Introduction to shariah screening
According to a Pew Research Centre study published in April 2017 (Lipka & Hackett, 2017), there were approximately 1.8 billion Muslims worldwide as at 2015. With regard to recent growth, Islam is the second largest religion in terms of total size and is often reported to be the fastest-growing religion in terms of its annual percentage growth. With this tremendous population growth follows the potential for more firms to adopt practices that adhere to Islamic shariah principles to satisfy this growing market. This is especially the case considering the fact that as more first-time Muslim customers become informed about their choices, they are likely to prefer banking with Islamic banks in addition to maintaining their accounts with conventional banks. This adherence is strictly maintained in some countries, while in others, Muslims still prefer having accounts in Islamic as well as conventional banks (Iqbal et al., 2018).
A key tenet of the Islamic faith is that Islam provides a perfect and all-encompassing guideline and law for all aspects and areas of life. This takes the form of shariah law, or Islamic jurisprudence, believed to be divine law revealed by Allah through His messengers and the Holy Book. The last prophet, Mohammad (peace be upon him), was an active businessman. The current day-trading-based banking or profit-and-loss sharing principles in the Islamic world come from the Prophet’s practices from some 1,400 years ago. Consequently, national economic authorities around the world, preferentially in Islamic jurisdictions, have established laws and requirements for companies to conduct business activities in accordance with and in harmony with Islamic law. These guidelines on business activities are well documented, whether codified in national legislation or in other forms, such as interpretations of scripture by shariah courts.
Under shariah law, Islamic businesses are forbidden from obtaining financing from banks that deal with interest (riba), invest despite excessive uncertainty (gharar), gamble (maysir), or engage in other non-shariah compliant activities. Understandably, this will influence the decisions of more religiously concerned Muslim customers to prefer shariah-compliant businesses as opposed to conventional businesses, as the former would be less likely to have intentions that would actively violate shariah law through their banking choices. Although guidelines on Islamic business activity are well documented, as with any theology and religious law, the interpretation and implementation of shariah law differs across different governments and jurisdictions around the world. In order to achieve sustainable growth in Islamic finance, it is necessary to obtain a clear understanding of the differences in shariah rulings across these jurisdictions. Shariah rulings must be integrated, standardized, and harmonized on an international basis to achieve sustainable growth. The subsequent parts of this chapter will illustrate several similarities and differences between shariah rulings across various jurisdictions.
The start of the Islamic finance standard
“The truthful and honest merchant is associated with the Prophets, the upright and the martyrs.” This mention by the Prophet (peace be upon him) of the ‘truthful and honest merchant’ in the seventh century, encouraging honesty and kindness when dealing with customers, is the earliest known form of Islamic finance (Haron et al., 2013). However, during its early conception and operation Islamic finance did not perform smoothly, as it met with many challenges at a time when other, mostly Western, countries had colonized Islamic countries. The revival of Islamic finance started sometime between the 1940s and 1950s when Islamic countries began pushing for independence and gaining international recognition. Even so, the establishment of modern Islamic banking, which started in Malaysia during the 1940s, is remembered as being unsuccessful, with a follow-up attempt in the form of the Myt Ghamir bank in Egypt being unfortunately also short-lived. Elsewhere, other oil-rich Islamic Middle Eastern countries started Islamic financial exercises to serve their growing Muslim populations.
Table 1.1 Comparison of qualitative screening criteria for shariah-compliant companies
| Business activities | Index |
| DJIM | S&P | SAC | FTSE | MSCI | AAOIFI |
| Alcohol | P | P | P | P | P | P |
| Advertisement and media | P | P | A | A | A | – |
| Cloning | P | – | – | – | – | – |
| Conventional financial services | P | P | P | P | P | P |
| Gambling and gaming | P | P | P | P | P | P |
| Pork-related products | P | P | P | P | P | P |
| Adult entertainment (pornography) | P | P | P | P | P | P |
| Tobacco | P | P | P | P | P | P |
| Public image | – | – | I | – | – | – |
| Maslaha (public interest) | – | – | I | – | – | – |
| Weapons and arms | P | P | P | P | A | P |
| Hotels | P | A | A | P | P | – |
| Trading of gold and silver as cash on deferred basis | – | P | – | – | – | – |
| Stem cell research | – | – | – | – | – | P |
Islamic finance gained momentum from 1999 onwards when Dow Jones attempted to create the world’s first Islamic index in Bahrain. This was quickly followed up by other equity providers such as the Shariah Advisory Council (SAC) from Malaysia. From this point onwards, Islamic finance experienced rapid growth and has since been acknowledged as a competitive alternative investment to its counterparts offered by conventional finance institutions. While the supply side – Islamic banking – has been experiencing tremendou...
