12.1. General

(1) This Chapter sets out the minimum Capital requirements to cover the credit risk and market risk arising from the holding, by an Islamic Bank, of sukuk in its banking book.

Guidance

For credit risk arising from sukuk in an Islamic Bank’s trading book, Chapter 8 applies. For market risk arising from sukuk in an Islamic Bank’s trading book, Chapter 10 applies.

(2) Sukuk are certificates that represent a holder’s proportionate ownership in an undivided part of an asset or pool of assets where the holder assumes all rights and obligations to the asset or pool. A typical sukuk transaction would involve the originator of the sukuk, the issuer of the sukuk and an investor (sukuk holder).

Guidance

In equity-based sukuk (such as musharakah sukuk and mudarabah sukuk), the underlying investment does not offer predictable returns. In contrast, the underlying assets of asset-based sukuk (such as salam sukuk and murabahah sukuk) offer fairly predictable returns to holders.

12.2. Securitisation

Guidance

In addition to its holding of sukuk in the banking book, an Islamic Bank’s sukuk-related exposures may arise from securitisation and an Islamic Bank being, or acting as, the sukuk’s:

• (a) originator;
• (b) issuer;
• (c) servicer; or
• (d) provider of credit enhancement.

These rules, the instructions for preparing returns and the returns themselves do not (yet) have provisions on securitisation and re securitisation. Those provisions are to be inserted in the second or third phases of these rules.

12.3. Risk-weights for rated sukuk

The risk-weights for sukuk rated by an ECRA are those in accordance with tables 6.2 and 6.3 in Chapter 6 of this Rules.

12.4. Risk-weights for Unrated sukuk

(1) The risk-weights for unrated sukuk (that is, sukuk that are not rated or sukuk that are rated by a rating agency that is not an ECRA) must be determined based on the underlying structure and assets, in accordance with the Rules in this chapter.

(2) For unrated sukuk that use a combination of the Shari’ah-compliant contracts, the Capital requirement must be calculated taking into account the risk implications of the overall structure and assets.

12.5. Sukuk issued by Government or National bank of Kazakhstan

Sukuk issued by the Government of Kazakhstan or the National Bank of Kazakhstan are subject to a risk-weight of 0%.

12.6. Sukuk issued by IILMC

1) Sukuk issued by the International Islamic Liquidity Management Corporation (or IILMC) must be risk-weighted as if they were claims on short-term banking exposure.

(2) Rated sukuk issued by IILMC are subject to the risk-weights based on their ratings, as set out in table 13.3.4. Unrated sukuk issued by IILMC are subject to 20% risk-weight.

Table 13.3.4 Risk-weights for sukuk issued by IILMC

Note 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.

12.7. Sukuk awaiting transfer of assets

For sukuk where the legal transfer of assets has not taken place, the risk-weight is that of the originator (based on the ratings issued by an ECRA), subject to any Shari’ah-compliant credit enhancement by the issuer. If the originator is unrated, the risk-weight is 100%.

12.8. Sukuk with combination of assets

(1) Sukuk comprising a combination of different kinds of assets (such as shares, leasable assets, receivables from murabahah and receivables from salam) must be risk-weighted according to the respective percentages of the assets allocated in the investment.

(2) If the Islamic Bank or the AFSA does not have any reliable information to determine the nature or basis of the underlying assets of the sukuk, a risk-weight of 100% must be applied if the sukuk are listed or 400% if the sukuk are unlisted.

12.9. Salam sukuk

(1) Salam sukuk represent fractional ownership of the Capital of a salam transaction, where the salam Capital is constituted by an advance payment to a counterparty as supplier of a commodity (the subject matter) to be delivered at a future date.

(2) The gross return to the sukuk holders consists of the margin or spread between the purchase price of the subject matter and its selling price after delivery.

(3) In some sukuk issues, a third party gives an undertaking that the subject matter will be sold at a price exceeding the purchase price by a specified margin. The undertaking may be achieved by means of a parallel salam transaction in which a third party purchases the subject matter for delivery on the same delivery date as in the original salam contract.

12.10. Treatment of salam sukuk without parallel salam

(1) The risk-weight for salam sukuk without parallel salam must be based on the counterparty (salam supplier) unless the salam Capital is guaranteed by a third party.

(2) If the salam Capital is guaranteed by a third party, the risk-weight must be based on the guarantor, but only if the guarantor’s risk-weight is lower than that of the salam supplier. The risk-weight for an unrated salam supplier or an unrated guarantor is 100%.

