This process is reverse and involves pooling of

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This process is reverse and involves pooling of existing assets of a company and then issuing of securities against these assets. The process begins with identifying income-generating assets of a company and estimating the nature and quantum of expected cash inflows from these assets. The assets are then transferred into the hands of a special purpose vehicle (SPV) organized as a Mudarabah that is specifically created for this purpose. Against these assets and expected income from assets, which can be estimated with reasonable degree of accuracy, the SPV- Mudarabah issues securities that are sold to investors. Sukuk 19
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Asset Securitization The income stream in future is passed on to the security holders after deducting a certain percentage for the Mudarib. An issue that is of utmost significance in the process of securitization involves sale and buy-back (bai-al-einah) as compared to sale and lease-back. Another controversial issue relates to sale or transfer of receivables or debt (bai-al-dayn). What is to be noted in the above process is the use of sale and buy back (bai-al-einah) which effectively amounts to riba-based borrowing. Sale and buy-back of asset enables delinking of the financing from the underlying asset and hence not acceptable in the Islamic framework. Sukuk 20
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The Malaysians Once Again Nevertheless, it has been widely used by investment bankers in Malaysia. Another forbidden mechanism is used to impart liquidity to the instruments sale of debt at a discount or at a negotiated price ( bai-al-dayn). The sukuk-al-murabahah created through the aforesaid mechanism are traded freely at any mutually negotiated price (that is invariably lower due to discounting of debt). The end outcome of such practice is the emergence of a vibrant market in bonds that is Islamic only in name, but conventional in every other sense. Sukuk 21
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The Conventional Bond 1. Bonds do not represent ownership on the part of the bond holders in the commercial or industrial enterprises for which the bonds were issued. Rather, they document the interest-bearing debt owed to the holders of the bonds by the issuer, the owner of the enterprise. 2. Regular interest payments are made to the bond holders. The amount of interest is determined as a percentage of the capital and not as a percentage of actual profits. Sometimes the interest is fixed, while oftentimes in bonds with longer tenors the rate of interest is allowed to float. 3. Bonds guarantee the return of principal when redeemed at maturity, regardless of whether the enterprise was profitable or otherwise. The issuer of such bonds is not required to return more than the principal and the agreed amount of interest. Whatever profits may have been earned by the enterprise accrue entirely and exclusively to the issuer. So the bond holders have no right to seek a share in the profits beyond the interest.
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