Institutional Quality and Sukuk Development: A Study of Five OIC Countries

Nuhbatul Basyariah* -  Department of Sharia Banking, STEI Hamfara Yogyakarta, Indonesia
Hadri Kusuma -  Faculty of Business and Economics, Universitas Islam Indonesia, Indonesia
Ibnu Qizam -  Faculty of Economics and Business, UIN Syarif Hidayatullah Jakarta, Indonesia
DOI : 10.22515/shirkah.v5i3.335

The objective of this study is to shed some light on the effect of institutional quality on the development of the global sukuk market. Specifically, this study examines the impacts of the institutional quality that adopts three dimensions of the Worldwide Governance Indicators (WGI), i.e., Rule of Law (RL), Regulatory Quality (RQ), and Government effectiveness (GE) on the global sukuk development of the top-five countries of sukuk issuance, i.e., Malaysia, Kingdom of Saudi Arabia, United Arab Emirates, Indonesia, and Bahrain. Drawing on a quantitative study with the data in the forms of global sukuk issuance from 2002 to 2017, panel-data regression (OLS) and General Method of Moment (GMM) were applied. This study showed that RL and GE have a significantly positive effect on sukuk issuance; however, RQ did not influence the development of the global sukuk market. These results imply that a country that is capable to maintain the institutional quality, especially in terms of rule of law and government effectiveness, will most likely be the country that can successfully develop the sukuk market. These results play a crucial role in filling a research gap among previous studies and provide an empirical evidence of the government’s role and its influence on the sukuk development.

Keywords : Institutional Quality; Islamic Financial Development; Sukuk Development; Worldwide Governance Indicators

