This chapter addresses Islamic structured finance.1 Two types of structured products are traded:
The first type of structured products is linked to a combination of underlying assets and derivatives such as options, forwards, futures, and swaps; they are usually issued by reputable investment banks that compete for institutional investors and high-net-worth investors; clients buy these products either for return enhancing or for hedging need.
The second type of products is linked to a securitized asset such as land or a loan, and may be issued by governments as well as private corporations for large-scale project financing. Securitization has enabled banks, issuing companies, structured investment vehicles, and hedge funds to achieve excessive leverage, earn large profits, and dilute risks.
This chapter concentrates on derivatives-based Islamic structured products; it describes their objectives, their anatomy, the Islamic modes for structuring products, and the risks and merits of structured products. The chapter covers the definition, the features, the risks and benefits, and types of structured products. It addresses the role of financial engineering in designing structured products. The chapter provides examples of Islamic structured products and discusses the challenges for Islamic structurers.
The role of financial markets is to intermediate ...