Equity Board Market Index Futures (EBMIF)? its Shari’ah direction….

ISSUE :

Whether “Equity Broad Market Index Futures (EBMIF)” can be allowed in the Islamic equity portfolio as an instrument?

DIRECTION:

EBMIF could be allowed in the Islamic equity portfolio as an instrument provided that:

1. Underlying subject matter / stock shall be recognized by the broad principles of Shari’ah (Halal stock).

2. The mechanisms shall not involve the element of Gharar (uncertainty), investment return shall not involve the element of Riba (usury) and in all situations of transaction the element of Ghassa (deceive) shall be avoided.

Hence, EBMIF may be allowed in the Islamic equity portfolio as an instrument by complying the above guidelines.

ISSUE :

Is it okay if some of the underlying component stocks are not with Shari’ah compliant?

DIRECTION:

1. Though it is a universal natural understanding that, when we talk about an Islamic market, product, sytem, operation or business, it shall be expected by a total compliance with the Shari’ah (principles & ethics).

2. But, the express developing areas like Islamic financial market, which is a growing faculty by day today updates and is impossible to be expected to be with 100% Shari’ah compliant with immediate effect. Therefore, the Islamic financial market has been so far developed with gradual effect (Shari’ah compliant) on the basis of the principle of Masalih al-Mursalah (public interest).

3. Furthermore, if the majority components of the stocks are in line with Shari’ah is a good criteria to justify as Shari’ah compliant. At this point of time some opinions concluded that, if in the stock components about 30% are non-compliant while the 70% are of Shari’ah compliant is okay to justify as Halal counter. This could be justified by the Islamic maxim “Lil Akthari Hukmil Kul” ( The decision shall be given on account of majority).

Hence, it is okay to justify the stock components if some (about 30%) of the underlying component stocks are not in Shari’ah compliant.

ISSUE:

The use of futures allows the following:

i. temporary substitute for cash (from income/injections/realization etc),
ii. while portfolio managers purchase the individual securities hence,
iii. reducing the drag on portfolio returns for holding low-yielding cash.

What is the Shari’ah view?

DIRECTION:

Having temporary substitute for cash and purchasing the individual securities shall not have any contradiction with the Shari’ah provided that, all parties (issuer, intermediaries & subscriber) involved in the transaction shall follow the above mentioned Shari’ah guidelines (in principles & activities).