6 Tips on How to Check a Stock is Halal or Haram

6 min read
4/03/21 6:04 AM

More and more Aussies are growing their nest eggs by investing in the stock market. But for Muslim Australians looking to get in on the action, it’s not so simple.

The Shariah requires us to only invest in fully Halal companies. Amongst other things, this means the firm you are investing in needs to have a halal business model and not take interest-based loans to finance its operations. The tricky bit is trying to find out how which stocks on the conventional stock market meet these standards.

But that’s not to say it isn’t possible. The Islamic concept of mudrabah has enabled Muslims to invest in business ventures for hundreds of years. By applying the same principles to our stock market investments, we can ensure that we’re meeting the requirements of the Quaran, whilst simultaneously building a more secure future for our families.

In this article, we’ll demystify Islamic trading and share our top 5 tips for screening stocks. Let’s get you ready to invest!

What Is Halal Trading?

First, let’s dig deeper into what makes a stock halal or haram.

Shariah guidelines encourage us to strive for a balance between the individual and society. In light of this, Halal investing is simply a form of socially responsible investing. Halal practices ensure that you’re investing in businesses that benefit society and provide for future generations and who wouldn’t want that!

It’s for this reason that many socially conscious non-muslims are now also choosing to follow Halal investment practices.

Providing that you don’t ignore the interests of other people when you are investing, accumulating wealth through stocks is not considered haram. The following points form the foundations of Shariah-compliant stock investment:

For many Muslims, these principles would be natural considerations when investing. It’s not a complex set of guidelines. It’s a reflection of the morals we live by and promote through our daily activities.

6 Ways to Check Your Stocks Are Halal

It may surprise you that 42% of the FTSE 100 are Sharia-compliant. So it’s easier to invest than you think. You just need to know how to complete a simple screen before buying stocks, to ensure each trade you make meets Shariah standards:

1. Review the Business Model

The easiest screen you can make is to check the business model of the company you are considering investing in. Some lines of business are haram by nature, such as:

  • Selling or promoting alcohol
  • Selling pork products
  • Facilitating gambling
  • Promoting illegal activities
  • Promoting pornography
  • Weapons manufacture

Instantly rule out any businesses in these industries. Then there are some grey areas. Interest earning companies in the financial services sector like banks, insurers and stockbrokers could be considered to breach Sharia guidelines. (Note that this principle applies to other Islamic investments such as Islamic Mortgages too).

If in doubt, avoid. Or do thorough research before committing your finances.

Aside from the business model, another point to consider is that businesses must be established and in operation to be considered halal. This means the capital planning has been executed and facilities and equipment have been purchased at the point of investment. Sharia doesn’t permit you to invest in the “idea” of a company that has not yet materialised.

2. Dig Deeper Into the Running of the Company

Many new investors conduct an initial screen of a businesses proposition and consider it enough if the overall business is halal. But what if the running of the company includes haram practices?

The most common mistake new Muslim investors make is investing in businesses with interest-based income or businesses that are borrowing on interest. Such investors are generating income from non-Sharia compliant investments.

If this applies to a stock that you are considering, there is a general rule that can be applied to check whether the investment is still viable. Income from Haram investments should not exceed 5% of the gross revenue of the company.

To discover this information, you’ll need to do some recon. Check annual reports to determine what revenue was received by non-compliant investments and compare this to the companies gross revenue. If it exceeds 5%, there are two generally permissible conditions.

Firstly, the investor must determine the amount of haram income received and offset it by giving away the same percentage of his profits to charity. Secondly, the investor must voice his opposition to these Haram activities, either written or orally.

3. Ask About Interest-Bearing Debt

The third criteria a stock must meet to be deemed halal relates to the percentage of interest-bearing debt in relation to the total assets of the company. The total interest-bearing debt to not exceed 33% of total assets.

It’s worth mentioning that the 33% metric doesn’t just apply to halal investments. Lots of non-muslim investors use similar benchmarks for their stock screens as it’s deemed a comfortable level of risk.

However, it can be difficult to ascertain the amount of interest-bearing debt that a business holds. For example, when you examine some accounts, you’ll notice borrowings listed as interested free loans from directors. To overcome this, ask to review the supplemental notes on accounts, which breaks the loans down further and will tell you specifically.

If you don’t have time to do a thorough screen another option is to choose zero interest stocks. The Kick Ass Entrepreneur has a list of zero interest stocks that you can use as a starting point. Just remember to check back regularly to make sure their status doesn’t change.

4. Check the Illiquid Assets to Total Assets Ratio

An asset that can’t be converted into cash, such as real estate is said to be illiquid. In circumstances where a business is underfunded, the business owners might initiate a sale of illiquid assets. When this happens, they are often sold for less than their market value.

But how is this an issue for Sharia compliance?

If a company has purely liquid assets, such as cash in the bank with no other assets, it can be sold at par value. Here, Mufti Taqi is of the opinion that the illiquid assets should be at least 20% of total assets.

To identify illiquid assets, ask for a balance sheet that includes goodwill gestures, property, equipment and any other intangible assets the company may have. To arrive at the percentage of total assets add up the figures for illiquid assets, divide by total assets, and multiply by 100. You want it to be 20% or more to invest.

5. Simplify Your Stock Screens With Islamic Finance Apps

Our first four tips have covered the main things you should look for when screening stocks for compliance with Shariah guidelines. Our final tip gives you a solution if you don’t have time to complete a thorough screen yourself.

We’re recommending you use an Islamic finance app like Zoya or Islamicly to check whether specific stocks are compliant. Both apps have free versions available and they’ll enable you to instantly see whether a stock is a suitable halal investment.

If you upgrade to premium, there’s even the option to receive a detailed breakdown as to why the stock passed or failed. It’s simple, effect and foolproof for investors who don’t have the time to screen stocks in detail but to want to ensure they comply with the teachings of Islam.

6. Check Other Finance Products for Shariah Compliance

A final thought: remember that its not only direct trades that could see your money invested in haram businesses. Many Muslims unknowingly invest their savings in super annulations, IRA’s and bank accounts that violate Shariah investment principles.

As a Muslim living in Australia, it’s incredibly difficult to ensure that all of your investments are compliant. Even if you find a traditional financial services provider who promises to maintain a halal investment portfolio, it’s hard to monitor where they’ve distributed your funds. In reality, you need to choose a dedicated Islamic finance provider, like Crescent Wealth to feel confident in your investments. Find out more about how we invest.

Ensure All Your Investments Are Halal With These 6 Tips

You don’t want your hard-earned money invested in haram businesses. After all, the beauty of Halal investment practices is that they don’t just provide your family with financial security in the future. They provide the entire community with security, by investing in socially responsible enterprises that benefit society and generations to come.

In this way, you’re making your money work that little bit harder and still maintaining your commitment to your faith. It’s the best of both worlds!

At Cresent Wealth, we are passionate about building a better world through Islamic investments. Our Islamic superannuation funds are invested according to comprehensive investment filters that adhere to the ethical and Islamic investment principles outlined in this post. Contact us to find out how we can take the hassle out of your investments.