We think you have liked this presentation. If you wish to download it, please recommend it to your friends in any social system. Share buttons are a little bit lower. Thank you!
Presentation is loading. Please wait.
Published byAshley Hopkins
Modified about 1 year ago
© A. Jobst, 2008 Andreas A. Jobst Monetary and Capital Markets Dept. International Monetary Fund (IMF) Sukuk – Quo Vadis? Islamic Securitization After the Subprime Crisis th Street, NW, Washington, DC 20431, USA
© A. Jobst, 2008 Overview 1.Macroeconomic Situation and Effect on Islamic capital market instruments 2.Developments of the Sukuk Market 3.Islamic Securitization as the “Third Way” 4.Challenges and Outlook
© A. Jobst, 2008 Monetary and Capital Markets Department
© A. Jobst, 2008 Financial Sector Write-downs and Capital Infusions (billions of U.S. dollars) Write-downs by Region Infusions by Region Write-downs by Type Mortgages Other Trading Loans/Leveraged loans SIVs Monolines Capital Shortfall new funding, dividend cutback
© A. Jobst, 2008 General Impact of the Current Market Situation … but there are several factors driving up spreads –series of measures announced by central banks (liquidity injections, e.g. collateral framework, FX swaps, standing facilities) and governments (asset purchases, capital support and debt guarantees) only supply-side effect on secured money markets failed to restore inter-bank lending and investment in credit- sensitive assets externalities of Fed/ECB/BoE actions: currency premium, trading bias towards “guaranteed banks” –Keynesian deficit-spending: crowding out by govt debt LT govt re- financing via debt issuance or higher taxes –financial sector de-leveraging: large ST and MT asset supply further price depression and tight credit –higher Sharpe ratio, currency option skew, etc.
© A. Jobst, 2008 The Credit Crisis and its Effect on Islamic Finance Islamic finance industry in expansionary phase: average annual rates of about 15% >US$800 billion of deposits and investments in Islamic banks, mutual funds, insurance schemes and Islamic branches of conventional banks … but some factors exacerbate the impact of global credit environment: –“imported inflation”/de-pegging in GCC, and increased local currency issuance/local investment in sukuk (Islamic “bonds”) –asset-based concept of Islamic finance: sectoral concentration and little asset diversity slump in real estate –“compliance risk” after recommendations by AAOIFI on sukuk structures (Feb. 2008)
© A. Jobst, 2008 Sukuk and Islamic Finance Principles sukuk transform bilateral risk-reward sharing between borrowers and lenders into market-based refinancing of shari’ah-compliant lending or trust-based investment in existing or future assets. sukuk do not pay interest, but generate returns through commoditization of capital gains from actual transactions (i.e., asset transfer), such as: –leasing (sale-leaseback): ijara (thumma al-bay)] –cost-plus sale (sale-buyback): murabahah (bay al-inah) –profit-sharing/”sweat capital”/trust: musharakah or mudarabah shari’ah-compliant assets, usufructs or services investors own the underlying asset(s) via SPV that funds unsecured payments to investors from direct investment in real, religiously- sanctioned economic activity
© A. Jobst, 2008 Basic Sukuk Structure (w/ Third Party Assets)
© A. Jobst, 2008 Past Development of Sukuk Market increasing appeal in non-core markets (UK, Turkey, Maghreb) sukuk issuance soared over the last three years in response to growing demand for alternative investments outstanding sukuk globally exceeded US$90 bn. at end-2007 gross issuance of sukuk has quadrupled over the past two years, rising from US$7.2 bn. in 2004 to close to US$39 bn. by end-2007, and growth predicated at 15-25% p.a. owing in large part to large infrastructure development plans in Middle East and financial innovation total issuance in 2007 equivalent to roughly a quarter of conventional securitization in EM but only two percent of conventional (local and foreign) bond issuance
© A. Jobst, 2008 Current Development of Sukuk Market moderate issuance in 2008, but number of deals brought to market has steadily increased (139 in 2008 vs. 161 in 2007 over same time) sukuk volume dropped to US$15.2bn ( 50% from US$36.3bn.) in 2008 so far, while structured finance volume dried up with just US$387bn. issued ( 80%) amid stable EM issuance (US$310bn.) ijara structure now dominates (>50%), followed by musharaka and mudaraba sukuk issuance still concentrated in parts of Asia and countries of the GCC other currencies (but USD, SAR and MYR) hold largest share (approx. US$7 bn.)
