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Shariah index shows increasing trends toward Islamic investment.

Byline: Mushtak Parker

LONDON: Another sign of the importance of Saudi financial institutions leading the Islamic financial sector out of the doom and gloom of the credit crunch and the current global financial turmoil, is the recent launch by Saudi investment bank, Falcom Financial Services, of the "largest Islamic equity index in the GCC (Gulf Cooperation Council) licensed by Tadawul (the Saudi stock exchange)."

The launch of the Falcom Shariah Index in the Saudi Securities Market (Tadawul), say the promoters, is in response to the "increasing trends toward Islamic investment." At end of December 2008, another Saudi bank, Saudi Hollandi Bank, successfully closed a SR775m Mudaraba Sukuk, as part of a planned SR1.5 billion Islamic notes issuance program.

This has given hope for a revival of the Sukuk market which has been affected in terms of market confidence because of the contagion effect of the credit crunch and its associated global financial crisis.

Falcom claims that its Shariah Index is unique in that it has a pre-market feature - the only index to have this. The feature allows investors to review the market position of their portfolios before the market opens.

"The pre-market opening mechanism serves to establish an orderly market open and greatly enhances market efficiency - a strategic tool needed to place your trades accurately," explains Falcom.

The index includes the requisite stock screening and filtering processes to ensure Shariah compliance.

These include screening the activities of companies to ensure Shariah compliance; and the financial ratios of the companies to ensure that they do not exceed the agreed leverage ceilings in terms of interest income, debt to market capitalization ratios and debt to assets ratios.

The latter are normally not more than 33 percent. The Falcom Shariah Index stock universe is also periodically reviewed for changes in the constituent free float and to ensure that companies whose financial ratios exceed the agreed ceilings are then removed from the universe. Falcom has its own independent Shariah board.

The promoters claim that this index is the first of its kind on the Tadawul, and comprises some 112 companies which in turn comprise nearly 78 percent of the Tadawul All-Share Index (TASI).

"The index," according to Falcom, "is calculated in real time and published in Saudi riyals. Overtime, Falcom expects its Shariah index to be used as the basis for Shariah-compliant ETFs (exchange-traded funds), OTS (over the counter products) and index-linked equity funds.

The Falcom Shariah Index have clear and transparent index rules and governance procedures that ensure the index is investible and straightforward to track."

The index guiding principles for companies' stocks include that all stocks are free-float adjusted; all stocks meet liquidity screens; all index changes are clearly communicated; and a company must be fully Shariah-compliant.

Falcom's Shariah Index is its first although the investment bank has a family of Shariah-compliant fund and investment products including the Falcom Sukuk Fund, which "offers investors the opportunity to invest with steady capital appreciation and relatively high degree of capital preservation of their investments. To achieve the fund's objectives, the fund manager invests in medium to long-term sukuk investments."

Falcom also has a Saudi Equity Fund, aimed at providing long-term capital appreciation and growth by investing in a fund weighted 90 percent in Saudi stocks; a Saudi Riyal Murabaha Fund and a Euro Murabaha Fund; an IPO Fund: and a Multi-Asset (mixed Portfolio) Fund.

Indexes are usually provided by major dedicated index companies such as Dow Jones Indexes, FTSE, Standard & Poor's, MSCI and Russell, or by individual banks which usually have a small number of indexes catering for their particular markets.

This compared to the Dow Jones and FTSE whose Shariah Index families, Dow Jones Islamic Market (DJIM) and the FTSE Shariah Indexes comprise over 95 indexex each.

More recently financial centers such as the Dubai International Financial Center (DIFC) and stock exchanges such as Kuwait Stock Exchange, Bursa Malaysia, Singapore Stock Exchange and now Tadawul have teemed up with either the major index providers or individual banks to launch bespoke Shariah indices.

However, the surfeit of Shariah indexes, the actual number of Islamic equity and other products such as ETFs, OTCs, Sukuk Funds and index-linked funds are relatively small. The reason is that there remains a mismatch between the sheer Shariah index offerings and the lack of product sophistication of investors and the markets at which these indexes are aimed.

The challenge for index providers is to educate the investment market and securities regulators about such products and what contribution they can make to the development of a particular capital market.

Copyright: Arab News 2009 All rights reserved.

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Publication:Arab News (Jeddah, Saudi Arabia)
Date:Jan 26, 2009
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