S&P introduces stability ratings for Islamic banks with profit-sharing investment accounts

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Standard & Poor's Ratings Services today launched a new service: stability ratings for Islamic banks with profit-sharing investment accounts. "We're pleased to be the only rating agency to offer this innovative service to Islamic banks, which gives their customers a useful opinion about their profit-sharing investment accounts," said Standard & Poor's credit analyst Anouar Hassoune.

In a report published today, "S&P Launches Stability Ratings For Islamic Banks Offering Profit-Sharing Investment Accounts," Mr. Hassoune explains how these financial instruments are to be rated.

PSIAs are an important source of funding for Islamic financial institutions (IFIs), much like savings and checking accounts are a main funding tool for conventional banks. But unlike conventional time deposits, PSIAs comply with Sharia law, which bans the payment of interest.

Instead of interest, PSIA depositors are entitled to receive a share of the bank's profits, but also obliged to bear all potential losses on their investment. This profit-sharing principle is core to Islamic finance, according to which investors and entrepreneurs must share the risks and rewards of a given venture.

As PSIAs are loss absorbing, our classic credit ratings are not applicable to this class of instruments. We have decided, however, that our stability ratings are applicable and could provide PSIA depositors and the wider financial community with a useful opinion about these instruments.

Stability ratings represent Standard & Poor's opinion about the expected stability of cash flow distributable to PSIA holders of an Islamic financial institution on a scale running from 'SR-1' (highest) to 'SR-7' (lowest).

By stability, we specifically mean the relative sustainability and variability of distributable cash flow, which underpin cash distributions. A stability rating incorporates analyses of three aspects of the issuer: structure and governance, business risk profile, and financial risk profile.

"Investors may find that stability ratings help them understand and compare the expected volatility of the yield served on PSIAs of different banks," said Mr. Hassoune, "particularly as stability ratings are subject more to changes in the characteristics of the institution than to the ebb and flow of market valuations or sentiments."

Stability ratings are neither opinions about an IFI's overall creditworthiness or profitability; nor recommendations to buy, sell, or hold a particular PSIA. Furthermore, they do not comment on the suitability of any investment for a given investor.