Introduction to Islamic Banking and Finance:

Principles and Practice

M. Kabir Hassan, Rasem N. Kayed, and Umar A. Oseni

Chapter 7

Islamic Bonds
Learning Objectives

Upon the completion of this chapter, the reader should be able

to:
1. Understand what sukuk is, its historical origin and
benefits, and the distinguishing features of sukuk from
conventional bonds
2. Understand how Islamic bonds are structured, and
distinguish between different types
3. Be familiar with the AAOIFI standards on Islamic bonds,
and the characteristics of investment sukuk and Sharī‘ah
rulings defined by these standards
4. Differentiate between sovereign and corporate ratings
of Islamic bonds, and the methodology used to rate products
 Learning Objective 7.1
Understand what sukuk is, its
What are Sukuk? historical origin and benefits,
and the distinguishing
features of sukuk from
conventional bonds.

Sukuk: an Arabic term for financial certificate; it is the Islamic

equivalent of bond
Sukuk: asset-backed instruments, and tradable Sharī‘ah
compatible trust certificates

AAOIFI defines Sukuk as:

Certificates of equal value representing undivided shares in the
ownership of tangible assets, usufructs and services or (in the
ownership of) the assets of particular projects or special
investment activity (AAOIFI 2008, p. 307)
The IFSB defines Sukuk in its Capital Adequacy Standard
(IFSB-2) as ‘certificates that represent the holder’s proportionate
ownership in an undivided part of an underlying asset where the
holder assumes all rights and obligations to such asset’
 Learning Objective 7.1
Understand what sukuk is, its
What are Sukuk? historical origin and benefits,
and the distinguishing
features of sukuk from
conventional bonds.

A Brief History of Sukuk

• Sak, the singular form of sukuk was used to refer to documents

or certificates representing obligations, contracts, conveyances of
rights executed in conformity to the principles of Sharī'ah
•The earliest usage of the sukuk receipts relates to the method of
payment of the soldiers during the Umayyad Caliphate in the 1st
century of the Islamic calendar where soldiers were given
commodity coupons in place of cash
• During the medieval period, sak was used as the main
instrument for transferring obligations arising from commercial
transactions, thus reducing movement of cash between cities
 Learning Objective 7.1
Understand what sukuk is, its
What are Sukuk? historical origin and benefits,
and the distinguishing
features of sukuk from
conventional bonds.

A Brief History of Sukuk

• In the modern practice of Islamic finance, sak is used to

provide alternative funding for financing projects through
asset securitization

• The Islamic Fiqh Academy of the Organization of Islamic

Cooperation (OIC) ruled for legitimacy of the concept of
sukuk
 Learning Objective 7.1
Understand what sukuk is, its
What are Sukuk? historical origin and benefits,
and the distinguishing
features of sukuk from
conventional bonds.

Benefits of Sukuk
1. Among the best ways of financing large enterprises beyond
the ability of a single party to finance

2. Provide an ideal means for investors seeking to deploy

streams of capital and at the same time are able to liquidate
their positions with ease should the need arise

3. Manage liquidity for banks and Islamic financial institutions

4. A means for the equitable distribution of wealth

 Learning Objective 7.1
Understand what sukuk is, its
What are Sukuk? historical origin and benefits,
and the distinguishing
features of sukuk from
conventional bonds.

Advantages of Sukuk include:

• Diversification of fund sources

• Secondary liquidity

•Creation and enhancement of profile on the international

market

• Infrastructural development in Muslim countries

• Pricing benchmark

• Sizeable financing
 Learning Objective 7.1
Understand what sukuk is, its
What are Sukuk? historical origin and benefits,
and the distinguishing
features of sukuk from
conventional bonds.

Differences Between Sukuk and Conventional Bonds

1. Conventional bonds are contractual debt securities, while
sukuk represent the undivided ownership of each of the
sukuk holders in the underlying asset

2. Returns in conventional bonds comes in interest (coupon)

and the principal amount whereas in sukuk, the return is in
profits

3. In conventional bonds, the contractual relationship between

issuer and investor is debt/credit, while it is a partnership
relationship in sukuk
 Learning Objective 7.1
Understand what sukuk is, its
What are Sukuk? historical origin and benefits,
and the distinguishing
features of sukuk from
conventional bonds.

