Developing rating system for shariah compatibility indices: the case of borsa Istanbul

Abstract

Individual investors who have an ethical approach for the Islamic point of view on investing stock market commonly apply for Islamic Indices. Companies which are monitored each quarter by Shariah boards are announced and listed. These indices simplify stock market investment for those investors who are not specialized in screening annual reports to detect whether publicly traded companies have non-permissible activities both financially and operationally or not. The main problem of these indices is they are just listing the names of companies which are Shariah-compliant. However, no detailed information is given about the financial reports of companies on how much they are compatible. For instance, by just checking these indices investors cannot distinguish between a company which has no interest-bearing security on its assets at all and another company which hardly satisfies the screening criteria. The aim of this paper is to develop a special rating system for companies which are listed on Islamic Indices in Turkey. Companies are being ranked and scored according to their compatibility with the criteria. We aim to simplify the decision-making process for investors who are ethically sensitive to stock exchange market investment when they constitute their portfolio. After the analysis, investors will be able to see which company is ethically more responsible than others.