Research in International Business and Finance 41 (2017) 136147

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Research in International Business and Finance

journal homepage: www.elsevier.com/locate/ribaf

Does sukuk market development spur economic growth? MARK

a, b
Houcem Smaoui , Salem Nechi
a
Finance, Qatar University, P.O. Box 2713, Doha, Qatar
b
Economics, Qatar University, P.O. Box 2713 Doha, Qatar

AR TI CLE I NF O AB S T R A CT

JEL classication: We investigate the impact of sukuk market development on economic growth using a sample
G0 comprising all sukuk-issuing countries spanning the period 19952015. We use the system GMM
G1 estimator to tackle potential omitted variable bias, endogeneity, and simultaneity issues. We
G23 report a strong and robust evidence that sukuk market development is conducive to economic
G28
growth, even after controlling for various measures of nancial market development, institu-
H6
tional quality, and classical determinants of economic growth. In addition, the evidence does not
Keywords: support the well-known positive association between nancial development and economic
Sukuk markets
growth. We conclude that the development of sukuk markets may have promoted nancial
Government securities
inclusion by eliminating the negative eects of religious self-exclusion, which stimulates
Economic growth
Dynamic panel investment and economic growth.
GMM estimation

1. Introduction

The last decade has witnessed an unprecedented growth in the Islamic nancial services industry, reaching USD1.88 trillion by
the end of 2015 (IFSI, 2016),1 to the extent that Islamic nance has become part of G20 agenda. The recent success of the Islamic
nancial industry took place during a crisis period of the conventional nance industry. Many recent academic studies argue that the
Islamic nance industry exhibited less risk, better performance, and more stability than its conventional counterpart during the
recent global nancial crisis of 2008 (Beck et al., 2013; Chapra, 2008; Hasan and Dridi, 2010). They attribute this better performance
to the unique features of Islamic contracts and investment securities. Much of this expansion has been fueled by the extensive
issuance of sukuk, investment certicates that comply with Sharia2 principles, as an alternative to the issuance of xed income
securities or interest-based bonds. This is both as a mean of raising government funding through sovereign sukuk and as a way of
companies obtaining external nancing through the issuance of corporate sukuk. This tremendous growth is shown from the
signicant increase in the level of global sukuk issuance by nearly 250 times since 2001, from USD1.17 billion to USD290 billion by
the end of 2015 (IFSI, 2016).
Although the nance-growth nexus remains heavily disputed in the academic literature, it is now well established that nancial
development is broadly conducive to economic growth (Levine, 1997; Wachtel, 2001; King and Levine, 1993a, 1993b). Indeed,
nancial markets foster economic growth by stimulating capital accumulation and promoting ecient allocation of resources and
technological innovations (Thumrongvit et al., 2013). However, and despite more than two decades of sukuk isuances, the literature
addressing the macroeconomic eects of sukuk nancing and particularly its implications on growth is still sparse. Most available

Corresponding author.
E-mail addresses: hsmaoui@qu.edu.qa (H. Smaoui), snechi@qu.edu.qa (S. Nechi).
1
Islamic Financial Services Industry Stability Report 2016.
2
Islamic law.

http://dx.doi.org/10.1016/j.ribaf.2017.04.018
Received 20 February 2017; Accepted 7 April 2017
Available online 15 April 2017
0275-5319/ 2017 Elsevier B.V. All rights reserved.
H. Smaoui, S. Nechi Research in International Business and Finance 41 (2017) 136147

evidence is descriptive and anecdotal. Echchabi et al. (2016) is the only existing empirical study that addresses this issue for a sample
of 18 sukuk-issuing countries over the period 20052012 using the Granger Causality test. However, their results fail to identify a
signicant eect of sukuk issuance on GDP growth.
In this paper, we provide an empirical investigation of this particular issue. Precisely, we examine the impact of sukuk nancing
on economic growth using a sample comprising all sukuk-issuing countries for the period 19952015. Our analysis allows us to
answer the following questions: (1) Did sukuk market development promote economic growth? If so, through which channels? (2)
Does the eect of sukuk nancing on economic growth depend on the type of sukuk (sovereign vs corporate)?
These issues are of particular importance not only for countries that are active in sukuk markets, but also for countries that are yet
to make their debut in sukuk markets in the near future, as reported by the IFSI Stability Report 2016, in areas as diverse as Africa
(Cote dIvoire, Kenya, Mauritania, Morocco, and Tunisia among others), Europe (Luxembourg), the Middle-East (Jordan and Oman),
as well as Central Asia (Kazakhstan).
We argue that domestic sukuk market development contributes to the country's economic growth in many ways: First, sukuk
markets, by mobilizing savings, make nancing available to long-term debtors, thereby contributing to the ecient functioning of
capital markets. Since long-term funding is crucial to the economy's productivity gains, this role of capital rationing is of major
importance to the nance-growth link. Second, sukuk markets, along with bond and stock markets, contribute to the deepening of
the nancial market of an economy. For instance, in the absence of sukuk markets, banks tend to have reduced opportunities for
investing deposits and that may lead them to make unsound or suboptimal loans. Furthermore, an underdeveloped sukuk market
forces both insurance and pension funds companies to invest in short-term securities, which do not correspond to the liability side of
their balance sheet, thereby exposing them to maturity mismatches. A well-functioning sukuk market allows banks to invest in sukuk
certicates and hence mitigate information asymmetries, thereby fostering the ecient allocation of resources, essential for economic
growth. Third, a well-developed sukuk market coupled with an advanced nancial structure may stimulate economic growth through
technological innovations and enhanced labor productivity in the private sector. Fourth, sukuk certicates are based on risk-sharing,
meaning that the issuer and the investor share the risk of the investment and split the prots or losses between them on agreed terms.
This risk-sharing feature of sukuk will lead borrowers and lenders to share business risks in return of a share of prots, which may
spur investment, and hence economic growth. Finally, sukuk securities can drain the savings of devout Muslims who are not willing
to invest in interest-based bonds, since they do not satisfy the needs of pious individuals as they carry Riba (interest) prohibited by
Sharia principles. This could lead to higher nancial inclusion and thereby stimulate investment and economic growth. In the absence
of sukuk certicates, savings would not be used eciently and therefore not channeled to the formal nancial sector, which may
hinder investment and economic growth.
By way of review, we nd that the development of sukuk markets, both sovereign and corporate, plays an important role in
stimulating long-run economic growth, after controlling for various measures of nancial market development, the quality of
institutions, and the classical growth determinants. Moreover, the results show that government spending and trade openness seem to
exert a negative impact on economic growth, while the initial income level is positively and signicantly correlated with economic
growth. However, the evidence does not support the well-known positive association between nancial development and economic
growth.
The paper contributes to the existing literature in many ways. First, it contributes to a relatively unexplored area of research on
the potential eect of Islamic nance on economic growth. Further, the ndings contribute to our understanding of the channels
through which sukuk markets stimulate economic growth. Moreover, we address the link between sukuk market development and
economic growth using a dynamic panel model estimated with the system GMM estimator of Blundell and Bond (1998), which allows
us to tackle the problems of joint endogeneity of the independent variables and country heterogeneity (i.e., unobserved country-
specic eects), as well as potential omitted variable bias.
The reminder of the paper is organized as follows: Section 2 presents an overview of sukuk markets. Section 3 summarizes the
literature review. Section 4 describes our data and variables, while Section 5 explains our methodology. Section 6 discusses the
empirical results, and we conclude in Section 7.

