Valuation of Islamic Debt Instruments, the Sukuk: Lessons for Market Development

A key issue for the fast growing Islamic debt market is whether sukuk instruments are equivalent to conventional bonds as is practiced today by the market operators. This major research question is explored here using a large traded data set on sukuk matched with a sample of conventional bonds issued by the same issuers with same risk-rating and traded in the same market. Matched samples of sukuk and conventional bonds traded over seven years are used in our analyses, using statistical and causality tests. The results suggest that sukuk instruments are priced significantly differently and that their yields are not Granger-caused by conventional security yields or vice versa. This empirical finding does not support the market’s current practices based on the assumption that sukuk are like normal bonds. In addition, we describe the basic contract specifications, core cash flow structures in order to develop and suggest valuation models for three selected sukuk types. The major implication of these findings is that there is much more research needed to first document the independent nature of sukuk market behavior and the need for a re-examination of current market practices. © Authors