KMI 30 Index

The KMI 30 Index, formally the Karachi Meezan Index 30, is a Shariah-compliant stock market index that tracks the performance of the 30 most liquid companies listed on the Pakistan Stock Exchange (PSX) screened for adherence to Islamic financial principles.^[1][2]
Established with a base value of 15,000 as of June 30, 2008, the index employs a free-float adjusted market capitalization weighting methodology to reflect the tradable portion of constituents' shares, with individual company weights capped at 12% and sector weights at 15% to promote diversification and mitigate concentration risk.^[2]
Constituents are selected semi-annually based on a combined ranking of free-float capitalization (50% weight) and trading liquidity via impact cost (50% weight), while undergoing rigorous Shariah compliance filters, including limits on interest-bearing debt below 37% of market value and non-permissible income under 5% of total revenue.^[2]
As a key benchmark for halal equity investments in Pakistan, it supports strategic asset allocation, performance gauging, and investor confidence in Islamic finance, with periodic adjustments for corporate actions like dividends and share issuances to maintain continuity.^[2][1]

History

Launch and Early Development

The KMI 30 Index was launched on September 1, 2008, by the Karachi Stock Exchange (KSE), now part of the Pakistan Stock Exchange (PSX), in collaboration with Al Meezan Investment Management Limited.^[3] This date marked the first day of Ramadan 1429 Hijri, aligning the index's introduction with a significant period in the Islamic calendar to emphasize its Shariah-compliant focus.^[4] The index was established as the first co-branded Islamic benchmark on the exchange, tracking the 30 most liquid Shariah-compliant equities to meet growing demand for verifiable Islamic investment options in Pakistan.^[1] The base period for the index was set as June 30, 2008, with calculations simulated from a base value of 15,000 to reflect historical performance prior to launch.^[2] Early development prioritized free-float adjusted market capitalization weighting, capping individual company influence at 12% to ensure diversification and minimize concentration risk.^[2] Constituents were selected based on liquidity metrics, such as average daily traded value over six months, combined with Shariah screening by an independent board to exclude non-compliant sectors like alcohol, tobacco, and interest-based finance.^[1] This initiative addressed a gap in Pakistan's capital markets, where conventional indices like the KSE 100 overlooked Islamic principles adhered to by a substantial portion of investors.^[1] The partnership between KSE and Al Meezan facilitated rigorous compliance verification, drawing on Al Meezan's expertise in Islamic asset management to build credibility and attract institutional funds focused on ethical investing.^[1] Initial constituents represented key sectors such as energy, banking, and cement, reflecting the exchange's liquid Shariah-eligible listings at the time.^[1]

Institutional Changes and Revisions

The KMI 30 Index, originally launched as the KSE-Meezan Index by the Karachi Stock Exchange in collaboration with Al Meezan Investments on September 2, 2008, with a base value of 15,000 as of June 30, 2008, operates under a structured institutional framework for ongoing revisions managed by the Pakistan Stock Exchange (PSX). Following the 2016 consolidation of Pakistan's stock exchanges into PSX, the index's governance shifted to PSX's Broad Index Policy Framework, while retaining Al Meezan Investments for Shariah compliance verification by its research analysts. This partnership ensures periodic assessments align with both market liquidity and Islamic principles, without documented fundamental shifts in the core institutional oversight since inception.^[5][2] Revisions occur through semi-annual re-compositions, selecting the top 30 Shariah-compliant companies based on a composite score of 50% free-float market capitalization and 50% average impact cost over the prior six months. Review cut-off dates are March 31 and September 30, with announcements on May 15 and November 15, respectively, and effective implementation typically within days thereafter to minimize disruption. Free-float shares are updated semiannually during these cycles, using data submitted by listed companies, while corporate actions—such as cash dividends, bonus issues, or rights offerings—trigger immediate divisor adjustments to preserve index continuity and prevent artificial distortions. Weighting employs free-float adjusted market capitalization, with a 12% cap per constituent to enforce diversification, redistributing any excess proportionally among remaining components.^[2] These institutional processes have enabled the index to adapt to market evolutions, such as fluctuating liquidity rankings and compliance statuses, resulting in routine additions and removals. For example, the December 2024 re-composition, effective December 30, 2024, incorporated six new entrants—including Oil and Gas Development Company (OGDC), Sazgar Engineering Works (SAZEW), and Pakistan Aluminium Mills (PAEL)—while excluding prior constituents based on refreshed eligibility metrics, reflecting enhanced Shariah screening and trading volume data. No evidence indicates alterations to the 12% weight cap or composite selection formula since launch, underscoring methodological stability amid routine operational refinements.^[6][7]

