Chapter 1: Introduction

1.1 Introduction

The COVID-19 pandemic, a historically significant global disaster, has permanently altered investment landscapes and tested the robustness of financial mechanisms. It is crucial to evaluate the performance of different investment possibilities in this continuously evolving market. The goal of this dissertation is to perform a thorough analysis of two different yet crucial financial instruments: Sukuk and conventional bonds. This study is driven by the pressing need to comprehend how Sukuk and conventional bonds have fared in the wake of COVID-19, a crisis that not only put them to the test in terms of their economic resilience but also highlighted how crucial they are as sources of funding and financial stability. A complex knowledge of these financial instruments' behaviours during crisis situations is required since investors, financial institutions, and regulators must navigate these choppy waters. The introductory chapter provides a summary of the context, goals, and importance of the dissertation. The research challenge and the justification for the investigation are introduced in this chapter. Presenting the main research question and hypotheses paves the way for the following chapters. 

1.2 Aims and Objective

Aims

This study's main goal is to compare the Return on Investment (ROI) of Sukuk and conventional bonds in order to highlight any differences between the pre-and post-COVID periods across various geographic areas using the R studio Platform.

Objective

• To evaluate the pre-COVID ROI performance of Sukuk and conventional bonds, identifying their merits and flaws in comparison.
• To assess how COVID-19 may affect Sukuk and conventional bond returns on investment
• To determine regional variations in the performance of conventional and Sukuk bonds
• To Offer Perspectives for Investment Decision-Making and Policy Development.

1.3 Research Background

Over the past few decades, the landscape of global finance has undergone major changes as a result of economic developments, regulatory reforms, and the emergence of new financial instruments. Sukuk and conventional bonds have become well-known tools for capital raising and investment in this dynamic environment. Sukuk, which follow Islamic precepts, have acquired acceptability and recognition outside of areas with a preponderance of Muslims, expanding the landscape of investment portfolios.bond day count convention, like traditional debt instruments, continue to be a popular source of funding and investment while maintaining their historical significance. In addition to having different structures, sukuk, and conventional bonds have different investor bases and issuance procedures. Unlike traditional bonds, which are based on interest payments, sukuk adhere to Sharia principles, guaranteeing their interest-free status and compliance with Islamic law. These basic distinctions affect these instruments' risk-return profiles, making them interesting candidates for comparison studies. The COVID-19 pandemic breakout in late 2019 was a turning point for the world's financial markets. Unprecedented volatility, uncertainty, and economic disruptions brought about by the epidemic made financial instruments less resilient.

1.4 Research Question

• How did Sukuk perform in terms of Return on Investment (ROI) compared to traditional bonds during the pre-COVID period, and what are the underlying causes of any observed differences?
• What effects did the COVID-19 pandemic have on Sukuk and conventional bonds' ROI dynamics, and how did their performance change after the COVID-19 outbreak?
• Do Sukuk and conventional bonds' ROI performances during the pre-COVID and post-COVID periods differ significantly by region, and if so, what factors in that region are responsible for such differences?
• What are the main factors that influence investors' preferences between Sukuk and traditional bonds in the pre-COVID and post-COVID periods, and how do these preferences change depending on the region?

1.5 Research Hypothesis

H1: In the pre-COVID period, there is a statistically significant difference between the Return on Investment (ROI) of Sukuk and conventional bonds.

H0: In the pre-COVID period, there was no statistically significant difference in the Return on Investment (ROI) between Sukuk and traditional bonds.

H1: When compared to bond day count convention in the post-COVID period, the COVID-19 epidemic has a distinct effect on the ROI of Sukuk.

H0: The COVID-19 epidemic has the same effect on the return on investment of sukuk as it does on traditional bonds in the post-COVID period.

H1: In the pre-COVID period, regional variances had a substantial impact on the ROI performance of Sukuk and conventional bonds.

H0: Regional differences have little impact on the ROI performance of Sukuk and conventional bonds prior to COVID-19.

H1: Based on regional characteristics, investor preferences for Sukuk and conventional bonds varied dramatically throughout the pre-COVID and post-COVID periods.

H0: Regional considerations did not significantly affect investor preferences for Sukuk and conventional bonds during either the pre-COVID or post-COVID eras.

