securitization and musyarakah+murabahah and ijarah


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securitization and musyarakah+murabahah and ijarah

  1. 1. Islamic Capital Market
  2. 2. Key Components: Islamic Capital Market <ul><li>Shariah Compliant Stocks </li></ul><ul><li>Islamic Funds </li></ul><ul><li>Sukuk / Islamic Investment certificates- Fixed, quasi fixed and Variable return securities </li></ul>
  3. 3. Shariah Compliant Stocks <ul><li>Shariah Guide lines: </li></ul><ul><li>Shariah based principle of equity participation is Shirkah. </li></ul><ul><li>Stocks are classified as Shariah compliant if their business activities do not fall in the prohibited list prescribed by Shariah Scholars. </li></ul><ul><li>Certain financial ratios are also applied for screening . </li></ul>
  4. 4. Shariah Compliant Stocks <ul><li>Prohibited activities: </li></ul><ul><li>Alcohol </li></ul><ul><li>Gambling </li></ul><ul><li>Pork related products </li></ul><ul><li>Pornography </li></ul><ul><li>Conventional financial services </li></ul><ul><li>Conventional insurance </li></ul><ul><li>Tobacco, </li></ul><ul><li>Indecent Entertainment </li></ul><ul><li>Financial Ratios: </li></ul><ul><li>Main ratios applied are </li></ul><ul><ul><li>Debt to equity ratio </li></ul></ul><ul><ul><li>Cash and interest bearing securities to equity ratio </li></ul></ul><ul><ul><li>Cash to asset ratio </li></ul></ul><ul><li>In Malaysia, the screening of listed stocks is undertaken by a centralised body- Shariah Advisory Council of SEC </li></ul><ul><li>In other jurisdictions, screening services are performed by individual institutions </li></ul>
  5. 5. Shariah Related Issues in Stocks Trading <ul><li>Not permitted to purchase shares by raising interest bearing loans through a broker or someone else. </li></ul><ul><li>Not permitted to pledge the shares for the interest bearing loan. </li></ul><ul><li>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. </li></ul>
  6. 6. Issues in Stocks Trading (Contd) <ul><li>Not permitted to conclude futures contract for shares because according to Shariah only one thing either payment or delivery can be deferred. </li></ul><ul><li>The contract of Salam is not permissible in shares – identified items. </li></ul>
  7. 7. Types of Funds <ul><li>Equity Funds </li></ul><ul><li>Mudaraba Funds </li></ul><ul><li>Commodity Funds </li></ul><ul><li>Property Funds </li></ul><ul><li>Ijarah Funds </li></ul>
  8. 8. <ul><li>Investment & Murabaha Funds: </li></ul><ul><li>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 </li></ul><ul><li>Profit between the bank and the fund is comparable to returns from money market instruments . </li></ul><ul><li>Mixed Funds: </li></ul><ul><li>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. </li></ul>
  9. 9. Islamic Capital Market - Issues <ul><li>Regulatory Framework </li></ul><ul><li>Shariah' compliance and convergence </li></ul><ul><li>Product development </li></ul><ul><li>Cost efficiency </li></ul><ul><li>Development of market professionals </li></ul><ul><li>Investor education </li></ul><ul><li>Knowledge sharing </li></ul>
  10. 10. Securitization
  11. 11. Securitization <ul><li>Involves: </li></ul><ul><li>Evaluating specific risks </li></ul><ul><li>Isolating and efficiently allocating risks </li></ul><ul><li>Evaluating the taxation, accounting and legal implications within the regulatory framework </li></ul><ul><li>Designing appropriate credit enhancement structures e.g. over collateral, cash collateral, subordination etc. </li></ul><ul><li>Pricing the residual risk. </li></ul>
  12. 12. Securitization: Unbundling of roles <ul><li>Traditional business model revolves around originating an asset and holding it till maturity. </li></ul><ul><li>Through securitization, it is possible to </li></ul><ul><ul><li>Disaggregate , repackage and distribute assets to different parties – able and willing to accept them </li></ul></ul><ul><ul><li>Realize benefits from specialization and economies of scale </li></ul></ul><ul><li>Securitization transforms originator’s role from being an accumulator to that of a distributor. </li></ul>
  13. 13. Benefits to financial sector <ul><li>Securitization creates incentives for originator for </li></ul><ul><ul><li>Developing transparent credit approval process </li></ul></ul><ul><ul><li>Efficient collection procedures and strong mechanisms to control this process </li></ul></ul><ul><li>Public availability of information about pool performance adds to confidence in securitized paper </li></ul><ul><li>New forms of securities – market completion </li></ul><ul><li>Assist development of capital markets </li></ul><ul><li>Attracts conservative buyers </li></ul><ul><li>Draws international capital </li></ul><ul><li>Facilitates efficient allocation of risks </li></ul>
  14. 14. Securitization mitigates the Risks <ul><li>Originator’s Perspective </li></ul><ul><li>Mitigates liquidity risk of an illiquid asset </li></ul><ul><li>Reduced cost of funding </li></ul><ul><li>Takes assets off balance sheet, without loss of use </li></ul><ul><li>Reduced cost of finance if the investment is serving multiple originators by pooling assets </li></ul><ul><li>Investors’ Perspective </li></ul><ul><li>Foreign exchange risk is reduced if underlying asset is denominated in multiple currencies </li></ul><ul><li>Pooling of diversified assets with heterogeneous risk </li></ul><ul><li>Mitigates earnings risk </li></ul><ul><li>Undivided ownership of the asset is an added protection </li></ul>
  16. 16. What is Securitization? <ul><li>Issuing certificates of ownership against an investment pool or business enterprise. </li></ul>
