GRM 2010 GRM 2011

Abstract Details

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Title of Paper:
Development of Islamic Securitization in the GCC countries to support housing finance markets – an assessment of markets, regulations and policies
Paper Proposal Text :
Residential real estate finance markets are in a nascent stage in the Golf Cooperative Council (GCC) countries. In comparison with other regions, GCC mortgage lending/GDP levels are much lower. The region will face an increased demand for housing underpinned by growing populations and declining household sizes. The increased availability of adequate and affordable housing finance products is therefore of major importance for these countries.

The development of Islamic Securitization is likely to play an important role in channeling long-term funds into housing. Additionally, sound and transparent securitization structures are poised to stimulate demand for the GCC sukuks in general as real estate is an important component of Islamic Banking and Finance (IBF). The real estate bubble in Dubai which burst in 2008/2009 showed especially the vulnerability of Islamic finance debt instruments and the need to improve the regulatory and institutional framework to ensure the sound expansion of a promising market instrument. It seems that Shariah compliant products have not been any more effective than conventional financial products in shielding lenders from real estate meltdowns.

The objective of the paper is therefore to define a framework for the requirements for sound, transparent and sustainable structures for Islamic securitization instruments. The identified framework is used to assess the GCC securitization markets. The definition of the framework is based on comparing the differences between Islamic and conventional securitization, such as “risk-sharing” in IBF versus “risk-shifting” in conventional securitization as well as the treatment of the underlying asset (“asset-linked” in IBF versus the “asset-based” in conventional securitization). The paper highlights existing gaps in the GCC markets and makes recommendations on how these can be addressed. The paper has a particular focus on real estate transactions given their overall impact on the GCC economic, financial and political environment.

First, the paper deals with housing finance markets in GCC countries. The second part defines the prerequisites for Islamic securitization and assesses these against the situation in the GCC countries. Areas of analysis are, for example, the supervisory and regulatory framework, governance issues as well as the risk dimension and its management. As appropriate, the analysis draws on examples from other markets with notable experience in Islamic securitization (e.g. Malaysia). Third, the paper makes recommendations how existing gaps could be overcome.

As Islamic securitization structures tend to avoid unfettered financial innovation and structural complexity, which is typically associated with conventional securitization structures, the establishment of sound and transparent structures provides an opportunity to strengthen the increased demand for sukuks and improve the liquidity of GCC capital markets as well as to provide access to long-term funds for housing. The paper will be a valuable contribution to the improved performance and development of the IBF industry in GCC markets (471 words).