Islamic Securitization Research Articles

Islamic securitizations, what they are and their developmental role, a study in the experiences of selected countries.

The research aims to present perspective of Islamic securitizations (instruments), their characteristics, and how they can contribute to achieving economic development, by shedding light on the applying experience in leading Islamic countries, namely Malaysia, Saudi Arabia, and the Emirates. This research has applied the descriptive and analytical approach by addressing the nature of Islamic instruments, their characteristics and their developmental role. The research has concluded a number of results, the most important results are as follows: that Islamic securitization is one of the means that contribute to achieving economic development as an effective financing tool by linking the financial sector with the real economy, and it contributes to achieving economic development by financing investment projects and eliminating the problem of unemployment. Islamic securitization has achieved remarkable development in Malaysia, as the local securitization market in Malaysia is an important platform for government agencies and investment companies in securitizations. The ratio of Islamic securitizations to GDP in the Kingdom of Saudi Arabia increased from 24.7% in 2012 to 39.34% in 2020. The United Arab Emirates ranked first among the Gulf Cooperation Council countries in issuing Islamic securitization with an amount of $63.644 billion.

Islamic Securitization as a Yardstick for Investment in Islamic Capital Markets

The paper shows that Islamic securitization through Sukuk securities is vital in fostering the Islamic capital market. Sukuk investments entail investors and issuers to follow a set of nuanced moral and ethical principles beyond maximizing profit. As measured by social trust, investor trust could be critical in the worldwide Sukuk investment boom. Therefore, the primary objective of the article is to demonstrate the impact of Islamic securitization through the Sukuk bonds in guaranteeing investment in the Islamic capital market. The study employs a systematic literature review and qualitative research methodology based on secondary data to achieve the purpose of the study. The finding of the study indicates that despite all the obstacles in slowing the progression of the Islamic capital market, it manages to develop gradually worldwide. Further, concerning class flow and risks, Sukuk is similar to conventional bonds, but certain characteristics of the Sukuk bond make it a reliable instrument in the Islamic capital market.

Modeling an Islamic Student Financing Securitization

The study investigates developing an Islamic student financing securitization model based on sukuk structures. This study employs sample of descriptive, analytical, and comparative analyses utilized to discuss a novel framework of Islamic securitization through the different structures of sukuk wakalah derived from asset securitization. The result served to investigate the use of Islamic student financing securitization in a Shariah-compliant manner, which would be implementable in Malaysia. It emphasized the sukuk structures based on the wakeel principle, which indicated a situation where a wakeel or representative appointment was made to manage a project on the behalf of the sukuk holder. The findings of this study supported the economic benefits obtained in the form of lower overall financing costs through the use of securitization for student financing in higher education. This paper offers important implications specifically for the creation of sukuk structures and issuing a highly graded and marketable sukuk, which are compliant towards global Shariah principles. The paper fills the gap perceived within the existing literature of Islamic finance by showing Islamic securitization via sukuk as a viable source of funds potential utilizable in stabilizing the securities market. It can also pose as a solution for securing a sustainable funding.

Asset securitizations and bank stability: Evidence from different banking systems

The issuance of asset securitization has been subject to a substantial debate by financial regulators and practitioners post the financial crisis of 2008. This study examines the impact of asset securitizations on the performance and financial stability of banks in a dual banking system (Islamic and conventional). Using a unique sample of international banks located in 21 countries, our results provide strong evidence that banks involved in asset securitization are generally riskier and less financially stable. When we comparatively assess the different structures of securitization conditioned on the bank type (i.e. Islamic versus conventional securitization), these two models of asset securitizations show differential effects on bank stability. Unlike conventional securitization, which is marked by significantly low bank stability, an issuance of Islamic securitization leads to lower bank risk. This evidence is prevalent among the two bank types during the financial crisis of 2008–2009 and within non-crisis years. We attribute these findings to the distinctive monitoring and the constraints included in the Islamic model of securitization. The study provides new insights into alternative structures of bank securitization, offering policy implications for regulators governing countries with dual-banking systems.

Impact of Islamic Securitization (Sukuk) on Islamic Banks Liquidity Risk in Light of Basel III Requirements

This study aims to investigate the relation between Islamic securitization representing in Sukuk, and the Islamic banks ‘liquidities in light of Basel 3 requirements. So that the study investigates three variables which include Islamic securitization as independent variable; net cash from financing activities and net noncore funding dependence ratio as dependent variables. The study follows quantitative method by employing cross sectional data context analysis. The data is collected from six banks over six countries through the period 2011-2013. Pearson regression is used to measure causal relation between Sukuk and Net Stable Fund Ratio (NSFR), hence the model is developed to describe the relation. The study uses net noncore funding dependence ratio as (NSFR) which was required by Basel III. The regression result finds that there is positive relation between Sukuk and NSFR for Islamic banks. Also the study uses loans / deposits ratio to discover the relation between Sukuk and Islamic banks ‘liquidity risk, so the regression test shows that there is positive relation between Sukuk and loans / deposit ratio.

