Shariah screening process is set up to identify the elements that infringe the rules and guidelines of Shariah law which 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 will have conventional finance institution will bared to interest activities. To solve this issue, Shariah scholars have allow on certain acceptable level to which companies can involve in such practices and summary 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(SC) has the responsibility to determine the Shariah compliant stocks. It also has its very own Shariah Advisory Council(SAC) 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 Market Index(DJIMI) is more elaborate and tighter than of Malaysia’s Shariah Advisory Council. SC and DJIMI are avalaible from List of Shariah Compliant Securities. In Malaysia criteria, the two concentrations 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, SAC and DJIMI are facing many of the challenges of the stock screening. Even though, SAC and DJIMI 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, SC of Malaysia considered to more tolerant towards mixed business activities by companies in the Shariah screening criteria. However, DJIMI and MSCI will be more rigid in treating mixed business companies from the Shariah-compliant consideration. Under SC of Malaysia, it does not following the others in its new guidelines. Mixed business or company 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. Through Shariah screening to determine the status of mixed company as Shariah compliant. In order to improve there are 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 SAC has established benchmarks that are in juristic reasoning.The SAC has enforced 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(b) That the main activities of the company are essential and considered maslahah (benefit’ in general) to the Muslim ummah (nation) and the country , and the non-permissible element is little and involves matters such as umum balwa’ (common plight and difficult to avoid.) There are some 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 everyday 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 income earned by its subsidiaries are not Shariah compliant. The benchmark of Shari’ah compliant stocks The input from non-permissible activities more than the benchmark, the stock 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. The answers are still debatable among the Muslim scholars. Next, 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 is not allows, as such, the impression of income being less than 5 percent is thought without a strong basis. To improve this problem, Shariah stock screening process should has zero percent in any business involved in riba. Muslim investors can be more rely on Shariah stock screening because it does not included sinful elements. It is difficult to reach this because most of the companies in Malaysia have mixed 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 explain 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 noticed that none of the countries controls Islamic-related disclosure for non-financial companies, and has various influence on companies’ practices in making such disclosures. In this research, Malaysia, Saudi Arabia and United Kingdom agreed to disclosure related to Islamic-related disclosures. The influence 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 practiced by only Islamic banks. In Saudi Arabic, self-regulation of Islamic-related disclosures practiced not only by Islamic banks but also by other types of companies. Shariah screening required elements is another difference 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 was recommend 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 impossible to implement. The countries should create an International Shariah Advisory Council to set a standard for the International Shariah Adisory Council. Malaysia may development the Islamic capital market to be categories by greater internationalization. To reach this goal, there will be more development in the future of Shariah legal, regulatory and governance frameworks.