NATIONAL BANK OF THE KYRGYZ REPUBLIC

RESOLUTION

dated May 31, 2017 No. 21/10

On Amendments and Additions to Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated July 18, 2018 No. 2018-P-12/30-3)

In accordance with Articles 7 and 43 of the Law "On the National Bank of the Kyrgyz Republic", the Board of the National Bank of the Kyrgyz Republic

RESOLVES:

1. Make amendments and additions to the following regulatory legal acts of the National Bank of the Kyrgyz Republic (attached):

• Resolution of the Board of the National Bank of the Kyrgyz Republic "On the Regulation 'On Corporate Governance in Banks of the Kyrgyz Republic Conducting Operations in Accordance with Islamic Principles of Banking and Finance' dated November 30, 2011 No. 67/9;

- (paragraph 3 lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic dated July 18, 2018 No. 2018-P-12/30-3)

• Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation 'On Operations Conducted in Accordance with Islamic Principles of Banking and Finance' dated September 23, 2009 No. 38/8;

• Resolution of the Board of the National Bank of the Kyrgyz Republic "On the Regulation 'On Requirements for Standard Contracts Concluded in Accordance with Islamic Principles of Banking and Finance' dated September 30, 2009 No. 39/4;

• Resolution of the Board of the National Bank of the Kyrgyz Republic "On the Regulation 'On the Implementation of Islamic Finance Principles in the Kyrgyz Republic within the Framework of a Pilot Project' dated October 30, 2006 No. 32/2;

• Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation 'On Operations Conducted by Microfinance Organizations and Credit Unions in Accordance with Islamic Principles of Banking and Finance' dated October 26, 2011 No. 60/8;

• Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation 'On Minimum Requirements for Standard Contracts of Microfinance Organizations and Credit Unions Concluded in Accordance with Islamic Principles of Banking and Finance' dated October 23, 2013 No. 39/9;

• Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation 'On Classification of Assets and Corresponding Provisions to the Reserve for Coverage of Potential Losses and Damages by Microfinance Organizations Conducting Operations in Accordance with Islamic Principles of Banking and Finance' dated September 24, 2014 No. 42/8;

• Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation 'On Classification of Assets and Corresponding Provisions to the Reserve for Coverage of Potential Losses and Damages in Credit Unions Conducting Operations in Accordance with Islamic Principles of Banking and Finance' dated April 23, 2014 No. 16/3.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated July 18, 2018 No. 2018-P-12/30-3)

2. This Resolution enters into force on June 22, 2017.

3. 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.

4. The Department of Supervision and Licensing Methodology shall bring this Resolution to the attention of current commercial banks, microfinance organizations, credit unions, their associations (unions), JSC "Financial Company of Credit Unions", OYL "Association of Islamic Finance", OYL "Union of Banks of Kyrgyzstan", regional departments, and the representation of the National Bank of the Kyrgyz Republic in the Batken region.

5. Control over the implementation of this Resolution is entrusted to the Member of the Board of the National Bank of the Kyrgyz Republic T.Dj.Jusupov.

Chairman of the Board of the National Bank of the Kyrgyz Republic		T. Abdygulov

| | | Appendix to the Resolution of the Board of the National Bank of the Kyrgyz Republic dated May 31, 2017 No. 21/10 |

AMENDMENTS AND ADDITIONS to certain regulatory legal acts of the National Bank of the Kyrgyz Republic

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated July 18, 2018 No. 2018-P-12/30-3)

1. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On the Regulation 'On Corporate Governance in Banks of the Kyrgyz Republic Conducting Operations in Accordance with Islamic Principles of Banking and Finance' dated November 30, 2011 No. 67/9":

in the Regulation "On Corporate Governance in Banks of the Kyrgyz Republic Conducting Operations in Accordance with Islamic Principles of Banking and Finance", approved by the aforementioned Resolution:

• paragraph 1 shall be worded as follows:

"1. This Regulation applies to banks conducting operations in accordance with Islamic principles of banking and finance, including banks having an 'Islamic window' (hereinafter - banks).

Effective corporate governance in banks is one of the most important conditions for ensuring the stable development of individual banks and the banking system as a whole.

For the purposes of this Regulation, the following definitions are used:

• investment accounts - these are client accounts on which funds attracted by the bank based on a mudaraba contract are reflected. Depending on the type of mudaraba contract, an investment account may be unrestricted or restricted;

• fiduciary responsibility - this is responsibility:

a) of the bank to its clients for compliance with Sharia rules and principles;

b) of the bank for proper management of funds of investment account holders and compliance with conditions stipulated in mudaraba contracts;

• risk profile - a combination of bank risk indicators based on collected, analyzed, and systematized information that characterizes the bank's exposure to risks in activity areas taking into account established priorities.";

• the ninth paragraph of paragraph 3 shall be worded as follows:

"The methodological basis for effective corporate governance in banks and banking groups is the recommendations of the Basel Committee on Banking Supervision and the Islamic Financial Services Board, which are posted on the website of the Bank for International Settlements (Switzerland) www.bis.org and on the website of the Islamic Financial Services Board (IFSB) www.ifsb.org, as well as the OECD corporate governance principles posted on www.oecd.org.";

• the Regulation shall be supplemented with paragraph 3-1 of the following content:

"3-1. Internal regulatory documents aimed at implementing effective corporate governance and not contradicting this Regulation may be developed in the bank.";

• paragraph 4 shall be supplemented with a paragraph of the following content:

"Shareholders of the bank and their affiliated persons, bank officials, as well as persons associated with the bank must have impeccable business reputation in accordance with the requirements established by the Law of the Kyrgyz Republic 'On the National Bank of the Kyrgyz Republic, Banks and Banking Activity' (hereinafter - the Law) and the requirements of the National Bank for licensing the activities of banks conducting operations in accordance with Islamic principles of banking and finance.";

• paragraph 7 shall be worded as follows:

"7. Issues attributed to the exclusive competence of the general meeting of shareholders of the bank are defined by the Law and the Law of the Kyrgyz Republic 'On Joint Stock Companies'.";

• the Regulation shall be supplemented with paragraph 9-1 of the following content:

"9-1. The powers of the general meeting of shareholders of the bank during the regime of temporary administration are exercised in accordance with the regulatory legal acts of the National Bank of the Kyrgyz Republic (hereinafter - the National Bank).";

• paragraph 10 shall be worded as follows:

"10. The Board of Directors of the bank is the management body of the bank carrying out general management of the bank between general meetings of shareholders.