Differences Between Sukuk and Conventional Bonds

4. Sukuk holders have ownership rights in the underlying

asset, while conventional bonds merely represent a
debt certificate

5. Sukuk must be asset-backed, while conventional bonds

may be backed by financial assets such as receivables,
which are not allowed in the case of sukuk

(Refer to Table 7.1 in the text book for major differences

between Sukuk and Bonds)
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Types and Structure of Islamic Bonds

• Sukuk can be of many types depending on the types of

Islamic finance products used in its structuring

• AAOIFI identified fourteen major sukuk-structured products

(Table 7.2 in the textbook)
• Sukuk have been classified as:
- Tradable sukuk
- Non-tradable sukuk
- Debt based suluk
- Equity based
(Refer to Table 7.3 of the textbook for classification of sukuk
according to types)
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

The Most Common Investment Sukuk

• Mudarabah Sukuk (Trust Investment Bonds)

• Musharakah Sukuk (Partnership Investment Bonds)

• Ijarah Sukuk (Leased Asset Bonds)

 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

The Fourteen Sukuk Structures of AAOIFI

1. Sukuk ijarah (leased assets certificates)
2. Sukuk ijarha mausufa bi dhima (forward lease certificates)
3. Sukuk manfaa ijarah (usufruct of a lease certificate)
4. Sukuk manfaa ijarah mausufa bidhima (usufruct of a
forward lease certificate)
5. Sukuk milkiyat-al-khadamat (ownership of services
certificates)
6. Sukuk al-salam (forward contract certificates)
7. Sukuk al-istisna’a (manufacturing certificates)
 Learning Objective 7.2
Understand how Islamic
Structuring Islamic Bonds bonds are structured, and
distinguish between
different types

The Fourteen Sukuk Structures of AAOIFI

8. Sukuk al-murabahah (cost-plus certificates)

9. Sukuk-al-musharakah (partnership certificates)
10. Sukuk al-mudarabah (trustiInvestment certificates)
11. Sukuk al-wakalah (investment agency certificates)
12. Sukuk al-muzra’a (sharecropping certificates)
13. Sukuk al-musaqa (irrigation certificates)
14. Sukuk al-mugharasa (agricultural certificates)
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Structuring of Islamic Bonds

• The replication of conventional bond features excluding
characteristics impinging on fundamental principles of
Sharī‘ah in commercial transactions e.g. prohibition of riba
and gharar

• The process of modelling and structuring Islamic bonds

requires basic knowledge of major Islamic finance products
e.g. mudarabah, musharakah, ijarah, murabahah, wakalah

• Islamic finance experts developed, modeled and structured

finance products through Islamic financial engineering
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Mudarabah Sukuk (Trust Investment Bonds)

• Investment sukuk representing ownership of units of equal
value in the Mudarabah equity
• Registered in the names of the sukuk holders on the basis of
undivided ownership of shares in the Mudarabah equity
• Usually structured as an agreement between the rabb al-mal
who provides the capital and the entrepreneur which may be
an investment company or a Special Purpose Vehicle (SPV)
• Returns shared in accordance with the percentage of share
ownership of each sukuk holder
• Losses are borne by financiers but necessary measures
mitigate risks (through the process of securitization)
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Basic Features of Mudarabah Sukuk (MS)

As articulated in the Resolution of the Islamic Fiqh Academy
of the OIC in its fourth session in 1988
1. Mudarabah Sukuk (MS) represent common ownership and
entitle holders to share in specific projects against which the
MS have been issued
2. Contract based on the official notice of the issue or the
prospectus, which must provide all information required by
Sharī‘ah for a Qirad contract
3. The MS holder is given the right to transfer the ownership
by selling the sukuk in the securities market at his/her
discretion
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types
Basic Features of Mudarabah Sukuk (MS)

The sale of MS must follow the rules listed below:

