No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Islamic legal methodologies and Shariah screening standards: Application in the Indonesian stock market
Abstract
This article provides a framework for applying the principles of Islamic legal methodology to determine the optimal Shariah screening standards for Islamic equity markets. It is argued that using maslahah mursalah (unrestricted benefit) is an appropriate method for identifying appropriate financial standards and its principles stipulate that the benchmark that yields the best economic returns to investors should be chosen. The methodological framework is applied to the Indonesia equity market where the economic implications of the Islamic stock screening standards of the Indonesian Islamic Shariah Stock Index and four global indices are assessed. Portfolios are constructed by applying Islamic stock screening standards for each of the indices by using data on 377 stocks listed in the Indonesian stock market for 5 years. The performances measured by the Sharpe ratio, Treynor index, and Jensen alpha reveal that the Dow Jones Islamic Index screening criteria performs the best. Based on the method of maslahah mursalah, the article recommends using the screening standard of this index in the Indonesian stock market to maximize benefits to investors. While the approach used in this article is applied to Islamic equity markets, the methodological framework can also be used for other similar cases in Islamic finance.
... Therefore, the Islamic capital market is not a separate system from the capital market system as a whole. In general, Islamic capital market activities are no different from conventional capital markets, but there are several special characteristics of the Islamic capital market, namely that the products and transaction mechanisms do not conflict with the principles of Islamic law (Rizaldy & Ahmed, 2019). The Islamic capital market provides opportunities for diversification, especially in terms of mitigating systematic risks such as the turbulence caused by Covid-19 (Rizaldy & Rahayu, 2021). ...
... The first is from a qualitative perspective where the business run by the issuer is not the types of businesses that are prohibited by sharia, such as alcoholbased industries or conventional financial services. The second is from the quantitative side, where interest-based debt should not be the dominant element in assets, as well as non-halal income should not exceed 10% (Marzban & Asutay, 2012;Rizaldy & Ahmed, 2019). Sharia shares can be interpreted as proof of ownership of the issuer or public company and do not include shares that have special rights. ...
This study aims to determine the effect of Islamic capital market literacy, financial behavior, and income on the interest in investing in the Islamic capital market among generation Z. The research type and method used is quantitative research. The data used is primary data collected using an online questionnaire containing questions related to the variables, spread among Gunadarma University students as respondents. This study uses multiple linear regression analysis with a non-probability sampling technique assisted by statistical tools SPSS version 25. The results of this study indicate that partially Islamic capital market literacy variables (X1) and financial behavior (X2) have a significant effect on interest in investing in Islamic capital market. However, income (X3) has no partial effect on interest in investing. Meanwhile, simultaneously, the variables of Islamic capital market literacy, financial behavior, and income have an influence on interest in investing in the Islamic capital market. The results of this study emphasize the importance of increasing financial literacy to increase the involvement of Generation Z in the Islamic financial system, by intensifying socialization and education programs, in this case on the Islamic capital market. Keywords: Islamic Capital Market Literacy; Financial Behavior; Income; Interest to Invest; Gen Z
... Rahman and Bukair (2015) added that a larger number of board members enhances SSB' control capabilities over Islamic bank operations and minimizes uncertainty and lack of information. This opinion is corroborated with AlAbbad et al., (2019) and Rizaldy and Ahmed (2019) which states that a larger number of SSB members means greater control and monitoring of Sharia compliance which has an impact on increasing the trust of the Sharia bank customers. Based on the discussion above, it can be concluded that in general, the number of SSB members has a positive effect on the level of trust of Islamic bank customers. ...
... This research intersects with research by Bukair and Rahman (2015) who obtained evidence that a larger number of board members will reduce uncertainty and lack of information and affect the ability of SSB to control transactions and operations in accordance with regulations. This opinion is corroborated with previous research by AlAbbad et al., (2019) and Rizaldy and Ahmed (2019) stating that a larger number of SSB members means an increase in control and monitoring which has an impact on the image of a Sharia bank which will further increase the trust and loyalty of the Sharia bank customers. Based on the discussion above, it can be concluded that in general, the number of SSB members has a positive effect on the level of trust of Islamic bank customers. ...
Purpose - This study aims to examine in more detail the characteristics of SSB that will affect the level of trust of Islamic banking customers. The purpose of this study is to understand empirically the relationship between the characteristics of SSB and the trust of Islamic bank customers in Indonesia.
Method - A quantitative approach with the panel data analysis method is used to analyze sample data from all Sharia commercial banks in Indonesia in the 2012-2019 period. The independent variable in this study consisted of 6 characteristics of SSB.
Result - The results of the study show the facts that the 3 characteristics of SSB are proven to be able to increase customer trust. The three variables are the number of members, financial expertise, and doctoral education.
Implication - Islamic Commercial Banks in Indonesia suggest to put more consideration of the number of members, financial expertise, and doctoral education in the recruitment process for the selection of Sharia bank SSB members.
Originality - In contrast to previous research which examines the effect of the existence of SSB on customer trust and loyalty, this study seeks to get deeper answers to the input factors of SSB characteristics that really have a positive impact on a positive image and customer trust in Islamic banks.
... They provide assurance that the business sectors of listed stocks offered in the index do not violate sharia principles. Ideally the Islamic capital market does not contain ribawi (interest-based) transactions, dubious transactions (gharar), and shares of companies engaged in prohibited sectors such as alcohol and pork-based industries (Mahfooz & Ahmed, 2014;Rizaldy & Ahmed, 2019). The Islamic capital market must be free from unethical and immoral transactions, such as market manipulation, insider trading transactions, selling shares that are not yet owned, and buying them later (short selling) (Rethel & Abdalloh, 2015). ...
... The main focus on quantitative screening is to eliminate companies deriving significant income from non-halal sources and companies that have excessive leverage in order to avoid usury and trade of debt (bai al dain) which are prohibited in Islam. Literature shows that the application of a different Shariah screening criteria will then lead to significantly different portfolios with different constituents and performance (Derigs & Marzban, 2008;Rizaldy & Ahmed, 2019). These generated Islamic stock indices are usually considered to have lower risk and better performance and provide diversification advantages (Abbes & Trichilli, 2015;Ashraf, 2013;Ashraf & Mohammad, 2014;Balcılar et al., 2015;Fethi et al., 2014;Majid & Kassim, 2010;Munawaroh & Sunarsih, 2020;Saiti et al., 2014) Source: Prepared by the authors Figure 1. ...
Purpose – COVID-19 typically affects economic activity and growth, including the movement of global Islamic stock indices. This experimental study intends to analyse and map the global Islamic equity markets competition and identify which countries had the best performance while facing the turbulence of COVID-19.
Methodology – This research was conducted by simulating the formation of a global Islamic stock portfolio and ranking based on weighting of investment allocations in each country. The data used were monthly data during the first year of the COVID-19 crisis period from 12 countries that provide an Islamic stock index and are constituents of Dow Jones Global Islamic Indices and/or FTSE Shariah. The Single Index Model was employed as the method in the formation of the global portfolio in this research.
Findings – Our analysis revealed that four countries that deserve the biggest weights, namely China, Japan, Turkey, and Malaysia, were the countries with the best relative performance compared to their risk and the most defensive countries to the global systematic market risk and turbulence during the first year of the COVID-19 crisis period. On the other hand, three countries were eliminated as their Excess Return to Beta were lower than the Cut-Off Point, these countries were the United Kingdom, United Arab Emirates, and Canada, which means that the returns of these countries were not worth the risks.
Originality – While some studies have analysed the behaviour of Islamic stock markets during the COVID-19 crisis, none of them tried to map the global Islamic stock market that reflects the competitiveness of the constituent countries and the competition amongst them.
Practical implication – This research argues that if Islamic multinational investors allocate their funds while facing the COVID-19 turbulence by considering the global map generated from this study, the investors will have a global Islamic investment portfolio with an optimal return which is higher than the market return and minimal risk which is lower than the market risk.
