Researches and Applications in Islamic Finance بحوث و تطبيقات في المالية االسالمية Recherches et Applications en Finance Islamique
ISSN : 9052- 0224 Vol 5, N° 1, February 2021
The creation of an Islamic stock market index on the Moroccan financial place according to the S&P method
Ismail NASIRI Pr. Mohamed DRISSI BAKHKHAT
Faculty of Law and Economics, Faculty of Law and Economics, Abdelmalek Essaadi University, Abdelmalek Essaadi University, Tangier – Morocco Tangier - Morocco [email protected] [email protected]
Abstract: This article aims to broaden the literature on the subject of the construction of Islamic stock market indices by studying the case of Morocco. The results show that the selection process has resulted in a well-diversified universe of Shariah-compliant actions. Moreover, we found 57 of 75 listed companies compliant for the first screening and subsequently, we found 18 compliant companies after reviewing the consolidated balance sheet and The income and expense accounts of these companies. During the analysis period considered (January 2017 to December 2018). The Moroccan All Shares Index (MASI) has been statistically found to have a higher variance than its counterpart the Standard and Poor Moroccan Islamic Index (SPMII), indicating that investors will not make sacrifices for a classic index that has a high level of risk.
Keywords: Islamic stock market indices, Screening, Morocco.
Received: 30 September 2020, accepted: 18 February 2021
Citation: Nasiri I. and M. Drissi Bakhkhat (2021), The creation of an Islamic stock market index on the Moroccan financial place according to the S&P method, Researches and Applications in Islamic Finance, Vol 5, No 1, pages: 107-123
107
Vol 5, No 1 (2021)
Introduction
Global Islamic Finance assets are forecast to reach USD 3.69 trillion by 2024, according to the 2020 Islamic Finance Development Report 20201.According to the report, global Islamic Finance assets increased by 14 percent year-on-year totaling USD 2.88 trillion in 2019. Islamic Finance assets of Gulf Cooperation Council (GCC) reached USD 1.2 trillion in 2019, followed by Middle East and North Africa (MENA) at USD 755 billion (excluding the GCC), and Southeast Asia at USD 685 billion. Shaken by the Arab spring of 2011 and the global financial crisis of 2008, Morocco, one of the most promising emerging countries in the world, has recently aligned its economic development strategy with the inclusion of Islamic finance to strengthen its economy and diversify its sources of financing. After the approval of a draft Islamic Finance Bill by the Moroccan Parliament in November 2014, the Moroccan Ministry of Finance and Economy adopted a circular in July 2015 describing the banking licensing process, including Shariah-compliant units. The new banking law allows the establishment of Shariah-compliant banks (Islamic law) and allows foreign lenders to create Islamic units in Morocco as well. The year 2018 was the first full year for the eight Moroccan banks and participating counters. A first exercise that resulted in a volume of funding that can be described as significant, given the deficiencies still present in the ecosystem of participatory financing in the Kingdom. According to the latest monetary statistics of Bank Al-Maghrib, at year-end 2019, the number of bank accounts had increased by 5% annually to more than 28 million, after 4.7% at year-end 2018. Regarding the accounts opened by the participating banks, their number stood at about 87 thousand, compared to 56 thousand accounts last year. To meet the needs of high net worth investors who want to grow their capital and diversify their portfolio by holding halal assets, financial operators should urgently create Shariah-compliant equity funds to invest in and develop a set of indices that list Shariah- compliant companies and serve as a benchmark for compliant portfolio managers. Unfortunately, Moroccan stock market players have not yet created such indices that would allow international Muslim investors to be tempted and monitor stock market developments in a style consistent with their underlying ethical principles. Guyot (2011) studied the performance of 9 Islamic indices belonging to the Dow Jones family by comparing them with conventional indices and conducting a co-integration and efficiency analysis from January 1999 to December 2008. He concluded that there is an absence of co-integration and the possibility of diversification opportunity; Islamic stock market indices are much more efficient than their conventional counterparts. Majid et al. (2007) focused on Malaysian Islamic indices. The conclusion drawn by this study is that
1 https://icd-ps.org/en/news/refinitiv-icd-2020-report-global-islamic-finance-assets-expected-to-hit-369-trillion- in-2024 ( Accessed 21/01/2021)
108
Vol 5, No 1 (2021)
Islamic stock market indices are more volatile than conventional indices, more precisely; they are more sensitive to exchange rates and less sensitive to interest rates than their counterparts. In this article, we follow the selection process of companies listed on the Casablanca Stock Exchange under Shariah in order to obtain a set of Shariah-compliant companies, which leads us to ask the following question: What would be the performance of the newly created Moroccan Islamic stock market index compared to the MASI index? How does it proceed qualitatively and quantitatively to the creation of the Islamic stock market index? Which quantitative criteria will we use in this research to create a Moroccan Islamic index? Which Moroccan companies can contribute to the constitution of the Islamic stock market index? Is the Islamic index stable over time compared to its MASI counterpart? An Islamic stock market index could be created based on Standard & Poor's (S&P) financial ratios alone. To do so, we select 75 companies listed on the Casablanca Stock Exchange to obtain Shariah-compliant shares. The remainder of this article is structured as follows: The second section presents a literature review of studies that have examined the characteristics of this particular investment and a brief history of the main Islamic stock market indices. The third section is built around the Shariah screening methodologies we used in this study. In the fourth section, we present the used methodology and the method of constructing Islamic Indices S&P. The last section is devoted to the results and discussions.
