Sukuk Return and Risk: A Comparison between Ijarah and
Mudharabah-based Contracts
Septi Adi Jaelani Bachtiar, Handi Risza, and Prima Naomi
Magister Manajemen Faculty Economics and Business, Universitas Paramadina, Indonesia
Keywords: Sukuk, Mudharabah, Ijarah, Risk, Return.
Abstract: Sukuk’s value and the amount of Sukuk’s emissions in Indonesia continue to increase, although the options
are still limited to Mudharabah and Ijarah contracts only. Sukuk’s issuers also prefer to issue Sukuk with an
Ijarah agreement. There are several opinions as to why Sukuk Ijarah is more popular in Indonesia, one of
which is its risk consideration of the agreement. In addition, a few previous studies have also mentioned that
Mudharabah Sukuk has a better yield than that of Ijarah Sukuk, while other research has highlighted the
relationship between the performance of Sukuk and its risk for both Ijarah and Mudharabah. This study aims
to examine the difference between Ijarah and Mudharabah Sukuk in terms of their performance and risk using
reasonable price data and a maturity period. The Sukuk’s return and risk is obtained by calculating the amount
of Holding Period Yield (HPY), Yield to Maturity (YTM), Risk Adjusted Return (RAR), and the HPY
deviation standar. We found that in terms of return and risk, the Ijarah-based Sukuk differs significantly from
the Mudharabah-based Sukuk. The Ijarah-based Sukuk shows higher return performance than Mudharabah-
based Sukuk. In terms of risk, the Ijarah-based Sukuk also shows higher risk than the Mudharabah-based
Sukuk.
1 INTRODUCTION
The Islamic capital market complies with the Shariah
Islamic law. One common Shariah investment
instrument is Sukuk. The Sukuk market has emerged
during the past decade, and Sukuk is one of the
products whose growth has been remarkable along
with Islamic Finance development (Raur, 2014).
Literally, Sukuk refers to certificates and technically
it refers to securities, notes, papers, or certificates,
with features of liquidity and tradeability (Dusuki,
2015). Sukuk is allowed under Shariah law because it
is backed up by real assets such as land, buildings, or
equipment. Therefore, when Sukuk is purchased and
sold by the investor, they engage directly in real
assets and are not simply trading paper (Wilson,
2008)
Sukuk has various structures based on its
underlying assets. There are three main clusters of
Sukuk structure, which are: (1) sale-based Sukuk,
which consists of ba’i bithamin ajil, murabahah,
salam (Bay’ al salam), and Istisna’; (2) leased-based
Sukuk (ijarah); and (3) equity-based Sukuk, which
includes Mudharabah, musharakah, and wakala.
Based on the standards of the Accounting and
Auditing Organization for Islamic Financial
Institutions (AAOIFI), all Islamic Sukuk (syariah)
instruments have been qualified as secured and save
instruments that comply with Islamic Law that are
free from usury, gharar, and maysir.
In its development, Sukuk has become one of the
most important Islamic financial instruments since
the infamous Islamic banking system spread widely
around the world. Sukuk has become an innovative
financial solution for those who need financing or
investment alternatives. Currently, Sukuk is mostly
issued by non-Muslim majority countries, such as the
United Kingdom, Saxony Anhalt (Germany), Japan,
and others. The Islamic financial market volume
reached US $2.29 trillion by the end of 2016, with
Islamic banking accounting for 80% followed by
Sukuk at 14%, and the rest is other Islamic financial
instruments (Edbiz, 2017).
In Indonesia, since the first Sukuk was issued in
2002, there have been only two types of Sukuk that
exist: Ijarah-based and Mudharabah-based Sukuk. A
typical process of issuing Ijarah Sukuk is illustrated
in Figure 1.
First, the emiten issues a certificate of
participation and the investor is provided with cash.
Bachtiar, S., Risza, H. and Naomi, P.
Sukuk Return and Risk: A Comparison between Ijarah and Mudharabah-based Contracts.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 163-168
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
163

Under an Ijarah contract, the use of a particular
property is transferred from the owner to another
person in exchange for a rental payment. It is a leasing
agreement with the lessor (referred as the mujir), the
lesse (called the mustajir), and the rent is paid to a
lessor called ujrah.
Figure 1: Ijarah-Based Sukuk Structure.
An Ijarah contract is predetermined for a certain
period, and the rent provides regular income either
monthly, quarterly, or annually.Therefore, the Ijarah-
based Sukuk fulfills the requirement to be
characterized as a bond. It is important to denote that
Ijarah-based Sukuk represents a proportiaonate
ownership claim over a leased asset, and therefore
those who hold the Sukuk certificate will have
ownership responsibilites that only terminate either
when the securities reach maturity or if they are sold
to another party who then takes over the responsilities
(Usmani, 2002).
On the other hand, a Mudharabah-based Sukuk
has a slightly different structure than the Ijarah
Sukuk. The complete structure is illustrated in Figure
2. Unlike the Ijarah-based Sukuk, the Mudharabah-
based Sukuk is issued under a Mudharabah contract.
According to this contract, one party provides the
capital (rab-al-maal/shahibul maal) while the other
provides manpower and expertise (mudharib). Profits
gained from this cooperation will be divided based on
the proportion of the agreed (nisbah) ratio. However,
the losses incurred from the cooperation will be borne
entirely by the party that provides capital as long as
there is no indication of intended purpose by the party
that provided the expertise (moral hazard of the
mudharib).
In Indonesia’s Shariah capital market, the Ijarah-
based Sukuk issuing trend is currently greater than the
interest in Mudharabah-based Sukuk. To date, based
on the Financial Services Authority of Indonesia
(OJK) data, the number of outstanding corporate
Sukuk as of 21 April, 2017 is 55 series, which consist
of 37 Sukuk using Ijarah-based contracts (67.27%)
and 18 Sukuk using Mudharabah-based contracts
(32.73%). The value of Ijarah-based Sukuk has
reached Rp 5.79 trillion (47.75%), while
Mudharabah-based Sukuk is slightly greater at Rp
6.34 trillion (52.25%) (Masyrafina, 2017).
In terms of risk, both Ijarah-based and
Mudharabah-based Sukuk have important risks that
must be considered, just as with other standard
financial instruments (Amine, 2012). These risks
include country risk, sectoral risk, and assets risk.
Risks also include structure risk, market risk, credit
risk, operational risk, and taxation risk.
Figure 2: Mudharabah-Based Sukuk Structure.
However, Ijarah-based Sukuk is considered less
risky, since it has the advantage of a fixed rate of
return, which is suitable for investors who seek a
certain amount of return as well as those who want to
avoid exposure to risk. On the other hand,
Mudharabah-based Sukuk also has the advantage of
much greater opportunity to obtain a higher rate of
return, despite its volatile nature. From those
contrasting characteristics, it would be interesting to
analyse further on both types of Sukuk, as each of
them has an advantage in terms of return and risk. To
our knowledge, there are not many studies that
explore both Ijarah-based as well as Mudharabah-
based Sukuk in terms of their risk and return, in
particular for the Indonesian market. Therefore, it is
important gap in the literature that needs to be filled.
This study focuses on comparing the risk and return
between the Ijarah-based and the Mudharabah-based
Sukuk. In addition, we are also interested in
evaluating whether Sukuk, with longer time to
maturity, has a higher return and risk as highlighted
in the investment basic rule.
Understanding the return and risk of Sukuk in
Indonesia’s capital market would be necessary for
both investors and company as issuers. Firstly,
investors need to consider the risk and return of
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
164

Sukuk in order to optimize their portfolio. They will
need information on which types of Sukuk they
should choose according to their risk and return
preference as well as the length of the investment to
balance their portfolios. Secondly, the Sukuk’s issuer
should be interested in knowing what their return
would be compared to the average Sukuk market
return. Understanding the risks of each type of Sukuk
contract will be important for their future knowledge.
Thirdly, it is also important for the regulator to
understand the risk and return of each type of Sukuk
contract in order to design the future market
development for Sukuk instruments in Indonesia as
well as the capital market itself. Lastly, this research
also provides information for the National Sharia
Council (DSN) in Indonesia. As the authority that
holds an important role in issuing Islamic fatwa
(regulation), the DSN requires accurate and detailed
information so that all Shariah financial products,
particularly Sukuk that is issued in the Indonesia
capital market, can be protected and withheld from
gharar, maiysir, and riba practices.
2 METHODS
Variables used in this study consist of yield and risk
of Sukuk. We use two indicators of return: Holding
Period Yield (HPY) and Yield To Maturity (YTM),
and two indicators of risk: Risk of HPY and Risk of
YTM, which are calculated as Risk Adjusted Return
(RAR).
