In the name of Allah, The Beneficent, The Merciful
First Published: 8th February 2008 Last Updated: 28th January 2018
This summary discusses how to screen investments in stocks and shares, and is an overview of a research paper which can be downloaded here.
This fatwā seeks to clarify the Sharīʿah position on investing in stocks and shares. It focuses particularly on four areas:
– The Dow Jones Islamic indices
– The cleansing of impermissible activities
– The cleansing of interest
– Screening criteria for investments in stocks and shares
The Dow Jones Islamic Market Indices are part of an Index created for investors seeking investments in compliance with Muslim Sharīʿah law. This fatwā confirms that the Al Qalam Sharīʿah panel find the methodology of assessing investments and shares for sharīʿah compatibility to be acceptable. The fatwā clarifies the criteria of the Dow Jones Islamic Indices, which are mainly twofold: –
1. The company has debt totalling less than one third or market capitalisation
2. Annual sale of impermissible activities totals less than 5% of annual turnover
The fatwā emphasises the importance of calculating the exact figure of the proportion of money gained from impermissible activities and stresses that this money should be donated to charity in order to purify the dividend income.
The cleansing of interest is also examined, with the fatwā clarifying that if an exact amount cannot be calculated, then an estimation must be made on the current market rate.
The fatwā lists the Al Qalam criteria for screening investments, under which five key benchmarks are explained:
1. The business must be lawful
2. The total debt of the company should not exceed 33% of the total assets (this includes
interest based debt)
3. The total illiquid assets of the company should be at least 33%
4. The income from non- sharīʿah complain investment should not exceed 5% of gross revenue
5. The net liquid assets per share should be less than the market price of the share.
This fatwā concludes by providing a practical breakdown of the dividend purification process for a hypothetical investment in an Al-Qalam approved company.