Can Islamic injunctions indemnify the structural flaws of securitized debt?

M. Shahid Ebrahim (), Aziz Jaafar (), Fatma A. Omar and Murizah Osman Salleh

Journal of Corporate Finance, 2016, vol. 37, issue C, 271-286

Abstract: Securitization enhances liquidity of debt contracts. However, its structural deficiency at origination has led to the freezing of its secondary market and failure of institutions holding the collateral. This paper builds on key cultural (i.e., Islamic) rulings to rectify flaws entrenched in securitized debt stemming from asymmetric information and agency issues. These injunctions help in the efficient underwriting of debt contracts across the globe to: (i) redeem its ‘toxicity’; (ii) guarantee liquidity; (iii) alleviate fragility of the financial system; and (iv) promote economic growth. Finally, this study promotes a rethink of the current ‘Islamic’ financial system from a narrow literalist juridical perspective to one that is grounded in financial economics.

Keywords: Agency cost; Collateral; Debt default; Financial fragility; Islamic injunctions (search for similar items in EconPapers)
JEL-codes: D53 G10 G20 G28 O16 Z12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Working Paper: Can Islamic Injunctions Indemnify the Structural Flaws of Securitized Debt? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:37:y:2016:i:c:p:271-286

DOI: 10.1016/j.jcorpfin.2016.01.002

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