Islamic Funds Research Articles

Analysis & Test of Market Efficiency: A Case Study of KSE

This study employs more recent and comprehensive data (1997-2013) for the empirical verification of weak form efficiency in Karachi Stock Exchange (KSE). We use Augmented Dickey Fuller (ADF) and Philips-Perron (PP) tests to detect unit root in the daily returns series. Further, we run Random Walk Model (RWM) to detect unit root in returns series. We use Runs test to detect any possible serial correlation in residuals. Results are in support of weak form efficiency. However, the study argues that strong form efficiency does not exist in KSE. We compare equity funds returns with KSE 100 Index returns for 10 years (2003-2012) and we find that the mean returns and standard deviations are not much different. However, the correlation between the returns is found to be low which indicates that equity funds do not mimic market index and have very concentrated portfolios comprising of growth stocks. Finally, we also compare the returns and Sharpe ratio for Islamic and conventional equity mutual funds. Since Islamic funds due to investment and trading restrictions can not exactly mimic market portfolio, the return comparison could help in studying whether the contention of EMH proponents that expert investors too can do as good as earning returns on market portfolio is entirely valid or are there some qualifications and exceptions. We report evidence that challenges the EMH proposition.

Analisis Akad Mudharabah Dalam Fasilitas Pendanaan Jangka Pendek Syariah Pada Bank Syariah Mandiri

Islamic Banking began to grow rapidly since 2001, in line with these developments required an Islamic Short Term Funding Facility (FPJPS), with mudharabah mechanism provided by the central bank, Bank Indonesia, so that the value of the liquidity of Islamic banking especially Bank Syariah Mandiri increased. This research is descriptive qualitative using data and information as well as the study of literature / bibliography. This study was elaborated on the Islamic Short Term Funding Facility (FPJPS) mechanism mudharabah and Bank Syariah Mandiri how to respond to the Islamic Short Term Funding Facility

Is Ethical Money Sensitive to Past Returns? The Case of Portfolio Constraints and Persistence in Islamic Funds

In this paper, we analyze the performance persistence and survivorship bias of Islamic funds. The remarkable growth of these types of ethical funds raises the question of how non-financial attributes, including beliefs and value systems, influence performance and its persistence. A procedure commonly used in prior literature to assess persistence is the measuring of the performance of investment strategies based on past performance. In this context, we propose a refined version of this methodology that controls the cross-sectional significance of the performance of these strategies. This procedure correctly identifies whether abnormal performance is due to a dynamic investment strategy based on past performance, or whether it is obtained by investing in a particular set of mutual funds. The significance of the persistence varies depending on the time horizon (yearly/half-yearly), survivorship, or the tail of the distribution. In particular, we find that persistence only exists for the best funds, whereas for the worst funds, the results are not significant.

Comparison between Islamic and General Equity Funds of Pakistan: Difference in Their Performances and Fund Flow Volatility

This study aims to analyze the performance, assets volatility and fund flow performance relationship of Islamic and conventional equity funds. Islamic funds are different from conventional funds as they do not invest in those businesses whose operations or capital structure is against the Shariah (law) of Islam. We do not find any significant difference between the performances of Islamic and conventional funds and they both are unable to beat the market. Conventional funds witnessed more volatility in their asset size than Islamic funds. Islamic funds are more sensitive to lagged positive returns and less sensitive to lagged negative returns as compared to conventional funds. These results indicate that Islamic investors derive multi attribute function instead of just profit and risk optimization.

Socially responsible investing and Islamic funds: New perspectives for portfolio allocation

The purpose of this paper is to investigate the performance of ethical and conventional investments. It examines also whether socially responsible and Islamic investments offer an additional opportunity for domestic investors to diversify their portfolios. Empirical results show that ethical investment ethical investment has inferior performance compared with their unscreened benchmarks. Moreover, using cointegration analysis, empirical results show the absence of long-run relationship between Islamic and conventional indices which offer new potential for portfolio diversification in local markets. However, there exist a long-run relationship between SR indices and their conventional counterparts. In the other hand, cointegration tests show that Islamic and socially responsible indices have long-run relationship only for FTSE indices.

