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Can Islamic Injunctions Indemnify the Structural Flaws of Securitized Debt?

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  • Aziz Jaafar

    (Bangor University)

  • M. Shahid Ebrahim
  • Fatma A. Omar
  • Murizah Osman Salleh

Abstract

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

Suggested Citation

  • Aziz Jaafar & M. Shahid Ebrahim & Fatma A. Omar & Murizah Osman Salleh, 2016. "Can Islamic Injunctions Indemnify the Structural Flaws of Securitized Debt?," Working Papers 16001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    • Handle: RePEc:bng:wpaper:16001
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    More about this item

    Keywords

    Agency cost; collateral; debt default; financial fragility; Islamic injunctions.;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

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