• IBANK Chapter 10 IBANK Chapter 10 Treatment of Sukuk

    • IBANK Part 10.1 IBANK Part 10.1 General

      • IBANK 10.1.1 Introduction

        (1) This Chapter sets out the minimum capital requirements to cover:
        (a) the credit risk and market risk arising from the holding, by an Islamic banking business firm, of sukuk in the banking book; and
        (b) the firm's other sukuk-related exposures arising from the firm being (or acting in the capacity of) an originator, issuer, provider of credit enhancement or provider of a liquidity facility in a securitisation.

        Note For credit risk arising from sukuk in the firm's trading book, Chapter 4 applies. For market risk arising from sukuk in the firm's trading book, Chapter 6 applies.
        (2) This Chapter also sets out the requirements for allowing capital relief to an Islamic banking business firm.
        Amended by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.1.2 Sukuk

        (1) Sukuk are certificates that represent a holder's proportionate ownership in an undivided part of an asset or pool of assets where the holder assumes all rights and obligations to the asset or pool.
        (2) The assets that may be the subject of sukuk include:
        (a) tangible assets (including istisna assets);
        (b) intangible assets;
        (c) financial assets;
        (d) usufructs (including ijarah lease assets);
        (e) services;
        (f) equity participation in business ventures (such as mudarabah and musharakah);
        (g) a pool of the kinds of assets mentioned in paragraphs (a) to (d); and

        Note The pooling of different kinds of assets allows for greater mobilisation of funds. For example, an SPE would be able to issue tradeable sukuk for financial assets that would not normally be tradeable on their own, if the SPE packages a pool made up of a proportion of financial assets.
        (h) any other asset approved in writing by the Regulatory Authority.
        (3) The assets that are the subject of sukuk must be Shari'a-compliant and readily identifiable. The assets may be in a specific project or investment activity that must itself be Shari'a-compliant.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.1.3 IBANK 10.1.3 Tradeability of sukuk

        Sukuk are not tradeable unless their trading is in accordance with Shari'a.

        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.1.3 Guidance

          1 As a general principle, sukuk with underlying financial assets solely in the form of receivables (debts) are not tradeable.
          2 Sukuk that are made up of financial assets may be traded by a firm if:
          (a) the financial assets are combined with tangible assets and the value of tangible assets in the pool is not less than the percentage determined by the firm's Shari'a supervisory board (this kind of sukuk is sometimes called sukuk al-istithmar); or
          (b) the firm is selling all of its assets (or a pool of assets with a standing financial obligation) and the financial assets are incidental to the tangible assets or usufructs being sold and are unavoidably included in the sale.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.1.4 Categories of sukuk according to ownership of assets

        Sukuk may also be categorised, based on the sukuk holders' ownership of the underlying assets, into:

        (a) asset-backed sukuk where legal and beneficial ownership of the underlying assets are transferred to the sukuk holders; and
        (b) asset-based sukuk where only beneficial ownership of the underlying assets is transferred (through a trust) to the sukuk holders.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK Part 10.2 IBANK Part 10.2 Securitisation and re-securitisation

      Amended by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK Division 10.2.A IBANK Division 10.2.A General

        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.1 Securitisation

          (1) Securitisation, in relation to an Islamic banking business firm, is the process of creating and issuing sukuk or tranches of sukuk. In securitisation:
          (a) payments of the principal and profits are derived from the cash flows generated by the securitised assets (that is, by the assets underlying the sukuk); and
          (b) legal or beneficial ownership to the underlying assets is transferred to the investors in the form of sukuk.
          A reference to securitisation includes re-securitisation.
          (2) The structure of a securitisation must be Shari'a-compliant.

          Note Under rule 10.1.2 (3), the assets that are the subject of sukuk (and the specific project or investment activity where the assets are) must also be Shari'a-compliant.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.2 Parties to securitisation

          (1) For purposes of calculating an Islamic banking business firm's capital requirements, the parties to a securitisation are the originator, the issuer and the investors.

          Note 1 Depending on the securitisation structure, an Islamic banking business firm may be (or act in the capacity of) originator, issuer, investor or any 1 or more of the following:
          (a) a manager of the sukuk issuance;
          (b) a sponsor of the sukuk issuance;
          (c) an adviser to the sukuk issuance;
          (d) an entity to place the securities with investors;
          (e) a provider of credit enhancement;
          (f) a provider of a liquidity facility;
          (g) a servicer to carry out certain activities usually carried out by the manager of the sukuk issuance in relation to the underlying assets.
          Note 2 An Islamic banking business firm may act as sponsor of a sukuk issuance or similar programme involving assets of a customer. As sponsor, the firm earns fees to manage or advise on the programme, place the securities with investors, provide credit enhancement or provide a liquidity facility.

          Note 3 Depending on the securitisation structure, a servicer (instead of the manager of the sukuk or issuer) may carry out the following activities:
          (a) handling related taxes;
          (b) managing escrow accounts;
          (c) remitting payments;
          (d) obtaining takaful;
          (e) maintaining the underlying assets on behalf of the lessor (sukuk holders) in ijarah or IMB sukuk.
          Note 4 The originator of a sukuk issuance may act as servicer of the underlying assets.
          (2) The contractual terms of the sukuk issuance determine the rights of the sukuk holders to the securitised assets.

          Note For the rights of sukuk-holders, see rule 10.2.10 (Effects of true sale on sukuk holders).
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.3 IBANK 10.2.3 Firm acting as originator

          An Islamic banking business firm that acts as originator of a sukuk issuance must transfer (through an SPE) the ownership of assets held by it to sukuk holders.

          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

          • IBANK 10.2.3 Guidance

            1 As an originator, an Islamic banking business firm may obtain either or both of the following benefits:
            (a) increased liquidity, since a relatively illiquid asset (such as an asset held as lessor in an ijarah or IMB contract) is converted into cash paid by the investors;
            (b) reduced capital requirements, insofar as the securitisation permits the firm to exclude, from the calculation of its risk-weighted assets, exposures relating to the underlying assets.
            2 To obtain the benefit of reduced capital requirements, the firm must ensure that the securitisation structure enables it to derecognise, from its balance sheet, the underlying assets. For the criteria for derecognition, see rule 10.2.26.
            Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.4 IBANK 10.2.4 Firm acting as issuer

          An Islamic banking business firm may act as issuer of sukuk.

