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Credit ratings in accordance with Shari’a principles

FAQs

What are the services offered by IIRA?

IIRA was established to provide a wide range of services. The main purpose is to play a pro-active role in the development of financial markets by providing an assessment of the risk profile of entities and instruments which can be used as a basis for investment decisions.

IIRA is a unique rating agency in that it provides a Shari’a quality rating, credit rating, corporate governance rating and sovereign rating services.

IIRA’s credit rating services will cover both Islamic banks and institutions and their products, such as sukuks, as well as conventional banks and financial institutions and their products such as bonds and commercial paper.

IIRA’s corporate governance rating assesses the governance system of banks, corporates and financial institutions against international best practices and local regulatory requirements, thus providing guidance for improving governance systems.

Sovereign rating assesses the creditworthiness of the government of a country, that is, its ability and willingness to fully service its financial obligations on time.

IIRA will also carry out research, analysis and evaluation of sectors, industries and entities. For this purpose, IIRA is building a strong database of individual firms and industries.

IIRA’s ratings help regional investors and other stakeholders of both the Islamic as well as conventional financial institutions to determine creditworthiness and investment suitability. While providing these services, IIRA maintains high standards of objectivity, independence, transparency and consistency. IIRA believes that these attributes are essential to build investors’ confidence and to develop acceptance in capital markets and among lending institutions.

Why do we need IIRA when we already have the big international rating agencies?

IIRA is a legitimate alternative to the international agencies because we know the region better. Because Islamic financial institutions differ from conventional ones, investors and other stakeholders in the Islamic financial market have always felt the need for an independent opinion on the creditworthiness of the Shari’a compliant institutions and products. IIRA was therefore established to provide impartial, independent and reliable ratings to the regional investors and stakeholders of both the Islamic as well as conventional financial institutions.

How does IIRA’s rating differ from any other rating agency?

IIRA utilizes analytical methodologies equivalent to other rating agencies in terms of content and process, however, in terms of knowledge of local region, IIRA’s ratings are likely to be superior to other ratings. IIRA also uses a national scale as well as an international scale rating. IIRA offers a Shari’a quality rating as well, which is an assessment of how compliant with Shari’a a particular product or an entity is.

How independent are IIRA’s credit ratings from its shareholders?

Our credit opinions are based on vigorous analysis carried out by our professional staff and the ratings are assigned with complete independence. In line with our policy of being transparent, we disclose the name of all those entities who had credit ratings with IIRA and also had an ownership of more than 5% in IIRA. This disclosure is made as at the end of each financial year and can be viewed in our shareholders section on the website.

How does a rating from IIRA help an issuer?

Ratings by external independent rating agency like IIRA provide an assessment of the overall financial and institutional health of the institution and motivate an enlightened management to work for improving the internal practices to earn improved ratings and a better reputation in the market. Ratings also enhance the confidence in, and credibility of, rated entities / instruments and lead to reduced cost of funding.

How do ratings help develop financial markets?

Ratings provide a basis for informed judgment by investors. Investors can match their risk appetite with the risk profile of entities and available instruments. The rated instruments are generally more acceptable for investment, and as a result of their tradeability the financial market broadens and deepens. Ratings also add to and encourage fuller disclosure of information and better governance procedures.

Is there any need for a Shari’a Quality Rating?

There is no doubt that the major feature characterizing Islamic financial institutions and products is that they are legitimate and people prefer them over conventional products in order to avoid “Haram” (what is forbidden by the Shari’a). Therefore, there has to be an evaluation of institutions or products according to the extent that they adhere and respect this element of legitimacy. All products cannot be at the same level of legitimacy and the SQR brings about this necessary differentiation in an objective manner.

How does IIRA’s Shari’a Quality Rating respond to the need?

The Shari’a Rating is aimed at providing information and independent assessment of Shari’a compliance by IFIs or institutions that offer Islamic banking or financial services, as well as Islamic financial products. Major elements of this evaluation will cover an institution’s internal mechanisms for Shari’a compliance, the authority, strength and resources of the entity’s Shari’a committee, and the opinions expressed by Shari’a committee members and their differences in opinion, if any.

