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KembaraXtra–Islamic Finance–Islamic Capital Market – Business Sector Screens
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Role of Shari’ah Screening Contributors
• Major Shari’ah screening contributors include:
– FTSE Global Islamic Index
– Dow Jones Global Islamic Market Index
– S&P Shari’ah Index
• These contributors apply both qualitative and quantitative screening to assess Shari’ah compliance
Quantitative Aspect of Business Sector Screening
• Examines the proportion of revenue and profit before tax derived from:
– Shari’ah non-compliant business activities
• Purpose is to ensure that income from prohibited activities is kept within acceptable limits
• A company must ensure that at least 95% of its gross revenue comes from Shari’ah-permissible businesses
Qualitative Aspect of Business Sector Screening
• Focuses on public sensitivity and corporate image
• Assesses business activities from the perspective of Islamic teachings
• Evaluates whether the nature of the company’s operations aligns with ethical and moral values in Islam
Business Activities Not Allowable under Shari’ah (Qualitative Screen)
• Alcohol, tobacco, and pork-related products
• Companies linked to interest (riba)
• Non-halal leisure activities, including:
– non-halal hotels
– cinema and movie theatres
– gambling
– music-related activities
– pornography
• Weapons, arms, and ammunition
• Traditional financial services, such as:
– conventional insurance
– interest-based banking
• Biotechnology companies involved in:
– human genetic engineering
– animal genetic engineering
Additional Exclusions by Some Shari’ah Scholars
• Certain printing and media sector firms may be excluded, such as:
– magazines promoting nudity (e.g. Playboy magazine)
– nude photographs
• Newspapers are generally excluded from this prohibition
Underlying Reason for Qualitative Exclusions
• Islamic teachings instruct humans to:
– participate in good and ethical activities
– work towards virtue and moral conduct
• Many products and services listed above are explicitly prohibited (haram) in Islam
• Hence, companies involved in these sectors are eliminated through qualitative screening
Key Exam Takeaway
Business sector screening in the Islamic capital market evaluates both the nature of business activities and the proportion of revenue from non-compliant sources, ensuring that companies operate ethically and derive at least 95% of their income from Shari’ah-permissible activities.
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