Pakistan regulator revises Shariah screening rules for PSX-KMI index

Pakistan’s Securities and Exchange Commission has approved revisions to the Shariah screening criteria and methodology for the PSX-KMI All Share Index, as part of broader efforts to align capital markets with Islamic finance standards and strengthen investor confidence.

The regulator said the revisions bring the index framework in line with international benchmarks and are intended to bolster confidence in Shariah-compliant capital market instruments.

The decision follows a high-level review meeting of the Committee on the Post-2027 Financial Sector Strategy, chaired by the finance secretary, which emphasized accelerating implementation of initiatives in line with a Federal Shariat Court ruling mandating the phased elimination of riba, or interest, from the financial system by December 2027.

The meeting reviewed progress on the ongoing transformation and next steps toward transitioning Pakistan’s financial system to a Riba-free framework. The Securities and Exchange Commission of Pakistan was directed to prepare a comprehensive plan for converting SECP-regulated sectors into Shariah-compliant models and to develop a post-2027 strategy to sustain the transition.

Part of broader reform push

The enhancement of Islamic indices forms part of the SECP’s Strategic Action Plan 2024-26 to enable Islamic finance across all regulated sectors.

The measures are linked to implementation of the Federal Shariat Court’s ruling and the 26th Constitutional Amendment relating to Article 38(1)(f), which require elimination of riba in a phased manner by the end of 2027.

The SECP said the revised framework is expected to support development of the Islamic capital market, facilitate informed investment decisions and encourage listed companies to adopt Shariah-compliant capital structures.

Revised screening criteria

Under the updated criteria, the non-compliant debt-to-total assets ratio has been reduced to 33% from 37%, reflecting what the regulator described as increased availability of Shariah-compliant financing and closer alignment with global practices.

A Shariah compliance rating mechanism has also been introduced, assigning three-, four- or five-star ratings to qualifying companies to enhance transparency and allow investors to assess compliance levels.

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

The SECP further advised the Pakistan Stock Exchange 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. The Pakistan Stock Exchange, Al-Meezan Investment Management Limited and Meezan Bank Limited jointly submitted the methodology for the PSX-KMI All Share Index, which the SECP approved in May 2024.