Handbook of Empirical Research on Islam and Economic Life
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Handbook of Empirical Research on Islam and Economic Life

Edited by M. Kabir Hassan

In Islamic jurisprudence, a comprehensive ethic has been formulated governing how business and commerce should be run, how accountability to God and the community is to be achieved, and how banking and finance is to be arranged. This Handbook examines how well these values are translated into actual performance. It explores whether those holding true to the system are hindered and put at a disadvantage or whether the Islamic institutions have been able to demonstrate that faith-based activities can be rewarding, both economically and spiritually.
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Chapter 29: Testing the financial distress prediction model for sukuk- issuing companies in Malaysia

Roslina Mohamad Shafi, Sharifah Raihan Syed Mohd Zain, Mohamed Eskandar Shah Mohd Rasid and Ahamed Kameel Mydin Meera

Abstract

Companies are exposed to business and financial risk and are affected by business cycles and economic downturns. A company is fortunate if it is capable of preventing and alleviating financial crises by utilizing existing financial distress models to deal with volatile markets and changes in the global economy. Such models are capable of signalling to a company worst case scenarios and remedial possibilities to prevent future distress. However, applying such risk models to sukuk-issuing companies remains a point of contention because sukuk and related bonds are fundamentally different types of financial instruments and possess dissimilar risk exposure to traditional instruments. The current study examines this difference by testing existing financial distress prediction models on sukuk-issuing companies. The results show that the Altman and Ohlson financial distress models were capable of alerting companies of possible financial distress with a 52.78 per cent prediction accuracy. Further testing revealed that the Ohlson model produced a higher prediction power than the Altman model for Malaysian sukuk-issuing companies. These signify that logit model is more powerful for sukuk issuing companies.

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