Resolution of the Board of the National Bank of the Kyrgyz Republic No. 2021-P-12/70-3-(NPA) of 15 December 2021 on Amending Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic

NATIONAL BANK OF THE KYRGYZ REPUBLIC

RESOLUTION

of 15 December 2021 No. 2021-P-12/70-3-(NPA)

On Amending Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic

In accordance with Articles 20 and 68 of the Law of the Kyrgyz Republic "On the National Bank of the Kyrgyz Republic, Banks and Banking Activities", the Board of the National Bank of the Kyrgyz Republic resolves:

1. To amend the following resolutions of the Board of the National Bank of the Kyrgyz Republic (attached):

• "On Approval of the Instruction on Determining Capital Adequacy Standards for Commercial Banks of the Kyrgyz Republic" of 21 July 2004 No. 18/2;

• "On Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic" of 25 August 2005 No. 26/5;

• "On Approval of the Instruction on Determining Capital Adequacy Standards for Banks Operating in Accordance with Islamic Principles of Banking and Financing" of 28 December 2009 No. 51/4;

• "On Approval of the Regulation on Periodic Regulatory Reporting of Banks Operating in Accordance with Islamic Principles of Banking and Financing" of 30 March 2011 No. 20/4.

2. This resolution enters into force on 1 January 2022.

3. To set the deadline for banks operating in accordance with Islamic principles of banking and financing to comply with the requirements for calculating the total capital adequacy ratio (K2.1), taking into account the capital required to cover operational risks, as provided for in paragraph 6 of the Instruction on determining capital adequacy standards for commercial banks operating in accordance with Islamic principles of banking and financing, from 1 July 2022.

4. To set the deadline for banks operating in accordance with Islamic principles of banking and financing to comply with the requirements for calculating the leverage ratio (K2.4), as provided for in paragraph 9 of the Instruction on determining capital adequacy standards for commercial banks operating in accordance with Islamic principles of banking and financing, from 1 January 2023.

5. To set for banks operating in accordance with Islamic principles of banking and financing compliance with the values of:

1) the Tier 1 capital adequacy ratio (K2.2), as provided for in paragraph 3.2 of the Regulation "On Economic Norms and Requirements Mandatory for Commercial Banks of the Kyrgyz Republic", within the following timeframes:

• from 1 January 2023 - not less than 6.5%;

• from 1 January 2024 - not less than 7.5%;

2) the Common Equity Tier 1 capital adequacy ratio (K2.3), as provided for in paragraph 3.2 of the Regulation "On Economic Norms and Requirements Mandatory for Commercial Banks of the Kyrgyz Republic", within the following timeframes:

• from 1 January 2023 - not less than 5%;

• from 1 January 2024 - not less than 6%.

6. To set for systemically important banks operating in accordance with Islamic principles of banking and financing compliance with the values of:

1) the total capital adequacy ratio (K2.1), as provided for in paragraph 3.2-1 of the Regulation "On Economic Norms and Requirements Mandatory for Commercial Banks of the Kyrgyz Republic", within the following timeframes:

• from 1 January 2023 - not less than 12.5%;

• from 1 January 2024 - not less than 14%;

2) the Tier 1 capital adequacy ratio (K2.2), as provided for in paragraph 3.2-1 of the Regulation "On Economic Norms and Requirements Mandatory for Commercial Banks of the Kyrgyz Republic", within the following timeframes:

• from 1 January 2023 - not less than 7.5%;

• from 1 January 2024 - not less than 9.5%;

3) the Common Equity Tier 1 capital adequacy ratio (K2.3), as provided for in paragraph 3.2-1 of the Regulation "On Economic Norms and Requirements Mandatory for Commercial Banks of the Kyrgyz Republic", within the following timeframes:

• from 1 January 2023 - not less than 6%;

• from 1 January 2024 - not less than 8%.

7. To set for banks operating in accordance with Islamic principles of banking and financing the validity period of subparagraph 2 of paragraph 19-1 of the Instruction on determining capital adequacy standards for commercial banks operating in accordance with Islamic principles of banking and financing, in the part concerning the exclusion of intangible assets related to technical and software products, until January 2024.

8. To the Legal Department:

• publish this resolution on the official website of the National Bank of the Kyrgyz Republic;

• after official publication, send this resolution to the Ministry of Justice of the Kyrgyz Republic for inclusion in the State Register of Regulatory Legal Acts of the Kyrgyz Republic.

