- Email: [email protected]
Sukuk, banking system, and financial markets: Rivals or complements?
Accepted Manuscript Sukuk, banking system, and financial markets: Rivals or complements? Houcem Smaoui, Karim Mimouni, Akram Temimi
PII: DOI: Reference:
S0165-1765(17)30381-6 http://dx.doi.org/10.1016/j.econlet.2017.09.014 ECOLET 7770
To appear in:
Economics Letters
Received date : 20 June 2017 Revised date : 11 September 2017 Accepted date : 12 September 2017 Please cite this article as: Smaoui H., Mimouni K., Temimi A., Sukuk, banking system, and financial markets: Rivals or complements?. Economics Letters (2017), http://dx.doi.org/10.1016/j.econlet.2017.09.014 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
Sukuk, Banking System, and Financial Markets: Rivals or Complements? Houcem Smaoui1 Karim Mimouni2 Akram Temimi3
Abstract Using the system GMM estimation technique, we study the effects of the financial development on Sukuk markets using a panel dataset of 11 countries from 1995 to 2015. First, we find that Sukuk and bank financing are substitutes. Economies where banks play a key role in providing private credit issue less Sukuk. Second, the evidence shows that Sukuk are complements to bonds and stocks. More Sukuk are issued in market-oriented economies. Finally, we show that the 2008 global financial crisis has a positive effect on Sukuk markets development.
JEL Classifications: C33, G10, G21, G29 Keywords: Sukuk, Financial development, Crisis
1
Department of Finance and Economics, Qatar University, [email protected] Department of Finance and Economics, Qatar University, [email protected] 3 Department of Finance and Economics, Qatar University, [email protected] 2
1
Sukuk, Banking System, and Financial Markets: Rivals or Complements? Houcem Smaoui4 Karim Mimouni5 Akram Temimi6
Abstract Using the system GMM estimation technique, we study the effects of the financial development on Sukuk markets using a panel dataset of 11 countries from 1995 to 2015. First, we find that Sukuk and bank financing are substitutes. Economies where banks play a key role in providing private credit issue less Sukuk. Second, the evidence shows that Sukuk are complements to bonds and stocks. More Sukuk are issued in market-oriented economies. Finally, we show that the 2008 global financial crisis has a positive effect on Sukuk markets development.
JEL Classifications: C33, G10, G21, G29 Keywords: Sukuk, Financial development, Crisis 1. Introduction Sukuk securities are the Islamic counterparts of conventional bonds with two main differences. First, they are compliant with Islamic laws (Sharia) by paying profit instead of interest. Second, they usually involve ownership in a real asset. The risk sharing aspect and the extensive contracting structure of Sukuk exert tight monitoring on the lending-borrowing channel. The use of Sukuk securities ensures therefore that financing is granted to credit-worthy borrowers and mitigates agency problems (Halim et al., 2016; Ebrahim et al., 2016). Minhat and Dzolkarnaini (2017) document that the wide use of Islamic financing is more beneficial to less profitable firms due to agency costs and adverse selection problems amongst Islamic finance providers. Conventional bonds, on the other hand, are either pure debt contracts or represent financial claims on opaque projects where the underlying asset may have no real economic value. Accordingly, many structured credit instruments are “paper chasing” vehicles with extremely high liquidity, which may overheat financial markets during crises (Kayed & Hassan, 2011). This striking disparity between Islamic and conventional financial tools contributed to the relatively positive performance of Islamic finance during and after the 2008 global financial crisis (Hassan and 4
Department of Finance and Economics, Qatar University, [email protected] Department of Finance and Economics, Qatar University, [email protected] 6 Department of Finance and Economics, Qatar University, [email protected] 5
2
Dridi, 2010). In particular, Sukuk markets have experienced tremendous growth averaging 27% per year in the last two decades (Alzaharani and Megginson, 2017). By 2016, the outstanding corporate and sovereign Sukuk have reached $318.5 billion7. While the 2008 crisis may have played a key role in this expansion, the development of the domestic financial systems is of pivotal importance. Moreover, whether the credit market is bank-oriented or market-oriented should have a bearing on Sukuk. To uncover how these factors affected Sukuk markets, this paper addresses two main questions: (i) How does the banking sector affect the market for Sukuk? (ii) How do bond markets and stock markets affect the development of Sukuk? To our knowledge, this paper is the first to comprehensively study the effects of a country’s financial development on Sukuk issuance, including the impact of the banking system, the bond market, and the stock market. Smaoui and Khawaja (2017) is the only study to bring focus to the determinants of Sukuk market development using a panel data framework. They failed however to investigate the effect of the banking system and the stock market development on Sukuk markets. We contribute to the nascent literature on Sukuk by testing the following hypotheses: H1: Sukuk and bank financing are substitutes. While the presence of a well-developed banking system may be complementary to the development of a liquid and