Presents a revolutionary positive approach to Islamic screening for investments presented at the 2nd Oxford Islamic Finance roundtable held at Oxford on the 15th of April, 2009.

1. A Universal Platform for Shari'a Compliant Equity Screening 15 April 2009 Dr. Mohd. DaudBakar and Dr. Sayd Farook Second Oxford Islamic Finance Round-Table The Frontiers of Islamic Finance Innovation 1

3. Key current credible index providers: MSCI, DJIMI, S&P and FTSE Shari'a Global Equity Index Series

4. All seek to address timeless Shari'a issues

6. Interest received by company on interest bearing bank deposits or investments

7. Interest paid by company on interest bearing debt

9. Most allow 5% of revenue from Interest income which again has to be purified

10. Interest paid is mostly screened through tracking the level of debt relative to Total Assets or Market Cap – 33.33% is used by most screens

12. 33.33% based on 1/3 being considered as “abundant” in the hadith reported by al-Tirmidhi

14. Market capitalisation represents the market value of the company as valued on the stock market

15. Significant split amongst index providers re using Total Assets or Market Capitalisation

16. Can produce significantly different results e.g. intellectual property based companies such as pharmaceutical or IT software companies may have low asset values but high market capitalisation

18. Market trend is moving towards socially responsible investment

19. AAOIFI will be mandating CSR governance standard for IFI's from January 2010

21. In particular addressing the following issues:

22. Moving from a binary system to a rating system

23. Greater transparency of screening

24. Moving from negative to positive screening

25. Re-evaluating financial ratios used for relevance andlongevity despite fluctuations in the stock market

27. Instead of a binary (in or out) system, each criteria will be given a rating allowing stakeholders to gauge how close or far companies are from the threshold for each criteria

28. This will facilitate comparison across companies and industries and motivate companies close to the threshold to change

29. Introduce a SR criteria in tune with Islamic ethos and CSR standards

30. Differentiates between clear haraam/halaal and “grey/difference of opinion” areas by assigning commensurate weightings

32. Activity: Will seek to differentiate between clear haraam and “difference of opinion” acivities

33. Structure: Will seek to address Shari'a issue of company incurring interest on debt.

34. Tradability: Will seek to address issue of cash/liquid assets/debt (due from & due to) not to be traded except at par – only relevant for those not wishing to hold the stock

36. HI – Halal income e.g. textiles

37. UA – Haram income (Universally Agreed) e.g. tobacco

38. DO – Haram income (Difference of opinion) e.g. arms manufacturing

39. IS – Haram income (Indirect Secondary activity) e.g. hotel

40. Relief given to DO activities by the Shari'a board assigning a “relief” factor against this income based on the fact that it is a “grey area”.

41. Indirect secondary activities refer to an actvity which in essence is halale.g supermarket but will incidentally sell haram products e.g alcohol, pork etc.

44. Current screens on debt seem to amalgamate this issue with the shari'a issue of not trading debt except at par

45. DI/OIF seeks to clearly separate the two issues by having two separate criteria

46. DI/OIF proposal is to have a traffic light weighting based on a commonly used corporate ratio and measure – the gearing ratio = interest bearing debt/equity

48. debt/equity > 1 (red = unacceptable)

49. debt/equity < 0.5 (green = acceptable)

51. DI/OIF effectively breaks down a company's market value into 3 chunks:

52. 1. Illiquid Net Assets eg. fixed assets, stock, LT Inv

53. 2. Liquid Net Assets eg. cash/loans, debtors/creditors

54. 3. Intangible Net Assets eg. Brand, goodwill

55. Proposed ratio : Illiquid Net Assets/Market Cap

56. Illiquid assets used instead of liquid assets because with liquid assets the argument can always be made that any fluctuation in share price, as long as the share price is above the value of liquid assets, is due to the fluctuation in illiquid and intangible assets

58. 20% < Illiquid assets/market cap < 35% not acceptable but close to threshold

59. Illiquid assets/market cap = 35% threshold for acceptability

60. 35% < Illiquid assets/market cap < 50% acceptable but close to threshold

62. 3 areas where SRI can help equity screening & selection

63. Islamic investors should take into account social issues such as use of child labour and pollution

64. Positive screening by investors by placing greater preference to company's actively involved in positive SRI initiatives

65. Where fund managers/investors actively engage with company's to encourage SRI initiatives

67. 1. Munkar activities – socially irresponsible activities a company is involved in

68. 2. Ma'roof activities – activities where the company is making a positive contribution to society/environment

69. 3. Influential Persons – persons that have influence over the running of the company are linked to munkar activities

70. 3 step process:

71. 1. Rate Munkar activities – with overall SR rating for such activities

72. 2. This rating can then be enhanced if the company is assessed to partake in Ma'roof activities

74. 1. Proactive company making positive contribution to the world

75. 2. Avoids harming society or environment by having strong policies

76. 3. Company is silent on issue and is considered neutral

77. 4. Company is socially irresponsible towards society and environment

80. All 4 criteria will have their individual ratings

81. For each rating, additional disclosures can be given eg as well as a green level of debt, the actual gearing ratio can be given

82. Index providers or fund managers can augment these criteria to the acceptance levels prescribed by their own respective shari'a boards

83. Cumulative Weighted Rating Guidance

84. The 4 ratings for each respective category can be amalgamated into one cumulative weighted rating

85. Each criteria (activity, structure, tradability and social responsibility) can be weighted based on Shari'a board or index provider preference