Single Counterparty Exposure Limit for Islamic Banking Institutions

Risk concentration refers to an exposure with the potential to produce losses that are substantial enough to threaten the financial condition of an Islamic banking institution. Risk concentrations can materialise from excessive exposures to a single counterparty and persons connected to it, a particular instrument, or a particular market segment. A risk concentration to a single counterparty may arise through direct exposures to the counterparty and indirectly through exposures to guarantors and protection providers. The magnitude of this risk is significantly influenced by the existence of common or correlated risk factors which, in times of stress, can adversely affect the creditworthiness of each individual counterparty making up the concentration.

The single counterparty exposure limit (SCEL) represents a non-risk-adjusted backstop measure to ensure that exposures to a single counterparty and persons connected to it remain within a prudent limit at all times.

This policy document sets out—
(a) the prudential limit for exposures to a single counterparty and persons connected to it;
(b) the Bank’s specification as to what constitutes “connected”, “counterparty” and “exposure”;
(c) the Bank’s requirements and expectations of Islamic banking institutions in managing and monitoring exposures to a single counterparty and persons connected to it;
(d) scope and treatment of exposures applicable to a single counterparty and persons connected to it; and
(e) expectations with respect to on-going compliance with the SCEL.

This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking