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Securitization in Project Finance

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					 SECURITIZATION

                       By
Dr. Muhammad Imran Usmani
             Presen
       Presentation Outline

• Introduction

• Shari’a Perspective on Securitization

• Types of Sukuk

• Securitization of Musharakah

• Securitization of Murabaha

• Securitization of Ijarah
               Presen
            Introduction
• In normal conventional market, security is a
  document, representing receivable amounts
  owed by the issuer in favor of the holder.

• Normally the amounts secured by a security
  are interests bearing loans.

Different kinds of securities
    Bonds issued by a company
    Bonds issued by a government
    Debentures
    Certificates
    Notes
    Treasury Bills
        Shari’a Perspective
              Presen

• Securities representing a loan or debt (such as
  bonds) cannot be sold or purchased.

• If they are sold at a price higher or lower than
  their face value, it is considered as “Riba”

• If they are purchased at their face value (Bai
  al Dayn), this involves “Gharar” and hence
  prohibited.

• However, securities may be assigned to a third
  party at par value.The difference between sale
  and assignment (HAWALA) is that transfer in
  HAWALA is with recourse while transfer in
  Sales in without recourse.
                Presen
             Securitization

Definition

“Issuing certificates of ownership, against an
  asset, investment pool or business enterprise.”

• If the securities represent the proportionate
  ownership of the holder in illiquid or
  tradable assets, the trade of such securities
  is permissible.

• The sale of such security will be tantamount to
  the sale of holder’s proportionate share in the
  assets.
            Presen
         Types of Sukuk
Ijara Sukuk
  Sukuk of ownership in leased assets
     Issued with the aim of selling the asset so that
     holders of Sukuk become owners of the assets.
  Sukuk of ownership of usufructs of assets
     Issued with the aim of leasing the asset so
     that holders of Sukuk become owners of the
     usufruct of the assets.
  Sukuk of ownership of services
     Issued for the purpose of providing services
     through a specified provider so that Sukuk
     holders become owners of these services.
            Presen
         Types of Sukuk
Musharaka Sukuk
  Issued with the aim of using the mobilized funds
  for establishing a new project, developing an
  existing project or financing a business activity on
  the basis of any of partnership contracts.

  Participation certificates – represent projects
  or activities managed on the basis of Musharaka.

  Mudaraba Sukuk – represent projects or
  activities managed on the basis of Mudaraba.

  Investment Agency Sukuk – represent
  projects or activities managed on the basis of an
  investment agency by appointing an agent to
  manage the operation.
             Presen
          Types of Sukuk
Murabaha Sukuk
  Issued for the purpose of financing the purchase
  of goods through Murabaha so that Sukuk holders
  become the owners of Murabaha Commodity

Salam Sukuk
  Issued for the purpose of mobilizing funds so that
  the goods to be delivered on the basis of salam
  come to be owned by the Sukuk holders

Istisna’ Sukuk
  Issued for the purpose of mobilizing funds to be
  employed for the production of goods so that the
  goods produced come to be owned by the Sukuk
  holders
             Presen
          Types of Sukuk
Muzara’a (sharecropping) / Musaqa
(irrigation) Sukuk
  Issued for the purpose of using the mobilized
  funds for financing a project so that Sukuk
  holders become entitled to a share in the crop as
  per the agreement.

Mugharasa (agricultural) Sukuk
  Issued for the purpose of mobilizing funds so that
  Sukuk holders become entitled to a share in the
  land and plantation.
Securitization of Musharakah
           Presen
   Musharakah Securitization
• Musharakah is a mode of financing which can
  be securitized easily.

• Especially in case of big projects where huge
  amounts are required.

• Every subscriber can be given a Musharakah
  certificate, which represents his proportionate
  ownership in the assets of the Musharakah.

• After the project is started, these Musharakah
  certificates can be treated as negotiable
  instruments. Certificates can be bought and
  sold in the secondary market.
           Presen
   Musharakah Securitization
Essential Conditions

• Profit earned by the Musharakah is shared
  according to an agreed ratio.

• Loss is shared on pro rata basis.

• All the assets of the Musharakah should not be
  in liquid form. Portfolio of Musharakah should
  consist of non-liquid assets valuing more
  than 33% of its total worth.
           Presen
   Musharakah Securitization
Essential Conditions

• However, if Hanafi view is adopted, trading
  will be allowed even if the non-liquid assets
  are less than 33% but the size of the non-
  liquid assets should not be negligible.

• Whenever there is a combination of liquid and
  non-liquid assets, it can be sold and purchased
  for an amount greater than the amount of
  liquid assets in combination.
                     Presen
                    Difference
Musharakah Certificates            Conventional Bond

• Represents the direct pro • Has nothing to do with
  rata ownership of the       the actual business
  holder in the assets of the undertaken with the
  project.                    borrowed money.

• If all the assets of the      • The bond stands for a
  joint project are in liquid     loan repayable to the
  form, the certificate will      holder in any case, and
  represent a certain             mostly with interest.
  proportion of money
  owned by the project.
           Presen
   Musharakah Securitization
Securitization of Musharakah can be used for:

  • Construction of Projects and factories

  • Expansion Projects

  • Working Capital Finance
Securitization of Murabaha
             Presen
   Securitization of Murabaha
• Murabaha is a transaction, which cannot be
  securitized for creating a negotiable
  instrument to be sold and purchased in
  secondary market.

• However, if the Murabaha paper is transferred,
  it must be at par value; not more, not less.

• A mixed portfolio consisting of a number of
  transactions including Murabaha, may issue
  negotiable certificates subject to certain
  conditions.
              Presen
             Conditions
• In Murabaha Securitization, pool of asset
  should consist of Ijarah valuing more than
  33% of its total worth.

• However, as described earlier if Hanafi view is
  adopted, trading will be allowed even if the
  non-liquid assets are more than 10% of its
  total worth.

• Investors will have a Mudaraba relationship
  with the Manager of the Pool.
              Presen
             Conditions
• Investors in the pool will have Musharakah
  relationship and each one will be proportionate
  owner of the pool.

• Profit will be shared according to an agreed
  ratio between the Pool and the Manager.

• Share of the pool will be further divided
  among the investors according to the rules of
  Musharakah.
Securitization of Ijarah
             Presen
     Securitization of Ijarah
• It is possible to create a secondary market
  instrument for the financiers on the basis of
  Ijarah.

• The lessor (owner) can sell the leased asset
  wholly or partly either to one party or to a
  number of individuals to recover his cost of
  purchase of the asset with a profit thereon.

• This purchase of a proportion of the asset by
  each individual may be evidenced by a
  certificate, which may be called 'Ijarah
  certificate’.
             Presen
     Securitization of Ijarah
• Ijarah certificate represents the holder's
  proportionate ownership in the leased asset.

• The holder will assume the rights and
  obligations of the owner/lessor to the extent
  of his ownership.

• The holder will have the right to enjoy a part
  of the rent according to his proportion of
  ownership in the asset.
              Presen
      Securitization of Ijarah
• In the case of total destruction of the asset,
  he will suffer the loss to the extent of his
  ownership.

• These certificates can be negotiated and
  traded freely in the market and can serve as
  an instrument easily convertible into cash.

• Essential Condition

   “It’s essential that the Ijarah certificates are
     designed to represent real ownership of the
     leased assets, and not only a right to
     receive rent.”
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posted:8/11/2011
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