In the late 1990s, Malaysia introduced a new way for corporations to raise capital by allowing the issuance of Shariah-compliant bonds, known as sukuk. Unlike conventional bonds, sukuk are structured to comply with Islamic law, which prohibits the payment or receipt of interest. The approach proved highly successful, according to a comprehensive study co-authored by UC Riverside finance professor Jean Helwege. Published in the Journal of Financial Economics, the research found that Islamic bonds attracted billions of dollars in new investment without displacing the conventional corporate bond market, ultimately expanding businesses’ access to financing and supporting Malaysia’s economic growth.
The researchers analysed two decades of Malaysia’s corporate bond market after sukuk were introduced in 1997. Rather than competing directly with conventional bonds, Islamic bonds attracted investors and institutions that would not otherwise purchase interest-bearing securities. “The overall finding was that these bonds increased in popularity,” Helwege said. “People did like to buy them, but it didn’t make the conventional bonds go away. The result was that there’s more financing overall, and it does seem to have been helpful to the growth of the Malaysian economy.” The findings challenge the assumption that introducing a new financial product divides an existing market, showing instead that sukuk expanded the total pool of capital available to businesses.
Although Islamic bonds produce returns that closely resemble those of conventional bonds, they are structured differently to comply with religious principles. Instead of explicitly paying interest, sukuk use contractual arrangements based on profit sharing or asset-backed financing that generate similar economic outcomes. “From an investor’s perspective they look extremely similar,” Helwege said. “But there are details in the structure that make them consistent with the Islamic world.” Sukuk also cannot finance businesses involved in activities prohibited under Islamic law, such as gambling. While often described as profit-sharing instruments, Helwege noted that they differ from equity because investors still expect to recover their principal without giving up ownership in the company.
Malaysia provided an ideal setting for the study because it deliberately developed an Islamic capital market alongside its conventional bond market. This dual system allowed researchers to observe how companies and investors responded when presented with two securities offering similar financial returns but different religious eligibility. Many corporations chose to issue both conventional bonds and sukuk, enabling them to reach traditional investors as well as Islamic investors, particularly those in wealthy Gulf states and other regions. Even as Islamic bond issuance expanded, conventional bonds continued to play a significant role in corporate financing.
The study also found that pricing differences between conventional bonds and sukuk remained relatively modest. Although issuing Islamic bonds requires additional costs, including obtaining religious certification, companies benefited from access to a broader investor base. In the late 1990s, annual sukuk issuance totalled less than US$2.5 billion, compared with US$5 billion to nearly US$18 billion in conventional bond issuance. By 2017, Islamic bond issuance had climbed to more than US$20 billion annually, while conventional bond issuance remained relatively stable. The growth illustrates how sukuk evolved from a niche financial product into a major source of corporate funding without weakening the conventional bond market.
The findings have implications beyond Islamic finance. As markets increasingly develop specialised investment products tailored to specific groups of investors, including environmentally and socially responsible funds, the research suggests that new financial instruments can increase access to capital when they attract investors who would otherwise remain on the sidelines. For Helwege, the study’s central message is clear: accommodating religious values strengthened rather than fragmented the market. “It was a popular product,” she said. “The conventional bonds didn’t disappear. There was simply more financing available overall.”
More information: Antje Berndt et al, The impact of introducing a (nearly) redundant security: Evidence from Malaysian corporate bonds, Journal of Financial Economics. DOI: 10.1016/j.jfineco.2026.104310
Journal information: Journal of Financial Economics Provided by University of California – Riverside