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  • CA-3.3 CA-3.3 Salam and Parallel Salam

    • Introduction

      • CA-3.3.1

        This section sets out the minimum capital requirement to cover credit and market (price) risks arising from entering into contracts or transactions that are based on the Sharia rules and principles of Salam. The bank is exposed to the (a) credit (counterparty) risk of not receiving the purchased commodity after disbursing the purchase price to the seller, and (b) price risk that the bank incurs from the date of execution of a Salam contract, which is applicable throughout the period of the contract and beyond the maturity date of the contract as long as the commodity remains on the balance sheet of the bank.

        Apr 08

      • CA-3.3.2

        This section is applicable to (a) Salam contracts that are executed without any Parallel Salam contracts and (b) Salam contracts that are backed by independently executed Parallel Salam contracts.

        Apr 08

      • CA-3.3.3

        A Salam contract refers to an agreement to purchase, at a predetermined price, a specified kind of commodity4 which is to be delivered on a specified future date in a specified quantity and quality. The bank as the buyer makes full payment of the purchase price upon execution of a Salam contract or within a subsequent period not exceeding two or three days as deemed permissible by its Sharia Supervisory Board (SSB).

        4 A commodity is defined as a physical product which is and can be traded on a secondary market, e.g. agricultural products, minerals (including oil) and precious metals. The commodity may or may not be traded on an organised exchange.

        Apr 08

      • CA-3.3.4

        In certain cases the bank may enter into a back-to-back contract (Parallel Salam) to sell a commodity with the same specification as the purchased commodity under a Salam contract to a party other than the original seller. The Parallel Salam allows the bank to sell the commodity for future delivery at a predetermined price (thus hedging the price risk on the original Salam contract) and protects the bank from having to take delivery of the commodity and warehousing it.

        Apr 08

      • CA-3.3.5

        The non-delivery of the commodity by a Salam seller (i.e. counterparty risk) does not discharge the bank's obligations to deliver the commodity under a Parallel Salam contract, and thus exposes the bank to potential loss in obtaining the supply elsewhere.

        Apr 08

      • CA-3.3.6

        The obligations of a bank under Salam and Parallel Salam are not inter-conditional or interdependent, which implies that there is no legal basis for offsetting credit exposures between the contracts.

        Apr 08

      • CA-3.3.7

        In the absence of a Parallel Salam contract, a bank may sell the subject-matter of the original Salam contract in the spot market upon receipt, or, alternatively, the bank may hold the commodity in anticipation of selling it at a higher price. In the latter case, the bank is exposed to price risk on its position in the commodity until the latter is sold.

        Apr 08

    • Credit Risk

      • CA-3.3.8

        The amount paid for the purchase of a commodity based on a Salam contract shall be assigned a RW based on the credit standing of the counterparties involved in the contracts as rated by an ECAI that is approved by the CBB. If a counterparty is unrated, a RW of 100% will apply. (See Section CA-4.2).

        Apr 08

      • Exclusions

        • CA-3.3.9

          The capital requirement is to be calculated on the amount paid, net of (i) specific provisions, (ii) any amount that is secured by eligible collateral (as defined in section CA-4.7) and/or (iii) any amount which is past due by more than 90 days. The portions that are collateralised and past due are subject to the treatment as set out in chapter CA-4.

          Apr 08

      • Applicable Period

        • CA-3.3.10

          The credit RW will be applied from the date of the contract made between both parties until the maturity of the Salam contract, which is upon receipt of the purchased commodity. However, between the date of contract and disbursement of funds to the customer the exposure is a commitment (off-balance sheet) and a credit conversion factor (CCF) of 20% will be applied before applying the relevant RW.

          Apr 08

      • Offsetting Arrangement between Credit Exposures of Salam and Parallel Salam

        • CA-3.3.11

          The credit exposure amount of a Salam contract is not to be offset against the exposure amount of a Parallel Salam contract, as an obligation under one contract does not discharge an obligation to perform under the other contract.

          Apr 08

    • Market Risk

      • CA-3.3.12

        The price risk on the commodity exposure in Salam can be measured in two ways, either the maturity ladder approach in accordance with paragraphs CA-5.6.9 to CA-5.6.12 or price risk in accordance with paragraph CA-5.2.2.

        Apr 08

      • CA-3.3.13

        The long and short positions in a commodity, which are positions of Salam and Parallel Salam, may be offset under either approach for the purpose of calculating the net open positions provided that the positions are in the same group of commodities.

        Apr 08

      • Foreign Exchange Risk

        • CA-3.3.14

          It the funding of a commodity purchase or selling of a commodity leaves a bank open to foreign exchange exposures, the relevant positions should be included in the measures of foreign exchange risk described in section CA-5.5.

          Apr 08

    • Summary of Capital Requirement at Various Stages of the Contract

      • CA-3.3.15

        The following table sets out the applicable period of the contract that attracts capital charges:

        (a) Salam with Parallel Salam
        Applicable Stage of Contract Credit RW Market Risk Capital Charge
        Payment of purchase price by the bank of a Salam customer Based on customer's rating or 100% RW for unrated customer.

        No Netting of Salam exposures against parallel Salam exposures.

        (See section CA-4.2)         		Two approaches are available.

        Maturity Ladder Approach (see paragraphs CA-5.6.9 to CA-5.6.12 of chapter CA-5)

        Price risk (see CA-5.2.2 of chapter CA-5)
        Receipt of the purchased commodity by the bank. Asset available for delivery to the customer. If the bank has legal right to recoup from the customer any loss on disposing of the asset Based on customer's rating or 100% RW for unrated customer.

        No Netting of Salam exposures against parallel Salam exposures.

        (See section CA-4.2)         		NA
        Receipt of the purchased commodity by the bank. Asset available for delivery to the customer - If the bank has no legal right to recoup from the customer any loss on disposing of the asset NA Two approaches are available.

        Maturity Ladder Approach (see paragraphs CA-5.6.9 to CA-5.6.12 of chapter CA-5)

        Price risk (see paragraph CA-5.2.2 of chapter CA-5)
        The purchased commodity is sold and delivered to the buyer and the amount is received. NA NA
        (b) Salam without Parallel Salam
        Applicable Stage of Contract Credit RW Market Risk Capital Charge
        Payment of purchase price by the bank of a Salam customer. At this stage of the contract, only one of credit or market risk is possible at the same time. To be prudent, higher of the two should be provided (not both). The higher of the following (credit or market)
        Based on customer's rating or 100% RW for unrated customer.

        (See section CA-4.2)         		Price risk but without additional 3 %. (see paragraph 5.2.2 of chapter CA-5)
        Receipt of the purchased commodity by the bank NA Price risk but without additional 3 %. (see paragraph 5.2.2 of chapter CA-5)
        The purchased commodity is sold and delivered to the buyer. NA NA
        Amended: April 2011
        April 2008