Dr. Md. Touhidul Alam Khan :

The global Islamic finance industry has experienced remarkable growth over the past decade, establishing itself as a significant component of the international financial landscape. With assets surpassing a trillion dollars and sukuk issuance reaching new heights, the sector’s expansion underscores the increasing relevance and sophistication of Shariah-compliant financial products. Central to this evolution is the development of robust, transparent, and ethically aligned credit rating frameworks that support investor confidence, foster market stability, and enhance the sector’s integrity.

As Islamic finance continues to flourish across various jurisdictions – from Malaysia’s thriving sukuk markets to the GCC’s expanding Islamic banking sector – the importance of credible credit ratings cannot be overstated. These ratings serve as vital tools for fostering transparency, alleviating information asymmetries, and providing independent assessments of financial health and risk. Notably, major international agencies such as Moody’s, Fitch, and S&P Global have adapted their methodologies to incorporate the ethical and financial nuances inherent in Islamic finance, while specialized agencies like the Islamic International Rating Agency (IIRA) and regional players have broadened global engagement.

Global developments and regulatory reforms
The global outlook for Islamic finance remains optimistic. In 2024, S&P Global reported a 10.6 per cent increase in assets, buoyed by strong Islamic banking growth and Sukuk issuances. This trend is expected to persist into 2025, albeit alongside evolving standards that may reshape market dynamics. The advent of AAOIFI’s Shariah Standard 62, which emphasizes the legal transfer of Sukuk assets to investors, signals a paradigm shift. This development aims to provide sukuk holders with direct recourse, aligning risk profiles more closely with international debt standards while raising questions about asset classification and creditworthiness.

The implementation of Standard 62 across jurisdictions will necessitate adjustments in legal frameworks, credit assessment practices, and risk management strategies. For countries such as Malaysia, which dominates the Sukuk market, this might mean recalibrating their structures to maintain market attractiveness and investor confidence. For emerging markets and less-developed Islamic finance jurisdictions, especially in the OIC member states, the challenge lies in aligning local laws with international standards while safeguarding Shariah compliance.
Country and regional perspectives
Within the OIC bloc, credit rating agencies highlight a mixed landscape. Fitch’s classification of nearly 70 per cent of these countries into Group D reflects vulnerabilities in recovery prospects post-default, stemming from economic instability, political uncertainties, and financial sector weaknesses. While the UAE and Qatar enjoy comparatively better ratings, countries like Turkey, Egypt, and Indonesia-crucial Islamic finance hubs-remain in lower recovery categories. The absence of any OIC nation attaining the highest ratings underscores the need for structural reforms and stronger financial governance.

In Asia, Malaysia’s Islamic banking sector exemplifies resilience and steady growth. With Islamic financing constituting over 43% of banking loans, Malaysia’s deep capital markets and supportive regulatory environment have fostered a robust sukuk issuance platform. Fitch’s recognition of Malaysia as the world’s largest sukuk market highlights the country’s strategic positioning in Islamic finance, offering valuable insights for Bangladesh.

Similarly, Brunei’s Bank Islam Brunei Darussalam presents a strong model of prudent Islamic banking, with solid asset quality and capitalization. Its success underpins the vital role of sound financial management and regulatory oversight-a lesson for Bangladesh’s burgeoning Islamic banking sector.

In the Middle East and Europe, the outlook remains stable, with regions like the GCC expected to continue outpacing conventional banks in profitability. Omani banks like Sohar Islamic are adopting advanced risk governance practices, leveraging ratings agencies’ analytics to bolster internal controls. These developments illustrate the importance of integrating credit ratings into comprehensive risk management frameworks, a strategy Bangladesh can emulate as it seeks to enhance sector stability.
Iran’s journey, marked by regulatory reforms and proposals to tighten oversight of unhealthy banks, reflects the significance of credible credit assessments. Ensuring transparency and reliance on recognized rating agencies can help Iran stabilize its financial system-a lesson for Bangladesh, emphasizing the need for reforms that align with global best practices.

Implications for Bangladesh
Bangladesh’s ambitious Islamic banking and financial sector require careful adaptation of these global trends. As the country aims to expand its Islamic finance market, adopting a mature, ethical credit rating environment becomes crucial. Developing local rating agencies equipped with Shariah-compliant assessment methodologies will bolster investor confidence and ensure compliance with Islamic principles.
Integrating principles of transparency, fairness, and ethical conduct into the credit rating process is paramount. By aligning rating standards with Shariah objectives, Bangladesh can differentiate its financial products and attract both domestic and international investors seeking ethically grounded investments. Such alignment also mitigates risks associated with mispricing, conflicts of interest, and lack of transparency, fostering a resilient financial ecosystem.

Furthermore, regulatory reforms should emphasize the role of credit ratings in risk management, requiring financial institutions and Islamic banks to incorporate credible assessments into their decision-making processes. This approach will enhance the sector’s stability, especially in the face of emerging challenges such as global economic uncertainties.

(Dr. Md Touhidul Alam Khan is the Managing Director & CEO of NRBC Bank PLC and fellow cost & management accountant from Institute of Cost & Management Accountants of Bangladesh -ICMAB. He is also the first certified sustainability reporting assurer (CSRA) in Bangladesh).