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Can Islamic Injunctions Indemnify the Structural Flaws of Securitized Debt?

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

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Authors

A. Jaafar

F.A. Omar

M.O. Salleh



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 Mar 29, 2024
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

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