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The Role and Regulation of Stock Exchang in An Islamic Economy How Can Islam Help in Reducing Volatility in The Stock Market
The Role and Regulation of Stock Exchang in An Islamic Economy How Can Islam Help in Reducing Volatility in The Stock Market
AN ISLAMIC ECONOMY
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Part I: Common Stock in Islamic Finance
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Common Stock in Islamic Finance
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Conditions for Permissibility and
Negotiability
• The main business of the company is not in violation of
Shariah.
• If the company invests/ lends/ deposits its surplus funds in
interest-bearing assets or borrows money on interest, it must
not be “significant”
• If some income from interest-bearing accounts is included in
the income of the company, the proportion of such income in
the dividend must be given in charity.
• Stocks of a company are negotiable only if the company owns
some non-liquid assets.
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Common Stock in Islamic Finance
Shariah Screens: Example: I (DJIM)
• Industry Type: Excluded are companies that represent the following
lines of business: alcohol, tobacco, pork-related products, financial
services, defense/weapons and entertainment.
• Financial Ratios: Excluded are companies whose:
• Total debt divided by trailing 12-month average market
capitalization is 33% or more; Cash plus interest-bearing securities
divided by trailing 12-month average market capitalization is 33%
or more; Accounts receivables divided by 12-month average market
capitalization is 33% or more.
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
FINANCIAL SCREEN
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Common Stock in Islamic Finance
Shariah Screens: Example: II (S&P)
Sector-Based Screens
• Business activities related to the following are excluded:
Pork; Alcohol; Gambling; Financials; Advertising and
Media (newspapers are allowed, sub-industries are
analyzed individually); Pornography; Tobacco; Trading of
gold and silver as cash on deferred basis
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Common Stock in Islamic Finance
Shariah Screens: Example: II (S&P)
Accounting-Based Screens
•Debt / Market Value of Equity (12 Month average) < 33 %;
•Accounts Receivables / Market value of Equity (12 Month average) <
49 %;
•(Cash + Interest Bearing Securities) / Market value of Equity (12
Month average) <33%;
•Non-Permissible Income other than Interest Income / Revenue <
5%
•Dividend Purification Ratio: Dividends * (Non Permissible Revenue /
Total Revenue)
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Part II: Ethics & Efficiency in Islamic Stock
Market
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Ethics & Efficiency in Islamic Stock Market
Forms of Efficiency
• Allocational Efficiency
• Pricing Efficiency
• Informational Efficiency
• Operational Efficiency
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Ethics & Efficiency in Islamic Stock Market
Norms of Secular Ethics
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Ethics & Efficiency in Islamic Stock Market
Norms of Islamic Finance
•
Freedom to Contract
• Freedom from Al Riba
• Freedom from Al Gharar (Excessive Uncertainty)
• Freedom from Al-Qimar (Gambling) and Al-Maysir
(Unearned Income)
• Freedom from Price Control and Manipulation
• Entitlement to Transact at Fair Prices
• Entitlement to Equal, Adequate and Accurate Information
• Freedom from Darar (Detriment)
• Mutual Cooperation and Solidarity
• Maslahah Mursalah (Unrestricted Public Interest)
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Islamic Stock Market:
Nature and Regulation of Primary Market
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Islamic Stock Market:
Nature and Regulation of Secondary Market
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Part III: Issues & Trends in Regulation
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Issues & Trends in Regulation
International organization of securities commissions (IOSCO)
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Other Standard Setting Bodies
Islamic Financial Services Board (IFSB)
Covers banking, insurance and securities regulation
wide range of initiatives it has undertaken, for example
developing corporate governance standards for Islamic
collective investment schemes, and capital adequacy
requirements for Sukuk securitisations
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Key Issues in Islamic Stock Market
Regulation
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Thank You
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008