| March 27
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
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
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
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
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
(Editing by Kim Coghill)