Defaulted Sukuk And Bonds In Malaysian Capital Market Finance Essay

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What are the basic characteristics or features of defaulted sukuk and bonds in Malaysian Capital Market and is there any difference between the characteristics?

Question No. 2:

Is the financial performance of Sukuk different from the fixed income securities?

Question No. 3:

Why did the issuers of defaulted sukuk and bonds failed to pay their obligations?

Question No. 4:

Research Objectives

The first objective of this research is to do a comparative study of all defaulted or "D rated or suspended" sukuk and bonds in the Malaysian market by comparing the characteristics (see Annexure-1) of both types of issuers. The purpose for this comparative study is: to identify why these corporations failed to pay, which sukuk structure defaulted the most in Malaysia and identify the reasons behind it. The author is of the opinion that there may not be any concerns with the approved sukuk structures but there might be other practical characteristics within issuer or company that may be the cause of these defaults.

Second objective of this dissertation is to explore the relationship between all the defaulted sukuk and bonds in the Malaysian market by comparing the financial performance of the issuers of these sukuk/bonds to see if there are any differences between the health of the issuers or merely nomenclature, a simple change of name from bond to sukuk. The basic objectives and requirements in structuring a bond or a sukuk transaction are to fulfill the funding needs of an organization. Investors in these transactions are usually concerned with the financial health of the issuers. The health of any corporation can be measured through the analysis of its financial performance. A study of defaulted sukuk and bonds may shed light on meeting both organizational and investor needs.

Data Source

To achieve above-mentioned objectives, the author will focus on the secondary data available in published papers, books, magazine articles and databases available on Islamic finance, sukuk and bonds via the Internet. The researcher will consider both quantitative and qualitative study to achieve these objectives. The quantitative data will be collected from financial statements of defaulted issuers and SC, IFIS and BPAM websites. These databases give extensive information on Islamic capital markets. The BPAM database is especially designed to cover the bond market in Malaysia, housing all the basic information regarding the bond or sukuk issue available today. The IFIS database is a specialized Islamic finance database; this will be used to compare the Malaysian sukuk market with other issuers in the world. The quantitative data will help the researcher to collect data regarding financial performance and growth of the sukuk and bond issues in Malaysia and compare it with sukuk issued internationally. Qualitative research will help in understanding the approved structures, issues, challenges and criticism regarding these sukuk.

Sample Specification

This study is mainly on the performance of Sukuk and Bonds in Malaysian capital Market. The sample in this study focuses mainly on all the "D" Rated or suspended sukuk and bonds in Malaysian market from 1990 till May 2010. A total of 64 issuers of sukuk and bonds were rated "D" by the rating agencies or were suspended due to non-payment of their obligations. This sample is further subdivided into two categories, first category is of "Bond issuers" where the total 33 number of bond issuers came in this category and second category is of sukuk issuers where the total 31 number of sukuk issuers came in this category. The list of all the sukuk and bonds in the sample is given in the table 2.

Research Methodology

This paper is mainly focused to compare the characteristics of defaulted sukuk and bonds issuers in Malaysia. The main purpose of doing this comparative analysis is to understand the theoretical and practical difference between sukuk and bonds. Two different research methodologies will be adopted to compare the characteristics. These methodologies will compare the qualitative and quantitative characteristics of both types of issuers.

Theoretically both sukuk and bonds are different from each other which lead to the difference of performance of issuers. There is no difference between generating funds through issuance of sukuk or bonds it is merely a name of contract, the actual difference is between the purpose of raising funds and the intention of both investors and issuers. Parties involved in issuance of bonds have completely different expectations than the parties involved in issuance of sukuk. The ultimate goal of both the contract is definitely the earning money however the difference is the sharing and holding the responsibility.

Following are the two comparative studies to be conducted to understand the difference in characteristics of sukuk and bonds.

