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DCR-VIS explains rating system for Musharika, Modaraba cos

RECORDER REPORT

KARACHI: DCR-VIS credit rating agency has defined ratings for Musharika certificates for an assessment of an entity's credit quality on the likelihood of timely payment of estimated profits.

The credit rating agency explained that Musharika is a form of a partnership between two or more parties Ñ investors and an industry, or financial institutions and depositors Ñ whereby each party contributes to the capital of partnership in equal or varying ratio to establish a new project or share in an existing one, and whereby each of the parties becomes an owner of the capital on a permanent or declining basis and shall have its agreed share of profits. However, losses are shared in proportion to the contributed capital.

With the aim of promoting investment which remains within the confines of profit and loss sharing, 'Vital Information Services' has developed a unique Musharika model known as 'Musharika Variable Income Securities'.

This instrument has received 'Fatwa' from Islamic scholars. It is fully Shariah complaint and is comparable with the corporate bonds. Through this scheme, investors would be sharing the profit, of loss, of the company issuing these securities.

At redemption of the capital they will also be sharing the appreciation or diminution in assets value.

The ratings reflect an assessment of an entity's credit quality to form an opinion on the likelihood of timely payment of estimated profits. And, in Musharika, the ratings also reflect the estimated likelihood of payment of share in appreciation of asset value and redemption of capital.

DCR-VIS has asserted that external factors also have an impact on a company's future performance. The government policies on tariffs, quotas, subsidies, environmental issues, regulatory and taxation issues are some of the external factors that may affect a company's ability to perform.

The study of regulatory environment is not restricted to laws circumscribed by government regulatory agencies only. DCR-VIS would treat the Shariah (Fatwa) restrictions as quasi-regulatory in nature and while assigning ratings, the entity's mode of operations being in conformity to Shariah requirements. In case of both Modaraba and Musharika transactions, the credit rating agency would primarily be concerned with financial condition of the entity and its capacity to meet its financial obligations on timely basis.

For Modaraba companies, DCR-VIS credit rating is an opinion of a Modaraba entity's overall financial condition and its capacity to meet its financial obligations when due. This credit rating does not apply to any specific Modaraba transaction obligations and it also does not take into account any specific credit enhancement or guarantee on the specific obligation.

In case of Musharika, credit rating is an opinion of the creditworthiness of an issue with respect to likelihood of timely payment of specific financial obligation. The credit rating also takes into account the nature and provisions of the obligation, creditworthiness of guarantors and any other form of credit enhancements.