Islamic Private Debt Securities (IPDS)? a Financial Gate-Way for ALL Humanity....

Islamic Private Debt Securities (IPDS)?
a discovered financial corridor for all humanity in the contemporary global socio-economic reality.

Changing economic and business environments as well as rapid technological advances over the last decade have had significant impact on the development of the financial system, domestically and globally. The needs to tackle the Islamic financial products are also crucial in order to align with the changes and promotion of Islamic financial products.

Global forces at work and advances in technology have redefined the rules of the game and transformed the operational environment within which financial institutions operate.

Indeed, the ability to reap the benefits arising from greater competition depends largely on the capability and capacity of financial institutions to adapt swiftly and to embrace the changes. Similarly, the rapid pace of economic development and transformation that creates new demands as well as opportunities for businesses have called for a more effective and efficient provision of financial services.

In moving ahead, a well-defined strategy will need to be formulated for the financial sector if it were to prosper in the new environment and play a meaningful role in the nation’s future economic development. This is very true in the light of making Malaysia as Islamic financial hub in the region; the proper landscape lay down should be properly design.

Key Challenges that Need to be Addressed

As changes in the global financial industry continue to evolve and accelerate in the new millennium, the Malaysian financial system, particularly domestic banking institutions and insurance companies will face mounting pressure to become more efficient and competitive, innovative, technology-driven, and strategically more focused. The financial infrastructure will have to be developed accordingly to facilitate and support this development. In so doing, the industry will face the following key challenges:

(i) The need for domestic institutions to improve their efficiency and effectiveness to be at par with the best international players; and

(ii) The need to ensure that performance gaps do not widen, as technology continues to drive global trends in financial services. In order to compete in the new environment, financial institutions in leading markets are leveraging on new technology, as well as:

(a) Becoming increasingly global and specialized;

(b) Using new organization structures and more aggressive compensation models;

(c) Relying much more on alliances and third party relationships; and

(d) Investing more in technology.

 A well-diversified and competitive financial system is vital for the long-term economic growth and development to ensure that risks in the economy are well distributed among the various sub-sectors. In the new millennium, the future of the financial system lies in its ability to create a dynamic set of financial players, which are able to provide the support to the domestic economy, and more importantly, that are increasingly more efficient, competitive, sound and stable that would facilitate the economic transformation process.

While opportunities have emerged in this new environment, threats of the global marketplace are becoming more intensive, as global players and technology advancements are having an unprecedented impact on the approach of banking and financial businesses. Against this background, it is vital for the financial system, particularly the domestic financial institutions to be resilient and efficient if Malaysia is to ensure that its financial sector remains effective and responsive in the face of a more globalised, liberalized and a more complex domestic economy.

Declining of Traditional Financial Intermediation

The declining of traditional financial intermediation role of banking resulted from rapid expansion of capital market particularly financial innovation indicates deteriorating monopoly power over the surplus unit in the economy i.e. the depositors. As such, differentiated strategies based on strengths and market niches need to be formulated with a greater emphasize given to formulate strategies to tap the lowest cost and stable funds.

Debt Capital Market

Expansion of capital market resulted in declining role of intermediation of financial institution and narrowing margin. Fee based income through expansion in capital market activities becomes a new major source of income. The Islamic private debt securities (IPDS) market has grown slowly but steadily over the last few years as it provides alternative and sound avenue of investment. The growth in IPDS market is shown below:

Dynamic Risk Management

The new Basel Capital Accord

The competitive dynamic of financial market shifts from size of financial institution (i.e. big banks vs. small banks) to risk inherent with the financial institutions (high-risk vs. low-risk bank).

Addressing risk concentration and insulating the financial system through reducing reliance on loans.  It creates pressure on high-risk financial institutions to restructure their balance sheet and take on less leverage.

A more flexible and forward-looking mechanisms need to be innovated including ongoing innovation of risk-transfer vehicle that can meet the changing reality of risk management.

