Defaulted Sukuk And Bonds In Malaysian Capital Market Finance Essay

What are the basic features or characteristics of defaulted sukuk and bonds in Malayan Capital Market and is at that place any difference between the features?

Question No. 2:

Is the fiscal public presentation of Sukuk different from the fixed income securities?

Question No. 3:

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

Question No. 4:

Research Aims

The first aim of this research is to make a comparative survey of all defaulted or “ D rated or suspended ” sukuk and bonds in the Malayan market by comparing the features ( see Annexure-1 ) of both types of issuers. The intent for this comparative survey is: to place why these corporations failed to pay, which sukuk construction defaulted the most in Malaysia and place the grounds behind it. The writer is of the sentiment that there may non be any concerns with the sanctioned sukuk constructions but there might be other practical features within issuer or company that may be the cause of these defaults.

Second aim of this thesis is to research the relationship between all the defaulted sukuk and bonds in the Malayan market by comparing the fiscal public presentation of the issuers of these sukuk/bonds to see if there are any differences between the wellness of the issuers or simply nomenclature, a simple alteration of name from bond to sukuk. The basic aims and demands in structuring a bond or a sukuk dealing are to carry through the support demands of an organisation. Investors in these minutess are normally concerned with the fiscal wellness of the issuers. The wellness of any corporation can be measured through the analysis of its fiscal public presentation. A survey of defaulted sukuk and bonds may cast visible radiation on run intoing both organisational and investor demands.

Data Beginning

To accomplish above-named aims, the writer will concentrate on the secondary informations available in published documents, books, magazine articles and databases available on Islamic finance, sukuk and bonds via the Internet. The research worker will see both quantitative and qualitative survey to accomplish these aims. The quantitative informations will be collected from fiscal statements of defaulted issuers and SC, IFIS and BPAM web sites. These databases give extended information on Islamic capital markets. The BPAM database is particularly designed to cover the bond market in Malaysia, lodging all the basic information sing the bond or sukuk issue available today. The IFIS database is a specialised Islamic finance database ; this will be used to compare the Malayan sukuk market with other issuers in the universe. The quantitative information will assist the research worker to roll up informations sing fiscal public presentation and growing of the sukuk and bond issues in Malaysia and compare it with sukuk issued internationally. Qualitative research will assist in understanding the sanctioned constructions, issues, challenges and unfavorable judgment sing these sukuk.

Sample Specification

This survey is chiefly on the public presentation of Sukuk and Bonds in Malayan capital Market. The sample in this survey focuses chiefly on all the “ D ” Rated or suspended sukuk and bonds in Malayan market from 1990 boulder clay May 2010. A sum of 64 issuers of sukuk and bonds were rated “ D ” by the evaluation bureaus or were suspended due to non-payment of their duties. This sample is farther subdivided into two classs, first class is of “ Bond issuers ” where the entire 33 figure of bond issuers came in this class and 2nd class is of sukuk issuers where the entire 31 figure of sukuk issuers came in this class. The list of all the sukuk and bonds in the sample is given in the tabular array 2.

Research Methodology

This paper is chiefly focused to compare the features of defaulted sukuk and bonds issuers in Malaysia. The chief intent of making this comparative analysis is to understand the theoretical and practical difference between sukuk and bonds. Two different research methodological analysiss will be adopted to compare the features. These methodological analysiss will compare the qualitative and quantitative features of both types of issuers.

Theoretically both sukuk and bonds are different from each other which lead to the difference of public presentation of issuers. There is no difference between bring forthing financess through issue of sukuk or bonds it is simply a name of contract, the existent difference is between the intent of raising financess and the purpose of both investors and issuers. Parties involved in issue of bonds have wholly different outlooks than the parties involved in issue of sukuk. The ultimate end of both the contract is decidedly the earning money nevertheless the difference is the sharing and keeping the duty.

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

Comparison of Qualitative features

The first comparative survey will be conducted on the qualitative features of issuers of “ D Rated and suspended ” sukuk and bonds. The research is expected to place and discourse the qualitative features and to understand the grounds and impact of these features. The comparing will be done on the undermentioned features.

