DSE has four Shari’ah-compliant equities: Twiga, Swissport, TOL and Vodacom

EQUITIES represent a viable investment option for Islamic investors but require thorough screening to ensure Shariah compliance.

Shariah-compliant stocks are carefully assessed to confirm that the companies avoid prohibited activities in both their core operations and financial practices.

Although different schools of thought vary in their thresholds, the primary focus of screening methodologies for Shariah compliance lies in two key areas; (i) Source of revenue and (ii) Capital structure. Source of Revenue: Most scholars agree that a company is considered compliant if more than 95 per cent of its revenue is derived from halal activities.

A tolerance of up to 5.0 per cent from haram activities is accepted, provided that this income is purified through charitable donations.

Haram activities include, but are not limited to gambling, production and distribution of alcohol and tobacco products, conventional banking and insurance services, pornography and production and distribution of pork related products.

The Securities Commission of Malaysia (SCM) imposes an additional 20 per cent revenue cap on companies involved in certain non-core activities, such as hotel and resort operations, stockbroking, share trading and rental income derived from non-compliant sources. Capital Structure: Capital structure screening evaluates a company’s exposure to interest-bearing debt, cash and receivables.

Different schools of thought establish varying thresholds, referencing either the company’s total assets or its market capitalisation.

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) caps both interest-bearing debt and interest-earning securities at 30 per cent of market capitalisation. Additionally, the sum of cash and receivables must not exceed 70 per cent of total assets.

The Dow Jones Islamic Market Index limits all three variables—interest-bearing debt, cash and receivables—to 33 per cent of market capitalisation.

The Securities Commission of Malaysia (SCM) and the MSCI Global Islamic Indices set the threshold for these variables at 33 per cent of total assets. Notably, the SCM excludes Shariahcompliant deposits, sukuk and other halal assets from these calculations.

The DSE has arguably four Shari’ah compliant equity listings depending with the used screening methodology. The equities include Twiga Cement, Swissport Tanzania, TOL Gases and Vodacom Tanzania.

The combined value of the mentioned stocks is 2.44tri/-, which approximately 20 per cent of the domestic market capitalisation, while the total free float of the companies amounts to 665bn/- as of the end of October 2024.

Twiga Cement (TPCC) is Tanzania’s leading cement manufacturer. In 2023, the company reported a profit of 99.18bn/-, equivalent to an EPS of 551/- per share. Although TPCC carries no debt, it maintains lease liabilities and other obligations that generate interest.

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The company’s total assets stood at 454.74bn/- as of March 2024, while its market capitalisation reached 647.72bn/- by the end of September 2024.

Cement manufacturing qualifies as a Shariah-compliant business.

Additionally, TPCC earns less than 1.0 per cent of its revenue from interest income, satisfying the business screening criteria. However, compliance with financial screening depends on the methodology applied: TPCC qualifies as compliant through the AAOIFI methodology as its interest-bearing liabilities are below 1.0 per cent of market capitalisation, and cash and receivables constitute only 45 per cent of total assets, well within the 70 per cent threshold.

However, the company fails the MSCI Global Islamic Indices methodology since the 45 per cent ratio of cash and receivables to total assets exceeds the 33.33 per cent limit.

Additionally, its cash alone, at 33.02 per cent of total assets, precisely meets the threshold of several methodologies, including SCM and the FTSE Shariah Global Equity Index. Swissport Tanzania (SWISS) a leading ground and cargo handling service provider and operates at two major airports—Julius Nyerere International Airport (JNIA) and Kilimanjaro International Airport (KIA).

The company controls 90 per cent of the ground handling and 97 per cent of the cargo handling market in Tanzania. In 2023, it generated 40.5bn/- in revenue and achieved a net profit of 5.5bn/-, equivalent to 102/70 per share, paying a dividend of 51/33 per share. Swissport’s revenue streams include ground and cargo handling services, as well as a lounge business at KIA.

The lounge, which involves alcohol sales, contributes less than 4.0 per cent of total revenue, allowing the company to meet business screening requirements.

Financially, Swissport holds no interest-bearing debt but does have lease liabilities that generate interest. These liabilities amount to 5.0 per cent of total assets, within acceptable limits.

The sum of cash and receivables equals 31.5 per cent of total assets and 32.8 per cent of market capitalisation, meeting the thresholds of all recognised screening methodologies.

TOL Gases (TOL) is the region’s largest manufacturer and distributor of industrial and medical gases and was the first company to be listed on DSE.

More than 85 per cent of its shares remain owned by Tanzanians, 26 years after privatisation. In 2023, the company reported a net profit of 2.71bn/-, reflecting a 22 per cent decline due to reduced accessory sales.

As of June 2024, TOL’s total assets stood at 52.74bn/-, with 76 per cent invested in property, plant and equipment. Cash and receivables accounted for 12.7 per cent of total assets and 17.9 per cent of market capitalisation. TOL’s compliance with screening methodologies varies.

TOL qualifies as compliant through AAOIFI, SCM and MSCI methodologies as its interest-bearing liabilities amount to 29.8 per cent of total assets and 42 per cent of market capitalisation, within these methodologies’ limits

However, TOL fails the Dow Jones and Russell Jadwa Shariah Indices methodologies which limit interest-bearing debt to 33 per cent of market capitalisation. Vodacom Tanzania (Voda) is the country’s leading telecommunications company, holding approximately 30 per cent market share.

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The company generates annual revenue exceeding 1.0tri/-, with M-Pesa contributing over one-third of this revenue. However, 5.0 per cent of M-Pesa’s revenue comes from interest income, constituting 2.0 per cent of Vodacom’s total revenue. Other income streams include voice, mobile data, messaging and fixed services.

As of June 2024, Vodacom’s total assets amounted to 2.38tri/-, with M-Pesa deposits accounting for a third of these assets. The company does not carry any interest-bearing debt, though it has lease liabilities that accrue interest. These liabilities represent 15 per cent of total assets, falling within the thresholds of all screening methodologies.

However, Vodacom’s cash holdings and receivables—including M-Pesa deposits—amount to 45.8 per cent of total assets, exceeding the 33 per cent limit of certain methodologies, such as the MSCI Global Islamic Indices. These case studies demonstrate the complexity of ensuring Shariah compliance for equity investments.

While some companies may meet the criteria of one methodology, they might fall short under others. Islamic investors must carefully evaluate each company based on their preferred screening framework and the underlying principles.

This process involves personal judgment, reinforcing the importance of aligning investments with individual beliefs and objectives.