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  • RM-6.2 RM-6.2 Definition and Profiles of Rate of Return Risk

    • RM-6.2.1

      Islamic bank licensees are exposed to rate of return risk in the context of their overall balance sheet exposures. An increase in benchmark rates may result in IAHs' having expectations of a higher rate of return. Rate of return risk differs from interest rate risk in that Islamic bank licensees managing Shari'a-compliant products are concerned with the result of their investment activities at the end of the investment-holding period. Such results cannot be pre-determined exactly.

      January 2013

    • RM-6.2.2

      A consequence of rate of return risk may be displaced commercial risk. Islamic bank licensees may be under market pressure to pay a return that exceeds the rate that has been earned on assets financed by IAHs when the return on assets is under-performing as compared with competitors' rates. Islamic bank licensees may decide to waive their rights to part or their entire Mudarib share of profits in order to satisfy and retain their fund providers and dissuade them from withdrawing their funds. Displaced commercial risk derives from competitive pressures on Islamic bank licensees to attract and retain investors (fund providers). The decision of Islamic bank licensees to waive their rights to part or all of their Mudarib share in profits in favour of IAHs is a commercial decision, the basis for which needs to be subject to clear and well defined policies approved by the Islamic bank licensee's BOD.

      Amended: January 2020
      January 2013

    • RM-6.2.3

      A Profit Equalisation Reserve (PER) is the amount appropriated by Islamic bank licensees out of their gross income, before allocating the Mudarib share, in order to maintain a certain level of return on investment for IAHs and increase owners' equity. The basis for computing the amounts to be so appropriated should be predefined and applied in accordance with the contractual conditions accepted by the IAH and after formal review and approval by the Islamic bank licensees' BOD.

      January 2013

    • RM-6.2.4

      An Investment Risk Reserve (IRR) is the amount appropriated by Islamic bank licensees out of income of IAHs, after allocating the Mudarib share, in order to cushion the effects of the risk of future investment losses on IAHs. The terms and conditions whereby IRR can be set aside and utilised should be determined and approved by the BOD.

      January 2013

    • RM-6.2.5

      The CBB does not set any required minimum levels of appropriation or balances of PER and IRR relative to IAHs funds. It recommends that Islamic bank licensees pay due regard to relevant IFSB Guidance Notes and Standards in relation to PER and IRR with particular reference to the IFSB Guidance Note GN-3 dated December 2010 (Practice of Income Smoothing the Profits Payout to Investment Account Holders).

      January 2013