Munich Personal RePEc Archive

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

Kariastanto, Bayu and Ihsanin, Aulia (2012): Could regulator materialize potential demand for Islamic securities? Evidence from Indonesia.

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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.

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