Sharia Screening Criteria:
With reference to Sharia investment standards, they are ethical investments. Islamic investors prefer to invest those companies, which earn their profit through Islamic ways or Halal means.
If you want to invest to follow Islamic principles and through Sharia Conformity, you are prohibited from making investments in ‘Non Conformity stocks’, which include Banking, Interest based company, Insurance, Pork, Alcohol, Tobacco, Gambling, Weapons, Entertainment Industry etc.
Basically two types of Screening required to Find Sharia Conformity Stocks.
1. Industry Based Conformity.
2. Financial Ratio Based Conformity.
1. Industries Based Conformity:
Those companies running their business ethically that could not harm their product or service to any people, emotionally or physically are complying with sharia Law.
All those companies will be considered as shariah Compliance, means investing in these companies is Halal.
According to the Islamic law, Muslims are not allowed to invest in anything that will increase immorality, increase drugs or alcohol or even invest in companies which promote weapons of mass destruction.
What is the Non-Conformity Industry?
There are many industries that are non-complianceand investment in these companies are not allowed as per Islamic Law.
- Non-Banking Financial Institution
- Housing Finance
- Film Production & Entertainment
- TV Broadcasting & Software Production
- Breweries & Distilleries
- Investment Finance
- Term Lending
- Recreation/Clubs/ Amusement Parks
- Weapon Product
- Post Office scheme.
2. Financial Ratio Based Compliance:
Companies need to pass the below parameters for Islamic Investment.
1- Debt Ratio:
The Ratio of total Debt to Market Value of Equity is less than 33 %. Considering trailing 12 Months Average.
2- Cash Ratio:
The ratio of Accounts Receivables to the Market value of Equity is less than 33%. Considering Trailing 12 months Average.
3- Interest Ratio:
The ratio of total Cash + Interest Bearing Securities to the Market value of Equity is less than 33 %. Considering trailing 12 months Average.
4- Impure Income ratio:
The ratio of total Interest + Impure Income to the Total Income is less than 5%. Considering trailing 12 months average.
– For Impure Ratio you have to check the percentage and same percentage of profit needed to give charity for purity of your income.
– If a company passes the above ratio along with the sector-based screens, the trading and investments in such companies are allowed as Per Sharia.