Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Shariah and ethical screening in Islamic finance in the light of environment, human rights and child labor

Offers a modified Shariah and ethical screening criteria incorporating environmental concerns, rights of children and human in general

Shariah and ethical screening in Islamic finance in the light of environment, human rights and child labor

  1. 1. Shariah Screening Empowering investors in disciplining markets A proposed modified criteria Tariqullah Khan
  2. 2. Important! This is an academic handout and not a business proposal.
  3. 3. First, some Q&A on Shariah Screening --Second, the modified criteria
  4. 4. A 1 Q These questions have become very relevant in modern times where technology has facilitated globalization and investors’ concerns with Shariahcompliance has also grown – estimated size US$ 2 trillions. Shariah Screening is a computer aided response of the market to address to similar questions to facilitate wealth management in compliance with the Shariah. Does the Shariah allow buying and selling company shares? Can I invest in Google, Facebook or Twitter Shares? Can I invest in a hotel, that may occasionally be selling alcohol? Can I buy and sell shares of a company which owes a lot to others?
  5. 5. A Q Investment decisions have important implications for human and economic development, environmental balance, use of resources and for the future generations. Hence these shall not merely be determined by expected financial returns but shall also be based on the nonfinancial benefits and overall impact on society & its future. Thus investment decisions shall be simultaneously guided by the compliance with certain ethical and moral norms in addition to the expectations for a rate of return. So what is the exact concern addressed?
  6. 6. A Q In recent years there has been a growing interest in ethical & socially responsible investments. In 1994 the Fiqh Academy of the OIC ruled that it is not permissible to buy and sell shares of companies which don’t 100% confirm to the Shariah even if the business itself may be permissible like a hotel that sells alcohol. Indeed, this is very restrictive as almost all companies somehow violate certain Shariah conditions. This meant that Shariah compliant investment in stock markets is not possible. This imposes restrictions under which capital markets cannot be flourished. As a response of the market, the pioneering Dow Jones Islamic Market Index (DJIMI), developed by Mr. Rushdi Siddiqi of the Dow Jones & his team was launched in 1999 in Bahrain and subsequently replicated in a number of different ways. A research paper "Trading In Equities - A Shariah Perspective" by Nizam Yaquby was submitted to the Fourth Harvard University Forum on Islamic Finance in 2000. What is the background of Shariah Screening?
  7. 7. A Q The Dow Jones Islamic Market Index was launched in Bahrain during 1999. Official and latest information about the Dow Jones Islamic Market Index (DJIMI) is available at http://www.djindexes.com/islamicmarket/ DJIMI Screening Criteria Step ❶ Exclude businesses: Alcohol, Pork-related products, Conventional financial services, Entertainment, Tobacco Weapons and defense Step ❸ purify through charity by limiting impurity to 5% of income Step ❷ Confirm to following Tolerable Financial Ratios: I. Debt to Market Cap <33% II. Receivables <33% III. Cash and interest bearing securities <33% What is the Dow Jones Islamic Market Index (DJIMI)?
  8. 8. A DJIMI Screening Criteria simply means that: In the first place, the computer will delete Alcoholic products, Pork-related products, Conventional financial services, Entertainment, Tobacco, Weapons and defense industry products. In the second place, the computer will delete companies whose a) Debt/ Market Capitalization ratio, b) Receivables/Market Capitalization ratio and c) Cash and interest bearing securities/Market capitalization ratio will exceed 33%. Q After screening on the 2 levels, the remaining companies will be considered Shariah compliant. This screening is done under supervision of Shariah scholars. So what does the DJIMI mean simply?
  9. 9. A Q Yes there are, e.g., the following is a December 21st 2013 screen shot from the DJIMI dynamic Website Are there any samples of the DJIMIs?
  10. 10. A Q Indeed, there are several others and the number is growing rapidly. Few examples are: I. FTSE Shariah Index http://www.ftse.com/Indices/FTSE_Shariah_Global_Equity_I ndex_Series/index.jsp II. S & P 500 Shariah Index http://us.spindices.com/indices/equity/sp-500-shariahindex III. MSCI Global Islamic Indices http://www.mscibarra.com/products/indices/international _equity_indices/islamic/ IV. IdealRatings - http://www.idealratings.com/ V. BSE Shariah 50 Index - http://www.tasis.in/BSE-TASIS.pdf VI. Thomson Reuters Islamic Indices http://thomsonreuters.com/islamic-indices/ In addition to DJIMI are there any other Shariah Screening Indices?