HPY (Holding Period Yield) is the total return
received from holding the Sukuk over a period of time
and is expressed as a percetage. HPY is calculted
using equation (1), where C is coupon, F is
redemption value, and P is fair price.
HPY = HPR -1
= − 1 (1)
YTM (Yield To Maturity) is the expected rate of
return based on the assumption that the Sukuk is held
until the maturity date and not be called. YTM
includes the coupon rate within its calculation. We
use this as a proxy, since investors are more likely to
make investment decisions based on an instrument's
YTM than its coupon rate. We use equation (2) to
calculate YTM, where C is coupon, F is redemption
value, P is fair price, and n is maturity time.
= (2)
Risk of HPY is calculated as the standard
deviation of HPY. The standard deviation of HPY is
calculated using equation (3), where xi HPY is the
holding period yield; is the average of HPY,
and n is the number of Sukuk.
=
∑
( )
(3)
RAR (Risk Adjusted Return) is a measure to find
how much return is provided by an investment given
the level of risk associated with it. It enables the
investor to make a comparison between the high-risk
and the low-risk return investment. By calculating
risk-adjusted return, investors can judge whether
he/she is extracting the highest possible gains with
minimal risk involved and thereby the return on
investment. Some of the popular risk-adjusted return
measures are the Sharpe Index, the Treynor Index,
and the Jensen's Alpha Index. In this research, we
used the Sharpe Index, and calculated it using
equation (4) where R
i
is the return of Sukuk
calculated using YTM; R
f
is the risk-free return,
which is proxied by the SBIS (Sertifikat Bank
Indonesia Shariah); and σ
p
is the standard deviation of
return.
=
( )
(4)
The data used in this study are the monthly data of
corporate Sukuk in Indonesia in 2015. Purposive
sampling is applied in order to acquire the intended
data. Criteria used for selecting the corporate Sukuk
are as follows:
1. The Sukuk is evaluated by IBPA (Price
Indonesia Securities Appraiser Corporation);
2. The Sukuk is denominated in Rupiah;
3. Sukuk does not include Sukuk’s amortization;
4. Sukuk has a minimum rating of BBB+ during
the observation period, which is based on the
relevant rating issued from standards agency
(Pefindo, Moody's, or Fitch); and
5. Sukuk has never defaulted.
Based on the sample selection criteria, the number
of Sukuk eligible for this study 46 Sukuk, which
includes 31 Ijarah-based Sukuk and 15 Mudharabah-
based Sukuk.
Sukuk Return and Risk: A Comparison between Ijarah and Mudharabah-based Contracts
165

The design of the research is described in the
figure 3.
Figure 3. Research Desaign.
First, we calculate HPY and risk of HPY for each
type of sukuk. Namely ijara and mudaraba. We also
calculate YTM and RAR. Secondly, we conducted a
different test between the two types of sukuk for each
variable. Third, to analyze deeper, regarding whether
TMT impacts risk and return on each sukuk, we
divide each sukuk into three categories based on
TMT, ie long term, medium and short. Lastly, we
calculate each of these variables in each category.
3 RESULTS
The Sukuk data employed in this study is based on its
fair market price. The monthly market price of Ijarah-
based and Mudharabah-based Sukuk in Indonesia
experienced downward and upward trend during the
year of 2015. The complete fluctuation can be seen in
Figure 4.
Source: analyzed from IBPA (2016).
Figure 4: Fair-price Trend ofIjarah and Mudharabah Sukuk
for the year 2015.
From Figure 4, it can be seen that both Ijarah-
based and Mudharabah-based Sukuk experienced
approximately similar trends. Early in the year,
during January and February, both Sukuk increased.
However, their market price slowly decreased until
the first lowest point on June and then increased
again. Both Sukuk had their lowest prices in
September 2015, while in overall the market price
Ijarah-based Sukuk was higher than the
Mudharabah-based Sukuk.
The risk and return profile of both Ijarah-based
and Mudharabah-based Sukuk are presented in Table
1. It can be seen that in terms of return, the average
monthly HPY and YTM of Ijarah-based is higher
than the Mudharabah-based Sukuk. Meanwhile, the
risk of Sukuk proxied by RISK of HPY and RAR also
indicated the same pattern, in which Ijarah-based is
higher than the Mudharabah-based Sukuk. This result
is consistent with the notion of investment in which a
high return is accompanied by high risk. Overall, the
Ijarah-based Sukuk has better performance than the
Mudharabah-based Sukuk.
