4. CREDIT RISK (CONTINUED) 4.9 Credit Risk Mitigation (CRM) As a first way out, the assessment of credit when granting a financing facility is based on a particular customer’s cash flow as the main source of payment and not on the collateral offered. However, the acceptance of tangible security as collateral would offer a second way out in the event of business failure thereby improving recovery rates. The types of collaterals accepted by the Group would have an impact on the calculation of the Group’s capital adequacy as the quality and the type of collaterals determine whether the Group is able to obtain capital relief and the extent of such relief. Capital relief is defined as the assignment of a lower or zero risk weight to the counterparty exposure by setting off or reducing the counterparty exposure against the collateral value. The main types of collaterals obtained by the Group to mitigate credit risks are as follows: (a) Cash on lien (b) Landed property (c) Shariah compliant quoted shares and unit trusts (d) Malaysian Federal Government Securities (e) Rated/Unrated Islamic Securities/Sukuk (f) Guarantee The reliance that can be placed on CRM is carefully assessed in light of issues such as compliance with Shariah rules and principles, legal enforceability, market value and counterparty credit risk of the guarantor. The Group has put in place policies and procedures which govern the determination of eligibility of various collaterals to protect the Group’s position from the onset of a customer relationship on the CRM, for instance, in requiring standard terms and conditions or specifically agreed upon documentation to ensure the legal enforceability of the credit risk mitigants. In order to obtain a fair assessment of collateral securing the financing facility, a valuation is performed periodically ranging from weekly to annually, depending on the type, liquidity and volatility of the collateral value. In mitigating the counterparty credit risks arising from foreign exchange and derivatives transactions, the Group enters into master agreements that provide for closeout netting with counterparties, whenever possible. A master agreement that governs all transactions between the two parties, creates a greater legal certainty that the netting of outstanding obligations can be enforced upon termination of outstanding transactions if an event of default occurs. 448 Pillar 3 Disclosure as at 31 December 2023 Bank Islam Malaysia Berhad ◆ Integrated Annual Report 2023
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