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Our Screening Criteria
Our Screening Criteria
In order for a company’s shares to be considered Sharia’h-compliant for Islamic investment, they must adhere to specific screening criteria established by renowned Ulamas of Islamic Finance. These criteria serve as key benchmarks that companies must meet to qualify as Sharia’h-compliant stocks.
1.The Business:
One of the primary considerations for Sharia’h-compliant investing is the nature of the investee company’s business activities. It is widely understood, both among Muslims and in our diverse society, that investing in businesses involved in alcohol, gambling, pork, nightclubs, and similar activities is impermissible (haram) according to Islamic principles. This prohibition is clear-cut and does not require detailed analysis. Therefore, companies engaged in such activities are automatically excluded from consideration.
There exists a somewhat murkier area concerning companies in the
financial services sector, such as banks, insurers, and stockbrokers. These
companies may need to be evaluated on a case-by-case basis rather than applying a blanket policy. However, the cautious approach when dealing with such ambiguous cases is to avoid investing altogether.
2.Income From Non-Sharia’h Compliant Investments:
In many instances, although the core business of a company aligns with Sharia’h principles, there may be certain aspects of its operations that involve non-compliant activities, such as interest-based income or lending on interest. This generates what is known as income from non-Sharia’h compliant investments.
According to a common guideline, this income from prohibited investments should not exceed 5% of the company’s gross revenue. To ensure compliance, investors need to examine annual reports to determine the percentage of income derived from non-Sharia’h compliant sources. Subsequently, they are required to donate an equivalent percentage of their capital gain & dividend to charity.
Moreover, investors must express their disapproval of these non-compliant activities, either in writing or verbally, potentially during the company’s annual shareholder meeting.
3.Interest-Bearing Debt To Total Assets:
The third criterion involves assessing the ratio of interest-bearing debt & lease liabilities to total assets within the company. According to this guideline, the total interest-bearing debt should not surpass 33% of the total assets. Interestingly, this metric is not only advocated by the Islamic finance Scholar but also endorsed by renowned non-Muslim investors. Figures like Benjamin Graham, considered one of the greatest investors of the 20th century, emphasised this criterion in his influential book “The Intelligent Investor.” This principle was further upheld by his renowned disciple, Warren Buffett.
However, determining the precise amount of interest-bearing debt can sometimes be challenging, as it may not always be explicitly stated in the company’s financial reports. For example, listed “borrowings” could include interest-free loans from directors. Therefore, investors need to carefully scrutinize financial disclosures to accurately assess this metric.
4.Illiquid Assets To Total Assets Ratio:
Next, let’s discuss the ratio of illiquid assets to total assets, where illiquid assets refer to those that cannot be readily converted into cash at prevailing market prices. Real estate, such as office buildings or factories, is a common example. In cases where a company is undercapitalized, it may need to resort to selling illiquid assets quickly, often at prices well below market value. This illustrates the challenge of selling illiquid assets promptly while aiming to attain close to market prices.
There are differing opinions on what proportion of illiquid assets should make up total assets. This issue is relevant for Sharia’h compliance because if a company holds purely liquid assets—let’s say 5 Million cash in the bank with no other assets—it can only be sold at par value as per Islam. Islamic Finance experts suggest that illiquid assets should constitute at least 20% of total assets to meet Sharia’h compliance standards.
Illiquid assets typically appear on a company’s balance sheet and encompass items like goodwill, property, plant, equipment, and intangible assets—essentially anything that aligns with the definition of illiquid provided above. To calculate the percentage, sum up the figures for illiquid assets, divided by total assets, and multiply by 100. Ideally, this ratio should be 20% or higher.
It’s important to note that for listed companies, it’s rare to have no illiquid assets. Intellectual property, for instance, serves as a significant illiquid asset for technology companies, while manufacturing firms often list plant and machinery as their largest illiquid assets.
5.Net Liquid Assets vs Market Capitalization:
The next criterion pertains to the comparison between Net Liquid Assets and Market Capitalization. Before delving into the criterion itself, let’s understand its rationale.
Net Liquid Assets are derived by subtracting Tangible Fixed Assets, Inventory, and Liabilities from Total Assets. For simplicity, let’s equate net liquid assets to cash. In Sharia’h, it’s impermissible to exchange money for less or more money, as seen in previous criteria. For instance, it’s not allowed to purchase a box for 50 rupees when it contains 70 rupees inside. Similarly, if the value of net liquid assets exceeds the market capitalization of a company, it implies that shareholders are essentially paying for more cash than the market value of the company, which contradicts Islamic principles.
