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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
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e,82
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78
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80
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85
orpo
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orpo
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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
18