Abstract
Due to its distinctive features and investment quality, sukuk as an Islamic alternative to bond financing, have known last decades a worldwide interest and a rapid widespread, particularly after the 2007-2008 global financial crisis. Despite the global market prevalence of sukuk, the literature on the sukuk – economic wealth nexus still inexistant. In this study, we develop a basic model that captures the welfare effects of sukuk markets. The main finding shows the importance of a well-developed sukuk market in hedging interest rate and inflation risks effectively and, thereby improving investor welfare.Keywords: Sukuk, Economic welfare, Partial equilibriumJEL Classifications: D53 G15 D60DOI: https://doi.org/10.32479/ijefi.11507
Highlights
Over the last two decades, private capital markets (PCMs) have known increasing recognition in allocating capital, achieving productivity, and providing adequate managerial incentives, thereby leading many emerging economies to develop their stock markets
Theoretically developing PCMs presupposes the existence of private savings despite that individuals are not well cultivated and lack the experience required in managing their own savings (Bernheim, 1996)
While analysis of the welfare effects of the introduction of sukuk would require a general equilibrium model and would consider the effects of introducing new assets on the equilibrium return rates on existing assets, we adopt in this paper a simpler partial equilibrium model to approximate the effect of investment opportunities on the welfare of a small investor taking the return rates on all assets as given and unchanged following the introduction of new assets
Summary
Over the last two decades, private capital markets (PCMs) have known increasing recognition in allocating capital, achieving productivity, and providing adequate managerial incentives, thereby leading many emerging economies to develop their stock markets. While analysis of the welfare effects of the introduction of sukuk would require a general equilibrium model and would consider the effects of introducing new assets on the equilibrium return rates on existing assets, we adopt in this paper a simpler partial equilibrium model to approximate the effect of investment opportunities on the welfare of a small investor taking the return rates on all assets as given and unchanged following the introduction of new assets These assumptions, restrictive, allow us to develop a simple model to study the effect of available investment opportunities on the welfare of a small investor. In an economy with both bond and sukuk markets, the investor optimum can be achieved by investing in cash, bond and sukuk securities of different maturities All these four assets provide a perfect hedge against the risks associated with inflation and interest rates.
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