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Investing in the stock market can be a rewarding way to build wealth over time. However, for Muslims following Islamic financial principles, investing in “halal” stocks that align with Shariah guidelines is essential. Halal stocks are those that comply with Islamic ethical and financial principles, and screening for them involves a specific process. In this article, we will explore how to screen for halal stocks effectively.
Understanding the Importance of Halal Stocks:
Halal stocks are investments in companies that operate in ways that are compliant with Islamic laws and values. This means avoiding businesses involved in activities like alcohol, gambling, pork, or interest-based financing. To ensure your investments adhere to our religious beliefs, it’s crucial to screen for halal stocks.
The AAOIFI Methodology:
One widely recognized method for screening halal stocks is the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) methodology. AAOIFI provides a set of rules and guidelines to help investors identify halal investment opportunities.
There are also other reputed methodologies like those followed by the S&P, Dow Jones, FTSE and MSCI. They have slight variations. In this article, we will first look at the AAOIFI methodology and then conclude with pointers on others and how you can screen using multiple methodologies. At Muslim Xchange, we do all the hard work and screen global stocks based on 5 major Shariah methodologies.
Step-by-Step Guide to Screening for Halal Stocks:
1. Business Screen: Avoid Haram Companies
The first step in screening for halal stocks is to avoid businesses involved in haram (forbidden) activities. These include companies associated with alcohol, gambling, pork, movies, music, and interest-based financing. Look for stocks in industries that comply with Islamic principles.
1a. Impure or Non-Halal Income
If a company’s main business is halal, but it also has earnings from haram activities, check if the non-halal income (including Interest income) exceeds 5% of its total revenues. If it below 5%, then the company has passed the Business screen. You may read our article “Is it really halal to invest in stocks” to understand the reasoning behind the 5% threshold.
1b. Interest Income
Islam prohibits earning money from interest (riba). Ensure that the companies you consider for investment generate little or no income from interest. Review their financial statements and reports to identify any interest-based income. As mentioned above in the Impure income section, interest income must be added to any non-halal income to check if the total is below the 5% threshold.
2. Financial Screen
Evaluate key financial ratios to gauge the financial activities of the company. The financial activities should be compliant with the Shariah standards.
2a. Interest-based Debt Analysis:
Interest-based debt is not permissible and companies heavily reliant on such financing are screened out. AAOIFI does not permit investing into a stock that has debt more than 30% of its market cap. Companies with high debt levels are also risky for investors. So, we benefit in both ways, alhamdulillah. Look for financially stable companies with debt levels below the threshold.
2b. Non-Compliant Assets:
Companies many times will have investments, either short-term or long-term, into haram sources. For example, companies will sometimes park their extra cash into stocks, bonds, and other types of funds. If a company’s non-compliant assets are more than 30% of its market cap, it will not be permissible to invest in such a stock.
Bonus: Go beyond Shariah screening
As Muslim investors, look for companies involved in halal activities that align with Islamic values. Even if a company is Shariah compliant, do not invest in it if it clearly supports oppression and unethical practices. Look for companies that are good for humanity and the society in general.
Screening for halal stocks is a crucial step for Muslim investors looking to align their investments with their faith. The AAOIFI methodology provides a comprehensive framework to ensure your investment choices are in line with Islamic principles. There are some variations in the different methodologies. You may read our Shariah Screening section to learn about the different standards.
By following these steps and conducting thorough research, you can create a halal stock portfolio that both respects your religious beliefs and helps you achieve your financial goals.
About Muslim Xchange
Muslim Xchange offers invaluable support to Muslim investors through the provision of comprehensive Shariah compliance reports for global stocks. Our rigorous screening process adheres to five key Shariah standards, ensuring that you make informed investment choices that align with your faith.
Our screening is meticulously conducted under the supervision of an AAOIFI Certified Shariah Advisor and Auditor, guaranteeing the highest level of compliance with Islamic finance principles.
What sets us apart is the trust we’ve earned from prominent institutions in the industry. We’ve also established strategic partnerships with well-respected advisory firms, having more than two decades of invaluable experience in Shariah compliance and halal investing. With Muslim Xchange, you can confidently navigate the complex world of halal investing while maximizing your financial potential.