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International comparison of Shari’ah compliance screening standards

Catherine S F Ho (Arshad Ayub Graduate Business School, Universiti Teknologi MARA, Shah Alam, Malaysia)

International Journal of Islamic and Middle Eastern Finance and Management

ISSN: 1753-8394

Article publication date: 15 June 2015

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.

Keywords

Acknowledgements

The author appreciates the funding provided by the Research Management Institute, UiTM and the Malaysian Government for this research. The author also appreciates valuable comments and feedback from participants of seminars in Malaysian universities. The author alone is responsible for any error.

Citation

Ho, C.S.F. (2015), "International comparison of Shari’ah compliance screening standards", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 8 No. 2, pp. 222-245. https://doi.org/10.1108/IMEFM-07-2014-0065

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited