The Effect of Quantitative Shariah-screening on Portfolio Performance in Malaysia

Abstract

The Islamic capital market in Malaysia comprises a wide range of investment vehicles, including Shariah-compliant stocks, Islamic bonds (Sukuk), and Shariah-compliant mutual funds. Malaysia’s government continues to support the development of the Islamic capital market through regulatory frameworks and incentives. This has fostered a positive environment for Shariah-compliant investing. The growing awareness of Islamic values has significantly driven the expansion of shariah compliance in Islamic finance into a new phase. A key component of shariah compliance is the screening process. The introduction of Shariah screening criteria is to ensure that investments in the Islamic capital market align with Islamic principles. The aim of this study is to investigate the impact of Shariah screening on portfolio performance. Specifically, it will assess how the debt ratio and cash ratio of stocks influence their performance, given that Shariah screening restricts the debt and cash ratios to no more than 33%. This study adopts a qualitative approach, for a more robust understanding of the impact of Shariah screening on portfolio performance, particularly during market fluctuations and economic shocks. This research will add to the growing body of knowledge on Shariah-compliant investing and its impact on portfolio performance. It will provide evidence on the quantitative screening mechanisms (debt and liquidity screening) and their role in maximizing financial performance in the context of Islamic finance. The findings could help both individual and institutional investors in Malaysia make informed decisions when constructing Shariah-compliant investment portfolios.  

Keywords: Shariah screening, Portfolio performance, Shariah shares, Shariah equity, Shariah Investment Management