facilitating the implementation of ifsb standards fis workshop series © islamic financial services...
TRANSCRIPT
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
1
Workshops onFacilitating the Implementation of IFSB Standards
CAPITAL ADEQUACY STANDARDFOR Institutions ( Other than Insurance Institutions)
Offering only Islamic Financial Services
Cairo, Egypt27 – 28 August 2008
All rights reserved. No part of this publication may be reproduced, translated, stored in or introduced into a retrieval system or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the Islamic Financial Services Board.
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
2
Case Study
Measurement of Capital
Adequacy Ratios of an IIFS
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
3
Learning Objectives
Participants will be able to:
Understand the background for and context of the IFSB-CAS
Identify and classify the risks associated with Shari’ah compliant
instruments
Define data requirements for:
o the key calculations for the relevant approaches and;
o the main exposure types
Execute the basic calculations for the capital adequacy formulas
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
4
Methodology
Capital adequacy ratios using IFSB and Basel II are calculated
based on:
Type of Risk Basel approach
Credit Risk Standardised Approach
Market Risk 1996 Market Risk Amendments
(Standardised Measurement Method)
Operational Risk Basic Indicator Approach
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
5
AssumptionsCredit Risk
1. All International Murabahah and Wakalah attract a RW of 50%, as they represent transactions with high credit quality rated international banks with residual maturity up to 3 months
2. Murabahah and Ijarah (in local currency) treated under preferential risk weights
50% of Murabahah & Ijarah are for retail business; and
50% of Murabahah & Ijarah are over collectivized by RRE
3. Investment in Government Musharakah Sukuk are treated as Sukuk held in the banking book
4. No past due receivable
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
6
Assumptions cont’d
Market Risk
5. For inventories, book values = market values of the commodities at spot market prices
6. Residual value of assets leased = amount receivable from operating Ijarah less 10% depreciation
Sources of Funds
7. Percentage of assets funded by unrestricted PSIA is 27%
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
7
Balance Sheet
• To Identify risks associated
with Shari’ah compliant
products
• To classify risks
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
8
Assets
Cash & cash equivalent (local) 7,640,300,010.54
Cash & cash equivalents (foreign) 3,666,429,588.06
Correspondents A/Cs 5,319,257,257.77
Account Receivables
International Murabahah (foreign) 47,395,740,416.74
Wakalah (foreign) 13,232,002,133.74
Murabahah (local) 21,198,540,883.65
Istisnaa 7,190,999.45
Ijarah 2,589,290,037.89
Qard 839,980,349.77
Diminishing Musharakah 2,297,075,300.36
Mudarabah 147,785,420.15
Properties held for sale 179,733,023.67
Investments
Investment in Govt. Musharakah Sukuk 18,257,778,137.78
Investment in equities (subsidiaries) 1,804,968,610.01
Other assets 2,956,549,000.00
Fixed Assets 4,742,207,616.78
Total On-balance sheet items 132,477,828,786.36
Off/balance sheet items 30,573,255,130.56
Total assets 163,051,083,916.92
Liabilities
Current Accounts (local) 33,095,265,730.85
Current Accounts (Foreign) 51,134,349,148.22
Other A/Cs (foreign) 492,485,700.62
other A/Cs (local) 33,492,930.20
Sub-total 84,755,593,509.89
Unrestricted investment accounts (local) 26,040,775,217.25
Unrestricted investment accounts (foreign) 9,374,904,225.32
Sub-total 35,415,679,442.57
Other liabilities 4,462,923,826.89
Owner equities 7,843,632,007.01
Total on-balance sheet items 132,477,828,786.36
Contingent liabilities
Acceptance Commitments 7,435,832,969.93
L/Gs commitments 1,645,478,824.17