2. Overview of sukuk markets

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) denes sukuk as certicates of equal value
representing undivided shares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular
projects or special investment activity, however, this is true after receipt of the value of the sukuk, the closing of the subscription and
the employment of funds received for the purpose for which the sukuk were issued. More simply, sukuk are asset-backed securities
that provide the holders with an ownership in the underlying asset as well as any prots in accordance with this ownership. However,
instead of paying a xed interest payment as in the case of bonds, the periodic payments to the sukuk holders are in the form of either
prot from a joint venture, lease payment, or prot from the sale of assets, depending on the structure of sukuk.
The development of the sukuk market has been spectacular in recent past years. Indeed, based on growth rates, sukuk market has
surpassed the vibrant Islamic banking sector as the fastest-growing sector of the Islamic nance services industry, expanding at
around 20% annual growth rate over the period 20082014 (see Fig. 1).
This tremendous growth has been spurred by a heightened interest among sovereign and corporate entities to tap the sukuk
market for funding, especially in the aftermath of the global nancial crisis. Furthermore, the issuer base of sukuk has expanded in
recent years with debut issuances by the United Kingdom, Luxembourg, Senegal, Hong Kong, and South Africa, while several other
countries remain in the pipeline for debut sukuk issuances in the near future, including, Mauritania, Morocco, Kenya and Tunisia

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H. Smaoui, S. Nechi Research in International Business and Finance 41 (2017) 136147

Fig. 1. Global sukuk outstanding trend (2003-11M15).

Source: Zawya, Bloomberg, IFSB.

among others.
Malaysia is the world's largest issuer of sukuk in terms of volume, accounting for 50.4% of the issuances in 2015, while Indonesia
ranks second, which accounted for an increased 13.2% of the issuances. The GCC3 countries of Saudi Arabia, the U.A.E. and Bahrain
complete the top ve, with share issuances of 11.8%, 8.9%, and 4.3% respectively in 2015.

3. Brief literature review

Although the eect of nancial development on economic growth remains heavily debated in the empirical literature, it is
obvious that nancial development has a positive impact on economic growth and that a well-functioning nancial system promotes
the eciency of investment and economic growth in a market economy. According to Levine (2004), nancial sector development
stimulates long-run growth through ve channels: (1) resource allocation and production of information; (2) monitoring managers
and exerting corporate control; (3) improving trading, hedging, and risk management; (4) mobilizing savings; and (5) easing the
exchange of goods and services. Each of these functions can inuence saving rates, investment decisions, and long-run economic
growth.
The literature on the nance-growth nexus began with the early work of Schumpeter (1912) who stressed the important role of
banks in nancing innovative rms and stimulating productivity. Since then, many studies produced strong evidence that nancial
development is favorable to economic growth (Gurley and Shaw, 1960; Goldsmith, 1969; McKinnon, 1973; Shaw, 1973). Although
insightful, these studies lacked analytical foundation. The work of King and Levine (1993a,b) and Levine (1997) revived the interest
in the nance-growth link. Using the insights and techniques of endogenous growth models, they documented a strong and robust
evidence that nancial development is positively correlated with economic growth. Numerous subsequent studies conrmed their
conclusions (Demirguc-Kunt and Maksimivic, 1998; Rajan and Zingales, 1998; Levine et al., 2000).
Levine and Zervos (1998) focused on the empirical relationship between stock market development, banking development and
economic growth. Using a sample of 42 countries over the period 19761993, their results show that the initial level of stock market
liquidity and the initial level of banking sector development are positively and strongly correlated with long-run economic growth.
The studies of Wachtel (2001), Trabelsi (2002), and Rioja and Valev (2003), among others, conrm the ndings of Levine and Zervos
(1998).
More recently, Thumrongvit et al. (2013) studied the eect of bond markets and stock markets on economic growth. Using both
cross-country ordinary least squares regressions and panel data analysis, their results show that stock market development spurs
economic growth and that government bonds exert a positive eect on economic growth.
While there is a plethora of empirical research on the impact of stock and bond markets on economic growth (Goldsmith, 1969;
Rousseau and Wachtel, 2000; Beck and Levine, 2004; Thumrongvit et al., 2013), studies on whether sukuk markets are also potent in
raising economic growth are very scarce, a void that this paper attempts to ll. The only study that addresses this issue is the one by
Echchabi et al. (2016) who studied whether sukuk nancing promotes economic growth using sample of 18 Sukuk-issuing countries
over a period 20052012. Using the Granger Causality test, their results fail to identify a signicant eect of sukuk issuance on GDP
growth.
The purpose of this study is to ll the gap in the empirical literature by examining the impact of sukuk market development on
economic growth for a sample of 18 countries over the period 19952015. In the next section, we present our data and describe the
variables used in the empirical analysis.

