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RM-2.2.13

Islamic bank licensees must have a policy for carrying out a due diligence process2 in evaluating counterparties, in particular, for transactions involving:

(a) New ventures with multiple financing modes: Islamic bank licensees must carry out due diligence processes on customers or sovereigns using multiple financing modes to meet specific financial objectives designed to address Shari a, legal or tax issues of customers: and
(b) Creditworthiness that may be influenced by external factors: Where significant investment risks are present in participatory instruments, especially in the case of Mudarabah financings, additional counterparty reviews and evaluations will focus on the business purpose, operational capability, enforcement and economic substance of the proposed project including the assessment of realistic forecasts of estimated future cash flows3. Risk mitigating structures must be put in place by Islamic bank licensees as far as possible.

2 The process may include Value at Risk, stress testing and sensitivity analysis, amongst others.

3 Please refer to Chapter RM-3 on Equity Investment Risk.

Amended: April 2013
January 2013