Hejaz Asset Management

Sharia Screening Methodology for Investment Products

This document has been prepared by Hejaz Asset Management (HAM) to help investors understand the screening criteria and methodology applied to HAM’s investment options. 

All investments whether held directly by an investment vehicle controlled by HAM, or via an externally managed investment fund or Exchange Traded Fund (ETF) must meet the screening criteria set out in this document. It should be noted that screens and permissible levels of holdings may change at any time and largely depends on interpretation of Sharia Law. As such the information in this document is up-to-date at 30/09/2025, however it is subject to change from time to time. If a change is made to information that is not materially adverse, this document will be updated and published on the Hejaz website: https://www.hejazfs.com.au/sharia-screening-methodology/. Any significant changes to the screening methodology will be separately notified to investors. 

Introduction

HAM applies screening processes to its investment products in line with Sharia principles and parameters as guided by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). 

AAOIFI is an international, non-profit standard-setting body established in 1991 and headquartered in Bahrain. It develops Sharia, accounting, auditing, governance, and ethics standards for Islamic financial institutions, and its Sharia standards are widely adopted as benchmarks across the global Islamic finance industry. For further information on AAOIFI - https://aaoifi.com/?lang=en  

The AAOIFI Standards serve as a foundational framework for the Investment Manager in constructing the investment strategy and guiding investment decisions. The AAOIFI Standards are globally recognised as the benchmark for Sharia-compliant finance, but they are principles-based in nature, requiring interpretation by qualified scholars who sit on Sharia Supervisory Boards. While the underlying standards remain consistent, their practical application may vary depending on the regulatory environment, market norms, and the interpretive philosophy of the Sharia Supervisory Board involved.  

To support the implementation of the AAOIFI Standards, HAM utilises an independent proprietary and/or third-party technology platforms and data tools to screen and monitor prospective and existing investments against applicable AAOIFI Sharia Standards. Where such a solution is used, the third party provider/platform has been approved and endorsed for Sharia-compliance finance by Sharia scholars and advisors globally.

Governance

Sharia compliance is overseen by an external Sharia Supervisory Board, Global Islamic Financial Services (GIFS):  https://www.gifsrv.com/. GIFS conducts semi-annual Sharia compliance audits, reviewing the investment selection process, portfolio holdings, and marketing collateral to monitor adherence to this Sharia screening methodology. GIFS is appointed and retained under a contractual arrangement by the Investment Manager to provide Sharia governance advice and ensure the application of the screening processes provided by AAOIFI. In addition to this GIFS provides half yearly audit assurance that HAM’s investments are complying with Sharia principles as outlined by the AAOIFI guidelines. 

This document outlines the way in which HAM apply the Sharia screening methodology to: 

1. Listed Equities
2. Listed Real Estate Investment Trusts (REITs)
3. Fixed Income Investments

1. Listed Equities

1.1 Business Activity Screening

Any investment in a listed entity is subject to a business activity screening to determine whether the entity derives income from any of the Islamically impermissible activities listed below. Screening is applied on a consolidated basis, including subsidiaries. A look-through assessment is applied to the underlying assets and revenue sources of investee entities, including where they form part of a larger conglomerate.

Unless the exposure to such activities is determined to be incidental, an investment in the entity will be excluded. Where the entity’s exposure is regarded as incidental, the entity will be assessed in accordance with the Financial Ratio Screening process in section 1.2.

Where exposure to such activities is incidental, the company may proceed to Financial Ratio Screening (section 1.2) provided the exposure is within those thresholds. Screening is applied on a consolidated basis, including subsidiaries. A look-through assessment is applied to the underlying assets and revenue sources of investee companies, including where they form part of a larger conglomerate.

• Alcoholic beverages (production, retail, bars, pubs)
• Tobacco (manufacturing and retail, including vapes and vape like activities)
• Pork and pork-related products
• Conventional financial services (commercial banks involved in retail banking, corporate lending, investment banking; companies involved in mortgage and mortgage related services; providers of financial services, including insurance, capital markets and specialized finance; gold and silver hedging providers, credit agencies; stock exchanges; hedge funds; specialty boutiques; consumer finance services, including personal credit, credit cards, lease financing, travel-related money services and pawn shops; financial institutions primarily engaged in investment management, related custody and securities fee based services; companies operating mutual funds, closed-end funds and unit investment trusts; financial institutions primarily engaged in investment banking and brokerage services involving conventional securities and derivative instruments, including equity and debt underwriting, mergers and acquisitions; securities lending and advisory services institutions; and insurance and reinsurance brokerage firms, including companies providing property, casualty, life, disability, indemnity or health insurance (including private and supplemental/ancillary policies).
• Defence and weapons (The manufacture, sale, or distribution of weapons, military equipment, or defence systems, production of weapons of mass destruction, including nuclear, chemical, and biological weapons, aerospace or technology companies where revenue is derived from supplying military or weapons-related products or services.
• Gambling and casinos, including lottery and betting services
• Music production and distribution, radio broadcasting
• Cinema and television production/distribution (businesses engaged in the production, distribution and screening of movies and television shows, owners and operators of television broadcasting systems and providers of cable or satellite television services involved in the introduction of cinema and entertainment programs not including kids, cultural and sports production)
• Adult entertainment (businesses whose primary purpose is the production, distribution, marketing, hosting, or sale of sexually explicit content or services and other age-restricted sexual material)
• Embryonic stem cell activities (e.g., businesses, clinics or hospitals involved in abortion, surrogacy, or donation-based fertility treatments)