9. To the Banking Supervision and Licensing Methodology Department to bring this resolution to the attention of OJSC "Commercial Bank Kyrgyzstan", CJSC "EcoIslamicBank", OJSC "Bakai Bank", the Union of Banks of Kyrgyzstan, relevant structural subdivisions, regional departments, and the representative office of the National Bank in Batken Oblast.

10. To assign control over the execution of this resolution to the member of the Board supervising the Banking Supervision and Licensing Methodology Department.

Chairman	K. Bokontaev

		Annex to the Resolution of the Board of the National Bank of the Kyrgyz Republic of 15 December 2021 No. 2021-P-12/70-3-(NPA)

AMENDMENTS to Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic

1. To amend the resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Instruction on Determining Capital Adequacy Standards for Commercial Banks of the Kyrgyz Republic" of 21 July 2004 No. 18/2 as follows:

in the Instruction on determining capital adequacy standards for commercial banks of the Kyrgyz Republic, approved by the above resolution:

• in the Appendix to the Instruction:

in section "Off-Balance-Sheet Liabilities", restate article 595 as follows:

"

595	Liabilities which the bank has the right to unconditionally revoke/cancel at any time without prior notice to the client	0	10%	100%	0

".

2. To amend the resolution of the Board of the National Bank of the Kyrgyz Republic "On Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic" of 25 August 2005 No. 26/5 as follows:

in the Regulation "On Periodic Regulatory Banking Reporting", approved by the above resolution:

• in Appendix 2:

in section 15.5 "Off-Balance-Sheet Liabilities", restate article 595 as follows:

"

595	Liabilities which the bank has the right to unconditionally revoke/cancel at any time without prior notice to the client	0	10%	100%	0

";

in subsection 15.G "Off-Balance-Sheet Liabilities of the Bank within the "Islamic Window"", restate article 510 as follows:

"

510	Liabilities which the bank has the right to unconditionally revoke/cancel at any time without prior notice to the client	0	10%	100%	0

".

3. To amend the resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Instruction on Determining Capital Adequacy Standards for Banks Operating in Accordance with Islamic Principles of Banking and Financing" of 28 December 2009 No. 51/4 as follows:

in the Instruction on determining capital adequacy standards for banks operating in accordance with Islamic principles of banking and financing, approved by the above resolution:

• restate subparagraph "b" of paragraph 5 as follows:

"b) own (regulatory) capital is Tier 1 capital.";

• restate paragraph 6 as follows:

"6. Capital adequacy ratios of an Islamic bank based on risk-weighting of balance-sheet assets placed in accordance with Islamic principles of banking and financing (hereinafter - assets) and off-balance-sheet liabilities assumed by the bank in accordance with Islamic principles of banking and financing (hereinafter - off-balance-sheet liabilities):

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

K2.1 = (NCK / ((RWA - RWAm) + P * Cor)) * 100%,

where:

NCK - net Total capital, which is determined as the sum of Tier 1 capital and Tier 2 capital.

RWA - the sum of balance-sheet assets and off-balance-sheet liabilities weighted by risk minus special reserves for potential losses and damages.

RWAm - the sum of balance-sheet assets and off-balance-sheet liabilities financed from funds attracted under a restricted mudaraba contract, weighted by risk minus special reserves for potential losses and damages.

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

Cor - the amount of capital reserved to cover operational risks. The calculation of capital reserved to cover operational risks using the Basic Indicator Method is carried out in accordance with the Procedure for determining the level of capital required to cover operational risks of banks, approved by the resolution of the Board of the National Bank of the Kyrgyz Republic.

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

K2.2 = (T1C / (RWA - RWAm)) * 100%,

where:

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

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

K2.3 = (CET1 / (RWA - RWAm)) * 100%,

where:

CET1 - Common Equity Tier 1 capital.

