Use Of The Shariah Quality Compliance Rating In Russia As Part Of The Investment Decision Making Process

Use Of The Shariah Quality Compliance Rating In Russia As Part Of The Investment Decision Making Process

Russian rating services market 2 Global rating agencies - Fitch - Standard & Poor's - Moody's Local rating agencies - National Rating Agency LLC - Analysis, Consulting & Marketing Rating Agency CJSC (АК&M) - Rus-Rating CJSC - Expert RA Rating Agency CJSC 40 Rating services market 60 NRA (21%) Local Global

Products and Services 3 INDIVIDUAL RATINGS Banks Asset management companies Investment companies Insurance companies Non-state pension funds Mortgage companies Holding and financial companies Non-bank lending institutions Enterprises Leasing companies Microfinance institutions Depository institutions Registrars Russia s regions Forest Management Ratings Guarantee fund Islamic Finance Ratings NON-INTERACTIVE RATINGS Issues of securities Sovereign ratings Pension savings management quality RANKINGS Banks Asset management companies Investment companies Insurance companies Enterprises Non-state pension fund Sovereign governments ANALYTICS Industry reports Banking sector analyses Macroeconomic reports Real estate (construction, retail) reports Analytics on local and regional governments SPECIAL PROJECTS Forest Management Effectiveness Ratings (developed together with WWF) Russian Regions Investment Attractiveness Ratings Service Quality Ratings Corporate Governance Ratings

Ratings that are reckoned with 4 The National Rating Agency is in the register of agencies accredited with the RF Ministry of Finance. This means that the government recognizes it as a creditable rating agency that makes correct assessments and conclusions. NRA s assessments are reckoned with by Russia s financial authorities and are accepted by users such as governmental entities, state corporations, investment and asset management companies, banks and enterprises as a factor to be considered when evaluating credit worthiness, making investment decisions, depositing money or getting involved in various business projects, tenders and bids. RF Ministry of Finance of the Russian Federation Ministry of Economic Development of the Russian Federation Central Bank of the Russian Federation Vnesheconombank SME Bank Moscow Exchange National Stock Market Association (NSMA) Ministry of Regional Development, As well as RusNANO, Deposit Insurance Agency, AHML, etc.

Equity Investments: background and status 5 A positive factor: Russian-Arab trade turnover remains stable Its share in the total trade turnover remains low -- 2-3 percent at most. Arab monarchies, especially Saudi Arabia, Kuwait, the UAE, Qatar and Bahrain, are important providers of long-term capital. In the UAE alone, open-end investment funds are estimated to exceed US$1 trillion. Investors potential interest in the Russian market is fairly high Investors are particularly interested in infrastructure projects, agricultural land, transport terminals, etc. Investors generally regard Russia as a risky market Infrastructure investment projects, successfully implemented in Russia, are more of an exception than a rule. Some of those projects were financed using the so-called return investments (Russian money invested through funds registered in Arab states). Other investment were made through Muslim communities and upon recommendation of regional Muftis Councils. www.ra-national.ru 5

What impedes investments in Russia 6 I. Many funds based in Arab counties invest under strict Shariah principles, rather than under conventional investment schemes used by the Western business community. II. III. Lack of established practice of performing high-quality road-shows for investors in Russian regions. Russia's lack of transparency increases investment risks and pulls down potential investment activity. IV. There are no laws regulating alternative investment forms and no full-fledged laws protecting foreign investors rights. V. Lack of criteria for project evaluation in terms of Shariah compliance on the part of project operator or investment/ financial product. VI. Limited opportunities for issuing Shariah-compliant financial products VII. Sovereign credit rating downside risk.

Information and rating assessments used in the investment decision making process 7 Investment attractiveness I II Industry risks III Credit risks IV Corporate governance V Commitment to Shariah principles

Factors influencing the investment attractiveness assessment 8 www.ra-national.ru 8

The Investment Attractiveness Rating scale and Russian regions identified as best performers in 2013 9

Sources of information used to assess the factors determining a region s investment attractiveness 10 NRA s Investment Attractiveness Rating, assigned to a region, draws on the following data sources: Statistical data Statistical data are used as a starting point for determining a region s economic condition and distinguishing features Examples: GRP per capita, employment rate, average wages, road and railroad density, amount of financial and lending institutions, etc. Business community opinion survey findings Regional business community opinion surveys enable an objective evaluation of important investment attractiveness aspects not covered by statistical research (such as perceived business and investment environment quality). Examples: percentage of business people who view the business environment as favorable; time and cost involved in registering a business and obtaining connections to basic utilities (by business people s estimates), etc. Expert opinions Expert opinions supplement and amplify other investment attractiveness assessments and allow to determine each factor s contribution to (weight in) the final investment attractiveness score. Examples: assessment of the social and political stability in the region, evaluation of the informal institutes role, etc.

