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Shariah Norms for Equity

Shariah Norms for Equity

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Published by: profinvest786 on Jul 30, 2010
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10/25/2012

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Shariah
Compliant Equity Investments: An Assessmentof Current Screening Norms
By:
M.H. Khatkhatay&Shariq NisarABSTRACT
The preferred Islamic investment format is equity. However equitycomes along with ownership. Hence Islamic investors have to ensurethat the selected company’s activities and structuring are not repugnantto
shariah
norms. Due to exigencies of modern business andparticularly the pervasiveness of interest transactions, fully
shariah
-compliant equities are extremely rare.So,
shariah
scholars have arrived at minimum compliance criteriawhich, while excluding companies in gross violation, yet provideinvestors a reasonably wide choice of 
shariah
-compliant equities.The authors have reviewed and compared the norms set by threeorganizations. A critical and analytical assessment of the differentcriteria follows. Empirical data of the five hundred companies includedin the BSE500 index of the Bombay Stock Exchange is used to assessthe impact of the different norms.Based on the empirical results and analytical arguments and in thebackdrop of an Islamic perspective, an independent set of norms isproposed.
 
Shariah 
Compliant Equity Investments: An Assessment of Current Screening Norms
2
Contents
1.Introduction2.Data Base and Research Methodology3.Equity Shares and Equity Funds as
Shariah
Compliant Investment Avenues
3.1.Equity Shares3.2.Equity Funds
4.The Business and Structure of the Entreprise
4.1.Business of the Entreprise4.2.Structure of the Entreprise4.2.1Indebtedness of the Enterprise4.2.2Earnings from Impermissible (
 Haram
) Activities4.2.3Cash and Receivables/Payables of the Enterprise
5.Screening Norms for
Shariah
Compliance
5.1.Dow Jones Islamic Index Screening Criteria, USA5.1.1Screens for Acceptable Business Activites5.1.2Screens for Acceptable Financial Ratios5.1.2.1Debt to Market Cap5.1.2.2Liquid Assets to Market Cap5.1.2.3Receivables to Market Cap5.2.Screening Criteria of Securities and Exchange Commision (SEC),Malaysia5.2.1Core Activities5.2.2Mixed Activities5.2.3Benchmarks of Tolerance5.2.3.1The Five-Percent Benchmrk 5.2.3.2The Ten-Percent Benchmrk 5.2.3.3The Twenty Five-Percent Benchmrk 5.2.4Debt and Liquidity5.3.Meezan Islamic Fund Criteria, Pakistan
 
Paper Presented at the Seventh Harvard University Forum on Islamic FinanceApril 23, 2006, Harvard Law School, Massachusetts, USA
3
5.3.1 Business of the Investee Company5.3.2 Debt to Total Assets5.3.3 Net Illiquid to Total Assets5.3.4Investment in
Shariah
Non-Complinat Activities and Incomefrom
Shariah
Non-Compliant Investment5.3.5 Net Liquid Assets vs. Share Price
6.Comparison of Various Screening Norms
6.1.Comparison of Screening According to Nature of Business6.2.Screening on the Basis of Financial Ratios6.2.1Level of Indebtedness6.2.2Level of Receivables
7.Critical Assesment of Various Screening Norms
7.1Screening Norms Regarding Nature of Business7.2Screening Norms Relating to Financial Ratios7.2.1Suitability of Market Capitalisation For Use in Screening Ratios7.2.2Norm for Level of Debt Financing7.2.3Level of Interest Earnings7.2.3.1Purging of Interest Income7.2.4Level of Receivables
8.Conclusion

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