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KembaraXtra–Islamic Finance–Islamic Capital Market – Shari’ah Stock Screening (Business Activities & Filtering Methodology)
Qualitative and Quantitative Tests
• Shari’ah stock screening applies two compulsory tests: quantitative and qualitative
• A company is Shari’ah-investable only if it passes both tests
• Failing either test leads to exclusion from Shari’ah-compliant investment lists
Filtering Methodology in Practice
• The methodology uses several tiers of filtering to form a list of Shari’ah-investable stocks
• Filtering is conducted in a specific sequence:
– quantitative screening first
– qualitative screening next
Quantitative Filtering Procedure
• Conducted at the initial stage of screening
• Follows approved Shari’ah benchmarks
• Examines:
– the company’s core business pursuit
– the company’s financial ratios
• Ensures that prohibited elements are not dominant in business or financial structure
Qualitative Filtering Procedure
• Conducted after quantitative screening
• Focuses on non-numerical factors
• Depends largely on:
– judgement
– opinions
– fatwas of the Shari’ah Supervisory Board (SSB)
• Especially important for borderline or grey-area cases
3.4–3 Screening Business Activities
Classification of Business Activities
• Shari’ah screening classifies business activities into three main categories:
- Allowable under Shari’ah
- Not permissible under Shari’ah
- Mixed activities
1. Business Activities Allowable under Shari’ah
• Include businesses providing lawful needs, goods, and services, such as:
– food
– education
– garments
– furniture
– healthcare
• Companies must comply with Islamic financial rules
• Operations must be free from haram practices, including:
– interest (riba)
– gambling and games of chance (maisir)
– excessive risk and speculation (gharar)
– any other prohibited commercial elements
2. Business Activities Not Permissible under Shari’ah
• Include companies involved in:
– conventional banking and insurance
– gambling
– liquor and liquor-related activities
– pork and pork-related businesses
– non-halal food and beverages
– Shari’ah-non-compliant entertainment
– tobacco and tobacco-related businesses
• Such businesses are automatically excluded from Shari’ah-compliant investment
3. Mixed Business Activities
• Involve a combination of allowable and non-permissible activities
• Straightforward to classify purely halal or haram businesses
• Main challenge in Shari’ah screening lies in assessing mixed-activity companies
• Requires deeper analysis and SSB judgement to determine Shari’ah-investability
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