Thailand is the latest to join the campaign to attract the growing pool of global money looking for sharia-compliant investments. Global index provider FTSE Group and the Stock Exchange of Thailand have expanded the FTSE SET Index Series with the addition of the FTSE SET Shariah Index.
Using the FTSE SET All-Share Index as the base universe, the index is screened by Yasaar Limited, a leading sharia consultancy. Unlike other methodologies, the FTSE SET Shariah Index uses asset-based debt screening, the same that is used for the FTSE Shariah Global Equity Index Series. This is a more conservative approach to sharia compliance. The resulting methodology is less speculative and more in keeping with sharia principles ensuring companies do not qualify for the index simply due to market cap fluctuations.
Sharia principles generally preclude investments in businesses such as conventional financial services, alcohol, pork-related products, gambling, leisure and entertainment. They also preclude interest-bearing investments and investments in companies with unacceptable levels of debt.
SET president Patareeya Benjapolchai says the launch of the index is Thailand's way of dipping into the huge potential of the sharia market.
"This new index will serve both domestic and international investors looking to invest in a transparent and sharia-compliant manner, as well as help issuers create structured investment products tailored to the global Islamic market," says Patareeya.
Assets in sharia-compliant investments total around $65 billion worldwide, according to financial services research firm Cerulli Associates. Another $600 billion of Islamic money is locked up in fixed deposits, according to industry sources.
In the FTSE SET Shariah Index, companies involved in any of the following activities will be filtered out as non sharia-compliant:
- Conventional finance (non-Islamic banking, finance and insurance)
- 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, cinema, music, pornography and hotels)
- Weapons, arms and defence manufacturing
The remaining companies are then further screened on a financial basis. The following financial ratios must be met for companies to be considered sharia-compliant:
- Debt of less than 33% of total assets
- Cash and Interest bearing items are less than 33% of total assets
- Accounts receivable and cash are less than 50% of total assets
- Total interest and non-compliant activities income should not exceed 5% of total revenue
The FTSE SET Shariah Index is the seventh in the FTSE SET Index Series. The other indices are the: FTSE SET Large Cap Index, the FTSE SET Mid Cap Index, the FTSE SET Small Cap Index, the FTSE SET All-Share Index, the FTSE SET Mid Small Cap Index, and the FTSE SET Fledgling Index.