6.36. Treatment of murabahah and related contracts

(1) An Islamic Bank is exposed to credit risk under a murabahah contract if the obligor fails to pay the agreed selling price under the contract. Therefore, an Islamic Bank is subject to a Capital charge for credit risk exposure once the asset is sold and payment is due to an Islamic Bank.

(2) For an MPO contract, an Islamic Bank is exposed to credit risk if the obligor (purchase orderer) defaults on its obligation to purchase the asset. Because an Islamic Bank has recourse against the obligor to purchase the asset at the agreed price, the credit risk exposure commences once an Islamic Bank acquires the asset.

(3) In an MPO contract, an Islamic Bank is also exposed to credit risk if the obligor fails to pay the agreed price in accordance with the agreed terms.

Table 6.7A Credit risk-weights for murabahah

Stage of Contract	Credit Risk-weight
asset available for sale and on firm’s balance sheet	not applicable
asset has been sold and title transferred, and selling price is due to an Islamic Bank	based on the customer’s type and rating under Rule 6.24

Table 6.7B Credit risk-weights for MPO

Stage of contract	Credit risk-weight
asset available for sale and on firm’s balance sheet	based on the customer’s type and rating under Rule 6.24, with the applicable risk-weight applied to the acquisition cost less any cash collateral
asset has been sold and title transferred, and selling price is due to firm	based on the customer’s type and rating under Rule 6.24

Table 6.7C Credit risk-weights for MPO

Stage of contract	Credit risk-weight
asset available for sale and on firm’s balance sheet	based on the customer’s type and rating under Rule 6.24, with the applicable risk-weight applied to the acquisition cost less any cash collateral
asset has been sold and title transferred, and selling price is due to firm	based on the customer’s type and rating under Rule 6.24