panaversity THE FOUR SCREENING METHODOLOGIES — GLOBAL COMPARISON
| Methodology | Maintained By | Sector Screen | Debt Screen | NPI Screen | Cash Screen |
|---|---|---|---|---|---|
| SC Malaysia SRI | Securities Commission Malaysia | Comprehensive positive/negative list | 33% total debt/total assets | 5% non-permissible income | 33% |
| Saudi Tadawul | Tadawul (Saudi Exchange) | Exclusion-based | 30% debt | 5% non-permissible income | 33% |
| MSCI Islamic | MSCI / independent scholars | Exclusion-based | 33% total debt/market cap | 5% non-permissible income | 33% |
| DJIM | S&P Dow Jones / Shariah scholars | Exclusion-based | 33% trailing 24-month average market cap | 5% non-permissible income | 33% |
| AAOIFI SS 21 | AAOIFI | Exclusion-based | 30% total debt/market cap | 5% non-permissible revenue | 30% |
STEP 1: SECTOR SCREENS (ALL METHODOLOGIES — EXCLUSIONS)
Automatically exclude any company with MATERIAL INVOLVEMENT in:
Hard exclusions (zero tolerance — any involvement disqualifies):
- Conventional banking (interest-based)
- Conventional insurance
- Alcohol production or distribution
- Tobacco production or distribution
- Pork products (including gelatin, pork-based food processing)
- Gambling (casinos, bookmakers, lottery, online gambling)
- Adult entertainment / pornography
- Weapons of mass destruction
Soft exclusions (use NPI income screen — see Step 3):
- Defence / military equipment (below WMD level)
- Conventional media (mixed — needs NPI test)
- Hotels and hospitality (may have alcohol revenue — needs NPI test)
- Entertainment (needs NPI test)
- Non-halal food with permissible majority products (needs NPI test)
STEP 2: FINANCIAL RATIO SCREENS
Debt Screen (interest-bearing debt / total assets or market cap):
- If interest-bearing debt > 33% of total assets (AAOIFI/MSCI) or market cap → EXCLUDE
- "Interest-bearing debt" = conventional loans, bonds, overdrafts, interest-bearing leases
- Does NOT include trade payables, deferred tax, operating liabilities
Cash + Interest-Bearing Securities Screen:
- If (cash + short-term investments + interest-bearing securities) > 33% of total assets → EXCLUDE
- Rationale: Company holds excessive amount of conventional financial assets
Accounts Receivable Screen (some methodologies):
- If accounts receivable > 49% or 70% (methodology dependent) of total assets → flag (Indicates a company that is effectively lending rather than trading)
Data sources:
- Latest annual financial statements (12-month trailing or most recent)
- Some methodologies use 24-month trailing averages for market-cap ratios
- SC Malaysia uses total assets; MSCI and DJIM use market capitalisation denominator
STEP 3: NON-PERMISSIBLE INCOME (NPI) SCREEN
NPI Definition: Revenue from activities that are prohibited under Shariah. Examples: interest income, revenue from conventional insurance, alcohol sales, tobacco sales, pork sales, gambling revenue, adult content revenue.
NPI Threshold: 5% of total revenue (all four methodologies)
Calculation: NPI % = Total Non-Permissible Revenue / Total Revenue × 100
If NPI % > 5% → EXCLUDE If NPI % ≤ 5% → PASS (but requires PURIFICATION — see Step 4) If NPI % = 0% → FULLY CLEAN
Data source: Annual report revenue breakdown, segment reporting. If not disclosed: use analyst estimates or conservative assumption.
STEP 4: PURIFICATION CALCULATION
For holdings that PASS the 5% NPI screen but have some non-permissible income:
Purification Obligation: For each dividend received from such a company: Purification Amount = Dividend Received × NPI % of that company
Total Portfolio Purification = Σ (Dividend from company i × NPI % of company i)
Action: Donate the purification amount to charity (sadaqah). Do not retain. Cannot offset against income.
Journal entry in investor's / fund's books: Dr: Purification Expense [Amount] Cr: Charity Payable — Purification [Amount]
On payment: Dr: Charity Payable — Purification [Amount] Cr: Cash [Amount]
STEP 5: SCREENING CONFLICT RESOLUTION
When different methodologies produce different results for the same company:
Priority hierarchy (conservative approach):
- Apply the methodology specified in the fund's SSB-approved investment policy.
- If the fund applies "most conservative of all methodologies" → exclude if any methodology excludes.
- For borderline cases → refer to SSB for ruling. Do not trade without SSB determination.
Common conflict scenarios:
- SC Malaysia includes a company that MSCI excludes (e.g., different debt ratio denominators)
- DJIM includes a company with 4.9% NPI that a stricter SSB considers too close to limit
- Plantation companies: SC Malaysia includes palm oil; MSCI may screen for environmental reasons
QUARTERLY REBALANCING WORKFLOW
- Obtain updated Shariah-compliant securities list from each applicable methodology provider.
- Compare against current portfolio holdings.
- Identify newly NON-COMPLIANT holdings → immediate divestment required.
- Identify newly COMPLIANT holdings → eligible for purchase.
- For holdings that remain compliant: update NPI % from latest annual reports.
- Recalculate portfolio-level purification obligation.
- Produce SSB quarterly compliance report.
Divestment timeline after compliance breach: Most SSBs allow 30 days to divest non-compliant holdings without triggering additional Shariah liability. Confirm with the fund's specific SSB fatwa on divestment timing.
MANDATORY QUARTERLY SSB REPORT — STRUCTURE
- Portfolio composition: # and % of holdings by Shariah status (Compliant / Borderline / Non-Compliant)
- Changes from prior quarter: additions to non-compliant list requiring divestment
- Purification obligation: calculation, amount, recommended charities
- Borderline holdings under SSB review
- Recommended actions before next quarter
- SSB attestation signature
MANDATORY ANNUAL FUND DISCLOSURES
- Shariah screening methodology adopted (and which authority approved it)
- SSB composition and qualifications
- Number of portfolio reviews conducted in the year
- Non-compliant holdings identified and divested (number, % of portfolio affected)
- Purification amounts paid and recipients
- Any unresolved borderline cases and SSB rulings sought