Sri Lankan stock broker Lanka Securities has introduced a 'Shariah' compliant share list to meet the requirements of both local and foreign Islamic investors on the Colombo Stock Exchange.
The screening methodology for stocks is designed to ensure compliance with the Shariah laws and principles of Islamic finance, a statement said.
Lanka Securities, a joint venture between Pakistan's First Capital Securities Corporation, Bank of Ceylon and Merchant Bank of Sri Lanka, said the list will be reviewed on a weekly basis to capture the impact of the price movements of the equities.
"LSL Shariah Compliant Securities List has been designed and developed to be used as a basis of Shariah complaint equity investments at the CSE," it said.
Shariah forbids interest and making ‘money from money’ and encourages that wealth be generated through legitimate trade.
While Shariah compliant investment avenues are now becoming available in most countries, Sri Lanka has not seen large-scale development, the statement said.
Companies involved in several activities will be filtered out as non Shariah-complaint, Lanka Securities said.
These are conventional banking, insurance, financial services, or any other interest-related activity, alcohol, pork-related products and non-halal food production, packaging and processing or any other activity related to pork and non-halal food.
Entertainment like casinos, gambling and pornography, tobacco, weapons, arms and defense manufacturing are also excluded.
Lanka Securities said the remaining companies are then further screened on a financial basis.
It identified several financial ratios that must be met for companies to be considered Shariah-complaint.
Total interest and income from non-compliant activities should not exceed 5.0 percent of the total revenue and interest bearing debt must be less than 30 percent of the market capitalisation.
Also, interest earning deposits must be less than 30 percent of the market capitalisation, and accounts receivable, prepayments and cash must be less than 50 percent of the total assets.
New firms listed in the CSE it will be added to the list if they meet the criteria.
The financial data on which the list is based on will be updated quarterly when the companies release the interim financials.
Lanka Securities said the business and financial screeners have been identified looking at the industry best practices along with the guidance set by the Accounting and Auditing Organisation for Islamic Financial Institutions.