legal guide09.indd - Islamic Finance News

Securitization and Shariah Law (continued..)
can be financed through securitizing the underlying
assets, project receivables, or through the issuance
of securities backed by the project’s cash flow from
user fees.
For a securitization market to grow and develop in
the MENA region, a comprehensive and modern
securitization framework satisfactorily addressing
the legal, regulatory, accounting and tax issues must
be implemented.
On the legal side, a modern insolvency and bankruptcy
law must be implemented in order to assure
that the assets being securitized are the subject of
a “true sale” and are available to the originator’s
creditors, since one of the primary objectives of securitization
transactions is to separate the underlying
collateral from the credit risk of the originator
and vest it in the SPE. Shariah law does not recognize
the separation of legal and equitable title, and,
therefore, “true sales” in Shariah jurisdictions must
be structured as a sale of the legal interest in the collateral
to the SPE in a way that satisfies all applicable
Shariah requirements (such as notification of the
transfer to all debtors and receipt of their confirmation,
if applicable).
A modern insolvency law would also permit legal
counsel to confirm in its non-consolidation opinion
that creditors of the parent company will not be able
to force it and the SPE to be deemed one economic
unit, thereby permitting those creditors to reach the
assets of the SPE through a consolidated bankruptcy
or insolvency process.
Similarly, a modern insolvency and bankruptcy law
must confirm the bankruptcy-remoteness of the
issuing SPE, whose purpose must be limited to the
securitization transactions and certain logicallyrelated
activities.
Additionally, relevant law must enforce the necessary
structural requirements as to how the SPE must
operate and its inability to initiate bankruptcy or
insolvency proceedings.
At the same time, a modern securitization law is
required to clarify investors’ first priority security
interest in the collateral, subject only to creditors
who are mandatorily preferred by law, whose
security interest must be perfected in accordance
with applicable law.
Without such a law, Shariah does not recognize the
concept of a security interest in a manner consistent
with the understanding in western jurisdictions, and
it is therefore difficult to obtain clear legal opinions
confirming the nature of the security interest
created under the transaction documents and any
perfection requirements, such as registration or
other recordation.
“A modern securitization law
would permit more meaningful
enforceability opinions critical
to successful securitizations”
Similarly, a modern securitization law would permit
more meaningful enforceability opinions critical to
successful securitizations.
Shariah law, by its nature, often takes the form of
“general principles”, which often leaves the courts
of the relevant MENA jurisdiction with considerable
discretion as to the interpretation of a particular
Shariah law and the manner in which it should be
applied in a particular transaction.
It is not uncommon for differing views to exist on
particular issues within each school of Shariah jurisprudence.
Moreover, decisions of courts are not
often reported and, even if reported, are generally
not considered to establish binding precedent for
subsequent decisions.
A modern securitization statute would permit
confirmation in legal opinions that remedies are
exercisable under transaction documents upon the
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