Credit derivatives (i.e. Asset backed securitisation) through issuance of collateralised debt obligation by the special purpose vehicle i.e. a bankruptcy remote entity is one of the mechanisms to completely transfer the risks.

Benefit of Asset Backed Securitization

 The asset backed securitization is expected to bring about the following benefits:

1. Capital Adequacy Ratio.
2. Increase in Profitability.
3. Risk Management

Capital Adequacy Ratio

Based on the preliminary assumed target transaction size is approximately RM 500 million. By selling these facilities to a newly established Special Purpose Vehicle ("SPV"), RM 500 million of risk-weighted assets ("RWA") will be released from bank's Balance Sheet. This would free up the current risk-based capital and enable bank to originate newer and more profitable facilities.

 Based on the Prudential Standards on Asset Backed Securitization Transactions by Licensed Institutions issued by Bank Negara Malaysia ("BNM"), dated March 2003, paragraph 2.4:

 "Where a banking institution (both originating and third party licensed institution) provides first loss facility, directly or indirectly to the SPV, the banking institution is required under the capital adequacy framework to deduct the full amount of the facility from its capital base (i.e. total capital). The deduction will however, be capped at the amount which would have been provided for as it the entire assets were to remain or appear in the institution’s balance sheet.”

Assuming a Senior Note issuance amount of 90% of total transaction size, the first loss portion retained by bank through the Junior Note would be 10% of the transaction size. Based on our understanding of the guidelines, the amount of the Junior Note would be deducted from the capital base, but would be capped at the amount which would have been provided for as if the entire assets were to remain or appear in bank's balance sheet.

Hence from this analysis, we believe that the adjustments for bank's CAR would be as follows:

That the ABS transaction would increase the CAR of bank by 1.60%1 to 11.88%. Hence from the illustration above, we conclude that the transaction would not adversely affect the CAR of bank. Further, given the specific statement regarding the capped limit outlined in the Prudential Guideline, the CAR of the bank will not be adversely affected under any circumstances.

Increase in Profitability for Bank

We believe that bank's profitability can increase by participating in the following three roles:

(i) Junior Note holder;
(ii) Servicer;
(iii) Placement Agency in this transaction. Furthermore, bank can gain a leveraged return from the newly originated assets.

Junior Note holder

The junior note will have implied yield more than the average yield of the securitized loan portfolio. Hence the bank will still earn more spread as compared to keeping the loan portfolio in its balance sheet. However the risk profile still remains for the portion of junior note as if the loan portfolio still remains in the balance sheet.

Service

Additionally, bank would also generate an ongoing fee through acting as the servicer of the transaction. With this qualification, in addition to the market recognition, it would entitle bank to collect a fee through acting as a backup-servicer for other future securitization transactions. i.e., to act as the servicer of the transactions in which the originator does not have strong credit and servicing quality. This requirement is usually imposed by the rating agency.

Placement Agency

Common place for many primary transactions in Malaysia, bank would also be able to obtain a substantial profit as the placement agency during the syndication process.

Newly Originated Assets

Assuming that new facilities are originated in this exercise, bank also stand to gain an expected profit from the newly originated facilities in addition to the expected profit from the Junior Note. In order words, this transaction allows a leveraged return on the asset. This funding technique has been a common tool for international financial institutions to diversify their funding sources and allow them to enhance their profitability through a more efficient allocation of their capitals.

Risk Management

Asset-Liability Hedge

This transaction represents an alternative source of funding for bank, and would enable bank to lock-in long term funding cost based on estimated average life of the transaction. Given that the funding cost of portfolio, the average yield is able to be locked-in a low long term funding cost as well as the profit rate margin though this transaction.

Reduction of Single Borrowing Limit

Since this transaction is targeted as an off-balance sheet transaction, bank would have the opportunity to extend further credits to existing customers who have already reached the single borrowing limit within bank by off-loading the existing facilities to this transaction. At the same time, we can still capture the existing benefits through holding the Junior Note. Therefore, we believe that this Transaction can manage the credit quality of our portfolio in a very effective manner.

