From depth to dynamics: sukuk market development and capital buffer adjustment in Islamic banking systems
Ramazan Yildirim, Muhammed Hadin Oner, Ömer Faruk TekdoğanPurpose
This study aims to examine how sukuk market development is associated with the dynamic adjustment of Islamic banks’ capital adequacy.
Design/methodology/approach
The analysis uses quarterly, system-level data for Islamic banks across ten countries over Q4-2013 to Q3-2024. A dynamic panel framework combining fixed-effects and pooled mean group (PMG) estimators is used to distinguish long-run relationships from short-run dynamics. Robustness is assessed using dynamic ordinary least squares and common correlated effects pooled estimators. Sukuk market development is measured as aggregate sukuk issuance relative to total Islamic banking assets.
Findings
The relationship between sukuk market development and capitalization is more evident over longer horizons than through immediate short-run changes. In the main PMG specification, higher sukuk market development is associated with lower CAR, whereas the long-run coefficients for Tier 1 and CAS are statistically insignificant. The short-run effects are consistently insignificant. Across the alternative estimators, the sign, magnitude and statistical significance of the long-run relationship vary, indicating a conditional and nonuniform association.
Practical implications
Sukuk market development may enhance prudential resilience. Regulators may incorporate sector-scaled sukuk indicators, alongside direct exposure measures, into macroprudential monitoring. Islamic banks may also integrate sukuk into medium- to long-term liquidity and capital planning.
Social implications
Well-developed sukuk markets may support financial stability, confidence in Shari’ah-compliant finance and more resilient funding channels.
Originality/value
This study models the dynamic relationship between sukuk market development and Islamic banking capitalization using quarterly, system-level data and an Islamic-banking-sector-scaled sukuk measure.