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This paper discusses the underlying principles of Sukuk. The ultimate objective of the study is to provide an understanding on the fundamental idea of Sukuk, its rating and its implication to default risk. Sources of data include observation, documents and texts, specifically from Securities Commission Malaysia (SC), Rating Agency Malaysia (RAM) and Malaysian Rating Corporation Berhad (MARC), Standard & Poor's report, and authors’ analysis on the subject matter. Despite showing consistent growth of issuance across countries, Sukuk may also promote default risk as Sukuk also needs to undergo a credit rating assessment of its future payment prospects. Even though Sukuk issuance comes together with asset security, however any negative migration of the credit rating assessment would indicate default risk.
Procedia - Social and Behavioral Sciences 65 ( 2012 ) 662 – 667
1877-0428 © 2012 The Authors. Published by Elsevier Ltd.
Selection and peer-review under responsibility of JIBES University, Jakarta
doi: 10.1016/j.sbspro.2012.11.181
*Nor Balkish Zakaria. Tel: +6 -07-9352716; fax: +6-07-9352381
E-mail address:
International Congress on Interdisciplinary Business and Social Science 2012
(ICIBSoS 2012)
The Construct of Sukuk, Rating and Default Risk
Nor Balkish Zakariaa,* , Mohamad Azwan Md Isab , Rabiatul Alawiyah Zainal
Accounting Research Institute & Faculty of Accountancy, Universiti Teknologi MARA, Segamat Campus,Malaysia
b,c Accounting Research Institute & Faculty of Business Management, Universiti Teknologi MARA, Segamat Campus, Malaysia
This paper discusses the underlying principles of Sukuk. The ultimate objective of the study is to provide an
understanding on the fundamental idea of Sukuk, its rating and its implication to default risk. Sources of data include
observation, documents and texts, specifically from Securities Commission Malaysia (SC), Rating Agency Malaysia
(RAM) and Malaysian Rating Corporation Berhad (MARC), Standard & Poor
subject matter. Despite showing consistent growth of issuance across countries, Sukuk may also promote default risk
as Sukuk also needs to undergo a credit rating assessment of its future payment prospects. Even though Sukuk
issuance comes together with asset security, however any negative migration of the credit rating assessment would
indicate default risk.
© 2012 Published by Elsevier Ltd. Selection and/or peer-review under responsibility of JIBES University,
Keywords: Sukuk; Rating; Defaul risk
1. Introduction
Sukuk represents a value of an asset and frequently referred to as an Islamic bond, but a more accurate
translation of the Arabic word would be an Islamic Investment Certificate. The Securities Commission
Malaysia (SC) defines Islamic private debt securities (IPDS) as any securities issued pursuant to any
Shariah principles and concepts approved by the Shariah Advisory Council (SAC) of the SC (SC, 2004).
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) (1999) defines Sukuk
certificates of equal value representing undivided shares in ownership of tangible assets, usufructs
and services in the ownership of particular projects or special investment activity, however, this is true
Available online at
© 2012 The Authors. Published by Elsevier Ltd.
Selection and peer-review under responsibility of JIBES University, Jakarta
Nor Balkish Zakaria et al. / Procedia - Social and Behavioral Sciences 65 ( 2012 ) 662 – 667
after receipt of the value of Sukuk, the closing of subscription and the employment of the funds received
for the purpose for which the Sukuk were issued.
Sukuk, which are compliant with Shariah Islamic law (Wilson, 2004), are an attractive investment
instruments for Islamic banks, takaful or Islamic insurance companies and Shariah managed funds that
cannot invest in conventional securities that involve payment of riba or interest. Sukuk enhance the
stability of financial institutions by providing them with improved portfolio, liquidity, and risk
management tools. Furthermore, Sukuk become highly demanded as there are an increasing number of
Muslims of high net worth, who want their asset holdings to comply with Islamic law (Wilson, 2008).
Recent modernization in Islamic finance has changed the dynamics of Islamic financial industry. The
demand for Sukuk or Islamic securities has become increasingly popular in the last few years and has
gained universal acceptance as a feasible alternative to conventional financial products. Sukuk have
developed as one of the most significant mechanisms to raise finance in the market through Islamically-
acceptable structure (Mohamed, 2008). This paper would therefore explore the underlying principles of
Sukuk, its rating and default risk implication due to Sukuk rating. The paper is organized as follows;
Section two discusses the construct of Sukuk by highlighting the differences between conventional bonds
and Sukuk, and elaborating the types of Sukuk and the global development of Sukuk. While Section three
discusses the Research methodology, Section four discusses Sukuk rating and default risk. The conclusion
of the paper is presented in the last section.
