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Default risk as a factor preventing companies from entering the sukuk market

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Abstract

The international sukuk market is represented by a limited number of issuers. One of the factors preventing companies from entering the market is, apparently, elucidating the true default risk of the potential sukuk issuance and related risk-minimization tools, such as guarantees and ratings. The article focuses on the default risk the potential sukuk issuer should consider. The research methodology includes a comparison between the theoretical maxims of sukuk, described by scholars and standard setters, and the existing market practice. To evaluate the potential impact of defaults and near defaults on the issuer’s reputation, a poll was conducted among the market practitioners. The results show that sukuk largely continue to imitate the bond market as per the default risk, and the path dependence of the industry on the ill-formed sukuk dominating the market impedes the revert to the initial concept of sukuk as an investment instrument. Certain steps are suggested for a potential issuer to minimize the default risk.

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Fig. 1
Fig. 2

Source: Made by the authors based on IIFM (2021)

Fig. 3

Source The authors, based on works by Ahmad et al. (2018) and Radzi and Lewis (2015)

Fig. 4

Source The authors

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Notes

  1. Some studies draw a wider classification of sukuk structures. For example, Laldin (2012) outlines sale-based sukuk (murabaha, bai’ al- ‘ina, salam and istisna’), lease-based sukuk (based on ijara), partnership-based sukuk (mudaraba and musharaka), agency-based sukuk (wakala), and hybrid sukuk.

  2. These sukuk are also referred to as “trade-based” by Tasnia et al. (2017, p. 1).

  3. Murabaha is a sale transaction with deferred payment, usually in installments. The price in murabaha is stipulated on “cost plus” method.

  4. Bai’ bithaman ajil is a contract of sale with deferred payment.

  5. Salam is an advance payment contract of sale with deferred delivery.

  6. Istisna’ is a contract of manufacturing of particular goods, including construction.

  7. These sukuk are also referred to as “participatory” by Tasnia et al. (2017, p. 1).

  8. Musharaka is a partnership, whereby two or more parties unite there capital to do business. The contract can be organized is various forms.

  9. Mudaraba is a form of fund management, whereby one party provides capital, and the other manages the fund based on preliminary agreed criteria.

  10. Wakala is an agency.

  11. Or “famous remarks,” as mentioned by Laldin (2012, p. 17).

  12. See, for example, https://iq.islamicmarkets.com/sukuk/bank-cimb-niaga-sukuk-phase-iii-rp322-billion-7-apr-2021.

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  1. HSE-Skolkovo Institute for Law and Development, National Research University Higher School of Economics, Moscow, Russia

    Madina Kalimullina

  2. Department of Economics and Finance, The University of New Orleans, New Orleans, USA

    M. Kabir Hassan

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  1. Madina Kalimullina
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Appendix 1

Appendix 1

See Table 19.

Table 19 Poll respodents’ profiles and their sukuk-related experience
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Kalimullina, M., Hassan, M.K. Default risk as a factor preventing companies from entering the sukuk market. Risk Manag 24, 298–326 (2022). https://doi.org/10.1057/s41283-022-00096-9

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