Islamic Finance and Securitisation

Islamic or Sharia Law is against the principle, for loaned money, to earn fixed and predetermined interest (known as "Riba").

Sharia prohibits the fixed remuneration of capital and suggests that remuneration should be linked to the profitability of the asset being financed.

It is therefore based on the principle of risks being shared between the lender and the borrower in line with the profits and losses on the underlying asset. If Sharia is to be respected, then all financial transactions have to be structured in such a way that they are based on a tangible asset (Underlying Asset) so as to enable profits and losses relating to the holding of this asset to be shared.

This approach can be implemented within the framework of securitisation structures established in Luxembourg by virtue of the securitisation Law notably by the issuance of "Sukuks".

A Sukuk is an Islamic bond product that is similar to an asset backed security (ABS). Generally speaking, it is a debt instrument issued by an entity established in Luxembourg, which may be either a securitisation fund or a securitisation company established in accordance with the Securitisation Law. This institution is known as an SPV (Special Purpose Vehicle).

This "bond" is issued for a fixed term – either short or medium term – and its value and yield are entirely linked to the value and yield of an underlying asset held by the issuing institution.

The underlying asset generates periodic income which is collected by the issuing entity. The bond generates periodic or future interest for its holder which is directly linked to this income.

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