Instruction on Determining Capital Adequacy Standards for Banks Conducting Operations in Accordance with Islamic Principles of Banking and Finance

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Date of creation: 2026-04-09

Appendix
to the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 28, 2009 No. 51/4

INSTRUCTION on determining capital adequacy standards for banks conducting operations in accordance with Islamic principles of banking and finance

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of November 30, 2011 No. 67/8, April 25, 2012 No. 18/9, July 16, 2014 No. 32/6, December 23, 2015 No. 78/23, April 27, 2016 No. 19/6, April 26, 2017 No. 17/13, May 31, 2017 No. 21/11, April 10, 2019 No. 2019-P-12/19-3, September 15, 2021 No. 2021-P-12/51-2, December 15, 2021 No. 2021-P-12/70-3, November 16, 2022 No. 2022-P-12/70-1, December 20, 2023 No. 2023-P-12/80-3, 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), April 2, 2026 No. 2026-P-12/20-5-(NPA))

1. General Provisions

2. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic of May 31, 2017 No. 21/11)

3. The purpose of this Instruction is to establish capital adequacy standards for an Islamic bank, as well as the features of calculating capital adequacy coefficients for a bank having an "Islamic window".

4. Bank capital is the guarantee of profitable and sustainable growth, a guarantor of client confidence in the bank, and serves as the basis for covering potential losses inherent in banking.

5. Capital is a means of protecting against the consequences of excessive risk situations and financial insolvency (insolvency) of the bank. The bank must have sufficient (adequate) capital capable of covering possible losses and losses without the threat of insolvency. The amount of capital must be adequate to the increasing volume of banking operations conducted in accordance with Islamic principles of banking and finance, which are associated with a high degree of risk.

6. Capital Adequacy Standards for Islamic Banks

7. Minimum capital size:

a) minimum size of authorized capital for newly established Islamic banks in the Kyrgyz Republic (including branches of foreign banks); b) own (regulatory) capital is Tier 1 capital.

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2, December 15, 2021 No. 2021-P-12/70-3)

6. Capital adequacy coefficients for an Islamic bank, based on risk-weighted balance sheet assets placed in accordance with Islamic principles of banking and finance (hereinafter - assets) and off-balance sheet liabilities accepted by the bank in accordance with Islamic principles of banking and finance (hereinafter - off-balance sheet liabilities):

a) the total capital adequacy coefficient (K2.1) is determined by the formula:

K2.1 = (NSC / ((NBA - NBAm) + P * Kor)) * 100%,

where:

NSC - Net Total Capital, which is determined as the sum of Tier 1 capital and Tier 2 capital.

NBA - sum of balance sheet assets and off-balance sheet liabilities, risk-weighted, minus special reserves for covering potential losses and losses.

NBAm - sum of balance sheet assets and off-balance sheet liabilities financed by funds attracted under a limited Mudaraba agreement, risk-weighted, minus special reserves for covering potential losses and losses.

P - established indicator (number, inverse of the total capital adequacy coefficient) for commercial banks - 8.33 (100% : 12%), for systemically important banks - 7.14 (100% : 14%).

Kor - size of capital reserved to cover operational risks. Calculation of capital reserved to cover operational risks using the Basic Indicator Method is carried out in accordance with the Procedure for determining the level of capital required to cover operational risks of banks, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic.

b) the Tier 1 capital adequacy coefficient (K2.2) is determined by the formula:

K2.2 = (T1C / (NBA - NBAm)) * 100%,

where:

T1C - Tier 1 capital, which is determined in accordance with paragraph 15 of this Instruction.

c) the Common Tier 1 capital adequacy coefficient (K2.3) is determined by the formula:

K2.3 = (CT1C / (NBA - NBAm)) * 100%,

where:

CT1C - Common Tier 1 Capital.

The National Bank, based on an assessment of risks and the systemic importance of banks, has the right to increase the minimum size of capital adequacy coefficients.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 15, 2021 No. 2021-P-12/70-3)

7. The capital adequacy coefficient for a bank having an "Islamic window" is calculated in accordance with the Instruction on determining capital adequacy standards for commercial banks of the Kyrgyz Republic, approved by the Resolution of the Board of the National Bank of July 21, 2004 No. 18/2 (hereinafter - Instruction for commercial banks). In this case, when calculating the capital adequacy coefficient, assets placed in accordance with Islamic principles of banking and finance are risk-weighted in accordance with this Instruction.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2)

8. When calculating capital adequacy coefficients for a bank having an "Islamic window", its separate components are included in the calculation taking into account operations conducted in accordance with Islamic principles of banking and finance. For example, when calculating Tier 2 capital, general reserves for covering potential losses and losses on assets placed in accordance with Islamic principles of banking and finance must be included.

