A Specified Project
CA-4.8.16
An
Islamic bank licensee can advance funds to a construction company which acts as Mudarib in a construction contract for a third-partycustomer (ultimate customer). The ultimatecustomer will make progress payments to the Mudarib, who in turn makes payments to theIslamic bank licensee . The essential role of theIslamic bank licensee in this structure is to provide bridging finance to the Mudarib pending its receipt of the progress payments. In this Mudarabah structure, theIslamic bank licensee as investor advances funds as Rabb-al-Mal to the construction company as Mudarib for the construction project, and is thus entitled to a share of the profit of the project but must bear 100% of any loss. In most cases, the Islamicbank licensee has no direct or contractual relationship with the ultimatecustomer , but in such a structure theIslamic bank licensee stipulates that payments by the ultimatecustomer to the Mudarib be made to an account ("repayment account") with theIslamic bank licensee which has been opened for the purpose of the Mudarabah and from which the Mudarib may not make withdrawals without theIslamic bank licensee's permission.January 2015CA-4.8.17
Where Paragraph CA-4.8.17 applies, the
Islamic bank licensee is exposed to the risk on the amounts advanced to the Mudarib under the Mudarabah contract, but this risk would be mitigated by the amounts received from the ultimate customer into the "repayment account" which are effectively collateralised. Under the Mudarabah contract the amounts advanced by theIslamic bank licensee to the Mudarib would normally be treated undercredit risk as "equity positions in the banking book", the use of the structure involving a "repayment account", whereby the ultimatecustomer makes payments into such an account with theIslamic bank licensee instead of making payments directly to the Mudarib, has the effect of substituting thecredit risk of the ultimatecustomer for that of the Mudarib to the extent of the collateralised balance of the "repayment account".January 2015CA-4.8.18
In addition to
credit risk (i.e. in the absence of a repayment account, the risk that the Mudarib has received payment from the ultimate customer but fails to pay theIslamic bank licensee , or, if the repayment account is used, that the ultimate customer fails to pay), theIslamic bank licensee is exposed to capital impairment in the event that the project results in a loss. The proposed RW and impact ofcredit risk mitigation are explained in Section CA-4.7.January 2015
