Moody’s says Asian Sukuk (Islamic bonds) are poised for fast growth

Moody’s Investors Service believes that the prospects for the markets in Sukuk, or Islamic bonds, and Islamic financing in general are very encouraging in Asia, and this outlook goes beyond predominantly Muslim countries.

“Globally, the Malaysian market now accounts for most outstanding Sukuk, but interest is growing in the rest of Asia, obviously in jurisdictions such as Indonesia and Pakistan, but also, for example, in Singapore and most recently Hong Kong,” said Dominique Gribot-Carroz, a Moody’s AVP.

“By end-July 2007, outstanding Sukuk globally totalled USD 82.36 bln, of which close to 62% was denominated in Malaysian ringgit,” she said, adding, “impressively, for what began as a ‘conventional’ financial system, more than 70% of all Malaysian corporate borrowing was Islamic in 2005.”

Gribot-Carroz’s remarks coincided with the release of an introduction to Moody’s rating of Sukuk in Asia, and in which she examines the market’s key features and examples of rating assignments in the region.

“From the perspective of market growth, the key lesson from the experience of Malaysia is the need for and effectiveness of coordination between the government and regulatory authorities,” said Gribot-Carroz, who is based in Hong Kong.

Sukuk are better described as “Trust Certificates” or “Participation Securities” that grant the investor a share of an asset along with the cash flows and risk commensurate with such ownership. Inherent to their definition is compliance with Shar’iah or Islamic law.

“From Moody’s viewpoint, the Sukuk and Islamic bond markets are relatively new and growing fast,” said Gribot-Carroz.

As a rating agency, Moody’s — in its analysis of Sukuk — focuses on the credit risk and expected loss on an investment relative to its promise.

Aside from any quantitative analysis (which draws upon our existing methodologies), Moody’s will always consider the legal integrity of the structure as it is a transaction’s documentation that governs the cash flows and the risk to which the investor is exposed.

When rating Sukuk and Islamic banks, Moody’s does not work directly with Shari’ah scholars, but ideally, given the influence they have over an institution, looks at it more from a corporate governance perspective.

Furthermore, Moody’s tries, as the report says, to understand the reason for the structure and believes that ultimately, the better the understanding between all parties — including bankers, lawyers, Shari’ah scholars and rating agencies — the smoother the rating process.