HOW TO FIND IF A STOCK IS HALAL OR HARAAM?- Shariah Stock Screening Criteria.

The stock market has become the most sought-after practice to generate online income. It has proved its capability to provide diverse earning opportunities over the years. One can generate both active and passive income from the stock market according to personal needs and preferences.
Islam has always emphasized earning halal and has established infallible guidelines for the Ummah to follow and remain guided in every sector. There is no doubt that the Ummah needs guidance in the stock market as well. Therefore, Islamic Scholars have studied the stock market and laid-down guidelines or so, to say, “Shariah stock screening criteria” which allows Muslim traders and investors to find halal stocks.

WHAT IS SHARIAH STOCK SCREENING CRITERIA?

The stock screening criteria consists of a list of standards that must be checked before investing in a company. There are thousands of companies listed in the stock market and the stock screening criteria helps us to categorize the stocks into two categories namely Shariah-compliant stocks (Halal Stocks) and Non-Shariah-compliant stocks (Haraam Stocks). 

The stock screening criteria are broadly divided into: 

1. BUSINESS SCREEN
2. FINANCIAL RATIO SCREEN

6 SHARIAH STOCK SCREENING CRITERIA TO FIND A HALAL STOCK :

Following are the 6 steps to find a halal stock :

BUSINESS SCREEN:

1. Nature of Business of the company:

This step involves finding out the type of business carried out or the products or services provided by the company. For example: If the company is involved in providing interest-bearing loans or if the company manufactures or sells alcohol or if its business is related to pork then investing in such a company is haram. This step is essential because when we invest in the shares of a company, we own a small share of that company and in turn support the business of that company. And if the company is involved in haram activities(pornography) or sells products that are prohibited in Islam(Alcohol) then we are indirectly investing to support these haram activities. Following is the list of sectors in which trading or investing is haram:

SECTOR	REASON
ALCOHOL	It is an intoxicant and its consumption is Haraam.
TOBACCO	Consumption of tobacco is injurious to health therefore it is haraam.
INTEREST-BASED COMPANIES	Interest is termed as Riba in Islamic law. This is because it increases the economic gap between the rich and the poor and is exploitive in nature.
PORNOGRAPHY	Pornography is considered filthy and immoral in Islam. It is considered to be promotive of adultery which is haraam.
GAMBLING	Gambling is a game of chance which is addictive in nature. This makes a person rely upon luck, chance and often unrealistic possibilities in place of hard work and perseverance. Theferore it is haraam.
WEAPONS	Weapons are used for violence and mass destruction. Mass destruction means killing innocent people and therefore it is forbidden in Islam.
CLONING	Biological cloning can be considered as fidgeting with the creation of God and that is why it is Haraam.
MEDIA AND ENTERTAINMENT	Producers, broadcasters and distributors of music, television shows and movies are included in this category. All of the above mentioned sources of entertainment are Haraam or prohibited in Islam. Although it is permissible to invest in companies dealing with NEWS channels, Kids channels, educational channels, sports channels.
PORK	Companies dealing with the manufacturing, distribution and retail of Pork are considered as non-shariah-compliant as Pork is Haraam under Islamic law.

Apart from these sectors, there might be companies that are not Shariah-compliant and If you have any kind of doubt always refer to a Mufti or an Islamic scholar.

2. Type of revenue of the company: 

In this step, the type of revenue generated by the company i.e (Halal revenue, Mixed revenue or Haram revenue) is investigated. 

• A company that is involved in a halal business and earns purely from such business is considered to be a halal revenue company and investing in the stocks of such a company is halal. 
• A company may have multiple sources of revenue and in such cases, the percentage of haram revenue should be less than 5%. This means that if a company earns a part of its income through interest-based transactions or gambling etc. then the percentage of such income should not exceed 5%. Investing in a mixed revenue company that does not exceed the limit of 5% is halal. 
• A company that earns more than 5% of its revenue through a non-compliant source e.g. income from addictive drugs or insurance reimbursement claims etc. then investing in the stocks of such a company is haram. 

FINANCIAL RATIO SCREEN:

 3. Ratio of Interest-bearing debt to total assets:

In this step, the ratio of interest-bearing debt to the total assets of the company is calculated. This step includes taking into consideration the overall balance sheet of a company. This step helps to find whether the company is completely debt-free or not. Considering the fact that it is extremely difficult to find a company that is debt-free, the Ulema have fixed a minimum value of debt that a company may be under while still being Shariah-compliant. So, if the ratio of interest-bearing debt to total assets of the company is less than 33% then it is permissible to invest in such a company.

4. Ratio of Non-compliant investments to total assets:

This step involves finding the ratio of non-compliant investments to the total assets of the company. Non-compliant investments refer to the investments made in mutual funds, bonds, derivatives etc. If this ratio is less than 33%, then investing in such a company is halal.

5. Ratio of Illiquid assets to total assets:

In this step, the ratio of illiquid assets to the total assets of the company is calculated. Illiquid assets include those which are not in the form of cash or cash equivalents. This ratio should not be more than 25% and it is permissible to invest in companies that do not exceed this limit.

6. Market price per share of the company:

In this step, the calculation is made using the following formula ;

Net Liquid Assets To Share Price =  (Total Assets – Illiquid Assets – Total Liabilities) / Number of Shares

The market price per share must be greater than the net liquid assets per share of the company. Investing in such a company is permissible. 

The process of stock screening is detail-oriented and requires a lot of research. Hence the process of stock screening can be a bit time consuming. In order to solve this issue several apps and websites like Islamically and Zoya provide already screened stocks. If you have any doubt regarding the compliance of the stocks of a company you may refer to such websites to find out whether it is halal or not.

Our courses – https://www.shariahinvestments.io/stock-market-trading-courses-courses-services/

You can also find a related article from Islamically (Halal Stocks Finder and Screener | Shariah Advisor for your Halal Investments- Islamic), this article also mentions some other criteria that are to be kept in mind.

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