Islamic Financial Institutions, Stock Markets, and Stock Indices

The Islamic financial institutions have been gaining acceptance in the recent years. However, despite this acceptance and rising number of Islamic financial institutions, there is minimal pragmatic study about this subject. Therefore, this research tries to establish the competency of the Islamic indices against Conventional Indices by utilizing different statistical methods. For the purposes of establishing the connection between the Indices, the correlational method is utilized, which indicates that the Islamic Indices of MSSI and Dow Jones have a negative correlation value with their standard, implying that there is existence of a favorable situation for investing in several ventures, which is interpreted as if one index is not getting revenue or losses in business, which at the same time other indices are making profits that consequently reduce the general risk, and thus offer the favorable situations to venture.

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The results of the descriptive statistics indicates that Dow Jones Technology (07-15) has the highest sum, which is 70.0241948 as compared to the other indices. In addition, the statistics demonstrate that majority of the Islamic and Conventional Indices have positive returns as compared to the negative ones that indicate loses. When reviewing the mean and standard deviation, we find that the mean return of MSCI together with and DJ Conventional is high as compared to the Islamic Indices. Nevertheless, this is backed by the less standard deviations value, which implies that the conventional has an increased risk as Compared to the Islamic. This sharply differs with Ahmad (2010) findings, which indicated that MSSI has increased risk as compared to MSCI as a result of the MSCIs mean return being less than MSCI.

During the period of crises according to the analyses, the Islamic Indices showed good performance as compared to their conventional counterparts. They showed relatively high mean returns as well as low risks in comparison with its unscreened Index.

Question 2

The Islamic indices are considered to be the most visible and widely used set of Sharia compliant standards in the world. Most investors intending to plan for low volatility return from their selection of investments due to the suitability of the Islamic indices. However, the selection investment is based on the performances of the market trend, which is resulted from reduced risks kind of investments which go hand in hand with Islamic value of little uncertaintys nature, which is provided by the Islamic indices. The Islamic indices outperform their conventional counterparts during crisis periods but at times the results are inconclusive for the non-crisis periods. This could mainly be due to the fact that they do not have any exposure to the conventional financial sector stocks associated with the conventional nature of Sharia-compliant investments that offers investors a superior investment alternative during the crisis periods. Moreover, investors are in no risks while investing in the Shari ah compliant index, but apart from that, most of them are recommended by this Shari ah compliant to invest in Islamic indices such as the Russell Jadwa index, since this index performs better and produce a positive return. This article only limits the performance of the global Islamic indices to only twelve conventional and Islamic indices and therefore, researchers can use it in their forthcoming researches on the global market so as to identify more indices with the aim of gaining further understanding on the differences between the performances of the conventional and Islamic indices returns.

The international capital market act has however observed a bombardment of Islamic indices such as the Financial Times Islamic Index Series (FTSE), Standard & Poor Shari ah Index (S&P), Dow Jones Islamic Market (DJIM) and Morgan Stanley Capital Intentional Islamic Index Series (MSCI), over the preceding years. Through the global index providers dedication to the Islamic indices development, it has been proven that there are signs of greater sophistication in the investing trends of most Islamic investors. Some international Islamic indices such as the FTSE and the DJIM have been able to form their Islamic indices by using diverse approaches and expectations that range from regulators to investors, who can either be conventional investors or Islamic investors. In most cases, investors are more interested in the Islamic indices, mostly due to their resistant nature. The Sharia board of index provider comes up with rules, as a theoretical exercise, for Shari ah compliance while the screening of the index is however performed at the index provider level. The index provider then strictly performs the identification of stock based on the Shari ah rules and later creates the Islamic Index. Some researchers assume that there has been great demand of the Islamic financial instruments recently. There has also been an increase in the Islamic stock markets indexes that are formed by those organizations involved in Islamic finance due to their great potential in productivity and development.

The Islamic indexes however offer the superiority of Islamic ideology accompanied by traditional financial management and also offers investors the opportunity to identify an actual attractive investment setting. Due to the limitation in the current research literature that relates to the Islamic indices, some studies use the stock market data to examine the Islamic indices and the conventional indices performance. The world Islamic financial market has been able to attract both the Muslim and non-Muslim investors global capital market flows in the recent decades, by gathering a substantial motion which concentrates them into global Islamic indices for instance FTSE, DJIM and MSCI. Nevertheless, the development of Islamic capital markets in both the international and the domestic markets are affected by rapid increase in the Islamic development, which in turn must be at balance with the products in the capital markets which are in line with the Shari ah so as to respond to market demand. They are also affected by the issue of competitive benefit that is associated with conventional goods. They are also affected by the Muslim investors who store their resources in stock markets but expect the goods to be in line with the Sharia. However, since their attentiveness of the Sharia compliant goods call for them to invest in shares that are in line with Sharia, it becomes a very progressive issue.

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