Limited Downside in Investment in Junior Note

Further, upon closing of the transaction, bank will only be the Junior Note holder. As such, the risk incurred in the securitized portfolio will be capped by the size of the Junior Note while investment. In other words, the risk faced by bank will only be limited to its investment in the Junior Note. For any additional defaults beyond the subordination level, the risk will be borne by the Senior Note holders.

 Bay al 'Inah (Buy Back Sell)in the Issuance of IPDS 

 Bay’ al-'Inah is a forbidden contract based on the consensus of the jurists (ijma’), however it’s a lawful contract in the Shafi’s view. This is a type of sale taken as a means for Riba.

The Maliki and Hanbali jurists hold that the contract of 'Inah is not valid (Sahih) because, according to them the motive of the parties to the contract determines the legality or illegality of the contracts, and in the sale under consideration the motive of the parties is illegal and, therefore, the sales are not valid because they constitutes a legal device (Hilah) to get a loan with interest which should be averted at all costs according to the Sharicah. Ibn Qayyim, a Hanbali author states that intention influences legal act: the formality of legal act can be the same but end results depend on the intention.

According to Shafi’i school such sales are to be allowed because, in the words of Imam Shafi’i, contracts are valid (Sahih) by the external evidence that they were properly concluded: the unlawful intention (niyya or qasd) of the parties is immaterial, it does not invalidate their act, unless expressed in that act.

In addition to the above, Ibn Qayyim prohibited the contract of Bay’ al-inah based on the hadith of the Prophet (PPUH) in which he said:

“a time is certainty coming to mankind when they legalise the riba under the name of Bay’ (Sale)”.

To several Muslim scholars al-'Inah contract is haram based on the following  hadith hasan:

" إذا تبايعتم بالعينة وأخذتم أذناب البقر، ورضيتم بالزرع، وتركتم الجهاد سلط الله عليكم ذلا لا ينزعه حتى ترجعوا إلى دينكم " (صحيح أبي داود، حديث رقم 2956 )  (صححه الألباني)

Ibn Umar said: “I heard the Prophet of Allah (S.A.W) say when you enter into the cinah transaction, hold the tails of oxen, are pleased with agriculture, and give up conducting jihad, Allah will make disgrace prevail over you, and will not withdraw it until you return to your original religion”.

From the above, it is very clear that this type of contract (better not to say bai’ or sale, because once we mention the world bai’ it seems as if it is permissible) is not halal based on ajima and some Prophetic sayings.

Most of the Muslims scholars (such as Ibn Abbas, Um al-Muamneen Aishah, Al-hassan, Ibn Syreen, Al-Thoriah, Imam Malik, Al-awzah, etc)are on the opinion that every body who sell goods or any type of asset based on deferred price and then buy back that asset for lower cash price, that contract is not valid.

According to Abu Hanifa, this sale is void if it is concluded without the intermediation of a third person .However, Imam Al-Shafi, and the Zahiry’s School (only), Said: this type of contract is valid.

The Structure

Securitization for a corporate entity involves more complicated issues. It involves three main parties, namely the Originator (i.e. the owner of the assets), the Special Purpose Vehicle (SPV) which buys the assets and issues securities and the investor (who buys the securities). Banks participate in the securitization process as originator cum servicer.

Securitization enables a company to convert its assets into immediate cash, which will then determine the company’s ability to going concern. It is regarded as an off-balance sheet financing whereby not only a company can convert the usable assets in to cash, but it also removes the assets (e.g. receivables) from the books.

Requirement For Assets That May Be Securitized The assets that are the subject matter of a securitization transaction must fulfill all of the following criteria:

(i) the assets must generate cash flow;

 (ii) the Originator has a valid and enforceable interest in the assets and in the cash flows of the assets prior to any securitization transaction;

 (iii)  there are no impediments (contractual or otherwise) that prevent the effective transfer of the assets or the rights in relation to such assets from an Originator to an SPV. For example: that the necessary regulatory or contractual consents have been obtained in order to effect the transfer of such assets from an Originator to an SPV; that the Originator has not done or omitted to do any act which enables a debtor of the Originator to exercise the right of set-off in relation to such assets;

 (iv) the assets are transferred at a fair value;

v) no trust or third party’s interest appears to exist in competition with an Originator’s interest over the assets; and

 (vi) where the interest of an Originator in the assets is as a chargee, the charge must have been created for a period of more than 6 months before the transfer.

