Regulatory Alerts2024-03-17
Added · Updated
Instructions No. (3) of 2024 Regarding Capital Requirements for Profit-Sharing Financing Forms
The Palestine Monetary Authority issued Instructions No. (3) of 2024 to establish capital adequacy requirements for Islamic banks operating in Palestine, specifically targeting profit-sharing financing forms including Mudaraba and Musharaka. The regulations mandate specific credit risk weights—ranging from 100% to 400%—based on client listing status, credit ratings, and asset types, while granting a uniform 250% weight to designated agricultural, industrial, technological, and health sector projects. Furthermore, the Instructions require banks to segregate Mudaraba and Musharaka accounts within their banking books and implement dedicated risk monitoring procedures effective from the issuance date.
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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
- The provisions of these Instructions aim to determine the capital requirements for profit-sharing financing forms (Musharaka, Mudaraba).
- 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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Palestine Monetary Authority PALESTINE MONETARY AUTHORITY
- 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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Palestine Monetary Authority PALESTINE MONETARY AUTHORITY
- 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
- 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.
- 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.
- 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%:
- 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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Palestine Monetary Authority PALESTINE MONETARY AUTHORITY
- Industry (production lines, food industries, animal feed, leather and footwear manufacturing, stone and marble production, furniture, spinning and weaving).
- Renewable and alternative energy, water treatment plants, waste recycling, and energy efficiency improvement projects.
- Technology (research and development, consulting and training, computer software development and production, service exports, technology incubators, infrastructure projects).
- Health sector (hospitals, medical services, pharmaceutical industries).
Article (5) General Provisions
- The risk weights referred to in Articles (2 and 3) of these Instructions apply if the exposures are classified in the Banking Book.
- 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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