By Dr Mohd Zaidi Md Zabri
In recent years, the importance of zakat reporting has become more prominent among Malaysian companies.
This increased focus stems from the fundamental nature of zakat itself as it is a fundamental pillar of Islam, which requires Muslims to give a specific portion of their wealth to those in need. It is typically 2.5% of an individual’s or business’s accumulated wealth and assets that have been held for a year.
This practice embodies social responsibility and helps reduce inequality by providing financial assistance to the less fortunate. To promote this practice, Bursa Malaysia introduced the PRIBUMI Bursa Malaysia Zakat Index (Zakat Index), a financial tool that encourages ethical investment aligned with Islamic values.
What sets the Zakat Index apart is its status as the first of its kind in the world. This innovation not only underscores Malaysia’s leadership in Islamic finance but also positions the country as a hub for financial innovation.
The Zakat Index is a market capitalization-weighted index that tracks the performance of the largest 200 companies on the Main Market of Bursa Malaysia.
Launched on July 15, 2024, the Zakat Index helps investors who want to align their investments with Islamic ethical principles, particularly those that contribute to Corporate Zakat (Zakat Perniagaan).
Not only are the companies selected based on their Zakat contributions, but they are also chosen based on their size and profitability. This thorough selection process ensures that the index includes only the most financially stable and ethically compliant companies, blending financial strength and social responsibility.
As of June 2024, the Zakat Index includes 27 companies from various sectors, including financial services, healthcare, telecommunications, and utilities. To maintain the ethical standards of the index, companies involved in activities such as gambling, liquor production, pork-related activities, and tobacco are excluded.
To understand the broader impact of the Zakat Index, it is important to know how the index is created and maintained.
The index is reviewed twice a year, in June and December, to ensure that the companies included still meet the criteria. During these reviews, companies are assessed based on their market size and financial health, ensuring that only the top 200 firms that meet the requirements remain part of the index. This regular review process keeps the index relevant and ensures it consistently reflects the most financially and ethically sound companies.
One key aspect of the Zakat Index is the profitability screening, which involves evaluating companies based on their net income over the past three years. This ensures that only those with a consistent track record of profitability are included.
The Zakat Index is more than just a financial tool; it represents a shift towards integrating ethical considerations into investment decisions. This sets a precedent for the importance of ethical investing in driving positive social impact.
Moreover, the index has shown strong performance, performing better than traditional benchmarks like the FBM KLCI.
A case in point, over the past 12 months, the Zakat Index has delivered a cumulative return of 18.83%, compared to the FBM KLCI’s 15.50%. This performance demonstrates that ethical investments can yield competitive returns, challenging the notion that socially responsible investing compromises financial performance.
The Zakat Index’s sectoral composition, with significant representation from financial services, utilities, and telecommunications, ensures a comprehensive benchmark for ethical investing.
The success of the Zakat Index is a testament to the viability of ethical investing. It shows that companies can achieve financial success while adhering to high ethical standards.
This is particularly relevant today, as there is growing interest in investments that consider environmental, social, and governance (ESG) criteria. The Zakat Index offers a concrete example of how ethical principles can be integrated into investment strategies to achieve both financial and social objectives.
As the demand for ethical investment options grows, the Zakat Index stands out as a pioneering tool that meets this need. Investors are increasingly seeking opportunities that align with their values, and the Zakat Index offers a credible and transparent benchmark.
The success of the index can inspire more companies to improve their ethical standards, contributing to overall market growth and sustainability. In addition, the Zakat Index also reinforces Malaysia’s position as a global leader in Islamic finance.
By integrating Zakat principles into a mainstream financial instrument, the index promotes the values of Islamic finance on a global stage, attracting both local and international investors committed to ethical investing.
The future prospects for the Zakat Index are promising. As awareness of ethical investing continues to grow, more investors are likely to seek out indices like the Zakat Index that align with their values.
This could lead to increased demand for ethical investment products and further growth of the market. Additionally, as more companies recognize the importance of ethical practices, we may see an increase in the number of firms eligible for inclusion in the Zakat Index, further enhancing its diversity and robustness.
In conclusion, the Zakat Index represents a significant advancement in ethical investing. By focusing on profitability and Corporate Zakat contributions, the Zakat Index provides a robust and socially responsible benchmark for investors in Malaysia and beyond.
As ethical considerations continue to gain prominence in the financial world, the Zakat Index is poised to play a pivotal role in shaping the future of sustainable investing. The index not only offers a viable investment option for those seeking to align their financial goals with their ethical values but also sets a standard for other markets to follow. By promoting corporate accountability and social responsibility, the Zakat Index is helping to drive a new era of ethical investing.
The author is a Senior Lecturer at the Department of Finance, Faculty of Business and Economics, Universiti Malaya. He is also the Secretary for International Council of Islamic Finance Educators (ICIFE).
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