Islamic Finance - Islamic asset-backed securities and Sukuks
The ICM is a market for long-term securities that offers future income based on assets. The Sukuk is one of these instruments, which normally denotes proportionate undivided ownership of the asset and is anticipated to generate a return for Sukuk investors. Sukuks are participation certificates issued to investors with an equal unit value and are denominated in money. Each Sukuk represents a pro rata share of the income produced by these assets as well as a proportionate share of ownership of the underlying asset. A Sukuk offers a functioning substitute for the market for traditional corporate and governmental bonds. The pool of asset-backed receivables or assets that make up the Islamic asset-backed security are backed by obligors who are not connected to the issuer. The originator or obligor will be required to sell the established assets to the SPV/issuer under this structure. A special purpose vehicle (SPV) was established as a bankruptcy remote corporation to hold assets in the interest of investors. In the event that the originator were to be declared bankrupt, the creditors would not have any recourse against the SPV. On the premise that these assets can produce cash flow and future revenue, the asset in this situation could be receivables or a physical asset. This asset must be sold using a real sale concept that forbids recourse against the creator. Asset-backed securities are the consequence of a real transaction in which the originator's asset, such as account receivables, is transferred from the originator's book to the issuer/SPV. Later, the coupon associated to the securities issued to the investors will be paid using the cash flow generated by the asset. The two types of Sukuks—asset-based and asset-backed—are fundamentally based on a securitization method known as Tawriq, or Taskeek in Arabic. Securitization, to put it simply, is the process of combining assets and putting them into marketable securities. The names "Islamic bonds" and "Islamic notes" refer to securitization of receivables or future financial obligations in specific countries, such as Malaysia.
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