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STOCK SCREENING PROCESS FOR SHARIAH-COMPLIANT STATUS

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 STOCK SCREENING PROCESS FOR SHARÔÑAH-COMPLIANT
STATUS

By:
Ahmad Zaki Salleh
Faculty of Syariah and Law
University Sains Islam Malaysia

Introduction

One of the characteristics of investing in unit trust funds is that the risks are being
minimized by investing in the diversified portfolios.1 In the context of the
diversification, there is a saying in the English proverb which says “do not put all your
eggs into one basket”. The rationale behind the prohibition of the action is when any of
the eggs slips out it may affect the rest in the same basket. Placing all the money into
one single investment area is very much like putting all the eggs into one single basket.
In the unit trust funds investment, the pooled money is invested in a varied
portfolio in order to prevent investment risks. Thus, the selection of portfolio represents
one of the important elements in the unit trust funds investment, including the Islamic
unit trust funds.
When selecting portfolio for the investments, conventional unit trust funds can
freely choose between debt-bearing investments and profit-bearing investments. They
also can invest across the spectrum of all available fields in the stock market.2 An
Islamic unit trust funds, however, must set up a process in which the stocks are studied
and short listed in order to select those companies that only meet the criteria set by the
SharÊÑah. The process is normally called stock screening.
The main reason behind the stock screening process is to ensure investment
activities that involve prohibited elements such as usury and gambling, manufacturing
and selling of forbidden products, such as liquor, pork and pornographic materials, and
engaging in operations surrounding the elements of uncertainty, such as conventional
insurance practices, and fraudulences are excluded as these elements are strictly
forbidden by the SharÊÑah. Neither the stock market nor the other related money making
ventures are excused from the above principles. As a result, the stocks and shares of
companies involved in the above mentioned practices are deemed non-ÍalÉl (not
permissible). Thus, investing in such companies is not allowed by the SharÊÑah. The
question to be asked is, what if the core business of a company is ÍalÉl (permissible) in
nature, but a small portion of its business activities does not comply with SharÊÑah

1
Portfolio refers to a collection of investment owned by the same individual or organization. These
investments often include stocks, bond and mutual funds. See investorwords.com.
2
Said El-Fakhani and M. Kabir Hasan, Performance of Islamic Mutual Funds, paper presented at the 12th
Annual Conference of Economic Research Forum, 19-21 August 2005, Cairo, Egypt, 5.

1
principles, can Muslim investors invest in such a company? The answer lies on the
stock screening criteria that will be discussed in this chapter.
Hence, this chapter aims to discuss the stock screening process as practiced by
the SharÊÑah Advisory Council of the Securities Commission. The criteria of the non-
SharÊÑah compliance companies, as outlined by the council, will be studied. It will also
look into the possibility of Muslim investors to invest into mixed companies, which are
involved in both ÍalÉl and non- ÍalÉl elements. If there is any possibility, what is the
percentage of this non-ÍalÉl activities portion in the companies that is permissible for
investment, and what are the criteria for this kind of investment?
In addition to providing answers to the above questions, this chapter will also
highlight the role of SharÊÑah Advisory Council (SAC) of the Securities Commission
(SC) as well as the SharÊÑah consultants of the Islamic unit trust funds industry in the
stock screening process.
The chapter begins with a brief overview of Malaysia’s capital market, followed
by roles of SharÊÑah Advisory Council (SAC) of the Securities Commission (SC). The
chapter continues with the discussion on the stock screening process, which is process of
evaluating companies for the purpose of determining whether a company’s stock is
considered ÍalÉl or not. The discussion will further to the criteria of unapproved stocks,
which are stocks that are categorized as non-SharÊÑah compliance, followed by the
discussion of SharÊÑah criteria of investing in mixed companies and the SAC’s
benchmark for mixed listed securities.

SHARÔÑAH ADVISORY COUNCIL OF THE SECURITIES COMMISSION

The authority responsible for the determination of SharÊÑah compliance stock, or stock
screening process in Malaysia is the SharÊÑah Advisory Council (SAC) of the Securities
Commission (SC). The authority was established only in 1996.3 Prior to its
establishment, several initiatives had been taken by the SC to ensure the continuous
development of the Islamic capital market and in this context, Islamic unit trust funds in
particular. The major step was in setting up and providing the necessary infrastructure
for research, discussion and dialogue, as they are crucial in the development process of
the industry.4
The continuing commitment of the Securities Commission as the regulatory
body for the unit trust industry as well as the capital market led to the setting up of a
dedicated Islamic Capital Market Unit within its Research and Development Division.5
The unit is staffed by researchers who are well versed in conventional capital market
practices as well as others who are trained in SharÊÑah and Islamic law, particularly in

3
Securities Commission, Regulation of the Securities Commission Syariah Advisory Council (Kuala
Lumpur: Securities Commission, 1st Ed., 2002), p.108.
4
Ibid. 108.
5
Ibid. 109.

2
Fiqh al-MuÑÉmalÉt. The mandate of this unit is to carry out research activities in areas
which are related to Islamic financial products and Islamic jurisprudence.
Recognizing that the development of this aspect of the capital market in
particular, requires input from, and constant dialogue and discussion with, not only the
industry practitioners but also Islamic scholars, the SC in 1994, established an informal
group called the Islamic Instrument Study Group (IISG).6 This was done with the
objective of facilitating a process whereby Islamic scholars and industry participants can
examine existing capital market instruments and guide market participants on matters
pertaining to Islamic capital market issues through discussion and debate. The IISG
comprised of renowned Malaysian Islamic law scholars and experts, corporate figures
who are active in the area of Islamic banking and Islamic securities as well as
academicians.
The Islamic Capital Market Unit of the SC provides extensive research and
secretarial support to the IISG. The success of IISG and its ability to fill the absence in
the area of Islamic capital market expertise prompted the SC to propose the
establishment of a formal body with the responsibility of not only evaluating specific
capital market instruments but also ensuring that the operation of the Islamic capital
market fulfils all SharÊÑah principles and requirements. Hence, on 16 May 1996,
SharÊÑah Advisory Council (SAC) of the Securities Commission was officially
established.7
The SharÊÑah Advisory Council (SAC) of the Securities Commission is
responsible to ensure the operation of Islamic Capital Market in Malaysia is inline with
the SharÊÑah principles. The members of the body consist of Islamic scholars,
academicians and Islamic finance experts. The council advises the SC on all matters
pertaining to the systematic development of a comprehensive Islamic capital market and
serves as the focal point of reference on all issues relating to the Islamic capital market
and SharÊÑah. For the term of 2008 to 2010, the SAC has appointed 10 distinguished
members.8
The revised guidelines on unit trust of 1997 had imposed on management
companies that manage Islamic unit trust funds or intends to offer one to set up their
own SharÊÑah consultant or SharÊÑah advisory committee to ensure and monitor all
investment decisions as well as funds operation are at all times in compliance with the
Islamic principles as laid down by the SharÊÑah Advisory Council (SAC) of the SC.9
Thus, while the SAC of the SC provides overall guidelines of the sector, the SharÊÑah
consultant or SharÊÑah advisory committee of the respective funds or companies will be
responsible for the operations and investment portfolios of the fund concerned. For the
industrial reference, the SAC has provided the list of registered SharÊÑah individuals or
SharÊÑah advisers eligible for the schemes managed and administered in accordance with

6
Ibid. 109.
7
Securities Commission, Regulation of the Securities Commission Syariah Advisory Council, 109.
8
The list of Shariah Advisory Council’s member as for the term 2008 to 2010 is attached in Appendix B.
9
See: The Guidelines of Unit Trust Funds, Securities Commission, Article 6.06, 8.

3
SharÊÑah principles under the Guidelines of Unit Trust Funds.10 As at 31st December
2008, the SC has listed 41 individuals and seven companies in Malaysia qualified to
advise on matters pertaining to the decisions and operations of Islamic unit trust funds.
In general, the appointed members of the panel consist of academicians and
practitioners, as well as Islamic scholars that have understanding in regards to the
Islamic financial instruments and system. The official duty of the SharÊÑah advisory
committee has been mentioned in the previous chapter.11
It is important to note here that although the number of scholars and individuals
listed by the SC is quite big, the industry, in its local and global context, is now suffering
from the shortage of appropriately qualified scholars and experts in SharÊÑah and fiqh al-
muÑÉmalÉt. Considering the global industrial growth rate of the Islamic financial
system, which is estimated at 15 percent annually, and with the forecast of Islamic
banking and finance assets reaching 1 trillion dollars by year 201012, the demand for
individuals and scholars as practitioners and advisors in the industry is growing very
fast. However, this rapid rate of growth in the sector has worried Islamic bankers as the
industry is not keeping up with demand.13 That is because only a handful of Islamic
scholars who are specialists in SharÊÑah, or Islamic law, hold sway over Islamic finance,
and evidence is growing that their expertise is rapidly being stretched. Sheikh Nizam
YaÑqËbi, one of the prominent scholars of Islamic banking and finance industry stated
that: “The industry is growing phenomenally and many more sophisticated SharÊÑah
scholars are graduating, but it is not growing fast enough to meet the demand.”14

STOCKS SCREENING PROCESS

As mentioned earlier, the stock screening process is undertaken by the SharÊÑah

Advisory Board (SAC) of the Securities Commission (SC) of Malaysia and the list of
SharÊÑah approved securities is updated twice a year in May and November. The list
serves as a catalyst for the development of SharÊÑah compliant products and services and
provides investment reference for Islamic unit trust funds, takÉful funds and Islamic
stock broking services. In addition, it also serves as the basis for construction and
revision of Kuala Lumpur SharÊÑah Index shares component. The SharÊÑah- approved
securities are device in order to meets several objectives as follows:15
• Facilitate investors seeking investment in SharÊÑah-approved securities listed on
the exchange
• Centralisation and harmonisation of SharÊÑah decisions

10
The list of registered SharÊÑah individuals or SharÊÑah adviser eligible for the Islamic unit trust scheme in
Malaysia, as of March 2008, is attached as Appendix C.
11
Please refer to Chapter 2.
12
Zaher Barakat & Allen Merhej, Key Islamic Bank, in Islamic Finance in Practice, Issue 2, Autumn 2008,
16.
13
Gillian Tett, Banks seek Islamic Scholars Versed in Finance, Financial Times, May 19, 2006.
14
Mohammed Abbas, Shortage of Scholars Troubles Islamic Banking, International Herald Tribune, 22
January 2008.
15
Mohamad Akram Laldin, Shariah Approved Securities Screening Process in Malaysia, unpublished
paper, 8-9.

4
 • Enhance disclosure and transparency
• Promote the development of ICM products and services (e.g. Islamic index
funds)
• Encourage application of Islamic banking products

At present, there are almost 900 securities listed on Bursa Malaysia but not all
are SharÊÑah compliant. The SharÊÑah compliance securities comprise of 84% out of the
total securities and the rest are non-SharÊÑah compliance securities. The activity of the
companies that covers the SharÊÑah compliance securities includes industrial products,
trading services, consumer products and constructions.16
In the stocks screening process, companies are divided into three categories or
status; companies engaged in only permissible activities, companies involved with only
non-permissible activities, and companies’ activities that comprise both permissible and
non permissible elements.
Companies engaged in only permissible activities are those whose business
activities have fully complied with SharÊÑah principles and guidelines, which include
that where the company has neither borrowed money on interest basis nor keeps its
surplus in an interest bearing account. The company also has not dealt with the ÍarÉm
or prohibited products. However, evidently, such companies are very rare in the
contemporary stock markets. Almost all the companies quoted in the present stock
markets are in some way involved in an activity which violates the injunctions of
SharÊÑah. Even if the main business of a company is ÍalÉl, its borrowings are, in most
cases, based on interest. On the other hand, they normally keep their surplus money in
an interest bearing account or purchase interest-bearing bonds or securities.17
Companies under the category of non-permissible activities are those which are
involved in non-ÍalÉl activities under the SharÊÑah principles. Companies whose
activities comprise both permissible and non-permissible activities are performing both
ÍalÉl and non-ÍalÉl activities. This type of companies is also known as mixed
companies.
To determine whether or not a Muslim can buy and sell the stocks issued by
companies listed on Bursa Malaysia (formerly known as KLSE), the stocks has to
undergo several steps of screening as follows:
1. Extraction of relevant financial information from audited financial report and
other material information
2. Undertaking SharÊÑah compliance review process to identify contribution from
non-permissible activities of the respected companies
3. Compare with SharÊÑah financial benchmark with the contribution from non-
permissible activities of the respected companies
4. Tabulate the result to SharÊÑah Advisory Council for final consideration /
decision
5. Compile the result and issue list of SharÊÑah-approved securities
16
Ibid.
17
Usmani, M.T., SharÊÑah Principles Governing Islamic Investment Funds, 5.

