Guarantees
CA-4.7.7
Capital relief for the use of a guarantee is given when the following conditions are satisfied:
(a) The guarantee represents theIslamic bank licensee 's direct claim on the guarantor and it must be explicitly referenced to specific exposures or a pool of exposures so that the extent of the cover is clearly defined and incontrovertible;(b) The guarantee is irrevocable and does not allow the guarantor to unilaterally cancel the guarantee after creation of the receivables;(c) The guarantee is unconditional and provides no protection clause that prevents the guarantor from being obliged to pay out in a timely manner in the event that the original counterparty fails to make payments due;(d) TheIslamic bank licensee has the right to pursue, in a timely manner, the guarantor for monies outstanding, rather than having to pursue the original counterparty to recover its exposure;(e) The guarantee is an explicitly documented and legally enforceable obligation assumed by the guarantor in all relevant jurisdictions. There must be a well-founded legal basis to reach this conclusion; and(f) The guarantee covers all types of expected payments made under the contract in the event that the original counterparty defaults.January 2015CA-4.7.8
It is permitted to have a range of guarantors to cover the exposure. Guarantees issued by parties with a lower RW than the counterparty will result in a reduction of the capital charge because the credit exposure covered by the guarantee is assigned the RW of guarantor. The RW applicable to the uncovered portion remains that of the underlying counterparty.
January 2015CA-4.7.9
Takaful is not allowed as a
credit risk mitigation technique.January 2015
