Abdulrhman Edrees

200921310
Islamic finance
Second assignment

As an expert in Islamic funds management, explain the criteria for the

selection of Islamic stocks for investing to an Islamic fund manager.

Introduction

First of all, an explanation of the Islamic investment policy would be helpful for
the subject. Islamic investments are a unique form of investments, in addition of
the "normal" goal of maximizing profit for the shareholders, an Islamic fund
must be complained with the sharia rules. Islamic investment are a unique form
of socially responsible investment, were in Islam, there is no division between the
spiritual and the secular. The Sharia Board, a group of Islamic scholars (jurists) that
vests investment products for compliance with Islamic Law and conducts ongoing due
diligence of them, is the start of the Islamic investment policy.(1)

Main argument

The discussion is about explaining the criteria for the selection of Islamic stocks
for investing to an Islamic fund manager. Basically the criteria is the sharia
overall principles of money/finance/investment. The first criteria is that the stock
is not related to any of the (haram) businesses, the following businesses are
generally excluded: alcohol, tobacco, pork products, weapons, defense, and
entertainment (an example is the DOW jones Islamic fund, which dont contain
stock that deals with these products)"2". Second, conventional financial services
(banking, insurance, etc.) "riba" and any interest bearing investment is prohibited in
islam. Third and more important is that the validity of the stock in terms of
Shariah, will always be subject to this basic condition: instead of a fixed return tied up
with their face value, they must carry a pro-rated profit actually earned by the Fund.
Therefore, neither the principal nor a rate of profit (tied up with the principal) can be

guaranteed"3". Even though it is not bonds or interest bearing instrument, some funds
deals with stock but they guarantee the profit for the investors. The investor must
enter the invested in a sharing bases. Sharing of profits & loss. The fourth criteria is
that even if the stock is not dealing with prohibited product, and even if the
profit and losses are shared, "gharar" or uncertainty in investment is also
prohibited. Making an investment in a vague environment is a misleading kind
of risk"4". When a stock is bought base on a future uncertain condition in a
volatile environment, this is considered an excessive risk. The fifth criteria
Prohibition of speculation unlike conventional investors Muslims cannot base their
investment decisions on short-term speculation. They cannot enter the market as
speculators but only as investors. Last but not least, derivatives. Option is
purchasing the right to buy or sell a stock or a commodity at a future date for a fixed
price (regardless of the then prevailing price in the market). Exercising this option
means buying at the price set in the past. Not exercising the option results in the
investor paying the option fee. A great majority of scholars are of the opinion that
Futures trading is not permitted in Islam"5". Finally, short selling. Short selling
sometimes it may seems as gambling. The definition is the sale of a security that is
not owned by the seller, or that the seller has borrowed. Short selling is motivated by
the belief that a security's price will decline, enabling it to be bought back at a lower
price to make a profit"6".

Conclusion

A screening pattern may be helpful in determining the shariah compliance of stocks.

Performing quantitative, qualitative and trading practice screening should be a good
tool to better compliance with the criteria. Quantitative screening for interest related
income. Qualitative for business screening. Trading screening for trading practices
such as short selling. The question of criteria will be an ongoing debate due to the
never ending evolving nature of stock and financial instrument. Scholars will always
research and discuss the cases, environment and bases of the stock to result if it is in
compliance with the shariah.

1
http://www.investopedia.com/ask/answers/07/islamic_investments.asp
2
http://en.wikipedia.org/wiki/Dow_Jones_Islamic_Fund
3
http://www.albalagh.net/Islamic_economics/finance.shtml
4
http://fatwa.islamweb.net/fatwa/index.php?page=showfatwa&Option=FatwaId&Id=1
22852
5
http://www.milligazette.com/Archives/2005/01-15July05-PrintEdition/011507200530b.htm
6
http://www.investopedia.com/terms/s/shortselling.asp