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  • Musharakah

    • CA-3.6.6

      This Section sets out the minimum capital adequacy requirement to cater for "capital impairment risk", the risk of losing the amount contributed to an enterprise or ownership of an asset. The Islamic bank licensee acts as a partner in a Musharakah contract and is exposed to the risk of losing its capital upon making payment of its share of capital in a Musharakah contract. A Musharakah can expose the Islamic bank licensee either to capital impairment risk or to 'credit risk', depending on the structure and purpose of the Musharakah and the types of asset in which the funds are invested. The invested capital is redeemable either by liquidation of the Musharakah assets at the end of the contract which has a fixed tenure or as mutually agreed by the partners, or upon divestment of partnership in an on-going Musharakah subject to giving a notice to other partners. The amount of capital redemption is represented by the value of a share of capital, which is dependent on the quality of the underlying investments or assets, and ability to generate profits and cash flows from the Musharakah.

      January 2015

    • CA-3.6.7

      As a partner to a Musharakah contract, the Islamic bank licensee is not entitled to a fixed rate of return and is thus exposed to variable profits generated by the partnership which are shared on a basis as agreed in the Musharakah contract, whereas losses are to be borne by the Islamic bank licensee and its partners according to their respective ratio of invested capital. Therefore, the Islamic bank licensee is exposed to entrepreneurial risk of an active partner that manages the partnership and business risks associated with the underlying activities and types of investments or assets of the partnership.

      January 2015

    • CA-3.6.7A

      For the purpose of determining the minimum capital adequacy requirement, this Section makes distinctions between the four main categories of Musharakah as set out below:

      (a) Private commercial enterprise to undertake trading activities in foreign exchange, shares and/or commodities This type of Musharakah exposes the Islamic bank licensee to the risk of underlying activities, namely foreign exchange, equities or commodities;
      (b) Private commercial enterprise to undertake a business venture (other than (a)) This type of Musharakah exposes the Islamic bank licensee to the risk as an equity holder, which is similar to the risk assumed by a partner in venture capital or a joint venture, but not to market risk. As an equity investor, the Islamic bank licensee serves as the first loss position and its rights and entitlements are subordinated to the claims of secured and unsecured creditors. For further explanation of the nature of risk in such ventures, see Paragraphs CA-4.8.4 to CA-4.8.6; and
      (c) Joint ownership of real estate or movable assets (such as cars) is divided into two sub-categories:
      (i) Musharakah in Ijara contract
      Ownership of such assets can produce rental income for the partnership, through leasing the assets to third parties by means of Ijara contracts. In this case, the risk of the Musharakah investment is essentially that of the underlying Ijara contracts — that is, credit risk mitigated by the collateral represented by the leased assets.

      However, in some cases the lessee is not a third party but the Islamic bank licensee's partner as customer. The existence of such an Ijara sub-contract in addition to a Musharakah exposes the Islamic bank licensee to credit risk in respect of the partner's obligation to service the lease rentals and
      (ii) Musharakah in Murabahah contract
      The Islamic bank licensee is entitled to its share of revenue generated from selling the assets to third parties by means of Murabahah contracts that expose the Islamic bank licensee to credit risk in respect of the Murabahah receivables from the buyer/counterparty.
      January 2015