Why do companies issue sukuk?

Abstract

a b s t r a c t JEL classification: G14 P51This 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.

A Review of Islamic Investment Literature

“…The equity principle eliminates squandering of either party funds due to excessive risk-taking. As such, Islamic joint venture financing is affected more by selection decisions than moral hazard, which is similar to other findings on Islamic portfolios (Klein & Weill, 2016). As such, Islamic financial transactions prevail on the conditions that warrant rightful ownership of property which links the investment with the real economic sector.…”

“…Consequently, Islamic joint ventures are not a priority for risk-averse depositors, especially in the event of information asymmetry (Azmat et al, 2015a). As such, Islamic joint venture financing is affected more by selection decisions than moral hazard, which is similar to other findings on Islamic portfolios (Klein & Weill, 2016). However, Azmat et al (2015b) argue that Islamic joint ventures do not resemble equity-like products, which make it feasible for them to have a higher rating with lower risk, as they were shielded from the shock of the 2008 financial crisis.…”

“…However, Investors in Malaysia did not react to bond announcements but did react negatively to the stock market in the case of Sukuk (Godlewski et al, 2013;Klein & Weill, 2016). Meanwhile, Sukuk and bond announcements differed before, during and after the global financial crisis period.…”

“…6 Sukuk certificates had been used in Muslim society before the modern Islamic finance period (Hayat & Malik, 2014). Islamic bonds are structured in a way that conforms to Sharia guidelines and consists of the attributes of stocks and bonds (Klein & Weill, 2016). 7 Additionally, Ayub (2007) identified mixed portfolio Sukuk as another category other than the four mentioned earlier.…”

“…In essence, Sukuk is another means of mobilising funds to finance investment with an expected favourable yield to settle the future obligations, which allow it to access the capital market (Nagano, 2016). Islamic bonds are structured in a way that conforms to Sharia guidelines and consists of the attributes of stocks and bonds (Klein & Weill, 2016).…”