6.41. Treatment of musharakah (non-diminishing)

(1) Except for diminishing musharakah contracts, all musharakah investments are treated as equity investments

(2) As an equity investment, a musharakah investment must be risk-weighted in accordance with table 6.11A.

Table 6.11A Credit risk-weights for musharakah (non-diminishing)

Item	Description of investment	Risk-weight, %
1	investments in funds
	(a)    rated funds	based on ECRA rating in table 6.11B
	(b)    unrated funds that are listed	100
	(c)    unrated funds that are unlisted	150
2	equity exposures
	(a)    equity exposures that are not deducted from capital and are listed on a recognised exchange	300
	(b)    equity exposures that are not deducted from capital and are not listed on a recognised exchange	400, except if rule 6.41(3) applies
3	investment in real estate	400
4	investment in physical assets (such as commercial vehicles, passenger cars, ships, aircraft, railway machinery, computers, business machines and other types of equipment)
	(a)    if an Islamic Bank has majority ownership over the asset and can exit the investment at any time	300
	(b)    if an Islamic Bank does not have majority ownership over the asset or cannot exit the investment at any time	400, except if rule 6.41(3) applies

Table 6.11B Risk-weights for investments in rated funds based on ECRA ratings

AAA to AA-	A+ to A-	BBB+ to BBB-	BB+ to BB-	B+ to B-	below B-
20	50	100	100	150	150

Guidance

1. i) In the table, the ratings are given according to Standard & Poor’s conventions. If a claim or asset is not rated by Standard & Poor’s, its ratings must be mapped to the equivalent Standard & Poor’s rating.

(3) The lower risk-weight of 300% applies to an investment that would normally be riskweighted at 400% if, under the musharakah contract, the Islamic Bank is allowed to withdraw its participation within 5 days after giving notice of withdrawal. In any other case, an Islamic Bank may apply a risk-weight of 300% if it can demonstrate:

1. (a) that the lower risk-weight is appropriate for the nature, scale and complexity of an Islamic Bank’s business;
2. (b) that an Islamic Bank can effectively participate in the management of the investment and that such participation would not unduly increase operational risk;
3. (c) an Islamic Bank’s ability to monitor the operations and performance of the investment;
4. (d) that the valuation methods and exit strategies used by an Islamic Bank are appropriate; and
5. (e) that an Islamic Bank has effective reporting and information-sharing systems.