The Board of Directors exercises control over the management of the bank and its financial condition and is accountable to the general meeting of shareholders of the bank.";

• paragraph 11 shall be worded as follows:

"11. Issues attributed to the exclusive competence and responsibility of the Board of Directors are defined by the Law and include the determination of the bank's strategies and policies.";

• paragraph 18 shall be worded as follows:

"18. The Board of Directors must necessarily create the following committees:

1. Risk Management Committee, ensuring control over the Board's activities in risk management issues that the bank assumes;

2. Audit Committee;

3. Appointments and Remuneration Committee.

The bank may also establish a Corporate Governance Committee, a New Products Committee, a Compliance Control Committee, and other committees.

The activities of the Board of Directors' committees must comply with the requirements of the National Bank and the bank's internal documents.

The bank must create other committees to strengthen corporate governance in the bank, in particular:

• Financing Committee, making decisions on all issues related to the issuance of financing, guarantees, obligations, sureties, other assets and obligations, which by their nature are financing operations and carry credit loss risk. The activity of the Financing Committee is regulated in accordance with the legislation of the Kyrgyz Republic and the internal regulation of the Committee, which is approved by the Board of Directors.

• Assets and Liabilities Management Committee of the bank, exercising control over the overall structure of the bank's balance sheet, monitoring the structure of assets and liabilities, and ensuring compliance with the assets and liabilities management policy established by the Board of Directors. The activity of the Assets and Liabilities Management Committee is regulated in accordance with the legislation of the Kyrgyz Republic and the internal regulation of the Committee, which is approved by the Board of Directors.

All committees in the bank are headed by the chairmen of the respective committees.";

• the first sentence of paragraph 19 shall be worded as follows:

"The Corporate Governance Committee, the main task of which is to protect the interests not only of shareholders but also of interested parties (employees, clients, including holders of investment accounts and other depositors, suppliers), monitors and evaluates the implementation and compliance of bank management policy, as well as monitors the implementation of the investment strategy for managing funds of investment account holders.";

• paragraph 23 shall be worded as follows:

"23. The Risk Management Committee ensures control over the Board's activities in risk management issues that the bank assumes.

The Assets and Liabilities Management Committee of the bank exercises control over the overall structure of the bank's balance sheet, monitoring of assets and liabilities, as well as control over compliance with the assets and liabilities management policy established by the Board of Directors.";

• the Regulation shall be supplemented with paragraph 23-1 of the following content:

"23-1. The internal documents of the bank regulating the activities of all committees established in the bank must define:

• the purpose of creation and activity of the committee;

• the powers of the committee;

• the procedure for appointing the Committee Chairman;

• the procedure for conducting meetings;

• the reporting procedure;

• the responsibility of each committee member for decisions made and signed by them.

Also, in these documents, the following requirements must be established for each committee member participating in the meeting and making decisions:

• to be aware of the essence of the issue under consideration;

• to understand the influence of their decisions on the bank's activities;

• to assess the possibility of arising risks and consequences of their decisions.

The opinion of a committee member who has comments and proposals on the issue under consideration and disagrees with the adopted decision must be expressed during voting and reflected in the protocol. The protocol must be signed by all committee members present at the meeting and the committee secretary. Committee members who did not participate in the meeting must be familiarized with the protocol and adopted decisions under signature.";

• paragraph 24 shall be worded as follows:

"24. The Board of Directors must act in the best interests of the bank, observe the principle of equal treatment of all shareholders, and is obliged to report to shareholders on its activities at each annual general meeting of shareholders.

The Chairman and members of the Board of Directors are responsible for inaction on issues for which responsibility is assigned to the Board of Directors.";

• in paragraph 25:

in the first sentence, the word "operational" shall be excluded;

the paragraph shall be supplemented with a second paragraph of the following content:

"The opinion of a Board of Directors member who has comments and proposals on the issue under consideration and disagrees with the adopted decision must be expressed during voting and reflected in the protocol. The protocol and stenographic report (detailed written text of participants' speeches) of the Board of Directors meeting must be signed by the presiding officer and the Secretary of the Board, after coordination (vising) with the members of the Board of Directors present at the meeting. Board of Directors members who did not participate in the meeting must be familiarized with the protocol and adopted decisions under signature.";

• paragraph 26 shall be worded as follows:

"26. Members of the Board of Directors must meet the minimum qualification requirements established by the National Bank.";

• paragraph 27 shall be worded as follows:

"27. In order to ensure competence, objectivity, and independence, independent members of the Board of Directors possessing recognized reputation and professional experience in economic, financial, monetary, and legal issues must be elected to the Board of Directors.

At least one member of the Board of Directors of the bank must be a citizen of the Kyrgyz Republic fluent in the state and/or official language.

At least one-third of the composition of the Board of Directors of the bank must consist of independent members of the Board of Directors.

