Abstract
This study was conducted in order to analyse the two-way relationship between the Islamic stock market and sukuk market development, and economic growth. this study also analyses whether trade openness influences the development of the Islamic stock market and sukuk market, and economic growth. VAR (Vector Auto Regressive), VECM (Vector Error Correction Model), and a Granger Causality Test used to test the hypothesis. Using Indonesia and Malaysia as the sample countries and from February 2008 to December 2017 period, the results showed that there is a bi-directional causality between the development of the Islamic stock market and the development of the sukuk market in Indonesia and Malaysia. There is a bi-directional causality between the development of the Islamic stock market and sukuk market with economic growth in Indonesia. Unidirectional causality is found between economic growth and the sukuk market development in Malaysia. And no causality (neutrality) is reported between the development of the Islamic stock market and economic growth in Malaysia. Meanwhile, trade openness has a significant and positive effect on the sukuk market development as well as economic growth in Malaysia. For the limitations, this research only focused on two countries and only delved into the corporation sukuk market.
Highlights
The Islamic financial system, especially the Islamic financial market, is an alternative for the conventional financial system, which has a high level of volatility
Islamic stock development has an influence towards sukuk market development, and the sukuk market has an influence towards the Islamic stock market development
These results are supported by the Granger causality test, which demonstrates that there is a two-way causality relationship between Islamic stock market development and sukuk market development in Indonesia and Malaysia, whether short-term or long-term
Summary
The Islamic financial system, especially the Islamic financial market, is an alternative for the conventional financial system, which has a high level of volatility. The Islamic financial market refers to the Islamic principles, which operationally are usually in line with Islamic concepts. Besides offering wider access to companies to develop their businesses, the Islamic principle protects related parties from exploitation, fraud, and unfairness between payoffs in conducting transactions. The rapid developments in the Islamic financial market are generally caused by the high increase in global sukuk issue value, whether government bonds or corporate bonds. Global sukuk issued have increased by about 272 times since 2001, from USD1.17 billion to become USD318.5 billion by the end of 2016 (IFSB 2017). Malaysia is in the first position as the country with the highest sukuk issue value at USD38,968 million, followed by Indonesia in the second position with a sukuk issue value of USD14,363 million (ICD 2017)
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