Risk Issues of Islamic Financial Institutions - Moody's repo
From HodHood
www.moodys.com
Moody’s Global
Special Comment Credit Research
January 2008
Table of Contents: Risk Issues at Islamic
Summary Opinion 1
Section 1: Risk Entanglement Within IFIs’
Asset Classes is Mitigated by a Naturally
Financial Institutions
Strong Collateralisation of Credit Portfolios 4
Section 2: Balance-Sheet Management
Constitutes an Area in Which IFIs are
Investing Human Capital 5
Section 3: Specific Non-Financial Risks Summary Opinion
Make Strong Corporate Governance
Frameworks at IFIs Necessary 9 Risk management is at the heart of banks’ financial intermediation process, and
Appendix 1: Glossary of Arabic Terms has assumed utmost importance at a time when complexity and volatility in
Used in Islamic Finance 11 financial markets have become both differentiating factors building competitive
Appendix 2: The Five Core Principles of advantages and sources of risk entanglement. Basel II and widespread write-
Islamic Banking and Finance 13
downs have highlighted the importance of sufficient capital adequacy and, more
Appendix 3: Islamic Financial Institutions
Rated by Moody’s 14 importantly, set a framework for improving the overall risk management
Appendix 4: IFSB’s Adjustments to Basel architecture in banks. In rating financial institutions, Moody’s places great
II’s Capital Adequacy Ratio 15 emphasis on risk management frameworks and corporate governance, particularly
Appendix 5: Moody’s Related Research 16 in fast-growing emerging markets where such factors tend to attract lower scores
than in more mature economic and business environments.
Analyst Contacts: Islamic financial institutions (IFIs) are no exception. Similarly to conventional
financial institutions, they face many challenges in adequately defining, identifying,
Paris 33.1.53.30.10.20 measuring, selecting, pricing and mitigating risks across business lines and asset
classes. The Islamic Financial Services Board (IFSB) has recently published a
19 Anouar Hassoune
Vice President/Senior Credit Officer standard for risk management in Islamic institutions, and this forms the basis for all
discussions between Moody’s analysts and bank management in this area.
London 44.20.7772.5454 Islamic banks’ balance-sheet structures indicate that there is a great diversity of
classifications on both the asset and liability side. Such variety affects the ease of
13 Adel Satel
Managing Director comparison both between differing Islamic institutions and between Islamic
institutions and their conventional peers, making it difficult to apply just one
appropriate risk management approach. Therefore, the IFSB has prudently
adopted a principles-based approach. The IFSB standard lists 15 guiding
principles for risk management in IFIs. There is a general requirement followed by
those covering credit, equity investment, market, liquidity, rate-of-return and
operational risks. Overall, the main differences between these principles and those
appropriate for a conventional bank relate to five key areas:
Special Comment Moody’s Global Credit Research
Risk Issues at Islamic Financial Institutions
The range of asset classes found in Islamic banks.
The relatively weak position of investment account holders.
The importance of the Shari’ah supervisory board and the bank’s ability to provide the board with
adequate information as well as abide by its rulings.
Rate-of-return risk.
New operational risks.
Notwithstanding the IFSB’s endeavour to provide the Islamic banking industry with a set of guidelines towards
best-practice risk management, we believe that a number of additional risk issues at IFIs deserve further
examination. This view stems from:
IFIs’ relatively short track record (modern Islamic banking has been in existence for only three decades,
and many Sukuk products less than a decade).
The fact that most Islamic banks are active in the developing world where transparency, corporate
governance and risk management at large are still works in progress.
The shortage of skilled risk management professionals familiar enough with the Shari’ah-compliant
banking universe.
The purpose of this report is precisely to define what differentiates IFIs in terms of their risk profiles,
highlighting the potential implications that such differences may have on the IFIs’ bank financial strength
ratings.
Section 1 tackles the issue of risk entanglement in IFIs’ asset portfolios – i.e. an inability to (easily) identify
and segregate differing sources of risk.
Section 2 explores the challenges IFIs face in terms of balance-sheet management.
Section 3 focuses on the non-financial risks to which IFIs are exposed in conducting their intermediation
business.
The main conclusions of this report are as follows:
In IFIs’ financing and investment contracts, risk categories of different natures are often entangled, a
constraint mitigated by the naturally strong asset collateralisation of their portfolios.
Balance-sheet management – including liquidity, investment, asset-liability management (ALM) and capital
management – constitutes a critical field where IFIs face a series of specific challenges that are difficult to
cope with.
Specific non-financial risks make it necessary for IFIs to build on, and adhere to, strong corporate
governance frameworks.
2 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
Special Comment Moody’s Global Credit Research
Risk Issues at Islamic Financial Institutions
Moody’s Acknowledges the Importance of the Islamic Financial
Industry
Islamic finance is a growing subset of the global financial system, and is increasingly becoming a
mainstream industry. Notwithstanding a series of specific features that somewhat distinguish IFIs
from a number of their conventional peers, the building blocks are very similar for every banking
institution. This explains why Moody’s analytical approach to Islamic issuers and issues is often
very similar, but not exactly equivalent, to that applied to conventional rated entities and securities. 1
Fundamentally, what makes Islamic finance special is that it limits or even sometimes forbids the
use of some tools (such as interest-based profits, trading of debts or speculative derivatives),
reducing those available to an ethical and moral subset. If fully adhering to the core principles of
financial Islam, Sukuk in particular should really be equity based, as should risk-sharing securities.
Indeed, venture capital and equity are the most common – and the most halal (lawful) – forms of
ethical finance, as all parties share risk and reward.
However, for the majority of existing institutional financings (in the form of Sukuk), investors ask for,
and indeed receive, debt securities. Equity is expensive, hence the structural engineering of asset-
backed, risk-sharing securities. Securitisation is the debt structure that best satisfies the underlying
profit-sharing principles of Shari’ah-compliant investment.
Moody's believes that knowledge of Islamic finance is key to understanding the drivers behind the
business model of Shari’ah-compliant issuers and the structure of the securities they issue. This
goes beyond agnostically focusing on the balance sheet or legal structure, deconstructing all the
risks to their base components (with sufficient information from reporting documents) and then
analysing the credit risk in a “conventional” way, which could also be possible but would probably
constitute a weaker approach. However, many self-interested parties propagate their own
accounting standards, regulation, opinions, rules and principles. While Islamic finance is always an
emotive topic, diversity creates heterogeneity, which we need to be aware of and cope with.
