Letter of Transmittal

17th January, 2017

Md. Bokhtiar Hasan
Assistant Professor
Department of Finance and Banking
Islamic University, Kushtia.

Subject: Submission of the report.

Dear Sir,
We are submitting a structured and comprehensive report on Why does Shariah
Index fail to make attention of Muslim investor of Bangladesh? Despite many
constraints like scope and access to information, we have tried to create something
satisfactory. We have tried to follow your guidelines in every aspects of preparing
this report. We have concentrated on the most relevant and logical areas to make
our report coherent as practical. It was a great pleasure for us to work on such a
practical topic.

We shall be highly glad if you kindly receive this report and provide your valuable
judgment. It would really be our immense pleasure if you find this report useful
and informative.

Sincerely,

On behalf of the group:

Md. Shahbub Alam

Roll No: 1121044(Re-add)
Department of Finance and Banking
Islamic University, Kushtia.

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 ACKNOWLEDGEMENT

The successful completion of this report on Why does Shariah Index fail to make
attention of Muslim investor in Bangladesh? has been possible for many helping
hands.

At first, we would like to express our infinite gratuity towards almighty Allah and
our course teacher Md. Bokhtiar Hasan, Assistant Professor, Dept. of Finance &
Banking, Islamic University, Kushtia to provide extremely well arranged
guidelines to complete our report work.

We would like to express our heartiest appreciation to our all classmates, who have
been a constant support to us and have patiently helped us throughout our report.

We also thank to the individuals for providing us with necessary information when
we take interview of them for preparing the report.

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 Table of Contents

Sl. Page
Topic
No. no.
Chapter 1
Introduction
1.1 Objective of the Study 4
1.2 Data Collection Method 4
1.3 Literature Review 4
Chapter - 2
Shariah Index Overview

2.1 Meaning of Shariah Index 6

2.2 Reason for Shariah Index 6

2.3 History of Shariah Index in Bangladesh 6

2.4 Screening Procedure of Shariah Index 7

Chapter - 3
Results & Analysis
3.1 Result of the survey 9
3.2 Analysis of the Survey 11
Recommendation for overcoming the problems of the
3.3 13
Survey
3.4 Conclusion 14
Questionnaires for survey of the report 15
References 16

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 Chapter 1
Introduction

1.1 Objective of the Study

The key objectives of the studies are to identify the reasons why Shariah Index fails
to make attention of Muslim investor in Bangladesh. The other objectives of this
study are to generate some suggestions to overcome the problems identified so as
to ensure smooth functioning and growth of Shariah Index to make attention of
Muslim investor in Bangladesh.

1.2 Data Collection Method

To prepare the report we use primarily survey methodology. The both primary and
secondary methods are used:

Primary Sources:
The primary data were collected through interview with aid of an interview
schedule. A total number of 20 respondents randomly selected were interviewed.
The sample respondents comprised of 10 Muslim investors who dont have shariah
index and 10 non-investors in share market.

Secondary Sources:
Secondary sources of data have been used for data requirement of the report. To
collect the secondary sources of data internet and different articles published in the
journals and magazines have been used.

1.3 Literature Review

DSE president, Mr. Ahasanul Islam said, The companies that followed Islamic
Shariah based are likely to be included with this Shariah Index. The base point of
DSEX Shariah Index will be 1,000. The people who did not want to make
investment in the stock market, in absence of Islamic product will now be
encouraged to come in the market and make an investment.With this fund

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managers and investors from GCC (Gulf Cooperation Council) countries will enter
in Bangladesh stock market.With introduction of the DSEX Shariah Index, foreign
investment especially from the GCC countries will now come in our market.

Manager-Product Management, S&P BSE Indices, Mahavir Kaswa said, Listed

stocks under the DSEX index will be eligible to be placed in, but after fulfilling
certain conditions. Exclusion from DSEX will automatically exclude a company
from the DSEX Shariah Index. The securities will be sorted out after screening by
two ways-sector wise and accounting basis.Companies engage in advertising and
media, news or sports channel, newspaper, alcohol, cloning, tobacco, gambling and
trading of gold and silver cannot be placed in the shariah index. Even financial
institutions except Islamic banks, Islamic financial institutions, Islamic Insurance
companies will not be eligible.Companies incorporated and managed in a
completely shariah compliant manner, having a shariah supervisory board and
doing transactions (business and financial) in accordance with shariah principle
will be eligible.However a company's debt situation compares to its average market
capitalization during last 36 months should be less than 33 per cent to be eligible,
while the company's account receivable compare to its average market
capitalization during last 36 months should be above 49 per cent. If more than five
per cent revenue of a company comes from non-compliant activities it cannot be
placed in the DSEX Shariah Index.