5
Step 1: Extraction of Relevant Financial Information

This step involves identifying the source of revenue and activities of the companies
involved. In undertaking this task, the SharÊÑah Advisory Council (SAC) received input
and support from the Securities Commission (SC). The SC gathered information on the
companies from various sources such as company annual financial reports, company
responses to survey forms and through inquiries made to the respective company's
management. The SC, through the SAC, continues to monitor the activities of all
companies listed on Bursa Malaysia to determine their status from the SharÊÑah
perspective.18

Step 2: Undertaking SharÊÑah Compliance Review Process to Identify Contribution

from Non-Permissible Activities of the Respected Companies

The SAC has applied a standard criterion in focusing on the activities of the companies
listed on Bursa Malaysia. As such, subject to certain conditions, companies whose
activities are not contrary to the SharÊÑah principles are classified as SharÊÑah compliant
securities. On the other hand, companies are classified as SharÊÑah-non compliant
securities if they are involved in the following core activities:19
a. Financial services based on ribÉ (interest);
b. Gambling and gaming;
c. Manufacture or sale of non- ÍalÉl products or related products;
d. Conventional insurance;
e. Entertainment activities that is non-permissible according to SharÊÑah;
f. Manufacture or sale of tobacco-based products or related products;
g. Stock broking or share trading in SharÊÑah-non compliant securities; and
h. Other activities deemed non-permissible according to SharÊÑah.

The SAC also takes into account the level of contribution of interest income
received by the company from conventional fixed deposits or other interest
bearing financial instruments. In addition, dividends received from investment in
SharÊÑah-non compliant securities are also considered in the analysis carried out by the
SAC. For companies with activities comprising both permissible and non-permissible
elements, the SAC considers two additional criteria:

a. The public perception or image of the company must be good; and

b. The core activities of the company are important and considered maÎlaÍah
("benefit' in general) to the Muslim ummah (nation) and the country, and
the non-permissible element is very small and involves matters such as
18
Mohamad Akram Laldin, Shariah Approved Securities Screening Process in Malaysia, 8-9; See also Nik
Ruslin Nik Jaafar, Conference on Islamic Capital Market, presented at the Securities Commission on July 8,
1999, 1.
19
The details on these activities will be discussed further in section ‘The SharÊÑah Criteria of Unapproved
Stocks’ of this chapter.

6
 ÑumËm balwa (common plight and difficult to avoid), Ñurf ('custom) and the
rights of the non-Muslim community which are accepted by Islam.

The above information about the different activities of the company will
undergo both quantitative as well as qualitative phase. The quantitative phase, which is
undertaken by the securities commission, involves the CCC concept, which includes
consolidating information related to the group turnover (TO) and the group profit before
tax (PBT). This information will then be compute in order to determine the percentage
of contribution from ÍalÉl as well as non-ÍalÉl activities. Finally, the percentage of the
contribution is compared against the financial benchmark determined by the SAC.20

Step 3: Comparing the contribution of non-permissible activities of the respected

companies with SharÊÑah financial benchmark

The financial benchmark developed by the SharÊÑah Advisory Council comprises of

three tiers benchmark, which involves the five percent benchmark (5%), ten percent
benchmark (10%) and twenty-five percent benchmark (25%).21 The details of the
different benchmarks will be discussed in the next section.

Step 4: Tabulation of the Result to SharÊÑah Advisory Council for Final

Consideration

This step involve the qualitative phase in which the above quantitative exercise results
are presented to the SharÊÑah Advisory Council (SAC) of the Security Commission for
the final approval. The SAC will take into consideration several factors in making the
final decisions. Among these factors are the public perception or image of the company
involve, importance of the companies to Ñummah, Ñurf (custom), ÑumËm balwa
(common plight), rights of non-Muslims etc. If the company pass the quantitative phase
but have a bad image particularly among the Muslims because of their history or other
factors, then the SAC might declare the company’s share as non-compliance.22

Step 5: Compiling the result and issuing the list of SharÊÑah approved securities

This is the final stage as it involves the compiling and issuing of the SharÊÑah approved
securities. This exercise is done twice a year in April and October and it involves the
listing of all previously listed companies. It should be noted that, some companies may

20
The examples of the ratio calculations in the quantitative analysis for the stocks evaluation is provided in
the next section of this chapter, under the subtitle ‘SharÊÑah Criteria on Mixed Company’. Please refer to
page 37-41. See Nik Ruslin, Ibid, p.3; Asharul Huzairi, Shariah Stock Screening Process, Paper Presented in
the Conference of Fundamental of Islamic Capital Market, 13-14 December 2006, at Islamic Banking and
Finance Institute Malaysia (IBFIM), Kualal Lumpur, 4.
21
Mohamad Akram Laldin, Ibid., 13-14.
22
Mohamad Akram Laldin, Ibid., 15.

7
meet the criteria of SharÊÑah compliance at one time and may be declared as non-
compliance at other time if it does not fulfils the above criteria of compliance.23

THE SHARÔÑAH CRITERIA OF UNAPPROVED STOCKS

As mentioned before, the main criteria for being classified as ÍalÉl stocks or SharÊÑah
compliance stocks is that the business of the main company issuing the stock must be
totally in accordance with the SharÊÑah principles. The contemporary SharÊÑah experts
are almost unanimous on this point. If all the transactions and business activities of a
listed company are fully complied with the SharÊÑah principles and guidelines, then its
shares can be purchased, held and sold without any obstruction from the SharÊÑah
perspective.
On the contrary, if the company’s activities are not in accordance with the
SharÊÑah principles, then the stocks of the company are not complying with the SharÊÑah.
Consequently, purchasing and selling the stocks are not permissible from the SharÊÑah
perspective.
The SAC of the SC has set up certain criteria to verify the unapproved stocks. In
formulating the criteria, the SAC of the SC has focused on primary activities of the
company with regard to the goods and services offered. This is because these primary
activities bring primary returns for the company and are subsequently distributed to the
shareholders in the form of profits and dividends.
Therefore, if the primary operations of listed securities or companies are
involved with the primary activities that are being listed in the SAC’s criteria for non-
SharÊÑah compliant stocks and companies, then the stocks will be excluded from the list
of SharÊÑah approved stocks. The IISG, in its fifth meeting on 23 August 1995, outlined
four basic primary activities criteria to analyze the listed securities and companies.24 The
criteria are as follows:
i. Companies operations based on interest (ribÉ)
ii. Companies operations involve in gambling
iii. Companies operations involve the manufacture and/or sale of ÍarÉm
products
iv. Companies operations contain element of gharar (uncertainty)

Companies’ Operations Based On Interest (RibÉ)

The first criterion of the primary activities of a listed company is that the company must
not be involved in the interest (ribÉ) based operation. If the primary activity of the listed
company is based on interest or ribÉ, then the company is considered non-SharÊÑah
compliant. The conventional financial institutions, including commercial and merchant
banks and finance companies are examples of companies whose primary operations and

23
Ibid., 15.
24
Securities Commission, Regulation of the Securities Commission Syariah Advisory Council (Kuala
Lumpur: Securities Commission, 1st Ed., 2002), 114.

8
activities are generally known to be based on ribÉ. Therefore, investing in these
companies is not allowed according to the SharÊÑah.
That Islam prohibits ribÉ is a well-known fact not only among Muslims but also
among non-Muslims. Verses of the al-Qur´Én in sËrah al-Baqarah have stated strong
command to avoid making transactions with interest. In the verses Allah has said:

!
"#$ % '&
"#$ $() * & %+ ,(-) "#$ ,&. * & /! & 0 12/'" 3 4 #5 &
6 7 ) %+ 8 ! 9$ -) :%; %< 82 / < "#= # >?@7 9A B <
M"$ ) "#$& %+ NH . )C D 2 < 1E = F G HI- 3JK )'<
.O1 P- O= Q , RSH %+ ) T 0CU
Those who devour riba (interest) will not stand except as one whom
the evil one by his touch hath driven to madness. That is because they
say trade is like riba, but Allah hath permitted trade and forbidden
riba. Those who after receiving direction from their Lord, desist shall
be pardoned for the past, their case is for God to judge, but those who
repeat the offence are companions of fire, they will abide therein
(forever). Allah will deprive riba of all blessing, but will give increase
for deeds of charity, for He love not creatures ungrateful and wicked.25

.VF WR 1 F ! "#$ M " &)=4) %+ & X & F Y 2R-

])^= 1Z%< 1 X !) ;=) %+ # OG$H" & /4&'< & %[&QX 1 \<
_`$a 8 ! >`$@F< _`$a7 )4 !) . %&@X ) %&@X 1Z -
. %[X 1 F ! 1Z b$ D & 0CUX -)
O ye who believe! Fear Allah, and give up what remains of your
demand for usury, if ye are indeed believers. If ye do it not, take
notice of war from Allah and His Messenger: But if ye turn back, ye
shall have your capital sums; deal not unjustly, and ye shall not be
dealt with unjustly. If the debtor is in a difficulty, grant him time till it
is easy for him to repay. But if ye remit it by way of charity, that is
best for you if ye only knew.26

25
Surah al-Baqarah, verse 275-276.
26
Surah al-Baqarah, verse 278-290.

9
 The above verses obviously disallow completely any extra payment or charge
made over and above the principle or capital sum. The other parts of the verses provide
ample warning to those who continue to practice interest or ribÉ.
Contrary to the disallowance of charging any extra payment to the capital sum,
Islam permits an increase in capital through trade. In the Qur’an Allah has said:

c̀= dX ZX - ! ,e & " 1ZF " 1Z - & % &'X & F Y 2R-

c (= 1Z" %+ ! 1ZaQ/- & % & X ) 1ZF# Of $X 7
O ye, who believe, do not consume your property among yourselves
wrongfully, but let there be trade and traffic by mutual consent…27

The Prophet's traditions, which are considered as the most important source of
SharÊÑah after the Qur´Én, have stated to the effect that exchange between the following
six items have to be done equal for equal and hand to hand, which means that they need
to be delivered instantly if they are of the same kind. If they are of different kinds, they
may be exchanged for unequal amounts but still hand to hand. The six items are: gold,
silver, wheat, corn, date and salt. The ÍadÊth is as follows:28

g. $ " $ ) h,.i g. ?jQ " ?jQ ) h,.i g. SE " SE

g. k[ " k[ ) h,.i g. l%m " l%m ) h,.i g. n " n ) h,.i
.o=- C < 6 6p )- 6 p < h,.i
Another tradition of the Prophet (pbuh) states that when BilÉl, one of his great
companions, came to him from the market with a ÎÉÑ29 of good quality dates, he asked,
where BilÉl got it from for he recognized that the dates were not from Madinah. When
BilÉl replied that he exchanged two ÎÉÑ of poor quality dates with one ÎÉÑ of good
quality dates, the Prophet said that was ribÉ and BilÉl should have sold his poor quality
dates and used the money to buy the good quality dates. The ÍadÊth is as follows:30

8%It qF s < v$" $ " t1%;) %7 u 8%It qF r! sg" A B

w[ < A 6= $x /CF7 s 0 ysg" E - t1%;) %7 u

27
Surah al-Nisa’, verse 29.
28
×adÊth reported by Muslim. See ØaÍÊÍ Muslim, Book 10, Chapter 19 RibÉ (Usury), HadÊth No. 3845; See
also Ibn QudÉmah al-MaqdasÊ, al-MughnÊ ÑAlÉ al-MukhtaÎar al-KhiraqÊ (Beirut: DÉr al-Kutub al-ÑIlmiyyah,
2nd Ed., 2004), vol. 4, 4.
29
ØÉÑ is a traditional weight measurement used in the past, including in the time of Prophet (pbuh).
30
×adÊth reported by Muslim. See ØaÍÊÍ Muslim, Book 10, Chapter 23 Sale of Wheat Like for Like, HadÊth
No. 3871; See also Ibn QudÉmah al-MaqdasÊ, al-MughnÊ ÑAlÉ al-MukhtaÎar al-KhiraqÊ (Beirut: DÉr al-
Kutub al-ÑIlmiyyah, 2nd Ed., 2004), vol. 4, 4.

