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What is the cost of faith? An empirical investigation of Islamic purification
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Accepted version
Date
2017-05-28
Authors
Hutchinson, Mark C.
Mulcahy, Mark
O'Brien, John
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Published Version
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.
Description
Keywords
Islamic finance , Mutual funds , Purification , Shari'ah compliant
Citation
Hutchinson, M. C., Mulcahy, M. and O'Brien, J. 'What is the cost of faith? An empirical investigation of Islamic purification', Pacific-Basin Finance Journal. In Press. doi:10.1016/j.pacfin.2017.05.005