Islamic Bonds (Sukuk)

M. Kabir Hassan,
Rasem N. Kayed,
and Umar A. Oseni

Learning Objectives
Upon the completion of this chapter, the reader should be able
to:
1.
Understand what sukuk is, its historical origin and
benefits, and the distinguishing features of sukuk from
conventional bonds
2.
Understand how Islamic bonds are structured, and
distinguish between different types
3.
Be familiar with the AAOIFI standards on Islamic bonds,
and the characteristics of investment sukuk and Sharah
rulings defined by these standards
4.
Differentiate between sovereign and corporate ratings
of Islamic bonds, and the methodology used to rate products

Learning Objective 7.1

What are Sukuk?

Understand what sukuk is,

its historical origin and
benefits, and the
distinguishing features of
sukuk from conventional
bonds.

Sukuk: an Arabic term for financial certificate; it is the Islamic

equivalent of bond
Sukuk: asset-backed instruments, and tradable Sharah
compatible trust certificates
AAOIFI defines Sukuk as:
Certificates of equal value representing undivided shares in the
ownership of tangible assets, usufructs and services or (in the
ownership of) the assets of particular projects or special
investment activity (AAOIFI 2008, p. 307)
The IFSB defines Sukuk in its Capital Adequacy Standard
(IFSB-2) as certificates that represent the holders proportionate
ownership in an undivided part of an underlying asset where the
holder assumes all rights and obligations to such asset

Learning Objective 7.1

What are Sukuk?

A Brief History of Sukuk

Understand what sukuk is,

its historical origin and
benefits, and the
distinguishing features of
sukuk from conventional
bonds.

Sak, the singular form of sukuk was used to refer to documents

or certificates representing obligations, contracts, conveyances of
rights executed in conformity to the principles of Shar'ah

The earliest usage of the sukuk receipts relates to the method of

payment of the soldiers during the Umayyad Caliphate in the 1st
century of the Islamic calendar where soldiers were given
commodity coupons in place of cash

During the medieval period, sak was used as the main

instrument for transferring obligations arising from commercial
transactions, thus reducing movement of cash between cities

Learning Objective 7.1

What are Sukuk?

Understand what sukuk is,

its historical origin and
benefits, and the
distinguishing features of
sukuk from conventional
bonds.

A Brief History of Sukuk

In the modern practice of Islamic finance, sak is used to

provide alternative funding for financing projects through
asset securitization

The Islamic Fiqh Academy of the Organization of Islamic

Cooperation (OIC) ruled for legitimacy of the concept of
sukuk

Learning Objective 7.1

What are Sukuk?

Understand what sukuk is,

its historical origin and
benefits, and the
distinguishing features of
sukuk from conventional
bonds.

Benefits of Sukuk
1. Among the best ways of financing large enterprises beyond
the ability of a single party to finance
2. Provide an ideal means for investors seeking to deploy
streams of capital and at the same time are able to liquidate
their positions with ease should the need arise
3. Manage liquidity for banks and Islamic financial institutions
4. A means for the equitable distribution of wealth

Learning Objective 7.1

What are Sukuk?

Understand what sukuk is,

its historical origin and
benefits, and the
distinguishing features of
sukuk from conventional
bonds.

Advantages of Sukuk include:

Diversification of fund sources

Secondary liquidity

Creation and enhancement of profile on the international

market

Infrastructural development in Muslim countries

Pricing benchmark

Sizeable financing

Learning Objective 7.1

What are Sukuk?

Understand what sukuk is,

its historical origin and
benefits, and the
distinguishing features of
sukuk from conventional
bonds.

Differences Between Sukuk and Conventional Bonds

1. Conventional bonds are contractual debt securities, while
sukuk represent the undivided ownership of each of the
sukuk holders in the underlying asset
2. Returns in conventional bonds comes in interest (coupon)
and the principal amount whereas in sukuk, the return is in
profits
3. In conventional bonds, the contractual relationship between
issuer and investor is debt/credit, while it is a partnership
relationship in sukuk

Learning Objective 7.1

What are Sukuk?