2. Literature review
Islamic stock market indices are first of all compliant with Shariah law (Shariah - compliant) also applying the different laws existing in the various financial markets. Rizvi and Arshad (2014), worked on comparing the efficiency of the Islamic market with that of the conventional market using the MF-DFA (Multifractal of trended fluctuation analysis) method. The objective of this analysis is to deepen the understanding of the Islamic market and to draw a conclusion that market development has an impact either directly or indirectly on efficiency and optimal resource allocation. Jawadi et al. (2014) explained that the returns of traditional financial products outperform those of Islamic products in the period before the subprime crisis and underperform the latter in times of crisis (2006-2011). In their Meta-analysis, El khamlichi and Viallefont (2015), showed that Islamic indices do not underperform conventional indices. Elbousty and Oubdi (2017) confirmed that there are no differences between the returns and volatilities of the two types of indices. Islamic investment performs better than conventional investment in general, Shariah restrictions seem to have moderate positive effects in portfolio diversification, also during periods of financial recession of major crises such as the one in 2008 (Balcilar et al, 2016; Hkiri et al. 2017; Umar et Suleman 2017; Ahmad et al. 2018; Hossain et al. 2018; Cevik et Bugan 2018; Usman et al. 2019; Umar 2017). The tests carried out by Yildiz and El Khamlichi (2017) show that only the Sharpe and M2 ratios give identical rankings. A Pearson linear correlation coefficient analysis was also
109
Vol 5, No 1 (2021)
performed to measure the correlation between the rankings of 16 risk adjusted performance measures (RAPMs). The final index rankings are obtained using the Borda counting method. Their results suggest that, on a regional basis, Asian countries perform better than Latin American and EMEA (Europe, Middle East, and Africa) countries. When countries are examined individually, the EM Colombia Islamic Index comes first in the assessment; the EM United Arab Emirates Islamic Index comes last. Alexakis et al (2017) explore the long-term relationship between Islamic and conventional stock market indices by adopting the technique of co-integration and finding that the Islamic index is the least reactive in times of crisis and showing the robust nature of the Islamic portfolio with the potential to benefit from diversification. Rizvi and Arshad (2018) stipulate that Islamic indices perform better but do not find abnormal returns one on a global scale. They also have a lower systematic risk compared to conventional benchmarks, with advantages in terms of portfolio diversification. According to Paltrinieri and Kutan (2019), investors can gain diversification benefits by including Islamic instruments in their asset allocation strategies, such as socially responsible instruments. In particular, they study co-integration and dynamic correlations by analyzing a sample of 17 Islamic, SRI, and conventional stocks that reveals co-movements between Islamic, SRI, and conventional indices with mutual causality when looking at the index world. They also compare the results with some macroeconomic variables such as oil prices and the VIX index. Kamil et al. (2020) found that Islamic equity portfolios operate with a smaller investment universe due to the screening of non-Shariah compliant stocks. It has been theoretically argued that this results in sub-optimal portfolio diversification, which in turn negatively affects risk-adjusted returns. They offer empirical evidence that such a portfolio diversification is far from a foregone conclusion, at least empirically. Their results suggest that Islamic portfolios are not invariably handicapped in terms of portfolio diversification. They also have also explored dimensions that may explain differences in relative investment performance between Islamic and conventional portfolios, such as portfolio constraints, short selling, and market conditions. Based on their recent literature review, Hassan et al. (2020) found that most research focuses on empirical studies, especially on Islamic stock markets, Islamic banking, and other aspects of Islamic banking and finance. However, they see that basic research on Islamic banking and finance is largely ignored. Therefore, in order to appreciate the spirit of Islamic finance, future research should focus on fundamental aspects of Islamic banking and finance, such as the pricing of Islamic assets, Islamic contract theory, and the structure of Islamic banking and financial instruments. By conducting a systematic literature review on a sample of articles published in academic journals from 2009 to 2019, Delle Foglie and Panetta (2020) showed that there is a lack of consensus on the answers. Until now, most of the contributions have focused on the contraposition of the two systems, trying to verify the presence of decoupling, contagion, interdependence or relationship between these two realities. Some studies recommend the
