Please refer to the Prudential Regulation R-1 on the capital adequacy framework for microfinance banks (MFBs).

2. In this regard, it is advised that the instructions on ‘Capital Adequacy Framework for Microfinance banks’ have been revised in line with international best practices and Basel Capital Framework. The capital adequacy instructions for microfinance banks were last updated in the year 2008 and since then significant changes have taken place in the calculation of CAR especially with the implementation of Basel III from December 31, 2013 in Pakistan. These developments have necessitated revision in the Capital Adequacy Framework for MFBs.

3. The regulation R-1 along with Annexure-A containing instructions on calculation of CAR is enclosed.

4. Following is the summary of main changes:

     i. The revised Tier-1 capital includes Common Equity Tier 1 and Additional Tier-1 components.

     ii. A floor of 20% Risk weight has been introduced for financing against gold.

     iii. An Operational Risk Capital Charge @ 3% of average Gross Income has been introduced.

     iv. Capital charge against off-balance sheet items has been introduced.

     v. Benefit of Revaluation Reserve has been enhanced from 50% to 100%.

     vi. Deferred Tax Assets will be deducted from capital in a phased manner @ 25% per annum starting from December 31, 2015 with full deduction from December 31, 2018.

5. These instructions will become effective from September 30, 2015. However, MFBs are advised to submit their CAR returns based on the instructions contained in this circular as parallel run for the 2nd quarter ending June 30, 2015.

Please acknowledge receipt.

Encl: (i) Revised Prudential Regulation R-1 along with instructions on CAR calculation (Annexure-A)

          (ii) CAR Reporting Format in MS-Excel