Sukuk and Bond Performance in Malaysia

Sukuk and bonds are two kinds of financial instruments that share the Malaysian capital market. Sukuk are Sharia-compliant financial instruments referred as “Islamic bonds” in the Malaysian market (Note 1). The aim of this paper is to diagnose the performance of Sukuk portfolios compared with bond portfolios. For this purpose, we use the series of indices TR BPAM ALL BOND INDEX. Those indices cover the whole Sukuk and bond Malaysian market. We collect historical data of those indices from the website of Bond Pricing Agency of Malaysia (BPAM) for a period of six years from 2007 to 2012. We first study the significance of the difference in the portfolios’ mean return. Secondly, we address the portfolios’ return correlation. Comparing indices shows that Sukuk index outperformed the bond index and market index. Furthermore, the results confirm a significant and positive correlation between returns of Sukuk and bond portfolios.


Introduction
Sukuk is an Arabic term; it is a plural of term Sack which means certificate.The term Sukuk is, broadly, translated as "Islamic bonds" although the correct translation is "Islamic Investment Certificates" (Tahmoures, 2013).The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) officially defined Sukuk as certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services (AAOIFI, 2008).Referring Sukuk as "Islamic bonds" is due to some similarities between Sukuk and bonds, especially in terms of financial process.In fact, some studies say that Sukuk are innovated to mimic the financial features of bonds in addition to being compliant with Islamic finance principles, we cite for example the work of Lahsasna and Lin (2012).
In fact, several similarities exist between Sukuk and bonds; however these two financial instruments are different and are not duplicate tools of financing.Like conventional bonds, Sukuk have fixed term maturity, coupon and are tradable at normal yield price (Zakaria, Isa, & Abidin, 2012).Unlike bonds, Sukuk are issued in accordance with Sharia principles.Indeed, Sukuk differ from conventional bonds since bonds are defined as long-term debt instruments that are issued by corporations and government (Tahmoures, 2013) while Sukuk are defined by AAOIFI (2008) as certificates of equal value that represent proportion ownership of an existing asset or a pool of diversified assets.
Despite the debate on various aspects of Sukuk such as their originality, their compliance and their performance, Sukuk have become promising alternative instruments of financing consistent with portfolio theory and financial planning.Financial engineering has implemented several Sukuk structures to enable public and private organizations to fund.Furthermore, investors can include Sukuk in their portfolios as part of their portfolio diversification strategies (Oakley, 2011).
The Sukuk market is the fastest growing and promising segment of Islamic finance.Indeed, the issuance of Sukuk is increasing considerably worldwide, especially in Malaysia, United Arab Emirates (UAE) and Saudi Arabia (Fitriya, 2012).The global value of Sukuk issues exceeds 109 billion dollars in 2012 (Figure 1).
Malaysian Sukuk market is among the most structured in the field.The first issues of Sukuk date 90s with the corporate Sukuk issued by Shell MDS (Note 2).The volume of this issue around 30 million dollars.The Sukuk market is held in parallel with the conventional bond market.Ariff and Safari (2012) examined the deference between Sukuk and conventional bonds by investigating the presence of a causal link between the performance on Sukuk and conventional bonds with the same yield and the same rating.Their results found no causal link.Hassan (2012) conducted his research on the comparison of Sukuk and bonds in assessing any differences related to the diversification of bonds portfolios by adding Sukuk.The author assessed the value at risk (VaR) of Sukuk compared with VaR of conventional bonds of the same issuer.The results highlighted that there is a gain in diversification of bonds portfolios by adding Sukuk.In addition, Hassan (2012) stressed that Sukuk portfolio is riskier than a bond portfolio.This may be due to factors related to characteristics of Islamic finance.
Lahsasna and Lin (2012) focused on Sukuk Sharia issues considering that structuring Sukuk mimics features of conventional bonds in Malaysian market such as in terms of late payment penalty, trading of debt based Sukuk, purchase undertaking in equity based structures and ownership status in asset based transactions.These issues pose a Sharia debate which is extended to other financing practices in Islamic finance.Fathurahman and Fitriati (2013) attempted to analyze the ratio between yields (yield to maturity [YTM]) on Sukuk and conventional bonds listed in Indonesian stock market in October 2011.The findings showed that the average of the Sukuk and conventional bonds differs significantly overall and that Sukuk average YTM is greater than conventional bonds in three of ten groups studied.The authors concluded their paper by recommending the consideration of compliance with Sharia in future researches.Godlewski et al. (2013) investigated the reaction of Malaysian market investors to the announcements of Sukuk and conventional bonds issues.The stock market is neutral to announcements of conventional bond issues, but it reacts negatively to announcements of Sukuk issues.Godlewski et al. (2013) assigned this result to the great demand for Islamic investment certificates and to the adverse selection promoting Sukuk issuance by lower-quality debtor firms.
Tahmoures (2013) addressed the issue of compatibility between Sukuk and conventional bonds.The author attempted to compare these two financial instruments from different points of view like the structure and risk/return features.Tahmoures (2013) supported that issuers and investors can choose one or other of these financial instruments since Sukuk and bonds succeed in raising capital for both corporations and governments.Nevertheless, there are basic differences between the two instruments.Indeed, bonds are based on debt while Sukuk are equity based instruments.Then Sukuk are ideal choice for investors wishing to respect the Islamic finance principles.
Most publications as Cakir and Raei (2007), Ariff and Safari (2012), Hassan (2012) and Godlewski et al. (2013) agree that Sukuk offer an alternative investment, but the debate about if Sukuk is an efficient instrument of investment is always open.
Our aim in this paper is to analyze the performance of Sukuk portfolios and bond portfolios in Malaysian bonds and Sukuk market by using the series of indices TR BPAM ALL BOND INDEX rather than individual Sukuk or bonds.Indeed, this series of indices represent the whole Malaysian bonds and Sukuk market and allow to illustrate the global performance of this market.

