Regulation on the Implementation of Islamic Financing Principles in the Kyrgyz Republic within the Framework of a Pilot Project

Registered in the Ministry of Justice of the Kyrgyz Republic

November 30, 2006. Registration number 120-06


	Approved by Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 30, 2006 No. 32/2

REGULATION

on the implementation of Islamic financing principles

in the Kyrgyz Republic within the framework of a pilot project

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of November 30, 2006 No. 38/1, June 29, 2007 No. 33/1,

April 25, 2008 No. 18/2, December 17, 2008 No. 47/3, August 28, 2013 No. 32/8,

June 11, 2014 No. 25/9, July 16, 2014 No. 32/6, December 27, 2117 No. 2017-P-12/54-12-(BS), March 28, 2018 No. 2018-P-12/10-6-(BS))

INTRODUCTION

PREAMBLE

This Regulation is developed in implementation of the Decree of the President of the Kyrgyz Republic dated July 12, 2006 No. 373 "On the pilot project for the implementation of Islamic financing principles in the Kyrgyz Republic" and the "Memorandum of Understanding between the Kyrgyz Republic and the Islamic Development Bank and 'EcoBank', regarding the implementation of Islamic banking and financing in the Kyrgyz Republic" dated May 16, 2006 (hereinafter referred to as the "Memorandum").

Section 1

General Provisions

The purpose of this Regulation is to establish the procedure for the implementation of certain types of activities by the branch/department of JSC "EcoBank" (hereinafter referred to as the "Bank") in accordance with Islamic financing principles within the framework of the Pilot Project in accordance with the conditions of the Memorandum.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 30, 2006 No. 38/1)

In carrying out its activities, the Bank must comply with all economic standards and other requirements established by the NBKR. In the course of carrying out activities in accordance with Islamic financing principles within the framework of the Pilot Project, the Bank is guided by this Regulation and must not expose the interests of the Bank, its depositors, and other creditors to risk.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 30, 2006 No. 38/1)

The Pilot Project for the implementation of Islamic financing principles must be carried out by the Bank through a branch/department, the operations of which will be limited to operations conducted within the framework of this Regulation.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 30, 2006 No. 38/1)

4. (Excluded in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 29, 2007 No. 33/1)

In carrying out activities in accordance with Islamic financing principles, the Bank has the right to invest funds in businesses permitted by Sharia.
A Sharia Council must be established in the Bank to approve transactions (contracts) for compliance with Sharia requirements. In carrying out activities in accordance with Islamic financing principles, all transactions (contracts) must be approved by the Sharia Council.

SECTION 2

Types of Transactions under Islamic Financing Principles and Procedure for Their Implementation

(Title of the section in the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 17, 2008 No. 47/3)

Chapter 2.1

"Mudaraba" Transaction

(Title of the chapter in the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 17, 2008 No. 47/3)

Mudaraba is a transaction concluded on the basis of a contract, under the terms of which one party—the investor—provides capital (monetary funds), and the other party—the entrepreneur—accepts the capital and uses it by applying its own labor resources, for the purpose of obtaining profit and distributing it between the parties in accordance with the contract.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 17, 2008 No. 47/3)

Mudaraba transactions (contracts) are divided into the following types:

Limited Mudaraba - a Mudaraba transaction, under the terms of which the investor establishes a list of assets or objects for investment by the entrepreneur, in which case a separate contract is concluded with the entrepreneur and the investor for each investment object. In this case, the investor has the right to expect a share of the profit obtained from the use of funds for each transaction separately, determined by a separate contract.

Unlimited Mudaraba - a Mudaraba transaction, under the terms of which the entrepreneur independently determines the object for investment, without any restrictions, in accordance with his knowledge and experience, within the framework of the Contract, and in accordance with the subject of the Contract.

Open Mudaraba - a Mudaraba transaction, under the terms of which the investor has the right to receive the monetary funds provided by him from the entrepreneur in advance, upon first demand. In this case, the investor has no right to demand a share of the profit.

Closed Mudaraba - a Mudaraba transaction, under the terms of which the investor has the right to demand from the entrepreneur the monetary funds provided by him only after the expiration of the term specified in the contract. In this case, the investor has the right to receive a share of the profit determined by the contract.

Special Mudaraba - a Mudaraba transaction, under the terms of which the investor establishes a regime for the use by the entrepreneur of the funds provided by him (in this case, by the Bank) separately from the funds provided by other investors, without the right to combine them. In this case, the investor has the right to expect a share of the profit obtained only from the use of the monetary funds and labor resources of the entrepreneur provided by him.

General Mudaraba - a Mudaraba transaction, under the terms of which the investor establishes a regime for the use by the entrepreneur of the funds provided by him (in this case, by the Bank) under which the entrepreneur has the right to include them in the total volume of funds provided by other investors. In this case, the investor has the right to expect a share of the profit obtained from the use of the entire aggregate of monetary funds and labor resources of the entrepreneur provided.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 17, 2008 No. 47/3)

The Mudaraba transaction is applied by the Bank in two cases:

as a tool for attracting funds;
as a tool for placing attracted funds under Mudaraba.

A Mudaraba contract must be concluded in writing.
The Bank, acting in the role of the investor, must assess the business plan, determine objects for investment, assess the activities of the entrepreneur, and consult him subsequently during the execution of the contract.
When issuing monetary funds under a Mudaraba transaction, the Bank must include in the contract a condition prohibiting the non-targeted use of monetary funds and the issuance of loans, advances, and credits.
For the proper fulfillment of obligations under the Mudaraba transaction, the Bank, acting in the role of the investor, must obtain security from the client in the form of pledge, guarantee, surety, earnest money, and other types of security provided by legislation or contract for an amount equal to the amount provided by the Bank under the contract.
The Mudaraba contract must provide for at least:

indication of the type of contract;
depending on the type of contract, the contract may contain an indication of the investment object, the impossibility of early withdrawal of the deposited amount, the possibility of mixing funds received from the investor with funds of third parties;
the amount of the sum provided;
the method of securing the obligations of the entrepreneur;
rights and obligations of the parties;
liability of the entrepreneur who failed to fulfill or improperly fulfilled the obligation to compensate for losses arising during the performance of the contract as a result of the entrepreneur's culpable or unlawful actions/inaction at the expense of the entrepreneur, including at the expense of the entrepreneur's security or other property;
the procedure for distributing profit and losses in such a way as to exclude any uncertainty for the participants of the contract;
the entrepreneur's fulfillment of the contract conditions independently or with the involvement of qualified persons;
accounting for the use of monetary funds received from the investor, allowing, upon completion of the contract or a separate stage, to determine the profit obtained, which is subject to distribution between the parties;
the procedure for terminating the contract.

The profit of each party to the contract is determined in a percentage ratio from the profit obtained by the entrepreneur during the use of funds provided by the investor.

The procedure for distributing profit between the parties must be determined in the contract in advance.

In the event that as a result of the performance of the contract the entrepreneur not only did not receive profit, but also incurred losses, the investor bears losses in the amount of the capital sum provided, and the entrepreneur in this case does not receive remuneration for his labor. This rule of loss distribution applies if the losses arose not due to the fault of the entrepreneur.

In the event that losses arose during the performance of the contract as a result of the culpable or unlawful actions/inaction of the entrepreneur, such losses must be covered at the expense of the entrepreneur. In this case, the investor has the right to receive from the entrepreneur the sum previously transferred under the contract at the expense of the security, and in the event that it is insufficient, at the expense of other property of the entrepreneur.

A Mudaraba contract cannot be terminated unilaterally if:

the entrepreneur has begun to perform the contract and is already using funds in entrepreneurial activities;
the term of the contract has not expired.

Attraction of monetary funds by the Bank under Mudaraba:

a) In accounting, monetary funds attracted on the terms of a Mudaraba contract are reflected in the liabilities section of the Bank's balance sheet on sub-accounts of balance sheet accounts for deposits of individuals, legal entities, banks, and other financial and credit institutions (groups of accounts 20000-20400 of the Chart of Accounts for Accounting in Commercial Banks and Financial and Credit Institutions of the Kyrgyz Republic).

b) When opening an account for a client under a Mudaraba contract, the Bank must perform all necessary requirements related to customer identification in accordance with the regulatory acts of the NBKR.

c) Accounting for funds attracted by the Bank under a Mudaraba contract is kept on the balance sheet accounts of the Bank for the principal amount deposited in accordance with the contract. Accounting for Mudaraba liabilities in foreign currency is kept in the nominal value of the currencies. Analytical accounting for client accounts is kept by the Bank in a special automated program, reflecting all operations performed on the account.

d) The Board of the Bank establishes the procedure, sizes, and rules for paying the share of profit due to clients under a Mudaraba contract. The amount of profit paid to the client under the terms of the Mudaraba contract is recognized as period expenses.

e) The Bank accrues expenses under Mudaraba contracts in accounting on a periodic basis (monthly or quarterly) based on the conditions of the contracts, taking into account the specifics and terms of repayment of funds placed by the Bank in investment projects (Murabaha, Mudaraba, Ijara, Istisna, Musharaka, etc.).

f) In the event that the Bank, acting as the entrepreneur, achieves positive financial results, the Bank pays the client a share of the profit. The procedure and terms for distributing profit from Mudaraba operations are carried out in accordance with the conditions of the contract.

g) Depending on the type of Mudaraba contract, limited or unlimited, the client's share of profit is calculated. In the case of a limited Mudaraba contract, the client's share of profit will be calculated based on the profitability of investing in a specific project, the share of funds invested by the client, and the distribution ratio established in the contract. In the case of an unlimited Mudaraba contract, the client's share of profit is calculated based on the Bank's profitability from placing attracted funds in active operations carried out by the Bank under Islamic financing principles (Mudaraba, Murabaha, Istisna, Musharaka, Salam, Ijara, etc.) for a specific period specified in the contract, proportionally to the investments of the parties.

h) Mudaraba transactions in content are equated to deposit operations and are limited by the economic standard K5 (Standard of the maximum size of risk on deposits of individuals), according to the Regulation on economic standards and requirements mandatory for compliance by commercial banks and financial and credit institutions licensed by the NBKR. Also, according to this Regulation, the Bank determines and manages concentration risk.

i) Accounts for accounting of Mudaraba transactions are included in the calculation of mandatory reserve requirements according to the Regulation on mandatory reserves. When calculating the liquidity coefficient, these liabilities are included in the sum of the Bank's liabilities according to the criteria specified in the Regulation on economic standards and requirements mandatory for compliance by commercial banks and financial and credit institutions licensed by the NBKR.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 17, 2008 No. 47/3)

Issuance of monetary funds under Mudaraba:

a) Assets placed under Mudaraba transactions are equated to assets carrying credit risk, and therefore fall under all restrictions related to the placement of loans.

When calculating the capital adequacy coefficient, assets placed under a Mudaraba transaction are equated to assets with a degree of risk in accordance with the Instruction on determining capital adequacy standards for banks carrying out operations in accordance with Islamic banking and financing principles, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 28, 2009 No. 51/4 (hereinafter referred to as the Instruction on determining capital adequacy standards).

According to the Regulation on the classification of assets and corresponding provisions for reserves to cover potential losses and losses, and in accordance with internal procedures, the Bank monthly assesses these assets for deterioration with the creation of a reserve to cover potential losses.

b) Assets placed under Mudaraba transactions are initially accounted for in the balance sheet at the amount of monetary funds invested in the transaction, on sub-accounts of balance sheet accounts for loans issued by the Bank (group of accounts 10900 of the Chart of Accounts for Accounting in Commercial Banks and Financial and Credit Institutions of the Kyrgyz Republic).

c) Since assets placed under Mudaraba transactions carry the risk of non-repayment of funds (credit risk), the Bank creates reserves to cover potential losses and losses for this type of assets.

d) Profit/income from Mudaraba transactions is recognized in accounting upon the expiration of the Mudaraba contract and receipt of the final result from the project, or may be received by the Bank as an intermediate result, which can be reliably assessed, and received by the Bank under the terms of the contract, with subsequent recalculation and adjustment upon completion of the project. For long-term projects, calculation and recognition of income in accounting is carried out on a monthly or quarterly basis based on regular assessment of the project for compliance of achieved results of work performed at different stages of project implementation with those planned in the business plan. In the event of positive results, the Bank accrues income based on the percentage of profit established in the contract, in a percentage ratio from the profit due to the Bank upon completion of the project.

e) Loss is recognized in accounting as a reduction of the amount of investments accounted for in the Bank's assets and is written off at the expense of the reserve created by the Bank. In the event that the amount of loss is equal to the amount of investment in the Mudaraba operation, the Bank performs a full write-off of the asset at the expense of the created reserve.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of July 16, 2014 No. 32/6)

Chapter 2.2

Partnership Agreement "Musharaka"

Musharaka Agreement - a partnership agreement between two or more parties, by means of which each partner contributes a certain amount of money or, with the consent of all partners - material assets, which gives each partner the right to conduct business using the company's assets on the terms of profit distribution according to the contract, and each partner bears losses in accordance with his contribution to the company's total capital.
Musharaka contracts are classified into two main categories:

combination of participants without the formation of a legal entity;
combination of participants with the formation of a legal entity, including:

a) partnership associations or legal entities created in accordance with the legislation of the Kyrgyz Republic;

If otherwise does not follow from the subject of the contract, the Musharaka contract is applied both to combinations of participants without the formation of a legal entity and to combinations with the formation of a legal entity.

Musharaka - is a form of partnership based on a Musharaka contract, in which one of the partners promises to gradually buy out the ordinary shares (share) of the other partner until the ownership of the shares (share) passes completely to him. This operation begins with the formation of a partnership, after which the purchase and sale of shares between the two partners begins. It is necessary that these purchase and sale operations are not provided for in the partnership agreement. The buying partner is allowed only to give a promise to buy shares. This promise must be independent of the partnership agreement. In addition, the sales contract must be independent of the partnership agreement. It is not allowed for one contract to be concluded on the condition of concluding another contract.