Where the issue, offer or invitation of ABS are Islamic in nature, the assets that are the subject matter of the securitization transaction must be acceptable in accordance with Shari'ah principles. In the event of doubt, clarification should be sought from the Shari'ah Advisory Council of the SC.

The Originator

1. An Originator must be an entity incorporated in Malaysia.

2. An Originator must be a going concern at the date of transfer of any assets to an SPV. For the purposes of these Guidelines, an Originator will not be considered as a going concern if it is unable to pay any of its debts as they fall due or when it suspends payment of any of its debt obligations.

3. Any transfer of assets by an Originator to an SPV must comply with the true sale criteria.

4. The Originator may only purchase ABS issued by an SPV up to 10% of the original amount of the ABS issued by the SPV at market value at any time unless otherwise permitted by the SC.

5. No limits with respect to the holdings of subordinated debt securities by an Originator. Where an Originator is the only primary subscriber resulting in the Originator holding more than 10% of the ABS, the Originator must make best endeavors to place out such excess ABS within a period of not more than 3 months from the date of issuance of such ABS.

6. An Originator should also have internal systems to ensure that funds due to the SPV are separated and “ring-fenced” from other funds due to the Originator as soon as practicable.

 True Sale Criteria

The underlying assets must have been isolated from an Originator i.e. put beyond the reach of the Originator and its creditors even in receivership or bankruptcy as far as possible.

The risk that a transfer of assets by an Originator to an SPV might be re-characterized as a financing transaction rather than a sale of assets should be minimized as far as possible. In this regard, the Originator must effectively transfer all rights and obligations in the underlying assets to the SPV.

An Originator must not hold any equity stake, directly or indirectly, in an SPV. In addition, the Originator must not be in a position to exercise effective control over the decisions of the SPV in relation to the securitization transaction.

An SPV must have no recourse to an Originator for losses arising from those assets for any credit enhancement provided by the Originator at the outset of the securitization transaction.

Where an Originator is also the Servicer, the services must be provided on an arm’s length basis, on market terms and conditions. In addition, there must be no obligation imposed on the Originator to remit funds to the SPV unless and until they are received from the debtor of the Originator in respect of the underlying assets.

Notwithstanding of the above provisions,

(i) Where such assets have declined to a level that renders the asset securitization transaction uneconomical to carry on, an Originator may retain a first right of refusal to repurchase assets from an SPV at a fair value; or

(ii) the Originator may repurchase assets from the SPV where the Originator is under an obligation to do so under a securitization transaction when it has breached any conditions, representation or warranty in respect of the securitization transaction.

The Special Purpose Vehicle (SPV)

1. An SPV must be resident in Malaysia for tax purposes.

2. An SPV must have independent and professional directors or trustees as the case may be.

3. In determining whether an SPV is sufficiently “bankruptcy remote”, the following must be taken into account: 

(i)  An SPV cannot include in its objectives, the power to enter into any other activities that are not incidental to its function as a special purpose vehicle in relation to the securitization transaction.

(ii)  An SPV must sub-contract to third parties all services that may be required by it in order to maintain the SPV and its assets;

(iii)  An SPV is not permitted to have employees or incur any fiduciary responsibilities to third parties other than to parties involved in the securitization transaction; and

(iv)  All the liabilities, present or future, of an SPV (including tax) must be quantifiable and capable of being met out of resources available to it.

4. An SPV must be responsible for the acts and omissions of all persons to whom it delegates any of its functions. Thus, an SPV is ultimately responsible to ensure that its assets are managed with due care and in the best interests of ABS holders.