Research Questions
Our research questions for this study are: Q1: "Does the Sukuk portfolios return differ significantly from conventional bonds portfolios return?"Q2: "Are there a correlation between the return of portfolios of Sukuk and bonds portfolios?"

Data Sample of the Study
The data used in purpose of this study are daily historical data of TR BPAM ALL BOND INDEX obtained through Bond Pricing Agency Malaysia (BPAM) website.This series of indices was created in 2007 by Thomson Reuters and the Malaysian Bond Pricing Agency (BPAM).These indices are very representative of the Malaysian Sukuk and bonds market hence our choice of those indices in the context of this study.

Methodology
Our purpose is to evaluate the performance of Sukuk portfolios compared with conventional bonds portfolios in the context of Malaysian market.For this purpose, we create our portfolios using the indices of the series TR BPAM ALL BOND INDEX in Malaysian bonds and Sukuk market (Table 1).Furthermore, we use the global index TR BPAM ALL BOND INDEX as a benchmark of the global market.
For Sukuk, we use the Islamic segment of the index TR BPAM ALL BOND INDEX and to represent bonds we use the conventional segment of the index.For each maturity, we take the appropriate segment of the index.
For example: -Sukuk portfolio of all maturities P1 Sukuk(all) is corresponding to index TR BPAM ALL BOND INDEX-Islamic-All maturities.
-Sukuk portfolio of 3 months to one year of maturity is corresponding to index TR BPAM ALL BOND INDEX-Islamic-3months to 1 year of maturity.
-Bonds portfolio of 1 year to three years of maturity is corresponding to index TR BPAM ALL BOND INDEX-Conventional-1year to 3 years of maturity.
-Bonds portfolio of more than 7 years of maturity is corresponding to index We construct our portfolios using these indices.For instance, the first portfolio P1 Sukuk(all) corresponds to the index TR BPAM ALL BOND INDEX-Islamic-All maturities which comprises Sukuk of all maturities.The number of Sukuk varies between 450 in 2007 and 621 in 2012.
We obtained five Sukuk portfolios and five bonds portfolios.We use the paired sample t-test for means to address the first research question Q1 and we use the Pearson correlation tests to answer the second research question Q2.  o P1 Bonds(all) .

Sample Characteristics
o P2  Results for paired samples t-tests regarding different Sukuk portfolios are given in Table 3.The results are statistically significant for only pairs including Sukuk portfolio of 3 months to one year of maturity P2 Sukuk(3m-1y) .For the others pairs, results are statistically insignificant.From these results, we can conclude that there is a difference statistically significant between Sukuk portfolio having maturity less than one year (P2 Sukuk(3m-1y) ) and other Sukuk portfolios.
Table 3. Paired sample t-test (Sukuk portfolios) Table 4 gives results in the case of bonds portfolios.These results are statistically insignificant, and then we cannot conclude to a difference between return means of different bonds portfolios in this case.Table 4. Paired sample t-test (bonds portfolios)