... Source: Adopted from Rizaldy and Ahmed (2018) Benefit of Islamic investment thresholds) the universe of stocks available for investment and can have an impact on the performance of the Islamic indices as compared to conventional equity indices. ...
... Notes: TAtotal assets; 24 Mtrailing 24-month average market capitalization; ARaccounts receivable; IBSinterest-bearing securities; TRtotal revenue; INTIinterest income; NCAnoncompliant activities Source: Adopted from Rizaldy and Ahmed (2018) IMEFM 13,1 models and the Granger causality tests to test the volatility and correlations in China's equity sectors. The results illustrated a strong correlation between various sectoral indices. ...
Purpose
The purpose of this paper is to investigate the extent to which Chinese equity investors can benefit from diversifying their portfolio into Shariah -compliant (Islamic) indices. It examines three Islamic stock indices (FTSE Shariah China price index, MSCI China Islamic IMI price index and the DJ Islamic Greater China price index) and ten sectoral indices in Shanghai Stock Exchange as a sample.
Design/methodology/approach
The multivariate GARCH dynamic conditional correlations (MGARCH-DCC) is deployed to estimate the time-varying linkages of returns of the selected indices, covering approximately eight years daily data starting from 28 August 2009 to 29 September 2017.
Findings
In general, in terms of volatility, the results indicate that all Islamic Indices are less volatile than the conventional indices. From the correlation analysis, the results imply that Chinese conventional equity investors would benefit from Islamic stock indices, especially when they include DJ Islamic Greater China in their portfolio.
Originality/value
The findings of this paper may have several significant implications for the Chinese equity investors and fund managers for better understanding about co-movements of the Chinese conventional sectoral indices with the Shariah -compliant stock indices with the purpose of gaining higher risk-adjusted returns through portfolio diversification.
... Source: Adopted from Rizaldy and Ahmed (2018) Benefit of Islamic investment thresholds) the universe of stocks available for investment and can have an impact on the performance of the Islamic indices as compared to conventional equity indices. ...
... Notes: TAtotal assets; 24 Mtrailing 24-month average market capitalization; ARaccounts receivable; IBSinterest-bearing securities; TRtotal revenue; INTIinterest income; NCAnoncompliant activities Source: Adopted from Rizaldy and Ahmed (2018) IMEFM models and the Granger causality tests to test the volatility and correlations in China's equity sectors. The results illustrated a strong correlation between various sectoral indices. ...
Purpose – The purpose of this paper is to investigate the extent to which Chinese equity investors can benefit from diversifying their portfolio into Shariah-compliant (Islamic) indices. It examines three Islamic stock indices (FTSE Shariah China price index, MSCI China Islamic IMI price index and the DJ Islamic Greater China price index) and ten sectoral indices in Shanghai Stock Exchange as a sample.
Design/methodology/approach – The MGARCH-DCC is deployed to estimate the time-varying linkages of returns of the selected indices, covering approximately eight years daily data starting
from 28 August 2009 to 29 September 2017.
Findings – In general, in terms of volatility, the results indicate that all Islamic Indices are less volatile than the conventional indices. From the correlation analysis, the results imply that Chinese conventional equity investors would benefit from Islamic stock indices, especially when they include DJ Islamic Greater China in their portfolio.
Originality/value – The findings of this paper may have several significant implications for the Chinese equity investors and fund managers for better understanding about comovements of the Chinese conventional sectoral indices with the Shariah-compliant stock indices with the purpose of gaining higher risk-adjusted returns through portfolio diversification.
... This aligns with ethical standards within the framework of social responsibility and sustainable development (Franzoni and Allali, 2018;Gunardi et al., 2022). Furthermore, the concept of maslahah mursalah (unrestricted benefit) guides investment decisions toward generating optimal returns while maintaining compliance with Islamic principles (Rizaldy and Ahmed, 2019). Collectively, these principles foster a financial system that prioritizes ethical considerations and social welfare over mere profit maximization, reflecting a holistic financial approach in line with Islamic teachings. ...
This paper investigates the implementation of ijarah muntahiyah bittamlik (IMBT) as an infrastructure project financing scheme within the Public-Private Partnership (PPP) models from a collaborative governance perspective. This paper follows a case study methodology. It focuses on two Indonesian non-toll road infrastructure projects, i.e., the preservation of the East Sumatra Highway projects, each in South Sumatra province and Riau province. The findings revealed that Indonesia’s infrastructure development priorities and its vision to become a global leader in Islamic finance characterized the system context that shaped the implementation of IMBT as an infrastructure project financing scheme within the PPP-AP model. Key drivers include leadership from the government, stakeholder interdependence, and financial incentives for the partnering business entity to adopt off-balance sheet solutions. Principled engagement, shared motivation, and the capacity for joint action characterized the collaboration dynamics, leading to detailed collaborative actions crucial for implementing IMBT as a financing scheme.
... In other words, all policies to resolve income and wealth inequality in Indonesia can be determined by the government using a maṣlaḥah mursalah basis, as long as the policy meets the five conditions mentioned. If fulfilled, the policy in question is considered to have a strong basis and reassure Indonesian society in general (Rizaldy & Ahmed, 2019). ...
Income and wealth inequality in Indonesia persists despite efforts by central and local governments to address it. Maṣlaḥah mursalah provides a strong theoretical foundation for creating policies that are both religious and highly beneficial. This study aims to explain the history of using maṣlaḥah mursalah in income and wealth policies, provide evidence of income and wealth inequality in Indonesia, and explore the potential of using maṣlaḥah mursalah to address this inequality. This study examines two key facts: the history of maṣlaḥah mursalah's policies on income and wealth, and income and wealth inequality in Indonesia. They were obtained from Arabic uṣūl al-fiqh literature and the analysis of the Gini ratio and palm index. The data were compared to determine the most urgent policy needs and the possibility of using maṣlaḥah mursalah as the basis. This study found that maṣlaḥah mursalah has been widely used in income and wealth distribution policies. Since income and wealth inequality in Indonesia still exists and continues to increase in the ratio, maṣlaḥah mursalah will likely be the basis of settlement policy. This study aims to provide a robust theoretical foundation for the Indonesian government to design and implement maṣlaḥah mursalah-based policies to address income and wealth inequality, including human capital development, labour market opening for women, labour rights protection, improved access to finance, social transfer programs, zakat and tax optimisation, housing policy reform, and increased transparency and corruption eradication.
... This mimetic behavior has been previously related to changes in oil prices (Ulussever & Demirer, 2017) and to the market structure under different market regimes (Balcilar et al., 2013;Youssef & Mokni, 2018), as well as to religious beliefs (Gabbori et al., 2022;Loang & Ahmad, 2022;Medhioub & Chaffai, 2019). Moreover, investor behavior may be influenced by faith and religious tenets (Canepa & Ibnrubbian, 2014;Klein et al., 2017;Oran et al., 2018), which can lead to segmentation of the stock market or differences in the dynamics of Islamic stock prices, compared to conventional ones (Alhomaidi et al., 2019;Rizaldy & Ahmed, 2019). Some studies have also explored the fact that financial markets in Muslim countries may react to various announcements, among them those on sukuk versus conventional bond issues (Godlewski et al., 2013;Klein et al., 2017;Mohamed et al., 2017), additions or deletions from Islamic market indexes (Jaballah et al., 2018), and sukuk credit rating changes (Muhamad Sori et al., 2019). ...
... The first screening is a qualitative business activity-based screening that excludes companies that are involved in prohibited products and services. These would include alcohol, pornography, gambling, pork-related products, tobacco, conventional financial institutions, etc. (BinMahfouz and Ahmed 2014, Derigs and Marzban 2008, Rizaldy and Ahmed 2019. The companies that pass the qualitative screening go through the second quantitative screening that involves passing certain financial benchmarks related to acceptable levels of conventional debt, liquidity, impure income and/or interest-based investments of the company (Derigs andMarzban 2008, Rizaldy and. ...
