Sukuk Issuance Research Articles

How sukuk shapes firm performance

AbstractWith the large expansion of Islamic finance in the recent years, sukuk, which are the Sharia‐compliant substitute to conventional bonds, are now becoming more prominent. The aim of this study was to examine the impact of sukuk issuance on firm performance. To do so, we analyse how stock market performance and operating performance (OP) are influenced by issuance of sukuk and bonds on a sample of Malaysian listed companies. We consider the short‐term and medium‐term stock market reaction through the computation of cumulative abnormal returns and buy‐and‐hold abnormal returns. We investigate the impact on OP by performing regressions and by calculating abnormal operating performance (AOP) so that we can compare how issuance affects similar firms. We find that sukuk issuance generates a negative stock market reaction both in the short term and in the medium term. We also find evidence that issuing sukuk hampers OP. The analysis of AOP shows that sukuk issuers have better performance than their matched bond issuers, but that sukuk contributes to reduce the gap in performance over time. Overall, our results support the view that sukuk issuance hampers stock market performance, but that it is not attributable to a signalling effect on the bad financial situation of the issuer. We interpret our findings as evidence of adverse selection taking place on the financed projects and agency problems stemming from the specific sukuk structuring with stock market investors more reluctant to invest in sukuk issuers.

Religiosity vs. well-being effects on investor behavior

Does religiosity impact the trading of securities in financial markets? We separate two channels that could affect investor behavior, disentangling a religiosity effect from a well-being effect. Our original identification strategy compares the stock market reaction to sukuk and bond issuance during the holy month of Ramadan, allowing for a differentiated stock market reaction to the religious component of a trade. Using the event study methodology, we measure abnormal returns for a sample of 2140 issuances by 133 issuers in Malaysia over the period 2000–2013. While we find evidence for both channels, sukuk issuance during Ramadan is valued more positively than bond issuance by stock market investors. Further, the positive reaction to sukuk issuance during Ramadan only rewards firms which issue sukuk exclusively. Our findings support the view that religiosity influences the behavior of investors, suggesting that this factor should be taken into account in the analysis of financial markets.

What explains corporate sukuk primary market spreads?

This study investigates the determining factors of international corporate sukuk pricing in the primary market for the period of 2004–2015. We present novel evidence for a unique data set covering all 63 international corporate sukuk issuances consisting of both a fixed margin rating as well a credit rating score. Our cross-sectional analysis indicates that both credit rating and maturity are significant factors which reduce issue spreads, whereas sukuk margin rating increases issue spreads. More prominently, Shari’ah scholar reputation and the type of sukuk are not statistically significant factors in the explanation of the issue spread. Our results are comparable with determinants of conventional bond pricing, and our findings further confirm existing sukuk market practices.

Market Reactions Towards the Announcement of Sukuk Issuance: Evidence from Malaysian Market

ABSTRACT Drawing from the significance and implication that investors can use to properly comprehend the trend in market reaction from the new issuance of information, this study aims to investigate the market’s reaction toward the announcement of Islamic bond or sukuk. The Islamic bond market provides not only an avenue for more dynamic capital trades and portfolio diversification but also functions as an engine that accelerates the growth of the Islamic capital market. This study specifically aims to investigate whether the announcements of sukuk issuance that carry any new information can create impact on the market’s reactions. The overall sample time frame for this study is divided into three event windows; before, during and after the financial crisis in order to ascertain any unusual impact on the market’s return during the 2007-2008 financial crises. The stock market return is measured via the FTSE and Bursa Malaysia’s KLCI. In order to offer a more robust finding on the returns, this study re-measured the market return using Bursa Malaysia’s FTSE EMAS Index as it is a better representation of the sample population. The data collected from Bursa Malaysia, Bloomberg and DataStream database will be then analysed using Brown and Warner’s standard event study methodology of Brown and Warner (1985). Based on the 115 sukuk issuances between 2002 and 2013 (a period of 12 years), this study reveals that the effect of the announcement is significantly negative a day before and on the announcement date. On top of that, the result finds that there is a significantly positive reaction 30 days after the announcement of sukuk issuance which indicates that investors take a longer time to absorb the information from the sukuk announcement. The existence of a significantly positive reaction of stock markets during the financial crisis periods could be attributed to the conditions where the Islamic debt issuance might have sent an incredible signal about the financial position of the company, which have helped in solving the financial problem, especially during the economic downturn. However, the EMAS Index shows none of these significant results. The significant findings in this study (i.e., when uses the KLCI) are expecting to contribute clearer evidence and strategies concerning whether the information regarding sukuk can help investors to form a better investment strategy. Keywords: Sukuk; Islamic bond; Islamic finance; market reactions; stock market return