Islamic Finance expert’s criterion states that the value of net liquid assets per share should not surpass the market price per share, or more straightforwardly, net liquid assets should not exceed the market capitalization. This scenario could arise in companies like holding companies, which possess purely liquid assets.
It’s crucial to ensure that the value of net liquid assets aligns appropriately with the market capitalization to adhere to Sharia’h principles.
6.Non-Compliant Investments To Total Assets:
The final criterion in our rule set dictates that the ratio of non-compliant investments to total assets should be less than 33%. This guideline serves as a crucial safeguard to ensure adherence to Sharia’h principles in investment practices. Non-Sharia’h compliant investments encompass a wide range of financial instruments, including conventional mutual funds, money market instruments, commercial papers, interest-bearing bank deposits, bonds, PIBs, FIBs, T-Bills, CoIs, CoDs, TFCs, DSCs, NSS, derivatives, and others. By limiting the proportion of these non-compliant investments relative to total assets, investors uphold the principles of Islamic finance and mitigate the risk of engaging in activities that contravene Sharia’h law. This criterion reflects a commitment to ethical and socially responsible investing, aligning with the values and beliefs of Sharia’h-compliant investors.
In order for a company’s shares to be considered Sharia’h-compliant for Islamic investment, they must adhere to specific screening criteria established by renowned Ulamas of Islamic Finance. These criteria serve as key benchmarks that companies must meet to qualify as Sharia’h-compliant stocks.
1.The Business:
One of the primary considerations for Sharia’h-compliant investing is the nature of the investee company’s business activities. It is widely understood, both among Muslims and in our diverse society, that investing in businesses involved in alcohol, gambling, pork, nightclubs, and similar activities is impermissible (haram) according to Islamic principles. This prohibition is clear-cut and does not require detailed analysis. Therefore, companies engaged in such activities are automatically excluded from consideration.
There exists a somewhat murkier area concerning companies in the
financial services sector, such as banks, insurers, and stockbrokers. These
companies may need to be evaluated on a case-by-case basis rather than applying a blanket policy. However, the cautious approach when dealing with such ambiguous cases is to avoid investing altogether.
2.Income From Non-Sharia’h Compliant Investments:
In many instances, although the core business of a company aligns with Sharia’h principles, there may be certain aspects of its operations that involve non-compliant activities, such as interest-based income or lending on interest. This generates what is known as income from non-Sharia’h compliant investments.
According to a common guideline, this income from prohibited investments should not exceed 5% of the company’s gross revenue. To ensure compliance, investors need to examine annual reports to determine the percentage of income derived from non-Sharia’h compliant sources. Subsequently, they are required to donate an equivalent percentage of their capital gain & dividend to charity.
Moreover, investors must express their disapproval of these non-compliant activities, either in writing or verbally, potentially during the company’s annual shareholder meeting.
3.Interest-Bearing Debt To Total Assets:
The third criterion involves assessing the ratio of interest-bearing debt & lease liabilities to total assets within the company. According to this guideline, the total interest-bearing debt should not surpass 33% of the total assets. Interestingly, this metric is not only advocated by the Islamic finance Scholar but also endorsed by renowned non-Muslim investors. Figures like Benjamin Graham, considered one of the greatest investors of the 20th century, emphasised this criterion in his influential book “The Intelligent Investor.” This principle was further upheld by his renowned disciple, Warren Buffett.
However, determining the precise amount of interest-bearing debt can sometimes be challenging, as it may not always be explicitly stated in the company’s financial reports. For example, listed “borrowings” could include interest-free loans from directors. Therefore, investors need to carefully scrutinize financial disclosures to accurately assess this metric.
4.Illiquid Assets To Total Assets Ratio:
Next, let’s discuss the ratio of illiquid assets to total assets, where illiquid assets refer to those that cannot be readily converted into cash at prevailing market prices. Real estate, such as office buildings or factories, is a common example. In cases where a company is undercapitalized, it may need to resort to selling illiquid assets quickly, often at prices well below market value. This illustrates the challenge of selling illiquid assets promptly while aiming to attain close to market prices.
There are differing opinions on what proportion of illiquid assets should make up total assets. This issue is relevant for Sharia’h compliance because if a company holds purely liquid assets—let’s say 5 Million cash in the bank with no other assets—it can only be sold at par value as per Islam. Islamic Finance experts suggest that illiquid assets should constitute at least 20% of total assets to meet Sharia’h compliance standards.