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 Chapter - 2
Shariah Index Overview
2.1 Meaning of Shariah Index

A SHARIAH Index in 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.

2.2 Reason for Shariah Index

In an essay on working with Islamic finance, Martin L Ross says, Islamic law
focuses on the need to avoid usury and risk. It does not view money as an asset and
hence does not favor 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, the 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.

2.3 History of Shariah Index in Bangladesh

Dhaka Stock Exchange (DSE) launched a new index titled Islamic Shariah Index
in January 20, 2014 to increase investment by Islamic Shariah-based banks in the
stock market.
This is an effort to boost investment by the Islamic banks to stabilise the stock
market, DSE executives said. The Standard and Poors (S&P), a US-based
financial services company, has developed the new index applying its
methodology.
At present, 77 listed companies from banks, non-bank financial institutions,
insurance companies and mutual funds are in operations based on Islamic Shariah.

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These companies are likely to be included with the index that might set out its
journey with a base point of 1,000, said the executives.
Al-Arafah Islami Bank, First Security Islami Bank, ICB Islamic Bank, Shahjalal
Islami Bank, Social Islami Bank and Islami Bank Bangladesh Limited are the six
banks being operated on the basis of Islamic Shariah.
Islamic Finance and Investment Limited are only one financial institution governed
by Shariah.
Fareast Islami Life Insurance, Islami Insurance Bangladesh Limited, Padma Islami
Life Insurance, Prime Islami Life Insurance and Takaful Islami Life insurance are
the five companies from insurance sector.
IBL Fareast Islamic Mutual Fund, ICB AMCL Islamic Mutual Fund and IFIL
Islamic Mutual Fund are the three funds from the sector.

2.4 Screening Procedure of Shariah Index

The screening is done at two levels: Sector-Based Screens and Accounting-Based

Screens. They are as follows:

Sector-Based Screens: Business activities related to the following are

excluded:
Alcohol
Cloning
Financials, except:
Islamic Banks
Islamic Financial Institutions
Islamic Insurance Companies
Gambling
Pork
Pornography
Tobacco
Trading of gold and silver as cash on deferred basis

During the selection process, each companys latest financial statement is reviewed
to ensure that the company is not involved in any non-shariah compliant activities,
regardless of whether the latest statement is a quarterly, semi-annual or annual
statement. If the latest statement is available in all three of these frequencies an
annual statement will likely be used, as these are more likely to be audited. Those
that are found to be non-compliant are screened out. The above industries are not

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considered Islamic and would not be appropriate for investment for observant
Muslims.

Accounting-Based Screens:

After removing companies with non-compliant business activities, the rest of the
companies are examined for compliance in financial ratio, as certain ratio may
violate compliance measurement. Three areas of focus are leverage, cash, and the
share of revenues derived from non-compliant activities. All of these are subject to
evaluation on an ongoing basis.

Leverage compliance: This compliance is measured as:

Debt/market value of equity (36 month average) <33%

Cash Compliance: There are compliances with reference to cash holding. These
are:

Account Receivable/market value of equity (36 month average) <49%

(Cash+ Interest Bearing securities)/Market value of Equity (36 month
average) <33%

Revenue Share from Non-Compliant Activities: In certain cases, revenues from

non-compliant activities can be tolerated, if they comply with the following
threshold:

(Non-permissible income other than interest income)/Revenue <5%.

Dividend Purification Ratio: This ratio is provided to investors for purification

purposes, it is calculated as:

Dividends*(Non permissible Revenue/total revenue)

Index Eligibility: The stock, first, must be constitution of the DSE broad index
(DSEX). They are then screened for shariah compliance. Only those stock that are
compliant remain in the DSEX shariah index (DSES).

Addition and Deletions: Additions are made to the Shariah indices once a month
after the addition to the underlying index, if found compliant by the Shariah board.
Deletions will be done at the same time as the underlying index.