Sovereign sukuk issues: opportunities for Europe

In the course of the 2013 Islamic World Forum held in London, the former British Prime Minister David Cameron announced, before an audience of 1800 politicians and businessmen from 115 countries around the world, his government's plans for structuring the first European large sovereign sukuk [Arabic الصكوك]. This announcement was followed, in July 2014, by the first major issuance of sovereign sukuk by a European country. This study analyses the traits of sukuk - Islamic equity certificates - and contains reflections on the state of the European market and on the opportunities that sukuk issues may offer for financing large infrastructure projects or public debt and for multiplying the number of investors desirous of holding public debt issued by European countries in hard currencies.

Sovereign sukuk issues: opportunities for Europe

In the course of the 2013 Islamic World Forum held in London, the former British Prime Minister David Cameron announced, before an audience of 1800 politicians and businessmen from 115 countries around the world, his government's plans for structuring the first European large sovereign sukuk [Arabic الصكوك]. This announcement was followed, in July 2014, by the first major issuance of sovereign sukuk by a European country. This study analyses the traits of sukuk - Islamic equity certificates - and contains reflections on the state of the European market and on the opportunities that sukuk issues may offer for financing large infrastructure projects or public debt and for multiplying the number of investors desirous of holding public debt issued by European countries in hard currencies.

Comparative Analysis of Sukuk Issuance of US$ Tier 1 Capital Certificates Boubyan Bank and US$ Additional Tier 1 ADIB Capital Invest 1 Ltd

Comparative Analysis of Sukuk Issuance of US$ Tier 1 Capital Certificates Boubyan Bank and US$ Additional Tier 1 ADIB Capital Invest 1 Ltd

Sukuk issuance and information asymmetry: Why do firms issue sukuk?

This study investigates the factors that promote a bank borrower to issue sukuk rather than conventional debt security in Malaysia and Indonesia from 2000 to 2014. First, our empirical results show that a bank borrower is likely to approach the sukuk market as the funding size grows and if the firm is valued highly. Second, we find that under high information asymmetry, a firm with a high stock price and large funding demand prefers sukuk issuance to conventional debt. We conclude that firms use the sukuk market as an intermediate funding market when the funding demand is too large to borrow from banks and the information asymmetry is too high for them to approach the conventional debt market.

Determinants of The Islamic Social Reporting Disclosure

The issue of corporate responsibility was a warm up for discussion. This study aimed to analyze the influence of company issuing sukuk, size, and profitability on the disclosure of Islamic Social Reporting. This study uses secondary data obtained through the site www.bapepam.go.id and www.idx.co.id by using purposive sampling. The results showed that only size that affect the disclosure of ISR, so the larger the total assets of the greater disclosure of Islamic Social Reporting. Sukuk issuance has no effect because the ownership structure of companies in Asia, including Indonesia tends to family ownership concentration. Profitability has no effect because the company has a perspective that is different to the Islamic Social Reporting. DOI: 10.15408/aiq.v9i1.3771

Konsep dan Aplikasi Sukuk Negara dalam Pembiayaan Defisit APBNdi Indonesia

Increasing government expenditure which is not accompanied by increasing country Income can cause an enhancement State Budget deficit, so far, the government still fond to cover up budget deficit with foreign debt, where foreign debt is never apart from the interest as of the loan. Therefore, alternative way accordance with the principles of shari’ah which can become a source of financing of the state budget deficit need to issued. This research aims to know more in the concept of the sovereign sukuk issuance in state budget financing and to discover position of sovereign sukuk in state budget deficit in Indonesia. this research use literature study. To discuss more in and achieve the goal, attempting to collect data both primary and secondary. The processing of collecting data method of observation which is the first step to see and get the necessary data with how to observethe intensively books and other data source. Then analyzed using the way of thinking of the induction-deductions method to draw a conclusion. In order to analyze which conveyed more depth, continued analysis using descriptive analysis techniques analysis. This research results that sovereign sukuk potential to be developed as an alternativein accordance withthe principles of shari’ah which can become a source of financing the deficit with 3 publishing mechanism, namely Private placement, book building and auction. Position of sovereign sukuk in state budget deficit in 2010- 2014 is not clear because the deficitincrease from IDR 46.8 Trillion to IDR 241.5 Trillion, but in 2014- 2015 budget deficit decrease from IDR 241.5 Trillion to IDR 222.5 Trillion, while the financing of thestate budget deficit sourcefrom the issuance of the sovereign sukuk on2014-2015 experiencing an increase of IDR 265 Trillion to IDR 298 Trillion, that the allocationslook more detailed, transparent and orderly manner . And willreducethe budget deficit.

