Final Project Report of Essentials of Islamic Finance

Title: Shariah Stock Screening of KSE-100 Companies

Assigned Sector: Commercial Banks (9-13)

Group Members:
Uzair Rashid (29502)
Zubair Mehmood (29481)
Aisha Riaz (30176)
Osama Ali Rizwan (30056)
Zunair Ali Khan (29440)

Submitted to: Dr. Mudeer Khattak

Report by: Uzair Rashid (29502)
Bank assigned: Meezan Bank

Shariah Stock Screening Criteria in Pakistan:

Business of the Investee Company:
The main and the basic core of the company has to not violate any of principle of Shariah. By
this statement we can describe that we should not invest in companies who are involving interest
in their business, such as conventional banks, insurance companies etc. Also we should invest in
companies who are operating businesses like liqour, tobacco, prostitution etc.
Interest Bearing Debt to Total assets:
This ratio has to be less than 37%. if there are companies who has more than this ratio can be
considered as violating the Shariah Screening and these companies doing their business on
interest and fixed profit ratios.
Non-Compliant Investments to Total Assets:
The ratio of these investments should be less than 33%. These investments include such as
interest bearing bank deposits, bonds, t-bills etc.
Non-Compliant Income to Total Revenue:
The ratio of this has to be less than 5% of the company, otherwise it's not according to the
shariah law because they are earning most of there revenue from non shariah methods.
Illiquid Assets to Total Assets:
The ratio of Illiquid Assets has to be at least 25%, these ratio defines their cash or cash
equivalent assets. e.g raw material, work in process etc.
Net Liquid Assets vs Market Price:
The market price of per asset or share has to be more than net Liquid Asset price.
this is the calculation formula which we can use to identify:
Net liquid Asset to per share= (total assets-illiquid assets-total liabilities)/ number of shares.
Size of the sector:
the sector which is assigned to our group is Commercial Banks. In this sector there are 20 banks
from all over Pakistan, every bank has further branches in almost every city. In commercial
banks there are two types one is Conventional Banks and the second type is Islamic banks. The
sector code is 807 and the market capitalization in Pakistani Rupees is 1,394,859,639,221.
Introduction/History of Meezan bank:
Meezan Bank is the first Islamic bank in Pakistan. it commenced its operations in 2002, State
bank issued the first ever Islamic Commercial Banking license to Meezan Bank. Its head quarter
is located at Meezan House in Karachi, Pakistan. This bank has the network of more than 845
branches.

Current size analysis:

The current size analysis is found through the formula of Current size analysis. In this formula
first we get the value from financial statement, in this case we use the financial statement of
Meezan Bank, year 2020. In this statement the total assets of the company is 1,521,560; but we
have to convert this value in millions to further divide it with total sector size which is already
mentioned in sector size part (the value sector size is 1,394,859,639,221).
Formula:
Current size= (Total assets of company/total sector size) × 100
After calculation we find the value:
=109.833

Shariah Stock Screening:

We are finding the facts through which we can evaluate about Meezan bank shariah complaince.
Through these two analysis we will do the Shariah Stock Screening:
-Qualitative Screening:
According to the perceptions of the people meezan bank operates strictly under the islamic
shariah methods. this bank is well recognized because of its product development capacity and
capability. there islamic banking research and advisory services are also defines there working
according to Shariah Complaince.
According to the formula;
Other income of non-shariah sources/ net sales
=697480/116660948 =0.59
Which is less than 5%.
-Quantitative Screening:
Leverage compliance ratio = interest bearing debt/market value of equity
=25215000000/805872076333000000
=0.0031
Cash Compliance Ratio = Cash + short term investment/market value of
equity=485261000000/805872076333000000
=0.6021
Receivable compliance ratio= Accounts receivable/ Market value of equity
=508379000000/805872076333000000
=0.6308
Recommendations:
As we have seen through all the qualitative and quantitative analysis Meezan bank pvt. Is shariah
complaint. We can recommend this bank to improve its availability in rural areas as well so, as
we are a Muslim country our population can also make their financial ways according to Islam.
This will help them to create a bigger pool of investor and capital through they can also improve
their Ijarah and Rab-ul-maal services.

