Conflicts of interests in the conventional and Islamic securitisation

Abstract

The 2007-2008 financial crisis observed the demise of the securitisation market, and this caused doubts on the viability of conventional securitisation and its underlying ethos. In the wake of such a market failure the financial industry and legal scholars have been in search of alternatives to the conventional securitisation. Some suggested that Islamic securitisation could provide an answer to this market failure. In theoretical terms the most causes of the 2007-2008 crisis can be pin downed to market failures owing to conflict of interests of conventional securitisation. It is the instances of market failures that provide a justification for the new regulation to correct misaligned incentives1. In this scenario, when one resorts to the ‘Islamic securitisation’, it simply means resorting to this new regulation in the wake of the global market failure.