Saiful Azhar Rosly
IB 1006 Islamic capital market:
Islamic Securitization and Sukuk
Prof. Saiful Azhar Rosly 28th April 2009.
The term Islamic securitization has been used quite loosely by practitioners back in the late 1990s especially after the 1997 Asian financial crisis. To reduce heavy dependency on bank loans for economic development, corporations were encourage to use bonds to mobilize capital. Islamic bonds or Islamic private debt securities (IPDS) made their way through various incentives by the Securities Commissions and Bank Negara Malaysia.
Securitization is generally defined as the conversion of assets to marketable securities. Assets can be categorized into:
- physical assets – eg. land and buildings
- financial assets – eg. loan and credit card receivables
Usually securitization will take involve operations that deals with:
- Special Purpose Vehicle (SPV)
- True Sale
For this reason, securitization will always imply asset-backed securitization (ABS), that deals with a true sale of physical or financial assets to a Special Purpose Vehical (SPV).
Asset securitization, whether Islamic or conventional is based on a simple structure i.e. assets are transferred from their originating entity (i.e. the Originator) to a bankruptcy remote Special Purpose Vehicle (i.e SPV).
Basic structure of asset securitization consists of the following parties:
- Special Purpose Vehicle (SPV)
- Originator and True Sale Criteria
Originator is the entity that is seeking to transfer its asset to a SPV in a securitization transaction. The transfer of asset must comply with the true sale criteria, which means the assets must be put beyond the reach of the Originator and its creditors in the event of bankruptcy. It also means that transfer of assets from the Originator to the SPV must remove any risk that may re-characterized it as a financing transaction rather than a true sale. To do so, the Originator must effectively transfer all rights and obligations in the underlying assets to the SPV and not retain any residual beneficial interest in the underlying asset.
- Special Purpose Vehicle: The SPV is an entity that issues asset-backed debt securities and can be established as either a company or as a trust structure. As a trustee, it must be independent of the asset Originator and as a company must be structured as an “orphan” corporation whose ownership is independent of the asset of the Originator. The SPV must be bankruptcy remote in a sense that:
- it cannot enter into any other activity other than issuance of the ABS. It is a single purpose company.
- The Originator or its creditors have no claims on the asset of the SPV in case the Originator goes under bankruptcy.
In conventional structure, the SPV issues new securities such as bonds (ie. ABS) to investors using the assets as collateral. In the Islamic structure there are two versions:
1) Islamic ABS (ie i-ABS): SPV sells assets to investors and buy them back by applying ‘enah sale and issues the i-ABS as an evidence of indebtedness. Since this is only a financing arrangement, the assets act as collateral. In this way, the investors hold beneficial ownership while the SPV holds legal ownership. In i-ABS, murabaha/BBA receivables have been used as underlying assets
2) Sukuk Ijarah: Sukuk is supposedly an equity product where the SPV acts on behalf of the investors to pool funds and purchase assets from the Originator based on the pooled fund. These assets are then leased to the Originator in return for rental income to the investors. Sukuk therefore does not behave like conventional ABS where the securities (ie conventional ABS) are merely instrument to obtain loans from the investors. Conventional ABS does not involve any buyback mechanism as commonly found in Sukuk. The buyback mechanism serves to provide capital protection to investors. Assets used in Sukuk are largely land and buildings. Murabaha/BBA receivables are not common.
Hence the structures of conventional ABS and Islamic ABS or Sukuk have many differences, although the basic features such as the roles of Originator and SPV have many similarities.
- Islamic asset or debt securitization
Islamic private debt securities such as al-bai-bithaman ajil Islamic debt securities (BAIDS) neither involve a true sale or SPV. Hence, it cannot be categorized as ABS. It is simply a plain al-enah sale between the issuer and investors. Islamic asset securitization is also known as “ Islamic asset-based securitization”. This because BAID is supported by some “underlying assets” that represent subject matter in the al-enah sale.