Report by: Osama Ali Rizwan (30056)

Assigned bank: National Bank of Pakistan

Shariah screening criteria:

Below are the screening criteria:
Criteria: 1
Interest bearing debt to TA ratio should be less than 37%. The interest bearing debt includes
Bonds etc, commercial paper etc.

Criteria: 2
The ratio of NC investment to TOTAL ASSET should be less than 33%. It includes conventional
mutual funds, T-Bills etc.

Criteria: 3
The ratio of NC income to Total revenue should be less than 5%. Total revenue includes
G.Revenue plus any other income. Non compliant income includes gambling, income from
interest based income etc.

Criteria:4
The ratio of Illiquid assets to total assets should be at least 25%. Illiquid asset that are not cash
etc.
 Criteria: 5
The market price per share should be greater than the net liquid asset should be greater than the
net liquid asset per share.

Criteria: 6
Business of the company should not violate any shariah principles. Also a company is not
allowed to acquire shares of any firm that gives services on interest are the firms that are
indulged in a business that is not approved by shariah etc. Like pornography, gambling etc.

Size of the sector:

The sector size of the commercial bank is 1,394,859,639,221

History of the National bank of Pakistan:

NBP is a Pakistani-government owned bank which is multi-national and is commercial. It is also
the subsidiary of SBP that is also known as State Bank of Pakistan. The headquarter of it is in
Karachi.In 1949 it was established under the National bank of Pakistan ordinance of 1949 and
acted as agent of central bank as SBP was not having branches at that time. Under it’s belt then it
took a lot of government’s operations back then and has served well. It’s first branches were
opened in East Pakistan followed by two branches in Lahore and Karachi each. As of 2020 it has
more than 1511 branches and it’s assets as of September is more than of 20.2 billion Dollars.

Current Size Analysis

The current size analysis (total assets or total sales) of the company relative to sector size ( total
assets or total sales ) of all the companies in the industry/sector .
Data of 2020: Total Assets= 3,017,209,992 Sector Size=1,394,859,639,221

Formula= Current Size Analysis= 3,017,209,992 /1,394,859,639,221*100 =>Current Size Analysis=

0.216

Shariah stock screening criteria in Pakistan

Following ways are to measure the company or screening criteria in Pakistan

Qualitative Screening
⮚ Business Screening
Sector screening is passed by companies that generate less than 5% of operational revenue (core
or active business activity related) from the non-permissible categories listed below. Activities
 including Alcohol, pork, tobacco, interest-based activities, pornography, gambling are not
permitted or prohibited.

Other income of non-shariah sources / net Sales

= 41324938 / 141738885

= 29%

Which is more than 5% so it is non-compliant.

Quantitative Screening
⮚ Financial Ratio Screening

Market value of equity (2020) = Price per share Multiply by Number of outstanding shares
Rs. 42.6* 2,127,513,026 = Rs 91397959597

Market Value of equity (2019) =Rs. 92121314025

Market Value of Equity (2018) = Rs. 91397959597

The average market value of equity of 36months =

(91397959597+92121314025+91397959597)/3

=Rs. 90958273571

• There are three financial ratios which a listed company has to clear to pass the financial ratio
screening:

a. Leverage Compliance

• Interest bearing debt/market value of equity 36 month average Market Cap < 33%

Borrowings+ Deposit and other accounts+ Liabilities against asset subject to finance lease+ lease
liability against right of used assets/ 90958273571

= 138539006+2418928469+197224+ 7869355/ 90958273571

= 0.42<33%
• as the leverage compliance ratio is less than 1 it means it has more equity.

b. Cash Compliance
• Cash + short term investments/ market value of equity 36 month average Market Cap < 33%

= 249969566/ 90958273571

= 27.48% < 33%

c. Receivables Compliant

• Accounts Receivables/ market value of equity

36 month average Market Cap < 49%

Balance with other banks+ Lending to financial institution + advances/ 90958273571

= 2.84<49%

• If all three ratios are below the mentioned threshold, the company is said to have passed the
financial ratio screening.