deep Sukuk market since banks can serve as dealers and market makers therein, a more sophisticated banking system will most likely deprive Sukuk of market share. As banks play a significant role in the economies of our sample countries, we expect bank financing to crowd-out Sukuk H2: Sukuk are complements to bond and stock markets. Although conventional bonds may compete with Sukuk and hamper their development, the bond market can provide the required infrastructure for Sukuk issuance and trading. In addition, the disintermediation generated by bond markets should accelerate the development of Sukuk markets. Accordingly, we expect bond markets to complement Sukuk. Furthermore, well-functioning stock markets reduce asymmetric information and enhance corporate governance lowering the cost of external equity and the cost of issuing debt (Demirgüç-Kunt & Maksimovic, 1996). Additionally, the know-how of trading market securities should foster the issuance of Sukuk. Thus, we conjecture that the development of bond and stock markets is conducive for the growth of Sukuk markets.
2. Sample and Methodology 2.1 The Sample We examine the impact of financial development on Sukuk using a panel dataset of 11 countries8 from 1995 to 2015. To ensure a time-series dimension to our data, countries with less than three annual Sukuk 7 8
Islamic Financial Services Industry Stability Report, 2017. Bahrain; Brunei; Gambia; Indonesia; Malaysia; Pakistan; Qatar; Saudi Arabia; Singapore; Turkey; and Yemen. 3
observations have been dropped. A description of the variables and their expected signs is provided in Table 1.
2.2 Methodology To estimate our dynamic panel model, we use the system GMM estimator of Blundell and Bond (1998) which combines, within a system, the regression in first differences and the regression in levels. It is worth noting that the system GMM estimator is biased downward in small samples (Blundell and Bond, 1998). To alleviate this problem, we use the procedure of Calderon et al. (2000) that decreases the size of the instruments’ matrix. Moreover, we employ the Windmeijer’s (2005) small-sample correction of the estimated variance.
Table 1 Variables description Definition Dependent variable: Sukuk Market Development
Measure Annual Sukuk market capitalization to GDP
Expected Sign N/A
Economic Size
GDP at Purchasing Power Parity
+
Trade Openness
Ratio of exports and imports to GDP
+
Mixed Common Law/Sharia Law
Dummy equal to 1 if the country adopted a mixed Law from the British common law and Sharia Law and 0 otherwise
+
Size of the Banking System
Credit to the private sector by commercial banks to GDP
–
Banking Concentration
The percentage of bank assets held by the three largest commercial banks in the country.
+
Bond Market Development
Bond market capitalization to GDP
+
Stock Market Development
Stock market capitalization to GDP
+
Crisis dummy
Equal to 1 starting in 2008 and 0 otherwise
+
4
3. Empirical Results Table 2 displays the descriptive statistics for our main variables. Table 2 Descriptive Statistics Variable Sukuk Market Development
N 226
Mean 0.700
Std. Dev. 2.183
Min 0
Max 18.174
Economic size (billion $)
226
5.075
5.696
0.154
26.748
Trade Openness
230
111.527
92.384
27.604
439.656
Mixed Common Law/Sharia Law
231
0.545
0.499
0
1
Size of Banking System
224
45.450
36.448
3.014
154.892
Banking Concentration
220
58.372
34.950
0
100
Bond Market Development
220
22.261
28.323
0
111.274
Stock Market Development
128
87.842
72.687
6.781
303.568
Table 3 shows that the coefficient of the size of the banking system is negative and significant at the 5 percent level, whatever the specification. Accordingly, the larger the role of banks in the economy, the lower the issuance of Sukuk. Hence, the banking sector and Sukuk market appear to be substitutes in accordance with hypothesis H1. This result is supported by the configuration of our sample as Sukuk are mainly issued in the GCC countries and Malaysia where banks play a central role. Column 2 of Table 3 controls for the effect of the 2008 global financial crisis. When the crisis dummy is added to Column 1 regression, the coefficient of the crisis variable is positive and significant at the 1 percent level. This result confirms that Islamic finance instruments gained more popularity after the 2008 crisis due, in part, to their close control and better selection of borrowers. In column 3, we investigate the impact of the structure of the banking sector, measured by the bank concentration, in addition to the size of the banking sector. The latter variable maintains its negative sign and significant impact. Interestingly, the concentration variable has also a negative and significant impact on Sukuk market development, suggesting that economies with more concentrated banking issue less Sukuk. In oligopolistic banking structures, banks have an incentive to maintain long-term close relationships with their clients by offering attractive financial products and services. Such close relationships mitigate agency costs between lenders and borrowers and limit the need for alternative external financing including Sukuk. When the crisis dummy is added in column 4, the effect of the concentration variable becomes nonsignificant while that of the banking sector remains negative and significant. It follows that the size of the banking sector is more important than its concentration structure in the development of Sukuk markets.
