Financing government budget deficit as a liquidity risk mitigation tool for Islamic Banks: A dynamic approach

Abstract

Purpose

The purpose of the paper is to construct a framework constituting a link between Islamic banks’ excess liquidity and states’ financing needs, in an Islamic way.evel0.

Design/methodology/approach

The framework, constituting a linkage between Islamic banks’ funding capacity and governments’ financing needs, is constructed using a money market approach. Later on, the volatility of existing sovereign Sukuk is compared to corporate Sukuk, using generalized autoregressive conditional heteroskedasticity (GARCH) (1, 1) model, to assess the stability of the secondary market for Islamic government securities.

Findings

The volatility is weak for the Sukuk studied; this means that there is stability of the secondary market for Sukuk (sovereign and corporate).

Originality/value

This is the first paper that presents a framework dealing directly with Muslim states’ budget deficit and debt. The framework includes Islamic banks, public companies, the central bank, Ministry of Finance and the government.

Citation

Boumediene, A. (2015), "Financing government budget deficit as a liquidity risk mitigation tool for Islamic Banks: A dynamic approach", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 8 No. 3, pp. 329-348. https://doi.org/10.1108/IMEFM-04-2014-0038