role & regulation of stock exchange in an islamic economy
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ROLE & REGULATION OF STOCK EXCHANGE IN AN ISLAMIC ECONOMY. 8th Distance Learning Course An Intermediate Course in Islamic Economics. Presenter: Mohammed Obaidullah, Economist, IRTI October 21, 2008. PLAN OF PRESENTATION. Part I: Common Stock in Islamic Finance - PowerPoint PPT PresentationTRANSCRIPT
ROLE & REGULATION OF STOCK EXCHANGE IN AN ISLAMIC
ECONOMY
Presenter: Mohammed Obaidullah, Economist, IRTI October 21, 2008
8th Distance Learning Course8th Distance Learning Course An Intermediate Course in Islamic
Economics
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
Part I: Common Stock in Islamic Finance
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Common Stock in Islamic Finance
• Common Stock and Mudaraba: Issue of Limited Liability
• Common Stock and Musharaka: Issue of Managerial Participation
• Common Stock and Sukuk
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
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.
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Common Stock in Islamic FinanceShariah Screens: Example: I (DJIM)
• Industry Type: Excluded are companies that represent the following lines of business: alcohol, tobacco, pork-related products, 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 market capitalization is 33% or more; Accounts receivables divided by 12-month average market capitalization is 33% or more.
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
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 Third is too much (Al Thuluth Katheer)".
• Critics of the one-third rule assert that it involves an out-of-context use of the above hadith
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
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 as cash on deferred basis
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Accounting-Based Screens•Debt / 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) <33%;•Non-Permissible Income other than Interest Income / Revenue < 5%•Dividend Purification Ratio: Dividends * (Non Permissible Revenue / Total Revenue)
Common Stock in Islamic FinanceShariah Screens: Example: II (S&P)
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Part II: Ethics & Efficiency in Islamic Stock Market
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
• Allocational Efficiency• Pricing Efficiency• Informational Efficiency• Operational Efficiency
Ethics & Efficiency in Islamic Stock Market
Forms of Efficiency
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
•Freedom from Coercion •Freedom from Misrepresentation •Right to Equal Information •Right to Equal Information Processing Power•Freedom from Impulse •Right to Trade at Efficient Prices •Right to Equal Bargaining Power
Ethics & Efficiency in Islamic Stock Market
Norms of Secular Ethics
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
• Freedom to Contract• Freedom from Al Riba
• Freedom from Al Gharar (Excessive Uncertainty)• Freedom from Al-Qimar (Gambling) and Al-
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
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
• 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)
• Underwriting Wholesale Purchase Followed by RetailBest Efforts UnderwritingRisk Transfer
Islamic Stock Market: Nature and Regulation of Primary
Market
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Islamic Stock Market: Nature and Regulation of Secondary
Market
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
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
Part III: Issues & Trends in Regulation
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
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; and 3.To reduce systemic risk These objectives are supported by the 30 core principles
“There is no need to formulate separate regulatory principles [as] IOSCO‟s objectives and principles of securities regulation can be applied to Islamic capital markets.”
Issues & Trends in Regulation
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
•Co-operation and information sharing between regulators • Accounting disclosures based on internationally acceptable standards (such as IFRS) in coordination with AAOIFI•Regulatory classification of Islamic securities products and their treatment in a fair, transparent and consistent manner•individual regulators to consider defining their position on Shariah compliance•Subject of PSIAs – an ideal area of further research in IF
IOSCO Recommendations
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
Other Standard Setting Bodies
Islamic Financial Services Board (IFSB) Covers banking, insurance and securities
regulationwide 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.
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008
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
Eighth Distance Learning Program on Intermediate Course in Islamic Economics, October 21, 2008