CBUAE/BSD N 1198/2021 يسري تنفيذه من تاريخ 25/2/2021
13.1IBs must establish an adequate framework towards the management of market risks inherent in the holding of Mudaraba, Musharaka, and Wakala instruments for investment purposes. This includes consideration of quality of the partner, underlying business activities and ongoing operational matters.
13.2IBs must have in place appropriate mechanisms to safeguard the interests of all fund providers. Where IAH funds are commingled with the IBs’ own funds, the IBs must ensure that the bases for asset, revenue, expense and profit allocations are established, applied and reported in a manner consistent with the IB’s fiduciary responsibilities.
13.3In performing the due diligence review, IBs must consider in evaluating the risk in Mudarabah, Musharakah, and Wakala instruments and the capabilities and risk profiles of potential partners (Mudarib or Musharakah partner). Such due diligence is essential to an IBs’ fiduciary responsibilities as an investor of IAH funds in profit sharing and loss-bearing instruments (such as Mudarabah, Musharkah and Wakala).
13.4IBs must consider factors relating to the legal and regulatory environment affecting the equity investment performance during risk evaluation. These factors include policies pertaining to tariffs, quotas, taxation or subsidies and any sudden policy changes affecting the quality and viability of an investment.
13.5IBs risk mitigation techniques attaching to lack of reliable information must require its investor to take an active role in monitoring the investment, or the use of specific risk mitigating structures.
13.6IBs must define and set the objectives of, and criteria for, investments before using profit-sharing and loss-bearing instruments (such as Mudarabah, Musharkah and Wakala), including the types of investment, tolerance for risk, expected returns and desired holding periods.
13.7IBs must have, and keep under review, policies, procedures and an appropriate management structure for evaluating and managing the risks involved in the acquisition of, holding and exiting from loss bearing investments. IBs must ensure proper infrastructure and capacity are in place to monitor continuously the performance and operations of the entity in which IB invest as partners. These should include evaluation of Shari’ah compliance, adequate financial reporting by, and periodical meetings with, partners and proper recordkeeping of these meetings.
13.8IBs must identify and monitor the transformation of risks at various stages of investment lifecycles, for example, where the investee’s business involves innovative or new products and services in the marketplace.
13.9IBs must analyze and determine possible factors affecting the expected volume and timing of cash flows for both returns and capital gains arising from equity investments.
13.10IBs must use Shari’ah compliant risk-mitigating techniques, which reduce the impact of possible capital impairment of an investment. This may include the use of Shari’ah permissible security from the partner.
13.11IBs must ensure that their valuation methodologies are appropriate and consistent and must assess the potential impacts of their methods on profit calculations and allocations. The methods must be mutually agreed between the IB and the Mudarib and/or Musharaka partners.
13.12IBs must assess and take measures to deal with the risks associated with potential manipulation of reported results leading to overstatements or understatements of partnership earnings.
13.13IBs must define and establish exit strategies in respect of their equity investment activities, including extension and redemption conditions for Mudaraba, Musharaka and Wakala investments, subject to the approval of the institution’s Internal Shari’ah Supervision Committee.
13.14IBs must be aware that the risks arising from the use of profit-sharing instruments for financing purposes do not include credit risk in the conventional sense but share a crucial characteristic of credit risk because of the risk of capital impairment.