Significant Difference in the Yields ofSukukBonds versus Conventional Bonds

Abstract

Bond yields of Treasury and corporate bonds are observed in a listed exchange. This article reports the findings on the market yield behaviour of two types of debt securities in the same exchange, the sharia-compliant sukuk bonds and the normal conventional bonds. There are 17 exchanges where sukuk bonds are traded, and the outstanding value is estimated at US$ 1,200 billion. The average yields of sukuk Treasury bonds are significantly higher (premium) than that of conventional Treasury bonds. On the other hand, investors in the sukuk corporate bonds receive slightly lower returns (discount) of about 25 basis points in the case of long-term sukuk bonds. To the best of our knowledge, this is the first study to verify these differences using appropriate advanced econometric methods. These results have far-reaching implications for the market practices as well as for teaching of bond pricing behaviour since this new form of debt markets is growing at about 17 per cent a year. JEL Classification: F23, F31, G12

Exploring the Yield Spread Between Sukuk and Conventional Bonds in Malaysia

“…Second is the stickiness of investors or Islamic institutions to Shariah-compliant instrument. Trading volume of sukuk in the secondary market is low because investors tend to buy and hold the instrument until maturity (Ariff et al, 2017; Najeeb et al, 2017; Ulusoy & Ela, 2018). Due to the limited supply of Shariah-compliant instruments in the market, Islamic institutions find it difficult to manage liquidity, especially over a short-term period.…”

“…Alam et al (2013) conclude that stock market participants react differently to sukuk issues over conventional bonds. While the findings in Ariff et al (2017) show a lower yield rate on the corporate-issued sukuk over the corporate-issued conventional bonds, Fathurahman and Fitriati (2013) find an opposite result in the Indonesian market. Thus, experiences may vary depending on country's regulation and practices (Hanefah et al, 2013;Karatas & Nienhaus, 2015;Saeed & Salah, 2014).…”

“…On the contrary, several empirical studies based on market data show the distinctive characteristic of sukuk over conventional bonds. Based on the data from Malaysia, there is a significant difference in the yield rate of sukuk in comparison to conventional bonds (Ariff et al, 2017; Ariff & Safari, 2012). Globally, sukuk offers diversification benefit due to higher mean return in the long run and lower volatility (Haque et al, 2018; Hassan et al, 2018).…”

“…The study by Ariff et al (2017) point out a yield spread puzzle between sukuk and bonds, though the authors have yet to provide a satisfactory explanation, justifying the observed phenomenon. They conclude that there was significant difference of yield rate between sukuk and conventional sovereign bond based on the prices traded from 2005 to 2014 in Malaysia.…”

The Volume of Issuance of Government Islamic Securities SR-007 Series, 2015–2018

“…This specialty of Sukuk has caused the volume of Sukuk issuance SR 001-SR 010 to grow with yield between 5.90%-12% (Direktur Jenderal Pengelolaan Utang, 2009). Other strong factors that influence investors' investing decisions are yields as payments that can take the form of profit/margin/fee or other forms of payment in accordance with Sukuk emission agreements granted to Sukuk holders until the end of the Sukuk period (M Ariff, Chazi, Safari, & Zarei, 2017;Melzatia, Doktoralina, & Mahroji, 2018;Sholihin, 2010). The yield rate shows that the Retail Sukuk SR-007 was highest in January 2018 (10.12%), while the lowest yield was in March 2017 (5.97%).…”