Understand what sukuk is,

its historical origin and
benefits, and the
distinguishing features of
sukuk from conventional
bonds.

Differences Between Sukuk and Conventional Bonds

4.
Sukuk holders have ownership rights in the
underlying
asset, while conventional bonds merely
represent a
debt certificate
Sukuk must be asset-backed, while conventional
bonds
may be backed by financial assets such as
receivables,
which are not allowed in the case of
sukuk

5.

(Refer to Table 7.1 in the text book for major differences

between Sukuk and Bonds)

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Types and Structure of Islamic Bonds

Sukuk can be of many types depending on the types of

Islamic finance products used in its structuring

AAOIFI identified fourteen major sukuk-structured products

(Table 7.2 in the textbook)

Sukuk have been classified as:

Tradable sukuk
Non-tradable sukuk
Debt based suluk
Equity based
(Refer to Table 7.3 of the textbook for classification of sukuk
according to types)

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

The Most Common Investment Sukuk

Mudarabah Sukuk (Trust Investment Bonds)

Musharakah Sukuk (Partnership Investment Bonds)

Ijarah Sukuk (Leased Asset Bonds)

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

The Fourteen Sukuk Structures of AAOIFI

1. Sukuk ijarah (leased assets certificates)
2. Sukuk ijarha mausufa bi dhima (forward lease certificates)
3. Sukuk manfaa ijarah (usufruct of a lease certificate)
4. Sukuk manfaa ijarah mausufa bidhima (usufruct of a
forward lease certificate)
5. Sukuk milkiyat-al-khadamat (ownership of services
certificates)
6. Sukuk al-salam (forward contract certificates)
7. Sukuk al-istisnaa (manufacturing certificates)

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

The Fourteen Sukuk Structures of AAOIFI

8. Sukuk al-murabahah (cost-plus certificates)
9. Sukuk-al-musharakah (partnership certificates)
10. Sukuk al-mudarabah (trustiInvestment certificates)
11. Sukuk al-wakalah (investment agency certificates)
12. Sukuk al-muzraa (sharecropping certificates)
13. Sukuk al-musaqa (irrigation certificates)
14. Sukuk al-mugharasa (agricultural certificates)

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Structuring of Islamic Bonds

The replication of conventional bond features excluding

characteristics impinging on fundamental principles of
Sharah in commercial transactions e.g. prohibition of riba
and gharar

The process of modelling and structuring Islamic bonds

requires basic knowledge of major Islamic finance products
e.g. mudarabah, musharakah, ijarah, murabahah, wakalah

Islamic finance experts developed, modeled and structured

finance products through Islamic financial engineering

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Mudarabah Sukuk (Trust Investment Bonds)

Investment sukuk representing ownership of units of equal

value in the Mudarabah equity

Registered in the names of the sukuk holders on the basis of

undivided ownership of shares in the Mudarabah equity

Usually structured as an agreement between the rabb al-mal

who provides the capital and the entrepreneur which may be
an investment company or a Special Purpose Vehicle (SPV)

Returns shared in accordance with the percentage of share

ownership of each sukuk holder

Losses are borne by financiers but necessary measures

mitigate risks (through the process of securitization)

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Basic Features of Mudarabah Sukuk (MS)

As articulated in the Resolution of the Islamic Fiqh Academy
of the OIC in its fourth session in 1988
1. Mudarabah Sukuk (MS) represent common ownership and
entitle holders to share in specific projects against which the
MS have been issued
2. Contract based on the official notice of the issue or the
prospectus, which must provide all information required by
Sharah for a Qirad contract
3. The MS holder is given the right to transfer the ownership
by selling the sukuk in the securities market at his/her
discretion

Learning Objective 7.2

Structuring Islamic Bonds

Basic Features of Mudarabah Sukuk (MS)

Understand

how Islamic
bonds are structured, and
distinguish between
different types

The sale of MS must follow the rules listed below:

