Academic journal article International Journal of Business

Is There a Place for a Shariah-Compliant Index on the Paris Stock Market?

Academic journal article International Journal of Business

Is There a Place for a Shariah-Compliant Index on the Paris Stock Market?

Article excerpt


In the aftermath of the WTC attacks on September 11, 2001, capital repatriation combined with a significant rise in oil prices contributed to a massive capital accumulation in the Gulf region. This huge amount of financial liquidities, estimated at around 5 trillion dollars (Soustras, 2008; Bouslama, 2009) represents a very promising financing and investment potential, which partly explains the outgrowing interest in what is now commonly called "Islamic finance", especially in developed countries. The French financial market cannot afford being left aside in this field.

Following the "Shariah" rules that govern the Muslim economic, social and legal transactions, Islamic finance is built up on five pillars. The use of interest rates (Riba) is prohibited; speculative behaviour (Maysir), uncertainty regarding the characteristics of the contract (Gharar) as well as specific activities (1) (Haram) are banned. Moreover, the distribution of profits and losses is encouraged and so is the asset-backing. Based on these rules, a significant number of Islamic mutual funds and stock market indices were introduced over the last decade as an answer to the investment potential and portfolio diversification needs of wealthy Muslim investors (2).

The first Islamic mutual fund was created in 1968 in Malaysia. However, it is only in the 1990s that the investment in such funds was authorized by the Islamic case law. Since then, the number and amounts of assets under management (AuM) of such funds tremendously expanded; as such, from nine funds in 1996 with a total amount of AuM equal to 800 million dollars, one could count 130 funds in 2006 for a total of 7 billion of AuM. In March 2010, more than 350 Islamic equity funds were recorded worldwide with more than 25 billion dollars of AuM. Besides the reasons already mentioned, the different financial scandals and crisis (Internet bubble, subprimes) experienced by the more traditional/well known financial practices as well as the presence of a large and expanding Muslim population (more than one billion) and the emergence of a Muslim middle class especially in India and Pakistan, can explain the increasing interest in these funds. In the same line, the Dow Jones Islamic family of indices (DJIM) created in 1999 that includes today more than seventy indices differentiated by companies' size, sector or geographic position, the FTSE Shariah Equity Index or the S&P Shariah Indices introduced in 2006 also show the growing potential of this new form of financial investment. There is no such an index on the Paris Euronext stock market.

For France, one major reason for playing an active role in the Islamic finance development comes from the importance of its Muslim community: with more than 6 million French citizens belonging to it, accounting for almost 10% of its total population, the French Muslim community is nowadays the most important in Europe. Contributing to the implementation and development of an Islamic finance investment policy may thus present a strong symbolic content. However, the financial implications of such a policy are not negligible: despite a certain delay in promoting these new financial practices, the simulation implemented by Pastre and Jouini (2009) shows that the Paris Stock Exchange market has the ability of attracting potentially up to 100 billion dollars until 2020 on the basis of a real market openness and an active communication policy. Henceforth, the creation of a French Islamic stock market index in Paris could enforce its competitiveness in the matter.

This paper explores the methodological issues behind the introduction of such an index in terms of stock eligibility criteria and their impact on the available investment set as well as in terms of index computation. Moreover, we also propose a comparison between the risk-adjusted performance of a Shariah-compliant index that we create with already existing comparable Islamic stock indices such as the S&P 500 Shariah Index and the S&P Europe 350 Shariah Index. …

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