Professor Dr. Aishath Muneeza

“…Diverse Shariah screening methodologies employed by private companies and regulatory bodies in Islamic finance, focusing on criteria for determining Shariah compliance, purification of income, and the varying approaches to dividend purification across different institutions and jurisdictions….”

Private companies have developed Shariah screening methodologies tailored to ensure compliance with Islamic investment principles. Morgan Stanley Capital International (MSCI) employs a comprehensive Shariah screening methodology to uphold compliance with Islamic investment principles. This methodology encompasses both business activity screening and financial screening, complemented by a provision for dividend purification. In terms of business activity screening, MSCI prohibits investment in companies engaged in various prohibited activities, including alcohol production and distribution, tobacco manufacturing and sales, pork-related products manufacturing and retail, conventional financial services such as commercial banking, investment banking, insurance, and credit agencies, defense and weapons manufacturing, gambling and casino operations, music production and distribution, hotel ownership and operation, cinema and entertainment industry, and adult entertainment businesses.

Financial screening by MSCI involves the application of three key financial ratios to identify companies with excessive leverage or significant income from interest. These ratios include the total debt over total assets, sum of cash and interest-bearing securities over total assets, and sum of accounts receivables and cash over total assets. None of these ratios may exceed 33.33%. Additionally, MSCI sets a lower threshold of 30% for new inclusions to its Islamic Indexes to mitigate turnover resulting from financial screening. Furthermore, MSCI implements dividend purification measures to ensure compliance with Shariah principles regarding income derived from interest or prohibited activities. According to Shariah principles, a proportion of the dividend must be deducted and given to charity in such cases. MSCI applies a "dividend adjustment factor" to reinvested dividends, calculated as the difference between total earnings and income from prohibited activities and interest income, divided by total earnings. This factor undergoes an annual review during the May Semi-Annual Index Review. Through the meticulous application of these screening criteria, MSCI ensures that its Islamic Indexes maintain strict adherence to Shariah principles. This approach provides investors with a range of investment options that align with their ethical and religious beliefs, fostering confidence in the integrity of the investment process.

Financial Times Stock Exchange (FTSE) implements a Shariah screening methodology in collaboration with Shariah consultants Yasaar Limited to ensure compliance with Islamic principles for companies included in the FTSE Yasaar Global Equity Shariah Index Series. This screening process involves two primary steps. Firstly, the screening begins with a business activity assessment. Companies engaged in specific prohibited activities are identified and filtered out as non-Shariah compliant if their revenue from these activities exceeds 5% of their total revenue. Prohibited activities include conventional finance (non-Islamic banking, finance, and insurance), alcohol and intoxicants, pork-related products and non-halal food production, entertainment (casinos, gambling, cinema, music, pornography, and hotels), tobacco in all its forms, and weapons, arms, and defense manufacturing. Following the initial business activity screening, the remaining companies undergo further evaluation based on financial ratios. To be considered Shariah-compliant, companies must meet specific financial criteria, including:

• Debt should be less than 33.333% of total assets.
• Cash and interest-bearing items should be less than 33.333% of total assets.
• Accounts receivable and cash should be less than 50% of total assets.
• Total interest and non-compliant activities income should not exceed 5% of total revenue.

Companies meeting both the business activity and financial ratios criteria are included in the FTSE Yasaar Global Equity Shariah Index Series.

This index series is fully certified as Shariah-compliant through the issuance of a Fatwa by Yasaar Limited's principals, providing investors with confidence in the adherence to Islamic principles within their investment portfolios.

AlMeezan, Pakistan's largest private-sector asset management and investment advisory firm, boasts a robust portfolio of Shariah-compliant investment solutions. With 25 years of industry experience, it stands out as the exclusive provider of Shariah-compliant investment management services in the country. AlMeezan employs a meticulous Shariah stock screening methodology, which entails the exclusion of companies involved in investment activities related to Shariah non-compliant securities, conventional banking, conventional insurance, alcoholic beverages, tobacco, pork production, arms manufacturing, pornography, or other related impermissible activities. In its financial ratio screening process, AlMeezan sets specific benchmarks to ensure Shariah compliance. These benchmarks include maintaining a total debt-to-total asset ratio below 37%, ensuring that non-Shariah compliant investments constitute less than 33% of total assets, restricting Shariah non-compliant income to less than 5% of total revenue, and ensuring that illiquid assets represent less than 25% of total assets. Through these stringent screening criteria, AlMeezan upholds its commitment to Shariah principles and provides investors with ethical and reliable investment opportunities.

In the Shariah stock screening process of DJIM process begins with queries initiated through various delivery systems such as Internet platforms, Excel add-ins, and FTP (File Transfer Protocol), enabling efficient access to data. These queries are directed to the Ratings Intelligence (RI) Database, a comprehensive repository of financial information. The RI Shariah Committee, comprised of qualified Islamic scholars and experts, oversees the screening process. They provide guidance and supervision to ensure compliance with Shariah principles. The Research Team conducts qualitative analysis based on ratio screens and movement screens, evaluating factors such as debt levels, revenue sources, and compliance movements. Fundamental analysis forms a crucial part of the screening process, involving thorough examination of company websites, financial accounts, investor relations, and third-party information. Stocks are reviewed daily, and the findings are made available through a web service, facilitating easy retrieval of compliance information by fund managers. Additionally, data from this service can be downloaded in Excel format for further analysis and decision-making.

The Shariah screening process of DJIM involves the following processes:

i) Business Sector Screening

The business sector screening process implemented by DJIMI involves a meticulous examination of companies' activities to ensure compliance with Shariah principles. This screening aims to exclude businesses engaged in activities incompatible with Islamic law. Some of the key sectors subjected to screening include:

• Alcohol: Companies involved in the production, distribution, or sale of alcohol, including breweries, wineries, and liquor retailers, are deemed non-compliant with Shariah principles and are excluded from the index.
• Pork-related activities: Businesses associated with the production, processing, or sale of pork products are considered non-permissible, including pork farmers, slaughterhouses, and retailers selling pork-based items.
• Gambling: Companies involved in gambling operations, such as casinos, online betting platforms, and gaming software developers, are screened out due to their non-compliance with Shariah principles regarding gambling.
• Pornography: Businesses engaged in the production, distribution, or promotion of pornographic material are excluded from Shariah-compliant investments due to their violation of Islamic ethical standards.
• Conventional financial services: Institutions offering interest-based financial services, including commercial banks, investment banks, and insurance companies operating on conventional models, are considered non-compliant with Shariah and are thus excluded from the index.
• Advertising and media: Companies involved in promoting non-Islamic activities such as alcohol, gambling, or pornography through advertising or media content production may be screened out due to their promotion of non-permissible activities.
• Tobacco: Entities involved in the production, processing, or sale of tobacco products are deemed non-compliant with Shariah principles and are excluded from Shariah-compliant investments.
• Trading of gold and silver on a deferred basis: Businesses engaged in the trading of gold and silver on a deferred basis, which contravenes Shariah principles regarding speculative transactions and uncertainty, are excluded from Shariah-compliant investments.