“A fatwa, just like a rating, is an opinion. Investors are constrained neither by ratings nor by fatwas and make decisions from their own perspectives,” says Anouar Hassoune, vice-president and senior credit officer at Moody’s international ratings agency in Paris.
The growth of analysis and indices tracking Islamic instruments by agencies such as Moody’s and Standard & Poor’s follows demand from Muslims and non-Muslims alike.
Many potential and even current investors are unclear how best to judge these new Islamic instruments, and have welcomed analysis of their technical features. But these ratings agencies make no attempt to judge the sharia dimension – that aspect is approved by a board of Islamic scholars.
While global investment banks and other institutions can offer standardisation on the commercial and technical aspects of Islamic finance, many differing interpretations of sharia remain. “Fragmentation is a fact of life,” says Mr Hassoune.
The ratings agencies, aided by scholars, have had to come up with new methods of analysis in the past couple of years to help to guide the growing number of investors in Islamic finance.
Alka Banerjee, vice-president of index services at Standard & Poor’s in New York, says: “It was imperative that we work with an established board of scholars because we don’t have credibility in the space of sharia compliance – we were novices. The scrutiny was very intense.”
Last year, S&P launched the GCC Shariah series of indices – the name refers to the Gulf Co-operation Council which groups Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
The indices were screened by Ratings Intelligence Partners, a Kuwait-based consulting company whose researchers work with a sharia supervisory board. Companies considered non-compliant include those that deal with alcohol, tobacco, pork, entertainment and financial services.
Companies with debt levels worth more than one-third of their assets are also unacceptable.
Ms Banerjee discovered an interesting statistical fact. No matter the total number of western stocks in any group under consideration, whether 20 or 500, about 50-60 per cent were always found to be Sharia-compliant. “It follows a consistent pattern and follows the normal probability curve,” she says.
However, classifying equities according to sharia principles is more straightforward than assessing other instruments, such as sukuk, or Islamic bonds, and Islamic banks.
“Profit-sharing accounts found in Islamic finance don’t meet our normal criteria so we have adjusted the framework by which we judge stability,” says Paul Coughlin, S&P executive managing director for corporate and government ratings.
Islamic banking bans the payment of “riba” which some interpret as interest. Instead of conventional fixed interest rates, payments on sukuk derive from the profits of tangible assets. They can be structured to deliver a fixed annual rate from a profit-sharing investment account (PSIA).
Moody’s makes a broad division in its classification of sukuk. The first group benefits from a guarantee from the originator and is called asset-based sukuk.
The second group is sukuk without such an explicit guarantee and is called asset-backed “to reflect the fact that the most critical ratings factor lies in the credit quality of the underlying assets”, according to Moody’s.
The first type of sukuk has been the subject of controversy, with some Islamic scholars saying they adhere to only the letter and not the spirit of Islamic law.
Moody’s discovered an additional advantage to the second type of sukuk. “One of the many benefits of Islamic securitisation transactions giving birth to secured asset-backed Sukuk is the ability of the originator to issue sukuk rated higher than the originator’s ... credit ratings,” the agency says.
This happened last July when Tamweel, a Dubai-based property finance company, launched the Gulf’s first rated Islamic securitisation and transferred legal ownership of residential property and associated financing contracts to investors. Moody’s rated the paper Aa2 while Tamweel itself is rated A3.
Analysts and ratings agencies say further growth in securitisation and more sophisticated financing tools in the Gulf will need greater legal and regulatory clarity.
For example, collateral foreclosure, inherent as a risk in property-backed PSIAs, has yet to be tried and tested in the Gulf where real estate has fuelled much of the growth in sukuk.
The Islamic International Ratings Agency in Bahrain conducts analysis of sharia compliance as well as the more usual technical oversight. “We are the only specialised agency doing this,” says Jamal Zaidi, chief executive officer.
“The sukuk market in Malaysia is developing very fast and in more depth than in the Middle East because regulatory actions have provided support to the capital markets. Sukuk in Malaysia must have a rating and this provides a level of comfort.”
