Demystifying Islamic Equity Investment: Portfolio Theory and Practice
Authors:   Islamic Development Bank Institute, Ashraf Dawood , Boudt Kris , Khokhar Nulazim-Ali , Raza Muhammad 
Published: January 2024

Abstract This book aims to help individual investors, institutional investors, and academics understand the Sharī‘ah compliant portfolio management process. We show that, when implemented using a rule-based approach, Islamic equity investment can be very rewarding, if somewhat complex. That effort pays off in terms of transparency and explicability of investment decisions and performance. The book attempts to provide clear guidance concerning the screening and portfolio allocation of Sharī‘ah compliant equities. It explains the Islamic foundations of Sharī‘ah compliant investing, and details the application of various portfolio allocation strategies that meet pre-defined financial objectives, e.g., to minimize risk, maximize risk-adjusted returns, etc. The book also covers the ex-post performance evaluation of portfolios. Overall, we hope that, as the book’s title suggests, this comprehensive treatment of Islamic equity investment will contribute to “demystifying” the Islamic equity investment process. The sequencing of chapters is logical, such that Sharī‘ah compliance is first explored in considerable detail in the earlier part while simultaneously being used as a motivation for the book. Sharī‘ah aspects are then intermittently again explained in some of the following chapters, where necessary, to contextualize the application of portfolio creation techniques impacted by Sharī‘ah prohibitions. The value proposition of the book is that it compiles well-established portfolio allocation methodologies of structuring equity portfolios and the related existing Islamic knowledge—Sharī‘ah compliant or otherwise—in one place. This will allow practitioners and academics easier access to relevant information in a single volume rather than needing to access multiple sources online/offline such as papers and or articles that separately explain equity screening and portfolio allocation. The book addresses a broad audience, from novice investors to more sophisticated institutional investors and fund managers. Given the more extensive reader base, it would be worthwhile to set the expectations right. One approach to this guide could be to read it from beginning to end without trying to deal with portfolio construction methodologies using R code or Excel. This would be like watching a sport without playing it. Ultimately, whether or not to watch a game without ever playing it is a personal choice. However, just be aware that you will not get the same experience as someone who has actually played the game. Alternatively, if you want to implement the Sharī‘ah compliant investment process, you could work through the illustrations in the book and with the accompanying code on the website1 as you read each chapter. The difference will be a much deeper understanding of the Sharī‘ah compliant investment process than you would gain from simply reading about it. A third way to use the book, if you already are an experienced investor, may be to treat this book as a reference manual where you can look up new ways to tackle complex portfolio structuring issues.