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

• restate paragraph 9 as follows:

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

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

where:

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

OL - off-balance-sheet liabilities taking into account credit conversion factors defined by this Instruction, as well as those liabilities which the bank has the right to unconditionally revoke/cancel at any time without prior notice to the client, and to which a credit conversion factor of 10% of the total amount of such off-balance-sheet liabilities may be applied. In this case, the amount of reserves for potential losses and damages is deducted from off-balance-sheet liabilities (after applying credit conversion factors) within the amount of weighted off-balance-sheet liabilities.";

• restate paragraph 9-1 as follows:

"9.1. In order to maintain the financial stability of the bank and maintain the stability of its activities, a requirement is established to maintain an "additional capital buffer of the bank" (index "capital buffer") for dividend payments. The index "capital buffer" is defined as the ratio of net Total capital to the sum of balance-sheet assets and off-balance-sheet liabilities financed from funds attracted under a restricted mudaraba contract, weighted by risk minus special reserves for potential losses and damages. The value of the index "capital buffer" of banks is established by the Supervisory Committee of the National Bank.";

• restate paragraph 19.1 as follows:

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

1) losses for the current year;

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

• the solution must be new or significantly different from existing market offerings, or offer new possibilities for using existing technologies, as confirmed by market research and comparison of key characteristics of the technology;

• the solution must offer clients obvious direct or indirect benefits (for example, a technical specification showing increased security, quality of service, efficiency, product quality, lower prices, a combination of any of the listed) and be supported by the bank's comparative analysis with quantitative assessments where necessary.

If there are results of technical testing, they must be available to the National Bank. Alternatively, confirmation of the technical reliability of this solution from an independent third party may be provided.

These technical and software products must be accounted for by the bank at book value;

3) investments (in the form of shares or equity participation in capital) in other non-consolidated banks and financial-credit organizations, as well as non-financial organizations, except for investments (in the form of shares or equity participation in capital) made under sharia/musharaka partnership agreements. If the bank invests in these organizations additional Tier 1 capital or Tier 2 capital, these investments must be deducted from the corresponding capital;

4) all deferred tax assets that depend on future profitability, calculated on the basis of International Financial Reporting Standards (IFRS) 12, except for deferred tax assets related to temporary differences. Deferred tax assets may be offset against deferred tax liabilities if the conditions of IFRS 12 are met;

5) direct or indirect investments in own shares. The bank has the right to buy back its own shares only for their subsequent sale at a higher price, provided that the bank has concluded a preliminary agreement for the sale of shares for their realization after buyback and the bank's activity has been profitable for the previous 5 (five) years before the day of the decision to buy back its own shares. The bank will deduct these shares until they are sold.

Using an identical approach, banks must deduct investments in their own additional Tier 1 capital when calculating additional Tier 1 capital and investments in their own Tier 2 capital when calculating their Tier 2 capital.

Mutual cross-holdings of capital that lead to an artificial increase in the bank's capital position must be deducted in full. Banks must apply the appropriate deduction approach for such investments in the capital of other banks, other financial and insurance organizations. This means that the deduction must be applied to the same capital component for which the capital would qualify as if it had been issued by the bank itself.";

• restate paragraph 20 as follows:

"20. The assessment of capital adequacy within the framework of this Instruction is carried out in relation to credit risk, i.e. the risk relating to various types of assets and consisting in the inability of the client to ensure full or partial return of the asset, as well as operational risk in terms of calculating the total capital adequacy ratio in accordance with subparagraph "a" of paragraph 6 of this Instruction.";

• in paragraph 29:

restate the second paragraph as follows:

"Credit conversion factor 10%:";

restate the third paragraph as follows:

"- off-balance-sheet liabilities which the bank has the right to unconditionally revoke/cancel at any time without prior notice to the client.";

• supplement the Instruction with paragraph 44 as follows:

"44. Information on compliance with capital adequacy standards and their calculation is submitted by banks monthly as part of the periodic regulatory banking report of banks operating in accordance with Islamic principles of banking and financing.".

