Designing Collateralized Debt Obligations in Non-Riba Banking, Based on Imamia Jurisprudence

Abstract

The most important factor of financial institutions' failure is credit risk, which by necessity needs to be reduced by finding some solutions. One of the modern instruments of credit derivatives is collateralized debt obligations that diversify and transfer credit risk to many investors, and they are also known as a way of financing. Here is a question:" Can Non-Riba banking system utilize credit derivatives for decreasing credit risk and financing? In this article, at first we survey collateralized debt obligation and its mechanism from the viewpoint of economic science. We then compare this instrument with jurisprudential principles. One of the most important results of the research is the accordance of CDO with Islamic contract conditions. CDO is valid in terms of ijarah, murabaha, and insurance under the condition of qard (borrowing, loan). Furthermore, this research has developed an operational and local solution to decrease credit risk and finance.

Keywords

• cdo
• credit risk
• credit derivatives
• securitization
• non-riba banking