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Approved by 

Resolution No. 32/2 of the  

National Bank of the  

Kyrgyz Republic Board 

dated October 30, 2006  

REGULATION 

for Implementing the Principles of Islamic Banking and Finance in the Kyrgyz Republic within the Pilot Project 

(As amended by the Resolutions of the NBKR Board No. 38/1 dated November 30, 2006, No. 33/1 dated June 29, 2007, No. 18/2 dated April 25, 2008, No. 47/3 dated December 17, 2008, No. 32/8 dated August 28, 2013, No. 25/9 dated June 11, 2014, No. 32/6 dated July 16, 2014, No. 7/2 dated February 10, 2016, No. 40/4 dated September 28, 2016, No. 49/8 dated December 21, 2016, No. 21/10 dated May 31, 2017)  

 

PREFACE 

INTRODUCTORY CLAUSE (PREAMBLE) 

The present Regulation was developed pursuant to the Decree No. 373 of the President of the Kyrgyz Republic On the Pilot Project for Implementing the Principles of Islamic Finance in the Kyrgyz Republic dated July 12, 2006, and the Memorandum of Understanding between the Kyrgyz Republic and the Islamic Development Bank and the EcoBank for Implementing the Islamic Banking and Finance dated May 16, 2006 (hereinafter referred to as the “Memorandum”). 

SECTION 1 

GENERAL PROVISIONS 

1. The present Regulation is aimed to establish the procedure of carrying out individual activities by a branch/unit of the OJSC EcoBank (hereinafter referred to as the “Bank”) in compliance with the principles of Islamic finance within the Pilot Project and under the terms of the Memorandum. 

(As amended by Resolution No. 38/1 of the National Bank of the Kyrgyz Republic Board dated November 30, 2006

2. In carrying out its activities, the Bank shall comply with all prudential standards and other requirements established by the National Bank of the Kyrgyz Republic (hereinafter referred to as the “National Bank”). When carrying out its activities in compliance with the principles of Islamic finance within the Pilot Project, the Bank shall be guided by this Regulation and shall not jeopardize the interests of the bank, its depositors and other creditors. 

(As amended by the NBKR Board Resolutions No. 38/1 dated November 30, 2006, and No. 7/2 dated February 10, 2016

3. The Pilot Project for Implementing the Principles of Islamic Finance shall be executed by the Bank through its branch/unit with transactions limited to those stipulated by this Regulation. 

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

4. (Became invalid as per Resolution No. 33/1 of the National Bank of the Kyrgyz Republic Board dated June 29, 2007) 

5. When carrying out activities in accordance with the principles of Islamic finance, the Bank shall be authorized to invest in Shariah-approved business. 

6. The Shariah Council shall be established in the Bank to approve Shariah compliant transactions (contracts). When carrying out activities under the principles of Islamic finance, all transactions (contracts) shall be approved by the Shariah Council. 

SECTION 2 

TYPES OF TRANSACTIONS PERFORMED UNDER THE PRINCIPLES OF ISLAMIC FINANCE, AND THE PROCEDURE OF THEIR HANDLING 

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

Chapter 2.1 

Mudarabah Transaction 

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

1. Mudarabah is a transaction closed based on the contract under which one party (an investor) provides capital (money), and another party (an entrepreneur) accepts the capital and employs it using its own labor resources for the purpose of profit taking and distributing between the parties in compliance with the contract. 

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

2. Mudarabah transactions (contracts) shall be categorized as follows: 

Limited Mudarabah is a Mudarabah transaction, under which an investor establishes a list of assets or facilities to be invested by an entrepreneur with each investment facility being subject to a separate contract between the entrepreneur and the investor. In this case the investor shall be empowered to bargain for a share of profit received from using the funds under each transaction separately and defined by a separate contract. 

Unlimited Mudarabah is a Mudarabah transaction, under which an entrepreneur independently determines an investment facility, without any restrictions, based on his knowledge and experience, under the Contract and according to the subject matter of the Contract. 

Open Mudarabah is a Mudarabah transaction, under which an investor may, prior to the stated maturity, receive from an entrepreneur the money provided by it, on demand. In this case, the investor may not demand a share of the profit. 

Closed Mudarabah is a Mudarabah transaction, under which an investor may demand from an entrepreneur the money provided by it only after the maturity date specified in the contract. In this case, the investor shall be entitled to receive a share of the profit specified in the contract. 

Special Mudarabah is a Mudarabah transaction, under which an investor establishes the capital treatment for an entrepreneur according to which the entrepreneur may use the provided funds (in this case, the bank) only separately from the funds provided by any other investors, without the right of their consolidation. In this case, the investor may rely on a share of the profits received only as a result of using the funds provided by it and labor resources of the entrepreneur. 

General Mudarabah is a Mudarabah transaction, under which an investor establishes the capital treatment for an entrepreneur according to which the entrepreneur (in this case, the bank) may consolidate the funds provided by the investor with a total amount of funds provided by any other investors. In this case, the investor shall be empowered to bargain for a share of profit received from the use of the whole amount of the provided funds and labor resources of the entrepreneur. 

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

3. Mudarabah transaction may be used by the bank in the following two cases: 

- as an instrument to attract funds; 

- as an instrument to allocate funds attracted under Mudarabah 

4. The Mudarabah Contract shall be executed in written. 

5. The bank, acting as an investor, shall assess the business plan, identify the investment facilities, assess the entrepreneurs activities and advise it later in the course of the contract. 

6. When issuing funds under the Mudarabah transaction, the bank shall include a provision in the contract prohibiting any unauthorized use of the funds and issuance of loans and credits. 

7. For proper fulfillment of the obligations under the Mudarabah transaction, the Bank, acting as an investor, shall receive a collateral from the client in the form of a pledge, surety commitment, guarantee, deposit and other types of collateral provided by law or by a contract equal to the amount provided for by the Bank under the contract. 

8. The Mudarabah Contract shall at least cover the following: 

1) an indication of the type of contract; 

2) depending on the type of contract, the contract may specify the investment facility, the impossibility of early withdrawal of the amount deposited, the possibility of consolidating the funds received from the investor with the third parties funds; 

3) amount provided; 

4) the way of securing the entrepreneurs obligations; 

5) rights and obligations of the parties; 

6) the entrepreneurs liability for failure to fulfill, or improper fulfilled, obligations to recover losses arising from execution of the contract due to any guilty or wrongful actions/omissions of the entrepreneur at the expense of the entrepreneur, which includes using the collateral or other property of the entrepreneur; 

7) the procedure for allocating profits and losses in such a way as to exclude any uncertainty for the parties to the contract; 

8) contractual compliance of the entrepreneur ensured independently or with the involvement of any qualified persons; 

9) keeping records of the used funds received from the investor, which allows upon termination of the contract or a separate stage to determine the profit received to be distributed between the parties; 

10) the procedure for termination of the contract. 

9. The profit of each party to the contract shall be determined as a percentage of the profit received by the entrepreneur when using the funds provided by the investor. 

The order of profit distribution between the parties shall be determined in the contract in advance. 

Where, during the contract, the entrepreneur has not only received a profit, but also incurred losses, the investor shall bear such losses in the amount of capital provided, and the entrepreneur in this case will not receive remuneration for its work. This rule for distributing losses shall be effective if the losses arose not through the entrepreneurs fault. 

Where losses occurred during the contract as a result of any guilty or wrongful actions/omissions of the entrepreneur, these losses shall be borne by the entrepreneur. At the same time, the investor shall be entitled to receive from the entrepreneur the amount transferred earlier under the contract at the cost of the collateral, and where it is not sufficient at the cost of any other property of the entrepreneur. 

10. The Mudarabah Contract may not be terminated unilaterally where: 

- the entrepreneur has already got down to the contract implementation and already used the funds in the course of its entrepreneur activities; 

- the contract has not expired. 

11. Banks attraction of funds under the Mudarabah Contract: 

а) In accounting, monetary funds attracted under the Mudarabah Contract shall be recorded in the section applied to the banks liabilities on sub-accounts of the balance-sheet accounts of the deposits of individuals, legal entities, banks and other financial institutions (groups of accounts 20000-20400 of the Chart of Accounts in Commercial Banks and Financial Institutions of the Kyrgyz Republic). 

b) When opening an account for a client under the Mudarabah Contract, the Bank shall fulfill all the necessary requirements related to the clients identification in accordance with the National Bank regulations. 

c) Accounting of funds attracted by the bank under the Mudarabah Contract shall be maintained on the banks balance-sheet accounts with regard to the principal amount deposited under the contract. The accounting of Mudarabah obligations in a foreign currency shall be maintained in the denomination of such currency. Analytical accounting of clients personal accounts shall be maintained by the Bank through a special automated program that records all transactions performed on the account. 

d) The Banks Board shall establish the procedure, size and rules for paying a share of profits payable to clients under the Mudarabah Contract. The amount of profit paid under the terms of the Mudarabah Contract to the client shall be deemed the expenses of the period. 

e) The Bank shall, on a periodic basis (monthly or quarterly), subject to the terms of the contracts, accrue expenses (within the accounting) under the Mudarabah Contracts taking into account the specific nature and terms of repaying funds placed by the Bank in investment projects (Murabahah, Mudarabah, Ijarah, Istisna, Musharakah, etc.). 

f) Where the bank, acting as an entrepreneur, achieves positive financial results, the Bank shall pay the client a share of profit. The procedure and terms for distributing profits from Mudarabah transactions shall be carried out in accordance with the terms of the contract. 

g) A share of the clients profit shall be calculated subject to the type of the Mudarabah Contract limited or unlimited. In case of the Limited Mudarabah Contract, the clients profit share will be calculated based on the profitability of investing in a particular project, the proportion of funds invested by the client and the proportion of the profit distribution specified in the contract. In case of the Unlimited Mudarabah Contract, the clients profit share shall be calculated based on the banks profitability from placing the attracted funds into active transactions carried out by the Bank under the principles of Islamic finance (Mudarabah, Murabahah, Istina, Sharikah, Salam, Ijarah, etc.) for a specific period. The amount specified in the contract shall be proportional to the investments of the parties. 

h) By their content, the Mudarabah transactions shall be treated as deposit transactions and limited to the economic standard K5 (Prudential Standard of Maximum Risk for Individuals Deposits) in accordance with the Regulation for Prudential Standards and Requirements Mandatory for Commercial Banks and Financial Institutions Licensed by the National Bank. In addition, according to this regulation, the Bank shall identify the concentration risk and control it. 

i) Mudarabah transactions financial accounts shall be included in the calculation of mandatory reserve requirements under the Regulation for Mandatory Reserves. When calculating the liquidity ratio, these liabilities shall be included in the amount of the banks liabilities in accordance with the criteria specified in the Regulation for Prudential Standards and Requirements Mandatory for Commercial Banks and Financial Institutions Licensed by the National Bank

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

12. Disbursements under Mudarabah: 

а) Assets placed under the Mudarabah transactions shall be treated as assets bearing credit risk and therefore fall under all restrictions related to loan placements. 

When calculating the capital adequacy ratio, the assets placed under the Mudarabah transaction shall be treated as assets with an extent of risk identified in accordance with the Instruction for Determining the Capital Adequacy Standards of Banks Performing Transactions under the Principles of Islamic Banking and Finance approved by Resolution No. 51/4 of the National Bank of the Kyrgyz Republic Board dated December 28, 2009 (hereinafter referred to as the “Instruction for Determining the Capital Adequacy Standards”). 

As per the Regulation for Asset Classifications and Related Deductions to the Potential Loss Provision and in accordance with internal procedures, the Bank shall evaluate these assets on a monthly basis in terms of their deterioration along with building up a potential loss provision. 

b) Assets placed under the Mudarabah transactions shall be initially recorded in the balance sheet indicating the amount of cash invested in a transaction in sub-accounts of balance-sheet accounts for loans issued by the bank (group of accounts 10900 of the Chart of Accounts in Commercial Banks and Financial Institutions of the Kyrgyz Republic). 

c) Since assets placed under the Mudarabah transactions bear the default risks (credit risk), the Bank shall create provisions for this type of assets to cover potential losses and damages. 

d) Profit/income from the Mudarabah transactions shall be recognized in the accounting upon termination of the Mudarabah Contract and achievement of the project deliverable, or can be received by the Bank as an interim result that can be reliably estimated 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 shall be performed on a monthly or quarterly basis according to regular assessment of the project as to compliance of the achieved results for the activities undertaken at various stages of the project with those planned in the business plan. In case of positive results, the Bank shall accrue income based on the share of profit specified in the contract, as a percentage of profit due to the Bank based on the results of the completed project. 

e) Any loss shall be recognized in the accounting as a decrease in the amount of investments taken into account in the Banks assets and written off against the provision built up by the Bank. Where the amount of loss is equal to the amount of investment in the Mudarabah transaction, the Bank shall make a full write-off of the asset against the built up provision. 

(As amended by the Resolution No. 32/6 of the National Bank of the Kyrgyz Republic Board dated July 16, 2014) 

Chapter 2.2 

Sharikah Partnership Contract 

1. Sharikah Contract is a partnership contract between two or more parties under which each partner contributes a certain amount of money or, with the consent of all partners, any tangible assets, which empowers each partner to conduct business using the assets of the company on the basis of profit distribution under the contract, while any losses shall be borne by each partner in accordance with its relevant contribution to the companys total capital. 

2. The Sharikah Contracts shall be classified within two key categories: 

1) association of participants without establishing a legal entity; 

2) association of participants with establishing a legal entity, including: 

a) partnerships and/or legal entities established in accordance with the Legislation of the Kyrgyz Republic; 

Unless otherwise stipulated by the subject matter of the contract, the Sharikah Contract shall be applied both to associations of participants without establishing a legal entity and to the associations with establishing a legal entity. 

