By Arno Maierbrugger
Gulf Times Correspondent
Bangkok


In the wake of a globally growing Islamic finance sector, rating agencies specialised on Islamic financial products and Shariah compliance of financial instruments are seeing fast rising demand for their services.
Although the “big three” rating agencies, Standard & Poor’s, Moody’s and Fitch Rating, are rating Islamic banks or Islamic financial vehicles such as sukuk, they are not differentiating them sufficiently enough from conventional banks requesting a global credit rating, critics say. For example, in order to evaluate risk, the established rating agencies would apply a similar analytical framework to Islamic financial institutions as they do to any non-Islamic bank, not adequately weighing the profit-sharing and commodity-based nature of Islamic finance instruments, the wide variety of possible structures for Shariah-compliant banking and the complexity of a rating that arises from this factors.
While all three claim to have developed their own methodologies to rate sukuk and Islamic banks as per their underlying Shariah-compliant structures, the agencies acknowledge that Islamic finance rating in general needs completely different analytics.
“As Islamic finance plays an increasingly important role in both the Muslim and non-Muslim markets, it is useful to explore the often subtle particularities of Islamic finance, especially when it comes to rating their funding instruments,” says Hassoune Anouar, who helped developing Islamic rating analytics for Standard & Poor’s and Moody’s and today serves as head of research and strategist for the Middle East and North Africa of The Bank of Tokyo Mitsubishi UFJ’s Dubai branch.
“Notably, the profit-loss sharing nature of some Islamic funding instruments makes it difficult to ascertain at what point they enter default,” he added.
So far, there haven’t been many Islamic rating agencies that provide a rating spectrum that encompasses the full array of capital instruments and the specialty of Islamic financial products. One of them is Bahrain-based Islamic International Rating Agency (IIRA), established in 2005, which has developed its own rating system that the agency claims is “recognising and incorporating the unique features of Islamic finance”. The IIRA has since received formal recognition from Central Bank of Bahrain as a credit assessment institution.
Some other Islamic rating agencies can be found in Malaysia, the world’s largest issuer of sukuk. One is Kuala Lumpur-based RAM Ratings, established as early as in 1990. While RAM Ratings also rates conventional financial instruments, it has developed a special methodology for sukuk and Islamic project finance ratings, as well as for ratings of financial institutions and insurers.
Malaysian Rating Corp Berhad (MARC), launched in 1996, is another Islamic rating agency in Malaysia focusing in Islamic capital market instruments and sukuk, Islamic non-fixed income investments, takaful institutions and Islamic banking governance.
Those Asia-based Islamic rating agencies are now being joined on the international market by National Ratings Agency (NRA), one of Russia’s largest domestic rating agencies established in 2002. One of NRA’s specialties are Islamic finance ratings, which it offers in form of its Shariah Quality Compliance Rating since 2013 to Islamic financial institutions and corporate entities in countries of the former Soviet Union with developing Islamic finance markets, particularly Azerbaijan and Kazakhstan. In 2014, the NRA joined forces with Bahrain’s IIRA to expand further in Central Asia. NRA also recently opened a branch in Vienna, Austria, awaiting a license to expand in Eastern and Western Europe to tap the European Islamic finance market.
“There is demand for Islamic finance ratings both due to the growing Islamic population and from Arab investors venturing into Europe,” said Victoria Mukhina, head of NRA’s Austrian branch.