Screening Process In FTSE Shariah Compliance Listed Products Finance Essay

FTSE Group (FTSE) was established in the year 2002. It is a world-leader in the creation and management of over 120,000 equity, bond and alternative asset class indices. FTSEs offices are available in Beijing, London, Frankfurt, Hong Kong, Boston, Shanghai, Madrid, Paris, New York, San Francisco, Sydney and Tokyo, FTSE Group services clients in 77 countries worldwide.

FTSE is a self-regulating company jointly owned by The Financial Times and the London Stock Exchange. FTSE does not give financial advice to clients, just allows for the condition of accurately objective market information. FTSE indices are used extensively by a series of investors. For instance, the investors include consultants, asset owners, fund managers, investment banks, stock exchanges and brokers. The indices are used for investment analysis, performance measurement, asset allocation, portfolio hedging and creation of index tracking funds. Independent committees of senior fund managers, derivatives experts, actuaries and other experienced practitioners review and approve all changes to the indexes to make sure that they are made objectively and without bias.

FTSE operates the popular FTSE 100 Index and FTSE 250 Index as well as over 100,000 other indices, including 600 real-time indices. There are currently seven main groups of indices, which are Global Equity, Regional and Partner, Fixed Income, Real Estate, Alternative Investment, Responsible Investment, and Investment Strategy.

With an unmatched record of flexibility, transparency, accuracy, and the capability to meet any agreement, FTSE indices are previously the benchmark for global investors. FTSE indices are used broadly by investors world-wide for investment analysis, performance measurement, asset allocation, portfolio hedging and for creating a wide range of index tracking funds. FTSE calculates and manages the FTSE Shariah Global Equity Index Series in partnership with Yasaar

Research Incorporation, providing a set of Shariah compliant indices for Islamic investors internationally.

The FTSE Shariah Global Equity Index Series covers all regions across both developed and emerging markets, to create a wide-ranging Shariah indexing solution. FTSE Group has developed an innovative joint venture with Yasaar Research Incorporation, a subsidiary of Yasaar Limited, to create a range of Shariah compliant indices.

Yasaar Limited

Yassar Limited, a UK-incorporated company, is now pioneering an independent approach to Shariah compliance and co-ordination services. These services can be utilized on a private basis by any bona fide financial institution, regulatory authority, corporate entity, fund manager, legal firm, accounting & auditing partnership, rating, agency, and so on.

Yasaar Limited is an independent global Shariah (Islamic Law) consultancy that is not associated to any financial institution, enabling the condition of impartial, best practice Shariah solutions. Their Shariah principals are well-known experts in Fiqh al Maumalat (Shariah law relating to financial transactions) and are established on the Shariah Supervisory Boards of a number of major financial institutions.

As an Associate member of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Yasaar participates in developing accepted standards for Shariah compliance. With offices in Dubai, London, and representative offices in New York, Kuala Lumpur and Singapore, they recommend financial institutional clients Shariah compliance services, including reviews of financial product structures and advice on amendments to achieve Shariah compliance, initiation of Shariah compliant concepts for investment products, and development of screening software to make available Shariah compliant stock universes. Shariah

In response to the rising demand for Shariah compliant investment opportunities, FTSE has developed a better series of Shariah indices that use improved methodology and provide a broader Shariah index solution for Islamic investors. Shariah screening process is undertaken by Yasaar Research Incorporation with FTSE then calculating and distributing the indices. The new family of Shariah indices has been planned as the basis for trading and benchmarking of financial products, such as institutional and retail funds, exchange traded funds, derivatives contracts, and other financial products.

Shariah can be defined as Muslim or Islamic law, both civil and criminal justice as well as regulating individual conduct both personal and moral. The custom-based body of law based on the Quran and the religion of Islam. Muslim states are theocracies, religious texts are law; the latter distinguished by Islam and Muslims in their application, as Shariah or Shariah law. According to Hamilton Alexander Rosskeen Gibb, Shariah means a discussion on the duties of Muslims. Hunt Janin and Andre Kahlmeyer, both of them define Shariah as a long, diverse, complicated intellectual tradition," rather than a "well-defined set of specific rules and regulations that can be easily applied to life situations. Another definition of Shariah is a shared opinion of the [Islamic] community, based on a literature that is extensive, but not necessarily coherent or authorized by any single body, by Knut S. Vikor.