5. Without prejudice to any applicable law, an SPV must cause to be maintained proper accounts and records to enable a complete and accurate view to be formed of its assets, liabilities, income and expenditure and to comply with all other regulatory reporting requirements in respect of the issue, offer or invitation of ABS.

6. An SPV must be dissolved when the following circumstances arise:

 (i) It refuses to accept transfers of the assets or issue ABS within 6 months from the date on which the securitization transaction is approved by the SC or such other period as may be specified by the SC; or

(ii) More than seventy five percent of ABS holders have resolved, in accordance with the terms and conditions agreed by all the relevant parties in a securitization transaction, that the SPV shall be dissolved and the SC has been notified of this resolution. In addition, more than 50% of the senior classes of ABS holders must consent to the dissolution; or

(iii) Upon full repayment of the ABS in accordance with the terms and conditions of the securitization transaction.

Servicer

The duties of any Servicer of the assets must include the following:

(i)  The Servicer must keep proper accounts;

(ii)  The trustee must be informed of any change of Servicer;

(iii) The Servicer must have adequate operational systems and resources to administer the asset portfolio. In particular, these internal systems should ensure that the cash flows belonging to the SPV are "ring-fenced" and segregated in relation to a securitization transaction; and

(iv) Where there is any change of Servicer, provision must be made in the legal documentation for the periodic transfer of the necessary information from the Originator to the substitute Servicer to enable the monitoring of the asset portfolio, its performance analysis and collections from debtors of the Originator.

Rating Requirement

All issues, offers or invitations that come within the scope of these Guidelines must be rated by a rating agency recognized by the Commission unless otherwise allowed in writing by the Commission. An indicative rating must have been obtained by the issuer at the time of submission of the declarations and information to the Commission.

The mandatory rating requirement need not be complied with in regard to any issue, offer or invitation in respect of irredeemable convertible loan stocks.

Where the credit rating of any issue, offer or invitation is below investment grade, the issuer must disclose the extent of credit risk to investors and their professional advisers in order to evaluate the risks relating to the private debt securities.

Underwriting

The underwriting of any issue, offer or invitation shall be decided by the issuer and its adviser.

In the event that the issuer and its adviser should decide that no underwriting is required, the issuer must state the minimum level of subscription necessary to achieve the funding objectives of the issuer.

Unless otherwise allowed in writing by the Commission, where any issue, offer or invitation is under-subscribed and cannot meet the minimum level of subscription, the issue, offer or invitation must be aborted and any consideration received for the purposes of subscription, where applicable, must be immediately returned to all subscribers.

In relation to Islamic Private Debt Securities (“IPDS"), the issuer must appoint either:

(i)  An independent Shari’ah adviser(s) who has been approved by the Commission and who meets the following criteria:

(a) is not an undercharged bankrupt;

(b) has not been convicted for any offence arising out of a criminal proceeding;

(c) is of good repute;

(d) possesses the relevant qualifications and expertise, particularly in fiqh muamalah and Islamic jurisprudence, and has a minimum of 3 years working experience or exposure in Islamic finance; or

(ii) the Shari'ah Committee of an Islamic bank or a licensed institution approved by Bank Negara Malaysia to carry out Islamic Banking Scheme or Skim Perbankan Islam, to advise on all aspects of the IPDS including documentation, structuring, investment as well as other administrative and operational matters in relation to the IPDS.

Where the Shari'ah adviser proposed to be appointed is a company, such company must have, in its employment, a minimum of one individual who meets certain criteria. In addition, the company should not have breached any securities or banking laws since the date of its incorporation nor have a winding up order or resolution passed against the company.

Any Shari'ah principle and concept adopted in order to structure an IPDS must be based on such principles and concepts as approved by the Commission’s Shari'ah Advisory Council ("SAC").

Where any Shari'ah principle or concept applied in the structuring of an issue, offer or invitation is based on a principle or concept, the approval of the SAC must be obtained prior to any submission of declarations and information to the Commission.

Credit Enhancement

Banking institutions may provide credit enhancement facilities in order to improve the credit attractiveness of a securitization scheme. These facilities may be in the form of first or second loss facilities that include but are not limited to arrangements such as subordinated loan facilities, over-collateralization or cash collaterals.

