March 27 Sharia-compliant structures could help revive the securitisation market tarnished by the global financial crisis, providing a fresh source of funds for companies, a top official from Malaysia's Securities Commission said.
Policymakers are keen to revamp securitisation, or packaging loans into bonds, which has struggled to regain credibility after some of the products turned sour in 2007, triggering a chain of events that threatened to lead to a global financial meltdown.
Because Islamic finance shuns outright speculation it could offer the benefits of securitisation minus the weaknesses that led to the sub-prime mortgage crisis, said Nik Ramlah Mahmood, deputy chief executive of Malaysia's Securities Commission.
"There is a golden window of opportunity for Islamic securitisation to lead the way," Mahmood said in a speech at an Islamic finance legal seminar in Brunei.
While still at an early stage of development, the features of Islamic securitisation could help re-open a market that can fund a wide range of activities, including mortgages, car loans and working capital for businesses.
"The exclusion of complex structures such as CDOs (collateralised debt obligations) for instance, acts as a natural risk mitigant that offers an enhanced value proposition for investors."
Despite the sector's small size, several deals have proven the concept works, although existing legal and taxation issues have hindered greater transaction volume.
One issue relates to lack of legal certainty of the bankruptcy remoteness of special purpose vehicle (SPV) used in Islamic securitisation, with some jurisdictions allowing this through trust law while others use corporate law, Ramlah said.
"Whatever the means of achieving it, legal clarity with regard to the status of the SPV is critical."
Taxation issues are also prevalent in cross border deals, while streamlining procedures could help minimise risks typically linked to the sector, she added.
Such issues are now being discussed by regulators which convened this week in Brunei for a series of seminars organised by the Kuala Lumpur-based Islamic Financial Services Board, which sets global guidelines for Islamic finance.
Malaysia's regulators have led the way in securitisation, introducing guidelines on asset-backed securities (ABS) in 2001, revised in 2004, which also covers sharia-compliant ABS, but more work remains, Ramlah said.
"Streamlining and tightening the corporate governance regime at every level of transactions could minimise the risk typically linked to securitisation."
This could help boost volumes. Between 2004 and 2013, the Securities Commission approved 44 ABS proposals, nine of them Islamic, compares with 940 private debt securities proposals submitted for approval during the same period.
Despite deal scarcity, Islamic structures have proven useful in securitising various types of assets, including housing loans by Malaysia's national mortgage corporation Cagamas.
Cagamas has issued two Islamic ABS, the first one in 2005 using residential mortgage-backed securities in turn secured by government assets.
Telekom Malaysia Berhad, issued an ABS sukuk in 2008, allowing it to monetize non-core assets with a value of just over 1 billion ringgit ($303 million).
Last year, Munich-based FWU Group issued a $20 million Islamic bond backed by insurance policies, the first tranche of a $100 million programme arranged by EIIB-Rasmala, a venture between London-based European Islamic Investment Bank and Dubai's Rasmala Group.
In 2012, FWU also issued a $55 million Islamic bond backed by intellectual property rights.
The market has also seen the emergence of covered sukuk, which provide recourse to a pool of assets if the originator becomes insolvent, with examples in both Malaysia and Britain.
London-based Gatehouse Bank, a subsidiary of Kuwaiti firm Securities House, issued a 6.9 million pound ($10.4 million) covered sukuk backed by a property in Basingstoke in 2012.
Malaysia Building Society Berhad issued a 495 million ringgit covered sukuk last year, the first from a 3 billion ringgit programme.
"With its dual recourse, the structured covered sukuk would appear to be more attractive to investors," Ramlah said.
Bankers and scholars have long called for the industry to move from asset-based structures towards asset-backed ones, which they see as closer to the risk-sharing principles of Islamic finance.
(Editing by Kim Coghill)