Capital market and economic growth in Malaysia: the role of ṣukūk and other sub-components

Abstract

Purpose The purpose of this paper is to explore the effects of the capital market on economic growth by considering the role of ṣukūk (Islamic investment certificates) and other capital market sub-components in Malaysia between 1998 and 2018. Design/methodology/approach The empirical investigation is based on the autoregressive distributed lag (ARDL) cointegration bounds test. Findings The results reveal the prevalence of a long-run equilibrium relationship between capital market variables and economic growth. As expected, bond market components (ṣukūk and conventional bonds) have a positive, albeit insignificant influence on economic growth. In contrast, in the long-term, stock market development – regardless of the indicator used on economic growth – is shown to have a significant and positive effect. The study suggests that stock market sub-components affect Malaysia’s economic growth the most. Research limitations/implications The primary limitation of this study is that only corporate ṣukūk were considered, while government ṣukūk were excluded from the estimation due to a lack of requisite information, resources and data. Practical implications A strategic framework should be established, especially in pricing efficiencies. Furthermore, there is a need to create more awareness on the benefits of ṣukūk investment among conventional bond investors, including retail investors. Thus, there will be more players in the ṣukūk market, and this will help to improve market liquidity. Originality/value Apart from conventional capital market sub-components, this study takes into account ṣukūk as a sub-component in the capital market on economic growth using the ARDL framework. Also, this study particularly concentrates on the world’s largest ṣukūk issuer, Malaysia, rather than focusing on other ṣukūk-issuing countries.

Impact of Capital Market Performance on Economic Growth in Developing Nations: A Qualitative Approach

“…This study used time series data collected annually for quantitative analysis and did not have the minimum of 30 observations required for time series analysis. Tan and Shafi (2021) in another study explored the effects of the capital market on economic growth in Malaysia using quarterly data from quarter one of 1998 to quarter four of 2018. Economic growth was measured with per capita real GDP while the independent variable was measured with the following proxies of Sukuk conventional bonds, Stock market capitalisation, Total stock market turnover, real savings and growth rate of employment.…”

Impact of capital market performance on economic growth in Nigeria: a systematic review

“…These studies found that there is a long-run relationship between capital market variables or indicators and economic growth (Erasmus et al, 2021;Tan & Mohamad, 2021). The capital market has a significant positive impact on economic growth (Adesina-Uthman, 2020).…”

Islamic Finance-Growth Nexus: Evidence from Indonesia

“…Specifically, if sharia stocks grow, the economy will benefit because they become a source of funding for companies that are already listed on the stock exchange, boosting production, innovation, and resource allocation efficiency (Tan & Shafi, 2021) and sales of goods or services to consumers to drive the economy. In the 1910s, Schumpeter proposed that stock markets provide finance to businesses by allowing them to purchase new technologies, thereby promoting economic growth (Thaddeus et al, 2021).…”

“…In that case, one example is infrastructure, such as toll roads, which can increase transactions and economic mechanisms in Indonesia. Furthermore, the rise in outstanding corporate Sukuk indicates a high level of productivity in the form of more goods and services offered Tan & Shafi, 2021). Nneka (2022) asserted that Sukuk, as a long-term capital source, is critical for real economic sustainability and growth, as well as the stability of the financial system.…”

“…The financial sector is related to economic growth through its function of distributing funds to sectors in need so that a developing financial sector will strengthen the allocation of sources of funds for 141 p-ISSN: 2503-4235 economic growth. Furthermore, research on the Islamic financial industry is still very limited, as the majority of existing studies only look at the financial industry in the stock/capital market sector (Kapaya, 2020;Tan & Shafi, 2021), banking (Anwar et al, 2020;Elmawazini et al, 2020;Ledhem & Mekidiche, 2020;Supriani et al, 2021), bonds Smaoui & Nechi, 2017), and the insurance industry (Mainata & Pratiwi, 2019;Muye & Hassan, 2016;Osei-Bonsu et al, 2021) separately.…”