Capital Adequacy Framework for Islamic Banks

528 Pages·2016·3.5 MB·English

Capital Adequacy Framework
for Islamic Banks
(Risk-Weighted Assets)
Issued on: 13 October 2015
BNM/RH/PD 029-3 Islamic Banking and Capital Adequacy Framework for Islamic
Takaful Department Banks (Risk-Weighted Assets)

PART A OVERVIEW ................................................................................ 1
A.1 EXECUTIVE SUMMARY ............................................................ 1
A.2 APPLICABILITY ........................................................................ 3
A.3 LEGAL PROVISION .................................................................. 3
A.4 LEVEL OF APPLICABILITY ...................................................... 3
PART B CREDIT RISK ............................................................................ 5
B.1 INTRODUCTION ........................................................................ 5
B.2 THE STANDARDISED APPROACH FOR CREDIT RISK ......... 7
B.2.1 EXTERNAL CREDIT ASSESSMENTS ...................................... 7
B.2.2 DEFINITION OF EXPOSURES ................................................ 11
Exposures to Sovereigns and Central Banking institutions ...... 11
Exposures to Non-Federal Government Public Sector Entities
(PSEs) ...................................................................................... 13
Exposures to Multilateral Development Banking institutions
(MDBs) ..................................................................................... 14
Exposures to Banking Institutions and Corporates ................... 14
Exposures to Takaful Companies, Securities Firms and Fund
Managers ................................................................................. 18
Exposures Included in the Regulatory Retail Portfolio .............. 18
Financing Secured by Residential Real Estate (RRE) Properties
................................................................................................. 20
Exposures Secured by Commercial Real Estate (CRE) ........... 22
Defaulted Exposures ................................................................ 22
Higher Risk Assets ................................................................... 23
Other Assets ............................................................................. 24
B.2.3 TREATMENT FOR THE COMPUTATION OF CREDIT RISK-
WEIGHTED ASSETS FOR ISLAMIC CONTRACTS ............... 25
MURĀBAHAH .......................................................................... 26
BAI’ BITHAMAN AJIL (BBA) AND BAI’ INAH ........................... 28
IJĀRAH ..................................................................................... 29
SALAM ..................................................................................... 31
ISTISNĀ` .................................................................................. 33
MUSHĀRAKAH ........................................................................ 35

Issued on: 13 October 2015
BNM/RH/PD 029-3 Islamic Banking and Capital Adequacy Framework for Islamic
Takaful Department Banks (Risk-Weighted Assets)

MUDĀRABAH .......................................................................... 39
QARDH .................................................................................... 42
SUKŪK ..................................................................................... 42
B.2.4 OFF-BALANCE SHEET ITEMS ............................................... 43
B.2.5 CREDIT RISK MITIGATION .................................................... 46
Minimum Conditions for the Recognition of Credit Risk Mitigation
Techniques ............................................................................... 48
Credit Risk Mitigation Techniques ............................................ 48
Other Aspects of Credit Risk Mitigation .................................... 67
B.3 THE INTERNAL RATINGS BASED APPROACH ................... 68
B.3.1 ADOPTION OF THE IRB APPROACH .................................... 68
Adoption of IRB Across Asset Classes ..................................... 68
Implementation Timelines and Transition Period ...................... 72
Determination of Capital Requirements under the IRB approach
................................................................................................. 75
B.3.2 CATEGORIES OF EXPOSURES............................................. 77
Definition of Corporate Exposures, including Specialised
Financing .................................................................................. 77
Definition of Bank Exposures ................................................... 81
Definition of Retail Exposures .................................................. 82
Definition of Equity Exposures .................................................. 85
Definition of Purchased Receivables Exposures ...................... 87
B.3.3 RISK COMPONENTS .............................................................. 89
Risk Components for Corporate, Sovereign and Bank
Exposures ................................................................................ 89
Risk Components for Retail Exposures .................................. 100
Risk Components for Equity Exposures ................................. 102
B.3.4 CREDIT RISK MITIGATION (CRM) ....................................... 103
Minimum Conditions for the Recognition of Credit Risk Mitigation
Techniques ............................................................................. 104
Collateralised Transactions .................................................... 105
Guarantees ............................................................................. 119
On-Balance Sheet Netting ...................................................... 127
Other Aspects of Credit Risk Mitigation .................................. 128

