DefinePK

Abstract

This study examines the role of Sukuk, a Shariah-compliant financial instrument, in promoting economic development across emerging markets. Sukuk differ fundamentally from conventional bonds by representing ownership in tangible assets, aligning finance with the real economy, and ethical investment principles. Using panel data from 2010 to 2022 across nine countries, this research employs fixed-effects and random-effects regression models to investigate the relationship between Sukuk issuance and macroeconomic indicators such as GDP per capita, Broad Money, Tax Revenue, and Domestic Credit to the Private Sector. Findings suggest that while Sukuk issuance has a positive correlation with economic growth, the impact is statistically insignificant. In contrast, factors like domestic credit and inflation show stronger, significant associations with GDP per capita. The Hausman test indicates the fixed-effects model is more appropriate, highlighting the importance of country- specific variables. Despite challenges such as inconsistent regulations and limited investor awareness, Sukuk demonstrates promise as an ethical financial tools, particularly in infrastructure development and sustainability initiatives. The study concludes that institutional quality and regulatory harmonization are crucial to unlocking Sukuk’s full developmental potential and recommends policy reforms and further research to enhance its role in inclusive and sustainable economic growth.
1.1 Background of the Study
Islamic finance, dating back to the early Islamic era, was built on ethical and risk-sharing values applicable to economic transactions. Its current revival traces back to the 1960s, when experimental savings institutions in Egypt grew into a movement, and when, in the 1970s, full-sized Islamic banks sprang up throughout the Middle East and Southeast Asia. In the 1990s and 2000s, the pace of institutional and international expansion of Islamic financial systems also accelerated (Zaher & Hassan, 2001). Today Islamic finance embraces a variety of services, from Islamic banking to Takaful (Islamic insurance), from Islamic capital markets to Shari’ah-compliant asset management. Other than the revolutionary providers of Islamic finance, much credit can be given to the regulatory industry of Shari'ah scholars as manifested in institutions like AAOIFI and the IFSB. As of 2023, Sukuk Islamic financial securities continue to be among the fastest-growing categories, where global issuances exceed $200bn every year (IFSB, 2023).
The defining feature of Sukuk which differentiates them from traditional bonds is the fact that they are backed by real asset ownership and return on a revenue sharing basis, not on a loan and lending basis. Such an organization contributes to financial stability by mitigating systemic risk, boosting asset utilization, and aligning finance with the real economy (Ali et al., 2022). Nations like Malaysia, Saudi Arabia, UAE and Indonesia have been successfully making use of Sukuk to finance infrastructure, education, health, and energy related projects. In Malaysia, Sukuk represented more than 60 per cent of aggregate national bond issues in 2022, used to finance essential national infrastructure and public services (Bank Negara Malaysia, 2023). Similarly, sovereign Sukuk in GCC states are employed to help cover budget deficits and attract overseas investment. Even non-Muslim-majority countries such as the United Kingdom have entered the Sukuk market to diversify their investment portfolios and promote ethical finance (Thomson Reuters, 2023). However, there are still obstacles ahead. Lack of standardized regulations, different interpretations of Shari’ah and limited investor protection are significant hindrances to global expansion. The difficulty in structuring Sukuk and enforcing contracts across countries further constrains its scalability (IMF, 2021). Addressing this regulatory and institutional disparity is essential to unlocking the full development potential of Sukuk in both Muslim and non-Muslim economies.
 

https://doi.org/10.5281/zenodo.17255256