S&P launches Asia sharia index

Standard & Poor's today launched a sharia-compliant equity index covering nine Asian countries, and said that it planned more sharia indexes over the next 12 months.

The index includes stocks from China, Hong Kong, India, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand. Constituents are drawn from the top 15 companies in each country with over $1 billion market capitalisation, and screened for sharia compliance by the Kuwaiti firm Ratings Intelligence.

S&P's head of global index management, Alka Banerjee, told Risk: "In the next 12 months we will cover the whole globe. Our aim is to provide relevant benchmarks that correlate with the headline indexes." Future indexes will include a pan-Arab index, global property, healthcare and infrastructure sectoral indexes, an emerging market index and global large-cap and small-cap indexes.

The indexes will be used as benchmarks for funds and structured products, and S&P is also in talks on using the indexes for exchange-traded funds, Banerjee said. Assessing sharia compliance is becoming easier, she added. "We have had no problem with acceptance. There is a lot more convergence in equities – there's not much controversy over which sectors we exclude."

Sharia prohibits gambling, which rules out much of the orthodox financial services industry. It also bans investing in companies involved with alcohol, pork products and a number of other forbidden areas.

Controversy continues over permitted debt. At present the most widely held belief is that a company can hold gross debt of up to 33% of its market capitalisation, accounts receivable of up to 49% of market cap, and cash and interest-bearing securities of up to 33%, without falling foul of sharia. But discussion continues around these figures, Banerjee said. "The interpretations change as Islamic scholars change their understanding of finance."

She added that the differences between Islamic and conventional finance are slowly eroding: "The rules are moving to converge with conventional finance. A few years ago, 33% [debt] would have been seen as very liberal. But these numbers are not laid down in the Koran, they are the product of interpretation, so there is debate."