Issued on: 13 October 2015
BNM/RH/PD 029-3 Islamic Banking and Capital Adequacy Framework for Islamic
Takaful Department Banks (Risk-Weighted Assets)

B.3.5 RISK-WEIGHTED ASSETS ................................................... 130
Risk-Weighted Assets for Corporate, Sovereign and Bank
Exposures .............................................................................. 130
Risk-Weighted Assets for Retail Exposures ........................... 134
Risk-Weighted Assets for Equity Exposures .......................... 136
Risk-Weighted Assets for Purchased Receivables ................. 141
Risk-Weighted Assets for Leasing .......................................... 147
B.3.6 CALCULATION OF MINIMUM CAPITAL REQUIREMENT ... 148
Regulatory Capital .................................................................. 148
Calculation of Expected Losses ............................................. 149
Calculation of Provisions ........................................................ 152
Risk-Weighted Assets ............................................................ 152
Parallel Calculation ................................................................. 153
Prudential Capital Floor .......................................................... 153
B.3.7 MINIMUM REQUIREMENTS FOR THE IRB APPROACH .... 155
Rating System Design ............................................................ 156
Rating System Operation ....................................................... 170
Risk Estimation ....................................................................... 176
Governance, Oversight and Use of Internal Ratings .............. 209
Validation of Rating Systems and Internal Estimates ............. 215
B.3.8 QUALIFICATION ................................................................... 224
Overview of Approval and Review Process ............................ 224
General Qualification Process ................................................ 225
Home-Host Supervisory Issues .............................................. 226
Changes to IRB Implementation and Adoption ....................... 228
PART C OPERATIONAL RISK ............................................................ 230
C.1 INTRODUCTION .................................................................... 230
C.1.1 SOUND PRACTICES FOR OPERATIONAL RISK
MANAGEMENT ..................................................................... 230
C.2 THE BASIC INDICATOR APPROACH (BIA) ........................ 231
C.3 THE STANDARDISED APPROACH AND ALTERNATIVE
STANDARDISED APPROACH.............................................. 234
C.3.1 THE STANDARDISED APPROACH (TSA) ........................... 234

Issued on: 13 October 2015
BNM/RH/PD 029-3 Islamic Banking and Capital Adequacy Framework for Islamic
Takaful Department Banks (Risk-Weighted Assets)

C.3.2 THE ALTERNATIVE STANDARDISED APPROACH (ASA) 239
PART D MARKET RISK....................................................................... 243
D.1 INTRODUCTION .................................................................... 243
Scope of the Capital Charges ................................................. 243
Approaches of Measuring Market Risks ................................. 244
Standardised Approach .......................................................... 244
Internal Models Approach ....................................................... 244
D.1.1 PRUDENT VALUATION GUIDANCE .................................... 245
Systems and Controls ............................................................ 246
Valuation Methodologies ........................................................ 246
Independent Price Verification ................................................ 248
Valuation Adjustments ............................................................ 248
D.1.2 CLASSIFICATION OF FINANCIAL INSTRUMENTS ............ 249
Trading Book Policy Statement .............................................. 249
Definition of Trading Book ...................................................... 250
Classification of Specific Financial Instruments ...................... 252
D.1.3 TREATMENT OF MONEY MARKET INSTRUMENTS IN
TRADING BOOK ................................................................... 253
Controls to Prevent Regulatory Capital Arbitrage ................... 254
Treatment of Hedging Positions ............................................. 255
D.1.4 TREATMENT OF COUNTERPARTY CREDIT RISK IN THE
TRADING BOOK ................................................................... 256
D.2 THE STANDARDISED MARKET RISK APPROACH ............ 257
D.2.1 BENCHMARK RATE RISKS ................................................. 257
Specific Risk ........................................................................... 258
Specific Risk Capital Charges for Issuer Risk ........................ 258
General Benchmark Rate Risk ............................................... 261
Offsetting of Matched Positions .............................................. 262
Maturity Method ...................................................................... 262
Vertical Disallowance ............................................................. 263
Horizontal Disallowance ......................................................... 264
Duration Method ..................................................................... 266

Issued on: 13 October 2015
BNM/RH/PD 029-3 Islamic Banking and Capital Adequacy Framework for Islamic
Takaful Department Banks (Risk-Weighted Assets)

