IDEAS home Printed from
   My bibliography  Save this paper

Incentive-Compatible Sukuk Musharakah for Private Sector Funding


  • Diaw, Abdou
  • Bacha, Obiyathulla Ismath
  • Lahsasna, Ahcene


Despite the huge potential on both the demand and supply sides of the ÎukËk market, the current ÎukËk structures fall short of adequately meeting the market’s needs as the SharÊ’ah compliance of many of them and/or their economic efficiency are questionable. Even though partnership-based ÎukËk are claimed to reflect the true spirit of Islamic finance, their underuse as a financing instrument is a notable fact. Such a situation, if not addressed, will mpede the development of the ÎukËk market in the future. This paper proposes an innovative ÎukËk mushÉrakah model for consideration by companies and revenue generating infrastructure projects. The model has an incentive-compatible feature by making the share of the issuing entity in the profit positively related to its performance in addition to a convertibility clause. The sector Return on Equity (ROE), adjusted with the firm beta, is considered a benchmark for measuring the performance of the firm. The paper examines the design of the model, its risk return profile as well as its pricing for secondary market trading. The theoretical properties of the model are empirically validated through two types of simulations: Monte Carlo Simulation and backtesting. The proposed model constitutes a new class of financial security with respect to the residual nature of the claim and its limited tenor. It, thus, presents an opportunity for diversification. The model implies higher risk for the investor, as neither the profit nor the capital is guaranteed–like common stock– but the return is expected to be higher. The model would entail higher financial cost for companies–as compared to debt instruments–but it would imply at the same time lower probability of bankruptcy, since the ÎukËk are equity-based instruments.

Suggested Citation

  • Diaw, Abdou & Bacha, Obiyathulla Ismath & Lahsasna, Ahcene, 2012. "Incentive-Compatible Sukuk Musharakah for Private Sector Funding," MPRA Paper 46009, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:46009

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    1. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2013. "The Basic Public Finance Of Public–Private Partnerships," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 83-111, February.
    2. Franck Bancel & Usha R. Mittoo, 2004. "Why Do European Firms Issue Convertible Debt?," European Financial Management, European Financial Management Association, vol. 10(2), pages 339-373.
    3. Hasan, Zubair, 2002. "Mudaraba as a mode of finance in Islamic banking: theory, practice and problems," MPRA Paper 2951, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Sukuk musharakah; Monte Carlo Simulation; Backtesting; Product development; Risk-return; Incentive-compatible;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:46009. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter) or (Rebekah McClure). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.