securitization and musyarakah+murabahah and ijarah
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securitization and musyarakah+murabahah and ijarah securitization and musyarakah+murabahah and ijarah Presentation Transcript

  • Islamic Capital Market
  • Key Components: Islamic Capital Market
    • Shariah Compliant Stocks
    • Islamic Funds
    • Sukuk / Islamic Investment certificates- Fixed, quasi fixed and Variable return securities
  • Shariah Compliant Stocks
    • Shariah Guide lines:
    • Shariah based principle of equity participation is Shirkah.
    • Stocks are classified as Shariah compliant if their business activities do not fall in the prohibited list prescribed by Shariah Scholars.
    • Certain financial ratios are also applied for screening .
  • Shariah Compliant Stocks
    • Prohibited activities:
    • Alcohol
    • Gambling
    • Pork related products
    • Pornography
    • Conventional financial services
    • Conventional insurance
    • Tobacco,
    • Indecent Entertainment
    • Financial Ratios:
    • Main ratios applied are
      • Debt to equity ratio
      • Cash and interest bearing securities to equity ratio
      • Cash to asset ratio
    • In Malaysia, the screening of listed stocks is undertaken by a centralised body- Shariah Advisory Council of SEC
    • In other jurisdictions, screening services are performed by individual institutions
  • Shariah Related Issues in Stocks Trading
    • Not permitted to purchase shares by raising interest bearing loans through a broker or someone else.
    • Not permitted to pledge the shares for the interest bearing loan.
    • It is not permitted to sell the shares that the seller does not own which is called short sale . The promise by the broker to lend these shares at the time of delivery is of no consequence.
  • Issues in Stocks Trading (Contd)
    • Not permitted to conclude futures contract for shares because according to Shariah only one thing either payment or delivery can be deferred.
    • The contract of Salam is not permissible in shares – identified items.
  • Types of Funds
    • Equity Funds
    • Mudaraba Funds
    • Commodity Funds
    • Property Funds
    • Ijarah Funds
    • Investment & Murabaha Funds:
    • Involve purchase of commodities from third parties (through a bank as an agent of the fund) and reselling the same to the bank on deferred basis
    • Profit between the bank and the fund is comparable to returns from money market instruments .
    • Mixed Funds:
    • The subscription amounts of which are employed in different types of investments like equities, leasing, commodities, etc. For trading of Mixed Funds the tangible assets should be more than 51% while the liquid assets and debts less than 50 percent.
  • Islamic Capital Market - Issues
    • Regulatory Framework
    • Shariah' compliance and convergence
    • Product development
    • Cost efficiency
    • Development of market professionals
    • Investor education
    • Knowledge sharing
  • Securitization
  • Securitization
    • Involves:
    • Evaluating specific risks
    • Isolating and efficiently allocating risks
    • Evaluating the taxation, accounting and legal implications within the regulatory framework
    • Designing appropriate credit enhancement structures e.g. over collateral, cash collateral, subordination etc.
    • Pricing the residual risk.
  • Securitization: Unbundling of roles
    • Traditional business model revolves around originating an asset and holding it till maturity.
    • Through securitization, it is possible to
      • Disaggregate , repackage and distribute assets to different parties – able and willing to accept them
      • Realize benefits from specialization and economies of scale
    • Securitization transforms originator’s role from being an accumulator to that of a distributor.
  • Benefits to financial sector
    • Securitization creates incentives for originator for
      • Developing transparent credit approval process
      • Efficient collection procedures and strong mechanisms to control this process
    • Public availability of information about pool performance adds to confidence in securitized paper
    • New forms of securities – market completion
    • Assist development of capital markets
    • Attracts conservative buyers
    • Draws international capital
    • Facilitates efficient allocation of risks
  • Securitization mitigates the Risks
    • Originator’s Perspective
    • Mitigates liquidity risk of an illiquid asset
    • Reduced cost of funding
    • Takes assets off balance sheet, without loss of use
    • Reduced cost of finance if the investment is serving multiple originators by pooling assets
    • Investors’ Perspective
    • Foreign exchange risk is reduced if underlying asset is denominated in multiple currencies
    • Pooling of diversified assets with heterogeneous risk
    • Mitigates earnings risk
    • Undivided ownership of the asset is an added protection
  • SECURITIZATION SHARI’AH PERSPECTIVE
  • 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.
  • Types of Securitization
    • Securitization of Musharakah
    • Securitization of Murabahah
    • Securitization of Ijarah
  • 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
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
    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.
    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.
    Securitization of Murabahah
  • 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.
  • 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'.
  • 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.
  • 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.
  • 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.”
  • SECURITIZATION OF GOVERNMENT ASSETS
    • Ports
    • Airports
    • Railways
    • Roads and Bridges
    • Hospitals
    • Schools
    • Buildings
    • Dams
    • Land – mainly owned by the Provincial Government
    • State owned Enterprises
  • MODE
    • Sale and Lease back
    • Sale and Lease-to-Purchase (Diminishing Musharakah)
    VEHICLE
    • Central Bank
    • Primary Dealers
    • Secondary market
  • INSTRUMENTS
    • Treasury Bills
    • Government Sukuk
    USES
    • Liquidity Management of Islamic and non-Islamic Banks.
    • Money Market Operation
    • Federal
    • Provincial
    • District and Municipal
    • Semi Government
    • Zakat Fund
    • Non-Tax Resource general for all levels of Government