2. Construct of Sukuk
Both Sukuk and conventional bond have fixed term maturity, bear profit (coupon) and are tradable at
normal yield price. However, according to Bakar (2008), Sukuk are different from the conventional bond
as it represents the undivided shares in ownership of assets, usufruct, projects and services. Sukuk also
demonstrate the partnership relationship between the issuer and the investor. Meanwhile, conventional
bond is debt obligation, which can be either secured against certain underlying assets or unsecured in the
form of promise to pay. In return, the issuer promises the investors to pay back the amount plus interest at
its maturity date. In terms of differences between conventional bond and Sukuk; conventional bond is
clearly a debt instrument while Sukuk may be debt or equity instruments. In conventional bond,
bondholder owns the cash flow rather than the asset in Sukuk. Sukuk encompass variety of contracts to
create financial obligations while conventional bonds only issue a contract of loan to create indebtedness.
The return derives on bond is linked to interest, which is charged out of the loan contract while the return
on Sukuk is linked to profit elements. Sukuk have several types depending on its usefulness. The most
There are also other diversified and mixed asset Sukuk that emerged in the market such as hybrid Sukuk,
where the underlying pool of assets can comprise of Muraba
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 re-
sale of the commodity. is to settle the purchase price, which is securitized via the
issuance of Murabahah notes (Dar and Azami, 2010). Murabahah Sukuk cannot be legally traded at the
secondary market, as the certificates represent a debt owing from the subsequent buyer of the commodity
to the Sukuk holders and such trading of debt on a deferred basis is not permitted by Shariah. Mudarabah
Sukuk is investment Sukuk that represent common ownership of units of equal value in the Mudarabah
equity; the holders of Mudarabah Sukuk are the suppliers of capital and own shares in the Mudarabah
equity and its returns according to the percentage of share ownership (Wilson, 2008). Mudarabah Sukuk
should not contain a guarantee from the issuer or the manager of the fund, for the capital or a fixed profit,
or a profit based on any percentage of the capital.
664 Nor Balkish Zakaria et al. / Procedia - Social and Behavioral Sciences 65 ( 2012 ) 662 – 667
Musharakah Sukuk is investment Sukuk that represent ownership of Musharakah equity (MARC, 2006).
It does not differ from the Mudarabah Sukuk except in the organization of the relationship between the
party issuing such Sukuk and holders of these Sukuk, whereby the party issuing Sukuk forms a committee
from the holders of the Sukuk, who can be referred to for investment decisions. Musharakah Sukuk is
ideal for borrowing to finance large commercial ventures, such as a factory expansion or construction
projects. Musharakah Sukuk can be treated as negotiable instruments and can be bought and sold in the
secondary market. Ijarah Sukuk represents ownership of equal shares in a rented real estate or the usufruct
of the real estate. Holders of Ijarah Sukuk have the right to own the real estate, receive the rent and trade
their Sukuk in the secondary markets; in exchange they bear all cost of maintenance of and damage to the
real estate. Unlike lease financing under conventional methods, the responsibility to maintain the
underlying asset under the Ijarah facility rests on the financiers (Bakar, 2003). Upon default or maturity,
the issuing entity issues a promise to purchase the assets at an agreed price.
Salam Sukuk refers to a sale in which payment is made in advance by the buyer, and the delivery of the
asset is deferred by the seller (Wilson, 2008). It is more popular for short run financing Sukuk. The issuer
of the certificates is the seller of the goods of Salam; the holders are the buyers of the goods; they are
entitled to the sale price of the certificates or the sale price of the Salam goods sold through a parallel
Salam, if any. The profit is the difference between the purchase price and the sale price. Sukuk
are certificates that carry equal value and are issued to mobilize funds required for production of goods
and products that will be owned by the certificate holders. According to Engku (2008), the issuer of these
certificates is the manufacturer; the subscribers are the buyers of the intended product, while the funds
realized from subscription are the cost of the product. The Islamic bank is funding the manufacturer
during the construction of the asset, acquires title to that asset and up on completion either immediately
passes title to the developer on agreed deferred payment terms or, possibly, leases the asset to the
developer under an Ijarah Sukuk. Shariah prohibits these certificates to be traded in the secondary market.
Mudarabah and Musharakah are also known as equity financing in Islamic banking and to a certain extent
they have some risks (Mohd Jaffar, 2010). As for other Shariah contracts like Murabahah (cost plus
profit), Bai Bithaman Ajil (sales through installments), Ijarah (rent and buy), (manufacturing to
order) and a few more that have less risks or no risk (Arif, 1989), these contracts are categorized as loan
financing (BIMB, 1994).
