If a stock or security meets certain conditions, does that mean it is Halal? If the response is yes, then everyone should be aware of it so that they may properly vet their financial holdings. To locate companies that comply with Sharia law, investors must go through a screening procedure. With this in mind, this article will teach you five basic criteria for a company to be considered Halal since we know that Muslim investors are interested in understanding this.
5 Main Criteria for Halal Stock
The five essential requirements for Halal stocks are presented here.
1. Commercial Pursuits
The company’s operations must conform to Islamic law. A Muslim should not put his or her money into a business that offers or sells haram products or services. There should be no intention to break Sharia law at the heart of any commercial enterprise.
2. Allow a 5% Tolerance For Multitasking
Although the corporation operates mostly in accordance with Islamic law, it is permitted to engage in certain haram practices. Non-Shariah-compliant activities are not allowed to account for more than 5% of a company’s total income, as stipulated by most institutions and standard-setting organizations like the AAOIFI. Also, the haram component must be cleaned out, according to Islamic financial specialists.
3. Limit of 3% Annual Interest for Borrowing
Most businesses simply have no choice but to get a loan with interest. In most cases, businesses will use the tried-and-true method of obtaining a loan with an interest rate. The level of leverage in a business is measured by looking at its debt as a proportion of its total assets. AAOIFI rules that it is not shariah-compliant to put money into businesses that have long-term and short-term debts that add up to more than 30 percent of their market worth. There is a 30% limit on interest-bearing debt or loans for a stock to be considered shariah compliant.
4. Level of Interest-Earning Securities
No more than 30% of the company’s value should be invested in interest-bearing securities (AAOIFI). However, interest earnings can’t account for more than 5% of the overall cash flow.
5. Funds and Outstanding Invoices
All monetary transactions must take place at face value or less in accordance with Shariah law. The value of an investor’s stake in a firm is reflected in the price at which its shares are traded. For instance, the price of a company’s stock depends not on the company’s book value but on market expectations for its future performance.
Therefore, one cannot buy or sell stocks at face value. To prevent this from happening, Shariah advisers at the world’s top banks have imposed a cap of 33% on cash and receivables as a percentage of total assets.
If you’ve been paying attention, you should have a few solid stock tip ideas after reading this article. The best and least expensive method to purchase shares is via an online broker or investing platform.