-If mudarabah capital is in money, the trading of MS
will be
like the exchange of money for money and it must satisfy
the rules of Bai al Sarf
-If the mudarabah capital is in debt, it must be based on
principles of debt trading in Islamic jurisprudence
- If capital is a combination of
cash, receivables, goods, real
assets and benefits, trade
must be based on the
market price evolved by
mutual consent

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Basic Features of Mudarabah Sukuk (MS)

4. The manager/SPV who receives the funds collected from the
subscribers to MS can also invest his/her own funds
5. Neither prospectus nor MS should contain a guarantee, from
the issuer or the manager of the fund, for the capital or a
fixed profit, or a profit based on any percentage of the capital
Accordingly:
(i)

the prospectus, or the MS issued pursuant to it, may not

stipulate payment of a specific amount to the MS holder
(ii) profit is to be divided, as determined by applying the
rules of Sharah
(iii) the profit and loss account of the project must be
published and disseminated to MS holders

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Basic Features of Mudarabah Sukuk (MS)

6. It is permissible to create reserves for contingencies, such
as loss of capital, by deducting from the profit a certain
percentage in each accounting period
7. The prospectus may also contain a promise made by a third
party, to donate a specific sum, without any counter benefit,
to meet losses in a given project, provided such
commitment is independent of the Mudarabah contract
(The Resolution of the Islamic Fiqh Academy of the OIC in its
fourth session in 1988)

Learning Objective 7.2

Structuring Islamic Bonds

Figure 7.1:
Structure of
Mudarabah
Sukuk

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Steps Involved in the Structure of Mudarabah Sukuk

A company which needs liquidity establishes an SPV

The SPV issues sukuk certificates to investors/sukuk

subscribers

Cash generated used as capital in Mudarabah contract

between SPV and an organisation appointed to manage the
business

The Mudarabah business is carried out and profits are

periodically distributed among the two major parties: the
company and the SPV

The SPV pays the investors/sukuk holders according to the

units of their individual shares in the invested capital

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Musharakah Sukuk

Musharakah Sukuk are investment bonds which represent

the ownership of the partnership equity

Musharakah Sukuk can be used for the mobilization of funds

for new project, develop an existing project or finance a
huge business activity based on joint venture contracts

The Musharakah certificate given to all sukuk holders

represent their proportion of ownership in the assets of the
project being undertaken

The Musharakah certificates are treated as negotiable

instruments which are tradable in the secondary market;
they can be bought and sold in the capital markets

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Musharakah Sukuk

The structure of a Musharakah Sukuk is based on the joint

venture partnership

Profit is shared according to an agreed predetermined ratio

Any loss is shared according to the individual contribution of

the parties/sukuk holders involved

Every subscriber is entitled to participate in the

management of the business if he or she wishes

Learning Objective 7.2

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Structuring Islamic Bonds

Insert Figure 7.2

A Musharakah
Sukuk
Structure

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Ijarah Sukuk

Ayub (2007, pp. 400-401) defines ijarah sukuk as the

securities representing ownership of well-defined and known
assets tied up to a lease contract, rental of which is the return
payable to the sukuk holders

The contract of ijarah has been:

Structured and transformed as a competitive bond in the
secondary market
-

Structured to allow the mobilisation of funds for

development of long term infrastructure projects via the
issuance of ijarah sukuk

Used as securitization of a tangible asset e.g. a hospital

or airport

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Different Variations Ijarah Sukuk

1. Sukuk of ownership in leased asset
-

It is issued with the sole aim of selling the asset to the

sukuk holders through the transfer of title

The sukuk holders jointly own the asset through

undivided ownership and are entitled to profits and
losses accordingly

This form of ijarah sukuk can be used for the purchase

of a new asset

Learning Objective 7.2

Structuring Islamic Bonds

Understand

how Islamic
bonds are structured, and
distinguish between
different types

2. Sukuk of ownership of usufructs of assets:

It is issued to conferring the right of usufruct in the
sukuk holders where they become joint owners
-

The sukuk holders only become owners of usufruct

(manfaa) of the assets since the owners of asset have
leased its usufruct to the sukuk holders

