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1 – 10 of 203Nur Amirah Borhan and Noryati Ahmad
This study aims to identify the determinants of Malaysian corporate Sukuk rating and attempts to find out which determinant has the most significant impact.
Abstract
Purpose
This study aims to identify the determinants of Malaysian corporate Sukuk rating and attempts to find out which determinant has the most significant impact.
Design/methodology/approach
The framework tries to establish a relationship between firm’s size, profitability, Sukuk guarantee status and types of Sukuk with Sukuk rating from the perspective of Agency Theory and Information Asymmetry Theory. The data consist of 43 Sukuk issuances from 2006 to 2015. Multinomial Logistic Regression Model is then used to find out the significant determinants of Sukuk rating.
Findings
The study found that only three variables significantly impact Sukuk rating. The results show that a guaranteed Sukuk Ijarah or a guaranteed Sukuk Musyarakah that is issued by a highly profitable firm has a higher likelihood of getting rating AAA or rating AA as compared to getting rating A. A type of Sukuk, particularly Sukuk Murabahah, is the most significant variable influencing Sukuk rating. However, firm size is not a significant determinant of Sukuk rating in the context of this study.
Research limitations implications
The first limitation of the study is the relatively small sample size. Second, the study only tested four independent variables.
Practical implications
Several implications are derived from the results of the study. First, new firms that are planning to issue Sukuk should consistently maintain a high level of profit and consider issuing debt-based Sukuk to ensure that the issued Sukuk have higher rating. To increase the likelihood of getting higher rating, they should also consider providing a third-party guarantor. As for existing Sukuk issuers that are in lower rating category, they should increase their profitability to be upgraded to higher rating category. Second, risk-adverse investors should invest in highly profitable, guaranteed and debt-based Sukuk, as these Sukuk are likely to be in higher rating category and provide guarantee in terms of capital payments during liquidation or bankruptcy. Third, to reduce information asymmetry, policymakers should make it compulsory for all Sukuk issuers to have their Sukuk rated annually and make it mandatory for all rating agencies in Malaysia to publish their Sukuk rating methodologies.
Originality/value
This paper helps to expand the limited existing literature about the determinants of Sukuk rating, particularly for the Malaysian corporate Sukuk.
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Zeyneb Hafsa Orhan, Sajjad Zaheer and Fatih Kazancı
This paper aims to achieve two goals: first, to evaluate the existing interest-free monetary policy tools in the major Islamic financial hubs of Malaysia, Pakistan and Bahrain…
Abstract
Purpose
This paper aims to achieve two goals: first, to evaluate the existing interest-free monetary policy tools in the major Islamic financial hubs of Malaysia, Pakistan and Bahrain and; second, to suggest how monetary policy tools in Turkey can be used in other countries.
Design/methodology/approach
This study follows a qualitative research method based on literature review, comparison, evaluation and design.
Findings
The policy rate cannot be used due to Shariah concerns. The reserve requirement depends on qard, and the reserves should be kept separately in the central bank. In terms of ijarah sukuk, Shariah concerns should be taken into account and a new structure, as displayed in Figure 3, should be followed. Government investment certificates can be used as an interest-free monetary policy tool. A genuine mudarabah interbank investments can also be used. Wadiah acceptance with no habitual gift can be used as well, and Tawarruq and central bank notes are not preferable due to Shariah concerns as well. Having said that, a Turkey-based tawarruq platform can be structured for others to use instead of applying to London.
Originality/value
This paper’s unique suggestion is to develop an interbank taqaruz market and a taqaruz method with the central bank. It is also unique for Turkey in the subject.
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The purpose of this paper is to provide an analysis of different sukuk structures from a financial perspective. This examination includes murabahah and ijara‐based sukuk, the…
Abstract
Purpose
The purpose of this paper is to provide an analysis of different sukuk structures from a financial perspective. This examination includes murabahah and ijara‐based sukuk, the former offering a fixed return, and the latter, the most popular form of sukuk, a variable return. The potential for other more novel sukuk structures based on musharakah partnership contracts is also examined, and sukuk pricing issues are explored using alternative benchmarks to London Inter‐bank Offer Rate.
Design/methodology/approach
Flow charts are used to illustrate the financial transfers and the rights and obligations of sukuk investors as well as the beneficiaries of the funding. Historical data have used to assess whether the payments flows are more stable in the case of sovereign sukuk where the returns are based on gross domestic product (GDP) growth rather than interest.
