Risk Management Framework for Shari’ah Compliant Banking

Banks must be aware and understand the different types of risk inherent in all Shari'ah compliant banking products that they offer. Banks must have in place appropriate risk management approaches and methodologies to identify and differentiate various risk components in Shari'ah financial products and the underlying contracts used in these products. For example, risk inherent may differ at different stages of the life of the product that would require the bank to distinguish and quantify each category of risk using different approaches and methodologies. Banks must ensure these methodologies are assessed and validated by independent risk management function or external independent validation to ensure that the risk categorization and measurement methodologies used are appropriate and effective. 6.5 Banks that offer profit sharing investment accounts (PSIAs) must establish mechanisms for monitor that funds provided by the account holders were utilized for purposes that are in line with the terms and conditions agreed with account holders. Banks must also comply with the risk management requirements set out in the PSIAs Rules (September 2022) and any subsequent updates. 6.6 Banks must ensure that the structuring of products, underlying transactions and contracts are fully compliant with Shari'ah rules and principles. Banks must have in place appropriate functions and structure (e.g. Shari'ah risk administration department or unit either separated or embedded within the risk originating function) to ensure that documentation of transactions required for Shari'ah compliant products are complete and that the sequencing of transactions and contracts, are compliant with Shari'ah rules and principles. For example, the dates play a very important role in Murabahah transactions and any transaction can be rendered invalid if the sequencing of obtaining documents is changed. 6.7 Board, senior management and staff should have sound knowledge, skills and understanding of Shari'ah rules and principles as well as risks associated with Shari'ah compliant products and services offered by the bank. Banks should periodically review adequacy of resources, competencies and skills for the operation of Shari'ah compliant banking activities and have in place training programs to address any gaps identified in internal capacity and competencies. 7. Credit Risk 7.1 Principle 2.0 : Banks shall have in place appropriate methodologies and adequate systems, infrastructure and resources for identifying, measuring, managing and reporting the credit risk exposures arising from Shari'ah compliant financing products. 7.2 Banks must have well-defined criteria and policies and processes for approving new credit, renewing and refinancing existing Shari'ah compliant financing. These criteria should include the type, nature and amount of credit exposures, including the terms and conditions and other contractual obligations under the Shari'ah compliant contract used that the bank may accept and in line with the approved-risk appetite, risk limits, risk bearing capacity as well as SAMA's requirements on responsible lending.