Researchers | Sulaiman Mouselli, Alaa Salhani and Reem Bahlawan |
Published in | Journal of Islamic Finance Accountancy (JOIFA), volume 9, issue 1, pp. 48-59, 2024. |
Abstract | Liabilities sukuk and equity sukuk are recorded on the liabilities and equity side of Islamic banks’ statements of financial position. Tier One sukuk are equity sukuk with special characteristics of loss absorption and perpetuity to meet Basel III requirements. This paper attempts to investigate if the impact of Liabilities sukuk on the profitability of Islamic banks differs from that of Tier One sukuk. The dataset contains all Islamic banks in the United Arab Emirates that issued liabilities sukuk or Tier One sukuk from 2008 to 2021. We compiled 88 observations from 7 Islamic banks over 14 years. Then, we applied panel OLS multivariate linear regression models using pooled, fixed effects, and random effects methods. The suitable estimation method was selected based on the redundant fixed effects test and the Hausman test. The results of this study reveal novel findings. Liabilities sukuk reduces all profitability indicators. That is, Liabilities sukuk are costly, and issuing more of this sukuk will damage the return to shareholders. Hence, we conclude that Liabilities sukuk do not encourage managers to better utilise bank resources and do not necessarily change the appetite of those banks to engage in riskier activities. Islamic banks should avoid issuing liabilities sukuk and increase their issuance of Tier One sukuk. Moreover, we encourage investors to buy stocks of Islamic banks that have larger Tier One Sukuk while avoiding investing in Islamic banks that utilise liabilities sukuk because the latter rewards them lower EPS. Key words: Liabilities sukuk, Tier One sukuk, Profitability, Islamic banking, United Arab Emirates. |
Link to full paper |