CA-3.7 CA-3.7 Mudarabah
Introduction
CA-3.7.1
This section sets out the minimum capital adequacy requirement to cover the risk of losing invested capital arising from entering into contracts or transactions that are based on the Sharia rules and principles of Mudarabah where the bank assumes the role of capital provider. This section is applicable to both restricted and unrestricted Mudarabah financing.
Apr 08CA-3.7.2
A Mudarabah is an agreement between the bank and a customer whereby the bank would contribute capital to an enterprise or activity which is to be managed by the customer as the (labour provider or) Mudarib.
Apr 08CA-3.7.3
Profits generated by that enterprise or activity are shared in accordance with the terms of the Mudarabah agreement whilst losses are to be borne solely by the bank unless the losses are due to the Mudarib's misconduct, negligence or breach of contracted terms.
Apr 08CA-3.7.4
A Mudarabah financing can be carried out on either:
(a) A restricted basis, where the capital provider allows the Mudarib to make investments subject to specified investment criteria or certain restrictions such as types of instrument, sector or country exposures; and(b) An unrestricted basis, where the capital provider allows the Mudarib to invest funds freely based on the latter's skills and expertise.Amended: April 2011
April 2008CA-3.7.5
As the fund provider, the bank is exposed to the risk of losing its capital investment or 'capital impairment risk' upon making payment of the capital to the Mudarib. Any loss on the investment is to be borne solely by the capital provider, but is limited to the amount of his capital. Losses that are due to misconduct, negligence or breach of contractual terms, are to be borne by the Mudarib.
Apr 08CA-3.7.6
However, while it is not permissible for a Mudarib to give a guarantee against such losses, such a guarantee may be given by a third party on the basis of tabarru (donation). In such a case, the amount of the Mudarabah capital so guaranteed may be considered as subject to credit risk with a risk weighting equal to that of the guarantor.
Apr 08CA-3.7.7
In particular, such guarantees may be given when liquid funds are placed in an Islamic interbank market under a Mudarabah contract.
Apr 08Equity Position Risk
CA-3.7.8
Mudarabah exposures, unless deducted for regulatory capital purposes according to the Prudential Consolidation and Deduction Requirements, will be treated as stated in paragraphs CA-3.7.9 to CA-3.7.11.
Apr 08CA-3.7.9
Mudarabah exposures in the nature of specialized financing will be risk-weighted as per the supervisory slotting criteria as detailed in section CA-4.3.
Apr 08CA-3.7.10
Other Mudarabah exposures will be risk-weighted using the risk weights applicable to equities as explained in section CA-4.2.
Apr 08Summary of Capital Requirements for Mudarabah Categories
CA-3.7.12
The following tables set out the Mudarabah categories that attract capital charges:
Mudarabah Category Credit RW Market Risk Capital Charge Specialized financing Supervisory slotting method will be applied.
Between 90-270% RW of the contributed amount to the business venture based on the four categories.NA Other 150% RW* of the contributed amount to the business venture less any specific provisions (if there is a third party guarantee, the RW of the guarantor shall be substituted for that of the assets for the amount of any such guarantee). NA Mudarabah meeting the definition of trading book As set out in the applicable market risk section (See chapter CA-5). * 100% RW may be applied if the funds can be withdrawn by the bank at short notice of 5 working days.
Apr 08