110
Vol 5, No 1 (2021)
advantage of taking Islamic assets into account in portfolio allocation. On the contrary, others suggest that Islamic assets are not different from conventional assets and, in some cases; they underperform their benchmark, confirming the absence of a correlation effect. Consequently, the analysis carried out leaves the possibility of further investigations to find definitive answers. In this respect, they propose a change in the approach to investigating the phenomenon, examining the two capital markets through the lens of integration. In their view, it might be possible to assess how to take advantage of the benefits of Shariah-compliant instruments by combining them with conventional instruments, taking into account the main results of previous studies, instead of "simply" comparing them.
2.1 The main Islamic stock market indices
- The Dow Jones Islamic Market Index or DJIMI: As of the launch date of this index in February 1999, this index includes the evolution of companies in 66 countries around the world, is Shariah-compliant and complies with Islamic finance criteria. The DJIMI family is made up of more than 90 indices distributed according to geographical areas and sectors of activity. - The Financial Time Stock Exchange Shariah or the FTSE Shariah: through the joint venture between FTSE and the consulting firm Yasaar that this index in question was created, this financial instrument includes indices such as DIFX Shariah, SGX 100, and the FTSE Bursa Malaysia index (FTSE 2010). - Morgan Stanley Capital International Islamic or MSCI Islamic: At the launch date was in March 2007, the family of this index provides broad geographical coverage (69 countries). - The Jakarta Islamic Index or the JII: launched in 2000 to facilitate negotiations and exchanges between different forms of companies that respect the principles of Islamic finance, it consists of 30 Islamic actions. - The Kuala Lumpur Shariah Index or the KLSI: established in 2007, as part of a partnership between FTSE and the Malaysian Stock Exchange. This index represents the performance of companies that are listed on the Malaysian stock exchange and also considered to be in compliance with Shariah law, but they must comply with the liquidity requirements of FTSE. - Standard and Poor's Shariah or S&P Shariah: in 2006, this index was launched by Standard & Poor's, as well as the Islamic version of its benchmark indices and other newly created indices. The S&P 500 Shariah Global Index includes: Regional indices (4 indices) Indices by country (4 indices) Sectoral indices (4 indices) Other global indices (2 indices)
So, the indices mentioned above, mainly dedicated to small, medium and large companies, and are part of 26 developed markets in Asia, Europe, America and Australia.
111
Vol 5, No 1 (2021)
And the S&P Index represents the central focus of our research. We have chosen it as a base from which the Moroccan Islamic stock market index will constitute because of its comprehensiveness and the holding of four quantitative screening financial ratios.
3. Process of screening of Islamic stock market indices
As soon as an Islamic stock market index is created, it is necessary to refer to the Shariah scholars who are responsible for carrying out stock screening. For the creation of an Islamic stock market index, two types of qualitative and quantitative screening are required.
3.1. Qualitative screening Our research was based on the following nomenclature: GICS: (Global Industry Classification Standards). This is a classification adopted by the Shariah committees of S&P's Islamic stock market indices. Indeed, starting first with the first screening, the purpose of which is to oust companies on the basis of the nature of their sector of activity. Islamic rules of conduct clearly prohibit certain activities considered to be Haram (prohibited) such as pig activities, wine, finance (non-Islamic banks and insurances), hotels2 too, pornography, the gambling industry (casinos) and the gold and silver trade.
Table 1: Overview of qualitative criteria for Shariah compliance screening methods
Qualitative criteria (prohibited sectors) S&P Alcohol Broadcasting and entertainment Conventional financial services Gambling Hotels Insurance Media (except newspapers) Products related to pork Restaurants and Bars Tobacco Gold and silver trading Weapons and defence Cinema Music * Based on the latest published version of the MSCI Islamic Index Series Methodology of November 2018, available at: www.msci.com[Accessed August 27, 2020]. Source: (Derigs and Marzban, 2008).
