Shariah-Compliant Screening Practices in Malaysia

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Mohamed Azam Mohamed Adil Catherine S.F. Ho Mansor Md. Isa Ezani Yaakub Mohammad Mahyuddin Khalid

Abstract

This study reviews twenty-eight users of Islamic equity screening in Malaysia based on the most recent information collected in 2012. Except for the Securities Commission and two index providers, the rest of the users are mutual fund companies. Our review indicates that, with few exceptions, the majority of the local screening users are following the benchmarks set by the Securities Commission of Malaysia, in which only industry screening is applied to separate Shariah compliant from non-compliant companies. A few users, however, employ a two-tier quantitative approach in addition to the qualitative screening. The qualitative screening removes companies whose main businesses are Shariah non-compliant. Companies with mixed activities are then subject to quantitative screenings in which non-compliant contributions are measured against applicable benchmarks. The Securities Commission is scheduled to have in place a two-tier quantitative screening method which is more in line with international practices by the end of 2013.

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