... Qualitative screening atau disebut juga dengan sector screens merupakan proses seleksi saham terkait area bisnis (Derigs & Marzban, 2008). Proses seleksi kualitatif ini berfokus pada karakter aktivitas bisnis sebuah perusahaan (Rizaldy & Ahmed, 2019). ...
This research examined differences of portfolio performance before adding indicator of social environment index from five standards (ISSI, FTSE, MSCI, DJIM and S&P) and differences of portfolio performance before and after adding indicator of social environment index.The result concludes portfolio performance using the Sharpe measure significantly different, while Treynor and Jensen Alpha did not show a significant difference of performance, there is also no significant difference of portfolio performance (Sharpe, Treynor and Jensen Alpha) before and after adding indicator social environment index. It shows that addition of indicator social environment index is not affected portfolio performance.
... To be included in the Islamic or shari'ah-based indices, the stock should satisfy the screening criteria derived from Shari'ah (Anjum & Rajput, 2020). Not all Islamic indices, however, have the same rules which means that one company may be included in one Islamic index but excluded from another (Zaidi et al., 2015) but generally, these rules fall in two categories: core business and financial ratios (Rizaldy & Ahmed, 2019). Core business means that companies generating most of its income from prohibited sources like alcohol, interest income, and pork are excluded from the index and financial ratios mean that companies may be excluded based on indicators like liquidity level and debt level. ...
The main purpose of this study was to examine the performance of Shariah-based stock indices during the pandemic of COVID-19 and to compare that to the performance of its counterparts conventional indices in gulf cooperation council (GCC) countries. Study inquires included whether Islamic indices represent a diversification opportunity during the pandemic of COVID-19 and whether the effect of the pandemic on the performance of Islamic and conventional indices is different. Quantitative method of research was followed to achieve the objectives of this study by testing returns on the included Islamic and conventional indices for one year before the pandemic from the first of March, 2019 to the 10 th of March 2020 and during the pandemic from 11 th of March, 2020 to 29 th of March, 2021. Risk-adjusted performance measures were used to evaluate the performance of the included indices and correlation analysis was used to determine if Islamic indices can be used as a diversification tool for the conventional indices. Data were downloaded from many websites including the websites of the GCC countries' exchanges and analyzed using some risk-adjusted performance measures, Friedman test, and correlation analysis. Study results revealed that the effect of the pandemic on the performance of Islamic indices and their conventional counterparts is the same and that Islamic indices do not represent a diversification opportunity for investors during the pandemic
... This finding is rational because firms with higher assets have more flexibility in performing socially responsible activities, thus, their social performance increases. This result supports the current screening criteria in some Islamic indexes, which use asset size as the main criterion (Derigs & Marzban, 2008;Ho et al., 2011Ho et al., , 2015Khatkhatay & Nisar, 2007;Rizaldy & Ahmed, 2019). Moreover, Table 7 reaffirms that no difference is seen in governance quality performance between Islamic and non-Islamic firms, at either large or small firms. ...
This study empirically investigates the effect of an Islamic label on environmental, social, and governance (ESG) performance. Islamic firms in Indonesia and Malaysia that are characterized by lower debt and lower non-sharia compliant income and have a higher ethical standard are expected to make a better contribution to the environment and society. Testing firms in Indonesia and Malaysia, two emerging countries in ASEAN (Association of Southeast Asian Nations), reveals a significant difference in overall environmental and social performance, but not in governance quality. Also, the study documents the significant effect on performance of using Islamic criteria for leverage, accounts receivable, and cash. Overall, after controlling for some variables and splitting the sample into different time horizons and firm sizes, the study consistently reveals that firms labeled as Islamic have better environmental and social performance, but not governance performance. The relevant policies should be adjusted.
JEL classifications
G21, G29.
... The political event also assumed has a strong relationship with the abnormal return of the capital market. If the market is efficient, the price movement is fully reflecting the information (Rizaldy & Ahmed 2019). ...
General Election (GE) is one of the most important political issues which has an impact on the economic condition. This research aims to reveal the effect of General Election 2019 on the capital market reaction. Specifically, the study compares the impact of three events in the GE 2019, namely, The General Election 2019, the announcement of Elected President 2019, and Mahkamah Konstitusi (MK) decision. By employing Abnormal Return with t-test analysis, the study reveals that the publication of the elected-president has the most significant impact on the Islamic Capital Market compares to the two other events. While using Trading Volume Activity (TVA), all the three events of GE 2019 affects the TVA. This finding suggests that for the Islamic capital market investor, the announcement of the elected president is seen as the most significant event that determines the whole of economic condition for the next five years. Hence, for the policy-makers, they must focus on the date of the announcement by preparing such a policy to maintain the market condition.
... Like other investors, Muslim investors also have a necessity of financial investment to utilize potential from their fund possessions [1]. Pragmatically, the Islamic capital market's presence aims to draw trust and attention of potential Muslim investors to boost up their relevancy so that their economic advantages can be optimized [2]. Moreover, the involvement of Sharia investment is also expected to reduce the dependence of the firms that issuing Islamic stocks to use ribabased debt on conventional bank. ...
... Oleh karena itu, opsi kompromi dilakukan tidak lain karena konteksnya belum memungkinkan untuk menerapkan prinsip-prinsip syariah secara kaffah (menyeluruh) (Fielnanda, 2017). Terkait hal tersebut, penelitian yang dilakukan oleh Rizaldy mengemukakan bahwa standar screening saham syariah di Indonesia dapat diterapkan dengan menggunakan konsep maslahah mursalah (Rizaldy & Ahmed, 2019). Namun dalam penelitian lain disebutkan bahwa maslahah mursalah tidak dapat digunakan dengan alasan bahwa sumber hukumnya lemah dan kehujjahannya tidak dilandaskan pada dalil yang qath'i (Muchtar, 2019). ...
Purpose
This study aims to understand the practices and rules of Sharia crowdfunding policies in Indonesia given the rapid growth of financial technology and the increasing importance of crowdfunding as a funding alternative for micro, small, and medium enterprises (MSMEs).
Design/methodology/approach
This study used qualitative methods, exploratory methods and literature studies for data collection. The focus is on understanding the regulatory environment and institutional framework that support Sharia crowdfunding in Indonesia.
Findings
Despite a specific law regulating Sharia crowdfunding, several authoritative institutions in Indonesia offer FinTech, crowdfunding and Sharia crowdfunding services. Some regulations have been issued, such as Bank Indonesia Regulation Number 19/12/PBI/2017 and Financial Services Authority (OJK) Regulation Number 37/POJK.04/2018, which was later amended to Number 57/POJK.04/2020. This study emphasizes the crucial role of OJK in providing security guarantees for implementing FinTech, including crowdfunding. At the same time, Sharia crowdfunding also follows fatwas issued by DSN-MUI.
Research limitations/implications
This study describes Sharia crowdfunding policies in Indonesia and indicates that further research could delve deeper into specific cases and examine the impact of these policies on the growth and sustainability of Sharia crowdfunding.
Practical implications
This study underlines the need to enhance Sharia crowdfunding standards and to create rules that explicitly address this issue. This has implications for regulatory authorities, FinTech companies and MSMEs seeking to leverage Sharia crowdfunding.
Social implications
This study suggests potential social implications, including a more inclusive financial system that complies with Islamic principles and supports MSMEs' growth.
Originality/value
This study is unique in its focus on Sharia crowdfunding policies in Indonesia, providing a comprehensive view of the regulatory landscape and existing institutional framework.
Purpose – This study aims to investigate the pragmatic issues on the radical call for the establishment of an
external Shariah auditor (ESA) in the governance framework of Islamic banks (IBs).
Design/methodology/approach – From 11 well-established Malaysian IBs, 16 internal auditors were
interviewed to provide an in-depth understanding on how ESA can provide greater assurance to stakeholders
in Malaysian IBs.
Findings – This study reported mixed acceptance from internal auditors on the proposed additional
governance layer to be undertaken by the ESA. Generally, internal auditors reluctantly agreed that Shariah
auditing by the ESA would enhance the quality of Shariah assurance but maintain several practical concerns
regarding lack of guidelines on Shariah auditing, the additional cost to be borne by IBs and the possible
tensions between the ESA and Shariah board (SB) amid the diverse Shariah interpretations available for
experts in the field.
Practical implications – The critical point on the manifestation of an ESA in the contemporary IB
practice brought by this study highlights the need for regulation and policy promulgation that embrace a
comprehensive approach to Shariah audit process within the religio-ethical dogma of Islamic banking and the
pragmatic approach to banking.
Originality/value – This study provides evidence on the expected role and competency of an ESA and
explores the implications produced by its implementation in Malaysian IBs. This study also clarifies how IBs
should delineate the role of Shariah assurance from SB to ESA.
In recent years, the Islamic securities market has grown significantly in Iran. One of the most important types of Islamic securities is Ijarah sukuk, which has been welcomed by founders seeking financing and has been able to acquire a significant market share in Iran and the world. Ijarah Sukuk is certificates of equal value that are issued by the owner of an existing property or asset either on his own or through a financial intermediary, to lease it against a rental from the subscription proceeds. One of the assets that are the basis for the issuance of Ijarah Sukuk is shares, which according to the shariah committee of the Securities and Exchange Organization of Iran, if the majority of the company's assets, whose shares are the basis for the issuance of sukuk, are fixed assets, the issuance of Ijarah sukuk on it equal to the value of the shares in Possession is allowed. The basic question in this research is what is the criterion of dominance in shares and how is it calculated? The current research is considered descriptive and practical. In this research, firstly, the decision of the Shariah committee on the predominance criterion is examined and criticized, then the proposed criteria for determining the predominance of rentable assets are presented and analyzed, and finally, the selected predominance criterion is presented.
Islamic finance operates as an alternative system meeting the investment requirements of individuals adhering to Islamic beliefs. While conventional finance prioritizes stock exchanges facilitating small-scale investments, challenges arise for Muslims investing their savings in stocks due to potential conflicts between companies' activities and revenues and religious principles. This situation prompts Islamic scholars to deliberate on the permissibility of purchasing specific company stocks. Diverse scholars and Shariah boards have established precise criteria for determining the permissibility of buying a company's stocks, resulting in the development of indexes aimed at identifying compliant companies. Shariah-compliant stocks or companies adhere to the principles of Shariah law, governing various life aspects, including financial and economic activities. This study investigates Shariah screening methods, exploring their rationale, foundations, and potential religious influences, particularly focusing on five prominent Islamic indices. The study investigates Shariah justifications and motives behind these methods, discussing their evaluation through different standards. Despite scholars' varying opinions and evolving methodologies, the primary objective remains consistent: to facilitate halal income for Muslim investors while maintaining Islamic ethical principles in financial practices.
The number of disputes in religious courts continues to increase every year, giving great potential to develop the use of artificial intelligence to make it more efficient and effective by paying attention to the basic principles of Islamic law. This paper discusses the potential and development of the use of artificial intelligence technology in dispute cases in religious courts based on Maslahah Mursalah. The research method is juridical-normative, with a conceptual and philosophical approach. The research shows that the use of artificial intelligence in dispute resolution at religious courts is important for the reason that it can minimize the risk of errors and help judges determine legal considerations in the dispute resolution of Islamic law so that they are more accurate, effective, and efficient. The potential for developing the use of artificial intelligence technology in religious courts must consider several aspects, including the integration of artificial intelligence technology in the dispute resolution process in religious courts, the development of artificial intelligence-based decision support systems, and legal-ethical aspects of the use of artificial intelligence in religious courts. The formulation of the concept for developing the use of artificial intelligence technology in dispute resolution in the religious courts must be guided by the Maslahah Mursalah principle as a moral-ethical foundation within the legal system framework, which includes legal structure, legal substance, and legal culture so that the development of the use of artificial intelligence technology in the disputes resolution of Islamic law in religious courts be effective and justice for all.
This study aims to determine the extent to which the role of Islamic banks in the economy in Indonesia. The method used in this research is a systematic literature review which begins with data collection using the Publish or Perish search engine, the assessment is carried out through the websites https://sinta.kemdikbud.go.id/ and https://garuda.kemdikbud.go .id/, to presentation using content analysis techniques, mapping with Vosviewer, and ending with analysis using Biddle's Role Theory. Based on a systematic literature review conducted on 22 Sinta-indexed national journals for the 2017-2022 period, it was found that Islamic banks have an important role in Indonesia, namely as; driving economic growth, assisting the development of MSMEs, assisting the development of the halal industry, helping to tackle the Covid 19 pandemic, and several other roles. Judging from Biddle's Role Theory; 1) Structurally, Islamic banks in Indonesia have played their role as financial institutions through raising investment funds from third parties and channeling financing, 2) Functionally, Islamic banks in Indonesia function as drivers of national and regional economic growth, providers of capital for MSMEs, providers of financing and supporting facilitators for the halal industry, to help tackle Covid 19 through digitalisation of Islamic banking, services that implement health protocols, assistance in procuring Personal Protective Equipment (PPE), assistance with KUR distribution, providing relief for customers affected by the pandemic, and maximizing CSR programs, 3) Interactionally, the role of Islamic banks in Indonesia has not been very effective due to interaction problems in the form of a lack of socialization, promotion, community literacy, and access to Islamic banks which are relatively difficult to reach.
This paper examines the interactions between Islamic ethics related to entrepreneurs and finance and discusses their implications on entrepreneurial finance. The practice of Islamic entrepreneurial ethics creates trust that helps to mitigate agency problems. In such cases, investors can use contracts involving Islamic financial ethics. However, in the absence of the practice of normative entrepreneurial ethics, agency problems arise that need to be resolved contractually. This paper argues that Islamic legal and ethical principles impose constraints on contractual forms which reduce the flexibility of mitigating agency problems arising in entrepreneurial finance. When entrepreneurial ethics are not practiced, investors can finance entrepreneurs by diluting Islamic financial ethical principles to alleviate agency problems.
Supervisory Board Characteristics as Social Performance Determinants in Islamic Banks. This study tries to examine several characteristics of the supervisory board and its influence on aspects of the social performance of Islamic banks in Indonesia. The random-effects model regression analysis is chosen as a method with the Islamic Commercial Bank 2012-2017 as a sample. This study finds that financial expertise and meeting frequency can spur social performance. These happen because the necessary competence of the supervisory board is in the financial sector. Also, indications for coordination and supervision are measured by meeting intensity. Therefore, Islamic banks must focus on the competence and capability of recruiting supervisory boards.
This article considers the basic teaching principles in universities of the course on Islamic economy and its practical application to classical economy environment. In contrast to the classical model of economy which is irrelevant to religious norms of the society, the Islamic economy, banking and business are tightly connected to the proscribed ethic regulations of Quran. The functioning of Islamic Economy is performed strictly in the framework of Islamic Law. Thus the teaching of Islamic Economy is done in parallel in two parts: the Islamic Law and Classical economy. The development of correct understanding and interpretation of Islam through educational activities in the field of education and science is one of the attempts to implement Islamic economic principles in Russia.
Purpose
– This paper aims to review the Shari’ah investment screening methodologies of 34 prominent global Islamic finance users, including index providers, Shari’ah service providers, Islamic banks, a regulator, an association body and fund managers.
