A Review of Securities Commission of Malaysia’s Revised Shariah Stock-Screening Criteria

Abstract

This paper addresses the perceived more tolerant Shariah-screening criteria by the Securities Commission of Malaysia (SCM). Recently, in 2013, SCM introduced the "two-tier" screening process of the stocks traded on Bursa Malaysia. Despite this revision, the two-tier process is seen as being less stringent than the Shariahscreening process of e.g. Dow Jones and MSCI. Such perception may affect the credibility of the SCM in determining Shariah-compliant securities compared to international standards. Proponents of SCM screening criteria argue that since Shariah screening in Malaysia only includes Malaysian listed stocks, more rigid screening process may limit the list of investible stocks, and may further restrict the benefits of diversification, i.e. one may not be able to form efficient portfolios or achieve appropriate risk-return portfolios while complying with the Shariah principles. This paper argues that the justification for the less-stringent screening process adopted by the SCM does not seem to be corroborated by theoretical or portfolio diversification studies, and evidence from the socially-responsible investing and Shariah-compliant empirical findings.

Challenging the Current Shariah Screening Methodology Assessments in Kuala Lumpur Shariah Index (KLSI)

“…Too much diversity on Shariah screening methodology will add cost and requires a larger number of screening processes and in the long run could hamper Islamic finance growth (Derigs and Marzban, 2008). Besides, Shariah screening assessments with more strict requirements have affects on the pool of eligible investments for Islamic investments (Engkuchik, 2016). In other word, benefits from diversification of portfolios may not be maximized through Shariah-compliant portfolios.…”

“…Another issue derived from the introduction of Shariah screening is the cost that need to be borne by Muslim investors (Engkuchik, 2016). Inconsistencies of Shariah-compliant status by companies had made Muslim investors need to sell their shares once the company has been delisted from Shariah-compliant status.…”

Perbedaan Penerapan Standar Islamic Stock Screening Dan Social Environment Index Terhadap Kinerja Portofolio Saham Bei

“…Islamic stock screening atau Shariah screening merupakan proses identifikasi seperangkat investasi yang mematuhi prinsip-prinsip Syariah, melarang riba, maisyir, dan gharar serta mampu memenuhi kriteria investor Muslim untuk berinvestasi di dalamnya (Ashraf & Mohammad, 2014;Engkuchik, 2016;Ho, 2015;Ho, Rahman, Yusuf, & Zamzamin, 2014;Marzban & Asutay, 2012). Islamic stock screening sudah diterapkan secara luas pada tingkat dunia.…”

Islamic Screening Mechanism of Islamic Capital Market—A Comparison Between the Fatwa—DSN-MUI, the Kuala Lumpur Stock Exchange Islamic Index and the Dow Jones Islamic Market Index

“…In other words, the benefits from diversification may not be maximized by the ethical investors. Based on this notion, the general perception of ethical investment and Sharia investment is that ethical or Sharia-compliant investors may earn lower returns than the unscreened portfolios or market benchmarks (Engkuchik, 2016).…”

“…The SAC of KLSESI, in its written guidelines, focuses only on two criteria, namely: (1) core activity; and (2) level of interest income of company to determine whether a particular company is permissible or not in its index. However, it is silent on the other two criteria, namely: (1) the debt level; and(2) liquidity level as used by other Islamic Indices (Rahman et al, 2010). According to Wan Zainal et al ICOI-2018 (2016), SAC Revised 2013 consists of: 1. Business activity is core business (tolerate minor violations, as long as the core business is permissible); 2.…”