Islamic Capital Markets
  • Book Title:
 Islamic Capital Markets
  • Book Author:
Nafis Alam
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Abstract Islamic Capital Market Research: Past Trends and Future Considerations

 Islamic capital markets are an emerging research theme in financial market studies, which can be further expanded owing to a dearth of extensive studies in this field. A major part of the literature covers the comparative analysis of the Islamic financial system with conventional counterparts, divided amongst banking and capital markets.

The aim of this chapter is to demonstrate the extraordinary potential and depth of current and future research themes in Islamic capital markets. The chapter discusses the areas and issues that have been covered intensively in the recent literature and also helps to identify the areas that have received relatively less attention. Finally, the chapter also points to the newest areas of research that seem promising for future research into Islamic capital markets.


 Islamic banking and finance has emerged over the past decade as an intriguing fi eld of research in academia. Islamic countries primarily straddle the developing and the less developed strata of global economic society.

 With financial assets of nearly $ 1.8 trillion globally, Islamic banking and finance has started to gain traction in Muslim and non-Muslim financial markets over the last decade. The ever-increasing intensity of the recurring financial crises evidenced in the recent financial meltdown of 2007–2008 has created much pressure and has brought the conventional financial system under the microscope yet again. While some have looked at ways and means to fix the instability inherent in the conventional interest- based system, others have searched for alternative financial systems.

In this respect, the Islamic financial system seems to offer a promising avenue for future financial resilience and stability. However, to date, this view has been largely circulated within professional circles and it has only recently become a topic of academic inquiries.

 The room for exploration in Islamic banking and finance is huge, owing to a dearth of extensive studies in this fi eld. A major part of the literature contains a comparative analysis of the Islamic financial system with conventional counterparts, divided among banking and capital markets. Some studies also focus on the instruments used in Islamic and commercial banking, and discuss the regulatory and supervisory challenges related to Islamic banking (e.g. Sundararajan and Errico 2002 ; International Monetary Fund 2004 ; Ainley et al. 2007 ; Sole 2007 ; Jobst 2007 ).

 In this survey, we focus on the two main aspects of research in Islamic banking and finance: the banking sector and capital markets. While not claiming to survey the entire Islamic finance literature, which is too vast to cover in its entirety, we aim to demonstrate the extraordinary potential and depth of research, current and future.

To do this, we undertake an exploration of the Thomson Reuters ISI Web of Knowledge and other journal search and ranking methodologies, including the SCImago Journal & Country Rank (SJR) measures, to identify the main journals in which there is significant literature on Islamic capital markets.

This facilitates our mapping in Sect. 1.3 of the areas and issues that have been covered intensively in recent literature, and it also helps us identify the areas that have received relatively less attention. In Sect. 1.4 , we point to the newest areas of research that seem promising for future research and conclude our brief review of Islamic financial literature.


 Islamic financial institutions operate in nearly 75 countries, mostly in the Middle East and Southeast Asia, with Bahrain and Malaysia as the major hubs. Islamic financial products have mushroomed over the past decades in competition with the conventional financial industry in both Muslim dominated and Muslim minority countries. Although it is a niche industry, the Islamic financial industry is becoming a market that could rival the conventional sector in many countries. Dusuki and Abdullah ( 2007 ) described the Islamic financial sector as no longer a business entity operating only to fulfill the religious obligations of the Muslim community, but more significantly, striving to fulfill the needs and demands of new customers as well (as cited in Wilson 1995 ).

 The growth in Islamic financial services has attracted much attention from across the world, and nearly 25 % of Islamic financial institutions now operate in countries that do not have Muslim majorities, while the conventional banking system has started opening Islamic banking windows across the world, primarily in Europe and North America (Pollard and Samers 2007 ).

 The initial attempts at introducing Islamic finance in the western world were initiated by the Islamic Finance House established in 1978 in Luxembourg. There is also the Islamic Bank International of Denmark in Copenhagen, and the Islamic Investment Company in Melbourne, Australia. Shanmugam et al. ( 2004 ) observed that a tremendous effort has been made over the last decade in introducing Islamic fi nancial services in western countries, especially in the United Kingdom, Australia and the United States.


 Islamic equities and investigation of stock market data for multiple different aspects such as performance, effi ciency and development has been explored in recent literature. A primary thread of the literature looks at risk and return performance analysis.

Milly and Sultan ( 2012 ), explored this relationship using weekly data over 2000–2009, comparing the performance of conventional stocks, Islamic stocks, and socially responsible stocks. Their fi ndings led to the conclusion that Islamic stocks provide a safer option during periods of economic and financial distress. Their findings are in contradiction of earlier works by Hayat and Kraussl ( 2011 ) for a similar time period. They found that Islamic equity funds under-performed the conventional and Islamic benchmarks. Their fi ndings were more pronounced during times of crisis, and they concluded that Muslim investors might improve their portfolio performance by investing in Islamic index tracking funds or Islamic exchange-traded funds rather than investing in Islamic equity funds.

 In a recent study, Al-Khazalai et al. ( 2014 ) examined whether Islamic stock indexes outperform conventional stock indexes by taking into account nine regional pairs of Dow Jones indices over the period of 1996–2012.

They found that over the full sample period as well as in the pre-crisis period, the conventional indexes stochastically dominated Islamic indexes. But the findings during the recent financial crisis changed drastically, during which European, US, and global Islamic stock indexes dominated conventional counterparts, and they concluded that Islamic investing performs better during economic crises.

 The fi ndings are further corroborated by Jawadi et al. (2014 ) and Ho et al. ( 2014 ). Jawadi et al. (2014 ) argue, with a study of sample years 2001–2011, that although conventional investments seemed promising before the crisis and during periods of calmness, Islamic funds and investing have clearly outperformed them since the subprime crisis began and in turbulent times.

In addition, they also highlight that the impact of the 2008–2009 global financial crisis on Islamic markets is less significant than for conventional markets, suggesting investors can benefit by exposing themselves to Islamic investment opportunities. The outperformance of Islamic indices in crisis periods is further reaffirmed by Ho et al. ( 2014 ) who found that Islamic indices outperformed their conventional counter-parts, even during the earlier Dotcom crisis as well as during the global financial crisis. They highlight the conservative nature of Islamic invest-ments as a probable cause for these fi ndings. These fi ndings are corrobo-rated by Rizvi and Arshad ( 2014 ), who explored regional-level Islamic and conventional indices and found a low moving correlation between the conventional and Islamic indices, substantiating their argument, that during the crisis, Islamic indices provide though not complete, but partial insulation, and thus a safer haven.

 While the fi ndings of Islamic investing as a safer haven in fi nancial tur-moil are abundant, a recent study by Chau et al. ( 2014 ) argue that in crises of a different nature, behaviour is different. Studying the impact of political uncertainty caused by the recent civil uprisings in the Arab world

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