DETERMINANT OF
SUKUK ISSUANCE IN INDONESIA FROM INFORMATION ASYMMETRY PERSPECTIVE (2013-2022)
Imaroh Mawaddah
Universitas
Indonesia
Email:
imarohmawaddah@gmail.com
Abstract
Previous research found that sukuk is more exposed
to information asymmetry problems, especially adverse selection, than bond. Indonesia
as the third largest country for sukuk market falls below its peers in terms of
governance. It means the information asymmetry in Indonesia is relatively
higher which could reduce market effectiveness. So to
improve sukuk market in Indonesia, studying the implication of information
asymmetry and how it affects the capital structure decision is important. This
study try to explain the
issuance of sukuk in Indonesia 2013-2022 from information asymmetry perspective.
This study uses secondary data from 2013-2022 and would be done by using logistic
regression to conclude if the variables representing adverse selection and
moral hazard affect the decision of sukuk issuance. Our regression found
evidence of adverse selection in Indonesia sukuk market but did not find moral
hazard problem. The result supports previous research that concludes that sukuk
structuration leads firms with higher financial distress and a lower reputation
to enter the market. The result could
help investor to understand sukuk market and review their risk management
procedure. It could also become additional material for government to design a
suitable regulatory environment for a more govern sukuk market that would improve
the development of sukuk market.
Keywords: Information asymmetry; sukuk; bond; Indonesia
Research Background
Sukuk
shares several similarities with bonds such as nominal value, maturity date, rate
or margin and a regular stream of cash-flows provided to investors. Some
scholars argue that the differences between sukuk and conventional bonds are
mainly cosmetic (Klein
& Weill, 2016). They
explained that sukuk margin is usually benchmarked to the equivalent interest
rate so although it is only used for pricing, it worries some scholars about riba.
On
the other hand, several scholars also argue that sukuk has major features that would
distinguish from its conventional counterparts. The main characteristic that
makes sukuk different from bonds is that sukuk must be backed by a real asset (Wilson
2008). Klein
and Weill (2016) define sukuk as tradable certificates
of ownership that give the right of a stream of revenue from an investment
project. Guizani (2020) considered sukuk as hybrid
securities because it bears the features of stocks and bonds. Unlike bond, sukuk
involves partnership and non-partnership business agreements, not a
lender-borrower relationship (Uddin,
Kabir, Hossain, Wahab, & Liu, 2020). In
partnership sukuk (mudarabah or musharakah)
investors and issuer of the asset share profits and losses from certain
activities stipulated in the contract while non-partnership contracts (ijarah
and murabahah) create either lessor-lessee or
buyer-seller relationship between the investors and borrowers. Thus, sukuk
holders have recourse to the assets in the event of default although they lack
right of voting and interfering in underlying asset (Guizani,
2020).
Islamic
instruments, including sukuk, involve a high information cost because it has more
complex contract than bond. Sukuk requires SPV to temporarily isolate the
underlying asset or contract and, as explained above, its contractual
relationship is not simply lender and borrower make it more exposed to moral
hazard and adverse selection (Guizani,
2020). Previous
research (e.g
Abdul Halim et al. 2020; Guizani 2020; Uddin et al. 2020; Nagano 2017; Klein
and Weill 2016; Hanifa, Masih, and Becha 2014) confirmed
that sukuk is preferable for firms that face a higher information asymmetry
cost. Their research confirmed the presence of adverse selection that low
quality firm would prefer sukuk over bond and sukuk issuance is interpreted by
investor as negative signal (Godlewski,
Turk-Ariss, & Weill, 2013). Uddin
et al. (2020)
argued the reason behind sukuk issuance, other than religious motive, are sukuk
provides lighter indebtedness consequences, avoidance of effective third-party
monitoring, and tax advantage.
The first Indonesia sukuk was issued in 2002 following
the issuance of Sharia ruling No 32/DSN-MUIIIX/2002. Since then, Indonesia sukuk
market has grown at a steady pace but still smaller comparing conventional
bonds. In 2021, sukuk market accounted for 4,3% from total debt market in
Indonesia (IDX 2022). Although Indonesia is one of the largest sukuk market and
have the highest indicator for its knowledge, its governance score still fall
behind other countries like Malaysia, Bahrain, Oman, Kuwait and UAE (ICD -
Thomson Reuters, 2022).
In addition, Fitch Rating also classify Indonesia in Group D which consist of
countries where the law is not sufficient for investor protection. Considering
the current condition, sukuk market in Indonesia could face higher asymmetric
information relative to other countries. In other words, Indonesia sukuk market
could face adverse selection and moral hazard problem which is the
manifestation of information asymmetry.
