General
I’m speaking at Harvard university forum on Islamic finance
Wednesday, February 3rd, 2010
We’re very proud to present our research methodology at this highly regarded conference, it’s humbling to know that one is speaking after a Nobel Laureate and a who’s who list of Islamic finance, the recognition of being selected to present feels very rewarding for all the effort we’ve done, and congratulations to the IdealRatings team.
For more details follow this link
Mohamed Donia
Compliance has more than screening to it
Wednesday, February 3rd, 2010
Compliance, be it Shariah, green, environmental, social, and governance (ESG), has the same workflow since they all revolve a client requiring the elimination of certain investment vehicles based on certain criteria, and since these customer requirements have been around for a long time, one would expect a certain level of maturity of the technologies, processes and workflows involved in the task to simplify the process, reduce its cost, and eliminate the errors. Surprisingly, that not what I’ve seen at all. Glue on solutions with a mesh of Excel sheets at the foundation form the basis of what most firms use for compliance today, and the result is that this part of the investment system is not stable, you have subject matter experts with minimum transparency delivering a spreadsheet that is bolted on a trading system then updated manually.
We chose to deliver our compliance results using a web based platform that includes automates the compliance cycle, managers synchronize their positions and securely collaborate with their compliance teams, and the audits, even third party audits, are supported by the system. Clients love that because it goes above and beyond what a spreadsheet based solution could ever do, and because they have a full audit trail of the whole investment cycle, all while maintaining security and privacy.
So when you think of compliance, think of all the things a compliance solution should be able to offer on top of timely accurate data to help you run efficiently.
Youssri Helmy
Non permissible revenue, how many sources? how much money?
Thursday, December 10th, 2009
In social responsible investments you only need to track whether companies are engaged in certain business or not, but in Shariah compliant investments you need to identify the investment constraints, including the value of good sold in a non allowed business segment. We often see very detailed rule books with sophisticated metrics that vary depending on a company’s core business as well as its location.
As our sole focus is providing the most elemental numbers that enable the formulation of any recipe, we have to keep a close eye on the developments, trends, and expectations of changes in these rule books, and we a long time ago settled on the operational model of “when in doubt, track it”, which means, as soon as we see an interest in a new revenue stream, we separate and track it, this lead us to the establishment and tracking of 30 revenue streams, and that’s a lot, and we don’t think our work is done, we’re seeing more on the horizon, and I doubt these will be the last ones we add.
The audience responses vary when we mention the number 30, from “that’s impressive” to “what do you do with all these sources?”, the feedback always depends on the amount of time and number of rule books the audience has to manage, those with 1 rue book don’t think they need all this complexity, those with 5 rule books immediately realize the value provided by this level of granularity, they will never have to spend another weekend in spreadsheet hell guessing how to classify a multinational with 10 subsidiaries according to 2 different interpretations of *good Vs bad intent of a cash deposit. We even track the source of loans and see if these loans are compliant or not, for example, estimating the revenue of yahoo’s in segments like dating services, music, videos, gaming is definitely a complex and expensive exercise.
We believe there’s value for the single rule book managers, we believe this granularity ultimately means accuracy, accuracy in executing the rule book as intended, accuracy to remove only the companies that do fall outside the rules, and accuracy to include companies that should be included, think of it as using a surgeon’s scalpel Vs a table knife in an operation, we often see companies that simply should not be there, either in or out of the investable universe, and it’s mostly due to someone using a table knife to make the decision.
So, I like to think of us as a 30 caliber scalpel now, and looking forward to moving to higher grade of stainless steel or new scalpel technologies.
Youssri Helmy
San Francisco
Few things are what they appear to be!
Thursday, June 11th, 2009
When Mohamed and I first looked at creating a screening service for the Islamic finance market, we thought it was a relatively simple problem that could be solved using mostly software and algorithms, the definition of a compliant company appeared fairly straightforward, we had licensed the best data feeds in the world which included business activity classification in several standardized formats, and running the financial ratios was a breeze, we in fact used Excel to prototype the first working models, and it was all running very smoothly in a couple of weeks, and we gave the output to small number of friends who worked as analysts reviewing Shariah compliant equities in various markets. We felt this was an overly easy task, in fact we felt it was too good to be true. We were right, it was in fact too good to be true because it wasn’t true.
We started doing our own exploring of the resulting companies, and we found some blatant examples of companies that passed our screening that simply should not be there like GM (NYSE:GM) and GE (NYSE:GE) for example, we personally knew that these companies had a substantial portion of their revenues from financial activities yet they magically slipped through our sieves, we also couldn’t find several companies like Chiquita (NYSE:CBQ) and Hershey (NYSE:HSY) that we were expecting to see on the list, at the same time, we started getting similar feedback form our analyst friends, each from his own experience on issues with the lists we sent.
We had to pause and rethink our approach, with all the mergers and acquisitions and diversification strategies that public companies are pursuing, a large number of companies was involved in various lines of business, but since the legacy classification code had only one pigeon hole to put a company in, we realized that relying on these classification codes was an oversimplification of the problem we were trying to solve, and that we had to go back to the drawing board.
After weeks of thinking, we came up with a bulletproof methodology, we’ve continued to refine our processes since then, and accounted for Sukuk and other Shariah compliant structures, but our framework remained intact, the hybrid model has proven its value in supporting a scalable and accurate research platform, and it yielded the largest accurate investable Shariah compliant universe.
After this experience, we’ve learned that in addressing a complex problem one has to anticipate unexpected complexities as few things are in fact what they appear to be.
Let us know your thoughts on our methodology and service if you’re a user of our system or if you’re involved in Islamic finance or other RI products.
Youssri Helmy
San Francisco
