Analysis of performance of Borsa İstanbul participation index and its relationship between market interest rates

Islamic finance implementations are positioned predominantly on banking activities just as in conventional finance. Partnership mechanism is the most important mechanism enabling Islamic finance to divert it from banking, to brake off it dependence on interest rates and to reduce the dominance of debt-based finance. One of the areas that partnership mechanism can be executed to a great extent is stock market. Shares of stocks represent ownership shares of a firm and hence the holders have a share in profits and losses. Islamic indices comprise of stocks of companies whose activities are shariah compliant and whose interest earnings do not exceed certain percentage in total revenue The performance of the stocks of the companies covered in Islamic indices can be taken as signal to what extent participatory finance can be independent of interest rates and can differentiate itself from conventional finance. Using Participation Index launched in 2011, this study aims to determine whether Islamic indices and market interest rates are linked and to evaluate the performance of return and volatility of these indices. Correlation analysis, cointegration test and causality analysis have been carried out to see the link between the Participation Index and market interest rates. The link between BIST100 index and market interest rates has been investigated using same analyses so that we can better evaluate the findings. There are two reasons behind the selection of BIST100 index. The first one is this index is the benchmark index and the second is the BIST100 index does not require shariah compliance. This study also compares Participation Index return rates and volatility with those of the BIST100 index and of some other investment instruments. The findings of the study are as follows: • The correlation between participation index and market interest rates is weaker when compared with that between BIST100 index and market interest rates. • The BIST100 index and market interest rates are cointegrated. The study finds no evidence of cointegration between the Participation index and market interest rates. • While there exists no causality between participation index and market interest rates, there is causality between BIST100 index and market interest rates.