Shariah is the "way" Muslim should live or the "path" they must follow. Shariah is derived from the sacred text of Islam (the Qur'an), and Traditions (Hadith) gathered from the life of the Islamic prophet, Muhammad. There are different interpretations in some areas of Shariah, depending on the school of thought (Madh'hab), and the particular scholars (Ulema) involved. Traditionally, Islamic jurisprudence (Fiqh) interprets and refines Shariah by extending its principles to address new questions. Islamic judges (Qadi) apply the law, however modern application varies from country to country. Shariah deals with many aspects of life, including crime, politics, economics, banking, business, contracts, family, sexuality, hygiene, and social issues.

Islamic law is now the most widely used religious law, and one of the three most common legal systems of the world alongside common law and civil law (Roman law). During the Islamic Golden Age, classical Islamic law may have influenced the development of common law, and also influenced the development of several civil law institutions. In commerce, it can determine business style and point out a desire to fulfill with 'halal' (Islamic permitted) and ethical investing.

2.0 SCREENING PROCESS 2.1 BACKGROUND OF SCREENING PROCESS

The Shariah screening from Yasaar will be reevaluated quarterly in March, June, September and December. The Shariah screening process make use of data as at the last day of February, May, August and November and implemented on the working day after the third Friday of March, June, September and December.

Stock screening is a process of determining whether a stock or security is Shariah compliant or not. It consists of a variety of Shariah principles that form the criteria which should be used to decide whether the stock or security is Shariah compliant or not.

The main objective of screening the stock is to ensure the stock or security that one purchases or invests in does not contain any forbidden elements that make it Shariah non-compliant. For Muslims, it is a severe sin to consume something that is unlawful or prohibited.

According to a hadith of the Holy Prophet (peace and blessings of Allah be upon him) as reported by Jabir (may Allah be pleased with him), the Messenger of Allah said: The flesh grown from unlawful provisions deserves to be thrown in the Hell fire (Ahmad). From the hadith, it is obvious that Muslims need to be very cautious not to consume or supply his family with food that originates from unlawful income. In fact it is not just food that we consume must be permitted, it is all that we consume in general sense should be pure and clean.

To ensure that we consume only what is permissible, we have to make certain that the income that we earn and resulting wealth that we generate and accumulate must have been done through lawful means. To help us make sure this, the Shariah had laid down the basic principles that should be followed in our business or commercial transactions.

The verse clearly states two basic criteria in selecting food for our consumption, namely, they should first be lawful and secondly they should be good. From the science of the Holy Quran, the order of the words in the verse implies that we should choose food that is lawful first. Among the lawful food we should then choose those that are good for us. There are two implications here: First, it implies that what is lawful must be good. However, what is good may not be lawful such as strong drinks. Secondly, determine what is good for someone may not be good for another. Hence, one should be selective in choosing among the lawful what is good for him.

While the first verse outlines the basic principles of Islamic transactions in general, the second provides the basis for stock screening. This does not mean that the basic principles of Islamic transactions do not apply in the stock screening process. In fact, the third principle of Islamic transactions which pertains to good or product to be transacted is further clarified by the second verse quoted above. In other words the stock cannot contain any prohibited elements whether by action or by contents. Stock screening therefore entails the scrutiny of the good or product of the company and the manner it is being produced, particularly in terms of financing.

By partnering with Yasaar Limited, an unbiased consultancy and leading authority on Shariah, with Shariah screening provided through their subsidiary Yasaar Research Incorporation, FTSE remain neutral and fully up to date with latest practices. The FTSE Shariah Global Equity Index Series has been fully certified as Shariah compliant through the subject of a Fatwa (Islamic legal opinion) by Yasaars principals.

As a contrast to other competitor methodologies, a more traditional approach to Shariah compliance is ensured by rating debt ratio limits that are considered as a percentage of total assets, rather than more unstable measures that use a 12 month trailing market capitalization approach. This ensures that companies do not pass the screening criteria due to market price

fluctuation, allowing the methodology to be less speculative and more in keeping with Shariah principles. Constituents are frequently evaluated by Yasaar Research Incorporation against strict Shariah principles, enabling FTSEs quarterly reviews to reflect the most up to date Shariah compliant status.