General rules of the Musharaka contract are applied in the Musharaka transaction, and it is not allowed to include in the Musharaka contract any provision that gives any party the right to withdraw its share from the company's capital.

The Musharaka contract is concluded in writing. In the event that a legal entity is created on the basis of the contract, it is subject to registration. The document of the partnership establishment agreement or the company charter must clearly formulate the purpose of the partnership.

The Bank is allowed to conclude partnership agreements if the financial funds or property presented by the parties for the purpose of carrying out partnership activities originate from permissible sources. When creating a company based on partnership, all necessary confirmations must be obtained regarding compliance with the rules and principles of Sharia in the performance of operations in the process of partnership activities, including the management of the company, observing Sharia rules.
When making amendments to the partnership agreement, if the profit sharing coefficient is revised, each partner must bear losses in accordance with his contributed share in the partnership capital.
If material assets (goods) are contributed to the capital of a company established on the basis of a Musharaka partnership agreement, the monetary value of such assets must be determined by independent experts.
As a contribution to the capital of a company established on the basis of a Musharaka agreement, it is not allowed to contribute debt obligations (accounts receivable). Debt obligations can be contributed to the capital of a company established on the basis of a Musharaka partnership agreement only if they are inseparable from other assets presented as a contribution to the capital. At the same time, the cost of net assets must be confirmed by independent auditors.
The contract for the creation of a company based on partnership must provide for the obligation of each partner to act within the framework of the contract and in the interests of the company, as well as unconditional compliance with the rules and principles of Sharia.
The contract may provide for the condition of carrying out the management of the company by certain partners or one partner. In this case, other partners are obliged to adhere to this decision and not take actions on behalf of the company.
The Musharaka contract may provide for the appointment of a manager not from among the partners, for a fixed remuneration, included in the company's costs or payments in the form of a part of the investment profit and a fixed remuneration in the form of an incentive for the manager. If from the very beginning management is carried out based on a percentage share of the received profit, then this action classifies the manager as a Mudarib (entrepreneur) and in this case he has the right only to a share in the profit, if any, and he is not paid any more remuneration for the manager's services.
It is not allowed in the Musharaka contract to determine a fixed remuneration for a partner who contributes his share to the management of the funds of the company established on the basis of the Musharaka agreement, or who provides his services in any other form, for example, provides services in the field of accounting. At the same time, it is allowed to give him a larger share of the profit than if he had earned in accordance with his share in the partnership capital.
The Musharaka contract must provide for the liability of partners to provide security to cover losses in the event of unlawful actions, negligence, careless attitude, or violation of the contract by partners/partner.
If a guarantee of compensation for losses incurred by some or all partners is provided by a third party, such a guarantee must meet the following requirements:

legal capacity and financial obligation of such a third party acting as a guarantor must be independent of the Musharaka contract;
the guarantee cannot be provided for a certain compensation and cannot be related to the Musharaka contract;
the third party acting as a guarantor must not own more than half of the amount of capital in the company for which it provides a guarantee;
the company receiving the guarantee must not own more than half of the amount of capital of the company providing such a guarantee;
the partner in whose favor the third-party guarantee is issued has no right to refuse to fulfill his obligations under the contract if the guarantor does not fulfill the conditions of the guarantee.

The Musharaka contract must provide for a procedure for distributing profit between the parties in the form of a share of the received profit proportionally to the contribution of each partner to the company's capital. Profit cannot be established as a fixed monetary amount.
The Musharaka contract may provide for a change in the partners' share in profit distribution on the date of its distribution or the right of a partner to assign on the date of profit distribution a part of the profit due to him in favor of another partner.
The Bank has no right to voluntarily accept losses of other partners. But in the Musharaka contract, the Bank may provide for the right of other partners to voluntarily accept without any prior condition responsibility for losses at the moment of their occurrence.
Partners are permitted to agree on the use of any profit distribution method, regardless of whether it is constant or variable. For example, they may agree that the percentage share of profit in the first stage of the contract differs from that in the second stage, depending on the mismatch of periods or the amount of profit received. This is permitted provided that the use of such a method does not result in a situation where a partner is excluded from profit participation.
Profit must be distributed based on actual results, without taking into account the expected profit of the company's activities.
It is not permitted to include in the terms or profit distribution method of a Musharaka contract any provision or condition that may lead to a violation of the principle of profit distribution. Any condition or profit distribution method that may lead to such a result renders the contract invalid.
Partners are not permitted to stipulate in the contract a provision according to which one of the partners receives a lump sum from the profit or a percentage of the company's capital created on the basis of the Musharaka contract as a share of profit.
It is permitted to agree that if the amount of received profit exceeds a certain maximum threshold established by the parties, the excess profit belongs to a specific partner. The parties may also agree that if the profit does not exceed the maximum amount or is below such amount, the profit is distributed in accordance with their contract.
Upon completion of the partnership term or its liquidation, profit may be finally distributed based on the proceeds from the sale of all existing assets of the company created on the basis of the Musharaka contract, at market value.
It is permitted to distribute any funds to any party in advance, i.e., before actual or constructive assessment, provided that final actual settlements take place at a later stage. In this case, the parties are obliged to compensate the company for any amount they received in excess of their entitled share of profit after actual or constructive assessment.
If the subject of the Musharaka contract is assets acquired for lease (leasing) that will generate income, or if the subject of the contract is services that will generate receipts, the distributed amount is distributed annually to partners in advance and is subject to settlement and compensation at the end of the Musharaka contract term.
It is permitted, based on the charter or decision of the parties, not to distribute the company's profit or to periodically retain a certain amount of profit as a solvency reserve or a reserve to cover capital loss (investment risk reserve).
It is permitted to agree and retain part of the profit for charitable donations.
The parties may conclude a Musharaka contract for a specific term or without specifying a term, or establish a resolutory condition as the basis for terminating the contract.

Each partner has the right to terminate the Musharaka contract (i.e., withdraw from the company) after providing proper notice to his partner(s). In this case, he has the right to his share in the company, and his withdrawal does not lead to the termination of the partnership of the remaining partners.

In the case of a fixed-term contract, the parties are permitted to agree on early termination of the partnership. In all such cases, the obligations and actions performed by the partners before the termination of the contract remain unchanged and continue to exist.

A partner is permitted to give a binding promise to purchase, either during the period of the company's existence or at the time of its liquidation, all assets of the company created on the basis of the Musharaka contract at their market value or by agreement on the date of purchase. It is not permitted to give a promise to acquire assets of the company created on the basis of the Musharaka contract at a predetermined nominal value.
An enterprise created on the basis of a Musharaka contract ceases its activities upon the expiration of the contract term or before this date, if the partners decided to terminate it early, or in the case of an enterprise created for a specific business, after the actual liquidation of assets that constitute the subject of the partnership agreement. Termination of the Musharaka contract may occur in the case of anticipated liquidation. In this case, the Musharaka contract is considered completed, and the parties, if they wish, start a new partnership, through which assets not sold during actual liquidation but evaluated based on anticipated liquidation are considered the capital of the new enterprise.

If liquidation is associated with the expiration of the contract term, all existing assets are sold in accordance with current market prices, and the proceeds from their sale are used for the following purposes:

a) for liquidation costs;

b) for payment of financial obligations from the enterprise's net assets;

c) for distribution of remaining assets among partners in accordance with their share in the company's capital. If there are not enough assets and the parties cannot return all their invested capital, the assets are distributed proportionally to their share in the company's capital.

A company established for the purpose of providing services is created on the basis of a contract between two or more partners to provide services related to a specific profession or qualified labor, or to provide specific or professional services, as well as to manufacture goods. Partners distribute profit according to the agreed ratio.
A company created on the basis of a partnership for the provision of services has no monetary capital. Partners may distribute various types of services among themselves and may assign some or all partners to provide a series of services or a specific service in such a way as to achieve interaction for the provision of the entire volume of services.
Profit is distributed among partners in accordance with the agreed ratio, but the contract cannot stipulate a provision according to which a specific partner is paid a lump sum from the profit.
If the company established on the basis of a partnership for the provision of services requires means of production, each party is permitted to provide the necessary means of production required for the provision of its services. In this case, each partner has ownership rights to the means of production he provided. Partners may contribute funds to acquire necessary equipment or tools based on joint ownership. It is also permitted for a party participating in the Musharaka contract to provide means of production necessary for the company for remuneration, which will be charged to the company's current expenses.
The Bank carries out accounting for "Musharaka" operations in accordance with the requirements of International Financial Reporting Standards, IFRS 28 "Accounting for Investments in Associates".
Assets placed under a Musharaka transaction are classified as investment activities, carry credit risk, and fall under all restrictions related to the placement of loans.

When calculating the capital adequacy ratio, assets placed under a Musharaka transaction are equated to assets with a risk degree in accordance with the Instruction on Determining Capital Adequacy Standards.

According to the regulation on asset classification and corresponding provisions for potential losses and write-offs, and in accordance with internal procedures, the Bank monthly assesses these assets for impairment and creates a reserve.

(In the edition of the Resolution of the National Bank of the Kyrgyz Republic Board of July 16, 2014 No. 32/6)

Chapter 2.3

"Murabaha" Transaction

Murabaha Transaction is a transaction for the sale of goods purchased by the Bank upon the client's application. The sale price of the goods by the Bank is determined by the parties as the sum of the purchase price and the agreed markup in the contract. The markup may be established in the form of:

a fixed lump-sum payment;
a percentage of the cost of goods.

The Bank finances the commercial operation - it purchases goods in its own name and at its own expense upon the client's order. At the same time, the Bank assumes all the risk of the commercial operation.

When selling goods to the Client under a Murabaha contract, the Bank must be the owner of the goods.

The Murabaha contract is concluded in writing, simple or notarized. Ownership of the goods transfers after full payment of the price, unless otherwise provided by the contract terms. If ownership of the property is subject to state registration, ownership arises for the purchaser at the moment of its registration. If the contract for the alienation of property is subject to state registration, ownership arises for the purchaser at the moment of its registration.

Payment for goods under a Murabaha contract may occur through regular installments on a short-term or long-term basis. After concluding the contract, the Bank cannot demand additional payments due to delay or extension of payment, arising for any reason or without reason.

(In the edition of the Resolution of the National Bank of the Kyrgyz Republic Board of December 17, 2008 No. 47/3)

A material condition of the Murabaha transaction is the mandatory indication and separation in the sale price of the markup amount.
The Murabaha transaction is carried out on the basis of a written application to the Bank by a potential client wishing to purchase a specific good from the Bank.

In the application, the client indicates the name of the good, the approximate price at which he is willing to purchase it, as well as the purchase conditions, typically installment payments. The client may also indicate the seller from whom the Bank may purchase the good. The Bank has the right to independently choose the seller if there are more acceptable offers from other sellers.

The Bank concludes a sales contract with a specific seller, in which it is specified that the Bank purchases the good for subsequent sale to the client under a Murabaha contract.
It is not permitted to conclude a sales contract if the client was bound by any prior contractual obligations regarding the good that is the object of purchase and subsequent sale under a Murabaha contract.

The seller must be a third party in relation to the client and the Bank. It is not permitted for the client to act as both the seller in the Bank's sales transaction and the client in the Murabaha contract with the Bank.

In exceptional cases, the Bank may purchase goods from a party who is a close relative of the client, provided there is a right of sale and repurchase.

The Bank has the right, after purchasing goods from the seller, to establish the possibility of their return within a certain period. If the client does not repurchase the goods from the Bank, the Bank may return the goods to the supplier within a certain period, by agreement of both parties. This possibility remains valid until the goods are repurchased from the Bank.

The sales contract with the goods supplier specifies:

names of the parties;
subject of the contract;
name of the goods;
quantity of goods, price, payment terms and conditions;
delivery terms;
rights and obligations of the parties;
penalties for non-performance of obligations;
method of security;
other conditions.

The Bank may conclude a sales contract independently or through an agent. As an agent, the Bank may appoint the client, in which case the client acts on behalf, in the name of, and by order of the Bank, under the terms stipulated in the agency contract, which must reflect the following: subject of the contract, names of the parties and goods, payment terms and conditions, documents confirming the sales transaction, other conditions.

In cases where the client acts on behalf of the Bank as an agent, the following conditions must be observed:

a) the Bank itself must pay the Seller for the goods without crediting funds to the account of the client acting as an agent. The Bank may provide funds to the client acting as an agent only in the following cases:

if the seller of the goods is an individual entrepreneur operating in accordance with the current legislation of the Kyrgyz Republic;
when goods are purchased outside the Kyrgyz Republic.

In this case, the total balance of funds issued for the purchase of goods to clients acting as agents under agency contracts must not exceed 20% of the Bank's financing portfolio for Murabaha operations;

b) the Bank must obtain documentary confirmation from the seller that the sale was effected.

All documents and contracts related to the sale-purchase of goods must be in the name of the Bank, even if the client acts as the Bank's agent.

The Bank must receive the goods from the supplier's territory or any other place specified in the delivery terms.

The Bank bears the costs of delivering the goods, which are included in the cost of the goods.

The Bank assumes responsibility as the owner of the goods and also bears subsequent risks, which may be insured. Insurance remuneration arising before the sale of goods to the client belongs entirely to the Bank.

Insurance costs are included in the price of the subject purchased under the Murabaha contract.

(In the edition of the Resolutions of the National Bank of the Kyrgyz Republic Board of August 28, 2013 No. 32/8, December 27, 2017 No. 2017-P-12/54-12-(BS))

To ensure proper performance by the client of the promise to conclude and execute the Murabaha agreement, the Bank must conclude a pledge agreement for monetary funds or another type of pledge with the client. The monetary amount transferred as collateral cannot be invested by the Bank if permission from the client was not obtained for this.

