The purpose of this paper is to compare the criteria used among Islamic Indices, specifically between the Kuala Lumpur Stock Exchange Shari'ah Index (KLSESI) and the Dow…
The purpose of this paper is to compare the criteria used among Islamic Indices, specifically between the Kuala Lumpur Stock Exchange Shari'ah Index (KLSESI) and the Dow Jones Islamic Market Index (DJIM) in screening a permissible company for investment purposes. The two controversial criteria examined are: level of debt and level of liquidity of company.
The paper investigates the 642 companies listed on the Bursa Malaysia in 2006 as approved Shariah's compliant companies by the Shari'ah Advisory Council of the KLSE.
Overall, the results reveal that the KLSESI does not use both the criteria set by the DJIM as its measures during the screening process. As for the level of debt criterion, the results show that 44.07 percent of the companies listed under the KLSESI are highly geared. These companies depend heavily on debt to finance their capital. However, the results for the level of liquidity criterion are not as extreme as the level of debt where it shows only 17 percent of the companies listed under the KLSESI are highly liquid. The results also indicate that if both criteria are compared concurrently, only 198 out of 565 companies listed under the KLSESI conform to the criteria set up by the DJIM.
The main reasons why the differences exist among Islamic Indices are due to micro‐factor as faced by Malaysian companies such as the limited amount of capital resources. The Shari'ah supervisory board of the respective indices represents the sole body that determines the rules or criteria to be used by each index. This explains why the indices differ from one country to another and efforts should be done by regulators in the respective countries to harmonize the differing criteria used.
The paper represents the first study that compares the criteria used by two different indices regarding Islamic capital investment in a developing country.
This paper aims to expand the literature on performance and volatility of Islamic funds and indices in comparison to their conventional unscreened counterparts, by…
This paper aims to expand the literature on performance and volatility of Islamic funds and indices in comparison to their conventional unscreened counterparts, by studying the Moroccan case considering the recent introduction of Islamic finance in the country toward the end of 2015.
As there are still no Shariah-compliant indices in Morocco, the authors first applied four Shariah screening methodologies of some of the world leading equity index providers (i.e. Dow Jones, FTSE, S&P and MSCI) to screen the public listed companies in Casablanca Stock Exchange for Shariah compliance. Next, the authors constructed four Islamic float-weighted indexes for which they modeled the dynamic volatility using an extension of the AutoRegressive Conditional Heteroskedasticity models, namely, EGARCH(1,1).
The findings show that the screening process resulted in a well-diversified universe of Shariah-compliant stocks (25.6 per cent) to invest in. Furthermore, it is found that constructed Islamic indices outperformed the broad-based Moroccan All Shares Index (MASI) during the considered period of analysis (January 2013 to December 2014), and their long-run volatility is higher. This indicates that investors in Shariah-compliant stocks do not sacrifice financial performance for their risky investment. The estimates of the model show that volatility for the MASI is more persistent and takes longer time to die, and the leverage effect is positive for all indices, meaning that volatility of indexes’ returns is influenced more by good news than bad news, a result that is in contrast to other studies for developed countries.
On the arrival of the new banking law that introduced Islamic finance for the first time in Morocco, the authors suppose that these results could be very helpful for the Moroccan financial authorities in consideration with the construction of Islamic equity indices for Muslim investors seeking to invest ethically in accordance to their religious convictions but also for index funds managers and other equity market players.
The present study is the first of its kind in Morocco to construct Islamic indices using Shariah screening methodologies for which the volatility is modeled using an EGARCH(1,1) dynamic volatility model.