Findings
The paper finds that special purpose vehicles are a prerequisite for the successful issuance and management of sukuk. The use of GDP‐based pricing benchmarks would have resulted in greater payments stability for sovereign debt in Saudi Arabia, but not for Malaysia.
Research limitations/implications
The data analysis was restricted to two countries, but this could be extended. Alternative pricing benchmarks were suggested for sovereign sukuk but not for corporate sukuk.
Practical implications
Ministries of Finance and Central Banks of Muslim countries should review their debt financing policies and explore the potential of sovereign sukuk.
Originality/value
Little has been written previously on the use of musharakah partnership contracts for sukuk, and pricing issues have not hitherto been systematically investigated.
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Sukuk are popular means for governments to raise money through sovereign issues, and for corporations to obtain finance through corporate sukuk offerings. The purpose of this…
Abstract
Purpose
Sukuk are popular means for governments to raise money through sovereign issues, and for corporations to obtain finance through corporate sukuk offerings. The purpose of this study is to critically examine the issues revolving around various aspects of sukuk such as regulation, performance and future challenges from different Asian market jurisdictions.
Methodology/approach
Using various sukuk structures and other literatures, this chapter critically investigates some general legal and regulatory requirements for sukuk issuance, its required infrastructure in various jurisdictions in addition to some other relevant important issues to generate cash flows and raise finance through Islamic capital market (ICM) operations without violating the tenets of Sharī’ah in sukuk structures which ultimately helps the economic growth of the Asian region.
Findings
The study finds that in many Asian countries, a separate and specialised regulatory framework, as demanded by sukuk, is lacking and this instrument is treated under the same regulations as of conventional capital markets and their instruments. Some of the regulations may be appropriate for ICM and sukuk, however, most of these regulations need proper modification in order to treat sukuk with clear understanding.
Practical implications
Being part of a niche and new area of Islamic finance in the global financial market a plethora of confusion exists regarding various aspects of sukuk including regulation, performance and future challenges particularly in Asian jurisdiction where sukuk are largely in operation. Findings from this study can be used as a reference to understand the need of the proper modification of conventional regulations, the performance of sukuk in better ways, and meeting other relevant challenges.
Originality/value
Although the demands for having specialised regulatory framework of sukuk, or at least amendments in the current framework for conventional bonds is gaining momentum worldwide in order to accommodate sukuk in the capital markets according to their peculiar nature, it has not caught much attention of researchers and practitioners involved with Islamic finance. Therefore, this study is expected to add value to regulation, standardisation and performance of sukuk in the Asian market, and it deals with the obstacles in the growth of sukuk, which were not extensively covered earlier by the researchers and the Islamic finance industry practitioners.
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This study aims to learn how a three-way interaction moderation model is used to analyse the role of country-specific characteristics, in the form of the implementation of Sharia…
Abstract
Purpose
This study aims to learn how a three-way interaction moderation model is used to analyse the role of country-specific characteristics, in the form of the implementation of Sharia law and legal origin in a particular country, in the choice of sukuk type.
Design/methodology/approach
The firm profitability and firm leverages of sukuk issuer are used as the firm characteristics that can influence the choice of sukuk type between Mudharaba sukuk, Ijara sukuk and Murabaha sukuk. The research sample of 545 global sukuk issuances, obtained from the IIFS database, includes the issuance of Mudharaba sukuk, Ijara sukuk and Murabaha sukuk from ten sukuk issuer countries all over the world.
Findings
The research results show that the probability of choosing Mudharaba and Ijara sukuk is found in issuers sukuk with a high firm leverage, while the probability of choosing Murabaha sukuk is found in issuers sukuk with a high firm profitability. A three-way interaction moderation model is used in this research to explain that sukuk issuers in countries that implement Sharia law and adopt a legal origin common law system will have a higher choice of Mudharabah and Ijarah sukuk types if the firm’s leverage is high. If the firms’ profitability is high, then the sukuk issuer prefers Murabaha sukuk.
Research limitations/implications
The use of firm’s characteristic variables is based solely on trade-off theory and pecking order theory. Also, limitations on the implementation of Sharia law in countries that do not provide opportunities for countries that apply a mixed law system.
