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ISSUES IN ISLAMIC EQUITY

There are seven issues of Islamic private equity.


1. Risk Sharing and Equity Markets
Islamic finance has had its share of criticism. Many label contemporary
offerings of Islamic finance as mere replications of modern day financial
instruments window-dressed with clever legal stratagem. When stripped
down to their economic fundamentals, devoid of differentiation on the
basis of pure nomenclature, many Islamic financial products are said to be
almost indistinguishable from mainstay (loan-based) financial instruments.
In response to such voices of disapproval, many now champion the idea of
risk-sharing in Islamic finance.
However, one sector that stands as a prime candidate that is equity
market. The notion that the stock market is including some element of risk
sharing is reasonable. Most places in the world today, equity markets are
thriving, systematic and regulated. This makes the best way to handle
calls for partnership stylized significant risk in Islamic finance. The task at
hand now is to deal with issues arising in the implementation and
promotion of Sharia-compliant equities market.

2. Smaller investment universe


In modern portfolio management theory, diversification is said to be an
important factor that affects the risk-adjusted performance of a portfolio
of stocks. if stock portfolios are not sufficiently diversified, they may pay a
price in the form of suboptimal risk or return performance.
Islamic private equity finance only Sharia compliant projects to make a
halal profit. This means that Islamic private equity funds have lower
investment opportunities. Islamic stock portfolio is invested in certain
sectors. Islam stock portfolio is invested in sectors such as services that
violate sharia practicing usury, alcohol, gambling, tobacco, gambling and

so on. In addition, the quantum of debt, interest income and receivables is


limited to the set at acceptable levels. This led a group of stocks that can
be invested by the Islamic investor limited and smaller. The question is,
does it make Islam less diverse portfolio of stocks to the point that it
culminated in the risk-adjusted return is lower? While the answer points to
an affirmative theory, empirical research can only confirm whether this is
in fact a reality.

3. Investment Heuristics
Many studies have compared the performance of stocks of Islam, with
conventional indices and portfolio. This research received mixed results.
Empirical findings are sensitive to the sample, the selected data, the
period of time and methodologies. Therefore, it is difficult to claim that
conventional equity is more to say or otherwise under any and all
circumstances. The question that category of shares is a better
investment (Islamic or conventional) is crucially dependent on the
parameters of empirical studies. Therefore, the answer to such a question
is often considers just as an academic. Less of a moot point is any insights
on when Islamic portfolios fare better or for whom such an investment
category is well suited.

4. Automated Stock Screening


In this issue, usually the sharia stock index providers such as Dow Jones,
FTSE, MSCI and S & P work automatically for the inspection process to
identify stocks that comply with Sharia. For example, they rely on
established industry classification taxonomy in the implementation of the
inspection While such an approach is both efficient and convenient, it still
has

unintended

repercussions.

One

can

illustrate

how

automatic

inspection is mistaken usually people will associate with Louis Vuitton


clothes and accessories. However, closer examination reveals that the

large revenues come from the sale of wines and alcohol. However,
automatic inspection has categorized it as Sharia-compliant as regards the
only industry Louis Vuitton clothes and accessories. The same can be said
when

examining

stocks

using

financial

ratios.

Financial

reporting

standards vary from one jurisdiction to another, and most if not all do not
qualify for the specific purpose of Sharia stock screening.
5. Going beyond Sector Screening and Financial Ratio
Sharia Compliance is very important to Islamic Business to guide and
make the business clear than conventional. But the issue is, its not
necessity imply of good business without their contributions to the society.
Islamic business should increase their contribution such as Social
Responsibility Investment (SRI) and also Corporate Social Responsibility
(CSR), environment protection and also in conservation. Islamic equity not
only legal in term of law but need good performance and have a good
perspective among society and the Sharia compliant can be extended to
include all that is good and healthy. Increasing the SRI and CSR in Islamic
equity are very helpful to motivate to take Islamic equity to its next phase
of evaluation because, Islamic not only provide halal product but show
that Islamic is very responsible and care with what going on in around of
business.

6. Enhancing the Value Proposition


Nowadays, Islamic Finance also more rapidly expending to compete with
the conventional finance sector, but the issue is, how the Islamic Finance
make a strategy in their competition with conventional. So, enhancing the
value proposition is one of the ways that needed in Islamic finance. One of
the alternatives is by establishing a clear value, distinct value and
gratifying value proposition. What is means is, Islamic financial product
such as Islamic Equity should increase their human skills to help develop
the operation value to more efficiency and effective. One of the problems
of Islamic finance is still lack of human skill to enhancing the value

proposition. So, maybe the Islamic should increase their study and
research such using empirical investigation to get some finding and
information from external and internal side on how to increase the value.

7. Role of Empirical Research Supplementing Sharia Rulings


One of the roles of empirical research towards Islamic equity is in aspect
of purification. So, as a fund manager should study more about the
elements that prohibited in Islamic Law or Sharia law, so that all the
elements can remove from the Islamic product such as Islamic equity.
Besides that, Islamic Financial also able to know the variations in Sharia
Stock screening norms between the Sharia jurisdictions such as weapons
manufacturing. In additional, there is common resolves as to the Sharia
permissibility of practise such as short selling, trading of stock index
fortunes and other derivative instruments. So, some suggestion from
researcher is, even though Islamic Jurisprudence and law as a main
resources of addressing issues, but the relevant empirical research finding
as a supplementary role to providing the input when formulating Sharia
pronouncements.

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