Musharakah is a form of partnership under the Sharikah Contract, in which one of the partners promises to gradually buy out equities (shares) of another partner until the ownership of the equities (shares) is fully transferred to the former. This transaction shall start with the formation of a partnership with subsequent purchase and sale of shares between the two partners. It is required that these purchase and sale transactions are not stipulated in the partnership contract. The buying partner may only give a promise to buy shares. This promise shall be independent of the partnership contract. In addition, the purchase and sale contract shall be independent of the partnership contract. At no time one contract may be entered into under the condition of entering into the other contract. 

3. General rules of the Sharikah Contract shall be applied for the Musharakah transaction, while it is not permitted to include any provision in the Musharakah Contract that empowers any party to withdraw its share from the companys capital. 

The Sharikah Contract shall be executed in writing. Where a legal entity is established under the contract, it shall be subject to registration. The purpose of the partnership shall be clearly stipulated in the articles of partnership. 

4. The Bank may enter into the partnership contracts where the funds or property provided by the parties for the purpose of carrying out partnership activities are originated from permissible sources. When establishing a company based on the partnership, all necessary confirmations shall be obtained about compliance of the transactions carried out within the partnership activities with the Shariah rules and principles including management of the company that complies with the Shariah rules. 

5. Where the profit-sharing ratio is revised in the process of amending the partnership contract, each partner shall bear losses in accordance with its share contributed in the partner capital. 

6. If any tangible assets (goods) are contributed to the capital of a company established under the Sharikah Partnership Contract, the monetary value of such assets shall be determined by independent experts. 

7. Any debt obligations (accounts receivable) may not be contributed to the capital of a company established under the Sharikah Partnership Contract. Debt obligations may be contributed to the capital of a company established under the Sharikah Partnership Contract only if they are inseparable from other assets represented as a contribution to the capital. At the same time, the value of net assets shall be confirmed by independent auditors.  

8. The partnership-based company contract shall provide for the obligation of each partner to act under the contract and in the companys interests as well as unconditional compliance with the Shariah rules and principles.  

9. The contract may provide for the management of the company by several partners or one partner. In this case, other partners shall adhere to this decision and not take any actions on behalf of the company. 

10. The Sharikah Contract may stipulate the appointment of a manager not from among the partners, for a fixed remuneration included in the companys expenses or payments as part of the investment profit and a fixed remuneration as incentives for the manager. If from the very beginning the management is carried out as a percentage of the profits received, this shall classify the manager as a mudarib (entrepreneur) and, in this case, he shall be entitled only to a share in the profits, if any, and is not paid any more remuneration for the managers services. 

11. The Sharikah Contract may not specify any fixed remuneration to a partner who contributes to the fund management of a company established under the Sharikah Contract or that provides its services in some other form, for example, accounting services. At the same time, it may be offered more profit compared to that it could earn as per its share in partner capital. 

12. The Sharikah Contract shall provide for the liability of partners to provide collateral to cover losses in case of misconduct, mismanagement, negligence or breach of the contract by any partners/partner. 

13. Where the guarantee against losses incurred by some or all partners is provided by a third party, such guarantee shall meet the following requirements: 

1) the legal capacity and financial obligation of such third party acting as a guarantor shall be independent of the Sharikah Contract; 

2) the guarantee may not be provided against any compensation and may not be related to the Sharikah Contract; 

3) the third party acting as a guarantor shall not own more than half of the capital amount in the company to which it gives a guarantee; 

4) the company that has received the guarantee shall not own more than half of the capital amount in the company that provides such guarantee; 

5) a partner in whose favor a third party guarantee is issued, may not refuse to fulfill its obligations under the contract if the guarantor fails to fulfill the terms of the guarantee. 

14. The Sharikah Contract shall provide for the distribution of profits between the parties as a share of the profit received in proportion to each partners contribution to the companys capital. The profit may not be specified as a fixed amount of money. 

15. The Sharikah Contract may provide for any changes in the shares of partners within profits distributed as of the profit distribution date, or the right of a partner to give a part of its profit on the day of profit distribution to the benefit of any other partner. 

16. The Bank may not voluntarily accept losses of any other partners. But under the Sharikah Contract, the Bank may provide for the right of any other partners to voluntarily take over liability for losses, without any preliminary stipulations, at the time of their occurrence. 

17. The partners may agree to use any method of profit distribution, whether such profit is permanent or not, for example, to agree that the percentage of share in the profits at the first stage of the contract may be different from the percentage of share at the second stage subject to any discrepancies between the two periods or between the amounts of profit received. This may be practiced if such method does not cause a situation where a partner would be excluded from participation in the profit. 

18. The profit shall be distributed according to the actual results, without taking into account the expected profit of the companys activity. 

19. Any conditions or profit distribution method under the Sharikah Contract may not include any provision or condition that could entail a violation of the profit distribution principle. Any condition or profit distribution method leading to such result will make the contract invalid. 

20. The partners may not include a provision in the contract according to which one of the partners receives, as a share of profits, a lump sum of the profits or its percentage of the companys capital created under the Sharikah Contract. 

21. The partners may agree that where the amount of received profit exceeds a maximum threshold established by the parties, the excess profit may belong to a certain partner. The parties may also agree that where the profit does not exceed the maximum amount or is less than such amount, such profit shall be distributed in accordance with their contract. 

22. Upon expiry of the partnership or its liquidation, the profit can be finally distributed based on the proceeds from sale of the companys all existing assets created under the Sharikah Contract at a market value. 

23. Any funds may be distributed to any party in advance, i.е. before an actual or constructive evaluation, provided that the final actual calculations are made at a later stage. In this case, the parties shall compensate the company for any amount they have received in excess of their assigned shares of profits after the actual or constructive evaluation. 

24. Where the subject matter of the Sharikah Contract is represented by assets acquired for leasing that will yield income, or the subject matter of the contract is represented by services that will bring in proceeds, the amount shall be distributed annually to partners as an advance and be subject to settlement and compensation at the end of the Sharikah Contract. 

25. Based on the articles of association or decisions of the parties, it is permissible not to distribute the profit of the company or periodically retain some amount of profit as a solvency reserve or as a provision to cover the loss of capital (an investment risk reserve). 

26. The partners may come to an agreement to retain some portion of the profit for charitable donations. 

27. The parties may enter into a Sharikah Contract for a specified period (and without specifying such period) or establish a cancellation clause as the basis for termination of the contract. 

Each partner may terminate the Sharikah Contract (that is, to withdraw from the company) after giving its partner (partners) proper notice thereof. In this case, it is entitled to its share in the company, and its withdrawal shall not entail termination of the partnership among the remaining partners. 

With a fixed-term contract, the parties may agree on termination of the partnership before time. In all such cases, the obligations and actions to be fulfilled and carried out by the partners before termination of the contract shall remain unchanged and survive the termination. 

28. A partner may give a mandatory promise to purchase, either during the operation period of the company or at the time of its liquidation, all assets of the company created under the Sharikah Contract at their market value or by agreement as of the date of purchase. It shall not be allowed to give a promise to acquire the assets of the company created under the Sharikah Contract at face value determined in advance. 

29. An enterprise created under the Sharikah Contract shall cease its operation upon expiration of the contract or prior to that date if the partners decided to terminate it before time, or, in the case of an enterprise created for a particular business, after actual liquidation of the assets that represent the subject matter of the partnership contract. The Sharikah Contract may be terminated in the event of an expected liquidation. In this case, the Sharikah Contract shall be deemed complete, and the parties, if desired, may start a new partnership whereby assets not sold in the course of actual liquidation, but estimated on the basis of the expected liquidation, shall be deemed the capital of the new enterprise. 

Where the liquidation is associated with the expiry of the contract, all the existing assets shall be sold at current market prices, and the income from their sales shall be used for the following purposes:  

а) liquidation costs; 

b) payment of financial liabilities from net assets of the enterprise; 

c) distribution of the remaining assets among the partners in accordance with their shares in the companys capital. If the assets are not enough and the parties may not return all their invested capital, the assets shall be distributed in proportion to their shares in the companys capital. 

30. A company designated for providing services shall be established under a contract entered into between two or more partners to provide services associated with a particular profession or skilled labor or to provide certain services or professional services as well as for manufacture of goods. Partners shall distribute profit according to the agreed ratio. 

31. A company established under the partnership designated for provision of services shall not have any money capital. Partners may distribute various types of services among each other and may assign a range of services or a specific service to some or all of their partners through a method which facilitates their interaction to provide a full range of services. 

32. Profit shall be distributed among the partners in accordance with the agreed ratio, but the contract may not contain a provision under which any lump sum of profits may be paid to any partner. 

33. Where a company established under the partnership designated for provision of services needs the means of production, each party may provide any relevant means of production required to provide its services. In this case, each partner has ownership of the means of production that it has provided. Partners can contribute funds to purchase any required equipment or tools under the joint ownership. A party involved in the Sharikah Contract may also provide the means of production necessary for the company for a fee that will be charged to the current expenses of the company. 

34. The bank shall maintain accounting records for the Sharikah transactions in accordance with the International Financial Reporting Standards, IAS 28 Accounting for Investments in Associates

35. The assets placed under the Sharikah Transactions relate to investment activities, carry a credit risk and fall under all restrictions associated with placement of loans. 

When calculating the capital adequacy ratio, assets placed under the Sharikah Transactions shall be treated as assets with a degree of risk identified in accordance with the Instruction on Defining Capital Adequacy Standards

According to the Regulation for Asset Classifications and Related Deductions to the Potential Loss Provision and according to the internal procedures, the Bank shall on a monthly basis evaluate these assets for deterioration along with building up the provision for losses. 

(As amended by the Resolution No. 32/6 of the National Bank of the Kyrgyz Republic Board dated July 16, 2014) 

Chapter 2.3 

Murabahah Transaction 

1. Murabahah Transaction is a transaction for sale of goods purchased by the Bank at the request of the client or owned by the Bank at the time of the clients request. The price of selling the goods by the Bank shall be defined by the parties as the sum of the purchase price and an extra charge agreed upon by the parties to the contract. The extra charge can be set as: 

- a fixed lump-sum figure; 

- percentage of the cost of goods. 

The Bank shall finance the trading operation, that is, it purchases goods on its behalf and at its own expense, on the clients request. In this case, the Bank assumes the entire risk of the trading operation. 

When selling the goods to the client under the Murabahah Contract, the bank shall act as the owner of the goods. 

The Murabahah Contract shall be executed in writing in a simple or notarial form. The ownership of the goods shall be transferred after full payment of the price, unless otherwise stipulated by the terms of the contract. Where the ownership of the property is subject to the state registration, the ownership title of the acquirer shall arise from the time of its registration. Where the property alienation agreement is subject to the state registration, the ownership title of the acquirer shall arise from the time of its registration. 

Payment of the price for goods under the Murabahah Contract can be made by regular contributions on a short-term or long-term basis. After conclusion of the contract, the Bank may not claim any additional payments due to any delay or prolongation of payment arising for any reason or without justification. 

(As amended by the Resolution No. 40/4 of the National Bank of the Kyrgyz Republic Board dated September 28, 2016) 

2. A material condition of the Murabahah transaction shall be the mandatory specifying and indicating the extra charge in the sale price. 

3. The Murabahah transaction shall be carried out based on a written request of a potential client to the Bank wishing to purchase any product from the Bank. 

In the request, the client shall specify the name of goods, the approximate price at which it is ready to purchase it, and the terms of the purchase as a rule, the payment by installments. The client can also specify the seller, from whom the Bank can purchase the goods. The Bank shall be entitled to choose the seller if there are more acceptable offers from any other sellers. 

Any property received by the Bank for repayment of previously issued financing, as well as any other property, can be realized under the Murabahah transaction subject to compliance with the requirements set forth in the Regulation for Individual Real Estate Transactions/Operations of Commercial Banks and Microfinance Companies of the Kyrgyz Republic approved by the Resolution of the National Bank of the Kyrgyz Republic Board No. 36/2 dated August 29, 2012. 

(As amended by the Resolution No. 40/4 of the National Bank of the Kyrgyz Republic Board dated September 28, 2016) 

4. The Bank shall enter into a contract for the sale of goods with a seller, with the contract specifying that the Bank shall buy the goods for subsequent sale to the client under the Murabahah Contract. 

5. The contract for the sale of goods may not be entered into where the client was bound by any previous contractual obligations with the seller with respect to the goods being the subject of the purchase and subsequent sale under the Murabahah Contract. 

The seller shall be treated as a third party in relation to the client and the Bank. The client may not simultaneously act both as a seller under the contract for the sale of goods entered into with the Bank and as a client under the Murabahah Contract entered into with the Bank. 

In exceptional cases, the Bank may buy goods from a party, who is a close relative of the client subject to the availability of the right to sell and repurchase. 

After purchasing the goods from the seller, the Bank shall be entitled to create the possibility of its return within a specified period. If the client fails to repurchase the goods from the Bank, the Bank may return the goods to the supplier within a specified period, upon agreement between the two parties. This possibility shall remain in force until the goods are repurchased from the Bank. 

6. The contract of sale entered into with the supplier of the goods shall specify the following: 

- name of the parties; 

- subject of the contract; 

- name of goods; 

- the goods quantity and price as well as terms and conditions of payment; 

- delivery time; 

- rights and obligations of the parties; 

- penalties for non-fulfillment of obligations; 

- performance bond; 

- other conditions. 

The Bank may conclude the contract of sale both independently and through an agent. As an agent, the Bank may appoint the client, while the client shall act at the expense, for and on behalf of the Bank on the terms stipulated in the agency agreement, which shall cover the following: the subject matter of the contract, the names of the parties and goods, terms and conditions of payment, documents confirming the purchase and sale transaction, and other conditions. 

Where the client acts on behalf of the Bank as an agent, the following conditions shall be met: 

а) the Bank shall itself pay the seller for the goods without crediting funds to the clients account acting as an agent. The Bank may provide cash to the client acting as an agent only in the following cases: 

- if the seller of the goods is an individual entrepreneur acting in accordance with the applicable Legislation of the Kyrgyz Republic; 

- when the goods are purchased outside the Kyrgyz Republic. 

