Islamic (Sukuk) Vs. Conventional Financing: Comparative Analysis of the Sources of ROE Under Different Financing Decisions

Abstract

Over the last decade, Islamic Financials (Sukuk) emerged as a pioneering capital market instrument. The riskiness of Sukuk is similar to that of the bond as they depend on the financial credibility of the issuer hence assumed to have no significant difference, the only difference seems to be in legal nature. Weather this culminates into real structural difference given them unique identity has yet to be seen. This study aims to investigate the impact of Islamic verses conventional financing decision on firms’ performance, and identifying factors that were causing that performance. This study takes ROE of 11 companies issuing Islamic Financials and 11 companies issuing Conventional Financials from the period between 2010 and 2015 and found the factors affecting their performance. Internal and external factors were identified and their impact on ROE is analysed using panel regression. The results showed that that Sukuk financing organizations are more influenced by external and internal factors as compared to conventional ones. The sources of profitability is more towards efficient management of their assets (TAT) and financial leverage (EM) rather than demand side factors (PM). Moreover, their profit are more influenced from internal factors as compared to external factors. The discoveries uncover the Islamic Financials (Sukuk) to be an essentially high wellspring of benefit for an organization alongside the other customers' infectious determinants, for example, religious standards, sharia-consistent instruments, and intrigue (Riba) free financing.