The favourites for the first true securitization are Dubai, Indonesia and Malaysia. All are expected to produce Islamic securitization transactions next year.
Islamic finance is necessarily driven by asset-backed finance (it has to be for sharia compliance) and this lends itself well to securitization. But the first true securitizations have been frustrated by a combination of unique Islamic structuring concerns and the usual emerging markets considerations.
The Islamic challenges include finding a guaranteed minimum return for investors, limiting or capping risk, the provision of guarantees and hedging arrangements (where scholars are not all in agreement).
There were a number of Islamic-compliant structured transactions in 2006, such as the Dubai Palm Island financing, that came close to the first securitization. But they relied on external credit support to provide cash backing for 100% of the deal. Deals such as the Blue City Oman financing and the PCFC Dubai Ports sukuk were also exciting developments, but not the groundbreaking structured transaction the market was hoping for.
These deals, particularly the PCFC sukuk, have created a new way of thinking on how to develop Islamic products through partnership structures, or musharaka joint ventures, and will form the basis for the coming year's asset-backed securitizations.