Screening criteria Differences
v Screening criteria of SEC Malaysia
Screening for shariah complaint stocks is done at central level by the Shariah Advisory Council (SAC) of the Scurities and Exchange Commission (SEC). A list of permissible stocks is issued by the SAC twice a year. The screening criteria is mainly activity or income based. No debt or liquidity screen are used. Thus screening will reqire income statement but not the balancce sheets of the companies. Individual funds or investment companies do not make their own shariah screening criteria. Following screening criteria are used.
1. Core activities: the core activties of the companies should not be shariah incompatible. Therefore companies with following s their core business activities are excluded: Financial services based on riba (interest); gambling,manufacture or sale of non-halal products or related product, conventional insurance, entertainmnet activities that are non-permissible according to shariah, manufacture or sale of tobacco-based product or related products, stockbroking or share trading in shariah non-approved securities, and other activities deemed non-permissible according to shariah.
2. Mixed activities : for companies with activities comprising both permisssible and non-permissible element, the SAC considers two additional criteria”
a. The public perception or image of the company must be good, and
b. The core activities of the company are important and considered maslaha (public interest) to the muslim ummah (nation) and the country, and the non-permissible element is very small and involves matters such as umum balwa (common plight and difficult to avoid), uruf(custom) and the rights of the non=muslim community which are accepted by Islam.
3. Bench Marks of Tolerance : Apllicable in case of mixed activities. If the contributiions in turnover or profit before tax from non permissible activities of a company exceed the benchmark,the securities of the company are classified as shariah non approved. The benchmark are:
a. The five-percent benchmark applied to assess the level of mixed contributions from the activities that are cleary prohibited such as riba (interest-based companies like conventional banks), gambling, liquor and pork.
b. The 10- percent benchmark applied to asses the level of mixed contributions from the activities that involve the element of “umum balwa” which is a prohibited element affecting most poepled and difficult to avoid. For example, interest income from fixed deposits in conventional banks.
c. The 25-percent benchmark this benchmark is used to asses the level of mixed contributions from the activities that are generally permissible according to shariah and have an element of maslaha (public interest), but there are other elements that may effect the shariah status of these activities. For example, hotel and resort operations, share trading, etc.. as these activities may also involve other activities that are deemed non permissible according to the shariah
4. Debt and liquidity : no restriction on the proportion of debt or proportion of liquid assests in total assests.
v Dow jones Islamic Index Screening Criteria:
1. Screens for Acceptable Business Activities:
Aktivities of the companies should not be inconsistent with shariah precepts. Therefore, based on revenue allocation, if any company has business activities in the shariah inconsistent group or sub-group of industries it is excluded from the Islamic index univers. The DJIMI shariah Supervisory Board established that following broad categories of industries as inconsistent with shariah percept: alcohol, pork-related product, Conventonal financial services (banking,insurance, etc), entertainment (hitels, casino/gambling, cinema, pornography, music, etc), Tobacco and weapons and defense industries.
2. Screens for acceptable financial ratios
After removing companies with unacceptable primary business activities, remove companies with unacceptable level of debts of impure interest income.
1. Debt to Assets:
Exclude companies if Total debt divided by Trailing 12-Month Average Market capitalization is greater than or equal to 33%
(note: Total debt=Short term Debt + current Portion of long-Term debt+long term debt)
2. Liquid Assets to Total Assets:
Exlude companies if the sum of cash and interest Bearing Securities divided by Trailing 12 month average market capitalization is greater than or equal to 33%.
3. Receiveables to Assets:
Exclude companies if Accounts Receivables divided by Total Assets is greater than or equal to 45%.
(note: Accounts Receivable = Current Receivables + long Term Receivables)
Companies passing the screens are included as components of theDow jones Islamic Market Index.