Moody’s is committed to behaving with special care in presenting its views and fine-tuning its
policies, ensuring due acknowledgement and awareness of the importance of the Islamic financial
industry. In serving the widening Islamic investor base, we recognise the particular features of
Shari’ah-compliant instruments, but we do not accord such instruments special treatment beyond
that of any other “new” complex financial securities we may be asked to rate. In other words, we
acknowledge the innovations and complexities attached to Islamic securities, but we also recognise
that, in most cases, our rating criteria and methodologies are flexible enough to embrace the subtle
specificities of Shari’ah-compliant issuers and issues.
1
See Moody’s report entitled “A Guide to Rating Islamic Financial Institutions”, April 2006 (97226), and Appendix 5 for Moody’s related research.
3 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
Special Comment Moody’s Global Credit Research
Risk Issues at Islamic Financial Institutions
Section 1: Risk Entanglement Within IFIs’ Asset
Classes is Mitigated by a Naturally Strong
Collateralisation of Credit Portfolios
In IFIs’ financing and investment contracts, it is often challenging to distinguish between risk
categories. In other words, it is generally difficult to distinguish between the market and credit risks attached
to a financial transaction abiding by the rules of Shari’ah-compliant financing and investment. Islamic financial
intermediation is based on a series of contractual agreements, known as murabaha, ijara, mudharaba,
musharaka, salam and istisna, among others. 2 From a financial reporting perspective, all contracts are
generally included in one broad line item called “Islamic financing and investment”. In some cases where the
IFI has adopted IFRS as the set of applicable accounting rules, the banking book is reported separately from
the trading book, but in this case also the distinction remains more formal than substantial.
In a large number of contracts, risk categories of a different nature are entangled. For example, in an
ijara contract, which resembles a financial lease, the IFI buys an asset that is subsequently leased or rented to
a customer against periodic rental payments. The IFI remains the owner of the leased asset throughout the
duration of the lease contract, leaving the bank exposed to the residual value of the asset at maturity or should
the lessee be willing to terminate the ijara relationship prior to maturity. The management of leased assets’
residual value is a feature that differs materially from credit risk management and assumes access to robust
and reliable market data as to asset-price volatility and behaviour across economic cycles and business
conditions, all the more so as IFIs tend to run a portfolio of asset inventories that they buy and then sell or
lease.
Inventory management is another aspect that separates IFIs, from a risk management perspective, from their
conventional peers. Similar issues arise when it comes to diminishing musharaka contracts (co-ownership
contracts whereby the customer’s ownership share in a financed asset increases as principal is incrementally
repaid to the bank). Should the customer default, the IFI’s share in the financed asset is used as collateral, the
value of which might be volatile and naturally subject to scrutiny and management independently from the
customer’s perceived creditworthiness. Diminishing musharaka contracts are increasingly used as a financing
mechanism for Shari’ah-compliant home purchase, particularly in Dubai.
Similarly, in istisna (project finance) contracts, IFIs are deemed to remain the beneficial owners of financed
assets until the “borrowing” company pays back the final instalment under the istisna agreement. In the case
where the borrower defaults before the istisna’s maturity, the IFI is entitled to dispose of the financed assets,
which are generally illiquid because they are specific to the nature of the plant, the industry or the enterprise to
which the IFI’s funds were initially allocated. In the case of default, the IFI – more than any conventional bank
– becomes a merchant, behaving in the field of commerce rather than in that of pure financial intermediation.
This puts additional pressure on IFIs to equip themselves with the correct technical and professional expertise
for both credit assessment and the management of underlying asset valuation, trading and liquidity, should
loan foreclosure and collateral realisation occur.
Underlying all these contracts is the general favouring by Shari’ah of the principles of equity whereby
financiers are encouraged to share risk and profits with the “borrower”. This is in marked contrast to the simple
and isolated credit risk associated with debt instruments and Sukuk instruments utilising “par value purchase
undertakings”.
Such constraints attached to the status of IFIs as sellers and buyers of tangible goods – as opposed to
conventional banks intermediating between cash inflows and outflows with different maturities – also
have risk-mitigating benefits. One rule of the five key principles of modern Islamic finance 3 states that any
financial transaction should be backed by a tangible, identifiable underlying asset. This is a powerful way for
the IFI to secure, at least in principle, strong access to the collateral backing the transaction. In short, IFIs
naturally have a high level of collateralisation on their credit portfolios, and thus are in a position to somewhat
reduce their economic, if not regulatory, exposures at default. In addition, IFIs have in principle greater visibility
2
See the glossary of Arabic terms in Appendix 1.
3
See Appendix 2 for a complete description of the five core principles underlying Islamic banking and finance.
4 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
Special Comment Moody’s Global Credit Research
Risk Issues at Islamic Financial Institutions
in terms of the economic allocation of the funds they supply to borrowers. Indeed, contrary to a conventional
financial institution where a customer is not obliged to disclose the purpose of its loan, the IFI finances the
acquisition of an identifiable asset for which legal ownership belongs, in most cases, to the bank until full
repayment is made. Therefore, thanks to this information as to the usage of borrowers’ funds, IFIs should be in
a better position to manage their credit portfolios in terms of sector diversification. Sector diversification is all
the more important from a capital perspective as Islamic banks usually face concentration risks by name and
geography, and are also skewed heavily towards real estate financing and investment, further weighing on the
quality of their assets, and thus on their credit ratings. It is indeed a fact of life that most Islamic banks are
domestic financial institutions operating in undiversified emerging economies, where systemic risks are higher
than average and credit as well as investment portfolios display low levels of granularity.
Section 2: Balance-Sheet Management Constitutes an
Area in Which IFIs are Investing Human Capital
Beyond the challenges posed by risk entanglement in IFIs’ asset classes, partially mitigated by the more
robust liens over collateral described in Section 1, Islamic banks are also specifically more exposed to:
Several asset risks, in particular investment and liquidity risk.
A number of liability risks, given the unavailability of a wide range of non-Shari’ah funding sources to which
conventional banks can easily gain access.
Transformation risks raising the issue of how specific ALM should be at IFIs.