Design/methodology/approach
– A comparative analysis is performed to highlight the variances of the Shari’ah-compliant methods and principles practiced by these renowned institutions with the latest compiled data.
Findings
– The two sets of business screens and financial screens are profiled separately to clearly examine the similarities and differences between the different methodologies. Some of these practitioners are more specific in their listing of Shari’ah-impermissible activities, while some are more general in allowing more businesses to be included as permissible. The majority of these users practice a two-tier method of screening: qualitative and quantitative. Under quantitative screen, the range of allowable threshold ratios on non-permissible criteria differs slightly between them.
Research limitations/implications
– With the wide divergence in screening methodologies applied by practitioners, there is a general consensus in the acceptance of compliant assets from various countries and practice. Standardization is, therefore, seen as a need not only to make understanding of Shari’ah investments clear to investors but also to discourage misunderstandings between scholars and investors.
Practical implications
– The suggestion, therefore, is to set globally acceptable universal Shari’ah standard methodologies which are applicable by the world Islamic financial market. These standards which are relevant and logical to global ethical investing would further stimulate investments in Islamic finance.
Social implications
– With Shari’ah-compliant asset growing exponentially relative to the world’s financial assets, it is alleged that greater harmonization of the global screening methods would prevent misunderstanding and provide a clearer insight on Shari’ah investing, which could further accelerate growth of the Islamic finance sector worldwide.
Originality/value
– To provide a more transparent regulatory environment and build local and regional regulatory framework through establishment of standards, there should be more consistency with minimum barriers that prevent the industry from achieving its full potential. The paper also contributes to existing literature by documenting and analyzing the qualitative and quantitative screening procedures as practiced by a comprehensive set of global Islamic finance users. It is, therefore, important to share this knowledge as an effort toward greater understanding and harmonization of the practices at the global level to accelerate growth in the industry.
Shariah is an Islamic law derived from the divine revelation and practice of the prophet; namely, al-Quran and al-Hadith. Shariah prohibits elements such as usury (riba), gambling (maysir) and uncertainty (gharar). These elements are present in many conventional financial activities. For a Muslim, this means getting involved indirectly in prohibited practices, which is considered as grave sin. To tackle this problem, Shariah scholars have set some acceptable boundaries for companies to do their business activities and outline steps to purify the sinful earnings. However, it is not an easy task to do. This paper will discuss the criteria, processes as well as the tediousness involved in the screening for Shariah compliant and proposed the possible solution to be undertaken to assist in the Shariah screening process.
This paper provides empirical evidence on risk-adjusted performance comparisons of share indices from Islamic and conventional markets. To ensure valid comparisons, the selected Islamic indices are matched with conventional indices. The Treasury-bill rate and the MSCI All-World index are used as risk-free rate and world benchmark, respectively. Monthly returns are analyzed and four sub-periods are examined as crisis and non-crisis periods. Findings reveal that Islamic indices outperformed their conventional counterparts during crisis periods but results are inconclusive for the non-crisis periods. This could be due to the conservative nature of Shari'ah-compliant investments offering investors superior investment alternative during crisis.
The present paper studies the financial performance of Islamic and conventional indexes for three major regions: Europe, the USA and the World. The study covers the period 2000–2011, enabling us to capture the impact of the recent global financial crisis. To this end, we computed different performance ratios and estimated the CAPM-GARCH model to take into account the financial risk time-variation in order to provide precise performance evaluations. Our findings offer some interesting results and have diverse economic and policy implications. First, while conventional investments seemed promising before the crisis and during periods of calmness, Islamic funds have outperformed them since the subprime crisis began and in turbulent times, but this result is specific to the region under consideration and to the performance criterion. Second, the heterogeneous conclusions in terms of performance may reflect the different states of development of the Islamic finance industry in these regions. Third, we show that the impact of the 2008–2009 global financial crisis on Islamic markets is less significant than for conventional markets, suggesting that by keeping their eye on Islamic finance products, investors can expect some interesting investment opportunities.
This paper focuses on Shari’ah-compliant investments, which are managed in a Shari’ah-compliant manner that goes beyond defining a set of rules or guidelines to generate a static list of automatically screened equities. Shari’ah screening is about identifying a set of investments that adhere to Shari’ah principles and would thus be considered eligible for an Islamic investor to invest in. Generally, different Shari’ah mandates can be found across the industry that may result in different asset universe sizes and constituents. The main distinction between the different rulebooks is the use of either total assets or market capitalization as the base to value a company and to use as denominator for the different financial ratios. By using the top 200 large cap companies in the United States as well as Japan, this paper reveals that different Shari’ah mandates result in discrepancies in asset universe size, constituents, asset allocation and most important, return and risk. Therefore such an analysis of the Shari’ah mandates is crucial before launching a new Islamic fund to ensure that the advantages and disadvantages of the different mandates are recognized and taken into consideration. This analysis also revealed that different mandates might be advantageous in different regions and time spans.
In this paper we analyze the effects of different strategies to construct Shariah compatible financial portfolios. The difference between conventional and current Shariah portfolio management is the application of sector screens and financial screens by which the asset universe is reduced. Yet, here different schools of scholars define different screening rules leading to significant differences with respect to compliance, but also with respect to performance. After analyzing this discrepancy we propose several new strategies to apply the inconsistent rule systems and a new paradigm for defining Shariah-compliance. Under this new paradigm compliance is attributed to the portfolio and not to the individual assets of the universe. We report results of an empirical study analyzing the potentials of these strategies and of the paradigm. We can show that under the proposed concepts Shariah-compliant portfolios can be realized which have return and risk profiles comparable to the conventional non-constrained portfolios.
This study provides a unique case study into the impact of stock exchange financing within the fully shari’ya compliant Islamic economy of Sudan. The evidence suggests that while Islamic financial instruments have considerable potential in facilitating development finance through their emphasis on partnership this is better achieved through the banking system rather than the Khartoum stock exchange. Larger firms able to cross list elsewhere are likely to accrue considerable benefits from lower costs of equity and ability to attract investors although governance preferences are likely to be towards block shareholders through listing in regional MENA markets.
We pursue the first large scale investigation of a strongly growing mutual fund type: Islamic funds. Based on an unexplored, survivorship bias adjusted dataset, we analyse the financial performance and investment style of 265 Islamic equity funds from twenty countries. As Islamic funds often have diverse investment regions, we develop a (conditional) three level Carhart model to simultaneously control for exposure to different national, regional and global equity markets and investment styles. Consistent with recent evidence for conventional funds, we find Islamic funds to display superior learning in more developed Islamic financial markets. While Islamic funds from these markets are competitive to international equity benchmarks, funds from especially Western nations with less Islamic assets tend to significantly underperform. Islamic funds’ investment style is somewhat tilted towards growth stocks. Funds from predominantly Muslim economies also show a clear small cap preference. These results are consistent over time and robust to time varying market exposures and capital market restrictions.
Purpose
The purpose of this paper is to compare the criteria used among Islamic Indices, specifically between the Kuala Lumpur Stock Exchange Shari'ah Index (KLSESI) and the Dow Jones Islamic Market Index (DJIM) in screening a permissible company for investment purposes. The two controversial criteria examined are: level of debt and level of liquidity of company.
Design/methodology/approach
The paper investigates the 642 companies listed on the Bursa Malaysia in 2006 as approved Shariah 's compliant companies by the Shari'ah Advisory Council of the KLSE.
Findings
Overall, the results reveal that the KLSESI does not use both the criteria set by the DJIM as its measures during the screening process. As for the level of debt criterion, the results show that 44.07 percent of the companies listed under the KLSESI are highly geared. These companies depend heavily on debt to finance their capital. However, the results for the level of liquidity criterion are not as extreme as the level of debt where it shows only 17 percent of the companies listed under the KLSESI are highly liquid. The results also indicate that if both criteria are compared concurrently, only 198 out of 565 companies listed under the KLSESI conform to the criteria set up by the DJIM.
