Securitization And Leasing: A Jigsaw Puzzle Of Two Parts...

When writing an article, an author usually tries to connect the dots. Indeed, year 2020 created many puzzling dots. So the following two articles represent an attempt to arrange the puzzle pieces in a reasonable manner.  

Islamic Securitization pre and post COVID-19 era

Securitization is a structured product under both conventional and Islamic finance. Securitization is the process of pooling various assets into a Special Purpose Vehicle (SPV) besides financing the acquisition of these pooled assets by the issuance of securities through the SPV. Hence, Islamic finance mimics conventional in defining securitization since most financial Islamic products are based on the concept of asset backing. Another similarity is the parties’ involvement in the securitization process.

Nevertheless, there are two main differences. First, the underlying assets pool or portfolio should match the Islamic Shariaa principals or the accepted Islamic financing schemes. Second, investors should have a share of ownership in the asset pool of the new SPV. In other words, investors participate in the securitization product based on a profit and loss generation mechanism rather than an interest rate based as in conventional financing. Sukuk is considered the most common Islamic product used with securitization deals. So how did Islamic Sukuk securitization perform in 2020 especially in light of the COVID-19 outbreak? What is the contemplated outlook for Sukuk securitization in 2021?    

2020 a review

From a global perspective, Covid pandemic had a negative impact on conventional securitization deals. According to S&P global securitization report, conventional securitization new issuance in 2020 is expected to record an aggregate of USD$ 830 Billion. If compared to 2020 new issuance expectations prior the Covid, it should have recorded an amount of USD$ 1.12 Trillion. Hence, the pandemic resulted in a decline of around 26% in the global securitization market. The market of Islamic bonds or Sukuk is no different. As mentioned by Moody’s in last August, global issuance of Islamic bonds or Sukuk is expected in 2020 to record an aggregate of USD$ 170 Billion representing a drop of 5% ending a four consecutive years of annual growth. Worth mentioning that most of the Sukuk issuance in 2020 represents Sovereign Sukuk issued by governments to support its balance sheets against the pandemic impact beside the major drop in oil prices. In other words, it is not a fully securitized product if compared to the conventional concept. Furthermore, if correlating the whole Sukuk market of USD$ 170 billion to only the conventional securitization new issuance of USD$ 830 billion, Sukuk will represent around 20%. This indicates that Sukuk securitization deals will witness a further drop than 5% in 2020 despite starting the current year with a positive outlook. This is evidenced by some Islamic market news detailing securitization programs launched prior the pandemic. One example is the first asset backed USD$ 266 million Sukuk launched in Saudi Arabia last January. The Sukuk proceed was expected to acquire real estate assets in Europe with a specific focus on Germany. Since then, few Sukuk securitization deals were conducted or announced except recently. In last September, KFH- Bahrain launched an Islamic Securitization program offering local financial institutions and state owned entities an opportunity to manage their liquidity positions and balance sheets through the issuance of a series of Mudarba Sukuk. 

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