Securitization means issuing certificates of ownership against an investment pool or business enterprise. This article discusses the issues, problems, and rules in issuing such certificates with respect to the nature of investment pool. Basic guidlines are also privided on the negotiability and sale of these certificates in the secodary markets.
Securitization of Musharakah:
Musharakah is a mode of financing which can be securitized easily, especially, in the case of big projects where huge amounts are required with a limited number of people can not afford to subscribe. Every subscriber can be given a Musharakah certificate, which represents his proportionate ownership in the assets of the Musharakah, and after the project is started by acquiring substantial non-liquid assets, these Musharakah certificates can be treated as negotiable instruments and can be bought and sold in the secondary market. However, trading in these certificates in not allowed when all the assets of the Musharakah are still in liquid form (i.e. in the shape of cash or receivables or advances due from others).
Securitazation of Murabahah:
Murabahah is a transaction, which can not be securitized for creating a negotiable instrument to be sold and purchased in secondary market. The reason is obivious. If the purchaser/client in a Murabahah transaction singns a paper to evidence his indebtedness towards the seller/financier, the paper will represent a monetary debt receivable from him. In order to words, it represents money payable by him. Therefore transfer of this paper to a third party will mean transfer of money. It has already been explained that where money is exchanged for money (in the same currency) the transfer must be at par value. It can not be sold or purchased at a lower or a higher price. Therefore, the paper representing a monetary obligarion arising out of a Murabahah transaction can not create a negotiable instrument. If the paper is transfer, it must be at par value. However, if there is a mixed portfolio consisting of a number of transactions like Musharakah, leasing and Murabahah, then this portfolio may issue negotiable certificates subject to certain conditions.
Securitization of Ijarah:
The arrangment fo Ijarah has a good potential of securitization, which may help create a secondary market for the financiers on the basis of Ijarah. Snce the lessor in Ijarah owns the leased assets, he can sell the asset, in whole or in part, to a third party who may purchase it and may replace the seller in the rights and obligations of the lessor with regard to the purchased part of the asset.
Therefore, if the lessor, after entering in to Ijarah, whishes to recover his cost of purchase of the asset with a profit thereon, he can sell leased asset wholly or partly either to one party or to a number of individuals. In the latter case, the purchase of a proportion of the asset by each individual may be evidenced by a certificate which may be called "Ijarah certificate".
This certificate will represent the holder's proportionate ownership in the leased asset and he will assume the rights and obligations of the owner/lessor to that extent. Since the asset is already leased to the lessee, lease will continue with the new owners, each one of the holders of this certificate will have the right to enjoy a part of the rent according to his proportion of ownership in the asset. Similarly he will also assume the obligations of the lessor to the extent of his ownership. Therefore, in the case of total destruction of the asset, he will suffer the loss to the extent of his ownership. These certificates, being an evidence of proportionate ownerhip in a tangible asset, can be negotiated and traded freely in the market and can serve as an instrument easily convertible in to cash. Thus they may help in solving the problems of liquidity managment faced by the Islamic banks and financial institutions.
It should be remembered, however, that the certificate must represent ownership of an undivided part of the asset with all its rights and obligations. Misunderstanding this basic concept, some quarters tried to issue Ijarah certificates representing the holder's right to claim certain amount of the rental only with out assigning to him any kind of ownership in the asset. It means that the holder of such a certificate has no relation with the leased asset at all. It is only right is to share the rental received from the leassee. This type of securitization is not allowed in Shariah. As explained earlier in this article, the rent after being due is a debt payable by the lessee. The debt or any security representing debt only is not a negotiable instrument in Shariah, because trading in such an instrument amounts to trade in money or in monetary obligation which is not allowed, except on the basis of equality, and if the equality of value is observed while trading in such instrument, the very purpose of securitization is defeated. Therefore, this type of Ijarah certificates can not serve the purpose of creating a secondary market.
It is, therefore, necessary that the Ijarah certificates are designed to represent real ownership of the leased assets, and not only a right to receive rent.
Securitization of Musharakah:
Musharakah is a mode of financing which can be securitized easily, especially, in the case of big projects where huge amounts are required with a limited number of people can not afford to subscribe. Every subscriber can be given a Musharakah certificate, which represents his proportionate ownership in the assets of the Musharakah, and after the project is started by acquiring substantial non-liquid assets, these Musharakah certificates can be treated as negotiable instruments and can be bought and sold in the secondary market. However, trading in these certificates in not allowed when all the assets of the Musharakah are still in liquid form (i.e. in the shape of cash or receivables or advances due from others).
Securitazation of Murabahah:
Murabahah is a transaction, which can not be securitized for creating a negotiable instrument to be sold and purchased in secondary market. The reason is obivious. If the purchaser/client in a Murabahah transaction singns a paper to evidence his indebtedness towards the seller/financier, the paper will represent a monetary debt receivable from him. In order to words, it represents money payable by him. Therefore transfer of this paper to a third party will mean transfer of money. It has already been explained that where money is exchanged for money (in the same currency) the transfer must be at par value. It can not be sold or purchased at a lower or a higher price. Therefore, the paper representing a monetary obligarion arising out of a Murabahah transaction can not create a negotiable instrument. If the paper is transfer, it must be at par value. However, if there is a mixed portfolio consisting of a number of transactions like Musharakah, leasing and Murabahah, then this portfolio may issue negotiable certificates subject to certain conditions.
Securitization of Ijarah:
The arrangment fo Ijarah has a good potential of securitization, which may help create a secondary market for the financiers on the basis of Ijarah. Snce the lessor in Ijarah owns the leased assets, he can sell the asset, in whole or in part, to a third party who may purchase it and may replace the seller in the rights and obligations of the lessor with regard to the purchased part of the asset.
Therefore, if the lessor, after entering in to Ijarah, whishes to recover his cost of purchase of the asset with a profit thereon, he can sell leased asset wholly or partly either to one party or to a number of individuals. In the latter case, the purchase of a proportion of the asset by each individual may be evidenced by a certificate which may be called "Ijarah certificate".
This certificate will represent the holder's proportionate ownership in the leased asset and he will assume the rights and obligations of the owner/lessor to that extent. Since the asset is already leased to the lessee, lease will continue with the new owners, each one of the holders of this certificate will have the right to enjoy a part of the rent according to his proportion of ownership in the asset. Similarly he will also assume the obligations of the lessor to the extent of his ownership. Therefore, in the case of total destruction of the asset, he will suffer the loss to the extent of his ownership. These certificates, being an evidence of proportionate ownerhip in a tangible asset, can be negotiated and traded freely in the market and can serve as an instrument easily convertible in to cash. Thus they may help in solving the problems of liquidity managment faced by the Islamic banks and financial institutions.
It should be remembered, however, that the certificate must represent ownership of an undivided part of the asset with all its rights and obligations. Misunderstanding this basic concept, some quarters tried to issue Ijarah certificates representing the holder's right to claim certain amount of the rental only with out assigning to him any kind of ownership in the asset. It means that the holder of such a certificate has no relation with the leased asset at all. It is only right is to share the rental received from the leassee. This type of securitization is not allowed in Shariah. As explained earlier in this article, the rent after being due is a debt payable by the lessee. The debt or any security representing debt only is not a negotiable instrument in Shariah, because trading in such an instrument amounts to trade in money or in monetary obligation which is not allowed, except on the basis of equality, and if the equality of value is observed while trading in such instrument, the very purpose of securitization is defeated. Therefore, this type of Ijarah certificates can not serve the purpose of creating a secondary market.
It is, therefore, necessary that the Ijarah certificates are designed to represent real ownership of the leased assets, and not only a right to receive rent.