The Journal of Academic Social Science Studies

International Journal of Social Science Doi number:http://dx.doi.org/10.9761/JASSS3079 Number: 39 , p. 235-250, Autumn III 2015 Yayın Süreci Yayın Geliş Tarihi 02.09.2015

Yayınlanma Tarihi 25.10.2015

DO THE SECT DIFFERENCES OF CUSTOMERS IN ISLAMIC COUNTRIES INFLUENCE THE RETURNS OF ILL-GOTTEN STOCKS? İSLAM ÜLKELERİNDEKİ MÜŞTERİLERİN MEZHEPSEL FARKLILIKLARI HARAM HİSSELERİN GETİRİLERİNİ ETKİLER Mİ? Asst. Prof. Dr. İbrahim BOZKURT Çankırı Karatekin University Faculty of Economics and Administrative Sciences Abstract When bad firms produce things and services that are not accepted by all religions and the majority of the society, their cash flows are affected in a negative way. Thus, the stocks of bad firms (sin stocks) both are attracted less by investors and have a higher litigation risk. Since such risks exist, the returns expected from these sin stocks must be higher. The studies in this field show that the sin stocks have higher returns than the market. In this study, contrary to the related studies, only the stock returns of firms that deal with “bad” or “sinful” activities in the Islamic societies are analyzed. The aim of this study is to analyse the return performances of ill-gotten stocks traded at the Islamic countries’ stock markets and to analyse the effect of sect differences in the Islamic countries on ill-gotten stock returns. With this purpose in this study, the daily stock prices of 63 ill-gotten and 32 not ill-gotten stocks that are selected from eight Islamic countries’ markets between 2000 and 2014 are used as data. The results of the analyses that were made by utilizing Jensen’s Alpha show that the ill-gotten stocks brought more risk-adjusted excess returns, compared to not ill-gotten stocks and there was a statistical significant difference between the excess returns of Shia and Sunni countries’ ill-gotten stocks and this difference was in favour of the ill-gotten stocks of Sunni countries. Keywords: Sin Stock; İll-Gotten Stock; Islamic; Sect; Risk-Adjusted Excess Return Özet Kötü firmaların, bütün dinlerce ve toplumun büyük bir kesimi tarafından kabul görmeyen ürün ve hizmetleri üretmesi, bu firmaların nakit akışlarını olumsuz yönde etkiler. Buna nedenle; kötü firmaların hisseleri (günahkâr hisseler), hem yatırımcılar tarafından daha az dikkate alınır hem de daha yüksek bir dava riskine sahip olur. Bu tür risklerin varlığı nedeniyle de günahkâr hisselere yapılan yatırımlardan istenen getirilerin daha yüksek olması gerekir. Literatürde yer bulan çalışmalar; günahkâr hisselerin, piyasanın üstünde bir getiriye sahip olduğunu ortaya koymaktadır. Bu

236 İbrahim BOZKURT çalışmada, literatürdeki çalışmaların aksine, sadece İslam dinine sahip topluluklarda “kötü” ve “günah” olarak kabul edilen faaliyetlerde bulunan (faizle uğraşan) firmaların hisse getirileri (haram hisselerin getirileri) analiz edilmektedir. Bu çalışmanın temel amacı; Müslüman ülke borsalarında işlem gören haram hisselerin getiri performanslarını analiz etmek ve Müslüman ülkelerdeki mezhepsel farklılıkların, haram hisselerin getirileri üzerindeki etkisini incelemektir. Bu amaç doğrultusunda; çalışmada, sekiz Müslüman ülke borsasında işlem gören 63 haram ve 32 haram olmayan hisse senedinin 2000-2014 yılları arasındaki günlük hisse fiyatları veri olarak kullanılmaktadır. Jensen’s alpha yöntemi kullanılarak yapılan analizlerin sonucunda; haram hisselerin, haram olmayan hisselerden daha fazla riske göre düzeltilmiş anormal getiri sağladığı, Şii ve Sünni ülkelerdeki haram hisselerin riske göre düzeltilmiş anormal getirileri arasında istatistiki açıdan anlamlı bir fark bulunduğu ve bu farkın Sünni ülkelerdeki haram hisseler lehine olduğu ortaya konulmaktadır. Anahtar Kelimeler: Günahkar Hisse; Haram Hisse; İslam; Mezhep; Aşırı Getiri

1. INTRODUCTION In today’s modern business administration view, the major aim of firms is to maximize their market values. The firm value is influenced by the factors such as the cash flows expected in the future periodically, the risks at expected cash flows and the continuation of expected cash flows (Ercan, Öztürk, Demirgüneş, Başçı & Küçükkaplan, 2010, p. 35). When the cash flow expectations of firms are high, the amount of profit that will be distributed to the shareholders will generally be high and this influences the firm value positively. Since the variability of cash flows will increase the risk situation, this variability influence on the firm value is negative. When the cash flows are steady and continuous, the firm value is positive. To increase the expected cash flows in the future, to decrease the variability of cash flows and to make the cash flows continuous depend on the increase in sales. The increase in sales depends on the production of products and services that will meet the expectations of potential customers. The products and services that will meet the expectations of customers are ones that suit their religious beliefs, cultural structures and the moral values of the society they live in (Yükselen, 2008, p. 134-143). However today, there are firms that produce things or services that don’t suit people’s moral val-

