For stocks / scripts to be Shariah Compliant, it must meet all the six key tests of the Shariah Screening Criteria, as given below;
- Business of the Investee Company must be Halal and in-line with the dictates of Shariah. Hence, investment in securities of any company dealing in conventional banking, conventional insurance, alcoholic drinks, tobacco, pork production, arms manufacturing, pornography or any related un-Islamic activities is not permissible.
- Debt to Total Assets Ratio of the Investee Company should be less than 40%. Debt, in this case, is classified as any interest bearing debts. Zero Coupon Bonds and Preference Shares are both by definition part of debt.
- Non-Complaint Investments to Total Investments Ratio of the Investee Company should be less than 33%. Investment in any non-compliant (non Shariah Compliant) security shall be included for the calculation of this ratio.
- Non-Compliant Income to Total Revenue Ratio of the Investee Company should be less than 5%. Total Revenue includes Gross Revenue plus any other income earned by the company. This amount is to be cleansed out as charity on a pro rata ratio of dividends issued by the company.
- Illiquid Assets to Total Assets Ratio of the Investee Company should be at least 20%. An illiquid asset is defined as any asset that the Shariah permits to be traded at a value other than the par, e.g.
- Share Price to Net Liquid Assets of the Investee Company should be greater. The market price per share should be greater than the net liquid assets per share, which is calculated as;
Net Liquid Assets per Share = (Total assets - Illiquid Assets - Total Liabilities) / (No of Shares)
Posted in: General