At the same time, the aggregate amount of funds provided to clients acting as agents under agency agreements shall not exceed 20% of the Banks financing portfolio under the Murabahah Transactions; 

b) the Bank shall take a documentary evidence from the seller confirming the sale. 

All documents and contracts related to the sale/purchase of goods shall be executed on behalf of the Bank, even if the client acts as a bank agent. 

The Bank shall receive the goods from the suppliers premise or any other place specified in the delivery conditions. 

The Bank shall bear expenses for the delivery of goods, which are included in the cost of the goods. 

The Bank shall bear responsibility as the owner of the goods as well as carry any subsequent risks that can be insured. Insurance premium that will arise before the sale of goods to the client, shall belong entirely to the Bank. 

The insurance costs shall be included in the price of the item purchased under the Murabahah Contract. 

(As amended by Resolution No. 32/8 of the National Bank of the Kyrgyz Republic Board dated August 28, 2013) 

7. As a security for the clients proper acting upon its promise to conclude and implement the Murabahah Contract, the Bank shall enter into a contract of monetary pledge or any other type of pledge with the client. The amount of money transferred as the pledge may not be invested by the Bank unless a permission thereof has been granted by the client. 

The Bank shall return the pledge after completing the Murabahah Contract by the client. At the request of the client, the contributed amount of pledge can be credited against the payment in accordance with the Murabahah Contract. 

The Bank shall bear risks associated with any damage to the goods during transportation or storage, and they may not be covered against the pledge. 

Where the client violates the promise, the Bank shall be empowered to sell the purchased goods to any third parties. If the actual sale price was lower than the price at which the bank had purchased the goods, the Bank shall be entitled to deduct the indicated difference from the pledge amount and return the remainder to the client. 

The Bank may take an advance payment after entering into the Murabahah Contract for the purchaser. This can be done at the time of making contracts at the stage when the client has given a promise to buy the goods. 

If the client has chosen the seller of the goods on its own, the Bank shall include the following conditions in the contract: 

а) the clients securing proper execution of the contract for the sale of goods by the seller; 

b) the clients recovery of all the Bank losses arose due to the sellers failure to execute the contract, including potential court costs, in particular, against the collateral, where the seller fails to execute the contract of sale. This condition shall work even if the Murabahah Contract has not been executed. 

When concluding the Murabahah Contract, all the terms under which the trade transaction will be carried out shall be stipulated, including: 

1) all expenses incorporated by the Bank in the sale price, in particular, payments to a third party. Salary costs for the Bank employees may not be referred to such expenses; 

2) the selling price; 

3) extra charge, that is, the fee charged by the Bank for this transaction. 

At the same time, the sale price or the extra-charge may not be set in any uncertain way, for example, depending on any indicators that will be known in future. The price and the extra charge are acceptable to be established depending on the indicators applicable at the stage of the contract, so that the Banks extra charge is known for the client in advance before signing the Murabahah Contract. The size of the extra-charge may not depend on any time factors.  

The Bank may include the following conditions in the Murabahah Contract: 

a) that the Bank shall be not liable for any or all defects in the goods after the goods have passed into the possession of the client; 

b) that the Bank may sell the goods to any third party if the client refuses to accept the goods after the Murabahah Contract coming into effect, with the client refunding the amount missing to cover the Banks expenses. 

The Bank shall not be entitled to perform the Murabahah Transactions: 

a) in respect of the following goods: gold, silver, currency; 

b) with circulating capital, where the assets are secured by the accounts receivable; 

c) for refinancing the transaction. 

When creating the Musharakah, one of the parties may not participate through the Murabahah under the conditions of cash payments or deferred obligations. 

8. Payment under the Murabahah Contract shall be made by the client in accordance with the terms of the contract. 

The Bank may require early repayment from the client in the event of any unreasonable delay in the next installment subject to prior notification to the client of the payment deadline. 

Where the client has not made the full payment of the price, the Bank will not register the ownership of the goods in the name of the client until the installments are paid in full. 

The Bank may sell the goods if the client delays payments in excess of the period specified in the contract. If the Bank sells the goods, the client shall be reimbursed for those payments that have already been received from it. 

In the event that the Bank has received the pledge from the client, the client may issue an order to the Bank to sell the pledge to cover the debt without recourse to the court. 

Where there are arrears in payment at a specified period, the entrepreneur may, in accordance with the Murabahah Contract, allocate the established amount of the overdue payment or part of the debt for charitable purposes. 

9. The Bank shall not charge a commission fee and any payment from the client for the possibility of providing financing. 

The costs for preparing the contract documentation shall be split up between the Bank and the client unless they agree that one of the parties will pay the costs. All costs shall be stated fairly and shall cover the amount of work performed. 

Where the Murabahah is performed for the purchaser through syndicated financing, the Bank acting as the syndicated financing organizer may claim for due commission fee to be paid by the participants in the syndicated financing. 

The Bank may charge a fee for the feasibility study where it is developed at the request and for the benefit of the client, and the client has agreed to pay to the Bank. 

10. The initial direct costs of the Bank (commission to the intermediator, payment for legal services, etc.) associated with entering into an agreement to purchase the subject matter of the Murabahah Contract from the supplier shall be recognized as expenses of the current period. 

11. The Banks investments on the terms of the Murabahah Contract shall be initially recorded in the balance sheet in terms of the amount of cash invested in the transaction on the subaccount of balance sheet accounts for any other bank property. 

12. Subsequent costs of the Bank related to the purchase of goods as well as transportation costs, import duties and other costs shall be included in the purchase price of the goods. 

13. In compliance with the terms of the contract for the sale of goods entered into with the client, the Bank shall recognize the loan issued to the client in the amount the client shall pay to the Bank in accordance with the contract. Subsequent accounting of the loan and recognition of income from the transaction shall be made in accordance with the IAS 39 requirements and the National Bank regulations. 

In case of paying a lump sum for the goods by the client, the Bank shall allocate the received monetary funds in repayment of the loan and recognize the income. 

Where, under the terms of the contract, the client pays for the goods by installments as per the payment schedule, the Bank shall make a monthly accrual of income in the accounting under the Murabahah Transaction, according to the payment schedule. The amount of funds received shall be allocated to repay the loan and accrue the income to be received. 

14. The Bank shall periodically assess the quality and magnitude of the risk of potential loss of assets associated with the Murabahah Transactions, with appropriate classification and deductions to the potential loss provision in accordance with the Regulation for Asset Classifications and Related Deductions to the Potential Loss Provision

15. Assets placed under the Murabahah Transaction shall be accounted for as loans treated as assets bearing a credit risk and therefore fall under all restrictions associated with the placement of loans. 

When calculating the capital adequacy ratio, the assets placed under the Murabahah transaction shall be classified as loans with a credit risk ratio of 100%. 

According to the Regulation for Asset Classifications and Related Deductions to the Potential Loss Provision and pursuant to the internal procedures, the Bank shall make an evaluation of these assets on a monthly basis as to their deterioration along with building up the potential loss provision, if necessary. 

In carrying out this transaction, the Bank shall pay special attention to the country and transfer risks, reliability of the supplier and the insurant of the goods as well as to security of the goods delivery. 

(As amended by the Resolution No. 25/9 of the National Bank of the Kyrgyz Republic Board dated June 11, 2014) 

Chapter 2.4 

Ijarah and Ijarah Muntahiyah Bittamlik Transactions 

(Chapter title as amended by the Resolution No. 47/3 of the National Bank of the Kyrgyz Republic Board dated December 17, 2008

1. Ijarah is a transaction for taking special possession of movable or immovable property by a lessor at the clients request, or movable or immovable property owned by the bank at the time of the clients request and giving it to a lessee in temporary possession under property lease and use for an agreed term, on a fee basis.  

(As amended by the Resolution No. 21/10 of the National Bank of the Kyrgyz Republic Board dated May 31, 2017). 

2. Idjarah Muntahiyah Bittamlik is a transaction that includes the Ijarah Contract under which the client shall be entitled to repurchase the previously leased (in temporary possession and use) property either upon expiry of the Ijarah Contract or in stages during the contract period. 

3. Ijarah Contract is a contract under which a lessor shall take possession of any movable or immovable property specified by a lessee, or movable or immovable property owned by the bank at the time of the clients request and give it to the lessee for property lease in temporary possession and use for an agreed term, on a fee basis. 

(As amended by the Resolution No. 21/10 of the National Bank of the Kyrgyz Republic Board dated May 31, 2017). 

Lessee is an individual or a legal person who, under the Ijarah Contract, shall accept the subject matter of the contract for a specified fee for a certain period and under certain conditions for temporary possession and use. 

Lessor is a bank that, at the expense of its own and/or borrowed funds, acquires property during implementation of the Ijarah Contract and grants it as an Ijarah subject to the Lessee for a specified fee, for a specified period and under specified conditions for temporary possession and use, with or without transfer of ownership to the Lessee in relation to the subject matter of the contract.  

Seller is an individual or a legal entity who, under the contract of sale entered into with the lessor, sells the property, which is the subject matter of the Ijarah, to the latter at a specified date. The seller can simultaneously act as a lessee within the same Ijarah Contract. 

Lease payments are the fees for owning and using the subject matter of the Ijarah Contract. These payments include reimbursement of the lessors expenses related to the acquisition and transfer of the Ijarah subject to the lessee, reimbursement of costs associated with the provision of any other contractual services as well as the lessors income. 

4. The Ijarah transaction shall be performed by the Bank upon the clients request as well as based on the financial and legal documents required to make a decision for entering into the contract. 

To make a decision for entering into the Ijarah transaction, the Bank shall assess the lessees ability to pay lease payments as well as evaluate liquidity of the property to identify the possibility of re-renting the property or its selling. 

(As amended by the Resolution No. 40/4 of the National Bank of the Kyrgyz Republic Board dated September 28, 2016) 

5. With the Banks positive decision, the lessee shall provide a written promise to take the property for lease. 

The lessee shall contribute a specified amount by agreement of the parties as a guarantee of keeping the promise, that is, to take the property for lease. The amount contributed shall be used only for damage recovery in case of the clients violating the promise. 

By agreement with the client, the Bank may use it for investment under the Mudarabah Contract entered into between the Bank and the lessee. 

6. The subject matter of the Ijarah transaction may be represented by any non-consumable items including: enterprises and other property complexes, buildings, equipment, vehicles, and other movable and immovable property. 

7. The leased property shall be used on the assumption of its preservation, and the benefits derived from the implementation of the Ijarah Contract shall be lawful and comply with the Shariah requirements. 

8. The subject matter of the Ijarah Contract may be represented by a share of individual assets held together with the lessee, whether the lessee is a partner of the lessor or not. In this case, the lessee can benefit from the leased share in the same way as the lesser, i.e. by means of a time-sharing mode or by determining a part of the property. 

9. The lessor shall bear responsibility for any defects caused to the leased property, which deteriorate the quality of the used property, and shall not exclude the responsibility for any deterioration that the leased property may suffer either as a result of its own actions or as a result of the impact of any events that are outside of its control affecting the benefits expected under the Ijarah Contract. 

10. Where the benefit from the leased property is decreased completely or in part as a result of any unlawful actions of the lessee during the lease of this property, the lessee shall remove the obstacles for receiving benefit of the lessee. In this case, the lease term shall be extended for a period equivalent to the period during which the lessee could not benefit from the leased property, while the lessee shall not surrender the lease during the period of the lost profit. 

11. The lessor shall provide basic maintenance. The lessee shall perform routine or periodic maintenance. 

12. Property insurance shall be provided by the lessor. Insurance costs shall be included in the lease payment. After signing the contract, the lessor may not collect the lease payment from the lessee in excess of the established amount of the lease payment. 

13. To implement the Ijarah Contract, the Bank shall take possession of the property. The property may be purchased from a person/entity, who will be subsequently a lessee, and then leased to that person/entity. 

14. The lessee may enter into a sublease contract on terms other than the lease contract, with the lessors notification. 

15. The lessee may lease the property to its owner at the first stage of the lease for a lease payment that is lower, equal to, or higher than the lease payment it pays where the both payments are immediately paid on the basis of immediate delivery. Counter payments may not be higher due to deferred payment. 

16. The lessor may purchase or manufacture the property described in the specification at the request of the lessee. 

The lessee may abandon the property that does not meet the specification. 

17. The lessee may purchase the property, which it plans to lease, together with the Bank. Accordingly, the lease payment will be paid by the lessee in relation to the share which it owns. 

18. The Bank may appoint a lessee or a third party as an agent for the acquisition of property according to the agreed specification and the price for further lease to the lessee. 

19. The Ijarah Contract shall be executed in writing and subject to notarization and state registration in cases provided for by the Legislation of the Kyrgyz Republic. 

20. The material conditions of the Ijarah Contract are as follows: 

а) the name and description of the Ijarah Contracts subject matter that are sufficient for the identification; 

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

c) the size, procedure, conditions and terms of making lease payments; 

d) specifying the party that selects the Ijarah subject matter and the seller; 

e) other conditions. 

21. Where the lessor fails to provide the property to the lessee within the period provided for in the Ijarah Contract, the lease payment shall not be paid for the period between the effective date of the contract and the actual date of leasing the property to the lessee; the rent shall be reduced accordingly where the parties have not agreed that the lease term would be extended for a period equivalent to the period of failure to provide the property after the original date of the contract termination. 

22. The client shall make an advance payment, which can be detained by the lessor in the case of failure to execute the Ijarah Contract due to the fault of the lessee in order to compensate for the damage. 

23. The lessor may enter into several Ijarah Contracts with respect to the same property leased for different terms to several lessees provided that these two contracts are not executed simultaneously with respect to the same property and in the same period. 

24. The Ijarah Contract may be entered into with several lessees entitled to the same benefit in respect of any property and lease period, without establishing a certain period for a certain person. In this case, each lessee can get a benefit from the property during the period established for it, according to the stipulated rules between the lessees. 

