The islamic finance having more than 400 islamic banks and financial organizations operating in 58 countries is flourishing in todays global capital market with a spectacular growth rate and stability over the last several. The buyer can pay the price on the spot or establish deferred payment terms paying either in installments or in one future lump sum. However, when we talk about the context of islamic finance and its instrument, it is certainly not free from the rules of islamic law as other muamaalat chapters, from where appears significant difference between conventional sukuk and islamic sukuk, especially those in the. Another major difference between sukuk and conventional bonds is asset ownership which is borne out of the general structures of islamic finance products.
In the conventional bond the underlying asset is money debt and in the sukuk the. Another important difference between bonds and sukuk is that the assets involved in sukuk certificates comply with all laws of islam. Islamic finance, sukuk, conventional financial instrument, valuation method, capital structure effect, key challenge. Apr, 2015 sukuk could be based on mudaraba, musharaka, murabaha, salam, istishna, ijara or hybrid of all these page 3 4.
With sukuk, the future cash flow from the underlying asset is transferred into present cash flow. Although, a bond may also indicate this, the real definition of a bond simply indicates a debt obligation. Tun abdul razak university abstracts islamic bonds sukuk and conventional bond markets operate simultaneously in malaysia complementing each other. Modern sukuk emerged to fill a gap in the global capital market. The piety premium of islamic bonds middle east quarterly. May 20, 20 in the case of restructuring or its application, islamic sukuk is not much different from the conventional sukuk bonds. For securities issued by government agencies such as cagamas, the mean yields of sukuk securities and conventional bonds are significantly different, except for securities.
We attribute the negative cumulative abnormal returns for bonds during the crisis. The second is to explore specific advantages and disadvantages of sukuk during certain market conditions, such as financial crisis of 2008. Resource upheld sukuk are such where a real deal has occurred and the spv controls the fundamental resource. Both sukuk and bonds can have some particular features. This objective of the research helps to enhance the knowledge of the researcher in the field of a financial instrument, as sukuk is one of the new financial products. The key difference between conventional securitization and asset securitization in islamic finance is the end investors ownership rights, or access, to the. In comparison, under sukuk structure the sukuk holders each hold an undivided.
Difference between conventional bond and sukuk2 in its simplest form, a bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specified dates, interest and principal. However, for conventional bonds, only gdp shows a significant negative effect on the relationship. In conventional bond structure, issuer is under obligation to pay interest payments and principal at the maturity. Five important differences between sukuk and traditional bonds. Sukuk are financial instruments and certificates of equal value representing undivided shares in ownership of tangible assets projects usufructs services and broadly any economic activity. The riskfree interest rate is defined here as the yield on 10year u. The authors confirmed the advantages and the value added offered by the islamic capital market of sukuk. Feb, 20 however, the debate among scholars in distinguishing sukuk from its conventional counterpart is still ongoing. Differences and similarities in islamic and conventional banking muhammad hanif. Want to learn halal ways to make money and build wealth. However, there are many differences between sukuk and bonds. The contract requires a fixed price and product specifications that both parties agree to. Theyre a debt obligation from the issuer to the bond holder. Islamic investors want to balance their equity portfolios with bondlike products.
Conceptual and structural differences between bonds and sukuk. Shareholder wealth perspective abstract this paper investigates whether the stock market reacts differently to the issuance of fixedrate sukuk as compared to fixedrate conventional bonds and hence, if there is a difference in the shareholder wealth effect of these two types of issuances. Similarities of sukuk and conventional bond both sukuk and. Are islamic bonds different from conventional bonds. 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 2014. Sukuk represent ownership of real assets, whereas conventional bondholders own debt. The first and most striking difference in investor behavior between sukuk and conventional bonds is in the reaction of the market to changes in the riskfree interest rate r t free. Objective research on sukuk bond a new financing product. The maximum difference between yields of sukuksecurities and conventional bonds issued by government occurs for securities with 3 years maturities and the difference is 6.
Though a benefit based sukuk is a securitization of the advantages which is nearer in structure to a conventional bond. No ownership in the business, joint venture or project is conferred on the bond holder. Sukuk and conventional bond securities have some similarities that led to practitioners and the mass media as well as some academics to consider sukuk as being similar to conventional bonds except for islamic regulations applying for the issue of sukuk bonds. Comparison between the performance of sukuk and conventional bond in malaysia xv preface this research paper is submitted as a part of the requirement to fulfill for the bachelor of finance hons course. Sukuk, as discussed above, is a certificate of ownership right in particular underline, and you get rent income from that particular source but as we know in case of the conventional bond source of income is not disclosed, nor bondholders have an ownership right on any particular underline asset.
