Edited by Mervyn K. Lewis, Mohamed Ariff and Shamsher Mohamad
The role of credit rating agencies is reviewed in this chapter with the aim of elucidating the benefits, challenges and risks in rating financial institutions in the context of the strong growth of the Islamic banking industry particularly in the dual banking system in Malaysia. We address the often-asked question of whether there are significant methodological differences in rating Islamic banks compared with conventional banks. An eclectic view is taken of the role of credit rating agencies to examine the necessary conditions for the rating of Islamic banking and products to be effective not only in mitigating systemic risks but also in furthering the development of Islamic financial institutions, products and services. The latter is achieved through bridging the information gaps between depositors and borrowers, on the one hand, and between issuers and investors of Islamic banking services and financial products, on the other. Before examining the credit rating process, some overall indicators are presented of the Islamic and conventional banking industry in Malaysia and its performance.
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