CA-4.1 CA-4.1 Introduction
CA-4.1.1
Credit risk exposures in Islamic financing arise in connection with accounts receivable in Murabaha contracts, counterparty risk in Salam contracts, accounts receivable and counterparty risk in Istisn'a contracts and lease payments receivable in Ijarah contracts, and Sukuk held to maturity in the banking book. Credit risk is measured according to the Standardised Approach as outlined in the Basel II guidelines, except for certain exposures arising from investments by means of Musharaka or Mudaraba contracts in assets in the banking book. The latter are to be treated as giving rise to credit risk (in the form of capital impairment risk), and are to be risk-weighted applying the supervisory slotting criteria for exposures in the nature of specialised financing and the risk weights applicable to equities for other equity exposures as detailed in the Musharaka and Mudaraba sections of this Rulebook.
Apr 08CA-4.1.2
Broadly, the assignment of Risk Weights (RW) under the standardised approach takes into consideration the following:
• The credit risk rating of an obligor or other counterparty, or a security, based on external credit assessment institutions (ECAI) ratings7. In determining the risk weights in the standardised approach, Islamic banks must use assessments by only those external credit assessment institutions which are recognised as eligible for capital purposes by CBB in accordance with the criteria defined in section CA-4.6.• Credit risk mitigation techniques adopted by the banks;• Types of the underlying assets that are sold and collateralised or leased by the banks; and• The amount of specific provisions made for the overdue portion of accounts receivable or lease payments receivable.
7 The notations follow the methodology used by one institution, Standard & Poor's. The use of Standard & Poor's credit ratings is an example only; those of some other external credit assessment institutions could equally well be used. The ratings used throughout this document, therefore, do not express any preferences or determinations on external assessment institutions by CBB.
Amended: April 2011
April 2008CA-4.1.3
Where a discount is applied on fair value of an asset (as explained in CA-2.1.4), the value of the asset will be adjusted to exclude that discount part. Refer to appendix CA-7.
Apr 08