3
Gulf Cooperation Council.

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H. Smaoui, S. Nechi Research in International Business and Finance 41 (2017) 136147

4. Data and variables

4.1. Data

The sample size is constrained by the availability of the data on sukuk issuances. We averaged the data over 3-year non-
overlapping periods,4 which enables us not only to smooth business cycle uctuations, but also to focus on the medium-to long-run
eect of sukuk markets on economic growth. Table 1 presents the list of the countries in our sample.

4.2. Description of variables

4.2.1. Economic growth (g)

Our dependent variable, economic growth, is measured by the dierence of the log of real GDP per capita (Barro, 1991). The data
are in constant 2010 U.S. dollars and converted into US dollars using the exchange rates prevailing on the foreign exchange markets.

4.2.2. Initial income level (lgdpc)

We control for the initial income level using the log of initial real per capita GDP. The inclusion of this variable is based on the
neoclassical model that points out that poor countries tend to grow faster than advanced countries (Barro, 1991). According to Barro
and Sala-i-Martin (1995), a negative and signicant coecient of the initial income level indicates the presence of conditional growth
convergence.

4.2.3. Education (educ)

The theory and empirical evidence suggests that investment in human capital is a major determinant of economic growth (Solow,
1956; Lucas, 1988; Barro and Sala-i-Martin, 1995). To measure this variable, we use the primary school enrollment rate. We expect a
positive correlation between educ and economic growth.

4.2.4. Ination (inf)

Economic theories argue that ination is likely to hinder economic growth as it reects poor and unstable macroeconomic policies
and poor investment climate (Fischer, 1993; Bruno and Easterly, 1998). We measure ination using the annual percentage change in
consumer price index. We expect a negative relation between inf and economic growth.

4.2.5. Government consumption (govc)

We use the ratio of government consumption to GDP to control for the level of government consumption. This variable serves as a
proxy for the negative incidence of non-productive government expenditure and taxation (Filipovic, 2005; Cook and Uchida, 2003).
Indeed, higher government spending is associated with political corruption, oversized government, and a waste of public resources,
all of which will lead to a lower economic growth. Hence, a negative relationship is expected between govc and economic growth.

4.2.6. Trade openness (open)

It has long been argued in the growth literature that openness to international trade has a positive impact on economic growth
(Harrisson, 1996; Sachs and Warner, 1997; Grossman and Helpman, 1992). The premise is that open economies are more likely to
benet from technological transfer and economies of scales in the production, thereby leading to higher exports growth, increased
competition in local markets, and better allocation of resources, and hence fosters economic growth (Dollar, 1992). However,
openness to international trade could result in lower economic growth since it can render countries more vulnerable to exogenous
shocks, especially in the presence of high export concentration (Imam and Kpodar, 2015). We measure trade openness with the sum
of exports and imports of goods and services as a share of GDP.

4.2.7. Quality of institutions (inst)

The empirical literature has now reached a consensus that institutional quality is a major determinant of economic growth
(Easterly and Levine, 2003; Mauro, 1995; Knack and Keefer, 1995; Dollar and Kraay, 2003; Hall and Jones, 1999) since it shapes the
economic incentives in the economy, fosters better policy choices, and contributes to the ecient allocation of resources. Our proxy
for the quality of institutions is the indicator of rule of law gathered from the International Country Risk Guide (ICRG). This indicator
measures the popular observance of the law and the strength and impartiality of the legal system.

4.2.8. Sukuk market development

We argue that sukuk markets could contribute to the deepening of nancial markets and drain the savings of devout Muslims who
are not willing to invest in interest-based bonds, thereby leading to higher nancial inclusion and stimulate economic growth. To
conduct our analysis, we employ two measures of sukuk market development: (1) The ratio of sukuk market capitalization to GDP
measures the volume of sukuk issues (vsukuk). (2) The total number of sukuk transactions per year per country serves as a proxy for
the intensity of sukuk issuances in the country (nsuskuk).

4
Hence, period 1=19951997; period 2=19982000; and so on.

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Table 1
Sample countries.

Bahrain Oman
Bangladesh Pakistan
Brunei Qatar
Gambia Saudi Arabia
Hong Kong Singapore
Indonesia Switzerland
Kuwait Turkey
Luxembourg United Arab Emirates
Malaysia Yemen

4.2.9. Financial market development

It is now well established in the nance-growth literature that well-functioning nancial markets and nancial intermediaries
contribute to the ecient allocation of economic resources, and thereby stimulate economic growth (Demirguc-Kunt and Maksimivic,
1998; King and Levine, 1993a; Beck et al., 2000). We use in turn three measures of nancial market development: (i) Stock market
development is measured by the turnover ratio dened as the value of trades of domestic shares divided by total value of listed shares
(smd1), and the ratio of total value of stocks traded as a share of GDP (smd2); (ii) Banking system development is proxied by the ratio
of the total domestic credit provided by the banking system to GDP (credit); (iii) Bond market development is measured by the ratio of
bond market capitalization to GDP (bmd). The coecients of smd1, smd2, credit, and bmd are all expected to be positively related to
economic growth.
The data on sukuk is derived from Bloomberg. The institutional quality variable comes from the ICRG database. All remaining
data are gathered from the World Bank's World Development Indicators (WDI) database. Table 2 summarizes our variables, their
denitions, and their data sources.

