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Islamic Compliant

ABSTRACT

Receivables securitization is a vital financial instrument which has faced some resistance in the Islamic world -- with the exception of Malaysia - with the result that its role in Islamic finance is as yet underdeveloped. The reasons behind this resistance are relatively ambiguous, and have not been thoroughly explored, as the existing Islamic literature offers only touches on the topic on a superficial level. This study traces the roots of the concerns of Islamic academics, opens them up to thorough discussion and proposes an objective way forward.

While this study identifies three justifications behind the Islamic resistance to receivables securitization that relate to fiat money, gharar (risk), and usury, it could be argued that the key issue driving these objections is a misapplication of the Islamic rules governing gold and silver to fiat money. There is, however, a strong basis for arguing that fiat money is merely a ‘legal commodity' and should be regulated by the Islamic commodity rules, removing the obstacle to the use of receivable securitization.

Concerns regarding gharar (risk) and interest are valid but can be safely managed by developing an ethics-based form of securitization that protects against such risks as gambling or inability to deliver. In addition, securitization transactions could be structured on usury-free models.

Finally, an attention should be drawn to the methodology used by Islamic intellectuals to apply Islamic rules to contemporary concepts. Methodologies need to be re-examined to ensure that they are true to the spirit of Islamic teaching.

Introduction

While it is still a relatively new concept, securitization has become a vital and effective instrument for raising funds, boosting liquidity, managing risk and allocating capital efficiently. Nevertheless, in a world where consumption has become a way of life and gambling has been raised to the status of a profession or an art form, securitization poses a silent but real threat to economies.

The question has been raised as to whether or not securitization has played a role in the recent financial crisis.[1] It is argued that securitization encourages excessive borrowing, limits oversight by lenders and encourages dependence by borrowers, as well as creating what some call the "illusion of liquidity".[2] Undoubtedly, the provision of loans and securitization facilitates the realization of individuals' goals and creates investment opportunities. But due to the sensitivity of these tools, a disciplined and ethical environment is needed in order to protect against their misuse. This is, according to Hugo Bouleau, what is offered by the principles of Islamic finance[3]; indeed, Islam provides a comprehensive ethical way of life including commerce and investment.

Islamic financial system solidly links between real assets, profits and risks. A financial transaction which does not provide these linkages may fail in the Shari'ah compliance test. However, assessing compliance is not always as simple as it may appear. While the foundations of the Islamic financial system were laid centuries ago, there are still divergences in scholar views concerning details, which has created serious challenges and generated debate in terms of identifying and understanding the gaps in applying the foundations of Islamic Shari'ah on the contemporary concepts. This has slowed the process of formulating a definite Islamic regulatory framework for financial industry particularly in a purely capitalist world.

As one the most debatable issues under Islamic law; this study focuses on the Islamic regulatory framework of receivable securitization which is acknowledged by Shari'ah scholars and Islamic finance professionals as very important instrument, but at the same time as a critical and sensitive field.

The framework of Shari'ah compliant receivable securitization is not yet firmly established due to the novelty of many economic and financial concepts, the lack of the Shari'ah scholars consensus on understanding and accommodating contemporary aspects, and, arguably, the expanded application of sadd al-dhara'i approach which, generally, means banning any permissible activity if it might lead to impressible result, contrary to the Shari'ah maxim "the norm in regards transactions is that of permissibility" which simply means that, any transaction, in principal, is permissible until a contradiction to Shari'ah is proven. This dilemma has given rise to two major directions of thought with regard to an Islamic perspective on receivable securitization; one is originated in Malaysia and the other, generally speaking, representing the rest of the Islamic world.

As a result of these factors, receivable securitization is less developed in Islamic financial markets than in the conventional. In fact, individuals or institutions who seek to comply with Shari'ah rules can find themselves lost in a maze of contradicting views and fatwas (considered opinions of Shari'ah scholars). In response to this reality, this study provides an analytical examination of the status of Shari'ah compliant receivable securitization for the sake of identifying the roots of the gaps and challenges. After all, it is not a study specializing in Shari'ah but an academic and professional tracing, using a simple problem solving technique, of the realistic causes behind challenging receivable securitization under Islamic law. It is a vital step for a clear understanding of the problem toward proposing a rational way forward.

The study addresses these issues in three chapters. Chapter One, An introductory platform, establishes the significance of the research topic, reviews the existing literature and demonstrates the value added by this study. Chapter Two, General Background and key underlying concepts, provides an introduction to the concepts of receivable securitization as well as the Islamic financial system in order to assist the reader in engaging with the ideas presented. Chapter Three, the Islamic regulatory framework for receivable securitization, provides a conceptual introduction to Shari'ah compliant securitization, and examines the roots of causes that behind challenging of the receivables securitization under Islamic law, where Chapter Four, Proposal for a way forward, provides a global proposal for embracing an ethical and disciplined Islamic compliant receivables securitization.

Finally, the Conclusion summarizes the overall inputs and outputs of the study including its question and results.

Chapter One: AN INTRODUCTORY PLATFORM
1 . 1 Why it matters

Globalization is inescapable. The faiths, cultures and nations of the world are being gathered together into a single economy and trade pool. Despite the diversity of identities, economies are compelled to meet around the global table. At the end, the wisest strategy for any ideological group is to find a way to accommodate international developments while remaining true to its principles and convictions.

Islam is the second largest religion of the world, with its followers estimated at 21% of the world's population.[4] Muslim communities in historically non Muslim countries are growing rapidly. For instance, a 2001 census in the UK indicated a population of 1.591 million Muslims[5]. Although the next census will be in 2011, Richard Kerbaji reported that the growth of Muslim population is 10 times faster than that of other communities within the UK.[6]

Independent of radical trends, the significance of Islam as a major world religion and the impact of Muslims as a community within the global context have made Islamic considerations a top priority on political and economic agendas within the international arena. Likewise, the global Muslim community cannot afford to be passive but must rationally and objectively engage with global changes and challenges. In a lecture given in 1993, H.R.H. the Prince of Wales stressed the fact that:

" … The Islamic and Western world can no longer afford to stand apart from a common effort to solve their common problems… We have to share experiences, to explain ourselves to each other".[7]

This is, indeed, the reality of where we find ourselves today. And while interaction between civilizations and national and international factors is unavoidable, fundamental beliefs and inviolable principles will continue to exist which must be understood and respected.

From finance perspective, while exact s are not available, broad agreement does exist that the size of the wealth and assets and the wide range of business networks of Muslims, both in Islamic countries and in the rest of the world, is significant. The demand for financial services which comply with Islamic law can be expected to increase tremendously, particularly following the recent global recession. It is estimated that there will be about 15 - 20 % annual growth in the Islamic financial products, with equity fund assets climbing to US $53 billion by 2010.[8]

It is clear that a direct correlation exists: whenever the demand for banking products increases, banking debts multiply. This heightens credit risk and threatens the availability of capital and liquidity. Basel II, which represents the international consensus on capital standards, embraces securitization as an effective and helpful tool in this regard.[9] However, unless Muslim intellectuals invest considerable energy in developing clear and reliable regulatory frameworks which comply with Islamic law for the newborn concepts including securitization, Islamic banks will continue to experience difficulties in the areas of liquidity and risk management, and will fail to meet the requirements for international convergence.

From another angle, the recent global economic crisis has exposed the fragility of capitalist economics. According to Sam Whimster “[c]apitalism itself is without morality…The finance capitalism of today has some startlingly irrational features and is no longer led by those who possess the requisite moral probity”.[10] As the need for more disciplined and ethical systems becomes increasingly apparent, the potential of Islamic finance as an alternative to conventional finance is gaining attention. As a result, broader awareness is developing in the international community regarding the features of Islamic finance and securitization. Toby Birch comments that the Islamic principles established by a desert-dwelling Bedouin fourteen hundred years ago embody the timeless wisdom which holds the key to the financial crises of today.[11]

The recognition of the advantages of Islamic financial systems on objective and professional terms by non Muslim experts places a serious responsibility on Muslims experts and researchers to address and resolve the internal challenges which currently impede the development of Shari'ah compliant products, including receivable securitization.

1 . 2 Literature review

It could be stated that a wealth of studies on Islamic finance can be found in libraries and on the online resources. In addition, Arabic and English literature typically have many publications on securitization within its conventional sense. However, studies focussing specifically on Shari'ah compliant receivable securitization, and its underlying challenges, are, noticeably few.

The works which have, in fact, played the greatest role in shaping the dominant Islamic view on receivable securitization, are the many working papers that have been submitted at Islamic scholarly forums and conferences, particularly the annual conferences of the International Islamic Fiqh Academy, and the Islamic Fiqh Academy of Muslim World League. For instance, at its 19th conference in April 2009, the International Islamic Fiqh Academy discussed a group of working papers specifically focussing on, or closely related to, receivable securitization. However, by and large, the structures and approach of the papers were virtually identical, which is to be expected as the authors shared the same perspective on the same issue.

In terms of its significance, securitization represents one of the most important innovations in the finance sector. It is, as Leon Kendall puts it, “changing the face of American and world of finance”.[12] This view is shared by many experts in the field, who see securitization as an essential component of the modern financial system. Vinod Kothari makes an identical statement to that of Kendall, and suggests that securitization is more than funding instrument that works beyond financial limitations.[13] This admiration for securitization can be attributed to the advantages which, according to Charles Ston and Anne Zissu, provides in alleviating balance sheet pressure,[14] transferring and fragmentizing credit risk, raising capital and securing liquidity.

The importance of securitization is recognized by Islamic Intellectuals. AbdulBari Musha'al points out that receivable securitization is an important instrument in that it provides lenders rapid turnaround on their capital in order to re-inject it into investment and production operations.[15] Fuad Muhaisen identifies nine advantages provided by securitization, including its role in funding and financing privatization projects.[16] Furthermore, the working papers mentioned above which were submitted at the 19th conference of International Islamic Fiqh Academy demonstrate a common acknowledgment of the importance of receivable securitization in the Islamic world.

Despite the worldwide recognition of the importance of securitization, another side of it could be recognized. Lawis Ranieri describes securitization as an adventure that involves a dark side, observing that it has contributed to destabilizing the thrift system and industry.[17] This represents one factor in the argument that securitization has been a contributing factor in the global credit crash. Thrift and credit are connected while they are also key components in the greater economic system. Securitization arguably promotes excessive credit creation,[18] encourages a culture of consumerism, and has contributed to the global financial crisis. Niall Ferguson argues that the crisis was caused by the rise and fall of "securitized loans".[19] While this assertion deserves consideration, it is possible that it was not securitization but the absence of the ethics that rationalize its use, which was the problem.

Islamic finance principles offer a framework with the capacity to fill this void. In his book ‘Islamic Finance Standards: Solving the Global Financial Crisis', Samir Kantaji provides a practical analysis of the global crisis and suggests that Islamic principles of finance provide the ethical and disciplined environment necessary to prevent such a future financial crash.[20]

While the principles of Islamic finance were established more than fourteen hundred years ago, they do offer, as implied by Hugo Bouleau, solutions to today's banking problems.[21] The question, however, is whether Shari'ah scholars have the flexibility to apply these principles meaningfully to contemporary financial concepts, in general, and to securitization, in particular.

The dominant philosophy of Shari'ah scholars is sadd al-dhara'i (banning any permissible activity if it might lead to an impressible result). This approach has been stressed by the International Islamic Fiqh Academy in its Resolution No. 92 (9/9), issued in April 1995.[22] However, many Islamic intellectuals oppose broadening the application of sadd al-dhara'i. Akhtar Zaiti emphasizes the contrasting Shari'ah maxim, “the norm in regards transactions in that of permissibility”, and the fact that the financial principles, maxims and frameworks provided by the Quran and Sunnah are not detailed because the finance industry and human interests vary over time. She argues that Muslims should be guided by this principle of permissibility as they engage with evolving financial concepts, including securitization, except in cases which present an obvious contradiction with the Quran and Sunna.[23]

Similarly, Fuad Muhaisen argues that Islam clearly identifies which activities are prohibited, leaving room for innovation and development over the course of time, and that this is how contemporary financial concepts should be approached.[24] Regardless of the argument, what is certain is that the convictions of some Shari'ah scholars, coupled with the rapid development of finance and economic concepts and the impossibility of accurately foreseeing all of their potential implications, impede the development of Islamic financial systems.

Studies addressing Shari'ah compliant receivable securitization typically roam around avoidance of Riba (usury) and Gharar (Risk), issues which are subdivided into more focused points such as profit-risk share, tangible asset connection and other underlying sub-issues. However, sale of loan is considered the cornerstone of employing receivable securitization, and is the subject of vigorous debate by Islamic intellectuals.

Sale of loan was a topic of discussion at the 1998 International Islamic Fiqh Academy conference. The conference concluded that the sale of loan to a third party, whether at a current or deferred price, is strictly prohibited in Islam because it leads to Riba (usury).[25] But at its 2006 conference, International Islamic Fiqh Academy demonstrated greater flexibility and determined four permissible models for sale of Loan,[26] A similar resolution was issued by Islamic Fiqh Academy of MWL at its 2002 conference stating that some sale of loan models are prohibited because they lead to riba (usury) or Gharar (risk) of the inability of delivery, accordingly, receivable securitization is prohibited.[27] It should be noticed that loan in Islam could be goods, services, usufructs or receivables (cash flow), but none of the mentioned resolutions accepted the sale or securitization of receivables.

There is no consensus regarding the prohibition of sale of loan. For example, in his book ‘The theory of loan in Islamic fiqh' Ahmed Al-Hajj discusses the different viewpoints supporting and opposing sale of loan and concludes that it is permissible provided that delivery of the sale (repayment of the loan) is not possible[28]. This approach has been embraced by the Malaysian Securities Commission Shariah Advisory Council since 1996 which opened the door wide to receivable securitization in this Islamic country[29], which is, according to Rashid Al-Khan, has been widely criticized by many Middle Eastern scholars.[30] Furthermore, Saiful Rosly and Mahmood Sanusi point out that trading of Islamic bond structured on a sale of loan basis in Malaysia has been found impermissible by the majority of Shari'ah scholars.[31]

Apparently, there is a clear disagreement over the key issues involved in achieving effective Shari'ah compliant receivable securitization. However, this does not mean that Shari'ah compliant receivable securitization cannot be utilized until the dilemma is resolved. Nor does it mean that the current position of Shari'ah scholars is final. The possibility always exists of renegotiating the interfaces that are developed between Shari'ah and developing technical concepts.

The literature already includes a number of publications which discuss the foundational concepts of Islamic finance and attempt to develop an Islamic framework for securitization which brings together Islamic principles and finance innovation. But gaps remain in terms of scope and approaches of studies. To put differently, the existing Islamic literature offers only a superficial and indirect exploration of the reasons for which the permissibility of receivable securitization has been challenged under Islamic law, and handles this discussion within previous immature viewpoints.

1 . 3 Scope and significance of the study

This study provides a panoramic view of the current situation of receivable securitization within the Islamic law. It discusses the dominant Islamic intellectuals' approach that banes it, and tackles the question of what are the realistic reasons of challenging receivables securitization under Islamic law.

In order to add value, this study is a digging deeper into the roots of the argument. Using a simple problem solving techniques, it traces those roots to out what is, precisely, reason behind the resistance of Shari'ah scholar to accepting receivables securitization. Differently, this study openly discusses the issues, and it is completely built of the maxim that in principal, any transaction is permissible until a contradiction to Shari'ah is proven. Furthermore, the study reflects rational viewpoint regarding riba (usury) concept which has been unreasonably exaggerated over the time.

Notwithstanding, this study must not be read as a revolt against any of the Islamic schools of thought or organizations, but an objective attempt to re-pull the attention to realistic causes of prohibition of receivables securitization under Islamic law.

Overall, this study helps to identify areas where religious perspectives and technical practice do not yet interface with regard to receivable securitization, and spells out the reforms needed to the approach of Islamic intellectuals' methodology in terms of Islamic financing in general and securitization in particular.

Chapter Two: General Background and Key Underlying Concepts
2 . 1 Introduction

In order to understand the roots of the challenges of Islamic compliant receivable securitization, this chapter highlights key aspects of securitization as created and developed by the conventional finance industry and, on the other hand, the related key aspects of Shari'ah and Islamic finance.

2 . 2 An introduction to Securitization
2 . 2 . 1 Origin of Securitization

While Vinod Kothari states that securitization has a two hundred year history in Denmark and suggests that therefore Denmark should be considered its birthplace, he admits the fact that securitization as a structured finance instrument was developed in the US.[32] Indeed, credit for the innovation of securitization is due the US government which initiated the first mortgage-backed securitization transaction through the Government National Mortgage Association (GNMA) in 1970.[33]

The introduction of securitization was promoted by a severe shortage of liquidity which caused by a withdrawal of traditional lenders who turned to more profitable investments.[34] However, the perception of securitization as a magic wand that could make fund and liquidity problems disappear, together with a credit crush, dramatically expanded the usage of securitization. In the years since, extensive experience and lessons have been, and are being, learned in tailoring and structuring securitization transactions.

2 . 2 . 2 Concept of Securitization

Little documentation exists regarding the origin of the term ‘securitization'. Lewis Ranieri claimed that this term was not a real word, and it was used for the first time by the Wall street Journal in 1977.[35] As an emerging concept, therefore, securitization does not yet have a universally accepted definition. According to Leon Kendall, securitization is "a process of packaging individual loans and other debt instruments, converting the package into a security or securities, and enhancing their credit status or rating to further their sale to third-party investors".[36] While this definition describes the process of securitization, Peter Jeffrey focuses on the objective of securitization and suggests that in its simplest form it is "a secured borrowing, whereby a company borrows against an asset or group of assets".[37] This is exactly what was concluded by a United Kingdom VAT & Duties Tribunal in Capital One Bank (Europe) Plc v Revenue and Customs [2005] when it stated that securitization is “nothing more than a sophisticated means of borrowing money”.[38]

From a different angle, Vinod Kothary called attention to the philosophy of securitization and pointed out that it is in its widest sense is "every process that converts financial relation into a transaction". However, he defined the term 'asset securitization' as "a device of structured financing in which an entity seeks to pool together its interest in identifiable cash flows over time, transfer the same to investors either with or without the support of further collaterals, and thereby achieve the purpose of financing".[39] Securitization can be also defined as “The transformation of a loan portfolio or other assets such as property into securities that can be sold in the primary market and traded in the secondary market”.[40] Another definition that is ascribed to Ernst and Young states that securitization is:

“Any transaction under which a securitization vehicle directly or indirectly acquires receivables or bears risk associated with commitments taken or activities carried out by third parties and issues in exchange securities whose return is directly linked to the risks borne”.[41]

While clearly many definitions exist for the terms ‘securitization' and ‘asset securitization'[42] which describe them in either the simplest or broadest terms and approach the concept from various perspectives, all concur that securitization is a process of packaging and transforming a specific bulk of assets through a special purpose vehicle(s) into marketable securities for the purpose of liquidity and/or risk management.

A key point to be addressed here is that the term ‘asset securitization' is commonly used to describe the process of securitizing financial claims or receivables, notwithstanding the fact that balance sheets include other types of assets that can be subject to securitization, particularly under Islamic law (i.e. lease structure). In this context, the verb 'securitize', according to the Concise Oxford Dictionary means to "convert an asset, specially a loan, into marketable securities, typically for the purpose of raising cash".[43] This confirms the fact that other assets can be securitized but accounts receivable and loans are the most common type of securitizable assets, perhaps because they constitute the bulk of the assets of financial firms and credit institutions.

2 . 2 . 3 Structure of and Parties to Receivable Securitization

Receivable securitization can be structured on a typical funded, synthetic or collateralized debt obligation (CDO) structure.[44] However, in order to avoid dispersion and complexity; the focus here will be on the typical funded structure.

A typical funded structure of receivables securitization (see 1) basically involves borrowers, an originator, an issuer and investors. These form the backbone of a typical funded securitization structure; nevertheless, a credit enhancer, rating agency and an underwriter/lead manager are also considered key players for the sake of regulatory compliance and in order to introduce an attractive opportunity for the targeted investors.

Borrowers: Given that receivable securitization is a process that deals with loans; borrowers are considered the cornerstone of a securitization transaction. As they are responsible for paying the underlying loans, structuring a receivable securitization must take into account their credit capability. Some regulatory frameworks may require their consent.

Originator: In receivable securitization, lenders or creditors are usually the originators of a securitization transaction. The originator can be a governmental agency or any financial, credit or investment institution such as a commercial bank, investment bank or captive finance company.

The role of the originator does not start only at the point of the agreement with the SPV, but begins earlier,[45] specifically, from the moment that the originator recognizes the need for, or the feasibility of, securitizing a bulk of receivables. The origination process includes many steps involving, but not limited to, planning and structuring the securitization transaction, identifying and segregating the assets, notifying the borrowers, establishing the SPV(s), concluding the consultation and services agreements and handling any mediation activities between the borrowers and the SPV.

Furthermore, the originator might continue to play the role of ‘servicer,' providing, among other services, customer services, payment and collection services as well as default management and collateral liquidation.[46]

An issuer: The key point of the securitization process is the issuance of the securities that resulted from pooling and transforming the assets. This issuance is usually performed by an SPV, which is normally a new and independent entity established for the purpose of taking over the position of the originator as a lender or creditor in the credit relationship. In other words, once a securitization takes place, borrowers no longer have a credit relationship with the originator, but rather with the SPV.

