Our Shariah Screening Methodology

By Faraz Omar

We most closely follow the Shariah Standard of Indonesia

Having extensively researched on the Shariah screening standards and how they are applied, we came up with a screening methodology that we believe offers the most encompassing and problem-free solution to semi-automated Shariah screening.

The methodology adopted at Muslim Xchange (MX) most closely follows the Shariah Standard of Indonesia. I wrote an article on Muslim Ink last year that explained how anyone could manually screen for halal stocks. The article elaborated on the background and context for the existing rules and compared different standards. Much of my reasoning has been mentioned in it as well.

The following is a breakdown of how we screen stocks at MX.

Business Screen

We screen for haram activities not only through the industries the companies are in, but also through the description they provide and in many doubtful cases checking their websites and activities.

For companies with mixed revenues, wherever information was available, we have checked if they had haram revenues and if those exceeded a 5% benchmark that most Shariah standards adopt. The Shariah standard of Indonesia has a 10% benchmark but this includes Interest income.

However, standards like the S&P 500 Shariah and Dow Jones Islamic Market have kept a 5% level for Haram revenues excluding Interest income. This is what we have adopted at MX.

Companies with mixed activities but without clear information on the percentage of prohibited activities need a thorough manual analysis, which at the time of screening was not feasible to do. They have been marked as “MUTE” – instead of simply giving a “FAIL” – indicating that they need more analysis.

We have also differentiated between Cannabis companies that purely serve the medical need vs. companies that also serve recreational and wellness industries. Many scholars have regarded the first as permissible. We have however called this out in our explanation.

Financial Ratio Screen

In this screen, we have only checked for the total debt that the company carries. Standards differ as to what the debt should be compared against: Market Cap or Assets. We are neutral in this regard as we believe both have their pros and cons. The Debt criteria most standards follow is around 33%. Indonesia’s standard is at 45%. We check the stock’s debt against three screens: Debt to Assets < 33%, Debt to Assets < 45% and Debt to Market Cap <33%. The Financial Ratio is considered a PASS if the numbers clear either of these conditions. We have mentioned however in our explanation as to which of the screens the stock passes through.

We do not check for Cash and ST Investments because we believe a company is more than just its assets and that this can disadvantage companies that do not have illiquid assets. This method is adopted in Indonesia and partly in Malaysia.

Conclusion

Although I was in touch with more than one Shariah expert/scholar while building this screener (apart from the extensive research of Shariah standards), we hope to have an official Shariah board or advisory soon In sha Allah.

No work is without error and we are always a work in progress. We pray this initiative benefits the ummah. We welcome your feedback, questions, and criticisms. Email us: support Jazaakumullahu khairan!


FOUNDER

Faraz Omar

Faraz has an MBA in Finance and learned Islam for many years under competent scholars and teachers. He has studied an Islamic finance course under Dr. Sami Al-Suwailem. He is also founder of Muslim Ink and an investor in the stock market.

31 thoughts on “Our Shariah Screening Methodology”

  1. Assalamo alaikum Br Faraz,
    Jzkl khair an for this great tool!

    The members of the Sisters Trading Community in Canada are very excited to use the screener. We love the detailed information and the layout and interface also look great alhd.

    Two questions came up from the group, will you be adding UK tickers to the screen and are there any plans for MX to be offered as an App?

    Jzkl khairan for your hard work, may Allah SWT reward you for your service.

    1. Walaikum assalaam wa rahmatullah Sr Ayesha,
      Aameen, thank you so much! Jazaakumullahu khairan! Yes, in sha Allah, we will be adding more markets in the coming months, starting with Canada and UK, and mobile apps as well. Alhamdulillah really happy to hear your feedback.

  2. Above states “We check the stock’s debt against three screens: Debt to Assets < 33%, Debt to Assets < 45% and Debt to Market Cap <33%. The Financial Ratio is considered a PASS if the numbers clear either of these conditions. "

    Sorry if I'm being dumb but I don't get that…why not just say Debt to Asset < 45% and Debt to Market Cap < 33%?
    i.e. leave out the Debt to Assets <33%.

    Because if it's 33.1% Debt to Assets it will pass. Or am I missing something?!

    1. Ah ok figured it out sorry.
      It’s either
      A) Debt to Assets < 33% OR
      B) Debt to Assets < 45% AND Debt to Market Cap <33%

      1. You’re first inference was right brother. The stock has to clear either of the three. Certainly it’s kind of redundant when you say 33% and 45%. But we have that in place because many Standards are around 33% with the exception of the Indonesian one at 45%.
        So just pointing it out that this particular stock either passes all three types or only two or only one.

        Just additional info for investors to help in their decision making.

  3. It is really a very good initiative, in sha Allah might be a helpful tool for many Muslims across the globe. May Allah SWT guide and bless you for all the hard work.

  4. Salaam.

    Just to be clear, I can create a company with $1million of capital investment and then take on $300,000 conventional interest bearing loan from the bank and then start selling shares in my company and I’m Islamic?

    1. Walaikum assalam wa rahmatullah brother,

      If your business is not “dodgy”, then Shariah-compliant, yes. Islamic, no 🙂 Please have a look at this article to understand the background and reasoning for why scholars have approved it.

  5. Assalam-o-Alaikum brother, Jazakallah for the effor. There is a great need for such Sharia compliance screeners for ETFs as well. If you can kindly look into it as well, it will be a great service for the community.