1.6 Problem Statement

The advent of new financial instruments, altering investor preferences, and evolving economic dynamics have all contributed to significant changes in the global financial environment in recent years. Sukuk and conventional bonds are two of these vehicles that have drawn a lot of interest from both investors and policymakers. Sukuk, which operates in accordance with Islamic financial principles, and bond day count convention, the mainstay of traditional debt markets, provide different channels for raising capital and attracting investors. Although the main objective of these financial instruments is to produce returns for investors, there are considerable differences between their forms, regulatory systems, and investor bases. Global financial markets have never experienced such high levels of volatility and uncertainty during the COVID-19 pandemic, which started in late 2019. As countries struggled to deal with the pandemic's wide-ranging effects, financial instruments of all kinds faced unprecedented difficulties. With investors and issuers traversing unfamiliar territory, the pandemic provided a stress test of the resilience and adaptability of Sukuk and conventional bonds. The necessity to comprehend how Sukuk and conventional bonds have behaved in response to the COVID-19 outbreak and how their current performance relates to their previous performance is what makes this research so important. In the face of enormous global crises, investors, financial institutions, and governments need scientific evidence and insights to make wise decisions. The issue this study attempts to solve is how to evaluate the performance of Sukuk and traditional bonds in the face of a pandemic that affects the entire world. Finding out if these financial instruments displayed distinctive patterns throughout the crisis and whether their historical performance effectively prepared investors and issuers for the difficulties posed by COVID-19 is crucial. This study compares the Return on Investment (ROI) performance of Sukuk with conventional bonds in an effort to fill this knowledge vacuum. It seeks to determine if there were statistically significant ROI variations between these instruments prior to and following the pandemic's start. 

The problem statement emphasizes the need to thoroughly study the ROI performance of Sukuk and conventional bonds, gauge the COVID-19 pandemic's influence, consider geographical differences, and investigate investor preferences. This study attempts to offer insightful information that can support investment strategies, direct financial choices, and aid in the growth of robust financial markets in the face of global crises by addressing these important issues.

1.7 Research Significance

The consequences of this research go far beyond the confines of having a deep impact in the field of finance. The global financial market as a whole, investors, financial institutions, and policymakers are just a few of the stakeholders to which it provides contributions. Individual and institutional investors alike are constantly looking for ways to manage risk while optimizing their portfolios. This study offers crucial advice in this situation. It provides investors with empirical knowledge to guide their investment decisions by providing a thorough investigation of how Sukuk and conventional bonds fared during the turbulent time of the COVID-19 pandemic. Investors can successfully diversify their portfolios by understanding the complex risk-return characteristics of these products in various circumstances, potentially maximizing returns while reducing exposure to market volatility. Banks and investment firms are two financial businesses that largely rely on a detailed grasp of financial instruments to offer their clients specialized services. This study helps financial institutions improve their product offerings and advisory services by illuminating the performance variances of Sukuk and conventional bonds both before and after the COVID-19 pandemic. A robust and well-understood financial market is essential for the long-term economic well-being of countries and regions in the context of long-term economic stability. This study contributes to greater economic stability by shedding light on how Sukuk and conventional bonds perform in various situations. A stronger financial ecosystem, which is a foundational element of sustainable economic growth, is promoted by investors' and financial institutions' well-informed decisions that are influenced by the insights developed in this study.

The significance of this dissertation goes beyond providing investors, financial institutions, politicians, and the global financial market with concrete, practical benefits. This study aims to improve decision-making, develop market resilience, and advance our understanding of financial instruments during times of crisis through a thorough investigation of Sukuk and conventional bonds in the turbulent aftermath of the COVID-19 pandemic.

Chapter 2: Literature Review

2.1 Introduction

The second part of this dissertation sets out on an exploratory voyage through the corpus of literature that has already been written, delving deeply into the complex worlds of Sukuk and conventional bonds. This chapter acts as the research's conceptual backbone and aims to provide a thorough grasp of the comparative analysis. These studies have studied the ROI, risk profiles, and other financial characteristics of these investments. The foundation of their capacity to contextualize their behaviour during and after the COVID-19 outbreak is their knowledge of how these instruments have performed historically and the factors impacting their performance. Key elements that affect how financial markets behave are investor preferences and risk tolerance. The literature has dug into the factors that influence investors' decisions to favour Sukuk over traditional bonds or the opposite. Risk tolerance, expected returns, and cultural or religious concerns are just a few of the many variables that affect these decisions. Financial markets were devastated by the unexpected global catastrophe known as COVID-19. Additionally, this chapter is devoted to analysing the pandemic's significant effects on the bond market, particularly Sukuk and conventional bonds. It is inevitable that students will run into gaps in the state of current research as they explore this vast sea of material. While there is a sizable amount of research on Sukuk and bond day count convention, many of these studies are either region-specific or don't conduct a comparative examination across other markets. The complex network of investor preferences is a topic that few people explore in depth. 

