Analysis of Shari’ah Based Equity Screenings: Developing a Shari’ah-Compliant Index for Qatar Stock Exchange

Although, any amount or portion of Haram is not permissible in Shari'ah, an exception has been addressed on the basis of the Shari'ah-established maxim of "necessities call for relaxation of prohibition" by the vast majority of Shari'ah scholars to allow investing in listed companies that engage in some non-permissible transactions to a certain tolerable extent, provided that the financial outcomes of these transactions are purified by giving the part that is not-permissible to charity. Identifying companies that Muslims can invest in is done by using specific Shari'ah screening criteria that measure the amount of return emanating from non-permissible activities conducted by the company. With the absence of unified religious opinions followed by all Muslims, Islamic indices have been created worldwide with each index having its own Shari'ah screening criteria. This thesis identifies the screening criteria used by seven Islamic indices, compare and contrast between their screening criteria and tries to examine whether it is time to have an Islamic index with no tolerance to non-permissible activities using Qatar as a case study. It is found that there exists a number of differences among Islamic indices and these differences have an impact on the Muslim investors level of investment freedom through its impact on the universe of Halal equity assets. It is also found that an Islamic index with zero tolerance to non-permissible activities may be constructed for Qatar Stock Exchange without losing much of freedom of choice in this market. Like al- Rayan index, the proposed index also consists of 18 companies. A comparison between the proposed zero-tolerance index and the already existing Al Rayan Islamic index shows that there are no differences in their behavior, which indicates that having companies that do some non-permissible activities and have non-permissible income in the "Islamic basket" is not necessary in Qatar. The thesis offers some recommendations that can further improve Shari'ah screening process and eliminate the inconsistency that exists currently between the different Islamic indices which will in turn enhance confidence in Islamic equity universe and market behavior of Islamic investor.