Debt Composition and Economic Growth in the GCC
Evidence from Bonds and Sukuk
DOI:
https://doi.org/10.70009/jels.2026.3.1.2Keywords:
Islamic finance, sukuk, conventional bonds, panel cointegration, economic growth, GCC economiesAbstract
This paper tests whether conventional bond issues and Islamic sukuk issues impact economic growth in 6 GCC countries during 2010-2024 to differing degrees. The research question is prompted by the robust growth of regional debt markets, frequent oil price shocks, and the development-led diversification reorientations in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. Based on both the literature on finance-growth and on Islamic finance, this paper theorizes that debt structure, not volume, matters because conventional bonds and sukuk differ institutionally and economically. In a traditional sense, a conventional bond is an interest-bearing liability used for fiscal financing, whereas a sukuk is an asset-backed Shari’ah-compliant investment vehicle (claim) that relates to usufruct, assets, or investment cash flows. Using a balanced panel and second-generation panel methods that account for cross-sectional dependence, mixed integration orders, and long-run relationships, the study estimates models for real GDP growth and real GDP per capita growth. The results show that conventional bond issuance is negatively associated with aggregate GDP growth, while sukuk issuance is not significant for aggregate output but is positively associated with GDP per capita growth. The findings suggest that sukuk may be more closely linked to welfare-enhancing, infrastructure-oriented, and inclusive development than conventional bonds in the GCC context. The paper contributes to the finance-growth and Islamic finance literature by showing that debt composition matters, not only debt volume.
References
Abbas, S. M. A., & Christensen, J. E. (2007). The Role of Domestic Debt Markets in Economic Growth: An Empirical Investigation for Low-Income Countries and Emerging Markets. IMF Working Paper, WP/07/127, 1–40.
Alghfais, M. (2016). Comparative Analysis: The Impact of Financial Sector Development on Economic Growth in the Non-Oil Sector in Saudi Arabia. SAMA Working Paper, WP/16/5, 1–38.
Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. The Review of Economic Studies, 58(2), Article 2. JSTOR. https://doi.org/10.2307/2297968
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
Barro, R. J. (1995a). Inflation and economic growth. Bank of England Quarterly Bulletin, 35(2), 166–176.
Barro, R. J. (1995b). Inflation and economic growth (No. 5326; NBER Working Paper Series No. 5326). National Bureau of Economic Research, Inc. https://www.nber.org/system/files/working_papers/w5326/w5326.pdf
Barro, R. J., & Sala-i-Martin, X. (2004). Economic growth (2nd ed). MIT Press.
Beck, N., & Katz, J. N. (1995). What To Do (and Not to Do) with Time-Series Cross-Section Data. American Political Science Review, 89(3), 634–647. https://doi.org/10.2307/2082979
Beck, T., & Levine, R. (2004). Stock Markets, Banks, and Growth: Panel Evidence. Journal of Banking and Finance, 28(3), Article 3.
Beck, T., Levine, R., & Loayza, N. (2000). Finance and the Sources of Growth. Journal of Financial Economics, 58(1–2), Article 1–2.
Bencivenga, V. R., & Smith, B. D. (1991). Financial Intermediation and Endogenous Growth. The Review of Economic Studies, 58(2), 195. https://doi.org/10.2307/2297964
Central Bank of the UAE. (2024). UAE Islamic Finance Report 2023: The Year of Sustainability. SAMA Working Paper, 1–57.
