How far has the Islamic finance industry come in the move towards asset-backed securitization, and what steps should be taken to promote it further?
There may be more challenges than opportunities in securitization: risk aversion, fractionalized markets, lackluster growth. Yet the underlying return potential of some securitized transactions suggests than there can eventually be a lively secondary market in such instruments.
Across the major markets, securitization works because you have a broad hinterland. Most Islamic issuers operate outside this framework, suggesting a need to focus on greater research for deal clarity and deeper international reach for adequate participation. But that quickly leads to an improbable cost-benefit outcome, at least for now.
Sustained growth in the securitization business is likely to parallel more normal growth patterns globally, regardless of efforts internal to the Islamic finance industry. In the meantime, a limited market of sophisticated local institutions will benefit most from the attractive profit rates available in these deals.
DOUGLAS CLARK JOHNSON
CEO, Codexa Capital
While asset-backed Sukuk are much closer to the risk sharing and tangible ideals of Shariah its unfortunately not what the market wants. Borrowers are usually unwilling to give Sukuk investors true rights over the asset, and most of the Islamic investors in turn don’t actually want asset risk — they want senior unsecured corporate risk. Asset-backed Sukuk are also more complex and costly to structure compared to unsecured (asset-based) Sukuk.
Unless (against market demand) scholars start to express a strong preference for Islamic securitization, there are limited Shariah driven incentives to move to asset-backed Sukuk and it will remain a small market.
KHALID F HOWLADAR
Senior credit officer, asset-backed and Sukuk finance, Moody’s Middle East.
Much Islamic finance involves assets, as for example with Murabahah, where assets are purchased and sold; while with Ijarah assets are rented. When these transactions are securitized they become Sukuk.
However it is morally desirable that asset securitization should only apply to new financing with all the parties aware of the structuring involved. Securitizing existing assets such as mortgages without the consent of the clients, as happened before the sub-prime crisis, was morally dubious and financially disastrous. Debtors should know the identity of those they are repaying.
In short, securitization has many merits from a financial perspective, as it enables investors to remain liquid while clients in need of finance can secure longer term funding at competitive rates. Islamic financial institutions should however only provide such funding to clients who understand the risks, not least that their assets may be seized if they fail to keep up their repayments.
RODNEY WILSON
Emeritus Professor, Durham University UK