Sukuk holders can also sublease the usufruct of the

asset to a third party

3. Sukuk of ownership of services:

Issued to subscribers to confer the ownership in such
services to the sukuk holders
The sukuk holders may also sublease such services to a
third party

Learning Objective 7.2

Understand

how Islamic
bonds are structured, and
distinguish between
different types

Structuring Islamic Bonds

Figure 7.3
Ijarah Sukuk
Transaction

Learning Objective 7.3

AAOIFI Standards for Islamic Bonds

Characteristics of Investment Sukuk

Be familiar with the AAOIFI

standards on Islamic
bonds, and the
characteristics of
investment sukuk and
Sharah rulings defined by
these standards.

Certificates represent the rights and obligations of the

owner

Common share in the ownership of the underlying asset

Shar'ah compliance

Trading of investment sukuk and the rights they represent

Return and losses are commonly shared by certificate

holders

Learning Objective 7.3

AAOIFI Standards for Islamic Bonds

Be familiar with the AAOIFI

standards on Islamic
bonds, and the
characteristics of
investment sukuk and
Sharah rulings defined by
these standards.

Sharah Rulings and Requirements

Sharah rules and requirements contained in AAOIFI
Standards of sukuk are classified into two categories:
-

Sharah requirements in the issuance of investment

sukuk

Sharah rules in trading in investment sukuk

Learning Objective 7.3

AAOIFI Standards for Islamic Bonds

Be familiar with the AAOIFI

standards on Islamic
bonds, and the
characteristics of
investment sukuk and
Sharah rulings defined by
these standards.

Significant AAOIFI Pronouncement on Sukuk in 2008

Guidelines on sukuk issued earlier by AAOIFI have

generated controversy among Sharah scholars, market
players and investors

The AAOIFI Pronouncements on sukuk in 2008:

to

Do not stand as substitutes for the earlier guidelines

They are merely clarifications/directives on guidelines
avoid misapplication of requirements for issuance of
investment sukuk and the Sharah rulings for their
trading in the Islamic capital markets

Learning Objective 7.3

Rating of Islamic Bonds

Be familiar with the AAOIFI

standards on Islamic
bonds, and the
characteristics of
investment sukuk and
Sharah rulings defined by
these standards.

Ratings of Islamic Bonds

Bond credit rating is the assessment of the credit

worthiness of a corporations debt issues or government
bonds. The designated grades range from AAA which is
considered as the highest grade to C

Credit rating allows potential investors to make informed

decisions before subscribing to debt securities.

There are over 50 rating agencies that have been

established across the world. The leading global rating
agencies include, Moody's Standard & Poor's, and Fitch
Rating of Islamic Bonds

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Ratings of Islamic Bonds

Different countries have their own rating agencies, such as

Malaysia, India, Bangladesh, and Sri Lanka

The two popular classifications of bonds while rating their

quality are:
-

investment grade bonds

junk bonds

The Islamic International Rating Agency (IIRA) which was

established by the IDB began operations in 2005 and has
since been striving to ensure quality in the Islamic finance
industry

Learning Objective 7.3

Rating of Islamic Bonds

Types of Islamic Bonds Ratings

Be familiar with the AAOIFI

standards on Islamic
bonds, and the
characteristics of
investment sukuk and
Sharah rulings defined by
these standards.

Islamic bonds can be rated on two bases:

- Sovereign
- Corporate
First: Sovereign Ratings

Sovereign credit rating is the credit rating of a sovereign

entity such as a national government

The risk level of the regulatory, political, economic and legal

atmosphere comprises a crucial factor in sovereign credit
ratings

Learning Objective 7.3

Rating of Islamic Bonds

Be familiar with the AAOIFI

standards on Islamic
bonds, and the
characteristics of
investment sukuk and
Sharah rulings defined by
these standards.