25. The lease payment can be made in cash, in kind (goods) or as some advantages (services). The lease payment shall be established either as a lump sum covering the period of the Ijarah Contract validity or as partial payments for specified periods of the contract; may be paid in full as advance payment or in installments for a period equal to, greater than or less than, the period of the Ijarah Contract validity. The lease payment may be fixed or be as variable amount as agreed by the parties. 

26. The lease payment is mandatory under the contract, and the lessors right to receive the lease payment shall occur from the time when the lessee starts to benefit from the lease of the property or when the lessor provides the lessee with the right to receive the benefit from the leased property. 

27. Where the lease payment is subject to any changes, it is necessary to specify the amount of rent for the first period of the Ijarah Contract. The amount of lease payment may be specified for subsequent periods according to a certain basis of comparison. The exact order shall underlie in such a basis for comparison, which shall be the determining factor for the amount of the lease payment for the remaining periods. This base for comparison shall have certain thresholds: both the maximum and the minimum. 

28. By agreement of the parties, a part of the lease payment may be paid to the lessor, while the other part will be aimed at covering any expenses approved by the lessor such as: the cost of basic maintenance, insurance, etc. 

29. The two parties may agree to change the amount of rent for future lease periods, i.е. the periods within which the lessee has not yet received any benefit from the lease by updating the Ijarah Contract. The lease payment that has not been paid for any previous periods becomes a debt that the lessee shall pay to the lessor, so it may not be increased. 

30. As a security for paying the lease payment and avoiding any negligent attitude to the leased property, the lessee shall provide a collateral in the form of liquid assets. 

31. The Bank may demand from the client the early payment of lease in the event of any unjustified delay in the due installment of the lease payments on the assumption of reminding the client of the payment terms. 

32. The both parties may agree on immediate making the lease payment. The lease payment can be made in partial installments in this case, the lessor may call for a provision under which the lessee shall immediately pay the remaining lease payment if, after receiving an appropriate notice of the need to make the lease payment for a specified period, it delays a partial payment without a justified reason. Any acceleration in making the remaining lease payments in the event of default shall be subject to settlement at the end of the Ijarah Contract or, if the Ijarah Contract is subject to early termination, at the time of such termination. Any extension of the contract period by the lessor after the end of the period specified for immediate payment shall be deemed an agreement to defer payment during the period of such extension, and not the right of the lessee. 

33. The lessor may not increase the specified lease payment in the event of a delay in payment by the lessee. 

34. The Ijarah Contract or the Ijarah Muntahiyah Bittamlik Contract may contain a provision under which the lessee who has unreasonably delayed payment shall pay a specific amount or percentage of the lease payment due in case of late payment. The payment of this amount over and above the due lease payment shall go to charity. In the event of a loss of the right to receive collateral provided by the lessee, the lessor may deduct from such amounts only the amount payable to it as lease payment for prior periods, and not all partial lease payments, including payments for which the obligations have not yet come into force for the periods for which the lessee has not yet benefited from the leased property. The lessor can also deduct from the collateral amount all legal compensations payable by the lessee for breach of the contract. 

35. The lessor may sell the leased property to a third party informing it of the availability of the Ijarah Contract. At the same time, all rights and obligations under the contract will be transferred to the new owner. 

36. In the event of the leased property destruction, the Ijarah Contract shall be terminated, and the remaining lease payments shall not be paid. 

37. The lessee shall be liable for damage caused by the lessee through its fault. 

38. In the event of partial damage to the property, which caused a decrease in the planned revenues, the lessee may terminate the Ijarah Contract. In addition, the parties may, in this case, agree on a change in the amount of the lease payment, but, at the same time, the leased payments shall not be charged for the period of lost profit. The lesser shall provide a similar property for further implementation of the Ijarah Contract, otherwise the contract shall be terminated. 

39. If the lessee ceases to use the leased property or returns it to the owner without its consent, the lease payment shall remain payable to the owner for the remaining period of the Ijarah Contract, and the lessor may not lease it to another lessee during this period of the contract, but shall retain the property in the possession of a new lessee. 

40. The Ijarah Contract may be terminated: 

a) by mutual agreement; 

b) in case of violation of the terms or cessation of lease payments; 

c) when the leased property is damaged; 

d) upon expiry of the contract; 

e) when the property is sold to the lessee. 

41. The transfer of ownership shall be confirmed by a document other than the Ijarah Contract in the form of a promise to: 

a) sell for a token or other agreed payment or for an incremental payment of the remaining part of the lease payment or by paying the market value of the leased property; 

b) donate it without giving a reason; 

c) donate it after payment of the remaining payments. 

In all the above cases, a separate document proving the promise to donate property, sell it or donate after the occurrence of a specific event, shall be drawn up separately from the Ijarah Muntahiyah Bittamlik Contract. It may not be treated as an integral part of the Ijarah Contract. 

42. The promise to transfer the ownership to the lessor shall be mandatory with no bilateral agreement to be concluded. 

43. The transfer of ownership shall be effected under a gift or sale agreement, which shall be separate from the Ijarah Contract and the promise made. 

44. In the event of entering into a contract with a suspensive condition, the new contract for the transfer of ownership shall not be concluded for fulfillment of the conditions. 

Where at least one payment is not made, ownership of the property shall be not transferred. 

45. The rules governing the Ijarah Contract shall also apply to the Ijarah Muntahiyah Bittamlik Contract, i.e. the lessor has made a promise to transfer ownership of the leased property to the lessee. None of these rules may be violated under the pretext that the leased property has been purchased by the lessor based on the lessees promise that he will acquire it or that the ownership of it will be transferred to it or that it will make the lease payment above the set lease payment made for similar property equal to the amount of payments taken under installment sale, or due to the fact that the local legislation and adopted banking practices specify such transaction as the installment sale with deferred transfer of ownership. 

46. ​​The transfer of ownership of the leased property may not be effected simultaneously through the sale contract and the Ijarah Contract as the sales contract takes effect on a specified date in future. 

47. Where the leased property has been destroyed or where the continuation of the lease contract becomes impossible till the date of its expiration for any reason not related to the lessee, for both cases the lease payment shall be adjusted based on the prevailing market value. 

48. The Ijarah and the Ijarah Muntahiyah Bittamlik transactions shall be classified as leasing transactions accounted for in accordance with the requirements of Standard 17 Leasing of the International Financial Reporting Standards (IFRS). 

The Ijarah shall be classified as an operating lease for accounting purposes, and the Ijarah Muntahiyah Bittamlik shall be classified as a finance lease. 

The classification is based on one of the main principles laid down in the procedure for the submission of financial reports in accordance with the IFRS the predominance of the economic essence of the transaction over its legal form. 

49. Assets placed under the Ijarah transactions (lease) shall be classified as fixed assets of the bank (group of accounts 11100 of the Chart of Accounts in Commercial Banks and Financial Institutions of the Kyrgyz Republic), while the total amount of the banks fixed assets shall not exceed 100% of the paid authorized capital. 

When calculating the capital adequacy ratio, the assets placed under the Ijarah transaction shall be valued as fixed assets with a credit risk ratio of 100%. 

Assets placed under the Ijarah Muntahiyah Bittamlik Transactions (leasing) shall be treated as assets bearing credit risk and fall under all restrictions related to the placement of loans. 

When calculating the capital adequacy ratio, the assets allocated under the Ijarah Muntahiyah Bittamlik transactions shall be classified as financing with a credit risk ratio of 100%. 

(As amended by Resolution No. 21/10 of the National Bank of the Kyrgyz Republic Board dated May 31, 2017). 

According to the Regulation for Assets Classifications and Related Deductions to the Potential Loss Provision when carrying out transactions in accordance with the principles of Islamic banking and finance and in accordance with the procedures, the Bank shall monthly estimate these assets for deterioration with building up the provision. 

(As amended by the Resolution No. of the National Bank of the Kyrgyz Republic Board 21/10 dated May 31, 2017). 

Chapter 2.5 

Qard Hasan Transaction 

1. Qard Hasan is a transaction under which one party, on the basis of a contract, provides money to another party as an interest-free loan issued on terms of repayment or for charitable purposes. 

The Bank considers the Qard Hasan transaction as a form of raising funds or as a form of granting loans on terms of repayment without charging any fees. 

(As amended by Resolution No. 47/3 of the National Bank of the Kyrgyz Republic Board dated December 17, 2008

2. The Qard Hasan Contract shall be executed in a simple written form.  

The Qard Hassan Contract provides for the absence of any profitability from one contracting party and the possibility of disposition of the funds received from another contracting party. 

The Qard Hassan Contract shall contain the following material conditions: 

- the amount provided; 

- the contract validity and the date of return; 

- rights and obligations of the parties; 

- commission fees for bank services related to maintaining the current account. 

3. In banking, the funds raised under the terms of the Qard Hasan Contract shall form the banks resource pool and be treated as demand deposits. 

Under the terms of the Qard Hasan Contract, the client shall provide the Bank with cash on an interest-free basis, with the clients ability to freely dispose of them, and the Bank, in turn, may use part of the attracted resources in accordance with its investment policy. 

In order to maintain the required level of current liquidity and the ability to timely fulfill the obligations, the Bank shall maintain sufficient amount of cash on hand or on a correspondent account. 

Under the terms of the Qard Hasan Contract, the Bank may render service to an account holder using a checkbook or a plastic card. In this case, the Bank may charge a fee for the account holder for the provision of services for maintaining and servicing the current account. 

In some cases, the Bank may consider the possibility of granting a loan to a client under the terms of the Qard Hasan Contract. 

4. Monetary funds attracted under the Qard Hasan Contract shall form the deposit base of the Bank and be posted to the interest-free demand deposit accounts (groups of accounts 20000, 20200, 20400 of the Chart of Accounts in Commercial Banks and Financial Institutions of the Kyrgyz Republic). 

5. When opening an account for a client under the Qard Hasan Contract, the Bank shall meet all the necessary requirements related to the clients identification in accordance with the National Bank regulations. 

6. Accounting of the funds raised by the Bank under the Qard Hasan shall be maintained on the banks balance sheet accounts with regard to the principal amount of the contribution in accordance with the contract. Accounting of deposit accounts in foreign currencies shall be maintained in the nominal value of such currencies. Analytical accounting of the clients personal accounts shall be maintained by the Bank through a separate automated program recording all the transactions performed on the account. 

7. The Qard Hasan Transaction to raise funds for maintenance shall be treated as deposit transactions (urgent interest-free deposits) and limited to the economic standard K5 (Prudential Standard of Maximum Risk for Individuals Deposits). In accordance with this provision, including the Qard Hasan Transactions, the Bank shall identify the concentration risk and manage it according to its internal regulations. 

In the same way, the financial accounts of the Qard Hasan transactions shall be included in the calculation of the mandatory reserve requirements. When calculating the liquidity ratio, these liabilities shall be included in the amount of the banks liabilities under the Regulation for Prudential Standards and Requirements Mandatory for Commercial Banks and Financial Institutions Licensed by the National Bank

8. Assets placed under the Qard Hasan Transactions shall be treated as the assets bearing a credit risk, and therefore shall fall under all restrictions associated with the placement of loans. 

When calculating the capital adequacy ratio and assessing them by the degree of risk, the assets placed under the Qard Hasan Transaction shall also be treated as loans with a credit risk ratio of 100%. 

According to the provision for classification of assets and related deductions to the potential loss provision and according to the internal procedures, the Bank shall on a monthly basis evaluate these assets for deterioration along with building up the provision for losses. 

The Qard Hasan Transactions (deals) with the Banks affiliates shall be carried out by the Bank in accordance with the Instruction for the Requirements to Transactions with Insiders and Affiliates of Commercial Banks and other Financial Institutions Licensed by the National Bank

Chapter 2.6 

Istisnaa and Parallel Istisnaa Transactions 

1. Istisnaa Transaction is the sale of property that shall be manufactured or built by a manufacturer or a building contractor and transferred to the client after the completion of works. 

The Istisnaa transaction shall not be carried out with the existing property. 

2. The subject matter of the Istisnaa Contract is represented by the production of a non-existent product or structure that have special characteristics as required by the client, which the manufacturer has agreed to produce in compliance with the required specification. 

3. The Parallel Istisnaa transaction operates through two separate contracts. In the first contract, the Bank, acting as a supplier, enters into an agreement with the client. In the second contract, the Bank acts as a buyer and concludes another contract with a manufacturer, building contractor or supplier in order to fulfill its contractual obligations to the client under the first contract. In the process of performing such transactions, the Bank derives profit from the difference in price between the two contracts. One of the contracts shall be concluded immediately (i.e., the Istisnaa contract that the Bank enters into with the manufacturer, building contractor or supplier), while the second contract (that is, the contract with the client) shall be concluded later. 

Manufacturer, building contractor is a legal entity or an individual engaged in entrepreneurial activities. 

Client is a legal entity or an individual who orders production of the contract subject as per a required specification. 

4. When concluding the Istisnaa Contract, the client shall apply to the Bank with a request to provide him a finished product after it has been manufactured under a contractual obligation on the assumption that the manufacturer provides relevant materials and work. Parties to the contract shall determine the specifications of the goods for a certain price, which shall be paid immediately or after a specified period. 

The Bank shall assess the solvency of the property purchaser on the basis of the financial documents submitted. 

5. The Bank and the client shall enter into the Istisnaa Contract before the Bank obtains ownership of the contract subject, which shall be sold to the client, or ownership of the materials from which the subject of the contract is made (or built). 

6. The Istisnaa Contract shall be binding upon the contracting parties provided required conditions are met that include the specification of the type, quality and quantity of the subject matter to be made under the contract. 

7. The Istisnaa Contract shall be concluded in writing and be legally binding. The parties to the contract shall be bound by all the obligations and consequences arising from their arrangement. 

8. The manufacturer shall produce the goods that are the subject matter of the contract according to the specifications and within a specified period of time. 