In order to ensure competence, objectivity, and independence, independent members of the Board of Directors possessing recognized reputation and professional experience in economic, financial, monetary, and legal issues must be elected to the Board of Directors.

At least one member of the Board of Directors of the bank must be a citizen of the Kyrgyz Republic fluent in the state and/or official language.

At least one-third of the composition of the Board of Directors of the bank must consist of independent members of the Board of Directors.";

• paragraph 29 shall be supplemented with a sentence of the following content:

"For example, in the case where the bank offers various types of restricted investment accounts.";

• in paragraph 39, the words "transactions (contracts)" shall be replaced with the words "policies and standard contracts";

• the Regulation shall be supplemented with paragraph 39-1 of the following content:

"39-1. Violation by a member of the Shariah Board of their fiduciary duties may be grounds for the fiduciary (the bank and its shareholders) to terminate their powers early and for the Bank to file claims, lawsuits, and other demands against them.";

• in paragraph 40, after the words "in accordance with requirements", the word "standards" shall be added;

• the first sentence of paragraph 44 shall be worded as follows:

"Members of the Shariah Board must meet the requirements established by the National Bank.";

• in paragraph 45, after the words "independent of the Board", the words "and the Board of Directors" shall be added;

• paragraph 46 shall be worded as follows:

"46. The activity of the bank's Shariah Board is regulated by a regulation approved by the general meeting of shareholders. For a bank having an 'Islamic window', where the share of assets does not exceed 50% of the balance sheet currency, the activity of the Shariah Board is regulated by a regulation approved by the Board of Directors of the bank. The activity of the department responsible for monitoring compliance with Sharia standards is regulated by a regulation approved by the Board of Directors of the bank and agreed upon with the Shariah Board.";

• the fourth paragraph of paragraph 47 shall be worded as follows:

"3) the procedure for interaction with the Board of Directors, the Board, and the bank's committees.";

• paragraph 48 shall be worded as follows:

"48. The Board carries out management of the current activities of the bank based on the legislation of the Kyrgyz Republic, the internal regulation on the Board, and is accountable to the Board of Directors.";

• paragraph 49 shall be worded as follows:

"49. Issues attributed to the competence and responsibility of the Board are defined by the Law and include the implementation of strategies and policies defined by the Board of Directors.";

• paragraph 52 shall be worded as follows:

"52. Members of the Board must meet the minimum qualification requirements established by the National Bank.";

• paragraph 53 shall be worded as follows:

"53. In carrying out their activities, members of the Board should be objective and guided primarily by the interests of the bank, rather than personal interests or the interests of individual shareholders and bank officials, making every effort to ensure healthy and safe banking practices corresponding to Sharia standards.

The opinion of a Board member who has comments and proposals on the issue under consideration and disagrees with the adopted decision must be expressed during voting and reflected in the protocol. The protocol and stenographic report (detailed written text of participants' speeches) of the Board meeting must be signed by the presiding officer and the Secretary of the Board of the bank, after coordination (vising) with the members of the Board of the bank present at the meeting. Board members who did not participate in the meeting must be familiarized with the protocol and adopted decisions under signature.";

• the second paragraph of paragraph 54 shall be worded as follows:

"1) members of the Board who do not have the corresponding powers according to the functional distribution of duties participate in decision-making, except in cases where the decision is made collegially;";

• paragraph 57 shall be worded as follows:

"57. Mechanisms ensuring compliance with legislation, including regulatory legal acts of the National Bank on preventing conflicts of interest and regulating transactions with affiliated persons and persons associated with the bank, with members of the Board, the Board of Directors, other officials, significant participants, as well as with any other natural persons associated with the specified persons by common interests, must be developed in the bank.

For the purpose of identification and prevention of conflict of interest, the bank must have at least the following:

• develop procedures for informing the Board of Directors and the Board of the bank about potential threats in the bank's activities related to conflict of interest;

• bank officials and employees, before appointment (election) to the position, are obliged to provide the bank with a list of close relatives;

• in the event of a conflict of interest, a bank official or employee is obliged to immediately notify the Board and/or the Board of Directors of the bank;

• the bank must maintain a database of conflicts of interest that have occurred;

• untimely disclosure of a conflict of interest entails liability in accordance with the banking legislation of the Kyrgyz Republic.";

• paragraph 60 shall be worded as follows:

"60. In addition to the requirements established by the legislation of the Kyrgyz Republic on disclosure of information about the bank's activities, as well as paragraphs 5, 30, 31, 36, 38 of this Regulation, effective corporate governance implies disclosure of information, which among other things includes:

1. the structure of the bank's management bodies (composition, qualifications and experience, powers, duties, supervised areas, work regulations and membership in committees, including information on the number of committee meetings held, etc.);

2. the structure of the bank's owners (significant shareholders of the bank, share of foreign investors in the bank's equity capital, voting rights, etc.);

3. the organizational structure of the bank and, if applicable, the structure of the banking group;

4. types, terms and volumes of transactions with affiliated persons and insiders of the bank;

5. standards of professional ethics;

6. information on issues of conflict of interest, remuneration, and risk management.";

• notes to the Regulation shall be recognized as having lost force;

• the Regulation shall be supplemented with Chapters 9, 10, and 11 of the following content:

"Chapter 9. Corporate Secretary of the Bank

62. The corporate secretary of the bank ensures and organizes the work (meetings and record-keeping) of the general meeting of shareholders and the Board of Directors of the bank.

63. The corporate secretary is an official of the bank, appointed and dismissed by decision of the Board of Directors of the bank.

64. The corporate secretary carries out their activities in accordance with the Law, regulatory legal acts of the National Bank, the charter of the bank, and internal regulatory acts of the bank, as well as decisions of the general meeting of shareholders and the Board of Directors of the bank.

