In fact, this is not always the case, says Mohamad Safri Shahul Hamid, Deputy CEO at Malaysian financial institution MIDF Amanah Investment Bank Berhad. If these activities account for 5% or less of revenues and adre “cleansed” through charitable donations, for example, then you can participate in Islamic finance.

 

Mohamad Safri spoke to CFO Innovation’s Cesar Bacani about the ins and outs of non-Islamic companies joining the world indexes and other ways they can gain the attention of Muslim investors, who are among the least affected by the global financial crisis. Excerpts:

 

Dow Jones is based in the United States, but they are advised by their own set of Shariah scholars – they are named on their website. There are qualitative criteria [the business activities] and quantitative criteria [financial ratios]. 

 

For example, total debt over trailing 24-month average market capitalization must not exceed 33%. Accounts receivable divided by trailing24-month average market cap must not exceed 33% as well. The last test is cash equivalents over market capitalization trailing average over the last 24 months, which should not exceed 33%.

 

FTSE has its own Islamic index and its own criteria as well, which are similar but not the same as the Dow Jones Islamic index criteria. FTSE criteria are similar in the sense that the numerators [are the same] – they also look at debt, cash and interest-bearing items and accounts receivable. But the denominator is different – it’s total assets [rather than market capitalization as in Dow Jones].

 

Yes, you are right, these are prudential or commercial considerations. But at the same time, they have a bearing on Islamic consideration. For example, from an Islamic finance perspective, a company should not be over-leveraged. Hence, you have [the debt and cash equivalents] tests. They cannot exceed the one-third cap or threshold set up by the scholars.

 

The thresholds were set out by the scholars many years ago when the Dow Jones Islamic Index was launched [in 2003] and the FTSE index was started [in 2007]. The index makers have to get certifications from Islamic scholars.

 

Everyone that buys into Islamic products [must have] their own Shariah scholars. Islamic banks and Islamic insurance companies are guided by their own Shariah committee. Before the treasury or the investing department within a particular bank or takaful [Islamic insurance] company invests in a product, they need to get the green light from their own Shariah body.

 

It’s difficult to achieve 100%. Nobody’s perfect and to achieve perfection in this world is not going to be easy. This is also true of conventional products. If you try to sell in Hong Kong, for example, maybe your product may not be so hot, but in other parts of the world it would do well.

 

I was involved in [the structuring] of an exchangeable bond for Khazanah [Malaysian government’s investment arm]. One of the three assets it could be exchanged for was [Asian retailer] Parkson. When we went to the Middle East, to Iran, Saudi, Dubai, we told them that when you go into Parkson today, there are certain sections where you can find non Shariah-compliant goods [such as alcohol]. They were aware and they still accepted our structure. They still deemed the company as a Shariah-compliant company. So it [5% or less of revenues from non-Islamic activities] is a globally acceptable criterion.