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Islamic Equity Market PDF
Islamic Equity Market PDF
=
=
) (
) (
0 0 0
1
1
where:
n : the number of stocks in the index
pi0 : the closing price of stock (i) at the base date (31/12/1998)
qi0 : the number of free float shares of stock (i) at the base date (31/12/1998)
pit : the price of stock (i) at time (t)
qit : the number of free float shares of stock (i) at time (t)
Ct : the adjustment factor for the base date market capitalization
t : the time the index is computed
Mt : free float market capitalization of the index at time (t)
Bt : adjusted base date market capitalization of the index at time (t)
X : cross rate: domestic currency in USD of company (i) at time (t) {applies only to companies that are not traded in USD}
USD
it
The continuity in index values is maintained by adjusting the divisor for all changes in
the constituents share capital after the base date. This includes additions and
deletions to the index, rights issues, share buybacks and issuances, and spin-offs.
77
HYPOTHETICAL STOCK INDEX DATA
Quarter-End
0 1 2 3 4
Price per Share
A* 5 2.5 3.5 2.1 2.5
B 5 5 6 6.5 7
C 5 5 5.5 6 5.7
D 5 5 8 10 9.5
E 5 5 8 10 9.5
Shares Outstanding
A* 1,000 2,000 2,000 4,000 4,000
B 1,000 1,000 1,000 1,000 1,000
C 1,000 1,000 1,000 1,000 1,000
D 200 200 200 200 200
E 200 200 200 200 200
Market Capitalization RM
A* 5,000 5,000 7,000 8,400 10,000
B 5,000 5,000 6,000 6,500 7,000
C 5,000 5,000 5,500 6,000 5,700
D 1,000 1,000 1,600 2,000 1,900
E 1,000 1,000 1,600 2,000 1,900
Total sample 17,000 17,000 21,700 24,900 26,500
All other stocks 13,000 14,000 20,000 23,000 25,000
Total all stocks 30,000 31,000 41,700 47,900 51,500
Dividend Distributions
Total A-E NA 170 185 210 240
All other stocks NA 70 90 110 125
Total all stocks NA 240 275 320 365
* Two for one split at end of quarters 1 and 3
78
Market Value Weighted
Index = Aggregate Market Value of Component Stocks on date t
Base AMV at date 0
= P
1
Q
1
P
0
Q
0
Where P
1
Q
1
= Current AMV
P
0
Q
0
= Base AMV
Date Market Value Weighted Index Calculation
0 RM17,000/17,000 = 100
1 RM17,000/17,000 = 100
2 RM21,700/17,000 = 127.65
3 RM24,900/17,000 = 146.47
4 RM26,500/17,000 = 155.88
79
79
Index Computation Method: Free-
Float Weighting
Free Float Weighting Full Market Capitalization weighting
1. Trade investments in an index constituent.
2. Significant long-term holdings by founders, their families, and/or
directors.
3. Employee Share Ownership Plans
4. Government holdings.
5. Portfolio investments subject to a lock-in clause, for the duration of that
clause.
80
80
Index Computation Method: Free-Float
Weighting
Non Free-float (%) = ______________restricted factors_________________
Total number of shares outstanding excl. treasury shares
Free-Float (%) = 100% - Non Free-float (%)
Example Issuer A Issuer B
Total shares listed 100 130
Treasury shares - 30
Shares outstanding net of T/S 100 100
Restricted factors (non free-float) 15 27
Free-Float holding 85 73
Free-Float % 85% 73%
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Index Computation Method: Free-Float
Weighting
Amount of Free-Float % Free-Float
s 15% Not eligible
> 15% - s 20% 20%
> 20% - s 30% 30%
> 30% - s 40% 40%
> 40% - s 50% 50%
> 50% - s 75% 75%
> 75% 100%
Issuer Current
weighting
Free-
float
Free-Float
weighting
A 2.5% 100% 2.5%
B 0.5% 75% 0.375%
82
Issues in Shariah Filters
Impact of Liquidity ratio filter on Islamic
banks and Islamic financial institutions
will they be included in the list of Shariah
compliant companies
Global Indices favors firms from USA,
Europe and advanced countries what
about companies in the Muslim world
Negative screen only- provides a list of
non-Shariah compliant activities
83
Weightage of DJIM:
(Source: Siddiqui, 2007)
84
What about positive screen? Concern for the
environment, corporate governance, contribution to the
economic development of Muslim countries /
communities, etc, see for e.g., DJ Dharma Index
(Buddhist index)
Source: Siddiqui, 2007
85
Limitations on assets diversification.