Status: The bank is non-compliant and we found it in Qualitative screening as the company has
generated more than 5% of revenue that is operational from the non-permissible category etc.

Suggestion and recommendations: : National bank should start focusing on how to get more
operational revenue from the shariah permissible and should consider an approach where they
get income which has little or no interest. There interest based income is way more than other
conventional banks.
Report by: Zunair Ali Khan (29440)
Assigned Bank: Standard Chartered Bank

Shariah Stock Screening Criteria in Pakistan

 The core business of the organization ought not abuse any rule of Shariah. Hence, it isn't
admissible to get the portions of the organizations offering financial services on interest
like conventional banks, insurance agencies, or the organizations engaged with some other
business not approved by the Shariah.
 The Interest Bearing Debt to Assets proportion should be less than 37%. To comprehend
the reasoning behind this condition, it ought to be remembered that such organizations are
for the most part dependent on interest.
 The proportion of Non-Compliant Investments to Total Assets should be less than 33%.
Non-Shariah Compliant Investments include ventures for ordinary common assets,
conventional money market instruments, Bonds and so on.
 The proportion of Non-Compliant Income to Total Revenue should be less than 5%.
Complete Revenue incorporates Gross Revenue in addition to some other pay earned by
the organization. For example, gambling income.
 The proportion of Illiquid Assets to Total Assets should be at least 25%. These assets
cannot convert into cash. Illiquid Assets include inventory of raw materials, work-in-
process.
 Market Price per share should be at least equal to or greater than net liquid assets per share.

Size of Sector

There are six Islamic commercial banks and more than twenty conventional banks operating in
Pakistan. Market capitalizations of these commercial banks are Rs. 1,394,859,639,221.

Introduction:

Standard Chartered Bank (Pakistan) Ltd. is the oldest and largest global bank in Pakistan. It is
likewise the main worldwide bank to be awarded Islamic banking license and the first to open an
Islamic financial branch. 2013 stamped Standard Chartered's 150th anniversary in Pakistan. The
Bank, began as the Chartered Bank opened its first office in Karachi in March 1863.

The Banks serves both Retail and Corporate and Institutional Banking clients. Retail Banking
gives Credit cards, individual advances, contracts, deposit taking and wealth management services
to individuals. Corporate and Institutional Banking provides clients with services in trade finance,
transactional banking, lending, securities services, foreign exchange, debt capital markets and
corporate finance. It also offers a complete suite of Islamic banking solutions under its Standard
Chartered Saadiq brand. The Bank employs over 2,800 people in Pakistan and has a network of 43
branches in 10 cities.

Current Size Analysis:

Current analysis of Standard Chartered Bank (Pakistan) Ltd according to the annual report of 2020
is;

Current size = (total assets) / (total sector size) * 100

= 721,904,745 x 100

1,394,859,639,221.

= 0.05175465

Shariah Stock screening

1. Business Analysis
It is one of main part of any bank, as we all know in today's world modern banking, the main thing
or intention of bank to satisfy their customers and for the satisfaction of the customers demand. In
customer’s perception Standard Chartered Bank is a Islamic bank because they have Saadiq
banking they are fully differentiated from conventional banking For this reason standard chartered
bank introduce new products and services have been implemented for the satisfaction of the
customers. Standard chartered bank several new products, for this purpose. Standard chartered
bank have some unique products in the market for which it is now the market leader in respect of
providing the best services in market. In the latest research found from the account holders when
asking about their customer’s satisfaction, More than 30% said standard chartered bank are
excellent about helping their customers 20% comment about the less than average performance.
Shariah compliant;
Income Ratio = 104,267
40,940
=2.546%

2. Financial Ratio Analysis

 Leverage compliance = interest bearing debt/market value of equity

=6148.02 /73,944.22 * 100
= 8.3144<33%

 Cash Compliance = Cash + short term investments/ market value of equity

= 496,220.37/73,944.2
= 976.36% <33%

 Receivable compliance= Account receivables/market value of equity

= 175,569.85/73,944.22
= 2.37<49%

It is evidence from above ratios that the performance of the standard chartered bank is up to the
mark.