In Malaysia, beginning in 1990s, the debt capital market has exhibited tremendous growth especially in
the area of Islamic securities. The consistent growth of Sukuk issuance, increase in knowledge and
expertise amongst market players, progressive development of the Malaysian regulatory framework and
desire to seek a wider investor base especially from the Middle East, have prompted the promulgation of
Sukuk issues based on the , Musharakah and Mudarabah. In terms of global
development, the overall Sukuk issuance volume also had increased to USD 179 billion at the end of Q2
2011 compared to 2010 (MIIFC, 2011). Kuwait Finance House (2012) reported that the global Sukuk
market grew nearly 40 per cent year-by-year to the end of May 2012 with USD 55 billion issued as of the
end of May 2012. Appetite among investors to launch Shariah compliant bonds to an increasingly
Sukuk issuer (Gavin, 2012). Standard &
Poor's (2009) reported that the past decade witnessed the Islamic financial services sector growing at a
rate of more than 10 per cent annually and has accumulating assets estimated to be worth USD 700 billion
worldwide. Islamic finance is emerging as an alternative source of finance in addressing major
development challenges faced by many Organization of Islamic Cooperation countries. The global market
for Islamic financial services, as measured by the total volume of Shariah compliant assets, is estimated to
have reached USD 1.1 trillion at the end of 2011. The Organization of Islamic Cooperation countries,
Nor Balkish Zakaria et al. / Procedia - Social and Behavioral Sciences 65 ( 2012 ) 662 – 667
growth story. Growth of global Islamic finance assets remained uninterrupted over the past decade. The
overall size of the industry increased notably from only USD 80 billion at the beginning of the last decade
to USD 1.1 trillion at the end of 2011.
3. Research Methodology
This paper conceptually discusses the construct of Sukuk with its rating and default risk implication. The
ultimate objective of the study is to provide an understanding on the fundamental idea of Sukuk, its rating
and its implication to default risk. Sources of data collection include observation, documents and texts,
specifically from Securities Commission Malaysia (SC), Rating Agency Malaysia (RAM) and Malaysian
Rating Corporation Berhad (MARC), Standard & Poor
matter. Written data sources include published an reports, reports,
newspapers articles and others. The financial information of Sukuk issuance and default over the period is
obtained from the SC, RAM, MARC and Standard & Poor report.
4. Sukuk Rating and Default Risk
Default on loan occurs when the borrower fails to make interest or principal payments when they are due.
Default risk affects the interest rate charged on a debt instrument. The greater the default risk, the higher
the interest rate charged by lenders. An increase in the riskiness of a borrower's operating cash flows will
increase the likelihood of default (Kleiman, 2012). As financial market complexity and borrower diversity
have grown over time, investors and regulators have increased their reliance on the opinions of the credit
rating agencies. Credit ratings are in use in the financial markets of most developed economies as well in
emerging market countries. Credit rating is a process of assessing the likelihood of timely payment of the
principal and interest/profit over the duration of a particular debt. The rating is graded into two broad
categories investment grade and non-investment grade. The investment grade comprise ratings of AAA,
AA, A and BBB, whilst the non- investment grade comprise ratings of BB, B, C and D. Bond or Sukuk
ratings assigned by all the rating agencies are meant to indicate the likelihood of default or delayed
payment of the security. To assist bond investors in making their assessment about the future payment
prospects of a particular bond issue, ratings services such as Standard & Poor's and Moody's Investors
Services assess the quality of various bonds by measuring default risk. Bond ratings have provided a good
guide in gauging the risk of default. Default rates are very low for higher-rated bonds, and increase as the
bond ratings decline. The higher the ratings are, the smaller the number of issues that would subsequently
default. With lower ratings, the default percentage increases dramatically. Thus, the default premium
widens as the ratings decrease.
As other conventional bonds, Sukuk may also promote default risk. Sukuk however are claiming to be
safer than conventional bonds as they theoretically transfer ownership of the underlying assets to the
holders, who in turn will earn a return on holding that asset (Othman and Kamarudzaman, 2012). This is
regarded as protection for the Sukuk holders in case of default. Even if the issuer defaults or goes
bankrupt, investors should be in a good position to recover much of their contributions. Therefore,
providing asset security or corporate guarantees (referred as Special Vehicle in Sukuk contracts) to
investors is vital in Sukuk structures. Sukuk also have to undergo credit rating similar to conventional
bonds. Despite being a leader in Sukuk market, Malaysia has also recorded cases of Sukuk defaults such
as Johor Corporation, Ingress Sukuk, Tracoma Holdings and Nam Fatt Berhad. Upon examining Sukuk
default, Majid, Shahimi and Abdullah (2010) suggest that Sukuk default occurs due to the breach of any
binding obligations under the original terms of the agreement between the issuer and the Sukuk holders.