2.2 PRINCIPLE OF SCREENING PROCESS Shariah Principle The Shariah is the Arabic term for Islamic Canon Law, which is a system of policy that is resulting from the Quran and the Sunnah. According to the Islamic faith, money is not measured as an end in itself but is a means to higher values. If it is earned, invested and spent according to the guidelines set out by the Shariah, the individual, family and society as a whole will benefit. Faith-based Islamic financial management requires investments to comply with Shariah principles.

Shariah Investment Principle In Islamic Law, it promotes the use of money for lawful projects and the earning of income. On the other hand, Islamic Law prohibits the receipt or payment of interest (Riba), that means no traditional deposits, loan, bonds, and overdraft; non risk sharing, which all parties involved in a transaction must share rewards or risks equitably; speculative behavior or uncertain transaction; investment in prohibited activities such as alcohol, pork-related products, entertainment, tobacco, non-Islamic financial services and gambling.

Shariah Compliant Principle Shariah compliant investment vehicles take socially responsible investing (SRI) to a new stage, proving that conscious investing does not necessarily lower returns. Hedge funds can turn to specialty shops that specialize in weeding out investments that violate Islamic Law. Nonaccredited investors (investors with less than $1 million to invest) can also get permit by following Shariah indexes or mutual funds.

Investing Under Islamic Law Islamic law does not permit investors to derive benefits from interest paid on loans, the sale of pork, firearms, and other sin investments related to pornography, gambling, alcohol or tobacco. Institutions that engage in short selling and the use of leverage are also frowned upon since borrowing goes against one of the basic principles of Islamic law. Following these rules cancels out the possibility of investing in investment banking firms like Goldman Sachs (NYSE:GS), insurers like AIG (NYSE:AIG) and other financial service firms that use derivatives as a way to boost their profits.

Islamic Law Hedge Fund Advisor Shariah Capital, one of the world's best Islamic financial institutions according to Global Finance Magazine, is one resource hedge fund managers turn to when developing strategies to meet the Shariah compliance needs of their clients. Islamic law scholars and attorneys work with clients to find suitable investments and devise products that attempt to mirror strategies involving short selling and the use of leverage.

Shariah Indexes for Individual Investors Standard & Poor's (S&P) has compiled more than 20 Shariah indexes focusing on specific countries, such as Japan or emerging markets and broad categories like global infrastructure and global property. Individual investors can begin by focusing on two broad Shariah compliant equity indexes introduced by S&P earlier this year. The S&P CNX Nifty Shariah Index and the larger S&P CNX 500 Shariah Index are both in partnership with India's National Stock Exchange. Indian outsourcer Infosys (NASDAQ:INFY) is the most familiar stock among the top three holdings on each index. The other top holdings of each include, oil conglomerates, reliance industries and India's largest engineering company Larsen & Toubro (OTC: LTOUF).

Shariah Compliant Funds The Amana Trust Income Fund (AMANX) also helps investors take the guess work out of choosing Shariah compliant investments. The fund is almost completely void of financial service companies enabling it to outperform the Standard & Poor's 500 Index (S&P 500) by roughly 6% a year to date. The AMANX fund has a three and five year return of 11.72% and 15.78%

respectively. The funds top three holdings, include United States Steel (NYSE:X), energy company FPL Group (NYSE:FPL) and natural gas company EnCana Corporation (NYSE:ECA). The Iman K Fund (IMANX) is a much smaller Shariah compliant fund with a similar focus. Yasaar Research Incorporations Screening Principles Yasaars Shariah screening process has been designed to satisfy three core principles. These principles state that the screening process should be: Conservative A company must demonstrate Shariah compliance before it becomes part of the eligible universe, and if the data to establish Shariah compliance is unavailable, no assumptions regarding the Shariah status of a company will be made. In essence, all companies are noncompliant until proven otherwise. Consistent By using a strict, rules-based approach, the screening process is made objective and consistent across regions. The use of a comprehensive global database also ensures a consistent level of information is available on which to base this screening. Auditable The screening process is managed and supervised by Yasaars Shariah Board. The Shariah Board monitors, evaluates and audits the screening process at normal intervals. Shariah compliant elements are updated daily and audit trails of any changes to a companys Shariah status is existing to the Board for review.

AAOIFI Accreditation As a Supporting Member of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), FTSE is committed to contributing to the global development of Islamic Banking and Financial Services. FTSE and Yasaar Research Incorporations screening process is managed in accordance with written guidelines relating to the Shariah. These guidelines have been set by Yasaars Shariah Board who also monitor compliance. The Shariah guidelines can be grouped into two separate components business activity and financial ratios.

