Exploring the Yield Spread Between Sukuk and Conventional Bonds in Malaysia

Abstract

This article aims to shed light on the differences in yield rate between conventional bond and sukuk in the Malaysian market. We find that the historical yield rates for the government-issued sukuk is significantly higher than the conventional bond. Conversely, there is a slight yield spread discount between the corporate-issued sukuk and bonds for all rating classes. We conclude that liquidity factor can mainly explain the positive yield spread on the government-issued sukuk. We also illustrate the effect of tax and expenses on asset pricing, which may contribute to the yield spread discount for corporate issuance. JEL Classification: E43, G12, G13

Revisiting the question of liquidity: are sukuk less liquid than conventional bonds?

“…All of these factors suggest that liquidity conditions in the sukuk market are likely to be less favourable than those observed in similar conventional bonds market, thus providing a strong support for our empirical findings. This is also backed by the empirical results from Asmuni and Tan (2021) who document the presence of some form of liquidity premium in the pricing of Malaysian sovereign sukuk issuances.…”

“…The current body of literature suffers from several limitations. First, all of the past studies had very limited scope with majority focusing on comparing liquidity conditions of sukuk and bonds in a specific domestic market and the remaining studies focusing on limited international issuances (Alabbasi et al , 2021; Ariyana et al , 2020; Asmuni and Tan, 2021; Hameed et al , 2019; Nienhaus and Karatas, 2016). This has significantly limited the relevance of such findings to other domestic and international markets.…”

“…This is likely to affect the applicability of the results to the wider market and may lead to some incorrect conclusions. Furthermore, studies that use the full samples are also likely to suffer from incorrect conclusions because of comparing the liquidity conditions of sukuk and bonds issuances with dissimilar characteristics (Almaskati, 2022; Asmuni and Tan, 2021; Hameed et al , 2019). Overall, the limited number of past attempts, their limited scopes and potential issues with their methodologies suggest the need for a more comprehensive empirical examination of the liquidity conditions in the sukuk market.…”

“…Additionally, Nienhaus and Karatas (2016) report that some of the liquid international sovereign sukuk issuances have similar market and liquidity characteristics to their conventional equivalents, which suggests that both types belong to the same asset class. Lastly, Asmuni and Tan (2021) attribute yield differences between sovereign sukuk and bonds issuances in the Malaysian market to differences in liquidity conditions.…”

Analysis on the Determinants of Republic of Indonesia Sovereign Sukuk Liquidity in Secondary Market

“…Moreover, the standard deviation of public expectations regarding inflation rates can be a strong explanatory variable for the emergence of noise in the Turkish bond market. Asmuni and Tan (2021) investigated the yield differences between sukuk and conventional bonds in the domestic market of Malaysia. The study indicated that historically, government-issued Sharia bonds have higher yields than conventional bonds, while for sukuk or bonds issued by corporations, the yield differential is not clear.…”