Investing In Shariah Compliant Companies
The easiest way for Muslims to invest their money in a halal manner is by investing in Shariah compliant equities of companies listed on local stock exchanges.
Buying stocks of companies which are classified as Shariah compliant is permissible from an Islamic perspective. There is widespread consensus among Shariah scholars for the same. Hence, trading in Shariah compliant stocks is considered as a halal source of income.
In this article we will outline what makes a stock Shariah compliant and what trading activities are considered compliant from Shariah perspective
What Are Shariah Compliant Stocks?
Shariah scholars, over the past 3 decades, have framed certain rules to ascertain if a company is Shariah compliant. Such rules are called ‘Shariah Equity Screening Criteria’.
If a listed company passes the Shariah equity screening criteria, it is called a ‘Shariah compliant company’. Investment in such companies is permissible and is considered halal. Earning by trading in such companies is considered a halal source of income.
What is Shariah Equity Screening Criteria?
The Shariah screening criteria sets out the rules of how to screen listed companies to find out if they are permissible for investment by Muslims. It has two levels.
1. Business Screening
Companies that derive less than 5% of operating revenue (core or active business activity related) from the below non-permissible areas, pass the sector screening.
Non-permissible or prohibited activities are:
- Alcohol
- Pork
- Tobacco
- Interest based activities
- Pornography
- Gambling
- Conventional entertainment
- Trading of gold and silver on a differed basis.
2. Financial Ratio Screening
There are three financial ratios which a listed company has to clear to pass the financial ratio screening:
- Interest bearing debt / 36 month average Market Cap < 33%
- Cash + short term investments / 36 month average Market Cap < 33%
- Accounts Receivables / 36 month average Market Cap < 49%
If all three ratios are below the mentioned threshold, the company is said to have passed the financial ratio screening.
A company which passes both the levels of screening i.e. Business screening as well as Financial ratio screening, is said to be a SHARIAH COMPLIANT COMPANY.
Investment in the common equity of such companies is permissible for Muslims. For detailed screening criteria, please see: Islamicly Shariah Screening Criteria
Islamicly provides the most up to date Shariah screened list of stocks for most major markets covering more than 45,000+ stocks globally. Upgrade to view all the Shariah compliant stocks in your market!
Dividend Purification
Dividend purification is the process of ensuring that the income from Shariah-compliant investments is free from any non-permissible earnings.
Companies having less than 5% of their revenues coming from prohibited business activities are said to have passed the Sector-based Screens. But the proportion of dividends attributed to revenue generated from such non-permissible business activities and interest income will have to be purified.
Purification is an integral part of investing in a halal manner.
For more information on dividend purification, please read: How to Purify Dividends
Watch how to purify dividends on Islamicly
What needs to be purified? Dividends or capital gains?
Dividend purification: Only the amount received by the investor from the company (invested company) in the form of dividend has to be purified. Here, ‘purified’/‘purification’ means, the amount needs to be donated to a charity of your choice.
The purification ratio for each Shariah compliant stock is provided on Islamicly.
Capital gain purification: Capital gains or trading gains i.e. profit from increase in value of your stocks, need not to be purified. Your entire trading gain through investment in Shariah compliant stocks is halal income and need NOT to be purified.
Walkthrough Video for World first Shariah Certified Portal
Is Intra-day trading permissible?
Intra day – Buy first and then sell:
If you buy a Shariah compliant stock first and then sell it, this is considered permissible If the buy and sell happens on the same day (intra-day), it is still permissible – the simple reason is if you have bought it, and fulfilled all the conditions of ownership, you are the full owner of the same. Hence you have the full right to sell it too, even if the buy and sell transaction happens the same day or even within minutes.
Delivery of the stock in your CDS or DEMAT account (digital shareholding account/wallet) is not a necessary pre-condition to being an owner of the stock.
But, the trading contract should not be such where delivery of stock is not allowed or possible. For example, if your broker allows you to do day trading and auto squares off your trades without giving you an option to take delivery, then such a trading contract, even if it is for a Shariah compliant stock, is not permissible.
Intra-day – Sell first and then buy it back to settle the trade – Short selling:
Short selling trades are not-permissible as you have sold something which you have not bought/own i.e. sold something that you are not the rightful owner of.
Intra-day – Buy first and then sell – using leverage provided by your broker.
Interest free leverage:
If your broker is providing you interest free leverage, then it is permissible to do intra-day (Buy first and then sell) transactions in Shariah compliant stocks. Please do read the terms and conditions of your brokerage account to find out if the leverage provided is interest free or not.
Interest bearing leverage:
If you are trading in Shariah compliant stocks using interest based borrowed funds or broker provided leverage which is interest based, then such a trading activity is not permissible
Investment in Non-Compliant Stocks
If a stock is non-compliant, investment in that stock/company is not-permissible. If you had previously invested in that stock, then you need to sell the same within 7 days. All gains (including capital gains/trading gains/dividends) received from this stock needs to be purified i.e. donated to a charity of your choice.
