Addition of the Non-Compliant Investment to Total Assets Ratio As Rule 6

Unveiling the Non-Compliant Investment to Total Assets Ratio:

As per the available contemporary fatwa on screening for Shariah-compliant stocks, the Shariah team recommended including the ratio of non-compliant investments of a company to its total assets for more stringent Shariah-compliant stock screening.

In Islamic finance, adherence to Shariah principles is important. Investors seeking to align their investments with Islamic teachings rely on rigorous screening methods to ensure compliance with Shariah law. Among the various conditions of screening criteria, the non-compliant investment to total assets ratio emerges as a crucial metric, offering insights into the ethical and Shariah compliance of investment portfolios.

Understanding the Non-Compliant Investment to Total Assets Ratio:

The non-compliant investment to total assets ratio measures the portion of a company’s assets dedicated to investments conflicting with Shariah principles. This ratio should ideally be below 33%. Non-Shariah-compliant investments encompass conventional interest-bearing activities (riba), mutual funds, money market instruments, commercial paper, interest-bearing bank deposits, bonds, and various financial products like investment funds, short-term debt securities, government bonds, certificates of deposits, and financial derivatives, or engagement in unethical practices contrary to Islamic values.

Importance of Shariah-compliant stock screening:

1. Alignment with Islamic Principles: Shariah-compliant investors prioritize investments that adhere to the tenets of Islamic law, including principles of fairness, transparency, and social responsibility. The non-compliant investment to total assets ratio serves as a litmus test, enabling investors to gauge the extent to which a company’s assets comply with Shariah guidelines.
2. Ethical Investing: Shariah-compliant investing goes beyond financial returns; it emphasizes ethical considerations and societal welfare. By scrutinizing the non-compliant investment ratio, investors ensure that their investment portfolios exclude companies engaged in activities deemed unethical or harmful from an Islamic perspective.
3. Risk Mitigation: Shariah non-compliance poses inherent risks to investment portfolios, including reputational damage, legal liabilities, and diminished investor confidence. The non-compliant investment to total assets ratio aids in identifying and mitigating these risks by screening out companies with high levels of non-compliant investments.

Conclusion:

Within the dynamic world of Islamic finance, the ratio of non-compliant investments to total assets stands out as a crucial metric. This metric plays a significant role in directing investors towards Shariah-compliant investment avenues. By integrating this ratio into stock screening approaches, investors adhere to the tenets of Shariah law, manage risks effectively, and foster ethical and sustainable investment practices.

Important note:

A company whose actual business is halal, but if it is also partially involved in haraam business and the investment in haraam business is less than one-third of its total assets, then according to the scholars, it is permissible to buy shares of such a company. It is worth noting that the investor should express his disagreement with the haraam investment as much as possible and also donate the profit earned from this haraam investment to the needy.