Comparative Analysis of Risk Between Conventional Bonds and Sukuk Using Duration-Normal VaR
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Aug 16, 2026
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Noor-Ul-Hacq Sookia
https://orcid.org/0000-0002-3155-0473
Sheik Ahmad Ryman Bissessur
https://orcid.org/0000-0001-9657-1999
https://orcid.org/0000-0002-3155-0473
Sheik Ahmad Ryman Bissessur
https://orcid.org/0000-0001-9657-1999
Abstract
Purpose: Islamic finance and Sukuk have garnered so much interest in recent times that not just Islamic countries, but also Western countries have started trading in Sukuk. This research paper aims to assess whether Sukuk can bring benefits to investors in terms of reduced market risks when added to a portfolio of conventional bonds.
Methodology: The research employed the Duration-Normal Value-at-Risk (VaR) Model.
Findings: Using the Duration-Normal VaR model, it has been found that the market risk associated with the mixed portfolio through the addition of Sukuk to the conventional bond was significantly lower than that of a pure bond portfolio. This could be explained by the low correlation between the conventional bonds and Sukuk. The accuracy of the Duration-Normal VaR model has been confirmed by the Kupiec Proportion of Failure Test.
Originality: This paper provides a different view on applying the Value-at-Risk (VaR) approach for assessing the market risk associated with Islamic and conventional bonds and further applies a backtesting procedure to examine the accuracy of the model.
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Keywords
SukukMarket RiskValue-at-RiskDuration-Normal ModelBack-testing Procedures
References
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Almaskati, N. “Sukuk Versus Bonds: New Evidence from the Primary Market.” Borsa Istanbul Review, vol. 22, no. 5 (2022): 1033-1038. https://doi.org/10.1016/j.bir.2022.06.005
Alshater, M.M. et al. “Islamic Banking: Past, Present and Future.” Journal of College of Sharia and Islamic Studies, vol 41, no. 1 (2023): 193-221. https://doi.org/10.29117/jcsis.2023.0351
Alswaidan, M.W., A. Daynes and P. Pasgas. “Understanding and Evaluation of Risk in Sukuk Structures.” Journal of Islamic Accounting and Business Research, vol. 8, no. 4 (2017): 389-405. https://doi.org/10.1108/JIABR-05-2015-0021
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Badri, A. Malaysian Sukuk Market Handbook: Your Guide to the Malaysian Islamic Capital Market. Kuala Lumpur: RAM Rating Services, 2008.
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Hammoudeh, S. et al. “Dynamic Dependence of the Global Islamic Equity Index with Global Conventional Equity Market Indices and Risk Factors.” Pacific-Basin Finance Journal, vol. 30, (2014): 189–206.
Hamzah, S.R. et al. “Empirical Evidence of Risk Shifting in Bonds and Debt-Based Sukuk: The Case of Malaysian Corporations.” Journal of Islamic Accounting and Business Research, vol. 9, no. 5 (2018): 687-700.
Hanefah, M.M., A. Noguchi and M. Muda. “Sukuk: Global Issues and Challenges.” Journal of Legal, Ethical and Regulatory Issues, vol. 16, no. 1 (2013): 107–119.
Hanif, M. “Economic Substance or Legal Form: An Evaluation of Islamic Finance Practice.” International Journal of Islamic and Middle Eastern Finance and Management, vol. 9, no. 2 (2016): 277–295.
Hanim. K. et al. “The Subprime Mortgage Crisis and Islamic Securitization.” International Journal of Islamic and Middle Eastern Finance and Management, vol. 3, no. 4 (2010): 386–401.
Haque, M.M. et al. “Who Drives Whom-Sukuk or Bond? A New Evidence from Granger Causality and Wavelet Approach.” Review of Financial Economics, vol. 36, no. 2 (2018): 117–132.
Harper, D.R. “Understanding Value at Risk (VaR): Explanation and Calculation Methods.” Investopedia, 2018. Updated November 25, 2025. https://www.investopedia.com/articles/04/092904.asp
Hassan, K.A. “Comparison between Sukuk and Conventional Bonds: Value at Risk Approach.” MSc diss., University of Westminster, London, (2012).