A rating agency: For a successful securitization, a good rating of the credit quality of the transaction should be secured from a very well-established rating agency. Professional rating agencies usually provide a professional evaluation of the type and quality of the underlying assets, including any related risks.[47]

Credit enhancer: Credit enhancement is a very important process for attracting investors to be involved in a securitization transaction. It provides them with a certain level of protection in the event that the originator fails to meet his commitments or the cash flows for the securitized assets are insufficient to cover the projected return of the securities.

Another point, which will be discussed further below, is that credit enhancement can be secured internally through guarantees provided by the originator or on the basis of the quality of the securitized assets. Having noted that, a credit enhancer appears as a party in a securitization structure only if the credit enhancement is provided by a third party enhancer (i.e. by a letter of credit). In such a case, the enhancer must have a high credit rating in order to secure the confidence of the investors.

Underwriter / lead manager: The offering of the issued securities public or to private investors is usually handled by a professional firm, typically, a bank which plays the role of underwriter in the securitization process. The key role of the underwriter is to manage the process of selling the securities to investors in order to achieve the securitization's targets. It should be noted that the trend among financial professionals today is to call this party a ‘lead manager', rather than an ‘underwriter', because the guarantee provided is, in principal, a commitment to make every effort to ensure that the securities are sold. There is, however, no guarantee in terms of the prices and quantity of the securities sold.[48]

Investors: The ultimate objective of the securitization process is to transfer risk to investors and/or to generate liquidity from them. A securitization transaction may target specific kinds of investors through a private placement process or open it to the public. In both cases, the key investors are usually fund managers, pension funds, governmental funds, commercial banks and insurance companies.[49]

2 . 2 . 4 Process of Securitization

It goes without saying that the securitization process involves detailed, complex and overlapping steps. In this paper, however, the focus is on the key steps which have strong significance in terms of the research objectives, namely, the packaging and transferring of the underlying receivables as well as the issuance of securities.

2 . 2 . 4 . 1 Packaging the Underlying Receivables

The most vital step in a securitization transaction is packaging the underlying assets. This begins with identifying the targeted receivables, which may include any assets that generate cash flows over a period of time, such as mortgages, credit cards loans, consumers' loans, corporate loans, auto loans, student loans or equipment and property leases.[50]

Nonetheless, it should be noted that the quality of the underlying receivables is a key factor for a successful transaction. In a securitization transaction, quality is measured on a pool basis rather than on an individual account. This means that in order to have a suitable pool of receivables: (1) the packaged receivables should be able, collectively, to generate a stable amount of cash flows over time, (2) the credit risk of the entire package should be of a reasonable level, (3) there should be sufficient credit support to the entire pool (4) there should be a reasonable level of homogeneity in terms of the underlying loans, (5) there should be balance in terms of diversity, particularly in terms of borrowers and maturity, and (6) there should be no large individual obligators who could disturb the pool.[51]

Furthermore, there are other factors which should be considered for the purpose of packaging a group of receivables, for instance, tax obligations, interest and exchange rates risk and legal and regulatory requirements.[52]

The packaging phase includes and/or overlaps with other managerial, legal and advisory tasks that are required for smooth and professional identification and segregating of the underlying receivables. This includes financial and legal due diligence, mediation, feasibility studies, rating, modelling, structuring and documentation. Having said this, it should be highlighted that the packaging process is, in reality, an exercise on paper.

2 . 2 . 4 . 2 Transferring the Underlying Receivables to the SPV

Once the underlying receivables are identified, the structure is determined and the SPV is established, the originator transfers the engaged receivables to the SPV at a discounted price.

There are essentially three legal approaches to transferring the receivables. One option involves ‘assignment' and ‘novation,' which typically ensures a true sale from the originator to the SPV. Another option involves ‘sub-participation,' which establishes a debtor-creditor relationship between the originator and the SPV.

However, the majority of securitization transactions are structured on a true sale basis.[53] True sale, in securitization deals, is a key and vital issue in order to avoid the unwanted complications of a judicial re-characterization of the entire transaction, particularly in bankruptcy and tax cases.[54] The issue was deliberated in Capital One Bank (Europe) Plc v Revenue and Customs [2005], in which the tribunal concluded that “the assignment of the receivables was an assignment by way of security and not an assignment by way of sale”.[55] This also confirms the significance of the ‘true sale' in receivables transfer for the purpose of achieving a bankruptcy-remote securitization, where the SPV and the transferred receivables are not affected by any claims against the originator.

2 . 2 . 4 . 3 Issuing the Securities

By concluding the transfer process, the SPV becomes the owner of the underlying assets and the possessor of their cash flows. It can then issue financial securities -- usually bonds or notes -- and sells them to investors. The proceeds of the sale typically are used to pay the price of the assets to the originators.

In a conventional securitization, investors are entitled to receive a periodic income, depending on the agreed interest model, and their principals, usually, will be repaid to them by the end of the security term. In other words, the SPV is obligated to repay the principals and pay their interest periodically, which means that the relationship between the SPV and the investors, in principal, is a loan, rather than an investment, relationship.

2 . 2 . 5 Significance of Receivable Securitization

The origins and records of securitization explain that there are several dimensions of the importance of receivable securitization, inter alia: Firstly, it is a tool to raise fund, cash and liquidity. This is achieved by removing illiquid assets (i.e. non-performing loans) from the balance sheet[56] by transferring them to an SPV against cash plus profit which is usually paid by the SPV from selling the issued securities.

Secondly, receivable securitization is an instrument for efficient risk management. Credit, default or counterparty risk, which relates to more than 70% of a bank's balance sheet, is probability of loss due to the debtor's non-payment of a loan, principal or any other kind of credit or investment- related cash flows.[57] Securitization allows banks and other credit institutions to transfer away such risk to an SPV and alleviates their credit risk which poses a threat not only due to the possibility of non-payment but also due to the interest rate fluctuation.[58]

Thirdly, the ability to raise liquidity and manage credit risk through securitization helps significantly in managing capital adequacy, which is one of the essential regulatory requirements for operating a bank or credit institution. This is why securitization recently has been embraced by Basel II as an instrument for maintaining capital adequacy.

Securitization offers various opportunities for periodic income. It also strengthens the financial positions of banks and credit institutions which eventually trickles down to corporate and individual clients in the form of financial facilities. This -- within a proper environment -- offers greater convenience to individuals, enhances business stability and creates employment opportunities.

Amongst other benefits,[59] these key dimensions of receivable securitization validate the significance of this innovated concept and demand recognition of its potential specifically for banking business.

2 . 2 . 6 The dangers of securitization

The past thirty years have shown that while securitization can be extremely useful, there are risks and dangers associated with this tool. In addition to the risks which have already been mentioned which relate to originators, SPVs and investors, securitization is now being blamed for its role in the credit crises of 2007. It seems to Niall Ferguson that securitization is the prime cause of the global financial crises because banks have been given increasing freedom to lend money and then repackage and market their loans.[60] More specifically, Eric Tymoinge points out that securitization causes a decline in the quality of loans and creates new risks by transferring the financial risk, and that ultimately the gambling nature of securitization brings with it serious risks.[61]

Simply, as long as lenders have access to a tool which enables them to repackage and sell loans to third parties in order to transfer their risks and get their deferred money back immediately, they naturally will have no motivation to follow necessary due diligence, including a careful check of the creditworthiness of borrowers.[62] In this context, banks began to offer easy, low-interest loans which gave borrowers access to new lifestyle options. Some began to borrow even on a daily basis and consumed extensive amounts of credit, purchasing even items such as bubble gum and chocolate on their credit cards. This, according to Yuliya Demyanyk and Otto Hemert, has, unsurprisingly, caused a rapid but fragile growth in subprime loans.[63] However, by utilizing the tool of securitization, most of these subprime loans have been dumped back to investors who are principally the borrowers themselves. Yuliya Demyanyk and Otto Hemert pointed out that the quality of loans had declined for six year before the crisis of 2007, and while securitizers were aware of this they were unwilling to reign in their opportunism,[64] instead they were, as commented by Amiyatosh Purnanandam, developing a pattern of risky behaviours[65] in the very sensitive banking industry and financial markets.

This illustrates the gambling nature of securitization. It is, in this sense, a tool for lending money with one hand and taking it back with profit with the other, which, eventually, according to Hugo Bouleau, destroys cash and real wealth.[66]

2 . 3 Islamic Financial System: A Basic Understanding
2 . 3 . 1 Islamic Law: Shari'ah and Fiqh

‘Shari'ah' is an Arabic term which technically refers to the body of divine rules and doctrines of all religions.[67] In common use, however, it refers to Islamic law. Accordingly, Islamic law, Shari'ah and Islamic Shari'ah are synonymous terms for the same concept.

Shari'ah, then, is the set of divine rules, provisions and principles provided in the Quran, as well as in the teachings of the Prophet Mohammad (peace be upon him) --which are called Prophet Sunnah or Sunnah-- to govern the individual and communal lives of Muslims. It is, according to Muhammad Ayub, “a code of law or divine injunctions that regulate the conduct of human beings in their individual and collective life”.[68]

Sayyid Sabiq defines Shari'ah as “the set of rules that emerged from Quran, Sunnah and Islamic scholars' views”.[69] In this context, Ramadhan Al-Sharnabassi provides a clear distinction between Shari'ah and Fiqh, which is a related term. Fiqh, he says, is a branch of Shari'ah and refers to the efforts and approaches of Islamic scholars to understand and explain the Shari'ah rules and principles in terms of the practical aspects only.[70] Accordingly, the Shari'ah principles and rules laid out by the Quran and the Sunnah are fixed and non-negotiable, while Fiqh outcomes are debatable because they are, ultimately, the views of human beings. On this topic, the Oxford Dictionary of Islam states that “Muslims understand Shari'ah to be an unchanging revelation, while fiqh, as a human endeavour, is open to debate, reinterpretation, and change”. [71]

This distinction is very important for understanding and developing Islamic compliance requirements, particularly concerning emerging concepts and issues.

2 . 3 . 2 Objectives and Principles of Shari'ah

The objectives of Shari'ah (or Maqasid Al-Shari'ah) are the significances and wisdoms that God considered in his rules in order to meet the needs of his creatures.[72]

There is always a specific and direct wisdom or reason behind every divine rule. These have been grouped into six main categories: protection of faith (Din), protection of life (Nafs), protection of intelligence (Aql), protection of lineage (Nasl), protection of honour (Ird), and protection of wealth (Mal).

By safeguarding these values, the interests of the individual, family, society and nation will be attained. It is a rule, interest (Maslahah) that acknowledged by Quran and Sunnah should be recognized by scholars when they elaborate Shari'ah principles or in the course of applying them on newborn concepts.