Research limitations/implications
The main reasons why the differences exist among Islamic Indices are due to micro‐factor as faced by Malaysian companies such as the limited amount of capital resources. The Shari'ah supervisory board of the respective indices represents the sole body that determines the rules or criteria to be used by each index. This explains why the indices differ from one country to another and efforts should be done by regulators in the respective countries to harmonize the differing criteria used.
Originality/value
The paper represents the first study that compares the criteria used by two different indices regarding Islamic capital investment in a developing country.
Purpose
The purpose of this paper is to analyze the impact of applying alternative Shariah screens on the resulting universe of halal assets and to show that Shariah screening procedures currently used in practice are inconsistent with respect to discriminating between halal and haram.
Design/methodology/approach
An empirical data analysis of the different asset universes obtained when applying the criteria specified by the most prominent Shariah‐compliant funds and indexes to a common standard asset universe, the assets contained in the S&P 500 index.
Findings
Analysis reveals that the asset universes are significantly different in size as well as constituents, i.e. for every index there is a substantial number of assets which are specified as halal or haram but classified the opposite way for other indexes. This indicates that, so far, there is no universal or generally accepted understanding of how to transform the descriptive Shariah rules into a system of checkable investment guidelines.
Research limitations/implications
The results presented in this paper could motivate the development of a standardized screening framework which, taking into account the existing Shariah guidelines, produces a controlled, unified and understandable classification of assets, by which the credibility and consistency of Islamic equity products is enriched.
Practical implications
Islamic institutions and Shariah scholars are guided to set up a common and standardized Shariah screening norm based on which computer‐based management systems for Shariah compatible portfolios could be developed.
Originality/value
This paper is believed to be the first empirical comparative analysis identifying the impact of using different Shariah screens on the composition of the compliant asset universe. The sensitization of Shariah scholars, fund managers and Islamic investors for the consequences of this so far undiscovered relation will certainly contribute to an enrichment of the credibility and consistency of Islamic equity products.
This paper contributes to the current debate on the empirical validity of the decoupling hypothesis of the Islamic stock market from its mainstream counterparts by examining return and volatility spillovers across the global Islamic stock market, three main conventional national stock markets (the US, the UK and Japan) and a number of influential macroeconomic and financial variables over the period from July 1996 to June 2016. To that end, the VAR-based spillover index approach based on the generalized VAR framework developed by Diebold and Yilmaz (2012) is applied. The empirical analysis shows strong interactions in return and volatility among the global Islamic stock market, the conventional stock markets and the set of major risk factors considered. This finding means that the Islamic equity universe does not constitute a viable alternative for investors who wish to hedge their investments against the vagaries of stock markets, but it is exposed to the same global factors and risks hitting the conventional financial system. Therefore, this evidence leads to the rejection of the decoupling hypothesis of the Islamic stock market from conventional stock markets, which has significant implications for faith-based investors and policy makers in terms of portfolio diversification, hedging strategies and contagion risk.
This study compares the performance of market-weighted Shariah-compliant portfolios (SCPs) with conventional benchmark portfolios (CBPs) from the USA, Canada, Europe, the GCC, and Japan. Portfolios are constructed from constituent-level monthly price data using the Shariah screening criteria as proposed by MSCI, FTSE, Dow Jones, S&P and AAOIFI. The unique SCP construction approach used in this study removes any concerns of performance deviation due to the portfolio construction methodology, rebalancing timing, and management skills for security selection or market timing. Empirical results indicate that SCPs are generally less risky than CBPs. We also find that Shariah screening standards are insignificant in their effect on return performance. SCPs using the BVTA approach usually report a little better nominal and risk-adjusted returns than SCPs using the MVE approach for financial screening. The negligible difference in risk-adjusted performance and rebalancing based on different criteria indicate a need for greater consistency in applying Shariah screening standards.
Purpose: This study examines the phenomenon of fatwā shopping, its effect on consumer trust in Islamic finance products and the need for effective consumer protection regulations in the Islamic finance industry.
Design/methodology/approach: The methodology used in this study is qualitative research which draws significantly from relevant regulations on financial consumer protection through analytical method to identify common themes on fatwā shopping and consumer trust in the relevant literature.
Findings: This study finds that the increasing practice of fatwā shopping through clandestine searches by some Islamic banks to get their new products endorsed by leading Sharī‘ah scholars requires proper legal regulation to avoid a total erosion of trust in the entire Islamic finance industry.
Research limitations: Though fatwā shopping is practiced in the Islamic finance industry, it is always difficult to get some desperate Islamic bankers to agree to this; hence, this study does not portend to examine the evidence on fatwā shopping, but it seeks to bring to the fore the effect of fatwā shopping on consumer trust in Islamic financial services, and the need for effective consumer protection regulations.
Practical implications: This study is expected to provide an invaluable guide and policy framework for emerging and promising jurisdictions on the need to regulate fatwā shopping through effective legal framework based on some best practices identified in the study.
Originality/value: Though there have been a number of studies relating to fatwā shopping, focusing on the need for effective consumer protection regulations in the Islamic finance industry will enrich the existing literature and have significant implications for the future of the industry.
This article examines the occurrence and legal implications of ‘fatwā shopping’ in the Islamic finance industry and the need to put the proper legal mechanisms in place to regulate the phenomenon. It provides a case study of the existing legal restrictions in some jurisdictions with a centralised Sharīʿah Supervisory Board at the national level such as in Malaysia. As a preliminary review of the implications of ‘fatwā shopping’ in the industry, this study examines the consequential problems, current perceptions and prospects of such practice. The study finds that instances of ‘fatwā shopping’ are common in cross-border Islamic finance transactions such as cross-border ṣukūk transactions where there is less regulation.
The increasing presence of Islamic banking and finance in Malaysia's financial sector and the country's exemplary role in the global Islamic finance industry has called for an evaluation of the contribution of Islamic finance to the real economic activity. In order to empirically investigate the impact of Islamic finance on performances of major macroeconomic indicators, this study applies the ARDL approach on quarterly data set for Malaysia covering the period from 1998 to 2013. The results suggest that Islamic finance has started to make important contributions to the real economy by effectively carrying out the financial intermediation role of pooling and channeling funds to the investment activities. In view of the important contributions of Islamic finance to the Malaysian economy, continuous efforts need to be undertaken to further expand the industry. This includes refinement of the legal and regulatory framework to enable healthier growth of the industry, thus further strengthens Malaysia's position as the leader in the Islamic finance industry at the global level.
How do modern Muslims adapt their traditions to engage with today's world? Charles Tripp's erudite and incisive book considers one of the most significant challenges faced by Muslims over the last sixty years: the challenge of capitalism. By reference to the works of noted Muslim scholars, the author shows how, faced by this challenge, these intellectuals devised a range of strategies which have enabled Muslims to remain true to their faith, whilst engaging effectively with a world not of their own making. The work is framed around the development of their ideas on Islamic socialism, economics and the rationale for Islamic banking. While some Muslims have resorted to confrontation or insularity to cope with the challenges of modernity, most have aspired to innovation and ingenuity in the search for compromise and interaction with global capitalism in the twenty-first century.
The primary objective of the study is to provide a comprehensive description of the contemporary Shari ah investment screening process and its implication on the practices of managing mutual funds. This will be done by critically reviewing the application of such screening criteria, from both Shari ah and practical perspectives, and providing some suggestions for improvement. In practice there appears to be inconsistencies in the Shari ah investment screening criteria among Islamic investment institutions, as well as the changing of the Shari'ah rules over time. That shakes confidence in the application of Shari'ah screening criteria, which might adversely affect the Islamic mutual funds industry. The paper, therefore, attempts to identify such inconsistencies and proposes some practical solutions which may restore confidence in the investment screening process.
