A comparison of the performance of the FTSE South Africa Islamic Index to the conventional market (JSE) in South Africa

Abstract

Over the past four decades there has been a growing interest in the emerging field of Islamic finance and investment (IFI) in South Africa and more generally in other parts of the Western world. One of the distinguishing features of IFI is that investment in any form of business enterprise has to meet certain criteria that fulfil the requirements of Islamic Law (Shariah). In South Africa there has accordingly been a concerted effort to embrace the principles of IFI in the market. The aim of this study is to identify whether there has been any difference in the financial performance of shares on the stock exchange meeting the Islamic investing criteria compared to those that do not, within an emerging market context. The proxy for the Islamic market is the Financial Times Stock Exchange (FTSE) South Africa Islamic Index. The returns on this index are compared to three proxies for the conventional market from 1996 to 2007 using single and multiple regression models: (1) the All Share Index on the Johannesburg Stock Exchange (JSE) in a single-factor regression; (2) the Resources Index and Financial-Industrial Index in a two-factor model; (3) and a four-factor model developed by Carhart (1997) that accounts for size, growth and momentum in the market in addition to the All Share Index. Looking at all three measures, no significant differences were identified in the performance of the Islamic index compared to that of the conventional market.