SECP tightens Shariah criteria, aligns Islamic screening with global benchmarks

The Securities and Exchange Commission of Pakistan (SECP) has tightened Shariah screening standards for the PSX-KMI All Share Index by reducing the permissible non-compliant debt-to-total assets ratio from 37% to 33%.

The revisions align with international benchmarks and aim to strengthen investor confidence in Shariah-compliant capital market instruments, SECP said in a statement on Thursday.

Under the revised criteria, a Shariah compliance rating mechanism has been introduced, assigning three, four, or five-star ratings to qualifying companies to enhance transparency and enable investors to assess levels of compliance.

Moreover, the list of Shariah-compliant companies for the PSX-KMI All Share Index will be published with a five-working-day objection window for evidence-based requests for revision.

A mechanism has also been introduced for the interim inclusion of newly listed companies, subject to screening and approval by the KMI Index Committee.

SECP has further advised PSX to consider additional enhancements, including reducing the non-compliant investments-to-total assets ratio from 33% to 30%, introducing quarterly index updates, and automating data collection.

Under the Shariah Governance Regulations, 2023, screening methodologies for Shariah-compliant securities require SECP approval. Accordingly, PSX, Al-Meezan Investment Management Limited, and Meezan Bank Limited jointly submitted the methodology for the PSX-KMI All Share Index, which was approved by SECP in May 2024.

The decision follows a high-level review meeting of the Committee on the Post-2027 Financial Sector Strategy, chaired by the Finance Secretary.

The meeting emphasised accelerating the implementation of initiatives in line with the Federal Shariat Court’s ruling. Progress on the ongoing transformation and next steps toward transitioning Pakistan’s financial system to a Riba-free framework were reviewed.

The SECP was directed to prepare a comprehensive plan for transforming SECP-regulated sectors into Shariah-compliant models and to develop a post-2027 strategy to sustain the transition.

As per the statement, the enhancement of Islamic indices forms part of this broader reform agenda under the SECP’s Strategic Action Plan 2024-26 for enabling Islamic finance in all regulated sectors.

These measures are part of the ongoing implementation of the Federal Shariat Court’s ruling and the 26th Constitutional Amendment relating to Article 38(1)(f), which mandates the elimination of riba from the financial system in a phased manner by December 2027.

The regulator was of the view that the revised framework would support the development of the Islamic capital market, facilitate informed investment decisions, and encourage listed companies to adopt Shariah-compliant capital structures.