CA-1.3 CA-1.3 Measuring credit risks
CA-1.3.1
In measuring credit risk for the purpose of
capital adequacy , banks are required to apply a simple risk-weighted approach through which claims of different categories of counterparties are assigned risk weights according to broad categories of relative riskiness.CA-1.3.2
The Agency has adopted the risk weightings recommended by the Basel Committee on Banking Supervision, where applicable. However, the Basel Committee does not define the risk weightings for some of the specific Islamic contracts.
CA-1.3.3
In Islamic banking, the legal form is as important as the substance of the transaction otherwise the transaction would not be permissible under Shari'a. Therefore, when assigning risk weights to the various Islamic contracts, banks should consider the legal form of the transactions as well as the substance.
CA-1.3.4
The framework of weights consists of four weights — 0%, 20%, 50% and 100% for on and off balance sheet items, which based on a broad-brush judgment, are applied to the different types of assets and off balance sheet
exposures within the banking book.CA-1.3.5
The resultant different weighted assets and off balance sheet
exposures are then added together to calculate the total credit-risk-weighted assets of the bank.CA-1.3.6
The Agency has addressed the issue of the risk weightings for some of the commonly used Islamic contracts. If banks are involved in contracts not covered below they should contact the Agency and agree on an appropriate risk-weighting category.
Murabaha and Murabaha to the purchase orderer
CA-1.3.7
The Agency as a policy requires that all Murabaha contracts be based on binding promises. The Murabaha receivables should be assigned a risk weight based on the credit standing of the obligor as recommended by the Basel Committee.
Mudaraba contracts
CA-1.3.8
Mudaraba contracts should be assigned a risk weighting according to the underlying investments. Where Mudaraba funds are invested in securities listed on recognised exchanges and the price volatility is based on market movements, these should be removed from credit risk weightings and subject to market risk regulations. Examples would be equity Mudarabas where banks may have direct exposure in the value of the underlying equities or commodity Mudarabas.
CA-1.3.9
Investments in other Mudarabas such as real estate or leasing should be assigned risk weightings according to the standing of the underlying investment as per the Basel Capital Accord.
CA-1.3.10
Where a Mudaraba fund invests in another Mudaraba contract, which in turn makes investments at its own discretion, the risk weight would be based on the credit standing of the counterparty (investee Mudarib) as recommended by the Basel Committee. Investments in particular asset classes made at the discretion of the (investor) Mudaraba fund should be assigned risk weighting according to the underlying investments, where possible.
Musharaka contracts
CA-1.3.11
Musharaka contracts refer to partnerships in specific transactions or projects. These exclude participation in the share capital (equity) of other enterprises. Risk weights should be assigned in accordance with the standings of the underlying investment as per the guidelines of the Basel Committee. Musharaka in real estate, plant and machinery or other similar assets attract a 100% risk weighting.
CA-1.3.12
Musharakas in trading transactions will attract risk weighting as per the standing of the underlying investment, which in all cases would attract a 100% risk weighting. Where the transaction involves trading in commodities which may be traded in secondary markets, these should be removed from credit risk weighting and subjected to market risk regulations.
CA-1.3.13
In cases where it is difficult to ascertain the composition of the underlying asset, risk weight would be assigned based on the credit standing of the counterparty.
Ijarah / Ijarah Muntahia Bittamleek assets
CA-1.3.14
Under Shari'a, substantial risks and rewards of ownership of assets may not be transferred to lessees. Therefore, assets acquired for the purpose of leasing under Ijarah or Ijarah Muntahia Bittamleek contracts should be carried on the balance sheet of the lessor and assigned a risk weighting of 100%.
CA-1.3.15
However, where these are residential properties, leased under Ijarah Muntahia Bittamleek with the lessee's option to buy at the end of the lease term and to use the properties for residential purposes, a 50% risk weighting is assigned, where the lessor has a first enforceable charge on the assets.
Istisna'a and parallel Istisna'a contracts
CA-1.3.16
The accounting for these contracts should be in accordance with Financial Accounting Standard (FAS) No. 10: Istisna'a and Parallel Istisna'a, issued by AAOIFI.
CA-1.3.17
Istisna'a and parallel Istisna'a contracts would attract risk weighting as per the credit standing of the respective counterparties in accordance with the Basel Committee.
Salam and parallel Salam
CA-1.3.18
Amounts paid in respect of Salam contracts (for which there exists a parallel Salam contract) should normally be assigned a risk weight as per the credit standing of the customer in accordance with the Basel Committee.
CA-1.3.19
Salam and parallel Salam contracts would attract risk weighting as per the credit standing of the respective counterparties in accordance with the Basel Committee.
Participations and equity investments
CA-1.3.20
The supervision of banks for capital adequacy purposes is carried out on a consolidated basis, taking into account all holdings of the capital of other entities by the concerned bank. For subsidiaries, the preferred mode of consolidation is to add the assets and liabilities into the accounts of the parent on a line-by-line basis. For associate companies (i.e. where the parent bank owns 20% or more of the voting stock, and/or has voting control of the concerned company), the assets and liabilities should also be consolidated on a line-by-line basis. If banks do not wish to consolidate subsidiaries or associates (that meet the above criteria), they must contact the Agency to agree on the accounting treatment to be used. Participations and investments which amount to below 20% of the voting capital of the concerned company should be accounted for at fair value and weighted at 100%.
CA-1.3.21
Banks which have subsidiary and associate companies must also be supervised for capital adequacy on a solo basis (i.e. after deducting all holdings of the share capital of all subsidiaries and associates (that meet the criteria in paragraph CA-1.3.20 above) and excluding all their assets and liabilities from the accounts of the parent bank). Holdings of other participations and equity investments need not be deducted on a solo basis, but should be accounted for at fair value and weighted at 100%. Banks should note paragraph CA-2.2.6 in respect of the treatment described in this paragraph and in paragraph CA-1.3.20.
Intra fund balances
CA-1.3.22
Transactions between the corporate book (i.e. self-financed and financed by unrestricted investment accounts) and restricted investment accounts are not allowed, unless approved by the Agency on a temporary basis.
CA-1.3.23
If permitted by the Agency, on a temporary basis, the following weightings will be applied:
(a) Corporate or unrestricted investment funds invested in Restricted Investment Accounts.
Risk weighting would be assigned on the underlying asset as per the Basel Committee Guidelines and in accordance with the guidance set out under chapters CA-1 to CA-6.(b) Restricted investment account funds invested in corporate books.(i) In the corporate books, the assets financed by restricted investment accounts would be included as part of the corporate assets and risk weighting assigned in accordance with the guidelines.(ii) 0% risk weighting should be assigned to the funds invested by the restricted investment accounts in the corporate books in order to avoid double counting as the resultant assets are already risk weighted in the Bank's books.(iii) Banks must agree with the Agency on the treatment of investments by restricted investment accounts in the corporate book. The Agency will consider each case on its merit.