Comparative performance-related fund flows for Malaysian Islamic and conventional equity funds

Purpose – The purpose of this paper is to compare the fund flow – performance relationship for Islamic and conventional equity funds in Malaysia. Design/methodology/approach – The authors use panel regression models to estimate the relationship between fund flows and performance for Islamic and conventional equity funds in Malaysia from 2001 to 2009. The data for each fund include fund flows, assets under management, management expenses, fund age, portfolio turnover, fund risk and return and the number of funds in the fund’s family. The authors also include market returns and year effects. The sample consists of 127 Malaysian equity funds with at least 65 per cent domestic equity holdings comprising 35 Islamic and 92 conventional equity funds. Findings – Islamic fund investors respond to performance in much the same way as conventional fund investors, increasing fund flows to better performing funds and decreasing fund flows to poorer performing funds. However, there is also evidence that Islamic fund investors are relatively less responsive toward poorly performing Islamic funds, suggesting an asymmetry in the expected positive fund flow – performance relationship, but only for Islamic fund investors. When choosing funds based on other fund attributes, Islamic fund investors again exhibit similar behaviour, and like conventional fund investors direct larger percentage fund flows into smaller funds as well as funds with larger past fund flows and higher expense ratios. Research limitations/implications – The authors were only able to access data on annual net fund flows not quarterly or monthly fund inflows and outflows as usual in developed markets and this may obscure some important aspects of investor decision-making. There is also insufficient data for matched-sample techniques, which may better control for fund-specific characteristics. Practical implications – Islamic funds like conventional funds will experience increased fund flows with better performance and vice versa. However, Islamic fund investors appear somewhat less likely to remove monies from poorly performing funds. The authors believe this is because investors either place a premium on the non-return attributes of Shariah-compliant funds and/or wish to avoid search costs in finding another suitable Islamic fund. Apart from this, Islamic and conventional fund investors behave in a similar manner, and the authors believe that this is possible in Malaysia given the size and diversity of its Islamic fund sector. Originality/value – This paper is one of the very few empirical studies concerning the behaviour of Islamic investors, particularly in Malaysia, primarily because of limitations in data availability.

A Comparative Returns Performance Review of Islamic Equity Funds with Socially Responsible Equity Funds and the Broader Market Indices

Islamic mutual funds and socially responsible mutual funds are two similar asset classes that incorporate negative screens in their portfolio selection process to filter out stocks that fail to meet certain ethical, social, environmental, and/or religious standards. This study uses a single-factor capital asset pricing model and an adjusted sample consisting of 224 Islamic funds and 573 socially responsible funds to examine their excess risk-adjusted returns, market volatility, and systematic risk. It also gauges the market-timing abilities of the fund managers concerned in relation to both Islamic/socially responsible and conventional market indices. While there are some differences in the risk factors of Islamic funds and socially responsible funds, both are associated with lower risks and have the same market-timing ability.

Constrained investments and opportunity cost – evidence from Islamic funds

Purpose – The purpose of this paper is to examine the impact of Shariah guidelines on the performance of the Dow Jones Islamic Index (DJIM-US). Shariah or Islamic law is a set of rules that determines Islamic allowed activities including socially and ethically acceptable investments. Design/methodology/approach – The authors apply four risk-adjusted methodologies and co-integration analysis to investigate whether limited asset universe Shariah investments limit investment opportunities and impose an opportunity cost on investors given the prediction of conventional portfolio theories. Findings – In contrast to the prediction of conventional portfolio theories, the findings suggest no apparent opportunity cost for Shariah compatible investments. In particular, Dow Jones Islamic Mutual Funds do not under-perform the broader market US benchmarks nor do they have any co-integration with the broader indexes. Moreover, the authors find similar evidence in the studies of Islamic mutual funds in Saudi Arabia, Malaysia and Kuwait. Research limitations/implications – The findings will be reinforced when the authors will look into long run performance of Shariah compliant funds in future. Using non-linear approach will add further clarity to the findings. Practical implications – The results provide an insight suggesting that successful mutual fund managers are able to overcome Shariah restrictions and constraints through creative investment strategies. In the data set, the Amana Trust Growth fund and the Amana Trust Income fund were always the best performers with a highly significant abnormal return, no matter what the methodology was. Social implications – The performance of Islamic funds during the approximately seven-year period covered by the study is very promising. Popularity of Islamic Investment is expected to grow as Muslim population represents about 25 percent of the world population and the possibility for the Muslim funds to be considered as viable alternative by non-Shariah abiding or non-Muslim investors. The empirical results in the paper provide evidence that lack in diversification did not constrain the performance of Islamic funds. Originality/value – This paper applied comprehensive risk-adjusted methodologies and co-integration analysis to Islamic Funds for a seven-year period for multiple countries. The findings confirm previously obtained results and highlight the fact that constrained Islamic Funds may not under-perform as per conventional portfolio theories.

