Does Greek Financial Crisis Affect Sukuk Markets? Experience from Gulf Countries

Abstract

Many studies have been carried out to investigate the impact of recent European financial crises on the performance of financial instruments in other regions. Nevertheless, there have been insufficient studies explaining such impact on Islamic financial instruments. In particular, whether Greek Financial crisis have affected performance of Sukuk traded in Gulf Markets needs to be answered. This study is aimed at empirically investigating the causality of credit and liquidity risk on Sukuk Markets in Gulf economies in the period of Greek Financial Crisis (2010 to 2013). We analyzed the Sukuk data by employing Granger causality test, with all the associated vector autoregression model procedures. To investigate different stages of the contagion impact, we carried out the analysis in three tests, i.e., using (i) full period data; (ii) pre-downturn data; and (iii) during-downturn data. Our findings show that Bahrain sukuk market is cointegrated with those of Qatar and UAE in the full period observations. Meanwhile, during the crisis, Qatar Sukuk market is cointegrated with those of UAE and Bahrain. We also find that Bahrain Sukuk triggers market shock in both Qatar and UAE Sukuk markets. Bahrain consistently causes changes in price and spread of UAE Sukuk, both in the context of the full period and the during-crisis period. The reverse is also true. There has been strong tie between Bahrain and UAE Sukuk markets.