The Primacy of Stability over Growth: Macroeconomic Drivers of Shariah-Compliant Equity Performance in Emerging Asia

Abstract

Whether macroeconomic growth or stability is more closely associated with Shariah-compliant equity performance remains an open question in Islamic finance research. This study provides multi-country evidence using a fixed-effects panel model motivated by Arbitrage Pricing Theory and an approximately balanced panel of seven major emerging Asian economies: Bangladesh, India, Indonesia, Malaysia, Pakistan, Saudi Arabia, and Turkey, over 2016-2023. The results show a consistent pattern in favour of stability-oriented factors. The real effective exchange rate, inflation, and the reserves-to-external-debt ratio are each significantly and positively associated with the level of the Shariah index, whereas FDI, trade openness, and remittances are statistically insignificant. This pattern is consistent with, but does not formally test, a “decoupling effect” in which Shariah indices appear less responsive to conventional growth channels. Stock market turnover, treated as a financial-market-conditions variable rather than a growth variable, is the only non-stability indicator that remains significant, consistent with a liquidity effect. Because growth- and stability-oriented variables are measured on different scales, the comparison is based on the consistency of statistical significance rather than coefficient size. The findings therefore indicate that macroeconomic stability is at least as important as growth for Shariah-compliant equity performance in the sampled markets. This conclusion remains subject to the reduced-form, levels-based dependent variable, limited statistical power relative to the number of parameters, and unaddressed endogeneity.