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© Copyright SIDC 2009 Session III Islamic Equity Market & Shariah Compliant Stocks
© Copyright SIDC 2009
Session III
Islamic Equity Market & Shariah Compliant
Stocks
© Copyright SIDC 2008
Shariah-compliant Securities:
Screening process
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© Copyright SIDC 2008
The main thrust of ICM is compliance
with Shariah principles .....
• Comprises prominent Shariah scholars,
jurists & market practitioners
• Advises SC on ICM compliance matters
• Provides Shariah guidance
• Acts as a reference point for industry
• Promotes product harmonisation and
standardisation
Shariah Advisory Council (SAC) was established at
capital market level [ establisehed in 1996 under the Securities
Commission Act (SCA) ]
S
A
C
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What are the Shariah-compliant stocks?
• Securities (ordinary shares / equities) of a company listed on Bursa Malaysia which is classified as Shariah permissible for investment
• Primary business and investment activities that generate income for the company must conform with Shariah principles
Shariah-compliant stocks
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Why do we need Shariah-compliant
stocks
It sets the foundation for Islamic equity investment
Participation by Muslim investor in ICM was minimal in 1970s
Insufficient or no clear guidance on the stocks that can be traded (Shariah)
Listed companies are involved in various activities (halal & haram)
The scenario had left Muslim behind the economic activities
Lost opportunity (in the early 1990s) when there was a significant increase in the number of company listed on the stock exchange
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Who should be taking responsibility to issue
Shariah-compliant securities list
Mid-1960s, Lembaga Tabung Haji started to explore the
possibility to invest of its funds in Shariah-compliant
investment
Pre-1997, Bank Islam Malaysia Bhd took early initiative to
review the Shariah status of listed companies
In 1996-1997, SAC of SC had developed several basic
criteria as a guidance for Shariah compliance review process
Jun 1997, SC introduced an official SAC list of Shariah
compliant stocks listed on Bursa Malaysia
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Why SC should be responsible in issuing
Shariah-compliant stocks?
SC has a regulatory power to extract relevant and critical information and data from listed companies
SC has invested in building up infrastructre for compliance review process (Islamic Capital Market System)
Enables SC to issue appropriate guidelines on Shariah compliance – e.g guidelines on disposal of non Shariah-approved securities
Able to promote centralisation and harmonisation of Shariah decisions on the status of listed securities
Enhance market confidence on the list of Shariah-compliant securities
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Pre-1997
Bank Islam
Malaysia Bhd
issued list of
Shariah-compliant
stocks for internal
reference
1996-1997
SAC of SC
developed basic
criteria for Shariah
compliance review
process
Jun 1997
1st official list of
Shariah- compliant
stocks was
introduced by SC
1999
Bursa Malaysia
launched Kuala
Lumpur Shariah
Index
2004
SC disclosed Shariah
financial benchmarks
that are applied in
compliance review
process
2004
Review Syariah
status at Pre-IPO
stage
Innovation of Shariah-compliant stocks
2007
Bursa Malaysia launched FBM EMAS Shariah
Index and FBM Hijrah Shariah Index
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SAC’s approach in screening listed stocks
Based on Shariah criteria sourced from Quran, Hadith, Qiyas, Ijma’ and general Shariah principles
Determine income contribution from Shariah
prohibited activities of listed companies
using Shariah methodology and criteria set
out by the SAC
Classify a stock as Shariah-compliant
if income contribution from the prohibited
activities is within Shariah tolerable level
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Shariah-compliant stocks meets several
objectives
Facilitate investors seeking investment in Shariah-compliant
securities listed on the exchange
Centralisation and harmonisation of Shariah decisions
Enhance disclosure and transparency
Promote the development of ICM products and services (e.g.
Islamic index and Islamic funds)
Encourage application of Islamic banking products
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Who get the benefit from Shariah-compliant
stocks list?
The list become as a major reference to the Muslim
investors who only invest in Shariah compliant stocks
or instruments.
Institutional investors like Tabung Haji, EPF, Islamic unit
trust funds, other large corporation as well as retailers.
