Performance of Islamic indices : The opportunity for non-muslim countries

Abstract

Hitherto, comparative study of Islamic finance in both non-Muslim and Muslim countries is scarce. This is including the area of investment in Islamic equity portfolio in non-Muslim countries. Consequently, it is interesting to study performance comparison of investment in Islamic financial products such as Islamic indices created by Muslim and non-Muslim countries. Results obtained from this research will be useful for investors as investment information and for Islamic and non-Islamic countries alike to create investment alternatives such as Islamic financial products or funds.

This research mainly focuses the investigation on performance and characteristics between the conventional country indices and the Islamic indices from MSCI indices as proxy of Islamic funds and equity investments. The scope of the study involves the investigation on the performance and benefit of country indices under Islamic screening criteria using average raw returns and risk-adjusted returns, co-integration approach and variance ratio analysis. The study also examines the effect on the performance of country characteristics and Islamic factor in sample indices by focus to Islamic indices’ returns only and test by mean difference test, the post hoc test, and regression analysis.

The results of research show the opportunity in non-Muslim countries for Islamic indices investment in which they gave the higher average return and lower risk than conventional indices. The factors that are related to the difference in average return are the characteristics of being Muslim or non-Muslim country, level of Islamic financial development and the Shariah law application in country.

The implication of this research is to provide an evidence of Islamic investment, Islamic funds, and other equity investments. Also, this research contributes to the knowledge about performance and the benefit of Islamic equity investment in other environment beside Islamic world. This would help to confirm benefit of Islamic indices and Islamic investment in non-Muslim countries and can understand the characteristic of Islamic investment whether it is more like the country characteristics or distinct from them.