Shari`ah Compliance, Performance, and Conversion: The Case of the Dow Jones Islamic Market Index℠

I. INTRODUCTION Islamic banking and finance is no longer an uncertain experiment. Although Islamic banking and finance is in its infancy-only forty years old compared to the four-hundred-year-old conventional banking industry-it has in this comparatively short period of time defined its major framework issues. Islamic finance is now a sturdy table supported by three strong legs: (1) the Islamic capital market; (2) Takaful;1 and (3) Islamic banking. Islamic investing, as part of the Islamic capital market, is a religious prohibitions-oriented area much like the secular-oriented area of socially responsible investing2 where an emphasis is placed on negative screens to filter out proscribed securities based on criteria which establish a minimum level of social responsibility on the part of a company. Islamic equity investing is only twenty years old. In this Article, I will discuss the relevant background of Islamic equity investing, including the role of Shar'ah scholars, the preconditions for participating in the stock markets (Shar'ah screening), and the Shari'ah universe of equities that results from the screening inherent in the investment process. With respect to the universe of Shar'ah-compliant equities, this Article will also discuss and analyze the Dow Jones Islamic Market Index ("DJIM"), launched on February 9, 1999 in Manama, Bahrain by Dow Jones Indexes. By way of background, the DJIM was the first attempt by any global index provider to create a measurement tool for Shari'ah-compliant investors and to reduce the research costs of ascertaining Shari'ah-compliance by creating a global universe of Shari'ah-screened companies approved by a Shari'ah supervisory board. Furthermore, the DJIM has established the initial standard of Shari'ahcompliant equity investing globally by highlighting the dilemmas of Shari'ah-compliant investing in Muslim countries, flushing out the geographical location of underlying Shari'ah-compliant companies, and offering an incentive for companies to be included in a high-profile Shari'ah-compliant index. Today, the DJIM is a galaxy of seventy Islamic indices which cover a variety of Shari'ah-compliant equities and fixed income securities across the globe.3 II. ALLAH'S LAW AS INTERPRETED The role of a Shari'ah supervisory board in a financial institution is to ensure that all of the institution's financial undertakings are pure, or in religious terms, free from unlawful (haram) elements. Shari'ah supervisory boards base their advice and opinions, or fatawa,4 on their readings and interpretations of: the Qur'an, which is believed by Muslims to be the revealed word of God (Allah); the Sunnah or practice of the Prophet of Allah, Prophet Muhammad, upon him be peace; the consensus of the scholars (ijma); and the opinions of the classical jurists and their successors.5 Sponsors of Islamic financial projects rely on Shari'ah supervisory boards to monitor their undertakings to ensure-on their behalf and on behalf of their investors, their depositors, and their shareholders-that their financial transactions, policies, and procedures are in compliance with Islamic legal and religious precepts. This deference to scholars is rooted in the Qur'an which reminds people to seek knowledge from its possessors.6 The idea of remembrance in the verse refers to the scholars' knowledge of the rules, regulations, and philosophical bases of relevant Qur'anic and Sunnatic injunctions, all designed to condition the affairs of humanity in accordance with the Divine Guidance in public and in private. These injunctions extend far and wide covering such issues as worship and piety, conduct with family, neighbors, and society at large, and business and political relationships. In general, membership on a Shari'ah supervisory board is open to Muslim scholars whose learning was undertaken for the sake of the Almighty and was attained in humility at the feet of the truly heedful and pious. …