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KembaraXtra–Islamic Finance–Islamic Capital Market – Equity Value
Overview and Definition
Equity value refers to the total value of a company that belongs to its shareholders. It represents ownership in the firm and is calculated by multiplying the market price per share by the total number of outstanding shares. In Islamic finance, equity value is especially important because it reflects real ownership and participation in business outcomes rather than guaranteed or interest-based returns.
Equity Value and Shari’ah Principles
Equity value aligns closely with Shari’ah principles because shareholders earn returns only when the company generates profits and bear losses when the company underperforms. This reflects risk-sharing, which is central to Islamic finance, and mirrors Musharaka-style arrangements where profit and loss depend on actual business performance.
Equity Value versus Debt-Based Claims
Equity value focuses solely on shareholders and excludes claims of debt holders, preferred shareholders, and other fixed-income stakeholders. This distinction is crucial in Islamic finance because interest-based debt instruments are discouraged, making equity-based ownership and valuation more relevant and Shari’ah-consistent.
Equity Value and Business Performance
Movements in equity value directly reflect changes in a company’s financial health and future prospects. Strong earnings, growth potential, and good governance tend to increase equity value, while declining profits or higher risks reduce it. This ensures that risk and reward move together, fulfilling the Islamic requirement that returns must be linked to real economic activity.
Importance of Equity Value for Islamic Investors
Islamic investors prioritise equity value because it shows how much of the company they truly own, the level of risk they share, and the potential profits they may earn from halal and productive activities. As a result, equity value is often more meaningful than enterprise value when evaluating investments in the Islamic capital market.
Overview and Definition
Equity value refers to the total value of a company that belongs to its shareholders. It represents ownership in the firm and is calculated by multiplying the market price per share by the total number of outstanding shares. In Islamic finance, equity value is especially important because it reflects real ownership and participation in business outcomes rather than guaranteed or interest-based returns.
Equity Value and Shari’ah Principles
Equity value aligns closely with Shari’ah principles because shareholders earn returns only when the company generates profits and bear losses when the company underperforms. This reflects risk-sharing, which is central to Islamic finance, and mirrors Musharaka-style arrangements where profit and loss depend on actual business performance.
Equity Value versus Debt-Based Claims
Equity value focuses solely on shareholders and excludes claims of debt holders, preferred shareholders, and other fixed-income stakeholders. This distinction is crucial in Islamic finance because interest-based debt instruments are discouraged, making equity-based ownership and valuation more relevant and Shari’ah-consistent.
Equity Value and Business Performance
Movements in equity value directly reflect changes in a company’s financial health and future prospects. Strong earnings, growth potential, and good governance tend to increase equity value, while declining profits or higher risks reduce it. This ensures that risk and reward move together, fulfilling the Islamic requirement that returns must be linked to real economic activity.
Importance of Equity Value for Islamic Investors
Islamic investors prioritise equity value because it shows how much of the company they truly own, the level of risk they share, and the potential profits they may earn from halal and productive activities. As a result, equity value is often more meaningful than enterprise value when evaluating investments in the Islamic capital market.
- Published on
KembaraXtra–Islamic Finance–Islamic Capital Market – Equity Value
Overview and Definition
Equity value refers to the total value of a company that belongs to its shareholders. It represents ownership in the firm and is calculated by multiplying the market price per share by the total number of outstanding shares. In Islamic finance, equity value is especially important because it reflects real ownership and participation in business outcomes rather than guaranteed or interest-based returns.
Equity Value and Shari’ah Principles
Equity value aligns closely with Shari’ah principles because shareholders earn returns only when the company generates profits and bear losses when the company underperforms. This reflects risk-sharing, which is central to Islamic finance, and mirrors Musharaka-style arrangements where profit and loss depend on actual business performance.
Equity Value versus Debt-Based Claims
Equity value focuses solely on shareholders and excludes claims of debt holders, preferred shareholders, and other fixed-income stakeholders. This distinction is crucial in Islamic finance because interest-based debt instruments are discouraged, making equity-based ownership and valuation more relevant and Shari’ah-consistent.
Equity Value and Business Performance
Movements in equity value directly reflect changes in a company’s financial health and future prospects. Strong earnings, growth potential, and good governance tend to increase equity value, while declining profits or higher risks reduce it. This ensures that risk and reward move together, fulfilling the Islamic requirement that returns must be linked to real economic activity.