1.2 Financial Ratio Screening

Listed Entities that pass the Business Activity Screening (section 1.1) are then assessed against the following financial thresholds:

• Income (gross) from Islamically impermissible sources must not exceed 5% of total revenue.
• Cash and interest-bearing investments must not exceed 30% of the 12-month average market capitalization.
• Interest-bearing debt (gross) must not exceed 30% of the 12-month average market capitalization.
• Investments in fixed-income preferred shares are not permitted.

1.3 Impermissible investment instruments and approaches

In addition to sections 1.1–1.2, the Fund does not invest in or use the following instruments or approaches. 

• Short selling
• Derivatives other than currency hedging forwards, swaps and Sharia compliant options. Sharia-compliant options offer option-like protection through sale-based or promise-based mechanisms, tied to a real asset and a bona fide hedging purpose—not as stand-alone, tradable derivatives.

2. Listed Real Estate Investment Trusts (REITs)

2.1 Business Activity Screening

REITs are excluded if they derive material rental income, as stipulated in section 2.2 of this document, from tenants engaged in the following Islamically impermissible activities: 

• Alcoholic beverages (production, retail, bars, pubs)
• Tobacco (manufacturing and retail, including vapes and vape like activities)
• Pork and pork-related products
• Conventional financial services (commercial banks involved in retail banking, corporate lending, investment banking; companies involved in mortgage and mortgage related services; providers of financial services, including insurance, capital markets and specialized finance; gold and silver hedging providers, credit agencies; stock exchanges; hedge funds; specialty boutiques; consumer finance services, including personal credit, credit cards, lease financing, travel-related money services and pawn shops; financial institutions primarily engaged in investment management, related custody and securities fee based services; companies operating mutual funds, closed-end funds and unit investment trusts; financial institutions primarily engaged in investment banking and brokerage services involving conventional securities and derivative instruments, including equity and debt underwriting, mergers and acquisitions; securities lending and advisory services institutions; and insurance and reinsurance brokerage firms, including companies providing property, casualty, life, disability, indemnity or health insurance (including private and supplemental/ancillary policies)
• Defence and weapons (The manufacture, sale, or distribution of weapons, military equipment, or defence systems, production of weapons of mass destruction, including nuclear, chemical, and biological weapons, aerospace or technology companies where revenue is derived from supplying military or weapons-related products or services.
• Gambling and casinos, including lottery and betting services
• Music production and distribution, radio broadcasting
• Cinema and television production/distribution (businesses engaged in the production, distribution and screening of movies and television shows, owners and operators of television broadcasting systems and providers of cable or satellite television services involved in the introduction of cinema and entertainment programs not including kids, cultural and sports production. 
• Adult entertainment (businesses whose primary purpose is the production, distribution, marketing, hosting, or sale of sexually explicit content or services and other age-restricted sexual material)
• Embryonic stem cell activities (e.g., businesses, clinics or hospitals involved in abortion, surrogacy, or donation-based fertility treatments)

2.2 Income materiality thresholds:

• Rental income (gross) from Islamically impermissible tenants (as outlined in section 2.1 of this document) must not exceed 5% of total REIT income; or
• Interest-bearing income (gross) must not exceed 5% of net income.

2.3 Financial Ratio Screening

REITs are also excluded in the following circumstances:

• Interest-bearing debt must not exceed 30% of the REIT’s asset market value (If market value is not available, book value is used). Note: REITs can be illiquid. If the 30% threshold is exceeded, divestment may be delayed, and the Fund may temporarily hold assets that do not meet the screening criteria.
• Investments in fixed-income preferred shares are not permitted.

2.4 Impermissible investment instruments and approaches

In addition to sections 2.1–2.3, the Fund does not invest in or use the following instruments or approaches. 

• Short selling
• Derivatives other than currency hedging forwards, swaps and Sharia compliant options. Sharia-compliant options offer option-like protection through sale-based or promise-based mechanisms, tied to a real asset and a bona fide hedging purpose—not as stand-alone, tradable derivatives. 