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 Chapter - 3
Results & Analysis

3.1 Result of the survey

In view of Muslim investors who dont have shariah index:

The problems arise from the problems arise from the Muslim investors who dont have
shariah index. These problems are mentioned in the following chart:

Muslim investors who dont have shariah

100% index
90%
90%
80% 80%
80%
70%
70%

60%
50%
50%

40%
30% 30%
30%
20%
20%

10%

0%

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In view of non-investors in share market:

The problems arise from non-investors in share market. These problems are mentioned in
the following chart:

Non-investors in share market

90%

80%

70%

60%

50% 90%

40%

30%

20%

10%
10%
0%

Lack of Information
Illiteracy

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3.2 Analysis of the Survey

There are some problems for which shariah index fail to make attention of Muslim
investor.The problems have been categorized in two levels. These are:
i. Problems arise from the Muslim investors who dont have shariah index
ii. Problems arise from non-investors in share market

Problems arise from the Muslim investors who dont have shariah index:

When we make a survey, some problems arise from the Muslim investors who
dont have shariah index. These are analyzed as follows:

Lack of Advertisement
About 90% of the respondents think the lacking of proper advertisement about
shariah index is one of the important factors in Bangladesh. In case of shariah
index advertising and media are made with the following exception:
Media and advertising companies generating revenues in excess of 65% of
total income from the GCC countries
News Channels
Newspapers
Sports Channels

2011 Bangladesh share market scam:

The 2010-11 Bangladesh share market scam is an ongoing stock market turmoil in
the two Bangladeshi stock exchanges, DSE and CSE. The market went up 62% in
2009, and 83% in 2010, but then went down 10% in January 2011, and a further
30% in February 2011. After that time in January 20, 2014 Dhaka Stock Exchange
(DSE) launched a new index titled Islamic Shariah Index. But Shariah Index
cannot be developed by these years.
About 80% respondents think that shariah index cannot make the attention of the
Muslim investors for the share market scam.

Restrictions on rules and regulation:

Companies which want to provide shariah based share may be characterized by:
Having a Shariah Supervisory Board.

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 All transaction (business and financial) are in accordance with Shariah
principals.
Incorporated and managed in a full shariah compliant manner.
But companies cannot maintain the rules and regulation because
All products of the company are not Islamic.
All investments of the company are not Islamic.
Does not pass accounting based screens.

So about 70% respondents think that shariah index cannot make the attention of the
Muslim investors for the restrictions on rules and regulation.

Difficulties for accounting-based screens:

About 80% respondents think that shariah index cannot make the attention of the
Muslim investors because shariah index passes accounting based screens which are
very difficult to measure. After removing companies with non-compliant business
activities, the rest of the companies are examined for compliance in financial ratio.
Three areas of focus are leverage, cash, and the share of revenues derived from
non-compliant activities.

Low attractive offerings:

About 50% of the respondents think that the offerings of the companies are not so
much attractive that they can allure people to buy a shariah based share.

Secularism in Bangladesh:
Secularism is one of the four fundamental principles according to the original 1972
Constitution of Bangladesh and Islam is the state religion. Over 90% of
Bangladeshis are Muslims, the rest being Hindus, Buddhists, Christians, and others.
People in Bangladesh observe various secular festivals at different times
throughout the year.
So about 30% respondents think that shariah index cannot make the attention of the
Muslim investors for the secularism in Bangladesh.

Investors to access shariah index info for a fee:

According to 20% of the respondents, institutional investors will now be able to get
information about the companies under the newly launched shariah- compliant
index of the Dhaka Stock Exchange for a fee. An institutional investor or a TREC
(trading right entitlement certificate) holder will have to pay non-refundable fee of

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Tk 5 lakh first and a further Tk 10,000 a month. The institutions and the TREC
holders will also have to sign non-disclosure agreements with the premier bourse
before knowing the companies under the DSES Index launched on January 20.

No clearance about Shariah Index by the company:

About 30% of the respondents say that companies dont provide information about
the share which is shariah base share or which is general share. Investors cannot
gather information about the share when they purchase it. So this is another
obstacle to make attention the muslim investor in Bangladesh in shariah index.

Problems arise from non-investors in share market:

When we make a survey, some problems arise from non-investors in share market.
These are analyzed as follows:

Lack of Information:
About 90% of the respondents have no information about Shariah Index. Just they
have poor knowledge about share. It is one of the important factors for failure to
make attention the individuals in shariah index.

Illiteracy:
Illiteracy is another factor that adversely affects in the attention in the share market.
The populations of rural area who are illiterate are not interested in share business.
About 10% of the respondents are floating in the sea of ignorance. They do not
know what is share and what shariah index is.