As far as Maslahah (interest) is concerned, within Shari'ah, it refers to gaining a benefit or avoiding harm. Consequently, the key criterion in drafting or applying an Islamic rule is what harmful or positive impacts it can have on individuals or society.

One of the admirable features of Islam is that on the one hand it contains an unchangeable set of foundations, but on the other hand it allows very broad flexibility. This ensures Islam's relevance regardless of period and location, because experts in Islamic law have latitude to interpret divine rules for application to local and contemporary contexts. The logic applied by scholars corresponds to a set of principles, standards and methods that have been developed over time in order to ensure that scholars' decisions are based on objective, rather than subjective, justifications.[73]

2 . 3 . 3 Islamic Economic System

The Islamic economic system is modelled on major ancient rules and instruments which remain relevant today. It is designed to create a disciplined, stable and ethical economic environment, and its rules cannot be separated from other aspect of Shari'ah requirements; and they strongly connect economic activities with godliness and ethics. [74]

Furthermore, the Islamic economic system creates a harmonious balance between the interests of society and individuals.[75] It recognises private ownership and gives the individual full rights to gain money through lawful means. Nevertheless, individuals are obligated, and motivated, to contribute to social cooperation (takaful) and development through duties (i.e. zakat) and charitable activities (i.e. wagf, qardh hassan ‘free interest loans' and sadaqat ‘donations'). This, in addition to the Islamic system of inheritance, promotes a fair distribution of wealth without loading people with high financial obligations. Moreover, the interests of the society take priority in the event of any conflict with individual desires and interests.

Muslims are obligated by Shari'ah to work and produce by any lawful means they choose. However, it is not acceptable to receive investment gain without bearing risk. In addition, the system of ethics provided by Shari'ah requires Muslims to act in good faith and with fairness, causing no harm in the way in which they conduct their activities, deals and transactions and fulfilling their commitments with integrity.[76]

In order to maintain justice, provide equal opportunity to all and to control and discipline humans for actions that may impede justice or opportunity for others, Islam provides restrictions on unjust activities.[77] For instance, usury (riba) and gambling are prohibited in order to prevent the harmful impacts they could have on individuals or society.

2 . 3 . 4 Islamic Financial System

Although the term “Islamic financial system” is relatively new, the Islamic financial system offers banking, capital market, formation capital, financial intermediation and financial risk management.[78] In general, however, the term “Islamic financial system” refers to those financial transactions and activities which are designed to conform to Islamic Shari'ah rules.

Islamic scholars and economists have done extensive work to develop a clear analysis of the Shari'ah standards and requirements for establishing a genuinely Islamic finance industry. While some grey areas do remain in terms of scholars' views on some details, the basic principles of Islamic finance are established and recognized. As an ethical system, key pillars must be considered in Islamic compliant transactions exists to safeguard interrelating private and public interests and needs. See 2.

While each of these pillars plays an important role in the provision of Shari'ah compliant financial services, ultimately the most important issue -- which is frequently overlooked by financial experts and institutions -- is ensuring that the Shari'ah pillars are actually considered in transactions. If an institution succeeds in setting up complicated structures which violate these principles while appearing, supposedly, to follow them to deceive their Shari'ah boards and customers, their “Shari'ah” transactions are not legitimate. Sincere intent is the key element in genuine Shari'ah compliance. It is written in the Sunnah that: “deeds are judged by intentions; and everyone gets only what he intended”.[79] A Fiqh maxim also states that “Consideration in transactions is given to the meanings and intentions not to the words and phrases”.[80]

Consequently, labelling a product as a “Shari'ah compliant” while it in fact is not, does not make it Shari'ah acceptable. It is necessary to distinguish between true Shari'ah and the misapplication of its teachings, not only in the financial industry, but in every area of life.

Chapter Three: The Islamic regulatory framework of receivable securitization:
3 . 1 Introduction

Having provided an overview of receivable securitization and Islamic economic and financial systems, the groundwork is now laid to tackle the obstacles to utilizing receivables securitization in Islamic financial markets.

The positions taken by experts in Shari'ah concerning receivable securitization are somewhat confusing and their reasoning appears shallow and inconsistent. They do, of course, make some valid points, but they clearly fail to tackle the roots of the problems.

This chapter provides an overview of receivables securitization in Islamic finance literature and its legitimacy under Islamic law. The discussion of legitimacy explores the dominant view of receivable securitization and then offers an analysis of how this perspective has developed. Using a problem solving technique, the roots of the challenge will be traced and identified, then discussed critically from different points of views as a basis for offering an impartial and objective standpoint and proposing solutions.

3 . 2 The Concept of Securitization in Islamic Finance Literature

Although it is argued that tawreek and taskeek are different concepts[81], generally speaking, they are --besides tasneed-- the Arabic terms that used as translation of the term ‘securitization'.

As is the case in conventional finance, there is no universally accepted definition for the term ‘securitization' in Islamic finance literature. According to the Islamic Financial Services Board, securitization is a process of issuing sukuk (Islamic bonds) involving origination of assets, transfer of the assets to an SPV and issuing securities to investors[82]. This, by and large, is consistent with the view of the The Accounting and Auditing Organization for Islamic Financial Institutions, which defines securitization as dividing the ownership of real assets (tangible, usufructs or services or a combination of these) into equal value units, and issuing sukuk equal to their value.[83]

In contrast to its use in conventional finance, in Islamic finance the term securitization commonly refers to securitization of tangible assets rather than to securitization of account receivables.

This distinction is affirmed by the The Islamic Financial Services Board in its IFSB-7 standard on the Capital Adequacy Requirements for Sukuk, Securitisations and Real Estate Investment which states, in the context of clarifying the securitization process:

“9. Securitisation in sukuk is broadly referred to as a process of issuing sukuk involving the following steps: origination of assets (in conventional finance, these are normally loans or other receivables, while in Islamic finance they are Shari`ah-compliant assets such as the subject matter of ijarah);…”[84]

Accordingly, it could be suggested that securitization in the broadest Islamic sense refers to any process that transforms Shari'ah acceptable assets into tradable securities. Nevertheless, as far as receivables securitization is concerned, Islamic intellectuals make no distinction from the conventional usage of the term. For instance, Aktar Zaiti suggests that securitization is a process of packaging and rating secured or non-secured assets and then selling them to investors.[85] More comprehensively, Ajeel Al-Nashmi proposes that securitization is packaging homogenous and secured loans into a single credit enhanced loan which is then offered to the public through SPV for the sake of risk and liquidity management.[86]

3 . 3 The Legitimacy of Receivables Securitization in Islamic Law

Despite the fact that receivables securitization is broadly utilized in Malaysia as an Islamic compliant product, there is a common understanding that receivables securitization is impermissible under Shari'ah rules and principles. However, while the permissibility is still limited in the Islamic world, this discussion will be devoted to the dominant view that led to this limitation.

3 . 3 . 1 The Impermissibility of Receivables Securitization

In Resolution No. 178(19/4), the International Islamic Fiqh Academy states that conventional receivables securitization, in which investors earn interest on their principals, is prohibited. The Resolution also states that receivables can be securitized only within a pool of a mixture of receivables and real assets (tangible, usufructs or services), provided that the real assets represent the majority of the pool constituents.[87]

Similarly, the Islamic fiqh Academy of Muslim World league, in its Resolution No. 1 at its 6th conference in 2002, concluded that transforming receivables into tradable securities is impermissible, because it constitutes a sale of loans to thirds parties in a way that includes riba.[88] Furthermore, the Accounting and Auditing Organization for Islamic Financial Institutions in its statement on sukuk in February of 2008, states that:

“Sukuk, to be tradable, must not represent receivables or debts, except in the case of a trading or financial entity selling all its assets, or a portfolio with a standing financial obligation, in which some debts, incidental to physical assets or usufruct, were included unintentionally…”[89]

This is also the approach that confirmed by The Islamic Financial Services Board in its above mentioned standard namely ‘IFSB-7 standards on the Capital Adequacy Requirements for Sukuk, Securitisations and Real Estate Investment'.

While the texts cited reflect the dominant approach in the Islamic world, practice in Malaysia has developed along different lines. The Malaysian Securities Commission Shariah Advisory Council declared that assets securitization, including financial assets, is permissible, using a different interpretation of related Shari'ah principles, as well as financial concepts, to support this position. [90]

This leads to the question why the dominant approach in the Islamic world prohibits receivable securitization. The key justifications given by Islamic intellectuals for prohibiting receivable securitization are that receivable securitization is riba (usury), or leads to riba, as well as the prohibition of selling a loan to a third party because of gharar (risk). Nevertheless, the basis of these justifications is not absolutely clear and appears somewhat unconvincing - at least to those who are not experts in Shari'ah.

For instance, the above mentioned resolution of the Islamic Fiqh Academy of Muslims Wold League, it is stated that the reason for the prohibition of the sale of loan-- which is essential for receivables securitization-- is the inability to deliver the sold loan to the purchaser, therefore, selling the loan at a discounted value to the borrower himself is permissible because the delivery is guaranteed as it is already in hand. At first glance, this reasoning implies that selling the loan to a third party at a discounted value is impermissible because the delivery is not guaranteed, or it is permissible if it is possible to guarantee the delivery of the loan.

However, this logic is not supported by the Shari'ah scholars' argument. The International Islamic Fiqh Academy and the Islamic Fiqh Academy of Muslims Wold League state that receivables cannot be securitized because it would involve the sale of loans to a third party, which is considered riba (usury) as the loan is sold at a discounted value. In addition, the International Islamic Fiqh Academy states that receivables cannot be securitized due to the interest that is paid to the holders of the securities.[91] In light of this, the uncertain grounds on which receivables securitization is prohibited under Islamic law could be questioned.

In defence of this prohibition, it could be pointed out that the Shari'ah scholars' arguments that have been reviewed for the purpose of this study demonstrate that the scholars are, in fact, clear in terms of the logic of their conservative position on receivable securitization. However, there are critical details between their arguments' lines which considered, according to them, essential for implementing the Islamic finance pillars and achieving the Shari'ah objectives.

Those critical details need to be properly traced and understood as they are key to developing appropriate Shari'ah acceptable solutions and to the arguments in favour to receivable securitization. A simple (‘why' and ‘so what') analysis helps in mapping out the logic behind the real concerns of Islamic intellectuals in terms of receivable securitization. It helps, as well, in zooming in the discussion on those real and serious issues rather than diffusing the discussion into a mixture of causes and effects. See 3

3 . 3 . 2 Examining the Identified Roots

Having analysed the roots of prohibition receivables securitization, it could be claimed that, according to the dominant Islamic view, receivable securitization is challenged by three conclusions, namely: (1) that fiat money are subjected to gold and silver Shari'ah rules (2) that the sale of loan falls under gharar (risk) contacts; and (3) that interest on securities is prohibited.

