A Review of Securities Commission of Malaysia’s Revised Shariah Stock-Screening Criteria

Abstract

This paper addresses the perceived more tolerant Shariah-screening criteria by the Securities Commission of Malaysia (SCM). Recently, in 2013, SCM introduced the “two-tier” screening process of the stocks traded on Bursa Malaysia. Despite this revision, the two-tier process is seen as being less stringent than the Shariahscreening process of e.g. Dow Jones and MSCI. Such perception may affect the credibility of the SCM in determining Shariah-compliant securities compared to international standards. Proponents of SCM screening criteria argue that since Shariah screening in Malaysia only includes Malaysian listed stocks, more rigid screening process may limit the list of investible stocks, and may further restrict the benefits of diversification, i.e. one may not be able to form efficient portfolios or achieve appropriate risk-return portfolios while complying with the Shariah principles. This paper argues that the justification for the less-stringent screening process adopted by the SCM does not seem to be corroborated by theoretical or portfolio diversification studies, and evidence from the socially-responsible investing and Shariah-compliant empirical findings.