Sukuk, banking system, and financial markets: Rivals or complements?

•We study the relationship between financial development and Sukuk issuance.•The banking system competes with Sukuk issuance.•The bond market complements Sukuk issuance.•The financial crisis has been a catalyst to Sukuk issuance.

Using the system GMM estimation technique, we study the effects of the financial development on Sukuk markets using a panel dataset of 11 countries from 1995 to 2015. First, we find that Sukuk and bank financing are substitutes. Economies where banks play a key role in providing private credit issue less Sukuk. Second, the evidence shows that Sukuk are complements to bonds and stocks. More Sukuk are issued in market-oriented economies. Finally, we show that the 2008 global financial crisis has a positive effect on Sukuk markets development.