A banking institution providing credit enhancement must ensure that:

 i. The facility has a finite amount and duration, specified at the outset of the transaction;

ii. There is no recourse to the banking institution beyond the fixed contractual obligations under the facility;

iii. The SPV and/or investors have the right to select and alternative party to provide the facility;

iv. The facility is documented separately from any other facility provided by the banking institution;

v. The details of the facilities are disclosed in the offering information memorandum or prospectus; and

vi. The facility is provided on an arm's length basis and is subject to the banking institution's normal credit approval and review.

First Loss Facility

First loss credit enhancement facility represents the first level of protection against potential loss. This amount is determined with the rating agencies based on certain formula such as the multiples of expected loss of the asset pool or certain minimum levels of over-collateralization and interest cover ratios with a view to secure a particular rating for the senior classes.

First loss credit enhancement can be provided in several forms such as a subordinated investment, capitalization of the SPV, or over-collateralization (discussed separately below). Irrespective of its form, the purpose of first loss credit enhancement is to absorb any losses in the asset pool caused by the 6ks to which the asset pool is exposed to.

1. Where a banking institution (both originating and third party licensed institution) provides first loss facility, directly or indirectly to the SPV, the banking institution is required under the capital adequacy, framework to deduct the full amount of the facility from its capital base (total capital). The deduction will however, be capped at the amount which would have been provided for as if the entire assets were to remain or appear in the institution's balance sheet.

 2. In cases where the asset transferred to the SPV is more than the total amount of securities being issued by the SPV, the difference between the two values would normally constitute an over-collateralization amount (transferred as security). This could act as a first loss facility in which case will require capital deduction by the originating banking institution, unless provision has been made through the income statement.

3. A first loss facility may also be in the form of maintenance of cash collateral account, where cash is provided upfront by the provider of the credit enhancement. Banking institutions that provide such facility as first loss facility would normally write off that amount in the income statement, failing which, the amount (outstanding amount) would have to be deducted from its capital base (total capital) under the capital adequacy computation.

4.  Credit enhancement could also be provided through the structure of the securities issued itself. This will involve the issuance of senior and subordinated securities; the latter is normally unrated and held by the originator as a form of first loss facility, in which case, capital deduction is applied.

5. The maintenance of excess spread accounts within the SPV could also be a form of credit enhancement. If the excess spread is provided the difference between the return at which the pool is transferred to the SPV and the weighted average cost of the funding raised by the SPV as first loss facility and has been captured as a gain on sale (and therefore become part of the capital of the originating institution), the amount shall be deducted from the capital base.

Second Loss Facility

1. A cedit enhancement facility will be treated as 'second loss facility' if it ranks above the first loss facility that has been agreed by BNM. Such facility is often rated lower than BBB or equivalent quality and is often provided as protection against the mezzanine risks tranches. Banking institutions that provide 'second loss facility' shall assign a 100% risk weight to the facility on its balance sheet.

2. Where various credit enhancements are given for a transaction in a hierarchy (that is, one being senior to the other in terms of allocation of cash flows), BNM may consider the senior ones among the several enhancements as being a 'second loss' in limited circumstances, where BNM has to be satisfied that the junior forms of credit enhancement are sufficient as a first loss facility.

For instance, if there is an over-collateralization as well as a subordinated debt security in a transaction, where the level of over-collateralization is considered sufficient and no less than that enjoyed by any BBB-rated tranche in a securitization transaction, the subordinated debt may be treated as second loss piece.

In such circumstances, banking institutions shall demonstrate to BNM their claim on the quality of the unrated/subordinated tranche to be treated as 'second loss' and shall obtain the opinion of the rating agencies as to the quality of the subordinated tranche.

3. In the event of downgrades of the second loss facility, the facility may continue to be treated as 'second loss' and held by banking institutions. However, BNM reserves the right to assign a higher risk weight, require provision to be made, or reclassify the facility as first loss (in which case capital deduction is required and subject to the 8% cap) should the situation warrant.

