RoleofIslamicInternationalRatingAgencyRoleofIslamicInternationalRatingAgency

DevelopingSukukHubsinIslamicCountriesandFacilitatingCross‐borderTransactionsDevelopingSukukHubsinIslamicCountriesandFacilitatingCross‐borderTransactionsgg

May 6, MuscatFaheem Ahmad, IIRA

InternationalandRegionalRatingAgencies

International Rating Agencies like Standard & Poor’s, Moodys

d Fit h h hi t f t l t 100and Fitch have a history of at least 100 years.

To reduce the dependence of member countries on three

international rating agencies, European countries are

endeavoring to establish a rating agency. Initial cost of setting upendeavoring to establish a rating agency. Initial cost of setting up

a rating agency in Europe has been estimated at around 300

million Eurosmillion Euros.

IIRA– ARegionalRatingAgency

Based in Bahrain, The Islamic International Rating Agency (IIRA)

t t d ti i J l 2005started operations in July 2005.

IIRA is sponsored by multilateral development institutions,

leading banks, other financial institutions and rating agencies.

Shareholders of IIRA operate from eleven countries.p

Member countries of Islamic World are fortunate to have Islamic

International Rating Agency (IIRA) to represent dynamics of

Islamic Financial System.

ObjectivesofIIRA

Rating Islamic Financial Institutions 

differently

11

differently

11

PrimaryObjectivesofIIRA

Mapping of  Ratings by IIRA d C b d

Facilitate Development of Sukuk market and  Cross‐border 

Transactions33

Sukuk market through National Scale Ratings 22

Objective:RatingIslamicFinancialInstitutions–withadifference

Conventional rating products do not sufficientlyaddress acknowledged differences between Islamicgbanking and conventional banking

Available rating products are primarily focused oneither credit risk or corporate governance

Need for an analytical framework thataccommodates the unique features of IFIs andaccommodates the unique features of IFIs andrecognizes the mutually dependent nature ofcredit and fiduciary risks in an IFI

Objective:RatingIslamicFinancialInstitutions–withadifferenceFiduciary Rating SystemUnique two-dimensional framework that comprehensively covers the

l f M d ib li i i i l d li i helements of Mudarib quality, institutional governance and compliance withShari’ah principles adopted by an institution.

C t GCorporate Governance 

Shari’ah Compliance

Asset Manager QualityFiduciary Score

Asset Manager Quality

National Scale Ratings Global Scale Ratings

Objective:RatingIslamicFinancialInstitutions–withadifference

IFI 1Credit Rating AA‐

Sovereign Rating BBB

IFI 2Credit Rating A+

Sovereign Rating A

IFI 3Credit Rating A‐

Sovereign Rating BB+na

nce,

88

nanc

e,82

nanc

e,85

ce,

74

ce,

78

ce,

80

nt,

90

nt,

85

nt,

85

orpo

rate

Gove

rn

orpo

rate

Gove

rn

orpo

rate

Gove

rn

haria

hCo

mpl

ian

haria

hCo

mpl

ian

haria

hCo

mpl

ian

sset

Man

agem

en

sset

Man

agem

en

sset

Man

agem

en

Co Co CoSh Sh ShAs As As

Fiduciary Score, 86 Fiduciary Score, 83 Fiduciary Score, 84

Objective:RatingIslamicFinancialInstitutions–withadifference

H ll k f Fid i R ti S t T diHallmark of Fiduciary Rating System  ‐ Transcending National Borders

Elements of fiduciary score will set benchmark for CorporateGovernance, Shari'ah Compliance and Asset Manager Quality, p g yacross different countries.

Objective:FacilitatedevelopmentofSukukMarketthroughNationalScaleRatings

In case, sovereign rating of a country is in the AAA

BBB band or lower; significant proportion of

investment grade scale becomes unavailable

AA+

AA

AA‐

on the international scale. In the following

case, sovereign rating is ‘BBB’.