3. Fixed Income

3.1 Activity and Instrument Exclusions

Investments are excluded in businesses if they derive material income, as stipulated in section 3.2 of this document, by engaging in the following Islamically impermissible activities: 

• Alcoholic beverages (production, retail, bars, pubs)
• Tobacco (manufacturing and retail, including vapes and vape like activities)
• Pork and pork-related products
• Conventional financial services (commercial banks involved in retail banking, corporate lending, investment banking; companies involved in mortgage and mortgage related services; providers of financial services, including insurance, capital markets and specialized finance; gold and silver hedging providers, credit agencies; stock exchanges; specialty boutiques; consumer finance services, including personal credit, credit cards, lease financing, travel-related money services and pawn shops; financial institutions primarily engaged in investment management, related custody and securities fee based services; companies operating mutual funds, closed-end funds and unit investment trusts; financial institutions primarily engaged in investment banking and brokerage services in conventional or conventional derivative instruments, including equity and debt underwriting, mergers and acquisitions; securities lending and advisory services institutions; and insurance and reinsurance brokerage firms, including companies providing property, casualty, life disability, indemnity or supplemental health insurance)
• Defence and weapons (The manufacture, sale, or distribution of weapons, military equipment, or defence systems, production of weapons of mass destruction, including nuclear, chemical, and biological weapons, aerospace or technology companies where revenue is derived from supplying military or weapons-related products or services.
• Gambling and casinos, including lottery and betting services
• Music production and distribution, radio broadcasting
• Cinema and television production/distribution (businesses engaged in the production, distribution and screening of movies and television shows, owners and operators of television broadcasting systems and providers of cable or satellite television services involved in the introduction of non-compliant cinema and entertainment programs not including kids, cultural and sports production. 
• Adult entertainment (businesses whose primary purpose is the production, distribution, marketing, hosting, or sale of sexually explicit content or services and other age-restricted sexual material)
• Embryonic stem cell activities (e.g., businesses, clinics or hospitals involved in abortion, surrogacy, or donation-based fertility treatments)

3.2 Revenue Screening

This section sets the materiality thresholds that give effect to the business-activity exclusions in Section 3.1. 

• The primary source of revenue must be from Islamically permissible activities.
• To be considered compliant, at least 95% of revenue must be derived from Islamically permissible sources.

3.3 Contractual Requirements

• All financing structures must be based on Islamically permissible contracts such as:
  • Murabaha (cost plus sale)
  • Ijara (leasing)
  • Musharakah (partnership)
  • Mudarabah (profit-sharing)

These are defined in the glossary below.  

4. Non permissible investments

If an investment is found to be non-Sharia compliant, the Investment Manager is required to use all reasonable endeavours to exit that investment within 90 days from the date of identification of the non-compliance, but this may not always be achievable. 

4.1 Breach and Purification Process

Where a Sharia screen is breached, the following process will apply: 

1. Identification
   • The non-compliance is identified through either internal monitoring, third-party screening (i.e. screening/data-provider platforms used by the Investment Manager), or the semi-annual Sharia audit.
   • The Investment Manager records the breach in the Fund’s breach register and reports it to the Responsible Entity.
2. Assessment
   • The Investment Manager assesses the nature and materiality of the breach, including the amount of impermissible income generated and how soon the investment can be exited.
3. Exit
   • The Investment Manager initiates divestment of the non-compliant security or asset.
   • The Investment Manager is required to use all reasonable endeavours to exit that investment within 90 days from the date of identification of the non-compliance, but this may not always be achievable.

4. Purification
   • Any income derived from impermissible activities during the holding period is calculated.
   • Such amounts are earmarked for purification and cannot be retained for the benefit of investors.
   • The relevant income is deducted from the Investment Management Fee and then donated to charitable causes that are aligned with Sharia principles.

5. Reporting
   • The Investment Manager documents the breach, exit, and purification steps.
   • A summary of breaches and purifications undertaken is provided to the Sharia Supervisory Board and the Responsible Entity as required.

5. Glossary of Islamic Finance Terms 

Murabaha (Cost-Plus Sale)

A financing structure where the financier purchases an asset and sells it to the client at an agreed price that includes a disclosed profit margin. Payment may be made immediately or on a deferred basis. The profit margin is fixed and agreed in advance. 

Ijara (Leasing) 

A contract where the financier acquires an asset and leases it to the client for an agreed rental payment over a specified period. Ownership of the asset remains with the financier during the lease term. In some structures, ownership may transfer to the client at the end of the lease. 

Musharakah (Partnership) 

An arrangement where two or more parties contribute capital to a joint enterprise and share profits according to a pre-agreed ratio. Losses are shared in proportion to each party’s capital contribution. 

Mudarabah (Profit-Sharing) 

A partnership where one party provides the capital (the investor) and the other party provides expertise and management (the entrepreneur or manager). Profits are shared according to an agreed ratio, while financial losses are borne solely by the investor, provided the manager has acted in good faith.