Mohammad Irfan

Research Scholar

Department of Management 

Central University Haryana, Mahendergarh, Haryana.

CAUSAL RELATIONSHIP BETWEEN MACROECONOMIC VARIABLES AND SHARIAH INDEX IN EMERGING ECONOMIES: AN EMPIRICAL STUDY OF INDIA

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

OBJECTIVE

Causal Relationship

SHARIH INDEX

ERCPI

IR

M3

Causal Relationship between all Macro Variable and Shariah Index

The present paper is focused on examining the Macroeconomic Variable and BSE Shariah Index, during the period from the date of launch of Shariah index in Indian Capital Market i.e. from 1 April 2009 to 31st March 2014.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

OBJECTIVE

To carry out unit root tests to see whether the macroeconomic variables and S&P BSE 500 Shariah Index are stationary or not.

To examine the relationship between S&P BSE 500 Shariah Index and macroeconomic variables in India. And what is the number of co-integrating vectors.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

Globally, Islamic finance is estimated to be worth about $300 billion, growing at 20% annually. India with a 19.3% Muslim population, the highest in a non-Islamic country, should have been in the forefront of Islamic banking initiatives, but it is yet to be permitted here. It will hugely benefit the Indian economy by attracting investments from the cash rich Middle Eastern economies on the lookout for new investment destinations. Monetary police play a vital role of this paper because of the relationship between S&P BSE 500 Shariah Index and macroeconomic factors. Economic theory postulates that exchange rates, inflation, money supply and interest rates, as well as other factors are important variables in developing a comprehensive understanding of the behavior of stock prices and index movements.

INTRODUCTION OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

FINANCE IN SHARIAH LAWShariah is Islamic canonical law, which observant Muslims adhere to in their daily lives. Shariah has certain strictures regarding finance and commercial activities permitted for Muslims. It prescribes a set of criteria which needs to be satisfied before a Muslim investor or institution can invest in the equity of a given company. From the view point of Shariah law, businesses such as those dealing in pork, alcohol, gambling, conventional financial services, media or advertising, tobacco, pornography, music etc are non-permissible for investment. Furthermore, companies have to be screened so that they satisfy certain accounting ratio restrictions.

INTRODUCTION OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

ISLAM AND THE FINANCIAL ECONOMY The Islamic economy is built upon the real economy this is where the process of production of tangible goods and services, Islam has designated a role for finance in the economy - due to Islam's focus on the real economy which is the wealth creating aspect of any economy finance in Islam is not an end in itself as there is no interest (Riba). Wealth in Islam is created through each stage of industry i.e. mining, refining, manufacturing and sales' All of this adds value at each stage and creates wealth for the economy.لّل� اَّل� َأ�َح� َب�اَو� لِّر� ْث�اَّل� اال�َب�ْي�ُع�ِم� �َّن�ِم� �ِإ ال�وا َق� ِم� َّن�ُه�

� َذ�ل�َك�َب�َأَب�ا الِّر� َم� ِّر� ال�َب�ْي�ُع�و�َح� ُه�"That is because they say: ‘Trading is only like Riba,' whereas Allah has permitted trading and forbidden Riba." [al-Baqarah, 2:275]Riba (Arabic word) the basis of Islamic Finance prohibits usury, termed as Riba (which is the lending of money at exorbitant rates) but it doesn’t stop just there.

INTRODUCTIONOBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

SHARIAH SCREENINGStandard & Poor’s has contracted with Ratings Intelligence Partners (RI) to provide the Shariah screens and filter the stocks based on these screens. Ratings Intelligence Partners is a London/Kuwait-based consulting company specializing in solutions for the global Islamic investment market. Its team consists of qualified Islamic researchers who work directly with a Shariah Supervisory Board. It is continually working with regional banks to create Shariah-compliant equity products and expand investment offerings. Shaiarh Screening based on:Sectoral Based Screening: BSE TASIS Shariah includes sector like Oil & Gas, FMCG, IT, Health Care, Transport Equipment, Housing Related, Telecom, Metal Minning, capital Goods, Chemical & Petrol, Consumer Durable, Diversified.All these sectors are Permissible in Shariah Law.

INTRODUCTIONOBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

Accounting Based Screening: Furthermore, companies have to be screened so that they satisfy certain accounting ratio restrictions. There is financial ratio like Leverage, cash holding and share revenue derived from non-permissible business.Leverage Measure := Debt/Market Value of equity 12 Months average grater than 33%Cash Compliance: Cash Holding = Account Receivable/ Market Value of equity 12 Months average greater than 49%Revenue Share from Non-Permissible Business:= (Net profit Income other Then interest income)/ Revenue greater then 5%

