Amana makes the ‘White List’ public

Amana Asset Management Limited, one of the group companies carrying out the screening process with the involvement of Shari’ah Scholars, has initiated the publishing of the White List:

Islamic finance has been a hot topic amongst financial market analysts around the world and Sri Lanka, one of the best performing stock markets in the world. A recent paper published by one of the well known analysts, ‘Accenture,’ states that Islamic financial products are moving from niche products to the mainstream as the Muslim middle class grows.

In the Sri Lankan context, the interest for Islamic market comes in many folds.

In addition to the Muslims who are becoming increasingly Shari’ah conscious when they see more options available in terms of Shari’ah compliant financial products, the ethically conscious conventional players too are finding Islamic financial products as pretty good alternatives. On the other hand the conventional service providers including some of the banks have identified the potential of the market and have started entering one after the other.

As one of the key capital market products, equity is one strong option in the Islamic finance investment product range. However, there is clear guidance from the scholars that a screening has to be carried out in order to identify what the permissible stocks are, which is called the ‘White List’. To determine their eligibility for investment, stocks are screened to ensure that they meet the standards set out in the published methodology.

In order to be part of the White List, companies must exclude certain non-acceptable products, business activities, certain types of income and expenses and meet certain levels of ratios from the assets and liabilities. This exclusions and limitations are considered healthy for the organisations and thereby to the investors as well.

Shari’ah regulation for equity screening and purification

Accounting and Auditing Organisation for Islamic Finance Institutions (AAOIFI) defines a share as: “A share in the assets of a company and is represented by a certificate that can be negotiated. This applies to all shares, whether Shari’ah compliant or not” (Shari’ah Standard No. 21 Financial Paper).

There are four globally accepted White List Indices, namely, Dow Jones Islamic Market Index, Standard and Poor Islamic Index, FTSE (Financial Times Stock Exchange) Islamic Index and the Kuala Lumpur Shari’ah Index.

All these indices adopt similar screening levels which are accepted around the world. There are essentially four levels of screening to determine whether or not a particular share is eligible to be included into the White List

Level one – Core business activity screening

Core business of the company must be Halal and in line with the dictates of Shari’ah. Hence, investment in securities of any company dealing in interest, alcoholic drinks, tobacco, pork production, arms manufacturing, pornography or related activities is not permissible.

Level two – Types of share screening

The company should not have issued preference shares that have special financial features leading to the granting of priority to these shares at the time of liquidation or the distribution of profits. It is permitted to grant certain shares features related to procedural or administration matters, in addition to the rights attached to ordinary shares, like voting rights.

Level three – Financial ratio screening

a.Debt to total assets

Debt to Asset ratio should be less than 40%. Debt, in this case, is classified as any interest bearing debts. Zero coupon bonds and preference shares are, both, by definition, part of debt.

b.Non-compliant Investments to total assets

The ratio of non compliant investments to total assets should be less than 33%. Investment in any non-compliant security shall be included for the calculation of this ratio.

c.Illiquid assets to total assets

The ratio of illiquid assets to total assets should be at least 10%. Illiquid asset means any valuable asset other than cash and receivables. Thus illiquid assets include tangible assets, benefits and rights such as property, plant and equipment, building, furniture and fixture, intangible assets, stock in trade, raw materials, stores and spares and all similar assets.

d.Net liquid assets to share price

The market price per share should be greater than the net liquid assets per share calculated as: (Total assets – illiquid assets – total liabilities) divided by number of shares.

Level four – Screening of non-Halal generated income

a.Non-compliant Income to total revenue

The ratio of non compliant income to total revenue should be less than 5%. Total revenue includes gross revenue plus any other income earned by the company.

b.Purification of non-compliant income

The obligatory purification figure which should be given in charity, is arrived at by the following mechanism:

Prohibited income = Non-Halal potion in each share

Number of shares of the company

Non-Halal potion in each share x Number of shares owned by the Investor = Purification amount.

A similar screening process is adopted around the world including the Dow Jones Islamic Market Index. Researchers have revealed both in the local and international context that the white listed Companies have outperformed the conventional Indices in the long term.

In a research paper titled ‘Islamic Investment: Evidence From Dow Jones and FTSE Indices’ Khaled A. Hussein concludes that In the long run, there is a clear evidence that the Islamic indices have a superior performance compared with their counterparts. A similar conclusion was arrived at by NDB Aviva Wealth Management, who has a top professional research team in the country.

From a business analytical view, if one looks at the criterion, it is very clear this excludes all the unethical elements and prevents the investors from contributing any level of harm to the human society and the environment at large.

While the first level of screening is straight forward in this process the second criteria makes effort to ensure fair treatment to the investor among other investors by the company. The third one eliminates the high dependence on interest income and borrowed capital. Interest, in Islam is prohibited as it leads to oppression in simple terms, as the borrower is bound to pay a fixed return irrespective of the result in his or her effort for which the money was borrowed.  

The level four ensures that the company does not fully run with liquid (cash or cash equivalent) assets which will not be able to earn meaningful returns both in the short and long run. The fourth level brings in the methodology purify in the event that the earning was mixed up with unacceptable income due to unavoidable circumstance or even within the tolerable limits. Analysts around the world have acknowledged that the Colombo Stock exchange has outperformed many of the developed countries in the world during the last two to three years.

While the Sri Lankan economy is growing at a rate as high as 8% and above, active participation of the middle class people of the country in the investment activities is very vital.

Investors who are willing to take higher risk with higher returns while maintaining their ethical values, the White List of the Colombo Stock Exchange is a clear route.

Amana Group brought in the Islamic finance to Sri Lanka by setting up and offering various products and options in this market.

They also introduced the Dow Jones Islamic Market Index to the country and continue to provide the White List Islamic Equity Fund Namal Amana Equity Fund through Amana Capital Limited.

The statistics are available in the press on the performances of this fund. Amana has its Shari’ah Advisory Board along with a team of finance professionals who carry out this tedious screening process.

You may refer www.amamasset.com for further information on the White List and post any questions on the same.