Term of Issuance

Underliing Contract

Asset/Equity Ratio

Sum of Entire Issue to Equity

Fixed Assets/Total Assets Ratio

Use of Fundss


Listed or Non Listed Company

Initial Evaluations

Current Status ( Redeemed or Outstanding )


Comparison Quantitative features

The chief intent of publishing the sukuk and bonds is to carry through the fiscal demands of an establishment. This paper will compare the fiscal public presentation of all “ D rated and suspended ” sukuk issuers with bonds issuers ( corporate issues ) in Malayan Capital Market. Financial public presentation of these sukuk and bonds issuers will be compared with regard to wide classs of fiscal ratios: coverage, geartrain, liquidness, profitableness and turnover. The writer believes that sukuk and bonds are wholly different in nature and due to their implicit in contracts, there should be a significant difference in their fiscal public presentation. These differences will be elaborated upon in item throughout the thesis.

This fiscal public presentation of sukuk and bonds will be analyzed by comparing parametric and non-parametric trial of equality of both the samples. The parametric trial like Mean and average ; and nonparametric trial like Wilcoxon/Mann-Whitney ranked trial will be used to gauge the equality of different fiscal ratios of sukuk and bonds.

Motivation for taking the variables

The chief aim of running any establishment or house is to accomplish some preset benchmark, and for running any concern the chief aim is to do it profitable. Profitableness of any organisation can be maximized by using the best mix of available resources. These resources are fundamentally assets of an organisation and the claims against these assets in footings of liabilities and proprietor ‘s equity. Owner ‘s equity is non ever sufficient for the growing of any house and these houses have to trust on the external resources. The support demands can be short term or long term depending on the nature of the undertaking under consideration.

Theoretically bonds are ever considered debt funding and ever come under the umbrella of liabilities ; nevertheless sukuk is depending on the implicit in contract. If it is musharaka, mudaraba funding it is considered equity funding, if it is murabaha or BBA it is treated under liabilities. The chief object of publishing both sukuk and bonds is heightening the profitableness of the organisation with the best mix of available resources.

The comparative analysis is done of the undermentioned of import fiscal ratios. Investors can gauge the recognition worthiness of a company by analysing and understanding the consequence of these ratios.

Fiscal ratios under observation

Following fiscal ratios are considered as critical for analysing the public presentation of any company. In this subdivision we will seek to specify the construct of fiscal ratios under treatment and their significance in determination devising from investor point of position.

Interest coverage ratio ( ICov )

Operating cashvflow involvement coverage ratio ( OCFIC )

Entire geartrain ( TG )

Entire Liabilitiess to Total Assets ( TLTA )

Cash Ratio ( CSHR )

Current Ratio ( Cr )

Interest costs ( IC )

Net income before Tax Margin ( PBTM )

Entire Asset Turnover ( TAT )

Non-Current Asset Turnover ( NCAT )

Interest coverage ratio ( ICov )

Interest coverage is a ratio to find how comfortably a company can pay its funding cost on outstanding debt. The involvement coverage ratio is computed by spliting a company ‘s net incomes before involvement and revenue enhancements ( EBIT ) of one period by the company’sA involvement expensesA of the same period:


Interest Coverage Ratio

The lower the ratio, theA more the company is burdened by debt costs. When involvement coverage ratio is 1.5A or below, A the ability of house to run into involvement disbursals may be questionable. An involvement coverage ratio of less than1 indicatesA the house is non bring forthing equal grosss to fulfill funding costs. The ‘coverage ‘ feature of the ratio specifies how many times the involvement disbursals could be paid from available net incomes. A company that withstands net incomes good above its involvement demands is in an first-class state of affairs to endure possible fiscal storms. However a house that hardly manages its funding costs can easy endure bankruptcy for even individual month.

Operating Cash flow involvement coverage ( OCFIC )

Operating hard currency flow involvement coverage ratio ( OCFIC ) , measures the capacity of a company to bring forth hard currency flow from its operations to pay its funding costs. Companies with positive hard currency flow generate more hard currency flows than required to pay its involvement costs. There are two other resources to bring forth the hard currency flows, i.e. investing or funding activities. However the companies with healthy hard currency flows generated from its operations are considered safe. Companies with hapless hard currency flows from operation have to trust either on disposal of some of its investings or they have to trust on external beginning of funding to run into its duties.

