1. By Faheem Ahmad, President–Strategic Planning and Global Relationships Islamic International Rating Agency, Bahrain By Faheem Ahmad, President–Strategic Planning and Global Relationships Islamic International Rating Agency, Bahrain June 24, 2014 IDBG 9 th Global Forum on Islamic Finance Lessons Learnt from Rating Global Sukuk Lessons Learnt from Rating Global Sukuk

2. Contents of the Presentation An Overview of the Global Debt Market Global Ratings and Trends since 2008: Our Observations Role of Global Credit Rating Agencies in OIC Countries Review of the Sukuk Market Sukuk Ratings and Issues

3. An Overview of the Global Debt Market FI: financial institutions; GG: general government; II: international institutions; NFI: non-financial corporations; NPISH: non- profit institutions serving households Size of Global Debt Market estimated at USD 100 Trn in mid-2013; Grown from USD 70 Trn in mid-2007; Outstanding Debt Domestically issued by Governments & Non-financial Corporations estimated at USD 43 Trn (80% higher than in mid-2007); Quantum of Domestically issued debt by Non- financial Corporations surpassed USD 10 Trn; Growth of International Debt Market sluggish as Financial Sector deleveraging after financial crisis; grew by merely 19% since mid-2007; Investments in debt securities by Non-residents account for about 25% of the stock of global debt securities; The share of Emerging Market Debt Securities held by Cross-border Investors grew to 12% in 2012; Doubled since 2008.

4. Distribution of Global Bond Market by Country Revolutionary developments in the Financial markets in last 25 years: a dramatic drop in bond yields, nominal and real; the explosion in sovereign debt burdens; the rise of emerging market debt.

5. Distribution of Global Govt. Issues by Country

6. Corporate Bond Ratings US Broad Investment Grade Corporate Bond Rating Breakdown (as % of Total Corporates)

7. An Overview of the Ratings World * NRSRO: Nationally recognized statistical ratings organization Source: Annual certification submissions by NRSROs to SEC USA – Dec. 31, 2012

8. Market Share of the Big 3 Rating Agencies Source: Annual certification submissions by NRSROs to SEC USA – Dec. 31, 2012

9. An Overview of the Sukuk Market Sukuk Issuances 2007 Sep. 2013 Corporate Quasi Sovereign Sovereign Unlisted Sukuk Listed Sukuk By Region Listed vs. Unlisted

10. Sukuk Market – Liquidity & Tradability Around 70% of lead arrangers believe that liquidity and tradability drives the price gap between Sukuk and bonds*. 69.6% Source: Sukuk Perceptions and Forecast Study 2014 – Thomson Reuters Zawya

11. Ratings in the Sukuk Market The market is looking for assurance through ratings*... Quantum of Rated Issues Sukuk rating should be compulsory Source: Sukuk Perceptions and Forecast Study 2014 – Thomson Reuters Zawya

12. The Big 3 Global Credit Rating Agencies The Big 3 Global Rating Agencies, Standard & Poor’s, Moody’s and Fitch have a history of at least 100 years; As of today, the ‘Big 3’ dominate the industry in terms of their share in ratings outstanding and fee income. Their performance reveals that the Big 3 are mandated to cater for US based financial institutions, $ based bonds and large corporations; They have no or negligible contribution in the development of Domestic Economies outside the US Ratings/DevelopmentOutside USWithin US Local Debt Market   Bond Market   Med./Small FIs   Municipal Bonds   SMEs  Islamic FIs*  Takaful Firms*  * Methodologies are extension of conventional ratings

13. Issues relating to ‘Asset-Based’ and ‘Asset- Backed’ Sukuk structures Sukuk structure not taken into account in assessing the credit quality Absence of third party assessment of Shari’a Quality further aggravating the low tradability of Sukuk Sukuk Ratings and Shari’a Implications

14. Role of Islamic International Rating Agency Islamic International Rating Agency (IIRA) was established under the patronage of Islamic Development Bank (IDB) Group in line with the IDB’s ‘Vision 1440H’; IDB’s ‘Vision 1440H’ envisages integration of IDB member countries’ economies among themselves and with the global economy; Prominent financial institutions including two rating agencies in OIC member states participated in formation of IIRA with IDB Group being the lead investor (27% shareholding). IIRA is formally recognized by the Central Bank of Bahrain (CBB) as an External Credit Assessment Institution (ECAI) and is also on the panel of approved rating agencies of IDB.

15. IIRA’s Global Footprint 24 Entities and Sovereigns in 14 Countries Bahrain: Sovereign ratings, Bahrain Islamic Bank, ABC Islamic Bank, KFH Bahrain, Gulf Finance House, Al Baraka Banking Group Turkey: Sovereign rating, Bank Asya, Kuveyt Türk Participation Bank Pakistan: Burj Bank Limited, K-Electric (Sukuk) Tunisia: Banque ZitounaSenegal: Banque Islamique de Senegal Saudi Arabia: Bank Al Jazira Iraq: Iraqi Islamic Bank Niger: Banque Islamique Du Niger Jordan: Jordan Islamic Bank, Islamic Insurance Company Guinea: Banque Islamique Du Guinea Qatar: Qatar International Islamic Bank Sudan: Bank of Khartoum UAE: Dubai Islamic Bank Recently, through a communiqué to all local banks, Central Bank of Bahrain has encouraged all IFIs to solicit and obtain ratings from IIRA; Three new sovereign rating assessments are also planned by IIRA.

16. Promotion of Domestic Ratings including those of Small & Medium Businesses Development of capital markets through local Sukuk issuances Sukuk clearing system for cross border trading Standardization of Shari’a aspects in cases of default Enforcement of AAOIFI standards for IFIs Comment on Shari’a aspects of Sukuk structures by rating agencies Sukuk Market & Future Strategy in OIC Countries

17. Thank You 17