The last decade witnessed a wide expansion of islamic finance in middle eastern and southeast asian countries. However, the debate among scholars in distinguishing sukuk from its conventional counterpart is still ongoing. Figure 1a also depicts the yield curve of the bnm issued sukuk securities as well as conventional. Afshar, school of business, woodbury university, usa abstract the substance of finance or financial system is to find reasonable solutions for existing practical problems. Sukuk and conventional bond securities have some similarities that probably prompted practitioners, mass media journalists,even some academics to consider sukukas being similar to conventional bonds. Risks underlying sukuk financial islam islamic finance. Islamic bond issuance what sovereign debt managers need.
This paper aims at assessing the potential difference between sukuk and conventional bonds by capturing any additional diversification benefit that can be gained by adding sukuk in to conventional fixed income portfolio. Musharakah sukuk can be treated as negotiable instruments and can be bought and sold in the secondary market. Compare and contrast sukuk islamic bonds with conventional bonds, are they compatible. The average gap between issuance costs for sukuk and conventional bonds in the gulf, the other worlds other major centre for islamic finance, is believed to be very small or nonexistent. In its simplest form sukuk represents ownership of an asset or its usufruct. How sukuk islamic bonds differ from conventional bonds.
The title chosen for this research project is comparison between performance of sukuk and conventional bond in malaysia. Originalityvalue although several papers already exist in discussing on sukuk. Mohamed ariff and meysam safari abstract sukuk securities have some similar features with conventional bonds, which is probably the reason why the financial press describe them as if they are the same. In the case of restructuring or its application, islamic sukuk is not much different from the conventional sukuk bonds. However, the descriptive statistics show that the average coupon rate on sukuk is higher than for conventional bonds 4. Introduction, structuring and application of sukuk bonds an excellent introduction to sukuk bonds. The role of sukuk in islamic capital markets comcec. Conventional bonds are structured on the basis of debt whereas sukuk are basically investment certificates consisting of ownership claims in a pool of assets. There are five important differences between sukuk and traditional bonds. A sukuk is an islamic financial certificate, similar to a bond in western finance, that complies with sharia islamic religious law. Are islamic bonds different from conventional bonds.
Apr 15, 2016 difference between conventional bond and islamic bond sukuk distinguishing sukuk from conventional bonds conventional bonds sukuk asset ownership bonds dont give the investor a share of ownership in the asset, project, business, or joint venture they support. Proceedings of foundation of islamic finance series, second conference, kuala lumpur, malaysia, march 810, 2011. Difference between conventional bond and islamic bond sukuk distinguishing sukuk from conventional bonds conventional bonds sukuk asset ownership bonds dont give the investor a share of ownership in the asset, project, business, or joint venture they support. However there is no study done on factors influencing firms to issue sukuk over conventional bonds. The sukuk financing model for green projects sukuk. Sukuk securities have some similar features with bond securities.
In practice, a shariah advisory board is usually set up and consulted to ensure that the sukuk being structured comply with islamic principles. Jul 26, 2014 sukuk adhere to an islamic view of finance, avoiding riba generating money from money, i. Sukuk as a tool for infrastructural development in nigeria. Shariah contracts have evolved to adopt a hybrid structure combining ijarah. That is partly because islamic investors in the gulf remain cashrich, partly due to the limited supply of sukuk, and partly since sukuk investors tend to hold the. However, when we talk about the context of islamic finance and its instrument, it is certainly not free from the rules of islamic law as other muamaalat chapters, from where appears significant difference between conventional sukuk and islamic sukuk, especially those in the. What is the primary difference between sukuk and conventional bonds. The substance of finance or financial system is to find reasonable solutions for existing practical problems. Some of the important points have been listed below. It is the trust certificate, which gives its holder an undivided proportion of ownership in the underlying projectasset and right to receive cash flows from this underlying. Similarities of sukuk and conventional bond both sukuk and. This paper investigates the impact of conventional bonds and sukuk announcement on shareholder wealth and their determinants using 79 sukuks and 87 conventional bonds over the period of 20042012 in six developed islamic financial market. Feb, 20 however, the debate among scholars in distinguishing sukuk from its conventional counterpart is still ongoing. Ytms of malaysian corporate bonds aarated islamic vs conventional.
