Which Firms Do Prefer Islamic Debt? An Analysis and Evidence from Global Sukuk and Bonds Issuing Firms

Md Hamid Uddin, Sarkar Kabir, Mohammed Hossain, Nor Wahab, Jia Liu

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Abstract

The Islamic debt instrument sukuk has been in the financial market for nearly two decades now, but we do not know why a firm would prefer an Islamic debt over conventional debt set aside the religiosity issue. We analyze that there is a genuine reason to choose Islamic debt because it has lighter indebtedness consequence, benefits of avoiding external trustee monitoring, and tax incentives. Based on the cross-country data as of 2002-2016 for 346 firms issuing dollar-denominated global sukuk and bonds, the test results show that firms that prefer Islamic debt and issue sukuk are financially more unstable, and thus exposing to higher insolvency risk as compared to bond issuing counterparts. This finding is consistent across different dimensions, such as: cross-country, cross-industry, size groups, and crisis periods. Therefore, we conclude that sukuk offers an alternative channel of debt financing for the firms with lower creditworthiness having difficulties to approach the conventional debt market.
Original languageEnglish
Pages (from-to)(In-Press)
Number of pages43
JournalEmerging Markets Review
Volume(In-Press)
Publication statusAccepted/In press - 3 Aug 2019

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Uddin, M. H., Kabir, S., Hossain, M., Wahab, N., & Liu, J. (Accepted/In press). Which Firms Do Prefer Islamic Debt? An Analysis and Evidence from Global Sukuk and Bonds Issuing Firms. Emerging Markets Review, (In-Press), (In-Press).