The tawarruq may expose the IFI to various types of risks, such as market, liquidity, credit and operational risks. These risks, which appear at various stages of transactions, may change in nature that may necessitate the establishment of a comprehensive and sound risk management infrastructure, reporting and control framework.

a) Explain the phrase: “comprehensive and sound risk management infrastructure”? 

b) Suppose a Tawarruq facility is financed by the investment account fund (IA) offered by Malaysian Islamic banks. Explain the risk implications of the IA funding system. What are the strategies for risk mitigation and control? 

c) Islamic banks under the Islamic Financial Service Board (IFSB) use Profit Sharing Investment Accounts (PSIA) to fund the Tawarruq financing. Supposed the banks are not able to provide competitive returns to PSIA holders. What are the strategies pursued by these banks to rectify the situation? 

d) BBB Corporate J received a $100 million Tawarruq facility. At the Probability of Default (PD) of 5%, the outstanding facility is $70 million upon default. Find Expected Loss given financing to value ratio (FTV) = 2. 

Answer rating: 100% (QA)

a A comprehensive and sound risk management infrastructure is defined as coordinated activities to direct and control an organization with regard to risk Risk management is defined as coordinated acti... View the full answer