Instructions No. (3) of 2024 Regarding Capital Requirements for Profit-Sharing Financing Forms

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Palestine Monetary Authority
PALESTINE MONETARY AUTHORITY

Instructions No. (3) of 2024
Regarding Capital Requirements for Profit-Sharing Financing Forms

Pursuant to the provisions of Law Decree No. (9) of 2010 regarding Banks, particularly Articles (33 and 72) thereof, and after reviewing Instructions No. (9) of 2018 regarding Capital Adequacy Requirements for Islamic Banks, and in accordance with the powers delegated to us, and in pursuit of the public interest, we have issued the following Instructions:

Article (1)
Objective and Scope of Application

1. The provisions of these Instructions aim to determine the capital requirements for profit-sharing financing forms (Musharaka, Mudaraba).
2. The provisions of these Instructions apply to all banks licensed by the Monetary Authority to conduct Islamic banking business in Palestine.

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2. When financing working capital or the main activities of private commercial companies through Mudaraba contracts, the bank must adhere to the following:
   a. Granting a preferential risk weight of 250%, if the client is a company listed on the Palestine Exchange. b. Granting a preferential risk weight of 400%, if the client is an unlisted company on the Palestine Exchange.

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2. When financing project investments through Mudaraba contracts, the bank must adhere to the following:
   a. Weighting is determined according to the credit rating of the Mudarib, if the Mudarib is a company listed on the Palestine Exchange. b. Granting a preferential risk weight of 250%, if the Mudarib is an unlisted company on the Palestine Exchange.
   c. Amounts due from the Mudarib are weighted according to the credit rating of the Mudarib.

Article (3)
Credit Risk Weighting for Musharaka Contracts

1. Excluding activities related to trading in foreign currencies, equities, and commodities, when financing working capital or the main activities of private commercial companies through Musharaka contracts, the bank must adhere to the following:
   a. Granting a preferential risk weight of 250%, if the client is a company listed on the Palestine Exchange. b. Granting a preferential risk weight of 400%, if the client is an unlisted company on the Palestine Exchange.
2. When the Musharaka contract is based on co-ownership in real estate or movable assets (with a lease agreement or subordinate Murabaha contract), the bank must adhere to the following:
   a. Weighting is determined according to the credit rating of the lessee (in case of lease agreement) or the client (in case of Murabaha contract). b. Granting a preferential risk weight of 100%, if the lessee or client is unrated.
3. When the Musharaka contract is based on diminishing Musharaka related to real estate or limited assets leased to the client under a lease agreement, the bank must adhere to weighting according to the credit rating of the lessee.

Article (4)
Exceptions

In exception to what is stipulated in Articles (2 and 3) of these Instructions, contracts based on Musharaka and Mudaraba forms directed at the following activities are weighted at 250%:

1. Agriculture (fish farming projects, red meat and fattening, medicinal herbs, land reclamation, poultry breeding, livestock and cattle breeding, beekeeping and honey production, greenhouses for producing various vegetables and fruits).

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2. Industry (production lines, food industries, animal feed, leather and footwear manufacturing, stone and marble production, furniture, spinning and weaving).
3. Renewable and alternative energy, water treatment plants, waste recycling, and energy efficiency improvement projects.
4. Technology (research and development, consulting and training, computer software development and production, service exports, technology incubators, infrastructure projects).
5. Health sector (hospitals, medical services, pharmaceutical industries).

Article (5)
General Provisions

1. The risk weights referred to in Articles (2 and 3) of these Instructions apply if the exposures are classified in the Banking Book.
2. The bank must adopt procedures and mechanisms for monitoring and managing risks related to Mudaraba and Musharaka forms, and each of the Mudaraba and Musharaka accounts must be managed within a separate account.

Article (6)
Repeal

All provisions inconsistent with these Instructions are hereby repealed.

Article (7)
Implementation and Enforcement

All competent authorities, each within its respective scope, must implement the provisions of these Instructions, which shall apply as of their issuance date.

Issued in Ramallah, on date: 17/03/2024 CE

Dr. Firas Malhem
Governor
[Signature]

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