Are there any criteria for securities or stocks to be halal? If the answer is yes, it would be best if everyone knew it to screen their investments. Everyone needs to complete a screening process to find sharia-compliant stocks. Therefore, knowing that Muslim investors are interested in learning screening of stocks, here we introduce you to the five main criteria for the stock to be halal.
5 main criteria for halal stock
1- Business activities.
The company should operate in permissible activities guided by Islamic principles. Investing in a company that deals in haram things such as alcohol, tobacco, gambling, pork, nightclub activities, etc., are prohibited. The main objective of any business should not violate the Sharia laws.
2- 5% tolerance level for mixed activities.
Though the overall business is halal, the company can carry out minor haram activities. Most institutions and standard-setting bodies like AAOIFI limit the revenue generated from non-Shariah-compliant operations should not exceed 5% of the company’s revenue. In addition, Islamic finance experts require to purify the haram portion.
3- Threshold on interest-bearing loan (debt)
In fact, companies can’t avoid taking out an interest-bearing loan. The majority of companies will rely on conventional interest-based loans. The percentage of debt as a percentage of total assets indicates the company’s leverage. According to AAOIFI, investing in companies with total long and short-term debt of more than 30% of market capitalization is not shariah compliant. To be a shariah-compliant stock, a company’s total interest-bearing loan or debt should not exceed 30% of the company’s market cap.
4- Threshold on interest-bearing securities and interest income
The total interest-bearing securities should not exceed 30% of the total market cap (AAOIFI). While the interest income must be less than 5% of the total income or revenue.
5- Cash and account receivables
According to Shariah law, one can trade cash and debt only at par value. The company’s share represents ownership of the company’s assets and liabilities, and the share price represents the value of that ownership. Share prices, in particular, are determined by future price expectations rather than the company’s book value. As a result, when trading stocks, one cannot trade at par value. Shariah advisors in the leading financial institutions have set limits on the proportion of cash and receivables to total assets not to exceed 33% to avoid this situation (according to SC Malaysia and DJIM, while the MSCI Global Islamic Indices threshold is 33.33%)
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