KembaraXtra–Islamic Finance–Islamic Capital Market–Qualitative Screens

Meaning of Qualitative Screens

Qualitative screens are Shari’ah-based rules used by Islamic scholars to decide whether an investment is halal (permissible) or haram (prohibited).
They focus on the nature and behaviour of the company, not numbers or ratios.
If a company fails qualitative screening, it is automatically excluded, even if it is profitable.

Types of Qualitative Screening

1. Industry Screening

Industry screening examines which sector or industry the company operates in.


The company is not Shari’ah-compliant if its core business is involved in prohibited (haram) industries.


Examples of prohibited industries:
• Alcohol production and distribution
• Gambling, betting, casinos, and games of chance
• Interest-based banking and conventional insurance (riba-based finance)
• Pornography and non-Shari’ah-compliant entertainment
• Pork and non-halal food production
• Weapons and arms manufacturing (in many Shari’ah opinions)


Key rule:
👉 If the main industry is haram, the stock is rejected regardless of financial strength.

2. Business Practices Screening

Business practices screening evaluates how the company conducts its operations.


Even if the industry is halal, the company may still be excluded if its practices are unethical or exploitative under Islamic principles.


Unacceptable business practices include:
• Exploitation of customers or suppliers
• Fraud, deception, or misleading advertising
• Price manipulation or unfair trading practices
• Abuse of monopoly power
• Harmful labour practices or injustice to workers


Key rule:
👉 Islam requires justice (adl) and fair dealing, not just halal products.
​

Why Qualitative Screening Is Important


• Ensures investments align with Islamic ethics
• Prevents indirect support of immoral activities
• Promotes fairness, transparency, and social responsibility
• Reflects the Islamic principle that how profit is earned matters, not just how much is earned


Simple Example

• A food company selling halal products passes industry screening
• If the same company exploits farmers or cheats customers, it fails business practices screening
👉 Result: Not Shari’ah-compliant

One-Line Summary

👉 Qualitative screening checks whether a company’s industry and behaviour are morally acceptable under Shari’ah, before any financial analysis is done.

KembaraXtra–Islamic Finance–Islamic Capital Market–Quantitative Screens

Meaning of Quantitative Screens


Quantitative screens are numerical and ratio-based rules used by Shari’ah scholars to decide whether a company is financially acceptable for Islamic investment.
Unlike qualitative screening (which looks at business nature), quantitative screening looks at the company’s balance sheet and income sources.


These rules recognise modern realities: many otherwise halal companies may have limited exposure to interest-based elements. Shari’ah allows this only within strict limits.


Main Quantitative Screening Criteria

1. Debt-to-Asset Ratio (Interest-Based Debt Test)




This ratio checks how much of a company’s assets are financed using interest-based borrowing.


Why it matters:
Islam strictly prohibits riba (interest). However, scholars allow limited tolerance due to current economic systems.


Rule (Dow Jones Islamic Index):
• Interest-based debt ÷ total assets must not exceed ~33%


Meaning:
👉 If more than one-third of the company’s assets are funded by interest-based loans, the stock is not Shari’ah-compliant.


Simple example:
• Total assets = $300 million
• Interest-based debt = $120 million
• Debt ratio = 40% → ❌ Not compliant
• If debt = $90 million (30%) → ✅ Acceptable
​

2. Interest-Related Income Test

This test checks whether the company earns income from interest, such as:
• Interest from bank deposits
• Interest from bonds or fixed-income investments


Key rule:
• Income from interest or non-permissible activities must remain very small (commonly below 5%)


Meaning:
👉 A company whose main business is halal but earns minor incidental interest may still be allowed.


Simple example:
• Total revenue = $100 million
• Interest income = $2 million (2%) → ✅ Acceptable
• Interest income = $8 million (8%) → ❌ Not compliant


3. Monetary Assets (Liquidity and Receivables Test)


This test checks how much of the company’s assets are purely monetary, such as:
• Cash and bank balances
• Accounts receivable
• Marketable securities


Why it matters:
In Shari’ah, money itself cannot be traded for profit. Shares must represent ownership in real assets and real business activity.


