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SECURITIZATION
SHARI’AH PERSPECTIVE
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What is Securitization?
• Issuing certificates of
ownership against an
investment pool or business
enterprise.
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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.
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• 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
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• 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
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• 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