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The Economics of Islamic Finance and Securitization

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  • Andreas Jobst

Abstract

Islamic lending transactions are governed by the precepts of the shariah, which bans interest and stipulates that income must be derived as return from entrepreneurial investment. Since Islamic finance is predicated on asset backing and specific credit participation in identified business risk, structuring shariah-compliant securitization seems straightforward. This paper explains the fundamental legal principles of Islamic finance, which includes the presentation of a valuation model that helps distil the essential economic characteristics of shariah-compliant synthetication of conventional finance. In addition to a brief review of the current state of market development, the examination of pertinent legal and economic implications of shariah compliance on the configuration of securitization transactions informs a discussion of the most salient benefits and drawbacks of Islamic securitization.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/117.

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Length: 35
Date of creation: 01 May 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/117

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Keywords: Islamic banking; Bank credit; Loan guarantees; Financial institutions; securitization; islamic finance; islamic securitization; sukuk; islamic law; capital market; capital markets; ijarah; murabaha; islamic jurisprudence; ijara; commercial law; asset securitization; takaful; capital market development; islamic investment; riba; cost of capital; debt securities; capital adequacy; islamic scholars; islamic insurance; equity interest; islamic financing; islamic bond; musharaka; forward contracts; islamic debt; equity participation; islamic bonds; islamic securities; securities trading; islamic capital market; international capital markets; securities commissions; option pricing; islamic contracts; islamic capital markets; credit rating; private equity; shariah scholars; islamic development; murabahah; islamic assets; islamic economies; islamic bond market; islamic finance instruments; futures contracts; corporate bonds; mudarabah; financial securities; debt service; hadith; securitization of assets; equity funds; bond issues; commercial codes; international capital; islamic bank; islamic banks; islamic investments; capital market investors; islamic economy; stock ownership; islamic principles; local capital market; asset backed securities; hedging; islamic finance sector; hoarding; salam contracts; islamic world; muslim investors; sale of debt; access to funds; underdeveloped capital markets; zero coupon bonds; excess liquidity; private equity funds; salam contract; underwriting standards; capital market access; capital gains; islamic bond issue; equity investment; securities accounts; capital market financing; capital structure; mudarib; moral hazard; transparent capital markets; fiqh;

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  1. Mirakhor, Abbas & Zaidi, Iqbal, 1988. "Stabilization and Growth in an Open Islamic Economy," MPRA Paper 56003, University Library of Munich, Germany.
  2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 29(2), pages 449-70, May.
  3. El-Hawary & Dahlia & Grais, Wafik & Iqbal, Zamir, 2004. "Regulating islamic financial institutions : The nature of the regulated," Policy Research Working Paper Series 3227, The World Bank.
  4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  5. Luca Errico & Mitra Farahbaksh, 1998. "Islamic Banking," IMF Working Papers, International Monetary Fund 98/30, International Monetary Fund.
  6. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
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Citations

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Cited by:
  1. Sandrine KABLAN & Ouidad YOUSFI, 2014. "Performance of Islamic Banks across the world: an empirical analysis over the period 2001-2008," Working Papers, Department of Research, Ipag Business School 2014-448, Department of Research, Ipag Business School.
  2. Godlewski, Christophe J. & Turk-Ariss, Rima & Weill, Laurent, 2013. "Sukuk vs. conventional bonds: A stock market perspective," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 745-761.
  3. Baele, Lieven & Farooq, Moazzam & Ongena, Steven, 2011. "Of Religion and Redemption: Evidence from Default on Islamic Loans," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8504, C.E.P.R. Discussion Papers.
  4. Kablan, S & Yousfi, O, 2011. "Efficiency of islamic and conventional banks in countries with islamic banking," MPRA Paper 32951, University Library of Munich, Germany.
  5. Juan Sole & Andreas Jobst, 2012. "Operative Principles of Islamic Derivatives," IMF Working Papers, International Monetary Fund 12/63, International Monetary Fund.
  6. Abdelbari El Khamlichi & Kabir Sarkar Humayun & Mohamed Arouri & Frédéric Teulon, 2014. "Are Islamic equity indices more efficient than their conventional counterparts ? Evidence from major global index families," Working Papers, Department of Research, Ipag Business School 2014-091, Department of Research, Ipag Business School.
  7. Hussein, Kassim, 2010. "Bank level stability factors and consumer confidence – a comparative study of Islamic and conventional banks’ product mix," MPRA Paper 21800, University Library of Munich, Germany.
  8. Giorgio Gomel & Angelo Cicogna & Domenico De Falco & Marco Valerio Della Penna & Lorenzo Di Bona De Sarzana & Angela Di Maria & Patrizia Di Natale & Alessandra Freni & Sergio Masciantonio & Giacomo Od, 2010. "Islamic finance and conventional financial systems. Market trends, supervisory perspectives and implications for central banking activity," Questioni di Economia e Finanza (Occasional Papers), Bank of Italy, Economic Research and International Relations Area 73, Bank of Italy, Economic Research and International Relations Area.
  9. Martin Čihák & Heiko Hesse, 2010. "Islamic Banks and Financial Stability: An Empirical Analysis," Journal of Financial Services Research, Springer, Springer, vol. 38(2), pages 95-113, December.
  10. Karmila Hanim Kamil & Marliana Abdullah & Shahida Shahimi & Abdul Ghafar Ismail, 2010. "The subprime mortgages crisis and Islamic securitization," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, Emerald Group Publishing, vol. 3(4), pages 386-401, November.
  11. Jean-Yves MOISSERON & Bruno-Laurent MOSCHETTO & Frédéric TEULON, 2014. "Islamic finance a review of the literature," Working Papers, Department of Research, Ipag Business School 2014-093 Keywords : Islam, Department of Research, Ipag Business School.
  12. Baele, L. & Farooq, M. & Ongena, S., 2012. "Of Religion and Redemption: Evidence from Default on Islamic Loans (Replaces CentER DP 2010-136)," Discussion Paper, Tilburg University, Center for Economic Research 2012-014, Tilburg University, Center for Economic Research.
  13. Omar Masood & Ghulam Shabbir Khan Niazi & Noryati Ahmad, 2011. "Empirical evidence on the risk management tools practised in Islamic and conventional banks," Qualitative Research in Financial Markets, Emerald Group Publishing, Emerald Group Publishing, vol. 3(2), pages 105-116, June.
  14. Martin Cihák & Heiko Hesse, 2008. "Islamic Banks and Financial Stability," IMF Working Papers, International Monetary Fund 08/16, International Monetary Fund.

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