Growing Islamic finance 'facing new challenges'

London: The rapid expansion of Islamic financial institutions (IFIs) in recent years has resulted in them becoming increasingly entrenched in their domestic, regional and global markets, says Moody's Investors Service in a new Special Comment.

But, this has also brought with it a number of challenges, according to the report.

Moody's credit ratings can play a role in helping these institutions respond to these challenges, as is the case for their conventional counterparts.

"Islamic financial institutions share many characteristics with conventional institutions. However, the Sharia-compliant asset classes managed by IFIs may sometimes differ from those of conventional banks, not so much in their economic substance, but more in their financial form," said Moody's vice-president/senior credit officer and co-author of the report Anouar Hassoune.

"Indeed, Islamic banks and those essentially conventional financial entities that also offer Islamic services must abide by a series of rules and principles without which a transaction would not be deemed to be in line with financial Islam.'

Many of the challenges faced by IFIs stem from the accelerated pace of their successful inclusion within more competitive and interrelated, if not integrated, financial markets across borders. For financial intermediaries globally, robust governance, enhanced transparency, consistent communication, sufficient credibility, fortress reputation, financial flexibility, swift access to diversified funding sources and strong liquidity have become of utmost importance.

Moody's report explains what ratings specifically address in the case of IFIs, and provides details as to the different types of rating that would be assigned to different Islamic financial institutions depending on the category of their liabilities.

For Islamic banks, Moody's will generally use issuer ratings and financial strength ratings to describe the overall creditworthiness of the IFI. In some circumstances Moody's will assign deposit ratings to allow easy comparison of creditworthiness among peers.