This book provides an overview of the practice of Islamic finance and the historical roots that define its modes of operation. The focus of the book is analytical and forward-looking. It shows that Islamic finance exists mainly as a form of rent-seeking legal-arbitrage. In every aspect of finance - from personal loans to investment banking, and from market structure to corporate governance - Islamic finance aims to replicate in Islamic forms the substantive functions of contemporary financial instruments, markets, and institutions. By attempting to replicate the substance of contemporary financial practice using pre-modern contract forms, Islamic finance has arguably failed to serve the objectives of Islamic law. This book proposes refocusing Islamic finance on substance rather than form. This approach would entail abandoning the paradigm of ‘Islamization’ of every financial practice. It would also entail reorienting the brand-name of Islamic finance to emphasize issues of community banking, micro-finance, and socially responsible investment.
Purpose
This paper seeks to review and extend previous research on the performance of Islamic mutual funds (IMFs) by evaluating the relative performance of IMFs and conventional funds during the global economic crisis in the context of the Saudi Arabian capital market.
Design/methodology/approach
This paper compares the market timing and stock selection abilities of 159 mutual funds listed on the Saudi Arabian stock market from 2007 to 2011 by using the CAPM regression and Treynor and Mazuy models. The paper addresses the benchmark problem from which most prior IMFs studies suffered by using appropriate regional benchmarks. As a robustness check, coefficients of IMFs and conventional funds are compared by using the differences in mean and standard deviation analysis obtained from the standard CAPM model on individual funds.
Findings
The empirical results show evidence of better performance of IMFs relative to conventional funds during periods of economic crisis. In addition, although there is no evidence of relative superiority in market timing ability, managers of IMFs appear to have better stock selection ability during times of economic crisis.
Research limitations/implications
The combination of superior stock selection ability of IMFs and the negative market timing ability of conventional funds suggest that IMFs offer better hedging opportunities for investors during periods of economic downturn.
Practical implications
The findings of this paper suggest that IMFs can provide hedging benefits during adverse economic conditions – an issue of great importance due to the current and forecast insecurity surrounding the global capital markets. By holding a portion of their investment portfolio in IMFs, investors can experience a higher degree of confidence in terms of investment security, growth and returns. Similarly, managers of conventional funds can improve risk adjusted performance by following similar screening criteria as IMFs during economic slowdowns.
Originality/value
This paper represents the first comprehensive study on the comparative performance of Islamic and conventional mutual funds during the current financial crisis by including all fund managers listed on the Saudi Arabian stock market. The paper extends the knowledge of the emerging literature of Islamic finance and mutual fund performance.
This study attempts to investigate market co-movements in Islamic and mainstream equity markets across US and Asia Pacific. The objective is to understand the behavior of contagion across multiple crises in the last decade and a half. Taking a lead from theory, of pure and fundamental contagion, we employ wavelet decomposition to unveil the multi-horizon nature of co-movement. Our findings support the popular belief, that the majority of the global shocks since 1996 were transmitted via excessive linkages from US to Asia Pacific, while the recent subprime crisis reveals a fundamental based contagion. In terms of the real sector grounded Islamic markets, they tend to show traces of reduced exposure in some crises owing to low leverage effect, while the less diversified portfolio nature increases vulnerability in other crises. The findings tend to provide an empirical grounds for the argument of Islamic equities and their composition, as a possible buffer to financial crises.
This study examines market co-movements in Islamic and mainstream equity markets across different regions in order to discover contagion during 9 major crises and to measure integration between markets. Using wavelet decomposition to unveil the multi-horizon nature of co-movement, we find that the shocks were transmitted via excessive linkages, while the recent subprime crisis reveals fundamentals-based contagion. While Islamic markets show traces of reduced exposure to the recent crisis owing to low leverage effect, their less diversified portfolio nature increases vulnerability to other crises. We generally find incomplete market
integration, with relatively higher fundamental integration for Islamic markets which may be attributable to their real sector allocation nature.
Past studies have shown considerable differences between equity markets in conventional and Islamic financial systems, in terms of financial products and principles. Using a copula approach, this study shows that the global Islamic equity market index (represented by the Dow Jones Islamic Market Index) exhibits significant dependence with three major global conventional equity indices (Asia, Europe, and United States) and the global factors (oil prices, stock market implied volatility (VIX), the U.S. 10-year Treasury bond interest rate, and the 10-year European Monetary Union government bond index) which are common to the world financial system and pertinent to contagion risks in the case of financial crises. Moreover, this dependence varies over time for all cases except the S&P 500 index and is also asymmetric between bear and bull markets in some cases. Our findings thus suggest that the Sharia-compliance rules are not restrictive enough to make the global Islamic equity market index very different from the conventional indices. In addition, the decoupling hypothesis of the Islamic equity universe from the conventional financial system is not well supported by our empirical evidence.
Islamic finance is emerging as a rapidly growing part of the financial sector in the Islamic wo rld. Islamic finance is not restricted to Islamic countries, but is spreading wh e re v e r t h e re is a sizable Muslim c o m mu n i t y. CCORDING to some estimates, more than 100 financial institu-tions in over 45 countries practice some form of Islamic finance, and the industry has been growing at a rate of more than 15 percent annually for the past five years. The market's current annual turnover is estimated to be 5 billion in 1985, and is projected to hit the $100 billion mark by the turn of the century. The growth in Islamic finance initially coincided with the current account sur-pluses of oil-exporting Islamic countries. But its continued growth in the face of eroding oil revenues reflects the influence of other factors, such as the desire for sociopo-litical and economic systems based on Islamic principles and a stronger Islamic identity. In addition, the introduction of broad macroeconomic and structural reforms—in financial systems, the liberal-ization of capital movements, privatization, and the global integration of financial mar-kets—have paved the way for the expan-sion of Islamic finance. What is Islamic finance? Islamic finance was practiced predomi-nantly in the Muslim world throughout the Middle Ages, fostering trade and business activities with the development of credit. In Spain and the Mediterranean and Baltic states, Islamic merchants became indis-pensable middlemen for trading activities. In fact, many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen. In contrast, the term "Islamic financial system" is relatively new, appearing only in the mid-1980s. In fact, all the earlier refer-ences to commercial or mercantile activities conforming to Islamic principles were made under the umbrella of either "interest-free" or "Islamic" banking. However, describing the Islamic financial system simply as "interest-free" does not provide a true picture of the system as a whole. Undoubtedly, prohibiting the receipt and payment of interest is the nucleus of the system, but it is supported by other princi-ples of Islamic doctrine advocating risk sharing, individuals' rights and duties, property rights, and the sanctity of con-tracts. Similarly, the Islamic financial sys-tem is not limited to banking but covers capital formation, capital markets, and all types of financial intermediation. Interpreting the system as "interest free" tends to create confusion. The philosophi-cal foundation of an Islamic financial sys-tem goes beyond the interaction of factors of production and economic behavior. Whereas the conventional financial system focuses primarily on the economic and financial aspects of transactions, the Islamic system places equal emphasis on the ethical, moral, social, and religious dimensions, to enhance equality and fair-ness for the good of society as a whole. The system can be fully appreciated only in the context of Islam's teachings on the work ethic, wealth distribution, social and eco-nomic justice, and the role of the state. The Islamic financial system is founded on the absolute prohibition of the payment or receipt of any predetermined, guaran-teed rate of return. This closes the door to the concept of interest and precludes the use of debt-based instruments. The system encourages risk-sharing, promotes entre-preneurship, discourages speculative be-havior, and emphasizes the sanctity of contracts (Box 1). An Islamic financial system can be ex pected to be stable owing to the elimina-tion of debt-financing and enhanced alloca-tion eff i c i e n cy. A "two -w i n d ows" model for Islamic financial intermediaries has bee n s u g gested in which demand deposits are b a cked 100 pe rcent by re s e rves, and inve s t-ment deposits are accepted pure ly on an equity-sharing basis. Analytical models d e m o n s t rate that such a system will be s t able since the term and stru c t ure of the l i abilities and the assets are symmetrically m a t ched through profit-sharing arra n ge-ments, no fixed interest cost accrues, and refinancing through debt is not po s s i b l e. Allocation eff i c i e n cy occurs because in-vestment altern a t ives are strictly selected based on their pro d u c t ivity and the ex pected rate of re t urn. Finally, en-t rep re n e urship is encoura ged as entre-p re n e urs compete to become the agents for the suppliers of financial capital who, in t urn, will cl o s e ly scru t i n i ze projects and m a n a gement tea m s.