Comparison of Qualitative characteristics

The first comparative study will be conducted on the qualitative characteristics of issuers of "D Rated and suspended" sukuk and bonds. The research is expected to identify and discuss the qualitative characteristics and to understand the reasons and impact of these characteristics. The comparison will be done on the following characteristics.

Term of Issuance

Underlying Contract

Asset/Equity Ratio

Amount of Total Issue to Equity

Fixed Assets/Total Assets Ratio

Utilization of Funds


Listed or Non Listed Company

Initial Ratings

Current Status (Redeemed or Outstanding)


Comparison Quantitative characteristics

The main purpose of issuing the sukuk and bonds is to fulfill the financial needs of an institution. This paper will compare the financial performance of all "D rated and suspended" sukuk issuers with bonds issuers (corporate issues) in Malaysian Capital Market. Financial performance of these sukuk and bonds issuers will be compared with respect to broad categories of financial ratios: coverage, gearing, liquidity, profitability and turnover. The author believes that sukuk and bonds are entirely different in nature and due to their underlying contracts, there should be a substantial difference in their financial performance. These differences will be elaborated upon in detail throughout the dissertation.

This financial performance of sukuk and bonds will be analyzed by comparing parametric and non-parametric test of equality of both the samples. The parametric test like Mean and median; and nonparametric test like Wilcoxon/Mann-Whitney ranked test will be used to estimate the equality of different financial ratios of sukuk and bonds.

Motivation for choosing the variables

The main objective of running any institution or firm is to achieve some predetermined benchmark, and for running any business the main objective is to make it profitable. Profitability of any organization can be maximized by utilizing the best mix of available resources. These resources are basically assets of an organization and the claims against these assets in terms of liabilities and owner's equity. Owner's equity is not always sufficient for the growth of any firm and these firms have to rely on the external resources. The funding needs can be short term or long term depending on the nature of the project under consideration.

Theoretically bonds are always considered debt financing and always come under the umbrella of liabilities; however sukuk is depending on the underlying contract. If it is musharaka, mudaraba financing it is considered equity financing, if it is murabaha or BBA it is treated under liabilities. The main object of issuing both sukuk and bonds is enhancing the profitability of the organization with the best mix of available resources.

The comparative analysis is done of the following important financial ratios. Investors can estimate the credit worthiness of a company by analyzing and understanding the effect of these ratios.

Financial ratios under observation

Following financial ratios are considered as critical for analyzing the performance of any company. In this section we will try to define the concept of financial ratios under discussion and their significance in decision making from investor point of view.

Interest coverage ratio (ICov)

Operating cashvflow interest coverage ratio (OCFIC)

Total gearing (TG)

Total Liabilities to Total Assets (TLTA)

Cash Ratio (CSHR)

Current Ratio (Cr)

Interest costs (IC)

Profit before Tax Margin (PBTM)

Total Asset Turnover (TAT)

Non-Current Asset Turnover (NCAT)

Interest coverage ratio (ICov)

Interest coverage is a ratio to determine how comfortably a company can pay its financing cost on outstanding debt. The interest coverage ratio is computed by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period:


Interest Coverage Ratio

The lower the ratio, the more the company is burdened by debt costs. When interest coverage ratio is 1.5 or below, the ability of firm to meet interest expenses may be questionable. An interest coverage ratio of less than1 indicates the firm is not generating adequate revenues to satisfy financing costs. The 'coverage' characteristic of the ratio specifies how many times the interest expenses could be paid from available earnings. A company that withstands earnings well above its interest requirements is in an excellent situation to weather possible financial storms. However a firm that barely manages its financing costs can easily suffer bankruptcy for even single month.

Operating Cash flow interest coverage (OCFIC)

Operating cash flow interest coverage ratio (OCFIC), measures the capacity of a company to generate cash flow from its operations to pay its financing costs. Companies with positive cash flow generate more cash flows than required to pay its interest costs. There are two other resources to generate the cash flows, i.e. investment or financing activities. However the companies with healthy cash flows generated from its operations are considered safe. Companies with poor cash flows from operation have to rely either on disposal of some of its investments or they have to rely on external source of financing to meet its obligations.

