The Theory and Practice of Profit Sharing Investment
Foundations of Islamic Finance series
Edited by Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad
Chapter 8: Securitization Issues and Islamic Financial Products with Reference to Sukuk
Michael T. Skully 8.1 INTRODUCTION Securitization is the creating and sale of new, usually liquid, financial assets backed by the security of other existing, usually illiquid, assets. It is through the shifting of risks and cash flow streams that otherwise illiquid assets owned by a firm become marketable. Conventional modern securitization involves the creation of a portfolio of homogeneous assets with identifiable cash flows. This portfolio is then sold to a credit-enhanced, Special Purpose Company (SPC). The SPC in turn raises the required funds through the sale of its own securities, which represents an interest in these assets. As this structuring is so important to its success, this activity is also known as structured finance. Islamic securitization is effectively conventional securitization modified to accommodate shari’ah principles and results in the creation of a financial asset known as sukuk. A sukuk is sometimes also referred to in the popular press as an Islamic bond, but this would be a mis-representation. A more appropriate term is a shari’ah-compliant investment certificate. The difference, unlike a conventional debt instrument, is that a sukuk should be used to fund a specific investment rather than for general use. The income arising from profits (not interest) earned by the sukuk holders should also be related to the purpose of this funding, thus connecting the real assets securitized with their associated risk and return. A positive return is provided only when the underlying activity is profitable. These assets and their use must also be acceptable shari’ah activities. Finally,...
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