Accepted thresholds (scholarly views):
• At least 51% of assets should be illiquid (real assets)
OR
• Some scholars allow 33% illiquid assets as a minimum


Meaning:
👉 A company dominated by cash and receivables may fail Shari’ah screening.


Simple example:
• Real assets (factories, equipment) = 60%
• Monetary assets = 40% → ✅ Acceptable
• Monetary assets = 80% → ❌ Not compliant


Underlying Shari’ah Principle


Li al-akthar hukm al-kul
👉 “The ruling is based on what is dominant.”


If halal elements dominate, limited non-permissible elements may be tolerated within strict thresholds.


One-Line Summary

👉 Quantitative screening ensures that a company’s debt, income, and assets do not rely excessively on interest or money-based activities, keeping investments aligned with Shari’ah principles.

KembaraXtra–Islamic Finance–Islamic Capital Market–Understanding Monetary Assets in Shari’ah Screening


What Does This Rule Mean?

When Shari’ah scholars screen companies, they do NOT say that a company cannot have cash.
Instead, they say that cash and money-like items must NOT dominate the company’s assets.


Islamic investing requires that shares represent ownership in real business activities and real assets, not mainly ownership of money.


So… Can a Company Have Cash?


✅ Yes, absolutely.
Every company must hold cash to:
• Pay salaries
• Pay suppliers
• Run daily operations


❌ But if most of the company’s assets are cash or money-based, then buying its shares becomes similar to trading money for money, which is not allowed in Shari’ah.


👉 That is why limits are placed on monetary assets.


What Are Monetary Assets? (Very Simple)


1. Cash
This includes:
• Money in bank accounts
• Cash on hand


Example:
A company keeps $10 million in the bank to pay expenses.


✔ Normal and allowed
✖ Problem only if it becomes the major part of total assets


2. Accounts Receivable
Accounts receivable = money owed to the company by customers


This happens when:
• A company sells goods or services
• The customer has not paid yet


Simple example:
A halal furniture company sells sofas worth $1 million on credit.
Customers will pay next month.


👉 That $1 million is accounts receivable (money expected in the future)


Why it matters:
• Accounts receivable are money claims, not physical assets
• Too much of it makes the company money-based, not asset-based


3. Marketable Securities
These are short-term financial investments that can easily be converted into cash, such as:
• Treasury bills
• Bonds
• Interest-bearing money market instruments


Example:
A company invests excess cash in conventional bonds to earn interest.


❌ This is problematic because:
• It involves interest (riba)
• It is money generating money


Why Shari’ah Sets Limits on These Assets


Islamic law requires:
• Real economic activity
• Ownership of tangible assets
• Profit linked to business risk


If a company mainly owns:
• Cash
• Receivables
• Interest-based instruments


Then buying its shares means:
👉 You are mostly buying money, not a real business


And in Islam:
👉 Money cannot be traded for profit by itself


What Do the Percentages Mean?


Scholars set thresholds such as:
• Monetary assets ≤ 45%
• Real (illiquid) assets ≥ 51%


This ensures:
• The company is asset-backed
• Shares represent real ownership
• Trading shares is Shari’ah-compliant


Very Simple Example

Company A (Compliant):
• Factories & equipment: 60%
• Cash & receivables: 40%
✅ Allowed


Company B (Not Compliant):
• Cash & receivables: 80%
• Real assets: 20%
❌ Not allowed


One-Line Summary

👉 Islam does not forbid companies from holding cash, but it requires that real assets and real business activities dominate, so shares represent genuine ownership rather than money trading.

