Entire section Custom print Link Text Only Rich Text Print

CM-1.8.5

Islamic bank licensees must have in place a detailed and clear policy statement pertaining to ECL recognition. The policy statement must be approved by the Board of Directors, including at the time of any periodic changes. The policy statement must be comprehensive and must include, but not be limited to, the following components:

(a) Definition of default (including consideration of cross defaults and restructured/renegotiated/rescheduled facilities in such assessment);
(b) Portfolio segmentation, detailing the level at which PD and LGD will be measured;
(c) For collectively evaluated exposures, a description of the basis for creating groups of portfolios with shared credit risk characteristics;
(d) Qualitative and quantitative staging criteria, including criteria for qualifying as low credit risk assets and triggers for both forward and backward transition between Stages 1 to 3 (CM-1.8.24);
(e) Source of internal data sets, minimum period of internal data repository and when external data sets will be used as reliable proxies in assessment of required impairment allowances;
(f) Identify and document the ECL assessment and measurement methods (such as a loss rate method, PD/LGD modelling methods, prepayment and cure rate models or any another method) to be applied to each exposure, segment or portfolio;
(g) Methodology for conversion from through-the-cycle (‘TTC’) to point-in-time (‘PIT’) PDs and variables considered for making forward-looking adjustments to PIT PDs, including use of macroeconomic factors;
(h) Determine the extent to which the value of collateral and other credit risk mitigants will be used for LGD calculations (including the use of liquidation haircuts and, where available, forecasting of collateral values);
(i) Policy for specific cash shortfall assessment for Stage 3 accounts (NPE provisions);
(j) Document the methods and frequency used to validate models for ECL measurement (e.g. back tests, quantitative and qualitative validation tests). Models, input data and systems used to develop PD, LGD and other components of ECL must be subject to internal and external validation as required under CM-1.4.10; and
(k) Include a process for evaluating the appropriateness of significant inputs and assumptions in the ECL assessment and measurement method chosen. It is expected that the basis for inputs and assumptions used in the estimation process will generally be consistent from period-to-period. Where the basis of use of inputs and assumptions changes, the rationale must be documented.
Amended: October 2022
Added: June 2022