Fiscal policy and sukuk market development in OIC countries

Abstract

Purpose This study aims to examine the fiscal policy drivers of sovereign sukuk market development in selected Organization of Islamic Cooperation (OIC) countries. Specifically, the research aims to analyze the effects of fiscal deficit, public debt and government expenditure on sovereign sukuk market development, while controlling for macroeconomic and financial factors. Design/methodology/approach The sample consists of eight OIC member countries that play active role in the global sukuk market which include Saudi Arabia, United Arab Emirates, Malaysia, Indonesia, Qatar, Pakistan, Turkey and Sudan. In addition, the study covers a period of 10 years spanning between 2011 and 2020. Similarly, the study uses three models, namely, random effect, generalized least square and system generalized method of moments panel models. To check for the robustness of the results, the study replaces current values of fiscal policy variables with one-year lagged values. Findings The findings establish that fiscal policy variables significantly influence the development of sovereign sukuk markets. Specifically, public debt is a significant fiscal variable that promotes sovereign sukuk market development, while fiscal deficit has a negative effect on the development of sovereign sukuk market. However, the findings suggest that government expenditure does not influence sovereign sukuk issuance in the OIC member countries. Practical implications The study is significant to both investors and regulators in the sukuk market because it attempts to spotlight the importance of sound fiscal climate in developing sovereign sukuk market. Public debt is a facilitator, whereas fiscal deficit appears to be a constraint. Therefore, policymakers should determine the optimal mix of public debt and fiscal deficit in designing policies that promote sukuk market development. Originality/value The novelty of the study is its focus on the role of fiscal policy variables in facilitating sovereign sukuk market development. The study systematically establishes the link between fiscal policy and sovereign sukuk market in the OIC countries. Previous empirical studies focus extensively on the effects of macroeconomic, financial and institutional factors on sukuk market development.

Institutional quality and Islamic financial development

“…The authors conclude that the progress of the UAE's Islamic banking industry depends on its level of economic performance. However, Baita et al (2023) found no significant effect of economic size, inflation, or trade openness on driving Islamic financial development through sukuk market development.…”

Developing Sukuk for Research and Innovation Project

“…From a Shariah perspective, sukuk ijarah is the most accepted Islamic bond format. However, the sharia restrictions that must be met are that there must be a back-up asset, in accordance with the principle of risk-sharing in accordance with sharia, the rate may fluctuate depending on demand, different from the principle of time value of money, the return is in the form of rent, not interest payments (Baita et al, 2023).…”