AbstractMost of the prior research in the area of Islamic Investments has looked at performance; little attention has been given to the relationship between screening criteria and performance, especially in the GCC region. Therefore, this thesis examines the impact of using different screening criteria on the creation, and hence the performance of, Halal portfolios in Kuwait. In contrast to previous studies, the present study breakdowns Halal stocks in to ‘pure Halal’ (PH) and ‘Mixed Halal’ (MH), and the non-Halal stocks in to ‘Sin’ and ‘Mixed Sin’ (MS). This is to respond to the debate among Shariah scholars about the screening criteria, whether the fatwa on investing in them should be revisited and is it the right time to move towards pure Halal investments only. Specifically, this study explores the impact of tightening the current screening criteria on the creation and performance of Halal portfolios under different market conditions. Hence, broadly speaking, this thesis examine the issues associated with the creation and performance assessment of the Halal and non-Halal portfolios.
For the purpose of this study, both quantitative and qualitative methods were employed. Firstly, due to the scarcity of literature, information and issues related to screening and performance were discussed with 58 face-to-face interviews with key figures in the Islamic investment funds industry in the GCC. The interviews explore whether MH are good investments from a Shariah perspective, and if there is a need to revisit the fatwa and the screening criteria. Secondly, different Halal portfolios were constructed based on the screening definitions suggested by the interviewees using a content analysis of companies’ annual reports listed in Kuwait Stock Exchange (KSE). This is to investigate the impact of applying different screens on the size of the Halal asset universe and whether it is possible to create diversified pure portfolios or at least MH that are close to pure Halal portfolios. Thirdly, quantitative methods were employed to examine whether these Halal portfolios are good investments from a financial perspective, using parametric and non-parametric statistical analysis and traditional risk-adjusted performance measures. Performance was first compared with the KSE market and a control portfolio (CP) as benchmarks then a ‘matched pair’ approach was also conducted. Finally, a general linear model (GLM) was applied to inspect whether the Shariah classification of stocks or other factors such as firm size, sector, and the global financial crisis (GFC) impact on performance.
The findings from the interviews suggest that PH and MH investee companies are different types of Halal investments, and that there are a growing number of Islamic funds and individual investors that invest only in PH stocks, driven by religious motivations. Further, some interviewees seriously questioned the Shariah-compliance of MH stocks and thought of the fatwa that allows MH stocks should be revisited. Therefore, many interviewees agreed that the financial screening criteria needed to become tighter and that companies in Muslim countries should be treated differently from western ones as noted by Wilson (2005). Interviewees revealed that AAOIFI’s screening criteria are widely adopted in the GCC but most interviewees believed that the change in AAOIFI’s criteria in 2006 from total asset to market capitalization was intended to expand the Halal asset universe. Nonetheless, the analysis of companies’ annual reports finds that the use of AAOIFI (2006) during the GFC resulted in a sizeable number of MH equities being re-categorised as MS stocks, but without harming portfolios’ performance.
Further, the statistical analyses suggest that there is no penalty for Halal investments during the full, the bullish or GFC periods, even after halving the screening thresholds. Differences were only identified during the bearish period, showing that some sin portfolios performed better, but overall, Halal portfolios did not underperform either the CP or the KSE index in any of the sample periods.
Moreover, the GLM analysis also supports this finding that the Shariah-compliance of stocks is not the main factor affecting performance, but rather the sector they belong to and the GFC period. Hence, Islamic funds should consider allocating their investments more in the non-financial sectors rather than in the financial sector, especially during bearish markets to improve diversification. Nevertheless, there are fewer PH non-financial stocks, so, a ban on investment in MH stocks is premature, but ‘tightening’ the MH stocks’ financial screening thresholds is currently a better option. Some interviewees, also suggested that PH investors could diversify their portfolios by investing across all GCC stocks markets. Thus, Islamic fund managers need to be active fund managers focusing on certain sectors and markets in different market conditions.
Halving the financial screening thresholds did not hurt MH portfolios’ performance because the loss in the number of MH stocks is compensated for by the lower interest-bearing gearing ratio of the individual companies suggested by the halved thresholds. This is supported by previous studies that report a negative relationship between stock returns and firms’ gearing, especially during market downturns (Penman et al., 2007; George and Hwang, 2010; Bhatt and Sultan, 2012).
Finally, the screening analysis reveals an inadequate level of disclosure for assessing Sharia-compliance from companies’ annual reports. This highlights the need for harmonizing the Shariah screening criteria, and the development of accounting and auditing standards based on Islamic values rather than western ones to reflect the unique characteristics of Halal investment.
|Date of Award
|Christine Helliar (Supervisor) & Nongnuch Tantisantiwong (Supervisor)
- Islamic funds
- Islamic screening
- Halal Investment