Aug 13 Investors treat a company's shares
differently depending on the specific types of Islamic bond it
issues and the reputation of the Islamic scholars who oversee
the instruments, a study by the International Monetary Fund
The study, published this week, is one of the first
systematic efforts to establish a numerical link between
investors' behaviour and sukuk structures, and as such it may
influence companies to choose certain structures over others.
The IMF based its findings on the stock price movements of
companies which issued sukuk between 2006 and 2013, using a
sample of 131 sukuk deals across eight countries including
Qatar, Saudi Arabia, the United Arab Emirates and Malaysia.
Global sukuk issuance could reach $130 billion in 2014,
according to a Thomson Reuters study. About a dozen types of
sukuk are in use worldwide.
All of them claim to follow religious principles such as
bans on interest payments and pure monetary speculation, but
some resemble conventional bonds in important ways while others
have equity-like characteristics.
Glossary of Islamic finance terms:
The study found the ijara structure tended to draw a
positive reaction from the stock market, with the shares of
companies using that structure performing relatively well.
Ijara is a lease-based transaction where the originator
sells assets to a special-purpose vehicle, which issues sukuk
certificates to obtain money to pay for the assets; actual
ownership of the assets does not necessarily change hands.
By contrast, equity-based structures such as musharaka - an
investment partnership where profits and losses are shared under
agreed ratios - met a relatively negative reaction.
This was apparently because equity-like structures were
often perceived as signals of financial weakness at the issuing
companies, the IMF said. Investors felt an issuer expecting to
realise a low profit would have more of an incentive to share
the profit; an issuer expecting high profits would choose a
debt-like instrument to maximise its bottom line.
The study could increase the use of ijara as the structure
of choice for new issuers around the world. Britain used ijara
in its first sovereign sukuk issue this year, and Luxembourg
plans to use the structure in its maiden deal later this year.
The IMF also looked at other characteristics of sukuk such
as their tenors and pricing, but did not find these factors to
be statistically significant for the responses of equity market
Boards of sharia scholars at financial institutions issuing
sukuk rule on whether the Islamic bonds follow religious
principles. A small number of prominent scholars around the
world sit on multiple boards, commanding big fees for doing so.
The IMF study suggested institutions were rational in paying
such fees; the market preferred the shares of companies which
had the most respected scholars endorsing its sukuk.
Geographical proximity was also important, as the market
favoured companies with scholars who were most familiar with
local rules and practices, rather than scholars from remote
But the study found that the size of an institution's sharia
board, and the length of the relationship between individual
scholars and the institution, did not have an impact.
"Our findings support the view that the market premium paid
for sharia scholar reputation and proximity with issuer may be
justified," the study said.
"However, the certification requirement should not overprice
having a large number of scholars involved or their tenure, as
these factors are not associated with a significant premium in
terms of market valuation."
(Editing by Andrew Torchia)