Banking, Finance & Takaful

FTSE launches new Shariah Developed Minimum Variance Index

FTSEIndex provider the FTSE Group has announced the launch of its new FTSE Shariah Developed Minimum Variance Index. The index series aims to deliver reduced index volatility through ethical and financial screening. The methodology for the FTSE Shariah Developed World Index has been designed to target a balanced index risk profile by overweighting stocks that reduce index volatility and underweighting stocks that increase index volatility.

The methodology is a design-first in Shari’ah finance world; combining Shari’ah investment principles with advanced risk management techniques:

  • Specifically designed to meet the needs of the Shari’ah market globally
  • New index series builds on the success of existing FTSE Shariah equity indices
  • Index series certified Shar’iah-compliant by independent consultants, Yassar Limited
  • Strengthens FTSE’s leading position as a developer of innovative, alternatively- weighted indices

The Islamic banking and finance industry has grown rapidly over the last 30 years and now comprises over $1 trillion dollars of AUM. This growth has been accompanied by a requirement for appropriate asset management tools including benchmark equity indices that are Shari’ah-compliant. FTSE Shariah equity indices include a business screening, where companies involved in ineligible activities are excluded, and a financial screening. The indices have been created in partnership with Yassar Limited and have been certified as Shari’ah-compliant through the issue of a Fatwa by Yassar’s principals.

Kevin Bourne, Managing Director – ESG, FTSE Group said, “We are delighted to be able to launch our new suite of Shariah-compliant indices, which reflect the growing demand from investors for best-in-class benchmarking tools. The new index series adopts a conservative approach to Shari’ah-compliance, combined with a quantitative methodology that targets lower risk and is better aligned with Shari’ah principles.

“Working in partnership with Yassar Ltd, the new index series has been fully certified as Shariah compliant and builds on FTSE’s portfolio of innovative, alternatively-weighted indices.”

The FTSE Shariah Indices are based on FTSE indices that are managed according to a publicly available set of rules and overseen by an independent committee of seasoned market practitioners. Yassar’s screening methodology is detailed below:

Business Activity Screening – initially, companies involved in any of the following activities will be filtered out as Non-Shari’ah compliant:

  • Conventional finance (non-Islamic banking, finance, insurance etc)
  • Alcohol
  • Pork related products and non-halal food production, packaging and processing or any other activity related to pork and non-halal food
  • Entertainment (casinos, gambling and pornography)
  • Tobacco
  • Weapons, arms and defence manufacturing

Financial Ratios Screening – the remaining companies are then further screened on a financial basis. The following financial ratios must be met for companies to be considered Shari’ah-compliant:

  • Debt is less than 33.333 per cent of total assets
  • Cash and interest bearing items are less than 33.333 per cent of total assets
  • Accounts receivable and cash are less than 50 per cent of total assets
  • Total interest and non compliant activities income should not exceed five per cent of total revenue

Source: CPI Financial

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