Few things are what they appear to be!

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