(3) The Capital charge for salam sukuk without a parallel salam contract or other hedge is 15% on the long position of salam exposures.

12.11. Treatment of salam sukuk with parallel salam

(1) The risk-weight for salam sukuk with parallel salam must be based on the counterparty(salam supplier) unless the salam Capital is guaranteed by a third party.

(2) If the salam Capital is guaranteed by a third party, the risk-weight must be based on the guarantor, but only if the guarantor’s risk-weight is lower than that of the salam supplier. The risk-weight for an unrated salam supplier or an unrated guarantor is 100%.

(3) A salam sukuk issuance that is structured with an undertaking from the issuer that the underlying commodity will be sold to a third party at a specified selling price (by means of a parallel salam contract) must carry the risk-weight of the third party.

(4) There is no Capital charge for market risk that consists of basis and forward gap risks (namely, the risk that the hedge may be impaired because the underlying commodity delivered may be of inferior quality or may be delivered later than the contractual date). This is because the underlying commodity is normally traded on an exchange that eliminates the risk of late delivery, non-delivery or delivery of a commodity that is of inferior quality.

(5) The Capital charge for salam sukuk with a parallel salam contract or other hedge is 15% on the net position of the salam exposures plus 3% on the gross position of those exposures.

12.12. Istisna sukuk

(1) Istisna sukuk represent fractional shares in the financing of a project to construct an asset at a price to be paid in future instalments. The total of those instalments equals the face value of the sukuk plus mark-up.

(2) The sukuk can be in the form of serial notes or certificates with different maturity dates that match the progress schedule of instalments as agreed between the sukuk issuer (as manager on behalf of the sukuk investors) and the construction firm.

12.13. Treatment of istisna sukuk without parallel istisna

(1) The risk-weight for istisna sukuk where there is no parallel istisna must be based on the issuer.

(2) If a third party provides a guarantee, the risk-weight for the istisna sukuk must be based on the guarantor, but only if the guarantor’s risk-weight is lower than that of the issuer. The risk-weight for an unrated issuer or an unrated guarantor is 100%.

(3) A risk-weight of 20% must be added in the calculation of credit risk Capital charges, in order to account for the price risk to which the underlying istisna is exposed.

12.14. Treatment of istisna sukuk with parallel istisna

(1) In the case of istisna sukuk with parallel istisna, the relevant asset may be constructed on behalf of an ultimate customer or off-taker with whom the Islamic Bank enters into the parallel istisna contract. In this case, there is a credit risk exposure to the ultimate customer for the payment due under the parallel contract.

(2) The credit risk starts at the commencement of the construction work until the whole amount or all the instalments are paid by the ultimate customer.

(3) The risk-weight for the credit exposure must be based on the ultimate customer.

(4) If a third party provides a guarantee, the risk-weight must be based on the guarantor, but only if the guarantor’s risk-weight is lower than that of the ultimate customer. The riskweight for an unrated customer or an unrated guarantor is 100%.

12.15. Murabahah sukuk

(1) In murabahah sukuk, the originator (and, in some cases, the issuer) of the sukuk is the buyer (on credit) of the murabahah asset and the sukuk investors are the sellers (on credit) of that asset. The funds provided by the sukuk investors (and received by the issuer) represent the murabahah selling price of the asset.

(2) The sukuk holders own the murabahah and are entitled to receive payment of that receivable (the selling price of the asset) either in instalments or in a lump sum at the end of the murabahah contract.

12.16. Treatment of murabahah sukuk

(1) The risk-weight for murabahah sukuk must be based on the issuer or other obligor (as rated by an ECRA). If the issuer or obligor is unrated, the risk-weight is 100%.

(2) If the sukuk structure involves funding of an asset purchase in foreign currency, the relevant exposure must be calculated in accordance with Rule 8.24 (foreign exchange risk).

12.17. Ijarah and IMB sukuk

(1) Ijarah and IMB sukuk represent the holder’s proportionate ownership in leased assets where the sukuk holders collectively assume the rights and obligations of the lessor. The sukuk holders are entitled to a share of the lease rentals in proportion to their ownership shares in the leased assets.

(2) As a proportionate owner, an ijarah or IMB sukuk holder assumes a proportionate share of:

• (a) any loss, if the leased asset is destroyed; or
• (b) the cost of meeting the obligation to provide an alternative asset.