2.3 CRITERIA OF SCREENING PROCESS There are two main criteria in screening process, which are: Sector based screens Business activities related to the following are excluded, like 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. All these industries are not considered Islamic and would not be appropriate for investment for observant Muslims. During the selection process, each companys audited annual report is reviewed to ensure that the company is not involved in any non-Shariah compliant activities. Companies that are found to be non-compliant are screened out.

Accounting based screens Companies left after passing through sector based screen are examined for compliance in financial ratios. Three areas of focus are leverage, cash and the share of revenues derived from noncompliant activities. All of these are subject to evaluation on an ongoing basis.

Core Activities The core activities of the companies should not be Shariah incompatible. Therefore companies with following as their core business activities are excluded: Financial services based on riba (interest); gambling; manufacture or sale of non-halal products or related products; conventional insurance; entertainment activities that are non-permissible according to Shariah; manufacture or sale of tobacco-based products or related products; stock-broking or share trading in Shariah non-approved securities; and other activities deemed non-permissible according to Shariah.

3.0 FTSE PDODUCTS

Package Products FTSE product packages provide detailed component and index level data for hundreds of indices. The data products offer a collection of service options to meet all requirements. Structured on a file-by-file basis, investors can access the packages via a File Transfer Protocol (FTP) directly from FTSE or from one of FTSEs third party distributors. Files are available on a one-off, daily or monthly basis. Package options are outlined as below: Index Valuation This service provides index level data in a range of currencies for a wide service choice of indices within the FTSE Shariah Global Equity Index Series. Constituent Service This service provides index constituent data including market capitalisation, free-float factor and index weightings on a daily basis. Tracker Services This service highlights corporate actions, dividend activity and other constituency changes on a daily basis. Real-Time Data A variety of Real-Time indices are available to maintain tradable products. The indices are available straight from FTSE or via one of our vendors. Data Distribution A FTSE license is required to licenses: Allow investors to pass FTSE data to third parties or clients. Launch any product whose performance is linked to the value of a FTSE index. Use the FTSE name or name of the index in the marketing of the product. Licenses can be obtained directly from FTSE, and fees differ according to product type.

Shariah compliant Financial Products Shariah compliant finance is a vital element of life for the faithful. Nowadays, Shariah compliant financial products are available to both Muslims and non-Muslims around the world. Therefore, all consumers should have the chance to engage in these products without facing unnecessary regulatory barriers. As a result, regulatory framework, including taxation, of Shariah compliant products should apply equally regardless of the faith of provider or consumer.

State bank of Pakistan is presently regulating the Islamic banking Mechanism through different regulatory instruments of law which includes circulars and others. For that reason, arrangement of other laws is necessary for a good framework for the right interpretation of Shariah compliant products which ought to be based on the principle of concordare leges legibus est optims interpretandi modus to make laws agree with laws is the best mode of interpreting them. Moreover, the law should be so adjusted to include the nature of contract instead of the types of contract because of the fact that contractus regit actum, which is contract governs the act.

The most well-defined dissimilarity between Islamic financing and existing equivalent products is the prohibition of interest. This is based on the principle that it is undesirable in and of itself for same commodity, including money, to increase in value only by being lent to another person. Nevertheless, Shariah does not prohibit the making of a return on capital if the provider is willing to share in the risks of a productive enterprise.

Besides that, Shariah prohibits transactions that involve interest, gambling, speculation, unethical investment, contractual terms of a transaction involving uncertainty, deception, ambiguity or lack of clarity and give rise to speculation (Gharar). Hence, Islamic financial transactions are structured using contracts or mixture of contracts that fulfill the requirements of Shariah. Some of the most common Shariah compliant financial products are discussed as below: 1. Murabaha Basic price plus profit

A financial institution in Murabaha financing purchases the goods for the customer and re-sells them to the customer on a deferred basis, adding an agreed profit margin. The customer then pays the sale price for the goods either in installments or on lump sum basis at the end of the period. There are three sub products of this product Basic Murabaha, Commodity Murabaha and Reverse Murabaha.

