Capital Adequacy Ratio

The terms capital adequacy ratio and solvency ratio are often used interchangeably. Solvency or capital adequacy ratio is a form of prudential regulation aimed at ensuring that regulated entities operate safely and soundly. The essence of the solvency test is a comparison between an institution’s capital (the excess of its assets over liabilities) and a required minimum amount. Regulators want to ensure that takaful operators are able to meet their liabilities. In doing so, there should be regular assessment of their risk profile. The assets and liabilities are measured according to a prescribed valuation, which may differ depending on accounting rules. This determines the extent of solvency. For further details see: Islamic Financial System; Principles and Operations.

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