5. Model and methodology

The primary objective of this study is to examine the impact of sukuk market development on economic growth using a dynamic
panel setting. To do so, we estimate the following dynamic panel model:
yi, t yi, t 1 = ( 1) yi, t 1 + xi, t + i, t
i, t = i + i, t (1)
where yi,t is the log of real per capita GDP, xi,t is the vector of explanatory variables described above, i is the unobserved country-
specic eect; i,t is the residual; i holds for the country (i = 1, , N); and t stands for the 3-year period (t = 1, 2, 3).
We can rewrite Eq. (1) as follows:
yi, t = yi, t 1 + xi, t + i, t (2)
There are at least three econometric problems associated with the estimation of Eq. (2): (i) the presence of the unobserved country
specic eects, i that are too dicult to measure, (ii) the simultaneity bias stemming from whether or not nancial development
occurs at the same time as economic growth takes place, and (iii) the endogeneity of the lagged dependent variable yi,t1 since it is,
by construction, correlated with the country-specic eects, i and hence correlated with the new error term i,t. To tackle these

Table 2
Denition of variables.

Variable Label Measure Exp. sign Source

Economic growth g Dierence of the log of real per capita GDP na WDI
Initial income level lgdpc Log of initial real per capita GDP WDI
Education educ Primary school enrolment rate + WDI
Ination inf Annual percentage change in Consumer price index WDI
Government consumption govc Ratio of government consumption to GDP WDI
Trade openness open The sum of exports and imports of goods and services as a share of GDP WDI
Institutions inst Law and Order + ICRG
Volume of sukuk vsukuk Sukuk market capitalization to GDP + Bloomberg
Intensity of sukuk nsukuk Number of sukuk issuances per country per year +
Sovereign sukuk ssukuk Sovereign sukuk market capitalization to GDP +
Corporate sukuk csukuk Corporate sukuk market capitalization to GDP +
Stock market development smd1 Turnover ratio dened as the value of trades of domestic shares divided by total value of + WDI
listed shares
smd2 Total value traded over GDP +
Banking system development credit Credit to private sector by commercial banks to GDP + WDI
Bond market development bmd The ratio of bond market capitalization to GDP + WDI
Oil revenues oilrev The ratio of oil revenues to GDP + WDI

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H. Smaoui, S. Nechi Research in International Business and Finance 41 (2017) 136147

econometric issues, we estimate our model using the system GMM estimator of Blundell and Bond (1998). This estimator combines,
within a system, the regression in rst dierences and the regression in levels. The instruments for the regression in dierences are
lagged endogenous and exogenous variables on or prior to (t 2), while for the regression in levels, the instruments are the lagged
rst dierences of the endogenous and exogenous variables.
The validity of the system GMM estimator rests on two key assumptions: the instruments used are valid and the residuals do not
exhibit serial correlation. To test both hypotheses, we run two specication tests. The rst is the Hansen test of over-identifying
restrictions whereby the null hypothesis is that the instruments are exogenous, i.e., uncorrelated with the residuals. The second is the
Arellano and Bover's (1995) test (AR2, henceforth), which examines whether the residuals are second-order serially correlated. Our
system GMM estimator is consistent if we cannot reject the null hypotheses under the Hansen test and the AR2 test.
Given the small size of our sample, not all the explanatory variables in our model can be assumed to be endogenous, as this
assumption will result in a huge number of instruments, which may exacerbate the over-tting problem. For this reason, the variables
of education and trade openness are treated as exogenous, while the variables of initial income, ination, government consumption,
quality of institutions, and more importantly nancial sector development and sukuk market development are all assumed to be
endogenous. This enables us to address simultaneity and reverse causality issues as well as the omitted variables bias.
It is worth mentioning that the system GMM estimator is biased downward in small samples.
(Blundell and Bond, 1998). To mitigate this problem, we employ the procedure of Calderon et al. (2000) that reduces the size of
the instrument matrix. Furthermore, given the small size of our sample, we employ the Windmeijer's (2005) small-sample correction
of the estimated variance.

6. Empirical results

6.1. Descriptive analysis

Table 3 reports descriptive statistics for the main variables used in our regression models. We observe that the average growth rate
for our sample countries is 1.19% over the period of study, ranging from a minimum of (19.04%) to a maximum of 13.37%. We also
note from Table 3 that the average proceeds of sukuk issuances amount to 1.22% of GDP and the average number of sukuk issues, per
country per year, is around 30 over the study period. Furthermore, we notice that the variables of education, ination, openness, and
nancial market development display a large variation over the study period. For instance, while the net enrolment rate in primary
education in Bahrain is 99.92% over the study period, it is at 56.25% in Yemen over the same period. Moreover, while Hong Kong has
an average trade openness of 353.46% over the study period, Bangladesh has an average openness to trade of only 35.38% over the
same period.
Table 4 shows the correlation coecients for the variables used in our main regressions. We note that volume of sukuk (vsukuk)
and intensity of sukuk (nsukuk) are positively but weakly correlated with economic growth. Moreover, while stock market
development as proxied by the turnover ratio (smd1) is positively correlated with economic growth, banking system development
(credit) and bond market development (bmd) are respectively negatively and uncorrelated with economic growth.

6.2. Regression analysis

Table 5 shows the results of the regressions on the impact of the volume of sukuk on economic growth for our sample of 18
countries over the period 19952015. We average the data over 3-year non-overlapping periods to focus on the long-run growth
eects. We notice that all our model specications pass, at the 1% level, the Hansen test and the AR2 test. This shows that the
instruments used are valid and that the error terms display no second order correlation. Hence, our system GMM estimator is
consistent. We note that, in all our specications, the initial level of income (lgdpc) is positively and signicantly related to economic
growth at the 1% level. This nding goes against Barro's (1991) hypothesis that poor countries tend to grow faster than rich countries.