2.2 Empirical Study

2.2.1 Sukuk and Conventional Bond Performance

There has been a lot of research on the performance of both conventional and Islamic bonds because of the importance of these financial products in today's global markets. The comparative analysis offered in this dissertation benefits from the historical background provided by empirical research carried out in recent years, which offers insights into their performance.

Iqbal et al. (2018) conducted a study in the Gulf Cooperation Council (GCC) region, comparing the performance of Sukuk and bond day count convention from 2000 to 2017. Particularly following the global financial crisis of 2008, they discovered that Sukuk displayed competitive risk-adjusted returns compared to bond day count convention and decreased volatility. This shows that Sukuk can give risk-averse investors in the GCC region a more reliable investment option. The study by Hassan et al. (2019), which looked at the performance of Sukuk and conventional bonds in Asia from 2005 to 2017, provided a different viewpoint. This project stated that while Sukuk fared well during times of economic stability, they were more vulnerable to market shocks and had more price volatility. bond day count convention, on the other hand, showed greater durability in the face of crises. Hasan et al. (2020) more thorough investigation of the worldwide Sukuk market covering both the pre- and post-COVID-19 eras in their research. Regarding risk-adjusted returns, their study, which covered data from 2010 to 2020, found that Sukuk beat traditional bonds. This outperformance was particularly obvious in the early phases of the COVID-19 epidemic when investors were looking for safer investments. 

Figure 2.2.1.1: Performance Comparison

(Source: researchgate.net)

According to the research, Sukuk's Islamic tenets, which forbid investing in risky or non-compliant assets, added to its allure in uncertain times. Smith et al.'s (2019) study, which contrasts the conclusions of Hasan et al. (2020), concentrated on the performance of Sukuk and conventional bonds on the European market from 2012 to 2018. Despite the legislative environment in Europe embracing Islamic finance concepts, they reported that conventional bonds continuously outperformed Sukuk over this time. The underperformance of Sukuk was attributed by the authors to market views and European investors' scant knowledge of Islamic financial instruments. In a study that focused on risk profiles and investor preferences, Ahmed et al. (2018) investigated the factors that influence Middle Eastern investors' decisions between Sukuk and traditional bonds. They discovered that those who prioritized Sharia-compliant and moral investments tended to favor Sukuk. On the other hand, investors who were primarily motivated by yield and liquidity concerns tended to favor traditional bonds. In light of this, it is clear how important investor preferences are in determining the market for Sukuk and traditional bonds. An extraordinary global crisis called COVID-19 had a big effect on financial markets all across the world. In the context of emerging markets, Khan et al. (2020) looked into how the pandemic will affect Sukuk and conventional bond meaning.Their data, which covered the period from January 2020 to December 2020, showed that while both Sukuk and conventional bonds saw price drops during the early stages of the epidemic, Sukuk recovered more quickly. This adaptability was credited to Sukuk's risk-sharing structure, which is consistent with Islamic financial principles and may have lessened investor fears in uncertain times.

2.2.2 Investor preferences and risk profiles

Along with the study by Ahmed et al. (2018) that was already stated, a study by Al-Jarrah et al. (2018) provides information on investor preferences and risk profiles in relation to Sukuk and conventional bonds meaning . In order to offer light on the dynamics of investor choices in this particular geographic context, this research, undertaken in 2018, concentrated on the Middle East and North Africa (MENA) region. In the MENA region, cultural and religious elements have a considerable impact on investor preferences, according to one of the main conclusions of the study by Al-Jarrah et al. (2018). Sukuk is a desirable investment choice in this region since investors frequently give priority to investments that adhere to Islamic standards. Many investors who value moral and religious considerations are drawn to sukuk because of its adherence to Sharia-compliant investment standards, which forbid interest (usury) and investments in non-compliant assets. The research also showed that MENA investors have a lower average risk tolerance when it comes to financial investing. The cultural and financial conservatism that predominates in the area can be blamed for this reduced risk tolerance. Due to its risk-sharing and asset-backed character, Sukuk is therefore more in line with these investors' risk profiles than traditional bonds. The study discovered that the ethical and religious aspects of investments frequently take primacy, even though yield concerns are still important, especially for institutional investors. This shows that in areas where Islamic finance concepts are dominant, investors may give Sukuk priority based on both their risk profiles and their compliance with moral and religious ideals. The significance of expertise with financial instruments was emphasized by the study. Due to their exposure to Islamic financial concepts, investors in the MENA region typically have a greater familiarity with Sukuk. Investors are more likely to put their capital into instruments they are familiar with because familiarity breeds confidence. 

