SPV in Both Islamic and Traditional Financial Systems - Essay Example

Securitization of assets is the detachment of the asset from the seller. This need saw the establishment of special purpose entities (SPEs).

Securities bought from special purpose entities, therefore, are safer since they have some sort of guarantee which reduces the risks to the investor. 5 They are used for structuring a broad range of products that are capital in nature throughout the world. Examples of SPEs include corporations, partnerships, and trusts. Initially, an SPE functions as a depository institution for a particular group of people which starts to lead to its establishment. Afterward, the SPE issues securities in the market which are in turn bought by investors.

Since SPEs are legal entities, they must limit their operations within the limits provided for by the legal documents which are drafted during their establishment which are used to govern the entity. After being established, an SPE functions as an independent entity, appointing its managerial staff and catering for expenses incurred in its operations. An SPE receives assets from the people who formed it plus any new members who join it afterward. The entity isolates the assets legally hence making the asset accessible to owners and sellers hindered.

The assets deposited in the entity are then used to pay for securities issued by the investors. SPEs have made a big contribution to the securitization of investments in the market. Without the presence of a special purpose entity, a great risk for investors would exist with them transacting businesses with the sellers of the assets.6Special purpose entities and securitization of assets were made popular by the mortgage markets.6Special purpose entities are used by organizations to securitize, gain custody and then lease assets.

Securitization of various financial assets is now a common phenomenon in various organizations. A firm may securitize accounts receivables, commercial loans, and credit card balances. Firms reap several benefits from securitization. For instance, an organization gets an influx of money by vending the assets its holds. The debt cost that an organization has may reduce due to the asset-backed securities issued by special purpose entities hence easing the debt burden on the organization.

6A good example of an organization that benefitted from securitization is Ford Motor Company. The company was able to deal with its liquidity problems by issuing bonds against consumer and dealer loans. Firms have also been able to acquire assets via securitization. To be able to do this, they may employ synthetic leases into their SPEs. Synthetic leases were common to technology-based companies for example Cisco in the 1990s.