Table 1: Risk and Returnof Ijarah-based and Mudharabah-
based Sukuk in 2015.
RETURN
HPY
YTM
Ijarah
Mudha
rabah
Ijarah
Mudha
rabah
Mean
10.2424
9.9814
10.1040
9.9814
RISK
RISK of HPY
RAR
Ijarah
Mudha
rabah
Ijarah
Mudhar
abah
Mean
0.3740
0.2580
0.0767
0.0646
Source: Analyzed from IBPA (2016)
Table 2: Result for Mean Difference Test of returns and
risks.
Test
HPY
RISK of
HPY
YTM
RAR
Mann-
Whitney U
4.2833
5153.5700
7.4331
5.2110
Wilcoxon W
9.1395
10009.856
0
12289464.
0000
10.0673
Z
-38.4520
-30.5350
-9.5640
-29.8940
Asymp. Sig.
(2-tailed)
0.0010
0.0000
0.0030
0.0000
Source: Data analysed using Mann-Whitney Test.
To complete the analysis, we ran the test of
normality and similarity of variance for both return
and risk of Sukuk (the full profile is available and can
be provided upon request). From both tests
conducted, the results show that both return and risk
data of Ijarah-based and Mudharabah-based Sukuk
are not normally distributed and the variance is
dissimilar. Therefore, the hypothesis testing in the
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
166

next stage of the analysis was conducted by using the
non-parametric statistics method. The Mann Whitney
for mean difference was chosen because the data are
not normally distributed. The summary of the test
results is shown in Table 2.
From Table 2, it can be seen that the Mann-
Whitney U statistics indicates significant values for
overall variables, which are 0.01, 0.00, 0.003, and
0.001 for HPY, RISK of HPY, YTM, and RAR,
respectively. Overall, those variables have p-value
less than 0.05, and thus the average return and risk
calculated are significantly different. In other words,
both return and risk of Ijarah-based and
Mudharabah-based Sukuk were proven to be
statistically different. The difference between Ijarah-
based and Mudharabah-based Sukuk is significant at
the 5% level.
In order to gain a deeper understanding of these
results, we also conducted a separate test for each type
of Sukuk. Specifically, we tested whether the
maturity of Sukuk (TMT) affects risk and return. To
run this analysis, we classified the overall Sukuk data
into three time maturity categories: Short Term (0-1
years), Medium Term (1-3 years), and Long Term
(more than 3 years). We then measured the risk and
return for each group, which are represented by four
variables, as in the full sample. The results of the test
are described in Table 3.
From Table 3 it can be seen that the return of
Ijarah-based Sukuk measured by HPY decreased
along with the increase of time to maturity; however,
the risk increased. That is not the case if we measure
by YTM, however.
Table 3: Average Return and Risk of Ijarah-based and Mudharabah-based Sukuk are based on TMT.
Return
Risk
Ijarah
TTM
Short
TTM
Medium
TTM
Long
TTM
Short
TTM
Medium
TTM
Long
HPY
10.2552
10.2353
10.1742
0.2926
0.4792
0.5189
YTM
10.0097
10.2039
10.3767
0.0723
0.0823
0.0848
Mudharabah
TTM
Short
TTM
Medium
TTM
Long
TTM
Short
TTM
Medium
TTM
Long
HPY
9.2916
-
10.3209
0.18935
-
0.58144
YTM
9.6741
-
11.8404
0.0650
-
0.0616
Source: Analyzed from IBPA (2016).
The return of Mudharabah-based Sukuk
increased along with the time of maturity, measured
both by HPY and Meanwhile, for Mudharabah it was
slightly different RTM. Nevertheless, the risk of
Mudharabah-based Sukuk resulting from both
measurements was not consistent.
The results presented in the previous section show
that Ijarah-based and Mudharabah-based Sukuk
have different return and risk. One of the important
explanations of this issue might be attributable
towards their characteristics. Mudharabah-based
Sukuk has characteristics that are similar to equity-
based investment instruments. The yield of the
Mudharabah Sukuk is derived from the revenue share
or profit received by the issuer based on the agreed-
upon nisbah level at the outset. Meanwhile, Ijarah-
based Sukuk has the characteristic that is
approximately the same as fixed income investment
instruments or debt. The yield of the Ijarah Sukuk is
derived from the margin of rent or the excess of the
principal, of which the amount is already known and
agreed upon at the earliest stage. Therefore,
theoretically, the returns and risks of the
Mudharabah-based Sukuk should be relatively
higher than the Ijarah-based Sukuk.