Methodology and Calculation

Shariah Compliance Screening Process

The Shariah compliance screening for the KMI 30 Index is conducted by Al Meezan Investment Management Limited, which provides the list of eligible Shariah-compliant securities to the Pakistan Stock Exchange (PSX) for index composition.^[2][8] This process applies six specific filters to ensure adherence to Islamic principles, drawing on standards approved by the Shariah Supervisory Board of Meezan Bank Limited (MBL).^[9] Screening occurs semi-annually on May 15 and November 15, using the most recent audited financial statements, with any non-compliance leading to exclusion from the index pool.^[2][8] The qualitative filter requires the company's core business to be halal, excluding activities such as conventional banking, insurance, alcohol production, tobacco, pork-related products, gambling, pornography, or arms manufacturing that violate Shariah prohibitions on riba (interest), gharar (excessive uncertainty), and haram (forbidden) elements.^[2][9] Quantitative filters assess financial ratios: interest-bearing debt (including zero-coupon bonds and preference shares) must not exceed 37% of total assets; non-compliant investments must be less than 33% of total assets; and non-compliant income (e.g., from interest or prohibited sources) must constitute under 5% of total revenue.^[2][9] Additionally, illiquid assets (those not tradable at par value, such as real estate or commodities) must exceed 25% of total assets to ensure sufficient tangible backing, and net liquid assets per share must meet or exceed the market price per share.^[2][8] Any impermissible income identified (below the 5% threshold) requires purification, where investors donate the pro-rata share of such income received as dividends to approved charities, expressing formal disapproval of non-compliant activities through annual general meetings or correspondence.^[9] Companies passing these screens form the eligible universe, from which the top 30 are selected for the index based on liquidity and free-float market capitalization criteria.^[2] This methodology aligns with AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) guidelines while incorporating PSX-specific adaptations for local market conditions.^[9]

Selection and Eligibility Criteria

The KMI 30 Index selects its constituents from companies listed on the Pakistan Stock Exchange (PSX) that satisfy both Shariah compliance filters and technical eligibility requirements. Shariah screening, conducted by Al Meezan Investments analysts using the company's latest audited financial statements, excludes firms whose core business violates Islamic principles, such as those involved in alcohol production, pork-related products, gambling, pornography, conventional banking, or interest-based financial services. Additionally, quantitative financial thresholds must be met: interest-bearing debt must constitute less than 37% of total assets; non-compliant investments (e.g., interest-bearing securities) less than 33% of total assets; non-compliant income (e.g., from interest or impermissible sources) less than 5% of total revenue; illiquid assets must exceed 25% of total assets; and the market price per share must be at least equal to the net liquid assets per share.^[2][8] Technical eligibility further filters Shariah-compliant companies to ensure market viability and liquidity. Eligible securities must be held in the Central Depository System, with the company listed on the PSX for at least two months and operational for at least one year. The stock must have traded on at least 75% of total trading days in the review period, maintain a minimum free-float of 5% of total outstanding shares, and not be on the defaulters' counter or suspended from trading in the preceding six months. Mutual funds and other non-equity instruments are ineligible.^[2][8] From the pool of companies passing both Shariah and technical screens, up to 30 are selected semi-annually (as of May 15 and November 15, using data from March 31 and September 30, respectively) by ranking based on a composite score: 50% weighted to free-float market capitalization and 50% to impact cost, a liquidity metric measuring the cost of executing large trades relative to quoted prices (lower impact cost indicating higher liquidity). The top-ranked 30 companies form the index, with individual constituent weights capped at 12% of the total free-float market capitalization to prevent over-concentration. Corporate actions such as dividends, bonus shares, or rights issues trigger adjustments to maintain continuity.^[2][8]