Significant difference in the yields of sukuk bonds versus. Comparison between islamic sukuk and conventional bonds. Sukuk could be based on mudaraba, musharaka, murabaha, salam, istishna, ijara or hybrid of all these page 3 4. Similarities of sukuk and conventional bond both sukuk and conventional bonds can be rated by any of the rating agencies. The holder of sukuk is entitled to receive periodical payments based on the proceeds generated by the underlying. The contract specifies a profitsharing ratio and indicates that the obligor will contribute assets such as cash or property to the joint venture. The islamic finance having more than 400 islamic banks and financial organizations operating in 58 countries is flourishing in todays global capital market with a spectacular growth rate and stability over the last several decades world bank, 2016. However, there exist some fundamental differences between the two instruments that such a description is misleading. To the best of our knowledge, this is the first study to verify. The difference between sukuk yield and conventional bond yield tends to be larger for maturities between 2 years and 15 years. Want to know what sukuk are, and how they differ from conventional corporate or treasury bonds. Oct 09, 2017 conventional bond vs sukuk amila nahar.
Jul 26, 2014 sukuk ownership indicates ownership of an asset that has value. These sukuk holders are investors looking for shariah compliant securities. The first aim is to study the advantages and disadvantages between and conventional sukuk bonds. Apr 15, 2016 difference between conventional bond and islamic bond sukuk distinguishing sukuk from conventional bonds conventional bonds sukuk asset ownership bonds dont give the investor a share of ownership in the asset, project, business, or joint venture they support. Relative risk of islamic sukuk over government and. Sukuk al istisna islamic project bond i stisna is a contract between a buyer and a manufacturer in which the manufacturer agrees to complete a construction project by a future date. Sukuk certificates derived from an underlying murabaha structure may still be negotiable if the murabaha receivables form a small proportion exact percentages may vary depending on the transaction and the analysis of each sharia scholar of a larger portfolio of sukuk assets comprising mostly other negotiable instruments such as sukuk al.
Differences and similarities in islamic and conventional. Both of these financial vehicles, conventional bonds and sukuk, attempt to mobilize the funds from surplus spending units to shortage spending units. The spv uses the sukuk proceeds to pay the originator the purchase price of the tangible assets. Because sukuk are assetbased securities not debt instruments they fit the bill. Claims that islamic finance is more resistant to crisis compared to the conventional finance is analysed in this thesis through the comparison between sukuk and bond financing. Each sukuk has a face value based on the value of the underlying asset, and the investor may pay that amount or as with a conventional bond buy it at a premium or discount. The word sukuk is used to denote the islamic equivalent of traditional bonds. The debt management office dmo nigeria is a government agency established to centrally coordinate the management of nigerias debt.
In the case of restructuring or its application, islamic sukuk is not much different from the conventional sukuk bonds. This present research aims at examining the comparative study between the sukuk, a new financing product and conventional bond. Although there are various fundamental differences between the sukuk and conventional bonds, both instruments try to solve the same common financial problem of raising capital for needed entities. The aaoifi has laid down 14 different types of sukuk.
Pdf comparison between sukuk and conventional bonds. These tests were performed on maturities ranging from three months to 20 years from various types of issuers in malaysia. Thus, claim embodied in sukuk is not simply a claim to cash flow but also an ownership claim. Sukuk securities and conventional bonds, comparison of the. The spv will also declare a trust over the tangible assets and hold the assets as a trustee for the sukuk holders, who are the beneficiaries. Although there are various fundamental differences between the sukuk and conventional bonds, both instruments try to solve the same common financial problem of. Sukuk investors receive profit generated by the underlying asset on a periodic basis while bond investors receive periodic interest payments. Islamic finance difference between sukuk and bonds.
Difference between conventional bond and islamic bond sukuk distinguishing sukuk from conventional bonds conventional bonds sukuk asset ownership bonds dont give the investor a share of ownership in the asset, project, business, or joint venture they support. In other words, sukuk represent ownership in a tangible asset, usufruct of an asset, service, project, business, or. Difference between conventional bond and sukuk in its simplest form, a bond is a contractual debt obligation wher eby the issuer is contractually obliged to pay to bondholders,on certain specified dates, interest and principal. These sukuk are not common because their payments to investors represent debt. However, when we talk about the context of islamic finance and its instrument, it is certainly not free from the rules of islamic law as other muamaalat chapters, from where appears significant difference between conventional sukuk and islamic.
Bond yields of treasury and corporate bonds are observed in a listed exchange. However, the debate among scholars in distinguishing sukuk from its conventional counterpart is still ongoing. There are mainly three differential points between sukuk and conventional bonds. Indeed, sukuk are now promising tools for financing and for investors. A musharakah contract is a contract between partners whether the contract is between the issuer and the sukuk holders, or a musharakah contract among sukuk holders.
