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Fiduciary Rating

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The Islamic finance is recognized as being fundamentally different from conventional finance, Therefor, there has been a need for a rating methodology which can capture the unique dimensions of Islamic Financial Institution (IFI). Taking on the responsibility to fulfill this need, IIRA, together with its technical partners and shareholders, JCR-VIS Credit Rating Company of Pakistan and the Malaysian Rating Corporation, has developed the Fiduciary Rating System (FRS).

This is a two-dimensional rating system. In contrast with conventional ratings that focus either on credit or governance aspects, the FRS recognizes the mutually dependent nature of credit and fiduciary risks in an IFI. The presence of a sound governance structure does not guarantee strong financial performance and fiduciary scores may face downward pressure on account of credit-related developments, despite the absence of any negative developments on the fiduciary front. Poorly governed institutions may, however, be more susceptible to the risk of failure.

The FRS, thus, consists of two broad pillars: Credit Rating and Fiduciary Score.

The credit rating assessment is focused on the ability and willingness of an institution to meet its contractual obligations in a timely manner. It must be recognized that in the case of IFIs, the nature of liability in various modes of financing differs.

The analytical framework for Fiduciary Scores has been developed to accommodate the unique features of IFIs and jurisdictional differences in Shari’a standards. Key concepts presented in this methodology are adaptable to all types of IFIs, such as banks and takaful (Islamic insurance) and asset management companies. The aggregate Fiduciary Score is derived from three elements, which are: Corporate and Shari’a Governance (including transparency and disclosure), Compliance with Shari’a Principles, and Asset Manager Quality.


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