Despite the above explanation, results from this
study show otherwise, where the Ijarah-based Sukuk
has a higher return and risk in contrast to the
Mudharabah-based Sukuk. This finding is
interesting, since it might be due to some possible
explanations. Most of the Mudharabah-based Sukuk
in Indonesia is traded using project revenues
(contracts) on a profit-sharing basis. This contract has
a certain value until the end of the contract period.
This means that the level of certainty in the amount
of profit-sharing that will be received in the future is
higher than that of the revenue-based sharing
company in the form of operating profit or net profit.
Thus, the level of the Mudharabah-based Sukuk
investment risk is relatively low and even lower than
the Ijarah-based Sukuk due to the fact that the
majority of Mudharabah Sukuk issuers are state-
owned enterprises (SOEs, BUMN), which are
considered to have lower credit risk.
Another interesting feature from this research
finding is that in Ijarah-based Sukuk, the longer the
contract or the time to maturity (TMT), the lower the
return (HPY) will be, which in turns increases the risk
(RISK of HPY). This result is not in accordance with
the basic rules of investment, in which the longer the
Sukuk Return and Risk: A Comparison between Ijarah and Mudharabah-based Contracts
167

TMT, the greater the return and the higher the risks.
A possible explanation given was the low liquidity of
Ijarah-based Sukuk on the secondary market. The
number of outstanding Sukuk in Indonesia is still
relatively small, which tends to induce investors to
hold their assets until maturity. Therefore, the longer
the TMT, the greater the risk (additional liquidity
risk), but with a lower return (HPY).
Another important point is the finding on the
Mudharabah-based Sukuk. By using YTM to
measure return, the longer the TMT, the higher the
return, but the lower the risk. If we follow the basic
rules of investment, the longer the time to maturity,
the higher the return and the risk will be. A possible
explanation towards this anomaly is the composition
of listed Sukuk issuers used as research objects. Most
of the long-term Mudharabah-based Sukuk comes
from SOE issuers that use the value of the contract of
work as the basis for profit sharing. The SOE issuers
are considered to have smaller risk than the issuers
from the private sector. Meanwhile, the shorter term
of the Mudharabah-based Sukuk comprises a mixture
of types of issuers. In addition, the type of income that
is used as revenue-sharing basis is a mixed income or
operating profit. Thus, the level of uncertainty for this
type of Sukuk is relatively higher as opposed to the
longer term Sukuk.
4 CONCLUSION
This study provides evidence towards two different
types of Sukuk in Indonesia. We found that in terms
of return and risk, the Ijarah-based Sukuk differs
significantly from the Mudharabah-based Sukuk.
The Ijarah-based Sukuk shows higher return
performance than Mudharabah-based Sukuk. In
terms of risk, the Ijarah-based Sukuk also shows
higher risk than the Mudharabah-based Sukuk. These
findings contrast basic investment theory, in which,
based on the characteristics, the Mudharabah-based
Sukuk should have higher return and risk than Ijarah-
based, since it is an equity-based investment.
In more detailed investigations, we found several
anomalies: (1) on the Ijarah-based Sukuk, the longer
the TMT, the lower the return (HPY), but the higher
the risk of HPY; (2) on the Mudharabah-based
Sukuk, the longer the TMT, the higher the return, but
the risk decreases. These anomalies are possibly due
to the fact that most of the Mudharabah-based Sukuk
traded in Indonesia are using project revenue
(contract) as the profit-sharing basis, with a fixed
contract value until the end of the contract period. The
majority of the Mudharabah-based Sukuk issuers are
SOEs. Meanwhile, the number of existing Ijarah-
based Sukuk is still relatively small, which in turn
makes the investment hold up to maturity.
However, those results still need to be evaluated
further, for instance by lengthening the observation
period. That might have been a limitation in this
study. We also suggest that further research compare
between the Mudharaba-based Sukuk and the Ijarah-
based Sukuk that are issued by SOEs and private
companies in order to get a thorough understanding
on this issue. Investigating the variables that cause
differences in both types of Sukuk will also be
interesting to explore in future studies.
ACKNOWLEDGMENT
We would like to thank Else Fernanda, SE., M.Sc. for
his input on this research result from the practitioner's
point of view. Also to Dr. Intan Nurul Awwaliyah
who is willing to become a peer review of this article.
Suggestions from both are very meaningful in this
article.
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