A critical analysis of Islamic equity funds

Purpose – The purpose of this paper is to highlight the inconsistencies between the methodologies of Islamic funds and indices. Design/methodology/approach – The paper has reviewed the methodologies of the most prominent funds and indices (5) to apply their apparent screening features to the asset universe. In the analysis conducted, qualitative and quantitative screens are derived from each selected fund and index methodological approach to asset selection subject to Shari’ah constraints. Qualitative screens are applied first followed by quantitative screens. Findings – Few inconsistencies are evident between the chosen funds and indices when the qualitative screens are applied. However, the major inconsistencies are highlighted after analysis of the quantitative screens. Research limitations/implications – A number of companies within the asset universe are investment trusts, and such financial statement line item data were not found. However, this posed no difficulty, as these companies were investment trusts and would have been excluded in the qualitative screening process. Social implications – This paper will assist in the construction of a framework which thus leads to the development of a standardized methodological approach, ultimately benefiting investors. Originality/value – This paper is believed to be the first which analyzes the impact of Shari’ah screens on the Financial Times Stock Exchange (FTSE). Additionally, this paper also analyzes the impact of Shari’ah screens pre and post the financial crisis. The findings of this research paper will also aid in the construction of a different research methodological approach capable of selecting halal securities listed in the FTSE 250.

Performance of Islamic Mutual Funds: A Comparison with Conventional Mutual Funds

slamic finance industry has been expanded in the last decade and has branched out itself from banking to other financial sectors like Islamic Assets Management and Islamic Insurance Companies. Islamic finance industry growth over the past decade is impressive comparative to conventional sector particularly at the time of financial crisis. The focus of this research study is to assess the performance of Islamic and Conventional mutual funds in Pakistan for the period of 7 years ranging from 2007 to 2013. The research also studied the impact of NAV on mutual funds and how the volatility influences the Islamic and Conventional mutual funds. This research is based on the sample of equity funds using all Asset Management Companies in Pakistan on the basis of availability of each fund‘s NAV. The findings suggest that mutual funds performance led to mixed trend. The results indicates that portfolio returns of Islamic funds are more clustered around mean that shows the level of consistency in the performance of the Islamic funds, whereas portfolio returns of the Conventional funds are more volatile and inconsistent comparatively. Concerning overall performance, Islamic funds performed better than Conventional funds.

Large scale analysis of Islamic equity funds using a meta-frontier approach with data envelopment analysis

The paper aims to analyze the efficiency of Islamic equity funds (IEF) during crisis and growth periods and across six investment regions. To our best knowledge, our study uses for the first time the meta-frontier approach with data envelopment analysis (DEA) to compare the relative efficiency of Islamic equity funds. The paper uses a large scale set of data with a sample of 301 IEF for the period of 1993–2013 which enables us to reach conclusions across different investment regions and across different periods which cannot be made with a small size set of data. The paper provides empirical evidence about the improvement of the efficiency levels between 2002 and 2007. It shows that the average efficiency scores during recession periods are higher than the corresponding scores during growth periods. The paper also reveals that the Asia Pacific and Middle East/Africa investment regions exhibit the best technology for IEF. While North America, Europe, Emerging Markets and funds investing worldwide operate with almost the same scores and remain below the average showing a technology gap from “the best practice” for IEF. For funds investing worldwide and in North America, the meta-technology ratio is steadily increasing since 2009, indicating an improvement in their technologies. Our results suggest that although Islamic funds do not seem to be impacted by the financial crisis, they do need to improve their efficiency since the levels are far below the frontier.

Are Islamic stock markets efficient? A time-series analysis

This article investigates the weak-form informational efficient hypothesis for three major Islamic stock markets (world, emerging and developed). Unlike previous studies, we applied different parametric and nonparametric tests to investigate efficiency in the short and long horizons. Using recent data over the period May 2002–June 2012, we developed a time-series analysis of Islamic stock price dynamics in the context of the recent global financial crisis (2008–2009). Our analysis offers two interesting results. First, emerging Islamic stock markets seem to be less efficient than developed Islamic markets, suggesting interesting investment opportunities and diversification benefits from this region in both the short run and the long run. Second, nonrejection of the cointegration hypothesis for developed Islamic markets and the global conventional stock market point to efficiency for the former in the long term, even if it is inefficient in the short term. This finding has at least two economic and political implications: (i) investors who seek moderate risk would do well to opt for Islamic funds in developed countries, particularly as they share the same tendency and provide similar expected returns in the long term as conventional funds, (ii) Islamic financial systems can offer a useful model that can help to reform and remodel conventional financial institutions.

