KARACHI, Jan 14: Modarabas are likely to attract more clients after JCR-VIS decision to do away with separate rating scales that were in use for rating modarabas until late last year. Top managers say the decision to undertake credit ratings of modarabas on conventional scales used for rating other entities will attract investors.
“This will help investors in decision making,” said former chairman of Modarabas Association Basheer A. Chowdry. He said that with the modarabas now being credit rated on conventional scales it would be possible for the investors to compare their credit worthiness or otherwise with that of other segments of the financial sector. Towards the end of last year JCR-VIS had restored conventional scales for both the entity and instrument ratings for modarabas.
“Since the job of the rating agency is to benchmark the degree the risk the difference in the nature of risk should not be a hindrance in carrying out the ratings on the same scale,” says a JCR-VIS report. The nature of risk in case of modarabas and other entities differs because of the difference in the Islamic and non -Islamic mode of financing. But essentially risk is defined as the possibility of a loss in an investment or in a financial transaction. So any financing transaction—be it conventional or Shariah-based—entails a certain risk. The risk in a conventional transaction is that a fixed sum (principal and/or markup) will not be paid on the due date. Some Islamic forms of financing e.g. morabaha and Ijarah also carry a similar risk.
Modaraba managers say the decision to rate the modarabas and their instruments on common scale would go a long way in establishing and deepening a market for Islamic products. “Now it will be easier for the people to gauge the risk associated with the Islamic debt raising instruments of modarabas in comparison with that of the conventional tools,” said a modaraba manager.