  11. 11. A Yes, except for Securities Commission Malaysia, like the DJIMI all Shariah screening services are offered by commercial companies using almost same methodology - based on a negative screening of industries followed by a financial ratios based screening of companies. The Securities Commission Malaysia (SCM) http://www.sc.com.my/frequently-asked-questions-on-revisedshariah-screening-methodology/ also undertakes Shariah screening of shares based on its own methodology. The SCM uses three considerations in its screening 1. Negative screening of industry 2. Financial ratio-based screening of companies based on social responsibility of businesses 3. The level of Shariah-compliant component in the financial ratios Q Do they use same methodology?
  12. 12. A The proposed criteria is similar to the SCM criteria with the following differences: Objectives of the Shariah are adopted as an anchor for the social responsibility Considerations for environment and issues of human rights like child labor are included Businesses consistent with the above two considerations are given preference Q What is new in the proposed modified criteria?
  13. 13. modified criteria in 7 steps
  14. 14. Make a list of all companies that are potentially available for investment Ask if the companies comply with Maqasid Al Shariah or do not comply Maqasid Al Shariah – In harmony, promotion/enhancement and safeguard of 1. Mind & Intellect, 2. Human dignity, 3. Future generations, 4. Wealth, 5. Religious Faith
  15. 15. Delete from list, companies that do not comply with Maqasid Al Shariah Companies engaged in: 1) Child labor 2) Environmental degradation 3) Commercialization of sex 4) Alcohol, tobacco, illicit drugs 5) Commercialization of lending as interest-based financial services 6) Gambling and zero sum games including financial derivatives 7) Supporting aggression and violation of human rights
  16. 16. Classify selected companies in terms of contribution to social responsibility Food, shelter, water, sanitation, primary & secondary education, basic health Utilities, infrastructure, general health care and higher and professional education Requirements of meeting middle class living standards in a society Comforts, refinements and entertainment Luxuries
  17. 17. From list selected in step 3 delete if: Debts to be paid to others are greater than % of total market capitalization or market value of total assets Food, shelter, water, 60% sanitation, primary & secondary education, basic health Utilities, infrastructure, health 50% and higher and professional education Requirements of meeting 40% middle class living standards in a society Comforts, refinements and 30% entertainment 10% Luxuries
  18. 18. From list selected in step 3 delete if: Debts to be received from others are greater than % of total market capitalization or market value of total assets Food, shelter, water, sanitation, primary & secondary education, basic health Utilities, infrastructure, health and higher and professional education Requirements of meeting middle class living standards in a society Comforts, refinements and entertainment Luxuries 60% 60% 40% 30% 30%
  19. 19. From list selected in step 3 delete if: Cash & interesting bearing assets are greater than % of total market capitalization or market value of total assets Food, shelter, water, sanitation, primary & secondary education, basic health Utilities, infrastructure, health and higher and professional education Requirements of meeting middle class living standards in a society Comforts, refinements and entertainment Luxuries 30% 30% 30% 20% 10%
  20. 20. From list selected in step 3 delete if: Impure income is greater than % of total income Food, shelter, water, sanitation, primary & secondary education, basic health Utilities, infrastructure, health and higher and professional education Requirements of meeting middle class living standards in a society Comforts, refinements and entertainment Luxuries 10% 10% 10% 5% 5%
  21. 21. Sectors 1. Food, shelter, water, sanitation, primary & secondary education, basic health 2. Utilities, infrastructure, health and higher and professional education 3. Requirements of meeting middle class living standards in a society 4. Comforts, refinements and entertainment 5. Luxuries Tolerability limits Receivables 60% Liquid assets 30% 60% Income impurity 10% 50% 30% 60% 10% 40% 30% 40% 10% 30% 20% 30% 5% 10% 10% 30% 5% Leverage Summary of the Proposed Modified Shariah Screening Criteria

×