An opportunity in Islamic finance for local rating agencies

by  — 15 June 2013

There has been much discussion of a local credit ratings agency, following the announcement of Qatar’s central bank governor Sheikh Abdullah Saud Al Thani. But how can it differentiate it self to stand out against the global rating agencies?

Speaking at a Sukuk Conference held in Doha recently, Faheem Ahmad a senior technical advisor with the Islamic International Rating Agency (IIRA) noted that it is a positive move that Qatar wants to develop a local credit ratings agency, but is not clear yet what the framework for the ratings will be. The thrust of his talk was the importance of credit ratings within the context of Islamic finance.

Islamic finance has been experiencing significant growth in the region, and Qatar specifically. The latest report from Ernst & Young showed that Islamic banking assets are expected to have grown by as much as 23 percent in 2012. The central bank governor of Qatar also pointed out that assets in Islamic banks have multiplied 20 times in the past 10 years, from QAR8.8 billion to QAR195 billion. However, this growth has not been matched in financial support systems such as credit ratings.

Credit ratings agencies are tasked with providing investors with informed analysis of risks associated with specific debt securities. However, conventional ratings products like those offered by global credit ratings agencies such as Standard & Poor’s (S&P), Fitch and Moody’s use the same criteria for rating both Islamic banking and conventional banking.

QAR195 billion - Qatar’s Islamic banks’ current assets that have multiplied 20 times over the past 10 years, according to the central bank governor of Qatar.

Ahmad offered that Islamic banks should look beyond credit risk and corporate governance, and establish a more comprehensive criterion to judge the stability of Islamic banks, one that recognises the mutually dependent nature of credit and fiduciary risks. 

It is important to know if the ‘mudarib’ - the entrepreneurial partner in a mudaraba partnership that provides the expertise and management – can be trusted with the money given to them, explained Ahmad. The IIRA for example uses a combination of factors, corporate governance, shari’ah governance and the asset manger quality to create a fiduciary score. 

However, Stuart Anderson, the managing director and regional head at S&P, told The Edge that sometimes complex Islamic financing structures do follow the same basic principles as non-Islamic ones. Anderson did admit that there are certain “singular characteristics” that influence their credit profiles, for instance their funding. He noted that they take these into account on a case-by-case basis when applying the criteria to Islamic banks.

As mentioned, it is unclear what the framework for any possible local credit ratings agency is. But, considering that Qatar is positioning itself as a hub for Islamic finance, it would serve the country well to develop a ratings agency that caters to this underdeveloped market.

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