Background

Wealth of Australian Muslim community is on the rise and a large part of it would be invested in domestic and international share markets. One of the main issues Muslim investors encounter is how shares are screened for eligibility in Islamic investments. 

There is a plethora of opportunities in Shariah compliant equities in the Australian stock exchange. The industries wherein Islamic investments could be undertaken include mining, tele-communication, transportation, property funds, building & construction, healthcare, infrastructure, agriculture, manufacturing, utilities, renewable energy and electricity. This opportunity would be of a mammoth proportion if international equity markets are roped in for investments.

Australian Islamic financial services companies provide facilities for equity investments, domestically and internationally. Australian Shariah compliant superannuation funds also invest in share markets to grow retirement nest eggs for their members.

Shariah Screening

Generally speaking, there are two types of staggered screening done in the world wide Islamic financial services industry: sector based screening and accounting based screening. The former is performed to determine eligibility for all investments and the latter is carried out for companies which are not fully Shariah compliant characterised by not having a Shariah Advisory Board, not all transactions are Shariah compliant and not incorporated or managed fully in accordance with Shariah principles.

In sector based screening, all non-Shariah compliant sectors are excluded which would consist of alcohol, gaming/casinos, adult entertainment, pork products, tobacco products, weaponry, financial services except Islamic financial services and insurance except Islamic insurance (Takaful). These sectors are not considered Islamic and Muslims would not be comfortable to invest in these businesses to grow their wealth. Major Shariah screening service providers such as Dar Al Istithmar and Ratings Intelligence Partners would review the latest financial reports of relevant companies to ensure that they are not involved in any non-Shariah compliant business dealings.

Accounting based screening examines various financial ratios to measure an acceptable level of Shariah compliance. These ratios generally focus on leverage or debt financing, cash holdings and proportion of revenue derived from non-Shariah compliant enterprises. As an example, we provide the methodology of Dow Jones Shariah Indices. To be eligible for Islamic investments, a company requires to satisfy the following criteria for financial ratios: Debt/Equity (market value of equity over 3 years) must be less than 33%; Cash plus interest bearing investments/Equity (market value of equity over 3 years) must be less than 33%; Account Receivables/Equity (market value of equity over 3 years) must be less than 49% and Non-permissible Income other than Interest Income/Revenue must be less than 5%. This financial ratio analysis is to ensure that non-Shariah compliant business activities are within a tolerable level of necessity for companies operating under conventional market conditions.

In the event of investors receiving dividends or investment incomes from companies with non-Shariah compliant business dealings, a Dividend Purification Formula (DPF) is suggested to calculate the amount of investment income which could be donated to cleanse incomes received from such companies. The DPF is calculated as Dividend x (Non-permissible Dividends/Total Dividends).

Shariah screening service providers generally operate under instructions of their Shariah Advisory Boards. These agencies have access to highly qualified Shariah advisers and finance professionals to produce accurate screening advice for Islamic investment community.

Concluding Remarks

Shariah screening methodologies may not be uniform across the industry. All Shariah compliant share market investment providers apply certain methods to ensure subject shares are screened in terms of business sectors and an acceptable level of financial ratios. This affords an assurance that Muslim investors are well taken care of in their Islamic investments.