INTRODUCTIONOBJECTIVE

INTRODUCTION

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

SHARIAH LAW

DATA AND METHODOLOGY

• SHARIAH INDEX 50

• CPI, M3,• ER, IRDAILY RETURNS

• RBI• BSEINDIA• Yahoo finance• Asiaindex.co.in

SOURCES

April 1, 2009 TO

Mach 31, 2014

TIME PEROID

Methodology Study the Performance of Macroeconomic Variable

and Shariah Index

The Unit Root Test of Dickey-Fuller

Johansen - Cointegration Test

Engle Granger Test for Shariah and Macro variables

Correlation.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

DATA AND METHODOLOGY

In this study, daily returns, without any adjustment for dividends, has computedby using this formula:Rt = ln(Pt / Pt – 1)* 100Where:Rt = is the daily return at time t of the Shariah Index and Benchmark Indices.Pt = is the daily price in time period t.Pt-1 = is the daily price one period t-1.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

Table 1: Descriptive Statistics of Shariah Index and Macro-variable from April 2009 to March 2014

Table 1 present a summary of descriptive statistics of the variables. Sample mean, standard deviation, skewness and kurtosis has been reported in the table. Table shows that all the variables are skewed except the Interest and Shariah. The volatility of variables in terms of standard deviation as percentage of means highest in CPI and lowest in Interest rate rest are following to the CPI.

EMPIRICAL RESULTSOBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

Particulars CPI Ex. Rate Int. Rate M3 Shariah

Mean 0.7895 0.0034 7.7020 1.3651 0.4929

Standard Error 0.1236 0.0032 0.2898 1.1216 0.4348

Median 0.8265 0.0021 8.5400 0.3241 0.7391

Standard Deviation 0.9495 0.0248 2.2261 8.6153 3.3395

Sample Variance 0.9015 0.0006 4.9556 74.2238 11.1521

Kurtosis 3.9612 -0.0490 -0.8026 1.3362 0.5575

Skewness 0.3113 0.0972 -0.7241 0.3189 -0.5570

Range 6.1334 0.1161 7.6000 44.8563 17.2235

Minimum -1.6598 -0.0564 3.7200 -19.3336 -9.2633

Maximum 4.4736 0.0597 11.3200 25.5227 7.9603

Sum 46.5828 0.1978 454.4200 80.5384 29.0823

Observations 60 60 60 60 60

Table 2: Correlation Matrix of Shariah Index and Macro variable and Shraiah Index from April 2009 to March 2014

Tables 2 have presented the correlation matrix of all macro variables including the S&P BSE 500 Shariah Index. In which CPI and ER are the highly correlated to each others, ER and IR, M3 and IR, respectively have positive relationship, Shariah have negative relationship with ER, IR, respectively and rest of variable have positive relationship with Shariah.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

EMPIRICAL RESULTS

Particular Shariah CPI ER IR M3

Shariah 1        

CPI 0.151 1      

ER -0.320 0.083 1    

IR -0.016 -0.120 0.066 1  

M3 0.057 -0.028 -0.158 0.002 1

Table 3: ADF Unit Root Test on Variables Results

Table 3, The results of the ADF test, When the variables are tested in level then found IR on intercept was non stationary rest of variables were stationary, but after that variables were tested in 1st difference all the variables are found to be integrated of order zero and hence are stationary.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTSADF Unit Root Test

LIMITATION

CONCLUSION

EMPIRICAL RESULTS

Variables Model ADF Test Statistic

Level First Difference

BSE ShariahIntercept

-6.396 -10.170(-3.605593) (-3.615588)

Trend & Intercept-6.313 -10.039

(-4.205004) (-4.219126)

CPIIntercept

-5.573 -5.664(-3.605593) (-3.6329)

Trend-5.641 -5.691

(-4.205004) (-4.243644)

ER Intercept

-4.356 -6.331(-3.605593) (-3.615588)

Trend & Intercept-4.982 -6.232

(-4.211868) (-4.219126)

IRIntercept

-2.734* -7.559(-3.615588) (-3.621023)

Trend & Intercept-6.219 -7.775

(-4.211868) (-4.226815)

M3Intercept

-6.775 -7.220(-3.605593) (-3.615588)

Trend & Intercept-6.788 -7.191

(-4.205004) (-4.219126)

Table 4: Johanson Co-integration Test for Trace Statistic

The results are shown in table 4. An empirical result of trace statistic indicates that the rejection of null hypothesis at 0.05 critical values i.e. there are no co-integration vector. In other words, S&P BS 500 Shariah has long relationship with Marco variables i.e CPI, ER, IR, M3. Trace test also indicates that 5 Co-integration equation at 5 % level of significance, tells about long run equilibrium between Indian Islamic capital market and selected Macro variables.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTSJohansn Co-integration

LIMITATION

CONCLUSION

EMPIRICAL RESULTS

Hypothesized

Eigen ValueTrace

Statistic Critical Value

Prob.**

No. of CE(s)

None * 0.591135 84.32996 69.81889 0.0023

At most 1 * 0.364766 50.34392 47.85613 0.0286

At most 2 * 0.310197 33.10095 29.79707 0.0201

At most 3 * 0.269554 18.9897 15.49471 0.0142

At most 4 * 0.169418 7.053909 3.841466 0.0079

The results are shown in table 5. An empirical result of Max-Eigen statistic indicates that the rejection of null hypothesis at 0.05 critical values i.e. there are no co-integration vector. In other words, S&P BS 500 Shariah has long relationship with Marco variables i.e CPI, ER, IR, M3. Trace test also indicates that 1 Co-integration equation at 5% level of significance, tells about long run equilibrium between Indian Islamic capital market and selected Macro variables.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