2 The prohibition of hotel activity is justified for the following reason: hotels are not only providers of accommodation; they also sell alcohol.
112
Vol 5, No 1 (2021)
Of course, some activities are explicitly mentioned by Islamic law, other activities are excluded from the list judged Halal by Islamic stock index Shariah boards; we could also mention those related to tobacco, arms production, advertising and the media (except newspapers), with the exception of sports and information channels. Above Table 1 illustrates the activities excluded by the Shariah. Table 2: Industry screening for Shariah Compliance Screening Methods
S&P* (GICS Sub-industries) 30201010 Brewers 30201020 Distillers and Winegrowers 25301040 Restaurants 40201040 Specialized finance 40101010 Diversified banks 40201010 Consumer financing Savings and mortgage 40101015 Regional banks 40102010 financing 30203010 Tobacco 25301020 Hotels, resorts and cruise lines 25401025 Cable and Satellite 25401030 Cinema and Entertainment 25401020 Radio broadcasting 40201030 Multi-sectoral participations Other diversified financial 25301010 Casinos and games of chance 40201020 services 40301030 Multi-line insurance 40301020 Life and health insurance Investment banking and 40301010 Insurance brokers 40203020 brokerage Property and casualty 40203030 Diversified financial markets 40301040 insurance Asset management and 40203010 custodian banks * S&P adopts additional sectoral screening related to the commercial activities of Cloning and Gold and Silver Trading. Source: "Methodological Map: Islamic Indexes" published by Dow Jones Indexes Analytics & Research on 31 December 2011, accessed on 20 August 2020 at the following address.www.djindexes.com.
The GICS and ICB classification standards are the most widely used by Shariah screening providers compared to their competitors (for example, Thomson Reuters Business Classification (TRBC)). Although the differences between these competing systems remain minor, the GICS has the advantage of providing a precise definition of non-Shariah-compliant sectors and exceeds its counterparts in terms of classification granularity, with 154 different sub-industries, 30 more than the TRBC and 40 more than the ICB.
3.2. Quantitative screening It is clear that if companies meet the standards of the first screening, the second type called remains to be accomplished, financial screening, this financial screening would have certain differences according to the Shariah board whose mission is to guarantee the Shariah
113
Vol 5, No 1 (2021)
compatibility of values, our research will focus on a series of ratios published in the Standard & Poor's Shariah Indices3 guide, namely the following ratios. Indeed, this Shariah compliance screening step is the quantitative inspection process: the company's debt level; the company's interest and other prohibited revenues; and the extent of the company's cash and receivables. This is done by calculating financial ratios to be compared with the rejection thresholds set by the stock market index providers. In fact, the financial ratios used by Shariah selection methods use different nominators and denominators, and moreover, even when it is the same financial ratio formula, the release thresholds may vary from one method to another. This index was chosen because it is also frequently used to strictly specify the screening of companies, so the release thresholds may differ from one methodology to another. In addition, S&P adopts a fourth ratio that measures the share of revenue from non- compliant activities. In general, a security is considered Shariah-compliant when all financial ratios are below their respective rejection thresholds.