9. The contract shall specify the price of the subject matter of the contract, the date of delivery, the resources used (own or with the involvement of goods made by any other entities that existed before the conclusion of the contract unless otherwise provided by the contract). 

10. Prior to the conclusion of the contract, all proposals for determining the price shall be considered. 

11. The price of the subject matter of the contract shall be determined at the time of entering into the contract and can be paid in the form of monetary or material resources. The price can be paid on a deferred basis or in installments over a period of time, or, if delivery of the subject matter of the contract is phased in, a part of the price can be paid immediately, and the rest part shall be paid in installments according to the stages of delivery or the work performance. 

12. The price under the Istisnaa Contract transactions may vary according to any change in the delivery date. The price of the subject matter of the Istisnaa Contract may not be determined on the basis of “costs plus fixed profits”. The Bank shall use information obtained from other dealers and suppliers to estimate costs and determine prospective profits. 

13. The Istisnaa transaction shall not be used as a tool for simple financing at interest. 

14. The Istisnaa Contract may be concluded for the construction of real property on a certain land plot that belongs to a final buyer or a contractor, or on the land plot from the use of which each of them has a benefit. 

15. In the event of a bankruptcy of the manufacturer, the client shall have a priority right in respect of the work in progress provided that the client has paid a part of the cost of the raw materials. 

16. The parties shall establish the period during which the manufacturer will be responsible for any defects or for maintenance of the facilities that are the subject matter of the contract. 

17. After entering into the Istisnaa Contract, it may be amended by agreement of the parties as to previously agreed specifications for production or construction, as well as any additional requirements can be specified provided that the price is accordingly adjusted and an appropriate justified period is granted to meet the new requirements. 

18. No additional fee shall be charged for any extension of the payment term. A pre-payment shall be allowed for a discount even if it is not provided for in the contract. 

19. In case of any unforeseen circumstances (force majeure), any changes in the price may be made by agreement of the parties or by a court order. 

20. The Bank may replace the contractor and conclude the Istisnaa Contract with the client to complete the project, which was started with the previous contractor. In this case, the project shall be evaluated on the basis of the existing status of the project at the expense of the client. The client shall also be personally liable for all outstanding debts, if any arise as a result of the unfinished Istisnaa Contract. In the future, a new Istisnaa Contract shall be concluded to perform the remaining work. 

21. Where any buildings or utility facilities are constructed on the land owned by the client, the Istisnaa Contract may be executed at the manufacturers expense where the latter fails to execute the contract or cannot complete the work within a specified period of time with this provision entering into force upon stoppage of works by the manufacturer. 

22. Where the contractor fails to continue the fulfillment of its obligation, the client (the owner of the land) may not acquire any unfinished building structures or utility facilities that are already ready, without the contractor being given a refund. This condition depends on the reason why the contractor fails to continue the work. 

Where the contract fails to be executed due to the contractors fault, the client can only receive the paid value of the built structure, while the building contractor shall compensate the final buyer for the amount of actual losses that he incurred. 

Where the contract fails to be executed due to any unlawful actions of the client, the contractor shall be entitled to receive an amount equal to the cost of the completed work and compensation for any loss or damage. 

Where the contract fails to be executed due to any reasons, to which neither party to the contract is related, the final buyer shall be entitled only to the constructed structure that is already in place, and neither party shall be liable for compensation for losses or damage incurred by the other party. 

23. Where any changes in the legislation led to an increase in the value of the subject matter of the contract, the additional costs shall be borne by the client. 

24. The Bank, acting as a manufacturer or a final buyer, may, as a guarantee, accordingly make advance payments or claim their payment (which is a part of the price) if the terms of the contract are complied with, or charge them as a fine if the contract is terminated. Preferably, this amount shall be equal to the actual damage suffered. 

25. In the Istisnaa Contract, a bank may require (whether it acts as a manufacturer or as a client) such guarantees as it deems sufficient to enforce its rights in relations with the client or the manufacturer. The bank acting as the client can give guarantees requested by the manufacturer, which can be in the form of a pledge, personal guarantee, assignment of rights, a current account or consent to block withdrawal of funds from the account. 

26. The Bank acting as a client may appoint, with the manufacturers consent, a consultant firm with technical expertise in making a qualified assessment of the contract execution and recommendations for payment, delivery, etc. 

27. The Bank acting as a manufacturer may enter into a separate agency agreement under which the client shall be appointed by the Banks agent for supervision over the manufacture or the construction works in order to ensure compliance of the subject matter of the contract with the contract specification. 

28. Any additional costs for supervision of the Istisnaa Contract execution shall be paid by agreement of the parties. 

29. The manufacturer shall be released from its obligations if the subject matter of the contract has been transferred to the final buyer, or to the person appointed by it, if the final buyer is able to exercise full control over the subject matter of the contract. 

30. Where the state of the subject matter of the contract does not comply with the contract specifications on the date of delivery, the client shall be entitled to refuse or accept it, which will mean satisfactory performance of the contract with the possibility of price changes. 

31. The client shall accept the delivered subject matter of the contract where there is no any sufficient reason for its refusal. For refusal to accept the subject matter of the contract, a clear justification of the reason for the refusal shall be given. 

32. In case of any unreasonable refusal, the subject matter of the contract shall remain in the possession of the manufacturer and, in this case, the manufacturer shall not bear any responsibility for any loss and damage that may occur to the subject matter of the contract if such loss and damage are not the result of negligent attitude or illegal actions of the manufacturer. The client shall bear the costs of preserving the subject matter of the contract. 

33. Delivery of the subject matter of the contract shall be deemed effected from the time of its transfer to the actual possession of the final buyer, which allows it to gain control over the subject matter of the contract after the completion of the manufacturing process. At this stage, the manufacturers commitment to the subject matter of the contract ends and the final clients commitment starts. After the end buyer has been permitted to take control over the subject matter of the contract, the end buyer shall be liable for any loss or damage that may subsequently occur to the subject matter of the contract, unless a negligent attitude or a wrongful action of the manufacturer has been proved. 

34. The manufacturer may act as the clients agent in the sale of the subject matter of the contract where the client has delayed acceptance of the subject matter of the contract for a specified period of time. In this case, the manufacturer shall sell the subject matter of the contract on behalf of the client and, after deducting the agreed contractual value, return the remaining funds, if any, to the client. Where the price received is less than the contract price, the manufacturer shall be entitled to apply to the client to recover the remaining part. 

35. The client shall bear the costs of selling the subject matter of the contract. 

36. The penalties for breaching the terms of delivery of the subject matter of the contract shall be applied as an appropriate compensation for the losses incurred. Such compensation shall be allowed only if the delay is not caused by any unforeseen circumstances (force majeure). 

However, the penalty clause applied to the failure to pay by the end buyer may not be provided for. 

37. The subject matter of the contract may not be sold before it becomes the actual ownership of the Bank. 

38. The Bank acting as a client, after taking the ownership of the subject matter of the contract, may designate the manufacturer as an agent to sale the subject matter of the contract to the Banks client. 

The agency agreement shall be separate from the Istisnaa Contract. 

39. The Bank may order goods on the basis of a specification and pay the price in cash to ensure the manufacturers liquidity when entering into the contract. Subsequently, the Bank may enter into an agreement with any other party for the purpose of selling, acting already as a manufacturer or a supplier of the goods, the specification of which shall meet the requirements of such other party under the Parallel Istisnaa Contract, and shall fulfill its contractual obligations accordingly. The delivery date set in the parallel contract (sales contract) shall not precede the date set in the original purchase contract, and moreover, the two contracts shall remain separate from each other. 

40. The Bank acting as a manufacturer and as a supplier shall be authorized to conclude the Istisnaa Contract for the purpose of selling such goods to the client in installments and to conclude the Parallel Istisnaa Contract based on an immediate payment from the manufacturer and the building contractor to purchase the goods established in the specification in the first contract and sell them to the client. This shall be permitted provided that the two contracts remain independent. 

41. When entering into the Istisnaa Contract as a manufacturer or a supplier, the Bank shall assume liability for property risk, maintenance costs and insurance prior to transfer of the subject matter to the client. In the Parallel Istisnaa Contract concluded with the manufacturer, the Bank may not transfer to the latter the responsibility for the risk arising from its obligations to the client. 

42. No any contractual links between obligations under the two contracts (the Istisnaa and the Parallel Istisnaa Contracts) may be established upon their conclusion. Thus, a party participating in the usual Istisnaa Contract may not lay down its duties or delay the transfer of the subject matter of the contract where its obligation under the Parallel Istisnaa Contract is not fulfilled; or increase the price of the goods supplied because of the increase in the value of goods under the Parallel Istisnaa Contract.  

However, there is no any limit on the right of an organization to provide for conditions and requirements when concluding the Parallel Istisnaa Contract when it acts as a buyer, including a penalty clause different or similar to the clause that the client has provided for in the first Istisnaa Contract under which the Bank acts as a supplier. 

43. In accounting, the Banks investments in the Istisnaa Transactions shall be recorded at actual costs on the subaccount of the balance-sheet accounts of loans (group of accounts 10900 of the Chart of Accounts in Commercial Banks and Financial Institutions of the Kyrgyz Republic). 

44. All the Banks subsequent expenses related to the manufacture of the subject matter of the Istisnaa Contract shall increase the cost of investments and be capitalized on the subaccount of the balance-sheet accounts of credits (group of accounts 10900 of the Chart of Accounts in Commercial Banks and Financial Institutions of the Kyrgyz Republic). 

45. Where under the terms of the contract, the client contributes funds as the separate stages of the manufacturing process for the ordered goods to be completed, the Bank shall allocate them to repay the loan. 

46. ​​Upon completing the manufacturing process for the subject matter of the contract, the Bank shall, under the Purchase and Sale Agreement, transfer the subject matter to the client and terminate its recognition only after the client has fully repaid the value specified in the contract reflecting the amount of income received from the sale.  

47. The Bank shall periodically assess the quality and magnitude of the potential loss risk associated with the assets in the form of loans under the Istisnaa Contracts with the appropriate classification and deductions to the potential loss provision as required by the National Bank. 

48 The assets placed under the Istisnaa and the Parallel Istisnaa transactions shall be accounted for as loans treated as the assets bearing credit risk and, therefore, shall fall under all restrictions related to the placement of loans. 

49. When calculating the capital adequacy ratio, assets placed under the Istisnaa and the Parallel Istisnaa transactions shall be classified as loans with a credit risk ratio of 100%. According to the Regulation for Asset Classifications and related Deductions to the Potential Loss Provision, and in accordance with the internal procedures, the Bank shall assess these assets on a monthly basis for deterioration along with building up the provision for losses. 

50. Where the Banks actual costs for completing the manufacture or construction of the subject matter of the contract are significantly less than the estimated costs, or where the Bank achieves a discount from the party with which it has entered into the Parallel Istisnaa Contract in order to acquire the subject matter of the contract and fulfill the contractual obligation, the Bank shall be entitled not to provide the discount to the final buyer, and the latter shall not be entitled to the amount, or part thereof, that the Bank has received above the estimated costs. The same rule shall apply when the actual costs of production are much higher than the estimated costs. In this case, the difference received by the Bank as an income shall be reflected in other income gained from the Banks transactions. 

(As amended by the Resolution No. 32/8 of the National Bank of the Kyrgyz Republic Board dated August 28, 2013) 

Chapter 2.7 

Guarantee Transaction 

1. Timely fulfillment of obligations under the contracts for the sale, exchange, lease, rights and other contracts can be secured by a pledge, guarantee, and other means provided for in this chapter. 

2. The fulfillment of an obligation can be ensured simultaneously in several ways, for example, by a personal guarantee and by a pledge. 

3. Transactions related to securing the performance of obligations shall be made in writing, and, in cases stipulated by legislation or by agreement of the parties, shall be certified notarially. 

4. Invalidity of the security agreement shall not entail the invalidity of this obligation (the principal obligation). The invalidity of the principle obligation shall entail the invalidity of the obligation that secures it. 

5. The lessee shall provide security for compensation of damage caused to the leased property through the fault of the lessee. 

6. Personal guarantees shall be divided into two types: 

- the debtor may ask the guarantor for assistance, and this guarantee shall be offered at the request and with the consent of the debtor; 

- a guarantee without assistance, which is offered at a discretion of a third party without the request of the debtor or its consent (voluntary guarantee). 

7. The Bank shall provide guarantees for the clients financial obligations for the amount of the principal debt with the condition that the client will compensate the principal amount of the debt to the bank. 

(As amended by the Resolution No. 49/8 of the National Bank of the Kyrgyz Republic Board dated December 21, 2016) 

8. The guarantee shall stipulate the validity period and the amount for which the guarantee is provided. 

9. The creditor may claim the debt amount both from the debtor and the guarantor. 

10. Where the creditor exempts the debtor from paying the debt, the guarantor shall also become unbound to pay the debt. However, if the creditor releases the guarantor from financial liability, the debt of the debtor shall remain. 

Where the guarantor repays the debt, the debtor shall compensate only the repaid amount to it. 

11. Where the Bank makes transactions based on the Mudarabah or the Musharakah, it may not guarantee the exchange rate fluctuations. 

12. Where the contract specifies that the debtor shall provide security in the form of a guarantee from a third party, and the debtor has not provided the guarantor, the Bank, in the event of failure to provide the guarantor, has the right not to fulfill the obligation until provision of the security or to terminate the contract. 

13. Performance of a pledge agreement shall be mandatory for a pledger, even if the pledged asset is not in the possession of the creditor, and accordingly the debtor may not terminate the pledge agreement. However, the acceptance of the pledge is not mandatory for the creditor since it has the right to waive his right to pledge. Death of the pledger or the pledgee or the liquidation of a legal entity shall not affect the validity of the pledge agreement, and the assignees will replace the pledger and the pledgee for redemption and obtaining the benefit from the pledge. 

