Detailed Financial Screening of various Sharia Boards

 Detailed Financial Screening of various Sharia Boards

• S&P Islamic Index (Global)
• Accounts Receivables / Market value of Equity (36 month average) < 49 %
• (Cash + Interest Bearing Securities) / Market value of Equity (36 month average) <33%
• (Non-permissible income other than interest income) / Revenue < 5%
• Debt / Market Value of Equity (36month average) < 33 %
  


• FTSE Islamic Index (Global)
  
  • Debt is less than 33.333% of total assets
  • Cash and interest bearing items are less than 33.333% of total assets
  • Accounts receivable and cash are less than 50% of total assets
  • Total interest and non-compliant activities income should not exceed 5% of total revenue.
    
    
• Shariah Advisory Council (SAC) of the Securities & Exchange Commission in Malaysia (Malaysia)
  They follow a two-tier screening: tier 1 is on business, and tier 2 is accounting measures.
  
  Tier 1: Business Activity Benchmarks
• The contribution of Shariah non-compliant activities to the Group revenue and Group profit before taxation of the company will be computed and compared against the relevant business activity benchmarks as follows:
  
  (i) The five-per cent benchmark: The five-per cent benchmark is applicable to 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);
• dividends from Shariah non-compliant investments; and
• other activities deemed non-compliant according to Shariah principles as determined by the SAC.
• For the above-mentioned businesses/activities, the contribution of Shariah non-compliant businesses/activities to the Group revenue or Group profit before taxation of the company must be less than five per cent.

(ii) The 20-per cent benchmark: The 20-per cent benchmark is applicable to the following businesses/activities:

• 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.
• For the above-mentioned businesses/activities, the contribution of Shariah non-compliant businesses/activities to the Group revenue or Group profit before taxation of the company must be less than 20 per cent.

Tier 2: Financial Ratios

• Financial Ratio Benchmarks: For the financial ratio benchmarks, the SAC takes into account the following financial ratios to measure riba and riba-based elements within a company’s statements of financial position:
1. (Cash over total assets) <33%
   Cash only includes cash placed in conventional accounts and instruments, whereas cash placed in Islamic accounts and instruments is excluded from the calculation.
2. (Debt over total assets) <33%
   Debt only includes interest-bearing debt, whereas Islamic financing or sukuk is excluded from the calculation.

• In addition to the above two-tier quantitative criteria, the SAC also considers qualitative aspect, which involves public perception or image of the company’s activities from the perspective of Islamic teaching.

• Accounting and Auditing Organization for Islamic Financial Institutions (Global)
• The corporation does not state in its memorandum of association that one of its objectives is to deal with prohibited goods or materials as per Islamic principles. 
• Total debt (long-term or short-term debt) is less than 30% of the market capitalisation
• That the total amount of interest-taking deposits, whether short-, medium- or long-term, shall not exceed 30% of the short-, medium- or long-term, shall not exceed 30% of the market capitalisation of total equity. 
• The income generated from the prohibited component does not exceed 5% of the total income. 

• Tasis (India): Since their screening methodology is proprietary, it is not clearly established. By reading their paper, the idea is easy to follow. 
• Total debt (long-term or short-term debt) should be less than 10% of total assets.* (Note: For Nifty Sharia Index, where Tasis is the advisor, Interest based-debt should be less than or equal to 25% of Total Assets.)
• Interest income should be less than or equal to 3% of the total income.
• Receivables plus cash and bank balances should be less than or equal to 90% of Total Assets.

*As per our understanding of their presentation. Earlier, their methodology was industry-specific; depending on the industry type, the debt level was adjusted