65. Combining the independent position of the corporate secretary of the bank with the performance of other duties in the bank is permitted only with the consent of the Board of Directors of the bank.

66. The functional duties of the corporate secretary are developed by the bank independently in accordance with the legislation of the Kyrgyz Republic and internal regulatory acts of the bank.

67. The corporate secretary of the bank is obliged to act in good faith and reasonably in the best interests of the bank, which implies compliance with the following fiduciary duties:

---

1. exercise their powers in compliance with the requirements of the banking legislation of the Kyrgyz Republic, the bank's charter, and internal regulatory acts of the bank;

2. use the powers granted to them;

3. adhere to the principle of equality in relation to shareholders and members of the Board of Directors;

4. meet the requirements of impeccable business reputation in accordance with the legislation of the Kyrgyz Republic.

68. The Corporate Secretary is obliged to keep a stenographic protocol (detailed written text of participants' speeches) of the meetings of the Bank's Board of Directors and prepare protocols based on the results, including voting by written poll and using communication means.

The Corporate Secretary is obliged to familiarize all members of the Board of Directors with the signed protocol, including by using communication means.

10. Basic requirements for the Appointment and Remuneration Committee

69. The Appointment and Remuneration Committee is established in the bank regardless of the types of activities conducted to improve the efficiency of the Bank's Board of Directors and optimize its decisions.

The Committee's activities must be aimed at strengthening control over the appointments and remuneration of members of the Management Board, heads and employees of internal audit, risk management, and compliance services, as well as key employees determined by the bank.

70. The Appointment and Remuneration Committee determines the level of remuneration paid by the bank, which must be sufficient to attract, motivate, and retain persons possessing the competencies and qualifications necessary for the bank, while the level of remuneration paid by the bank must not lead to loss-making activities.

71. The Committee's activities are regulated by the requirements of the legislation of the Kyrgyz Republic and the internal regulation of the Committee, which is approved by the Bank's Board of Directors.

72. The Committee must consist of no fewer than three members of the Board of Directors appointed by the shareholders' meeting, one of whom must be independent.

73. The Committee provides recommendations to the Board of Directors regarding candidates for inclusion in the Management Board, heads and employees of internal audit, risk management, and compliance services, as well as key employees determined by the bank, taking into account the requirements established by the National Bank.

74. The Committee considers candidates for the position of Corporate Secretary, assesses the compliance of candidates with established requirements, and presents its recommendations to the Board of Directors.

75. The payment of remuneration to members of the Board of Directors, Management Board, heads of internal audit, risk management, compliance services, as well as key employees determined by the bank, must be carried out in accordance with the internal regulatory act on remuneration adopted by the bank.

The internal regulatory act on remuneration must be developed by the Remuneration Committee and approved by the Bank's Board of Directors. The Board of Directors, with the support of the Remuneration Committee, must ensure control over the implementation and realization of the bank's internal regulatory act on remuneration, and if necessary, review and make corrections.

76. The level of remuneration provided by the bank to members of the Board of Directors, Management Board, heads of internal audit, risk management, compliance services, and key employees determined by the bank must create sufficient motivation for their effective work, allowing the bank to attract and retain competent and qualified specialists.

The amount of additional remuneration to members of the Board of Directors must be established by a resolution of the general meeting of shareholders, taking into account the bank's performance results, the results of the financial year, and the effective participation of the Board member in the activities of the Board of Directors.

77. The remuneration system must correspond to the business strategy, risk management strategy, goals, values, and long-term interests of the bank, and must also provide for measures to prevent conflicts of interest. Incentive programs should contribute to the implementation of the adopted risk management culture, within which decision-making practices correspond to established criteria and encourage employees to act in the interests of the bank (taking into account client interests), and not only in their personal interests or in the interests of their subdivision. In particular, bonuses (bonuses) provided by the incentive program must not encourage employees to take excessive risks.

78. The amount of remuneration must directly depend on the risk-to-result ratio. Methods of paying remuneration in advance of future income, the term and probability of receipt of which are uncertain, must be carefully weighed based on accepted qualitative and quantitative indicators. The remuneration system must provide for the possibility of changing the amounts of paid bonuses (bonuses) taking into account all risks, including violations of risk appetite limits, internal procedures, or regulatory requirements.

79. The internal regulatory act on remuneration must include the following:

• the procedure and period for paying bonuses (bonuses);
• a system of criteria for paying bonuses (bonuses), which must take into account the results of risk management in the perspective for long-term motivation;
• the amounts of bonuses (bonuses);
• if necessary, conditions for deferring payment of a significant portion of bonuses (bonuses) until the moment of receiving the result from taking a specific risk, taking into account risk reduction measures ("unreliability/loss");
• conditions for reducing or canceling bonuses (bonuses), based on received results or taking measures before their payment;
• conditions for compliance and execution of work plans/approved bank budget;
• bank profitability.

11. Basic requirements for the New Products Committee

80. The New Products Committee may be established in the bank to make decisions on the necessity of developing new banking products, introducing new products to the banking services market, as well as to control the process of the bank's entry into the market for new products developed by the bank in accordance with antimonopoly regulation legislation.

81. The Committee is authorized to make decisions regarding new banking products to ensure an effective, targeted, and controlled process of initial assessment, subsequent development, testing, and implementation of banking products or services within existing resource constraints.

82. The Committee may determine the degree of involvement of various bank subdivisions in the process of developing new banking products.

83. When developing and introducing new banking products, the committee must conduct a risk assessment for new banking products and ways to reduce (minimize) them.

84. The committee's activities are regulated by the legislation of the Kyrgyz Republic and the "On the Committee" Regulation, which is approved by the Bank's Board of Directors.