Higher fee (monitoring costs).
Early warning signal.
Absence of uniform prudential regulation.
Restrictions of some hedging techniques
Advantages of Shariah Index:
Shariah compliance.
Competitive performance.
86
DJIM vs DJWI Sectors (31/12/07)
(Source: Siddiqui, 2007)
87
87
Performance of Shariah Indices
Atta (2000) DJIMI outperformed the unscreened index
during bull period (96-99).
Hussain (2004) FTSE GIIS performed at least as good as
FTSE All-World Index.
Bull market: FTSE GIIS performed better.
Bear market: FTSE GIIS performed lower.
Hakim & Rashidian (2004) investors Islamic index are not
worse-off (DJIMI is in line with other indexes).
DJIMI outperforms unscreened index.
DJIMI outperformed by non-Islamic ethical index.
88
88
Performance Shariah Indices
Better performance during Bull period probably due to the
Non-Shariah characteristics of Islamic index:
Small caps, technology, growth stocks.
Low interest income productive use of cash surplus.
Low receivables efficient working capital management.
General expectation:
screened index will performed poorly than unscreened index.
89
Preference Shares (saham Preferen)
Malaysian Companies Act 1965 has
defined preference share as a share that
does not give a right to the shareholders to
vote at its general meeting or any right to
participate in any distribution of the
company that has stated the amount,
whether through dividends, redemption,
dissolution or otherwise
90
Preference Shares (saham Preferen)
The characteristics of a preference shares
are as follows:
Predetermined or fixed rate of dividend very
much similar to bond
Has higher priority of claims over ordinary
shareholders in dividend payment and assets if
business is liquidated. However stands below
creditors or debt holders in claim of assets if
business is liquidated
No voting rights unlike ordinary shareholders
91
Types of Preference Shares
Cumulative preference shares
Dividend payment is fixed and predetermined
In the event that the company fails to pay
dividend in one year, that dividend will be
accumulated and paid in the following year
Non-cumulative preference shares
Dividend payment is fixed and predetermined
In the event that the company fails to pay
dividend in one year, that dividend will not be
accumulated and therefore not paid in the
following year
92
Preference Shares (cont.)
OIC Fiqh academy ruled that (both types
of ) preference shares are not permissible
However the Shariah Advisory Council of
Malaysian Securities Commission ruled
that non-cumulative preference shares are
permissible based on tanazul where the
right to profit of the ordinary shareholder is
given willingly to a preference shareholder.
93
Convertible Stocks/Bonds
Preference shares or bonds that will be
converted into ordinary shares after a
predetermined period
Value of future conversion is uncertain although
the conversion ratio, i.e., the number of ordinary
shares that will be given upon conversion, is
fixed
No formal fatwa given although most Shariah
scholars are concerned about element of gharar
94
Shareholder Rewards
Cash dividends
No objections from Shariah
Bonus issue or stock dividend
Shares in lieu of cash
No objections from Shariah
Rights issues
Current shareholders given special right to
purchase new shares at below market price
Acceptable to Shariah
95
Shareholder benefits or perks
Rewards given to shareholder in kind rather
than cash, for e.g., free food or food coupon,
hotel stays etc
Acceptable to Shariah
Wallahuwaalam
Thank You
azmiomar@iiu.edu.my