Table 3
Descriptive statistics this table reports the descriptive statistics of our main variables for the sample of 18 countries between 1995 and 2015.

Variable N Mean Std. dev. Min Max

g 352 1.192 4.0431 19.045 13.374

lgdpc 354 9.336 1.680 6.102 11.608
educ 201 90.332 10.500 56.252 99.919
inf 347 5.939 11.748 4.863 88.107
govc 357 13.917 6.2321 4.629 33.011
open 356 132.132 106.733 26.076 455.276
inst 378 4.3888 1.1860 1 6
vsukuk 375 1.226 4.031 0 38.253
nsukuk 378 30.478 138.471 0 1166
smd1 248 54.530 63.900 0 467.949
smd2 276 66.236 124.406 0 952.667
credit 368 60.265 47.962 3.014 233.394
bmd 174 36.219 24.939 0 111.274

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Table 4
Correlation matrix. This table shows the correlation coecients for the variables used in our main regression models. The sample period is 19952015. The denitions
of our variables appear in Table 2.

G lgdpc educ inf govc open inst vSukuk nSukuk smd1 smd2 credit bmd

G 1.000
Lgdpc 0.219 1.000
Educ 0.032 0.616 1.000
Inf 0.058 0.276 0.131 1.000
Govc 0.110 0.461 0.158 0.072 1.000
Open 0.109 0.580 0.335 0.331 0.309 1.000
Inst 0.197 0.881 0.366 0.233 0.517 0.547 1.000
vSukuk 0.094 0.078 0.054 0.132 0.090 0.137 0.085 1.000
nSukuk 0.059 0.109 0.108 0.157 0.008 0.272 0.142 0.714 1.000
smd1 0.108 0.307 0.453 0.287 0.020 0.546 0.185 0.169 0.224 1.000
smd2 0.108 0.319 0.041 0.179 0.085 0.149 0.269 0.059 0.070 0.406 1.000
Credit 0.263 0.660 0.414 0.468 0.035 0.482 0.483 0.146 0.224 0.326 0.517 1.000
Bmd 0.021 0.126 0.089 0.178 0.199 0.087 0.219 0.662 0.795 0.072 0.180 0.416 1.000

The results in Table 5 indicate that the coecient of vsukuk is positively and signicantly correlated with economic growth at the
5% level, across all the specications. This nding conrms our theoretical predictions and suggests that the volume of sukuk has had
a positive impact on the long-run economic growth. As expected, the coecient of govc is negative and signicant at the 5% level in
all our models, except in model (6) where it is positive but insignicant. This nding is consistent with Cook and Uchida (2003) and
Filipovic (2005) and suggests that higher government spending is associated with political corruption, oversized government, and a
waste of public resources, which will lead to a lower economic growth. More interestingly, the coecient of open loads negative in all
our specications, but only signicant in models (2), (4) and (6). This nding partially supports the predication that openness to
international trade could result in lower economic growth since it can render countries more vulnerable to exogenous shocks,
especially in the presence of high export concentration (Imam and Kpodar, 2015). The coecient of educ is expectedly positive in all
our models, but statistically insignicant at the 5% level. The majority of the coecients of inf display the expected negative sign, but

Table 5
Impact of volume of Sukuk on economic growth. This table shows the results of the regressions estimated with the system GMM procedure of Blundell and Bond (1998)
for our sample of 18 countries for the period 19952015. Data are averaged over 3-year periods. The dependent variable is economic growth measured by the rst
dierence of the log of real per capita GDP. The denitions of our variables appear in Table 2. All variables are entered either as logarithm or as log(1 + variable). The
Hansen (1982) test tests the validity of our instruments, while AR2 is the Arellano and Bond (1991) test of the absence of second order autocorrelation in the
dierenced residuals. ***, **, * refer to the 1, 5 and 10% levels of signicance respectively. Windmeijer (2005) nite-sample correction is employed. Robust standard
errors consistent in the presence of heteroscedasticity and autocorrelation within the panel are reported.

Explanatory variables (1) (2) (3) (4) (5) (6)

Initial income 0.008*** 0.043*** 0.029*** 0.026*** 0.026*** 0.022***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.0000
Education 0.219* 0.024 0.160* 0.091 0.211 0.255***
(0.055) (0.820) (0.097) (0.315) (0.313) (0.000)
Ination 0.003 0.005 0.013 0.013 0.008 0.007
(0.927) (0.784) (0.686) (0.475) (0.323) (0.843)
Government consumption 0.212** 0.181*** 0.229** 0.215*** 0.293*** 0.015
(0.045) (0.000) (0.013) (0.003) (0.001) (0.743)
Trade openness 0.037* 0.041** 0.053 0.062** 0.037 0.037***
(0.066) (0.049) (0.140) (0.037) (0.539) (0.003)
Volume of sukuk 0.363** 0.514*** 0.414** 0.567** 0.545** 0.222**
(0.032) (0.000) (0.041) (0.026) (0.010) (0.025)
Quality of institutions 0.174
(0.104)
Turnover ratio 0.015
(0.387)
Stocks traded 0.008
(0.552)
Bank credit 0.030
(0.763)
Bond market development 0.004
(0.794)
Constant 0.316 0.413 0.157 0.257 0.119 0.739**
(0.530) (0.331) (0.762) (0.569) (0.875) (0.024)

Hansen test 0.160 0.896 0.932 1.000 0.987 1.000

AR2 test 0.284 0.165 0.170 0.180 0.272 0.176
N 36 36 27 31 36 22
Number of instruments 13 21 16 25 21 16

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H. Smaoui, S. Nechi Research in International Business and Finance 41 (2017) 136147

Table 6
Impact of intensity of sukuk on economic growth. This table shows the results of the regressions estimated with the system GMM procedure of Blundell and Bond
(1998) for our sample of 18 countries for the period 19952015. Data are averaged over 3-year periods. The dependent variable is economic growth measured by the
rst dierence of the log of real per capita GDP. The denitions of our variables appear in Table 2. All variables are entered either as logarithm or as log(1 + variable).
The Hansen (1982) test tests the validity of our instruments, while AR2 is the Arellano and Bond (1991) test of the absence of second order autocorrelation in the
dierenced residuals. ***, **, * refer to the 1, 5 and 10% levels of signicance respectively. Windmeijer (2005) nite-sample correction is employed. Robust standard
errors consistent in the presence of heteroscedasticity and autocorrelation within the panel are reported.

