1. Scholarly Works

This paper is the first attempt to investigate the multiscale tendency of the co-movement and cross-correlation of nine Islamic Exchange Traded Fund (ETF) returns across the global developed and emerging markets using both wavelet coherence and wavelet MODWT methods. The wavelet coherence results tend to indicate consistent co movement between most of the ETF returns especially in the long run. The study also uncovers evidence of wide variation of co-movement across the time-scales during the global financial crisis and the Euro debt crisis. Strong co-movement can be observed during the global financialcrisis, both for the medium term investors and long term investors. The paper studies the relationship between different ETF returns using wavelet multi-resolution analysis. The cross-correlation analysis also shows certain significant and positive correlations between the ETF returns, especially during the period of global financial crisis. The findings from these two recent dynamic time-scale decomposition methodologies have important policy implications for both risk management and investors’ investment policy.

This study constructs active Islamic portfolios using a multi-style rotation strategy, derived from the three prominent styles, namely, momentum, value, and quality investing. We use the stocks that are consistently listed in the U.S. Dow Jones Islamic index for a sample period from 1996 to 2012. We also include two macroeconomic mimicking portfolios to capture the premiums of industrial production growth and inflation innovation, accommodating the economic regime shifts. Based on the information coefficients, we find the six-month momentum and the fractal measure as momentum factors; the enterprise yield (gross profit/TEV) and the book to market ratio as valuation factors; the gross profit to total assets, the return on capital, and the scaled total accruals as quality factors. We further construct active portfolios using the augmented Black Litterman (ABL) factor model to avoid the factor alignment problem, with the factor views predicted using Markov Switching VAR, MIDAS, and Bayesian Model Averaging. The out-of-sample performance of our portfolios can produce information ratios of 0.7–0.8 over the composite indices, and information ratios of 0.42–0.48 over the style indices, with the annualized alphas of 10–11%. Even when we put the constrained tracking error of 1% over the benchmark, our portfolios still produce information ratios of 0.9–1.2 before transaction costs, and 0.6–0.8 after transaction costs. We provide intuitive explanations for each premium changing over time, and suggest the promising strategy for Islamic equity investors to outperform the market.

On the backdrop of growing importance of Shariah compliant equity markets, the purpose of this paper is to study cross-country portfolio diversification benefits for investors with major trading partners of Saudi Arabia, namely, USA, China, Japan, Germany and India, who have already invested or tend to invest in Saudi Arabian stock market. The authors have investigated time invariant, dynamic correlations at different investments horizons of the investors among Islamic asset classes by applying relevant econometric techniques like multivariate generalized autoregressive conditional heteroscedastic - DCC and continuous wavelet transforms. For robustness, this study also applied maximal overlap discrete wavelet transform. The findings tend to indicate that the Saudi Arabian investors have portfolio diversification benefits with all major trading partners in the short-term investment horizon. Interestingly, Saudi Arabian market has the least portfolio diversification benefits with the Chinese market. However, in the long run, all markets are correlated, yielding minimum portfolio diversification benefits and most importantly Saudi Arabian investors have portfolio diversification benefits with the Indian Islamic equity market in almost all investment horizons. The findings are highly consistent across different econometric technique estimations.

The last decade has witnessed a rapid expansion of Islamic financial instruments with a notable proliferation of Islamic investment certificates called sukuk. In spite of the expansion, research to appraise their growth implications remains limited. This paper investigated the structural differences within sukuk and conventional and their implications on investor return reactions. It also looked at the investors' different decision making time horizon dimensions in response to the respective debt security's announcement. Our sample consisted of 158 conventional bonds and 129 sukuk issuers between 2000 and 2013. Event-study methodology and wavelet analysis were used resulting in three major findings. Firstly, market investors perceived sukuk and conventional bonds as different financial instruments. Variations in investor reactions persisted when each sub-category of sukuk and conventional bond were examined separately. Lastly, firm value and shareholder wealth were affected in different ways upon the issuance announcement of of a specific sukuk or conventional bond. Specifically, the equity-like features within convertible bonds and partnership-based sukuk negated institutional investors' wealth, but were due to different 'dilution' arguments. Sukuk created unique wealth effects for corporate issuers, day traders and institutional investors in comparison with conventional bonds.

