Islamic indices
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Summary
10 papers analyzed
These studies suggest that Islamic indices can offer competitive performance, particularly in terms of risk-adjusted returns and during financial crises, while also providing ethical investment options for faith-based investors.
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Introduction
Islamic indices, which are stock market indices that comply with Islamic law (Shariah), have gained significant attention in recent years. These indices exclude businesses involved in activities prohibited by Islamic principles, such as alcohol, gambling, and interest-based finance. This synthesis examines the performance, efficiency, and risk characteristics of Islamic indices compared to their conventional counterparts.
Key Insights
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Performance Comparison:
- Islamic indices often show similar or slightly superior performance compared to conventional indices, especially in terms of risk-adjusted returns . However, some studies find no significant difference in mean returns between the two types of indices .
- During financial crises, Islamic indices tend to perform better or at least as well as conventional indices, suggesting they may offer some resilience during downturns .
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Market Efficiency:
- Conventional indices are generally found to be more efficient than Islamic indices. However, during periods of financial downturns, Islamic indices have shown similar levels of efficiency.
- Over time, Islamic indices have been moving towards greater efficiency, displaying similar levels of efficiency as their conventional counterparts in recent periods.
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Risk Characteristics:
- Islamic indices exhibit different risk characteristics compared to conventional indices. The presence of a leverage effect risk is noted in both types of indices.
- The risk-adjusted performance measures, such as the Sharpe ratio and Treynor ratio, often show that Islamic indices provide competitive returns without additional risk .
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Investment Viability:
- Islamic indices provide a viable investment avenue for faith-based investors, allowing them to invest in compliance with their religious beliefs without sacrificing financial performance.
- These indices also offer opportunities for portfolio diversification for conventional investors.
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Standardization and Criteria:
- Different Islamic market indices use varying criteria for selecting Shariah-compliant companies, leading to a lack of uniformity. Common criteria include halal business activities and debt ratios, but other criteria can differ significantly.
Conclusion
Islamic indices generally perform on par with or slightly better than conventional indices, especially during financial downturns. They offer competitive risk-adjusted returns and provide a viable investment option for faith-based investors. While conventional indices are typically more efficient, Islamic indices have been improving in efficiency over time. The lack of standardization in the criteria for Shariah compliance remains a challenge, but overall, Islamic indices present a robust alternative for both faith-based and conventional investors seeking diversification.
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