A. Introduction

1. This appendix to the IBB Module sets out the rules, guidance and norms required to fulfil the regulatory requirements in respect of managing the Group Risk associated with Islamic Banks which are a constituent of Financial Groups. These rules, guidance and norms supplement the regulatory requirements set out in the Rules in Chapter 11 of IBB Module. These elements convey the supervisory expectations of the AFSA regarding Group Risk and its management by an Islamic Bank. The AFSA will use these rules, norms and key elements specified here to assess compliance with IBB Module on Group Risk.

2. Chapter 11 of IBB Module includes rules for an Islamic Bank:

(a) to implement an effective management framework for Group Risk exposure; and

(b) to ensure capital adequacy at the level of the Financial Group.

3. Chapter 11 of IBB Module also includes requirements limiting Financial Group exposures and restrictions on the ownership or control of Banks.

4. Group Risk refers to the risk of potential losses incurred by an Authorised Firm on account of its relationship with other members of its Financial Group, if it were to be part of one. Group membership may be a source of both strength and weakness to an Authorised Firm. The purpose of Group Risk requirements is to ensure that an Authorised Firm takes proper account of the risks related to the Authorised Firm’s membership of a Group. The Group Risk requirements form a key part of the AFSA’s overall approach to prudential supervision.

B. Financial Group - Requirements

5. For the purposes of BBR Rule 11.1, the AFSA would consider a range of factors when requiring an Authorised Firm to form a Financial Group. These factors would include regulatory risk factors, including but not limited to, (direct and indirect) participation, influence or contractual obligations, interconnectedness, intra group exposures, intra group services, regulatory status and legal framework.

6. If more than one member of the same Group is subject to an obligation to provide information in respect of a position of the Group or Financial Group, one or more of those Authorised Firms may make application to the DFSA for an appropriate waiver or modification.

7. For the purposes of Rule 11.4 (1), an Islamic Bank may take into account its position within its Group. For instance, it would be reasonable for a small Islamic Bank within a larger Group to place some reliance on its parent to ensure that appropriate systems and controls are in place.

C. Financial Group Capital Requirements

8. If an Islamic Bank breaches Rules 11.4 (1) and 11.4 (2), the AFSA will take into account the full circumstances of the case, including any remedial steps taken by another regulator or the Islamic Bank, in determining what enforcement action, if any, it will take.

9. Capital resources or adjusted capital resources would not be freely transferable if they are subject to an obligation to maintain minimum Capital Requirements to meet domestic solvency requirements, or to comply with debt covenants. In general, capital resources or adjusted capital resources are considered not to be freely transferable if they are subject to a legal or constructive limitation on their transferability, whether that transfer would be made by dividend, return of capital or other form of distribution. Examples of relevant limitations might include obligations to maintain minimum capital Requirements to meet domestic solvency requirements, or to comply with debt covenants.

10. The following examples are provided to illustrate the application of Rule 11.6.

(a) The concentration risk limit which requires that the total of an Islamic bank’s net exposures to a counterparty or connected counterparties must not exceed 25% of its Regulatory Capital (RC) applies to its Financial Group, so that the Financial Group’s net exposures to a counterparty or connected counterparties must not exceed 25% of the Financial Group’s RC, calculated using the Rules in Chapter 11 of IBB Module.

(b) Similarly, the limit in IBB Module in Chapter 5, which require that the total of all of the Islamic Bank’s net large exposures must not exceed 800% of its RC) applies to its Financial Group, so that the Financial Group’s total net large exposures to counterparties or connected counterparties must not exceed 800% of the Financial Group’s RC, calculated using the Rules in chapter 11 of IBB Module.

11. Because the Financial Group Capital Requirement set out in Rule 11.5 includes Capital Requirements in respect of Group entities, capital resources may be included in the calculation of Financial Group capital resources to the extent of those requirements. Capital that is surplus to those requirements is, however, subject to an additional condition before it may be taken into account for the purposes of Financial Group capital adequacy