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  • CM-1.6 CM-1.6 Non-Performing Exposure Management

    • CM-1.6.1

      Islamic bank licensees must ensure that their credit policy contains policy on Non-performing exposures (‘NPEs’). Such policy must outline the approach they would take to deal with NPEs in line with the Board approved risk appetite framework including tolerance levels for NPE for different portfolios. Responsibility for such credit must be assigned to a specialised workout section.

      Added: June 2022

    • CM-1.6.2

      To formulate and execute a fit-for-purpose policy on NPEs, Islamic bank licensees must complete an assessment of the following elements as a minimum:

      (a) The internal capabilities to effectively manage, i.e. maximise recoveries and reduce NPEs over a defined time horizon;
      (b) The external conditions and operating environment; and
      (c) The capital implications of NPEs
      Added: June 2022

    • CM-1.6.3

      Islamic bank licensees must include, at a minimum, clearly defined quantitative targets for NPEs (where relevant, including targets for foreclosed assets), which must be approved by the senior management. The combination of these targets must lead to a concrete reduction, gross and net (of provisions), of NPE exposures, at least in the medium-term.

      Added: June 2022

    • CM-1.6.4

      While expectations about changes in macroeconomic conditions can play a role in determining target levels (if based on reliable external forecasts), they should not be the sole driver for the established NPE reduction targets. Targets should be established at least along the following dimensions:

      (a) By time horizons, i.e. short-term (indicative 1 year), medium-term (indicative 3 years) and possibly long-term;
      (b) By main portfolios (e.g. retail mortgage, retail consumer, retail small businesses and professionals, SMEs, large corporates and commercial real estate);
      (c) By implementation option chosen to drive the projected reduction, e.g. cash recoveries from hold strategy, collateral repossessions, recoveries from legal proceedings or write-offs.
      Added: June 2022

    • CM-1.6.5

      When the NPE levels exceed the thresholds under the Board approved Risk Appetite Framework, the Islamic bank licensee must develop an NPE operational plan which clearly defines how the licensee will effectively reduce the level of NPEs over a time horizon of at least 1 to 3 years (depending on the type of operational measures required).

      Added: June 2022

    • CM-1.6.6

      Islamic bank licensees must fully understand and examine:

      (a) Scale and drivers of the NPE problem:
      (i) The size and evolution of NPE portfolio on an appropriate level of granularity, which requires appropriate portfolio classification as outlined in Section 1.8;
      (ii) The drivers of NPE in-flows and out-flows, by portfolio where relevant; and
      (iii) Other potential correlations and causations.
      (b) Outcomes of NPE actions taken in the past:
      (i) Types and nature of actions implemented, including forbearance measures; and
      (ii) The success of the implementation of those activities and related drivers, including the effectiveness of forbearance treatments.
      (c) Operational capacities (processes, tools, data quality, IT/automation, staff/expertise, decision-making, internal policies, and any other relevant areas for the implementation of the strategy) for the different process steps involved, including, but not limited to:
      (i) Early warning and detection/recognition of NPEs;
      (ii) Forbearance;
      (iii) Provisioning;
      (iv) Collateral valuations;
      (v) Recovery/legal process/foreclosure;
      (vi) Management of foreclosed assets (if relevant); and
      (vii) Reporting and monitoring of NPEs and effectiveness of NPE workout solutions.
      Added: June 2022

    • Capital Implications of NPEs Capital Implications of NPEs

      • CM-1.6.7

        Capital levels and their projected trends are important inputs towards determining the scope of NPE reduction actions available to licensees. Islamic bank licensees should dynamically model the capital implications of the different elements of their policy on NPEs, ideally under different economic scenarios. Those implications should also be considered in conjunction with the risk appetite framework as well as the internal capital adequacy assessment process (‘ICAAP’).

        Added: June 2022

      • CM-1.6.8

        Where capital buffers are slim and profitability low, Islamic bank licensees must include suitable actions in their capital planning, ICAAP and recovery plans which will enable effective management and sustainable clean-up of NPEs.

        Added: June 2022

      • CM-1.6.9

        Islamic bank licensees should also identify medium and long-term options for NPE reductions.

        Added: June 2022

      • CM-1.6.10

        A strong level of monitoring and oversight by risk management function in respect of the formulation and implementation of the NPE strategy (including the NPE operational plan) must also be ensured.

        Added: June 2022

      • CM-1.6.11

        Islamic bank licensees must write-off financings which are deemed to be uncollectable in a timely manner.

        Added: June 2022