Table 3 : Summary of criteria for selecting acceptable financial ratios
The screening Shariah-compliant ratios S&P
Debts
Liquidity
Receivables
Share of income from non-compliant activities
Source: "Methodological Map: Islamic Indexes" published by Dow Jones Indexes Analytics & Research on 31 December 2011, accessed on 20 August 2020 at the following address www.djindexes.com 4. The Methodology for the creation of the Islamic Index
To collect financial data, several databases4 were used depending on the nature and availability of the information sought. Our research was based on the following nomenclature: GICS: (Global Industry Classification Standards). This is a classification adopted by the Shariah committees of S&P's Islamic stock market indices. We proceed to the selection of
3 Among the methodological guides available for building Islamic indices, it appears to be the most accurate and transparent. 4 fric-afrique.fr ; cdgcapitalbourse.ma and casablanca-bourse.com : (Accessed 07 /05/2020)
114
Vol 5, No 1 (2021)
companies based on the first qualitative screening as explained in section 3.2. Of course, some activities are explicitly mentioned by Islamic law, other activities are excluded from the list judged Halal (licit) by Islamic stock index Shariah boards; we could also mention those related to tobacco, arms production, advertising and the media (except newspapers), with the exception of sports and information channels. Table 1 above illustrates the activities excluded by the Shariah. Then, we measure the fourth financial ratios of the quantitative screening to determine the companies could constitute the Islamic stock market index of Morocco. Accounts for quantitative screening: The Total Assets, Financing Debt, Treasury Assets and Other Financial Receivables accounts are included in the Balance Sheet, while interest and other financial income and turnover are included in the income and expense account, based on the consolidated accounts for all accounts. Stock exchanges or financial markets are places where different financial products are traded, among which the best known are stocks and bonds. The Stock Exchange plays the dual role of being both a place of financing for companies, states or communities (issue of shares or bonds) but also a place of investment (investors). It is for this reason that the stock market is split into two sub-markets which are respectively the primary market and the secondary market. The role of the primary market is to organize the meeting of companies seeking to finance their development and holders of capital (a parallel can be drawn between the primary market and the new market). The secondary market plays the role of the second- hand market, where the various players can exchange securities. This market is of course the most active, since billions of Euros a day are traded. According to the Casablanca Stock Exchange website5, it has adopted the floating market capitalization since December 2004. There are generally two most dominant types of indices, MASI (Moroccan All Shares Index): Overall index consisting of all equity securities, MADEX (Moroccan Most Active Shares Index) is a stock market index composed of the 62 most active stocks in Casablanca. The new method of calculating the index is as follows:
=1000 (1)
Where:
: price of the index at time t in basis points ; : floating factor of share i at time t ; : capping factor of share i at time t ; : total number of shares i at time t ; : price of share i at time t ; : base capitalization on December 31, 1991 ; : the adjustment coefficient of the base cap at time t.
5 http://www.casablanca-bourse.com/bourseweb/UserFiles/File/New_indices.pdf (Accessed 07 /08/2019)
115
Vol 5, No 1 (2021)
In order to build the Moroccan Islamic index and by statistically comparing it with the MASI, it should be developed according to the same formula (1). But the main change is to replace the basic denominator (Bo . ) by the sum of the floating capitalization of each of the Shariah-compliant companies, dating from 5, January 2017 as that of a basic market capitalization for Islamic indices.
(2)
: price of the index j at time t in basis points ; number of selected Shariah compliant companies for construction of the n : Moroccan Islamic index ;
: floating capitalization of company i at time t ;
: floating capitalization of company i on January 5, 2017.
5. Results and discussions 5.1. Shariah-compliant companies
On the only basis of the Global Industry Classification Standard (GICS), we collected for each company listed on the Casablanca Stock Exchange, the first qualifying screening process was applied to the following6 Shariah-compliant companies. Table 4 below lists these companies by sector of activity.
Only 57 of 75 publicly traded companies have been found to be Shariah-compliant based on their GICS sector classification. Table 4 also shows the diversification of Shariah-compliant sectors, with 17 different sectors in which investors could invest. These are dominated by some of the high value-added industries, namely construction and building materials, distributors, materials, software and computer services and food producers and processors, which account for a very large share of the Moroccan stock market in 2018.
6 It should be noted that for some sectoral screening such as (3577 food products, 5337 retailers and food wholesalers), these have not been eliminated since operators in these sectors do not deal with prohibited-foods. For both locally produced and imported food, an import licence is required from the Ministry of Commerce and the Ministry of Agriculture to declare the adherence of these foods to the Shariah.
116
Vol 5, No 1 (2021)
Table 4 : Companies in compliance with the first step of the qualitative screening review
Sectors Standard & Poor 's (S&P)
Number of companies %
Construction and building materials 7 12,28%
Oil and gas 3 5,26%
Real Estate 5 8,77%
Distributors 7 12,28%
Food producers and processors 7 12,28%
Transportation 3 5,26%
Engineering and equipment Industrial goods 2 3,50%
Holding companies 2 3,50%
Hardware, software and computer services 7 12,28%
Telecommunications 1 1,75%
Public services 1 1,75%
Chemical products 2 3,50%
Mining operations 4 7,01%
Forestry and paper 1 1,75%
Electricity, electrical and electronic equipment 2 3,50%
Beverages 1 1,75%
Pharmaceutical industry 2 3,50%
Total companies 57 100%
Source: Elaborated by the authors based on the results of the qualitative selection process.