How were the members of Shari’a Board selected?

The Shari’a Board of IIRA consists of 19 scholars. They have been selected from different countries based on their knowledge and experience in Shari’a, and Islamic Finance, and their integrity and reputation.

How are the members of the Shari’a Committee of IIRA selected?

Shari’a Quality Rating is a transparent evaluation system based mainly on objectivity, impartiality, and independence, developed by a board made up of a group of eminent “Fiqh” (Jurisprudence) Scholars. The criteria in selecting such scholars were their geographical diversification and experience in Islamic banking and finance. The Rating Committee consists of Internal rating experts and external experts from the field of Banking and Finance and Shari’a. The selection of external members ensures that they are independent and are not in anyway connected with the entity to be rated. They are also subject to a code of conduct and confidentiality. The management of IIRA provides support to the Rating Committee in obtaining from the client responses to the queries of the Rating Committee and all the relevant information such as details of products and schemes and related Fatwas backing up the products and the latest standard agreements. .

What factors are considered when analyzing the Shari’a quality of an institution?

While doing the Shari’a Quality Rating, IIRA’s Shari’a Rating Committee examines a number of factors before arriving at a rating assessment. These factors include the fatwa / fatwas issued by the Shari’a Committee of the institution; the mechanism within the institution to comply with the Shari’a Committee’s fatwa, and the opinions of the Shari’a Committee of the institution, as well as any dissenting opinion there-on.

IIRA’s Shari’a Committee also assesses the detailed structure of assets and liabilities and selected executed agreements and documents to evaluate the degree of compliance with the approved scheme or product. IIRA also looks at the strength of the internal control and audit systems and the procedures and safeguards against commingling of funds (in the case of Islamic windows in conventional banks). The level and quality of disclosure of information to clients, investors and other stakeholders is also considered. We assign importance to the presence (or lack) of a code of ethics and its understanding and implementation among all the tiers of management and employees. Each of the above aspects is assessed separately to arrive at an overall Shari’a Quality Rating.

It is our standard practice that the initial ratings assigned by IIRA are first discussed with the management of the institution so that the management has the opportunity to present any new information or data that could have an impact on the rating. This exercise completes the rating process. However, the rating is an independent opinion of IIRA and the Rating Committee issues the final rating according to its own judgment.

What are IIRA’s prices for its services?

IIRA follows a structured fee scale for entities and for bonds and sukuks. The fee is proportional to the value of bonds/sukuks while for entities we follow a scale of fees depending on the size of the entity.

What other institutions compliment or supplement IIRA’s mission?

IIRA has been sponsored by multilateral development finance institutions (Islamic Development Bank, Islamic Corporation for Development of the Private Sector), commercial and investment banks, Takaful companies, and credit rating agencies. These institutions provide a very strong support base to IIRA. The Board of Directors representing various shareholders consists of persons who have vast experience in banking, finance, rating and compliance and control procedures. The financial strength of the sponsors and the pool of experience of Directors provide a solid foundation for IIRA.

What types of financial institutions find IIRA's services useful?

IIRA rates Islamic and conventional banks, financial institutions and products, Mutual funds, Insurance and Takaful companies.

What countries does IIRA cover?

Currently IIRA has received very positive responses from MENA region and Far East. As the financial hub of the region, and having the largest concentration of financial institutions, Bahrain is obviously our first target market. However, IIRA is not restricted to Bahrain alone. IIRA offers its services to all entities operating in any Muslim and non-Muslim country.

Do you believe that Islamic ratings will see an increased demand to accompany the increase in demand for Islamic banking and insurance?

IIRA is the only rating agency offering Shari’a Quality Rating as a service. Under this service we will provide an independent assessment and opinion on the level of Shari’a compliance. This will help the investors make their choice based on their preference for Shari’a compliant entities and instruments. This service we believe has a large potential demand among investors who seek to place their funds in Shari’a compliant institutions and instruments only. Such investors are in Islamic countries as well as in other countries.


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