• IBANK Part 6.7 IBANK Part 6.7 Market Risk Capital Charges for Islamic Financial Contracts

    • IBANK Division 6.7.A IBANK Division 6.7.A General

      • IBANK 6.7.1 Introduction

        This Part describes and sets out the market risk capital charges applicable to the main kinds of Islamic financial contracts.

        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.7.2 Capital Charges for Hybrid Contracts

        If an Islamic banking product or financial instrument is structured using a combination of Islamic financial contracts, and it is not clear from this Part how to calculate the capital charge for the product or instrument, the firm must not use a capital charge unless the charge has been approved by the Regulatory Authority.

        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Division 6.7.B IBANK Division 6.7.B Sale-Based Contracts

      • IBANK 6.7.3 Treatment of Murabahah and Related Contracts

        (1) An Islamic banking business firm is exposed to market risk under a murabahah contract when the asset is available for sale and on firm's balance sheet.
        (2) The capital charge for a murabahah contract is 15% on the position. There is no capital charge for a binding MPO contract or a CMT.

        Note In the case of a CMT where the firm holds on to the commodity for a longer period than normal (for example, following the customer's refusal to honour its commitment to buy) the commodity is subject to a capital charge of 15%.
        (3) Bai bithaman ajil and musawamah contracts are treated in the same way as murabahah contracts.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.7.4 Treatment of Salam and Related Contracts

        Under a salam contract, an Islamic banking business firm is exposed to market risk after the firm has paid the purchase price to the seller and before the purchased commodity is sold and delivered to a buyer.

        Table 6.7.4A Market risk capital charge for salam without parallel salam

        stage of contract capital charge
        firm has paid purchase price to salam customer (seller) 15% on the long position of salam exposures
        firm has received purchased commodity but has not sold and delivered the commodity to a buyer

        Table 6.7.4B Market risk capital charge for salam with parallel salam

        stage of contract capital charge
        firm has paid purchase price to salam customer (seller) 15% on the net position (that is, after netting of salam exposures against parallel salam exposures)

        plus

        3% on the gross position (that is, the sum of the salam exposures and parallel salam exposures)
        firm has received purchased commodity but has not sold and delivered the commodity to a buyer
        Note The parallel salam does not extinguish the requirement for capital from the first salam contract.

        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.7.5 Treatment of Istisna without Parallel Istisna

        (1) If an Islamic banking business firm is the seller under an istisna without parallel istisna contract, the firm is exposed to market risk when there is unbilled work-in-process inventory. The capital charge for the contract is 1.6% of the firm's unbilled work-in-process inventory.
        (2) If an Islamic banking business firm is the buyer under an istisna without parallel istisna contract, the firm is exposed to market risk as it makes progress payments to the supplier. The capital charge for the contract is 15% of the work-in-process inventory.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.7.6 Treatment of Istisna with Parallel Istisna

        (1) There is no capital charge for an istisna with parallel istisna contract if there is no provision in the parallel istisna contract that allows the seller to increase or vary the selling price. Also, there is no capital charge if there is a written undertaking given to the firm that the contractor's performance (including work-in-process) is the responsibility of the ultimate counterparty.
        (2) However, there is a capital charge of 1.6% of the firm's unbilled work-in-process inventory if:
        (a) there is a provision in the parallel istisna contract that allows the seller to increase or vary the selling price; or
        (b) there is no written undertaking that the contractor's performance is the responsibility of the ultimate counterparty.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Division 6.7.C IBANK Division 6.7.C Lease-Based Contracts

      • IBANK 6.7.7 Treatment of Ijarah and Related Contracts

        There is no market risk capital charge for ijarah contracts, but ijarah contracts are subject to the credit risk capital requirements under rule 4.5.6.

        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Division 6.7.D IBANK Division 6.7.D Equity-Based Contracts

      • IBANK 6.7.8 Treatment of Diminishing Musharakah

        (1) The capital charge for a diminishing musharakah contract depends on the category of the enterprise or asset to which the contract relates.
        (2) If the contract is in relation to a private commercial enterprise to undertake trading activities in foreign exchange, shares or commodities, the capital charge depends on the underlying asset as set out in Chapter 6.
        (3) If the contract is in relation to a joint ownership of real estate or movable assets through musharakah with murabahah subcontract, the capital charge is 15% (that is, the charge for the murabahah subcontract, as set out in rule 6.7.3).
        (4) There is no capital charge if the contract is in relation to a joint ownership of real estate or movable assets through musharakah with ijarah subcontract, because there is no charge for the ijarah subcontract under rule 6.7.7.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 6.7.9 Treatment of Mudarabah

        (1) The capital charge for a mudarabah contract depends on the category of the enterprise or asset to which the contract relates.
        (2) If the contract is in relation to a private commercial enterprise to undertake trading activities in foreign exchange, shares or commodities, the capital charge depends on the underlying asset as set out in Chapter 6.
        (3) If the contract is in relation to a placement in the interbank market, there is no capital charge except if the funds are invested in foreign exchange. The capital charge for a mudarabah contract where the funds are invested in foreign exchange is that calculated in accordance with Part 6.2 (foreign exchange risk).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Division 6.7.E IBANK Division 6.7.E Loan-Based Contracts

      • IBANK 6.7.10 Treatment of Qard

        There is no capital charge for a qard contract except if the loan is provided in a foreign currency or in the form of a commodity. For qard-based financing in a foreign currency or commodity, the capital charge is that calculated in accordance with Part 6.2 (foreign exchange risk) or Part 6.4 (commodities risk), as the case requires.

        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Division 6.7.F IBANK Division 6.7.F Service-Based Contracts

      • IBANK 6.7.11 Treatment of Wakalah

        (1) If a wakalah contract is in relation to a private commercial enterprise to undertake trading activities in foreign exchange, shares or commodities, the capital charge depends on the underlying asset as set out in Chapter 6.
        (2) If the contract is in relation to a placement in the interbank market, there is no capital charge except if the funds are invested in foreign exchange. The capital charge for a wakalah contract where the funds are invested in foreign exchange is that calculated in accordance with Part 6.2 (foreign exchange risk).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).