International comparison of Shari’ah compliance screening standards

Abstract

Purpose-This paper aims to review the Shari'ah investment screening methodologies of 34 prominent global Islamic finance users, including index providers, Shari'ah service providers, Islamic banks, a regulator, an association body and fund managers. Design/methodology/approach-A comparative analysis is performed to highlight the variances of the Shari'ah-compliant methods and principles practiced by these renowned institutions with the latest compiled data. Findings-The two sets of business screens and financial screens are profiled separately to clearly examine the similarities and differences between the different methodologies. Some of these practitioners are more specific in their listing of Shari'ah-impermissible activities, while some are more general in allowing more businesses to be included as permissible. The majority of these users practice a two-tier method of screening: qualitative and quantitative. Under quantitative screen, the range of allowable threshold ratios on non-permissible criteria differs slightly between them. Research limitations/implications-With the wide divergence in screening methodologies applied by practitioners, there is a general consensus in the acceptance of compliant assets from various countries and practice. Standardization is, therefore, seen as a need not only to make understanding of Shari'ah investments clear to investors but also to discourage misunderstandings between scholars and investors. Practical implications-The suggestion, therefore, is to set globally acceptable universal Shari'ah standard methodologies which are applicable by the world Islamic financial market. These standards which are relevant and logical to global ethical investing would further stimulate investments in Islamic finance. Social implications-With Shari'ah-compliant asset growing exponentially relative to the world's financial assets, it is alleged that greater harmonization of the global screening methods would prevent misunderstanding and provide a clearer insight on Shari'ah investing, which could further accelerate growth of the Islamic finance sector worldwide. Originality/value-To provide a more transparent regulatory environment and build local and regional regulatory framework through establishment of standards, there should be more consistency with minimum barriers that prevent the industry from achieving its full potential. The paper also contributes to existing literature by documenting and analyzing the qualitative and quantitative screening procedures as practiced by a comprehensive set of global Islamic finance users. It is, therefore, important to share this knowledge as an effort toward greater understanding and harmonization of the practices at the global level to accelerate growth in the industry.

Influence of Sharia Supervisory Board Characteristics on the Shariah Compliance

“…To understand IFIs comprehensively, it is very important to have some basic understanding of Shariah standards and compliance [4]. The earlier standardization efforts by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) becomes less dominantly applied by IFIs [5].…”

Shariah Screening Methodology: Does It ‘Really’ Shariah Compliance?

“…The differences in the quantitative ratios can be caused by different objectives among the Shariah screeners, whether country-specific, regulationoriented or globally business-oriented (Khatkhatay and Nisar, 2007;Abdul Rahman et al, 2010;Ho, 2015). Therefore, inconsistencies in the method of classification used by different groups will make some stocks that are deemed permissible by one group may be non-permissible by other groups (Derigs & Marzsban, 2008).…”

Revisiting the Halal screening investments: the case of GCC stock markets

“…Therefore, some Shariah scholars relax different screening criteria for commingled equity investments, which are discussed extensively in the literature. These criteria are divided into two types of screen: (i) qualitative (sector or business) screens; and (ii) quantitative (financial) screens (see: Siddiqui, 2007;Khatkhatay and Nisar, 2007;Derigs and Marzban, 2008;Abdul Rahman, 2010;Marzban and Asutay, 2012;Ho et al, 2012;Pok, 2012;Mahfooz and Ahmed, 2014;Rahman, 2015;Ho, 2015;Hutchinson et al, 2018).…”