Islamic finance and market segmentation: Implications for the cost of capital

▶ Full Shari’ya Law compliance in stock markets leads to segmentation and higher costs of capital. ▶ Larger firms are better placed to cross list thereby avoiding domestic high costs of capital. ▶ Large monitoring costs involved in Islamic finance infer banking industry is better than stock market to raise new finance. ▶ Islamic finance is centred on concept of partnership inferring benefits to firms corporate governance. This paper considers the impact of full Islamic shari’ya compliance on developing stock exchanges in their effective provision of development capital. Evidence from a unique study focussing on the Sudan telecommunications company and its listings on the Khartoum as well as Arabian Gulf stock exchanges reveals that costs of capital are considerably higher in the former than latter markets. While there are firm governance benefits arising from Islamic finance monitoring costs are substantial and the banking system is better placed to administer financing arrangements. Larger firms are better placed to circumvent this segmentation through cross-listing on regional exchanges.