ues or that have a negative impact on the society. These firms have activities related to products or services (cigarette, alcohol, gambling, marijuana and sex) having bad impact on people/society and are called bad firms (Fabozzi, Ma & Oliphant, 2008, p. 82). The stocks of bad firms are called sin stocks (Hong & Kacperczyk, 2007, p. 1). Here, the concept of sin is not a concept that can be explained in all aspects or is not an open, understandable or clear concept but it is used to define not suiting godly orders and disrupting the human and natural design (Bozkurt, 2005). When bad firms produce things and services that aren’t accepted by all religions and the majority of the society, their cash flows are affected in a negative way. Thus, sin stocks both are attracted less by investors and have a higher litigation risk (Fabozzi et al., 2008, p. 82). Since such risks exist, the returns expected from these sin stocks must be higher. The studies (Table 1) in this field show that the sin stocks that are present in sex, alcohol, gun, gambling, cigarette and nuclear energy sectors have higher returns than the market. The only common aspect of these different studies (Table 1) is that, the firm activities that are used in the studies are accepted as “bad” or “sinful” in all religions and societies in the world. On the other hand, some activities are accepted as bad or sinful in only certain

Do The Sect Differences Of Customers In Islamic Countries Influence The Returns Of Ill-Gotten Stocks?

local traditions or in certain religious beliefs. For example interest is forbidden to Muslims only1. In the Islamic religion Allah states trade is halal but interest is ill-gotten (Second Surah of the Koran, 2/275). According to Islam, activities contrary to religious rules and forbidden by religion are called “ill-gotten”. Thus, the conventional western banking industry is an ill-gotten industry in Islamic religion (Fabozzi et al., 2008, p. 85) whereas Islamic banking industry is not. The main aim of this study is to comparatively analyze the return performances of ill-gotten stocks2 with the return performances of not ill-gotten stocks, in mainly Islamic countries’ stock markets, and also to analyze the impact of religious sect differences of potential customers in the Islamic countries on ill-gotten stock returns. In the following sections of the study, related studies in the literature, the hypothesis of the study, information regarding the data and methodology used for the study, the findings of the study and the conclusions reached in the study are pre-

In fact interest is forbidden in both Judaism (Exodus, 22/25-23/9) and Christianity (Luka, 19/11-27; Matta, 25/15-30). However to keep up with the developments and changes in economics and after the French Revaluation, especially, interest which become very common, acted as a basic component of the western economy and wasn’t forbidden anymore. 2 Since interest is one of the sins peculiar to the Islamic religion, instead of “sin stocks” in the literature, “illgotten stocks” concept was used, which is “not halal”. In the study, the ill-gotten stocks refer to the stocks of the conventional bank stocks in the Islamic countries and the Islamic bank stocks in the Islamic countries are accepted “not ill-gotten stocks”. In fact, in the Islamic religion, eating pork is also forbidden so the stocks of the firms that have production related to pork must be accepted ill-gotten stocks, too. This is true, but in the Islamic countries, although there are firms that produce pork or pork-related products, there are so few firms whose stocks are publicly traded. Therefore such firms were excluded from this study. 1

237

sented, respectively. 2. LITERATURE REVIEW The subject-related studies in the literature analyze the returns of the stocks of the firms that deal with activities that are accepted as “bad” or “sin” by all societies and religions. These studies were summarized in Table 1, with their samples, methods, analyzed sinful industries and the results they obtained. All of the studies, apart from those of Lobe and Walkshäusl (2011), show that sin stocks have a return higher than the market. Hong and Kacperczyk (2009) stated that the reason of these higher than the market returns is, sin stocks don’t attract the investors much and this causes neglected firm effect and also they have higher litigation risk, which causes a higher return expectation. Salaber (2009) stated that sin stock returns differ from market returns because of three reasons: (i) Bad companies are generally effected by economic circumstances and recession less, (ii) alcohol, cigarette and gambling which are bad and sin, cause addiction and this influences the cash flows of bad product owners positively and (iii) in bad industries, they work by higher leverage ratios. The studies in Table 1 have contributed significantly to the literature. For instance Fauver and McDonald IV (2014), analyzed whether or not behaviors towards sin stocks differed among the countries; Salaber (2009) analyzed whether or not sin stock returns differed during economic growth and stability; Visaltanachoti et al. (2009), analyzed the sin stock returns in China instead of USA and European countries; Lobe and Walkshäusl (2011), compared sin stock returns with the returns of ethical idexes; Fabozzi et al. (2008), studied with a set of data higher than the studies made before and Salaber (2007) analyzed

238 İbrahim BOZKURT

the effects of religious beliefs on the returns of sin stocks, making a contribution to the literature. Table 1: Literature Review Sin Industries

Multi-Factor Model

The data set of the 267 firms from 21 different countries’ stock markets between 1970 -2007.

Adult, Alcohol, Biotech, Tobacco, Gambling and Weapons.

The data set of 193 firms from the USA stock markets between 1926 -2006. The data set of 183 firms from the USA stock markets between 1926 -2005.

Liston and Soydemir (2010)

The data set of the firms that are traded in the USA stock markets between 2001 -2007.

Regression Analysis MultiFactor Model

As a result of the study that analyzes the Alcohol, excess returns of sinful stocks, it was found Gambling out that the sinful stocks outperformed the and Tobacco. market.

Tobin’s Q and Single Index Model

The data set of 46 firms from the China stock markets between 1995 -2007.

