Indices - Scope of Standard

Transcription

1. Shari ’ah Standard No. (27): Indices Statement of the Standard 1. Scope of the Standard This Standard covers definition of Indices, methods of their calculation, their main types, their various forms of applications, and the Shari’ah status of each of these forms. The Standard also sets out the Shari’ah rulings that govern Indices. 2. Definition and Main Applications of the Index 1/2 An Index is a statistically computed figure based on a selected package of financial papers or commodities dealt in organized or non-organized financial markets, or in both. Each paper/commodity is given a specific weight, according to its market value, and the total value is divided by a constant figure. Among the best-known indices at present are the Consumer Price Index, and the Dow Jones and FTSE indices in the financial markets. 2/2 An Index that is well designed to measure the market situation, indicates the general economic situation of the country, and may help in forecasting its future developments before any change takes place and, thus, facilitates investment decisions. An index may also provide a signal to investors about the future movement of the prices of financial papers, or demonstrate a certain downward or upward trend of such prices. Due to the inconsistency that might occur between one index and another, indices are used besides other analytical methods, as well as the experience and knowledge about the market situations and the predominant models of transactions. 2/3 The upward and downward movements of an index reveal the directions of the market, and hence the market is denoted as a rising or a declining market. 706
2. Shari ’ah Standard No. (27): Indices 3. Bases of Calculation and Characteristics of Indices 3/1 Calculation of indices is a process that depends on several aspects including past and current price forecasts, market projections, time intervals, upper and lower limits of dealing prices, and display charts. 3/2 Indices differ from each other in several aspects such as the components of the index or the type of data it attempts to summarize, the weight it assigns to each component, and the method of calculation thereof. There are, however, some common characteristics among all wellknown indices in the capital and commodity markets, regardless of the data that each index attempts to analyze. Most important among these characteristics are accuracy, objectivity and transparency. Accuracy refers to proper specification of the components of the index, sources of its data input, time of obtaining the data, method of calculating the weights, and basis of rounding off the numbers. Objectivity entails presentation of the detailed calculations of the index to leave no room for difference of opinion with regard to determination of the value of the index on a specific date or at a specific place. Transparency entails pre-specification of the time, place, and method of announcing the readings of the index so that the process does not involve Jahalah (ignorance or uncertainty). 3/3 There are some general principles that govern almost all indices, such as: 3/3/1 The absolute value of the index has no implication when presented as a single figure. The value of the index, at a given point of time, becomes meaningful only when compared to the past and future values of the index. Only then, the trend and percentage of change may be observed. For instance, an increase of 9 points in the value of the index may represent 2% of its previous value. 3/3/2 The values of the index at different periods may be multiplied or divided by any constant figure (i.e., increasing or decreasing 707
3. Shari ’ah Standard No. (27): Indices the figures of the index by the same percentage like division of shares), without affecting the accuracy of its implications. That is to say, the implications of the index are confined to what it represents of the average upwards and downwards changes in the weights of its components from time to time. 4. Types of Indices Indices are classified according to different considerations: 4/1 With regard to their general or specific nature, indices may be classified into the following categories: ■ General Indices that measure the market situation in general. ■ Sectoral Indices that measure the market situation of a certain sector or industry, such as the transport sector. 4/2 Indices that precede price movements may be classified, with regard to central and area fluctuations, into the following categories: ■ Centered Oscillating Indices, which measure price changes during a specific period in the past, and indicate probable future events. ■ Ranged Oscillating Indices (band) that fluctuate between two areas, like overbuying or overselling. 5. Permissible Methods of Using Indices 5/1 It is permissible in Shari’ah to use indices to discern the magnitude of change in a certain market, or to judge the performance of specialized managers by comparing the returns they achieve to the indices. Indices may be used to form up an idea about a portfolio or to estimate its systematic risks instead of monitoring the performance and risks of each financial paper independently. Moreover, Indices may also be used for forecasting the future situation of the market and discovering the pattern of changes that the market may undergo. Therefore, using indices for guidance in operations that relate to real transactions is permissible in Shari’ah. 5/2 It is permissible to use indices as a benchmark for comparison of funds and investment bonds, or for correlating the remuneration of 708
4. Shari ’ah Standard No. (27): Indices the manager or the bonus of the agent to the investment, or the bonus of the Mudarib to the results of the Mudarabah. 5/3 It is permissible to use an index like LIBOR, or a certain share/ commodity price index, as a basis for determining the profit of a Murabahah pledge, provided that the contract is to be concluded on a specific profit that does not vary with further changes in the index. [see Shari’ah Standard No. (8) on Murabahah – Item 4/6] 5/4 It is permissible to use the index to determine the portion of the variable Ujrah (rent) that represents the return. [see Shari’ah Standard No. (9) on Ijarah and Ijarah Muntahia Bittamleek – para 5/2/3] 5/5 It is permissible that work rules, regulations and the arrangements, pertaining to money-based employment contracts, stipulate a provision on wage indexation.Wage indexation here refers to periodical adjustment of wages according to changes in the price level, as determined by the concerned bodies. However, in case of accumulation of unpaid wage that takes the form of debt, Shari’ah rulings on debts should be observed. 5/6 It is permissible to link the deals to be undertaken by the Mudarib or the agent to a specific index, so that he can dispose of the commodity at the market price when the index reaches a certain reading, or purchase a certain amount of the commodity at a specific reading of the index. 5/7 It is permissible to connect the fulfillment of a binding pledge on the part of a buyer or a seller to the rate of increase or decrease of a specific index in comparison to the price of the commodity at a particular date, so that any further increase may be added to the price of the commodity. 5/8 It is permissible to link the amount of a donation to a charitable body, in case of delayed settlement, with a particular index, at one end. 6. Impermissible Methods of Using Indices 6/1 Shari’ah prohibits trading in indices or taking advantage of their changes in the financial markets, through payment or receipt of 709
5. Shari ’ah Standard No. (27): Indices money on the mere occurrence of certain readings of the index, and without selling or buying the real assets which the index represents or any other assets. Such dealing is prohibited even if it is practiced for the sake of hedging against potential risk. 6/2 It is prohibited in Shari’ah to conclude option contracts on indices. [see Shari’ah Standard No. (20) on Sale of Commodities in Organized Markets – item 5/2] 6/3 It is also prohibited in Shari’ah to conclude contracts on the Index Contracts’ Multiplier. 6/4 It is also prohibited in Shari’ah to link a contract that should not be suspended, like selling, to a specific index. 6/5 It is prohibited in Shari’ah to connect the amount of a cash debt, at the time of lending, to the price index. 7. Development of an Islamic Index The following points should be observed while developing an Islamic Index: 7/1 Adherence to Shari’ah precepts, in addition to the technical controls relating to the components of the index, and its applications. 7/2 There should be a Shari’ah Supervisory Board for the Index, to ensure observation of the Shari’ah precepts in the components and applications of the index, and to conduct periodical review and reporting relating thereto. 8. Date of Issuance of the Standard This Standard was issued on 12 Jumada I, 1427 A.H., corresponding to 3–9 June 2006 A.D. 710