SECURITIZATION

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SECURITIZATION

• SHARIAH PERSPECTIVE

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What is Securitization?

• Issuing certificates of ownership against an
  investment pool or business enterprise.

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Types of Securitization

• Securitization of Musharakah
• Securitization of Murabahah
• Securitization of Ijarah

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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'.

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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.

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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.

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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.

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SECURITIZATION OF GOVERNMENT ASSETS

• Ports
• Airports
• Railways
• Roads and Bridges
• Hospitals
• Schools
• Buildings
• Dams
• Land mainly owned by the Provincial Government
• State owned Enterprises

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