The Islamic Financial Industry: Performance of Islamic vs. Conventional Sector Portfolios

This paper studies the basic principles of the Islamic financial system to know the positive aspects that make it more solid and stable than the conventional financial system during financial crises. On the other hand, this research carries out a comparison between conventional and Islamic sectoral portfolios for the period from January 1996 to December 2015, through the use of different performance measures. Specifically, the performance measures used in this paper include Jensen’s, Treynor’s, Sharpe’s and Sortino’s classical performance ratios and two of the most recent and accurate performance measures that take into account the four statistical moments of the probability distribution function, the Omega’s ratio and the MPPM statistic. In addition, for robustness, this paper analyses whether the performance results of conventional and Islamic sector portfolios depend on the state of the economy, by splitting the whole sample period into three sub-periods: pre-crisis, crisis and post-crisis. So, this paper would determine which types of portfolios offer better performance depending on the economic cycle. The main results confirm that, in general, the best performing sector is Health Care, while the worst performing sector is Financials. Furthermore, Islamic portfolios provide higher returns than conventional portfolios during the full period as well as the three sub-periods.