Differences and similarities between major shariah indices
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Shariah Indices Screening Methodologies: Key Differences and Similarities
Major Shariah indices, such as those provided by Dow Jones, FTSE, S&P, MSCI, and national bodies like Malaysia’s Securities Commission, all use a two-tier screening process that combines qualitative and quantitative filters to determine which stocks are Shariah-compliant. The qualitative screening typically excludes companies involved in non-permissible activities (like alcohol, gambling, or interest-based finance), but the level of detail and strictness in defining these activities can vary between indices. Some indices are more specific in listing prohibited activities, while others use broader definitions, leading to slight differences in which companies are included or excluded 974.
Quantitative screening involves financial ratio thresholds, such as limits on debt, cash, and interest income. While all major indices use these financial screens, the exact ratios and tolerance levels differ. For example, the allowable percentage of non-compliant income or debt may be set at different levels by different index providers. These variations mean that a company might be considered Shariah-compliant by one index but not by another, depending on the thresholds used 974.
Performance Comparison: Returns and Risk Among Shariah Indices
Despite differences in screening methodologies, research consistently finds that the performance of major Shariah indices is very similar. Studies comparing indices in different countries (such as Malaysia’s FTSE Bursa Malaysia EMAS Shariah and Indonesia’s Sharia Stock Index) show no significant difference in risk-adjusted returns, as measured by Sharpe, Treynor, and Jensen ratios . Similarly, comparisons among global indices like DJIMI, FTSE GIIS, KLSESI, and JII reveal that the strictness of the screening process does not significantly affect index performance; indices with tighter or looser screening policies perform similarly .
Long-term studies of U.S. Shariah-compliant indices also show that their returns and risk characteristics are comparable to those of the broader market, even across different economic conditions . In India, the Nifty Shariah index and the conventional Nifty index have shown similar performance and volatility, with no significant difference in mean returns . In Bangladesh, the Shariah index even outperformed its conventional counterpart on a risk-adjusted basis, though the difference in simple mean returns was not significant .
Inter-Index Relationships and Global Influence
Research into the relationships between Shariah indices across countries finds some interdependence, especially in the long run. For example, the Dow Jones Islamic Market Index (DJIM) is found to have a significant influence on regional Shariah indices worldwide, including those in the Gulf, Asia Pacific, and BRIC countries . However, the relationships between specific national indices, such as those in India and Indonesia, can be more complex, with some indices acting as drivers and others as followers, but not always showing direct or short-term connections .
Toward Greater Standardization and Investor Confidence
While the core principles of Shariah screening are shared across major indices, the lack of uniformity in detailed screening criteria and financial thresholds can create confusion for investors and companies. There is ongoing debate about which indices are most faithful to Shariah principles and which may be too lenient. Calls for greater standardization and transparency in screening methodologies are common, as this would help build investor confidence and facilitate international investment in Shariah-compliant assets 479.
Conclusion
Major Shariah indices share a common two-tier screening approach, but differ in the specifics of their qualitative and quantitative criteria. Despite these methodological differences, their performance in terms of returns and risk is remarkably similar, both among themselves and compared to conventional indices. The global influence of leading indices like DJIM is significant, but relationships between national indices can vary. Ongoing efforts to harmonize screening standards could further strengthen the appeal and credibility of Shariah-compliant investing worldwide.
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