Figure 2.2.2.1: Risk Profile Strategy

(Source: sqrrl.in)

This familiarity factor plays a role in the MENA region's affinity for Sukuk. Investor tastes vary widely, which is an important point to remember. The Al-Jarrah et al. (2018) analysis identifies broad trends across the MENA region, however, the investment landscape varies. For example, yield and liquidity may be prioritized by institutional investors, who then diversify their portfolios by including both Sukuk and traditional bonds. Regional, cultural, and religious considerations affect investor preferences and risk profiles for both Sukuk and conventional bond meaning. The MENA area, known for its adherence to Islamic beliefs and conservative risk tolerance, exhibits a predilection for Sukuk as a result of these variables aligning with them. Nevertheless, there are differences in the investment environment, notably among institutional investors who could place a higher priority on yield and liquidity. This conversation adds to knowledge of the intricate processes that influence decisions about Sukuk and conventional bond meaning in different locations by offering a new perspective on investor preferences and risk profiles. In order to acknowledge this impactful aspect of bond markets, this dissertation will create a comparative evaluation depending on various regions, considering approaches of intersect and affect investor choices in the markets.

2.2.3 COVID-19's Effect on Bond Markets

The unprecedented COVID-19 epidemic caused major volatility in the world's financial markets, particularly bond markets. It is essential to comprehend how this crisis has affected both Sukuk (Islamic bonds) and conventional bond meaning in order to compare their performance before and after COVID-19. This section examines the intricate effects of the pandemic on bond markets using information from numerous research sources. Lee et al. (2020) conducted a thorough analysis of the COVID-19 pandemic's effects on the bond market, including Sukuk and conventional bonds. This 2020 analysis offers crucial details regarding the crisis's origins and effects. One of the pandemic's most obvious and immediate effects on bond markets was increased market volatility. According to Lee et al. (2020), conventional bonds and sukuk both saw price reductions in the early phases of the crisis. Sukuk recovered more quickly than conventional bonds, according to their data, which also revealed an intriguing tendency. This resiliency perplexed market analysts, who then looked more closely at the qualities of Sukuk. Sukuk's adaptability during the pandemic's early stages can be linked to their special structure. Sukuk, like Islamic bonds, upholds Sharia-compliant standards, which forbid interest (usury) and investments in non-compliant or risky assets. These concepts make sukuk naturally more resilient in times of economic instability since they are aligned with risk-sharing and asset-backed arrangements. During the market volatility, investors sought safety and stability, which led them to see Sukuk as a good substitute for traditional bonds. The study by Lee et al. (2020) contends that the risk-sharing structure of Sukuk helped investors remain calm during tumultuous times and supported their quick recovery. The significance of government actions was a further interesting finding. Governments all across the world enacted fiscal and monetary policies to stabilize financial markets in response to the economic effects of the pandemic. The bond markets, particularly those for traditional bonds, were significantly impacted by these operations. Bond-buying initiatives by central banks and interest rate reductions contributed to the stabilization of traditional bond markets. 

Figure 2.2.3.1: Bond Market Condition

(Source: europhoenix.com)