In the country risk rating, Euromoney Country Risks

consider the following factors in the ranking of countries by
risk:
-

Political risk

Economic performance/projections

Structural assessment

Debt indicators

Credit Ratings

Access to bank finance

Access to capital markets

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

IIRA Ratings
The six basic categories used by IIRA in analysing sovereign
sukuk and the likelihood of any default on debt obligations
at maturity are:
-

Politics and Policy Continuity

The EconomyStructure and Growth Prospects

Budgetary and Fiscal Policy

Monetary Policy and Flexibility

The External Accounts

Internal and External Debt

Learning Objective 7.4

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Rating of Islamic Bonds

Figure 7.4
First Page
of IIRA
Sovereign
Ratings of
Turkey in
2008

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Types of Islamic Bonds Ratings

Corporate credit rating is a credit worthiness rating in form of

financial indicator to potential investors of debt securities
such as sukuk

Corporate credit ratings play a significant role in the economy

of a country and, more importantly, it promotes stability and
sustainability in the financial industry

The level of risk surrounding a business entity determines the

confidence prospective investors will have in it

Corporate entities must adopt best practices (reducing their

risk level, demonstrating ability to meet financial obligations)

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

In the Islamic financial markets, corporate ratings involve:

- Bond/sukuk ratings
- Banks financial strength ratings
- Sharah quality ratings
- Corporate governance ratings
- Real estate ratings etc

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Rating Products and Methodology

The rating products in Islamic financial markets consist of all

types of issuers and sukuk issues. The IIRA identified the
following eight major rating products:
-

Sovereign Ratings
Issuer Ratings
Bond/sukuk Ratings
Insurer Financial Strength Rating
Banks Financial Strength Rating
Shar'ah Quality Ratings
Corporate Governance Ratings
Real Estate Ratings

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Sovereign Ratings

A reliable third party gives an opinion on the feasibility of

the repayment of the issuer or an issue of its financial
obligations within the record time

The general rating of countries as sovereign entities is first

carried out before the rating of particular issue or institution

Methodology

Involves both qualitative and quantitative factors

Assessing the likelihood of default on debt obligations for

sovereign sukuk

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

IIRA considers the following six analytical categories

while assessing the likelihood of default on debt obligations
for sovereign sukuk:
-

Politics and Policy Continuity

-

The EconomyStructure and Growth Prospects

Budgetary and Fiscal Policy

Monetary Policy and Flexibility

The External Accounts

Internal and External Debts

Learning Objective 7.4

Rating of Islamic Bonds

Issuer Ratings

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Rating sukuk issuer with special emphasis on ability to fulfill

its financial obligation

Non-financial organs such as the corporate and Sharah

governance of the entity from the bond/sukuk ratings

Methodology
In rating the issuer:
- Non-financial organs rated with particular regards to credit
worthiness and continued ability to fulfil debt obligations to
stakeholders
- Overall financial and institution credit worthiness of issuer
determines level of investors confidence potential

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Bond/Sukuk Ratings

Rating of sukuk in financial markets is as important to

investors as to the issuer

Investors aspire to receiving dividends in a timely manner

after subscribing to sukuk

Methodology:

Documented terms and covenants of the issued sukuk are

evaluated and the risk/return is measured

Viability of such sukuk in the secondary market will

proportionally increase the number of subscribers

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Insurer Financial Strength Ratings

Financial strength of the insurer of the sukuk will help in

avoiding or mitigating risks

Insurer of the sukuk must have corporate ability and

requisite financial strength to meet contractual obligations

IIRA aims to be a source of reliable information and ratings,

encouraging growth of a financially strong insurance
industry

IIRA believes it has a vital role encouraging prudent

management of insurance companies and improving the
industrys strength for the benefit of all stakeholders

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Insurer Financial Strength Ratings

Methodology

IIRA assesses:

- The current financial strength and the sustainability of such

financial strength of the insurance company
- The capability of the insurance company to meet the
obligations of the policy holders and other contract holders such
as the shareholders
Qualitatively, the country risks of the domicile of such company
as well as its business profile are analysed

