SECURITIZATION

SHARI’AH PERSPECTIVE

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What is Securitization?

• Issuing certificates of

ownership against an

investment pool or business

enterprise.

Securitization

• Securitization is a structured finance process that distributes risk by aggregating debt instruments in a pool, then issues new securities backed by the pool.

• The term "Securitisation" is derived from the fact that the form of financial instruments used to obtain funds from the investors are securities.

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Types of Securitization

• Securitization of Musharakah

• Securitization of Murabahah

• Securitization of Ijarah

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Securitization of Musharakah

• Musharakah is a mode of financing which can be securitized easily.

• Especially in case of big projects where huge amounts are required.

• KLSE main board

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Securitization of Musharakah

Musharakah certificate

• Every subscriber can be given a Musharakah certificate, which represents his proportionate ownership in the assets of the Musharakah.

• After the project is started, these Musharakah certificates can be treated as negotiable instruments.

• Can be bought and sold in the secondary market.

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Securitization of Musharakah

Some Essential Conditions

• All the assets of the Musharakah should not be in liquid form.

• Portfolio of Musharakah should consist of non-liquid assets valuing more than 50% of its total worth.

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Securitization of Musharakah

• However, if Hanafi view is adopted, trading will be allowed even if the non-liquid assets are less than 50% but the size of the non-liquid assets should not be negligible.

• Whenever there is a combination of liquid and non-liquid assets, it can be sold and purchased for an amount greater than the amount of liquid assets in combination.

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Difference Between Musharakah Certificates and a Conventional Bond

Musharakah Certificates• Represents the direct

pro rata ownership of the holder in the assets of the project.

• If all the assets of the

joint project are in liquid form, the certificate will represent a certain proportion of money owned by the project.

Conventional Bond• Has nothing to do

with the actual business undertaken with the borrowed money.

• The bond stands for a loan repayable to the holder in any case, and mostly with interest.

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Securitization of Murabahah • Murabahah is a transaction, which cannot

be securitized for creating a negotiable instrument to be sold and purchased in secondary market.

• However, if the Murabahah paper is transferred, it must be at par value; not more, not less.

• A mixed portfolio consisting of a number of transactions including Murabahah, may issue negotiable certificates subject to certain conditions.

• The reason is obvious. If the purchaser/client in a murabahah transaction signs a paper to evidence his indebtedness towards the seller/financier, the paper will represent a monetary debt receivable from him.

• In other words, it represents money payable by him.

• Therefore transfer of this paper to a third party will mean transfer of money.

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Securitization of Murabahah

• It has already been explained that where money is exchanged for money (in the same currency) the transfer must be at par value.

• It cannot be sold or purchased at a lower or a higher price.

• Therefore, the paper representing a monetary obligation arising out of a murabahah transaction cannot create a negotiable instrument.

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Securitization of Murabahah

• If the paper is transferred, it must be at par value.

• However, if there is a mixed portfolio consisting of a number of transactions like musharakah, leasing and murabahah, then this portfolio may issue negotiable certificates subject to certain conditions.

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Securitization of Murabahah

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Securitization of Ijarah

• It is possible to create a secondary market instrument for the financiers on the basis of Ijarah.

• The lessor (owner) can sell the leased asset wholly or partly either to one party or to a number of individuals to recover his cost of purchase of the asset with a profit thereon.

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Securitization of Ijarah

• This purchase of a proportion of the asset by each individual may be evidenced by a certificate, which may be called 'Ijarah certificate'.

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Securitization of Ijarah

Ijarah certificate• Represents the holder's proportionate

ownership in the leased asset.

• The holder will assume the rights and obligations of the owner/lessor to that extent.

• The holder will have the right to enjoy a part of the rent according to his proportion of ownership in the asset.

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Securitization of Ijarah

• In the case of total destruction of the asset, he will suffer the loss to the extent of his ownership.

• These certificates can be negotiated and traded freely in the market and can serve as an instrument easily convertible into cash.

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Securitization of Ijarah

Essential Condition

“It is essential that the Ijarah certificates are designed to represent real ownership of the leased assets, and not only a right to receive rent.”

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SECURITIZATION OF

GOVERNMENT ASSETSPorts

Airports

Railways

Roads and Bridges

Hospitals

Schools

Buildings

Dams

Land – mainly owned by the Provincial Government

State owned Enterprises

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MODE

Sale and Lease back

Sale and Lease-to-Purchase (Diminishing

Musharakah)

VEHICLE

Central Bank

Primary Dealers

Secondary market

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INSTRUMENTS

Treasury Bills

Government Sukuk

USES

Liquidity Management of Islamic and non-

Islamic Banks.

Money Market Operation

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Federal

Provincial

District and Municipal

Semi Government

Zakat Fund

Non-Tax Resource general for all levels of

Government