Formula for OCFIC is

OCFIC = Net Cash generated from operational activities/ Financing Costs

Total Gearing (TG)

What Does Gearing Mean? An analysis ratio of a company's level of long-term debt compared to its equity financing. Gearing is expressed in percentage form. Companies with high gearing (more long-term liabilities than shareholder equity) are considered speculative. Gearing is simply how company finances its business; it is through debt or outside financing or through equity financing.

Total Gearing = (Total liabilities + Contingent Liabilities)/ (Shareholder's Equity + Minority Interest)

Debt financing is not always free, increase in gearing will increase the cost of financing and will reduce the PBTM.

Total Liabilities to Total Asset Ratio (TLTA)

Total Liabilities to Total Asset Ratio measures the firm's financial risk which will help to understand how much of the company's assets are been financed by external financing. Total liabilities include both Current and Non-Current liabilities and then divided by the company's total assets.

TLTA = (Current Liabilities + Non-Current Liabilities) /Total Assets

This ratio is very simple to calculate with a broad impact of company's performance. The ratio is actually the percentage of how much assets are funded by external financing. The lower the ratio of the company the more are the assets financed by equity.

Cash Ratio (CSHR)

The cash ratio specifies the cash portion of current assets which includes the cash, cash equivalents or invested funds. Cash ratio provides the capability of a company to meet its current assets with highly liquid assets. It is value of cash and marketable securities divided by current.

Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities

Cash ratio (CSHR) is also called the most conservative ratio of all liquidity ratios. CSHR is indicator of a company's ability to meet its current liabilities that need immediate payments. It is noticed from the analysis of both the samples that there are some companies whose current ratio was very healthy but they defaulted. One of major reason for their default is very small portion of cash and cash equivalents.

Current Ratio (Cr)

Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations. If the Current ratio of a company is more than 1.0 which means company's short term assets exceed its short term liabilities and the firm can meet its short term obligation. Short-term obligations mean payments to be done in a year or less.

The Current Ratio formula is:

Current Ratio


Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

Interest costs Ratio (IC)

IC is the total expense incurred on the entire credit financing from external sources. Interest costs or financing costs have both positive and negative impact on the PBTM. It depends on the proportion of interest cost on the revenues. Companies with conservative approach of taking external financing have very small proportion of interest cost. However at the same time their revenues are proportionally very small which gives smaller PBTM than the companies with mixed financing.

Interest Cost = Interest cost/ Revenues

Profit before Tax Margin (PBTM)

The dependent variable in our model is PBTM. The bottom line of every business activity is profitability which is considered as the main motivation of every business transaction. Managers use different tools and resources to enhance the profitability of the business. PBTM is considered as bottom line of all the financial ratios. PBTM is the ratio of net income before taxes to net sales.

PBTM = (PBT/ Revenues)

It is dependent of how the resources are utilized which includes proper utilization of assets (Current and Noncurrent), Managing financial resources (Debt and Equity) and cost (Interest and others) are managed.

Total Asset Turnover (TAT)

The total asset turnover helps in determining the relationship between available resources of a company and revenues generated with those assets. Essentially, TAT is used to make sure that the company is realizing a sufficient return on the investment made. Periodic calculation of the TAT can help a company to identify and built new processes and procedures which can be helpful to increase the return. The practice of calculating the TAT is simply to generate the better revenues while making the best use of available company resources.

Total Asset Turnover ratio = Revenue / Total Assets

PBTM and Non-Current Asset Turnover Ratio (NCAT)

Non-current Ratio (NCAT) or Fixed asset ratio is the ratio of net revenues to fixed assets. NCAT ratio measures a company's capability to generate net revenues from Non-current asset investments like; property, plant and equipment. A higher NCAT ratio shows the company has been efficient in utilizing fixed assets investments to generate revenues.