5
Table 3 Multivariate analysis Explanatory Variables Lag of Dependent Variable
(1) 0.810*** (0.000)
(2) 0.718*** (0.000)
(3) 0.715*** (0.000)
(4) 0.494*** (0.000)
(5) 0.461** (0.015)
(6) 0.348** (0.016)
Economic size (billion $)
1.302** (0.033)
0.485*** (0.009)
1.493*** (0.008)
0.720*** (0.001)
0.331* (0.085)
0.607** (0.038)
Trade Openness
0.079*** (0.002)
0.0361*** (0.001)
0.0885*** (0.005)
0.0285*** (0.005)
0.005** (0.028)
0.0103 (0.341)
Mixed Common Law/Sharia Law
12.70** (0.027)
3.967** (0.036)
13.56*** (0.004)
6.218*** (0.000)
3.528*** (0.005)
5.218** (0.041)
Size of Banking System size
-0.121** (0.020)
-0.088*** (0.000)
-0.129* (0.098)
-0.0365** (0.034)
Crisis
5.325*** (0.000)
2.684*** (0.000)
Banking Concentration
-0.0827** (0.033)
0.005 (0.647)
Bond Market Development
0.029** (0.032)
Stock Market Development
Constant
0.0178*** (0.000)
Hansen Test
-18.01** (0.015) 0.598
-7.144** (0.012) 0.915
-15.01** (0.014) 1.000
-9.663*** (0.000) 1.000
-4.031*** (0.008) 0.922
-9.093* (0.057) 0.988
AR2 Test Number of Observations
0.064* 208
0.065* 204
0.145 200
0.090* 200
0.500 204
0.915 122
***, **, * refer to the 1, 5 and 10% levels of significance respectively. The p-values are reported in parenthesis. Windmeijer (2005) finite-sample correction to the two-step covariance matrix is employed.
Columns 5 & 6 of Table 3 investigate the impact of the bond market development and the stock market development on the issuance of Sukuk. The coefficients on both variables are positive and highly significant at the 1 percent level, supporting hypothesis H2. This result is of paramount importance suggesting that while Sukuk are rivals to the banking sector, they are complements to the bond and stock markets. Table 3 also controls for the impact of the structural determinants of Sukuk markets identified by the work of Smaoui and Khawaja (2017). We note that the lag of Sukuk is positive and significant in all specifications supporting our use of a dynamic model. Economic size loads positive and significant in all specifications. Large countries seem to benefit from economies of scale when developing the Sukuk market. Trade openness is positive and significant in all but one specification, suggesting that corporations in open economies need more sources of capital to remain competitive. Finally, the Mixedcomsharia variable is positive and significant in all specifications. As expected, the stronger a country abides by the Sharia laws, the more it issues Sharia compliant instruments including Sukuk.
6
4. Conclusion With the tight restrictions on long-term bank financing under the Basel III regulatory framework and the proliferation of green and socially responsible investments, Sukuk markets have certainly enormous development opportunities in the near future and so are the challenges. This paper sheds light on the main financial structure determinants needed for this expansion. Our results strongly suggest that the development of Sukuk markets depends on the environment where they are implemented and on whether the credit market is bank-oriented or market-oriented. Our results reveal that a well-developed banking sector is a handicap to the development of Sukuk markets. On the other hand, well-developed bond and stock markets facilitate Sukuk expansion. This paper also finds that the 2008 crisis has been a catalyst and a stimulator of Sukuk issuance as Sukuk and Islamic finance at large were able to resist the economic downturn and remained relatively positive compared to other conventional tools.