9. Leverage (K2.4) is determined by the formula:

K2.4 = (T1C / (TA + OBL)) * 100%,

where:

TA - total assets of the bank minus intangible assets and special reserves for covering potential losses and losses;

OBL - off-balance sheet liabilities taking into account credit conversion factors defined by this Instruction, as well as those liabilities for which the bank has the right to unconditional withdrawal/cancellation at any time without prior notice to the client, to which a credit conversion factor of 10% of the total amount of such off-balance sheet liabilities may be applied. In this case, the sum of reserves for covering potential losses and losses is subtracted from off-balance sheet liabilities (after applying credit conversion factors) within the amount of risk-weighted off-balance sheet liabilities.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 15, 2021 No. 2021-P-12/70-3)

9.1. In order to maintain the financial stability of the bank and the stability of its activities, a requirement is established for supporting the "additional bank capital buffer" (index "capital buffer") for dividend payments. The "capital buffer" index is determined as the ratio of Net Total Capital to the sum of balance sheet assets and off-balance sheet liabilities financed by funds attracted under a limited Mudaraba agreement, risk-weighted, minus special reserves for covering potential losses and losses. The value of the "capital buffer" index for banks is established by the Supervisory Committee of the National Bank.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 15, 2021 No. 2021-P-12/70-3)

9-2. A bank does not have the right to make a decision on dividend payment if the "capital buffer" index, calculated taking into account the deduction of the amount of dividends planned for payment, will be below the value established by the National Bank.

After dividend payment, the "capital buffer" index must be at a value not lower than that established by the National Bank.

In case of compliance with the value of the "capital buffer" index, calculated taking into account the deduction of the amount of dividends planned for payment, the bank must obtain permission from the National Bank for payment, except in cases where the bank increases its authorized capital at the expense of retained earnings.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of April 10, 2019 No. 2019-P-12/19-3)

9-3. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic of April 10, 2019 No. 2019-P-12/19-3)

3. Capital Structure

(Chapter as amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2)

10. The basis of capital is the fully paid authorized capital of the bank. According to the standards of the Basel Committee on Banking Supervision, authorized capital is a key element of capital common to banking systems in all countries; it is clearly visible in the reporting published by banks and is the basis on which the market assessment of capital adequacy is based; it is crucial for determining the bank's profitability and competitiveness indicators.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2)

11. Only authorized capital (ordinary and preferred shares) for which there are no obligations to return funds invested by the bank's shareholders is included in the capital. These funds can be obtained by shareholders only through the transfer or sale of shares to third parties.

The formation of authorized capital, acquisition of bank shares, as well as the acquisition of a threshold participation in the bank's capital at the expense of borrowed funds is prohibited.

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2, December 20, 2023 No. 2023-P-12/80-3)

12. The bank does not have the right to accept its own shares as collateral and acquire them.

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2, December 20, 2023 No. 2023-P-12/80-3)

13. For the purposes of banking supervision, a distinguishing feature of capital components is their ability to cover losses that may arise in the course of the bank's activities. For this reason, when assessing capital adequacy, some "non-capital" accounting accounts are included in the capital (for example, a general reserve for covering potential losses and losses or subordinated bonds and other debt obligations).

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2)

14. For the purposes of calculating capital adequacy coefficients, bank capital is divided into Tier 1 capital and Tier 2 capital.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2)

15. Tier 1 capital is necessary to ensure the absorption of losses during the bank's current activities.

Tier 1 capital consists of the following elements:

• Common Tier 1 capital;
• Additional Tier 1 capital.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2)

