2.11
Screening and Purification
Criteria: Shari’a Application
to Investments
Iqbal Asaria, Yasaar Ltd
Introduction
With the current growth in Shari’a-compliant investments, the need for a
screened universe of stocks is increasing. These screens typically opine on
the permissibility or otherwise of investment in stocks and securities from
an investor’s point of view. Investors and/or their fund managers are thus
able to offer Shari’a-compliant investment channels.
Traditionally, these screened universes have been used by long equity
fund managers. Now, increasingly such universes are used by Index
providers, like FTSE and Dow Jones, to provide benchmarks for funds. They
are also used by providers of exchange traded funds and other index-based
instruments. Lately, alternative investment funds have also started to use
them.
Given their increasing and varied usage, it is important to have a robust
methodology in place, which is transparent and verifiable. In addition, there
is a need to bear in mind that the universe of investable stocks needs to be
as large as possible, so as not to detract fromthe risk mitigating advantages
of portfolio diversification. Thus, the screening of stocks for Shari’a
compliance is beginning to be a critical task that demands thoroughness
and professionalism.
It is interesting to look at the rationale behind the Shari’a screens and
methodologies of the various providers for these services. Essentially, the
process involves looking at business compliance and financial compliance.
Business compliance
With regards to business compliance, one needs to determine if a corporation
is engaged in the provision of prohibited activities like alcohol, gambling,
armaments, tobacco, pornography, interest-based finance or pork. Most
Shari’a scholars have put a tolerance level of 5 per cent for such activities.