Growth and Sustainability of Islamic Finance Practice in the Financial System of Tanzania: Challenges and Prospects

Tanzania has witnessed an abrupt growth in Islamic finance industry over the last decade. A quick survey has revealed attractiveness of the industry to conventional bankers, financial agencies and among Muslims particularly between 2008 and 2013. Islamic financial institutions have grown in terms of the increasing number of Islamic products and assets particularly in the year 2012 during which, three banks and three Islamic Microfinance institutions (SACCOS) were opened, and seemed to give a promising future if sustained. However, this remarkable growth and sustainability of improved financial services is jeopardized by lack of national legal framework that guides financial operations within the system of Central Bank of Tanzania, and dysfunction of traditional Islamic funding system such as ‘Takaful’ and ‘Zakat’. This situation predicts a plight future for the industry in the country, and if it is not addressed properly will add to the list of the widespread poverty and deteriorating people's socio-economic status.

Global factors driving structural changes in the co-movement between sharia stocks and sukuk in the Gulf Cooperation Council countries

In this paper, we investigate the volatility spillovers between sukuk and sharia-compliant stocks in GCC countries. A multivariate Fractionally Integrated Asymmetric Power ARCH model with dynamic conditional correlations (DCC) is estimated under Student-t distribution. We provide strong evidence of persistence behavior in sukuk and sharia stock volatilities and a time-varying negative correlation. Using the Bai and Perron (2003. Journal of Applied Econometrics, 18, 1) test, we uncover structural breakpoints in the DCCs path corresponding to extreme external events including the failure of Lehman Brother's on September 2008. Such extreme events have increased the magnitude of the dynamic correlations between sharia-stocks and sukuk. We estimate a modified DCC model with exogenous variables (DCCX), which allows for exogenous variables to impact the behavior of the DCC over time. We find significant behavioral shifts in the sukuk/sharia stock relationship, which can be explained by market liquidity, U.S. CDS spreads and crude oil prices. Our findings provide useful implications for Islamic fund managers operating in the GCC markets as well as for GCC policymakers.

Purifying Islamic equities: the interest tax shield

Purpose– This paper aims to add to the debate regarding the appropriate methodology to purify tainted components fromshari’ah-compliant equities.Design/methodology/approach– Based on theQur’anicalprohibition againstribaand an analysis of the purification methodology recommended by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)shari’ahStandard 21, this paper highlights the shortcomings in Standard 21 and references the corporate finance literature to argue for the need to also purify the interest tax shield from debt.Findings– Purification is a pivotal element of the Islamic investment process, yet Standard 21 permits a loose interpretation which causes portfolios to be under-purified. Standard 21 also makes no mention of the interest tax shield from debt even though the benefits are at odds with the principles of social justice in Islam. That there is no mention of the interest tax shield from debt in the (limited) literature on the purification of Islamic equities is puzzling.Practical implications– This paper has implications for the Islamic funds industry and for devout Muslim investors.Originality/value– The specific contribution of this paper is the identification of the interest expense tax shield (well-established in the corporate finance literature) as a significant non-compliantriba-related component that needs to be considered in the purification process.

Co-movement between sharia stocks and sukuk in the GCC markets: A time-frequency analysis

We assess the co-movement between the sharia-compliant stocks and sukuk in the Gulf Cooperation Council (GCC) countries. The wavelet squared coherency approach is applied to daily data covering GCC global, corporate and financial services sukuk indexes as well as GCC sharia stocks. The empirical evidence indicates a strong dependence between these sharia stock and sukuk indexes. The degree of co-movement power is varying over time and frequency and the long-run is dominant. To highlight the importance of the wavelet analysis, we perform the value-at-risk (VaR) for a GCC multi-country portfolio. The finding provides strong evidence that the benefits of portfolio diversification vary across frequencies and time. Our results provide several practical implications for Islamic funds when selecting sharia-compliant assets and designing their optimal weights.

Does Shari’ah Screening Cause Abnormal Returns? Empirical Evidence from Islamic Equity Indices

Islamic equity funds are subject to the screening criteria for stock selection imposed by the principles of Islamic jurisprudence (Shari’ah). Equities must pass three basic screens: revenue source, business activity, and financial factors to be included in an Islamic fund. However, screening criteria are not universal especially for the financial factors. One can use financial ratios based on either the book-value of total assets or the market-value of equity for screening of stocks. This may not only result in a different portfolio composition but also entail diverse rebalancing and monitoring costs. The performance of 29 Islamic equity indices (IEIs) versus conventional indices from four major international index providers using different Shari’ah screening criteria are analyzed in a single as well as in a multi-equation framework. The use of a multi-equation framework has the added advantage of utilizing the information content of different screening criteria adopted by different index providers. The empirical findings suggest that the difference in screening criteria does not significantly affect the performance of IEIs. Returns deviation, if any, stems from the relative riskiness of the IEI as compared with the relevant benchmark. Work needs to done to streamline the quantitative screening criteria to avoid confusion among the investing public.

