Aidilfitri is a season of celebration that often inspires a renewed focus on long-term goals and ethical stewardship.
For Muslim investors, this spiritual commitment extends to financial choices that must comply with Shariah principles.
Consequently, Shariah investments are prohibited from earning interest and investing in restricted activities – filtering out companies that are not suitable and shaping how portfolios are constructed.
In Singapore, a benchmark designed to support this approach is the FTSE ST Singapore Shariah Index (SGX: FSTAS).
The index is designed to track companies on the Singapore Stock Exchange (SGX: S68) that meet Islamic investment standards.
Understanding how this screening works can help investors see how faith-based investing is implemented into real equity markets.
The FTSE ST Singapore Shariah Index
Using the FTSE ST All-Share Index as its base universe, constituents are screened by a global network of expert Shariah scholars to evaluate whether they comply with the Shariah criteria for inclusion.
In order to qualify, these companies are required to pass two main tests:
- Business activity screening
- Financial ratio screening
The index is reviewed semi-annually, where companies can be removed or added depending on their fulfillment of the two criteria.
First Step – Business Activity Screening
The first step of the Shariah screening examines the company’s core business activities.
Because some industries do not meet Islamic ethical guidelines, they are excluded entirely.
Industries that are typically prohibited include:
- Conventional finance and insurance
- Gambling and casino operations
- Alcohol production and distribution
- Tobacco products
- Adult entertainment
- Pork-related businesses
- Weapons, arms, and defence manufacturing
Take Singapore’s major banks, namely DBS Group Holdings Ltd (SGX: D05) and Oversea-Chinese Banking Corporation Limited (SGX: O39), for example.
They are not included in the Shariah index because their business models depend heavily on interest-based lending.
In contrast, companies with main activities that are considered permissible may pass this round of screening.
For example, Singapore Telecommunications Limited (SGX: Z74).
Since its core business involves operating digital services and telecommunications infrastructure across Asia, it can pass the business activity screen.
The purpose of this round is to ensure that investments avoid activities that are considered haram (prohibited).
Second Step – Financial Ratios Screening
Even if the company’s industry is permissible, it will not automatically be included in the index.
The firm must also pass the financial ratio test which limits the exposure to interest-based financing.
During this round of screening, companies must meet specific financial thresholds.
- Gearing ratio must be below 33.33%, which limits the amount of interest-bearing debt a company can take on relative to its assets.
- Cash and interest-bearing securities must not exceed 33.33% of total assets. This ensures that a company is not holding large amounts of funds in interest-gearing instruments.
- Combined value of account receivables and cash must remain under 50%, so that a company’s value is mainly supported by real economic activity and not financial assets.
Hongkong Land Holdings Limited (SGX: H78), for example, invests and manages commercial and residential properties.
This property company may pass the industry screen because it generates income through physical assets.
However, the company’s leverage and financial structure must remain within the Shariah limits.
Based on Hongkong Land’s 2025 financial results, its gearing ratio stood at 12%.
The cash and interest-bearing securities to total assets ratio was around 6.4%, while the combined cash and account receivables to total assets ratio was approximately 7.3%.
Both ratios are comfortably below the Shariah screening thresholds, allowing the company to be included in the index.
Review Frequency
Typically, the FTSE ST Singapore Shariah Index is reviewed bi-annually in March and September.
If any of the existing constituents fail to meet the Shariah criteria, they will be removed and replaced with a new company.
These periodic reviews ensure that the index remains aligned with the Shariah principles.
Why Shariah Screening Can Appeal to Wider Audience
Although the FTSE ST Singapore Shariah Index is designed for Muslim investors, it can also appeal to a broader group of investors.
Since it excludes firms with excessive debt during the financial screening process, those selected tend to have lower leverage.
Additionally, the framework emphasises businesses that generate revenue from real economic activities rather than speculative ventures.
Constituents of the index will exhibit more conservative financial profiles.
This results in a portfolio that can sometimes resemble quality-focused investment strategies that not only prioritise financial discipline but also sustainable business models.
Things to Consider
Shariah compliance may provide an ethical screening framework, but just using it alone does not guarantee strong investment performance.
Investors need to remember that, it is still important to evaluate the underlying fundamentals before making any investment decisions.
Just like any other investment, such fundamentals include earnings growth, profitability, and the ability to generate free cash flow in the long run.
Assessing whether the firm possesses sustainable competitive advantages and if it operates in an industry with favourable long-term prospects is important.
Additionally, evaluating its current valuation relative to its peers will also provide useful insights.
Get Smart: Faith and Financial Discipline in Investing
The FTSE ST Singapore Shariah Index applies both business activity and financial ratio filters to sift out companies that comply with Islamic investment principles.
In doing so, the index provides a framework for investors who wish to align their portfolios with Shariah guidelines.
At the same time, it may also appeal to investors seeking financially disciplined businesses, because these criteria often favour companies with lower leverage and stronger balance sheets.
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Disclaimer: Charlyn T. owns shares in DBS and OCBC.