Each of these three issues is discussed in the following paragraphs.
Investment allocation and liquidity management continue to vex IFIs’
balance-sheet managers.
The limited scope of eligible asset classes for IFIs increases concentration in investment portfolios,
which tends to be mitigated by a lower appetite for speculative transactions. Financial Islam forbids
gharar (uncertainty) and maysir (speculation). Therefore, IFIs are naturally crowded out from the high-
risk/high-return leveraged and/or structured investment asset classes. As such instruments tend to be, in one
form or another, based either on interest (riba) or derivatives (not commonly allowed by Shari’ah supervisory
boards although Islamic “equivalents” are appearing), their technical eligibility is in most cases difficult to
justify. IFIs thus limit the scope of their investment strategies to plain vanilla asset classes such as stocks,
Sukuk and real estate, notwithstanding their cash reserves in the form of short-term international murabahas
for liquidity purposes. IFIs also tend to build portfolios of participations in the capital of a set of financial and
industrial companies held for strategic purposes; usually, mudaraba contracts are used, as is the case for
Shari’ah-compliant investment and/or private equity firms such as Arcapita Bank (not rated) and Gulf Finance
House (not rated) in Bahrain. A limited range of permissible asset allocations leads to concentration risks in
IFIs’ investment portfolios, by asset class, lawful sector and also usually by name. The immaturity of
securitisation in the region means that this financial technology has not been widely used to remove such
excess concentrations from the balance sheet, although 2007 did see the first few transactions of commercial
property loans and residential ijarah “mortgages”. In particular, Sukuk are scarce and constitute an illiquid
market where investors tend to stick to a buy-and-hold approach rather than move towards more active bond
trading. The size of the Sukuk market globally is only about US$100 billion today, less than one-third of which
is made up of euro-denominated Sukuk listed on international markets.
Liquidity management is far from being an easy task for IFIs. Despite the efforts of the Central Bank of
Bahrain (CBB) and others to provide a range of liquid instruments in which Islamic banks can place their
surplus cash, there is still a great shortage of liquid instruments, which means IFIs tend to be more illiquid than
their conventional peers and have more non-earning assets on their books. Indeed, most instruments used for
liquidity management purposes are interest based. Typically, Islamic banks would place their excess cash
reserves into short-term interbank murabahas, at a cost compared to conventional banks. Indeed, short-term
murabahas resemble money market interbank placements, but as murabaha contracts make it necessary for
commodity brokers to be involved, costs for managing liquidity might be high. As a consequence, IFIs are truly
5 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
Special Comment Moody’s Global Credit Research
Risk Issues at Islamic Financial Institutions
– and often more visibly – subject to the constant trade-off between profitability and liquidity in a binary way.
Contrary to conventional banks, which benefit from a continuum of asset classes displaying different
characteristics in terms of liquidity and profitability, IFIs at this stage of the development of the Islamic financial
industry barely have an alternative: profitable but highly illiquid asset classes (such as credit exposures and
Sukuk); or highly liquid short-term murabahas with international investment-grade banks, but at a cost.
Fortunately, yields on Islamic assets in many markets are sufficient for the cost of managing liquidity, because
“borrowers” are often willing to pay a premium for the Islamic nature of the banking relationship they build with
the IFI. In the future, however, as the industry matures, margins might come under pressure and the trade-off
between liquidity and profitability might lead to an increase in IFIs’ risk appetite, provided that instruments for
liquidity management purposes are not designed for the benefit of IFIs. In Saudi Arabia, the Saudi Arabian
Monetary Agency (SAMA) has developed an ad-hoc instrument called mutajara, which behaves like a
repurchase agreement (repo). Contractually, it is a term deposit with SAMA or other financial institutions, but
75% of this deposit can be “repoed” at SAMA at any point in time for liquidity purposes. In Bahrain, the CBB is
also working on developing a Shari’ah-compliant repo scheme. Finally, the Sukuk market is growing fast.
Governments and government-related institutions have made it clear on several occasions that their role on
the Sukuk market would not be limited to that of a benchmark-setter; issuing sovereign and public-sector
Sukuk would also contribute to enhancing the overall liquidity of the market. IFIs need this to weather possible
liquidity shortages in light of unforeseen events. For instance, during the financial crisis in Turkey during 2000-
2001, IFIs faced severe liquidity problems and one, Ihlas Finance, was closed.
A limited range of possible funding sources leads to concentrated liabilities,
imbalanced funding mixes and stretched capital management strategies.
IFIs’ wholesale liabilities tend to be concentrated. IFIs are generally well entrenched in retail banking,
which gives them access to a large, and increasing, pool of relatively cheap deposits, when these are not in
the form of Profit-Sharing Investment Accounts (PSIAs). Apart from retail accounts, which are in most cases
both granular and stable across business cycles, IFIs also resort to wholesale creditors for funding. So far,
Sukuk have not served as the main term funding source: only a handful of IFIs have issued medium-term
Sukuk so far, or are expected to do so in the near future, such as Sharjah Islamic Bank (not rated), Abu Dhabi
Islamic Bank (A2/P-1, stable) and Albaraka Banking Group (not rated). For asset-backed Sukuk, an Islamic
bank needs to originate enough income-generating contracts, the underlying assets of which are owned by the
bank (like in ijara and/or musharaka) for the Sukuk to be possible. However, the majority of Sukuk issued so
far, particularly in the Gulf region, have been asset based rather than asset backed, with “par value
repurchase undertaking” structures whereby the market value of the underlying assets bears little or no
relation to the funding amounts raised. Also, as these are not true-sale structures, any non-liquid assets can
be used. Therefore, IFIs typically raise short- to long-term funds from bank and non-bank customers, who tend
to be price sensitive, relatively unstable (except those from the public sector) and concentrated. Deposit
concentration is generally a negative rating factor for IFIs.
IFIs’ funding continuums remain imbalanced. Between deposits in their various forms (qardh hasan,
PSIAs, murabaha) and Tier 1 capital, IFIs have so far had access to a limited number of alternative funding
sources with different features in terms of priority of claims, ratings and thus cost. Only very few subordinated
Sukuk have been issued so far. Malayan Banking Berhad (A3/P-1, stable) in Malaysia, for example, issued a
junior Sukuk (rated Baa1 on 11 April 2007) eligible as Tier 2 debt under Bank Negara Malaysia’s regulation.