The systematic failure of the global equity markets during the recent financial crisis made investors re-evaluate their portfolio constituents. It is argued that equities that comply with the Islamic investment principles perform better than conventional equities during the declining phase of capital markets. The better performance of Islamic investments can be attributed to the Shari’ah based screening criteria that specifically forbids investment in shares of those companies that are excessively leveraged and/or engaged in lending activities. This study investigates the extent to which this claim is valid by comparing the performance of global and regional Islamic equity indices (IEIs) with conventional equity indices during the past decade. The equity indices for such analysis are preferred since it does not account for transaction costs or management skills. A logistic smooth transition autoregressive (LSTAR) model is used to investigate whether the ‘down market’ performance of IEIs differs fromconventional indices. The LSTAR is superior to conventional ordinary least squares models since this allows for a smooth transition from the ‘down market’ to the ‘up market’ rather than an abrupt change. The empirical results indicate that IEIs, in general, perform better than conventional indices during the period 2000 to 2012. We do not find any abnormal returns associated with Islamic equity indices on a global basis however, there is evidence of positive abnormal returns in the case of regional indices from Europe and Asia. Overall, IEIs exhibit lower systematic risk as compared with their benchmark suggesting that any excess performance from Islamic investments stems from the systematic risk that each investments assumes with respect to their benchmark during the declining phase of capital markets. The findings of this study is of interest to both academics and the general investing public since it provides evidence that IEIs are comparatively less risky than their conventional counterpart and thus provide hedging opportunities during the downfall of capital markets.
Past studies suggest that the Islamic finance system is only weakly linked or even decoupled from conventional markets. If this statement is true, then this system may provide a cushion against potential losses resulting from probable future financial crises. In this article, we make use of heteroscedasticity-robust linear Granger causality and nonlinear Granger causality tests to examine the links between the Islamic and global conventional stock markets, and between the Islamic stock market and several global economic and financial shocks. Our findings reveal evidence of significant linear and nonlinear causality between the Islamic and conventional stock markets but more strongly from the Islamic stock market to the other markets. They also show potent causality between the Islamic stock market and financial and risk factors. This evidence leads to the rejection of the hypothesis of decoupling of the Islamic market from their conventional counterparts, thereby reduces the portfolio benefits from diversification with Sharia-based markets. A striking result shows a connection between the Islamic stock market and interest rates and interest-bearing securities, which is inconsistent with the Sharia rules. The results also suggest that modeling Islamic stock markets should be done within a nonlinear VAR system and not through a regression equation.
This paper uses stochastic dominance (SD) analysis to examine whether Islamic stock indexes outperform conventional stock indexes by comparing nine Dow Jones Islamic indexes to their Dow Jones conventional counterparts: Asia Pacific, Canadian, Developed Country, Emerging Markets, European, Global, Japanese, UK, and US indexes. Over the periods of 1996–2012 and 2001–2006, we find that all conventional indexes stochastically dominate Islamic indexes at second and third orders in all markets except the European market. However, the European, US, and global Islamic stock indexes dominate conventional ones during the 2007–2012 period. The results indicate that Islamic indexes outperform their conventional peers during the recent global financial crisis. Thus, Islamic investing performs better than conventional investing during meltdown economy.
Saudi Arabia constitutes more than 20% of the global Islamic capital market. More than 80% of the mutual funds listed on Saudi Arabian stock market are Shari’ah compliant funds. This article reviews and extends previous research on the performance of Islamic mutual funds (IMFs) by evaluating the relative performance of IMFs and conventional funds during the global economic crisis from April 2007 to June 2011 in the context of the Saudi Arabian capital market. Standard CAPM regression and Treynor and Mazuy (1966) models are used to compare the market timing and stock selection abilities of IMFs and conventional funds by using monthly returns data on 159 mutual funds listed on the Saudi Arabian stock market from 2007 to 2011. The empirical results provide evidence of better performance of IMFs relative to conventional funds during the economic crisis. In addition, although, there is no evidence of relative superiority in market timing ability, managers of IMFs appears to have better stock selection ability during the economic crisis. The combination of superior stock selection ability of IMFs and the negative market timing ability of conventional funds suggests that IMFs offer better hedging opportunity to investors during periods of economic downturn. All investors, regardless of ethical or religious orientation, can enjoy the benefit of hedging by holding a proportion of investment portfolio in IMFs. Similarly, managers of conventional funds can improve the risk adjusted performance by following similar screening criteria as IMFs during economic slowdowns.
This paper examines the performance of seven indexes chosen from the Dow Jones Islamic Market Index (DJIM) vis-à-vis their non-Islamic counterparts using a variety of measures such as Sharpe, Treynor, Jensen and Fama’s selectivity, net selectivity and diversification. Second, we examine the persistence of performance using Carhart’s (1997) four factor pricing models. Third, we use cointegration to examine how the Islamic indexes compare to their non-Islamic counterparts. The sample period is from January 1996 to December 2005 (120 data points). It is further broken down into two sub-periods: January 1996 to December 2000 (60 data points) and January 2001 to December 2006 (60 data points). We find no difference between Islamic and non-Islamic indexes. The Dow Jones Islamic indexes outperform their conventional counterparts from 1996 to 2000 and underperform them from 2001 to 2005. Overall, similar reward to risk and diversification benefits exist for both the Islamic and conventional indexes.
In this paper I derive a risk-adjusted measure of portfolio performance (now known as Jensen's Alpha) that estimates how much a manager's forecasting ability contributes to the fund's returns. The measure is based on the theory of the pricing of capital assets by Sharpe (1964), Lintner (1965a) and Treynor (Undated). I apply the measure to estimate the predictive ability of 115 mutual fund managers in the period 1945-1964 - that is their ability to earn returns which are higher than those we would expect given the level of risk of each of the portfolios. The foundations of the model and the properties of the performance measure suggested here are discussed in Section II. The evidence on mutual fund performance indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance. It is also important to note that these conclusions hold even when we measure the fund returns gross of management expenses (that is assume their bookkeeping, research, and other expenses except brokerage commissions were obtained free). Thus on average the funds apparently were not quite successful enough in their trading activities to recoup even their brokerage expenses.
Islamic finance is a prohibitions-driven industry, which aims primarily to circumvent the canonical Islamic prohibitions of riba and gharar. The concepts of riba and gharar may best be understood as unbundled sales of credit and risk, respectively. An obvious solution is to adopt mutual structures for financial intermediaries of credit (e.g., banks) and risk (e.g., insurance companies), as early experiments in Islamic finance had apparently done. However, growth in Islamic finance over the past three decades has been led by rent-seeking Shariah arbitrageurs, whose efforts continue to be focused on synthesizing contemporary financial products and services from classical nominate contracts, without regard to corporate structure of financial institutions. In this article, I argue that mutuality should be given back its central role in our discourse on Islamic finance. In particular, I argue that mutuality in intermediation of credit and risk can assist significantly in implementing the substance of Shariah as well as its forms, including the financial empowerment of Islamic financial customers (be they Muslims or otherwise) to face the challenging domination of Islamic finance by international financial behemoths. © 2007 Wiley Periodicals, Inc.