In this article, Musaffa is going to share the Islamic stock screening process in Pakistan.
Basically, Islamic and conventional stocks are the same, whereby both show the ownership of a company. The fundamental difference is that the Islamic stock is proof of ownership of the companies that are not against the principles of Shariah. Furthermore, those companies meet the requirement to be Shariah-compliant, while the conventional share is not. To become halal stock, a company should undergo the shariah screening process. Shariah stock screening is a selection process whereby the financial authority in the country performs it to select the shares to be a part of the Shariah index. Generally, there are two kinds of screening process namely, business screening and financial screening. In other words, those are qualitative and quantitative screening.
Every country that is developing in sharia stock investment has its screening process by the trusted authority. As an example, the Shariah Advisory Council of the Securities Commission of Malaysia introduced a shariah stock screening which required both quantitative and qualitative assessments. Other than Malaysia, several countries initiate to demonstrate sharia screening for Islamic Index. Pakistan is among the countries that also have Islamic stock screening methodologies for halal stocks.
All stocks in the All Shares Islamic Index of Pakistan (KMIAS) should pass two tests. Both are Shariah screening criteria and technical filters.
Sharia Screening Filters
To be sharia-compliant stock, a company should meet the six requirements below:
- The core of the business should not violate any principle of Shariah. For example, providing services on interest like a conventional bank, insurance, etc. Moreover, it should not be other activities against Shariah, e.g., selling liquor, pork, haram meat, gambling, etc.
- The interest-bearing debt to total asset ratio should be less than 37%.
- The ratio of non-compliant investments to the total assethould be less than 33%.
- The ratio of non-compliant income to total revenue should be less than 5%.
- The ratio of illiquid assets to the total asset should be at least 25%.
- Market per share should be at least equal to or greater than net liquid assets per share.
- The company on the Defaulters’ Counter or having suspended days, declared Non-Tradable as on the re-composition date shall not be considered for inclusion in All Shares Islamic Index of Pakistan.
- The company will be eligible for the All Share Islamic Index of Pakistan (KMIAS) if its securities are available in the Central Depository System.
- The reviewers will include a newly listed company in the index re composition list, fulfilling the other eligibility criteria.
- The company must have an operational track record of at least one financial year.
- The company with less than 5% free float or shares are traded for less than 75% of the entire trading system days of the review period shall be included in the Index but disclosed separately in the index.
- Mutual funds are ineligible for inclusion in the All Shares Islamic Index. However, to provide an investment with a comprehensive list of shariah-compliant investment avenues in the capital market, a separate list of all shariah-compliant investments will be developed, including mutual funds and Sukuk,
During the Islamic stock screening process, the analysts of Al- Meezan review each company’s financial report to ensure that the company fulfils the benchmark or threshold for shariah compliance screening. Furthermore, if the analysts find non-compliant companies, they will screen those companies out.
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