Riyadh, Asharq Al-Awsat – The Enron Corporation was dropped from of the Dow Jones Islamic Market Index long before it declared bankruptcy in December 2001, and because of that, heads of Islamic investment funds and Muslim investors managed to escape the colossal losses caused by its now-infamous bankruptcy. In a situation like today’s financial crisis, we find Shariaa-compatible investment funds and Muslim investors are the least harmed owing to the strict Islamic-Shariaa investment criteria.
These criteria stipulate that a company’s debts should by no means exceed 33 percent of its market value as a precondition for investment, while other criteria are even stricter, for example attributing the debts to the assets and not the market value.
Comparing the Dow Jones or Standard & Poor’s (S&P) Shariaa-compatible market indexes to non-compatible ones, we notice that the scale tips in favor of the Shariaa-compatible ones, particularly during periods of financial crises as the latter limits the investors’ market losses. In the current international crisis, the Dow Jones Islamic Market Index (DJIM) recorded losses of 15.3 percent from the 1st January 2007 through 25th September 2008, while the Dow Jones World Index (DJWI) registered losses at 22.7 percent during the same period.
As for the S&P’s Global BMI Shariaa Index- which covers 52 markets all over the world- its shares declined by 23.4 percent on 30th September 2008 compared to 25.3 percent to its traditional Index. When Indian markets collapsed in April 2008, Shariaa shares were successful in maintaining the investors’ trust as it decreased by only 12 – 17 percent compared to 20 – 25 percent of the traditional indexes.
In terms of revenues, if we were to compare the performances of Shariaa-compatibles indexes to traditional ones, it is clear that that the Shariaa indexes have the edge. More specifically, if we were to look at the Shariaa S&P Indexes in last five years you will see that the US Shariaa-compatible S&P 500 Index achieved 10.43 percent compared to only 7.8 percent of the traditional index. Likewise, the Shariaa- compatible 350 index of giant European companies achieved 19.80 percent compared to 17.36 percent of the traditional ones. In Japan, the Shariaa-compatible 500 Index of giant companies achieved 10.43 percent compared to 10.34 percent of the traditional ones.
These figures indicate that the criteria utilized in Islamic finance are a successful tool that can lessen investment risks in financial markets.
They are also evidence of legitimacy and are a product of deeply rooted scientific foundations and solid grounds. Therefore, the Risk Control departments at financial institutes must make certain and insist on applying these criteria in order to protect their investments.
In closing, Shariaa institutes must not be lenient in applying these criteria, and should resists pressures from corporate executives to amend them based on the claim that they are open to interpretation.