Index Calculation and Weighting Rules

The KMI 30 Index is computed using a free-float market capitalization-weighted methodology, where the index value reflects the aggregate free-float market capitalization of its 30 constituent companies divided by a divisor.^[2] The free-float adjustment excludes shares held by promoters, directors, associated companies, government entities, and other non-publicly available holdings, ensuring only liquid shares available for trading influence the weighting.^[2] Free-float shares for any constituent are capped at the lesser of estimated free float or the book-entry shares recorded in the Central Depository Company of Pakistan Limited (CDC).^[2] Individual constituent weights are limited to a maximum of 12% of the total index free-float market capitalization as of the composition day, with any excess redistributed proportionally among the remaining constituents to maintain diversification.^{[2] [1]} The index was launched with a base value of 15,000 on June 30, 2008, and the initial divisor is derived from the base period's free-float market capitalization divided by this value.^[2] Subsequent divisor adjustments ensure continuity during corporate actions, preventing artificial distortions in index levels. Corporate actions trigger specific adjustments: for cash dividends, the ex-dividend closing price is reduced by the dividend per share amount, and the divisor is recalculated to reflect the new aggregate market capitalization; for bonus issues, the ex-bonus price is adjusted proportionally (e.g., a 10% bonus reduces the price by the bonus ratio), followed by divisor revision; rights issues involve a two-stage process, first adjusting the ex-rights price and later updating free-float shares post-subscription based on actual uptake.^[2] The index is rebalanced semi-annually on May 15 and November 15, incorporating data from the preceding March 31 and September 30, respectively, to refresh constituents and weightings while preserving the divisor's integrity unless altered by actions like delistings or mergers.^[2] This framework prioritizes liquidity and Shariah compliance in weighting, with the top 30 most liquid qualifying companies selected prior to applying free-float adjustments.^[1]

Constituents

Current Constituents as of 2025

The KMI 30 Index consists of the 30 most liquid Shariah-compliant companies selected based on float-adjusted market capitalization and trading volume, as determined by the semi-annual re-composition process conducted by the Pakistan Stock Exchange in collaboration with Al Meezan Investments.^[10] The following table lists the constituents effective from the June 2025 re-composition, which remains in effect as of October 2025.^[10]

Historical Additions and Removals

The KMI 30 Index undergoes semi-annual re-composition to ensure it captures the 30 most liquid Shariah-compliant companies listed on the Pakistan Stock Exchange (PSX), with reviews typically covering six-month periods ending June 30 and December 31, and changes effective shortly thereafter, such as December 30 or June 30. Additions and removals are based on quantitative criteria including average daily trading value, float-adjusted market capitalization, and ongoing Shariah compliance screening by a supervisory committee, which excludes firms with non-compliant income ratios exceeding 5% from interest-based activities or impermissible business segments. This process, governed by PSX methodology, adjusts for market shifts, corporate actions, and compliance lapses, maintaining the index's focus on liquidity and ethical standards without free-float adjustments beyond the 12% single-stock cap.^[1][2] In the December 2024 re-composition, announced on December 21 for the January 1 to June 30, 2024 review period, seven companies were added to reflect improved liquidity and compliance: Oil & Gas Development Company Limited (OGDC), Sazgar Engineering Works Limited (SAZEW), Pak Elektron Limited (PAEL), Honda Atlas Cars (Pakistan) Limited (HCAR), Fauji Foods Limited (FFL), K-Electric Limited (KE), and Dawood Hercules Corporation Limited (DAWH), spanning sectors like energy, engineering, and consumer goods. Seven companies were removed due to declining liquidity or other eligibility shortfalls: Cherat Cement Company Limited (CHCC), Dolmen City REIT (DCR), Interloop Limited (ILP), NetSol Technologies Limited (NETSOL), Nishat Mills Limited (NML), Shell Pakistan Limited (SHELL), and TPL Properties Limited (TPLP). These adjustments, effective December 30, 2024, aimed to align the index with evolving market dynamics while preserving Shariah integrity, with a contingency noted for Engro Corporation (ENGRO) in case of delisting.^[11] Earlier examples illustrate recurring turnover; for instance, in the December 2022 re-composition for the January 1 to June 30, 2022 period, The Hub Power Company Limited (HUBC) was removed, signaling shifts in utility sector representation amid liquidity assessments. Such periodic churn, typically involving 5-10 stocks per cycle, prevents stagnation and responds to economic factors like sector performance or regulatory changes, though full historical sequences require aggregating PSX notices, as comprehensive public archives emphasize recent updates over exhaustive past logs.^[12]