Practical implications
The role of Sharia law and common law legal origin is proven, through a three-way interaction model, to strengthen the interaction of the firm leverage and choice of Mudharaba sukuk.
Social implications
Legal certainty for Islamic financial institutions is created in the context of ease of investing in sukuk. Flexibility in the structure is also one of the factors that encourage the development of market acceptance of sukuk. The right structure of the sukuk can be used for specific target markets.
Originality/value
There has been no study carried out on a three-way interaction moderation model used to analyse the role of country-specific characteristics. The role of Sharia law and common law legal origin is proven, through a three-way interaction model, to strengthen the interaction of the firm leverage and choice of Mudharaba sukuk.
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Siti Raihana Hamzah, Obiyathulla Ismath Bacha, Abbas Mirakhor and Nurhafiza Abdul Kader Malim
The purpose of this paper is to examine the extent of risk shifting behavior in bonds and sukuk. The examination is significant, as economists and scholars identify risk shifting…
Abstract
Purpose
The purpose of this paper is to examine the extent of risk shifting behavior in bonds and sukuk. The examination is significant, as economists and scholars identify risk shifting as the primary cause of the global financial crisis. Yet, the dangers of this debt-financing feature are largely ignored – one needs to only witness the record growth of global debt even after the global financial crisis.
Design/methodology/approach
To identify the signs of risk shifting existence in the corporations, this paper compares each corporation’s operating risk before and after issuing debt. Operating risk or risk of a firm’s activities is measured using the volatility of the operating earnings or coefficient variation of earning before interest, tax, depreciation and amortization (EBITDA). Using EBITDA as the variable offers one distinct advantage to using asset volatility as previous research has – EBITDA can be extracted directly from firms’ accounting data and is not model-specific.
Findings
Risk shifting can be found in not only the bond system but also the debt-based sukuk system – a noteworthy finding because sukuk, supposedly in a different class from bonds, have been criticized in some quarters for their apparent similarity to bonds. On the other hand, this study thus shows that equity feature, when it is embedded in bonds (as in convertible bonds) or when a financial instrument is based purely on equity (as in equity-based sukuk), the incentive to shift the risk can be mitigated.
Research limitations/implications
Global awareness of the dangers of debt should be increased as a means of reducing the amount of debt outstanding globally. Although some regulators suggest that sukuk replace debt, they must also be aware that imitative sukuk pose the same threat to efforts to avoid debt. In short, efforts to ensure future financial stability cannot address only debts or bonds but must also address those types of sukuk that mirror bonds in their operation. In the wake of the global financial crisis, amid the frantic search for ways of protecting against future financial shocks, this analysis aims to help create future stability by encouraging market players to avoid debt-based activities.
Originality/value
This paper differs from the previous literature in two important ways, viewing risk shifting behavior not only in relation to debt or bonds but also when set against debt-based sukuk, which has been subjected to similar criticism. Indeed, to the extent that debts and bonds encourage risk shifting behavior and threaten the entire financial system, so, too, can imitation sukuk or debt-based sukuk. Second, this paper is unique in exploring the ability of equity features to curb equity holders’ incentive to engage in risk shifting behavior. Such an examination is necessary for the wake of the global financial crisis, for researchers and economists now agree that risk shifting must be a controlled behavior – and that one way of controlling risk shifting is by implementing the risk sharing feature of equity-based financing into the financial system.
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Siti Raihana Hamzah, Norizarina Ishak and Ahmad Fadly Nurullah Rasedee
The purpose of this paper is to examine incentives for risk shifting in debt- and equity-based contracts based on the critiques of the similarities between sukuk and bonds.
Abstract
Purpose
The purpose of this paper is to examine incentives for risk shifting in debt- and equity-based contracts based on the critiques of the similarities between sukuk and bonds.
Design/methodology/approach
This paper uses a theoretical and mathematical model to investigate whether incentives for risk taking exist in: debt contracts; and equity contracts.
Findings
Based on this theoretical model, it argues that risk shifting behaviour exists in debt contracts only because debt naturally gives rise to risk shifting behaviour when the transaction takes place. In contrast, equity contracts, by their very nature, involve sharing transactional risk and returns and are thus thought to make risk shifting behaviour undesirable. Nonetheless, previous researchers have found that equity-based financing also might carry risk shifting incentives. Even so, this paper argues that the amount of capital provided and the underlying assets must be considered, especially in the event of default. Through mathematical modelling, this element of equity financing can make risk shifting unattractive, thus making equity financing more distinct than debt financing.
