• Displaced commercial risk

    • IFR 5.4.4 IFR 5.4.4

      An Authorised Person Managing a PSIA, which is an Unrestricted PSIA, must calculate a Displaced Commercial Risk Capital Requirement in respect of its PSIA business.

      • Guidance

        (i) An Authorised Person Managing a PSIA, on an unrestricted basis is subject to a unique type of risk referred to as Displaced Commercial Risk. This risk reflects the fact that an Authorised Person may find itself under commercial pressure to pay a rate of return to its PSIA holders which is sufficient to induce those investors to maintain the investment of their funds in an Unrestricted PSIA managed by the Authorised Person, rather than withdrawing those funds from the Unrestricted PSIA and investing them elsewhere. If this "required" rate of return is higher than that which would be payable under the normal terms of the PSIA Investment Contract, the Authorised Person may be under pressure to forgo some of the share of profit which would normally have been attributed to an Authorised Person and, by extension, be available for distribution to its shareholders (e.g. part of the Mudarib's share of the profits of a Mudaraba). Failure to do this might result in a volume of withdrawals of funds by investors large enough to jeopardise the Authorised Person's commercial position (or, in an extreme case, its solvency). Thus, part of the commercial risk attached to the returns attributable to the PSIA is, in effect, transferred to the shareholders of the Authorised Person or the Authorised Person's own capital. It also reflects situations whereby an investor may be permitted to exit an investment in a particular asset pool at par where the fair value of such assets is lower than their carrying amounts resulting in the Authorised Person absorbing the loss arising as a result of such shortfall.
        (ii) In an Unrestricted PSIA, the PSIA holder authorises the Authorised Person to invest the PSIA holder's funds in a manner which the Authorised Person deems appropriate without specifying any restrictions as to where, how or for what purpose the funds should be invested, provided that they are invested in a manner that complies with Shari'a. Under this arrangement, the Authorised Person can commingle the PSIA holder's funds with its own funds or with other funds which the Authorised Person has the right to invest on an unrestricted basis (i.e. funds from other Unrestricted PSIAs). The PSIA holders and the Authorised Person generally participate in the returns on the invested funds.
        (iii) In a Restricted PSIA, the PSIA holder imposes certain restrictions as to where, how and for what purpose the funds are to be invested. Further, the Authorised Person may be restricted from commingling its own funds with the restricted PSIA funds for the purposes of investment. In addition, there may be other restrictions that the PSIA holders may impose. In other words, the funds provided by holders of Restricted PSIAs are managed by the Authorised Person which does not have the right to use or dispose of the investments in which those funds are made except within the conditions of the relevant PSIA Investment Contract.
        (iv) An Authorised Person undertaking Islamic Financial Business is also exposed to fiduciary risk which arises where the terms of the relevant PSIA Investment Contract between the Authorised Person and the PSIA holder are breached and where the Authorised Person does not act in compliance with Shari'a.
        (v) An Authorised Person (whether acting as an Islamic Financial Institution or through an Islamic Window) is required to apply the Capital Requirements specified in PRU Chapter 3 to any Islamic Financial Business it carries on.

    • IFR 5.4.5

      (a) An Authorised Person's Displaced Commercial Risk Capital Requirement is based on 35% of the sum of CRCOM and the Market Risk capital requirement of assets funded by Unrestricted PSIA holders and is calculated using the following formula:
           PSIACOM = PSIACOMcredit + PSIACOMmarket x 35%.
      (b) PSIACOM is the Displaced Commercial Risk Capital Requirement;
      (c) PSIACOMcredit is the Credit Risk capital requirement for assets funded by Unrestricted PSIA holders and is calculated in accordance with PRU Section 4.8; and
      (d) PSIACOMmarket is the Market Risk capital requirement for assets funded by Unrestricted PSIA holders and is calculated in accordance with PRU Chapter 5.
      Amended on (3 February, 2020).