14. The pledger shall be the owner of the pledged property or the person authorized to dispose of the property. The pledge shall be specified in the contract. The same property may be provided for more than one pledge provided that the subsequent pledgee will be duly notified of previous pledges. If the pledges were registered on different days, the priority of their reimbursement will be established in accordance with the date of their registration. 

15. The pledger may repurchase the pledged property and may also give consent to the creditor to sell the property if an agreement has been reached on repaying the debt. 

16. The seller may be entitled by the buyer to keep the sold property as collateral in order to ensure making remaining payments by installments. The buyer may also retain in his possession the property sold through a one-time payment until it receives payment for the property. 

17. The creditor also may specify that the debtor shall transfer to it the rights to sell the pledged property so that the creditor can receive the required amount (if the debtor fails or refuses to repay the debt) from the amount received from the sale of the pledged property, without legal recourse. 

18. The pledger (debtor) shall bear full responsibility for paying all expenses related to documentation, storage, and sale of mortgaged property. 

19. The creditor (the pledgee) shall be entitled to pledge until full repayment, except for cases when it has agreed to partial repayment. However, after repayment of the debt, the creditor shall not be entitled to keep the pledge as security for any other unsecured debts, unless this has been agreed in advance. The creditor and the debtor may agree, after payment of the debt, to recognize the released pledge as the security for any other debt that may arise between them during a specified subsequent period. 

20. The pledger may use the pledged property with the consent of the pledgee. However, the pledgee may not use the pledged property at all even if the pledger has given its permission to do so. 

21. No commission fees may be charged for issuance of a letter of guarantee. The Bank may request the applicant to incur administrative costs associated with the issuance of the guarantee letter provided that these costs do not exceed the commission fee usually charged for such services. At the same time, the structure of administrative costs approved by the internal documents of the bank shall be disclosed to the client. 

(As amended by Resolution No. 49/8 of the National Bank of the Kyrgyz Republic Board dated December 21, 2016) 

22. No guarantee letters may be issued in favor of the applicant, who will use them to receive an interest-bearing loan or the conclusion of any prohibited transactions. 

23. The costs for issuing a documentary letter of credit shall be incurred by the client. The bank may also charge fees for services rendered, whether as a flat rate or as a percentage of the letter of credit amount, provided that the duration of the letter of credit is not taken into account when calculating the commission fees. This rule on services rendered shall relate to import and export letters of credit. The fees may be charged only for the costs (excluding the time extension) incurred as a result of the contract amendment, and such fees shall be charged as a fixed rate rather than as a percentage of the amount. 

24. When charging a fee for a documentary letter of credit, the Bank shall take into account the following: 

a) availability of a guarantee upon confirmation of this letter of credit. Accordingly, the Bank may charge an additional amount to the costs incurred if it confirms the letter of credit issued by another bank; 

b) issuance of the letter of credit shall not include an interest or a transaction that could potentially include an interest. 

25. It is permitted to subscribe to the Islamic Insurance Policy as a security for debt obligations and it is not permitted that these debts be covered by a normal insurance. 

26. Any third party (other than mudarib or investment agent) make take a volunteer commitment to compensate for the investment losses of the party to whom the commitment was made, provided that the guarantee is in no way related to the Mudarabah financial contract or the investment agency contract. 

27. The Bank may provide guarantees for participation in a tender. 

28. With view of ensuring proper fulfillment of the promise by the Client related to concluding and executing a unilateral undertaking, the Bank may take money as collateral, which guarantees the Bank compensation for any damages where the client violates its promise. 

29. The Bank shall be entitled to return its tangible assets that were sold to the client, but for which he has not yet received any payment. 

30. The Bank shall be entitled to protect the integrity of a pledged item or any other security, in particular, as legal recourse, in cases of its misuse, which may lead to its loss or damage. 

31. The rights of the parties holding the pledged property as a security for the debt will prevail over the rights of the parties that have unsecured debts. 

32. The guarantees issued by a bank shall be treated as assets bearing credit risk and, therefore, fall under all restrictions associated with the placement of loans. 

When calculating the capital adequacy ratio, the guarantees issued by the bank shall be classified as off-balance sheet assets with a credit risk degree identified in accordance with the Instruction for Determining the Capital Adequacy in Commercial Banks of the Kyrgyz Republic

33. The Bank shall perform accounting of bank guarantees in accordance with the International Financial Reporting Standards. 

Guarantees issued by the Bank shall be included in the calculation of the net currency position in accordance with the requirements of the Instruction for the Procedure of Observing the Limits of an Open Foreign Exchange Position by Commercial Banks on the Territory of the Kyrgyz Republic

Chapter 2.8 

Salam Transaction 

1. Salam is a transaction for purchasing goods on the basis of a delayed delivery subject to paying the value of the goods on the contract date. 

2. This is the type of a sale transaction, in which the price is treated as capital. 

3. Parallel Salam is a transaction under which the Bank enters into a contract with any third party to supply goods with specification conforming to the specification set in the first Salam Contract entered into with the supplier provided that execution of the second Salam Contract does not depend on the execution of the first Salam Contract. 

4. Under the Salam and the Parallel Salam contracts, the Bank may act both as a buyer and a seller. 

5. The Bank shall purchase goods and sell it at the request of a solvent client. 

6. Bank is an entity that carries out both the acquisition and sales of goods. 

7. Seller is a legal entity or an individual from whom the Bank purchases the goods. 

8. Interchangeable goods are the goods that have common characteristics that not largely differ from each other. Any interchangeable goods can be replaced by any other goods in case of their destruction when their assessment does not require the evaluation of the damaged or replaced goods. 

9. To perform the Salam Transactions, individual contracts or a general cooperation agreement, which may comprise individual contracts indicating their duration, may be concluded. 

10. Under the General Agreement, the parties shall define the scope of the contract and the intention of the parties to purchase and sell as well as the quantity and specifications of the goods, their delivery method, the basis for determining the price and the method of payment. In addition, guarantees and other conditions shall be provided for. 

11. The Salam Contract shall be concluded in writing and, if required by law, subject to notarization and state registration. A material condition of the contract shall be as follows: 

а) sale of certain goods with delayed delivery; 

b) payment of the value of the goods on the contract date. 

12. The price under the Salam Contracts may be established both in the form of money resources and in the form of interchangeable goods (goods determined by generic features). 

13. If the price is determined in cash, the currency, amount and method of payment shall be specified. If the price is determined in the form of interchangeable goods, their grade, type, specification and quantity shall be clearly established. 

14. The price under the Salam Contract shall be paid immediately at the time of its conclusion. In exceptional cases, the payment may be delayed for no more than three days, which shall not affect execution of the Salam Contract provided that the delay period is not equal to, or does not exceed, the delivery period of interchangeable goods. 

15. The debt may not be used as capital under the Salam Contract. 

16. The Salam Contract shall cover the goods that can be weighed, measured or counted. 

17. The subject matter of the contract may not be represented by currency, gold or silver. 

18. The goods shall be in such a form that allows to make a specification that excludes any uncertainty, for the compliance of which the seller shall be responsible. 

19. The goods shall be specifically identified in accordance with any accepted practice and the experts opinion. 

20. The quantity of each unit of goods shall be determined depending on its state and the nature of the goods, i.e. its weight, size, volume and number of packages. 

21. The goods shall be available under normal circumstances at the place where they shall be at the time of delivery and be available to the seller so that it can fulfill its obligation to deliver the goods to the buyer. 

22. The parties shall set a specific delivery date, but they can set different delivery dates for goods and deliver goods in batches provided that their value was paid at the time of the initial contract. 

23. The parties may determine the place for delivery of the goods. If the parties to the contract do not determine the place for delivery of goods, such place shall be deemed the place of entering into the contract if it has not appeared to be impossible to deliver the goods to this place. In this case, the place for delivery of the goods shall be determined based on usual practice.  

24. The supply of goods can be ensured by any kinds of security for the obligation to make payments. 

25. The buyer may not sell the goods until it obtains ownership of them. 

26. By mutual consent of the parties, the Salam Contract may be completely terminated and obligations ceased in exchange for a full refund of its value. It also can be partially terminated, i.e. cancellation of the supply of a part of the goods in exchange for the corresponding part of the reimbursement of the contract value. 

27. The seller shall deliver the goods to the buyer on the set date in accordance with the terms of the contract, the set specifications and in the agreed quantity. The buyer, on the other hand, shall accept the goods if they meet the requirements stipulated by the specifications in the contract. 

28. Where the seller offers goods of a higher quality than those required by the contractual specifications, the buyer shall accept the goods if the seller does not request a higher price for higher quality. This shall apply only when the description (with lower qualitative specifications) provided for in the contract is not considered a material condition. 

29. Where the quality of the delivered goods is lower than that required by the contractual specifications, the buyer may either reject or accept the goods in such condition. In case of acceptance, the parties may agree on accepting such goods at a lower price. 

30. The seller shall deliver the goods in the form of products specified in the contract. 

31. Goods can be delivered ahead of schedule provided that the goods meet the set specifications and are delivered in the required quantity. 

32. Where the seller fails to fulfill its obligation or where the seller does not have all or part of the goods on hand on the due date, the buyer may: 

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

b) terminate the contract and recover the funds paid. 

Parties may also agree to replace the goods with any other goods. 

33. No clause covering penalties for delay in the delivery of goods may be incorporated. 

34. The seller may enter into a separate independent Salam Contract with a third party to purchase the goods of the same specification as those provided in the first Salam Contract to fulfill the obligation under the first contract and deliver the goods. Consequently, the Bank, acting as a seller in the first Salam Contract, becomes the buyer in the second Salam Contract. 

35. The buyer may conclude a separate Parallel Salam Contract with a third party in order to sell the goods purchased under the Salam Contract, the description of which conforms to the description of the goods to be purchased under the first Salam Contract. In this case, the Bank, acting as a buyer in the first Salam Contract, becomes a seller in the second Salam Contract. 

36. In both cases, the parties may not bind the obligations under the two Salam Contracts. 

Obligations and rights under the two contracts shall be separate in all aspects. In the event of any breach of obligations under the first Salam Contract, the other party (the affected party) may not associate this damage or loss with the party with which the first party entered into the Parallel Salam Contract. Consequently, it is not entitled (due to its loss or damage suffered under the first Salam Contract) to terminate the second Salam Contract or to delay its execution. 

37. All the rules applying to the Salam Contract shall also apply to the Parallel Salam Contract. 

38. No commodity bonds for debt obligations arising from the Salam Contract shall be issued. 

39. In Salam Transactions, the Bank shall finance the purchase of goods specified by the client followed by its sale to the client at a price comprising the Banks extra charge. 

(As amended by Resolution No. 40/4 of the National Bank of the Kyrgyz Republic Board dated September 28, 2016) 

40. The Banks investments under the Salam Contract shall be initially recorded in the balance sheet on the sub-accounts of loans issued by the Bank. 

41. The initial direct costs of the Bank (commission fees to the intermediary, payment for legal services, etc.) associated with conclusion of the agreement to purchase the subject matter of the Salam Contract from the supplier shall be recognized as expenses of the current period. 

42. Subsequent costs of the Bank related to the purchase of goods as well as transportation costs, import duties and other costs shall be included in the purchase price of the goods and increase the amount of the loan issued by the Bank. 

43. In compliance with the terms of the contract concluded, the subsequent credit records shall be made as well as the proceeds from the transaction shall be recognized. 

In case of a lump sum payment by the client for the goods, the Bank shall allocate the received money resources to repay the loan and recognize the income. 

In the event that, under the terms of the contract, the client makes payment for the goods by installments according to the payment schedule, the Bank shall make monthly income accruals for the Salam transaction according to the schedule. The amount of funds received shall be allocated to repay the loan and the income accrued. 

44. The Bank shall periodically assess the quality and magnitude of the potential loss risk associated with assets under the Salam transactions with the appropriate classification and deductions to the potential loss provision in accordance with the Regulation for Asset Classifications and Related Deductions to the Potential Loss Provision

45. Assets placed for the Salam transactions shall be recorded as loans treated as assets bearing a credit risk and, therefore, fall under all restrictions associated with placement of loans. 

46. When calculating the capital adequacy ratio, the assets placed under the Salam transaction shall be classified as loans with a credit risk ratio of 100%. 

47. According to the Regulation for Asset Classifications and Related Deductions to the Potential Loss Provision and according to the internal procedures, the Bank shall assess these assets on a monthly basis for their deterioration along with building up the provision. 

Chapter 2.9 

Documentary Letter of Credit Transaction 

1. The Bank shall be entitled to present for payment any actual expenses incurred in connection with issuance of a documentary letter of credit. It is also acceptable for a bank to charge commission fees for the provision of required services whether such commission fees are in the form of a lump sum or they represent a specified percentage of the amount of the letter of credit, provided that the period of the letter of credit validity is not taken into account when determining the commission fees. This rule shall apply to services provided under the import and export credits, except for cases when changes in conditions entail a change in the schedule of the letter of credit. Thus, it is permissible for an organization to charge fees only for actual expenses incurred in this case it will be a specified amount rather than a percentage. 

The bank shall fulfill the following conditions: 

a) in fact, the aspect of the guarantee shall not be taken into account when calculating the fees for the implementation of a documentary credit. Accordingly, the Bank may not assign fees in addition to actual costs incurred if it confirms the letter of credit issued by another Bank; 

b) the issuance of a letter of credit shall not involve a profit that generates interest and shall not become the means of obtaining such profit; 

c) No any combination of contracts may be used in a documentary letter of credit as an excuse for incorporating any prohibited transactions such as commission fees for a guarantee or a loan. 

2. The Bank may open all types of documentary letters of credit. The Bank may also participate, or play the role of an intermediary, in such transactions in accordance with the existing forms of the executed documentary letter of credit. 

3. The Bank may not perform any transactions on a documentary letter of credit either for itself or on behalf of another client or organization, or through joint work, when such letter of credit refers to the goods prohibited by the Shariah or under a contract that is invalid or incorrect (according to Shariah). 