Bank securitisation, other Tier 2 instruments, Tier 3 short-term debt to cover the regulatory capital charge of
market risk, as well as plain vanilla and innovative hybrid capital notes, are inexistent in the Islamic financial
industry. One of the reasons behind such a vacuum in the wide – but often grey – area between deposit and
core capital of IFIs lies in the fact that a number of Shari’ah supervisory boards have been uncomfortable so
far with the concept of differentiating between priorities of claims of various classes of stakeholders in the case
of liquidation.
Therefore, IFIs’ capital management strategies tend to be stretched. Allocation of economic capital to
business units using risk-adjusted return-on-capital methodologies, for example, is barely applied, except in a
handful of well-advanced institutions globally. However, even in the conventional universe, the allocation of
economic capital to business units is still limited to a relatively small number of institutions that adopt more
sophisticated risk management techniques. Therefore, it is not surprising that advanced approaches for
6 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
Special Comment Moody’s Global Credit Research
Risk Issues at Islamic Financial Institutions
economic capital computation have not so far been widely adopted by IFIs in emerging markets. Capital
allocation tends to be inefficient at this stage, although this is not disadvantageous to a large extent as: (i)
capitalisation ratios are high, and capital is not scarce in the geographies where IFIs are most active (typically
in the Gulf region); (ii) asset yields are wide enough to serve record ROEs; and (iii) actual yields on equity far
exceed shareholders’ required rates of return. In the longer run, however, competitive pressure will drive
margins down: customers will become more educated about the concepts and principles underlying Islamic
banking and finance and will tend to be less willing to accept lower returns on their qardh hasan deposits and
switch more naturally to PSIAs, driving IFIs’ funding costs up, and capital could become scarcer given the
emergence of new investment opportunities outside the banking sector. All of these elements could easily
change the nature of the IFIs’ profitability equation, with lower net returns directed towards more demanding
shareholders. A solution to the conundrum would be to let capitalisation ratios dwindle gradually to protect
returns to shareholders while building assets more efficiently above targeted hurdle rates. Funding would
therefore attract less core equity and more alternative refinancing vehicles such as Sukuk (including
subordinated, convertible and exchangeable Sukuk), hybrid instruments, securitisation techniques, various
classes of PSIAs and other deposit-like tradable short- to medium-term notes. In such a context, credit ratings
will become even more necessary than they are today.
How specific should ALM be at IFIs?
Controlling margin rates is at the heart of IFIs’ ALM. The management of interest-rate risk is one of the
fundamental tasks of conventional banks’ ALM committees. Similarly, IFIs face the same issue of identifying,
measuring and controlling the risk exposure stemming from the expected cash inflows and outflows of assets
and liabilities according to their economic maturities. Like conventional banks, IFIs have both a portfolio
yielding fixed income over the duration of contracts and a portfolio generating floating rates of profit.
However, unlike conventional banks, the charge attached to funding costs is supposed to be a function of
asset yields, as per the core principle of profit sharing underlying Islamic banking and finance, which is at the
heart of PSIAs. Should there be no smoothing of returns to PSIA-holders, those IFIs that resort materially to
PSIAs for funding would in theory be less profitable than conventional banks when the interest- or profit-rate
cycle is at its peak, because when conventional banks would face a predetermined cost of funds, IFIs would
on the contrary be in a position to share more returns with PSIA-holders.
The opposite scenario would also be true: when the interest- or profit-rate cycle trends down towards its
trough, IFIs would buffer the decline by distributing less profit to PSIA-holders, whereas conventional banks
would have to absorb the same cost of funds at a time when net asset yields had shrunk, therefore reducing
more substantially their margins.
Another difference between Islamic and conventional banks is their respective capacity to use derivatives to
hedge their loan books against adverse interest-/profit-rate scenarios. IFIs have a natural preference for short-
term exposures or contractual credit terms that would allow for quick repricing schemes, such as ijara or
diminishing musharaka, which typically reprice every quarter, behaving like floating profit-rate loans. These
mechanisms make it less necessary for Islamic banks to resort to (expensive) profit-rate swaps for hedging
purposes. Only less than a handful of IFIs to date have had access to such hedging instruments, so far very
scarce, illiquid, based on over-the-counter arrangements and thus still quite costly.
In the longer term, IFIs are expected to be increasingly exposed to project finance and mortgage lending, two
of the most likely and powerful engines for the future momentum of Gulf banking markets. In both lines of
business, an IFI’s capacity to supply long-term fixed-rate financing would be viewed as a key competitive
advantage. From a balance-sheet-management perspective, the IFI’s corresponding capacity to manage the
derived profit-rate risk would be critical, particularly under Basel II’s Pillar 2, which Islamic banks will have to
comply with sooner rather than later. A prerequisite for more efficient balance-sheet management is the
gradual establishment of deeper, more liquid, more efficient and more affordable derivatives and securitisation
markets in compliance with Shari’ah financial laws.
What prevails in profit-rate risk is also valid for the management of currency risk. In terms of currency
risk, IFIs have a natural tendency to prefer a straightforward back-to-back approach to foreign-exchange risk
mitigation, which is not in most cases the most price-efficient way to handle this risk category. Shari’ah-
compliant financial derivatives already exist, but are widely developed. Incentives are limited, however, as
7 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
Special Comment Moody’s Global Credit Research
Risk Issues at Islamic Financial Institutions
most Islamic banks are active in the Gulf Co-operation Council (GCC), where local currencies are pegged
either to the U.S. dollar or to a basket of international currencies, reducing tremendously their volatility. In the
longer run, GCC economies might converge towards a single regional currency, the anchor of which might not
be the U.S. dollar or the euro, but potentially a wider mix of internationally recognised currencies. This would in
turn allow for some discrepancy between the reporting currency of GCC-based IFIs and the various cash flows
they generate from multiples geographies. This will become even more obvious as IFIs such as Kuwait
Finance House (KFH; Aa3/P-1, stable), Al Rajhi Bank (A1/P-1, stable) and Qatar Islamic Bank (not rated) are
expanding abroad in a more ordered and ambitious manner, sometimes in other emerging markets including
the relatively volatile economies of Pakistan, Turkey, Sudan and even Yemen. These jurisdictions are
increasingly the key to the future growth of IFIs as they have far larger Muslim populations and are
comparatively underbanked.
