CA-3.9 CA-3.9 Qard Hasan
Introduction
CA-3.9.1
This Section sets out the minimum capital requirement to cover the risk of losing capital arising from entering into contracts or transactions that are based on the Shari'a rules and principles of Qard.
January 2015CA-3.9.2
Qard is a loan given by an
Islamic bank licensee , where the borrower is contractually obliged to repay only the principal amount borrowed.17 In the contract of Qard, no payment in addition to the principal amount lent may be required, as that would be a form of Riba.
17 As a business entity, banks provide financing to their customers to perform their role as financial intermediary and seek an opportunity to earn profits for their enterprise and for distribution to their shareholders and fund providers. Therefore, most banks will not be providing any significant amount of lending on the basis of Qard, as Shari'a rules and principles require the borrower to pay only the principal amount in that case. Nonetheless, a bank survey has shown that, in several jurisdictions, some banks do provide Qard-based lending for different reasons. These vary widely among banks and may include: (a) lending to some specific type of clients such as the poor, needy or widows, etc. as a part of Corporate Social Responsibility practice; (b) lending out of their Charity Account (built out of their non-permissible income) to small entrepreneurs and new businesses that do not have access to sufficient assets that can be used as collateral; (c) lending as a part of their business product — that is, not out of the Charity Account; (d) providing funding to various microfinance institutions or customers; and (e) lending mainly for marketing or public acceptance purposes, where a small portion of the overall financing portfolio is allocated to support certain activities of underprivileged sections of the population, etc.
January 2015CA-3.9.3
If a fixed period of repayment is stipulated in the contract, the borrower is liable to pay back the principal amount to the
Islamic bank licensee on or before the agreed date of payment. On the other hand, if no period is stipulated in the contract, it is binding upon the borrower to make a repayment of the loaned amount to the lender on demand.January 2015Collateralisation
CA-3.9.4
As one of the CRM techniques,
Islamic bank licensees can secure a pledge of a tangible asset. The collateralisation is not automatically provided in a Qard contract but must be explicitly stated or must be documented in a separate security agreement at or before the time of signing of the Qard contract. TheIslamic bank licensee may employ other techniques such as pledge of deposits/PSIA or a third-party financial guarantee.January 2015Credit Risk
CA-3.9.5
Islamic bank licensees are exposed tocredit risk in the event that the borrower fails to repay the principal amount in accordance with the agreed terms of the contract. In a fixed-period Qard contract,credit risk exposure commences upon the execution of the contract until the full repayment by the borrower.January 2015CA-3.9.6
The credit exposure is measured based on account receivable in Qard — that is, the amount due from the
customer at the end of the financial period less any provision for doubtful debts.January 2015CA-3.9.7
The account receivable amount (net of specific provisions) arising from the Qard contract must be assigned a RW based on the credit standing of the borrower, as rated by an ECAI that is approved by the CBB (see Section CA-4.6). In cases where the borrower is unrated, a RW of 100% applies. The RW of a financial guarantor can be substituted for the RW of the borrower provided that the guarantor has a better credit rating than the borrower and that the guarantee is legally enforceable. If an exposure is covered by multiple CRM techniques, the exposure must be segregated into segments covered by each type of CRM technique as specified in Section CA-4.7. For any uncovered exposure, the RW of the underlying counterparty applies.
January 2015Market Risk
CA-3.9.8
In the case where a cash loan is provided by the
Islamic bank licensee , there is no element ofmarket risk . If, however, a loan is provided in a currency other than the local currency or in the form of a commodity, the relatedmarket risk is applicable, as outlined in Section CA-5.6.January 2015Summary of Capital Requirement for Qard-based Lending
CA-3.9.9
The following table sets out capital charges for lending on the basis of Qard:
Exposure Credit RW Market Risk Capital Charge Accounts receivable from customer Exposure is equal to the amount of loan (less specific provisions) X customer's rating (or 100% RW for unrated customer). Not applicable* * Applicable only if Qard-based lending is made in the foreign currency or in commodities.
January 2015