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  • Rate of Return Risk Management

    • RM-6.3.5

      Islamic bank licensees must implement appropriate systems for identifying and measuring the factors which give rise to rate of return risk.

      January 2013

    • RM-6.3.6

      When calculating a rate of return, Islamic bank licensees must employ a gapping method for allocating positions into time bands with remaining maturities or re-pricing dates, whichever is earlier. Fixed and floating rate assets of Islamic bank licensees must be classified according to their receivable dates because the returns on these receivables represent the fund providers' direct and beneficial ownership of the assets.

      January 2013

    • RM-6.3.7

      Actual cash flows may indicate a gap for a given time band, affecting the rate of return for that period. Depending on the complexity and the nature of their business operations, Islamic bank licensees may employ techniques ranging from simple gap to advance simulation or dynamic approaches to assess future cash flow variability and net income. The estimates derived from selected approaches may provide acceptable approximations of periodic future earnings' variability; hence, the outcomes will yield different levels of expected returns to IAHs.

      January 2013

    • RM-6.3.8

      The measurement of rate of return risk highlights the importance of cash flow forecasting for instruments and contracts where Islamic bank licensees are required to simulate and assess their behavioral maturity, underlying assumptions and parameters, which must be reviewed periodically for reliability. The materiality of potential threats to future earnings and the usefulness of the resulting information must be considered in determining the type and extent of forecasted behavior for Islamic bank licensees.

      January 2013

    • RM-6.3.9

      In assessing whether a potential threat is likely to have a material, likely and imminent impact on a balance sheet position, Islamic bank licensees must ensure that they understand the different characteristics of their balance sheet positions in the different currencies and jurisdictions within which they operate.

      January 2013

    • RM-6.3.10

      In assessing exposure to rate of return risks, Islamic bank licensees must take into account the non-contractual behavioral maturity of the transactions in the context of the environment in which they operate and changing market conditions.

      January 2013

    • RM-6.3.11

      With reference to Paragraph RM-6.3.10, in case of early repayment made by the customer (in Murabaha or Ijara transactions), Islamic bank licensees may accept full settlement but give rebates on subsequent transactions, while in other cases, the Islamic bank licensees may give rebates immediately at their discretion without any reference to this in the contract.

      January 2013

    • RM-6.3.12

      Islamic bank licensees are encouraged to employ balance sheet techniques to minimize their exposures using the following strategies, among others:

      (a) Determining and varying future profit ratios according to expectations of market conditions;
      (b) Developing new Shari'a-compliant instruments; and
      (c) Issuing secuntisation tranches of Shari'a permissible assets.
      January 2013