As a result of the study that analyzes the abnormal returns of sinful stocks, it was found out that both the annual average excess return and the risk-adjusted annual average excess return of the portfolio made up of sinful stocks were positive (these returns were by 11,15% and 13,7%, respectively)

As a result of the study that analyzes the Alcohol, excess returns of sinful stocks, it was found Gaming and out that these stocks outperform by 2,5% Tobacco. annually (by nearly 0,2% monthly).

As a result of the study that analyzes the Alcohol, excess returns of sinful stocks, it was found Gambling out that the sinful stocks outperformed the and Tobacco. market index. As a result of the study that analyzes the Alcohol, excess returns of sinful stocks, it was found Gambling out that when compared with the market and Tobacco. returns, the excess returns of the sinful stocks were statistically significant and positive.

Multi-Factor Model and Rolling Regressinon Technique

Visaltanachoti, Zheng and Zou (2009)

Salaber (2007)

The data set of the firms traded in the European stock markets between 1975 -2006.

As a result of the study that analyzes the effects of the factors such as legal regulations or religious beliefs on the returns of sinful stocks, it was found that the Protestants were Alcohol, more sin averse compared to the Catholics Gambling and because of this, more return was deand Tobacco. manded, to invest on sinful stocks in the Protestant countries. Moreover, in the countries where litigation risk and tax rates were higher, the sinful stock returns were higher.

Risk-Adjusted Return

Results

Fabozzi et al. ( 2008)

Method(s)

Hong and Kacperczyk (2009)

The Sample

Salaber (2009)

The owner(s)

Sharpe Ratio, Multi-Factor Model Multi-Factor Model

The data set of 325 firms from the stock markets of G20 countries between 1995 -2009. The data set of 33 firms from the USA stock markets between 2007 -2012.

239

As a result of the study that compares the portfolio performances of the sinful stocks with the ethical index performances, it was found out that the sinful stocks could not provide any excess returns.

As a result of the study that analyzes the Alcohol, excess returns of an index made up of sinful Defense, stocks, it was found out that the excess return Gambling of the sin index was statistically significant and Tobacco. and positive. As a result of the study that analyzes the Alcohol, effect of the differences of social values of Gambling countries on the returns of sinful stocks, it and Tobacco. was found out that the sinful stocks made an excess return of nearly 1-2%

Single Index Model

Svensson and Zetterqvist (2012)

The data set of 285 firms from the European stock markets between 1965 2011.

Multivariate Regression Analysis. And Multi-Factor Model

Adult, Alcohol, Defense, Gambling, Nuclear and Tobacco.

Fauver and McDonald IV (2014)

The data set of 755 firms from the stock markets of 51 different countries between 1995 -2007.

Richey (2013)

Lobe and Walkshäusl (2011)

Do The Sect Differences Of Customers In Islamic Countries Influence The Returns Of Ill-Gotten Stocks?

As a result of the study that analyzes the Alcohol, excess returns of the sinful stocks, it was Gambling, found out that apart from gambling, the Soft Drink sinful stocks present in the other industries and Tobacco. made positively excess returns.

Salaber (2007, p. 20) stated that further studies can contribute to literature, analyzing the sin stock returns in the Islamic countries. It is thought that this study which was inspired by Salaber’s (2007) suggestion, will contribute to the literature in two ways: (i) Contrary to the studies in the literature, this study analyzes only the stock returns of firms (banks) that deal with activities accepted as “bad” or “sin” in Islamic religion or societies, instead of the activities accepted as “bad” or “sin” in all religions or societies. (ii) This study analyzes the impact of religious sect differences between potential bank customers on illgotten stock returns (thus, the stock choices of local and foreign investors, no matter what their religious beliefs are). In the literature, there are a lot of studies that analyze the financial performances of conventional banks that are active in the Islamic countries (Samad, 2004; Ashraf & Rehman, 2010; Viverita, 2011; Siraj & Pillai, 2012). However, a study that analyzes the effect religious sect differences

of customers on the stock returns of conventional banks in the Islamic countries has not been traced yet. This study is to be the first one in the literature in this respect. 3. HYPOTHESIS OF THE STUDY Religion is one of the significant factors that influence customers’ choices of products and services. For example Omer (1992), Naser, Jamal and Al-Khatip (1999), Othman and Owen (2001), Karakaya (2004), Gaith and Andrew (2009), Al Ajmi, Hussain and Al-Saleh (2009) and Lee and Ullah (2011) found that Muslims, because of their religious beliefs, preferred Islamic banking services instead of conventional banking services. According to the findings, the conventional banks that are active in the Islamic countries are preferred less by the customers because of religious reasons. This situation causes the firms to care for their future cash flows and investors to deal with ill-gotten stock less. When investors show less attention to a stock, this may

240 İbrahim BOZKURT

cause a neglected firm effect anomaly. According to this anomaly, the stocks which are less preferred show a higher performance than other stocks (Karan, 2001). Thus the first hypothesis of this study is as follows: In the Islamic countries, ill-gotten stocks that have higher risk and more potential to cause neglected firm effect have more abnormally expected returns compared to not ill-gotten stocks. H1: In the Islamic countries, the illgotten stocks have more risk-adjusted abnormal returns than not ill-gotten stocks. Salaber (2007) found that the societies that think highly of religious values avoid sins so in the countries with stricter religious rules, more return is required to make investment on sin stocks. In Islamic religion, there are differences between the sects, about the forbiddance of “interest”. Sunni sect has a narrower trend of forbiddance whereas Shia sect has a wider (Bayındır, 2006, p. 211). In the Hanafi3 sect which has a narrower forbiddance for “interest”, interest is forbidden in the related country borders and between the Muslims of that country. However in the Zaydis belief of Shia Sect, which has a wider interest forbiddance, interest is forbidden among all people, no matter what their countries or religions are (Bayındır, 2006). In the Zafari belief of Shia sect, interest can be taken from another person when you are abroad, but cannot be given to another. Thus, people who are stricter with the interest forbiddance will prefer the Islamic banking services and products instead of the conventional banking and the people who are not so strict will be able to prefer the both Islamic and conventional banking services and products. As a result, the ill-gotten stocks in Shia countries have more potential to cause neglected firm effect than the ill-gotten stocks Hanafi sect is one of the denomination types of the Sunni Islamic law and constitutes more than half of the Sunni population. 3

