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SAMA is a member of the Islamic Financial Services Board and its Working Group that prepared the "Capital Adequacy Standard for Institutions Offering Only Islamic Financial Services". In this regard, this IFSB Standard is intended to be applied to non-insurance institutions offering only Islamic financial products and services. Supervisors may also choose to apply these to 'Islamic Window' operations in their jurisdictions. The Capital Adequacy Standard (CAS) is not intended to be applied at the consolidated level to a group or a sub-group that consists of entities other than IIFS.
The CAS provides for Capital Adequacy calculations for seven (7) Shariah compliant financing and investment instruments as follows:
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Murabaha
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Salam
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Istisna
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Ijarah and Ijarah Muntahia Bitlamleek
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Musharaka and Diminishing Musharaka
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Mudarabah
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Sukuk
Also the CAS separately sets out the requirements for Operational Risk and the treatment of Profit-Sharing Investment Accounts (PSIA). The CAS proposes a Capital adequacy framework for IIFS that compares with the Standardized Approach for credit risk and the Basic Indicator approach for operational risk under the Basel II Capital Adequacy Standard.
As the CAS applies to banks that 'only' offer Islamic financial products and services, currently this is relevant to a few banks in Saudi Arabia. These banks would be largely compliant to IFSB CAS, if they apply the Basel II Standardized Approach for credit risk and the Basic Indicator approach for operational risk.
Banks that only provide Islamic Financial services are encouraged to compute their Capital Adequacy according to IFSB Standard using the proposed method for assigning risk to their shariah compliant assets. The calculation under the CAS could then permit comparison between the capital requirements under CAS and Basel II. At that stage, SAMA will discuss with the banks the relevance of the two methodologies and make a decision on the banks' final choice of the Capital Adequacy framework. Banks choosing to proceed under IFSB CAS, should discuss their plans and approaches with SAMA to decide on an appropriate timetable.