Formula for OCFIC is

OCFIC = Net Cash generated from operational activities/ Financing Costss

Entire Gearing ( TG )

What DoesA GearingA Mean? An analysisA ratio of a company ‘s degree of long-run debtA compared toA its equity funding. Gearing is expressed in per centum signifier. Companies with high geartrain ( more long-run liabilities than shareholderA equity ) are considered bad. Gearing is merely how company finances its concern ; it is done debt or outside funding or through equity funding.

Entire Gearing = ( Entire liabilities + Contingent Liabilities ) / ( Shareholder ‘s Equity + Minority Interest )

Debt funding is non ever free, addition in pitching will increase the cost of funding and will cut down the PBTM.

Entire Liabilitiess to Entire Asset Ratio ( TLTA )

Entire Liabilitiess to Entire Asset Ratio measures the house ‘s fiscal hazard which will assist to understand how much of the company ‘s assets are been financed by external funding. Entire liabilities include both Current and Non-Current liabilities and so divided by the company ‘s entire assets.

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

This ratio is really simple to cipher with a wide impact of company ‘s public presentation. The ratio is really the per centum of how much assets are funded by external funding. The lower the ratio of the company the more are the assets financed by equity.

Cash Ratio ( CSHR )

The hard currency ratio specifies the hard currency part of current assets which includes the hard currency, hard currency equivalents or invested financess. Cash ratio provides the capableness of a company to run into its current assets with extremely liquid assets. It is valueA ofA cashA andA marketable securitiesA divided by current.

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

Cash ratio ( CSHR ) is besides called the most conservative ratio of all liquidness ratios. CSHR is index of a company ‘s ability to run into 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 really healthy but they defaulted. One of major ground for their default is really little part of hard currency and hard currency equivalents.

Current Ratio ( Cr )

Current Ratio is a liquidityA ratio that measuresA a company ‘s ability to pay short-run obligations.A 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 house can run into its short term duty. Short-run duties mean payments to be done in a twelvemonth or less.

The Current Ratio expression is:

Current Ratio


Besides known as “ liquidness ratio ” , “ hard currency plus ratio ” and “ hard currency ratio ” .

Interest costs Ratio ( IC )

IC is the entire disbursal incurred on the full recognition funding from external beginnings. Interest costs or funding costs have both positive and negative impact on the PBTM. It depends on the proportion of involvement cost on the grosss. Companies with conservative attack of taking external funding have really little proportion of involvement cost. However at the same clip their grosss are proportionately really little which gives smaller PBTM than the companies with assorted funding.

Interest Cost = Interest cost/ Grosss

Net income before Tax Margin ( PBTM )

The dependant variable in our theoretical account is PBTM. The bottom line of every concern activity is profitableness which is considered as the chief motive of every concern dealing. Directors use different tools and resources to heighten the profitableness of the concern. PBTM is considered as bottom line of all the fiscal ratios. PBTM is the ratio of net income before revenue enhancements to net gross revenues.

PBTM = ( PBT/ Revenues )

It is dependent of how the resources are utilised which includes proper use of assets ( Current and Noncurrent ) , Pull offing fiscal resources ( Debt and Equity ) and cost ( Interest and others ) are managed.

Entire Asset Turnover ( TAT )

TheA totalA assetA turnoverA helps in finding the relationship between available resources of a company and grosss generated with those assets. Basically, TAT is used to do certain that the company is recognizing a sufficient return on the investing made. Periodic computation of theA TAT can assist a company to place and construct new procedures and processs which can be helpful to increase the return. The pattern of ciphering theA TATA is merely to bring forth the better grosss while doing the best usage of available company resources.

Entire Asset Turnover ratio = Revenue / Total Assetss

PBTM and Non-Current Asset Turnover Ratio ( NCAT )

Non-current Ratio ( NCAT ) or Fixed plus ratio is the ratio of cyberspace grosss to fixed assets. NCAT ratio measures a company ‘s capableness to bring forth net grosss from Non-current plus investings like ; belongings, works and equipment. A higher NCAT ratio shows the company has been efficient in using fixed assets investings to bring forth grosss.