The list become as a basis in constructing Shariah
Index by Bursa Malaysia, FTSE and also RHB Dow
Jones Islamic
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The Shariah compliance process
Extraction of relevant
financial information
from audited financial
report and other material
information
Undertaking Syariah
compliance review
process to identify
contribution from non-
permissible activities
Compare with
Syariah
financial
benchmark
Tabulate the result to
SAC for final
consideration / decision
Compile the result and
issue list of Shariah-
compliant securities
Industrial
Products 34%
Construction
7.4%
Trading/
Services 19%
Properties 10%
Plantation 5%
Technology 8%
IPC 0.8%Finance 0.6%
Trusts 0.3%
Consumer
Products 15%
Shariah non-compliant
securities
14%
Shariah-compliant
securities
86%
Over 80% of securities listed on Bursa Malaysia are
Shariah-compliant
• The List is updated in May and November every year
• Basis for construction and revision of Shariah Index
• Investment reference for Islamic unit trust funds, takaful funds and Islamic stockbroking services
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Shariah compliance review criteria
1. Financial services based on riba (interest)
2. Gambling
3. Manufacturing or sale of non-halal products
4. Conventional insurance
5. Entertainment
6. Manufacture or sale of tobacco-based
products or related products
7. Stockbroking or share trading in Syariah non-
compliant securities
8. Other activities deemed non-permissible
1. Interest income from conventional fixed deposits
/ interest bearing instruments
2. Dividend received from investment in Shariah
non-compliant securities
Classified as
Shariah-compliant
if the company is
not significantly
involved in the
following activities:
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Two phases of compliance review process
Compliance
review process
1
Quantitative phase
Compute the contribution of
non-permissible activities
and compare with group
turnover and group profit
before tax
Qualitative phase
2
SC
SAC
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1. Group TO2. Group PBT
1. TO and PBT of non permissible activities
2. SOP of non permissible activities3. Interest income4. Dividend received from investment in non permissible
securities
Consolidate information on :
1. TO and PBT of non permissible activities vs group TO and PBT2. SOP of non permissible activities vs group PBT3. Interest income vs group TO4. Dividend received from investment in shariah-non compliant securities vs
group PBT
Compute percentage of contribution :
Shariah-non compliant if contribution to Group TO or group PBTexceeds the financial benchmark
Compare the percentages against financial benchmark
Phase 1 : Quantitative method - CCC
concept
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The financial benchmarks used by SAC
The 5-percent benchmark
to assess the level of mixed contributions from the activities that are clearly prohibited
such as riba (interest-based companies like conventional banks), gambling, liquor and
pork
The 10-percent benchmark
to assess the level of mixed contributions from the activities that involve the element
of ‘umum balwa’ which is prohibited element affecting most people and difficult to
avoid e.g interest income from fixed deposits in conventional banks and tobacco-
related activities
The 25-percent benchmark
to assess the level of mixed contributions from the activities that generally permissible
according to Syariah and have an element of maslahah to the public, but there are other
elements that may effect the Syariah status of these activities e.g hotel and resort
operations, share trading, stockbroking, as these activities may also involve other
activities that are deemed non-permissible to the Shariah
The 20-percent benchmark
to assess the level of non permissible rental activities of listed companies
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The financial benchmarks used by SAC
WHY ?
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Phase 2 : Qualitative_Pre-Compliance results
presented to SAC for final approval
SAC considers other factors / criteria before decision is given
companies which compliant with quantitative review may turn to non-compliant status due to qualitative/image consideration
Qualitative Image – public perception or image of
the company
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© Copyright SIDC 2008
Case Study 1 : Syahdu Senja Holdings
Berhad
Principal activity – Construction and civil engineering
Associated
Syahdu Senja
Holdings Berhad
KRH Cons.
