FIN 205 Study Guide - Final Guide: Sukuk, Sharia, Islamic Development Bank
26 Sep 2016
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Document Summary
Conventional capital markets have two main streams: securities markets for debt trading, stock markets for equity trading. Islamic funds: currently there are about 750 islamic funds managing more than us billion worth of assets. The following are general guidelines used for screening and filtering the stocks of a company before it is included in an equity fund: shariah-compatibility of business. Conventional banks, insurance companies, alcohol, pork, gambling, nightclub, casino, pornography etc: existence of debt. The maximum tolerance of debt-to-equity ratio is 33: interest income. Companies that have substantial amount of income derived form interest: negotiability of shares, ordinary vs. Ordinary shares are permissible since they represent undivided ownership in the business. However, preferred shares go against the shariah because they require and promise a definite return to their holder. Challenges for fund managers: low number of eligible stocks, short selling and margin buying not allowed, not a big opportunity to diversify your portfolio.