The Application of Islamic Sukuk in Jordan: Possibilities and Challenges

The issuance of Islamic Sukuk Law in Jordan is a step in the right direction for the liberation of the financial system from the predominance of an interest-based financial system than just a creditor to be participants in economic activity also provides opportunities for individuals who are eager to invest in Islamic financial instruments and as an engine of the Jordanian economy. Through the studying some of the economic and financial indicators in Jordan for the period from (1998 - 2012), the study found a positive indicators support the idea of Sukuk Islamic such as the relatively high rates of savings and bank deposits as a percentage of GDP, which means providing the necessary funding for the underwriting of these instruments. But there are other indicators put this idea in a challenge in terms of its acceptance or its continuity by the financial system and investors due to the lack of confidence in the economy and to the high ratio of public debt and public deficit. Moreover, the penetration of interest-based system in the economy and the absence of efforts seriousness in fighting corruption are also another serious challenges. With all this, the activation and issuance of laws governing the reform of the financial system ,anti-corruption and increasing transparency will enhance the confidence of investors in order to accept financing of Islamic derived investments .moreover ,it necessary to be screened the experiences of other Muslim and non-Muslim countries who apply Islamic securitization and introduce them with these products and their characteristics to stimulate the economic sectors to accept this Islamic project.

Religion and the Clash of “Ideals” and “Realities” in Business: The Case of Islamic Bonds (Sukuk)

Fueled by an increasing demand for investments that comply with Shariah (Islamic law), sukuk (Islamic investment certificates or participation certificates) have developed as one of the main components of the Islamic finance industry. In general, sukuk can be structured as asset based or asset backed, yielding wholly different risk profiles in the event of default and liquidation. However, given that the sukuk market is dominated by asset‐based sukuk, this article examines the motivation for greater interest in this specific sukuk structure. It also analyzes the challenges facing the regulatory framework and tax implemented for Islamic securitization in various jurisdictions. Then, it further evaluates, from the perspective of credit rating agencies, the importance of purchase undertakings in the structure and some controversies on this very point. The main issue that emerges is the difficulty of resolving the clash between the ideals of Islam and the realities of the marketplace. © 2015 Wiley Periodicals, Inc.

The Global Financial Crisis, Securitization and Islamic Finance: An Opportunity for Inward and Outward Reform

It is often contended by academics and practitioners in the Islamic finance industry that the global financial crisis would not have happened if the international financial markets had followed the principles of Sharīʿah, especially in the asset securitization sphere. This article attempts to respond to these assertions by examining the factors that contributed to the global financial crisis alongside an analysis of how Islamic finance could have been of value in its aversion. Specifically, the article provides details on the origins of the global financial crisis, its evolution and triggers. It then proceeds to investigate the financial principles, both conceptually and practically, in the Islamic securitization (ṣukūk) model. Ultimately, it is argued that from a conceptual standpoint, Islamic financial principles would have served to avert the crisis; however, contemporary ṣukūk practices would have only been likely to reduce the probability of its occurrence. This outcome is important insofar as it assists the Islamic finance industry achieve its full potential, which includes the capability of proposing effective reforms to the international financial architecture.

Emerging Markets in a Shifting Global Financial Architecture: The Case of Islamic Securitization in the Gulf Region

AbstractGiven major geo‐economic shifts in the wake of the global financial crisis, this paper sets out to review major debates in the field of geographies of emerging markets (EM). Observing lingering implicit assumptions about the undirectionality behind the emergence of EM discourses and practices, the paper argues that contemporary processes of South‐South and South‐North investment call for a ‘decentred’ view on EM integration. Such a decentred framework allows us to research whether geographical shifts in the world of global finance indeed imply a fundamental shift the nature of its practices. In this paper, I therefore explore the case of Islamic securitization in the Gulf Region, which constitutes a veritable geo‐economic hinge in a shifting global economy. Here, I argue, bilateral negotiation processes take place between vectors of global finance such as investment banks on the one hand, and EM client firms and Islamic banks on the other hand, in order to find a viable context‐sensitive financing solution. While this case acknowledges the blossoming plurality of global finance, the paper concludes with the view that this plurality is nevertheless mainly reproducing existing power configurations within the global financial architecture.

