Can Islamic Injunctions Indemnify the Structural Flaws of Securitized Debt?

Ebrahim, M.S.; Jaafar, A.; Omar, F.A.; Salleh, M.O.

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.

Citation

Ebrahim, M., Jaafar, A., Omar, F., & Salleh, M. (2016). Can Islamic Injunctions Indemnify the Structural Flaws of Securitized Debt?. Journal of Corporate Finance, 37, 271-286. https://doi.org/10.1016/j.jcorpfin.2016.01.002

• Journal Article Type: Article
• Acceptance Date: Jan 4, 2016
• Online Publication Date: Jan 9, 2016
• Publication Date: Apr 9, 2016
• Deposit Date: Jan 4, 2016
• Publicly Available Date: Jul 9, 2017
• Journal: Journal of Corporate Finance
• Print ISSN: 0929-1199
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 37
• Pages: 271-286
• DOI: https://doi.org/10.1016/j.jcorpfin.2016.01.002
• Keywords: Agency cost, Collateral, Debt default, Financial fragility, Islamic injunctions
• Public URL: https://durham-repository.worktribe.com/output/1415837