The Bank is obliged to return the collateral after the client's execution of the Murabaha agreement. Upon the client's application, the deposited amount may be credited towards payment in accordance with the Murabaha contract.

The Bank bears risks associated with damage to the goods during transportation or storage, and they cannot be covered by the collateral.

In the event of the client's breach of promise, the Bank has the right to sell the acquired goods to third parties. If the actual realization price was lower than the price at which the Bank acquired the goods, the Bank has the right to deduct the specified difference from the collateral amount and return the remainder to the client.

The Bank may take an advance payment after concluding Murabaha for the purchase orderer. This may be done during the preparation of contracts at the stage when the client has given a promise to buy the goods.

If the seller of the goods was chosen by the client himself, the Bank must include the following conditions in the contract:

a) regarding the provision of security by the client for proper performance of the sales contract with the seller;

b) regarding the reimbursement by the client of all losses incurred by the Bank due to the seller's non-performance of the contract, including possible court costs, including from the security, if the seller does not perform the sales contract. This condition must remain in effect even if the Murabaha agreement was not executed.

When concluding a Murabaha contract, all conditions under which the commercial operation will be carried out must be stipulated, including:

all costs included by the Bank in the sale price, including payments to third parties. Costs of paying salaries to Bank employees cannot be included in costs;
the realization price;
the markup - remuneration received by the Bank from this transaction.

At the same time, the realization price or markup cannot be established in an undefined manner, for example, depending on any indicators that will be known in the future. It is permissible if the price and markup are established depending on indicators at the stage of the agreement, so that the Bank's markup is known to the client in advance before signing the Murabaha contract. The size of the markup cannot depend on temporal factors.

The Bank may include the following conditions in the Murabaha contract:

a) that the Bank is not responsible for any or all defects of the goods after the goods pass into the client's possession;

b) that the Bank has the right to sell goods to a third party, if the client refuses to accept the goods after the Murabaha contract comes into effect, with the client reimbursing the shortfall to cover the Bank's costs.

The Bank is not permitted to conduct Murabaha transactions:

a) regarding the following goods: gold, silver, currency;

b) with working capital where the security of assets is accounts receivable;

c) in the case of refinancing the transaction.

When creating Musharaka, it is prohibited for one of the parties to participate through Murabaha on the terms of cash payments or deferred obligations.

Payment under a Murabaha contract is made by the client in accordance with the contract terms.

The Bank may demand early repayment from the client in the event of unjustified delay of the next installment, provided that the client is notified in advance of the payment deadlines.

If the client has not made full payment, the Bank does not register ownership of the goods in the client's name until the installments are paid in full.

The Bank may sell the goods if the client delays payments for longer than the period specified in the contract. If the Bank sells the goods, the payments already received from the client are reimbursed.

In the event that the Bank received security from the client, the client gives instructions to the Bank to sell the collateral to cover the debt without going to court.

In the event of delayed payments by the due date, the entrepreneur may, in accordance with the Murabaha contract, direct the established amount from the overdue payment or part of the debt to charitable purposes.

Commission remuneration and fees for the possibility of providing financing from the client by the Bank are not charged.

Expenses for preparing documents for the contract are shared between the Bank and the client, if they have not agreed that one party will pay the expenses. It must be observed that all expenses are indicated fairly and reflect the volume of work performed.

If Murabaha for the purchase orderer is carried out through syndicated financing, the Bank acting as the organizer of syndicated financing has the right to claim remuneration due to be paid to the participants of the syndicated financing.

The Bank may charge for preparing a technical-economic justification if it is prepared at the client's request and for his benefit, and the client has agreed to pay the Bank.

The Bank's initial direct costs (commission to the intermediary, legal services fees, etc.) associated with concluding the contract to acquire the subject of the Murabaha contract from the supplier are recognized as current period expenses.
The Bank's investments under the terms of a Murabaha contract are initially recorded in the balance sheet at the amount of funds invested in the transaction, in the sub-account of balance sheet accounts for other Bank property.
Subsequent costs of the Bank associated with the purchase of goods, as well as transportation costs, import duties, and other expenses, are included in the purchase price of the goods.
In accordance with the terms of the concluded contract for the sale of goods to the client, the Bank recognizes the credit issued to the client in the amount that the client is obligated to pay to the Bank in accordance with the contract. Subsequent accounting and recognition of income from the transaction are carried out in accordance with the requirements of IFRS 39 and regulatory legal acts of the NBKR.

In the event of a lump-sum payment by the client of the total payment amount for the goods, the Bank directs the received funds towards loan repayment and recognizes income.

In the event that, under the contract terms, the client pays for the goods in installments according to a payment schedule, the Bank accrues income from the Murabaha transaction monthly in accounting, according to the payment schedule. The amount of received funds is directed towards loan repayment and accrued income.

The Bank periodically assesses the quality and magnitude of the risk of possible losses associated with assets under Murabaha transactions, with corresponding classification and provisions to the Provision for Potential Losses and Write-offs (PPLW), in accordance with the Regulation on asset classification and corresponding provisions for potential losses and write-offs.
Assets placed under a Murabaha transaction are accounted for as loans, equated to assets carrying credit risk, and therefore fall under all restrictions related to the placement of loans.

When calculating the capital adequacy ratio, assets placed under a Murabaha transaction are classified as loans with a credit risk degree of 100%.

According to the Regulation on asset classification and corresponding provisions for potential losses and write-offs, and in accordance with internal procedures, the Bank monthly assesses these assets for impairment and creates a reserve if necessary.

In conducting this transaction, the Bank pays special attention to country and transfer risks, supplier and insurer reliability, and the safety of goods delivery.

The Bank may conclude contracts with Islamic financial institutions to provide financing to clients for "Murabaha" transactions, observing principles and conditions corresponding to Shariah standards. The contract between the Bank and the Islamic financial institution providing financing for the "Murabaha" transaction must be approved by the Bank's Shariah Board.

(In the edition of the Resolution of the National Bank of the Kyrgyz Republic Board of June 11, 2014 No. 25/9)

Chapter 2.3.1 Commodity Murabaha Transaction

(Chapter in the edition of the Resolution of the National Bank of the Kyrgyz Republic Board of March 28, 2018 No. 2018-P-12/10-6)

Commodity Murabaha (tavar ruk) is a transaction concluded for the purpose of obtaining monetary funds, consisting of two contracts: the purchase of goods with deferred payment under a Murabaha contract and the subsequent sale of said goods to a third party, who is not the initial seller, for immediate payment.

(In the edition of the Resolution of the National Bank of the Kyrgyz Republic Board of March 28, 2018 No. 2018-P-12/10-6)

The commodity Murabaha transaction is applied by the Bank as an instrument for attracting monetary funds, including investments. This transaction may be considered as an instrument for placing monetary funds for one of the parties to the transaction if the parties to the transaction are Financial and Credit Organizations (FCOs). This transaction cannot be used as an instrument for financing bank clients or attracting monetary funds from bank clients.

(In the edition of the Resolution of the National Bank of the Kyrgyz Republic Board of March 28, 2018 No. 2018-P-12/10-6)

When selling goods, the party selling the goods must be the owner of the goods.

(In the edition of the Resolution of the National Bank of the Kyrgyz Republic Board of March 28, 2018 No. 2018-P-12/10-6)

Monetary funds obtained as a result of the commodity Murabaha transaction must be used in operations corresponding to Shariah standards.

(In the edition of the Resolution of the National Bank of the Kyrgyz Republic Board of March 28, 2018 No. 2018-P-12/10-6)

Agreements for the commodity Murabaha transaction are concluded in writing. Links between the obligations of the parties under two agreements (an agreement for the purchase of goods with deferred payment and an agreement for the sale for immediate payment) are not permitted.

(In the edition of the Resolution of the Board of the National Bank of the KR of March 28, 2018 No. 2018-P-12/10-6)

The buyer of the goods (the object of commodity Murabaha) must be a person who is not the seller from whom the goods were acquired with deferred payment (the goods must be sold to a third party).

(In the edition of the Resolution of the Board of the National Bank of the KR of March 28, 2018 No. 2018-P-12/10-6)

At the time of concluding the transaction, the goods must be in stock with the seller and must be in his ownership. In the absence of goods at the place of concluding the transaction, it is necessary to additionally provide the buyer with data on the goods in the form of a specification or samples, as well as information on the volume of goods and their location, so that the purchase of goods by the buyer was valid, not fictitious.

(In the edition of the Resolution of the Board of the National Bank of the KR of March 28, 2018 No. 2018-P-12/10-6)

When concluding the commodity Murabaha transaction, the buyer of the goods may appoint the seller from whom the goods were acquired with deferred payment, or his representative, as an agent for the sale of the goods purchased from this seller (or his representative). In such cases, the agency agreement must be concluded after the buyer takes possession of the goods.

(In the edition of the Resolution of the Board of the National Bank of the KR of March 28, 2018 No. 2018-P-12/10-6)

A commodity Murabaha transaction cannot be concluded with respect to gold, silver, or various types of currency.

(In the edition of the Resolution of the Board of the National Bank of the KR of March 28, 2018 No. 2018-P-12/10-6)

Chapter 2.4

Transaction "Ijara and Ijara Muntahia Bittamlik"

(The title of the chapter is in the edition of the Resolution of the Board of the National Bank of the KR of December 17, 2008 No. 47/3)

Ijara is a type of investment activity for the special acquisition by the lessor of equipment or other property in ownership and providing it to the lessee in property lease (rental) for temporary possession and use for an agreed term, on a paid basis.
Ijara Muntahia Bittamlik is a transaction involving an Ijara agreement, according to which the client receives the right to buy out the property previously taken in lease (temporary possession and use), either upon expiration of the Ijara agreement term, or gradually during the period of the agreement's validity.
Ijara Agreement is an agreement according to which the lessor undertakes to acquire in ownership the property specified by the lessee and provide this property to the lessee for a fee for temporary use.

Lessee - a physical or legal entity that, in accordance with the Ijara Agreement, is obliged to accept the subject of the agreement for a certain fee for a certain term and on certain conditions for temporary possession and use.

Lessor - a bank that, at the expense of its own and/or borrowed funds, acquires in ownership during the implementation of the Ijara Agreement property and provides it as the subject of Ijara to the Lessee for a certain fee for a certain term and on certain conditions for temporary possession and use with or without the transfer of ownership rights to the subject of the agreement to the Lessee.

Seller - a physical or legal entity that, in accordance with the sales agreement concluded with the Lessor, sells to him within the established term the property that is the subject of Ijara. The Seller may simultaneously act as the Lessee within the framework of one Ijara Agreement.

Rental payments are the fee for possession and use of the subject of the Ijara Agreement. These payments include reimbursement of the Lessor's costs associated with the acquisition and transfer of the subject of Ijara to the lessee, reimbursement of costs associated with providing other services provided for by the agreement, as well as the Lessor's income.

The Ijara transaction is concluded by the bank based on the client's application for the acquisition of property from a specific supplier, and financial and legal documents necessary for making a decision to conclude the agreement.

To make a decision to conclude an Ijara transaction, the bank must assess the lessee's ability to pay rent, as well as assess the liquidity of the property to identify opportunities for re-leasing the property or its sale.

Upon a positive decision by the Bank, the Lessee provides a written promise to lease the property.

The Lessee pays a certain amount agreed upon by the parties as a guarantee of fulfilling the promise - to take the property into lease. The paid amount is used only to compensate for damages in case of the customer's breach of the promise.

With the agreement of the customer, the Bank may use it for investment based on a "Mudaraba" agreement concluded between the Bank and the Lessee.

The subject of the Ijara transaction may be any non-consumable things, including: enterprises and other property complexes, buildings, equipment, vehicles, and other movable and immovable property.
Leased property must be used subject to its preservation, and the benefits received from the performance of the Ijara Agreement must be lawful and comply with Sharia requirements.
The subject of the Ijara Agreement may be a share in individual assets that are held together with the lessee, regardless of whether the lessee is a partner of the lessor or not. In this case, the lessee may benefit from the leased share in the same way as the lessor, i.e., by means of time-sharing or by determining a certain part of the property.
The Lessor assumes responsibility for any defects caused to the leased property that reduce the quality of use of the property, and does not exclude responsibility for any deterioration that the leased property may undergo as a result of its own actions, or as a result of the impact of events that are beyond its control, affecting the benefits that were supposed to be received under the Ijara Agreement.
If the benefit from the leased property is reduced completely or partially as a result of the lessee's wrongful actions during the lease of this property, then the lessee is obliged to eliminate obstacles to the lessee's receipt of benefits. In this case, the lease term is extended for the period during which the lessee could not receive benefits from the leased property; the lessee must not refuse the lease during the period of lost benefits.
The Lessor carries out major technical maintenance. The Lessee must perform current or periodic (ordinary) technical maintenance.
The Lessor is responsible for the leased property during the period of the Ijara agreement, if the lessee does not commit any wrongful actions or negligence regarding the leased property.

If insurance of the property is mandatory under legislation, the Lessor must insure the property in accordance with Sharia standards. In the event that insurance of the property in accordance with Sharia standards is impossible, the property may be insured by traditional method with the corresponding approval of the Bank's Sharia Board. Insurance expenses are included in the rent. After signing the agreement, the Lessor cannot charge the Lessee any funds beyond the established size of the rent. The Lessor may also appoint the Lessee as an agent to insure the property at the expense of the Lessor.

