Do constraints on financial and operating leverage affect the performance of Islamic equity portfolios?

Dawood Ashraf*, Karl Felixson, Mohsin Khawaja, Syed Mujahid Hussain

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

24 Citations (Scopus)


The Islamic equity screening standards specifically forbid investment in equities of companies with high financial leverage and a low fraction of investment in real assets. We investigate how these constraints on financial leverage and higher investment in real assets (operating leverage) affect the performance of Islamic equity portfolios (IEPs). The empirical findings suggest that investors sacrifice potential returns by holding constrained portfolios but also avoid some of the risk. The exact effect on portfolio performance is largely dependent of the actual screening standard used, either book-value based (MSCI) or market-value based (AAOIFI). These results have clear implications for both investors and policy makers.

Original languageEnglish
Pages (from-to)171-182
Number of pages12
JournalPacific Basin Finance Journal
Publication statusPublished - Apr 1 2017


  • Investment in real assets
  • Islamic equity investments
  • Leverage
  • Portfolio management

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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