Treatment of Profit Rate Derivatives, Sell and Buy Back
Agreement (SBBA) and Reverse SBBA Transactions ............ 267
Example 1: Calculation of General Risk (Maturity Method) for
Benchmark Rate Related Financial Instruments .................... 273
D.2.2 EQUITY POSITION RISK ...................................................... 276
Specific and General Risk ...................................................... 276
Specific Risk ........................................................................... 276
General Risk ........................................................................... 277
D.2.3 FOREIGN EXCHANGE RISK (INCLUDING GOLD AND
SILVER POSITIONS) ............................................................. 279
The Treatment of Structural Positions .................................... 279
Measuring the Exposure in a Single Currency ....................... 280
The Treatment of Profit, Other Income and Expenses in Foreign
Currency ................................................................................. 281
Measuring the Foreign Exchange Risk in a Portfolio of Foreign
Currency Positions ................................................................. 282
D.2.4 COMMODITIES RISK ............................................................ 284
Simplified Approach ................................................................ 286
Maturity Ladder Approach ...................................................... 286
Models for Measuring Commodities Risk ............................... 290
D.2.5 INVENTORY RISK ................................................................. 294
Murabahah and Murabahah for Purchase Order (MPO) ........ 294
Istisna’ .................................................................................... 295
Ijarah and Ijarah Muntahia Bittamleek (IMB) .......................... 296
Operating Ijarah ...................................................................... 298
Ijarah Muntahia Bittamleek (IMB) ........................................... 298
D.2.6 TREATMENT OF OPTIONS .................................................. 301
Underlying Position Approach ................................................ 301
Simplified Approach ................................................................ 304
Delta-Plus Method .................................................................. 306
Scenario Approach ................................................................. 309
Example 4: Delta-Plus Methods for Options ........................... 310
Example 5: The Scenario Approach for Options .................... 316
D.3 INTERNAL MODELS APPROACH ........................................ 321

Issued on: 13 October 2015
BNM/RH/PD 029-3 Islamic Banking and Capital Adequacy Framework for Islamic
Takaful Department Banks (Risk-Weighted Assets)

D.3.1 COMBINATION OF INTERNAL MODELS AND THE
STANDARDISED MARKET RISK MEASUREMENT
APPROACH ........................................................................... 321
D.3.2 QUALITATIVE STANDARDS ................................................ 324
D.3.3 QUANTITATIVE STANDARDS ............................................. 327
D.3.4 SPECIFICATION OF MARKET RISK FACTORS .................. 330
D.3.5 MODELLING OF SPECIFIC RISK ......................................... 333
D.3.6 STRESS TESTING ................................................................. 337
D.3.7 MODEL VALIDATION STANDARDS .................................... 340
D.3.8 MODEL REVIEW ................................................................... 342
D.3.9 FRAMEWORK FOR THE USE OF BACK TESTING ............. 343
PART E LARGE EXPOSURE RISK REQUIREMENTS ....................... 352
E.1 LERR FOR ISLAMIC BANKING INSTITUTIONS .................. 352
PART F SECURITISATION FRAMEWORK ........................................ 353
F.1 INTRODUCTION .................................................................... 353
F.2 REQUIREMENTS FOR CAPITAL RELIEF ............................... 354
F.3 STANDARDISED APPROACH FOR SECURITISATION
EXPOSURES ......................................................................... 356
F.3.1 REQUIREMENTS OF USE OF EXTERNAL RATINGS ......... 356
F.3.2 TREATMENT OF ON-BALANCE SHEET SECURITISATION
EXPOSURES ......................................................................... 359
F.3.3 TREATMENT OF OFF-BALANCE SHEET SECURITISATION
EXPOSURES ......................................................................... 361
F.3.4 TREATMENT OF OVERLAPPING EXPOSURES ................. 362
F.3.5 TREATMENT OF COUNTERPARTY CREDIT RISK FOR
SECURITISATION EXPOSURES .......................................... 362
F.3.6 TREATMENT OF SECURITISATION OF REVOLVING
UNDERLYING EXPOSURES WITH EARLY AMORTISATION
PROVISIONS ......................................................................... 363
F.3.7 TREATMENT OF CREDIT RISK MITIGATION FOR
SECURITISATION EXPOSURES .......................................... 363

Issued on: 13 October 2015
BNM/RH/PD 029-3 Islamic Banking and Capital Adequacy Framework for Islamic
Takaful Department Banks (Risk-Weighted Assets)

