What is Shariah Screening?
Shariah equity screening is a dynamic process to determine if investment in the equity of a listed company is permissible from a Shariah perspective.
Shariah Equity screening is guided by a Shariah Equity Screening Criteria.
What is a Shariah-compliant Equity investment?
Investments made in equity stocks, screened in accordance with Shariah principles under the guidelines of Shariah supervisory board are called Shariah - compliant equity investments.
Such Shariah equity screening is used by Islamic equity fund managers to identify a list of Shariah permissible stocks to invest in, while managing a Shariah compliant fund or portfolio of stocks.
A Shariah-compliant fund needs to pass sector based and accounting ratio screens.
Some of the Sector based Shariah exclusions are:
Revenues from sales of Alcohol, Pork, Tobacco, Gambling, p*rnography, Conventional Financial Services, Conventional Insurance, trading of Gold & Silver on deferred cash basis.
Our Uniqueness
We follow established Shariah screening criteria set up by our well known Shariah Advisory Board.
Our Shariah Equity Screening Outsourcing Solution enables fund managers an access to a pre-screened universe of stocks which are Shariah compliant.
Our system and technology can be customized to classify equities as Shariah-compliant based on any custom criteria specified by the asset manager’s Shariah committee as well.
Our dynamic Shariah audit tool helps Shariah funds remain in continuous Shariah compliance by generating precise Shariah Compliance audit reports at the desired frequencies.
Shariah Screening Criteria For Equities
Ratings Intelligence with its shariah advisory board has developed shariah screening criteria which are accepted by the majority of shariah scholars and Islamic index providers.
Screening criteria are of three levels:
I. Business Sector Screening
The business of a company will be conducted in accordance with Shariah principles as interpreted by the Shariah Advisor.
Companies that involve in the below activities are screened out:
Brewers, distillers, Wineries, packagers, wholesalers, transporters, sellers including pubs, bars etc.
Companies deriving revenue from all forms of Alcohol are considered non-permissible. This involves producers, bottlers, suppliers, retailers and all other support functions serving and deriving revenue from the alcohol industry.
Look out for:
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i.Specialised crop producers which grow and sell crops exclusively for alcohol production
Example:
A bran farmer growing a specific variety of bran and sells its produce to an alcohol manufacturer. -
ii.Breweries
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iii.Wineries
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iv.Capital goods manufacturers making brewing machines
Example:
A custom-built machine manufacturer or automation engineering company manufacturing a brewing or distilling machine. Revenue from such machinery sales will be considered not-compliant -
v.Bottle manufacturing companies making specially designed bottled using for packing alcoholic beverages
Example:
A specialty glass bottle manufacturer making custom designed wine bottles as well as other bottles. The revenue from manufacturing such customised wine bottles will be considered non-permissible. -
vi.Packing material manufacturers producing alcohol packaging
Example:
A bottle label printer, undertaking to design and print labels for alcoholic beverages in addition to it printing labels for other non-alcoholic beverage producers. Revenue from sales to alcohol industry will be considered not-compliant. -
vii.Bars/pubs/clubs
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viii.Entertainment venues serving alcohol
Example:
An amusem*nt park operator selling alcohol in its food courts/stalls -
ix.Sports clubs
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x.Restaurants
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xi.Supermarket and department stores selling alcohol
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xii.Real estate companies leasing to restaurants, bars, supermarkets. These companies can be tricky. What one needs to ascertain is the amount of area being utilized for alcohol sales and not the proportionate revenue share from alcohol sales.
Example:
A real estate company owning a mall has leased space to a supermarket. This supermarket also sells alcohol. Let’s say the real estate company derives rental income of $100 from the supermarket. Based on markets, if we know/assume that about 10% revenue of the supermarket is from alcohol sales we may proportionate that 10% of the rental income of the real estate owner is from a non-permissible source i.e. Alcohol sales. The non-permissible revenue of the real estate owner, in this case, will be $100 x 10% = $10.But the Shariah committee says non-permissible revenue for the real estate owner should be as per the area used for non-permissible activities by its tenant and not the financial value of the same. Hence, if we assume about 5% of floor area in a supermarket is used to store/display alcoholic beverages the non-permissible revenue for the real estate owner would be $100 x 5% = $5.
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xiii.Sugar manufacturers producing alcohol as a by-product. As a residual product of sugar manufacturing, molasses are produced. This could be sold to the alcohol industry and used in the distillation process. Revenue from such sales would be considered non-permissible.
Companies engaged in conventional interest-based financial services are considered non-permissible for investment by Shariah-compliant investors.
Following financial services businesses are considered non-compliant:
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Commercial banks
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Investment banks
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Mortgage Lenders
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Mortgage agencies
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Capital markets including stock exchanges
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Speciality finance houses
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Financial brokerage agencies
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Investment management firms/agencies
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Stockbrokers
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Pawn shops/agencies
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Mutual funds and all other financial funds
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Underwriters
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Insurance companies
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Insurance agencies
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Insurance brokers
Exceptions:
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a.Islamic Banks
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b.Islamic Financial Institutions
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c.Islamic Insurance Companies
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i.A Shariah Committee or Shariah scholar who supervises all business activities and products of the company and certifies the same as Shariah-compliant
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ii.All products of the company are certified as Islamic either by an internal scholar or board of scholars or by an external Shariah Advisory firm
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iii.All investments and non-operating business activities of the company are Islamic
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iv.The company must pass all accounting based screens
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The above businesses are those which have:
Look out for:
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i.Companies which have compliant products but derive non-operating income [other than interest income] from non-permissible investment activities.
