Does Sukuk market development promote economic growth?

Purpose – This paper aims to explain the relationship between sukuk market and economic growth. In this context, the study investigates the impact of sukuk market development on economic growth for nine countries (Brunei, Indonesia, Jordan, Kuwait, Malaysia, Nigeria, Saudi Arabia, Pakistan and Turkey) which have Islamic ﬁ nanceandbanking system. Design/methodology/approach – The study analyzed the data of nine countries as Brunei, Indonesia, Jordan, Kuwait, Malaysia, Nigeria, Saudi Arabia, Pakistan and Turkey for periods between 2014Q1 and 2017Q4. As a part of gross domestic product, total sukuk export measured by the sukuk market and the sukuk density which was considered as annual sukuk export per country were used to determine sukuk marketdevelopment. In ﬂ ation,trade de ﬁ cit and ﬁ nancial stressserieswere used as control variables. Findings – It was determined that there was a long-term cointegrated relationship between sukuk market development and economic growth. Sukuk volume and sukuk density had a positive effect on growth in the long run. One unit increase in sukuk volume increased growth by 0.5%, while increase in sukuk density increased growth by 1.7%. According to short-term relationships, it was seen that sukuk variables did not have aneffect ongrowth.However,sukuk exportscontributedpositively togrowth ratesin thelong run. Research limitations/implications – The ﬁ ndings of this study are limited with nine countries (Brunei, Indonesia, Jordan, Kuwait, Malaysia, Nigeria, Saudi Arabia, Pakistan and Turkey). Also, the accessible data of sukuk market was used and the periods of 2014Q1 – 2017Q4 was analyzed in a study. Accordingly, future studies can ﬁ nd different results for different countries which has Islamic ﬁ nance and banking system for differentperiods in theglobalmarket. Originality/value – This study provides empirical ﬁ ndings to the related literature, and it proves that sukuk market development contributes positively to the economic growth of countries including Islamic ﬁ nanceandbanking system in thelong run.


Introduction
It is a fact that banking sector is so important for economic development and growth. Recent financial crises show that current conventional banking system has some deficiencies. In this point, Islamic banking system which is thought to be an alternative model has entered to banking sector of many countries (Gedikli and Erdo gan, 2016). Islamic banking system is not so old formally, but it is seen that Islamic finance and banking system achieved a great growth in the past decades (Zaher and Hassan, 2001). For example, total asset growth was US$1.88tn and global Islamic banking assets were US$1.493tn by 2016 [IFSB (Islamic Financial Services Board), 2017, p. 7]. Islamic banking and finance system can be explained through two basic theories. First theory determines that Islamic banks make a bridge between fund holders and businesses. According to banking theory, this role is similar to brokers who make a bridge between lenders and debtors. Second theory determines that Islamic banks finance equity in the same way as leasing finance and credit purchase. In this context, Islamic banks and conventional banks have some similarities (Al-Jarbi, 2007, p. 19). Essentially, Islamic banking works by Sharia, and this banking system corresponds to Islamic values and ethics (Ahmad and Shabbir, 2015, p. 4).
