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

Abstract EN

Purpose – The purpose of this paper is to explore the effects of the capital market on economic growth by considering the role of sukūk (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 ( sukūk 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 sukūk were considered, while government sukūk 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 sukūk investment among conventional bond investors, including retail investors.

Thus, there will be more players in the sukūk market, and this will help to improve market liquidity.

Originality/value – Apart from conventional capital market sub-components, this study takes into account sukūk 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 sukūk issuer, Malaysia, rather than focusing on other sukūk-issuing countries.