Resolutions of the Securities Commission Shariah Advisory Council

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RESOLUTION 168 Capital Market Products According to Islamic Jurisprudence ASSET SECURITISATION At its 7th meeting on 1 December 1995, the IISG resolved that asset securitisation is permissible if the underlying asset of the instrument is Shariah compliant. INTRODUCTION In general, asset securitisation is a process of issuing securities by selling financial assets identified as the underlying asset to a third party. Its purpose is to liquidate financial assets for cash or as an instrument to obtain new funds at a more attractive cost, compared to obtaining funds through direct borrowing from financial institutions. Specifically, financial assets which have a future cash flow will be sold by a company that needs liquidity or as new funds to a third party known as a special purpose vehicle (SPV) for cash. To enable the payment for the purchase of the assets, the SPV will issue asset-backed debt securities to investors, based on the pledged future cash flow of the assets. Investors will then gain returns through future cash flows managed by the SPV. Among the assets with future cash flows that has the potential to be securitised for the issuance of asset-backed debt securities issues are house financing receivable account, credit card account, vehicle financing receivable 168 A resolution made was regarding asset securitisation in general. However, several matters related to this concept specifically are still under study. 67
Resolutions of the Securities Commission Shariah Advisory Council account, highway toll collection, etc. In the Islamic context, assets must be securitised in accordance with the Shariah. ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF ASSET SECURITISATION The basis for the concept of asset securitisation is already present in Islam and has been discussed at length by past Islamic jurists, especially on the securitisation of cash flow. The basis can be examined through the following principles: The Mal Principle The use of assets as collateral in asset securitisation to facilitate the issuance of an instrument of value is part of the mal principle in Islam. Mal refers to something that has value and can be gainfully used according to the Shariah. A clear difference between the concept of mal and an asset lies in the features prohibited by the Shariah. In Islam, prohibited items such as liquor and pork are not included in the mal category for Muslims. However, if they are owned by non-Muslims, these items are mal for them. Cash flow is also included in the category of mal if its origin is halal (lawful) according to the Shariah. This is because, cash flow is considered a dayn (debt) and according to Islamic jurisprudence, a debt with no ambiguity is haq maliy which is included in mal. 169 Bai` Dayn Asset securitisation is related to the sale of debts, (bai` dayn) which is debated in Islamic jurisprudence. The IISG, at its 8th meeting on 25 January 1996, and the SAC at its 2nd meeting on 21 August 1996, discussed this issue. The SAC, at its 2nd meeting, agreed to accept bai` dayn in the structuring of Islamic capital market products. 170 169 See SAC resolution on call warrants for further elaboration on the mal concept. 170 See SAC resolution on bai` dayn for further details. 68
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SHARIAH CRITERIA FOR LISTED SECURIT
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INTRODUCTION Shariah Criteria for L
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ijarah leasing contract Glossary ij
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