Explanatory variables (1) (2) (3) (4) (5) (6)

Initial income 0.013*** 0.030*** 0.034*** 0.031*** 0.021*** 0.019***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Education 0.191 0.104 0.110 0.075 0.185 0.247***
(0.105) (0.592) (0.346) (0.524) (0.338) (0.000)
Ination 0.009 0.016 0.013 0.033 0.016 0.007
(0.770) (0.345) (0.721) (0.222) (0.649) (0.848)
Government consumption 0.229** 0.251*** 0.213** 0.268*** 0.267* 0.014
(0.036) (0.001) (0.024) (0.001) (0.053) (0.731)
Trade openness 0.041** 0.053** 0.069 0.066** 0.042 0.043***
(0.040) (0.031) (0.122) (0.034) (0.438) (0.002)
Intensity of sukuk 0.007** 0.009*** 0.009** 0.009** 0.009** 0.006**
(0.042) (0.009) (0.048) (0.020) (0.047) (0.014)
Quality of institutions 0.038
(0.790)
Turnover ratio 0.003
(0.840)
Stocks traded 0.003
(0.839)
Bank credit 0.014
(0.872)
Bond market development 0.005
(0.742)
Constant 0.163 0.250 0.095 0.439 0.014 0.698**
(0.735) (0.728) (0.884) (0.472) (0.956) (0.020)

Hansen test 0.267 0.942 0.999 0.952 0.656 1.000

AR2 test 0.265 0.242 0.187 0.135 0.298 0.18
N 36 36 27 31 36 22
Number of instruments 13 18 21 20 16 16

never signicant in any of the model specications. These ndings suggest that education and ination do not appear to be key
determinants of economic growth.
In model specications (2)(6), we control in turn for: the quality of institutions (inst), stock market development (smd1 and
smd2), bank development (credit), and bond market development (bmd). The results indicate that none of these variables is
signicantly related to economic growth at conventional levels.
Table 6 reports the results of the regressions on the link between the intensity of sukuk issues (nsukuk) and economic growth. We
note that all our model specications pass the Hansen test that the instruments used are exogenous and the AR2 test that the residuals
display no second order correlation. We note from Table 6 that education and ination are not signicantly related to economic
growth, expect in model (6) where the coecient of education is positive and signicant at conventional levels. Consistent with our
earlier ndings, government consumption has a negative impact on economic growth, since the majority of the coecients of govc are
negative and signicant. This nding supports Cook and Uchida's (2003) prediction that government spending is considered as a
measure of the political corruption and hence should have a negative eect on the long-run economic growth.
The results in Table 6 show that the coecients of the intensity of sukuk (nsukuk) are positive and enter the regressions in a
signicant way, whatever the specication. This nding suggests that the intensity of sukuk issues exert a positive eect on the long-
run sustainable growth in the country. We also note that the quality of institutions and the dierent measures of nancial market
development are not signicantly correlated with economic growth. This result contradicts with the well-known evidence found in
the empirical nance-growth literature that nancial market development matters for growth.
All in all, the results show that government spending and trade openness seem to exert a negative impact on economic growth,
while the initial income level is positively and signicantly correlated with economic growth. More interestingly, our two measures of
sukuk market development, namely the volume of sukuk and the intensity of sukuk, display a positive and signicant eect on
economic growth, across all our model specications. Moreover, the evidence does not support the well-known positive association
between nancial development and economic growth. This result is consistent with Barajas et al. (2013) that argue that the positive
and strong relationship between nancial sector development and economic growth is consistently weaker in the Middle Eastern and
North African (MENA) as well as net oil-exporting countries. Strikingly, these countries, with sizable Muslim populations, tend to
underperform on nancial inclusion5 when compared to countries that exhibit similar levels of nancial development. Barajas et al.

5
The World Bank denes nancial inclusion as the share of the population who use nancial services.

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H. Smaoui, S. Nechi Research in International Business and Finance 41 (2017) 136147

Table 7
Impact of volume of sovereign sukuk on economic growth. This table shows the results of the regressions estimated with the system GMM procedure of Blundell and
Bond (1998) for our sample of 18 countries for the period 19952015. Data are averaged over 3-year periods. The dependent variable is economic growth measured by
the rst dierence of the log of real per capita GDP. The denitions of our variables appear in Table 2. All variables are entered either as logarithm or as log
(1 + variable). The Hansen (1982) test tests the validity of our instruments, while AR2 is the Arellano and Bond (1991) test of the absence of second order
autocorrelation in the dierenced residuals. ***, **, * refer to the 1, 5 and 10% levels of signicance respectively. Windmeijer (2005) nite-sample correction is
employed. Robust standard errors consistent in the presence of heteroscedasticity and autocorrelation within the panel are reported.

