Sharia Compliance of Sharia Asset-Backed Securities
Suci Aprilliani Utami, Aneu Cakhyaneu, and Yana Rohmana
Islamic Economics and Finance Study Program, Universitas Pendidikan Indonesia, Bandung, Indonesia
Keywords: Sharia compliance, capital market, sharia asset-backed securities.
Abstract: To support the economic growth rate in Indonesia, the role of sharia financial institution is needed, one of
which is Sharia Capital Market which has various products such as EBA or Asset-Backed Securities. Asset
Backed Securities (EBA) is a form of sharia securitization that is present to address; Funding issues and sharia
banking capital as a source of real sector financing. Securitization is essentially a well-known financial
practice for collecting types of contractual debt such as housing loans, commercial loans, vehicle loans or
credit card debt obligations, and incorporating those debts to bonds, through securities, or secured credit
obligations Then sold to various investors, therefore it takes the principle of prudence in implementing it. The
securitization of sharia assets is still relatively new developed in Indonesia. Therefore, in order to avoid doubts
and irregularities that are not in accordance with the principles of sharia, it needs a strong legal foundation.
The approach used in this research is analytical descriptive. The results conclude that there are several
mechanisms in the process of securitization issuance that is contrary to Shariah compliance.
1 INTRODUCTION
Indonesia is one of the countries with the majority of
the Muslim population, so Indonesia has a high
potential for the development of Syariah Finance
Industry. In addition, the global financial market
trend is towards disintermediation. In other words, the
role of the capital market is more dominant than the
role of the banking system (financial intermediaries)
in the allocation of financial resources. Therefore, the
capital market will be the future for the economy and
financial system for developed countries and
countries that fall into the category of emerging
markets such as Indonesia.
One of the capital market products is asset-backed
securities. Currently, underwriting or securitization is
financing methods are widely used in the business
field. Basically, underwriting is a process whereby
companies collect their hard-to-cash assets and issue
billing rights to the pool of assets. When such assets
are pledged, they can be traded in financial markets.
Simply put, guarantees are a process whereby legal
entities transform their tangible assets into financial
assets.
The Financial Services Authority as the financial
regulator, issues POJK No. 20 / POJK.04 / 2015 on
Issuance and Requirements of Islamic Sharia EBA as
of 10 November 2015 (Otoritas Jasa Keuangan
Republik Indonesia, 2015). This POJK is a
refinement of Sharia capital market regulations to
encourage the development of sharia capital market
industry in Indonesia (Otoritas Jasa Keuangan, 2017).
Asset Backed Securities (EBA) sharia is a form of
shariah securitization that is present to address
funding problems and capital of sharia banking as a
source of real sector financing. The function of
securitization through Asset-Based Securities is an
effort to liquidate non-liquid assets, with the
aforementioned efforts by the capital market to
provide funding by disseminating securities for the
ownership of certain assets.
The securitization of sharia assets is still relatively
new developed in Indonesia. Therefore, in order to
avoid doubts and irregularities that are not in
accordance with the principles of sharia, it needs a
strong legal basis.
According to (Cumming & Trainar, 2009), stated
that “Securitization is the open market selling of
financial instrument backed by asset cash flow or
asset value.” According to (Ifham, 2017), it is
different from conventional securitization. In the
shariah securitization transaction scheme, the party
conducting the securitization does not purchase
receivables. Against transactions of transactions that
are still receivable, there is no difference of opinion
of scholars if the transaction uses akw hiwalah.
Utami, S., Cakhyaneu, A. and Rohmana, Y.
Sharia Compliance of Sharia Asset-Backed Securities.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 231-234
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
231

However, for transactions that are in the nature of
trading receivables (bay al-dayn) there are
differences of opinion among scholars.
This study will be focused to examines the sharia
compliance of the capital market securitization of
Asset-Based Securities (ABS) through policies,
regulations and practices in the sharia capital market.
