Economic uncertainties, macroeconomic announcements and sukuk spreads

Abstract

With the large expansion of Islamic finance in the recent years, sukuks (Islamic bonds), which are the Shariah-compliant substitute to conventional bonds, are now becoming more prominent. Although there are numerous studies that have looked at the impact of global shocks on conventional bond spreads, little attention has been paid to explore the effect of the global shocks to the sukuk spreads. This study’s objective was thus to examine the impact of factors affecting the conventional bond and sukuk markets, including financial factors, economic policy uncertainty, U.S. and EU macroeconomic news, using an ordinary least squares approach. The results indicated that for regions and countries such as the GCC (Gulf Cooperation Council), Malaysia, Indonesia, Turkey, and Singapore, global shocks play a vital role in explaining sukuk spreads. Furthermore, employing a matched sample featuring firms from these regions and countries revealed that European and U.S. macroeconomic announcements and economic policy uncertainty have a significantly greater impact on sukuk spreads than on conventional bond spreads.