2.1. Principle 1—Capital Adequacy

An Islamic Bank must have Capital, of adequate amount and appropriate quality, for the nature, scale and complexity of its business and for its risk profile.

2.2. Principle 2—Credit risk and problem assets

(1) An Islamic Bank must have an adequate credit risk management policy that takes into account an Islamic Bank’s risk tolerance, its risk profile and the market and macroeconomic conditions.

(2) An Islamic Bank must have adequate policies for the early identification and management of problem assets, and the maintenance of adequate provisions and reserves.

2.3. Principle 3—Transactions with related parties

An Islamic Bank must enter into transactions with related parties on an arm’s-length basis in order to avoid conflicts of interest.

2.4. Principle 4—Concentration risk

An Islamic Bank must have adequate policies to identify, measure, evaluate, manage and control or mitigate concentrations of risk in a timely way.

2.5. Principle 5—Market risk

(1) An Islamic Bank must have an adequate market risk management policy that takes into account an Islamic Bank’s risk tolerance, its risk profile, the market and macroeconomic conditions and the risk of a significant deterioration in market liquidity.

(2) An Islamic bank must have adequate policies to identify, measure, evaluate, manage and control or mitigate market risk in a timely way.

2.6. Principle 6—Operational risk

(1) An Islamic Bank must have an adequate operational risk management policy that takes into account an Islamic Bank’s risk tolerance, its risk profile and the market and macroeconomic conditions.

(2) An Islamic bank must have adequate policies to identify, measure, evaluate, manage and control or mitigate operational risk in a timely way.

2.7. Principle 7—Liquidity risk

(1) An Islamic Bank must have prudent and appropriate quantitative and qualitative liquidity requirements. It must have policies that ensure compliance with those requirements and to manage liquidity risk prudently, in a manner that takes into account its risk tolerance, its risk profile and the market and macroeconomic conditions.

(2) An Islamic Bank must have adequate policies to identify, measure, evaluate, manage and control or mitigate liquidity risk in a timely way

2.8. Principle 8—Group risk

An Islamic Bank must effectively manage risks arising from its membership in a group.

2.9. Principle 9—Equity participation risk

(1) An Islamic Bank must have an adequate equity participation risk management policy that takes into account its risk tolerance and its risk profile.

(2) The Islamic Bank must have adequate policies to identify, measure, evaluate, manage and control or mitigate equity participation risk in a timely way (including exit strategies for its investment activities).

2.10. Principle 10—Rate of return risk

(1) An Islamic Bank must have an adequate management policy for rate of return risk in the banking book that takes into account its risk tolerance, its risk profile and the market and macroeconomic conditions. The Islamic Bank must have policies to identify, measure, evaluate, manage and control or mitigate rate of return risk (and any resulting withdrawal risk or displaced commercial risk) in a timely way.

(2) An Islamic Bank must have sound investment policies that are aligned with the risk and return expectations of its Profit Sharing Investment Account holders (or PSIAs), taking into consideration the distinction between restricted and unrestricted PSIAs. An Islamic Bank must be transparent in smoothing any profit pay-outs.

2.11. Principle 11—Shari’ah governance and compliance

An Islamic Bank must have a Shari’ah governance policy that is adequate for the nature, scale and complexity of its business and for its risk profile, and to ensure that an Islamic Bank complies with Shari’ah.