Are Sukuk Securities the Same as Conventional Bonds?

Abstract

Sukuk securities have some similar features with conventional bonds, which is probably the reason why the financial press describe them as if they are the same. Mass media names sukuk as Islamic bonds. This paper investigates this matter empirically by first examining if the yield to maturities of sukuk securities and conventional bonds of same quality rating gives same returns to investors. We also conduct a test to see if there is a causal relationship between the two. Results show a significant difference in yield of sukuk against yield of conventional bonds. Moreover, results of Granger causality test do not show causal relation between yields of these two types of securities. Some differences between yield curves of Islamic Securities and conventional bonds of different types of issuers are identified.

Finally, the effect of issuance of ijarah sukuk on issuing firm’s beta is studied. The results shows that the absolute change in beta of the firm is significant, which needs careful interpretation so possibly providing a clue to the difference in yield of two securities.

Keywords: Sukuk, Bond, Islamic Finance, Granger Causality