Risk Management in
Islamic Financial Instruments
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A.1.3 Findings from the Recent Literature
The evolution of Islamic indexes has enhanced the growth of Islamic mutual fund industry as
they provide benchmarks for a passively managed investment strategy. However, to analyze
the performance of the Islamic mutual fund industry, it’s important to investigate actively
managed funds that demonstrate different transaction costs, management fees, management
skills, and costs associated with implementing social responsibilit. Despite the growing
interest in Islamic finance, only a few empirical studies, like Merdad, et al. (2010) and
BinMahfouz and Hassan (2014) analyze the plausible impact of the Sharia screening criteria on
the investment characteristics and performances of Islamic equity mutual funds. BinMahfouz
and Hassan (2014) analyze the risk and investment style of Islamic equity mutual funds in
Saudi Arabia, the worlds’ largest home market for the Islamic mutual funds industry.
A.1.3.1 Comparison Between Performance of Islamic and Conventional
Mutual Fund
One may argue that conventional mutual funds are more likely to outperform their Islamic
mutual funds counterparts, because they are restricted to Sharia compliant stocks only. This
may lead to riskier investment portfolios, due to restricting the Islamic investment portfolios
to a relatively lower level of diversification. However, the majority of previous studies find
evidence that Sharia screening criteria do not seem to have an adverse impact on either the
performance or the risk of Islamic investment portfolios, compared to their conventional
counterparts.
Earlier studies, like Wilson (2001) and Ahmed (2001), find that Islamic mutual funds are
financially viable and Sharia compliant investments can compete on a commercial risk/return
basis. Later, Elefakhani, et al. (2005), Kraeussl and Hayat (2008) and Abderrezak (2008) show
that, on average, there is no statistically significant difference between the risk adjusted
performance of Islamic equity mutual funds and their Islamic and conventional market
benchmarks. This is based on the different geographical markets that are examined.
Confirming previous studies, Hoepner, et al. (2009) show that Islamic equity mutual funds do
not significantly trail their international benchmarks. However, they find that, in non-Muslim
countries, Islamic mutual funds tend to underperform their market benchmarks.
By using a matched sample approach, Abdullah et al. (2007), Hassan et al. (2010) and Mansor
and Bhatti (2011) indicate that the performance differences between Malaysian Islamic mutual
funds and their conventional fund peers are marginally significant.
A.1.3.2 Riskiness Of Islamic Portfolio And Conventional Portfolio
Furthermore, empirical studies find that Islamic investment portfolios tend to be less volatile
and less vulnerable to systematic risk than conventional investment portfolios. Abdullah et al.
(2007) and Muhammad and Mokhtar (2008) show that Malaysian Islamic funds are less