References Alzahrani, M., and Megginson, W.L., 2017. Finance as Worship: A Survey of Islamic Finance Research. CEIF Discussion Paper (4/2017). Available at SSRN: https://ssrn.com/abstract=2967619. Arellano, M., and Bond, S., 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies 58(2), 277-297. Blundell, R., and Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87(1), 115-143. Calderon, C., Chong, A., & Loayza, N., 2000. Determinants of current account deficits in developing countries. World Bank Research Policy Working Paper, 2398. Demirgüç-Kunt, A. and Maksimovic, V., 1996. Stock market development and firm financing choices. World Bank Economic Review 10 (2), 341–369. Ebrahim, M.S., Jaafar, A., Omar, F.A., Salleh, M.O., 2016. Can Islamic injunctions indemnify the structural flaws of securitized debt? Journal of Corporate Finance 37, 271–286. Halim, Z.A., How, J. and Verhoeven, P., 2016. Agency costs and corporate Sukuk issuance. Pacific-Basin Finance Journal 47, 83-95. Hansen, L. P., 1982. Large sample properties of generalized method of moments estimators. Econometrica 50(4), 1029-1054. Hasan, M. and Dridi, J., 2010. The effects of global crisis on Islamic and conventional banks: a comparative study. International Monetary Fund working paper No. 10/201, International Monetary Fund, New York, NY.
7
Islamic
Finance
Services
Board
Stability
Report,
2017.
Available
at
http://www.ifsb.org/docs/IFSB%20IFSI%20Stability%20Report%202017.pdf Kayed, R.N. and Hassan, M.K., 2011. The global financial crisis and Islamic finance. Thunderbird International Business Review 53(5), 551-564. Minhat, M. and Dzolkarnaini, N., 2017. Which firms use Islamic financing? Economics Letters 150(C), 15-17. Smaoui, H. and Khawaja, M., 2017. The Determinants of Sukuk Market Development. Emerging Markets Finance and Trade 53, 1501–1518. Windmeijer, F., 2005. A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics 126(1), 25-51.
8
Highlights
We study the relationship between financial development and Sukuk issuance. The banking system competes with Sukuk issuance. The bond market complements Sukuk issuance. The financial crisis has been a catalyst to Sukuk issuance.
9
PII: DOI: Reference:
S0165-1765(17)30381-6 http://dx.doi.org/10.1016/j.econlet.2017.09.014 ECOLET 7770
To appear in:
Economics Letters
Received date : 20 June 2017 Revised date : 11 September 2017 Accepted date : 12 September 2017 Please cite this article as: Smaoui H., Mimouni K., Temimi A., Sukuk, banking system, and financial markets: Rivals or complements?. Economics Letters (2017), http://dx.doi.org/10.1016/j.econlet.2017.09.014 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
Sukuk, Banking System, and Financial Markets: Rivals or Complements? Houcem Smaoui1 Karim Mimouni2 Akram Temimi3
Abstract Using the system GMM estimation technique, we study the effects of the financial development on Sukuk markets using a panel dataset of 11 countries from 1995 to 2015. First, we find that Sukuk and bank financing are substitutes. Economies where banks play a key role in providing private credit issue less Sukuk. Second, the evidence shows that Sukuk are complements to bonds and stocks. More Sukuk are issued in market-oriented economies. Finally, we show that the 2008 global financial crisis has a positive effect on Sukuk markets development.
JEL Classifications: C33, G10, G21, G29 Keywords: Sukuk, Financial development, Crisis
1
Department of Finance and Economics, Qatar University, [email protected] Department of Finance and Economics, Qatar University, [email protected] 3 Department of Finance and Economics, Qatar University, [email protected] 2
1
Sukuk, Banking System, and Financial Markets: Rivals or Complements? Houcem Smaoui4 Karim Mimouni5 Akram Temimi6
Abstract Using the system GMM estimation technique, we study the effects of the financial development on Sukuk markets using a panel dataset of 11 countries from 1995 to 2015. First, we find that Sukuk and bank financing are substitutes. Economies where banks play a key role in providing private credit issue less Sukuk. Second, the evidence shows that Sukuk are complements to bonds and stocks. More Sukuk are issued in market-oriented economies. Finally, we show that the 2008 global financial crisis has a positive effect on Sukuk markets development.