This paper investigates the effects of religious screening on payout behavior of US firms. Shariah compliant (SC) indices serve as suitable sample as they are emerging as alternative investment class in the last two decades. Through an analysis of a sample of US firms belonging to Dow Jones proprietary database for the period 2006-2018, this study provides evidence that SC firms are more prone to make total payout, cash dividends and repurchases. We use panel logistic regressions with industry and year fixed effects. The findings reveal that the drivers of higher propensity of total payout are higher profitability, higher retained earnings, lower debt capital structure and lower asset growth. The factors that contribute to likelihood of paying higher cash dividends are higher profitability, lower governance levels and lower market/book assets ratio. Moreover, better governance, lower asset growth and lower equity/assets increase the propensity of SC firms to make higher repurchases. These findings are important contribution to the Islamic corporate finance and dividend policy literature.

Capital structure serves as an important device for mitigation of agency conflicts and, although firms combine debt and cash dividends to address the agency conflicts, debt is preferred as a bonding device by many managers due to its lower cost as compared to equity (John, Knyazeva & Knyazeva, 2015). However, shariah-compliant firms (SCF) cannot use this device due to prohibition of interest-bearing loans in Islam. In this scenario, the dividend payout policy becomes a highly important tool of corporate governance for shariah-compliant investors. Moreover, the managers of these firms cannot maintain stable dividends by issuing bonds and, therefore, the dividend policy of such firms would be different. This chapter highlights the dividend payout behaviour of SCF by comparing them to conventional firms.

This article makes an initial attempt to study the hedging effectiveness of Islamic stock returns against inflation for different investment horizons. We applied the wavelet analysis to measure the cross-correlations between the time series as a function of time-scales using data ranging from 2007 to early 2015. The main results tend to indicate the following: First, that for investment horizons not exceeding 3 years, the FTSE Bursa Malaysia Emas Shariah Index constituent returns may potentially hedge against inflation. Additionally, the hedging ability of stock returns was absent from 2008 to 2009 following the global financial crisis. Finally, a buy-and-hold strategy exceeding 3 years may erode investments. The results are plausible and have strong policy implications.

In the present study we estimate the size of the shadow economy for Malaysia using the modified-cash-deposit-ratio (MCDR) approach. Subsequently, we relate shadow economy with its determinants such as national income, government spending, stock market development, misery index and tax burden. Our emphasis in this study is on the role of Islamic stock market in mitigating shadow economy in Malaysia. We consider Bursa Malaysia as an Islamic stock market as more than 70% of the companies listed in the Bursa Malaysia stock indices are Sharia-compliant. Our results clearly suggest that there is a role for Islamic stock market in reducing the size of shadow economy in Malaysia.

This study embodies a preliminary endeavour at analysing the impact of leverage on portfolio behaviour, with specific reference to return and volatility, in the European stock markets, using the debt ratio as one of the important benchmarks for Islamic stock screening. Given the focus of Islamic stock screening on the debt ratio, we use data from 320 firms for eight European countries which were classified according to their level of debt and size. For this, the portfolio optimisation based Mean-Variance Efficient Frontier (MVEF), the Sharpe Ratio and the Capital Market Line (CML) were employed. Our findings tend to demonstrate that, under shocks, high leverage worsens the portfolio return, volatility, and value at risk. The results further point out that optimal portfolio composition is obtained through a high proportion of low debt funds in the case of two separate equity funds, of low debt and high debt portfolios respectively. The systematic risk of several portfolio strategies is further explored with regards to a benchmark of European index and market-wide, return and volatility shocks.

The purpose of this paper is to examine the extent of risk shifting behavior in bonds and sukuk. The examination is significant, as economists and scholars identify risk shifting as the primary cause of the global financial crisis. Yet, the dangers of this debt-financing feature are largely ignored - one needs to only witness the record growth of global debt even after the global financial crisis. To identify the signs of risk shifting existence in the corporations, this paper compares each corporation's operating risk before and after issuing debt. Operating risk or risk of a firm's activities is measured using the volatility of the operating earnings or coefficient variation of earning before interest, tax, depreciation and amortization (EBITDA). Using EBITDA as the variable offers one distinct advantage to using asset volatility as previous research has - EBITDA can be extracted directly from firms' accounting data and is not model-specific.

