ISLAMABAD – The Securities and Exchange Commission of Pakistan (SECP) has approved revisions to the Shariah screening criteria and methodology for the PSX-KMI All Share Index. The revised criteria aim to align the index with international standards and enhance investor confidence in Shariah-compliant capital market instruments.
This decision comes after a high-level review meeting of the Post-2027 Financial Sector Strategy, chaired by the Finance Secretary. The meeting emphasized the importance of accelerating initiatives in line with the Federal Shariat Court’s ruling, particularly those aimed at transitioning Pakistan’s financial system to a Riba-free framework by 2027. The review focused on the progress of the ongoing transformation and outlined the next steps for this ambitious goal.
The SECP has been directed to prepare a comprehensive plan for transforming SECP-regulated sectors into Shariah-compliant models. This plan is part of the SECP’s broader Strategic Action Plan for 2024-2026, which seeks to enable Islamic finance across all regulated sectors in Pakistan. These changes align with the Federal Shariat Court’s ruling and the 26th Constitutional Amendment (Article 38(1)(f)), which mandates the phased elimination of Riba from the financial system by December 2027.
The revisions to the Shariah screening framework are expected to support the development of Pakistan’s Islamic capital market, help investors make informed decisions, and encourage listed companies to adopt Shariah-compliant capital structures. Among the key changes is a reduction in the non-compliant debt-to-total assets ratio from 37% to 33%, reflecting the growing availability of Shariah-compliant financing options and aligning Pakistan’s market with global practices. Additionally, a new Shariah compliance rating mechanism has been introduced, with companies now being assigned three, four, or five-star ratings based on their level of compliance. This system aims to improve transparency and provide investors with clear information on compliance.
To ensure transparency, the SECP has mandated that the list of Shariah-compliant companies for the PSX-KMI All Share Index will be published with a five-working-day window for objections. During this period, stakeholders can submit evidence-based requests for revisions. A new mechanism has also been introduced to allow the interim inclusion of newly listed companies, provided they pass the required screening and approval process by the KMI Index Committee.
In addition, the SECP has advised the Pakistan Stock Exchange (PSX) to consider further enhancements. These include reducing the non-compliant investments-to-total assets ratio from 33% to 30%, updating the index quarterly, and automating the data collection process to increase efficiency and accuracy.
As per the Shariah Governance Regulations of 2023, the screening methodologies for Shariah-compliant securities must receive SECP approval. In this context, the PSX, in collaboration with Al-Meezan Investment Management Limited and Meezan Bank Limited, jointly submitted the updated methodology for the PSX-KMI All Share Index, which was approved by the SECP in May 2024.