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Comparative Study for Sukuk & Conventional Bond

Case Study for Sukuk & Conventional Bond

Objective Research on Sukuk Bond - A New Financing Product

This present research aims at examining the comparative study between the Sukuk, a new financing product and conventional bond. Sukuk are the financial certificates which are termed as an Islamic equivalent bond (Watkins, 2011). These bonds are not based on any fixed or variable interest rates. This new financing product is designed especially for the Islamic people as they do not include the guidelines for paying interest to its investors (Tuicolo, 2010). Sukuk are associated with the flow of cash where the returns are generated while purchasing the assets which are the part of the asset based securities of any company. 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. 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 which are adopted by the various financial markets of global level. Through this study, a difference between the conventional bond and sukuk will also recognized as whether any correlation exist between the Sukuk and bond or not.

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Aim

  • To draw the comparison between the sukuk and conventional bond of financial market

Objectives

  • To understand the new financial product of market that Sukuk, a bond of Islamic financial market
  • To evaluate the risk and return associated with Sukuk
  • To analyze the future of Sukuk
  • To investigate the relationship between the Sukuk and conventional Bond

Research Question

  1. What are the risk and return associated with Sukuk?
  2. How to analyze the future of sukuk in financial market?
  3. How to investigate the relationship between the Sukuk and conventional Bond?
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Key Academic Publications

in this section of the proposal a range of journals and researches which are performed in the field of Sukuk and conventional bond is discussed. This will detail about the findings and conclusions of these academic articles, journals and researches and it will help to understand the appropriate information about this new financing product. A brief synopsis of the researches which are conducted in context of sukuk bonds are detailed below as it will help to review some significant form information about the topic.

Safari, M., 2011. Are Sukuk Securities the same as Conventional bonds? Proceedings of foundation of Islamic finance series.

Abstract: This research paper details about the similarities and differences between the Sukuk securities and Conventional bonds. The aim of the study is to evaluate that whether the sukuk and bonds are similar not. This paper exposes that there exist some similarities and some differences in the features of this securities. It examines about the yield maturity of the sukuk securities and conventional bonds which as they are issued by different issuers and maturities. The final conclusion of the research states that there are some important difference between the yield of sukuk and bonds. This conclusion of the paper states that there is difference between the both this financial products of the company.

Afshar, A. T., 2013. Compare and Contrast Sukuk (Islamic Bonds) with Conventional Bonds, Are they Compatible? The Journal of Global Business Management

Abstract: The primary purpose of this journal is to evaluate the comparison between the Islamic bonds and conventional bonds and to identify that whether they are compatible or not. By analyzing the detail information about these two financial vehicles, the research shows that there is huge difference between sukuk and conventional bonds. This difference was in the term of financial risk and financial return involved in these two financial products of the organizations. Finding of the research states that sukuk securities are based on method of equity and conventional bonds are based on the method of debt instrument.


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Theoretical Review

This section of the research will help the researcher to acknowledge the precise information about the financial product sukuk and conventional bond. It will help to analyze the different opinions and findings the various literary materials which are published in the same field.
Sukuk, a part of Islamic finance

Islamic finance is different from the other finance of the global market. This system is based on the principles and concept of Sharia which is the Islamic law. Unders this law of Islam all the financial transactions are to be free from the rates of interest, trading under uncertainty is prohibited and the return on assets will only be accepted when it is generated from the real assets (Marsh, 2011). Researches and studies which are performed in the field of Islamic bonds exposed that Sukuk are basically the Islamic bonds and holders of these securities hold the beneficial ownership in the assets as they are not based on the rates of interest. When the investors acquire the sukuk, they become the owner of those assets or the diversified assets and pledge against the flows of cash which are sourced from this assets. At the time acquiring the sukuk, the risk and return which are linked with these securities are also transferred to the investors of these assets (Ariff, Iqbal and Mohamad, S2012). Holder of the sukuk bonds also gains the benefit of undivided beneficial ownership from those underlying assets which are hold by them. Sukuk bonds are categorized into different segments asset based and asset backed (Marsh, 2011).