In the next quantitative screening, we calculated the financial ratios provided by S&P (shown in Table 5 below). The results of the calculations ultimately reveal 18 for the S&P Index. Table 5 below shows Shariah-compliant companies with their financial ratios.
117
Vol 5, No 1 (2021)
Table 5 : Companies that comply with the second step of the quantitative screening review
S&P Shariah Compliance Review
Shariah-compliant Companies According R1< 33% R2< 33% R3<49% R4< 5% to the S&P Islamic Stock Market Index
AFRIC INDUSTRIES SA 0,35% 0,67% 23,99% 0,31% AFRIQUIA GAZ 9,26% 7,97% 23,99% 0,21%
BALIMA 4,15% 0,67% 3,62% 0,43%
CENTRALE DANONE 13,74% 0,91% 3,14% 0,02%
CIMENTS DU MAROC 0,03% 1,50% 3,74% 0,99% COLORADO 4,34% 4,24% 26,19% 0,09% COSUMAR 10,37% 2,48% 11,04% 0,31% CTM 15,29% 2,72% 21,12% 0,09% ITISSALAT AL-MAGHRIB 12,33% 1,66% 9,68% 0,01% LAFARGEHOLCIM MAR 14,42% 0,34% 0,0037% 0,04% LESIEUR CRISTAL 4,03% 10,56% 19,59% 0,21% OULMES 27,96% 3,29% 17,09% 0,04% M2M Group 0,91% 4,30% 17,08% 1,68% RISMA 9,25% 18,86% 0,86% 0,56% SODEP-Marsa Maroc 9,02% 2,59% 9,34% 2,26% SONASID 1,98% 6,92% 37,13% 0,06% SOTHEMA 2,15% 1,01% 22,90% 0,02% TOTAL MAROC 8,47% 9,45% 14,19% 0,03% Source: Elaborated by the authors R1: Debt Ratio , R2: Interest Ratio , R3: Cash Ratio and R4: Non-Permissible Incomes Ratio
There are 18 companies that are Shariah-compliant according to their financial ratios based on S&P concepts according to quantitative screens; we focus on a statistical description for each financial ratio.
118
Vol 5, No 1 (2021)
Table 6 : Descriptive statistics of financial ratios (R1, R2, R3 and R4) for S&P
N Max Min Average Median Standard deviation
R 1 : Debts
18 27,96% 0,03% 9,17% 9,02% 7,12%
R 2 : Cash and cash equivalents
18 18,86% 0,34% 4,48% 2,59% 5,07%
R 3 : Receivables
18 37,13% 0 ,0037% 13,31% 11,04% 10,68%
R 4 : Share of income from non-compliant activities
18 2,26% 0,01% 0,34% 0,09% 0,60%
Source: Elaborated by the authors (R1). Debt ratio which means total debt divided by the average market capitalization of the last 36 months according to the method in question and its value must be strictly less than 33%, 18 companies were found according to the S&P method with a maximum value of 27.96% and a minimum value of 0.03%, its average value is 9.17% with a median of 9.02% while the standard deviation is 7.12%. (R2). Liquidity ratio which consists of total cash and interest-bearing securities divided by the average market capitalization of the last 36 months which must be strictly less than 33%. With the 18 selected companies, the maximum value is 18.86% with a minimum value of 0.34% where the average is 4.48% with a median of 2.59%, while the standard deviation is 5.07%. (R3). Ratio of receivables which is composed of total receivables divided by the average market capitalization of the last 36 months which must be strictly less than 49%, the maximum value is 37.13% with a minimum value of 0.0037%, the average of this ratio in question is 13.31% where the median equals 11.04% while the standard deviation is 10.68%. (R4). Ratio of the share of income from non-compliant activities, non-qualifying income other than interest income divided by sales must be strictly less than 5%, the maximum value is 2.26% with a minimum value is 0.01%, where the mean is equal to 0.34% with a median of 0.09% while the standard deviation is 0.60%.
