Revision of Quantitative Approach in Shariah Screening Methodology

In the current Shariah screening methodology for securities listed on Bursa Malaysia, the denominators used to compute the percentage of Shariah non-compliant business activities under the 5% or 20% benchmarks are revenue and profit before taxation (PBT). The contribution of Shariah non-compliant activities to both revenue and PBT of the company will be computed and compared against such business activity benchmarks.

However, in the 281st Shariah Advisory Council of Securities Commission Malaysia (SAC of SC) Meeting held on 11 July 2024, the SAC of SC has issued a resolution on Revision of Quantitative Approach in Shariah Screening Methodology and resolved as follows:

Introduce a single computation approach i.e. total income as the revised denominator in calculating the percentage of Shariah non-compliant business activities. The total income consists of contribution from revenue, other income and share of profit of the company; and
Remove PBT from the denominator in calculating the percentage of Shariah non-compliant business activities.

The effective date of the SAC resolution above will be adopted for the announcement of the List of Shariah-compliant Securities in May 2025.

Shariah Justification

Shariah justifications for the SAC resolution above are as follows:

Enhancing Computation Approach Through Assessment on Listed Company’s Overall Financial Income

Adopting a single computation approach i.e. total income and removing PBT from the current denominator is more accurate in computing the contribution from Shariah non-compliant activities of a listed company and is more reflective of the state of the company. This constitutes an enhancement of computation practice to ensure that the implementation of Shariah screening methodology as determined by the SAC is duly optimized. This is in line with the teachings of Islam that emphasizes al-`adl (justice) in all kinds of action where Allah S.W.T. says:

إِنَّ ٱللَّهَ يَأْمُرُ بِٱلْعَدْلِ وَٱلْإِحْسَـٰنِ
“Allah commands justice, and the doing of good,”
(Surah An-Nahl 16:90)

This verse entails that Allah S.W.T. commands for absolute justice and fairness in all aspects of life such as dealings, human affairs and others. In the context of Shariah screening of listed companies, the adoption of total income as the revised denominator is enhanced to ensure the computation of Shariah non-compliant business activities of listed companies is made in a fairly manner.

Furthermore, enhancing the computation approach via total income is also aligned with Principle 6 of Aspiration 2: Justice and Benevolence under the Maqasid al-Shariah Guidance Islamic Capital Market Malaysia which emphasizes upholding best practices, codes of conduct and ethical values. This Principle entails a conduct undertaken with fairness, quality, justice and promoting the well being of people as a whole.

The revision of the Quantitative Approach in Shariah Screening Methodology shall be reflected as the following: