Dow Jones celebrates 10 years of Islamic Market Indexes

Dow Jones Indexes is currently celebrating the 10th year of the foundation of its Islamic Market Indexes (DJIMI), the first benchmark to measure the performance of Shariah-compliant investable equities.
Probably given the present financial crisis, the event is being celebrated with a rather low profile as though it were not really important. And in any case, hardly anyone today remembers the revolutionary breakthrough for the Islamic financial markets the indexes assisted in making possible.

Michael A. Petronella, the president of Dow Jones Indexes, asserts that the decade of Dow Jones Islamic Market Indexes has been a prolific success story of its own. "Dow Jones Indexes has turned what was considered an exotic idea into a cutting edge series of Shariah-compliant indexes and has been playing a leading role in further fostering and shaping the Islamic indexing world ever since," said Petronella in a statement last month to commemorate the 10th anniversary of the launch of the index.

"We have not only continuously expanded the Dow Jones Islamic Market index series, but were also first movers in Sukuk indexing and combining Islamic with sustainability criteria in the Dow Jones Islamic Market Sustainability Index," he added.

Indeed, what appears to be normal now -- trading of shares by Muslim investors on global stock exchanges -- needed some bold decisions 20 years ago in order to make the equity investment universe available to the compliant investor.

What has become known as the July 1987 fatwa from Sheikh Taqi Usmani (Pakistan), Professor Salih Tuğ (Turkey) and Sheikh Muhammad al-Tayyeb al-Najjar (Egypt) -- setting preconditions for investment in publicly listed companies -- ultimately played a pivotal role.

One of the other steps undoubtedly was Resolution No. 63/1/7 from the seventh session of the Fiqh Academy held in Jeddah in May 1992. The modern limited-liability company and the trade in its shares was officially recognized, together with the use of investment funds. In theory, this threw the doors to global equity markets wide open for compliant investors.

Islamic industry sponsors from that time, such as National Commercial Bank (now controlling shareholder in Türkiye Finans), Albaraka and some Islamic mutual funds further played a pioneering part in paving the way for the big boost that ultimately was given by the Islamic equity indexes.

How to select appropriate shares for investment out of the vast scale of noncompliant companies was indeed another hurdle to be overcome.

The RHB Islamic Index (1996), the FTSE Global Islamic Indexes (1988), the Dow Jones Islamic Markets Indexes (1999) and the KLSE Shariah Index (1999) standardized industry selection criteria (excluding unlawful activities such as dealing in pork, arms, liquor and conventional interest-based finance, etc.) and financial screening ratios (excluding companies with too much debt or cash). Suddenly the indexes provided easy-to-understand lists of acceptable companies. Both professional and private ethical investors gained easy access to global stock exchanges.

Also in the next phase, Turkey's presence in the progress was visible. In January 2006, it hosted the first Islamic exchange-traded fund (ETF) tracked by BMD Securities on the Dow Jones Islamic Market Turkey Index, which is listed on the İstanbul Stock Exchange (İMKB).

The Dow Jones Islamic Market Indexes have grown into an industry standard. The index series has been expanded to more than 100 indexes for all major financial markets, regions and sectors. Amongst these are Islamic indexes for the ASEAN, BRIC and GCC regions, for India as well as for global and Malaysian blue chips.

Today, the Dow Jones Islamic Market Indexes are designed to serve as underlying or benchmark for compliant financial products such as exchange-traded funds, mutual funds and structured products. There are currently more than 75 licensees with more than $7 billion in assets tied to the Dow Jones Islamic Market Indexes.

Together with the efforts of rating companies such as Moody's, Standard & Poor's and the Islamic International Rating Agency (IIRA), the indexes catapulted compliant equity to become trustworthy, mainstream investment products that are part of most contemporary portfolios worldwide.

[*] Paul Wouters is a consultant to Bener Danışmanlık.

(Today's Zaman)