NAT = Revenues/ Fixed Assets

Companies with better NAT ratio can better manage their long term borrowing than the companies with more emphasis on current assets investments. It is very important for a firm to invest in its fixed asset to generate the long term cash-flows which is necessary to meet long term obligations.

Testable hypothesis

Following hypothesis were tested in our analysis in this paper.

Testing the equality of Means:

Testing the equality of Medians:

Testing the equality of Variances:

The null hypothesis Ho designed here show that there is no significant difference between two test groups and the alternate hypothesis designed here to justify the difference between the two groups. Above hypothesis were tested on 95% confidence level and the test is said to be two tailed or non-directional.

Test of Equality of financial Ratios

This paper will determine the differences of distributions across populations or we will focus on the differences of two distribution-characteristics: First on moment or mean and second on central moment or Variance. These are the two characteristics, which describe the location and spread of distribution.


We will start with the testing for equality of variances (F-test) because the equality of variances is a common assumption in mean equality T-test. F-test is used to test if the variances of two populations are equal. F test can be a one-tailed or two-tailed test. The two-tailed version tests against the alternative that the variances are not equal. The one-tailed version only tests in one direction of the sample. That is the variance from the first population is either greater than (>) or less than (<), but not both, the variance of second population.

The significance of the F-ratio is obtained by referring to a table of the F distribution, using degree of freedom {df1, df2}, where df1 and df2 are the degrees of freedom from the regression mean square and residual mean square.

How to reject or accept F-test (for overall significance")


Decision: Reject Ho if the f-stat falls in the rejection area (p values> Ho: α=.05)


The two-series t-test is used to indicate if two sample means are equal. A common use of this t-test is to analyze the performance of new procedure or treatment to a current procedure or treatment.

The hypotheses to compare the means of two independent samples are:

(Means are equal)

(Means are not equal)


The test statistic is a student's t-test with "N2" degrees of freedom (df), where N is the total number of observations. A low pvalue gives evidence to reject the null hypothesis against the alternative. In other words we can write that, there is evidence that the means are not equal.

Decision: Reject the null hypothesis if the test statistics for each sample falls in the rejection region (p values< .05)

Wilcoxon-Mann-Whitney test (WMW)

Wilcoxon signed rank test (WMW) is used to test whether the median of a symmetric population is 0 or not. First, the data are ranked without looking to sign of each observation. Second, the sign of the each observation is attached to its corresponding rank. Finally, the one sample z - statistic (standard error of the mean /mean) is calculated from the signed ranks. For all small samples under observations, the statistic is compared to likely results and if each rank was equally likely to have a "+"or "-"sign affixed. For large samples, the z- statistic is compared to percentiles of the standard normal distribution.

The Wilcoxon rank sum test (also known as the Wilcoxon-Mann-Whitney test) [1] is used to test whether two samples are taken from the same population. It is appropriate if the likely alternative is that the two populations are moved with respect to each other. The test is performed by ranking the combined data set, dividing the ranks into two sets according the group membership of the original observations, and calculating a two sample z statistic, using the pooled variance estimate. For large samples, the statistic is compared to percentiles of the standard normal distribution. For small samples, the statistic is compared to what would result if the data were combined into a single data set and assigned at random to two groups having the same number of observations as the original samples.

Skewness and Kurtosis [2] 

A basic task in many statistical studies is to characterize the location and variability of a set of a data. Further the data is classified into skewness and kurtosis. Skewness is an indicator of symmetry, or more precisely we can say the lack of symmetry. A data set under observation is called symmetric if it looks the same to the both sides of the center point.

Kurtosis is an indicator of the data whether it is peaked or flat as compare to a normal distribution. That is, data sets with high kurtosis tend to have a distinct peak near the mean, decline rather rapidly, and have heavy tails. Data sets with low kurtosis tend to have a flat top near the mean rather than a sharp peak. A uniform distribution would be the extreme case.

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