As the credibility of ratings depends on the reputation of the rating agency, the major international agencies have an advantage given their expertise. It can be argued that this expertise is in rating conventional banks, rather than Shariah compliant financial institutions, but because they are able to recruit the best analysts, in reality they are very competent at rating Islamic banks. It is unlikely that the major ratings agencies would reach agreement on standards for rating Islamic financial institutions, as each agency has its own system, and they are commercial competitors. The smaller specialist agencies that rate Islamic banks could more easily reach agreement on standards as they have governmental backers. However, their ratings generally carry less commercial credibility. Furthermore, Islamic financial institutions have to compete with conventional banks offering Islamic products, and these banks are invariably rated by the major agencies, with no separate ratings for their Shariah compliant operations. Although, therefore, uniform standards might appear tidier, ratings are probably best left to the market. Market participants have the sophistication to be able to interpret the different ratings assigned by the major agencies, as their skill is in managing risk. Having different ratings methodologies may complicate matters, but far from hindering tradability, it actually provides more information on which to base buying and selling decisions. PROFESSOR RODNEY WILSON: VP – Director of Postgraduate Studies, Durham University
Standardization has been alleged to be the cure-all in what ails Islamic finance. Yes, standardization is the foundation for growth, but, as Islamic finance is a mere 40 plus years old, will it stifle innovation? No, as the process can be best described as an expanding virtuous circle. Let me explain. The process is generally three-fold, and the time horizon is case by case per Islamic contract: 1. First, agreement among Shariah scholars. Yes, standardization will increase the tradability of Islamic products, and no, it will not stifle innovation. The key issue is not to try to fast forward standardization for the sake of tradability. RUSHDI SIDDIQUI Global Director, DJIM Group
In my view, yes. However, these ratings must be distinguished from the ratings of conventional instruments because they do not take into account of the endorseability of Shariah requirements. A better mechanism would be for the ratings to come together with Shariah endorsement on the products. MOHAMED RIDZA Ridza Law (Mohamed Ridza & Co)
Rating of bonds in the global fixed income markets is optional to issuers. An issuer would decide to have a rating for the purpose of widening the investor base, as there are quite a number of investors in the primary market who can only buy bonds that are rated. The same applies to any Islamic products, including Sukuk issued under the global Islamic fixed income market. Correspondingly, a rated Sukuk would be able to attract a greater number of investors in secondary market trading. Logically this should enhance the tradability of the Sukuk as there is more liquidity in the market. Nonetheless, rating alone is insufficient to ensure active tradability of the Sukuk. What is more critical is the supply of Sukuk in the market. There may be a lot of demand for rated Sukuk, but there may not be enough supply. A lot of investors are very concerned with substitution risks, in that if they sell a Sukuk they may not be able to find a replacement Sukuk to invest. As such, supply of the products is more critical at this juncture to facilitate active tradability of Sukuk. BADLISYAH ABDUL GHANI CIMB Islamic
My two cents is that global standardization in Islamic ratings would definitely assist in an increase in tradability of Islamic products. It has been long identified that one factor to boost the volume of Islamic products is to give a standardized product structure. Only then can trading in products increase, which will enhance economic trade and fund flow between two Islamic countries. This was the very reason why the International Islamic Financial Market (IIFM) and the International Islamic Rating Agency (IIRA) were established, to formulate standard guidelines for product structuring and ratings respectively. NIK MOHAMED DIN NIK MUSA Bank Negara Malaysia
Definitely the credibility and the demand for Islamic products would flare up exponentially. This would only occur if the Islamic ratings are standardized and the rating system is centralized across the globe. If a reputable organization takes the initiative of spearheading the challenge to centralize the Islamic ratings system, then slowly but surely it will gain credibility across the Muslim nations because of its just and fair practices, just like the Accounting and Auditing of Islamic Financial Institutions (AAOIFI) did in the past. AAOIFI started as a voluntary organization in 1991, but now it has gained recognition and acceptance across the Islamic financial services industry as the pioneer in implementing Islamic accounting and auditing standards. In the near future, there could be another body like AAOIFI that would regulate the Islamic ratings system. REHAN SAEED Director of Banking Operations, UM Financial Canada
In regard to Sukuk, undoubtedly, the answer must be ‘yes’. One of the main constraints over the past several years to the growth of the Sukuk market has been the assumed mystery behind this investment, as viewed through the eyes of conventional investors. By setting Sukuk totally apart from conventional equivalents from a risk perspective, potential investors are unable to make a meaningful comparison between various investment options open to them and, as a consequence, tend to avoid Sukuk. There is no reason for this – indeed the greater support to investors that stems from their undivided title to a tangible underlying asset within the Sukuk structure should enhance this alternative. Thus any global standardization that helps investors to understand that risk within a Shariah compliant structure can be analyzed using the same standard approach as conventional alternatives will provide a level of comfort that should lead to greater acceptance, greater demand and greater liquidity. James Hume Omega Group
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