Which firms do prefer Islamic debt? An analysis and evidence from global sukuk and bonds issuing firms

The Islamic debt instrument sukuk has been in the market for two decades; still, we do not know why a firm prefers an Islamic debt over conventional debt, set aside religiosity issue. We argue there is a genuine reason to choose Islamic debt because it has lighter indebtedness, benefits of avoiding external monitoring, and tax incentives. Based on the cross-country data for 346 firms issuing dollar-denominated global sukuk and bonds, we find that firms that prefer Islamic debt and issue sukuk are financially more unstable, and thus exposing to higher insolvency risk as compared to bond issuing firms. •The study finds firms issue sukuk when they have higher insolvency risk.•This finding persists across different Muslim countries and industries.•The results are based on firms that issue dollar sukuk to international investors.•It means Muslim market clientele is not necessarily the reason for the sukuk issue.•Sukuk allows international debt market access to less solvent local firms.