An Introduction to Islamic Finance: Theory and Practice

The Islamic Financial System 125

guarantor and to the risk to the underlying asset’s returns and risks; or, in
other words, the risks/returns of the underlying assets do not “fl ow” back to
the security owner. Although the security is backed by the assets in the pool,
its payoffs are not linked to the security risk/return profi le. Arising from this
distinction, we argue that a securitized security in Islamic fi nance will be
designed to be linked to the payoffs of the underlying asset and we therefore
refer to such securities as “asset - linked” securities.
Figure 6.2 shows the process of securitization of asset - linked securi-
ties. Different fi nancial intermediaries and economic agents will hold assets

FIGURE 6.2 The structuring of asset - linked securities

INVESTORS

Individual

Investors

Institutional

Investors

Corporate

Sector

Banking

Sector Household

Banking

Sector

Specialized

Finance

Houses

Originators

(Corp., Asset Owners)

Pool of Assets

Securities of

diverse risks

and maturities

Primary and Secondary Capital and

Money Markets

Securitization