An Introduction to Islamic Finance: Theory and Practice

178 AN INTRODUCTION TO ISLAMIC FINANCE

Islamic Index Series (FTSE - GII). The market capitalization of the Glo-

bal DJIMI as of February 28, 2011 was estimated to be US$21.92

trillion, and the universe of Shari’ah - compliant stocks included 2,468

stocks (see http://www.djindexes.com/islamicmarket/). The number of

the stocks included is relatively low because the DJIMI includes only

those stocks that are open to an international investor who can repat-

riate the proceeds. As a result, several of the qualifi ed local stocks are

excluded. The screening process may also differ from index to index.

For example, whereas the DJIMI applies ratios derived from both the

income statements and the balance sheet, Malaysian indices use only

income-statement ratios to determine debt or liquidity levels.

Table 9.2 shows the screening process used to construct the Dow Jones
Islamic Index.
Figure 9.2 shows the trend of Islamic indices in different markets
since 2004.

TABLE 9.2 Dow Jones Islamic Index screening

1. Screens for Shari’ah - compatible businesses:

Based on revenue allocation, if any company has business activities in the Shari’ah -
inconsistent group or sub - group of industries, it is excluded from the Islamic
Index universe. The DJIMI Shari’ah Supervisory Board established that the
following broad categories of industries are inconsistent with the precepts of
the Shari’ah: alcohol, pork - related products, conventional fi nancial services
(banking, insurance, etc.), entertainment (hotels, casinos/gambling, cinema,
pornography, music, etc.), tobacco, and weapons and defense industries.

2. Financial ratios fi lter:

Stocks of companies passing the following fi lter for fi nancial ratios are included as
components of the Dow Jones Islamic Market Index.

2.1. Debt to Assets:

Exclude companies if Total Debt divided by Trailing 12 - Month Average Market
Capitalization is greater than or equal to 33 percent.(Note: Total Debt = Short -
Term Debt + Current Portion of Long - Term Debt + Long - Term Debt)

2.2. Liquid Assets to Total Assets:

Exclude companies if the sum of Cash and Interest Bearing Securities divided by
Trailing 12 - Month Average Market Capitalization is greater than or equal to
33 percent.

2.3. Receivables to Assets:

Exclude companies if Accounts Receivables divided by trailing 24 - month average
market capitalization is 33 percent or more.

Source: Syed (2005) and http://www.djindices.com/islamicmarkets