Participation in conventional debt markets is unacceptable from a Shariah perspective as the instruments all involve riba-based payments, hence the emergence of markets in Sukuk which involve instruments that are structured using rents or profits as the means for payments. In contrast, most conventional equity markets transactions are permissible from a Shariah perspective, and there is no need to have separate Islamic equity markets, although the Dubai Financial Market was the first to declare that all its listings were Shariah compliant. For investors in equity markets who want Shariah assurance that their assets are halal, screening provides the solution, using tried and tested methodologies such as those provided by the Dow Jones Islamic Market Indices. This involves both financial screening (to eliminate companies that are highly leveraged or have significant income from interest) and sector screening (to ensure companies are involved in legitimate business activities).
Given the effectiveness of this screening, there is no need to establish dedicated Shariah compliant equity markets, where trading might be thin with adverse implications for share price volatility. Arbitrage between Shariah compliant and conventional markets would also be likely, raising many Shariah issues that could not easily be resolved.
Modern equity investment differs from Musharakah and Mudarabah, but in Shariah all activities are permissible unless explicitedly forbidden, a principle noted by the OIC Fiqh Academy when they ruled on the general permissibility of equity investment.
PROFESSOR RODNEY WILSON:
The question assumes a premise that may yet be unfounded. While it may be true that Sukuk issuance is more adept at grabbing the headlines, the equity market is by no means overshadowed.
Islamic equity markets are thriving with estimated assets under management of US$250 billion, almost three times the current Sukuk market. Since 1999, when the Dow Jones Islamic indices were launched, we have seen a number of major players enter the market; the likes of S&P, MSCI Barra and others have brought in diversity in methodology and approach, allowing Islamic fund managers to differentiate their Islamic equity products.
In terms of reach, the Islamic equity markets continue to outperform the Islamic debt markets. Investment in Islamic equities has been a global phenomenon, with Islamic fund managers selecting stocks from all over the world. Sukuk, on the other hand, have pre-dominantly been led by sovereign authorities and corporates primarily clustered in the Middle East and Malaysia, with a few rare instances of issuance coming from other regions as well.
With regard to the characteristics that an Islamic equity exchange needs to have, I would wish to defer the question as I don’t think there is a need to have a separate Islamic equity exchange at this point in time. Shariah compliant shares/stocks on conventional exchanges can easily be identified with the help of the available Shariah screening methodologies.
What is perhaps more vital is to provide all the available tools to Islamic investors that would otherwise be inaccessible alongside this equity. On this note, it is encouraging to see the advent of Islamic structured products — many of which are equity index linked — and the emergence of Islamic hedge funds, both of which have deepened and enriched the Islamic equity markets.
In this light, an important need and tool as yet underdeveloped for Islamic investors are innovative Islamic derivative contracts on Shariah compliant equities. It is clear, for example, that Islamic financial futures contracts on Shariah compliant shares would provide additional impetus to Islamic equities.
This is of personal interest to me. Having recently been involved in an initiative to develop such a contract, it seems the day is not far off when Islamic financial future contracts will be traded on well-reputed international stock exchanges. Indeed, Malaysians have already begun trading in a locally structured Islamic futures contract, so the next step would be to internationalize such an idea, thereby facilitating a more complete Islamic equity market. One small step for Malaysians may not necessarily translate into a giant step for the rest of the globe.
Dr HUMAYON DAR:
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