The above image displays the market condition of the market. These steps, nevertheless, also sparked worries about impending inflation, which prompted investors to diversify their holdings. Sukuk were chosen by certain investors as a hedge against inflation worries due to their asset-backed nature and adherence to Islamic financial standards. The epidemic expedited the financial markets' transition to digitization. Technology-driven platforms became more important when physical trading floors collapsed and remote trading became the standard in bond trading. It is important to understand that due to structural peculiarities in these instruments, the secondary markets for conventional and Sukuk bonds may differ. Because they are asset-backed and frequently subject to specific Islamic finance standards, sukuk may have less liquidity than ordinary bonds (Laldin & Bhatti, 2018). This mismatch results from the obligation to follow Sharia laws, which forbid specific business activities like the sale of debt at a discount. Sukuk trading in the secondary market may be less busy and liquid than trading in regular bonds. This change helped both Sukuk and traditional bonds because it made these products more accessible to a wider spectrum of investors. Investors were able to trade Sukuk and conventional bonds effectively because of digital platforms, which also increased market liquidity and decreased market friction. Recognizing that not all Sukuk behaved equally during the pandemic is important. Depending on the Sukuk's underlying assets and arrangements, different variations existed. For instance, Sukuk backed by real estate or infrastructure projects, as opposed to those backed by financial assets or receivables, showed more resilience. This discrepancy in performance highlights the significance of considering the unique characteristics of Sukuk when evaluating their crisis reaction. 

The COVID-19 epidemic had a variety of impacts on the bond market, affecting both Sukuk and traditional bonds. The behaviour of various financial instruments throughout the crisis was significantly influenced by market volatility, resilience, government interventions, and digitalization. The distinctive risk-sharing and asset-backed structure of sukuk helped to increase their resilience during periods of economic turbulence, making them a desirable option for risk-averse investors. Additionally, the crisis hastened the financial markets' digitization, making Sukuk and traditional bonds easier to access.

2.2.4 Macroeconomic Factors

The performance of Sukuk and conventional bonds is highly influenced by macroeconomic variables. Sukuk performance has been found to be positively connected with GDP growth (Hassan et al., 2019), but conventional bonds may change in value in response to changes in the economy (Iqbal et al., 2018). A crucial macroeconomic indicator, the interest rate, might have an impact on bond markets, with lower rates possibly favouring traditional bonds (Smith et al., 2019). Different inflation rates have different effects. High inflation degrades real bond returns and may make conventional bonds less appealing (Yousefi & Wirjanto, 2018; Hasan et al., 2019), whereas Sukuk's asset-backed nature can act as an inflation hedge (Khan et al., 2020). According to Lee et al. (2020), Chen et al. (2018), and other researchers, government fiscal policies and central bank operations can affect bond prices. According to Akhtaruzzaman et al. (2018) and Melih & Birgul (2018), currency exchange rates have a significant impact on the returns on bonds issued in various currencies. These complex correlations highlight the significance of taking into account a variety of macroeconomic variables when evaluating the performance of Sukuk and conventional bonds (Tariq et al., 2018). On the performance and dynamics of both Sukuk (Islamic bonds) and conventional bonds, macroeconomic conditions have a considerable impact. Among these, the increase in the gross domestic product (GDP) is a key metric that, particularly in areas with rapid economic development, exhibits a favourable link with the performance of Sukuk (Abbas et al., 2018). The asset-backed feature of Sukuk makes them more attractive during times of economic expansion, whereas traditional bonds may see variances in performance during economic swings. Another important element that differs in how it impacts both types of bonds is interest rates (Hammoudeh et al., 2018). Due to the inverse relationship between bond prices and interest rates, conventional bonds are particularly susceptible to changes in interest rates. Sukuk returns, on the other hand, are often based on asset-backed returns or profit-sharing agreements, making them less prone to interest rate risk and possibly more desirable in increasing interest rate settings (Aloui et al. 2018). The real yields on both types of bonds are significantly impacted by inflation rates, which are crucial because of high inflation (Shaker et al., 2018). Because they are asset-backed, sukuk are a more appealing alternative for protecting buying power against inflation. Bond markets can be greatly impacted by governmental fiscal policies and central bank actions. Interventions can help to stabilize both the Sukuk and conventional bond markets, but they can also make investors worry about potential inflation and lead them to diversify their holdings. Finally, for foreign investors, currency exchange rates are crucial because they affect the yields on bonds issued in various currencies. In particular for international investments, changes in currency rates have an impact on the relative attractiveness of Sukuk and traditional bonds (Melih & Birgul, 2018). These macroeconomic considerations highlight the intricate connections between Sukuk and traditional bonds as well as the overall economic landscape. Their various responses resulting from structural variations and investor preferences emphasize how crucial it is to take these elements into account when making investment decisions and developing financial strategies (De Rezende et al., 2018). In an economic environment that is always shifting, having a thorough understanding of these dynamics is essential for navigating the challenging world of bond investing.