16. The structure of Common Tier 1 capital consists of the following elements:

1. ordinary shares - issued and fully paid ordinary shares of the bank meeting the conditions established by legislation;
2. non-cumulative preferred shares - issued and fully paid preferred shares of the bank meeting the conditions established by legislation and not requiring the bank to distribute dividends.
   In the presence of circumstances/conditions when dividend distribution is mandatory, such preferred shares and capital contributed in excess of the nominal value of these shares must be accounted for in Additional Tier 1 capital or Tier 2 capital;
3. share premium - the difference between the selling price of ordinary and preferred shares included in Common Tier 1 capital and their nominal value as a result of the issue.
   Share premium can be used to pay for services related to placement, registration, and printing expenses for printing forms during the issue of bank shares.
   Share premium is not subject to distribution among shareholders in the form of dividends and remains in the bank.
   With the written consent of the National Bank, share premium may be used to increase the authorized capital of the bank only for the purpose of complying with requirements for the minimum size of authorized capital;
4. reserves for future needs of the bank - reserves created from after-tax profit for future and/or unforeseen events;
5. retained earnings (losses) of previous years - the balance of net profit (losses) after taxation of previous years after deducting declared dividends and distribution to other capital accounts.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2)

17. The structure of Additional Tier 1 capital includes the following elements:

1. additional capital contributed by individuals and legal entities - funds contributed by individuals and legal entities in excess of the paid authorized capital. The need to contribute these funds arises in case of the bank's failure to meet the National Bank's requirements for the minimum size of own (regulatory) capital (Tier 1 capital) and/or economic standards, and/or in the presence of risk of non-compliance, including at the request of the National Bank, and/or the need to increase authorized capital by the deadline determined by the National Bank. These funds are credited only if the bank has a contract with individuals and legal entities on the contribution of funds towards the acquisition of bank shares with the condition of irrevocability (under any circumstances), permanence of the contributed funds, as well as with the condition that in case of the bank's bankruptcy, claims on these funds will be satisfied in the same order as the claims of the bank's shareholders. The amount of additional capital must be sufficient for the bank to meet the minimum values of these requirements and standards. Subsequently, the funds additionally contributed by individuals and legal entities must be converted into ordinary and/or preferred shares, and these persons must be endowed with an indisputable right to acquire issued shares for the amount of these provided funds;
2. preferred shares that meet the criteria for Additional Tier 1 capital but are unacceptable for Common Tier 1 capital. Preferred shares in this item are indicated taking into account the amount contributed above their nominal value;
3. other capital instruments - instruments possessing signs of both capital and debt obligation, to which perpetual subordinated debt belongs.
   Subordinated debt is understood as an unsecured obligation that should not be repaid early at the request of creditors, and a claim that in case of the bank's liquidation is satisfied last after satisfying all claims from creditors and depositors, but before settlements with the bank's shareholders. In this case, other capital instruments may be included in the composition of Additional Tier 1 capital with the permission of the National Bank upon written application of the bank's Board of Directors. Instruments of Additional Tier 1 capital issued by the bank must meet the criteria established for them.

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2, April 2, 2026 No. 2026-P-12/20-5-(NPA))

18. Additional Tier 1 capital must meet the following criteria for capital elements:

1. must be issued and paid;
2. must be subordinated, i.e., claims on these instruments are satisfied last after satisfying all claims of depositors, main creditors, and the bank's subordinated debt;
3. the instrument must not be collateral or guarantee for the bank's/related parties' obligations, and must not fall under any requirements/conditions that could oblige the bank legally or economically to prioritize satisfaction of claims;
4. must be perpetual, i.e., have no maturity dates;
5. may be repurchased by the issuer or redeemed at its initiative only after a minimum period of not less than 5 (five) years. In this case:
   a) the bank must not take any actions upon issuing the instrument, expecting that this instrument will be repurchased; b) repurchase/redemption is allowed only in the case:

• replacement of the instrument with an instrument of the same kind or highest quality, if the replacement of the specified instrument is carried out on terms that are reliable for the bank's capital;
• if the National Bank's minimum capital requirements are not violated;
• obtaining prior permission from the National Bank;

6. any payment of principal (for example, by repurchase or payment) must be carried out with the prior consent of the National Bank, and banks must not assume or create expectations that consent from the National Bank will be obtained;
7. right to choose regarding dividend/income payment:
   a) the bank must at all times have the full right to cancel dividend/payment; b) the decision to cancel dividend and payment should not be considered as a case of default or insolvency of the bank; c) possibility of fulfilling other obligations as they fall due at the expense of unpaid dividends; d) cancellation of dividend/payment should not impose restrictions on the bank. In this case, restrictions on dividend payment for ordinary shares may also be established;
8. the instrument cannot be included in liabilities to the extent exceeding assets, if such excess is a sign of insolvency, according to legislation;
9. if the bank's Common Tier 1 capital ratio drops to 5.125%, the bank must have the right to convert these instruments into ordinary shares or write off these instruments by distributing losses on them.
   In this case, write-off must lead to the following results:
   a) reduction of claims on the instrument in case of bank liquidation; b) reduction of the amount paid upon repurchase of the instrument; c) partial or full reduction of the amount of income/dividend payments;
10. neither the bank nor a related party over which the bank exercises control or has significant influence has the right to repurchase the instrument, including the bank does not have the right to directly or indirectly participate (including by allocating funds in the form of financing, prepayment, etc., and/or providing other services) in the purchase of the instrument.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2)