Industry risks 11 Industry-specific ratio Industry reports Industry Ratio Discount/ premium Banking 1 0.0 Insurance 0.7-0.3 Construction 1.3 +0.3 Retail 1.5 +0.5 Metallurgy 1.7 +0.7 Oil & Gas 2.0 +1.0

Use of the Ratings 12 An important part of a business image, a rating is also an effective risk management and customer attraction tool. In many cases, a rating is required by the regulator, provides preferences or helps avoid legislative restrictions. The rating allows: Insurers to get accredited with banks and the Agency for Housing Mortgage Lending; take part in tenders; and have enough assets to cover their technical reserves and equity capital Companies and enterprises to reduce borrowing costs and/or raise more debt Banks to reduce credit costs, alleviate pressures on their capitalization and partner with SME Bank Issuers to have their securities included in the Lombard List Depositories and investment companies engaged in depository operations to cooperate with banks in the area of securities, the ownership of which is certified by the depository; Asset managers to manage insurance reserves, funds intended for housing provision for the military and non-state pension funds assets Regional and local governments to reduce borrowing costs and/or raise more debt

The Shariah Quality Compliance Rating 13 The Shariah Quality Compliance Rating (SQCR) Methodology has been approved by the Economic Department of Russia s Muftis Council and the Russian Association of Experts in Islamic Finance (RAEIF) SQCR Rating Process: List of generally accepted Shariah requirements applying to the conduct of commercial operations, for which there is a general consensus among Islamic scholars. List of information needed for the rating model. Complete and accurate information disclosure. Rating model using weighted factors. Expert Panel (established by NRA and consisting of reputable Islamic finance experts) makes the final decision on the assigned/ revised rating. NRA publishes a press release about the rating action on its website. The rated entity makes a statement on NRA s rating assignment.

Information needed to derive the Shariah Quality Compliance Rating 14 Filled in Questionnaire. Letter of recommendation confirming the validity of Questionnaire information Copies of balance sheet and P&L report as of the latest reporting date, and quarterly balance sheets and P&L reports for current year and previous years (or other reports confirming the entity s active status). Certificate of incorporation/ registration of a legal entity/ self-employed person. Information about the entity founders: short background (for individuals), full details and business description (for legal entities). Halal Compliance Certificate(s) for the entity s products/ services (desirable). Entity s development strategy (if any). Principles of conduct of commercial operations. Customers and users of the entity s products. Code of Corporate Conduct (if any) By-law on the Shariah Committee/ Expert (if any) and results of the Committee s work.

Shariah Quality Compliance Rating scale 15 Rating Sh1 What it means An entity fully conforms to Shariah standards Sh2 An entity conforms to a high level of Shariah standards in most aspects of Shariah quality analysis Sh3 An entity conforms to a moderately high level of Shariah standards in most aspects of Shariah quality analysis Sh4 An entity conforms to a moderately high level of Shariah standards, but has a number of weaknesses Sh5 An entity conforms to a satisfactory level of Shariah standards Sh(NR1) An entity does not conform to Shariah standards, but is taking measures to ensure compliance therewith Sh(NR2) An entity does not conform to Shariah standards, but intends to become compliant therewith

Companies that have been assigned the SQCR 17 Company Rating Business specialization Rating revision date LaRiba-Finance Limited Partnership Sh1 Financial and advisory services 17.07.2014 AMAL Financial House Sh1 Consumer and trade finance 30.06.2014 Baker Tilly Tax Services Sh3 Tax advisory services 25.12.2013 Rezeda Suleyman Sh3 Tailoring and selling of Islamic clothes 25.12.2013 Rimma Allyamova Islamic Clothing House Sh3 Tailoring and selling of Islamic clothes 25.12.2013 Tekhnologii Pitaniya LLC Sh3 Baking and retail sales 25.12.2013 Shadi LLC Sh3 Fish skin leather making and selling 25.12.2013 www.ra-national.ru 16

Use of Shariah Quality Compliance Ratings 17 INVESTMENT TARGET Shariah Quality Compliance Ratings Five rating aspects INVESTOR Projects (assessment from the Shariah compliance perspective) Company s activities (the image and reputation component) Sukuk (project issues/ issues by Shariah-compliant companies )

Sukuk statistics and development prerequisites 18 What is required - Willingness of political parties and business community to promote and support the industry - Setting up of a central supervisory authority, to be responsible for Shariah compliance control - Competitive pricing environment. - Introduction of liquidity management tools - Personnel training in Islamic finance And besides,.. - Islamic finance experts / consultants - Financial institutes and funds willing to take up the new project and understanding its specifics and risks - Rating agencies to provide rating assessments needed in the decision making process.

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