-If mudarabah capital is in money, the trading of MS will be
like the exchange of money for money and it must satisfy
the rules of Bai‘ al Sarf
-If the mudarabah capital is in debt, it must be based on
principles of debt trading in Islamic jurisprudence
- If capital is a combination of
cash, receivables, goods, real
assets and benefits, trade
must be based on the
market price evolved by
mutual consent
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Basic Features of Mudarabah Sukuk (MS)

4. The manager/SPV who receives the funds collected from the
subscribers to MS can also invest his/her own funds
5. Neither prospectus nor MS should contain a guarantee, from
the issuer or the manager of the fund, for the capital or a
fixed profit, or a profit based on any percentage of the capital
Accordingly:
(i) the prospectus, or the MS issued pursuant to it, may not
stipulate payment of a specific amount to the MS holder
(ii)profit is to be divided, as determined by applying the
rules of Sharī‘ah
(iii) the profit and loss account of the project must be
published and disseminated to MS holders
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Basic Features of Mudarabah Sukuk (MS)

6. It is permissible to create reserves for contingencies, such
as loss of capital, by deducting from the profit a certain
percentage in each accounting period

7. The prospectus may also contain a promise made by a third

party, to donate a specific sum, without any counter benefit,
to meet losses in a given project, provided such
commitment is independent of the Mudarabah contract

(The Resolution of the Islamic Fiqh Academy of the OIC in its

fourth session in 1988)
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Figure 7.1:
Structure of
Mudarabah
Sukuk
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Steps Involved in the Structure of Mudarabah Sukuk

• A company which needs liquidity establishes an SPV
• The SPV issues sukuk certificates to investors/sukuk
subscribers
• Cash generated used as capital in Mudarabah contract
between SPV and an organisation appointed to manage the
business
• The Mudarabah business is carried out and profits are
periodically distributed among the two major parties: the
company and the SPV
• The SPV pays the investors/sukuk holders according to the
units of their individual shares in the invested capital
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Musharakah Sukuk
• Musharakah Sukuk are investment bonds which represent
the ownership of the partnership equity

• Musharakah Sukuk can be used for the mobilization of funds

for new project, develop an existing project or finance a
huge business activity based on joint venture contracts

• The Musharakah certificate given to all sukuk holders

represent their proportion of ownership in the assets of the
project being undertaken

• The Musharakah certificates are treated as negotiable

instruments which are tradable in the secondary market;
they can be bought and sold in the capital markets
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Musharakah Sukuk

• The structure of a Musharakah Sukuk is based on the joint

venture partnership

• Profit is shared according to an agreed predetermined ratio

• Any loss is shared according to the individual contribution of

the parties/sukuk holders involved

• Every subscriber is entitled to participate in the

management of the business if he or she wishes
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Insert Figure 7.2

A Musharakah
Sukuk
Structure
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Ijarah Sukuk
• Ayub (2007, pp. 400-401) defines ijarah sukuk as “the
securities representing ownership of well-defined and known
assets tied up to a lease contract, rental of which is the return
payable to the sukuk holders”
• The contract of ijarah has been:
- Structured and transformed as a competitive bond
in the secondary market
- Structured to allow the mobilisation of funds for
development of long term infrastructure projects via the
issuance of ijarah sukuk
- Used as securitization of a tangible asset e.g. a hospital
or airport
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Different Variations Ijarah Sukuk

1. Sukuk of ownership in leased asset

- It is issued with the sole aim of selling the asset to the
sukuk holders through the transfer of title
- The sukuk holders jointly own the asset through
undivided ownership and are entitled to profits and losses
accordingly
- This form of ijarah sukuk can be used for the purchase
of a new asset
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

2. Sukuk of ownership of usufructs of assets: - It is

issued to conferring the right of usufruct in the sukuk
holders where they become joint owners
- The sukuk holders only become owners of usufruct
(manfa’a) of the assets since the owners of asset have
leased its usufruct to the sukuk holders
- Sukuk holders can also sublease the usufruct of the
asset to a third party
3. Sukuk of ownership of services:
- Issued to subscribers to confer the ownership in such
services to the sukuk holders - The
sukuk holders may also sublease such services to a third party
 Learning Objective 7.2
Understand how Islamic

Structuring Islamic Bonds bonds are structured, and

distinguish between
different types

Figure 7.3
Ijarah Sukuk
Transaction
 Learning Objective 7.3
Be familiar with the AAOIFI
AAOIFI Standards for Islamic Bonds standards on Islamic bonds,
and the characteristics of
investment sukuk and
Sharī‘ah rulings defined by
these standards.