666 Nor Balkish Zakaria et al. / Procedia - Social and Behavioral Sciences 65 ( 2012 ) 662 – 667
Performance of the Sukuk issuer highly affects the final rating on the Sukuk itself. Rating on Sukuk
reflects the creditworthiness of the issuer and stability of Sukuk. By having the annual rating reviews
conducted by the respective rating agencies, S
status and progress. In addition, negative rating migration (i.e. from A to B) on Sukuk may be significant
to the possibility of Sukuk default to a certain extent. Generally, Sukuk with higher ratings are unlikely to
default and vice versa. Bandyopadhyay (2006) posits that the credit quality worsens as the probability of
default increases. In the wake of a series of high profile Sukuk defaults in the Gulf Corporation Countries,
such as Investment Dar, Saad Group and Dubai ukuk are alleged to
have lost credibility as feasible and viable Islamic long-term project financing instrument (Raja Abd Aziz,
2010). (2009), the default rate for Malaysian sukuk
was relatively low at 0.46% in 2008. From 2002-2009, about 24 domestic sukuk had defaulted mainly
(96 .
5. Conclusion
Sukuk is vital and viable source of Islamic financing for the economic and social development. Sukuk
compose of various types depending owth and acceptance of Sukuk
are stable over the years and across the globe. However, the increasing number of defaulted Sukuk
should be one of the concerns because it is closely related to credit risk. Sukuk issuance still needs to
undergo a similar rating process like other bonds. Through this credit rating evaluation, in one hand,
Sukuk may be seen as reliable credit instruments as other conventional debt. However, on the other hand,
although Sukuk are issued together with asset security, Sukuk still faces the probability of default and
thus the essential. Future studies might focus on factors affecting Sukuk
The authors would like to acknowledge supports from Accounting Research Institute of Universiti
Teknologi MARA and Ministry of Higher Education of Malaysia.
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... 226;Rahman, Abdul, Muda, & Abdullah, 2014) that may lead to a moral hazard problem (Diamond, 1984;Kolsi & Zehri, 2014;Zhang, Cai, Dickinson, & Kutan, 2016), because the earnings of a sukuk holder (principal) under a partnership contract are subject to the best efforts and management ability of the issuer (agent), since sukuk holders are silent partners and cannot effectively penalize the issuer (agent, or active partner) for a bad investment. In a nutshell, a partnership sukuk does not necessarily guarantee a payment, or capital return (Alshamrani, 2014;Hamzah, 2016;Zakaria, Isa, & Abidin, 2012). Therefore, a partnership sukuk is clearly different from a fixed income bond that contractually guarantees earnings. ...
... Similarly, other equity pricing factors, such as firm size, value, profitability, and investment risks, are also less likely to be directly related to sukuk, as it is not a corporate stock, but a trust-certificate for the fixed-term investment in a firm (SCM, 2009, pp. 21;Zakaria et al., 2012;McMillen, 2007;Mohamed, Masih, & Bacha, 2015). ...
... It is an intriguing question, because sukuks were introduced to the market as an alternative to the conventional bond for corporate financing without infringing upon the Islamic tenets regarding financial transactions. It is a general perception that sukuk cash flow, ceteris paribus, is more uncertain than bond cash flow, due to contractual differences (Alshamrani, 2014;Hamzah, 2016;Zakaria et al., 2012), and rational investors inherently take this higher uncertainty into account when pricing a sukuk. To examine this matter, we first examine whether the difference between sukuk and bond returns shows any systematic pattern that may create an arbitrage opportunity for investors to switch between bonds and sukuks, as they are generally deemed to be alternative assets. ...
The global interest in sukuk, an Islamic alternative to bond financing, has grown rapidly, particularly after the 2008 global financial crisis, due to its distinctive features and investment quality. Sukuk were first launched in Malaysia and are presently available in 29 countries, including the United Kingdom, United States, Singapore, Hong Kong, and Luxembourg. Despite the global market prevalence of sukuk, asset pricing literature has not yet addressed the pricing mechanism of sukuk, which is inherently different from bonds and equity due to the contractual differences. However, analysts use LIBOR, or the Islamic interbank benchmark rate, as the ad‐hoc benchmark to evaluate sukuk performance. In this study, we develop a basic pricing model that captures the common risks in sukuk returns. We identify two risk factors for sukuk that require risk premiums: (a) sukuk market risk and (b) information asymmetry risk. Using these two common sukuk risks factors, investment analysts can estimate the fair value of sukuk more precisely than other ad hoc measures available.