Recommendations

Standard chartered bank is one of the best foreign banks in Pakistan, but in this era market concept
has been totally changed, customer needs good services and proper insurance. Monopoly in the
basis of image cannot work for the bank. So it their customers services, good customer insurance
and care can work for the bank, in the final analysis it is the customer who can make difference
between making any business successful. So the customer services and satisfaction is the main part
of the bank.
The standard chartered bank has earned very good reputation among all the top foreign banks
operating in Pakistan. For my recommendation and point of view can be applied for the betterment
of the bank;
  They should add few more employees for the betterment of customer’s satisfaction.
 All kinds of rules and regulations should be disclosed to the customers, so they can easily
understand the bank policies.
 Standard chartered bank should give more promotional offer to their customers.
 More ATMs services should be provided by bank; ATMs needs to be maintained properly.
 Standard chartered bank should improve their online customer services.
 Marketing and services team should work together it will reduce the gap between these two
departments.

Report by: Zubair Mehmood (29481)

Assigned Bank: UBL Bank

Shariah screening criteria:

1. If organization or company which are taking interest and violating principles of shariah
should not be approved. Or any other business for example Haram meat, night clubs and
gambling which are prohibited in Islam.
2. If any company which have more than 37% interest bearing debt ratio, then we should
not invest in those companies. For examples conventional banks and finance lease.
3. If business is investing money it should not more than 33% because according to shariah
the investment of total assets must be less than 33%. For example, conventional mutual
funds and commercial paper.
4. Non complaint income ratio should be less than 5% to total revenue it also includes any
other income earned by company. According to this all companies those have more than
5% income are shariah non-compliant. For example, gambling income from alcohol and
drugs.
5. Illiquid assets ratio should be at least 25%. Illiquid assets are those assets which cannot
be converted into cash easily. For example, raw materials and work in process.
6. Liquid asset should be less than market per price. Net liquid assets to share price = (total
assets-illiquid assets - total liabilities)/number of shares.
Size of the sector:
 There are 20 commercial banks in Pakistan and these are further divided into two categories,
Islamic and conventional banks. Market capitalization of these banks are Rs. 1,394,859,639,221.
Introduction and History:
In 1959 UBL inaugurate its first branch in Chandigarh. After six months of inauguration UBL
had branches in:
1. Karachi
2. Lahore
3. Dacca
In 1963 UBL became first bank in Pakistan to have a branch in London, William Street. The
saving scheme for school going children was launched by UBL in 1964. In 1971 UBL launched
3 online branches in Karachi.
UBL have 1386 branches in Pakistan. Some of them are Islamic and some are conventional.
Their vision is to be the world bank of excellence and higher expectations for all stake holders
and customers.
Their mission is to be the most efficient and innovative growing bank in business market
Excellence, teamwork and honesty of purpose are their core values.
Current size analysis:
For this we use UBL annual report 2020. According to report the current size analysis can be
calculated from this formula.
Current size = (total assets of company) / total sector size) * 100
Total assets of UBL= 201780524700000
Total sector size= 1,394,859,639,221
=201780524700000 /1394859639221*100
=0.14466009269
Shariah stock screening:
 Qualitative screening:
Business Analysis: for business analysis we use this formula
=other income/net sales
=644381/74959172
=0.859%
  Quantitative screening:
Financial ration analysis: firstly, we’ll find the market value of equity b using 2018, 2019 and
2020 annual report of UBL.
=109026135000+114847818000+116495375000/3
=340369382000/3
=113456442000= market value of equity
a. Leverage compliance
=interest bearing debt/market value of equity
=69872000000/113456442000
=20.52%
b. Cash compliance
=Cash + short term investments/ market value of equity
=2201876000000/113456442000
=19.4%
c. Receivables compliance
= accounts receivable/market value of equity
=636073000000/113456442000
=5.6%