          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

          • IBANK 10.2.4 Guidance

            1 An Islamic banking business firm may act as issuer of asset-backed sukuk by packaging assets into a pool and transferring legal and beneficial ownership of the assets to sukuk holders by true sale under rule 10.2.8.
            2 An Islamic banking business firm may act as issuer of asset-based sukuk by packaging assets into a pool and transferring only beneficial ownership of the assets to sukuk holders because there is some obstacle to the transfer of legal ownership. Such an obstacle would, for example, exist if the assets were purchased by the firm from the central government of a state and the transfer of full ownership would require special legislation.
            Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.5 IBANK 10.2.5 Collateral security structure

          (1) A collateral security structure may be used in some sukuk, such as those based on project financing. The security interest arising from the structure must be perfected (or perfectible) and that interest must be the only claim on the collateral.

          Note In this rule, collateral:
          (a) arises from the structure (for example, the asset or project that is the subject of financing in a joint venture between the SPE and another party); and
          (b) is used to mitigate the underlying exposures of the securitisation.
          (2) The collateral security structure must be supported by a written and reasoned opinion of a qualified legal counsel. The legal opinion must conclude that the security interest is perfected (or perfectible) and that there are no prior or subsequent claims on the collateral.
          (3) The legal opinion must address:
          (a) the nature of the security interest;
          (b) the enforceability of the security interest against third parties;
          (c) perfection requirements (such as notices and registration); and
          (d) the effects of the issuer's bankruptcy on perfection.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

          • IBANK 10.2.5 Guidance

            The Regulatory Authority expects the legal opinion to consider that, in many jurisdictions:

            •    rahn (mortgage or other pledge of assets) is possessory in nature so as to make perfection a particularly difficult issue
            •    bankruptcy laws, the concept of perfection and the priorities in the distribution of assets are not well developed.
            Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK Division 10.2.B IBANK Division 10.2.B Securitisation process

        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.6 Sukuk securitisation

          The process of a sukuk securitisation is:

          (a) first, the origination of assets;
          (b) second, the transfer of the assets to an SPE which is created to issue the securities and manage the assets on behalf of the sukuk holders; and
          (c) third, the issuance of the sukuk to investors.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.7 Special purpose entities

          (1) A special purpose entity (or SPE) is a legal entity that is created solely for a particular financial transaction or series of transactions.
          (2) An SPE may take the form of a limited partnership, limited liability company, corporation, trust or collective investment fund. An SPE may also be established under a special law that allows the creation of SPEs.
          (3) Most sukuk securitisations require the creation of an SPE to:
          (a) hold the assets transferred by the originator;
          (b) issue sukuk based on the assets; and
          (c) act as intermediary between the originator and the sukuk holders.

          Guidance
          1 In conventional securitisations, the SPE must not have any other business. In a sukuk securitisation, the SPE can be organised, for example, as a mudarabah, musharakah or wakalah, but the requirement for the SPE to have no other business continues to apply.
          2 By its nature, an SPE is a legal shell with only the specific assets transferred by the originator (that is, the SPE has no other property in which any other party could have an interest). The transferred assets are effectively owned, legally or through a trust, by the sukuk holders.
          (4) An SPE must be bankruptcy-remote from the originator. It must not be consolidated with the originator for tax, accounting or legal purposes.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.8 Criteria for true sale

          (1) For asset-backed sukuk, ownership of the underlying assets must be transferred to the sukuk holders (or to an SPE for their benefit) by a true sale under Shari'a.
          (2) The 4 main criteria for a true sale are:
          (a) the transfer must be such that:
          (i) it cannot be re-characterised by a court or other body as a secured loan; or
          (ii) it cannot be avoided in a bankruptcy or insolvency proceeding involving the originator of the assets;

          Example

          The sale should not be a fraudulent transfer in anticipation of bankruptcy or a preference payment
          (b) the bankruptcy or insolvency of the originator must not affect the assets transferred and the issuer of the sukuk must be able to enforce collection and other rights against the source of the income without any hindrance resulting from the bankruptcy or insolvency of the originator;
          (c) the transfer must be perfectible at the election of the issuer; and
          (d) the sale must be free and clear of all prior overriding liens.
          (3) The transfer of assets must be evidenced by a written contract for their sale to the sukuk holders.

          Note For the covenants and declarations that must be included in the transaction documents, see rule 10.2.27.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.9 Effects of true sale on originator

          For asset-backed sukuk, the effects of a true sale on the originator include:

          (a) derecognition, from the originator's balance sheet, of the assets sold, so that the assets become bankruptcy-remote (and therefore not subject to claw back by a liquidator in the event of the originator's liquidation); and
          (b) the originator ceasing to have any financial liability to the sukuk holders in relation to the assets.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.10 Effects of true sale on sukuk holders

          For asset-backed sukuk, the effects of a true sale on sukuk holders include:

          (a) giving the holders a legally recognised ownership interest over the underlying assets;
          (b) giving the holders realisable security over the underlying assets;
          (c) giving the holders a right to payments of the principal and profits;
          (d) insulating the holders from exposure to any financial problems of the originator;
          (e) exposing the holders (as owners) to losses in the event of impairment of the assets; and
          (f) in case of a default of the sukuk (for example, because ijarah lessees of the assets fail to pay what is due), giving the holders a claim to the assets (but not to the originator).

          Note In contrast to rule 10.2.10 (f), recourse to the originator is possible in some asset-based sukuk (see rule 10.2.14 (2) (b) (iii))
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.11 Prohibition against advanced undertaking to repurchase

          (1) If a sukuk issuance satisfies the criteria for a true sale of the assets, the risks to the sukuk holders of the payments of the principal and profits must depend on the performance of the underlying assets and not on any other mechanism such as a repurchase undertaking.

