Sharia Compliance and Stock Performance in the Organization of Islamic Cooperation Countries

The Sharia Compliant Investment (SCI) plays an important role in the economy. It offers Muslims investment opportunities where they do not have to sacrifice their beliefs to achieve abnormal returns. Likewise, it offers non-Muslim an opportunity for diversification. This work aims to investigate the Sharia compliance of the listed companies in 23 countries across the Organization of Islamic Cooperation (OIC) member states following the MSCI screening methodology over the period from June 2012 to March 2020. The natural logarithmic return and standard deviation are used to compare the performances of SC and NSC companies. In addition, regression models were developed to estimate the parameters coefficient. A similar analysis was performed for the various sectors. It was found, based on the difference of means between SC and NSC portfolios, the quarterly, one-year and two-year return are insignificant. However, the difference of means for standard deviation of one-year and two-year are negative and significant. This shows that while similar returns are achieved from SCI and NSCI, the risk associated with SCI is lower. These results were confirmed by the parameters coefficient from the regression models. However, the regression models for the sectoral analysis provided conflicting results. In the one-year and two-year analysis, some SC sectors outperformed their counterpart, while others unperformed their conventional counterpart. The parameter coefficients for returns and standard deviation for the Mining, Oil and Gas and Utilities sectors, are consistently significant and are positive for return and negative for standard deviation. This indicates SCI composed of businesses within these sectors have higher returns and lower risk compared to its NSC counterpart. On the other hand, Health and Social Assistance sector displayed a negative return and positive standard deviation for two-year analysis. This shows that SC portfolios composed of businesses within these sectors have lower return and higher risk associated with them compared to their NSC counterparts.