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Article 8: Islamic Banking

C 164/2018 Effective from 29/9/2018
  1. 1. A Bank offering Islamic financial services must have in place an appropriate framework for market risk management, including reporting, in respect of all assets held, particularly those that do not have a ready market and/or are exposed to high price volatility.
  2. 2. A Bank offering Islamic financial services must develop a market risk strategy including the level of acceptable market risk appetite taking into account contractual agreements with fund providers, types of risk-taking activities and target markets in order to maximize returns while keeping exposures at or below the pre-determined levels. The strategy must be reviewed at least annually, communicated to relevant staff and disclosed to fund providers. The strategy must provide for guidelines governing risk-taking activities in different portfolios of restricted investment account holders and applicable market risk limits.
  3. 3. A Bank offering Islamic financial services must ensure that its strategy includes a definition of its risk appetite for tradable assets and that its risk appetite is adequately supported by capital held for that purpose.
  4. 4. A Bank offering Islamic financial services must be able to quantify market risk exposures and assess exposure to the probability of future losses in its net open asset positions. The Bank must incorporate a detailed approach to valuing its market risk positions where no direct market prices are available. This may include appropriate forecasting techniques to assess the potential value of these assets.
  5. 5. Where available valuation methodologies are deficient, a Bank offering Islamic financial services must assess the need to:
    1. a. allocate funds to cover risks resulting from illiquidity, new assets and uncertainty in assumptions underlying valuation and realization; and
    2. b. establish a contractual agreement with the counterparty specifying the methods to be used in valuing the assets.
  6. 6. A Bank offering Islamic financial services must apply the same risk management policies and procedures to assets held on behalf of restricted investment account holders as it does to assets held on behalf of shareholders and unrestricted investment account holders.
  7. 7. Where a Bank offering Islamic financial services plays the role of market maker to restricted investment account holders, the resultant liquidity risk must be managed appropriately.