Being a global leader for Shariah equity screening methodology development and execution, we at Islamicly constantly endeavour to keep you updated with the latest scholarly thought in this space.
In line with our vision, we have always been working with our Shariah board of scholars, who are globally considered pioneers in the Shariah equity methodology space, to bring to you the latest scholarly thought.
The Islamicly Shariah board has made certain enhancements to the Shariah equity screening criteria.
Change 1: Tolerance to Impure incomes
If a company derives less than 5% of its total business income (including all kinds of interest income) from such non-permissible sectors, it may be tolerated and the company will still be deemed to have passed the Level One Core Business Sector–Based Screens.
Previous:
If a company derives less than 5% of its total business income (excluding non-operating interest income) from such non – non-permissible sectors, it may be tolerated and the company will still be deemed to have passed the Level One Core Business Sector–Based Screens.
Explanation:
In line with emerging thought across Shariah boards, the treatment of non operating interest income has now been enhanced. The new methodology takes into account all kinds of interest income irrespective of whether it is from operating or non operating sources. Hence all kinds of interest income is considered for the 5% threshold of impure business income of the company. In effect, the business sector screening criteria has become more strict which is in conformity with AAOIFI standards as well.
Change 2: Removal of cash and accounts receivables ratio
Previous:
Cash Compliance
This compliance is measured as:
(Cash + Interest Bearing Securities) / Market value of Equity (36 month average) <33%
Accounts Receivables Compliance
This compliance is measured as:
Accounts Receivables / Market value of Equity (36-month average) < 49 %
Explanation:
The initial thought of the Shariah board for imposing a cash ratio threshold was to avoid the imposition of rules of sarf on the trading of the company’s stock as well as to avoid such companies who had high levels of unproductive cash. In simple words, if a company’s cash balances were to be in excess of a third of its market value, the rules of sarf would apply on the trading of its shares i.e. they could only be traded at par value.
With evolving thought that the company is a going concern and cash balances are usually invested in some form of productive function, there has been emerging consensus among leading Shariah boards, that this cash ratio thresholds are no longer relevant. This is again in line with the latest AAOIFI standards in place as well as confirms to the decisions of Shariah boards of leading Islamic banks in the world.
Please refer to the revised screening criteria document for more details available at https://islamicly.com/home/screeningprocess
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Team Islamicly
