A study conducted by the University of Sydney Business School has found that Islamic assets, in compliance with ethical and religious norms outlined in Sharia law, exhibit superior performance compared to conventional assets in volatile markets. The research, which has been published in the prestigious Journal of International Business Studies, delved into the impact of the 2007-2008 global financial crisis by analyzing daily stock, bond, and money market data from nine Islamic and 37 non-Islamic countries spanning from May 2007 to June 2010.
Islamic assets, characterized by their adherence to Sharia principles that prohibit interest on debt and investments in speculative financial instruments such as derivatives (e.g., options and futures), have demonstrated their resilience and potential to contribute to sustainable development.
Lead author of the study, Associate Professor Shumi Akhtar, emphasized that the increased integration of financial markets in the decade leading up to the US subprime mortgage crisis had resulted in heightened volatility across various asset classes and nations. This prompted the researchers to explore the volatility linkages between Islamic and conventional stock, bond, and money market indices on a global scale.
Volatility linkages, which measure the extent to which movements in one market affect movements in another, are pivotal in avoiding market crashes similar to the 2008 financial crisis. The study’s univariate analysis of volatility linkages across the entire sample period revealed that Islamic assets exhibit lower volatility linkages with conventional assets compared to linkages between two conventional assets.
Professor Akhtar elaborated on the findings, stating, “This difference was up to 26.33 percentage points in our univariate analysis, and up to 6.45 in our multivariate analysis. Even after controlling for country-level fixed effects and time-varying characteristics, the difference remains statistically significant and as large as 3.16 percentage points.”
The reduced volatility of Islamic assets can be attributed to their avoidance of leverage and speculative financial products, which often entail the purchase of assets with the expectation of short-term value appreciation. This approach aligns with the core principles of Islamic finance, rooted in fairness, sustainability, and risk aversion.
Professor Akhtar underscored the potential impact of Islamic finance on fulfilling the United Nations’ Sustainable Development Goals, stating, “By insisting on investments tied to tangible assets that add economic value, Islamic finance indirectly fosters the UN’s eighth goal of ‘Decent Work and Economic Growth’ and twelfth goal of ‘Responsible Consumption and Production.’”
Furthermore, Islamic finance’s emphasis on tangible assets positions it to support climate action. Prominent examples include the issuance of Green Islamic corporate bonds by international firms, aimed at environmental protection and financing infrastructure projects in Africa. These efforts contribute to socially valuable projects and underscore the industry’s commitment to environmental, social, and corporate governance standards.
In conclusion, the study’s findings emphasize the potential benefits of incorporating Islamic assets into diverse investment portfolios, highlighting their resilience in turbulent market conditions. As global financial markets continue to evolve, embracing Islamic assets may offer a sanctuary for investors seeking sustainable and ethical financial assets.
