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Suppose that a committee has been set up to evaluate and Essay

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3) Suppose that a committee has been set up to evaluate and propose improvements to the current criteria used in Shariah stock screening and that you have been asked to provide inputs and suggestions. What would you say? In other words, provide some recommendations on how the Shariah stock screening process and/or the criteria used can be improved, together with the reasoned justifications. You may also want to research further on the details of such stock screening practices. Shariah stock screening process is set up to identify the elements that infringe the rules and guidelines of Shariah law which rooted from the sources of hariah.

The sources included al-Quran, Sunnah and the teaching of Prophet Muhmmad. The main differences between conventional and Islamic stock screening are those prohibited elements. Most of the conventional financial activities will involve riba, maysir and gharar which are not allowed in shariah stock screening process. Follow the thought of Alhabshi, to have a fully Shariah-compliant equities are extremely rare.

It is because most of the countries do have conventional finance institution will exposed to riba-related activities. To solve this problem, Shariah scholars have agreed on certain acceptable level to which companies can involve in such practices and outline the steps to purify the sinful earnings. In order to eliminate any involvement with sinful elements, Islamic financial activities conduct the standard of Shariah screening. Shariah screening is a difficult process, it needs analytical judgment. An analytical judgment may through research, a well-elaborated process and time. The screening are not always positive, it can be negative. The investment in companies that involve with providing basic necessities to the society is positive screening. In contrast, the investment in companies that have high concentration on unethical activities is negative screening. In the stock screening process only halal stocks can be invested by following the Shariah index. Security Commission has the responsibility to determine the Shariah compliant stocks. It also has its very own Shariah Advisory Council to determine Shariah index. Shariah Advisory Council considers the amount of interest income received by the company from the conventional fixed deposits or other interest bearing financial instrument. The dividends received from investment in Shariah non-compliant securities are also included in the analysis. Dow Jones Islamic Index is more elaborate and tighter than of Malaysia’s Shariah Advisory Council. Security Commission and Dow Jones Islamic Market Index are avalaible from List of Shariah Compliant Securities. In Malaysia criteria, the two mains focus in stock screening are business activities and financial ratio. The companies must meet both criteria in order to become a Shariah compliant so as to be eligible for Muslim investors. Screening Activities Figure 1.0 Screening ProcessBy referring table 1 to further understand the current criteria used in Shariah stock screening by Securities Commission and Dow Jones Islamic Market Indexes. The table clearly distinguish the differences between Securities Commission and Dow Jones Islamic Market Indexes. As we mentioned before, to have fully Shariah-compliant equities are extremely rare. In order to reach this goal, Shariah Advisory Council and Dow Jones Islamic Market Indexes are facing many of the challenges of the stock screening. Even though, Shariah Advisory Council and Dow Jones Islamic Market Indexes are keep improve and set a standard to the stock screening process. We will discuss some of the challenges or issues that need to be improve. Mixed Business or Company In year 2013, Securities Commission of Malaysia considered to more tolerant towards mixed business activities by companies in the Shariah screening criteria. However, Dow Jones Islamic Market Indexes and MSCI Indexes will be more stringent in treating mixed business companies from the Shariah-compliant consideration. Under Securities Commission of Malaysia, it does not following the others in its new guidelines. Mixed business activities are the company will involve in some prohibited business activities. For example, they may operate in non-halal business or invest interest-based earning. A mixed company is a company where its core activities are permissible but simultaneously it has other prohibited activities. The mixed companies must be screened for determined of its status as Shariah compliant. In order to improve this issue by two level of screening involves the qualitative screening methodology and quantitative screening methodology. For the first level of screening involves the qualitative screening methodology. For example, in a case of a parent company producing permissible industrial goods but it gives loan to its subsidiary company carrying out business transactions involving riba, the parent company will be considered as non Shariah compliant. The quantitative screening methodology also important to deal with issues of mixed business. At this level, the SAC deals with issues of mixed contribution (both permissible and non-permissible) in determining the revenue and profit of a company that has passed the qualitative test. In order to