Analysis of Sharī‘ah Based Equity Screenings: Developing a Sharī‘ah-Compliant Index for Qatar Stock Exchange

Abstract

Although, any amount or portion of Haram is not permissible in Sharī‘ah. An exception has been addressed on the basis of the Sharī‘ah-established maxim of “necessities call for relaxation of prohibition.” This allows investing in companies that engage in some non-permissible transactions (mixed companies) to a certain tolerable extent, provided that the financial outcomes of these transactions are purified by giving the part that is not-permissible to charity. Identifying mixed companies that Muslims can invest in is done by using specific Sharī‘ah screening criteria that exclude out of the universe of all listed companies in a specific market those companies with returns emanating from non-permissible activities beyond certain threshold limits. This paper identifies the screening criteria used by seven Islamic indices, compares and contrasts between them and tries to examine whether it is time to have an Islamic index with no tolerance to non-permissible activities using Qatar as a case study. It is found that there exists a number of differences among Islamic indices which have impact on the Muslim investors level of freedom through their impact on the universe of Halal equity assets. It is also found that an Islamic index with zero-tolerance to non-permissible activities may be constructed for Qatar Stock Exchange without losing much of freedom of choice in this market. A comparison between the proposed zero-tolerance index and the already existing Al Rayan Islamic index shows that there are no differences in their respective behaviors. This indicates that having companies that do some non-permissible activities and having non-permissible income in the “Islamic basket” of listed companies is not necessary in Qatar. This paper consists of five sections. The first section provides an introduction to the presented topic. The methods that are used for Sharī‘ah investment screening are discussed in section two. The third section includes a comparison of the screening criteria that are currently used by major index providers. The creation of an Islamic index with Zero-tolerance in Qatar Stock Exchange is illustrated in section four. The last section consists of conclusions and recommendations.

Keywords: Islamic Equity Market; Equity Screening; Islamic Finance; Qatar

JEL Classification: G10; G19; Z12