10
 u 8%It qF s < ht1%;) %7 u 8%It qF 1[ z U" V7 I
- T6=- ! Z ) h,[QX h "$ V7 h "$ V7 h9)- :t1%;) %7
. " $ | } $DY * " $ * < $ X
The Prophet MuÍammad (peace be upon him) in the traditions clearly forbids
any extra benefits that are obtained without the basis of trade. According to Ibn
QudÉmah in his al-MughnÊ, the reason of prohibition of these six items is that the first
two are of valued materials that are weighted with their specific measurement, and the
last four are of the food based materials that are also weighted with their specific
measurement. They have their own established types and rate of exchange, therefore no
excess is allowed when the trade is of the similar type. If the trade was of the different
types then the differences of rate and weight are allowed.31
The Prophet MuÍammad (peace be upon him) has also declared war on usury or
ribÉ and those who dealt in it. He was reported said: “when usury and fornication appear
in a community, the people of that community render themselves deserving of the
punishment of Allah.”32
The wisdom behind the prohibition of ribÉ in transaction is, it will discourage
people from doing good to one another, as required by Islam. If interest is prohibited in
a society, people will lend money to the needy at goodwill, which is expecting the same
amount of money lent to be returned by the borrower. If interest is made permissible,
the needy will then be burdened by the requirement to pay back more than the amount
he borrowed.33
In the context of listed companies that involved mainly in the interest or ribÉ
transactions the Dynamic Finance Berhad is an example. The company provides
financing to businessmen and then charges a fixed interest for every loan it provides.
The interest is the main income for this organization. As a result, Muslims are
prohibited to make any investment in this type of company and any other company that
has the same criteria.

Operations That Involve Gambling

The second criterion for any listed company’s stocks to be declared as SharÊÑah
compliant is that the company is free from any activities that involve gambling.
Therefore, a listed company whose primary business operation involves gambling is
considered non- SharÊÑah compliant.

31
See Ibn QudÉmah al-MaqdasÊ, al-MughnÊ, Ibid., vol. 4, 4-6.
32
Reported by al-×Ékim, as cited by Yusuf al-Qaradawi, Halal and Haram in Islam (N.p.: Shabih Ahmad
Publication, 1988), 264.
33
Al-Qaradawi, Ibid, 266.

11
 Gambling, which includes raffling or a lottery, is a chance transaction in which
there is no possibility of predicting the outcome. It is prohibited in Islam for the
following reasons:
i. Gambling makes a person dependent on chance, luck and empty wishes,
thus, making that person less inclined to work seriously and productively.
ii. In Islam, an individual’s property is sacred and it may not be taken away
from the owner except through lawful exchange, or unless he gives it away
freely to charity. Accordingly, taking the property of a person as gambling
losses is unlawful.

The prohibition on gambling in Islam is clear in the al-Qur’an, where Allah has
ordered the faithful to stay away from it, as decreed in verse 90, sËrah al-MÉ´idah:

, 7 # b5B= p~• ) G U/~• ) $€a & ) $ & /! & F Y 2R-

H%&QX 1Z%[ 9 F B <
O you who believe! Intoxicants and gambling, (dedication of stones, and
divination by arrows, are an abomination of satan’s handiwork; eschew
such abomination that ye may prosper.34

In a ÍadÊth reported by Ibn MÉjah, Prophet MuÍammad (peace be upon him)

said: “He who says to his friends ‘come let us gamble’ must give charity.”35
In the context of listed companies whose operations involve gambling, Genting
Berhad is one of the examples. The company is one of the largest and well known
casino operators in the world, and their primary business activity is solely gambling.
Consequently, Muslim investors are totally prohibited from buying shares in such a
company.

Operations That Involve the Manufacturing and Selling of ×arÉm Products

The third criterion is that the primary activities of a listed company are not engaged in
the production and sale of goods and services that are prohibited in Islam. These things
include: processing, producing and marketing alcoholic drinks; supplying non-ÍalÉl
meat like pork, and providing immoral services like prostitution, pubs, discos, etc.
In Islam, liquor, pork and meat of animals that are not slaughtered according to
Islamic rites are classified as ÍarÉm (forbidden). Accordingly, trading these goods is
also ÍarÉm. Other examples of ÍarÉm trading include the manufacture and/or sale of

34
Surah al- MÉ´idah, verse 90. See translation by Abdullah Yusuf Ali, The Meaning of the Holy Qur’an,
p.95.
35
Hadith reported by Ibnu MÉjah. See al-SuyËtÊ, JalÉl al-DÊn ÑAbd al-RaÍmÉn bin AbÊ Bakr, SharÍ Sunan
Ibnu MÉjah (Karachi: Qadimi Kutub Khanah), vol. 5, 102.

12
idols, crosses and statues. Permitting the sale of, or trading in, such articles implies
promoting and propagating them among people, and consequently encouraging them to
do what Islam prohibits. The Prophet has reported saying: “Surely Allah and His
messenger have prohibited the sale of wine, the flesh of dead animals, swines and
idols…”
In this regard, Islam has urged mankind to consume ÍalÉl and good food. In
sËrah al-Baqarah, verse 168, Allah has said:

T D & [ X ) c #e c g( f=~• M< & % ] F 2R-

.bV R •)C7 1Z /!
O ye people! Eat of what is on earth, lawful and good; and do not follow
the footsteps of the evils one for, he is to you an avowed enemy.36

In another verse, details are given as to the types of meat that are prohibited. In
sËrah al-MÉ´idah, verse 3, Allah has said:

? F F & ) " %+ $ ‚ ,E- ) $ ƒF & 1H ) C& ) ? & 1Z %7 w $# (

8%7 l"4 ) 1 4 ! * a , - ) ?H F ) ? #6$ & ) `4 0 & )
&)$Q 5J & bNa< 1Z 4 p~• " & €a& aX -) SURF
1Z %7 w X-) 1ZF 6 1Z w&% & - & D ) 1E X g< 1ZF 6
_:/ d $ „ _?U M< $ … < cF 6 g;€† 1Z w …=) M [/
b1 (= b= Q„ %+ \< O1&P€†
Forbidden to you (food) are dead meat, blood, the flesh of swine, and
that on which has been invoked other than Allah’s name, that which has
been killed by strangling, or by violent blow, or by a headlong fall, or by
gored to death, that which has been eaten by wild animal, unless you are
able to slaughter it (in due form), and that which is sacrificed on stone
altars.37

As to the prohibition of alcoholic drinks, Allah has decreed:

36
SËrah al-Baqarah, verse 168. See translation by Abdullah Yusuf Ali, The Meaning of the Holy Qur’an,
21.
37
Surah al-MÉ´idah, verse 3. See translation by Abdullah Yusuf Ali, The Meaning of the Holy Qur’an, 84.

13
 # b5B= p~• ) G U/~• ) $€a & ) $ & /! & F Y 2R-
H%&QX 1Z%[ 9 F B < ,7
O you who believe! Intoxicants and gambling, and (dedication of)
stones, and (divination by) arrows, are an abomination of satan’s
handiwork. So avoid such abomination that you may prosper.38

The Prophet MuÍammad (peace be upon him) did not only prohibit the
consumption of alcohol, but He also forbade any trading in it, even by non-Muslims. It
is not permissible for a Muslim to import or export alcoholic beverages, or to own or
work in a place which sells them. In connection with alcohol, Prophet MuÍammad
(peace be upon him) has cursed ten categories of people, saying:

27 ) 2[‰ ") 2 0 ;) ‡= |) $ ˆ u [ :u s ;= s 0
. ! ? Š ) 2% () E$U [ ) E$I 7)
Truly, Allah has cursed wine (khamr) and has cursed the one who
produced it, the one for whom it is produced, the one who drinks it, the
one who serves it, the one for whom it is carried, the one who sells it, the
one who earns from the sales of it, the one who buys it, and the one for
whom it is bought.39

This principle also applies to trading in drugs because both alcohol and drugs
have similar intoxicating effects. Moreover, the deeply addictive nature of drugs, and
their effect on one’s health, finances, family and society are also the reason why drugs
are considered ÍarÉm. However, the trading in drugs is only permissible if the drugs are
for medicinal purposes.
Guinness Corporation and Carlsberg Corporation are two examples of
companies whose primary activities are involved in the production and the sale of
alcoholic beverages. Thus the shares of these companies are ÍarÉm and cannot be
bought by Muslim investors. Garfield Sdn. Bhd is another example of a company
dealing in ÍarÉm products. The company is involved in buying, rearing and selling pigs
and it is well known that pork is dangerous to health.40 This is because pork carries a
deadly parasite (trichina) that can harm those who eat it. In addition to this there are also
some scholars who say that eating pork frequently can diminish a human being’s sense
of shame in relation to what is indecent.41 These are the reasons why Allah has
prohibited eating pork. Allah has said:

38
Surah al- MÉ´idah, verse 90. See translation by Abdullah Yusuf Ali, The Meaning of the Holy Qur’an, 95.
39
Hadith narrated by ´AbË DawËd, al-TirmidhÊ, and Ibn MÉjah. See Sunan AbÊ DawËd, Book 20, Chapter
1383, HadÊth No. 3666; See Ibn QudÉmah al-MaqdasÊ, al-MughnÊ, vol. 4, 3.
40
Asharul Huzairi, Shariah Stock Screening Process, Ibid., 5.
41
Asharul Huzairi, Ibid., 5.

14
 c? Z - ! [& O17 e 8%7 c $H M ! M()- M< CB- ,0
< " %+ $ ‚ ,E- c a< )- b5B= /\< O$ ‹D 1H )- c( Qa c 6 )-
.b1 (= b= Q„ 3"= \< _6 7 ) OŒ " $ „ $ …
Say: I find not in the message received by me by inspiration any (meat)
forbidden to be eaten by those who wish to eat it, unless it be dead meat,
or blood poured forth, all the flesh of swine, for it is an abomination, or
what it inspires, (meat) on which a name has been invoked, other than
Allah.42

As to the prohibition on immoral activities, such as adultery, Islam prohibits its

followers from committing the abominable act, so much so that the perpetrator deserves
the heaviest penalty should he or she be found guilty. Allah has said in the Qur’an, in
surah al-Isra’, verse 32:

•Ž
.cg ; A ;) c? ( < /! 8/#ƒ & "$& X )

Nor come high to adultery, for it is a shameful deed and an evil, opening
the road (to other evils).

Operation That Contains Element of Gharar (uncertainty)

The fourth criterion is that the primary activity of the listed company is not involved in
Gharar or uncertainty. Therefore, if the listed company’s primary business activities are
involved in gharar matters, the company is considered non-SharÊÑah compliant and
investing in such a company is not permissible. The main example of company’s
activities involved in gharar matters is conventional insurance companies.
The basis of the prohibition on Gharar is a hadith of the Prophet MuÍammad
(peace be upon him):

u 8%It u s ;= 8• :s 0 t F7 r [X u M…=t `$ $E o- 7
.=$‚ * " 7) ` U• * " 7 t1%;) %7

Verily the Prophet (pbuh) prohibits gharar transactions44

42
SËrah al-´AnÑÉm, verse 145. See translation by Abdullah Yusuf Ali, The Meaning of the Holy Qur’an,
p.116.
43
SËrah al-´Isra’, verse 32. See translation by Abdullah Yusuf Ali, The Meaning of the Holy Qur’an, p.238.

