Islamic Banks’ Risks: It’s Rating Methodology and Shariah Assessment Solutions

Abstract

The remarkable worldwide development of the Islamic finance industry and Islamic capital market has resulted in industry players demanding that Islamic banks be rated. Ratings will help them to assess whether a firm is utilizing the funds entrusted to it with due care, by providing indications of good performance so that informed decisions can be made. Since Islamic finance is recognized as being fundamentally different from conventional finance, a rating methodology is needed; one that can capture the unique dimensions of Islamic banks, in particular Shariah (Islamic law) risk. Therefore, this study will examine to what extent credit rating agencies, in particular standard and poor’s, Fitch and Moody’s differ in evaluating the creditworthiness of conventional and Islamic banks. Owing to Islamic banks’ operations needing to comply with Shariah law, this study will further investigate the way to assess Shariah compliance from the perspective of Shariah scholars and practitioners. The research on ratings not only helps boost investor confidence in the Islamic finance industry, but also leads to a better understanding of the concept. This is despite the different methods adopted by the agencies concerned.