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Can Islamic injunctions indemnify the structural flaws of securitized debt?

Listed author(s):
  • Ebrahim, M. Shahid
  • Jaafar, Aziz
  • Omar, Fatma A.
  • Salleh, Murizah Osman

Securitization enhances liquidity of debt contracts. However, its structural deficiency at origination has led to the freezing of its secondary market and failure of institutions holding the collateral. This paper builds on key cultural (i.e., Islamic) rulings to rectify flaws entrenched in securitized debt stemming from asymmetric information and agency issues. These injunctions help in the efficient underwriting of debt contracts across the globe to: (i) redeem its ‘toxicity’; (ii) guarantee liquidity; (iii) alleviate fragility of the financial system; and (iv) promote economic growth. Finally, this study promotes a rethink of the current ‘Islamic’ financial system from a narrow literalist juridical perspective to one that is grounded in financial economics.

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File URL: http://www.sciencedirect.com/science/article/pii/S0929119916000031
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Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 37 (2016)
Issue (Month): C ()
Pages: 271-286

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Handle: RePEc:eee:corfin:v:37:y:2016:i:c:p:271-286
DOI: 10.1016/j.jcorpfin.2016.01.002
Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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