Borsa Istanbul Review (Jul 2023)
Constructing an index for participation finance
Abstract
In the aftermath of the 2008 global crisis, excessive financialization in the economic system, along with extreme shortening of the holding times of assets, led to a disconnection between the real economy and financial markets. In the post-crisis period, participation finance, which is expected to re-establish the eroded link between the real and financial economy, has attracted more attention. Countries are in an increasing competition at an international scale to benefit from relevant demand; however, the quantification process should be scrutinized in order to realize the potential of the sector and to create a benchmark for global market actors. Consequently, developing alternative approaches for comparing countries in the field is crucial. Evaluation of countries in the context of participation finance at a global scale is an emerging field in the literature. The approach in this study is to develop a new tool based on transparency and objectivity in participation finance and to provide benefits in the process of determining the participation finance rankings. Moreover, this study acts as an anchor for understanding global participation finance. In the study, country data are compiled from organizations that produce and share data on participation finance and countries are listed with a criteria importance through intercriteria correlation (CRITIC)-based technique for order preference by similarity to an ideal solution (TOPSIS) method. Using the CRITIC method, the theme of regulation and governance has the highest weight in participation finance, followed by banking and nonbanking sectors, education and research, and perception and awareness. Based on the weighted criteria, TOPSIS is used to produce rankings. The top three countries in the ranking are Malaysia, Indonesia, and Saudi Arabia. According to the weighting results applied to the variables, countries are recommended to take the following actions: establish institutions that will ensure compliance with the relevant legal framework, develop a legally based monitoring system, create areas for Islamic fintech research and development and related legislation.