Čihák, M., & Hesse, H. (2010). Islamic Banks and Financial Stability: An Empirical Analysis. Journal of Financial Services Research, 38(2), Article 2. https://doi.org/10.1007/s10693-010-0089-0
Driscoll, J. C., & Kraay, A. C. (1998). Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data. Review of Economics and Statistics, 80(4), Article 4. https://doi.org/10/b88vxp
Echchabi, A., Abd Aziz, H., & Idriss, U. (2018). The impact of Sukuk financing on economic growth: The case of GCC countries. International Journal of Financial Services Management, 9(1), 60. https://doi.org/10.1504/IJFSM.2018.10011021
Farah, A. A., Mohamed, M. A., Ali Farah, M., Yusuf, I. A., & Abdulle, M. S. (2025). Impact of Islamic banking on economic growth: A systematic review of SCOPUS-indexed studies (2009–2024). Cogent Economics & Finance, 13(1), 2490819. https://doi.org/10.1080/23322039.2025.2490819
Fasano, U., & Wang, Q. (2001). Fiscal Expenditure Policy and Non-Oil Economic Growth: Evidence from GCC Countries. IMF Working Paper, WP/01/195, 1–20.
Gaytan, A., & Ranciere, R. (2004). Wealth, Financial Intermediation and Growth. Working Paper No. 191. Center for Economic Research and Educational Policy.
Goldsmith, R. W. (1969). Financial Structure and Development. Yale University Press.
Gurley, J. G., & Shaw, E. S. (1967). Money in a theory of finance. Brookings Inst.
Haneef, R., & Smolo, E. (2013). Reshaping the Islamic Finance Industry: Applying the Lessons Learned from the Global Financial Crisis. In H. Ahmed, M. Asutay, & R. Wilson (Eds.), Islamic Banking and Financial Crisis: Reputation, Stability and Risks (pp. 21–39). Edinburgh University Press. https://doi.org/10.3366/edinburgh/9780748647613.003.0002
Hassan, M. K., Sanchez, B., & Yu, J.-S. (2011). Financial development and economic growth: New evidence from panel data. The Quarterly Review of Economics and Finance, 51(1), Article 1. https://doi.org/10.1016/j.qref.2010.09.001
Herndon, T., Ash, M., & Pollin, R. (2014). Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff. Cambridge Journal of Economics, 38(2), 257–279. https://doi.org/10.1093/cje/bet075
Ibrahim, M. H. (2015). Issues in Islamic banking and finance: Islamic banks, Shari’ah-compliant investment and sukuk. Pacific-Basin Finance Journal, 34, 185–191. https://doi.org/10.1016/j.pacfin.2015.06.002
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53–74. https://doi.org/10.1016/S0304-4076(03)00092-7
IMF. (2024). Gulf Cooperation Council: Pursuing Visions Amid Geopolitical Turbulence. Policy Papers, 2024(066), 1. https://doi.org/10.5089/9798400295744.007
Iqbal, Z., & Mirakhor, A. (2011). An Introduction to Islamic Finance: Theory and Practice (2nd ed.). John Willey & Sons (Asia).
ISRA. (2011). Islamic Financial System: Principles and Operations. International Shari’ah Research Academy for Islamic Finance (ISRA).
ISRA. (2015). Islamic capital markets: Principles and practices. International Shari’ah Research Academy for Islamic Finance.
ISRA. (2023). Islamic Financial System: Principles and Operations (3rd Edition). International Shari’ah Research Academy for Islamic Finance (ISRA).
Jobst, A. A. (2007). The Economics of Islamic Finance and Securitization. IMF Working Paper, WP/07/117, 1–35.
Jung, W. S. (1986). Financial Development and Economic Growth: International Evidence. Economic Development and Cultural Change, 34(2), Article 2.
Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90(1), 1–44. https://doi.org/10.1016/S0304-4076(98)00023-2
Kao, C., & Chiang, M.-H. (2000). On the estimation and inference of a cointegrated regression in panel data. In Advances in Econometrics (Vol. 15, pp. 179–222). Emerald (MCB UP ). https://doi.org/10.1016/S0731-9053(00)15007-8
Khan, M. S., & Mirakhor, A. (1990). Islamic banking: Experiences in the Islamic Republic of Iran and Pakistan. Economic Development and Cultural Change, 38(2), Article 2.
King, R. G., & Levine, R. (1993). Finance and Growth: Schumpeter Might Be Right. Quarterly Journal of Economics, 108(3), Article 3.
KSA. (n.d.). Vision 2030: Kingdom of Saudi Arabia. Kingdom of Saudi Arabia (KSA). Retrieved January 12, 2025, from https://www.vision2030.gov.sa/media/rc0b5oy1/saudi_vision203.pdf
Ledhem, M. A., & Mekidiche, M. (2022). Islamic securities (ṣukūk) and economic growth: New empirical investigation from Southeast Asia using non-parametric analysis of MCMC panel quantile regression. Islamic Economic Studies, 29(2), 119–138. https://doi.org/10.1108/IES-06-2021-0020
Levine, R. (1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature, 35(2), Article 2.
Levine, R. (2005). Finance and Growth: Theory and Evidence. In P. Aghion & S. N. Durlauf (Eds.), Handbook of Economic Growth (Vol. 1, pp. 865–934). Elsevier. https://doi.org/10.1016/S1574-0684(05)01012-9
Levine, R., & Zervos, S. (1998). Stock Markets, Banks, and Economic Growth. American Economic Review, 88(3), Article 3.
LSEG, & ICD. (2025). ICD – LSEG Islamic Finance Development Report 2025: 50 Years of Exponential Growth. The London Stock Exchange Group (LSEG). https://www.lseg.com/content/dam/data-analytics/en_us/documents/reports/lseg-islamic-finance-development-indicator-2025.pdf
Mahara, D. (2018). Bond Market Development and Economic Growth: Experience of East Asian Economies. Central European University.
McKinnon, R. I. (1973). Money and Capital in Economic Development. Brookings Institution.
NDMC. (2025). 2025 Annual Borrowing Plan: Fiscal Year 2025. National Debt Management Center (NDMC), Kingdom of Saudi Arabia.
Pedroni, P. (1999). Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors. Oxford Bulletin of Economics and Statistics, 61(s1), 653–670. https://doi.org/10.1111/1468-0084.61.s1.14
Pedroni, P. (2004). Panel cointegration: Asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20, 597–625. https://doi.org/10.1017/S0266466604203073
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross‐section dependence. Journal of Applied Econometrics, 22(2), 265–312. https://doi.org/10.1002/jae.951
Pesaran, M. H. (2021). General diagnostic tests for cross-sectional dependence in panels. Empirical Economics, 60(1), 13–50. https://doi.org/10.1007/s00181-020-01875-7
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), Article 3. https://doi.org/10.1002/jae.616
Pescatori, A., Sandri, D., & Simon, J. (2014). Debt and Growth: Is There a Magic Threshold? IMF Working Paper, WP/14/34, 1–19.
Pradhan, R. P., Arvin, M. B., Norman, N. R., & Bahmani, S. (2020). The dynamics of bond market development, stock market development and economic growth: Evidence from the G-20 countries. Journal of Economics, Finance and Administrative Science, 25(49), 119–147. https://doi.org/10.1108/JEFAS-09-2018-0087
Pradhan, R. P., Zaki, D. B., Maradana, R. P., Dash, S., Jayakumar, M., & Chatterjee, D. (2015). Bond market development and economic growth: The G-20 experience. Tékhne, 13(1), 51–65. https://doi.org/10.1016/j.tekhne.2015.09.003
Reinhart, C. M., & Rogoff, K. S. (2010). Growth in a Time of Debt. American Economic Review, 100(2), 573–578. https://doi.org/10.1257/aer.100.2.573
Romer, P. M. (1986). Increasing Returns and Long-Run Growth. Journal of Political Economy, 94(5), 1002–1037. JSTOR.
Romer, P. M. (1990). Endogenous Technological Change. Journal of Political Economy, 98(5), S71–S102. JSTOR.
Said, A., & Grassa, R. (2013). The determinants of sukuk market development: Does macroeconomic factors influence the construction of certain structure of sukuk? Journal of Applied Finance & Banking, 3(5), 251–267.
Schumpeter, J. A. (1983). The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle. Transaction Books.
