The big picture
A Shariah-compliant label answers a defined screening question at a particular review date. It does not certify a company’s valuation, eliminate investment risk or remove the need to examine incidental non-compliant income. Advanced screening combines business activity, financial classifications, published methodology and qualified oversight. This topic teaches an auditable worksheet and a conditional purification calculation. It does not assume that every index provider follows identical rules or that JISPL supplies a specific ratio to every account holder.
Core concepts
Learning objectives
- Build a dated business and financial screening worksheet from issuer accounts.
- Apply the announced debt-screen transition at its correct effective review.
- Calculate an illustrative dividend purification amount using an explicitly applicable ratio.
- Evaluate IPO status, sukuk structure and ongoing status changes using qualified evidence.
1. Establish the mandate and business screen
1.1 Identify the actual methodology
Begin by naming the authority or product methodology you intend to follow. Record its version, effective review date, financial period, publication date and scope. KMI30 is a selected index; the broader Shariah-compliant universe is not limited to those thirty constituents. A company can meet a Shariah screen yet be excluded from a particular index for selection or technical reasons. Conversely, an old index list is not evidence of current status.
1.2 Understand the economic activity
Read segment revenue, principal activities, subsidiaries, investments and notes before calculating ratios. An acceptable numerical result cannot cure a prohibited core business. Separate an incidental item within an otherwise acceptable activity from an inherently impermissible business model. Where descriptions or mixed activities are ambiguous, document the issue for qualified Shariah review rather than inventing an approval. A client’s separate objectives, liquidity needs and risk tolerance still require investment analysis after the permissibility assessment.
Step-by-step method
- Select and archive the applicable methodology and dated status notice.
- Map business segments and material subsidiary activities.
- Flag unclear classifications for qualified review before declaring a result.
A hypothetical company disappears from KMI30 but remains on a published broader compliant list. The learner checks the stated index-selection reason instead of automatically announcing that its underlying business has become impermissible.
2. Reconstruct financial ratios and control the rule date
2.1 Numerators, denominators and classification
Use the specified accounts and accounting scope consistently. Classify interest-bearing debt from the notes rather than substituting all liabilities; separately identify non-compliant investments and income. Other methodology tests address illiquid assets and net liquid assets per share relative to market price. Revenue, profit, total assets and market capitalisation are different denominators and must not be exchanged merely because a data portal has a convenient field. Retain the line-item mapping and ambiguous classifications.
2.2 The announced November2026 transition
PSX noticeN244 of26February2026 announced a reduction in the interest-bearing-debt-to-total-assets threshold from37% to33%, for November2026 recomposition based on June2026 annual or half-yearly accounts. At this topic’s22October2026 review, distinguish that scheduled implementation from the earlier37% screen. The notice also schedules a compliance-rating and objection mechanism. Do not apply a future threshold to an earlier status list or treat a rating as a return forecast. At a boundary, use the exact comparison and subsequent effective brochure, not rounded ratios.
Step-by-step method
- Extract the specified balance-sheet and income-note items with page references.
- Calculate unrounded ratios and reconcile them with published screening data.
- Assign the result to the correct account period and effective methodology.
Teaching example: interest-bearing debt34 and total assets100 give34%. That lies below37 but above33. It illustrates transition sensitivity, not an automatic real-company status verdict; all business and financial tests and the relevant review date still apply.
3. Calculate and document income purification
3.1 Applicable ratio and distribution base
Incidental non-compliant income may require purification under the applicable Shariah guidance. Obtain the published company-specific purification measure for the relevant period and confirm what it measures. A percentage of revenue, a per-share amount and a percentage of dividend are not interchangeable. Do not apply an unverified figure from a different company or year. Ask whether the prescribed base is gross dividend, another distribution measure or a per-share holding calculation, and follow that actual instruction.
3.2 Limits and recordkeeping
If the applicable guidance explicitly prescribes a2% purification ratio on a gross dividend of PKR10,000, the teaching amount is0.02×10,000=PKR200. This is a conditional arithmetic example, not a universal fatwa or an observed JISPL client figure. Document holdings, entitlement date, gross distribution, withholding, ratio source, amount and charitable disposal evidence. Do not automatically reduce the purification base by tax withheld or assume the treatment of gains on sale; obtain the relevant qualified guidance. Donation does not guarantee tax deductibility.
Step-by-step method
- Obtain the dated ratio and confirm its definition and calculation base.
- Calculate with the prescribed units and retain the reconciliation.
- Record disposal and refer capital-gain or status-transition questions to a qualified adviser.
A teaching investor receives PKR8,500 after withholding on a gross10,000 distribution. If the applicable instruction uses gross dividend and2%, purification remains200, not170. The example establishes arithmetic only; the real instruction and tax treatment require verification.
4. Evaluate IPOs and sukuk without relying on labels
4.1 Newly listed equity and formal status
An IPO prospectus describes an offer; it is not automatically a Shariah approval. Read the stated activity, use of proceeds, financing, investments and screening evidence. The26February2026 PSX notice formalised Shariah screening for new IPO listings: upon Shariah approval, inclusion in KMI All Share is from listing, with that IPO provision effective from the notice date. This timing differs from the scheduled November changes. Verify the individual company approval rather than treating every new listing as compliant.
4.2 Sukuk versus conventional bonds
Conventional bonds generally represent an interest-bearing debt obligation. Sukuk are structured certificates whose rights depend on the documented assets, contracts and cashflows. The word sukuk alone does not explain recourse, ownership, tradability, credit exposure or loss allocation. Examine the Shariah approval, offering document, obligor, trustee, payment mechanism, security and redemption provisions. Asset-backed and asset-based structures can give materially different claims. An acceptable structure still carries credit, market, liquidity and operational risks; a fixed distribution schedule does not make it risk-free.