4. The Bank shall execute the letter of credit if it meets the instructions except for cases of forgery of the documents. 

5. The Bank may demand security for an obligation arising in connection with a documentary letter of credit or provide a documentary letter of credit as a collateral for guarantee of payment in favor of companies and banks. The Bank may act as an intermediary for securing a documentary letter of credit using acceptable and accessible forms of collateral, including funds on settlement accounts or funds deposited by the client under the Mudarabah Contract. 

6. The Bank may not use interest bonds, shares of companies engaged in Shariah-prohibited activities and interest-bearing receivables as collateral. 

7. Where the client intends to purchase imported goods from the Bank through financing under a documentary letter of credit under the Murabahah Contract, the following conditions shall be observed: 

а) Opening of the documentary letter of credit shall not precede the conclusion of a sales contract between the client and the beneficiary (seller). 

b) The Bank shall be the party that buys goods from the supplier and then sells them to the client under the Murabahah Contract in accordance with the Shariah rules applied to the Murabahah Contract for the supply client. 

8. Where the documentary letter of credit includes a provision, which complies with the prevailing principles and practices that unify the documentary letter of credit, it is necessary to qualify such provision by including a clause of no violation of the Shariah rules and principles. 

9. The Bank may not discount the accepted bills, i.e., to purchase these bills at a cost less than their nominal value. 

10. The Bank may not negotiate a decrease in the nominal value of documents, on the basis of which the payment shall be made on demand or upon presentation of bills. 

11. The bookkeeping of transactions on the letters of credit shall be made in accordance with the Banks accounting policies and the International Financial Reporting Standards. 

When calculating the capital adequacy ratio, uncovered letters of credit shall be classified as off-balance sheet assets with a credit risk degree identified in accordance with the Instruction for Determining the Capital Adequacy Standards in Commercial Banks of the Kyrgyz Republic

The letter of credit, which is the Bank's liability, shall be included in the calculation of net currency position in accordance with the requirements of the Instruction for the Procedure of Observing the Limits of an Open Foreign Exchange Position by Commercial Banks on the Territory of the Kyrgyz Republic

Chapter 2.10 

Foreign Currency Transactions 

1. The Bank shall be entitled to make foreign currency purchase and sale transactions subject to their compliance with the following Shariah rules: 

a) both parties shall have a currency to be exchanged for the opposite before making the exchange whether the currency is actually or supposedly held; 

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

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

d) currency transactions shall not be performed in the futures and forward markets. 

2. No currency contracts for future sales may be entered into. This rule shall be observed whether these contracts are the exchange of deferred remittances to repay debts or the execution of a deferred contract in which there is no joint ownership of both units of exchange by the parties. 

3. No transactions may be performed in the forward foreign exchange market even if the purpose is an insurance transaction (the conclusion of transactions for the period of sale or purchase of foreign currency) to avoid losses within any specified transactions that depend on the currency, the price of which may fall in the near future. 

4. The Bank may enter into insurance transactions for a future markdown of the currency in cases where the Bank shall fulfill the obligations or execute the Murabahah in the relevant currency. 

5. The Bank and the client may agree that repayment of loans and other lending transactions can be made in a different currency as per the local exchange rate on the day of payment. 

6. Money transfers may be made in a currency other than the currency provided by the transfer applicant. This transfer shall consist of the exchange of currencies through actual or assumed ownership by delivering a currency amount confirmed by a bank account, after which the transfer of the amount shall be made using the currency that the money transfer applicant buys. A fee for money transfers may be discharged. 

7. When entering into a contract for the sale of a specified currency amount, the right to own the whole amount shall be recognized on the day of completing the transaction. 

8. The ownership may be actual and assumed. The form of ownership of assets shall depend on their types and rules used in the customs of business turnover. 

9. Physical (actual) ownership shall be transferred at the time of personal transfer to the hands. 

10. The assumed ownership of the asset shall be recognized if the seller has allowed another entity to receive and sell this asset on its behalf, even if there was no physical transfer of ownership of the asset, including cases: 

a) when the Bank credits funds to the clients account; 

b) when the Bank enters into an agreement with the client for the exchange of cash currency to non-cash and vice versa; 

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

11. A bilateral obligation to sell and purchase currency shall be prohibited if this obligation is mandatory, even for the purpose of insurance against losses due to a currency depreciation. However, a unilateral obligation shall be permitted. 

12. No parallel purchase and sale of foreign currency may be made as it includes one of the following factors that deprive it of legal effect: 

a) there is no delivery and receipt of two purchased and sold currencies, which causes a deferral of the sale of currency under the contract; 

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

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

13. One of the Musharakah or Mudarabah partners may not be the guarantor of another partner if the transaction is related to currency exchange. However, any third party can voluntarily act as a guarantor if this guarantee is not specified in the contract. 

14. The currency amounts, which are the debtors established liabilities, may be exchanged if such exchange will lead to the repayment of two debts in the case of a bilateral currency exchange as well as to the full repayment of the existing debt. 

15. One of the prohibited ways of entering into foreign exchange trading is when a banks client enters into foreign exchange trading without owning a sufficient amount and uses loans issued by the bank that operates in the field of currency trading; thus, such bank gives the client the opportunity to enter into a deal with the amount in excess of that it could pay. 

16. The Bank may not issue loans to a client under the condition that currency transactions shall be conducted only with this institution and with no any other. If such condition is absent, the Shariah does not prohibit the issuance of loans. 

17. The foreign currency transactions shall be carried out by the bank within the Pilot Project in accordance with the Instruction for the Procedure of Observing the Limits of an Open Foreign Exchange Position by Commercial Banks on the Territory of the Kyrgyz Republic and the Regulation for Economic Standards and Requirements Mandatory for Commercial Banks and Financial Institutions Licensed by the National Bank

Chapter 2.11 

Payment Cards 

1. The Bank may issue payment cards under the following conditions: 

a) A cardholder will not pay any interest in case of untimely payment of any required amount. 

b) The Bank may oblige the cardholder to deposit an amount as a guarantee, and this amount may not be spent by the cardholder. The Bank shall invest this amount in order to obtain benefit for the cardholder according to the Mudarabah and notify that any income received from this amount will be shared between the Bank and the cardholder in accordance with the terms of the Mudarabah Contract. 

c) the Bank shall determine that the cardholder may not use the card for purposes prohibited by the Shariah, and that the Bank may cancel the card in the event of a breach of this provision. 

2. The Bank may charge a firm and unchanging fee for withdrawal of cash amounts in accordance with the services rendered. However, the fee charged for withdrawing cash amounts shall not vary. The amount of fees for issuing and maintaining the card as well as the amount of commission fee for payments shall be determined by the Bank. 

3. The Bank shall be entitled to issue a debit card to the client based on the amount available on the clients account. 

The client shall not pay any commission fee to the Bank for using the card except when it is used for withdrawing cash or buying a currency in an organization other than the issuing bank. 

4. The Bank shall be entitled to issue credit cards provided that the cardholder will not pay any interest in case of untimely repayment of the loan amount as well as interest for using the renewable credit limit. 

5. The Bank shall be entitled to charge commission fees from the party accepting the card as payment. The commission fees shall be calculated as a percentage of the amount spent on the purchase of goods and services. 

6. The Bank may charge membership fees as well as the card extension and renewal fees from the cardholder. 

7. The cardholder may withdraw a cash amount not exceeding a limit of available funds or more, if it has been previously agreed with the Bank that issued the card, provided that no interest is charged for such amount. 

8. The Bank may grant benefits not prohibited by the Shariah such as preferential right to discounts at a hotel, airlines, restaurant reservations and so on. 

The Bank shall not be entitled to grant privileges to the cardholder prohibited by the Shariah such as conditional life insurance, entry to any prohibited places, or prohibited gifts. 

9. The Bank may join an international card management organization provided that the Bank does not violate the Shariah rules, which may be considered acceptable by these organizations. 

The Bank may pay a fee for membership and services as well as any other fees of an international card management organization, as long as they do not include interest payments, in particular, indirect payments, for example, in the case of an increase in service fees to take credit into account. 

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

By their content, card accounts shall be treated as deposit transactions and limited to the economic standard K5 (Prudential Standard for Maximum Risk of Individuals Deposits). 

Chapter 2.12 

Safe and Guaranteed Custody Transactions 

(Chapter as amended by Resolution No. 18/2 of the National Bank of the Kyrgyz Republic Board dated April 25, 2008) 

1. Wadi'ah Yad Hamanah Transaction 

1.1. Wadi'ah Yad Hamanah transaction (contract) is a safe custody contract for money or other valuables of the client. The Bank shall not be authorized to dispose of the custody item and can only carry out the instructions of the deposit holder in respect of this item charging a certain fee for this. 

1.2. Services under the Wadi'ah Yad Hamanah Contracts shall be provided by the Bank in the form of safe custody of money or other valuables in bank safes (safe-deposit boxes). 

2. Wadi'ah Yad Dhamanah Transaction 

2.1. Wadi'ah Yad Dhamanah transaction (contract) is a contract of guaranteed custody, under which the Bank shall be authorized to dispose of the funds entrusted to it and receive profit from their placement. 

2.2. The services under the Wadi'ah Yad Dhamanah Contract shall be provided by the Bank through opening and servicing savings accounts. 

2.3. Out of the profits received from placement of funds attracted under the Wadi'ah Yad Dhamanah Contract, the Bank may, at its discretion, pay the Hiba donation to the owners of these accounts. The Bank may establish the procedure, size and rules for payment of the Hiba donation to the clients. The amount of Hiba donation paid to the clients shall be recognized as the costs of the period. 

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

2.4. With view of maintaining the required level of current liquidity and the ability to timely fulfill obligations under the Wadi'ah Yad Dhamanah Contract, the Bank needs to maintain sufficient cash in the cash desk or on a correspondent account with the National Bank of the Kyrgyz Republic. 

2.5. By their contents, the Wadi'ah Yad Dhamanah transactions shall be treated as deposit transactions and limited to the economic standard K5 (Prudential Standard of Maximum Risk for Individuals Deposits) pursuant to the Regulation for Prudential Standards and Requirements Mandatory for Commercial Banks and Financial Institutions Licensed by the National Bank approved by the NBKR Board Resolution for Approval of the Regulation for the Prudential Standards and Requirements Mandatory for Commercial Banks and Financial Institutions Licensed by the National Bank No. 18/1 dated July 21, 2004, registered in the Ministry of Justice of the Kyrgyz Republic on August 23, 2004, under registration number 93-04. Similarly, based on this Regulation, the Bank shall identify the concentration risk and manage it.  

2.6. The Wadi'ah Yad Dhamanah transactions accounts shall be included in the calculation of mandatory reserve requirements in accordance with the Provision for Mandatory Reserves approved by Resolution No. 22/4 of the National Bank of the Kyrgyz Republic Board On Approval of the New Revised Provision for Mandatory Reserves dated August 27, 2004, and registered in the Ministry of Justice of the Kyrgyz Republic on October 5, 2004, under registration number 108-04. When calculating the liquidity ratio, these liabilities shall be included in the amount of the bank's liabilities according to the criteria specified in the Regulation for Prudential Standards and Requirements Mandatory for Commercial Banks and Financial Institutions Licensed by the National Bank

3. Accounting of the Wadi'ah Yad Dhamanah Deposits  

3.1. Accounting of funds raised by the Bank under the Wadi'ah Yad Dhamanah Contract shall be maintained on the balance sheet accounts of the clients' deposits as to the principal amount of the contribution under the contract. Accounting of deposit accounts in foreign currencies shall be maintained in the nominal value of such currencies. Analytical accounting for clients personal accounts shall be maintained by the Bank through a separate automated program recording all transactions performed on the account. 

Chapter 2.13 

Hiba Donation 

(Chapter as amended by Resolution No. 47/3 of the National Bank of the Kyrgyz Republic Board dated December 17, 2008) 

Hiba donation is a kind of material incentive paid to the bank's clients who placed money under the Qard Hasan and Wadi'ah Yad Dhamanah Contracts as well as under other deposit transactions on an interest-free basis. 

Since the Qard Hasan and the Wadi'ah Yad Dhamanah Contracts as well as other deposits on an interest-free basis do not provide a guaranteed return, the payment of Hiba donation shall be made at the discretion of the Bank subject to the results of the Bank's activities. 

The Bank may pay the Hiba donation both in cash or in any other form as incentive gifts, benefits and discounts on fees for banking services, etc. 

When disclosing information on taking Islamic deposits under the Qard Hasan and the Wadi'ah Yad Dhamanah Contracts as well as other deposits on an interest-free basis, in contracts for taking Islamic deposits entered into by the Bank with clients, the Bank shall inform potential clients (depositors) that in the case of positive results of the bank's activities in accordance with the principles of Islamic banking and finance, the Bank may pay the Hiba donation to the investors as an encouragement depending on the size of the deposit made by the depositor. 

SECTION 3 

RISK MANAGEMENT 

1. In compliance with the requirements of the Basel Core Principles for Effective Banking Supervision, the Bank shall constantly work on creating a solid basis for prudential regulation of capital, market discipline, and further strengthening risk management and financial stability. 

2. Bank transactions performed under the principles of Islamic finance (PIF) as well as transaction performed under the traditional principles of financing shall be divided into active and passive; hence, the risks arising due to Banks applying the PIF shall be divided into risks associated with raising funds and risks associated with their placement. 

3. The Board of Directors, acting as a supervisory body that approves and controls the development strategy of the Bank, shall establish the criteria for performing active and passive transactions of the Bank. They shall be based on the criteria defined by the Laws of the Kyrgyz Republic, the regulations of the National Bank, and the international practice. The Board of Directors shall also develop and approve the legal and administrative frameworks of the Bank so that they do not interfere with effective risk management. 

