Introduction: Index Providers

What has been the role of Shariah Index Providers in the development of the Shariah Finance market? 

The Dow Jones was critical to the development of the Shariah Finance market by offering the first Islamic Index in 1999.  They are a world leader in Indexes, having created the first Index, the Dow Jones Industrial Average, in 1896. Standard & Poors entered the market later in 2006.  Without the creation of Dow Jones and S & P Indices, the Shariah Finance market would be inconsequential today.


Are Dow Jones and/or S & P active sponsors of Islamic Finance conferences?

Yes.  S & P has been a huge sponsor of Islamic Finance conferences all over the world. They are underwritten many positive articles in business and finance journals touting the benefits of Shariah Finance. 

Dow Jones has taken the additional measure of creating a Shariah Compliant Mutual fund. This fund has undergone a number of name changes, from Dow Jones Islamic Fund to Azzad-Dow Jones Islamic Fund to the current Iman Fund. This fund remains small and seemingly unimportant.

 

What is an Index?

An index is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market.

It would be too difficult to track every single security trading in the country. To get around this, a smaller sample of the market is selected which is representative of the whole. Thus, just as pollsters use political surveys to gauge the sentiment of the population, investors use indexes to track the performance of the stock market. Ideally, a change in the price of an index represents an exactly proportional change in the stocks included in the index.

  Source: http://www.investopedia.com/university/indexes/index1.asp


Why is an Index important?

An index is a real gauge to the global equity or debt market to a well-established standard.

A new market will not develop if there is not a “benchmark” also known as an “index” from which to compare a new investment’s rate of return, to the average most closely related investments return.  It allows mutual fund managers and other investment managers to advertise their performance to clients, if it is strong. It allows investors to compare between thousands of different kinds of mutual funds.

For example, when you invest in a small cap mutual fund, the performance of this fund will be “benchmarked” or compared to a Small Cap Index that is recognized in the market.

If you buy an equity mutual fund that has a one year rate of return of 10%, there is no way of knowing if 10% is great or terrible, unless this 10% is compared to the average rate of return by a similar group of stocks or index.  In the investment markets, relative performance is very important, and the reason why investors switch from one manager to another.