The pakistan credit rating agency pacra credit ratings for islamic instruments may 07 12
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The Pakistan Credit Rating Agency PACRA Credit Ratings For Islamic Instruments May 07’12. ADNAN AFAQ MD PACRA. About PACRA. 1. PACRA, Pakistan’s first rating agency – 1994 Banks AMC Insurance Refineries IPPs Corporate Sukuks

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The Pakistan Credit Rating Agency PACRA Credit Ratings For Islamic Instruments May 07’12

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The Pakistan Credit Rating Agency PACRA Credit Ratings For Islamic InstrumentsMay 07’12

ADNAN AFAQ

MD PACRA


About PACRA

1. PACRA, Pakistan’s first rating agency – 1994

Banks AMC Insurance Refineries IPPs Corporate Sukuks

2. JV : IFC + Fitch Ratings + Lahore Stock Exchange

3. To date + 1,500 rating opinions

Rated 85% of debt instruments in Pakistan

4. Recognized by Apex Regulators – Pakistan &

Bangladesh

5. Development work for World Bank: Bond Market - NBFI sector

6. We do: Risk Advisory,

Specialized Training on Risk Management

Corporate Governance Assessment (IFC model)


Development of Credit Ratings

Coverage of rating agencies (~ 90% of World GDP)


Why Credit Rating?

  • Bank Deposits

  • Tax Payers’ money

  • Listed Companies

  • Insurance

  • Real Estate Projects

  • Mutual Funds

Whenever

Public Money

is invested

Disclosure of

Risk & Return

is imperative

Risk & Return Correlation

Transparency: Independent view of risk


Why Credit Rating

  • Greater Access to Capital

  • Timely Action

  • Transparency

  • Relative Position

Management

Regulators

Investor

Identify Risk Factors

Systemic Risk

Enterprise Risk level

  • Not possible to

  • capture without

  • quantification

  • Market condition

  • Market action/inaction

  • Matching of

  • Risk & return


Crux of Islamic Finance

  • Transaction must have real economic purpose

    • No undue speculation allowed [Gharar]

    • No exploitation or

    • sinful activities permitted

  • Underlying concept: Sharing of risks & rewards

  • Riba:Interest & other Unlawful gain are prohibited


  • World Sukuk Markets

    • Total Sukuk Size: $215 b outstanding


    World Sukuk Markets

    • Main Players:

      • Malaysia (60-70% of new issuances globally)

      • Saudi Arabia

      • UAE

      • Pakistan

    • Latest happenings

      • Malaysia- Largest Islamic bond Plus highway $10bbn

      • Saudi Arabia- rise in activity: Civil Aviation, Saudi bin Ladin

        SATORP

      • South Africa- Treasury Sukuk proposition

      • Thailand- Tax Incentive

      • Oman- Infrastructure Sukuk proportion

      • Japan- Changes in tax & stamp duties

      • Ireland- Finance Bill 2010 facilitate Islamic Finances

    Preparing Launch

    • Azerbaijan

    • Kazakhstan

    • Australia

    • India

    • Japan

    • Singapore

    • Nigeria

    • Ireland


    Introduction to Sukuks

    • Plural of Sak – meaning ‘certificates’ in Arabic

    • Beneficial ownership interest in a tangible asset &/or resulting cash flows

    • Resembles a conventional lease agreement

    • Late payment charges paid to charity

    • Financier commissions the construction/manufacture of asset

    • Simultaneous forward Ijara agreement

    • Sale of agreed asset at cost plus agreed profit margin

    • Provides liquidity to the customer

    • Funds entrusted with a corporate for use in pre-agreed business

    • Profit & loss sharing

    • Similar to Mudaraba but this is an equity stake

    • Profit & loss sharing

    Risks associated with structure type


    Sukuk Ratings

    • Rating looks through the structure of the Sukuk at the originator of the transaction.

    Step 1; Base rating = originator’s Rating

    Step 2; Notching [Up –Down ] dependent on:

    • Type of claim or underlying contract

      • Ijara ensures predictable returns due to fixed rentals while

      • Musharaka is equity-based and hence less predictable

    • Quality of assets underlying the transaction

    • Mechanisms like reserves can further enhance credit

    Sukuk rating will be IDR plus one or multiple notches depending on strength of afore-mentioned factors


    Credit Risk Assessment Pyramid

    Long-term Sustainability

    Relative Positioning

    Macro-Economic Environment

    Business Life-cycle

    Short-term Sustainability

    11


    Credit Ratings – An Introduction

    Rating Scale – To measure relative credit risk

    Investment Grade

    Speculative


    Default…

    Failure to perform an obligations laid down in the agreement

    • Failure to pay amounts due;

      Very strict adherence to covenants (promise)

      BringsMarket Discipline

      Creates Credit History


    Limitations of Sukuk

    • Enforcementnot ensured (lack of legal precedent)

      Interpretation may differences between Shariah and local courts

      2.Register able asset not always transferred to SPV:

      • Due to Foreign ownership

      • Cumbersome

      • Expensive


    Iranian Sukuk Market


    AnyQ & A ??? Thank You!


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