Importance of Equity Value for Islamic Investors
Islamic investors prioritise equity value because it shows how much of the company they truly own, the level of risk they share, and the potential profits they may earn from halal and productive activities. As a result, equity value is often more meaningful than enterprise value when evaluating investments in the Islamic capital market.
Overview and Definition
Equity value refers to the total value of a company that belongs to its shareholders. It represents ownership in the firm and is calculated by multiplying the market price per share by the total number of outstanding shares. In Islamic finance, equity value is especially important because it reflects real ownership and participation in business outcomes rather than guaranteed or interest-based returns.
Equity Value and Shari’ah Principles
Equity value aligns closely with Shari’ah principles because shareholders earn returns only when the company generates profits and bear losses when the company underperforms. This reflects risk-sharing, which is central to Islamic finance, and mirrors Musharaka-style arrangements where profit and loss depend on actual business performance.
Equity Value versus Debt-Based Claims
Equity value focuses solely on shareholders and excludes claims of debt holders, preferred shareholders, and other fixed-income stakeholders. This distinction is crucial in Islamic finance because interest-based debt instruments are discouraged, making equity-based ownership and valuation more relevant and Shari’ah-consistent.
Equity Value and Business Performance
Movements in equity value directly reflect changes in a company’s financial health and future prospects. Strong earnings, growth potential, and good governance tend to increase equity value, while declining profits or higher risks reduce it. This ensures that risk and reward move together, fulfilling the Islamic requirement that returns must be linked to real economic activity.
Importance of Equity Value for Islamic Investors
Islamic investors prioritise equity value because it shows how much of the company they truly own, the level of risk they share, and the potential profits they may earn from halal and productive activities. As a result, equity value is often more meaningful than enterprise value when evaluating investments in the Islamic capital market.
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KembaraXtra-Islamic Finance-Islamic Capital Market- Stock Screening Process (Step-by-Step)
Step 1a: Financial Data Standardisation
• Financial statements of companies are first standardised
• Ensures consistency and comparability of data across firms
• Aligns accounting figures for accurate Shari’ah assessment
• Necessary before applying financial ratio screening
Step 1b: Business Classification
• Companies are classified based on core business activities
• Identifies the sector and nature of operations
• Used to quickly exclude companies involved in clearly prohibited (haram) activities
Examples of prohibited activities:
• Conventional banking and interest-based finance
• Alcohol, gambling, pork-related products
• Pornography, weapons, tobacco
Step 2a: Screening for Financial Compliance
• Companies passing business classification are screened using financial ratios
• Objective is to limit involvement with riba (interest) and non-permissible income
• Common checks include:
– Interest-bearing debt ratios
– Interest income ratios
– Liquidity ratios
• Ensures financial structure does not heavily rely on prohibited elements
Step 2b: Screening for Business Activity Compliance
• Evaluates whether business activities are Shari’ah-permissible in substance
• Even if main business is halal, ancillary income sources are examined
• Thresholds may allow minimal non-compliant income within acceptable limits
Step 3: Further In-depth Business Activity Analysis (IDBAA) or Manual Screening
• Conducted when companies fall into grey areas
• Involves:
– deeper qualitative review
– company disclosures
– revenue segmentation
• Manual screening ensures borderline cases are not wrongly included or excluded
Step 4: Final Decision
• Shari’ah supervisory authority or board issues a final ruling
• Company is classified as:
– Shari’ah-compliant (investable), or
– Non-compliant (excluded)
• Approved companies are included in:
– Islamic indices
– Islamic mutual funds
– Islamic ETFs
Screening Methodology in Islamic Finance
Purpose of Shari’ah Stock Screening
• Ensures investments comply fully with Shari’ah law
• Prevents involvement in:
– riba (interest)
– maisir (gambling)
– gharar (excessive uncertainty)
• Builds confidence among Islamic investors
Why Screening Is Required
• Islamic capital market transactions must not conflict with Shari’ah principles
• Conventional markets do not apply religious filters
• Islamic markets require formal detection and certification of halal companies
Historical Development
• Formal Shari’ah stock screening began in 1996
• Introduced by Dow Jones USA
• Led to the creation of the Dow Jones Islamic Global Market Index
• This marked the institutionalisation of Islamic equity screening
Shari’ah Corporate Governance Structure
Centralised Shari’ah Governance Model
• Unique feature of Islamic financial markets
• Financial market authority:
– sets Shari’ah standards
– relies on fatwas issued by qualified Islamic scholars
• Ensures uniformity and consistency in Shari’ah rulings
Market-Based Governance Model
• Individual financial institutions:
– have their own Shari’ah supervisory boards
– issue institution-specific fatwas
• Financial authority:
– monitors compliance
– ensures adherence to broader Shari’ah standards
Key Takeaway (Exam-Friendly)
Shari’ah stock screening is a structured process involving business and financial screening, in-depth analysis, and final Shari’ah approval to ensure that only halal and ethically compliant companies are investable in the Islamic capital market.
Step 1a: Financial Data Standardisation
• Financial statements of companies are first standardised
• Ensures consistency and comparability of data across firms
• Aligns accounting figures for accurate Shari’ah assessment
• Necessary before applying financial ratio screening
Step 1b: Business Classification
• Companies are classified based on core business activities
• Identifies the sector and nature of operations
• Used to quickly exclude companies involved in clearly prohibited (haram) activities
Examples of prohibited activities:
• Conventional banking and interest-based finance
• Alcohol, gambling, pork-related products
• Pornography, weapons, tobacco
Step 2a: Screening for Financial Compliance
• Companies passing business classification are screened using financial ratios
• Objective is to limit involvement with riba (interest) and non-permissible income
• Common checks include:
– Interest-bearing debt ratios
– Interest income ratios
– Liquidity ratios
• Ensures financial structure does not heavily rely on prohibited elements
Step 2b: Screening for Business Activity Compliance
• Evaluates whether business activities are Shari’ah-permissible in substance
• Even if main business is halal, ancillary income sources are examined
• Thresholds may allow minimal non-compliant income within acceptable limits
Step 3: Further In-depth Business Activity Analysis (IDBAA) or Manual Screening
• Conducted when companies fall into grey areas
• Involves:
– deeper qualitative review
– company disclosures
– revenue segmentation
• Manual screening ensures borderline cases are not wrongly included or excluded
Step 4: Final Decision
• Shari’ah supervisory authority or board issues a final ruling
• Company is classified as:
– Shari’ah-compliant (investable), or
– Non-compliant (excluded)
• Approved companies are included in:
– Islamic indices
– Islamic mutual funds
– Islamic ETFs
Screening Methodology in Islamic Finance
Purpose of Shari’ah Stock Screening
• Ensures investments comply fully with Shari’ah law
• Prevents involvement in:
– riba (interest)
– maisir (gambling)
– gharar (excessive uncertainty)
• Builds confidence among Islamic investors
Why Screening Is Required
• Islamic capital market transactions must not conflict with Shari’ah principles
• Conventional markets do not apply religious filters
• Islamic markets require formal detection and certification of halal companies
Historical Development
• Formal Shari’ah stock screening began in 1996
• Introduced by Dow Jones USA
• Led to the creation of the Dow Jones Islamic Global Market Index
• This marked the institutionalisation of Islamic equity screening
Shari’ah Corporate Governance Structure
Centralised Shari’ah Governance Model
• Unique feature of Islamic financial markets
• Financial market authority:
– sets Shari’ah standards
– relies on fatwas issued by qualified Islamic scholars
• Ensures uniformity and consistency in Shari’ah rulings
Market-Based Governance Model
• Individual financial institutions:
– have their own Shari’ah supervisory boards
– issue institution-specific fatwas
• Financial authority:
– monitors compliance
– ensures adherence to broader Shari’ah standards
Key Takeaway (Exam-Friendly)
Shari’ah stock screening is a structured process involving business and financial screening, in-depth analysis, and final Shari’ah approval to ensure that only halal and ethically compliant companies are investable in the Islamic capital market.
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KembaraXtra-Islamic Finance-Islamic Capital Market- Stock Screening
• Shari’ah stock screening involves filtering and examining data from a listed company’s latest published annual report
• The purpose is to assess whether a company is Shari’ah-compliant and investable
Objectives of Shari’ah Stock Screening
• To harmonise Shari’ah screening standards with global expectations
• To encourage capital inflows, especially from:
– Asian investors
– Middle Eastern investors
• To increase confidence and participation in the Islamic capital market
Global Adoption of Screening Methodology
• The screening methodology follows practices used by global Shari’ah index providers, such as:
– Dow Jones Islamic Market Index
– FTSE Global Islamic Index
– MSCI Shari’ah Index
• This alignment supports international consistency and credibility
Core Components of the Screening Methodology
The current Shari’ah stock screening methodology consists of two main tests:
1. Quantitative Test
• Examines measurable and numerical factors
• Focuses on:
– the company’s core business activities
– the company’s financial ratios
• Ensures the business is not primarily involved in non-permissible activities
• Uses approved benchmarks to assess compliance
2. Qualitative Test
• Assesses non-numerical and judgment-based factors
• Includes evaluation of:
– the company’s public image
– market perception
– ethical concerns not captured by financial data
• Relies heavily on expert judgement
Requirement for Shari’ah-Investability
• For a company to be classified as Shari’ah-investable:
– it must pass both the quantitative test and the qualitative test
• Failure in either test results in exclusion from the Shari’ah-compliant list
Filtering Procedures in Practice
• The screening methodology applies multiple tiers of filtering
• Aim is to develop a final list of Shari’ah-investable stocks
Order of Filtering
- Quantitative Filtering
• Applied first
• Based on:
– core business activities
– financial ratios
• Uses pre-approved Shari’ah benchmarks - Qualitative Filtering
• Applied after quantitative screening
• Largely dependent on:
– opinions
– fatwas
– assessments of the Shari’ah Supervisory Board (SSB)
Role of the Shari’ah Supervisory Board (SSB)
• The SSB provides authoritative opinions on:
– borderline cases
– ethical concerns
– reputational issues
• Their judgement is crucial in the qualitative screening stage
Key Exam Takeaway
Shari’ah stock screening is a structured process involving quantitative and qualitative tests, applied through multiple filtering tiers, to ensure that only ethically and financially compliant companies are classified as Shari’ah-investable.
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KembaraXtra–Islamic Finance–Islamic Capital Market – Shari’ah Stock Screening (Business Activities & Filtering Methodology)
Qualitative and Quantitative Tests
• Shari’ah stock screening applies two compulsory tests: quantitative and qualitative
• A company is Shari’ah-investable only if it passes both tests
• Failing either test leads to exclusion from Shari’ah-compliant investment lists
Filtering Methodology in Practice
• The methodology uses several tiers of filtering to form a list of Shari’ah-investable stocks
• Filtering is conducted in a specific sequence:
– quantitative screening first
– qualitative screening next
Quantitative Filtering Procedure
• Conducted at the initial stage of screening
• Follows approved Shari’ah benchmarks
• Examines:
– the company’s core business pursuit
– the company’s financial ratios
• Ensures that prohibited elements are not dominant in business or financial structure
Qualitative Filtering Procedure
• Conducted after quantitative screening
• Focuses on non-numerical factors
• Depends largely on:
– judgement
– opinions
– fatwas of the Shari’ah Supervisory Board (SSB)
• Especially important for borderline or grey-area cases
3.4–3 Screening Business Activities
Classification of Business Activities
• Shari’ah screening classifies business activities into three main categories:
- Allowable under Shari’ah
- Not permissible under Shari’ah
- Mixed activities
1. Business Activities Allowable under Shari’ah
• Include businesses providing lawful needs, goods, and services, such as:
– food
– education
– garments
– furniture
– healthcare
• Companies must comply with Islamic financial rules
• Operations must be free from haram practices, including:
– interest (riba)
– gambling and games of chance (maisir)
– excessive risk and speculation (gharar)
– any other prohibited commercial elements
2. Business Activities Not Permissible under Shari’ah
• Include companies involved in:
– conventional banking and insurance
– gambling
– liquor and liquor-related activities
– pork and pork-related businesses
– non-halal food and beverages
– Shari’ah-non-compliant entertainment
– tobacco and tobacco-related businesses
• Such businesses are automatically excluded from Shari’ah-compliant investment
3. Mixed Business Activities
• Involve a combination of allowable and non-permissible activities
• Straightforward to classify purely halal or haram businesses
• Main challenge in Shari’ah screening lies in assessing mixed-activity companies
• Requires deeper analysis and SSB judgement to determine Shari’ah-investability
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KembaraXtra-Islamic Finance–Islamic Capital Market – Qualitative and Quantitative Screening Criteria & Comparison of Shari’ah Screening Methodology
Screening Criteria (Shari’ah Screening)
• Shari’ah screening methods are approved by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
• AAOIFI is a standard-setting body in:
– accounting
– auditing
– governance
– Shari’ah standards
for Islamic financial institutions
• Shari’ah screening methods provide formal procedures to:
– examine listed companies
– identify non-compliance with Shari’ah principles
• The screening criteria are designed to eliminate companies that:
– engage in non-Shari’ah-compliant business activities
– rely on prohibited financial practices
• Companies are excluded if their:
– financing norms
– financial structures
do not meet the lowest acceptable Shari’ah thresholds
• The objective is to ensure that:
– prohibited elements are not dominant
– only minimally acceptable levels (as per Shari’ah standards) are tolerated
Types of Shari’ah Screening (AAOIFI Perspective)
• According to AAOIFI, Shari’ah screening consists of two main types:
– Business sector screening
– Financial ratio screening (quantitative screening)
Comparison of Shari’ah Screening Methodology
S&P Dow Jones Methodology
• Stocks or securities are first screened by:
– sector-wise (industry activity) screening
• This is followed by:
– stock-based financial ratio screening
• Ensures that both:
– the nature of business
– the financial structure
comply with Shari’ah requirements
FTSE Methodology
• Screening begins with:
– industry activity screening
• Followed by:
– financial ratio screening
• Emphasises sequential filtering:
– business permissibility first
– financial compliance second
Summary Comparison (Note Form)
• S&P Dow Jones
– Sector-wise screening first
– Then stock-level financial ratio screening
• FTSE
– Industry activity screening first
– Followed by financial ratio screening
• AAOIFI Framework
– Business sector screening
– Financial (quantitative) ratio screening
Key Exam Takeaway
Shari’ah screening criteria approved by AAOIFI eliminate companies that fail to meet minimum acceptable Shari’ah standards, while global index providers such as S&P Dow Jones and FTSE apply sector-based business screening followed by financial ratio screening to identify Shari’ah-compliant stocks.
Screening Criteria (Shari’ah Screening)
• Shari’ah screening methods are approved by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
• AAOIFI is a standard-setting body in:
– accounting
– auditing
– governance
– Shari’ah standards
for Islamic financial institutions
• Shari’ah screening methods provide formal procedures to:
– examine listed companies
– identify non-compliance with Shari’ah principles
• The screening criteria are designed to eliminate companies that:
– engage in non-Shari’ah-compliant business activities
– rely on prohibited financial practices
• Companies are excluded if their:
– financing norms
– financial structures
do not meet the lowest acceptable Shari’ah thresholds
• The objective is to ensure that:
– prohibited elements are not dominant
– only minimally acceptable levels (as per Shari’ah standards) are tolerated
Types of Shari’ah Screening (AAOIFI Perspective)
• According to AAOIFI, Shari’ah screening consists of two main types:
– Business sector screening
– Financial ratio screening (quantitative screening)
Comparison of Shari’ah Screening Methodology
S&P Dow Jones Methodology
• Stocks or securities are first screened by:
– sector-wise (industry activity) screening
• This is followed by:
– stock-based financial ratio screening
• Ensures that both:
– the nature of business
– the financial structure
comply with Shari’ah requirements
FTSE Methodology
• Screening begins with:
– industry activity screening
• Followed by:
– financial ratio screening
• Emphasises sequential filtering:
– business permissibility first
– financial compliance second
Summary Comparison (Note Form)
• S&P Dow Jones
– Sector-wise screening first
– Then stock-level financial ratio screening
• FTSE
– Industry activity screening first
– Followed by financial ratio screening
• AAOIFI Framework
– Business sector screening
– Financial (quantitative) ratio screening
Key Exam Takeaway
Shari’ah screening criteria approved by AAOIFI eliminate companies that fail to meet minimum acceptable Shari’ah standards, while global index providers such as S&P Dow Jones and FTSE apply sector-based business screening followed by financial ratio screening to identify Shari’ah-compliant stocks.
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KembaraXtra–Islamic Finance–Islamic Capital Market – Business Sector Screens
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Role of Shari’ah Screening Contributors
• Major Shari’ah screening contributors include:
– FTSE Global Islamic Index
– Dow Jones Global Islamic Market Index
– S&P Shari’ah Index
• These contributors apply both qualitative and quantitative screening to assess Shari’ah compliance
Quantitative Aspect of Business Sector Screening
• Examines the proportion of revenue and profit before tax derived from:
– Shari’ah non-compliant business activities
• Purpose is to ensure that income from prohibited activities is kept within acceptable limits
• A company must ensure that at least 95% of its gross revenue comes from Shari’ah-permissible businesses
Qualitative Aspect of Business Sector Screening
• Focuses on public sensitivity and corporate image
• Assesses business activities from the perspective of Islamic teachings
• Evaluates whether the nature of the company’s operations aligns with ethical and moral values in Islam
Business Activities Not Allowable under Shari’ah (Qualitative Screen)
• Alcohol, tobacco, and pork-related products
• Companies linked to interest (riba)
• Non-halal leisure activities, including:
– non-halal hotels
– cinema and movie theatres
– gambling
– music-related activities
– pornography
• Weapons, arms, and ammunition
• Traditional financial services, such as:
– conventional insurance
– interest-based banking
• Biotechnology companies involved in:
– human genetic engineering
– animal genetic engineering
Additional Exclusions by Some Shari’ah Scholars
• Certain printing and media sector firms may be excluded, such as:
– magazines promoting nudity (e.g. Playboy magazine)
– nude photographs
• Newspapers are generally excluded from this prohibition
Underlying Reason for Qualitative Exclusions
• Islamic teachings instruct humans to:
– participate in good and ethical activities
– work towards virtue and moral conduct
• Many products and services listed above are explicitly prohibited (haram) in Islam
• Hence, companies involved in these sectors are eliminated through qualitative screening
Key Exam Takeaway
Business sector screening in the Islamic capital market evaluates both the nature of business activities and the proportion of revenue from non-compliant sources, ensuring that companies operate ethically and derive at least 95% of their income from Shari’ah-permissible activities.
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KembaraXtra–Islamic Finance–Islamic Capital Market – Financial Ratio (Quantitative) Shari’ah Screening
Purpose of Quantitative Shari’ah Screening
- Ensures that companies eligible for Islamic investment meet minimum Shari’ah financial standards.
- Aims to limit exposure to:
- Interest-based financing (riba)
- Excessive leverage (debt)
- Non-compliant income
- Excessive receivables that may create gharar (uncertainty)
- Complements business sector (qualitative) screening to give holistic Shari’ah compliance.
Key Screening Frameworks Used Globally
Two major global Shari’ah index providers apply quantitative screening with different technical approaches:
1. S&P Dow Jones Shari’ah Screening
2. FTSE Shari’ah Screening
Although both follow the same Shari’ah principles, they differ in measurement methods, benchmarks, and ratios used.
A. Sector / Business Activity Screening (Quantitative Thresholds)
S&P Dow Jones – Sector Screens
- Income from the following tainted (non-compliant) sources must not exceed 5% of total revenue:
- Alcohol
- Tobacco
- Pork-related products
- Traditional financial services (interest-based banking, insurance)
- Weapons, arms, and ammunition
- Unlawful entertainment (hotels, casinos, cinemas, pornography)
FTSE – Business-Related Screening
- The following business activities are considered Shari’ah non-compliant:
- Traditional finance
- Alcohol and alcohol-related activities
- Pork-related products, food production, packaging, processing, or any pork-related activity
- Unlawful entertainment (e.g. casinos, gambling, haram hotel businesses)
- Tobacco
- Weapons, arms, and defence manufacturing
📌 Key idea:
Both S&P Dow Jones and FTSE allow only minimal tolerance (≤5%) for income from non-compliant sources.
B. Accounting-Based / Financial Ratio Screening
S&P Dow Jones – Accounting-Based Screens
The following ratios must each be less than 33%, calculated using 24-month average market capitalisation:
- Total debt ÷ 24-month average market capitalisation
- (Cash + interest-bearing securities) ÷ 24-month average market capitalisation
- Accounts receivable ÷ 24-month average market capitalisation
👉 Focuses on market value–based measurements, making the screening sensitive to stock price movements.
FTSE – Financial Ratio Screening
A company is considered Shari’ah-compliant if it satisfies all of the following:
- Debt
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KembaraXtra–Islamic Finance–Islamic Capital Market – Islamic Assets Under Management
-Meaning of fund management in Islamic finance:
-When a group of investors pool resources to collectively purchase stocks or other assets,the activity requires professional management
-This activity is known as fund management
-A professional fund manager is appointed to manage investments on behalf of investors
-Why collective investment is used:
-Individual investors may lack sufficient capital or expertise to invest independently
-Collective investment enables access to diversified portfolios and professional decision-making
-Institutions providing fund management:
-Both commercial banks and investment banks offer fund management services
-In practice,investment banks dominate this service more than commercial banks
-Because Islamic finance is asset-based,fund management suits Islamic financial institutions (IFIs) better than traditional lending
-Global presence of Islamic funds (2018):
-Approximately 323 Islamic funds offered Shari’ah-compliant products
-Funds operated across Saudi Arabia,Bahrain,Kuwait,Qatar,Pakistan,Malaysia,Singapore,Germany,the US,the UK,and Ireland
-Funds covered low-risk/moderate-return,balanced,and high-risk/high-return categories
-Most were equity and mutual funds,with some in real estate,hybrid funds,and Takaful
Modes of Managing Islamic Funds
-Mudarabah basis:
-The fund manager acts as mudarib
-The manager earns a share of realised profits based on a pre-agreed ratio
-No fixed salary is guaranteed
-Agency (Wakalah) basis:
-The fund manager acts as an agent
-The manager receives a fixed fee or a percentage of the fund’s Net Asset Value (NAV)
Classification of Islamic Investment Funds by Usage
-Equity funds:
-Invest in shares of Shari’ah-compliant joint-stock companies
-Returns earned through capital gains and halal dividends
-Distributed to investors on a pro rata basis
-Ijarah funds:
-Used to purchase assets for leasing
-Lease income is shared among fund subscribers
-Ijarah Sukuk can be traded in the secondary market
-New buyers assume all rights and obligations of the seller
-Commodity funds:
-Used to purchase commodities for resale
-Profits from resale are distributed among investors
-Murabahah funds:
-Closed-ended funds
-Not tradable in the secondary market
-Reason:Islamic banks do not hold sufficient tangible assets in Murabahah structures
-Mixed funds:
-Invest in a combination of equities,commodities,and leasing assets
-Trading allowed only if 51% or more of assets are tangible
Role of Shari’ah-Compliant Products
-Serve purposes of equity and debt securitisation
-Also used in Shari’ah-compliant derivative-like structures
-Banking,brokering,investment,and Shari’ah advisory services follow Islamic principles
Equity Financing in Islamic Finance
-Equity financing is central to Islamic finance
-Achieved through Uqud Al-Isytirak (partnership contracts)
-Includes:
-Mudarabah – profit-sharing
-Musharaka – profit and loss sharing
Debt Financing in Islamic Finance
-Conventional interest-based debt is prohibited
-Islamic debt financing must be linked to real assets
-Achieved through Uqud Al-Mu’awadat (exchange contracts)
-Common Islamic debt instruments include:
-Murabahah – cost-plus sale
-Ijarah – leasing
-Bai‘ al-Salam – advance purchase
-Istisna – purchase order/manufacturing contract
-Types of Ijarah recognised under Shari’ah:
-Operating lease
-Finance lease
Key Takeaway
-Islamic assets under management emphasise asset-backed financing,ethical investment,risk-sharing,and professional fund management,forming a core pillar of the Islamic capital market
-Meaning of fund management in Islamic finance:
-When a group of investors pool resources to collectively purchase stocks or other assets,the activity requires professional management
-This activity is known as fund management
-A professional fund manager is appointed to manage investments on behalf of investors
-Why collective investment is used:
-Individual investors may lack sufficient capital or expertise to invest independently
-Collective investment enables access to diversified portfolios and professional decision-making
-Institutions providing fund management:
-Both commercial banks and investment banks offer fund management services
-In practice,investment banks dominate this service more than commercial banks
-Because Islamic finance is asset-based,fund management suits Islamic financial institutions (IFIs) better than traditional lending
-Global presence of Islamic funds (2018):
-Approximately 323 Islamic funds offered Shari’ah-compliant products
