Charting Future Resilient Sukuk Market in Malaysia: What can be Learned from Macreconomic Determinants of Sukuk Issuance?

Abstract

This article examines the effects of macroeconomic variables on sukuk issuance in Malaysia from the first quarter of 2005 to the fourth quarter of 2019. It seeks to analyse the relationship between Sukuk issuance and selected macroeconomic variables such as Bursa Malaysia composite index (BMCI), exchange rate (EXR), GDP, Inflation (INF) and interest rate (INT). This study employs time series analysis techniques such as Johansen Co-Integration Analysis, Vector Error Correction Model (VECM), and Forecast Error Variance Decomposition (FEVD) analysis to unravel the short run and the long run dynamics among the selected variables. Our findings suggest that BMCI, EXR, INT are significant in affecting sukuk issuance in Malaysia in the long run while for the short run, the BMCI, EXR, and GDP, are significant.  EXR is the most important contributor in short-term for sukuk issuance, followed by GDP and BMCI. These findings further suggest that the government can closely monitor exchange rate (EXR) movement to promote fundings of business projects through sukuk issuance. The findings on the significance of BMCI in both the short run and the long run suggest that investors can also consider investing in sukuk securities within their portfolio investment to manage the risk and return profile. It is also recommended that policy makers can design policies to ensure the performance of BMCI and GDP growth to achieve a resilient sukuk market especially during and post the Covid-19 pandemic.