... There is therefore a need to explore the modus operandi of such Á sukūk issuances/operations and the challenges facing their development. Findings by existing academic and professional works have affirmed Á sukūk as a technical instrument whose processes are not only sophisticated but intricate, engaging numerous entities and requiring much expertise, which entails significant costs (Sole, 2008;Securities Commission Malaysia, 2009a;Nazar, 2011;Zakariaa et al., 2012;Saeed and Salah, 2014;ISRA, 2015;Nagano, 2016;Tasnia et al., 2017;AAOIFI, 2017;Murugiah, 2018;Zolfaghari, 2017;Al-Ali, 2019;Paltrinieri et al., 2020;Balli et al., 2020). Due to the issues of sophistication and cost, issuance of Á sukūk is a complex and expensive task such that Á sukūk remains a financing instrument issued by sovereigns and large entities. ...
... If there is no centralized regulatory authority to supervise all aspects of the issuance, then there is possibility of breaching some of the current consumer protection standards used in capital markets. This is an issue noted in earlier research works (Sole, 2008;Majid et al., 2011;Zakariaa et al., 2012;Tasnia et al., 2017). The point that needs to be understood is that blockchain Á sukūk can also fail and that the risk of default still exists. ...
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Purpose This paper aims to explore issues arising from ṣukūk (Islamic bonds) on blockchain, including Sharīʾah (Islamic law) and legal matters. Design/methodology/approach A qualitative methodology is used in conducting this research where relevant literature on ṣukūk was reviewed. Through a doctrinal approach, the paper presents analyses on the practice of ṣukūk and ṣukūk on blockchain by discussing its legal, Sharīʾah and regulatory issues. This culminates in a conceptual analysis of blockchain ṣukūk and its peculiar challenges. Findings This paper reveals that digitizing ṣukūk issuance through blockchain remedies certain inefficiencies associated with ṣukūk transactions. Indeed, structuring ṣukūk on a blockchain platform can increase transparency of underlying ṣukūk assets and cash flows in addition to reducing costs and the number of intermediaries in ṣukūk transactions. The paper likewise brings to light legal, regulatory, Sharīʾah and cyber risks associated with ṣukūk on blockchain that confront investors, practitioners and regulators. This calls for deeper collaboration in research among Sharīʾah scholars, lawyers, regulators and information technology experts. Research limitations/implications As a pioneering subject, the paper notes the prospects of blockchain ṣukūk and the current dearth of literature on it. The paper would assist relevant Islamic capital market entities and authorities to determine the potential and impact of blockchain ṣukūk in their respective businesses and the financial system. Practical implications Blockchain ṣukūk will assist in addressing issues inherent in classical ṣukūk and in paving the way to innovative solutions that will facilitate and enhance the quality of ṣukūk transactions. For that, ṣukūk would require appropriate regulatory technology to address its governance and regulation peculiarities. Originality/value Integrating ṣukūk with blockchain technology will add value to it. The paper advances the idea that blockchain ṣukūk revolutionises ṣukūk and enhances its practice against known inadequacies.
... The majority of papers on sukuk defaults have been focusing on the local sukuk issuances. Particularly, significant number of papers are exploring the sukuk default cases on the Malaysian market (Alam et al. 2018;Kamarudin et al. 2014;Saad et al. 2016Saad et al. , 2018Shahida et al. 2014;Zakaria et al. 2012). In this paper we are focusing on the international sukuk market, and examining the international sukuk defaults, which are relatively less studied. ...
... In this paper we are focusing on the international sukuk market, and examining the international sukuk defaults, which are relatively less studied. A number of papers have been found that concentrate on the potential default forecast (Alam et al. 2018;Shahida et al. 2014;Zakaria et al. 2012), dispute management in case of default (Oseni 2014;Oseni and Hassan 2014), and post-default restructuring (Ahmad et al. 2018;Marinescu 2012;Tasnia et al. 2017). There is possibly a gap between default concept in the conventional law and the Shariah. ...
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The international sukuk market is represented by a limited number of issuers. One of the factors preventing companies from entering the market is, apparently, elucidating the true default risk of the potential sukuk issuance and related risk-minimization tools, such as guarantees and ratings. The article focuses on the default risk the potential sukuk issuer should consider. The research methodology includes a comparison between the theoretical maxims of sukuk, described by scholars and standard setters, and the existing market practice. To evaluate the potential impact of defaults and near defaults on the issuer’s reputation, a poll was conducted among the market practitioners. The results show that sukuk largely continue to imitate the bond market as per the default risk, and the path dependence of the industry on the ill-formed sukuk dominating the market impedes the revert to the initial concept of sukuk as an investment instrument. Certain steps are suggested for a potential issuer to minimize the default risk.