15
 Gharar or doubtful transaction is the basis for gambling and hence prohibited.
Gambling is a clear case of chance transaction. In the case of such chance transaction,
there is no possibility of predicting the outcome. If the outcome can be predicted, there
is some amount of information or knowledge available to the transactors to predict the
possible outcomes of the transaction. It is here that one is supposed to take the risk
based on the knowledge of the deal he is about to close.45
On the contrary, a doubtful or uncertain transaction will obviously result in some
unfair or unjust outcome to any of the parties involved. A traditional or classical
example is one is not allowed to lease an orchard while the trees are just flowering. This
can result in injustice to the parties involved in the transaction, because it is the fruits
that are to be transacted and not the flowers. The doubt or uncertainty here lies in the
fact that no one knows exactly how many fruits will be borne by the trees.
In present day’s transaction, for example, an insurance against hazards in which
the insured pays a specified premium during the year can be an example for such
activity. If no accident of the type specified in the insurance policy occurs to the
property during the year, the company will retain the premiums received and nothing is
returned to the insured. On the other hand, if some calamity occurs, the insured
individual is paid the agreed upon sum. This kind of transaction involves gharar since
there is uncertainty involves in it. The doubt or uncertainty here lies in the fact that no
one knows whether something may, or may not, happen.
These examples signify the desire of the SharÊÑah to ensure justice to all parties.
It is interesting to note that the Islamic way of establishing justice is to close all doors of
injustices right from the start rather than to allow it to happen and consider the action or
punishment later.

The Criteria Set Up by the Financial Times Stock Exchange (FTSE) and Dow Jones
Islamic Market (DJIM)

In the context of SharÊÑah non-compliant stocks, the Financial Times Stock Exchange
(FTSE)46 and Dow Jones Islamic Market (DJIM) have also listed criteria for the purpose

44
Narrated by Muslim. See ØaÍÊÍ Muslim, Book 10, Chapter 20 Invalidity of a Transaction by Throwing
Stone, HadÊth No. 3614.
45
El-Gamal, M.A., An Economic Explication on the Prohibition of Gharar in Classical Islamic
Jurisprudence, paper presented at the 4th International Conference on Islamic Economics, Leicester, U.K.,
13-15 August 2001, p.5-6. http://www.ruf.rice.edu/~elgamal/files/gharar.pdf. Date accessed: 12.4.2008.
46
FTSE Group is a world leader in the creation and management of indexes. With offices in Beijing,
London, Frankfurt, Hong Kong, Madrid, Paris, New York, San Francisco, and Tokyo, FTSE Group-
services clients in 77 countries worldwide. It calculates and manages the FTSE Global Equity Index Series,
which includes world recognized indexes ranging from the FTSE All World Index, the FTSE4Good series
and the FTS Eurofirst Index series, as well as domestic indexes such as the prestigious FTSE 100. The
company has collaborative arrangements with the Athens, AMEX, Cyprus, Euronext, Johannesburg London,
Madrid, NASDAQ and Taiwan exchanges, as well as Nomura Securities, Hang Seng and Xinhua Finance of
China. FTSE also has a collaborative agreement with Dow Jones Indexes to develop a single sector
classification system for global investors. FTSE indexes are used extensively by investors worldwide for
investment analysis, performance measurement, asset allocation, portfolio hedging and for creating a wide
range of index tracking funds. Independent committees of senior fund managers, derivatives experts,

16
of screening process. According to FTSE and DJIM, companies that represent any of
the following areas of business are excluded from the SharÊÑah compliant stocks or, in
other words, are considered not ÍalÉl to invest in them:47
i. Alcohol
ii. Tobacco
iii. Pork Related Products
iv. Entertainment (Casino, Gambling, Cinema, Music, Pornography, Hotel, etc.
v. Conventional Finance (non Islamic Banking, Finance and Insurance)
vi. Weapons and Defense
Comparatively, the criteria set up by the FTSE and DJIM are seen to be more
extensive than the SC’s criteria as more areas are excluded from the SharÊÑah compliant
list. In the listed criteria we can see clearly that four out of six areas are included in the
SC’s criteria for the SharÊÑah compliant stocks, namely; alcohol, pork related products,
entertainment which includes Casino, Gambling, Cinema, Music, Pornography, Hotel,
etc. (although cinema and music are not clearly stated as non-compliant in the SC’s
criteria), and conventional finance which include non-Islamic Banking, finance and
Insurance.
The FTSE and DJIM clearly stated that the companies involved in tobacco
industry are not considered compliant with the SharÊÑah guidelines whereas in the SC’s
criteria, the tobacco industries are not clearly mentioned.
Uniquely, the FTSE and DJIM have excluded the companies involved in the
weapons and defense industry from the SharÊÑah compliant list and they are considered
non-halal investment from their perspective.

THE SHARÔÑAH CRITERIA FOR MIXED COMPANIES

In the previous section, the conditions of a company whose primary activities are
engaged in the four criteria set up by the SAC of the Securities Commission have been
mentioned. As a result, any company whose primary activities are involved with these
criteria is considered non-SharÊÑah compliant, thus investing in their stocks is not
permissible from the SharÊÑah perspective. It has also been mentioned that the company
whose activities involved only in the legal aspects and do not deal with the four criteria
set up by the SAC is undoubtedly ÍalÉl for the investor to invest in.
The problem arises when a company’s primary activity is permitted by the
SharÊÑah but at the same time there are some other activities in the company that may
contain prohibited elements to some extent. For example, a big company whose core
activity is the production of industrial goods but has a subsidiary company whose
activity involves ribÉ or interest. This activity occurs within the company’s group and

actuaries and other experienced practitioners review all changes to the indexes to ensure that they are made
objectively and without bias. Real time FTSE indexes are calculated on systems managed by Reuters. Prices
and FX rates used are supplied by Reuters.
47
See Yasaar/FTSE Collaboration for FTSE’s Islamic Index Series; See also Dow Jones Islamic Market
Index; See also Rushdi Siddiqi, “Islamic Equity Benchmark: A Measure to Measure”, Islamic Banker, no.
27, April 1998, 7-8.

17
the parent company (main company) sometimes provides loans, on an interest basis, to
the subsidiaries and the holding company for financing activities. Another example of a
mixed company is a large company whose core activity is involved in buying and selling
real estate and the company has subsidiary companies involved in running a hotel or
resort where the casino for gambling services is provided and liquor is sold within the
premises.
The SharÊÑah Advisory Council (SAC) of the Securities Commission (SC), in its
second meeting on 21st August 1996, has discussed the status of these companies. The
resolution was that such companies may be included in the list of approved securities
provided that the non-ÍalÉl activities of the company do not exceed the benchmark
determined by the SAC.48 In addition the company must fulfil the criteria outlined by
the SAC for the mixed company. The SAC has also resolved that the subject of ÑumËm
al-balwÉ and gharar yasÊr need to be taken into consideration when justifying any
investment in a mixed company.49
As for the additional criteria that need to be fulfilled by a mixed company in
order to be declared by the SAC as SharÊÑah compliance, the criteria are as follows:
i. The core activities of the companies must be activities which are not against
the SharÊÑah, as outlined in the criteria for the primary activities of a
company mentioned before. Furthermore, the ÍarÉm elements must be very
small when compared to the core activities;
ii. The public must have a good opinion or perception of the companies; and
iii. The core activities of the companies must have important maÎlaÍah
(benefits in general) to the nation and the country, and the ÍarÉm elements
must be very small and involve such matters as ÑumËm al-balwÉ (common
plight), Ñurf (custom) and the rights of the non-Muslim community, as
accepted by Islam.50

The Legal Status of Mixed Companies in Islamic Law

The issue of mixed company is actually not new to the SharÊÑah. Scholars have
discussed the issue and expressed their views of mixed companies and the management
role that Muslims and non-Muslims jointly share in such a company.
Generally, the discussion of the traditional scholars can be seen on the question
of the legal status of companies jointly owned by Muslims and non-Muslims. They
discussed the situation where the non-Muslim partners carry out prohibited elements
such as practicing ribÉ-based activities and trading of liquor, which are prohibited for

48
The benchmark for the non-halal elements in the company’s activities as determined by the SharÊÑah
Advisory Council of the Securities Commission will be discussed in the next session of this chapter.
49
See: Securities Commission, Regulation of the Securities Commission SharÊÑah Advisory Council (Kuala
Lumpur: Securities Commission, 1st Ed., 2002), 114.
50
Securities Commission, Regulation of the Securities Commission Syariah Advisory Council (Kuala
Lumpur: Securities Commission, 1st Ed., 2002), 114-115.

18
Muslims.51 Nevertheless, as Islam recognizes the rights of the non-Muslims, the
SharÊÑah classifies this matter as mÉl or property for them thus confirming their legal
right to trade the subject.52 Islam has also ruled that its followers cannot damage or
violate the property of non-Muslim community even when the said property is
prohibited for Muslims.53 Due to the existence of the situation, there are different views
among past Islamic scholars with regard to permitting the establishment of such
companies in Islam.
The other problem that the scholars dealt with is on a company jointly owned by
Muslim partners where one of the partners carries out prohibited activities, such as
dealing with interest or ribÉ.54 Such a situation may arise due to different levels of
´ÊmÉn (faith), knowledge, religious and moral practices of a person. This situation has
also given rise to different opinions based on the principle that a person’s sins are not
transferable to another, and also on the principle that the transaction is generally
permissible.
The views about the legal status of a mixed company in the discussion can be
divided generally into two groups; scholars that disallowed the formation of such
companies and scholars that permit the joint venture activities between Muslims and
non-Muslims in a company.
´ImÉm al-×anafÊ and MuÍammad bin al-×asan al-ShaybÉnÊ were among the
scholars who viewed that Muslims cannot collaborate with non-Muslims through joint
ownership of a company.55 This means that such joint ownership of a company between
Muslims and non-Muslims is not permissible. The reason for the prohibition is the
differences in activities carried out by non-Muslims. What is considered mÉl or property
to the non-Muslims, such as pork, liquor and others, is not permissible for Muslims.56

51
Al-KhayyÉÏ, ÑAbd al-ÑAzÊz, al-SharikÉt fÊ Öaw´ al-IslÉm, al-IdÉrah al-MÉliyyah (Amman: al-MajmaÑ al-
MÉlikÊ, 1999), vol. 1, 196.
52
The issue of non-Muslim’s right to buy and sell prohibited things for Muslims such as liquor and pork had
also been a subject of disagreement among the traditional scholars. According to majority scholars of
×anafÊ, although the prohibited subjects such as pork and liquor are prohibited to Muslims, they are still
considered mÉl mutaqawwim or valued property for non-Muslims; therefore trading these things are allowed
among them. In the case of ´itlÉf (intentional damage) by any Muslim, the doer is liable and the value of the
damaged thing should be paid as compensation to the owner. On the contrary, some scholars from other than
×anafÊ School of law are of the view that these prohibited things for Muslims cannot be considered as
valued property (mÉl mutaqawwim) even for the non-Muslim in Islamic country. The rationale from the
prohibition is that non-Muslim in the Islamic country are bound to all Islamic ruling and law especially
those that are related to the financial transaction or al-muÑÉmalÉt. The view that has been highlighted in this
section is based on the majority view of contemporary scholars from different schools of law that see the
prohibited things for non-Muslim is still considered as property. The further discussion on the subject could
be accessed in the following references. See Ibn ÑÓbidÊn, MuÍammad bin AmÊn, Rad al-MukhtÉr ÑAlÉ al-
Dur al-MukhtÉr SharÍ TanwÊr al-´AbÎÉr (Beirut: DÉr al-Kutub al-ÑIlmiyyah, 1994), vol. 4, 111; Wahbah al-
Zuhayli, al-Fiqh al-IslÉmÊ wa AdillatuhË, vol. 4, 2879-2880.
53
Al-ZuÍayli, Wahbah, al-Fiqh al-IslamÊ wa AdillatuhË (Damascus: Dar al-Fikr, 4th Ed., 1997), vol. 4,
2880.
54
Al-KhayyÉÏ, al-SharikÉt fÊ Öaw´ al-IslÉm, vol. 1, 196
55
Ibn al-HummÉm al-×anafÊ, MuÍammad bin ÑAbd al-WÉÍid, SharÍ FatÍ al-QadÊr (Beirut: DÉr al-Kutub
al-ÑIlmiyyah, 1st ed., 1995), vol.2, 5; Ibn ÑÓbidÊn, Rad al-MukhtÉr ÑAlÉ al-Dur al-MukhtÉr SharÍ TanwÊr al-
´AbÎÉr, Ibid., vol. 3, 364.
56
ImÉm al-×anafÊ and MuÍammad ×asan al-ShaybÉnÊ prohibited the joint stock companies between Muslim
and non-Muslim only in the case of MufÉwaÌah partnership contract. This is because MufÉwaÌah, in its

