Overview
The Securities Commission (SC) Shariah Advisory Council (SAC) employs a two-tier quantitative screening methodology to determine whether a Public-Listed Company (PLC) is Shariah-compliant. A company must successfully pass both tiers to be classified as Shariah-compliant.
Mixed Companies: Permissible and Prohibited Activities
In reality, many public-listed companies operate a mix of permissible (halal) and prohibited (haram) business activities. The Shariah screening methodology recognizes this complexity and provides a framework to evaluate whether such mixed companies can still be considered Shariah-compliant for investment purposes.
Key Considerations for Mixed Companies:
Primary Business Activity: The company's core business must be Shariah-compliant. Prohibited activities should only arise from minority stakes in non-compliant subsidiaries or associates, or from incidental revenue streams.
Materiality Thresholds: The SC SAC applies specific percentage benchmarks (5% for highly prohibited activities like tobacco, conventional banking; 20% for other non-compliant activities) to measure how much non-compliant income the company generates.
Financial Structure: Beyond business activities, the company's balance sheet is scrutinized to ensure it doesn't rely excessively on interest-based debt (ribā) or hold excessive interest-bearing cash deposits.
Income Purification: Even if a company passes the screening, investors are typically required to purify their returns by donating the proportionate amount of non-compliant income to charity.
How Calculations Are Made: Subsidiaries vs Associates
The methodology treats subsidiary companies and associate companies differently based on the level of control and consolidation principles:
S Subsidiary Companies
(Typically ownership > 50%, giving control)
Full Consolidation: 100% of both revenue and PBT are included in the Group's consolidated figures, regardless of ownership percentage.
Rationale: The parent company exercises control over the subsidiary's operations and financial policies.
Example:
Rumah Bhd (70% owned): Full RM 100M revenue and RM 20M PBT included
A Associate Companies
(Typically ownership 20-50%, significant influence only)
Proportionate Share: Only the parent company's ownership percentage of the associate's PBT is included. Revenue is calculated proportionately for screening purposes.
Rationale: The parent has significant influence but not control; equity method accounting applies.
Example:
Rokok Bhd (30% owned): Only 30% × RM 10M revenue = RM 3M and 30% × RM 5M PBT = RM 1.5M included
Important Note: This distinction ensures that the screening methodology accurately reflects the parent company's actual financial exposure and responsibility for non-compliant activities, proportionate to their level of ownership and control.
Case Study: Synergy Holdings Bhd
Group Structure and Financial Data
| Entity | Equity Stake | Activity | Shariah Status | Revenue (RM) | PBT (RM) |
|---|---|---|---|---|---|
| PLC (Parent) | N/A | Holding, Management | Compliant | 50,000,000 | 10,000,000 |
| Rumah Bhd (Sub) | 70% | Property Development | Compliant | 100,000,000 | 20,000,000 |
| Kotak Bhd (Sub) | 55% | Manufacturing (Boxes) | Compliant | 50,000,000 | 10,000,000 |
| Rokok Bhd (Assoc) | 30% | Manufacturing (Tobacco) | Non-Compliant (5%) | 10,000,000 | 5,000,000 |
| Riba Bank (Assoc) | 20% | Conventional Banking | Non-Compliant (5%) | 5,000,000 | 2,000,000 |
Group Financial Ratios (for Tier 2 Test)
Group Total Assets
RM 100M
Conventional Debt
RM 35M
Conventional Cash
RM 20M
Tier 1: Business Activity Benchmarks
This tier screens the company's income derived from Shariah non-compliant activities against the Group's total income, using a 5% or 20% threshold.
Step 1: Calculate Group Totals (Consolidated)
Group Revenue
50M (PLC) + 100M (Rumah) + 50M (Kotak)
RM 200,000,000
Group PBT
10M + 20M + 10M + (30% × 5M) + (20% × 2M)
RM 41,900,000
Note: For associates, only the PLC's share of the associate's revenue/PBT is used in calculations.
Step 2: Calculate Non-Compliant Contribution (5% Benchmark)
Activities of Rokok Bhd (Tobacco) and Riba Bank (Conventional Banking) fall under the 5% benchmark (Higher Prohibition Activities).
| Non-Compliant Item | Calculation | Value (RM) |
|---|---|---|
| Tobacco Revenue | 30% × 10,000,000 | 3,000,000 |
| Riba Revenue | 20% × 5,000,000 | 1,000,000 |
| Total NC Revenue (A) | 3,000,000 + 1,000,000 | 4,000,000 |
| Total NC PBT (B) | (30% × 5M) + (20% × 2M) | 1,900,000 |
Step 3: Apply Business Activity Screening
| Test | Calculation | Percentage | Benchmark | Status |
|---|---|---|---|---|
| Revenue Test | 4,000,000 ÷ 200,000,000 | 2.00% | < 5% | ✔ Pass |
| PBT Test | 1,900,000 ÷ 41,900,000 | 4.53% | < 5% | ✔ Pass |
Tier 1 Result: PASS
Synergy Holdings Bhd passes the Business Activity Benchmark as both the Revenue (2.00%) and PBT (4.53%) contributions from non-compliant activities are below the 5% threshold.
Tier 2: Financial Ratio Benchmarks
This tier screens the company's financial balance sheet for elements of ribā (interest) and ribā-based instruments. Both ratios must be below 33%.
Test 1: Conventional Debt over Total Assets
Conventional Debt
RM 35,000,000
Total Assets
RM 100,000,000
Calculation: 35,000,000 ÷ 100,000,000
35.00%
Benchmark: < 33%
Test 2: Conventional Cash over Total Assets
Conventional Cash
RM 20,000,000
Total Assets
RM 100,000,000
Calculation: 20,000,000 ÷ 100,000,000
20.00%
Benchmark: < 33%
Tier 2 Result: FAIL
Synergy Holdings Bhd fails the Financial Ratio Benchmark because its Conventional Debt over Total Assets ratio (35.00%) exceeds the maximum allowable 33% threshold.
Final Shariah Status Determination
A company must pass BOTH the Business Activity (Tier 1) and Financial Ratio (Tier 2) screenings to be classified as Shariah-compliant.
Tier 1: Business Activity
PASS
Tier 2: Financial Ratio
FAIL
Final Status
NON-COMPLIANT
Summary
Although Synergy Holdings Bhd's operating income from prohibited activities (2.00% by revenue, 4.53% by PBT) is compliant with the 5% benchmark, its high level of conventional, interest-bearing debt relative to its total assets (35.00%) causes it to be classified as Shariah Non-Compliant. This illustrates how the financial ratio benchmark ensures balance sheet compliance against ribā-based elements, even for companies in permissible sectors.
Interactive Shariah Compliance Checker
PermalinkEnter your PLC's figures below. We'll compute Tier 1 (Business Activity) and Tier 2 (Financial Ratio) tests and show the final status.
Tier 1 — Business Activity (5% or 20%)
Tip: For associates, include only the parent’s proportionate share in your non-compliant figures.
Tier 2 — Financial Ratios (33%)
Benchmark: Each ratio must be < 33%.
Tier 1 — Business Activity
Tier 2 — Financial Ratios
Final Status
—
Both Tier 1 and Tier 2 must pass to be Shariah-compliant.