4. In any traditional securitization where several forms of credit enhancements are involved, the originating banking institutions must be able to demonstrate to BNM the order in which they will be used to absorb losses from the underlying assets.

5. Where credit enhancements provided are other than those mentioned herein (e.g. third party credit enhancements), the principles in the preceding paragraphs as well as existing capital adequacy framework shall apply. Banking institutions are advised to discuss with BNM the regulatory impact of providing such a facility.

6. While an originating banking institution is allowed to provide both first and second loss facility, BNM reserves that right to require that the second loss facility be provided by a third party, which could be another banking institution, under certain circumstances such as deteriorating capital strength of the originating banking institution.

Accounting Issue

Standing Interpretation Committee of Guidelines of the International Accounting Standard Board

This interpretation addresses the question of when a special purpose entity would be consolidated by a reporting enterprise. The SIC agreed that an enterprise should consolidate a special purpose entity ("SPE") when, in substance, the enterprise controls the SPE.

Examples of SPEs include entities set up to affect a lease, a securitization of financial assets or R&D activities. The concept of control used in IAS 27: Consolidated Financial Statements requires having the ability to direct or dominate decision making accompanied by the objective of obtaining benefits from the SPE's activities.

The Interpretation provides example indications of when control may exist in the context of an SPE. The examples involve activities of the SPE on behalf of the reporting enterprise, the reporting enterprise having decision-making powers over the SPE, and the reporting enterprise having rights to the majority of benefits and exposure to significant risks of the SPE.

Some enterprises may also need to evaluate separately the topic of derecognition of assets, for example, related to assets transferred to an SPE.

In some circumstances, such a transfer of assets may result in those assets being derecognized and accounted for as a sale. Even if the transfer qualifies as a sale, the provisions of IAS 27 and SIC-12 may mean that the enterprise should consolidate the SPE. SIC-12 does not address the circumstances in which sale treatment should apply for the reporting enterprise or the elimination of the consequences of such a sale upon consolidation.

Tax Issues

Some uncertainties are still looming over, especially in the areas of taxation. Naturally, a person will only raise fund via a selected method over other alternatives if he can derive benefits there from of at least achieve a “no gain, no loss” position from tax perspective.

Tax cost is of great significance and as such, tax implications arising from any financing structures must be addressed at outset.

To date, there is no specific income tax law in Malaysia governing the taxation of the originator or SPV involved in securitization exercise.

Since asset securitization is relatively new, it will take a while before it is fully-developed in Malaysia, including the related tax issues. Hence, one has to rely on the existing tax law.

Final Remarks

It is important to have  a  master plan that cater private debt issuance in the Islamic financial dealings as the growth of the products has substantially increase in the recent development.

The issue of Bay’ al-'Inah has to take into consideration. On what ground  Muslim jurists make their ijtihad on the applicability of Bay’ al-'Inah in the issuance of Islamic Private Debt Securities.

Bai al-'Inah is a valid contract in the Shaf’iis point of view based on Qiyas, and is a forbidden sale in the Jamhor’s opinion based on a sahih hadith. Up to our knowledge, Malaysia is the only Muslim country which is practicing bai’ al-inah, and widely being used in the bonds market -in the securitization process.

Nevertheless, it is important to have a sound Islamic Financial system in order to meet the challenge of globalization and rapid  technology changes, so that Malaysia can be a the leader of Islamic financial dealings which Muslim world are lacking.

The OIC summit may be a platform to design and duly endorse the landscape for future Islamic Financial system which ultimately benefit the Ummah.

The needs of mutual agreement between OIC members, the spirit of brotherhood, and the solidarity of Ummah must be put in place in order to find the right tune for Muslim countries to advance in the this world and hereafter.

The differences must be reconciled in a right manner so that Muslim will unite under the banner of the Islam noble teachings with universal character, which may simultaneously bring advantage for all humanity regardless of one's background of religion, race, status, gender, color or even nationality.