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Ibrahim, M.H. “Issues in Islamic Banking and Finance: Islamic Banks, Shariah-Compliant Investment and Sukuk.” Pacific-Basin Finance Journal, vol. 34, (2015): 185–191.
Iqbal, Z. “The Appeal of Sukuk as Asset-Backed Financing.” Journal of King Abdulaziz University: Islamic Economics, vol. 28, no. 2 (2015): 177-187.
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https://doi:10.1108/IMEFM-09-2018-0285
Al-Deehani, T., R.A.A. Karim and V. Murinde. “The Capital Structure of Islamic Banks Under the Contractual Obligation of Profit Sharing.” International Journal of Theoretical and Applied Finance, vol. 2, no. 3 (1999): 243–283.
Almaskati, N. “Sukuk Versus Bonds: New Evidence from the Primary Market.” Borsa Istanbul Review, vol. 22, no. 5 (2022): 1033-1038. https://doi.org/10.1016/j.bir.2022.06.005
Alshater, M.M. et al. “Islamic Banking: Past, Present and Future.” Journal of College of Sharia and Islamic Studies, vol 41, no. 1 (2023): 193-221. https://doi.org/10.29117/jcsis.2023.0351
Alswaidan, M.W., A. Daynes and P. Pasgas. “Understanding and Evaluation of Risk in Sukuk Structures.” Journal of Islamic Accounting and Business Research, vol. 8, no. 4 (2017): 389-405. https://doi.org/10.1108/JIABR-05-2015-0021
Ariff, M. and M. Safari. “Are Sukuk Securities the Same as Conventional Bonds?” Afro Eurasian Studies, vol. 1, no. 1 (2012): 101-125.
Auditing Organization for Islamic Financial Institutions (AAOIFI). “Sharia Standard No 17: Investment Sukuk.” https://aaoifi.com/ss-17-investment-sukuk/?lang=en
Ayub, M. Understanding Islamic Finance. West Sussex: Wiley, 2007.
Azmat, S., M. Skully and K. Brown. “Issuer’s Choice of Islamic Bond Type.” Pacific Basin Finance Journal, vol. 28, (2014): 122-135.
Badri, A. Malaysian Sukuk Market Handbook: Your Guide to the Malaysian Islamic Capital Market. Kuala Lumpur: RAM Rating Services, 2008.
Balli, F., H. Ghassan and E. Al Jeefri. “Sukuk and Bond Spreads.” Journal of Economics and Finance, vol. 45, no. 3 (2021): 529-543. https://doi.org/10.1007/s12197-021-09545-9
Bhuiyan, R.A et al. “Financial Integration Between Sukuk and Bond Indices of Emerging Markets: Insights from Wavelet Coherence and Multivariate GARCH Analysis.” Borsa Istanbul Review, vol. 18, no. 3 (2018): 218-230. https://doi.org/10.1016/j.bir.2017.11.006
Bhuiyan, R.A et al. “Does the Malaysian Sovereign Sukuk Market Offer Portfolio Diversification Opportunities for Global Fixed-Income Investors? Evidence from Wavelet Coherence and Multivariate-GARCH Analyses.” The North American Journal of Economics and Finance, vol. 47 (2019a): 675-687. https://doi.org/10.1016/j.najef.2018.07.008
Bhuiyan, R.A et al. “Co-Movement Dynamics Between Global Sukuk and Bond Markets: New Insights from a Wavelet Analysis.” International Journal of Emerging Markets, vol. 14, no. 4 (2019b): 550-581. https://doi.org/10.1108/IJOEM-12-2017-0521
Campbell, S.D. “A Review of Back-testing and Back-testing Procedures.” Finance and Economics Discussion Series, 2005: 1-23.
Danielsson, J. Financial Risk Forecasting: The Theory and Practice of Forecasting Market Risk, with Implementation in R and Matlab. Chichester: Wiley, 2011.
Dusuki, A.W. “Do Equity-Based Sukuk Structures in Islamic Capital Markets Manifest the Objectives of Shariah?” Journal of Financial Services Marketing, vol. 15, no. 3 (2010): 203–214.
Dusuki, A.W. Islamic Financial System: Principles and Operations. Kuala Lumpur: International Shari’ah Research Academy for Islamic Finance, 2012.