19
 Some contemporary SharÊÑah experts also shared the view that it is not allowed
for a Muslim to deal in the shares of such a company, even if its main business is ÍalÉl.
Their basic argument is that every shareholder of a company is a sharÊk (partner) of the
company, and every sharÊk, according to the SharÊÑah, is an agent for the other partners
in the matters of the joint business. Therefore, the mere purchase of a share of a
company represents an authorization from the shareholder to the company to carry on its
business in whatever manner the management deems fit. If it is known to the
shareholder that the company is involved in an un-Islamic transaction, and still he holds
the shares of that company, it means that he has authorized the management to proceed
with that un-Islamic transaction. In this case, he will not only be responsible for giving
his consent to an un-Islamic transaction, but that transaction will also be rightfully
attributed to himself, because the management of the company is working under his
implicit authorization.57
Moreover, when a company is financed on the basis of interest, the company’s
funds employed in the business are contaminated by the non-halal elements that entered
into the funds. Similarly, when the company receives interest on its deposits a non-halal
element is necessarily included in its income which will be distributed to the share-
holders through dividends.58
Some traditional scholars, on the other hand, are of the view that it is permissible
for Muslims to have non-Muslims as partners in business, although it is not encouraged
to do that. They are mostly from the school of ShÉfiÑÊ, and some scholars among ×anafÊ,
MÉlikÊ, and ×anbalÊ.59
AbË YËsuf said that it is makrËh for Muslims to jointly own a company with
non-Muslims. However, it is a business liberty for everyone to enjoy business activities
in their own way, regardless of their religious beliefs. But Muslims are prohibited from
dealing in non-ÍalÉl activities even though this is not the case for the non-Muslims.60
Scholars of Maliki’s school have also confirmed that it is makrËh for Muslims to share
ownership of a company with non-Muslims. This opinion was based on the sayings of
al-×aÏÏÉb and Ibn ×Éjib, who say that a true Muslim should not co-operate with YahËdÊ

general terms, refers to a contract in which the partners are deserved the rights to the shares, profits, jobs and
everything including the responsibilities to the activities of such companies, regardless of whether the
activities are permissible from the SharÊÑah perspective or not. In other words, they are considered equal one
to one. As Muslim can never be as the same as non-Muslim in many aspects, especially in the ÑaqÊdah
(belief) and ÍalÉl and ÍarÉm aspects, therefore ImÉm al-×anafÊ and al-ShaybÉnÊ did not allow them to
participate in establishing such a company. In other types of company, however, there is no evidence that
indicates the disallowance of these scholars for such partnership to take place. Therefore, the general
argument that said they both disallowed joint stock company between Muslim and non-Muslim to take
place, as mentioned by the SharÊÑah Advisory Council (SAC) of the Securities Commission (SC) in their
resolution, according to the researcher, is not accurate.
57
Usmani, General Principles Governing Islamic Investment Funds, Ibid., 7.
58
Ibid., 8.
59
See al-Khattab, MuwÉhÊb al-JalÊl SharÍ MukhtaÎar KhalÊl (Beirut: Dar al-Fikr), vol.5, pp. 118-119; Al-
BuhËtÊ, ManÎËr bin YËnus, KashÉf al-QinÉ´ ÑAn Matan al-´IqnÉÑ (Beirut: Dar al-Fikr, 1982), vol.5, p.6; al-
NawawÊ, al-MajmËÑ SharÍ al-MuÍaÐÐab (Beirut: Dar al-Fikr, 1982), vol.10, p.4405; al-RamlÊ, Nihayat al-
Muhtaj (Beirut: Dar al-Fikr), vol.5, p.6;
60
Ibn ÑÓbidÊn, Rad al-MukhtÉr ÑAlÉ al-Dur al-MukhtÉr SharÍ TanwÊr al-´AbÎÉr, Ibid., vol.3, p.369; TabyÊn
al-×aqÉ´iq, vol.3, p.316; al-ZuÍaylÊ, al-Fiqh al-IslamÊ, vol.5, p.3897.

20
(jew), NaÎrÉni (christian) and fÉjir Muslims in business activities, unless the Muslims
control the management of the business.61
Majority scholars of ShÉfiÑÊ and ×anbalÊ schools of law point out that it is
makrËh because the Muslim co-owners of the company cannot be sure whether the non-
Muslims are participating in prohibited activities or not.62
A large number of the contemporary scholars also agreed that the joint stock
company is permissible. They argue that a joint stock company is basically different
from a simple partnership. In partnership, all the policy decisions are taken through the
consensus of all the partners, and each one of them has a veto power with regard to the
policy of the business. Therefore, all the actions of a partnership are rightfully attributed
to each partner. Conversely, the policy decisions in a joint stock company are taken by
the majority. Being composed of a large number of shareholders, a company cannot
give a veto power to each shareholder. The opinions of individual shareholders can be
overruled by a majority decision. Therefore, each and every action taken by the
company cannot be attributed to every shareholder in his individual capacity. If a
shareholder raises an objection against a particular transaction in an Annual General
Meeting, but his objection is overruled by the majority, it will not be fair to conclude
that he has given his consent to that transaction in his individual capacity, especially
when he intends to refrain from the income resulting from that transaction.63
Therefore, if a company is engaged in a ÍalÉl business, but also keeps its surplus
money in an interest bearing account, wherefrom a small incidental income of interest is
received, it does not render all the business of the company unlawful. If a person
acquires the shares of such a company with clear intention that he will oppose this
incidental transaction and will not use that proportion of the dividend for his own
benefit, it cannot be said that he has approved the transaction of interest and that
transaction cannot be attributed to him.
The other aspect of the dealings of such a company is that it sometimes borrows
money from financial institutions. These borrowings are mostly based on interest. In
this case the same principle is relevant. If a shareholder is not personally agreeable to
such borrowings, but has been overruled by the majority, these borrowing transactions
cannot be attributed to him. Moreover, even though according to the principles of
Islamic jurisprudence, borrowing on interest is a grave and sinful act, for which the
borrower is responsible in the Hereafter; but this sinful act does not render the whole
business of the borrower as ÍarÉm or impermissible. The borrowed amount being
recognized as owned by the borrower, anything purchased in exchange for that money is
not unlawful. Therefore, the responsibility of committing a sinful act of borrowing on
interest rates with the person who willfully indulged in a transaction of interest, but this
fact does render the whole business of a company as unlawful.64

61
Al-SharÍ al-KabÊr maÑa ×Éshiyat al-DusËqÊ, vol. 3, 348.
62
Ibn QudÉmah, al-MughnÊ, Ibid., vol. 5, 1.
63
Usmani, General Principles Governing Islamic Investment Funds, Ibid., 14.
64
Usmani, Ibid., 15.

21
View of SharÊÑah Advisory Council (SAC) of the Securities Commission

Based on the view of majority of scholars, the approach towards permitting Muslims to
invest in the shares of companies with mixed permissible and prohibited activities is
justified by the SharÊÑah Advisory Council of the Securities Commission. In addition to
the evidences and arguments provided by the majority of scholars on the matter, the
SAC has its own rationale behind the approval in making an investment in a mixed
company which is based on the following:
i. The principle of ÑumËm al-balwÉ (common plight), which means an
unfavorable widespread situation affecting most people and is difficult to
avoid.65 The common example of this principle as agreed by the scholars is
the ribÉ (interest). That was in the days when there were no Islamic banks
in the country and the activities of conventional financial institutions were
known to be based on ribÉ. Companies are not able to avoid this ÍarÉm
element since they have to borrow money from such institutions to keep
their business operations running. Therefore, borrowing money on ribÉ
based loans was permissible according to the principle of ÑumËm al-
balwÉ.66 In the context of mixed companies, the principle applies to the
situation of unavoidable difficulty wherein the non- halal activities of the
company are untraceable, or when halal and haram elements are
inseparable because of the nature of the business of the company. The
SharÊÑah Advisory Committee in its second meeting on 21st August 1996,
when discussing the issue of benchmark for haram elements in a mixed
company, resolved that the situation categorized as ÑumËm al-balwÉ needs
to be considered in determining the status of the company.67
ii. The principle of al-ÖarËriyÉt al-khamsah in which SharÊÑah has listed ÍifÐ
mÉl (the preservation of property) as one of the maÎÉliÍ ÌarËriyÉt that must
be regarded seriously.68 The question of the Muslims’ economic strength
and integrity is an important factor in the continuity and progress of
Muslims. Large companies, whose core activity is permissible, should not
be cast aside by Muslims just because there is a small number of activities
that do not comply with the SharÊÑah requirements. Thus, based on this
principle, Muslim investors are allowed to invest in these companies so as
to ensure that they are not left to lag behind non-Muslims in the economic
sphere, provided that the companies’ stock has undergone the screening

65
NÉziÍ HammÉd, MuÑjam al-MuÎÏalaÍÉt al-´IqtiÎÉdiyyah fÊ Lughat al-FuqahÉ´ (Virginia: International
Institute of Islamic Thought (IIIT), 1993), p.203; See also Securities Commission, Resolution of the
Securities Commission Syariah Advisory Council (Kuala Lumpur: Securities Commission, 1st Ed., 2002),
123.
66
It should be noted that the riba can no longer be considered as ÑumËm al-balwÉ as many Islamic banks and
financial institutions offering transactions in accordance with the Islamic principles are available in many
countries today. The principle may only apply for Muslims in a country with no Islamic banking services.
67
Usmani, Ibid. 123.
68
Al-ShÉÏibÊ, al-MuwÉfaqÉt (Beirut: DÉr al-MaÑrifah, 1986), vol.2, pp.8-10. Al-MaÎÉlih al-ÖarËriyah refers
to the five primary concerns of mankind, i.e., preservation of religion, self, mind, genealogy and property.

