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