© A. Jobst, 2008 Prospects: Islamic Securitization as a “Third Way”? Sukuk and Covered Mortgage Bonds revitalize the secondary mortgage market covered bonds: –unsecured debt obligations, collateralized by a dedicated (“ring fenced”) assets that are fully retained by the issuer –interest payments guaranteed and independent of cover assets –on-balance sheet treatment redress misaligned incentives that undermined ex ante market discipline and led to demise of the structured finance ijara sukuk: –investors receive no institutional guarantee (and off-balance sheet) –but have direct recourse to real assets that fund secured repayment from profitable investment
© A. Jobst, 2008 Incentive Problems in Conventional Securitization
© A. Jobst, 2008 Islamic Securitization as a “Third Way”? (2) Sukuk and conventional securitization – incentive problems between asset manager and investor (principal-agent dilemma): –religious prohibition of gambling (maisir) and speculation (gharar) commands clear object characteristics/delivery results and restricts trading activity to bone fide merchant transactions on real debt based on contractual certainty –no issuer leverage on the underlying asset portfolio and excessive risk taking (asset substitution) between originator and issuer: –adequate disclosures underpinned by a solid foundation of religious standards (supervised by a designated shari’ah board), which also curb and valuation problems that had infested the conventional securitization market. between originator/servicer and issuer/asset manager: –contract certainty rules out potential of inflated, back-loaded (and variable) servicer expenses (and cannot be prioritized) –fixed, ex ante premium for transfer of “asset obligations” to servicer between borrower and originator: –no predatory lending due to sanctioned exploitation (and unilateral gains); no moral hazard of “walking away” or debt modification (prohibited under shari’ah); social benefit as public interest and system of distributive justice (maslaha)
© A. Jobst, 2008 Incentive Problems in Conventional Securitization
© A. Jobst, 2008 AAOIFI Recommendations (Feb. ’08) (1) Key recommendations relate to the role of asset ownership, investment guarantees, and the shari’ah advisory and approval process in sukuk origination and trading maintain tenet of risk-reward sharing (otherwise interest- bearing loan) Entrepreneurial investment: investors become legal owners (with all of the rights and obligations) rather than nominal holders of the securities transforms pari passu asset-based sukuk into tranched asset- backed securities (ABS). Credit support: must not offer loans to investors in case of profit shortfall Compliance of collateral: no revenue streams or debt Shari’ah certification: review of all contracts/documentation
© A. Jobst, 2008 AAOIFI Recommendations (Feb. ’08) (2) Purchase price guarantee: issuer/agent (wakil), partner (musharik) or manager (mudarib) cannot guarantee principal through re-purchase of underlying assets or guarantee except: –repurchase at net value or fair market value, or a price agreed at the time of purchase –ijara sukuk (remaining lease payments or nominal value) –trust guarantees to cover cases of negligence, misconduct or breach of contract (representations and warranties) –alternatives: amortizing clause for underlying assets (cf. Villamar sukuk) or (separate) voluntary guarantee agreement by agent in mudarabah/musharaka sukuk
© A. Jobst, 2008 Current Economic and Regulatory Challenges origination and servicer risk from narrow asset supply poses challenges to investor diversification poor asset diversity given narrow range of deal types and maturities future development could be arrested by insufficient supervisory harmonization and the ongoing controversy about financial innovation Islamic jurisprudence neither definite nor bound by precedent and no universal recognition and enforceability of rulings –cross-referencing of fatwas –regional diversity of secondary sources: ijtihad (independent analytical reasoning), ijma (consensus) and qiyas (deduction by analogy)
© A. Jobst, 2008 Čihák, Martin and Heiko Hesse, 2008, “Islamic Banks and Financial Stability: An Empirical Analysis,” IMF Working Paper 08/16 (Washington: International Monetary Fund). Hesse, Heiko, Andreas A. Jobst and Juan Solé, 2008, “Trends and Challenges in Islamic Finance,” World Economics (April-June). Jobst, Andreas A., Peter Kunzel, Paul Mills and Amadou Sy, 2008, “Islamic Bond Issuance – What Sovereign Debt Managers Need to Know,” International Journal of Islamic & Middle East Finance and Management, Vol. 1, No. 4. Jobst, Andreas A., 2007, “The Economics of Islamic Finance and Securitization,” Journal of Structured Finance, Vol. 13, No. 1 (Spring), Solé, Juan, 2007, “Introducing Islamic Banks into Conventional Banking Systems”, IMF Working Paper 07/175 (Washington: International Monetary Fund). References
Misperceptions On Costs And Complexity Of Sovereign Sukuk: Economics And Legal Perspective Moinuddin Ul Islam Farhanah Mohd Mokhtar MSc In Islamic Banking.
ISLAMIC CAPITAL MARKETS. Main function is to facilitate transfer of investable funds from those having surplus to those requiring funds. Achieved by selling.
Reproductions of this material, or any parts of it, should refer to the IMF Statistics Department as the source. Real Sector Division IMF Statistics Department.
Development of a Mongolian MBS Market Workshop on Housing Finance 28th June 2011 Presented by Jim France.
Dr. Abd elrahman Elzahi Saaid Ali Economist Islamic Research and Training Institute, a Member of IDB Group.
1 CHAPTER IX INTERNATIONAL FINANCIAL MARKETS The International Financial System INTERNATIONAL BUSINESS.
ISLAMIC B S UKUK MARKET Possibilities & Challenges Prof. Dr. Mohd. Ma’sum Billah
Corporate Bonds and Sukuk Issues Developing the Market in Maldives Rabel Akhund 7 May 2008 Male.
INFRASTRUCTURE FINANCING. What is Infrastructure? “Infrastructure is define as the physical framework of facilities through which goods and services are.
Overview of the Financial System The Economics of Money, Banking, and Financial Markets Mishkin, 7th ed. Chapter 2.
