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KembaraXtra–Islamic Finance–Islamic Capital Market – Financial Ratio (Quantitative) Shari’ah Screening
Purpose of Quantitative Shari’ah Screening
- Ensures that companies eligible for Islamic investment meet minimum Shari’ah financial standards.
- Aims to limit exposure to:
- Interest-based financing (riba)
- Excessive leverage (debt)
- Non-compliant income
- Excessive receivables that may create gharar (uncertainty)
- Complements business sector (qualitative) screening to give holistic Shari’ah compliance.
Key Screening Frameworks Used Globally
Two major global Shari’ah index providers apply quantitative screening with different technical approaches:
1. S&P Dow Jones Shari’ah Screening
2. FTSE Shari’ah Screening
Although both follow the same Shari’ah principles, they differ in measurement methods, benchmarks, and ratios used.
A. Sector / Business Activity Screening (Quantitative Thresholds)
S&P Dow Jones – Sector Screens
- Income from the following tainted (non-compliant) sources must not exceed 5% of total revenue:
- Alcohol
- Tobacco
- Pork-related products
- Traditional financial services (interest-based banking, insurance)
- Weapons, arms, and ammunition
- Unlawful entertainment (hotels, casinos, cinemas, pornography)
FTSE – Business-Related Screening
- The following business activities are considered Shari’ah non-compliant:
- Traditional finance
- Alcohol and alcohol-related activities
- Pork-related products, food production, packaging, processing, or any pork-related activity
- Unlawful entertainment (e.g. casinos, gambling, haram hotel businesses)
- Tobacco
- Weapons, arms, and defence manufacturing
📌 Key idea:
Both S&P Dow Jones and FTSE allow only minimal tolerance (≤5%) for income from non-compliant sources.
B. Accounting-Based / Financial Ratio Screening
S&P Dow Jones – Accounting-Based Screens
The following ratios must each be less than 33%, calculated using 24-month average market capitalisation:
- Total debt ÷ 24-month average market capitalisation
- (Cash + interest-bearing securities) ÷ 24-month average market capitalisation
- Accounts receivable ÷ 24-month average market capitalisation
👉 Focuses on market value–based measurements, making the screening sensitive to stock price movements.
FTSE – Financial Ratio Screening
A company is considered Shari’ah-compliant if it satisfies all of the following:
- Debt
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