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  • CA-4.1 CA-4.1 Introduction

    • CA-4.1.1

      Credit risk exposures in Islamic financing arise in connection with accounts receivable in Murabaha contracts, counterparty risk in Salam contracts, accounts receivable and counterparty risk in Istisn'a contracts and lease payments receivable in Ijarah contracts, and Sukuk held to maturity in the banking book. Credit risk is measured according to the Standardised Approach as outlined in this Module, except for certain exposures arising from investments by means of Musharaka or Mudaraba contracts in assets in the banking book. The latter are to be treated as giving rise to credit risk (in the form of capital impairment risk), and are to be risk-weighted applying the supervisory slotting criteria for exposures in the nature of specialised financing and the risk weights applicable to equities for other equity exposures as detailed in the Musharaka and Mudaraba sections of Chapter CA-3.

      January 2015

    • CA-4.1.2

      Broadly, the assignment of Risk Weights (RWs) takes into consideration the following:

      (a) The credit risk rating of an obligor or other counterparty, or a security, based on external credit assessment institutions (ECAI) ratings22. In determining the risk weights in the standardised approach, Islamic bank licensees must use assessments by only those external credit assessment institutions which are recognised as eligible for capital purposes by CBB in accordance with the criteria defined in Section CA-4.6;
      (b) Credit risk mitigation techniques adopted by the Islamic bank licensees;
      (c) Types of the underlying assets that are sold and collateralised or leased by the Islamic bank licensees; and
      (d) The amount of specific provisions made for the overdue portion of accounts receivable or lease payments receivable.

      22 The notations follow the methodology used by one institution, Standard & Poor's. The use of Standard & Poor's credit ratings is an example only; those of some other external credit assessment institutions could equally well be used. The ratings used throughout this document, therefore, do not express any preferences or determinations on external assessment institutions by the CBB.

      January 2015

    • CA-4.1.3

      Exposures must be risk-weighted net of specific provisions and may take eligible collateral into account where the risk weight of the collateral is lower than that of the counterparty or obligor.

      January 2015