Definition of Islamic index
Using indices for guiding operations that relate to real transactions is permissible according to Sharia law. It is permissible to use indices to determine the magnitude of a certain market or to judge the performance of certain fund managers or estimate the performance and systematic risks of a portfolio of financial papers. It is also permissible to link periodical adjustments of salaries or wages to changes in the level of prices. It is permissible to correlate the remuneration package of a fund’s manager, mudarib’s bonus, variable rent in an ijarah contract and a deferred settlement of a donation to a charitable body with a particular index.
However, trading in indices or making payment or receipt of money based on the index changes without buying or selling the real assets that the index represents, is prohibited by Shariah as it is considered a form of gambling. On the same basis, it is prohibited to conclude or deal with option contracts that are based on indices or on the index contract multiplier as these transactions deal with wills and intentions rather than real commodities. In developing an Islamic index, Sharia compliance must be adhered to in its components and a Sharia supervisory board must be appointed to conduct periodical reviews and reporting.