JEL Classifications: C33, G10, G21, G29 Keywords: Sukuk, Financial development, Crisis 1. Introduction Sukuk securities are the Islamic counterparts of conventional bonds with two main differences. First, they are compliant with Islamic laws (Sharia) by paying profit instead of interest. Second, they usually involve ownership in a real asset. The risk sharing aspect and the extensive contracting structure of Sukuk exert tight monitoring on the lending-borrowing channel. The use of Sukuk securities ensures therefore that financing is granted to credit-worthy borrowers and mitigates agency problems (Halim et al., 2016; Ebrahim et al., 2016). Minhat and Dzolkarnaini (2017) document that the wide use of Islamic financing is more beneficial to less profitable firms due to agency costs and adverse selection problems amongst Islamic finance providers. Conventional bonds, on the other hand, are either pure debt contracts or represent financial claims on opaque projects where the underlying asset may have no real economic value. Accordingly, many structured credit instruments are “paper chasing” vehicles with extremely high liquidity, which may overheat financial markets during crises (Kayed & Hassan, 2011). This striking disparity between Islamic and conventional financial tools contributed to the relatively positive performance of Islamic finance during and after the 2008 global financial crisis (Hassan and 4
Department of Finance and Economics, Qatar University, [email protected] Department of Finance and Economics, Qatar University, [email protected] 6 Department of Finance and Economics, Qatar University, [email protected] 5
2
Dridi, 2010). In particular, Sukuk markets have experienced tremendous growth averaging 27% per year in the last two decades (Alzaharani and Megginson, 2017). By 2016, the outstanding corporate and sovereign Sukuk have reached $318.5 billion7. While the 2008 crisis may have played a key role in this expansion, the development of the domestic financial systems is of pivotal importance. Moreover, whether the credit market is bank-oriented or market-oriented should have a bearing on Sukuk. To uncover how these factors affected Sukuk markets, this paper addresses two main questions: (i) How does the banking sector affect the market for Sukuk? (ii) How do bond markets and stock markets affect the development of Sukuk? To our knowledge, this paper is the first to comprehensively study the effects of a country’s financial development on Sukuk issuance, including the impact of the banking system, the bond market, and the stock market. Smaoui and Khawaja (2017) is the only study to bring focus to the determinants of Sukuk market development using a panel data framework. They failed however to investigate the effect of the banking system and the stock market development on Sukuk markets. We contribute to the nascent literature on Sukuk by testing the following hypotheses: H1: Sukuk and bank financing are substitutes. While the presence of a well-developed banking system may be complementary to the development of a liquid and deep Sukuk market since banks can serve as dealers and market makers therein, a more sophisticated banking system will most likely deprive Sukuk of market share. As banks play a significant role in the economies of our sample countries, we expect bank financing to crowd-out Sukuk H2: Sukuk are complements to bond and stock markets. Although conventional bonds may compete with Sukuk and hamper their development, the bond market can provide the required infrastructure for Sukuk issuance and trading. In addition, the disintermediation generated by bond markets should accelerate the development of Sukuk markets. Accordingly, we expect bond markets to complement Sukuk. Furthermore, well-functioning stock markets reduce asymmetric information and enhance corporate governance lowering the cost of external equity and the cost of issuing debt (Demirgüç-Kunt & Maksimovic, 1996). Additionally, the know-how of trading market securities should foster the issuance of Sukuk. Thus, we conjecture that the development of bond and stock markets is conducive for the growth of Sukuk markets.
2. Sample and Methodology 2.1 The Sample We examine the impact of financial development on Sukuk using a panel dataset of 11 countries8 from 1995 to 2015. To ensure a time-series dimension to our data, countries with less than three annual Sukuk 7 8
Islamic Financial Services Industry Stability Report, 2017. Bahrain; Brunei; Gambia; Indonesia; Malaysia; Pakistan; Qatar; Saudi Arabia; Singapore; Turkey; and Yemen. 3
observations have been dropped. A description of the variables and their expected signs is provided in Table 1.
2.2 Methodology To estimate our dynamic panel model, we use the system GMM estimator of Blundell and Bond (1998) which combines, within a system, the regression in first differences and the regression in levels. It is worth noting that the system GMM estimator is biased downward in small samples (Blundell and Bond, 1998). To alleviate this problem, we use the procedure of Calderon et al. (2000) that decreases the size of the instruments’ matrix. Moreover, we employ the Windmeijer’s (2005) small-sample correction of the estimated variance.
