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  • Bank as a Seller (al sani') in an Istisna'a Contract

    • Istisna'a with Parallel Istisna'a

      • CA-3.4.11

        In cases where an Islamic bank licensee enters into a parallel Istisna'a contract to procure an asset from a party other than the original Istisna'a customer (buyer), the price risk relating to input materials is mitigated. The Islamic bank licensee remains exposed to the counterparty risk of the parallel Istisna'a seller in delivering the asset on time and in accordance with the Istisna'a ultimate buyer's specifications. This is the risk of not being able to recover damages from the parallel Istisna'a seller for the losses resulting from the breach of contract.

        January 2015

      • CA-3.4.12

        The failure of the parallel Istisna'a seller to deliver a completed asset which meets the ultimate buyer's specifications does not discharge the Islamic bank licensee's obligations to deliver the asset ordered under an Istisna'a contract, and thus exposes the Islamic bank licensee to potential loss in making good the shortcomings or obtaining the supply elsewhere.

        January 2015

    • Credit Risk

      • Exposure to Customer

        • CA-3.4.13

          The receivable amount generated from selling of an asset based on an Istisna'a contract with full exposure to the customer (ultimate buyer) must be assigned a RW based on the credit standing of the customer as rated by an ECAI that is approved by the CBB. Refer to Section CA-4.2 for the RW. In cases where the ultimate buyer is unrated, a RW of 100% applies.

          January 2015

      • Exposure to Asset

        • CA-3.4.14

          When the project is rated by an ECAI, the RW based on the credit rating of the ultimate buyer is applied to calculate the capital adequacy requirement. Otherwise, the RW must be based on the "supervisory slotting criteria" approach for specialised financing (project finance), as set out in Appendix CA-5, which carries RWs as given below:

          Supervisory Categories Strong Good Satisfactory Weak
          External credit assessments BBB- or better BB+ or BB BB- to B+ B to C-
          Risk weights 70% 90% 115% 250%
          January 2015

        • CA-3.4.15

          Istisna'a financing with an "Exposure to Asset" structure is required to meet the characteristics as set out below in order to qualify for the above RW:

          (a) The segregation of the project's liabilities from the balance sheet of the Istisna'a ultimate buyer or project sponsor from a commercial and accounting perspective which is generally achieved by having the Istisna'a contract made with a special-purpose entity set up to acquire and operate the asset/project concerned;
          (b) The ultimate buyer is dependent on the income received from the assets acquired/projects to pay the purchase price;
          (c) The contractual obligations give the manufacturer/ constructor/ bank a substantial degree of control over the asset and the income it generates — for example, under the BOT arrangement where the manufacturer builds a highway and collects tolls for a specified period as a consideration for the selling price; and
          (d) The primary source of repayment is the income generated by the asset/project rather than relying on the capacity of the ultimate buyer.
          January 2015

      • Exclusions

        • CA-3.4.16

          The capital requirement is to be calculated on the receivable amount, net of:

          (a) Specific provisions;
          (b) Any amount that is secured by eligible collateral (as defined in Section CA-4.7); and
          (c) Any amount which is past due 90 days or more (see CA-4.2).
          Amended: July 2017
          January 2015

        • CA-3.4.17

          Any portion of an Istisna'a contract that is covered by an advanced payment must carry a RW of 0%, or the amount of the advanced payment must be offset against the total amount receivable or amounts owing from progress billings.

          January 2015

      • Applicable Period

        • CA-3.4.18

          The credit RW is to be applied from the date when the manufacturing or construction process commences and until the selling price is fully settled by the Islamic bank licensee, either in stages and/or on the maturity of the Istisna'a contract, which is upon delivery of the manufactured asset to the Istisna'a ultimate buyer.

          January 2015

      • Offsetting Arrangement between Credit Exposures of Istisna'a and Parallel Istisna'a

        • CA-3.4.19

          The credit exposure amount of an Istisna'a contract is not to be offset against the credit exposure amount of a Parallel Istisna'a contract because an obligation under one contract does not discharge an obligation to perform under the other contract.

          January 2015

    • Market Risk

      • Exposure to Customer

        • (a) Istisna'a with Parallel Istisna'a

          • CA-3.4.20

            There is no capital charge for market risk to be applied in addition to provisions in Paragraphs CA-3.4.13 to CA-3.4.19, subject to there being no provisions in the Parallel Istisna'a contract that allow the seller to increase or vary its selling price to the Islamic bank licensee, under unusual circumstances. Any variations in a Parallel Istisna'a contract that are reflected in the corresponding Istisna'a contract which effectively transfers the whole of the price risk to an Istisna'a customer (buyer), are also eligible for this treatment.

            January 2015

          • CA-3.4.21

            If the seller is allowed to vary the selling price of the asset, then the price risk must be calculated in accordance with Paragraph CA-5.2.2.

            January 2015

        • (b) Istisna'a without Parallel Istisna'a

          • CA-3.4.22

            A capital charge of 1.6% is to be applied to the balance of unbilled WIP inventory to cater for market risk, in addition to the credit RW stated in Paragraphs CA-3.4.13 to CA-3.4.19.

            January 2015

          • CA-3.4.23

            The unbilled WIP inventory is held subject to the binding order of the Istisna' ultimate buyer and is thus not subject to inventory price as described in Section CA-5.6.

            January 2015

    • Foreign Exchange Risk

      • CA-3.4.24

        Any foreign exchange exposures arising from the purchasing of input materials, or from Parallel Istisna'a contracts made, or the selling of a completed asset in foreign currency must be included in the measures of foreign exchange risk described in section CA-5.5.

        January 2015