Can IFIs avoid combining shareholders’ and PSIA-holders’ funds, as the theory would suggest? The
liabilities of Islamic banks may – in common with assets – have very different profiles and need careful
management. The biggest issue remains the position of PSIAs. Juristically, PSIAs are a form of limited term
equity rather than debt claims on the bank, and therefore losses relating to the assets they fund should not
affect the bank’s own capital. However, Islamic banks are not immune from runs or panic withdrawals, and
PSIA-holders typically have the right to withdraw their funds at short notice, foregoing their share of the profit
for the most recent period and also their share of any losses that might have arisen.
Unrestricted PSIA funds will generally be combined with those of the bank’s shareholders who may have quite
different risk appetites, as PSIA-holders are generally looking for a safe investment, similar to deposit account
holders in conventional banks. In practice, the treatment of the fund-combining issue is handled differently.
Shamil Bank of Bahrain (not rated) has so far applied a strict distinction, for management account and return
computation purposes, between assets financed by shareholders’ funds and what the bank calls “unrestricted
investment accounts”. Conversely, KFH does not explicitly segregate classes of liabilities and prefers a more
flexible and convenient way of computing a total gross return on assets, and then applying both a musharaka
and mudaraba fee to isolate returns to PSIA-holders.
Notwithstanding such practical differences among IFIs in both combining funding sources and
computing returns, “displaced commercial risk” is always at stake, giving birth to various mechanisms
of smoothing returns. As demonstrated below, the practice of smoothing investment returns through “profit
equalisation reserves”, “investment risk reserves” and active management of mudarib fees is a very common
feature of IFIs to avoid random, business- and confidence-driven liquidity crises. “Displaced commercial risk”
(DCR) is indeed a term reflecting the risk of liquidity suddenly drying up as a consequence of massive
withdrawals should the IFI’s assets yield returns for PSIA-holders lower than expected, or worse, negative
rates of profits. As a matter of fact, a negative return on PSIAs would not constitute a breach of contractual
obligations, as PSIAs are supposed to absorb losses other than those triggered by misconduct or negligence,
and therefore would not be considered a default. Nevertheless, default might be subsequently triggered by the
very tight liquidity conditions the IFI would face in the case of massive runs on deposits. While this is in
keeping with the risk-sharing principles encouraged by Islam, it remains to be seen how such account holders
would react to losses on their accounts.
Some banking regulators have taken the view that this practice of smoothing returns results in a modification
of the legal attributes of the PSIA such that Islamic banks have a “constructive obligation” to continue
smoothing returns. This means that the practice of smoothing becomes obligatory, and unrestricted PSIA-
holders effectively have the same rights as conventional depositors.
Managing DCR efficiently is a subtle, dynamic exercise. Traditionally, there are four lines of defence
against DCR. Investment risk reserves (IRRs) and the bank’s mudarib fee tend to absorb expected losses;
profit equalisation reserves (PERs) are used to cover unexpected losses of manageable magnitude; and,
ultimately, shareholders’ funds stand against unexpected losses with a higher net impact.
IRRs are built from periodic provisions for expected, statistical losses. IRRs come as a deduction from the
asset portfolio, in the same way that loan-loss reserves are deducted from conventional banks’ loan books.
IRRs are gradually built from the periodic provision charge equivalent to the expected losses attached to IFIs’
investment portfolios, transiting through the IFI’s income statement. Should actual losses be in line with IRRs,
8 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
Special Comment Moody’s Global Credit Research
Risk Issues at Islamic Financial Institutions
there is limited likelihood that DCR would materialise into a bank run and thus into a liquidity crisis. Indeed,
returns to PSIA-holders would not be negatively affected. IRRs are generally deducted from income
distributable to PSIA-holders after the PERs are accounted for, and after the mudarib fee is captured by the
IFI.
Reducing mudarib fees to protect returns to PSIA-holders remains a management decision. PSIAs are the
combination of a musharaka contract (whereby PSIA-holders and shareholders bring funds to the banking
venture) and a mudaraba contract (whereby the IFI’s managers allocate PSIA-holders’ funds to various asset
classes on their behalf). Therefore, the IFI is eligible, under the mudaraba contract, for a mudarib
(management) fee, which typically constitutes 20-40% of asset yields net of PERs. In case asset yields
deteriorate beyond levels absorbable by IRRs, the IFI’s management team, in line with the board’s formal
approval, could reduce management fees ex post, which it can do contractually (although unilateral increases
of mudarib fees are strictly forbidden). This is viewed as a gift of the bank to PSIA-holders to earn their loyalty
across the cycle. Typically, mudarib fee reductions tend to apply when unexpected losses (beyond expected
losses handled by IRRs) are manageable one-offs. When exceeding a certain threshold, losses would be
covered by PERs.
PERs, a grey area in the capital continuum, collectively belong to PSIA-holders for smoothing their returns.
PERs are accounted for before any computation of the mudarib fee or IRRs. PERs are extracted from gross
asset yields. Their purpose is to provide an excess return to PSIA-holders in periods where assets have
performed worse than expected, and therefore when yields on PSIAs might be lower for a given IFI than for its
Islamic and conventional peers. PERs collectively belong to present and future PSIA-holders, although past
PSIA-holders (who might not be current or future customers of the IFI) may have contributed to building them.
This is in line with the principle according to which the various stakeholders of an IFI are subject to collective
solidarity. PERs being a future claim of PSIA-holders on the bank, they are not part of capital in accounting
terms, and thus are not subject to distribution to shareholders. From a regulatory perspective, however, the
treatment suggested by the IFSB is very subtle, just like the treatment of PSIAs for the computation of capital
adequacy ratios of IFIs under Basel II. 4 The key principle underlying the IFSB’s approach is that PERs (and
PSIAs overall) have a loss-absorbing feature, the intensity of which would not merit inclusion in eligible capital
(the numerator of Basel II’s capital adequacy ratio), but would rather allow for some deductions from computed
risk-weighted assets (the denominator of Basel II’s capital adequacy ratio), depending on the
conservativeness of the regulator in terms of the degree to which PSIAs and PERs would be deemed capital-
like instruments.