The term of Islamic banking is derived from Islamic finance model. Islamic finance model is responsible for values as "sustainable, ethical, social and ecological", and these values make the model so different from conventional finance model (Khan et al., 2017, p. 311). In addition, it is thought that Islamic finance model can provide social justice in a society through its profit-sharing approach (Noordin et al., 2018). Although Islamic banking system was born in Muslim countries, this alternative banking system has been seen in Non-Muslim countries for a long time (Usai, 2017). Every country may use Islamic banking system, but they can change the model or transform the model based on their financial system. According to Yıldırım and Yıldırım (2018, pp. 266-268) Islamic investment and financial products are quickly becoming a part of the world economy because most of the money comes from Muslim countries (Abdel-Khaleq and Richardson, 2006, p. 409). All financial transactions, products and services of Islamic banks should not include any of haram elements such as interest-based transactions, conventional insurance, gambling and arms, alcohol and swine. The most common transactions among the financial instruments are "murabaha (sales contract), ijarah (leasing based) and mudarabaha (partnership)". Sukuk is the most common Islamic capital market instrument based on these transactions (Thomson Reuters, 2017, p. 8). Sukuk which is based on Shariah's principles, is seen as an alternative investment instrument in a global financial market (Alswaidan, 2013 (Shapoor et al., 2015). The term of sukuk is based on plural of word Sakk (Arabic: Sakk ‫ﺹ‬ ‫ﻙ‬ , Sukuk ‫ﺹ‬ ‫ﻙ‬ ‫ﻭ‬ ‫ﻙ‬ ). In the Arabic meaning, sakk-sukuk presents Islamic investment trust certificate. The sukuk term is accepted as a plural word and the modern usage of sukuk term presents Islamic Bonds and Debts in the context of Shariah principles (Alswaidan, 2013). In sukuk model, there are asset-backed securities for owners that the pre-agreed profit sharing rate is accepted by sides and there will no interestbased transaction in the whole process (Smaoui and Khawaja, 2017). In practical form, sukuk and bonds are similar. For example, both of bonds and sukuk have a nominal value but the working principles are different. Sukuk is based on Islamic law, and it works without interest, but bonds are conventional products and they works with interest (Ahroum and Achchab, 2017). Sukuk provides low-risk bonds for investors (Individual) and also it provides cheaper source of debts for companies (Rafay et al., 2017).
The global sukuk market is almost under the domination of GCC (The Persian Gulf Corporation) and SEA (South East Asia) countries, UAE, Saudi Arabia, Bahrain, Qatar, Kuwait (from GCC countries) are leading the global sukuk market. Although Malaysia plays a major role in the global sukuk market, Indonesia and Singapore (from SEA countries) are also important players in the global sukuk market. On the other side, countries such as Pakistan, Japan, USA, UK, Germany, Turkey, Egypt and Gambia take attention in the context of developing sukuk market (Zolfaghari, 2017, p. 6). It can be said that larger sukuk market is related with larger economic size with higher Muslim population in a country (Smaoui and Khawaja, 2017). When the empirical relationship between financial development and economic growth is examined, it is seen that financial development causes an increase in growth performance (De Gregorio and Guidotti, 1995).
This study discusses the effect of sukuk market development on economic growth in a country. Sukuk is a long-term and medium-term capital market product for trading purposes. In the literature, studies dealing with the effects of sukuk on economic growth do not seem sufficient. Nayan and Norsiah (2014) investigated the relationship between sukuk market and economic growth and they determined that sukuk market had a positive effect on economic growth. Echchabi et al. (2016) investigated the pure impact of sukuk on economic development and they determined that sukuk issuance had a significant effect on the gross domestic product (GDP), gross capital formation (GDP) are brought together; otherwise, it had no effect for Saudi Arabia and the GCC. Smaouia and Nechi (2017) investigated the effect of sukuk market development on economic growth for all sukuk issuing countries in the sukuk industry. They determined that there was no strong relationship between sukuk market and economic growth. But they suggested that sukuk market could promote financial inclusion through eliminating negative effects of religious self-exclusion. Echchabi et al. (2018) explained the effect of sukuk issuance on economic growth in GCC countries, and they found that the Sukuk financing has no significant effect on economic growth in GCC countries. Mitsaliyandito and Arundina (2018)  The literature has supported that the sukuk market development will contribute Islamic financial market positively and also it will influence Muslim countries' economic development positively, too [COMCEC (Standing Committee for Economic and Commercial Cooperation of the Organization of Islamic Cooperation), 2018]. In this context, studies on sukuk market development are so important. The analyses can help countries to improve their sukuk market and develop their Islamic financial system in the long term. This study aims to explain the significant relationships between sukuk market and economic growth in developing countries. It is thought to provide useful information and empirical proofs for sukuk market development.

The data and methodology
This study investigates the relationship between sukuk issuance and economic growth for countries as Brunei, Indonesia, Jordan, Kuwait, Malaysia, Nigeria, Saudi Arabia, Pakistan and Turkey. Accordingly, the annual data for the period 2014Q1-2017Q4 was used for nine exporters of Sukuk. The prediction equation is shown as below: In equation (1), the growth is real growth per capita (2010 prices in US$). Sukuk figures, total sukuk issuance and sukuk density in the financial system are handled as follows. The variable X in equation (1) is the control variables. Control variables are inflation, trade deficit and financial stress series. To investigate the unit root analysis of the series, first of all, the cross-sectional dependence of the series is required. If the cross-sectional dependence is not taken into account, the results may be deviated.
Empirical findings Pesaran CD test results are shown in Table 1. It is seen that sukuk variables, growth rate and inflation series have horizontal cross-sectional dependence but trade deficit series do not have horizontal crosssectional dependence (Table 1). For this reason, sukuk variables, growth rate and stagnation status of inflation series are taken into consideration by Pesaran CADF test considering the cross-sectional dependence and stagnation status of inflation series will be investigated by LLC and IPS unit root tests. Table 2 shows the Pesaran CADF test results.
It is seen that the other series except the trade gap series are stationary until five delays and the trade gap series are stationary at the level (Table 2). Table 3 shows the LLC and IPS test results for the inflation series.
When the LLC and IPS unit root test results of the inflation series are examined, the basic hypothesis cannot be rejected and the difference is determined to be stable. After investigating the stationarity of the series, the existence of a long-term causality relationship between the series was investigated by Westerlund and Edgerton (2007) bootstrap panel cointegration test. Westerlund and Edgerton (2007) test is a cointegration analysis that has strong results in small samples that allow intergroup and intergroup gradient dependence. The basic hypothesis is established in such a way that there is a co-integrated relationship. The test results are shown in Table 4.
The basic hypothesis is rejected when asymptotic results which do not consider horizontal cross-sectional dependence are examined (Table 4). However, when the bootstrap test statistics considering horizontal cross-sectional dependence are considered, the basic hypothesis cannot be rejected, and it is decided that the series are co-integrated. Short-term and long-term relationships can be considered after investigating the cointegrated relationships between the series. Table 5 shows the PMG test results. Short-and long-term test statistics can be seen for sukuk volume and sukuk density. According to the test results, sukuk volume and sukuk density have a positive effect on growth in the long term. One unit increase in Sukuk volume contributes growth positively as 0.5%, while the increase in sukuk density contributes growth positively as 1.7%. When we examine short-term relationships, it is seen that sukuk variables did not have any significant effect on growth.

Conclusion
The Islamic banking sector operates as the largest Islamic financial sector in global markets. The future of the sukuk market is estimated to be bright. Islamic financial model provides an alternative financial system and its alternative financial instruments for global investors through interest-free principle (Cevik and Bugan, 2018). Recent data shows that sukuk issuance has increased in the global market. For example, Malaysia expanded its sukuk issuance to such as Singapore and Turkey (Bhuiyan et al., 2019). On the other hand, The Islamic stock and fund market, which is outside the sukuk market, is still a niche sector (Sidio, 2017, p. 5). Sukuk has a significant impact on different economic and banking transactions as it has a predictable position in the stock markets and international currency (Ahmed et al., 2014). Recently, developed and developing Muslim and non-Muslim countries have begun to deal with sukuk, one of the best options to create funding beyond traditionalism. Sukuk has become an important tool to increase financing efficiently and effectively during mobilization (Zulkhibri, 2015). If the challenges can be eliminated, the sukuk market development will expand Islamic finance industry as well as economic development (Hasan et al., 2019). In this study, the impact of sukuk market development on economic growth was examined for nine developing countries as Brunei, Indonesia, Jordan, Kuwait, Malaysia, Nigeria, Saudi Arabia, Pakistan and Turkey where Islamic finance was available in 2014Q1-2017Q4. The development of the Sukuk market has been addressed in two dimensions. As a part of GDP, total sukuk issuance measured by the sukuk market and Sukuk market development annual sukuk issuance per country are taken into consideration as the sukuk concentration. Inflation, trade deficit and financial stress series were examined as control variables. There is a long-term cointegrated relationship between the development of the sukuk market and economic growth. Sukuk volume and sukuk density have a positive effect on growth in the long run. One unit increase in sukuk volume increases growth by 0.5%, while the increase in sukuk density increases growth by 1.7%. When we examine short-term relationships, it is seen that sukuk variables do not have an effect on growth. As a result, sukuk exports contribute positively to growth rates in the long run.