KembaraXtra – Islamic Finance: SC Malaysia’s Definition of Ṣukūk (Simple Explanation with Examples)

SC Malaysia’s Definition of Ṣukūk

The Securities Commission Malaysia (SC Malaysia) defines Ṣukūk in its Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework (2015) as:


Certificates of equal value that evidence undivided ownership or investment in assets, using Shariah principles and concepts endorsed by the Shariah Advisory Council (SAC).


Simple meaning:
Ṣukūk are certificates that give investors shared ownership or investment rights in assets or ventures, as long as the structure follows Shariah principles approved by the SAC of SC Malaysia.

Why SC Malaysia’s Definition Is Considered Broad

• Unlike AAOIFI or IFSB, SC Malaysia’s definition:
  • Does not restrict the type of assets used as underliers,
  • Leaves detailed rules to specific sections of the Guidelines.


• This approach provides greater flexibility for market innovation, while oversight is maintained by the SAC.

Asset Rules for Sale- and Lease-Based Ṣukūk

Applicable to:

• Ṣukūk Bāiʿ Bithaman Ājil
• Ṣukūk Murābaḥah
• Ṣukūk Istisnāʿ
• Ṣukūk Ijārah

(a) Asset and its use must be Shariah-compliant

Simple meaning:
The asset and how it is used must be halal and permissible under Shariah.

Example:

• Allowed: Office buildings, machinery, halal manufacturing plants
• Not allowed: Casinos, alcohol factories

(b) Consent required for encumbered or jointly-owned assets

Simple meaning:
If the asset:

• Is pledged as collateral, or
• Is owned together with another party,
  permission must be obtained before using it for Ṣukūk issuance.

Example:
A building used for Ṣukūk is mortgaged → bank consent is required.

(c) Receivables must be mustaqir and traded on spot

Simple meaning:
If the asset is a receivable:

• It must be established and certain (mustaqir), and
• It must be exchanged immediately for cash or commodities.

Example:
Receivables from a completed commodity murābaḥah sale can be used, but not future or uncertain debts.


Rules for Partnership- and Agency-Based Ṣukūk
Applicable to:

• Ṣukūk Mushārakah
• Ṣukūk Muḍārabah
• Ṣukūk Wakālah bi al-Istithmār

Requirement: Ventures or investments must be Shariah-compliant

Simple meaning:
The business activity financed by the Ṣukūk must be halal and compliant with Islamic principles.

Example:

• Allowed: Renewable energy project
• Not allowed: Conventional banking operations

SC Malaysia’s Position on Financial Assets and Receivables


Acceptance of Financial Assets

According to the Shariah Advisory Council (SAC) of SC Malaysia:

• Financial assets such as receivables and debts arising from Shariah-compliant transactions (e.g. commodity murābaḥah) are permissible underlying assets.
• Ṣukūk backed 100% by receivables may be issued and traded

Example:
Ṣukūk Murābaḥah backed entirely by commodity murābaḥah receivables is allowed in Malaysia.

Comparison with Other Scholarly Views

• SC Malaysia SAC:
  • Allows trading of Ṣukūk with 100% receivables


• Other scholars / standards:
  • Allow trading only if majority of assets are tangible
  • Restrict pure debt-based Ṣukūk trading

Why Malaysia’s Approach Is Significant

• Encourages market depth and innovation
• Supports Malaysia’s role as a global Ṣukūk hub
• Provides regulatory clarity while allowing flexible asset structures

Simple Exam-Friendly Summary

• SC Malaysia defines Ṣukūk as ownership or investment certificates.
• Asset types are not restricted in the main definition.
• Detailed rules are provided in the Guidelines.
• Receivables and financial assets are permitted, even as 100% underliers.
• Trading rules are guided by SAC-approved Shariah concepts.

KembaraXtra – Islamic Finance: Features of Ṣukūk

Background: Why Ṣukūk Were Developed

Ṣukūk emerged as a Sharīʿah-compliant alternative to interest-bearing bonds. Conventional bonds are debt instruments where:

• The issuer borrows money,
• The bondholder lends money,
• The issuer guarantees principal repayment plus interest (coupons).

