Identifying Islamic alternatives to short selling in Iranian stock market and prioritizing them using TOPSIS

Abstract

Purpose – This paper aims to first explain short selling and its benefits and damages; then, using experts’ opinions and Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) method as well as based on the legal, financial and jurisprudential criteria adopted, evaluate and prioritize Islamic alternatives to short selling; and finally, introduce the most proper approach for implementing it in Iran’s stock market. Design/methodology/approach – The methods applied in the paper are as follows: Library method to collect the required data for developing the theoretical and jurisprudential foundations of the study, identifying the appropriate criteria for prioritizing; the alternative methods for short selling in the Islamic markets; and the field method to determine the level of significance of the ranking criteria and prioritize the alternative methods for short selling in the Islamic markets on the basis of such criteria. The alternative methods for short selling in Iranian stock market were identified and analyzed jurisprudentially and legally. Afterwards, these strategies were prioritized based on the (legislative, financial and jurisprudential) criteria which were adopted in the form of Delphi from the related literature, research and expert opinions by means of TOPSIS approach. The method with the highest ranking will be introduced as the alternative method for short selling. Findings – The paper suggests that among all Islamic alternatives to short selling, based on experts’ opinions and legal considerations, method of combining Murabaha and Wa’ad is the most proper strategy in Iranian stock market. Research limitations/implications – An important limitation we faced in this study was limited familiarity of Iran, capital market participants with Islamic finance concepts including Islamic alternatives to short selling. Therefore, designed questionnaire was sent only to participants who had experience in the field of Islamic finance that they were not more than 31 people. Of course, in this study, large sample size was not necessary because the questionnaire was completed by experts, and therefore, results were scientific and reliable. Originality/value – One of the transaction strategies which significantly contributes to the enhancement of market liquidity is short selling. However, this strategy is not applicable to the Islamic stock markets because of its contradictions with a number of Islamic laws. Therefore, Islamic financial researchers have attempted to design relevant legal mechanisms drawing on the Islamic contracts to make use of the merits of this transaction strategy. In addition to introducing short selling and its demerits for the stock market, the paper explored the alternative methods and proposed the most proper one for implementing in Iranian stock market.

Sentiment Analysis on Short Selling: An Islamic Perspective

“…Several sources indicate that the Indonesian Ulema Council forbids short selling on the grounds that it is not in accordance with sharia rules. Where in practice there is ambiguity and contains riba (Ahmadvand, Dezfuli, & Sadehvand, 2014). In addition, the practice of short selling is prohibited in Islam because it allows investors to sell shares that they do not own (Aminy, 2018).…”

“…In addition, Short selling plays a unique role in financial markets (Reed, 2013) In conventional capital markets short selling provides liquidity, reduces overpriced stock prices and generally increases market efficiency. (Ahmadvand, Dezfuli, & Sadehvand, 2014). As for the Iranian stock market, the "combination of Murabahah and Wa'ad" approach was introduced as an Islamic alternative to short selling (Ahmadvand, Dezfuli, & Sadehvand, 2014).…”

“…(Ahmadvand, Dezfuli, & Sadehvand, 2014). As for the Iranian stock market, the "combination of Murabahah and Wa'ad" approach was introduced as an Islamic alternative to short selling (Ahmadvand, Dezfuli, & Sadehvand, 2014). In addition, it was found that when short selling was allowed to increase market quality (Charoenrook & Daouk, 2009).…”

“…(Dusuki & Abozaid, 2008) Securities lending is an essential aspect of stock market activities all over the worldwide. It began in the United Kingdom in the 1950s and 1960s and quickly extended to the United States, as well as developed and emerging nations (Ahmadvand, Dezfuli, & Sadehvand, 2014). Short selling is generally associated with a stock market fall and is perceived as negative news by the average person on the street (Mohamad, 2013).…”