Halal shares are stocks of companies that follow Islamic Shariah precepts. Investors must ensure the company is Shariah compliant, with a principal business not related to haram products, and meets financial guidelines such as debt-to-asset ratio and interest-related income. Speculative stock trading practices are prohibited.
Halal shares are shares of companies that employ halal practices. Under Islamic Shariah precepts, investors can invest money in the stock market if certain criteria are met. If a person invests in halal stocks, any money they earn from these investments is also considered halal. It is similar to the joint venture concept called Musharakah in halal lending approaches. When a buyer acquires shares in a business, he or she becomes a partner because he or she is now a shareholder.
Actions can only be considered halal if the company passes qualitative and quantitative assessments to assess whether it is actually Shariah compliant. The factors that are analyzed for the determination of halal stocks are the business in which the company is engaged, the percentage of income related to interest and business practices. Investors planning to invest in halal stocks are expected to apply certain screening procedures to ensure that their investments are 100% halal. The first thing an investor evaluates is the company’s main source of income.
Businesses are labeled illegal, or haram, if they engage in gambling, gaming, or pornography. Businesses dealing in pork, alcohol, or media promoting gossip columns are also considered haram. Tobacco products, lotteries, and any business involving drugs are also prohibited. Typical businesses that are considered halal are those that involve textiles, computers, energy, and telecommunications.
These types of halal stocks are favored by investors who want to comply with Islamic law. If a company deals in haram products, the revenue from those products should be less than 5%. In that case, the company is classified as having a principal business related to other materials, and investment in this company is allowed.
Factors such as debt to asset ratio, interest related income, and monetary assets are also analyzed. Shariah financial guidelines believe that liquid assets and accounts receivable should not exceed 45% of the company’s total assets. In this case, accounts receivable are calculated as the sum of long-term accounts receivable and current accounts receivable. The company’s debt-to-asset ratio is used to determine its financial strength. If debt financing is the basis of more than 33% of its capital, the company is disqualified for investment.
Regarding interest, the company is not allowed to borrow to finance its investments if it wants to hold halal shares. According to Shariah principles, the company must not generate income from interest-related sources. However, some scholars have relaxed this guidance somewhat. Stock buyers can invest in a company if its interest-related income is less than 5%. Shariah scholars don’t allow investors to speculate either; Stock trading practices such as day trading, margin trading, short selling and option trading are prohibited under Shariah.
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