The proposed launch of the Bahraini based International Islamic Rating Agency (IIRA) (Incorporated 21st October 2002) with the Islamic Development Bank as its main sponsor has yet to surface.
What are your views on Rating Agencies specifically focusing on Islamic products? Is this necessary or could the global conventional rating agencies (S&P, Moody’s, Fitch etc…) which are well known to the global investor community provide this service?
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As the corporate Sukuk market becomes more established and the sovereign Sukuk market grows, it will be essential to have a credible ratings system to support the growth of a liquid secondary market. However, for the market to generate real breadth and depth, conventional financial institutions must become active participants. These major investors and traders must be able to compare and contrast Shariah-compliant instruments with conventional alternatives that offer similar risks. Thus the depth of analysis and transparency that supports a conventional rating must be echoed in the Islamic equivalent. If a conventional rating agency can approach the task with sufficient sensitivity and understanding of the unique features of Shariah-compliant financial instruments, then the resulting comparative rating system should provide much-needed support to increased liquidity and wider acceptance of Sukuk as a generally recognised investment structure.
JAMES HUME
The role of a Rating Agency is to provide an in depth analysis, comment and guidance in a standardized format that is readily understood by international investors on the overall quality of the structure, review the salient categories of downside risks and mitigants, stress test performance in the different market scenarios and opine on the credit or performance rating of the security in question. The industry knowledge, expertise and track record of the Rating Agency and its international credibility is important to the relevant user constituency. Some Rating Agencies have therefore acquired relevant expertise and resources needed to rate Islamic products. A new specialist international Rating Agency focused exclusively on Islamic banking and finance products may have a competitive advantage but will need to build its brand recognition within the global investor base as several of them are active players in today’s Islamic investment products family. Increasingly, the international investor appetite for Islamic products has grown significantly in size and sophistication and the business has gradually evolved from a regional perspective to a truly global scalable model. There is therefore some potential for a specialist Islamic Rating Agency to add value. SOHAIL JAFFER Partner, FWU Group, Luxembourg
There is a role for local and Global Ratings Agencies to play with regard to Islamic Finance. However, it does need to be made very clear as to what the agency is actually rating. There appears to be some confusion in the market as to whether Ratings Agencies should be reviewing Credit, Shariah Compliance or both. This confusion can only be eliminated by more education and improved communication.
DAVID VICARY
Director, Deloitte Consulting, Malaysia
The establishment by the Islamic Development Bank of an Islamic Rating Agency has undoubtedly raised the profile of the Islamic finance industry as a whole. However, for this investment to be worthwhile, the Islamic Rating Agency must operate to the standards that investors have become accustomed to from the conventional agencies. After all, when a conventional agency assigns a rating to an issue of securities it conducts an in-depth analysis and various stress tests on, inter alia, the performance of the assets and/or the seller and the counterparties involved. The rating assigned to a particular issue is a direct result of such investigations. Investors (particularly conventional investors, who frequently purchase Shariah instruments) will require the Islamic Rating Agency to perform a similar level of due diligence as the conventional agencies, if investor confidence in the rating assigned by the Islamic Rating Agency is to develop. The conceptual differences between a Sukuk and a conventional bond are not such as to prevent the conventional Rating Agencies being able to analyse Shariah compliant securities. However, there are regional and cultural considerations that the conventional agencies need to take into account (e.g. the legal regime in certain Middle Eastern jurisdictions) and until they make a sufficient investment (which they are beginning to do) in this area, the conventional agencies will not be able to fully tackle such considerations. Perhaps competition from the Islamic Rating Agency will spur the conventional agencies to develop their presences and their understanding of certain regions.
Mohammed Asaria Associate, Lovells PLC, UK
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