1.

0 INTRODUCTION

The most important discoveries are outlined in the most current empirical literature in
Islamic banking and finance, which also acts as a roadmap for more study. Early research
focuses on the effectiveness, production technology, and general performance characteristics
of Islamic versus conventional banks, while more recent research examines risk, competition,
profit and loss sharing (PLS) behaviour, and other factors like small business lending and
financial inclusion. The empirical research reveals no significant distinctions between Islamic
and conventional banks in terms of their efficiency, competitiveness, and risk factors, with a
few notable outliers (although small Islamic banks are found to be less risky than their
conventional counterparts).

There is some evidence that Islamic finance promotes inclusivity and the growth of the
financial industry. There is minimal indication that Islamic funds perform worse than typical
industry benchmarks, according to findings from the empirical finance literature, which is
dominated by studies that concentrate on the risk/return characteristics of mutual funds.
However, some recent data indicates that the issue of Islamic bonds (Sukuk) damages
shareholder value.
 2.0 TOOLS FOR THE RECENT EMPIRICAL LITERATURE AND DIRECTIONS
FOR FUTURE RESEARCH

The essential ideas behind Islamic banking and finance, particularly the prohibition of
Riba and obedience to other Sharia rules, are as old as religion itself, however banks have
only supplied Islamic financial services since the 1960s. These Sharia-compliant services
today constitute a $2 trillion worldwide business, with Islamic banks (or Islamic windows of
conventional banks) accounting for 80% of assets, Sukuk (Islamic bonds) accounting for
15%, Islamic mutual funds accounting for 4%, and Takaful accounting for 1%. (Islamic
insurance). According to the Islamic Financial Services Board (2013), Iran has the largest
Islamic banking market (accounting for around 40% of worldwide Islamic banking assets),
followed by Saudi Arabia (14%), Malaysia (9%), and the United Arab Emirates (UAE) and
Kuwait (both with 9% shares).

Islamic banks directly compete with regular banks in the majority of Muslim nations,
where only Iran and Sudan have exclusively Islamic banks. For instance, almost 35% of the
assets in the financial industry in countries like Saudi Arabia adhere to Sharia law. For the
UAE (22%) Qatar (20%), and Malaysia, the numbers are lower (20 percent). Even though
Islamic banking and financial assets are projected to make up less than 1% of all global
financial assets, they have developed more quickly than conventional (Western) finance since
the banking crisis of 2007–2008, and this pattern is anticipated to continue in the near future.
Along with an increase in banking assets, major financial centres are increasingly competing
to issue the most Sukuks and provide a wider range of Islamic investment products. Given
these developments, it is appropriate to present a review of the existing literature on Islamic
banking and finance in order to identify the key areas of interest and potential future study
fields.

A wider range of issues are now being examined, such as the relationship between
Islamic banking and financial and economic development, the spread of Islamic banking, the
function of Shariá Supervisory Boards and governance issues, the effect of religious and
financial screening on fund performance, and comparisons of Shariá screening with other
types of investment filtering like those for socially and environmentally conscious
investments. The study of Sukuk and related instruments is still in its early stages, as is most
of the governance work. The study of systemic hazards and their connections to Islamic and
conventional banking still needs to be done in the banking sector. Furthermore, additional
research is required on the characteristics and connections between liquidity and market
funding risks (as in the traditional empirical banking literature). Pricing too-big-to-fail and
other government safety net subsidies in Islamic banking systems, as well as (hypothetical)
stress testing of banks in Muslim nations, both require further research. Can systemically
significant financial institutions (SIFIs) be identified and their dangers to the nations and
areas in which they operate assessed? Additionally, it would be fascinating to learn how
much these factors affect bank performance and risk given that many Islamic institutions are
headquartered in the Gulf Cooperation Council (GCC) nations, whose economies are mostly
reliant on energy prices. The relationship between financial and social inclusion in the
Islamic world and ideas of poverty, equality, and economic progress should be the subject of
broader inquiries. Is there a connection between money and health in the Islamic world?
Future academic research should address these and several other issues that concern both the
conventional and Islamic banking and financial sectors, in our opinion.
 3.0 TECHNIQUES FOR THE RECENT EMPIRICAL LITERATURE AND
DIRECTIONS FOR FUTURE RESEARCH