Stock Picking and Market Timing of the Egyptian Fund Managers: Evidence from the Financial Crisis

From five Gulf countries over the 2007-2012 period, this paper offers a comprehensive investigation for these managerial skills during and after the Financial Crisis (FC) of 2007- 2008; it also inspects the relative differences in performance between equity conventional mutual funds (CMFS) and Islamic ones. The results show no evidence of over-or-under performance for the fund managers due to these two skills, where there are no structural changes for the regression line across the two sub-periods, but it reveals the superiority of equity CMFS performance in Kuwait in particular along the overall period. Thus, it seems that if the investors cannot gain superior returns by investing in the Gulf mutual funds on general, they may attain a comparative advantage by investing in the conventional funds against the Islamic ones especially in Kuwait. It also implies that the ethical screening, which is adopted by the Islamic funds of Kuwait, already limits their diversification opportunities and then adversely affects their performance. JEL classification: G1; G2 Keywords: Capital markets, Islamic mutual funds, performance evaluation, market timing ability, stock picking ability

Integrating Islamic Financing and Halal Industry: A Survey on Current Practices of the Selected Malaysian Authority Bodies

Halal industry is a vast industry that consists of several sectors; ranging from food, pharmaceutical and cosmetic products, services (i.e. transportation and logistics) and, banking and finance. All these various sectors in the actual state of practices are currently positioned separately. This paper expands the proposal of integrating halal industries with the Islamic funds. Principally, these sectors should not be deemed separately as they are under the same umbrella of Shariah. The collaboration of the industry can lead to harmonious system that can support each other. In this case, the Islamic financial system through Islamic banking and capital market instruments will channel their long term funding to other Halal industry. As the start, it is important to look at the current practices of authority bodies in the sectors of Halal industry (except for Islamic banking and finance) and Islamic capital market. This outlook is prioritized given that the authority bodies will influence the behavior of the players. This paper focuses on Halal industry in Malaysia. Specifically, the main selected documents of the related authority bodies in this industry were assessed to grasp their approaches regarding Shariah compliance approval or Halal recognition. This will contribute to an initiative that can integrate this industry from the policy makers and supervisors’ perspective. Finding shows that there are different angles of Halal aspects focused by these authority bodies, and there is a room for adjustment towards integration.

International diversification among Islamic investments: is there any benefit

Purpose – The purpose of this paper is to assess the benefits to investors of international diversification among only Islamic funds. Compared to conventional investors who are not restricted in their choice of funds, Islamic investors are restricted to investing in shari’a-compliant funds, thus giving up some diversification benefits. The possibility of international diversification among only Islamic funds may thus help Islamic investors to invest in accordance to their religious beliefs and still benefit from diversification. Design/methodology/approach – The paper assesses the benefits of diversification by analyzing the extent of co-integration among four regional Islamic funds and by estimating the short-term and long-term structural dynamics of and among these funds. The paper uses an Autoregressive-Distributed Lag (ARDL) approach to testing the long-run relationships among these funds and use variance decomposition and impulse response functions to examine the structural dynamics of the relationship between these funds. These methods can also be used for predictive purposes and represent, in authors opinion, a useful approach that complements the traditional methodology of static covariance matrix to find the efficient frontier at a given moment in time. Findings – The results indicate that international diversification can help reduce risk if Asia Pacific Islamic funds and MENA region Islamic funds are invested contemporaneously and/or Asia Pacific Islamic funds and North America Islamic funds, and/or Europe funds and MENA funds. The paper also finds that investors would benefit from investing in North American funds and MENA funds both in the long run and in the short run. Conversely, the paper finds that Europe funds and North American funds are co-integrated in the long-run precluding the opportunity for substantial diversification benefits from these particular portfolio mixes. Research limitations/implications – The long-run analysis helps passive fund managers and investors in composing their portfolio by providing evidence that some portfolio mixes of different regional Islamic funds lead to better risk return performance than one regional Islamic fund portfolios. The short-run analysis however helps the active fund managers and investors as it suggests that diversifying in the short run and reviewing their portfolio on a regular basis would be beneficial as well. Originality/value – This analysis justifies the promotion of Islamic finance as the negative correlation between several Islamic funds across the regions studied suggests better opportunities of investments via international diversification making Islamic funds more desirable.