Characteristics of Investment Sukuk

• Certificates represent the rights and obligations of the

owner

• Common share in the ownership of the underlying asset

• Sharī'ah compliance

• Trading of investment sukuk and the rights they represent

• Return and losses are commonly shared by certificate

holders

AAOIFI Standards for Islamic Bonds
Learning Objective 7.3
Be familiar with the AAOIFI
standards on Islamic bonds,
and the characteristics of
investment sukuk and
Sharī‘ah rulings defined by
these standards.

Sharī‘ah Rulings and Requirements

Sharī‘ah rules and requirements contained in AAOIFI

Standards of sukuk are classified into two categories:

- Sharī‘ah requirements in the issuance of investment

sukuk
- Sharī‘ah rules in trading in investment sukuk
 Learning Objective 7.3
Be familiar with the AAOIFI
AAOIFI Standards for Islamic Bonds standards on Islamic bonds,
and the characteristics of
investment sukuk and
Sharī‘ah rulings defined by
these standards.

Significant AAOIFI Pronouncement on Sukuk in 2008

• Guidelines on sukuk issued earlier by AAOIFI have
generated controversy among Sharī‘ah scholars, market
players and investors

• The AAOIFI Pronouncements on sukuk in 2008:

- Do not stand as substitutes for the earlier guidelines
- They are merely clarifications/directives on guidelines
to avoid misapplication of requirements for issuance of
investment sukuk and the Sharī‘ah rulings for their
trading in the Islamic capital markets
 Learning Objective 7.3
Be familiar with the AAOIFI
Rating of Islamic Bonds standards on Islamic bonds,
and the characteristics of
investment sukuk and
Sharī‘ah rulings defined by
these standards.

Ratings of Islamic Bonds

• Bond credit rating is the assessment of the credit

worthiness of a corporation’s debt issues or government
bonds. The designated grades range from ‘AAA’ which is
considered as the highest grade to ‘C’

• Credit rating allows potential investors to make informed

decisions before subscribing to debt securities.

• There are over 50 rating agencies that have been

established across the world. The leading global rating
agencies include, Moody's Standard & Poor's, and 
Fitch Rating of Islamic Bonds
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Ratings of Islamic Bonds

• Different countries have their own rating agencies, such as
Malaysia, India, Bangladesh, and Sri Lanka
• The two popular classifications of bonds while rating their
quality are:
- ‘investment grade bonds’
- ‘junk bonds’
• The Islamic International Rating Agency (IIRA) which was
established by the IDB began operations in 2005 and has
since been striving to ensure quality in the Islamic finance
industry
 Learning Objective 7.3
Be familiar with the AAOIFI
Rating of Islamic Bonds standards on Islamic bonds,
and the characteristics of
investment sukuk and
Sharī‘ah rulings defined by
these standards.

Types of Islamic Bonds Ratings

Islamic bonds can be rated on two bases:
- Sovereign
- Corporate
First: Sovereign Ratings

• Sovereign credit rating is the credit rating of a sovereign

entity such as a national government

• The risk level of the regulatory, political, economic and legal

atmosphere comprises a crucial factor in sovereign credit
ratings  
 Learning Objective 7.3
Be familiar with the AAOIFI
Rating of Islamic Bonds standards on Islamic bonds,
and the characteristics of
investment sukuk and
Sharī‘ah rulings defined by
these standards.