2. Ijara Operating Lease This product is a renting product that can be used to lease a variety of assets including cars, fridges, televisions and property (both residential and commercial). The Shariah compliant product offering institution acquires title to the asset and gives on rent to the customer. At no time does title to the asset pass to the customer nor is it expected to pass. If the customer wishes to purchase the asset at a later date a separate agreement is drawn up. 3. Ijara wa Iqtina Finance Lease This product is the same as the Ijara described above except that title to the asset is expected to pass to the customer at some time, usually at the end of the contract period. It can be used to purchase both goods and property. 4. Diminishing Musharaka Shared Ownership This product involves the use of two written contracts, being Ijara agreement and a diminishing ownership agreement (Musharaka), where two or more parties share ownership of an asset. For instance, a customer wishes to purchase a property and pays a specific percentage as a deposit to the vendor of the property and then enters into a diminishing ownership agreement with the Shariah compliant financial product provider under which the Shariah compliant financial product provider pays the outstanding amount, taking title to the property by way of a sub-lease between the vendor and the Shariah Compliant financial product provider. The Shariah compliant financial product providers customer now have, say 10%, beneficial interest or share in the property, with the remainder being with the Shariah compliant financial product provider. The Shariah compliant financial product provider allows the customer to defer payment of 90% over a period of, say 25 years. It does not and cannot add any interest to the 90% and so under this contract the customer pays back the exact amount paid out by the Shariah Compliant financial product provider.

At the same time, customer who enters into the diminishing ownership agreement also enters into a lease agreement, whereby the Shariah compliant financial product provider agrees to lease its share of the house to the customer for a variable amount of rent. This lease agreement runs concurrent with the diminishing ownership agreement. The customer may also be expected to pay any outgoings related to the property as well as all administrative and legal costs, arrangements fees and stamp duty.

Both the amounts repaid under the diminishing ownership agreement and the amount paid under the lease agreement are amalgamated and used to calculate how much of the Shariah compliant financial product providers share of the property has been purchased per month by the customer. As the Shariah compliant financial product providers share in the property decreases so does the amount paid under the lease agreement.

At the end of 25 years and if all the conditions contained within the two contracts have been met, the Shariah compliant financial product provider will pass title to the property to customer under the diminishing ownership agreement, normally for an additional payment. Moreover, some Shariah compliant financial product provider also require the customer to sign a third agreement under which the customer provides some form of security against payment of the amounts due under the other two contracts, other Shariah compliant financial product providers may also require more than three agreements to be signed. 5. Wakala Agency This is an investment product, which functions in the same way as Mudaraba. The difference between the two is that with a Mudaraba all the profit is divided between the parties. Whilst with a Wakala the investor receives only the agreed ratio against investment. Anything made above that ratio is kept by the Shariah compliant financial product provider and not given to the investor.

Islamic Current Accounts These operate in the same way as the conventional current account except that there is no overdraft facility and no interest added by the Shariah compliant financial product provider to the account for funds in credit.

Economic Aspects toward FTSE Products Nowadays, government should seek to address an existing inequality in the tax treatment of Shariah compliant financial product and to promote fairness by contributing to the Governments financial exclusion and asset saving objectives. This healthy competition would seek, would commit in working together with financial services provider to achieve a reduction in the number of people who lack access to a Shariah Compliant financial product provider account of any kind. Many people, particularly those living on low incomes, cannot access mainstream financial products such as Shariah Compliant financial product provider accounts and loans.

At this time the Government is also looking for, through measures, to make available targeted support and incentives for saving. Evidence recommends that on average people have less access to an uptake of financial services. Part of the reason for this may be the lack of provision of Shariah compliant financial product.

Applying the tax law as it currently stands would leave in place a real inequality since the tax treatment would not always reflect the economic purpose of the transaction. Customers could suffer if providers have to charge proportionately more for their products than conventional Shariah Compliant financial product provider s, although some may be better off overall if in some circumstances they would pay less tax on the equivalent products from a conventional Shariah Compliant financial product provider.

There are close links between provides of Shariah compliant financial product and the investment market, for instance, Islamic funds investment in stock market and benchmarking of profit through KIBOR etc. Benchmarking of KIBOR as minimum profit rate is criticized from Pakistan Nationals around the globe, however, some writers have advocated in favor of this at various forums, however, might is not always right.