  6. Asalamualaikum Br Faraz,

    Jazakallahu Khayr for developing this application. I have a question. I currently reside in North America and usually trade on USA stocks. I see that few of the stocks that I usually trade on are shown compliant over here but on other apps it’s shown as Non Compliant. Could you please clarify on this matter? Thank you for the keeping service as free. 🙂

    1. Walaikum assalam wa rahmatullah brother,

      Baarak Allahu feek. Thank you for kind comments. There may be more than one reason why this may happen. The Shariah screening methodology may be different in the other apps. It is best if we know the reason why a stock has been labeled non-compliant and then perhaps we can compare and provide a clear explanation 🙂

      1. Dear Brother Faraz,

        as salamu alaikum wa Ramadan Karim,

        Mabruk to your easy to use tool. Which market cap you use, last day, at reporting time of the financials or any smoothening method? A lot of differences can be explained by that.

        I added your website to the names of screening tools. Myself did an open source google sheet to calculate AAOIFI debt and liquidty filter plus zakat for investors based on zakatable assets method.

        Please join my telegram group on Islamic Stock Screening: https://t.me/islamicstockscreening

        All the best,
        Michael

        1. Walaikum assalam wa rahmatullah brother Michael

          Welcome to MX! Happy to hear your comments, alhamdulillah, jazaak Allahu khairan!

          Yea, we’re using last reported for market cap and we update every month. In sha Allah we are also considering if a 12-month avg would be better, but there’s pros and cons.. Allahu Alam

  7. السلام عليكم ورحمة الله وبركاته
    One thing that I would like it to be addressed is “Purification” , I know purity on Dividends is due, but what about on profits made from stocks.
    I mean, one earns profit from buying and selling stocks as an active trader and doesn’t not hold stocks longer then a week or month.
    The Aim is to make active Income from trading. So in this case does one has to purify their earnings, if yes, then at what percentage ? .

    جزاكم الله خيرا

    1. Walaikum assalamk wa rahmatullah wa barakatuh,

      Apologies for the late reply. Regarding profits from stock trading, there is a difference of opinion among scholars if one needs to purify capital gains. While some scholars say we must purify capital gains as well, many scholars say it is not necessary to do this because it is not possible to calculate the small % of the haraam portion in the share price, when the majority of the company’s assets are halal. Allah knows best.

    2. Mostly Dividend is suggested to be purified, you may consider the higher Earnings per Share, which can be found easily and calculate the 5% on that. This should be covering the aspect sufficiently inshallah.

      Capital Gains are mostly not considered and as a trader you pay already full rate of 2.5% Zakat for trading goods.

  8. Salaam.
    Very nice website. Found through google. Allah make you successful and jazakAllah for this website. Please include UK stocks FTSE 100/250 and AIM stocks.

    1. Walaikum assalam wa rahmatullah,

      Thank you and welcome to MX! In sha Allah we will in the coming months 🙂

  9. As salam alaikum Brother Faraz, great work MashaAllah. May Allah SWT reward you immensely, ameen. I couldn’t find some tickers eg. SLGG, UVXY, TZA. Would you kindly be able to add them as well. JazakAllahu khairan.

  10. Mustapha Saidykhan

    Can you guys please add otcs again. I use it as a general reference in order to decide whether it’s halal. The information needed to determine if a otc is halal is all on otc market.com. That’s has the most up to date description along with financials.

    1. Assalamu alaikum brother,
      OTC’s QX and QB US are available. International and Pink aren’t. We excluded Pink because of the limited information and regulation, even according to the OTC Markets itself. Quoting from their website:

      The Pink Open Market provides brokers a platform for transparent trading and best execution in any security. There are no financial standards or disclosure requirements. A wide spectrum of companies are traded on this market, including foreign companies that limit their disclosure in the U.S., penny stocks and shells, as well as distressed, delinquent, and dark companies not willing or able to provide information to investors.

      OTC Markets Group segments Pink companies based on the information they provide to investors into Current, Limited or No Information. Companies can make disclosure available pursuant to one of the following Reporting Standards:

      Filing required reports with the SEC, U.S. Bank Regulatory Authority, or home country if listed on a Qualified Foreign Exchange

      Companies that do not meet one of the above standards can provide disclosure to investors directly to http://www.otcmarkets.com via the Alternative Reporting Standard

      The Pink Market is for professional and sophisticated investors with a high risk-tolerance for trading companies with limited information available and limited regulatory oversight. Investors are strongly advised to proceed with caution and thoroughly research companies before making any investment decisions.

      We found that many companies provided false/misleading/incorrect descriptions to their actual business activity. This makes it impossible to give accurate screening results unless we manually investigate the thousands of companies listed in the Pink market.

  11. I like the science behind your screener, but some of the compliant stocks are not tayyeb. It’s the equivalent of eating halal versus “organic” halal. The companies may have good leverage but their non-Islamic mission automatically rules them out as halal (ie: Pfizer/Moderna [harmful ineffective genetically-modifying mRNA vaccines], Tattoed Chef [harmful pea protein], Microsoft [Bill Gates!] and so forth. You are gleaning stocks in terms of their mixed assets but the halal nature of the investment is IMPORTANT. We must strive not to invest in things that are destroying mankind, for some of these imposters will reflect as shariah-compliant with impressive debt-to-equity ratios and be ultimately haraam. And Allah Knows Best!

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