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Essay: Islamic finance

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  • Subject area(s): Finance essays
  • Reading time: 3 minutes
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  • Published: 21 September 2015*
  • File format: Text
  • Words: 723 (approx)
  • Number of pages: 3 (approx)

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The evolution of Islamic finance now takes place in most of the countries, whether in Muslim countries or non-Muslim countries. Islamic finance institutions perform the same essential functions as financial institutions do in the conventional system, except that there is a need for them to carry out their transactions in accordance with the rules and principles of Islam. One of the most growing parts of the Islamic finance is Islamic equity market. In principle, Islamic equity market is characterized by the absence of interest based transactions, doubtful transactions and unlawful stocks of companies which deal in non-shariah compliance activities or items. Its market activities must be free from any of unethical or immoral elements.
The emergence of several Islamic indices such as the Dow Jones Islamic index has offered better screening processes to both Muslim and non-Muslims investors. The existence of the shariah screening process in the stock market will enable Muslim investors to invest into companies that run the permissible activities in the businesses. The Dow Jones Islamic Market Index (DJIM), launched in 1999 in Bahrain, was first benchmark to represent Islamic-compliant portfolios and for investors seeking investments in compliance with Muslim Shariah law. The DJIM in essence is a specialized ethical index that screens out prohibited stocks, as defined by Shariah law, and it is monitored by Muslim scholars.
Malaysia is recognized as one of the dynamic leaders and practitioners of Islamic finance particularly in the Islamic Banking, Sukuk and Islamic Equities Markets. For the Islamic equities markets, The Kuala Lumpur Shariah index was established in April 17, 1999 to provide investors with a benchmark for Shariah-compliant securities listed on the Bursa Malaysia previously known as Kuala Lumpur Stock Exchange (KLSE). The shariah compliant stocks for this index are selected from the main board of bursa Malaysia. All the shariah-compliant stocks listed on Bursa Malaysia are reviewed and approved at national level by the shariah advisory council (SAC) of the securities commisisons of Malaysia. Furthermore, a new series of tradable equity indices called FTSE-Bursa Malaysia Emas Shariah Index (FBMES) and FTSE-Bursa Malaysia Hijrah Shariah Index (FBMHS) has been introduced by Bursa Malaysia on 2007. This index provides a benchmark for investors seeking to make investments based on Shariah principles and helps them to make better informed decisions.
Indonesia as the biggest Muslim country in the world has a massive market for the development of Shariah finance industry. Indonesia Shariah capital market, which is part of the Shariah finance industry, is one of the important contribution towards increasing the market share of shariah finance industry in Indonesia although the development is still new compared to the shariah banking in Indonesia. However it is expected to growth along with the growth in Indonesia capital market industry. Indonesia Stock Exchange has two index based of Shariah Stock, they are Jakarta Islamic Index (JII) and Indonesia Shariah Stock Index (ISSI). Shariah capital market in Indonesia begins with the launched of Jakarta Islamic Index by Indonesia stock exchange (which was known as Jakarta stock exchange at that time) in collaboration with PT Danareksa Investment Management on July 3, 2000. This index consists of companies that their business activities are accordance with the Islamic law regulated by National Shariah Board. It is aims to guide investors who want to invest funds in Shariah Jakarta Stock Exchange. Furthermore, the Indonesia shariah index name Indonesia Sharia Stock Index (ISSI) has been launched by Indonesia Stock Exchange (IDX) on May 12, 2011.
In an economy stock market both conventional and Islamic plays a vital role in assessment of economic position of the economy. For example, Rising in stock market is a sign of a growing economy of the country. The linkages between stock market and economic growth are important to the investors and other relevant parties in decision-making. The variables that may assist the volatility of the stock prices need to be discovered by them so that they can manage their investments and portfolios. In history, Macroeconomic variables are considered as the powerful tool to forecast the volatility of stock market all over the globe. Numerous studies have been done to find out the relationship between macroeconomic variables and stock returns and provide mixed results. Thus this research intends to identify the relationship between stock return and macroeconomics variable. However, this research focuses on Islamic stock return rather than conventional and in the context of Malaysia and Indonesia.

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