Illiquid assets typically appear on a company’s balance sheet and encompass items like goodwill, property, plant, equipment, and intangible assets—essentially anything that aligns with the definition of illiquid provided above. To calculate the percentage, sum up the figures for illiquid assets, divided by total assets, and multiply by 100. Ideally, this ratio should be 20% or higher.
It’s important to note that for listed companies, it’s rare to have no illiquid assets. Intellectual property, for instance, serves as a significant illiquid asset for technology companies, while manufacturing firms often list plant and machinery as their largest illiquid assets.
5.Net Liquid Assets vs Market Capitalization:
The next criterion pertains to the comparison between Net Liquid Assets and Market Capitalization. Before delving into the criterion itself, let’s understand its rationale.
Net Liquid Assets are derived by subtracting Tangible Fixed Assets, Inventory, and Liabilities from Total Assets. For simplicity, let’s equate net liquid assets to cash. In Sharia’h, it’s impermissible to exchange money for less or more money, as seen in previous criteria. For instance, it’s not allowed to purchase a box for 50 rupees when it contains 70 rupees inside. Similarly, if the value of net liquid assets exceeds the market capitalization of a company, it implies that shareholders are essentially paying for more cash than the market value of the company, which contradicts Islamic principles.
Islamic Finance expert’s criterion states that the value of net liquid assets per share should not surpass the market price per share, or more straightforwardly, net liquid assets should not exceed the market capitalization. This scenario could arise in companies like holding companies, which possess purely liquid assets.
It’s crucial to ensure that the value of net liquid assets aligns appropriately with the market capitalization to adhere to Sharia’h principles.
6.Non-Compliant Investments To Total Assets:
The final criterion in our rule set dictates that the ratio of non-compliant investments to total assets should be less than 33%. This guideline serves as a crucial safeguard to ensure adherence to Sharia’h principles in investment practices. Non-Sharia’h compliant investments encompass a wide range of financial instruments, including conventional mutual funds, money market instruments, commercial papers, interest-bearing bank deposits, bonds, PIBs, FIBs, T-Bills, CoIs, CoDs, TFCs, DSCs, NSS, derivatives, and others. By limiting the proportion of these non-compliant investments relative to total assets, investors uphold the principles of Islamic finance and mitigate the risk of engaging in activities that contravene Sharia’h law. This criterion reflects a commitment to ethical and socially responsible investing, aligning with the values and beliefs of Sharia’h-compliant investors.
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Profit me se ginti karke kitna hissa alag karna hai…???? Jara bataei…a
Purification method capital gain/dividend ke liye hai , shariah compliant (halal) share ko sell karne se jo profit hota hai usey purify karne ke liye app me available calculator ka use karein.
Requesting to Fatwa board:-
Sub: Illiquid Asset to Total asset ratio 50%. Ok ✓
But companies like light Asset model, Artificial intelligence, IT, software, IoT, platform busines, machine learning etc have <20%. But they are purely Halal than any other business in all other ratios. So please review this ratio for the modern Internet related business.
Most of the other popular Shariah Screeners not even considering this ratio.
ASLLAMU ALAIKUM
SIR
. Swing trading halal hai ye konse ulama ne kaha hai. Please reply
Wa alaikumus Salaam,
Swing trading se aap kya samajhte hain?
Assalam Alaikum,
Jazakallahu khairan for your website and app.Best part I liked about it is that it gives detailed calculation and reasons for being halal/ non halal for free.
I am wondering about illiquid assets to total assets ratio.In IT software industries there not much illiquid assets mostly less than 20 percent are they still halal.Some business /sector dose not require illiquid assets to operate?
Rules are common for all, whether IT or Construction Industry.
Business may be Halal but if they fail in any other rule, they will become Non Compliant.
There are approx 1500 copliant stocks, check opportunities in them.
I am new islamicstockcreener ! Iwas reading islamicstockcreener blogs how the screening is done for stocks. I see company generating 5% from non halal sources can qualify for Sharia compliant status. Also interest bearing debt 36/month average market cap <33% is also one of the criteria for screening. My question is from where did scholer get 5% and 33% to set a limit for screening. Are there any hadith or references from the Quran or any other sources?
[…] 3.Financial Shari’ah ScreeningCriteria: […]
Why there is a auto deduction of payment from bank,
You should make other options also
Kya islam me SIP jayz hai bray meharbani bta den
Pehele aap ye samjh ne ki koshish karen ki SIP kya cheez he or, kis cheez me kr rhe hn, Non compliant stock he, ya compliant stock, etc.
uske bad jayez or na jazayz ka hukum lagaya jayega.