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Sukuk and Bond Puzzle: An Analysis with Characteristics Matched Portfolios

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  • Mohammed Sawkat Hossain
  • Md Hamid Uddin
  • Sarkar Humayun Kabir

Abstract

A sukuk is an Islamic financial asset structured to offer investors a cash flow equivalent to that of a bond. The difference between them is in their contractual mechanism: a bond constitutes a lender–borrower relationship between the holders and issuers whereas a sukuk constitutes a lessor-lessee, buyer-seller, or a partnership relationship. Therefore, we examine whether they are different assets in terms of their return and risk profile. Given the difference between them, it is also important to identify what drives sukuk returns. The study finds that sukuk returns are insignificantly different from those of bonds but have significantly higher risk. However, we find that sukuk investors are not sufficiently compensated for the higher risk. Overall, our study finds that sukuks’ market performance is unrelated to bond market performance, but the market performance of the industry in which the sukuk-financed project originates has a significant effect on sukuk performance.

Suggested Citation

  • Mohammed Sawkat Hossain & Md Hamid Uddin & Sarkar Humayun Kabir, 2021. "Sukuk and Bond Puzzle: An Analysis with Characteristics Matched Portfolios," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(13), pages 3792-3817, October.
    • Handle: RePEc:mes:emfitr:v:57:y:2021:i:13:p:3792-3817
    DOI: 10.1080/1540496X.2019.1706478
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    Cited by:

    1. Shabeer Khan & Niaz Ahmed Bhutto & Uzair Abdullah Khan & Mohd Ziaur Rehman & Wadi B. Alonazi & Abdullah Ludeen, 2022. "Ṣukūk or Bond, Which Is More Sustainable during COVID-19? Global Evidence from the Wavelet Coherence Model," Sustainability, MDPI, vol. 14(17), pages 1-20, August.
    2. Awais Ur Rehman & Saqib Farid & Muhammad Abubakr Naeem, 2022. "The link between corporate governance, corporate social sustainability and credit risk of Islamic bonds," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 18(12), pages 5990-6014, May.

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