2 LITERATURE REVIEW
2.1 Sharia Investment
In the Islamic economic system, investment is a
muamalah activity that is highly recommended,
because by investing property owned to be productive
and also bring benefits to others. The Qur'an
explicitly prohibits the hoarding activity (ikhtinaz) on
the possessed property. Islam has an economic
system organized in order to realize the welfare of
human life both in meters and non-material. Sharia
investment is an investment based on sharia
principles, both in the real sector and in the financial
sector. So that investment can not be separated from
the principles of sharia.
In the Qur'an there are verses that indirectly
instruct the Muslims to prepare for tomorrow better.
Thus, the authors state that the concept of investment
can not be separated from the Islamic Shari'a, where
in the Qur’an surah an-nisa which means:
“And let those (executors and guardians) fear in
justice as (if they (themselves) had left weak offspring
behind and feared for them. So let them fear Allah and
speak words of appropriate justice”.
The above verse commands us to do not leave
dhurriat dhi "afa (weak breeds), both morally and
materially. As if to provide suggestions for always
pay attention to well-being (in this case
economically) and leave no economic difficulties, it
seems that the Qur'an has long invited his people to
always pay attention to the welfare that one way is to
invest.
2.2 Sharia Compliance
Islamic law comes from the Qur'an and Sunnah, the
principles of shari’a are all provisions that are based
on the source of the law. To apply the principles
contained in the shari'a, the technical rules are the
same as in making legislation in general. The rule
derives from the principles of shari'a made by the
giver or lawmaker who specifically where the legal
system of finance originates.
Sharia principles are the main reference for the
National Sharia Council (DSN) in drafting fatwas
related to shariah-based financial activities aimed at
the Islamic finance industry. Not only that, the
existence of sharia principles is used to accommodate
the Sharia Supervisory Board in oversight to the
sharia finance industry whether bank or non-bank. As
every Islamic finance industry, both banks and non-
banks are required to have a supervisory board, which
automatically both the Islamic banking industry and
non-bank finance are bound by the provisions of
sharia rules as stipulated, this is called the compliance
of sharia (Nurhisam, 2016)
2.3 Asset – Backed Securities
In finance literature, Asset-Backed Securitisation
(ABS) is defined as a creative way of raising funds
through the issuance of marketable securities backed
by future cash flows from revenue-producing assets.
As such, securitisation is the transformation of an
illiquid asset into a security that is issued and more
importantly it can be traded in a capital market. The
term asset-backed security (ABS) is generally applied
to issues backed by non-mortgage assets (Siew, S.M,
2004).
The asset securitization techniques even though it
complex, has won a secured place in corporate
financing and investment portfolios because it can,
paradoxically, offer originators a cheaper source of
funding and investors a superior return (Giddy I.,
2000). These asset securitisation techniques are being
embraced by a number of Asian countries seeking to
promote home ownership, to finance infrastructure
growth, and to develop their domestic markets,
including Malaysia (Keng T. Y. and Ting K. H,
2004).
3 METHODOLOGY
This paper uses library/literatures based research
methodology in order to explore sharia compliance of
sharia asset-backed securities. Library/literatures
based research methodology is a kind of qualitative
research approach.
Qualitative research method is a method to
investigate objects that can not be measured with
numbers or other sizes that are exact. Qualitative
research can also be interpreted as research that is
descriptive and tend to use analysis with inductive
approach.
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4 RESULT AND DISCUSSION
Islamic guarantee, like any other agreement which
includes all its activities, must be in accordance with
the teachings of the Qur'an and Sunnah. It further
includes all the words and deeds of the Companions,
as well as the sayings and deeds of prominent people
in the history of Islam who teach about them also
should be referenced (Billah, 2010).
By exploration of literatures, it is found that asset
backed structure is more compliant to shariah
principles than another asset based i.e sukuk. This is
due to the asset backed nature of Islamic financing
and some shariah issues in the asset based structure
(Abdullah, 2012).
According to a statement from (Cumming &
Trainar, 2009), stated that “Securitization is the open
market selling of financial instrument backed by asset
cash flow or asset value.”
