IBANK 4.5.6 Treatment of Ijarah and Related Contracts

(1) An Islamic banking business firm that is the lessor under an ijarah contract is exposed to credit risk if the lessee fails to pay the rental amount in accordance with the agreement to lease.
(2) In addition, the firm is exposed to credit risk if the lessee (lease orderer) defaults on its obligation to lease the asset. In this situation, the firm may lease or dispose of the asset to another party, but the firm is also exposed to credit risk if the lessee is not able to compensate it for the losses incurred arising from the disposal of the asset.
(3) In an ijarah contract, the underlying asset is not eligible collateral for purposes of credit risk mitigation.
(4) An IMB contract is treated as a financing agreement and must be risk-weighted in accordance with table 4.5.6.

Table 4.5.6 Credit risk-weights for IMB contracts

stage of contract credit risk-weight
asset available for lease and on firm's balance sheet based on the lessee's type and rating under Part 4.4, with the applicable risk-weight applied to the acquisition cost
lease contract has become binding and rental payments due from lessee based on the lessee's type and rating under Part 4.4, with the applicable risk-weight applied to net receivables (that is, total estimated value of lease receivables for the remaining period plus the residual value of the leased asset at the end of the contract)
(5) An operating ijarah is treated as an investment and must be risk-weighted in accordance with subrule (6), (7), (8) or (9), depending on the leased asset and how the investment is made.
(6) If the investment in is real estate and the investment is made by the firm itself (direct investment exposure), the risk-weighted amount of the direct investment exposure must be calculated by multiplying the carrying value of the asset by 150%.
(7) If the investment is in real estate and the investment is made by the firm indirectly (indirect investment exposure) through subsidiary, its share of equity investment in the capital of such subsidiary must be risk-weighted at 150% and any financing provided by the firm to the subsidiary must be risk-weighted at the same rate.
(8) If the investment is in real estate and the investment is made by the firm indirectly (indirect investment exposure) through a joint venture or partnership, the indirect investment exposure must be risk-weighted at:
(a) 300% if the firm has majority ownership over the asset and can exit the investment at any time; or
(b) 400% if the firm does not have majority ownership over the asset or cannot exit the investment at any time.
(9) If the investment is in physical assets (such as commercial vehicles, passenger cars, ships, aircraft, railway machinery, computers, business machines and other types of equipment), the exposure must be risk-weighted at:
(a) 300% if the firm has majority ownership over the asset and can exit the investment at any time; or
(b) 400% if the firm does not have majority ownership over the asset or cannot exit the investment at any time.
Derived from QFCRA RM/2015-2 (as from 1st January 2016).