It should be understood that the argument here is built on the assumption that the receivables themselves have resulted from Shari'ah legitimate transactions. In other words, they are not an outcome of interest-based transactions or generated from non Shari'ah compliant products or activities such as trading in alcohols, pork or prostitution.

3 . 3 . 2 . 1 Fiat Money are Subjected to Gold and Silver Shari'ah Rules

In ancient times, transactions were commonly concluded on a barter basis: commodities against commodities. Adam Smith describes the system of commerce in many nations as follows: “They had no coined money, nor any established instrument of commerce of any kind. Their commerce was carried on by barter.” He also points out that “In ancient times almost all rents were paid in kind; in a certain quantity of corn, cattle, poultry, etc…”.[92] This indicates that even in deferred transactions the debtor was obliged to return a commodity simply because there was neither coined money nor banknotes.

As time passed, gold and silver became the primary commodity money and later fiat money were developed as a medium of exchange, a store of value and a unit of account.[93] They also function as a standard of deferred payment or as a general medium of payment.[94] Consequently, today's transactions suggest that receivables are, in principal, fiat money as they are the standards of deferred payment, and this is what is usually understood from contracts and transactions' documents.

Naturally, as a contemporary instrument, the nature of fiat money has created a real confusion regarding the nature of deferred payments. As will be discussed later, it could be stated that the dominant view in Islamic literature is that deferred payments are fiat money, and fiat money is subject to Shari'ah rules that apply to gold and silver, which restricts receivables securitization.

In Islam, gold cannot be exchanged for deferred gold or silver, nor can silver be exchanged for deferred silver or gold regardless of the value of either, otherwise it is considered ‘riba al-nisa' (usury of deferred exchange). On the other hand, lending immediate commodity against more deferred commodity is prohibited and otherwise it is concluded as riba al-nasi'ah (usury of loan).[95]

Having noted that, it should be highlighted that the International Islamic Fiqh Academy[96] and Islamic Fiqh Academy of MWL[97] stated that gold and silver originally constituted the money (in its medium of exchange sense) due to their inherent and natural value; however, because fiat money has replaced gold and silver and become commonly accepted as the standard of value and medium of exchange, fiat money must be subjected to the same Shari'ah rules that apply to gold and silver, particularly in terms of riba (usury) and zakat (tax). Accordingly, no currency may be sold by any deferred like or unlike currency or any kind of money including gold and silver.

This could be used as the basis for prohibiting receivables securitization. Wahbah Al-zuhaily argues that receivables securitization is prohibited as it includes sale of loan, and even the school of thought which allows sale of loan prohibits it if the loan is merely gold and silver; therefore, receivables securitization falls under the sale of money by money.[98]

To put it more simply, in receivables securitization, the originator transfers a pool of debts to the SPV at a discounted value, and seeing that fiat money is used as a medium for deferred payments, it could be argued that SPV, in reality, purchases more deferred fiat money (equal to gold and silver) from the originator for less immediate fiat money (equal to gold and silver), which results in both type of riba (usury) which have been mentioned. See 4

Using the same assumption, it could also be argued that this is true in trading the issued securities because the security holder sells deferred more fiat money for immediate less fiat money.

Although the above mentioned view represents the dominant approach in Islamic literature, it could be definitely stated that it does not represent a consensus among Islamic intellectuals on this matter. There is disagreement concerning, on the one hand, the operative or effective criterion of prohibition of riba (usur) in gold and silver and, on the other hand, the nature of fiat money itself.

Illah (The objective criterion of a Shari'ah rule) is an important aspect of Fiqh that helps in categorizing a new case or concept (not addressed by Quran and Sunnah) under a rule of an addressed case or concept based on the objective criterion of the existed ruling, and this is called qiyas (analogy).

As has been mentioned, the dominant contemporary view is that the criterion of the strict restrictions on trading in gold and silver is their common use as measure of value and medium of exchange, which in Islamic literature is called mutlaq al-thamaniyyah. However, this is not, in fact, the view of key Islamic schools of thought (Hanbali, Maliki, Shafi'i, and Hanafi) and many Islamic intellectuals.

Abdullah Al-Minee' mentions that Hanbali is of the view that the illah (criterion) of the riba (usury) that apply to of gold and silver is that they are exchanged by their weight which means any things that exchanged by its weight (i.e. copper) can be subjected to gold and silver rules. On other hand, Maliki and Shafi'i are of the view that the illah (criterion) is that the inherent value of the gold and silver, and accordingly nothing else can be subjected to their rules unless on an inherent value criterion. A third group of scholars concluded that the illah (criterion) is the usage of gold and silver as a medium of exchange.[99] In the same context, Muhammad Haneef and Emad Barakat argue that: “The ‘illah of riba in money is due to its function as a measure of value and medium of exchange (thamaniyyah), although the Hanafi …scholars see the ‘illah to be the weight (wazn) of gold and silver”.[100] Therefore, any medium of exchange should be subjected to the same rules of gold and silver.

Ahmed Hasan agrees that Shafi'i and Maliki and part of the Hanbali school are of the view the illah (criterion) is the inherent value of gold and silver and their role as basis of every value, while Hanafi and the majority of Hanbali are of the view that it is the weight of gold and silver. However, he strongly objects to the statement that a group of scholars reported that the illah (criterion) is the usage of gold and silver as a measure of value and as a medium of exchange. After a detailed review of the schools and scholars' argument, Ahmed Hasan concludes that the appropriate view is that the illah (criterion) of the riba in gold and silver is their inherent value, not anything else.[101] Similarly, Mohammad Al-Ashqar, after a critical analysis of the various points of view, concludes that a statement that attaches fiat money to the gold and silver riba (usury) rules is invalid and the adherence to this statement is meaningless.[102]

Having noted that, apparently, it could be argued that there is no scholarly support to criterion of the usage as gold and silver as medium of exchange. What is more, fiat money does not contain inherent value or valuable weight, and from this point of view they should not be subjected to the gold and silver rules in terms of riba (usury). This view is not exceptional in Islamic literature; many scholars have arrived at this conclusion. Mohammad Jabr states that the rules regarding gold and silver apply to gold and silver only and to nothing else whatsoever.[103] In addition, as a solution to the problems of the changeable value of the fiat money and inflation, Mohammad Shbair suggests abandoning the fiat money as a medium of deferred exchange and reinstating gold for this function.[104]

Obviously, it could be asserted that fiat money can in no way take the place of gold and silver, particularly for deferred payments, as they do not have inherent value and do not share the illah (criterion) of the gold and silver riba ruling. Furthermore, subjecting fiat money to the rules that govern gold and silver results in injustice and unfairness, particularly in cases of value changes or inflation due to their instability compared to the value of gold and silver. If this is true, what then is the nature of fiat money, and therefore what is the nature of receivables?

Islamic literature is rich in studies and researches that discuss the nature of fiat money from an Islamic Shari'ah perspective.[105] Based on them, it is argued that fiat money can be characterized as debt notes, commodity, new form of the fulus (old money made from cheap metal such as copper), representative of the gold and silver money, and finally, an independent new kind of money replaced the gold and silver.[106]

Each of these applications entails its own Shari'ah implications and rulings and has been deliberated by intellectuals and researchers. To avoid repetition, however, the focus here will remain on the commodity-based approach.

It has already been demonstrated that fiat money cannot be equated with gold and silver because it lacks an inherent and relatively stable value. Consequently, the nature of the fiat money should be understood within its economic sense, in order to conclude what Shari'ah rules are applicable to it.

Many contemporary Islamic intellectuals argue that fiat money is a true commodity (urudh); should be treated as any other good and not subjected to the gold and silver rules.[107] Fiat money, therefore, can be sold and traded regardless of exchange restrictions.

This view is based on the physical nature of coins and banknotes and their purchasing power, which make them desirable and acceptable in contracts and transactions. However, opponents of this view argue that fiat money are made to be used as a medium of exchange and not to be traded as commodities, which absolutely omits the primary functions of the fiat money, besides they are usually made from cheap material which means that the banknotes and coins themselves cannot be a subject matter of a contract, but rather their purchasing power.[108]

This rejection of fiat money as a commodity can be refuted with many facts. Firstly, barter is the original form of commerce and is therefore considered the original method of exchange; the development of new media of exchange does not negate the fact that people still exchange commodities through acceptable media. Ludwig Mises states that “Credit transactions are in fact nothing but the exchange of present goods against future goods”.[109] The use of fiat money can, therefore, be considered an advanced method of barter.

Secondly, the appreciation of fiat money as commodities does not omit their function as media of change. History shows us that gold, silver, copper and other materials have been used as media of exchange or as standard of value while they were appreciated as commodities.Even cattle had been used for such function in the Homeric society, but they are still used as commodity till today.[110] There is no conflict between these two features. Thirdly, there is not any medium of exchange that has been naturally and strictly created for this function; even gold and silver, arguably, began to be used for coins in 600 BC,[111] but they had been used as a commodity for thousands of years. Therefore, the functions of money are secondary additions to a commodity but not primary.

Fourthly, civilization, knowledge and advanced scientific, professional and technological intelligence introduce innovative concepts that needed to be understood and accepted within their nature. In this regard, it could be stated that ‘virtual sites' and ‘legal entities' are key innovative concepts that facilitate the life, trading and communication of individuals and nations. Undoubtedly, Shari'ah is able to accommodate the emergence of new concepts such as these, and has already done so. For instance, Shari'ah scholars have accepted the concept of ‘legal entity' (i.e. a company); whereby this entity, can own, trade, enter into contracts, litigate and be liable, as well as it can also be sold to a third party. Although it is not a natural person, its independent personality is perfectly recognised and acknowledge albeit it is constituted from a combination of components, mainly people, assets, contracts and official registrations. It could not be claimed that a company, as a package, cannot be a valid party to or a subject matter of a contract merely because its official registration exists on paper, a material of little value.

Moreover, the commodity nature and the value of virtual sites are not denied, and Shari'ah, in principal, does not prohibit selling them. Hence, it could be reasonable to claim that internet websites such as Google and Amazon, which are worth a lot they are merely virtual products; the homepage of such websites would be worth nothing on their own, without the skilled teams, databases and solutions which stand behind them. In other words, an internet website is a virtual commodity but is, as a package, a valid subject for a sale agreement.

Analogically, fiat is a newborn instrument, and should be appropriately classified within the economic system according to its real nature and function. This is to say, that fiat money is constituted from physical material (paper or metal), asset support and legal orders. These ingredients should be treated all together as a package, and eventually, this package can be input or output of the economy, as well as can be a subject matter of a contract or transaction.