Thus, claim embodied in sukuk is not simply a claim to cash flow but also an ownership claim. The maximum difference between yields of sukuk securities and conventional bonds issued by government occurs for securities with 3 years maturities. Comparison between the performance of sukuk and conventional bond in malaysia xv preface this research paper is submitted as a part of the requirement to fulfill for the bachelor of finance hons course. Basics of sukuk1 sukuk is popularly known as an islamic or sharia compliant bond whilst in actual fact, it is an assetbacked trust certificate. Conventional bonds are prohibited in islamic finance due to the interest they carry and prohibition of debt trading. Sukuk represent proportionate ownership share in the underlying assetsproject activity, whereas conventional bonds are just debt obligations on the issuer towards bondholders share in debt. Sukuk issuance costs still above conventional bonds in. Sukuk can resemble conventional bonds by some of its features, but it has different underlying structure and provision. Conventional bonds a bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specified dates, interest and principal, whereas, the sukuk holders claims an undivided beneficial ownership in the underlying assets. A stock market perspective article pdf available in journal of comparative economics 4. Islamic bonds called sukuk the word sukuk is an arabic word which means certificate. Index 1 basics of sukuk 2 difference between conventional bond and sukuk 3 sukuk in detail 4 typical international sukuk mechanism 5 sukuk structures page 2 3. Sukuk refers to certificates of equal value which evidence undivided ownership or investment in the assets using shariah principles and concepts endorsed by the shariah advisory council.
Sukuk are, and must be, backed by assets, projects andor economic activities assetbacked sukuk while conventional bonds are based on debt. In his view most majority of todays sukuk are very similar to the conventional bonds. Pdf although there have been recent developments in respect of the. These are certificates which are offered by corporations and governments which follow islamic principles.
Sukuk provides access to a vast and growing islamic liquidity pool in addition to the conventional debt. Testing sukuk and conventional bond offers based on corporate. Sukuk based on fixed rates are exposed to this risk in the same manner as fixed rate bonds because the rise in market interest rates leads to the fall in the fixedincome sukuk values. The views expressed in this working paper are those of the authors and do not necessarily represent. Nowadays, the market sukuk, has the raising number of foreign investors from. However, there are key differences between sukuk and conventional bonds. However, this representation is not altogether correct. Prepared by selim cakir and faezeh raei1 authorized by aasim husain october 2007 abstract this working paper should not be reported as representing the views of the imf. Most importantly, the structure of sukuk has to conform to that of the religious principles of shariah. Sukuk are also subject to credit rating just like bonds. Islamic finance difference between sukuk and bonds.
Islamic bonds sukuk emerged as an innovative capital market instrument over the last decade. Components, markets, players and growth core sukuk structure sale based sukuk. Sukuk typically represent an undivided beneficial ownership interest in certain tangible assets save for certain receivables, such as zhimam or duyun, the usufruct of an asset or certain projects or investment activities. Both sukuk and bonds can have some particular features. In other words, sukuk represent ownership in a tangible asset, usufruct of an asset, service, project, business, or. Both sukuk and bonds in some cases may have the same characteristics. Because sukuk are assetbased securities not debt instruments they fit the bill. Contemporary sukuk are used to raise funds for investments in a. In practice, some sukuk are issued with repurchase guarantees just as conventional bonds are. Historical records show that these notes were widely traded and exchanged. Though a benefit based sukuk is a securitization of the advantages which is nearer in structure to a conventional bond. In the past, sukuk were used to facilitate trade transactions among merchants by serving as promissory notes. In fact, several similarities exist between sukuk and bonds. Hence, this paper will investigate the determinants of firms in issuing sukuk over conventional bonds.
Safari, meysam, are sukuk securities the same as conventional bonds. However, the credit rating is about the stability of the underlying asset and the volatility that the buyer may face. Rather, sukuk can be defined as certificates of equal value representing undivided shares in. Instead, the sukuk alijarah structure uses the leasing contract as the basis for the returns paid to investors, who are the beneficial. Using a sample consisting of 88 sukuk and 287 conventional bonds issued in. Difference between islamic bond sukuk and conventional bond. Returns on sukuk derive either from performance of an. Both of these financial vehicles, conventional bonds. This study aims to analyze the ratio between yields on sukuk and conventional bonds using model calculations yield to maturity ytm and portfolio optimization model markowitz model and single index model.
A comparative analysis of sukuk and conventional bonds. However, for conventional bonds, only gdp shows a significant negative effect on the relationship. The authors confirmed the advantages and the value added offered by. The only difference pointed out is that regulations consistent with islamic principles of financial trading apply to sukuk bonds. In response to this argument, it was pointed out that yield to maturity reflects the interplay of supply and demand which may be affected by a financial products packaging and. Comparative analysis between global sukuk and bond indices. Although not all sharia scholars agree that this arrangement complies with islamic law, a product called sukuk ijara may come with a repurchase guarantee. Sukuk are in many aspects similar to conventional eurobonds. Its introduction and application what is sukuk sukuk in general may be understood as a shariah compliant bond. Islamic bond issuance what sovereign debt managers need to know. It is complex to understand the exact nature of sukuk and differentiating them from bonds. Instead of applying interest to the holders like conventional bonds, the issuer will offer profitsharing scheme based on the.