Sdn. Bhd Subsidiary
Lai & Lai
Sdn. Bhd
Jaya
Sdn. Bhd
Pembinaan Jaya
Sdn. Bhd
Kejuruteraan
Jaya Sdn. Bhd
Tobacco business
Related information
Group info :
Group TO : RM10 million
Group PBT : RM 5 million
Non-permissible activities
info :
TO tobacco : RM 900,000
PBT tobacco : RM 400,000
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Case study 1 : Pre-compliance result
Benchmark for tobacco : 10% of Group TO or Group PBT
Pre-compliance result :
Shariah-compliant (contribution from tobacco < the 10% benchmark)
Non-permissibles Calculation Quantitative
result
Percentage of tobacco to
Group TO
RM900,000 / RM10.0 mil 9%
Percentage of tobacco to
Group PBT
RM400,000 / RM5.0 mil 8%
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Case Study 2 : Lembayung Jingga Berhad
Principal activity – Manufacturing of furniture and other related
industry
Associated
Lembayung
Jingga Berhad
Cengal
Sdn. Bhd Subsidiary
Nyatoh
Sdn. Bhd
Merbau
Sdn. Bhd
Plywood
Sdn. Bhd
Nasib Baik
Sdn. Bhd
Gaming business
Related information
Group info :
Group TO : RM 2 million
Group PBT : RM 500,000
Non-permissible activities
info :
Interest income : RM 220,000
SOP gaming : RM 24,000
Interest income
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Case study 2 : Pre-compliance result
Benchmark for interest income : 10% of Group TO
Benchmark for gaming : 5% of Group TO / Group PBT
Pre-compliance result :
Shariah-non compliant (contribution from interest income > the 10%
benchmark)
Non-permissibles Calculation Quantitative
result
Percentage of interest
income to Group TO
RM220,000 / RM2.0 mil 11%
Percentage of gaming to
Group PBT (SOP)
RM24,000 / RM500,000 4.8%
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Case Study 3 : Mujur Minat Berhad
Principal activity – Manufacturing and trading of consumer products
Associated
Mujur Minat
Berhad
High-High
Sdn. Bhd Subsidiary
Hong Hap
Sdn. Bhd
Untung Besar
Sdn. Bhd
Hi Low
Sdn. Bhd
Right Left
Sdn. Bhd
Gaming business
Related information
Group info :
Group TO : RM 10 million
Group PBT : RM 5 million
Non-permissible activities
info :
TO liquor : RM 400,000
PBT liquor : RM 120,000
TO gaming : RM 200,000
PBT gaming : RM100,000
Liquor business
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Case study 3 : Pre-compliance result
Benchmark for liquor and gaming : 5% of Group TO / Group PBT
Contribution from non-permissible activities :
Group TO : (4% + 2%) = 6%
Group PBT : (2.4% + 2) = 4.4
Pre-compliance result :Shariah-non compliant (contributions from non-permissible activities [liquor &
gaming] > the 5% benchmark)
Non-permissibles Calculation Quantitative
result
Percentage of liquor to
Group TO
RM400,000 / RM10.0 mil 4%
Percentage of liquor to
Group PBT
RM120,000 / RM5.0 mil 2.4%
Percentage of gaming
to Group TO
RM200,000 / RM10.0 mil 2%
Percentage of gaming
to Group PBT
RM100,000 / RM5.0 mil 2%
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Shariah guidance on investment in Shariah
non-compliant stocks
Case 1 :
• Investment in Shariah-compliant stocks, which subsequently
reclassified as Shariah non-compliant
Price of Shariah non-compliant stocks
On the announcement date After the announcement date
• liquidate
immediately
• any capital gain
from disposal can
be kept by investors
Price > Original
Investment cost
• Hold until the price
of securities equal
to original
investment cost
• Dividends received
can be used to
expedite the
disposal
Price < Original
Investment cost
• liquidate immediately
• Profit (different between original investment cost and closing price of announcement date) –can be kept
• Profit (different between
disposal price and closing
price of announcement
date) – channelled to
charitable bodies
Price > Original
Investment cost
• Hold until the price
of securities equal
to original
investment cost
• Dividends received
can be used to
expedite the
disposal
Price < Original
Investment cost
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© Copyright SIDC 2008
Example
Investment cost = RM5.50/share
Closing price on the announcement date = RM6.00/share
Disposal Price = RM7.50/share
Capital gain at closing price =RM0.50/share (kept by investor)
Different between disposal price and and closing price on announcement date
= RM 1.50/share (channelled to charitable bodies)
Kept by investor
(RM0.50)
Investment Cost
(2 January)
Announcement date
(25 April)
Disposal price
(3 June)
5.50 6.00 7.50
Channelled to charitable bodies
(RM1.50)
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cont...
Case 2 :
Investment in Shariah non-compliant stocks
• Investors to dispose their non-approved securities within a month of knowing the status of the securities.
• Any gain made in the form of capital gain or dividend received during or after the disposal of the securities to be channelled to charitable bodies.
• Investors can keep their original investment cost only
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© Copyright SIDC 2008
Wallahu A`lam
Thank You
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