In the late 1990s, Malaysia introduced a financial instrument that appeared to resemble a conventional corporate bond but was designed to comply with Islamic law. Known as sukuk, or Islamic bonds, these securities avoid the payment and collection of interest, a practice prohibited under Shariah principles. A new study published in the Journal of Financial Economics finds that Malaysia’s experiment did more than create an alternative form of borrowing: it brought new investors into the market, expanded corporate access to capital and helped support the country’s economic growth.
The research, co-authored by Jean Helwege, a professor of finance at the University of California, Riverside, examines two decades of activity in Malaysia’s corporate bond market after the country began developing a Shariah-compliant capital market in 1997. The researchers compared the evolution of Islamic bonds with that of conventional corporate bonds, asking whether the new securities would replace existing financial products or simply divide the same pool of investors.
Their findings point to a striking result. Islamic bonds grew rapidly without causing the conventional bond market to disappear or contract significantly. Instead, sukuk attracted individuals and institutions that otherwise would not have invested in interest-bearing debt. The result was a larger overall market, with companies gaining access to a broader range of potential financiers.
“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.”
Although sukuk often deliver cash flows that closely resemble those of conventional bonds, their legal and financial structures are different. Conventional bonds generally represent loans in which an issuer promises to repay principal while making scheduled interest payments. Islamic bonds cannot be built around interest. Instead, they use arrangements such as asset-based financing, leasing, trade transactions or profit-sharing contracts, depending on the structure and the interpretation of Islamic financial authorities.
In economic terms, however, many sukuk are designed to provide investors with predictable returns and a strong expectation of receiving their principal back. This makes them highly comparable to conventional bonds from an investment perspective, even though the contractual foundations are different. The securities must also avoid financing activities considered impermissible under Islamic law, including gambling and certain alcohol-related businesses. Companies seeking to issue sukuk typically undergo a religious certification process, which adds costs but provides access to investors who observe these restrictions.
The Malaysian market offered an unusually clear setting for testing how a specialized financial product affects competition and investment. The country deliberately developed Islamic and conventional capital markets side by side, allowing corporations to choose between instruments with similar financial characteristics but different religious eligibility. Many companies issued both types of bonds, using conventional securities to reach traditional investors while offering sukuk to investors in Malaysia, the wealthy Gulf states and other regions who would not purchase interest-bearing debt.
The data show how quickly the Islamic market moved from a niche product to a major source of corporate financing. In the late 1990s, annual Islamic bond issuance was below US$2.5 billion, while conventional issuance ranged from approximately $5 billion to nearly $18 billion. By 2017, Islamic issuance had climbed above $20 billion. Conventional issuance remained comparatively stable, generally ranging from $7.2 billion to $10.8 billion per year. The contrasting trends suggest that sukuk did not merely redirect money that would otherwise have flowed into conventional bonds; it generated additional demand.
The study also examined the pricing differences between the two forms of debt. Because Islamic bonds require specialized legal documentation, asset arrangements and Shariah certification, they can be more expensive to issue. Companies must weigh those costs against the benefit of reaching investors who are otherwise excluded from conventional debt markets. The researchers found that pricing differences remained relatively small, indicating that the enlarged investor base could offset much of the additional complexity.
The authors describe the result as evidence against the assumption that a new financial product simply fragments an existing market. Instead, a security that is “nearly redundant” in terms of its financial payoff can still have a significant economic impact if it makes investment possible for people with different legal, ethical or religious requirements. The same principle could apply to other specialized products, including green bonds, socially responsible investments and securities designed for investors with strict environmental or governance preferences. In Malaysia, accommodating religious values did not weaken the bond market. It helped make the market bigger, giving businesses more ways to raise money and investors more opportunities to participate.
Subject of Research: People
Article Title: The impact of introducing a (nearly) redundant security: Evidence from Malaysian corporate bonds
Web References: https://doi.org/10.1016/j.jfineco.2026.104310
References: Helwege, J., Berndt, A., Liu, A., and Packer, F. “The impact of introducing a (nearly) redundant security: Evidence from Malaysian corporate bonds.” Journal of Financial Economics. DOI: 10.1016/j.jfineco.2026.104310
Image Credits: UC Riverside
Keywords: Islamic bonds, sukuk, Shariah-compliant finance, Malaysia, corporate bonds, financial markets, investment, business financing, capital markets, Journal of Financial Economics