22
 process and impermissible activities of these companies are still under the
benchmark of the SharÊÑah Advisory Council of the Securities
Commission.69

iii. The principle of limited liability, i.e., every person is liable to what he did
and sins cannot be transferred from one person to another.70 Allah has said:

! O5&Q/ ‘, S€a&ZX ) ’AM| “, RG= E) c”"= M‚"- %+ $ „- &,0

" 1ZJ#F < 1Z[B$ 1Z#"= 8 ! 1P •$D- =p) >`=p ) =ƒX ) 2 %7
. Q% X < 1 F
Say: Shall I seek for my cherisher other than God, when He is the
Cherisher of all things (that exist)? Every soul draws the reward of
its acts on none but itself: no bearer of burdens can bear the burden
of another. Your goal in the end is towards God: He will tell you
the truth of the things wherein ye disputed.71

According to al-KhayyÉÏ, the sins of ribÉ (interest) in muÑÉmalÉt

(transactions) are the responsibility of the person who manages the business,
and in this context is the management board.72 Therefore, if the
management decided to take loans on an interest basis by the agreement of
the majority shareholders except Muslim shareholders, then the Muslim
shareholders are not responsible in terms of the sins to the act.

iv. Changes in rulings which occurred as a result of the changes in period of

time, environment and human nature. This principle is based on a legal
maxim which said:
ƒ k‚ " Z(• k‚X $ZF
It cannot be denied that change in ruling is caused by change in time.73

Changes in time and environment have a great effect on the rulings

(aÍkÉm). History of Islamic jurisprudence has showed that many rulings
have been changed and amended due to the change in time and
environment. This process is important to keep the practicality of Islam as
69
Securities Commission, Resolution of the Securities Commission Syariah Advisory Council, 116; See
also Wilson, Rodney, the Economics of Mutual Funds: An Islamic Approach, 13.
70
Muhammad Hashim Yahya, Approved Securities by Shariah, paper presented at Securities Commission
on May 19, 1999, 8.
71
Surah al-An’am, verse 164. translation by Abdullah Yusuf Ali, The Meaning of the Holy Qur’an, 118.
72
Al-KhayyÉÏ, ÑAbd al-ÑAzÊz, al-SharikÉt fÊ Öaw´ al-IslÉm, al-IdÉrah al-MÉliyyah (Amman: al-MajmaÑ al-
MÉlikÊ, 1999), vol.1, 196.
73
Al-ZarqÉ´, MuÎÏafÉ AÍmad, al-Madkhal ilÉ al-Fiqh al-ÑÓm (Beirut: Dar al-Fikr, 1968), vol. 2, 923.

23
 the only religion and to ensure that the maÎlaÍah of the people at that
particular time is gained from the execution of the rulings. For example,
during the early days, religious teachers taught for the purpose of fulfilling
their obligations to the society. However, nowadays because of the changes
in the environment, there is an increase in demand for religious teachers.
Thus, this duty has now become a profession and the religious teachers are
being paid for their services.74 In the context of investing in mixed
companies, although some traditional views are against the view adopted by
the SAC, the important of changes in period of time and environment has
been considered in the process of permitting the investment in mixed
companies.
v. Even though Islam has determined what is ÍalÉl and what is ÍarÉm, it also
takes into consideration human weaknesses and capacity. Under the
compulsion of necessity, Islam even permits Muslims to eat prohibited food
in sufficient quantities so as to reduce starvation and save him from death.
Allah said in al-Qur'an:

.b1 (= b= Q„ %+ ! %7 1&P! g< _6 7 ) OŒ " $ „ $ … <

But if one is compelled by necessities, neither craving nor

transgressing, there is no sins on him; indeed, Allah is forgiving
merciful.75

Furthermore, a legal maxim provides to this effect:

.$@/ < C; Qm ) – Um * B 4!
If the good and bad things are mixed together then make a fair decision.76

vi. The esteemed Islamic scholars did not prohibit such companies when
evaluating the status of companies jointly owned by both Muslim and
Muslim fÉjir77, even though the company was later found to carry out
prohibited activities such as ribÉ and the sale of liquor.78

vii. The past Islamic scholars also discussed the issue from both permissible
and prohibited sources. The majority of scholars have allowed for such

74
Muhammad, H.Y., Approved Securities by Shariah, p.8.
75
Albaqarah:173. See translation by Abdullah Yusuf Ali, The Meaning of the Holy Qur’an, 22.
76
ÑIzzuddin ÑAbd al-SalÉm, QawÉÑid al-AÍkÉm fÊ MaÎÉliÍ al-´AnÉm (Beirut: Dar al-MaÑrifah, 1991), vol. 1,
83.
77
Muslim fÉjir means a Muslim who does not follow the commandments of Allah and does not protect
himself from doing what is prohibited. See the definition given by the SharÊÑah Advisory Council of the
Securities Commission on the subject in the Resolution of the SharÊÑah Advisory Council, 112.
78
See Securities Commission, Resolution of the Securities Commission SharÊÑah Advisory Council (Kuala
Lumpur: Securities Commission, 1st Ed., 2002), 114-115.

24
 transactions involving permissible and prohibited funding provided the ratio
of permissible funds is more. According to ÑIzzuddin ÑAbd al-SalÉm:

& - ,&. h % [ ƒdX 1 F — % & =CF ˜ H" %7 $H& S%„ & !

2< h ™C( ) ™= F 6 ! b $( 2% O= F 6 :&- 9C M< - > a/! $
4! 6 I p d hs %H& M< z 0 & `=CF h % [ p dX
)- = F #C $.& '" , 7 & !) h_? C%" _? ( :&'" >? #$" >? ( w % D
& '" sgH& S%„ & !) h3 4 š$HX M< 3| g< _? ( $.& - 6 I
w %D ?% [ & Tp B Osg( O1E=6 :&'" b $( b1E=6 ›% D
_? H" _? #$" _? ( :&- w % D )- h_? FB- _`-$ :&'" z …$ D-
... $H& M< z 0 & `=CF >`ƒ‰ B >?H HI ?% [ & \< _? C%"
If the permissible money is more, that is, one dirham of prohibited
money is mixed with one thousand of permissible money, then the
transaction allowed.79

viii. Al-KÉsÉnÊ in his BadÉiÑ al-ØanÉiÑ has mentioned a report narrated from
AbË ×anÊfah:

$H& 9Ca&<- ’AM| ‘, " : s 0 /- F7 % M…= ?Q F( M"- 7 )=)

S ‚& ) h 3 4 # /) " [ " ]&'" g< sgH& %7 S ‚& ) h
... E ) h [ " ƒd 1 $H& %7
Everything will be tainted by what is prohibited, but if the larger part
is ÍalÉl, then the trade is allowed. And if the larger part is ÍarÉm then
the trade is not allowed, so as giving it away as a gift and charity…80

ix. Ibn Taymiyyah also gave the same view with regard to the funds where the
permissible and prohibited are mixed. In his famous publication, majmaÑ
al-FatÉwÉ, he stated that:

79
ÑIzzuddin bin ÑAbd al-SalÉm, QawÉÑid al-AÍkÉm fÊ MaÎÉliÍ al-´AnÉm, Ibid., vol.1, p.72-73.
80
Al-KÉsÉnÊ, BadÉiÑ al-SanÉiÑ (Beirut: DÉr al-Kutub al-ÑIlmiyyah, 1st ed., 1994), vol.6, p.144.

25
 1ZH • >?2 | 12 % [ MQ< b $() s> g( 12 - M< 4!
, %H " 1ZH ) . 9^ 7! $H [ /- ž$7 4! + ! š$H "
1 S%&„~• E sgH& & \< . sgH& 9 7- /- ž$7 4! + !
?% [ & “,H" , 0 . S%&„•~ E $H& & !) ?% [ & š$H " 1ZH
•sgH& 8%7 S ‚& < "#$ " , [ & '< . >? $H ME &," : , 0) .
‰ ) :&'" cQ&- z " 4! /- 3 4) . $DY _ B) 9$Z& ž$[ & - + !
1 ›% D ) b $() >sg( M< 4!) &› < ? $H & ME `6 #ƒ <
Z$ s & sgH& =C0 D&' & - &," • sgH& $H
3 ) . Z$ " 1a /\< $DŸ s " EC(- s ›% D <
. >sg( M0 & ) $H& =C0 $D- $H& ) sgH& : " ›% D
Should the permissible be more, then the business transaction will not be
judge as prohibited… and should one’s wealth be found to have a mixture
of the permissible and prohibited, then the permissible element will not be
prohibited; on the contrary, the owner is allowed to take according to the
permitted ratio.81

x. The concept of Gharar yasÊr and Ghubn YasÊr. Gharar and ghubn are two
negatives elements that can unfavorably affect a contract. However, should
it occur in a small amount, Islamic law considers it normal and does not
unfavorably affect a contract’s goodwill. In other words, the miniscule
presence of these two negative elements in a contract is excusable. Then
the same situation can happen in a mixed company where the permitted
activity is more than the prohibited activity. Therefore the nature of such
company is within the permissible bounds of the Islamic jurisprudence and
excusable.

These are the arguments presented by the SharÊÑah Advisory Council of the
Securities Commission in justifying the permissibility of investing in mixed companies.
As noted earlier, the issue of investing in mixed companies has been a subject of
disagreement in fiqh literature, not even the contemporary scholars are in agreement in
this respect. For example, the Dow Jones SharÊÑah Advisory Board does not permit the
investors to invest in the mixed companies as they have provided an exhaustive list of
different types of industries which, according to them, are classified as non-compliant.

81
Ibn Taymiyyah, MajmËÑ Fatawa Ibn Taymiyyah, vol. 7, 14.

26
On the other hand, there are others who agree with the SharÊÑah Advisory Council of the
Securities Commission that the investment in mixed companies should not be totally
banned due to only some portion of the companies’ activities that do not comply with
the SharÊÑah’s guidelines. For example, the Meezan Islamic Fund Advisory Board of
Pakistan82 is of the same view as the SAC that the investment in mixed companies is
permissible to some extent, provided that the rules of benchmarks -which will be
discussed in the coming section- and other specific regulations, are abided. Thus the
subject is, conclusively, a matter of ijtihÉd which should be carried out by the SharÊÑah
Advisors of the respective institutions properly with the consideration of a number of
crucial elements such as objectives of the funds, maÎlaÍah, environment, and others.

THE SHARÔÑAH ADVISORY COUNCIL’S BENCHMARK FOR MIXED LISTED

SECURITIES

To determine the status of a listed mixed company as a SharÊÑah approved company or

security, the SharÊÑah Advisory Council (SAC) of the Securities Commission (SC) has
draw up specific benchmarks to ensure that prohibited elements are minimal and related
to those excused by SharÊÑah. The SharÊÑah Advisory Council (SAC) has considered a
number of benchmarks as a basis that can be considered as the measurement to classify
the mixed company as SharÊÑah compliant or not.

The Establishment of Benchmarks

The establishment of benchmarks is considered an utmost important matter in the

screening process. The SharÊÑah advisory board needs to have clear guidelines to
determine whether the impermissible or non-ÍalÉl activities of a mixed company do not
exceed the level of necessity acknowledged by the SharÊÑah. Traditional scholars did
not draw up any benchmarks for the respective purpose. However, there are certain
traditions of the Prophet MuÍammad (peace be upon him) as well as ijtihÉd of scholars
that could be understood as an act of establishing a measurement for the same objective.
Two important cases, at the least, reported in the traditions of the Prophet
MuÍammad (peace be upon him), showed the importance of having a benchmark. The
first case is the ruling of wearing silk by men, and the second is the case of property
allocation for the purpose of charity by SaÑad bin AbÊ WaqqÉÎ.
As for the first case, that is the case of wearing silk by man, one of the Prophet’s
companions has narrated that:

82
Khatkhatay, M.H. and Shariq Nisar, Shariah Compliant Equity Investments: An Assessment of Current
Screening Norms, Paper presented at the Seventh Harvard University Forum on Islamic Finance, April 23rd
2006, Harvad Law School, Massachusetts, USA, 19-20.

