Islamic Index Tracks "Value" through Morality By Will McClatchy February 15, 1999

BAHRAIN — As with any form of investment, indexing is affected by cultural and religious values. A new example is than Dow Jones' new Islamic Market Index, which helps Islamic investors and banks participate in equities.

"There was no established index providing a global Islamic equity benchmark index," said Rushdi Siddiqui, Director of Islamic Group Business Development at Dow Jones. He helped launch the index in Bahrain on February 9, 1999. Much of the administration is done in Princeton, NJ.

"Religious scholars are becoming more comfortable with equities," he said, which is one reason Muslims have tended to participate less in them. Islamic principles generally ban investing in companies associated with the sin industries, sex, alcohol or stimulants. Most restrict heavy borrowing or lending, require transparency of operations, and impose other restrictions.

Investable assets controlled by Islamic investors are estimated to be between $80 Billion and $150 Billion and are growing at 12% to 15% annually. Much of the assets are invested in cost-plus financing funds called murabaha, leasing funds called ijara, commodity funds, REITs, project finance, and venture capital called musharaka. Relatively little is invested in equities, certainly compared to the United States.

The difficulty in building the index stems from the time-consuming and scholarly task of screening thousands of global large cap equities for compliance with Islamic principles of investing. A committee of five international Islamic scholars from five different countries sets the guidelines, and they sit on almost all of the Shari'ah (religious) Boards of Islamic funds out of the Gulf.

There currently is no comprehensive global index created by an independent entity. Money managers and funds publish their own internal indexes, and it is difficult if not impossible to verify their performance claims.

While reporting in the US is taken for granted, in many global markets there is less transparency. This can result in loss of confidence and capital flight to external money managers and banks.

"In my opinion it will allow stock exchanges in Muslim countries to establish more transparency and accountability, hence, possibly return of capital flight, especially as privatization occurs and family-owned businesses are listed," he said. Investment firms will look to this index as a benchmark.

Currently the index has a total market cap of approximately $7.5 trillion and is composed of over 1,000 equities. The average capitalization of a firm on the index is about $12 Billion.

How much money will flow into Islamic funds in the future? Siddiqui expects $15 Billion to $30 Billion to be under management in active and index mutual funds within 4-5 years. The index will be followed with special interest by Muslims living in the West, he said. There are approximately 6 million Muslims in the US, 2 million in the UK, and 500,000 in Canada.

The index is reviewed quarterly to ensure it keeps up with religious and capitalization guidelines. It is weighted approximately 70% to the Americas, 20% to Europe and Africa, and 10% to Asia and the Pacific Rim. The high weighting for the Americas occurred in part because American companies, which have relatively low debt ratios, generally survive screening better than firms in other parts of the world.

Dow Jones charges for licensing of the index feed to investment firms. As with many of its indexes, the basic daily closing numbers are offered free to media.

February 15, 1999