The issuance of securities by a company in Malaysia is subject to the rules and requirements set out by the Securities Commission Malaysia (SC). Among the instruments traded or listed on Bursa Malaysia are ordinary shares, preference shares, warrants, transferable subscription rights and loan stocks or bonds.
From an Islamic point of view, some of these instruments are considered permissible (halal) or Shariah compliant stocks if they had been issued based on Shariah principles.
Previously, Shariah compliance reviews were only conducted on companies after they were listed on Bursa Malaysia. Since October 2004, however, companies applying to be listed can request for the Shariah review process to be conducted simultaneously with their application to list.
As at the 30th May 2008, 843 securities had been classified by the Shariah Advisory Council (SAC) as Islamic securities. These constituted 85% of the listed securities on Bursa Malaysia, or 64.6% of total market capitalization as at the same date.
Stock screening criteria
Shariah advisers have formulated a number of rules to ensure that the instruments traded are Shariah compliant, known as the screening process. In undertaking this process, the following parameters shall be taken into account:
(i) Qualitative
The general requirement in evaluating the status of Shariah-approved securities is that the company must not be involved in the following core activities:
-
Financial services based on riba (interest)
-
Gambling
-
Manufacture or sale of non-halal products or related products
-
Conventional insurance
-
Entertainment activities that are non-permissible according to Shariah
-
Manufacture or sale of tobacco-based products or related products
-
Stockbroking or share trading in non-Shariah approved securities
-
Any other activities deemed non-permissible according to the Shariah principles.
The SAC also takes into account the level of contribution of interest income received by the company from conventional fixed deposits or other interest-bearing financial instruments. In addition, dividends received from investments in non-Shariah approved securities are also considered in the analysis carried out by the SAC.
For companies with activities comprising both permissible and non-permissible elements, the SAC considers the following additional criteria:
-
Public perception or image of the company must be good or exemplary.
-
The core activities must be considered maslahah (in the public interest) to the Muslim ummah and the country, and the non-permissible elements present must be minimal and involve matters such as umum balwa and uruf (custom).
(ii) Quantitative
The SAC has also established several benchmarks based on ijtihad (reasoning from the source of Shariah by qualified Shariah scholars) for the purpose of determining the acceptable level of mixed contributions from permissible and non-permissible activities of a company.
If the contributions from non-permissible activities exceed the following thresholds, the securities of the company will not be classified as Shariah approved:
-
The 10% benchmark assesses the level of mixed contributions from activities that involve the element of umum balwa (a prohibited element affecting most people and difficult to avoid).
An example of such a contribution is the interest income from fixed deposits placed in conventional banks. This benchmark is also used for tobacco-related activities.
-
The 25% benchmark assesses the level of mixed contributions from the activities that are generally permissible according to the Shariah and have an element of maslahah.However, there may be other elements that could affect the Shariah status of these activities and must be taken into consideration.
Activities under this category include hotel and resort operations, share trading and stockbroking as these may also involve other related activities that are deemed non-permissible according to Shariah rules.
Where the SAC fits in
The role of Shariah experts is critical, being a key component to ensure that Islamic capital market (ICM) products are Shariah compliant. The SAC was established in May 1996 mainly to advice the SC on Shariah matters pertaining to the ICM. Members of the council are qualified individuals who can present Shariah opinions and must have vast experience in the application of Shariah, particularly in Islamic economics and finance.
At the same time, the SAC was given the mandate to ensure that the running of the ICM complies with Shariah principles. Its scope of jurisdiction is to advice the SC on all matters related to the comprehensive development of the ICM, and functions as a reference center for ICM-related issues. Members of the SAC consist of Islamic scholars or jurists and Islamic finance experts.
The SAC also provides Shariah guidance on ICM transactions and activities, aimed at standardizing and harmonizing applications. Its primary sources of research and reference are the Quran and Sunnah, while secondary sources include Ijmak, Qiyas and Maslahah. In originating and innovating new products, the SAC will take into account various Islamic concepts such as Ujrah, Bai Dayn, Ijarah, Istisna, Mudarabah, Murabahah, Qardhul Hasan and Musharakah.
The SAC’s contributions in the developing ICM landscape are reflected in the continued increase in the number of Shariah-based instruments.
With the recent launch of tradable indices such as FTSE-Bursa Malaysia Emas Shariah Index and the FTSE-Bursa Malaysia Hijrah Shariah Index, this should create further opportunities for investors seeking Shariah compliant investments and for asset managers to create new products serving the investment community.
For more details on the SAC, visit www.bursamalaysia.com.
Farhah Hayati Mamat is a senior associate at Azmi & Associates. She can be contacted at +603 2118 5000 or via email at
[email protected]
. Visit
www.azmilaw.com