  17. 17. Securitization <ul><li>Securitization is a structured finance process that distributes risk by aggregating debt instruments in a pool, then issues new securities backed by the pool. </li></ul><ul><li>The term &quot;Securitisation&quot; is derived from the fact that the form of financial instruments used to obtain funds from the investors are securities. </li></ul>
  18. 18. Types of Securitization <ul><li>Securitization of Musharakah </li></ul><ul><li>Securitization of Murabahah </li></ul><ul><li>Securitization of Ijarah </li></ul>
  19. 19. Securitization of Musharakah <ul><li>Musharakah is a mode of financing which can be securitized easily. </li></ul><ul><li>Especially in case of big projects where huge amounts are required. </li></ul><ul><li>KLSE main board </li></ul>
  20. 20. Securitization of Musharakah <ul><li>Musharakah certificate </li></ul><ul><li>Every subscriber can be given a Musharakah certificate, which represents his proportionate ownership in the assets of the Musharakah. </li></ul><ul><li>After the project is started, these Musharakah certificates can be treated as negotiable instruments. </li></ul><ul><li>Can be bought and sold in the secondary market. </li></ul>
  21. 21. Securitization of Musharakah <ul><li>Some Essential Conditions </li></ul><ul><li>All the assets of the Musharakah should not be in liquid form. </li></ul><ul><li>Portfolio of Musharakah should consist of non-liquid assets valuing more than 50% of its total worth. </li></ul>
  22. 22. Securitization of Musharakah <ul><li>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. </li></ul><ul><li>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. </li></ul>
  23. 23. Difference Between Musharakah Certificates and a Conventional Bond <ul><li>Musharakah Certificates </li></ul><ul><li>Represents the direct pro rata ownership of the holder in the assets of the project. </li></ul><ul><li>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. </li></ul><ul><li>Conventional Bond </li></ul><ul><li>Has nothing to do with the actual business undertaken with the borrowed money. </li></ul><ul><li>The bond stands for a loan repayable to the holder in any case, and mostly with interest. </li></ul>
  24. 24. Securitization of Murabahah <ul><li>Murabahah is a transaction, which cannot be securitized for creating a negotiable instrument to be sold and purchased in secondary market. </li></ul><ul><li>However, if the Murabahah paper is transferred, it must be at par value; not more, not less. </li></ul><ul><li>A mixed portfolio consisting of a number of transactions including Murabahah, may issue negotiable certificates subject to certain conditions. </li></ul>
  25. 25. <ul><li>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. </li></ul><ul><li>In other words, it represents money payable by him. </li></ul><ul><li>Therefore transfer of this paper to a third party will mean transfer of money. </li></ul>Securitization of Murabahah
  26. 26. <ul><li>It has already been explained that where money is exchanged for money (in the same currency) the transfer must be at par value. </li></ul><ul><li>It cannot be sold or purchased at a lower or a higher price. </li></ul><ul><li>Therefore, the paper representing a monetary obligation arising out of a murabahah transaction cannot create a negotiable instrument. </li></ul>Securitization of Murabahah
  27. 27. <ul><li>If the paper is transferred, it must be at par value. </li></ul><ul><li>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. </li></ul>Securitization of Murabahah
  28. 28. Securitization of Ijarah <ul><li>It is possible to create a secondary market instrument for the financiers on the basis of Ijarah. </li></ul><ul><li>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. </li></ul>
  29. 29. Securitization of Ijarah <ul><li>This purchase of a proportion of the asset by each individual may be evidenced by a certificate, which may be called 'Ijarah certificate'. </li></ul>
  30. 30. Securitization of Ijarah <ul><li>Ijarah certificate </li></ul><ul><li>Represents the holder's proportionate ownership in the leased asset. </li></ul><ul><li>The holder will assume the rights and obligations of the owner/lessor to that extent. </li></ul><ul><li>The holder will have the right to enjoy a part of the rent according to his proportion of ownership in the asset. </li></ul>
  31. 31. Securitization of Ijarah <ul><li>In the case of total destruction of the asset, he will suffer the loss to the extent of his ownership. </li></ul><ul><li>These certificates can be negotiated and traded freely in the market and can serve as an instrument easily convertible into cash. </li></ul>
  32. 32. Securitization of Ijarah <ul><li>Essential Condition </li></ul><ul><li>“ 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.” </li></ul>
  33. 33. SECURITIZATION OF GOVERNMENT ASSETS <ul><li>Ports </li></ul><ul><li>Airports </li></ul><ul><li>Railways </li></ul><ul><li>Roads and Bridges </li></ul><ul><li>Hospitals </li></ul><ul><li>Schools </li></ul><ul><li>Buildings </li></ul><ul><li>Dams </li></ul><ul><li>Land – mainly owned by the Provincial Government </li></ul><ul><li>State owned Enterprises </li></ul>
  34. 34. MODE <ul><li>Sale and Lease back </li></ul><ul><li>Sale and Lease-to-Purchase (Diminishing Musharakah) </li></ul>VEHICLE <ul><li>Central Bank </li></ul><ul><li>Primary Dealers </li></ul><ul><li>Secondary market </li></ul>
  35. 35. INSTRUMENTS <ul><li>Treasury Bills </li></ul><ul><li>Government Sukuk </li></ul>USES <ul><li>Liquidity Management of Islamic and non-Islamic Banks. </li></ul><ul><li>Money Market Operation </li></ul>
  36. 36. <ul><li>Federal </li></ul><ul><li>Provincial </li></ul><ul><li>District and Municipal </li></ul><ul><li>Semi Government </li></ul><ul><li>Zakat Fund </li></ul><ul><li>Non-Tax Resource general for all levels of Government </li></ul>