This paper examines the financial performance of ethical funds in different regions and concludes that there is a cost attached to ethical investing. An analysis of 964 mutual funds comprising of Socially responsible funds (SRFs) and the Shariah-compliant equity funds (SCFs) suggests that: a) except for global funds, both types of funds underperform in the market, b) both types of funds are preferred for investment in growth and momentum stocks, c) SRFs are preferred for small capitalized stocks whereas SCFs do not follow any specific style or investment strategy, d) unlike SRFs, SCFs do not provide a safe haven for investors during crises. These findings are probably due to the lack of diversification opportunities and poor managerial skills. The results are robust to various asset pricing models and macroeconomic factors.

Muslim developing countries like many of their conventional counterparts suffer serious indebtedness. Amongst the 57 OIC countries, only the six Gulf cooperation Council countries have positive fiscal balances. The other 51 OIC nations have government budget deficits. Nineteen of these 51 countries are classified by the World Bank/IMF as HIPC (heavily indebted poor country). That government expenditure exceeds government revenues is a fairly common characteristic of developing economics. It is typically the result of the need to fund development. As matters now stand, there are two key problems with this. First, the budget shortfall is typically met by way of interest-based borrowing. Second, as domestic capital accumulation is usually insufficient, governments have to resort to borrowing in foreign currency.

The purpose of this paper is to appraise the effectiveness of monetary policy actions in variant market conditions for Islamic stocks. These stocks offer ground for a natural experiment as they have restrictions on the line of business and their distinguished capital structure does not allow them to combat the liquidity crisis through the use of leverage. The paper uses the quantile regression approach for a multi-country sample of Islamic stock indices to assess the impact of domestic as well as US expansionary monetary policy on stock returns of Islamic indices at various locations of distribution of returns. It is found that, at lower return levels, an expansionary monetary policy has a negative effect on the returns. In other cases, there is no significant impact of policy rate change on index returns. It is more appropriate to use firm level data of Islamic stocks instead of stock indices. However, the information regarding index constituents is not publicly available. The paper offers useful information to investors and policy makers. It shows that central banks should improve their credibility for monetary policy to be effective and their policies must be designed keeping in view the strong impact of US rate on global monetary environment.

Despite the huge potential on both the demand and supply sides of the sukuk market, the current sukukstructures fall short of adequately meeting the market’s needs as the Shari'ah compliance of many of them and/or their economic efficiency are questionable. Even though partnership-based sukuk are claimed to reflect the true spirit of Islamic finance, their underuse as a financing instrument is a notable fact. Such a situation, if not addressed, will impede the development of the sukuk market in the future. This paper proposes an innovative sukuk musharakah model for consideration by companies and revenue generating infrastructure projects. The model has an incentive-compatible feature by making the share of the issuing entity in the profit positively related to its performance in addition to a convertibility clause. The sector Return on Equity (ROE), adjusted with the firm beta, is considered a benchmark for measuring the performance of the firm. The paper examines the design of the model, its risk return profile as well as its pricing for secondary market trading.

Although the sukuk market has maintained remarkable growth momentum over the recent years, the optimism has been significantly moderated by the abrupt shock due to the pervasive Covid-19 pandemic. However, sukuk can be used as an effective financing option by governments to overcome a fiscal deficit and to support those adversely affected by the pandemic. Sukuk Prihatin (SP), the first-ever digital sukuk issued by the Government of Malaysia, has launched to engage citizens to contribute to the country's recovery efforts in the wake of Covid-19. Therefore, this study aims to probe the motivation that influences retail investors' inclination to invest in such innovative sukuk. Based on an integrated model of planned behavior (TPB) and social cognitive theories (SCT) and data gathered from 279 retail investors, this research found that attitude towards SP investment (SPI), social norms, perceived control regarding SPI, sukuk features and digitization are significant determinants of investors' willingness to invest in SP. It also revealed that tax incentives-moderated interactions of social norms, perceived control and sukuk features on SPI intention are significant.