Farid, J. Fixed Income Risk: Calculating Value at Risk (VAR) for Bonds. 2013. [Online] Available at: https://financetrainingcourse.com/education/2013/05/bondrisk-calculating-value-at-risk-var-for-bonds/
Fathurahman, H. and R. Fitriati. “Comparative Analysis of Return on Sukuk and Conventional Bonds.” American Journal of Economics, vol. 3, no. 3 (2013): 159-163.
Fauzi, F., D. Foo and A. Basyith. “Islamic Bond Announcement: Is There Any Effect on Returns?” Global Business Review, vol. 18, no. 2 (2017): 327–347.
Godlewski, C.J., R. Turk-Ariss, and L. Weill. “Sukuk vs. Conventional Bonds: A Stock Market Perspective”, Journal of Comparative Economics, vol. 41, no. 3 (2013): 745-761. https://doi.org/10.1016/j.jce.2013.02.006
Grigoriu, A. “Volatility as a Risk Measure.” Institute of Actuaries (2011). https://active-asset-allocation.com/wp-content/uploads/2018/04/Risk-Letter-1-Version-ENG.pdf
Hammoudeh, S. et al. “Dynamic Dependence of the Global Islamic Equity Index with Global Conventional Equity Market Indices and Risk Factors.” Pacific-Basin Finance Journal, vol. 30, (2014): 189–206.
Hamzah, S.R. et al. “Empirical Evidence of Risk Shifting in Bonds and Debt-Based Sukuk: The Case of Malaysian Corporations.” Journal of Islamic Accounting and Business Research, vol. 9, no. 5 (2018): 687-700.
Hanefah, M.M., A. Noguchi and M. Muda. “Sukuk: Global Issues and Challenges.” Journal of Legal, Ethical and Regulatory Issues, vol. 16, no. 1 (2013): 107–119.
Hanif, M. “Economic Substance or Legal Form: An Evaluation of Islamic Finance Practice.” International Journal of Islamic and Middle Eastern Finance and Management, vol. 9, no. 2 (2016): 277–295.
Hanim. K. et al. “The Subprime Mortgage Crisis and Islamic Securitization.” International Journal of Islamic and Middle Eastern Finance and Management, vol. 3, no. 4 (2010): 386–401.
Haque, M.M. et al. “Who Drives Whom-Sukuk or Bond? A New Evidence from Granger Causality and Wavelet Approach.” Review of Financial Economics, vol. 36, no. 2 (2018): 117–132.
Harper, D.R. “Understanding Value at Risk (VaR): Explanation and Calculation Methods.” Investopedia, 2018. Updated November 25, 2025. https://www.investopedia.com/articles/04/092904.asp
Hassan, K.A. “Comparison between Sukuk and Conventional Bonds: Value at Risk Approach.” MSc diss., University of Westminster, London, (2012).
Hassan, M.K., et al. “A Review of Islamic Investment Literature”, Economic Papers, vol. 38, no. 1, (2018): 345-380.
Hussain, T. and M.N. Khalil. “Shariah Issues in Islamic Capital Markets of Pakistan: A Case Study of Sukuk.” Journal of Islamic Thought and Civilization, vol. 9, no. 1 (2019): 1–22.
Ibrahim, M.H. “Issues in Islamic Banking and Finance: Islamic Banks, Shariah-Compliant Investment and Sukuk.” Pacific-Basin Finance Journal, vol. 34, (2015): 185–191.
Iqbal, Z. “The Appeal of Sukuk as Asset-Backed Financing.” Journal of King Abdulaziz University: Islamic Economics, vol. 28, no. 2 (2015): 177-187.
Islamic Financial Services Board (IFSB). “Islamic Financial Services Industry Stability Report 2024” Maintaining Financial Stability in a Challenging Risk Environment.” https://www.ifsb.org/wp-content/uploads/2024/09/IFSB-Stability-Report-2024-8.pdf
Islamic Financial Services Board (IFSB). “Islamic Financial Services Industry Stability Report 2025. Navigating Shallow Waters: Addressing Structural Vulnerabilities and Shoring Up Resilience to Global Shocks.” Kuala Lumpur, 16 May 2025. https://www.ifsb.org/wp-content/uploads/2025/05/IFSI-Stability-Report-2025.pdf
Ismath Bacha, O. and A. Mirakhor. “Funding Development Infrastructure Without Leverage: A Risk-Sharing Alternative Using Innovative Sukuk Structures.” The World Economy, vol. 41, no. 3 (2018): 752–762.