          Note In a sukuk securitisation, the applicable risks are those of the underlying assets, and these will, in principle, be reflected in any credit rating issued by an ECRA.
          (2) The mudarib (investment manager), sharik (partner) or wakeel (agent) must not undertake in advance to repurchase the underlying assets at maturity for their nominal or par value.
          (3) A repurchase undertaking to cover risks arising from mudarabah sukuk, musharakah sukuk or wakalah sukuk may be built into the structure of the sukuk only if the mudarib, sharik or wakeel undertakes to repurchase the assets at maturity for:
          (a) their net value;
          (b) their market value;
          (c) their fair value; or
          (d) a price to be agreed at the time of repurchase.
          (4) However, the originator (as lessee) of a securitisation of a pool of ijarah assets may undertake to purchase the assets at maturity for their nominal or par value, but only if the originator is not also a mudarib, sharik or wakeel in relation to the securitisation.
          (5) In this rule:

          repurchase undertaking means a unilateral binding promise, made by the originator to the issuer or trustee, to purchase the sukuk assets at a future date or on the occurrence of certain events (such as maturity of the sukuk or exercise of early redemption right by sukuk holders).
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK Division 10.2.C IBANK Division 10.2.C Risk management of securitisation

        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.12 Role of governing body — securitisation

          (1) An Islamic banking business firm's governing body must oversee the firm's securitisation exposures.
          (2) The governing body:
          (a) must understand, and set the scope and purpose of, the firm's sukuk securitisation; and
          (b) must be aware of the risks and other implications associated with sukuk securitisation.
          (3) The governing body must ensure that the firm's senior management establishes and implements securitisation policies that include:
          (a) appropriate risk management systems to identify, measure, monitor, report on and control or mitigate the risks arising from the firm's involvement in securitisation; and
          (b) how the firm monitors, and reports on, the effect of securitisation on its risk profile.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.13 Policies — Shari'a compliance

          An Islamic banking business firm must establish and implement policies to ensure that the firm's offer documents for sukuk are sufficiently clear and precise to eliminate the risk of gharar or any other activity prohibited by Shari'a.

          Note Under rule 7.2.1 an Islamic banking business firm must establish and implement policies to ensure that its business is conducted in accordance with Shari'a. The policies must include effective and comprehensive procedures so that the firm complies with Shari'a (in general and in relation to the requirements for Islamic financial contracts) and with the fatwas, rulings and guidelines issued by its Shari'a supervisory board.

          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.14 Risk management of complex sukuk

          (1) For the issuance of complex sukuk structured in the form of convertible sukuk or hybrid sukuk, an Islamic banking business firm must evaluate:
          (a) the risks underlying the issuance;
          (b) the nature of the contracts or structures being combined; and
          (c) any legal risks applicable to the structure.

          Example of legal risk

          risk arising from the interaction between a Shari'a contract and civil law
          (2) Other issues that the firm must evaluate include:
          (a) whether the underlying assets comply with Shari'a;
          (b) the recourse available to holders:
          (i) against the underlying assets;
          (ii) against an obligor such as the issuer or a guarantor; or
          (iii) for asset-based sukuk — against the assets or obligors in subparagraph (i) or (ii), or against the originator (who retained legal title to the assets); and
          (c) valuation and provisioning required (if necessary) for tranches held by the firm.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.15 Relation to internal capital adequacy assessment

          An Islamic banking business firm must be able to demonstrate to the Regulatory Authority that the firm's ICAAP captures the following specific risks relating to securitisation:

          (a) credit risk, market risk, liquidity risk and reputation risk for each securitisation exposure;
          (b) potential delinquencies and losses on the exposures;
          (c) risks arising from the provision of credit enhancements and liquidity facilities; and
          (d) risks arising from guarantees provided by monoline insurers and other third parties.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK Division 10.2.D IBANK Division 10.2.D Credit enhancement

        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.16 Credit enhancement

          (1) Credit enhancement, of sukuk, is the raising of the credit quality of the sukuk above that of the underlying assets. The mechanisms for credit enhancement include:
          (a) over-collateralisation;
          (b) excess spread;
          (c) cash collateral; and
          (d) takaful protection.
          (2) The purpose of credit enhancement is for the sukuk to obtain higher credit rating from ECRAs (and thereby reduce both the credit risk to the sukuk holders and the funding cost of the securitisation for the originator).

          Note For the use of ECRAs, see rules 4.3.7 and 4.3.8 and Division 10.2.E.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.17 Providing credit enhancement

          (1) Credit enhancement in a sukuk structure may be provided:
          (a) internally, through an issuer-provided credit enhancement structure such as an excess spread reserve, over-collateralisation or a cash collateral account; or
          (b) externally, through a third-party guarantee credit enhancement structure such as takaful or a cash collateral account.
          (2) In an issuer-provided credit enhancement, the issuer would provide credit enhancement by assuming part of the credit risk of the underlying assets.
          (3) In a third-party guarantee credit enhancement, a party (the guarantor) other than the issuer assumes (indefinitely or for a fixed period) all or part of the credit risk. The guarantor must not have a right of recourse to the originator.
          (4) Unless the terms of the guarantee provide otherwise, a claim must first be made on the underlying assets before any claim is made against the guarantor.

          Note For the treatment of credit enhancement provided by sukuk structure, see rule 10.4.5.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.18 Credit enhancement — over-collateralisation

          An originator may retain a small equity participation in a pool of securitised assets to provide over-collateralisation.

          Example

          The originator of a securitisation of a pool of ijarah lease assets might securitise 90% of the pool and retain 10% as an equity position (that is, a residual claim). The sukuk holders would be entitled to income based on 90% of the rental income from the pool, and the originator would be entitled to income based on the remaining 10%.