Performance Metrics

Historical Price Data and Returns

The KMI 30 Index was introduced on September 1, 2008, by the Pakistan Stock Exchange (then Karachi Stock Exchange) with a base value of 10,000, serving as a benchmark for Shariah-compliant equities from inception.^[13][14] Since launch, the index has exhibited significant long-term appreciation amid Pakistan's economic fluctuations, rising to approximately 238,104 by late October 2025, representing over 23-fold growth from its base.^[15] This trajectory reflects periodic booms driven by sectors like energy, banking, and fertilizers, though punctuated by sharp drawdowns tied to macroeconomic instability, currency depreciation, and geopolitical events. Annual returns have varied widely, with standout gains in recovery phases; for instance, the index delivered a 76.31% return over the trailing 12 months ending October 2025, fueled by improved investor sentiment and policy reforms.^[15] Year-to-date through October 2025, returns stood at 31.28%, building on a 52-week range from a low of 133,360.22 to a high of 251,866.83, highlighting intra-year volatility exceeding 88% peak-to-trough.^[15] Earlier milestones include reaching around 54,119 by June 2019, roughly quadrupling from base levels amid post-global financial crisis recovery, before advancing to 124,751 by September 2024.^[16][17] The compounded annual growth rate (CAGR) since inception approximates 17-18%, derived from base-to-current expansion, though unadjusted for dividends or exact interim data; this outperforms many emerging market Islamic indices but lags conventional benchmarks in certain high-growth years due to Shariah exclusions.^[18] Data from financial aggregators like Investing.com and Sarmaaya.pk, cross-verified against PSX releases, underscore the index's resilience, with total returns including reinvested dividends enhancing absolute performance for tracking funds.^[19][15][1]

Risk and Volatility Analysis

The KMI 30 Index exhibits volatility comparable to the KSE-30 Index, with standard deviations of returns around 1.2% on a monthly basis, indicating similar total risk levels for both Shariah-compliant and conventional top-tier Pakistani equities.^[20] Earlier empirical analysis over periods including 2009-2014 showed the KMI 30's annualized standard deviation at approximately 36.75%, lower than broader market benchmarks, reflecting reduced exposure to leveraged financial sectors excluded under Shariah criteria.^[21] This containment of volatility stems from screening out firms with high debt-to-asset ratios, which limits amplification of market downturns through deleveraging effects.^[21] Systematic risk, measured by beta against the KSE-100, averages around 0.92 for the KMI 30, slightly below the market's unity, suggesting marginally lower sensitivity to overall Pakistani equity movements.^[21] Against the KSE-30, its beta is approximately 1.08, aligning closely with peer conventional indices and implying equivalent non-diversifiable risk in concentrated, liquid stock subsets.^[22] Studies confirm stable volatility persistence in KMI 30 returns, with dynamic forecasts remaining within error bands, unlike more erratic broader indices.^[23] Shariah compliance mitigates certain risks, such as interest rate volatility, which positively impacts KSE-100 returns but leaves KMI 30 unaffected due to exclusion of riba-based activities.^[21] However, this introduces concentration risk, as the index tilts toward commodity-linked sectors like energy and textiles, heightening exposure to global price swings and domestic export fluctuations absent in diversified conventional benchmarks.^[16] Liquidity risk persists despite selection for high trading volume, as periodic reconstitutions can trigger front-running or forced adjustments in Shariah-compliant portfolios.^[2] Overall, while empirical evidence supports favorable risk-adjusted returns versus KSE-100, the index's performance during Pakistan-specific crises underscores vulnerability to geopolitical and macroeconomic shocks common to emerging markets.^[24]

