Premium
Islamic legal methodologies and Shariah screening standards: Application in the Indonesian stock market
Author(s) -
Rizaldy Muhamad R.,
Ahmed Habib
Publication year - 2019
Publication title -
thunderbird international business review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.553
H-Index - 37
eISSN - 1520-6874
pISSN - 1096-4762
DOI - 10.1002/tie.22042
Subject(s) - indonesian , equity (law) , islam , index (typography) , accounting , stock market index , stock market , sharpe ratio , stock (firearms) , financial economics , economics , business , islamic finance , treynor ratio , actuarial science , law , computer science , political science , engineering , geography , portfolio , mechanical engineering , philosophy , linguistics , world wide web , context (archaeology) , archaeology
This article provides a framework for applying the principles of Islamic legal methodology to determine the optimal Shariah screening standards for Islamic equity markets. It is argued that using maslahah mursalah (unrestricted benefit) is an appropriate method for identifying appropriate financial standards and its principles stipulate that the benchmark that yields the best economic returns to investors should be chosen. The methodological framework is applied to the Indonesia equity market where the economic implications of the Islamic stock screening standards of the Indonesian Islamic Shariah Stock Index and four global indices are assessed. Portfolios are constructed by applying Islamic stock screening standards for each of the indices by using data on 377 stocks listed in the Indonesian stock market for 5 years. The performances measured by the Sharpe ratio, Treynor index, and Jensen alpha reveal that the Dow Jones Islamic Index screening criteria performs the best. Based on the method of maslahah mursalah, the article recommends using the screening standard of this index in the Indonesian stock market to maximize benefits to investors. While the approach used in this article is applied to Islamic equity markets, the methodological framework can also be used for other similar cases in Islamic finance.