The Council of the Islamic Financial Services Board (IFSB) has recently adopted two new capital requirements standards for Sukuk securitizations and other real estate investments.
The updated capital requirements will help create an adequate safety net for improving the securitization markets from South East Asia to the Gulf States, the IFSB said.
The guiding principles for Islamic collective investment schemes sets out the definition of an Islamic collective investment scheme (ICIS) and deals with issues such as the scope of ICIS governance, disclosure material and protection for ICIS investors.
The capital adequacy requirements for Sukuk securitizations focuses on issues such as the capital treatment of securitization exposures and the capital requirements for an institution offering Islamic financial services that invests its own funds in real estate investment activities.
The capital requirements are only applicable to Islamic financial institution that act as originators. These requirements are determined via the risk-weighted asset amount. The credit risk weights for securitization exposure now stand at 20% for triple-A to double-A, 50% for single-A, 100% for triple and double-B and 150% for single-B and below. Unrated classes are now required to carry a risk weight of 100%.
The Islamic financial institution must hold the capital requirement out of its own funds, preferably in the form of equity with a current account. The only exception will be where investors agree to maintain capital requirements although this agreement, even if non-contractual, must be disclosed publicly.
The securitization's servicer might also grant an interest-free loan to the SPE to insure timely payment to investors when shorter-term obligations are mismatched with receivables from long-term debt.
Credit risk mitigations for the capital requirements may include guarantees, collateral and on-balance sheet netting.