Risk Management Guidelines for IBIs

Principle 23 ibis shall have in place appropriate

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Principle 2.3: IBIs shall have in place appropriate methodologies for measuring and reporting the credit risk exposures arising under each Islamic financing instrument. 24. IBIs shall develop and implement appropriate risk measurement and reporting methodologies relevant to each Islamic financing instrument in respect of managing their counterparty risks, which may arise at different contract stages (including counterparty performance risk in Salam and Istisna contracts). Depending on the Islamic financing instrument, the IBIs may employ an appropriate methodology that takes into account the price volatilities of the underlying assets. The selected methodology shall be appropriate given the nature, size and complexity of the IBIs’s credit related activities. IBIs shall ensure that adequate systems and resources are available to implement this methodology. Principle 2.4: IBIs shall have in place Shariah-compliant credit risk mitigating techniques appropriate for each Islamic financing instrument. 25. IBIs shall clearly define their credit risk-mitigating techniques including, but not limited to, having in place: a methodology for setting mark-up rates according to the risk rating of the counterparties, where expected risks should have been taken into account in the pricing decisions; permissible and enforceable collateral 2 and guarantees; clear documentation as to whether or not purchase orders are cancelable; and Clear procedures for taking account of governing laws for contracts relating to financing transactions. 2 IBIs are expected to include in its process, an ongoing monitoring of quality and valuation of any collateral. Risk Management Guidelines for IBIs Page 6 of 19
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STATE BANK OF PAKISTAN ISLAMIC BANKING DEPARTMENT 26. IBIs shall establish limits on the degree of reliance and the enforceability of collateral and guarantees. They shall protect themselves against legal impediments that may restrict the accessibility of collateral when they need to enforce their rights in respect of a debt. IBIs shall formally agree with the counterparty at the time of signing the contract on the usage, redemption and utilization of collateral if the counterparty defaults in payment. 27. IBIs shall have policies to define adequately the action to be taken by the IBIs when a customer cancels a non-binding purchase order. The policies will describe how the IBIs (a) monitor and control their exposures to suppliers, and especially during delivery between suppliers to the IBIs where a customer is acting as an agent; and (b) identify whether the risks associated with the assets will be borne by the supplier or the customer (which acts as agent and accepts the assets from the supplier). For example, the IBIs may enter into a purchase contract with a supplier on a “sale or return” basis, with an option to return the purchased item within a specified period.
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  • Fall '11
  • Finance, .........

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