Know When You Should Check the Shariah-Compliance Status of Stocks?

Know When You Should Check the Shariah-Compliance Status of Stocks?

For Muslim Investors, it is crucial to know the Shariah-Compliance status of the stocks they are investing. This is the first step of doing halal stock investment. Once you confirm the stock is halal, you can continue to invest or trade. However, the Shariah compliance of the company can change due to different factors. Therefore, the investors should know when they should Check the Shariah-Compliance status of stocks.

Shariah Screening Criteria

We classify stocks as Shariah-compliant once they pass shariah screening criteria. According to AAOIFI shariah stock screening criteria, the shares of a company whose core activities are Shariah-compliant is permitted under the following conditions:

Business screening

  • The firm’s objective does not specify its goal to trade in interest or forbidden products or materials such as pork or others.
  • The total amount of revenue generated by prohibited activities should not exceed 5% of the company’s overall revenue.

Financial screening

  • The total long and short-term debt is less than 30% of market capitalization.
  • Total interest-bearing securities are less than 30% of market capitalization.
  • Impermissible income as a percentage of total income or revenue is less than 5%

As you can see, there are two aspects that influence a company’s Shariah compliance:

  1. The company’s business activities
  2. The company’s financial ratios.

Because a company’s commercial activity and revenue composition might change every quarter, it can have an impact on the company’s Shariah compliance status.

Also, because financial ratios are the mix of the company’s actual reported data and its market price, both of which are dynamic and changeable, the stock’s Shariah compliance changes with the underlying change in these two aspects. Hence, it’s critical to keep track of these changes in compliance and make sure your stocks are always Shariah-compliant.

When You Check the Shariah-Compliance Status of Stocks?

Changes in the business activity of the company

Every quarter, companies release a summary of sales information, with a more complete breakdown in their annual report. Because of changes in its non-permissible business activity, a firm can become non-compliant if it launches a new non-permissible business activity that contributes more than 5% of its total revenue. This might happen when the company’s quarterly or yearly financial results are released.

Changes in financial ratios

i. Changes as a result of fundamental financial figures: The corporation releases its financial data every quarter. If these figures change, the stock’s compliance may change if it crosses the threshold with the new figures.

ii. Changes in the company’s market capitalization: The price of the stock fluctuates every day while trading takes place. When a company’s stock price drops, its market cap drops, which can lead to a violation in financial ratios, causing the stock to become non-compliant. The effect might even be the opposite, with non-compliant stocks becoming compliant.

How Can You Track Shariah-Compliance of Stocks?

At Musaffa Shariah Stock Screening Platform, you can monitor the shariah-compliance status of your stocks by adding them to your watchlist. Investors are welcome to add their favorite stock to their watchlist and constantly monitor its shariah compliance status.

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