Dividends for Islamic finance (page 1 of 4)

At its peak in early 2000, WorldCom, the giant US telecom company, was valued at $185 billion. If WorldCom were a country, its national economy would have ranked in the global top 25 - more than the economies of Saudi Arabia and the UAE combined.

So when the company collapsed in June 2002, due to a combination of outright fraud and bad accounting practices, the shock was tremendous. Thousands of WorldCom's own employees, who owned shares, saw their life savings disappear into thin air. And millions of investors around the world suffered a similar fate. So why did no one see this coming?

The world's largest fund managers, for instance, watched helplessly as $185 billion in WorldCom stock turned into a mountain of virtually worthless paper. Many mutual funds that had invested in WorldCom were forced to write off their investments, leading to losses of billions of dollars for investors worldwide.

But not everyone was a loser. A small, though rapidly growing group of investors came out unscathed. They escaped because nearly a year before WorldCom's collapse, the Dow Jones Islamic Market index (DJIM) - the leading Islamic benchmark, which guides Islamic investments around the world - decided to remove WorldCom from its indices.

WorldCom was removed because its debt-to-market capitalization ratio broke the limit of 33 percent that Dow Jones imposed in order to be sharia compliant. As WorldCom's debts mounted and share price came off the peaks of 2000, its debt-to- capitalization ratio soared, forcing Dow Jones to remove it from their various Islamic indices.

By deleting WorldCom in June 2001, six months before the scandal broke, Dow Jones enabled fund managers around the world to save their investors hundreds of millions of dollars. Since most mutual funds are attached to indices, if there is any change in the composition, the funds follow suit. As soon as WorldCom was removed, the Islamic fund managers sold off WorldCom shares, at a time when the share price was a respectable $14. Barely six months later, the share was trading at a symbolic penny.

WorldCom was not the only example. On numerous occasions, the Dow Jones Islamic index managed to detect signs of corporate trouble before Wall Street woke up to it. The DJIM ejected Tyco, another deeply troubled American company, well before that scandal became public. And despite the complex accounting that shrouded Enron, the Dow Jones Islamic index tossed out the company before it declared bankruptcy in December 2001.

"Most people were surprised that we had decided to remove these corporate landmarks from our indices. But that was an automatic decision since their debts had gone beyond the limit and were no longer in accordance with the sharia. So we just had to get rid of them," says Rushdi Siddiqui, managing director of Dow Jones Islamic Indices (DJII), a division of the Dow Jones family of financial information products.

There are 95 Islamic funds that follow the DJIM and have over $1.2 billion invested in various stock markets around the world. By selling off WorldCom, Tyco and other dubious shares, the fund managers were able to save several million dollars for their investors - exactly when other fund managers were seeing their investors' wealth evaporating rapidly.

"The dynamics of the global financial sector are creating a new opportunity for accelerated growth in Islamic finance and recommended industry-wide initiatives to encourage this,'' says Mohammed Khalfan bin Kharbash, the UAE minister of state for finance.