Table 1 Variables description Definition Dependent variable: Sukuk Market Development
Measure Annual Sukuk market capitalization to GDP
Expected Sign N/A
Economic Size
GDP at Purchasing Power Parity
+
Trade Openness
Ratio of exports and imports to GDP
+
Mixed Common Law/Sharia Law
Dummy equal to 1 if the country adopted a mixed Law from the British common law and Sharia Law and 0 otherwise
+
Size of the Banking System
Credit to the private sector by commercial banks to GDP
–
Banking Concentration
The percentage of bank assets held by the three largest commercial banks in the country.
+
Bond Market Development
Bond market capitalization to GDP
+
Stock Market Development
Stock market capitalization to GDP
+
Crisis dummy
Equal to 1 starting in 2008 and 0 otherwise
+
4
3. Empirical Results Table 2 displays the descriptive statistics for our main variables. Table 2 Descriptive Statistics Variable Sukuk Market Development
N 226
Mean 0.700
Std. Dev. 2.183
Min 0
Max 18.174
Economic size (billion $)
226
5.075
5.696
0.154
26.748
Trade Openness
230
111.527
92.384
27.604
439.656
Mixed Common Law/Sharia Law
231
0.545
0.499
0
1
Size of Banking System
224
45.450
36.448
3.014
154.892
Banking Concentration
220
58.372
34.950
0
100
Bond Market Development
220
22.261
28.323
0
111.274
Stock Market Development
128
87.842
72.687
6.781
303.568
Table 3 shows that the coefficient of the size of the banking system is negative and significant at the 5 percent level, whatever the specification. Accordingly, the larger the role of banks in the economy, the lower the issuance of Sukuk. Hence, the banking sector and Sukuk market appear to be substitutes in accordance with hypothesis H1. This result is supported by the configuration of our sample as Sukuk are mainly issued in the GCC countries and Malaysia where banks play a central role. Column 2 of Table 3 controls for the effect of the 2008 global financial crisis. When the crisis dummy is added to Column 1 regression, the coefficient of the crisis variable is positive and significant at the 1 percent level. This result confirms that Islamic finance instruments gained more popularity after the 2008 crisis due, in part, to their close control and better selection of borrowers. In column 3, we investigate the impact of the structure of the banking sector, measured by the bank concentration, in addition to the size of the banking sector. The latter variable maintains its negative sign and significant impact. Interestingly, the concentration variable has also a negative and significant impact on Sukuk market development, suggesting that economies with more concentrated banking issue less Sukuk. In oligopolistic banking structures, banks have an incentive to maintain long-term close relationships with their clients by offering attractive financial products and services. Such close relationships mitigate agency costs between lenders and borrowers and limit the need for alternative external financing including Sukuk. When the crisis dummy is added in column 4, the effect of the concentration variable becomes nonsignificant while that of the banking sector remains negative and significant. It follows that the size of the banking sector is more important than its concentration structure in the development of Sukuk markets.
5
Table 3 Multivariate analysis Explanatory Variables Lag of Dependent Variable
(1) 0.810*** (0.000)
(2) 0.718*** (0.000)
(3) 0.715*** (0.000)
(4) 0.494*** (0.000)
(5) 0.461** (0.015)
(6) 0.348** (0.016)
Economic size (billion $)
1.302** (0.033)
0.485*** (0.009)
1.493*** (0.008)
0.720*** (0.001)
0.331* (0.085)
0.607** (0.038)
Trade Openness
0.079*** (0.002)
0.0361*** (0.001)
0.0885*** (0.005)
0.0285*** (0.005)
0.005** (0.028)
0.0103 (0.341)
Mixed Common Law/Sharia Law
12.70** (0.027)
3.967** (0.036)
13.56*** (0.004)
6.218*** (0.000)
3.528*** (0.005)
5.218** (0.041)
Size of Banking System size
-0.121** (0.020)
-0.088*** (0.000)
-0.129* (0.098)
-0.0365** (0.034)
Crisis
5.325*** (0.000)
2.684*** (0.000)
Banking Concentration
-0.0827** (0.033)
0.005 (0.647)
Bond Market Development
0.029** (0.032)
Stock Market Development
Constant
0.0178*** (0.000)
Hansen Test
-18.01** (0.015) 0.598
-7.144** (0.012) 0.915
-15.01** (0.014) 1.000
-9.663*** (0.000) 1.000
-4.031*** (0.008) 0.922
-9.093* (0.057) 0.988
AR2 Test Number of Observations
0.064* 208
0.065* 204
0.145 200
0.090* 200
0.500 204
0.915 122
***, **, * refer to the 1, 5 and 10% levels of significance respectively. The p-values are reported in parenthesis. Windmeijer (2005) finite-sample correction to the two-step covariance matrix is employed.
