What makes for a successful Sukuk issuance? How should corporates structure their offerings in a way that they are welcomed by the capital market? The value of Sukuk does not rest on the creditworthiness of the issuer but represents undivided ownership in tangible assets, usufruct, or services of revenue-generating issuers, with the underlying asset being Shari'ah-compliant in both nature and use. However, Sukuk market prices do vary both with the creditworthiness of the issuer and with the market value of the underlying asset.
In the International Monetary Fund Working Paper Do the Type of Sukuk and Choice of Shari'a Scholar Matter? Christophe J. Godlewski, Rima Turk, and Laurent Weill consider whether these features influence stock market reaction Christianna Tsiterou to Sukuk issuance, studying the abnormal stock returns of listed companies that issued 131 Sukuk between 2006 and 2013 across eight countries.
The authors conclude that the Ijara Sukuk structure favours a positive stock market reaction, attributing this result to both the lower Shari'ah compliance risk of Ijara compared to other structures and to the adverse selection mechanism that hampers the issuance of profit-and-loss sharing Sukuk. Their finding of a better investor reaction to Ijara Sukuk in comparison to other Sukuk types would suggest increasing domination of this type of Sukuk in the future.
The audit quality of Shari'ah, according to the Working Paper, can influence investor reaction to Sukuk issuance, with better quality issues sending a positive signal on the ability to trade the financial instrument in the future. Further, market reaction may also be influenced by the reputation of the Shari'ah scholars endorsing the issue.
However, while there is evidence of the beneficial influence of reputation and proximity of scholars on stock market reaction to Sukuk issuance the study did not find support for the view that all scholar characteristics matter, as neither the number of scholars endorsing the issue nor their tenure was found to be significant. Third, there was only very limited evidence that the importance of scholar characteristics varies by Sukuk type.
Thus, it would appear that both the choice of Sukuk structure and the scholars hired for its certification matter for the market valuation of the issuing firm. These findings support the view that the market premium that is paid for Shari'ah scholar reputation and proximity with issuer may be justified. 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.
The authors' findings provide important insights for the expansion of Sukuk markets across different countries. They suggest that Ijara structures may benefit the most from the expansion of Sukuk markets because of the better investor reaction to them compared to other structures.
The findings also suggest that investors attach value to the selection of scholars with certain characteristics and the authors suggest that future research may address further whether the (sometimes criticized) high compensation of Shari'ah scholars certifying the legality of Sukuk is justified by the accompanying positive firm valuation by investors.
© Islamic Business and Finance 2014