Step-by-step method
- Match the IPO or sukuk to its specific approval and offering documents.
- Trace proceeds, contractual rights and cashflow sources.
- Check eligibility, tradability, credit and liquidity separately from Shariah approval.
A hypothetical sukuk has a Shariah approval but weak secondary-market liquidity. The learner records structural permissibility separately from the ability to sell quickly; neither the certificate’s name nor an expected distribution creates a guaranteed exit.
5. Maintain an audit trail through changing status
5.1 Review cycles and corporate events
Re-screen when the relevant status publication or methodology changes and when material issuer events warrant review. Acquisitions, financing, business changes and revised accounts can alter the inputs. Preserve the original data vintage so a later revision does not silently rewrite the decision history. A published ratio is useful evidence but may require reconciliation where the account scope, classifications or effective dates differ. Treat unresolved disagreements as questions, not accusations or self-issued approval.
5.2 Independent challenge and escalation
Use a review checklist with preparer, independent checker, source links, calculations, decisions and follow-up dates. Follow the applicable adviser’s instructions for a status change, holding transition and purification; do not invent a universal immediate-sale deadline. Communicate fact and uncertainty clearly to clients. Shariah review and valuation review should remain distinct: a permissible company may be overpriced, concentrated or unsuitable for a near-term cash need. A reproducible file supports an informed discussion without replacing qualified oversight.
Step-by-step method
- Monitor official status notices and material issuer disclosures.
- Have a second reviewer challenge classifications and effective dates.
- Document unresolved points, adviser instructions and subsequent actions.
Two researchers calculate different debt ratios for a teaching company because one includes a non-interest trade payable. They reconcile the methodology and account notes before changing the worksheet, retaining both the original classification and the reason for correction.
From financial statements to a documented decision
- Select dated methodology
- Screen business activity
- Map financial account lines
- Apply effective ratios
- Confirm purification instruction
- Review and retain evidence
Reference table
| Test or decision | Required evidence | Common error |
|---|---|---|
| Core business | Segment activities and qualified classification | Using ratios to excuse prohibited activity |
| Financial screens | Specified account lines, scope and denominator | Substituting convenient portal fields |
| Rule timing | Effective methodology and status notice | Applying November change in October |
| Purification | Dated company ratio and prescribed base | Using net cash or wrong-year ratio |
| Instrument rights | IPO approval or sukuk contracts | Treating an Islamic label as risk-free |
Glossary of key terms
- Business screen
- Assessment of principal and material economic activities under a specified Shariah methodology.
- Debt screen
- A defined interest-bearing debt ratio evaluated with the required denominator and effective threshold.
- Effective review date
- Date or recomposition to which a particular rule or status applies.
- Illiquid assets
- Assets classified under the methodology’s non-liquid trading rules, not simply assets hard to sell.
- Net liquid assets per share
- A specified net-liquid-assets calculation divided by relevant outstanding shares.
- Purification
- Disposal of the defined non-compliant income amount under applicable qualified guidance.
- Shariah status
- A dated assessment under a particular screening framework, distinct from valuation.
- Sukuk
- Certificates with rights derived from their documented Shariah structure, assets and contractual cashflows.
Frequently asked questions
Is every company outside KMI30 non-compliant?
No. Index selection and the broader compliant universe are different; inspect the current official status.
Was the33% debt threshold already applicable on22October2026?
The26February notice schedules the change for November2026 recomposition; match the specific effective publication.
Can purification make a prohibited main business permissible?
No. Business permissibility must be assessed independently; purification is not a substitute for passing that screen.
Should I always multiply my net dividend by the ratio?
No. Confirm whether the applicable instruction uses gross dividend, per-share income or another defined base.
Common pitfalls
| Common mistake | A better approach |
|---|---|
| Mixing market capitalisation and total assets | Use the exact required denominator and account scope. |
| Using a future rule for an earlier review | Keep methodology announcement and implementation dates separate. |
| Calling a ratio rounded to the boundary an automatic pass | Use unrounded data and the exact comparison rule. |
| Promising that an Islamic label removes investment risk | Analyse valuation, credit, liquidity and concentration independently. |
Your learner task
Create a dated worksheet for a hypothetical company with source-page references for business activity, debt, investments, income and other required tests. Show how a34% debt ratio behaves under the old and scheduled thresholds without issuing an actual status verdict. Calculate a conditional2% purification on a10,000 gross dividend, document the base, and list questions requiring qualified Shariah review.
Sources & verification
Use the linked documents to check the factual and regulatory context. Source dates and limitations are stated where relevant. Educational examples and analytical frameworks are not personalised recommendations.
- JISPL · Source knowledge curriculum ↗
Original course identity and subtopics; educational expansion corrects unsupported certainty.
- PSX · KMI30 methodology brochure ↗
Business and financial screening definitions; read with subsequent effective notices rather than treating the older brochure as the only current authority.
- PSX/N244 ·26February2026 ↗
Primary PDF verified: debt-screen37% to33% and rating/objection changes from November2026 recomposition; IPO provision effective from notice date.
- PSX · Guidelines for Shariah-compliant investing ↗
Official investor guidance; obtain current company-specific purification instructions and qualified clarification where needed.
- PSX · Islamic index information ↗
Distinguish index selection, broader Shariah status and current notices.
Editorial review: 22 October 2026