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

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.