establish the minimum acceptable level of mixed contributions from non-permitted activities, the Shariah Advisory Council has established benchmarks that are in juristic reasoning.The SAC has imposed two additional criteria’s for companies with activities comprising both permissible and non permissible elements, and they are as follows:(a) That the public perception or image of the company must be good; and(b) That the core activities of the company are important and considered maslahah (benefit’ in general) to the Muslim ummah (nation) and the country , and the non-permissible element is very small and involves matters such as umum balwa’ (common plight and difficult to avoid.) There is a number of maxims of Islamic jurisprudence that excuse Muslims caught in umum balwa’ situations. The purpose of such an excuse is to facilitate the carrying out of daily activities It may be possible for a Shariah compliant company to be considered non Shariah compliant if after the screening, it is found that the revenue earned by its subsidiaries are not Shariah compliant. The benchmark of Shari’ah compliant securities If the contribution from non-permissible activities exceeds the brenchmark, the securities of the company will then be classifies as Shari’ah non-compliant. Refer back to table 1 the acceptable involvement on non-permissible element under Security Commission. There are some argues between the Muslim scholars. They have raised the issue on how to determine the financial ratio. They want to know how to justify for each ratio such as debt should be less than 33 per cent; account receivable should be less than 33 per cent and interest income less than 5 per cent? The answers are still debatable among the scholars. Next, the issue in the screening process relates to the interest income that should be less than 5 percent. In this respect the issue is how to justify that a company with less than 5 percent interest income can be included and pass the screening process. In Shari’ah, interest must be prohibited, as such, the idea of income being less than 5 per cent is deemed without a strong basis. To improve this problem, Shariah stock screening process should has 0% in any business involved in riba. Muslim investors can be more relie on Shariah stock screening because it does not included sinful elements which is riba. It is difficult to reach this because in Malaysia most of the company the will have subsidiary business. However, the Shariah Advisory should works harder to solve the argue between muslim scholars. Muslim should not invest even the ratio did not exceed the benchmark it is a sin. To makes the Shariah stock screening be more effective, financial ratio screening needs to be unanimous. Not all the financial institutions calculate the financial ratio in the same way. For Dow Jones Islamic Market Indexes, it used average market capitalization as denominator for their financial ratio. However, FTSE and MSCI, use total assets as divisor. Financial ratios for every company need to be unanimous to prevent the ratios to be explained in various ways as we mention before.No International Shariah Screening Stock Standard The Shariah Board of different jurisdictions have the freedom to exercise ijtihad aslong as their rulings do not contravene the principles of Shariah as enshrined in the Quran and Sunnah. But of course, the rulings must be supported by relevant authorities to justify the stand by the Shariah Boards.After some researches, we notice none of the countries regulates Islamic-related disclosure for non-financial companies, and has different effects on companies’ practices in making such disclosures. Malaysia, Saudi Arabia and United Kingdom agree to disclosure related to Islamic-related disclosures. The effect of lack of regulations in Saudi Arabia and the United Kingdom is that the companies that are in the Islamic equity market are self-regulated. In the United Kingdom, self-regulation of Islamic disclosures is practiced by onlt Islamic banks. In Saudi Arabic, self-regulation of Islamic-related disclosures is practiced not only by Islamic banks but also by other types of companies. Shariah screening for required elements are another differences among the countries. In Saudi Arabic, Shariah screening for required elements are not important .They are looking at the operational side, the companies are all Shariah compliant. In the context of overall operations, if the companies are doing domestic operations, then they do not have issue with operations, since all of them are Shariah compliant. In Malaysia and the United Kingdom, Shariah screeners need to do more tham just rely on ratios.All countries having differences and inconsistencies Shariah screening standard, it is recommended that the relevant authority should set a universal standard with clear guidelines and understanding to be applicable to all. It may seem difficult given the different circumstances and backgrounds surrounding the Islamic countries now but it is not implossible to be implemented. The countries should create an International Shariah Advisory Council to set a standard for the International Shariah Adisory Council. Malaysia may growth the Islamic capital market to be characterized by greater internationalization. To reach this goal, there will be further development of Shariah legal, regulatory and governance frameworks.

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