... One of the sharia products that attract investors is Sukuk. Sukuk has a significant potential to evolve as innovative Islamic financial instruments that obey the sharia principles (Ahmed et al., 2014;Haji Wahab & Naim, 2020;Zakaria et al., 2012a). ...
... The following is the data on the growing emission of Sukuk in the past several years. One of the guidelines in making an investment decision is on Sukuk's rating, which can categorize into investment and non-investment ranking (Melzatia et al., 2019;Zakaria et al., 2012a). Information related to Sukuk's ranking becomes essential as it provides informative statements and signals the probabilities of default risk. ...
The rating of Sukuk becomes the reflection of the capital markets' activities. The better rating of Sukuk, the more investor is interested in purchasing a Sukuk. This study aimed to examine the effects of leverage, liquidity, and profitability on Sukuk's rating. The technique of data analysis employed was ordinal logistic regression. The research result revealed that the leverage and liquidity affected the Sukuk. Meanwhile, the profitability did not affect the rating of Sukuk. The test result simultaneously showed that the leverage variable and liquidity affected the Sukuk rating. Overall, this study's research result supported the previous research that discovered the impacts of leverage and liquidity variables on Sukuk's rating. The implication is that companies should improve their leverage and liquidity performance to improve the bond rating. JEL Classifications: G1 How to Cite: Nurohman, D., Lutfiana, I. M., & Khoiriawati, N. (2020). Effects of Leverage, Liquidity, and Profitability on The Rating of Sukuk. Etikonomi: Jurnal Ekonomi, 19(2), xx – xx.
... Prior studies on sukuk have certain distinguished directions. The early and still evolving direction, with the emergence of new sukuk, is related to their types, structure, risk and their implications toward the mobilization of Shariah-compliant resources (Zakaria et al., 2012;Godlewski et al., 2013;Alswaidan et al., 2017;Hasan et al., 2019;Hussain and Khalil, 2019;Roslen et al., 2021;Bin-Nashwan et al., 2022). The expansion of sukuk market encouraged research on another direction that emphasized on the development of sukuk market and its JFRA interrelations with both stock and bond markets (Al-Amine, 2008;Said and Grassa, 2013;Smaoui and Khawaja, 2017;Klein et al., 2018;Bhuiyan et al., 2019;Maghyereh et al., 2019;Balli et al., 2022). ...
The choice between different financing sources is governed by a number of finance theories, particularly, trade-off theory and pecking order theory. However, the special characteristics of Islamic finance, which forces the exclusion of conventional bonds, leave Islamic banks with limited number of alternatives. Tier 1 sukuk are distinguished type of sukuk that combines the features of conventional bonds and stocks. This paper aims to answer the following question: Does the issuance of Tier 1 sukuk positively affect Islamic banks’ profitability or is their impact concentrated on enhancing Islamic banks’ capital adequacy ratios? The data set used in this study consists of all United Arab Emirates (UAE) Islamic banks that issued Tier 1 sukuk over the period 2010–2020. Pooled and fixed effects panel regressions of Tier 1 sukuk and other control variables on three proxies of Islamic banks’ profitability were run. The selection of fixed-effect model is based on Hausman test, redundant fixed effects and likelihood ratio test. This study reveals novel findings. Tier 1 sukuk increases both earnings per share (EPS) and capital adequacy ratios. That is, this study finds that there is a positive significant impact of Tier 1 sukuk on EPS, which indicates that issuing more Tier 1 sukuk will generate more return to shareholders in terms of higher EPS because of the lower cost of Tier 1 sukuk compared to equity. However, this study finds that there is an insignificant impact of Tier on sukuk on both return on assets and return on equity. Hence, it is concluded that Tier 1 sukuk does not increase the risk appetite of UAE Islamic banks.
... Credit and default risk reflect the ratings of Sukuk as rating agencies would scrutinize the creditworthiness of the Sukuk issuer (Zakaria et al., 2012). Therefore, Sukuk issuer reputation in the debt market is vital as one of the important rating factors. ...