Research limitations/implications
Global awareness of the dangers of debt should be increased as a means of reducing the amount of debt outstanding globally. Although some regulators suggest that sukuk replaces debt, they must also be aware that imitative sukuk poses the same threat to efforts to avoid debt. In short, efforts to ensure future financial stability cannot address only debts or bonds but must also address those types of sukuk that mirrors bonds in their operation. In the wake of the global financial crisis, amid the frantic search for ways of protecting against future financial shocks, this analysis aims to help create future stability by encouraging market players to avoid debt-based activities and promoting equity-based instruments.
Practical implications
This paper’s findings are relevant for countries that feature more than one type of financial market (e.g. Islamic and conventional) because risk shifting behaviour can degrade economic and financial stability.
Originality/value
This paper differs from the previous literature in two important ways, viewing risk shifting behaviour not only in relation to debt or bonds but also when set against debt-based sukuk, which has been subjected to similar criticism. Indeed, to the extent that debts and bonds encourage risk shifting behaviour and threaten the entire financial system, so, too, can imitation sukuk or debt-based sukuk. Second, this paper is unique in exploring the ability of equity features to curb equityholders’ incentive to engage in risk shifting behaviour. Such an examination is necessary for the wake of the global financial crisis, for researchers and economists now agree that risk shifting must be controlled.
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Datien Eriska Utami, Irwan Trinugroho and Bruno S. Sergi
We empirically investigate the determinants of sukuk issuance type in Indonesia to issue either ijarah sukuk or mudharabah sukuk. We include sukuk characteristics, sharia-related…
Abstract
We empirically investigate the determinants of sukuk issuance type in Indonesia to issue either ijarah sukuk or mudharabah sukuk. We include sukuk characteristics, sharia-related factors, and firm characteristics, provide empirical evidence on the determinants of sukuk issuance type by incorporating sukuk-specific factors, firm-specific factors, and sharia compliance variables, and address the role of Sharia Supervisory Board, as the sharia representative of firm compliance for sharia products, in the issuer’s choice of sukuk type. By studying 88 sukuk issuance in Indonesia from 2009 to 2017, we find that firm profitability and the sharia compliance level have a significant effect on the probability of issuing mudharabah sukuk. Some other factors’ characteristics including sukuk yield, firm age, and inflation rate are also found to have a significant effect.
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Abu Umar Faruq Ahmad, Aishath Muneeza, Mohammad Omar Farooq and Rashedul Hasan
Sukuk restructuring primarily aims at offering a debtor more latitude, in form and time, to settle his obligations. To meet Shari’ah requirements of transferring assets to Sukuk…
Abstract
Sukuk restructuring primarily aims at offering a debtor more latitude, in form and time, to settle his obligations. To meet Shari’ah requirements of transferring assets to Sukuk holders in asset-based Sukuk, the originator usually transfers the beneficial ownership to the issuer special purpose vehicles (SPV). However, in asset-backed Sukuk, the originator sells the underlying asset to an SPV and Sukuk holders do not have recourse to the originator in the event of defaults. Among some key unresolved Shari’ah issues in this regard is whether a change of contract necessitates entering a new contract. Other related issues that conflict with the tenets of Shari’ah are: (1) Sukuk structuring on tangible assets and debts; (2) receiving the full title by the Sukuk holders to the underlying assets in the event of default in case of securities that are publicized as asset backed; (3) Sukuk’s similarity with interest bearing conventional bonds: (a) capital guarantee by the originator or third party, (b) the originators’ promise to repurchase Sukuk at face value upon their redemption, and (c) providing internal and external credit enhancement. The Shari’ah-compliance of the above-mentioned clauses and structures of Sukuk remain debated among the Shari’ah scholars. Based on some specific cases, this study examines the Shari’ah viewpoint on sukuk restructuring and potential solutions to these unresolved Shari’ah issues in light of the past and recent declaration of some Sukuk defaults as non-Shari’ah complaints. Undoubtedly, resolution of these and other unresolved issues pertaining to Sukuk defaults can help strengthen the confidence of investors in Islamic capital market structures.
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