(In the edition of the Resolution of the Board of the National Bank of the KR of March 28, 2018 No. 2018-P-12/10-6)

To fulfill the Ijara Agreement, the bank acquires property in ownership. The property may be acquired from a person who will subsequently become the Lessee and then be leased to this person.
The Lessee may conclude a sublease agreement on terms different from the lease agreement, with notification to the Lessor.
The Lessee may lease the property to its owner at the first stage of the lease for a rent that is lower, equal to, or higher than what he pays, if both rental payments are paid based on immediate delivery and immediate payment. Counter-payments cannot be higher due to deferred payment.
The Lessor may acquire or manufacture the property described in the specifications upon the application of the Lessee.

The Lessee has the right to refuse the property that does not correspond to the specification.

The Lessee together with the Bank may acquire property that he plans to lease. Accordingly, the rent will be paid by the Lessee for the share that he does not own.
The Bank may appoint the Lessee or a third party as an agent to acquire property according to the agreed specification and price for further transfer to lease to the Lessee.
The Ijara Agreement is concluded in writing and is subject to notarization and state registration in cases provided for by the legislation of the Kyrgyz Republic.
The essential conditions of the Ijara Agreement are:

a) name, as well as a sufficient description for identification of the subject of Ijara;

b) rights and obligations of the parties related to the acquisition and transfer of the subject of Ijara;

c) size, procedure, conditions and terms of payment of rent;

d) indication of the party that carries out the selection of the subject of Ijara and the seller;

e) other conditions.

If the Lessor does not provide the property to the Lessee within the time specified in the Ijara Agreement, rent is not paid for the period between the date of entry into force of the agreement and the actual date of providing the property to the Lessee; rent is correspondingly reduced if the parties did not agree that the lease term will be extended for a period equivalent to the period of non-provision of property, after the initial end date of the agreement.
The Customer makes an advance payment, which the Lessor may retain in case of non-performance of the "Ijara" agreement due to the Lessee in order to compensate for damages.
The Lessor has the right to conclude several Ijara Agreements regarding the same property, leased for different terms to several Lessees, provided that these two agreements are not performed simultaneously regarding the same property and in the same period.
The Ijara Agreement may be concluded with several Lessees having the right to the same benefit regarding some property and lease period, without specifying a certain period of time for a specific person. In this case, each Lessee may receive benefits from the property during the period allocated to him, according to the rules provided between the Lessees.
Rent may be paid in cash, in kind (goods) or some benefits (services). Rent is established either as a one-time payment including the period of the Ijara Agreement, or as partial payments for certain periods of the agreement, may be paid entirely as a prepayment or made in installments during a period equal to, exceeding, or less than the period of the Ijara Agreement. Rent may be a fixed or variable amount by agreement of the parties.
Rent is mandatory according to the agreement and the Lessor's right to receive rent arises from the moment when the Lessee begins to receive benefits from the leased property or when the Lessor ensures the Lessee the right to receive benefits from the leased property.
In the event that rent is subject to some changes, it is necessary to provide for the amount of rent for the first period of the Ijara Agreement. It is permissible to determine the size of rent for subsequent periods according to a certain comparison base. The basis for such a comparison must be an exact procedure that is a determining factor for the size of rent for the remaining periods. This comparison base has its own certain threshold: both maximum and minimum.
By agreement of the parties, part of the rent may be paid to the Lessor, the other part directed to cover certain expenses approved by the Lessor, such as: cost of major technical maintenance, insurance, etc.
The two parties may agree to change the size of rent for future lease periods, i.e., periods in which the Lessee has not yet received some benefits from the lease, by updating the Ijara Agreement. Rent not paid for any previous periods becomes a debt that the Lessee must pay to the Lessor, therefore it cannot be increased.
To secure the payment of rent and negligent attitude to the leased property by the Lessee, collateral is provided in the form of liquid assets.
The Bank has the right to demand early repayment of rent from the client in case of unjustified delay of the next rent installment, provided that the client is reminded of the payment deadlines.
Both parties may agree on immediate payment of rent. Rent may be paid in partial payments, in this case the Lessor may provide a provision according to which the Lessee must immediately make payment of the remaining payments if he, after receiving the corresponding notice of the need to make payment for a certain period, delays the production of a partial payment without justified reason. Any acceleration of payment of the remaining payments in case of non-performance of obligations is subject to settlement at the end of the Ijara Agreement period or, if the Ijara Agreement terminates earlier, at the moment of such termination. Any extension of the contract period by the Lessor after the expiration of the specified period for immediate payment is considered consent to defer payment during the period of such extension, and not the right of the Lessee.
The Lessor cannot determine any increase in the due rent in case of delay of payment by the Lessee.
The Ijara Agreement or Ijara Muntahia Bittamlik may provide for such a provision according to which the Lessee, unjustifiably delaying payment, pays a certain amount or additional share of the due amount of rent. Payment of such a sum in excess of the due rent is directed to charitable purposes, according to the internal policy of the bank approved by the Sharia Board.

In the event of loss of the right to receive the collateral provided by the Lessee, the Lessor may deduct from such sums only the sum that is due to him as rent for previous periods, and not all sums of partial rent payments, including payments, obligations for which have not yet arisen for periods for which the Lessee has not yet received benefits from the leased property. The Lessor may also deduct from the amount of collateral compensation that the Lessee must pay for breach of the agreement.

(In the edition of the Resolution of the Board of the National Bank of the KR of March 28, 2018 No. 2018-P-12/10-6)

The Lessor may sell the leased property to a third party, notifying him of the existence of the "Ijara" agreement. At the same time, all rights and obligations under the agreement will pass to the new owner.
In the event of destruction/death of the leased property, the "Ijara" agreement terminates, remaining rent payments are not paid.

(In the edition of the Resolution of the Board of the National Bank of the KR of March 28, 2018 No. 2018-P-12/10-6)

The Lessee is responsible for damages arising to the Lessee due to his fault.
In the event of partial damage to the property, leading to a reduction in planned income, the Lessee has the right to terminate the "Ijara" agreement. Also, the parties may agree in this case to change the size of rent, but at the same time, rent is not charged for the period of lost benefits. The Lessor must provide similar property for further implementation of the "Ijara" agreement, otherwise the agreement terminates.
If the Lessee stops using the leased property or returns it to the owner without his consent, then rent remains payable to the owner for the remaining period of the Ijara Agreement, and the Lessor cannot lease it to another Lessee during this period of the agreement, but must keep the property at the disposal of the new Lessee.
The Ijara Agreement may be terminated:

a) by mutual consent;

b) in case of violation of deadlines or termination of rent payments;

c) with damage to the leased property;

d) upon expiration of the agreement term;

e) upon sale of the property to the Lessee.

Transfer of ownership is confirmed by a document separate from the "Ijara" agreement, in the form of a promise:

a) to sell for a symbolic or other agreed fee or by progressive payment of the remaining part of the rent or by payment of the market value of the leased property;

b) to gift it without specifying the reason;

c) to gift it after payment of the remaining payments.

In all the above cases, a separate document proving the promise to gift the property, sell it, or gift it after the occurrence of a certain event, must be drawn up separately from the Ijara Muntahia Bittamlik agreement. It cannot be considered an integral part of the Ijara Agreement.

The promise to transfer ownership rights is mandatory for the Lessor, while a two-sided agreement is not concluded.
Transfer of ownership is carried out on the basis of a gift or sales agreement, which is concluded separately from the Ijara Agreement and the provided promise.
In the event of concluding an agreement with a suspensive condition, upon fulfillment of the conditions, a new agreement on the transfer of ownership rights is not concluded.

If even one payment is not paid, ownership of the property is not transferred.

Rules governing the Ijara Agreement must also apply to the Ijara Muntahia Bittamlik agreement, i.e., the Lessor gave a promise to transfer ownership rights to the leased property to the Lessee. None of these rules should be violated on the pretext that the leased property was purchased by the Lessor based on the Lessee's promise that he would acquire it or that ownership rights to it will be transferred to him or that he will pay rent higher than the due rate paid for similar property, equal to the size of payments accepted for installment sales, or due to the fact that local legislation and accepted banking practices consider such an operation as a sale with deferred transfer of ownership rights.
Transfer of ownership rights to the leased property cannot be carried out by implementing a sales agreement in parallel with the Ijara Agreement, because the sales agreement enters into force on a certain date in the future.
If the leased property is destroyed or if continuation of the lease agreement becomes impossible before the expiration of its term for a reason to which the Lessee has no relation, then for both cases, rent is adjusted based on the prevailing market value.
Ijara and Ijara Muntahia Bittamlik transactions are classified as leasing operations and are reflected in accounting in accordance with the requirements of Standard 17 "Leases" of International Financial Reporting Standards (IFRS).

Ijara for accounting purposes is classified as an operating lease, and Ijara Muntahia Bittamlik - as a finance lease.

The basis for classification is one of the main principles laid down in the procedure for presenting financial reporting in accordance with IFRS - the predominance of the economic essence of the operation over its legal form.

Assets placed under Ijara (lease) transactions are classified as fixed assets of the bank, (account group 11100 of the Chart of Accounts for commercial banks and financial and credit institutions of the Kyrgyz Republic), while the total amount of fixed assets of the bank must not exceed 100% of the paid-up charter capital.

When calculating the capital adequacy ratio, assets placed under the Ijara operation are assessed as fixed assets with a credit risk degree of 100%.

Assets placed under Ijara Muntahia Bittamlik (leasing) transactions are equated to assets carrying credit risk and fall under all restrictions related to the placement of credits.

When calculating the capital adequacy ratio, assets placed under the Ijara Muntahia Bittamlik operation are classified as credits/leases with a credit risk degree of 100%.

According to the Regulation on asset classification and corresponding provisions for reserves to cover potential losses and losses, and in accordance with internal procedures, the bank monthly evaluates these assets for impairment with the creation of a reserve.

Chapter 2.5

Transaction "Qard Hasan"

Qard Hasan is a transaction under the terms of which one party, based on an agreement, provides funds to another party in the form of an interest-free loan on conditions of repayment, either for charitable purposes.

The Bank considers the Qard Hasan transaction as a form of attracting funds or as a form of providing a loan on conditions of repayment without charging any fee.

(In the edition of the Resolution of the Board of the National Bank of the KR of December 17, 2008 No. 47/3)

The Qard Hasan Agreement is concluded in simple written form.

The Qard Hasan Agreement implies the absence of any profitability from one contracting party and the possibility of disposing of the received funds by the other contracting party.

The Qard Hasan Agreement contains the following essential conditions:

the size of the amount provided;
terms of the agreement, date of repayment;
rights and obligations of the parties;
payment for bank services for maintaining the current account.

In banking activities, funds attracted on the terms of the Qard Hasan Agreement form the resource base of the bank and are considered as demand deposits.

Under the terms of the Qard Hasan Agreement, the client provides funds to the bank on an interest-free basis, with the client's right to freely dispose of them, and the bank, in turn, may use part of the attracted resources in accordance with its investment policy.

The Bank, in order to maintain the required level of current liquidity and the ability to fulfill obligations in a timely manner, must maintain a sufficient volume of funds in the cash or on the correspondent account.

Under the terms of the Qard Hasan Agreement, the Bank may provide the account holder with service using a checkbook or plastic card. In this case, the bank may charge the account holder a fee for providing services for maintaining and servicing the current account.

In individual cases, the Bank may consider the possibility of issuing a loan to the client on the terms of the Qard Hasan Agreement.

Funds attracted under a Kard Hasan contract form the Bank's deposit base and are reflected in interest-free demand deposit accounts (account groups 20000, 20200, 20400 of the Chart of Accounts for Commercial Banks and Financial and Credit Institutions of the Kyrgyz Republic).
When opening an account for a client under a Kard Hasan contract, the bank must fulfill all necessary requirements related to client identification in accordance with the regulatory acts of the NBRK.
Accounting for funds attracted by the bank on Kard Hasan terms is maintained on the bank's balance sheet accounts for the principal amount of the contribution according to the contract. Accounting for deposit accounts in foreign currency is maintained in the nominal value of the currency. Analytical accounting for clients' personal accounts is maintained by the bank in a separate automated program, reflecting all operations performed on the account.
The "Kard Hasan" transaction for attracting funds for maintenance is equated to deposit operations (term interest-free deposits) and is limited by the economic norm K5 (Norm of the maximum size of risk on deposits of individuals). Also, in accordance with this regulation, including for "Kard Hasan" operations, the bank determines concentration risk and manages it in accordance with internal regulations.

Also, accounts for "Kard Hasan" transactions are included in the calculation of mandatory reserve requirements. When calculating the liquidity coefficient, these liabilities are included in the sum of the bank's liabilities in accordance with the Regulation on economic norms and requirements mandatory for commercial banks and financial and credit institutions licensed by the NBRK.

Assets placed under "Kard Hasan" operations are equated to assets carrying credit risk, and therefore fall under all restrictions related to the placement of loans.

When calculating the capital adequacy coefficient and assessing them by risk degree, assets placed under the Kard Hasan operation are also equated to loans with a credit risk degree of 100%.

In accordance with the regulation on the classification of assets and corresponding provisions in the reserve for covering potential losses and losses, and in accordance with internal procedures, the bank monthly evaluates these assets for deterioration with the creation of a reserve.

Transactions (operations) of Kard Hasan with persons related to the bank are carried out by the bank in accordance with the Instruction on requirements for transactions with insiders and affiliated persons of commercial banks and other financial and credit institutions licensed by the NBRK.

Chapter 2.6

Transaction "Istisnaa and Parallel Istisnaa"

Istisnaa Transaction - is the sale of property that must be manufactured or built by a manufacturer or construction contractor and transferred to their customer after the completion of work.

Istisnaa Transaction is not carried out with existing property.