Investment is an activity that involves the commitment of resources for a certain holding period in anticipation of creating more resource (wealth). This chapter focuses on the risk-adjusted performance of two-specific classes of assets, namely, the socially responsible investment (SRI) class and the shariah-compliant classes of assets. The aim is to ascertain whether investors have to bear an extra cost for choosing these classes of assets in their portfolio. In managing the Islamic finance space, religiosity and/or ethical practices prompt investors to discard so-called 'sin-stocks' and limit their investment horizons to permissible faith-based investment alternatives ...

The global Islamic finance industry has evolved from a small industry to a dynamic, robust, and competitive one. Currently, the industry, built on the notion of justice and fairness, has a global asset size of approximately USD2 trillion (MIFC, 2016). Despite the soft global economic outlook, this industry is expected to grow as many more nations are embracing this alternative system that is proven to be not only profitable but also resilient to macroeconomic shocks.

Using wavelet techniques (discrete and continuous), this paper is the first attempt to investigate the co-movement dynamics at different time scales or horizons of Islamic Dubai Financial Market (DFM-UAE) index returns with their counterpart regional Islamic indices returns such as GCC index, ASEAN index, Developing Countries index, Emerging Countries Index, and the Global Sukuk. Finally, we examine the impact of the LIBOR on the Islamic DFM-UAE return. Our first finding is that the two markets DFM_UAE, and (GCC and Saudi) are converging, in the long run, to the same level of risk and volatility with the Global Sukuk index. The wavelet analysis based on betas indicates a strong non-homogeneous correlation across scales and for different periods of time. Closer markets tend to suggest a contagion effect showing higher correlation and higher interdependence with a certain time delay. Evidence shows a flight to quality to the less risky Sukuk market mostly during the last financial crisis. The lead–lag analysis tends to indicate that the GCC leads DFM-UAE which leads Sukuk. Finally, this study sheds further light on the important leading impact of the overnight LIBOR on the returns of Islamic stock indices especially during the big changes or under shocks indicating policy implications for portfolio diversification for the international investors. The results are plausible and intuitive and have strong policy implications.

The goal of this paper is to address the relationship between crude oil-price changes on some selected African Islamic indices, using daily data from May 4, 2011, to January 25, 2018. We employed three main techniques: MODWT, CWT, and multivariate-GARCH-DCC, to analyze whether these markets have any diversification opportunities. Our findings reveal that, first, the results of MODWT shows Egyptian Islamic index leading all indices. Second, CWT results show that investors would gain diversification benefits in almost all markets (except South Africa) and enjoy the benefit that comes with long-term investments. Third, we observed low correlations between the Egyptian and Tunisian Islamic indices, with oil-price returns suggesting diversification benefits in these markets. Of all the Islamic stock markets, Tunisia's has the lowest volatility with the crude oil index. Investors holding a portfolio of these stocks can afford to have exposure in crude oil-related assets and achieve maximum diversification benefits

This paper examines the flow-performance relationship and the presence of "Smart money effect" in Socially responsible funds (SRFs) and Shariah compliant funds (SCFs). A survivorship bias free sample of 686 funds comprising of 212 SCFs and 474 SRFs were analysed with investment focus in the Asia pacific, Emerging markets, Europe, Global (with no focus to any specific country or region), Middle East and North Africa (MENA) and North America. The findings show that flow-performance relationship is asymmetric for both the funds as the response to positive returns is more as compare to the negative returns for the last/current year as well as the last/current month. There is also a significant presence of "Smart money effect" in both the funds for the entire sample but there is no evidence of "Smart money effect" in SRFs for the sample of old funds.

The purpose of this paper is to set forth seven broad recommendations and 15 specific initiatives within a four-dimensional framework for the development of social capital in Islamic finance, particularly the stock market, given its role as the first best means of risk sharing. The four-dimensional framework comprises dimensions of principle and value, trust-reinforcing regulation, investment opportunity and infrastructure, as well as reputational intermediaries. A web of multi-pronged initiatives that are mutually reinforcing is proposed considering the multifaceted dimensions of social capital and the various possible transmission channels by which social capital can influence the financial system. While empirical studies have demonstrated the importance of trust and ethics in financial development, the pressing issue remains how social capital, including trust and ethics, can be developed to achieve a trustworthy, ethical and efficient financial system. This paper attempts to address this concern.