A Study on the Differentiation of Shariah Screening Criteria for Stocks

Abstract

Partnership is one of the basic contract forms of Islamic law. The most important financial instrument based on partnership in Islamic finance is stocks. Although stocks are shariah-compliant instruments, investment in stocks was not allowed for a while due to problems arising from modern practice. In this respect, there has been a change in the views on stocks with the acceptance that not all transactions in the stock market are illegitimate and that the joint stock company complies with the Islamic partnership law. With this change, it was discussed which companies to invest in. In this context, investments in companies whose main activity is illegitimate are prohibited, while shariah-compliant companies are allowed. However, due to the scarcity of the second type of companies, investments in mixed companies were permitted. In these sense, thresholds were determined within the scope of Shariah screening activities. When the Shariah screening methodologies are examined, it is seen that there are many different threshold values.These thresholds vary depending on the screening item, shariah board, countries and the scope of the indices. However, the most significant factor in this regard is the threshold determination method. This study aims to reveal the determinant role of methodological differences on the change of thresholds by focusing on three methods.