Islamic finance as an ethical finance practice and performance evaluation of Islamic indices

The global financial crisis has forced countries to question the foundations of the international financial system and investigate its flaws in order to find safer and more reassuring alternatives to shocks. The lack of transparency in the financing processes of traditional financial stakeholders has suggested the introduction of alternative financial paradigms that promote a more ethical system. Following this observation, the international community started to take an interest in Islamic finance a few years ago. In this context, the aim of the research is to compare the performance of conventional indices and Islamic indices. The research consists of two sub-objectives. The first one is to determine the differences in the performance of Islamic indices and conventional indices, and the second one is to analyse the effect of macroeconomic variables on Islamic and conventional indices. In the first part, it is aimed to compare a number of financial values (Sharpe ratio, Treynor ratio and Jensen alpha index) between 40 Islamic indices and 40 conventional indices through 3 separate panel data sets (developed countries, developing countries and border countries). This section includes monthly data from 2009 to 2020. Panel data econometrics is utilised for parameter estimation since it includes unit dimension as well as time dimension. The second section aims to examine and compare the relationships between the macroeconomic indicators determined by Islamic and conventional indices separately. This section includes annual data from 2009 to 2020, 12 annual observations for 52 countries are compiled and a panel data analysis with 624 observations is performed. The results show that there is no difference between the performance of Islamic and conventional indices and that macroeconomic variables have a similar impact on the performance of Islamic and conventional indices. Therefore, the findings of the study provide relevant information to investors and policy makers to further support the development of the Islamic stock market as an alternative investment option.