Securitisation In Islamic And Conventional Financial Systems Finance Essay

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In this chapter the basic features of securitisation used in Islamic and Conventional financial system is presented in respect to the structures of bonds and derivatives. Over the years securitisation has developed into a significant financing tool, offering credit to both the public and the private sectors. In particular, we have seen that under the Subprime mortgage crisis the US credit markets relied heavily on the shadow banking system provided by securitisation to satisfy their financing needs. There are various kinds of products in the financial market used for the purpose of securitisation. The key motivation for the employing the tools of securitisation include cheaper funding, regulatory capital relief, arbitrage and balance sheet considerations. [1] We have discussed in previous chapters that due to the non performance of the loans financial institutions were strapped into liquidity problems. This issue diverted the financial institutions to relay on the bond market to support their financing needs instead of looking for bank loan financing and equity financing for required funds. A bond is kind of a loan or a debt security. In conventional bond structure the issuer of the bond is like debtor and the holder of the bond is like a creditor. The bond issuer owes the holder a debt and pays the holder of the bond fixed interest, until the date of maturity when the principal amount is due. We have discussed in the previous chapters that interest and debt based transaction in there nature lead to inequity and instable economic situations. And their malfunctioning can be termed as a major element attracting the crisis over the years. [2] Bonds are termed as a source of external funding for the issuer to finance his long term financial projects. Bond holders have a creditor stake in the company for a definite term. [3] Sukuk (plural of Sakk), commonly referred to as “Islamic bonds”, are proportional undivided ownership rights in tangible assets, or a pool of assets, or in the assets of a specific project or investment activity. Sukuk are used in Islamic financial sector as alternate of conventional notes. Sukuk have developed as one of the most significant mechanisms for raising finance in the international capital markets used by Islamic financial institutions as an alternative to syndicated financing [4] as a proportionate interest in the well defined pool of specific assets to yield income and capital interest. The funds raised through the issuance of Sukuk are applied to investment in specified and particular assets rather than for general or undetermined purposes. Identifiable assets provide the basis for Islamic bonds. Since the Sukuk are based on the real underlying assets, income from the Sukuk relates to the purpose for which the funding was used. The Sukuk certificate represents a proportionate ownership right over the assets in which the funds are being invested. The ownership rights are transferred, for a fixed period ending with the maturity date of the Sukuk, from the original owner (the originator) to the Sukuk holders. The process of issuing Sukuk involves the following steps: Origination of assets from Shariah compliant assets.

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