Analysis of the Portfolios' Return Correlation
The results of correlation tests on returns of the portfolios are shown in Tables 5, 6 and 7. Results of correlation tests of Sukuk portfolios (Table 5) indicate that returns of different portfolios are positively correlated.The correlation between Sukuk portfolio P1 Sukuk(all) and Sukuk portfolios P5 Sukuk(7y+) is estimated to 0.976.The correlation between the first Sukuk portfolio and the fourth P4 Sukuk(3y-7y) is about 0.948.The correlation between P1 Sukuk(all) and P3 Sukuk(1y-3y) is 0.759.Return of Sukuk portfolio having maturity of one year to three years  (P3 Sukuk(1y-3y) ) and Sukuk portfolio of 3 to 7 years of maturity (P4 Sukuk(3y-7y) ) are significantly and positively correlated with a value 0.779 of correlation.The correlation is also significant and positive between Sukuk portfolios P4 Sukuk(3y-7y) and P5 Sukuk(7y+) with a value of 0.870.Then, the correlation is positive and significant between different Sukuk portfolios while the value of correlation differs between different portfolios.Some portfolios have high correlation like portfolio of all maturities and portfolio of 7+ years of maturity.Results of correlation tests of bonds portfolios (Table 6) indicate that returns of different portfolios are positively correlated.The correlation is high between bonds portfolio P1 bonds(all) and bonds portfolios P5 Bonds(7y+) (with 0.950 value of correlation) , P4 Bonds(3y-7y) (with 0.901 value of correlation) and P3 Bonds(1y-3y) (with 0.735 value of correlation).Return of bonds portfolio having maturity of one year to three years (P3 Bonds(1y-3y) ) and bonds portfolio of 3 to 7 years of maturity (P4 Bonds(3y-7y) ) are significantly and positively correlated with a value 0.730 of correlation.The correlation is also significant and positive between bonds portfolios P4 Bonds(3y-7y) and P5 Bonds(7y+) with a value of 0.738.Concerning the correlation between Sukuk portfolios with bonds portfolios, the Table 7 shows the correlation coefficients between these two types of portfolios.The results indicate a positive correlation between Sukuk and bonds portfolios in each level of maturity with a significance level of 1%.Thus, we can conclude that there is a significant correlation between returns of Sukuk and bonds portfolios.

Conclusion
This research has compared the performance of Sukuk and bonds portfolios using a series of indices in the Malaysian Sukuk and bonds market.Indeed, we use the indices of the series TR BPAM ALL BOND INDEX reflecting the performance of Sukuk and bonds market in Malaysia for the period from 2007 to 2012.We first addressed the significance of the difference in the portfolios' mean return.Secondly, we addressed the portfolios' return correlation.For the issue of the significance of the difference in the portfolios' mean return, the results of paired sample t-tests show that there is a difference statistically significant, only, between Sukuk and bonds portfolios having less than one year of maturity.The results of correlation indicate a significant and positive correlation between returns of Sukuk and bonds portfolios.This study complements the studies concerned with the comparison of performance of Sukuk and bonds.The particularity of this study is that we work on Sukuk and bond portfolios based on indices reflecting the performance of the Malaysian bond and Sukuk market instead of using a small sample of individual Sukuk.In addition, analysis of Sukuk index in this same paper reveals that it outperforms its conventional counterpart.Overall, our results agree with those of some studies confirming that Sukuk perform as bonds given the positive correlation between these two financial instruments.

Figure 3
Figure 3 indicates the evolution of Sukuk, bonds and market indices from the series TR BPAM ALL BOND INDEX in Malaysian Sukuk and bonds market.Over the entire period from 2007 to 2012, the three indices move in , RPB1 represent, for example, the mean return of Sukuk portfolio P1 Sukuk(all) and bonds portfolio P1 Bonds(all) .
Zin et al. (2011)attempted to explore the practice and prospect of Sukuk market in Malaysia and discuss the difference between Sukuk and conventional bonds in Malaysian market.The authors confirmed the advantages and the value added offered by the Islamic capital market of Sukuk.Indeed, Sukuk are now promising tools for financing and for investors.

Table 1 .
Islamic indices represent Sukuk portfolios and conventional indices represent conventional bonds portfolios.The composition of every index is given in Table 1.This table indicates the number of Sukuk and bonds in each index between 2007 and 2012.Sukuk and bonds portfolios and corresponding indices above gives the indices used to represent different Sukuk and bonds portfolios.In addition, Table 1 indicates the number of Sukuk or bonds for each index between 2007 and 2012.For example, the first line corresponding to Sukuk index of all maturities indicates that the index contain 450 Sukuk (450S) in 2007, 499 Sukuk in 2008 and 621 Sukuk in 2012.The corresponding conventional index is composed of 200 bonds (200B) in 2007, 189 bonds in 2008 and 198 bonds in 2012.

Table 2 .
Paired sample t-test (Sukuk and bonds portfolios)