Islamic banking products cannot be rated, a leading credit ratings provider has announced.
Standard & Poor's (S&P) Ratings Services released a report about funding sources of Islamic financial institutions (IFIs) and profit-sharing investment accounts (PSIAs).
The payment of interest, that is considered to be usury or 'riba', is prohibited by Sharia (Islamic law).
When this problem was brought to light, many banks, building societies and other financial services providers have launched special Islamic banking products.
These Islamic banking products included savings accounts, current accounts, mortgages, personal loans and PSIAs that comply with Sharia.
However, because Standard & Poor's rates PSIAs as hybrid structures as they have debt as well as equity characteristics, rating of Islamic banking products poses a problem.
"The use of these hybrid instruments sets IFIs apart from their conventional peers," explained Standard & Poor's credit analyst Anouar Hassoune.
"We have concluded that these hybrid instruments are non-rateable, because it is nearly impossible to identify contractual default for PSIAs," Mr Hassoune, the author of the report added.
Sharia-compliant investment products like PSIAs or IFIs draw upon three additional sources of funding, he explained. These include 'sukuk' or tradable notes that are compliant with Sharia, and are usually backed by income-producing assets that are the source of cash flow.
Standard & Poor's offers more than credit ratings, as well as other products and services designed to help individuals and institutions around the world make better-informed financial decisions with greater confidence.
Islamic banking products "non-rateable"
Financial Services > e-banking > Banking news
Islamic banking products "non-rateable"
Wed, 15 Jun 2005
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