Government, in close consultation with Securities and Exchange Commission of Pakistan, should consider allowing NBFCs to offer Shariah compliant financial product within their sphere of activities in line with Islamic Banking offered by conventional banks. However, the modus operandi should be much more transparent by allowing them to open separate branches with fresh induction of either capital or issuance of TFCs correlated with the weighted average rate of return on products offered by such NBFCs on prospective products. This will improve the environment of healthier competition and serve as a deterrent of creation of cartel in Banking sector who are currently using the KIBOR as basic profit margin without keeping an eye over the fact that the consumer is ready to take any rate profit instead of a minimum guaranteed profit which is suspicious in the light of Shariah.

Moves towards removing possibly disadvantageous tax treatment for Shariah compliant financial product will extend product flexibility and consumer choice. They may also have the effect of encouraging investment in Shariah compliant financial products advertising themselves.

4.0 CONCLUSION In order to determine the compliance of stocks or securities particularly for Muslim investors, it is essential to ensure that appropriate Shariah screening process is undertaken by FTSE. FTSE has developed its criteria in stock screening which includes sector based screens and accounting based screens. One of the most significant characteristic in Shariah screening process is to make sure that all activities related to FTSE is Shariah compliance. Doing nothing would not address the potential unfairness and uncertainty outlined above and would not encourage the provisions of Shariah compliant financial product by the regulated market. There is a risk that if no action is taken, such products might develop in an unregulated market.

Issuance of descriptive circular and notifications could outline the problem in short term by improving the clearest irregularity at the same time as permanent solutions need to be developed in legislation. This allows more time to develop long-term solutions in what is still a fast developing area. However, this would provide only a temporary solution and could not address areas where current tax treatment might have conferred an advantage for one party on Shariah compliance financial product. It would not offer a structural solution capable of giving a clear framework for the future development of new products.

The velocity of market development suggests that a large number of financial institutions will be interested in developing a range of Shariah Compliant Financial products once greater clarity is brought to the question of tax treatment, and will benefit from enhanced flexibility in development and marketing.

Primarily, most of the Shariah compliant at this time in development be geared towards retail customers. However, Shariah compliant financial business products are already being developed and Banks have shown curiosity in intensifying into this area. Over time a significant proportion of the customer base for providers of Shariah Compliant financial products is likely to be small businesses who wish to comply as far as possible with the provisions of Shariah law. At present, they may face difficulties in reconciling this obligation with securing necessary financial access.

To summarize, the paper has shown that the screens commonly used to assess Shariah compliance of companies for the purpose of including them in the list of acceptable companies, need to be modified.

The nature of business of the companies which is considered acceptable has to be completely Shariah compliant. A company with multiple businesses with even a minor Shariah noncompliant business needs to be considered as unacceptable. In the same way, a company a subsidiary of which is in a non-complaint business should also be dubbed as unacceptable, irrespective of its own business activity.

A suggestion has been made that organizations undertaking screening on the basis of Shariah compliance standards should put in place a system requiring compliant companies in industries such as hotels, shipping, and others, which generally tend to fail on one of the criteria for compliance, to regularly report their results and activities to the screening organization for a fee so that investors could gain a wider choice and the reporting companies not get automatically excluded from the list of Shariah compliant companies communicated to potential investors. The use of market capitalization in the screening ratios is inappropriate and should be replaced by other relevant balance sheet items, notably total assets. The value of the ratio normally set for compliance regarding level of debt financing is liberal. It should be scaled down by at least 20%. Similarly, the minimum compliance level for interest income earned needs to be brought down from the normal 5% to 3%, i.e. by about 40%. An additional screen, not usually applied, should also be introduced to control the level of interest-based investments (assets) and it should be set at 10% of the total assets.

Regarding purging of interest income the method to be adopted should be to donate to charity the pro rata amount of interest income earned per share by the company during the period of holding of the share, irrespective of whether the company pays a dividend or not.

Most sets of screening standards include a screen for controlling the level of cash and receivables (or net receivables) on the rationale that these can only be traded at par. A higher proportion of these assets in the total assets, could direct to a violation of this Shariah requirement. It has been

shown in the paper that the entire reasoning is flawed. Such a ratio does not serve any purpose at all as the level of market price of a share is not due to a corresponding value for the companys cash hoard or receivables and payables. Hence such a ratio is not needed; indeed it is misleading and incorrect. In conclusion, Shariah screening process is necessary in Islamic capital market to ensure that Muslims investors can involve in the economic without abusing the Shariah principles.

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