Relationship between risk and return in Sukuk market

This study attempts to identify the different types of risk embedded in the sukuk structure and to determine the relationship between the risks and the returns of sukuk. Data were collected from seven groups of the sukuk market from 2005 to 2013 on a periodic monthly basis and analyzed using correlation analysis and multi-regressions analysis. The test results confirm the significant influence of market risk, credit risk, operational risk and liquidity risk on the sukuk returns in different ways. The results of the analysis on the basis of maturity indicate that the longer the period of maturity the higher is the risk exposure. The results of the analysis on the rating indicate that the impact of risk is very high on lower- rated sukuk. The sectorial- based analysis indicate that the corporate sukuk return is highly exposed to risk compared to other sectors. Analysis on the Gulf countries’ sukuk market indicates that the corporate sector is more exposed to risk than the financial sector. The analysis of risk impact on the basis of selected country indicates that Bahrain’s sukuk market is highly exposed to risk when compared to the sukuk markets of the UAE and Malaysia. Although, there are some limitations, the findings pave ways for a number of recommendations, among others are; maintaining inflation- rate risk at an optimal level, hedging their interest- rate risk with Libor, replacing the conventional interest rate with the Libor rate, using a common currency in the Gulf region, forming a risk- steering committee to monitor and mitigate risk, formulating a common shari’ah board at the international level, and taking necessary measures to provide a conducive environment to promote secondary markets for sukuk