1.

Why has the Securities Commission Malaysia's (SC) Shariah Advisory Council (SAC) revised the Shariah screening methodology for companies listed and to be listed on Bursa Malaysia?

In 1995, the SC's SAC established the methodology to undertake Shariah screening process for listed companies. The methodology comprises quantitative and qualitative assessments.

In view of the current development and sophistication of the Islamic finance industry, the screening methodology has now been revised by adopting a two-tier approach to the quantitative assessment which applies the business activity benchmarks and the newly-introduced financial ratio benchmarks while at the same time maintaining the qualitative assessment.

This revision is in line with the SC's initiatives to further build scale in the Shariah-compliant equity and investment management segments as well as expand the Islamic capital market's (ICM) international reach, as outlined in the Capital Market Masterplan 2.

2.

What are the changes in the Shariah screening methodology?

The changes are as follows:

Business Activity Benchmarks

The 5% benchmark would be applicable to the following business activities:

• conventional banking;

• conventional insurance;

• gambling;

• liquor and liquor-related activities;

• pork and pork-related activities;

• non-halal food and beverages;

• Shariah non-compliant entertainment;

• interest income from conventional accounts and instruments;

• tobacco and tobacco-related activities; and

• other activities deemed non-compliant according to Shariah.

The 20% benchmark would be applicable to the following activities:

• hotel and resort operations;

• share trading;

• stockbroking business;

• rental received from Shariah non-compliant activities; and

• other activities deemed non-compliant according to Shariah.

The contribution of Shariah non-compliant activities to the overall revenue and profit before tax of the company will be calculated and compared against the relevant business activity benchmarks.

Note:
Current Shariah screening methodology:

Financial Ratio Benchmarks

The financial ratios applied are as follows:

3.

What is the primary implication of the revised screening methodology?

The streamlining of the business activity benchmarks and the inclusion of the financial ratio benchmarks will enhance the robustness of the screening methodology for listed securities and, in turn, is expected to bolster the competitiveness of the Malaysian Islamic equity market and Islamic fund management industry.

4.

How does the revised methodology affect the Shariah-compliant status of listed companies?

The Shariah-compliant status of the company may be affected in the following manner:

• Companies with mixed activities which are currently assessed under the 10% or 25% benchmarks may be affected because their activities are now assessed under the 5% or 20% benchmarks.
  Example:

  1.	Company A listed on Main Market, Bursa Malaysia Business activities: Property development, trading of building materials and manufacture and distribution of cigarettes (tobacco)	Shariah non-compliant activity	Current methodology [10% benchmark]	Revised methodology [5% benchmark]
  		Tobacco's revenue / Group revenue = 9%	Status : Shariah-compliant	Status: Shariah non-compliant

• Companies with high level of conventional debt may be affected as currently there is no screening based on the total conventional debt of the company.
  

  Example:

  2.	Company B listed on Main Market, Bursa Malaysia Business activities: Property development, trading of building materials and construction works	Level of conventional debt	Current methodology [ Not applicable]	Revised methodology [33% benchmark]
  		Total conventional debt / Group total asset = 36%	Status : Shariah-compliant	Status: Shariah non-compliant

5.

When is the effective date?

The outcome of the revised methodology will be reflected in the List of Shariah-compliant Securities by the SC's SAC effective from November 2013.

To ensure a smooth transition under the revised methodology, collective investment schemes and other funds approved by the SC as Shariah-compliant are given a grace period of six (6) months[¹] from the effective date of the List of Shariah-compliant Securities in November 2013 to dispose of securities that are excluded from the list. During the grace period, all capital gains realised from the sale of such securities may be retained by the collective investment schemes or funds, without the need to channel any portion of the capital gains to charitable bodies or baitulmal.

Note: Original investment cost may include brokerage cost or other related transaction costs.