12.18. Treatment of Ijarah and IMB sukuk

The risk-weight for ijarah or IMB rentals must be based on the lessee’s counterparty credit risk, since the residual value risk of the underlying asset is not borne by the sukuk holders.

12.19. Musharakah sukuk

Musharakah sukuk represent the direct proportionate ownership shares of the holders in the assets of a private commercial enterprise or project, where the subscription money is normally used to purchase non-liquid assets.

Guidance

Musharakah sukuk are profit-sharing and loss-sharing instruments where the exposures are of the nature of equity positions in the banking book, except in the case of investments (normally short-term) in assets for trading purposes.

12.20. Treatment of musharakah sukuk

(1) The treatment of musharakah sukuk must be based on the intent of the underlying investments in musharakah as set out in this rule.

(2) For a private commercial enterprise that undertakes trading activities, the risk-weight must be as set out in under the section earlier on Equity-based contracts and Chapter 8 (market risk).

(3) For a private commercial enterprise that undertakes a business venture or project (other than an enterprise that undertakes trading activities), the risk-weight for equity participation risk in respect of an equity exposure in a business venture or project must be measured according to the section on Equity-based contracts and Chapter 8 (market risk).

(4) For a joint ownership of real estate or movable assets as income-producing musharakah investments through leasing to third parties by means of ijarah, the risk-weight must be based on the counterparty (that is, the lessee).

(5) For a joint ownership of real estate or movable assets as income-producing musharakah investments with murabahah sub-contracts, the risk-weight must be based on the underlying murabahah contracts and the counterparties involved in those murabahah contracts.

12.21. Mudarabah sukuk

(1) In mudarabah sukuk, the sukuk holders subscribe to the certificates issued by a mudarib. The holders share the profits and bear any losses arising from the mudarabah operations.

(2) The returns to the holders depend on the revenue produced by the underlying investment.

12.22. Treatment of mudarabah sukuk

(1) The treatment of mudarabah sukuk must be based on the intent of the underlying investments in mudarabah as set out in this rule.

(2) For a private commercial enterprise that undertakes trading activities, the risk-weight must be as set out in section under Equity-based contracts and Chapter 8 (market risk).

(3) For a private commercial enterprise that undertakes a business venture or project (other than an enterprise that undertakes trading activities), the risk-weight for equity participation risk in respect of an equity exposure in a business venture or project must be measured according to section under Equity-based contracts and Chapter 8 (market risk).

12.23. Wakalah sukuk

(1) In wakalah sukuk, the sukuk holders provide the Capital for Shari’ah-compliant investment activities, and the investment agent (wakeel) undertakes to invest the funds. These sukuk entitle the holders to a return in proportion to their investment in the underlying assets and a right (under a purchase undertaking) to buy all or a proportion of the underlying assets if specified conditions are fulfilled.

(2) In wakalah sukuk, the SPV acting as the principal on behalf of the sukuk holders appoints a wakeel to invest funds provided by the sukuk holders into a pool of assets. The wakeel lends its expertise and manages those investments on behalf of the SPV for a particular period, in order to generate a return for the sukuk investors.

(3) The SPV and the wakeel enter into a wakalah agreement to govern the appointment, scope of services and fees payable to the wakeel, if any.

(4) The pool of assets may comprise a broad range of Shari’ah-compliant assets that selected by the wakeel for a period corresponding to the duration of the sukuk (for example, Shari’ah-compliant equities, Shari’ah-compliant assets such as real estate and cars, murabahah, istisna, other sukuk).

Guidance

While the wakalah structure has some similarities to the mudarabah structure, the way in which holders receive their share of profits differ:

(1) wakalah sukuk holders receive the return on their investments less the management fees payable to the wakeel

(2) in a mudarabah structure, the profits are divided between the parties according to agreed ratios.

12.24. Treatment of wakalah sukuk

(1) The treatment of wakalah sukuk must be based on the intent of the underlying investments in wakalah as set out in this rule.

(2) For investments in trading activities in foreign exchange, shares or commodities, the riskweight must be as set out as set out in the section Service-based contracts and Chapter 8 (market risk).

(3) For investments in assets that can be leased or sold on a murabahah basis as incomeproducing wakalah investments through leasing to third parties by means of ijarah, the risk-weight must be based on the counterparty (that is, the lessee).

(4) For investments in assets that can be leased or sold on a murabahah basis as incomeproducing wakalah investments with murabahah sub-contracts, the risk-weight must be based on the underlying murabahah contracts and the counterparties involved in those contracts.