In order to investigate the possible existence of a difference between the yield to maturity ytm of sukuk securities and the ytm of conventional bonds for the same duration and same issuer, pairsampled ftests have been conducted. Difference between sukuk and conventional bond coursebb. In the conventional bond the underlying asset is money debt and in the. They suggest that with longterm maturities 15 or 20 years. Ariff and safari 20 examined the differences between the yields of sukuk and conventional bonds for different maturities ranging from 3 months to 20 years. Sukuk are the financial certificates which are termed as an islamic equivalent bond watkins, 2011. Pdf significant difference in the yields of sukuk bonds. On the other hand, investors in the sukuk corporate bonds receive slightly lower returns discount of about 25 basis points in the case of longterm sukuk bonds. Consequently, while sukuk represents a share in the project, business or. Compare and contrast sukuk islamic bonds with conventional. Although the sukuk almurabaha structure is less commonly used in comparison to some of the other sukuk structures described in this chapter 2 sukuk structures, it could be considered as a possible alternative where it is not possible to identify a tangible asset for the purposes of the underlying investment in the islamic finance industry, the term murabaha is broadly.
While a conventional bond is a promise to repay a loan, sukuk constitute partial ownership in a debt, asset, project, business or investment. Difference between islamic bond sukuk and conventional bond. At its root, the relationship between the issuer of a bond and the consumer is very different from the relationship between the issuer of sukuk and the purchaser of sukuk. The difference between the means is a positive figure, indicating that islamic securities tend to yield more than conventional bonds issued by the government of malaysia.
Since sukuk are shariacompliant, they are not really debt instruments. What is the primary difference between sukuk and conventional bonds. Sukuk ownership indicates ownership of an asset that has value. Sukuk typically represent an undivided beneficial ownership interest in certain tangible assets save for certain receivables, such as zhimam or duyun, the usufruct of an asset or certain projects or investment activities. There are 17 exchanges where sukuk bonds are traded, and the outstanding value is estimated at. Sukuk differ in nature from bonds, irrespective of a few similarities. Sukuk al murabaha cost plus or deferred payment sukuk a murabaha contract is an agreement between a buyer and seller for the delivery of an asset. Sukuk are, and must be, backed by assets, projects and or economic activities assetbacked sukuk while conventional bonds are based on debt. The title chosen for this research project is comparison between performance of sukuk and conventional bond in malaysia. There are fundamental riskreturn differences between the two.
In addition to shariah compliance, a key difference between sukuk and conventional bonds is that that the former is based on the income of a tangible assets or rights to a business generating an income, which in turn is supposed to benefit the real economy as well wider society. Are sukuk securities the same as conventional bonds. To a large extent, sukuk holders own part of the underlying assets in any sukuk transaction depending on the extent of their investment which determines the share they are entitled to. A bond represents the issuers pure debt, while sukuk represent ownership stake in an.
Relative risk of islamic sukuk over government and conventional bonds by ravindran ramasamy, shanmugam munisamy, mohd hanif mohd helmi. The present research is based on the sukuk bond, a new financing product and on the basis of which a comparative study between the sukuk and conventional bond will be studied. The convergence between islamic and conventional finance, particularly in the case of sukuk, is gaining momentum as foreseen by several scholars mirakhor 2007. Both sukuk and bonds in some cases may have the same characteristics. Ariff and safari 2012 examined the deference between sukuk and conventional bonds by investigating the. Sukuk and conventional bonds do share similar characteristics such as. Five important differences between sukuk and traditional.
Sukuk market has been growing tremendously since it has first been issued in the global market. Although sukuk is also similar to stocks in the sense that it represents. A comparative analysis of sukuk and conventional bonds. This article reports the findings on the market yield behaviour of two types of debt securities in the same exchange, the shariacompliant sukuk bonds and the normal conventional bonds. The average yields of sukuk treasury bonds are significantly higher premium than that of conventional treasury bonds. Sukuk represents ownership in the asset against which sukuk are issued as underlying asset. Similarities between sukuk and conventional bonds finance. A sukuk is an islamic financial certificate, similar to a bond in western finance, that complies with sharia islamic religious law. Treasury bonds, widely considered in financial markets to be one of the safest and most. Instead, the sukuk alijarah structure uses the leasing contract as. This paper aims at assessing the potential difference between sukuk and conventional bonds by capturing any additional diversification benefit that can be gained by adding sukuk in to conventional fixed income portfolio. How sukuk islamic bonds differ from conventional bonds.
However, the debate among scholars in distinguishing sukuk. For the kruskalwallis test, the null hypothesis is that the sukuk and bond events samples come from identical populations. This said, there are certain differences between conventional bonds and sukuk. In the case of bonds, the bond certificate may be backed by assets that are not compliant with shariah, which may be bundled together with other types of assets without the consumers knowledge. This is because any lending where interest is involved is strictly prohibited as per sharia law. Pdf on account of the prohibition of interest riba, islamic finance is generally considered not. Dec 05, 2016 want to know what sukuk are, and how they differ from conventional corporate or treasury bonds. Figures in table 8 indicate that the difference of caars between sukuk and conventional bond issues is significant for the event windows.