Investing in Stock Exchange : The Halal Way

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There are three main types of companies in terms of how Shariah compliant they are:

  • Shariah compliant business & Shariah compliant financials: These companies have a Shariah compliant business activity and no borrowings with interest. They are very difficult to find, but they offer a high level of Shariah compliance.
  • Non-Shariah compliant business: These companies have a non-Shariah compliant business activity, such as the production of pork or alcohol. Investing in these companies is never Shariah compliant and should be avoided.
  • Shariah compliant business & mixed financials: Many companies fall into this area where their business is Shariah compliant but they may have a small proportion of borrowings with interest or may have deposits in a business account in a conventional bank and thus receive interest.

With the interconnectedness of the financial system, it is almost impossible to evade some exposure to non-Shariah compliant financial services. However, the majority of contemporary jurists permit investing in such companies as long as one does not benefit from the impure income and secondly, as long as the company proves to have minimal exposure to interest. This is established by successfully passing financial screening criteria.

The two screenings a company must go through are as follows:

  • Business screening: The company must not be involved in any of the following businesses:
    • Financial services industry that is involved in interest-based lending and/or distribution of interest-based products.
    • Manufacturing or distribution of alcohol and tobacco.
    • Companies operating in betting and gambling operations.
    • The production, packaging, processing, or any other activity related to pork and non-halal food and beverages.
    • Bio-technological companies involved in human genetic manipulation, alteration, mutation and cloning.
    • Shariah non-compliant entertainment.
  • Financial Ratios Screening: The company's financials will be analyzed using the last available audited financial statements. The following conditions must be met:
    • The collective amount raised as loans on interest does not exceed 30% of the total assets of the company.
    • The total amount of interest-bearing securities, whether short, medium or long term does not exceed 30% of the total assets.
    • The amount of income generated from prohibited sources does not exceed 5% of the total revenue of the company.

If all of the above conditions are met, then the shares will be deemed to be Shariah compliant. However, the proportion of income generated from prohibited sources is to be given in charity and must not be retained under any circumstance.

Shariah-compliant investing offers a way to invest in companies that align with your values. By following the guidelines outlined above, you can be sure that your investments are Shariah compliant and that you are not profiting from prohibited activities.

Here are some of the benefits of Shariah-compliant investing:

  • You can be sure that your investments are aligned with your values.
  • You can avoid investing in companies that are involved in prohibited activities, such as gambling or the production of alcohol.
  • You can contribute to the development of the economy.
  • You can reduce your risk of financial loss.

If you are interested in Shariah-compliant investing, there are a number of resources available to help you get started. You can find a list of Shariah-compliant investment funds and companies online. You can also talk to a financial advisor who specializes in Shariah-compliant investing.

Reference https://www.askimam.org/public/question_detail/46129

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