Recommendations:
 They should attend more local charitable events in Pakistan like they do in UK.
 They should promote their digital banking platform more and also educate people about
the new ways that you can manage your finance on the go.
 They should add more facilities for their customers.
Report by: Aisha Riaz (30176)
Assigned Bank: MCB Bank

Shariah screening criteria

Business of the Investee Company
The company you're investing in shouldn’t be involved in an activity not according to shariah
principle, it is advised to not acquire shares of a company which involves interest like
conventional banks, and other businesses not approved by shariah like selling of liquor, haram
meat,etc.
2. Interest Bearing Debt to Total Assets
Basically if a company is taking a loan to buy assets and that loan is more than 37% and interest
based then that company is not shariah compliant and if less than 37% then it is.
3. Non-Compliant Investments to Total Assets

The ratio of Non Compliant Investments to Total Assets should be less than 33%. Non-Shariah
Compliant Investments include investments in conventional mutual funds.
4. Non-compliant Income to Total Revenue
The proportion of Non-Compliant Income to Total Revenue should be less than 5%. Complete
Revenue incorporates Gross Revenue in addition to some other pay earned by the organization.
For example, gambling income.
5. Illiquid Assets to Total Assets
The market price per share should be greater than the net liquid asset should be greater than
the net liquid asset per share.
6. Net Liquid Assets/Share vs. Market Price/Share
The market price per share should be greater than the net liquid assets per share calculated as.

SIZE OF THE SECTOR

The sector which we are assigned to look at is commercial banks and according to our research
they’re are 20 banks in Pakistan registered who have many branches all over the country.
They’re are two types: commercial and Islamic banks. The sector code is 807 and the market
capitalisation of these banks is Rs. 1,394,859,639,221.

INTRODUCTION OF THE BANK

MCB Bank is a multinational bank which is based in Pakistan's different areas like Lahore,
Punjab,etc it has 1551 branches majority of its shares are owned by Nishat group. It was
founded in 1947. Its headquarters are at Lahore, pakistan. They’re net income is approximately
Rs25.5 billion.

CURRENT SIZE ANALYSIS:

According to annual report of MCB bank 2020 the current size analysis is
Current size = ( total Assets of company) / total sector size) *100
= 1760245000000/ 1394859639221*100
=126.19513465764

Shariah stock screening

We looked at the facts through which we can evaluate MCB Bank shariah compliance. With the
help of these two criteria we will find out about the Shariah stock screening.
Qualitative screening:
According to the people’s perception of MCB bank the MCB bank has allocated a seperate
group, compliance & controls who’s independent function is to look at the banks activities and
keep a check on it whether they are meeting all the shariah compliance principles or not.
= other income/net sales
= 18135787+ 128250 /88470278 *100
= 20.41

Quantitative screening:
Financial ratio analysis: firstly we’ll find the market value of equity by using 2018, 2019 and
2020 annual report of MCB bank
=151322879,000 + 168914783000 + 190101955000
 Total market equity.
= 17011320566.66666
1. Leverage complaisance:

=42186000000/170113205667
=0.247
2. Cash compliance:
=160853000000/170113205667
=0.945

3. Receivables compliance:
=527645000000/170113205667

Recommendations:
● They should work on promoting they’re mobile banking more because it's really
convenient and would be very relevant to today's needs.
● They should add more ATM branches in Rural areas.

Whole project Analysis:

Banks Qualitative Leverage Cash Receivable Status

Screening compliance Compliance compliance
Ratio Ratio Ratio
Meezan Bank 0.59 0.0031 0.6021 0.6308 Complaint
UBL Bank 0.859% 20.52% 19.4% 5.6% Complaint

MCB Bank 20.41 247% 945.5 % 0.03101 % Non-complaint

National Bank 29% 0.42 27% 2.84% Non-complaint

Standard Chartered 2.546% 8.3144% 976.36% 2.37% Non-complaint

Bank