In the 1990s, the financial industry witnessed the growth of Islamic funds around the world due to demands from Muslims’ participation in the capital market. Then, investors are not only concerned with profits, but also ethics. Due to the increase of demand in Malaysia as well, the Islamic Capital Market (ICM) was established. The activities in ICM are ever complying with Shariah through the supervision of the Securities Commission Malaysia (SC). Muslims in Malaysia now have the alternative of diversifying their portfolio to investments which align with Islamic values. The Shariah Advisory Council (SAC) of SC was established in 1996 with the purpose of advising SC in matters regarding ICM and to act as a reference centre. The SAC of SC is the body which govern and monitor the Shariah compliance of all companies listed on Bursa Malaysia.

Besides that, Malaysia's domestic capital market is a key source of funding for the country's economy. Notably, Islamic finance has been a major player, making up over 60% of the total capital market activity on average for the past five years. Recognizing the crucial role of MSMEs in Malaysia's economic growth, the Securities Commission Malaysia (SC) has actively championed Shariah-compliant crowdfunding platforms. These platforms, established through the introduction of Islamic equity crowdfunding (ECF) and peer-to-peer (P2P) financing frameworks (Frameworks), enabling MSMEs other methods to secure funding from the capital market.

The ECF is an alternative fundraising platform that enables MSMEs to raise capital from the public, through registered online platforms with SC, which ten ECF platforms have been registered as of 2022. As of 2023, the ECF platforms have raised RM686.69 million, with 381 campaigns organised and 299 issuers. The P2P framework enables MSMEs to unlock capital in small amounts from a pool of individual lenders. The framework was established in May 2016. As of 2023, RM5.96 billion have been raised through 85,793 campaigns and 6,913 issuers. These Frameworks have raised a total fund value of RM6.647 billion as of 2023.

To continue the efforts in enabling these Frameworks, the Securities Commission of Malaysia (SC) introduced the Shariah Screening Assessment Toolkit for Unlisted Micro, Small and Medium Enterprises (Toolkit). The Toolkit serves as a guideline to screen the Shariah status of MSMEs in the unlisted market. The Toolkit consists of questions which shows the alignment of the business with Shariah, endorsed by Shariah Advisory Council (SAC) of SC. With the Toolkit, investors now have more options in diversifying their portfolio into the unlisted market.

Unlisted Securities

The Shariah screening methodology consists of two quantitative measurements, namely business-activity benchmarks, and the financial-ratio benchmarks. As for the former benchmark, it is divided into two, which the first is a five-per cent benchmark for the following businesses/activities:

• conventional banking and lending;
• conventional insurance;
• gambling;
• liquor and liquor-related activities;
• pork and pork-related activities;
• non-halal food and beverages;
• Shariah non-compliant entertainment;
• tobacco and tobacco-related activities;
• interest income from conventional accounts and instruments (including interest income awarded arising from a court judgement or arbitrator);
• dividends² from Shariah non-compliant investments; and
• other activities deemed non-compliant according to Shariah principles as determined by the SAC.

As for the second division, a 20-per cent benchmark is applied to listed businesses/activities:

• rental received from Shariah non-compliant activities; and
• other activities deemed non-compliant according to Shariah principles as determined by the SAC

The non-Shariah compliant contributions from the mentioned businesses/activities to the revenue or Profit Before Taxation (PBT) of MSMEs shall not exceed the respective benchmarks.

As for the financial ratio benchmarks, it is separated into two, which the first is cash over total assets. Cash that has been placed under conventional account(s) and/or instrument(s) should not exceed 33-per cent. The second criterion is debt over total assets, which to measure interest-bearing debt in the entity. Such ratio should not exceed 49-per cent of the entity’s financial position. As for the assessment questions, it was produced with reliance on the benchmarks as well.

Currently, there are no qualitative aspects present in the assessment, unlike the Shariah screening methodology for listed securities. Further, the assessment by the Toolkit does not require any endorsement by the SAC of SC. The Shariah advisors of respective MSMEs may utilize any methods for assessment on Shariah as they deem fit. If the MSMEs are classified as Shariah-compliant through the Toolkit, then the MSMEs could raise Shariah-compliant funds through ECF and P2P platforms from interested investors.

Listed Securities

Two screening approaches is utilized by the SAC of SC in the process of classifying listed securities as Shariah-compliant or not, namely quantitative and qualitative approach. As for the quantitative approach, SAC adopts a two-tier quantitative approach, namely the business activity benchmarks and the financial benchmarks. The business activity benchmarks are where the contributions of listed businesses should not exceed the given benchmarks. The first is a 5-per cent benchmark, where the businesses/activities are listed below:

• conventional banking and lending;
• conventional insurance;
• gambling;
• liquor and liquor-related activities;
• pork and pork-related activities;
• non-halal food and beverages;
• Shariah non-compliant entertainment;
• tobacco and tobacco-related activities;
• interest income¹ from conventional accounts and instruments (including interest income awarded arising from a court judgement or arbitrator);
• dividends² from Shariah non-compliant investments; and
• other activities deemed non-compliant according to Shariah principles as determined by the SAC.

The second is a 20-per cent benchmark where the businesses/activities are listed as below:

• share trading;
• stockbroking business;
• rental received from Shariah non-compliant activities; and
• other activities deemed non-compliant according to Shariah principles as determined by the SAC.

The contributions of the businesses/activities listed above towards the revenue or PBT of the organisation should not exceed the respective benchmarks.

As for the financial ratio benchmarks, the following two ratios are considered, namely cash over total assets (the cash placed in conventional accounts and instruments) and debt over total assets (interest-bearing debt), both should not exceed 33-per cent.

Besides quantitative aspect, the qualitative aspect of the organisation is taken into account as well where public perceptions or image of the organisations are to adhere to Shariah.

In conclusion, the SAC of SC was established to monitor and support the capital market from the Islamic perspective, ensuring securities are Shariah-compliant. Series of discussions have been done to ensure the highest level of compliance to Shariah, hence answering the demand of the Muslim investors to participate in the capital market, also at the same time supporting the MSMEs sector as the backbone of the economy of the country.