In my last article I discussed the necessity of taking into consideration the controversial jurisprudential dispute entailed in Islamic bonds (sukuk) during the rating process conducted by credit rating agencies.
In response to the aforementioned article, I received a comment from the General Manager of Moody’s Investor Service in the Middle East, Mr. Jihad al Nakhla, in which he expressed his rejection of the idea that credit rating agencies should take the jurisprudential dispute into account during the rating process. He cited a number of considerations; including his statement that credit rating is an independent opinion that determines the issuers’ ability to fulfill the terms and pay back the debt in accordance with the their credit worthiness.
Credit rating also highlights the legal risks involved in sukuk and the nature of the contractual relationship between its members. As for the assessment of Islamic bonds, this process is conducted in collaboration with Islamic fatwa committees and the concerned consultants who are together in charge of determining whether the sukuk in question are Shariaa-compliant or not.
Let us assume that we must consider the contentious jurisprudential dispute entailed within the structure of Islamic bonds and ratings; it must be clarified that in order to deem sukuk as Shariaa-compliant it is necessary to resort to an external competent jurisprudential committee to offer its legitimate opinion. This means that our remarks upon the legitimate authority result in involving us so that we become party to the dispute, and thus lose the independence required for any credit rating agency.
Mr. Jihad concluded his comments by saying that many Muslims have sufficient confidence in the scholars of fatwa committees and therefore it was not necessary to take the controversial jurisprudential dispute sukuk into consideration during the credit rating process. Mr. Jihad believes that there is no difference between Islamic bonds and debt bonds since they all are liability related.
These are the major points in Mr. Jihad’s comment. Clearly, his comment was of great benefit to me and included valuable information.
Mr. Jihad’s argument has made it clear to me that the points of difference between us do not lie in the details but rather in the basic view of Islamic bonds. Mr. Jihad believes that sukuk are just like debt bonds. His viewpoint supports the idea upon which I elaborated in my previous article regarding the credit rating agencies’ perception of sukuk.
I believe that Islamic bonds or sukuk should be regarded from an independent perspective that considers their particularity since the concept is based upon the fact that sukuk holders own part of an asset, utility or service, and thus the ensuing profit is an outcome of this asset, utility or service. Moreover, the other perception is that the structure of sukuk should conform to Shariaa; this is a fundamental difference between sukuk and debt bonds.
For the jurisprudential controversy to affect credit rating, we must decide whether it is deemed risky or not in terms of its impact upon the liquidity of sukuk and its impact upon contractual commitments resultant of sukuk.
With respect to its impact upon liquidity, undoubtedly sukuk that comply with Shariah are considered a decisive factor for the majority of investors regarding whether they should or should not invest in these bonds. Other criteria follow and this is exactly what I had asserted in my previous article.
As for its impact upon the commitments of sukuk holders, Standard & Poor’s Agency stated in a report that focused on the issue of Islamic bonds (12 January 2006) that it will take the jurisprudential dispute into account when rating sukuk if the aforementioned bonds were subject to legitimate courts since the dispute over them may compel the court to invalidate these sukuk in the end.
I would like to clarify a certain point that was mentioned in my previous article, which is that I did not request that rating agencies offer their opinion regarding whether the Islamic bonds in question are Shariaa-compliant or not. Rather, I simply demanded that the jurisprudential dispute entailed in sukuk be considered in the process of rating and acknowledged in their reports.
For instance, if the opinion upon which sukuk had been based was found to be contradictory to the legitimate criteria set by the Auditing and Accounting Organization for Islamic Financial Institutions or if it flouts resolutions issued by Islamic jurisprudential academies, then the agency should make mention of it. This is not considered a judgment upon sukuk or an amendment to the approved authority; rather it is a practice to ensure transparency and clarity in the credit rating report. This would be easy to implement and does not require a legitimate Shariaa authority but rather a researcher schooled in Shariaa, as this information is available and attainable for whoever has Shariaa knowledge background.
In conclusion, I believe that the existence of rating agencies that specialize in Islamic banking similar to the International Islamic Agency for Rating will solve this dilemma that results from a lack of consideration for the particularity of Islamic banking.