RM-3.3 RM-3.3 Operational Considerations
RM-3.3.1
Islamic bank licensees must implement appropriate strategies, risk management and reporting processes in respect of the risk characteristics of equity investments, including Mudarabah and Musharakah investments.January 2013RM-3.3.2
Islamic bank licensees must define and set the objectives of, and criteria for, investments using profit sharing instruments, including the types of investment, tolerance for risk, expected returns and desired holding periods.Islamic bank licensees must define their investments exit strategy (see paragraphs RM-3.3.14–16 for more details).January 2013RM-3.3.3
For purposes of Paragraph RM-3.3.2, a Musharakah structure may contain an option for redemption whereby the
Islamic bank licensee as financier has a contractual right to require its partner periodically to purchase, under a separate contract, a proportion of theIslamic bank licensee's share in the investment at net asset value or, if the contract so specifies on some agreed basis (Diminishing Musharakah).January 2013RM-3.3.4
Islamic bank licensees must implement and keep under review, policies, procedures and an appropriate management structure for evaluating and managing the risks involved in the acquisition of, holding and exiting from profit sharing investments.Islamic bank licensees must ensure proper infrastructure and capacity are in place to monitor continuously the performance and operations of the entity in which anIslamic bank licensee invests as partner. These must include evaluation of Shari'a compliance, adequate financial reporting by, and periodical meetings with, partners and proper recordkeeping of these meetings.Amended: April 2013
January 2013RM-3.3.5
Islamic bank licensees must identify and monitor the transformation of risks at various stages of investment lifecycles, for example, where the investee's business involves innovative or new products and services in the marketplace.Islamic bank licensees that employ different financing instruments (where one of which include Musharakah) at different contract stages must have appropriate procedures and controls in place, as different stages may give rise to different risks.January 2013RM-3.3.6
Islamic bank licensees must analyse and determine possible factors affecting the expected volume and timing of cash flows for both returns and capital gains arising from equity investments.January 2013RM-3.3.7
Islamic bank licensees should use, if applicable, Shari'a compliant risk-mitigating techniques, both financial and non-financial in nature, to reduce the impact of possible capital impairment of an investment.January 2013RM-3.3.8
Islamic bank licensees must ensure that their valuation methodologies are appropriate and consistent, and assess the potential impacts of their methods on profit calculations and allocations. The methods must be mutually agreed between theIslamic bank licensees and the Mudarib and/or Musharakah partners.January 2013RM-3.3.9
Islamic bank licensees must agree with the Mudarib and/or Musharakah partners before entering into any agreement, on the appropriate valuation methods and periods for which the profit is to be calculated and allocated taking into account market practices and liquidity features.January 2013RM-3.3.10
Valuation and accounting play an important role in measuring the quality of an equity investment, especially in a privately held entity, for which independent price quotations are not always available nor sufficient in volume to provide a basis for meaningful liquidity or market valuation. An appropriate and agreed method to be applied to determine the profit of the investment can be in the form of a certain percentage of either gross or net profit earned by the Mudarabah or Musharakah business, or any other mutually agreed terms.
January 2013RM-3.3.11
In the case of a change of the partnership's shares in a Musharakah (for example in a Diminishing Musharakah), the shares changing hands must be valued at fair value.
January 2013RM-3.3.12
Islamic bank licensees must assess and take measures to deal with the risks associated with potential manipulation of reported results leading to overstatements or understatements of partnership earnings. Reported earnings can be either gross or net. If for some reason the practices of smoothing profits over accounting periods and the establishment of escrow accounts to hold certain profit portions during the life of an equity investment are recognised and agreed by all the investing parties, theIslamic bank licensee must incorporate their potential impact in theIslamic bank licensee's overall earnings.January 2013RM-3.3.13
Islamic bank licensees may agree with the Mudarib and/or Musharakah partners to engage independent parties where necessary to carry out audits and valuations of the investments. Provided these are properly executed and completed, these measures will help to ensure transparency and objectivity in valuation and in the distribution of profits and the determination of amounts to be redeemed.January 2013RM-3.3.14
Islamic bank licensees must define and establish the exit strategies in respect of their equity investment activities prior to commitment, including extension and redemption conditions for Mudarabah and Musharakah investments, subject to the approval of theIslamic bank licensee's Shari'a Board.January 2013RM-3.3.15
Islamic bank licensees must establish the criteria for exit strategies, including the redemption of equity investments and the divestiture of under-performing investments.January 2013RM-3.3.16
The criteria may include alternative exit routes and the timing of exit. In case of losses where improved business prospects exist,
Islamic bank licensees may indicate an investment extension period.Islamic bank licensees ' expectations should be based on their assessment that there are plausible grounds for believing that there will be a business turnaround during the period resulting in the view that the investment will, in a defined time period, recover and yield profits.January 2013RM-3.3.17
Islamic bank licensees must recognise that, as a going concern, an investee may not always have the liquidity necessary to enable making profit distributions. Hence,Islamic bank licensees must agree with the investment partner the methods for the treatment of retained profits by the investee.January 2013
