UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Introduction to Islamic Securitization

Tawriq (from wariq) means to render something into cash.  Taskik (from Sakk) is also used as securitization though literally refers to the process of dividing the assets into papers (Sukuk).  Tawriq is defined as: “transforming a deferred debt for the period between the establishment of the debt and the maturity period into papers which can be treated in the secondary market.” (Hammad, Nzaih, in Majallah Majma ‘Al Fiqh’)

Securitization or taskeek in Arabic refers to the process of the division of the ownership of tangible assets or rights to use those assets or both or right to a project into units, which have equal value and the issuance of those units to investors.  In simple terms, securitization describes the process of aggregating assets and packaging them into marketable securities.

Distinction between conventional bond and Islamic Sukuk:

A conventional bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bond holders, on a certain specified date, interest and principal.  Under a Sukuk structure, the Sukuk holders each hold an undivided beneficial ownership interest in the underlying assets.  Sukuk holders are entitled to a share in the revenues generated by the Sukuk assets.  In sum, Sukuk are monetary denominated participation certificates of equal unit value to be issued to investors to represent their proportionate share in the ownership of the underlying assets and a pro- rata share in the income generated by those assets.

Types of Securities:

  1. Receivables Securitization (Debt Securitization).
  2. Asset-based/project-based/ownership-based/usufruct-based securitization.
  3. Asset-backed securities (i.e.) Securities are backed by established income stream prior to securitization.

Types of Islamic Securities: 

Debt Securities:

  1. Murabahah Papers/ Debt Securities.
  2. Istisna’a Papers/Debt Securities.
  1. Asset-Based Securities:
  1. Sukuk al-Ijarah.
  2. Sukuk al-Musharakah.
  3. Sukuk al- Mudharabah .
  4. Sukuk Istithmar.
  1. Asset-Backed Securities:
  1. Sukuk al-Ijarah.
  2. Murarabah Bond.
  3. Sukuk Musharakah/Mudharabah.

*Information taken from materials handed out at the Amanie Islamic Finance School Workshop in Dubai, UAE on December 14-15, 2008.

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