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