27
 ($ C 7 7 #M $&< 7 %; " 1 ($ C 7 FPC( O$&Z" "- FPC(
%7 % 8%I % s ;= F %7 $D :s 0 )O$ 7 " % C 7 7 O*< = "
E ! s < bSE4 •$D¡• M<) O$ $( bG P C •C(! M<) 1%;)
.12P /\ ¢,( M - = 4 8%7 b $H
The Prophet took a piece of silk and placed it on his right hand. He then
took some gold on his left hand. Then he said, both these things are
prohibited unto men among my followers, but permissible for the
women.83

In another ÍadÊth, al-BarrÉ´ bin ´Ózib has narrated that:

" C ; " ? ) [ w[ ; s 0 ˜[|'& 7 ? [| FPC( C & "- FPC(

%7 % 8%I RM F /$ - :s 0 F7 % M…= OGp 7 " €A $ & 7 _ #$
?" B!) £ $ & `6 7) ƒ‰ Fd& z #X " /$ - O* ; 7 / 2/) O* a" 1%;)
7 / 2/) 5e [& w X) %a #6=) 1a & = $"!) %&@ & $U/) M7 C
.¤$ ;\& ) #M#a & ) #C ) $ $H& ) SE 1X D) ?jQ& ? /Y
Allah's Apostle ordered us to do seven things and forbade us to do other
seven. He ordered us: to follow the funeral procession. to visit the sick,
to accept invitations, to help the oppressed, to fulfill the oaths, to return
the greeting and to reply to the sneezer: (saying, "May Allah be merciful
on you," provided the sneezer says, "All the praises are for Allah,"). He
forbade us to use silver utensils and dishes and to wear golden rings, silk
(clothes), DibÉj (pure silk cloth), QissÊ and Istabraq (two kinds of silk
cloths).84

It is obviously understandable from the two ÍadÊth that wearing silk clothes is
prohibited to the man, and the act is considered ÍarÉm. In another ÍadÊth, narrated by
AbË ÑUsmÉn al-NahdÊ:

G / X- C2F .&7 "- w[ ; s 0 `6 0 FPC( ? [| FPC( 6Y FPC(

1%;) %7 % 8%I % s ;= - d "=&4'" _C0$< " ? 7 * H/) $ 7

83
Narrated by Ibnu MÉjah. See Sunan Ibnu MÉjah, vol.10, p.458, hadith no:3587.
84
Al-BukhÉrÊ, ØaÍÊÍ al-BukhÉrÊ, vol.4, p.460, hadith no:1163.

28
 F %7 < s 0 2"\& %X % [ I\" = |-) ZE + ! $ $H& 7 82/
%7'& MF[ /-
While we were with ÑUtbah bin Farqad at Adharbijan, there came
ÑUmar's letter indicating that Allah's Apostle had forbidden the use of
silk except this much, then he pointed with his index and middle fingers.
To our knowledge, by that he meant embroidery.85

Again, in this ÍadÊth, the prohibition of wearing silk for men is being
highlighted. However, in this text the Prophet has made an exception to the amount of
silk that considered permissible if it was found on a man’s dress. The ÍadÊth has showed
that if a certain portion of cloth being made from silk, then it doesn’t count as a silk
dress, and Prophet MuÍammad (peace be upon him) has made an approximate
measurement for the purpose by showing his index and middle fingers. The
measurement, in this case, may be small but the important thing is that Prophet has
established a benchmark.
The question now is how much is the permissible portion of silk on a man’s
dress that is not counted as ÍarÉm in today’s measurement? The views of the scholars
are solely dependent on ijtihÉd based on the understanding of the ÍadÊth. Some scholars
have limited the portion to 50 percent of the whole dress. Some other scholars are of the
view that the portion should not exceed 40 percent of the total dress. Whichever the
percentage, it has clearly showed that the benchmark is what is needed in determining
the permissible element rather than the prohibited one.
As of the case of SaÑad bin AbÊ WaqqÉÎ, the Prophet MuÍammad (peace be
upon him) has made a portion of his property when he decided to give it away as charity.
The ÍadÊth is as follows:

" C[; " $ 7 7 OG 2| " 7 b3 /$ D- :; " % C 7 FPC(

1%;) %7 % 8%I % s ;= :s 0 F7 % M…= "- 7 O— 0) M"-
*B & M" ¥%" C0 M#/! w&% < M" C | O*B) z 6 & ?d( 7 M/6 [
s < $& " w&% < s 0 M M.%." ¤CUX'<- >?F" + ! MFP$ ) sO )4 /-)
& - b$ D ~A F&„- 3 P=) = X & - 3/! bk. )- bk ˜%‘. ) ˜%‘. s 0 1P
T$B- + ! % B) 2" M‚ X c? Q/ NQFX 3/!) ] F QQZ c? 7 1E= X
s 0 M" HI- C[" :%D- % s ;= w&% < 3X-$ M< M< ,[dX 8 ( 2"
& - 3%[ 1P c?[&<=) c?B=6 " T66p + ! ™H I g 7 , [ < :% X 3/!
85
Al-BukhÉrÊ, ØaÍÊÍ al-BukhÉrÊ, vol.18, p.149, hadith no:5380.

29
 12X$dE M" HI' £ - 12% )$DY 3" $j ) b &0- 3" *Q F 8 ( :% X
8%I % s ;= MP$ ? D " C[; 5‰ & Z 12" 7- 8%7 1E6$X )
.?Z " T & - 1%;) %7 %
One day, the Prophet MuÍammad (peace be upon him) visited Sa’ad
bin Abi Waqqas who was ill. Sa’ad expressed to the Prophet
MuÍammad (peace be upon him) his feeling that his illness was
coming to an end and that death was near. He asked the Prophet’s
opinion on giving his property away as alms for he had only one
daughter to inherit his wealth. Therefore, he wished to give away two-
third of his property as alms. However, the Prophet MuÍammad
(peace be upon him) stated his objections. Then Sa’ad asked whether
he could give away half (1/2) of his property. The Prophet MuÍammad
(peace be upon him) said no. The Prophet MuÍammad (peace be upon
him) then said: one-third (of the property to give away as alms) is
enough, and that one-third is still too much. Verily, to leave your heir
wealthy is far better than to leave your heir impoverished and
dependant on other people’s charity.86

Based on the Prophet’s (pbuh) word of “one-third 1/3 (or 33.33%) is enough” it
can be used as a guideline for the basis of formulating a benchmark. The question is
whether the percentage is suitable to be used in screening mixed companies as it relates
directly to the bequest of property and giving charity or alms. Even so, it is undeniable
that the number can be used as a benchmark to set the maximum limit of a mixture
because an amount exceeding the said percentage set will be considered excessive.

Benchmark Based on Ghabn FÉhish

The practice of ghabn fÉhish in trading is not allowed in Islam. However if the ghabn is
small then it is excused. The meaning of ghabn is gain which exceeds market price.
The theory of ghabn fahish describes gain which exceeds the market price achieved
through cheating. If ghabn happens without any act of cheating, then it is permitted.
The activity of tanÉjushÊ or manipulation if accompanied by the elements of
ghabn fÉhish can give the right to the buyer to cancel the sale and purchase contract,
according to the majority of Islamic jurists from the MÉlikÊ, ShÉfiÑÊ, and ×anbali. This
shows that if the ghabn fÉhish is accompanied by the element of tanÉjushÊ, it is not
permissible. However, if it occurs below the benchmark, it is excused. The ×anafÊ
ruled that the upper limits for ghabn fÉhish are as follows:

86
Al-BukhÉrÊ, ØaÍÊÍ al-BukhÉrÊ, vol. 5, 43, hadith no:1213.

30
 i. 5 percent for ordinary goods;
ii. 10 percent for animals used for riding, and
iii. 20 percent for fixed assets.87

Benchmark for the Mixed Companies

The SAC has established several benchmarks based on ijtihÉd (reasoning from the
source of SharÊÑah by qualified SharÊÑah scholars) to determine the tolerable level of
mixed contributions from permissible and non-permissible activities towards revenue
and profit before tax of a company. If the contributions from non-permissible activities
exceed the benchmark, the securities of the company will not be classified as SharÊÑah
approved. The benchmarks are as follows:

The 5% benchmark
This benchmark is used to assess the level of mixed contributions from the activities that
are clearly prohibited such as ribÉ (interest-based companies like conventional banks),
gambling, and activities derived from liquor and pork which are deemed ÍarÉm
(prohibited).88

The 10% benchmark

This benchmark is used to assess the level of mixed contributions from the activities that
involve the element of ÑumËm balwÉ (a prohibited element affecting most people and
difficult to avoid). An example of such a contribution is the interest income from fixed
deposits placed in conventional banks. This benchmark is also used for tobacco-related
activities.89

The 25% benchmark

This benchmark is used to assess the level of mixed contributions from the activities that
are generally permissible according to SharÊÑah and have an element of maÎlaÍah
(public interest), although there may be other elements that could affect the SharÊÑah
status of these activities. Among the activities that belong to this benchmark are hotel
and resort operations, share trading, stock broking, as these activities may also involve
other related activities that are deemed non-permissible according to SharÊÑah rules.90

87
Securities Commission, Resolution of the Securities Commission SharÊÑah Advisory Council, 114.
88
Kamisah Mustafa, Sekuriti Lulus Syariah; Apa dan Bagaimana, Securities Industry Development Centre
(SIDC) Quarterly Bulletin, November 2004, p.3; See also Securities Commission, Resolution of the
Securities Commission SharÊÑah Advisory Council (Kuala Lumpur: Securities Commission, 1st Ed., 2002),
114-115.
89
Kamisah Mustafa, Ibid., 3.
90
Kamisah Mustafa, Ibid., 3; See also Securities Commission, Resolution of the Securities Commission
SharÊÑah Advisory Council (Kuala Lumpur: Securities Commission, 1st Ed., 2002), 114-115.

31
Evaluation of Mixed Companies

After the establishment of the benchmark, the stocks of the listed companies concerned
are then evaluated to determine whether the stocks are SharÊÑah compliant or not. The
evaluation is done in two stages. The first stage involves a quantitative analysis of a
mixed company in which the ratio of the non-ÍalÉl element and activities are calculated
and compared to the benchmark determined by the Council; the second stage is
qualitative analysis which deals mainly with the public image of the company.

Quantitative Analysis

In the quantitative analysis, the turnover and profit-before-tax of the group consolidated
accounts and the non-ÍalÉl activities of mixed companies are firstly calculated. Then,
the ratios of the turnover and/or profit-before-tax (PBT) of the non-ÍalÉl activities to the
turnover (TO) (and/or PBT) of the group consolidated accounts are calculated. The
ratios are then compared to the benchmark (the acceptable level of the contribution of
non-ÍalÉl activities to the group earning income, which is determined by the SAC). If
the ratios are lower than the benchmark, then the SAC will approve the purchase of
these stocks by Muslims, but if they are higher then the stocks will be disapproved for
purchase by Muslims.91
The following are cases of different companies that represent examples of
different types of calculation based on the SharÊÑah Advisory Council’s benchmark on
the stock screening process. The symbol ‘TO’ in the calculation below represents the
term ‘turnover’, while the symbol ‘PBT’ represents the ‘profit-before-tax’.

Case A
ABC Bhd is a holding company whose core activities are plantation and investment.
DEF Berhad is its subsidiary and is involved in gambling activities. The following are
the accounts of the holding company and its subsidiary:

Group Account DEF Berhad

TO PBT TO PBT
RM 1,000,000 RM 100,000 RM 55,000 RM 4,500

Ratio calculation:92

a. Contribution of non-halal activities to the Group’s turnover:

91
Nik Ruslin Nik Jaafar, Islamic Capital Market, paper presented at the Conference on Capital Market,
Securities Commission on July 8, 1999, p.12.
92
Nik Ruslin, Islamic Capital Market, 12.

32
 TO DEF Bhd RM 55,000 x 100%
--------------------- = ------------------------ = 5.5%
TO of Group RM 1,000,000

b. Contribution of non-halal activities to the Group’s PBT:

PBT DEF Bhd RM 4,500 x 100%

---------------------- = ------------------------ = 4.5%
PBT of Group RM 100,000

c. The higher percentage, which is 5.5%, will be compared against the

benchmark of 5% for the contribution from gambling activities in a mixed
company, as determined by the SharÊÑah Advisory Council SAC). Since
5.5% is higher than the benchmark, the holding company’s stock will be
rejected and considered as non- SharÊÑah compliant.

Case B
The second case involves the operation of banking activities by a holding company
namely GHJ Resources Bhd. The core activity of this company is producing industrial
products. Its associate company, KLM Merchant Bank Malaysia Bhd is involved in
banking activities. The profit-before-tax (PBT) of High Resources Bhd and the profit
portion attributed to KLM Merchant Bank Bhd are RM 10,000,000 and RM 1,250,000
respectively.