1 Chapter 1 Role of Financial Markets and Institutions.
Innovative Sukuk Structures & Their Impact on Development.
1. 2 Sukuk (Islamic Bond) Hamad Rasool Director : First WAPDA Sukuk Co. Director: First Credit Investment Bank. Director: WAPDA Finance.
Financial Markets, Instruments, and Market Makers Chapter 3 © 2003 South-Western/Thomson Learning.
A global think tank for the Islamic finance industry UK & European Real Estate Investment & Finance Forum, London, November 22, 2006 Dr Adnan Aziz Product.
1 Chapter 1 Money, Banking, and Financial Markets --An Overview © Thomson/South-Western 2006.
Chapter 2 An Overview of the Financial System. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 2-2 Function of Financial Markets Perform.
The Financial System. Introduction Money – Medium of exchange – Allows specialisation in production – Solves the divisibility problem, i.e. where medium.
McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Securities CHAPTER 2.
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Asset Classes and Financial Instruments CHAPTER 2.
Bond Markets in Latin America: On the Verge of a Big Bang? Eduardo Borensztein IMF Santiago de Chile, April 2007.
ISLAMIC DEVELOPMENT BANK Seminar on Islamic Finance BANCA DITALIA (Rome,11 November 2009) Second session a.m Monetary Policy and Liquidity Management.
Turkish-Arab Economic Forum Panel 6: Potential for Islamic Banking and “Sukuk” for Financing Major Projects in Turkey Hasan Genç Head of Enforcement Department.
The Malaysian Islamic Capital Market. Learning objectives 1.Describe the salient features of an Islamic financial market. 2.Describe various methods of.
Financial Instruments. Definition: Financial Instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity;
Local Capital Markets Emerging Market Investment Opportunities Executive Summary Local Capital Markets Emerging Market Investment Opportunities Executive.
Financing Residential Real Estate Lesson 1: Finance and Investment.
Chapter 9. The Bank Firm & Bank Management Balance sheet Bank Management Credit Risk Interest Risk Other activities & financial innovation Balance sheet.
Corporate Bond Issuance in Euroclear International Securities Services Philippe Laurensy, Euroclear Euroclear Collateral Conference May 2014.
University of Palestine International Business And Finance Management Accounting For Financial Firms Part (3) Ibrahim Sammour.
1. 2 Sukuk April 25, 2012 ALHuda-CIBE Trainings Avari Towers, Karachi Sukuk April 25, 2012 ALHuda-CIBE Trainings Avari Towers, Karachi Hamad Rasool Bhullar.
An Overview of the Financial System chapter 2 1. Function of Financial Markets Lenders-Savers (+) Households Firms Government Foreigners Financial Markets.
Chapter Ten Financial Crisis. Introduction From 2007 to mid-2009, global financial markets and systems have been in the grip of the worst financial crisis.
Chevalier Spring Savings – refers to the dollars that become available when people abstain from consumption Financial System – a network of.
NATIONAL BANK OF AZERBAIJAN KHAGANI ABDULLAYEV, EXECUTIVE DIRECTOR.
A Takaful Wrapper for Sukuk Issues International Takaful Summit Rabel Akhund Islamic Finance Group 2 November 2007.
Interest Rate Risk Management. Strategies to Manage Interest-rate Risk Rearrange balance-sheet Gap Management Duration Gap Management Off-Balance Sheet.
CHAPTER 12 INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS.
1 Chapter 06 Understanding Financial Markets and Institutions McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Saving, Investment, & Financial System. Objectives: What is the relationship between savings and investment spending? What is the purpose of financial.
CHAPTER 1 An Overview of Financial Markets and Institutions.
1. What would you do with $5,000? Be specific. 2. What percentage of taxes should the government take? 3. Where is the safest place to keep your money?
Developing Bond Markets in Asia: Motivation, Obstacles and Achievements So Far.
Mortgage Finance Opportunities and Challenges By Taimur Afzal, Chairman ASSOCIATION OF MORTGAGE BANKERS (AMB) March 25th
Mr. Weiss Test 5 – Sections 5 & 6 – Vocabulary Review 1. financial asset; 2. New Keynesian Economics; 3. transaction costs; 4. velocity of money; _____the.
Chapter 5 Money market Dr. Lakshmi Kalyanaraman 1.
1 17 Commercial Bank Operations. 2 Chapter Objectives Describe the most common sources of funds for commercial banks Describe the most common uses of.
SECURITIZATION By Dr. Muhammad Imran Usmani. Presen Presentation Outline Introduction Shari’a Perspective on Securitization Types of Sukuk Securitization.
ISLAMIC RESEARCH & TRAINING INSTITUTE (IRTI) (A member of) ISLAMIC DEVELOPMENT BANK GROUP (IDBG) Dr. Turkhan Ali Abdul Manap Senior Economist (IRTI) Prepared.
Copyright © 2014 Pearson Canada Inc. Chapter 2 AN OVERVIEW OF THE FINANCIAL SYSTEM Mishkin/Serletis The Economics of Money, Banking, and Financial Markets.
© 2017 SlidePlayer.com Inc. All rights reserved.