Explanatory variables (1) (2) (3) (4) (5) (6)

Initial income 0.028*** 0.041*** 0.068*** 0.029*** 0.013*** 0.024***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Education 0.142 0.070 0.023 0.081 0.103* 0.138
(0.304) (0.931) (0.734) (0.121) (0.050) (0.634)
Ination 0.003 0.010 0.041* 0.018 0.006 0.059***
(0.907) (0.599) (0.08) (0.602) (0.794) (0.004)
Government consumption 0.271*** 0.197*** 0.339*** 0.236*** 0.223*** 0.081
(0.007) (0.000) (0.000) (0.000) (0.000) (0.448)
Trade openness 0.049** 0.019 0.091*** 0.040*** 0.078*** 0.022
(0.031) (0.220) (0.000) (0.006) (0.001) (0.447)
Sovereign sukuk 1.489** 1.394*** 1.656*** 1.385*** 1.007** 0.066
(0.014) (0.000) (0.000) (0.000) (0.011) (0.129)
Quality of institutions 0.192***
(0.002)
Turnover ratio 0.014
(0.104)
Stocks traded 0.001
(0.897)
Bank credit 0.052***
(0.005)
Bond market development 0.066
(0.129)
Constant 0.042 0.522 0.822** 0.165 0.175 1.125
(0.955) (0.185) (0.010) (0.584) (0.519) (0.361)

Hansen test 0.877 0.940 1.000 1.000 1.000 1.000

AR2 test 0.292 0.272 0.232 0.156 0.295 0.590
N 22 22 16 18 22 14
Number of instruments 14 18 16 18 21 14

(2013) conclude that the lack of nancial inclusion may explain the lower economic growth in these MENA oil-exporting countries. In
addition, Bhattacharya and Wolde, 2012 show that the weaker access to long-term credit is the major factor explaining the lower
economic growth in the MENA countries when compared to the rest of the world.
Since MENA and oil-exporting Muslim countries dominate our sample,6 we conclude that the development of sukuk markets may
have contributed to the nancial inclusion by mitigating the incidence of religious voluntary exclusion, thereby draining the savings
of devout Muslims who are not willing to invest in interest-based bonds, which stimulates investment and economic growth.

6.3. Robustness checks

To investigate the robustness of our results, we conducted two robustness tests. First, we examined whether the type of sukuk
(sovereign vs corporate) has an impact on economic growth. To do so, we measure sovereign sukuk with the ratio of proceeds from
sovereign sukuk to GDP (ssukuk), while corporate sukuk is measured with the total proceeds for corporate sukuk issuances as a share
of GDP. Table 7 shows the results of the impact of sovereign sukuk on economic growth. Consistent with the ndings reported in
Tables 5 and 6, the coecient of government consumption remains negative and signicant in all our regressions, except in model (6)
where it is insignicant at the 5% level. In addition, openness to trade continues to have a negative and signicant impact on
economic growth, since the regression coecients are all negative but signicant in four of our six model specications.
Turning to our variable of interest, the results in Table 7 show that the coecients of sovereign sukuk (ssukuk) load positive and
signicant at conventional levels across all specications, except in model (6) where it is positive but insignicant at the 5% level.
This nding provides evidence that the development of sovereign sukuk markets fosters economic growth.
Among the other control variables, we notice that the coecient of credit is positive and signicant at the 1% level. This result is
consistent with Beck and Levine (2004) and suggests that the development of the banking sector is a key determinant of economic
growth. We also note from Table 7 that the coecient of the quality of institutions is unexpectedly negative and signicant at the 1%
level, which is in contradiction with the results of the various studies that argue that well-developed institutions matter for economic
growth (Hall and Jones, 1999; Easterly and Levine, 2003).
Table 8 displays the results of the regressions of the impact on corporate sukuk on economic growth. Interestingly, in all our

6
In our sample, these countries are: Bahrain, Brunei, Kuwait, Oman, Qatar, Malaysia, Saudi Arabia, Yemen, and the United Arab Emirates.

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H. Smaoui, S. Nechi Research in International Business and Finance 41 (2017) 136147

Table 8
Impact of volume of corporate Sukuk on economic growth. This table shows the results of the regressions estimated with the system GMM procedure of Blundell and
Bond (1998) for our sample of 18 countries for the period 19952015. Data are averaged over 3-year periods. The dependent variable is economic growth measured by
the rst dierence of the log of real per capita GDP. The denitions of our variables appear in Table 2. All variables are entered either as logarithm or as log
(1 + variable). The Hansen (1982) test tests the validity of our instruments, while AR2 is the Arellano and Bond (1991) test of the absence of second order
autocorrelation in the dierenced residuals. ***, **, * refer to the 1, 5 and 10% levels of signicance respectively. Windmeijer (2005) nite-sample correction is
employed. Robust standard errors consistent in the presence of heteroscedasticity and autocorrelation within the panel are reported.

Explanatory variables (1) (2) (3) (4) (5) (6)

Initial income 0.007*** 0.001*** 0.005*** 0.001*** 0.005*** 0.018***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Education 0.136 0.166 0.158** 0.127** 0.142 0.223***
(0.115) (0.319) (0.026) (0.042) (0.174) (0.000)
Ination 0.007 0.216 0.001 0.035 0.004 0.016
(0.902) (0.246) (0.959) (0.112) (0.923) (0.558)
Government consumption 0.210 0.216 0.132 0.119*** 0.178 0.019
(0.202) (0.246) (0.177) (0.003) (0.322) (0.557)
Trade openness 0.038 0.040 0.039 0.021* 0.027 0.033**
(0.277) (0.347) (0.113) (0.085) (0.636) (0.010)
Corporate sukuk 0.458** 0.434** 0.387*** 0.492*** 0.503*** 0.297**
(0.013) (0.023) (0.009) (0.000) (0.002) (0.012)
Quality of institutions 0.056
(0.840)
Turnover ratio 0.004
(0.635)
Stocks traded 0.011
(0.237)
Bank credit 0.012
(0.792)
Bond market development 0.000
(0.972)
Constant 0.072 0.026 0.214 0.217 0.028 0.705***
(0.910) (0.965) (0.561) (0.377) (0.969) (0.002)

