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  • Credit Risk and Counterparty Risk for Islamic Contracts

    • IFR 5.4.6

      (1) An Authorised Firm Managing a PSIA, which is an Unrestricted PSIA, must calculate its PSIAComcredit in relation to all Islamic Contracts financed by Unrestricted PSIAs in the manner prescribed in this section.
      (2) An Authorised Firm must, when undertaking the calculation in (1), apply an appropriate risk weighting for the relevant Islamic Contract.
      Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]
      [Amended] DFSA RM115/2012 (Made 15th October 2012). [VER5/12-12]

    • IFR 5.4.7 IFR 5.4.7

      (1) In this section:
      (a) "E" represents the Exposure determined by an Authorised Firm as applicable to an Islamic Contract; and
      (b) "CRW represents the risk weighting or capital charge assessed by an Authorised Firm as appropriate to that Islamic Contract.
      (2) Where an Islamic Contract is in the Non-Trading Book, an Authorised Firm must determine the PSIACOMcredit for that contract by applying the following formula:
      E × CRW × 8%.
      (3) Where an Islamic Contract is in the Trading Book, an Authorised Firm must determine the PSIACOMcredit for that contract in accordance with the methodology in PIB A4.7 and PIB A4.8 as appropriate.
      (4) An Authorised Firm must calculate its PSIACOMcredit of all contracts by:
      (a) identifying all Islamic Contracts to which this section applies;
      (b) valuing the underlying investment or asset of each contract and reducing the value of any such investment or asset in the manner stipulated in Section 4.9 of chapter 4 of PIB, the result of which constitutes E for that contract;
      (c) determining the risk weighting or capital charge appropriate to each contract, which will constitute the CRW for that contract in accordance with Rules in Sections 4.10, 4.11 and 4.12 of chapter 4 of PIB;
      (d) applying the respective formula in IFR Rule 5.4.7(2) or (3) to determine of PSIACOMcredit in respect of each contract; and
      (e) summing the PSIACOMcredit of each contract to determine the PSIACOMcredit applicable to the Authorised Firm.
      Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]
      [Amended] DFSA RM115/2012 (Made 15th October 2012). [VER5/12-12]
      [Amended] DFSA RM210/2017 (Made 25 October 2017). [VER12/01-18]

      • IFR 5.4.7 Guidance

        1. The DFSA considers that this Guidance will assist an Authorised Firm in applying the appropriate risk weighting or capital charge to each Islamic Contract for the purpose of IFR Rule 5.4.7. Accordingly, the DFSA expects an Authorised Firm managing PSIAs, which are Unrestricted PSIAs to pay due regard to this Guidance.
        2. The Rules in this section and this Guidance are also relevant to an Authorised Firm which invests in or holds Islamic Contracts, when calculating CRCOM for Islamic Contracts under PIB chapter 4.
        3. Table 2 contains Guidance on how an Authorised Firm Managing a PSIA, which is an Unrestricted PSIA should apply risk weightings for Islamic Contracts in respect of calculating relevant E and CRW for its PSIACOMcredit component of the PSIACOM.

        Table 2

        1.
        Islamic Contract type         		2.
        Underlying investment or asset         		3.
        CRW
        Binding Murabaha for the Purchase Orderer (MPO) Asset with an Authorised Firm before purchase by the Counterparty Apply the appropriate percentage from the second column in the table in PIB Rule A4.6.5
        Accounts receivable for the contract, i.e. amounts due from the Counterparty less any provision for doubtful debts CRW in accordance with PIB chapter 4
        Murabaha and Non-binding Murabaha for the Purchase Orderer (MPO) Accounts receivable for the contract, i.e. amounts due from the Counterparty less any provision for doubtful debts CRW in accordance with PIB chapter 4
        Mudaraba and Musharaka Where the underlying investment meets the requirements for inclusion in the Trading Book Market Risk Capital Requirement for the exposure associated with the underlying investment determined in accordance with PIB chapter 5
        Investment in commercial enterprise to undertake business ventures other than trading activities (or other than those which meet the requirements for inclusion in the Trading Book) CRW of 400% on the exposure
        Investment in real estate assets and other movable assets, using underlying Ijarah and Murabaha contracts CRW of the lessee for the underlying Ijarah contracts or the CRW of the counterparty of the underlying Murabaha contract, in accordance with PIB App4
        Ijarah/Ijarah Muntahia Bittamleek Asset with an Authorised Firm available for lease before purchase by the Counterparty — for both contracts with both binding or non-binding promise to lease Apply the appropriate percentage from the second column in the table in PIB Rule A4.6.5
        Residential real estate where the lessee has the right to purchase property at the end of the lease and the lessor has a legally enforceable first charge over the property Apply the appropriate percentage in accordance with PIB Rule 4.12.17.
        Total estimated value of lease receivables for the whole duration of the Ijarah, less any recovery value of the leased asset CRW of Ijarah lessee, in accordance with PIB Section 4.12
        Full recourse Istisna'a — with or without parallel Istisna'a and limited / non-recourse
        Istisna'a with/without parallel Istisna'a         		Net balance of the work-in-progress CRW of the Istisna'a buyer, in accordance with PIB Section 4.12
        Total amount receivable from the counterparty, pursuant to contract billings CRW of Istisna'a buyer, in accordance with PIB Section 4.12
        Salam and parallel Salam Value of the underlying asset receivable for the Salam contract CRW in accordance with PIB Section 4.12
        Assets acquired 100%
        Balance in relevant accounts receivable CRW in accordance with PIB Section 4.12
        Kefala The amount of the guarantee CRW in accordance with PIB Section 4.12
        Sukuk held in the Non-Trading Book Receivables from the Sukuk structure, including the principal and any returns associated with it, arising from any of the following as underlying contracts:

