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The Economics of Islamic Finance and Securitization

  • Andreas Jobst

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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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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  1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  2. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  3. Mirakhor, Abbas & Zaidi, Iqbal, 1988. "Stabilization and Growth in an Open Islamic Economy," MPRA Paper 56003, University Library of Munich, Germany.
  4. Luca Errico & Mitra Farahbaksh, 1998. "Islamic Banking: Issues in Prudential Regulations and Supervision," IMF Working Papers 98/30, International Monetary Fund.
  5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  6. Choudhry, Nurun N. & Mirakhor, Abbas, 1997. "Indirect Instruments Of Monetary Control In An Islamic Financial System," Journal of Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 4, pages 28-65.
  7. 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.
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