4. To amend the resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation on Periodic Regulatory Reporting of Banks Operating in Accordance with Islamic Principles of Banking and Financing" of 30 March 2011 No. 20/4 as follows:

in the Regulation "On Periodic Regulatory Reporting of Banks Operating in Accordance with Islamic Principles of Banking and Financing", approved by the above resolution:

• in Appendix 2:

restate subsection B of section 14 "B. Report on compliance with economic norms of capital adequacy and the norm (indicator) of liquidity and the requirement to maintain an additional capital buffer of the bank (index "capital buffer")" as follows:

"B. Report on compliance with economic norms of capital adequacy and the norm (indicator) of liquidity and the requirement to maintain an additional capital buffer of the bank (index "capital buffer")

Begin_nocompare

Name of economic norms and the requirement to maintain an additional capital buffer of the bank (index "capital buffer")	Designation	Calculation of the norm	Actual value of the norm	Established value of the norm	Deviation from the established value
Capital adequacy norm	K2.1	NCK ----- ----- (RWA - RWAm) + P * Cor		not less than 12% / 14%
K2.2	T1C ----- ----- RWA - RWAm		not less than 7.5% / 9.5%
K2.3	CET1 ----- ----- RWA - RWAm		not less than 6% / 8%
K2.4	T1C ----- ----- TA + OL		not less than 6%
Liquidity norm (indicator)	K3.1	LA ----- ----- OL		not less than 45%
Additional capital buffer of the bank (index "capital buffer")		NCK ----- ----- RWA - RWAm		not less than ___% (specify value)
Note: P - the established indicator (the number inverse to the total capital adequacy ratio for commercial banks - 8.33 (100% : 12%), for systemically important banks - 7.14 (100% : 14%); Cor - the amount of capital reserved to cover operational risks. The calculation of capital reserved to cover operational risks using the Basic Indicator Method is carried out in accordance with the Procedure for determining the level of capital required to cover operational risks of banks, approved by the resolution of the Board of the National Bank of 27 December 2019 No. 2019-P-12/68-1-(NPA); T1C - Tier 1 capital; CET1 - Common Equity Tier 1 capital; - value for systemically important banks

	Average values for the reporting period	1 week	2 week	3 week	4 week	5 week	6 week	Total
LA - Liquid assets
OL - Liabilities of the bank
Norm K3 = LA / OL

position: ______ surname: ______ signature: ______

Calculation of capital reserved to cover operational risks

Net income for year 1	…
Net income for year 2	…
Net income for year 3	…
b	15%
Cor

";

• restate section 15.5 "Off-Balance-Sheet Liabilities" as follows:

"

No.	Articles	On balance sheet	Credit conversion factor, %	Credit risk, %	Weighted value
530	Commitments to provide financing	0
530.1			100%	0%
530.2			100%	10%
530.3			100%	20%
530.4			100%	50%
530.5			100%	100%
530.6			100%	150%
530.7			100%	400%
540	General financing guarantees, standby letters of credit and acceptance guarantees
540.1			100%	0%
540.2			100%	10%
540.3			100%	20%
540.4			100%	50%
540.5			100%	100%
540.6			100%	150%
540.7			100%	400%
550	Commitments related to specific transactions
550.1			50%	0%
550.2			50%	10%
550.3			50%	20%
550.4			50%	50%
550.5			50%	100%
550.6			50%	150%
550.7			50%	400%
560	Commitments related to trade transactions
560.1			50%	0%
560.2			50%	10%
560.3			50%	20%
560.4			50%	50%
560.5			50%	100%
560.6			50%	150%
560.7			50%	400%
570	Sale and repurchase agreements
570.1			100%	0%
570.2			100%	10%
570.3			100%	20%
570.4			100%	50%
570.5			100%	100%
570.6			100%	150%
570.7			100%	400%
580	Letter of credit based on a Murabaha agreement, where the collateral is an insured pledge
580.1			20%	0%
580.2			20%	10%
580.3			20%	20%
580.4			20%	50%
580.5			20%	100%
580.6			20%	150%
590	Commitments in respect of which the bank has the right of unconditional revocation/cancellation at any time without prior notice to the client		10%	100%
600	Foreign exchange operations
600.1	Less than 1 year		2%	20%
	2%	100%
600.2	from 1 year to 2 years		5%	20%
	5%	100%
600.3	for each subsequent year			20%
		100%
610	Other off-balance-sheet commitments
610.1
610.2
610.3
620	TOTAL off-balance-sheet commitments (sum of art. 530 - 610)
630	Total special reserves to cover potential and leasing losses and losses (hereinafter - special reserves to cover losses)
630.1	Special reserve to cover losses on balance-sheet assets
630.2	Special reserve to cover losses on off-balance-sheet commitments
640	Total balance-sheet assets and off-balance-sheet commitments weighted by degree of risk less special reserves to cover losses (art. 450 plus art. 620 minus 630)