Shaikh, Salman (2010): Analysis of Stock Screening Principles in Islamic Mutual Funds Industry.
Download (163kB) | Preview
According to Islamic principles for investments in stocks, market price per share should be greater than net liquid assets per share. It may suggest that this principle restricts investments in the stock of liquid companies. Creditors prefer a favorable Current and Quick ratio but shareholders are not exactly happy when the company has immense liquidity. Excess liquidity implies the company has excess funds, but it has not invested them in its operations fully. There is a trade-off between profitability and liquidity companies have to make. Cash equivalents and marketable securities usually yield a return that is negative in real terms in most developing countries.
The interests of creditors are managed by another principle that if a company has financed a portion of its assets with interest bearing debt; then, the interest bearing debt should not be more than 40%. Debt financing is a double-edge sword. Leveraged companies can magnify their returns in booms, but in slumps, they lose the edge and can even go bankrupt and make both their shareholders and creditors suffer. Debt financing results in a zero-sum game in which at least one stakeholder i.e. shareholders or creditors suffer. Equity financing ensures normal returns in booms and survival in slumps. Therefore, the company will not be squeezed of liquidity as interest expense as an ‘autonomous expense’ will not feature as a significant portion of total operating expenses.
But, how to become shariah compliant is a logical question to ask at this point. There are certain principles that need to be followed to become shariah compliant. This paper will discuss how a company can become a shariah compliant KMI-30 company by using economic models and established deductive knowledge in Economic, Finance and Portfolio theory.
|Item Type:||MPRA Paper|
|Original Title:||Analysis of Stock Screening Principles in Islamic Mutual Funds Industry|
|Keywords:||Islamic Mutual Funds, Islamic Finance, MM Theory, Capital Structure, Leverage, Financial Ratios, Mutual Funds, Equity Financing|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
|Depositing User:||Salman Shaikh|
|Date Deposited:||07. Jan 2010 09:22|
|Last Modified:||15. Feb 2013 20:13|
Abdullah, Fikriyah (2007). Investigation of performance of Malaysian Islamic unit trust funds: Comparison with conventional unit trust funds. Managerial Finance Vol. 33 No.2, 142-15.3
Business Recorder, Karachi (September 09, 2009) Islamic Banking Industry Registers 12% Growth, Staff Reporter.
Forte, Gianfranco & Miglietta, Federica (2007), Islamic Mutual Funds as Faith-Based Funds in a Socially Responsible Context. Social Science Research Network.
Fakhani & Hassan (2005), Performance of Islamic Mutual Fund. Economic Research Forum. Global Development Network.
Modigliani, F. & Miller, M. (1963). "Corporate income taxes and the cost of capital: a correction". American Economic Review 53 (3): 433–443.
Osservatore. Vatican. (March 04, 2009). “Islamic Banking May Help Overcome Crisis”. Press Release.