Defaulted Sukuk and Bonds in Malaysian Capital Market Finance Essay

Research Objectives

The first objective of this research is to do a comparative study of all defaulted or "D rated or suspended" sukuk and bonds in the Malaysian market by comparing the characteristics (see Annexure-1) of both types of issuers. The purpose for this comparative study is: to identify why these corporations failed to pay, which sukuk structure defaulted the most in Malaysia and identify the reasons behind it. The author is of the opinion that there may not be any concerns with the approved sukuk structures but there might be other practical characteristics within issuer or company that may be the cause of these defaults.

Second objective of this dissertation is to explore the relationship between all the defaulted sukuk and bonds in the Malaysian market by comparing the financial performance of the issuers of these sukuk bonds to see if there are any differences between the health of the issuers or merely nomenclature, a simple change of name from bond to sukuk. The basic objectives and requirements in structuring a bond or a sukuk transaction are to fulfill the funding needs of an organization. Investors in these transactions are usually concerned with the financial health of the issuers. The health of any corporation can be measured through the analysis of its financial performance. A study of defaulted sukuk and bonds may shed light on meeting both organizational and investor needs.

Data Source

To achieve above-mentioned objectives, the author will focus on the secondary data available in published papers, books, magazine articles and databases available on Islamic finance, sukuk and bonds via the Internet. The researcher will consider both quantitative and qualitative study to achieve these objectives. The quantitative data will be collected from financial statements of defaulted issuers and SC, IFIS and BPAM websites. These databases give extensive information on Islamic capital markets. The BPAM database is especially designed to cover the bond market in Malaysia, housing all the basic information regarding the bond or sukuk issue available today. The IFIS database is a specialized Islamic finance database; this will be used to compare the Malaysian sukuk market with other issuers in the world. The quantitative data will help the researcher to collect data regarding financial performance and growth of the sukuk and bond issues in Malaysia and compare it with sukuk issued internationally. Qualitative research will help in understanding the approved structures, issues, challenges and criticism regarding these sukuk.

Sample Specification

This study is mainly on the performance of Sukuk and Bonds in Malaysian capital Market. The sample in this study focuses mainly on all the "D" Rated or suspended sukuk and bonds in Malaysian market from 1990 till May 2010. A total of 64 issuers of sukuk and bonds were rated "D" by the rating agencies or were suspended due to non-payment of their obligations. This sample is further subdivided into two categories, first category is of "Bond issuers" where the total 33 number of bond issuers came in this category and second category is of sukuk issuers where the total 31 number of sukuk issuers came in this category. The list of all the sukuk and bonds in the sample is given in the table.

Research Methodology

This paper is mainly focused to compare the characteristics of defaulted sukuk and bonds issuers in Malaysia. The main purpose of doing this comparative analysis is to understand the theoretical and practical difference between sukuk and bonds. Two different research methodologies will be adopted to compare the characteristics. These methodologies will compare the qualitative and quantitative characteristics of both types of issuers.

Theoretically both sukuk and bonds are different from each other which lead to the difference of performance of issuers. There is no difference between generating funds through issuance of sukuk or bonds it is merely a name of contract, the actual difference is between the purpose of raising funds and the intention of both investors and issuers. Parties involved in issuance of bonds have completely different expectations than the parties involved in issuance of sukuk. The ultimate goal of both the contract is definitely the earning money however the difference is the sharing and holding the responsibility. Following are the two comparative studies to be conducted to understand the difference in characteristics of sukuk and bonds.

Comparison Quantitative characteristics

The main purpose of issuing the sukuk and bonds is to fulfill the financial needs of an institution. This paper will compare the financial performance of all "D rated and suspended" sukuk issuers with bonds issuers (corporate issues) in Malaysian Capital Market. Financial performance of these sukuk and bonds issuers will be compared with respect to broad categories of financial ratios: coverage, gearing, liquidity, profitability and turnover. The author believes that sukuk and bonds are entirely different in nature and due to their underlying contracts, there should be a substantial difference in their financial performance. These differences will be elaborated upon in detail throughout the dissertation.

This financial performance of sukuk and bonds will be analyzed by comparing parametric and non-parametric test of equality of both the samples. The parametric test like Mean and median; and nonparametric test like Wilcoxon/Mann-Whitney ranked test will be used to estimate the equality of different financial ratios of sukuk and bonds.

Motivation for choosing the variables

The main objective of running any institution or firm is to achieve some predetermined benchmark, and for running any business the main objective is to make it profitable. Profitability of any organization can be maximized by utilizing the best mix of available resources. These resources are basically assets of an organization and the claims against these assets in terms of liabilities and owner's equity. Owner's equity is not always sufficient for the growth of any firm and these firms have to rely on the external resources. The funding needs can be short term or long term depending on the nature of the project under consideration.

Theoretically bonds are always considered debt financing and always come under the umbrella of liabilities; however sukuk is depending on the underlying contract. If it is musharaka, mudaraba financing it is considered equity financing, if it is murabaha or BBA it is treated under liabilities. The main object of issuing both sukuk and bonds is enhancing the profitability of the organization with the best mix of available resources. The comparative analysis is done of the following important financial ratios. Investors can estimate the credit worthiness of a company by analyzing and understanding the effect of these ratios

Wilcoxon-Mann-Whitney test

Wilcoxon signed rank test (WMW)A is used to test whether the median of a symmetric population is 0 or not. First, the data are ranked without looking to sign of each observation. Second, the sign of the each observation is attached to its corresponding rank. Finally, the one sample z - statistic (standard error of the mean /mean) is calculated from the signed ranks. For all small samples under observations, the statistic is compared to likely results and if each rank was equally likely to have a "+"or "-"sign affixed. For large samples, the z- statistic is compared to percentiles of the standard normal distribution.

TheA Wilcoxon rank sum testA (also known as theA Wilcoxon-Mann-Whitney test)  is used to test whether two samples are taken from the same population. It is appropriate if the likely alternative is that the two populations are moved with respect to each other. The test is performed by ranking the combined data set, dividing the ranks into two sets according the group membership of the original observations, and calculating a two sample z statistic, using the pooled variance estimate. For large samples, the statistic is compared to percentiles of the standard normal distribution. For small samples, the statistic is compared to what would result if the data were combined into a single data set and assigned at random to two groups having the same number of observations as the original samples.

Skewness and Kurtosis

A basic task in many statistical studies is to characterize the location and variability of a set of a data. Further the data is classified into skewness and kurtosis. Skewness is an indicator of symmetry, or more precisely we can say the lack of symmetry. A data set under observation is called symmetric if it looks the same to the both sides of the center point. Kurtosis is an indicator of the data whether it is peaked or flat as compare to a normal distribution. That is, data sets with high kurtosis tend to have a distinct peak near the mean, decline rather rapidly, and have heavy tails. Data sets with low kurtosis tend to have a flat top near the mean rather than a sharp peak. A uniform distribution would be the extreme case.

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