Comparison of Yield Spreads of Sukuk and Conventional Bonds in Malaysia

Levered firms among listed companies in Malaysia mostly issue long-term debt instruments to fund business expansions and projects either through issues of Islamic sukuk or conventional bonds. Investment options of either to issue sukuk or conventional bonds are challenging investment decisions since many Shariah scholars' claimed that sukuk yields are similar to those of conventional bonds. Many studies argued that sukuk structures mimic the conventional bonds features such as time to maturity, coupon rate and trades on the normal yield price relationships. The same applies in the case of late payment penalty upon default, trading of debt based sukuk, purchase undertaking in equity based structures and ownership status in asset based transactions, in which sukuk resemble conventional bonds. Sukuk however have different underlying structures and provisions since they are governed under Shariah rulings. The objective of this study is to investigate whether there is any difference in yield spreads between conventional bonds and sukuk. The assumption is that larger spread carries higher risk premium in terms of default risk. Secondary data on yield spreads are obtained from Bondinfo hub, the Central Bank of Malaysia. The data are then matched with long-term and medium-term issuances of bonds and sukuk. The independent samples T -test and Levene's test are utilized for hypotheses testing. The results revealed that conventional bonds' yields have larger spread compared to sukuk in long-term issuances while the opposite was found for medium-term issuances.