How to Identify a Halal Company for Investment — Part 1

Investing in stocks — it's not just a way to grow your capital but also a responsibility for where your funds are directed. For Muslims, it is important that the company's business complies with Sharia norms.

The company LLC «Stock Broker» adheres to international standards of AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and DFM (Dubai Financial Market). In this guide, we will examine how companies are checked for compliance with halal principles.

What does the company do?

First, the primary type of a company’s activity is checked. Investments are prohibited in companies whose business is associated with:

 

If a company is involved in electronics production or medicine, it passes this filter. If it's a hotel network, it is necessary to check what share of the revenue comes from selling alcohol or having a casino at the hotel.

Financial indicators

Even if a company produces a halal product (for example, smartphones), it can be "overleveraged" or receive too much income from interest. According to AAOIFI standards, the following coefficients are applied:

1. Debt Level (< 30% of Market Capitalization):

The total amount of all interest-bearing loans of the company (short-term and long-term) should not exceed 30% of its market capitalization over the last 12 months. This ensures that the company does not excessively rely on interest-bearing loans.

2. Cash and Interest-Bearing Deposits (< 30% of Market Capitalization):

The total amount of cash and equivalents, as well as interest-bearing deposits (for instance, in banks), should not exceed 30% of market capitalization. This prevents investments in companies whose primary activity is earning interest income.

3. Accounts Receivable (< 30% of Market Capitalization):

The amount of accounts receivable should not exceed 30% of market capitalization. High accounts receivable may indicate liquidity issues or that the company is financing its activity through deferred payments, which could be linked to interest transactions.

4. Impermissible Income (< 5% of Total Revenue):

Income from occasional impermissible operations (e.g., interest on bank deposits, late payment fines, income from selling alcohol at a hotel) should not exceed 5% of the total revenue of the company. If this threshold is exceeded, the company is considered non-halal.

Purification of Income

If a company is recognized as halal but has a small share of impermissible income (up to 5%), the investor is obligated to "purify" their dividends.

How it works: If, for example, 2% of the company’s income is derived from interest, then 2% of your received dividends should be directed to charity (sadaqa) without intending to receive a reward for it. This process is called purification.

Tools for Independent Verification

For those who want to independently verify stocks for Sharia compliance, there are various tools and resources:

• Company reports: Annual reports (10-K) and quarterly reports (10-Q) available on regulators' websites (such as SEC in the USA) contain all necessary financial information for calculating the coefficients.

• Sharia screeners: There are online platforms and apps (e.g., Islamicly, Zoya, Sahih Invest) that automatically analyze stocks according to AAOIFI standards and other Sharia advisory boards. They can be useful for preliminary evaluation 

• Consultation with experts: For complicated cases or when in doubt, it is always recommended to consult certified Sharia experts.

How does LLC «Stock Broker» simplify this process?

Analyzing each company’s financial statements independently is difficult and time-consuming. Stock Broker takes on this work, providing a reliable and convenient service:

• Certified experts: The team includes specialists qualified by AAOIFI who conduct in-depth analyses of companies' activities and financial indicators.

• Quarterly audit: Companies' financial indicators change, so we regularly review the list of approved stocks every three months to ensure their continuous compliance with Sharia principles.

• Ready lists: Clients get access to an up-to-date list of halal stocks (such as Apple, Microsoft, Tesla, etc.), which have been fully vetted and are ready for investment.