UNDERSTANDING SHARIA SCREENING METHODOLOGIES AND PRINCIPLES Bandar Seri Begawan, 30 th Nov – 4 th Dec 2015

2 Understanding Sharia Screening Methodologies and Principles

3 I.Selection Criteria of Shariah Stocks II.Important Screening-Factors III.Different Islamic Stock Screening Methods across Countries Agenda

4 The selection criteria of sharia stocks are based on Bapepam-LK Regulations No II.K.1 concerning Criteria and Issuance of Sharia Securities List, item 1.b.7. The regulation states that Securities in the form of shares, including sharia rights and sharia warrant, issued by Issuer or Public Company who does not declare that its business activities and management are conducted based on Sharia Principles, as long as the Issuer or Public Company fulfills the following criteria : I. The Company does not conduct any business activities that conflict with Sharia Principles. II. The Company fulfills/meets certain financial ratios. Referring to: 1. Fatwa No. 20/DSN-MUI/IV/ Fatwa No. 40/DSN-MUI/X/2003 Indonesian National Sharia Board Selection Criteria of Sharia Stocks

5 The Company fulfills/meets the following criteria and financial ratios: Financial Ratios Sharia Compliant Industry Prohibited Trading Ribawi Financial Services Specul- ation Haram Gambling Bribery Conflicts with Sharia Selection Criteria of Sharia Stocks: Criteria and Financial Ratios

6 (1)Gambling and games considered as gambling (2)Trading that is prohibited according to Sharia (1)Trading that is not followed by delivery/transfer (2)Trading with a fake offer or demand (3)Ribawi financial services, (1) interest-based bank (2) interest-based finance company (4)Buying and selling of risks that involve speculation (gharar) and gambling (maisir) (5)Producing, distributing, trading, and or providing (1) products or services that are forbidden because of its contents (haram li-ghairihi) (2)products or services that are forbidden not because of its contents but because they are stated forbidden by DSN-MUI (3)products or services that can deprave one’s morals and are harmful (6)Transactions that contain elements of bribery (risywah) Business Activities that Conflict with Sharia Principles

7 Although there are many components in the Screening-Methods using by the Countries but the most important factor that makes it significantly different is the ratio of: Important Screening-Factors

8 1. Total Equity Relatively stable Equity Value could be negative in case of loss ILIS do not change 2. Market Capitalization Depends on market price fluctuation Market Capitalization Value always positive Significant change in ILIS (Indonesian List of Islamic Stock) 3. Total Asset Relatively stable Total Asset Value always positive Significant change in ILIS (Indonesian List of Islamic Stock) Comparison Using Different Components

9 Bapepam-LK has run simulation on sharia compliant stocks listed in the Indonesia Stock Exchange for Stock with the top 20 market capitalization per December 31, 2010 These simulations on 20 samples of sharia stock shares have been performed by using the criteria of Islamic stock of 8 foreign countries: Indonesia, the United, States, Turkey, Arab, Pakistani, British and Malaysia Issuer's market capitalization value of stocks reach USD 367 billion and represents 57% of the average total capitalization value of IDX in (The processed data from 2008, 2009, and 2010.) Top 20 (Market Capitalization) 57% of Total Market Capitalization BAPEPAM Simulations on Screening Methods Across Countries

10 Screening Methods Indonesia (Bapepam-LK) 1.Total debt-bearing interest / total equity ≤ 82% 2.(Total interest income + other non-halal income) / total revenue ≤ 10% Countries Using Equity

11 Screening Methods Dow Jones Isalmic Market Index, USA 1. Total debt / Market Capitalization (24 Months Average) ≤ 33% 2. Liquid assets (Cash + interest bearing securities) / Market Capitalization (24 Market Average) ≤ 33% 3. Account receivables / Market Capitalization (24 Months Average) ≤ 33% United Arab Emirates 1.Interest bearing debt / Market Cap (12 Months Average) ≤ 33% 2.Interes bearing lending / Market Cap ≤ 30% 3.Interes bearing lending / total assets ≤ 30% 4.(Cash + trade receiveables + investment + other debtors) / total assets ≤ 70% 5.(Cash + trade receivables + other non-halal income) / operating income ≤ 5% 6.(Interest income + other non-halal income) / operating income ≤ 5% Countries Using Market Capitalization

12 Screening Methods Arab Saudi 1.Interest bearing debt / Market Cap (12 Months Average) ≤ 33% 2.(Value of debts + liquid funds) / Market Cap ≤ 50% 3.Interest income / total income ≤ 5% Istanbul Stock Exchange, Turkey 1.Debt to Market Value of equity (36 Months Average) < 33% 2.Accounts Receivables to Market Value of Equity (36 Months Average) < 49% 3.(Cash + Interest Bearing Securities) to Market Value of Equity (36 Months Average) < 33% 4.Non-Permisible Income other than Interest Income to Revenue < 5% Countries Using Market Capitalization

13 Screening Methods FTSE, England 1.Debt / Total Assets < 33% 2.Account receivables + Cash / Total Assets (12 Months Average) < 50% 3.Cash + Interest Bearing Securities / Total Assets (12 Months Average) < 33% 4.Non-Permisible Income other than Interest Income / Total Revenue < 5% Karachi Stock Exchange, Pakistan 1.Total interest-bearing debt / total assets ≤ 40% 2.Total illiquid assets / total assets ≥ 20% 3.Income from investment ≤ 5% of gross Revenue Countries Using Asset

