Impact of risk factors in return on sukuk (islamic bond) market: special reference from Nasdaq Dubai sukuk indices

Abstract

The objective of this study is to identify the different types of risk embedded in the sukuk structure and impact of them in return on Sukuk market. To identify the factors literature was reviewed and to find the impact of them secondary data were collected from Nasdaq Dubai sukuk indices of the global sukuk market from 2005 to 2014 on a periodic monthly basis. Collected data were analyzed and found various factors namely interest rate risk, inflation rate risk, dollar rate risk, consumer confidence risk, maturity risk, credit risk, Shari‘ah compliance risk and liquidity risk. Regression analysis revealed that risk factors explain 88% to 94% of the variation on sukuk return and global sukuk return is exposed to risk. Specifically, while dollar rate risk negatively related interest rate risk, inflation rate risk, consumer confidence risk, maturity risk, credit risk, Shari‘ah compliance risk and liquidity risk positively related with sukuk return. Further, the results confirmed the significant influence of market risk, credit risk, operational risk and liquidity risk on the sukuk returns in different ways. Maintaining optimum level of inflation, hedging interest- rate risk with the Thompson Reuters interest rate with Islamic industry, using a common currency in the Gulf region, mitigate risk management mechanism, establishing an international common Shari‘ah board and taking steps in order to develop secondary markets for sukuk are recommended.