Future
studies should consider mitigating issues and limitation arising from adverse
selection and moral hazard (Paltrinieri,
Hassan, Bahoo, & Khan, 2020). In
order to set the right risk mitigation policy, the underlying problem in sukuk
market need to be understood. In addition, despite being center
of Islamic Finance, study about Indonesia sukuk market is still limited. Most
studies include Indonesia in multi-country analysis, but rarely studies
Indonesia in particular. This study
tries to fill the gap by exploring the determinant of sukuk issuance and try to
explain Indonesia sukuk market from asymmetric information perspectives.
According to the research background,
this research is going to test determinant
of sukuk issuance decision in Indonesia 2013-2022 from information asymmetry
perspectives.
To explain
the issuance of sukuk in Indonesia 2013-2022 and provide the analysis based on
information asymmetry perspective.
The result
could help investor to understand sukuk market and review their risk management
procedure. It could also become additional material for government to understand
deeper about Indonesia sukuk market characteristics and use it to develop a favourable
regulatory environment for a more govern sukuk market.
This paper only covers the case of Indonesia
2013-2022, so some potential universal characteristics in sukuk issuance cannot
be generalized. This paper also exclude unlisted issuers
due to the unavailability of data collection. Moreover, it is also exclude the financial industry due its different nature and
level of information.
Metode
Sample and
Data
Table
2. Sampling Procedure
|
Sampling
Procedure |
Total |
|
|
1. |
Companies who issued sukuk and
bonds period 2013-2022 |
190 |
|
2. |
Financial Institutions |
(80) |
|
3. |
Unlisted and Delisted companies |
(46) |
|
5. |
Total sample |
64 |
Source :
Data processed by researcher
Variables
Identification
This
research tries to explore the relationship among variables. The dependent
variable used in this research is categorical variables which 2 if the company
issued sukuk in corresponding year, 1 if the company issued only bond in
corresponding year and 0 if the company did not issued any debt securities. The independent
variable follows Klein
and Weill (2016)
and Majumdar and Puthiya (2021)
which are profitability, liquidity, leverage, collateral, market to book ratio
and maturities. Following both research and (Altunbaş,
Kara, & Marques-ibanez, 2010),
this research used financial data year before issuance to prevent an endogenous
issue since the variable the year before the issuance cannot be impacted by the
issuance itself.
Table 3. Variables
|
Description |
Variable |
Proxy |
Measurement |
Previous Researches |
Hypotesis |
|
|
Sukuk
Preferences |
Categorical |
Sukuk |
if
the company issued sukuk in corresponding year (1), if the company only
issued bond (0) |
|
|
|
|
Independent |
Adverse
Selection |
Profitability |
EBITDA
TA |
EBITDA
/ Total Asset |
Klein
& Weill (2016), Majumdar & Puthiya (2021),
Mohamed dkk (2015) |
Negative |
|
Liquidity |
CR |
Current
Asset / Current Liabilities |
Klein
& Weill (2016), Majumdar & Puthiya (2021), |
Negative |
||
|
Leverage
|
DTA |
Total
Debt/Total Asset |
Klein
& Weill (2016), Majumdar & Puthiya (2021),
Mohamed dkk (2015), Uddin dkk
(2020) |
Negative |
||
|
Tangibility/Collateral |
Fixed
Asset |
Total
Fixed Asset/ Total asset |
Klein
& Weill (2016), Majumdar & Puthiya (2021),
Mohamed dkk (2015) |
Negative |
||
|
Moral Hazard |
Market
to book ratio |
MTB |
Market
value per share / Book value of equity per share |
Klein
& Weill (2016), Majumdar & Puthiya (2021),
Mohamed dkk (2015) |
Positive |
|
|
Maturity |
Maturity |
Years
counted from issuance date to maturity date |
Klein
& Weill (2016), Majumdar & Puthiya (2021),
Mohamed dkk (2015) |
Positive |
||
|
Control |
Covid-19 |
Binary |
Covid19 |
Dummy
variable = 1 if sukuk/bond issuance took place in year 2020-2021 dan 0
otherwise |
Lin & Su (2022) |
|
|
Size |
Total Asset |
Log_TA |
Log
Total Asset |
Guizani (2020), Majumdar &Puthiya
(2021), Ashraf dkk (2021), Uddin dkk (2020), Grassa &Minaoui
(2018), Nagano (2016) |
|
|
|
Amount |
Log
Amount |
Log_Amount |
Log
from Issuance amount in a year |
Klein
& Weill (2016), Abdul Halim et al. (2020),
Mohamed dkk (2015) |
|
|
|
Year
Issuance |
|
Years
Issuance |
|
Majumdar
& Puthiya (2021), Klein & Weill (2016) |
|
Data Analysis
Technique
Since
the dependent variable is categorical, the analysis is carried out by using logistic
regression because the dependent variables is categorical. When dependent variable
is categorical, the assumption of normal distribution can
not be used so it would not be appropriate to use linear regression
model like ordinary least square (OLS) method.