More specifically, economic system focuses on the production, distribution, and consumption of goods and services.[112] While fiat money, definitely is not a ‘service' which is defined as “Any activity or benefit that one party can offer to another that is intangible and does not result in the transfer of ownership of any physical object”,[113] then, fiat money falls under goods or commodities.

In view of that, and since that fiat money is not the physical papers or coins themselves but the full package that above explained, a theory could be constructed, according to which money fiat money is considered a ‘legal commodity'(sil'ah i'etibariyyah). Accordingly, fiat money should be subjected to the Shari'ah rules that apply to commodity but not the gold and silver.

This leads to highlight that, it is argued that commoditization of fiat money destroys people wealth and deactivates a number of Shari'ah rules, such as zakat (tax) and of riba (usury).[114] While this is an exaggeration, it could be refuted by the fact that fiat cannot be equated with gold and silver, particularly in credit transactions and deferred payments due to their unstable value and inflation, which leads to serious problems and ultimately results in an unfair deal for one party or another. Accordingly, people's wealth is better protected by realistic approaches and economics that admit the invalidity of fiat money as a standard of deferred payments.

As far as deactivating Shari'ah rules is concerned, it could be pointed out that Shari'ah exist not to protect rules, but to secure the interests of those created by God on the grounds of divine and objective guidelines. Shari'ah rules of transactions can be customized to meet the changing needs of people, provided this flexibility is exercised according to Shari'ah maqasid (objective) and principles. Having admitted that, the rules that are currently applied to fiat money are imposed by Islamic scholars and organizations based on human views and deductions; they are not explicitly addressed in the Quran or Sunnah due to the fact that they came into existence later. For this reason, choosing to follow rules that have been developed through a misinterpretation of the Quran and Sunnah is unjustifiable as long as a coherent reasoning exists. To put it more concisely, a Shari'ah maxim states that “ruling on an issue is an outcome of its understanding”: rules must be derived from understanding and not vice versa; we should not make rules and then adapt our understanding to fit them.

On the other hand, commoditization of fiat money does not have an effect on riba al-nasi'ah (usury of deferred exchange) since there is no difference between commodities, gold and silver in this regard. It also does not affect zakat (tax) rules, since commodities are not excluded from the zakat system.

Obviously, it could be asserted that fiat monies are ‘legal commodities' that represent a sophisticated method of barter and, secondarily, are used as a medium of exchange or payment due to their portability, reliability and common acceptance, exactly as websites today can be considered commodities while the internet had been developed to be used as a medium of communication.

After all, the argument regarding characterizing fiat money could be relatively complicated and perhaps require broader discussion than the scope of this study allows. However, as far as relievable securitization is concerned, it could be argued that, based on the ‘legal commodity' theory which is, most probably, an added value of this study, receivables should not be treated according to the gold and silver Shari'ah rules, but according to the commodities principles and should be categorized as real assets for the purpose of the Islamic financial system.

This conclusion is embraced by Malaysian scholars. However, their reasoning is based on their interpretation of the concept of mal (wealth). The Malaysian Securities Commission Shariah Advisory Council states that: “Mal refers to something that has value and can be gainfully used according to the Shariah… Cash flow is also included in the category of mal if its origin is halal (lawful) according to the Shariah. This is because, cash flow is considered a dayn (debt) and according to Islamic Jurisprudence, a debt with no ambiguity is haq maliy which is included in mal..”.[115] This realistic approach taken by Malaysian scholars has given Malaysia a central place in the Islamic financial markets.[116]

3 . 3 . 2 . 2 Sale of Receivables Falls under Gharar (Risk) Transactions

The Islamic financial system imposes ethical rules to protect individual and collective wealth. One of these rules is the prohibition of gharar deals.

Gharar literally means risk,[117] but the term ‘gharar contact' is used to refer to any deal that involves irrational or unreasonable risk. Al-Siddiq Al-Dharir specified fifteen types of considered risk in Shari'ah which include uncertainty in the kind, type, quantity or description of the subject matter of the contact, or its deferred maturity or term. It also includes the inability to deliver.[118]

One of the issues that usually arises in discussions on Shari'ah compliant receivables securitization is the inability to deliver the transferred or sold loans because they are in the hands of third parties (the borrowers), and the seller cannot guarantee their delivery (repayment) as the borrower may refuse or fail to comply. For this reason, it is argued that receivables securitization represents a gharar (risk) transaction.

AbdulBari Mush'al, argues that the permissibility of receivables securitization is questionable under Shari'ah as it leads to riba (usury) and carries the risk of inability to deliver.[119] Furthermore, Aktar Zaiti points out that the Malaysian Securities Commission Shari'ah Advisory Council has concluded that the disagreement between scholars on the sale of loans is mainly related to gharar (risk) of inability to deliver.[120]

Accordingly, it can be said that the issue of gharar (risk) is a key consideration with regard to receivable securitization as it is cannot be utilized without resolving the legitimacy of the sale of loan. However, while this issue has been explored in other studies, the focus here is on conclusions.

Ahmed Al-Hajj states that having reviewed the various perspectives what comes to light is that the argument centers on gharar (risk) in terms of the inability to deliver; therefore, transferring a loan to a third party is permissible, provided that the ability to deliver is guaranteed.[121] In the same vein, Nazih Hammad states that the conclusion of reviewing the arguments of the Islamic schools of thought is that the sale of the commodity loan is permissible as long as the gharar (risk) of the inability to deliver and riba are overcome.[122] In the same context, Ali Al-gharhadaghi confirms that according to some of the Sharia'h scholars it is permissible to sell the loan once the gharar (risk) of the inability to deliver is resolved[123]. In contrast, Al-Siddiq Al-dharir, as reported by Sami Humoud, concludes that sale of loan is absolutely permissible apart from riba (usury), and the claim of gharar (risk) due to inability to deliver is not valid provided that the loan is acknowledged by the borrower.[124]

From this perspective, it could be suggested that receivables can be securitized under Shari'ah rules provided that they were ethically, professionally and reasonably originated and rated. This is to say, seeing that receivables securitization ultimately involves transferring loans that are originated and packaged by an originator and evaluated by a rating agency; these two parties should carry the burden of the responsibility for protecting the transaction from gharar (risk). Therefore, Shari'ah obligates originators and rating agencies to perform their duties on utmost good faith as they are responsible for offering, gharar (risk)-free securities to the investors. Otherwise investors' contracts can be avoided on the basis of gharar (risk) and perhaps they will be entitled for compensation.

On the other hand, it could be emphasised that official bodies should play a key role in managing the risks of securitization by adopting clear and effective regulatory, supervisory and judicial frameworks as well as monitoring and accountability systems. Akhtar Zaiti reports that in Malaysia the sentiment is that issues of gharar (risk) can be resolved by means of governmental regulations and official monitoring agencies.[125]

Ultimately, it can be said that gharar in terms of inability to deliver does not constitute a significant obstacle to the use of receivable securitization in an Islamic financial system. The Islamic Financial Services Board, the International Islamic Fiqh Academy, the Islamic Fiqh Academy of MWL and The Accounting and Auditing Organization for Islamic Financial Institutions have accepted the sale and securitization of commodity loans, as well as the securitization of mixed commodity-receivables pools. However, it still important to emphasize that the atmosphere and manner in which securitization is utilized should be ethical, well-governed and supervised in order to avoid any form of gharar (risk) and to ensure compliance with other Shari'ah pillars.

In this regards, it should be mentioned that the Islamic Financial Services Board plays an effective role in terms of enhancing its ethics, professionalism and quality on the basis of Shari'ah principles through standardization the Islamic financial industry, For instance, it has recently published the IFSB-10 on ‘Guiding Principles on Conduct of Business for Institutions Offering Islamic Financial Services' which stresses seven principles, among which are “truthfulness, honesty and fairness and “due care and diligence”. In addition, it has published the IFSB-5 on ‘Guidance on Key Elements in the Supervisory Review Process of Institutions offering Islamic Financial Services', which provides comprehensive guidelines for supervisory authorities which entail measures and requirements for effective supervision including regulatory, judiciary and risk management frameworks.

Although the Islamic Financial Services Board deals with the entire Islamic financial industry, its standards help in developing an ethical, professional and disciplined environment for utilizing gharar-free receivables securitization. In this context, gharar-free, however, does not necessarily mean a full guarantee of repayment by borrowers, but following reasonable measures and due care that limit the risk.

3 . 3 . 2 . 3 Interest on Security Is Prohibited

The third issue in Shari'ah compliant receivable securitization is the interest that is usually paid by the issuer (the SPV). The point here is that the holders of securities receive an excess on their principles guaranteed by the issuer regardless of profit or loss.

In conventional securitization, the relation between the SPV and the investor is a lender-borrower relationship. Therefore, what investors get on their principals is consider riba (usury) under Shari'ah rules. Lending in Islam must be free of interest; the needs of the poor should not be exploited by greedy riba (usury) takers. Besides, social cooperation and interdependence is one of the greatest Islamic pillars.

Beyond this, the dangers which riba (usury) poses to economies and societies have been recognized for thousands of years; Aristotle, in his book The Politics (350 BC), states that:

“the most hated sort [of wealth], and with the greatest reason, is usury, which makes gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, and not to increase at interest . . . Of all modes of getting wealth, this is the most unnatural".[126]

This illustrates the fact the prohibition of riba (usury) is not unique to Islam but is part of a broader understanding of the just framework that is necessary in order to balance and sustain the welfare, wealth and life of individuals and societies.

Having noted that, it should be stated that the golden Islamic principle in commerce and investment is ‘profit-loss sharing'. As the Prophet Mohammad (peace be upon him) said, “Al-ghurm bil ghunm” which simply means, who takes profit should pay in case of loss. Accordingly, it is not permissible for the SPV to guarantee pre-agreed excess on investors' principals. For that reason, in Resolution No. 178 (19/4) the International Islamic Fiqh Academy emphasizes the rule that the issuer shall not undertake to lend or donate any amount to compensate the interest in event of loss, as well as the rule that an investor shall bear the risk of his/her investments without any guarantee or compensation from the issuer except in the event of neglect or infringement.[127]

Alternatively, securitizers may apply any of the Islamic finance models that are developed on a ‘profit-loss sharing' basis. The Standards No. 17 of the Accounting and Auditing Organization for Islamic Financial Institutions lists fourteen types of profit-loss sharing structures.[128] Some of them (i.e musharakah, mudharaba and murabaha) can be helpful in structuring interest-free receivables securitization.

Chapter Four: Proposal for the Way Forward

Receivables securitization is a novel concept with the potential for being a double-edged sword; this, quite simply, the reason behind the resistance and concerns expressed by Shari'ah scholars. In other words, based on the analysis presented in this study, it could also be claimed that the way of how the shari'ah rules are applied by Islamic intellectuals -for instance the fiat money issue -- establishes real challenges to an effective employment of receivables securitization. However, this does not negate the fact that receivables securitization must be employed on an ethical, gharar-free and riba-free basis.

