Financing government budget deficit as a liquidity risk mitigation tool for Islamic Banks

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.