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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

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

ADNAN AFAQ

MD PACRA


About 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
Development of Credit Ratings

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


Why credit rating
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 rating1
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
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
    World Sukuk Markets

    • Total Sukuk Size: $215 b outstanding


    World sukuk markets1
    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
    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
    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
    Credit Risk Assessment Pyramid

    Long-term Sustainability

    Relative Positioning

    Macro-Economic Environment

    Business Life-cycle

    Short-term Sustainability

    11


    Credit ratings an introduction
    Credit Ratings – An Introduction

    Rating Scale – To measure relative credit risk

    Investment Grade

    Speculative


    Default
    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
    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



    Any q a thank you

    AnyQ & A ??? Thank You!


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