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

Author

Listed:
  • Madina Kalimullina

    (National Research University Higher School of Economics)

  • M. Kabir Hassan

    (The University of New Orleans)

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.

Suggested Citation

  • Madina Kalimullina & M. Kabir Hassan, 2022. "Default risk as a factor preventing companies from entering the sukuk market," Risk Management, Palgrave Macmillan, vol. 24(4), pages 298-326, December.
    • Handle: RePEc:pal:risman:v:24:y:2022:i:4:d:10.1057_s41283-022-00096-9
    DOI: 10.1057/s41283-022-00096-9
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    References listed on IDEAS

    as
    1. Sweder van Wijnbergen & Sajjad Zaheer, 2013. "Sukuk Defaults: On Distress Resolution in Islamic Finance," Tinbergen Institute Discussion Papers 13-087/VI/DSF57, Tinbergen Institute.
    2. Uddin, Md Hamid & Kabir, Sarkar Humayun & Hossain, Mohammed Sawkat & Wahab, Nor Shaipah Abdul & Liu, Jia, 2020. "Which firms do prefer Islamic debt? An analysis and evidence from global sukuk and bonds issuing firms," Emerging Markets Review, Elsevier, vol. 44(C).
    3. M. Kabir Hassan & Mervyn K. Lewis (ed.), 2014. "Handbook on Islam and Economic Life," Books, Edward Elgar Publishing, number 16009.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Sukuk defaults; Islamic finance; Default risk; Sukuk market impediments; Sukuk vs. bonds;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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