85. The Committee may consist of members of the Board of Directors and/or members of the Management Board, appointed by the shareholders' meeting of the bank.

86. The Committee, when making a decision on the development and introduction of new banking products, must comply within the limits of its powers with the requirements of the legislation of the Kyrgyz Republic and regulatory acts."

2. (Lost force in accordance with Resolution of the Board of the National Bank of the Kyrgyz Republic dated July 18, 2018 No. 2018-P-12/30-3)

3. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Operations Conducted in Accordance with Islamic Principles of Banking and Financing" dated September 23, 2009 No. 38/8:

in the Regulation "On Operations Conducted in Accordance with Islamic Principles of Banking and Financing", approved by the aforementioned Resolution:

• paragraph 1.1 is recognized as having lost force;

• in paragraph 1.2, the words "of the Kyrgyz Republic" are replaced with the words ", including banks having an "Islamic window";

• paragraph 1.4 is redacted as follows:

"1.4. A Shariah Council must be established in the bank. All bank policies and standard contracts must be approved by the Shariah Council.";

• in paragraph 1.5, the words "Islamic Bank" are replaced with the word "Bank";

• paragraph 2.1.1 is supplemented after the first sentence with a sentence of the following content:

"The debt of a mudarib or another party to an investor cannot be used as capital in a mudaraba transaction.";

• paragraph 2.1.2 is supplemented with a fifth paragraph of the following content:

"The parties may agree on the gradual withdrawal of capital by the investor.";

• paragraph 2.1.6 is redacted as follows:

"2.1.6. When issuing funds under a restricted/special mudaraba transaction, the bank must include conditions in the contract prohibiting the mudarib from misusing funds, including issuing loans to third parties and providing gifts and donations for charitable purposes at the expense of financing funds.";

• paragraph 2.2.6 is redacted as follows:

"If material assets (goods) are contributed to the capital of a legal entity established on the basis of a shariika/musharaka partnership agreement, the monetary value of such assets must be determined based on an independent assessment.

If partners made contributions to the capital in different currencies, they must be converted into the currency of the shariika/musharaka contract at current exchange rates.";

• paragraph 2.2.11 is supplemented with a third sentence of the following content:

"If one of the partners is appointed as an asset/cash manager based on a separate contract (separate from the shariika/musharaka contract), he has the right to receive certain remuneration.";

• paragraph 2.2.15 is supplemented with a sentence of the following content:

"The parties may agree on profit distribution disproportionate to partners' capital contributions. In this case, the coefficient of the passive partner's share (if any exists according to the contract conditions) in the profit cannot be higher than the coefficient of his contribution to the capital.";

• in paragraph 2.3.1, the first sentence is supplemented with the words ", or located in the bank's ownership at the time of the client's application.";

• in paragraph 2.3.5, the second sentence of the second paragraph is redacted as follows:

"It is not allowed for the client or his agent to act as both the seller in the goods sale transaction and the client under the murabaha contract with the bank.";

• in paragraph 2.3.7:

the third paragraph is redacted as follows:

"The bank bears risks associated with damage to the goods during transportation or storage before transfer to the client's possession, and they cannot be covered by collateral.";

the second sentence of the fifth paragraph is redacted as follows:

"However, the bank has no right to charge an advance payment during the preparation of contracts at a stage when the client has given an obligation to buy the goods.";

the fifteenth paragraph is supplemented with a sentence of the following content:

"If necessary, the client has the right to apply directly to the supplier for compensation;";

in the eighteenth paragraph, the word "foreign" is replaced with the word "any";

• paragraph 2.4.1 is redacted as follows:

"2.4.1. An Ijara transaction is a transaction for the special acquisition by the bank of movable or immovable property into ownership upon the client's application, or movable or immovable property located in the bank's ownership at the time of the client's application, and providing it to the client for property lease (rental) for temporary possession and use for an agreed term, on a paid basis.";

• paragraph 2.4.4 is supplemented with a fifth sentence of the following content:

"This amount may be accepted as payment for current lease payments.";

• paragraph 2.4.39 is supplemented with a seventh paragraph of the following content:

"The action of an Ijara contract is not terminated by the death of one of the parties. However, the tenant's heirs may terminate the Ijara contract upon providing evidence of the onerousness of performing the Ijara contract or the lack of need for the Ijara contract after the death of the testator.";

• in paragraph 2.5.4, the abbreviation "NBKR" is replaced with the words "National Bank of the Kyrgyz Republic";

• the second sentence of paragraph 2.6.18 is redacted as follows:

"A discount is allowed for prepayment, provided that it was not stipulated when concluding the contract.";

• in paragraph 2.8.17, the word "foreign" is replaced with the word "any".

4. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On the Regulation "On the Implementation of Islamic Financing Principles in the Kyrgyz Republic within the Framework of a Pilot Project" dated October 30, 2006 No. 32/2:

in the Regulation "On the Implementation of Islamic Financing Principles in the Kyrgyz Republic within the Framework of a Pilot Project", approved by the aforementioned Resolution:

• Chapter 2.4:

paragraph 1 is redacted as follows:

"1. Ijara is a transaction for the special acquisition by the lessor of movable or immovable property into ownership upon the client's application, or movable or immovable property located in the bank's ownership at the time of the client's application, and providing it to the lessee for property lease (rental) for temporary possession and use for an agreed term, on a paid basis.";

paragraph 3 is redacted as follows:

"3. An Ijara Contract is a contract according to which the lessor undertakes to acquire movable or immovable property specified by the lessee into ownership, or movable or immovable property located in the bank's ownership at the time of the lessee's application, and provide it to the lessee for property lease (rental) for temporary possession and use for an agreed term, on a paid basis.";

• in paragraph 49:

in the fourth paragraph, the words "credits/leases" are replaced with the word "financing";

in the fifth paragraph, after the words "losses and damages", the words "when conducting operations in accordance with Islamic principles of banking and financing" are added.

5. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On the Regulation "On Requirements for Standard Contracts Concluded in Accordance with Islamic Principles of Banking and Financing" dated September 30, 2009 No. 39/4:

in the Regulation "On Requirements for Standard Contracts Concluded in Accordance with Islamic Principles of Banking and Financing", approved by the aforementioned Resolution:

• the preamble is redacted as follows:

"This Regulation is mandatory for use by commercial banks having a license from the National Bank of the Kyrgyz Republic to conduct operations in accordance with Islamic principles of banking and financing, as well as banks having an "Islamic window" (hereinafter - banks).";

• in paragraph 1.1.3, after the words "to third parties", the words ", and providing gifts and donations for charitable purposes" are added;

• in paragraph 2.1.1, after the words "of a specific good", the words ", or a good located in the bank's ownership at the time of the client's application" are added;

• in paragraph 2.1.2, after the words "subject of the contract by the client's order", the words ", or located in the bank's ownership at the time of the client's application," are added;

• sub-item "a" of paragraph 2.1.8 is redacted as follows:

"a) that the bank bears no responsibility for any or all defects of the goods after the goods have passed into the client's possession, and the client has the right to apply directly to the supplier for compensation;";

• in sub-item "a" of paragraph 2.1.9, the word "foreign" is replaced with the words "any".

6. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Operations Conducted by Microfinance Organizations and Credit Unions in Accordance with Islamic Principles of Banking and Financing" dated October 26, 2011 No. 60/8:

in the Regulation "On Operations Conducted by Microfinance Organizations and Credit Unions in Accordance with Islamic Principles of Banking and Financing", approved by the aforementioned Resolution:

• the preamble is recognized as having lost force;

• throughout the text, the abbreviation "MFO" is replaced with the abbreviation "MFCO";

• in paragraph 1, after the words "order of conducting by microfinance organizations", the words ", including microfinance organizations having an "Islamic window" are added;

• in paragraph 2, the abbreviation "KR" is replaced with the words "of the Kyrgyz Republic";

• in paragraph 53, the first sentence is redacted as follows:

"A Murabaha transaction is a transaction providing for the sale of goods on installment, acquired by the MFCO upon the client's application, or located in the MFCO's ownership at the time of the client's application.";

• Section II "Types of Transactions Corresponding to Islamic Principles of Banking and Financing" is supplemented with Chapter 8 of the following content:

"Chapter 8. Istisnaa Transaction and Parallel Istisnaa

154-5. An Istisnaa transaction is a transaction under the terms of which one party (contractor) undertakes to perform a specific work (using raw materials and labor) according to the order of the other party (client) and hand over its results to the client within a specified term, and the client undertakes to accept the work results and pay a pre-agreed cost.

154-6. The subject of an Istisnaa contract is the result of the contractor's activity in manufacturing the object, as well as its processing (improving qualities or changing properties of the object) or reprocessing (creating a new object as a result of destroying the existing one) or performing other work (using raw materials and labor) and handing over its results according to specified specifications.

154-7. Parallel Istisnaa is a transaction that operates through two separate and independent contracts. In the first contract, the MFCO acts as a contractor or supplier and concludes an Istisnaa contract with the client, acting as the client. In the second contract, the MFCO acts as the client and concludes another contract (parallel Istisnaa) with a contractor or supplier in order to fulfill its contractual obligations within the framework of the first contract. The supplier or contractor is a legal or physical entity conducting entrepreneurial activity. The client is a legal or physical entity that orders the performance of specific work (using materials and labor) and the handover of its results according to specified specifications within the framework of an Istisnaa contract.

154-8. Before concluding an Istisnaa contract, the client applies to the MFCO, according to which he asks the MFCO to perform specific work (using materials and labor) and hand over its results upon completion of the work in accordance with agreed specifications. The parties to the contract determine the specifications (project) for a certain price, which is paid immediately or after a certain period. The MFCO must assess the client's solvency, and if necessary, assess his property based on provided financial documents.

154-9. The MFCO and the client conclude an Istisnaa contract before the MFCO 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 produced, built, and used to fulfill the client's order.

154-10. An Istisnaa contract is mandatory for its parties if all conditions are met, such as specifying specifications, specifying the type and price, specifying terms, quality, and quantity of the subject of the contract that must be produced. The client has the right of choice (to accept or refuse the subject of the contract) if the subject of the contract does not meet the agreed specifications.

154-11. An 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.

154-12. The contractor is obliged to perform specific work ordered by the client, which is the subject of the contract, and hand over its results with specified specifications within the agreed period of time, unless the parties have agreed otherwise.

154-13. The contract specifies the price of the subject of the contract, the delivery date or acceptance of work results, used resources (own or using components produced by other persons, existing before the conclusion of the contract, unless otherwise provided by the contract).

154-14. Before concluding an Istisnaa contract, all proposals for determining the price of the subject of the contract are considered.

154-15. The price of the subject of the contract is determined at the time of concluding the contract and may be paid in the form of money or material assets, or usufruct from assets for a certain term, regardless of whether such usufruct is associated with other assets different from the subject of the contract, or is associated with the subject of the contract itself. The price may be paid on a deferred basis or in installments over a certain period of time, in order to prevent uncertainty, the parties must choose and determine for themselves one of the payment methods at the time of concluding the contract. If the process of performing specific work within an Istisnaa contract consists of several stages or payment is determined based on stage-by-stage performance of work, in such a case, the contractor has the right to demand that the client make payments as stages of work are completed in accordance with the agreed specifications.