Because interest (riba) is prohibited in Islam, Ṣukūk were developed to offer similar economic benefits (such as long-term financing and regular returns) without interest, by linking investment to real assets and activities.


In the early stage, Ṣukūk were designed to closely resemble bonds to:

• Support government and corporate financing needs,
• Help build a yield curve, which is essential for pricing financial instruments,
• Allow Islamic capital markets to function alongside conventional markets

Over time, however, Ṣukūk evolved into a distinct Sharīʿah-compliant financial certificate, no longer viewed as “Islamic bonds”.

Key Features of Ṣukūk (Explained Simply with Examples)

1. Proportionate ownership of underlying assets

Meaning:
Ṣukūk holders own a share of real assets, not a debt claim.


Example:
Investors own shares in a building leased to a government under Ṣukūk Ijārah.

2. Directly linked to real sector activities

Meaning:
Ṣukūk must be connected to real economic activity, not money lending.


Example:
Ṣukūk issued to finance an airport, power plant, or manufacturing facility.

3. Structured using Sharīʿah-compliant contracts

Meaning:
Ṣukūk use approved Islamic contracts such as:

• Ijārah (leasing),
• Mushārakah (partnership),
• Muḍārabah (profit-sharing),
• Wakālah (agency).

Example:
Lease rentals in Ṣukūk Ijārah instead of interest coupons.

4. Various tenures (short, medium, long, or perpetual)

Meaning:
Ṣukūk can be structured for different time horizons, including perpetual Ṣukūk.

Example:

• Short-term Ṣukūk for liquidity management
• Long-term Ṣukūk for infrastructure projects

5. Regular returns in the form of profit or rent

Meaning:
Returns are profits or rental income, not interest.

Example:
Investors receive lease rentals from a leased asset every six months.


6. Proceeds must be used for Sharīʿah-compliant activities

Meaning:
Funds raised cannot be used for haram activities.


Example:
Allowed: education, healthcare, energy
Not allowed: gambling, alcohol, conventional banking

7. Secondary market trading must comply with Sharīʿah

Meaning:
Trading rules depend on the nature of underlying assets.


Example:
Ṣukūk backed mainly by tangible assets are tradable; pure debt-based Ṣukūk face restrictions.

8. Can be rated, listed, and cleared

Meaning:
Ṣukūk can function like bonds in capital markets.

Example:
Ṣukūk listed on exchanges and rated by international rating agencies.


9. Issued in various denominations, currencies, and markets
Meaning:
Ṣukūk can target:

• Retail or institutional investors,
• Domestic or international markets,
• Multiple currencies (e.g. MYR, USD).

Example:
A government issues USD-denominated international Ṣukūk.

10. Can be rescheduled or restructured

Meaning:
Ṣukūk can be modified if financial conditions change, subject to Sharīʿah approval.

Example:
Extending maturity or revising rental terms during financial distress.

Why Early Ṣukūk Looked Like Bonds

• Bond markets are crucial for building a yield curve.
• Without a yield curve:
  • Pricing models do not work,
  • Risk-free rates cannot be established.


• Early Ṣukūk adopted bond-like features to ensure market acceptance.

As the market matured, Ṣukūk developed their own identity, balancing:

• Market efficiency, and
• Sharīʿah principles.

Simple Exam-Friendly Summary

• Ṣukūk were developed as an interest-free alternative to bonds.
• Early Ṣukūk mimicked bonds for market practicality.
• Modern Ṣukūk are ownership-based, asset-linked, and Sharīʿah-compliant.
• They provide long-term financing, regular returns, tradability, and flexibility—without interest.

Key Takeaway

Ṣukūk combine the economic functionality of bonds with the ethical and legal foundations of Islamic finance, making them a core instrument of the modern Islamic capital market.