Identifying the determinants of Malaysian corporate Sukuk rating

Abstract

Purpose

This study aims to identify the determinants of Malaysian corporate Sukuk rating and attempts to find out which determinant has the most significant impact.

Design/methodology/approach

The framework tries to establish a relationship between firm’s size, profitability, Sukuk guarantee status and types of Sukuk with Sukuk rating from the perspective of Agency Theory and Information Asymmetry Theory. The data consist of 43 Sukuk issuances from 2006 to 2015. Multinomial Logistic Regression Model is then used to find out the significant determinants of Sukuk rating.

Findings

The study found that only three variables significantly impact Sukuk rating. The results show that a guaranteed Sukuk Ijarah or a guaranteed Sukuk Musyarakah that is issued by a highly profitable firm has a higher likelihood of getting rating AAA or rating AA as compared to getting rating A. A type of Sukuk, particularly Sukuk Murabahah, is the most significant variable influencing Sukuk rating. However, firm size is not a significant determinant of Sukuk rating in the context of this study.

Research limitations implications

The first limitation of the study is the relatively small sample size. Second, the study only tested four independent variables.

Practical implications

Several implications are derived from the results of the study. First, new firms that are planning to issue Sukuk should consistently maintain a high level of profit and consider issuing debt-based Sukuk to ensure that the issued Sukuk have higher rating. To increase the likelihood of getting higher rating, they should also consider providing a third-party guarantor. As for existing Sukuk issuers that are in lower rating category, they should increase their profitability to be upgraded to higher rating category. Second, risk-adverse investors should invest in highly profitable, guaranteed and debt-based Sukuk, as these Sukuk are likely to be in higher rating category and provide guarantee in terms of capital payments during liquidation or bankruptcy. Third, to reduce information asymmetry, policymakers should make it compulsory for all Sukuk issuers to have their Sukuk rated annually and make it mandatory for all rating agencies in Malaysia to publish their Sukuk rating methodologies.

Originality/value

This paper helps to expand the limited existing literature about the determinants of Sukuk rating, particularly for the Malaysian corporate Sukuk.

Citation

Borhan, N.A. and Ahmad, N. (2018), "Identifying the determinants of Malaysian corporate Sukuk rating", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 11 No. 3, pp. 432-448. https://doi.org/10.1108/IMEFM-02-2017-0045