Sharīʿah Screening Process of Capital Markets : An Evaluation of Methodologies

This study highlights the issues in the screening process of Sharīʿah-compliant stock universe from Sharīʿah and professional perspectives. We have critically analyzed Sharīʿah-compliance methodologies of selected (eight) institutions in the light of Islamic principles of business. Findings suggest multiple weaknesses in the process, including variations in tolerance limits (for ḥarām-elements), variations in the use of calculation methods (total assets and market capitalization), insufficient income purification mechanism, and confusions about the application of bayʿ al-ṣarf and bayʿ al-dayn regulations. In addition, we find lack of revisions in the tolerance limits, corresponding to the expansion of the Islamic finance market. We also find that certain important areas, such as questionable marketing and sales practices and environmental damages, are ignored in filteration. This study proposes a Sharīʿah-compliance rankings mechanism for Islamic stock markets, within agreed upon framework, based on the degree of violations