in the Sunni countries. At this point the second hypothesis that was formed takin the customers’ religious beliefs into consideration (because the customers’ religious beliefs effect banks’ future cash flows and future cash flows effect investors’ decisions and finally, investors’ decisions also effect stock prices) is this: H2: There is a statistically significant difference between risk-adjusted excess returns of ill-gotten stocks in the Sunni and Shia countries; the risk-adjusted excess return of illgotten stocks is more in the Shia countries. 4. DATA AND METHODOLOGY In this study the daily stock prices of 63 ill-gotten and 32 not ill-gotten stocks that are traded in the eight Islamic countries’ stock market (4 of them Sunni and 4 Shia) between 2000 and 2014 were used as data. Each price of the stocks was taken from its stock market’s web site. Table 2 shows the details of the data set. Table 3 shows the distribution of the sect differences in the Islamic countries. The countries which are the subjects of the study are United Arab Emirates (UAE), Kuwait, Turkey, Jordan, Lebanon, Iran, Iraq and Bahrain. The reason of choosing these countries is that, the Islamic banking has a significant place in the general banking system of these countries (Hasan & Dridi, 2010, p. 11). Taking these countries as sample makes it possible to compare illgotten and not ill-gotten stock returns.

Do The Sect Differences Of Customers In Islamic Countries Influence The Returns Of Ill-Gotten Stocks?

241

UAE

I

2 Commercial Bank of Dubai P.S.C.

UAE

C

3 Emirates NBD

UAE

C

4 Mashreq Bank

UAE

C

5 AJMAN BANK PJSC

UAE

C

6 Amlak

UAE

I

7 Abu Dhabi Commercial Bank

UAE

C

8 Abu Dhabi Islamic Bank

UAE

9 Bank of Sharjah

DIB

AED

2000-2014

CBD

AED

2003-2014

EMIRATE

AED

2007-2014

MASQ

AED

2001-2014

AJMANB

AED

2008-2014

AMLAK

AED

2004-2008

ADCB

AED

2001-2014

I

ADIB

AED

2000-2014

UAE

C

BOS

AED

2004-2014

10 Commercial Bank International

UAE

C

CBI

AED

2002-2014

11 First Gulf Bank

UAE

C

FGB

AED

2002-2014

12 Finance House

UAE

C

FH

AED

2005-2014

13 Invest Bank

UAE

C

INVESTB

AED

2005-2014

14 National Bank of Abu Dhabi

UAE

C

NBAD

AED

2001-2014

15 National Bank of Fujairah PJSC

UAE

C

NBF

AED

2005-2014

16 National Bank of Umm Al-Qaiwain

UAE

C

NBQ

AED

2005-2014

17 National Bank of Ras Al-Khaimah

UAE

C

RAKBA

AED

2005-2014

18 Sharjah Islamic Bank

UAE

I

SIB

AED

2004-2014

19 United Arab Bank (P.J.S.C.)

UAE

C

UAB

AED

2005-2014

20 Union National Bank

UAE

C

UNB

AED

2003-2014

21 The Bahraini Saudi Bank

Bahrain

C

BSB

BHD

2000-2012

22 Shamel Bank

Bahrain

I

SHAM.BH

USD

2001-2007

23 Al Salam Bank

Bahrain

I

SALAM

BHD

2006-2014

24 Al-Ahli United Bank

Bahrain

C

AUB

USD

2000-2014

25 Bahrain Islamic Bank

Bahrain

I

BISB

BHD

2000-2014

26 BBK

Bahrain

C

BBK

BHD

2000-2014

27 Ithmaar Bank B.S.C.

Bahrain

I

ITHMR

USD

2006-2014

28 Khaleeji Commercial Bank B.S.C

Bahrain

I

KHCB

BHD

2008-2014

29 National Bank of Bahrain

Bahrain

C

NBB

BHD

2000-2014

30 Natıonal Bank Of Kuwaıt

Kuwait

C

NBK

KWD

2004-2014

31 Gulf Bank

Kuwait

C

GBK

KWD

2004-2014

32 Commercıal Bank Of Kuwaıt

Kuwait

C

CBK

KWD

2004-2014

33 Al-Ahli Bank Of Kuwaıt

Kuwait

C

ABK

KWD

2004-2014

34 Ahli Unıted Bank

Kuwait

I

ALMUTA

KWD

2004-2014

35 Kuwaıt Internatıonal Bank

Kuwait

I

KIB

KWD

2004-2014

36 Burgan Bank

Kuwait

C

BURG

KWD

2004-2014

37 Kuwaıt Fınance House

Kuwait

I

KFIN

KWD

2004-2014

38 Boubyan Bank

Kuwait

I

BOUBYA

KWD

2006-2014

39 Warba Bank

Kuwait

I

WARBAB

KWD

2013-2014

Abu Dhabi Securities Exchange www.adx.ae Bahrain Bourse http://www.bahrainbourse.ne t Kuwait Stock Exchange http://www.kuwaitse.com/A/

