Sukuk investment: Comparison of the profits obtained by using Ijarah and Musharakah Mutanaqisah principles with long‐term tenure

Abstract

Purpose

The purpose of this paper is to determine whether the amount of profits gained from musharakah mutanaqisah model using coupon rate of 4.5 per cent, price at par and tenure of five years was greater than using ijarah principle where the price is at a discount. Also to compute and compare the profits obtained from sukuk investment in ijarah and musharakah mutanaqisah for 3.5 per cent coupon rate and price at par for a sukuk with tenure of 12.5, 15, 17.5 and 19 years.

Design/methodology/approach

In total, two models were used to calculate profit. These models are based on ijarah and musharakah mutanaqisah principles. Formulas are derived from ijarah and musharakah and mutanaqisah principles used in sukuk.

Findings

Sukuk investment using ijarah principle is found to be a better investment alternative than musharakah mutanaqisah principle, regardless of the number of years of the sukuk, as long as it is a long‐term tenure. However, for short‐term tenure, the latter is preferred based on the amount of profits generated.

Research limitations/implications

The formulas and results shown in this research are just one of the mathematical approaches that can be used for decision making in sukuk investment. There are other approaches which may deemed to be more effective in decision making. This research was applied only to ijarah and musharakah mutanaqisah types of investment.

Practical implications

The results in the research will assist in making a quick decision on what type of sukuk investment for the investors and issuers and which will be suitable given the amount of financial resources and duration of the investment period.

Originality/value

Many researchers have attempted to study the implications of using mathematical formulas to guide decision making on the choice of sukuk investment and this research has, to a certain extent, concurred with and complemented the works of past researchers. Additionally it will create awareness and provide more information to potential investors on better sukuk investment alternative principles from a mathematical point of view.

Citation

Jamilah Abdul Jalil, M. and Abdul Rahman, Z. (2012), "Sukuk investment: Comparison of the profits obtained by using Ijarah and Musharakah Mutanaqisah principles with long‐term tenure", Qualitative Research in Financial Markets, Vol. 4 No. 2/3, pp. 206-227. https://doi.org/10.1108/17554171211252538