Columns 5 & 6 of Table 3 investigate the impact of the bond market development and the stock market development on the issuance of Sukuk. The coefficients on both variables are positive and highly significant at the 1 percent level, supporting hypothesis H2. This result is of paramount importance suggesting that while Sukuk are rivals to the banking sector, they are complements to the bond and stock markets. Table 3 also controls for the impact of the structural determinants of Sukuk markets identified by the work of Smaoui and Khawaja (2017). We note that the lag of Sukuk is positive and significant in all specifications supporting our use of a dynamic model. Economic size loads positive and significant in all specifications. Large countries seem to benefit from economies of scale when developing the Sukuk market. Trade openness is positive and significant in all but one specification, suggesting that corporations in open economies need more sources of capital to remain competitive. Finally, the Mixedcomsharia variable is positive and significant in all specifications. As expected, the stronger a country abides by the Sharia laws, the more it issues Sharia compliant instruments including Sukuk.
6
4. Conclusion With the tight restrictions on long-term bank financing under the Basel III regulatory framework and the proliferation of green and socially responsible investments, Sukuk markets have certainly enormous development opportunities in the near future and so are the challenges. This paper sheds light on the main financial structure determinants needed for this expansion. Our results strongly suggest that the development of Sukuk markets depends on the environment where they are implemented and on whether the credit market is bank-oriented or market-oriented. Our results reveal that a well-developed banking sector is a handicap to the development of Sukuk markets. On the other hand, well-developed bond and stock markets facilitate Sukuk expansion. This paper also finds that the 2008 crisis has been a catalyst and a stimulator of Sukuk issuance as Sukuk and Islamic finance at large were able to resist the economic downturn and remained relatively positive compared to other conventional tools.
References Alzahrani, M., and Megginson, W.L., 2017. Finance as Worship: A Survey of Islamic Finance Research. CEIF Discussion Paper (4/2017). Available at SSRN: https://ssrn.com/abstract=2967619. Arellano, M., and Bond, S., 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies 58(2), 277-297. Blundell, R., and Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87(1), 115-143. Calderon, C., Chong, A., & Loayza, N., 2000. Determinants of current account deficits in developing countries. World Bank Research Policy Working Paper, 2398. Demirgüç-Kunt, A. and Maksimovic, V., 1996. Stock market development and firm financing choices. World Bank Economic Review 10 (2), 341–369. Ebrahim, M.S., Jaafar, A., Omar, F.A., Salleh, M.O., 2016. Can Islamic injunctions indemnify the structural flaws of securitized debt? Journal of Corporate Finance 37, 271–286. Halim, Z.A., How, J. and Verhoeven, P., 2016. Agency costs and corporate Sukuk issuance. Pacific-Basin Finance Journal 47, 83-95. Hansen, L. P., 1982. Large sample properties of generalized method of moments estimators. Econometrica 50(4), 1029-1054. Hasan, M. and Dridi, J., 2010. The effects of global crisis on Islamic and conventional banks: a comparative study. International Monetary Fund working paper No. 10/201, International Monetary Fund, New York, NY.
7
Islamic
Finance
Services
Board
Stability
Report,
2017.
Available
at
http://www.ifsb.org/docs/IFSB%20IFSI%20Stability%20Report%202017.pdf Kayed, R.N. and Hassan, M.K., 2011. The global financial crisis and Islamic finance. Thunderbird International Business Review 53(5), 551-564. Minhat, M. and Dzolkarnaini, N., 2017. Which firms use Islamic financing? Economics Letters 150(C), 15-17. Smaoui, H. and Khawaja, M., 2017. The Determinants of Sukuk Market Development. Emerging Markets Finance and Trade 53, 1501–1518. Windmeijer, F., 2005. A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics 126(1), 25-51.
8
Highlights
We study the relationship between financial development and Sukuk issuance. The banking system competes with Sukuk issuance. The bond market complements Sukuk issuance. The financial crisis has been a catalyst to Sukuk issuance.
9