LONDON, 1 March 2004 - Securitization, which involves the pooling of financial assets for sale to investors through commercial papers such as securities, notes, or bonds which can then be traded, is relatively new to the Middle East & North African (MENA) markets. But there are signs that securitization is about to take off in a big way over the next few years, especially in the corporate (or private) sector as companies seek to add value to their businesses by converting illiquid assets into marketable and tradable securities.

This should inevitably enhance the development of the capital markets in the MENA region, because securities ideally ought to be listed on stock markets or securities exchanges, and traded to create liquidity, and of course generate returns for investors. In a comparable economic market such as Malaysia, the general bond market, including the government Malaya Benchmark Bonds, is well-established; and the Islamic bond market in particular is the most established, with Islamic securities outstanding at end 2002 totaling more than 49 billion ringgit, and more than half of the new securities issued in 2003 were Islamic.

Most of the Malaysian Islamic issues are debt-backed, although the government has introduced tax incentives for issuers who issue asset-backed securities, which are more acceptabvle4 especially in the Gulf jurisdictions. Malaysian corporates issue commercial papers to raise financing to finance expansion work; and working capital requirements; and in the case of Islamic issues to refinance more expensive conventional debt.

Assets can either be tangible (land, property, housing, equipment and machinery) or non-tangible (receivables from debt financings such as trade and commodity finance; factoring; forfaiting, and a range of credit derivatives).

This distinction is important especially if you consider that the sector that is poised to set the pace for securitization, especially small ticket corporate securitization, is the Islamic finance sector.

In a few days time, Beirut-based Bemo Securitization Sal (BSEC), a subsidiary of Lebanon's Banque Europeene pour le Moyen (Bemo), is announcing the launch of the SR103 million Carvan-1 Sukuk al-Ijara (Islamic leasing bond), which the originators claim is the first Sukuk to be backed by assets physically located in the Gulf Cooperation Council (GCC) states, and which has a two-tier two jurisdiction structure. For the Caravan-1 Sukuk is backed by a pool of vehicle and lease agreements sold by Hanco Rent-a-Car, one of Saudi Arabia's leading car pool leasing and rental companies.

In fact, the Jersey-based Volaw Trust Company, working with BSEC, has confirmed that it has already established the Jersey Special Purpose Vehicle (JSPV) that will finance the purchase of Hanco leasing assets in Saudi Arabia through the issuance of a Sukuk to investors in the GCC.

BSEC's claim about a first in the two-tier and two jurisdiction structure may be true. But it is not the first Islamic securitization backed by physical assets located in the GCC. Ask Saudi Arabia's National Commercial Bank (NCB).

Two years ago, NCB securitized a similar pool of rental and leased vehicles owned by Al-Jameel, the agents for Toyota and Lexus in the Kingdom. Since then, NCB has done several small-ticket Shariah-compliant securitizations.

Similarly, in Kuwait in early January 2004, hardly had the ink dried on the incorporation papers of the emirate's latest Islamic finance company, Al-Manar Financing & Leasing, and the company in its first transaction successfully securitized 5.3 million Kuwaiti dinars worth of the receivables of Investment Dar, the Kuwaiti Islamic investment company. Even in countries such as Turkey, Islamic financial institutions are eyeing securitizations. "The Sukuk issue is a major consideration for us," stresses Ufuk Uyan, chief executive officer, of Kuwait Turk Evkaf Finance House, the joint venture Islamic bank between Kuwait Finance House and Turkish investors. "We would like to arrange corporate Sukuk issues, because there is good demand on the financing side.

There are good projects everywhere which need to raise financing either for expansion, working capital, or refinancing of conventional debt.

Perhaps one area where asset-backed securitization (which is universally acceptable by Shariah advisories) will potentially make a huge impact is mortgage-backed securities.

As for securitization in general and Islamic securitization in particular, originators and underwriters agree that the future is bright. BSEC, for instance, is targetting small-and-mdeium enterprises (SMEs), which it claims are very often overlooked by international banks and the larger national and regional banks.