The logistic regression model is stipulated as:
𝑆𝑢𝑘𝑢𝑘 i,t =
𝛽0 + 𝛽1
EBITDATA i,t-1+ 𝛽2CR
i,t-1+ 𝛽3FixedAsset
i,t-1+ 𝛽4DTA
i,t-1+ 𝛽5MTB
i,t-1 + 𝛽6
Maturity i,t + 𝛽7 log_TA i,t-1+ 𝛽8 log_Amount i,t+ 𝛽9
Covid19 i+ 𝛽10
Years Issuance i,t+ɛ
i,t
Where:
Sukuk :
categorical variables (if the company issued sukuk in corresponding year (1), if
the company only issued bond (0)
EBITDATA :
profitability measured by EBITDA / Total Asset of firm I at year t-1
CR :
liquidity measured by current asset / current liabilities of firm at year t-1
Fixed Asset :
tangibility measured by total fixed asset/ total asset of firm i at year t-1
DTA :
leverage measured by Total Debt/Total Asset of firm i
at year t-1
MTB :
Market value per share / Book value of equity per share of firm i at year t-1
Maturity :
the mean of sukuk/bond maturity of firm i at year t
(in years counted from issuance date to maturity date)
Covid-19 :
Dummy variable = 1 if sukuk/bond issuance took place in year 2020-2021 dan 0
otherwise
Log_TA :
Size proxied by the logarithm of the total assets of firm i
at year t-1
Log_Amount :
the logarithm of the total amount issuance of firm i
at year t
Year Issuance :
the dummy variable of years
Result and
Discussion
Samples and Descriptives
The panel data of 64 firms shows 186 observations with
issuance (135 with only bond issuance and 51 with sukuk issuance). The total
issuance over 2013-2022 from the samples are USD19.370.373.632. Those number is
accounted for 30,44% of the total population (total issuance value in Indonesia
bond market) and 33,74% from total number of issuance
in Indonesia. It means Indonesia bond market mostly come from financial
institution. From the data, we also can conclude that bond issuance continue to dominate bond market in Indonesia. Figure 2
represents the trend in the value of bonds/sukuks issued by samples during the
period of our study.
From the descriptive statistics, we found that
standard deviation is higher in variables EBIDATA, DTA, maturity and MTB. To
solve this condition, researcher used winsorized
means in 2% and 98% quartiles to reduces the effect of outlier. Unlike other
variables, some observation has negative value of EBITDATA and MTB. Negative
values of EBITDATA shows that some companies has
losses in certain period, while negative MTB shows that company has negative
equity which means it was in financial distress condition or investing in high
cost property, plant and equipment (PPE) by issuing stock.
Table 4. Descriptive Statistics
|
Mean |
Std.Dev |
Min |
Max |
|
|
EBITDATA |
0,09581 |
0,20555 |
-2,63733 |
1,09961 |
|
CR |
1,57786 |
1,64771 |
0,02593 |
24,79729 |
|
DTA |
0,65415 |
0,99795 |
0,06377 |
19,82561 |
|
FixedAsset |
0,60591 |
0,21570 |
0,04232 |
1,00000 |
|
MTB |
2,27486 |
2,32223 |
-3,19735 |
22,41000 |
|
Maturity |
1,33270 |
2,21351 |
0,00000 |
16,24658 |
|
log_TA |
13,66005 |
1,39995 |
8,76230 |
16,78344 |
|
log_Amount |
17,96432 |
0,98327 |
15,36760 |
20,49918 |
Regression Result
The regression was carried out by using logistic
regression in STATA to understand the reason behind firm preferences of sukuk. The
dataset consist of 186 issuance. We check the
multicollinearity among variables and found no variables has extreme values of
collinearity (>0,7). We also perform the goodness fit of test after
regression by using three indicators which are -2 log likelihood ratio, chi
square and Pseudo R values. The -2 log likelihood shows
value of 54,028 with p value of chi square 0,0000 means that the model has
significant value over null model. Pseudo R2 test show that regression model
has explanatory power of 27,43% from the maximum model. All result conclude
that the model is fit.
