Mohd Johan Lee is an Islamic finance lawyer and managing partner of law firm J.Lee & Associates. In an article published by Reuters News on 24 June 2009 titled “No debt sales, no progress for Islamic finance?” he concluded the following;
It is indeed for the development of Islamic banking and monetary market that the sale of debt on spot be allowed. Without such practice, the creditors and bankers in an Islamic banking system cannot securitise their debts as practiced by the conventional system.
Thus, the permissibility of such debt sales is crucial to ensure the liquidity of the Islamic money market and Islamic banking system.
Without such debt sales, the Islamic finance industry can not be developed forward. This is because, without such debt trading, Islamic bankers will be stuck with their debt. As in typical banking practice, a low liquidity ratio would incapacitate the investment (and depository) business.
I’m not a lawyer or a Shariah scholar but one thing I stand by is practising Islamic banking the Islamic way, therefore I tend to not agree with his stand that “creditors and bankers in an Islamic banking system cannot securitise their debts as practiced by the conventional system, and therefore will at the losing end". My question is do we need to securitise like the conventional system? Do we need to securitise at all?
A securitisation usually involves the setting up of a Special Purpose Vehicle (SPV) to purchase debt obligations (Receivables) from a corporate or financial institution (the Originator) and issuing bonds secured over this pool of Receivables. Most conventional securitisations have some form of credit enhancements and the most popular is selling the Receivable at a discount. Receivable is a debt and Shariah doesn’t allow selling debt above or below par.
Saying “without such debt sales, the Islamic finance industry can not be developed forward” shows that he doesn’t understand that the Islamic finance industry is partnership, trade and justice driven and not debt driven like the conventional economic system. The conventional fractional reserve banking system is a system based on debt and artificial money creation but the Islamic financial system is built on real, productive economic activities.
On the same note, I find the Islamic money market a bit of an anomaly; if Shariah prohibits the trading of money, what then is traded at the Islamic money market?
It is indeed for the development of Islamic banking and monetary market that the sale of debt on spot be allowed. Without such practice, the creditors and bankers in an Islamic banking system cannot securitise their debts as practiced by the conventional system.
Thus, the permissibility of such debt sales is crucial to ensure the liquidity of the Islamic money market and Islamic banking system.
Without such debt sales, the Islamic finance industry can not be developed forward. This is because, without such debt trading, Islamic bankers will be stuck with their debt. As in typical banking practice, a low liquidity ratio would incapacitate the investment (and depository) business.
I’m not a lawyer or a Shariah scholar but one thing I stand by is practising Islamic banking the Islamic way, therefore I tend to not agree with his stand that “creditors and bankers in an Islamic banking system cannot securitise their debts as practiced by the conventional system, and therefore will at the losing end". My question is do we need to securitise like the conventional system? Do we need to securitise at all?
A securitisation usually involves the setting up of a Special Purpose Vehicle (SPV) to purchase debt obligations (Receivables) from a corporate or financial institution (the Originator) and issuing bonds secured over this pool of Receivables. Most conventional securitisations have some form of credit enhancements and the most popular is selling the Receivable at a discount. Receivable is a debt and Shariah doesn’t allow selling debt above or below par.
Saying “without such debt sales, the Islamic finance industry can not be developed forward” shows that he doesn’t understand that the Islamic finance industry is partnership, trade and justice driven and not debt driven like the conventional economic system. The conventional fractional reserve banking system is a system based on debt and artificial money creation but the Islamic financial system is built on real, productive economic activities.
On the same note, I find the Islamic money market a bit of an anomaly; if Shariah prohibits the trading of money, what then is traded at the Islamic money market?
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