Example:
Islamic insurance companies which sell only Takaful products may invest their shareholder's funds in conventional financial instruments deriving non-permissible incomes. Such insurance companies are not considered Shariah compliant. -
ii.An Islamic financial institution which derives all its revenues from Islamic products, maintains all its investments in a Shariah-compliant manner but does not have a Shariah supervisory board or a Shariah scholar supervising its activities; such a company will be considered non-compliant. The requirement of Shariah scholar’s supervision is obligatory.
Screening for Transitional Financial Services Companies from Conventional to Shariah
We offer services for screening for those companies that are willing to convert their conventional business to Shariah based on the below criteria and guidelines.
We will also provide such services based on the customised guidelines suggested by the clients and theirs Shariah Supervisory Board.
Criteria for Conventional Banks, Insurance companies and Financial Institutes under the process of conversion towards shariah are:
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Should have a complete roadmap for conversion of conventional and liabilities towards shariah within the stipulated time frame given by the shariah board.
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All the activities regarding the conversion must be carried out under the supervision of Shariah board.
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Such companies must have internal or external shariah board.
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Revenues derived from non-compliant activities must be purified and given to the charity.
If a company under transition follows the criteria stated above, it will be considered as shariah compliant.
Lottery and casino operations, online gambling, gambling software developers, betting companies, gambling machine manufacturers, gambling promoters and marketers.
Look out for:
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i.Online gaming companies
Retailers, manufacturers and distributors of food products containing pork. Restaurants selling pork items.
Business activities which involve breeding, rearing, slaughtering, processing, packaging pork products are considered non-compliant.
Look out for:
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i.Restaurants selling pork-based dishes
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ii.Supermarkets selling fresh or frozen pork products
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iii.Livestock companies dealing in pork related activities
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iv.Animal feed manufacturing companies dealing in pork related activities
Producers, promoters and marketers, publishers of all types of adult entertainment, explicit content etc.
Businesses producing, printing, distributing or marketing p*rnographic material are considered non-permissible for investment.
This could be over any media i.e. print, visual or audio. Content which is abusive/offensive is also considered non-permissible.
Look out for:
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i.Online marketing firms
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ii.Bookstores
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iii.Media Firms
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iv.Production houses
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v.Sexual content in magazines
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vi.Gaming companies
Gaming companies producing such gaming formats wherein the characters may use abusive language or may have sexual themes.
Such games are usually classified as suitable for adults. Revenue from such games is considered non-permissible. -
vii.Cable TV operators
Producers, processors, packagers, retailers of tobacco products
Businesses involved in growing, processing, packing, marketing and retailing of tobacco products are considered non-permissible.
Companies involved in doing research on behalf of tobacco companies or funded by them are considered non-permissible too.
Look out for:
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i.Supermarkets and retailers selling tobacco products
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ii.R&D labs involved in Tobacco research
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iii.Paper manufacturers selling specially designed paper for cigarette rolling and filters
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Advertisers of pork, alcohol, gambling, tobacco and all other non-Islamic activities - Advertising broadcasters who display such content which contravene the tenants of Islam
Advertisers of pork, alcohol, gambling, tobacco and all other non-Islamic activities 
Advertising broadcasters who display such content which contravene the tenants of Islam - Producers, distributors, and broadcasters of music, movies, television shows, and musical radio shows
- Cinema operators
Producers, distributors, and broadcasters of music, movies, television shows, and musical radio shows 
Cinema operators Companies deriving revenue from advertising and media businesses are considered Shariah non-permissible. Advertising is considered Shariah repugnant as they may contain such visuals/language which may be considered inappropriate from a Shariah perspective. Companies producing, airing, distributing or marketing entertainment content such as feature films, music, television soaps etc. are also considered non-permissible.
Exceptions:
- News Channels
News Channels - Newspapers
Newspapers - Sports Channels
Sports Channels - Children’s Channels
Children’s Channels - Educational Channels
Educational Channels -
a.News Channels
Advertising revenues of News Channels are considered compliant as it is assumed that advertising content on such channels would be less inappropriate from a Shariah perspective. Further, such channels seem to serve a greater social good. -
b.Newspapers
Advertising content in Newspapers is generally textual rather than pictorial. Textual advertising revenues are permissible from a Shariah standpoint as they may not be repugnant to Shariah. Further, such media seem to serve a greater social good. -
c.Sports Channels
Advertising revenues of Sports Channels are considered compliant as it is assumed that advertising content on such channels would be less inappropriate from a Shariah perspective.
Look out for:
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i.Text-based advertising revenues are permissible such as Google ads.
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ii.Advertising content producers are considered non-compliant
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iii.Media companies carrying these adverts and generating revenues from the same are considered non-compliant
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iv.Media companies which produce film content, television soap content are considered non-compliant
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v.Animated films and media content producers/distributors are considered compliant.
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vi.Revenue proportion derived from supermarkets and bookstores selling music and film CDs or DVDs is considered non-compliant.
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d.Children’s Channels
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e.Educational Channels
From the viewpoint of Shariah, gold and silver are a medium of exchange and as such cannot be sold forward. Although the primary business activity of gold/silver mining companies does comply with Shariah principles; these companies are not permitted to sell their gold/ silver stocks forward for hedging purposes.
Look out for:
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i.Exploration stage companies which have no revenues but have hedged their future production of gold/silver are not compliant
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ii.Companies having a derivative loss, but having hedged more than 1/3rd of their gold/silver production are not compliant
