RELIGION AND EARNINGS MANAGEMENT - Some ... - Unitec

4.0. THE SHARIAH FIRMS
To govern the ICM, the Securities Commission of Malaysia established a body
called the Shariah Advisory Council (SAC) in May 1996 (Bursa Malaysia Report,
2005). The SAC qualifies firms as Shariah and non-Shariah through periodic
inquiries. The SAC uses the annual financial reports and a survey to obtain detailed
company information. It may also make specific inquiries, if needed (ICM Bulletin,
2007). The review process leads to the classification of companies as Shariah-
approved companies or non Shariah-approved companies. The SAC issues a list of
Shariah-compliant securities twice a year.
The SAC uses two screening processes through the application of two standard
criteria. In the first level, the SAC scrutinizes the primary activities of the companies
to determine whether or not they are contrary to Shariah principles. Basically, the
companies are regarded as Shariah-approved if their core activities are not involved in
the following activities:
i. Financial services based on riba (interest)
ii. Gambling
iii. Manufacture or sale of non-halal (prohibited) products or related products
iv. Conventional insurance
v. Entertainment activities that are non-permissible according to Shariah
vi. Manufacture or sale of tobacco-based products or related products
vii. Stock broking or share trading in non-Shariah approved securities
viii. Other activities deemed non-permissible according to Shariah.
The second level of screening is applied in the case of companies engaged in
both permissible and non-permissible activities. For these companies, the SAC
considers the following:
i. The core activities of the company must not involve the forbidden
activities (as outlined above).
ii. Any peripheral or subsidiary activity that occur in these forbidden areas
must be measurably insignificant relative to the core activities.
iii. The public perception or image of the company must be exemplary.
iv. The core activities of the company must be in the public interest and the
country, and the non-permissible elements present must be minimal and
difficult to avoid (Bursa Malaysia, 2007).
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