154-16. The price for Istisnaa contract operations may vary according to changes in the delivery date. The price of the subject of an Istisnaa contract cannot be determined based on "cost plus fixed profit." The MFCO uses information about supplier prices, competitive in the market, to assess costs and determine prospective profit.

154-17. An Istisnaa transaction must not serve as a means for simple financing under interest.

154-18. An Istisnaa contract may be concluded for the construction of real estate objects on a specific land plot owned by the final buyer or contractor, or on land from the use of which each of them derives benefit.

154-19. In the event of the contractor/supplier's bankruptcy, the client has priority rights within the framework of an Istisnaa contract regarding the unfinished object, provided that the client has paid part of the cost of the raw materials.

154-20. The parties establish a term within an Istisnaa contract, during which the contractor/supplier is responsible for any defects or maintenance of the object that is the subject of the contract.

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154-21. The parties have the right, within the framework of the istishna contract, if necessary and with mutual consent, to make amendments and additions to the existing istishna contract, both to previously agreed specifications and to introduce additional requirements. In doing so, the price must be correspondingly adjusted and a reasonable period must be provided for the performance of the new requirements.

154-22. Amendments to the istishna contract for the purpose of increasing the price in exchange for a payment deferral are not permitted. A discount for advance payment is allowed, provided it was not stipulated at the time of concluding the istishna contract.

154-23. In the event of unforeseen circumstances (force majeure), price changes may be made by agreement of the parties or by court order.

154-24. The FCO may replace the contractor and conclude an istishna contract with the customer to complete a project that was started with the previous contractor. In this case, the project assessment shall be based on the existing project status, at the expense of the customer. The customer also bears personal responsibility for any unpaid debts that arise as a result of the unfinished istishna contract. Subsequently, a new istishna contract is concluded for the performance of the remaining work.

154-25. In the case of construction of buildings or communal facilities on land owned by the customer, the istishna contract may be funded by the contractor if the latter does not fulfill the contract or cannot complete the works within the stipulated period, and this provision comes into force from the moment the contractor ceases work.

154-26. If the contractor is unable to continue fulfilling its obligation, the customer (landowner) does not have the right to acquire the 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 contractor’s fault, the client may receive only the paid cost of the constructed facility, and the construction contractor must compensate the final buyer for the actual losses incurred.

If non‑performance of the contract is linked to unlawful actions of the customer, the contractor is entitled to receive an amount equal to the value of the completed work and compensation for any losses or damage.

If non‑performance of the contract is due to reasons unrelated to either party, the customer pays only for the work performed by the contractor; otherwise the parties bear no responsibility to each other for any damage or loss.

154-27. In case of legislative changes, if the consequences of such changes entail additional costs within the istishna contract that cannot be imposed on the contractor by law, the additional costs shall be borne by the customer.

154-28. The FCO, acting as contractor or final buyer, may require or pay monetary funds as a down‑payment, which constitute part of the price, if the contract conditions are fulfilled. In the event that the istishna contract is terminated, the down‑payment is retained as a penalty, and the amount must equal the actual incurred loss.

154-29. Within the istishna contract the FCO has the right to demand, regardless of whether it acts as contractor or customer, such guarantees as it deems sufficient to protect its rights in relations with the customer or contractor. The FCO, acting as customer, may provide guarantees requested by the contractor, which may be in the form of a pledge or assignment of rights.

154-30. The FCO, acting as customer, may appoint, with the contractor’s consent, a consulting firm with technical experience so that, on behalf of the FCO, it monitors compliance of the performed works with the agreed specifications and also provides recommendations regarding payment for the performed works, its delivery and acceptance.

154-31. The FCO, acting as contractor, has the right to conclude a separate agency agreement according to which the customer is appointed as the FCO’s agent for control over the manufacturing or construction process in order to ensure conformity of the contract subject with the agreed specifications.

154-32. Additional expenses for monitoring compliance with the istishna contract are paid by agreement of the parties.

154-33. The contractor is released from the obligation under the istishna contract if the contract subject is transferred to the final buyer, provided the final buyer is able to exercise full control over the contract subject, or to a person appointed by the final buyer.

154-34. If the condition of the contract subject does not correspond to the agreed order (project) specifications at the delivery date, the customer has the right to reject or accept it, which will constitute satisfactory performance of the contract with the possibility of price adjustment.

154-35. The customer is obliged to accept the delivered contract subject unless there is sufficient basis for its rejection. A clear justification of the reason for rejection must be provided for refusing acceptance of the contract subject.

154-36. In case of an unjustified rejection, the contract subject remains in the contractor’s possession. In this case the contractor bears no responsibility for any losses or damage that may occur to the contract subject, unless such losses or damage result from the contractor’s negligence or unlawful actions. The customer bears the costs of preserving the contract subject.

154-37. Delivery of the contract subject is considered effected from the moment it is transferred into actual possession (from the moment the parties sign the acceptance‑transfer act) by the final buyer, which allows the final buyer to obtain control over the contract subject after the production process is completed. At this stage the contractor’s obligation regarding the contract subject ends and the final buyer’s obligation begins. If, after the final buyer has obtained the possibility to take control of the contract subject, any loss or damage occurs to the contract subject without proof of negligence or unlawful actions by the contractor, the final buyer bears such loss or damage.

154-38. The contractor may act as the customer’s agent in the sale of the contract subject if the customer delays acceptance of the contract subject within the stipulated period. In this case the contractor sells the contract subject on behalf of the customer and, after deducting the agreed contractual price, returns any remaining funds to the customer, if any. If the obtained price is lower than the price stipulated in the contract, the contractor has the right to request the customer to reimburse the remaining portion. The expenses related to the sale procedure are borne by the customer.

