the role and regulation of stock exchange in an islamic economy how can islam help in reducing...

8/6/2019 The Role and Regulation of Stock Exchange in an Islamic Economy How Can Islam Help in Reducing Volatility in the Stock Market

1/21

ROLE & REGULATION OF STOCK EXCHANGE IN

AN ISLAMIC ECONOMY

Presenter: Mohammed Obaidullah, Economist, IRTI

October 21, 2008

8th Distance Learning Course8th Distance Learning CourseAn Intermediate Course in Islamic Economics


2/21

Part I: Common Stock in Islamic Finance

Part II: Ethics & Efficiency in Islamic Stock Market

Part III: Issues & Trends in Regulation

PLAN OF PRESENTATION

Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008


3/21

Part I: Common Stock in Islamic Finance



4/21

Common Stock in Islamic Finance

Common Stock and Mudaraba: Issue of LimitedLiability

Common Stock and Musharaka: Issue of

Managerial Participation

Common Stock and Sukuk



5/21

Conditions for Permissibility and

Negotiability The main business of the company is not in violation of

Shariah.

If the company invests/ lends/ deposits its surplus funds in

interest-bearing assets or borrows money on interest, it must

not be significant

If some income from interest-bearing accounts is included in

the income of the company, the proportion of such income in

the dividend must be given in charity.

Stocks of a company are negotiable only if the company owns

some non-liquid assets.



6/21

Common Stock in Islamic FinanceShariah Screens: Example: I (DJIM)

Industry Type: Excluded are companies that represent thefollowing lines of business: alcohol, tobacco, pork-relatedproducts, financial services, defense/weapons and

entertainment.

Financial Ratios: Excluded are companies whose: Total debt divided by trailing 12-month average market

capitalization is 33% or more; Cash plus interest-bearing

securities divided by trailing 12-month average marketcapitalization is 33% or more; Accounts receivables divided

by 12-month average market capitalization is 33% or more.



7/21

FINANCIAL SCREEN

Subject to continuous change in the light of new insights ; Not to

be taken as divine rules of Shariah compliance.Example: One-third rule:

The Prophet PBUH advised Abu Bakr RAA not to donate more

than One-Third of his wealth, and commented that "One Thirdis too much (Al Thuluth Katheer)".

Critics of the one-third rule assert that it involves an out-of-

context use of the above hadith



8/21

Common Stock in Islamic FinanceShariah Screens: Example: II (S&P)

Sector-Based Screens Business activities related to the following are

excluded: Pork; Alcohol; Gambling; Financials;Advertising and Media (newspapers are allowed,

sub-industries are analyzed individually);

Pornography; Tobacco; Trading of gold and silver ascash on deferred basis



9/21

Accounting-Based ScreensDebt / Market Value of Equity (12 Month average) < 33 %;Accounts Receivables / Market value of Equity (12 Month average)

< 49 %;

(Cash + Interest Bearing Securities) / Market value of Equity (12

Month average)


10/21

Part II: Ethics & Efficiency in Islamic Stock

Market



11/21

Allocational Efficiency

Pricing Efficiency

Informational Efficiency Operational Efficiency

Ethics & Efficiency in Islamic Stock MarketForms of Efficiency



12/21

Freedom from CoercionFreedom from MisrepresentationRight to Equal InformationRight to Equal Information Processing PowerFreedom from ImpulseRight to Trade at Efficient PricesRight to Equal Bargaining Power

Ethics & Efficiency in Islamic Stock Market

Norms of Secular Ethics



13/21

Freedom to Contract

Freedom fromAl Riba Freedom fromAl Gharar(Excessive Uncertainty) Freedom fromAl-Qimar(Gambling) andAl-Maysir

(Unearned Income)

Freedom from Price Control and Manipulation

Entitlement to Transact at Fair Prices

Entitlement to Equal, Adequate and Accurate

Information Freedom from Darar(Detriment) Mutual Cooperation and Solidarity

Maslahah Mursalah

(Unrestricted Public Interest)

Ethics & Efficiency in Islamic Stock Market

Norms of Islamic Finance



14/21

Merit Regulations Vs. Mandatory Disclosures Price Fixation Vs. Free Pricing

Role of Intermediaries in Offer and Sale Tender Method (Bai Muzayadah)

Genuine Bids Only (Prohibition of saum `ala saum akhihi)

UnderwritingWholesale Purchase Followed by Retail

Best Efforts Underwriting

Risk Transfer

Islamic Stock Market:

Nature and Regulation of Primary Market



15/21

Islamic Stock Market:

Nature and Regulation of Secondary Market


Speculation on Stock Markets:Co-operative or Zero-sum GamesThe Issue of Liquidity and Transaction Costs

Day TradingMargin Trading: Riba-based BorrowingStock Lending and Short SellingSettlement SystemInsider TradingTrading Halts

Allocational Vs. Operational Efficiency


16/21

Part III: Issues & Trends in Regulation



17/21

International organization of securities commissions (IOSCO)

Objectives And Principles of Securities Regulation For Islamic

Securities Products

1.To ensure that markets are fair, efficient and transparent;

2.To protect investors; and3.To reduce systemic risk

These objectives are supported by the 30 core principles

There is no need to formulate separate regulatory principles

[as] IOSCOs objectives and principles of securities regulation

can be applied to Islamic capital markets.

Issues & Trends in Regulation



18/21

Co-operation and information sharing between regulators

Accounting disclosures based on internationallyacceptable standards (such as IFRS) in coordination with

AAOIFI

Regulatory classification of Islamic securities productsand their treatment in a fair, transparent and consistent

manner

individual regulators to consider defining their position onShariah compliance

Subject of PSIAs an ideal area of further research in IF

IOSCO Recommendations



19/21

Other Standard Setting BodiesIslamic Financial Services Board (IFSB)

Covers banking, insurance and securities regulation

wide range of initiatives it has undertaken, for example

developing corporate governance standards for Islamic

collective investment schemes, and capital adequacy

requirements for Sukuk securitisations

Accounting and Auditing Organisation for Islamic

Financial Institutions (AAOIFI)Standards on accounting, auditing, ethics, Shariah and

governance.



20/21

Key Issues in Islamic Stock Market

Regulation

How to maintain a linkage between financial

and real sectors of the economy

How to balance between concerns about

allocational and operational efficiency



21/21

Thank You


the role and regulation of stock exchange in an islamic economy how can islam help in reducing...

Documents