The Performance of Islamic Stock Markets During Covid-19 Pandemic in Malaysia

International Postgraduate Conference on Accounting and Finance (IPCAF 2025) 2 May 2025 Kuala Lumpur e-ISBN: 978-967-0760-39-1 Publish Date: 14 October 2025 1 Paper ID: IPCAF202511 DOI: THE PERFORMANCE OF ISLAMIC STOCK MARKETS Huzaimi Hussain 1 1 Faculty of Business and Management, Universiti Teknologi MARA, Sarawak Branch, Samarahan Campus, 94300, Kota Samarahan, Sarawak, Malaysia. *Corresponding author: [email protected] ABSTRACT The study compares the performance of Islamic stock markets with the conventional stock market in Malaysia focusing during the period of Covid-19 pandemic in Malaysia. The raw returns and risk-adjusted of Emas Shariah index and Hijrah Shariah index are employed to represent Islamic indices while FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) is employed to proxy for conventional market benchmark. The results based on raw returns reveal that all the three indices share the same pattern of before, during and after the crisis period. To measure the performance, the test using risk-adjusted return of Sharpe, Treynor and Jensen Alpha prove that the two Islamic indices outperform the FBM KLCI for the period of before and after the pandemic Covid-19. It is also concluded that the performance of these two Islamic indices is significantly different from conventional benchmark of FBM KLCI index. The study contributes to the current Islamic investment literature by providing empirical analysis and performance comparison. The result would offer some insight into investors as well as policy makers for future investment and stock market development. Keywords: Malaysian stock markets, conventional index, Islamic indices, Sharpe ratio, Covid-19 1. INTRODUCTION The development of Islamic economic and finance has received an encouraging response worldwide. Malaysia is considered as a pioneer in the Islamic Economics and Finance where the progress commerce with the banking sector, witnessing the establishment of Islamic Banking Act in 1980. In 1983, the country begins with the establishment of the first Islamic bank, Bank Islam Malaysia Bhd. It was then followed by the other sectors, namely Islamic insurance (takaful), capital and money markets sectors. The commitment and support by the Malaysian leaders in providing regulatory frameworks has provided a significant platform for the Islamic Financial system to advance and flourish in Malaysia. The industry must embark in providing a solid Islamic financial landscape that could utilize the local resources and attract more foreign funds, and at the same time highly resilience to contain or International Postgraduate Conference on Accounting and Finance (IPCAF 2025) 2 May 2025 Kuala Lumpur e-ISBN: 978-967-0760-39-1 Publish Date: 14 October 2025 2 absorb any external disturbance. Among the event which present a challenge to the Malaysian economy, or Islamic finance specifically are 1997 Asian Financial Crisis, Subprime Mortgage Crisis 2008, and finally the latest Covid-19 pandemic which occurred in 2019. To contain the spread of the pandemic, Malaysian government left with no option but to implement lock-down or the first movement control order (MCO) on 18 March 2020. This measure witnessed a serious impact to the Malaysian economy, which amounts to the decreased in economic activity and business closures, especially in retail and tourism sectors. As part of the recovery process, Malaysian government in response has allocated a stimulus package with the amount of RM530 billion to assist those who are affected and simultaneously stimulate economy. Inevitably, Malaysian economy experienced a sharp contraction of -5.2% in Gross Domestic Product (GDP) in the year 2020. The economy fortunately shows a recovery trend in 2021 and 2022 when it recorded a 3.1% and 8.7% GDP respectively. These continuous progress of providing Islamically halal and viable investments platform in Malaysia should be fully supported. Profitable return of investment would attract funds into our equity market not only from Muslims investors, but also non-Muslims whether from local or international. It is thus, part of the motivation of this research to provide some empirical evidence on the performance of Islamic equities in Malaysia. It is imperative to explore on the performance of Islamic equities in Malaysia as this would present its current accurate depiction and provide room for improvement and development in the future. This research would specifically focus on assessment of Islamic stock markets in Malaysia during the Covid-19 crisis. 2. LITERATURE REVIEW The fundamental principles and legal ruling of Islamic teaching are derived from the main source of the noble book of al-Quran and the saying, action and approval of Prophet Muhammad (p.b.u.h) known as hadith. These ruling or hukum are applied into all aspect of Muslims’ life such spiritual, emotional, cultural and economic. Islamic finance and investment which fall under the category of Islamic economic aspect should also follow the general guideline of Islamic teaching. Abdullah and Chee (2010) define Islamic Finance as “a form of finance that is based on Shariah, or the body of Islamic law”. The authors also stipulate the main principles of Islamic finance namely, belief in divine guidance, no riba (usury or interest), no haram (forbidden) investment, encouragement of risk sharing, and financing must be based on real assets. Consequently, all economic or business activity must be in line with the Shariah (Islamic