Sukuk are defined by the aaoifi accounting and auditing organization for islamic financial institutions as securities of equal denomination representing individual ownership interests in a. Rather, sukuk can be defined as certificates of equal value representing undivided shares in the ownership of. Islamic finance theory and practical use of sukuk bonds. Sukuk are also considered to serve as security instruments that provide a predictable level of return fixed or floating. Testing is done by using the average, standard deviation, coefficient of correlation, covariance of the portfolio, as well as the statistical test t. We questioned why some issuers choose sukuk while others continue to use conventional bonds. Although international issues sukuk is similar to conventional bonds, sukuk when it appears like some of the features as grading, the procedures for issuing and redemption, coupon payment and default provisions, the relationship returns to the returns of conventional bonds, sukuk. These types of sukuk combine two or more forms of islamic finance contracts in. Five important differences between sukuk and traditional. Sukuk, which are most similar to a conventional fixed income securitie could help fill the fixed income supply gap for environmental investors to the extent the proceeds of a sukuk are earmarked for a particular environmentally beneficial purpose. These similarities have been highlighted so the financial press has described these securities to be similar to conventional bonds, despite important differences of these securities. The debt management office dmo nigeria is a government agency established to centrally coordinate the management of nigerias debt. Recent issues of islamic bonds were welcomed with broad criticism, both by islamic scholars and.
Similarities of sukuk and conventional bond both sukuk and conventional bonds can be rated by any of the rating agencies. Oct 09, 2017 conventional bond vs sukuk amila nahar. Pdf corporate choice between conventional bond and sukuk. Hamzah, 2016 through combining both the securities as they are. Islamic investors want to balance their equity portfolios with bond like products. Sukuk issues, which are islamic financial instruments structured to replicate the cash flows of conventional bonds, have notably proliferated, fuelling the debate on the similarity between islamic and conventional finance. The market for sukuk is now maturing and different sukuk structures have been emerging over the years. The sukuk are based on the underlying tangible assets that the spv has acquired rather than being debt securities, which is the case with the issuance of conventional bonds. Malaysias sovereign sukuk vs conventional issuance 2006june 2017. Sukuk and conventional bond securities have some similarities that led to practitioners and the mass media as well as some academics to consider sukuk as being similar to conventional bonds except for islamic regulations applying for the issue of sukuk bonds. Comparative analysis of return on sukuk and conventional. The sukuk financing model for green projects sukuk home. However, his results on the comparison of yield to maturity of sukuk and that of conventional bonds show that sukuk securities are different from conventional bonds.
Compare and contrast sukuk islamic bonds with conventional. Islamic investors want to balance their equity portfolios with bondlike products. In fact, sukuk certificates are exposed indirectly to interest rate fluctuations through the widespread benchmarking with libor in. Sukuk and bonds are two kinds of financial instruments. Sukuk and conventional bonds issuance during periods that include the malaysian period of economic crisis. Resource upheld sukuk are such where a real deal has occurred and the spv controls the fundamental resource. Sukuk can resemble conventional bonds by some of its features, but it is technically neither debt nor equity. Difference between sukuk and conventional bond coursebb. By the time, islamic bonds gained bigger and bigger market share. Sukuk versus bonds recently, one of the aaiofis top sharia scholarsin his seminal paper has rightfully criticized the existing sukuk issues in terms of their violation of the sharia standards.
However, there exist some fundamental differences between the two instruments that such a description is misleading. How do sukuk differ from conventional bonds and securitization. Sukuk are financial instruments and certificates of equal value representing undivided shares in ownership of tangible assets projects usufructs services and broadly any economic activity. Using an event study methodology on a sample of malaysian.
Comparative analysis of return on sukuk and conventional bonds. Dec 25, 2014 sukuk, the plural form of the word sakk, refers to an investment certificate that is deemed to be compliant with islamic financing principles. Modern sukuk emerged to fill a gap in the global capital market. The aaoifi issued standard for different types of sukuk, classifying some of these sukuk as tradable and. Are sukuk securities the same as conventional bonds. This study examines three variables in relation to sukuk and conventional bonds issuance for the period of 19902011. Think of sukuk as islamic bonds that are structured in.
In the case of murabahah sukuk, the issuer of the certificate is the seller of the murabahah commodity, the subscribers are the buyers of that commodity, and they are entitled to its final sale price upon the resale of the commodity. The holder of sukuk is entitled to receive periodical payments based on the proceeds generated by the underlying. Since then, sukuk have been growing in popularity and have been utilised by both corporate sector and states for raising financing. Theyre a debt obligation from the issuer to the bond holder. Sukuk adhere to an islamic view of finance, avoiding riba generating money from money, i. The key characteristic of sukuk the fact that they. Comparison between islamic sukuk and conventional bonds. Sukuk can resemble conventional bonds by some of its features, but it has different.