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Sukuk has been developed into a global asset class, supporting development with the participation of a wide range of issuers and investors irrespective of demographic continents. Sukuk structuring is not only related to regulations imposed by the regulators but also has high consideration on rating and yield performance. This study aims to examine the effect of the Sukuk structures on Sukuk rating and yield in Bursa Malaysia (Malaysian Stock Exchange) listed companies during the term of 2008–2013. This study uses the ordinal logit regression model (OLRM) to investigate the effect of Sukuk structures on the rating, and the ordinary least-square (OLS) to investigate the effect of Sukuk structures on the yield. The result demonstrates two opposite directions after controlling for firm characteristics. While Sukuk rating is negatively related to Sukuk structures, Sukuk yield shows a positive direction with Sukuk structures. This study evidently shows that the selection of Sukuk structure is among the important factors for Sukuk yield performance, in addition to fulfilling the regulatory requirements on Sukuk structuring. The selection of the best structure can achieve the issuance and investment objectives. This study was limited to the study of the relationship between Sukuk structure on Sukuk ratings and yield using the aggregate data of Malaysian public listed companies that issued Sukuk during the period of 2008 to 2013. The study provides new insights into the issue of how the Sukuk structure influences the Sukuk rating and yield. The findings of this study contribute to the existing literature on the determinants of Sukuk ratings and yields.
... He found that majority investors of Sukuk keep on their own securities till the time of maturity. Zakaria et al. (2012) tested the Sukuks' concept and implications regather the risk. The data collection of thieve study represented by text and observation, and documentation. ...
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The purpose of current study is to be participated in such trends throughout testing the Index of legitimacy in the presence of shariah risks in Shariah reports. Furthermore, it aims to investigate and detect the influence of Shariah risks on legitimacy of Sukuk. Theoretical model is developed by the present study and analyzed data of 82 Sukuk's in Malaysian' Bursa. The data collected from the reports of Shariah in the period years between 2005 to 2015. The current study is a quantitative used Partial Least Squares (PLS). The study revealed that there is evidence show a negative impact of shariah risks on index legitimacy in the reports of shariah. The unique contribution of the present study that might strongly added to the literature regarding the impact of legitimacy index and risks of shariah from the shariah reports for Sukuk Markets. In addition, this study contributes by adding some implication to be added to policy whereby the policy is made management of Islamic financial institutions (IFIs) and shariah advisory council.
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Sukuk has started to be issued in Malaysia in the beginning of 1990s. Across the world, the issuance amount has annually been greater than 100 billion dolar. Middle East, Asia and Europe have been giving importance to sukuk as an alternative financing tool. Sukuk issuance was allowed to be issued in our country with the communique of Capital Markets Board (CMB) in 2010. The first issuance was launched by Kuveyt Türk Participation Bank in 2010. And also, sukuk has been issued by 4 four participation banks and private sector so far in our country. In 2012, the Undersecretariat of Treasury starting in sukuk issuance has accelerated the development of the sukuk market in our country. Investors have seen sukuk as an important financial instrument because of the fact that sukuk has the secondary market in our country. In this study, sukuk market showing the growth trend both globally and in our country has been examined. Firstly, this study has focused on the conceptual structure, features and types of sukuk. Different sukuk markets across the world has also been examined. There have additionally been detailed information about the sukuk market in Turkey comprising of the comparison between the CMB communique 2010 and the CMB communique 2013, the evaluation of sukuk issuances launched by institutions and organizations in Turkey and recommendations in order to support the development of the sukuk market in Turkey.
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Finans piyasasının içinde bulunduğu rekabet ortamında faizsiz finansal araçlar her geçen gün Müslüman ve Müslüman olmayan yatırımcıların ilgi odağı haline gelmektedir. Artan ilginin nedeni ise faizsiz finans piyasasının yatırımcı için daha az risk taşıması ve güven duyulan bir piyasa olmasından kaynaklanmaktadır. Sukuk (kira sertifikası), popüler olarak kullanımı artan ve son zamanlarda en fazla işlem görmekte olan bir faizsiz finansal yatırım aracı olarak ön plana çıkmaktadır. Faizsiz finans alanında yatırım araçları sadece katılım bankaları tarafından ihraç edilmekte ve piyasaya sunulmaktadır. Bu ise katılım bankalarını faizsiz finans merkezleri haline getirmiştir. Katılım bankaları tarafından yatırım araçlarının piyasaya sunulması, beraberinde pazarlama sorunlarını da ortaya çıkarmıştır. Sukuk, katılım bankaları tarafından en fazla piyasaya sunulan finansal yatırım aracıdır. Bu bağlamda, faizsiz bir finans aracı olan ve katılım bankaları tarafından ihracı gerçekleştirilen sukukun pazarlanmasında karşılaşılan sorunlar çalışmanın amacı olarak belirlenmiştir. Batman ilinde gerçekleştirilen çalışmada mülakat (yüz yüze görüşme) tekniği kullanılmıştır. Verilerin elde edilmesi amacıyla, Batman ilinde faaliyet gösteren beş katılım bankası ile görüşülmüş, ancak veriler dört katılım bankasından elde edilmiştir. Elde edilen veriler doğrultusunda, sukukun pazarlanmasında müşteride bulunması istenen kriterler açısından banka kaynaklı, bilgi birikimi, uzmanlık ve müşteri bilgilendirme açısından (özellikle sukuk pazarlamasında aktif rol alan banka personeli) personel kaynaklı, istenen kriterlere uyma ve talep edilen bilgi, belge ve ekonomik kaynakları karşılama açısından müşteri kaynaklı ve sözleşme kaynaklı sorunların olduğu sonucuna ulaşılmıştır. Çalışma sonucunda ulaşılan sorunlara yönelik çözüm önerilerinde bulunulmuştur.
