M Asia Trade

What are Shariah compliant stocks? Shariah compliant stocks are those stocks whose income is not derived from businessed involved in activities prohibited by Shariah. The prohibited sectors include interest based financial institutions; manufacturing, distribution and sale of potable alcoholic beverages and narcotics; processing, distribution and sale of pork and pork related products, meat and products of other animals killed in a non-halal manner; gambling and tobacco.

The stocks are screened for Shariah compliance by using some screening norms. This is done in two steps:

1. Screening based on activities- here companies which are involved in prohibited business activities are screened out. The companies that pass this step are called Business Compliant and are put through the second step.

2. Financial Screening- their total interest-bearing debt should not exceed 25%, their income from interest and interest based investments should not be more tan 3% of their total income and their recievables and cash/bank balances should not be more than 90% of their total asset value.

The business compliant companies or stocks which qualify on the financial screening criterias are termed as Shariah compliant companies and investment in such stocks is called Shariah compliant investment.

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