Sukuk versus conventional Bonds

Many scholars and researches have detailed that sukuk and conventional bonds are not exactly different from each other. There are some similarities and dissimilarities between the features of these two financial products (Vishwanath and Azmi, 2009). To evaluate the comparative study between the sukuk and conventional bond there is need to compare and contrast the features, risk and return associated with this financial instruments. Scholars investigated that the conventional bonds are debts based financial instruments which does not give the share of ownership to its investors (Tariq and Dar, 2007). Whereas Sukuk are the asset based securities and the holders of these securities also acquire the right of ownership in the assets (Afshar, 2013). After examining these financial instruments, it can be stated that the conventional bonds represents about the share of a debt and skuk states about the share of investors in an underlying asset.

Comparison between the sukuk and bonds can only be justified when the risk and return which are associated with these financial products will be compared. There are many risks which are associated with these products, but there impact is different in each case. In terms of financial or business risk in bonds, there are chances of default in payments of interest from the organization whereas in sukuk there is not such risk of return as they are assets based securities (Cakir and Raei, 2007). Value of the conventional bonds or the prices of the bonds are fixed and on the basis of which the interest are given to its investors. But in context to the price risk there is greater amount of risk is involved in sukuk as their end value is different from its beginning value.The major difference in terms of the return of this bonds is that in sukuk, return can be expected and in bonds which are debt based there return is pre-determined as they holder gets the return in form of interest. Sukuk are formed in accordance with the Islamic law which states that receiving and taking of interest is prohibited in their principles (Al-Awsat, 2011). By analyzing this above risk and return it can be analyzed that in terms of return, holders of bond receive regular payment in form of interests until the life of bond. Holders of the bond also get the amount of principle at the time of maturity of the bond. In case of sukuk the holder gets the share of profit or loss from the underlying assets.

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Research Methodology

Research methodology parts will details about all the tools and techniques of the research which will be used to accomplish the aim and objective of the study in proficient way. This will also help the researcher to advance its knowledge in the area of new financial products that whether the sukuk and conventional bonds are correlated with each other or not.

Research Design

Design of the research facilitates the researcher to conduct its study in appropriate manner. In this current report descriptive design of research will be applied as it will help to explore enormous amount of information about the sukuk and conventional bond and also helps to investigate a detail contrasts and comparison between this financial products (Sam and Daniel, 2011).

Research Approach

There are two types of the approach which can be followed while conducting the detail investigation about the subject matter. One is inductive approach and other is deductive approach. In this current research inductive method of research is followed which help the researcher to explore the difference and similarity between the sukuk and conventional bond in more theoretical way (Creswell, 2013).

Data Collection

Data will be collected from the secondary method of data collection as the main aim of the researcher is to understand the new financial product of the market and to investigate the comparison between sukuk and conventional bond. Secondary data will also support the researcher to assess the correlation between the sukuk and bonds (Shaikh, 2013). Data will be collected from the different journals, articles, reports, websites, and books and from many other sources of secondary mode of data collection.

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References

Journal

  • Marsh, J. (2011). Asian Islamic products battle for primacy. Asian Investor, 38
  • Shaikh, M. (2013). Comparative Study of Sukuk and Conventional Bond. Pakistan Business Review, 15(1), 156-173.
  • Tariq, A., and Dar, H. (2007). Risks of Sukuk structures: Implications for resource mobilization. Thunderbird International Business Review, 49(2), 203-223.
  • Tuicolo, M. (2010). The sukuk market goes global. Finance Asia, 68-69.
  • Vishwanath, S. R., and Azmi, S. (2009). An Overview of Islamic Sukuk Bonds. Journal Of Structured Finance, 14(4), 58-67.
  • Watkins, S. (2011). Sukuk success. Financial Management (14719185), 32-34.

Books

  • Ariff, M., Iqbal, M. and Mohamad, S. (2012). The Islamic Debt Market for Sukuk Securities: The Theory and Practice of Profit Sharing Investment. Edward Elgar Publishing.
  • Cakir, S. and Raei, F. (2007). Sukuk Vs. Eurobonds: Is There a Difference in Value-at-Risk?, International Monetary Fund.
  • Creswell, J. W. (2013). Qualitative, Quantitative, and Mixed Methods Approaches. 4th ed. SAGE Publications, Inc.
  • Sam, G. A. and Daniel, S. P. (2011). Research Methodology. Gyan Publishing House.
 
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