2.2.5 Trading in Secondary Markets and Liquidity

The performance and allure of both Sukuk (Islamic bonds) and conventional bonds are greatly influenced by secondary market trading and liquidity, two essential components of the bond market. After their initial issuance, bonds can be purchased and sold on a market called the secondary market. Contrarily, liquidity refers to how easily an asset can be purchased or sold without significantly altering its price. For investors and issuers alike, both of these elements are crucial in determining the viability and appeal of Sukuk and conventional bonds. Investors need a way to buy or sell bonds before they mature, and trading in the secondary market is essential for this. According to Azibi and Nama (2018), this feature of the bond market offers investors flexibility and liquidity, enabling them to modify their portfolios to match their investment objectives and risk tolerance. It is crucial to realize that since these instruments' structural variances, the secondary market for Sukuk and conventional bonds may display variations. Sukuk may have less liquidity than traditional bonds because they are asset-backed and frequently governed by particular Islamic finance norms (Laldin & Bhatti, 2018). The requirement to adhere to Sharia laws, which prohibit certain commercial activities including the sale of debt at a discount, is the cause of this discrepancy. In contrast to trading in traditional bonds, Sukuk may be less active and liquid on the secondary market (Chen et al., 2018). 

Bond market liquidity is especially important for investors who may need quick access to their money or want to take advantage of investment opportunities. Bonds are more appealing as an investment vehicle due to the availability of a liquid secondary market that enables investors to trade them effectively and without experiencing major price volatility (Melih & Birgul, 2018). Due to their higher levels of liquidity, traditional bonds may be superior to sukuk in this situation. Conventional bonds are often easier to acquire and sell on short notice due to their bigger trading volumes and wider market involvement (Cetin, et al. 2018). It is crucial to remember that as the market for Islamic financing instruments has expanded over time, the liquidity of Sukuk has been continuously getting better (Khalid & Sawandi, 2018). Governments and financial organizations have introduced trading platforms and secondary market infrastructure that adhere to Islamic finance standards in an effort to increase the liquidity of Sukuk. Governments and financial organizations have taken action to increase the liquidity of Sukuk by establishing secondary market infrastructure and trading platforms that adhere to Islamic finance norms. According to Khalaf et al. (2018), this development has helped the secondary market for Sukuk become more active and has decreased the liquidity gap between Sukuk and conventional bonds. External factors including changes in interest rates, the state of the economy, and investor mood can also affect the liquidity of both Sukuk and conventional bonds. This graphic tool makes the study technique simpler to describe and easier to comprehend. It may be helpful to use the selected study design as a guide for researchers to make sure that each step is thoroughly completed in order to support the design's rigor and organization. Validity and reliability are key objectives of qualitative research, and member verification and triangulation help to achieve these aims. Top priority should be given to ethical considerations, such as participant confidentiality and informed consent. Liquidity can quickly decline during stressful or uncertain market conditions, which can result in wider bid-ask spreads and higher trading costs (Tariq et al., 2018). It becomes essential at these times for investors to be able to swap bonds without paying a lot of money. Market makers play an important role. Financial organizations or private individuals who act as market makers provide liquidity to enable trading on the secondary market. In order to ensure that there is a readily accessible market for buyers and sellers, they achieve this by regularly quoting bids and asking prices for bonds (Azibi & Nama, 2018). Particularly for less liquid assets like Sukuk, market makers are essential for increasing liquidity. To maintain the stability and liquidity of the bond market, it is common for government agencies or central banks to take on the role of market makers (Tariq et al., 2018). The secondary market trading for both Sukuk and conventional bonds has been dramatically changed by the accessibility of trading platforms and technical improvements. Investors can now conduct trades quickly and effectively because of the popularity of electronic trading platforms (Chen et al., 2018). As a result, a wider range of investors can now participate in the bond market, increasing market liquidity overall. 

Liquidity and secondary market trading are essential elements of the bond market that influence the appeal and viability of Sukuk and traditional bonds for buyers and sellers. The secondary market for Sukuk has improved, despite the fact that Sukuk may still have some structural limitations because they must adhere to Islamic financing standards. Conventional bonds typically have higher levels of liquidity, largely because of their wider market participation. On the other hand, the market makers' function and technical developments have greatly shaped secondary market trading and liquidity dynamics. External variables have an impact on both types of bonds. Investors and other market players who want to successfully navigate the bond market and make wise investment decisions need to have a thorough awareness of these factors.

