Contemporary Islamic Finance: Innovations, Applications and Best Practices

CHAPTER 20

Islamic Mutual Funds' Performance in Saudi Arabia

HESHAM MERDAD

Assistant Professor, Department of Finance and Economics, King Fahd University of Petroleum and Minerals

M. KABIR HASSAN

Associate Professor and Chair of Finance Department, University of New Orleans

Unfortunately, most empirical studies that discuss Islamic mutual funds still do not provide a definite answer to this most critical question: Is investing in Islamic mutual funds associated with any cost? Some researchers conclude that investing in Islamic mutual funds comes at no cost because their findings indicate no evidence of any performance differences between Islamic and conventional funds. On the other hand, some researchers conclude that there is a cost because Islamic mutual funds provide investors with lower returns than conventional mutual funds. Such inconsistent results exist because the Islamic finance and investment field is relatively new compared to its conventional counterpart, and thus the Islamic mutual fund literature is still in its infancy.

This chapter carries the critical investigation of Islamic mutual funds to Saudi Arabia. Saudi Arabia is considered an ideal experimental environment to conduct this empirical study for two important reasons: First, Saudi Arabia alone possesses the largest amount (52 percent) of Shariah-compliant fund assets worldwide.¹ Second, Saudi Arabia is considered one of the few countries that strictly adhere to the Shariah law. (In fact, Saudi Arabia's law ...