L/Cs Commitments 10,891,835,984.49
Other commitments 10,600,107,351.97
Total Liabilities 163051083916.92
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
9
Basel I
Calculation of capital adequacy ratio: A brief reminder
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
10
IFSB-CAS
Calculation of Capital Requirements for Credit Risk
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
11
Ref Category Exposure RWA CARCapital Requirements for
Credit Risk
Form C2 RWA for individual claims based on ECA 0 0.00 8% 0.00
Form C 3 RWA for short-term exposures & other assets 71,618,530.00 42,452,896.50 8% 3,396,231.72
Form C 4 RWA for exposures under profit sharing mode 18,257,778.00 0.00 8% 0.00
Form C 5RWA for exposures with preferential risk weights 23,787,830.00 13,083,306.50 8% 1,046,664.52
Form C 6 RWA for past due receivables 0.00 0.00 8% 0.00
Form C 7 RWA for Off-balance sheet exposures 30,573,255.00 20,057,015.74 8% 1,604,561.25
Total 144,237,393.00 75,593,218.74 6,047,457.50
Calculation of Capital Requirements for Credit Risk
FORM C1: Summary Table for Credit Risk Capital Requirements
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
12
Exposure Type Rating RW Original Exposure
Credit Risk Mitigation Techniques
RWA
Supervisory Haircut Simple Approach
Amount of collateral Haircut % Adjusted
Collateral Net
Exposure RW of counterparty
1 2 3 4 5 6 7 8 9
4 ( 1 - 5 ) ( 3 - 6 ) (3 x 2) or (7 x 2) or (3 x 8)
Short-term ExposureA-1/P-1 20%
International Murabahah & Wakalah* A-2/P-2 50% 60,627,742.00
30,313,871.00
A-3/P-3 100%
Diminishing Musharakah others 150% 2,297,075.00
3,445,312.50
Mudarabah Unrated 100% 147,785.00 147,785.00
Istisna Unrated 100% 7,191.00 7,191.00
Qard Unrated 100% 839,980.00 839,980.00
Other assets 100% 2,956,549.00 2,956,549.00
Fixed Assets 100% 4,742,208.00 4,742,208.00
Total Exposure 71,618,530.00 42,452,896.50
FORM C3: RWA for Short-term Exposure and Other Assets
Calculation of Capital Requirements for Credit Risk
Refer to slide (5) - assumptions
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
13
Exposure Type Rating RW Original Exposure
CRM
RWSimple Approach
RW of counterparty
1
2
3
4 5
(3x2) or (3x4)
Mudarabah Simple Method
300%
Govt. Musharakah Sukuk 400% 18,257,778.00 0%* 0
Joint Ownership of real estate and movable assets Slotting method
90%
100%
135%
270%
Total 18,257,778.00 0
Calculation of Capital Requirements for Credit Risk
FORM C 4: RWA for Investments made under Profit sharing Mode
* Assuming RW of Govt. is zero
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
14
A Exposure Type RWAmount of Exposure
Value of Collateral **
Haircut % ***Value of eligible
collateral Net
ExposureRWA
1 2 3 4 5 6 7
3 ( 1 - 4) (2 - 5) (2 x 1 ) or (6 x 1)
1Murabahah or Ijarah collateralized by residential real estate
35%11,893,915.00 4,162,870.25
2Murabahah or Ijarah collateralized by Commercial real estate
50%
100%
3Murabahah and/or Ijarah receivables from individuals or small business (retail)
75%11,893,915.00
8,920,436,25
Total 23,787,830.00 13,083,306.50
* Preferential Risk Weights if the underlying assets are sold under Murabahah or leased under Ijarah
** collaterals other than real estate such as Hamish jiddiah or Urbon
*** Cash collateral in foreign currencies subject to a haircut of 8%
Calculation of Capital Requirements for Credit Risk
FORM C 5: RWA for Exposures with Preferential Risk Weights*
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
15
Calculation of Capital Requirements for Credit Risk
FORM C 7: Off-balance Sheets Exposures
Exposure CCF Outstanding Amount
Credit Equivalent
Adjusted collateral
Net Exposure RW RWA
1 2 3
( 1 x 2)
4 5
( 3 – 4)
6 7
(5 x 6)
L/Cs collateralized by underlying shipments / goods
20% 10,891,836 2,178,367 450,677 1,727,690 100% 1,727,690
≤ 1 year commitments 20% 1,645,479 329,095 35,710 293,385 100% 293,385
≥ 1 year commitments 50%
others 100% 18,035,940 18,035,940 0 18,035,940 100% 18,035,940
