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 screening 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.
Purpose Most of the major Islamic countries’ stock exchanges have not been able to perform at the same pace with the major emerging countries’ stock exchanges since the mid of 1990s. The purpose of this paper is to examine the implications of stock market liberalization on cost of capital as one of the crucial driver to stock market development and physical investment growth in emerging Islamic countries. Design/methodology/approach This study employs static panel data techniques on the sample of seven emerging Islamic countries over the years 1989-2008. Findings The findings of this study suggest that stock market liberalization significantly reduces cost of capital in the stock markets of sample Islamic countries, which carries policy-oriented implications. Reduction in the cost of capital increases the number of exchange-traded companies, profitability of projects and aggregate investment level; therefore, the study findings are highly concerned by the economic policymakers, corporations and investors alike. Research limitations/implications In the literature, different proxies are employed to measure stock market liberalization and cost of capital as well. Due to data limitations, this study could not employ different proxies for both, especially for stock market liberalization, for robustness purpose. That limitation further restricted the coverage of Islamic stock markets and time period. Therefore, generalization of the study results for overall Islamic stock markets can be slightly drawn. Originality/value The paper provides further understanding regarding the effects of SML on cost of capital, thereby indirectly on the stock market development, in the context of EIC.
It is more or less agreed that even though the rising trend has occurred in the stock markets of emerging countries during 1990s, those in the emerging Islamic countries (EIC), with the common characteristics of small size, less liquidity, less efficiency, high cost of capital and volatility, have not been able to perform at the same pace. The proponents of stock market liberalization (SML) prescribes liberalization as a full-fledged solution to the problems of the EIC, whereas the limited number of studies illustrate mixed results. Against this backdrop, this study makes the initial attempt to examine the effects of SML on the development of stock markets in the EIC. Relying on panel data techniques on a sample of 7 EIC over the years 1989 to 2008, the results tend to demonstrate that SML significantly increases stock market size and liquidity, hence contributing to the development of stock markets in the EIC. With these results, the study produces policy implications suggesting that SML has been beneficial to the stock markets and further liberalization policies should be implemented to deepen and broaden the stock markets in the EIC.
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