119
Vol 5, No 1 (2021)
13600,00 3200,00
13200,00
12800,00
12400,00 3000,00 12000,00
11600,00
11200,00
10800,00 2800,00
05/01/2017 05/02/2017 05/03/2017 05/04/2017 05/05/2017 05/06/2017 05/07/2017 05/08/2017 05/09/2017 05/10/2017 05/11/2017 05/12/2017 05/01/2018 05/02/2018 05/03/2018 05/04/2018 05/05/2018 05/06/2018 05/07/2018 05/08/2018 05/09/2018 05/10/2018 05/11/2018 05/12/2018
MASI SPMII
Figure 1 : Evolution the S&P the Moroccan Islamic index (SPMII) and the (MASI)
Figure 1 shows that the two indices behaved differently during the period from 05/01/2017 to 12/31/2018. In Figure 1, we can see that the MASI index varies stochastically in a time interval from 05/01 /2017 to 14/04/2017 with a value at the beginning of the fluctuation is 12186.12 with a decrease at the end of this period is 11222.64. While the SPMII index varies very slightly over the same period compared to its counterpart, with a value of 3038.56 and the end value of this period is 3053.02. During the period from 14/04/2017 to 01/02/2018, we can clearly see from the evolution of the curve, that the value of the MASI index increases upwards starting from the value 12186.12 going towards a very important maximum value according to the temporal interval limited by this study, is 13278.30, while the SPMII index varies in a very slight way over the same period with a value 3038.56 to 3054.77. During the period from 01/02/2018 to 12/03/2018, the variation of MASI is very slight, with a decrease of 12997.44 on 07/02/2018, but quickly took the value which is 13249.37 on 12/03/2018. While SPMII keeps the same level of fluctuation over this period.
During the period from 12/03/2018 to 31/12/2018, there was a very remarkable drop in the MASI index with a value of 10987.44 on 05/11/2018 and a relatively stable variation of its counterpart SPMII with a value of 3057.26 over the same period. While the conventional
120
Vol 5, No 1 (2021)
index is moving upwards with a value of 11364.31 on 31/12/2018 while the Islamic index is worth 3064.89. However, it should be noted that the Islamic index was less volatile than those of the MASI since the index was constructed by only 18 companies while its counterpart contains all the stocks of listed companies, in addition, the Islamic stock market index is much more stable than that of the MASI. Table 7 below supports this statement with descriptive statistics for the two indices.
Table 7 : Descriptive statistics of the indices studied
MASI SPMII
Average 12104,884 3077,1943
Max 13284,94 3133,73
Min 10885,51 3028,31
S.d 633,94423 18,73664
Source: Established by the authors
In terms of scale, SPMII varied around its average of 3077.1943 points while MASI fluctuated around its average value of 12104.884 points. This is mainly due to the difference between the divisors of the indexes related to the base market capitalization. The Islamic indices have a base market capitalization as of January 5, 2017 while the MASI index takes into account a base market capitalization as of December 31, 1991. The standard deviation of the conventional index is 633.94423 with respect to its counterpart with a value of 18.73664, which relatively confirms that the fluctuation of the MASI index is stochastic with a very high risk, while the variance of the Islamic index is 18.73664, which explains why its risk is controllable and manageable.
6. Conclusion
This article examined the Moroccan stock market's compliance with Shariah law using the S&P methodology, the world's leading provider of stock market indices (S&P). The first step of qualitative selection resulted in 57 Shariah-compliant companies using the GICS sector classifier. The second quantitative selection process based on financial ratios ultimately resulted in the establishment of 18 companies for S&P. The latter is based on four financial ratios that are very strictly compared to other screening instruments, both qualitative and quantitative. More specifically, the use of a fourth financial ratio by this index, which measures the proportion of ineligible revenues in relation to sales. These compliant companies were then used to construct a Moroccan Islamic stock market index using the same method of calculating the MASI (Moroccan All Shares Index).
121
Vol 5, No 1 (2021)
We have statically compared the MASI index with its counterpart SPMII (Standard and Poor Moroccan Islamic Index), With 18 companies that are Shariah-compliant, based on their financial ratios based on the S&P methodology, as shown in Table 5. We found from Figure 1 that MASI varies up and down with a value of 12186.12 and 10987.44 over a period from 05/01/2017 to 31/12/2018. But it was not the same case for SPMII which started with a value of 3038.56 and ends with 3057.26 over the same period of its counterpart, which confirms the idea that the SPMII does not fluctuate excessively. The standard deviation of the conventional index is 633.94423 with respect to its counterpart with a value of 18.73664, which relatively confirms that the fluctuation of the MASI index is stochastic with a very high risk, while the variance of the Islamic index is 18.73664, which explains why its risk is controllable and manageable. According to the result obtained above in figure 1 as well as in table 7 showing and explaining that the fluctuation of the Islamic index is very slight in comparison with the classical index, this variation is generally due to the difference between the divisors of the indices related to the base market capitalization. The Islamic indices have a base market capitalization as of January 5, 2017 while the MASI index takes into account a base market capitalization as of December 31, 1991. Our present research could not cover all parts of the topic in question. Of course, the time period was very limited and the recently created SPIII does not have a long period of time as MASI does. With the arrival of the new banking law that introduced Islamic finance for the first time in Morocco, we assume that these results could be very useful to Moroccan financial authorities in building Islamic stock market indices for Muslim investors seeking to invest ethically according to their religious beliefs but also for index managers and other equity market participants.