-Funds operated across Saudi Arabia,Bahrain,Kuwait,Qatar,Pakistan,Malaysia,Singapore,Germany,the US,the UK,and Ireland
-Funds covered low-risk/moderate-return,balanced,and high-risk/high-return categories
-Most were equity and mutual funds,with some in real estate,hybrid funds,and Takaful
Modes of Managing Islamic Funds
-Mudarabah basis:
-The fund manager acts as mudarib
-The manager earns a share of realised profits based on a pre-agreed ratio
-No fixed salary is guaranteed
-Agency (Wakalah) basis:
-The fund manager acts as an agent
-The manager receives a fixed fee or a percentage of the fund’s Net Asset Value (NAV)
Classification of Islamic Investment Funds by Usage
-Equity funds:
-Invest in shares of Shari’ah-compliant joint-stock companies
-Returns earned through capital gains and halal dividends
-Distributed to investors on a pro rata basis
-Ijarah funds:
-Used to purchase assets for leasing
-Lease income is shared among fund subscribers
-Ijarah Sukuk can be traded in the secondary market
-New buyers assume all rights and obligations of the seller
-Commodity funds:
-Used to purchase commodities for resale
-Profits from resale are distributed among investors
-Murabahah funds:
-Closed-ended funds
-Not tradable in the secondary market
-Reason:Islamic banks do not hold sufficient tangible assets in Murabahah structures
-Mixed funds:
-Invest in a combination of equities,commodities,and leasing assets
-Trading allowed only if 51% or more of assets are tangible
Role of Shari’ah-Compliant Products
-Serve purposes of equity and debt securitisation
-Also used in Shari’ah-compliant derivative-like structures
-Banking,brokering,investment,and Shari’ah advisory services follow Islamic principles
Equity Financing in Islamic Finance
-Equity financing is central to Islamic finance
-Achieved through Uqud Al-Isytirak (partnership contracts)
-Includes:
-Mudarabah – profit-sharing
-Musharaka – profit and loss sharing
Debt Financing in Islamic Finance
-Conventional interest-based debt is prohibited
-Islamic debt financing must be linked to real assets
-Achieved through Uqud Al-Mu’awadat (exchange contracts)
-Common Islamic debt instruments include:
-Murabahah – cost-plus sale
-Ijarah – leasing
-Bai‘ al-Salam – advance purchase
-Istisna – purchase order/manufacturing contract
-Types of Ijarah recognised under Shari’ah:
-Operating lease
-Finance lease
Key Takeaway
-Islamic assets under management emphasise asset-backed financing,ethical investment,risk-sharing,and professional fund management,forming a core pillar of the Islamic capital market
- Published on
KembaraXtra–Islamic Finance–Islamic Capital Market – Equity Funds
-Equity funds are a major category of Islamic investment funds that focus on investing in shares of Shari’ah-compliant joint-stock companies
-These funds pool money from multiple investors and invest collectively in approved equities
-All investments must pass Shari’ah screening,including business activity screening and financial ratio screening
-Nature of investment:
-Equity funds invest directly in ownership instruments rather than debt
-Investors become indirect owners of companies through the fund
-Returns depend on the performance of underlying companies,not guaranteed income
-Sources of return:
-Returns are generated through capital gains,when share prices increase
-Halal dividends,if distributed by the company and purified if required
-Profits are distributed to investors on a pro rata basis according to units held
-Risk profile:
-Equity funds generally carry higher risk compared to Sukuk or money market funds
-However,they offer higher long-term return potential
-Risk arises from market volatility,business performance,and economic conditions
-Shari’ah compliance features:
-Exclude companies involved in prohibited activities such as alcohol,gambling,interest-based finance,and non-halal products
-Limit exposure to interest-based debt and income through financial ratio screening
-Any incidental non-compliant income must undergo purification
-Management structure:
-Equity funds are managed either on a Mudarabah basis (profit-sharing) or Wakalah basis (fee-based agency)
-Fund managers make investment decisions under Shari’ah supervisory oversight
-Liquidity:
-Units of Islamic equity funds are generally redeemable at NAV
-Provides higher liquidity compared to direct ownership of individual shares
-However,liquidity is typically lower than conventional equity funds due to market depth
-Role in Islamic finance:
-Equity funds promote risk-sharing,a core Islamic finance principle
-Encourage investment in real economic activities
-Support long-term capital formation and ethical wealth creation
-Key takeaway:
-Islamic equity funds offer investors a Shari’ah-compliant pathway to participate in stock markets while adhering to ethical standards and risk-sharing principles