Comparative Analysis

Versus Conventional Indices like KSE 100

The KMI 30 Index, by applying Shariah compliance screens that prohibit investments in sectors like conventional banking, alcohol, and tobacco while limiting debt-to-asset ratios to below 33% and interest-based income to under 5%, exhibits a markedly different sector allocation compared to the KSE 100 Index.^[1][22] The KSE 100, comprising the top 100 companies by free-float adjusted market capitalization and representing approximately 85% of Pakistan Stock Exchange (PSX) total market capitalization across all sectors, is heavily weighted toward financial institutions, which often account for over 20-30% of its composition due to their size and liquidity.^[1] In contrast, the KMI 30's exclusion of interest-dependent firms results in underweighting finance (typically under 10%) and overweighting commodity-linked sectors such as oil and gas, cement, and textiles, leading to greater exposure to cyclical industries but reduced leverage-related vulnerabilities.^[11][24] Empirical analyses of historical performance reveal mixed but generally favorable risk-adjusted outcomes for the KMI 30 relative to the KSE 100. One study examining data from the PSX found that KMI 30 constituents delivered higher average returns alongside lower systematic risk compared to KSE 100 stocks, attributing this to the screening process's avoidance of highly indebted firms prone to volatility amplification during economic stress.^[16] Another investigation reported lower absolute returns for the KMI 30 versus the KSE 100 over certain periods, though the difference in mean returns was not statistically significant, suggesting Shariah restrictions do not impose a substantial performance penalty.^[25] Risk metrics further highlight distinctions: Shariah-compliant portfolios, including those tracked by the KMI 30, demonstrate lower beta and volatility, with standard deviations often 10-20% below conventional benchmarks, stemming from reduced exposure to debt-fueled expansions in the financial sector.^[26][20] Portfolio diversification benefits arise from the partial decorrelation between the indices, with correlation coefficients typically ranging from 0.7 to 0.9 but dropping during crises, allowing conventional investors to pair KSE 100 holdings with KMI 30 assets for improved Sharpe ratios.^[27] For example, wavelet coherence analysis of PSX data indicated that while the KMI 30 and KSE 100 move together at longer scales, short-term divergences provide hedging opportunities, particularly as Shariah screens favor tangible-asset heavy firms resilient to interest rate shocks.^[28] Recent recompositions, such as the inclusion of energy firms like Oil & Gas Development Company in the KMI 30 effective January 2025, underscore ongoing adjustments to maintain liquidity while preserving compliance, potentially amplifying sector tilts amid Pakistan's commodity-driven growth.^[6] Overall, these dynamics imply that Shariah constraints introduce a conservative bias, yielding comparable long-term returns with enhanced downside protection, though outperformance hinges on favorable commodity cycles rather than inherent ethical superiority.^[29][30]

Performance During Economic Events

During the 2008-2009 global financial crisis, the KMI-30 Index registered declines in line with broader market pressures but exhibited lower volatility and superior risk-adjusted returns compared to conventional indices like the KSE-100, attributed to its exclusion of highly leveraged financial sectors.^[21] Empirical analysis from July 2008 to November 2013 confirmed that Shariah-compliant stocks in the KMI-30 maintained higher excess returns per unit of total risk than the KSE-30, with generalized autoregressive conditional heteroskedasticity models revealing reduced conditional volatilities during crisis periods.^[20] However, subsequent scrutiny has challenged blanket claims of consistent outperformance, noting that while Islamic indices showed resilience in some metrics, absolute returns still reflected global contagion effects.^[31] In the COVID-19 pandemic, particularly from March 2020 onward, the KMI-30 Index faced sharp initial drops, such as a 575.80-point loss to close at 59,544.08 amid the March 2020 market crash, but demonstrated greater resilience than conventional counterparts through subsequent waves.^[32] Studies across five COVID-19 waves in Pakistan highlighted that the KMI-30 experienced asymmetric negative return spillovers but with lower overall adverse impacts and sustained positive dynamic conditional correlations with the KSE-100, enabling faster recovery.^[33] Islamic indices like the KMI-30 outperformed conventional ones in pre- and during-pandemic phases, with reduced volatility transmission due to sector exclusions limiting exposure to pandemic-vulnerable industries.^[34] Amid Pakistan's macroeconomic challenges, including the 2022-2023 balance-of-payments crisis, high inflation exceeding 30%, and devastating floods, the KMI-30 Index hit a 52-week low of 133,360.22 before rebounding, reflecting sensitivity to domestic factors like currency depreciation and IMF program implementations.^[15] From fiscal year 2023 to 2025, the index delivered a 46.24% return amid partial stabilization, underscoring its alignment with broader economic cycles while benefiting from Shariah screens that favored commodity and export-oriented firms less affected by import-driven inflation.^[35] Overall, macro-variables such as interest rates and GDP growth have empirically driven KMI-30 fluctuations, with the index showing vulnerability during downturns but potential hedging via ethical screening.^[36]

