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Writers and speakers about Islamic finance often contend that not only is it more moral, it also produces better financial results.

I am always sceptical about such assertions, and took a detailed look at the numbers in my June 2018 column in the magazine Islamic Finance News. You can read it below.

Does having principles make you poorer or richer?

This is actually a silly question. My principles are integral to my identity, because I am accountable to God for how I live my life. I did not choose my principles because I thought they would make me richer.

However, in the context of Islamic finance, it is an interesting question to ask. For example, several providers screen quoted stock market companies, to identify those which are approved for Shariah compliant investors and the major index providers publish Shariah compliant versions of their indices. During the global financial crisis, many speakers at Islamic finance conference delighted in pointing out that, on average, Shariah compliant shares had performed much better than those which were not.

The speakers were accurate, as demonstrated by the statistics for the period 2008-2011 below. These show the performance of two US dollar denominated indices published by FTSE.

The FTSE Shariah All-World index significantly outperformed its conventional counterpart in 2008, the worst year of the global financial crisis. The reasons are obvious when you look at the composition of the two indices. In particular, see the relative representation of banks, insurance companies and financial services:

The global financial crisis devastated the share prices of most banks and insurance companies and harmed the financial services industry more widely. Accordingly, it is no surprise that the Shariah All-World index, in which these supersectors were almost unrepresented, outperformed its conventional counterpart.

However, once the world emerged from the crisis, the Shariah All-World index has consistently underperformed its conventional counterpart. Part of this is no doubt due to the bouncing back of depressed share prices in the banking and insurance sector. However, in my view there is also a more fundamental reason.

A conventional investor who is selecting shares from the complete universe of shares will, on average, outperform a Shariah compliant investor who selects shares only from the Shariah compliant subset of the universe.

Even if the Shariah compliant subset has characteristics that make them better than the average share in the universe, the conventional investor is always free to buy such high quality Shariah compliant shares, since he selects from the whole universe. However, the Shariah compliant investor can never buy high quality non-Shariah compliant shares.

This is simply a fact of life to be accepted. For example, I know that tobacco shares and casinos make good investments, but I refuse to buy them for moral reasons.