14 Screening Methods Malaysia 1.Maximum of 5% of turnover or profit before tax (for riba, gambling, liquor and pork) 2.Maximum of 10% of turnover or profit before tax (for ummul balwa e.g. Interest from conventional bank) 3.Maximum of 25% of turnover or profit before tax (maslahah activities e.g. Hotel & restors. Share trading) Countries Not Using Interest-Bearing Debt Ratio

15 Screening Methods using Equity Total in ILIS (%) Indonesia (Bapepam-LK) 1.Total debt-bearing interest / total equity ≤ 82% 2.(Total interest income + other non-halal income) / total revenue ≤ 10% Indonesia List of Islamic Stock (ILIS) Number of Sharia Stocks listed in IDX: Simulation Using Different Screening Methods

16 Screening Methods using Market Capitalization Total in ILIS (%) Dow Jones Isalmic Market Index, USA 1. Total debt / Market Capitalization (24 Months Average) ≤ 33% 2. Liquid assets (Cash + interest bearing securities) / Market Capitalization (24 Market Average) ≤ 33% 3. Account receivables / Market Capitalization (24 Months Average) ≤ 33% United Arab Emirates 1.Interest bearing debt / Market Cap (12 Months Average) ≤ 33% 2.Interes bearing lending / Market Cap ≤ 30% 3.Interes bearing lending / total assets ≤ 30% 4.(Cash + trade receiveables + investment + other debtors) / total assets ≤ 70% 5.(Cash + trade receivables + other non-halal income) / operating income ≤ 5% 6.(Interest income + other non-halal income) / operating income ≤ 5% Indonesia List of Islamic Stock (ILIS) Number of Sharia Stocks listed in IDX: Simulation Using Different Screening Methods

17 Screening Methods using Market Capitalization Total in ILIS (%) Arab Saudi 1.Interest bearing debt / Market Cap (12 Months Average) ≤ 33% 2.(Value of debts + liquid funds) / Market Cap ≤ 50% 3.Interest income / total income ≤ 5% Istanbul Stock Exchange, Turkey 1.Debt to Market Value of equity (36 Months Average) < 33% 2.Accounts Receivables to Market Value of Equity (36 Months Average) < 49% 3. (Cash + Interest Bearing Securities) to Market Value of Equity (36 Months Average) < 33% 4. Non-Permisible Income other thanInterest Income to Revenue < 5% Indonesia List of Islamic Stock (ILIS) Number of Sharia Stocks listed in IDX: Simulation Using Different Screening Methods

18 Screening Methods using Asset Total in ILIS (%) FTSE, England 1.Debt / Total Assets < 33% 2.Account receivables + Cash / Total Assets (12 Months Average) < 50% 3.Cash + Interest Bearing Securities / Total Assets (12 Months Average) < 33% 4.Non-Permisible Income other than Interest Income / Total Revenue < 5% Karachi Stock Exchange, Pakistan 1.Total interest-bearing debt / total assets ≤ 40% 2.Total illiquid assets / total assets ≥ 20% 3.Income from investment ≤ 5% of gross Revenue Indonesian List of Islamic Stock (ILIS) Number of Sharia Stocks listed in IDX: Simulation Using Different Screening Methods

19 Screening Methods using Asset Total in ILIS (%) Malaysia 1.5% of turnover or profit before tax (for riba, gambling, liquor and pork) 2.10% of turnover or profit before tax (for ummul balwa e.g. Interest from conventional bank) 3.25% of turnover or profit before tax (maslahah activities e.g. Hotel & restors. Share trading) 100 Countries Not Using Interest-Bearing Debt Ratio

20 Tota in ILIS (%) Total interest-bearing debt / Total Asset ≤ 45% Total interest-bearing debt / Total Asset ≤ 40% Total interest-bearing debt / Total Asset ≤ 33% Total interest-bearing debt / Total Asset ≤ 30% Total interest-bearing debt / Total Market Capitalization (12 Months Average) ≤ 33% Total interest-bearing debt / Total Equity ≤ 82% Indonesian List of Islamic Stock (ILIS) Result of Simulation Using Total Asset, Market Capitalization and Equity

21 Indonesian List of Islamic Stock (ILIS) on December 2009 until the latest period (June 2014) ILIS is published twice a year (every six months) YearsPeriod Stock Total Issuer Public Company Delisted Issuer IPO 2009 I II I II I II I II I II I Number of Sharia Stocks listed in IDX

22 As of August 2014, The Sharia Securities List is The First Periodic of Sharia Securities List in 2014 which have 326 sharia stocks consisting of 322 sharia stocks from The First Periodic of Sharia Securities on May 2014 and 4 sharia stocks from The Incidental Sharia Securities List issued simultaneously with the effective registration statement of the Issuer. Number of Sharia Stocks Listed in IDX by Sector Sector No. of ILIS Companies 1st Period Agricultural Sector1311 Mining 2830 Basic Industry and Chemical46 Various Industry28 Consumer Goods Industry2629 Property, Real Estate and Building construction5049 Infrastructure, Utilities and Transportation2329 Finance01 Trade, Service and Investment7483 Public Company54 Issuers are not Listing912 IPO84 Total310326

Thank You very much. 23