Using Bay Al-Inah in Issuance of Sukuk in Primary Market : A Look into Scholars' View

Using Bay Al-Inah in Issuance of Sukuk in Primary Market : A Look into Scholars' View

Accounting Issues in Sukuk Issuance

This research aims to establish an accounting guideline for Sukuk issuance in non-financial companies and it has a special significance in solving various accounting problems during the Sukuk issuing process. Online survey has been conducted to obtain the accountants’, academic and professional perceptions about the research questions, it covers several accounting issues, and it had received 25 on-line responses. In conclusion, we point, among other things, that the IFRS are accepted to account for Sukuk transactions, as using Special Purpose Vehicle is necessary to issue Sukuk, it should be consolidated by the Originator as well; it showed that Sukuk certificate could represent ownership of assets, represent liability or claim on the SPV and Right of usufruct of Assets. But the biggest part of respondents replied that Sukuk certificate should appear under liability.

Investigating FTSE KLCI Using CAAR Estimations Following Sukuk Announcement in Malaysia: Based on Sukuk Ratings

The intention of the article is to explore whether different rating announcements on sukuk issuance provide any supplementary information to market for the years 2004-2011 in Malaysia. Data collected from the Securities Commission Malaysia (SC) and Bloomberg database. This research classifies the sukuk ratings from highest to poor quality. The investigation exercises event study methodology using cumulative average abnormal return (CAAR) on symmetric and asymmetric performances based on the reaction of the FTSE Kuala Lumpur Composite Index (FTSEKLCI) to the news of sukuk issuance. The results designate positive and significant asymmetric reactions on sukuk issuance. The market responds positively and significantly to the announcements of sukuk for the rating of high-quality, excellent and good ratings. However, FTSE KLCI will react negatively for the medium, questionable and weak ratings. The conclusions would be useful to issuers, investors, and decision-makers in assessing the credit risk of sukuk issuance. This study assists the sukuk issuers and investors in making profitable decisions on their investment.

DOES SUKUK FINANCING PROMOTE ECONOMIC GROWTH? AN EMPHASIS ON THE MAJOR ISSUING COUNTRIES

For the past few decades, Islamic finance has imposed itself as a viable alternative / complementary system to the long existing conventional financial system. Nevertheless, recent research has claimed that Islamic finance as it is currently practice, does not promote economic growth. Hence, the objective of this study is to empirically test this claim, by examining the potential effect of Islamic finance in the specific form of Sukuk issuance on the economic growth represented by three proxies, namely, Gross Domestic Product (GDP), Gross Capital Formation (GDP) and trade activities. The data covers not only GCC (Gulf Cooperation Council), but also other countries including Malaysia, Indonesia, Turkey, Pakistan, Singapore, China, Brunei, Kazakhstan, Germany, United Kingdom (UK), The Gambia and France. The data were collected from the Islamic Finance Information Services (IFIS) and the World Bank databases, and were subsequently analysed through Toda and Yamamoto Granger Non Causality test. Accordingly, the findings indicated that the Sukuk issuance had an influence on the GDP and GCF only when all the countries were pulled together, otherwise no effect was identified for Saudi Arabia and the GCC. Keywords: Islamic Finance, Sukuk , Economic Growth, Financial Development, Saudi Arabia.

Agency costs and corporate sukuk issuance

Once a niche financial instrument, sukuk have become a mainstream alternative source of capital for corporations. This paper examines the motivations for firms to finance their investment opportunities using sukuk rather than conventional bonds, and their choice of sukuk structure. We test the agency implications of sukuk design for a sample of 230 corporate bonds issued in Malaysia from 2001 to 2014. Our results are consistent with the agency cost mitigation of free cash flow and underinvestment providing a core rationale for firms' adoption of such a complex asset-based financing. Our results are robust to sample selection bias, a wide array of controls, and alternative specifications.