Research comparing the risk and return characteristics of Islamic mutual funds with
various benchmarks, such as conventional and Islamic market indices as well as portfolios of
conventional bonds, predominates in the empirical literature. The primary distinction between
Islamic funds and their conventional counterparts is that managers have a smaller universe of
companies to invest in because they are required to screen out companies that are not Shariá
compliant. This includes (religious) screening out businesses that operate in areas prohibited
by Islamic law and screening out firms that cannot achieve certain financial criteria (for
example, exceeding the maximum interest payme).

Overall, the investment options available to Islamic fund managers are more constrained.
Recent empirical research finds no difference in the performance of Islamic equities funds
and other conventional funds or index benchmarks, according to Elfakhani et al. (2005),
Hayat (2006), Abderrezak (2008), Haddad et al. (2009), and Hoepner (2011). Others even
discover that Islamic funds perform better, as Ferdian and Dewi (2007) and Mansor and
Bhatti (2011). The only study to suggest that Islamic funds perform poorly is Hayatt and
Kraeussl (2011). Several studies have merged efficiency analysis (which dominates the
empirical Islamic banking literature) with fund return analysis (Saad et al, 2010; and
Abdelsalama et al, 2010). (2014). According to Saad et al. (2010), certain Islamic funds are
more efficient than their conventional equivalents, while according to Abdelsalama et al.
(2014), the average socially responsible investment (SRI) fund is more efficient than the
typical Islamic fund.

A more recent tendency has been to investigate aspects of the Islamic bond (Sukuk)
market. Cakir and Raei (2007) show that Sukuk returns are not substantially connected with
traditional bond returns, giving options for portfolio diversification (although Derigs and
Marzbank, 2009 find no such potential benefits). Both Godlewski et al. (2011) and Alam et
al. (2013) employ event research methodologies to investigate investor reactions to Sukuk
issuance. They both find evidence of negative market reaction, implying that investors do not
regard such acts favourably. Finally, Bialkowski et al. (2012) employ an event research
technique to investigate the "Ramadan effect." They discover that stock returns are greater
and less volatile in the final month of the year. According to them, "Ramadan favourably
influences investor psychology because it boosts emotions of togetherness and social
identification among Muslims throughout the world, leading to hopeful attitudes that extend
to investing decisions" (p.835).

Islamic banking and finance may now be found in five forms. Banks and financial
institutions exist in nations where the establishment of an Islamic financial system is actively
supported by the government. Following that, Islamic banks and financial institutions
compete with conventional (Western) institutions in the private corporate sector.
Furthermore, conventional commercial banks (through Islamic windows), traditional Islamic
banks, and non-bank financial institutions all practise Islamic banking. Furthermore, Sharia-
compliant transnational financial institutions (such as the Islamic Development Bank in
Jeddah) exist. Finally, Islamic financial market tools (mutual funds, Sukuk) and insurance
(Takaful) are becoming increasingly essential. For example, Sukuk issuance helped fund the
Olympic Village and "Shard" construction in London.
4.0 CONCLUSION

Over the last decade or two, a large empirical literature on Islamic banking and financial
concerns has evolved. The major result of this body of literature is that Islamic banks are at
least as efficient as conventional banks and, in particular, have lower default/insolvency risk.
Islamic banks often concentrate their efforts on higher-margin small business borrowers who
are less prone to default. The research on market power concerns is conflicting, however
there is some indication that Islamic banks can be more competitive than regular banks. Other
data (while limited) shows that the growth of Islamic banking can help with financial
inclusion and economic development. The empirical finance literature, driven by research
focusing on the risk-return characteristics of mutual funds, finds that Islamic funds typically
outperform conventional funds—there is scant evidence that they outperform standard
industry benchmarks. However, there is some evidence that Sukuk issuance reduces
shareholder value.