This chapter outlines the key points necessary to better harmonize the modern financial industry in general, and receivables securitization in particular, with the principles of Islamic Shari'ah.

4 . 1 The Perspective of Islamic Academics (Not sure if this title reflects the content)

Islam represents a comprehensive method of life, highly ethical yet incredibly simple. It should be acknowledged, therefore, that most of the challenges which relate to Islam today are the result of misapplication of its rules based on misunderstandings or predetermined thinking.

The Prophet Mohammad (peace be upon him), said that every hundred years God employs who brings contemporary interpretations to the teachings of Islam. This indicates that while principles laid out in the Quran and Sunnah are fixed, the application of these principles to daily life needs to be reconsidered at least every two generations due to the changeability of needs, tools and understandings.

Accordingly, new concepts should be approached with a free and open mind, particularly in light of the Shari'ah maxim which states that “the norm in regards transactions is that of permissibility". This implies the norm that whenever a new concept emerges, it should be accepted and utilized until and unless it is demonstrated that it explicitly contradicts a Shari'ah principle.

Notwithstanding, Shari'ah scholars, conversely, ban new concepts until they make sure that it is permissible on the grounds of sadd al-dhara'i (blocking every means might lead to a prohibited). Furthermore, qiyas (analogy) is considered a relatively objective tool for applying Shari'ah rules to new issues that have not been explicitly addressed in the Quran or Sunnah. Shari'ah scholars, however, frequently omit qiyas if it does not serve in apply a specific rule, and turn to use istihsan (preference) instead, which, generally, means the application of what is better for people and society. This approach moves the application from objective to subjective bases.

Another point to be addressed is that Shari'ah scholars have created from riba (usury) a ghost that threatens every transaction, and, therefore, have blocked and prohibited many deals and concepts on the grounds that they are riba lead to riba or involve suspicion of riba. This is certainly not the proper approach to arriving at a Shari'ah ruling. The Prophet Mohammad (peace be upon him), instructed Muslims to facilitate and not to complicate and abstract. In this sense, blocking every means because of riba complicates people's and nations' lives indeed and violates divine Islamic teachings.

Having noted that, it could be called to open minds, fearless and objective steps by Shari'ah scholars and Islamic intellectuals toward better understanding of the nature of fiat money and then apply the appropriate rules on it. Opening the door for discussing this critical issue on economic and objective bases will lead to reasonable results. As has been explained, it could be emphasized that categorizing fiat money under gold and silver rules despite the admitted unlikeness in nature and illah (criterion) is not appropriate, while the theory of ‘legal commodity' is clearly rational and objective. Islamic intellectuals should, therefore, seriously consider adopting this approach in order to remove critical obstacles to the development of Islamic finance, including receivable securitization.

4 . 2 Ethical, Regulatory and Supervisory Enhancement

Concern regarding inability to deliver is a focus of Shari'ah intellectuals, but this does not mean that it is the only issue that falls under gharar and the broader umbrella of ethics and fairness. However ethics deal primarily with personal believes and this is why Islam is faith based system; without believes it might be a challenge to apply ethics.

It could be argued that a lack of ethics creates an environment where receivable securitization can become dangerous, but this should lead to better regulatory and supervisory oversight to enforce the rules of ethics. To put it more simply, ethics are generated from beliefs, but in the absence of belief they could be enforced by rules.

Accordingly, in order to guard against the dangers of receivables securitization, a professional and unbiased critical assessment of its thirty year history could be made to identify its risk factors and causes. Such an assessment should be conducted on macro and microeconomic levels including social implications. Furthermore, this could be taken on by an international organization or official national authority with the mandate to translate the results into rules and policies to be enforced by effective tools and oversight.

On the operations level, emphasis could be put on the ethical professionalism of the originators and rating agencies. Supervisory authorities could set rules to ensure the quality and the fairness of the securitization opportunities that are offered by the originators and the rating agency. These rules should address the following issues:

1. The duty of the originator to perform reasonable due diligence and apply the “know your client” standards and rules.

2. A receivable to be securitized should be supported by any other fixed asset or reliable pledge, along with a reasonable record and history of the client's repayments at least two years before securitizing a receivable.

3. Restriction or prohibition of subprime loans.

4. Setting rigid rules for the rating business and the responsibility and accountability of the rating agency, including with regard to securities' holders' claims against it.

Finally, with regards to securities trading, it could be called for extensive and effective supervisory and regulatory frameworks that enhance the stock markets discipline and control the gambling in securities trading, and all kind of conflict of interests particularly on stock market management level.

4 . 3 Actuality of Deals

While actuality of intentions and activities is considered part of faith and ethics, it could be emphasized that actuality of underlying deals is very important for utilizing Shari'ah compliant receivables securitization. As mentioned above, Islamic rules are designed to protect individual and collective wealth. Therefore, structuring of receivable securitization should be built on real and actual deals. For instance, if the transaction involves sale, rent or any other legal action or deal such as operation, maintenance or services contract, these deals should be merely fake and paper work, but actually exist and give rise to all relevant legal implications.

The issue in Islamic finance, as a divine and faith-based system, is to satisfy ourselves that the transaction entails sincere compliance with Shari'ah and is not only a piece of clever documentation aimed to turn around principles and rules or to satisfy Shari'ah boards, scholars or customers.

Once again, while this is ultimately a matter of personal integrity, compliance could be practically imposed by regulatory and supervisory tools. For example, the Shari'ah boards could be evaluated and restructured in order to guarantee the actuality of the receivable securitization transactions. To this end, the suggestions are made:

1. Shari'ah board members should be appointed in coordination with the supervisory authority, not only that but, the authority shall assign a number of them on its own decision.

2. A Shari'ah board shall conduct a detailed Shari'ah compliance assessment for a receivable securitization proposal, using objective tools including assessment criteria checklists. A brief (usually half page) document from the Shari'ah board giving its blessing for the decision should not be accepted by the authority for the purpose of licensing and registration of the securitization and listing its securities.

3. The Shari'ah board should continue to play a role even after assessing and approving the Shari'ah compliance of the transaction in order to ensure that all the underlying deals are real and have been existed according to the Shari'ah compliant proposal.

Chapter Five: Conclusion

Receivable securitization has been used extensively since the 1970s. Over the years, it became increasingly popular for the benefits it offered until the credit crash of 2007, when fingers were pointed at securitization as the culprit. While its darker side has now been recognised, securitization is, ultimately, just a tool in the hands of those who choose to use it responsibly or irresponsibly. Its dangers could have been controlled if it had been used on a win-win basis. Regrettably, however, it was used instead to facilitate the greed of unethical money makers.

Recently, and particularly post the crisis, Islamic finance is receiving attention as an ethics-based system that fills the gaps existing in capitalism. In addition, the forces of globalization are requiring interactions across broad distances and Muslims are being called upon to play their role effectively.

In an effort to make a contribution to this process, this study focuses on receivable securitization under Islamic law. More specifically, its aim is to offer a better understanding of the real causes of the underdevelopment of receivable securitization in the broader Islamic world while is used successfully in Malaysia.

The existing Islamic literature offers only a superficial and indirect exploration of the reasons for which the permissibility of receivable securitization has been challenged under Islamic law, and handles this discussion from the perspective that the outcome is a foregone conclusion. However, this study takes an open approach to digging deeper into the roots of the arguments against receivable securitization in order to identify the real and direct issues driving these arguments. It tackles three conclusions that are made against receivable securitization under Islamic law, namely: (1) that fiat monies are subject to the Shari'ah rules which apply to gold and silver, (2) that the sale of receivables falls under gharar (risk) contacts, and (3) that Interest on securities is prohibited.

Upon careful examination of these issues, it becomes apparent that the issue of fiat money being subject to the Shari'ah rules on gold and silver is the true basis of the resistance of Shari'ah scholars to embracing receivables securitization, particularly because of the implication of riba (usury). Shari'ah scholars believe that receivables securitization clearly involves riba because it involves the exchange of fiat money in ways that are prohibited according to the Shari'ah rues for gold and silver.

This study concludes that the argument that fiat money should fall under the same Islamic rules as gold and silver is weak and hypothesizes that the history and the nature of fiat money suggest that it is merely a ‘legal commodity' and should not be subjected to the gold and silver rules but rather to the commodities rules, which eliminates the key reason for prohibiting receivables securitization.

The study argues that once the problem concerning fiat money is resolved, the issues of gharar (risk) and interest on securities can be easily managed under Islamic law. Respected Islamic organizations such as the Islamic Financial Services Board, the International Islamic Fiqh Academy, Islamic Fiqh Academy of MWL and The Accounting and Auditing Organization for Islamic Financial Institutions have dealt with the gharar (risk) issue and legitimized the securitization of commodity loans. In addition, if effective regulatory and supervisory frameworks are in place gharar (risk) can be more easily overcome. On the other hand, the issue of interest on securities can easily be avoided by utilizing the interest-free models that have been developed by Islamic finance experts.

From a different angle, the study reveals that the challenges of Islamic finance in general, and receivables securitization in particular, result from the dominant way of thinking among Islamic intellectuals. Therefore, the study calls for a reform of the current methodology used to apply Shari'ah rules to contemporary situations. To put it more simply, according to the maxims of Shari'ah, an emerging concept should be accepted with an open mind until and unless it is explicitly proven that it contradicts the principles of Shari'ah . Furthermore, it is unacceptable to establish rules and then use the rules to shape the understanding of the issue. The correct approach requires a clear understanding of the nature and implications of an issue before Shari'ah rules can be applied. On the other hand, the study recommends that the fear of riba (usury) should not be allowed to get out of hand and that rules concerning riba should be applied only where appropriate. This is also true concerning the sadd al-dhara'i (blocking every means that lead to a prohibition).

Finally, the study recommends enhancing ethics-based receivable securitization transactions through effective regulatory, judicial and supervisory frameworks that are built on a careful review of the history of receivables securitization over the past thirty years.

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[48] Andrew Davidson, Anthony Sanders, Lan-ling Wolff and Anne Ching, Securitization: Structuring and Investment Analysis, (John Wiley & Sons Inc. New Jersey 2003) 523

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[53] Peter Jeffrey (ed), A Practitioner's Guide to Securitization ( City & Financial Publishing Surrey, UK 2006) 42

[54] Vinod Kothari, Securitization: The Financial Instrument of the Future, ( John Wiley & Sons (Asia) Pte Ltd Singapore 2006) 578

[55] Capital One Bank (Europe) Plc v Revenue and Customs [2005] UKVAT V19238, Para. 114.

