Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Chapter 20Islamic Asset Management and Shariah Screening

This chapter is concerned with financial assets and products that are traded on capital markets that the shariah deems permissible, and the functioning of capital markets themselves. A methodology of shariah screening has been developed by scholars that determines if a certain asset is shariah-compliant or not. As we discuss financial markets, the screening is applied by and large to equities. Shares reflect ownership in a company, whereby shareholders share in the profits of a company through the payments of dividends. Shareholders also earn profits from capital gains due to the appreciation in the value of the underlying shares.

The shariah permits having an equity stake in a company via the mechanism of owning shares in it under the concept of musharakah. Although certain scholars opine that classical musharakah was between individuals themselves, modern shareholding is not a partnership between individuals as much as it is between individuals and a corporate legal entity. However, much of the Muslim world is open to the idea of shareholding and in fact would prefer to have much more of it.

The shariah does not permit ownership of all kinds of businesses, though. The shariah does not permit an equity stake in pig farms, alcohol breweries, wineries, or in businesses that earn interest, such as banks and insurance companies. Given the modern scale of business divided between permissible and nonpermissible activities, ...