Total 30,573,255 20,543,402 486,387 20,057,015 20,057,015
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
16
Calculation of Capital Requirements for Market Risk
IFSB-CAS
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
17
Ref. ExposureCapital
Requirements CF* RWA
Form D2 Total Equity Risk Capital Charge 0 0 12.5 0
Form D3Total Specific Risk Capital Charge for Sukuk positions 0 12.5
Form D4Total General Risk Capital Charge for Sukuk and off-balance sheet financial instruments 12.5
Form D5 Total foreign exchange capital charge ** 271,804.80 12.5 3,397,560.00
Form D6 Total commodity risk capital charge 12.5 0
Form D7 Total inventory risk capital charge 2,776,214.00 213,504.00 12.5 2,668,800.00
Total 485,308.80 12.5 6,066,360.00
* reciprocal of minimum capital adequacy ratio
** This balance can be checked from the position in foreign currency
Calculation of Capital Requirements for Market Risk
FORM D 1: Summary of Market Risk Capital Requirements
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
18
Currency Net Spot Position 1
Net Forward Position2
Guarantees3 Other Items4 Net Long Position or Net Short Position
US dollar (-) 27,891.74 27,891.7 0.0
Saudi Riyal (+) 3,357,303.91 3,357,303.9
Jordanian Dinar 0.0 0.0
Qatar Riyal (-) 77.63 77.6 0.0
Sterling P (+) 40,257.30 40,257.3
Euro (-) 867,583.83 867,583.8 0.0
UAE Dirham (-) 372.16 372.2 0.0
Oman Riyal (-) 23.41 23.4 0.0
Bahrai Dinar (-) 22.41 22.4 0.0
Total Position 895,971.2 3,397,561.2
X Y
Net Gold Position
Z
Capital charge calculation
Greater of Net Long Position (X) or absolute value of Net Short
Position (Y)
Absolute value Net Gold or Silver
Position (Z)
Capital Requirement Total Capital Charge
3,397,561.2 0.0 8% 271,804.80
Calculation of Capital Requirements for Market Risk
FORM D 5: Foreign Exchange Risk Capital Charges
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
19
Book Value
Market Value Capital Charge Capital requirement
Properties held for sale 179,733.00 179,733.00 15% 26,960.00
Salam (without parallel Salam) 15%
Unbilled WIP inventory under Istisna without parallel Istisna
7,191.00 7,191.00 1.6% 115.10
Residual value of assets leased* 2,589,290.00 2,330,361.00* 8% 186,428.90
Total 2,776,214.00 2,517,285.00 213,504.00
Calculation of Capital Requirements for Market Risk
FORM D 7: Inventory Risk Capital Charges
*Assuming 10% depreciation , See slide (6) - Assumptions
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
20
Calculation of Capital Requirements for Operational Risk
IFSB-CAS
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
21
2004 2005 2,006
Net income from financing activities 1,459,000 2,582,000.00 4,903,000.00
Net income from investment activities 22,000.00 68,000.00 76,000.00
Fee income (e.g. commission and agency fee) 578,000 1,413,000 2,547,000
2,059,000.00 4,063,000.00 7,526,000.0 13,648,000
Less
Investment account holders' share of income 340,000.00 715,000.00 1,632,000 2,687,000
Gross income 1,719,000.00 3,348,000.00 5,894,000 10,961,000
Average Gross Income 3,653,666.67
Assigned Capital Charge 15%
Capital requirement for operational risk 548,050.00
Conversion factor 12.5
Operational Risk Weighted Assets 6,850,625
Calculation of Capital Requirements for Market Risk
FORM E: Operational Risk
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
22
Calculation of Eligible Capital
IFSB-CAS
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
Tier 1 Capital Amount Tier 2 Capital Amount
Issued and fully paid ordinary shares/common stock 7,000,000 Asset revaluation reserve 275,025 611,167
Perpetual non-cumulative preference shares General provisions
Share premium Hybrid capital instruments
Legal reserves 240,705 Subordinated debt of more than 5 years
Retained profit
Less:
Goodwill
TOTAL 7,240,705 275,025
Tier 1 + Tier 2 = 7,515,730
Less : Investment in subsidiaries = 1,804,969
Total Eligible capital = 5,710,762
Calculation of Eligible Capital
