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Could regulator materialize potential demand for Islamic securities? Evidence from Indonesia

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  • Kariastanto, Bayu
  • Ihsanin, Aulia

Abstract

One main advantage of Islamic securities is their wider demands because Islamic securities are able to meet both demands for Islamic and conventional securities. This argument is valid if and only if the demands for Islamic securities do exist AND investors believe that Islamic securities do comply with sharia. One important regulator role in developing Islamic capital market is to ensure sharia compliance of Islamic securities and to convince investors regarding this compliance. Bapepam-LK carries out this role by publishing semiannually the list of Islamic securities (DES). Utilizing the first issuance of DES on September 2007, we employ differences in differences (DID) regression to see the immediate, medium, and long term market response to this announcement. We also estimate cumulative abnormal returns by employing the standard market model for the robustness test. We find that market reacts to sharia compliance declaration by regulator in the long-run, hence potential demands are realized and the Islamic securities will enjoy greater market power. We also provide evidence that Islamic investors are not too strict in screening Islamic securities and are willing to accept different opinions regarding sharia compliance. This finding could explain why Islamic finance is still growing rapidly even though there are critiques in the genuineness of sharia compliance of the current Islamic financial products/services.

Suggested Citation

  • Kariastanto, Bayu & Ihsanin, Aulia, 2012. "Could regulator materialize potential demand for Islamic securities? Evidence from Indonesia," MPRA Paper 61247, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:61247
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    References listed on IDEAS

    as
    1. Laurent Weill, 2009. "Do Islamic Banks Have Greater Market Power ?," Working Papers of LaRGE Research Center 2009-02, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
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    3. repec:zbw:bofitp:2011_006 is not listed on IDEAS
    4. Ms. Faezeh Raei & Mr. Selim Cakir, 2007. "Sukuk vs. Eurobonds: Is There a Difference in Value-at-Risk?," IMF Working Papers 2007/237, International Monetary Fund.
    5. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, April.
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    Cited by:

    1. Kariastanto, Bayu, 2013. "Small Share of the Islamic Banks in Indonesia, Supply-side Problems?," MPRA Paper 61248, University Library of Munich, Germany.

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    More about this item

    Keywords

    regulator; Islamic securities; sharia compliance; demand; investor confidence;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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