IBANK 6.5.6 Guidance

An Islamic banking business firm should test diversification against the following criteria used by the European Banking Authority:

•   The index must have a minimum number of equities. There must be an absolute threshold below which the index cannot be considered sufficiently diversified to ignore the specific risk completely.
•   None of the equities must significantly influence the volatility of the index. Equities must not represent more than a certain percentage of the total index value.
•   The index must have equities diversified from a geographical perspective.
•   The index must represent equities that are diversified from an economic perspective. Different 'industries' must be represented in the index.
Derived from QFCRA RM/2015-2 (as from 1st January 2016).