Ticker Symbol

Period

Bank Name

Dubai Financial Market http://www.dfm.ae

Currency

Bank Type*

1 Dubai Islamic Bank

Market and Official Web Site

Country

Table 2: List of Ill-Gotten and Not Ill-Gotten Stocks (Data Set)

242 İbrahim BOZKURT USD

2003-2014

BLC

USD

2003-2014

BOB

USD

2003-2014

BYB

USD

2003-2014

BEMO

USD

2003-2014

BLOM

USD

2003-2014

I

BANS1

IRR

2011-2014

BMLT1

IRR

2009-2014

NOVN1

IRR

2008-2014

BPAR1

IRR

2004-2014

BPAS1

IRR

2011-2014

BSDR1

IRR

2009-2014

KRAF1

IRR

2003-2014

BTEJ1

C

41 BLC Bank

Lebanon

C

42 Bank of Beirut

Lebanon

C

43 Byblos Bank

Lebanon

C

44 Banque BEMO

Lebanon

C

45 Blom Bank

Lebanon

I

46 Ansar Bank

Iran

47 Mellat Bank

Iran

I

48 EN Bank

Iran

I

49 Parsian Bank

Iran

I

50 Pasargad Bank

Iran

I

51 Saderat Bank

Iran

I

52 Kafarin Bank

Iran

I

Tehran Stock Exchange http://www.tse.ir

Lebanon

Beirut Stock Exchange http://www.bse.co m.lb/

AUDİ

40 Bank Audi

53 Tejarat Bank

Iran

I

IRR

2009-2014

54 Post Bank

Iran

I

BPST1

IRR

2010-2014

55 Sina Bank

Iran

I

VSIN1

IRR

2007-2014

Iraq

C

IQD

2009-2014

57 Bank Of Baghdad

Iraq

C

BBOB

IQD

2009-2014

58 BalBank

Iraq

C

BBAY

IQD

2009-2014

59 National Bank Of Iraq

Iraq

C

BNOI

IQD

2009-2014

60 Credit Bank Of Iraq

Iraq

C

BROI

IQD

2009-2014

61 Dijlah & Furat Bank for Development

Iraq

I

BDFD

IQD

2010-2014

62 Iraqi Islamic Bank

Iraq

I

BIIB

IQD

2009-2014

63 Union Bank Of Iraq

Iraq

C

BUOİ

IQD

2009-2014

64 Gulf Commercial Bank

Iraq

C

BGUC

IQD

2009-2014

65 Kurdistan International Bank

Iraq

I

BKUI

IQD

2009-2014

Iraq Stock Exchange http://www.isx-iq.net

56 Ashur International Bank For Investment

BASH

C

IQD

2009-2014

67 Akbank T.A.Ş.

Turkey

C

AKBNK

TRY

2003-2014

68 Alternatifbank A.Ş.

Turkey

C

ALNTF

TRY

2003-2014

69 Asya Katılım Bankası A.Ş.

Turkey

I

ASYAB

TRY

2006-2014

70 Deniz Bank A.Ş

Turkey

C

DENIZ

TRY

2004-2014

71 Finansbank A.Ş.

Turkey

C

FINBN

TRY

2003-2014

72 Şekerbank T.A.Ş.

Turkey

C

SKBNK

TRY

2003-2014

73 T.Garanti Bankası A.Ş.

Turkey

C

GARAN

TRY

2003-2014

74 T.İş Bankası A.Ş.

Turkey

C

ISCTR

TRY

2003-2014

75 Tekstil Bankası A.Ş.

Turkey

C

TEKST

TRY

2003-2014

76 Türk Ekonomi Bankası A.Ş.

Turkey

C

TEBNK

TRY

2003-2014

77 Albaraka Türk Katılım Bankası A.Ş.

Turkey

I

ALBRK

TRY

2007-2014

78 Türkiye Halk Bankası A.Ş

Turkey

C

HALKB

TRY

2007-2014

79 Türkiye Vakıflar Bankası

Turkey

C

VAKBN

TRY

2005-2014

80 Yapı Ve Kredi Bankası A.Ş.

Turkey

C

YKBNK

TRY

2003-2014

81 Arab Bank

Jordan

C

ARBK

JOD

2006-2014

JOIB

JOD

2006-2014

JOKB

JOD

2006-2014

JCBK

JOD

2006-2014

THBK

JOD

2006-2014

AJIB

JOD

2006-2014

JDIB

JOD

2006-2014

82 Jordan Islamic Bank

Jordan

I

83 Jordan Kuwait Bank

Jordan

C

84 Jordan Commercial Bank

Jordan

C

85 The Housing Bank For Trade And Fin.

Jordan

C

86 Arab Jordan Investment Bank

Jordan

C

87 Jordan Dubai Islamic Bank

Jordan

I

Amman Stock Exchange http://www.ase.com.jo /

66 Sumer Commercial Bank

Istanbul Stock Exchange www.borsaistanbul.com

Iraq

BSUC

Do The Sect Differences Of Customers In Islamic Countries Influence The Returns Of Ill-Gotten Stocks?