Shareholders’ funds constitute the ultimate line of defence against DCR. Ultimately, should IRRs, mudarib fee
cuts and PERs be insufficient to protect depositors from excessive volatility regarding PSIA returns,
shareholders can lawfully use their own capital to compensate for possible losses or PSIA-holders’ opportunity
costs. Shareholders’ funds have in the past been used to compensate holders of investment accounts, such
as in 1998 for Dubai Islamic Bank PJSC (A1/P-1, stable) and in 1990 for KFH. In both cases, PSIA-holders
suffered no losses.
Section 3: Specific Non-Financial Risks Make Strong
Corporate Governance Frameworks at IFIs Necessary
Reputation risk is critical for IFIs. As a matter of image, loan foreclosure and security realisation, described
as a relative strength of Islamic banks, are double-edged swords. Taking into account the expected take-off in
mortgage lending in the GCC countries, the question of loan foreclosure and collateral seizing may be critical
going forward. An IFI can hardly feel comfortable in the case of a Muslim family defaulting on the financial
obligation pertaining to its primary residential property. In a number of jurisdictions, such a scenario would
immediately trigger legal action leading the (conventional) bank to take full ownership of the collateralised
property, at the expense of the borrower, who would be forced to relocate to an alternative, often smaller,
home. In the context of the Muslim societies where IFIs are most active, it would be quite damaging for the
IFI’s “ethical” reputation to leave a Muslim family homeless for the sake of profit, and then sell the seized
property post foreclosure on the secondary market for real estate. Islamic finance presents itself as an ethical
4
See Appendix 4 for further details on how the IFSB takes into consideration PERs and assets financed by PSIAs in the computation of IFIs’ capital
adequacy ratios under adjusted Basel II guidelines. Reference is also made to IFSB’s published standard on Islamic banks’ capital adequacy.
9 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
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alternative to conventional banking. Therefore, should mortgage financing pick up in a number of Islamic
jurisdiction, reputation risk management would call for a number of mitigating mechanisms, including mutual
insurance (takaful) attached to housing loans, securitisation to separate origination/commercial objectives from
risk issues and the capacity of IFIs to run at all times a portfolio of properties in order to manage the credit
migration and delinquency scenarios of defaulting families resorting to Shari’ah-compliant mortgage finance.
More broadly, reputation risk might stem from the misconception that IFIs, through zakat, might be close to
violent militant groups. In order to avoid even the perception of such involvement, IFIs have materially invested
in know-your-customers (KYC) and anti-money laundering (AML) systems in order to enhance their processes
and procedures for the early detection and reporting of doubtful and fraudulent transactions, sometimes at a
heavy cost. However, such investments are not specific to IFIs, as many other conventional banks in the
Middle East have also strengthened their KYC and AML systems in recent years.
The competitive dynamics of IFIs could enhance Shari’ah arbitrage, itself a component of Shari’ah-
compliant risk. IFIs compete head on with conventional banks, but they also position themselves as
contenders within the Islamic financial industry, sometimes internationally, if not globally. Shari’ah is subject to
interpretation, particularly in the field of economic and financial transactions (known as the fiqh al-muaamalat).
Therefore, from one market to another, from one school of thought (madhab) to another, and even from one
Shari’ah scholar to another, the fine line between what is considered lawful at a point in time and what is not
considered lawful can be so thin that fatawa may differ substantially. Therefore, Muslim investors and
originators might be tempted by Shari’ah arbitrage, which is the risk of resorting to the most liberal
interpretation of financial Islam for business purposes. This could be damaging from a macro-industrial
perspective, should the whole Islamic financial industry be overly heterogeneous to the point where
fragmentation becomes unavoidable and durable. Shari’ah arbitrage might also lead an IFI to crowd itself out
of the market because it would not be considered sufficiently Shari’ah compliant by its constituency, the final
decision-making body as to Shari’ah compliance that is beyond the reach of any fatwa. Of course, Moody’s
does not opine on the Shari’ah compliance of an IFI, its products and services, or of Sukuk. However, Shari’ah
compliance risk is a factor in assessing an IFI’s creditworthiness. Shari’ah compliance risk can be interpreted
as a subset of the broader category of legal and compliance risk, which itself is a subset of operational risks.
Scarcity of talent might impede, for a while, the growth dynamics of Islamic banks. Senior officers of
most Islamic banks, when asked to comment on the most critical challenges for their institutions and for the
industry as a whole, would inevitably rank the scarcity of qualified human resources as the most striking
weakness of the whole industry. There is a clear, identifiable and sometimes quantifiable shortage of skilled
managers, officers and clerks in the Shari’ah-compliant financial universe. Not only is the industry growing
fast, triggering pressure on existing staff to absorb growing volumes, but a number of new entrants are also
entering the arena: markets like Bahrain, Qatar, Saudi Arabia, the UAE, Malaysia and Singapore, among
others, have witnessed the incorporation of a large number of new IFIs announcing authorised capital of
unprecedented size. Newcomers must be staffed and newly trained employees are scarce because education,
training and experience take time to build exploitable competences. The easiest and most effective way to
quickly staff freshly instituted organisations is to acquire them from existing banks, creating visible pressure on
the labour market in the entire industry. Risks including management discontinuity, excessive growth of
personnel expenses, innovation disincentives and lack of experienced staff might all damage an IFI’s capacity
to build competitive advantages, and ultimately its market position, reputation and business model. Of course,
this would not be without rating implications.
10 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
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Appendix 1: Glossary of Arabic Terms Used in Islamic
Finance
adl: a trusted and honourable person, selected by both parties to a transaction. Somewhat analogous to a
trustee.
amana/amanah: literally means reliability, trustworthiness, loyalty and honesty, and is an important value
of Islamic society in mutual dealings. It also refers to deposits in trust, sometimes on a contractual basis.
bai/bay: contract of sale, sale and purchase.
bai al-salam: advance payment for goods. While normally the goods need to exist before a sale can be
completed, in this case the goods are defined (such as quantity, quality, workmanship) and the date of delivery
fixed. Usually applied in the agricultural sector where money is advanced for inputs to receive a share in the
crop.
fatwa (pl. fatawa): an authoritative legal opinion based on the Shari’ah.
fiqh: practical Islamic jurisprudence. Can be regarded as the jurists’ understanding of the Shari’ah.
gharar: uncertainty in a contract or sale in which the goods may or may not be available or exist (e.g. the
bird in the air or the fish in the water). Also, ambiguity in the consideration or terms of a contract – as such, the
contract would not be valid.
hadith: the narrative record of the sayings, doings and implicit approval or disapproval of the Prophet.
halal: permissible, allowed, lawful. In Islam, there are activities, professions, contracts and transactions that
are explicitly prohibited (haram) by the Qur’an or the Sunnah. Barring these, all others are halal. An activity
may be economically sound but may not be allowed in Islamic society if it is not permitted by the Shari’ah.