          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.19 Credit enhancement — excess spread

          (1) Excess spread is the difference between:
          (a) the expected periodic net income from the securitised assets; and
          (b) the periodic amounts payable to the sukuk holders.
          (2) Excess spread may be built into a sukuk structure by the issuer retaining a percentage of the periodic net income if the net income is in excess of the target level of the periodic payments to the sukuk holders. The issuer must keep any amount retained in an excess spread reserve.
          (3) If the net income for a period falls below the level required to meet the target level of the payments to the sukuk holders, the issuer may release an amount from the excess spread reserve to make good, in whole or in part, the shortfall.
          (4) The issuer must not establish an excess spread reserve unless:
          (a) the reserve is disclosed in the transaction documents;
          (b) a summary of the policies for transferring funds to and from the reserve is included in the transaction documents; and
          (c) the firm's governing body has approved the basis for computing the amounts to be transferred to and from the reserve.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.20 Credit enhancement — cash collateral account

          (1) Cash collateral account is a segregated trust account that is funded when a new series of sukuk is issued. The purpose of the account is to cover any shortfall (when the excess spread falls below zero) in the payment of coupons, principal or servicing expenses.
          (2) The account may be funded:
          (a) by the issuer; or
          (b) more commonly, by the originator or another third party through qard.
          (3) The pooling and servicing agreements of the sukuk issuance must state the amount of the cash collateral based on a specified percentage of the sukuk issued.
          (4) The amount in the account may be invested in high-rated sukuk to generate profits.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.21 Credit enhancement — takaful protection

          A third party may provide takaful protection to sukuk holders against losses due to defaults or rating downgrades of sukuk.

          Example of default

          In ijarah sukuk, non-payment of rentals or redemption price by the lessee (originator).

          Note Takaful protection against losses due to defaults or downgrades is permitted, because it is not a credit default swap in any way. The takaful participants have an insurable interest in the form of their credit exposures.

          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK Division 10.2.E IBANK Division 10.2.E External ratings

        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.22 External credit rating agencies

          (1) Depending on the securitisation structure, 1 or more ECRAs may be involved in rating the sukuk securitisation. An Islamic banking business firm must use only ECRAs to risk-weight securitisation exposures.

          Note For the use of ECRAs in general, see rules 4.3.7 and rule 4.3.8.
          (2) Because investors are not concerned with the credit strength of the originator or issuer in a sukuk securitisation, an ECRA that is rating the sukuk must assess the quality of the underlying pool of assets and the robustness of the structure. In assigning a rating, the ECRA must consider:
          (a) the quality of the asset portfolio;
          (b) the solvency of the originator or the issuer;
          (c) the perfection of the legal structure;
          (d) the tax risks;
          (e) the title to the securitised assets;
          (f) the risks of set-off and prepayment;
          (g) the nature and structure of the sukuk.

          Note A change in the rating for a sukuk issue may be due to deterioration in the performance of the collateral, heavy utilisation of credit enhancement or downgrade of a supporting rating (for example, a takaful company that was underwriting takaful on the pool of the assets).
          (3) For asset-based sukuk (where only beneficial ownership of the underlying assets is transferred), the rating will depend on a combined view of:
          (a) the strength of the rating of the originator or issuer; and
          (b) the quality of the asset pool.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.23 IBANK 10.2.23 Ratings must be publicly available

          (1) A credit rating assigned by an ECRA must be publicly available.
          (2) The loss and cash flow analysis for the securitisation, and the sensitivity of the rating to changes in the assumptions on which it was made, must also be publicly available.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

          • IBANK 10.2.23 Guidance

            Information required under this rule should be published in an accessible form for free. Information that is made available only to the parties to a securitisation is not considered publicly available.

            Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.24 Ratings must be applied consistently

          (1) A credit rating assigned by an ECRA must be applied consistently across a given type of securitisation exposure.
          (2) An Islamic banking business firm must not use an ECRA's (the first ECRA's) credit rating for 1 or more tranches and another ECRA's rating for other tranches within the same securitisation structure (whether or not those other tranches are rated by the first ECRA).

          Note Under rule 4.3.8:
          (a) if there are 2 different assessments by ECRAs, the higher risk-weight must be applied; and
          (b) if there are 3 or more different assessments by ECRAs, the assessments corresponding to the 2 lowest risk-weights should be referred to and the higher of those 2 risk-weights must be applied.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.25 Effect of ratings of issuer and issue

          If the issuer of sukuk is rated (but the issue is not), any eligible collateral may be used for credit risk mitigation. If the issue is rated, collateral included as part of the sukuk structure must not be used for credit risk mitigation.

          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK Division 10.2.F IBANK Division 10.2.F Risk transference, bankruptcy remoteness and credit risk assessment

        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.26 Recognition of risk transference (asset derecognition criteria)

          The originator of a sukuk issuance may exclude, from the calculation of its risk-weighted assets, exposures relating to the securitised assets only if:

          (a) the immediate transferee of the underlying assets is an SPE, and the holders of the legal or beneficial interests in the SPE have the right to pledge or exchange such interests without restriction;
          (b) substantially all credit risks (and price risk, if any) associated with the securitised assets have been transferred;
          (c) the originator has no direct or indirect control over the securitised assets;
          (d) the securitised assets are bankruptcy-remote from the originator;
          (e) the securitised assets held by the issuer cannot be consolidated with the assets of the originator or the issuer's parent in case of bankruptcy of any of them;
          (f) a qualified legal counsel (whether external or in-house) has given a written reasoned opinion that paragraphs (c) to (e) are satisfied;
          (g) clean-up calls:
          (i) must be at the discretion of the issuer;
          (ii) must not provide credit enhancement; and
          (iii) may be exercised only when 10% or less of the purchase consideration for the securitised assets remains to be paid; and

          Note A clean-up call is an option that permits the securitisation exposures to be called before all of the underlying exposures or securitisation exposures have been repaid.
          (h) sukuk holders have a claim only on the securitised assets, and have no claim against the originator.