Ratio calculation:93
a. Contribution of non-halal activities to the Group’s turnover:

Profit from KLM RM 1,250,000 x 100%

------------------------ = ------------------------ = 12.5%
PBT of Group RM 10,000,000

b. The ratio 12.5% from the contribution of non-halal activities will be

compared against the SharÊÑah’s benchmark to determine whether the
holding company’s stock is approved or not. Since the percentage is higher
than the benchmark from riba based contribution to the company as
determined by the Council, which is 5%, then the stocks of the company are
considered as non- SharÊÑah compliant.

93
Nik Ruslin, Ibid., 12.

33
Case C
The third case is in respect of a subsidiary which is involved in hotel management and
the selling of alcohol and liquor. The holding company, OPQ Holding Bhd, is engaged
in investment activities. Its subsidiary, RST Hotel Bhd manages a hotel which sells
alcohol and liquor in its premises. Their turnover (TO) and profits before tax (PBT) are
as follows:

Company/Subsidiaries Turnover (TO) Profit Before Tax

(PBT)
OPQ Holding Bhd 10,000,000 2,500,000
RST Hotel Bhd 2,100,000 230,000
Selling alcohol and liquor 700,000 55,000

Ratio calculation:94

(a) The first step is to calculate the contribution from its hotel activities.
(i) Contribution of hotel activity to the Group’s turnover:

RST Hotel’s TO RM 2,100,000 x 100%

------------------------ = ------------------------ = 21.0%
Group’s TO RM 10,000,000

(ii) Contribution of hotel activity to the Group’s profit before tax (PBT):

RST Hotel’s PBT RM 230,000 x 100%

------------------------ = ------------------------ = 9.2%
Group’s PBT RM 2,500,000

If the above calculated ratio is below the SharÊÑah benchmark for hotel and
resort activities, which is 25% as determined by the SAC, then the stocks will
proceed to the next step of the evaluation.

(b) The second step is to calculate the ratio for the selling of alcohol and liquor.

(i) Contribution of the non-halal elements to the Group’s turnover (TO):

TO from alcohol RM 700,000 x 100%

-------------------- = ------------------------ = 7.0%
Group’s TO RM 10,000,000

(ii) Contribution of the non-halal elements to the Group’s profit before tax
(PBT):

94
Nik Ruslin, Ibid., 13.

34
 PBT from alcohol RM 55,000 x 100%
------------------------ = ------------------------ = 2.2%
Group’s PBT RM 2,500,000

(iii) If the ratios as calculated above (whichever is higher) turned out to be

above the determined benchmark, then the stock of the holding company
will be rejected. In this case, the ratio 7% is higher than the benchmark
5% for the contribution from alcohol and liquor in a mixed company as
determined by the Council. Therefore, the stocks are considered non-
SharÊÑah compliant.

Case D
The fourth case involves income from fixed deposits. A holding company, namely
UVW Bhd, whose core activity is manufacturing sugar, has two subsidiaries; XYZ Sdn
Bhd, which is involved in exporting sugar, and VGA Sdn Bhd, which is involved in food
manufacturing. The group’s earning is RM 1,000,000 and out of that, the interest
income from conventional fixed deposits is RM 120,000.

Ratio calculation:95
Interest Income RM 120,000 x 100%
-------------------- = ------------------------ = 12%
Group’s Earning RM 1,000,000

This rate then will be compared to the benchmark. As income from fixed
deposit is determined at 10%, the ratio 12% of this company is higher than the
benchmark, thus considered as non-SharÊÑah compliant stocks.

Qualitative Analysis

The second stage involves a qualitative analysis of the companies. As mentioned earlier,
the SharÊÑah Advisory Council (SAC) will look at the areas of maÎlaÍah, Ñurf, and
ÑumËm al-balwÉ of these companies. The Council will then make the decision whether
or not Muslims can purchase the stocks of the mixed companies. The SAC in this
context refers to the public image of the company as criteria in determining whether the
stocks are SharÊÑah compliant or not. By this method, the Council’s decision is based on
several external factors of the company. The SAC in its resolution has listed three bases
where their decision on image of a company is based on. They are:

95
Nik Ruslin, Ibid., 14.

35
 i. Image based on MaÎlaÍah RÉjiÍah (tangible deeds).
Image involving public interest and a mix of activities which do not comply
with the SharÊÑah guidelines are small and forgivable.96 For example: hotel
and resort activities. The SAC resolved that hotel and resort activities do
not comply with SharÊÑah because of image. This is due to the existence of
night clubs provided by the hotel management for the guests. According to
the SAC, hotel activities give a negative image to the public; as such the
SAC placed a benchmark of 25% on the image factor for hotel and resort
activities.97

ii. Image based on Sadd al-DharÊÑah.

Image involving activities where the benefits are disputed, and may lead to
harm and aspersion to the public. For example: manufacturing of condoms.
The SAC resolved that the manufacturing and marketing of condoms do not
comply with SharÊÑah because of the image. As such, the SAC placed a
benchmark of 5% for this activity.98

iii. Image based on factors between MaÎlaÍah and Sadd al-DharÊÑah.

Image of a company involved in activities that largely benefit the Muslim
society but at the same time has its negative element which portrays a bad
image of the Muslim society normally falls under this category.99 The
status of this type of company is done on a case by case basis and does not
involve any pre-determined benchmarks. For example: sale of liquor and
alcohol in public transport such as by an airline. In this case the Council
does not have any particular benchmark and its resolution is based on the
sole discretion of the SharÊÑah Advisory Council (SAC) of the Securities
Commission (SC).

CONCLUDING REMARKS

As seen from the above discussion, screening process for SharÊÑah compliant stocks in
Malaysia is done at central level by the SharÊÑah Advisory Council (SAC) of the
Securities Commission. A list of permissible stocks is issued by the Council twice a
year. The screening criteria mainly involve activities of the companies or income based
screening. No company’s debt ratio or liquidity screen is used in the process, as
practiced by some international institutions such as Dow Jones Islamic Market of United

96
See Securities Commission, Resolution of the Securities Commission SharÊÑah Advisory Council (Kuala
Lumpur: Securities Commission, 2nd Ed., 2006), 164.
97
Ibid., p.165.
98
Ibid., pp.164-165. According to the SharÊÑah Advisory Council (SAC), this resolution is based on studies
which show that condom is often used for immoral activities.
99
See Securities Commission, Resolution of the Securities Commission SharÊÑah Advisory Council, 164.

36
States and Meezan Islamic Bank of Pakistan. Thus, stocks screening in Malaysia
requires income statements and not the balance sheets of the company.
As for the screening criteria, the SharÊÑah Advisory Council (SAC) is seen as
quite lenient in determining the approval of ÍalÉl stocks. This can be seen in its
initiative to consider additional criteria, as outlined by them, to evaluate companies that
comprise both ÍalÉl and ÍarÉm activities or mixed companies.
As for the company that gains some profits from the interest bearing account or
interest loan, the SharÊÑah Advisory Council’s benchmark for its legality seems fair. It
is an undeniable fact that in today’s modern age the practice of ribÉ is widespread. It is
also noted that the Dow Jones and Meezan Bank are also allowed the investment in
companies that have interest based profit provided that the percentage of income based
on ribÉ is under their benchmark.
In the case of a particular company involved in ÍarÉm activities such as
gambling and liquor, however, the present ruling of the SharÊÑah Advisory Council
(SAC) is seen as too liberal. This is because gambling and alcohol are proven to bring
more harm than benefit to the people and the nation. When it comes to these two ÍarÉm
items, there is more harm in terms of material and moral loss as the indulgers are at loss,
materially and morally. As a consequence, social problems like broken families and
businesses, child abuse and theft becomes rampant. Hence, it is suggested that stocks of
companies involved in these two activities, be it significant or insignificant, should not
allowed to be purchased at all by Muslims.

This stand is based on the following arguments:

1. Yusuf al-QaradÉwÊ said: “If something is entirely harmful it is ÍarÉm, and
if it is entirely beneficial it is ÍalÉl.” He also stated that, “Muslim jurists
had established the criterion that whatever is conducive to or leads towards
the ÍarÉm is itself ÍarÉm.” Furthermore, he stated that, “…anything which
assists in the doing of what is ÍarÉm is itself ÍarÉm, and anyone who helps
another person to do it shares in the sin of it.” This has actually been
explained in the Qur’an. Allah has stated:

2 P& !) ] F% *< F ) bk b1&P! 2 < &,0 $€a & ) $ & 7 3/ 'a

1Z %+ # 3 &Q[& ,0 QF 4 3/ 'a ) 2[&Q/ $ & -
. )$ZQ X 1Z%[ T Ÿ
They asked thee concerning wine and gambling. Say: O Prophet,
in them is great sin and some benefit for human being but the sin
is greater that the benefit.100

100
Surah al-Baqarah, verse 219.

37
 Therefore it is seen that the sin of the ÍarÉm is not limited to only the
person who engages in it, but it extends to others who support it materially
or morally. Each participant is held accountable according to his or her
share. Prophet MuÍammad (peace be upon him) confirmed the sinful
relations between all those who involved in the liquor activities, as he said:

E$U [ ) E$I 7) 27 ) 2[‰ ") 2 0 ;) ‡= |) $ ˆ u [

. ! ? Š ) 2% ()
Truly, Allah has cursed wine (khamr) and has cursed the one who
produced it, the one for whom it is produced, the one who drinks it,
the one who serves it, the one for whom it is carried, the one who
sells it, the one who earns from the sales of it, the one who buys it,
and the one for whom it is bought.101

2. Hadith of the Prophet MuÍammad (peace be upon him) mentioned:

s ;= w[ ; :s 0 h 2F7 % M…= Ok " " [RF % C 7 M"- 7

2F ") hb #" $H& !) hb #" s %H& !: s 1%;) %7 % 8%I %
-$ ; C& < T 2 R 8 X < h] F bk. 2 %[ bT 2 b= -
87$ M7 $ h $H& M< *0) T 2 R M< *0) ) h …$7) F C
8 ( !) - h8™ ( _3% “,Z !) - h < *X$ & - 3| 8 H& s (
h %‘ Cad& l%I wH%I 4! c?‚j Cad& M< !) - h = H %
.S&% & ME) - h ‘% Cad& Ca< TCa< 4!)
The ÍalÉl is clear and the ÍarÉm is clear. Between the two there are
doubtful matters concerning which people do not know whether
they are ÍalÉl or ÍarÉm. One who avoids them in order to
safeguard his religion and his honor is safe, while if someone
engages in a part of them he may be doing something ÍarÉm, like
one who grazes his animals near the hima (the grounds reserved for
animals belonging to the King which are out of bounds for others'
animals); it is thus quite likely that some of his animals will stray

101
Hadith narrated by Abu DawËd, TirmidhÊ, and Ibnu MÉjah. See Sunan AbÊ DawËd, Book 20, Chapter
1383, HadÊth No. 3666;

38
 into it. Truly, every king has a hima, and the hima of Allah is what
He has prohibited.102

Therefore, stocks of mixed companies that are involved in activities related to

gambling and liquor, whether in terms of selling or buying or providing services to these
two items, regardless of their portion to the whole company’s activities, should not be
considered as SharÊÑah compliant.
In addition, it is suggested that the SharÊÑah Advisory Council comes up with a
long term plan in which the decrement of ÍarÉm elements in SharÊÑah approved stocks is
given its priority. The reason behind this view is that the allowance for the Muslims to
invest in mixed companies is confined to the circle of ÖarËrÉt (necessities). The
condition of ÖarËrÉt does not stand for all time. There should be a plan to eliminate this
condition. In this context, there should be a plan to purify the list of SharÊÑah approved
stocks, which means there will be times when no companies that comprise of ÍalÉl and
ÍarÉm activities are listed in the SharÊÑah approved stocks.

102
Hadith narrated by Muslim. See ØaÍÊÍ Muslim, Book 10, Chapter 25, HadÊth No. 3882.

39

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