The Economics of Islamic Finance and Securitization

IMF Working Papers, May 1, 2007

Source details

Islamic lending transactions are governed by the precepts of the shariah, which bans interest and stipulates that income must be derived as return from entrepreneurial investment.
Islamic finance is predicated on asset backing and specific credit participation in identified business risk, making the structuring of shariah-compliant securitization appear straightforward.
The paper explains the fundamental legal principles of Islamic finance and presents a valuation model that distils the essential economic characteristics of shariah-compliant synthetication of conventional finance.
The paper includes a brief review of the current state of market development for Islamic securitization.
The examination of legal and economic implications of shariah compliance informs a discussion of the most salient benefits and drawbacks of Islamic securitization.

Legal principles:
- Shariah prohibition of interest and requirement that income derive from entrepreneurial investment.
- Emphasis on asset backing and specific credit participation in identified business risk.
Valuation model:
- Presented to distil essential economic characteristics of shariah-compliant synthetication of conventional finance (model described in the paper).
Market review:
- Brief review of the current state of market development for Islamic securitization (details in the paper).
Benefits and drawbacks:
- Paper discusses the most salient benefits and drawbacks of Islamic securitization informed by legal and economic implications of shariah compliance.

Subjects: Credit, Islamic finance, Legal support in revenue administration, Securities, Securitization
Keywords: capital market, Islamic law, present value, reserve account, WP