Credit Rating and Islamic Bonds (Sukuk)
According to a report published by the Saudi ‘Al-Eqtisadiah’ newspaper, credit rating agencies have unanimously agreed that when assessing sukuk (Islamic bonds), they do not take into account whether the bond is Shariah-compliant or not. This is because agencies believe that the decision regarding whether the Islamic bonds in question are Shariaa-compliant or not is a matter that fatwa committees should deal with.
The truth is; I believe that this is an unacceptable deficiency in the principle of rating in view of the fact that risks related to Shariaa should be taken into account when rating Islamic bonds. This is because declaring sukuk as non-Shariaa compliant, because they are based on fatwas that flout resolutions issued by the jurisprudential academies and the concerned ‘ijtihad jamaei’ (collective interpretation) institutions or because they are based on opinions that are contentious among scholars will affect bond underwriting and buying among investors. This, in turn, will result in a decline in the liquidity of these bonds (meaning its ability to circulate).
Raymond Hill of Fitch Ratings agrees with this last fact. Undoubtedly the liquidity aspect of Islamic bonds is an important factor in the decision made by investors to buy the bond or not. Additionally, it has proven that upon finding out that bonds were not Shariaa-compliant, after having bought them, investors then sell them at a lower price so as to get rid of them but end up losing a portion of their investment – and that is if they can find someone to buy them in the first place.
We may also add to this the legal risks entailed in the case of disputes over these bonds or which result as the outcome of sentences that declare them non-Shariaa compliant, which then makes them susceptible to invalidation or diminishes the rights of their holders by nullifying some of their conditions in accordance with the judiciary’s discretion.
Therefore, the regulation of these bonds using Islamic Shariaa law and the prevalent known jurisprudential opinions is required of credit rating agencies, and the impact of rating must be reflected on these bonds. This is so as to reassure investors with regards to the outcome of such rating.
All credit rating does not take into account the jurisprudential views on which the Islamic bonds are based since the strength of the jurisprudential view or its deviance is not considered a rating capable of expressing with utmost clarity and transparency the risks involved in this type of investment.
My assessment of the fact that credit rating agencies do not take Islamic jurisprudential opinions into consideration in the rating process could be summed as follows:
First: Credit rating institutions deal with Islamic bonds in the same way they deal with debt bonds without considering the particularity that sukuk have over the traditional debt bonds, which is that the former represent a share of ownership while the latter entail no ownership.
Second: The absence of competent jurisprudential expertise within these institutions [credit rating agencies], which could help clarify this dimension [Islamic bonds], which means that these institutions avoid delving into this field.
Third: The lack of a legitimate, clear and consensually agreed upon criterion with regards to Islamic bonds that credit rating agencies could implement and use as a reference and for arbitration.
This deficiency may be treated by uniting the efforts of the credit rating agencies and the supporting Islamic banking institutions, such as the committees for auditing and accountability within Islamic financial institutions and the Islamic financial services councils and international Islamic rating agencies, to set the criteria for rating Islamic bonds so that the controversial jurisprudential dispute inherent within sukuk can be taken into account.
These institutions should also employ the expertise of Shariaa law scholars so as to clarify this field, thus enabling the establishment of a legitimate and united Shariaa-compliant criterion for Islamic bonds.