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Wad - Operational Requirements

Yahya Massoud
By Yahya Massoud
1 month ago
Wad - Operational Requirements

Shariah, Bank

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1 month ago

Nice read

1 month ago



  1. 9 of 25 Wa `d PART C S 16.1 17. OPERATIONAL REQUIREMENTS Unless stated otherwise, the operational requirements in this policy document shall apply to an IFI regardless of whether the IFI is a promisor or a promisee under the wa`d arrangement. Governance and oversight S 17.1 The requirements under this part complement the broad governance and oversight expectations specified under the relevant policy documents on governance issued by the Bank. While broad governance and oversight principles are applicable, an IFI must observe specific requirements on governance and oversight as outlined in this policy document to manage risks and unique nature of wa`d. S 17.2 An IFI must have sufficient understanding of wa`d risk profile and ensure the availability of personnel with the appropriate knowledge and skills to offer wa`d. Board of directors S 17.3 The board of directors of an IFI (the Board) must establish a sound governance structure to facilitate an effective oversight on the management and application of wa`d. The adequacy of the governance structure shall commensurate with the nature, complexity and risk profile of wa`d. S 17.4 The Board has overall responsibility for corporate governance, Shariah governance and Shariah compliance of the IFI. As such, the Board must – (a) approve the business and risk strategies of the IFI with regard to the application of wa`d; (b) approve and oversee the implementation of policies and procedures governing the application of wa`d, which must include, at minimum, the following aspects: (i) risk management; (ii) information disclosure; (iii) wa`d documentations; (c) ensure that appropriate internal controls, systems and infrastructure are in place to implement wa`d in accordance with Shariah requirements; (d) ensure that sufficient resources are in place, and that the IFI has adequate and qualified personnel with sufficient knowledge and competency on the concept, application and risks associated with wa`d; and (e) ensure that independent reviews are conducted regularly to assess compliance with the policy documents issued by the Bank and internal policies established by the IFI. Shariah Committee S 17.5 The Shariah Committee has the responsibility to advise the IFI in ensuring its business, affairs and activities involving wa`d comply with Shariah. As such, the Shariah Committee must – Issued on: 2 February 2017
  2. 10 of 25 Wa `d (a) endorse the application of Shariah requirements in the relevant policies and procedures governing wa`d; (b) review the terms and conditions stipulated in legal documentations and other documents 3 , and endorse that the terms and conditions are in compliance with Shariah; (c) advise and provide clarification on relevant Shariah rulings, decisions or policy documents on Shariah matters issued by the Bank, and if relevant, any other authorities; and (d) assess the work carried out by Shariah review and Shariah audit and endorse any rectification measures to ensure that wa`d complies with Shariah requirements. Senior management S 17.6 18. The senior management has the responsibility to ensure that the business and operations of an IFI complies with Shariah requirements. As such, the senior management must – (a) develop and implement internal control and risk management policies and procedures in line with the business and risk strategies approved by the Board; (b) establish policies, procedures and processes with regard to proper management of wa`d; (c) implement relevant internal systems, infrastructure and mechanisms to identify, measure, control and monitor risks associated with wa`d; (d) identify, assign and train key personnel with the appropriate skill and ensure that the roles and responsibilities are properly delegated to the relevant functions to undertake the different activities under wa`d; (e) undertake regular review and monitor compliance with the approved internal policies; and (f) ensure timely disclosure of relevant information with regard to wa`d to the Board and the Shariah Committee. Structuring Shariah compliance S 18.1 3 An IFI must ensure that (a) the overall operations of wa`d are in compliance with Shariah requirements as provided in Part B of this policy document; (b) the overall operations of wa`d are in compliance with any specific requirements on wa`d as provided in the policy documents on Shariah contracts issued by the Bank; (c) product structure, legal documents, internal policies and procedures involving wa`d are endorsed by the Shariah Committee; (d) any issues pertaining to Shariah matters must be discussed and deliberated at the Shariah Committee; and (e) the opinion of the Shariah Advisory Council of the Bank (SAC) is sought if there are any unresolved Shariah issues involving wa`d. Such as information published on promotional materials, product manuals or other publications. Issued on: 2 February 2017
