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Shariah Status: New Screening Methodology

News From : DagangHalal.com (02 Dec 2013)

The Islamic Capital Market will be witnessing a new list of Shariah-compliant companies which have been screened under the revised methodology to determine the Shariah- compliant status of listed companies.

While the Securities Commission had announced the revised Shariah screening methodology much earlier in June 2012, the actual application was to take effect last Friday.

The revised screening methodology is a welcomed move that will firstly, encourage companies who want to have Shariah- compliant status to adhere to higher Shariah standards, and secondly increase foreign direct investment (FDI) as it becomes an alternative for foreign investors who have been investing in other Islamic capital markets such as the Dow Jones Islamic Index which has a similar screening process.

The new methodology includes a stricter two-tier quantitative approach – the first tier reviews the company’s business activities, and the second tier reviews financial ratios, the results of both must pass the indicated benchmarks.

Once the listed company clears the quantitative hurdle a qualitative examination of the public’s perception or image of the company’s activities to Islam is also reviewed.

In greater detail, the first tier of the quantitative screening process involves a 5% benchmark for the following business activities -conventional banking, conventional insurance, gambling, liquor and liquor-related activities, pork and pork-related activities, non-halal food and beverages, Shariah non-compliant entertainment, interest income from conventional accounts and instruments, tobacco and tobacco-related activities, and other activities deemed non-compliant according to Shariah.

Where the company engages in any of the above stated business activities the screening process involves calculating the percentage of the revenue of the activity over the group revenue or the profit before tax of the activity over the group profit before tax (whichever is higher). The resultant percentage must be below 5% to pass this threshold of the screening process.

The second benchmark is 20% for the following business activities – hotel and resort operations, share trading, stockbroking business, rental received from Shariah noncompliant activities and other activities deemed non-compliant according to Shariah.

Again the screening process involves calculating the percentage of the revenue of the activity over the group revenue or the profit before tax of the activity over the group profit before tax (whichever is higher). The resultant percentage must be below 20% to pass this threshold of the screening process.

With regard to the second tier of quantitative screening, the first financial ratio screens the company’s cash and cash equivalent placed in conventional accounts and instruments over the total assets of the company. The resultant percentage must be below 33%.

The second financial ratio screening calculates the company’s interest bearing debt over its total assets. The resultant percentage must be below 33%.

This new screening methodology being more stringent may exclude companies that were considered Shariah-compliant under the old screening process. However it will enable Malaysia to be on par with the screening processes across the world and help internationalise the Shariah-compliant status of companies listed on the Islamic capital market.

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Dr Sherin Kunhibava, a consultant and academician at University Malaya, specialises in commercial law (Islamic banking and finance law).

Source : www.themalaysianreserve.com

 

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