Schumpeter, J. A. (2005). Business cycles: A theoretical, historical, and statistical analysis of the capitalist process (1. ed., [reprint]). Bartleby’s Books [u.a.].
Shahzad, S. J. H., Ferrer, R., Ballester, L., & Umar, Z. (2017). Risk transmission between Islamic and conventional stock markets: A return and volatility spillover analysis. International Review of Financial Analysis, 52, 9–26. https://doi.org/10.1016/j.irfa.2017.04.005
Shaw, E. S. (1973). Financial deepening in economic development. Oxford University Press.
Smaoui, H., & Nechi, S. (2017). Does sukuk market development spur economic growth? Research in International Business and Finance, 41, 136–147. https://doi.org/10.1016/j.ribaf.2017.04.018
Smolo, E. (2024). Islam and Free Trade: The Contributions of Muslim Scholars to Modern Economic Theories. In E. Smolo & M. M. Raheem (Eds.), The Future of Islamic Finance (pp. 49–64). Emerald Publishing Limited. https://doi.org/10.1108/978-1-83549-906-120241004
Smolo, E., Ibrahim, M. H., & Dewandaru, G. (2021). Impact of Bank Concentration and Financial Development on Growth Volatility: The Case of Selected OIC Countries. Emerging Markets Finance and Trade, 57(7), Article 7. https://doi.org/10.1080/1540496X.2021.1903869
Smolo, E., Jahangir, R., Nagayev, R., & Aysan, A. F. (2023). Performances of leading Islamic finance markets prior to and during the COVID-19 pandemic. Heliyon, 9(1), Article 1. https://doi.org/10.1016/j.heliyon.2023.e12870
Smolo, E., Jahangir, R., Nagayev, R., & Tarazi, C. S. C. (2022). Performances of Islamic and conventional equities during the global health crisis: Time-frequency analysis of BRICS+T markets. Review of Financial Economics, 40(3), Article 3. https://doi.org/10.1002/rfe.1152
Smolo, E., & Mirakhor, A. (2010). The Global Financial Crisis and its Implications for the Islamic Financial Industry. International Journal of Islamic and Middle Eastern Finance and Management, 3(4), Article 4. https://doi.org/10.1108/17538391011093306
Smolo, E., & Rafique, M. O. (Eds.). (2025). Islamic Green Finance: Towards Ethical and Environmentally Responsible Investing. Routledge. https://doi.org/10.4324/9781003540403
Smolo, E., & Raheem, M. M. (2024a). A Brief Overview of Islamic Finance: From Madinah Market to Wall Street. In E. Smolo & M. M. Raheem (Eds.), The Future of Islamic Finance (pp. 1–14). Emerald Publishing Limited. https://doi.org/10.1108/978-1-83549-906-120241001
Smolo, E., & Raheem, M. M. (Eds.). (2024b). The Future of Islamic Finance: From Shariah Law to Fintech. Emerald Publishing Limited.
Sturm, M., Gurtner, F., & Alegre, J. G. (2009). Fiscal policy challenges in oil-exporting countries: A review of key issues. ECB, Occasional Paper No. 104, 1–60.
Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Development. IMF Working Papers, 16(05), Article 05. https://doi.org/10/ggr942
Tabash, M. I., & Dhankar, R. S. (2014). The Flow of Islamic Finance and Economic Growth: An Empirical Evidence of Middle East. Journal of Finance and Accounting, 2(1), Article 1. https://doi.org/10.11648/j.jfa.20140201.12
Westerlund, J. (2007). Testing for Error Correction in Panel Data*. Oxford Bulletin of Economics and Statistics, 69(6), 709–748. https://doi.org/10.1111/j.1468-0084.2007.00477.x
Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data (2nd ed). MIT Press.
Downloads
Published
Data Availability Statement
Data are available upon reasonable request.
Issue
Section
Categories
License
Copyright (c) 2026 Rayan Alharbi, Edib Smolo (Author)
This work is licensed under a Creative Commons Attribution 4.0 International License.
