Islamic Finance – Islamic Capital Market - Securitisation
The process of turning an asset into cash or its cash equivalent in the shape of papers that can be traded on the secondary market is known as securitization. A usually illiquid asset can be converted into a more liquid form with the aid of securitization. Securitization essentially packages financial pledges and converts them into a form that permits free transfer among numerous investors. With the structured funding of mortgage pools in the 1970s, securitization got its start. Banks were basically portfolio lenders before the advent of this kind of financial engineering, holding loans or receivables until they matured or were settled. Deposits and debt, which was a direct duty of the bank, were the main sources of funding for these loans. Inadvertently, this limited banks' ability to make loans. The concept of securitization emerged in order to appropriately package the specified pools of loans or receivables, such as mortgage loans. These bundles would then be dispersed to investors in the form of securities or loans that are secured or collateralized by the underlying receivables pool. These assets are tradeable in the sense that holders or investors may offer to sell them on the secondary market to another interested party. Through this process, the leasing receivables are changed from an illiquid asset—a future cash flow—to instant cash funds for the business, or originator. Additionally, it will convert these packaged leasing receivables into securities that investors can purchase and subsequently liquidate at market value at any moment during the issuance period. The fixed yield paid from the cash flow and the rise in price of these papers when interest rates fall will both help investors who purchase these securities.
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