Exploring the Yield Spread Between Sukuk and Conventional Bonds in Malaysia

Abstract

This article aims to shed light on the differences in yield rate between conventional bond and sukuk in the Malaysian market. We find that the historical yield rates for the government-issued sukuk is significantly higher than the conventional bond. Conversely, there is a slight yield spread discount between the corporate-issued sukuk and bonds for all rating classes. We conclude that liquidity factor can mainly explain the positive yield spread on the government-issued sukuk. We also illustrate the effect of tax and expenses on asset pricing, which may contribute to the yield spread discount for corporate issuance. JEL Classification: E43, G12, G13