Islamic finance and Sharia-compliant investing has seen substantial growth over the years. As more investors are interested in becoming fully Sharia-compliant, the question of what may they be giving up in exchange arises. This has led us to analyze the potential of Sharia-compliant investments. It is well known that having a Sharia-compliant investment portfolio could be rather restrictive as some sectors and investment instruments are forbidden such as tobacco, alcohol, gambling, pork products, conventional interest based financial and insurance institutions, and conventional fixed income. In our study, we wanted to provide quantitative proof of any differences an investor may encounter if he were to invest in Sharia-compliant equities and fixed income compared to their conventional counterparts. We were able to observe that even though Sukuk is often analyzed as a conventional bond, it is substantially different in its underlying risks and payoff structure. The Sukuk market is gaining steam, but it lacks geographical diversity. Another issue we observed with Sukuk is the lack of liquidity. The demand for this type of product is much higher than the supply. Western countries should follow the lead of the United Kingdom and facilitate the issuance and holding of Sukuk securities. As for the equities market, we compared a Sharia-compliant index with an equivalent conventional index across three regions: global, United States and Europe. Our findings provide proof that since 2003, in all three regions, the Sharia-compliant indices have outperformed their conventional counterparts while taking on similar or lower risk profiles. Our findings suggest that Sharia-compliant investing has great potential from a financial and economic point of view. Financially, as explained above, an investor can expect to perform as well as or better than the rest of the market. Economically, investing in Sukuk rather than conventional fixed income means that you are making a bigger impact on society as a whole; because when investing in Sukuk, you are financing a real project. The potential of Sharia-compliant investing will depend heavily on the continued growth of Sukuk certificates and further understanding of their valuation and pricing
