It is important that the offer documents and legal contracts are rigorously prepared as any ambiguity could damage investor confidence and harm the market. In any case, contractual uncertainty equates to gharar, which is prohibited under Shariah.
Lengthy legal work is of course costly, as is due diligence by Shariah boards in the approval of contracts, but these are necessary preconditions for sound securities issuance. In the case of Sukuk, following Taqi Usmani’s criticisms of structures almost a year ago, AAOIFI has issued clear guidelines stressing the importance of the underlying assets and the need for investors to have a title that relates to these assets. Without this, there can be no Shariah legitimacy for any trading. Defining and valuing the assets also involves time and costs, but it cannot be neglected.
In summary, the set-up costs for asset-backed securitizations are significant, but any shortcuts would damage rather than enhance the market.
PROFESSOR RODNEY WILSON
he credit process for trading in the secondary markets is no more rigorous then for the purchase of primary issues. Credit checking and due diligence for securitized assets are no less time consuming in conventional markets. For securitization issues, both Shariah compliant and conventional, the credit process is more complex due to the fact that the buyer needs to seek comfort in the market value of the underlying asset and the legal ability to sell the asset in the event of a default.
However, as the current crisis shows, rigorous credit checking is important, and taking short cuts is harmful in the long run.
DR NATALIE SCHOON
Head of product management, Bank of London and the Middle East, UK