Modelling Sukuk Structures in Indonesia: Economic Development and the Risk Management

Indonesia is one of the emerging markets for the development of the Islamic finance securitization i.e. sukuk. Beyond that, there is much need to be done for the growth of the sukuk market. Being country abundance with the natural resources, idle land and cultivated area should be seen as an opportunity to turn it into the assets securitization. This indirectly would inject liquidation to the Indonesian economic, perhaps to achieve efficiency in the whole economic sectors. Thus, objectives of this paper are to propose equity based sukuk structures for agriculture projects. Besides, several issues pertaining to the risk management of the sukuk also will be discussed in this study. Risk management is vital to be conferring as this would affect the liquidity position of the sukuk. The developments of the model oblige close and undivided attention, solely to avoid conflict with the prevailing thinking of Muslim investors. In addition, comprehensive understandings on the risk from the Islamic perspectives need to be further explored. Otherwise the fundamental parts will be remains abstract.

The subprime mortgages crisis and Islamic securitization

PurposeThe purpose of this paper is to provide an insight of Islamic securitization based on sukuk structures.Design/methodology/approachDescriptive, analytical, and comparative analyses are used to discuss the risk‐sharing behaviour in Islamic securitization through different structures of mudharabah and musharakah sukuk derived from asset securitization.FindingsThe paper reveals that although sukuk are structured in a similar way to conventional asset‐backed securities, they can have significantly different underlying structures, provisions and shariah‐compliant. In particular, it prohibits the receipt and payment of interest and stipulates that income must be derived from an underlying real business risk rather than as a guaranteed return from interest. With regards to sukuk securitization, an asset is one of the vital elements that should exist as an evidence to support the process and make it permissible in Islam. In terms of Islamic securitization mechanism, it can be divided into two principles, namely, debt based and partnership. This paper further emphasizes that sukuk structures based on partnership principle is regarded as risk sharing rather than risk shifting, where it works by combining risk‐exposures in such a way that they offset one another to some degree. Accordingly, overall risk will be less than total risks on individual basis.Practical implicationsThis paper has important implication for the understanding of risk management practices particularly in structuring sukuk. Banks as originators and special purpose vehicles (SPV) as issuers, might consider more sukuk on partnership principles since it directed towards risk‐sharing concept that could lead to increase mobilization of savings and investment. As for the investors or sukuk holders, the partnership principle could generate the wealth creation, which to be shared between both investors (fund providers) and issuers (fund users), while both bear the risks involved and the resulting loss.Originality/valueThe paper will fill the gap in the existing literature of Islamic finance by showing that Islamic securitization via sukuk is a viable source of funds that could help stabilize the securities market, and as solution to the current subprime mortgages financial crisis.

Islamic Securitization After the Subprime Crisis

Islamic securitization in the form of sukuk has grown into a notable segment of global structured finance over the last three years. This article surveys the unique structural features of the sukuk market and assesses the potential of conflicts of interest that became apparent in the U.S. subprime mortgage crisis to contaminate the integrity of the securitization process if conducted in compliance with Shari’ah principles. This examination also considers recent regulatory changes to the definition of sukuk and current policy considerations of alternative forms of capital-market-based refinancing techniques, such as covered mortgage bonds, and the way they relate to Islamic securitization. The article concludes with a brief outlook on future challenges and developments in the sukuk market.

Islamic Finance and Securitization: Man-Made Tale or Reality

The core and fundamental axiom of Islamic finance is the elimination of riba which literally means interest. Islam's unconditional prohibition of riba changes the landscape of the Islamic financial system. Prohibition of interest by Islam is actually an indirect prohibition of pure debt security. Instead of debt other forms of financing based on the principle of sharing of profit and loss are recommended under Shariah (Islamic law). We will look at most of the shariah compliant services and whether that is not just a leap of faith. However Plato's Theaetetus of belief, knowledge and understanding will try to bring out some light on that issue.

The Economics of Islamic Finance and Securitization

Islamic lending transactions are governed by the precepts of the shariah, which bans interest and stipulates that income must be derived as return from entrepreneurial investment. Since Islamic finance is predicated on asset backing and specific credit participation in identified business risk, structuring shariah-compliant securitization seems straightforward. This paper explains the fundamental legal principles of Islamic finance, which includes the presentation of a valuation model that helps distil the essential economic characteristics of shariah-compliant synthetication of conventional finance. In addition to a brief review of the current state of market development, the examination of pertinent legal and economic implications of shariah compliance on the configuration of securitization transactions informs a discussion of the most salient benefits and drawbacks of Islamic securitization.

The Economics of Islamic Finance and Securitization

Islamic lending transactions are governed by the precepts of the shariah, which bans interest and stipulates that income must be derived as return from entrepreneurial investment. Since Islamic finance is predicated on asset backing and specific credit participation in identified business risk, structuring shariah-compliant securitization seems straightforward. This paper explains the fundamental legal principles of Islamic finance, which includes the presentation of a valuation model that helps distil the essential economic characteristics of shariah-compliant synthetication of conventional finance. In addition to a brief review of the current state of market development, the examination of pertinent legal and economic implications of shariah compliance on the configuration of securitization transactions informs a discussion of the most salient benefits and drawbacks of Islamic securitization.