Learning Objective 7.4

Rating of Islamic Bonds

Banks Financial Strength Rating

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

IIRA adopts global financial practices in rating both Islamic

and conventional financial institutions

The main issues in banks financial strength ratings is

investment quality and credit worthiness

The key subject headings in IIRAs asset quality analysis are

-

Banking Environment
Credit or Investment Policies and Loan Administration
Procedures
Portfolio Composition and Characteristics
Risk Management Practices
Lending History and Performance
Forecasting the portfolio and quality
Analytical conclusions regarding economic values

Learning Objective 7.4

Rating of Islamic Bonds

Banks Financial Strength Rating

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Methodology

Fundamentals for assessment of banks financial strength:

-

Market assessment
Consideration of factors determining asset quality
Liquidity and fund management
Asset/Liability management
Capital adequacy
Adjustments to achieve economic reality
Finance, information systems, planning disciplines
Earnings Performance
Ownership and management performance, reflecting all
the above
Emphasis on ability of financial institution to make
profits and pay dividends

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Shar'ah Quality Ratings

Seek to assess the level of Sharah compliance of Islamic

financial institutions, corporate entities or conventional
financial institutions offering Islamic financial services or
products such as sukuk

The Sharah quality rating aims at informing the investing

public on the level of compliance of certain corporate
entities with the requirements of the Sharah

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Shar'ah Quality Ratings

Methodology
Assessing levels of compliance of financial institutions or
corporate entities with the requirements of the Sharah:

- Authentication of products and services

-

Safeguards against comingling of funds in the case of an

Islamic window or branch of a conventional financial
institution

Code of ethics adopted by the institution

Policy of the calculation of profit or loss and the

consequent sharing of same

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Corporate Governance Ratings

Prospective investors consider the ratings of corporate
governance/corporate entities before investing

IIRA issues an independent opinion of available managerial

structure and practices though variety of characteristics
e.g.:
Transparency and adequate disclosure
History, board performance, demonstrated
trustworthiness
Management: who is the actual governor (CEO or
executive team)
Effectiveness the top management team/process
Shareholders

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Corporate Governance Ratings

Methodology

Best practices in the corporate governance rating of

corporate entities are used as benchmarks for assessment
rather than using standards of particular country/jurisdiction

The level of fairness, transparency, responsibility and

accountability are considered key in the evaluation process

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Real Estate Ratings

IIRAs rating on real estate pertains to the overall rating of
the developer and is not a rating of a particular project unless
a specific project rating is requested

The rating is assigned after taking into account:

- Market characteristics
- The organizational structure and management quality
of the developer
- Assessment of each of the projects in the
portfolio the developer is executing

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Real Estate Ratings

Methodology
The real estate rating methodology designed by IIRA aims at
providing the stakeholders with a balanced view of the
strengths and weaknesses of the developer and to create a
healthy environment in the industry

IIRA will analyze all on-going projects of the developer and

arrive at an overall rating of the developer

The developers activities such as the performance of its

architects, engineers, contractors, and other necessary
personnel are rated accordingly

Learning Objective 7.4

Rating of Islamic Bonds

Differentiate between
sovereign and corporate
ratings of Islamic bonds,
and the methodology used
to rate products

Rating Symbols and Definitions

Rating agencies convey respective opinions or decisions to

the investors and other stakeholders through the use of
symbols

Level of credit worthiness or the grade is determined by

certain symbols

The IIRA has two major categories of rating symbols:

The International Scale Ratings: focuses on
foreigncurrency debt, external account liquidity, and
factors
affecting a countrys balance of payment
-

National Scale Ratings: emphasises on the capacity of a

government and other institutional borrowers within a
country to meet their local currency debt obligations

Key Terms and Concepts

Corporate credit rating

Mudarib

Equity-based sukuk

Negotiable sukuk

Debt-based sukuk

Non-tradable sukuk

Foreign direct investment

Rabb al-mal

Ijarah

Riba

Islamic capital market

Secondary market

Islamic financial
engineering

Sovereign credit rating

Sukuk

Tradable sukuk

Trust certificate

Junk bonds

Mudarabah Sukuk