Islamic Securitization – The Right Way Forward?

1 Introduction

The collapse of the securitization market and the ensuing market turbulence have cast serious doubts on this economic proposition of unbundling, transforming, and re-distributing credit risk via structured finance instruments. In view of sweeping fiscal intervention in the financial sector, a widespread retrenchment of mortgage exposures, and substantial liquidity injections by central banks to support inter-bank money markets, both the scale and persistence of the current credit crisis seem to suggest that pervasive securitization — together with improvident credit origination, inadequate valuation methods, and insufficient regulatory oversight — can perpetuate market disruptions, with potentially adverse consequences for financial stability and economic growth.

Quo vadis Islamic finance?

Since the summer of 2007, the global financial system has undergone a period of dramatic turbulence, which has caused a widespread reassessment of risk in both developed and emerging economies. The global financial turbulence appears to have had a limited impact on the Islamic finance industry, which has been in an expansionary phase in recent years (Economist, 2008; Financial Times, 2008). This rapid growth has been fuelled not only by surging demand for Sharia’ah compliant products from Muslim financiers but also by investors around the world, rendering the expansion of Islamic finance a global phenomenon. In fact, there is currently over $800 billion worth of deposits and investments lodged in Islamic banks, mutual funds, insurance schemes (known as takaful), and Islamic branches of conventional banks.