Shari'ah Screening Methodology : New Shari'ah Compliant Approach

Ramazan Yildirim, Bilal Ilhan
2018 Journal of Islamic Economics Banking and Finance  
Purpose -The purpose of this paper is to address to a long-standing criticism of the various Shari'ah screening methodologies implemented by Islamic index providers. This study aims to provide evidences derived from the Islamic sources (Qur'an & Sunnah) and offers a potential solution for the harmonization of Shari'ah screening methodologies. Design/methodology/approach -A literature review of the criticisms is presented along with a new approach to discussing the rationale behind financial
more » ... ening criteria. All criticisms centering on current Shari'ah screening methodologies can be reduced to two points, namely, the financial ratio, and the threshold criteria. The approach proposed here discusses the rationale for Shari'ah compliance classification (the judgment per se), followed by a discussion addressing the important criticism related to the quantitative screen 'leverage ratio'. Findings -Strong evidences from the Qur'an reveal that the most righteous and fair judgment is provided when the only factors that are considered are the entirely endogenous factors. This study further emphasizes the importance of using a screening methodology that supports the main notions of Islamic finance as a whole, and adheres to the essence of the ayah (Al-Baqarah: 275) Research limitations/implications -This is 'preliminary' research and analysis that holds considerable possibility of further deepening, validation and substantiation. Practical implications -This study exhibits a potential towards the harmonization of Shari'ah screening methodologies which encourages the participation of Muslim investors by ensuring better awareness and confidence regarding stock investments. Originality/value -This paper fulfils an identified need to study how Shari'ah screening methodologies can be derived from the Islamic sources yet is based on "out-of-the-box" thinking.
doi:10.12816/0051173 fatcat:blpwuhla2rdbldezz3ivsqed7y