          Note Under rule 10.4.1, an originator that meets the requirements set out in this rule must, however, hold regulatory capital against any exposures that it retains in relation to the securitisation (including exposures arising from the provision of credit enhancements and liquidity facilities).
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.27 Conditions for bankruptcy remoteness

          (1) The conditions for bankruptcy remoteness include those set out in subrules (2) to (5).
          (2) If the issuer becomes bankrupt, the issuer's assets are to be distributed in accordance with the law or a court order (rather than in accordance with the contractual arrangements involving the issuer).
          (3) The transaction documents for the sale of the underlying assets to the sukuk holders must include:
          (a) separateness covenants to ensure:
          (i) bankruptcy remoteness of the issuer's assets; and
          (ii) non-consolidation of the securitised assets held by the issuer with the assets of the originator or the issuer's parent in case of bankruptcy of any of them;
          (b) non-competition declarations under which the investors and the issuer agree that neither will compete against the other in filing for bankruptcy; and
          (c) bankruptcy declarations under which the originator, investors, providers of credit enhancements, providers of liquidity facilities and other parties agree not to initiate involuntary bankruptcy proceedings against the issuer.
          (4) The issuer must declare, in its constitutional documents and in the transaction documents, not to initiate voluntary bankruptcy proceedings.
          (5) The covenants and declarations in this rule must be supported by a written and reasoned opinion of a qualified legal counsel. The legal opinion must conclude that the covenants and declarations are enforceable.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.28 Need for credit risk assessment

          (1) An Islamic banking business firm must carry out credit risk assessment of its securitisation exposures in accordance with this rule. This rule applies to securitisation exposures in the firm's banking book and trading book.
          (2) The firm must, on an ongoing basis, have a clear understanding of the nature and features of each securitisation exposure (including the risk characteristics of the assets underlying the exposure). This requirement applies whether the exposure is on-balance-sheet or off-balance-sheet.
          (3) Because payments of the principal and profits to sukuk holders depend on the performance of the underlying assets, the firm must assess the performance of the sukuk on an ongoing basis.

          Note To properly assess the performance of sukuk, the firm must have on-going and timely access to performance information about the underlying assets. The information should include exposure type, percentage of financing 30, 60 and 90 days past due, default rates, prepayment rates, financings in foreclosure, property type, occupancy, average credit score, progress of underlying project, average financing-to-value ratio, industry diversification and geographic diversification.
          (4) The firm must, at all times, understand the sukuk's structural features that may materially affect the performance of its securitisation exposures (such as credit enhancements, liquidity facilities, triggers, and deal-specific definitions of default).
          (5) While the firm may rely on external credit risk assessments, it must ensure that external assessments do not substitute for the firm's own due diligence and credit risk assessment.

          Note For the use of ECRAs, see rules 4.3.7 and 4.3.8 and Division 10.2.E.
          (6) If the firm fails to comply with this rule in relation to a securitisation exposure, the Regulatory Authority may direct the firm:
          (a) to apply a risk-weight of 1,250% to the exposure; or
          (b) to deduct the amount of the exposure from its regulatory capital.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

        • IBANK 10.2.29 Capital treatment to be based on economic substance

          (1) The capital treatment of a securitisation exposure must be determined on the basis of the economic substance, rather than the legal form, of the securitisation structure. If an Islamic banking business firm is uncertain about whether a transaction is a securitisation, the firm must consult with the Regulatory Authority.
          (2) Despite anything in these rules, the Regulatory Authority may look through the structure to the economic substance of the transaction and:
          (a) vary the capital treatment of a securitisation exposure; or
          (b) reclassify a transaction as a securitisation and impose a capital requirement or limit on the transaction.
          Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK Part 10.3 IBANK Part 10.3 Capital requirements for holdings of sukuk

      Amended by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.3.1 Rated Sukuk

        The risk-weights for sukuk rated by an ECRA are those in accordance with table 4.4.7A and table 4.4.7B.

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

      • IBANK 10.3.2 Unrated Sukuk

        (1) The risk-weights for unrated sukuk (that is, sukuk that are not rated or sukuk that are rated by a rating agency that is not an ECRA) must be determined based on the underlying structure and assets, in accordance with this Part.
        (2) For unrated sukuk that use a combination of the Shari'a-compliant contracts, the capital requirement must be calculated taking into account the risk implications of the overall structure and assets.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.3 Sukuk Issued by Qatar

        Sukuk issued by the State of Qatar or the Qatar Central Bank are subject to a risk-weight of 0%.

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

      • IBANK 10.3.4 Sukuk Issued by IILMC

        (1) Sukuk issued by the International Islamic Liquidity Management Corporation (or IILMC) must be risk-weighted as if they were claims on short-term banking exposure.
        (2) Rated sukuk issued by IILMC are subject to the risk-weights based on their ratings, as set out in table 10.3.4. Unrated sukuk issued by IILMC are subject to 20% risk-weight.

        Table 10.3.4 Risk-weights for sukuk issued by IILMC

        Note In the table, the ratings are given according to Standard & Poor's conventions. If a claim or asset is not rated by Standard & Poor's, its ratings must be mapped to the equivalent Standard & Poor's rating.

        AAA to A- BBB+ to BBB- BB+ to BB- B+ to B- below B-
        20 20 50 50 150

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

      • IBANK 10.3.5 Sukuk Awaiting Transfer of Assets

        For sukuk where the legal transfer of assets has not taken place, the risk-weight is that of the originator (based on the ratings issued by an ECRA), subject to any Shari'a-compliant credit enhancement by the issuer. If the originator is unrated, the risk-weight is 100%.

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

      • IBANK 10.3.6 Sukuk with Combination of Assets

        (1) Sukuk comprising a combination of different kinds of assets (such as shares, leasable assets, receivables from murabahah and receivables from salam) must be risk-weighted according to the respective percentages of the assets allocated in the investment.
        (2) If the Islamic banking business firm or the Regulatory Authority does not have any reliable information to determine the nature or basis of the underlying assets of the sukuk, a risk-weight of 100% must be applied if the sukuk are listed or 400% if the sukuk are unlisted.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.7 Salam Sukuk

        (1) Salam sukuk represent fractional ownership of the capital of a salam transaction, where the salam capital is constituted by an advance payment to a counterparty as supplier of a commodity (the subject matter) to be delivered at a future date.
        (2) The gross return to the sukuk holders consists of the margin or spread between the purchase price of the subject matter and its selling price after delivery.
        (3) In some sukuk issues, a third party gives an undertaking that the subject matter will be sold at a price exceeding the purchase price by a specified margin. The undertaking may be achieved by means of a parallel salam transaction in which a third party purchases the subject matter for delivery on the same delivery date as in the original salam contract.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.8 Treatment of Salam Sukuk without Parallel Salam

