Sukuk Securities and Conventional Bonds: Evidence of Significant Differences

Abstract

Sukuk securities have similar features with conventional bonds. The financial press has, however, inappropriately referred to Sukuk as Islamic bonds. This paper investigates Sukuk securities empirically by first examining the yields to maturities of Sukuk securities and conventional bonds of various issuers and maturities. Tests of differences in performance of the two classes of securities and Granger causality tests substantiate that these securities are different. This paper identifies some significant differences between the yield curves of Sukuk securities and those of conventional bonds of the same issuers for the same term and rating. Results show significant differences between the average yields of Sukuk and those of conventional bonds with the same quality and term issued by the same issuers from 2005 to 2012. Granger causality tests confirm that the yields of bonds do not Granger-cause the yields of Sukuk, verifying no causality between the two. There is strong empirical evidence that the two types of debt instruments are not the same. This prompts re-examination of investment advisory and valuation methodology currently applied in the Sukuk industry of 11 capital markets.

Keywords: Sukuk, Bond, Yield Curve, Yield-To-Maturity, Islamic Finance, Islamic Bond, Fixed Income Securities, Securitization, Debt Capital Market, Malaysia

JEL Classification: Z12, G12