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  • Commercial Enterprise to Undertake a Business Venture

    • CA-4.8.3

      In assigning the RW, consideration is given to the intent of the profit-sharing investment, and to the nature of the underlying assets. For the purpose of determining minimum capital requirements, the RW is applied based on Paragraphs CA-4.8.4 to CA-4.8.22.

      January 2015

    • CA-4.8.4

      Financing on a Musharakah or Mudarabah basis of a commercial enterprise to undertake a business venture can expose an Islamic bank licensee to capital impairment risk as well as credit risk, to an extent that depends on the structure and purpose of the financing and the types of assets in which the funds are invested. Commonly, an Islamic bank licensee would invest in a commercial enterprise with the intention of holding the investment for an indefinite period or with a view to eventual sale (as in the case of venture capital or private equity investments). As an equity investor, the Islamic bank licensee's rights and entitlements are subordinated to the claims of secured and unsecured creditors.

      January 2015

    • CA-4.8.5

      Capital impairment risk is the risk of losing the amount invested in an enterprise or in the ownership of an asset. Such impairments may arise for two kinds of reasons:

      (a) The investee may be unprofitable, so that the Islamic bank licensee as investor fails to recover its investment; and
      (b) The Musharakah partner or Mudarib may fail either:
      (i) To pay the Islamic bank licensee's share in the profit on a periodical basis, as contractually agreed; or
      (ii) To settle the Islamic bank licensee's entitlement to its share of the capital and the profits at the time of redemption. The former kind of reason is an impairment of capital without any credit default being involved; whereas the latter, being a failure of the partner to meet its contractual obligations, is a type of credit default.
      January 2015

    • CA-4.8.6

      Bearing in mind the relatively risky nature of financing based on profit-sharing modes, the CBB sets out some prudential conditions on Islamic bank licensees that invest IAH funds in such financing either directly or by commingling the funds of IAH with those of shareholders in such financing (see module CM). Unrestricted investment account holders (UIAH) typically have a small risk appetite and are content with an investment which has a relatively low risk and low returns.

      January 2015

    • CA-4.8.7

      The RW for investments in commercial enterprises is calculated according to either of the following methods:

      (a) Simple risk-weight method (see also Section CA-4.4), treating the investment as an equity exposure held in the banking book; or
      (b) Supervisory slotting method, considering the investment as a type of specialised financing.
      January 2015