        (1) The risk-weight for salam sukuk without parallel salam must be based on the counterparty (salam supplier) unless the salam capital is guaranteed by a third party.
        (2) If the salam capital is guaranteed by a third party, the risk-weight must be based on the guarantor, but only if the guarantor's risk-weight is lower than that of the salam supplier. The risk-weight for an unrated salam supplier or an unrated guarantor is 100%.
        (3) The market risk capital charge for salam sukuk without a parallel salam contract or other hedge is 15% on the long position of salam exposures (that is, the charge for the underlying salam contract, as set out in rule 6.7.4).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.9 Treatment of Salam Sukuk with Parallel Salam

        (1) The risk-weight for salam sukuk with parallel salam must be based on the counterparty (salam supplier) unless the salam capital is guaranteed by a third party.
        (2) If the salam capital is guaranteed by a third party, the risk-weight must be based on the guarantor, but only if the guarantor's risk-weight is lower than that of the salam supplier. The risk-weight for an unrated salam supplier or an unrated guarantor is 100%.
        (3) A salam sukuk issuance that is structured with an undertaking from the issuer that the underlying commodity will be sold to a third party at a specified selling price (by means of a parallel salam contract) must carry the risk-weight of the third party.
        (4) There is no capital charge for market risk that consists of basis and forward gap risks (namely, the risk that the hedge may be impaired because the underlying commodity delivered may be of inferior quality or may be delivered later than the contractual date). This is because the underlying commodity is normally traded on an exchange that eliminates the risk of late delivery, non-delivery or delivery of a commodity that is of inferior quality.
        (5) The capital charge for salam sukuk with a parallel salam contract or other hedge is 15% on the net position of the salam exposures plus 3% on the gross position of those exposures.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.10 Istisna Sukuk

        (1) Istisna sukuk represent fractional shares in the financing of a project to construct an asset at a price to be paid in future instalments. The total of those instalments equals the face value of the sukuk plus markup.
        (2) The sukuk can be in the form of serial notes or certificates with different maturity dates that match the progress schedule of instalments as agreed between the sukuk issuer (as manager on behalf of the sukuk investors) and the construction firm.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.11 Treatment of Istisna Sukuk without Parallel Istisna

        (1) The risk-weight for istisna sukuk where there is no parallel istisna must be based on the issuer.
        (2) If a third party provides a guarantee, the risk-weight for the istisna sukuk must be based on the guarantor, but only if the guarantor's risk-weight is lower than that of the issuer. The risk-weight for an unrated issuer or an unrated guarantor is 100%.
        (3) To account for the price risk to which the underlying istisna is exposed, a risk-weight of 20% must be added in calculating the credit risk capital charge.
        (4) A risk-weight of 400% applies if the returns to the sukuk holder come from the cash flow of the underlying asset (for example, a toll road or other infrastructure project).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.12 Treatment of Istisna Sukuk with Parallel Istisna

        (1) In the case of istisna sukuk with parallel istisna, the relevant asset may be constructed on behalf of an ultimate counterparty or off-taker with whom the Islamic banking business firm enters into the parallel istisna contract. In this case, there is a credit risk exposure to the ultimate counterparty for the payment due under the parallel contract.
        (2) The credit risk starts at the commencement of the construction work until the whole amount or all the instalments are paid by the ultimate counterparty.
        (3) The risk-weight for the credit exposure must be based on the ultimate counterparty.
        (4) If a third party provides a guarantee, the risk-weight must be based on the guarantor, but only if the guarantor's risk-weight is lower than that of the ultimate counterparty. The risk-weight for an unrated customer or an unrated guarantor is 100%.
        (5) A risk-weight of 400% applies if the returns to the sukuk holder come from the cash flow of the underlying asset (for example, a toll road or other infrastructure project).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.13 Murabahah Sukuk

        (1) In murabahah sukuk, the originator (and, in some cases, the issuer) of the sukuk is the buyer (on credit) of the murabahah asset and the sukuk investors are the sellers (on credit) of that asset. The funds provided by the sukuk investors (and received by the issuer) represent the murabahah selling price of the asset.
        (2) The sukuk holders own the murabahah and are entitled to receive payment of that receivable (the selling price of the asset) either in instalments or in a lump sum at the end of the murabahah contract.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.14 Treatment of Murabahah Sukuk

        (1) The risk-weight for murabahah sukuk must be based on the issuer or other obligor (as rated by an ECRA). If the issuer or obligor is unrated, the risk-weight is 100%.
        (2) If the sukuk structure involves funding of an asset purchase in foreign currency, the relevant exposure must be calculated in accordance with Part 6.2 (foreign exchange risk).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.15 Ijarah and IMB Sukuk

        (1) Ijarah and IMB sukuk represent the holder's proportionate ownership in leased assets where the sukuk holders collectively assume the rights and obligations of the lessor. The sukuk holders are entitled to a share of the lease rentals in proportion to their ownership shares in the leased assets.
        (2) As a proportionate owner, an ijarah or IMB sukuk holder assumes a proportionate share of:
        (a) any loss, if the leased asset is destroyed; or
        (b) the cost of meeting the obligation to provide an alternative asset.

        Note If the ijarah or IMB sukuk holders fail to provide an alternative asset if the original leased asset is destroyed, the lessee can terminate the lease without paying future rentals.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.16 Treatment of Ijarah and IMB Sukuk

        The risk-weight for ijarah or IMB rentals must be based on the lessee's counterparty credit risk, because the residual value risk of the underlying asset is not borne by the sukuk holders.

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

      • IBANK 10.3.17 Musharakah Sukuk

        Musharakah sukuk represent the direct proportionate ownership shares of the holders in the assets of a private commercial enterprise or project, where the subscription money is normally used to purchase non-liquid assets.

        Note Musharakah sukuk are profit-sharing and loss-sharing instruments where the exposures are of the nature of equity positions in the banking book, except in the case of investments (normally short-term) in assets for trading purposes.