The subject of the Istisnaa contract is the production of a non-existent good or structure, which has special characteristics according to the customer's requirement and the manufacturer agreed to perform according to the specified specification.
The Parallel Istisnaa Transaction operates through two separate contracts. In the first contract, the Bank, acting as a supplier, concludes a contract with the customer. In the second contract, the Bank acts as a buyer and concludes another contract with the manufacturer, construction contractor, or supplier in order to fulfill its contractual obligations to the customer, which it has within the framework of the first contract. In the process of performing such transactions, the Bank receives profit from the price difference between the two contracts. One of the contracts is concluded immediately (i.e., the Istisnaa contract, which the Bank concludes with the manufacturer, construction contractor, or supplier), while the second contract (i.e., the contract with the customer) is concluded later.

Manufacturer, construction contractor - a legal or natural person carrying out entrepreneurial activity.

Client - a legal or natural person who orders the manufacture of the subject of the contract according to a certain specification.

When concluding an Istisnaa contract, the client applies to the Bank for the provision of a finished product after its manufacture within the framework of a contractual obligation, on condition that the corresponding materials and work are provided by the manufacturer. The parties to the contract determine the specifications of the goods for a certain price, which is paid immediately or after a certain period.

The Bank must assess the solvency of the customer of the property, based on the provided financial documents.

The Bank and the client conclude an Istisnaa contract before the Bank acquires the right of ownership to the subject of the contract, which must be sold to the client or the right of ownership to the materials from which the subject of the contract is (or is being) manufactured (or built).
The Istisnaa contract is mandatory for the contracting parties on condition of fulfillment of certain conditions, which include the specification of type, quality, and quantity of the subject of the contract, which must be produced.
The Istisnaa contract is concluded in writing and is legally binding. The parties to the contract are bound by all obligations and consequences arising from their agreement.
The manufacturer is obliged to manufacture the goods, which are the subject of the contract, according to the specification within the agreed period of time.
The contract indicates the price of the subject of the contract, the delivery date, the resources used (own or with the involvement of goods produced by other persons, existing before the conclusion of the contract, if otherwise not provided by the contract).
Before the conclusion of the contract, all offers for determining the price are considered.
The price of the subject of the contract is determined at the time of conclusion of the contract and may be paid in the form of money or goods. The price may be paid on a deferred basis or in installments over a certain period of time, or, if the delivery of the subject of the contract is staged, then part of the price may be paid immediately, and the rest is paid in installments according to the stages of delivery or performance of work.
The price for Istisnaa contract operations may vary in accordance with changes in the delivery date. The price of the Istisnaa contract subject cannot be determined based on "cost plus fixed profit". The Bank uses information from other dealers and suppliers to assess costs and determine prospective profit.
The Istisnaa Transaction must not be a means of simple financing for interest.
The Istisnaa contract may be concluded for the construction of real estate objects on a certain land plot, which belongs to the final buyer or contractor or on land from the use of which each of them has a benefit.
In the event of the manufacturer's bankruptcy, the client has a priority right to unfinished production, on condition of payment by the client of part of the cost of raw materials.
The parties establish a term during which the manufacturer is responsible for any defects or for the maintenance of structures that are the subject of the contract.
After the conclusion of the Istisnaa contract, it is allowed to make changes by agreement of the parties to the previously agreed specifications for production or construction, as well as to make additional requirements, on condition that the price will be adjusted accordingly and a corresponding justified period will be provided for the fulfillment of new requirements.
No additional fee is charged for extending the payment term. A discount is allowed for prepayment, even if it is not provided for at the time of concluding the contract.
In the event of unforeseen circumstances (force majeure), changes may be made to the price by agreement of the parties or by court order.
The Bank may replace the contractor and conclude an Istisnaa contract with the customer to complete the project that was started with the previous contractor. In this case, the assessment of the project should be made based on the existing status of the project, at the expense of the customer. Also, the customer bears personal responsibility for all unpaid debts, if any, arising as a result of the unfinished Istisnaa contract. A new Istisnaa contract is subsequently concluded to perform the remaining work.
In the case of construction of buildings or communal facilities on land belonging to the customer, the Istisnaa contract may be carried out at the expense of the manufacturer, if the latter does not perform the contract or cannot complete the work within the established period of time, and this provision comes into force from the moment of termination of work by the manufacturer.
If the contractor is unable to continue performing his obligation, the customer (land owner) does not have the right to acquire ownership of unfinished construction or communal facilities that are already ready, without providing compensation to the contractor. This condition depends on the reason why the contractor cannot continue work.

If the contract is not performed due to the fault of the contractor, then the client can only receive the paid value of the built structure and the construction contractor must compensate the final buyer for the amount of actual losses he incurred.

If non-performance of the contract is related to unlawful actions of the customer, the contractor has the right to receive an amount equal to the cost of the completed work, and compensation for any losses or damage.

If non-performance of the contract is related to reasons to which neither party to the contract has any relation, then the final buyer has the right only to the built structure that is already in place and neither party bears responsibility for compensation for losses or damage incurred by the other party.

In the event of a change in legislation leading to an increase in the cost of the subject of the contract, the additional costs are borne by the customer.
The Bank, acting as a manufacturer or final buyer, may as a guarantee, respectively, make advance payments or demand their payment, which is part of the price, if the conditions of the contract are fulfilled, or charged as a penalty if the contract is terminated. It is preferable that this amount be equal to the actual damage incurred.
In the Istisnaa contract, the bank may demand, regardless of whether it acts as a manufacturer or customer, such guarantees as it deems sufficient in order to ensure the implementation of its rights in relations with the customer or manufacturer. The Bank, acting as a customer, may give guarantees requested by the manufacturer, which may be in the form of a pledge, personal guarantee, assignment of rights, current account, or consent to block the withdrawal of funds from the account.
The Bank, acting as a customer, may appoint, with the consent of the manufacturer, a consulting firm with technical experience, providing a qualified assessment of the performance of the contract and recommendations for payment, supply, etc.
The Bank, acting as a manufacturer, may conclude a separate agency contract, according to which the customer is appointed as the Bank's agent for supervision of the manufacture or production of construction works in order to ensure the compliance of the subject of the contract with the contractual specification.
Additional expenses for supervising the performance of the Istisnaa contract are paid by agreement of the parties.
The manufacturer is released from the obligation if the subject of the contract is transferred to the final buyer, or to a person appointed by him, if the final buyer is able to exercise full control over the subject of the contract.
If the condition of the subject of the contract does not correspond to the contractual specifications on the date of delivery, then the customer has the right to refuse or accept it, which will mean satisfactory performance of the contract, with the possibility of changing the price.
The customer is obliged to accept the delivered subject of the contract if there is no sufficient ground for its rejection. For refusal to accept the subject of the contract, there must be a clear justification for the reason for refusal.
In the case of unjustified refusal, the subject of the contract remains in the possession of the manufacturer and in this case the manufacturer does not bear any responsibility for losses and damage that may occur with the subject of the contract, if such losses and damage are not the result of careless attitude or unlawful actions of the manufacturer. The customer bears the costs for the preservation of the subject of the contract.
Delivery of the subject of the contract is considered carried out from the moment of transfer to actual possession by the final buyer, which allows him to obtain control over the subject of the contract after the completion of the production process. At this stage, the manufacturer's obligation regarding the subject of the contract ends and the final buyer's obligation begins. If after the final buyer has the opportunity to take control over the subject of the contract, then responsibility for any losses or damage that subsequently occur with the subject of the contract, without proof of the presence of careless attitude or unlawful actions on the part of the manufacturer, lies with the final buyer.
The manufacturer may act as the customer's agent in the operation of selling the subject of the contract, if there is a delay on the part of the customer in accepting the subject of the contract within the established period of time. In this case, the manufacturer sells the subject of the contract on behalf of the customer and after deducting the agreed contractual cost returns the remaining funds, if any, to the customer. If the price received is less than the contractual price, then the manufacturer has the right to appeal to the customer for reimbursement of the remaining part.
The customer bears the costs of selling the subject of the contract.
Penalty sanctions for violation of the conditions for delivery of the subject of the contract are applied as appropriate compensation for the losses incurred. Such compensation is allowed only if the delay is not caused by unforeseen circumstances (force majeure).

Nevertheless, it is not allowed to provide for a clause on penalty sanctions directed against the final customer for non-payment.

It is not allowed to sell the subject of the contract before it passes into actual possession of the bank.
The Bank, acting as a customer, after taking possession of the subject of the contract may appoint the manufacturer as an agent for selling the subject of the contract to the bank's customers.

The agency contract is concluded separately from the Istisnaa contract.

The Bank may order goods based on specifications and pay in order to ensure the liquidity of the manufacturer the price in cash upon conclusion of the Contract. Subsequently, the Bank may conclude a contract with another party in order to sell, already as a manufacturer or supplier of goods, the specifications of which meet the requirements of the other party based on the Parallel Istisnaa contract and accordingly fulfill its contractual obligations. On condition that the delivery date provided for in the parallel contract (sales contract) should not precede the date provided for in the original purchase contract, and moreover, the two contracts must remain separate from each other.
The Bank, acting as a manufacturer and supplier, is allowed to conclude an Istisnaa contract in order to sell such goods to the customer in installments and conclude a Parallel Istisnaa contract based on immediate payment with the manufacturer and construction contractor for the acquisition of goods provided for in the specifications in the first contract and sell them to the customer. This is allowed on condition that the two contracts remain independent.
In the event of concluding an Istisnaa contract as a manufacturer or supplier, the Bank accepts the obligation for property risk, for costs for technical maintenance and insurance until the transfer of the subject of the contract to the customer. The Bank cannot in the Parallel Istisnaa contract concluded with the manufacturer, transfer to the latter the responsibility for the risk arising from its obligations to the customer.
Contractual links between obligations under two contracts (Istisnaa contracts and Parallel Istisnaa contracts) are not allowed when they are concluded. Thus, it is not allowed for a party participating in a regular Istisnaa contract to refuse its obligations or delay the transfer of the subject of the contract because its obligation under the Parallel Istisnaa contract is not fulfilled; or increase the price of supplied goods due to an increase in the cost of goods under the Parallel Istisnaa contract.

Nevertheless, there are no restrictions on the right of the organization to provide conditions and requirements when concluding a parallel Istisnaa contract, when it acts as a buyer, including a clause concerning penalty sanctions, different or similar to the clause that the customer provided for in the first Istisnaa contract, in which the Bank acts as a supplier.

In accounting, the Bank's investments in Istisnaa transactions are reflected at actual costs in the sub-account of balance sheet accounts of loans (account group 10900 of the Chart of Accounts for Commercial Banks and Financial and Credit Institutions of the Kyrgyz Republic).
All subsequent costs of the Bank related to the manufacture of the subject of the Istisnaa contract increase the value of investments and are capitalized in the sub-account of balance sheet accounts of loans (account group 10900 of the Chart of Accounts for Commercial Banks and Financial and Credit Institutions of the Kyrgyz Republic).
If by the terms of the contract, the client contributes funds as individual stages of the manufacturing process of the ordered product are completed, the Bank directs them to repay the loan.
Upon completion of the manufacturing process of the subject of the contract, the Bank, based on the Sales Contract, transfers the object to the client and ceases to recognize it only after the client has fully repaid the cost specified in the contract, with reflection of the amount of income received from the sale.
The Bank periodically conducts an assessment of the quality and magnitude of the risk of possible losses associated with assets, in the form of loans under Istisnaa Contracts with corresponding classification and provisions in the RPPU in accordance with the requirements of the NBRK.
Assets placed under Istisnaa and Parallel Istisnaa transactions are accounted for as loans, are equated to assets carrying credit risk, and therefore fall under all restrictions related to the placement of loans.
When calculating the capital adequacy coefficient, assets placed under Istisnaa and Parallel Istisnaa transactions are classified as loans with a credit risk degree of 100%. In accordance with the Regulation on the classification of assets and corresponding provisions in the reserve for covering potential losses and losses, and in accordance with internal procedures, the bank monthly evaluates these assets for deterioration with the creation of a reserve.
If the Bank's actual costs for the completion of production or construction, which are the subject of the contract, are significantly less than the estimated costs or, if the Bank obtains a discount from the party with which it has concluded a Parallel Istisnaa contract in order to acquire the subject of the contract and fulfill the contractual obligation, the bank has the right not to provide a discount to the final buyer and the latter has no right to the amount or part of it that the Bank received in excess of estimated costs. The same rule applies when the actual production costs are significantly higher than the estimated costs. At the same time, the difference received by the bank as income must be reflected in other income from bank operations.

(In the edition of the Resolution of the Board of the National Bank of KR of August 28, 2013 No. 32/8)

Chapter 2.7

Transaction "Guarantees"

Timely fulfillment of obligations under contracts for sale, exchange, lease, rights and other contracts may be secured by pledge, guarantee and other methods provided for in this chapter.
Fulfillment of an obligation may be secured simultaneously by several methods, for example, a personal guarantee and a pledge.
Transactions on securing the fulfillment of obligations are concluded in writing, and in cases established by legislation or by agreement of the parties, notarized.
Invalidity of an agreement on securing an obligation does not entail invalidity of this obligation (main obligation). Invalidity of the main obligation entails invalidity of the obligation securing it.
The tenant provides security for compensation for damage caused to the rented property due to the fault of the tenant.
Personal guarantees are divided into two types:

the debtor has the right to ask for help from the guarantor, and this guarantee is offered at the request and with the consent of the debtor;
guarantee without assistance, which is offered at the own initiative of a third party without the request of the debtor or his consent (volunteer guarantee).

The Bank provides guarantees for the client's financial obligations in the amount of the principal debt on condition of compensation by the client to the bank of the principal debt.
The guarantee establishes the term of action, the amount for which the guarantee is provided.
The creditor has the right to demand the amount of debt, both from the debtor and from the guarantor.
If the creditor releases the debtor from paying the debt, then the guarantor also becomes free from the obligation to pay the debt. However, if the creditor released the guarantor from financial liability, the debtor's debt remains.

