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What is the cost of faith? An empirical investigation of Islamic purification

Author

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  • Hutchinson, Mark C.
  • Mulcahy, Mark
  • O'Brien, John

Abstract

Based on the Qur'anic prohibition against interest (riba), this paper quantifies the true cost of purification for the first time. The extant literature focuses on the performance of various Islamic portfolios but the returns of these funds are pre-purification. This is a significant oversight given that, for some scholars, the entire permissibility of the industry rests on purification. By comparing the impact on returns of three purification methodologies we show that purification adversely and statistically significantly impacts portfolio returns and that the choice of purification methodology also matters. Our results are robust to alternative portfolio construction methodologies and standardised tax rates. The implications are that purification is not a trivial matter for compliant Muslim investors — comprehensive shari'ah compliance has a significant faith and financial implications for compliant Muslim investors such that it could be argued that, by ignoring the impact of purification on returns, the findings of the extant literature are incomplete.

Suggested Citation

  • Hutchinson, Mark C. & Mulcahy, Mark & O'Brien, John, 2018. "What is the cost of faith? An empirical investigation of Islamic purification," Pacific-Basin Finance Journal, Elsevier, vol. 52(C), pages 134-143.
    • Handle: RePEc:eee:pacfin:v:52:y:2018:i:c:p:134-143
    DOI: 10.1016/j.pacfin.2017.05.005
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    2. Ali I. El Saleh & Doureige J. Jurdi, 2021. "Stock performance under alternative Shariah screening methods: Evidence from Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4339-4388, September.
    3. Khan, Abdullah & Rizvi, Syed Aun R. & Ali, Mohsin & Haroon, Omair, 2021. "A survey of Islamic finance research – Influences and influencers," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).
    4. Khaled O. Alotaibi & Mohammad M. Hariri, 2021. "Content Analysis of Shariah-Compliant Investment Equity Funds in KSA: Does Social Justice Matter?," International Journal of Business and Management, Canadian Center of Science and Education, vol. 15(6), pages 1-1, July.
    5. Khaled O. Alotaibi & Christine Helliar & Nongnuch Tantisantiwong, 2022. "Competing Logics in the Islamic Funds Industry: A Market Logic Versus a Religious Logic," Journal of Business Ethics, Springer, vol. 175(1), pages 207-230, January.

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    More about this item

    Keywords

    Islamic finance; Mutual funds; Purification; Shari'ah compliant;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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