  3. 11 of 25 Wa `d Binding wa`d S 18.2 In the event where an IFI is the promisor, the IFI must ensure that the expression of wa`d is in writing or can be evidenced by documentations as soon as practicable. S 18.3 An IFI4 must ensure that the conditions5, of which occurrence would cause action(s) to be taken by the promisor to fulfill wa`d are − (a) clearly stipulated in wa`d documentation; and (b) identifiable by both the promisor and promisee. Fulfillment, revocation and breach of wa`d S 18.4 An IFI shall clearly outline the requirements on fulfillment, breach and revocation of wa`d in the wa`d documentation, which shall reflect the following: (a) wa`d is fulfilled when the promisor executes the action(s), regardless of whether the promisee invokes wa`d; (b) wa`d is breached by the promisor when the promisor does not execute the action(s) despite wa`d being invoked by the promisee; and (c) wa`d is revoked when – (i) the promisee agrees to the promisor’s revocation of wa`d; or (ii) the promisor does not execute the action(s) and the promisee does not invoke wa`d. S 18.5 For the purpose of paragraph 18.4, the IFI shall clearly specify the time period following the occurrence of the conditions, in which – (a) the promisor shall conduct the action(s); and (b) the promisee has the right to invoke wa`d. G 18.6 An IFI may refer to Appendix 4 for the illustration on fulfillment, revocation and breach of wa`d. Counter value on wa`d S 18.7 An IFI shall not impose or pay any consideration specifically for the provision of wa`d including fees or charges. G 18.8 For the avoidance of doubt, the IFI may impose or pay counter values such as fees or charges 6 on other Shariah contracts or arrangements used together with wa`d or incurred for expenses incidental7 to the use of wa`d. 4 5 6 If the IFI is the promisee that prepares wa`d documentation or the IFI is the promisor. For the purpose of wa`d, conditions include (i) time period such as date or time; (ii) price such as purchase or sale price of assets, profit rates, currency exchange rates; (iii) conduct such as purchase of asset; and (iv) events such as changes in relevant regulations. As an example, if market disruption is identified as a condition, the IFI may wish to give more clarity in terms of the relevant indicators and the quantification of such indicators that would signify market disruption. This definition applies throughout this document where there are conditions of which occurrence would cause promisor to fulfill wa`d, such as in paragraphs 18.13 (c), (e) and (f). In line with the policy requirements under Guidelines on the Imposition of Fees and Charges on Issued on: 2 February 2017
  4. 12 of 25 Wa `d Actual loss For the purpose of paragraph ‎12.4(a), the IFI shall ensure that the actual loss consists of the following: (a) at minimum – (i) the amount of shortfall between the outstanding principal amount and recoverable value of the asset; (ii) where applicable, the amount of shortfall between the cost of asset acquisition and the disposal value of the asset; (iii) direct costs or loss, based on actual or estimated amount; and (b) any additional components with regard to wa`d as specified in the policy documents issued by the Bank including on Shariah contracts 8. S 18.9 S 18.10 For the purpose of paragraph ‎12.4(b) – (a) actual loss consists of actual or estimated9 direct costs or loss. Any estimation done shall be based on approaches or methodologies established in the market and information obtained from reliable sources10; and (b) the IFI shall establish policies and procedures11 in determining actual loss, which are endorsed by the Shariah Committee. S 18.11 Actual loss based on customary market practice under paragraph ‎12.4(b) is only applicable if no specifications are provided in the policy documents issued by the Bank or when actual loss is established based on customary market practice for the particular products or services. Documentation12 S 18.12 An IFI shall develop a comprehensive documentation for wa`d which are in compliance with Shariah requirements as well as the applicable laws. S 18.13 An IFI shall ensure that the terms and conditions of wa`d arrangement includes the following: (a) time or date that wa`d is binding; (b) specifications on the subject matter, including action(s) to be taken by the promisor, assets or any other items or arrangements involved; (c) conditions attached to wa`d; 7 8 9 10 11 12 Financial Products and Services that was issued by the Bank. For example, brokerage fees on commodity murabahah transactions. Such as costs for legal documentations. Such as actual loss as specified in paragraph 25.26 of policy document on Tawarruq. For example, when a promisor breach the wa`d causing a default in derivative obligations, actual loss to the promisee may consist of costs/loss in relation to promisee’s risk mitigation arrangements whether conducted on actual basis (i.e. specific back-to-back arrangement with a third party) or on estimated basis (i.e. risk mitigation on portfolio basis). Such as calculation agents, financial institutions providing market quotations, providers of market data and indicators (e.g. Bloomberg, Reuters). For IFI as a promisee, this shall also include the course of action should the amount claimed exceed actual loss suffered. Paragraphs 18.12 to 18.16 are applicable to the IFI as a promisee that prepares the wa`d documentation or the IFI as a promisor. Issued on: 2 February 2017