• In the country risk rating, Euromoney Country Risks

consider the following factors in the ranking of countries by
risk:

- Political risk
- Economic performance/projections
- Structural assessment
- Debt indicators
- Credit Ratings
- Access to bank finance
- Access to capital markets
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

IIRA Ratings
The six basic categories used by IIRA in analysing sovereign
sukuk and the likelihood of any default on debt obligations
at maturity are:
- Politics and Policy Continuity
- The Economy–Structure and Growth Prospects
- Budgetary and Fiscal Policy
- Monetary Policy and Flexibility
- The External Accounts
- Internal and External Debt

Rating of Islamic Bonds
Learning Objective 7.4
Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Figure 7.4
First Page
of IIRA
Sovereign
Ratings of
Turkey in
2008
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Types of Islamic Bonds Ratings

• Corporate credit rating is a credit worthiness rating in form of

financial indicator to potential investors of debt securities
such as sukuk
• Corporate credit ratings play a significant role in the economy
of a country and, more importantly, it promotes stability and
sustainability in the financial industry
• The level of risk surrounding a business entity determines the
confidence prospective investors will have in it
• Corporate entities must adopt best practices (reducing their
risk level, demonstrating ability to meet financial obligations)
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

• In the Islamic financial markets, corporate ratings involve:

- Bond/sukuk ratings
- Bank’s financial strength ratings
- Sharī‘ah quality ratings
- Corporate governance ratings
- Real estate ratings etc
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Rating Products and Methodology

• The rating products in Islamic financial markets consist of
all types of issuers and sukuk issues. The IIRA identified the
following eight major rating products:
- Sovereign Ratings
- Issuer Ratings
- Bond/sukuk Ratings
- Insurer Financial Strength Rating
- Banks Financial Strength Rating
- Sharī'ah Quality Ratings
- Corporate Governance
Ratings
- Real Estate Ratings
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Sovereign Ratings
• A reliable third party gives an opinion on the feasibility of
the repayment of the issuer or an issue of its financial
obligations within the record time
• The general rating of countries as sovereign entities is first
carried out before the rating of particular issue or institution
Methodology
• Involves both qualitative and quantitative factors
• Assessing the likelihood of default on debt obligations for
sovereign sukuk
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

• IIRA considers the following six analytical categories

while assessing the likelihood of default on debt obligations
for sovereign sukuk:
- Politics and Policy Continuity
- The Economy–Structure and Growth Prospects
- Budgetary and Fiscal Policy
- Monetary Policy and Flexibility
- The External Accounts
- Internal and External Debts
 Learning Objective 7.4
Differentiate between
sovereign and corporate
Rating of Islamic Bonds ratings of Islamic bonds,
and the methodology used
to rate products
Issuer Ratings
• Rating sukuk issuer with special emphasis on ability to fulfill
its financial obligation
• Non-financial organs such as the corporate and Sharī‘ah
governance of the entity from the bond/sukuk ratings
Methodology
In rating the issuer:
- Non-financial organs rated with particular regards to credit
worthiness and continued ability to fulfil debt obligations to
stakeholders
- Overall financial and institution credit worthiness of issuer
determines level of investors’ confidence potential
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Bond/Sukuk Ratings
• Rating of sukuk in financial markets is as important to
investors as to the issuer
• Investors aspire to receiving dividends in a timely manner
after subscribing to sukuk

Methodology:
• Documented terms and covenants of the issued sukuk are
evaluated and the risk/return is measured
• Viability of such sukuk in the secondary market will
proportionally increase the number of subscribers
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Insurer Financial Strength Ratings

• Financial strength of the insurer of the sukuk will help in
avoiding or mitigating risks
• Insurer of the sukuk must have corporate ability and
requisite financial strength to meet contractual obligations
• IIRA aims to be a source of reliable information and ratings,
encouraging growth of a financially strong insurance
industry
• IIRA believes it has a vital role encouraging prudent
management of insurance companies and improving the
industry’s strength for the benefit of all stakeholders
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Insurer Financial Strength Ratings

Methodology

• IIRA assesses:

- The current financial strength and the sustainability of such

financial strength of the insurance company
- The capability of the insurance company to meet the
obligations of the policy holders and other contract holders such
as the shareholders