NAT = Revenues/ Fixed Assetss

Companies with better NAT ratio can break pull off their long term adoption than the companies with more accent on current assets investings. It is really of import for a house to put in its fixed plus to bring forth the long term cash-flows which is necessary to run into long term duties.

Testable hypothesis

Following hypothesis were tested in our analysis in this paper.

Testing the equality of Meanss:

Testing the equality of Medians:

Testing the equality of Discrepancies:

The void hypothesis Ho designed here show that there is no important difference between two trial groups and the alternate hypothesis designed here to warrant the difference between the two groups. Above hypothesis were tested on 95 % assurance degree and the trial is said to be two tailed or non-directional.

Trial of Equality of fiscal Ratios

This paper will find the differences of distributions across populations or we will concentrate on the differences of two distribution-characteristics: First on minute or mean and second on cardinal minute or Discrepancy. These are the two features, which describe the location and spread of distribution.


We will get down with the proving for equality of discrepancies ( F-test ) because the equality of discrepancies is a common premise in average equality T-test. F-test is used to prove if the discrepancies of two populations are equal. F trial can be a one-tailed or two-tailed trial. The two-tailed version trials against the option that the discrepancies are non equal. The one-tailed version merely tests in one way of the sample. That is the discrepancy from the first population is either greater than ( & gt ; ) or less than ( & lt ; ) , but non both, the discrepancy of 2nd population.

The significance of the F-ratio is obtained by mentioning to a tabular array of the F distribution, utilizing grade of freedom { df1, df2 } , where df1 and df2 are the grades of freedom from the arrested development mean square and residuary mean square.

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


Decision: Reject Ho if the f-stat falls in the rejection country ( p values & gt ; Ho: I±=.05 )


The two-series t-test is used to bespeak if two sample agencies are equal. A common usage of this t-test is to analyse the public presentation of new process or intervention to a current process or intervention.

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

( Means are equal )

( Means are non equal )


The trial statistic is a pupil ‘s t-test with “ N2 ” grades of freedom ( df ) , where N is the entire figure of observations. A low pvalue gives grounds to reject the void hypothesis against the option. In other words we can compose that, there is grounds that the agencies are non equal.

Decision: Reject the void hypothesis if the trial statistics for each sample falls in the rejection part ( P values & lt ; .05 )

Wilcoxon-Mann-Whitney trial ( WMW )

Wilcoxon signed rank trial ( WMW ) A is used to prove whether the median of a symmetric population is 0 or non. First, the informations are ranked without looking to subscribe of each observation. Second, the mark of the each observation is attached to its matching rank. Finally, the one sample z – statistic ( standard mistake of the average /mean ) is calculated from the signed ranks. For all little samples under observations, the statistic is compared to likely consequences and if each rank was every bit likely to hold a “ + ” or “ – ” mark affixed. For big samples, the z- statistic is compared to percentiles of the criterion normal distribution.

TheA Wilcoxon rank amount testA ( besides known as theA Wilcoxon-Mann-Whitney trial )[ 1 ]is used to prove whether two samples are taken from the same population. It is appropriate if the likely option is that the two populations are moved with regard to each other. The trial is performed by ranking the combined information set, spliting the ranks into two sets harmonizing the group rank of the original observations, and ciphering a two sample z statistic, utilizing the pooled discrepancy estimation. For big samples, the statistic is compared to percentiles of the criterion normal distribution. For little samples, the statistic is compared to what would ensue if the informations were combined into a individual information set and assigned at random to two groups holding the same figure of observations as the original samples.

Lopsidedness and Kurtosis[ 2 ]

A basic undertaking in many statistical surveies is to qualify the location and variableness of a set of a information. Further the information is classified into lopsidedness and kurtosis. Skewness is an index of symmetricalness, or more exactly we can state the deficiency of symmetricalness. A information set under observation is called symmetric if it looks the same to the both sides of the centre point.

Kurtosis is an index of the information whether it is peaked or level as comparison to a normal distribution. That is, informations sets with high kurtosis tend to hold a distinguishable extremum near the mean, decline instead quickly, and have heavy dress suits. Data sets with low kurtosis tend to hold a level top near the mean instead than a crisp extremum. A unvarying distribution would be the utmost instance.