3.3 Recommendation for overcoming the problems of the Survey

Even though stock markets in Bangladesh have seen a new phase of growth in
recent years, a large section of the Bangladeshi population restrained itself from
investing in the stock markets. This is mainly because the Muslim population
abstained from investing due to their religious beliefs of not indulging in any
investment activity that is prohibited under the Shariah Law. Overcoming the
existing problems following steps should be taken to make the attention of Muslim
investors in Shariah Index:

Professionally Managed Shariah Investment:

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According to Shariah scholars, investing in stock market is permissible as buying
shares of a company means that investors are becoming shareholders and therefore
sharing business-risks equally. But the companies strictly have to comply with
Shariah-principles. To find out the stocks which are shariah compliant is not easy
task for the investors and involves continuous research. Moreover one should be
familiar with Shariah-law in order to invest according to ones faith.
Development of Qualified International Shariah Board:
Shariah Index Fund should follow the S&P BMI Bangladesh Shariah Index, which
is under the strong supervision of a Shariah board consisting of well-renowned
Islamic scholars who have developed the entire process of selection of stocks
through quantitative screening as well as a qualitative filtering considering business
nature of companies.

Purification of Earning:
Although the non-Shariah compliant stocks are screened out automatically through
the Shariah screening process, the fund still may contain some earnings which may
have been derived from the non permissible portion of the revenue of the stocks.
Purification of earnings shuld be on the process by deducting from the returns on
the investment, those earnings emanating from an unacceptable source or if there is
any ambiguity in the earnings from a Shariah point of view.

Investing in Fundamentally Strong Shares:

As Shariah Index Fund will follow the S&P BMI Bangladesh Shariah Index, it
should automatically sort out the most liquid fundamentally strong Shariah
compliant shares.

3.4 Conclusion

We hope that the market would recover and the volumes in the scrips included in
Shariah index would also increase significantly, which is one of the purposes for
launching such index. A large section of people who want to make their investment
keeping in line with their religion would get a fair opportunity to do so.

S&P BMI Bangladesh Shariah Index is developed by a world class index provider
which is considered as a global leader in providing investable and benchmark
indices to the financial markets. Recently, in July 2012, the company has emerged
as S&P Dow Jones Indices after joining hands with Dow Jones and the service has
become even stronger. Indices are calculated and supervised on a regular basis,
while maintaining the highest standard and transparency in index calculation and

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adjustment. First time in Bangladesh, Alliance Capital is providing the investors an
opportunity to invest in a world class index by tying up with S&P Indices.

The index is serving to attract foreign investors who prefer to invest in shariah-
compliant stocks. But there are lots of things to be done to make the index popular
both at local and global levels.

Questionnaires for survey of the report

For the Muslim investors who dont have shariah index:

When we make a survey, we ask the following question for the Muslim investors
who dont have shariah index.

1. Are you Muslim?

Ans: Yes / No
2. Do you know Dhaka Stock Exchange have launched Shariah Index?
Ans: Yes / No / No Comment
3. Do you have any investment in Shariah Index?
Ans: Yes / No
4. Why have you not invest in Shariah Index?
Ans: Lack of advertisement / Lack of knowledge / Illiteracy
Low attractive offerings / No Comment
5. Does Shariah Index fail to make attention of Muslim investor by rules and
regulation?
Ans: Yes / No / No Comment
6. Do you think share market scam is the main obstacle to make attention in
Shariah Index?
Ans: Yes / No / No Comment
7. Are there any difficulties in accounting-based screens for Shariah Index?
Ans: Yes / No / No Comment
8. Does Shariah Index fail to make attention of Muslim investor for the secularism
in Bangladesh?

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 Ans: Yes / No / No Comment

For the non-investor in share market:

When we make a survey, we ask the following question for the Muslim investors
who dont have shariah index.

1. Do you have any investment in share market?

Ans: Yes / No
2. Do you know Dhaka Stock Exchange have launched Shariah Index?
Ans: Yes / No / No Comment
3. Why dont you have any knowledge about Shariah Index?
4. Ans: Lack of publicity / Lack of knowledge / Illiteracy/
No Comment

References

1. Mr. Ahasanul Islam

President of DSE, Chairman of Mona Financial Consultancy & Securities
Limited, Managing Director of Sandhani Life Insurance Company Ltd and Vice
President of Bangladesh Insurance Association

2. Mahavir Kaswa
Senior Manager, Product Management,
S&P BSE (Bombay Stock Exchange Ltd.) Indices

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