understanding sharia screening methodologies and principles bandar seri begawan, 30 th nov – 4 th...

UNDERSTANDING SHARIA SCREENING METHODOLOGIES AND PRINCIPLES Bandar Seri Begawan, 30th Nov – 4th Dec 2015

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UnderstandingSharia Screening Methodologies and Principles

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I. Selection Criteria of Shariah Stocks

II. Important Screening-Factors

III. Different Islamic Stock Screening

Methods across Countries

Agenda

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The selection criteria of sharia stocks are based on Bapepam-LK Regulations No II.K.1 concerning Criteria and Issuance of Sharia Securities List, item 1.b.7.

The regulation states that Securities in the form of shares, including sharia rights and sharia warrant, issued by Issuer or Public Company who does not declare that its business activities and management are conducted based on Sharia Principles, as long as the Issuer or Public Company fulfills the following criteria :

I. The Company does not conduct any business

activities that conflict  with Sharia Principles.

II. The Company fulfills/meets certain financial ratios.

Referring to:1. Fatwa No. 20/DSN-MUI/IV/20012. Fatwa No. 40/DSN-MUI/X/2003Indonesian National Sharia Board

Selection Criteria of Sharia Stocks

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The Company fulfills/meets the following criteria and financial ratios:

Financial RatiosSharia Compliant Industry

Prohibited Trading

Ribawi Financial Services

Specul-ation

Haram

Gambling

Bribery

Conflicts with

Sharia

Selection Criteria of Sharia Stocks: Criteria and Financial Ratios

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(1) Gambling and games considered as gambling(2) Trading that is prohibited according to Sharia

(1) Trading that is not followed by delivery/transfer(2) Trading with a fake offer or demand

(3) Ribawi financial services,(1)  interest-based bank(2)  interest-based finance company

(4) Buying and selling of risks that involve speculation (gharar) and gambling (maisir)

(5) Producing, distributing, trading, and or providing(1)  products or services that are forbidden because of its contents

(haram li-ghairihi)(2) products or services that are forbidden not because of its contents but

because they are stated forbidden by DSN-MUI(3) products or services that can deprave one’s morals and are harmful

(6) Transactions that contain elements of bribery (risywah)

Business Activities that Conflict  withSharia Principles

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Although there are many components in the Screening-Methods using by the Countries but the most important factor that makes it significantly different is the ratio of:

Important Screening-Factors

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Comparison Using Different Components

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• Bapepam-LK has run simulation on sharia compliant stocks listed in the Indonesia Stock Exchange for Stock with the top 20 market capitalization per December 31, 2010

• These simulations on 20 samples of sharia stock shares have been performed by using the criteria of Islamic stock of 8 foreign countries: Indonesia, the United, States, Turkey, Arab, Pakistani, British and Malaysia

• Issuer's market capitalization value of stocks reach USD 367 billion and represents 57% of the average total capitalization value of IDX in 2010.

• (The processed data from 2008, 2009, and 2010.)

57% of Total Market

Capitalization

BAPEPAM Simulations on Screening Methods Across Countries

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Screening Methods

Indonesia (Bapepam-LK)1.Total debt-bearing interest / total equity ≤ 82%2.(Total interest income + other non-halal income) / total revenue ≤ 10%

Countries Using Equity

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Screening MethodsDow Jones Isalmic Market Index, USA

1. Total debt / Market Capitalization (24 Months Average) ≤ 33%2. Liquid assets (Cash + interest bearing securities) / Market Capitalization (24 Market Average) ≤ 33%3. Account receivables / Market Capitalization (24 Months Average) ≤ 33%

United Arab Emirates

1.Interest bearing debt / Market Cap (12 Months Average) ≤ 33%2.Interes bearing lending / Market Cap ≤ 30%3.Interes bearing lending / total assets ≤ 30%4.(Cash + trade receiveables + investment + other debtors) / total assets ≤ 70%5.(Cash + trade receivables + other non-halal income) / operating income ≤ 5%6.(Interest income + other non-halal income) / operating income ≤ 5%

Countries Using Market Capitalization

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Screening Methods

Arab Saudi

1.Interest bearing debt / Market Cap (12 Months Average) ≤ 33%2.(Value of debts + liquid funds) / Market Cap ≤ 50%3.Interest income / total income ≤ 5%

Istanbul Stock Exchange, Turkey

1.Debt to Market Value of equity (36 Months Average) < 33%2.Accounts Receivables to Market Value of Equity (36 Months Average) < 49%3.(Cash + Interest Bearing Securities) to Market Value of Equity (36 Months Average) < 33%4.Non-Permisible Income other than Interest Income to Revenue < 5%

Countries Using Market Capitalization

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Screening Methods

FTSE, England

1.Debt / Total Assets < 33%2.Account receivables + Cash / Total Assets (12 Months Average) < 50%3.Cash + Interest Bearing Securities / Total Assets (12 Months Average) < 33%4.Non-Permisible Income other than Interest Income / Total Revenue < 5%

Karachi Stock Exchange, Pakistan

1.Total interest-bearing debt / total assets ≤ 40%2.Total illiquid assets / total assets ≥ 20%3.Income from investment ≤ 5% of gross Revenue

Countries Using Asset

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Screening MethodsMalaysia

1.Maximum of 5% of turnover or profit before tax (for riba, gambling, liquor and pork)2.Maximum of 10% of turnover or profit before tax (for ummul balwa e.g. Interest from conventional bank)3.Maximum of 25% of turnover or profit before tax (maslahah activities e.g. Hotel & restors. Share trading)

