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  • CA-9 CA-9 Real Estate Activities

    • CA-9.1 CA-9.1 Current Regulatory Environment of Real Estate Activities

      • CA-9.1.1

        Islamic bank licensees often invest in real estate directly on their balance sheets, or as part of off-balance sheet asset management activities, or indirectly through a wholly or majority-owned subsidiary. Real estate lends itself as a permissible asset class, as Shari'a rules and principles allow such investment. However, there is a general concern that such investments may expose the Islamic bank licensees to the effects of cyclical real estate markets.

        January 2015

      • CA-9.1.2

        Owing to the risks outlined in Paragraph CA-9.1.1, real estate investment activities are suitable for an Islamic bank licensee only on a very limited scale and under restrictive conditions designed to control the various risks posed to the Islamic bank licensee and its UPSIAs. Islamic bank licensees must demarcate clearly their real estate exposures into financing and investment categories. The CBB requires licensees to report real estate exposures to the CBB.

        January 2015

      • Indirect Exposure in Real Estate

        • CA-9.1.3

          Islamic bank licensees can engage in indirect real estate activities where real estate business is conducted by separate entities. Such exposure can take a number of forms. For example, an Islamic bank licensee can: (a) be involved in real estate activities through a joint venture or equity participation with a property development company; (b) establish a real estate subsidiary to carry out related commercial activities; or (c) accept real estate as collateral against its financing to the customers.

          January 2015

      • Treatment of Real Estate Investment Exposures through Joint Venture or Equity Participation

        • CA-9.1.4

          As mentioned in Subparagraph CA-3.6.11, an Islamic bank licensee can enter into a private commercial enterprise to undertake a business venture (which can include real estate). There are two possible methods used to calculate equity exposures in this type of investment. According to the simple risk-weight method, the RW must be applied to the exposures (net of specific provisions) based on the treatment of equity exposures in the banking book. The applicable RW for such exposures must entail a 400% RW for investments in shares that are not publicly traded less any specific provisions for impairment. Alternatively, a 300% RW is applicable for investments in shares that are publicly traded less any specific provisions for impairment. If there is a third-party guarantee to make good impairment losses, the RW of the guarantor may be substituted for that of the assets for the amount of any such guarantee where the risk weight of the guarantor is lower, subject to the conditions for guarantees in Section CA-4.7 being fulfilled. In order to use the alternative slotting method for calculation of RWs, an Islamic bank licensee must seek the CBB's prior written approval and map its RWs into four supervisory categories as set out in Appendix CA-6.

          Amended: April 2016
          Added: January 2015

      • Treatment of Investment Exposures in Real Estate Subsidiaries of Banks

        • CA-9.1.5

          From a capital adequacy perspective, where an Islamic bank licensee has a subsidiary through which it carries out real estate investment, its investments in the capital of such a subsidiary must be treated in the same way as an investment in a non-banking commercial entity — that is, by application of a 800% RW for the investment if this amount is greater than 15% of its Total Capital. This RW will be applicable on the portion of the investment that exceeds the 15% threshold. The investment in real estate entities below the 15% level will be risk-weighted not lower than in Paragraph CA-9.1.4.

          January 2015

      • Treatment of Real Estate Taken as Collateral

        • CA-9.1.6

          If an Islamic bank licensee accepts real estate as collateral, whether residential or commercial, from customers against its financing activities, the eligibility of such real estate as a credit risk mitigant will be subject to the provisions of Section CA-4.7 and subject to the risk-weighting of the concerned contract (see CA-3 for differing contract types). Moreover, an Islamic bank licensee is required to take the following steps when the collateral is in the form of real estate:

          (a) Any claim on collateral must be properly filed on a timely basis. Collateral interests must reflect a perfected lien; that is, appropriate steps are taken in relation to the real estate so that security interest of the Islamic bank licensee is effective against customer's default and/or third parties;
          (b) The collateral agreement and the underlying legal process must enable the Islamic bank licensee to have access to and to dispose of the collateral within a reasonable time frame;
          (c) The realisable value of the collateral (after deducting any haircuts) must be able adequately to cover the amount of financing;
          (d) The valuation must be performed at a minimum once every year, or more frequently if needed;
          (e) The real estate must be insured under a Takaful scheme, or another insurance arrangement subject to the Shari'a Supervisory Board's approval, against damage and deterioration;
          (f) Ongoing claims on property (such as tax) must be regularly monitored; and
          (g) Any risk of environmental liability arising from the property such as contamination in the soil, or of ground water, etc., must be taken into account.
          Amended: July 2019
          January 2015

      • Risk-Weighting of Real Estate Exposures

        • CA-9.1.7

          The calculation of RWs for real estate financing and investment exposures is summarised below.

          January 2015

      • Real Estate Financing

        • CA-9.1.8

          An Islamic bank licensee can provide real estate financing on the basis of Ijara, IMB, diminishing Musharakah, Murabahah and Istisna. Except for operating Ijara, use of other contracts to provide real estate finance to customers will commonly fall in the category of financing. The RWs for these exposures must be calculated based on the Rules provided in the relevant Sections, as set out below:

          (a) IMB: Section CA-3.5;
          (b) Diminishing Musharakah: Sections CA-4.8;
          (c) Murabahah: Section CA-3.2;
          (d) Istisna: Section CA-3.4; and
          (e) For all the above contracts used to provide real estate financing, the RW of a debtor, counterparty or other obligor can be reduced and given preferential treatment if criteria mentioned in Section CA-4.2 are applicable.
          January 2015

      • Real Estate Investment

        • CA-9.1.10

          Islamic bank licensees are required to hold regulatory capital against all of their real estate investment exposures. The risk-weighted amount of a real estate investment exposure is computed by multiplying the amount of the carrying value by the appropriate risk weight.

          January 2015

        • CA-9.1.11

          The applicable risk weights of a single investment exposure for Murabahah, IMB and operating Ijarah are as follows:

          (a) The treatment for a single investment exposure is a 200% RW;
          (b) The treatment for an exposure due to a holding for financing purposes during the non-binding stage of the transaction is a 200% RW; and
          (c) The treatment of an exposure resulting from operating Ijara is the risk weights as mentioned in Paragraph CA-3.5.21.
          January 2015

        • CA-9.1.12

          When Islamic bank licensees are involved extensively in real estate investment activities, the CBB may impose a higher capital charge on a solo basis to cushion unexpected losses. Further, the CBB may increase the level of CCF in case Islamic bank licensees are engaged in real estate as part of off-balance sheet asset management activities.

          January 2015

      • Valuation of Real Estate Activities

        • CA-9.1.13

          The measurement of risk exposures in real estate activities is dependent on sound and proper valuations as outlined in Chapter CM-2 of this Rulebook. The risks inherent in the real estate activities depend on a number of factors, including the type of property and the independent parties who will assess these activities. Islamic bank licensees must have in place adequate valuation rules and proper valuation methodologies.

          January 2015

        • CA-9.1.14

          Islamic bank licensees must value their property activities on a consistent basis. Otherwise, there can be no level playing field for capital adequacy treatment. In the case of assets under Murabahah or Ijara/IMB transactions, the Islamic bank licensee must employ appropriate valuation to estimate the amount for which a property switches from investment to financing, or vice versa.

          January 2015

        • CA-9.1.15

          The valuation of an Islamic bank licensee's real estate investments is subject to the rules in Module CM. Islamic bank licensees must have robust procedures to substantiate the results of valuations while comparing them with some independent information source such as property market reports or reliable publications. Islamic bank licensees should scrutinise any significant variations in these valuations and make any necessary rectifications.

          January 2015