88 Bank Al-Etihad

Jordan

243

C

UBSI

JOD

2006-2014

89 Arab Banking Corporation

Jordan

C

ABCO

JOD

2006-2014

90 Invest Bank

Jordan

C

INVB

JOD

2006-2014

91 Capital Bank Of Jordan

Jordan

C

EXFB

JOD

2006-2014

92 Societe Generale De Banque - Jordanie

Jordan

C

SGBJ

JOD

2006-2014

93 Caıro Amman Bank

Jordan

C

CABK

JOD

2006-2014

94 Bank Of Jordan

Jordan

C

BOJX

JOD

2006-2014

AHLI

95 Jordan Ahli Bank Jordan C JOD 2006-2014 * Here, “I” stands for an Islamic bank and “C” stands for a conventional bank. In other words, “C” stands for ill-gotten stocks and “I” stands for not ill-gotten stocks.

Source: Author Table 3: Distribution of Sunni and Shia Populations Approximate Approximate Approximate *Primary Percentage of Muslim Percentage of Nu. Country Percentage of DenominaPopulation Shia PopulaSunni Population tion (%) tion 1 UAE 76,2 90 10 Sunni 2 Kuwait 95 80 20 Sunni 3 Turkey 98,6 90 10 Sunni 4 Jordan 98,2 99 01 Sunni 5 Lebanon 59,3 45 55 Shia 6 Iran 99,4 5 95 Shia 7 Iraq 99 30 70 Shia 8 Bahrain 81,2 15 75 Shia * The primary denomination stands for the sect that is preferred more than 50% of the population of a country. Source: Lugo, L.( 2009). Parallel to the purpose of this study, the return performances of ill-gotten and not ill-gotten stocks were measured by analyzing the returns of the portfolios made up of stocks in Table 2. In this study, six portfolios were formed, basically. The first of the two portfolios which were formed without paying attention to sect differences contained 63 ill-gotten stocks

and the second one contained 32 not illgotten stocks. The third portfolio contained 46 ill-gotten stocks and the fourth one contained 13 not ill-gotten stocks that are traded in the Sunni countries’ stock markets. The fifth one contained 17 ill-gotten stocks and the sixth one consisted of 19 not illgotten stocks that are traded in the Shia countries’ stock markets (Table 4).

244 İbrahim BOZKURT

Table 4: Summary Statistics of the Portfolios (2000-2014) Portfolio1 Portfolio 2 Portfolio 3 Portfolio 4 Portfolio 5 Portfolio 6 Ill-gotten Not Ill-gotten Ill-gotten Not Ill-gotten Ill-gotten Not Ill-gotten Sect Sunni Sunni Shia Shia Bank numbers* 63 32 46 13 17 19 Mean Return 0.000613 0.000416 0.001214 0.000412 -0.000087 -0.000044 Maximum Return 0.154879 0.162763 0.271527 0.193915 0.136612 0.245793 Minimum Return -0.130790 -0.286576 -0.241393 -0.286576 -0.101990 -0.289986 Standard Deviation 0.021288 0.027462 0.008817 0.018613 0.015455 0.023445 Skewness 1.088314 -0.146261 0.201679 -1.245291 0.977045 -0.257056 Kurtosis 26.72356 9.618667 32.492308 58.860887 16.256396 14.181052 *In this Table, the numbers showing the banks included in the portfolio indicate that the Shia countries compared to Sunni countries approach “interest” in a stricter manner. The percentage of the Islamic banks traded in the Shia stockmarkets overall is 53% but only 22% in the Sunni countries. The return performances of the portfolios formed to test the hypothesis were measured using Jensen’s Alpha method. This method which was suggested by Jensen in 1968 contains the alpha criterion representing the difference between a portfolio’s realized return and its risk-adjusted return. α = the portfolio’s realized return – the portfolio’s risk-adjusted return (1) The risk-adjusted return of the portfolio is determined by CAPM (Capital Asset Pricing Model). CAPM developed by Sharpe (1964) and Lintner (1965) shows what a stock’s expected return must be, to suit its systematic risk (β) (Equation 2). (2)

According to this, Jensen’s Alpha criterion is designed as in Equation 3. (3)

Starting out with Equation 3, we can also reach the regression model used in this study (Equation 4). (4)

Ra,t which is present in Equation 3 and 4 represents a portfolio’s realized re-

turn at a specific “t” period; Rf,t represents the risk free rate of interest at a specific “t” period; Rm,t represents the market portfolio’s return at a specific “t” period; βa represents a portfolio’s systematic risk and αa, represents the alpha coefficient. As a result of regression, if αa takes a positive value, this means a portfolio has performed better whereas if it gets a negative value, this means it has performed worse in the market. In this study, the realized return of each of the portfolios in “t” day, represents the equal-weighted average of returns of all the stocks included that portfolio in “t” day. The return (Rit) that was got from each of “i” stocks at a specific “t” period was calculated logarithmically by the help of Equation 5. Since the stocks in the scope of the study are traded with different currency units in different stock markets (Table 2), it was needed to represent the portfolios with the same currency unit. Therefore, before the logarithmic returns were calculated, the daily closing prices of the stocks had been changed to the US dollar at that day’s rate of exchange.

Ri ,t  ln(

Ri ,t Ri ,t 1

)

(5)

Do The Sect Differences Of Customers In Islamic Countries Influence The Returns Of Ill-Gotten Stocks?

As risk free rate of interest, the daily interests of the Kuwait treasury bills were used (http://new.cbk.gov.kw). The annual risk free rate of interests (Ry) were obtained and changed into daily risk free rate of interests (Rf) by the help of Equation 6.

