Who drives whom ‐ sukuk or bond? A new evidence from granger causality and wavelet approach

• Published date: 01 April 2018
• Date: 01 April 2018
• Author: Mohammad Ashraful Ferdous Chowdhury,Obiyathulla Ismath Bacha,Abdul Aziz Buriev,Mansur Masih,Md. Mahmudul Haque
• DOI: http://doi.org/10.1016/j.rfe.2017.09.002

ORIGINAL ARTICLE

Who drives whom - sukuk or bond? A new evidence from

granger causality and wavelet approach

Md. Mahmudul Haque

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Mohammad Ashraful Ferdous Chowdhury

1,2

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Abdul Aziz Buriev

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Obiyathulla Ismath Bacha

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Mansur Masih

1

1

INCEIF, Lorong Universiti A, 59100

Kuala Lumpur, Malaysia

2

Department of Business Administration,

Shahjalal University of Science &

Technology, Bangladesh

3

Westminster International University

Tashkent, Uzbekistan

Correspondence

Md. Mahmudul Haque, INCEIF, Lorong

Universiti A, 59100 Kuala Lumpur,

Malaysia.

Email: tasnim0823925@gmail.com

Abstract

Sukuk is a highly appealing alternative instrument of conventional bond in the

financial market over the last two decades. To a certain extent, the market players

assume sukuk as the same as bond. However, sukuk has its own fundamental

asset backed principles, whereas bond is backed by debt. The objective of the

study is to examine the Granger-causality and lead–lag relationship between

sukuk and bond by using the data of the Malaysian Government securities return

for both conventional and Islamic instruments. The data for every working day of

7 years covering the period from January 31, 2007 to December 31, 2013 were

collected from Bloomberg database. The yield returns of both securities have been

plotted for each six months of a year. This study applied both Granger-causality

and dynamic co-movement techniques such as, continuous wavelet transforms

(CWT) coherence for analyzing the temporal evolution of the frequency content

of both securities by decomposing each period into different time scales. The

empirical findings of the paper reveal that with a bit of exception, there is a cau-

sal relationship between sukuk securities and conventional bonds for a given per-

iod of time. For robustness, this study applied the wavelet coherence approach

and found that bond is led by sukuk in the long term investment horizon rather

than in the short term. Our findings relating to the lead-lag relationship between

sukuk and bonds have important implications in terms of policy regulations and

investment management. Future research and market practices could reinvestigate

the differences between these two securities across different markets and types.

JEL CLASSIFICATION

C33, A13

KEYWORDS

Conventional bond, Granger causality, Sukuk, Wavelet techniques

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INTRODUCTION

Over the recent past years, sukuk is increasing considerably not only in Islamic countries but also around the world. Global

sukuk issuance is around 120 billion dollar and Malaysia continues to be the global sukuk market leader with

First published online by Elsevier on behalf of The University of New Orleans, 15 September, 2017, https://doi.org/10.1016/j.rfe.2017.09.002

Received: 30 June 2015

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Revised: 12 April 2017

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Accepted: 13 September 2017

DOI: 10.1016/j.rfe.2017.09.002

Rev Financ Econ. 2018;36:117–132. wileyonlinelibrary.com/journal/rfe ©2017 The University of New Orleans

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approximately 67% of total sukuk issuances during 2013. Although sukuk has been dominating the Malaysian capital mar-

ket, the motivations of the firms issuing sukuk or conventional bonds remained largely unexplored. In spite of the rising

interest the issuers in sukuk offers, research to appraise firm’s motivations to issue specific Sukuk type remains limited. El

Mosaid and Boutti (2014) found that there is no difference between Sukuk and Bond since they are positively correlated.