It is clear that the investor is a buyer of Asset
Backed Securities as stipulated in the terms of the sale
and purchase of Civil Code. The construction of this
law is certainly different if it is related to the
background of the engagement between the original
debtor and the initial creditor. The agreement
underlying the engagement between them must be
based on an obligation or that we are familiar with the
lending and borrowing agreement as stipulated in
Article 1765 Civil Code. From the aspect of KIK-
EBA's engagement, it turns out that it has been based
on three types of engagement, namely trading
agreement, exchange and lending and borrowing.
From the description of the practice of
securitization of sharia assets abroad in the Middle
East, Asia, Europe and North America can be
identified some of the characteristics attached to the
issuance of Islamic Sharia EBA abroad, namely the
transfer of assets from the originator to SPV, assets
transferred in the form of real assets and bills, the
need for ratings for EBAs being issued, and the
transfer of such assets in the form of true sale and sale
with recourse. Some of these characteristics may not
be applicable in a country whose understanding of
fiqh muamalah is different from other countries.
Therefore, to see if Islamic Sharia EBA can be
adopted in Indonesia, it is necessary to understand the
existing infrastructure in Indonesia, especially the
regulation both conventional and syariah that
regulates the EBA.
4.1 Sharia Compliance
As already mentioned, assets are pledged to the
company to obtain financing through the issuance of
a debt certificate. Thus when we discuss asset
guarantees according to Islam, the two problems that
arise are on the one hand related to the assurance
process of the asset (the problems of Bay Al Inah)
and related to debt guarantees (Bay al-Dayn).
4.2 Bay’ al-‘Inah
Assurance of the asset is done by Bai al-Inah, the
investor sells the assets of the company and then sells
the assets back to the same company with the price
already raised to the investor will be executed on the
next date. For example, a company has assets worth 1
billion which are then pledged to obtain financing.
Assets will be sold to investors at a price of 1 Billion.
Then the investors will sell the assets back to the
company at a price of 1.5 billion (this is at a high price
exceeding billion). This concept is used when the
assets are pledged using murabahah agreement and Al
bai Baithaman Ajil.
Bay al-Inah is not allowed in Islamic principles
because of the difference between the original price
sold by the firm to the investors and the price that the
firm will sell to the investors and the price reissued
by the investors to the firm brings usury and legalizes
something which is not legal. According to the
shari'ah college, such transactions are legitimate with
external evidence that they are duly bound; things that
are not in accordance with the law are considered
important at least have been mentioned in the
contract.
4.3 Bay’al-Dayn
When the company issues a guarantee or certificate to
the investor, as a proof of a debt, sometimes this
guarantee is traded in the secondary market, ie the
investor sells the certificate to a third party. Since the
certificate indicates a company's debt to investors, the
trade of these certificates is called Bay al-Dayn.
Shari'a, in Indonesia, the sale and purchase of
debts (bay al dayn) is not permitted. Therefore, in the
scheme of establishment and issuance of syariah
asset-backed securities must be made in such a way
that there is no sale and purchase of receivables from
the initial creditor to the party conducting the
securitization.
According to Ibn Taymiyah and Ibnul Qayyim
allow the transaction on condition there is no riba (at
par). While jumhur ulama prohibit such transactions
Sharia Compliance of Sharia Asset-Backed Securities
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because there is an element of risk the debtor can not
pay (gharar). Shari'a, in Indonesia, the sale and
purchase of debts (bay al dayn) is not permitted.
Therefore, in the scheme of establishment and
issuance of syariah asset-backed securities must be
made in such a way that there is no sale and purchase
of receivables from the initial creditor to the party
conducting the securitization.
The Hanafi, Hanbali and Maliki schools agree that
the debt should not be sold to non-debtors or all third
parties because the sale of debt involves gharar
elements and the sale of something the seller does not
own.
5 CONCLUSION
The process of asset shariah securitization in general
is not different from conventional asset securitization
process. However, not all types of assets that are
securitized conventionally can be securitized by
sharia. This is because in the sharia transaction is
forbidden the transfer of assets, payments, which
contains elements of usury, gambling and gharar. In
addition, not all types of assets can be traded.
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