Significance in Islamic Finance

Role as a Benchmark for Shariah-Compliant Investments

The KMI 30 Index functions as a key benchmark for Shariah-compliant investments in Pakistan by tracking the performance of the 30 most liquid Shariah-compliant companies listed on the Pakistan Stock Exchange (PSX), weighted by float-adjusted market capitalization with a maximum 12% cap per constituent to prevent over-concentration.^[37] Launched in July 2009, it measures the aggregate returns of equities that adhere to Islamic principles, excluding sectors involving riba (interest), haram activities like alcohol production or gambling, and excessive gharar (uncertainty), thereby providing a standardized gauge for ethical investors seeking alignment with faith-based financial criteria.^[2] This role supports portfolio construction and performance evaluation in Islamic finance, where conventional benchmarks like the KSE 100 are unsuitable due to their inclusion of non-compliant assets. Constituents undergo quarterly Shariah screening by a Shariah board, applying quantitative thresholds such as interest-bearing debt below 37% of total assets, illiquid assets (cash plus interest-bearing securities) under 33% of total assets, and non-Shariah-compliant income limited to less than 5% of total revenue, alongside qualitative review of core business activities.^[38] Non-compliant companies are removed, ensuring the index reflects ongoing adherence; for instance, rebalancing occurs semi-annually based on liquidity metrics like average daily traded value and impact cost.^[2] This rigorous process positions the KMI 30 as a reliable reference for institutional and retail investors, facilitating comparisons of Shariah-compliant portfolios against broader market trends while mitigating exposure to prohibited elements. In practice, the index serves as the primary standard for benchmarking Shariah-compliant mutual funds and exchange-traded funds (ETFs) in Pakistan, with funds like the ABL Islamic Stock Fund allocating primarily to its constituents to capture growth in halal equities.^[39] Empirical analyses confirm its suitability as a benchmark, outperforming alternatives in representing Islamic equity performance due to its free-float methodology and focus on liquid, compliant stocks; for example, studies evaluating Islamic mutual funds against the KMI 30 demonstrate consistent risk-adjusted returns aligned with Shariah constraints.^[40] Derivatives and passive products, such as those referencing the Meezan Pakistan Index (which incorporates KMI 30 composition), further extend its utility in structured Islamic finance products.^[41]

Tracked Funds and Derivatives

The KSE Meezan Index Fund (KMIF), managed by Al Meezan Investment Management Limited, is the principal Shariah-compliant mutual fund designed to track the performance of the KMI-30 Index by investing in its constituent companies in proportion to their index weightages.^[42][43] Launched as an open-end fund, KMIF seeks to minimize tracking error while adhering to Shariah principles, providing investors with passive exposure to the index's top 30 liquid Shariah-compliant equities.^[44] As of July 31, 2025, the fund's net assets stood at PKR 5.16 billion, reflecting steady growth in assets under management amid Pakistan's developing Islamic finance sector.^[45] No exchange-traded funds (ETFs) directly replicate the KMI-30 Index, though related Shariah-compliant ETFs like the Mahaana Islamic Index ETF track alternative benchmarks such as the MII-30, which selects stocks by trading volume rather than the KMI-30's free-float market capitalization and liquidity criteria.^[46][47] This distinction arises from varying methodologies in Pakistan's index ecosystem, where KMI-30 emphasizes market-cap weighting for broader representation of Shariah-compliant performance.^[2] Derivatives products, such as futures or options contracts, based specifically on the KMI-30 Index are not available on the Pakistan Stock Exchange (PSX).^[48] PSX facilitates index derivatives primarily on conventional benchmarks like the KSE-100, but Shariah restrictions on elements of uncertainty (Gharar) and speculation limit similar offerings for Islamic indices like KMI-30, aligning with broader prohibitions in Islamic finance against conventional derivative structures.^[2] Investors seeking leveraged or hedged exposure must rely on underlying stock futures or the tracking mutual fund, underscoring the index's role as a direct equity benchmark rather than a derivatives base.^[1]