Jobst, A. et al. “Islamic Bond Issuance: What Sovereign Debt Managers Need to Know.” International Journal of Islamic and Middle Eastern Finance and Management, vol. 1, no. 4 (2008): 330–344.
Jorion, P. Financial Risk Manager Handbook, 4th ed. Hoboken, New Jersey: John Wiley & Sons, Inc., 2007.
Khan, A. et al. “A Bibliometric Review of Takaful Literature.” International Review of Economics and Finance, vol. 69, (2020): 389-405.
Klein, P. and L. Weill. “Why Do Companies Issue Sukuk?” Review of Financial Economics, vol. 31, no.1 (2016): 26–33. https://doi.org/10.1016/j.rfe.2016.05.003
Kuwait Finance House Research Ltd. Global Sukuk market: 2015 Outlook. 2015.
Lahsasna, A. and L. Lin. “Issues in Islamic Capital Markets: Islamic Bond/Sukuk.” In Proceedings of the 3rd International Conference on Business and Economic Research 12-13 March 2012. Bandung, 2012.
Maghyereh, A.I., H. Abdoh and B. Awartani. “Connectedness and Hedging Between Gold and Islamic Securities: A New Evidence from Time-Frequency Domain Approaches.” Pacific-Basin Finance Journal, vol. 54, (2019): 13–28.
Mimouni, K., H. Smaoui and A. Temimi. “The Impact of Sukuk on the Performance of Conventional and Islamic Banks.” Pacific-Basin Finance Journal, vol. 54, (2019): 42–54.
Naim, A.M., M.Y. Isa and M.L. Hamid. “The Effects of new AAOIFI Standards on Sukuk in Choosing the Most Authentic Islamic Principles.” Journal of Islamic Accounting and Business Research, vol. 4, no. 1 (2013): 77–93.
Mohamed, H.H., M. Masih and O.I. Bacha. “Why do Issuers Issue Sukuk or Conventional Bond? Evidence from Malaysian Listed Firms Using Partial Adjustment Models.” Pacific-Basin Finance Journal, vol. 34, (2015): 233–252.
Nagano, M. “Who Issues Sukuk and When? An Analysis of the Determinants of Islamic Bond Issuance.” Review of Financial Economics, vol. 31, (2016): 45-55. https://doi.org/10.1016/j.rfe.2016.05.002
Naifar, N. “Do Global Risk Factors and Macroeconomic Conditions Affect Global Islamic Index Dynamics? A Quantile Regression Approach.” The Quarterly Review of Economics and Finance, Vol. 61 (2016): 29-39. https://doi.org/10.1016/j.qref.2015.10.004
Naifar, N. and S. Mseddi. “Sukuk Spreads Determinants and Pricing Model Methodology.” Afro-Asian Journal of Finance and Accounting, vol. 3, no. 3 (2013): 241–257.
Najeeb, S.F., O. Bacha and M. Masih. “Does a Held-to-Maturity Strategy Impede Effective Portfolio Diversification for Islamic Bond (Sukuk) Portfolios? A Multi-scale Continuous Wavelet Correlation Analysis.” Emerging Markets Finance and Trade, vol. 53, no. 10 (2017): 2377–2393.
Nanaeva, Z.K. “How Risky Sukuk Are? Comparative Analysis of Risks Associated with Sukuk and Conventional Bonds.” MSc Diss. The British University in Dubai, 2010.
Nasir, A. and U. Farooq. “Analysis of Value at Risk of Sukuk and Conventional Bonds in Pakistan.” Journal of Islamic Accounting and Business Research, vol. 8, no. 4 (2017): 375–388. https://doi.org/10.1108/JIABR-01-2014-0004
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How to Cite
Sookia, Noor-Ul-Hacq, and Sheik Ahmad Ryman Bissessur. 2026. “Comparative Analysis of Risk Between Conventional Bonds and Sukuk Using Duration-Normal VaR”. Journal of College of Sharia and Islamic Studies 44 (2). https://doi.org/10.29117/jcsis.2026.0456.
Section
Articles in English