other client property accepted in repayment of provided financing;
• assets for subsequent transfer to clients, including under murabaha, istisna'a, etc. contracts.

Remuneration (hiba)

– a type of material incentive paid to bank customers who have placed funds under card, wadi'ah yad dhamanah contracts, as well as under other permitted types of deposits.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 16, 2022 No. 2022-P-12/70-1-(NPA))

Chapter 2. Creation of Financing Portfolio Pools

4. The bank must define a transparent and clear structure for the distribution of profit/loss and management of financing portfolio pools when creating one or several financing portfolio pools as part of assets that will be financed by various types of bank accounts, bank deposit (deposit) accounts.

This structure must specify the placement objectives, investment strategy, and inherent risk for each pool, terms, specifics of remuneration distribution, profit-sharing ratio, and top-ups. At the same time, the bank must maintain accounting of pool income/expenses.

5. Financing portfolio pools must be created by the bank in accordance with the aforementioned structure based on submitted documents by the decision of the bank's responsible body, determined by the bank's management decision. Until the structure is developed, financing portfolio pools may be created with the approval of the bank's chairman or another authorized manager determined by the bank's management decision based on submitted documents.

6. The specified structure must be approved by the bank's Shariah Board, and within 30 days from the date of approval, the document must be sent to the National Bank of the Kyrgyz Republic (hereinafter – National Bank). All subsequent changes to the profit/loss distribution structure must also be approved by the Shariah Board and within 30 days from the date of approval of the changes, must be sent to the National Bank for notification.

7. The bank must have a functioning automated information system that will allow distributing:

1. deposits;
2. financing, investments, and other placement of funds;
3. income and expenses;

8. Mudaraba deposits must be directed to financing, investments, and placement in accordance with the bank's internal policy.

Deposits must not be invested in acquiring the bank's fixed assets (land, construction, furniture fittings, computers, intangible assets) used for the bank's operations, which must be acquired by the bank from own sources/own capital.

9. Banks may create treasury operation pools for interbank operations, in accordance with the organizational structure for managing asset pools, having obtained the corresponding permission from the bank's authorized body, determined by the bank's management decision.

10. When concluding a contract for mudaraba investment accounts, the bank must disclose to the depositor the financing portfolio pool to which the deposit funds will be directed.

11. Banks are recommended to create separate financing portfolio pools for placing foreign currency deposits. Management of foreign currency deposits must be carried out in accordance with this Instruction.

12. The bank may combine the bank's capital (available in the form of liquid assets/cash), funds on mudaraba deposits (on unlimited mudaraba accounts), card, and wadi'ah yad dhamanah into a financing portfolio pool. At the same time, the bank assumes all risks of current deposits under card and wadi'ah yad dhamanah contracts. Therefore, for calculating and distributing profit/loss, the bank may combine current card and wadi'ah yad dhamanah deposits with the bank's placed capital.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 16, 2022 No. 2022-P-12/70-1-(NPA))

13. Each financing portfolio pool created and managed in the bank is considered a "separate enterprise" having its own assets, liabilities, income, and expenses, which can be identified, quantified, and verified at any time.

Chapter 3. Distribution of Income and Expenses

14. Accounting of income and expenses for various financing portfolio pools is carried out in accordance with accounting and reporting principles.

15. Direct expenses are covered by the corresponding financing portfolio pool, while indirect expenses, including the cost of creating a financing portfolio pool (salaries, depreciation of fixed assets, etc.), are covered by the bank.

16. Direct expenses that must be covered by the financing portfolio pool may include depreciation of fixed assets under ijara/ijara muntahiya bitamalik contracts, cost of goods and materials sold, insurance/takaful expenses for the financing portfolio pool's assets, commission fees or documentation expenses (state duties and fees, paid taxes to the state budget), impairment/losses due to physical damage caused by force majeure events to specific assets in the financing portfolio pools.

17. The pool management structure in the bank and the corresponding management decision on pool creation may specify other direct expenses, as well as any other similar expenses that must be covered by the financing portfolio pool.

18. Expenses incurred for creating general reserves, in accordance with the Regulation "On the Classification of Assets and Corresponding Allocations to the Reserve for Covering Potential Losses and Losses in Operations in Accordance with Islamic Principles of Banking and Finance", approved by the Resolution of the Board of the National Bank dated December 28, 2009 No. 51/6 (hereinafter – Regulation), must not be deducted from the pool's gross income calculation. At the same time, special reserves, according to the Regulation, must be deducted from the pool's gross income calculation, since these expenses are related to income generation, except for expenses for creating reserves due to operational risks (damage, malfunction, theft, etc.).

