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  • CA-7 CA-7 Profit Sharing Investment Accounts

    • CA-7.1 CA-7.1 Profit Sharing Investment Accounts

      • CA-7.1.1

        This chapter deals with the capital adequacy requirement for assets financed by Profit Sharing Investment Accounts (PSIA), a pool of investment funds placed with an Islamic bank on the basis of Mudarabah.

        Apr 08

      • CA-7.1.2

        The PSIA (commonly referred to as "investment accounts" or "special investment accounts") can be further categorised into:

        (a)Unrestricted PSIA; and
        (b)Restricted PSIA.
        Apr 08

      • CA-7.1.3

        The bank has full discretionary powers in making investment decisions for unrestricted PSIAs. However, the placement of funds in restricted PSIA's by the bank is subject to investment criteria specified by the bank, or by the customer, in the Mudarabah contract, or agreed between the investment account holders (IAH) and the bank at the time of contracting.

        Apr 08

      • CA-7.1.4

        The bank assumes the role of an economic agent or Mudarib in placing such funds in income-producing assets or economic activities, and as such is entitled to a share (the Mudarib share) in the profits (but not losses) earned on funds managed by it on behalf of the IAH, according to a pre-agreed ratio specified in the Mudarabah contract.

        Apr 08

      • Reserves

        • CA-7.1.5

          The bank can take precautionary steps by setting up prudential reserve accounts to minimise the adverse impact of income smoothing for PSIA on its shareholders' returns and to meet unexpected losses (UL) that would be borne by the IAH on investments financed by PSIA, namely:

          •   Profit equalisation reserve (PER)

          PER comprises of allocations from the gross income21 of the Mudarabah to be available for smoothing returns paid to the investment account holders and the shareholders, and consists of a PSIA portion and a shareholder's portion; and/or
          •   Investment risk reserve (IRR)

          IRR comprises amounts appropriated out of the income of investment account holders after deduction of the Mudarib share of income, to meet any potential future losses on the investments financed by the PSIA.

          21 In some countries, the appropriation of income is to be made out of after tax income.

          Apr 08