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  2. 2. What is Securitization? <ul><li>Issuing certificates of ownership against an investment pool or business enterprise. </li></ul>
  3. 3. 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>
  4. 4. Types of Securitization <ul><li>Securitization of Musharakah </li></ul><ul><li>Securitization of Murabahah </li></ul><ul><li>Securitization of Ijarah </li></ul>
  5. 5. 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>
  6. 6. 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>
  7. 7. 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>
  8. 8. 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>
  9. 9. 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>
  10. 10. 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>
  11. 11. <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
  12. 12. <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
  13. 13. <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
  14. 14. 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>
  15. 15. 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>
  16. 16. 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>
  17. 17. 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>
  18. 18. 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>
  19. 19. 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>
  20. 20. 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>
  21. 21. 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>
  22. 22. <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>