Hanifite laws: an Islamic school of law founded by Iman Abu Hanifa. Followers of this school are known as
Hanafis.
haram: unlawful, forbidden (see halal). Describes activities, professions, contracts and transactions that are
explicitly prohibited by the Qur’an or the Sunnah.
hawala: bill of exchange, promissory note, cheque or draft. A debtor passes on the responsibility of payment
of his debt to a third party who owes the former a debt. Thus, the responsibility of payment is ultimately shifted
to a third party. Hawala is used in developing countries as a mechanism for settling international transactions
by book transfers.
ijarah/ijara: lease, hire or the transfer of ownership of a service for a specified period for an agreed lawful
consideration. This is an arrangement under which an Islamic bank leases equipment, a building or other
facility to a client for an agreed rental.
ijarah wa iqtina/ijarah muntahla bittamleek: a leasing contract used by Islamic financial
institutions that includes a promise by the lessor to transfer the ownership of the leased property to the lessee,
either at the end of the lease or by stages during the term of the contract.
ijtihad: literally effort, exertion, industry, diligence. As a legal term, it means the effort of a qualified Islamic
jurist to interpret or reinterpret sources of Islamic law in cases where no clear directives exist.
istisna’a/istisna: a contract of sale of specified goods to be manufactured with an obligation on the
manufacturer to deliver them on completion. It is a condition in istisna that the seller provides either the raw
material or the cost of manufacturing the goods.
maisir/maysir: the forbidden act of gambling or playing games of chance with the intention of making an
easy or unearned profit.
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mudaraba/mudarabah: a form of contract in which one party (the rab-al-maal) brings capital and the
other (the mudarib) personal effort. The proportionate share in profit is determined by mutual consent, but the
loss, if any, is borne by the owner of the capital, unless the loss has been caused by negligence or violation of
the terms of the contract by the mudarib. A mudaraba is typically conducted between an Islamic financial
institution or fund as mudarib and investment account holders as providers of funds.
mudarib: the managing partner or entrepreneur in a mudaraba contract (see above).
murabaha: a contract of sale with an agreed profit mark-up on the cost. There are two types of murabaha
sale: in the first type, the Islamic bank purchases the goods and makes them available for sale without any
prior promise from a customer to purchase them, and this is termed a normal or spot murabaha; the second
type involves a promise from a customer to purchase the item from the bank, and this is called murabaha to
the purchase order. In this latter case, there is a pre-agreed selling price that includes the pre-agreed profit
mark-up. Normally, it involves the bank granting the customer a murabaha credit facility with deferred payment
terms, but this is not an essential element.
musharaka/musharakah: an agreement under which the Islamic bank provides funds that are mingled
with the funds of the business enterprise and possibly others. All providers of capital are entitled to participate
in management, but are not necessarily obliged to do so. The profit is distributed among the partners in a pre-
determined manner, but the losses, if any, are borne by the partners in proportion to their capital contribution.
It is not permitted to stipulate otherwise.
qard al hasana/qard hassan: a virtuous loan in which there is no interest or mark-up. The borrower
must return the principal sum in the future without any increase.
rab-al-maal: the investor or owner of capital in a mudaraba contract (see above).
rahn: a mortgage or pledge.
riba: interest. Sometimes equated with usury, but its meaning is broader. The literal meaning is an excess or
increase, and its prohibition is meant to distinguish between an unlawful exchange in which there is a clear
advantage to one party in contrast to a mutually beneficial and lawful exchange.
riba al-fadi riba al-buyu: a sale transaction in which a commodity is exchanged for the same commodity
but unequal in amount or quality, or the excess over what is justified by the counter-value in an
exchange/business transaction.
salam: a contract for the purchase of a commodity for deferred delivery in exchange for immediate payment.
Shari’a/Shariah/Shari’ah: in legal terms, the law as extracted from the sources of law (the Qur’an and
the Sunnah). However, Shari’ah rules do not always function as rules of law as they incorporate “obligations,
duties and moral considerations that serve to foster obedience to the Almighty”.
Sukuk: participation securities, coupons, investment certificates.
Sunnah: the way of the Prophet Mohammed including his sayings, deeds, approvals and disapprovals as
preserved in the hadith literature. It is the second source of revelation after the Qur’an.
takaful: a Shari’ah-compliant system of insurance based on the principle of mutual support. The company’s
role is limited to managing the operations and investing the contributions.
tawarruq: literally monetisation. The term is used to describe a mode of financing, similar to a murabaha
transaction, where the commodity sold is not required by the borrower but is bought on deferred terms and
then sold to a third party for a lower amount of cash, so becoming “monetised”.
ummah: the community or nation. Used to refer to the worldwide community of Muslims.
wakala: agency, an agency contract that generally includes in its terms a fee for the agent.
zakah/zakat: a tax that is prescribed by Islam on all persons having wealth above an exemption limit at a
rate fixed by the Shari’ah. Its objective is to collect a portion of the wealth of the well-to-do and distribute it to
the needy. The way it is distributed is set out in the Qur’an. It may be collected by the state, but otherwise it is
down to each individual to distribute the zakat.
12 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
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Appendix 2: The Five Core Principles of Islamic Banking
and Finance
Islamic banking and finance essentially abides by five core rules, three being banning principles and two being
positive obligations:
The ban on interest (riba). No financial transaction should be based on the payment or receipt of interest.
Profit from indebtedness or the trading of debts is seen to be unethical. Instead, the investor and investee
should share in the risks and profits generated from a venture, an asset or a project.
The ban on uncertainty (gharar). Uncertainty in the terms of a financial contract is considered unlawful,
but not risk per se. Consequently, speculation (maysir) is forbidden. Therefore, financial derivatives are
usually not permissible under Shari’ah-compliant finance despite the possible application for risk mitigation
or risk transfer.
