BUSINESS SCREENING COMPARISON

INTRODUCTION

Shariah is an Islamic law derived from the prophet's divine revelation and practice, namely the Quran and Hadith. Usury (riba), gambling (maysir), and uncertainty (gharar) are all prohibited by Shariah. These elements can be found in many conventional financial activities. For a Muslim, this entails indirectly participating in prohibited activities, which is considered a grave sin. The screening process is intended to identify elements that violate Shariah laws and rules, which are based on the Quran and Prophet Muhammad's teachings. Khatkhatay and Nisar (2007) stated that "fully Shariah-compliant equities are extremely rare." This is because most countries have conventional financial institutions, which exposes them to riba-related activities when dealing with them. To address this issue, Shariah scholars have agreed on an acceptable level at which businesses can engage in such practises and have outlined the steps to purify the sinful earnings.

SHARIAH SCREENING BACKGROUND

To determine whether a stock is Shariah-compliance to invest in, a screening process is applied to the stocks. Shariah screening is used to eliminate stocks that are deemed unacceptable for investment because they contain prohibited elements such as liquor, gambling, and riba. The high involvement of interest-based conventional banking has driven away Muslim investors from the stock market. According to some scholars, this is a major loss for Muslims because the stock market promises a good income. As a result, in 1987, Muslim scholars gathered and developed criteria that allowed Muslims to earn halal income through stock market investment (Adam & Bakar, 2014).

Shariah screening is carried out to eliminate any involvement with sinful elements. It necessitates analytical judgment, extensive research, a well-planned process, and time (Popotte, 2010). The screening is usually done with two main focuses: business screening and financial screening. The business screening is being carried out to ascertain the nature of the core business. Meanwhile, financial screening is being performed to determine whether the company's revenue is free of prohibited income or if it is involved with it but within the acceptable ratio permitted by the Shariah scholar (Adam & Bakar, 2014) 

COMPARISONS OF SHARIAH SCREENING METHODOLOGY

There are many Shariah screening procedures across the world, such as AAOIFI screening methodology, Securities Commission Malaysia screening methodology, Dow Jones Islamic screening methodology, MSCI screening methodology, FTSE screening methodology, Russel-Jadwa screening methodology, and many more.

 

The various practices result from different interpretations of Shariah compliance by individual Shariah boards. Shariah derives its interpretation from the Quran, Sunnah, and other sources derived from the consensus of Shariah experts, taking into account the opinions of the four Imams who formed the major Islamic schools of thought, namely Hanifah, Malik, Al-Shafie, and Hanbali. It has been observed that the diversity of juristic opinions has resulted in differences in Shariah standards being practised across countries. With the different authorized Islamic schools of thought and opinions of the Shariah board, they accepted different consensus in accordance with their legal authorization, resulting in Islamic finance laws and regulatory practices varying across countries (Ho, 2015). 

The table shows the comparisons of some Shariah screening methodology:

	AAOIFI	SC	DJMI	MSCI	FTSE	RUSSEL JADWA
Scope	Global	Malaysian stock	Global	Global	Global	Global
Screener	Association	Regulator	Index Provider	Index Provider	Index Provider	Index Provider
Business screening	Do not allow investment in companies which are involved in more than 5% of their revenue from: ●       Alcohol ●       Pork-related products ●       Tobacco ●       Conventional financial services ●       Non-operating interest ●       Conventional insurance ●       Weapons ●       Gambling/Casinos ●       Music ●       Hotels ●       Advertising, TV and cinema ●       Adult entertainment ●       Gold and silver hedging	Do not allow investment in companies which are involved in more than 5% of their revenue from: ●       Alcohol ●       Pork-related products and non-halal production ●       Tobacco ●       Conventional financial services ●       Conventional insurance ●       Gambling/Casinos ●       Shariah non-compliant entertainment Do not allow investment in companies which are involved in more than 20% of their revenue from: ●       Hotels ●       Share trading and stock-broking business ●       Rental from Shariah non-compliant activities	Do not allow investment in companies which are involved in more than 5% of their revenue from: ●       Alcohol ●       Pork-related product ●       Tobacco ●       Conventional financial services ●       Weapons ●       Gambling/Casinos ●       Hotels ●       Cinemas	Do not allow investment in companies which are involved in more than 5% of their revenue from: ●       Alcohol ●       Pork-related products ●       Tobacco ●       Conventional  financial services ●       Weapons ●       Gambling/Casinos ●       Music ●       Hotels ●       Cinemas ●       Adult entertainment	Do not allow investment in companies which are involved in more than 5% of their revenue from: ●       Alcohol ●       Pork-related products and non-halal production ●       Tobacco ●       Conventional  financial services ●       Weapons ●       Gambling/Casinos	Do not allow investment in companies which are involved in more than 5% of their revenue from: ●       Alcohol ●       Production and distribution of meat not slaughtered according to Shariah rules ●       Pork-related products ●       Tobacco ●       Conventional financial services ●       Weapons ●       Gambling/Casinos ●       Restaurants, hotels, and places of entertainment that provide prohibited services ●       Magazines, advertising, TV, cinema, and video games ●       Adult entertainment ●       Trading of gold and silver as cash on a deferred basis ●       Human embryos and genetic cloning

Comparison of business screening

Because we are referring to the same source, all screening approaches share the same basic criteria. The level of acceptance, however, varies depending on the environment, location, and school of thought. 

All major Shariah indices around the world agree on a 5 percent allowable percentage on Shariah non-compliant incomes from total business revenues. The 5% assesses the level of mixed contributions from clearly prohibited activities such as riba'-based activities, gambling, liquor, and pork; interest income from conventional accounts and instruments; and tobacco-related activities. However, the table shows additional measurements used by SC. SC screening methodology used two benchmarks on their business screening, which are 5% and 20%, with the 5% benchmark if the activities involve conventional banking, conventional insurance, gambling, liquor and liquor-related activities, pork and pork-related activities, non-halal food and beverages, Shariah non-compliant entertainment, interest income from conventional accounts and instruments, and tobacco and tobacco-related activities, and the 20% benchmark if the activities involve hotel and resort operations, share trading, stockbroking, rental received from Shariah non-compliant activities, and other activities that are deemed Shariah non-compliant.

It was found that some screening methodologies do not specify the list of Shari'ah non-compliant business activities in detail. For example, in the business category of non-halal products, some screening providers are very detailed in specifying the criteria of the business, such as in Russel-Jadwa, who specified a business that deals with the production and distribution of meat not slaughtered is non-Shariah-compliant activities, according to Shariah rules. Meanwhile, the other five methodologies stated in the table only specify alcohol and pork-related products as non-permissible. Russell-Jadwa's screening methodology is very clear and detailed in defining the criteria for determining whether a company is Shariah-compliant or not compared to the other five. Another unique industry identified as non-compliant in Russel-Jadwa is trading gold and silver as cash on a deferred basis, stem cell research, and genetic cloning.

Next, financial screening comparison.