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Sukuk have become increasingly popular as a feasible and viable shariah-compliant long-term financing instrument. Being the leader in sukuk market, Malaysia is committed to evolve its financial services sector to serve the needs of businesses and consumers, as well as to increase its appeal in the regional and global market shares of selected niches, in particular, the sukuk market. Sukuk markets around the world are growing to becoming significant sources of capital even though a series of high profile sukuk defaults in the Gulf Corporation Countries (GCCs) had tarnished the market's confidence on sukuk. Malaysia had also recorded several cases of sukuk defaults such as of Johor Corporation, Ingress Sukuk Berhad, Tracoma Holdings Berhad and Nam Fatt Corporation Berhad. The issue of sukuk default is very crucial since it affects the welfare of its stakeholders. Identification of default risk in sukuk is important for supervision and risk management purposes. Certainty with regard to the post-default process in sukuk transactions is necessary because the risk for a default exists in all types of transactions. Even the most prudently structured products can fail due to circumstances outside investors" control. Therefore, this paper aims to discuss the issue of sukuk default and its implication on Malaysian capital market. At the same time, it also intends to investigate the implication of sukuk default on a country"s reputation, the legal aspect and on the investor"s protection. The impact of sukuk default on Malaysian capital market as a hub for global Islamic finance industry is also discussed comprehensively in this study. It is hoped that this study will help sukuk issuers and rating agencies for estimation of credit risk and setting corporate pricing on a risk adjusted return basis, as well as the regulators in ensuring market stability and efficiency towards sustainable economic growth.
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Purpose – This paper aims at developing an early warning signal model for predicting corporate default in emerging market economy like India. At the same time, it also aims to present methods for directly estimating corporate probability of default (PD) using financial as well as non‐financial variables. Design/methodology/approach – Multiple Discriminate Analysis (MAD) is used for developing Z‐score models for predicting corporate bond default in India. Logistic regression model is employed to directly estimate the probability of default. Findings – The new Z‐score model developed in this paper depicted not only a high classification power on the estimated sample, but also exhibited a high predictive power in terms of its ability to detect bad firms in the holdout sample. The model clearly outperforms the other two contesting models comprising of Altman's original and emerging market set of ratios respectively in the Indian context. In the logit analysis, the empirical results reveal that inclusion of financial and non‐financial parameters would be useful in more accurately describing default risk. Originality/value – Using the new Z‐score model of this paper, banks, as well as investors in emerging market like India can get early warning signals about the firm's solvency status and might reassess the magnitude of the default premium they require on low‐grade securities. The default probability estimate (PD) from the logistic analysis would help banks for estimation of credit risk capital (CRC) and setting corporate pricing on a risk adjusted return basis.
Purpose The purpose of this paper is to provide an analysis of different sukuk structures from a financial perspective. This examination includes murabahah and ijara ‐based sukuk , the former offering a fixed return, and the latter, the most popular form of sukuk , a variable return. The potential for other more novel sukuk structures based on musharakah partnership contracts is also examined, and sukuk pricing issues are explored using alternative benchmarks to London Inter‐bank Offer Rate. Design/methodology/approach Flow charts are used to illustrate the financial transfers and the rights and obligations of sukuk investors as well as the beneficiaries of the funding. Historical data have used to assess whether the payments flows are more stable in the case of sovereign sukuk where the returns are based on gross domestic product (GDP) growth rather than interest. Findings The paper finds that special purpose vehicles are a prerequisite for the successful issuance and management of sukuk . The use of GDP‐based pricing benchmarks would have resulted in greater payments stability for sovereign debt in Saudi Arabia, but not for Malaysia. Research limitations/implications The data analysis was restricted to two countries, but this could be extended. Alternative pricing benchmarks were suggested for sovereign sukuk but not for corporate sukuk . Practical implications Ministries of Finance and Central Banks of Muslim countries should review their debt financing policies and explore the potential of sovereign sukuk . Originality/value Little has been written previously on the use of musharakah partnership contracts for sukuk , and pricing issues have not hitherto been systematically investigated.
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