FORM F: Eligible Capital
Ratio of Tier 2 to Tier 1 = 3.8%
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
24
Calculation of CA ratios
Comparison:
IFSB formula
Basel II formula
Basel I formula
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
25
IFSB Formula Basel II formula Basel I Formula
a)Total eligible regulatory capital which is used as the numerator for CAR
5,710,762.00 5,710,762.00 5,710,762.00
b) Total RWA for credit risk 75,593,218.74 75,593,218.7432,513,792.00
c) Total RWA for market risk 6,066,360.00 6,066,360.00 6,066,360.00
d) Sub-total 81,659,578.7481,659,578.74 38,580,152.00
e) Total RWA for operational risk 6,850,625.00 8,530,000.00
Total RWA 88,510,203.74 90,189,578.74 38,580,152.00
f) RWA (CR & MR) funded by profit sharing investment account holders 22,048,086.26
RWA (CR & MR) funded by restricted investment account holders 00 00
RWA (CR & MR) funded by unrestricted investment account holders 27% 22,048,086.26
RWA (CR & MR) funded by PER and IRR
g) Minimum Capital Adequacy Requirements
h) Total RWA - RWA funded by unrestricted PSIA( CR + MR) ( e – f)66,462,117.48
o) Standard Formula 8.6% 6.3% 14.8%
p) Supervisory Formula
Calculation of Capital Adequacy Ratios
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
26
Group Exercise 4
Analyses:The Impact of Balance Sheet Structure onCapital Adequacy Ratio
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
27
Balance sheet Structure of Hypothetical Banks
25
5
10
8
13
40
1
Assets Liabilities
15
50
25
10
1
Other
Mudarabah
Musharakah
Istisna
Ijarah
Murabahah
Large PSIA portfolio
Significant Musharakah and
Mudarabah exposure
Source: Modified from McKinsey
Bank A
Other
CA + SA
PSIA
Equity
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
28
35
25
853
25
1
Balance sheet Structure of Hypothetical Banks cont’d
15
15
60
10
1
Assets Liabilities
Limited PSIA within deposit base
Limited Musharakah and Mudarabah
exposure
Source: Modified from McKinsey
Bank B
Other
Mudarabah
Musharakah
Istisna
Ijarah
Mudarabah
Other
CA + SA
PSIA
Equity
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
29
35
15
10
10
5
25
1
15
15
60
10
1
Other
CA + SA
PSIA
Equity
Other
Mudarabah
Musharakah
Istisna
Ijarah
Murabahah
Limited PSIA within deposit base
Significant Musharakah and
Mudarabah exposure
Source: Modified from McKinsey
Balance sheet Structure of Hypothetical Banks cont’d
Bank C
LiabilitiesAssets
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
Thank you …
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
31
Mashair Mohammed Ibrahim
Assistant Project Manager
Islamic Financial Services Board
3rd Floor Block A, Bank Negara Malaysia Building
Jalan Dato’ Onn, 50480 Kuala Lumpur, Malaysia
P.O.Box 10591, 50714 Kuala Lumpur, Malaysia
Telephone: 603 – 26984248 ext. 135
Fax: 603-26984280
e-mail: [email protected]
Contact information
FACILITATING THE IMPLEMENTATION OF IFSB STANDARDS
FIS WORKSHOP SERIES
© ISLAMIC FINANCIAL SERVICES BOARD© ISLAMIC FINANCIAL SERVICES BOARD
32
Summary of Capital Requirements for Shari’ah Compliant Contracts
ContractRisk weights
Credit Risk** Market Risk CR + MR
Murabahah Inventory Asset delivered to a counterparty
N.A.100%
187.5%N.A.
187.5%100%
Salam Salam without parallel Salam Salam with Parallel Salam
100%100%
187.5%287.5 % + 24%
287.5%< 287.5%
Istisna Istisna without parallel Istisna Istisna with parallel Istisna
100%100%
20%N.A.
120%100%
Ijarah Inventory Operating Ijarah IMB
N.A.100%100%
187.5%100%N.A.
187.5%200%100%
Musharakah 300% - 400%90% - 270%
Depends on the underlying assets
≥ ( 300% - 400%)≥ ( 90% - 207%)
Mudarabah 300% - 400%90% - 270%
Depends on the underlying assets
≥ ( 300% - 400%)≥ ( 90% - 207%)
* Capital charges do not include operational risk
** Provided the counterparty is unrated, otherwise the RW of the counterparty should be applicable
Capital Charges*
15%8%
23%< 23%
9.6%8%
15%16%8%
≥ (24% - 36%)≥ (7.2% - 21.6%)
≥ (24% - 36%)≥ (7.2% - 21.6%)