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).