Countries Not Using Interest-Bearing Debt Ratio

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Screening Methods using EquityTotal in ILIS (%)

2010 2009 2008

Indonesia (Bapepam-LK)

1.Total debt-bearing interest / total equity ≤ 82%2.(Total interest income + other non-halal income) / total revenue ≤ 10%

60 60 55

Indonesia List of Islamic Stock (ILIS)

Number of Sharia Stocks listed in IDX: Simulation Using

Different Screening Methods

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Screening Methods using Market CapitalizationTotal in ILIS (%)

2010 2009 2008Dow Jones Isalmic Market Index, USA

1. Total debt / Market Capitalization (24 Months Average) ≤ 33%2. Liquid assets (Cash + interest bearing securities) / Market Capitalization (24 Market Average) ≤ 33%3. Account receivables / Market Capitalization (24 Months Average) ≤ 33%

70 60 50

United Arab Emirates1.Interest bearing debt / Market Cap (12 Months Average) ≤ 33%2.Interes bearing lending / Market Cap ≤ 30%3.Interes bearing lending / total assets ≤ 30%4.(Cash + trade receiveables + investment + other debtors) / total assets ≤ 70%5.(Cash + trade receivables + other non-halal income) / operating income ≤ 5%6.(Interest income + other non-halal income) / operating income ≤ 5%

80 75 55

Indonesia List of Islamic Stock (ILIS)

Number of Sharia Stocks listed in IDX: Simulation Using

Different Screening Methods

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Screening Methods using Market Capitalization Total in ILIS (%)

2010 2009 2008Arab Saudi

1.Interest bearing debt / Market Cap (12 Months Average) ≤ 33%2.(Value of debts + liquid funds) / Market Cap ≤ 50%3.Interest income / total income ≤ 5%

80 65 60

Istanbul Stock Exchange, Turkey

1.Debt to Market Value of equity (36 Months Average) < 33%2.Accounts Receivables to Market Value of Equity (36 Months Average) < 49%3. (Cash + Interest Bearing Securities) to Market Value of Equity (36 Months Average) < 33%4. Non-Permisible Income other thanInterest Income to Revenue < 5%

65 50 50

Indonesia List of Islamic Stock (ILIS)

Number of Sharia Stocks listed in IDX: Simulation Using

Different Screening Methods

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Screening Methods using AssetTotal in ILIS (%)

2010 2009 2008FTSE, England

1.Debt / Total Assets < 33%2.Account receivables + Cash / Total Assets (12 Months Average) < 50%3.Cash + Interest Bearing Securities / Total Assets (12 Months Average) < 33%4.Non-Permisible Income other than Interest Income / Total Revenue < 5%

30 20 20

Karachi Stock Exchange, Pakistan1.Total interest-bearing debt / total assets ≤ 40%2.Total illiquid assets / total assets ≥ 20%3.Income from investment ≤ 5% of gross Revenue

80 70 70

Indonesian List of Islamic Stock (ILIS)

Number of Sharia Stocks listed in IDX: Simulation Using

Different Screening Methods  

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Screening Methods using AssetTotal in ILIS (%)

2010 2009 2008

Malaysia1.5% of turnover or profit before tax (for riba, gambling, liquor and pork)2.10% of turnover or profit before tax (for ummul balwa e.g. Interest from conventional bank)3.25% of turnover or profit before tax (maslahah activities e.g. Hotel & restors. Share trading)

100 100 100

Countries Not UsingInterest-Bearing Debt Ratio

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Tota in ILIS (%) 2010 2009 2008

Total interest-bearing debt / Total Asset ≤ 45% 90 85 80

Total interest-bearing debt / Total Asset ≤ 40%80 70 70

Total interest-bearing debt / Total Asset ≤ 33%70 65 70

Total interest-bearing debt / Total Asset ≤ 30%70 65 60

Total interest-bearing debt / Total Market Capitalization (12 Months Average) ≤ 33%

80 80 75

Total interest-bearing debt / Total Equity ≤ 82% 60 60 55

Indonesian List of Islamic Stock (ILIS)

Result of Simulation Using Total Asset, Market Capitalization and Equity

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Indonesian List of Islamic Stock (ILIS) onDecember 2009 until the latest period (June 2014)

ILIS is published twice a year (every six months)

Years Period

Stock

TotalIssuer

Public Company

Delisted Issuer

IPO

2009I 181 5 3 9 198II 186 4 6 3 199

2010I 194 3 6 7 210II 211 3 9 5 228

2011I 217 3 9 5 234II 238 3 9 3 253

2012I 280 5 9 10 304II 302 5 10 4 321

2013I 288 5 9 8 310II 313 5 10 8 336

2014 I 306 4 12 4 326

Number of Sharia Stocks listed in IDX

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As of August 2014, The Sharia Securities List is The First Periodic of Sharia Securities List in 2014 which have 326 sharia stocks consisting of 322 sharia stocks from The First Periodic of Sharia Securities on May 2014 and 4 sharia stocks from The Incidental Sharia Securities List issued simultaneously with the effective registration statement of the Issuer.

Number of Sharia StocksListed in IDX by Sector

SectorNo. of ILIS Companies 1st Period

2013 2014

Agricultural Sector 13 11

Mining  28 30

Basic Industry and Chemical 46 46

Various Industry 28 28

Consumer Goods Industry 26 29

Property, Real Estate and Building construction 50 49

Infrastructure, Utilities and Transportation 23 29

Finance 0 1

Trade, Service and Investment 74 83

Public Company 5 4

Issuers are not Listing 9 12

IPO 8 4

Total 310 326

Thank You very much.

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