Islamic Finance comes out ahead

Dow Jones's Islamic financials index, in contrast, rose 4.75 per cent

Following the global financial crisis, the Sydney Morning Herald (SMH) published a very interesting article titled 'Islamic finance rides the storm'. I quote: "Sharemarkets in London and New York are a third off their peaks. Dow Jones's Islamic financials index, in contrast, rose 4.75 per cent in the most recent September quarter..".

So what is the Dow Jones Islamic Finance Index? Answer: 'The Dow Jones Islamic Market Indexes were introduced in 1999 as the first benchmarks to represent Islamic-compliant portfolios. Today the series encompasses more than 70 indexes and remains the most comprehensive family of Islamic market measures. The indexes are maintained based on a stringent and published methodology. An independent Shari`ah Supervisory Board counsels Dow Jones Indexes on matters related to the compliance of index-eligible companies.'

So I was quite interested to find out what were the criteria that allowed a company to be listed in this Index. The SMH article touched on it, but I looked into it and found the following:

1 - It excluded companies that represent the following lines of business: alcohol, tobacco, pork-related products, interest based financial services, defense/weapons, gambling and pornography. In other words, only companies that deal in wholesome business.

2- It excludes companies whose gross interest bearing debt to total assets exceeds the percentage permitted under Islamic Shariah (33%). In layman's terms: it limits the amount of debt (and therefore greed) that a company can get into. Therefore, it limits the risk exposure of the business.

3- It generally excludes companies that deal in unethical behaviours including internal corruption and others.

4- It generally excludes companies that hold monopolies. Islam forbids monopolies by outlawing the hoarding of wealth (Al-Ihtikar).

The ban on interest based finance companies is because Islam encourages partnership in dealings as opposed to interest based dealings. Basically, the criteria are based on Shariah fundamentals of business dealings.

There is already talk about restructuring the global finance system having been deemed - failed. So may be, there is an opportunity here to adopt some of the Islamic criteria for finance and business.