[56] Peter Jeffrey (ed), A Practitioner's Guide to Securitization ( City & Financial Publishing, Surrey, UK 2006) 16

[57] Hennie V. Greuning and Zamir Iqbal, Risk Analysis for Islamic Banks, ( The International Bank for Reconstruction and Development / The World Bank, Washington 2008) 120

[58] Peter Jeffrey (ed), A Practitioner's Guide to Securitization ( City & Financial Publishing, Surrey, UK 2006) 16

[59] For more information, see: Peter Jeffrey (ed), A Practitioner's Guide to Securitization ( City & Financial Publishing, Surrey 2006) 9

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[81] See: Ajeel J. Al-Nashmi, ‘Al-Tawreeq and Al-Taskeek and their Applications', (A working Paper), the 19th Conference of the International Islamic Fiqh Academy, ( 2009).

[82] The Islamic Financial Services Board (IFSB), ' IFSB-7 Capital Adequacy Requirements for Sukuk, Securitization and Real Estate Investment' [Supplementary Standard, Jan 2009]. Para. 9

[83] The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), [ Shari'a Standards 17 ' 2003]. Appendix C.

[84] The Islamic Financial Services Board (IFSB) , ' Capital Adequacy Requirements for Sukuk, Securitisation and Real Estate Investment (Supplementary Standard)' Jan 2009]. Para. 9

[85] Akhtar A. Zaiti, ‘Islamic Sukuk (Al-Tawreeq) and their Contemporary Practices and Trading', (A working paper), the 19th Conference of the International Islamic Fiqh Academy, ( 2009).

[86] Ajeel J. Al-Nashmi, Al-Tawreeq and Al-Taskeek and their Applications, (A working paper), the 19th Conference of the International Islamic Fiqh Academy, ( 2009).

[87] International Islamic Fiqh Academy, ' Islamic Sukuk (Al-Tawreeq)' [Resolution. No. 178(19/4), 2009].

[88] The Islamic Fiqh Academy of MWL, ' Bay ul-dain (Sale of Laon)' [1st Resolution. of the 16th Conference, 2002].

[89] The Accounting and Auditing Organization for Islamic Financial Institutions Statement on Sukuk [Feb 2008] <http://www.aaoifi.com> Accessed on 20/08/2009

[90] Resolutions of The Securities Commission Shari'a Advisory Council [2nd Edn, Securities Commission Kuala Lumpur, Malaysia 2007] <www.sc.com.my/sub.asp?pageid=&menuid=267&newsid=&linkid=&type=> accessed on 15/08/2009.

[91] - International Islamic Fiqh Academy, ' Islamic Sukuk (Al-Tawreeq)' [Resolution. No. 178(19/4), 2009]. And The Islamic Fiqh Academy of MWL, ' Bay ul-dain (Sale of Loan)' [1st Resolution of the 16th Conference, 2002].

[92] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations., Edwin Cannan (ed). (1904). Available at Library of Economics and Liberty, <http://www.econlib.org/library/Smith/smWN17.html> accessed on 20/12/2009

[93] Louis-Philippe Rochon and Sergio Rossi, Modern Theories of Money: the Nature and Role of Money in Capitalist Economies, ( Edward Elgar Publishing Limited Cheltenham, UK 2003) 3-4

[94] Ludwing V. Mises, The Theory of Money and Credit. H E. Baston (tr) (1981) available on Library of Economics and Liberty Online, Accessed on 15/01/2010 <http://www.econlib.org/library/Mises/msT1.html>

[95] Rafic Y. Al-masri, Riba Al-Qard (Interest on Loan) and its Prohibition Evidences, ( Al-nashr Al-ilmi Centre/ King AbdulAziz University Jeddah 1987) 1-2

[96] The International Islamic Fiqh Academy (IIFA), ' The Paper Money and its Changeable Value' [Resolution. No. 21 (3/9) of the 3rd reference, 1986].

[97] The Islamic Fiqh Academy of MWL, ' The Paper Money' [Resolution. No. 6th of the 5th conference, 1982].

[98] Wahbah Al-zuhaily, ‘Dealing in Loan by sale and Others with contemporary Applications', (2009) Al-Minshawi Studies and Researches Centre, < http://www.minshawi.com/node/762> Accessed on 10/10/2009.

[99] Abdullah S. Al-Minee', Researches in Islamic Economy, ( 1st Edition The Islamic Office Beirut 1996) 269

[100] Muhammad A. Haneef and Emad R. Barakat, ‘Must Money Be Limited to Only Gold and Silver?:A Survey of Fiqhi Opinions and Some Implications', [2006] JKAU: Islamic Econ., Vol. 19, No. 1, <http://islamiccenter.kaau.edu.sa/arabic/Magallah/Pdf/19_1/191-Hanif_10.pdf> Accessed on 15/01/2010.

[101] Ahmed Hasan, ‘Banknotes in the Islamic Economics: their value and Laws', ( Dar Al-Fikr, Damascus 2002) 222-243

[102] Mohammad S. Al-Ashqar, Majid M. Abu-Rkhayyah, Mohammad O. Shbair and Omar S. Al-Ashqar, Fighi Researches in Contemporary Economics Issues, ( 1st Edn Dar Al-Nafa'is, Amman1998) 288

[103] Mohammad S. Jabr, Banknotes Rules in Islamic Shari'a , ( Al-Faisal Press Kuwait 1995) 36

[104] Mohammad O. Shbair, The Contemporary Financial Transaction in Islamic Fiqh, ( Dar Al-Nafa'is Amman, Jordan 2007) 171

[105] For more information see: (1) Ahmed Hasan, Banknotes in The Islamic Economics: Their value and Laws, ( Dar Al-Fikr Damascus 2002). (2) Mohammad S. Jabr, Banknotes Rules in Islamic Shari'a , ( Al-Faisal Press Kuwait 1995). (3) Abdullah S. Al-Minee', Researches in Islamic Economy, ( 1st Edition The Islamic Office Beirut 1996). (4) Mohammad O. Shbair, The Contemporary Financial Transaction in Islamic Fiqh, ( Dar Al-Nafa'is Amman, Jordan 2007). (5) Mohammad S. Al-Ashqar, Majid M. Abu-Rkhayyah, Mohammad O. Shbair and Omar S. Al-Ashqar, Fighi Researches in Contemporary Economics Issues, ( 1st Edition Dar Al-Nafa'is Amman, Jordan 1998)

[106] Ahmed Hasan, Banknotes in The Islamic Economics: their value and Laws, ( Dar Al-Fikr Damascus 2002) 165-214

[107] Ahmed Hasan, Banknotes in The Islamic Economics: their value and Laws, ( Dar Al-Fikr Damascus 2002) 173

[108] Ahmed Hasan, Banknotes in The Islamic Economics: their value and Laws, ( Dar Al-Fikr Damascus 2002) 179

[109] Ludwing V. Mises, The Theory of Money and Credit. H E. Baston (tr) (1981), available at the Library of Economics and Liberty <http://www.econlib.org/library/Mises/msT1.html> Para. I.1.18 accessed on 15/02/2010

[110] Mark S. Peacock, ‘The Origin of Money in Ancient Greece: The Political Economy of Coinage and Exchange' [2006] v30 Camb. J. Econ, p637,640 , <http://cje.oxfordjournals.org/cgi/reprint/30/4/637>accessed on 15/02/2010.

[111] Niall Ferguson, The Ascent of Money : a Financial History of the World, ( The Penguin Group, London 2009) 25

[112] "economic system"A Dictionary of Economics. John Black, Nigar Hashimzade, and Gareth Myles. Oxford University Press, 2009. Oxford Reference Online. Oxford University Press.Brunel University. http://www.oxfordreference.com/views/ENTRY.html?subview=Main&entry=t19.e3593 accessed on 10/01/2010

[113] "service"A Dictionary of Business and Management. Ed. Jonathan Law. Oxford University Press, 2009. Oxford Reference Online. Oxford University Press.Brunel University.http://www.oxfordreference.com/views/ENTRY.html?subview=Main&entry=t18.e5798 Accessed on 10/01/2010

[114] Mohammad O. Shbair, The Contemporary Financial Transaction in Islamic Fiqh, ( Dar Al-Nafa'is, Amman, 2007) 166

[115] Resolutions of The Securities Commission Shari'a Advisory Council, ( 2nd Edt Securities Commission Kuala Lumpur, Malaysia 2007) 68

[116] State Street , ' VisionFocus: Islamic Finance, Opportunity for Long-Term Growth' (Report Feb 2009) page 5 <http://www.statestreet.com/vision/focus/> Accessed on 17 Sep 2009.

[117] Jamaluddin Mohammad Inb Mandhour, Lisan Al-Arab (Arab tongue), ( Dar Al-Ma'arif, Egypt) 3233

[118] Al-Siddiq M. Al-Dharir, Al-Gharar in Contracts and its Effects on Contemporary Applications, ( Islamic developing Bank/Islamic Research and Training Institute Jeddah 1993) 12

[119] AbdulBari Mush'al, Islamic Sukuk (Tawreeq) and their Contemporary Practices and marketing, (A working Paper), the 19th Conference of the International Islamic Fiqh Academy, ( 2009).

[120] Akhtar A. Zaiti, Islamic Sukuk (Tawreeq) and their Contemporary Practices and Trading, (A working Paper), the 19th Conference of the International Islamic Fiqh Academy, ( 2009).

[121] Ahmed A. Al-Hajj, The Theory of Loan in Islamic Fiqh, ( Dar Al-Nafa'is, Amman 2008) 175

[122] Nazih K. Hammad, ‘Sale of Loan: Its rules and contemporary Applications', (A working paper 2009) available at Al-Minshawi Studies and Researches Centre < http://www.minshawi.com/node/762> Accessed on 15/10/2009.

[123] Ali M. Al-gharhadaghi, ‘Sale of Loan Rules', (A working paper 2009) available at Al-Minshawi Studies and Researches Centre < http://www.minshawi.com/node/762> Accessed on 15/10/2009.

[124] Sami H. Humoud, ‘Sale of Loan and Its Contemporary cases from Figh Prospective', (A working paper 2009) available at Al-Minshawi Studies and Researches Centre < http://www.minshawi.com/node/762> Accessed on 15/10/2009.

[125] Akhtar A. Zaiti, Islamic Sukuk (Tawreeq) and their Contemporary Practices and Trading, (A working Paper), the 19th Conference of the International Islamic Fiqh Academy, ( 2009).

[126] Aristotle, The Politics. Benjamin Jowett (tr) ( Batoche Books , Kitchener 1999) 17

[127] International Islamic Fiqh Academy, ' Islamic Sukuk (Al-Tawreeq)' [Resolution. No. 178(19/4), 2009].

[128] The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), [ Shari'a Standards 17 ' 2003]. Appendix C.

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