A Journal Says Famous Scholars Lower Sukuk Returns. I am Not Convinced.

Why would an investor accept a lower return because of the names on a Shariah board?

A recent paper says that investors do. In "Lending Leniency", Paolella, Sharkey and Syakhroza study 1,540 sukuk issued from 2012 to 2017. Their finding is Sukuk endorsed by more high-status scholars, those who carry the title "sheikh", pay investors less.

My view is that the paper finds something real but a shallow market with captive buyers can produce much of the same pattern.

What the paper found

First, two terms. A sukuk is a certificate that gives its holder a share in an asset, a lease or a venture, and a right to the income from it. Its periodic payment is a profit or rental distribution. The paper calls this payment a "coupon", as for a bond.

The authors count the sheikhs on the Shariah board of each sukuk, and then they compare coupons. In their main model, one sheikh in place of a non-sheikh goes with a coupon about 0.5 percentage points lower. The effect is weaker when the sukuk scores higher on an external Shariah compliance rating.

Their explanation is moral reassurance. Scholars disagree on which sukuk features Islam permits, so investors cannot easily judge a product. A famous name gives the product credibility, and investors give up some return for that comfort.

The market the paper studied

Sukuk is a shallow market. Domestic Islamic financial institutions hold a significant proportion of sukuk, and they often hold them until maturity.

The report gives four reasons for this behaviour. Regulation requires Islamic banks and insurers to hold high-quality Islamic assets for liquidity and capital purposes. Eligible alternatives are few. Islamic money markets are thin, and market-making is weak. The result is a loop of few sellers, little trading, wide spreads and weak price discovery.

In many cases, sukuk yields are close to or below yields on comparable conventional bonds. It links this to captive demand and a "scarcity premium". Investors "who are required or prefer to hold Islamic finance assets" are "willing to accept lower yields to do so".

Institutions accept lower returns because they have few other places for their money. On that view, the scholars have little to do with it.

Why scarcity alone does not answer the paper

A shortage of sukuk lowers the return on every sukuk issued at that time. The paper compares sukuk with other sukuk, and a market-wide shortage moves both sides of that comparison.

A general shortage explains the gap only if sukuk with more sheikhs came to market in tighter periods. That is possible, but nobody has shown it. A stronger counter-argument must show that scarcity hits some sukūk harder than others, and that those sukūk carry more sheikhs.

Where scarcity does bite

Sukuk is a fragmented market too. The stock of sukuk is spread across many small, bespoke issues. In such a market, large issues that reach global investors are the scarce paper. Larger issue sizes can tighten spreads.

The paper's own data link sheikhs to these deals. In its correlation table, the number of sheikhs rises with issue size (0.27) and with international placement (0.32).

These are the deals with the deepest order books. An order book is the list of investor bids that an arranger collects before it sets the final price. When bids exceed the amount on offer, the deal is oversubscribed, and the arranger can cut the profit rate.

Some deals show how this works:

• Qatar Islamic Bank, June 2025. A USD 750 million sukuk drew bids of USD 1.7 billion, 2.3 times the issue. The bank tightened pricing by 35 to 40 basis points from its first guidance.
• Saudi Arabia, September 2025. The Kingdom's first international ijarah sukuk raised USD 5.5 billion from an order book of about USD 19 billion.
• Malaysia, July 2026. A USD 1.5 billion global sukuk was 4.7 times oversubscribed, and the government tightened pricing by 30 basis points.

These deals fall outside the paper's 2012 to 2017 sample, so they show the mechanism but do not prove it. The paper does control for issue size and international placement. It does not control for currency, tenor or the depth of the order book. A dollar sukuk and a ringgit sukuk issued in the same year price off different benchmark rates.

Two points worth noting from the paper. The number of sheikhs falls slightly as credit quality rises (correlation of -0.17). Also, ijarah sukuk, which has broader investor acceptance, carry fewer sheikhs. So the scarcity that could matter here is scarcity of large international deals. A shortage of the safest or simplest paper does not fit the data.

Scholars as a passport to the order book

Scholars can still matter, through a different channel. Islamic banks, takaful operators and Islamic funds typically need their own Shariah board or adviser to clear an investment. A prospectus with names that many committees already know is easier to clear. More investors can bid, the book grows, and the price tightens.

On this reading, famous names widen access to the order book. Investors are not paying for personal comfort. The authors say that they cannot tell whether investors truly believe in high-status endorsements or use them as cover. Eligibility is a third explanation, and it fits a market of institutional buyers.

What would settle the question

A fair test is possible. Compare sukuk in the same currency and tenor, from the same type of issuer. Control for how many times each book was covered and for the types of investors who bought the paper. If the sheikh effect survives, the case for moral reassurance gets much stronger. If the effect shrinks, scarcity and access explain more of it.

So I return to the question I started with. When investors accept less from a sukuk with famous names on its board, do they pay for reassurance, or for a seat in a crowded order book?

Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

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