Ifind it ironic that Shariah scholars seem to spend an inordinate amount of time and trouble analyzing and filtering what companies do, and very little time indeed in questioning how they do it. The Joint Stock Company was around for over 200 years before the Victorians got the idea of allowing investors to limit their liability in the 1850s. This was extremely contentious in those days, when strongly held religious views and ‘morality’ were pervasive. The reason was that the shareholders receive a privilege — that of excluding them from liability beyond their investment — for which they essentially give nothing to Society in return. The resulting ‘externalization of costs’ has had extremely well documented toxic effects over the intervening years, and resulted in huge amounts of legislation aimed at ameliorating the effects. I find it difficult to perceive any qualitative difference between the inadequate sharing of risk and reward in a contract of interest-bearing debt which is “haram” (unlawful) and the inadequate sharing of risk and reward in the “Corporation”, which is apparently “halal” (lawful). So my answer is that I do not believe that any limited liability entity — as currently constituted — is beyond reproach. Having said that, I recognize that modern day development would be well nigh impossible without it, and I would be content to see this institution continue on the basis that a provision be made out of gross revenues into a compensation fund, i.e. a Limited Liability Levy or Tax.
CHRIS COOK
Sector and financial screens are used to determine what companies can be included in any Shariah compliant portfolio. The sector screens are relatively uncontroversial, with conventional financial institutions the major excluded category. The main debates centre of whether tobacco companies should be excluded (they usually are) and whether businesses which may have a minor portion of their income from haram activities, such as supermarkets and hotels, should be excluded, especially if such income is purified by charitable donations. The financial screens have brought more debate, the basic problem being that if all companies with leverage, receivables and interest income are excluded, there would be no equity investments available for Muslims. The one third criteria derived from the proportion of an estate over which discretion can be exercised is questioned by some, but on pragmatic grounds has many merits. My own view is that the Dow Jones screening criteria are acceptable, but there will always be those who object to any realistic proposal. PROFESSOR RODNEY WILSON Director of postgraduate studies, Durham University
Interaction with the “outside world” is not prohibited by the Shariah. Good economical, technical and financial developments have proven to be linked to reciprocal exchanges. Also, the numbers of the full Shariah-compliant companies and the volume of trade they represent stress the need for diversification. The present openness therefore is a necessary condition for the industry’s growth. The qualitative restrictions (haram or halal) are already fully compliant. The financial criteria such as interest exposure and liquidity threshold, combined with purification ensure sufficient cleansing. Perhaps the current criteria can be re-evaluated in 10 years and in view of global economical developments then. For the moment, stability is priority. PAUL WOUTERS Partner, Bener Law Office
A significant number fail to appreciate that Sharia screening ratios aren`t arbitary – the one third gearing ratio, for instance, has hadith to support the derivation of the 33 per cent. figure. A limit has to set so that parameters are clearly defined. Too stringent a ratio isn`t necessarily a plausible option because the use of conventional debt is endemic. Inherent flexibility lies in Islamic financing not counting as part of the ratio screens. This needs to be articulated more vocally so that the viability of Islamic finance is better appreciated by those who are new to Islamic finance. RAHAIL ALI Global Head of Islamic Finance, Lovells
Shariah criteria are stringent enough now because the industry is still developing. We have a criteria that is widely accepted (developed by the Dow Jones Islamic Market Indexes Shariah Supervisory Board, which is publicly available) and can spur significant growth in Islamic fund managers. One of the areas in which this criteria is lacking is in addressing the forced buy-high, sell-low criticism due to the use of market capitalization as the denominator in the financial screen area. Two areas in which the industry can improve is: improving the stability of Shariah screens to remove the relationship with the stock price and incorporating positive screens into the industry. The former can be fixed by using, for example, total assets instead of market capitalization as the denominator in the financial screens, as it varies less with the stock price. The latter should be addressed by focusing on companies which make a positive contribution to the maqasid (intent) of the Shariah. Examples of this could be weighting more heavily companies that create more environmental sustainability (reaffirming the Qur`anic view of people as trustees managing the earth), equitable distribution of wealth and equitable relationship between those with capital and entrepreneurs (one reason for the prohibition of riba). As the industry develops, Shariah scholars will develop new ways for practitioners to enhance their Shariah-compliance. BLAKE GOUD Executive Director, Institute of Halal Investing Portland
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