These are some of the reservations that a Muslim investor needs to be observant of in the stock market and the adherence to such criteria is of utmost importance.
A recent report by Pakistan Stock Exchange as of June 30th, 2021, of KMI-30 and KMI – All Share Index to know the shariah compliant stocks , can be downloaded by clicking on the links below:
As a result of Islamization efforts, Islamic Index (KMI 30) provides a value system for a Muslim investor who wants to strike a balance between economic goals and religious beliefs. Financing is usually undertaken either through debt or equity. However, excessive debt has been the root cause for every financial crisis that has taken place in the last hundred years (Carmen M. Reinhart and Kenneth S. Rogoff 2010). Even the economic superpowers of the world faced substantial loss with over dependance on debt, such as the subprime mortgage crises (2007/2008) in USA. Hence, it is debt that makes the financial sector so vulnerable.
Furthermore, the empirical findings of Myers (1993), Fama and French (1998 and 2002), Shyam-Sunder and Myers (1999) argue that most profitable companies have the least borrowing, so there is a negative relationship between profitability and debt. Therefore, the Islamic index can exceed the conventional index as the debt ratio of all companies included in any Islamic Index is low. Hence, a group of Muslim investors, by choosing to invest in a Shariah compliant stock, overall creates synergy that has a positive impact on the economy and thereby removes the economy from the shackles of over reliance on debt.
In a study by Yazi et al. (2015), it was shown that when a stock is included in a list of Shariah Compliant Stocks it has a positive effect on its price and similarly when a stock is excluded from the list of shariah compliant stock it has a negative effect on its price. Hence it is hoped that when a Muslim investor chooses to abide by Shariah and invest in only shariah compliant stocks, these companies would be encouraged to abide by Shariah too and maintain their level of debt, liquidity, not have interest-based Investment and / or income in order to maintain their name in the list of Shariah complaint stocks.
Details of Islamic Capital Market taken from a webinar presented by: Mr Farhan ul Haq Usmani
Executive Vice President and Head of Shariah Audit
Written by: Sadaf Sawant
Panel Member Shariah Advisory
Usmani and Co.
Jamia Dar Ul Uloom, Karachi