The Securities and Exchange Commission of Sri Lanka (SEC) will proactively classify Shariah compliant instruments on the Colombo Stock Exchange (CSE) and publish a list of such securities twice yearly, joining several other jurisdictions which follow this practice such as Malaysia, Pakistan and the UAE.
The Shariah classification is part of a broader national initiative to attract more foreign funds, especially from Islamic domiciles, as Sri Lanka continues rebuilding its economy after the 2004 tsunami, years of internal turmoil and the pandemic ravaged its tourism industry.
Having announced in May 2024 the appointment of six accredited Shariah scholars to handle this classification task, the SEC said the screening standards to be applied would be unique to Sri Lanka as the island nation “is a relatively small market and adaptable to external factors”.
The process involves a two-tier screening of qualitative and quantitative approaches to determine the Shariah status of CSE-listed securities.
The qualitative screening process uses the familiar business activity benchmarks to filter out Haram sectors – like those involved in interest-based finances including conventional insurance, gambling, weaponry, non-Halal products and non-Shariah entertainment.
Notably, this screening excludes the manufacture or sale of tobacco-based products or related products and stockbroking or share trading in Shariah non-compliant securities. Also considered would be the public perception or image of a company’s activities, according to Shariah rules and principles.
Table 1: Sri Lanka’s Shariah standard references
| Proposed thresholds | % | References |
| Impermissible income/Total income | < 5% | AAOIFI, FTSE Russle, Dow-Jones, Meezan and SC Malaysia |
| Interest bearing borrowings/Total assets | < 33% | FTSE-Russle, SC Malaysia |
| Impermissible investment/Total assets | < 33% | FTSE-Russle, SC Malaysia |
| Illiquid asset/Total asset | < 70% | AAIOFI |
Even if the securities pass this first filter, Shariah classification won’t be granted if they fail the quantitative approach criteria of impermissible income and investments plus debt and liquidity ratios (see Table 1).
Specifically, the SEC disallows income from gambling, interest-based transactions, Gharar (uncertainty) transactions like derivatives, conventional insurance claim reimbursement, penalties on late payments in credit sales, plus income from casinos, addictive drugs, alcohol – inclusive of dividend income from such sources. But purification is allowed on such impermissible income.
The SEC said only three of the Shariah scholars need to “sign off the publication of whitelist securities” and that the proposed Shariah compliant securities screening methodology shall be revised every three years to accommodate and adopt the changes in the capital market.