jurisprudence). Among the business sectors which are prohibited in Islam are the one that are related to such as riba, alcohol, gambling, pork products, weapon, pornography and tobacco. Employing data of Malaysian Exchange Traded Funds (ETF) instrument for three and five years, Norhafiza Nordin (2024) argue that including ETFs into the investment portfolio would bring about longterm growth and stability. The study which covers the period of Covid-19 crisis, apply standard Sharpe and Treynor ratios proposes the advantages of investing in ETF in Malaysia are due to its strategic benefits, lower expenses, flexibility and transparency. Nur Ikhwan Amran, Norlina Kadri and Nurul Syuhada Zaidi (2024) investigate the relationship between Islamic stock markets with the macroeconomic indicators in Malaysia during Covid-19 pandemic. The study claims that there are significant impact of Gross Domestic Product (GDP) growth, interest rate, and foreign direct investment on the performance of Islamic stock market in Malaysia during that critical period. Focusing on the performance of stock market in Malaysia, Ali Burhan Khan et al. (2022) examines the impact of oil price to both conventional and Islamic stock market during Covid-19 pandemic. The study employs wavelet analysis and Toda-Yamamoto causality test point out that oil price has significant impact on both indices. According to Hussin, Saring, Zahid and Ramli (2018), the performance of lowvolatility Shariah stock in Malaysia outperforms the conventional stock market in the medium and longterm period, but not in the short-term. 3. METHODOLOGY The objective of this study is to compare the performance of Islamic indices with the conventional market index in Malaysia, focusing during the crisis of pandemic Covid-19. To achieve the objective, this study employs three performance measurements namely Sharpe Ratio, Treynor Ratio and Jensen Alpha ratio. The main hypothesis is to test whether there is significant difference in return between the International Postgraduate Conference on Accounting and Finance (IPCAF 2025) 2 May 2025 Kuala Lumpur e-ISBN: 978-967-0760-39-1 Publish Date: 14 October 2025 3 two Islamic indices namely Emas Shariah and Hijrah Shariah with the conventional market benchmark proxied by FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI). In addition, the study employs 3-month Treasury Bills to represent the risk-free rate of return. This study utilizes daily closing data of FBM KLCI, Emas Shariah index, Hijrah Shariah index and 3-month Treasury Bills spanning from 2 January 2018 to 31 December 2023. The analysis is divided into three different periods, namely before, during and after the crisis. The data for before the crisis span from 2 January 2018 to 31 December 2019, during the crisis from 2 January 2020 to 31 December 2021and finally after the crisis from 3 January 2022 to 29 December 2023. 4. DISCUSSION AND CONCLUSION This research contributes to the present literature by providing the empirical evidence on the performance of both conventional and Islamic stock markets during the crisis period of Covid-19 in Malaysia. Generally, our analysis has proved that FBM KLCI market index is evidently a more stable or favourable investment during the crisis period. However, for the period before and after the crisis, the analysis shows mixed results. As for the period before crisis, both Islamic indices are less volatile than FBM KLCI market index. And as for the period after crisis, mix results are produced where FBM KLCI position in the middle between the two Islamic indices, where it is found to be less volatile thus, more favourable than Emas Shariah index and at the same time more volatile than Hijrah Shariah Index. The two Islamic indices prove to be statistically different with the conventional benchmark index. In conclusion, Islamic finance and investment specifically could serve as promising and viable alternative to the conventional one. The current study has offered some insight on the performance of the Islamic indices as compared to the conventional during the Covid-19 crisis. However, to deepen the understanding of the market behaviour, future research is recommended to include more variables such as FTSE Bursa Malaysia Small Cap Shariah Index or certain specific sectors listed in Bursa Malaysia such as property or food sectors. 5. ACKNOWLEDGMENT The author gratefully acknowledges the support and encouragement provided by Universiti Teknologi MARA Cawangan Sarawak, Kampus Samarahan, Kota Samarahan, Sarawak, Malaysia. 6. REFERENCES Abdullah V.C. & Chee K. (2010). Islamic Finance Why Is Makes Sense. Singapore: Marshall Cavendish Business. Hussin, S.A.S., Saring, N, Zahid, Z & Ramli, N.A. (2018). Performance of low volatility Shariah equities in Malaysia. AIP Conference Proceedings, https://doi.org/10.1063/1.5045432 Khan, A.B., Sharif A., Islam M.S.U., Ali A, Fareed, M. & Zulfaqar, M. (2022) Impact of oil prices on the Islamic and conventional stock indexes’ performance in Malaysia during the COVID-19 pandemic: Fresh evidence from the wavelet-based approach. Frontiers in Energy Research. doi: 10.3389/fenrg.2022.962017 Norhafiza Nordin (2024). Malaysian Exchange-Traded Fund versus Unit Trust: Which One is Better? Proceedings of the 2nd International Conference on Accounting and Business, Perak, Malaysia. Nur Ikhwan Amran, Nolina Kadri & Nurul Syuhada Zaidi (2024). Analyzing the Resilience and Impact of Islamic Stock Markets Before and After the Covid-19 Pandemic in Malaysia. UNIMAS Review of Accounting and Finance, 8(1)