R

f

 (1  R y )1/360  1

(6)

Finally, Stoxx Europe 600 Banks Index was used as a benchmark index to rep-

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resent the market portfolio. The returns of this index were calculated logarithmically as in Equation 5. 5. EMPIRICAL RESULTS Jensen’s alpha coefficients which represent the risk-adjusted excess return of the portfolio were calculated using the regression analysis shown in Equation 4. The results of the regression are shown in Tables 5, 6, 7 and 8.

Table 5: Regression Results of Ill-Gotten and Not Ill-Gotten Portfolios (2000-2014) Parameter

Coefficient

Std. Eror

Beta

0.171739

0.01325

12.95893*

Alpha 0.000686 0.00026 Rnot ill-gotten - Rf Beta 0.124703 0.021142 Alpha 0.000492 0.000422 (*)Shows that coefficients are statically significant at a significance level of 1%. (**)Shows that coefficients are statically significant at a significance level of 5%. (***)Shows that coefficients are statically significant at a significance level of 10%.

2.64861* 5.898498* 1.166834

Rill-gotten - Rf

t-Statistic

Source: Author The empirical results in Table 5 show that the portfolio of ill-gotten stocks outperforms the market index. According to the regression results, the alpha coefficient of the portfolio of ill-gotten stocks is 0.000686 and the t-statistic of the alpha coefficient is statistically significant at a significance level of 1%. These results show that the return of the portfolio of ill-gotten stocks in the Islamic countries is nearly 18% annually (0.000686*5 days*52 weeks) more than the return of the market index investment. According to the results, the beta coefficient of the portfolio of ill-gotten stocks is statistically significant and 17%. This result shows that the portfolio of illgotten stocks has got a lower risk level than the market portfolio. The findings in Table 5 show that the alpha value of the portfolio of not ill-gotten stocks was found not dif-

ferent from zero, statistically. In other words, the performance of not ill-gotten portfolio didn’t differ positively or negatively from the benchmark index. As a result, the findings in Table 5 show that the first hypothesis of the study must be accepted. Table 6 shows the annual excess return performances of ill-gotten and not illgotten portfolios between 2000 and 2014. According to the findings, the ill-gotten stock portfolio provided risk-adjusted excess return in the 11 of the total 15 analyzed years. The three of these returns were negative and the eight of them were positive. However the not ill-gotten stock portfolio could achieve risk-adjusted excess return in only four years, two of them positive and the other two negative.

246 İbrahim BOZKURT

Table 6: Regression Results of Ill-Gotten and Not Ill-Gotten Portfolios (on Annual Basis) The ill-gotten portfolio Number of firm Not Year Ill-gotten Ill-gotten

The not ill-gotten portfolio

Parameter Alpha

Parameter Beta

Alpha

2000 5 3 - 0.0019** 0.0973 0.000434 2001 7 4 0.0022 - 0.0480 0.000345 2002 9 4 0.0008 0.1185 - 0.000362 2003 25 6 0.0031** 0.1038 0.004786** * * 2004 32 12 0.0022 0.3323 0.002980 2005 39 12 0.0033* 0.3717* 0.003298 *** * 2006 52 18 - 0.0019 0.4643 - 0.002362 2007 54 20 0.0020* 0.2415* 0.002188*** 2008 55 21 - 0.0024** 0.2738* - 0.004639* *** * 2009 63 25 0.0011 0.1325 0.002853 2010 63 27 0.0003** 0.1220* 0.001278 2011 63 29 - 0.0007 0.1090* - 0.002665* 2012 63 29 0.0010** 0.0952* 0.000755 2013 62 29 0.0004 0.1558* 0.000780 *** * 2014 62 30 0.0008 0.1734 - 0.000731 (*)Shows that coefficients are statically significant at a significance level of 1%. (**)Shows that coefficients are statically significant at a significance level of 5%. (***)Shows that coefficients are statically significant at a significance level of 10%. Table 7 shows the regression results for each of the Sunni and Shia countries. According to the results, the only portfolio that showed a different performance from the benchmark index is the ill-gotten portfolio in the Sunni countries. This portfolio’s alpha coefficient is 0.001065 and the tstatistic of the alpha coefficient is statistically significant. However none of the portfolios in the Shia countries could get an excess return. The t-test results (3.786) that were used to compare the averages related

Beta 0.012303 - 0.061239 - 0.103044 0.076374 0.379453 - 0.118281** 0.381428*** 0.182011* 0.242906* 0.127978 0.032526 0.049413*** 0.045560 0.137485** 0.199519

Source: Author to the alpha coefficient show that the excess returns of the ill-gotten stocks in the Sunni and Shia countries differed statistically at a significance level of 1%. The findings in Table 7 partially approve the second hypothesis of this study. According to the findings, there is a statistically significant difference between the excess returns of the ill-gotten stocks in the Sunni and Shia countries. However this difference, contrary to the second hypothesis is in favor of the Sunni countries.

Do The Sect Differences Of Customers In Islamic Countries Influence The Returns Of Ill-Gotten Stocks?

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Table 7: Regression Results of Sunni and Shia Countries (2000-2014) SUNNİ COUNt-Statistic SHİA COUNTRİES TRİES (Alpha Difference) Alpha Beta Alpha Beta Rill-gotten - Rf Coefficient 0.001065 * 0.23791 * - 0.000093 0.002444 Std. Eror 0.000419 0.02113 0.000153 0.007817 t-Statistic 3.828746 11.2582 - 0.608720 0.307255 Rnot ill-gotten - Rf Coefficient 0.000553 0.18456 * - 0.000054 0.036611 *** Std. Eror 0.000518 0.02609 0.000408 0.019681 t-Statistic 1.067266 7.07394 - 0.120992 1.860227 (*)Shows that coefficients are statically significant at a significance level of 1%. (**)Shows that coefficients are statically significant at a significance level of 5%. (***)Shows that coefficients are statically significant at a significance level of 10%.

