Long-run asymmetric effects of financial risks on Sukuk market development: empirical evidence from Malaysia

Purpose: The purpose of this study is to empirically investigate the asymmetric effects of financial risk on Sukuk market development for a sample of Malaysian countries over the period of 2010–2021. Design/methodology/approach: This study refers to the International Country Risk Guide (ICRG) in det...

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Published in:Journal of Islamic Accounting and Business Research
Main Author: Mohd Roslen S.N.; Chua M.-S.; Hj Mohd Ruslan R.A.
Format: Article
Language:English
Published: Emerald Publishing 2024
Online Access:https://www.scopus.com/inward/record.uri?eid=2-s2.0-85181443424&doi=10.1108%2fJIABR-08-2022-0200&partnerID=40&md5=d4590e3f3f0629fd164b1ebdfd1398d2
id 2-s2.0-85181443424
spelling 2-s2.0-85181443424
Mohd Roslen S.N.; Chua M.-S.; Hj Mohd Ruslan R.A.
Long-run asymmetric effects of financial risks on Sukuk market development: empirical evidence from Malaysia
2024
Journal of Islamic Accounting and Business Research


10.1108/JIABR-08-2022-0200
https://www.scopus.com/inward/record.uri?eid=2-s2.0-85181443424&doi=10.1108%2fJIABR-08-2022-0200&partnerID=40&md5=d4590e3f3f0629fd164b1ebdfd1398d2
Purpose: The purpose of this study is to empirically investigate the asymmetric effects of financial risk on Sukuk market development for a sample of Malaysian countries over the period of 2010–2021. Design/methodology/approach: This study refers to the International Country Risk Guide (ICRG) in determining the financial risk factors to be studied in addition to the Malaysia financial stress index (FSI) to capture changes in financial risk level. The authors use the nonlinear autoregressive distributed lag (NARDL) model to tackle the nonlinear relationships between identified financial risk variables and Sukuk market development. Findings: The results suggest the existence of a long-run relationship between foreign debt service stability, international liquidity stability (ILS), exchange rate stability (ERS) and financial stress level with the Sukuk market development in Malaysia. Indeed, higher ILS and ERS will boost Sukuk market size, whereas higher foreign debt services and financial stress are negatively related to Sukuk market development. Findings also indicate that the long-run positive and negative impacts of identified financial risk components on Sukuk market development are statistically different. Taking into account the role of the Sukuk market in facilitating Malaysia’s economic growth, the country should aim to keep the foreign debt-to-GDP ratio at a sustainable level. Research limitations/implications: This study points to three possible directions for future research. The first is the differential impact of financial risk components on Sukuk issuance for different Sukuk structures. As more data becomes available in the future, this area could be further explored by conducting the above analysis for different combinations of Sukuk structures and currency denominations. In addition, future researchers could also consider exploring the variability of financial risk impacts through comparative studies of the leading Sukuk-issuing countries to account for differences in regulatory frameworks and supporting infrastructure. Practical implications: This study provides valuable practical and policy implications for strengthening the growth of the Sukuk market. While benefiting from the diversification benefits of funding sources to finance private or government projects and developments, Malaysia should remain vigilant to global economic conditions, foreign exchange markets and financial stress levels, as all of these factors may significantly influence investor sentiment and the rate of return offered by Sukuk issuance. Originality/value: The use of the NARDL approach, which investigates the long-run effects of financial risk factors on Sukuk market development in Malaysia, makes this study a valuable addition to the literature, as there has been little research into the asymmetric effects of those variables on Sukuk market development using samples from emerging Asian markets. © 2023, Emerald Publishing Limited.
Emerald Publishing
17590817
English
Article

author Mohd Roslen S.N.; Chua M.-S.; Hj Mohd Ruslan R.A.
spellingShingle Mohd Roslen S.N.; Chua M.-S.; Hj Mohd Ruslan R.A.
Long-run asymmetric effects of financial risks on Sukuk market development: empirical evidence from Malaysia
author_facet Mohd Roslen S.N.; Chua M.-S.; Hj Mohd Ruslan R.A.
author_sort Mohd Roslen S.N.; Chua M.-S.; Hj Mohd Ruslan R.A.
title Long-run asymmetric effects of financial risks on Sukuk market development: empirical evidence from Malaysia
title_short Long-run asymmetric effects of financial risks on Sukuk market development: empirical evidence from Malaysia
title_full Long-run asymmetric effects of financial risks on Sukuk market development: empirical evidence from Malaysia
title_fullStr Long-run asymmetric effects of financial risks on Sukuk market development: empirical evidence from Malaysia
title_full_unstemmed Long-run asymmetric effects of financial risks on Sukuk market development: empirical evidence from Malaysia
title_sort Long-run asymmetric effects of financial risks on Sukuk market development: empirical evidence from Malaysia
publishDate 2024
container_title Journal of Islamic Accounting and Business Research
container_volume
container_issue
doi_str_mv 10.1108/JIABR-08-2022-0200
url https://www.scopus.com/inward/record.uri?eid=2-s2.0-85181443424&doi=10.1108%2fJIABR-08-2022-0200&partnerID=40&md5=d4590e3f3f0629fd164b1ebdfd1398d2
description Purpose: The purpose of this study is to empirically investigate the asymmetric effects of financial risk on Sukuk market development for a sample of Malaysian countries over the period of 2010–2021. Design/methodology/approach: This study refers to the International Country Risk Guide (ICRG) in determining the financial risk factors to be studied in addition to the Malaysia financial stress index (FSI) to capture changes in financial risk level. The authors use the nonlinear autoregressive distributed lag (NARDL) model to tackle the nonlinear relationships between identified financial risk variables and Sukuk market development. Findings: The results suggest the existence of a long-run relationship between foreign debt service stability, international liquidity stability (ILS), exchange rate stability (ERS) and financial stress level with the Sukuk market development in Malaysia. Indeed, higher ILS and ERS will boost Sukuk market size, whereas higher foreign debt services and financial stress are negatively related to Sukuk market development. Findings also indicate that the long-run positive and negative impacts of identified financial risk components on Sukuk market development are statistically different. Taking into account the role of the Sukuk market in facilitating Malaysia’s economic growth, the country should aim to keep the foreign debt-to-GDP ratio at a sustainable level. Research limitations/implications: This study points to three possible directions for future research. The first is the differential impact of financial risk components on Sukuk issuance for different Sukuk structures. As more data becomes available in the future, this area could be further explored by conducting the above analysis for different combinations of Sukuk structures and currency denominations. In addition, future researchers could also consider exploring the variability of financial risk impacts through comparative studies of the leading Sukuk-issuing countries to account for differences in regulatory frameworks and supporting infrastructure. Practical implications: This study provides valuable practical and policy implications for strengthening the growth of the Sukuk market. While benefiting from the diversification benefits of funding sources to finance private or government projects and developments, Malaysia should remain vigilant to global economic conditions, foreign exchange markets and financial stress levels, as all of these factors may significantly influence investor sentiment and the rate of return offered by Sukuk issuance. Originality/value: The use of the NARDL approach, which investigates the long-run effects of financial risk factors on Sukuk market development in Malaysia, makes this study a valuable addition to the literature, as there has been little research into the asymmetric effects of those variables on Sukuk market development using samples from emerging Asian markets. © 2023, Emerald Publishing Limited.
publisher Emerald Publishing
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language English
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