LIMITATION

CONCLUSION

EMPIRICAL RESULTS

Hypothesized Eigen ValueMax-Eigen

Statistic

Critical Value Prob.**

No. of CE(s)

None * 0.591135 33.98604 33.87687 0.0485

At most 1 0.364766 17.24297 27.58434 0.5592

At most 2 0.310197 14.11125 21.13162 0.356

At most 3 0.269554 11.93579 14.2646 0.1131

At most 4 * 0.169418 7.053909 3.841466 0.0079

EMPIRICAL RESULTSJohanson Co-integration

Table 5: Johanson Co-integration Test for Max-Eigen Statistic

Table 6: Engle Granger Test for Shariah and Macro variables, Paired Granger Causality Test

Granger causality test reveals that there is bi-directional relationship between all variable except IR and Shariah, there is uni-directional relationship i.e. IR does not granger cause Shariah.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTSEngle Granger Test

LIMITATION

CONCLUSION

EMPIRICAL RESULTS

Null Hypothesis: Obs F-Statistic Prob.

CPI does not Granger Cause SHARIAH 39 1.6418 0.2086

SHARIAH does not Granger Cause CPI   0.0639 0.9383

ER does not Granger Cause SHARIAH 39 0.3267 0.7236

SHARIAH does not Granger Cause ER   1.4769 0.2426

IR does not Granger Cause SHARIAH 39 4.8027 0.0146

SHARIAH does not Granger Cause IR   1.4676 0.2447

M3 does not Granger Cause SHARIAH 39 1.6509 0.2069

SHARIAH does not Granger Cause M3   2.3447 0.1112

Table 7: Estimates of Normalized Co-integrating Coefficients

According to table 7, Where t-statistics (5.127, 3.622, 1.991, 2.059 of CPI, ER, IR, M3 respectively) are greater than critical value (1.96 at 5% Level of significance) it reveals that null hypothesis is rejected i.e. all variables are Co-integrated.

SHARIAH= 28.40+ 15.83 CPI + 353.32 ER + 79.91 IR + 8.5 M3

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTSCo-integration

LIMITATION

CONCLUSION

EMPIRICAL RESULTS

Variables Coefficient Std. Error t-statisticsShariah 1    CPI 15.834 -3.088 [-5.12737]ER 353.325 -97.556 [-3.62177]IR 79.914 -40.137 [-1.99105]M3 8.512 -4.133 [-2.05933]Constant 28.403    

Table 8 depicts that error correction rate of Shariah is (-0.02381) at 5% level of significant which is following by IR (-0.0000531) & M3 (-0.017104) respectively. While CPI, ER’s error correction rate arise (0.076085 & 0.000574) those are positive.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTSVECM

LIMITATION

CONCLUSION

EMPIRICAL RESULTS

Variables Coefficient Std. Error t-statisticsShariah -0.02381 -0.07553 [-0.31525]CPI 0.076085 -0.01514 [ 5.02409]ER 0.000574 -0.00055 [ 1.05002]IR -0.0000531 -0.00172 [-0.03089]M3 -0.017104 -0.02074 [-0.82466]

Table 8: Empirical analysis Vector Error Correction Mechanism (VECM)

Graphical Table: 1 : Graphical Presentation of Macroeconomic Variable and BSE Shariah Index

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTSGraphical Presentation

LIMITATION

CONCLUSION

EMPIRICAL RESULTS

Mostly data’s are on secondary base.

Lacks of the primary data as investor are not willing to share information.

The data of research only from 1st April 2009 to 31st March 2014.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTSVECM

LIMITATION

CONCLUSION

LIMTITATION

CONCLUSION The results of this study strongly support the view that, there is a substantial integration between Indian Islamic Capital Market and Macro Variables because Islamic Finance growing the world Economy. This paper empirically investigated the long run equilibrium relationship between The S&P BSE 500 Shariah and Macro variables CPI, ER, IR and M3. The investigator first used log return of all variables then run the ADF test for becomes the stationary all variables became stationary after level except the IR then again run ADF test in 1st difference for all variables now the time have come all variables becomes stationary. Johansen Co-integration test applied only the stationary data, Investigator found the long run relationship between S&P BSE 500 Shariah and Macro variables CPI, ER, IR and M3, there is highly cointegration of Shariah with ER which is following by IR, CPI and M3 respectively. Granger causality test reveals that there is bi-directional relationship between all variable expect IR and Shariah, there is uni-directional relationship i.e. IR does not granger cause Shariah. The multivariate co integration technique is used to investigate the long run relationship. Shariah is not only for Muslim investors but also non-Muslim investors. Islamic finance is growing the worldwide economy. Islamic finance will be the future of world economy because Islamic Finance works with socially responsiveness and Ethical way.

OBJECTIVE

INTRODUCTION

SHARIAH LAW

DATA & METHODOLOGY

EMPIRICAL RESULTS

LIMITATION

CONCLUSION

Thank You