Globally, the concept of securitization is not new, however, in Pakistan is still in its nascent stage. Before focusing on the pros and cons of securitization in Pakistan, it is important to understand the nature of securitization as to what it is?


By Humaira Zaheer
Feb 03 - 09, 2003 




While endeavoring to explain securitization, we make the most common slip-up by focusing on the process of securitization instead of on its substance. Hence, the crudest definition of securitization is that it consists of the pooling of assets and the issuing of securities to finance the carrying of the pooled assets. Securitization can also be termed as a structured or agreed process whereby interests in loans and other receivables are, packaged, underwritten and sold in the form of "Asset Backed Securities" (ABS). ABS are the securities, which are issued through a 'Special Purpose Vehicle' or SPV. (The SPV is usually a trust with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt).

On a broader view, securitization is a process by which any SPV raises funds by the issue of Term Finance Certificates (TFCs) or any other instrument with the approval of SECP, for such purpose and uses such funds by making payment to the originator or through such process acquires a property, or right in the receivables or other assets in the form of actionable claims.

Residential mortgages, home equity loans, manufactured housing loans, automobile loans and leases; credit card receivables; equipment loans and leases; small business loans; student loans; trade receivables are the examples of securitization.


To promote asset securitization in Pakistan, Government of Pakistan has already exempted the income of SPVs from tax through the Finance Ordinance 2000 and SPVs also receive preferential withholding treatment by the GoP.

According to SBP regulations, all banks/DFIs are allowed to participate in asset securitization through SPV. All banks/DFIs can only invest in only those ABS which are listed at the local bourses and have a minimum credit rating of 'A' or equivalent from a credit rating agency approved by SBP or an international credit rating agency namely S&P, Moody or Fitch. In addition to this, a legal framework has also been chalked out by the SECP.

Reviewing the securitization status in Pakistan, PTCL is a true example of asset securitization. PTCL obtained funds aggregating US$ 250 million against securitization of its future receivables relating to certain carriers viz. AT&T, Deutsche Telecom, Mercury Telecommunications (Note: its Special Purpose Vehicle was outside Pakistan).



Under the arrangement, these carriers have irrevocably assigned the company's future receivables to a trust setup for this purpose for the tenor of the facility (the tenor is for six years including a grace period of one year while the interest is to be paid on quarterly installments at 8.42% per annum). The cash flows arising from these receivables are paid to PTCL by the trust after deducting there from the repayment of principal and return that investors in the Securitization Trust are to be, and retaining a cash margin as a default cushion.

The first ever securitization in Pakistan under the SECP's ABS rules was for Trust Investment Bank worth Rs 100 mn where the Securitization lease receivables were sold to  'First Securitization Trust', which is a Special Purpose Vehicle established for this purpose.


Evaluating Securitization across-the-board, it is an attractive feature, which allows the financial entities to take out assets from their balances economizing on capital and liabilities for other uses. Although this aspect needs more elucidations, however, the foremost benefits of Securitization are:

*One is that the receivables are moved "off balance sheet" and interchanged by cash equivalents (less expenses of the Securitization), thus improving the originator's balance sheet and resulting in gain (or loss), which it is usually an intended, valuable corollary.

*Secondly, the securities issued in the Securitization are more highly rated by participating rating agencies (due to the isolation of the Receivables in a "bankruptcy-remote" entity), thus reducing the cost of funds to the Originator when compared to conventional forms of financing. In cases where the receivables bear interest, there is usually a significant spread between the interest paid on the securities and the interest earned on the receivables. Ultimately, the Originator receives the benefit of the spread.

*Another benefit for the Originator is as he usually acts as a 'Servicer' and there is normally no need to give any notice to the obligators under the Receivables, the transaction is transparent to the Originator's clientele and other persons with whom it carries out business.