The Effectiveness of Rating System to Measure Default Risk in Islamic Bond The Case of Islamic Bond Rating System in Indonesia

Abdul Qoyum, - and Misnen Ardiansyah, - (2010) The Effectiveness of Rating System to Measure Default Risk in Islamic Bond The Case of Islamic Bond Rating System in Indonesia. In: 3rd International Conference on Islmaic Banking and Finance : Risk Management, Regulation and Supervision, Jakarta Indonesia, 23 - 24 February 2010, Jakarta.

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Abstract

Rating has important meaning in the Islamic capital market, especially Islamic bond market. With the developement of sukuk market as the Islamic alternatives of the existing bond market, the issue of how to assign a rating to the stock ussuance rises. These credit ratings fulfil a key function of information transmission in capital market. Issues seek ratings for a number of reasons, including to improve the trust of their business counterparties or because they wish to sell securities to investor with preferences over ratings. Many investor rely on ratings the investement decision. For these reasons, rating are considered important by issuers and investors alike. However, the default problem of sukuk that issued by Dubay world has been made the focus of the investors to the default risk of sukuk increased. This study tries to examine the effectiveness of rating system in Islamic bond to measure the default risk. Using approach from Marton Model to predict the probability of default of Islamic bond, this research look for the relationship between rating and default risk. It used regression to answer this research question. From this study we find several conclusion. Firs, that the default probabilities of Islamic bonds are very low, even more impossible. The result shows the average probability of default about -120,94. Second, rating systems that used in Islamic bonds are effective, that is showed from the R Square. The default probabilities 59,4% can be predicted by the rating of Islamic bond.

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