SECURITIZATION
By
Dr. Muhammad Imran Usmani
Presen Outline
Presentation
• Introduction
• Shari’a Perspective on Securitization
• Types of Sukuk
• Securitization of Musharakah
• Securitization of Murabaha
• Securitization of Ijarah
Presen
Introduction
• In normal conventional market, security is a
document, representing receivable amounts
owed by the issuer in favor of the holder.
• Normally the amounts secured by a security
are interests bearing loans.
Different kinds of securities
 Bonds issued by a company
 Bonds issued by a government
 Debentures
 Certificates
 Notes
 Treasury Bills
Shari’aPresen
Perspective
• Securities representing a loan or debt (such as
bonds) cannot be sold or purchased.
• If they are sold at a price higher or lower than
their face value, it is considered as “Riba”
• If they are purchased at their face value (Bai
al Dayn), this involves “Gharar” and hence
prohibited.
• However, securities may be assigned to a third
party at par value.The difference between sale
and assignment (HAWALA) is that transfer in
HAWALA is with recourse while transfer in
Sales in without recourse.
Presen
Securitization
Definition
“Issuing certificates of ownership, against an
asset, investment pool or business enterprise.”
• If the securities represent the proportionate
ownership of the holder in illiquid or
tradable assets, the trade of such securities
is permissible.
• The sale of such security will be tantamount to
the sale of holder’s proportionate share in the
assets.
Presen
Types
of Sukuk
Ijara Sukuk
 Sukuk of ownership in leased assets
Issued with the aim of selling the asset so that
holders of Sukuk become owners of the assets.
 Sukuk of ownership of usufructs of assets
Issued with the aim of leasing the asset so
that holders of Sukuk become owners of the
usufruct of the assets.
 Sukuk of ownership of services
Issued for the purpose of providing services
through a specified provider so that Sukuk
holders become owners of these services.
Presen
Types
of Sukuk
Musharaka Sukuk
Issued with the aim of using the mobilized funds
for establishing a new project, developing an
existing project or financing a business activity on
the basis of any of partnership contracts.
 Participation certificates – represent projects
or activities managed on the basis of Musharaka.
 Mudaraba Sukuk – represent projects or
activities managed on the basis of Mudaraba.
 Investment Agency Sukuk – represent
projects or activities managed on the basis of an
investment agency by appointing an agent to
manage the operation.
Presen
Types
of Sukuk
Murabaha Sukuk
Issued for the purpose of financing the purchase
of goods through Murabaha so that Sukuk holders
become the owners of Murabaha Commodity
Salam Sukuk
Issued for the purpose of mobilizing funds so that
the goods to be delivered on the basis of salam
come to be owned by the Sukuk holders
Istisna’ Sukuk
Issued for the purpose of mobilizing funds to be
employed for the production of goods so that the
goods produced come to be owned by the Sukuk
holders
Presen
Types
of Sukuk
Muzara’a (sharecropping) / Musaqa
(irrigation) Sukuk
Issued for the purpose of using the mobilized
funds for financing a project so that Sukuk
holders become entitled to a share in the crop as
per the agreement.
Mugharasa (agricultural) Sukuk
Issued for the purpose of mobilizing funds so that
Sukuk holders become entitled to a share in the
land and plantation.
Securitization of Musharakah
Presen
Musharakah
Securitization
• Musharakah is a mode of financing which can
be securitized easily.
• Especially in case of big projects where huge
amounts are required.
• 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. Certificates can be bought and
sold in the secondary market.
Presen
Musharakah
Securitization
Essential Conditions
• Profit earned by the Musharakah is shared
according to an agreed ratio.
• Loss is shared on pro rata basis.
• All the assets of the Musharakah should not be
in liquid form. Portfolio of Musharakah should
consist of non-liquid assets valuing more
than 33% of its total worth.
Presen
Musharakah
Securitization
Essential Conditions
• However, if Hanafi view is adopted, trading
will be allowed even if the non-liquid assets
are less than 33% but the size of the nonliquid 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.
Presen
Difference
Musharakah Certificates
Conventional Bond
• Represents the direct pro • Has nothing to do with
rata ownership of the
the actual business
holder in the assets of the
undertaken with the
project.
borrowed money.
• 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.
• The bond stands for a
loan repayable to the
holder in any case, and
mostly with interest.
Presen
Musharakah
Securitization
Securitization of Musharakah can be used for:
• Construction of Projects and factories
• Expansion Projects
• Working Capital Finance
Securitization of Murabaha
Presen
Securitization
of Murabaha
• Murabaha is a transaction, which cannot be
securitized for creating a negotiable
instrument to be sold and purchased in
secondary market.
• However, if the Murabaha paper is transferred,
it must be at par value; not more, not less.
• A mixed portfolio consisting of a number of
transactions including Murabaha, may issue
negotiable certificates subject to certain
conditions.
Presen
Conditions
• In Murabaha Securitization, pool of asset
should consist of Ijarah valuing more than
33% of its total worth.
• However, as described earlier if Hanafi view is
adopted, trading will be allowed even if the
non-liquid assets are more than 10% of its
total worth.
• Investors will have a Mudaraba relationship
with the Manager of the Pool.
Presen
Conditions
• Investors in the pool will have Musharakah
relationship and each one will be proportionate
owner of the pool.
• Profit will be shared according to an agreed
ratio between the Pool and the Manager.
• Share of the pool will be further divided
among the investors according to the rules of
Musharakah.
Securitization of Ijarah
Presen of Ijarah
Securitization
• 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.
• This purchase of a proportion of the asset by
each individual may be evidenced by a
certificate, which may be called 'Ijarah
certificate’.
Presen of Ijarah
Securitization
• 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 the extent
of his ownership.
• The holder will have the right to enjoy a part
of the rent according to his proportion of
ownership in the asset.
Presen of Ijarah
Securitization
• 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.
• Essential Condition
“It’s 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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