Frequently Asked Questions On Revised Shariah Screening Methodology

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.

What are the changes in the Shariah screening methodology?

The changes are as follows:

Quantitative Assessment	Revised Shariah Screening Methodology	Current Shariah Screening Methodology
Business activity benchmarks	5% 20%	5% 10% 20% 25%
Financial ratio benchmarks	33%	Not Applicable

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:

Benchmark	Activity
5%	Conventional banking; Conventional insurance; Gambling; Liquor and liquor-related activities; Pork and pork-related activities; Non-halal food and beverages; Shariah non-compliant entertainment; and other activities deemed non-compliant according to Shariah
10%	Interest income from conventional accounts and instruments; Tobacco and tobacco-related activities; and other activities deemed non-compliant according to Shariah
20%	Rental received from Shariah non-compliant activities; and other activities deemed non-compliant according to Shariah
25%	Hotel and resort operations; Share trading; Stockbroking business; and other activities deemed non-compliant according to Shariah

*No longer applicable based on the resolution of the SAC. (Please refer to the Resolution of the SAC at /the-184th-shariah-advisory-council-of-the-securities-commission-malaysia-meeting-28-april-2016/ for further details.)

Financial Ratio Benchmarks
The financial ratios applied are as follows:

Cash over Total Assets

Cash will only include cash placed in conventional accounts and instruments, whereas cash placed in Islamic accounts and instruments will be excluded from the calculation.

Debt over Total Assets

Debt will only include interest-bearing debt whereas Islamic debt/financing or sukuk will be excluded from the calculation.Both ratios, which are intended to measure riba and riba-based elements within a company’s balance sheet, must be lower than 33%.

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.

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:

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:

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

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, investors are given six months¹ from the effective date of the List of Shariah-compliant Securities on 29 November 2013 to dispose of securities that are excluded from the list, in the event that the respective market price of such securities exceeds or is equal to the investment cost. During the six-months period, dividends received and capital gain realised from the disposal of such securities may be retained by investors, without the need to channel any portion of the dividends and capital gains to baitulmal and/or charitable bodies.Note: Original investment cost may include brokerage cost or other related transaction costs.

¹Collective investment schemes and other funds approved by the SC as Shariah-compliant are advised to follow the existing SAC guidance for the disposal of Shariah non-compliant securities after the end of the six-month grace period.