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

      • IBANK 10.3.18 Treatment of Musharakah Sukuk

        (1) The treatment of musharakah sukuk must be based on the intent of the underlying investments in musharakah as set out in this rule.
        (2) For a private commercial enterprise that undertakes trading activities, the risk-weight must be as set out in Division 4.5.D (equity-based contracts) and Chapter 6 (market risk).
        (3) For a private commercial enterprise that undertakes a business venture or project (other than an enterprise that undertakes trading activities), the risk-weight for equity participation risk in respect of an equity exposure in a business venture or project must be measured according to Division 4.5.D (equity-based contracts) and Chapter 6 (market risk).
        (4) For a joint ownership of real estate or movable assets as income-producing musharakah investments with murabahah subcontracts, the risk-weight must be based on the murabahah subcontracts and the counterparties in those contracts.
        (5) For a joint ownership of real estate or movable assets as income-producing musharakah investments through leasing to third parties by means of ijarah, the risk-weight must be based on the counterparty (that is, the lessee).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.19 Mudarabah Sukuk

        (1) In mudarabah sukuk, the sukuk holders subscribe to the certificates issued by a mudarib. The holders share the profits and bear any losses arising from the mudarabah operations.
        (2) The returns to the holders depend on the revenue produced by the underlying investment.
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.20 Treatment of Mudarabah Sukuk

        (1) The treatment of mudarabah sukuk must be based on the intent of the underlying investments in mudarabah as set out in this rule.
        (2) For a private commercial enterprise that undertakes trading activities, the risk-weight must be as set out in Division 4.5.D (equity-based contracts) and Chapter 6 (market risk).
        (3) For a private commercial enterprise that undertakes a business venture or project (other than an enterprise that undertakes trading activities), the risk-weight for equity participation risk in respect of an equity exposure in a business venture or project must be measured according to Division 4.5.D (equity-based contracts) and Chapter 6 (market risk).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

      • IBANK 10.3.21 Wakalah Sukuk

        (1) In wakalah sukuk, the sukuk holders provide the capital for Shari'a-compliant investment activities, and the investment agent (wakeel) undertakes to invest the funds. These sukuk entitle the holders to a return in proportion to their investment in the underlying assets and a right (under a purchase undertaking) to buy all or a proportion of the underlying assets if specified conditions are fulfilled.
        (2) In wakalah sukuk, the SPE acting as the principal on behalf of the sukuk holders appoints a wakeel to invest funds provided by the sukuk holders into a pool of assets. The wakeel lends its expertise and manages those investments on behalf of the SPE for a particular period, in order to generate a return for the sukuk investors.
        (3) The SPE and the wakeel enter into a wakalah agreement to govern the appointment, scope of services and fees payable to the wakeel, if any.
        (4) The pool of assets may comprise a broad range of Shari'a-compliant assets that selected by the wakeel for a period corresponding to the duration of the sukuk (for example, Shari'a-compliant equities, Shari'a-compliant assets such as real estate and cars, murabahah, istisna, other sukuk).

        Note While the wakalah structure has some similarities to the mudarabah structure, the ways in which holders receive their share of profits differ:
        •   wakalah sukuk holders receive the return on their investments less the management fees payable to the wakeel
        •   in a mudarabah structure, the profits are divided between the parties according to agreed ratios.
        Amended by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.3.22 Treatment of Wakalah Sukuk

        (1) The treatment of wakalah sukuk must be based on the intent of the underlying investments in wakalah as set out in this rule.
        (2) For investments in trading activities in foreign exchange, shares or commodities, the risk-weight must be as set out as set out in Division 4.5.F (service-based contracts) and Chapter 6 (market risk).
        (3) For investments in assets that can be leased or sold on a murabahah basis as income-producing wakalah investments with murabahah subcontracts, the risk-weight must be based on the murabahah subcontracts and the counterparties in those contracts.
        (4) For investments in assets that can be leased or sold on a murabahah basis as income-producing wakalah investments through leasing to third parties by means of ijarah, the risk-weight must be based on the counterparty (that is, the lessee).
        Derived from QFCRA RM/2015-2 (as from 1st January 2016).

    • IBANK Part 10.4 IBANK Part 10.4 Capital requirements where firm is originator or issuer

      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.4.1 Retained securitisation exposures

        (1) An Islamic banking business firm that acts as originator of a sukuk issuance may, despite having transferred the underlying assets, continue to be exposed (through retained securitisation exposures) in relation to the securitisation. The firm must hold regulatory capital against all of its retained securitisation exposures.
        (2) The sources of retained securitisation exposures include:
        (a) investments in the securitisation (including the investment required under subrule (3));
        (b) credit enhancements provided by the firm; and
        (c) liquidity facilities provided by the firm.
        A repurchased securitisation exposure must be treated as a retained securitisation exposure.

        Note 1 For paragraph (a), the exposure arising from investments by an Islamic banking business firm in a securitisation originated by the firm is an on-balance sheet exposure.

        Note 2 For paragraphs (b) and (c), the exposures arising from the provision of credit enhancements and liquidity facilities by an Islamic banking business firm in relation to a securitisation originated by the firm are off-balance sheet exposures.
        (3) An Islamic banking business firm that acts as originator of a sukuk issuance must retain 5% of the total issuance.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.4.2 Treatment of on-balance sheet retained securitisation exposures

        (1) The risk-weighted asset amount of an on-balance sheet retained securitisation exposure is calculated by multiplying the exposure by the applicable risk-weight in table 10.4.2.