19. Losses from financing and/or investments due to misconduct/negligence/breach of contract must not be covered by the bank from the financing portfolio pool's funds. The bank, acting as a mudarib, is responsible for compensating such losses to the depositor from its own capital.

§ 1. Distribution of Profit/Loss between Depositors' Funds and Own Capital

20. In case of combining the bank's capital with depositors' funds in a financing portfolio pool, the pool's net income/loss is distributed between the bank's own capital and depositors' funds proportionally to their respective participation share in the financing portfolio pool.

21. Profit and loss on mudaraba contracts are calculated and distributed based on the daily average balance in the depositor's account during the profit/loss calculation period. Given that the degree of risk embedded in the deposit contract is directly proportional to the contract term, the bank may apply a weighting coefficient for attracted funds when calculating the monthly average balance.

At the same time, the bank independently develops the procedure for calculating the weighting coefficient for attracted funds.

§ 2. Profit Participation Ratio

22. Information on the profit participation ratio (hereinafter – PPR) for the mudaraba investment account must be posted on the bank's official website and the notice board of the head office, branch(es)/savings offices within 3 (three) working days from the date of PPR approval by the bank's responsible body.

23. During the term of bank deposit (deposit) contracts, the PPR agreed with depositors (in particular, mudaraba investment account depositors) at the time of deposit acceptance cannot be revised downward by the bank, except when downward revision cases were provided for in the contract. In case of PPR revision, the bank must conclude a supplementary contract with the depositor.

24. The bank's share (mudariba) is determined as a portion of the profit from the use of depositors' funds in the total pool income in accordance with Appendix 1 to this Instruction.

25. The yield of different categories of bank accounts and bank deposit (deposit) accounts placed in the financing portfolio pool must be determined based on characteristics and criteria defined in the pool management structure.

26. The bank must specify in its profit distribution and financing portfolio pool management structure the main principles for paying remuneration in case of early/advance termination of the contract and/or withdrawal of funds from deposits.

Chapter 4. Reserves

§1. Profit Smoothing Reserve

27. The bank may maintain the volume of profit smoothing reserves (hereinafter – PSR) from the net income of the financing portfolio pool, i.e., the gross income of the financing portfolio pool minus direct expenses and losses, if any.

28. The PSR balance is reflected in accounting journals as reserves in the bank's capital.

29. PSR funds may be placed in highly liquid assets that comply with Shariah requirements, and income received from these funds must also be credited to the PSR account.

30. The bank may fully or partially use the PSR amount to increase depositors' profit in a period when the pool's earned profit is below market expectations (market yield rates).

31. In case the bank has a PSR, requirements related to the PSR must be specified in the bank's standard deposit contract.

§ 2. Investment Risk Coverage Reserves

32. According to the mudaraba contract, the financing portfolio pool may incur losses from investing. In this regard, by decision of the bank's board of directors, a decision may be made to create an investment risk coverage reserve (hereinafter – IRC) to compensate for future investment losses.

33. Losses incurred by the financing portfolio pool, if any, are covered from the balance available in the IRC.

34. In case the bank has an IRC, requirements related to the IRC must be specified in the bank's standard deposit contract.

Chapter 5. Verification and Audit

35. The procedure for distributing profit/loss on deposits is subject to verification by the Shariah Board and the bank's external independent auditor.

36. On a semi-annual basis, the bank's internal Shariah audit should conduct a selective check on compliance and execution of the requirements of this Instruction. In case of non-compliance/violations, the internal Shariah audit service (or authorized internal auditor) must notify the bank's management and the bank's Shariah Board.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated September 12, 2025 No. 2025-P-12/46-1-(NPA))

Chapter 6. Information Disclosure

37. The bank should disclose the following information in its financial reporting:

1. the number and nature of financing portfolio pools with their yield indicated;
2. the direction or sector of the economy and business in which mudaraba deposits are placed;
3. the procedure used for profit distribution, expense recognition, and reserve creation, as well as a brief description of their main components;
4. the mudariba bank's share (amount and percentage of distributed income);
5. the amount and percentage of the mudariba share of net profit transferred to depositors as hiba (if any);
6. the earned rate of profit (yield) compared to the rate of profit distributed among depositors during the year.

38. Information disclosure on the bank's official website and the notice board of the head office, branch(es)/savings offices:

1. the percentage of the bank's (mudariba) share for the corresponding period and the two preceding periods in each category of bank deposit (deposit) accounts;
2. top-ups on bank deposits (deposits) for the corresponding period and the two preceding periods;
3. actual monthly profit/loss distributed on bank deposits (deposits) for the past two years;
4. the amounts of PSR and IRC (if any).

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