At Muslim Xchange (MX), our stock screening process adheres to the Shariah standards endorsed by renowned institutions and indices worldwide. We collaborate with a reputable Shariah advisory firm that possesses over 15 years of experience in this field, ensuring the development and implementation of the most robust Shariah screening methodology. The screening is carried out by Faraz Omar, an AAOIFI-Certified Shariah Advisor and Auditor.
Business Screen
Our screening process involves the exclusion of companies engaged in the following types of businesses:
- Alcohol
- Gambling
- Movies & Haram entertainment
- Tobacco
- Financials
- Weapons
- Pork and Non-Halal Meat
- Recreational Cannabis*
*Recreational Cannabis is legal in Canada and parts of the US. We make an exception for cannabis used solely for medical treatments and research. This exception is based on the fatawa of major scholars and boards around the world.
Impure Income
Most Shariah standards tolerate a 5% impure income limit for companies earning from halal and haram sources. According to the standards adopted at the S&P, DJIM and MSCI, the 5% limit excludes interest income. However, AAOIFI and FTSE standards include Interest Income. Our screener includes interest income and therefore is compliant with all the five standards.
Financial Ratios
Our financial ratios screen encompasses five different criteria set by AAOIFI, FTSE, DJIM, S&P, and MSCI standards. A stock is considered to pass the screening if it satisfies any one of the five criteria. Additionally, we have implemented a ranking system wherein a stock that successfully meets all five standards is marked with five stars.
AAOIFI verifies compliance with Non-compliant Debt and Non-compliant Assets based on the company’s Market cap. The ratio should not exceed 30%. Impure income, including Interest income, must not exceed 5%. FTSE evaluates Debt, Cash, and Cash + Account Receivables against Assets, with ratios capped at 33.33% for the first two and 50% for Cash+AR. The impure income limit aligns with AAOIFI standards.
DJIM employs a 24-month-average of Market cap, while S&P uses a 36-month average for their calculations. MSCI examines Assets, similar to FTSE, but imposes a stricter measure for Cash+AR, limiting it to 33.33%. S&P’s and DJIM’s updated methodologies (09/15/2023 and 09/18/2023) only checks for Interest-based Debt.
Detailed explanations of the aforementioned Islamic methodologies can be found in the reports issued by the respective standards.
Zakat Calculations
Short-term Trading: In this case, investments are classified as trading goods. Zakat must be calculated based on the entire value of the investment.
Long-term Investments: For long-term investments, we employ the AAOIFI methodology to determine Zakatable Assets, corresponding debts, and allowable deductions. As a result, we have incorporated a Zakat per share figure specifically for Compliant stocks. Please note that Non-compliant stocks are ineligible for investment and, therefore, not applicable in this context.
Dividend Purification
In cases where a company generates impure income, the dividends it distributes (if applicable) must undergo purification. If a security is held for a period of less than a quarter, purification is not necessary. However, if the security is held beyond a financial period and dividends are received, purification becomes essential. To address this requirement, we have adopted the percentage approach for purification, aligning with standards such as S&P and DJIM. Furthermore, we are in the process of incorporating the AAOIFI method, which calculates the purification amount per share rather than relying on a percentage-based calculation.
Stocks that do not distribute dividends do not require purification. Therefore, if a company does not issue dividends, there is no need to engage in the purification process.
ETF Screening
To screen ETFs, we consider the fund’s total holdings and calculate the total percentage of impure income, debt, and other ratios as applicable to each Shariah standard. We also look into the investment prospectus to see if the fund invests purely into companies or includes non-permissible types of investments.
Limitations and Disclaimer
It is important to acknowledge our current limitations. We assume that debt in non-Muslim countries is interest-based; hence, our screener does not differentiate companies with interest-free debt. We recognize that no work is without errors, and we constantly strive for improvement. It is essential to note that we do not provide personal investment advice. We strongly recommend conducting thorough due diligence and consulting with a qualified Shariah advisor before making any investment decisions. We value your feedback, questions, and criticisms. Jazaakumullahu khairan!
