Islamic securitisation

Islamic principles prohibit interest and quasi-interest-based lending. The principle is based on a Koranic rule that Muslims can support or invest in others' businesses on the basis of partnership, but not on the basis of interest.

Securitisation is acquisition of assets, and assets carry both risks and rewards. Properly structured securitisation, particularly pass-through transactions, can act as Islamic funding products.

We present a collection of articles on Islamic securitisation:

The write ups below are by Vinod Kothari


by Vinod Kothari

The idea of Sukuks is, in fact, quite simple. It is an ownership pool into which real properties, whether movable or immovable, are thrown, and the sukuk then rents out the properties. The Sukuk is supposed to be compliant with the key Islamic principle that frowns upon interest income, but enables people to earn profits on assets that they own. Since the Sukuk owns assets, it may make profits thereon.

The beneficiaries of the Sukuk are investors who buy sukuk units. The rate of return on the property is passed over to the sukuk investors as their profit.

On the face of it, a sukuk structure would look very similar to equipment titling certificates used in aircraft financing, or real estate investment trusts used in real estate financing.

The subject matter of a sukuk can be both movable and immovable property, and ideally, the form of using this asset should be asset rental. In any event, the Sukuk should not buy such financial assets as violate the Islamic dictat against interest.

Links on Sukuks: AAOIFI guidelines on Sukuks, Feb 2008