        Table 10.4.2 Risk-weights based on ECRA rating

        Note In the table, the ratings are given according to Standard & Poor's conventions. If a claim or asset is not rated by Standard & Poor's, its ratings must be mapped to the equivalent Standard & Poor's rating.

        long-term rating securitisation exposure % re-securitisation exposure %
        AAA to AA- 20 40
        A+ to A- 50 100
        BBB+ to BBB- 100 225
        BB+ to BB- 350 650
        B+ and below or unrated As directed by the Regulatory Authority, apply 1,250% risk-weight or deduct the amount of the exposure from the firm's regulatory capital (see rule 10.4.2 (2))


        short-term rating securitisation exposure % re-securitisation exposure %
        A-1 20 40
        A-2 50 100
        A-3 100 225
        Below A-3 As directed by the Regulatory Authority, apply 1,250% risk-weight or deduct the amount of the exposure from the firm's regulatory capital (see rule 10.4.2 (2))
        (2) If an exposure is to be deducted from the firm's regulatory capital, the amount of the deduction may be calculated net of any specific provision taken against the exposure.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.4.3 Treatment of off-balance sheet retained securitisation exposures

        For off-balance-sheet retained securitisation exposures, an Islamic banking business firm must apply the relevant credit conversion factor, then must multiply the resulting credit equivalent amount by the applicable risk-weight in table 10.4.2.

        Note For the treatment of off-balance sheet exposures arising from:

        (a) a credit enhancement provided by the firm, see rule 10.4.4;
        (b) a credit enhancement provided by sukuk structure, see rule 10.4.5; and
        (c) a liquidity facility provided by the firm, see rule 10.4.6.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.4.4 Treatment of credit enhancement provided by firm that is also originator or issuer

        If an Islamic banking business firm that is the originator or issuer of a sukuk issuance also provides credit enhancement in relation to the sukuk, the risk-weight of the exposure from the enhancement must be calculated as if the firm were an investor in the sukuk securitisation, so that:

        (a) if the enhancement is provided in relation to an asset-backed sukuk issuance (that is, an issuance where there is transfer of both legal and beneficial ownership over the assets) — the firm must treat the enhancement provided based on the risk of the underlying assets; or
        (b) if the enhancement is provided in relation to an asset-based sukuk issuance (that is, an issuance where there is transfer of only beneficial ownership over the assets) — the firm must treat the enhancement provided based on the ECRA rating of the firm as originator.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.4.5 Treatment of credit enhancement provided by structure

        (1) An exposure in a credit enhancement structure must be risk-weighted as set out in table 10.4.5.

        Table 10.4.5 Risk-weights for exposures arising from structure

        Note In the table, the ratings are given according to Standard & Poor's conventions. If a claim or asset is not rated by Standard & Poor's, its ratings must be mapped to the equivalent Standard & Poor's rating.

        AAA to AA- A+ to A- BBB+ to BBB- BB+ to BB- B+ and below or unrated
        20 50 100 350 As directed by the Regulatory Authority, apply 1,250% risk-weight or deduct the amount of the exposure from the firm's regulatory capital (see rule 10.4.5 (2))
        (2) If an exposure is to be deducted from the firm's regulatory capital, the amount of the deduction may be calculated net of any specific provision taken against the exposure.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.4.6 Treatment of liquidity facility provided by firm that is also originator or issuer

        (1) If an Islamic banking business firm that is the originator or issuer of a sukuk issuance also provides a liquidity facility in relation to the sukuk, the risk-weight of the exposure from the facility (other than an eligible servicer cash advance facility) must be calculated by:
        (a) applying:
        (i) a 50% credit conversion factor (regardless of the maturity of the liquidity facility) if the facility provided is an eligible liquidity facility; or
        (ii) a 100% credit conversion factor if the facility provided is not an eligible liquidity facility; and
        (b) multiplying the resulting credit equivalent amount by the applicable risk-weight in table 10.4.2, depending on the credit rating of the firm (or by 100% if the firm is unrated).
        However, if an ECRA rating of the facility is itself used for risk-weighting the facility, a 100% credit conversion factor must be applied.

        Note For eligible liquidity facility, see rule 10.4.6 (4).
        (2) For an eligible servicer cash advance facility, a zero percent risk-weight must be applied. Eligible servicer cash advance facility is a liquidity facility under which the servicer grants, to the SPE, an advance (through an interest-free loan or qard) to ensure timely payment to sukuk holders.

        Note Shari'a requires that a servicer cash advance facility must remain separate from the sukuk undertaking and that the separation must be properly documented. For servicer, see note 1 (g) and note 3 under rule 10.2.2.
        (3) Liquidity facility, for sukuk, is a commitment from the facility provider to provide liquid funds if:
        (a) funds are needed to meet contractual payments to sukuk holders; and
        (b) there is a delay between the date of collection of the related cash flows and the date on which the payment to the sukuk holders is due.
        Example

        Timing mismatches between cash collections from the underlying assets (such as ijarah rentals) and the scheduled payments to the sukuk holders in certain sukuk structures may require liquidity facilities to be built into the structures.
        (4) To be an eligible liquidity facility:
        (a) the commitment to provide liquid funds must be in writing and must clearly state the circumstances under which the facility may be availed of and the limits for any draw down;
        (b) drawdowns must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements;
        (c) the facility must not cover any losses incurred in the underlying pool of exposures before a drawdown;
        (d) the facility must not be structured in such a way that drawdowns are certain;
        (e) the facility must be subject to an asset quality test that precludes it from being availed of to cover credit risk exposures that are past due for more than 90 days;
        (f) if the exposures that the facility is required to fund are ECRA-rated securities, the facility can only be used to fund securities that are rated, by an ECRA, investment grade at the time of funding; and
        (g) the facility cannot be availed of after all applicable credit enhancements (whether transaction-specific or programme-wide enhancements), from which the liquidity would benefit, have been exhausted.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK Part 10.5 IBANK Part 10.5 Effect of CRM techniques on capital requirements for sukuk

      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

      • IBANK 10.5.1 Capital relief from CRM techniques obtained by firm

        (1) An Islamic banking business firm that has obtained a CRM technique (such as eligible collateral, an eligible credit derivative, a guarantee from an eligible guarantor or an eligible netting agreement) applicable to a securitisation exposure may reduce its capital requirement for the exposure.
        (2) Collateral pledged by an SPE as part of the securitisation may be used as a CRM technique if it is eligible collateral.

        Note For eligible collateral see rules 4.6.8 and 4.6.9.
        Inserted by QFCRA RM/2017-1 (as from 1st April 2017).