What Makes A Stock Halal?

What makes a stock halal_

Have you ever wondered what makes a stock halal? Essentially, Shariah compliance determines if a stock is halal or haram. Muslim scholars have revised the right methodologies for Shariah screening. This screening process generally compiled of two stages:

  1. Operational Screening
  2. Financial Screening

Operational Screening:

Investments in any company engaged in haram activities are impermissible. Furthermore, A company’s core business activity must be considered when looking to invest in determining if it is allowed or not allowed. Below is a shortlist of prohibited business activities:

  • Interest-based products, services, and instruments.
  • The manufacture or distribution of alcohol products
  • The manufacture or distribution of arms and weapons
  • Gaming or gambling
  • Any conventional assurance-related activity
  • The production, packaging, processing, or any other activity relating to pork or pork products and other non-Halal meat
  • The production or distribution of pornographic material
  • Any other activities not permissible under Shariah as determined by the respective Shariah boards

Financial Screening 

Four components must be screened before claiming it Shariah-compliant,

  1. Impure income earned through “interest” or other suspect earnings
  2. Cash and debt compared to Total Assets or Average Market Capital
  3. Debt compared to Equity or Average Market Capitalization
  4. Account Receivables

1. Impure income earned through “interest” or other suspect earning:

Many companies cannot escape small amounts of unlawful activities such as interest. Consequently, scholars have come up with a ceiling to deal with this issue. Hence, most scholars agreed that the revenue from unlawful activities should be almost negligible and should not exceed the 5 % benchmark of the total income.

2. Cash and debt compared to Total Assets or Average Market Capital.

Scholars conclude that the total cash and debts in a company’s balance sheet should be less than 30-50% benchmark of the existing Assets or Average Market Cap, depending on the Shariah board.

3. Debt compared to Equity or Average Market Capitalization.

Scholars conclude that the total debt in a company’s balance sheet should be less than 30-33% benchmark of Equity or Average Market Cap, depending on the Shariah board. 

4. Account Receivables

Account receivables are money owed by customers in exchange for goods and services provided by the company. Shariah considers AR as debt owed to the company. For example, most Shariah scholars agree that the ratio of the Accounts Receivables to Total assets or Market Capitalization should not exceed 33%.

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