Who issues Sukuk and when?: An analysis of the determinants of Islamic bond issuance

Using security issuer data from Malaysia, Indonesia, Saudi Arabia, and the United Arab Emirates from the 2001–2013 period, this study investigates how Islamic bond (Sukuk) issuers differ from conventional debt and equity issuers. An international comparative analysis of these three types of security issuers yields three key insights. First, accessibility to the Sukuk market is essential in choosing Sukuk issuance; other determinants will not promote the use of Sukuk, unless this requirement is first satisfied. Second, the low degree of financial constraints on a firm promotes Sukuk issuance, once the required condition of issuer accessibility to the Sukuk market is satisfied. Third, undervaluation of a firm in the pre-issuance period also encourages Sukuk issuance, once the issuer's Sukuk market accessibility condition is satisfied. Taken together, we conclude that Sukuk issuance is preferred along with market timing, once the pecking-order conditions of market accessibility are satisfied.

Why do companies issue sukuk?

This paper investigates the determinants for firms to choose sukuk over conventional bond. We investigate the potential impact of information asymmetries through moral hazard and adverse selection to explain why firms prefer using sukuk. We perform logit regressions of the choice of debt type to determine which characteristics lead a firm to issue a sukuk rather than a bond. We use a dataset of sukuk and conventional bond issuances in Malaysia from 2004 to 2013. We find evidence of the influence of information asymmetries and adverse selection on the choice of the sukuk market.

The Structural Development of Istisna Sukuk from a Shari'ah Perspective

Istisna sukuk structures have been widely accepted for manufacturing and construction financing purposes. This paper looks at the structural development of Istisna sukuk and evaluates both its basic and combination structures. Concerning the former, the paper argues that when Istisna is used for asset purchasing exercises, it should strictly comply with the general Shariah rules regarding Istisna contracts. Prices must therefore be stipulated at the beginning, as must quality and expected delivery times. The paper then highlights some conflicting features arising from the combination of Istisna and Ijarah transactions. These raise Shariah issues when the issuer seeks to lease an asset to the end user at maturity, even though the asset has been transferred to that end user by way of the Istisna contract. It is therefore recommended that the market innovates in order to develop additional structures free from this type of impediment. The study proposes a ‘multiple contract’ structure be used whenever Istisna sukuk is issued in combination with other debt and equity instruments. This will help overcome Shariah issues related to secondary markets in Istisna sukuk issuances.

Potensi Keterdedahan Risiko Syariah Syarikat Pengendali Takaful Terpilih Di Malaysia

Nowadays, various Islamic financial products have been developed and have grown tremendously in the financial markets, including Islamic equity, Islamic banking and takaful. The Islamic finance industry has its own uniqueness compared to the conventional financial industry due to the Islamic finance industry has a need for Shariah compliance in Islamic finance industry as known as Shariah risk. Globally, Islamic capital market was faced incident of Shariah risk in the end 2007 when Sheikh Taqi Uthmani has declared that 85% of sukuk issuance in the market are non Shariah compliant in the end of 2007 and cause a decrease of sukuk issuance in the following years in 2008. There are also dispute cases in Islamic banking in Malaysia such as issue of contract Bay 'Bithaman Ajil (BBA) is not shariah compliant. The takaful industry in Malaysia is also exposed to Shariah risks due to the shariah compliance requirements in all operations and activities of the takaful operator. Therefore, this study will describe the key elements that results shariah risk in Islamic finance. The research will identified potential of shariah risk using a qualitative methodology based on research data from five informants who were experienced shariah compliance management in takaful operator. This study will analyze qualitative data using a computerized program Altas.ti 7. The study infers that there are potential of Shariah risk and incident of Shariah risk in activities and operation of selected takaful operator in Malaysia.

Firm's Growth and Sustainability: The Role of Institutional Investors in Mitigating the Default Risks of Sukuk and Conventional Bonds

Abstract This study investigates the relationship of conventional bonds and sukuk’ yields spread to institutional investors using multivariate regression model. Secondary data was used for issuance (N= 212 of conventional bonds and 325 of sukuk) cover the 2000-2014 periods which are gathered from Bank Negara Info Bond Hub website. Though, data on issuer performance has been obtained from Bloomberg and Thompson Data Stream. The results revealed that monitoring role and voting rights decisions by owned large ownership of shareholding in the company have a relationship towards sukuk issuances in mitigating the default risks but not for conventional bonds. Overall, there are 6 variables statistically significant relationship with yields spread for conventional bonds compared to only 4 for sukuk. Implying that, sukuk issuance doesn’t have any significant relationship with the elements that involved “riba” for instance, volatility effects and inflation rate proxy by consumer price index (CPI) as recorded by conventional bonds. However, both types of issuances give a good signal for the firm's sustainability growth performance at 99 percent significant level to mitigate the default risks with respect to yield spreads of sukuk and conventional bonds.