Investment in Shariah compliant stocks, which turned non-compliant later
If you invested in a stock when it was compliant, but it subsequently turns non-compliant (due to financial ratio failure or income from non-permissible activity has increased to more than 5%), then you have 90 days to sell that stock.
Any capital gains accrued to this stock from the day it turned non-compliant until the day it was finally sold out needs to be entirely purified. Dividends received during the first 30 days of the grace period will be purified as per the standard process. Any dividends received after the first 30 days of the grace period will be purified completely i.e. should be donated to charity of your choice.
As per the Shariah Board, purification with regards to capital gain in such scenarios is treated as follows:
1. For compliant stocks:
If you invest in a stock which is compliant and you make a capital or trading gain, no purification of capital/trading gains needs to be done i.e. you can retain all the gains as it is considered permissible income/earning.
Example:
Stock: A
Status at buy: Compliant
Status at Sell: Compliant
Buy Price: $10
Sell Price $50
Capital/trading gain: $40 ($50-$10)
This $40 is permissible earning and all of it can be retained by the investor.
No purification required on this income.
2. For compliant stock turning non-compliant:
If a stock you invested in was compliant at the time of investment, but subsequently turns non-compliant, you will have 90 days to exit that stock. After the end of the 90 day period, till the time you sell the stock, ALL gains – capital/trading/dividends need to be fully purified i.e. 100% of such gain from the end of the 90th day till the date of sale needs to be purified (donated to charity). Such a charity can be done to any charitable cause of your choice except to mosques etc.
All gains – capital/trading/dividends from the date the stocks turns non-compliant till the 90th day, or the earlier date of sale of that stock, can be retained as permissible income
Example:
Stock: A
Status at buy: Compliant
Status at Sell: Non-Compliant
Buy Price on 1st Jan: $10
Turned non-compliant date: 1st April
Price when non compliant turned: $30
Grace period ends: 1st July
Price when Grace period ends: $60
Scenario 1 – sell/exit BEFORE grace period ends
Sold date: 1st May
Sell Price (on 1st August): $50
Capital/trading gain: $40 ($50-$10)
Permissible income: $40 ($50-$10) – This amount ($40) can be retained as permissible income and there is no need to purify this amount. This is because the stock was sold before the expiry of the grace period i.e. 1st July.
Scenario 2 – sell/exit AFTER grace period ends
Sold date: 1st May
Sell Price (on 1st August): $70
Capital/trading gain: $60 ($70-$10)
Permissible income: $50 ($60-$10) – This amount ($50) can be retained as permissible income and there is no need to purify this amount. This is because the grace period was till 1st July when the price was $60. So all gains till this date will be considered permissible.
Income to be purified: $10 ($70-$60) This $10 has to be donated to charity (you may deduct the transaction charges from $10 such as brokerage paid and other statutory taxes and the net amount needs to be donated).
This is because the gains after the end of the grace period are considered non-permissible. Since price at the end of the grace period was $60 and the stock was sold after the grace period ended at $70, the gain of $10 will be considered non-permissible income.
3. If you invest in a non-compliant stock:
You need to exit this stock within 7 days and all gains (capital/trading/dividends) needs to be purified i.e. 100% of the gains should be donated to charity.
Example: Stock: A
Status at buy: Non-Compliant
Status at Sell: Non-Compliant
Buy Price: $10
Sell Price: $30
Capital/trading gain: $20 ($30-$10)
This $20 is non-permissible earning and all of it needs to be purified i.e. $20 needs to be donated to charity (you may deduct the transaction charges from $20 such as brokerage paid and other statutory taxes and the net amount needs to be donated)
Trading in Futures, Options, CFD of Shariah compliant stocks
Trading in Futures, Options, CFD is considered non-permissible. Hence you cannot trade in such products/strategies.
How Can Islamicly Help in Maintaining Shariah Compliant Investments in Stocks?
Islamicly is a retail app & web platform which enables Muslim consumers to get the most accurate & well researched real-time information on Shariah compliance of globally listed stocks, opening up the global equities market for Islamic retail investors. Islamicly app is the world’s 1st Shariah certified app for shariah compliant equities.
On Islamicly (App or Desktop) you can:
- Search and discover which stocks are Shariah compliant.
- More than 40% stocks on an average are Shariah compliant globally
- Add your choice of stocks in portfolio and update your holding data through the Desktop version (price, number of shares etc.). This will help you monitor your growth.
- If a stock changes compliance, get alerted immediately through in-app notifications
- See detailed reports for each stock and reasons for its compliance.
- Check dividend purification for every compliant stock
- Check compliance history for every stock (Available on the Web version).