In the event of repayment of the debtor's debt by the guarantor, the debtor compensates him only for the repaid amount.

If the Bank carries out transactions based on Mudaraba or Musharaka, it is not allowed to guarantee currency exchange rate fluctuations.
If the contract indicates that the debtor must provide security in the form of a guarantee from a third party, and the debtor did not provide a guarantor, the Bank in the event of non-provision of a guarantor has the right not to perform the obligation until the provision of security or terminate the contract.
Performance of a pledge contract is mandatory for the pledgor, even if the pledged asset is not in the possession of the creditor, and accordingly the debtor cannot terminate the pledge contract. However, acceptance of a pledge is not mandatory for the creditor, as he has the right to refuse his right to the pledge. The death of the pledgor or pledgee or liquidation of a legal entity does not affect the actions of the pledge contract, and successors will replace the pledgor and the pledgee in repayment and receipt of benefits from the pledge.
The pledgor must be the owner of the pledged property, or a person authorized to dispose of the property. The pledge must be identified in the contract. It is allowed to provide the same property under more than one pledge, on condition that the subsequent pledgee will be duly notified about previous pledges. If pledges were registered on different days, the order of their repayment will be established in accordance with the date of their registration.
The pledgor has the right to redeem the pledged property, may also give consent to the creditor to sell the property if an agreement was reached regarding the repayment of the debt.
The seller may obtain from the buyer the right to store the sold property as a pledge, in order to ensure the payment of the remaining installment payments. The buyer is also allowed to leave the property in his possession, sold on the basis of a one-time payment until he receives payment for the property.
The Creditor also has the right to impose a condition that the Debtor must transfer to him the rights to sell the pledged property, so that the Creditor can obtain the necessary amount (if the Debtor fails to repay the debt or refuses to repay the debt) from the proceeds of the sale of the pledged property, without recourse to the court.
The Pledgor (Debtor) bears full responsibility for payment of all expenses related to documentation, storage, and sale of the pledged property.
The Creditor (Pledgee) has the right to the pledge until full repayment, except in cases where he agreed to partial repayment. However, the Creditor does not have the right after the debt is paid to keep the pledge as security for other unsecured debts, unless this was agreed upon in advance. The Creditor and the Debtor may agree, after the debt is paid, to recognize the released pledge as security for any other debt that may arise between them during a certain subsequent period.
The Pledgor is allowed to use the pledged property with the consent of the Pledgee. However, the Pledgee generally has no right to use the pledged property, even if the Pledgor has given permission for this.
Commission fees for providing a guarantee letter must not exceed the commissions usually charged for such services.
It is not permitted to issue guarantee letters in favor of an applicant who will use them to obtain an interest-bearing loan or to conclude prohibited transactions.
Expenses for providing a documentary letter of credit are paid by the client. The Bank may also charge a fee for services rendered, whether as a fixed rate or as a certain percentage of the amount of the letter of credit, provided that the duration of the letter of credit is not taken into account when calculating commissions. This rule on services rendered applies to import and export letters of credit. It is permitted to charge only for incurred costs (not taking into account the extension of the term) that occurred as a result of a contractual amendment, and such a fee must be in the form of a fixed rate, not a percentage of the amount.
When charging a fee for a documentary letter of credit, the Bank must take into the following:

a) the guarantee aspect when confirming this letter of credit. Accordingly, the Bank is allowed to charge an additional amount to the incurred costs if it confirms a letter of credit issued by another bank;

b) The issuance of a letter of credit must not include interest or an operation that could potentially include interest.

It is permitted to subscribe to an Islamic Insurance Policy as security for debt obligations and it is not permitted for these debts to be insured on the basis of ordinary insurance.
A third party (except for the Mudarib or investment agent) is allowed to take a voluntary obligation to compensate the party to whom the obligation was given for investment losses, provided that the guarantee is in no way related to the financial contract of Mudaraba or the investment agency contract.
The Bank has the right to provide guarantees for participation in tenders.
The Bank, to ensure proper performance by the Client of the promise to conclude and execute a unilateral obligation, may take money in pledge, which guarantees the Bank compensation for losses in case of the client's breach of his promise.
The Bank has the right to recover its material assets that were sold to the client, but for which it has not yet received payment.
The Bank has the right to protect the integrity of the subject matter of the pledge or other security, including in court in cases of its improper use, which may lead to its loss or destruction.
The rights of parties holding pledged property as security for a debt will be senior to the rights of parties who have unsecured debts.
Guarantees issued by the bank are equated to assets carrying credit risk and, therefore, fall under all restrictions related to the placement of credits.

When calculating the capital adequacy ratio, guarantees issued by the bank are classified as off-balance sheet assets with a degree of credit risk in accordance with the Instruction on the determination of capital adequacy of commercial banks of the Kyrgyz Republic.

The Bank carries out accounting for bank guarantees in accordance with International Financial Reporting Standards.

Guarantees issued by the bank are included in the calculation of the net currency position in accordance with the requirements of the Instruction on the procedure for compliance with open currency position limits by commercial banks in the territory of the Kyrgyz Republic.

Chapter 2.8

Salam Transaction

Salam is a transaction for the purchase of goods based on deferred delivery, subject to payment of the cost of goods at the time of concluding the contract.
This is a type of sales transaction in which the price is considered as capital.
Parallel Salam is a transaction in which the Bank concludes a contract with a third party for the supply of goods, the specifications of which correspond to the specifications defined by the first Salam contract, with the supplier, provided that the fulfillment of the second Salam contract does not depend on the fulfillment of the first Salam contract.
Within the framework of Salam and Parallel Salam contracts, the Bank may act as both a buyer and a seller.
The Bank carries out the acquisition of goods and its implementation upon the application of a solvent client.
Bank - a person carrying out both the acquisition of goods and their sale.
Seller - a legal or natural person from whom the Bank acquires goods.
Interchangeable goods are such goods that have common characteristics, largely not different from each other. Any interchangeable goods can be replaced by other goods in case of their destruction, when there is no need to assess the cost of the damaged or replaced goods.
For the implementation of Salam transactions, separate contracts or a general cooperation agreement may be concluded, within the framework of which separate contracts may be concluded, indicating their term of validity.
In the General Agreement, the parties define the framework of the contract and the intention of the parties to carry out the purchase and sale, as well as define the quantity and specifications of goods, the method of their delivery, the basis for determining the price and the payment method. In addition, guarantees and other conditions are provided for.
A Salam contract is concluded in writing, and if required by legislation, it is subject to notarization and state registration. An essential condition of the contract is:

a) sale of a specific good with deferred delivery;

b) payment of the cost of goods at the time of concluding the contract.

The price under Salam contracts can be established both in the form of money and in the form of interchangeable goods (goods defined by generic signs).
If the price is defined in money, the currency, amount and method of payment must be defined. If the price is defined in the form of interchangeable goods, then their grade, type, specification and quantity must be clearly established.
The price under a Salam contract is paid immediately at the time of its conclusion. In exceptional cases, payment may be deferred for no more than three days, which must not affect the performance of the Salam contract, provided that the delay period is not equal to or exceeds the delivery period of interchangeable goods.
It is not allowed to use indebtedness as capital under a Salam contract.
A Salam contract is concluded for goods that can be weighed, measured or counted.
The subject of the contract cannot be currency, gold or silver.
Goods must be in such a form that allows for a specification that excludes any uncertainty, for which the seller is responsible.
Goods must be specifically defined in accordance with accepted practice and expert opinion.
The quantity of each unit of goods is determined depending on its condition and nature of the goods, i.e. its weight, size, volume and number of places.
Goods must be available under normal circumstances in the place where they should be at the time of delivery and be available to the seller so that he can fulfill his obligation to deliver goods to the buyer.
The parties establish a specific delivery date, but may set different dates for the delivery of goods, delivery of goods in batches, provided that their cost was paid at the time of the initial conclusion of the contract.
The parties may determine the place for the delivery of goods. If the parties to the contract do not determine the place for the delivery of goods, then such a place is the place of conclusion of the contract, unless it turns out that it is impossible to deliver goods to this place. In this case, the place for the delivery of goods is determined based on usual practice.
The delivery of goods may be secured by any kind of security for the obligation to make payments.
The buyer is not allowed to sell goods until he receives ownership rights to them.
By mutual agreement of the parties, the Salam contract may be completely terminated and obligations terminated in exchange for full compensation of its cost. Partial annulment is also permitted, i.e. annulment of the delivery of part of the goods in exchange for the corresponding part of the compensation of the cost of the contract.
The seller is obliged to deliver the goods to the buyer on the established day, in accordance with the conditions of the contract, in accordance with the agreed specifications and in the agreed quantity. The buyer, on the other hand, must accept the goods if they meet the requirements provided for by the specifications in the contract.
If the seller offers goods of higher quality than those required in accordance with the contractual specifications, the buyer must accept the goods if the seller does not request a higher price for higher quality. This applies only when the description (with lower quality specifications) provided for in the contract is not considered an essential condition.
If the quality of the delivered goods is lower than that required in accordance with the contractual specifications, then the buyer has the right to either reject or accept the goods in such condition. In case of acceptance, the parties may agree to accept such goods with a reduction in price.
The seller must deliver the goods in the form of products agreed in the contract.
Goods may be delivered in advance provided that the goods meet the agreed specifications and are delivered in the required quantity.
If the seller cannot fulfill his obligation or, the seller does not have all or part of the goods available on the established date, the buyer may:

a) wait for the goods to be available or provide a longer period of time for the delivery of goods;

b) terminate the contract and recover the paid funds.

The parties are also allowed to agree to replace the goods with other goods.

It is not permitted to include a clause providing for penalties for delay in the delivery of goods.
The seller is allowed to conclude a separate independent Salam contract with a third party in order to acquire goods of the same specification as those provided for in the first Salam contract with the aim of fulfilling the obligation under the first contract and delivering these goods. Consequently, the Bank, acting as a seller in the first Salam contract, becomes a buyer in the second Salam contract.
The buyer is allowed to conclude a separate Parallel Salam contract with a third party for the purpose of selling goods acquired on the basis of a Salam contract, the description of which coincides with the description of goods that are planned to be acquired using the first Salam contract. In this situation, the Bank, acting as a buyer in the first Salam contract, becomes a seller in the second Salam contract.
In both cases, the parties are not allowed to link obligations under two Salam contracts.

Obligations and rights under two contracts must be separate in all aspects. In case of violation of obligations under the first Salam contract, the other party (the aggrieved party) has no right to link this damage or loss with the party with whom the first party concluded the Parallel Salam contract. Consequently, she has no right on the basis of her losses or damage that she bears under the first Salam contract to terminate the second Salam contract or delay its performance.

All rules governing the Salam contract also apply to the Parallel Salam contract.
It is not permitted to issue commodity bonds on debt obligations arising from a Salam contract.
In Salam transactions, the Bank finances the purchase of a specific good by a customer-client with its subsequent sale to the client at a price including the Bank's markup. Under a Parallel Salam contract, the Bank acts as a supplier of goods, payment under the terms of the contract may be made in installments.
The Bank's investments under a Salam contract are initially accounted for in the balance sheet on sub-accounts of loans issued by the bank.
The Bank's initial direct costs (commission to the intermediary, fee for legal services, etc.) associated with the conclusion of a contract for the acquisition of the subject of a Salam contract from the supplier are recognized as expenses of the current period.
Subsequent costs of the bank associated with the acquisition of goods, as well as expenses for transportation, import duties and other expenses, are included in the purchase price of the goods and increase the amount of the loan issued by the bank.
In accordance with the conditions of the concluded contract, subsequent accounting of the loan is carried out, as well as the recognition of income from the transaction.

In the case of a one-time payment by the client of the total amount of payment for the goods, the bank directs the received funds to repay the loan and recognizes income.

In the event that, under the terms of the contract, the client makes payment for the goods in installments according to the payment schedule, the bank makes monthly accrual of income from the Salam transaction in the accounting according to the schedule. The amount of received funds is directed to repay the loan and the accrued income.

The Bank periodically assesses the quality and magnitude of the risk of possible losses associated with assets under Salam transactions with appropriate classification and provisions to the RPPU, in accordance with the Regulation on the classification of assets and corresponding provisions to the reserve for covering potential losses and losses.
Assets placed under Salam operations are accounted for as loans, are equated to assets carrying credit risk and, therefore, fall under all restrictions related to the placement of credits.
When calculating the capital adequacy ratio, assets placed under the Salam operation are classified as loans with a credit risk degree of 100%.
In accordance with the Regulation on the classification of assets and corresponding provisions to the reserve for covering potential losses and losses, and in accordance with internal procedures, the bank monthly assesses these assets for impairment with the creation of a reserve.

Chapter 2.9

Documentary Letter of Credit Transaction

The Bank is allowed to claim payment for actual expenses incurred in connection with the issuance of a documentary letter of credit. It is also permissible for the bank to charge fees for providing necessary services, regardless of whether such fees are in the form of a lump sum or they represent a certain percentage of the amount of the letter of credit, provided that the term of the letter of credit is not taken into account when determining commissions. This rule applies to services rendered under import and export credit, except in cases where changes in conditions entail changes in the schedule of the term of the letter of credit. Thus, it is permissible for the organization to charge fees only for actual incurred costs, in this case it will be a certain amount, and not a percentage content.

The Bank must comply with the following conditions:

a) the guarantee aspect in essence should not be taken into account when calculating fees for the implementation of a documentary letter of credit. Accordingly, the bank is not allowed to charge fees in addition to the actual incurred costs if it confirms a letter of credit issued by another bank;

b) the issuance of a letter of credit does not imply profit-bearing interest, and does not become a means of obtaining such profit;

c) it is not permissible to use a combination of contracts in a documentary letter of credit as justification for including prohibited operations, such as fees for providing a guarantee or issuing a loan.