The result shows that EBITDATA has positive and
significant relationship with sukuk issuance. While CR and market to book ratio
has negative and significant influences toward sukuk preferences. DTA is negative and significant in 90% level
of confidence. Maturity is found to be insignificant. All control variable also
do not have significant influence toward sukuk preferences.
An increase in EBITDATA would increase the probability of sukuk preferences by 10.825
times. While an increase in CR, DTA and MTB would decrease the the probability of sukuk preferences by 2,5595 times, 28,9855
times and 0,5016 times respectively.
Table 5. Regression Result
|
Coefficient |
Std.Error |
P>|z| |
||
|
SukukIssuance |
||||
|
EBITDATA |
9,2896 |
4,1038 |
0,024 |
|
|
CR |
- 0,9399 |
0,4371 |
0,032 |
|
|
DTA |
-3,3666 |
1,8686 |
0,072 |
|
|
FixedAsset |
-0,5251 |
1,2090 |
0,664 |
|
|
MTB |
-0,6900 |
0,1841 |
0,000 |
|
|
Maturity |
0,3371 |
0,2139 |
0,115 |
|
|
log_TA |
0,1836 |
0,2493 |
0,461 |
|
|
log_Amount |
0,0675 |
0,2808 |
0,810 |
|
|
COVID19 |
-14,8753 |
1.530,4130 |
0,992 |
|
|
LogLikehood |
-82,24 |
|||
|
Numberofobs |
186,00 |
|||
|
Prob>chi2 |
0,0000 |
|||
|
PseudoR2 |
0,2743 |
Discussion
Adverse Selection
The regression result shows evidence that firms in sukuk
market are exposed to adverse selection problem. In line with hypothesis, we
found that liquidity and leverage has negative and
significant relationship in sukuk issuance. Contrary, profitability was found
to have positive relationship with sukuk issuance. It means firm who entered
sukuk market has high profitability but are in financial distress caused by low
liquidity and has low access to debt market. In addition, tangibility or
collateral found to be insignificant in sukuk market.
Profitability shows a firm’s ability to generate
profit hence it also shows the ability to pay back its debt. Positive
relationship between profitability and sukuk issuance shows that firm issuing
sukuk has higher profitability comparing with firm who doesn’t issue sukuk. It
also means that the firms may choose to hold on to their retained earnings to
take advantage of future investment opportunities (Mohamed, Masih, &
Bacha, 2015). Liquidity and leverage have negative
relationship with sukuk issuance. Liquidity shows ability of the firm to
finance its short term activities. Firm with lower level liquidity seems to face higher level of
financial distress. While leverage shows the accessibility to financial market.
Lower level of leverage means lower accessibility to financial market. It could
also mean that the firm has lower reputation because reputation is very
important in financial market. Overall, tangibility has insignificant relationship
with sukuk issuance. It means that there is no
differences between sukuk and bond issuance in term of tangibility. However, by
definition, collateral is essential requirement for sukuk contract so it
requires further research.
Kirabaeva (2011) explains that adverse selection problem has small
impact in normal condition but when economy is in crisis it could lead to
significant losses and market halt thus market participant need to set several
mitigation policies. Further, Kirabaeva (2011) suggest that setting up collateral could decrease
uncertainty and mitigate adverse selection problem. It also could be decreased
with government intervention by setting up right policy to ensure market
liquidity.
Moral Hazard
The regression result shows lack evidence of moral
hazard in Indonesia sukuk market. The market valuation and book value of firm
seem to be in line so it doesn’t derive higher information asymmetry between
shareholder and management of the firm. Variable maturity found to be
insignificant which means there is no difference between conventional debt and
sukuk. Thus hypothesis that there is implication of
moral hazard in sukuk market is rejected.
Conclusion
Our regression found evidence of adverse
selection problem in Indonesia sukuk market. Firm with higher financial
distress and lower reputation most likely enter sukuk market than conventional
bond market. Moreover, the result shows lack evidence of moral hazard in sukuk
issuance proven by negative relationship with market to book ratio and insignificant
relationship with maturity. This result confirmed previous research by Klein and Weill (2016), Nagano (2016) and Majumdar and Puthiya (2021). It could be
supported evidence to Godlewski, Turk-Ariss, and Weill (2016) that sukuk
issuance derives negative signal in financial market.
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