The following industry and market analysis is primarily based on the most recent Islamic Financial Services Industry Stability Report (2014) provided by the Islamic Financial Services Board.
The total amount of assets in the Islamic financial industry was approximately $1.8 trillion by the end of 2013. The Islamic financial industry includes 4 major subcategories, Islamic banking, Sukuk (Islamic capital markets), Takaful (Islamic insurance) and Islamic Microfinance.
By far the largest subcategory is Islamic banking with an estimate of 80% of all assets. The remaining 20% split up to Sukuk $245.3 billion, Islamic funds $68.9 billion and Takaful $18.3 billion. The Islamic financial industry is still very small in comparison to the traditional industry, however it is one of the fastest growing sectors with an Compound Annual Growth Rate (CAGR) of 17,04% between the years of 2009 and 2013. The growth in the Islamic banking industry was, on average, 20% after the recovery of the global financial crisis in 2009. Most of the assets are concentrated in Islamic countries like Gulf Cooperation Council and Malaysia. Beside these major players, other countries in the Middle East or North Africa showed a rapid growth or entered the market.
Further growth, mentioned by Iqbal and Tsubota (2006), is also expected because of the increasing demand of Sharia compliant investments and financing due to the growth of “oiladollars” and the immigration of Muslim people all over the world.
The specialty of the regulatory framework for Islamic investments is that they all have to be Shariah confirm. The main principals for Islamic investments are (AlaSuwailem,'2006):
• It is not allowed to invest money only for the sole purpose of profit.
• The concept of interest (Riba) is not allowed
• It is only allowed to invest in companies, which are Shariah confirm (alcohol, weapons, pornography, gambling, etc. are prohibited by the Shariah)
• Gambling as itself is not allowed
• No high uncertainty/risk (Gharar) can be taken
• And the risk must always be shared between the lender and the borrower
One of the important differences between conventional finance and Islamic finance, as far as risk is concerned, is that in Islamic finance the risk must be split between borrower and lender and very high risk investments like short selling and high leverage is not allowed.
Table of Contents
Industry and Market Analysis
Literature Review
Data Analyses
Research Objective and Topics
This essay aims to contribute to the ongoing academic discussion regarding the performance of Islamic indices in comparison to conventional indices. By analyzing recent market data, the research investigates whether Islamic investment vehicles offer distinct risk-return characteristics and if they outperform their conventional counterparts across different economic phases, specifically considering the impact of the global financial crisis.
- Comparison of Islamic and conventional index performance.
- Evaluation of risk-adjusted returns using Sharpe and Treynor ratios.
- Analysis of systematic risk through CAPM-based beta estimation.
- Investigation of market diversification opportunities for investors.
- Examination of index behavior before, during, and after the global financial crisis.
Excerpt from the Book
Literature Review
This literature review will give an overview of the scientific literature regarding Islamic finance, however will focus on Islamic equity with emphasis on the performance of Islamic indices in comparison to conventional indices.
The two most studied topics are the performance of Islamic (mutual) funds and on Islamic indices.
Islamic mutual funds are substantially different form conventional funds for the reasons mentioned above (Shari’ah compliance). Hence, it is of interest to analyse if Islamic funds substantially underperform their conventional equivalent. Abdullah et al. (2007) examined the Jensen alpha of a portfolio of 14 Malaysian Islamic funds between the years 1992 to 2001 and where able to show that the Islamic portfolio significantly underperformed its market benchmark. This finding is confirmed by Kraeussl & Hayat (2008), who also find the underperformance of Islamic equity funds. However, Walkshäusl et al. (2012) find no significant difference in the performance of Islamic portflios.
Summary of Chapters
Industry and Market Analysis: This chapter provides an overview of the Islamic financial industry, detailing its subcategories and the regulatory framework that necessitates Shari'ah compliance for investments.
Literature Review: This section surveys existing scientific research regarding the performance of Islamic mutual funds and indices, noting that results remain highly contradictory across various studies and markets.
Data Analyses: This chapter presents an empirical study comparing US conventional and Islamic indices using CAPM regression, Sharpe ratios, and Treynor indices to evaluate risk-adjusted performance across four specific time periods.
Keywords
Islamic finance, Conventional finance, Shari'ah compliance, Market performance, Index analysis, Sharpe ratio, Treynor index, Beta, Risk-adjusted returns, Financial crisis, Diversification, CAPM, Islamic indices, Equity funds, Investment risk
Frequently Asked Questions
What is the fundamental focus of this research paper?
The paper primarily examines and compares the financial performance of Islamic indices against conventional indices to determine if there are significant differences in their risk and return profiles.
Which specific themes are addressed in this work?
Key themes include Shari'ah-compliant investment principles, performance measurement during financial market fluctuations, and the diversification benefits of Islamic equity indices.
What is the primary goal of the study?
The main objective is to provide empirical evidence on whether Islamic indices outperform or underperform conventional benchmarks, thereby contributing to the broader literature on ethical and Islamic investment.
Which scientific methods are employed?
The study utilizes the Capital Asset Pricing Model (CAPM) for beta estimation, along with Sharpe and Treynor ratios to assess risk-adjusted performance across different economic samples.
What content is covered in the main body of the paper?
The main body includes an industry analysis, a review of existing scientific literature, and a quantitative data analysis section that evaluates specific US-based indices from 2003 to 2015.
How would you characterize this work with keywords?
The work is characterized by terms such as Islamic finance, index analysis, risk-adjusted returns, CAPM, and Shari'ah compliance.
What do the regression results suggest about market outperformance?
The regression outputs indicate that neither index was able to substantially outperform the market consistently, suggesting that investors would not have gained abnormal returns by choosing one over the other.
How did the financial crisis affect the indices' performance?
The study breaks the data into periods before, during, and after the crisis, revealing that while Islamic indices sometimes showed higher average positive returns, the overall differences between them and conventional counterparts remain marginal.
- Citation du texte
- Arthur Ritter (Auteur), 2015, Islamic Investments. An Overview and Comparison of Islamic Indices, Munich, GRIN Verlag, https://www.grin.com/document/299131
