What is Shariah Index?

What is Shariah Index?

A SHARIAH Index is an index of companies that are found to be compliant with the Islamic canonical law or the Shariah.

Most Shariah indices which have been created so far have been based on an existing or an underlying index, whose constituents have been screened for compliance by a board that is well-versed in the principles of the Quran.

How is the Screening Done?

The screening is done at 2 levels.

- Depending on the sector that the company operates in and

- a few of the operating ratios that the company works with, as evident in their annual reports.

- The amount of debt, cash and the proportion of revenue that is accrued from the non-compliant activities

The following industries are excluded in the index.

- Pork
- Alcohol
- Gambling
- Financials
- Tobacco
- Pornography
- trading of gold and silver
- advertising & media (excluding newspapers and few selected cases)

What are the underlying reasons to create such type of indices?

The Islamic law and Quran focuses on the need to avoid usury and risk. The Islamic law does not view money as an asset and hence does not favour the practice of being able to make money from money, a predominant example of which would be lending money and also charging interest on the same.

In fact, this practice is considered “Haram” under Islamic Law.

In fact, it is also has a strict view against the sale of products whose existence is not certain, like insurance which one would purchase based on a future eventuality which may or may not happen.

Do we have a Shariah Index in India?

Of course yes. The first 2 Shariah indices based on Indian Indian equity markets were launched in February 2008 by Standard & Poor’s. Titled the S&P CNX 5—Shariah and the S&P Nifty Shariah, they have been created after screening the underlying indices.

In fact, this has been followed by by the launch of many mutual funds as well as portfolio management services which are compliant with Shariah law.