        Salam
        Istisna'a
        Ijarah
        Murabaha
        Mudaraba
        Musharaka         		CRW applicable to underlying Ijarah, Salam or Murabaha contracts, in accordance with PIB Section 4.12

        If the Sukuk provides recourse to the issuer, CRW applicable to the issuer or CRW applicable to underlying contracts of the Sukuk is in accordance with PIB Section 4.12, whichever is higher
          Usufructs/services CRW applicable to underlying service provider or usufruct owner, in accordance with PIB Section 4.12. If the Sukuk provides recourse to the issuer, CRW applicable to the issuer or CRW applicable to underlying service provider or usufruct owner in accordance with PIB App 4, whichever is higher
          Leased assets The higher of CRW of the underlying leased assets and that of the issuer
          Investment agency The higher of CRW of the underlying assets and that of the issuer
          Muzara'a (share of produce of the land) Musaqa (share of produce of the trees) Mugarasa (share in the land and the trees) 100%
          Mixture of tangible and intangible assets The higher of CRW of the underlying assets and that of the issuer
          Where the underlying investment meets the requirements for inclusion in the Trading Book Market Risk Capital Requirement for the exposure associated with the underlying investment determined in accordance with PIB chapter 5
        Bai' Bithaman Ajil Residential and commercial properties
        Plant and equipment
        Motor vehicles
        Shares
        Land         		CRW in accordance with PIB chapter 4
        Arboun Where an Authorised Firm has made the purchase deposit CRW in accordance with PIB chapter 4
          Where an Authorised Firm has received the purchase deposit No CRW is applicable
          Where the contract would meet the requirements for inclusion in the Trading Book Market Risk Capital Requirement for the exposure associated with the underlying investment determined in accordance with PIB chapter 5
        4. Where an Islamic Contract is not listed in Table 2, an Authorised Firm should consult with the DFSA, on a case-by-case basis, to determine the:
        a. contract type and the underlying investments or assets to calculate the E; and
        b. appropriate risk weighting or the capital charge for such contract to calculate the CRW.
        5. In some cases, as stipulated in the relevant parts of column 3 of Table 2, the calculation of capital requirement should be carried out as prescribed in PIB Rule A4.6.5 and in accordance with PIB chapter 5.
        6. In determining the E of a Binding Murabaha for the Purchase Orderer (MPO), as per PIB Rule A4.6.5, E should equal the total acquisition cost of the asset (purchase price and other direct costs) less market value of the asset (net of any haircut) less any security deposit provided.
        7. In determining the E of Ijarah / Ijarah Munthia Bittamleek contract, as per PIB Rule A4.6.5, E should equal the total acquisition cost of the asset (purchase price and other direct costs) less the market value of the asset (net of any haircut), less any Arboun (earnest money deposit received from the potential lessee).
        8. In addition to paragraph 7 above, in the case of an Ijarah Muntahia Bittamleek contract, the exposure may be reduced by the recovery value of the leased asset, only in cases where there is a reasonable basis to conclude that the leased asset can be repossessed and effectively redeployed as a leased asset to another Counterparty. This is important because the asset leased under the Ijarah Muntahia Bittamleek contract is usually customised equipment or large pieces of equipment which are integrated with other assets of the lessee and hence are unsuitable for repossession and releasing to another lessee.
        9. In determining the E of an Istisna'a contract, the exposures arising from such a contract should not be netted off against exposures arising from a Parallel Istisna'a contract entered into by an Authorised Firm for procuring the underlying investment for the Istisna'a contract.
        10. In determining the E of a Salam contract, the exposures arising from such a contract should not be netted off against exposures arising from a Parallel Salam contract entered into by an Authorised Firm for procuring the underlying asset for the Salam contract.
        11. Off-balance sheet exposures for import or export financing contracts based on Murabaha, where the underlying goods or shipment are collateralised and insured, should attract a 20% CCF to an Authorised Firm that issues or confirms the letter of credit.
        12. Where Mudaraba and Musharaka contracts are used to invest in commercial enterprise to undertake business ventures other than trading activities (or other than those which meet the requirements for inclusion in the Trading Book), the E is measured as the amount invested in the commercial enterprise less any specific provisions. If there is a guarantee and such guarantor is not connected to the commercial enterprise, then the CRW for the guarantor will be applied for risk weighting for the amount of any such guarantee.
        13. In addition to the relevant Rules prescribed in PIB chapter 4 and PIB App4, an Authorised Firm may consider the following types of collateral as eligible collateral for Credit Risk management:
        a. Hamish Jiddiyyah (security deposit) only for agreements to purchase or lease preceded by a binding promise;
        b. Arboun where earnest money deposit held after a contract is established as collateral to guarantee contract performance; and
        c. in Mudaraba investment in project finance, an Authorised Firm may use the collateralisation of the progress payments made by the ultimate customers to mitigate the exposures of unsatisfactory performance by the Mudarib.
        14. Where an Authorised Firm places funds under a Mudaraba contract, subject to a Shari'a compliant guarantee from a third party and such a guarantee relates only to the Mudaraba capital, the capital amount should be risk-weighted at CRW of the guarantor provided that the CRW of that guarantor is lower than the CRW of the Mudarib (as a Counterparty). Otherwise, the CRW of the Mudarib will apply.
        15. An Authorised Firm placing liquid funds with a central bank or another financial institution on a short-term Mudaraba basis in order to obtain a return on those funds, may apply the CRW applicable to the Mudarib (as a Counterparty), provided the Mudarib effectively treats the liquid funds placement as its liability, although normally such placements are not treated as liabilities of the Mudarib.
        Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]
        [Amended] DFSA RM115/2012 (Made 15th October 2012). [VER5/12-12]