References
Alexakis, C., V. Pappas, and A. Tsikouras, (2017). Hidden cointegration reveals hidden values in Islamic investments. Journal of International Financial Markets, Institutions and Money, 46, 70-83. Balcilar, M., G. Cerci, and R. Demirer, (2016). Is there a role for Islamic bonds in global diversification strategies? Managerial Finance. Cevik, E. I., and M. F. Bugan, (2018). Regime-dependent relation between Islamic and conventional financial markets. Borsa Istanbul Review, 18(2), 114-121. Delle Foglie, A., and I. C. Panetta, (2020). Islamic stock market versus conventional: Are islamic investing a ‘Safe Haven’for investors? A systematic literature review. Pacific-Basin Finance Journal, 101435. Elbousty, M. D., and L. Oubdi, (2017). Les indices boursiers islamiques sont-ils plus performants que leurs homologues conventionnels? -Étude comparative entre pays émergents et pays développés. Recherches et Applications en Finance Islamique, 1(2), 100-120.
122
Vol 5, No 1 (2021)
El khamlichi, A., and A. Viallefont, (2015). La performance des indices boursiers en finance islamique: Une Meta-analyse. Revue de Gestion et d’Économie, 3(1), 1-15. Guyot, A. (2011). Efficiency and dynamics of Islamic investment: evidence of geopolitical effects on Dow Jones Islamic market indexes. Emerging Markets Finance and Trade, 47(6), 24-45. Hassan, M. K., S. Aliyu, B. Saiti, and Z. A. Halim, (2020). A review of Islamic stock market, growth and real-estate finance literature. International Journal of Emerging Markets, 24-25. Hkiri, B., S. Hammoudeh, C. Aloui, and L. Yarovaya, (2017). Are Islamic indexes a safe haven for investors? An analysis of total, directional and net volatility spillovers between conventional and Islamic indexes and importance of crisis periods. Pacific-Basin Finance Journal, 43, 124-150. Hossain, M. S., M. H. Uddin, and S. H. Kabir, (2018). Sukuk as a financial asset: A review. Academy of Accounting and Financial Studies Journal, 22, 1-18. Jawadi, F., N. Jawadi, and W. Louhichi, (2014). Conventional and Islamic stock price performance: An empirical investigation. International Economics, 137, 73-87. Kamil, N. K., O. I. Bacha, and M. Masih, (2020). Is there a diversification “cost” of Shari’ah compliance? Empirical evidence from Malaysian equities, Economic systems, In press, https://doi.org/10.1016/j.ecosys.2020.100817 Majid, M., R. M. Yusof, and A. N. Razal, (2007). Dynamic Financial Linkages among Selected OIC Countries. Journal of Economic Cooperation among Islamic Countries, 28(2). Umar, Z., and T. Suleman, (2017). Asymmetric return and volatility transmission in conventional and Islamic equities. Risks, 5(2), 22. Usman, M., M. A. Q. Jibran, R. Amir-ud-Din, and W. Akhter, (2019). Decoupling hypothesis of Islamic stocks: Evidence from copula CoVaR approach. Borsa Istanbul Review, 19, 56-63. Umar, Z. (2017). Islamic vs. conventional equities in a strategic asset allocation framework. Pacific-Basin Finance Journal, 42, 1-10. Paltrinieri, A., and A. Kutan, (2019). Islamic finance and business: an overview with directions for further research. International Journal of Emerging Markets. Rizvi, S. A. R., and S. Arshad, (2014). An empirical study of Islamic equity as a better alternative during crisis using multivariate GARCH DCC. Islamic Economic Studies, 22(1), 8-28. Rizvi, S. A. R., and S. Arshad, (2018). Understanding time-varying systematic risks in Islamic and conventional sectoral indices. Economic Modelling, 70, 561-570. Yildiz S.B., and A. El Khamlichi, (2017). The Performance Ranking of Emerging Markets Islamic Indices Using Risk Adjusted Performance Measures, Economics Bulletin, 37(1).63-78.
123