The Bank may open all types of documentary letters of credit. The Bank is also allowed to participate or play the role of an intermediary in such transactions in accordance with existing forms of executable documentary letters of credit.
It is inadmissible for the Bank to carry out transactions on a documentary letter of credit either for itself, or on behalf of another client or organization, or by joint work, when such a letter of credit relates to goods prohibited by Sharia or on the basis of a contract that is invalid, incorrect (according to Sharia).
The Bank is obliged to execute the letter of credit if it corresponds to the instructions, except in cases of document forgery.
The Bank has the right to require security for the obligation arising in connection with a documentary letter of credit or to provide a documentary letter of credit as security for payment in favor of companies and banks. The Bank may act as an intermediary to secure a documentary letter of credit, using permissible and available forms of security, including in the form of funds in current accounts or funds deposited by the client under a Mudaraba contract.
The Bank is not allowed to use interest-bearing bonds, shares of companies engaged in activities prohibited by Sharia, and interest-bearing receivables as security.
If the client intends to purchase imported goods from the bank with financing under a documentary letter of credit under a Murabaha contract, the following conditions must be observed:

a) The opening of a documentary letter of credit must not precede the conclusion of a sales contract between the customer and the beneficiary (seller).

b) The Bank must be the party that purchases goods from the supplier and then sells them to the client under a Murabaha contract in accordance with the rules of Sharia regarding the Murabaha contract for the customer for supply.

If a documentary letter of credit includes a provision that is subject to prevailing principles and practices that unify documentary letters of credit, such a statement must be qualified by including a clause that it does not violate the rules and principles of Sharia.
The Bank is not allowed to discount accepted bills of exchange, i.e. to acquire these bills at a cost less than their nominal value.
It is inadmissible for the bank to negotiate a reduction in the nominal value of documents on the basis of which payment must be made upon presentation or payment upon presentation of bills of exchange.
Accounting for letter of credit operations is carried out in accordance with the Bank's Accounting Policy and International Financial Reporting Standards.

When calculating the capital adequacy ratio, uncovered letters of credit are classified as off-balance sheet assets with a degree of credit risk in accordance with the Instruction on the determination of capital adequacy standards of commercial banks of the Kyrgyz Republic.

A letter of credit that is an obligation of the bank is included in the calculation of the net currency position in accordance with the requirements of the Instruction on the procedure for compliance with open currency position limits by commercial banks in the territory of the Kyrgyz Republic.

Chapter 2.10

Foreign Exchange Operations

The Bank has the right to carry out transactions for the purchase and sale of foreign currency subject to their compliance with the following Sharia rules:

a) both parties must have the currency to be exchanged for the opposite, before making the exchange, regardless of whether the ownership of the currency is actual or presumed;

b) the units of currency exchange must be of the same amount, even if one of them is a banknote and the other is a coin of the same country;

c) the contract will not include any conditional alternatives or clauses on postponement regarding the delivery of one or both units of exchange;

d) currency transactions must not be carried out on futures and forward markets.

It is prohibited to conclude currency contracts for future sales. This rule must be observed regardless of whether these contracts are exchanges of deferred money transfers for the repayment of debts, or the execution of a deferred contract in which there is no joint ownership of both units of exchange by the parties.
It is prohibited to conclude any transactions on the forward foreign exchange market, even if the purpose is an insurance transaction (conclusion of term transactions for the sale or purchase of foreign currency) to avoid losses in certain operations, the price of which may fall in the near future.
The Bank has the right to conclude insurance transactions for future currency depreciation in cases where the bank must fulfill obligations or Murabaha in the corresponding currency.
The Bank and the client are allowed to agree that the repayment of loans and other credit operations may be carried out in another currency in accordance with the local exchange rate on the day of payment.
It is permitted to make money transfers in a currency other than the currency provided by the applicant for the transfer. This transfer consists of the exchange of currency through actual or presumed ownership, by delivery of the currency amount confirmed by a bank account, after which the transfer of the amount using the currency purchased by the applicant for the money transfer should follow. It is permitted to charge a fee for money transfers.
When concluding a contract for the sale of a certain amount of currency, rights to ownership of the entire amount must be recognized on the day of completion of the transaction term.
Ownership can be actual and presumed. The form of ownership of assets depends on their type and rules used in business customs.
Physical (actual) ownership is transferred at the moment of personal transfer into hands.
Presumed ownership of an asset is recognized in the event that the seller allowed another person to receive and sell this asset on his behalf, even if there was no physical transfer of ownership of the asset, including:

a) when the bank credits funds to the client's account;

b) when the bank concludes a contract with the client to exchange cash currency for non-cash and vice versa;

c) receipt of a check indicates presumed ownership only if the amount to be paid is available in the account of the drawer in the currency indicated on the check and if the bank has blocked this amount for payment.

A bilateral obligation to sell and buy currency is prohibited if this obligation is mandatory, even for the purpose of insurance against losses possible due to currency depreciation. However, a unilateral obligation is permitted.
Parallel purchase and sale of currency is not allowed, as it involves one of the following factors depriving it of legal force:

a) there is no delivery and receipt of two bought and sold currencies, which leads the contract to a deferred sale of currency;

b) the contract for the sale of currency becomes dependent on another contract for the sale of currency;

c) leads to a bilateral mandatory obligation of both parties to exchange currency, which itself is not permitted.

One of the Musharaka or Mudaraba partners is not permitted to be a guarantor for another partner if the transaction involves currency exchange. However, a third party may voluntarily act as a guarantor, provided this guarantee is not specified in the contract.
The exchange of currency amounts that constitute established debts of the debtor is permitted if it leads to the settlement of two debts in the case of a bilateral currency exchange, as well as to the full settlement of the existing debt.
One of the prohibited methods of entering into currency trading is when a bank client enters into currency trading without owning a sufficient amount, using loans issued by a bank operating in the currency trading sector, thereby providing the client with the opportunity to enter into a transaction for an amount exceeding what they could pay.
The bank is not permitted to lend to a client on the condition that currency transactions must be conducted only with this institution and no other. If such a condition is absent, then Sharia does not prohibit the issuance of loans.
Currency operations conducted by the bank within the framework of the Pilot Project must be carried out in accordance with the Instruction on the procedure for observing limits of open currency positions by commercial banks in the territory of the Kyrgyz Republic and the Regulation on economic indicators and requirements mandatory for commercial banks and financial credit institutions licensed by the NBKR.

Chapter 2.11

Payment Cards

The bank is permitted to issue payment cards under the following conditions:

a) The cardholder will not pay interest in the event of untimely payment of the required amount.

b) The bank may require the cardholder to make a deposit as a guarantee, and this amount cannot be spent by the cardholder. The bank must invest this amount for the benefit of the cardholder, according to Mudaraba, and inform that any income received from this amount will be shared between the Bank and the cardholder in accordance with the terms of the Mudaraba contract.

c) The bank must stipulate that the cardholder cannot use the card for purposes prohibited by Sharia, and that the bank may cancel the card in case of violation of this condition.

The bank has the right to charge a fixed, unchanging fee for cash withdrawals in accordance with the services rendered. However, the fee charged for cash withdrawals must not vary. The fee for issuing and servicing the card, as well as the commission for payments, is determined by the bank.
The bank has the right to issue a debit card to a client based on the amount available in the client's account.

The client should not pay a commission to the bank for using the card, except in cases where it is used for cash withdrawal or currency purchase at an organization other than the issuing bank.

The bank has the right to issue credit cards on the condition that the cardholder will not pay interest in the event of untimely repayment of the loan amount, nor interest for using the revolving credit limit.
The bank has the right to charge commissions from the party accepting the card as payment. Commissions are calculated as a percentage of the amount spent on the purchase of goods and services.
The bank has the right to charge the cardholder membership fees, renewal fees, and card update fees.
The cardholder is permitted to withdraw a cash amount not exceeding the limit of available funds or more, if this is pre-agreed with the bank that issued the card, on the condition that interest will not be charged on the amount.
The bank has the right to provide benefits not prohibited by Sharia, such as priority discounts in hotels, airlines, restaurant reservations, and so on.

The bank has no right to grant the cardholder privileges prohibited by Sharia, such as mandatory life insurance, entry to prohibited places, or prohibited gifts.

The bank is permitted to join an international card regulatory organization, provided that the bank does not violate Sharia rules that may be considered acceptable by these organizations.

The bank is permitted to pay membership fees, services, and other fees to the international card regulatory organization, as long as they do not include interest payments, including indirect ones, such as in the case of increasing service fees to take into account the provision of credit.

Card accounts are classified as deposit accounts and are included in the calculation of mandatory reserve requirements. When calculating the bank's liquidity ratio, these liabilities are included in the sum of the bank's liabilities.

Card accounts in terms of content are equated to deposit operations and are limited by economic indicator K5 (Maximum risk limit for deposits of individuals).

Chapter 2.12

Trust and Guaranteed Storage Transactions

(Chapter in the edition of Resolution of the Board of the National Bank of the KR dated April 25, 2008 No. 18/2)

Wadiah Yad Amanah Transaction

1.1. Transaction (contract) Wadiah Yad Amanah - a trust storage contract for money or other valuables of the client. The bank has no right to dispose of the subject of storage and can only execute the instructions of the depositor regarding this subject, charging a certain fee for this.

1.2. Services under the Wadiah Yad Amanah contract are provided by the bank in the form of storing money or other valuables in bank safes (cells).

Wadiah Yad Damanah Transaction

2.1. Transaction (contract) Wadiah Yad Damanah - a guaranteed storage contract, under the terms of which the bank has the right to dispose of the entrusted funds and receive profit from their placement.

2.2. Services under the Wadiah Yad Damanah contract are provided by the bank by opening and maintaining savings accounts.

2.3. From the profit received from the placement of funds attracted under the Wadiah Yad Damanah contract, the bank at its own discretion may pay Hibah rewards to the owners of these accounts. The bank has the right to establish the procedure, sizes, and rules for paying Hibah rewards due to clients. The amount of Hibah reward paid to clients is recognized as period expenses.

(In the edition of Resolution of the Board of the National Bank of the KR dated December 17, 2008 No. 47/3)

2.4. The bank, in order to maintain the required level of current liquidity and the ability to timely fulfill obligations under the Wadiah Yad Damanah contract, must maintain a sufficient volume of cash in the vault or on the correspondent account in the National Bank of the Kyrgyz Republic.

2.5. Wadiah Yad Damanah operations in terms of content are equated to deposit operations and are limited by economic indicator K5 (Maximum risk limit for deposits of individuals), according to the Regulation on economic indicators and requirements mandatory for commercial banks and financial-credit institutions licensed by the National Bank of the Kyrgyz Republic, approved by Resolution of the Board of the National Bank of the Kyrgyz Republic dated July 21, 2004 No. 18/1 "On Approval of the Regulation on economic indicators and requirements mandatory for commercial banks and financial-credit institutions licensed by the National Bank of the Kyrgyz Republic", registered in the Ministry of Justice of the Kyrgyz Republic on August 23, 2004, registration number 93-04. Also, according to this regulation, the bank determines and manages concentration risk.

2.6. Accounts for accounting of Wadiah Yad Damanah operations are included in the calculation of mandatory reserve requirements according to the Regulation on mandatory reserves, approved by Resolution of the Board of the National Bank of the Kyrgyz Republic dated August 27, 2004 No. 22/4 "On Approval of the New Edition of the Regulation 'On Mandatory Reserves'", registered in the Ministry of Justice of the Kyrgyz Republic on October 5, 2004, registration number 108-04. When calculating the liquidity ratio, these liabilities are included in the sum of the bank's liabilities according to the criteria specified in the Regulation on economic indicators and requirements mandatory for commercial banks and financial-credit institutions licensed by the National Bank of the Kyrgyz Republic.

Accounting for Wadiah Yad Damanah Deposits

3.1. Accounting for funds attracted by the bank under the Wadiah Yad Damanah contract is carried out on balance sheet deposit accounts for the principal amount of the deposit according to the contract. Accounting for deposit accounts in foreign currency is carried out at the currency nominal. Analytical accounting for client accounts is carried out by the bank in a separate automated program, reflecting all operations performed on the account.

Chapter 2.13

Hibah Reward

(Chapter in the edition of Resolution of the Board of the National Bank of the KR dated December 17, 2008 No. 47/3)

Hibah Reward - a type of material incentive paid to bank clients who have placed funds on the terms of Qard Hasan, Wadiah Yad Damanah, and other deposit (deposit) operations on an interest-free basis.

Since Qard Hasan, Wadiah Yad Damanah, and other interest-free deposits (deposits) do not provide for guaranteed profitability, the payment of Hibah reward is made at the discretion of the bank depending on the results of the bank's activities.

The bank may pay Hibah reward both in money and in other forms - in the form of incentive gifts, benefits, and discounts on tariffs for banking services, etc.

When placing information about the acceptance of Islamic deposits (deposits) under Qard Hasan, Wadiah Yad Damanah, and other interest-free deposits (deposits) contracts in the contracts for the acceptance of Islamic deposits (deposits) concluded by the bank with clients, the bank is obliged to inform potential clients (depositors) that in case of positive results of the bank's activities in accordance with Islamic principles of banking and financing, the bank may pay depositors Hibah reward as an incentive depending on the size of the deposit (deposit) made by the depositor.