4. Based on the criteria, the Banks Management Board shall develop, and the Board of Directors shall approve, the internal provisions clearly specifying which types and amounts (absolute and/or relative to the Bank's capital) of acquisitions and investments require a permission of a relevant body or official. One of the main criteria for performing active transactions is the requirement that any new acquisitions and investments shall not expose the Bank to any unjustified risks or shall not interfere with effective supervision. 

5. The Banks Management Board and the Board of Directors shall approve, implement and periodically check prudential criteria, policies, practices and procedures as well as performance of active transactions that bear credit risk, and continuously manage the portfolio of such assets, which are subject to continuous monitoring by the Risk Manager. 

6. The Banks Board of Directors shall ensure the implementation of sound banking practices and the compliance of these transactions with the principles of Islamic finance. 

7. The Banks Board of Directors shall be liable for: 

a) wording, approval and periodic updating of all business strategies, business plans and policies of the Bank related to the principles of Islamic finance; 

b) determining the main risks to which the bank is exposed in carrying out transactions under the principles of Islamic finance and for establishing acceptable levels of these risks; 

c) supervising the actions of the Banks Management Board undertaken to identify, measure, monitor and manage risks when performing transactions and activities in accordance with the principles of Islamic finance; 

d) developing and maintaining an adequate and effective system of internal control as well as for monitoring the effectiveness of the internal control system by the Banks Management Board in carrying out the activities and transactions in accordance with the principles of Islamic finance; 

e) coordinating the Banks policies and procedures for operations in accordance with the Islamic principles of financing with an expert from the Islamic Development Bank; 

f) developing appropriate internal mechanisms and procedures to maximize protection of the banks interests as a whole as well as its depositors and other creditors. 

8. Internal regulatory documents (policies and procedures) of the Bank shall contain: 

a) identification and management of risks (credit, liquidity, concentration, etc., risks) including the impact of each type of transactions carried out under the principles of Islamic finance on the banks activities as a whole; 

b) policies and procedures of anti-money laundering and counter-terrorism and -extremism financing; 

c) the procedure of conducting internal audit of the bank to comply with banking policies, control procedures, and take appropriate measures to eliminate the identified shortcomings; 

d) other issues related to management of the banks activities. 

(As amended by Resolution No. 7/2 of the National Bank of the Kyrgyz Republic Board dated February 10, 2016) 

9. The basis for quantitative identification of risks shall be the net total capital (NTC). The capital adequacy requirements, the definition of capital and the method of calculation shall be specified in the Instruction for Determining the Capital Adequacy Standards. In this Instruction, the capital components shall be specified laying special emphasis on the capital elements that are available to absorb potential losses. Like all active transactions of the Bank, the assets placed under the PIF impact NTC value by means of general and special reserves built up for these assets. 

10. Regardless of the principles of performing active transactions (PIF or traditional principles), capital adequacy shall be assessed against the credit risk, that is, the risk related to different types of assets, which consists in the clients failure to recover the asset in full or partly. 

11. Depending on the credit risk degree, all balance assets, regardless of the principles of their placement, shall be divided into five categories. At the same time, the main criteria, according to which the balance sheet assets fall under one or another category, shall be as follows: the type of a partner, the country of partners origin in terms of the transfer risk, the provision of asset, the guarantees and the terms of asset placement. 

12. Any negative influence on the capital, that is, manifestation of one of the risks, entails an increase in the risk of violating the prudential standards associated with NTC calculation. In this connection, the Bank shall implement the system according to which, depending on the margin of safety in terms of capital adequacy and compliance with other mandatory prudential standards, control over their observance (including transactions influencing the changes in prudential standards) falls directly on the management. 

13. In order to fulfill its basic functions, the National Bank shall introduce restrictions on the Banks activities through establishment of the prudential standards and requirements mandatory for the bank pursuant to the Regulation for Mandatory Prudential Regulations and Requirements as well as determine mandatory reserve requirements in accordance with the Provision for Mandatory Reserves

In addition, the National Bank shall supervise the Banks activities, in particular, based on the following regulations: 

- Regulation for Minimum Requirements to Risk Management in Banks of the Kyrgyz Republic; 

- Regulation for Minimum Requirements to Market Risk Management in Commercial Banks and other Financial Institutions Licensed by the National Bank; 

- Regulation for Minimum Requirements to Country Risk Management in Commercial Banks and other Financial Institutions Licensed by the National Bank; 

- Regulation for Minimum Requirements to Credit Risk Management in Commercial Banks and other Financial Institutions Licensed by the National Bank; 

- Regulation for Minimum Requirements to Operational Risk Management in Commercial Banks of the Kyrgyz Republic;  

according to which the Bank shall develop its internal policies, regulations and procedures for identifying, measuring, monitoring and managing risks arising from its activities. 

14. Supervision over the implementation of a continuous and effective risk management process shall be entrusted to the Banks Board of Directors. 

15. Credit risk is the probability of the borrowers 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. 

16. The Banks internal policy for performance of transactions under the principles of Islamic finance shall comprise practices and procedures of credit risk monitoring including: 

a) a well-founded and duly documented investment process; 

b) maintaining an appropriate process of administration, evaluation and continuous monitoring/reporting on assets bearing credit risk (including classification of these assets); 

c) providing appropriate mechanisms to control credit risk. 

17. The Banks policy for performance of transactions under the principles of Islamic finance shall determine, according to the Regulation for Asset Classifications and Related Deductions to the Potential Loss Provision, the rules for periodic verification of risk assets, asset classifications and provisioning as well as procedures for dealing with distressed assets. 

18. The Instruction for Credit Limits has established the prudential limits to potential risks of the Bank related to allocation of assets bearing credit risk among single borrowers or groups of related entities. In accordance with this Instruction, the Bank shall develop, and be guided by, its limitations of loan-granting. The supervision of the internal limits implementation shall be assigned to the Banks Credit Committee and the risk manager. 

19. The definition of “related entities” shall be used solely to reflect actual exposure to risk, which includes not only the companies that are legally bound, but also the financially bound ones. Following these criteria, the Bank shall introduce a management information system that allows management, as early as at the stage of allocating the assets bearing the credit risk, identify the level of concentration in its portfolio and promptly manage the emerging risks. 

20. The Banks policy for performance of transactions under the principles of Islamic finance shall, according to the Instruction for the Requirements to Transactions with Insiders and Affiliates of Commercial Banks and other FIs licensed by the National Bank, determine the rules according to which the Banks related entities may not be issued the assets on more favorable terms than the corresponding investments realized to non-affiliates of the Bank. The decision to issue assets to related entities shall be made directly by the decision of the Banks Board of Directors. 

21. The Banks policy for performance of transactions under the principles of Islamic finance shall include procedures for assessing the risk of allocating assets, which bear a credit risk, to a specified industry, for specified periods and purposes. 

22. The liquidity risk is the risk of losses, to which the Bank is exposed if it fails to meet its obligations in a timely manner without incurring unacceptable losses (i.e., to achieve liquidity only by disposing of assets, which will lead to unacceptable losses). 

23. The Bank shall develop the internal Liquidity Management Policy, in particular, on the basis of the Regulation for Minimum Requirements to Risk Management in the Banks of the Kyrgyz Republic. The limits for an acceptable level of liquidity shall be established by the Board of Directors. 

24. The liquidity risk management implies: sound management information systems, centralized liquidity control, analysis of net financing requirements under alternative scenarios, diversification of funding sources, stress testing and contingency planning. When managing liquidity, the issues of local and foreign currencies shall be considered separately. 

25. The Bank shall establish a detailed liquidity measurement system that includes methods for forecasting future cash flows of the Bank to assess the degree of liquidity risk that the Bank is exposed to under current and forecasted negative trends. 

26. The Bank shall develop contingency plans, including the plans for the banks secondary source of financing, which shall include clear and urgent measures in the event of a crisis or in cases where liquidity does not correspond to the levels established by the Board of Directors. With view of maintaining sufficient liquidity, the Bank shall establish the optimal ratio of assets and liabilities. 

27. Liquidity risk shall be managed by the Liquidity Management Committee. The Banks structure shall consist of the mid-level and senior managers directly involved in making decisions for transactions affecting the Banks liquidity. 

28. The accounting for transactions carried out under the principles of Islamic finance shall be maintained by the bank in accordance with the requirements of the International Financial Reporting Standards. 

29. The Bank shall develop a policy of accounting the transactions carried out under the principles of Islamic finance in accordance with the National Bank requirements applied to the accounting policy. 

30. The Bank shall develop the procedures with a detailed description of the rules and practices to perform transactions under the principles of Islamic finance. 

31. To assess the success of delivery on the Pilot Project for Implementing the Principles of Islamic Finance, the Bank's accounting for all transactions performed under these principles of finance shall be maintained both separately and as part of the consolidated financial statements of the Bank. The regulatory reporting of the Bank shall be submitted to the National Bank (according to Appendix No. 1), on a monthly basis, both separately for transactions performed under the principles of Islamic finance and on a consolidated basis. 

32. The Bank shall keep separate records, make financial statements, including balance statement, profit and loss statement, and cash flow statement for transactions performed under the principles of Islamic finance followed by consolidation with the bank's balance sheet. 

33. The National Bank shall be entitled to establish requirements for accounting and financial reporting taking into account the specific nature of the principles of Islamic finance. 

34. The Bank shall conduct an external audit of activities carried out under the principles of Islamic finance and submit an audit opinion on these activities to the National Bank in accordance with the Regulation for Minimum Requirements to External Auditing of Banks and Other Financial Institutions Licensed by the National Bank of the Kyrgyz Republic (approved by Resolution No. 22/2 of the National Bank Board dated 14.07.2005). 

SECTION 4 

ARRANGEMENT OF THE BANKS ACTIVITIES UNDER THE PRINCIPLES OF ISLAMIC FINANCE 

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

1. Licensing 

1.1. To start the operation of a branch/unit in accordance with the terms of this Regulation and receive the annex to the license in the form specified in Appendix 1 to this Regulation, which authorizes the execution of transactions under the principles of Islamic finance, the Bank shall submit the following documentation to the National Bank: 

1) The Statute of the branch/department, which shall specify: a) the procedure of arranging the activities of the branch/department, decision-making, coordination of decisions with the Management Board and, if necessary, with the Board of Directors, committees and other management bodies of the Bank;  

b) the provision for implementing the requirements of the Legislation of the Kyrgyz Republic when carrying out the activities of the Banks branch/unit in accordance with the Islamic principles; 

c) other issues not contradicting the Legislation of the Kyrgyz Republic related to the specifics of the activities under this Regulation; 

2) information about a nominee independent member of the Board of Directors an invited qualified expert on Islamic principles; 

3) information about the Banks branch/unit manager who shall have sufficient knowledge of each type of transactions authorized to be performed by the branch/unit; 

4) a business plan containing the detailed organizational structure of the Banks branch/unit, the economic justification and strategy of the Bank related to the activities of the Banks branch/unit; 

5) information about nominee managers of the departments of the Banks branch/unit in the form of Appendix 17 to the Regulation for Licensing the Banks Activities (approved by the Resolution No. 5/7 of the National Bank of the Kyrgyz Republic Board dated 02.03.2006) who possess knowledge of the principles of Islamic banking; 

6) The main policies of the Bank related to all types of activities carried out under the Islamic principles duly approved and ratified by the Banks Board of Directors in accordance with the established procedure, which will be implemented in this branch/unit, shall stipulate at least the following:  

a) procedures for identification, measurement, tracking, monitoring and management of all potential risks to which the bank is exposed; 

b) control measures to minimize all potential risks on an ongoing basis; 

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

7) detailed procedures for each transaction, which are delegated to the branch/unit; 

8) policies and procedures of anti-money laundering and counter-terrorism and -extremism financing when performing the transactions in accordance with the Islamic principles; 

9) a detailed action plan for opening and arranging the activities of the branch/unit of the bank. 

(As amended by the NBKR Board Resolutions No. 38/1 dated November 30, 2006, and 7/2 dated February 10, 2016) 

SECTION 5 

OTHER ISSUES 

 

1. The National Bank shall carry out supervision, regulation and inspection of the Bank's activities in compliance with the regulatory legal acts of the Kyrgyz Republic and the present Regulation with a view to implementing the pilot project. For the purpose of implementing the regulation and supervision, the National Bank may adopt the regulatory legal acts that correspond to the principles of Islamic finance and, if necessary, shall be entitled to make draft amendments and revisions to the Legislation of the Kyrgyz Republic. 

2. The Bank shall provide information and documents at the first request of the National Bank in accordance with the Legislation of the Kyrgyz Republic. 

3. The Bank shall carry out transactions under the Islamic principles in compliance with this Regulation and other regulatory legal acts of the National Bank. 

(As amended by the Resolution No. 38/1 of the National Bank of the Kyrgyz Republic Board dated November 30, 2006

4. In the course of its activities, the Bank shall take continuous efforts to inform clients about the specific nature of its activities related to performance of transactions under the principles of Islamic finance.  

5. Where the Bank fails to comply with the requirements of this Regulation, the National Bank may take remedial actions against the Bank in accordance with the regulatory legal acts of the National Bank. 

  

  

  

Appendix 1 

to Regulation for Implementing the Principles of Islamic Finance in the Kyrgyz Republic within the Pilot Project  

 

ANNEX TO THE LICENSE 

for the Right of Performing Banking Transactions 

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

The present Annex was issued to ______________________________________ (name of the legal entity) within the Pilot Project for Implementing the Principles of Islamic Finance in accordance with the Memorandum On Mutual Understanding between the Kyrgyz Republic and the Islamic Development Bank and the EcoBank for Implementing the Islamic Banking and Finance in the Kyrgyz Republic dated May 16, 2006, ratified by the Decree of the President of the Kyrgyz Republic No. 373 dated July 12, 2006. 

 

The________________________________________ (name of the legal entity) may carry out transactions in compliance with the Regulation for Implementation of the Principles of Islamic Finance in the Kyrgyz Republic within the Pilot Project. 

  

Deputy Chairman