Shariah Investment Screening Criteria: A Critical Review

BinMahfouz, Saeed; Ahmed, Habib

Abstract

The primary objective of the study is to provide a comprehensive description about the contemporary Sharia investment screening process and its implication on the practices of managing mutual funds. This will be done by critically reviewing the application of such screening criteria, from both Sharia and practical perspectives, and providing some suggestions for improvement. In practice there appears to be inconsistencies in the Sharia investment screening criteria among Islamic investment institutions, as well as the changing of the Sharia rules over time. This certainly shakes the confidence on the Sharia screening criteria standards, which might adversely affect the Islamic mutual funds industry. In order to solve the inconsistency of the Sharia screening, higher Islamic Sharia authority should be established, at least at the national level, to set up the Sharia screening standards and guidelines for the industry. This will also avoid conflicts of interest arising from allowing Islamic mutual funds/indices to assign their own, individual Sharia board. Surprisingly, non-income generating aspects such as social and environmental concerns are not incorporated in the contemporary Islamic investment screening process. This seems to be rather paradoxical, since it contradicts the Sharia embedded ethical values of fairness, justice and equity. Moreover, external audits regarding the implementation of Sharia rules should be adopted to ensure the compliance of the investment with Sharia guidelines. Furthermore, it is desirable for Sharia boards to adopt corporate governance practice and take proactive roles, especially in Muslim countries, to influence companies to adopt socially responsible and Sharia compliant investment practices. Finally, tolerance levels of conventional finance activities of companies in Muslim countries should be reevaluated and lowered in the Islamic investment screening criteria. This is due to the popularity and wide availability of Islamic banking and alternative Sharia instruments to interest-based finance coupled with the fact that Muslim shareholders form the majority and hence, can vote to influence companies to adopt Sharia compliant financing modes.

Citation

BinMahfouz, S., & Ahmed, H. (2014). Shariah Investment Screening Criteria: A Critical Review

• Journal Article Type: Article
• Publication Date: Jan 1, 2014
• Deposit Date: Oct 16, 2013
• Journal: Majallat Jāmiʻat al-Malik ʻAbd al-ʻAzīz. al-Iqtiṣād al-Islāmī
• Print ISSN: 1658-4244
• Electronic ISSN: 7383-1018
• Peer Reviewed: Peer Reviewed
• Volume: 27
• Issue: 1
• Pages: 111-145
• Public URL: https://durham-repository.worktribe.com/output/1468167