On the contrary, Afshar (2013) and Fathurahman and Fitriati (2013) identified that Sukuk and Bond are comparatively dif-

ferent in terms of their structure, properties and market perception. Unlike the prior studies, a major contribution of this

paper is that the risk and return of sukuk and bond are examined by focusing on different stock holding periods such as

short, medium and long term investment horizons. This work aims to discuss the differences between sukuk and conven-

tional bonds under the same conditions. In order to see the differences, this paper focuses on the same issuer which is the

Malaysian Government, same period and same tenure.

Our contributions lie firstly, in providing comparative analysis on a firm’s issuance motives, we include different types

of conventional bond offers and compare them with sukuk structured with underlying contracts based on Islamic Securities

Guidelines 2011 classifications. Secondly, we employ relatively advanced dynamic econometric techniques for our data to

provide stronger evidence for bond/sukuk issuance motives based on the test of optimality in a firm’s capital structure.

Finally, we provide a link between our empirical findings and the real world practices through discussions with the indus try

experts.

The remainder of the paper is organized as follows: Section 2 discusses the related literature and theoretical framework

guiding the study. Section 3 provides the sample description and research methodology to achieve the objectives of the

research. Section 4 discusses the findings of the study. And lastly, Section 5 brings concluding remarks of the study.

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LITERATURE REVIEW

Sukuk is referred to as Islamic bonds that contain an entitlement to rights of ownership of a given class of asset where bor-

rower gives it to a lender as a proof of ownership. Broadly, Sukuk contract may be defin ed as a debt funding arrangement

agreed between the investor and counter party such as firms, governments to engage economic activities of production or

services.

Islamic Financial Services Board (2009) defines Sukuk as the certificates that represent the holder’s proportionate own-

ership in an undivided part of the underlying asset, where the holder assumes all rights and obligations to such asset. Al-

Deehani, et al. (1999) argued sukuk as a relatively new innovation and seen as distinct from any present conventional bond

structures. Under this structure, sukuk holders’returns are paid based on profit-sharing arrangements on the performance of

the underlying projects in which sukuk investors have undivided and proportionate ownership. Under Sukuk structure, each

investor holds an undivided beneficial ownership in the underlying assets from a financial obligation perspective, there

should not be any guarantee of profit payment or principle redemption in this structure (See AAOIFI, 2008). There are two

types of Sukuk: asset based and asset backed. Under the asset based Sukuk, the Sukuk holders have beneficial ownership

in the asset. A common example of beneficial ownership is the ownership of funds held by a nominee bank or for stocks

held in the name of brokerage firm. Under asset backed Sukuk, the Sukuk holders own the asset and as a result do not

have recourse to the asset but to the originator if there is a shortfall in payment.

Like Bacha and Mirakhor (2013), Hassan and Mahlknecht (2011), Safari, Ariff, and Mohamad (2014), we compare and

contrast between sukuk and bond on the basis of their definitions, main characteristics, the structure, the underlying asset

requirements, the purpose of issuance, the ratings and risk-exposures. Firstly, 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. In the

case of a bond, the consumer is acting as the loaner and the bond issuer as a loan recipient. In this case, the loan has a

fixed interest, therefore being Riba (Al-Deehani et al., 1999). In sukuk, the purchaser is purchasing an asset that has value

rather than participating in an implicit loan agreement. Secondly the difference between bonds and sukuk is that the assets

involved in sukuk certificates comply with all laws of Islam. 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 con-

sumer’s knowledge (Ramasamy, Munisamy, & Helmi, 2011). The consumer of sukuk is assured that the value of the cer-

tificate corresponds to assets that are in the public good and not related to activities or products that are against Islam.

Thirdly, the underlying contact for sukuk issuance is a permissible contract such as, lease of property or any of their other

14 categories defined by AAOIFI (2003). In a bond, the core relationship is a loan of money which implie s a contract

whose subject is purely earning money on money, which in turn reflects riba. Fourthly, unlike bond, there is no guarantee

of principle and return in sukuk. Fifthly, Sukuk prices are market driven and depend on the appreciation or depreciatio n of

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