Islamic indices prove popular due to inherent anti-fraud measures

conventional investors are interested in the screening techniques in light of recent corporate scandals such as enron and worldcom

nterest in Islamic indices in growing among investors due to religious screens that can protect against corporate cheats.

Debt screens that involve balance sheet scrutiny are used in Islamic indices for religious reasons, but they are proving popular among conventional investors due to current market conditions and events such as Enron and WorldCom, according to Rushdi Siddiqui, director ' Islamic group business development ' for Dow Jones Indexes.

'We have seen increased interest from conventional investors from the point of view of the screens,' said Siddiqui.

'At the moment there is interest in having companies with a manageable amount of debt.'

Islamic investing means avoiding the 'sin sector,' according to Siddiqui. That means low debt, non-financial, social ethical investing.

The Dow Jones Islamic Market Indexes track Shari'ah-compliant stocks. The first step in creating them is to exclude industry groups that fall into an incompatible line of business.

Companies classified in other industry groups may also be excluded if they are deemed to have a material ownership in or revenues from prohibited business activities.

Incompatible lines of business include alcohol, pork-related products, conventional financial services and entertainment. Shari'ah scholars also advise against investment in tobacco manufacturers and weapon manufacturers.

The remaining stocks are then tested according to three filters designed to remove firms with unacceptable financial ratios.

While these filters are applied for religious reasons they have protected Islamic investors against corporate scandals and volatile markets.

For example, WorldCom was removed from the indices two years ago due to high levels of debt.

While many conventional investors rode the stock down and lost heavily, the debt filters protected Islamic investors.

The first filter excludes companies if total debt divided by trailing 12-month average market capitalisation is greater than or equal to 33%.

The second filter excludes companies if the sum of cash and interest bearing securities divided by trailing 12-month average market capitalisation is greater or equal to 33%.

The third filter excludes firms if accounts receivables divided by total assets is greater than or equal to 45%.

A team of Islamic scholars created the rules governing which companies are included in the Dow Jones Islamic indexes and which are removed.

The rules mean the Dow Jones Islamic indices are weighted towards healthcare, energy and technology companies. The finance sector is excluded due to its dealings with interest.

While the debt filters can protect investors they can also mean Islamic investors lose out by losing exposure to certain sectors, added Siddiqui.