F.3.8 TREATMENT OF CLEAN-UP CALLS ................................... 365
F.3.9 TREATMENT FOR IMPLICIT SUPPORT............................... 365
PART G REQUIREMENTS FOR APPROVED FINANCIAL HOLDING
COMPANIES .......................................................................... 367
G.1 GENERAL REQUIREMENTS ................................................ 367
G.2 Regulatory approval process for the adoption of an
advanced approach .............................................................. 367
Appendix I Eligibility Criteria for External Credit Assessment Institution
(ECAI) Recognition ................................................................. 370
Appendix II Summary of Risk Weights for Financing Secured by
Residential Real Estate (RRE) Properties .............................. 376
Appendix III Definition of Default ...................................................... 377
Appendix IIIa Diagrammatic Illustration of Re-ageing via Restructuring
381
Appendix IV Illustration on Risk-Weighted asset (RWA) Calculation for
Defaulted Exposures and Exposures Risk-Weighted at 150%
382
Appendix V Minimum Requirements on Supervisory Slotting Criteria
Method ................................................................................... 384
Appendix Va Supervisory Slotting Criteria for Specialised Financing
Exposures .............................................................................. 390
Appendix VI Counterparty Credit Risk and Current Exposure Method
410
Appendix VIa Sample Computation of Risk-Weighted Capital
Requirement and Exposure at Default (EAD) for a Portfolio of
Derivative Contracts ............................................................... 417
Appendix VIb “Add-on” Factors for Derivatives Contracts ............... 420
Appendix VIc Example for Calculation of Residual Maturity............. 423
Appendix VId Discount Factor and Range of Residual Maturity ....... 424
Appendix VII Capital Treatment for Failed Trades and Non-DvP
Transactions ........................................................................... 425
Appendix VIII List of Recognised Exchanges* ................................. 430

Issued on: 13 October 2015
BNM/RH/PD 029-3 Islamic Banking and Capital Adequacy Framework for Islamic
Takaful Department Banks (Risk-Weighted Assets)

Appendix IX Recognition Criteria for Physical Collateral Used For
Credit Risk Mitigation Purposes of Islamic Banking Exposures
432
Appendix X Summary Table of Gross Income Computation ............ 439
Appendix XI Mapping of Business Lines .......................................... 440
Appendix XII Illustration of the Offsetting Rules Between Negative and
Positive OR Capital Charge in Any Business Lines ................ 441
Appendix XIII Detailed Loss Event Type Classification .................... 442
Appendix XIV Illustration of Computation of Exposures with Credit Risk
Mitigation Effects .................................................................... 445
Appendix XV Information Requirements for Application to Adopt the
Internal Ratings Based Approach for Credit Risk ................... 448
Appendix XVI Information Requirements for Application to Adopt the
Internal Models Approach for Market Risk .............................. 451
Appendix XVII Illustration of Computation of Large Exposure Risk
Requirement ........................................................................... 457
Appendix XVIII Capital Treatment for Sell and Buyback Agreement
(SBBA)/ Reverse SBBA Transactions .................................... 460
Appendix XIX IRB Coverage ............................................................ 463
Appendix XX Assessment of Credit Risk based on Shariah Contracts
466
Appendix XXI Capital treatment for Investment Accounts ................ 480
Appendix XXII Transitional Arrangements and Approval Process .... 483
Appendix XXIII Credit Conversion Factors for Off-Balance Sheet Items
under the IRB Approach ......................................................... 489
Appendix XXIV Illustrative IRB Risk Weights ................................... 491
Appendix XXV Potential Evidence of Likely Compliance with the Use
Test 494
Appendix XXVI Data-Enhancing and Benchmarking Tools .............. 495
Appendix XXVI Illustration on the treatment of underwriting exposures
499
Appendix XXVII Definitions and General Terminologies .................. 501

Issued on: 13 October 2015
BNM/RH/PD 029-3 Islamic Banking and Capital Adequacy Framework for Islamic
Takaful Department Banks (Risk-Weighted Assets)

Appendix XXVIII Legal Requirements and Regulatory Process ....... 504
Appendix XXIX Methods of Legal Transfer ...................................... 509
Appendix XXX Comparison of Asset-based Sukūk and Asset-backed
Sukūk 511
Appendix XXXI Eligibility Criteria for Off-Balance Sheet Securitisation
Exposures .............................................................................. 512
Appendix XXXII Securitisation with Early Amortisation Provisions ... 514

Issued on: 13 October 2015