Does Islamic Finance Outperform Conventional Finance ? Further Evidence from the recent financial crisis

This paper aims to study the performance of Islamic finance regarding that of conventional finance over the last decade. This question is particularly interesting as within the current financial crisis, conventional finance is being rather ineffectual and risky and that in the same time one can expect that Islamic finance innovations could enable investors to get higher performance and lower risk. Indeed, thanks to the ethical and moral aspect of Islamic finance, its products seem to be more attractive to reinsure investors, control financial risk, stabilize financial systems and help to avoid future financial downturns. In this paper, we address this question using different indicators and measures of performance that we have applied to several conventional and Islamic stock indexes. While our findings seem to be heterogeneous over the whole period under consideration (2000 – 2011), we note that conventional financial products show higher returns than those of Islamic finance over the first subperiod (2000- 2006), while the Islamic finance outperforms classical finance during turbulent times and the financial crisis (2006- 2011). Such excess of performance during economic downturns may be explained by the fact that Islamic funds tend to avoid investing in high risk assets and are therefore less affected by economic crises. This implies that while keeping eyes on Islamic finance products, investors may expect high returns and less risk. Our findings also indicate that the investment in Islamic financial products may generate significant diversification benefits.