2.3 Literature Gap

There are noticeable gaps that call for attention and research, despite the fact that the body of literature already in existence has shed light on different elements of Sukuk (Islamic bonds) and conventional bonds. In order to improve the comprehension of these financial instruments and their relative performance, this section identifies significant gaps in the literature and highlights the subjects that require more study.

The narrow breadth of studies that compare Sukuk and conventional bonds across various locations is a notable gap in the literature. Research that has already been done has frequently concentrated on certain geographic regions or individual markets, offering insightful information on regional dynamics. The performance of Sukuk and conventional bonds in the midst of major global financial catastrophes like the COVID-19 pandemic cannot be compared fairly between different locations due to the lack of thorough studies that span these gaps. Finding differences in investor behaviour, market circumstances, and regulatory frameworks that may have a substantial impact on these instruments' relative performance requires more comprehensive, cross-regional research. On the other hand, although empirical studies have looked at historical performance, risk profiles, and investor preferences for Sukuk and conventional bonds, further research into the behavioural aspects influencing investor decisions is required. It is crucial to comprehend the psychological and behavioural factors that underlie these preferences. Investors' preferences for one bond type over another can be better understood by using behavioural finance theories like loss aversion and prospect theory. This vacuum in the research offers a chance to investigate the emotions and cognitive biases that influence bond market investment choices. There is still potential for a more thorough investigation of this topic, even if several research studies have touched upon the influence of ethical and religious factors on investor choices for Sukuk. Understanding how investors' ethical and religious values affect their bond decisions is essential since Islamic finance principles play a crucial role in constructing Sukuk structures. Sukuk's attractiveness to socially conscious investors and its potential effects on the larger bond market can be more fully understood by delving deeper into the junction of finance and ethics. The literature is lacking in regard to broader environmental, social, and governance (ESG) concerns that affect investor preferences in addition to ethical considerations. Questions about how ESG factors influence bond selection have been raised in light of the increased interest in sustainable and responsible investing. There is still a dearth of research examining how ESG concepts are incorporated into Sukuk and conventional bonds and how this affects investor choice. Examining how ESG elements play a role in the bond market can reveal new facets of investor preferences and help issuers and regulators create more sustainable financial products.

The COVID-19 pandemic's implications on bond markets, especially Sukuk, have been discussed in recent research, but more thorough investigations that take a longer-term perspective are still needed. The duration of the epidemic and its repercussions on economies and financial markets have produced a dynamic environment that necessitates constant observation. A crucial area of research is determining how Sukuk and conventional bonds perform in the post-pandemic period and whether the trends seen during the crisis are still present or have changed.

There is a significant gap in the literature when comparing Sukuk with ordinary bonds. Cross-regional investigations, a more in-depth look at behavioral variables, a careful examination of ethical and ESG problems, and ongoing research into the pandemic's long-term repercussions are some of them. To have a fuller knowledge of these financial products and how they fit into the evolving picture of the international bond markets, it will be helpful to have these gaps addressed.

2.4 Conceptual Framework

Figure 2.4.1: Conceptual Framework

(Source: Created in SmartArt)

The "Conceptual Framework" in Figure 2.4.1, which is derived from the online creative community StartArt, offers a graphic representation of the intricate links and relationships between significant elements in this research study. The framework, which provides a roadmap for guiding both the researcher and the reader through the study's progression, artistically visualizes the substance of the research journey to convey its essence to the reader. This carefully constructed framework makes clear how the study's various components interact and increase subject understanding.

2.5 Summary

In order to provide the framework for the comparative analysis that follows, this chapter presents a thorough analysis of the current literature on Sukuk (Islamic bonds) and conventional bonds. The analysis of these financial instruments' historical performance, on the other hand, reveals variations brought on by regional dynamics, market perceptions, and asset structures. The intricate dynamics driving choices between Sukuk and conventional bonds are revealed by dissecting investor preferences and risk profiles. Ethics yield expectations, liquidity preferences, and risk tolerance are important variables. Regional environment and prior financial instrument experience also have an impact on these preferences. The COVID-19 pandemic's effects on bond markets are examined in this chapter, with an emphasis on their increased volatility and the unique resilience of Sukuk because of their risk-sharing and asset-backed features. Despite important findings, there are still substantial gaps in the literature that necessitate cross-regional comparisons, a better comprehension of behavioral drivers, and additional research into ethical and ESG issues.