A+

A

Acase, sovereign rating is BBB . A‐

BBB+

BBB

BBB‐

Objective:FacilitatedevelopmentofSukukMarketthroughNationalScaleRatings

National scale ratings provide useful information to the local capitalmarkets and help investors compare domestic issues and issuers in localp pcurrency

Particularly, in cases were sovereign rating of the country on thei t ti l l i i th ‘BBB’ l ti l l ti i

Turkey India

international scale is in the ‘BBB’ or lower, national scale ratings gainmore importance

Global ScaleRatings

National ScaleRatings

Global ScaleRatings

National ScaleRatings

BBBB BB+

BB+

AAA

AAA

BBBB AAAA BBB‐

BBB‐

BBB‐

BBB‐

AAA

AAA

BBB‐

BBB‐

AA+

AA+

BB BB AA BB AA

Sovereign Rating

Creditwest Bank Ltd.

T.C. Ziraat Bankası

BB BB AA BB AA

Sovereign Rating

Industrial Development Bank of India

Bank of Baroda

Objective:FacilitatedevelopmentofSukukMarketthroughNationalScaleRatings

MajorBondMarketsintheWorld

Other, 17.2%

US, 37.9%

UK, 2.5%Spain, 2.2%

Canada, 2.1%

China, 4.5%

Germany, 4.1%

Japan, 20.0%

France, 4.8%

Italy, 4.6%

p

Objective:FacilitatedevelopmentofSukukMarketthroughNationalScaleRatings

Why Domestic Debt

Market?32,000

6 000

7,000GlobalDebtMarketsVolumes*

Market?Confidence in debt markets

has been recouped at a faster

i l ti t it

28,000

30,000

4,000

5,000

6,000

Bnpace in relation to equity

market, subsequent to Global

Financial Crisis. 24,000

26,000

2,000

3,000

,

USD

 B

Against market capitalization

of around $ 55 trillion of 20,000

22,000

0

1,000

Global equities market, global

bond market totaled $ 95

trillion in 2010.

2005 2006 2007 2008 2009 2010

EMEA Americas Asia Pacific # of Deals

* Source: Dealogic; Only transactions with book runners are included

Objective:FacilitatedevelopmentofSukukMarketthroughNationalScaleRatings

Why Domestic Debt

Market?71%

24% 2%

250

Valueofbondmarketbasedinissuerscountryofresidenceas%ofGDP,2010

Market?

Leading global economies

have highly developed 76%79%

98%21%

38%

150

200

have highly developed

debt markets even with

sound access to funding in

79%

62%

70%

42%30%

100

g

the international markets. 29%

58%70%

50

0

UK Italy US Japan France Germany World

Domestic InternationalSource: Bank for International Settlements; IMF

Objective:FacilitatedevelopmentofSukukMarketthroughNationalScaleRatings

Why Domestic Debt

Market? 30%80,000

90,000Worldbondmarket

With greater depth in

domestic debt 50 000

60,000

70,000

80,000

nmarket, cross-border

transactions have

increased International70%

13%30,000

40,000

50,000USD

 Bn

increased. International

debt market represents

30% of overall debt

87%

0

10,000

20,000

market in 2010 from

13% in 2000.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Domestic International

* Includes bonds, notes and money market instruments. Source: Bank for International Settlements

Objective:MappingofRatingsbyIIRAandCross‐borderTransactions

• As IIRA is planning to assign ratings on a national scale inIslamic countries; rating benchmarks for institutions withinIslamic countries; rating benchmarks for institutions withinIslamic countries will be developed.

• These benchmarks may be distinct from conventionalbenchmarks and thus, allow assessment of entities/issuesincorporating the essence of Islamic Finance.

• With greater penetration of national scale rating andsufficiently developed Sukuks market, transition to cross-border trading will be possible.g p

Objective:MappingofRatingsbyIIRAandCross‐borderTransactions

IIRA’svisiondovetailsIDB’sVision

IDB’s Vision‘To be the leader in fostering

socio-economic development in

IDB’s Vision‘To be the leader in fostering

socio-economic development inIIRA’s Vision

‘To foster growth in IslamicIIRA’s Vision

‘To foster growth in Islamicsocio economic development in member countries and Muslim communities in non-member countries in conformity with

socio economic development in member countries and Muslim communities in non-member countries in conformity with

To foster growth in Islamic Capital markets, as a rating

agency that stands for trust, transparency, fairness

To foster growth in Islamic Capital markets, as a rating

agency that stands for trust, transparency, fairness y

Shariahy

Shariah, p y,and independence’, p y,and independence’

Thank YouThank YouThank YouThank You

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