  5. 13 of 25 Wa `d (d) rights, duties, liabilities and obligations of the parties involved: (i) the promisor and the promisee; (ii) the guarantor(s) of the promisor, if any; (e) time period 13 for the promisor to execute the action(s) following the occurrence of conditions; (f) terms of invocation of wa`d by the promisee, which includes: (i) time period 14 for invoking wa`d following the occurrence of conditions; (ii) implications if wa`d is not invoked within the stipulated time period; (g) provision on the breach of terms and conditions of wa`d, including: (i) implications on the promisor; (ii) rights of the promisee to claim for compensation based on actual loss; (h) parameters15 in determining actual loss; and (i) terms on revocation of wa`d. S 18.14 An IFI shall ensure that terminologies used in the documentation reflect the definition and concept of wa`d, in line with the requirements in this policy document. Appropriate translation or explanation of any Arabic terminologies used in the documents must be included to facilitate the understanding of the promisor and promisee. G 18.15 Unless required otherwise16, an IFI may document the provision on the wa`d used with other Shariah contracts in a master agreement or specific agreements. S 18.16 Where an IFI uses wa`d in conjunction with other Shariah contracts, the IFI shall ensure that the sequence of executing Shariah contracts as specified in the terms and conditions of the financial products or services is observed17. S 18.17 In the event where an IFI is the promisor, the IFI has the duty to inform or notify the promisee on the wa`d arrangement. The IFI shall have measures in place to prove that the promisee has received the wa`d documentation18. Application of wa`d in currency exchange transactions S 18.18 An IFI shall ensure that the application of wa`d in currency exchange transactions 19 , including derivatives, is used to mitigate pre-existing risk exposures of at least one of the transacting parties20. 13 14 15 16 17 18 Such as specific date or number of days after the occurrence of the conditions. Such as specific date or number of days after the occurrence of the conditions. For example, a specified formula, items involved or components of actual loss. If such requirements are prescribed in the policy documents issued by the Bank such as policy documents on Shariah contracts. For example, while the master agreement for an ijarah muntahia bi al-tamlik (IMB) is intended to result in the underlying assets to be transferred to the customer, such transfer would only take place if the requirements under wa`d is fulfilled. Such as acknowledgement/initials by the promisee on wa`d documentations. However, actual reply from promisee is not necessary as long as the means of delivery of wa`d documentation is reasonably reliable for example registered mail, electronic correspondence. Issued on: 2 February 2017
  6. 14 of 25 Wa `d S 18.19 For the purpose of paragraph ‎18.18, the IFI shall – (a) obtain or maintain the documentary evidence21 that wa`d is used only in transactions for risk mitigation purposes; and (b) assess the features22 of the product used in the currency exchange transactions to determine whether it is used for risk mitigation purposes. 19. Risk management S 19.1 An IFI shall establish sound risk management policies to mitigate potential risk arising from the application of wa`d in accordance with the IFI’s role either as a promisor or promisee. S 19.2 An IFI shall establish risk management policies, which include the following: (a) processes, procedures and infrastructure required for the identification, monitoring and control of risk exposures associated with wa`d; and (b) periodic review and updating of the risk management policies and procedures on wa`d to ensure consistency with the IFI’s risk appetite. S 19.3 Where an IFI is a promisee, the IFI shall − (a) assess the risks arising from breach of wa`d by the promisor; (b) identify measures, to facilitate the recovery process in the event where the promisor breaches wa`d terms and conditions, which include – (i) identification of the amount of claims on actual loss; (ii) proper maintenance of records and documentary evidence to support the claims23; and (iii) identification of the procedures to make the claims and mechanisms to handle disputes on claims, if any; (c) have in place measures to ensure that wa`d is fulfilled by the promisor including − (i) monitoring the occurrence or fulfilment of conditions24 attached to wa`d; (ii) invocation of wa`d within the specified time period; and (iii) communication on invocation of wa`d to the promisor is done in writing or through other legally admissible evidence of such actions. 