Islamic securitisation means transferring a portfolio of real assets or compliant contracts, for example property leased under Ijara, to a special purpose entity that issues certificates representing a proportional ownership share in those assets and their income.
From portfolio to certificate: the steps of an Islamic securitisation
The originator, usually a bank, pools homogeneous contracts, for example 300 homes leased under Ijara. It sells them to a special purpose vehicle, which pays the price with funds raised from investors. Investors receive certificates representing an undivided share of the portfolio.
Why the transfer to the vehicle must be a true sale
For holders to genuinely own the assets, the transfer must pass ownership and the risks attached to it. A mere claim on cash flows, without ownership, creates a structure that looks asset-backed but behaves like secured debt.
What happens to holders' rights if the originator goes bankrupt
When the sale is legally complete, the assets leave the bank's balance sheet and are beyond the reach of its creditors. Holders are then paid from the rentals and the resale of the assets. In merely asset-based deals, they become ordinary unsecured creditors.
The originator as rental collector acting on an agency basis
After the transfer the bank often keeps collecting rentals and managing customers, but it now acts as the vehicle's Wakil for a fixed fee. It cannot guarantee collections, except where losses result from its own misconduct or negligence.
Which assets can be securitised without breaching Sharia?
The portfolio must relate to permissible activities, with no interest, alcohol or gambling. Above all, the legal nature of the assets determines whether certificates can trade on the secondary market, because selling a receivable is subject to stricter rules than selling a physical asset.
Ijara contracts: the easiest assets to transfer
A leased asset remains tangible property whose ownership can change hands at any agreed price. Certificates backed by Ijara contracts therefore trade freely, at a premium or a discount, with buyers receiving future rentals together with ownership of the asset.
Murabaha receivables: resale limited to face value
Once the goods have been delivered and sold on deferred terms, only the customer's debt remains. Selling that debt at a price different from its amount would amount to riba. Certificates representing only such receivables can change hands only at par.
Mixed pools: what minimum share of tangible assets?
When a pool combines Ijara, Istisna and Murabaha, tradability depends on the predominance of real assets. Many Sharia boards require them to exceed half of the pool, while some accept one third; the originator must monitor this ratio throughout the life of the deal.
How it differs from conventional securitisation
A conventional deal can be built on interest-bearing loans, credit card receivables or debts resold at a discount. The Islamic version excludes these underlyings, prohibits selling debt below face value and requires the return to come from the assets themselves.
Senior and junior tranches: a disputed form of slicing
Conventional structures allocate losses across ranked tranches. In Islamic finance, co-owners of the same asset normally share risk pro rata. Some deals accept voluntary subordination, but several scholars see it as an implicit guarantee of return to the senior holders.
Reserves and purchase undertakings: enhancing without guaranteeing
A reserve funded by excess rentals can smooth payments. A final purchase undertaking remains acceptable in Ijara, whereas the 2008 AAOIFI statement prohibits a Mudaraba, Musharaka or Wakala manager from promising to buy back the assets at their nominal value.
A worked example of a securitised property portfolio
A bank holds 100 million in home Ijara contracts yielding 6% a year. It sells them to the vehicle for 100 million, recycles that liquidity into new financing, and investors receive the rentals net of the servicing fee, roughly 5.7%.
Specialist external source
The Islamic Development Bank presents its sukuk issuance programmes backed by portfolios of financed projects and its role in building Islamic capital markets.