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  • Bank as a Buyer (al mustasni') in an Istisna'a Contract

    • Istisna'a with Parallel Istisna'a

      • CA-3.4.25

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

        January 2015

      • CA-3.4.26

        The failure of the Istisna'a supplier 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 a parallel 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-3.4.27

          The receivable amount generated from selling of an asset based on a parallel Istisna'a` contract with full exposure to the ultimate customer 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-4.6 for the RW. In cases where the ultimate buyer is unrated, a RW of 100% applies.

          January 2015

      • Exposure to Asset

        • CA-3.4.28

          When the project is rated by an ECAI, the RW based on the credit rating of the "off-taker" (third-party 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-3.4.29

          The "Exposure to Asset" Istisna'a structure is required to meet the characteristics as set out in Paragraph CA-3.4.22.

          January 2015

      • Exclusions

        • CA-3.4.30

          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 by more than 90 days as set out in Section CA-4.2. These other amounts are to be risk weighted as described in the concerned Sections.

          January 2015

        • CA-3.4.31

          Any portion of a parallel Istisna'a contract covered by an advance payment carries a RW of 0%, or the amount of the advanced payment is offset against the total amount receivable from the ultimate customer or amounts owing from progress billings.

          January 2015

      • Applicable Period

        • CA-3.4.32

          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 parallel Istisna'a ultimate buyer.

          January 2015

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

        • CA-3.4.33

          The credit exposure amount of a parallel Istisna'a contract is not to be offset against the credit exposure amount of an Istisna'a contract (or vice versa) because an obligation under one contract does not discharge an obligation to perform under the other contract.

          January 2015

    • Market Risk

      • Exposure to Customer

        • Istisna'a with Parallel Istisna'a

          • CA-3.4.34

            There is no capital charge for market risk to be applied in addition to provisions on credit risk, subject to there being no provisions in the Istisna'a contract that allow the supplier 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 a parallel Istisna'a customer (ultimate buyer) are also eligible for this treatment.

            January 2015

        • Istisna'a without Parallel Istisna'a

          • CA-3.4.35

            In Istisna'a without Parallel Istisna'a, the Islamic bank licensee is making progress payments to the Istisna'a supplier, thereby acquiring title to WIP inventory. The WIP inventory is exposed to price risk. As there is no parallel Istisna'a sale to an ultimate customer, there is no credit risk.

            January 2015

          • CA-3.4.36

            The WIP receives a capital charge appropriate to inventory — 15%.

            January 2015

    • Foreign Exchange Risk

      • CA-3.4.37

        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