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.
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.
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!