•Qualitatively, the country risks of the domicile of such company

as well as its business profile are analysed
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products
Banks Financial Strength Rating
• IIRA adopts global financial practices in rating both Islamic
and conventional financial institutions
• The main issues in banks’ financial strength ratings is
investment quality and credit worthiness
• The key subject headings in IIRA’s asset quality analysis are

- Banking Environment -
Credit or Investment Policies and Loan Administration
Procedures -
Portfolio Composition and Characteristics
- Risk Management Practices
- Lending History and Performance
- Forecasting the portfolio and quality
- Analytical conclusions regarding economic values
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products
Banks Financial Strength Rating
Methodology
• Fundamentals for assessment of banks’ financial strength:

- Market assessment
- Consideration of factors determining asset quality
- Liquidity and fund management
- Asset/Liability management
- Capital adequacy
-Adjustments to achieve economic reality -
Finance, information systems, planning disciplines
- Earnings Performance
- Ownership and management performance, reflecting all
the above -
Emphasis on ability of financial institution to make profits
and pay dividends
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Sharī'ah Quality Ratings

• Seek to assess the level of Sharī‘ah compliance of Islamic

financial institutions, corporate entities or conventional
financial institutions offering Islamic financial services or
products such as sukuk

• The Sharī‘ah quality rating aims at informing the investing

public on the level of compliance of certain corporate
entities with the requirements of the Sharī‘ah
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Sharī'ah Quality Ratings

Methodology
•Assessing levels of compliance of financial institutions or
corporate entities with the requirements of the Sharī‘ah:
- Authentication of products and services
- Safeguards against comingling of funds in the case of an
Islamic window or branch of a conventional financial
institution
- Code of ethics adopted by the institution
- Policy of the calculation of profit or loss and the
consequent sharing of same
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Corporate Governance Ratings

•Prospective investors consider the ratings of corporate
governance/corporate entities before investing
• IIRA issues an independent opinion of available managerial
structure and practices though variety of characteristics e.g.:

- Transparency and adequate disclosure

- History, board performance,
demonstrated trustworthiness
- Management: who is the actual
governor (CEO or executive team)
- Effectiveness the top management
team/process
- Shareholders
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Corporate Governance Ratings

Methodology

• Best practices in the corporate governance rating of

corporate entities are used as benchmarks for assessment
rather than using standards of particular country/jurisdiction
• The level of fairness, transparency, responsibility and
accountability are considered key in the evaluation process
 
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Real Estate Ratings

• IIRA’s rating on real estate pertains to the overall rating of
the developer and is not a rating of a particular project unless
a specific project rating is requested
• The rating is assigned after taking into account:
- Market characteristics
- The organizational structure and management quality
of the developer
- Assessment of each of the projects in the
portfolio the developer is executing
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Real Estate Ratings

Methodology
• The real estate rating methodology designed by IIRA aims at
providing the stakeholders with a balanced view of the
strengths and weaknesses of the developer and to create a
healthy environment in the industry
•IIRA will analyze all on-going projects of the developer and
arrive at an overall rating of the developer
•The developer’s activities such as the performance of its
architects, engineers, contractors, and other necessary
personnel are rated accordingly
 Learning Objective 7.4
Differentiate between
Rating of Islamic Bonds sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Rating Symbols and Definitions

• Rating agencies convey respective opinions or decisions to
the investors and other stakeholders through the use of
symbols
• Level of credit worthiness or the grade is determined by
certain symbols
• The IIRA has two major categories of rating symbols:
- The International Scale Ratings: focuses on foreign-
currency debt, external account liquidity, and factors
affecting a country’s balance of payment
- National Scale Ratings: emphasises on the capacity of a
government and other institutional borrowers within a
country to meet their local currency debt obligations
Key Terms and Concepts
• Corporate credit rating
• Equity-based sukuk
• Debt-based sukuk
• Foreign direct investment
• Ijarah
• Islamic capital market
• Islamic financial
engineering
• Junk bonds
• Mudarabah Sukuk
• Mudarib
• Negotiable sukuk
• Non-tradable sukuk
• Rabb al-mal
• Riba
• Secondary market
• Sovereign credit rating
• Sukuk
• Tradable sukuk
• Trust certificate