  1. Abd.Aziz, H., Idriss, U., & Echchabi, A. (2016). Does sukuk financing promote economic growth an emphasis on the major issuing countries. Turkish Journal of Islamic Economics, 3(2), 63–63. https://doi.org/10.15238/tujise.2016.3.2.63-73
  2. Adibuddin, A. F., Setiawan, D., & Sutopo, B. (2019). The recent development of islamic economic studies in indonesia. Shirkah Journal of Economics and Business, 4(1), 133–173. https://doi.org/10.22515/shirkah.v4i1.263
  3. Ahmad, N., Daud, S. N. M., & Kefeli, Z. (2012). Economic Forces and the sukuk market. Procedia - Social and Behavioral Sciences, 65(ICIBSoS), 127–133. https://doi.org/10.1016/j.sbspro.2012.11
  4. Alam, A., & Yazdifar, H. (2019). Institutional determinants of R & D investment : Evidence from emerging markets. Technological Forecasting & Social Change, 138, 34–44. https://doi.org/10.1016/j.techfore.2018.08.007
  5. Asian Development Bank. (2005). Improving the investment climate in Indonesia. In Asian Development Bank. Retrieved from https://www.adb.org/sites/default/files/publication/29709/improving-investment-climate-ino.pdf on September 20, 2020.
  6. BAPPENAS. (2016). Masterplan Arsitektur Keuangan Syariah Indonesia. Retrieved from https://www.bappenas.go.id/files/-publikasi_utama/Masterplan Arsitektur Keuangan Syariah Indonesia.pdf on August 18
  7. Borhan, N. A., & Ahmad, N. (2018). Identifying the determinants of Malaysian corporate Sukuk rating. International Journal of Islamic and Middle Eastern Finance and Management, 11(3), 432–448. https://doi.org/10.1108/IMEFM-02-2017-0045
  8. Buchanan, B. G., Le, Q. V., & Rishi, M. (2012). Foreign direct investment and institutional quality: Some empirical evidence. International Review of Financial Analysis, 21(24), 81–89. https://doi.org/10.1016/j.irfa.2011.10.001
  9. Challe, E., Ignacio, J., & Mengus, E. (2019). Journal of International Money and Finance Institutional quality and capital inflows : Theory and evidence q. Journal of International Money and Finance, 96, 168–191. https://doi.org/10.1016/j.jimonfin.2019.05.005
  10. Cherif, M., & Gazdar, K. (2010). Institutional and macroeconomic determinants of stock market development in mena region: new results from a panel data analysis. The International Journal of Banking and Finance, 7(1), 139–159.
  11. Choi, J. J., Lee, S. M., & Shoham, A. (2016). The effects of institutional distance on FDI inflow: General environmental institutions (GEI) versus minority investor protection institutions (MIP). International Business Review, 25(1), 114–123. https://doi.org/10.1016/j.ibusrev.2014.11.010
  12. Ekananda, M. (2016). Analisis ekonometrika data panel: teori lengkap dan pembahasan menyeluruh bagi penelitian ekonomi, bisnis, dan sosial (Edisi kedua). Jakarta: Mitra Wacana Media.
  13. Fagbemi, F., & Ajibike, J. O. (2018). Institutional quality and financial sector development : empirical evidence from Nigeria. American Journal of Business and Management, 7(1), 1–13. https://doi.org/10.11634/216796061807919
  14. Febrina, P., & Sumiyarni. (2014). Kelembagaan terhadap foreign direct investment di Asean 6. Media Ekonomi, 22, 241–260.
  15. Gani, A. (2007). Governance and foreign direct investment links: Evidence from panel data estimations. Applied Economics Letters, 14(10), 753–756. https://doi.org/10.1080/13504850600592598
  16. Globerman, S., & Shapiro, D. (2002). Global foreign direct investment flows: The role of governance infrastructure. World Development, 30(11), 1899–1919. https://doi.org/10.1016/S0305-750X(02)00110-9
  17. Hadiah, A. N. (2016). Financial services authority (OJK) policy on debt proportion and its impact on the profitability of DES listed companies in Indonesia. Shirkah: Journal of Economics and Business, 1(3), 327. https://doi.org/10.22515/shirkah.v1i3.29
  18. Hassan, M. K., Aliyu, S., Paltrinieri, A., & Khan, A. (2019). A Review of Islamic investment literature. Economic Papers, 38(4), 345–380. https://doi.org/10.1111/1759-3441.12230
  19. Hassan, M. K., Paltrinieri, A., Dreassi, A., Miani, S., & Sclip, A. (2018). The determinants of co-movement dynamics between sukuk and conventional bonds. Quarterly Review of Economics and Finance, 68, 73–84. https://doi.org/10.1016/j.qref.2017.09.003
  20. Huang, Y. (2010). Political Institutions and financial development : an empirical study. World Development, 38(12), 1667–1677. https://doi.org/10.1016/j.worlddev.2010.04.001
  21. Intapan, C., & Sriboonchitta, S. (2019). Structural changes and their econometric modeling. in springer nature Switzerland AG 2019 (Vol. 808). https://doi.org/10.1007/978-3-030-04263-9
  22. International Islamic Financial Market. (2014). Sukuk Report: A Comprehansive Study of the Global Sukuk Market. (November), 136. https://doi.org/10.1007/s13398-014-0173-7.2
  23. International Islamic Financial Market. (2018). IIFM Sukuk Report 2018 |7Th Edition. (April). Retrieved from www.LABUANIBFC.com on September 15, 2020.
