Riyadh, Asharq Al-Awsat – There are approximately 434 Islamic financial institutions around the world, including 180 Islamic Banks and 320 Islamic windows at conventional banks. At the same time from 1996 to September 2009, the number of sukuk bond issuers has increased to 747, and the sukuk industry is worth in the region of 106.6 billion dollars. The Islamic banking industry today has assets reaching trillions of dollars, and an estimated 20 percent annual growth rate.
Whilst the Islamic banking industry has experienced a boom with an increase in the number of Islamic financial institutes, products, and markets that they are involved in, there has not been a similar boom in Islamic financial legislation, regulations, and systems that support this industry. Therefore there is no equivalency between the Islamic financial industry and institutes, and the legislation and regulations that control this. It has been noted that the Islamic financial industry is operating in numerous key markets without any special legal regulations being applied to this.
The Islamic financial industry is also in need of qualified and professional institutes to support it, and the most important of these supportive institutes are credit rating institutes. Credit rating institutes continue to treat Islamic financial institutes and products as conventional financial institutes and products, and this is something that is completely unprofessional. Such treatment does not take into account the different standards that govern the Islamic financial industry, and this prompted the Islamic Financial Services Board [IFSB] to issue guidelines to credit rating agencies on how to recognize and classify Islamic Sharia-compliant institutes and products.
The objective of the IFSB guidelines is to have these adopted by the regulatory authorities when calculating the capital adequacy ratio of Islamic banks and Islamic financial institutes. These guidelines confirm that the IFSB has noticed that credit rating agencies do not treat Islamic financial institutes and products in the correct manner, and they should be treated separately and classified differently so that the credit rating reports issued by these agencies are professional, accurate, and fair. The IFSB has said that this is a condition to its recognition of the credit rating reports issued by these agencies for the purpose of calculating the capital adequacy ratio of Islamic banks and Islamic financial institutes.
The guidelines issued by the IFSB set the record straight with regards to the need for a special mechanism for classifying Islamic Sharia-compliant products and institutes, and this is something that I have called for in my articles for a long time. This influenced the discussions that were being conducted with some credit rating agencies, who responded to this by saying that they did not see any difference between the Islamic banking industry and conventional banking. However these guidelines have clarified the differences that affect each industry and that their failure to recognize these differences affects the credibility of the credit rating reports. The IFSB report shows that the credit rating agencies successfully proving their efficiency in analyzing traditional financial institutions does not mean that they are similarly successful in analyzing the credit rating of Islamic financial institutes.
Therefore it is up to the credit rating agencies to review their position to not differentiate between the conventional banking industry and the Islamic financial industry and develop a special mechanism to classify Islamic Sharia-compliant institutions and products in order to take into account the standards that govern this industry. Otherwise the credit rating reports being issued by these agencies will not be accepted because they do not reflect the truth and because they are inconsistent with the IFSB guidelines. Although it is true that for the time being these guidelines are non-binding, the rapid development of the Islamic financial industry and its entry into many organized markets, in addition to the development of the ideology of regulatory bodies in the world of Islamic finance, is something that in the end will lead to many regulatory bodies adopting these guidelines, and rather than being non-binding these guidelines will be obligatory.