19. Tier 2 capital is necessary to ensure the absorption of losses in case of bank liquidation.
    The structure of Tier 2 capital is determined as follows:

1. current year profit - profit after taxation received in the current year;
2. general reserves:
   a) general reserves for covering potential losses and losses; b) general reserves for covering potential losses and losses from other assets, except for assets carrying credit risk.
   These reserves, entitled to be included in Tier 2 capital, will be limited to a maximum of 1.25% of the value of assets and off-balance sheet liabilities, weighted by credit risk;
3. reserves for revaluation of securities - unrealized profit (losses) from the revaluation of securities available for sale;
4. reserves for foreign currency translation upon consolidation - unrealized income (losses) arising from changes in exchange rates when translating the reporting of foreign subsidiary financial institutions of the bank;
5. Profit Smoothing Reserve (PSR) - a reserve created by the decision of the board of directors of the Islamic bank from amounts allocated from gross profit before distribution of the mudarib's share, in order to maintain a certain level of yield for investment account holders. Conditions for calculating PSR must be determined in advance and applied in accordance with the terms of the contract signed with the investment account holder;
6. Investment Risk Coverage Reserve (if any) - an amount allocated from investment account holders' profit after distribution of the mudarib's profit share in order to mitigate the risks of future investment losses for investment account holders. The procedure for using this reserve must be approved by the board of directors of the Islamic bank;
7. a portion of capital and debt instruments that may be included in Tier 2 capital with the permission of the National Bank upon written application of the bank's board of directors;
8. the difference between the selling price of shares included in Tier 2 capital (not included in Tier 1 capital) and their nominal value as a result of the issue.

Instruments included in the structure of Tier 2 capital must meet the following criteria:

1. be issued and paid;
2. must be subordinated, i.e., claims on these instruments are satisfied last after satisfying all claims of depositors, main creditors, and the bank's subordinated debt;
3. the instrument must not be collateral or guarantee for the bank's/related parties' obligations, and must not fall under any requirements/conditions that could oblige the bank legally or economically to prioritize satisfaction of claims;
4. maturity date:
   a) the minimum maturity period must be not less than 5 (five) years; b) amortization of capital instruments is carried out based on the method of equal installments over the remaining 5 (five) years until the maturity date; c) must not provide any incentives for repurchase;
5. may be repurchased by the issuer or redeemed at its initiative only after a minimum period of 5 (five) years, and only after prior approval of the National Bank. In this case:
   a) the bank must not take any actions upon issuing the instrument, expecting that this instrument will be repurchased; b) repurchase/redemption is allowed only in the case:

• replacement of the instrument with an instrument of the same kind or highest quality, if the replacement of the specified instrument is carried out on terms that are reliable for the bank's capital;
• if the National Bank's minimum capital requirements are not violated;
• obtaining prior permission from the National Bank;

6. the investor/creditor does not have any rights to early repayment of future planned payments (income or principal of the instrument), except in cases of bankruptcy and liquidation;
7. neither the bank nor a related party over which the bank exercises control or has significant influence has the right to repurchase the instrument, including the bank does not have the right to directly or indirectly participate (including by allocating funds in the form of financing, prepayment, etc., and/or providing other services) in the purchase of the instrument.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of September 15, 2021 No. 2021-P-12/51-2)

19.1. Before calculating the coefficients of adequacy of net total capital, Tier 1 capital, Common Tier 1 capital, and the "leverage" coefficient, the following elements are deducted from Common Tier 1 capital:

1. losses for the current year;
2. intangible assets, except for assets related to technical and software products (for example, for biometric identification, smart contracts, etc.), aimed at increasing the number of clients and service coverage, which meet the following requirements:

• the solution must be new or significantly different