International Islamic funds

• Author: Christian Walkshäusl,Kathrin Lesser
• Published date: 01 January 2018
• DOI: http://doi.org/10.1016/j.rfe.2017.09.003
• Date: 01 January 2018

ORIGINAL ARTICLE

International Islamic funds

Kathrin Lesser

|

Christian Walksh€

ausl

University of Regensburg, Center of

Finance, Universit€

atsstraße 31, 93053

Regensburg, Germany

Correspondance

Christian Walkshäusl, University of

Regensburg, Center of Finance,

Universitätsstraße 31, 93053 Regensburg,

Germany.

Email: kathrin.lesser@ur.de,

christian.walkshaeusl@ur.de

Abstract

Internationally-investing Islamic equity funds from developed Islamic and non-

Islamic markets perform in general similar to the market. However, analyzing dif-

ferent market conditions, we provide evidence that funds domiciled in Islamic mar-

kets outperform their peers and funds from non-Islamic markets during market

turmoil, irrespective of the applied performance measurement model. We suggest

that this outperformance is owed to the expertise of fund managers from developed

Islamic markets who operate in a financial environment that is driven by Islamic

principles. Our results are robust with respect to the standard Fama-French three-

factor and four-factor models as well as to the novel five-factor model.

JEL CLASSIFICATION

G11, G12, G15, M14

KEYWORDS

International markets, Islamic investing, Mutual funds, Performance evaluation

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INTRODUCTION

Islamic finance plays a key role in the global financial economy, covering the financial needs of the Muslim population that

forms almost a quarter of the world’s population. Estimates put the current size of the global Islamic finance industry in

the area of USD 1.87 trillion (Islamic Financial Services Board, 2015). Islamic finance represents an increasing market that

encompasses four segments, i.e., Islamic banking, Islamic bonds (sukuk), Islamic insurances (takaful), and Islamic funds.

Shari’ah compliant funds are still estimated at less than 5% of Islamic finance assets, suggesting that there is still much

space for further growth in this segment. To direct some attention to this underrepresented segment, our study focuses on

Islamic equity funds. These are suitable for investors desiring to increase their exposure towards the capital market inside a

Shari’ah framework. In particular, Islamic funds exclude financial services, firms involved in the production of alcohol,

tobacco, pork related products, weapons, and suchlike that are not in accordance with Islamic principles.

Previous literature on Islamic funds predominantly covers developed Islamic markets, e.g., Malaysia and Saudi Arabia.

Hassan, Khan, and Ngow (2010) find no convincing performance differences between Islamic and non-Islamic Malaysian

unit trust funds in a period from 1996 to 2005. In addition, BinMahfouz and Hassan (2012) and Rubio, Hassan, and Mer-

dad (2012) provide empirical evidence that the Shari’ah screening process does not seem to have an adverse impact on the

risk-adjusted performance of Islamic equity mutual funds from Saudi Arabia, compared to their conventional peers. How-

ever, Abdullah, Hassan, and Mohamad (2007) conclude that Malaysian Islamic funds perform better than conventional

funds during bearish economic trends, while conventional funds show better performance than Islamic funds during bullish

economic conditions. Merdad, Hassan, and Alhenawi (2010) discover similar results for the Saudi Arabian market.

While there is at least some research on Islamic funds from developed Islamic markets, international evidence is scarce.

Hoepner, Rammal, and Rezec (2011) analyze funds from 20 different countries and conclude that Islamic funds from

First published online by Elsevier on behalf of The University of New Orleans, 29 September, 2017, https://doi.org/10.1016/j.rfe.2017.09.003

Received: 24 June 2015

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Revised: 31 August 2016

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Accepted: 27 September 2017

DOI: 10.1016/j.rfe.2017.09.003

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©2017 The University of New Orleans wileyonlinelibrary.com/journal/rfe Rev Financ Econ. 2018;36:72–80.