Towards a Robust Shariah Screening Criterion for Stocks

If it was not for the indices for Shariah compliant equities, the global Islamic capital market (ICM)Islamic capital market (ICM) would not have proliferated with an astounding pace. Those indices have played an extremely crucial role in assisting the investors seeking Shariah compliant stocks to invest their capital. This conjecture is equally true for Pakistan. In this regard, a remarkable initiative recently taken by the country is the launch of All Shares Islamic Index of PakistanPakistan (ASIIP)All Shares Islamic Index of Pakistan (ASIIP) . The index has been established to develop Pakistan’s ICM and to cater the needs of the investors pursuing Shariah compliant investment in stocks. The selection criterion of ASIIP comprises of mainly two categories: (1) Shariah screening criterion and (2) technical filters. Although a general understanding has been established regarding the Shariah screening criterion and its conceptual basis, there seems to always linger a muddle about how those Shariah rulings are unswervingly related to it. Part of this confusion is attributable to the presence of rather an incongruity between the criterion and its Shariah underpinnings. In view of that, this paper gives an insightful discussion on the criterion from Shariah perspective. It critically analyses the criterion and its underlying Shariah basis by conducting a comprehensive and conscientious research through qualitative method. In doing so, it also juxtaposes the criterion directly to the classical sources of Islamic jurisprudence. On the basis of analysis, it proposes major modifications, on the one hand, to introduce a new ratio or filter within the criterion and, on the other hand, to exclude unnecessary ones from it. It also recommends re-examining the benchmarks for the prevalent ratios. These propositions would not only improve the robustness of the prevailing criterion, but also help abridging the gap between practical aspect of the criterion and its conceptual Shariah basis. Ultimately, it would vitally contribute to critical success factors and future progression of ICM in Pakistan.