The ban on unlawful (haram) assets. No financial transaction should be directed towards economic
sectors considered unlawful as per the Shari’ah, such as the arms dealing, tobacco, or gambling
industries, as well as all enterprises for which financial leverage (indebtedness) would be deemed
excessive (including conventional banks).
The profit-and-loss sharing (PLS) obligation. Parties to a financial contract should share in the risks
and rewards derived from such financing or investment transaction.
The asset-backing obligation. Any financial transaction should be based on a tangible, identifiable
underlying asset.
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Appendix 3: Islamic Financial Institutions Rated by
Moody’s
Risk Issues at Islamic Financial Institutions
Islamic Financial Bank Financial Baseline Credit Local Currency Foreign Currency
Institution Country Strength Rating Assessment Deposit Ratings Deposit Ratings Outlook
Abu Dhabi Islamic Bank UAE D Ba2 A2/P-1 A2/P-1 Stable
Al Rajhi Bank Saudi Arabia C A3 A1/P-1 A1/P-1 Stable
Asya Katilim Bankasi A.S. Turkey D Ba2 Ba1/NP B1/NP Stable
Bank Al-Jazira Saudi Arabia D+ Baa3 A3/P-2 A3/P-2 Stable
Boubyan Bank Kuwait D Ba2 Baa2/P-2 Baa2/P-2 Stable
Dubai Islamic Bank PJSC UAE D+ Baa3 A1/P-1 A1/P-1 Stable
Kuwait Finance House Kuwait C- Baa1 Aa3/P-1 Aa3/P-1 Stable
Tamweel PJSC UAE D Ba2 A3/P-2 A3/P-2 Stable
14 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
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Appendix 4: IFSB’s Adjustments to Basel II’s Capital
Adequacy Ratio
In a report, Capital Adequacy Standard For Institutions (Other Than Insurance Institutions) Offering Only
Islamic Financial Services, published in December 2005, the IFSB released its adjustments to the Basel II
capital accord as it would be applicable to IFIs. The most striking feature of the IFSB’s report is the
consideration given to the factors that differentiate IFIs from conventional banks from a regulatory capital
perspective – namely the existence of loss-absorbing liabilities in the form of PSIAs. The IFSB does not
consider that either PERs/IRRs or PSIAs should be eligible for inclusion in capital. Rather, a portion of credit
and market (but not operational) risk-weighted assets (RWAs) – i.e. those financed by restricted and
unrestricted PSIAs – as well as those financed by PERs and IRRs, should be deducted from total RWAs as
per the following formula:
Regulatory capital adequacy ratio
=
Eligible capital (no difference with the Basel II definition)
ΣRWA – RWARestricted PSIAs – (1 – α)RWAUnrestricted PSIAs – αRWAPER+IRR
RWA: risk-weighted assets
Restricted PSIAs: off-balance sheet assets under management
Unrestricted PSIAs: on-balance sheet profit-sharing deposit accounts
PER, IRR: profit equalization reserves, investment risk reserves
α: adjustment factor between 0% and 100%, to be determined
by the regulator
Subscript: means « financed by »
15 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
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Appendix 5: Moody’s Related Research
Special Comments:
Understanding Moody’s Approach to Unsecured Corporate Sukuk, August 2007 (103919)
Asian Sukuk Poised for Fast Growth: Market Review and Introduction to Moody’s Rating Approach,
August 2007 (104446)
Shari’ah and Sukuk: A Moody’s Primer, May 2006 (103338)
A Guide to Rating Islamic Financial Institutions, April 2006 (97226)
Moody's Involvement in Rating Islamic Financial Institutions, April 2006 (97113)
Regulation and Supervision: Challenges for Islamic Finance in a Riba-Based Global System, January
2004 (81128)
Culture or Accounting: What Are The Real Constraints for Islamic Finance in a Riba-Based Global
Economy?, January 2001 (63369)
Selected Sukuk Rating Actions:
Moody's rates Abu Dhabi Islamic Bank's Trust Certificate Issuance Programme, November 2006
Moody's assigns (P)A1 ratings to DP World's proposed EMTN Programme and Sukuk, June 2007
Moody's affirms Dubai Islamic Bank's A1 Sukuk Trust Certificates rating, March 2007
Moody's rates Saad's Sukuk Issuance (P)Baa1, April 2007
Moody's rates Maybank's Subordinated Sukuk Certificates ("Certificates") Baa1, April 2007
Moody's rates DIFC Investments' Sukuk Issuance (P) A1, May 2007
Moody's assigns A1 rating to Emirates Islamic Bank's Sukuk Trust Certificates, May 2007
Moody's assigns (P)A1 ratings to Jebel Ali's proposed GMTN Programme and Sukuk, November 2007
Moody's assigns (P)Baa2 rating to NIG's proposed Sukuk, July 2007
Moody's assigns (P)A2 rating to Qatar Real Estate's proposed Sukuk , July 2007
Moody's affirms Baa1 ratings for Sarawak Corporate Sukuk Inc certificates, September 2006
Moody’s upgrades Malaysia Global Sukuk Inc.'s Trust Certificates to A3 from Baa1, December 2004
Moody's assigns definitive ratings to Floating Rate Secured Sukuk Notes issued by Tamweel Residential
ABS CI (1) Ltd, July 2007
Selected Islamic Bank Reports:
Abu Dhabi Islamic Bank, Credit Opinion, November 2007
Al Rajhi Bank, Credit Opinion, September 2007
Asya Katilim Bankasi A.S., Analysis, September 2007
Bank Al-Jazira, Credit Opinion, December 2007
Boubyan Bank, Analysis, December 2007
Dubai Islamic Bank PJSC, Credit Opinion, November 2007
Kuwait Finance House, Credit Opinion, May 2007
Tamweel PJSC, Analysis, November 2007
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication
of this report and that more recent reports may be available. All research may not be available to all clients.
16 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
Special Comment Moody’s Global Credit Research
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Authors Editor Production Associate
Anouar Hassoune Marion Kerfoot Martina Reptova
Khalid Howladar
Alessandra Mongiardino
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17 January 2008 Special Comment Moody’s Global Credit Research - Risk Issues at Islamic Financial Institutions
