Do Debt Markets Price Sukuk and Conventional Bonds Differently?

Abstract

A new type of debt securities called sukuk certificates have grown to US $840 billion in 11 financial markets as of 2011. These Islamic debt instruments share some features similar to conventional bonds, so market operators treat both as bonds. Whether it is appropriate to treat sukuk certificates as conventional bonds is empirically tested in this paper. If the yields of sukuk are the same as those of conventional bonds, Granger causality tests could confirm their equivalence. Practically the tests show otherwise. Also, the yields of sukuk instruments are significantly higher than yields of conventional bonds even after controlling issuers, rating quality and tenure in matched samples tests. Finally, sukuk issuance affects the issuing firm's beta risk significantly, which is consistent with capital structure theory. These new findings on the 10-year old Islamic debt market have regulatory and market making policy implications as to whether sukuk instruments should be classed as a new class of financial instruments, and not as bonds. Future research and market practices have to re-investigate a number of issues anew because sukuk market is for a different class of debt.

Keywords: sukuk, Bond, Yield curve, Yield to maturity, Islamic finance, Islamic bond, Fixed income finance, Securitization, Yield spread

JEL Classification: Z12, G12