Handbook of Empirical Research on Islam and Economic Life
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Handbook of Empirical Research on Islam and Economic Life

Edited by M. Kabir Hassan

In Islamic jurisprudence, a comprehensive ethic has been formulated governing how business and commerce should be run, how accountability to God and the community is to be achieved, and how banking and finance is to be arranged. This Handbook examines how well these values are translated into actual performance. It explores whether those holding true to the system are hindered and put at a disadvantage or whether the Islamic institutions have been able to demonstrate that faith-based activities can be rewarding, both economically and spiritually.
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Chapter 23: Taking a leap of faith: are investors left short changed?

Yunieta A. Nainggolan, Janice C.Y. How and Peter Verhoeven


This chapter examines the compliance and performance of an international sample of faith-based ethical funds which screen their investment not only on risk and return but also on compliance with Islamic law – Islamic equity funds (IEFs). Using a set of stringent shariah screens similar to those of Morgan Stanley Capital International (MSCI) Islamic Index, we find less than one-third of the equity holdings of IEFs are shariah compliant. While most of the fund holdings pass the business screens, only about 38 per cent pass the total debt to total assets ratio screen. This finding suggests that, in order to overcome a significant reduction in the investment opportunity, shariah principles are compromised, with IEFs adopting lax screening rules in an attempt to achieve financial performance. Our matched firm approach shows that shariah screening reduces investment performance by an average of 0.04 per cent per month if benchmarked against matched conventional funds – this is a relatively small price to pay for religious faith. Cross-sectional regressions show an inverse relationship between shariah compliance and fund performance: every 1 percentage point increase in total compliance decreases fund performance by 0.01 per cent per month. However, shariah compliance fails to explain relative performance of the funds when matched with conventional funds.

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