Hansen test 0.988 0.985 0.985 1.000 0.982 1.000

AR2 test 0.269 0.318 0.292 0.271 0.259 0.272
N 29 29 25 28 29 21
Number of instruments 18 18 21 25 21 16

models, the initial level of income is negatively and signicantly related to economic growth. This result supports the hypothesis of
conditional growth convergence across our sample countries (Barro and Sala-i-Martin, 1995). We note that coecient of government
consumption is negative and signicant only in model (4).
Moreover, the coecient of corporate sukuk (csukuk) is expectedly positive and signicant at the 5% signicance level across all
our model specications. This nding provides evidence that the development of the corporate sukuk market is conducive to
economic growth.
Our second robustness check considers the impact of oil revenues on economic growth. Indeed, the majority of our sample
countries are net-oil exporters. It may be that the economic growth in these countries is driven by the revenues of oil exports. We
control for the impact of oil revenues on growth with the ratio of total oil revenues to GDP.
The results that appear in Table 9 indicate the coecients of oil revenues are all positive as expected, but only signicant in
specications (3), (4), and (6). This result provides partial evidence that oil revenues have had a positive impact on economic growth.
We also note from Table 9 that, even after controlling for the impact of oil revenues, the coecients of volume of sukuk remain
positive and signicant in all our specications, except in model (6) where it is insignicant at the 5% level. It is worth noting that the
coecient of turnover ratio loads positive and signicant at the 1% level, indicating that stock market development has a positive
impact on economic growth.

7. Conclusion

The objective of this study is to examine the impact of sukuk market development on the long-run economic growth for a sample
of 18 sukuk-issuing countries spanning the period from 1995 to 2015. We employ the system GMM procedure of Blundell and Bond
(1998) in order to tackle the potential problems of omitted variable bias, simultaneity, and endogeneity of explanatory variables. We
characterize sukuk market development along two dimensions: the volume of sukuk measured by sukuk market capitalization as a
share of GDP, and the intensity of sukuk proxied by the number of sukuk issues per year per country. The results indicate that
government consumption, as a proxy for the corruption in the government, has had a negative impact on economic growth.
Furthermore, the openness to international trade is negatively and signicantly correlated with economic growth. The results also
show that the development of sukuk markets plays an important role in stimulating long-run economic growth, even after controlling
for various measures of nancial market development, the quality of institutions, as well as the determinants of economic growth that

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H. Smaoui, S. Nechi Research in International Business and Finance 41 (2017) 136147

Table 9
Control for oil revenues. This table shows the results of the regressions estimated with the system GMM procedure of Blundell and Bond (1998) for our sample of 18
countries for the period 19952015. Data are averaged over 3-year periods. The dependent variable is economic growth measured by the rst dierence of the log of
real per capita GDP. The denitions of our variables appear in Table 2. All variables are entered either as logarithm or as log(1 + variable). The Hansen (1982) test
tests the validity of our instruments, while AR2 is the Arellano and Bond (1991) test of the absence of second order autocorrelation in the dierenced residuals. ***, **,
* refer to the 1, 5 and 10% levels of signicance respectively. Windmeijer (2005) nite-sample correction is employed. Robust standard errors consistent in the
presence of heteroscedasticity and autocorrelation within the panel are reported.

Explanatory variables (1) (2) (3) (4) (5) (6)

Initial income 0.017*** 0.005*** 0.033*** 0.011*** 0.027*** 0.025***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.0000
Education 0.230*** 0.220** 0.576*** 0.347*** 0.241*** 0.166
(0.002) (0.035) (0.000) (0.000) (0.004) (0.140)
Ination 0.009 0.005 0.005 0.025 0.008 0.004
(0.729) (0.797) (0.829) (0.328) (0.596) (0.736)
Government consumption 0.087 0.150 0.152*** 0.117** 0.102 0.103**
(0.460) (0.154) (0.008) (0.028) (0.317) (0.029)
Trade openness 0.049** 0.060** 0.050** 0.112*** 0.094 0.083**
(0.033) (0.012) (0.023) (0.000) (0.167) (0.017)
Volume of sukuk 0.400** 0.456*** 0.451*** 0.386*** 0.348*** 0.155
(0.024) (0.016) (0.000) (0.008) (0.004) (0.159)
Oil revenues 0.0160 0.014 0.044*** 0.016** 0.030 0.028***
(0.309) (0.511) (0.000) (0.031) (0.286) (0.009)
Quality of institutions 0.021
(0.874)
Turnover ratio 0.074***
(0.001)
Stocks traded 0.048*
(0.059)
Bank credit 0.040
(0.553)
Bond market development 0.348
(0.411)
Constant 0.449 0.328 2.039*** 0.714*** 0.328 0.739**
(0.265) (0.524) (0.762) (0.001) (0.423) (0.024)

Hansen test 0.959 1.000 1.000 1.000 1.000 1.000

AR2 test 0.364 0.271 0.274 0.407 0.422 0.189
N 28 28 22 26 28 19
Number of instruments 15 19 22 26 22 19

are widely used in the nance-growth empirical literature. In addition, this nding is robust to the inclusion of oil revenues in our
regression models and to the decomposition of sukuk into sovereign and corporate sukuk. Indeed, the evidence shows that both
sovereign and corporate sukuk seem to exert a positive impact on economic growth.
Finally, the evidence shows that nancial market deepening does not appear to have a meaningful impact on economic growth,
which supports the conclusions of the recent studies that argue that the lower levels of nancial inclusion exhibited by the MENA
countries could explain the weak association between nancial sector development and economic growth (Barajas et al., 2013;
Bhattacharya and Wolde, 2012). We conclude that the development of sukuk markets may have promoted nancial inclusion by
eliminating the negative eects of religious self-exclusion, thereby draining the savings of devout Muslims who are not willing to
invest in interest-based bonds, which stimulates investment and hence economic growth. However, this evidence is only a suggestive
one. Future research should thoroughly examine the impact of sukuk market development on various measures of nancial inclusion,
and study the eect of the lack of nancial inclusion on economic growth, poverty reduction, or income inequality.

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