  24. Jain, P. K., Kuvvet, E., & Pagano, M. S. (2017). Corruption’s impact on foreign portfolio investment. International Business Review, 26(1), 23–35. https://doi.org/10.1016/j.ibusrev.2016.05.004
  25. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2005). Governance Matters IV: Governance Indicators for 1996-2004. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.718081
  26. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2009). Governance matters VII: Aggregate and individual governance indicators 1996-2007. Non-State Actors as Standard Setters, (June), 146–188. https://doi.org/10.1017/CBO9780511635519.007
  27. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). Governance matters vii: aggregate and individual governance indicators, 1996-2007. SSRN Electronic Journal, (June). https://doi.org/10.2139/ssrn.1148386
  28. Keefer, S. K. and P. (1995). Institutions and economic performance: cross-country tests using alternative institutional measures. Economic and Politics, 7(3), 207–227. https://doi.org/10.1111/j.1468-0343.1995.tb00111.x
  29. Khan, M. A., Khan, M. A., Abdulahi, M. E., Liaqat, I., & Shah, S. S. H. (2019). Institutional quality and financial development: The United States perspective. Journal of Multinational Financial Management, 49, 67–80. https://doi.org/10.1016/j.mulfin.-2019.01.001
  30. Kusuma, K. A., & Silva, A. C. (2014). Sukuk Markets A Proposed Approach for Development. Policy Research Working Paper Series, (December), 41. https://doi.org/10.1596/1813-9450-7133
  31. Langbein, L., & Knack, S. (2012). The Worldwide Governance Indicators : Six , One , or None ? The Journal of Development Studies, 46, No 2(November 2012), 350–370. https://doi.org/10.1080/-00220380902952399
  32. Law, S. H., & Azman-Saini, W. N. W. (2012). Institutional quality, governance, and financial development. Economics of Governance, 13(3), 217–236. https://doi.org/10.1007/s10101-012-0112-z
  33. Ojeka, S., Adegboye, A., Adegboye, K., Umukoro, O., Dahunsi, O., & Ozordi, E. (2019). Corruption perception, institutional quality and performance of listed companies in Nigeria. Heliyon, 5(10), e02569. https://doi.org/10.1016/j.heliyon.2019.e02569
  34. Paltrinieri, A., Dreassi, A., Migliavacca, M., & Piserà, S. (2020). Islamic finance development and banking ESG scores: Evidence from a cross-country analysis. Research in International Business and Finance, 51, 1–13. https://doi.org/10.1016/j.ribaf.2019.101100
  35. Phuc, N., Schinckus, C., Dinh, S., Phuc Canh, N., Schinckus, C., & Thanh, S. D. (2019). Do economic openness and institutional quality influence patents? Evidence from GMM systems estimates. International Economics, 157(October), 134–169. https://doi.org/10.1016/j.inteco.2018.10.002
  36. Robinson, J. (1952). The Model of an Expanding Economy. The Economic Journal, 62(245), 42–53. http://www.jstor.org/stable/2227172
  37. Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86–136. https://doi.org/10.1177/1536867x0900900106
  38. Roe, M. J., & Siegel, J. I. (2011). Political instability: Effects on financial development, roots in the severity of economic inequality. Journal of Comparative Economics, 39(3), 279–309. https://doi.org/10.1016/j.jce.2011.02.001
  39. Said, A., & Grassa, R. (2013). The determinants of sukuk market development: Does macroeconomic factors influence the construction of certain structure of sukuk? Journal of Applied Finance & Banking, 3(5), 251–267. Retrieved from https://ssrn.com/abstract=2318233 on September 15, 2020.
  40. Smaoui, H., & Ghouma, H. (2020). Sukuk market development and Islamic banks’ capital ratios. Research in International Business and Finance, 51(17). https://doi.org/10.1016/j.ribaf.2019.101064
  41. Smaoui, H., & Khawaja, M. (2017). The Determinants of sukuk market development. Emerging Markets Finance and Trade, 53(7), 1501–1518. https://doi.org/10.1080/1540496X.2016.1224175
  42. Tran, H. T. (2018). Institutional quality and market selection in the transition to market economy. Journal of Business Venturing, 1–27. https://doi.org/10.1016/j.jbusvent.2018.07.001
  43. Wang, Y., Cheng, L., Wang, H., & Li, L. (2014). Institutional quality, financial development and OFDI. Pacific Science Review, 16(2), 127–132. https://doi.org/10.1016/j.pscr.2014.08.023
  44. Widarjono, A. (2007). Ekonometrika Pengantar dan Aplikasinya (Edisi Kedua). Yogyakarta: Ekonisia.
  45. Yustika, A. E. (2012). Ekonomi Kelembagaan: Paradigma, Teori, dan Kebijakan. Malang: Erlangga.

Shirkah: Journal of Economics and Business
Published by Faculty of Islamic Economics and Business (FEBI)
Institut Agama Islam Negeri Surakarta, Indonesia
Jln. Pandawa No. 1, Pucangan, Kartasura, Central Java, Indonesia, 57168
Phone: +62271-781516
Website: http://shirkah.or.id/new-ojs/index.php/home
Email: shirkahiainsurakarta@gmail.com

P-ISSN :2503-4235 | E-ISSN : 2503-4243

This ejournal system and it's contents licensed under
a Creative Commons Attribution-NonCommercial 4.0 International License