154-39. The customer bears the expenses of selling the contract subject.

154-40. Penalty sanctions may be applied to the contractor concerning the contract subject in case the contractor violates the delivery deadlines, provided the delay was not caused by unforeseen circumstances (force majeure). It is not permitted to include a penalty clause directed against the final customer for non‑payment.

154-41. It is not permitted to sell the contract subject before it passes into actual possession of the FCO, except in cases provided for in clause 154-38.

154-42. The FCO, acting as customer, after acquiring possession of the contract subject may appoint the contractor as an agent for the sale of the contract subject to FCO customers. In this case the agency agreement between the FCO and the contractor is concluded separately from the istishna contract.

154-43. The FCO has the right, within the contract, to order the manufacture of a product with its own specification. Subsequently, the FCO may, on the basis of a “parallel istishna” contract, conclude a contract with another party for the purpose of selling, as a contractor or supplier of goods, whose specifications meet the requirements of the other party’s contract, and accordingly fulfill its contractual obligations. The delivery date stipulated in the parallel contract (sale contract) must not precede the date stipulated in the original purchase contract, and moreover the two contracts must not be linked to each other.

154-44. The FCO, acting as contractor or supplier, has the right to conclude an istishna contract for the sale of such goods to the customer on an installment basis and to conclude a parallel istishna contract on the basis of immediate payment with the main contractor/supplier for the acquisition of goods whose specifications are provided for in the first contract and then sell them to the customer. The two contracts must not be linked to each other.

154-45. In the case of concluding an istishna contract as contractor or supplier, the FCO assumes the property risk, the costs of technical maintenance and insurance up to the transfer of the contract subject to the customer. The FCO cannot, in a parallel istishna contract concluded with the manufacturer/supplier, transfer to the latter the responsibility for the risk arising from the FCO’s obligations towards the customer.

154-46. Contractual links between obligations under the two contracts (istishna and parallel istishna) are not allowed when they are concluded. Thus, a party involved in a regular istishna contract may not refuse its obligations or delay the transfer of the contract subject due to delays or non‑performance under the parallel istishna contract, nor increase the price of supplied goods because of price increases under the parallel istishna contract.

At the same time, the FCO’s right to set conditions and requirements when concluding a parallel istishna contract, when the FCO acts as buyer, is not limited, including a clause concerning penalties that differs from or is analogous to the clause the customer provided in the first istishna contract, in which the FCO acts as supplier.

7. Amend the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Minimum Requirements for Standard Contracts of Micro‑finance Organizations and Credit Unions concluded in accordance with Islamic principles of banking and finance" dated 23 October 2013 No 39/9 with the following changes and additions:

• Revise the preamble to read as follows:

  "This Regulation applies to micro‑finance organizations, including micro‑finance organizations that have an ‘Islamic window’, and credit unions that hold a licence (certificate) of the National Bank of the Kyrgyz Republic to conduct operations in accordance with Islamic principles of banking and finance (hereinafter – FCO)."

• Throughout the text replace the abbreviation "ФКУ" with the abbreviation "ФКО";

• In clause 20, after the words "of a certain product" add the words ", or a product owned by the FCO at the time of the client’s request.";

• Render clause 21 in the following wording:

  "21. Under a murabaha contract the FCO undertakes, on its own behalf, to acquire the contract subject at the client’s order, or a product owned by the FCO at the time of the client’s request, and to sell it to the client on an installment basis."

8. Amend the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Classification of Assets and Corresponding Reserve Allocations for Covering Potential Losses and Damages by Micro‑finance Organizations Conducting Operations in Accordance with Islamic Principles of Banking and Finance" dated 24 September 2014 No 42/8 with the following changes:

• In the Regulation "On Classification of Assets and Corresponding Reserve Allocations for Covering Potential Losses and Damages by Micro‑finance Organizations Conducting Operations in Accordance with Islamic Principles of Banking and Finance" approved by the above‑mentioned resolution:

  • Declare point 1 as repealed;

  • Render point 2 in the following wording:

    "2. This Regulation defines the general principles of the asset classification system and reserves for covering potential losses and damages (hereinafter – RPPU) for micro‑finance organizations, including micro‑finance organizations that have an ‘Islamic window’, that do not have a licence to attract funds (hereinafter – MFO), operating in accordance with Islamic principles of banking and finance on the basis of a certificate/licence of the National Bank of the Kyrgyz Republic (hereinafter – National Bank)."

  • Render sub‑point 2 of clause 29 in the following wording:

    "2) three years from the moment of acquisition of ownership – for immovable property, except for agricultural land, the periods for which are established by the legislation of the Kyrgyz Republic."

9. Amend the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation on Classification of Assets and Corresponding Reserve Allocations for Covering Potential Losses and Damages in Credit Unions Conducting Operations in Accordance with Islamic Principles of Banking and Finance" dated 23 April 2014 No 16/3 with the following changes:

• In the Regulation "On Classification of Assets and Corresponding Reserve Allocations for Covering Potential Losses and Damages in Credit Unions Conducting Operations in Accordance with Islamic Principles of Banking and Finance" approved by the above‑mentioned resolution:

  • Render point 1 in the following wording:

    "1. This Regulation applies to credit unions that hold a licence of the National Bank of the Kyrgyz Republic (hereinafter – National Bank) to conduct operations in accordance with Islamic principles of banking and finance (hereinafter – credit unions)."

  • Render sub‑point 2 of clause 23 in the following wording:

    "2) three years from the moment of acquisition of ownership – for immovable property, except for agricultural land, the periods for which are established by the legislation of the Kyrgyz Republic."