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CA-4.7.7

Capital relief for the use of a guarantee is given when the following conditions are satisfied:

(a) The guarantee represents the Islamic 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) The Islamic 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 2015