IBANK 4.5.5 Treatment of Istisna and Related Contracts

(1) Under an istisna contract, an Islamic banking business firm is exposed to credit risk if the obligor fails to pay the price, whether during the manufacturing or construction stage, or on completion of the asset.
(2) Under a parallel istisna contract, the firm, as the purchaser of the asset, is exposed to credit risk if the seller fails to deliver the asset at the agreed time and in accordance with the initial istisna buyer's specification.
(3) The parallel istisna seller's failure to deliver the asset does not discharge the firm's obligation to deliver the asset to the obligor under the initial istisna contract. Thus, the firm is also exposed to the potential loss of making good the shortcoming or acquiring the asset elsewhere.
(4) The firm must not net an istisna exposure against a parallel istisna exposure.

Table 4.5.5A Credit risk-weights for istisna without parallel istisna

stage of contract credit risk-weight
unbilled work-in-process based on the ultimate counterparty's type and rating under Part 4.4
unpaid billed work-in-process based on the ultimate counterparty's type and rating under Part 4.4

Table 4.5.5B Credit risk-weights for istisna with parallel istisna

stage of contract credit risk-weight
unbilled work-in-process based on the ultimate counterparty's type and rating under Part 4.4
unpaid billed work-in-process based on the ultimate counterparty's type and rating under Part 4.4

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