Credit Risk in Islamic Joint Venture Bonds

Abstract

This paper focuses on Islamic joint venture (IJV) bonds and examines whether conventional structural credit risk models capture Islamic bonds’ underlying risk. Their various extensions have first been adjusted for the IJV bonds’ unique characteristics and then tested through simulations to identify any appraisal issues. The models are then used to assess data from 52 Malaysian Islamic bond issuers. We find that conventional structural models and their Islamic extensions misevaluate IJV bonds and so afford them lower credit ratings.

Keywords: Credit risk, Islamic bonds

JEL Classification: G15, G24