19 20 21 22 23 24 Refers to currency exchange not on spot basis, for example wa`d to enter into Bai al-sarf contract in the future. At least one of the transacting parties (i.e. either the customer or the IFI) has a pre-existing exposure that needed to be hedged prior to entering into wa`d arrangement. Such as documentation on customer’s actual exposures or customer’s declaration on use of derivatives for risk mitigation purposes. For example, the party writing an option signifies the use of currency transaction as yield enhancement and not for risk mitigation. For example, receipts, documentations on costs incurred. For example, in option derivatives, the promisee should monitor whether strike price has been reached in order to exercise the option, upon which the promisor shall fulfill the wa`d. Issued on: 2 February 2017
  7. 15 of 25 Wa `d G 19.4 As wa`d is binding when the promisor expresses the wa`d orally, i.e. prior to any documentation or record of wa`d is made, the IFI as the promisee may adopt additional measures to protect the IFI’s interests which includes: (a) ensuring that the key terms are mutually agreed prior to finalisation of wa`d documentation; (b) ensuring that the IFI prepares wa`d documentation on behalf of the promisor; (c) assess that the promisor or his guarantor have the ability and capacity to honour wa`d before inception of transactions; and (d) assess that the documentation on the promisor’s guarantor, if any, is in line with the applicable requirements, including Shariah and legal requirements. S 19.5 Where an IFI acts as a promisor, the IFI shall ensure the following: (a) monitor the occurrence or fulfilment of conditions attached to wa`d; (b) action(s) to fulfil wa`d are executed within the stipulated time period; and (c) mitigate possible issues that may restrict the IFI from executing the action(s) or for guarantor to guarantee the promisor in accordance with wa`d. S 19.6 As wa`d is not binding on the promisee, there is no obligation for the promisee to conduct a transaction in acceptance of the promisor’s execution of the action(s) in fulfilling wa`d. The IFI as a promisor shall assess the risks involved in such circumstances and identify the appropriate risk mitigation measures25. 20. Business and market conduct General principle S 20.1 An IFI must take into consideration the customer’s interests in developing policies, processes and procedures to ensure that wa`d is conducted in a fair, transparent, responsible and professional manner. Fair dealings S 20.2 25 An IFI must ensure that its policies and procedures on business and market conduct for wa`d reflect fair dealings, including – (a) information provided must be accurate and clear; and (b) reasonable care must be taken prior to providing suitable advice and recommendations, if any. For example, if a promisor executes wa`d to sell an asset upon trigger event, the promisee is not obliged to purchase the asset from the promisor. To mitigate risk, the use of muwa`adah to create two unilateral binding wa`d may be used to ensure that the promisee is obliged to purchase the asset when the promisor sells the asset. Issued on: 2 February 2017
  8. 16 of 25 Wa `d G 20.3 In order to reflect fair dealings, an IFI may consider for the terms in wa`d to be in line with market practices and the circumstances specific 26 to the customers. Information disclosure S 20.4 An IFI shall provide adequate and relevant information to the customers, including those provided prior to the expression of wa`d. S 20.5 Disclosure prior to the expression of wa`d shall include the overview of wa`d, in particular its arrangement with other Shariah contracts, purpose, key terms and conditions, and key risks of using wa`d. S 20.6 Disclosure of the potential key risks under paragraph 20.5 includes but not limited to the following: (a) promisor has no recourse to the promisee; and (b) implications arising from breach of wa`d by the promisor. 21. Financial disclosure S 21.1 An IFI must ensure that all internal records on wa`d are updated regularly and are available for inspection by the Bank or external auditors as and when required. G 21.2 An IFI may provide clarity in notes to the accounts on the impact 27 of applying wa`d together with Shariah contracts on a particular product or service. 26 27 For example, ensuring that a reasonable time frame is given to the customer as promisor to execute the action(s) under wa`d, depending on the circumstances such as complexity of the transactions involved to conduct the action(s). For example, while co-ownership of asset in musyarakah mutanaqisah between the IFI and obligor may signify equity risk, the application of wa`d to transfer asset ownership to the obligor creates credit risk profile for the product. Issued on: 2 February 2017