Applications of the Value at risk Approach for Islamic Financial Instruments (Islamic Sukuk vs Conventional Bonds) Case Study of the Sukuk Index in the Kingdom of Saudi Arabia

Abstract

Sukuk is a widespread financial product of Islamic financial engineering that has found its way within the financial portfolios of major companies and international investment funds, due to the flexibility of its structure based on Islamic financial contracts. Also, sukuk is very different from conventional bonds especially from a return and risk perspective. This study aims to test how different the risk assessment process in sukuk is from conventional financial instruments through the value at risk (VaR) approach. Where the analysis was conducted based on the sukuk indices in the stock market in the Kingdom of Saudi Arabia, and this is due to the increasing growth witnessed by this market, whether at the level of issuance or at the level of trading during the recent period. The study period has been set from 2017 to 2022. This study attempts to build an approach to the value at risk of Islamic financial instruments in general and sukuk in particular, which differ from traditional financial instruments. This is done through the use of a set of basic financial engineering techniques. It has been noted that the amount of value at risk for sukuk indices in the Saudi stock market is relatively low. Inclusion of a sukuk index with a bond index can reduce the VaR of the portfolio by about 30% to 50% for the Saudi Arabia market index. This study also reveals attractive opportunities in terms of the diversification benefits of Sukuk indices in the financial portfolio. Although this study is limited to covering five years of data. However, the results presented are believed to be useful to the players in the financial markets.