Section 3

Risk Management

In accordance with the requirements of the Basel Core Principles for Effective Banking Supervision, the Bank must constantly work in its activities to create a solid foundation for prudential capital regulation, market discipline, and further strengthening of risk management and financial stability.
Banking operations conducted according to Islamic financing principles (IFP), like operations conducted according to traditional financing principles, are divided into active and passive, and therefore risks arising in the process of the bank applying IFP are divided into risks associated with attracting funds and risks associated with their placement.
The Board of Directors, as a supervisory body approving and controlling the bank's development strategy, establishes criteria for conducting the bank's active and passive operations. They are based on criteria defined by the Laws of the Kyrgyz Republic, regulatory acts of the NBKR, and international practice. The Board of Directors also develops and approves the legal and managerial structures of the bank so that they do not hinder effective risk control.
Based on the criteria, the Management develops, and the Board of Directors approves internal regulations, in which it is clearly defined which types and amounts (absolute and/or relative to the bank's capital) of purchases and investments require the permission of a specific body or official. One of the main criteria for conducting active operations is the requirement that any new purchases and investments do not expose the bank to unjustified risks or hinder effective supervision.
The Bank Management and the Board of Directors approve, implement, and periodically check prudential criteria, policies, practical methods, and procedures for conducting active operations involving credit risk and continuous management of such portfolios, the constant monitoring of which is carried out by the Risk Manager.
The bank's Board of Directors must ensure the implementation of sound banking practices and compliance of these operations with Islamic financing principles.
The bank's Board of Directors is responsible:

a) for formulating, approving, and periodically updating all business strategies, business plans, and policies of the bank according to Islamic financing principles;

b) for identifying the main risks to which the bank is exposed in the implementation of operations according to Islamic financing principles, as well as for establishing acceptable levels for these risks;

c) for supervising the actions of the Bank Management undertaken to identify, measure, monitor, and control risks in the implementation of operations and activities in accordance with Islamic financing principles;

d) for forming and maintaining an adequate and effective internal control system, as well as for monitoring the effectiveness of the internal control system by the Bank Management in the implementation of activities and operations in accordance with Islamic financing principles;

e) for aligning the bank's policies and procedures for implementing operations in accordance with Islamic financing principles with an expert of the Islamic Development Bank;

f) developing appropriate internal mechanisms and procedures in order to maximize the protection of the interests of the bank as a whole, its depositors, and other creditors.

The bank's internal regulatory documents (policies and procedures) must provide:

a) identification and risk management (credit, liquidity, concentration, etc.), including the impact of each type of operation conducted according to Islamic financing principles on the bank's activities as a whole;

b) policy and procedures for combating terrorism financing and legalization (laundering) of proceeds obtained criminally;

c) the procedure for conducting internal audit of the bank in order to comply with banking policies, control procedures, as well as taking appropriate measures to eliminate identified deficiencies;

d) other issues regarding the regulation of the bank's activities.

The basis for the quantitative determination of risks is net total capital (NTC). Capital adequacy requirements, capital definition, and calculation method are defined by the Instruction on determining capital adequacy standards. This Instruction specifies capital components to give special importance to those elements of capital available to absorb possible losses. As with all active operations of the bank, assets placed according to IFP affect the size of NTC through general and special reserves created for these assets.
Regardless of the principles of conducting active operations (IFP or traditional principles), capital adequacy assessment is conducted with respect to credit risk, that is, risk related to various types of assets and consisting in the inability of the client to ensure full or partial return of the asset.
Depending on the degree of credit risk, all balance sheet assets, regardless of the principles of their placement, are divided into five categories. At the same time, the main criteria, according to which balance sheet assets are assigned to a particular category, are: the type of partner, the partner's country affiliation in terms of transfer risk, asset collateral, guarantees, and terms of asset placement.
Any negative impact on capital, that is, the manifestation of one of the risks, leads to an increased risk of violating indicators related to the calculation of NTC. In this regard, the bank implements a system according to which, depending on the margin of safety for capital adequacy and the fulfillment of other mandatory indicators, control over their compliance, including operations affecting changes in indicators, is entrusted directly to the management.
In order to fulfill its main functions, the NBKR introduces restrictions on the bank's activities by establishing mandatory economic indicators and requirements for the bank to comply with according to the Regulation on economic indicators and requirements mandatory for compliance, as well as determining mandatory reserve requirements according to the Regulation on mandatory reserves.

In addition, the NBKR regulates the bank's activities, including based on the following provisions:

Regulation on minimum requirements for risk management in banks of the Kyrgyz Republic;
Regulation on minimum requirements for market risk management in commercial banks and other financial-credit institutions licensed by the NBKR;
Regulation on minimum requirements for country risk management in commercial banks and other financial-credit institutions licensed by the NBKR;
Regulation on minimum requirements for credit risk management in commercial banks and other financial-credit institutions licensed by the NBKR;
Regulation on minimum requirements for operational risk management in commercial banks of the Kyrgyz Republic;

according to which the bank develops internal policies, regulations, and procedures for determining, measuring, controlling, and monitoring risks arising in the process of its activities.

Control over the implementation of a continuous effective risk management process is entrusted to the bank's Board of Directors.
Credit risk - the probability of the borrower's failure to fulfill its obligations to the bank in accordance with the terms and conditions of the contract, which may have a negative impact on the bank's capital or its profit.
The bank's internal policy for implementing operations according to Islamic financing principles must contain practical methods and procedures for implementing credit risk control, including:

a) a justified and properly documented investment process;

b) maintaining a corresponding process of administration, assessment, and continuous monitoring/reporting on assets carrying credit risk (including the classification of these assets);

c) ensuring appropriate mechanisms for controlling credit risk.

The bank's policy for implementing operations according to Islamic financing principles must determine, according to the Regulation on asset classification and corresponding provisions for potential losses and losses, the rules for periodic review of risky assets, asset classification, and creation of provisions, as well as procedures for working with problematic assets.
The Instruction on lending restrictions establishes prudential limits to limit possible bank risks associated with placing assets carrying credit risk with a single borrower or groups of related persons. In accordance with this instruction, the bank develops and follows its own lending restriction limits. Control over the fulfillment of internal limits is entrusted to the Bank's Credit Committee and risk manager.
The definition of "related persons" is used exclusively to reflect actual risk exposure, which includes not only legally related companies but also financially related ones. Following these criteria, the Bank implements such a management information system that allows management to determine the level of concentration in its portfolio at the stage of placing assets carrying credit risk and to promptly manage emerging risks.
The bank's policy for implementing operations according to Islamic financing principles, according to the Instruction on requirements for transactions with insiders and affiliated persons of commercial banks and other FUs licensed by the NBKR, must define rules according to which assets cannot be issued to persons related to the bank on more favorable terms than corresponding investments to persons not related to the bank. The decision to issue assets to related persons is made directly by the decision of the Bank's Board of Directors.
The bank's policy for implementing operations according to Islamic financing principles must provide procedures for assessing the risk of placing assets carrying credit risk in a specific industry, for specific terms, and purposes.
Liquidity loss risk - the risk of loss to which the bank is exposed in the event of its inability to timely fulfill its obligations without incurring unacceptable losses (i.e., achieving liquidity only by selling assets, which will lead to unacceptable losses).
The bank develops an internal Liquidity Management Policy, including based on the Regulation on minimum requirements for risk management in banks of the Kyrgyz Republic. Limits on acceptable liquidity levels are established by the Board of Directors.
Liquidity loss risk management implies: good management information systems, centralized liquidity control, analysis of net funding requirements under alternative scenarios, diversification of funding sources, stress testing, and contingency planning. When managing liquidity, issues related to local and foreign currency should be considered separately.
The bank establishes a clearly defined liquidity measurement system, which includes methods for forecasting the bank's future cash flows to assess the degree of liquidity risk to which the bank is exposed under current and forecasted negative trends.
The bank develops contingency plans, including plans for the bank's secondary source of funding, which must provide for taking clear and urgent measures in case of a crisis or in cases where liquidity does not correspond to levels established by the Board of Directors. In order to maintain sufficient liquidity, the bank establishes an optimal ratio of assets and liabilities.
Liquidity loss risk management is carried out by the Liquidity Management Committee. This bank structure consists of middle and senior managers directly involved in making decisions on operations affecting the bank's liquidity.
Accounting for transactions conducted according to Islamic financing principles is carried out by the bank in accordance with the requirements of International Financial Reporting Standards.
The bank develops a policy for accounting for transactions conducted according to Islamic financing principles in accordance with the requirements of the NBKR regarding accounting policy.
The bank develops procedures with a detailed description of the rules and order for implementing transactions conducted according to Islamic financing principles.
To assess the success of implementing the Pilot Project for the introduction of Islamic financing principles, accounting for all operations conducted according to these principles by the bank is carried out both separately and as part of the bank's consolidated reporting. Regulatory banking reporting is provided to the NBKR (according to Appendix No. 1) monthly separately for operations conducted according to Islamic principles, as well as on a consolidated basis.
The Bank must maintain separate accounting and financial reporting, including the balance sheet, income statement, and cash flow statement, for operations conducted in accordance with Islamic principles, with subsequent consolidation with the Bank's balance sheet.
The NBKR has the right to establish requirements for accounting and financial reporting, taking into account the features of Islamic financing principles.
The Bank must conduct an external audit of activities conducted in accordance with Islamic principles and submit an audit report on such activities to the NBKR in accordance with the Regulation "On Minimum Requirements for External Audit of Banks and Other Financial and Credit Institutions Licensed by the National Bank of the Kyrgyz Republic" (approved by the Resolution of the Board of the NBKR No. 22/2 dated July 14, 2005).

Section 4

Organization of Bank Activities in Accordance with Islamic Financing Principles

(Section title in the edition of Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 17, 2008 No. 47/3)

1. Licensing

1.1. To commence the operation of a branch/department in accordance with the conditions of this Regulation and to obtain an attachment to the license in the form specified in Appendix 1 to this Regulation, authorizing transactions in accordance with Islamic financing principles, the Bank must submit the following documents to the NBKR:

Regulation on the branch/department, which must provide for: a) the procedure for organizing the activities of the branch/department, decision-making, coordination of decisions with the Board and, if necessary, the Board of Directors, committees, and other governing bodies of the Bank;

b) the regulation on compliance with the legislation of the Kyrgyz Republic when conducting activities of the branch/department of the Bank in accordance with Islamic principles;

c) other issues not contrary to the legislation of the Kyrgyz Republic, related to the features of activities under this Regulation;

information on the candidate for the position of an independent member of the Board of Directors, an invited qualified specialist - expert on Islamic principles;
information on the head of the branch/department of the Bank, who must possess sufficient knowledge of each type of operation authorized for the branch/department;
a business plan containing a detailed organizational structure of the branch/department of the Bank, economic justification, and the Bank's strategy for the activities of the branch/department;
information on candidates for the positions of heads of subdivisions of the branch/department of the Bank in the form of Appendix 17 to the Regulation "On Licensing of Bank Activities" (approved by Resolution of the Board of the NBKR No. 5/7 dated March 2, 2006), possessing knowledge of Islamic principles of banking;
duly approved and authorized, in the established manner, by the Board of Directors of the Bank, the main policies of the Bank for all types of activities in accordance with Islamic principles, which will be implemented in this branch/department, and providing at least:

a) procedures for identifying, measuring, monitoring, controlling, and monitoring all possible risks to which the Bank is exposed;

b) control measures to minimize all possible risks on a continuous basis;

c) a description of information systems (software for accounting and reporting on operations conducted in accordance with Islamic principles), risk management systems, and internal control systems in accordance with the approved policy;

detailed procedures for conducting each operation, the implementation of which is delegated to the branch/department;
policies and procedures for combating terrorist financing and money laundering (legalization) of proceeds obtained criminally when conducting operations in accordance with Islamic principles;
a detailed plan for opening and organizing the activities of the branch/department of the Bank.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 30, 2006 No. 38/1)

Section 5

Other Issues

The NBKR exercises supervision, regulation, and inspection of the Bank's activities in accordance with the normative legal acts of the Kyrgyz Republic, this Regulation, with the aim of implementing the pilot project. The NBKR, for the purpose of regulation and supervision, has the right to adopt normative legal acts corresponding to Islamic financing principles and, if necessary, has the right to submit draft amendments and additions to the legislation of the Kyrgyz Republic.
The Bank is obligated to provide information and documents at the first request of the NBKR in accordance with the legislation of the Kyrgyz Republic.
The Bank conducts operations in accordance with Islamic principles in accordance with this Regulation and other normative legal acts of the NBKR.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 30, 2006 No. 38/1)

In the course of its activities, the Bank must conduct continuous work to inform clients about the features of its activities in connection with the implementation of transactions in accordance with Islamic financing principles.
In the event of the Bank's failure to comply with the requirements of this Regulation, the NBKR may apply enforcement measures against the Bank in accordance with the normative legal acts of the NBKR.


	Appendix 1 to the Regulation "On the Implementation of Islamic Financing Principles in the Kyrgyz Republic within the Framework of a Pilot Project"

ATTACHMENT TO THE LICENSE

for the right to conduct banking operations

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 30, 2006 No. 38/1)

This attachment is issued ______________________________________

name of the legal entity

within the framework of the implementation of the pilot project on the introduction of Islamic financing principles in accordance with the Memorandum "On Mutual Understanding between the Kyrgyz Republic and the Islamic Development Bank and 'EcoBank', regarding the introduction of Islamic banking and financing in the Kyrgyz Republic" dated May 16, 2006, ratified by the Decree of the President of the Kyrgyz Republic dated July 12, 2006 No. 373.

________________________________________ may conduct transactions

(name of the legal entity)

in accordance with the Regulation "On the Implementation of Islamic Financing Principles in the Kyrgyz Republic within the Framework of a Pilot Project".

Regulation on the Implementation of Islamic Financing Principles in the Kyrgyz Republic within the Framework of a Pilot Project

Deputy Chairman

Lineage: Amended

Timeline