How does financial risk affect sukuk market development? Empirical evidence from ARDL approach

Abstract

Despite the great attention that sukuk received from Islamic financial systems, the academic literature on the determinants of sukuk market development (SMD) is both new and very limited. To our knowledge, this study is the first to empirically investigate the challenges to SMD in Saudi Arabia. The data were collected from in-depth Saudi Central Bank and ICRG databases over the period 2012Q1-2021Q1. Using ARDL approach, we analyse how the financial risk components affect the development of Saudi sukuk market. Our findings indicate that exchange rate stability, foreign debt stability and debt service stability seem to be the main drivers of the development of SMD in Saudi Arabia, while international liquidity stability and current account stability do not appear to play a major role. As policy implications, Saudi policymakers should strengthen financial stability to ensure a well-developed sukuk market.

Keywords

• Financial risk
• Sukuk market development
• ARDL approach