Why Do Firms Issue Sukuk Over Bonds? Malaysian Evidence

Abstract

Sukuk are dominating the Malaysian capital market with strong support from government, mega conglomerates and firms. Sukuk as an important source of firms’ financings are increasingly catching up with the conventional bonds in terms of volume of transactions and number of sukuk issuances. The objective of this paper is to identify the determinants of firms in issuing sukuk over conventional bonds. It is important to identify the determinants of firms in issuing sukuk whether it is from firms’ internal initiatives or induced by external incentives. The variables under observation are: capital investment, firm size, return on asset, market to book ratio, past sukuk issuance experience and past bonds issuance experience. By introducing the elements of leverage and tax incentives in the firms’ determinants to issue sukuk over conventional bonds, more indicators are identified as factors attracting firms to participate in the sukuk market. A pooled combination of cross sectional and time series model that incorporates fixed effect, random effect for both time and specific correlation are deployed. The technique used is two stage least square analyses under the Ordinary Least Square (OLS) and panel data regression technique. The sample consists of 79 listed firms on Bursa Malaysia issuing both bond and sukuk in 2001 to 2010. Firm sizes, past sukuk issuance experience and tax incentives are significant in explaining the firm’s determinants to issue sukuk over conventional bonds. There should be an intensive and comprehensive plan to encourage firms to issue sukuk based on the determinants identified. However, there are more room for improvements in terms of regulatory framework and facilitative infrastructure to speed up the growth of sukuk market in Malaysia. Keyword: bond; capital structure; Islamic capital market; Malaysia; sukuk