In a report “Classic Ratings Approach Applied to Islamic Banks Despite Industry specifics” Standard & Poor’s Ratings Services has thrown light on the approach taken in analysing the creditworthiness of Islamic financial institutions.
The report notes that the growth rate of Islamic banking services has outpaced that of “conventional” banking during the past decade, making it one of the most dynamic areas in international finance. The annual growth of Islamic financial institutions (IFIs) has been an estimated 15% worldwide over the past 10 years, and is expected to accelerate in the foreseeable future.
“Although sometimes complex, Islamic financing structures do at heart follow the same basic principles as non-Islamic ones,” explains Standard & Poor’s credit analyst Anouar Hassoune. “Standard & Poor’s consequently analyses IFIs on the same basis as non-Islamic financial institutions, using the same set of criteria and the same rating methodology.”
Hassoune adds that, on the whole, Islamic banks are not more or less creditworthy than conventional banks of similar size and profile. Nonetheless, Islamic banks do exhibit certain singular characteristics that influence their credit profile.
“The positive factors that Islamic banking brings in terms of profitability, cheap and stable deposits, and customer loyalty, tend to be offset by weaker liquidity, greater concentration risks, and less rigorous regulatory, accounting, and disclosure frameworks,” says Emmanuel Volland, a co-author of the report.
The most significant IFIs are active in the Gulf region, where S&P rates Al Rajhi Banking and Investment Corp (Al Rajhi; BBBpi) and has assigned an A- rating to Bahrain’s issue of Islamic leasing bonds. Islamic banks have also built a strong presence in Malaysia, where S&P has assigned a BBB/Positive rating to the US$600mn sharia-compliant trust certificates (called “sukuk”) issued by Malaysia Global Sukuk Inc on behalf of the sovereign. S&P also rates the Tunisia-based “takaful” (insurance) company BEST Reinsurance Co (BBB-/Negative/–), a member of the Dallah AlBaraka Islamic group.
“Classic Ratings Approach Applied to Islamic Banks Despite Industry Specifics” is available to subscribers of RatingsDirect, S&P’s web-based credit analysis system, at www.ratingsdirect.com.