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Stock Screening Process

Stock Screening Process

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Published by: syed othman alhabshi on Oct 04, 2008
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STOCK SCREENING PROCESS
 By Prof. Datuk Dr. Syed Othman Alhabshi  INCEIF 
1.DEFINITION
Stock screening is a process of determining whether a stock or security is Shariah-compliant or not. It consists of various Shariah principles that form the criteria whichshould be used to determine whether the stock or security is Shariah-compliant or not.
2.OBJECTIVE
The main objective of screening the stock is to ensure that the stock or security thatone purchases or invest in does not contain any prohibited elements that make itShariah non-compliant. For Muslims, it is a grave sin to consume something that isunlawful or prohibited.According to a hadith of the Holy Prophet (peace and blessings of Allah be upon him)as reported by Jabir (may Allah be pleased with him), the Messenger of Allah said:“The flesh grown from unlawful provisions shall not enter Paradise, and every fleshgrown from unlawful provisions deserves to be thrown in the Hell fire” (Ahmad).From the hadith, it is clear that Muslims need to be very careful not to consume or feed his family with food that originates from unlawful income. In fact it is not justfood that we consume must be permissible, it is all that we consume in the generalsense should be pure and clean.
3.SCOPE OF THIS PAPER 
This paper will confine discussion only on the stock screening processes as adopted by the Securities Commission of Malaysia (SC) and the Dow Jones Islamic MarketIndex (DJIM).
4.SHARIAH PRINCIPLES IN ISLAMIC TRANSACTIONS
To ensure that we consume only what is permitted, we have to ensure that the incomethat we earn and the resulting wealth that we generate and accumulate must have beendone through lawful means. To help us ensure this, the Shariah has laid down the basic principles that should be followed in our business or commercial transactions.The Holy Qur’an also states, “O ye who believe! Eat not up your property amongyourselves in vanities; but let there be amongst you traffic and trade by mutualgoodwill: Nor kill (or destroy) yourselves: for verily God hat been to you MostMerciful” [An-Nisaa (4):29]
 
From the above verse, it is clear that we should not take each others wealth or  property through vain means. But there should be proper, transparent, fair and justexchange or transactions which are mutually agreed by both parties. At the end of theverse, it says about killing or destroying oneself which implies that by cheating or forcing one to give up his property you are in fact killing his livelihood although hemay not die. Based on such interpretations of the verse, the scholars have outlined the principles of Islamic transactions as follows:
Willing buyer 
Willing seller 
Well defined or specified good, commodity or product
Agreed price
Offer and acceptanceThe following can be derived from the above list of requirements:First, the participants in transactions must be of age, free man, represented if blindand sane individual. Underage person is not allowed to transact unless permitted bythe guardian or parents.Second, the good or commodity or product must be well defined or specified to avoidany ambiguity or uncertainty (
 gharar)
which is prohibited. The good must be owned by the seller and can be delivered at the appointed time.Third, both parties need to agree on the priceFourth, the offer and acceptance can be verbal or in writing which acts as theconclusion of the agreement by both parties to the transaction.The Holy Qur’an has addressed mankind thus: “O ye people! Eat of what is on earth,lawful and good and not follow the footsteps of the evil one, for he is to you anavowed enemy” [
 Al-Baqarah
(2): 168].The verse clearly states two basic criteria in selecting food for our consumption,namely, they should first be lawful and secondly they should be good. From thescience of the Holy Qur’an, the order of the words in the verse implies that we shouldchoose food that is lawful first. Among the lawful food we should then choose thosethat are good for us. There are two implications here: First, it implies that what islawful must be good. However, what is good may not be lawful such as strong drinks.Secondly, what is good for someone may not be good for another. Hence, one should be selective in choosing among the lawful what is good for him.While the first verse outlines the basic principles of Islamic transactions in general,the second provides the basis for stock screening. This does not mean that the basic principles of Islamic transactions do not apply in the stock screening process. In fact,the third principle of Islamic transactions which pertains to good or product to be2
 
transacted is further clarified by the second verse quoted above. In other words thestock cannot contain any prohibited elements whether by action or by contents. Stock screening therefore entails the scrutiny of the good or product of the company and themanner it is being produced, particularly in terms of financing.5.
UNIVERSE CREATION AND STOCK SELECTION
1
The universe for Securities Commission (SC) of Malaysia is limited only to thosestocks or securities that are listed in Bursa Malaysia. This includes those securitieslisted in the First and Second Boards as well as in Masdeq.The universe for Dow Jones Islamic Market Index (DJIM) is based on global markets.The DJMI include stocks from 34 countries and cover 10 economic sectors, 18market sectors, 40 industry groups and 70 subgroups. Currently, the Dow JonesIslamic Market family of indices consists of the broad DJ Islamic Market Index, theDJ Islamic Market Canadian Index, the DJ Islamic Market UK Index, the DJ IslamicMarket Europe Index, and the DJ Islamic Market Asia/Pacific Index.Both the Securities Commission (SC) of Malaysia and Dow Jones Islamic MarketIndex (DJIM) have the same approach to the first level of screening which is based oncore business. The core business is considered permissible as long as they do not belong to any of those businesses that are listed as non-permissible.The SC listed the non-permissible core businesses as follows:
Financial services based on
riba
(interest);
Gambling and gaming;
Manufacture or sale of non
-halal 
 products or related products;
Conventional insurance;
Entertainment activities that are non-permissible according to Shariah;
Manufacture or sale of tobacco-based products or related products;
Stock broking or share trading in Shariah-non compliant securities; and
Other activities deemed non-permissible according to ShariahFor DJIM most Shariah boards have advised against investment in companiesinvolved in the following activities:
Alcohol
Tobacco
Pork-related products
Conventional financial services (banking, insurance, etc.)
1
This section onwards has made reference to Securities Commission booklet on “List of Shariah-Compliant Securities by the Shariah Advisory Council of the Securities Commission” dated 25 May 2007and the Dow Jones Islamic Market Index website
3

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