Where are Islamic finance indices pointing towards? Lessons from experimental ‘pockets’ of Islamic financial regulation on international stock markets

Abstract

Purpose

This paper aims to survey the screening practices and regulatory arrangements that can be gleaned from the experience of Islamic financial indices on international stock markets. Such indices can be regarded as experiments in the demarcation of “pockets” of Sharī‘ah-compliant securities exchange, in the context of non-Sharī‘ah-compliant stock markets. They offer valuable regulatory precedent, with a view to the development of a transnational domain of Islamic financial transactions.

Design/methodology/approach

The paper leverages the experience of Islamic financial indices for charting the fault lines between the foundational principles of Islamic finance, and those of interest-based investment commonly accepted on international financial markets. It subsequently reviews the most salient regulatory arrangements in place for discriminating between permissible and forbidden securities and modes of trading, as implemented on Islamic financial indices. These include selection criteria for index inclusion, and Sharī‘ah committees with ex ante and ex post supervisory duties.

Findings

The paper makes a case for viewing Islamic finance indices on international capital markets as capacity-building experiments for the regulation of transnational Islamic financial flows.

Originality/value

The study rejuvenates the pragmatic approach towards the development of Islamic capital markets, by suggesting that incremental organisational innovations, as developed in connection with Islamic financial indices, can build institutional capacity towards an economy that abides by Islamic values.

Citation

El Maknouzi, M.E.H. and Jadalhaq, I.M. (2020), "Where are Islamic finance indices pointing towards? Lessons from experimental ‘pockets’ of Islamic financial regulation on international stock markets", Journal of Financial Regulation and Compliance, Vol. 28 No. 2, pp. 267-281. https://doi.org/10.1108/JFRC-03-2019-0040