Criticisms and Limitations

Empirical Shortcomings of Shariah Restrictions

Shariah restrictions imposed on the KMI 30 Index, which prohibit investments in riba (interest)-based activities and other haram sectors, systematically exclude conventional financial institutions that dominate the Pakistani equity market. The banking sector, alongside energy, constitutes approximately 40% of the KSE-100 Index's free-float adjusted market capitalization weight, limiting Shariah-compliant portfolios to a narrower investable universe and increasing exposure to cyclical sectors such as cement and textiles.^[49] This sector exclusion reduces diversification benefits, elevating concentration risk as evidenced by higher idiosyncratic volatility in Shariah indices during non-crisis periods.^[22] Empirical analyses reveal marginal underperformance of the KMI 30 relative to conventional benchmarks like the KSE-100, particularly on risk-adjusted metrics. A study examining daily returns from 2009 to 2014 found the KMI 30 delivered lower mean returns and elevated standard deviation compared to the KSE-100, with statistical tests confirming the Shariah index's inferior efficiency due to screening constraints that bar high-return financial stocks.^[21] Similarly, Rana and Akhter (2015) documented KMI 30 underperformance on a risk basis, attributing it to the exclusion of leveraged sectors that amplify gains in expanding economies.^{[20] [22]} The restrictions also diminish responsiveness to macroeconomic factors favoring conventional finance. Interest rate volatility positively impacts KSE-100 returns through improved bank margins, but leaves KMI 30 unaffected, forgoing potential upside during monetary tightening cycles observed in Pakistan from 2018 to 2022.^[21] Over longer horizons, such as 2003–2013, the KMI 30's average annual returns trailed the KSE-100 by statistically insignificant yet persistent margins, underscoring opportunity costs from debt-averse criteria that constrain capital structure efficiency in growth phases.^[25] These findings hold despite periodic outperformance in downturns, highlighting a structural trade-off where ethical filters empirically compromise total return potential.^[50]

Debates on Screening Rigor and Sector Exclusions

The KMI-30 Index employs Shariah screening criteria that exclude companies with core activities in prohibited sectors such as conventional interest-based banking, insurance, alcohol production, pork-related products, gambling, and arms manufacturing, while also applying quantitative financial thresholds including interest-bearing debt below 37% of total assets, non-compliant income under 5% of total revenue, and non-compliant investments limited to less than 33% of total assets.^[2] These exclusions significantly reduce representation of financial services, which comprise a large portion of the broader Pakistan Stock Exchange, resulting in heavier weighting toward sectors like energy, cement, and textiles.^[2] Critics argue that such sector exclusions, while aligned with core Shariah prohibitions, constrain portfolio diversification and may underperform during financial sector booms, as evidenced by the index's exclusion of over 70% of listed equities due to financial involvement.^[51] Debates on screening rigor focus on the quantitative thresholds' permissiveness, with some scholars and analysts contending that allowances like 37% interest-bearing debt—higher than the 33% benchmark in standards from bodies like AAOIFI—tolerates substantial riba exposure, potentially diluting ethical purity despite purification mechanisms for impure income.^[2][52] Proponents of the thresholds, including the index's Shariah supervisory board at Al Meezan Investments, defend them as pragmatic fiqh interpretations allowing one-third impurity as non-excessive, enabling viable investments in modern economies without zero-tolerance impracticality.^[9][53] However, academic reviews highlight inconsistencies across Islamic indices, noting that KMI-30's criteria deviate from stricter global benchmarks like Dow Jones (which tightened debt limits post-2008), raising questions about uniform compliance and investor trust in Pakistan's localized application.^[54][55] Further contention arises over indirect exposures, where companies with minor non-compliant revenue streams (e.g., interest from short-term deposits) remain eligible under the 5% threshold, prompting criticism that this permits ancillary riba without rigorous purification or exclusion, unlike purist views advocating negligible tolerance.^[56] Empirical studies on Pakistani indices suggest that looser thresholds correlate with broader inclusion but weaker alignment to maqasid al-Shariah (objectives of Islamic law), as firms passing screens may retain operational leverage tied to debt markets.^[57][58] In response, periodic semi-annual reviews by Al Meezan analysts aim to enforce rigor, yet debates persist on whether Pakistan's framework, influenced by local Shariah boards, prioritizes market accessibility over stringent orthodoxy compared to Malaysian or global standards.^[2][59]