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KembaraXtra–Islamic Finance–Islamic Capital Market-
Comparative Performance of Islamic and Conventional Indices**
Purpose of Screening in Islamic Investing
• Investors in Islamic mutual funds must apply sector screening (business must be halal) and financial screening (limits on debt, interest income, etc.)
• This ensures investments align with Islamic values and beliefs
• A common concern is that screening may reduce returns by limiting the investment universe
Does Shari’ah Screening Reduce Performance?
• Academic literature shows this concern is largely unfounded
• Screening removes Shari’ah non-compliant firms but still leaves a large enough set of companies for proper diversification
• Studies such as Hassan (2005) and Rana & Akhtar (2015) find that:
– Islamic portfolios often achieve equal or higher expected returns than conventional portfolios
– Risk-adjusted performance is frequently better for Islamic indices
Indices Used for Comparison
• Developed markets
• Global markets
• Emerging markets
• S&P 500
• S&P Europe
• Each category is compared between Islamic (Shari’ah-compliant) and conventional indices
Key Performance Measures Explained Simply
• Annualised Return: Average yearly return over a period
• Standard Deviation (SD): Measures volatility (how much returns fluctuate)
• Coefficient of Variation (CV): Risk per unit of return (lower is better)
Overall Performance (2007–2016)
• Islamic indices generally delivered higher annualised returns than conventional indices
• Exception: Emerging markets, where conventional indices performed better in some periods
• This shows Islamic investing does not require sacrificing returns
Performance During Financial Crisis (2007–2010)
• Islamic indices did not consistently show lower volatility during the crisis
• In most cases, SD and CV were similar to conventional indices
• Exceptions:
– S&P 500
– S&P Europe
• This indicates that during extreme global stress, both systems were affected similarly
Post-Crisis Performance (2011–2016)
• Islamic indices showed:
– Lower standard deviation
– Lower coefficient of variation
• Meaning:
– Less volatility
– Better risk-adjusted returns
• This suggests Islamic indices recovered faster and more steadily after the crisis
Why Islamic Indices Often Perform Well
• Lower leverage (less debt)
• Avoidance of speculative and highly volatile sectors
• Greater exposure to real economic activities
• Built-in risk-sharing rather than risk transfer
Investment Allocation Context (2018)
• Islamic mutual funds: US$97 billion
• ETFs: US$9 billion
• Insurance funds: US$2 billion
• Pension funds: US$0.37 billion
• Shows Islamic funds are still smaller than conventional funds but growing steadily
Main Conclusion from Empirical Evidence
• Islamic indices are not inferior to conventional indices
• After adjusting for risk, Islamic indices are often superior
• Shari’ah screening improves stability and resilience, especially in post-crisis periods
One-line Summary
👉 Islamic indices demonstrate competitive—and often superior—risk-adjusted performance compared to conventional indices, proving that ethical investing does not require sacrificing returns.
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