Guidance Note In Connection with the Capital Adequacy Standa

Top 20 FREQUENT WORDS

ratings 70 financial 59 shar<U+012B> 57 ecai 56 default 53 assets 52 rating 51 compliant 47 ecais 44 risk 41 asset 39 iifs 38 recognition 29 instruments 27 ifsb 25 conventional 24 credit 24 criteria 24 finance 24 investment 22

DOCUMENT KEY POINTS

• about the islamic financial services board ifsb the ifsb is an international standard setting organisation that promotes and enhances the soundness and stability of the islamic financial services industry by issuing global prudential standards and guiding principles for the industry broadly defined to include banking capital markets and insurance sectors
• the standards prepared by the ifsb follow a lengthy due process as outlined in its guidelines and procedures for the preparation of standards guidelines which involves among others the issuance of exposure drafts holding of workshops and where necessary public hearings

• sultan bin nasser al suwaidi governor central bank of united arab emirates in alphabetical order of the country the member represents i

• technical committee chairman dr abdulrahman a

• the capital adequacy standard cas issued by the islamic financial services board ifsb in december addresses inter alia the structure and contents of shar ah compliant products and services that are not specifically addressed by the basel committee on banking supervision in the document international convergence of capital measurement and capital standards commonly referred to as basel ii and seeks to standardise the approach to risk weighting such products and services
• a conventional bank that has exposure to shar ah compliant assets may wish to use ratings by ecai s recognised in line with this guidance note to determine risk weights for those shar ah compliant assets while using ratings by other ecais to determine risk weights for its conventional assets

• rating analysis of shar ah compliant assets may differ from analysis of conventional assets both in terms of the general principles that govern shar ah compliant finance for example the concept of default and in terms of the features of specific financial instruments for example the crd was adopted by the eu commission in june and member states started implementing it from with the most sophisticated approaches being available from
• we do not suggest that shar ah compliant financing assets constitute a a separate asset class since various asset classes may be comprised within this category of assets such as sovereign suk k corporate suk k claims on financial institutions claims arising from asset based financial instruments such as mur bahah or equity rights in partnership entities such as mush rakah or mu rabah

• the principal areas where shar ah compliant finance may differ from conventional finance include though are not limited to the following a different meanings of ratings and the concept of default b priority of claims c corporate governance and the role of the shar ah board d risk mitigation techniques to cater for dcr e definition of capital f trading in suk k does not involve trading in debt unlike conventional bonds g asset valuations and h loss given default
• suk k holders derive their returns either from a an underlying real asset ij rah suk k or pool of assets or the usufruct of such assets which is fractionally owned by the suk k holders rather than being collateral for a debt as with conventional asset backed securities or b a securitised partnership mu rabah or mush rakah suk k in an underlying business venture

• a rating contains two predictive elements a a prediction of the relative creditworthiness of one issuer in relation to other issuers that is the prediction that assets rated aa will be in default less frequently than assets rated a which in turn will be in default less frequently than assets rated bbb and b an assessment of the likelihood that this particular asset will be in default during the rating time frame

• in the case of qar deposits the iifs is contractually required to repay of the principal amount on demand whereas in the case of the psia the amount to be contractually repaid is the current net asset value of the investment which may be more or less than the amount originally invested

• there are four types of criteria which this guidance note recommends that supervisory authorities use when deciding which ecais to recognise a criteria relating to an ecai s rating process internal controls and transparency b criteria relating to an ecai s analytic competence c criteria relating to the accuracy of an ecai s ratings and d criteria relating to an ecai s resources and financial condition

• this methodology should demonstrate that the ecai understands not only the ways in which some general principles underlying shar ah compliant finance differ from general principles underlying conventional finance but also the particular features of shar ah compliant financial instruments that may cause their risk characteristics to differ from conventional financial instruments that may appear similar or even share some similar characteristics for example some shar ah compliant financial instruments typically involve exposures to price risk as well as credit risk while others involve exposures to risk of capital impairment as distinct from default risk

• iifs may respond to this pressure by creating two types of reserves a profit equalisation reserve per which is a reserve appropriated out of gross income before allocating the mu rib s share and an investment risk reserve irr which consists of amounts appropriated out of the income of the investment account holders iah only after the deduction of the mu rib s share

• however in the case of operating ij rah while the credit risk is mitigated by the lessor s right to repossess the assets in the event of default by the lessee the lessor is also exposed to the risk arising from the obligation to ensure that the lessee s right to the services of the asset is not impaired or to provide a substitute asset if necessary to honour that obligation in ij rah according to certain specifications
• how does the ecai incorporate market risk and operational risk as well as credit risk exposures into instruments that originate as credit exposures and into lease based financings and deal with the credit risk on financings that are profit and loss sharing or profit sharing and loss bearing

• an appropriate and agreed method to be applied to determine the profit of the financing can take the form of a certain percentage of either gross or net profit earned by the mu rabah or mush rakah business or any other mutually agreed ter miss in the case of a change in the partnership shares in a mush rakah for example in a diminishing mush rakah the shares changing hands might be valued either at fair value or on some other mutually agreed basis in transaction

• ecais should demonstrate that they have sufficient resources to conduct high quality analysis both when assigning ratings for the first time and when maintaining ratings after they have been assigned
• it is to be emphasised that this guidance note in no way wishes to hinder the development of new and or small rating agencies

• profits generated by that enterprise or activity are shared in accordance with the terms of the mu rabah agreement while losses are to be borne solely by the capital provider unless the losses are due to the mu rib s misconduct negligence or breach of contracted ter miss mur bahah a mur bahah contract refers to a sale contract whereby the iifs sell to a customer at an agreed profit margin plus cost selling price a specified kind of asset that is already in their possession
• istisn an istisn contract refers to an agreement to sell to a customer a non existent asset which is to be manufactured or built according to the buyer s specifications and is to be delivered on a specified future date at a predetermined selling price

• salam a salam contract refers to an agreement to purchase at a predetermined price a specified kind of commodity not available with the seller which is to be delivered on a specified future date in a specified quantity and quality
• suk k suk k are certificates with each sakk representing a proportional undivided ownership right in tangible assets or a pool of assets or in the assets of a specific project or investment activity

Please note, This is an auto generated summary based on sentances position in the document and other factors

DOCUMENT WORD ANALYSIS

Main Category

AlHuda Material\sukuk islamic

KeyWords

asset invest risk ici rate investor origin credit financi structur securitisation NA iif required exposure fund estate servic NA legal

RELATED DOCUMENTS

Capital Adequacy Requirement for Sukuk

Capital Adequacy Requirements for Sukuk, Securitisations and

Credit Card

Guidance Note In Connection with the Capital Adequacy Standa

Guiding Principles on Governance for Islamic Collective Inve

Hawalah

SPV Structure in Sukuk by Ahmed Adil

Sukuk-Backed Financings of Energy Projects by Mark R. Spradl

Sukuk - Issues and way Forward

Sukuk and Basel II Ahmed Adil

DOCUMENT REFERENCES

Number of Pages

21

Published Date

2008-04-02 23:27:00

Full Document

Read the Full Document