3.786644*

0.922506

Source: Author Table 8 shows the excess return performances of the ill-gotten and not illgotten portfolios according to the countries. The findings show that the ill-gotten stocks in the Sunni UAE and Turkey performed in a highly better way than the benchmark

index, whereas the ill-gotten stocks in the Sunni Jordan and Shia Iraq performed in a worse way. As for the not ill-gotten stocks, only the ones in the Sunni UAE could perform a higher performance than the benchmark index.

Table 8: Regression Results of Sunni and Shia Countries on the Country Basis (2000-2014) Ill-Gotten Portfolio Not Ill-Gotten Portfolio No of No of Country Sect Firm Alpha Firm Beta Alpha Beta * ** *** UAE Sunni 16 0.002218 0.087433 4 0.001335 0.157946 * Turkey Sunni 12 0.000445 * 0.506311 * 2 -0.0001 0.405888 * *** * Jordan Sunni 13 -0.000345 0.033725 2 -0.000384 0.037096 ** Kuwait Sunni 5 0.000629 0.042374 5 -0.000248 0.132818 ** Bahrain Shia 4 -0.000101 0.012972 5 -0.00067 0.113146 * Lebanon Shia 5 0.0001 -0.004183 1 0.000306 -0.015826 Iran Shia 10 -0.000613 0.003568 Iraq Shia 8 -0.001115 *** -0.033791 3 -0.000375 -0.085274 *** (*)Shows that coefficients are statically significant at a significance level of 1%. (**)Shows that coefficients are statically significant at a significance level of 5%. (***)Shows that coefficients are statically significant at a significance level of 10%. Source: Author According to the overall findings of the study, the first hypothesis is accepted but the second one is partially accepted. This means, it was shown that there is a

statistically significant difference between the risk-adjusted excess returns of the illgotten stocks in the Shia and Sunni countries, however this difference is in favor of

248 İbrahim BOZKURT

the Sunni countries. One of the reasons of this result can be that, the Islamic banks usually use controversial methods4, instead of highly accepted (halal) methods according to Islamic religion (Durmuş, 2011). The frequent use of controversial methods can lead to a comment that these banks do not act according to the holy book but try to attract customers, looking as if they act according to the holy book. In the societies where this comment is made, the idea that there is not a difference between the conventional and the Islamic banking services, comes out. Therefore in the Sunni sect that has a narrower interest forbiddance, conventional banking service is preferred more. This preference increases the cash flows of the conventional banks in the Sunni countries more than that of the Shia countries, and increases the value of the ill-gotten stocks in the Sunni countries. The reasons why the second hypothesis was partially rejected imply that the Sunni countries started to omit interest’s ill-gotten aspect and they accept it a crucial component of the economic structure as in the western societies. 6. CONCLUSION The stocks of the firms related to products and services that make bed impact on people or society are called sin stocks. The studies present in the literature show that these stocks have a higher return than the market. In the related studies, it was The most controversial services in the Islamic banking services is the “murabaha” method. This method exceeds the 90% of the overall Islamic banking volume (Durmuş, 2011). In this method, the product demanded by the customer is bought paying by cash, by an Islamic bank. Later, it is sold to the customer, adding an accepted profit (Bulut & Er, 2012). In the conventional banks, this is done like this: First the bank gives the money to the customer in need of it, asking a certain rate of interest. Later, the customer buys the product from its owner, using this money and pays by cash. Therefore, “murabaha” is thought to be a tricky interest operation (Aktepe, 2012). 4

analyzed the stocks of firms whose activities are accepted as “bad” or “sinful” in all religions and societies in the world. In this study, instead of the activities which are accepted bad in all religions and societies, only the stock returns of firms that deal with “bad” or “sinful” activities in the Islamic societies were analyzed. What is more, instead of “sin stock” concept, “illgotten stock” concept was used. Here the ill-gotten stocks represent the conventional banks’ stocks in the Islamic countries. The stocks of the Islamic banks in the Islamic countries were also accepted not ill-gotten stocks. This study aims to (i) comparatively analyze the return performances of illgotten stocks with the return performances of not ill-gotten stocks, in mainly Islamic countries’ stock markets, (ii) find out the effect of sect differences in the Islamic countries on ill-gotten stocks. To achieve this end, the daily stock prices between 2000 and 2014 of 63 ill-gotten and 32 not illgotten stocks that are traded at the stock market of eight Islamic countries were used as data. The return performances of illgotten and not ill-gotten stocks were found out by analyzing the portfolios consisting of the related stocks. Jensen’s alpha method was used in the analysis. As a result of the study, it was found that (i) in the Islamic countries, ill-gotten stocks made more riskadjusted excess returns, (ii) there was a statistically significant difference between the risk-adjusted excess returns of the illgotten stocks in the Shia and Sunni countries and (iii) the difference was in favor of the Sunni countries. This study is thought to have contributions to the literature, (i) analyzing the stock returns of firms that have “bad” and “sinful” activities (that deal with interest) in only the Islamic societies, and (ii) analyzing the effect of sect differences on stock returns. Further studies can contribute to

Do The Sect Differences Of Customers In Islamic Countries Influence The Returns Of Ill-Gotten Stocks?

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