Page 130 - ICD-AR22-English

Notes to the Separate Financial Statements
FOR THE YEAR ENDED 31 DECEMBER 2022
– to respond to the Shari’ah related questions, enquiries and explications referred to it by the Board of Executive Directors or the management of the IsDB, its affiliates and trust funds;
– to contribute to the IsDB, its affiliates and trust funds programme for enhancing the awareness of its staff members of Islamic banking and deepen their understanding of the fundamentals, principles, rules and values relative to Islamic financial transactions; and
– to submit to the Board of Executive Directors of the IsDB, its affiliates and trust funds a comprehensive report showing the measure of the IsDB’s, its affiliates’ and trust funds’ commitment to principles of Shari’ah in the light of the opinions and directions given and the transactions reviewed.
31 RISK MANAGEMENT
The Corporation’s activities expose it to various risks (credit risk, market risk and liquidity risk) associated with the use of financial instruments. Senior management, under the supervision of the Board, oversees and manages the risks associated with the financial instruments.
Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.
The Corporation is exposed to credit risk in both its financing operations and its treasury activities. Credit risk arises because beneficiaries and treasury counterparties could default on their contractual obligations or the Corporation’s financial assets could decline in value.
For all classes of financial assets held by the Corporation, the maximum credit risk exposure is their carrying value as disclosed in the separate statement of financial position. The assets which subject the Corporation
to credit risk principally consist of bank balances, Commodity Murabaha and Wakala placements, Sukuk investments, Murabaha financing, Installment sales financing, Ijarah Muntahia Bittamleek, Istisna’a assets and other assets. This risk is mitigated as follows:
• Commodity Murabaha and Wakala placements and Sukuk investments are managed by the Corporation’s treasury department. The Corporation has made placements with financial institutions under the arrangement of Murabaha financing. Adequate due diligence is exercised prior to investments and as at the period end, management considers that there are no material credit risks posed by these investments.
• The Corporation evaluates Murabaha financing, installment sales, Ijarah Muntahia Bittamleek and Istisna’a financing (financing assets). Credit evaluation is performed internally, and external expertise is used where required. The Executive Committee of the Board of Directors of the Corporation approves all the financing. Such financing is generally secured against adequate security for financing. Under Ijarah Muntahia Bittamleek contracts, the Corporation is the owner of the related asset which is only transferred to the beneficiary
upon payment of all the installments due at the end of the lease term. The net book value of Ijarah Muntahia Bittamleek assets after taking allowance for impairment as disclosed in the separate statement of financial position was considered fully recoverable by the management of the Corporation.
The Corporation applies a three-stage approach to measuring expected credit losses (ECLs).
128 ICD ANNUAL REPORT 2022