Food for Thought
A Snapshot of Various Shariah Stock Screening Methodologies
Safiudin Ahmad Fuad
Brief Profile: Br. Safiudin Ahmad Fuad is a Shariah Management Trainee at the International Shariah Research Academy for Islamic Finance (ISRA). He can be contacted at firstname.lastname@example.org
Dr. Marjan Muhammad
Brief Profile: Dr. Marjan Muhammad is the Head of Research Quality Assurance at the International Shariah Research Academy for Islamic Finance (ISRA). She can be contacted at email@example.com
The first Shariah stock screening was initiated by RHB Unit Trust Management Berhad with the issuance of its Islamic Equity Index in May 1996. Later, in 1999, more indices were introduced to the market with the establishment of the Dow Jones Islamic Market Indices (DJIM) in February, the Kuala Lumpur Shariah Index (KLSI) in April and the FTSE Shariah Global Equity Index (FTSE) in November. But why do we have to conduct stock screening? This article briefly delineates the needs for Shariah stock screening and gives a snapshot of different screening methodologies adopted by some regulators and index providers.
Shariah Stock Screening
Any investment in a company must comply with the Shariah requirements as the ownership of shares of a company constitutes a structured proportionate share of that company’s business and assets. Hence, it is essential to determine the Shariah compliance status of the company before one decides to invest in it. The process of identifying any Shariah non-compliant elements of a company is called stock screening. Investors can invest in companies that fulfill the Shariah stock screening criteria. These screening criteria are applied at the time of the investment decision but also during the ongoing monitoring process to ensure the company remains Shariah compliant throughout the investment period.
Although screening methodologies tend to differ from one entity to another in terms of contents and threshold, generally there are two types of quantitative screening:
Table 1 summarises some activities which are deemed non-permissible for the business screening, and different ratios and levels of tolerence for the financial screening adopted by regulators and index providers in their Shariah screening methodologies.