Shariah Compliance Explained

For Muslim investors in Malaysia, Shariah compliance is a key factor when choosing which IPOs to invest in. It indicates whether a company's core business activities and financial management align with Islamic principles.

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Who Decides?

The Shariah status of all listed companies and IPOs on Bursa Malaysia is determined by the Shariah Advisory Council (SAC) of the Securities Commission (SC) Malaysia.

The SAC updates and publishes the official list of Shariah-compliant securities twice a year (typically in May and November). For IPOs, the compliance status is assessed and announced in the prospectus before listing.

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The Shariah Screening Methodology

To determine if an IPO is Shariah-compliant, the SAC applies a two-tier quantitative approach (consisting of business activity benchmarks and financial ratio benchmarks) followed by a qualitative assessment.

1. Quantitative Assessment

Tier A: Business Activity Benchmarks

This benchmark measures the percentage contribution of Shariah non-compliant activities to the company’s overall Revenue and Profit Before Tax (PBT).

• The 5% Benchmark Applies to activities that are clearly prohibited under Shariah. If the revenue or PBT from these activities exceeds 5%, the company is deemed non-compliant:

  • Conventional banking and conventional insurance (Takaful is compliant).
  • Gaming and gambling.
  • Manufacture or sale of tobacco and tobacco-related products.
  • Manufacture or sale of liquor and liquor-related products.
  • Pork and pork-related activities.
  • Non-halal food and beverages.
  • Shariah non-compliant entertainment.
  • Interest income from conventional accounts and instruments.
  • Dividends from Shariah non-compliant investments.
  • Other activities deemed non-permissible according to Shariah.

• The 20% Benchmark Applies to mixed business activities that are generally tolerated up to a higher threshold:

  • Share trading and stockbroking business on Shariah non-compliant securities.
  • Rental received from Shariah non-compliant activities.
  • Other activities deemed non-compliant according to Shariah.

Resolution on Hotel and Resort Operations Previously, hotel and resort operations were assessed under a specific benchmark. However, the SAC resolved that the specific 20% benchmark for hotel and resort operations is no longer applicable since their primary business is accommodation.

However, any non-compliant activities operated within the hotel (such as liquor sales or non-halal dining) remain strictly subject to the 5% benchmark.

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Tier B: Financial Ratio Benchmarks

Even if a company's business activities are compliant, it must pass financial screening. The SAC measures interest-based (riba) elements on the balance sheet. Both ratios must be lower than 33%:

1. Cash over Total Assets
   • Formula: (Cash in conventional accounts or instruments / Total Assets) < 33%
   • Note: Cash placed in Islamic accounts and instruments is excluded from this calculation.
2. Debt over Total Assets
   • Formula: (Interest-bearing debt / Total Assets) < 33%
   • Note: Islamic financing, Sukuk, and other Shariah-compliant financing structures are excluded from this calculation.

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2. Qualitative Assessment

In addition to numbers, the SAC takes into account the public perception and image of the company. It assesses whether the company’s activities align with general Islamic ethics and values, ensuring that the company does not cause public harm (mafsadah / harm) or contradict Islamic teachings.

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What Happens if a Compliant Security Becomes Non-Compliant?

For already listed companies, Shariah status can change during the semi-annual reviews. If a security is reclassified from Shariah-compliant to Shariah non-compliant, the Securities Commission Malaysia provides specific disposal guidelines depending on the market price relative to the investor's original investment cost on the effective date of the reclassification (typically the date of the announcement):

1. If Market Price is Equal to or Higher than the Investment Cost

If the stock price on the effective date of reclassification is equal to or exceeds your original investment cost:

• 6-Month Disposal Window: You are given a period of six months from the effective date to dispose of the securities.
• Permissible Gains: Any dividends received and capital gains realized from the disposal during this 6-month window can be kept by the investor.
• Purification after 6 Months: If you continue to hold and sell the securities after the 6-month window, any dividends received and excess capital gains (the difference between the selling price and the closing price of the security on the effective date) must be channeled to baitulmal or authorized charitable bodies. You are only permitted to retain the closing price on the effective date.

2. If Market Price is Below the Investment Cost

If the stock price on the effective date of reclassification is below your original investment cost:

• Permitted to Hold: You are allowed to continue holding the securities past the 6-month period until the market price recovers.
• Retention of Dividends: You can keep any dividends received during this holding period until the sum of the dividends received plus the market value of the securities equals your original investment cost.
• Disposal & Purification: Once the total value (dividends + market price) recovers to your original investment cost, you are advised to dispose of the securities. Any dividends or capital gains exceeding your original investment cost realized after the recovery point must be purified by channeling them to baitulmal or authorized charitable bodies.

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How to check Shariah status on ipotracker.my

Every IPO on our tracker displays a clear status badge:

• Shariah — Verified as Shariah-compliant.
• Non-Shariah — Does not meet the SC’s compliance criteria.

You can also use the Shariah Filter on the home page to instantly hide non-compliant IPOs and view only Shariah-compliant options.