14. SUPERVISORY REVIEW AND EVALUATION PROCESS
Guidance
(i) This Chapter implements the critical Pillar II of the Basel III framework and the corresponding IFSB Standard 16 implementing Pillar II for Islamic Banking. Pillar II offers an avenue for addressing all the risk exposures faced by an Islamic Bank, which have not been covered in the estimation of Capital Requirements to absorb potential unexpected losses. The rules in this Chapter set out the regulatory requirements for Islamic Banks to carry out a self-assessment of their risks which can be reviewed and assessed by the regulator. This Chapter details the rules stipulating the need for Islamic Banks to complete internal risk assessments followed by an internal capital adequacy assessment process (ICAAP). The AFSA will review the results of the ICAAP. This Chapter also sets out how the AFSA may impose an additional Capital Requirement specifically for individual Islamic Banks in addition to the minimum Capital Requirement specified in Chapter 4.
(ii) The detailed requirements specifying the methodologies, parameters, and guidance in respect of the ICAAP and supervisory review process requirements for a Bank are provided in Appendix 3 of the IBB. It is suggested that this Chapter be read in conjunction with Appendix 3 of the IBB Module, to facilitate understanding of the regulatory requirements and compliance with them.
14.1. Application to a Financial Group
Where an Islamic Bank to which this Chapter applies is part of a Financial Group, this Chapter applies on a consolidated basis in relation to all the entities within the Financial Group.
14.2. Internal Capital Adequacy Assessment Process (ICAAP)
(1) An Islamic Bank must implement and maintain an ICAAP which details the processes and procedures by which the Islamic Bank will assess and maintain adequate capital resources in relation to the risks faced by it.
(2) The Islamic Bank must conduct an ICAAP assessment at least annually giving due regard to the guidance in Appendix 3 of the IBB Module.
(3) The ICAAP assessment conducted by the Islamic Bank pursuant to (2) must be approved by its Governing Body and then submitted to the AFSA within four months from the end of the Islamic Bank’s financial year.
(4) In addition to (2), the Islamic Bank must conduct an ICAAP assessment:
(a) whenever there is material change to the business, strategy, nature or scale of the activities of the Islamic Bank which may have a significant impact on its risk profile or adequacy of its RC; or
(b) as and when required by the AFSA.
(5) The ICAAP assessment conducted by the Islamic Bank pursuant to (4) must be approved by its Governing Body and then submitted to the AFSA within two months from the date of such material change or requirement.
(6) An Islamic Bank must ensure that an ICAAP assessment is documented in writing and includes details of:
(a) the calculations and models used in the determination of the level of Capital Requirements which it considers will be adequate to cover all the risks identified by its ICAAP assessment;
(b) the Islamic Bank’s strategies and plans to ensure availability of the level of capital determined by the ICAAP;
(c) specifications of any models used in the ICAAP, including the underlying assumptions, parameters, and results of back-testing; and
(d) any other relevant information, giving due and appropriate regard to the guidance in Appendix 3 of the IBB Module.
(7) An Islamic Bank must retain the records of an ICAAP assessment for at least six years.
14.3. Imposition of an Individual Capital Requirement
(1) The AFSA may, subject to (3) and (4), at any time by written notice to a Islamic Bank:
(a) impose an Individual Capital Requirement; or
(b) vary or withdraw an Individual Capital Requirement.
(2) The AFSA may impose or vary an Individual Capital Requirement by written notice, on its own initiative, where the AFSA forms the view that the Islamic Bank’s Capital Requirement is insufficient to address adequately all its risks.
(3) The AFSA will, in addition to prescribing an Individual Capital Requirement, also specify in the notice the types and amounts of capital resources required to meet the Individual Capital Requirement.
(4) Any decisions made under this Rule 14.3 will be subject to the decision-making procedures set out in Schedule 1 of the AIFC Financial Services Framework Regulations.
(5) If the AFSA decides to exercise its power under (2) after a Licence has been granted, the Islamic Bank may refer the matter to the AIFC Court for review.
(6) An Islamic Bank must have and maintain, at all times, RC as defined in by the rules in Chapter 4 as well as capital meeting the types and amounts specified in the notice issued to it under this rule to meet its Individual CapitalRequirement.