Juan A. Sole

Islamic Securitization - The Right Way Forward?

Heiko Hesse, Andreas Jobst and Juan A. Sole published on RGEmonitor on 13 February an analysis regarding Islamic Securitization and the grown interest for Islamic finance during the financial crisis.

Islamic finance is driven by the general precept of extending religious doctrine in the shari’ah to financial agreements and transactions. Predatory lending, deteriorating underwriting standards, and a series of incentive problems between originators, arrangers, and sponsors, of which all have infested the conventional securitization process, belie fundamental Islamic principles.

The article linked in the source relates the characteristics of this form of securitization to calls for enhanced disclosure and standardization, ratings agency reforms, and better transparency of origination and underwriting practices in conventional structured finance. In particular, it assesses the potential of conflicts of interest (which became apparent in the U.S. subprime mortgage crisis) to contaminate the integrity of the securitization process if it were conducted in compliance with shari’ah principles.

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